Bloks Group Limited — Annual Report 2006

Aug 18, 2006

Hong Kong Pharmaceutical Holdings Limited 香港葯業集團有限公司[*]

(Provisional Liquidators Appointed)

(Incorporated in Bermuda with limited liability)

(Stock Code: 182)

FINAL RESULTS FOR THE YEAR ENDED 31 MARCH 2006

The Provisional Liquidators (the “Provisional Liquidators”) of Hong Kong Pharmaceutical Holdings Limited (the “Company”) announces the audited consolidated annual results of the Company and its subsidiaries (the “Group”) for the year ended 31 March 2006 (the “Period”), together with comparative figures for the corresponding period in 2005.

CONSOLIDATED INCOME STATEMENT

For the year ended 31 March 2006

Note Turnover 6 Cost of sales Gross profit Other revenue 6 Selling and distribution costs Administrative expenses Other operating expenses Profit/(loss) from operating activities 7 Finance costs 8 Gain on deconsolidation of a subsidiary 9 Profit/(loss) before tax Tax 10 Profit/(loss) for the year Attributable to:– Equity holders of the Company Minority interests Profit/(loss) for the year 11 Earnings/(loss) per share – basic 12 CONSOLIDATED BALANCE SHEET As at 31 March 2006 Non-current assets Property, plant and equipment Investment property Interests in associates Investments in securities Current assets Inventories Trade receivables Prepayments, deposits and other receivables Due from intermediate holding companies Cash and cash equivalents	For the year ended 3 2006 HK$’000 49,323 (30,333) 18,990 18,354 (15,768) (5,366) (894) 15,316 (5,903) – 9,413 – 9,413 9,413 – 9,413 0.67 cents 2006 HK$’000 716 835 – – 1,551 5,810 368 22,695 – 751 29,624	1 March 2005 HK$’000 62,929 (34,421) 28,508 1,538 (19,304) (16,004) (8,048) (13,310) (7,098) 16,686 (3,722) (1) (3,723) (3,723) – (3,723) (0.27)cents 2005 HK$’000 623 835 – 10,460 11,918 5,486 1,274 4,424 – 3,174 14,358

– 1 –

Current liabilities

Trade payables Tax payable Other payables and accruals Bank and other borrowings Provision for long service payments Net current liabilities Total assets less current liabilities Non-current liabilities Finance lease payables Provision for long service payments Net liabilities Capital and reserves Issued capital Reserves Deficit attributable to equity holders of the Company Minority interests Total deficit	9,771 651 55,714 42,401 88 108,625 (79,001) (77,450) – 308 308 (77,758) 140,379 (218,137) (77,758) – (77,758)	10,500 651 47,499 54,268 186 113,104 (98,746) (86,828) 1 342 343 (87,171) 140,379 (227,550) (87,171) – (87,171)

Notes:

1. BASIS OF PREPARATION

At 31 March 2006, the Group had consolidated net current liabilities of approximately HK$79,001,000 (2005: consolidated net current liabilities of approximately HK$98,746,000) and consolidated net liabilities of approximately HK$77,758,000 (2005: HK$87,171,000). The Group however generated a profit attributable to equity holders of the Company for the year ended 31 March 2006 of approximately HK$9,413,000 (2005: net loss of HK$3,723,000) and reported a decrease in cash and cash equivalents for the year ended 31 March 2006 of approximately HK$2,423,000 (2005: HK$1,450,000). Notwithstanding the adverse financial position of the Group as at 31 March 2006, the Provisional Liquidators have prepared these financial statements on a going concern basis as they believe that there are good prospects that the Restructuring Proposal as outlined below can be successfully implemented. The Group and the Company would not be a going concern at the balance sheet date if the Restructuring Proposal is not successfully implemented.

On 23 December 2004, the Provisional Liquidators entered into an escrow and exclusivity agreement (the “Exclusivity Agreement”) with a preferred investor (the “Investor”) regarding the implementation of a restructuring proposal for the Company (the “Restructuring Proposal”).

On 7 September 2005, a restructuring agreement was entered into by the Company and the Investor for the implementation of the Restructuring Proposal. A subscription agreement was also entered into by the Company, the Provisional Liquidators and the Investor pursuant to which the Investor has agreed to subscribe for and the Company has agreed to issue and allot the subscription shares and the subscription preference shares.

