Bloks Group Limited — Interim / Quarterly Report 2004

Jan 19, 2004

Hong Kong Pharmaceutical Holdings Limited

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

(Incorporated in Bermuda with limited liability)

SUMMARISED ANNOUNCEMENT OF INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2003

The Board of Directors (the “Directors”) of Hong Kong Pharmaceutical Holdings Limited (the “Company”) announces the unaudited condensed consolidated interim results of the Company and its subsidiaries (the “Group”) for the six months ended 30 September 2003 (the “Period”), together with comparative figures for the corresponding period in 2002. The condensed consolidated interim financial statements have not been audited, but have been reviewed by the Company’s audit committee.

CONDENSED CONSOLIDATED PROFIT AND LOSS ACCOUNT

Notes TURNOVER 4 Cost of sales Gross profit Other revenue and gains 4 Selling and distribution costs Administrative expenses Other operating expenses LOSS FROM OPERATING ACTIVITIES 5 Finance costs 6 LOSS BEFORE TAX Tax 7 LOSS BEFORE MINORITY INTERESTS Minority interests NET LOSS FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO SHAREHOLDERS LOSS PER SHARE – BASIC 9	For the six months ended 30 September 2003 2002 (Unaudited) (Unaudited) HK$’000 HK$’000 60,669 49,806 (39,348) (33,545) 21,321 16,261 2,071 2,203 (15,710) (17,866) (12,930) (14,513) (1,213) (13,358) (6,461) (27,273) (3,325) (3,527) (9,786) (30,800) (1) (1) (9,787) (30,801) 1,455 7,608 (8,332) (23,193) (0.59)cents (1.68)cents

Hong Kong Pharmaceutical Holdings Limited 19-1-2004

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Hong Kong Pharmaceutical Holdings Limited

Notes:

1. BASIS OF PRESENTATION

At 30 September 2003, the Group had consolidated net current liabilities of approximately HK$117,817,000 (31 March 2003: HK$107,763,000) and consolidated net assets of approximately HK$134,000 (31 March 2003: HK$8,466,000). The Group also incurred a net loss from ordinary activities attributable to shareholders for the Period of approximately HK$8,332,000 (2002: HK$23,193,000) and reported a decrease in cash and cash equivalents for the Period of approximately HK$2,346,000 (2002: HK$16,835,000).

During the previous financial year ended 31 March 2003 and up to the date of approval of these unaudited condensed consolidated interim financial statements, the Group defaulted on the repayments of certain bank and other borrowings. The Group has initiated discussions with the banks and other lenders with a view to arranging a rescheduling and/or refinancing of its bank and other borrowings (the “Debt Restructuring Arrangements”). Up to the date of approval of these unaudited condensed consolidated interim financial statements, certain fixed terms or binding agreements in respect of the Debt Restructuring Arrangements have been agreed upon or executed as further explained below.

The details of the terms of the Debt Restructuring Arrangements with banks and other lenders are as follows:

• (a) Pursuant to clause 7 of the loan agreement dated 29 March 2000 entered into between China Vantage Limited (“China Vantage”), a wholly-owned subsidiary of the Company, and Sin Hua Bank Limited, now known as Bank of China (Hong Kong) Limited (the “Bank”), an instalment repayment of approximately HK$3,999,000 was due on 27 April 2003. China Vantage defaulted on the repayment of such instalment. In accordance with clause 17 of the aforementioned loan agreement, in the event of default, the Bank can declare the total outstanding sum payable under the loan agreement of approximately HK$39,987,000 as immediately due and payable. China Vantage has subsequently been negotiating with the Bank firstly, to waive its rights under clause 17 and secondly, to defer the repayment of such instalment, together with another instalment, amounting to approximately HK$7,997,000 that falls due on 27 April 2004, to 30 June 2004. As the negotiation to obtain the extension has not yet been agreed by the Bank, the total loan balance of approximately HK$39,987,000 becomes immediately due and payable and, accordingly, it is classified as a current liability in the balance sheet.

• (b) Pursuant to clause 5(a) of the HK$40,000,000 convertible note (the “Note”) issued by the Company in favour of the Bank on 27 April 2000, the second and third instalment repayments of the principal amount of HK$2,000,000 and HK$4,000,000 fell due on 27 April 2003 and 27 October 2003, respectively. The Company defaulted on the repayments of both instalments. In accordance with clause 10 of the Note, in the event of default, the Bank can declare the then total outstanding sum payable under the Note of HK$38,000,000 as immediately due and payable. The Company has subsequently been negotiating with the Bank firstly, to waive its rights under clause 10 and secondly, to defer the repayments of the second and third instalments, together with the fourth instalment, amounting to HK$4,000,000 that falls due on 27 April 2004, to 30 June 2004. As the negotiation to obtain the extension has not yet been agreed by the Bank, the total balance of HK$38,000,000 is immediately due and payable and, accordingly, it is classified as a current liability in the balance sheet.

