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Herald Holdings Limited
(Incorporated in Bermuda with limited liability)


Report of the Directors


The directors have pleasure in submitting their annual report together with the audited accounts for the year ended 31 March 1997.

PRINCIPAL ACTIVITIES

The principal activity of the company is investment holding. The principal activities of the principal subsidiaries are set out on pages 35 to 38.

The analyses of the principal activities and geographical locations of operations of the group during the financial year are as follows:

MAJOR CUSTOMERS AND SUPPLIERS

The information in respect of the groupís sales and purchases attributable to the major customers and suppliers during the financial year is as follows:

At no time during the year, have the directors, their associates or any shareholder of the company (which to the knowledge of the directors owns more than 5 per cent of the companyís share capital) any interests (as defined in the Listing Rules) in these major customers and suppliers.

PRINCIPAL SUBSIDIARIES

Particulars of the companyís principal subsidiaries at 31 March 1997 are set out on pages 35 to 38.

ACCOUNTS

The profit of the group for the year ended 31 March 1997 and the state of the companyís and the groupís affairs at that date are set out in the accounts on pages 15 to 34.

An interim dividend of 1 cent per share was paid on 4 December 1996. The directors now recommend a final dividend of 1.5 cents per share in respect of the year ended 31 March 1997.

FIXED ASSETS

Movements in fixed assets during the year are set out in note 10 on the accounts.

BANK LOANS AND OVERDRAFTS

Particulars of bank loans and overdrafts of the group as at 31 March 1997 are set out in note 15 on the accounts.

SHARE CAPITAL

Movements in share capital during the year are set out in note 17 on the accounts.

The company repurchased and then cancelled 9,565,000 of its own shares during the year. The directors consider that the repurchase of shares will benefit shareholders by enhancing the earnings per share of the company.

Except as disclosed above, neither the company nor any of its subsidiaries purchased, redeemed or sold any of the companyís listed securities during the financial year.

DIRECTORS

The directors during the financial year were:

G Bloch

D S Chang

S T K Cheung

M Y S Thong

R Dorfman

D C Bray *

H M G Forsgate *

P K Y Tsao *

* Non-executive directors

In accordance with bye-law 87 of the companyís bye-laws, Messrs D S Chang and M Y S Thong retire from the board by rotation at the forthcoming annual general meeting and, being eligible, offer themselves for re-election.

DIRECTORS AND SENIOR MANAGEMENT

George BLOCH, aged 76, has been the Chairman of the company since its incorporation in 1992. He is a graduate of the College of Technology in Northampton, England. He went to Shanghai in 1939 and worked for a large engineering firm. He established his business in Japan in 1949 and moved to Hong Kong in 1955. In 1969, Mr Bloch, together with Mr Chang Dong-Song founded Herald Metal and Plastic Works Limited ("HMPL"), the initial company of the group. Mr Bloch is a Past District Governor of Lions International in Hong Kong and is Vice-Chairman of the Liver Foundation and was for several years Chairman of the Eye Bank. He is a leading collector of both western and Chinese art and his collection has been exhibited internationally. He has been honoured by the French Government and made a Chevalier de líOrdre des Arts et des Lettres and also has a major decoration from the Government of Austria.

CHEUNG Tsang-Kay, Stan, PhD, Hon LLD, JP, aged 53, has been the Managing Director of the company since its incorporation. Dr Cheungís community services in the past included Urban Council member, Broadcasting Authority member, The Hong Kong Polytechnic University Council member and Vice-Chairman of Occupational Safety & Health Council etc. He is currently a member of the Chinese Peopleís Political Consultative Conference, Shanghai Municipal Committee. Also, he is the Honorary Trustee and Adjunct Professor at Shanghai Jiao Tung University, Trustee of Fudan University and Director of Soong Ching Ling Foundation of Shanghai. Dr Cheung joined the group in 1975 and is a director of the principal companies of the group.

CHANG Dong-Song, aged 76, the father of Dr Cheung, has been an Executive Director of the company since 1992. Mr Chang was a co-founder of HMPL and since 1969 has played a principal role in the development of the groupís manufacturing activities. He is now the Managing Director of HMPL and a director of some of the groupís companies. He was a member of the Toys Advisory Council of the Hong Kong Trade Development Council. Mr Chang is also a member of The Chinese Peopleís Political Consultative Conference, Jiangsu Changshu Committee.

Robert DORFMAN, aged 42, is the step-son of Mr Bloch. He has been an Executive Director of the company since 1992. Mr Dorfman is Chairman of The Americas Area Committee of the Hong Kong General Chamber of Commerce and is a director of the Vision 2047 Foundation. He also serves on the Executive Committee of the Hong Kong Shippers Council and is a member of the Corporate Contribution Programme Committee of The Community Chest of Hong Kong. Mr Dorfman joined the group in 1983. He is the Managing Director of Herald Marketing Limited and Herald Electronics Limited and a director of some of the groupís companies.

THONG Yeung-Sum, Michael, aged 47, obtained a degree in Social Science at the University of Hong Kong. He is a member of the Hong Kong Society of Accountants and the Chartered Association of Certified Accountants. Before joining the group in 1976, he worked for three years with the Hong Kong office of a leading international accounting firm. Mr Thong has been an Executive Director of the company since 1992 and now serves as finance director and company secretary of the principal companies in the group.

Denis Campbell BRAY, CMG, CVO, JP, aged 71, has served as a Non-Executive Director of the company since 1992. Mr Bray joined the Hong Kong Government in 1950. In 1971, he was appointed District Commissioner, New Territories. He also served as Hong Kong Commissioner in London from 1977 to 1980 and as Secretary of Home Affairs and an ex-officio member of the Executive and Legislative Councils. From 1985 to 1992, Mr Bray was Executive Director of the Community Chest of Hong Kong. He is also a director of First Pacific Davies Limited and Leighton Asia Limited.

