10-K 1 fm10k_33102.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended March 31, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to _______________. Commission File No. 0-22049 S.W. LAM, INC. ---------------------------------------------- (Name of registrant as specified in its charter) Nevada 62-1563911 ------------------------------- --------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) Unit 25-32, Second Floor, Block B, Focal Industrial Centre, 21 Man Lok Street, Hunghom, Hong Kong ------------------------------------------------------------- (Address of principal executive offices)(Zip code) Registrant's telephone number, including area code: (852) 2766 3688 Securities Registered Pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered None None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $.001 par value ----------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past ninety (90) days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of July 29, 2002, 12,865,000 shares of common stock of the Registrant were outstanding. As of such date, the aggregate market value of the voting and non-voting common equity held by non-affiliates, based on the closing price, was approximately $234,750. DOCUMENTS INCORPORATED BY REFERENCE None TABLE OF CONTENTS Page ------- PART I ITEM 1. BUSINESS .................................................3 ITEM 2. PROPERTIES...............................................12 ITEM 3. LEGAL PROCEEDINGS........................................12 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..........................13 ITEM 6. SELECTED FINANCIAL DATA ......................14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............15 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................28 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..............28 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...................28 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS......................................29 ITEM 11. EXECUTIVE COMPENSATION...................................30 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................................31 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................................32 ITEM 14. CONTROLS AND PROCEDURES..................................33 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K......................................33 SIGNATURES...............................................35 CERTIFICATIONS...........................................36 INDEX TO FINANCIAL STATEMENTS............................38 PART I This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company's actual results could differ materially from those set forth in the forward-looking statements. Certain factors that might cause such a difference are discussed in the section entitled "Factors that May Affect Future Results" beginning on page 23 of this Form 10-K. The Company operates through its present various affiliates, all of which are located outside of the United States. Unless otherwise indicated or the context otherwise requires, the term Company refers collectively to S.W. Lam, Inc., where appropriate, and its subsidiaries or its affiliates. All references to China or the PRC are to the Peoples' Republic of China. The Company's functional currency is Hong Kong Dollars ("HK$"). For the convenience of readers, unless otherwise indicated, all financial information contained herein is presented in United States Dollars ("US$"). Translation of amounts from HK$ into US$ has been made at the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York on March 31, 2002 of US$1.00 = HK$7.8. No representation is made that the HK$ amounts could have been, or could be, converted into US$ at that rate or at any other rate. ITEM 1. BUSINESS S.W. Lam, Inc. (the "Company"), a Nevada corporation, through its present various affiliates, is engaged in the design, manufacturing and marketing of a broad range of gold products, other precious metal products and jewelry products to customers in Hong Kong, the People's Republic of China (the "PRC" or "China") and other parts of the world. The Company's operations are located in Hong Kong and the PRC. History and Development of the Company The Company's operations date to the formation of a jewelry manufacturing and marketing business by Lam Sai Wing ("Mr. Lam") in the 1980's. In the mid-1990's, Mr. Lam and his wife, Chan Yam Fai, Jane ("Ms. Chan"), restructured substantially all of their jewelry operations by transferring those operations to Hang Fung Jewellery Company Limited ("Hang Fung Jewellery") and transferring Hang Fung Jewellery to Quality Prince Limited ("Quality Prince"). In December 1996, Quality Prince completed a "reverse acquisition" with the Company (the "Exchange") pursuant to which the jewelry operations of Mr. Lam and Ms. Chan were acquired by the Company, prior operations of the Company were terminated, the Company assumed and carried on, through the operating subsidiaries of Quality Prince (collectively the "Hang Fung Group"), the jewelry operations and management of the Hang Fung Group assumed control of the Company. In May of 1997, Quality Prince entered into an agreement with Phenomenal Limited ("Phenomenal"), an unaffiliated third party, pursuant to which Phenomenal loaned to Quality Prince $10,000,000 and Quality Prince issued to Phenomenal a convertible promissory note (the "Note") and a non-detachable warrant (the "Warrant") to subscribe for 5,263,158 shares of common stock of the Company at an exercise price of $2.19 per share. In accordance with the term of the agreement, the Warrant expired in May 1998. In June 1998, Phenomenal agreed to extend the maturity date of the Note and waive its then entitlement to interest accrued under the Note and the Company and Phenomenal agreed to restructure and capitalize the Note into redeemable preferred stock of Hang Fung Jewellery. As a result, on June 30, 1998, Hang Fung Jewellery issued 5,263,788 shares of redeemable preferred stock (the "Preferred Stock") at approximately $1.90 per share to Phenomenal in replacement of the Note. In February 1999, the Hang Fung Group effected a corporate reorganization (the "Group Reorganization") with Hang Fung Gold Technology Limited ("Hang Fung Gold") becoming a holding company, excluding Quality Prince, for the Hang Fung Group and, according to the terms of the revised agreement with Phenomenal, Phenomenal's investment being converted into common stock in Hang Fung Gold. Immediately prior to the conversion, dividends on the Preferred Stock in the amount of $1,849,000 were paid. Immediately following the restructuring of the Hang Fung Group, Hang Fung Gold completed an offering of shares in Hong Kong raising approximately HK$59,000,000 (the "Hong Kong Offering") and the shares of Hang Fung Gold were listed and traded on The Stock Exchange of Hong Kong Limited (the "Hong Kong Exchange") commencing on March 16, 1999. 1 Following the Group Reorganization and Hong Kong Offering, the Company held, through Quality Prince, 53.145% of the issued capital stock of Hang Fung Gold, whereas Phenomenal held 21.855% of the issued capital stock and the investing public held the remaining 25% of the issued capital stock of Hang Fung Gold. Beginning in fiscal 1999, the Company implemented a number of initiatives such as (1) product branding, (2) establishment of strategic marketing alliances, (3) expansion of wholesale and retail distribution channels in the PRC, and (4) contemplation of an Internet business strategy. In connection with those initiatives, the Company began efforts to further expand its production facilities and halted contract manufacturing for third parties in order to devote its manufacturing capacity to production of its own products. As part of the Hang Fung Group's Internet strategy, in August 2000, Hang Fung Gold acquired 49.9% of the stock of New ePoch Information (BVI) Company Limited ("New Epoch") in exchange for shares of common stock of Hang Fung Gold (the "New Epoch Transaction") representing approximately 34.1% of the capital stock of Hang Fung Gold as enlarged following the transaction. Under the terms of the New Epoch Transaction, Hang Fung Gold has an option for a period of three years to acquire the remaining shares of New Epoch. In conjunction with the New Epoch Transaction, Hang Fung Gold entered into a Facility Agreement pursuant to which Hang Fung Gold agreed to provide to New Epoch a credit facility of up to the higher of (1) HK$50 million, or (2) two-thirds of the net proceeds of equity or debt issuances by Hang Fung Gold from time to time after closing of the acquisition. In August 2000, Hang Fung Gold completed a placement of shares resulting in proceeds of HK$62.7 million (the "HFG Placement"). As a result of the New Epoch Transaction and the HFG Placement, the Company's ownership interest in Hang Fung Gold was reduced to 31.4%. New Epoch is engaged in developing and facilitating e-commerce trading facilities between the PRC and the rest of the world, using offline trading services to complement its internet B2B platform. New Epoch, through a joint venture with Infoshare of the China International Electronic Commerce Centre -- an information technology arm of the Ministry of Foreign Trade and Economic Co-operation of the PRC, operates a portal under the domain name www.chinatradeworld.com (the "ChinaTradeWorld portal"), a B2B site designed to facilitate international trade with the PRC. 2 Company Structure The following chart sets forth the organization of the Company and its principal subsidiaries and affiliates as of March 31, 2002: S.W. Lam, Inc. (incorporated in Nevada, US) 100% Quality Prince Limited (incorporated in British Virgin Islands) 31.4% Hang Fung Gold Technology Limited (incorporated in Bermuda) 100% 49.9% Macadam Profits Limited New ePoch Information (BVI) Company Limted (incorporated in the British Virgin Islands) (incorporated in the British Virgin Islands) (E-commerce trading platform) 100% 100% Hang Fung Jewellery Company Limited Kai Hang Jewellery Company Limited (incorporated in Hong Kong) (incorporated in Hong Kong) (Manufacturing and selling (Property holding) of jewelry products) 100% Hang Fung Jewllery (Shenzhen) Co., Ltd. (established in the PRC) (Manufacturing of jewelry products)

3 Overview The Company, prior to the New Epoch Transaction and the HFG Placement, was a holding company with its operating subsidiaries principally engaged in the design, manufacture and distribution of a broad range of gold products, other precious metal products and jewelry products. All jewelry and precious metal operations of the Company are carried out through the Hang Fung Group which is owned, after the New Epoch Transaction and the HFG Placement, 31.4% by the Company. Manufacturing operations are carried on in Hong Kong and the PRC. The Hang Fung Group presently markets its products throughout the world including Hong Kong, the PRC, Southeast Asia, Europe and the United States. In August 2000, Hang Fung Gold acquired 49.9% of the equity interest of an affiliate, New Epoch, which is engaged in developing and facilitating e-commerce trading facilities between the PRC and the rest of the world, using offline trading services to complement an internet B2B platform. As a result of the reduction in the Company's ownership interest in its operating subsidiaries following the New Epoch Transaction and the HFG Placement, the results of those previous subsidiaries are no longer reported on a consolidated basis by the Company but are accounted for under the equity method of accounting. Developments During Fiscal Year 2002 - Hang Fung Gold In March 2002, Hang Fung Gold completed a reduction of share premium pursuant to which the entire amount of approximately $42.1 million standing to the credit of the share premium account as at March 1, 2002 was cancelled and transferred to the contributed surplus account and an amount of approximately $25.7 million in the contributed surplus account was then applied to eliminate the accumulated deficit as at March 31, 2001 amounting to approximately $25.7 million. The reduction in share premium against accumulated deficit will facilitate the ability of Hang Fung Gold to declare dividends under applicable law if it chooses to do so. Core jewelry operations continued during fiscal 2002 with increased emphasis and marketing efforts being devoted to sales and promotion of business in Hong Kong and Mainland China, including the first full year of operations of the 3D-Gold Tourism Exhibition Hall to attract customers and increase the profile of Hang Fung Gold in the region. Gold, Jewelry and Precious Metal Products Operations - Products The Hang Fung Group's products consist of a broad array of gold and silver jewelry products, gold and silver decorative items, semi-precious stone jewelry and other decorative products. The Hang Fung Group's products include, but are not limited to, bracelets, chains, charms, rings, earrings, ornamental plaques, serving sets and decorative pieces. The Hang Fung Group classifies its products in the following four distinct segments: Gold Products The principal product line of the Hang Fung Group consists of fine gold jewelry and decorative ornaments which are manufactured using mainly fine gold and karat gold. In order to cater to customer demands, gold products manufactured and sold by the Hang Fung Group cover a wide range of weight, ranging from approximately 0.5 grammes to 3,000 grammes (3 kg) and are priced at a range of approximately HK$50 to HK$300,000 per piece of which the prices for the most popular items range from approximately HK$50 to HK$3,000 per piece. Fine gold jewelry items include bracelets, anklets, bangles, necklaces, brooches, pendants, rings and earrings that are made of fine gold and karat gold. The fine gold jewelry items manufactured and sold by the Hang Fung Group include contemporary and innovative designs that are worn as fashion accessories as well as traditional oriental designs that are commonly presented as wedding and birthday gifts in the Asian community. 4 Gold ornaments, including statuettes, memento cards, key chains and other decorative items, are mainly made of fine gold. Gold ornaments may take various different forms and shapes such as cartoon characters, animals, signs of the zodiac as well as religious figures and symbols. The Hang Fung Group also manufactures customized gold memento cards and key chains for corporations as souvenirs in their business promotions. Other Precious Metal Products Other precious metal products manufactured by the Hang Fung Group include jewelry and decorative ornaments that are made of precious metals such as silver and platinum. Depending on the weight and design of such products, these products are sold in a price range of approximately HK$8 to HK$500,000 per piece of which the prices for the most popular items range from approximately HK$100 to HK$500 per piece. Jewelry Products Jewelry products manufactured by the Hang Fung Group are made up of mainly precious stones and gems. Depending on the quality and weight of stones and gems jewelry and design of such products, these products are sold in a price range of approximately HK$200 to HK$200,000 per piece of which the prices for the most popular items range from approximately HK$2,000 to HK$8,000 per piece. Others "Others" include mainly medals, coins and other miscellaneous items. Depending on the weight, design and material used in such products, these products are sold in a price range of approximately HK$50 to HK$4,000 per piece of which the prices for the most popular items range from approximately HK$50 to HK$300 per piece. In US dollars, the Hang Fung Group's products range in wholesale price from approximately $1 to over $65,000. The mean selling price of the Hang Fung Group's products is between $200 and $280. The following table illustrates, in US dollars, the typical range and average wholesale price of the Hang Fung Group's products by segment: Wholesale Average Price Range Wholesale Price ------------- ---------------- Fine gold products.................. $10 to $38,000 $200 Other precious metal products....... $1 to $65,000 $40 Jewelry products.................... $25 to $26,000 $650 Others.............................. $6 to $500 $20 - Product Design and Development The Hang Fung Group currently maintains a team of approximately 16 qualified and experienced staff in its in-house product design and development division in its Hong Kong office. The Hang Fung Group has been a pioneer in the introduction of innovative product designs as well as in the development of new production technology in the gold product industry. The product design and development division continuously monitors market trends and consumer preferences and participates in jewelry fairs, exhibitions and competitions to stimulate new ideas. Employees are also encouraged to attend relevant courses and workshops paid by the Hang Fung Group to strengthen their knowledge of production technology for gold products. The product design and development division currently creates over 3,000 new product designs on an annual basis. In order to maintain its competitiveness in the gold product market, the Hang Fung Group constantly introduces new products. Beginning in 1991, the Hang Fung Group introduced fine gold ornaments such as gold memento cards, key chains and electroformed products to the market. Some of the products of the Hang Fung Group are also designed to suit different geographical market needs. For example, the Chinese twelve signs of the zodiac ornaments and buddha figurines are in high demand in the PRC and other countries in the Asia Pacific region while cartoon characters and innovative jewelry items are in high demand in Europe and the US. 5 During 2002, the Hang Fung Group introduced house brands, such as the "Everlasting Fortune" and "Cupid-Cut" brands in the 3D-Gold diamond jewellery series, and began work to develop higher-margin sterling silver, 18K gold and diamond jewelry product lines. - Purchasing The primary raw material in the manufacture and assembly of the Hang Fung Group's products is gold bullion. For the year ended March 31, 2002, the cost of gold bullion accounted for approximately 91% of the Hang Fung Group's total purchases. The Hang Fung Group sources gold bullion primarily from suppliers in Australia, England, Germany and Hong Kong. The Hang Fung Group mainly sources gold bullion from gold bullion traders. Generally, the Hang Fung Group is able to maintain a steady supply of gold bullion from its suppliers, with an average of one day between the placing of an order and the receipt of the gold bullion. Other materials, including silver and color stones, are purchased, primarily, from suppliers in Hong Kong. For the year ended March 31, 2002, purchases of gold from the Hang Fung Group's five largest suppliers accounted for approximately 89% of the Hang Fung Group's total purchases. The Hang Fung Group sources gold bullion regularly from its major suppliers and has not experienced any difficulty in obtaining the raw materials required in the past. The Hang Fung Group has been dealing with its major suppliers for an average period of approximately ten years and maintains a good business relationship with each of them. Since there are numerous alternative sources of gold bullion such as banks and gold bullion dealers, the Hang Fung Group does not maintain any long-term contractual arrangements with its suppliers. Management believes that the Hang Fung Group is in an advantageous position to negotiate for better terms when sourcing gold bullion, as compared to gold bullion suppliers, and that the absence of established contractual relationships with any principal supplier will not have a material adverse effect on the operations or the financial position of the Hang Fung Group. Based on the prevailing market situation and given the liquidity of gold bullion in the market, the Hang Fung Group does not actively engage in hedging activities with respect to possible fluctuations in gold prices. The Hang Fung Group's management monitors the fluctuation of gold prices closely and should the need for hedging arise in the future, the Hang Fung Group may engage in hedging transactions. Moreover, the Hang Fung Group has been able to fix the purchase price of gold with its largest supplier with reference to the market gold price at the time the Hang Fung Group's gold products are sold to customers. By using this arrangement, the price of gold payable to its largest supplier will be the same as the price of gold charged by the Hang Fung Group to its customers, thereby minimizing the effect of fluctuation of gold prices on the Hang Fung Group. - Manufacturing and Assembly Production Facilities At March 31, 2002, the Hang Fung Group operated production facilities which are located in Hunghom in Hong Kong (the "Hunghom Facility"), and in Sha Tau Kok in the PRC (the "Sha Tau Kok Facility"). -- Production Facilities in the Hong Kong: Hunghom Facility The Hunghom Facility was established in 1988 and is now equipped with 15 production lines which are used primarily for the production of molds, gold memento cards and medals and the electroforming of fine gold and karat gold, as well as the production of computer-scanned gold statuettes. The Hunghom Facility is a vertically integrated facility capable of handling all aspects of the production process, from product design to mold-making and from casting to polishing as well as marketing to distribution. The premises of the Hunghom Facility are leased from an independent third party and have a total gross floor area of approximately 31,500 sq. ft., which are used as the Hang Fung Group's office, showroom, and warehouse as well as production facilities. 6 -- Production Facilities in the PRC: Sha Tau Kok Facility The Sha Tau Kok Facility is operated by, and the premises at which it is situated are leased by, Hang Fung Jewellery (Shenzhen) Co., Ltd., a wholly-owned subsidiary of Hang Fung Jewellery. The Sha Tau Kok Facility is located near the Sha Tau Kok customs office in Shenzhen, the PRC. The Sha Tau Kok Facility was developed in two phases. Development of the first phase was completed, and commercial production commenced, in July 1998. Development of the second phase was completed in November 1999, and commercial production commenced in the same month. The Sha Tau Kok Facility now houses 45 production lines primarily for the production of fine and karat gold products and other precious metal products. Production Process The Hang Fung Group combines traditional craftsmanship with advanced computerized technology such as the application of the computerized faceting machine and/or electroforming machine in the manufacturing process of gold products. While faceting and electroforming are automated procedures, the creation of product designs, the making of master wax models and master rubber molds, the carving of individual wax models and the polishing of the finished products are performed by skilled workers manually under the supervision of a team of experienced technicians. The production cycle for gold products takes approximately 7 to 30 days to complete, depending on complexity of product design, any specific requirements of the product, and production volume. -- Chain Jewelry Chain jewelry manufacturing begins with the melting of gold or silver into bars which are rolled and elongated on a press. The process is repeated a number of times until the bar is reduced to wire of approximately 20mm in diameter. The wire is then stretched to produce a finer wire which is then cut and swirled to form a spiral. The spiral is then cut to rings, which are sized and graded and soldered together afterwards to form a chain. -- Ornaments Manufacturing of other jewelry items, including gold ornaments which may be attached to chains, typically involves some, or all, of the following processes: Design and Mold Making The Hang Fung Group's in-house design team begins drawing the design by using computer-aided design software. The data for the design are then electronically transmitted to a computerized mold making machine and a master wax model is produced automatically. The master wax model is of prime importance as its degree of perfection determines the quality of the master rubber mold. A master rubber mold is then constructed by pouring liquified rubber over the master wax model (the "lost wax casting method"). The master rubber mold can be used to produce numerous replica wax models. Waxing Wax is injected into a master rubber mold to obtain the required number of wax models. After final carving, trimming and filing the surfaces and details of individual wax models, the wax models are attached to a metal stem to enable them to be handled without depositing fingerprints and grease on them, which would hinder metal deposition. Electroforming The wax models are then submerged in an electrolyte solution where gold ions are deposited onto the wax models by passing an electric current through the electrolyte solution. The entire process is controlled by computers and the processing time can be adjusted to achieve different thickness of gold layers. 7 Extraction of Wax Models The wax models cast with a layer of gold are then heated in a furnace at a pre-set temperature. The wax model underneath the gold layer melts and is extracted from the gold object. Filing and Tumbling The gold ornaments are then individually hand-filed by skilled workers to ensure smooth contours and surfaces. The base of each gold ornament is also checked and flattened to ensure that the ornament can stand upright. Stone Setting Stones are set using a variety of methods, including the "claw", "channel", "pave" or "bezel" setting methods, as determined by product design and setting requirements. Polishing Jewelry items are again polished automatically by polishing machines. Final Design and Assembly Designs or impressions are affixed to appropriate component parts by stamping, cutting or grinding. Component parts are shaped and assembled to specifications in accordance with the product design. - Manufacturing Technology and Development The Hang Fung Group continuously seeks to improve and modify its production technology and facilities in order to achieve better product quality and higher profit margin. Traditionally, the manufacture of gold products has been labor intensive and, therefore, product quality and production time may vary for each production. The Hang Fung Group has successfully combined traditional manual craftsmanship with advanced computerized technology to mass produce quality gold products in a cost efficient manner. The Hang Fung Group has committed to invest in developing the technology and improvement in product quality. As one of the first gold product manufacturers to have successfully implemented electro-forming technology, the Hang Fung Group is able to produce gold decorative ornaments of the same size as those produced using the traditional methods, but using less gold and therefore reducing costs. By adopting this new technology in the production of gold products, gold is more evenly spread on the wax model resulting in smoother contours and better appearance. In September 1998, the Hang Fung Group was granted a short-term patent of up to 8 years in Hong Kong in relation to the production technology for the computer-scanned gold statuette, a newly-launched product of the Hang Fung Group. Gold statuettes are produced by scanning the object to be reproduced, particularly busts, by a computerized scanner. Details of the contours of the bust are scanned and are stored as codes on electronic media. The codes can then be sent electronically to one of the production facilities of the Hang Fung Group and finally to the rapid prototyping system for further production of fine gold busts with the exact features of the scanned object. Besides offering a high degree of resemblance to the original object, the advantage of this production technology is that the amount of manual craftsmanship and production time can be significantly reduced. The Hang Fung Group has also obtained other patents in Hong Kong for other production methods. The Hang Fung Group used advanced electro-forming technologies to successfully manufacture the world's tallest one-piece electro-formed fine gold statue - the Goddess Kuan Yan and became the only manufacturer capable of producing one-piece electro-formed products in such size. The statue weighs approximately 168kg and is 273cm high with an estimated worth of HK$15 million. 8 - Quality Control The Hang Fung Group's quality control team consists of 40 persons and is committed to ensure that the products meet the Hang Fung Group's quality standards. All incoming raw materials, such as gold bullion, are inspected by the quality control team for purity before being used in the production process. Quality control checks are also conducted at various stages of production to ensure that product specifications are met. In addition, the Hang Fung Group has trained its production workers to closely inspect products during production. Defective products are either rejected or subject to refinements before entering the next stage of the production process. The production process is also closely monitored by trained technicians. All finished products are subject to final inspection before they are packed and delivered to customers. The Hang Fung Group's marketing staff also check the quality of finished products upon receipt of products before distribution. Hang Fung Jewellery (Shenzhen) Co. Ltd., a wholly-owned subsidiary of the Hang Fung Group, which operates the Sha Tau Kok Facility, has been granted the ISO 9001 certification. During 2002, Hang Fung Group was also awarded the ISO 9001 certification for its Hunghom Facility. - Inventory Policy and Control For gold bullion, in general, it is the Hang Fung Group's policy to maintain a stock holding period of approximately 70 days to 80 days. The Hang Fung Group had a stock level at the year ended March 2002 of approximately 3,200 kg of gold reserves for production use. The stock level is monitored by the senior manager of the gold and jewelry division who coordinates the transfer of raw materials and finished goods between the production facilities and the sales and marketing department. Stock movements from the safe or storeroom of each of the production facilities are recorded in the respective stock ledgers and stock movement reports are examined on a regular basis and are submitted to the accounting department of the Hong Kong head offices for consolidation and reconciliation. All movements of stock must be justified by the person making the stock withdrawal. Details, such as stock code, quantity and weight, are completed by the person making the withdrawal on the withdrawal note which will be passed to the senior manager of the gold and jewelry division for approval before the stock withdrawal takes place. The person making the withdrawal, accompanied by another member of staff, must sign the stock withdrawal note to acknowledge receipt of the stock. The person making the withdrawal, the senior manager and the accounting department each respectively keeps one copy of the signed withdrawal note. Goods are stored in safes and storerooms that are installed with a wide range of anti-theft devices. At the production line level, the stock retrieved by a production line supervisor from the storeroom at a production facility is distributed to workers at the production line. The supervisor keeps a record stating particulars such as type and weight of stock distributed to each worker. At the end of each working day, each worker stores his/her stock in a safety box and the locked safety box is returned to the production line supervisor. The supervisor then stores the safety boxes collected from the workers in a subsection designated for the production line in the storeroom master safe. At the end of a production cycle, the workers return the stock to the production line supervisors who will check against their records to ensure that the stock returned matches with the particulars stated in the records. Stock counts are performed on a monthly and ad hoc basis by the accounting department and the results of the stock counts are checked against the stock ledger. - Sales and Marketing The Hang Fung Group's marketing and sales activities are carried out by a team of approximately 300 staff members. The Hang Fung Group's marketing and sales staff carries out marketing and sales activities under the guidance of senior management which oversees the sales staff and overall marketing strategy. The Hang Fung Group's marketing and sales staff is responsible for establishing and maintaining relations with third party sales representatives and customers as well as marketing the Hang Fung Group's products to customers. The marketing and sales executives regularly attend trade fairs, seminars and exhibitions in Hong Kong and overseas in order to keep abreast of new product developments and market trends, to maintain regular contact with existing customers and to meet potential customers. Through participation in exhibitions, the Hang Fung Group is able to promote its corporate image, increase public awareness of its products and strengthen its competitive position in the gold products market. 9 Since its opening by the Hang Fung Group in January 2001, the 3D-Gold Tourism Exhibition Hall (the "Exhibition Hall") is a core component of the Hang Fung Group's marketing efforts, serving as both a showroom for the Hang Fung Group's products and technology and as a tourist attraction to meet the increasing business generated by tourists. The Exhibition Hall is located at the ground floor, 28 Man Lok Street, Hunghom, Kowloon and occupies a gross floor area of approximately 20,000 square feet. The Exhibition Hall reinforces the Hang Fung Group's determination to manufacture gold and jewellery products with innovative technology. The Exhibition Hall displays various scenes such as the Fine Gold Kuan Yan Statue, the Worlds' Largest Fresh Water Pearl, Super Star Wax Models, the 12 Zodiac of the Yuan Ming Yuan, and the Gold and Jewellery Environmentally Friendly Washroom which has been cited in the Guinness Book of World Records as "the world's most expensive bathroom" and as having "the world's most expensive toilet". Each scene has special characteristics. The Exhibition Hall expands the Hang Fung Group's customer base and revenue base and promotes Hong Kong's tourism industry with the development of a new and innovative tourist destination. During its first year of operations, the Exhibition Hall attracted more than one million visitors. In order to accommodate an increase in visitors anticipated to occur as a result of various undertaking by the Hong Kong government to attract and transport increased tourism, the Hang Fung Group is expanding the Exhibition Hall with the addition of 30,000 square feet of retail space scheduled to open in September 2002. Other promotional activities undertaken by the Hang Fung Group include the placing of advertisements in television, trade magazines, journals and other public media as well as direct mailing of product catalogues to existing and potential customers and maintenance of an Internet web site which provides comprehensive product information. In the PRC, potential customers have historically been referred to the Hang Fung Group by existing customers or learn about the Hang Fung Group's products from other sources such as advertisements. Customers may place orders to the Hang Fung Group's Hong Kong office by fax, telex, telephone or e-mail. In any event, all deliveries pursuant to confirmed orders from PRC customers are made in Hong Kong to the party designated by the PRC customers located in Hong Kong. The Hang Fung Group does not hold a PRC license to distribute its products in the PRC to customers in the PRC. The Hang Fung Group's PRC customers (being customers who have invoicing addresses in the PRC, and which are believed to be either wholesale distributors or retailers) are responsible for arranging the importation of the products in the PRC. Through an alliance with the The Administration of Shatoujiao Free Trade Zone of Shenzhen (the "Free Trade Administration"), Hang Fung branded products are sold through 30 retail chain stores. Pursuant to the alliance, the Hang Fung Group, jointly with the Free Trade Administration, developed the wholesale and retail business in the PRC by establishing and selling products under its own "3D-Gold" and "La Milky Way" brands. The Hang Fung Group has established solid business relationships with its customers and many of them have in turn introduced new customers to the Hang Fung Group. The Hang Fung Group also sponsors selected customers to attend major gold jewelry trade shows so as to further promote market awareness of the Hang Fung Group's products. The principal markets to which the Hang Fung Group's products are distributed are the PRC, Hong Kong, South East Asia, the United States and Europe. Sales by region (excluding Subcontracting fees) for the three years ended March 31, 2002 have been as follows: 2000 2001 2002 --------------- ---------------- ------------------ Amount Amount Amount $,000 Percent $,000 Percent $,000 Percent ------- -------- ------- ------- -------- ------- PRC and Hong Kong..... 51,605 41.9 98,408 57.8 152,776 76.0 Southeast Asia........ 17,268 14.0 30,524 17.9 21,622 10.7 United States......... 19,179 15.6 18,065 10.6 17,372 8.6 Europe................ 24,142 19.6 15,129 8.9 7,774 3.9 Others................ 10,921 8.9 8,099 4.8 1,579 0.8 -------- ------- -------- ------- -------- ------- Total.............. 123,115 100.0 170,225 100.0 201,122 100.0 ======= ===== ======= ===== ======== ====== 10 The Hang Fung Group generally adopts a tight credit policy and grants credit only to selected customers depending on their business relationship with the Hang Fung Group. Sales to customers in Hong Kong and overseas, other than the PRC, are mainly settled on an open account basis, with credit periods ranging from seven days to ninety days. All Hong Kong and overseas customers generally settle their accounts on time and no material default has been encountered by the Hang Fung Group. As for the PRC customers, owing to the different business practices prevailing in the PRC, customers normally settle their accounts at a slower pace up to 180 days after sales. Despite the slower payment pattern, the Hang Fung Group has experienced no significant bad debt problems and management believes there are no material collectibility problems. - Customers Products manufactured by the Hang Fung Group are principally sold to wholesale distributors or retail chain operators of gold, other precious metal and jewelry products. At March 31, 2002, the Hang Fung Group had approximately 300 regular customers. The Hang Fung Group estimates that, through customers and their extensive distribution networks, the products manufactured by the Hang Fung Group are sold in approximately 2,000 retail outlets worldwide. For the year ended March 31, 2002, the Hang Fung Group five largest customers accounted for approximately 11.1% of sales. During fiscal 2002, no customers accounted for more than 5% of the Hang Fung Group's revenues. The Hang Fung Group has no long term contracts with any customers. The Hang Fung Group's top five customers have each had a business relationship with the Hang Fung Group for over five years. - Competition The jewelry industry is highly fragmented, with little significant brand name recognition or consumer loyalty. Selection is generally a function of design appeal, perceived high value and quality in relation to price. While many competitors in the wholesale jewelry manufacturing and distribution business may have a wider selection of products or greater financial resources, the Hang Fung Group believes its competitive position is enhanced by the Hang Fung Group's broad customer base, experienced management team, advanced technology and capital investment in continuous product development and product design and the Hang Fung Group's close relationship with its customers and vendors. Therefore, although the competition is intense, management believes that the Hang Fung Group is well positioned to compete in the jewelry industry. Internet Operations In August 2000, the Hang Fung Group acquired 49.9% of the stock of New ePoch Information (BVI) Company Limited ("New Epoch"). New Epoch is engaged in developing and facilitating e-commerce trading facilities between China and the rest of the world using offline trading services to complement its Internet B2B platform. New Epoch is actively seeking cooperation with entities in China in various industries to explore and pioneer opportunities in China and will be the investment and business development arm of the Hang Fung Group in China. As a result of the severe downturn of the Internet business, New Epoch has curtailed its developing of e-commerce trading facilities. Staff As of March 31, 2002, the Hang Fung Group had approximately 2,000 employees, including 14 employees of New Epoch. Of the Hang Fung Group's employees, approximately 280 staff members are located in Hong Kong with the remaining employees being located in the PRC. None of the Hang Fung Group's or New Epoch's employees is governed by collective bargaining agreements and the Hang Fung Group and New Epoch each consider its relations with its employees to be satisfactory. 11 Certain Foreign Operation Considerations The operations of the Hang Fung Group are conducted in Hong Kong and the PRC. As a result, the Hang Fung Group's business, financial condition and results of operations may be influenced by the political, economic and legal environments in Hong Kong and the PRC, and by the general state of the Hong Kong and the PRC economies. On July 1, 1997, sovereignty over Hong Kong transferred from the United Kingdom to the PRC, and Hong Kong became a Special Administrative Region of the PRC (a "SAR"). As provided in the Sino-British Joint Declaration relating to Hong Kong and the Basic Law of the Hong Kong SAR, the Hong Kong SAR will have full economic autonomy and its own legislative, legal and judicial systems for fifty years. The Company's management does not believe that the transfer of sovereignty over Hong Kong will have an adverse impact on the Hang Fung Group's financial and operating environments. There can be no assurance, however, that changes in political or other conditions will not result in such an adverse impact. The Hang Fung Group's operations in the PRC are subject to special considerations and significant risks not typically associated with companies operating in North America and Western Europe. These include risks associated with, among other, the political, economic and legal environments and foreign currency exchange. The Hang Fung Group's results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulation on the import and export of gold, inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. Additionally, a portion of the revenues of the Hang Fung Group is denominated in Renminbi ("Rmb") which must be converted into other currencies before remittance outside the PRC. Both the conversion of Renminbi into foreign currencies and the remittance of foreign currencies abroad require approvals of the PRC government. ITEM 2. PROPERTIES Both the Company's and Hang Fung Group's executive offices are located at Unit 25-32, Second Floor, Focal Industrial Centre, 21 Man Lok Street, Hunghom, Hong Kong. This facility consists of approximately 31,500 square feet of office space, and is leased by the Hang Fung Group from an unaffiliated third party for approximately HK$2,395,000 (US$307,000) for fiscal 2002. This office space also houses certain marketing, product design and high quality gold production operations. The Hang Fung Group's principal production operations are conducted at facilities located in Sha Tau Kok, the PRC. The Hang Fung Group's principal production facilities are described in "Item 1. Business" under the heading "Manufacturing and Assembly, Production Facilities." The Hang Fung Group's principal showroom and marketing facilities are located in the Exhibition Hall which is described in "Item 1. Business" under the heading "Sales and Marketing." The space housing the Exhibition Hall is leased by the Hang Fung Group from an unaffiliated third party for approximately HK$1,090,000 (US$140,000) per year pursuant to a lease expiring in November 2003. A second lease covering the current pending expansion of the Exhibition Hall provides for annual lease payment of approximately HK$342,000 (US$44,000) with a term expiring in October 2004. The Company believes that its existing facilities will be adequate to support the Company's operations for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS The Company is from time to time a party to lawsuits incidental to its business. The Company and its management are not presently aware of any pending or threatened proceedings which, individually or in the aggregate, are believed to be material. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's shareholders through the solicitation of proxies, or otherwise, during the fourth quarter of the Company's fiscal year ended March 31, 2002. 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information While the Company's Common Stock trades in the over-the-counter market under the symbol "CHRM.PK", there is no established trading market in the Company's Common Stock and trading therein is sporadic. The last reported price of the Company's Common Stock, as of October 30, 2002, was $0.01. Holders At November 7, 2002, there were approximately 108 record holders of the Company's Common Stock. Dividends The Company has not paid any dividends since its inception and presently anticipates that all earnings, if any, will be retained for development of the Company's business and that no dividends on the shares of Common Stock will be declared in the foreseeable future. Any future dividends will be subject to the discretion of the Company's Board of Directors and will depend upon, among other things, future earnings, the operating and financial condition of the Company, its capital requirements, general business conditions and other pertinent facts. Therefore, there can be no assurance that any dividends on the Common Stock will be paid in the future. 13 ITEM 6. SELECTED FINANCIAL DATA The following tables present selected historical consolidated financial data of the Company derived from the consolidated financial statements of the Company which appear elsewhere herein. The following data should be read in conjunction with the consolidated financial statements of the Company included elsewhere herein. Year Ended March 31, ---------------------------------------------------------- 1998 1999 2000 2001 2002 -------- -------- -------- -------- -------- (amounts stated in US$,000, except per share data) Income Statement Data (1): Net sales.............................. $57,994 $ 85,005 $ 123,115 $ 47,645 $ - Subcontracting fees.................... 4,308 2,195 - - - ------- --------- --------- --------- -------- Total revenues....................... 62,302 87,200 123,115 47,645 - Gross profit........................... 15,143 17,705 23,655 8,408 - Operating income....................... 8,145 11,120 12,886 4,621 (55) Interest expense, net.................. (574) (1,078) (1,704) (523) - Share of income (loss) of affiliates... - - - (6,670) 1,393 Loss on dilution of equity interests in subsidiaries.......................... - (271) - (2,034) - Income (loss) before taxes............. 7,571 9,771 11,182 (4,606) 1,338 Minority interests..................... -- (2,013) (5,997) (1,805) - Net income............................. $ 6,285 $ 5,856 $ 6,781 $ (6,732) $ 1,338 ======= ======= ======= ========= ======== Net income per share................... $ 0.49 $ 0.46 $ 0.53 $ (0.53) $ 0.10 ======== ======== ======== ========== ======== Weighted average shares outstanding...........................12,800,000 12,800,000 12,800,000 12,814,000 12,865,000 ========== ========== ========== ========== ========== Balance Sheet Data (1): Working capital........................ $(1,170) $ 19,555 $ 24,960 $ (303) $ (303) Total assets........................... 45,667 73,698 95,165 20,369 21,707 Long-term debt, less current portion....................... 4,405 3,363 3,422 - - Stockholders' equity................... 14,278 20,134 26,811 20,069 21,404