The Proposed Restructuring, if successfully implemented, will, among other things, result in:

(i) a restructuring of the share capital of the Company through par value reduction, share consolidation and increase in authorised share capital as contained in the capital restructuring;

(ii) all the creditors of the Company discharging and waiving their claims against the Company by way of schemes of arrangements under section 166 of the Hong Kong Companies Ordinance and section 99 of the Bermuda Companies Act (“Schemes”);

(iii) the entire interest of the Company in its dormant or insolvent subsidiaries being transferred to a nominee of the scheme administrators of the Schemes for a nominal consideration; and

(iv) the resumption of trading in the new shares of the Company upon completion of the proposed restructuring (“Completion”) subject to sufficient public float being restored.

Having reviewed and considered the operations and affairs of the Company and its subsidiaries, the magnitude of the claims against the Company and the second stage delisting procedures, the Provisional Liquidators concluded that the proposed restructuring represents the best means available for the Company to be returned to solvency and to continue with the development and enhancement of its business. As at the date of this report, the Provisional Liquidators have received in-principle support from creditors representing more than 75% of the total indebtedness of the Company.

A document containing, inter alia, details of the Restructuring Proposal and a notice convening the first Special General Meeting (“First SGM”) was despatched to the Shareholders on 20 February 2006.

At the First SGM held on 14 March 2006, the resolutions proposed to approve the Ensure Settlement and the Hua Xin Disposal were passed but the other resolutions were voted down by the Independent Shareholders. The results of the First SGM were announced on 9 June 2006. However, since the First SGM and up to the Latest Practicable Date, despite comments by various parties, no alternative proposal to restructure the Company has been forthcoming.

Since the First SGM, having realised that there is no alternative proposal and the outcome will be the winding up of the Company, certain major Shareholders have written to the Provisional Liquidators requesting, pursuant to the bye-laws of the Company, that the Provisional Liquidators convene a new special general meeting. The Provisional Liquidators have received requests from Shareholders representing over 65% of the existing issued share capital of the Company in aggregate to convene a new special general meeting to reconsider the Restructuring Proposal.

Should the Group be unable to achieve a successful restructuring and continue in business as a going concern, adjustments would have to be made to restate the values of assets to their recoverable amounts, to provide for any further liabilities which might arise and to reclassify non-current assets and liabilities as current assets and liabilities, respectively.

2. ACCOUNTING POLICIES

The consolidated financial statements for the year ended 31 March 2006 have been prepared in accordance with all applicable Hong Kong Financial Reporting Standards (“HKFRSs”), which term collectively includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (“HKASs”) and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”), accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance. These financial statements also comply with the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited.

During the current year, the Group has adopted the new and revised HKFRSs, HKASs and Interpretations, issued by the HKICPA, which are effective for accounting periods commencing on or after 1 January 2005. The adoption of the new and revised HKFRSs and HKASs has had no material impact on the accounting policies of the Group and the Company and the methods of computation in the Group’s and the Company’s financial statements.

Up to the date of these financial statements, HKICPA has issued amendments, new standards and interpretations which are not yet effective for the accounting period ended 31 March 2006 and which have not been adopted in these financial statements. The Group is in the process of making an assessment of what the impact of these amendments, new standards and interpretations is expected to be in the period of initial application. So far it has concluded that the adoption of these amendments, new standards and interpretations is unlikely to have a significant impact on the Group’s results of operations and financial position.

– 2 –

3. DISPOSAL OF SUBSIDIARIES

Two of the Group’s subsidaries, Guizhou Ensure Chain Pharmacy Company Limited and Guizhou Ensure Medical Company Limited (collectively the “Ensure subsidiaries”) which are held via Joinbest Investment Limited (“Joinbest”), were deconsolidated as of 31 March 2004.

On 14 June 2005, the Provisional Liquidators agreed to dispose of the Group’s 100% equity interest in Joinbest to the minority shareholders of the Ensure subsidiaries and completion for the disposal was on 5 October 2005, realising a gain of approximately HK$4 million. Consideration for the disposal consisting of cash in the amount of HK$3,000,000 and cancellation of the Company’s convertible notes in the amount of HK$12,254,400 was received in October 2005 following sanction of the disposal by the High Court.

