INTRODUCTION Rainbow Group is principally engaged in the retail and wholesale of branded beauty products in Hong Kong. The beauty products sold by Rainbow Group may be broadly divided into three main categories, namely (i) skin-care products, (ii) fragrances and cosmetics and (iii) hair-care and personal-care products and accessories. As at the Latest Practicable Date, Rainbow Group operated a chain of eight retail outlets in prime business locations in Hong Kong under its trade name of Rainbow Cosmetic. Prior to the acquisition of all the business and assets of Rainbow Trading (including all debts and liabilities incurred in its ordinary course of business as recorded in its books of accounts as at completion) by Newide International which was completed after the close of business on 31 December, 2000 as part of the Reorganisation, the wholesale business of Rainbow Group was primarily carried out by Rainbow Cosmetic which developed its wholesale business network with a number of local distributors and distributors in Japan. As part of the Reorganisation and Rainbow Group s strategy to develop the wholesale business of branded beauty products, Newide International was established in October 2000 to consolidate the wholesale business of Rainbow Group and acquire all the business and assets of Rainbow Trading (including all debts and liabilities incurred in its ordinary course of business as recorded in its books of accounts as at completion) with effect from the close of business on 31 December, 2000. Rainbow Trading had net liabilities in the sum of approximately HK$10.34 million as at 31 December, 2000, and the consideration for the acquisition was at a nominal amount of HK$1.00 which was determined on arm s length basis for the purpose of the Reorganisation. Despite that Rainbow Trading incurred net liabilities as at 31 December, 2000, the Directors believe that the acquisition will enhance the wholesale business of branded beauty products of Rainbow Group as a whole. Leveraging on its experience and expertise in the beauty business in Hong Kong, Rainbow Group established its first beauty centre in April 1997 in Mongkok, Hong Kong, at the same location as one of the Rainbow Cosmetic outlets. Rainbow Group currently operates three beauty centres in Mongkok, Causeway Bay and Central, Hong Kong, of which the beauty centre in Mongkok is at the same area as the existing Rainbow Cosmetic outlet. Further details of the locations of the Rainbow Cosmetic outlets and Rainbow Group s beauty centres are set forth in the property valuation report, the text of which is set forth in Appendix II to this prospectus. The Directors believe that the beauty service business of Rainbow Group creates synergistic benefits to the retail business of Rainbow Group. For each of the two years ended 31 October, 2000 and the four months ended 28 February, 2001, the turnover attributable to the retail business of Rainbow Group accounted for approximately 73.55 per cent., approximately 76.19 per cent. and approximately 68.70 per cent. of the turnover of Rainbow Group, respectively. For the same years or period, the turnover attributable to the wholesale business of Rainbow Group accounted for approximately 25.63 per cent., approximately 22.30 per cent. and approximately 27.44 per cent. of its turnover, respectively. The balance of approximately 0.82 per cent., approximately 1.51 per cent. and approximately 3.86 per cent. of the turnover of Rainbow Group was attributable to its beauty service business. 69
The Directors intend to strengthen the corporate image of Rainbow Group by introducing a new and exclusive series of beauty products under the brand name of Nutriplus. As at the Latest Practicable Date, Rainbow Group launched 11 skin-care products and eight hair-care products under the brand name of Nutriplus targeting customers of the age of 25 and above. In August 2000, Rainbow Cosmetic engaged a beauty product producer in Switzerland, which is an Independent Third Party, to develop and produce a series of 11 skin-care products and to supply the products to Rainbow Group on an exclusive basis under the brand name of Nutriplus. In January 2001, Rainbow Cosmetic also engaged a local beauty product agent, which is also an Independent Third Party, to source from a producer in Canada a series of eight hair-care products and to supply the products to Rainbow Group on an exclusive basis under the brand name of Nutriplus. Sales of all these beauty products commenced in May 2001. In order to strengthen the brand loyalty of Nutriplus, the Directors plan to rename the beauty centres of Rainbow Group to Nutriplus offering beauty services with Nutriplus skin-care products. GROUP STRUCTURE AND REORGANISATION Corporate structure of Rainbow Group In preparation for the listing of the Shares on GEM, Rainbow Group underwent the Reorganisation, following which the Company became the ultimate holding company of the companies comprising Rainbow Group. Particulars of the Reorganisation are set forth under Group Reorganisation in Appendix IV to this prospectus. The following chart illustrates the corporate structure of Rainbow Group following the Reorganisation and their respective principal activities: The Company (Incorporated in the Cayman Islands) Investment holding 100% Rainbow (BVI) (Incorporated in the BVI) Investment holding 100% 100% 100% 100% 100% 100% Rainbow Cosmetic (Incorporated in Hong Kong) Wholesaling and retailing of beauty products (Note 1) Rainbow Cosmetic (Central) (Incorporated in Hong Kong) Retailing of beauty products (Note 2) Jet Legend (Incorporated in Hong Kong) Wholesaling and retailing of beauty products (Note 3) Newide International (Incorporated in Hong Kong) Wholesaling of beauty products (Note 4) Nutriplus Cosmetics (Incorporated in Hong Kong) Provision of beauty services (Note 5) Rainbow Macau (Incorporated in Macau) (Note 6) Notes: 1. As at the Latest Practicable Date, Rainbow Cosmetic operated two Rainbow Cosmetic outlets in Causeway Bay and three Rainbow Cosmetic outlets in Mongkok. Rainbow Cosmetic also engages in the wholesale business at the Rainbow Cosmetic outlets operated by it. 2. As at the Latest Practicable Date, Rainbow Cosmetic (Central) operated one Rainbow Cosmetic outlet in Central. 70