(1) The Company's functional currency is Hong Kong Dollars ("HK$"). Translation of amounts from HK$ into US$ is for the convenience of readers and has been made at the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York on March 31, 2001 of US$1.00 = HK$7.8. No representation is made that the HK$ amounts could have been, or could be, converted into US$ at that rate or at any other rate. 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company's actual results could differ materially from those set forth in the forward-looking statements. Certain factors that might cause such a difference are discussed in the section entitled "Factors that May Affect Future Results" beginning on page 23. General The following discussion should be read in conjunction with the Company's financial statements appearing elsewhere herein. - Corporate Structure In May of 1997, Quality Prince, a wholly-owned subsidiary of the Company, entered into an agreement with Phenomenal, an unaffiliated third party, pursuant to which Phenomenal loaned to Quality Prince $10,000,000 and Quality Prince issued to Phenomenal a convertible promissory note (the "Note"). The Note bore interest at 3% per month, and was repayable in a lump sum payment on March 20, 1998. As one of the conditions for the lending, the Company issued a non-detachable warrant (the "Warrant") to Phenomenal to subscribe for 5,263,158 shares of common stock of the Company at an exercise price of $2.19 per share. The Note was secured by personal guarantees provided by Mr. Lam and Ms. Chan and the 53.9% equity interest in the Company owned by Mr. Lam and Ms. Chan. In accordance with the term of the agreement, the Warrant expired in May 1998. On June 4, 1998, Phenomenal agreed to extend the maturity date of the Note from March 20, 1998 to June 4, 1998, and waive its entitlement to interest accrued under the Note during the period from May 20, 1997 (date of issue of the Note) to June 4, 1998. Also, the Company and Phenomenal agreed to restructure and capitalize the Note into redeemable preferred stock of Hang Fung Jewellery, a wholly owned intermediate subsidiary of the Company. As a result, on June 30, 1998, Hang Fung Jewellery issued 5,263,788 shares of redeemable preferred stock (the "Preferred Stock") at approximately $1.90 per share to Phenomenal in replacement of the Note. Under the revised agreement, Phenomenal was required to redeem its interest in the Preferred Stock and to subscribe for the common stock of Hang Fung Gold, upon satisfaction of certain conditions. Alternatively, Phenomenal had an option to require Hang Fung Jewellery to redeem the Preferred Stock at a redemption amount as determined in accordance with a pre-determined formula, or require Mr. Lam and Ms. Chan to purchase the Preferred Stock held by Phenomenal in case Hang Fung Jewellery defaulted in redeeming the Preferred Stock. Pursuant to the revised agreement with Phenomenal, in February 1999, the Hang Fung Group effected a corporate reorganization (the "Group Reorganization") with Hang Fung Gold becoming a holding company for the Hang Fung Group, excluding Quality Prince, and Phenomenal redeemed its interest in the Preferred Stock and subscribed for the common stock in Hang Fung Gold. Immediately following the restructuring of the Hang Fung Group, Hang Fung Gold completed an offering of securities in Hong Kong raising approximately HK$59,000,000 (the "Hong Kong Offering") and the shares of Hang Fung Gold were listed on The Stock Exchange of Hong Kong Limited (the "Hong Kong Exchange"). Trading of shares of Hang Fung Gold on the Hong Kong Exchange commenced on March 16, 1999. Following the Group Reorganization and Hong Kong Offering, the Company held, through Quality Prince, 53.145% of the issued capital stock of Hang Fung Gold, whereas Phenomenal held 21.855% of the issued capital stock and the investing public held the remaining 25% of the issued capital stock of Hang Fung Gold. On August 23, 2000, the Company's principal operating subsidiary, Hang Fung Gold Technology Limited ("HFGTL" or "Hang Fung Gold") issued 1,632 million shares to New ePoch Holdings International Limited ("NEH") in exchange for a 49.9% interest in New ePoch Information (BVI) Company Limited ("New Epoch")(the "New Epoch Transaction"). On August 28, 2000, HFGTL placed 550 million shares to individual investors for HK$62.7 million (the "HFG Placement"). 15 As a result of the New Epoch Transaction and the HFG Placement, the Company's indirect ownership interest in HFGTL decreased from 53.145% to 35% and from 35% to 31.4% and the Company's interest in HFGTL and its subsidiaries (including affiliates) are classified as affiliates. The Company's consolidated statements of operations reflect the Company's proportionate interest in HFGTL prior to and subsequent to the New Epoch Transaction and the HFG Placement. As at March 31, 2001 and 2002, the Company's investment in HFGTL is reported on the balance sheet under the equity method of accounting. The Company reported a loss on dilution of equity interests in subsidiaries relating to the decrease in the Company's ownership percentage in HFGTL based on the difference in the Company's interest in the net assets value of HFGTL prior to and after the New Epoch Transaction and the HFG Placement. - Operations Following the New Epoch Transaction and HFG Placement, the Company conducts no operations which are reported on a consolidated basis. Instead, the Company holds indirect, less than 50%, interests in the Hang Fung Group and New Epoch. Hang Fung Group's operations consist of designing, manufacturing and distributing a full range of gold and silver jewelry products and other ornamental products on a wholesale basis to customers in Hong Kong, China, Europe, Southeast Asia, and the United States. Revenues from such operations are generated through the manufacturing and wholesaling of jewelry products, and, beginning from May 1999, retail sales from showrooms. Prior to fiscal 2000, Hang Fung Group conducted subcontract jewelry manufacturing for selected customers and received fees in connection with the subcontract manufacturing ("Subcontracting fees"). The primary cost of operating Hang Fung Group's jewelry business is the raw material cost of gold and jewelry. Hang Fung Group assembles or manufactures the products which it sells, other than sales made as agent for certain business partners. Hang Fung Group constantly compares costs and quality of jewelry raw materials to assure that it is obtaining the best purchase price and quality available. The cost of such raw materials and products varies with currency fluctuations and other factors beyond Hang Fung Group's control. While any fluctuations in cost of acquiring raw materials may adversely affect Hang Fung Group's profit margins, Hang Fung Group has historically been able to pass such cost fluctuations on to its customers. See ITEM 1. "Business - Purchasing". Hang Fung Group's other significant operating expenses are marketing costs, including participation in advertising programs, customer support, inventory and quality control, jewelry design and general corporate overhead. New Epoch's operations consist of trading and developing and operating e-commerce trading facilities between the PRC and the rest of the world. No revenues of a material amount from such operations have been generated through March 31, 2002. The primary cost of operating New Epoch's business is salaries and recurring database maintenance expense. Critical Accounting Policies Our consolidated financial statements and related public financial information are based on the application of generally accepted accounting principles ("GAAP"). GAAP requires the use of estimates, assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue and expense amounts reported. These estimates can also affect supplemental information contained in the external disclosures of our company including information regarding contingencies, risk and financial condition. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Valuations based on estimates are reviewed for reasonableness and conservatism on a consistent basis throughout our company. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements: 16 - Principals of Consolidation and Accounting for Interests in Subsidiaries and Affiliates. As a result of the Group Reorganization and the HFG Placement, from and after August 28, 2000, the Company holds 100% of the outstanding stock of Quality Prince and Quality Prince holds 31.4% of HFGTL and HFGTL holds 49.9% of New Epoch. The consolidated financial statements of the Company include the accounts of its wholly-owned subsidiary, Quality Prince. However, the Company and Quality Prince are holding companies which carry on no active business other than their ownership of interests in HFGTL and, indirectly, New Epoch. The Company's investment in affiliates for which it ownership exceeds 20%, but which are not majority-owned or controlled by the Company, is accounted for using the equity method of accounting. Under the equity method, the Company's proportionate share of the affiliates' net income or loss is included in the consolidated statement of operations. Accordingly, the Company's proportionate share of the net income or loss of HFGTL, including its interest in New Epoch, is reflected as a single line item under share of income (loss) of affiliates. Prior to August 28, 2000 the Company included, and had the Company retained greater than 50% control of HFGTL the Company would include, the accounts of HFGTL in its consolidated financial statements and the portion of any income or loss not attributable to the Company would be reflected as a minority interest. - Revenue Recognition and Accounts Receivable. Revenue of Hang Fung Gold consists of the net invoiced value of merchandise sold after allowances for returns and discounts and rental income. Revenue is recognized when the outcome of a transaction can be measured reliably and when it is probable that the economic benefits associated with the transaction will flow to Hang Fung Gold. Sales revenue is recognized when the merchandise is delivered and title has passed. A reserve is established at that time for estimated sales returns, discounts and uncollectible amounts. The reserve is based primarily on management's evaluation of the financial condition of the customer and historical data relating to returns, discounts and uncollectible receivables. Hang Fung Gold has demonstrated the ability to make reasonable and reliable estimates of product returns, discounts and uncollectible receivables. Rental income is recognized on a straight-line basis over the period of the relevant leases. Interest income is recognized on a time-proportion basis on the principal outstanding and at the rate applicable. - Inventories. Inventories are stated at the lower of cost and net realizable value. Cost includes costs of raw materials calculated using the first-in, first-out method of costing and, in the case of finished goods, also direct labor and an appropriate proportion of production overheads. Net realizable value is based on estimated selling prices in the ordinary course of business, less further costs expected to be incurred to completion and disposal. Provision is made for obsolete, slow-moving or defective items where appropriate. When inventories are sold, the carrying amount of those inventories is recognized as an expense in the period in which the related revenue is recognized. The amount of any write-down of inventories to net realizable value and all losses of inventories are recognized as an expense in the period the write-down or loss occurs. The amount of reversal of any write-down of inventories, arising from an increase in net realizable value, is recognized as a reduction in the amount of inventories recognized as an expense in the period in which the reversal occurs. - Investment in Associates and Properties; Impairment of Assets. Hang Fung Gold maintains investments in various privately held entities involved in the development of e-commerce trading facilities. Investment in associates is stated at Hang Fung Gold's share of the fair value of the identifiable net assets of the associates at the time of acquisition, adjusted for Hang Fung Gold's share of undistributed post-acquisition results and reserves of the associates, distributions received from the associates and other necessary alterations in Hang Fung Gold's proportionate interest in the associates arising from changes in the equity of the associates that have not been included in the income statement. Hang Fung Gold also maintains investments in various properties. Investment properties are interests in leasehold land and buildings in respect of which construction and development work has been completed and which is held for their long-term investment potential. Investment properties are included in the balance sheet at their open market value on the basis of an annual valuation by an independent qualified valuer. All changes in the value of investment properties are dealt with in the investment properties revaluation reserve unless the total of this reserve is insufficient to cover a deficit on a portfolio basis, in which case the net deficit is charged to the income statement. When an investment property is disposed of, previously recognized revaluation surpluses are reversed and the gain or loss on disposal reported in the income statement is determined based on the net disposal proceeds less the original cost. 17 No depreciation is provided for investment property unless the unexpired lease term is 20 years or less, in which case depreciation is provided on the then carrying value over the unexpired lease term. Hang Fung Gold reviews long-lived assets, including its investments in affiliates and in investment properties, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Where it is determined that an asset has been impaired, a loss will be recorded and the value of the asset as reported will be reduced to the estimated recoverable value. Due to the dramatic downturn in the internet market, Hang Fung Gold recorded a charge of $1.1 million in fiscal 2002 relating to the impairment of its investment in affiliates engaged in development of an e-commerce trading facility. Comparability of Financial Data Prior to the New Epoch Transaction, HFGTL was the principal operating subsidiary of the Company. After the New Epoch Transaction and the HFG Placement, the Company's effective percentage of ownership in HFGTL was reduced from 53.145% to 31.4%, the Company's interest in HFGTL and its subsidiaries (including affiliates) changed from subsidiaries to affiliates of the Company. As HFGTL and its subsidiaries (including affiliates) are accounted for as affiliates from the date of the New Epoch Transaction, prior year comparative financial information may be of limited value. Results of Operations Following the New Epoch Transaction and HFG Placement, the operations of HFGTL Group are no longer consolidated but are accounted for under the equity method of accounting. For purposes of comparability, the discussion herein includes (1) consolidated results of operations as reported, (2) pro forma consolidated results of operations as if the New Epoch Transaction and HFG Placement had occurred at April 1, 1999, and (3) operating results of the Company's affiliates, HFGTL Group and New Epoch. Year Ended March 31, 2002 Compared to Year Ended March 31, 2001 Pro Forma HFGTL Group New Epoch Consolidated Consolidated ------------------ --------------------- ------------------ -------------------- Year ended March 31, 2001 2002 2001 2002 2001 2002 2001 2002 ------ ------- --------- -------- ------- ------- ------- ------- (in US`000s) Revenues $ 170,225 $ 201,122 $ 33 - $ - - $ 47,645 - Cost of sales and services (143,907) (173,539) (32) - - - (39,237) - ---------- --------- --------- ---------- ------- -------- --------- -------- Gross profit 26,318 27,583 1 - - - 8,408 - Selling, general and administrative expenses (13,861) (18,663) (1,041) (1,148) (56) (55) (3,787) (55) ---------- --------- --------- ---------- ------- -------- --------- -------- Operating income (loss) 12,457 8,920 (1,040) (1,148) (56) (55) 4,621 (55) Interest expense, net (2,741) (2,951) (191) (515) - - (523) - Share of profits (losses) of affiliates (791) (1,124) (1,231) - 2,358 1,393 (6,670) 1,393 Write-back of (provision for) amount due from affiliates (1,063) (1,059) 176 (589) - - - - Impairment of goodwill relating to affiliates (24,121) - - - - - - - Gain (loss) on dilution of equity interests in subsidiaries - - - - - - (2,034) - ---------- --------- ---------- ---------- ------- -------- ---------- --------- Income (loss) before income taxes (16,259) 3,786 (2,286) (2,252) 2,302 1,338 (4,606) 1,338 Reversal of (provision) for income taxes (1,174) 644 - - (369) - (321) - Minority interests - - - 10 - - (1,805) - ---------- --------- --------- ---------- ------- -------- ---------- --------- Net income (loss) $ (17,433) $ 4,430 $ (2,286) $ (2,242) $ 1,933 $ 1,338 $(6,732) $ 1,338 ========== ========= ========= ========== ======= ======== ========== =========

18 Revenues and Gross Profit. Consolidated revenues for the year ended March 31, 2002 were nil as compared to $47.7 million for the year ended March 31, 2001. The lack of consolidated revenues for the current year was attributable to the reclassification of HFGTL Group as affiliates following the New ePoch Transaction in August 2000. Pro forma consolidated revenues were nil for both the 2002 and 2001 fiscal years. HFGTL Group. Total revenues of HFGTL Group were $201.1 million for the year ended March 31, 2002, an increase of 18.2% from $170.2 million for the year ended March 31, 2001. The increase in revenues of HFGTL Group for the year was primarily attributable to increased sales in Hong Kong and Mainland China which were driven by increased marketing efforts in those markets, in particular the contribution of the 3D-Gold Tourism Exhibition Hall, and by the adoption of more competitive pricing. The revenue gains in Hong Kong and Mainland China were partially offset by decreased revenues in other markets attributable to the continued poor economic environment following the events of September 11. Geographically, within Southeast Asia (including Hong Kong and the PRC) sales by HFGTL Group increased 35.3% to $174.4 million during the year ended March 31, 2002 from $128.9 million during the prior year. Sales within Southeast Asia accounted for 86.7% of total sales during the current period as compared to 75.7% during the same period in the prior year. Sales within the region increased due to increased marketing effort, in particular in Hong Kong and the PRC during the year, which was partially offset by week global economic conditions, particularly following the events of September 11. Sales in Hong Kong and the PRC increased approximately 55.3% to $152.8 million for the year ended March 31, 2002 from $98.4 million for the prior year. Sales in Southeast Asia (not including Hong Kong and the PRC) during the year ended March 31, 2002 decreased 29.2% to $21.6 million from $30.5 million for the same period in the prior year. Outside of Southeast Asia (mainly in the United States and Europe), HFGTL Group experienced a 35.3% decrease in sales with these sales accounting for 13.3% of total sales in the 2002 fiscal year as compared to 24.3% of total sales in the prior year. The decrease in sales outside of Southeast Asia was attributable to increased marketing efforts in Southeast Asia regions and deteriorating macroeconomic conditions worldwide. Sales in Europe decreased approximately 48.3% to $7.8 million for the 2002 fiscal year from $15.1 million in the prior year. Sales in the United States decreased approximately 3.8% to $17.4 million during the 2002 fiscal year from $18.1 million in the prior year. Gross profit of HFGTL Group increased by 4.8% to $27.6 million during the current period from $26.3 million during the prior fiscal year. The increase in gross profit was mainly attributable to the increase in net sales. Gross margin decreased to 13.7% in the current period from 15.5% in the prior fiscal year period. The decrease in gross profit percentage during the current period was primarily attributable to adoption of a more aggressive competitive pricing strategy to cope with the increasingly competitive market and to boost market share. New Epoch. Total revenues of New Epoch were nil during fiscal 2002 and $33,000 during fiscal 2001. New Epoch operations during the year were focused on developing and operating e-commerce trading facilities between the PRC and the rest of the world. Operating Expenses. Consolidated operating expenses for fiscal 2002 were $55,000 as compared to $3.8 million for the prior fiscal year. The decrease in consolidated operating expenses was attributable to the fact that HFGTL has become an affiliate following the New Epoch Transaction and HFG Placement in August 2000. Pro forma consolidated operating expenses were $55,000 for the 2002 fiscal year and $56,000 for the prior year. HFGTL Group. Total operating expenses of HFGTL Group were $18.7 million for fiscal 2002, an increase of 34.6% from $13.9 million for the prior year. The increase in operating expenses of HFGTL Group for the year was primarily attributable to increased sales and marketing costs associated with the opening and operation of the 3D-Gold Tourism Exhibition Hall and the promotion of HFGTL Group's "3D-Gold" and "La Milky Way" products and brands. New Epoch. Total operating expenses of New Epoch were $1,148,000 for fiscal 2002, an increase of 10.3% from $1,041,000 for the prior year. As the business of New Epoch is still at investment stage, New Epoch must maintain staff costs, office rental and daily expenses to support its daily operations. 19 Interest Expense, Net. Consolidated interest expense, net, for fiscal 2002 was nil as compared to $523,000 for the prior year. The decrease in consolidated net interest expense was attributable to the fact that HFGTL has become an affiliate following the New Epoch Transaction and HFG Placement in August 2000. Pro forma consolidated net interest expense was nil for both fiscal 2002 and fiscal 2001. HFGTL Group. Net interest expense of HFGTL Group was $3 million for fiscal 2002, an increase of 11.1% from $2.7 million for fiscal 2001. The increase in net interest expense of HFGTL Group was primarily attributable to increased short-term bank borrowings to support business expansion in Hong Kong and the PRC. Share of Profit/(Losses) of Affiliates; Impairment of Goodwill Relating to Affiliates. Consolidated share of profits of affiliates totaled $1.4 million during fiscal 2002 as compared to a loss of $6.7 million during fiscal 2001. Consolidated share of profits/losses of affiliates represents the Company's 31.4% interest in HFGTL, including a 49.9% interest in New Epoch owned by HFGTL. Pro forma consolidated share of profits of affiliates totaled $1.4 million for fiscal 2002 and $2.4 million for fiscal 2001. The Company's share of losses of affiliates attributable to HFGTL during fiscal 2001 was principally attributable to a $24.1 million expense recorded by HFGTL for the impairment of goodwill relating to HFGTL's interest in New Epoch. Loss on Dilution of Equity Interest in Subsidiaries. Consolidated loss on dilution of equity interest in subsidiaries totaled nil during fiscal 2002 as compared to $2 million during fiscal 2001. Consolidated loss on dilution of equity interest in subsidiaries represents the loss attributable to the reduction in the Company's ownership interest in HFGTL from 53.145% to 31.4% as a result of the New Epoch Transaction and HFG Placement. Income Taxes. Consolidated income taxes for fiscal 2002 was nil as compared to $321,000 for fiscal 2001. The change in consolidated income tax expense was attributable to the fact that HFGTL has become an affiliate following the New Epoch Transaction and HFG Placement in August 2000. Pro forma consolidated income tax expense were nil for fiscal 2002 and $369,000 for fiscal 2001. HFGTL Group. HFGTL Group reported a tax benefit of $644,000 for fiscal 2002, as compared to a tax expense of $1.2 million for fiscal 2001. The tax benefit reported for fiscal 2002 was attributable to the reversal of an over-provision for PRC taxes in prior years totaling $1 million. Minority Interest. Consolidated minority interest totaled nil during fiscal 2002 as compared to $1.8 million during fiscal 2001. The decrease in minority interest was attributable to the fact that HFGTL has become an affiliate following the New Epoch Transaction and HFG Placement. Pro forma consolidated minority interest was nil for both fiscal 2001 and fiscal 2000. 20 Year Ended March 31, 2001 Compared to Year Ended March 31, 2000 Pro Forma HFGTL Group New Epoch Consolidated Consolidated ----------------- ------------------ ------------------- ------------------- Year ended March 31, 2000 2001 2000 2001 2000 2001 2000 2001 ------- ------- --------- ------- -------- -------- ------- -------- (in US`000s) Revenues $123,115 $ 170,225 $ - $ 33 $ - $ - $123,115 $ 47,645 Cost of sales and services (99,460) (143,907) - (32) - - (99,460) (39,237) ---------- ---------- -------- -------- ------- -------- --------- --------- Gross profit 23,655 26,318 - 1 - - 23,655 8,408 Selling, general and administrative expenses (10,748) (13,861) (111) (1,041) (22) (56) (10,770) (3,787) --------- ---------- -------- -------- ------- -------- --------- --------- Operating income (loss) 12,907 12,457 (111) (1,040) (22) (56) 12,885 4,621 Interest expense, net (1,704) (2,741) - (191) - - (1,704) (523) Share of profits (losses) of affiliates- (791) (63) (1,231) (4,136) 2,358 - (6,670) Write-back of (provision for) amount due from affiliates - (1,063) (305) 176 - - - - Impairment of goodwill relating to affiliates - (24,121) - - - - - - Gain (loss) on dilution of equity interests in subsidiaries - - - - 1,585 - - (2,034) -------- --------- --------- -------- ------- -------- --------- --------- Income (loss) before income taxes 11,203 (16,259) (479) (2,286) (2,573) 2,302 11,181 (4,606) Reversal of (provision for) income taxes 1,596 (1,174) - - 501 (369) 1,596 (321) Minority interests - - - - - - (5,997) (1,805) --------- --------- --------- --------- ------- -------- --------- --------- Net income (loss) $12,799 $(17,433) $ (479) $(2,286) $(2,072) $ 1,933 $ 6,780 $(6,732) ========= ========= ========= ========= ======= ======== ========= =========

