Bloks Group Limited — Annual Report 2004

Feb 10, 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 2004

The Provisional Liquidators (the “Provisional Liquidators”) of Hong Kong Pharmaceutical Holdings Limited (the “Company”) announces the audited condensed consolidated annual results of the Company and its subsidiaries (the “Group”) for the year ended 31 March 2004 (the “Period”), together with comparative figures for the corresponding period in 2003.

Notes Turnover 6 Cost of sales Gross profit Other revenue 6 Selling and distribution costs Administrative expenses Other operating expenses Loss from Operating Activities 7 Finance costs 8 Loss before tax Tax 9 Loss before Minority Interests Minority interests Net Loss from Ordinary Activities attributable to Shareholders Loss per share – Basic CONSOLIDATED BALANCE SHEET Non-current assets Properties, plant and equipment 14 Investment properties 15 Intangible assets 16 Goodwill 17 Interests in associates 19 Long term investments 20 Investments in securities 21 Current assets Inventories 22 Trade receivables 23 Prepayments, deposits and other receivables Due from intermediate holding companies 24 Short term investments 25 Time deposits-pledged 26 Cash and cash equivalents Current liabilities Trade payables 27 Tax payable Other payables and accruals Bank and other borrowings 28, 29 Provision for long service payments 31 Net current liabilities Total assets less current liabilities	For the y M 2004 HK$’000 142,004 (92,909) 49,095 2,420 (31,875) (27,817) (75,326) (83,503) (11,517) (95,020) (15) (95,035) 3,121 (91,914) (6.55) cents 31 2004 HK$’000 27,040 49,200 – – – – 10,460 86,700 8,097 4,346 5,145 – 71 30,000 4,624 52,283 14,057 651 61,652 134,154 186 210,700 (158,417) (71,717)	ear ended 31 arch 2003 HK$’000 108,321 (73,679)
		34,642 3,104 (35,142) (29,036) (45,793)
		(72,225) (6,683)
		(78,908) (1)
		(78,909) 19,646
		(59,263)
		(4.27)cents
		March 2003 HK$’000 78,261 42,150 13,566 14,528 583 1,175 –
		150,263
		18,556 4,669 21,506 13,378 2,720 30,000 8,844
		99,673
		22,034 651 47,008 137,628 115
		207,436
		(107,763)
		42,500

1

Non-current liabilities Bank and other borrowings 28, 29 Finance lease payables 30 Provision for long service payments 31 Minority interests Net (liabilities)/assets Capital and reserves Issued capital 32 Reserves Shareholders’ (deficiency)/equity	11,336 45 350 11,731 – (83,448) 140,379 (223,827) (83,448)	19,453 114 536
		20,103
		13,931
		8,466
		140,379 (131,913)
		8,466

Notes:

1. BASIS OF PREPARATION

At 31 March 2004, the Group had consolidated net current liabilities of approximately HK$158,417,000 (2003: HK$107,763,000) and consolidated net liabilities of approximately HK$83,448,000 (2003: net assets of HK$8,466,000). The Group also incurred a net loss from ordinary activities attributable to shareholders for the year ended 31 March 2004 of approximately HK$91,914,000 (2003: HK$59,263,000) and reported a decrease in cash and cash equivalents for the year ended 31 March 2004 of approximately HK$4,220,000 (2003: HK$16,213,000). Notwithstanding the adverse financial position of the Group as at 31 March 2004, 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.

Up to the date of approval of these audited condensed consolidated financial statements, the Group has defaulted on the repayment of certain bank and other borrowings. Since 5 August 2004, trading in the Company’s shares on the Stock Exchange of Hong Kong Limited (the “Stock Exchange”) has been suspended. On 13 October 2004, the High Court of Hong Kong (the “High Court”) appointed Mr. Cosimo Borrelli and Mr. Kelvin Flynn of Alvarez and Marsal Asia Limited as joint and several provisional liquidators (the “Provisional Liquidators”) of the Company. 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”) which provided 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 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 (the “Listing Division”), 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 in the Company (the “Resumption Proposal”). On 15 August 2005, a final revised Resumption Proposal was submitted to the Listing Division, incorporating additional information, clarification and disclosures in response to queries from the Listing Division.