3. As at the Latest Practicable Date, Jet Legend operated one Rainbow Cosmetic outlet in Tsimshatsui and one Rainbow Cosmetic outlet in Admiralty. Jet Legend also engages in the wholesale business at the Rainbow Cosmetic outlets operated by it. 4. Newide International engages in the wholesale business of Rainbow Group. 5. As at the Latest Practicable Date, Nutriplus Cosmetics operated three beauty centres in Mongkok, Causeway Bay and Central. 6. As at the Latest Practicable Date, Rainbow Macau did not carry on any business. Shareholding structure Following the Reorganisation and upon completion of the Pre-IPO Issue, the Capitalisation Issue and the Share Offer (taking no account of the Shares that may be issued pursuant to the exercise of the Over-allotment Option and Shares which may be issued upon exercise of options granted or may be granted under the Pre-IPO Share Option Scheme or the Share Option Scheme), the shareholding structure of the Company is set forth below: Initial Management Shareholders Significant shareholders of the Company Ms. Aldy Li 51.87% (Note 1) Mr. Elbert Lee 1.50% (Note 2) Mr. Lai Tin Ying, Michael (alias Lai Siu Tin) 0.62% (Note 3) Mr. Chiu Wai 0.94% (Note 4) 12.24% (Note 5) E-Teck ISL 7.04% (Note 6) Other investors 54.93% 19.28% 2.93% (Note 7) 77.14% 22.86% Public shareholders The Company Notes: 1. Ms. Aldy Li is the chairperson of the Board and an executive Director. 2. Mr. Elbert Lee is an executive Director. 3. Mr. Lai Tin Ying, Michael (alias Lai Siu Tin) is a non-executive Director. Pursuant to a subscription agreement dated 8 June, 2001 entered into between, inter alia, Rainbow (BVI) and Mr. Lai Tin Ying, Michael, 400 shares in the share capital of Rainbow (BVI), representing approximately 0.8 per cent. of the then issued share capital of Rainbow (BVI), were allotted and issued to Mr. Lai Tin Ying, Michael for a cash consideration of HK$1,000,000 which was fully paid and settled. For the purpose of the Reorganisation, the shareholding of Mr. Lai Tin Ying, Michael in the share capital of Rainbow (BVI) was exchanged for a total of 2,186,434 Shares (including Shares to be issued pursuant to the Capitalisation Issue), representing approximately 0.62 per cent. of the issued share capital of the Company immediately after completion of the Pre-IPO Issue, the Capitalisation Issue and the Share Offer (taking no account of any Shares that may be issued pursuant to the exercise of the Over-allotment Option and the options granted or may be granted under the Pre-IPO Share Option Scheme or the Share Option Scheme). 71
4. Mr. Chiu Wai is an independent non-executive Director. Pursuant to a subscription agreement dated 8 June, 2001 entered into between, inter alia, Rainbow (BVI) and Mr. Chiu Wai, Mr. Chiu Wai first acquired 600 shares in the share capital of Rainbow (BVI), representing approximately 1.20 per cent. of the then issued share capital of Rainbow (BVI), at a cash consideration of HK$1,500,000 which was fully paid and settled. For the purpose of the Reorganisation, the shareholding of Mr. Chiu Wai in the share capital of Rainbow (BVI) was exchanged for a total of 3,279,652 Shares (including Shares to be issued pursuant to the Capitalisation Issue), representing approximately 0.94 per cent. of the issued share capital of the Company immediately after completion of the Pre-IPO Issue, Capitalisation Issue and the Share Offer (taking no account of any Shares that may be issued pursuant to the exercise of the Over-allotment Option and the options granted or may be granted under the Pre-IPO Share Option Scheme or the Share Option Scheme). The Directors consider the issue of shares in the share capital of Rainbow (BVI) to Mr. Chiu Wai to be an appropriate means to raise funds for Rainbow Group and the proceeds raised thereof are used as general working capital of Rainbow Group. 5. These Shares are beneficially owned by and registered in the name of E-Teck. E-Teck and its shareholders are not connected with any of the Directors or the chief executive of the Company and its subsidiaries, the Initial Management Shareholders, DBS Asia, ICN and other professional parties involved in the Share Offer and their respective associates. All the issued share capital of E-Teck is beneficially owned by Ever-Long Asset Management Limited, which is a wholly-owned subsidiary of Ever-Long Holdings Limited. Ever-Long Holdings Limited is a wholly-owned subsidiary of Styland Holdings Limited which is a limited liability company incorporated in Bermuda whose shares are listed on the Main Board. Ever-Long Asset Management Limited, Ever-Long Holdings Limited and Styland Holdings Limited are deemed to be interested in the Shares held by E-Teck for the purpose of the SDI Ordinance. E-Teck first acquired 8,750 shares in the share capital of Rainbow (BVI), representing approximately 17.50 per cent. of the then issued share capital of Rainbow (BVI) pursuant to the conversion of seven convertible notes in the total amount of HK$3.50 million on 14 September, 2001 under the subscription agreement dated 19 October, 2000 as amended by a supplemental deed dated 8 June, 2001. For the purpose of the Reorganisation, the shareholding interest of E-Teck in the share capital of Rainbow (BVI) was exchanged for a total of 47,828,254 Shares (including Shares to be issued pursuant to the Capitalisation Issue) of which 5,000,000 Shares will be sold pursuant to the Offer for Sale. After completion of the Pre-IPO Issue, the Capitalisation Issue and the Share Offer, E-Teck will hold 42,828,254 Shares, representing approximately 12.24 per cent. of the issued share capital of the Company immediately after completion of the Pre-IPO Issue, Capitalisation Issue and the Share Offer (taking no account of any Shares that may be issued pursuant to the exercise of the Over-allotment Option and the options granted or may be granted under the Pre-IPO Share Option Scheme or the Share Option Scheme). The Directors consider the issue of shares in the share capital of Rainbow (BVI) to E-Teck to be an appropriate means to raise funds for Rainbow Group and the proceeds raised thereof are used as general working capital of Rainbow Group. As a result of the Offer for Sale, E-Teck, being one of the Vendors, will receive a sum of approximately HK$1.88 million as consideration for the sale of 5,000,000 Sale Shares. Each of Ever-Long Asset Management Limited, Ever-Long Holdings Limited and Styland Holdings Limited has severally undertaken to the Company, DBS Asia (acting on behalf of the Underwriters) and the Stock Exchange that it will not, save as provided in Rule 13.19 of the GEM Listing Rules, sell, transfer or otherwise dispose of (or enter into any agreement to sell, transfer or otherwise dispose of) any of its direct or indirect interest in the share capital of E-Teck for a period of six months from the date on which dealings in the Shares on GEM first commence (the First Six-Month Period ). 