• (c) On 29 October 2003, Shanghai Hua Xin High Biotechnology Inc. (“Hua Xin”), a subsidiary of the Company, defaulted on the full repayment of a loan from Shenzhen Development Bank Co., Ltd. (“Shenzhen Dev. Bank”), amounting to approximately HK$28,200,000. On 31 October 2003, Shenzhen Dev. Bank agreed, in writing, its approval to defer the repayment to 8 May 2004.

• (d) On 11 November 2003, Hua Xin defaulted on the full repayment of a loan from the Bank of Shanghai Co., Ltd. (“Bank of Shanghai”), amounting to approximately HK$7,520,000. On 11, 12 and 20 November 2003, the defaulted amount was fully repaid by Hua Xin and the guarantor of the aforementioned loan, Shenzhen Weiji Investment & Development Co., Ltd. (“Shenzhen Weiji”), amounting to HK$978,000 and HK$6,542,000, respectively.

• (e) The Company has issued HK$12,254,400 of other convertible notes (the “Other Notes”) to independent third parties in prior years as a consideration for the acquisition of a subsidiary in Mainland China. According to the terms of the Other Notes, on 30 March 2003, the noteholders were entitled to require the Company to redeem one-third of the principal amounts of the Other Notes amounting to approximately HK$4,085,000; or exercise the conversion rights to convert the same amounts into new ordinary shares of the Company. On 30 March 2004, the noteholders would then be entitled to require the Company to redeem the remaining two-thirds of the principal amounts of the Other Notes amounting to approximately HK$8,169,000; or to exercise the conversion rights to convert the same amounts into new ordinary shares of the Company. On 20 November 2003, the holders of the Other Notes agreed, in writing, with the Company to defer the redemption of the first instalment of the principal amounts of approximately HK$4,085,000 to 1 April 2004. As at 30 September 2003, both amounts will be repayable within one year, and, accordingly, they are classified as current liabilities in the balance sheet.

• (f) As at 30 September 2003, Hua Xin defaulted on the repayments of certain other loans, amounting to approximately HK$9,174,000, that were due both during the current period and prior years. Amongst the defaulted other loans, the lenders of loan balances of HK$1,927,000 agreed, in writing, their approval to defer the repayments to 31 December 2004. As a result of the loan extension arrangements, the balances of HK$1,927,000 will not be repayable within one year and, accordingly, are classified as non-current liabilities in the balance sheet.

• (g) As at 30 September 2003, Hua Xin had other loans amounting to approximately HK$8,581,000, originally falling due on 31 December 2003. The lenders of such other loans agreed, in writing, their approval to defer the repayments to 31 December 2004. As a result of the loan extension arrangements, the balances of HK$8,581,000 will not be repayable within one year and, accordingly, are classified as non-current liabilities in the balance sheet.

• (h) Guizhou Ensure Medical Company Limited, a subsidiary of the Company, had an other loan amounting to approximately HK$2,820,000 falling due on 9 June 2003. On 31 March 2003, the lender of such other loan agreed, in writing, its approval to defer the repayment to 31 December 2004. As a result of this extension arrangement, this amount will not be repayable within one year and, accordingly, it is classified as a non-current liability in the balance sheet.

Hong Kong Pharmaceutical Holdings Limited 19-1-2004

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3.

Hong Kong Pharmaceutical Holdings Limited

The directors have prepared these condensed consolidated interim financial statements on a going concern basis as they believe that:

• (a) there will be continuing financial support from the Group’s banks and other lenders;

• (b) there will be new capital injected by independent third parties; and

(c) the Group will have sufficient working capital for its operational requirements. Should the Group be unable to achieve the above 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 noncurrent assets and liabilities as current assets and liabilities, respectively.

2. ACCOUNTING POLICIES

The unaudited condensed consolidated interim financial statements are prepared in accordance with Hong Kong Statement of Standard Accounting Practice (“SSAP”) No. 25 “Interim financial reporting” issued by the Hong Kong Society of Accountants and Appendix 16 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited.