On 25 August 2005, the Stock Exchange confirmed in writing its conditional approval of the resumption of trading in the shares of the Company. 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.

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 are 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 subject to the approval of the Listing Division.

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. Should the Restructuring Proposal not be successfully implemented, 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.

IMPACT OF RECENTLY ISSUED HONG KONG FINANCIAL REPORTING STANDARDS

The revised SSAP 12 “Income taxes” is effective for the first time for the current year’s financial statements. SSAP 12 prescribes the accounting for income taxes payable or recoverable, arising from the taxable profit or loss for the current period (current tax); and income taxes payable or recoverable in future periods, principally arising from taxable and deductible temporary differences and the carryforward of unused tax losses (deferred tax).

The SSAP has had no significant impact for these financial statements on the amounts recorded for income taxes. However, the related note disclosures are now more extensive than previously required.

3. SEGMENT INFORMATION

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

• (a) Business segments

HK$’000

Segment revenue: Sales to external Customers Intersegment Sales Other revenue Total Segment results Interest and dividend Income Unallocated expenses Loss from operating activities Finance costs Loss before tax Tax Loss before minority interests Minority interests	Sum yung and pharmaceutical products 2004 2003 115,561 99,179 195 212 930 544 116,686 99,935 (1,171) (8,964)	Biotechnological and transgenic products 2004 2003 22,881 5,426 – – 188 470 23,069 5,896 (48,742) (38,678)	Property in 2004 2,286 – – 2,286 4,971	vestment 2003 2,396 – – 2,396 77	Corporate a 2004 1,276 – 12 1,288 (38,447)	nd others 2003 1,320 59 – 1,379 (22,408)	Elimina 2004 – (195) – (195)	tions 2003 – (271) – (271)	Consolid 2004 142,004 – 1,130 143,134 (83,389) 1,290 (1,404) (83,503) (11,517) (95,020) (15) (95,035) 3,121	ated 2003 108,321 – 1,014
										109,335
										(69,973) 2,090 (4,342)
										(72,225) (6,683)
										(78,908) (1)
										(78,909) 19,646

2

Net loss from ordinary activities attributable to shareholders Segment assets Interests in associates Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities HK$’000 Other segment information: Depreciation Amortisation of intangible assets Amortisation of goodwill Impairment losses included in the profit loss account Capital expenditure Other non-cash expenses	10,445 34,597 – – 10,445 34,597 10,474 22,597 Sum yung and pharmaceutical products 2004 2003 1,907 3,157 392 172 172 172 – – 1,305 2,680 527 4,351	29,990 100,005 – – 29,990 100,005 21,097 23,010 Biotechnological and transgenic products 2004 2003 5,110 6,172 1,411 1,899 – – 44,196 16,033 947 4,739 5,430 8,927	49,898 – 49,898 585 Property in 2004 5 – – – – (7,050)	42,846 – 42,846 624 vestment 2003 11 – – – 13 2,000	48,579 – 48,579 44,740 Corporate a 2004 533 – 942 – 6 29,329	68,010 583 68,593 24,113 nd others 2003 919 – 1,339 8,147 150 2,999	– – – – Elimina 2004 – – – – – –	– – – – tions 2003 – – – – – –	(91,914) 138,912 – 138,912 71 138,983 76,896 145,535 222,431 Consolid 2004 7,555 1,803 1,114 44,196 54,668 2,258 28,236	(59,263)
										245,458 583
										246,041 3,895
										249,936
										70,344 157,195
										227,539
										ated 2003 10,259 2,071 1,511 24,180
										38,021
										7,582 18,277

• (b) Geographical segments

The following table presents revenue and certain asset and expenditure information for the Group’s geographical segments.

