Bloks Group Limited - Proxy Solicitation & Information Statement 2006

THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in any doubt as to any aspect of this document or as to the action to be taken, you should consult a licensed securities dealer or registered institution in securities, a bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in Hong Kong Pharmaceutical Holdings Limited (Provisional Liquidators Appointed), you should at once hand this document and the accompanying form of proxy to the purchaser or the transferee, or to the bank, licensed securities dealer or registered institution in securities or other agent through whom the sale or transfer was effected for transmission to the purchaser or to the transferee.

The Stock Exchange of Hong Kong Limited and Hong Kong Securities Clearing Company Limited take no responsibility for the contents of this document, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this document.

HONG KONG PHARMACEUTICAL HOLDINGS LIMITED

香港葯業集團有限公司[*]

GAIN ALPHA FINANCE LIMITED

(Incorporated in the BVI with limited liability)

(Provisional Liquidators Appointed)

(Incorporated in Bermuda with limited liability)

(Stock Code : 182)

(1) RESTRUCTURING OF HONG KONG PHARMACEUTICAL HOLDINGS LIMITED (PROVISIONAL LIQUIDATORS APPOINTED) INVOLVING, INTER ALIA, THE CAPITAL RESTRUCTURING, THE DEBT RESTRUCTURING, THE SUBSCRIPTION, THE GROUP REORGANISATION AND THE WHITEWASH WAIVER;

(2) MAJOR AND CONNECTED TRANSACTION: THE ENSURE SETTLEMENT; (3) MAJOR TRANSACTION: THE HUAXIN DISPOSAL;

(4) ADOPTION OF NEW BYE-LAWS; AND

(5) GENERAL MANDATES TO ISSUE AND REPURCHASE NEW SHARES

Provisional Liquidators

Kelvin Edward Flynn and Cosimo Borrelli of

Financial adviser to the Company in respect of the Restructuring Proposal

Independent financial adviser to the Independent Shareholders

ALTUS CAPITAL LIMITED

A letter from Altus Capital Limited, the independent financial adviser to the Independent Shareholders, containing its advice to the Independent Shareholders in relation to the Restructuring Proposal, the Ensure Settlement and the Whitewash Waiver, is set out on pages 41 to 59 of this document.

A notice convening the SGM to be held at Room 204, The Duke of Windsor Social Service Building, 15 Hennessy Road, Wan Chai, Hong Kong, on Tuesday, 14 March 2006, at 10:00 a.m. is set out on pages 183 to 190 of this document. A form of proxy for use at the SGM is enclosed. Regardless of whether you intend to attend the SGM, you are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon to the branch share registrar of the Company in Hong Kong, Tengis Limited, at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wan Chai, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for the holding of the SGM or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the SGM or any adjournment thereof should you so desire.

20 February 2006

for identification purposes only

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Expected timetable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9
Letter from the Provisional Liquidators. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
Letter from the Investor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	36
Letter from Altus Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	41
Appendix I – Financial information of the Group. . . . . . . . . . . . . . . . . . . . . . . . . . . . .	60
Appendix II – Financial information of the Group upon Completion . . . . . . . . . . . .	140
Appendix III – Explanatory statement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	152
Appendix IV – Terms of the Preference Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	156
Appendix V – General information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	171
Notice of the SGM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	183

– i –

DEFINITIONS

In this document, unless the context otherwise requires, the following terms shall have the following meanings:

“Altus Capital”
Altus Capital Limited, a licensed corporation under the SFO permitted to conduct Type 4 (advising on securities), Type 6 (advising on corporate finance) and Type 9 (asset management) of the regulated activities under the SFO and the independent financial adviser to the Independent Shareholders
“Announcement”
the joint announcement dated 26 September 2005 issued by the Company and the Investor in relation to, inter alia , the Restructuring Agreement and the Subscription Agreement
“associate(s)”

has the meaning ascribed thereto under the Listing Rules

“Authorised Share Capital Increase”
the increase in the authorised share capital of the Company upon the Capital Cancellation becoming effective from HK$1,403,796.69 to HK$60,000,000 divided into 3,500,000,000 New Shares and 2,500,000,000 Preference Shares
“Bermuda Court”
the Supreme Court of Bermuda
“Bermuda Scheme”
the proposed scheme of arrangement between the Company and its Creditors pursuant to section 99 of the Companies Act 1981 of Bermuda (as amended)
“Board”
the board of Directors
“BVI”
the British Virgin Islands
“Capital Cancellation”
the cancellation of the unissued share capital in the authorised share capital of the Company of HK$300,000,000 upon the Capital Reduction and the Share Consolidation becoming effective, resulting in an authorised and issued share capital of the Company becoming HK$1,403,796.69
“Capital Reduction”
the reduction of the nominal value of each issued Share from HK$0.10 to HK$0.001
“Capital Restructuring”
the proposed restructuring of the capital of the Company comprising the Capital Reduction, the Share Consolidation, the Capital Cancellation and the Authorised Share Capital Increase

– 1 –

DEFINITIONS

“CCASS” the Central Clearing and Settlement System established and operated by HKSCC
“China Genetic” China Genetic Limited, a company incorporated in Hong Kong with limited liability and an indirect wholly-owned subsidiary of the Company prior to completion of the Huaxin Disposal
“Company” Hong Kong Pharmaceutical Holdings Limited (Provisional Liquidators Appointed), a company incorporated in Bermuda with limited liability and the securities of which are listed on the Stock Exchange
“Completion” completion of the Restructuring Agreement “Concert Party(ies)” has the meaning ascribed to the term “parties acting in concert” including those presumed to be acting in concert, in the Takeovers Code
“Courts” Hong Kong Court and Bermuda Court
“Creditor” any person (other than a person with a preferential claim, to the extent of its preferential claim amount or a person with a secured claim to the extent of its secured claim amount) with the benefit of a claim against the Company that arose on or before the date of Completion
“Debt Restructuring” the proposed restructuring of the Company’s indebtedness and liabilities under the Restructuring Agreement involving the Schemes
“Director(s)” the director(s) of the Company
“Ensure” 貴州一樹連鎖葯業有限公司 (Guizhou Ensure Chain Pharmacy Company Limited*), a company established in the PRC with limited liability
“Ensure Acquisition” the acquisition of 51% shareholding in Ensure in 2001 at the total consideration of approximately HK$15.2 million, which was satisfied partly by a cash payment of HK$3 million and partly by the issue of the GH Convertible Notes
“Ensure Interest” 51% of the entire equity capital of Ensure
“Ensure Settlement”
the transfer of Joinbest to the GH Noteholders in consideration of HK$3 million and the release of all claims against the Company including any claim for the repayment of the GH Convertible Notes pursuant to the Ensure Settlement Agreement

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DEFINITIONS

“Ensure Settlement Agreement”
the settlement agreement dated 14 June 2005 entered into between, among others, the Company, HKPDL and the GH Noteholders in relation to the Ensure Settlement
“Escrow Agent”
Alvarez & Marsal Asia Limited, a company incorporated in Hong Kong which will hold the deposit for the proceeds of the Subscription paid by the Investor as stakeholder in accordance with the terms of the Restructuring Agreement
“Executive”
the Executive Director of the Corporate Finance Division of the SFC or any delegate of the Executive Director
“GH Convertible Notes” the outstanding convertible notes with a principal amount of approximately HK$12.3 million issued by the Company convertible into Shares at HK$1.38 each as part of the consideration for the Ensure Acquisition
“GH Noteholders” holders of the GH Convertible Notes, being seven individuals in the PRC, namely 王春雷 (Wang Chun Lei), 方正 (Fang Zheng), 李彤 (Li Tong), 劉一勞 (Liu Yi Lao), 熊筱兵 (Xiong Xiao Bing), 王明康 (Wang Ming Kang) and 夏仲強 (Xia Zhong Qiang*), and the beneficial owners of Guizhou Heding which in turn owns the remaining 49% of the shareholding interest in Ensure prior to completion of the Ensure Settlement
“Golden Linker”
Golden Linker International Limited, a company incorporated in Hong Kong with limited liability and an independent third party who is not a connected person (as defined in the Listing Rules) of the Group
“Group”
the Company and its subsidiaries prior to the Restructuring Proposal becoming effective
“Group Reorganisation”
the disposals of Ensure and Huaxin and the transfer of all the Other Subsidiaries to the Scheme Administrators at a nominal consideration of HK$1 under the Schemes for the benefits of the Creditors
“Guizhou Heding”
中國貴州合鼎實業有限公司 (China Guizhou Heding Enterprise Company Limited*), the owner of the 49% equity interest in Ensure
“HKPDL”
HK Pharmaceutical (PRC) Distribution Limited, a company incorporated in Hong Kong with limited liability and an indirect wholly-owned subsidiary of the Company. HKPDL is the legal and beneficial owner of the entire issued share capital of Joinbest

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DEFINITIONS

“HKSCC” Hong Kong Securities and Clearing Company Limited
“Hong Kong” the Hong Kong Special Administrative Region of the PRC
“Hong Kong Court” the High Court of the Hong Kong Special Administrative Region
“Hong Kong Scheme” the proposed scheme of arrangement between the Company and its Creditors pursuant to section 166 of the Companies Ordinance (Chapter 32 of the Laws of Hong Kong)
“Huaxin” 上海華新生物高技術有限公司 (Shanghai Hua Xin High Biotechnology Inc.*), a company established in the PRC
“Huaxin Agreement” the sale agreement entered into on 15 November 2005 as supplemented by an amendment letter dated 16 December 2005, by, amongst others, Market Strategy, the Company and Golden Linker for, inter alia , the sale of the Huaxin Interest
“Huaxin Disposal” the disposal of the Huaxin Interest by Market Strategy to Golden Linker pursuant to the terms of the Huaxin Agreement
“Huaxin Interest” 57% of the entire equity capital of Huaxin held by China Genetic
“Independent Shareholders” Shareholders who are not interested in or involved in the Restructuring Proposal, the Whitewash Waiver and the Ensure Settlement
“Investor” Gain Alpha Finance Limited, a company incorporated in the BVI with limited liability and wholly-owned by Mr. Ko Chun Shun, Johnson
“Joinbest” Joinbest Investment Limited, a company incorporated in the BVI with limited liability and a wholly-owned subsidiary of the Company acting as the intermediate holding company of the Company’s 51% interest in the issued share capital of Ensure prior to completion of the Ensure Settlement
“Latest Practicable Date”
17 February 2006, being the latest practicable date prior to the printing of this document for ascertaining certain information contained in this document

– 4 –

DEFINITIONS

“Listing Rules” the Rules Governing the Listing of Securities on the Stock Exchange
“Long Stop Date” the long stop date for Completion, being 15 May 2006 or such other date as the Provisional Liquidators and the Investor may agree in writing
“Market Strategy” Market Strategy Enterprises Limited, a company incorporated in the BVI and a wholly-owned subsidiary of the Company
“Nam Pei Hong” Nam Pei Hong Sum Yung Drugs Company Limited, a company incorporated in Hong Kong with limited liability and an indirect wholly-owned subsidiary of the Company
“New Share(s)” ordinary share(s) of the Company of HK$0.01 in the share capital of the Company upon the Capital Reduction and the Share Consolidation becoming effective
“NPH Sino-Meditech” NPH Sino-Meditech Limited, a company incorporated in Hong Kong with limited liability and an indirect whollyowned subsidiary of the Company
“Order” the order of the Hong Kong Court dated 13 October 2004 appointing Messrs. Kelvin Edward Flynn and Cosimo Borrelli of Alvarez & Marsal Asia Limited (formerly of RSM Nelson Wheeler Corporate Advisory Services Limited) as provisional liquidators of the Company, inter alia , to exercise the powers of the Board, take into their custody and protect the assets of the Company and carry on and stabilise the operations of the Group, including facilitating a restructuring of the Company
“Other Subsidiaries”
the current direct and indirect subsidiaries of the Company other than Nam Pei Hong, NPH Sino-Meditech, Poo Yuk Loong and Huaxin
“Petition” the petition to wind-up the Company filed by the Petitioning Creditor in the Companies (Winding-Up) No. 1018 of 2004 of the Hong Kong Court
“Petitioning Creditor”
Goldon Investment Limited, a company incorporated in Hong Kong with limited liability and one of the Creditors
“Placement”
the proposed placement of 100,000,000 New Shares by the Investor to not less than two independent third parties who are neither connected persons (as defined in the Listing Rules) nor Concert Parties of the Investor immediately after Completion

– 5 –

DEFINITIONS

“Poo Yuk Loong”
Poo Yuk Loong Limited, a company incorporated in Hong Kong with limited liability and an indirect whollyowned subsidiary of the Company
“PRC”
the People’s Republic of China, but for the purposes of this announcement only excluding Hong Kong, the Macau Special Administrative Region of the PRC and Taiwan
“Preference Shares” the non-redeemable and convertible preference shares of HK$0.01 each in the share capital of the Company which are convertible into New Shares at the initial conversion price of HK$0.027 per New Share (subject to adjustments)
“Provisional Liquidators” where the context requires, Messrs. Kelvin Edward Flynn and Cosimo Borrelli of Alvarez & Marsal Asia Limited (formerly of RSM Nelson Wheeler Corporate Advisory Services Limited) as appointed pursuant to the Order and Messrs. Kelvin Edward Flynn and Cosimo Borrelli of Alvarez & Marsal Asia Limited and Mr. R. Craig Christensen of Arthur Morris Christensen and Co. of Hamilton Bermuda as appointed by an order of the Bermuda Court dated 27 October 2005 in their capacity as joint and several provisional liquidators of the Company
“Quam Capital”
Quam Capital Limited, a licensed corporation under the SFO permitted to conduct Type 6 (advising on corporate finance) of the regulated activities under the SFO and the financial adviser to the Company in respect of the Restructuring Proposal
“Relevant Period”
the period commencing on 26 March 2005 (the date of commencement of the six months period prior to the date of the Announcement in relation to the Restructuring Proposal) and ending on the Latest Practicable Date
“Restructuring Agreement”
the conditional agreement dated 7 September 2005, as supplemented by a letter dated 17 February 2006 to extend the Long Stop Date, entered into among the Company, the Provisional Liquidators, the Investor and the Escrow Agent for the implementation of the Restructuring Proposal
“Restructured Group”
the group that after Completion, comprises principally the Company, Nam Pei Hong, NPH Sino-Meditech and Poo Yuk Loong
“Restructuring Proposal”
the restructuring proposal of the Group under the Restructuring Agreement involving, inter alia , the Capital Restructuring, the Debt Restructuring, the Subscription and the Group Reorganisation

– 6 –

DEFINITIONS

“Schemes” collectively, the Bermuda Scheme and the Hong Kong Scheme
“Scheme Administrators” such persons who are appointed as scheme administrators pursuant to the terms of the Schemes
“SFC” Securities and Futures Commission “SFO” Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)
“SGM” the special general meeting of the Company to be held to consider and pass the relevant resolutions proposed for, inter alia , the implementation of the transactions contemplated under the Restructuring Agreement, the Subscription Agreement and the Whitewash Waiver
“Share(s)” ordinary share(s) of HK$0.10 each in the issued share capital of the Company
“Share Consolidation” the consolidation of every 10 issued shares of the Company of HK$0.001 each immediately upon the Capital Reduction becoming effective into one New Share
“Shareholder(s)” holder(s) of the Share(s)
“Stock Exchange” The Stock Exchange of Hong Kong Limited
“Subscription” the subscription for the Subscription Shares and the Subscription Preference Shares by the Investor pursuant to the Subscription Agreement
“Subscription Agreement” the conditional agreement dated 7 September 2005 entered into by and among the Company, the Provisional Liquidators and the Investor in relation to the Subscription
“Subscription Preference Shares”
2,160,000,000 Preference Shares to be allotted and issued to the Investor under the Subscription
“Subscription Shares”
810,000,000 New Shares to be allotted and issued to the Investor under the Subscription
“Takeovers Code”
the Hong Kong Code on Takeovers and Mergers
“TCM”
acronym for traditional Chinese medicine

– 7 –

DEFINITIONS

“Tin Ming Shares”

the Shares held by the controlling Shareholder, Tin Ming Management Limited, amounting to approximately 56.3% of the total issued share capital of the Company

“Umbrella”
Umbrella Finance Company Limited, a wholly-owned subsidiary of Citigroup Inc.
“Umbrella Convertible Note”
the outstanding convertible note with a face value of HK$38 million issued by the Company pursuant to a subscription agreement dated 27 April 2000
“Whitewash Waiver” a waiver of the obligation of the Investor and its Concert Parties to make a mandatory general offer for all the New Shares not already or agreed to be acquired by them upon Completion pursuant to Note 1 on dispensations from Rule 26 of the Takeovers Code by the Executive
“HK$” and “cents” Hong Kong dollars and cents, the lawful currency of Hong Kong
“%”

per cent.

for identification purposes only

– 8 –

2006

EXPECTED TIMETABLE

Latest time for lodging forms of proxy for the SGM . . . . . . . . 10:00 a.m. on Sunday, 12 March The SGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10:00 a.m. on Tuesday, 14 March

Announcement of results of the SGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wednesday, 15 March

Subject to the Courts’ availability, the Company, through the Provisional Liquidators, is seeking leave from the Courts to convene the Creditors’ meeting before 30 April 2006. Further announcement(s) in relation to the timetable for the Creditors’ meeting, the hearing of the Courts to sanction the Schemes, trading arrangements, and resumption of trading in the Shares will be made as soon as practicable.

A notice convening the SGM to be held at Room 204, The Duke of Windsor Social Service Building, 15 Hennessy Road, Wan Chai, Hong Kong, on Tuesday, 14 March 2006, at 10:00 a.m. is set out on pages 183 to 190 of this document. A form of proxy for use at the SGM is enclosed. Regardless of whether you intend to attend the SGM, you are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon to the branch share registrar of the Company in Hong Kong, Tengis Limited, at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wan Chai, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for the holding of the SGM or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the SGM or any adjournment thereof should you so desire.

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LETTER FROM THE PROVISIONAL LIQUIDATORS

20 February 2006

To the Shareholders,

Dear Sir or Madam,

(1) RESTRUCTURING OF HONG KONG PHARMACEUTICAL HOLDINGS LIMITED (PROVISIONAL LIQUIDATORS APPOINTED) INVOLVING, INTER ALIA, THE CAPITAL RESTRUCTURING, THE DEBT RESTRUCTURING, THE SUBSCRIPTION, THE GROUP REORGANISATION AND THE WHITEWASH WAIVER; (2) MAJOR AND CONNECTED TRANSACTION: THE ENSURE SETTLEMENT; (3) MAJOR TRANSACTION: THE HUAXIN DISPOSAL; (4) ADOPTION OF NEW BYE-LAWS; AND (5) GENERAL MANDATES TO ISSUE AND REPURCHASE NEW SHARES

INTRODUCTION AND BACKGROUND

The Company and the Investor jointly announced on 26 September 2005 that the Restructuring Agreement for the implementation of the Restructuring Proposal which involves, inter alia, the Capital Restructuring, the Debt Restructuring, the Subscription and the Group Reorganisation was signed on 7 September 2005. As an integral part of the Restructuring Proposal, the Company, the Provisional Liquidators and the Investor also entered into the Subscription Agreement on the same date, 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 Company is an investment holding company which was incorporated in Bermuda on 27 June 1997 and has been listed on the main board of the Stock Exchange since 30 September 1997. It is noted that listing was originally granted to Nam Pei Hong (Holding) Limited, a company incorporated in Hong Kong with limited liability, on 27 November 1991. In 1997, Nam Pei Hong (Holding) Limited proposed to, among other matters, change its domicile from Hong Kong to Bermuda and the proposal became effective in September 1997 whereby the listing of the shares of Nam Pei Hong (Holding) Limited on the Stock Exchange was withdrawn and the shares of the Company was listed by way of introduction. Trading in the Shares has been suspended since 5 August 2004 and will remain suspended until Completion and a sufficient public float has been restored.

On 21 September 2004, the Petitioning Creditor filed the Petition against the Company as a result of the Company’s failure to repay amounts due to the Petitioning Creditor. The Petition has been adjourned on several occasions to give the Provisional Liquidators further time to negotiate and implement a restructuring proposal for the Company. The latest adjournment was given by the Hong Kong Court on 9 January 2006 until 8 May 2006.

On 13 October 2004, Messrs. Kelvin Edward Flynn and Cosimo Borrelli of Alvarez & Marsal Asia Limited (formerly of RSM Nelson Wheeler Corporate Advisory Services Limited) were appointed as provisional liquidators of the Company by the Hong Kong Court, among other things, to protect and preserve the assets of the Company and, if possible, facilitate a restructuring of the Company.

– 10 –

LETTER FROM THE PROVISIONAL LIQUIDATORS

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 procedures in accordance with Practice Note 17 of the Listing Rules and that the Company was required to submit a resumption proposal to the Stock Exchange within six months.

On 14 June 2005, the Provisional Liquidators, HKPDL and the Company entered into the Ensure Settlement Agreement with the GH Noteholders. In summary, the Ensure Settlement Agreement provided for an “unwinding” of the Ensure Acquisition.

On 15 August 2005, the Provisional Liquidators submitted a revised resumption proposal outlining the Restructuring Proposal to the Stock Exchange. On 25 August 2005, the Stock Exchange informed the Provisional Liquidators that the Listing Committee approved in principle the Restructuring Proposal, subject to the fulfilment of certain conditions.

On 7 September 2005, the Company, the Provisional Liquidators, the Investor and the Escrow Agent signed the Restructuring Agreement. As at the Latest Practicable Date, the Provisional Liquidators had received in-principle support for the Restructuring Proposal from Creditors representing over 75% of the total estimated indebtedness of the Company.

On 27 October 2005, the Bermuda Court appointed Messrs. Kelvin Edward Flynn and Cosimo Borrelli of Alvarez & Marsal Asia Limited and Mr. R. Craig Christensen of Arthur Morris Christensen and Co. of Hamilton, Bermuda as provisional liquidators of the Company in Bermuda.

The purpose of this document is to provide the Shareholders with information in relation to, amongst other things, the Restructuring Proposal, the Whitewash Waiver, the Ensure Settlement and the Huaxin Disposal, and the advice from Altus Capital in respect of the terms of the Restructuring Proposal, the Whitewash Waiver and the Ensure Settlement and to give you notice of the SGM at which resolutions will be proposed to seek your approval of, amongst other things, (i) the Restructuring Agreement which, amongst other things, includes the Capital Restructuring, the Debt Restructuring, the Subscription and the Group Reorganisation; (ii) the Subscription Agreement and the Whitewash Waiver; (iii) the adoption of the new bye-laws of the Company; (iv) the appointment of new Directors, to be nominated by the Investor conditional on Completion; (v) the removal of all current Directors from the Board on Completion; (vi) the granting of a general mandate to the future Directors to exercise the powers of the Company to issue, allot or deal with additional New Shares as set out in the notice of the SGM; (vii) the granting of a general mandate to the future Directors to repurchase New Shares as set out in the notice of the SGM; (viii) the Ensure Settlement Agreement; and (ix) the Huaxin Disposal. The notice of the SGM is set out on pages 183 to 190 of this document.

REASONS FOR THE RESTRUCTURING PROPOSAL

The Group currently operates a chain of TCM and health food retailers in Hong Kong operating under Nam Pei Hong and a medical clinic in Wan Chai operating under NPH SinoMeditech. Nam Pei Hong is an indirect wholly-owned subsidiary of the Company which has 11 retail outlets throughout Hong Kong and a warehouse facility located in Shatin.

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LETTER FROM THE PROVISIONAL LIQUIDATORS

The Group has been suffering losses, running at a net operating cash outflow position in recent years, and has been relying on loans and borrowings to finance its business operations. For the three years ended 31 March 2005, net losses attributable to Shareholders were approximately HK$59.3 million, HK$91.9 million and HK$3.7 million, respectively, and the net cash outflow from operating activities was approximately HK$15.9 million, HK$4.2 million and HK$6.3 million, respectively. As at 30 September 2005, the Group’s total assets, which comprised mainly inventories, cash and receivable from investment disposal, were approximately HK$29.8 million and the Group’s total liabilities were approximately HK$116.3 million.

The Group generally financed its short term funding requirements with cash generated from operations, credit facilities from suppliers and banking facilities provided by its principal bankers. As at 31 March 2005, the Group had bank and other borrowings of approximately HK$54.3 million, which were all denominated in Hong Kong dollars and had not hedged against any foreign exchange exposure. During the year ended 31 March 2005, the Group did not engage in the use of any other financial instruments for hedging purposes, and there were no hedging instruments outstanding as at 31 March 2005. The gearing ratio (total borrowings over total assets) of the Group for the year ended 31 March 2005 was approximately 2.07 compared to approximately 1.05 for the year ended 31 March 2004.

The Group’s financial position has stabilised with a substantial reduction in losses since the appointment of the Provisional Liquidators and the advancement of working capital from the Investor. Prior to the appointment, the performance of the Group deteriorated due to, amongst other things, the Group’s strategy to invest in businesses in the PRC that were not integrated, did 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 were the main issues leading to the appointment of the Provisional Liquidators. The Company had also endured a lack of working capital to fund and expand the business. As stated in the announcement of the Company dated 7 December 2005, there had also been a lack of control over the PRC pharmacy operations arising from a dispute with the local joint venture partners.

Since their appointment, the Provisional Liquidators have had discussions with a number of potential investors interested in facilitating a restructuring for the Company. The Provisional Liquidators are of the view that, after taking into consideration the current financial position of the Group and alternative restructuring proposals received from potential investors, the Restructuring Proposal represents the best option available to the Company and its various Creditors and Shareholders. The primary objectives of the Restructuring Proposal are to inject working capital of HK$34.69 million into the Group, to restructure the Group’s business operations with a particular emphasis on Nam Pei Hong and to compromise and discharge all of the Company’s unaudited indebtedness of approximately HK$73.5 million as at 31 December 2005. If the Restructuring Proposal is not successfully implemented, the Provisional Liquidators consider it unlikely that the Company would receive a viable alternative restructuring proposal. In those circumstances there is a strong likelihood that the Company will be wound up resulting in a far less favourable return to the Creditors and Shareholders compared to the return available under the Restructuring Proposal. The successful implementation of the Restructuring Proposal is likely to be the only means by which the Creditors and Shareholders will recover any return from their investment in the Company.

– 12 –

LETTER FROM THE PROVISIONAL LIQUIDATORS

In addition to securing the commitment of the Investor to implement the Restructuring Proposal, the Provisional Liquidators also restructured the Group’s business operations and, where applicable, disposed of businesses that did not fit in with the long-term strategy the Investor has for the Group. Details of the Group’s reorganisation are set out in the subparagraph headed “The Group Reorganisation” below.

THE RESTRUCTURING PROPOSAL

The Restructuring Proposal involves, inter alia , the Capital Restructuring, the Debt Restructuring, the Subscription and the Group Reorganisation.

The Capital Restructuring

The existing authorised share capital of the Company was HK$300,000,000 divided into 3,000,000,000 Shares, of which 1,403,796,698 Shares were issued and credited as fully paid up as at the Latest Practicable Date. Under the Capital Restructuring, the share capital of the Company will be restructured in the following manner:

1. Capital Reduction

The par value of every issued Share will be reduced from HK$0.10 to HK$0.001 and the credit of approximately HK$139.0 million arising from such reduction will be applied to eliminate the accumulated losses of the Company.

2. Share Consolidation

Immediately upon the Capital Reduction becoming effective, every 10 issued shares of HK$0.001 each will be consolidated into one New Share. As a result, 1,403,796,698 issued shares of HK$0.001 each will be consolidated into 140,379,669 New Shares of HK$0.01 each.

3. Capital Cancellation

The unissued share capital in the authorised share capital of HK$300,000,000 will, after the Capital Reduction and the Share Consolidation, be cancelled and diminished resulting in an authorised and issued share capital of the Company becoming HK$1,403,796.69.

4. Authorised Share Capital Increase

Immediately upon the Capital Cancellation becoming effective, the Company’s authorised share capital will be increased from HK$1,403,796.69 to HK$60,000,000 divided into 3,500,000,000 New Shares of HK$0.01 each and 2,500,000,000 Preference Shares of HK$0.01 each.

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LETTER FROM THE PROVISIONAL LIQUIDATORS

The Capital Restructuring will be conditional upon:

(i) the passing of the relevant resolutions by the Shareholders at the SGM;
(ii) compliance with the relevant legal procedures and requirements under Bermuda law to effect the Capital Restructuring; and
(iii) the Listing Committee of the Stock Exchange granting the listing of, and permission to deal in, the New Shares arising from the Capital Restructuring, the Subscription Agreement and the conversion of the Subscription Preference Shares.