The accounting policies used in the preparation of the condensed consolidated interim financial statements are the same as those used in the annual audited financial statements for the year ended 31 March 2003, except that the Group has changed certain of its accounting policies following the adoption of the following revised SSAP and Interpretation issued by the Hong Kong Society of Accountants which are effective for the first time in the preparation of the current period’s condensed consolidated interim financial statements:

• SSAP 12 (Revised) : “Income taxes”

• Interpretation 20 : “Income taxes – Recovery of revalued non-depreciable assets”

A summary of their major effects is as follows:

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 on the Group’s results for the current or prior accounting periods. Accordingly, no prior period adjustment is required.

Interpretation 20 requires that a deferred tax asset or liability that arises from the revaluation of certain non-depreciable assets and investment properties is measured based on the tax consequences that would follow from the recovery of the carrying amount of that asset through sale. This policy has been applied by the Group in respect of the revaluation of its investment properties in the deferred tax calculated under SSAP 12.

SEGMENT INFORMATION

The following tables present the Group’s revenue and results analysed by business segments and revenue by geographical segments for the six months ended 30 September:

• (a) Business segments

Business segments
	Sum yung and		Biotechnological
	pharmaceutical		and transgenic		Property		Corporate
	products		products		investment		and	others	Eliminations		Consolidated
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
	2003	2002	2003	2002	2003	2002	2003	2002	2003	2002	2003	2002
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
Segment revenue:
Sales to external customers	49,734	45,370	9,136	2,471	1,200	1,194	599	771	–	–	60,669	49,806
Intersegment sales	90	144	–	–	–	–	–	–	(90)	(144)	–	–
Other revenue	320	432	173	383	–	–	–	–	–	–	493	815
Total	50,144	45,946	9,309	2,854	1,200	1,194	599	771	(90)	(144)	61,162	50,621
Segment results	241	(6,310)	(3,123)	(11,162)	1,056	1,088	(6,213)	(7,821)			(8,039)	(24,205)
Interest and dividend income											675	1,253
Unallocated revenue and gains											903	135
Unallocated expenses											–	(4,456)
Loss from operating activities											(6,461)	(27,273)
Finance costs											(3,325)	(3,527)
Loss before tax											(9,786)	(30,800)
Tax											(1)	(1)
Loss before minority
interests											(9,787)	(30,801)
Minority interests											1,455	7,608
Net loss from ordinary activities
attributable to shareholders											(8,332)	(23,193)

Hong Kong Pharmaceutical Holdings Limited 19-1-2004

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Hong Kong Pharmaceutical Holdings Limited

(b) Geographical segments

Geographical segments
	Hong	Kong	Mainland	China	Consolidated
	(Unaudited)		(Unaudited)		(Unaudited)
	2003	2002	2003	2002	2003	2002
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
Segment revenue:
Sales to external customers	24,090	26,740	36,579	23,066	60,669	49,806

4. TURNOVER, OTHER REVENUE AND GAINS

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 Period.

An analysis of turnover, other revenue and gains 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 and gains Interest income Dividend income Others	For the six months ended 30 September 2003 2002 (Unaudited) (Unaudited) HK$’000 HK$’000 49,734 45,370 9,136 2,471 1,200 1,194 599 771 60,669 49,806 598 1,092 77 161 1,396 950 2,071 2,203	For the six months ended 30 September 2003 2002 (Unaudited) (Unaudited) HK$’000 HK$’000 49,734 45,370 9,136 2,471 1,200 1,194 599 771 60,669 49,806 598 1,092 77 161 1,396 950 2,071 2,203
		49,806
		1,092 161 950
		2,203

5. LOSS FROM OPERATING ACTIVITIES

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

LOSS FROM OPERATING ACTIVITIES The Group’s loss from operating activities is arrived at after charging/(crediting):
	For the six months
	ended 30 September
	2003	2002
	(Unaudited)	(Unaudited)
	HK$’000	HK$’000
Cost of inventories sold	39,110	33,201
Depreciation	3,933	5,982
Amortisation of goodwill	557	755
Amortisation of know-how	548	1,216
Impairment loss of intangible asset	403	1,300
Unrealised (gain)/loss on revaluation of short term listed investments	(903)	3,161

6. FINANCE COSTS

Interest on bank loans and other borrowings wholly repayable within five years Interest on finance leases	For the six months ended 30 September 2003 2002 (Unaudited) (Unaudited) HK$’000 HK$’000 3,311 3,512 14 15 3,325 3,527	For the six months ended 30 September 2003 2002 (Unaudited) (Unaudited) HK$’000 HK$’000 3,311 3,512 14 15 3,325 3,527
		3,527

7.

