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CHARACTERISTICS OF THE GROWTH ENTERPRISE MARKET (“GEM”) OF THE STOCK EXCHANGE OF HONG KONG LIMITED (THE “STOCK EXCHANGE”) GEM has been established as a market designed to accommodate companies to which a high investment risk may be attached. In particular, companies may list on GEM with neither a track record of profitability nor any obligation to forecast future profitability. Furthermore, there may be risks rising out of the emerging nature of companies listed on GEM and the business sectors or countries in which the companies operate. Prospective investors should be aware of the potential risks of investing in such companies and should make the decision to invest only after due and careful consideration. The greater risk profile and other characteristics of GEM mean that it is a market more suited to professional and other sophisticated investors. Given the emerging nature of companies listed on GEM, there is a risk that securities traded on GEM may be more susceptible to high market volatility than securities traded on the Main Board and no assurance is given that there will be a liquid market in the securities traded on GEM. The principal means of information dissemination on GEM is publication on the internet website operated by the Stock Exchange. Listed companies are not generally required to issue paid announcements in gazetted newspapers. Accordingly, prospective investors should note that they need to have access to the GEM website in order to obtain up-to-date information on GEM-listed issuers. The Stock Exchange takes no responsibility for the contents of this report, makes no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this report. This report, for which the directors of Emperor Entertainment Group Limited (the “Company”) collectively and individually accept full responsibility, includes particulars given in compliance with the Rules Governing the Listing of Securities on GEM of the Stock Exchange for the purpose of giving information with regard to the Company. The directors, having made all reasonable enquiries, confirm that, to the best of their knowledge and belief: (1) the information contained in this report is accurate and complete in all material respects and not misleading; (2) there are no other matters the omission of which would make any statement in this report misleading; and (3) all opinions expressed in this report have been arrived at after due and careful consideration and are founded on bases and assumptions that are fair and reasonable. — 1 — MANAGEMENT DISCUSSION AND ANALYSIS For the three months (“Quarterly Period”) and six months (“Half-yearly Period”) ended 30th September, 2001, the Company and its subsidiaries (collectively referred to as the “Group”) recorded a loss of approximately HK$8.55 million and HK$10.34 million respectively, compared to a loss of approximately HK$1.58 million and HK$3.08 million respectively for the last corresponding period. For the Half-yearly Period, the turnover of the Group increased by 6.5% to approximately HK$54.08 million as compared with HK$50.78 million for the previous corresponding period. CORPORATE EXERCISES In June 2001, the Group raised a net amount of approximately HK$19.04 million by way of top-up placement of 20,000,000 shares in the capital of the Company to independent investors at a price of HK$0.98 per share (“Top-up Placement”). The Top-up Placement strengthened the cash position of the Group and allowed the Group greater flexibility to expand its core business. To diversify its business in the entertainment industry, the Group acquired from Questrel Holdings Limited (“Questrel”), its substantial and controlling shareholder, the entire interest in Emperor Movie Holdings Limited (“EMG”) and the outstanding loan due to Questrel from EMG at a consideration of approximately HK$52.78 million (“Acquisition”) in August 2001. EMG and its subsidiaries (collectively referred to as the “EMG Group”) are principally engaged in movie and television programs production and distribution, the production of multimedia entertainment products and artiste management. The artistes currently managed by the EMG Group would add to and strengthen the artistes roster of the Group. OPERATION REVIEW Music Production and Distribution Turnover of the sales of albums and the licensing of music videos, songs and catalogues for the Half-yearly Period amounted to approximately HK$32.21 million, representing a decrease of about 14.6% from that of the last corresponding period due to the unfavourable economic climate in Hong Kong. To suit different customer segments, the Group has entered into a licence agreement with an international record company for licensing of record during the Half-yearly Period. During the Half-yearly Period, the Taiwan branch office was closed down as part of the cost rationalisation program of the Group. As most of the Group’s artistes had already signed contracts with Taiwan’s prestigious record companies for the