The New Shares will rank pari passu in all respects with each other. The implementation of the Capital Restructuring will not alter the underlying assets, business operations, management or financial position of the Group or the interests or rights of the Shareholders, save that any fractional New Shares will not be issued to individual Shareholders but will be aggregated and, if a premium (net of expenses) can be obtained, sold for the benefit of the Company. The Capital Restructuring itself will not have any material adverse effect on the financial position of the Group. The Provisional Liquidators are of the view that it is necessary to effect the Capital Restructuring to restructure the capital base of the Company so as to facilitate the issue of the Subscription Shares to the Investor pursuant to the Subscription. The Capital Restructuring will also provide the Company with greater flexibility in issuing New Shares in the future.

Save for the allotment and issue of the Subscription Shares and the New Shares to be issued upon conversion of the Subscription Preference Shares, the Company has no intention to issue any further New Shares.

Further announcement(s) in relation to the timetable of the Capital Restructuring will be made as and when appropriate.

The Debt Restructuring

As at 31 December 2005, to the best of the knowledge of the Provisional Liquidators and having made all reasonable enquiries, based on the books and records of the Company and the notices of claim received by the Provisional Liquidators, the unaudited indebtedness of the Company was approximately HK$73.5 million comprising the Umbrella Convertible Note of HK$38 million together with the accumulated interest of approximately HK$4 million for the period from October 2002 to October 2004 at the interest of 4% per annum owing to Umbrella, HK$21 million owing to the Petitioning Creditor and the balance of approximately HK$10.5 million owing to other Creditors.

In respect of the GH Convertible Notes, the Ensure Settlement Agreement was signed on 14 June 2005 by, among others, the Company and the GH Noteholders to discharge the Company from its obligations to the GH Noteholders. Completion of the Ensure Settlement took place on 5 October 2005 and therefore the GH Convertible Notes were cancelled upon the completion of the Ensure Settlement. Further details of the Ensure Settlement are set out in the paragraph headed “The Ensure Settlement” below.

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LETTER FROM THE PROVISIONAL LIQUIDATORS

All outstanding liabilities of the Company will be compromised and discharged in full through the Schemes, pursuant to which the Scheme Administrators will receive HK$45.5 million from the proceeds of the Subscription and any cash held by the Company as at the date of Completion (i) for distribution to the Creditors and (ii) to cover restructuring costs pursuant to the terms of the Schemes.

The Schemes will have the effect of compromising and discharging each of the Company’s liabilities other than the liabilities of the Investor which will be excluded from the Schemes. They will become effective and binding on all the Creditors if, among other things, more than 50% in number representing and, also, not less than 75% in value of the indebtedness of all the Creditors who attend and vote in person or by proxy vote in favour of the Schemes at the relevant Creditors’ meeting(s). As at the Latest Practicable Date, the Provisional Liquidators had received in-principle support for the Restructuring Proposal from Creditors representing over 75% of the total estimated indebtedness of the Company.

To the best of the knowledge of the Provisional Liquidators and having made all reasonable enquiries, the majority of the remaining debts of the Group (other than the Company) of approximately HK$37.9 million as at 31 December 2005 relates to subsidiaries of the Company including Nam Pei Hong. None of the debts of the Company’s subsidiaries are guaranteed by the Company as at the Latest Practicable Date. As detailed in the paragraphs headed “The Ensure Settlement” and “The Huaxin Disposal” below, the Ensure Acquisition was unwound pursuant to the Ensure Settlement Agreement and the Huaxin Interest was sold pursuant to the Huaxin Agreement. In addition, the Other Subsidiaries will be excluded from the Restructured Group under the Restructuring Proposal. This will leave the Restructured Group with no liability at the Company level and Nam Pei Hong, NPH Sino-Meditech and Poo Yuk Loong with manageable and serviceable trade debts.

The Subscription

After the implementation of the Capital Restructuring and on the date of Completion, the Investor will subscribe for 810,000,000 New Shares at HK0.027 each and 2,160,000,000 Preference Shares at HK$0.027 each under a specific mandate to be obtained at the SGM in accordance with the terms of the Subscription Agreement. The Subscription Shares represent approximately 85.2% of the issued ordinary share capital of the Company at Completion. On the assumption that the Subscription Preference Shares are converted immediately upon Completion, the Subscription Shares and the New Shares to be issued and allotted upon full conversion of the Subscription Preference Shares will represent, in aggregate, approximately 95.5% of the issued ordinary share capital of the Company. The terms of the Preference Shares are detailed in the paragraph headed “Principal terms of the Preference Shares” below and in full detail in Appendix IV to this document.

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LETTER FROM THE PROVISIONAL LIQUIDATORS

The total consideration for the Subscription payable by the Investor of HK$80.19 million has been determined after arm’s length negotiation between the Provisional Liquidators and the Investor with reference to the present financial position of the Group and shall be satisfied fully in cash.

The aggregate cash proceeds from the Subscription will be applied as follows:

HK$45.5 million to be distributed in accordance with the Schemes; and
the balance of HK$34.69 million as working capital for the Restructured Group.

The Subscription is conditional upon completion of the Restructuring Proposal in accordance with the terms of the Restructuring Agreement.

The Group Reorganisation

Immediately following Completion, the Restructured Group will principally comprise Nam Pei Hong, the Group’s principal operating subsidiary, NPH Sino-Meditech, which operates a Chinese medicine clinic, and Poo Yuk Loong, which holds the lease of a number of Nam Pei Hong’s retail outlets.

As detailed in the paragraph headed “The Ensure Settlement” below, pursuant to the Ensure Settlement Agreement, the Company’s interest in Ensure has been transferred to the GH Noteholders in consideration of a cash payment of HK$3 million to the Company and the GH Noteholders releasing all claims against the Company (including any claim for repayment under the GH Convertible Notes).

In addition, as detailed in the paragraph headed “The Huaxin Disposal” below, on 15 November 2005, the Provisional Liquidators entered into a conditional agreement for the sale of the Huaxin Interest for a cash payment of HK$15 million. Completion of the Huaxin Disposal took place on 8 February 2006.

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LETTER FROM THE PROVISIONAL LIQUIDATORS

The issued share capital of the Other Subsidiaries will be transferred to a nominee of the Scheme Administrators for the benefit of the Creditors at a nominal consideration of HK$1 under the Schemes.

Set out below are the simplified group charts of the Group as at the date of the Announcement and the Restructured Group immediately after Completion and completion of the Placement:

The Group as at the date of the Announcement:

==> picture [404 x 295] intentionally omitted <==

----- Start of picture text -----

Tin Ming Management
Wai Fat International Other existing
Limited
Limited Shareholders
(Note 1)
Victory Hunter
Umbrella
Holdings Limited
56.3% 1.7% 9.2% 1.4% 31.4%
The Company
100% 100% 100%
NPH
Nam Pei Hong Poo Yuk Loong
Sino-Meditech
51% 57%
Ensure Huaxin
Other Subsidiaries
(Note 2) (Note 3)
----- End of picture text -----

Notes:

All the Tin Ming Shares are charged to Umbrella as security to a term loan facility of up to approximately HK$145 million acquired by Umbrella in December 2003 from Sin Hua Bank Limited (now known as Bank of China).
The remaining 49% equity interest in Ensure is owned by Guizhou Heding.
The remaining 43% equity interest in Huaxin is owned by four independent third parties.

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LETTER FROM THE PROVISIONAL LIQUIDATORS

The Restructured Group immediately after Completion and completion of the Placement:

==> picture [420 x 204] intentionally omitted <==

----- Start of picture text -----

Tin Ming Management Wai Fat International Other existing
Investor
Limited Limited Shareholders
Victory Hunter Independent third parties
Umbrella
Holdings Limited under the Placement
8.3% 0.3% 1.4% 0.2% 74.7% 10.5% 4.6%
The Company
100% 100% 100%
NPH
Nam Pei Hong Poo Yuk Loong
Sino-Meditech
----- End of picture text -----

CONDITIONS PRECEDENT TO COMPLETION

Completion will be subject to, inter alia , the satisfaction or waiver (as the case may be) of the following major conditions precedent:

(a) the Courts’ sanction of the Schemes;
(b) the delivery of an office copy of the order of the Bermuda Court sanctioning the Bermuda Scheme and an office copy of the order of the Hong Kong Court sanctioning the Hong Kong Scheme to the Registrar of Companies in Bermuda and in Hong Kong, respectively, for registration;
(c) resolutions being passed by the Shareholders or the Independent Shareholders (as the case may be) at the SGM approving, among other matters:
(i) the Capital Restructuring;
(ii) the Subscription Agreement and the issue of the Subscription Shares and the Subscription Preference Shares;
(iii) all transactions contemplated under the Restructuring Agreement;
(iv) the Whitewash Waiver to be granted by the SFC;
(v) removal of all Directors from the Board (to the extent legally possible);
(vi) appointment of new Directors, to be nominated by the Investor, to the Board; and
(vii) the adoption of new bye-laws of the Company;
(d) execution of the Subscription Agreement;

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LETTER FROM THE PROVISIONAL LIQUIDATORS

(e) if required, consent of the Bermuda Monetary Authority to the issue of the New Shares and the Preference Shares (including the Subscription Shares, the Subscription Preference Shares and any New Shares issued upon conversion of the Subscription Preference Shares) and the free transferability of the New Shares and the Preference Shares;
(f) withdrawal of the Petition and the discharge of the Provisional Liquidators conditional only on closing of the Schemes;
(g) either
(i) conditional confirmation from the Stock Exchange that it approves resumption of the trading in the Shares and the commencement of trading in the New Shares; or
(ii) confirmation from the Stock Exchange that it approves the Company’s draft announcement in respect of, inter alia, the resumption of trading in the Shares and the commencement of trading in the New Shares;
(h) the Listing Committee of the Stock Exchange granting the listing of, and permission to deal in, the New Shares on Completion and to be issued pursuant to the Restructuring Agreement and the Subscription Agreement;
(i) confirmation that the Executive has granted the Whitewash Waiver to the Investor pursuant to Note 1 on dispensations from Rule 26 of the Takeovers Code;
(j) the issue of an opinion from Bermuda counsel in form and substance reasonably satisfactory to the Parties that the documents necessary to implement the Restructuring Proposal will, on closing of the Schemes, be valid and effective under Bermuda law; and
(k) completion of the Group Reorganisation.

The consent of the Bermuda Monetary Authority as required under condition precedent (e) above is not applicable pursuant to a Notice dated 1 June 2005, where any shares issued by a Bermuda company, which entitles the holder to vote for or appoint one or more directors or a security which by its terms is convertible into a share which entitles the holder to vote for or appoint one or more directors, are listed on an appointed stock exchange (which includes the Stock Exchange) the Bermuda Monetary Authority has granted general permission for the issuance and subsequent transfer of any securities of the company from and/or to a nonresident, for as long as any of such securities of the company remain so listed.

Unless a poll is demanded, all resolutions put to vote under condition precedent (c) above shall be decided on a show of hands by the Shareholders except that the resolutions in relation to the approval of the Subscription and the Whitewash Waiver (i.e. conditions precedent (c) (ii) and (iv)) Agreement shall be voted by the Independent Shareholders by poll in accordance with the requirement under the Takeovers Code.

– 19 –

LETTER FROM THE PROVISIONAL LIQUIDATORS

The Company, the Provisional Liquidators and the Investor may agree in writing to amend or waive any of the conditions precedent, to the extent that such conditions precedent are capable of being waived or amended either unconditionally or subject to any further terms. Completion is conditional on each of the conditions precedent having been satisfied and remaining satisfied up to the business day on which the Provisional Liquidators issue a closing notice. In the event that Completion does not occur on or before the Long Stop Date, either the Provisional Liquidators or the Investor may terminate the Restructuring Agreement subject to and in accordance with its terms. The Investor has indicated that it will not waive conditions precedent (c)(iv) or (i) above and thus if the Whitewash Waiver is not granted by the Executive and approved by the majority of the Independent Shareholders at the SGM, Completion will not take place and the Restructuring Proposal will not be implemented. As at the Latest Practicable Date, condition precedent (d) above was fulfilled.

PRINCIPAL TERMS OF THE PREFERENCE SHARES

Pursuant to the Subscription Agreement, the Investor has agreed to subscribe for the Subscription Preference Shares, the principal terms of which are as follows:

Issue price: HK$0.027 per Preference Share Dividends: 5% per annum of the issue price and cumulative. Holders of the Preference Shares shall be entitled to receive dividends prior to and in preference to holders of the New Shares or any other class or series of securities of the Company

Voting rights: Holder of each Preference Share shall not have any right to attend and vote at general meetings of the Company

Conversion:

Each Preference Share shall be convertible, at the option of the holder thereof, on any business day after the date of issuance of such share but before the fifth anniversary thereof, into such number of fullypaid New Share to be determined by the issue price of such Preference Shares divided by the conversion price. Each Preference Share shall automatically be converted into such number of New Share to be determined by the issue price of such Preference Share divided by the then effective applicable conversion price on the fifth anniversary of the date of issuance of the Preference Shares

Conversion price: Each Preference Share shall be converted into New Shares at the initial conversion price of HK$0.027 per New Share. The conversion price will be subject to adjustments in certain circumstances, including consolidation and sub-division of the share capital of the Company, issue of New Shares credited as fully paid by way of capitalisation of profits or reserves, making of any capital distribution to the Shareholders, issue of New Shares for acquisition of asset or wholly for cash and issue of any New Shares or any securities which by their terms are convertible into or exchangeable for or carry rights of subscription for New Shares and the total effective consideration initially receivable for such securities is less than 95% of the closing price of one New Share at the date of the announcement of the terms of such securities

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LETTER FROM THE PROVISIONAL LIQUIDATORS

Liquidation: Holders of the Preference Shares shall be entitled to receive prior and in preference to any distribution of any asset, surplus or funds of the Company to holders of the New Shares or any other class of securities of the Company in the event of any liquidation, dissolution, winding up of the Company or a return of capital or a sale of all or substantially all of the assets of the Company

Restrictions on Holder of each Preference Share may not exercise any conversion conversion: rights attaching to the Preference Shares if, as a result of such exercise, the number of New Shares which are in public hands (within the meaning of the Listing Rules) is reduced to below 25% of all New Shares in issue immediately following such exercise or such other minimum percentage applicable to the Company for the time being as prescribed by the Stock Exchange

Transferability: The Preference Shares are transferable subject to the provisions of the bye-laws of the Company

Redemption: The Preference Shares are non-redeemable

EFFECTS OF THE RESTRUCTURING PROPOSAL

Share capital

The proposed changes in the share capital of the Company are illustrated in the paragraph headed “Share capital” of Appendix I to this document.

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LETTER FROM THE PROVISIONAL LIQUIDATORS

Shareholding structure

The following table shows the estimated changes in the shareholding of the Company upon Completion:

Investor Tin Ming Management Limited_(Note 1) Victory Hunter Holdings Limited(Note 1) Wai Fat International Limited(Note 1) Subtotal for the controlling shareholder and its Concert Parties(Note 1)_ Umbrella Other existing Shareholders Independent third parties under the Placement Total	Existing No. of Shares % – – 790,000,000 56.3 23,400,000 1.7 130,000,000 9.2 943,400,000 67.2 20,000,000 1.4 440,396,698 31.4 – – 1,403,796,698 100	Immediately upon Completion but before the Placement and conversion of any of the Subscription Preference Shares No. of New Shares % 810,000,000 85.2 79,000,000 8.3 2,340,000 0.3 13,000,000 1.4 94,340,000 10.0 2,000,000 0.2 44,039,670 4.6 – – 950,379,669 100	Upon Completion and after the Placement but before conversion of any of the Subscription Preference Shares No. of New Shares % 710,000,000 74.7 79,000,000 8.3 2,340,000 0.3 13,000,000 1.4 94,340,000 10.0 2,000,000 0.2 44,039,670 4.6 100,000,000 10.5 950,379,669 100	Upon Completion, the Placement and full conversion of the Subscription Preference Shares (Note 3) No. of New Shares % 2,870,000,000 92.3 79,000,000 2.5 2,340,000 0.1 13,000,000 0.4 94,340,000 3.0 2,000,000 0.1 44,039,670 1.4 100,000,000 3.2 3,110,379,669 100

Notes:

Tin Ming Management Limited, Victory Hunter Holdings Limited and Wai Fat International Limited are wholly-owned by Hong Tau Investment Ltd.. Hong Tau Investment Ltd. is owned as to 51% by Welcome Success Worldwide Ltd. and as to 49% by H.H.K. Finance Company Limited. Welcome Success Worldwide Ltd. is owned equally as to 50% by each of Mr. Sun Hiu Lu and Mr. Chu Kwan, both of whom are existing executive Directors. H.H.K. Finance Company Limited is 80% owned by 黑龍江中盟集團有限公司 (Heilongjiang China United Group Company Limited*) which is a state-owned enterprise in the PRC according to the Ministry of Commerce of the PRC.
All existing Shareholders will be classified as public after Completion under the Listing Rules.
Holders of the Preference Shares are precluded from exercising the conversion rights attaching to the Preference Shares if such conversion would result in less than 25% of the Company’s issued share capital being in public hands.

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LETTER FROM THE PROVISIONAL LIQUIDATORS

As shown in the above table, the Investor will be interested in approximately 85.2% of the Company’s enlarged issued ordinary share capital upon Completion. It is proposed that subject to Completion and prior to resumption of trading of the New Shares on the Stock Exchange, the Investor will enter into agreements to effect the Placement in order to restore the 25% public float as required under the Listing Rules. It is contemplated that after completion of the Placement, the Investor will hold approximately 74.7% of the Company’s enlarged issued ordinary share capital and the public float will be approximately 25.3%.

Working capital

The Investor will provide financial resources to meet the Group’s working capital requirements for its operations prior to and after Completion in the following manner:

(a) an interim working capital facility of up to HK$8 million was provided by the Investor. As at the Latest Practicable Date, HK$5.4 million had been drawn down by the Group, of which approximately HK$4.0 million and HK$1.4 million, respectively, were provided to Nam Pei Hong as working capital and used to settle a litigation of Nam Pei Hong. The Group shall repay the loan together with the interest accrued thereon at 5% per annum upon the earliest of (i) 30 April 2006; (ii) 10 business days from the date on which a written notice can be given by the Investor demanding repayment of the Loan together with the interest after the Investor has acquired a controlling interest in the share capital of the Company; and (iii) such other date the parties may agree in writing; and
(b) HK$34.69 million will be injected under the Subscription.

A further amount of up to HK$7.5 million will be paid by the Investor in accordance with the Restructuring Agreement for payment of costs and expenses in relation to the implementation of the Restructuring Proposal.

Indebtedness

To the best of the knowledge of the Provisional Liquidators and having made all reasonable enquiries, as at 31 December 2005, the estimated indebtedness of the Company and the Group was approximately HK$73.5 million and HK$111.4 million, respectively. Following Completion, all the indebtedness of the Company will be compromised and discharged pursuant to the Schemes and the Other Subsidiaries will be excluded from the Restructured Group under the Restructuring Proposal. This leaves the Restructured Group with no liabilities at the Company level and Nam Pei Hong, NPH Sino-Meditech and Poo Yuk Loong with manageable and serviceable trade debts in the amount of approximately HK$12.4 million.

Based on information currently available to the Provisional Liquidators, save as aforesaid and for the restructuring costs in the amount not exceeding HK$7.5 million payable to the Provisional Liquidators, the auditors and other professional parties, none of the companies in the Group had any outstanding loan capital issued and outstanding or agreed to be issued, bank overdrafts, mortgages, loans or other similar indebtedness, liabilities under acceptances or acceptance credits, debentures, mortgages, charges, hire purchases commitments, guarantees or other material contingent liabilities as at the close of business on 31 December 2005.

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LETTER FROM THE PROVISIONAL LIQUIDATORS

Net tangible assets

As detailed in the paragraph headed “Unaudited pro forma adjusted consolidated net tangible assets of the Group upon Completion” in Appendix II to this document, the unaudited pro forma adjusted consolidated net tangible assets of the Group upon Completion will be approximately HK$33.9 million, representing approximately HK$0.036 per New Share immediately following Completion. This represents an improvement of approximately HK$120.4 million to the net liabilities of the Group as at 30 September 2005 which amounted to approximately HK$86.5 million or HK$0.062 per Share.

THE WHITEWASH WAIVER

Upon Completion but before the Placement and conversion of any Subscription Preference Shares, the Investor and its Concert Parties will be interested in an aggregate of approximately 85.2% of the enlarged issued ordinary share capital of the Company. Accordingly, the Investor and its Concert Parties will be required to make an unconditional mandatory general offer for all the New Shares other than those already owned or agreed to be acquired by the Investor or its Concert Parties unless the Whitewash Waiver is granted and approved pursuant to the Takeovers Code. The Investor has therefore applied to the Executive for, and the Executive has indicated that he will grant, the Whitewash Waiver which, if granted, will be subject to the approval of the Independent Shareholders by way of poll at the SGM.

Details of the Whitewash Waiver are set out in the section headed “Letter from the Investor” of this document.

FUTURE INTENTIONS OF THE INVESTOR REGARDING THE RESTRUCTURED GROUP

Business plan

Details of the intentions of the Investor with respect to the Restructured Group are set out in the section headed “Letter from the Investor” of this document.

The Provisional Liquidators consider that the Investor’s future intentions with respect to the Restructured Group are in the best interests of the Company and the Shareholders, particularly when the Company’s current financial position is taken into account. If the Company is unable to restructure its indebtedness with its Creditors as set out in the Restructuring Proposal, the Provisional Liquidators believe that there is a strong likelihood that the Company will be wound up. Should the Company be wound up, it is likely that there would be a far less favourable return to the Creditors and the Shareholders compared to the return available under the Restructuring Proposal.

Directors and management

The current Board 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 powers of these Directors have been suspended since the appointment of the Provisional Liquidators. It is one of the conditions precedent of the Restructuring Agreement that all the existing Directors will be removed from the Board and new Directors, to be nominated by the Investor, will be appointed.

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LETTER FROM THE PROVISIONAL LIQUIDATORS

At the SGM, a resolution will be proposed to the Shareholders to approve the appointment of the proposed new Directors with effect from Completion. Upon Completion, the Petition will be withdrawn and the Provisional Liquidators will be discharged. The proposed new Directors of the Company will take office without any restriction on their powers save as specified in the bye-laws of the Company. Details of the proposed new Directors to be nominated by the Investor are set out in the section headed “Letter from the Investor” of this document.

MAINTAINING THE LISTING STATUS OF THE COMPANY

It is the intention of the Investor to maintain the listing status of the Company on the Stock Exchange upon Completion. Accordingly, it is proposed that subject to Completion and prior to resumption of trading of the New Shares on the Stock Exchange, the Investor will enter into agreements to effect the Placement in order to restore the 25% public float as required under Rule 8.08 of the Listing Rules before resumption of trading of the New Shares. The Investor shall procure that an announcement will be made by the Company immediately after the signing of the relevant placing agreements.

The Investor will undertake to the Company and the Stock Exchange that it will also use its best endeavours and take appropriate steps to ensure that an adequate number of the New Shares will be placed to independent third parties to maintain the public float of not less than 25% of the enlarged issued ordinary share capital of the Company in order to meet the minimum public float requirement under Rule 8.08 of the Listing Rules. The Investor is also precluded from exercising any conversion rights attaching to the Preference Shares pursuant to the terms of the Preference Shares if, as a result of such exercise, the number of New Shares which are in public hands (within the meaning of the Listing Rules) is reduced to below 25% of all ordinary shares of the Company in issue immediately following such exercise or such other minimum percentage applicable to the Company for the time being as prescribed by the Stock Exchange.

The Stock Exchange has stated that if less than 25% of the issued New Shares are in public hands following Completion or if the Stock Exchange believes that:

a false market exists or may exist in the trading of the New Shares; or
there are insufficient New Shares in public hands to maintain an orderly market,

it will consider exercising its discretion to suspend or continue to suspend the trading in the New Shares until a sufficient level of public float is attained.

The Stock Exchange has further stated that, as long as the Company remains listed on the Stock Exchange, any acquisitions or disposals of assets by the Company will be subject to the provisions of the Listing Rules. Pursuant to the Listing Rules, the Stock Exchange has the discretion to require the Company to issue an announcement and/or a circular to the Shareholders irrespective of the size of the proposed transactions particularly when such proposed transaction represents a departure from the principal activities of the Group following Completion. The Stock Exchange also has the power to aggregate a series of acquisitions or disposals of the Company and any such transactions may result in the Company being treated as if it were a new applicant and subject to the requirements for new applicants as set out in the Listing Rules.

– 25 –

LETTER FROM THE PROVISIONAL LIQUIDATORS

THE ENSURE SETTLEMENT

Background

Ensure was incorporated in the PRC on 11 March 1999 and is principally engaged in the retail of Chinese and Western medicines, herbs, Chinese herb tea, and the selling of health food products, and packaged food products.

On 13 August 2001, the Group purchased 51% of the equity interest in Ensure from the GH Noteholders. The intention of the Ensure Acquisition was to enhance the Group’s ability in the research, development, manufacture, promotion and distribution of its products. The Group acquired the equity interest at approximately HK$15.3 million, in which HK$3 million was satisfied by cash payment and approximately HK$12.3 million by way of the issue of the GH Convertible Notes.

The Provisional Liquidators formed the view that the Ensure Settlement Agreement should be entered into for the following reasons:

(a) the Company had defaulted under the terms of the GH Convertible Notes and the GH Noteholders had issued a statutory demand against the Company for its winding up;
(b) there was a lack of control over the business operations of Ensure, since its assets and operations were all in the PRC. It appeared that management has never fully cooperated with the Company in general day-to-day running of Ensure’s business. The relationship had deteriorated further since the Company’s default under the GH Convertible Notes;
(c) from the limited financial information available to the Provisional Liquidators, Ensure appears not to have been profitable since the Ensure Acquisition;
(d) there were no other buyers interested in the 51% shareholding interest in Ensure and the Investor’s plans for the Company did not incorporate Ensure; and
(e) there was overwhelming creditor support for the disposal of the Company’s interest in Ensure.

According to the limited financial information made available to the Provisional Liquidators, Ensure reported an audited net loss after taxation and extraordinary items of approximately RMB2.8 million (equivalent to approximately HK$2.7 million) for the year ended 31 March 2003, an unaudited net profit before taxation of approximately RMB1.0 million (equivalent to approximately HK$1.0 million) and an unaudited net profit after taxation and extraordinary items of approximately RMB0.9 million (equivalent to approximately HK$0.9 million) for the year ended 31 March 2004. The net assets of Ensure were approximately RMB0.6 million (equivalent to approximately HK$0.6 million) as at 31 March 2003 and approximately RMB1.5 million (equivalent to approximately HK$1.5 million) as at 31 March 2004.

The financial statements of Ensure and Guizhou Ensure Medical Company Limited, a wholly-owned subsidiary of Ensure, (together, the “Ensure Group”) were deconsolidated from those of the Group as of 31 March 2004 since the Provisional Liquidators considered control to have effectively ceased on such date. The deconsolidation resulted in a loss of approximately HK$10.0 million to the Group. After completion of the Ensure Settlement, an income of approximately HK$15.3 million, an increase in assets of HK$3.0 million and a decrease in liabilities of approximately HK$12.3 million are expected to be recognised in the financial statements of the Group for the year ending 31 March 2006.

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LETTER FROM THE PROVISIONAL LIQUIDATORS

Principal terms of the Ensure Settlement Agreement

The GH Convertible Notes matured on 30 March 2005 and hence the principal amount owing under the notes was due and payable by the Company. However, the Company did not have the financial resources to meet the obligation and legal proceedings were initiated against the Company by the GH Noteholders. On 14 June 2005, the Ensure Settlement Agreement was signed by, among others, the Company and the GH Noteholders. The terms of the Ensure Settlement Agreement discharged the Company from its obligations to the GH Noteholders in the following manner:

(a) HKPDL returned its 51% equity interest in Ensure originally acquired from the GH Noteholders to the GH Noteholders by transferring the shares in Joinbest, a whollyowned subsidiary of HKPDL and the intermediate holding company of the Company’s 51% equity interests in Ensure, to the GH Noteholders, who are beneficial owners of the remaining 49% of the equity interest in Ensure;
(b) the GH Noteholders returned the GH Convertible Notes of stated value of approximately HK$12.3 million to the Company for cancellation;
(c) the GH Noteholders paid HK$3 million cash to HKPDL; and
(d) the GH Noteholders provided a release of all claims against the Company and HKPDL.

The terms of the Ensure Settlement Agreement were determined based on a reversal of the Ensure Acquisition. The Provisional Liquidators are of the view that the terms of the Ensure Settlement Agreement are favourable and in the best interests of the Company, the Creditors and the Shareholders, in light of the poor financial position of the Company reflected in the Company currently being in provisional liquidation. The proceeds from the Ensure Settlement of HK$3 million will be used to repay part of the outstanding indebtedness due to the Creditors.