One of the Group’s subsidiaries, Shanghai Hua Xin Biotechnology Inc. (“Hua Xin”) is a Sino-foreign co-operative joint venture company established in Mainland China and acquired by the Group in 2001, with an operating period of 45 years commencing from 19 January 1993, was deconsolidated as of 30 November 2004.

Pursuant to an agreement dated on 15 November 2005, which was completed on 8 February 2006, the Provisional Liquidators sold the Group’s 57% equity interest in Hua Xin for a consideration of HK$15 million realising a gain on disposal of approximately HK$13.6 million. The disposal of Hua Xin also involves an assignment of debts to a third party of approximately (i) HK$31.26 million owing by Hua Xin to the Company, and (ii) HK$0.58 million owing by Hua Xin’s immediate holding company to a fellow subsidiary.

4. DIVIDENDS

The Provisional Liquidators do not recommend payment of any dividend for the year ended 31 March 2006 (2005: Nil).

5. SEGMENT INFORMATION

(a) Business segments

The following table presents revenue, profit/(loss) and certain asset, liability and expenditure information for the Group’s business segments.

Group

Sum yung and Biotechnological and pharmaceutical products transgenic products 2006 2005 2006 2005 HK$’000 HK$’000 HK$’000 HK$’000 Segment revenue: Sales to external customers 47,637 52,202 – 8,238 Intersegment sales 274 177 – – Other revenue 54 87 – 387 Total 47,965 52,466 – 8,625 Segment results (430) 151 – (960) Interest and dividend Income Unallocated revenue Unallocated expenses Profit/(loss) from operating activities Finance costs Gain on deconsolidation of a subsidiary Profit/(loss) before tax Tax Profit/(loss) for the year Minority interests Profit/(loss) attributable to equity holders of the Company Segment assets 9,117 11,319 – – Unallocated assets Total assets Segment liabilities 6,548 8,215 – – Unallocated liabilities Total liabilities Other segment information: Depreciation 512 867 – 115 Impairment losses included in the income statement – – – 19 Capital expenditure 643 261 – 19 Other non-cash Expenses 144 343 – 1,380 (b) Geographical segments The following table presents revenue and certain asset and expenditure information for Hong Kong 2006 2005 HK$’000 HK$’000 Segment revenue: Sales to external customers 49,200 54,627 Other segment information: Segment assets 30,337 25,281 Capital expenditure 646 254	Property inv 2006 HK$’000 123 – – 123 (15) 36 199 2 – – 123 the Group’s Mai 2006 HK$’000 123 838 –	estment Corporate an 2005 2006 HK$’000 HK$’000 1,261 1,563 – – – 17,592 1,261 19,155 (4,815) 15,053 986 22,022 194 59,785 5 29 – – – 3 4,376 711 geographical segments. nland China 2005 HK$’000 H 8,302 995 26	d others 2005 HK$’000 1,228 26 239 1,493 8,175 13,971 50,723 114 – – 1,592 Elimi 2006 K$’000 – – –	Eliminat 2006 HK$’000 – (274) – (274) nations 2005 HK$’000 – – –	ions Consolida 2005 2006 HK$’000 HK$’000 – 49,323 (203) – – 17,646 (203) 66,969 14,608 708 – – 15,316 (5,903) – 9,413 – 9,413 – 9,413 31,175 – 31,175 66,532 42,401 108,933 543 – 543 646 978 Consolida 2006 HK$’000 49,323 31,175 646	ted 2005 HK$’000 62,929 – 713
						63,642
						2,551 825 (16,686) –
						(13,310) (7,098) 16,686
						(3,722) (1)
						(3,723) –
						(3,723)
						26,276 –
						26,276
						59,132 54,315
						113,447
						1,101 19
						1,120
						280 7,691
						ted 2005 HK$’000 62,929 26,276 280

6. TURNOVER AND OTHER REVENUE

Turnover represents the net invoiced value of goods sold, after allowances for returns and trade discounts; the value of services rendered; and gross rental income received and receivable from investment properties during the year.