	Hong	Kong	Mainland	China	Eliminations	Eliminations	Consolidated	Consolidated
	2004	2003	2004	2003	2004	2003	2004	2003
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
Segment revenue:
Sales to external customers	56,230	56,575	85,774	51,746	–	–	142,004	108,321
Other segment information:
Segment assets	97,200	125,597	41,783	124,339	–	–	138,983	249,936
Capital expenditure	47	374	2,211	7,208	–	–	2,258	7,582

4. 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 Interest income Dividend income from listed investments Others	Group 2004 2003 HK$’000 HK$’000 116,398 99,179 22,881 5,426 2,286 2,396 439 1,320 142,004 108,321 1,181 1,861 109 229 1,130 1,014 2,420 3,104	Group 2004 2003 HK$’000 HK$’000 116,398 99,179 22,881 5,426 2,286 2,396 439 1,320 142,004 108,321 1,181 1,861 109 229 1,130 1,014 2,420 3,104
		108,321
		1,861 229 1,014
		3,104

5. LOSS FROM OPERATING ACTIVITIES

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

The Group’s loss from operating activities is arrived at after charging/(crediting):
		Group
	2004		2003
	HK$’000		HK$’000
Cost of inventories sold	92,463		73,073
Cost of services provided	331		491
Depreciation	7,555		10,259
Amortisation of a patent	392		172
Amortisation of know-how*	931		1,899
Amortisation of deferred development costs	480		–
Impairment of fixed assets	36,762		–
Impairment of know-how	2,816		9,696
Impairment of deferred development costs**	2,860		6,337
Research and development expenditure**	3,017		2,049
Impairment of goodwill	–		5,147
Amortisation of goodwill**	1,114		1,511
Minimum lease payments under operating leases in respect of land and buildings	12,403		13,247
Auditors’ remuneration	1,298		950
Staff costs (excluding directors’ remuneration)
Wages and salaries	18,803		21,090
Pension scheme contributions***	1,761		1,880
Bad debts written off	4,054		–
Loss on disposal of a subsidiary	1,404		–
Loss on disposal of fixed assets, net	139		498
Provision for doubtful trade receivables	402		5,674
(Write-back of provision)/Provision for prepayments and other receivables	(329)		3,086
Provision for amount due from a related company	314		1,061

3

(Write-back of provision)/provision for obsolete and slow-moving inventories	(1,796)	1,266
Provision for amounts due from intermediate holding companies	13,314	–
Provision for amount due from an associate	–	1,728
Provision for pending litigation	17,871	–
Impairment of interests in associates	583	–
Impairment of long term unlisted investments**	1,175	3,000
Unrealised (gain)/loss on revaluation of short term listed investments	(28)	1,687
(Gain)/loss on disposal of short term listed investments	(1,225)	1,279
(Surplus)/deficit on revaluation of investment properties	(7,050)	2,000
Exchange losses, net	19	3
Net rental income	(2,171)	(2,281)
Dividend income from listed investments	(109)	(229)
Interest income	(1,181)	(1,861)

• The amortisation of know-how for the year is allocated between “Cost of sales” and “Other operating expenses” on the face of the consolidated profit and loss account.

• ** The amortisation of goodwill, impairment in value of long term unlisted investment, impairment of deferred development costs, and research and development expenditure for the year are included in “Other operating expenses” on the face of the consolidated profit and loss account.

• *** At 31 March 2004, the Group had no significant forfeited contributions available to reduce its contributions to the pension scheme in future years (2003: Nil).

6. FINANCE COSTS

Interest on bank loans and other borrowings wholly repayable within five years Interest on finance leases Other finance costs	Group 2004 2003 HK$’000 HK$’000 11,477 6,639 40 32 – 12 11,517 6,683	Group 2004 2003 HK$’000 HK$’000 11,477 6,639 40 32 – 12 11,517 6,683
		6,683

7. 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 (2003: 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 loss before tax using the statutory rates for the countries in which the Company and its subsidiaries are domi tax rates are as follow: Loss before tax Tax at the applicable tax rates of 17.5% (2003: 16%) Effect of different tax rates of subsidiaries Income not subject to tax Expenses not deductible for tax Tax loss not recognised Tax charge Details of the estimated deferred taxation full potential asset are as follows: Excess of tax allowance over depreciation Tax losses	Group 2004 2003 HK$’000 HK$’000 15 1 ciled to the tax expense at the effective Group 2004 2003 HK$’000 HK$’000 (95,020) (78,908) (16,628) (12,625) 7 – (1,938) (162) 15,823 6,806 2,751 5,982 15 1 Group 2004 2003 HK$’000 HK$’000 (14,719) (4,001) (33,914) (30,980) (48,633) (34,981)	Group 2004 2003 HK$’000 HK$’000 15 1 ciled to the tax expense at the effective Group 2004 2003 HK$’000 HK$’000 (95,020) (78,908) (16,628) (12,625) 7 – (1,938) (162) 15,823 6,806 2,751 5,982 15 1 Group 2004 2003 HK$’000 HK$’000 (14,719) (4,001) (33,914) (30,980) (48,633) (34,981)
		(34,981)