Save for together being the controlling shareholders of Ensure as a whole, to the best knowledge of the Provisional Liquidators, and after having made all reasonable enquiries, each of the GH Noteholders is a third party independent of the Group and its connected persons (as defined in the Listing Rules).

Completion

The transactions contemplated in the Ensure Settlement Agreement were sanctioned by the Hong Kong Court on 21 September 2005 and completion took place on 5 October 2005. The Company has ceased to have any interest in Ensure.

The Ensure Settlement constituted a major and connected transaction for the Company and was therefore subject to the announcement, reporting and independent shareholders’ approval requirements under the Listing Rules. In the announcement of the Company dated 7 December 2005, it was reported that the Ensure Settlement was approved by Umbrella. Umbrella approved the Ensure Settlement in its capacity as a creditor of the Company and therefore no approval of Umbrella, as Shareholder has been given. The Stock Exchange has advised the Company that it has breached Rule 2.13(2) of the Listing Rules.

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LETTER FROM THE PROVISIONAL LIQUIDATORS

Furthermore, completion of the Ensure Settlement took place before the issue of the announcement of the transaction, which was made on 6 December 2005, the publication of this document, and obtaining the approval from the Independent Shareholders at a general meeting or a waiver from the Stock Exchange to hold such meeting under the Listing Rules. As a result, the Stock Exchange advised that the Company had breached Chapter 14A of the Listing Rules. At the SGM, a resolution will be proposed to seek the Independent Shareholders’ approval and ratification of the Ensure Settlement Agreement.

The Tin Ming Shares are charged to Umbrella as security to a term loan facility of up to approximately HK$145.0 million which was acquired by Umbrella in December 2003 from Sin Hua Bank (now known as Bank of China). Pursuant to its rights under the charge, Umbrella will be entitled to exercise the voting rights in the Tin Ming Shares at the SGM. Umbrella will apply to the Executive for a waiver of the obligation to make a mandatory general offer for all the Shares not already owned by it pursuant to Note 2 on dispensations from Rule 26 of the Takeovers Code.

THE HUAXIN DISPOSAL

Background

Huaxin is a sino-foreign equity joint venture registered and established in Shanghai, the PRC, on 19 January 1993 and has a registered capital of US$9.62 million. It was owned as to 57% by China Genetic and as to 43% by four other independent joint venture parties, two of whom are foreign entities prior to completion of the Huaxin Disposal, and is principally engaged in the research, development, manufacturing and distribution of bio-technological pharmaceutical products. Under the joint venture contract and the articles of association of Huaxin, each party shared profit and loss of Huaxin in proportion to their respective equity interests.

The Huaxin Interest was purchased by the Company in January 2001 for a consideration of approximately HK$32.6 million. From the Provisional Liquidators’ investigations, it appeared that Huaxin had the following issues:

(a) Huaxin suffered considerably poor financial performance arising from its lack of competitive advantage. Its products were readily available on the market and its manufacturing technology were manual and antiquated;
(b) Huaxin’s poor financial performance caused its inability to service its debt obligations which, in turn, gave rise to a plethora of creditor claims. Huaxin is currently in a liquidity crisis, and its management is seeking contributions from shareholders for its working capital requirements;
(c) there was a lack of information and control by the Company’s management over Huaxin and its business operations;

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LETTER FROM THE PROVISIONAL LIQUIDATORS

(d) Huaxin’s net asset position deteriorated rapidly since the time of acquisition of the Huaxin Interest. This rapid deterioration is due to three factors:
(i) Huaxin’s goodwill and know-how, which comprise a large part of its asset value, cannot be substantiated, hence, its auditors have impaired these items;
(ii) Huaxin’s other major assets, its land and buildings, suffer from title complications which in short, renders it unlikely that those items can be realised for cash easily; and
(iii) Huaxin’s liabilities have increased significantly because of its inability to service the interest component of those debts;
(e) the intercompany debts owed by Huaxin and China Genetic to the Company and Nam Pei Hong (Holding) Limited, a fellow subsidiary, respectively are, in the Provisional Liquidators’ view, unlikely ever to be repaid, given Huaxin’s poor financial condition.

Based on the limited financial information made available to the Provisional Liquidators and to the best of their knowledge and having made all reasonable enquiries, the unaudited net liabilities of the Huaxin were approximately HK$9.8 million as at 30 November 2004 and the audited net losses of Huaxin for the year ended 31 March 2003 and the unaudited net losses of Huaxin for the year ended 31 March 2004 were approximately HK$38.6 million and HK$8.0 million, respectively. Accordingly, the Provisional Liquidators are of view that the financial position of Huaxin was insolvent and unlikely to improve.

To the best of the knowledge of the Provisional Liquidators and having made all reasonable enquiries, a net gain of approximately HK$15.2 million is expected to accrue to the Company’s financial statements for the year ending 31 March 2006 from the Huaxin Disposal calculated with reference to the Company’s audited consolidated accounts for the year ended 31 March 2005.

Principal terms of the Huaxin Agreement

On 15 November 2005, the Provisional Liquidators in their own capacities for and on behalf of Market Strategy, the immediate holding company of China Genetic, entered into the Huaxin Agreement with Golden Linker for the sale of the Huaxin Interest. An amendment letter was signed by all the same parties to the Huaxin Agreement on 16 December 2005 to amend the definition of the claims by the Company against Huaxin in the Huaxin Agreement. To the best knowledge of the Provisional Liquidators, and after having made all reasonable enquiries, Golden Linker is an investment holding company whose shareholder is engaged in the pharmaceutical industry.

The consideration comprised a cash payment of HK$15 million and was determined after arm’s length negotiation after taking into account the issues relating to Huaxin as set out above.

The Huaxin Disposal also involved an assignment of debts to Golden Linker of (i) approximately HK$28.2 million, being the principal amount of a claim by way of subrogation by the Company against Huaxin exclusive of interest as at 29 December 2004; (ii) approximately HK$2.5 million, being the principal amount owing by Huaxin to the Company as at 31 March 2005 exclusive of interest; (iii) approximately HK$0.6 million owing by Huaxin to Nam Pei Hong (Holding) Limited; and (iv) approximately HK$36.1 million owing by China Genetic to Nam Pei Hong (Holding) Limited as at 31 March 2005.

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LETTER FROM THE PROVISIONAL LIQUIDATORS

To the best of the knowledge of the Provisional Liquidators, and after having made all reasonable enquiries, each of Golden Linker and its ultimate beneficial owner is a third party independent of the Group and its connected persons (as defined in the Listing Rules). In the Provisional Liquidators’ view, in light of the poor financial position of Huaxin, the Huaxin Disposal is in the best interests of the Company, the Creditors and the Shareholders. The proceeds from the Huaxin Disposal of HK$15 million will be used to repay part of the outstanding indebtedness due to the Creditors.

Completion

On 20 January 2006, the transactions contemplated in the Huaxin Agreement were sanctioned by the Hong Kong Court. Completion of the Huaxin Disposal took place on 8 February 2006 and the Company has ceased to have any interest in Huaxin.

The Huaxin Disposal constituted a major transaction for the Company and was therefore subject to the announcement, reporting and shareholders’ approval requirements under the Listing Rules. In the announcement of the Company 24 January 2006, it was reported that the Huaxin Disposal was approved by Umbrella. Umbrella approved the Huaxin Disposal in its capacity as a creditor of the Company and therefore no approval of Umbrella, as Shareholder has been given. The Stock Exchange has advised the Company that it has breached Rule 2.13(2) of the Listing Rules. As completion of the Huaxin Disposal took place before the publication of this document and obtaining the approval from the Shareholders at a general meeting. The Stock Exchange advised that the Company had breached Chapter 14 of the Listing Rules. At the SGM, a resolution will be proposed to seek the Shareholders’ approval and ratification of the Huaxin Agreement.

ADOPTION OF NEW BYE-LAWS

It is a condition precedent to Completion that the Company adopts new bye-laws. At the SGM, a special resolution will be proposed to adopt the new bye-laws of the Company.

The new bye-laws of the Company will include the terms of the Preference Shares to be subscribed by the Investor pursuant to the Subscription Agreement as set out in Appendix IV to this document. Additionally, the new bye-laws will contain relevant provisions to align the byelaws of the Company with the new requirements of the Listing Rules regarding, inter alia , corporate governance issues.

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LETTER FROM THE PROVISIONAL LIQUIDATORS

Copies of the existing bye-laws and the draft new bye-laws of the Company are available for inspection during normal business hours at the office of the Provisional Liquidators at 5th Floor, Allied Kajima Building, 138 Gloucester Road, Wan Chai, Hong Kong.

GENERAL MANDATES TO ISSUE AND REPURCHASE NEW SHARES

At the SGM, ordinary resolutions will be proposed to grant a general mandate to future Directors to exercise the powers of the Company to issue, allot or deal with additional New Shares not exceeding 20% of the issued ordinary share capital of the Company as at the date of the SGM and to grant a repurchase mandate to the future Directors to repurchase New Shares up to a maximum of 10% of the issued ordinary share capital of the Company as at the date of the SGM. Based on the 1,403,796,698 Shares in issue or 140,379,669 New Shares in issue immediately after completion of the Share Consolidation, the Company will be allowed to issue and allot a maximum of 280,759,339 Shares before the Share Consolidation or 28,075,933 New Shares after the Share Consolidation (not including the number of New Shares that could be repurchased under the repurchased mandate) and to repurchase 140,379,669 Shares before the Share Consolidation or 14,037,966 New Shares.

An ordinary resolution will also be proposed at the SGM providing that any New Shares repurchased under the repurchase mandate (up to a maximum of 10% of the aggregate nominal amount of the issued New Shares as at the date of the grant of the repurchase mandate) will be added to the total number of New Shares which may be allotted and issued under the general mandate.

An explanatory statement as required by the relevant provisions of the Listing Rules in connection with the repurchase mandate above is set out in Appendix III to this document. The results of the resolutions to be proposed at the SGM in relation to the above general mandate and repurchase mandate will not affect Completion.

LISTING AND DEALINGS

No listing of the Subscription Preference Shares will be sought on the Stock Exchange or any other stock exchanges. An application has been made to the Stock Exchange for the listing of, and permission to deal in, the New Shares to be allotted and issued under the Subscription Agreement and the New Shares to be issued upon conversion of the Subscription Preference Shares pursuant to the Subscription Agreement.

Subject to the granting of the listing of, and permission to deal in, the New Shares (including those to be issued pursuant to the exercise of the conversion rights attached to the Subscription Preference Shares), the New Shares will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS with effect from the commencement date of dealings in the New Shares on the Stock Exchange or such other date as determined by HKSCC. Settlement of transactions between participants of the Stock Exchange is required to take place in CCASS on the second trading day thereafter. All activities under CCASS are subject to the General Rules of CCASS Operation Procedures in effect from time to time.

As at the Latest Practicable Date and to the best of the knowledge of the Provisional Liquidators, the Company had 119,440,000 outstanding share options granted to certain directors and employees of the Group. The share options will be cancelled or lapsed pursuant to

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LETTER FROM THE PROVISIONAL LIQUIDATORS

the terms of the relevant share option scheme of the Company. Exercise prices of these share options range from HK$0.38 to HK$1.00 per Share. As the closing price of the Shares on the last trading day before the trading in the Shares was suspended on 5 August 2004 was HK$0.194, all the outstanding share options of the Company are out of money.

Save for the Umbrella Convertible Note and the abovementioned share options, the Company had no outstanding warrants, convertible securities or other derivatives convertible into Shares as at the Latest Practicable Date.

No part of the equity or debt securities of the Company is listed or dealt in or is proposed for listing or dealing in on any stock exchange other than the Stock Exchange.

TRADING ARRANGEMENTS

Documents of title

The Capital Restructuring will become effective upon Completion. Upon the Capital Restructuring becoming effective, the nominal value of the New Shares will become HK$0.01 each. Certificates for New Shares will be issued in blue in order to distinguish them from the certificates for the existing Shares which are in beige.

Shareholders may submit certificates for the existing Shares to the branch share registrar of the Company in Hong Kong, Tengis Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wan Chai, Hong Kong, to exchange, at the expense of the Company, for new certificates for the New Shares. It is expected that the certificates for the New Shares will be available within ten working days from the date of submission of the certificates for the existing Shares.

Facilities for odd lot holders

The existing board size of the Shares is 2,000 each and the New Shares will be traded in board lots of 100,000 each. In order to alleviate the difficulties arising from the existence of odd lots as a result of the Capital Restructuring, the Investor has agreed to procure China Everbright Securities (HK) Limited to stand in the market to provide matching services for the odd lots of the New Shares on a best effort basis. Holders of the New Shares in odd lots (i.e. lots which are not in integral multiples of 100,000 New Shares) who wish to take advantage of this matching facility either to dispose of their odd lots of New Shares or top up to board lots of 100,000 New Shares may contact Mr. Lai Tik Kei of China Everbright Securities (HK) Limited at telephone number (852) 2860 1183 during office hours.

The Provisional Liquidators recommend Shareholders to consult their own professional advisers if they are in any doubt about the arrangements described above.

Taxation

Shareholders having a registered address or being resident outside of Hong Kong may be subject to overseas taxation or deemed profits or capital gains arising from the exchange of the Shares for the New Shares. Shareholders, whether residing in Hong Kong or in other jurisdictions, are recommended to consult their own professional advisers if they are in any

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LETTER FROM THE PROVISIONAL LIQUIDATORS

doubt about the tax implications of the Schemes and, in particular, whether the receipt of the New Shares for their Shares would render such holders liable to taxation in Hong Kong or in other jurisdictions. It is emphasised that the taxation implications of the Schemes are personal matters of the Shareholders themselves and none of the Company, its directors and officers, future Directors and officers after Completion, the Provisional Liquidators or the Investor or any other parties involved in the Restructuring Proposal accepts any responsibility for the taxation or any other liability of the Shareholders arising from the exchange of the Shares for New Shares or any other aspect of the Schemes.

Further announcement(s) in relation to the timetable of the trading arrangements of the Shares and the New Shares will be made as and when appropriate.

RESUMPTION OF TRADING IN THE NEW SHARES

The Stock Exchange has indicated that resumption of trading in the New Shares is subject to certain conditions. Set forth below are the outstanding conditions to be fulfiled by the Company before Completion:

(i) passing of the relevant resolutions by the Shareholders in relation to the Capital Restructuring, the Subscription, the removal and appointment of directors at the SGM;
(ii) fulfilment of all conditions precedent to Completion;
(iii) withdrawal of all winding up petitions, if any, filed against any member of the Restructured Group;
(iv) restoration of the holding of at least 25% of the issued share capital of the Company in public hands upon completion of the Subscription;
(v) appointment of three independent non-executive directors including an independent non-executive director with appropriate professional qualifications or accounting or related financial management expertise; and
(vi) the issue of a resumption announcement.

The Provisional Liquidators expect that the above conditions imposed by the Stock Exchange will be fulfiled before the resumption of the trading in the New Shares on the Stock Exchange as in respect of: (i) resolutions will be proposed to the Shareholders to approve, inter alia, the Capital Restructuring, the Subscription, the removal and appointment of Directors; (ii) Completion is subject to the fulfilment of all conditions precedent; (iii) the Petition and all other petitions, if any, against the Restructuring Group will be discharged or withdrawn upon Completion; (iv) the public float will be restored to 25% upon completion of the Placement; (v) as stated in the Letter from the Investor, the Investor intends to nominate three independent non-executive Directors to be appointed for appointment by Shareholders at the SGM, including Mr. Yap Fat Suan, a fellow member of the Institute of Chartered Accountants in England and Wales and an associate member of Hong Kong Institute of Certified Public Accountants; and (vi) an announcement in relation to the resumption of the trading in the New Shares will be made before the day of the resumption.

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LETTER FROM THE PROVISIONAL LIQUIDATORS

THE SGM

Set out on pages 183 to 190 of this document is a notice convening the SGM to be held at Room 204, The Duke of Windsor Social Service Building, 15 Hennessy Road, Wan Chai, Hong Kong, on Tuesday, 14 March 2006, at 10:00 a.m., at which resolutions will be proposed to consider and approve, inter alia , (i) the Restructuring Agreement which, among other things, includes the Capital Restructuring, the Debt Restructuring, the Subscription and the Group Reorganisation; (ii) the Subscription Agreement; (iii) the adoption of the new bye-laws of the Company; (iv) the appointment of new Directors, to be nominated by the Investor conditional on Completion; (v) the removal of all Directors from the Board; (vi) the granting of a general mandate to the future Directors to exercise the powers of the Company to issue, allot or deal with additional New Shares as set out in the notice of the SGM; (vii) the granting of a general mandate to the future Directors to repurchase New Shares as set out in the notice of the SGM; (viii) the Ensure Settlement Agreement; and (ix) the Huaxin Disposal.

Completion of the Ensure Settlement and the Huaxin Disposal took place before obtaining the approval, respectively, from the Independent Shareholders and the Shareholders at a general meeting, the Company has therefore breached Chapters 14 and 14A of the Listing Rules. Resolutions will be proposed at the SGM to seek approval from the Independent Shareholders and the Shareholders and ratification of the Ensure Settlement Agreement and the Huaxin Agreement.

None of the existing Shareholders were involved in the negotiation of or are interested in the Restructuring Agreement, the Subscription Agreement, the Schemes and Whitewash Waiver. Accordingly, all Shareholders are considered as Independent Shareholders and no Shareholder shall be required to abstain from voting at the SGM. The Tin Ming Shares are charged to Umbrella as security to a term loan facility of up to approximately HK$145 million which was acquired by Umbrella in December 2003 from Sin Hua Bank (now known as Bank of China). Pursuant to its rights under the charge, Umbrella will be entitled to exercise the voting rights in the Tin Ming Shares. Umbrella will apply to the Executive for a waiver of the obligation to make a mandatory general offer for all the Shares not already owned by it pursuant to Note 2 on dispensations from Rule 26 of the Takeovers Code.

A form of proxy for use at the SGM is enclosed. Regardless of whether you are able to attend the SGM, you are requested to complete and return the form of proxy in accordance with the instructions printed thereon to the branch share registrar of the Company in Hong Kong, Tengis Limited, at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wan Chai, Hong Kong as soon as possible but in any event not less than 48 hours before the time appointed for the holding of the SGM or any adjournment thereof. Completion and delivery of the form of proxy will not preclude you from attending and voting in person at the meeting should you desire.

GENERAL

The Restructuring Agreement, the Capital Restructuring, the Subscription Agreement, the Whitewash Waiver and all the transactions contemplated thereunder will be subject to the approval of the Shareholders or the Independent Shareholders (as the case may be) at the SGM according to the Takeovers Code.

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LETTER FROM THE PROVISIONAL LIQUIDATORS

Quam Capital has been appointed as the financial adviser to the Company in respect of the Restructuring Proposal. As the powers of the Directors have been suspended since the appointment of the Provisional Liquidators on 13 October 2004, no independent board committee was formed and Altus Capital has been appointed as the independent financial adviser to advise the Independent Shareholders in relation to the Restructuring Proposal, the Whitewash Waiver and the Ensure Settlement. The letter of advice from Altus Capital, together with the principal factors and reasons considered in arriving at such advice, is set out on pages 41 to 59 of this document.

RECOMMENDATIONS

If the Restructuring Proposal is successfully implemented, all of the Company’s estimated indebtedness of approximately HK$73.5 million as at 31 December 2005 will be compromised and discharged in full through the Schemes. If the Company is unable to restructure its indebtedness with the Creditors as set out in the Restructuring Proposal, the Provisional Liquidators believe that there is a strong likelihood that the Company will be wound up. Should the Company be wound up, there is likely to be a far less favourable return to the Creditors and the Shareholders compared to the return available under the Restructuring Proposal.

Shareholders are strongly advised to consider the letter from Altus Capital before deciding to vote in favour of or against the resolutions to be proposed at the SGM.

ADDITIONAL INFORMATION

Your attention is drawn to the additional information set out in the appendices to this document, the “Letter from the Investor”, the “Letter from Altus Capital” and the notice of the SGM.

Yours faithfully, For and on behalf of HONG KONG PHARMACEUTICAL HOLDINGS LIMITED (Provisional Liquidators Appointed) Kelvin Edward Flynn Cosimo Borrelli R. Craig Christensen Provisional Liquidators of the Company without personal liability

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LETTER FROM THE INVESTOR

GAIN ALPHA FINANCE LIMITED

(incorporated in the BVI with limited liability)

20 February 2006

To the Shareholders,

Dear Sir or Madam,

RESTRUCTURING OF HONG KONG PHARMACEUTICAL HOLDINGS LIMITED (PROVISIONAL LIQUIDATORS APPOINTED) INVOLVING, INTER ALIA, THE CAPITAL RESTRUCTURING, THE DEBT RESTRUCTURING, THE SUBSCRIPTION, THE GROUP REORGANISATION AND THE WHITEWASH WAIVER

INTRODUCTION

It was jointly announced by the Investor and the Company on 26 September 2005 that the Investor entered into the Restructuring Agreement on 7 September 2005 with the Company, the Provisional Liquidators and the Escrow Agent for the implementation of the Restructuring Proposal. As an integral part of the Restructuring Proposal, the Investor also entered into the Subscription Agreement with the Company and the Provisional Liquidators on the same date, 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.

Details of the terms of the Restructuring Agreement and the Subscription Agreement are set out in the section headed “Letter from the Provisional Liquidators” of the document (the “ Document ”) dated 20 February 2006, of which this letter forms part. Terms used in this letter shall, unless the context otherwise requires, bear the same meanings as those defined in the Document.

The purpose of this letter is to provide you with, among other things, additional information on the Investor as well as the future plans of the Restructured Group after Completion.

BACKGROUND INFORMATION ON THE INVESTOR

The Investor is a company incorporated in the BVI with limited liability and whollyowned by Mr. Ko Chun Shun, Johnson. The principal business of the Investor is investment holding. It has not undertaken any business activities other than entering into the Restructuring Agreement, the Subscription Agreement and transactions relating thereto.

Mr. Ko Chun Shun, Johnson, aged 54 is the chairman and controlling shareholder of Universal Holdings Limited, the chairman and a substantial shareholder of DVN (Holdings) Limited and the co-chairman and a substantial shareholder of Varitronix International Limited, the securities of these companies being listed on the Main Board of the Stock Exchange. Mr. Ko has more than 30 years of experience in international trade and investment, in particular, in manufacturing and distribution of electronic products and in the media and technology industries.

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LETTER FROM THE INVESTOR

The Investor and its Concert Parties are not connected persons (as defined in the Listing Rules) or Concert Parties of any of the directors, chief executive and substantial shareholders of the Company or any of the subsidiaries of the Company or their respective associates (as defined in the Listing Rules). The Company did not own securities in the Investor as at the Latest Practicable Date.

FUTURE INTENTION OF THE INVESTOR REGARDING THE RESTRUCTURED GROUP

Business plan

It is the intention of the Investor that the Company will remain focused on the Group’s core business of retail sale of TCM and other medicines, health products and dried seafood products. Other than as stated in the Document, the Investor has no other intention or plans for any further capital injection into the Company. In view of 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 seeks to take advantage of Nam Pei Hong’s business profile and its well established reputation to expand further the Group’s TCM business in Hong Kong. The Investor has developed strategies to improve the operations of Nam Pei Hong and to expand the existing business, including plans to open new stores in Hong Kong and to conduct new marketing, packaging, distribution and product sourcing activities.

The Investor considers that one of the reasons for the continued loss of the Group is the underperformance of the Group’s PRC subsidiaries, including the businesses of Ensure and Huaxin which have been a significant drain on the Group’s resources. Accordingly, both Ensure and Huaxin will be excluded from the Restructured Group under the Restructuring Proposal to strengthen the financial position of the Restructured Group and to focus on the development of Nam Pei Hong’s business. The Investor has no intention to dispose of any assets of the Restructured Group upon Completion.

As advised by the Provisional Liquidators, the companies which form the Restructured Group had 104 employees as at the Latest Practicable Date. The Investor does not have any plan to lay off any such employees after Completion.

Directors and management

The current Board comprises five executive Directors and three independent nonexecutive Directors. The powers of these Directors have been suspended since the appointment of the Provisional Liquidators. It is one of the conditions precedent of the Restructuring Agreement that all the existing Directors will be removed from the Board upon Completion and nine new Directors nominated by the Investor, including three independent non-executive Directors, will be appointed.

Particulars of the proposed new Directors (other than Mr. Ko Chun Shun, Johnson whose biographical details are set out in the paragraph headed “Background information on the Investor” above) are set out below:

Executive Directors

Mr. Tsoi Tong Hoo, Tony , aged 41, graduated from the University of Western Ontario, Canada with a Bachelor of Business Administration degree. He has been a Chartered Financial Analyst since 1989, and has extensive experience in the areas of investment research, investing

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LETTER FROM THE INVESTOR

banking and corporate management. Mr. Tsoi is a member of Dual Filing Advisory Group of the SFC, and a member of the Listing Committees of the Growth Enterprise Market and Main Board of the Stock Exchange. Since March 2005, Mr. Tsoi has been appointed as an executive director of Varitronix International Limited and redesignated as a non-executive director of Universal Holdings Limited, the securities of both companies being listed on the Main Board of the Stock Exchange. Mr. Tsoi was previously an executive director of CCT Telecom Holdings Limited and Haier Electronics Group Co, Ltd. from September 1999 and March 2000 respectively. He resigned from both companies, which are listed on the Main Board of the Stock Exchange, in February 2002.

Mr. Chan Kam Kwan, Jason , aged 32, graduated from the University of British Columbia with a Bachelor of Commerce degree. Mr. Chan is a Certified Public Accountant and has more than 10 years of experience in accounting and corporate finance. Mr. Chan is currently the company secretary of Universal Holdings Limited and is also an independent nonexecutive director of Jackin International Holdings Limited, a company listed on the Main Board of the Stock Exchange.

Mr. Wong Fan, Frank , aged 41, has over 13 years of experience in the retail operations in both Hong Kong and the PRC, especially in the food and beverage market. Mr. Wong graduated from the Chinese University of Hong Kong, with a major in Mathematics, and worked for numerous well-known regional companies and was responsible for retail, wholesale and market promotion of products in the PRC from 1993 to 1996. Mr. Wong was also responsible for setting up representative offices of these companies in Dalian, Wuhan and Chengdu to handle sales and marketing activities. From 1996 to 1998, Mr. Wong helped set up Southsea Oils and Fats Industrial (Chiwan) Ltd. (“ SOFIL ”), a subsidiary of Kuok Oils and Grains Pte. Ltd. in the PRC. SOFIL’s main business operation is in cooking oil refinery with production and wholesale of its products in the PRC market. SOFIL is the PRC’s largest company in the production of cooking oil. With vast experience gained in the expansion and setting up of different ventures in the food and beverage industries, Mr. Wong joined Nam Pei Hong in 1998. Mr. Wong has been working as general manager of Nam Pei Hong for 7 years, and during his tenure of service, Nam Pei Hong has opened more than 12 new shops. Mr. Wong is also responsible for the expansion and development of NPH’s products in Mainland China including the promotion of the “Double Swallow” range of products, a popular range of ready-to-consume health food.

Mr. Yeung Heung Yeung , aged 43, graduated from the Tsinghua University in the PRC with a Master’s degree in Applied Mathematics in 1987 Mr. Yeung has over 6 years of experience in the management of pharmaceutical and biotechnology companies in the PRC. He has been the chief executive officer of Tsinghua Yuanxing Bio-Pharm Co. Ltd. (“ THYX ”) since 2000. THYX is engaged in the investment, research and development, manufacture and commercialisation of biological therapeutics chemical therapeutics, natural product-based therapeutics as well as nanotechnology-based materials and medical products.

Non-executive Director

Mr. Kelvin Edward Flynn , aged 35, is a managing director of Alvarez & Marsal Asia Limited. He has over 15 years of corporate recovery experience, including appointments as adviser to troubled companies in workout situations and to major groups of syndicated lenders and bondholders in complex debt restructuring assignments. Mr. Flynn has handled various appointments as liquidator, receiver and administrator and complex workouts in Hong Kong,

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LETTER FROM THE INVESTOR

Malaysia and Australia. He has also undertaken turnaround, workout, restructuring and due diligence assignments in Hong Kong, Japan, Korea, the PRC, Taiwan, Singapore and the Philippines.

Mr. Flynn’s primary industry experience includes telecommunications, retail and manufacturing. He also has experience in power generation and distribution, infrastructure, shipbuilding, hospitality, property, construction, mining, timber, plantations and commercial vehicle distribution.

Mr. Flynn has been involved in the restructuring of a number of listed companies in Hong Kong, Malaysia, the Philippines and Australia and one of his most recent assignments is presently the appointment as one of the provisional liquidators of the Company.