Revenues and Gross Profit. Consolidated revenues for the year ended March 31, 2001 were $47.7 million as compared to $123 million for the year ended March 31, 2000. The decrease in consolidated revenues was attributable to the dilution of equity interest in HFGTL from 53.145% to 31.4% following the New Epoch Transaction and HFG Placement in August 2000. As a consequence, HFGTL was no longer a subsidiary and has become an affiliate. Pro forma consolidated revenues were nil for both the 2000 fiscal year and the 2001 fiscal year. HFGTL Group. Total revenues of HFGTL Group were $170.2 million for the year ended March 31, 2001, an increase of 38.3% from $123.1 million for the year ended March 31, 2000. The increase in revenues of HFGTL Group for the year was primarily attributable to expansion of production facilities to meet increasing demand, new products design, increased marketing efforts and adoption of more competitive pricing strategy. Geographically, within Southeast Asia (including Hong Kong and the PRC) sales by HFGTL Group increased 87.1% to $128.9 million during the year ended March 31, 2001 from $68.9 million during the prior year. Sales within Southeast Asia accounted for 75.7% of total sales during the current period as compared to 55.9% during the same period in the prior year. Sales within the region increased due to improving economic conditions and extra marketing effort in particular in the PRC during the year following an extended period of weakness from late 1997 to early 1999 which was partially offset by pricing competition and additional sales during the 1999 period relating to the Millennium. Sales in Hong Kong and the PRC increased approximately 90.7% to $98.4 million for the year ended March 31, 2001 from $51.6 million for the prior year. Sales in Southeast Asia (not including Hong Kong and the PRC) during the year ended March 31, 2001 increased 76.3% to $30.5 million from $17.3 million for the same period in the prior year. Outside of Asia (mainly in the United States and Europe), HFGTL Group experienced a 23.9% decrease in sales with these sales accounting for 24.3% of total sales in the 2001 fiscal year as compared to 44.1% of total sales in the prior year. The decrease in sales outside of Asia was attributable to increased marketing efforts and strong product demand which accompanied improved economic conditions in Southeast Asia regions and deteriorating macroeconomic conditions worldwide. Sales in Europe decreased approximately 37.3% to $15.1 million for the 2001 fiscal year from $24.1 million in the prior year. Sales in the United States decreased approximately 5.7% to $18.1 million during the 2001 fiscal year from $19.2 million in the prior year. 21 Gross profit of HFGTL Group increased by 11% to $26.3 million during the current period from $23.7 million during the prior fiscal year. The increase in gross profit was mainly attributable to the increase in net sales. Gross margin decreased to 15.5% in the current period from 19.2% in the prior fiscal year period. The decrease in gross profit percentage during the current period was primarily attributable to adoption of a more competitive pricing strategy and the increase in proportion of sales of gold products of relatively lower profit margin. New Epoch. Total revenues of New Epoch were $33,000 during fiscal 2001 and nil during fiscal 2000. New Epoch operations during the year were focused on developing and operating e-commerce trading facilities between the PRC and the rest of the world. Operating Expenses. Consolidated operating expenses for fiscal 2001 were $3.8 million as compared to $10.8 million for the prior fiscal year. The decrease in consolidated operating expenses was attributable to the fact that HFGTL has become an affiliate following the New Epoch Transaction and HFG Placement in August 2000. Pro forma consolidated operating expenses were $56,000 for the 2001 fiscal year and $22,000 for the prior year. HFGTL Group. Total operating expenses of HFGTL Group were $13.9 million for fiscal 2001, an increase of 28.7% from $10.8 million for the prior year. The increase in operating expenses of HFGTL Group for the year was primarily attributable to increased staff salary and selling expenses to support increased business operations. New Epoch. Total operating expenses of New Epoch were $1,041,000 for fiscal 2001, an increase of 837.8% from $111,000 for the prior year. The increase in operating expenses of New Epoch for the year was primarily attributable to the limited operations conducted by New Epoch in the prior year following the formation of New Epoch in November 1999. Interest Expense, Net. Consolidated interest expense, net, for fiscal 2001 was $523,000 as compared to $1.7 million for the prior year. The decrease in consolidated net interest expense was attributable to the fact that HFGTL has become an affiliate following the New Epoch Transaction and HFG Placement in August 2000. Pro forma consolidated net interest expense was nil for both fiscal 2001 and fiscal 2000. HFGTL Group. Net interest expense of HFGTL Group was $2.7 million for fiscal 2001, an increase of 58.8% from $1.7 million for fiscal 2000. The increase in net interest expense of HFGTL Group was primarily attributable to increased trust receipt bank loans and long term bank loans. Share of Profit/(Losses) of Affiliates. Consolidated share of losses of affiliates totaled $6.7 million during fiscal 2001 as compared to nil during fiscal 2000. Consolidated share of losses of affiliates represents the Company's 31.4% interest in HFGTL, including a 49.9% interest in New Epoch owned by HFGTL. Pro forma consolidated share of profits of affiliates totaled $2.4 million for fiscal 2001 and pro forma consolidated share of losses of affiliates totaled $4.1 million for fiscal 2000. Loss on Dilution of Equity Interest in Subsidiaries. Consolidated loss on dilution of equity interest in subsidiaries totaled $2 million during fiscal 2001 as compared to nil during fiscal 2000. Consolidated loss on dilution of equity interest in subsidiaries represents the loss attributable to the reduction in the Company's ownership interest in HFGTL from 53.145% to 31.4% as a result of the New Epoch Transaction and HFG Placement. Income Taxes. Consolidated income taxes, including share of affiliates' income tax, for fiscal 2001 was $321,000 as compared to a tax benefit of $1.6 million for fiscal 2000. The change in consolidated income tax expense was attributable to the fact that HFGTL has become an affiliate following the New Epoch Transaction and HFG Placement in August 2000 and finalization of offshore claims in computing Hong Kong profit tax in fiscal 2000. Pro forma consolidated income tax expense were $369,000 for fiscal 2001 and a tax benefit of $501,000 for fiscal 2000. HFGTL Group. Income tax expense of HFGTL Group was $1.2 million for fiscal 2001, as compared to a tax benefit of $1.6 million for fiscal 2000. 22 Minority Interest. Consolidated minority interest totaled $1.8 million during fiscal 2001 as compared to $6 million during fiscal 2000. The decrease in minority interest was attributable to the fact that HFGTL has become an affiliate following the New Epoch Transaction and HFG Placement. Pro forma consolidated minority interest was nil for both fiscal 2001 and fiscal 2000. Factors that May Affect Future Results The Company's quarterly and annual operating results have been, and will continue to be, affected by a wide variety of factors that could have a material adverse effect on revenues and profitability of Hang Fung Group and New Epoch during any particular period, including the level of orders which are received and can be shipped in a quarter, the rescheduling or cancellation of orders by its customers, competitive pressures on selling prices, changes in product or customer mix, availability and cost of raw materials, loss of any strategic relationships, the ability of Hang Fung Group to introduce new products and implement new or expanded manufacturing technologies on a timely basis, new product introductions by competitors, the ability of New Epoch to commence revenue producing operations and generate sufficient revenues to operate profitably, fluctuations in exchange rates, changes in consumer tastes and spending patterns and general economic conditions, among others. Hang Fung Group's future operating results are particularly dependent upon several specific factors, in addition to the general factors noted above, including (1) substantial dependence upon manufacturing and, to a certain extent, marketing arrangements in the PRC, (2) ability to secure adequate financing to support planned increases in production and marketing of products, (3) Hang Fung Group's ability to sell adequate volumes of product at sufficient profit margins in the PRC to recoup Hang Fung Group's substantial investment plan in expanding distribution channels in the PRC and (4) Hang Fung Group's ability to manage projected revenue growth. Management believes that Hang Fung Group's ability to sustain its current margins and level of profitability is due, to a significant degree, to its establishment of favorable manufacturing arrangements in the PRC and marketing arrangements in the PRC with PRC government authorized entities. If, for any reason, Hang Fung Group were to be unable to continue its existing manufacturing activities in the PRC or contractual relationships in the PRC, or to replace those relationships with similar arrangements, it is possible that Hang Fung Group's operating costs could increase reducing both Hang Fung Group's margins and profitability. Management believes that Hang Fung Group's recent growth, and anticipated future growth, is a result of investments, and planned investments, in new and expanded production capacity and expanded marketing efforts. Hang Fung Group has invested substantial amounts in new machinery and the opening of the Sha Tau Kok Facility. Hang Fung Group has also invested substantial amounts to expand marketing efforts in the PRC, including Hong Kong. In order to continue to grow revenues and profitability, Hang Fung Group plans to invest substantial additional funds to expand production capacity further and to support further increases in marketing efforts, particularly in the PRC. The Company previously secured $10 million of funding through the sale of the Note to Phenomenal and subsequent Group Reorganization and secured an additional $7.6 million of funding through the Hong Kong Offering. While funding from those sources was adequate to support planned facility expansions and increased marketing efforts, there can be no assurance that Hang Fung Group will not require additional funding to support future planned expansion. See "-- Liquidity and Capital Resources." As a result of the New Epoch Transaction and the HFG Placement, the Company's ownership interest in the Hang Fung Group (where substantially all of the Company's operations are conducted and revenues generated) has decreased from 53.145% to approximately 31.4%. For periods subsequent to the New Epoch Transaction and the HFG Placement, the Company's operating results will reflect only the Company's percentage ownership in the operations of Hang Fung Group and New Epoch as affiliates and the the revenues and other operating items will not be reported on a consolidated basis. 23 Hang Fung Group has formed an alliance with The Administration of Shatonjiao Free Trade Zone of Shenzhen pursuant to which Hang Fung Group has committed to devote substantial resources and efforts to increasing distribution channels in the PRC. Countries in the Asia Pacific region experienced significant weaknesses in their currency, banking and equity markets in 1996 through 1998. A global economic slowdown during the second half of 2000 and the first half of 2001, followed by the events of September 11, have again adversely affected those economies. Because those economies are less mature than western economies, they remain subject to higher risk than western economies and any future weakness in the region, and the PRC in particular, could adversely affect, among other things, consumer demand for luxury goods in the region (perhaps including Hang Fung Group's products which may be considered luxury consumer goods), and the U.S. dollar value of Hang Fung Group's foreign currency denominated sales. In addition, Hang Fung Group's interest income and expense is sensitive to fluctuations in the general level of Hong Kong interest rates. Any regional weakness, particularly in the PRC, could adversely impact the results of Hang Fung Group's efforts to increase distribution channels in the PRC and could lead to our inability to recoup the investment in that regard. Hang Fung Group's policy is to denominate all its sales and assets in U.S. dollars or Hong Kong dollars. The Hong Kong Government has, throughout fiscal 1998 and since the beginning of fiscal 1999, repeatedly assured the public that the "peg" of Hong Kong dollar to the U.S. dollar will not be changed and the Hong Kong dollar will not be devalued. Similarly, the governor of the PRC's central bank has reassured the public that the Renminbi will not be devalued. Therefore, based on information available to management at this time, management does not anticipate significant fluctuations in the exchange rate between the U.S. dollar and the Hong Kong dollar in the foreseeable future. As Hang Fung Group makes its purchases of raw materials in local currencies, and attempts to settle those purchases in local currencies, management does not believe Hang Fung Group is exposed to undue amount of risk arising from fluctuations of the exchange rates between those currencies and the U.S. dollar. Weakness in the U.S. dollar during the first half of 2002 could, if not halted, result in increased risk of loss due to adverse exchange rate fluctuations. Hang Fung Group does not enter into foreign exchange forward contracts or currency options to hedge against foreign exchange fluctuations or interest rate swaps, interest rate forward contracts and other derivatives to hedge against interest rate exposures. Hang Fung Group monitors its exchange and interest rate risks on a continuous basis, both on a stand-alone basis and in conjunction with each other, from both an accounting and an economic perspective. Given the horizons of Hang Fung Group's risk management activities, there may be adverse financial impacts resulting from unfavorable movements in either foreign exchange or interest rates. Liquidity and Capital Resources At March 31, 2002, the Company had no cash balances and a working capital deficit of $303,000. This compares to no cash balance and a working capital deficit of $303,000 at March 31, 2001. At March 31, 2002, Hang Fung Group had cash balances of $11.5 million and working capital of $30.5 million as compared to a cash balance of $14.2 million and working capital of $24.5 million at March 31, 2001 and New Epoch had cash balances of $1.3 million and working capital of $1.9 million as compared to cash balances of $3.9 million and working capital of $4 million at March 31, 2001. Included in the cash balance of Hang Fung Group were $10 million at March 31, 2002 and $9.9 million at March 31, 2001 which amounts were pledged as collateral to secure existing bank financing facilities. For fiscal 2002, net cash used in operating activities amounted to $55,000 as compared to $9.2 million for the prior year. This change resulted from the reclassification of Hang Fung Group as an affiliate. Hang Fung Group had cash flows from operations of $8.2 million during fiscal 2002 as compared to $1.4 million during fiscal 2001. New Epoch used $1.6 million of cash in operating activities during fiscal 2002 as compared to $928,000 of cash used in operating activities during fiscal 2001. Net cash provided by investing activities totaled $55,000 during fiscal 2002 as compared to net cash used in investing activities of $20 million during fiscal year 2001. This change was attributable to reclassification of Hang Fung Group as an affiliate. Net cash used in investing activities by Hang Fung Group totaled $9 million during fiscal 2002 as compared to $28.9 million during fiscal 2001, and were primarily attributable to decreased investment in machinery and equipment and no further advances to affiliates. Net cash used in investing activities by New Epoch totaled $622,000 during fiscal 2002 as compared to $1.7 million during fiscal 2001, and were primarily attributable to decreased advances to affiliates in fiscal 2002. 24 Net cash provided by financing activities totaled nil during fiscal 2002 as compared to $9.6 million during fiscal 2001. This change was attributable to reclassification of Hang Fung Group as an affiliate. Net cash provided by financing activities for Hang Fung Group totaled $4.6 million during fiscal 2002 as compared to $11.8 million during fiscal 2001 and were primarily attributable to placement of shares in 2000. Net cash provided by financing activities for New Epoch totaled $63,000 during fiscal 2002 as compared to $6.5 million during fiscal 2001 and were primarily attributable to advances from Hang Fung Group in fiscal 2001. At March 31, 2002, and at March 31, 2001, the Company had no long term debt. Hang Fung Group had long term debt of $8.5 million at March 31, 2002 as compared to $9.4 million at March 31, 2001 and New Epoch had long term debt of $6.4 million at March 31, 2002 and 2001. The Company has limited direct liquidity requirements. The primary liquidity needs of Hang Fung Group are to fund accounts receivable and inventories as well as to fund periodic purchases of machinery, equipment and expansion of production facilities. Prior to Phenomenal's investment in Hang Fung Group and receipt of proceeds from the Hong Kong Offering, Hang Fung Group had historically funded its operations through a combination of internally generated cash, short-term borrowings under bank lines of credit and hire purchase financing. New Epoch's primary liquidity needs are to fund daily operating expenses and recurring database maintenance expenses. At March 31, 2002, the Company had no material capital commitments. Hang Fung Group intends to use available funds as needed to expand its wholesale and retail business. Additionally, Hang Fung Group is expanding the 3D-Gold Tourism Exhibition Hall with the addition of 30,000 square feet of retail space scheduled to open in September 2002. New Epoch intends to use available funds to develop and maintain its e-commerce trading facilities. At March 31, 2002, the Company had no material capital resources and Hang Fung Group's capital resources consisted of various bank credit facilities and certain capital leases, in addition to funds on hand. Hang Fung Group's bank credit facilities consist of a combination of term loans, lines of credit, letters of credit, overdraft, revolving and similar credit facilities generally utilized in the jewelry industry. Hang Fung Group's bank credit facilities are used to fund purchases of raw materials and inventory and to finance accounts receivable and overdrafts. Such facilities are consistent with credit facilities generally available to operators in the jewelry industry in terms of interest rates and fees, collateral, repayment terms, and renewal. Hang Fung Group's total available bank credit facilities at March 31, 2002 were approximately $60.9 million of which approximately $56.7 million had been used at such date. At March 31, 2002, Hang Fung Group also had a number of capital leases and operating leases pursuant to which Hang Fung Group holds various facilities and equipment. At March 31, 2002, Hang Fung Group's capital lease obligations totaled $4.5 million of which $2.3 million was attributable to current lease obligations. Obligations under operating leases require minimum annual rental payments by Hang Fung Group of approximately $340,000 in fiscal 2003. The Company believes that Hang Fung Group's available trade credit, bank credit facilities, funds on hand and funds generated from operations, will be sufficient to satisfy Hang Fung Group's bank credit needs and anticipated working capital requirements for at least the next 12 months, including the needs of New Epoch. 25 Contractual Obligations and Commercial Commitments The Company operates exclusively through Hang Fung Group and, therefor, has no contractual obligations or commercial commitments other than those of Hang Fung Group. The following table gives information about Hang Fung Group's existing material commitments under indebtedness and contractual obligations: ------------------------ ------------------------------------------------------------------------- Payments Due by Fiscal Year Ended March 31, Contractual Obligations ($,000) ------------------------ ---------- ---------- ---------- --------- --------- -------- ----------- Total 2003 2004 2005 2006 2007 thereafter ------------------------ ---------- ---------- ---------- --------- --------- -------- ----------- Bank loans (1) $ 16,835 $ 12,904 $ 1,043 $ 784 $ 662 $ 134 $ 1,308 ------------------------ ---------- ---------- ---------- --------- --------- -------- ----------- Capital lease obligations (2) 4,499 2,263 1,575 630 23 8 - ------------------------ ---------- ---------- ---------- --------- --------- -------- ----------- Operating leases (3) 698 340 189 80 61 28 - ------------------------ ---------- ---------- ---------- --------- --------- -------- ----------- Unconditional purchase obligations (3) 44 44 - - - - - ------------------------ ---------- ---------- ---------- --------- --------- -------- ----------- Total contractual cash obligations 22,076 15,551 2,807 1,494 746 170 1,308 ------------------------ ---------- ---------- ---------- --------- --------- -------- -----------

(1) See note 19 and 20 to accompanying financial statements of Hang Fung Gold. (2) See note 21 to accompanying financial statements of Hang Fung Gold. (3) See note 30 to accompanying financial statements of Hang Fung Gold. The following table gives information about other commercial commitments of Hang Fung: -------------------- --------------------------------------------------------------------------------- Other Commercial Amount of Commitment Expiring March 31, Commitments ($,000) -------------------- ----------- ----------- ----------- ----------- ---------- ---------- ----------- Total 2003 2004 2005 2006 2007 thereafter -------------------- ----------- ----------- ----------- ----------- ---------- ---------- ----------- Lines of credit (1) $ 37,861 $ 37,861 - - - - - -------------------- ----------- ----------- ----------- ----------- ---------- ---------- ----------- Standby letters of credit 631 631 - - - - - -------------------- ----------- ----------- ----------- ----------- ---------- ---------- ----------- Total commercial commitments 38,492 38,492 - - - - - -------------------- ----------- ----------- ----------- ----------- ---------- ---------- -----------

(1) Lines of credit include bank overdrafts and trust receipts bank loans which are utilized as of March 31, 2002. 26 Transactions with Related and Certain Other Parties The Company and the Hang Fung Group have periodically engaged in transactions with parties affiliated with the Company and the Hang Fung Group. All of such transactions and arrangements are reflected in the balance sheet and statement of operations of the Company and/or the Hang Fung Group. During the fiscal year ended March 31, 2001 and March 31, 2002, the Hang Fung Group paid rental payments of $41,538 and $20,769, respectively, to Mr. Lam in connection with the lease of a residential premises for Mr. Lam's residence. Such payments are made pursuant to Mr. Lam's employment agreement with the Hang Fung Group and are reflected in the statement of operations of the Hang Fung Group. The Company has from time to time both advanced to and borrowed funds from Mr. Lam. At March 31, 2001 and 2002, the Company owed Mr. Lam $303,000. All of such loans are unsecured, non-interest bearing and without pre-determined repayment terms and are reflected on the balance sheet of the Company. Mr. Lam and Ms. Chan personally pledged certain real estate as collateral to secure the existing banking facilities of the Hang Fung Group. Mr. Lam has also advanced funds to the Hang Fung Group from time to time. At March 31, 2002, the total amount owed by the Hang Fung Group to Mr. Lam was $780,513. Loans from Mr. Lam to the Hang Fung Group are unsecured, non-interest bearing and without pre-determined repayment terms. Those loans are reflected on the balance sheet of the Hang Fung Group. At March 31, 2002, the Hang Fung Group had advanced funds to the Company in the amount of $90,128. Those advances are unsecured, non-interest bearing and without pre-determined repayment terms. The advances are reflected on the balance sheet of the Hang Fung Group as current receivables and are reflected on the balance sheet of the Company as a reduction in the investment in affiliates account. At March 31, 2002 and 2001, New Epoch, a 49.9% owned affiliate of the Hang Fung Group, owed $6.4 million to the Hang Fung Group. Such amount is secured by the 50.1% equity interest in New Epoch not owned by the Hang Fung Group, bears interest at the rate of 2.5% over the prime lending rate as quoted by The Honkkong and Shanghai Banking Corporation Limited and is repayable after September 2003. Interest on the amounts due from New Epoch totaled $570,000 during fiscal 2002 and $244,000 during fiscal 2001. At March 31, 2002, the Hang Fung Group had established a reserve against the advance to New Epoch in the amount of $2.1 million to reflect the amount expected to be recoverable from the advance. The amount of the reserve is reflected in the balance sheet as an offset to the receivable accounted for under investment in affiliates and as a charge on the statement of operations. Seasonality The jewelry business is highly seasonal, with the third and fourth calendar quarters (second and third fiscal quarters), which includes the Christmas shopping season, historically contributing the highest sales. Seasonality cannot be predicted or counted upon, and the results of any interim period are not necessarily indicative of the results that might be expected during a full fiscal year. The following table sets forth Hang Fung Group's unaudited net sales for the periods indicated: Fiscal Year Ended March 31, 2000 2001 2002 (US$,000) (US$,000) (US$,000) Amount % Amount % Amount % --------- ------ ------ ----- --------- ----- 1st Quarter (4/1-6/30) $ 24,398 19.8 $ 27,211 16.0 42,002 20.9 2nd Quarter (7/1-9/30) 28,892 23.5 28,075 16.5 37,248 18.5 3rd Quarter (10/1-12/31) 31,098 25.3 47,776 28.1 44,913 22.3 4th Quarter (1/1-3/31) 38,727 31.4 67,163 39.4 76,959 38.3 --------- ------ -------- ----- -------- ----- Total $123,115 100.0 $170,225 100.0 $201,122 100.0 ======== ===== ======== ===== ======== =====

27 Inflation Inflation has historically not had a material effect on the Hang Fung Group's operations. When the price of gold or other raw materials has increased, these costs historically have been passed on to the customer. Furthermore, as Hang Fung Group does not have either long-term supply contracts or long-term contracts with customers, prices are quoted based on the prevailing prices for semi-precious gemstones or metals. Accordingly, the Company believes inflation will not have a material effect on Hang Fung Group's future operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Hang Fung Group's sales are denominated in Renminbi (the "Rmb"), U.S. dollars or Hong Kong dollars. Any material fluctuation in the value of the Rmb, the Hong Kong dollars relative to the U.S. dollars would have significant impact on the Hang Fung Group's operating results. In order to minimize the Hang Fung Group's exposure to fluctuations in the exchange rate of Rmb, the Hang Fung Group utilities its Rmb revenue to settle the expenses denominated in Rmb incurred in the purchase of raw materials and its production facilities in the PRC. Only the unused Rmb may be subjected to exchange risk. In addition, the Hang Fung Group's currency risk in fiscal 2002 was immaterial as a result of the "peg" of Hong Kong dollars to the U.S. dollars and therefore no derivative contracts such as forward contracts and options to hedge against foreign exchange fluctuations was considered or made. The Hang Fung Group's interest expense is subject to the fluctuations of Hong Kong interest rates. The interest rates on the bank installment loans of the Hang Fung Group, in the principal amount of approximately $5 million, ranged from Hong Kong prime lending rate less 1.75% to Hong Kong prime lending rate plus 1.75% in fiscal 2002. The Hang Fung Group does not currently hedge its interest rate exposure as the Hang Fung Group believes that there are (i) no significant changes in Hong Kong interest rates in the foreseeable future, and (ii) no adversely effects on its operation and cash flow even if the applicable interest rate is increased by 1% in Hong Kong prime lending rate. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements respectively of the Company and Hang Fung Gold, together with the independent auditors' report thereon of Moore Stephens Wurth Frazer & Torbet ("MSWFT"), Certified Public Accountants, appears following the Index to Financial Statements on page 38 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On June 26, 2002, Arthur Andersen & Co. ("AA") advised the Company that, in connection with its combination with PricewaterhouseCoopers ("PWC"), it was resigning as the Company's independent accountant effective June 30, 2002. AA's audit report on the financial statements of the Company as of March 31, 2001 and for the two years ended March 31, 2001 contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope, or accounting principles. During the Company's two most recent fiscal years and any subsequent interim period preceding the resignation of AA, there were no disagreements with AA on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement(s) if not resolved to the satisfaction of AA, would have caused AA to make reference to the subject matter of the disagreement(s) in connection with its report. During the Company's two most recent fiscal years and any subsequent interim period preceding the resignation of AA, there have been no reportable events of the type required to be disclosed by Item 304(a)(1)(v) of Regulation S-K. 28 On August 22, 2002, the Company, after being advised by PWC, the successor to AA, that it had declined to accept the engagement as the Company's independent accountants, the Company appointed MSWFT as its new independent accountants. Prior to the engagement of MSWFT, the Company did not consult with such firm regarding the application of accounting principles to a specific completed or contemplated transaction, or any matter that was either the subject of a disagreement or a reportable event. The Company also did not consult with MSWFT regarding the type of audit opinion which might be rendered on the Company's financial statements and no oral or written report was provided by MSWFT. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Identification of Directors, Executive Officers and Certain Significant Employees The following table sets forth certain information regarding the directors and executive officers of the Company. Name Age Position Lam Sai Wing......... 47 Chairman, Chief Executive Officer and President Chan Yam Fai, Jane... 39 Vice President, Chief Financial Officer and Director Ng Yee Mei........... 40 Vice President and Director Cheng Wa On.......... 39 Director Terms of Office The directors of the Company hold office until the next annual meeting of stockholders of the Company or until their successors in office are elected and duly qualified. All officers serve at the discretion of the Board of Directors except as set forth in employment agreements. Family Relationships Lam Sai Wing and Chan Yam Fai, Jane are husband and wife. Business Experience Lam Sai Wing has served as Chairman of the Board, Chief Executive Officer and President of the Company since the Exchange in December of 1996 and of the Company's predecessor and operating subsidiaries, the Hang Fung Group, since founding the Hang Fung Group in 1986. Chan Yam Fai, Jane has served as Vice President, Chief Financial Officer and a Director of the Company since the Exchange in December of 1996 and of the Hang Fung Group since 1990. Ng Yee Mei has served as Vice President and a Director of the Company since the Exchange in December of 1996 and of the Hang Fung Group since 1991. Cheng Wa On has served as a Director of the Company since the Exchange in December of 1996. Mr. Cheng has been employed by the Hang Fung Group as Export Manager since 1986. Compliance With Section 16(a) of the Exchange Act Under the securities laws of the United States, the Company's directors, its executive officers and any persons holding more than ten percent of the Company's Common Stock are required to report their initial ownership of the Company's Common Stock and any subsequent changes in that ownership to the Securities and Exchange Commission. Specific due dates for these reports have been established and the Company is required to disclose any failure to file by these dates during fiscal 2002. 29 All of the filing requirements were satisfied on a timely basis in fiscal 2002. In making these disclosures, the Company has relied solely on written statements of its directors, executive officers and shareholders and copies of the reports that they filed with the Commission. ITEM 11. EXECUTIVE COMPENSATION Executive Compensation Table The following table sets forth information as to the compensation paid or accrued by the Company or Hang Fung Group (all amounts are paid by the Hang Fung Group) to each officer and director receiving compensation of at least $100,000 per year and the Chief Executive Officer for the three years ended March 31, 2002: Annual Compensation ---------------------------------------------------------- Other Annual All Other Name and Principal Position Year Salary Bonus Compensation (1) Compensation --------------------------- ---- -------- ----- ---------------- ------------ Lam Sai Wing........................... 2002 $ 413,461 $ - $ 65,558 $ 0 Chief Executive Officer,............. 2001 191,666 320,512 66,178 0 Chairman and President............... 2000 166,880 507,060 56,222 0