6. These Shares are beneficially owned by and registered in the name of ISL. ISL and its shareholders are not connected with any of the Directors or the chief executive of the Company and its subsidiaries, the Initial Management Shareholders, DBS Asia, ICN and other professional parties involved in the Share Offer and their respective associates. All the issued share capital of ISL is beneficially owned by Inworld International Limited, which is a wholly-owned subsidiary of Inworld Group Limited. Inworld Group Limited is beneficially owned as to approximately 43.29 per cent. by Iwana Company Limited (being a wholly-owned subsidiary of Styland (Overseas) Limited, which is in turn a wholly-owned subsidiary of Styland Holdings Limited), as to approximately 34.76 per cent. by Dynamate Limited (being beneficially owned by Mr. Ngai Kwok Kin, 72
Kevin), as to approximately 19.51 per cent. by Joyview International Limited (being beneficially owned by Mr. Chan Wai Lun) and as to approximately 2.44 per cent. by Jet Concord Inc. (being a wholly-owned subsidiary of Renren Media Limited). Both Styland Holdings Limited and Renren Media Limited are companies incorporated in Bermuda and whose shares are both listed on the Main Board. Each of Styland Holdings Limited, Styland (Overseas) Limited, Iwana Company Limited, Mr. Ngai Kwok Kin, Kevin, Dynamate Limited, Inworld Group Limited and Inworld International Limited are deemed to be interested in the Shares held by ISL for the purpose of the SDI Ordinance. Each of Mr. Chan Wai Lun and Mr. Ngai Kwok Kin, Kevin is not connected with Styland Holdings Limited and Renren Media Limited. ISL first acquired 7,250 shares in the share capital of Rainbow (BVI), representing approximately 14.50 per cent. of the then issued share capital of Rainbow (BVI) pursuant to a contract for provision of website development services by ISL dated 19 October, 2000 as amended by a supplemental deed dated 8 June, 2001. The total consideration for the website development services was HK$3,000,000, of which HK$100,000 was paid in cash by Rainbow (BVI) and the remaining HK$2,900,000 was paid by the issue and allotment of 7,250 shares in Rainbow (BVI). The provision of website development services by ISL was completed in June 2001, and is not subsisting. For the purpose of the Reorganisation, the shareholding interest of ISL in the share capital of Rainbow (BVI) was exchanged for a total number of 39,629,125 Shares (including Shares to be issued pursuant to the Capitalisation Issue) of which 15,000,000 Shares will be sold pursuant to the Offer for Sale. After completion of the Pre-IPO Issue, the Capitalisation Issue and the Share Offer, ISL will hold 24,629,125 Shares, representing approximately 7.04 per cent. of the issued share capital of the Company immediately after completion of the Pre-IPO Issue, Capitalisation Issue and the Share Offer (taking no account of any Shares that may be issued pursuant to the exercise of the Over-allotment Option and the options granted or may be granted under the Pre-IPO Share Option Scheme or the Share Option Scheme). As a result of the Offer for Sale, ISL, being one of the Vendors, will receive a sum of approximately HK$5.63 million as consideration for the sale of 15,000,000 Sale Shares. Each of Styland Holdings Limited, Styland (Overseas) Limited, Mr. Ngai Kwok Kin, Kevin, Dynamate Limited and Iwana Company Limited has severally undertaken to the Company, DBS Asia (acting on behalf of the Underwriters) and the Stock Exchange that it or he will not dispose of any of its or his direct or indirect interest in the share capital of Inworld Group Limited, Inworld International Limited or ISL during the First Six-Month Period if such disposal will result in their aggregate control in the voting powers in general meetings of Inworld Group Limited, Inworld International Limited or ISL falling below 35 per cent. Each of Styland Holdings Limited and Styland (Overseas) Limited has severally further undertaken to the Company, DBS Asia (acting on behalf of the Underwriters) and the Stock Exchange that it will not dispose of any of its direct or indirect interest in Iwana Company Limited during the First Six-Month Period if such disposal will result in their aggregate control in the voting powers in general meetings of Iwana Company Limited falling below 35 per cent. Styland Holdings Limited has further undertaken to the Company, DBS Asia (acting on behalf of the Underwriters) and the Stock Exchange that it will not dispose of any of its direct or indirect interest in the share capital of Styland (Overseas) Limited during the First Six-Month Period if such disposal will result in its control in the voting powers in general meetings of Styland (Overseas) Limited falling below 35 per cent. Mr. Ngai Kwok Kin, Kevin has further undertaken to the Company, DBS Asia (acting on behalf of the Underwriters) and the Stock Exchange that he will not dispose of any of his direct or indirect interest in the share capital of Dynamate Limited during the First Six-Month Period if such disposal will result in his control in the voting power in general meetings of Dynamate Limited falling below 35 per cent. Inworld Group Limited has undertaken to the Company, DBS Asia (acting on behalf of the Underwriters) and the Stock Exchange that it will not dispose of any of its direct or indirect interest in the share capital of Inworld International Limited or ISL during the First Six-Month Period if such disposal will result in its control in the voting powers in general meetings of Inworld International Limited or ISL falling below 35 per cent. Inworld International Limited has undertaken to the Company, DBS Asia (acting on behalf of the Underwriters) and the Stock Exchange that it will not dispose of any of its direct or indirect interest in the share capital of ISL during the First Six-Month Period if such disposal will result in its control in the voting powers in general meetings of ISL falling below 35 per cent. 73