Independent non-executive Directors

Mr. Ho Tak Man, Billy , aged 57, holds a Bachelor of Medicine and Bachelor of Surgery degree from the University of Hong Kong and is a general practitioner in Hong Kong. Mr. Ho has not held any positions in listed public companies in the past three years.

Mr. Yap Fat Suan , aged 59, holds a Master of Business Administration degree from the University of Strathclyde, Glasgow. Mr. Yap is a Chartered Accountant in England and Wales and is a Fellow Member of the Institute of Chartered Accountants in England and Wales and an Associate Member of Hong Kong Institute of Certified Public Accountants. Mr. Yap has over 16 years of experience in finance and accounting. Mr. Yap is currently the managing director of Johnson Matthey Hong Kong Limited and prior to that appointment he was the general manager of Sun Hung Kai China Development Limited. Since September 2004, Mr. Yap is an independent non-executive director of DVN (Holdings) Limited, a company listed on the Stock Exchange.

Dr. Wong Yau Kar, David , aged 48, holds a doctor’s degree in economics from University of Chicago. Dr. Wong has extensive experience in direct investments and corporate finance. Currently, Dr. Wong is the managing director of United Overseas Investments Limited and an independent non-executive director of Universal Holdings Limited, a company listed on the Stock Exchange. Dr. Wong has also been actively participated in public services and to name a few, he has been a council member of the Hong Kong Institute of Directors since 1999 and a vice-president of the Chinese Manufacturers’ Association of Hong Kong.

The Investor shall procure that an announcement in compliance with Rule 13.51 of the Listing Rules will be made by the Company as soon as practicable after the appointment of the proposed new Directors become effective.

Maintaining the listing status of the Company

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LETTER FROM THE INVESTOR

THE WHITEWASH WAIVER

Immediately upon Completion but before the Placement and conversion of any Subscription Preference Shares, the Investor and its Concert Parties will be interested in an aggregate of approximately 85.2% of the enlarged issued ordinary share capital of the Company. Accordingly, the Investor and its Concert Parties will be required to make an unconditional mandatory general offer for all the New Shares other than those already owned or agreed to be acquired by the Investor or its Concert Parties unless the Whitewash Waiver is granted and approved pursuant to the Takeovers Code. The Investor has therefore applied to the Executive for, and the Executive has indicated that he will grant, the Whitewash Waiver which, if granted, will be subject to the approval of the Independent Shareholders by way of poll at the SGM.

Completion is conditional upon, among other things, the granting of the Whitewash Waiver by the Executive and the approval of the Whitewash Waiver by the Independent Shareholders at the SGM by poll. The Investor has indicated that it will not waive this condition precedent and thus if the Whitewash Waiver is not granted by the Executive or approved by the majority of the Independent Shareholders at the SGM, Completion will not take place and the Restructuring Proposal will not be implemented.

The shareholding of the Investor together with its Concert Parties will exceed 50% of the ordinary share capital of the Company upon Completion and therefore the creeper provisions of the Takeovers Code will not be applicable and they will be free to acquire further voting rights in the Company without triggering a general offer obligation.

The Investor together with its sole director and its Concert Parties did not own any shares, warrants, options, convertible securities, derivatives of or interest in the Company as at the Latest Practicable Date and had not dealt in any shares, warrants, options, convertible securities or derivatives of the Company during the Relevant Period.

GENERAL INFORMATION

Your attention is drawn to the sections headed “Letter from the Provisional Liquidators”, “Letter from Altus Capital” and the additional information set out in the appendices to the Document.

Yours faithfully, By order of the board of GAIN ALPHA FINANCE LIMITED Ko Chun Shun, Johnson Sole director

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LETTER FROM ALTUS CAPITAL

The following is the text of the letter of advice from Altus Capital to the Independent Shareholders in relation to the Restructuring Proposal, the Ensure Settlement and the Whitewash Waiver for the purpose of inclusion in this document.

8/F Hong Kong Diamond Exchange Building 8 Duddell Street, Central Hong Kong

20 February 2006

To the Independent Shareholders

Dear Sir/Madam,

(1) RESTRUCTURING OF HONG KONG PHARMACEUTICAL HOLDINGS LIMITED (PROVISIONAL LIQUIDATORS APPOINTED) INVOLVING, INTER ALIA, THE CAPITAL RESTRUCTURING, THE DEBT RESTRUCTURING, THE SUBSCRIPTION, THE GROUP REORGANISATION AND THE WHITEWASH WAIVER; AND

(2) MAJOR AND CONNECTED TRANSACTION: THE ENSURE SETTLEMENT

INTRODUCTION

We refer to our appointment as independent financial adviser to advise the Independent Shareholders in respect of the Restructuring Proposal, the Ensure Settlement and the Whitewash Waiver, details of which are set out in the document to the Shareholders dated 20 February 2006 (the “ Document ”), of which this letter forms part. Terms used in this letter shall have the same meanings as those defined in the Document unless the context requires otherwise.

No independent board committee will be formed to advise the Independent Shareholders as the powers of the Directors have been suspended since the appointment of the Provisional Liquidators on 13 October 2004. We have been therefore appointed to advise the Independent Shareholders as to whether the terms of the Restructuring Proposal, the Ensure Settlement and the Whitewash Waiver are fair and reasonable so far as the Independent Shareholders are concerned and whether the Restructuring Proposal, the Ensure Settlement and the Whitewash Waiver are in the interests of the Company and the Independent Shareholders as a whole and to advise the Independent Shareholders on how to vote.

We wish to state that: (i) in 2004, one of our associated companies, which is the investment manager of certain investment funds which invested in certain companies (“ Investees ”), appointed Alvarez & Marsal Asia Limited, the Escrow Agent, as receivers to the Investees; (ii) our appointment as the independent financial adviser to the Independent Shareholders has no connection with such appointment. We also wish to confirm that we are independent from the Company and its connected persons and are not involved in any circumstances stated under Rule 13.84 of the Listing Rules.

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LETTER FROM ALTUS CAPITAL

BASIS OF OUR OPINION AND RECOMMENDATION

In forming our opinion and recommendation, we have relied on the information, facts and representations contained or referred to in the Document and the information, facts and representations provided by, and the opinions expressed by the Provisional Liquidators and the Investor. We have assumed that all information, facts, opinions and representations made or referred to in the Document were true, accurate and complete at the time they were made and continued to be true, accurate and complete as at the date of the Document and that all expectations and intentions of the Company, the Provisional Liquidators or the Investor will be met or carried out as the case may be. We have no reason to doubt the truth, accuracy and completeness of the information, facts, opinions and representations provided to us by the Provisional Liquidators and the Investor. The Provisional Liquidators and the Investor have confirmed to us that no material facts have been omitted from the information supplied and opinions expressed. We have no reason to doubt that any relevant material facts have been withheld or omitted from the information provided and referred to in the Document or the reasonableness of the opinions and representations provided to us by the Provisional Liquidators and the Investor.

The Provisional Liquidators jointly and severally accept full responsibility for the accuracy of the information contained in the Document other than that relating to the Investor or its sole director and confirm, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed in the Document have been arrived at after due and careful consideration and there are no other facts not contained in the Document, the omission of which would make any statement in the Document other than those relating to the Investor or its sole director misleading. Shareholders should note that as some of the Directors have not been co-operative since the appointment of the Provisional Liquidators, the Provisional Liquidators have to rely on information made available to them and are not in a position to verify the accuracy of the information contained and opinion expressed in the Document.

The Investor and its sole director jointly and severally accept full responsibility for the accuracy of the information contained in the Document other than information relating to the Group or the Provisional Liquidators and confirm, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed in the Document have been arrived at after due and careful consideration and there are no other facts not contained in the Document, the omission of which would make any statement in the Document, other than those relating to the Group or the Provisional Liquidators, misleading. We have relied on such information and opinions and have not, however, conducted any independent verification of the information provided, nor have we carried out any independent investigation into the business, financial conditions and affairs of the Group or the future prospect of the Restructured Group.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In forming our opinion and recommendation, we have taken into consideration the following principal factors and reasons:

1. THE RESTRUCTURING PROPOSAL

1.1. Background and summary

The Group currently operates a chain of TCM and health food retailers in Hong Kong operating under Nam Pei Hong and a medical clinic in Wan Chai operating under

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NPH Sino-Meditech. Nam Pei Hong is an indirect wholly-owned subsidiary of the Company which has 11 retail outlets throughout Hong Kong and a warehouse facility located in Shatin.

The Group has been suffering losses and running at net operating cash outflow in recent years and has been relying substantially on loans and borrowings to finance its business operations. For the three years ended 31 March 2005, net losses attributable to Shareholders were approximately HK$59.3 million, HK$91.9 million and HK$3.7 million respectively, and the net cash outflow from operating activities was approximately HK$15.9 million, HK$4.2 million and HK$6.3 million respectively. For the six months ended 30 September 2005, the Group recorded a nominal unaudited net profit attributable to Shareholders of approximately HK$0.7 million and net cash outflow from operating activities was approximately HK$0.9 million. As at 30 September 2005, the Group’s total assets, which comprised mainly inventories, cash and receivables from investment disposal were approximately HK$29.8 million and the Group’s total liabilities were approximately HK$116.3 million.

At the request of the Company, trading in the Shares has been suspended since 5 August 2004 and will remain suspended until Completion and when sufficient public float has been restored. On 21 September 2004, the Petitioning Creditor filed the Petition against the Company as a result of the Company’s failure to repay amounts due to the Petitioning Creditor. On 13 October 2004, Messrs. Kelvin Edward Flynn and Cosimo Borrelli of Alvarez & Marsal Asia Limited (formerly of RSM Nelson Wheeler Corporate Advisory Services Limited) were appointed as provisional liquidators of the Company by the Hong Kong Court pursuant to the Order, to, among other matters, protect and preserve the assets of the Company and carry on and stabilise the operations of the Group, including facilitating a restructuring of the Company. The Petition has been adjourned on several occasions to give the Provisional Liquidators further time to negotiate and implement a restructuring proposal for the Company. The latest adjournment was given by the Hong Kong Court on 9 January 2006 until 8 May 2006.

The Company was placed into the second stage of the delisting procedures in accordance with Practice Note 17 of the Listing Rules by the Stock Exchange on 8 February 2005 and was required to submit a resumption proposal to the Stock Exchange within six months. On 15 August 2005, the Provisional Liquidators submitted a revised resumption proposal outlining the Restructuring Proposal to the Stock Exchange. On 25 August 2005, the Listing Committee of the Stock Exchange informed the Provisional Liquidators that they approved in principle the Restructuring Proposal, subject to the fulfillment of certain conditions.

On 14 June 2005, the Provisional Liquidators, HKPDL and the Company entered into the Ensure Settlement Agreement with the GH Noteholders to unwind the Ensure Acquisition.

On 7 September 2005, the Company, the Provisional Liquidators, the Investor and the Escrow Agent entered into the Restructuring Agreement for the implementation of the Restructuring Proposal. As at the Latest Practicable Date, the Provisional Liquidators had received in-principle support for the Restructuring Proposal from Creditors representing over 75% of the total estimated indebtedness of the Company. As an integral part of the Restructuring Proposal, the Investor also entered into the Subscription Agreement with the

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Company and the Provisional Liquidators on the same date, 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.

On 27 October 2005, the Bermuda Court appointed Messrs. Kelvin Edward Flynn and Cosimo Borrelli of Alvarez & Marsal Asia Limited and Mr. R. Craig Christensen of Arthur Morris Christensen and Co. of Hamilton Bermuda as provisional liquidators of the Company in Bermuda.

The primary objectives of the Restructuring Proposal are to inject working capital of approximately HK$34.7 million into the Group, to restructure the Group’s business operations with a particular emphasis on Nam Pei Hong, which is principally focused on the retail sale of TCM and other medicines, health products and dried seafood, and to compromise and discharge all of the Company’s unaudited indebtedness of approximately HK$73.5 million as at 31 December 2005. The Restructuring Proposal involves, inter alia, the Capital Restructuring, the Debt Restructuring, the Subscription and the Group Reorganisation.

Upon Completion but before the Placement and conversion of any Subscription Preference Shares, details of which are set out in the letter from the Provisional Liquidators of the Document (“ Letter from the Provisional Liquidators ”), the Investor will be interested in 810,000,000 New Shares, representing approximately 85.2% of the Company’s enlarged issued ordinary share capital, and 2,160,000,000 Preference Shares. Accordingly, under Rule 26 of the Takeovers Code, the Investor and its Concert Parties will be required to make an unconditional mandatory general offer for all the New Shares other than those already owned or agreed to be acquired by the Investor or its Concert Parties unless a whitewash waiver is granted and approved pursuant to the Takeovers Code. The Investor has applied to the Executive for the Whitewash Waiver and the Executive has indicated that the Whitewash Waiver will be granted subject to the approval of the Independent Shareholders by way of poll at the SGM. As none of the existing Shareholders were involved in the negotiation of, or are interested in, the Restructuring Agreement, the Subscription Agreement, the Schemes and Whitewash Waiver, all Shareholders are considered as Independent Shareholders and no Shareholder shall be required to abstain from voting at the SGM.

Upon Completion, the Restructured Group will be free of debt save that Nam Pei Hong, NPH Sino-Meditech and Poo Yuk Loong (“ Remaining Subsidiaries ”) will have manageable and serviceable trade debts in the amount of approximately HK$12.4 million.

1.2. Financial position of the Group

Shareholders should note that there had been delays in publishing the Company’s financial reports in compliance with the Listing Rules. Consequently, the annual reports of the Group for the two years ended 31 March 2005 and the interim reports for the six months ended 30 September 2004 and the six months ended 30 September 2005 were only despatched in February 2006. Set out below is a summary of the Group’s audited

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consolidated results for the five years ended 31 March 2005 and its unaudited consolidated results for the six months ended 30 September 2005:

Results					Six months	Six months
						ended 30
		Year ended 31		March	September
	2001	2002	2003	20041	20051, 2	2005
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
Turnover	39,006	71,063	108,321	142,004	62,929	21,573
Net (loss)/profit	(15,296)	(19,559)	(59,263)	(91,914)	(3,723)	666

Statement of net assets/liabilities

						As at
						30
			As at 31 March		September
	2001	2002	2003	20041	20051, 2	2005
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
Total assets	293,173	314,962	249,936	138,983	26,276	29,815
Total liabilities
(before
minority
interests	(199,421)	(216,008)	(227,539)	(222,431)	(113,447)	(116,320)
Net asset/
(liabilities)	71,936	65,377	8,466	(83,448)	(87,171)	(86,505)

Notes:

As the Provisional Liquidators considered the control by the Group over Ensure and its subsidiary, Guizhou Ensure Medical Company Limited (“ Ensure Group ”) effectively ceased on 31 March 2004, the accounts of these companies were not consolidated into the financial statements of the Group as of 31 March 2004. The Group’s financial statements for the year ended 31 March 2004 included only the turnover of the Ensure Group for the year ended 31 March 2004. The Group’s financial statements for the year ended 31 March 2005 do not include the accounts of the Ensure Group. The assets and liabilities of the Ensure Group have been classified as investments in securities and are carried forward at HK$10.46 million as at 31 March 2004 and 31 March 2005 in the financial statements of the Group. The Ensure Group was disposed of in June 2005.
Huaxin was deconsolidated from the Group’s financial statements as of 30 November 2004. As a result, the consolidated profit and loss accounts of the Group for the year ended 31 March 2005 included only the results of Huaxin from 1 April 2004 up to 30 November 2004. For details, please refer to notes 9 and 19 of the financial statements of the Group for the year ended 31 March 2005 as set out in Appendix I to the Document.

The Group has been experiencing financial difficulties for a number of years as a result of, among others: (a) the slow economic conditions and poor retail market in Hong Kong following the 1997 financial crisis; (b) the outbreak of the Severe Acute Respiratory Syndrome in 2003; (c) the Group’s investment in businesses in the PRC that are not

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integrated with and do not offer any economies of scale, cost savings or additional business opportunities to the Group; (d) the involvement of certain members of the Group in legal disputes that caused strain on the Group’s financial resources and distracted the attention of the management of the Group; and (e) the lack of control over the PRC pharmacy operations arising from a dispute with the local joint venture partners. These have adversely impacted the profitability of the Group and resulted in the lack of working capital of the Group to fund and expand its businesses.

The audited loss attributable to Shareholders for each of the three years ended 31 March 2005 was approximately HK$59.3 million, HK$91.9 million and HK$3.7 million respectively. For the six months ended 30 September 2005, the Group recorded a nominal unaudited net profit attributable to Shareholders of approximately HK$0.7 million. As at 31 March 2003, the Group had net assets of approximately HK$8.5 million whereas as at 31 March 2004, 31 March 2005 and 30 September 2005, the Group had net liabilities of approximately HK$83.4 million, HK$87.2 million and HK$86.5 million, respectively. We wish to point out that the then auditors of the Group made a disclaimer of opinion in respect of the audited financial statements of the Group for the year ended 31 March 2003. They stated that due to the significance of the fundamental uncertainty relating to the going concern basis, they were unable to form an opinion as to whether these financial statements give a true and fair view of the state of affairs of the Company and the Group. In respect of the two years ended 31 March 2005, as new auditors were only appointed on 16 February 2005, which was subsequent to the financial year ended 31 March 2004, the new auditors did not attend the stock-take of Nam Pei Hong as at 31 March 2004 and were not able to carry out the auditing procedures necessary to obtain all the information and explanations that they considered necessary for the purposes of the audit. The new auditors have qualified opinions on the financial statements of the Group for the two years ended 31 March 2005 as they were unable to determine whether proper books of account have been maintained by the Group for the two years ended 31 March 2005 and hence they were unable to form an opinion as to whether the financial statements present fairly the state of affairs of the Company and the Group during such periods.

The Group’s debt ratios as at 31 March 2003, 2004 and 2005 measured by the total liabilities divided by the total assets were approximately 0.9 times, 1.6 times and 4.3 times respectively. As at 30 September 2005, its debt ratio is was 3.9 times.

Based on the above, it is apparent that the Group is unlikely to achieve a recovery solely through internal resources and its existing business operations without implementing a restructuring to the Group. The Restructuring Proposal, if implemented, will provide the Restructured Group, comprising the Company and the Remaining Subsidiaries, with the necessary working capital and financial resources to revitalise its business operations and to compromise and discharge all its indebtedness through the Debt Restructuring (except for indebtedness owed to the Investor for the purpose of the Restructuring Proposal). Having reviewed a number of restructuring proposals received from potential investors, the Provisional Liquidators considered that the Restructuring Proposal is the best option available to the Company and its various Creditors and Shareholders. In view of the current financial conditions of the Group and in the absence of the Restructuring Proposal, the Company may be wound up by its Creditors and in such event, the Shareholders will be unlikely to receive any return in respect of their investments in the Company. On this basis, we concur with the view of the Provisional Liquidators that the Restructuring Proposal serves the best interests of both the Shareholders and Creditors.

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LETTER FROM ALTUS CAPITAL

1.3. The Restructuring Proposal

The Restructuring Proposal involves, inter alia , (i) the Capital Restructuring, (ii) the Debt Restructuring, (iii) the Subscription and (iv) the Group Reorganisation.

1.3.1.The Capital Restructuring

The Capital Restructuring comprises: (i) the reduction of the par value of every issued Share from HK$0.10 to HK$0.001; (ii) the consolidation of every 10 issued reduced share of HK$0.001 each into one New Share; (iii) the cancellation of all unissued share capital; and (iv) the increase of the authorised share capital. The Capital Restructuring will be subject to, among other matters, the approval by the Shareholders at the SGM and whose approval as a whole represents one of the conditions precedent to Completion.

As a result of the Capital Restructuring, a credit of approximately HK$139.0 million arising from the Capital Reduction will be applied to eliminate the accumulated losses of the Company.

Given the terms of the Restructuring Agreement, we are of the view that the principal purpose of the Capital Restructuring is to restructure the capital base of the Company so as to facilitate the issue of the Subscription Shares to the Investor pursuant to the Subscription. It will also provide the Company with greater flexibility in issuing New Shares in the future. Accordingly, we consider the arrangements under the Capital Restructuring to be fair and reasonable.

1.3.2.The Debt Restructuring

As at 31 December 2005, the unaudited total indebtedness due by the Group to its Creditors amounted to approximately HK$111.4 million, of which approximately HK$73.5 million was owed by the Company and the balance of approximately HK$37.9 million by its subsidiaries. The indebtedness of the Company of approximately HK$73.5 million as at 31 December 2005 comprised the Umbrella Convertible Note of HK$38.0 million together with accrued interest of approximately HK$4.0 million for the period from October 2002 to October 2004 at the interest of 4% per annum owing to Umbrella, HK$21.0 million owing to the Petitioning Creditor and the balance of approximately HK$10.5 million owing to other Creditors.

In respect of the GH Convertible Notes, the Ensure Settlement Agreement was signed on 14 June 2005 by, among others, the Company and the GH Noteholders to discharge the Company from its obligations to the GH Noteholders. Completion of the Ensure Settlement took place on 5 October 2005 and therefore, the GH Convertible Notes were no longer part of the indebtedness of the Company as at the Latest Practicable Date and were cancelled upon the completion of the Ensure Settlement. Further details of the Ensure Settlement are set out in the paragraph headed “The Ensure Settlement” below.

Pursuant to the Schemes, in exchange for the Creditors’ agreement to compromise and discharge in full all of their claims against the Company, which amounted to approximately HK$73.5 million as at 31 December 2005, the Scheme

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LETTER FROM ALTUS CAPITAL

Administrators will receive HK$45.5 million from the proceeds of the Subscription and any cash held by the Company as at the date of Completion for distribution to the Creditors and to cover the restructuring costs pursuant to the terms of the Schemes.

The majority of the remaining indebtedness of the Group, which amounted to approximately HK$37.9 million as at 31 December 2005, was owed by subsidiaries of the Company, including Nam Pei Hong. Under the Group Reorganisation, the Other Subsidiaries will be removed from the existing Group. Upon Completion, the Restructured Group will principally comprise the Company and the Remaining Subsidiaries, which leaves itself free of debt at the Company level and the Remaining Subsidiaries with manageable and serviceable trade debts of approximately HK$12.4 million. Details of the Group Reorganisation are set out under the paragraph headed “The Group Reorganisation” below.

According to the Provisional Liquidators, following the implementation of the Restructuring Proposal, proceeds from the Ensure Settlement and the sale of the Huaxin Interest and other possible recoveries, the estimated returns to the Creditors is approximately 75% (subject to proof of debt exercise and payment of the restructuring costs). All remaining debts of the Company will be discharged. On the other hand, if the Debt Restructuring fails to proceed and the Restructuring Proposal lapses, the Creditors and the Provisional Liquidators may proceed with the liquidation and winding up of the Group, in which case the Shareholders will be unlikely to receive any return from their investments in the Company. Based on the foregoing, we are of the opinion that the Schemes are in the interests of the Company and Shareholders as a whole.

The Schemes will have the effect of compromising and discharging each of the Company’s liabilities other than the liabilities of the Investor which will be excluded from the Schemes. They will become effective and binding on all the Creditors if, among other things, more than 50% in number representing and, also not less than 75% in value of the indebtedness of all the Creditors who attend and vote in person or by proxy, vote in favour of the Schemes at the relevant Creditors’ meeting(s). As at the Latest Practicable Date, the Provisional Liquidators had received in-principle support for the Restructuring Proposal from Creditors representing over 75% of the total estimated indebtedness of the Company.

1.3.3.The Subscription

After the implementation of the Capital Restructuring and on the date of Completion, the Investor will subscribe for 810,000,000 New Shares at HK$0.027 each and 2,160,000,000 Preference Shares at HK$0.027 each under a specific mandate to be obtained at the SGM in accordance with the terms of the Subscription Agreement. The Subscription Shares represent approximately 85.2% of the issued ordinary share capital of the Company at Completion. On the assumption that the Subscription Preference Shares are converted immediately upon Completion, the Subscription Shares together with the New Shares to be issued and allotted upon full conversion of the Subscription Preference Shares will, in aggregate, represent approximately 95.5% of the issued ordinary share capital of the Company. The Subscription Agreement is subject to approval of Independent Shareholders by way of poll at the SGM. So far as the Provisional Liquidators are aware, none of the existing Shareholders has any interest in the Subscription which is different from the other Shareholders. Therefore, all Shareholders can vote at the SGM in respect of the Subscription.

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The total cash consideration for the Subscription payable by the Investor of approximately HK$80.2 million will be applied as to: (a) HK$45.5 million for payments in accordance with the Schemes; (b) the balance of approximately HK$34.7 million as working capital for the Restructured Group. A further amount of up to HK$7.5 million will be paid by the Investor in accordance with the Restructuring Agreement for payment of costs and expenses in relation to the implementation of the Restructuring Proposal.

Subscription for New Shares

The issue price per New Share of HK$0.027 represents:

(i) a discount of approximately 86.1% to the closing price per Share of HK$0.194 on 4 August 2004, being the last trading day prior to the suspension of the trading in the Shares;
(ii) a discount of approximately 86.0% to the average closing price per Share of approximately HK$0.193 for the 10 consecutive trading days upon to and including 4 August 2004;
(iii) a discount of approximately 98.6% to the theoretical closing price per Share as a result of the proposed Share Consolidation under the Capital Restructuring of approximately HK$1.94 on 4 August 2004; and
(iv) a discount of approximately 98.6% to the theoretical average closing price per Share as a result of the proposed Share Consolidation under the Capital Restructuring of approximately HK$1.93 for the 10 consecutive trading days up to and including 4 August 2004.

While we noted the above significant discounts, we consider they should not be the primary factor in the evaluation of the issue price of the New Shares under the Subscription. It is noted that trading in the Shares has been suspended since 5 August 2004 and there have been significant changes to the business operations and financial conditions of the Group since then. Besides the proceedings taken by the Petitioning Creditor, the Group has ceased selling Western style medicine and prescription drugs through Ensure and will cease to engage in property investment after the disposal of its remaining investment property located in Beijing. The Provisional Liquidators are currently seeking a potential buyer for the property. As such, we consider that the closing price of the Shares prior to its suspension of trading on 5 August 2004 does not reflect the current financial condition and value of the Company and it is therefore inappropriate and irrelevant to use such price for comparison.

Based on the unaudited pro forma adjusted consolidated net tangible assets of the Group in Appendix II to the Document, the unaudited consolidated net liabilities of the Group prior to implementation of the Restructuring Proposal amounted to approximately HK$86.5 million as at 30 September 2005, equivalent to net liabilities of approximately HK$0.062 per Share. The issue price of HK$0.027 per New Share therefore represents a significant premium over the net liabilities attributed to each Share. Also, the unaudited pro forma adjusted consolidated net tangible assets of the

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Restructured Group upon Completion will amount to approximately HK$33.9 million, equivalent to net tangible assets of approximately HK$0.036 per New Share assuming no Preference Shares are converted. The Restructured Group’s net asset position immediately after Completion will be discussed in detail under the section headed “Effects of the Restructuring Proposal” below.

Based on the above and our analysis on the Preference Shares below, we consider that the subscription price of New Shares, which was arrived at after arm’s length negotiation between the Provisional Liquidators and the Investor with reference to the present financial position of the Group, is fair and reasonable.

Subscription for Preference Shares

Pursuant to the Subscription Agreement, the Subscription Preference Shares will be issued at the issue price of HK$0.027 each, which is identical to the issue price of the Subscription Shares. The holder of the Subscription Preference Shares will not have any voting rights but will be entitled to receive dividends at a rate of 5% per annum of the issue price of HK$0.027 per Preference Share. As the holder of the Subscription Preference Shares, the Investor has the right to convert its Preference Shares into New Shares, at any time within five years from the date of issue of such Preference Shares at the initial conversion price of HK$0.027 per New Share (subject to adjustment). The terms of the Preference Shares provide that, the Investor may not exercise any conversion rights attaching to the Preference Shares if, as a result of such exercise, the number of New Shares which are in public hands (within the meaning of the Listing Rules) is reduced to below 25% of all New Shares in issue immediately following such exercise or such other minimum percentage applicable to the Company for the time being as prescribed by the Stock Exchange. The Preference Shares are non-redeemable and shall be compulsorily converted into such number of New Shares to be determined by the issue price of such Preference Share divided by the then effective applicable conversion price on the fifth anniversary of the date of issuance of the Preference Shares.