(1) Mr. Lam's other annual compensation consists of a housing allowance and education allowance. Director's Compensation No compensation has been paid to any directors for service in such capacity in the past and no such compensation is presently payable to directors. At such time as the Board of Directors deems appropriate, the Company intends to adopt an appropriate policy to compensate non-employee directors in order to attract and retain the services of qualified non-employee directors. Employment Agreements The Company previously maintained employment agreements with Mr. Lam and Ms. Chan. In connection with the Group Reorganization and Hong Kong Offering, both of those employment agreements were terminated on February 27, 1999 and the Company's affiliate, Hang Fung Gold, entered into employment agreements with Mr. Lam, Ms. Chan and Ms. Ng Yee Mei. The current Employment Agreement with Mr. Lam commenced October 1, 2001 and runs for a term of three years. The agreement provides for a monthly salary of HK$416,666 with annual adjustments based on review by the board of directors. The agreement also provides for discretionary bonuses to be fixed by the board, with the aggregate bonuses payable to executive directors not to exceed 5% of consolidated profits of Hang Fung Gold. In addition to the salary and bonus provisions, Mr. Lam is entitled to (i) participation in insurance schemes adopted by Hang Fung Gold, (ii) participation in provident funds maintained by Hang Fung Gold, (iii) use of a company automobile, including maintenance, gas and parking, (iv) payment of maintenance, gas and parking costs for one automobile owned by Mr. Lam, (v) use of a company provided residence, including payment by Hang Fung Gold of all management and utility costs associated with such residence, or a monthly rental allowance of HK$100,000, and (vi) an education allowance of up to HK$300,000 annually to pay for tuition of dependent children under the age of 18. The current Employment Agreement with Ms. Chan commenced October 1, 2001 and runs for a term of three years. The agreement provides for a monthly salary of HK$108,333 with annual adjustments based on review by the board of directors. The agreement also provides for discretionary bonuses to be fixed by the board, with the aggregate bonuses payable to executive directors not to exceed 5% of consolidated profits of Hang Fung Gold. In addition to the salary and bonus provisions, Ms. Chan is entitled to (i) participation in insurance schemes adopted by Hang Fung Gold, (ii) participation in provident funds maintained by Hang Fung Gold, (iii) use of a company automobile, including maintenance, gas and parking, and (iv) payment of maintenance, gas and parking costs for one automobile owned by Ms. Chan. 30 Provident Plan From December 2000, the Company's affiliates have arranged for its Hong Kong employees to join the Mandatory Provident Fund Scheme (the "MPF Scheme"). The MPF Scheme is a defined contribution scheme managed by an independent trustee. Under the MPF Scheme, each of the company and its employees make monthly contributions to the scheme at 5% of the employees' earnings as defined under the Mandatory Provident Fund legislation. Both the employer's and the employees' contributions are subject to a cap of HK$1,000 per month and thereafter contributions are voluntary. Share Option Scheme The Company's affiliate, Hang Fung Gold, adopted a Share Option Scheme pursuant to which the directors of Hang Fung Gold may grant options to Hang Fung Gold employees to purchase shares of common stock of Hang Fung Gold. Pursuant to the Share Option Scheme, options may be granted to purchase shares of Hang Fung Gold at a price determined by the directors, not less than 80% of the average closing price of the share quoted on the Stock Exchange for the five trading days immediately preceding the date of the option or the nominal value of the share of Hang Fung Gold whichever is higher, for a period of not more than 10 years. The total number of shares issuable pursuant to the Share Option Scheme may not exceed ten percent of the shares of Hang Fung Gold outstanding from time to time. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Common Stock The following table is furnished as of June 15, 2002 to indicate beneficial ownership of shares of the Company's Common Stock by (1) each shareholder of the Company who is known by the Company to be a beneficial owner of more than 5% of the Company's Common Stock, (2) each director and named officer of the Company, individually, and (3) all officers and directors of the Company as a group. The information set out in the following table was supplied by such persons. Name and Address of Number of Shares Beneficial Owner (1) Beneficially Owned Percent --------------------- -------------------- ------- Good Day Holdings Ltd. (2)(3)...................... 6,600,000 (2) 51.3% Lam Mo Wan (3)..................................... 2,930,000 22.7% Chan Wai Sum (3)................................... 670,000 5.2% Lam Sai Wing (2)................................... 6,600,000 (2) 51.3% Carhill Limited (4)................................ 800,000 6.2% Chan Yam Fai, Jane................................. 300,000 2.3% Ng Yee Mei......................................... 0 - Cheng Wa On........................................ 0 - All officers and directors as a group (4 persons).. 6,900,000 (2) 53.6% (1) Unless otherwise noted, each person or group identified possesses sole voting and investment power with respect to the shares shown opposite the name of such person or group. (2) Good Day Holdings Ltd. is controlled 100% by Lam Sai Wing, an officer and director of the Company. Accordingly, Mr. Lam may be deemed to be the beneficial owner of the shares held by Good Day Holdings Ltd. (3) Address is Unit 25-32, Second Floor, Block B, Focal Industrial Centre, 21 Man Lok Street, Hunghom, Hong Kong. (4) Address is c/o Suite 4703, Central Plaza, 18 Harbour Road, Wanchai, Hong Kong. 31 Preferred Stock Series A Preferred Stock. The following table is furnished as of June 15, 2002 to indicate beneficial ownership of the Company's Series A Preferred Stock by each shareholder of the Company who is known by the Company to be a beneficial owner of more than 5% of the Company's Series A Preferred Stock. Name and Address of Number of Shares Beneficial Owner (1) Beneficially Owned Percent --------------------- ------------------- ------- Good Day Holdings Ltd. (3)............... 100,000 (2) 100.0% Lam Sai Wing............................. 100,000 (2) 100.0% (1) Unless otherwise noted, each person or group identified possesses sole voting and investment power with respect to the shares shown opposite the name of such person or group. (2) Good Day Holdings Ltd. is controlled 100% by Lam Sai Wing, an officer and director of the Company. Accordingly, Mr. Lam may be deemed to be the beneficial owner of the shares held by Good Day Holdings Ltd. (3) Address is Unit 25-32, Second Floor, Block B, Focal Industrial Centre, 21 Man Lok Street, Hunghom, Hong Kong. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company's predecessor and affiliate, Hang Fung Group, has, from time to time entered into transactions with officers and directors of the Company and companies controlled by officers and directors of the Company. During the fiscal year ended March 31, 2001 and March 31, 2002, the Hang Fung Group paid rental payments of $41,538 and $20,769, respectively, to Mr. Lam in connection with the lease of a residential premises for Mr. Lam's residence. Such payments are made pursuant to Mr. Lam's employment agreement with the Hang Fung Group and are reflected in the statement of operations of the Hang Fung Group. The Company has from time to time both advanced to and borrowed funds from Mr. Lam. At March 31, 2001 and 2002, the Company owed Mr. Lam $303,000. All of such loans are unsecured, non-interest bearing and without pre-determined repayment terms and are reflected on the balance sheet of the Company. Mr. Lam and Ms. Chan personally pledged certain real estate as collateral to secure the existing banking facilities of the Hang Fung Group. Mr. Lam has also advanced funds to the Hang Fung Group from time to time. At March 31, 2002, the total amount owed by the Hang Fung Group to Mr. Lam was $780,513. Loans from Mr. Lam to the Hang Fung Group are unsecured, non-interest bearing and without pre-determined repayment terms. Those loans are reflected on the balance sheet of the Hang Fung Group. At March 31, 2002, the Hang Fung Group had advanced funds to the Company in the amount of $90,128. Those advances are unsecured, non-interest bearing and without pre-determined repayment terms. The advances are reflected on the balance sheet of the Hang Fung Group as current receivables and are reflected on the balance sheet of the Company as a reduction in the investment in affiliates account. At March 31, 2002 and 2001, New Epoch, a 49.9% owned affiliate of the Hang Fung Group, owed $6.4 million to the Hang Fung Group. Such amount is secured by the 50.1% equity interest in New Epoch not owned by the Hang Fung Group, bears interest at the rate of 2.5% over the prime lending rate as quoted by The Hongkong and Shanghai Banking Corporation Limited and is repayable after September 2003. Interest on the amounts due from New Epoch totaled $570,000 during fiscal 2002 and $244,000 during fiscal 2001. At March 31, 2002, the Hang Fung Group had established a reserve against the advance to New Epoch in the amount of $2.1 million to reflect the amount expected to be recoverable from the advance. The amount of the reserve is reflected in the balance sheet as an offset to the receivable accounted for under investment in affiliates and as a charge on the statement of operations. 32 All of the above transactions are believed by management to be on terms at least as favorable to the Company as may have been obtained from unaffiliated third parties. The Company has no present policy governing related party transactions but intends to implement a policy such that all future and ongoing transactions between the Company and its directors, officers, principal stockholders or affiliates will be on terms no less favorable to the Company than may be obtained from unaffiliated third parties, and any such transactions will be approved by a majority of disinterested directors of the Company. ITEM 14. CONTROLS AND PROCEDURES (a) Our chief executive officer and our chief financial officer, after evaluating the effectiveness of the Company's "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a date (the "Evaluation Date") within 90 days before the filing date of this annual report, have concluded that as of the Evaluation Date, our disclosure controls and procedures were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities. (b) There were no significant changes in our internal controls or to our knowledge, in other factors that could significantly affect our disclosure controls and procedures subsequent to the Evaluation Date. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this Report: (1) Consolidated Financial Statements: See Index to Financial Statements on page 38 of this report for financial statements and supplementary data filed as part of this report. (2) Financial Statement Schedules None (3) Exhibits Exhibit Number Description of Exhibit -------- ------------------------- 2.1 Acquisition Agreement between S.W. Lam, Inc. and the shareholders of Hang Fung Jewellery Company Limited and Kai Hang Jewellery Company Limited (1) 3.1 Articles of Incorporation (1) 3.2 Bylaws (1) 4.1 Certificate of Designation for Series A Preferred Stock (1) 10.1 Sales Agency Agreement between Hang Fung Jewellery Co., Ltd. and China Jewellery Import & Export Co. (1) 10.2 Agreement for Jewellery Assembling between Hang Fung Jewellery Co., Ltd. and China Jewellery Import & Export Co. (1) 10.3 Sales Cooperation Agreement between Hang Fung Jewellery Co., Ltd. and China Jewellery Import & Export Co. (1) 10.4 Confirmation Agreement between Hang Fung Jewellery Co., Ltd. and China Jewellery Import & Export Co. (1) 10.5 Lease Agreement between Chan Yam Fai, Jane and Hang Fung Jewellery Co., Ltd. re: executive offices (1) 10.6 Warrant Agreement with Phenomenal Limited (3) 10.7 Convertible Note with Phenomenal Limited (3) 10.8 Deed Amendment (3) 10.9++ Employment Agreement between Hang Fung Gold and Ng Yee Mei dated February 27, 1999 (4) 10.10 Agreement between Hang Fung Gold Technology Limited, New Epoch Holdings International Limited, and Quality Prince Limited dated June 24, 2000 (5)

33 10.11 Facility Agreement between Hang Fung Gold Technology Limited and New Epoch Information (BVI) Limited dated June 24, 2000 (5) 10.12* Employment Agreement between Hang Fung Gold and Lam Sai Wing dated October 1, 2001 10.13* Employment Agreement between Hang Fung Gold and Chan Yam Fai Jane dated October 1, 2001 99.1* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

++ Compensatory plan or management agreement. * Filed herewith (1) Incorporated by reference to the respective exhibits filed with Registrant's Registration Statement on Form 10 (Commission File No. 0-22049) (2) Incorporated by reference to the respective exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended March 31, 1997 (3) Incorporated by reference to the respective exhibits filed with the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1997 (4) Incorporated by reference to the respective exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended March 31, 1999 (5) Incorporated by reference to the respective exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended March 31, 2000 (b) Reports on Form 8-K Form 8-K dated January 17, 2002 (filed January 17, 2002) reporting under Item 9, the issuance of a press release relating to a reduction in share premium by Hang Fung Gold Technology. Form 8-K dated March 22, 2002 (filed March 22, 2002) reporting under Item 9, the issuance of a press release reporting the earnings of SW Lam and Hang Fung Gold Technology for the quarter ended December 31, 2001. 34 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. S.W. LAM, INC. By: /s/ Lam Sai Wing -------------------------------------- Lam Sai Wing President and Chief Executive Officer Dated: November 21, 2002 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date -------------- --------- --------- /s/ Lam Sai Wing President, Chief Executive Officer November 21, 2002 ----------------------- (Principal Executive Officer) and Lam Sai Wing Chairman of the Board /s/ Chan Yam Fai, Jane Vice President, Chief Financial November 21, 2002 ----------------------- Officer (Principal Accounting Chan Yam Fai, Jane and Financial Officer) and Director /s/ Ng Yee Mei Vice President and Director November 21, 2002 ----------------------- Ng Yee Mei /s/ Cheng Wa On Director November 21, 2002 ----------------------- Cheng Wa On 35 CERTIFICATIONS I, Lam Sai Wing, certify that: 1. I have reviewed this annual report on Form 10-K of S.W. Lam, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: November 21, 2002 By:/s/ Lam Sai Wing -------------------------- Lam Sai Wing Chief Executive Officer 36 I, Chan Yam Fai, Jane, certify that: 1. I have reviewed this annual report on Form 10-K of S.W. Lam, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: November 21, 2002 By: /s/ Chan Yam Fai, Jane ------------------------------ Chan Yam Fai, Jane Chief Financial Officer 37 S.W. LAM, INC. Index to Financial Statements Page ----- S.W. Lam, Inc. Report of Independent Public Accountants F-1 Consolidated Balance Sheets as of March 31, 2001 and 2002 F-3 Consolidated Statements of Operations and Comprehensive Income for the Years ended March 31, 2000, 2001 and 2002 F-4 Consolidated Statements of Changes in Shareholders' Equity for the Years ended March 31, 2000, 2001 and 2002 F-5 Consolidated Statements of Cash Flows for the Years ended March 31, 2000, 2001 and 2002 F-6 Notes to Consolidated Financial Statements F-7 Hang Fung Gold Technology Limited Report of Independent Public Accountants F-22 Consolidated Income Statement for the Year ended March 31, 2002 F-23 Balance Sheets as at March 31, 2002 F-24 Consolidated Cash Flow Statement for the Year ended March 31, 2002 F-25 Notes to Financial Statements F-26 Report of Independent Public Accountants F-56 Consolidated Income Statement for the Year ended March 31, 2001 F-57 Consolidated Statement of Recognised Gains and Losses for the Year ended March 31, 2001 F-58 Balance Sheets as at March 31, 2001 F-59 Consolidated Cash Flow Statement for the Year ended March 31, 2001 F-60 Notes to Financial Statements F-61 38 INDEPENDENT AUDITORS' REPORT To The Board of Directors S. W. Lam, Inc. Hunghom, Hong Kong We have audited the consolidated balance sheet of The S. W. Lam, Inc. and subsidiary (the Company) as of March 31, 2002, and the related consolidated statements of operations and comprehensive income, changes in shareholders' equity, and cash flows for year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The consolidated financial statements of the Company for the years ended March 31, 2001 and 2000 were audited by other auditors whose report, dated July 14, 2001, expressed an unqualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of S. W. Lam, Inc. and subsidiary as of March 31, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. /s/ Moore Stephens Wurth Frazer and Torbet, LLP September 13, 2002 Walnut, California F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and the Board of Directors of S. W. Lam, Inc.: We have audited the accompanying consolidated balance sheets of S. W. Lam, Inc. (incorporated in the State of Nevada, the United States of America; "the Company") and Subsidiaries ("the Group") as of March 31, 2000 and 2001, and the related consolidated statements of operations and comprehensive income, cash flows and changes in shareholders' equity for the years ended March 31, 1999, 2000 and 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of S. W. Lam, Inc. and Subsidiaries as of March 31, 2000 and 2001, and the results of their operations and comprehensive income and their cash flows for the years ended March 31, 1999, 2000 and 2001, in conformity with generally accepted accounting principles in the United States of America. /s/ Arthur Andersen & Co ARTHUR ANDERSEN & CO Certified Public Accountants Hong Kong Hong Kong, July 14, 2001 This report is a copy of a previously issued accountants' report of Arthur Andersen & Co. This report has not been reissued by Arthur Andersen & Co. F-2 S. W. LAM, INC. CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2001 and 2002 Note 2 0 0 1 2 0 0 2 -------- ------------- ------------------------- HK$'000 HK$'000 US$'000 ASSETS Investment in affiliates 3 158,882 169,315 21,707 ============= ============ ============ LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS' EQUITY Current liabilities: Due to a director 8 2,368 2,367 303 ------------- ------------ ------------ Shareholders' equity: Common stock, par value US$0.001 each: - authorized - 25,000,000 shares - outstanding and fully paid - 12,865,000 shares 101 101 13 Preferred stock, par value US$0.001 each: - authorized - 25,000,000 shares - outstanding and fully paid - Series A preferred stock - 100,000 shares - - - Additional paid-in capital 4,118 4,118 528 Retained earnings 152,295 162,729 20,863 ------------- ------------ ------------ Total shareholders' equity 156,514 166,948 21,404 ------------- ------------ ------------ Total liabilities and shareholders' equity 158,882 169,315 21,707 ============= ============ ============

The accompanying notes are an integral part of these financial statements. F-3 S. W. LAM, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE YEARS ENDED MARCH 31, 2000, 2001 and 2002 Note 2 0 0 0 2 0 0 1 2 0 0 2 --------- --------------- --------------- -------------------------- HK$'000 HK$'000 HK$'000 US$'000 Revenues 9.a 959,070 371,630 - - Cost of sales (774,794) (306,048) - - --------------- --------------- ------------- --------------- Gross profit 184,276 65,582 - - Selling, general and administrative expenses (83,896) (29,541) (433) (55) Interest expense (19,492) (7,244) - - Interest income 6,216 3,166 - - Share of profits (losses) of affiliates - (52,025) 10,867 1,393 Loss on dilution of equity interests in subsidiaries 6 - (15,864) - - --------------- --------------- ------------- --------------- Income (Loss) before income taxes 87,104 (35,926) 10,434 1,338 (Provision for) Reversal of income taxes 5 12,432 (2,500) - - --------------- --------------- ------------- --------------- Income (Loss) before minority interests 99,536 (38,426) 10,434 1,338 Minority interests (46,716) (14,079) - - --------------- --------------- ------------- --------------- Net income (loss) and comprehensive income (loss) 52,820 (52,505) 10,434 1,338 =============== =============== ============= =============== Earnings (Loss) per common share HK$ 4.13 HK$ (4.10) HK$ 0.81 US$ 0.104 =============== =============== ============= =============== Weighted average number of common shares 12,800,000 12,814,000 12,865,000 12,865,000 =============== =============== ============= ===============

The accompanying notes are an integral part of these financial statements. F-4 S. W. LAM, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED MARCH 31, 2000, 2001 and 2002 Common stock Series A preferred stock -------------------------- ------------------------ Number of Amount Number of Amount Additional Retained paid-in shares shares capital earnings ------------ ------------ ------------ ---------- --------------- ---------- '000 HK$'000 '000 HK$'000 HK$'000 HK$'000 Balance as of March 31, 1999 12,800 101 100 - 3,960 151,980 Net income - - - - - 52,820 ----------- ------------ ------------ ------------- ------------ ------------- Balance as of March 31, 2000 12,800 101 100 - 3,960 204,800 Net loss - - - - - (52,505) Issuance of new common shares (Note 7) 65 - - - 158 - ----------- ------------ ------------ ------------- ------------ ------------- Balance as of March 31, 2001 12,865 101 100 - 4,118 152,295 Net income - - - - - 10,434 ----------- ------------ ------------ ------------- ------------ ------------- Balance as of March 31, 2002 12,865 101 100 - 4,118 162,729 =========== ============ ============ ============= ============ =============

The accompanying notes are an integral part of these financial statements. F-5 S. W. LAM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31, 2000, 2001 and 2002 2 0 0 0 2 0 0 1 2 0 0 2 ---------------- ---------------- --------------------------------- HK$'000 HK$'000 HK$'000 US$'000 Cash flows from operating activities: Net income (loss) 52,820 (52,505) 10,434 1,338 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities - Depreciation of property, machinery and equipment 55,580 26,954 - - Share of (profits) losses of affiliates - 52,025 (10,867) (1,393) Loss on dilution of equity interests in subsidiaries - 15,864 - - Minority interests 46,716 14,079 - - (Increase) Decrease in operating assets - Accounts receivable, net (30,189) 15,113 - - Prepayments and deposits 1,596 (9,691) - - Inventories, net (75,736) (144,913) - - Increase (Decrease) in operating liabilities - Accounts payable 1,940 9,462 - - Accrued liabilities 2,985 (3,654) - - Due to a director 1,325 2,766 - - Taxation payable (18,278) 2,500 - - Deferred taxation 3,449 - - - ------------- ---------------- ---------------- --------------- Net cash provided by (used in) operating activities 42,208 (72,000) (433) (55) ------------- ---------------- ---------------- --------------- Cash flows from investing activities: Increase in amount due to an affiliate - 281 433 55 Additions to property, machinery and equipment (83,420) (32,919) - - Net cash outflow from dilution of equity interests in subsidiaries (Note 10) - (122,486) - - ------------- ---------------- ---------------- --------------- Net cash used in investing activities (83,420) (155,124) 433 55 Cash flows from financing activities: ------------------------------------- Net proceeds from issuance of new ordinary shares - 158 - - Dividend paid to a minority shareholder of a subsidiary (14,328) - - - Increase (Decrease) in bank overdrafts (1,953) 5,942 - - Increase in trust receipts bank loans 85,785 58,683 - - New short-term bank loans 12,000 18,547 - - Repayment of short-term bank loans (2,000) (2,000) - - Repayment of long-term bank loans (2,807) (854) - - Repayment of capital element of capital lease obligations (12,544) (5,737) - - ------------- ---------------- ---------------- --------------- Net cash provided by financing activities 64,153 74,739 - - ------------- ---------------- ---------------- --------------- Net increase (decrease) in cash and bank deposits 22,941 (152,385) - - Cash and bank deposits, as of beginning of year 129,444 152,385 - - ------------- ---------------- ---------------- --------------- Cash and bank deposits, as of end of year 152,385 - - - ============= ================ ================ ===============

The accompanying notes are an integral part of these financial statements. F-6 S. W. LAM, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Organization S. W. Lam, Inc. ("the Company"), formerly known as New Wine Inc., was incorporated on April 12, 1994 in the State of Tennessee, the United States of America. On October 10, 1996, the Company effected a change of domicile by reincorporating in the State of Nevada, the United States of America, and changed its name from New Wine Inc. to S.W. Lam, Inc. The Directors consider Good Day Holdings Limited, a company incorporated in the British Virgin Islands, to be the ultimate holding company. On December 31, 1996, the Company acquired 100% interest in Quality Prince Limited ("QPL"; a company incorporated in the British Virgins Islands) by issuing 10,500,000 shares of its common stock of par value US$0.001 each, and 100,000 shares of its Series A preferred stock of par value US$0.001 each, to the previous shareholders of QPL. QPL is an investment holding company which had acquired on December 19, 1996, 100% interest in Hang Fung Jewellery Company Limited ("HFJCL"), Kai Hang Jewellery Company Limited, Macadam Profits Limited, and Soycue Limited (collectively known as the "Hang Fung Entities"). The acquisition of the Hang Fung Entities by QPL has been accounted for as a reorganization of entities under common control, similar to a pooling of interests, as the shareholders and management control of the Hang Fung Entities and QPL are the same before and after the acquisition. On December 4, 1997, Hang Fung Gold Technology Limited ("HFGTL") was incorporated and became a wholly owned subsidiary of the Company. On February 27, 1999, HFGTL became the holding company of the Hang Fung Entities pursuant to a group reorganization which included exchanges of shares. On the same date, HFJCL redeemed its preferred stock and Phenomenal Limited, the redeemable preferred stock holder, applied the redemption proceeds of US$10,000,000 to subscribe for 582,800 shares of HFGTL at US$17.16 each ("Share Subscription"). On March 9, 1999, HFGTL sold 78,750,000 shares at HK$0.9 each in a public offering and received net cash proceeds of HK$58,671,000, after deducting the common stock issuance expenditures. Immediately after the public offering, HFGTL capitalized share premium of approximately HK$23,425,000 for the issuance of 234,250,000 shares on a pro rata basis to the shareholders of HFGTL before the public offering ("Capitalization"). Thus, after the Share Subscription and the Capitalization, Phenomenal Limited holds 68,843,250 shares of HFGTL and the Company holds 167,406,750 shares of HFGTL. These equity transactions resulted in a dilution of the Company's effective shareholding in HFGTL from 100% to 53.15%. On August 23, 2000, HFGTL issued 1,632,000,000 shares at HK$0.114 each to New Epoch Holdings International Limited, an independent third party, as consideration for a 49.9% equity interest in New Epoch Information (BVI) Company Limited. On August 28, 2000, HFGTL sold 550,000,000 shares at HK$0.114 each. These equity transactions resulted in a dilution of the Company's effective shareholding in HFGTL from 53.15% to 31.40%. As a consequence, HFGTL was no longer a subsidiary and has become an affiliate. F-7 1. ORGANIZATION (Cont'd) As most of the Group's operations are conducted through HFGTL in the People's Republic of China (including Hong Kong and Mainland China), the Group is subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Group's results may be adversely affected by changes in the political and social conditions in the People's Republic of China, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. 2. Subsidiary Details of the Company's subsidiary as of March 31, 2002 are as follows: Name Place of Percentage of Principal activity equity interest incorporation held ----------------------- ---------------- --------------- ------------------- Quality Prince Limited British Virgin 100% Investment holding Islands There is no restriction on the distribution of the subsidiary's retained earnings. 3. AFFILIATES Investment in affiliates consisted of: 2 0 0 1 2 0 0 2 ----------- ----------------------- HK$'000 HK$'000 US$'000 Investment in Hang Fung Gold Technology Limited and its subsidiaries ("HFGTL") 159,163 170,029 21,799 Due to an affiliate (281) (714) (92) ------------ ----------- ---------- 158,882 169,315 21,707 ============ =========== ========== Quoted market value of investment in HFGTL 167,407 219,303 28,116 ============ =========== ========== As of March 31, 2002, the Company had a 31.40% interest in HFGTL, a company incorporated in Bermuda and whose shares are listed on The Stock Exchange of Hong Kong Limited (see Note 1). HFGTL is an investment holding company and its subsidiaries are principally engaged in the manufacturing and sales of gold and jewelry products. The underlying value of the investment in affiliates is in the opinion of the Company's directors, not less than the Company's carrying value as of March 31, 2002. F-8 3. AFFILIATES (Cont'd) The amount due to an affiliate is unsecured, non-interest bearing and not repayable before April 1, 2003. Summarized financial information of HFGTL, prepared under the accounting principles generally accepted in the United States of America, are as follows: Balance sheet As of As of March 31, March 31, 2001 2002 ---------------- --------------------------------- HK$'000 HK$'000 US$'000 Current assets 647,719 755,419 96,849 Non-current assets 389,199 370,239 47,467 --------------- --------------- -------------- Total assets 1,036,918 1,125,658 144,316 =============== =============== ============== Current liabilities 456,333 517,909 66,399 Non-current liabilities 73,697 66,255 8,494 --------------- --------------- -------------- Total liabilities 530,030 584,164 74,893 --------------- --------------- -------------- Shareholders' equity 506,888 541,494 69,423 --------------- --------------- -------------- Total liabilities and shareholders' equity 1,036,918 1,125,658 144,316 =============== =============== ==============