7. The following sets forth particulars of the other investors of the Company, who are holding the Shares for investment purpose and are not connected with one another and are Independent Third Parties: Approximate Number of percentage of Shares directly shareholding held immediately immediately Date on which after completion of after completion of Approximate shareholding the Pre-IPO Issue, the Pre-IPO Issue, cost of in Rainbow the Capitalisation the Capitalisation investment Group was Issue and the Issue and the for each Total cost of Name of shareholders first acquired Share Offer Share Offer Share (h) investment (%) (HK$) (HK$) Chan See Han (a) 8 June, 2001 1,530,504 0.44 0.46 700,000 Cheang Weng Sam alias Cheang Song Wai (b) 8 June, 2001 2,186,434 0.62 0.46 1,000,000 Lau Cheung Wai (c) 8 June, 2001 2,186,434 0.62 0.46 1,000,000 ICN (d) 8 June, 2001 1,546,609 0.44 0.32 500,000 Standard Network Limited (e) 8 June, 2001 1,039,217 0.31 0.46 500,000 Forebest Limited (f) 8 June, 2001 1,749,148 0.50 0.46 800,000 Total 10,238,346(g) 2.93 a. These Shares are beneficially owned by and registered in the name of Ms. Chan See Han, who is an Independent Third Party. Ms. Chan See Han first acquired 280 shares in the share capital of Rainbow (BVI), representing approximately 0.56 per cent. of the then issued share capital of Rainbow (BVI), pursuant to a subscription agreement dated 8 June, 2001, at a cash consideration of HK$700,000 which was fully paid and settled. For the purpose of the Reorganisation, the shareholding interest of Ms. Chan See Han in the share capital of Rainbow (BVI) was exchanged for a total of 1,530,504 Shares (including Shares to be issued pursuant to the Capitalisation Issue), representing approximately 0.44 per cent. of the issued share capital of the Company immediately after completion of the Pre-IPO Issue, the Capitalisation Issue and the Share Offer (taking no account of any Shares that may be issued pursuant to the exercise of the Over-allotment Option and the options granted or may be granted under the Pre-IPO Share Option Scheme or the Share Option Scheme). The Directors consider the issue of the shares in the share capital of Rainbow (BVI) to Ms. Chan See Han to be an appropriate means to raise funds for Rainbow Group and the proceeds raised thereof are used as general working capital of Rainbow Group. b. These Shares are beneficially owned by and registered in the name of Mr. Cheang Weng Sam (alias Cheang Song Wai), who is an Independent Third Party. Mr. Cheang Weng Sam first acquired 400 shares in the share capital of Rainbow (BVI), representing approximately 0.80 per cent. of the then issued share capital of Rainbow (BVI), pursuant to a subscription agreement dated 8 June, 2001, at a cash consideration of HK$1,000,000 which was fully paid and settled. For the purpose of the Reorganisation, the shareholding interest of Mr. Cheang Weng Sam in the share capital of Rainbow (BVI) was exchanged for a total of 2,186,434 Shares (including Shares to be issued pursuant to the Capitalisation Issue), representing approximately 0.62 per cent. of the issued share capital of the Company immediately after completion of the Pre-IPO Issue, the Capitalisation Issue and the Share Offer (taking no account of any Shares that may be issued pursuant to the exercise of the Overallotment Option and the options granted or may be granted under the Pre-IPO Share Option Scheme or the Share Option Scheme). The Directors consider the issue of the shares in the share capital of Rainbow (BVI) to Mr. Cheang Weng Sam to be an appropriate means to raise funds for Rainbow Group and the proceeds raised thereof are used as general working capital of Rainbow Group. c. These Shares are beneficially owned by and registered in the name of Mr. Lau Cheung Wai, who is an Independent Third Party. Mr. Lau Cheung Wai first acquired 400 shares in the share capital of Rainbow (BVI), representing approximately 0.8 per cent. of the then issued share capital of Rainbow (BVI), pursuant to a subscription agreement dated 8 June, 2001, at a cash consideration of HK$1,000,000 which was fully paid and settled. For the purpose of the Reorganisation, the 74
shareholding interest of Mr. Lau Cheung Wai in the share capital of Rainbow (BVI) was exchanged for a total of 2,186,434 Shares (including Shares to be issued pursuant to the Capitalisation Issue), representing approximately 0.62 per cent. of the issued share capital of the Company immediately after completion of the Pre-IPO Issue, the Capitalisation Issue and the Share Offer (taking no account of any Shares that may be issued pursuant to the exercise of the Over-allotment Option and the options that granted or may be granted under the Pre-IPO Share Option Scheme or the Share Option Scheme). The Directors consider the issue of the shares in the share capital of Rainbow (BVI) to Mr. Lau Cheung Wai to be an appropriate means to raise funds for Rainbow Group and the proceeds raised thereof are used as general working capital of Rainbow Group. d. These Shares are beneficially owned by and registered in the name of ICN which is also acting as the financial adviser to the Company. ICN and its shareholders are Independent Third Parties. All the issued share capital of ICN is indirectly owned as to 40 per cent. by Ms. Chu Oi Wan, Cecilia, as to 20 per cent. by Mr. Lui Bing Kin, Michael, as to 20 per cent. by Ms. Leung Yuk Kit and as to 20 per cent. by Mr. Hui Chuen Kin, Daniel, in each case, through companies controlled by them. ICN first acquired 100 shares in the share capital of Rainbow (BVI), representing approximately 0.2 per cent. of the then issued share capital of Rainbow (BVI), pursuant to a subscription agreement dated 8 June, 2001, at a cash consideration of HK$250,000 which was fully paid and settled. For the purpose of the Reorganisation, the shareholding interest of ICN in the share capital of Rainbow (BVI) was exchanged for a total of 546,609 Shares (including Shares to be issued pursuant to the Capitalisation Issue), representing approximately 0.16 per cent. of the issued share capital of the Company immediately after completion of the Pre-IPO Issue, the Capitalisation Issue and the Share Offer taking no account of any Shares that may be issued pursuant to the exercise of the Overallotment Option and the options granted or may be granted under the Pre-IPO Share Option Scheme or the Share Option Scheme. The Directors consider the issue of those shares in the share capital of Rainbow (BVI) to ICN