An analysis of turnover and other revenue is as follows:

Turnover Sale of sum yung and pharmaceutical products Sale of biotechnological and transgenic products Property investment – gross rental income Others Other revenue Gain on disposal of subsidiaries Interest income Dividend income from listed investments Others	Group 2006 2005 HK$’000 HK$’000 48,890 53,056 – 8,238 123 1,261 310 374 49,323 62,929 17,589 – 708 823 – 1 57 714 18,354 1,538	Group 2006 2005 HK$’000 HK$’000 48,890 53,056 – 8,238 123 1,261 310 374 49,323 62,929 17,589 – 708 823 – 1 57 714 18,354 1,538
		62,929
		– 823 1 714
		1,538

– 3 –

7. PROFIT/(LOSS) FROM OPERATING ACTIVITIES

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

The Group’s profit/(loss) from operating activities is arrived at after charging/(crediting):
		Group
	2006		2005
	HK$’000		HK$’000
Cost of inventories sold	29,989		34,017
Cost of services provided	344		317
Depreciation	543		1,094
Impairment of property, plant and equipment	–		19
Research and development expenditure*	–		795
Minimum lease payments under operating
leases in respect of land and buildings	5,604		7,615
Auditors’ remuneration	286		570
Staff costs (excluding directors’ remuneration)
Wages and salaries	8,260		10,856
Pension scheme contributions**	428		920
Bad debts written off	–		574
Gain on disposal of subsidiaries	(17,589)		–
Loss on disposal of property, plant and equipment, net	10		3,407
Provision for doubtful trade receivables	24		–
Provision for prepayments and other receivables	229		648
Provision for amount due from a director	–		160
Provision for obsolete and slow-moving inventories	–		99
Provision for amounts due from intermediate
holding companies, net	334		1,008
Provision for pending litigation	–		856
Loss on disposal of short term listed investments	–		8
Deficit on revaluation of investment property	–		365
Exchange losses, net	7		18
Net rental income	(123)		(1,174)
Dividend income from listed investments	–		(1)
Interest income	(708)		(823)

• The amortisation of goodwill, impairment in value of long term unlisted investment, impairment of deferred development costs, and research and development expenditure were included in “Other operating expenses” on the face of the consolidated income statement.

** At 31 March 2006, the Group had no significant forfeited contributions available to reduce its contributions to the pension scheme in future years (2005: Nil).

8. FINANCE COSTS

Interest on bank loans and other borrowings wholly repayable within five years Interest on finance leases GAIN ON DECONSOLIDATION OF A SUBSIDIARY Shanghai Hua Xin High Biotechnology Inc.	Group 2006 2005 HK$’000 HK$’000 5,898 7,076 5 22 5,903 7,098 2006 2005 HK$’000 HK$’000 – 16,686	Group 2006 2005 HK$’000 HK$’000 5,898 7,076 5 22 5,903 7,098 2006 2005 HK$’000 HK$’000 – 16,686
		7,098
		2005 HK$’000 16,686

9. GAIN ON DECONSOLIDATION OF A SUBSIDIARY

The subsidiary was deconsolidated as of 30 November 2004 and disposed of pursuant to an agreement dated on 15 November 2005 which was completed on 8 February 2006. Details of the deconsolidation are set out in Note 19 to the financial statements.

10. TAX

No Hong Kong profits tax has been provided as the Group did not generate any assessable profits arising in Hong Kong during the year (2005: Nil). Taxes on profits assessable elsewhere have been calculated at the rates of tax prevailing in the countries in which the Group operates, based on existing legislation, interpretations and practices in respect thereof.

Tax charge elsewhere for the year A reconciliation of tax expense applicable to profit/(loss) before tax using the statutory rates for the countries in which the Company and its su effective tax rates are as follows: Profit/(loss) before tax Tax at the applicable tax rates of 17.5% (2005: 17.5%) Income not subject to tax Expenses not deductible for tax Tax loss not recognised Tax charge Details of unrecognised deferred tax assets at the balance sheet date are as follows:– Excess of tax allowance over depreciation Tax losses	Group 2006 2005 HK$’000 HK$’000 – 1 bsidiaries are domiciled to the tax expense at the Group 2006 2005 HK$’000 HK$’000 9,413 (3,722) 1,647 (651) (3,223) (108) 228 (902) 1,348 1,662 – 1 Group 2006 2005 HK$’000 HK$’000 (143) (261) (34,333) (32,985) (34,476) (33,246)	Group 2006 2005 HK$’000 HK$’000 – 1 bsidiaries are domiciled to the tax expense at the Group 2006 2005 HK$’000 HK$’000 9,413 (3,722) 1,647 (651) (3,223) (108) 228 (902) 1,348 1,662 – 1 Group 2006 2005 HK$’000 HK$’000 (143) (261) (34,333) (32,985) (34,476) (33,246)
		(33,246)

