Bloks Group Limited — Annual Report 2001

Jul 27, 2001

HONG KONG Pharmaceutical HOLDINGS LIMITED

(Incorporated in Bermuda with limited liability)

ANNOUNCEMENT OF RESULTS FOR THE YEAR ENDED

31 MARCH 2001

The Board of Directors (the "Board") of Hong Kong Pharmaceutical Holdings Limited (the "Company") announces the audited consolidated results of the Company and its subsidiaries (the "Group") for the year ended 31 March 2001, with comparative figures for the previous year, as follows:

2001 2000

Notes HK$'000 HK$'000

TURNOVER 1 39,006 27,566

Cost of sales (22,560 ) (14,360 )

Gross profit 16,446 13,206

Other revenue 6,818 114

Distribution costs (19,059 ) (11,992 )

Administrative expenses (13,086 ) (13,087 )

Reversal of provisions for doubtful receivables 3,000 12,262

Write back of accounts payable - 4,478

Other operating expenses (5,186 ) (2,849 )

PROFIT/(LOSS) FROM OPERATING ACTIVITIES 1, 2 (11,067 ) 2,132

Finance costs (5,869 ) (8,007 )

LOSS BEFORE TAX (16,936 ) (5,875 )

Tax 3 1,640 10

NET LOSS FROM ORDINARY ACTIVITIES

ATTRIBUTABLE TO SHAREHOLDERS (15,296 ) (5,865 )

LOSS PER SHARE 4

Basic (1.37) cents (5.27) cents

Diluted N/A N/A

Notes:

1. Turnover

Turnover represents the net invoiced value of goods sold, after allowance for returns and trade discounts and gross rental income received and receivable from investment properties after the elimination of all significant intra-group transactions, during the year.

Revenues from the following activities have been included in turnover:

Contribution to profit/(loss)

Turnover from operating activities

2001 2000 2001 2000

HK$'000 HK$'000 HK$'000 HK$'000

By activity:

Wholesale and retail of Chinese

and other medicines, health products

and dried seafoods 35,963 25,040 (8,986 ) (3,751 )

Property investment - rental income 2,597 2,526 2,286 2,165

Provision of Chinese clinical services 446 - (1,292 ) -

Others - - (3,075 ) 3,718

39,006 27,566 (11,067 ) 2,132

By geographical area:

People's Republic of China:

Hong Kong 38,982 27,566 (10,918 ) 2,148

Elsewhere 24 - (149 ) (16 )

39,006 27,566 (11,067 ) 2,132

2. Profit/(loss) from operating activities

The Group's profit/(loss) from operating activities is arrived at after charging/(crediting):

2001 2000

HK$'000 HK$'000

Depreciation:

Owned fixed assets 2,336 1,017

Leased fixed assets 178 158

2,514 1,175

Loss on disposal of investment properties - 1,020

Loss on changes in fair value of short term investments 2,689 -

Gain on disposal of short term investments (1,403 ) -

3. Tax

No provision for Hong Kong or overseas (including the People's Republic of China) tax has been made for the Group as it has no estimated assessable profits during the year (2000: Nil).

2001 2000

HK$'000 HK$'000

(Over)/underprovision in prior years (1,640 ) 6

Tax rebate - (16 )

Tax credit for the year (1,640 ) (10 )

There were no significant unprovided deferred tax liabilities in respect of the year (2000: Nil).

4. Loss per share

The calculation of the basic loss per share is based on the net loss from ordinary activities attributable to shareholders for the year of HK$15,296,000 (2000: HK$5,865,000), and the weighted average number of 1,119,928,205 (2000: 111,370,580) ordinary shares in issue during the year.

The calculation of the basic loss per share for the year ended 31 March 2000 has been adjusted to reflect the share consolidation during the year.

Diluted loss per share for the years ended 31 March 2001 and 2000 have not been presented because the effects of the assumed conversion of the share options and convertible notes of the Company during these years were anti-dilutive.

5. Dividend

The directors do not recommend the payment of any dividend for the year ended 31 March 2001 (2000: Nil).

Change of company name

The name of the Company was changed from "N P H International Holdings Limited" to Hong Kong Pharmaceutical Holdings Limited" on 3 October 2000. The Company has also adopted, for identification purpose, "香港葯業集團有限公司" as the new Chinese name of the Company to replace the former Chinese name "南北行國際集團有限公司"

Business Review and Prospect

In the year under review, trading conditions in the retail sector continue to be difficult and competitive. Despite these adverse factors, the Group's turnover for the year increased by 41% from approximately HK$27.6 million in 2000 to approximately HK$39 million owing to the continuing effort of the Group, to restructure and consolidate its traditional retail and wholesale operations. During the year, the Group continued to rationalize and expand its retail networks. The number of retail outlets have been increased to 14 and 3 Chinese medicine clinics have been established. With caution and close monitoring, and if market conditions permit, both the retail network and Chinese medicine clinic network will be further developed in the future. Though trading environment was competitive and loss was sustained for the year, rewards from the efforts of the turn-around and consolidating the traditional business are expected in the ensuing years.