to be an appropriate means to raise funds for Rainbow Group and the proceeds raised thereof are used as general working capital of Rainbow Group. In addition, pursuant to the mandate letter dated 15 May, 2001 (as supplemented by two confirmation letters dated 6 June, 2001 and 24 August, 2001 respectively) entered into between the Company and ICN, the Company issued and allotted the Remuneration Shares to ICN on 25 September, 2001 in satisfaction of HK$250,000 being part of the financial advisory fee, at 50 per cent. of the Offer Price. The Directors consider the issue of the Remuneration Shares to ICN to be an appropriate means to secure financial advisory services rendered by ICN to Rainbow Group. The shareholding of ICN in the Company will be 0.44 per cent. of the issued share capital of the Company immediately after completion of the Pre-IPO Issue, the Capitalisation Issue and the Share Offer (taking no account of any Shares that may be issued pursuant to the exercise of the Overallotment Option and the options granted or may be granted under the Pre-IPO Share Option Scheme or the Share Option Scheme). If the options granted to ICN under the Pre-IPO Share Option Scheme is exercised in full, the shareholding of ICN in the Company will be 1.44 per cent. the issued share capital of the Company immediately after completion of the Pre-IPO Issue, the Capitalisation Issue and the Share Offer (assuming the Over-allotment Option is not exercised). e. These Shares are beneficially owned by and registered in the name of Standard Network Limited. Standard Network Limited and its shareholder are Independent Third Parties. All the issued share capital of Standard Network Limited is beneficially owned by Ms. Liu Suk Yi, Jessica. Standard Network Limited first acquired 200 shares in the share capital of Rainbow (BVI), representing approximately 0.4 per cent. of the then issued share capital of Rainbow (BVI), pursuant to a subscription agreement dated 8 June, 2001, at a cash consideration of HK$500,000 which was fully paid and settled. For the purpose of the Reorganisation, the shareholding of Standard Network Limited in the share capital of Rainbow (BVI) was exchanged for a total of 1,039,217 Shares (including Shares to be issued pursuant to the Capitalisation Issue), representing approximately 0.31 per cent. of the issued share capital of the Company immediately after completion of the Pre- IPO Issue, Capitalisation Issue and the Share Offer (taking no account of any Shares that may be issued pursuant to the exercise of the Over-allotment Option and the options that granted or may be granted under the Pre-IPO Share Option Scheme or the Share Option Scheme). The Directors consider the issue of the shares in the share capital of Rainbow (BVI) to Standard Network Limited to be an appropriate means to raise funds for Rainbow Group and the proceeds raised thereof are used as general working capital of Rainbow Group. 75
f. These Shares are beneficially owned by and registered in the name of Forebest Limited. Forebest Limited and its shareholder are Independent Third Parties. All the issued share capital of Forebest Limited is beneficially owned by Mr. Ng Hunson, Victor. Forebest Limited first acquired 320 shares in the share capital of Rainbow (BVI), representing approximately 0.64 per cent. of the then issued share capital of Rainbow (BVI), pursuant to a subscription agreement dated 8 June, 2001 at a cash consideration of HK$800,000 which was fully paid and settled. For the purpose of the Reorganisation, the shareholding interest of Forebest Limited in the share capital of Rainbow (BVI) was exchanged for a total of 1,749,148 Shares (including the Shares to be issued pursuant to the Capitalisation Issue), representing approximately 0.50 per cent. of the issued share capital of the Company taking no account of any Shares that may be issued pursuant to the exercise of the Overallotment Option and the options that granted or may be granted under the Pre-IPO Share Option Scheme or the Share Option Scheme. The Directors consider the issue of the shares in the share capital of Rainbow (BVI) to Forebest Limited to be an appropriate means to raise funds for Rainbow Group and the proceeds raised thereof are used as general working capital of Rainbow Group. g. All those 10,238,346 Shares are considered to be held in the public hands for the purpose of the GEM Listing Rules. h. Based on the Offer Price of HK$0.50, the approximate cost of investment for each Share paid by the other investors of the Company (other than the Remuneration Shares) is at a discount of 8 per cent. of the Offer Price. Such discounted price was a commercial decision made by Rainbow Group without referring to the offer price of any proposed public offer or placing. Rainbow Group regarded the issue of Shares to these investors to be the most economical means of capital resources and beneficial to Rainbow Group as a whole. The Remuneration Shares were issued and allotted to ICN at a discount of 50 per cent. of the Offer Price. The Directors consider the issue of the Remuneration Shares to ICN to be an appropriate means to secure financial advisory services rendered by ICN to Rainbow Group. PRODUCTS The beauty products sold by Rainbow Group may be broadly divided into three main categories, namely (i) skin-care products, (ii) fragrances and cosmetics and (iii) hair-care and personal-care products and accessories. The following table sets forth the turnover (generated from the retail sales and wholesales of beauty products) attributable to each category of beauty products for each of the two years ended 31 October, 2000 and the four months ended 28 February, 2001: Year ended 31 October, Four months ended Category 1999 2000 28 February, 2001 HK$ 000 % HK$ 000 % HK$ 000 % Skin-care products (Note 1) 78,617 61.50 79,545 64.02 23,377 61.69 Fragrances and cosmetics (Note 2) 27,935 21.85 24,560 19.77 9,208 24.30 Hair-care and personal-care products and accessories (Note 3) 21,280 16.65 20,135 16.21 5,307 14.01 Total 127,832 100.00 124,240 100.00 37,892 100.00 Notes: 1. Skin-care products include face- and body-care products such as cleansing lotion, face masks, face creams, moisturisers, body lotion and sun block products. 76