TAX

No Hong Kong profits tax has been provided for because the Group had no significant estimated assessable profits arising in Hong Kong during the Period (2002: 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.

No recognition of deferred tax has been made as the Group did not have any significant unprovided deferred tax liabilities in respect of the Period, and the recoverability of the potential deferred tax assets relating to tax losses and other deductible temporary differences is uncertain.

8. INTERIM DIVIDEND

The Directors do not recommend the payment of an interim dividend for the six months ended 30 September 2003 (2002: Nil).

Hong Kong Pharmaceutical Holdings Limited

19-1-2004

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Hong Kong Pharmaceutical Holdings Limited

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 Period of approximately HK$8,332,000 (2002: HK$23,193,000) and the weighted average number of 1,403,796,698 (2002: 1,383,629,485) ordinary shares in issue during the Period.

Diluted loss per share amounts for the six months ended 30 September 2003 and 2002 have not been presented because the effects of the assumed conversion of the share options and convertible notes of the Company during these periods were anti-dilutive.

BUSINESS REVIEW

The trading and financial performance for the six months period ended 30 September 2003 has been encouraging. The financial results for the period under review continues to support and re-affirms the effectiveness of the management’s relentless efforts in rationalizing its operations and implementation of cost control measures over the past two years.

In spite of the weak and slow recovery of the Hong Kong economy and the sudden outbreak and impact of the Severe Acute Respiratory Syndrome (“SARS”) in the early part of the Period, the Group recorded a turnover of approximately HK$60.7 million for the first six months of the financial year, this represents an increase of approximately 22% compared to the corresponding period of last year of approximately HK$49.8 million. Overall loss from operating activities of the Group reduced from approximately HK$27.3 million of last year to HK$6.5 million this year, a significant reduction in the operating loss of approximately 76%.

During the period under review, the Hong Kong operations contributed approximately HK$24.1 million, being approximately 39.7%, to the Group’s turnover and the remaining, approximately HK$36.6 million, derived from the operations in Mainland China.

The turnover from the Hong Kong segment dropped by approximately 10% compared to that of last year of approximately HK$26.7 million. Weak consumer sentiments has been a continuing factor in the dampening of sales growth in the Hong Kong segment, though management of the Group has fought hard to maintain and boost sales across the spectrum of the Group’s operations. The outbreak of SARS has further added significant burden to the economic recovery of Hong Kong, and eroded the return of the Group’s efforts in increasing sales in the segment.

The turnover from the Mainland, however, saw a different perspective, recording an increase of approximately 59%, from last year’s HK$23 million to approximately HK$36.6 million recorded in this Period. SARS has had favourable impact on the turnover of the Mainland segment. Both the pharmaceutical products and biotechnological products distribution operations in the Mainland have recorded surge in turnover as a result of the outbreak of SARS, which have led to a pervasive and perpetuating interests in general healthcare and health food products during and after the outbreak.

In terms of the business operations of the Group, the outbreak of SARS have resulted in both positive and negative impacts on the turnover of the sum yung and pharmaceutical products business segment of the mainland and Hong Kong respectively, but an overall net increase of approximately HK$4.4 million, equivalent to 10%, increase in external sales. And profit is recorded for the business segment of approximately HK$0.24 million for the Period compared to a loss of HK$6.3 million last year. The biotechnological segment also recorded a sharp increase, with turnover amounting to approximately HK$9.1 million, increased in excess of three folds as compared to approximately HK$2.5 million last year, and loss for the segment of approximately HK$3.1 million as compared to HK$11.2 million of last year, a significant reduction of approximately 72%.

Overall, the major business segments of the Group have achieved improvements, both in terms of increase in turnover and significant reduction of loss in their respective segment results. The improved performance from the business segments of the Group have led to a significant reduction in the operating loss for the year and the resultant net loss from ordinary activities attributable to shareholders of approximately HK$8.3 million as compared to HK$23.2 million recorded last year, a remarkable and welcomed reduction of approximately 64%.

