2. STEPS TAKEN BY THE COMPANY FOLLOWING THE ISSUE OF THE REPORT

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1 东方天蝎控股有限公司 Scorpio East Holdings Ltd. 25 Tai Seng Ave, #06-01, Scorpio East Building, Singapore Tel: Fax: Co. Reg. No G UPDATE ON REPORT OF THE SPECIAL AUDITORS Unless otherwise defined, capitalised terms used in this announcement shall have the same meaning as defined in the Company s announcement dated 25 March 2011 ( Announcement ). 1. BACKGROUND OF THE SPECIAL AUDIT In March 2011, it came to the attention of the Audit Committee that several material contracts had been purportedly entered into and/or terminated by the Company and its subsidiaries (the Group ) without the approval or knowledge of the board of directors (the Board ). As such, the Audit Committee, following consultations with the Singapore Exchange Securities Trading Limited ( SGX ) and SAC Capital Private Limited (the Sponsor ), called for a trading halt in the Company s shares on 22 March Such trading halt was subsequently converted to a suspension of trading in the Company s shares on 25 March On 25 March 2011, the Board approved the appointment of Stone Forest Corporate Advisory Pte Ltd as its special auditors ( Special Auditors ) to ascertain the veracity of certain of the Group s transactions and balances with certain counterparties which have been entered into or terminated by the Group, and bank transactions in relation thereto, and further to review the circumstances leading to the formation and/or termination of such contracts. On 24 August 2011, the Audit Committee received the report of the Special Auditors on its findings in respect of the abovementioned transactions (the Report ). In compliance with the Company s disclosure obligations under Chapter 7 of the Listing Manual Section B: Rules Of Catalist on the Singapore Exchange Securities Trading Limited (the Catalist Rules ), a copy of the executive summary of the Report (the Executive Summary ) is annexed to this announcement. 2. STEPS TAKEN BY THE COMPANY FOLLOWING THE ISSUE OF THE REPORT 2.1 Disclosure of terminated contracts It was highlighted in the Executive Summary that the purported termination of the Scorpio Contracts (as defined in the Executive Summary) is significant to the Group and should have been disclosed by the Company in view of the significant value of the contracts. As no such disclosure was made, the Company had breached Rule 703 of the Catalist Rules. The Company sets forth below the contracts which were purportedly terminated by the Group subsequent to the disposal of 29.56% shareholdings in the Company by Mr. Ho Ah Huat (the former chief executive officer ( CEO ) of the Company from 24 November 2004 to 16 March 2011 and consultant to the Company from 17 March 2011 to 15 June 1

2 2011, and hereinafter referred to as Mr. Ho ), Ms. Lian Lee Lee, Mr. Lian Poh Heng and Mr. Lian Poh Chey on 14 March 2011: Item Title Deposit Scorpio Scorpio s Producers placed with Entity Consideration producers 1 笑傲江湖 SEPic Long Red Ltd US$1.8m US$ 0.4m 2 Dream Movie Kung Fu Chefs 2 SEPic Entertainment S$1.6m S$1.6m Overseas Ltd 3 永不消逝的电波 US$0.925m 4 美丽的事 US$1.08m 5 大明王朝之乱世 Speedy Video SEE Distributors 情场 Sdn Bhd US$0.975m US$1.25m 6 神枪手 US$0.975m 7 飞花如蝶 US$1.04m 8 Jay Chou 2012 Concert SEProd Long Red Ltd S$1.25m S$0.5m 9 Jay Chou 2012 Malaysia Concert SEProd Long Red Ltd S$1.25m S$0.5m Total US$6.795m + S$4.10m US$1.65m + S$2.60m Note: SEPic refers to Scorpio East Pictures Pte Ltd, a wholly owned subsidiary of the Company; SEE refers to Scorpio East Entertainment Pte. Ltd., a wholly owned subsidiary of the Company; SEProd refers to Scorpio East Productions Pte. Ltd., a 52.63% owned subsidiary of the Company. If the termination of the Scorpio Contracts is legally effective, then the Group expects that it will receive full refund of the deposits paid to the producers for the Jay Chou 2012 Concerts (item 8 and 9 in the table) and 85% of the deposits paid to the producers for items 1 to 7. The Scorpio Contracts were purportedly terminated by Mr. Ho and/or Mr. Hady Hartanto (the current non-executive director, and former executive director of the Company from 15 March 2011 to 19 August 2011, and hereinafter referred to as Mr. Hady ) without prior approval of the Board. For further details relating to the Special Auditors observations as regards the Scorpio Contracts including the circumstances leading to their purported termination, the areas of concerns and recommendations to the Company, shareholders of the Company (the Shareholders ) are advised to refer to section 2 of the Executive Summary. 2.2 Disclosure of contracts with Alpha Entertainment Group Pte Ltd It was highlighted in the Executive Summary that Scorpio East Pictures Pte Ltd. s purported entry into contracts with Alpha Entertainment Group Pte Ltd ( Alpha ) is material information that should have been disclosed by the Company in view of the significant consideration of such contracts. In view of the failure to disclose such information, Catalist Rule 703 had been breached. Accordingly, the Company wishes to announce that the following contracts, all dated 17 March 2011, were purportedly made between Alpha and SEPic: 2