Given the above-mentioned terms of the Subscription Preference Shares and as far as the Independent Shareholders are concerned, we consider that the issue of the Subscription Preference Shares is a mechanism whereby the Investor will receive a fixed return for the portion of its investment in the form of Preference Shares. With regard to the dividend rate of 5% per annum of the issue price of the Subscription Preference Shares for a term of five years or until their conversion into the New Shares, we have compared such yield with the average yield accepted under the latest issues of the Exchange Fund Notes by the government of Hong Kong with a maturity of five years. The average yield accepted for the Exchange Fund Notes with a maturity of five years is approximately 4.2% per annum. The dividend yield of the Subscription Preference Shares therefore represents an interest premium of 0.8% above the average yield of five-year Exchange Fund Notes. We note that bonds or preference shares issued by private corporations would normally have higher dividend yield than those issued by the government or public corporations, reflecting their credit risks. For example, five-year United States Dollar bonds issued by: (i) PCCW Capital Limited, a private corporation which parent company is listed on the Stock Exchange, currently yield about 5.8% per annum, which is at a premium of about 1.2% above the 4.6% per annum yield of five-year bonds issued by the government of the United States of America; and (ii) Hutchison International

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LETTER FROM ALTUS CAPITAL

Finance (BVI) Limited, a private corporation which parent company is listed on the Stock Exchange, currently yield about 5.5% per annum, which is at a premium of about 0.9% above the 4.6% per annum yield of five-year bonds issued by the government of the United States of America.

Given the current financial and operating condition of the Group, we are of the view that the dividend rate of 5% per annum is fair and reasonable as far as the Independent Shareholders are concerned. Further information on the terms of the Subscription Preference Shares is set out in the Letter from the Provisional Liquidators.

1.3.4.The Group Reorganisation

In addition to securing the commitment of the Investor to implement the Restructuring Proposal, the Provisional Liquidators have also restructured the Group’s business operations and, where applicable, disposed of businesses that did not fit in with the long-term strategy the Investor has for the Group.

Immediately following Completion, the Restructured Group will principally comprise Nam Pei Hong, the Group’s principal operating subsidiary, NPH SinoMeditech, which operates a Chinese medicine clinic, and Poo Yuk Loong, which holds the lease of a number of Nam Pei Hong’s retail outlets. The Investor considers that one of the reasons for the continued loss of the Group is the underperformance of the Group’s PRC subsidiaries, including the businesses of Ensure and Huaxin, which have been a significant drain on the Group’s resources. Accordingly, the Other Subsidiaries will be removed from the Restructured Group under the Restructuring Proposal. It is intended that the Restructured Group will focus on the development of Nam Pei Hong’s business after Completion.

As detailed in the paragraph headed “The Ensure Settlement” below, pursuant to the Ensure Settlement Agreement, the Company’s interest in Ensure has been transferred to the GH Noteholders in consideration of a cash payment of HK$3 million to the Company and the GH Noteholders releasing of all claims against the Company (including any claim for repayment under the GH Convertible Notes).

In addition, on 15 November 2005, the Provisional Liquidators entered into a conditional agreement for the Huaxin Agreement for the sale of the Huaxin Interest for a cash payment of HK$15 million. The sale also involves an assignment of debts owed to the Company and Nam Pei Hong (Holding) Limited of approximately HK$67.4 million in aggregate by Huaxin and China Genetic to Golden Linker, the acquirer. On 20 January 2006, the transactions contemplated in the Huaxin Agreement were sanctioned by the Hong Kong Court. Completion of the Huaxin Disposal took place on 8 February 2006 and the Company has ceased to have any interest in Huaxin.

The issued share capital of the Other Subsidiaries will be transferred to a nominee of the Scheme Administrators for the benefit of the Creditors at a nominal consideration of HK$1 under the Schemes. According to the Provisional Liquidators, the Other Subsidiaries were either dormant or had ceased operations as at the Latest Practicable Date. On this basis, we are of the view that their removal from the Group will not have any material impact on the continuing operations of the Restructured

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LETTER FROM ALTUS CAPITAL

Group after Completion. On the other hand, the removal of the Other Subsidiaries from the Group will allow the Restructured Group to focus its resources on its intended core business of retail sale of TCM medicine and other medicines, health products and dried seafood. We consider that the transfer contemplated under the Group Reorganisation is a fair and reasonable arrangement.

1.4. The Ensure Settlement

According to the Provisional Liquidators, despite the Company’s majority shareholding in Ensure, the Company never attained effective control over Ensure and its business operation since the Ensure Acquisition in August 2001. The management of Ensure in the PRC was reluctant to provide full financial information about Ensure’s operations and assets to the Company, stemming from the Company’s default under the GH Convertible Notes. As at the Latest Practicable Date, the Provisional Liquidators had the audited accounts of Ensure for the financial year up to 31 March 2003 and the unaudited management accounts for the financial year up to 31 March 2004. As the auditors of the Group were unable to obtain sufficient financial information of Ensure and its subsidiary, Guizhou Ensure Medical Company Limited, the accounts of these companies were not consolidated into the financial statements of the Group as of 31 March 2004.

From the limited financial information of Ensure that has been made available to the Provisional Liquidators as summarised below, it appears that the value and profitability of Ensure is significantly below the original consideration paid by the Company.

	For the	year ended
	31	March
	2003	2004
	(audited)	(unaudited)
	(HK$’000)	(HK$’000)
Net assets or shareholders’ equity	553	1,436
Net profit/(loss)	(2,672)	882

The Company’s share of the book value of Ensure’s assets is significantly lower than the price paid by the Company for the Ensure Interest of approximately HK$15 million. Although Ensure recorded an unaudited net profit for the year ended 31 March 2004, the Provisional Liquidators were of the view that such amount was too nominal to justify the investment made by the Company. On such basis, it would take more than 10 years for the Company just to break even on its investment.

In addition, as stated in the letter from the Investor in the Document (“ Letter from the Investor ”), Ensure does not fall into the Investor’s future plan for the Company and the Provisional Liquidators have advised that there were no other buyers interested in the Ensure Interest. Therefore, the Ensure Settlement Agreement was entered into among the Company, HKPDL, the Provisional Liquidators and the GH Noteholders on 14 June 2005, which, in effect reversed the Ensure Acquisition by: (i) HKPDL transferring the shares in Jointbest to the GH Noteholders; (ii) the GH Noteholders returning the GH Convertible Notes of the stated value of approximately HK$12.3 million to the Company for cancellation; (iii) the GH Noteholders paying cash of HK$3 million to HKPDL; and (iv) the GH Noteholders providing a release of all claims against the Company and HKPDL.

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LETTER FROM ALTUS CAPITAL

The Ensure Settlement constituted a major and connected transaction for the Company and was therefore subject to the announcement, reporting and independent shareholders’ approval requirements under the Listing Rules. The transactions contemplated in the Ensure Settlement Agreement were sanctioned by the Hong Kong Court on 21 September 2005 and completion took place on 5 October 2005. The Company has ceased to have any interest in Ensure.

Based on the aforesaid, the Ensure Settlement Agreement: (i) allowed the Group to unwind its investments in Ensure; (ii) released all claims against the Company including any claim for the repayment of the outstanding GH Convertible Notes; and (iii) allowed the Group to focus its resources on the operations of Nam Pei Hong in the future.

Based on the above and having taken the reasonable steps required under Rule 13.80(1) of the Listing Rules, we are of the view that the terms of the Ensure Settlement Agreement are fair and reasonable and are in the interests of the Company and Independent Shareholders as a whole.

As stated in the Letter from the Provisional Liquidators, completion of the Ensure Settlement took place before: (i) the issue of the announcement of the transaction, which was subsequently made on 6 December 2005; (ii) the publication of the Document; and (iii) obtaining the approval from the Independent Shareholders at a general meeting or a waiver from the Stock Exchange to hold such meeting under the Listing Rules. As a result, the Stock Exchange advised that the Company had breached Chapter 14A of the Listing Rules.

Furthermore, in the announcement of the Company dated 7 December 2005 in relation to the Ensure Settlement, it was reported that the Ensure Settlement was approved by Umbrella. Umbrella approved the Ensure Settlement in its capacity as a creditor of the Company and therefore no approval of Umbrella, as Shareholder has been given. As a result, the Stock Exchange advised that the Company has breached Rule 2.13(2) of the Listing Rules.

At the SGM, a resolution will be proposed to seek the Independent Shareholders’ approval and ratification of the Ensure Settlement Agreement.

1.5. Effects of the Restructuring Proposal

1.5.1.Net assets

As set out in Appendix II to the Document, the unaudited pro forma adjusted consolidated net tangible assets of the Restructured Group upon Completion will amount to approximately HK$33.9 million, equivalent to approximately HK$0.036 per New Share (before any conversion of the Subscription Preference Shares) or approximately HK$0.011 per New Share (assuming full conversion of the Subscription Preference Shares). These represent significant improvements compared with the net liabilities of the Group of approximately HK$86.5 million as at 30 September 2005, equivalent to approximately HK$0.062 per Share prior to the implementation of the Restructuring Proposal.

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LETTER FROM ALTUS CAPITAL

The Restructuring Proposal will accordingly improve the net asset position and the capital base of the Restructured Group significantly, by: (i) the cash received under the Subscription; (ii) the indebtedness compromised and discharged by the Creditors under the Debt Restructuring; and (iii) the disposal of the Other Subsidiaries after accounting for the restructuring costs and other expenses.

In view of the enhancement in the overall pro forma net asset position of the Restructured Group, we consider that the Restructuring Proposal is in the interests of the Group and the Independent Shareholders as a whole.

1.5.2.Working capital

The Subscription is expected to raise approximately HK$80.2 million in cash, of which HK$45.5 million will be applied to the cash payment to the Scheme Administrators for the distribution to the Creditors and payment of the restructuring costs pursuant to the Schemes, and the remaining balance of approximately HK$34.7 million will be applied as working capital for the Restructured Group.

In addition to the amount to be injected under the Subscription, HK$8 million has been provided by the Investor as interim working capital facility for the Group. As at the Latest Practicable Date, approximately HK$5.4 million had been drawn down by the Group, of which approximately HK$4.0 million and HK$1.4 million, respectively, were provided to Nam Pei Hong as working capital and used to settle a litigation matter of Nam Pei Hong. The Group shall repay the above loan drawn together with the interest accrued thereon at 5% per annum upon the earliest of (i) 30 April 2006; (ii) 10 business days from the date on which a written notice can be given by the Investor demanding repayment of the loan together with the interest after the Investor has acquired a controlling interest in the share capital of the Company; and (iii) such other date the parties may agree in writing. Therefore, the working capital of the Group is expected to improve after Completion.

As set out under the section headed “Profit Forecast and Cash Flow Projections” in Appendix II to the Document; (i) the sole director of the Investor is of the opinion that, in the absence of unforeseen circumstances as well as taking into account the present working capital and the cash flow expected to be generated from the Subscription as committed by the Investor, the Restructured Group will have sufficient working capital for the 12-month period starting from the date of the Document; (ii) the pro forma forecast earnings of the Restructuring Group for the 24-month ending 31 March 2007 are estimated to be not less than HK$6 million (“ Profit Forecast ”); and (iii) based on the cash flow projections of the Restructuring Group for the 24-month ending 31 March 2007, after taking into account the unaudited results of the Group for the period from 1 April 2005 to 31 December 2005, the expected cash balance at the end of the projection period is approximately HK$24.8 million (“ Cash Flow Projections ”).

We have reviewed the basis and assumptions of the Profit Forecast and the Cash Flow Projections and are of the view that they are fair and reasonable. Barring any unforeseen circumstances, we are of the view that the estimated profit of no less than HK$6 million under the Profit Forecast and the expected cash balance of approximately HK$24.8 million for the 24-month period ending 31 March 2007 under the Cash Flow Projections are reasonably arrived at.

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LETTER FROM ALTUS CAPITAL

Based on the above, it is noted that the working capital and financial positions of the Group are expected to improve after Completion and this is favourable to the Group and the Shareholders as a whole.

1.5.3. Indebtedness

As at 31 December 2005, the estimated indebtedness of the Company and the Group was approximately HK$73.5 million and HK$111.4 million respectively. Following Completion, all of the indebtedness of the Company will be compromised and discharged by the Creditors pursuant to the Schemes except for the indebtedness owed to the Investor for the purpose of the Restructuring Proposal. Other Subsidiaries will be removed from the Restructured Group under the Restructuring Proposal. Consequently, upon Completion, the Restructured Group will have no liabilities at the Company level and with only manageable and serviceable trade debts among the Remaining Subsidiaries. We are of the view that interest burden of the Group will be significantly reduced and this will have a positive impact on the Group’s operating results.

1.5.4.Dilution effect on the shareholding

As a result of the issuance of the Subscription Shares and the Subscription Preference Shares, the percentage shareholding of the existing Shareholders in the Company will decrease upon the Completion. The effects on the existing shareholding structure of the Company upon Completion are set out in the paragraph headed “Shareholding structure” under the section headed “Effects of the Restructuring Proposal” in the Letter from the Provisional Liquidators. In order to assess the fairness and reasonableness of the dilution effect on the Company’s existing shareholding structure under the Restructuring Proposal, we have identified, based on published information and to the best of our knowledge, all those companies listed on the main board of the Stock Exchange which had undergone and completed restructuring exercises within the past 36 months from the date of the Announcement,

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LETTER FROM ALTUS CAPITAL

for comparison purpose (“ Comparables ”). The table below summarises the dilution effects on the shareholding structure of the Comparables and the Company:

Stock				Date of Shareholding of	Date of Shareholding of
codeCompany		circular	public shareholders		Dilution
			Before	After
			restructuring	restructuring
286 G-Prop (Holdings) Limited	5 September 2003		83.6%	1.53%	98.17%
181 Fujian Group Limited		9 October 2003	44.70%	11.00%	75.39%
269 Seapower Resources		21 October 2003	72.45%	1.41%	98.05%
International Limited
1208Oriental Metals	6 November 2003		54.80%	11.90%	78.28%
(Holdings) Limited
240 I-China Holdings Limited	24 February 2004		75.00%	1.50%	98.00%
577 Skynet (International Group)	30 November 2004		100.00%	10.90%	89.10%
Holdings Limited
182 The Company	20 February 2006		32.80%	4.84%1	85.24%1
				or	or
				1.48%2	95.49%2

Notes:

Based on the shareholding of the Company following Completion and the Placement but before the conversion of any Subscription Preference Shares.
Based on the shareholding of the Company following Completion, the Placement and after full conversion of any Subscription Preference Shares.

As disclosed above, the shareholding of the existing public Shareholders will be diluted from approximately 32.80% to approximately 4.84% of the enlarged issued share capital of the Company following Completion but before the conversion of any Subscription Preference Shares, representing a dilution by approximately 85.24%, which is within the range of dilution among the Comparables. Such dilution is resulted from the issue of the 810,000,000 New Shares to the Investor under the Subscription. If all Subscription Preference Shares are to be converted at the initial conversion price of HK$0.027 per New Share in full, 2,160,000,000 New Shares will be further issued and the existing Shareholders’ interests will be diluted further to approximately 1.48% of the enlarged issued share capital of the Company, representing a dilution by approximately 95.49%, which is still within the range of dilution among the Comparables. All existing Shareholders will be classified as public upon Completion.

We noted that trading in the Shares has been suspended since 5 August 2004. It is currently expected that New Shares will resume trading following Completion if the Restructuring Proposal is successfully implemented and the public float is restored. The Group has a net liabilities position and has limited working capital for its ongoing business. Under such circumstances and in the absence of the Subscription, the Company will not have the ability to pay its liabilities and might

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LETTER FROM ALTUS CAPITAL

eventually be wound up. In such case, the Shareholders will be unlikely to receive any return from their investments in the Company. The success of the implementation of the Restructuring Proposal is crucial for the Company and Shareholders as a whole as it provides an opportunity for the turnaround of the Company. On this basis, we consider that the degree of dilution in the shareholding of the Shareholders who are considered as falling within the public hands (within the meaning ascribed thereto in the Listing Rules) as a result of the Subscription, though substantial, is acceptable.

2. FUTURE INTENTION OF THE INVESTOR REGARDING THE RESTRUCTURED GROUP

As stated in the Letter from the Investor, it is the intention of the Investor that the Company will remain focused on the Group’s core business of retail sale of TCM and other medicines, health products and dried seafood. The Investor has no other intention or plans for any further capital injection into the Company or to dispose of any assets of the Restructured Group upon Completion. As advised by the Provisional Liquidators, the companies which form the Restructuring Group had 104 employees as at the Latest Practicable Date. The Investor does not have any plan to lay off any such employees after Completion.

In view of 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 seeks to take advantage of Nam Pei Hong’s business profile and its well established reputation to further expand the Group’s TCM business in Hong Kong. The Investor has formulated strategies to improve the operations of Nam Pei Hong and to expand its existing business, including plans to open new stores in Hong Kong and to conduct new marketing, packaging, distribution and product sourcing activities.

The powers of the existing Directors have been suspended since the appointment of the Provisional Liquidators. It is one of the conditions precedent that all the existing Directors be removed from the Board and new Directors, including three independent non-executive Directors, will be appointed. As stated from the Letter from the Investor, we understand that the Investor intends to appoint Mr. Ko Chun Shun, Johnson (“ Mr, Ko ”), Mr. Tsoi Tong Hoo, Tony (“ Mr. Tsoi ”), Mr. Chan Kam Kwan, Jason (“ Mr. Chan ”), Mr. Wong Fan, Frank (“ Mr. Wong ”), and Mr. Yeung Heung Yeung (“ Mr. Yeung ”) to be the executive Directors and Mr. Kelvin Edward Flynn (“ Mr. Flynn ”) to be a non-executive Director of the new Board. Details of each of their biographies are set out in the Letter from the Investor.

The Investor believes that the members of the new Board possess the relevant expertise to carry out the business plan of the Restructured Group proposed by the Investor after Completion and to operate the TCM businesses in Hong Kong. The Investor further believes that the proposed Directors have a wide range of expertise and complementary skills to operate the Restructured Group going forward.

Based on the above and having reviewed the biography of each of the proposed executive Directors set out in the Letter from the Investor, we noted that each of Mr. Ko, Mr. Tsoi and Mr. Chan has served as chairman, executive director, non-executive director or company secretary in other listed corporations in Hong Kong respectively and has extensive experience and wide range of expertise in areas such as (i) international trade and investment; (ii) investment research, investment banking and corporate management; and (iii) accounting and corporate finance. In addition, Mr. Wong, who has been working as general manager of Nam Pei Hong for about seven years, has extensive experience in retail, wholesale and market promotion in Hong Kong and in the PRC; and Mr. Yeung has over six years of experience in the management of pharmaceutical and biotechnology companies in the PRC.

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LETTER FROM ALTUS CAPITAL

In respect of the proposed non-executive Director, we noted that Mr. Flynn is one of the Provisional Liquidators and a managing director of Alvarez & Marsal Asia Limited. Mr. Flynn has over 15 years of experience in corporate recovery exercises and has handled various appointments as liquidator, receiver and administrator in complex workouts in Hong Kong, Malaysia and Australia. Mr. Flynn has also undertaken turnaround, workout, restructuring and due diligence assignments in various parts in Asia Pacific.

On this basis, we concur with the Investor that the members of the new Board possess the relevant expertise to carry out the business plan of the Restructured Group proposed by the Investor after Completion and to operate the TCM businesses in Hong Kong. We also concur with the Investor that the proposed Directors have a wide range of expertise and complementary skills to operate the Restructured Group going forward.

3. THE WHITEWASH WAIVER

Upon Completion but before the Placement and conversion of any Subscription Preference Shares, the Investor and its Concert Parties will be interested in an aggregate of 810,000,000 New Shares, representing approximately 85.2% of the enlarged issued ordinary share capital of the Company. Accordingly, under Rule 26 of the Takeovers Code, the Investor and its Concert Parties will be required to make an unconditional mandatory general offer for all the New Shares other than those already owned or agreed to be acquired by the Investor or its Concert Parties unless a whitewash waiver is granted and approved pursuant to the Takeovers Code. The Investor has applied to the Executive for the Whitewash Waiver and the Executive has indicated that the Whitewash Waiver will be granted subject to the approval of the Independent Shareholders by way of poll at the SGM. As none of the existing Shareholders were involved in the negotiation of, or are interested in, the Restructuring Agreement, the Subscription Agreement, the Schemes and Whitewash Waiver, all Shareholders are considered as Independent Shareholders and no Shareholder shall be required to abstain from voting at the SGM.

Completion is conditional upon, among other things, the granting of the Whitewash Waiver by the Executive and the approval of the Whitewash Waiver by the Independent Shareholders at the SGM. The Investor has stated that it has no intention to waive these conditions precedent and Completion will not take place and the Restructuring Proposal will not be implemented if the Whitewash Waiver is not granted by the Executive and approved by the Independent Shareholders.

The successful implementation of the Restructuring Agreement will: (i) alleviate the financial stress currently encountered by the Group; (ii) improve the Group’s overall financial position and operating condition; and (iii) will enhance the value of the Company. On the contrary, in the absence of the Restructuring Proposal, the Creditors might proceed with the liquidation and winding up of the Company, in which case, it is likely that there would be a far less favourable return to the Shareholders compared to the return available under the Restructuring Proposal. Therefore, we consider that the grant of the Whitewash Waiver, being an essential element of the Restructuring Proposal and a common feature in similar rescue proposals for companies which are in grave financial difficulties and revived as a result of injection of funds/assets by new investors, is fair and reasonable in the context of the financial rescue of the Company and is therefore in the interests of the Shareholders and the Company as a whole.

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LETTER FROM ALTUS CAPITAL

RECOMMENDATION

We have considered the principal factors and reasons as summarised below:

the discharge and waiver of a significant amount of indebtedness of the Group due to the Creditors upon Completion;
the injection of funds from the Subscription which is critical to the operations of the Group’s existing businesses;
the improvement in the working capital position and financial position of the Group from a net liabilities position to a net assets position upon Completion;
the likelihood of an involuntary liquidation of the Company if it fails to restructure its indebtedness;
that, Shareholders will be unlikely to receive any return in the event of a liquidation and winding up of the Company; and
that, based on their biographies, the members of the new Board possess the relevant expertise and skills to operate the Restructured Group going forward.

Based on the above, we are of the view that the Restructuring Proposal is in the interests of the Company and Independent Shareholders as a whole and the terms of: (i) the Restructuring Proposal, the Subscription Agreement and the Whitewash Waiver; and (ii) the Ensure Settlement are fair and reasonable so far as the Independent Shareholders are concerned. Accordingly, we recommend the Independent Shareholders to vote in favour of the resolutions in relation to: (i) the Restructuring Agreement, Subscription Agreement and the Whitewash Waiver; and (ii) the Ensure Settlement, to be proposed at the SGM.

Yours faithfully, For and on behalf of Altus Capital Limited Arnold Ip Sean Pey, Chang Executive Director Executive Director

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

1. SHARE CAPITAL

The authorised and issued share capital of the Company as at the Latest Practicable Date were, and following Completion, will be as follows:

Authorised:

As at the Latest Practicable Date:

HK$

3,000,000,000 Shares After Completion: 3,500,000,000 New Shares 2,500,000,000 Preference Shares	300,000,000.00

	HK$ 35,000,000.00

	25,000,000.00

Issued and fully paid or to be issued as fully paid or credited to be fully paid:

As at the Latest Practicable Date:

		HK$
1,403,796,698	Shares	140,379,669.80

After Completion but before conversion of the Subscription Preference Shares:

140,379,669 New Shares upon the Capital Restructuring becoming effective 810,000,000 New Shares to be issued pursuant to the Subscription 950,379,669 New Shares 2,160,000,000 Preference Shares	HK$ 1,403,796.69 8,100,000.00
	9,503,796.69

	21,600,000.00

After Completion and full conversion of the Subscription Preference Shares:

HK$

3,110,379,669 New Shares 31,103,796.69

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

There has been no alternation in the number of Shares since 31 March 2005, the day on which the latest audited account of the Group were made up, prior to the Latest Practicable Date.

As at the Latest Practicable Date, all issued Shares ranked pari passu in all respects, including in particular, as to dividends, voting rights and return of capital. All New Shares to be issued under the Subscription and upon conversion of the Subscription Preference Shares will rank pari passu in all respects with the New Shares then in issue, including in particular, as to dividends, voting rights and return of capital.

As at the Latest Practicable Date, the Company had 119,440,000 outstanding share options granted to certain directors and employees of the Group, of which not less than 113,800,000 share options were held by existing Directors and employees of the Other Subsidiaries. The share options will be cancelled or lapsed pursuant to the terms of the relevant share option scheme of the Company. Exercise prices of these share options range from HK$0.38 to HK$1.00 per Share. As the last closing price of the Shares before the trading in the Shares was suspended on 5 August 2004 was HK$0.194, all the outstanding share options of the Company are out of money.

Save for the Umbrella Convertible Note, the terms of which are detailed in page 110 of this document, and the abovementioned share options, the Company had no outstanding warrants, convertible securities or other derivatives convertible into Shares as at the Latest Practicable Date.

2. INDEBTEDNESS

3. FINANCIAL SUMMARY

The auditors disclaimed their opinions on the audited consolidated financial statements of the Company for the three years ended 31 March 2005. The auditors’ opinion in respect of the audited consolidated financial statements of the Company for the three years ended 31 March 2003, 2004 and 2005 are set out on pages 64 to 74 of this document.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The table below summarises the consolidated results of the Company for the preceding three years ended 31 March 2003, 2004 and 2005, as derived from the audited consolidated financial statements of the Company.

Turnover
Cost of sales
Gross profit
Other revenue
Selling and distribution costs
Administrative expenses
Other operating expenses
Loss from operating activities
Finance costs
Gain on deconsolidation of a subsidiary
Loss before tax
Tax
Loss before minority interests
Minority interests
Net loss from ordinary activities
attributable to Shareholders
Loss per share – basic

For the year ended 31 March
2003
2004
2005
HK$’000
HK$’000
HK$’000
108,321
142,004
62,929
(73,679)
(92,909)
(34,421)
34,642
49,095
28,508
3,104
2,420
1,538
(35,142)
(31,875)
(19,304)
(29,036)
(27,817)
(16,004)
(45,793)
(75,326)
(8,048)
(72,225)
(83,503)
(13,310)
(6,683)
(11,517)
(7,098)
–
–
16,686
(78,908)
(95,020)
(3,722)
(1)
(15)
(1)
(78,909)
(95,035)
(3,723)
19,646
3,121
–
(59,263)
(91,914)
(3,723)
(4.27)cents
(6.55)cents
(0.27)cents

To the best of the knowledge of the Provisional Liquidators, having made all reasonable enquiries, the Group had not incurred any extraordinary or exceptional item and had not declared any dividend during the three years ended 31 March 2005.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The table below summaries the audited consolidated net liabilities for the Group as at the last three year end dates, as extracted from the respective audited consolidated financial statements of the Company for the years ended 31 March 2003, 2004 and 2005.

Non-current assets
Properties, plant and equipment
Investment properties
Intangible assets
Goodwill
Interests in associates
Long term investments
Investments in securities
Current assets
Inventories
Trade receivables
Prepayments, deposits and other receivables
Due from intermediate holding companies
Short term investments
Time deposits-pledged
Cash and cash equivalents
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
Bank and other borrowings
Finance lease payables
Provision for long service payments
Minority interests
Net assets/(liabilities)
Capital and reserves
Issued capital
Reserves
Shareholders’ equity/(deficiency)

For the year ended 31 March
2003
2004
2005
HK$’000
HK$’000
HK$’000
78,261
27,040
623
42,150
49,200
835
13,566
–
–
14,528
–
–
583
–
–
1,175
–
–
–
10,460
10,460
150,263
86,700
11,918
18,556
8,097
5,486
4,669
4,346
1,274
21,506
5,145
4,424
13,378
–
–
2,720
71
–
30,000
30,000
–
8,844
4,624
3,174
99,673
52,283
14,358
22,034
14,057
10,500
651
651
651
47,008
61,652
47,499
137,628
134,154
54,268
115
186
186
207,436
210,700
113,104
(107,763)
(158,417)
(98,746)
42,500
(71,717)
(86,828)
19,453
11,336
–
114
45
1
536
350
342
20,103
11,731
343
13,931
–
–
8,466
(83,448)
(87,171)
140,379
140,379
140,379
(131,913)
(223,827)
(227,550)
8,466
(83,448)
(87,171)

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

4. AUDITORS’ REPORT ON THE FINANCIAL STATEMENTS OF THE COMPANY FOR THE YEAR ENDED 31 MARCH 2005

The following information is extracted from the auditors’ report on the financial statements of the Company for the year ended 31 March 2005. References to page numbers are the page numbers of such audited financial statements of the Company for the year ended 31 March 2005.

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TO THE MEMBERS OF HONG KONG PHARMACEUTICAL HOLDINGS LIMITED (Provisional Liquidators Appointed)

(Incorporated in Bermuda with limited liability)

We have audited the financial statements on pages 13 to 58 which have been prepared in accordance with accounting principles generally accepted in Hong Kong.