PROSPECTS

The Hong Kong economy and consumer sentiments in the market have yet to see slow but steady improvements, though the outbreak of SARS have drastically dampened their pace of recovery. The Hong Kong economy and its consumer markets should be set to benefit from the inbound tourists from the Mainland after relaxing its travelling restrictions to Hong Kong. Management of the Group is hopeful that the trading performance for the second half of the year will be as encouraging as the first half of the financial year. The sum yung and pharmaceutical products segment should achieve better sales results in view of the festive Chinese New Year and the seasonality of its operations. The outbreak of SARS have increased health awareness and led to a pervasive interests in Chinese and western over-thecounter pharmaceutical, general healthcare and health food products, which all should set a favourable platform to better trading performance in the ensuing years.

In light of the imminent commencement of the Closer Economic Partnership Arrangement (“CEPA”) between Hong Kong and the PRC, commencing in January 2004, the Group shall further explore into the opportunities which it ensues and seek further to expand by widening its geographical coverage of its distribution networks in the PRC market in the foreseeable future.

The management of the Group shall continue its relentless effort in rationalizing and consolidating its businesses, to maximise revenue and minimise costs. In this connection and as part of the Group’s rationalization strategy, the Group has contracted to dispose of its 34.43% equity interest in Yangzhou Genetic Engineering Ltd. on 26 November 2003.

Hong Kong Pharmaceutical Holdings Limited 19-1-2004 5

Hong Kong Pharmaceutical Holdings Limited

The disposal will assist the Group to streamline and consolidate its operations and to further preserve resources for working capital and future expansion needs.

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 the balance sheet date, the Group has total bank and other borrowing amounting to approximately HK$162 million, of which approximately HK$147.2 million are due within one year and approximately HK$90 million of the total borrowings are secured. Approximately HK$70.1 million of the total borrowings is denominated in Renminbi and retranslated accordingly at the appropriate exchange rate at the balance sheet date, and the balance of the borrowings are denominated in Hong Kong dollar.

In view of the stability of Renminbi, 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 30 September 2003.

The liquidity position of the Group as at the balance sheet date has not changed materially from that reported in the annual report year ended 31 March 2003. Current ratio measured at 0.47 time as at the balance sheet date for the period under review as compared to 0.48 time as at 31 March 2003. Similarly, the gearing ratio (total borrowings over total assets) for the period under review measured at 0.64 time as compared to 0.63 time recorded as at 31 March 2003.

The management of the Group is in discussions with its creditor banks with a view to a debt restructuring arrangement. Also, the Group is in discussions with certain potential investors with regard to making investments in the Group. The successful completion of a debt restructuring arrangement with the creditor banks and new funding from the investors will alleviate liquidity pressure and aids the Group’s future expansion plans.

CHARGE OF ASSETS

As at 30 September 2003, certain of the Group’s investment properties with an aggregate carrying value of HK$38,550,000 were charged to a bank to secure general banking facilities and convertible note issued to a bank, and a building of the Group with a carrying value of HK$44,693,000 was pledged to secure banking facilities granted to the Group. The Group’s trust receipts loans were secured by one of the Group’s investment properties with a carrying value of HK$2,400,000 as at 30 September 2003.

CONTINGENT LIABILITIES

The contingent liabilities of the Group have not changed materially from those disclosed in the annual report at 31 March 2003. Save as disclosed in note 17 of the condensed consolidated interim financial statements for the Period, the Group had no other significant contingent liabilities as at 30 September 2003.

STAFF AND REMUNERATION

As at 30 September 2003, the Group employed approximately 628 full time employees, of which approximately 531 were in the PRC. The remuneration of employees include salary and discretionary bonus. The Group also adopted a share option scheme to provide an incentive to the employees.

The remuneration policy and package, including the share options, of the Group’s employees are maintained at market level and reviewed annually by the management.

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

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

In the opinion of the Directors, the Company had complied with the Code of Best Practice (the “Code”) as set out in appendix 14 of the Rules Governing the Listing of Securities (“Listing Rules”) on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”), throughout the accounting period covered by the interim report, except that the independent non-executive directors of the Company are not appointed for specific terms as required by paragraph 7 of the Code, but 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.

PUBLICATION OF RESULT ON THE STOCK EXCHANGE’S WEBSITE

The detailed results containing all the information required by paragraph 46(1) to 46(6) of Appendix 16 to the Listing Rules will be published on the website of the Stock Exchange in due course.

By order of the Board of Directors Zhang Ke, Winston Executive Director and Chief Financial Officer

Hong Kong, 16 January 2004

* For identification purpose only

Please also refer to the published version of this announcement in China Daily dated on 19-1-2004.

Hong Kong Pharmaceutical Holdings Limited 19-1-2004

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