3 (a) Co-Production and Investment Deal Memo for 2 feature-length motion pictures (the Memo ); (b) Entertainment Agreement to engage the services of an artiste group known as 2PM (the 2PM contract ); (c) Entertainment Agreement to engage the services of an artiste group known as WG (the WG contract ); (d) Entertainment Agreement to engage the services of an artiste group known as Miss A (the Miss A contract ); and (e) Entertainment Agreement to engage the services of an artiste group known as Honey (the Honey contract ); (collectively, the Alpha Contracts ). The consideration for the Memo amounted to S$1.4 million, while the consideration for each of the 2PM contract, WG contract, Miss A contract and Honey contract amounted to S$1.2 million. Alpha is a company incorporated on 23 July 2010 in the British Virgin Islands ( B.V.I. ). The CEO of Alpha is Mr. Alan Chan ( Mr. Chan ). Ms. Liu Woon San ( Liu ) and Ms. Jung Jin ( Jung ) are both the registered shareholders and directors of Alpha. Ms. Liu and Ms. Jung are the spouses of Mr. Chan and Mr. Low Shiong Jin ( Mr. Low ) respectively. Mr. Low was named in a regulatory action by the SGX issued on 13 April 2010, wherein SGX-listed companies are required to consult the SGX before the appointment of the named persons, including Mr. Low, as a director or member of its management. According to Mr. Chan, WG refers to the Korean girl group Wonder Girls consisting of 5 members. 2PM refers to a Korean boy group of 6 members. Miss A is a Korean girl group of 4 members. The Honey band comprises 6-7 girls aspiring to be singers. Alpha claims it is currently in the process of training the girls to be professional singers. According to Mr. Chan, the party contracting with Alpha to organise the concerts under the Entertainment Agreements (comprising the 2PM contract, the WG contract, the Miss A contract and the Honey contract), is a company named 3R China Limited ( 3R China ). 3R China is a B.V.I. company, incorporated on 17 December Both Alpha and 3R China are newly incorporated companies with no apparent track record in the entertainment industry to organise concerts as at the date of the Entertainment Agreements. Alpha also does not have any track record in the production of movies. The Alpha Contracts were signed by Mr. Hady without prior approval of the Board or any form of due diligence exercise on Alpha, including its financial standing. The Special Auditors were unable to confirm the veracity of the Alpha Contracts. For further details relating to the Special Auditors observations as regards the Alpha Contracts, including the circumstances leading to their purported formation, the areas of concerns and recommendations of the Special Auditors to the Company, the Shareholders are advised to refer to section 3 of the Executive Summary. 2.3 Disclosure of round tripping transactions connected to the purported cancellation of the Scorpio Contracts and the purported formation of the Alpha Contracts 3

4 As set out in section 4 of the Executive Summary, several round-tripping transactions occurred on 17, 18 and 21 March 2011 between the Scorpio Entities and Alpha. An aggregate sum of S$3.2 million was transferred by way of telegraphic transfer to Alpha by the Scorpio Entities while an aggregate sum of S$2.86 million cash was transferred to the Scorpio Entities by Alpha. These transactions were effected purportedly in connection with the purported cancellation of the Scorpio Contracts and the purported formation of the Alpha Contracts. Having reviewed the accounting ledgers of the Scorpio Entities, the Special Auditors noted that the receipt of S$2.86 million had been recorded as refund of deposits/investments from the producers (of the Scorpio Contracts). This was done in spite of the fact that the amounts under reference had not actually been received from the producers. As set out section 4.4 of the Executive Summary, the round-tripping scheme was conceived by Mr. Low. For more details relating to the Special Auditors observations as regards the aforesaid round tripping transactions, the areas of concerns and recommendations of the Special Auditors of the Company, the Shareholders are advised to refer to section 4 of the Executive Summary. 2.4 Proposed investment and due diligence The Special Auditors also observed that Mr. Hady had been in discussions on (i) a proposed investment in Alpha, which involved the acquisition of a 51% stake in Alpha; and (ii) a proposed transfer of S$3 million into the client s account of JLC Advisors LLP, a firm of solicitors. For the purpose of the proposed acquisition of the 51% stake in Alpha, two cheque payments in relation to a refundable deposit of S$300,000 were prepared for Ms. Liu and Ms. Jung, the registered shareholders of Alpha. Although the proposed investment in Alpha and the proposed transfer of S$3 million were not carried through, the Executive Summary highlighted certain corporate governance and due diligence issues surrounding this proposed investment as well as the role played by Mr. Low. For more details relating to the Special Auditors observations as regards the aforesaid proposed investment in Alpha, the areas of concerns and recommendations of the Special Auditors of the Company, the Shareholders are advised to refer to section 5 of the Executive Summary. 2.5 Further action The Company is seeking legal advice on the findings contained in the Report, including (i) its rights and obligations in respect of the Scorpio Contracts and the Alpha Contracts; (ii) the conduct or misconduct of various individuals named in the Report; and will take such steps and actions as may be advised to protect the interests of the Shareholders and the Group. In the Report, the Special Auditors recommend that the Company should seek legal advice on whether the matters described in the Report should be referred to the relevant authorities. The Company is also seeking legal advice on this issue. When appropriate or required, the Company will make announcements to keep the Shareholders appraised. 4