Statement of operations For the year ended For the year ended March 31, 2001 March 31, 2002 ------------------- ------------------------ HK$'000 HK$'000 US$'000 Net sales 1,327,753 1,568,757 201,123 Gross profit 205,278 215,150 27,583 Profit (loss) before income taxes (126,671) 29,584 3,793 Net profit (loss) (135,827) 34,606 4,437 ============== =========== =========== Separate audited consolidated financial statements of HFGTL as of and for the year ended March 31, 2002, in accordance with the accounting principles generally accepted in Hong Kong ("HK GAAP"), are included in this Form 10-K. The accounting policies adopted by the Company conform to accounting principles generally accepted in Hong Kong ("HK GAAP") which differ in certain respects from accounting principles generally accepted in the United States of America ("US GAAP"). The principal differences having a significant effect on its financial statements are set out below: F-9 3. AFFILIATES (Cont'd) a. Investment properties Under HK GAAP, investment properties are stated on the basis of appraised values and depreciation is not provided. Under US GAAP, investment properties are stated at historical cost less accumulated depreciation. b. Share option scheme HFGTL follows the current practice in Hong Kong that no accounting entry is made on grant of share options to employees. Under US GAAP, compensation expense for share options is recognized at the date of grant (in accordance with Accounting Principles Board of Opinion ("APB") No. 25 or Statement of Financial Accounting Standards ("SFAS") No. 123) and amortized over the vesting period. The Company adopted APB No. 25 under which the amount of compensation expense is determined based upon the excess, if any, of the quoted market price of the shares over the exercise price of the options at the date of the grant and is amortized over the vesting period of the option concerned. A reconciliation of net income and shareholders' equity from HK GAAP to the accounting principles generally accepted in the United States of America ("US GAAP") in relation to net income for the year ended March 31, 2002 and shareholders' equity as of March 31, 2002 is: Net income of HFGTL for the year ended March 31, 2002 ------------------------------- HK$'000 US$'000 Balance under HK GAAP 34,555 4,430 Adjustments: 1. Reversal of revaluation deficit and additional depreciation on investment property ($150,000 - $99,000) 51 7 2. Recognition of deferred tax assets and provision of valuation allowance ($1,271,000 - $1,271,000) - - ---------- ---------------- Balance under US GAAP 34,606 4,437 ========== ================ F-10 3. AFFILIATES (Cont'd) Shareholders' equity: Shareholders' equity of HFGTL as of March 31, 2002 ------------------------------------ HK$'000 US$'000 Balance under HK GAAP 541,169 69,381 Adjustments: 1. Reversal of revaluation deficit and additional depreciation on investment property 325 42 2. Recognition of deferred tax assets and provision of valuation allowance ($1,271,000 - $1,271,000) - - ------------ ---------------- Balance under US GAAP 541,494 69,423 ============ ================ Hang Fung Gold Technology Limited erroneously reported an adjustment between HK GAAP and US GAAP in their notes to the March 31, 2001 financial statements relating to compensation expense determined under APB No. 25 in the amount of HK$20,307,000 (US$2,603,000), rather than the correct amount of HK$254,000 (US$32,564). As the amount of the compensation expense was deemed to be immaterial to the financial statements at March 31, 2001, it was not recorded in the financial statements of S.W. Lam, Inc. for the year so ended. This error in the footnote disclosure of the subsidiary's financial statements as at March 31, 2001 has no effect on reported net income or earnings per share of S.W. Lam, Inc. for the years ended March 31, 2001 and 2002. 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Basis of presentation The Company maintains its accounting books and records based on accounting principles generally accepted in the United States of America ("US GAAP"). Its subsidiaries and affiliates maintain their accounting books and records based on accounting principles generally accepted in Hong Kong ("HK GAAP"). The accompanying financial statements have been prepared to present its financial position, results of operations and cash flows in US GAAP, which require management to make certain estimates, assumptions and adjustments that affect reported amounts or certain disclosures. F-11 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd) b. Basis of consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries, together with the Group's share of post acquisition results and reserves of its affiliates under the equity method of accounting. The results of subsidiaries and affiliates acquired or disposed of during the year are recorded from or to their effective dates of acquisition or disposal. Gains and losses arising from deemed acquisition or disposal of interest in subsidiaries and affiliates as a result of issuance shares of the subsidiaries and affiliates are included in the consolidated statement of operations in the period in which it occurs. All material intra-group transactions and balances have been eliminated on consolidation. c. Subsidiaries A subsidiary is a company in which the Company holds, directly or indirectly, more than 50% of its issued voting share capital as long-term investment and over which it can exercise control, as defined under generally accepting accounting principles. d. Affiliates The Group's investment in affiliates for which its ownership exceeds 20%, but which are not majority-owned or controlled by the Group, is accounted for using the equity method of accounting. Under the equity method, the Group's proportionate share of the affiliates' net income or loss is included in the consolidated statement of operations. e. Cash and cash equivalents Cash and cash equivalents include cash on hand, deposit with banks and highly liquid investments with maturities of three months or less at the time of acquisition. f. Advertising and promotion costs The costs of advertising and promotion are expensed in the period in which they are incurred. g. Borrowing costs Borrowing costs are recognized as an expense in the period in which they are incurred. h. Income taxes The Group accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109: "Accounting for Income Taxes", which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred income taxes are provided using the liability method. Under the liability method, deferred income taxes are recognized for all significant temporary differences between the tax and financial statement bases of assets and liabilities. F-12 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd) i. Leases Capital leases represent those leases under which substantially all the risks and rewards of ownership of the leased assets are transferred to the Group. Fixed assets held under capital leases are initially recorded at the present value of the minimum payments at the inception of the leases, with equivalent liabilities categorized as appropriate under current or non-current liabilities. Interest, which represents the difference between the minimum payments at the inception of the finance leases and the corresponding fair value of the assets acquired, is allocated to accounting periods over the period of the leases to produce a constant rate of charge on the outstanding balance. Operating leases represent those leases under which substantially all the risks and rewards of ownership of the leased assets remain with the lessors. Rental payments under operating leases are charged to expense on a straight-line basis over the period of the relevant leases. j. Comprehensive income The Group has adopted Statement of Financial Accounting Standards No. 130: "Reporting Comprehensive Income" which requires the Group to report all changes in equity during a period, except for those resulting from investments by owners and distributions to owners, in financial statements for the period in which they are recognized. Adoption of the Standard had no impact on the Group's consolidated financial position, results of operations or cash flows since the Group had no items of other comprehensive income (loss) other than those recorded in the consolidated statements of operations. k. Foreign currency translation A substantial portion of the Group's sales, purchases and expenses are in Hong Kong dollars. Management believes that maintaining books and records in Hong Kong dollars will enable financial results and relationships to be measured with more relevance and reliability. In the financial statements of the individual companies within the Group, transactions in other currencies during the year are translated into Hong Kong dollars at the applicable rates of exchange prevailing at the time of the transactions. Monetary assets and liabilities denominated in other currencies are translated into Hong Kong dollars at the applicable rates of exchange in effect at the balance sheet date. All such exchange differences are dealt with in the individual companies' statements of operations. The net gain (loss) from foreign currency transactions included in the statements of operations was approximately HK$127,000, HK$(9,000) and nil for the years ended March 31, 2000, 2001 and 2002, respectively. Translation of amounts from Hong Kong dollars ("HK$") to United States dollars ("US$") for the most recent balance sheet and income statement is for the convenience of readers and has been made at the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York on March 31, 2002 of US$1 = HK$7.8. No representation is made that the Hong Kong dollar amounts could have been, or could be, converted into United States dollars at that rate or at any other rate. F-13 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd) l. Earnings per common share Basic earnings (loss) per common share is computed in accordance with Statement of Financial Accounting Standards No. 128: "Earnings Per Share", by dividing the net income (loss) for each year by the weighted average number of shares of common share outstanding during the years. The numerator in calculating basic earnings per common share for each year is the reported net income (loss). The denominator is based on the weighted average number of common shares of 12,800,000, 12,814,000 and, 12,865,000 shares for the years ended March 31, 2000, 2001 and 2002, respectively. Diluted earnings (loss) per common share are not presented as there were no dilutive potential common share in existence during the years ended March 31, 2000, 2001 and 2002. m. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. n. Fair value of financial instruments The carrying amount for amount due to a director approximates its fair value because of the short maturity of this. o. Recent accounting standards In June 2001, The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all business combinations completed after 30th June, 2001 to be accounted for using the purchase method and also prescribes explicitly the criteria for the recognition of intangible assets separately from goodwill. Under SFAS No. 142 which will be effective for fiscal years beginning 1st April, 2002 for the Group, goodwill will no longer be amortized but will be subject to impairment tests upon adoption and annually thereafter. In addition, under SFAS No. 141, an intangible asset shall be recognized as an asset apart from goodwill if it arises from contractual or other legal rights (regardless of whether those rights are transferable or separable from the acquired entity or from other rights and obligations). In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 prescribes that the fair value of retirement obligations in relation to tangible long-lived assets be recognized when they are incurred and displayed as liabilities. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. F-14 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd) o. Recent accounting standards (cont'd) In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets". SFAS No. 144 prescribes that, if the carrying value of long-lived assets to be disposed of is less than its undiscounted cash flows, they should be adjusted downward to the lower of carrying value and fair value less cost to sell. In addition, SFAS No. 144 broadens the presentation of discontinued operations in the income statement to include a component of an entity if its operations and cash flows can be clearly distinguished from the rest of the Group and these components are to be eliminated from the ongoing operations of the entity. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and requires that a liability for a cost associated with an exit or disposal activity be recognized at fair value when the liability is incurred, rather than at the date of an entity's commitment to an exit plan. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The effect of adopting the abovementioned standards is not expected to have a significant effect on the Group's financial position or results of operations. 5. INCOME TAXES (Provision for) reversal of income taxes consisted of the following: 2 0 0 0 2 0 0 1 2 0 0 2 ------------ ------------ ------------------------- HK$'000 HK$'000 HK$'000 US$'000 Current Hong Kong profits tax (5,217) (2,500) - - Over-provision of Hong Kong profits tax in prior years (a) 21,098 - - - Deferred tax (3,449) - - - ----------- ------------ --------- -------------- 12,432 (2,500) - - =========== ============ ========= ==============

Note - a. A substantial portion of the Group's business activities were conducted in Mainland China. Accordingly, the Group was entitled to a 50% offshore claim in computing its Hong Kong profits tax, under which 50% of the Group's profit was deemed to be derived from Mainland China activities and was not subject to Hong Kong profits tax. Prior to April 1, 1999, the Group's offshore claim was under review by the Hong Kong Inland Revenue Department ("the IRD") and the Group made provision for Hong Kong profits tax in respect of all of its profit, including the 50% deemed to be derived from Mainland China. During the year ended March 31, 2000, the Group's offshore claim was agreed by the IRD and excess provision for Hong Kong profits tax recorded prior to April 1, 1999 amounting to approximately HK$21,098,000 was written back. F-15 5. INCOME TAXES (Cont'd) The Company, its subsidiaries and affiliates are subject to income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which they operate. Subsidiaries and affiliates with business operations in Hong Kong are subject to Hong Kong profits tax at a rate of 16%. The British Virgin Islands subsidiaries are incorporated under the International Business Companies Act of the British Virgin Islands and, accordingly, are exempt from payment of British Virgin Islands income taxes. HFGTL is incorporated under the Companies Act 1981 of Bermuda (as amended) as an exempted company and, accordingly, is exempt from payment of Bermuda income taxes until 2016. The reconciliation of the Hong Kong statutory tax rate to the effective income tax rate based on the income (loss) before income taxes as stated in the consolidated statements of operations is as follows: 2 0 0 0 2 0 0 1 2 0 0 2 -------------- ------------- ------------- Hong Kong statutory income tax rate 16.0% 16.0% 16.0% Non-taxable income - share of profits of affiliates - - (16.0%) - arising from activities which qualified as offshore (8.0%) 7.3% - Non-deductible expenses - share of losses of affiliates - (23.2%) - - loss on dilution of equity interests in subsidiaries - (7.1%) - Over-provision of taxation in prior years (24.2%) - - Deferred tax assets for which no benefits have been recognized due to the establishment of valuation allowances 2.8% - - Other non-deductible items (0.9%) - - -------------- ------------- ------------- (14.3%) (7.0%) - ============== ============= =============

Components of deferred tax balances as of March 31, 2001 and 2002 are as follows: 2 0 0 1 2 0 0 2 ------------- ----------------------------- HK$'000 HK$'000 US$'000 Tax effect on loss on dilution of equity interests in subsidiaries (2,538) - - Valuation allowance 2,538 - - ------------- ------------- -------------- - - - ============= ============= ==============

The retained earnings of the foreign subsidiaries and affiliates would be subject to additional taxation if distributed. In the opinion of the Directors, these retained earnings are, at the present time, required to finance the continuing operations of the affiliates and, accordingly, no provision for additional taxation has been made. F-16 5. INCOME TAXES (Cont'd) Tax Filings and Penalties The Company is currently in the process of filing its United States federal income tax returns for the years ended March 31, 1997 through 2002, all of which show nil tax liability. The tax returns may potentially be subject to penalties for late filing; however the Company believes that no such amounts will be assessed. As the final outcome is indeterminate, no provision has been made in the accounts. 6. LOSS ON DILUTION OF EQUITY INTERESTS IN SUBSIDIARIES On August 23, 2000, HFGTL issued 1,632,000,000 shares at HK$0.114 each to New Epoch Holdings International Limited, an independent third party, as consideration for a 49.9% equity interest in New Epoch Information (BVI) Company Limited. On August 28, 2000, HFGTL sold 550,000,000 shares at HK$0.114 each. These equity transactions resulted in a dilution of the Company's effective shareholding in HFGTL from 53.15% to 31.40%. The loss resulting from dilution of the Company's interest in HFGTL amounted to approximately HK$15,864,000, which was charged to the consolidated statement of operations. 7. COMMON STOCK On January 16, 2001, the Company issued 65,000 shares of common stock, par value of US$0.001 each, of US$0.3125 per share to an independent third party in return for marketing and promotion services amounting to approximately HK$158,000 (equivalent of approximately US$20,000). 8. RELATED PARTY TRANSACTIONS a. The Group entered into the following transactions with a director: 2 0 0 0 2 0 0 1 2 0 0 2 ------------ ------------- -------------------------- HK$'000 HK$'000 HK$'000 US$'000 ~~Rental paid to Mr. Lam Sai Wing 324 127 - - ============ ============= =========== =============~~

b. The Group had the following outstanding balances with a director: 2 0 0 1 2 0 0 2 ------------- --------------------------- HK$'000 HK$'000 US$'000 Due to a director - Mr. Lam Sai Wing 2,368 2,367 303 ============= =========== ============= The balances due to a director were unsecured, non-interest bearing and without pre-determined repayment terms. F-17 9. SEGMENT INFORMATION Prior to August 23, 2000, the Group, through HFGTL, was principally engaged in manufacturing and sales of gold and jewelry products. Effective on August 23, 2000, the Company's interest in HFGTL was diluted from 53.15% to 35.01%, and further diluted from 35.01% to 31.4% on August 28, 2000. As a consequence, the Company is principally engaged in investment holding. a. Sales Analysis of sales by business activity and geographical location is as follows: 2 0 0 0 2 0 0 1 2 0 0 2 ------------- --------------- -------------------------------- HK$'000 HK$'000 HK$'000 US$'000 Sales of gold and jewelry products to customers in - Hong Kong/Mainland China 402,010 191,819 - - - South East Asia 134,517 57,665 - - - The United States of America 149,405 52,433 - - - Europe 188,065 42,040 - - - Others 85,073 27,673 - - ------------ --------------- --------------- --------------- 959,070 371,630 - - ============ =============== =============== =============== b. Operating profit * 2 0 0 0 2 0 0 1 2 0 0 2 ------------ --------------- -------------------------------- HK$'000 HK$'000 HK$'000 US$'000 Sales of gold and jewelry products 100,380 36,041 - - ============ =============== =============== ===============

* Operating profit represents gross profit less selling, general and administrative expenses. c. Identifiable assets, capital expenditures and depreciation Geographical analysis of identifiable assets, capital expenditures and depreciation is as follows: Identifiable assets 2 0 0 1 2 0 0 2 ------------------- ------------- ------------------------------ HK$'000 HK$'000 US$'000 Hong Kong/Mainland China 158,882 169,315 21,707 ============= ============= ============ Capital expenditures Hong Kong/Mainland China 32,919 - - ============= ============= ============ Depreciation Hong Kong/Mainland China 26,954 - - ============= ============= ============ F-18 9. SEGMENT INFORMATION (Cont'd) d. Major customers There are no individual customers accounting for more than 5% of the Group's sales for the years ended March 31, 2000, 2001 and 2002. e. Major suppliers Details of individual suppliers accounting for more than 5% of the Group's purchases are as follows: 2 0 0 0 2 0 0 1 2 0 0 2 ------------ ------------ --------- Heraeus Limited - supplied gold bullions 67.4% 52.2% - Chinese Wall Technology Company Limited 7.8% 15.7% - Johnson Matthey Hong Kong Limited 5.8% 21.7% - ============ ============ ========= 10. Supplemental Disclosure of Cash Flow Information a. Cash paid for interest and income taxes is as follows: 2 0 0 0 2 0 0 1 2 0 0 2 -------------- --------------- ----------------------- HK$'000 HK$'000 HK$'000 US$'000 Interest paid 18,599 7,244 - - ============== =============== =========== ========== Income taxes 2,397 - - - ============== =============== =========== ========== b. Cash received for interest income is as follows: 2 0 0 0 2 0 0 1 2 0 0 2 ----------- ------------- ---------------------- HK$'000 HK$'000 HK$'000 US$'000 Interest received 6,216 3,166 - - =========== ============= ========== ========== F-19 10. Supplemental Disclosure of Cash Flow Information (Cont'd) c. As mentioned in Note 1, the Company's interest in HFGTL was diluted from 53.15% to 35.01% on August 23, 2000. Details of net assets of HFGTL on August 23, 2000, when HFGTL changed from a subsidiary to an affiliate, were as follows: HK$'000 ------------- Property, machinery and equipment and capital leases, net 233,102 Cash and bank deposits 122,486 Accounts receivable, net 136,404 Prepayments and deposits 12,739 Inventories, net 352,162 Bank overdrafts (8,513) Trust receipts bank loans (266,010) Short-term bank loans (28,547) Minority interests (200,139) Accounts payable (38,041) Accrued liabilities (6,003) Due to a director (4,824) Taxation payable (42,826) Long-term bank loans (7,541) Capital lease obligations (14,003) Deferred taxation (13,394) ------------- Net assets as at the date of dilution 227,052 ============= Net cash outflow in respect of the dilution of equity interests in HFGTL was as follows: HK$'000 ------------- Cash and bank deposits 122,486 ============= d. Non-cash investing activities: During the years ended March 31, 2000, 2001 and 2002, capital lease obligations of approximately HK$15,070,000, nil and nil, respectively, were incurred to finance the Group's additions of new machinery and equipment. F-20 11. OTHER SUPPLEMENTAL INFORMATION 2 0 0 0 2 0 0 1 2 0 0 2 ---------------- ---------------- ----------------------------- HK$'000 HK$'000 HK$'000 US$'000 Depreciation of property, machinery and equipment - owned assets 44,215 22,527 - - - assets held under capital leases 11,365 4,427 - - Allowance for bad and doubtful accounts 5,000 - - - Interest on - bank overdrafts and loans 17,636 6,680 - - - capital lease obligations 1,856 564 - - Operating lease rentals for - premises 3,754 1,044 - - - machinery and equipment 82 30 - - Advertising and promotion 7,772 2,206 - - Repairs and maintenance 774 310 - - Rental income 48 32 - - Net foreign exchange gain (loss) 127 (9) - - Interest income from bank deposits 6,216 3,166 - - ============= ================ ================ ===============

F-21 Auditors' Report to the Shareholders of HANG FUNG GOLD TECHNOLOGY LIMITED (Incorporated in Bermuda with limited liability) We have audited the financial statements of Hang Fung Gold Technology Limited and its subsidiaries 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 to you. Basis of opinion We conducted our audit in accordance with Statements of Auditing Standards issued by the Hong Kong Society of Accountants. 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 judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the circumstances of the company and of the group, consistently applied and adequately disclosed. We planned and performed 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. 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. Opinion In our opinion the financial statements give a true and fair view of the state of affairs of the company and of the group as at 31st March, 2002 and of the profit and cash flows of the group for the year then ended, and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance. /s/ PricewaterhouseCoopers PricewaterhouseCoopers Certified Public Accountants Hong Kong, 24th July, 2002 F-22 HANG FUNG GOLD TECHNOLOGY LIMITED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31ST MARCH, 2002 (Amounts expressed in Hong Kong dollars) Note 2 0 0 2 2 0 0 1 --------- --------------- ------------------- $'000 $'000 (Restated - Note 2.a.ii) Turnover 4 1,568,757 1,327,753 Cost of sales (1,353,607) (1,122,475) --------------- -------------- Gross profit 215,150 205,278 Other income 4 4,486 - Selling, distribution and marketing expenses (62,878) (16,856) General and administrative expenses (87,180) (91,260) --------------- -------------- Profit from operations 69,578 97,162 Interest income 4 7,452 8,723 Interest expense (30,471) (30,105) Share of losses of associates and provision against advance to an associate 14 (17,026) (14,460) Impairment of goodwill relating to associates - (188,142) --------------- -------------- Profit (Loss) before taxation 5 29,533 (126,822) Taxation credit (charge) 7 5,022 (9,156) --------------- -------------- Profit (Loss) attributable to shareholders 8 34,555 (135,978) Retained profit, beginning of year 125,074 261,052 Transfer from share premium 27 200,693 - --------------- -------------- Retained profit, end of year 9 360,322 125,074 =============== ============== Earnings (Loss) per share 10 - Basic 0.65 cents (3.04) cents =============== ============== - Diluted 0.65 cents N/A =============== ==============

No consolidated statement of recognized gains and losses has been prepared as the Group had no recognized gains or losses other than those recorded in the consolidated income statement. F-23 HANG FUNG GOLD TECHNOLOGY LIMITED BALANCE SHEETS AS AT 31ST MARCH, 2002 (Amounts expressed in Hong Kong dollars) Consolidated Company ------------------------------- ------------------------------- Note 2 0 0 2 2 0 0 1 2 0 0 2 2 0 0 1 -------- -------------- --------------- --------------- -------------- $'000 $'000 $'000 $'000 NON-CURRENT ASSETS Fixed assets 11 349,885 351,978 - - Investment property 12 1,450 1,600 - - Investment in subsidiaries 13 - - 307,430 339,327 Investment in associates 14 18,579 35,347 - - -------------- --------------- --------------- -------------- Total non-current assets 369,914 388,925 307,430 339,327 -------------- --------------- --------------- -------------- CURRENT ASSETS Inventories 15 381,859 314,343 - - Accounts receivable 16 269,754 214,847 - - Prepayments and deposits 8,371 7,824 121 121 Due from holding companies 3 714 281 - - Investments 17 4,891 - - - Pledged bank deposits 18 77,830 77,210 - - Cash and bank deposits 12,000 33,214 - - -------------- --------------- --------------- -------------- Total current assets 755,419 647,719 121 121 -------------- --------------- --------------- -------------- CURRENT LIABILITIES Short-term bank borrowings 19 (395,968) (355,492) - - Finance lease obligations, current portion 21 (16,534) (12,973) - - Accounts payable 22 (54,983) (30,933) - - Accruals and other payables (12,209) (14,337) - - Due to a director 3 (6,088) (5,956) - - Taxation payable 23 (32,127) (36,642) - - -------------- --------------- --------------- -------------- Total current liabilities (517,909) (456,333) - - -------------- --------------- --------------- -------------- Net current assets 237,510 191,386 121 121 -------------- --------------- --------------- -------------- Total assets less current liabilities 607,424 580,311 307,551 339,448 -------------- --------------- --------------- -------------- NON-CURRENT LIABILITIES Long-term bank loans, non-current portion 20 (30,662) (35,580) - - Finance lease obligations, non-current portion 21 (16,906) (18,086) - - Deferred taxation 24 (18,687) (20,031) - - -------------- --------------- --------------- -------------- Total non-current liabilities (66,255) (73,697) - - -------------- --------------- --------------- -------------- Net assets 541,169 506,614 307,551 339,448 ============== =============== =============== ============== Representing: SHARE CAPITAL 25 53,320 53,320 53,320 53,320 RESERVES 27 127,527 328,220 286,128 486,821 RETAINED PROFIT (ACCUMULATED DEFICIT) 360,322 125,074 (31,897) (200,693) -------------- --------------- --------------- -------------- Shareholders' equity 541,169 506,614 307,551 339,448 ============== =============== =============== ==============

Approved by the Board of Directors on 24th July, 2002: LAM SAI WING CHAN YAM FAI, JANE Chairman Deputy Chairman F-24 HANG FUNG GOLD TECHNOLOGY LIMITED CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31ST MARCH, 2002 (Amounts expressed in Hong Kong dollars) Note 2 0 0 2 2 0 0 1 --------- ------------------- ------------------- $'000 $'000 Net cash inflow from operating activities 28.a 63,894 10,527 ------------------- ------------------- Returns on investments and servicing of finance Interest received 7,194 6,822 Interest paid (30,471) (30,105) ------------------- ------------------- (23,277) (23,283) ------------------- ------------------- Taxation Hong Kong profits tax paid (1,192) (6,203) Hong Kong profits tax refunded 355 - ------------------- ------------------- (837) (6,203) ------------------- ------------------- Investing activities Additions of fixed assets (65,046) (175,476) Proceeds from disposal of fixed assets 379 - Increase in investments (5,226) - Advances to an associate - (50,000) Increase in the amounts due from holding companies (433) (281) ------------------- ------------------- (70,326) (225,757) ------------------- ------------------- Net cash outflow before financing activities (30,546) (244,716) ------------------- ------------------- Financing activities 28.b Issue of shares - 62,700 Share issue expenses - (3,321) New long-term bank loans 3,710 37,480 Repayment of long-term bank loans (7,910) (2,900) New short-term bank loans 67,983 26,547 Repayment of short-term bank loans (1,991) (12,000) Repayment of capital element of finance lease obligations (25,738) (15,832) Increase (Decrease) in amount due to a director 132 (865) ------------------- ------------------- 36,186 91,809 ------------------- ------------------- Increase (Decrease) in cash and cash equivalents 5,640 (152,907) Cash and cash equivalents Beginning of year (211,126) (58,219) ------------------- ------------------- End of year 28.d (205,486) (211,126) =================== ===================

F-25 HANG FUNG GOLD TECHNOLOGY LIMITED NOTES TO THE FINANCIAL STATEMENTS (Amounts expressed in Hong Kong dollars unless otherwise stated) 1. ORGANISATION AND PRINCIPAL ACTIVITIES Hang Fung Gold Technology Limited ("the Company") was incorporated in Bermuda on 4th December, 1997 as an exempted company under the Companies Act 1981 of Bermuda (as amended). Its shares have been listed on The Stock Exchange of Hong Kong Limited since 16th March, 1999. The Company is an investment holding company. Its subsidiaries are principally engaged in the design, manufacture and distribution of a broad range of gold products, other precious metal products and jewelry products. Its associates are principally engaged in trading and the operation of internet portal sites to facilitate China trade. 2. PRINCIPAL ACCOUNTING POLICIES The financial statements have been prepared in accordance with Statements of Standard Accounting Practice issued by the Hong Kong Society of Accountants, accounting principles generally accepted in Hong Kong, and the disclosure requirements of the Hong Kong Companies Ordinance and the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited. Principal accounting policies are summarized below: a. Adoption of new/revised Statements of Standard Accounting Practice Effective from 1st April, 2001, the Company, and its subsidiaries and associates (together "the Group") have adopted, for the first time, the following Statements of Standard Accounting Practice ("SSAPs") issued by the Hong Kong Society of Accountants: SSAP 9 (revised) Events after the balance sheet date SSAP 14 (revised) Leases SSAP 26 Segment reporting SSAP 28 Provisions, contingent liabilities and contingent assets SSAP 29 Intangible assets SSAP 30 Business combinations SSAP 31 Impairment of assets SSAP 32 Consolidated financial statements and accounting for investments in subsidiaries F-26 2. PRINCIPAL ACCOUNTING POLICIES (Cont'd) a. Adoption of new/revised Statements of Standard Accounting Practice (Cont'd) The adoption of the above new/revised SSAPs had no material effect on the Group's financial statements, other than as described below: i. SSAP 26 - Segment reporting Segment information of the Group has been disclosed in Note 29 to the financial statements. ii. SSAP 30 - Business combinations Prior to 1st April, 2001, goodwill was eliminated against reserves in the year in which it arose. With the introduction of SSAP 30, goodwill arising on or after 1st April, 2001 is capitalized in the balance sheet and is amortized to the income statement on a straight-line basis over its estimated economic life. The Group has taken advantage of the transitional provisions in SSAP 30 whereby all goodwill arising from acquisitions before 1st April, 2001, previously eliminated against reserves, has not been restated, and any subsequent impairment of such goodwill is recognized in the income statement in accordance with SSAP 31 - Impairment of assets. Following the transitional provisions of SSAP 30, where an impairment loss has arisen since the date of acquisition on goodwill previously eliminated against reserves, this change in accounting policy for recognition of goodwill impairment has been applied retrospectively and the impairment losses have been recognized as a prior year adjustment in accordance with SSAP 2 - Net profit or loss for the period, fundamental errors and changes in accounting policies. In this respect, goodwill of approximately $188,142,000 previously eliminated against retained profit has been assessed by the Group and the Group determined that an impairment loss of $188,142,000 should be recorded during the year ended 31st March, 2001. As a result, the Group's previously reported profit attributable to shareholders for the year ended 31st March, 2001 of $52,164,000 has become a loss attributable to shareholders of approximately $135,978,000, however there is no impact on the Group's retained profit as at 1st April, 2001. In addition to the adoption of the above standards, the Group has adopted the consequential changes made to SSAP 10 - Accounting for investments in associates, SSAP 17 - Property, plant and equipment, SSAP 18 - Revenue, and SSAP 21 - Accounting for interests in joint ventures. The adoption of these consequential changes had no material effect on the Group's financial statements. The 2001 comparative figures presented herein have incorporated the effect of adjustments, where applicable, resulting from the adoption of the new/revised SSAPs. b. Basis of measurement The financial statements have been prepared on the historical cost basis, as modified by the revaluation of investment properties (see Note 2.h) and stating investments at fair value (see Note 2.i). F-27 2. PRINCIPAL ACCOUNTING POLICIES (Cont'd) c. Basis of consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries, together with the Group's share of post-acquisition results and reserves of its associates under the equity method of accounting. The results of subsidiaries and associates acquired or disposed of during the year are included in the consolidated financial statements from or to their effective dates of acquisition or disposal. Significant intra-group transactions and balances have been eliminated on consolidation. d. Goodwill Goodwill represents the difference between the fair value of the consideration given and the Group's share of the aggregate fair value of the identifiable net assets acquired. Goodwill is recognized as an asset in the balance sheet and is amortized on a straight-line basis over its estimated economic life. The carrying value of goodwill is assessed periodically or when factors indicating an impairment are present. Any impairment of goodwill is recognized as an expense in the period in which the impairment occurs. e. Subsidiaries A subsidiary is a company over which the Group can exercise control, which is normally evidenced when the Group has the power to govern its financial and operating policies so as to obtain benefits from its activities. In the Company's financial statements, investment in subsidiaries is stated at cost less any impairment losses, while income from subsidiaries is recorded to the extent of dividends received and receivable. f. Associates An associate is a company over which the Group has significant influence, but not control or joint control, over its financial and operating policy decisions. In the consolidated financial statements, investment in associates is accounted for under the equity method of accounting, whereby the investment is initially recorded at cost and is adjusted thereafter to recognize the Group's share of the post-acquisition results of associates, distributions received from associates, other necessary alterations in the Group's proportionate interest in associates arising from changes in the equity of associates that have not been included in the income statement of associates, amortization of the difference between the cost of investment and the Group's share of the aggregate fair value of the identifiable net assets acquired at the date of acquisition (goodwill), and any impairment losses. The Group's share of post-acquisition results of associates is included in the consolidated income statement. F-28 2. PRINCIPAL ACCOUNTING POLICIES (Cont'd) g. Fixed assets and depreciation Fixed assets are stated at cost less accumulated depreciation and any impairment losses. Major expenditures on modifications and betterments of fixed assets which will increase their future economic benefits are capitalized, while expenditures on maintenance and repairs of fixed assets are expensed when incurred. Depreciation is provided on a straight-line basis to write off the cost less impairment losses and estimated residual value of each asset over its estimated useful life. The annual rates of depreciation are as follows: Land and buildings 5% Machinery and equipment 15% to 20% Furniture and office equipment 12% to 20% Motor vehicles 20% The depreciation methods and useful lives are reviewed periodically to ensure that the methods and rates of depreciation are consistent with the expected pattern of economic benefits from fixed assets. Gains and losses on disposal of fixed assets are recognized in the income statement based on the net disposal proceeds less the then carrying amount of the assets. Fixed assets held under finance leases are recorded and depreciated on the same basis as described above. h. Investment properties Investment properties are leasehold interests in land and buildings held for their long-term investment potential. Investment properties are included in the balance sheet at their open market value on the basis of an annual valuation by independent qualified valuers. Changes in the value of investment properties are dealt with in the investment properties revaluation reserve unless the balance of this reserve is insufficient to cover a deficit on a portfolio basis, in which case the net deficit is charged to the income statement. Where a deficit has previously been charged to the income statement and a revaluation surplus subsequently arises, this surplus is credited to the income statement to the extent of the deficit previously charged. When an investment property is disposed of, previously recognized revaluation surpluses are reversed and the gain or loss on disposal reported in the income statement is determined based on the net disposal proceeds less the original cost. No depreciation is provided for investment property unless the unexpired lease term is 20 years or less, in which case depreciation is provided on the then carrying value over the unexpired lease term. i. Investments Short-term investments are carried at fair value in the balance sheet. Any unrealized holding gain or loss is recognized in the income statement in the period when it arises. Upon disposal of investments, any gain or loss thereon is accounted for in the income statement. F-29 2. PRINCIPAL ACCOUNTING POLICIES (Cont'd) j. Inventories Inventories are stated at the lower of cost and net realizable value. Cost includes costs of raw materials calculated using the first-in, first-out method of costing and, in the case of work-in-progress and finished goods, also direct labor and an appropriate proportion of production overheads. Net realizable value is based on estimated selling prices in the ordinary course of business, less further costs expected to be incurred to completion and disposal. Provision is made for obsolete, slow-moving or defective items where appropriate. When inventories are sold, the carrying amount of those inventories is recognized as an expense in the period in which the related revenue is recognized. The amount of any write-down of inventories to net realizable value and all losses of inventories are recognized as an expense in the period the write-down or loss occurs. The amount of reversal of any write-down of inventories, arising from an increase in net realizable value, is recognized as a reduction in the amount of inventories recognized as an expense in the period in which the reversal occurs. k. Impairment of assets Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Whenever the carrying amount of an asset exceeds its recoverable amount, an impairment loss representing the difference between the carrying amount and the recoverable amount of an asset is recognized in the income statement. The recoverable amount is the higher of an asset's net selling price and value in use. The net selling price is the amount obtainable from the sale of an asset in an arm's length transaction less the costs of disposal, while value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. Reversal of an impairment loss of an asset recognized in prior years is recorded when there is an indication that the impairment loss recognized for the asset no longer exists or has decreased. The reversal is recorded in the income statement. l. Turnover and revenue recognition Turnover consists of the net invoiced value of merchandise sold, after allowances for returns and discounts, and rental income. Revenue is recognized when the outcome of a transaction can be measured reliably and when it is probable that the economic benefits associated with the transaction will flow to the Group. Sales revenue is recognized when the merchandise is delivered and title has passed. Rental income is recognized on a straight-line basis over the period of the relevant leases. Interest income is recognized on a time proportion basis on the principal outstanding and at the rates applicable. F-30 2. PRINCIPAL ACCOUNTING POLICIES (Cont'd) m. Taxation Individual companies within the Group provide for profits tax on the basis of their profits for financial reporting purposes, adjusted for income and expense items which are not assessable or deductible for profits tax purposes. Deferred taxation is provided under the liability method, at the current tax rate, in respect of significant timing differences between profit as computed for taxation purposes and profit as stated in the financial statements, except when it is considered that no liability will arise in the foreseeable future. Deferred tax assets are not recognized unless the related benefits are expected to crystallize in the foreseeable future. n. Advertising and promotion costs Costs of advertising and promotion are expensed as incurred. o. Employee retirement benefits Costs of employee retirement benefits are recognized as an expense in the period in which the employees' services are rendered. p. Borrowing costs Borrowing costs that are directly attributable to the acquisition, construction or production of an asset that takes a substantial period of time to prepare for its intended use or sale are capitalized as part of the cost of that asset at rates based on the actual cost of the specific borrowings. All other borrowing costs are recognized as an expense in the period in which they are incurred. q. Provisions and contingencies A provision is recognized when there is a present obligation, legal or constructive, as a result of a past event and it is probable (i.e. more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are reviewed regularly and adjusted to reflect the current best estimate. Where the effect of the time value of money is material, the amount of a provision is the present value of the expenditures expected to be required to settle the obligation. Contingent liabilities are not recognized in the financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. A contingent asset is not recognized in the financial statements but disclosed when an inflow of economic benefits is probable. F-31 2. PRINCIPAL ACCOUNTING POLICIES (Cont'd) r. Leases Finance leases represent those leases under which substantially all the risks and rewards of ownership of the leased assets are transferred to the Group. Fixed assets held under finance leases are initially recorded at the present value of the minimum lease payments at the inception of the leases, with equivalent liabilities categorized as appropriate under current or non-current liabilities. Interest expense, which represents the difference between the minimum lease payments at the inception of the finance leases and the corresponding fair value of the assets acquired, is allocated to accounting periods over the period of the relevant leases to produce a constant rate of charge on the outstanding balances. Operating leases represent those leases under which substantially all the risks and rewards of ownership of the leased assets remain with the lessors. Rental payments under operating leases are charged to the income statement on a straight-line basis over the period of the relevant leases. s. Cash equivalents For the purpose of the consolidated cash flow statement, cash equivalents represent short-term highly liquid investments which are readily convertible into known amounts of cash and which were within three months of maturity when acquired, less advances from banks repayable within three months from the date of the advance. t. Currency translation Companies within the Group maintain their books and records in Hong Kong dollars. Transactions in other currencies during the year are translated into Hong Kong dollars at the applicable rates of exchange prevailing at the time of the transactions. Monetary assets and liabilities denominated in other currencies are translated into Hong Kong dollars at the applicable rates of exchange in effect at the balance sheet date. Exchange gains or losses are dealt with in the income statement in which they arise. u. Subsequent events Post year-end events that provide additional information about financial position at the balance sheet date or those that indicate the going concern assumption is not appropriate ("adjusting events") are reflected in the financial statements. Post year-end events that are not adjusting events are disclosed in the notes when material. v. Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in Hong Kong requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. F-32 3. Related party transactions Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. a. Significant transactions with related parties are summarized below: (i) During the year ended 31st March, 2002, the Group paid rental of approximately $162,000 (2001 - $324,000) in respect of residential premises owned by Mr. Lam Sai Wing, a director of the Company. The premises are used as the residence of Mr. Lam Sai Wing and his family. (ii) The amount due from an associate of $50,000,000 (2001 - $50,000,000) (see Note 14) is secured by the 50.1% equity interest in the associate not owned by the Group, bears interest at the rate of 2.5% over the prime lending rate as quoted by The Hongkong and Shanghai Banking Corporation Limited, and is repayable after September 2003. During the year, interest earned from this advance amounted to approximately $4,449,000 (2001 - $1,901,000). b. Details of the amounts due from holding companies (consolidated) are: Balance as at 31st Balance as at 31st Maximum balance outstanding March, 2002 March, 2001 during the year --------------- ---------------- ---------------- $'000 $'000 $'000 Quality Prince Limited, an immediate holding company 11 6 11 S.W. Lam, Inc., an intermediate holding company 703 275 703 --------------- ----------------- ================ 714 281 =============== ===============