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

8. NET LOSS FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO SHAREHOLDERS

The net loss from ordinary activities attributable to shareholders for the year ended 31 March 2004 dealt with in the financial statements of the Company is approximately HK$34,142,000 (2003: HK$17,828,000).

9. LOSS PER SHARE

The calculation of basic loss per share is based on the net loss from ordinary activities attributable to shareholders for the year of approximately HK$91,914,000 (2003: HK$59,263,000), and the weighted average number of 1,403,796,698 (2003: 1,389,411,493) ordinary shares in issue during the year.

Diluted loss per share amounts for the years ended 31 March 2004 and 2003 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.

10. DIVIDENDS

The Provisional Liquidators do not recommend the payment of any dividend for the year.

SUMMARY OF THE AUDITORS’ REPORT

The Company’s auditors conducted an audit in accordance with Statements of Auditing Standards issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”), except that the scope of 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 directors 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.

The audit was planned so as to obtain all the information and explanations considered necessary in order to provide sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. However the evidence available 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 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”).

4

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 2004 was necessarily delayed while the Restructuring Proposal was being finalised.

They 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 all the information required in relation to the audit for the year ended 31 March 2004. In consequence, the auditors 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 could be adopted to obtain sufficient evidence regarding the accuracy and completeness of the assets, liabilities, income and expenses of the Company and the Group.

Two of the Company’s subsidiaries, Guizhou Ensure Chain Pharmacy Company Limited (“Ensure Chain”) and Guizhou Ensure Medical Company Limited (“Ensure Medical”), were deconsolidated as of 31 March 2004 since the Provisional Liquidators considered control to have been lost on this date. The consolidated profit and loss account of the Group includes the results of the deconsolidated subsidiaries from 1 April 2003 up to 31 March 2004 based on available unaudited management accounts. The profit and loss accounts relating to the deconsolidated subsidiaries comprise turnover of HK$64,557,000; cost of sales of HK$53,504,000; other revenue of HK$734,000; selling and distribution costs of HK$8,338,000; administrative expenses of HK$2,403,000; other operating expenses of HK$1,127,000; finance costs of HK$411,000; taxation of HK$14,000 and minority interest of HK$197,000. The deconsolidated assets and liabilities as at 31 March 2004 have been classified as investments in securities as per Note 35(b). We were unable to obtain sufficient information and there were no practical alternative audit procedures that we could perform to satisfy ourselves that the amounts consolidated in respect of the deconsolidated subsidiaries are fairly stated. Any adjustments to the amounts consolidated would affect the carrying amount of the investments in securities as at 31 March 2004 and the loss from the ordinary activities attributable to shareholders of the Group for the year then ended. In addition to the limitations in audit scope regarding the amounts consolidated, we have been unable to ascertain whether control of the two subsidiaries was lost on 31 March 2004. If control was lost subsequent to 31 March 2004, the consolidated balance sheet would include the subsidiaries’ assets and liabilities amounts as set out in Note 35(b).

As disclosed in Note 41(g) to the financial statements one of the company’s subsidiaries, Shanghai Hua Xin High Biotechnology Inc. (“Hua Xin”), was deconsolidated as of 30 November 2004 since the Provisional Liquidators considered control to have been lost on this date. The consolidated financial statements of the Group include the results of Hua Xin based on financial statements for the year ended 31 December 2003 audited by another firm of auditors in the PRC and unaudited managements accounts for the 3 month period ended 31 March 2004. The consolidated amounts relating to Hua Xin comprises turnover of HK$22,820,000; cost of sales of HK$9,075,000; selling and distribution costs of HK$5,175,000; administrative expenses of HK$8,251,000; provisions for impairment of fixed assets of HK$46,691,000; other operating expenses of HK$625,000; finance costs of HK$3,394,000; fixed assets of HK$25,491,000; current assets of HK$7,063,000; current liabilities of HK$63,426,000 and long-term liabilities of HK$11,336,000. We were unable to obtain sufficient information and there were no practical alternative audit procedures that we could perform to satisfy ourselves that the amounts consolidated in respect of Hua Xin are fairly stated. Any adjustments to the amounts consolidated would have a consequential significant effect on the loss for the year and net liabilities at 31 March 2004.