2. Fragrances and cosmetics include perfumes and eau de toilette for both men and women, face make-up, eye make-up, lipsticks and nail vanish. 3. Hair-care and personal-care products and accessories include shampoo, conditioner, styling agent, hair dye, comb, cosmetic bags, containers, mineral water spray and manicure equipment. Rainbow Group also introduced a new and exclusive series of beauty products under the brand name of Nutriplus. In pursuing this business development, in August 2000, Rainbow Group engaged an overseas beauty product producer and a local beauty product agent (both of which are Independent Third Parties) to develop and produce a series of skin-care products and hair-care products, respectively, and to supply the products to Rainbow Group on an exclusive basis under the brand name of Nutriplus. In May 2001, Rainbow Group first launched the sales of 11 skin-care products and eight hair-care products under the brand name of Nutriplus. The Directors believe that by introducing beauty products under its own brand name, Rainbow Group will be able to enhance customer loyalty as these beauty products are only available at the Rainbow Cosmetic outlets. In addition to the retail business of branded beauty products, Rainbow Group also acts as distributor for certain brands of beauty products. As at the Latest Practicable Date, Rainbow Group had exclusive distribution rights for the following products: Type of Distribution Brand name Duration product territory Bicosmetic (Note 1) Renewed for one year commencing Skin-care Hong Kong from 1 January, 2001 subject to and Macau automatic renewal on an annual basis unless either party gives written notice of termination at least six months prior to expiration* Helvance (Note 2) Renewed for five years commencing Skin-care Hong Kong from 15 March, 2001 subject to automatic renewal on a five-year period basis unless either party gives written notice of termination at least six months prior to expiration Nutriplus (Note 3) skin-care products Two years commencing from Skin-care Hong Kong 1 August, 2000 subject to automatic renewal for a further 2 years unless either party gives written notice of termination at least 12 months prior to expiration* 77
Type of Distribution Brand name Duration product territory hair-care products Commencing from 8 January, 2001 Hair-care Asia to 31 March, 2006 unless either party gives written notice of termination at least 60 days prior to any proposed expiration date which cannot be earlier than three years following the commencement date * The Directors confirm that Rainbow Group had not received any written notice of termination as at the Latest Practicable Date. Notes: 1. The turnover attributable to sales of Biocosmetic beauty products was approximately HK$0.69 million, approximately HK$0.82 million and approximately HK$0.72 million, representing approximately 0.54 per cent., approximately 0.65 per cent. and approximately 1.83 per cent. of the turnover of Rainbow Group for each of the two years ended 31 October, 2000 and the four months ended 28 February, 2001, respectively. 2. The turnover attributable to sales of Helvance beauty products was approximately HK$1.64 million, approximately HK$2.91 million and approximately HK$1.12 million, representing approximately 1.27 per cent., approximately 2.31 per cent. and approximately 2.84 per cent. of the turnover of Rainbow Group for the two years ended 31 October, 2000 and the four months ended 28 February, 2001, respectively. 3. As sales of Nutriplus beauty products commenced in May 2001, no turnover was recorded for the two years ended 31 October, 2000 and the four months ended 28 February, 2001. 78
Nathan Road Sai Yeung Choi Street BUSINESS OF RAINBOW GROUP RETAIL BUSINESS The following map sets forth the locations of the Rainbow Cosmetic outlets and the beauty centres of Rainbow Group in Hong Kong: Argyle Street Sai Yee Street Nelson Street Fa Yuen Street Tung Choi Street Nelson Street Retail outlets in Hong Kong Kowloon Mongkok Nathan Road Carnarvon Road Granville Road Cameron Road Central Admiralty Tsim Sha Tsui Causeway Bay Chiu Lung Street Hong Kong Island Li Yuen Street West Li Yuen Street East Queen s Road Central Rainbow Cosmetic outlet Tamar Street Harcourt Road Admiralty Centre Drake Street Hennessy Road Percival Street Cannon Street Lockhart Road Yee Wo Street Kai Chiu Road beauty centre Queensway Yun Ping Road 79
Details of the Rainbow Cosmetic outlets For the two years ended 31 October, 2000 and the four months ended 28 February, 2001, sales generated by the Rainbow Cosmetic outlets accounted for approximately 73.55 per cent., approximately 76.19 per cent. and approximately 68.70 per cent. of the turnover of Rainbow Group, respectively. With its headquarters in Chai Wan, Rainbow Group operated eight Rainbow Cosmetic outlets in Hong Kong as at the Latest Practicable Date, particulars of which are set forth below: RETAIL OUTLETS Approximate Approximate Approximate sales sales per sq.ft. sales per sq.ft. per sq.ft. for the Approximate for the year ended for the year ended four months ended Opening date retail space 31 October, 1999 31 October, 2000 28 February, 2001 (sq.ft.) (HK$) (HK$) (HK$) Kowloon 1. Shop No. 3, August 1994 429 32,372 23,825 6,454 Ground Floor, (2,698)* (1,985)* (1,614)* Tern Plaza, (Note 1) (Note 1) 5 Cameron Road, Tsimshatsui 2. Ground Floor, April 1997 977 28,913 25,574 6,305 58-60 Sai Yeung Choi Street (2,409)* (2,131)* (1,576)* South, Mongkok (Note 2) (Note 2) 3. Shop D, Ground Floor, September 2000 767 880 2,232 Wai Kee House, (Note 3) (558)* 64-70 Argyle Street, (Note 3) Mongkok 4. Ground Floor, April 2001 1,462 48-50 Sai Yeung Choi Street South, Mongkok * These are calculated on a monthly basis. Notes: 1. The decrease of approximately 26.43 per cent. in the average monthly sales per sq.ft. during the year ended 31 October, 2000 as compared to the previous year was mainly attributable to the noticeable reduction in tourists. Such business trend continued to persist with a decrease of 18.69 per cent. in the average monthly sales per sq.ft. during the four months ended 28 February, 2001. 2. The decrease of approximately 11.54 per cent. in the average monthly sales per sq.ft during the year ended 31 October, 2000 as compared to the previous year was mainly due to a fire accident occurred in May 2000. The accident disrupted the operation of the retail outlet for two months and adversely affected its retail business during the second half of the year ended 31 October, 2000 and also during the four months ended 28 February, 2001 with a decrease of approximately 26.04 per cent. in the average monthly sales per sq.ft. 80