These amounts are unsecured, non-interest bearing and without pre-determined repayment terms. c. Details of the amount due to a director (consolidated) are: Balance as at 31st Balance as at March, 2002 31st March, 2001 -------------------- ------------------- $'000 $'000 Mr. Lam Sai Wing 6,088 5,956 ==================== =================== The balance with the director is unsecured, non-interest bearing and without pre-determined repayment terms. d. The Group's banking facilities are secured by, among others, mortgages over certain properties owned by Mr. Lam Sai Wing and Ms. Chan Yam Fai, Jane, directors of the Company, and assignment of the benefits in respect of the keyman insurance of Mr. Lam Sai Wing amounting to $20,000,000. F-33 4. TURNOVER and revenue Turnover and revenue (consolidated) consisted of: 2 0 0 2 2 0 0 1 ---------------- ----------------- $'000 $'000 Sales of merchandise 1,568,659 1,327,657 Rental income 98 96 --------------- ------------------ Turnover 1,568,757 1,327,753 Other income 4,486 - Interest income 7,452 8,723 --------------- ------------------ Total revenue 1,580,695 1,336,476 =============== ================== F-34 5. PROFIT (lOSS) BEFORE TAXATION Profit (Loss) before taxation (consolidated) was determined after charging or crediting the following items: 2 0 0 2 2 0 0 1 --------------- -------------- $'000 $'000 After charging - Interest on - gold loans and forward contracts wholly repayable within five years 5,483 - - bank overdrafts and borrowings wholly repayable within five years 22,367 27,272 - bank borrowings wholly repayable after five years 609 647 - finance leases 2,012 2,186 Employment costs (including directors' emoluments) 55,002 47,321 Advertising and promotion costs 20,162 7,772 Operating lease rentals in respect of - office and factory premises 5,141 4,485 - machinery and equipment 132 82 Website development expense 565 3,969 Depreciation of fixed assets - owned assets 80,180 63,662 - assets held under finance leases 14,226 11,774 Net loss on disposal of fixed assets 473 377 Deficit on revaluation of an investment property 150 250 Provision for bad and doubtful debts - 2,500 Provision for slow-moving and obsolete inventories 600 1,200 Net exchange loss (including translation loss on gold loans) 5,407 75 Auditors' remuneration 780 780 ============ ============= After crediting - Interest income from - bank deposits 3,003 6,822 - amount due from an associate (see Notes 3 and 14) 4,449 1,901 Rental income, less outgoings 84 82 ============ ============

F-35 6. DIRECTORS' AND SENIOR EXECUTIVES' EMOLUMENTS a. Details of directors' emoluments are: 2 0 0 2 2 0 0 1 ------------- ------------ $'000 $'000 Fees for executive directors - - Fees for non-executive directors 128 120 Other emoluments for executive directors - Basic salaries and allowances 4,191 2,460 - Bonus * - 2,500 - Contributions to pension scheme 24 4 ------------ ------------ 4,343 5,084 ============ ============ * The Company's executive directors are entitled to a discretionary bonus not exceeding 5% of the Group's consolidated profit attributable to shareholders. No directors waived any emoluments during the year. No incentive payment for joining the Group or compensation for loss of office was paid or payable to any directors during the year. Analysis of directors' emoluments by number of directors and emolument range is as follows: 2 0 0 2 2 0 0 1 --------------- ------------ Executive directors - Nil to $1,000,000 1 1 - $3,500,001 to $4,000,000 1 - - $4,500,001 to $5,000,000 - 1 Non-executive directors - Nil to $1,000,000 3 5 ------------ ------------- 5 7 ============ ============= b. Details of emoluments of the five highest paid individuals (including directors and other employees) are: 2 0 0 2 2 0 0 1 ----------------- -------------- $'000 $'000 Basic salaries and allowances 5,690 4,364 Bonus - 2,500 Contributions to pension scheme 60 20 -------------- -------------- 5,750 6,884 ============== ============== F-36 6. DIRECTORS' AND SENIOR EXECUTIVES' EMOLUMENTS (Cont'd) b. (Cont'd) Two (2001 - Two) of the highest paid individuals were directors of the Group, whose emoluments have been included in Note 6.a above. During the year, no emolument of the five highest paid individuals (including directors and other employees) was incurred as inducement to join or upon joining the Group or as compensation for loss of office. Analysis of emoluments of the five highest paid individuals (including directors and other employees) by number of individuals and emolument range is as follows: 2 0 0 2 2 0 0 1 -------------- ------------------ - Nil to $1,000,000 4 4 - $3,500,001 to $4,000,000 1 - - $4,500,001 to $5,000,000 - 1 -------------- ------------------ 5 5 ============== ================== 7. TAXATION Taxation credit (charge) (consolidated) consisted of: 2 0 0 2 2 0 0 1 ------------- -------------- $'000 $'000 Current taxation - Hong Kong profits tax (5,181) (2,519) - Write-back of over-provision of Hong Kong profits tax in prior years 1,001 - - Write-back of over-provision of Mainland China taxes in prior years (see Note 23) 7,858 - ------------- ------------- 3,678 (2,519) Deferred taxation - Write-back of (Provision for) deferred taxation 1,344 (6,637) ------------- ------------- 5,022 (9,156) ============= =============

The Company is exempted from taxation in Bermuda until 2016. Hong Kong profits tax has been provided at the rate of 16% (2001 - 16%) on the estimated assessable profit arising in or derived from Hong Kong. No Mainland China tax has been provided as the Group had no taxable profit subject to such tax during the year. F-37 8. PROFIT (LOSS) ATTRIBUTABLE TO SHAREHOLDERS The consolidated profit attributable to shareholders included a loss of approximately $31,897,000 (2001 - $200,701,000) dealt with in the financial statements of the Company. 9. RETAINED PROFIT Retained profit consisted of: 2 0 0 2 2 0 0 1 ---------------- --------------- $'000 $'000 Company and subsidiaries 375,253 131,241 Associates (14,931) (6,167) ---------------- -------------- 360,322 125,074 ================ ============== 10. EARNINGS (loss) PER SHARE The calculation of basic earnings (loss) per share for the year ended 31st March, 2002 is based on the consolidated profit attributable to shareholders of approximately $34,555,000 (2001 - loss of $135,978,000) and on the weighted average number of approximately 5,332,000,000 shares (2001 - 4,468,231,000 shares) in issue during the year. The calculation of diluted earnings per share for the year ended 31st March, 2002 is based on the consolidated profit attributable to shareholders of approximately $34,555,000 and on the weighted average number of approximately 5,351,772,000 shares in issue, after adjusting for the effects of all dilutive potential shares. A reconciliation of the weighted average number of shares used in calculating the basic earnings per share and the diluted earnings per share for the year ended 31st March, 2002 is as follows: `000 Weighted average number of shares used in calculating basic earnings per share 5,332,000 Adjustment for potential dilutive effect in respect of outstanding employee share options 19,772 ----------- Weighted average number of shares used in calculating diluted earnings per share 5,351,772 =========== No diluted loss per share for the year ended 31st March, 2001 is presented as the outstanding share options were anti-dilutive. F-38 11. FIXED ASSETS a. Movements of fixed assets (consolidated) were: 2 0 0 2 2001 ---------------------------------------------------------------- ----------- Land and Machinery Furniture Motor Total Total and and office buildings equipment equipment vehicles ----------- ----------- ------------ ------------ ----------- ----------- $'000 $'000 $'000 $'000 $'000 $'000 Cost Beginning of year 16,700 387,081 160,611 1,054 565,446 363,209 Additions 5,300 45,977 41,079 809 93,165 202,627 Disposals - - (997) - (997) (390) ----------- ----------- ------------ ------------ ----------- ----------- End of year 22,000 433,058 200,693 1,863 657,614 565,446 ----------- ----------- ------------ ------------ ----------- ----------- Accumulated depreciation Beginning of year 105 177,657 34,778 928 213,468 138,045 Provision for the year 1,100 74,122 19,117 67 94,406 75,436 Disposals - - (145) - (145) (13) ----------- ----------- ------------ ------------ ----------- ----------- End of year 1,205 251,779 53,750 995 307,729 213,468 ----------- ----------- ------------ ------------ ----------- ----------- Net book value End of year 20,795 181,279 146,943 868 349,885 351,978 =========== =========== ============ ============ =========== =========== Beginning of year 16,595 209,424 125,833 126 351,978 225,164 =========== =========== ============ ============ =========== ===========

b. Land and buildings: Land and buildings are located in Hong Kong and are held under medium-term leases. Land and buildings with a net book value of approximately $19,857,000 (2001 - $15,608,000) are mortgaged as collateral for the Group's banking facilities (see Note 32). c. Finance leases: Certain machinery and equipment were purchased under finance leases. Details of these assets are as follows: 2 0 0 2 2 0 0 1 -------------- -------------- $'000 $'000 Cost 71,131 58,868 Less: Accumulated depreciation (27,318) (20,382) --------------- -------------- Net book value 43,813 38,486 =============== ============== Depreciation for the year 14,226 11,774 =============== ============== F-39 12. INVESTMENT PROPERTY Movements of investment property (consolidated) were: 2 0 0 2 2 0 0 1 ------------- ------------ $'000 $'000 Beginning of year 1,600 1,850 Deficit on revaluation (150) (250) ------------- ------------ End of year 1,450 1,600 ============= ============ The investment property is located in Hong Kong and is held under a long-term lease. It is stated at open market value at 31st March, 2002 as determined by DTZ Debenham Tie Leung Limited, independent qualified valuers. Details of the investment property as at 31st March, 2002 are as follows: Location Group's interest Existing use ------------------------------------- ------------------- --------------- Flat B4 on 14th Floor, Peace Building, 100% Residential 3 Peace Avenue, Ho Man Tin, Kowloon, Hong Kong 13. INVESTMENT IN SUBSIDIARIES In the Company's balance sheet, investment in subsidiaries consisted of: 2 0 0 2 2 0 0 1 -------------- -------------- $'000 $'000 Unlisted shares, at cost 158,743 158,743 Due from subsidiaries 379,741 381,285 -------------- -------------- 538,484 540,028 Less: Impairment losses and provision against due from subsidiaries (231,054) (200,701) -------------- -------------- 307,430 339,327 ============== ============== The amounts due from subsidiaries are unsecured and non-interest bearing. The underlying value of investment in subsidiaries is, in the opinion of the Company's Directors and the Group's management, not less than its carrying amount as at 31st March, 2002. As of 31st March, 2002, the Company had given guarantees to banks of approximately $421,329,000 (2001 - $344,980,000) to secure banking facilities of certain subsidiaries. F-40 13. INVESTMENT IN SUBSIDIARIES (Cont'd) Details of the principal subsidiaries as at 31st March, 2002 were as follows: Name Place of Issued and fully Percentage of Principal activities incorporation/ equity interest operations paid capital held (i) --------------------------- ----------------- -------------------- ------------------ --------------------- Hang Fung Gold British Virgin US$1 100% Investment holding (International) Islands/Hong Company Limited Kong Hang Fung Jewellery Hong Kong Class A - Manufacturing and Company Limited (non-voting) selling of gold ordinary - $4 100% and jewelry (ii) products Class B (voting) ordinary - $2 Hang Fung Jewellery Mainland China $25,000,000 100% Manufacturing of (Shenzhen) Co., Ltd. gold and jewelry (iii) products Kai Hang Jewellery Hong Kong Class A - Property holding Company Limited (non-voting) ordinary - $10,002 (ii) 100% Class B (voting) ordinary - $2 Macadam Profits Limited British Virgin US$2 100% Investment holding Islands/Hong Kong Soycue Limited British Virgin US$1 100% Investment holding Islands/Hong Kong

Notes - (i) The shares of Macadam Profits Limited are held directly by the Company. The shares of other subsidiaries are held indirectly. (ii) The Class A (non-voting) ordinary shares have no voting rights, are not entitled to dividends unless dividends paid to holders of Class B (voting) ordinary shares exceed $900,000,000,000 in a financial year, and are not entitled to distribution of the companies' assets unless each Class B (voting) ordinary shareholder has been returned its paid-up capital together with a premium of $900,000,000,000. (iii) Hang Fung Jewellery (Shenzhen) Co., Ltd. is a wholly foreign owned enterprise established in Mainland China to be operated for 30 years up to 2028. None of the subsidiaries had any loan capital in issue at any time during the year ended 31st March, 2002. F-41 14. Investment in Associates Investment in associates (consolidated) consisted of: 2 0 0 2 2 0 0 1 ------------- ------------ $'000 $'000 Unlisted shares, at cost 186,048 186,048 Advance to an associate 50,000 50,000 Accrued interest 2,159 1,901 Impairment of goodwill (188,142) (188,142) Share of post-acquisition losses of associates (14,931) (6,167) Provision against advance to an associate (16,555) (8,293) ------------ ----------- 18,579 35,347 ============ =========== The amount due from an associate (New Epoch Information (BVI) Company Limited) of $50,000,000 is secured by the 50.1% equity interest in the associate not owned by the Group, bears interest at the rate of 2.5% over the prime lending rate as quoted by The Hongkong and Shanghai Banking Corporation Limited, and is repayable after September 2003. The underlying value of investment in associates is, in the opinion of the Company's Directors and the Group's management, not less than its carrying amount as at 31st March, 2002. Details of the principal associates as at 31st March, 2002 were as follows: Name Place of Issued and fully Percentage of Principal activities incorporation/ equity interest operations paid share capital held (i) --------------------------- ----------------- -------------------- ------------------ --------------------- Asia Trader Associates British Virgin US$450,000 16.5% (ii) Operation of Limited ("ATAL") Islands/Hong Internet portal Kong sites China International Hong Kong $20,000,000 24.5% Operation of Electronic Commerce Internet portal (HK) Limited sites to facilitate China trade New Epoch Information British Virgin US$1,000 49.9% Investment holding (BVI) Company Limited Islands/Hong Kong New Epoch Information Hong Kong $5,000,000 49.9% Trading and Company Limited investment holding

F-42 14. INVESTMENT IN ASSOCIATES (Cont'd) Notes - (i) The shares of the above associates are held indirectly by the Company. (ii) Asia Trader Associates Limited is an associate as the Group's interest in it is held through an associate which in turn holds more than 20% of the issued voting share capital of ATAL. The above summary lists only the principal associates of the Company which, in the opinion of the Company's Directors and the Group's management, principally affected the results or formed a substantial portion of the net assets of the Group. To give details of other associates would, in the opinion of the Company's Directors and the Group's management, result in particulars of excessive length. 15. INVENTORIES Inventories (consolidated) consisted of: 2 0 0 2 2 0 0 1 ---------------- -------------- $'000 $'000 Raw materials 266,164 160,912 Finished goods 119,495 156,631 ---------------- -------------- 385,659 317,543 Less: Provision for slow-moving and obsolete inventories (3,800) (3,200) ---------------- -------------- 381,859 314,343 ================ ============== As at 31st March, 2002, inventories of approximately $3,309,000 (2001 - $2,161,000) were stated at net realizable value. Inventories of approximately $286,965,000 (2001 - $317,543,000) were held under trust receipts bank loan arrangements (see Note 32). F-43 16. ACCOUNTS RECEIVABLE The Group grants to its customers credit periods ranging from 30 days to 120 days. The ageing analysis of accounts receivable (consolidated) is as follows: 2 0 0 2 2 0 0 1 -------------- ------------- $'000 $'000 0 to 90 days 271,097 215,249 91 to 180 days 3,946 7,295 181 to 270 days 4,711 2,303 --------------- -------------- 279,754 224,847 Less: Provision for bad and doubtful debts (10,000) (10,000) --------------- -------------- 269,754 214,847 =============== ============== 17. INVESTMENTS Investments (consolidated) consisted of: 2 0 0 2 2 0 0 1 ----------------- ------------------ $'000 $'000 Unlisted investments, at cost 5,226 - Less: Unrealized holding loss (335) - ----------------- ------------------ 4,891 - ================= ================== As at 31st March, 2002, investments represented units in investment funds managed by investment companies in Hong Kong. 18. PLEDGED BANK DEPOSITS As at 31st March, 2002, the Group's bank deposits of approximately $77,830,000 (2001 - $77,210,000) were pledged as collateral for the Group's banking facilities (see Note 32). F-44 19. SHORT-TERM BANK BORROWINGS Short-term bank borrowings (consolidated) consisted of: 2 0 0 2 2 0 0 1 ---------------- ------------- $'000 $'000 Bank overdrafts 8,351 84 Trust receipts bank loans 286,965 321,466 Gold loans from banks 41,954 - Other short-term bank loans 50,585 26,547 ---------------- ------------- 387,855 348,097 Long-term bank loans, current portion (Note 20) 8,113 7,395 ---------------- ------------- 395,968 355,492 ================ ============= Short-term bank borrowings are secured and bear interest at rates ranging from 1.90% to 1% over prime lending rate. Refer to Note 32 for details of the Group's banking facilities. 20. LONG-TERM BANK LOANS Long-term bank loans (consolidated) consisted of: 2 0 0 2 2 0 0 1 ------------ ---------- $'000 $'000 Amounts repayable within a period - not exceeding one year 8,113 7,395 - more than one year but not exceeding two years 8,134 7,703 - more than two years but not exceeding five years 12,323 18,714 - more than five years 10,205 9,163 ------------ ---------- 38,775 42,975 Less: Amounts repayable within one year included under current liabilities (Note 19) (8,113) (7,395) ------------ ---------- 30,662 35,580 ============ ==========

Long-term bank loans are secured and bear interest at rates ranging from 1.75% below prime lending rate to 1.75% above that. Refer to Note 32 for details of the Group's banking facilities. F-45 21. FINANCE LEASE OBLIGATIONS Finance lease obligations, net of future finance charges (consolidated), consisted of: 2 0 0 2 2 0 0 1 ------------- ------------ $'000 $'000 Total minimum lease payments under finance leases - not exceeding one year 17,648 14,866 - more than one year and not exceeding two years 12,286 11,454 - more than two years but not exceeding five years 5,161 7,859 ------------- ------------- 35,095 34,179 Less: Future finance charges (1,655) (3,120) ------------- ------------- 33,440 31,059 ============= ============= 2 0 0 2 2 0 0 1 -------------- ------------- $'000 $'000 The present value of finance lease obligations - not exceeding one year 16,534 12,973 - more than one year but not exceeding two years 11,846 10,548 - more than two years but not exceeding five years 5,060 7,538 ------------- ------------- 33,440 31,059 Less: Amounts repayable within one year included under current liabilities (16,534) (12,973) ------------- ------------- 16,906 18,086 ============= =============

22. ACCOUNTS PAYABLE The ageing analysis of accounts payable (consolidated) is as follows: 2 0 0 2 2 0 0 1 ------------ ------------- $'000 $'000 0 to 90 days 53,101 28,636 91 to 180 days 1,476 1,716 181 to 270 days 406 581 ------------- -------------- 54,983 30,933 ============= ============== F-46 23. TAXATION PAYABLE Taxation payable (consolidated) consisted of: 2 0 0 2 2 0 0 1 ------------- ------------ $'000 $'000 Hong Kong profits tax 3,343 - General provision for Mainland China tax * 28,784 36,642 -------------- ------------ 32,127 36,642 ============== ============ * Prior to 1st April, 1999, the Group earned contract processing fees based on the utilization of equipment and technology provided by the Group to its Mainland China contracting partners, and provision for Mainland China tax in relation to these fees has been made. The amount of such provision is reviewed periodically and will be written back if it is unlikely that it would be crystallized after carrying over the provision for a period of six years. 24. DEFERRED TAXATION Movements of deferred taxation (consolidated) were: 2 0 0 2 2 0 0 1 ------------ ------------ $'000 $'000 Beginning of year 20,031 13,394 Provision for net timing differences - 6,637 Write-back of over-provision in prior years (1,344) - ------------- ------------ End of year 18,687 20,031 ============= ============ Deferred taxation represents the taxation effect of accelerated depreciation of fixed assets for taxation purposes. There were no significant unprovided deferred tax liabilities as at 31st March, 2002. F-47 25. SHARE CAPITAL Movements were: 2 0 0 2 2 0 0 1 ------------------------------------ ----------------------------------- Number of shares Nominal value Number of shares Nominal value ----------------- ----------------- ----------------- ---------------- '000 $'000 '000 $'000 Authorized - ordinary shares of ---------- $0.01 each 20,000,000 200,000 20,000,000 200,000 ================= ================= ================= ================ Issued and fully paid - ordinary --------------------- shares of $0.01 each Beginning of year 5,332,000 53,320 3,150,000 31,500 Issue of shares for acquisition of associates - - 1,632,000 16,320 Issue of shares through a placement - - 550,000 5,500 ----------------- ----------------- ----------------- ---------------- End of year 5,332,000 53,320 5,332,000 53,320 ================= ================= ================= ================

26. SHARE OPTIONS The Company has a share option scheme, under which it may grant options to employees of the Group (including executive directors of the Company) to subscribe for shares in the Company, subject to a maximum of 10% of the nominal value of the issued share capital of the Company from time to time, excluding for this purpose shares issued on the exercise of options. The subscription price will be determined by the Company's board of directors, and will not be less than the higher of the nominal value of the shares and 80% of the average of the closing price of the shares quoted on The Stock Exchange of Hong Kong Limited on the five trading days immediately preceding the date of offer of the options. Movements of employee share options during the year ended 31st March, 2002 are: Number of share options --------------------------------------------- Date of grant Exercise period Exercise Beginning of Exercised End of year during the price year year ----------------------- ----------------------- -------------- -------------- -------------- -------------- '000 '000 '000 9th June, 2000 9th June, 2001 to $ 0.109 26th February, 2009 315,000 - 315,000 ============== ============== ==============

F-48 27. RESERVES Movements of reserves were: 2 0 0 2 2 0 0 1 ---------------------------------------------------------- ----------------- Share premium Contributed Total Total surplus ------------------ ------------------ ----------------- ----------------- $'000 $'000 $'000 $'000 Consolidated Beginning of year 328,220 - 328,220 104,613 Premium on issue of shares - - - 226,928 Share issue expenses - - - (3,321) Effect of reduction in share premium (i) (328,220) 127,527 (200,693) - ------------------ ------------------ ----------------- ----------------- End of year - 127,527 127,527 328,220 ================== ================== ================= ================= 2 0 0 2 2 0 0 1 ---------------------------------------------------------- ----------------- Share premium Contributed Total Total surplus ------------------ ------------------ ----------------- ----------------- $'000 $'000 $'000 $'000 Company Beginning of year 328,220 158,601 486,821 263,214 Premium on issue of shares - - - 226,928 Share issue expenses - - - (3,321) Effect of reduction in share premium (i) (328,220) 127,527 (200,693) - ------------------ ------------------ ----------------- ----------------- End of year - 286,128 286,128 486,821 ================== ================== ================= =================