5 2.6 Legal representation Allen & Gledhill LLP has been appointed to act for and assist the Company in respect of all legal matters arising from or relating to the Report, and any legal or regulatory proceedings in connection therewith. 2.7 Changes to the Board and key management Mr. Wong Teck Yenn ( Mr. Wong ) tendered his resignation as a non-executive director of the Company on or about July 2011 but decided to withdraw his resignation pending the release of the Report. The Company and Mr. Wong agreed that his resignation as a non-executive director of the Company will become effective from the date of this announcement. On 19 August 2011, Mr. Hady requested to step down as an executive director of the Company. Mr. Hady has been re-designated as a non-executive director of the Company with effect from 19 August The Board has directed the Nominating Committee to review the findings of the Report in relation to Mr. Hady s suitability for continued service as a director of the Group and make its recommendations to the Board. The Nominating Committee has embarked on an urgent recruitment drive to find a suitable CEO and a chief operating officer ( COO ) for the Company. To-date, the Nominating Committee has received and considered the curricula vitae of several potential candidates, but no appointments have been made. The Nominating Committee will make such recommendations to the Board in accordance with the terms of reference of the Nominating Committee. Mr KN Lim tendered his resignation as the financial controller of the Group on 29 June 2011 and his last day of service is 30 September The Nominating Committee will also proceed to identify a suitable replacement. 2.8 Interim measures As stated in the Board s announcement of 23 August 2011, two independent directors of the Company, Mr. Yee Kit Hong and Mr. Ko Chuan Aun, will, pending the appointment of a CEO, temporarily oversee the day-to-day activities of the Group so as to ensure that there is as little disruption as possible to the business and affairs of the Group. Further to the Company s announcement on 25 March 2011 in respect of the interim measures mentioned therein, and taking into consideration the current management structure, the Board will undertake to continue the interim measures previously announced on 25 March In addition, pending the appointment of a CEO, the Board will meet as frequently as necessary for board members to play a more proactive monitoring role. 2.9 Corporate Governance/Internal Audit The Audit Committee has considered the findings and recommendations of the Special Auditors and will recommend to the Board to retain a suitable consulting firm to assist the Board in reviewing the Group s internal control and risk management system. The Board will give priority to addressing any operational issues of the Group, including taking the appropriate actions in respect of the Scorpio Contracts and the Alpha Contracts and the appointment of a CEO, COO and CFO. 3. EXISTING BUSINESS 5

6 As highlighted in Section 2.13(a) of the Executive Summary, the Scorpio Contracts, taken together, were significant investments undertaken by the Group, and more importantly, they were the main potential source of revenue for the Group. Excluding the Alpha Contracts, the Group s other key business includes the distribution of videos and movies in Singapore. 4. TRADING SUSPENSION In light of the findings of the Special Auditors, the Company has decided that trading of its shares will, for the time being, continue to be suspended as the Company is currently still unable to reasonably assess its state of affairs and financial condition due to the following:- a) the potential financial impact on the Group, in particular, the continued availability of credit facilities, following the release of the findings of the Special Auditors; and b) the uncertainties surrounding the future prospect and conduct of the Group s businesses in the absence of key personnel following the: (i) stepping down of the 2 Executive Directors (Mr. Hady and Mr. Wong on 19 August 2011 and 3 May 2011 respectively), the resignations of the past Executive Directors (Mr. Ho and Ms. Lian Lee Lee) and Executive Officers (Mr. Teo Choong Nan (Head of Rental Licensing) and Ms. Adeline Low Li Pheng (Director of Events)) (ii) the entry into of the Alpha Contracts and (iii) the cancellation of the Scorpio Contracts. As mentioned in paragraph 2.6 above, priority will be given to addressing any operational issues of the Group, including taking the appropriate actions in respect of the Scorpio Contracts and the Alpha Contracts and the appointment of a CEO, COO and CFO so as to enable the suspension in the trading of the Company s shares to be lifted as soon as practicable. The directors will continue to take all necessary action in the best interest of the Shareholders and the Group. In this regard, further announcements to update Shareholders will be made as and when appropriate. By order of the Board Yee Kit Hong Non-Executive Independent Director and Audit Committee Chairman 7 September 2011 This announcement has been prepared by the Company and its contents have been reviewed by the Company s Sponsor, SAC Capital Private Limited, for compliance with the relevant rules of the Singapore Exchange Securities Trading Limited (the Exchange ). The Company s Sponsor has not independently verified the contents of this announcement. This announcement has not been examined or approved by the Exchange and the Exchange assumes no responsibility for the contents of this announcement, including the correctness of any of the statements or opinions made or reports contained in this announcement. The contact person for the Sponsor is Mr. Bernard Lim (Telephone: ) at 79 Anson Road #15-03 Singapore