11:56 CHINA EAST AIR<00670> - Announcement (17) Annual caps Based on such historical figures, and the expected expansion and developments of the Enlarged Group's business following the Proposed Acquisition, the total amounts of commissions payable by the Company to the Sales Companies under the Sales Agency Services Agreements for the three financial years ending 31st December, 2005, 2006 and 2007 are not expected to exceed RMB77,116,000, RMB88,683,000 and RMB101,985,000, respectively, taking into account the anticipated gradual and organic growth of the Enlarged Group's business over these years. Accordingly, these amounts have been set as the proposed annual caps for this Continuing Connected Transaction. Advertising services Advertising Services Agreement The Advertising Company is a company principally engaged in the businesses of multi-media advertising operations, including advertising design and production, and organising promotional functions and campaigns. On 12th May, 2005, the Company entered into an Advertising Services Agreement with the Advertising Company, pursuant to which the Advertising Company will from time to time provide the Enlarged Group with multi-media advertising services to promote its business and to organise promotional functions and campaigns to enhance its reputation in the civil aviation industry. Term Subject to approval being obtained from the Independent Shareholders at the AGM, the Advertising Services Agreement will become effective from 1st July, 2005 for a term of three years, subject to renewal. Pricing Under the Advertising Services Agreements, the service fees payable to the Advertising Company for its services provided shall be based on prevailing market rates available from independent third-party service providers under comparable conditions. Such service fees shall be determined based on arm's length negotiations, and shall be no less favourable than those offered by the Advertising Company to independent third parties. The parties will perform an annual review of the then prevailing service fees before the 31st of December in each calendar year, and agree on any required adjustments to the service fees in respect of the next calendar year. At the beginning of each calendar year, the Company will pay the Advertising Company a lump sum representing its budgeted advertising expenses for that year, and the Advertising Company shall accordingly structure and carry out its advertising functions for the Enlarged Group, and shall offset its service fees from that sum deposited by the Company on a quarterly basis in arrears. Reasons for and benefits of the transaction The Directors believe that the entering into of the Advertising Services Agreement will be beneficial to the Enlarged Group and its future business pursuits, and in turn is believed to be conducive to the interests of the Company's shareholders. This is because advertising businesses are not the core competencies of the Enlarged Group while the Advertising Company is experienced in advertising operations and has a proven track record with an extensive network of advertising sponsors to draw upon. In addition, compared with other independent third-party service providers, the Advertising Company has, through its cooperation with the Group for the last consecutive eight years, secured a better understanding of the Enlarged Group's culture and operations, and thus the advertising functions procured by the Advertising Company for the Enlarged Group would better fit and cater to its public relations and marketing strategies. Further, the advertising functions of all members within the Enlarged Group will be centrally organised by the Advertising Company, which will, as is believed, be better managed and cost-effective. Historical figures The historical figures of the total service fees paid by the Group to the Advertising Company for each of the three financial years ended 31st December, 2002, 2003 and 2004 are approximately RMB4,857,000, RMB2,676,000 and RMB5,629,000, respectively. the two years ended 31 December 2004 are as follows: For the year ended For the year ended 31 December 2003 31 December 2004 Net profit (before taxation and extraordinary items) HK$19,151,000 HK$15,934,000 Net profit (after taxation and extraordinary items) HK$17,436,000 HK$15,168,000 The unaudited net asset value of Fuqing Plastics (prepared in accordance with Hong Kong GAAP) as at 31 December 2003 and 31 December 2004 is approximately HK$38,839,000 and HK$48,098,000 respectively. ii. Fuzhou Plastics Fuzhou Plastics is a limited liability company established in the PRC on 20 July 1995 with a registered capital of US$5,700,000 (equivalent to approximately HK$44,460,000). Fuzhou Plastics is principally engaged in the manufacture of plastic casings for computer related products. Prior to the completion of the Equity Transfer Agreement, Fuzhou Plastics is owned as to 16.25% by Chatex, as to 8.75% by Batco and as to 75% by Fuqing Plastics. The unaudited net loss of Fuzhou Plastics (prepared in accordance with Hong Kong GAAP) for the two years ended 31 December 2004 are as follows: For the year ended For the year ended 31 December 2003 31 December 2004 Net loss (before taxation and extraordinary items) (Note) HK$2,501,000 Net loss (after taxation and extraordinary items) (Note) HK$2,501,000 Note: The Group acquired its interests in Fuzhou Plastics in March 2004 and accordingly, the Group has not computed the earnings of Fuzhou Plastics for the year ended 31 December 2003 in accordance with Hong Kong GAAP for the purpose of consolidating its financial results with the Group. The audited net loss of Fuzhou Plastics (prepared in accordance with the GAAP of the PRC) for the year ended 31 December 2003 is RMB8,282,000 (before taxation and extraordinary items) and RMB8,282,000 (after taxation and extraordinary items). The audited net asset value of Fuzhou Plastics (prepared in accordance with the GAAP of the PRC) as at 31 December 2003 is approximately RMB18,132,000 and the unaudited net asset value of Fuzhou Plastics (prepared in accordance with Hong Kong GAAP) as at 31 December 2004 is approximately HK$25,800,000. iii. Wuhan Plastics Wuhan Plastics is a limited liability company established in the PRC on 5 November 2004 with a registered capital of RMB10,000,000 (equivalent to approximately HK$9,434,000). Wuhan Plastics is principally engaged in the manufacture of plastic casings for computer related products. Prior to the completion of the Equity Transfer Agreement, Wuhan Plastics is owned as to 16.25% by Chatex, as to 8.75% by Batco and as to 75% by Fuqing Plastics. Since the establishment of Wuhan Plastics in November 2004, Fuqing Plastics and Chatex have been owning 75% and 16.25% interests in Wuhan Plastics respectively. The unaudited net loss of Wuhan Plastics (prepared