RESPECTIVE RESPONSIBILITIES OF THE PROVISIONAL LIQUIDATORS AND AUDITORS

The Provisional Liquidators are responsible for the preparation of financial statements which give a true and fair view. In preparing financial statements which give a true and fair view it is fundamental that appropriate accounting policies are selected and applied consistently. As more fully explained in Note 2 to the financial statements, the Provisional Liquidators are currently appointed to the Company, and the Provisional Liquidators have been unable to obtain, and are therefore unable to provide, all the relevant information in this regard.

It is our responsibility to form an independent opinion, based on our audit, on those financial statements and to report our opinion solely to you, as a body, in accordance with Section 90 of the Bermuda Companies Act 1981, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.

BASIS OF OPINION

We conducted our audit in accordance with Statements of Auditing Standards 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 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.

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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 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 2005 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 2005. 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.

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 deconsolidated assets and liabilities have been classified as an investment security and are carried forward at HK$10,460,000 carrying value as at 31 March 2004 and 31 March 2005 as per Note 19 and Note 35(b). However, we were unable to obtain sufficient information and there were no practical alternative audit procedures that we could perform to satisfy ourselves that control was lost as of this date. If control was lost subsequent to 31 March 2004, the consolidated profit and loss account would include the results of the

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APPENDIX I

subsidiaries for period up to their revised deconsolidation date during the year ended 31 March 2005. Adjustments for any additional amounts to be consolidated would affect the net loss from the ordinary activities attributable to shareholders of the Group for the year ended 31 March 2005.

As more fully explained in Note 9 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 profit and loss account of the Group includes the results of the deconsolidated subsidiaries from 1 April 2004 up to 30 November 2004 and the gain on deconsolidation as set out in Note 35(b) is based on available unaudited management accounts. The profit and loss account relating to the deconsolidated subsidiary comprises turnover of HK$8,238,000; cost of sales of HK$4,267,000; other revenue of HK$387,000; selling and distribution costs of HK$2,304,000; administrative expenses of HK$4,800,000; other operating expenses of HK$1,771,000 and finance costs of HK$2,334,000. In addition, we were unable to satisfy ourselves as to the amounts in respect of the opening balances of Hua Xin as at 1 April 2004. The deconsolidated assets and liabilities as at 30 November 2004 have been classified as an investment security and are carried forward at nil carrying value as at 31 March 2005 as per Note 19 and 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 subsidiary are fairly stated. Any adjustments to the amounts consolidated would affect the net loss from the ordinary activities attributable to shareholders of the Group for the year ended 31 March 2005. In addition to the limitations in audit scope regarding the amounts consolidated, we have been unable to ascertain whether control of the subsidiary was lost on 30 November 2004. If control was lost at a different date to 30 November 2004, the consolidated profit and loss account would include the subsidiary’s results up to the revised date of loss of control.

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 2004 to 13 October 2004 have been included in the financial statements and also whether balances brought forward at 1 April 2004 are true and complete.

The consolidated financial statements show a net deficiency of shareholders’ funds of HK$87,171,000 at 31 March 2005. 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.

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(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.

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 2005.

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

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 2005 or of the Group’s loss and cash flows for the year then ended. In all other respects, 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.

Moore Stephens

Certified Public Accountants Hong Kong

8 February 2006

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APPENDIX I

5. AUDITORS’ REPORT ON THE FINANCIAL STATEMENTS OF THE COMPANY FOR THE YEAR ENDED 31 MARCH 2004

The following information is extracted from the auditors’ report on the financial statements of the Company for the year ended 31 March 2004. References to page numbers are the page numbers of such audited financial statements of the Company for the year ended 31 March 2004.

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TO THE MEMBERS OF HONG KONG PHARMACEUTICAL HOLDINGS LIMITED (Provisional Liquidators Appointed)

(Incorporated in Bermuda with limited liability)

We have audited the financial statements on pages 13 to 60 which have been prepared in accordance with accounting principles generally accepted in Hong Kong.

RESPECTIVE RESPONSIBILITIES OF THE PROVISIONAL LIQUIDATORS AND AUDITORS

BASIS OF OPINION

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.

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APPENDIX I

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 High Court”) appointed Mr. Cosimo Borrelli and Mr. Kelvin Flynn as joint and several provisional liquidators (the “Provisional Liquidators”) of the Company. Subsequent to the year end, 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 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.

We were appointed auditors on 16 February 2005 which was subsequent to the end of the Company’s financial year. 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 2004. 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.

Since we were only appointed auditors on 16 February 2005, which was subsequent to the end of the Company’s financial year, 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 31 March 2004 at HK$8,097,000. 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 would have a consequential significant effect on the loss for the year and net liabilities at 31 March 2004.

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APPENDIX I

As more fully explained in Note 21 to the financial statements, 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.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

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.

(ii) Contingent liabilities

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

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 2004 or of the Group’s loss and cash flows for the year then ended. In all other respects, in our opinion the financial statements have been properly prepared in accordance with the Hong Kong Companies Ordinance.

MOORE STEPHENS

Certified Public Accountants Hong Kong

8 February 2006

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

6. AUDITORS’ REPORT ON THE FINANCIAL STATEMENTS OF THE COMPANY FOR THE YEAR ENDED 31 MARCH 2003

The following information is extracted from the auditors’ report on the financial statements of the Company for the year ended 31 March 2003. References to page numbers are the page numbers of such audited financial statements of the Company for the year ended 31 March 2003.

Certified Public Accountants Phone: 852 2846 9888 15/F Hutchison House 852 2526 5371 10 Harcourt Road Fax: 852 2860 4432 Central, Hong Kong 852 2845 9208

To the members

Hong Kong Pharmaceutical Holdings Limited

(Incorporated in Bermuda with limited liability)

We have audited the financial statements on pages 23 to 99 which have been prepared in accordance with accounting principles generally accepted in Hong Kong, other than as set out below.

RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS

The Company’s directors are responsible for the preparation of financial statements which give a true and fair view. In preparing financial statements which give a true and fair view it is fundamental that appropriate accounting policies are selected and applied consistently. It is our responsibility to form an independent opinion, based on our audit, on those financial statements and to report our opinion solely to you, as a body, in accordance with Section 90 of the Bermuda Companies Act 1981, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.

BASIS OF OPINION

We conducted our audit in accordance with Statements of Auditing Standards issued by the Hong Kong Society of Accountants. An audit includes an 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 judgements 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.

We planned and performed 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. 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.

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FUNDAMENTAL UNCERTAINTY RELATING TO GOING CONCERN BASIS

In forming our opinion, we have considered the adequacy of the disclosures made in note 2 to the financial statements concerning the adoption of the going concern basis on which the financial statements have been prepared. As explained in note 2 to the financial statements, the Group is currently undertaking a number of measures to relieve its current liquidity problems. The financial statements have been prepared on a going concern basis, the validity of which depends upon the successful outcome of the proposed debt restructuring plan of the Group, the ongoing support of the Group’s principal banks and other lenders, the availability of additional external funding and the attainment of profitable and positive cash flow operations. The financial statements do not include any adjustment that may be necessary should the implementation of such measures be unsuccessful. We consider that appropriate disclosures have been made, but the fundamental uncertainty relating to whether the going concern basis is appropriate is so extreme that we have disclaimed our opinion.

DISAGREEMENT ABOUT ACCOUNTING TREATMENT – INSUFFICIENT PROVISIONS AGAINST AMOUNTS DUE FROM INTERMEDIATE HOLDING COMPANIES

As more fully explained in note 22 to the financial statements, the Group’s receivables from intermediate holding companies included in current assets in the balance sheet comprise an aggregate amount of approximately HK$13,378,000, inclusive of interest of approximately HK$864,000, due from Tin Ming Management Limited and Hong Tau Investment Ltd. The repayment dates of these receivables have been revised on a number of occasions, and have been further extended to 31 March 2004. Only HK$700,000 has been settled subsequent to the balance sheet date. Notwithstanding the revised repayment terms, we consider that, in the absence of any security for these debts or other reliable financial information about these intermediate holding companies and their ability to settle these overdue amounts, we believe that the Group is unlikely to recover the remaining balance of approximately HK$12,678,000 in full and a provision should have been made against these receivables. However, due to the absence of sufficient information, it is also impracticable to quantify the amount of the provision to be made. If such provision had been made, the Company’s and the Group’s net loss from ordinary activities attributable to shareholders for the year ended 31 March 2003 would have been increased and the Company’s and the Group’s net assets as at 31 March 2003 would have been reduced by the amounts thereof.

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APPENDIX I

DISCLAIMER OF OPINION

Because of the significance of the fundamental uncertainty relating to the going concern basis, we are unable to form an opinion as to whether the financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 31 March 2003 and of the loss and cash flows of the Group for the year then ended and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

Had we not disclaimed our opinion, we would have qualified our report with respect to the disagreement about the accounting treatment relating to insufficient provisions against amounts due from intermediate holding companies as set out in the basis of opinion section of this report.

Ernst & Young Certified Public Accountants Hong Kong

12 December 2003

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APPENDIX I

7. FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2005

The following information is extracted from the audited financial statements of the Company for the year ended 31 March 2005. References to page numbers are the page numbers of such financial statements of the Company for the year ended 31 March 2005.

CONSOLIDATED PROFIT AND LOSS ACCOUNT

For the year ended 31 March 2005

Note 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 Gain on deconsolidation of a subsidiary 9 Loss before tax Tax 12 Loss before minority interests Minority interests Net loss from ordinary activities attributable to Shareholders 13 Loss per share – basic 14	2005 HK$’000 62,929 (34,421) 28,508 1,538 (19,304) (16,004) (8,048) (13,310) (7,098) 16,686 (3,722) (1) (3,723) – (3,723) (0.27)cents	2004 HK$’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

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APPENDIX I

CONSOLIDATED BALANCE SHEET

31 March 2005

Note Non-current assets Properties, plant and equipment 15 Investment properties 16 Interests in associates 18 Investments in securities 19 Current assets Inventories 20 Trade receivables 21 Prepayments, deposits and other receivables 22 Due from intermediate holding companies 23 Short term investments 24 Time deposits – pledged 25 Cash and cash equivalents Current liabilities Trade payables 26 Tax payable Other payables and accruals Bank and other borrowings 27, 28 Provision for long service payments 30 Net current liabilities Total assets less current liabilities Non-current liabilities Bank and other borrowings 27, 28 Finance lease payables 29 Provision for long service payments 30 Minority interests Net liabilities Capital and reserves Issued capital 31 Reserves Shareholders’ deficiency	2005 HK$’000 623 835 – 10,460 11,918 5,486 1,274 4,424 – – – 3,174 14,358 10,500 651 47,499 54,268 186 113,104 (98,746) (86,828) – 1 342 343 – (87,171) 140,379 (227,550) (87,171)	2004 HK$’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) 11,336 45 350 11,731 – (83,448) 140,379 (223,827) (83,448)

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APPENDIX I

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Year ended 31 March 2005

At 1 April 2003 Net loss for the year At 31 March 2004 and 1 April 2004 Net loss for the year At 31 March 2005	Share capital HK$’000 140,379 – 140,379 – 140,379	Share Capital premium redemption account reserve HK$’000 HK$’000 140,694 297 – – 140,694 297 – – 140,694 297	Capital Contributed reserve surplus HK$’000 HK$’000 13,051 80,933 – – 13,051 80,933 – – 13,051 80,933	Exchange fluctuation Accumulated reserve losses HK$’000 HK$’000 6 (366,894) – (91,914) 6 (458,808) – (3,723) 6 (462,531)	Total HK$’000 8,466 (91,914)
					(83,448) (3,723)
					(87,171)

The Group’s contributed surplus represents the difference between the nominal value of the shares of the former holding company of the Group acquired pursuant to the Group reorganisation in a prior year, over the nominal value of the Company’s shares issued in exchange therefor.

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APPENDIX I

CONSOLIDATED CASH FLOW STATEMENT

Year ended 31 March 2005

Note Cash flows from operating activities Loss before tax Adjustments for: Finance costs 8 Interest income 6, 7 Dividend income from listed investments 6, 7 Depreciation 7 Amortisation of goodwill 7 Amortisation of know-how, patent and deferred development costs 7 Bad debts written off 7 Impairment of fixed assets 7 Impairment of know-how 7 Impairment of deferred development costs 7 Unrealised gain on revaluation of short term listed investments 7 Loss/(gain) on disposal of short term listed investments 7 Deficit/(surplus) on revaluation of investment properties 7 Provision/(write back of provision) for prepayments and other receivables 7 Provision for amount due from a director 7 Provision for amount due from a related company 7 Provision for amounts due from intermediate holding companies, net 7 Provision/(write back of provision) for obsolete and slow-moving inventories 7 Provision for doubtful trade receivables 7 Provision for legal compensation 7 Impairment of interests in associates 7 Impairment of long term unlisted investments 7 Loss on disposal of fixed assets, net 7 Loss on disposal of a subsidiary 7 Gain on deconsolidation of subsidiary 35(b) Operating loss before working capital changes Decrease/(increase) in trade receivables Increase in inventories Increase in prepayments, deposits and other receivables	2005 HK$’000 (3,722) 7,098 (823) (1) 1,094 – – 574 19 – – – 8 365 648 160 – 1,008 99 – 856 – – 3,407 – (16,686) (5,896) 291 (109) (2,773)	2004 HK$’000 (95,020) 11,517 (1,181) (109) 7,555 1,114 1,803 4,054 36,762 2,816 2,860 (28) (1,225) (7,050) (329) – 314 13,314 (1,796) 402 17,871 583 1,175 139 1,404 – (3,055) (10,227) (2,892) (834)

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APPENDIX I

Note (Decrease)/increase in amounts due from intermediate holding companies Increase in amount due from director (Decrease)/increase in trade payables Increase in other payables and accruals Decrease in provision for long service payment Cash used in operations Dividend income from listed investment Overseas tax paid Net cash outflow from operating activities Cash flows from investing activities Interest received Purchases of fixed assets Proceeds from disposal of fixed assets Disposal of a subsidiary 35(a) Deconsolidation of subsidiaries 35(b) Decrease in time deposits with a maturity of more than three months when acquired Proceeds from disposal of short term investments Net cash generated from investing activities Cash flows from financing activities Interest paid Interest element on finance lease payments Other loans Repayment of bank and other loans Decrease in trust receipt loans Release of finance lease payments by disposal of fixed assets Capital element of finance lease payments Net cash used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Analysis of balances of cash and cash equivalents Cash and bank balances	2005 HK$’000 (372) (177) (2,178) 4,938 (8) (6,284) 1 – (6,283) 207 (273) 44,763 – (603) 30,000 63 74,157 (2,738) (22) 4,000 (70,497) – 31 (98) (69,324) (1,450) 4,624 3,174 3,174	2004 HK$’000 64 – 11,974 786 (115) (4,299) 109 (1) (4,191) 533 (1,969) 2 3,956 (4,199) – 3,903 2,226 (4,373) (40) 21,139 (18,605) (195) – (181) (2,255) (4,220) 8,844 4,624 4,624

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APPENDIX I

BALANCE SHEET

31 March 2005

Note Non-current assets Properties, plant and equipment 15 Interests in subsidiaries 17 Current assets Prepayments, deposits and other receivables 22 Due from intermediate holding companies 23 Time deposits – pledged 25 Cash and cash equivalents Current liabilities Other payables and accruals Bank and other borrowings 27,28 Net current liabilities Net liabilities Capital and reserves Issued capital 31 Reserves 33	2005 HK$’000 – 9,330 9,330 1,274 – – 1,604 2,878 30,883 50,254 81,137 (78,259) (68,929) 140,379 (209,308) (68,929)	2004 HK$’000 – 10,460 10,460 1,257 – 30,000 2,682 33,939 26,337 50,254 76,591 (42,652) (32,192) 140,379 (172,571) (32,192)

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APPENDIX I

NOTES TO THE FINANCIAL STATEMENTS

31 March 2005

1. CORPORATE INFORMATION

The head office and principal place of business of Hong Kong Pharmaceutical Holdings Limited (the “Company”) is located at 5th Floor, Allied Kajima Building, 138 Gloucester Road, Wan Chai, Hong Kong.

During the year, the Group was involved in the following principal activities:

wholesale and retail of Chinese and other medicines, health products and dried seafood products
production and sale of biotechnological products
property investment
provision of Chinese clinical services

To the best knowledge of the Provisional Liquidators, the ultimate holding company is Welcome Success Worldwide Ltd., which is incorporated in the British Virgin Islands.

2. BASIS OF PREPARATION

At 31 March 2005, the Group had consolidated net current liabilities of approximately HK$98,746,000 (2004: consolidated net current liabilities of approximately HK$158,417,000) and consolidated net liabilities of approximately HK$87,171,000 (2004: HK$83,448,000). The Group also incurred a net loss from ordinary activities attributable to shareholders for the year ended 31 March 2005 of approximately HK$3,723,000 (2004: HK$91,914,000) and reported a decrease in cash and cash equivalents for the year ended 31 March 2005 of approximately HK$1,450,000 (2004: HK$4,220,000). Notwithstanding the adverse financial position of the Group as at 31 March 2005, 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.

On 25 February 2005, the Company submitted a proposal to the Listing Division of the HKEx (the “Listing Division”), setting out the principal terms of the Proposed Restructuring and requesting the HKEx’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 and supporting business plan, profit forecast memorandum and financial projections were submitted to the Listing Division, incorporating additional information, clarification and disclosures in response to queries from the Listing Division. The Resumption Proposal sets out the principal terms of the proposed restructuring.

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.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

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.

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.

3. IMPACT OF RECENTLY ISSUED HONG KONG FINANCIAL REPORTING STANDARDS

The Hong Kong Institute of Certified Public Accountants has issued a number of new and revised Hong Kong Financial Reporting Standards and Hong Kong Accounting Standards (“new HKFRSs”), which are effective for accounting periods beginning on or after 1 January 2005. The Group has not early adopted these new HKFRSs in the financial statements for the year ended 31 March 2005. The Group has already commenced an assessment of the impact of these new HKFRSs but is not yet in a position to state whether these new HKFRSs would have a significant impact on its results of operations and financial position.

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of preparation

These financial statements have been prepared in accordance with Hong Kong Statements of Standard Accounting Practice, accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance. They have been prepared under the historical cost convention, except for the periodic remeasurement of investment properties and certain investments, as further explained below.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Basis of consolidation

The consolidated financial statements include the financial statements of the Company and its subsidiaries for the year ended 31 March 2005. The results of subsidiaries acquired or disposed of during the year are consolidated from or to their effective dates of acquisition or disposal, respectively. All significant intercompany transactions and balances within the Group are eliminated on consolidation.

Minority interests represent the interests of outside shareholders in the results and net assets of the Company’s subsidiaries.

Certain subsidiaries within the Group have been deconsolidated from the consolidated financial statements prior to 31 March 2005 because in the opinion of the Provisional Liquidators, the Group lost control over these subsidiaries and it will be misleading to the users if these subsidiaries are consolidated in the Group’s assets and liabilities at the balance sheet date.

Subsidiaries

A subsidiary is a company whose financial and operating policies the Company controls, directly or indirectly, so as to obtain benefits from its activities.

The results of the subsidiaries are included in the Company’s profit and loss account to the extent of dividends received and receivable. The Company’s interests in subsidiaries are stated at cost less any impairment losses.

Associates

An associate is a company, not being a subsidiary or a jointly-controlled entity, in which the Group has long term interest of generally not less than 20% of the equity voting rights and over which it is in a position to exercise significant influence.

The Group’s share of the post-acquisition results and reserves of associates is included in the consolidated profit and loss account and consolidated reserves, respectively. The Group’s interests in associates are stated in the consolidated balance sheet at the Group’s share of net assets under the equity method of accounting, less any impairment losses.

The results of associates are included in the Company’s profit and loss account to the extent of dividends received and receivable. The Company’s interests in associates are treated as long term assets and are stated at cost less any impairment losses.

Goodwill

Goodwill arising on the acquisition of subsidiaries represents the excess of the cost of the acquisition over the Group’s share of the fair values of the identifiable assets and liabilities acquired as at the date of acquisition.

Goodwill arising on acquisition is recognised in the consolidated balance sheet as an asset and amortised on the straight-line basis over its estimated useful life of 15 years, less any impairment losses.

SSAP 30 “Business combinations” was adopted as at 1 April 2001. Prior to that date, goodwill arising on acquisitions was eliminated against consolidated reserves in the year of acquisition. On the adoption of SSAP 30, the Group applied the transitional provision of SSAP 30 that permitted such goodwill to remain eliminated against consolidated reserves. Goodwill on acquisitions subsequent to 1 April 2001 is treated according to the SSAP 30 goodwill accounting policy above.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

On disposal of subsidiaries, the gain or loss on disposal is calculated by reference to the net assets at the date of disposal, including the attributable amount of goodwill which remains unamortised and any relevant reserves, as appropriate. Any attributable goodwill previously eliminated against consolidated reserves at the time of acquisition is written back and included in the calculation of the gain or loss on disposal.

The carrying amount of goodwill, including goodwill remaining eliminated against consolidated reserve, is reviewed annually and written down for impairment when it is considered necessary. A previously recognised impairment loss for goodwill is not reversed unless the impairment loss was caused by a specific external event of an exceptional nature that was not expected to recur, and subsequent external events have occurred which have reversed the effect of that event.

Negative goodwill

Negative goodwill arising on the acquisition of subsidiaries represents the excess of the Group’s shares of the fair values of the identifiable assets and liabilities acquired as at the date of acquisition, over the cost of the acquisition.

To the extent that negative goodwill relates to the expectations of future losses and expenses that are identified in the acquisition plan and that can be measured reliably, but which do not represent identifiable liabilities as at the date of acquisition, that portion of negative goodwill is recognised as income in the consolidated profit and loss account when the future losses and expenses are recognised.

To the extent that negative goodwill does not relate to identifiable expected future losses and expenses as at the date of acquisition, negative goodwill is recognised in the consolidated profit and loss account on a systematic basis over the remaining average useful life of the acquired depreciable/amortisable assets. The amount of any negative goodwill in excess of the fair values of the acquired non-monetary assets is recognised as income immediately.

SSAP 30 “Business combinations” was adopted as at 1 April 2001. Prior to that date, negative goodwill arising on acquisitions was credited to the capital reserve in the year of acquisition. On the adoption of SSAP 30, the Group applied the transitional provision of SSAP 30 that permitted such negative goodwill to remain credited to capital reserve. Negative goodwill on acquisitions subsequent to 1 April 2001 is treated according to the SSAP 30 negative goodwill accounting policy above.

On disposal of subsidiaries, the gain or loss on disposal is calculated by reference to the net assets at the date of disposal, including the attributable amount of negative goodwill which has not been recognised in the consolidated profit and loss account and any relevant reserves as appropriate. Any attributable negative goodwill previously credited to capital reserve at the time of acquisition is written back and included in the calculation of the gain or loss on disposal.

Related parties

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Related parties may be individuals or corporate entities.

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APPENDIX I

Impairment of assets

An assessment is made at each balance sheet date of whether there is any indication of impairment of any asset, or whether there is any indication that an impairment loss previously recognised for an asset in prior years may no longer exist or may have decreased. If any such indication exists, the asset’s recoverable amount if estimated. An asset’s recoverable amount is calculated at the higher of the asset’s value in use or its net selling price.

An impairment loss is recognised only if the carrying amount of an asset exceeds its recoverable amount. An impairment loss is charged to the profit and loss account in the period in which it arises, unless the asset is carried at a revalued amount, when the impairment loss is accounted for in accordance with the relevant accounting policy for that revalued asset.

A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the recoverable amount of an asset, however not to an amount higher than the carrying amount that would have been determined (net of any depreciation/amortisation), had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is credited to the profit and loss account in the period in which it arises, unless the asset is carried at a revalued amount, when the reversal of the impairment loss is accounted for in accordance with the relevant accounting policy for that revalued asset.

Fixed assets and depreciation

Fixed assets, other than investment properties and construction in progress, are stated at cost less accumulated depreciation and any impairment losses. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditure incurred after fixed assets have been put into operation, such as repairs and maintenance, is normally charged to the profit and loss account in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the fixed asset, the expenditure is capitalised as an additional cost of that asset.

Depreciation is calculated on the straight-line basis to write off the cost of each asset over its estimated useful life, after taking into account its estimated residual value. The principal annual rates for this purpose are as follows:

Building	4.75%
Leasehold improvements	Over the lease terms
Furniture, fixtures and equipment	9% to 331/3%
Motor vehicles	12.5% to 25%

The gain or loss on disposal or retirement of a fixed asset recognised in the profit and loss account is the difference between the net sales proceeds and the carrying amount of the relevant asset.

Construction in progress represents factory buildings, plant and machinery and other fixed assets under construction. It is stated at cost less any impairment losses, and is not depreciated. Cost comprises the direct costs of construction and capitalised borrowing costs on related borrowed funds during the period of construction. Construction in progress is reclassified to the appropriate category of fixed assets when completed and ready for use.

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APPENDIX I

Investment properties

Investment properties are interests in land and buildings in respect of which construction work and development have been completed and which are intended to be held on a long term basis for their investment potential, any rental income being negotiated at arm’s length. Such properties are not depreciated and are stated at their open market values on the basis of annual professional valuations performed at the end of each financial year.

Changes in the values of investment properties are dealt with as movements in the investment property revaluation reserve. If the total of this reserve is insufficient to cover a deficit, on a portfolio basis, the excess of the deficit is charged to the profit and loss account. Any subsequent revaluation surplus is credited to the profit and loss account to the extent of the deficit previously charged.

On disposal of an investment property, the relevant portion of the investment property revaluation reserve realised in respect of previous valuations is released to the profit and loss account.

Intangible assets

Patent

Purchased patent is stated at cost less accumulated amortisation and any impairment losses. Amortisation is calculated on the straight-line basis over its estimated useful life of 10 years.

Know-how

Know-how represents certain technological know-how acquired during the course of the business. It is stated at cost less accumulated amortisation and any impairment losses. Amortisation is calculated on the straight-line basis, over its estimated useful life of not more than 15 years, commencing from the date when the related products are put into commercial production.

Research and development costs

All research costs are charged to the profit and loss account as incurred.

Expenditure incurred on projects to develop new products is capitalised and deferred only when the projects are clearly defined; the expenditure is separately identifiable and can be measured reliably; there is reasonable certainty that the projects are technically feasible; and the products have commercial value. Product development expenditure which does not meet these criteria is expensed when incurred.

Deferred development costs are stated at cost less accumulated amortisation and any impairment losses. Amortisation is calculated on the straight-line basis over the commercial lives of the underlying products of not exceeding 15 years, commencing from the date when the products are put into commercial production.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Leased assets

Leases that transfer substantially all the rewards and risks of ownership of assets to the Group, other than legal title, are accounted for as finance leases. At the inception of a finance lease, the cost of the leased asset is capitalised at the present value of the minimum lease payments and recorded together with the obligation, excluding the interest element, to reflect the purchase and financing. Assets held under capitalised finance leases are included in fixed assets and depreciated over the shorter of the lease terms and the estimated useful lives of the assets. The finance costs of such lease are charged to the profit and loss account so as to provide a constant periodic rate of charge over the lease terms.

Leases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. Where the Group is the lessor, assets leased by the Group under operating leases are included in non-current assets and rentals receivable under the operating lease are credited to the profit and loss account on the straight-line basis over the lease terms. Where the Group is the lessee, rental payable under the operating leases are charged to the profit and loss account on the straight-line basis over the lease terms.

Long term investments

Long term investments are non-trading investments in unlisted equity securities intended to be held on a long term basis. They are stated at cost less any impairment losses, on an individual investment basis.

When impairments in values have occurred, the carrying amounts of the securities are reduced to their fair values, as estimated by the Provisional Liquidators, and the amounts of the impairments are charged to the profit and loss account for the period in which they arise. When the circumstances and events which led to the impairments in values ceased to exist and there is persuasive evidence that the new circumstances and events will persist for the foreseeable future, the amounts of the impairments previously charged are credited to the profit and loss account to the extent of the amounts previously charged.

Short term investments

Short term investments are investments in listed equity securities held for trading purposes and are stated at their fair values on the basis of their quoted market prices at the balance sheet date, on an individual investment basis. The gains or losses arising from changes in the fair value of a security are credited or charged to the profit and loss account in the period in which they arise.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined on a weighted average basis and, in the case of work in progress and finished goods, comprises direct materials, direct labour and an appropriate proportion of overheads. Net realisable value is based on estimated selling prices less any estimated costs to be incurred to completion and disposal.

Cash and cash equivalents

For the purpose of the consolidated cash flow statement, cash and cash equivalents comprise cash on hand and demand deposits, and short term highly liquid investments which are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, and have a short maturity of generally within three months when acquired, less bank overdrafts which are repayable on demand and form an integral part of the Group’s cash management.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Revenue recognition

Revenue is recognised when it is probable that the economic benefits will flow to the Group and when the revenue can be measured reliably, on the following bases:

(a) from the sale of goods, when the significant risks and rewards of ownership have been transferred to the buyer, provided that the Group maintains neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold;
(b) from the sale of marketable securities, when the relevant contract notes are exchanged;
(c) from the rendering of services, when the services are rendered;
(d) rental income, on a time proportion basis over the lease terms;
(e) interest income, on a time proportion basis taking into account the principal outstanding and the effective interest rate applicable; and
(f) dividend income, when the shareholders’ right to receive payment has been established.