3. This retail outlet commenced business operation in September 2000. RETAIL OUTLETS Approximate Approximate Approximate sales sales per sq.ft. sales per sq.ft. per sq.ft. for the Approximate for the year ended for the year ended four months ended Opening date retail space 31 October, 1999 31 October, 2000 28 February, 2001 (sq.ft.) (HK$) (HK$) (HK$) Hong Kong Island 5. Ground Floor, April 1996 1,077 32,457 26,059 7,819 10 Kai Chiu Road, (2,705)* (2,172)* (1,955)* Causeway Bay (Note 1) (Note 1) 6. Ground Floor, March 1998 842 21,022 15,851 3,625 518 Lockhart Road, (1,752)* (1,321)* (906)* Causeway Bay (Note 2) (Note 2) 7. Shop No. 7, May 2001 219 1,660 1st Floor, Podium of Admiralty Centre, 18 Harcourt Road, Central # 8. Ground Floor, October 1999 1,209 15,566 3,803 Parker House, (Note 3) (951)* 72 Queen s Road Central, Central * These are calculated on a monthly basis. # Being the new Rainbow Cosmetic outlet in Admiralty Centre commenced its business on 1 May, 2001. The lease in respect of the old Rainbow Cosmetic outlet at Shop No.33 on the Ground Floor of Podium of Admiralty Centre, 18 Harcourt Road, Central, expired in March 2001. The business of this Rainbow Cosmetic outlet was acquired by Jet Legend after the close of business on 31 December, 2000 as part of the Reorganisation. As such, only the turnover for the two-month period ended 28 February, 2001 was included in the financial results of Rainbow Group. Notes: 1. The decrease of approximately 19.70 per cent. in monthly sales per sq.ft. for the year ended 31 October, 2000 as compared to the previous year was mainly due to the disruption caused by the construction at the pedestrian walkway at Kai Chiu Road commenced in June 2000 for a period of two months. In addition, the Directors noticed that the removal of a nearby taxi stand at Kai Chiu Road since July 2000, as a result of the pedestrian construction, continued to foster adverse impact on the business of the retail outlet with a decrease of approximately 10 per cent. in the average monthly sales per sq.ft. during the four months ended 28 February, 2001. 2. The decrease of approximately 24.60 per cent. in sales per sq.ft. for the year ended 31 October, 2000 as compared to the previous year was mainly due to the disruption caused by the exterior renovation of the premises at which the retail outlet is located. The incident disrupted the business of the retail outlet for approximately six months since February 2000. Furthermore, there was road construction at Lockhart Road since August 2000 which continued to affect the business of the retail outlet during the four months ended 28 February, 2001 with a decrease of approximately 31.42 per cent. in the average monthly sales per sq.ft. 3. This retail outlet commenced its business operation in November 1999. 81
The Rainbow Cosmetic outlets are located in prime business locations with high pedestrian traffic in Hong Kong. Further details of the locations of the Rainbow Cosmetic outlets are set forth in the property valuation report in Appendix II to this prospectus. BEAUTY SERVICE BUSINESS In the light of the increasing demand for beauty services from a diverse clientele, Rainbow Group established its first beauty centre in Mongkok in April 1997. The Directors consider that Mongkok is one of the prime business locations in Hong Kong with high level of pedestrian traffic and maximum visibility for its retail business. As part of its strategic policy, Rainbow Group established another two beauty centres in Causeway Bay and Central in April 2000 and September 2000, respectively. The following sets forth the particulars of Rainbow Group s beauty centres in Hong Kong: Beauty centres Kowloon Opening date 1. 1st Floor, April 1997 60 Sai Yeung Choi Street South, Mongkok Hong Kong Island 2. 13th Floor, April 2000 Wellable Commercial Building, 513 Hennessy Road, Causeway Bay 3. Unit 901, 9th Floor, September 2000 54-56 Queen s Road Central, Central As at the Latest Practicable Date, Rainbow Group employed 19 beauticians, six of whom obtained diploma, certificates and/or equivalent creditation from beauty training institutions. These beauticians have an average of three years of experience in the beauty service business. In order to provide quality beauty services, Rainbow Group plans to invest in additional and advanced beauty-care equipment and technology. To complement the launch of its new and exclusive line of Nutriplus beauty products, Rainbow Group introduced Nutriplus skin-care treatment programmes to its customers in May 2001. For each of the two years ended 31 October, 2000 and the four months ended 28 February, 2001, income generated from the provision of beauty services by Rainbow Group accounted for approximately 0.82 per cent., approximately 1.51 per cent. and approximately 3.86 per cent. of the turnover of Rainbow Group, respectively. 82
WHOLESALE BUSINESS Rainbow Group also engages in the wholesale business of certain branded beauty products. Prior to the acquisition of all the business and assets of Rainbow Trading (including all debts and liabilities incurred in its ordinary course of business as recorded in its books of accounts as at completion) by Newide International which was completed after the close of business on 31 December, 2000 as part of the Reorganisation, the wholesale business of Rainbow Group was primarily carried out by Rainbow Cosmetic. Since that time, Rainbow Group has developed its wholesale business network with a number of local distributors and distributors in Japan. As part of the Reorganisation and Rainbow Group s strategic policy to develop the wholesale business of branded beauty products, Newide International was established in October 2000 to consolidate the wholesale business of Rainbow Group and acquire all the business and assets of Rainbow Trading (including all debts and liabilities incurred in its ordinary course of business as recorded in its books of accounts as at completion) with effect from the close of business on 31 December, 2000. The Directors believe that such acquisition will enhance the wholesale business of branded beauty products of Rainbow Group as a whole. The wholesale customers of Rainbow Group are principally beauty product wholesale agents and distributors. A geographical analysis of Rainbow Group s turnover attributable to the wholesale business for each of the two years