No deferred tax asset has been recognised due to the unpredictability of future profit streams.

11. PROFIT/(LOSS) ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY

The profit attributable to equity holders of the Company for the year ended 31 March 2006 dealt with in the financial statements of the Company is approximately HK$9,822,000 (2005: net loss of HK$36,737,000).

12. EARNINGS/(LOSS) PER SHARE

The calculation of basic earnings per share is based on the profit attributable to equity holders of the Company for the year of approximately HK$9,413,000 (2005: net loss of HK$3,723,000), and the weighted average number of 1,403,796,698 (2005: 1,403,796,698) ordinary shares in issue during the year.

Diluted earnings/loss per share amounts for the years ended 31 March 2006 and 2005 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.

– 4 –

DETAILS OF AUDITORS’ QUALIFICATION

Basis of opinion

We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”), except that the scope of our work was limited as explained below. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the Provisional Liquidators in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company’s and the Group’s circumstances, consistently applied and adequately disclosed.

We planned our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. However the evidence available to us was limited as set out in detail in the following paragraphs.

As more fully explained in Note 2 to the financial statements, dealing in the Company’s shares on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) has been suspended since 5 August 2004. On 13 October 2004 the High Court of Hong Kong (“the Court”) appointed Mr. Cosimo Borrelli and Mr. Kelvin Flynn both of Alvarez & Marsal Asia Limited as joint and several provisional liquidators (the “Provisional Liquidators”) of the Company. On 23 December 2004, the Provisional Liquidators, the Company and a potential investor (the “Investor”) entered into an exclusivity agreement regarding the implementation of a restructuring proposal (the “Restructuring Proposal”).

The Restructuring Proposal is subject to the approval of all relevant parties, including the regulatory authorities, creditors and shareholders. The implementation of the Restructuring Proposal is also subject to the grant of a Whitewash Waiver from the Executive Director of the Securities and Futures Commission under the Hong Kong Code on Takeovers and Mergers from the obligations to make a general offer for all the shares in the Company not already owned by the Investor and parties acting in concert with it.

The Rules Governing the Listing of Securities issued by the Stock Exchange require, inter alia, that companies whose shares are listed on the Stock Exchange submit audited financial statements to shareholders within 4 months of the balance sheet date. However, the audit of the final results of the Company and its subsidiaries for the year ended 31 March 2006 was necessarily delayed while the Restructuring Proposal was being finalised.

We were appointed auditors on 16 February 2005. The Provisional Liquidators were appointed on 13 October 2004 pursuant to an Order of the High Court. Upon the appointment of the Provisional Liquidators, the powers of the directors were suspended with regard to the affairs and business of the Company. As further set out in Note 2 to the financial statements, the Provisional Liquidators have not been able to provide us with all the information that we required in relation to our audit for the year ended 31 March 2006. In consequence, we were unable to carry out all of the auditing procedures necessary to obtain adequate assurance regarding the assets, liabilities, income and expenses appearing in the financial statements. There were no satisfactory audit procedures that we could adopt to obtain sufficient evidence regarding the accuracy and completeness of the assets, liabilities, income and expenses of the Company and the Group.