The management is of the view that, though the retail business of traditional Chinese medicine and dried seafoods still has potential to explore, the present and future developments in the retail consumer market render proactive strategic planning necessary. To overcome dependancy and to respond to changes in the current retail market, the Group continues to identify and explore emerging markets and opportunities which offer high growth and return potential to shareholders. In this connection, the Group made significant strategic investment decisions during the year. As part of the Group's corporate strategy, the Group successfully acquired assets in the PRC that are conducive to transforming the Group into a leading biotech medicine conglomerate, equipped with R&D, manufacturing and distribution capability. The management is confident that these quality asset investments shall generate healthy and sustainable returns to shareholders in the ensuing years.

In March 2001, the Group acquired 57% equity interest in Shanghai Hua Xin High Biotechnology Inc. ("Hua Xin") for a consideration of HK$32,550,000. Hua Xin is the first and one of the largest biotechnology enterprises in China and the first high-technology enterprise founded by the Academicians of the Chinese Academy of Science (the Institute of Biochemistry and Cell Biology, Chinese Academy of Science is also one of its shareholders). Having eight drugs in the pipeline, Hua Xin is also the bio-engineering enterprise with the greatest number of bio-pharmaceutical products in production and prototype, in the PRC. The production of Interleukin-2 and Interferon a-2b has already commenced and two other drugs are scheduled to commence production in later part of 2001. The other four drugs, all at the advanced stage of clinical trial, are scheduled to be manufactured and distributed by 2003. Hua Xin is one of the 36 bio-engineering pharmaceutical enterprises in the PRC which have obtained the certificate of Good Manufacturing Practice (GMP) from the State Drug Administration.

The acquisition of Hua Xin enables the Group to successfully enter an emerging business with high margin - bio-pharmacy. The Group will establish Hua Xin as our flagship in the development of the high bio-technology business in the future and make the R&D, production and sales of high bio-technology pharmaceutical products as our core business.

During the year, the Group organized a transgenic pharmaceutical research and development centre - Yang Zhou Genetic Engineering Ltd. - with an associate company of Yangzhou University and has made capital contribution of approximately HK$10,000,000 in April 2001 to the project. The Group controls 50.82% of its equity interest (of which 16.39% equity interest is held on behalf of the Yangzhou Municipal Government of Jiangsu Province). The centre has two key laboratories - the animal embryo laboratory and molecular cloning laboratory, the transgenic technology and cloning technology developed by Yangzhou University. It is engaged in the R&D, production and sales of transgenic biological products, genetic medicine and gene therapy and the market potentials are tremendous. The centre has made outstanding achievements in scientific research and is in a leading position in the world. The project will further strengthen the R&D capabilities of the Group and provide synergy to Hua Xin.

The Group is actively looking for opportunities to acquire a retail networks for pharmaceutical products distribution in China and has made satisfactory progress. The Group intends to take advantage of the preferential policies for the development of Western region and is targeting to acquire a network with the license to expand nationwide and the certificate of GSP from the State Drug Administration in the PRC during 2001.

The Group also strives to identify other investment opportunities in medicine related projects with high-tech elements and good market potentials, with a view to achieving, as soon as possible, the aim of establishing the Group as a modern medical group embracing R&D, production and marketing functions.

The management believes that the bio-engineering technology industry enjoys the best prospect for high growth in the future and realizes that sufficient funding is needed to achieve our goal. For the purpose of business development, the Group keeps close contacts with various financial and strategic investors.

The management is confident that with the dedicated efforts of its staff and the close relations with its business partners, the Group will soon see sustained long term improvement in its business performance.

On behalf of the board of directors, I would like to offer my sincere thanks to all of the shareholders and clients for their appreciation and support and to the staff for their hard work and contributions.

Purchase, sale or redemption of listed securities of the Company

Other than the subscription of 800 million new shares at a price of HK$0.10 per share in April 2000 by Tin Ming Management Limited, a wholly owned subsidiary of Hong Tau Investment Ltd., the substantial shareholder of the Company, and the placement of 200 million new shares at a price of HK$0.10 per share and 134 million new shares at a price of HK$0.60 per share to independent investors in April and September 2000, respectively, neither the Company, nor any of its subsidiaries purchased, sold or redeemed any of the Company's listed securities during the year.