Hugh Moss Gerald FORSGATE, CBE, JP, aged 78, has served as a Non-Executive Director of the Company since 1992. Mr Forsgate joined Hong Kong and Kowloon Wharf & Godown Company Limited in 1947 and served as a Director and General Manager from 1959 to 1979. He was appointed to the Urban Council in 1965 and acted as its Chairman from 1986 to 1991. He was also Chairman of the Kowloon-Canton Railway Corporation. Mr Forsgate is the Chairman of Eralda Industries Limited and an adviser to the Jardine Pacific Group. He also serves as a Non-Executive Director in several other listed companies in Hong Kong and is a member of the Port Development Board. In addition, he is the President of Hong Kong Rugby Union and Hong Kong Football Club.

TSAO Kwang-Yung, Peter, CBE, CPM, aged 63, has served as a Non-Executive Director of the company since 1992. Mr Tsao joined the Hong Kong Government in 1955. He has served in key positions within the Department of Trade and Industry and led the Hong Kong delegation in numerous rounds of trade negotiations with the EU and the United States. In 1983, Mr Tsao became Director of Information Services and was involved in the negotiations with China over the future of Hong Kong. He later served as Secretary for Administrative Services and Information and retired in 1992 from the post of Secretary for Home Affairs.

Gershon DORFMAN, aged 41, step-son of Mr Bloch, received his primary and secondary education in Hong Kong, Japan and Switzerland. He then obtained a degree in Business Administration from the University of Washington. Before joining the group in 1983 he spent six years with a leading local watch manufacturing company. He is the Managing Director of Herald Datanetics Limited and a director of some of the groupís companies.

DIRECTORS' INTERESTS IN SHARES

The directors who held office at 31 March 1997 had the following beneficial interests in the issued share capital of the company and a subsidiary (within the meaning of the Securities (Disclosure of Interests) Ordinance) at that date as recorded in the register of directorsí share interests:

Note:

Dr S T K Cheung is the beneficiary of a family trust which owned 75,498,356 shares in the company and 93,000 shares in Herald Datanetics Limited respectively at 31 March 1997.

SHARE OPTION SCHEME

Under the companyís share option scheme the directors may, at their discretion, invite full time employees of any of the companies in the group, including executive directors, to take up options to subscribe for shares in the company at a price determined by the directors but in any case not less than the higher of the nominal value of the shares and 80 per cent of the average of the closing prices of the shares on The Stock Exchange of Hong Kong Limited on each of the five trading days immediately preceding the offer of the option. An option granted may be exercised at any time during the period commencing one year from the date on which it was granted up to the date of expiration of the scheme. The aggregate number of shares issued or which may be issuable under the share option scheme may not exceed 10 per cent of the issued share capital of the company at the time of granting of an option.

On 30 March 1996, share options were granted under the companyís share option scheme to each of the directors, except Messrs D C Bray, H M G Forsgate and P K Y Tsao, to subscribe for 7,500,000 shares in the company at a price of HK$0.32 per share exercisable during the period from 1 April 1997 to 31 May 2002.

Except for the foregoing, at no time during the year was the company or any of its subsidiaries a party to any arrangement to enable the directors or chief executive of the company or any of their spouses or children under eighteen years of age to acquire benefits by means of the acquisition of shares in or debentures of the company or any other body corporate.

SUBSTANTIAL INTERESTS IN THE SHARE CAPITAL OF THE COMPANY

The company has been notified of the following interests in the companyís issued shares at 31 March 1997 amounting to 10 per cent or more of the shares in issue:

GIL is a company owned by a family trust which owned an aggregate of 75,498,356 shares in the company at 31 March 1997 as noted under "Directorsí interests in shares", comprising 69,728,356 shares held by GIL and 5,770,000 shares held by the trust itself. HIT, the trustee for the trust, was deemed to be interested in the 75,498,356 held by the trust. HHBV, HH, HFNL and HIB were all deemed to be interested in these shares due to their direct or indirect holdings in the shares of HIT. In addition, HHBV, HFNL, HIB had a further interest of 1,000,000 shares and HH had a further interest of 1,500,000 shares in the company at 31 March 1997.

DIRECTORSí INTERESTS IN CONTRACTS

No contract of significance, to which the company or any subsidiary was a party and in which a director of the company had a material interest, subsisted at the end of the year or at any time during the year.

DIRECTORSí SERVICE CONTRACTS

No director has an unexpired service contract with the company or any of its subsidiaries which is not determinable by the company within one year with payment of compensation, other than normal statutory obligations.

The non-executive directors were appointed by the board of directors for a term of two years commencing on 1 April 1997. Their remuneration is also determined by the board of directors annually.

COMPLIANCE WITH THE CODE OF BEST PRACTICE

The company has complied throughout the year with the Code of Best Practice as set out by The Stock Exchange of Hong Kong Limited in Appendix 14 to the Listing Rules.

PRE-EMPTIVE RIGHTS

There is no provision for pre-emptive rights under the companyís bye-laws or the Companies Act 1981 of Bermuda (as amended).

FIVE YEAR SUMMARY

A summary of the results and of the assets and liabilities of the group for the last five financial years is set out on page 39 of the annual report.

AUDITORS

A resolution for the reappointment of KPMG Peat Marwick as auditors of the company is to be proposed at the forthcoming annual general meeting.



By order of the board



Thong Yeung-Sum, Michael
Director
Hong Kong, 28 July 1997


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