We refer to Note 2 to the financial statements which indicates that the Restructuring Proposal was originally voted down at the SGM held on 14 March 2006. Following the outcome of the SGM on 14 March 2006, the completion of the restructuring scheme has been delayed. Correspondingly, additional restructuring costs have been incurred which are considerably higher than initially anticipated. Due to the uncertainty surrounding the completion of the restructuring scheme and discussions with the Investor to structure a revised costs arrangement, the commencement of the audit process (which includes the auditors attending the stocktake) was delayed. As a result, we were not instructed to attend the year-end stocktake. In consequence we were unable to carry out auditing procedures necessary to obtain adequate assurance regarding the quantities and condition of inventories, appearing in the balance sheet at HK$5,810,000. There were no other satisfactory audit procedures that we could adopt to obtain sufficient evidence regarding the existence and value of inventories. Any adjustment to the figure may have consequential significant effect on the profit for the year and net liabilities at 31 March 2006.

Fundamental uncertainties relating to the basis of preparation of financial statements and contingent liabilities

(i) Basis of preparation of financial statements

As more fully disclosed in Note 2 to the financial statements, the Provisional Liquidators were only appointed on 13 October 2004 pursuant to an Order of the High Court. The Provisional Liquidators are therefore not in a position to represent whether balances brought forward at 1 April 2004 are true and complete.

The consolidated financial statements show a net deficiency of amounts attributable to equity holders of the Company of HK$77,758,000 at 31 March 2006. As disclosed in Note 2 to the financial statements, the consolidated financial statements have been prepared on the going concern basis. In the opinion of the Provisional Liquidators, the Group and the Company would not be a going concern at the balance sheet date if the Restructuring Proposal is not successfully implemented. If the Restructuring Proposal is not successfully implemented, adjustments might have to be made further to reduce the value of assets to their recoverable amounts, to provide for any further liabilities which might arise and to reclassify fixed assets as current assets.

• (ii) Contingent liabilities

As disclosed in Note 35 to the financial statements, the Provisional Liquidators have not conducted full searches for liabilities of the Group and the Company since a formal adjudication process will be undertaken pursuant to the Restructuring Proposal. Accordingly there is a possibility that claims exist against the Group and the Company which have not been provided for or disclosed in the notes to the financial statements.

We consider that appropriate disclosures have been made in the financial statements concerning the above fundamental uncertainties, but we also consider that the uncertainties surrounding the circumstances under which the financial statements have been prepared are such that they form part of our overall disclaimer on the view given by the financial statements for the year ended 31 March 2006.

• In forming our opinion, we also evaluated the overall adequacy of the presentation of information in the financial statements. We believe that our audit provides a reasonable basis for our opinion.

Qualified opinion: Disclaimer on view given by financial statements and disagreement about accounting treatment

As more fully explained in Note 38 to the financial statements, restructuring costs incurred up to 31 March 2006 have not been provided for in these financial statements. In our opinion, such expenses should be recognised as liabilities as required by Hong Kong Accounting Standard 37 “Provisions, Contingent Liabilities and Contingent Assets”. Since we have not been provided with details of the estimated unprovided restructuring expenses at 31 March 2006, we are not able to quantify the effect of this failure to comply with the accounting standard.

Because of the significance of the possible effects of the various limitations in evidence available to us, as set out in the Basis of Opinion section of our report above, we are unable to form an opinion as to whether the financial statements present fairly the state of affairs of the Company and the Group as at 31 March 2006 or of the Group’s profit and cash flows for the year then ended. In all other respects, except for the non-recognition of liabilities referred to above, in our opinion the financial statements have been properly prepared in accordance with the Hong Kong Companies Ordinance.

As the Provisional Liquidators were not able to obtain all the information that we required in relation to our audit, we have not obtained all the information and explanations that we considered necessary for the purpose of our audit and we were unable to determine whether proper books of account have been maintained.

BUSINESS REVIEW

The Group’s principal business comprises the purchasing, processing, wholesaling and retailing of Traditional Chinese Medicine (“TCM”) and other medicines, health products, dried seafood, brand name health foods and the provision of medical clinic services.

For the financial year ended 31 March 2006, the Group recorded a consolidated turnover of approximately HK$49.3 million which was mainly attributable to the sale of the principal subsidiary’s products amounting to approximately HK$47.6 million. The net profit for the year was approximately HK$9.4 million compared to HK$3.7 million net loss in the year 2005. The profit from operations was approximately HK$15.3 million for the year, compared with an operating loss of approximately HK$13.3 million in the year 2005.