Code of Best Practice

In the opinion of the directors, the Company has complied with the Code of Best Practice as set out in Appendix 14 of the Listing Rules of The Stock Exchange of Hong Kong Limited ("Listing Rules") throughout the accounting period covered by the Annual Report, except that the independent non-executive directors of the Company are not appointed for specific terms and are subject to retirement by rotation and re-election at the annual general meeting of the Company in accordance with the provision of the Company's bye-laws.

Audit Committee

To comply with the revised Code of Best Practice as set out in Appendix 14 of the Listing Rules, on 1 December 1998, the Company set up an audit committee with written terms of reference for the purpose of reviewing and providing supervision of the financial reporting process and internal controls of the Group. The committee comprises two independent non-executive directors.

On behalf of the Board

Sun Hiu Lu

Chairman

Hong Kong, 26 July 2001

The detailed results containing all the information required by paragraph 45(1) to 45(3) of Appendix 16 to the Listing Rules will be published on the website of the Stock Exchange in due course.

NOTICE OF ANNUAL GENERAL MEETING

NOTICE IS HEREBY GIVEN that an Annual General Meeting of Hong Kong Pharmaceutical Holdings Limited (the "Company") will be held at Salon III, 1st Floor, The Harbour Plaza, 20 Tak Fung Street, Hung Hom, Kowloon, Hong Kong on Tuesday, 25 September 2001 at 10:00 a.m. for the following purposes:

1. To receive and adopt the audited consolidated financial statements and the reports of the Directors and auditors for the year ended 31 March, 2001.

2. To re-elect the retiring Directors and to authorise the board of Directors to fix the Directors' remuneration for the ensuing year.

3. To determine the maximum number of Directors and to authorise the board of Directors to appoint additional Directors up to the maximum number.

4. To appoint auditors of the Company for the ensuing year and to authorise the board of Directors to fix their remuneration.

5. As special business, to consider and, if thought fit, pass with or without amendments the following resolutions as ordinary resolutions and special resolution respectively:

ORDINARY RESOLUTIONS

(1) "THAT:

(a) subject to paragraph (c) below, the exercise by the Directors during the Relevant Period (as hereinafter defined) of all the powers of the Company to allot, issue and deal in additional shares of HK$0.10 each in the capital of the Company and to make or grant offers, agreements and options (including bonds, notes, warrants, debentures and securities convertible into shares of the Company) which would or might require the exercise of such powers be and is hereby generally and unconditionally approved;

(b) the approval in paragraph (a) above shall authorise the Directors during the Relevant Period (as hereinafter defined) to make or grant offers, agreements and options (including bonds, notes, warrants, debentures and securities convertible into shares of the Company) which would or might require the exercise of such powers after the end of the Relevant Period;

(c) the aggregate nominal amount of share capital allotted or agreed conditionally or unconditionally to be allotted (whether pursuant to an option or otherwise) and issued by the Directors pursuant to the approval in paragraph (a) above, otherwise than pursuant to (i) a Rights Issue (as hereinafter defined); (ii) the exercise of rights of subscription or conversion under the terms of any warrants issued by the Company or any bonds, notes, debentures or securities (including without limitation the exercise/conversion of the Bank Convertible Note (as hereinafter defined)); (iii) an issue of shares under any option scheme or similar arrangement for the time being adopted for the grant or issue to directors and/or employees of the Company and/or any of its subsidiaries of shares or rights of the Company; and (iv) an issue of shares as scrip dividend pursuant to the Bye-laws of the Company from time to time, shall not exceed 20% of the aggregate nominal amount of the share capital of the Company in issue as at the date of passing this Resolution and the said approval shall be limited accordingly; and

(d) for the purposes of this Resolution,

"Relevant Period" means the period from the passing of this Resolution until whichever is the earliest of:

(i) the conclusion of the next annual general meeting of the Company;

(ii) the expiration of the period within which the next annual general meeting of the Company is required by the Bye-laws of the Company or the laws of Bermuda or any other applicable law to be held; or

(iii) the date on which the authority set out in this Resolution is revoked or varied by an ordinary resolution of the shareholders in general meeting of the Company;

"Rights Issue" means an offer of shares open for a period fixed by the Directors to the holders of shares of the Company on the register on a fixed record date in proportion to their then holdings of such shares as at that date (subject to such exclusions or other arrangements as the Directors may deem necessary or expedient in relation to fractional entitlements or having regard to any restrictions or obligations under the laws of, or the requirements of any recognised regulatory body or any stock exchange in, any territory outside Hong Kong applicable to the Company); and

"Bank Convertible Note" means the convertible note in the principal amount of HK$40 million which may be convertible into shares of the Company issued by the Company to Sin Hua Bank Ltd., Hong Kong Branch (the "Bank") pursuant to the conditional subscription agreement dated 29 February, 2000 entered into between the Company and the Bank."