Provisions

A provision is recognised when a present obligation (legal or constructive) has arisen as a result of a past event and it is probable that a future outflow of resources will be required to settle the obligation, provided that a reliable estimate can be made of the amount of the obligation.

When the effect of discounting is material, the amount recognised for a provision is the present value at the balance sheet date of the future expenditures expected to be required to settle the obligation. The increase in the discounted present value amount arising from the passage of time is included in finance costs in the profit and loss account.

Income tax

Income tax comprises current and deferred tax. Income tax is recognised in the profit and loss account or in equity if it relates to items that are recognised in the same or a different period, directly in equity.

Deferred tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred tax liabilities are recognised for all taxable temporary differences:

except where the deferred tax liability arises from the initial recognition of an asset or liability and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
in respect of taxable temporary differences associated with investments in subsidiaries and interests in joint ventures except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Deferred tax assets are recognised for all deductible temporary differences, carryforward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carryforward of unused tax assets and unused tax losses can be utilised:

except where the deferred tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or liability and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
in respect of deductible temporary differences associated with investments in subsidiaries and interests in joint ventures, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax assets are recognised to the extent that it is probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.

Employee benefits

Paid leave carried forward

The Group provides paid annual leave to its employees under their employment contracts. Under certain circumstances, such leave which remains untaken as at the balance sheet date is permitted to be carried forward and utilised by the respective employees in the following year. An accrual is made at the balance sheet date for the expected future cost of such paid leave earned during the year and prior years by the employees and carried forward.

Employment Ordinance long service payments

Certain of the Group’s employees have completed the required number of years of service to the Group in order to be eligible for long service payments under the Hong Kong Employment Ordinance in the event of the termination of their employment. The Group is liable to make such payments in the event that such a termination of employment meets the circumstances specified in the Employment Ordinance.

A provision is recognised in respect of the probable future long service payments expected to be made. The provision is based on the best estimate of the probable future payments which have been earned by the employees from their services to the Group to the balance sheet date.

Pension schemes

The Group operates a defined contribution Mandatory Provident Fund retirement benefits scheme (the “MPF Scheme”) under the Mandatory Provident Fund Schemes Ordinance, for those employees who are eligible to participate in the MPF Scheme. Contributions are made based on a percentage of the employees’ basic salaries and are charged to the profit and loss account as they become payable in accordance with the rules of the MPF scheme. The assets of the MPF Scheme are held separately from those of the Group in an independently administered fund. The Group’s

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

employer contributions vest fully with the employees when contributed into the MPF Scheme, except for the Group’s employer voluntary contributions, which are refunded to the Group when the employee leaves employment prior to the contributions vesting fully, in accordance with the rules of the MPF Scheme.

The employees of the Group’s subsidiaries which operate in Mainland China are required to participate in central pension schemes operated by the local municipal government. The subsidiaries are required to contribute certain percentage of the payroll costs to the central pension schemes. The contributions are charged to the profit and loss account as they become payable in accordance with the rules of the central pension schemes.

Share option schemes

The Company operates share option schemes for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group’s operations. The financial impact of share options granted under the share option schemes is not recorded in the Company’s or the Group’s balance sheet until such time as the options are exercised, and no charge is recorded in the profit and loss account or balance sheet for their costs. Upon the exercise of share options, the resulting shares issued are recorded by the Company as additional share capital at the nominal value of the shares, and the excess of the exercise price per share over the nominal value of the shares is recorded by the Company in the share premium account, options which are cancelled prior to their exercise date, or which have lapsed, are deleted from the register of outstanding options.

Foreign currencies

Foreign currency transactions are recorded at the applicable exchange rates ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable exchange rates ruling at that date. Exchange differences are dealt with in the profit and loss account.

On consolidation, the financial statements of overseas subsidiaries and associates are translated into Hong Kong dollars using the net investment method. The profit and loss accounts of overseas subsidiaries and associates are translated into Hong Kong dollars at the weighted average exchange rates for the year, and their balance sheets are translated into Hong Kong dollars at the exchange rates ruling at the balance sheet date. The resulting translation differences are included in the exchange fluctuation reserve.

For the purpose of the consolidated cash flow statement, the cash flows of overseas subsidiaries are translated into Hong Kong dollars at the exchange rates ruling at the dates of the cash flows. Frequently recurring cash flows of overseas subsidiaries which arise throughout the year are translated into Hong Kong dollars at the weighted average exchange rates for the year.

Borrowing costs

Borrowing costs include interest charges and other costs incurred in connection with the borrowing of funds.

All borrowing costs are charged to the profit and loss account in the year in which they are incurred.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

5. SEGMENT INFORMATION

Segment information is presented by way of two segment formats: (i) on a primary segment reporting basis, by business segment; and (ii) on a secondary segment reporting basis, by geographical segment.

The Group’s operating businesses are structured and managed separately, according to the nature of their operations and the products and services they provide. Each of the Group’s business segments represents a strategic business unit that offers products and services which are subject to risks and returns that are different from those of the other business segments. Summary details of the business segments are as follows:

(a) the sum yung and pharmaceutical products segment sells Chinese and other medicines, pharmaceutical products, health products and dried seafood products to wholesalers and retailers;
(b) the biotechnological and transgenic products segment engages in the production and sale of biotechnological and transgenic products;
(c) the property investment segment engages in investment property holding and receives rental income from properties located in Hong Kong and Mainland China; and
(d) the corporate and others segment comprises the provision of Chinese clinical services, the trading of marketable securities and corporate income and expense items.

In determining the Group’s geographical segments, revenues and results are attributed to the segments based on the location of the customers, and assets are attributed to the segments based on the location of the assets.

Intersegment sales and transfers are transacted at cost or with reference to the selling prices used for sales made to third parties at the then prevailing market prices.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(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 pharmaceutical products 2005 2004 HK$’000 HK$’000 Segment revenue: Sales to external Customers 52,202 115,561 Intersegment Sales 177 195 Other revenue 87 930 Total 52,466 116,686 Segment results 151 (1,171 ) Interest and dividend Income Unallocated revenue Unallocated expenses Loss from operating activities Finance costs Gain on deconsolidation Loss before tax Tax Loss before minority interests Minority interests Net loss from ordinary activities attributable to shareholders Segment assets 11,319 10,445 Unallocated assets Total assets Segment liabilities 8,215 10,474 Unallocated liabilities Total liabilities Other segment information: Depreciation 867 1,907 Amortisation of intangible assets – 392 Amortisation of goodwill – 172 Impairment losses included in the profit loss account – – Capital expenditure 261 1,305 Other non-cash expenses 343 527	Biotechnological and transgenic products 2005 2004 HK$’000 HK$’000 8,238 22,881 – – 387 188 8,625 23,069 (960 ) (48,742 ) – 29,990 – 21,097 115 5,110 – 1,411 – – 19 44,196 19 947 1,380 5,430	Property 2005 HK$’000 1,261 – – 1,261 (4,815 ) 986 194 5 – – – – 4,376	investment 2004 HK$’000 2,286 – – 2,286 4,971 49,898 585 5 – – – – (7,050 )	Corporate and others 2005 2004 HK$’000 HK$’000 1,228 1,276 26 – 239 12 1,493 1,288 8,175 (38,447 ) 13,971 48,579 50,723 44,740 114 533 – – – 942 – – – 6 1,592 29,329	Eliminations 2005 2004 HK$’000 HK$’000 – – (203 ) (195 ) – – (203 ) (195 ) – – – – – – –	Consolidated 2005 2004 HK$’000 HK$’000 62,929 142,004 – – 713 1,130 63,642 143,134 2,551 (83,389 ) 825 1,290 (16,686 ) – – (1,404 ) (13,310 ) (83,503 ) 16,686 (11,517 ) (7,098 ) – (3,722 ) (95,020 ) (1 ) (15 ) (3,723 ) (95,035 ) – 3,121 (3,723 ) (91,914 ) 26,276 138,912 – 71 26,276 138,983 59,132 76,896 54,315 145,535 113,447 222,431 1,101 7,555 – 1,803 – 1,114 19 44,196 1,120 54,668 280 2,258 7,691 28,236

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(b) Geographical segments

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

Hong 2005 HK$’000 Segment revenue: Sales to external customers 54,627 Other segment information: Segment assets 25,281 Capital expenditure 254	Kong 2004 HK$’000 56,230 97,200 47	Mainland China 2005 2004 HK$’000 HK$’000 8,302 85,774 995 41,783 26 2,211	Eliminations 2005 2004 HK$’000 HK$’000 – – – – – –	Consolidated 2005 2004 HK$’000 HK$’000 62,929 142,004 26,276 138,983 280 2,258

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 Interest income Dividend income from listed investments Others	Group 2005 2004 HK$’000 HK$’000 53,056 116,398 8,238 22,881 1,261 2,286 374 439 62,929 142,004 823 1,181 1 109 714 1,130 1,538 2,420	Group 2005 2004 HK$’000 HK$’000 53,056 116,398 8,238 22,881 1,261 2,286 374 439 62,929 142,004 823 1,181 1 109 714 1,130 1,538 2,420
		142,004

		1,181 109 1,130
		2,420

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

7. LOSS FROM OPERATING ACTIVITIES

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

		Group
	2005	2004
HK$’000		HK$’000
Cost of inventories sold	34,017	92,463
Cost of services provided	317	331
Depreciation	1,094	7,555
Amortisation of a patent	–	392
Amortisation of know-how*	–	931
Amortisation of deferred development costs	–	480
Impairment of fixed assets	19	36,762
Impairment of know-how	–	2,816
Impairment of deferred development costs**	–	2,860
Research and development expenditure**	795	3,017
Amortisation of goodwill**	–	1,114
Minimum lease payments under operating leases in respect of
land and buildings	7,615	12,403
Auditors’ remuneration	570	1,298
Staff costs (excluding directors’ remuneration)
Wages and salaries	10,856	18,803
Pension scheme contributions***	920	1,761
Bad debts written off	574	4,054
Loss on disposal of a subsidiary	–	1,404
Loss on disposal of fixed assets, net	3,407	139
Provision for doubtful trade receivables	–	402
Provision/(write-back of provision) for prepayments and other receivables	648	(329)
Provision for amount due from a related company	–	314
Provision for amount due from a director	160	–
Provision/(write-back of provision) for obsolete and
slow-moving inventories	99	(1,796)
Provision for amounts due from intermediate holding companies, net	1,008	13,314
Provision for pending litigation	856	17,871
Impairment of interests in associates	–	583
Impairment of long term unlisted investments**	–	1,175
Unrealised gain on revaluation of short term listed investments	–	(28)
Loss/(gain) on disposal of short term listed investments	8	(1,225)
Deficit/(surplus) on revaluation of investment properties	365	(7,050)
Exchange losses, net	18	19
Net rental income	(1,174)	(2,171)
Dividend income from listed investments	(1)	(109)
Interest income	(823)	(1,181)

The amortisation of know-how was 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 were included in “Other operating expenses” on the face of the consolidated profit and loss account.
*** At 31 March 2005, the Group had no significant forfeited contributions available to reduce its contributions to the pension scheme in future years (2004: Nil).

– 94 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

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.(see Note 35(b))	Group 2005 2004 HK$’000 HK$’000 7,076 11,477 22 40 7,098 11,517 2005 2004 HK$’000 HK$’000 16,686 –	Group 2005 2004 HK$’000 HK$’000 7,076 11,477 22 40 7,098 11,517 2005 2004 HK$’000 HK$’000 16,686 –
		11,517

		2004 HK$’000 –

9. GAIN ON DECONSOLIDATION OF A SUBSIDIARY

The subsidiary was deconsolidated as of 30 November 2004 and details are set out in Note 19.

10. DIRECTORS’ REMUNERATION

Directors’ remuneration, disclosed pursuant to the Listing Rules and Section 161 of the Hong Kong Companies Ordinance, is as follows:

Fees: Executive directors Independent non-executive directors Other emoluments for executive directors: Salaries, allowances and benefits in kind	Group 2005 2004 HK$’000 HK$’000 – – – – – – 2,071 2,446	Group 2005 2004 HK$’000 HK$’000 – – – – – – 2,071 2,446
		–
		2,446

No fees or other emoluments were paid to the independent non-executive directors during the year.

The number of directors whose remuneration fell within the following band is as follows:

Nil to HK$1,000,000	Number of directors 2005 2004 5 5

There was no arrangement under which a director waived or agreed to waive any remuneration during the year.

– 95 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

11. FIVE HIGHEST PAID EMPLOYEES

Details of the remuneration of the five (2004: five) non-director, highest paid employees are as follow:

Salaries, allowances and benefits in kind Pension scheme contributions	Group 2005 2004 HK$’000 HK$’000 1,550 2,418 68 76 1,618 2,494	Group 2005 2004 HK$’000 HK$’000 1,550 2,418 68 76 1,618 2,494
		2,494

The number of the non-director, high paid employees whose remuneration fell within the following band is as follows:

	Number of employees	Number of employees
	2005	2004
Nil to HK$1,000,000	5	5

12. 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 (2004: 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.

			Group
		2005	2004
		HK$’000	HK$’000
Tax charge	elsewhere for the year	1	15

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 domiciled to the tax expense at the effective tax rates are as follows:

Loss before tax Tax at the applicable tax rates of 17.5% (2004: 17.5%) Effect of different tax rates of subsidiaries Income not subject to tax Expenses not deductible for tax Tax loss not recognised Tax charge	Group 2005 2004 HK$’000 HK$’000 (3,722) (95,020) (651) (16,628) – 7 (108) (1,938) (902) 15,823 1,662 2,751 1 15	Group 2005 2004 HK$’000 HK$’000 (3,722) (95,020) (651) (16,628) – 7 (108) (1,938) (902) 15,823 1,662 2,751 1 15

		(16,628) 7 (1,938) 15,823 2,751
		15

– 96 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Details of unrecognised deferred tax assets at the balance sheet date are as follows:–

Excess of tax allowance over depreciation Tax losses	Group 2005 2004 HK$’000 HK$’000 (261) (14,719) (32,985) (33,914) (33,246) (48,633)

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

13. NET LOSS FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO SHAREHOLDERS

The net loss from ordinary activities attributable to shareholders for the year ended 31 March 2005 dealt with in the financial statements of the Company is approximately HK$36,737,000 (2004: HK$44,602,000).

14. 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$3,723,000 (2004: HK$91,914,000), and the weighted average number of 1,403,796,698 (2004: 1,403,796,698) ordinary shares in issue during the year.

Diluted loss per share amounts for the years ended 31 March 2005 and 2004 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.

– 97 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

15. PROPERTIES, PLANT AND EQUIPMENT

Group

Buildings HK$’000 Cost or valuation: At beginning of year 49,852 Additions – Impairment – Disposals – Disposal – deconsolidated (49,852) At 31 March 2005 – Analysis of cost or valuation: At cost – At 31 March 2005 valuation – – Accumulated depreciation: At beginning of year 24,852 Provided during the year – Disposals – Disposal – deconsolidated (24,852) At 31 March 2005 – Net book value: At 31 March 2005 – At 31 March 2004 25,000	Leasehold improvements HK$’000 9,419 142 – (816) – 8,745 8,745 – 8,745 9,096 388 (816) – 8,668 77 323	Furniture, fixtures and Motor equipment vehicles HK$’000 HK$’000 30,729 2,500 47 84 (19) – (893) (1,035) – (1,464) 29,864 85 29,864 85 – – 29,864 85 29,583 1,929 545 161 (742) (985) – (1,088) 29,386 17 478 68 1,146 571	Construction in progress HK$’000 1,350 – – – – 1,350 1,350 – 1,350 1,350 – – – 1,350 – –	Total HK$’000 93,850 273 (19) (2,744) (51,316) 40,044 40,044 – 40,044 66,810 1,094 (2,543) (25,940) 39,421 623 27,040
		29,386
		478

		1,146

The net book value of the Group’s office equipment and motor vehicles held under finance lease as at 31 March 2005 amounted to approximately HK$15,000 (2004: HK$55,000) and HK$ nil (2004: HK$79,000) respectively.

– 98 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Company

Cost or valuation:
At 1 April 2004
Written off
At 31 March 2005
Accumulated depreciation:
At 1 April 2005
Written off
At 31 March 2005
Net book value:
At 31 March 2005
At 31 March 2004
INVESTMENT PROPERTIES
Group
Cost or valuation:
At 1 April 2004
(Deficit)/surplus on revaluation
Disposals
At 31 March 2005
Analysis of cost or valuation:
At cost
At 31 March 2005 valuation
Net book value:
At 31 March 2005

Leasehold improvements
HK$’000
812
(812)
–
812
(812)
–
–
–
2005
2004
HK$’000
HK$’000
49,200
42,150
(365)
7,050
(48,000)
–
835
49,200
–
–
835
49,200
835
49,200
835
49,200

16. INVESTMENT PROPERTIES

– 99 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The property is under a medium term lease and is situated in the Mainland China.

The Group’s investment property was revalued on 31 March 2005 by Knight Frank Hong Kong Limited, independent professionally qualified valuers, on an open market value, existing use basis.

Further particulars of the Group’s investment property are included on page 59 of the Annual Report.

17. INTERESTS IN SUBSIDIARIES

Unlisted shares, at cost Due from subsidiaries Due to subsidiaries Less: Provisions for impairment Provisions for amounts due from subsidiaries	Company 2005 2004 HK$’000 HK$’000 29,344 29,344 402,097 372,794 (1,130) – 430,311 402,138 (29,344) (29,344) (391,637) (362,334) 9,330 10,460

The amounts due from/(to) subsidiaries are unsecured, interest-free and have no fixed terms of repayment.

– 100 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Particulars of the principal subsidiaries are as follows:

	Place of	Nominal value	Percentage of	Percentage of
	Incorporation/	of issued ordinary/	equity attributable to
	registration and	registered	the Company			Principal
Name	operations	share capital	Direct	Indirect		activities
China Vantage Limited	Hong Kong	HK$2	–		100%	Financing activities
(“China Vantage”)
China Genetic Limited	Hong Kong	HK$2	–		100%	Investment holding
China Silver Limited	Hong Kong	HK$3	–		100%	Property holding
Forever Good Investments Limited	British Virgin Islands	US$1	–		100%	Investment holding
Forever Wealth Enterprises Limited	Hong Kong	HK$2	–		100%	Property holding
Gain Success Investments Limited	British Virgin	US$1	–		100%	Securities dealings
	Islands/Hong Kong
Joinbest Investment Limited*	British Virgin Islands	US$50,000	–		100%	Investment holding
Nam Pei Hong (Holding) Limited	Hong Kong	HK$113,942,339	–		100%	Investment holding
Nam Pei Hong Investments Limited	Hong Kong	HK$10,000	–		100%	Property holding
Nam Pei Hong Management Limited	Hong Kong	HK$300,000	–		100%	Provision of
						management services
Nam Pei Hong Nominees Limited	Hong Kong	HK$2	–		100%	Provision of
						nominee services
Nam Pei Hong Sum Yung	Hong Kong	HK$1,200,000	–		100%	Wholesale and
Drugs Company Limited						retail of Chinese
(“Sum Yung”)						medicines, dried
						seafood and
						health products
N P H International (B.V.I.) Limited	British Virgin Islands	US$4	100%		–	Investment holding
N P H Sino-Meditech Limited	Hong Kong	HK$2	–		100%	Provision of Chinese
						clinical services
Well Gain Assets Limited	Hong Kong	HK$2	–		100%	Property holding

Two subsidiaries held by Joinbest Investment Limited have been classified as investments in securities (see Note 19).

The above table lists the subsidiaries of the Company which, in the opinion of the Provisional Liquidators, principally affected the results for the year or formed a substantial portion of the net assets of the Group. To give details of other subsidiaries would, in the opinion of the Provisional Liquidators, result in particulars of excessive length.

– 101 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

18. INTERESTS IN ASSOCIATES

					Group	Group
				2005		2004
				HK$’000		HK$’000
Share of net assets				818		818
Due from associates				4,332		4,332
				5,150		5,150
Less:	Provisions for impairment			(818)		(818)
	Provisions for amounts due from		associates	(4,332)		(4,332)
					–	–

Particulars of the associates		are as follows:
				Percentage of
			Place of	ownership
			incorporation/	interest
		Business	registration and	attributable		Principal
Name		structure	operations	to the Group		Activities
Fujian	Province Xinmin	Corporate	Mainland China	19%	Production and
High Biotechnology					sale of genetic
Co.	Ltd.				medicines and
						medical
						equipment
Shanghai Biotechnology		Corporate	Mainland China	17.67%	Provision of
Industrial Zone United						building
Development Co. Ltd.					management and
					environmental
					support services

The English names of these associates in Mainland China are direct translations of their Chinese registered names.

The shareholdings in the associates all comprise equity shares held through a non wholly-owned subsidiary of the Company, Shanghai Huaxin Biotechnology Inc., which was deconsolidated as at 30 November 2004.

– 102 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

19. INVESTMENTS IN SECURITIES

Unlisted, investments at deconsolidated amounts (see Note 35(b))	2005 HK$’000 10,460	2004 HK$’000 10,460

Particulars of the investments are as follows:

		Place of	Nominal value	Percentage of equity	Percentage of equity
		incorporation/	of issued	attributable to
		registration and	ordinary/registered	the Company		Principal
Name	Note	operations	share capital	Direct	Indirect	activities
Guizhou Ensure Chain	(i)	Mainland China	RMB10,000,000	–	51.00%	Retail of
Pharmacy Co., Ltd.						pharmaceutical
(“Ensure Chain”)φ						products
Guizhou Ensure Medical	(i)	Mainland China	RMB3,000,000	–	45.82%	Retail of
Company Limitedφ						pharmaceutical
						products
Shanghai Huaxin High	(ii)	Mainland China	USD9,620,000	–	57.00%	Production and
Biotechnology Inc.φ						sale of
						biotechnological
						products

φ The Chinese name of the Company is a direct translation of its Chinese registered name. Notes:

(i) Two of the Group’s subsidiaries, 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.

The Provisional Liquidators have deconsolidated the Ensure subsidiaries in 2004 as they considered that the Group was unable to exercise its rights as a major shareholder either to control the assets and operations or to exercise significant influence over the financial and operating policy decisions of the Ensure subsidiaries. The management of the Ensure has not provided the Company with any financial information subsequent to the provision of unaudited management accounts for the year ended 31 March 2004, and, accordingly, deconsolidation has been made as of this date.

Subsequent to the balance sheet date, in June 2005, the Provisional Liquidators agreed to dispose of Joinbest to the minority shareholders of the Ensure subsidiaries. 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 on 21 September 2005 (see also Notes 28(e) and 40(d)).

(ii) One of the Group’s subsidiaries, Shanghai Huaxin Biotechnology Inc. (“Huaxin”) is a Sino-foreign cooperative 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.

The Provisional Liquidators have deconsolidated Huaxin in 2005 as they considered that the Group was unable to exercise its rights as major shareholder either to control the assets and operations or to exercise significant influence over the financial and operating policy decisions of the Huaxin. The management of Huaxin have not provided the Company with any financial information subsequent to the provision of unaudited management accounts for the period from 1 April 2004 to 30 November 2004, and, accordingly, deconsolidation has been made as of this date. The deconsolidated assets and liabilities as at 30 November 2004 are stated at nil carrying value at 31 March 2005.

Subsequent to the balance sheet date, the Provisional Liquidators have agreed to dispose of the Group’s interest in Hua Xin (see also Notes 35(b) and 40(d)).

– 103 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

20. INVENTORIES

Raw materials Work in progress Finished goods Merchandised goods	Group 2005 2004 HK$’000 HK$’000 – 318 – 963 – 386 5,486 6,430 5,486 8,097	Group 2005 2004 HK$’000 HK$’000 – 318 – 963 – 386 5,486 6,430 5,486 8,097
		8,097

All inventories are stated at cost.

21. TRADE RECEIVABLES

The Group’s credit terms granted to customers of Chinese and other medicines, health products and dried seafood products range between 30 and 90 days. The credit terms granted to customers of biotechnological and pharmaceutical products range between 60 and 180 days.

An aged analysis of the trade receivables as at the balance sheet date, net of provisions, is as follows:

Within 3 months 4 to 6 months 7 to 12 months 13 to 24 months Over 24 months	Group 2005 2004 HK$’000 HK$’000 1,206 3,193 – 854 2 148 48 128 18 23 1,274 4,346	Group 2005 2004 HK$’000 HK$’000 1,206 3,193 – 854 2 148 48 128 18 23 1,274 4,346
		4,346

22. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES

Included in the Group’s and Company’s prepayments, deposits and other receivables were the balance of working capital facility advanced by the investor and funds arising from realisation of assets being kept in escrow by the Provisional Liquidators of approximately HK$1,188,000 and HK$785,000 respectively (2004: HK$ nil).

23. DUE FROM INTERMEDIATE HOLDING COMPANIES

		Group		Company	Company
		2005	2004	2005	2004
	Note	HK$’000	HK$’000	HK$’000	HK$’000
Due from Tin Ming	(a)	13,120	12,110	13,120	12,110
Due from Hong Tau	(b)	1,202	1,204	1,202	1,204
Less: Provision for
impairment		(14,322)	(13,314)	(14,322)	(13,314)

– – – –

– 104 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Notes:

(a) The amounts of HK$6,744,000 and HK$6,003,000 (including interest amounting to approximately HK$1,236,000 and HK$903,000, respectively) due from Tin Ming Management Limited (“Tin Ming”) are unsecured and bear interest at prime rate plus 1% per annum. The amount of HK$6,744,000 was originally due on 28 March 2002 and was extended to 31 March 2003 and 31 March 2004, while the amount of HK$6,003,000 was due on 23 April 2003 and was extended to 31 March 2004. In 2004, the Company agreed to further extended the repayment date to 31 March 2005. On 21 December 2004, an amount of HK$374,000 was advanced to Tin Ming to repay its debt to Umbrella Finance Company Limited. This amount is unsecured and non interest bearing. The Provisional Liquidators are pursuing all available avenues to recover the amounts due from Tin Ming including legal action, if necessary. However, to be prudent, full provisions have been made for these receivables.
(b) The amount of approximately HK$1,202,000 due from Hong Tau Investment Ltd. (“Hong Tau”) represents the sharing of the Company’s financial restructuring costs by Hong Tau. The amount is unsecured and interest-free. The amount was originally due on 28 March 2002 and this was extended to 31 March 2004. In 2004, the Company agreed to further extend the repayment date to 31 March 2005. On 14 August 2003, Hong Tau settled approximately HK$700,000 with the remaining balance to be settled on 31 March 2005. The Provisional Liquidators are pursing all available avenues to recover the amounts due from Hong Tau including legal action, if necessary. However, to be prudent, full provisions have been made for these receivables.