The Group’s financial position has stabilised with a substantial increase in profits since the appointment of the Provisional Liquidators and advancement of working capital from the Investor. An additional flagship store was established in Tsim Sha Tsui in December 2005. Prior to their appointment, the performance of the Group deteriorated due to, among other things, the Group’s strategy to invest in businesses in PRC that were not integrated, did not offer any economies of scale, cost savings or create additional business opportunities for the Group. These include the Ensure and Hua Xin businesses, which have not contributed to the viability of the Group and have been a significant drain on the Group’s resources. Accordingly, to strengthen the financial position of the Group and to focus on the development of the Nam Pei Hong business, in line with the business plan of the Investor, the interests in Ensure and Hua Xin have been successfully disposed of.

All legal disputes which previously caused a strain on the Group’s financial resources and distracted the attention of management have been resolved.

– 5 –

RESTRUCTURING OF THE GROUP

On 23 December 2004, the Provisional Liquidators entered into an escrow and exclusivity agreement (the “Exclusivity Agreement”) with a preferred investor (the “Investor”) regarding the implementation of a restructuring proposal for the Company (the “Restructuring Proposal”).

Pursuant to the Exclusivity Agreement, the Provisional Liquidators granted the Investor an exclusive right to negotiate a legally binding agreement (the “Restructuring Agreement”) for the implementation of the Restructuring Proposal.

On 8 February 2005, the Company was notified by The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) that the Company had been placed into the second stage of the delisting procedure in accordance with Practice Note 17 of the Rules Governing the Listing on the Stock Exchange (the “Listing Rules”). As such, the Company was required to submit a resumption proposal to the Stock Exchange within six months.

On 25 February 2005, the Company submitted a proposal to the Listing Division of the Stock Exchange, setting out the principal terms of the proposed restructuring and requesting the Stock Exchange’s conditional approval for the resumption of trading in the shares of the Company (the “Resumption Proposal”). On 25 August 2005, the Stock Exchange confirmed in writing its conditional approval of the resumption of trading in the shares of the Company.

In relation thereto, on 7 September 2005, a restructuring agreement was entered into by the Company and the Investor for the implementation of the Restructuring Proposal. A subscription agreement was also entered into by the Company, the Provisional Liquidators and the Investor pursuant to which the Investor has agreed to subscribe for and the Company has agreed to issue and allot the subscription shares and the subscription preference shares.

The proposed restructuring, if successfully implemented, will, among other things, result in:

(i) a restructuring of the share capital of the Company through par value reduction, share consolidation and increase in authorised share capital as contained in the capital restructuring;

(ii) all the creditors of the Company discharging and waiving their claims against the Company by way of schemes of arrangements under section 166 of the Hong Kong Companies Ordinance and section 99 of the Bermuda Companies Act (“Schemes”);

• (iii) the entire interest of the Company in its dormant or insolvent subsidiaries being transferred to a nominee of the scheme administrators of the Schemes for a nominal consideration; and

(iv) the resumption of trading in the new shares of the Company upon completion of the proposed restructuring (“Completion”) subject to sufficient public float being restored.

On 14 March 2006, a Special General Meeting (“SGM”) was held proposing resolutions in relation to the Restructuring Proposal and the Whitewash Waiver. All the ordinary resolutions were passed but all the special resolutions were voted down by the Independent Shareholders. The Provisional Liquidators are of the view that there are a number of issues arising from the SGM that require investigation and careful consideration, including the validity of the votes that were cast and the status of the shareholders who were present and voted at the SGM.

On 15 March 2006, the explanatory statements and Schemes of Arrangement for creditors of the Company in Hong Kong and Bermuda (the “Schemes”) were distributed to the creditors together with notices for the Scheme Meeting. The resolutions for passing the Schemes were approved with 100% creditors’ support (which includes attending creditors and creditors’ proxies) at the meeting held on 6 April 2006, conditional upon a minimum return of 40% to unsecured creditors.

On 28 March 2006, the shareholders approved the consolidated financial statements and the Provisional Liquidators’ and auditors’ reports of the accounts for the years ended 31 March 2004 and 2005 at the Annual General Meeting (“AGM”).

Having reviewed and considered the operations and affairs of the Company and its subsidiaries, the magnitude of the claims against the Company and the second stage delisting procedures, the Provisional Liquidators concluded that the proposed restructuring represents and remains the best means available for the Company to be returned to solvency and to continue with the development and enhancement of its business.

