THIS CIRCULAR IS IMPORTANT AND REQUIRES ... - TOM Group

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LETTER FROM THE BOARDLock-up period for Consideration Shares and Incentive Shares(a)Consideration Shares(i)None of the Consideration Shares may be sold during the first 6 months after 19thApril, 2004 (i.e. the date of issue of the Consideration Shares);(ii) (1) 50% of the Consideration Shares may be sold from the beginning of the 7thmonth after 19th April, 2004; and(2) the remaining 50% of the Consideration Shares may be sold from the beginningof the 18th month after 19th April, 2004,provided that the aggregate number of the Consideration Shares sold on any onetrading day may not exceed 1% of the total number of the Consideration Shares.(b)Incentive Shares(i)None of the Incentive Shares may be sold during the first 6 months after the date ofissue of the Incentive Shares;(ii) (1) 50% of the Incentive Shares may be sold from the beginning of the 7th monthafter the date of issue of the Incentive Shares; and(2) the remaining 50% of the Incentive Shares may be sold from the beginning ofthe 18th month after the date of issue of the Incentive Shares,provided that the aggregate number of the Incentive Shares sold on any one tradingday may not exceed 1% of the total number of the Incentive Shares.All of the Consideration Shares are mortgaged to TOM Solutions during the above lock-upperiod as a security for the due performance of the obligations of Mr. Zhang under the Agreement.The Incentive Shares (if any) will also be mortgaged to TOM Solutions during the above lock-upperiod.Incentive ProfitsPursuant to the Agreement, it was agreed that if the audited after-tax profits of Hong XiangNew Co. prepared in accordance with HKGAAP for the 5 years ending 31st December, 2002 to2006 (inclusive) in aggregate is not less than RMB183,150,000 (approximately HKD172,783,019)(“Incentive Profits”), then the management (being Mr. Zhang and other management) of HongXiang New Co. will be entitled to a bonus, payable in cash after the issue of the audited accountsof Hong Xiang New Co. for the year ending 31st December, 2006, for an amount equal to 20% ofthe amount that exceeds such Incentive Profits.– 13 –
LETTER FROM THE BOARDAt the option of TOM Solutions, any shortfall in the Incentive Profits will be compensatedwithin 15 business days after the date of issue of the audited accounts of Hong Xiang New Co. forthe year ending 31st December, 2006 by:(a)(b)(c)the deduction from the PRC Shareholder’s entitlement to any dividend to be declaredand paid by Hong Xiang New Co.; and/orthe sale proceeds from the disposal of such number of the Consideration Shares and/or Incentive Shares mortgaged to TOM Solutions as mentioned above; and/orthe payment by Jingcai (which is a company controlled by Mr. Zhang) in cash. Mr.Zhang undertakes to procure that Jingcai will make such payment.The calculation on the Incentive Profits or any shortfall in the Incentive Profits (if any) willbe reviewed by the independent Directors and TOM will make appropriate disclosures in anannouncement and its annual report accordingly.Conditions precedentCompletion was conditional on, inter alia, the following conditions having been fulfilled orwaived on or before 8th April, 2004 (or such other date as the parties may agree):(a)(b)(c)(d)(e)(f)Hong Xiang New Co. having been established in accordance with the laws of thePRC, being owned as to 49% by BVI Shareholder and as to 51% by PRC Shareholderand Hong Xiang New Co. having obtained the required approvals and licences for thesale and distribution of audio and video products;the BVI Shareholder having been established in accordance with the laws of the BVIand being wholly-owned by Mr. Zhang;the Asset Acquisition having been completed in accordance with all applicable laws,rules and regulations;the Equity Transfer having been completed in accordance with all applicable laws,rules and regulations after completion of the Asset Acquisition;a labour service contract in such form and substance satisfactory to TOM Solutionshaving been duly executed between Hong Xiang New Co. and each member of themanagement team and other essential staff members (comprising of at least 3 personsincluding Mr. Zhang and Ms. Zhang) of Hong Xiang New Co.;TOM Solutions having been satisfied with the result of the due diligence exercisecarried out by it on the assets and liabilities, business and prospects of Hong XiangNew Co.;– 14 –
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