distribution and promotion of their records in Taiwan, the management believed that the closure of the Taiwan office would not have an adverse impact on the Group’s development in the Taiwan market. The principal office of the Group in Hong Kong would continue to work closely with the Taiwan local record companies to formulate and implement the Group’s business plan in Taiwan. — 2 — Film and Television Programs Production and Distribution The Acquisition diversified the Group’s business and generated another main income stream. Turnover of film and television programs production and distribution contributed approximately HK$8.46 million to the Group during the Half-yearly Period. Since the Acquisition, the EMG Group had released one film and one television program, and another six films and one television program were in various production stages as at 30th September, 2001. Artiste Management During the Half-yearly Period, the artiste management fee income of the Group slightly decreased by 5.1% to approximately HK$8.52 million. As at the end of the Half-yearly Period, there were 30 artistes under the Group (including eight contracted artistes from the EMG Group) as compared to 16 artistes as at the end of the last corresponding period. To sustain its competitive edge, the Group would continue sourcing quality artistes. Event Production There were three concerts organized by the Group during the Half-yearly Period with one being self-organized and two being co-organized with other parties. Turnover from this business sector amounted to approximately HK$4.90 million and a loss of about HK$0.64 million was recorded. Two more self-organized concerts were organized in the third quarter of the financial year ended 31st March, 2002 and the management believed that they would bring positive contribution to the Group. FINANCIAL RESOURCES In view of the expansion of the Group’s business, the usage of net proceeds raised from the initial public offering of approximately HK$88.0 million (“IPO Proceeds”) was modified as stated in the circular dated 20th July, 2001 (the “Circular”). Up to 30th September, 2001, the Group had fully utilised the IPO Proceeds in accordance with the revised use of proceeds, which are HK$12.0 million for development of music production and distribution business, HK$4.0 million for development of event production business, HK$33.0 million for the Acquisition and HK$39.0 million for general working capital of the Group. The general working capital was mainly applied for development of film and television programs production and distribution business of the EMG Group. — 3 — As at 30th September, 2001, the unsecured loan from Questrel was HK$52.5 million. On 4th December, 2000, Questrel had undertaken to the Company that it would not request the Group to repay the unsecured loan of HK$26.5 million for a period of 12 months from 19th December, 2000, the date on which the shares of the Company were listed on the GEM of the Stock Exchange and Questrel further agreed to waive any interest on such amount during the same period. The balance of HK$26.0 million is interest bearing at Hong Kong prime rate and has no fixed repayment term. Together with the cash flow generated by the operation of the Group in its ordinary course of business and its existing loan facilities, the Board of Directors (“the Board” or “the Directors”) expects that the Group will have sufficient working capital for its operation. PROSPECTS The Group expected that the Acquisition would stimulate and create a synergy effect to the business of the Group, enabling the Group to establish a comprehensive multimedia entertainment platform comprising music production, movie and television programs production and distribution, artiste management, events production and production of multimedia entertainment products. In spite of the current abhorrent economic climate, the management believed that with its strong artiste roster and expertise in the industry, the Group would be able to continue to expand its business and consolidate its position in the entertainment industry. COMPARISON OF BUSINESS OBJECTIVES WITH ACTUAL BUSINESS PROGRESS Business Objectives up to 30th Actual business progress up to 30th September, 2001 as stated in the September, 2001 prospectus dated 8th December, 2000 (the “Prospectus”) and the Circular 1. Strategic development/overseas expansion (i) Recruit not less than two additional In view of the current market condition, staff for the music production and the Group tightened cost control over distribution function and the artiste local operation and slowed down management function and the overseas expansion and therefore, only finance and administration one additional staff was recruited for the function. artiste management function during the Half-yearly Period. — 4 — (ii) Expand the function of its Taiwan The Taiwan branch office was closed office to include artiste since June 2001 for better resources management function; to establish allocation and cost rationalisation.