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 that all transactions entered into in the name of the Company and its subsidiaries during the period from 1 April 2003 to 31 March 2004 have been included in the financial statements.

The consolidated financial statements show a net deficiency of shareholders’ funds of HK$83,448,000 at 31 March 2004. 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 36 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.

The auditors consider that appropriate disclosures have been made in the financial statements concerning the above fundamental uncertainties, but they also consider that the uncertainties surrounding the circumstances under which the financial statements have been prepared are such that they form part of their overall disclaimer on the view given by the financial statements for the year ended 31 March 2004.

In forming their opinion, the auditors also evaluated the overall adequacy of the presentation of information in the financial statements. They believe that their audit provides a reasonable basis for their opinion.

Qualified opinion: Disclaimer on view given by financial statements

Because of the significance of the possible effects of the various limitations in evidence available, as set out in the Basis of Opinion section of our report above, the auditors 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 2004 or of the Group’s loss and cash flows for the year then ended. In all other respects, in their 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 required in relation to the audit, the auditors have not obtained all the information and explanations considered necessary for the purpose of the audit and 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 2004, the Group recorded a consolidated turnover of approximately HK$142.0 million which was mainly attributable to the sale of the principal subsidiary’s products amounting to approximately HK$116.4 million. The net loss for the year was approximately HK$91.9 million compared to HK$59.3 million in the year 2003. The loss from operations was approximately HK$83.5 million for the year, compared with an operating loss of approximately HK$72.2 million in the year 2003.

The Group’s financial position has deteriorated due to, among other things, the strategy to invest in businesses in PRC that are not integrated, do not offer any economies of scale, cost savings or create additional business opportunities for the Group. Legal disputes have also caused a strain on the Group’s financial resources and distracted the attention of management. These issues culminated in the appointment of the Provisional Liquidators. The Company has also endured a lack of working capital to fund and expand the business. There has also been a lack of control over the PRC pharmacy operations arising from a dispute with the local joint venture partners.

5

PROSPECTS

Subject to the approval of the Resumption Proposal by the Listing Division and upon 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 working capital requirements for its operations prior to and after Completion.

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 is confident in the outlook and growth potential of the 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 new stores in both Hong Kong and the PRC 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, will also be invested in.

LIQUIDITY AND FINANCIAL RESOURCES AND CAPITAL STRUCTURE

The Group generally finances its short term funding requirements with cash generated from operation, credit facilities from suppliers and banking facilities provided by our principal bankers.

As at 30 September 2004, the Group has total bank and other borrowings totalling approximately HK$54.26 million. All the borrowings are denominated in Hong Kong dollar.

In view of the stability of Renminbi to the Hong Kong Dollar, management of the Group did not consider necessary to hedge against foreign exchange exposure. During the Period, the Group did not engage in the use of any other financial instruments for hedging purposes, and there is no hedging instrument outstanding as at the balance sheet date. The gearing ratio (total borrowings over total assets) for the period ended 30 September 2004 is recorded at 1.12 compared to 1.05 time recorded as at 31 March 2004.

POST BALANCE DATE EVENTS

• (a) Trading in the shares of the Company has been suspended since 5 August 2004 and will continue to be suspended until further notice.

• (b) On 9 August 2004, a subsidiary of the Company, entered into a sale and purchase agreement with Hung Kee Enterprise, an independent third party, whereby the company agreed to dispose of its property situated at Shop C, Ground Floor, Hong Ping Mansion, Nos. 59, 59A, 61, and 65A Hip Wo Street Kowloon Hong Kong at the consideration of HK$16,500,000. Under the aforesaid disposal, the total consideration of HK$16,500,000 would be used for repayment of the mortgage loan of the aforesaid disposed property due and owing to Umbrella Finance Co., Ltd., the mortgagee of the Company in respect of the aforesaid disposed property.