(2) "THAT:

(a) subject to paragraph (b) below, the exercise by the Directors during the Relevant Period (as hereinafter defined) of all the powers of the Company to repurchase shares of HK$0.10 each in the capital of the Company on The Stock Exchange of Hong Kong Limited (the "Stock Exchange"), or on any other stock exchange on which the Shares of the Company may be listed and recognised by the Securities and Futures Commission of Hong Kong and the Stock Exchange for this purpose, subject to and in accordance with all applicable laws and the requirements of the Rules Governing the Listing of Securities on the Stock Exchange, or of any other recognised stock exchange as amended from time to time, be and is hereby generally and unconditionally approved;

(b) the aggregate nominal amount of shares of the Company to be repurchased by the Company pursuant to the approval in paragraph (a) above shall not exceed 10% of the aggregate nominal amount of the share capital of the Company in issue as at the date of the passing of this Resolution and the said approval shall be limited accordingly; and

(c) for the purposes of this Resolution, "Relevant Period" means the period from the passing of this Resolution until whichever is the earliest of:

(i) the conclusion of the next annual general meeting of the Company;

(ii) the expiration of the period within which the next annual general meeting of the Company is required by the Bye-laws of the Company or the laws of Bermuda or any other applicable law to be held; or

(iii) the date on which the authority set out in this Resolution is revoked or varied by an ordinary resolution of the shareholders in general meeting of the Company."

(3) "THAT subject to the passing of Resolutions Nos. (1) and (2) set out in item 5 of the notice convening this meeting, the general mandate granted to the directors of the Company to allot, issue and deal in additional shares pursuant to Resolution No. (1) set out in item 5 of the notice convening this meeting be and is hereby extended by the addition thereto of an amount representing the aggregate nominal amount of shares in the capital of the Company repurchased by the Company under the authority granted pursuant to Resolution No. (2) set out in item 5 of the notice convening this meeting, provided that such amount of shares so repurchased shall not exceed 10% of the aggregate nominal amount of the share capital of the Company in issue as at the date of passing Resolution No. (2) set out in item 5 of the notice convening this meeting."

(4) "THAT subject to and conditional upon (i) the Listing Committee of The Stock Exchange of Hong Kong Limited granting approval of the share option scheme (the "Share Option Scheme") (a copy of the rules of which has been submitted to the meeting marked "A" and signed for identification by the chairman of the meeting) and any options which may be granted thereunder and the listings of and permission to deal in any shares of the Company ("Shares") falling to be issued pursuant to the exercise of any such options, and (ii) the expiry on 5 November, 2001 of the existing share option scheme adopted by the Company on 22 September 1997, the Share Option Scheme be and is hereby approved and adopted with effect from 6 November 2001 and the directors of the Company be and they are hereby authorised to grant options to subscribe for Shares thereunder and to allot, issue and deal with Shares pursuant to the exercise of options granted thereunder and to do all acts and things as they may consider necessary or expedient to implement the rules of the Share Option Scheme and to vote on any matter connected therewith in accordance with the bye-laws of the Company."

SPECIAL RESOLUTION

(5) "THAT subject to and conditional upon the approval of the Registrar of Companies in Hong Kong, the Chinese name of the Company "香港葯業集團有限公司" adopted by the Company on 25 September 2000 for identification purpose be adopted and registered as the Chinese name of the Company under Part XI of the Companies Ordinance with effect from 25 September, 2001."

By Order of the Board

Sun Hiu Lu

Chairman

Hong Kong 26 July, 2001

Notes:

1. Any member of the Company entitled to attend and vote at the annual general meeting (or at any adjournment thereof) is entitled to appoint one or more person(s) as his proxy to attend and vote instead of him. A proxy need not be a member of the Company.

2. To be valid, proxy form, together with any power of attorney or other authority (if any) under which it is signed or a notarially certified copy thereof, must be lodged with the Company's Share Registrars, Tengis Limited at 4th Floor, Hutchison House, 10 Harcourt Road, Central, Hong Kong not less than 48 hours before the time appointed for holding the annual general meeting (or any adjournment thereof).

3. Completion and return of the form of proxy will not preclude members from attending and voting at the annual general meeting (or at any adjournment thereof).

"Please also refer to the published version of this announcement in the Hong Kong i-mail"