The Provisional Liquidators have carefully considered and analysed the commercial and other aspects of each restructuring proposal received from potential investors, including the recovery to the creditors of the Company (the “Creditors”), the returns to the shareholders of the Company (the “Shareholders”) and the time required to complete the proposal. The Provisional Liquidators are of the view that, in the absence of unforeseen circumstances and subject to Completion, the Restructuring Proposal provides more favourable terms than the other proposals and therefore represents the best option currently available to the Company, its Creditors and Shareholders as:

(i) all liabilities will be compromised and discharged through the Schemes and/or by specific agreement;

(ii) the pro forma consolidated net tangible asset value and revenues of the restructured Group is expected to be improved;

(iii) the restructured Group will have sufficient working capital for its on-going operations following Completion.

Upon Completion, the Company’s shares will resume trading on the Stock Exchange.

PROSPECTS

With conditional approval received from the Listing Division and subject to Completion, it is anticipated that the financial position of the Company will be substantially improved as all liabilities of the Company will be compromised and discharged through the Schemes.

The Investor is confident that the Group’s business can be revitalised by discharging its present liabilities and injecting sufficient working capital. The Restructuring Proposal has been structured to restore the financial health of the Company. The Investor has thus far injected preliminary working capital to meet the Group’s interim working capital requirements for its operations and will inject further working capital at Completion to meet the on-going requirements of the Group. The Investor has also played a role in the new flagship store opening in Tsim Sha Tsui, thus demonstrating commitment to improve the Group’s business going forward.

Considering the popularity of dietary supplements and the increasing ability of the Chinese population to consume precious food items during recent years in Hong Kong, the Investor remains confident in the outlook and growth potential of the Group’s TCM business and seeks to take advantage of the Company’s principal subsidiary’s business profile and its well established reputation. The Investor has developed strategies to improve the operations and to expand the existing business, including plans to open more new stores in Hong Kong and to conduct new marketing, packaging, distribution and product sourcing activities. New product development to expand its existing range of products, sum yung, which is the hallmark product of the Group will be conducted to meet the current trends of consumers.

POST BALANCE SHEET EVENTS

On 8 May 2006, the Hong Kong Court ordered that the winding up petition against the Company be adjourned for a further hearing on 18 September 2006 to allow more time for the Provisional Liquidators to implement the Restructuring Proposal. On 26 May 2006, the Bermuda Court ordered that the winding up petition against the Company be adjourned until 29 September 2006. The Long Stop Date has also been extended to 26 September 2006 based on mutual agreement in writing between the Investor and the Company.

CORPORATE GOVERNANCE

The Provisional Liquidators were appointed to the Company on 13 October 2004. Consequently, the Provisional Liquidators are unable to comment as to whether the Company complied with the Code of Best Practice as set out in Appendix 14 of the Listing Rules throughout the financial year.

AUDIT COMMITTEE

To the best knowledge of the Provisional Liquidators, the Company has an audit committee which was established in accordance with the requirements of the Code of Best Practice, for the purposes of reviewing and providing supervision over the Group’s financial reporting process and internal controls. The audit committee comprises two independent non-executive directors of the Company.

– 6 –

For and on behalf of Hong Kong Pharmaceutical Holdings Limited (Provisional Liquidators Appointed) Kelvin Edward Flynn Cosimo Borrelli

Joint and Several Provisional Liquidators acting as agent for and on behalf of the Company without personal liability

Hong Kong, 17 August 2006

At as the date of this announcement, the board of directors of the Company comprises five executive directors, namely Mr. Sun Hiu Lu, Ms. Huang Shuyun, Mr. Chu Kwan, Mr. Zhao Dake and Mr. Zhang Ke, Winston, and three independent non-executive directors, namely Mr. Ng Wing Hang, Dr. Melvin Wong and Mr. Chu Yu Lin, David. However, the power of the directors of the Company have been exercised by the Provisional Liquidators of the Company since their appointment pursuant to the order of the High Court of Hong Kong dated 13 October 2004.

• for identification purposes only

Please also refer to the published version of this announcement in China Daily.

– 7 –