• (c) Subsequent to the balance sheet date, between August 2004 and February 2005, the Group disposed of four investment properties to third parties for an aggregate consideration of HK$45,250,000 realising a loss on disposal of approximately HK$3,406,000. HK$42,400,000 of the consideration was used to repay the outstanding mortgage loans on the properties.

• (d) On 10 August 2004, judgment from a legal proceeding against the Company by Goldon Investment Limited (“Landlord”) was delivered against the Company in the amount of HK$ 17,153,624.92 (the “Judgement debt”) together with (1) interest to run on HK$ 2,249,142.60 at the annual rate of 1% over Hong Kong Prime from 31 March 1999 until 10 August 2004, and (2) interest to run on HK$ 14,904,482.32 from 1 December 2000 to 10 August 2004 at an annual rate 1% over Hong Kong Prime, and (3) thereafter interest to run on the entire amount of Judgment Debt at the judgment rate until full payment.

• (e) On 18 August 2004, the board of directors of the Company announced that several legal proceedings had been instigated against Hua Xin, an indirect 57% owned subsidiary of the Company. The aggregate monetary amounts of the claims against Hua Xin are equal to approximately RMB 8,220,000 and USD 312,454.

• (f) Upon hearing the application of the Bank of China (Hong Kong) Limited on 13 October 2004, the High Court appointed Mr. Kelvin Flynn and Mr. Cosimo Borrelli as Joint and Several Provisional Liquidators of the Company.

• (g) Subsequent to the balance sheet date, in November 2004, the Provisional Liquidators consider that the company lost control of its subsidiary, Shanghai Hua Xin High Biotechnology Inc. (“Hua Xin”).

• (h) Subsequent to the balance sheet date, in June 2005, the Provisional Liquidators agreed to dispose of Joinbest Investment Limited to the minority shareholders of Guizhou Ensure Chain Pharmacy Co., Ltd. realising a profit on disposal of approximately HK$4,794,000.

• (i) Subsequent to the balance sheet date, in November 2005, the Provisional Liquidators agreed to dispose the Group’s 57% equity interest in Hua Xin for a consideration of HK$15 million realising a gain on disposal of approximately HK$15.2 million. The disposal of Hua Xin also involves an assignment of debts to a third party of approximately (i) HK$0.6 million owing by Hua Xin to its fellow subsidiary, and (ii) HK$36.1 million owing by Hua Xin’s immediate holding company to a fellow subsidiary.

• (j) On 29 December 2004, approximately HK$28,587,000 of the Company’s pledged time deposit of HK$30,000,000 was seized by Shenzhen Development Bank Co. Ltd. to settle its secured loan to Hua Xin.

• (k) On 25 February 2005, the Company submitted a proposal to the Listing Division setting out the principal terms of the proposed restructuring. On 15 August 2005, a final revised Resumption Proposal was submitted to the Listing Division. On 7 September 2005, a restructuring agreement was entered into by the Company and the Investor for the implementation of the restructuring proposal.

PURCHASE, SALE OR REDEMPTION OF THE COMPANY’S LISTED SECURITIES

To the best knowledge of the Provisional Liquidators, neither the Company nor any of its subsidiaries had purchased, sold or redeemed any of the Company’s listed securities during the Period.

CODE OF BEST PRACTICE

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 interim period.

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 for the purposes of reviewing and providing supervision over the Group’s financial reporting process and internal controls. The audit committee comprises two independent nonexecutive directors of the Company. 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.

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PUBLICATION OF THE FINAL RESULT FOR THE YEAR ENDED 31 MARCH 2004 ON THE WEBSITE OF THE STOCK EXCHANGE

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

For and on behalf of Hong Kong Pharmaceutical Holdings Limited (Provisional Liquidators Appointed) Kelvin Flynn Cosimo Borrelli Joint and Several Provisional Liquidators acting as agent for and on behalf of the Company without personal liability

Hong Kong, 9 February 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.

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