Note - (i) Following a shareholders' resolution passed on 1st March, 2002, the Company transferred the entire amount of share premium of approximately $328,220,000 to contributed surplus ($127,527,000) and retained profit ($200,693,000). Under the Companies Act 1981 of Bermuda (as amended), contributed surplus is distributable to shareholders, subject to the condition that the Company cannot declare or pay a dividend, or make a distribution out of contributed surplus if (i) it is, or would after the payment be, unable to pay its liabilities as they become due, or (ii) the realizable value of its assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium account. As at 31st March, 2002, the Company had reserves of approximately $254,231,000 available for distribution to shareholders (2001 - Nil). F-49 28. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT a. Reconciliation of profit (loss) before taxation to net cash inflow from operating activities: 2 0 0 2 2 0 0 1 ---------------- -------------- $'000 $'000 Profit (Loss) before taxation 29,533 (126,822) Interest income (7,452) (8,723) Interest expense 30,471 30,105 Impairment of goodwill relating to associates - 188,142 Share of losses of associates and provision against advance to an associate 17,026 14,460 Depreciation of fixed assets 94,406 75,436 Net loss on disposal of fixed assets 473 377 Deficit on revaluation of an investment property 150 250 Unrealized holding loss on investments 335 - Increase in inventories (67,516) (107,094) Increase in accounts receivable (54,907) (63,330) Increase in prepayments and deposits (547) (4,776) Increase in accounts payable 24,050 3,866 (Decrease) Increase in accruals and other payables (2,128) 8,636 ------------- -------------- Net cash inflow from operating activities 63,894 10,527 ============= ==============

b. Analysis of changes in financing: Due to a Share Short-term Long-term Finance Total capital and share lease director premium bank loans bank loans obligations ----------- ----------- ------------ ------------ ----------- ----------- $'000 $'000 $'000 $'000 $'000 $'000 As at 1st April, 2000 6,821 136,113 12,000 8,395 19,740 183,069 Decrease in amount due to a director (865) - - - - (865) Issue of shares - 248,748 - - - 248,748 Share issue expenses - (3,321) - - - (3,321) New finance lease obligations - - - - 27,151 27,151 Repayment of capital element of finance lease obligations - - - - (15,832) (15,832) New bank loans - - 26,547 37,480 - 64,027 Repayment of bank loans - - (12,000) (2,900) - (14,900) ----------- ----------- ------------ ------------ ----------- ----------- As at 31st March, 2001 5,956 381,540 26,547 42,975 31,059 488,077 Increase in amount due to a director 132 - - - - 132 Effect of reduction in share premium - (328,220) - - - (328,220) New finance leases obligations - - - - 28,119 28,119 Repayment of capital element of finance lease obligations - - - - (25,738) (25,738) New bank loans - - 67,983 3,710 - 71,693 Repayment of bank loans - - (1,991) (7,910) - (9,901) ----------- ----------- ------------ ------------ ----------- ----------- As at 31st March, 2002 6,088 53,320 92,539 38,775 33,440 224,162 =========== =========== ============ ============ =========== ===========

F-50 28. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (Cont'd) c. Major non-cash transactions: During the year, the Group acquired fixed assets of approximately $28,119,000 (2001 - $27,151,000) under finance leases. d. Analysis of cash and cash equivalents: 2 0 0 2 2 0 0 1 ------------- ------------- $'000 $'000 Cash and bank deposits 89,830 110,424 Bank overdrafts (8,351) (84) Trust receipts bank loans (286,965) (321,466) ------------- ------------- (205,486) (211,126) ============= ============= 29. SEGMENT INFORMATION a. Business segments The Group is organized into two operating units: (i) wholesaling, trading and retailing of gold products, other precious metal products and jewelry products; and (ii) investment holding. An analysis by business segment is as follows: 2 0 0 2 ----------------------------------------------- Wholesaling, Investment Total trading and retailing holding ------------- ------------- --------------- $'000 $'000 $'000 Turnover Sales to external customers 1,568,659 98 1,568,757 =============== ============= ============== Operating results Segment results 70,181 (17,629) * 52,552 =============== ============= Interest income 7,452 Interest expense (30,471) Taxation 5,022 -------------- Profit attributable to shareholders 34,555 ==============

F-51 29. SEGMENT INFORMATION (Cont'd) a. Business segments (Cont'd) 2 0 0 2 ---------------------------------------------------------- Wholesaling, Investment Total trading and retailing holding ------------------ ------------------ ------------------ $'000 $'000 $'000 Other information Assets 1,084,509 40,824 1,125,333 ================== ================== ================== Liabilities 565,030 19,134 584,164 ================== ================== ================== Capital expenditures 87,865 5,300 93,165 ================== ================== ================== Depreciation 93,306 1,100 94,406 ================== ================== ================== Non-cash expenditures other than depreciation 600 - 600 ================== ================== ==================

2 0 0 1 -------------------------------------------------------- Wholesaling, Investment Total trading and retailing holding ------------------ ------------------ ---------------- $'000 $'000 $'000 Turnover Sales to external customers 1,327,657 96 1,327,753 ================== ================== ================ Operating results Segment results 97,606 (203,046) ** (105,440) ================== ================== Interest income 8,723 Interest expense (30,105) Taxation (9,156) ------------ Loss attributable to shareholders (135,978) ============

2 0 0 1 ---------------------------------------------------------- Wholesaling, Investment Total trading and retailing holding ------------------ ----------------- ----------------- $'000 $'000 $'000 Other information Assets 983,102 53,542 1,036,644 ================== ================= ================= Liabilities 512,887 17,143 530,030 ================== ================= ================= Capital expenditures 185,927 202,748 388,675 ================== ================= ================= Depreciation 75,331 105 75,436 ================== ================= ================= Non-cash expenditures other than depreciation 3,700 - 3,700 ================== ================= =================

F-52 29. SEGMENT INFORMATION (Cont'd) b. Geographical segments The Group's activities are conducted predominantly in Hong Kong, Mainland China, South-East Asia, the United States of America, Europe and others. An analysis by geographical segment is as follow: 2002 ------------------------------------------------------------------------- Hong Kong/ South-East The Europe Others Total United Mainland States of China Asia America ------------ ----------- ----------- ------------ ----------- ----------- $'000 $'000 $'000 $'000 $'000 $'000 Turnover 1,191,651 168,650 135,503 60,634 12,319 1,568,757 ============ =========== =========== ============ =========== =========== Segment results 10,844 * 6,275 22,657 12,564 212 52,552 ============ =========== =========== ============ =========== =========== Assets 1,125,333 - - - - 1,125,333 ============ =========== =========== ============ =========== =========== Capital expenditures 93,165 - - - - 93,165 ============ =========== =========== ============ =========== =========== 2001 ------------------------------------------------------------------------- Hong Kong/ South-East The Europe Others Total United Mainland States of China Asia America ------------ ----------- ----------- ------------ ----------- ----------- $'000 $'000 $'000 $'000 $'000 $'000 Turnover 767,585 238,083 140,903 118,006 63,176 1,327,753 ============ =========== =========== ============ =========== =========== Segment results (169,763) ** 11,564 25,161 25,793 1,805 (105,440) ============ =========== =========== ============ =========== =========== Assets 1,036,644 - - - - 1,036,644 ============ =========== =========== ============ =========== =========== Capital expenditures 388,675 - - - - 388,675 ============ =========== =========== ============ =========== ===========

Turnover by geographical location is determined on the basis of the destination of shipment of merchandise. * Including share of losses of associates and provision against advance to an associate of approximately $17,026,000 for the year ended 31st March, 2002. ** Including share of losses of associates and provision against advance to an associate of approximately $14,460,000 and impairment of goodwill relating to associates of approximately $188,142,000 for the year ended 31st March, 2001. F-53 30. COMMITMENTS The Group and the Company had the following commitments which were not provided for in the financial statements: a. Capital commitments Capital commitments, which were all authorized and contracted for, are analyzed as follows: Consolidated Company --------------------------------- --------------------------------- 2 0 0 2 2 0 0 1 2 0 0 2 2 0 0 1 --------------- ---------------- --------------- ---------------- $'000 $'000 $'000 $'000 Acquisition of fixed assets 343 9,587 - - =============== ================ =============== ================

b. Operating lease commitments The Group had operating lease commitments in respect of rented premises and machinery under various non-cancelable operating lease agreements extending to September 2006. The total commitments are analyzed as follows: Consolidated Company --------------------------------- ------------------------------ 2 0 0 2 2 0 0 1 2 0 0 2 2 0 0 1 --------------- ---------------- --------------- ------------- $'000 $'000 $'000 $'000 Amounts payable - within one year 2,651 1,784 - - - between one year and two years 1,477 1,704 - - - between two years and five years 1,323 2,081 - - - over five years - 221 - - ---------- ---------------- --------------- ---------------- 5,451 5,790 - - ========== ================ =============== ================

31. Pension scheme From 1st December, 2000, the Group has arranged for its Hong Kong employees to join the Mandatory Provident Fund Scheme ("the MPF Scheme"), a defined contribution scheme managed by an independent trustee. Under the MPF Scheme, each of the Group and its employees make monthly contributions to the scheme at 5% of the employees' earnings as defined under the Mandatory Provident Fund legislation. Both the employer's and the employees' contributions are subject to a cap of $1,000 per month and thereafter contributions are voluntary. For the year ended 31st March, 2002, the amount of the Group's employer contributions to the MPF Scheme was approximately $1,764,000 (2001 - $624,000). The Group's labor force in Mainland China are all employed on a contract basis and consequently the Group has no obligation for pension liabilities. F-54 32. BANKING FACILITIES AND PLEDGE OF ASSETS As at 31st March, 2002, the Group had aggregate banking facilities of approximately $475,277,000 (2001 - $432,186,000) from several banks for overdrafts, loans and trade financing. Unused facilities as at the same date amounted to approximately $32,783,000 (2001 - $38,117,000). These facilities were secured by: a. mortgage over the Group's land and buildings with a net book value of approximately $19,857,000 (2001 - $15,608,000) (see Note 11); b. the Group's inventories of approximately $286,965,000 (2001 - $317,543,000) held under trust receipts bank loan arrangements (see Note 15); c. pledges of the Group's bank deposits of approximately $77,830,000 (2001 - $77,210,000) (see Note 18); d. mortgages over certain properties owned by Mr. Lam Sai Wing and Ms. Chan Yam Fai, Jane, directors of the Company (see Note 3); e. assignment of the benefits in respect of the keyman insurance for Mr. Lam Sai Wing amounting to $20,000,000 (see Note 3); and f. guarantees provided by the Company. In addition, the Group has agreed with the banks to comply with certain restrictive financial covenants. F-55 Auditors' Report to the Shareholders of HANG FUNG GOLD TECHNOLOGY LIMITED (Incorporated in Bermuda with limited liability) We have audited the financial statements of Hang Fung Gold Technology Limited and its subsidiaries 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 to you. Basis of opinion We conducted our audit in accordance with Statements of Auditing Standards issued by the Hong Kong Society of Accountants and auditing standards generally accepted in the United States of America. 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 company and of the group, consistently applied and adequately disclosed. We planned and performed 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. 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. Opinion In our opinion, the financial statements give a true and fair view of the state of affairs of the company and of the group as at 31st March, 2001 and of the profit and cash flows of the group for the year then ended, and have been properly prepared in accordance with the accounting principles generally accepted in Hong Kong. Accounting practices used by the group in preparing the accompanying consolidated financial statements conform with generally accepted accounting principles in Hong Kong, but do not conform with accounting principles generally accepted in the United States of America. A description of these differences and a reconciliation of consolidated net income (loss) and shareholders' equity to accounting principles generally accepted in the United States of America is set forth in Note 31. /s/ Arthur Andersen & Co. ARTHUR ANDERSEN & CO Certified Public Accountants Hong Kong Hong Kong, 14th July, 2001. This report is a copy of a previously issued accountants' report of Arthur Andersen & Co. This report has not been reissued by Arthur Andersen & Co. F-56 HANG FUNG GOLD TECHNOLOGY LIMITED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31ST MARCH, 2001 (Expressed in Hong Kong dollars) Note 2 0 0 1 -------- ------------------ $'000 Turnover 4 1,327,753 Cost of sales (1,122,475) ------------------ Gross profit 205,278 Selling and distribution expenses (16,856) General and administrative expenses (91,260) ------------------ Profit from operations 97,162 Interest income 4 8,723 Interest expense (30,105) Share of losses of associates and provision for doubtful receivables from an associate 14 (14,460) ------------------ Profit before taxation 5 61,320 Taxation 7 (9,156) ------------------ Profit attributable to shareholders 8 52,164 Retained profit, beginning of year 261,052 Elimination of goodwill 14 (188,142) ------------------ Retained profit, end of year 9 125,074 ================== Earnings per share 10 - Basic HK1.17 cents ================== - Diluted HK1.16 cents ================== F-57 HANG FUNG GOLD TECHNOLOGY LIMITED CONSOLIDATED STATEMENT OF RECOGNISED GAINS AND LOSSES FOR THE YEAR ENDED 31ST MARCH, 2001 (Expressed in Hong Kong dollars) 2 0 0 1 ---------------- $'000 Deficit on revaluation of an investment property - Profit attributable to shareholders 52,164 ---------------- Net recognised gains 52,164 Elimination of goodwill from acquisition of an associate (188,142) ---------------- (135,978) ================ F-58 HANG FUNG GOLD TECHNOLOGY LIMITED BALANCE SHEETS AS AT 31ST MARCH, 2001 (Expressed in Hong Kong dollars) 2 0 0 1 ----------------------------------- Note Consolidated Company -------- ---------------- --------------- $'000 $'000 NON-CURRENT ASSETS Fixed assets 11 351,978 - Investment property 12 1,600 - Investment in subsidiaries 13 - 339,327 Investment in associates 14 35,347 - --------------- --------------- Total non-current assets 388,925 339,327 --------------- --------------- CURRENT ASSETS Inventories 15 314,343 - Accounts receivable 16 214,847 - Prepayments and deposits 7,824 121 Due from holding companies 3 281 - Pledged bank deposits 17 77,210 - Cash and bank deposits 33,214 - --------------- --------------- Total current assets 647,719 121 --------------- --------------- CURRENT LIABILITIES Short-term bank borrowings 18 (355,492) - Finance lease obligations, current portion 20 (12,973) - Accounts payable 21 (30,933) - Accruals and other payables (19,805) - Due to a director 3 (488) - Taxation payable 22 (36,642) - --------------- --------------- Total current liabilities (456,333) - --------------- --------------- Net current assets 191,386 121 --------------- --------------- Total assets less current liabilities 580,311 339,448 --------------- --------------- NON-CURRENT LIABILITIES Long-term bank loans, non-current portion 19 (35,580) - Finance lease obligations, non-current portion 20 (18,086) - Deferred taxation 23 (20,031) - --------------- --------------- Total non-current liabilities (73,697) - --------------- --------------- Net assets 506,614 339,448 =============== =============== Representing: SHARE CAPITAL 24 53,320 53,320 RESERVES 26 328,220 486,821 RETAINED PROFIT (ACCUMULATED DEFICIT) 125,074 (200,693) --------------- --------------- Shareholders' equity 506,614 339,448 =============== ===============

Approval by the Board of Directors on 14th July, 2001: LAM SAI WING CHAN YAM FAI, JANE Chairman Deputy Chairman F-59 HANG FUNG GOLD TECHNOLOGY LIMITED CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31ST MARCH, 2001 (Expressed in Hong Kong dollars) Note 2 0 0 1 --------- -------------- $ 000 Net cash inflow from operating activities 27.a 10,527 -------------- Returns on investments and servicing of finance Interest received 6,822 Interest paid (30,105) Dividends paid - -------------- (23,283) -------------- TAXATION Hong Kong profits tax paid (6,203) -------------- INVESTING ACTIVITIES Additions of fixed assets (175,476) Advances to an associate (50,000) Increase in the amounts due from holding companies (281) -------------- (225,757) -------------- Net cash outflow before financing activities (244,716) -------------- Financing activities 27.b Issuance of shares 62,700 Share issuance expenses (3,321) New short-term bank loans 26,547 Repayment of short-term bank loans (12,000) New long-term bank loans 37,480 Repayment of long-term bank loans (2,900) Repayment of capital element of finance lease obligations (15,832) (Decrease) Increase in amount due to a director (865) -------------- 91,809 -------------- Decrease in cash and cash equivalents (152,907) Cash and cash equivalents, Beginning of year (58,219) -------------- End of year 27.d (211,126) ==============

F-60 HANG FUNG GOLD TECHNOLOGY LIMITED NOTES TO THE FINANCIAL STATEMENTS (Amounts expressed in Hong Kong dollars unless otherwise stated) 1. ORGANISATION AND PRINCIPAL ACTIVITIES Hang Fung Gold Technology Limited ("the Company") was incorporated in Bermuda on 4th December, 1997 as an exempted company under the Companies Act 1981 of Bermuda (as amended). Its shares have been listed on The Stock Exchange of Hong Kong Limited since 16th March, 1999. The Company is an investment holding company. Its subsidiaries are principally engaged in the design, manufacture and distribution of a broad range of gold products, other precious metal products and jewellery products. Its associates are principally engaged in trading and developing and operating e-commerce trading facilities between Mainland China and the rest of the world. 2. PRINCIPAL ACCOUNTING POLICIES The financial statements have been prepared in accordance with Statements of Standard Accounting Practice issued by the Hong Kong Society of Accountants, accounting principles generally accepted in Hong Kong, and the disclosure requirements of the Hong Kong Companies Ordinance and the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited. Principal accounting policies are summarised below: a. Basis of measurement The financial statements have been prepared on the historical cost basis, as modified by the revaluation of an investment property. b. Basis of consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries (together he Group"), together with the Group's share of post-acquisition results and reserves of its associates under the equity method of accounting. The results of subsidiaries and associates acquired or disposed of during the year are recorded from or to their effective dates of acquisition or disposal. Significant intra-group transactions and balances have been eliminated on consolidation. c. Goodwill Goodwill represents the difference between the fair value of the consideration given and the Group's share of the aggregate fair values of the identifiable net assets of subsidiaries and associates acquired. Positive goodwill arises where the consideration given exceeds the Group's share of the aggregate fair values of the identifiable net assets acquired and is eliminated immediately against available reserves. Negative goodwill arises where the Group's share of the aggregate fair values of the identifiable net assets acquired exceeds the consideration given and is credited directly to reserves. d. Subsidiaries A subsidiary is a company in which the Company holds, directly or indirectly, more than 50% of its issued voting share capital as a long-term investment. In the Company's financial statements, investment in subsidiaries is stated at cost less provision for any impairment in value, while income from subsidiaries is recorded to the extent of dividends received and receivable. F-61 2. PRINCIPAL ACCOUNTING POLICIES (Cont'd) e. Associates An associate is a company, not being a subsidiary, in which the Group holds 20% or more of its issued voting share capital as a long-term investment and can exercise significant influence over its financial and operating policies. In the consolidated financial statements, investment in associates is stated at the Group's share of the fair value of the identifiable net assets of the associates at the time of acquisition, adjusted for the Group's share of undistributed post-acquisition results and reserves of the associates, distributions received from the associates and other necessary alterations in the Group's proportionate interest in the associates arising from changes in the equity of the associates that have not been included in the income statement. f. Turnover and revenue recognition Turnover consists of the net invoiced value of merchandise sold after allowances for returns and discounts and rental income. Revenue is recognised when the outcome of a transaction can be measured reliably and when it is probable that the economic benefits associated with the transaction will flow to the Group. Sales revenue is recognised when the merchandise is delivered and title has passed. Rental income is recognised on a straight-line basis over the period of the relevant leases. Interest income is recognised on a time-proportion basis on the principal outstanding and at the rate applicable. g. Taxation Individual companies within the Group provide for profits tax on the basis of their profits for financial reporting purposes, adjusted for income and expense items which are not assessable or deductible for profits tax purposes. Deferred taxation is provided under the liability method, at the current tax rate, in respect of significant timing differences between profit as computed for taxation purposes and profit as stated in the financial statements, except when it is considered that no liability will arise in the foreseeable future. Deferred tax assets are not recognised unless the related benefits are expected to crystallise in the foreseeable future. h. Advertising and promotion costs The costs of advertising and promotion are expensed as incurred. i. Employee retirement benefits Costs of employee retirement benefits are recognised as an expense as incurred. j. Borrowing costs Borrowing costs that are directly attributable to the acquisition, construction or production of fixed assets that takes a substantial period of time to prepare for its intended use or sale are capitalised as part of the cost of that asset at rates based on the actual cost of the specific borrowings. All other borrowing costs are recognised as an expense as incurred. F-62 2. PRINCIPAL ACCOUNTING POLICIES (Cont'd) k. Fixed assets and depreciation Fixed assets are stated at cost less accumulated depreciation. Major expenditures on modifications and betterments of fixed assets which will result in future economic benefits are capitalised, while expenditures on maintenance and repairs of fixed assets are expensed when incurred. Depreciation is provided on a straight-line basis to write off the cost less estimated residual value of each asset over its estimated useful life. The annual rates of depreciation are as follows: Land and buildings 5% Machinery and equipment 16% to 20% Furniture and office equipment 12% to 20% Motor vehicles 20% The carrying value of fixed assets is assessed periodically or when factors indicating an impairment are present. Fixed assets carried at cost less accumulated depreciation are reduced to their recoverable amount if this is lower than net book value, with the difference charged to the income statement. In determining the recoverable amount of individual items of fixed assets, expected future cash flows are not discounted to their present value. Gains and losses on disposal of fixed assets are recognised in the income statement based on the net disposal proceeds less the then carrying amount of the assets. Fixed assets held under finance leases are recorded and depreciated on the same basis as described above. l. Investment properties Investment properties are interests in leasehold land and buildings in respect of which construction and development work has been completed and which is held for their long-term investment potential. Investment properties are included in the balance sheet at their open market value on the basis of an annual valuation by an independent qualified valuer. All changes in the value of investment properties are dealt with in the investment properties revaluation reserve unless the total of this reserve is insufficient to cover a deficit on a portfolio basis, in which case the net deficit is charged to the income statement. When an investment property is disposed of, previously recognised revaluation surpluses are reversed and the gain or loss on disposal reported in the income statement is determined based on the net disposal proceeds less the original cost. No depreciation is provided for investment property unless the unexpired lease term is 20 years or less, in which case depreciation is provided on the then carrying value over the unexpired lease term. m. Inventories Inventories are stated at the lower of cost and net realisable value. Cost includes costs of raw materials calculated using the first-in, first-out method of costing and, in the case of finished goods, also direct labour and an appropriate proportion of production overheads. Net realisable value is based on estimated selling prices in the ordinary course of business, less further costs expected to be incurred to completion and disposal. Provision is made for obsolete, slow-moving or defective items where appropriate. When inventories are sold, the carrying amount of those inventories is recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all losses of inventories are recognised as an expense in the period the write-down or loss occurs. The amount of 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. F-63 2. PRINCIPAL ACCOUNTING POLICIES (Cont'd) n. Provisions and contingencies A provision is recognised when there is a present obligation, legal or constructive, as a result of a past event and it is probable (i.e. more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are reviewed regularly and adjusted to reflect the current best estimate. Where the effect of the time value of money is material, the amount of a provision is the present value of the expenditures expected to be required to settle the obligation. Contingent liabilities are not recognised in the financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. A contingent asset is not recognised in the financial statements but disclosed when an inflow of economic benefits is probable. o. Leases Finance leases represent those leases under which substantially all the risks and rewards of ownership of the leased assets are transferred to the Group. Fixed assets held under finance leases are initially recorded at the present value of the minimum payments at the inception of the leases, with equivalent liabilities categorised as appropriate under current or non-current liabilities. Interest expense, which represents the difference between the minimum payments at the inception of the leases and the corresponding fair value of the assets acquired, is allocated to accounting periods over the period of the relevant leases to produce a constant rate of charge on the outstanding balances. Operating leases represent those leases under which substantially all the risks and rewards of ownership of the leased assets remain with the lessors. Rental payments under operating leases are charged to the income statement on a straight-line basis over the period of the relevant leases. p. Currency translation Companies within the Group maintain their books and records in Hong Kong dollars. Transactions in other currencies during the year are translated into Hong Kong dollars at the applicable rates of exchange prevailing at the time of the transactions. Monetary assets and liabilities denominated in other currencies are translated into Hong Kong dollars at the applicable rates of exchange in effect at the balance sheet date. Exchange gains or losses are dealt with in the income statement. q. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles in Hong Kong requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. 3. RELATED PARTY TRANSACTIONS Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Significant transactions and balances with related parties are summarised below: a. During the year ended 31st March, 2001, the Group paid rental of approximately $324,000 in respect of residential premises owned by Mr. Lam Sai Wing, a director of the Company. The premises are used as the residence of Mr. Lam Sai Wing and his family. F-64 3. RELATED PARTY TRANSACTIONS (Cont'd) b. The amount due from an associate of $50,000,000 (see Note 14) is secured by certain of equity interest in the associate not owned by the Group, bears interest at the Hong Kong prime lending rate plus 2.5%, and is repayable after September 2003. During the year, interest earned from this advance amounted to approximately $1,901,000. c. Details of the amounts due from holding companies (consolidated) are: Balance as at Maximum balance 31st March, 2001 outstanding during the year ------------------ ------------------- $'000 $'000 Quality Prince Limited, the immediate holding company 6 6 S.W. Lam, Inc., the intermediate holding company 275 275 ------------- ================== 281 =============

These amounts are unsecured, non-interest bearing and without pre-determined repayment terms. d. Details of the amount due to a director (consolidated) are: Balance as at 31st Maximum balance due March, 2001 from a director during the year ----------------------- ----------------------------- $'000 $'000 Mr. Lam Sai Wing 488 - ======================= ============================= The balances with the director are unsecured, non-interest bearing and without pre-determined repayment terms. e. The Group's banking facilities are secured by, among others, mortgages over certain properties owned by Mr. Lam Sai Wing and Ms. Chan Yam Fai, Jane, directors of the Company, and personal guarantees provided by Mr. Lam Sai Wing and Ms. Chan Yam Fai, Jane (see Note 30). 4. TURNOVER AND REVENUE Analysis of turnover and revenue in the consolidated income statement is as follows: 2 0 0 1 ---------------- $'000 Sales of merchandise 1,327,657 Rental income 96 ---------------- Turnover 1,327,753 Interest income 8,723 ---------------- Total revenue 1,336,476 ================ The Group's turnover by major product category and geographical location, together with their respective contributions to profit from operations, are analysed as follows: F-65 4. TURNOVER AND REVENUE (Cont'd) a. By major product category - 2 0 0 1 ---------------------------------------------- Turnover Contribution to profit from operations ------------------- ----------------------- $'000 $'000 Sales of merchandise -Gold products 1,011,996 45,862 -Other precious metal products 129,348 23,271 -Jewellery products 183,604 27,577 -Others 2,709 368 Rental income 96 84 ------------------- --------------------- 1,327,753 97,162 =================== ===================== b. By geographical location* - 2 0 0 1 ---------------- $'000 Mainland China and Hong Kong 767,585 South-East Asia 238,083 The United States of America 140,903 Europe 118,006 Others 63,176 ---------------- 1,327,753 ================ * Turnover by geographical location is determined on the basis of the destination of delivery of merchandise. No analysis of profit from operations by geographical location is presented as it is generally in line with the distribution of turnover as set out above. F-66 5. PROFIT BEFORE TAXATION Profit before taxation in the consolidated income statement is determined after charging or crediting the following items: 2 0 0 1 --------------- $'000 After charging - Interest on - bank overdrafts and borrowings wholly repayable within five years 27,272 - bank borrowings wholly repayable after five years 647 - finance leases 2,186 Employment costs (including directors' emoluments) 47,321 Advertising and promotion costs 7,772 Website development expense 3,969 Operating lease rentals in respect of - office and factory premises 4,485 - machinery and equipment 82 Depreciation of fixed assets - owned assets 63,662 - assets held under finance leases 11,774 Net loss on disposal of fixed assets 377 Deficit on revaluation of an investment property 250 Provision for bad and doubtful debts 2,500 Provision for slow-moving and obsolete inventories 1,200 Derivative trading loss * - Net exchange loss 75 Auditors' remuneration 780 =============== After crediting - Derivative trading gain * 450 Interest from - bank deposits 6,822 - amount due from an associate (see Notes 3 and 14) 1,901 Rental income, less outgoings 82 Net exchange gain - =============== * During the year, the Company entered into forward contracts for trading of gold and recognised a gain of approximately $450,000. There was no outstanding forward contract as at 31st March, 2001. F-67 6. DIRECTORS' AND SENIOR EXECUTIVES' EMOLUMENTS a. Details of emoluments paid/payable to directors of the Company are: 2 0 0 1 ------------------- $'000 Fees for executive directors - Fees for non-executive directors 120 Other emoluments for executive directors - Basic salaries and allowances 2,460 - Bonus * 2,500 ------------------- 5,080 =================== * The Company's executive directors are entitled to a discretionary bonus not exceeding 5% of the Group's consolidated profit attributable to shareholders. No directors waived any emoluments during the year. No incentive payment for joining the Group or compensation for loss of office was paid or payable to any directors during the year. Analysis of directors' emoluments by number of directors and emolument range is as follows: 2 0 0 1 ---------------- Executive directors - Nil to $1,000,000 1 - $4,500,001 to $5,000,000 1 - $5,500,001 to $6,000,000 - Non-executive directors - Nil to $1,000,000 5 ---------------- 7 ================ b. Details of emoluments of the five highest paid individuals (including directors and other employees) are: 2 0 0 1 ---------------- $'000 Basic salaries and allowances 4,364 Bonus 2,500 ---------------- 6,864 ================ Two of the highest paid individuals were directors of the Group, whose emoluments have been included in Note 6.a above. During the year, no emolument of the five highest paid individuals (including directors and other employees) was incurred as inducement to join or upon joining the Group or as compensation for loss of office. F-68 6. DIRECTORS' AND SENIOR EXECUTIVES' EMOLUMENTS (Cont'd) b. (Cont'd) Analysis of emoluments of the five highest paid individuals (including directors and other employees) by number of individuals and emolument range is as follows: 2 0 0 1 ---------------- - Nil to $1,000,000 4 - $4,500,001 to $5,000,000 1 - $5,500,001 to $6,000,000 - ---------------- 5 ================ 7. TAXATION Taxation in the consolidated income statement consisted of: 2 0 0 1 --------------- $'000 Hong Kong profits tax - Current year 2,519 - Write-back of over-provision in prior years - --------------- 2,519 Deferred taxation - Hong Kong profits tax 6,637 --------------- 9,156 =============== The Company is exempted from taxation in Bermuda until 2016. Hong Kong profits tax has been provided at the rate of 16% on the estimated assessable profit arising in or derived from Hong Kong. 8. PROFIT ATTRIBUTABLE TO SHAREHOLDERS The consolidated profit attributable to shareholders included a loss of approximately $200,701,000 dealt with in the financial statements of the Company. 9. RETAINED PROFIT Retained profit consisted of: 2 0 0 1 -------------- $'000 Company and subsidiaries 131,241 Associates (6,167) -------------- 125,074 ============== F-69 10. EARNINGS PER SHARE The calculation of basic earnings per share for the year ended 31st March, 2001 is based on the consolidated profit attributable to shareholders of approximately $52,164,000 and on the weighted average number of approximately 4,468,231,000 shares in issue during the year. The calculation of diluted earnings per share for the year ended 31st March, 2001 is based on the consolidated profit attributable to shareholders of approximately $52,164,000 and on the weighted average number of approximately 4,502,197,000 shares in issue, after adjusting for the effects of all dilutive potential shares. The effect of the dilutive potential shares resulting from the exercise of the outstanding employee share options on the weighted average number of shares in issue during the year was approximately 33,966,000 shares, which were deemed to have been issued at no consideration as if all outstanding employee share options had been exercised on the date when the employee share options were granted. 11. FIXED ASSETS a. Movements of fixed assets (consolidated) were: 2 0 0 1 -------------------------------------------------------------------------------- Furniture Land and Machinery and Office Moter buildings and Equipment Vehicles Total equipment -------------- ----------------- ----------------- ------------ ------------ $'000 $'000 $'000 $'000 $'000 Cost Beginning of year - 297,607 64,682 920 363,209 Additions 16,700 89,474 96,319 134 202,627 Disposals - - (390) - (390) -------------- ----------------- ----------------- ------------ ------------ End of year 16,700 387,081 160,611 1054 565,446 -------------- ----------------- ----------------- ------------ ------------ Accumulated depreciation Beginning of year - 116,887 20,238 920 138,045 Provision for the year 105 60,770 14,553 8 75,436 Disposals - - (13) - (13) -------------- ----------------- ----------------- ------------ ------------ End of year 105 177,657 34,778 928 213,468 -------------- ----------------- ----------------- ------------ ------------ Net book value End of year 16,595 209,424 125,833 126 351,978 ============== ================= ================= ============ ============ Beginning of year - 180,720 44,444 - 225,164 ============== ================= ================= ============ ============