ended 31 October, 2000 and the four months ended 28 February, 2001 is set forth below: Year ended 31 October, Four months ended 1999 2000 28 February, 2001 HK$ 000 % HK$ 000 % HK$ 000 % Hong Kong 28,446 86.10 24,072 85.58 9,880 91.35 Japan 4,593 13.90 4,055 14.42 936 8.65 33,039 100.00 28,127 100.00 10,816 100.00 SALES, MARKETING AND PROMOTION The Directors recognise the importance of the corporate and brand image to the development of Rainbow Group and believe that ongoing relationship with its customers is important. As part of its growth strategy to become one of the leading providers of beauty products and services in Hong Kong, Rainbow Group has established a marketing team which had four members as at the Latest Practicable Date. In order to increase the public awareness of Rainbow Group, it implemented extensive marketing and promotion programmes during the two years ended 31 October, 2000 and the four months ended 28 February, 2001, that consisted of the following: Corporate image advertising It is the strategy of Rainbow Group to promote its corporate image on a regular basis through different promotion channels including the placing of advertisements in magazines and newspapers and on television and radio. 83
For each of the two years ended 31 October, 2000 and the four months ended 28 February, 2001, Rainbow Group incurred approximately HK$3.04 million, approximately HK$2.52 million and approximately HK$0.64 million on advertising, which represented approximately 9.05 per cent., approximately 6.64 per cent. and approximately 4.54 per cent. of the selling and distribution expenses of Rainbow Group, respectively. Customer loyalty programme In September 1999, Rainbow Group launched the Rainbow membership programme for free which was designed to promote customer loyalty and stimulate purchases at the Rainbow Cosmetic outlets. Information and catalogues on beauty products available at the Rainbow Cosmetic outlets are provided to holders of the Rainbow membership card to keep them informed of the latest beauty products and any special promotional items. Holders of the Rainbow membership card may also enjoy a discount of five per cent. on all items (including discounted items) purchased at the Rainbow Cosmetic outlets. Rainbow Group had approximately 4,606 and approximately 9,343 holders of the Rainbow membership card as at 31 October, 2000 and 28 February, 2001, respectively. As at the Latest Practicable Date, there were approximately 11,000 holders of the Rainbow membership card. As part of the customer loyalty enhancement strategy, in October 2000, Rainbow Group engaged ISL to develop an internet website with the domain name of www.i-rainbow.com.hk, which provide online and updated information on special or new beauty products and services offered by Rainbow Group. The website of www.i-rainbow.com.hk was launched in June 2001. PRICING STRATEGY As a retailer and wholesaler of branded beauty products, competitive pricing is vital to Rainbow Group. Rainbow Group determines the retail prices of the beauty products with reference to the following factors: (i) (ii) (iii) (iv) the selling price guideline and discount range set by the suppliers; the prices set by its competitors; perceiving market trends; and Rainbow Group s pricing strategy set by its management. It is also Rainbow Group s practice to offer its customers selected beauty products at discounted prices as agreed between Rainbow Group and its suppliers from time to time. Rainbow Group also grants a bulk-purchase discount to its wholesale customers. In general, Rainbow Group does not charge a fixed profit margin for its retail and wholesale businesses. 84
PURCHASES Prior to the acquisition of all the business and assets of Rainbow Trading (including all debts and liabilities incurred in its ordinary course of business as recorded in its books of accounts as at completion) by Newide International which was completed after the close of business on 31 December, 2000 as part of the Reorganisation, members of Rainbow Group sourced beauty products primarily from Rainbow Trading which purchased beauty products directly from overseas distributors. Apart from the purchases from Rainbow Trading, Rainbow Group also sourced beauty products from approximately 350 local and overseas suppliers, which are Independent Third Parties. A geographical analysis of Rainbow Group s purchases for each of the two years ended 31 October, 2000 and the four months ended 28 February, 2001 is set forth below: Year ended 31 October, Four months ended 1999 2000 28 February, 2001 HK$ 000 % HK$ 000 % HK$ 000 % Hong Kong 87,096 100.00 82,985 100.00 24,213 88.82 Europe (1) 681 2.50 America (2) 2,367 8.68 87,096 100.00 82,985 100.00 27,261 100.00 Notes: (1) Italy and the Netherlands. (2) Canada and Uruguay. Rainbow Group s purchases from its five largest suppliers in aggregate accounted for approximately 69.71 per cent., approximately 73.08 per cent. and approximately 45.48 per cent. of its total purchases for each of the two years ended 31 October, 2000 and the four months ended 28 February, 2001, respectively. During the same period, purchases of Rainbow Group from Rainbow Trading, which is its largest supplier, accounted for approximately 65.01 per cent., approximately 66.72 per cent. and approximately 33.06 per cent. of Rainbow Group s total purchases, respectively. Of the purchases from Rainbow Trading for each of the two years ended 31 October, 2000 and the two months ended 31 December, 2000, approximately 29.61 per cent., approximately 13.83 per cent. and approximately 12.80 per cent., respectively, was attributable to Rainbow Trading s purchases from a company in Canada which is wholly owned by a brother of Ms. Aldy Li, being an associate of an Initial Management Shareholder and hence, a connected person (as defined in the GEM Listing Rules) of the Company. Following the acquisition by Newide International of all the business and assets (including all debts and liabilities incurred in its ordinary course of business as recorded in its books of accounts as at completion) of Rainbow Trading which was completed after the close of business on 31 December, 2000 as part of the Reorganisation, Newide International continued to purchase from such connected person in the amount of approximately HK$0.89 million, which represented approximately 3.26 per cent. of the total purchases of Rainbow Group for the two months 85