b. Land and buildings: Land and buildings are located in Hong Kong and are held under medium-term leases. All land and buildings with a net book value of approximately $15,608,000 were mortgaged as security for the Group's banking facilities (see Note 30). F-70 11. FIXED ASSETS (Cont'd) c. Finance leases: Certain machinery and equipment were purchased under finance leases. Details of these assets are as follows: 2 0 0 1 ---------------- $'000 Cost 58,868 Less: Accumulated depreciation (20,382) ---------------- Net book value 38,486 ================ Depreciation for the year 11,774 ================ 12. INVESTMENT PROPERTY Movements of investment property (consolidated) were: 2 0 0 1 ---------------- $'000 Beginning of year 1,850 Deficit on revaluation (250) ---------------- End of year 1,600 ================ The investment property is located in Hong Kong and is held under a long-term lease. It is stated at the open market value at 31st March, 2001 as determined by DTZ Debenham Tie Leung Limited, an independent qualified valuer. Details of the investment property as at 31st March, 2001 are as follows: Location Group's interest Existing use ----------------------------------------- ------------------ ------------- Flat B4 on 14th Floor, Peace Building, 100% Residential 3 Peace Avenue, Ho Man Tin, Kowloon, Hong Kong F-71 13. INVESTMENT IN SUBSIDIARIES In the Company's balance sheet, investment in subsidiaries consisted of: 2 0 0 1 -------------- $'000 Unlisted shares, at cost 158,743 Due from subsidiaries 381,285 -------------- 540,028 Less: Provision for impairment in value and doubtful receivables from subsidiaries (200,701) -------------- 339,327 ============== The amounts due from subsidiaries are unsecured and non-interest bearing. The underlying value of investment in subsidiaries is, in the opinion of the Company's Directors, not less than the carrying value as at 31st March, 2001. F-72 13. INVESTMENT IN SUBSIDIARIES (Cont'd) Details of the subsidiaries as at 31st March, 2001 were as follows: Name Place of Issued and fully Percentage of Principal activities incorporation/ paid share capital equity interest operations held (ii) ------------------------------ ----------------- -------------------- ----------------- --------------------- Hang Fung Gold British Virgin US$1 100% Investment holding (International) Company Islands/Hong Limited Kong Hang Fung Jewellery Hong Kong Class A - Manufacturing and Company Limited (non-voting) selling of gold ordinary - $4 100% and jewellery (i) products Class B (voting) ordinary - $2 Hang Fung Jewellery Mainland China $25,000,000 100% Manufacturing of (Shenzhen) Co., Ltd. (iii) registered gold and capital jewellery products Jubonet.com Limited Hong Kong $2 100% Operation of an (formerly known as Pender e-commerce Limited) platform for gold and jewelley products Kai Hang Jewellery Hong Kong Class A - Property holding Company Limited (non-voting) ordinary - $10,002 (i) 100% Class B (voting) ordinary - $2 Macadam Profits Limited British Virgin US$2 100% Investment holding Islands/Hong Kong Soycue Limited British Virgin US$1 100% Investment holding Islands/Hong Kong

Notes - (i) The Class A (non-voting) ordinary shares have no voting rights, are not entitled to dividends unless dividends paid to holders of Class B (voting) ordinary shares exceed $900,000,000,000 in a financial year, and are not entitled to distribution of the companies' assets unless each Class B (voting) ordinary shareholder has been returned its paid-up capital together with a premium of $900,000,000,000. (ii) The shares of Macadam Profits Limited are held directly by the Company. The shares of other subsidiaries are held indirectly. (iii) Hang Fung Jewellery (Shenzhen) Co., Ltd. is wholly foreign owned enterprises established in Mainland China to be operated for 30 years up to 2028. None of the subsidiaries had any loan capital in issue at any time during the year ended 31st March, 2001. F-73 14. INVESTMENT IN ASSOCIATES Investment in associates (consolidated) consisted of: 2 0 0 1 ---------------- $'000 Unlisted shares, at cost 186,048 Goodwill on acquisition, eliminated against retained profit (188,142) Share of losses of associates (6,167) ---------------- (8,261) Advances to an associate 50,000 Accrued interest 1,901 Provision against receivables from an associate (8293) ---------------- 35,347 ================ During the year ended 31st March, 2001, the Company issued 1,632,000,000 shares with a fair value of $186,048,000 as consideration for the acquisition of a 49.9% equity interest in New Epoch Information (BVI) Company Limited. Goodwill resulting from this acquisition of approximately $188,142,000 has been eliminated against retained profit. The amount due from an associate (New Epoch Information (BVI) Company Limited) of $50,000,000 is secured by certain of equity interest in the associate not owned by the Group, bears interest at the Hong Kong prime lending rate plus 2.5%, and is repayable after September 2003. The underlying value of investment in associates is, in the opinion of the Company's Directors, not less than the carrying value as at 31st March, 2001. Details of the principal associates as at 31st March, 2001 were as follows: Name Place of Issued and Percentage of Principal activities incorporation/ fully paid equity interest operations share capital held (i) ------------------------------ ----------------- ----------------- ----------------- ----------------------- Asia Trader Associates British Virgin US$450,000 16.5% (ii) Trading and Limited ("ATAL") Islands/Hong developing and Kong operating of e-commerce trading facilities between Mainland China and the rest of the world China International Hong Kong $20,000,000 24.5% Trading and Electronic Commerce (HK) developing and Limited operating of e-commerce trading facilities between Mainland China and the rest of the world New Epoch Information (BVI) British Virgin US$1,000 49.9% Investment holding Company Limited Islands/Hong Kong New Epoch Information Hong Kong $5,000,000 49.9% Trading and investment Company Limited holding

F-74 14. INVESTMENT IN ASSOCIATES (Cont'd) Notes - (i) The shares of the above associates are held indirectly by the Company. (ii) Asia Trader Associates Limited is an associate as the Group's interest in it is held through an associate which in turn holds more than 20% of the issued voting share capital of ATAL. The above summary lists only the principal associates of the Company which, in the opinion of the Company's Directors, principally affected the results or formed a substantial portion of the net assets of the Group. To give details of other associates would, in the opinion of the Company's Directors, result in particulars of excessive length. 15. INVENTORIES Inventories (consolidated) consisted of: 2 0 0 1 --------- $'000 Raw materials 160,912 Finished goods 156,631 --------- 317,543 Less: Provision for slow-moving and obsolete inventories (3,200) --------- 314,343 ========= As at 31st March, 2001, no inventories were stated at net realisable value. Inventories of approximately $317,543,000 were held under trust receipts bank loan arrangements (see Note 30). 16. ACCOUNTS RECEIVABLE The Group grants to its customers credit periods ranging from 30 days to 120 days. The ageing analysis of accounts receivable (consolidated) is as follows: 2 0 0 1 --------------- $'000 0 to 90 days 215,249 91 to 180 days 7,295 181 to 270 days 2,303 --------------- 224,847 Less: Provision for bad and doubtful debts (10,000) --------------- 214,847 =============== 17. PLEDGED BANK DEPOSITS As at 31st March, 2001, the Group's bank deposits of approximately $77,210,000 were pledged as collateral for the Group's banking facilities (see Note 30). F-75 18. SHORT-TERM BANK BORROWINGS Short-term bank borrowings (consolidated) consisted of: 2 0 0 1 ----------------- $'000 Bank overdrafts 84 Trust receipts bank loans 321,466 Short-term bank loans 26,547 ----------------- 348,097 Long-term bank loans, current portion (Note 19) 7,395 ----------------- 355,492 ================= Short-term bank borrowings are secured and bear interest at rates ranging from 0.75% below the Hong Kong prime lending rate to 2.5% above that. Refer to Note 30 for details of the Group banking facilities. 19. LONG-TERM BANK LOANS Long-term bank loans (consolidated) consisted of: 2 0 0 1 --------------- $'000 Amounts repayable within a period - not exceeding one year 7,395 - more than one year but not exceeding two years 7,703 - more than two years but not exceeding five years 18,714 - more than five years 9,163 --------------- 42,975 Less: Amounts repayable within one year included under current liabilities (Note 18) (7,395) --------------- 35,580 =============== Long-term bank loans are secured and bear interest at rates ranging from 1.75% below the Hong Kong prime lending rate to 3.5% above that. Refer to Note 30 for details of the Group's banking facilities. F-76 20. FINANCE LEASE OBLIGATIONS Finance lease obligations, net of future finance charges (consolidated), consisted of: 2 0 0 1 ---------------- $'000 Amounts repayable within a period - not exceeding one year 12,973 - more than one year but not exceeding two years 10,548 - more than two years but not exceeding five years 7,538 ---------------- 31,059 Less: Amounts repayable within one year included under current liabilities (12,973) ---------------- 18,086 ================ 21. ACCOUNTS PAYABLE The ageing analysis of accounts payable (consolidated) is as follows: 2 0 0 1 ------------------ $'000 0 to 90 days 28,636 91 to 180 days 1,716 181 to 270 days 581 ------------------ 30,933 ================== 22. TAXATION PAYABLE Taxation payable (consolidated) consisted of: 2 0 0 1 ------------ $'000 Hong Kong profits tax - General provision for Mainland China business tax and enterprise income tax * 36,642 ------------ 36,642 ============ * Prior to 1st April, 1999, the Group received contract processing fees based on the utilisation of equipment and technology provided by the Group to its Mainland China contracting partners. Provision for Mainland China taxes in relation to these fees has been made for periods prior to 1st April, 1999. F-77 23. DEFERRED TAXATION Movements of deferred taxation (consolidated) were: 2001 ---------------- $'000 Beginning of year 13,394 Provision for net timing differences 6,637 ---------------- End of year 20,031 ================ Deferred taxation represented the taxation effect of accelerated depreciation of fixed assets for taxation purposes. There were no significant unprovided deferred tax liabilities as at 31st March, 2001. 24. SHARE CAPITAL Movements were: 2 0 0 1 -------------------------------- Number of shares Nominal value ---------------- ------------- '000 $'000 Authorised - ordinary shares of $0.01 each 20,000,000 200,000 ---------- ================ ============= Issued and fully paid - ordinary shares of $0.01 each (from 22nd February, 2000 - see Note (iii)) Beginning of year 3,150,000 31,500 Issuance of shares for acquisition of associates (i) 1,632,000 16,320 Issuance of shares through a placement (ii) 550,000 5,500 Effect of ten-for-one share split (iii) - - ------------ -------------- End of year 5,332,000 53,320 ============ ============== Notes - (i) During the year ended 31st March, 2001, the Company issued 1,632,000,000 shares of $0.01 each, with a fair value of $186,048,000 (i.e. $0.114 per share), as consideration for the acquisition of a 49.9% equity interest in New Epoch Information (BVI) Company Limited. (ii) In August 2000, the Company issued 550,000,000 shares of $0.01 each through a private placement for cash consideration of $62,700,000 (i.e. $0.114 per share). (iii) On 22nd February, 2000, the Company effected a ten-for-one share split and changed the par value of its shares from $0.1 per share to $0.01 per share. As a result, the then outstanding 315,000,000 shares with a par value of $0.10 each became 3,150,000,000 shares with a par value of $0.01 each. F-78 25. SHARE OPTIONS The Company has a share option scheme, under which it may grant options to employees of the Group (including executive directors of the Company) to subscribe for shares in the Company, subject to a maximum of 10% of the nominal value of the issued share capital of the Company from time to time, excluding for this purpose shares issued on the exercise of options. The subscription price will be determined by the Company's board of directors, and will not be less than the higher of the nominal value of the shares and 80% of the average of the closing price of the shares quoted on The Stock Exchange of Hong Kong Limited on the five trading days immediately preceding the date of offer of the options. During the year ended 31st March, 2001, the Company granted options to subscribe for 315,000,000 shares in the Company at a subscription price (subject to adjustment) of $0.109 per share to be exercised during the period from 9th June, 2001 to 26th February, 2009. No options were exercised during the year ended 31st March, 2001. 26. RESERVES Movements of reserves were: 2 0 0 1 ------------------ Share premium ------------------ $'000 Consolidated Beginning of year 104,613 Premium on issuance of shares 226,928 Share issuance expenses (3,321) ------------------ End of year 328,220 ================== 2 0 0 1 ---------------------------------------------- Share premium Contributed Total surplus ------------- ------------- ------------ $'000 $'000 $'000 Company Beginning of year 104,613 158,601 263,214 Premium on issuance of shares 226,928 - 226,928 Share issuance expenses (3,321) - (3,321) ------------- -------------- ----------- End of year 328,220 158,601 486,821 ============= ============== =========== Under the Companies Act 1981 of Bermuda (as amended), contributed surplus is distributable to shareholders, subject to the condition that the Company cannot declare or pay a dividend, or make a distribution out of contributed surplus if (i) it is, or would after the payment be, unable to pay its liabilities as they become due, or (ii) the realisable value of its assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium account. F-79 27. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT a. Reconciliation of profit before taxation to net cash inflow from operating activities: 2 0 0 1 ----------------- $'000 Profit before taxation 61,320 Interest income (8,723) Interest expense 30,105 Share of losses of associates 6,167 Provision against receivables from an associate 8,293 Depreciation of fixed assets 75,436 Net loss on disposal of fixed assets 377 Deficit on revaluation of an investment property 250 Increase in inventories (107,094) Increase in accounts receivable (63,330) (Increase) Decrease in prepayments and deposits (4,776) Increase in accounts payable 3,866 Increase in accruals and other payables 8,636 ----------------- Net cash inflow from operating activities 10,527 ================= b. Analysis of changes in financing: Share Total capital Short-term Long-term Finance and bank bank lease share loans loans obligations premium ------------- ------------ ------------ ------------ ------------ $'000 $'000 $'000 $'000 $'000 As at 31st March, 2000 136,113 12,000 8,395 19,740 176,248 Issuance of shares - for cash 62,700 - - - 62,700 - as consideration to acquire an 186,048 - - - 186,048 associate Share issuance expenses (3,321) - - - (3,321) New finance lease obligations - - - 27,151 27,151 Repayment of capital element of - - - finance lease obligations (15,832) (15,832) New bank loans - 26,547 37,480 - 64,027 Repayment of bank loans - (2,900) - (12,000) (14,900) ------------- ------------ ------------ ------------ ------------ As at 31st March, 2001 381,540 26,547 42,975 31,059 482,121 ============= ============ ============ ============ ============

c. Major non-cash transactions: (i) During the year, the Group acquired fixed assets of approximately $27,151,000 under finance leases. (ii) During the year, the Company issued 1,632,000,000 shares with a fair value of $186,048,000 as consideration for the acquisition of a 49.9% equity interest in New Epoch Information (BVI) Company Limited. F-80 27. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (Cont'd) d. Analysis of cash and cash equivalents: 2 0 0 1 ------------------ $'000 Cash and bank deposits 110,424 Bank overdrafts (84) Trust receipts bank loans (321,466) ------------------ (211,126) ================== 28. COMMITMENTS AND CONTINGENT LIABILITIES The Group and the Company had the following significant commitments and contingent liabilities which were not provided for in the financial statements: a. Capital commitments Capital commitments, which were all authorised and contracted for, are analysed as follows: 2 0 0 1 ---------------------------------------- Consolidated Company ----------------- ------------------ $'000 $'000 Acquisition of fixed assets 9,587 - ================= ================== F-81 28. COMMITMENTS AND CONTINGENT LIABILITIES (Cont'd) b. Operating lease commitments The Group had operating lease commitments in respect of rented premises and machinery under various non-cancellable operating lease agreements extending to September 2006. The total commitments are analysed as follows: 2 0 0 1 ----------------------------------- Consolidated Company ----------------- --------------- $'000 $'000 Amounts payable - within one year 1,784 - - between one year and two years 1,704 - - between two years and five years 2,081 - - over five years 221 - ------------- ---------------- 5,790 - ============= ================ The commitments payable within one year are analysed as follows: 2 0 0 1 ----------------------------------------- Consolidated Company ------------------ ------------------ $'000 $'000 Leases expiring - within one year - - - within two to five years 1,362 - - over five years 422 - ------------------ ------------------ 1,784 - ================== ================== 2 0 0 1 Consolidated Company --------------- ---------------- $'000 $'000 Leases expiring - within one year - - - within two to five years 1,362 - - over five years 422 - --------------- ---------------- 1,784 - =============== ================ c. Contingent liabilities 2 0 0 1 --------------------------------- Consolidated Company ------------- --------------- $'000 $'000 Bills discounted with recourse 5,166 - Guarantees provided by the Company in respect of banking facilities of its subsidiaries - 344,980 -------------- --------------- 5,166 344,980 ============== ===============

F-82 29. PENSION SCHEME The Group's employees in Mainland China are all employed on a contract basis and consequently the Group has no obligation for pension liabilities. During the period from 1st April, 2000 to 30th November, 2000, the Group arranged for its Hong Kong employees to participate in defined contribution provident funds ("the Original Scheme"), which were managed by independent trustees. Each of the Group and its employees in Hong Kong made monthly contributions to the Original Scheme at 5% of the employees' basic salaries. The employees were entitled to receive their entire contribution and the accrued interest thereon, and 100% of the Group's employer contribution and the accrued interest thereon upon retirement or leaving the Group after completing ten years of service or at a reduced scale of 30% to 90% after completing three to nine years of service. Any forfeited contributions made by the Group and related accrued interest were used to reduce the Group's employer contribution. The Original Scheme was terminated in December 2000. From 1st December, 2000, the Group has arranged for its Hong Kong employees to join the Mandatory Provident Fund Scheme ("the MPF Scheme"). The MPF Scheme is a defined contribution scheme managed by an independent trustee. Under the MPF Scheme, each of the Group and its employees make monthly contributions to the scheme at 5% of the employees earnings as defined under the Mandatory Provident Fund legislation. Both the employer's and the employees' contributions are subject to a cap of $1,000 per month and thereafter contributions are voluntary. For the year ended 31st March, 2001, the aggregate amount of the Group's employer contributions to the Original Scheme and the MPF Scheme was approximately $624,000 and there was no forfeited contribution utilised to reduce the Group's employer contributions to the Original Scheme. 30. BANKING FACILITIES AND PLEDGE OF ASSETS As at 31st March, 2001, the Group had aggregate banking facilities of approximately $432,186,000 from several banks for overdrafts, loans and trade financing. Unused facilities as at the same date amounted to approximately $38,117,000. These facilities were secured by: a. mortgage over the Group's land and buildings with a net book value of approximately $15,608,000 (see Note 11); b. pledges of the Group's bank deposits of $77,210,000 (see Note 17); c. the Group's inventories held under trust receipts bank loan arrangements (see Note 15); d. mortgages over certain properties owned by Mr. Lam Sai Wing and Ms. Chan Yam Fai, Jane, directors of the Company (see Note 3); e. personal guarantees provided by Mr. Lam Sai Wing and Ms. Chan Yam Fai, Jane (see Note 3); f. assignment of the benefits in respect of the keyman insurance for Mr. Lam Sai Wing amounting to $20,000,000; and g. guarantees provided by the Company. In addition, the Group is required to comply with certain financial covenants imposed by a bank. F-83 31. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES OF AMERICA GENERALLY ACCEPTED ACCOUNTING PRINCIPLES The accounting policies adopted by the Company conform to accounting principles generally accepted in Hong Kong ("HK GAAP") which differ in certain respects from accounting principles generally accepted in the United States of America ("US GAAP"). The principal differences having a significant effect on its financial statements are set out below: a. Accounting on Goodwill Under HK GAAP, goodwill arising on the acquisitions of affiliates has been charged directly to retained profit on consolidation. Under US GAAP, the purchase consideration has been allocated to the identifiable net assets acquired based on their fair values, with any residual accounted for as goodwill and amortised over its estimated useful life and less any impairment in value. b. Investment properties Under HK GAAP, investment properties are stated on the basis of appraised values and depreciation is not provided. Under US GAAP, investment properties are stated at historical cost less accumulated depreciation. c. Share option scheme HFGTL follows the current practice in Hong Kong that no accounting entry is made on grant of share options to employees. Under US GAAP, compensation expense for share options is recognised at the date of grant (in accordance with Accounting Principles Board of Opinion ("APB") No. 25 or Statement of Financial Accounting Standards ("SFAS") No. 123) and amortised over the vesting period. The Company adopted APB No. 25 under which the amount of compensation expense is determined based upon the excess, if any, of the quoted market price of the shares over the exercise price of the options at the date of the grant and is amortised over the vesting period of the opinion concerned. d. Cash flows There is no material difference in the cash flow statements of the Group between HK GAAP and US GAAP for the year ended March 31, 2001 except the following: i. Effect of cash flows from interest received, interest paid, profits tax paid, and dividends paid are separately presented in the cash flow statement under HK GAAP; ii. Cash and cash equivalents are short-term, highly liquid investments with original maturities of less than three months and are readily convertible to known amounts of cash. They include bank loans and overdrafts repayable within three months that are reflected as a component of cash and cash equivalents under HK GAAP. e. Reclassifications The reconciliation of net income (loss) and shareholders' equity from HK GAAP to US GAAP as presented below include those items which have a net effect on net income (loss) or shareholders' equity. There are no other major GAAP differences not included in the reconciliation which would affect the classification of assets and liabilities or income and expense. F-84 31. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES OF AMERCIA GENERALLY ACCPEPTED ACCOUNTING PRINCIPLES (Cont'd) A reconciliation of the financial results of the Group from HK GAAP to US GAAP in relation to net income (loss) for the year ended March 31, 2001 and shareholders' equity as of March 31, 20001 is: Net income (loss) for the Shareholders' equity as of year ended March 31, 2001 March 31, 2001 ------------------------------- ------------------------------ HK$'000 US$'000 HK$'000 US$'000 Balance under HK GAAP 52,164 6,688 506,614 64,951 Adjustments: - Provision for impairment in value (188,142) (24,121) - - of goodwill arising from acquisition of New Epoch Information (BVI) Company Limited under US GAAP; while goodwill is eliminated directly against retained profit under HK GAAP - Reversal of revaluation deficit on 250 32 373 48 investment properties - additional depreciation on (99) (13) (99) (13) investment properties - Stock compensation expense (20,307) (2,603) (20,307) (2,603) - Increase in additional paid-in - - 25,200 3,230 capital - Increase in deferred compensation - - (4,893) (627) expense -------------- -------------- --------------- -------------- Balance under US GAAP (156,134) (20,017) 506,888 64,986 ============== ============== =============== ============== Basic loss per ordinary share under US HK(3.49) cents US(0.45) GAAP cents =============== ============== Diluted loss per ordinary share under US HK(3.49) US(0.45) GAAP cents* cents* =============== ==============

* Diluted loss per ordinary share under US GAAP is antidilutive as a result of the net operating loss; therefore, the basic loss per ordinary share and diluted loss per ordinary share are the same. A reconciliation of the summarised cash flow statement of the Group from HK GAAP to US GAAP for the year ended March 31, 2001 is: Operating Investing Financing Returns on Taxation activities activities activities investment and servicing of finance ---------------- ----------------- ---------------- ----------------- ---------------- HK$'000 US$'000 HK$'000 US$'000 HK$'000 US$'000 HK$'000 US$'000 HK$'000 US$'000 Balance under HK GAAP 10,527 1,350 (225,757)(28,943) 91,809 11,770 (23,283) (2,985) (6,203) (796) ======= ======== ======== ======== ======= ======== ======== ======== ================ Balance under US GAAP (20,105)(2,578) (225,476)(28,907) (204,326)26,196 - - - - ======= ======== ======== ======== ======= ======== ======== ======== ================

32. NEW US GAAP ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognised currently in earnings unless specific hedge criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the item in the income statement or other comprehensive income (depending on the type of hedge). To adopt hedge accounting, a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", addresses a limited number of implementation difficulties involved in applying SFAS No. 133. F-85 32. NEW US GAAP ACCOUNTING STANDARDS (Cont'd) The adoption of SFAS No. 133 on April 1, 2001 will not have a significant effect on the Group's financial statements reconciled to US GAAP. 33. NEW HK GAAP ACCOUNTING STANDARDS In February 2000, the Hong Kong Society of Accountants ("HKSA") issued Statement of Standard Accounting Practice ("SSAP") No. 26 relating to segment reporting. SSAP No. 26 is effective from January 1, 2001 and requires certain disclosures regarding an enterprise's primary and secondary reportable segments. The adoption of SSAP No. 26 will not have a significant effect on the Group's financial results. In January 2001, the HKSA issued SSAP No. 28, "Provisions, Contingent Liabilities, and Contingent Assets". SSAP No. 28 clarifies the measurement and disclosures for provisions, contingent liabilities and contingent assets. SSAP No. 28 is effective from January 1, 2001. The adoption of SSAP No. 28 will not have a significant effect on the Group's financial results. In January 2001, the HKSA issued SSAP No. 29, "Intangible Assets". SSAP No. 29 establishes the recognition criteria for intangible assets not accounted for under other pronouncements. SSAP No. 29 requires acquired intangible assets to be recognised and amortised in financial statements to the extent they are identifiable, controllable, and provide future economic benefits. SSAP No. 29 is effective from January 1, 2001. The adoption of SSAP No. 29 will not have a significant effect on the Group's financial results. In January and June 2001, the HKSA also issued the following new SSAPs and interpretations of SSAPs: * SSAP 30, "Business Combinations" * SSAP 31, "Impairment of Assets" * SSAP 32, "Consolidated Financial Statements and Accounting for Investments in Subsidiaries" * Interpretation 12, "Business Combinations Subsequent adjustment of fair values and goodwill initially reported" * Interpretation 13, "Goodwill - Continuing requirements for goodwill and negative goodwill previously eliminated against/credited to reserves" These pronouncements will be effective for the Group's fiscal year beginning April 1, 2001. Under the requirements of SSAP 30, goodwill, if any, arising from future business combinations undertaken by the Group, which are accounted for using the purchase method of accounting will be recognised as an asset and amortised on a systematic basis over its useful life. In general, the amortisation period will not exceed twenty years as SSAP 30 makes a rebuttable assumption that the useful life of goodwill will not exceed twenty years from initial recognition. As permitted by the transitional provisions of SSAP 30, goodwill and negative goodwill previously eliminated against reserves need not be restated at the time of adoption of SSAP 30. In accordance with the provisions of Interpretation 13, assessments of impairment of goodwill in accordance with the provisions of SSAP 31 will apply to goodwill previously eliminated against reserves and which will not be restated at the time of adoption of SSAP 30. Any impairment loss identified in respect of goodwill previously eliminated against reserves will be immediately recognised as an expense in the income statement. The Group will be required to assess at each balance sheet date whether there is any indication of impairment of the goodwill. If such indications exist, the recoverable amount of the goodwill will need to be estimated to determine the amount of impairment, if any, to be recognised in the income statement. The Group has not yet completed its assessment of the impact this pronouncement may have on the Group's financial statements. Under the provisions of interpretation 13 and SSAP 30, upon the future disposal of an interest in a subsidiary or associate or joint venture by the Group, the gain or loss on disposal will be calculated taking into account the attributable amount of the purchased goodwill previously eliminated against reserves and not previously charged to the income statement. F-86 33. NEW HK GAAP ACCOUNTING STANDARDS (Cont'd) SSAP 31 prescribes procedures to be applied to ensure that assets are carried at not more than their recoverable amounts. SSAP 31 defines the recoverable amount of an asset to be the higher of its net selling price and its value in use. In adopting SSAP 31, the Group will be required to determine value in use of the assets, including fixed assets, any goodwill arising on business combinations accounted for using the purchase method and intangible assets, as the present value of estimated future cash flows from the use of the asset and from its disposal at the end of its useful life. The Group will be required to assess at each balance sheet date whether there are any indications that assets may be impaired, and if there are such indications, the recoverable amount of the assets will be determined. Any impairment losses identified will be immediately expensed to the income statement. The adoption of SSAP 32 on April 1, 2001 will not have a significant effect on the Group's financial statements. F-87

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