24. SHORT TERM INVESTMENTS

Listed Hong Kong equity investments, at market value: Listed Hong Kong debt investments, at market value: The short term investments were disposed of during the year.	Group 2005 2004 HK$’000 HK$’000 – 71 – – – 71	Group 2005 2004 HK$’000 HK$’000 – 71 – – – 71
		71

25. TIME DEPOSITS – PLEDGED

	Group	Group	Company	Company
	2005	2004	2005	2004
	HK$’000	HK$’000	HK$’000	HK$’000
Time deposits – pledged
–Note 28(c)	–	30,000	–	30,000

– 105 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

26. TRADE PAYABLES

An aged analysis of the trade payables as at the balance sheet date, based on invoice date, is as follows:

Within 3 months 4 to 6 months 7 to 12 months 13 to 24 months Over 24 months	Group 2005 2004 HK$’000 HK$’000 3,670 5,788 285 1,020 8 207 42 12 6,495 7,030 10,500 14,057	Group 2005 2004 HK$’000 HK$’000 3,670 5,788 285 1,020 8 207 42 12 6,495 7,030 10,500 14,057
		14,057

27. BANK AND OTHER BORROWINGS

Note Current portion of bank 28 and other borrowings Current portion of finance 29 lease payables	Group 2005 2004 HK$’000 HK$’000 54,254 134,086 14 68 54,268 134,154	Company 2005 2004 HK$’000 HK$’000 50,254 50,254 – – 50,254 50,254	Company 2005 2004 HK$’000 HK$’000 50,254 50,254 – – 50,254 50,254
			50,254

– 106 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

28. BANK AND OTHER BORROWINGS

Trust receipts loans, secured –Note (a) Bank loans: Secured –Note (b) and (c) Convertible notes: Bank convertible note, secured –Note (d) Other convertible notes, unsecured –Note (e) Other loans: Secured –Note (f) Unsecured –Note (f) Bank and trust receipts loans repayable: Within one year or on demand In the second year In the third to fifth years, inclusive Beyond five years	Group 2005 2004 HK$’000 HK$’000 – 1,781 – 77,343 – 79,124 38,000 38,000 12,254 12,254 50,254 50,254 4,000 – – 16,044 54,254 145,422 – 79,124 – – – – – – – 79,124	Company 2005 2004 HK$’000 HK$’000 – – – – – – 38,000 38,000 12,254 12,254 50,254 50,254 – – – – 50,254 50,254 – – – – – – – – – –	Company 2005 2004 HK$’000 HK$’000 – – – – – – 38,000 38,000 12,254 12,254 50,254 50,254 – – – – 50,254 50,254 – – – – – – – – – –
			–
			38,000 12,254
			50,254
			– –
			50,254

			– – – –
			–

– 107 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Convertible notes repayable: Within one year or on demand In the second year –Note (e) In the third to fifth years, inclusive Other loans repayable: Within one year or on demand In the second year –Note (f) Total bank and other Borrowings Portion classified as current liabilities_(Note 27)_ Long term portion	Group 2005 2004 HK$’000 HK$’000 50,254 50,254 – – – – 50,254 50,254 4,000 4,708 – 11,336 4,000 16,044 54,254 145,422 (54,254) (134,086) – 11,336	Company 2005 2004 HK$’000 HK$’000 50,254 50,254 – – – – 50,254 50,254 – – – – – – 50,254 50,254 (50,254) (50,254) – –	Company 2005 2004 HK$’000 HK$’000 50,254 50,254 – – – – 50,254 50,254 – – – – – – 50,254 50,254 (50,254) (50,254) – –
			50,254
			– –
			–
			50,254 (50,254)
			–

Notes:

(a) In last year, the Group’s trust receipts loans were secured by one of the Group’s investment properties with a carrying value of HK$2,700,000 at 31 March 2004 and a corporate guarantee executed by the Company.

On 14 February 2005, the said property was disposed of to an independent third party at the consideration of HK$2,850,000. Subsequent to the disposal, the trust receipts loans were paid off and the corporate guarantee executed by the Company was cancelled.

(b) Details of the bank loans granted to the Group by certain banks as at the balance sheet date are summarised below:

summarised below:
Note Sin Hua Bank Limited (now known as Bank of China (Hong Kong) Limited) (i) Bank of Shanghai (ii)	Group 2005 2004 HK$’000 HK$’000 – 39,743 – 9,400 – 49,143
		49,143

(i) The bank loan was fully repaid subsequent to the disposal of the investment properties.
(ii) In a prior year, Huaxin, a subsidiary obtained a bank loan amounting to approximately HK$2,820,000 (RMB3,000,000) from Bank of Shanghai to finance its working capital. The bank loan bears interest at 5.84% per annum and was repayable on 29 April 2004. The bank loan was secured by a building of Huaxin with a carrying value of approximately HK$25,000,000 at the balance sheet date and a corporate guarantee given by Shenzhen Weiji Investment & Development Co., Ltd. (“Shenzhen Weiji”), a company in which a director of the Company, Mr. Sun Hiu Lu, is both a director and shareholder. Further details are included in Note 39(b) to the financial statements. On 29 April 2004, Huaxin defaulted on the full repayment of the loan. Huaxin was deconsolidated as of 30 November 2004.

– 108 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

In a prior year, Huaxin obtained another bank loan amounting to approximately HK$6,580,000 (RMB7,000,000) from Bank of Shanghai to finance its working capital. The bank loan bears interest at 5.84% per annum and is repayable on 27 November 2004. The bank loan is secured by a corporate guarantee given by Shenzhen Weiji, a Company in which a director of the Company, Mr. Sun Hiu Lu, is both a director and shareholder. Further details are included in Note 39(b) to the financial statements. On 27 November 2005, Huaxin defaulted on the full repayment of the loan. Huaxin was deconsolidated as of 30 November 2004.

(c) The bank loan was fully repaid by the Company’s pledged time deposit in Shenzhen Development Bank during the year.
(d) The principal terms of the bank convertible note (the “Note”) are summarised below:

Voting: The noteholder is not entitled to attend or vote at any meetings of the Company.

Conversion price: HK$0.10 per share, subject to adjustment Interest: 4% per annum, payable semi-annually in arrears on dates falling 6 months and 1 year after the date of issue of the Note and on the respective dates falling every 6 months thereafter until the maturity date. Repayment: The Company is required to repay the principal amount outstanding by 6 semiannual successive instalments on dates falling 6 months and 1 year after the second anniversary of the date of issue of the Note and on the anniversary of such dates of each year thereafter in the respective amounts of 5%, 5%, 10%, 10%, 35% and 35% of the principal amount outstanding.

Maturity: The Company is required to repay the principal monies outstanding under the relevant Note to the noteholder together with accrued interest on the fifth anniversary of the date of issue of the Note.

Right of conversion: The noteholder has the right to convert the whole or part of the principal amount of the Note into new ordinary shares of the Company at any time prior to maturity. Upon the full conversion of the Note at the conversion price, based on the existing capital structure, 400,000,000 new ordinary shares of the Company would be issued to the noteholder.

The Note was secured by:

assignment of rentals over certain of the Group’s investment properties situated in Hong Kong;
fixed and floating charges over the shares, undertakings, properties, assets and rights of certain of the Company’s subsidiaries;
charge over the share capital of certain of the Company’s subsidiaries; and
corporate guarantees executed by certain of the Company’s subsidiaries.

The Note was issued to the Bank on 27 April 2000 following an ordinary resolution approving the issue of the Note passed by the shareholders at the Company’s special general meeting held on 25 April 2000.

On 27 October 2002, the first repayment of the Note of HK$2,000,000, together with accrued interest became due, but was not repaid by the Company. According to the terms of the Note, the Bank was entitled to pronounce the full amount of the Note as due and payable immediately upon the presentation of a written notice to the Company. The Bank did not present such written notice to the Company, but instead, the Bank exercised its conversion rights to convert the principal amount of HK$2,000,000 into 20,000,000 ordinary shares of HK$0.10 each in the Company on 18 December 2002.

– 109 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Pursuant to clause 5(a) the Note, 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.

On 23 February 2004, Bank of China notified the company in writing that it had assigned the beneficial interest of its right, benefits and interest in and to the indebtedness owing by the Company to Umbrella Finance Company Limited which is now the beneficial owner of the Note.

(e) In the prior year, the Company acquired a subsidiary in Mainland China for a consideration of HK$15,254,400, of which HK$12,254,400 was satisfied by the issue of convertible notes of the Company. The principal terms of the unsecured other convertible notes are summarised below:

Issuer: The Company Principal amount: HK$12,254,400

Voting: The noteholders are not entitled to attend or vote at any meetings of the Company.

Conversion price: HK$1.38 per share, subject to adjustment

Interest:

No interest is payable on the convertible notes.

Conversion and At any time within the period of 1 year commencing on the day falling on the redemption: first anniversary of the date of issue of the convertible notes (which was 30 March 2002), the noteholders may: (1) exercise the conversion right to convert an amount representing one-third of the principal amount of the convertible notes into new ordinary shares of the Company; or (2) require the Company to redeem one-third of the principal amount of the convertible notes.

At any time within the period of 1 year commencing on the day falling on the second anniversary of the date of issue of the convertible notes, the noteholders may: (1) exercise the conversion right to convert an amount representing twothirds of the principal amount of the convertible notes into new ordinary shares of the Company; or (2) require the Company to redeem two-thirds of the principal amount of the convertible notes.

On 20 November 2003, the holders of the other convertible 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. On 1 April 2004, the Company defaulted on the redemption of the first instalment of the principal amounts and, the total balance of HK$12,254,400 became immediately due and payable and, accordingly, it is classified under current liabilities in the balance sheet.

Subsequent to the balance sheet date, in October 2005, the holders of the convertible notes, as part of the consideration for their purchase of the Company’s subsidiary, Joinbest Investment Limited, agreed to the cancellation of the convertible notes (see also Notes 19 and 40(d)).

– 110 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(f)

Note Secured – Gain Alpha Finance Ltd. (i) Unsecured – Huaxin – deconsolidated	2005 HK$’000 4,000 – 4,000	2004 HK$’000 – 16,044
		16,044

(i) On 28 January 2005, one of the Company’s subsidiaries entered into an agreement with Gain Alpha Finance Limited (“Gain Alpha”), being a potential investor of the Company. Pursuant to the agreement, Gain Alpha agreed to provide a loan facility of up to HK$8,000,000 to the Company’s subsidiary for working capital. The loan facility is guaranteed by Umbrella Finance Company Limited (Umbrella), a major creditor of the Company. Umbrella is secured by way of fixed and floating charges over the shares, undertakings, properties, assets and rights of the Company’s subsidiary and bears interest at 5% per annum. As at 31 March 2005, an amount of HK$4,000,000 was drawn down by the subsidiary. The repayment date of this amount was on 30 June 2005, however on 28 September 2005, Gain Alpha agreed to extend the repayment date to 31 January 2006.

29. FINANCE LEASE PAYABLES

The Group enters into hire purchase contracts for certain of its motor vehicles and office equipment for its retail business and daily business operations. These contracts are classified as finance leases and have remaining lease terms less than 1 year.

At the balance sheet date, the total future minimum lease payments under hire purchase contracts and their present values were as follows:

				Present value	Present value
	Minimum		Minimum	of minimum	of minimum
lease payments		lease payments		lease payments	lease payments
	2005		2004	2005	2004
	HK$’000		HK$’000	HK$’000	HK$’000
Amounts payable:
Within one year	19		91	14	68
In the second year	1		40	1	27
In the third to fifth years,
inclusive	–		28	–	18
Total minimum finance
lease payments	20		159	15	113
Future finance charges	(5)		(46)
Present value of lease obligations	15		113

Less: Amount due from settlement

within 12 months (shown under current liabilities) Amount due for settlement after 12 months	(14) 1	(68
		45

– 111 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

30. PROVISION FOR LONG SERVICE PAYMENTS

Group

At 1 April 2004 Reversal of unutilised amounts At 31 March 2005 Portion classified as current liabilities Long term portion	HK$’000 536 (8)
	528 (186)
	342

The Group provides for the probable future long service payments expected to be made to employees under the Hong Kong Employment Ordinance, as further explained under the heading “Employee benefits” in Note 4 to the financial statements. The provision is based on the best estimate of the probable future payments which have been earned by the employees from their service to the Group to the balance sheet date.

31. SHARE CAPITAL

Authorised: 3,000,000,000 ordinary shares of HK$0.10 each Issued and fully paid: 1,403,796,698 (2004: 1,403,796,698) ordinary shares of HK$0.10 each	2005 HK$’000 300,000 140,379	2004 HK$’000 300,000

		140,379

– 112 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

32. SHARE OPTION SCHEMES

The Company operates share option schemes for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group’s operations. The share option scheme previously adopted by the Company (the “Old Scheme”) expired on 5 November 2001. Despite that no further options shall be granted under the Old Scheme, the provisions of the Old Scheme shall remain in full force and effect in all other respects to govern all outstanding options granted prior to termination.

At the Company’s annual general meeting held on 25 September 2001 (the “Adoption Date”), a new share option scheme (the “New Scheme”) was approved and adopted and became effective on 6 November 2001 and, unless otherwise cancelled and amended, will remain in force for 10 years from that date. Eligible participants of the New Scheme include any executive director, non-executive director, employee, agent, consultant or representative of the Group who satisfies the selection criteria prescribed by the rules of the New Scheme.

The maximum number of shares which may be issued upon the exercise of all options to be granted under the New Scheme and any other share option scheme of the Company must not exceed 10% of the shares of the Company in issue as at the Adoption Date. The total number of shares issued and to be issued upon exercise of the options (whether exercised or outstanding) under the New Scheme in any 12month period granted to each eligible participant must not exceed 1% of the shares of the Company in issue at any time. Any further grant of share options in excess of this limit is subject to shareholders’ approval in a general meeting.

Share options granted under the New Scheme to a director, chief executive or substantial shareholder of the Company, or to any of their respective associates, are subject to approval in advance by the independent non-executive directors. In addition, any share options granted under the New Scheme to a substantial shareholder or an independent non-executive director of the Company, or to any of their respective associates, in excess of 0.1% of the shares of the Company then in issue or with an aggregate value (based on The Stock Exchange of Hong Kong Limited (the “Hong Kong Stock Exchange”) closing price of the Company’s shares at the date of the grant) in excess of HK$5 million, within any 12-month period, are subject to shareholders’ approval in advance in a general meeting.

The offer of a grant of share options under the New Scheme may be accepted within 28 days from the date of the offer, upon payment of a nominal consideration of HK$1 in total by the grantee. Options granted will entitle the holders to subscribe for shares during such period as may be determined by the directors, which shall not be more than 10 years from the date of issue of the relevant options.

The exercise price of the share options under the New Scheme is determinable by the directors, but may not be less than the higher of (i) the Hong Kong Stock Exchange closing price of the Company’s shares on the date of the offer of the share options; (ii) the average Hong Kong Stock Exchange closing price of the Company’s shares for the five trading days immediately preceding the date of the offer; and (iii) the nominal value of a share.

Share options do not confer rights on the holders to dividends or to vote at shareholders’ meetings.

– 113 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

The following share options were outstanding during the year:

Name or category of participant Directors Ms. Huang Shuyun Mr. Chu Kwan Mr. Sun Hiu Lu Mr. Zhao Dake Mr. Zhang Ke, Winston Mr. Melvin Wong Mr. Ng Wing Hang Mr. Chu Yu Lin, David Other employees In aggregate	At 1 April 2004 25,000,000 2,000,000 27,000,000 25,200,000 1,000,000 26,200,000 27,000,000 27,000,000 3,000,000 1,500,000 1,500,000 6, 000,000 300,000 1,000,000 1,300,000 300,000 1,000,000 1,300,000 1,000,000 1,500,000 40,000 1,100,000 2,640,000 119,440,000	Number of share options Granted Lapsed during the during the year year – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – –	Price of Company’s shares At Date of Exercise Exercise At grant At exercise 31 March grant of share period of price of date of date of 2005 options share options share options options options* HK$ HK$ HK$ 25,000,000 16-5-2000 16-5-2000 to 0.639 0.81 – 15-5-2010 2,000,000 30-10-2000 30-10-2000 to 0.460 0.61 – 29-10-2010 27,000,000 25,200,000 16-5-2000 16-5-2000 to 0.639 0.81 – 15-5-2010 1,000,000 30-10-2000 30-10-2000 to 0.460 0.61 – 29-10-2010 26,200,000 27,000,000 16-5-2000 16-5-2000 to 0.639 0.81 – 15-5-2010 27,000,000 16-5-2000 16-5-2000 to 0.639 0.81 – 15-5-2010 3,000,000 10-7-2001 10-7-2001 to 1.00 1.20 – 9-7-2011 1,500,000 22-2-2002 22-2-2004 to 0.88 0.88 – 21-2-2012 1,500,000 22-2-2002 22-2-2005 to 0.88 0.88 – 21-2-2012 6, 000,000 300,000 27-5-2003 27-5-2003 to 0.380 0.355 – 1-5-2013 1,000,000 1-3-2004 1-3-2004 to 0.285 0.280 – 28-2-2006 1,300,000 300,000 27-5-2003 27-5-2003 to 0.380 0.355 – 1-5-2013 1,000,000 1-3-2004 1-3-2004 to 0.285 0.280 – 28-2-2006 1,300,000 1,000,000 1-3-2004 1-3-2004 to 0.285 0.280 – 28-2-2006 1,500,000 16-5-2000 16-5-2000 to 0.639 0.81 – 15-5-2010 40,000 30-10-2000 30-10-2000 to 0.460 0.61 – 29-10-2010 1,100,000 22-2-2002 22-2-2002 to 0.88 0.88 – 21-2-2012 2,640,000 119,440,000
		–
		– –
		–
		–
		–
		– – –

		– –
		–
		– –
		–
		–
		– – –
		–
		–

– 114 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The exercise price of the share options is subject to adjustment in the case of rights or bonus issues, or other similar changes in the Company’s share capital.
** The price of the Company’s shares disclosures as at the date of the grant of the share options is the Hong Kong Stock Exchange closing price on the trading day immediately prior to the date of the grant of the options. The price of the Company’s shares disclosed as at the date of the exercise of the share options is the weighted average of the Hong Kong Stock Exchange closing prices over all of the exercises of options within the disclosure category.

33. RESERVES

The details of movements in the Group’s reserves are set out in the consolidated statement of changes in equity on page 15.

The details of the movements in the Company’s reserves are set out as follows:–

At 1 April 2004 Net loss for the year At 31 March 2004 Net loss for the year At 31 March 2005	Share Capital premium redemption Contributed Accumulated account reserve surplus losses HK$’000 HK$’000 HK$’000 HK$’000 140,694 297 78,810 (358,230) – – – (34,142) 140,694 297 78,810 (392,372) – – – (36,737) 140,694 297 78,810 (429,109)	Total HK$’000 (138,429) (34,142) (172,571) (36,737) (209,308)

The Company’s contributed surplus represents the excess of the fair value of the shares of the subsidiaries acquired pursuant to the same reorganisation, over the nominal value of the Company’s shares issued in exchange therefor.

34. PLEDGE OF ASSETS

At 31 March 2005, the following assets of the Group were pledged to secure the Group’s banking facilities:

(a) fixed and floating charges over the shares, undertakings, properties, assets and rights of certain of the Company’s subsidiaries;
(b) corporate guarantees executed by the Company and certain of its subsidiaries;
(c) charge over the share capital of certain of the Company’s subsidiaries.

– 115 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

35. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT

(a) Disposal of a subsidiary

Net assets disposed of: Fixed assets Intangibles assets Inventories Trade and other receivables Bank balances and cash Due from shareholders Trade and other payables Minority interests Loss on disposal of subsidiary Satisfied by: Cash	2005 HK$’000 – – – – – – – – – – – –	2004 HK$’000 7,123 4,771 369 277 2,624 3,927 (494) (10,613) 7,984 (1,404) 6,580 6,580

Analysis of the net cashflow of cash and cash equivalents in respect of disposal of subsidiary:

Cash consideration Cash and bank balances disposed Net inflow of cash and equivalents in respect of the disposal of subsidiary	2005 HK$’000 – – –	2004 HK$’000 6,580 (2,624) 3,956

– 116 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(b) Deconsolidation of subsidiaries

Net (liabilities)/assets deconsolidated: Fixed assets Goodwill Intangibles assets Inventories Trade and other receivables Bank balances and cash Trade and other payables Amount due to directors Bank loan-unsecured Hire purchase creditor Other short term payables Other loan-unsecured Minority interests Gain on deconsolidation Re-classification as investments in securities_(see Note 19)_ Consideration Satisfied by: Bank balances and cash	2005 HK$’000 25,376 – – 2,621 5,050 603 (25,665) – (8,956) – (4,379) (11,336) – (16,686) 16,686 – – –	2004 HK$’000 1,898 13,414 1,316 14,778 17,309 4,199 (25,932) (2,218) (3,572) (230) (9,835) (470) (197) 10,460 – (10,460) – –

Analysis of the net cashflow of cash and cash equivalents in respect of the deconsolidation of subsidiaries:

	2005		2004
	HK$’000		HK$’000
Cash and bank balances deconsolidated	(603)		(4,199)

36. CONTINGENT LIABILITIES

A full search for the contingent liabilities of the Group and Company has not been conducted. However, law suits or winding-up petitions, if any, against the Group and the Company will be subject to a formal adjudication process, dealt and compromised with under the restructuring scheme.

Save as disclosed above, neither the Group nor the Company had any significant contingent liabilities as at the balance sheet date.

– 117 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

37. OPERATING LEASE ARRANGEMENTS

As lessee

The Group leases certain of its office and retail properties under operating lease arrangements. Lease for properties are negotiated for terms ranging from 1 to 20 years.

At the balance sheet date, the Group and the Company had total future minimum lease payments under non-cancellable operating leases falling due as follows:

Within one year In the second to fifth years, inclusive After five years	Group 2005 2004 HK$’000 HK$’000 4,397 7,679 5,005 8,651 – 10,613 9,402 26,943	Company 2005 2004 HK$’000 HK$’000 – 913 – 1,063 – – – 1,976	Company 2005 2004 HK$’000 HK$’000 – 913 – 1,063 – – – 1,976
			1,976

38. COMMITMENTS

In addition to the operating lease arrangements detailed in Note 37 above, the Group had the following capital commitments at the balance sheet date:

		Group
	2005	2004
	HK$’000	HK$’000
Authorised, but not contracted for:
Donations to various research funds	8,420	8,420

39. RELATED PARTY TRANSACTIONS

(a) As disclosed in Note 23 to the financial statements, as at the balance sheet date, the Group advanced HK$13,121,000 (2004: HK$12,110,000) and HK$1,202,000 (2004: HK$1,204,000) to Tin Ming and Hong Tau, the intermediate holding companies, respectively.
(b) In a previous year, Shenzhen Weiji, a company in which Mr. Sun Hiu Lu is both a director and shareholder, gave a corporate guarantee in respect of a bank loan of RMB10,000,000 (2004: RMB10,000,000) granted to Huaxin which was deconsolidated as of 30 November 2004.
(c) In a previous year, loans advanced by Shenzhen Weiji to Huaxin with total outstanding balance of RMB4,421,000 (2004: RMB4,421,000) are unsecured and repayable on 31 December 2005.

– 118 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(d) On 28 April 2003, Shenzhen Weiji entered into an agreement with Bank of Shanghai to give a corporate guarantee amounting to a maximum of RMB38,000,000 (2004: RMB38,000,000) for the period from 30 April 2003 to 29 April 2004, in respect of bank loans that were or will be granted to Huaxin which was deconsolidated as of 30 November 2004.

40. POST BALANCE SHEET 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 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. On 21 September 2004, the Petitioning Creditor filed a petition for the winding up of the Company as a result of the Company’s failure to repay amounts due to the Petitioning Creditor. The petition has been adjourned on several occasions to provide the Provisional Liquidators with further time to negotiate and implement a restructuring proposal for the Company. The latest adjournment of 8 May 2006 was granted by the Court on 9 January 2006.
(c) 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 (see Note 2).
(d) 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$3,941,000 (see Note 19 and 28(e) above).
(e) 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.

41. APPROVAL OF FINANCIAL STATEMENTS

The financial statements were approved and authorised for issue by the Provisional Liquidators on 8 February 2006.

– 119 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

8. UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2005

The following information is extracted from the unaudited financial statements of the Company for the six months ended 30 September 2005. References to page number are the page numbers of such unaudited financial statements for the six months ended 30 September 2005.

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 PROFIT/(LOSS) FROM OPERATING ACTIVITIES 5 Finance costs 6 PROFIT/(LOSS) BEFORE TAX Tax 7 PROFIT/(LOSS) ATTRIBUTABLE TO SHAREHOLDERS FOR THE PERIOD PROFIT/(LOSS) PER SHARE – BASIC 9	For the six months ended 30 September 2005 2004 (Unaudited) (Unaudited) HK$’000 HK$’000 21,573 31,188 (13,325) (15,955) 8,248 15,233 4,328 874 (6,910) (9,937) (1,913) (10,119) (543) (5,118) 3,210 (9,067) (2,544) (4,099) 666 (13,166) – (1) 666 (13,167) 0.05 cents (0.94)cents

– 120 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

CONDENSED CONSOLIDATED BALANCE SHEET

30 September
2005
(Unaudited)
Notes
HK$’000
NON-CURRENT ASSETS
Properties, plant and equipment
365
Investment properties
835
Investments in securities
10
–
1,200
CURRENT ASSETS
Inventories
5,401
Trade receivables
11
818
Prepayments, deposits and other receivables
12
4,879
Investment disposal receivable
15,254
Due from intermediate holding companies
13
–
Cash and cash equivalents
2,263
28,615
CURRENT LIABILITIES
Trade payables
14
11,247
Tax payable
651
Other payables and accruals
49,665
Bank and other borrowings
15
54,263
Provision for long service payments
186
116,012
NET CURRENT LIABILITIES
(87,397)
TOTAL ASSETS LESS CURRENT
LIABILITIES
(86,197)
NON-CURRENT LIABILITIES
Finance lease payables
–
Provision for long service payments
308
308
NET LIABILITIES
(86,505)
DEFICIENCY ATTRIBUTABLE TO
COMPANY’S SHAREHOLDERS
Issued capital
16
140,379
Reserves
17
(226,884)
(86,505)

31 March
2005
(Audited)
HK$’000
623
835
10,460
11,918
5,486
1,274
4,424
–
–
3,174
14,358
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)

– 121 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Total shareholders’ deficiency at 1 April Net profit/(loss) from ordinary activities attributable to shareholders Total shareholders’ deficiency at 30 September	For the six months ended 30 September 2005 2004 (Unaudited) (Unaudited) HK$’000 HK$’000 (87,171) (83,448) 666 (13,167) (86,505) (96,615)

– 122 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

	For the six	For the six	months
	ended 30	September
	2005		2004
(Unaudited)			(Unaudited)
	HK$’000		HK$’000
NET CASH OUTFLOW FROM OPERATING ACTIVITIES	(879)		(1,018)
NET CASH (OUTFLOW)/INFLOW FROM
INVESTING ACTIVITIES	(16)		26,006
NET CASH OUTFLOW FROM FINANCING ACTIVITIES	(16)		(27,249)
DECREASE IN CASH AND CASH EQUIVALENTS	(911)		(2,261)
Cash and cash equivalents at beginning of period	3,174		4,624
CASH AND CASH EQUIVALENTS AT END OF PERIOD	2,263		2,363

ANALYSIS OF BALANCES OF CASH AND
CASH EQUIVALENTS
Cash and bank balances	2,263		2,363

– 123 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS For the six months ended 30 September 2005

1. BASIS OF PREPARATION

At 30 September 2005, the Group had consolidated net current liabilities of approximately HK$87,397,000 (31 March 2005: HK$98,746,000) and consolidated net liabilities of approximately HK$86,505,000 (31 March 2005: HK$87,171,000). The Group also incurred a net profit attributable to shareholders for the Period of approximately HK$666,000 (2004: net loss attributable to shareholders of HK$13,167,000) and reported a decrease in cash and cash equivalents for the Period of HK$911,000 (2004: HK$2,261,000).

Up to the date of approval of these unaudited condensed consolidated interim 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 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”).

Up to the date of approval of these unaudited condensed consolidated interim financial statements, certain fixed terms or binding agreements in respect of the Restructuring Arrangements have been agreed upon or executed as further explained below.

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 (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 and supporting business plan, profit forecast memorandum and financial projections were submitted to the Listing Division, incorporating additional information, clarification and disclosures in response to queries from the Listing Division. The Resumption Proposal sets out the principal terms of the proposed restructuring.

– 124 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

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.

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.

– 125 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2. ACCOUNTING POLICIES

The unaudited condensed consolidated interim financial statements have been prepared in accordance with Hong Kong Accounting Standard (“HKAS”) 34 “Interim Financing Reporting”, issued by the Hong Kong Institute of Certified Public Accountants, and the applicable disclosure requirements of Appendix 16 to Rules Governing the Listing of Securities on the Stock Exchange (the “Listing Rules”). The condensed consolidated interim financial statements have been prepared under the historical cost conventions and have been prepared in accordance with accounting principles generally accepted in Hong Kong. The accounting policies and basis of preparation adopted in the preparation of the interim financial statements are consistent with those used in the annual financial statements for the year ended 31 March 2005, except in relation to a number of new and revised Hong Kong Financial Reporting Standards (“HKFRSs”, which also include HKASs and Interpretations) that affect the Group and are adopted for the first time for the current period’s financial statements.

The new and revised HKFRSs effective for accounting periods commencing 1 January 2005 are:

HKAS 1	Presentation of Financial Statements
HKAS 2	Inventories
HKAS 7	Cash Flow Statements
HKAS 8	Accounting Policies, Changes in Accounting Estimates and Errors
HKAS 10	Events after the Balance Sheet Date
HKAS 12	Income Taxes
HKAS 16	Property, Plant and Equipment
HKAS 17	Leases
HKAS 18	Revenue
HKAS 19	Employee Benefits
HKAS 21	The Effects of Changes in Foreign Exchange Rates
HKAS 23	Borrowing Costs
HKAS 24	Related Party Disclosures
HKAS 27	Consolidated and Separate Financial Statements
HKAS 28	Investments in Associates
HKAS 32	Financial Instruments: Disclosure and Presentation
HKAS 33	Earnings per Share
HKAS 36	Impairment of Assets
HKAS 37	Provisions, Contingent Liabilities and Contingent Assets
HKAS 38	Intangible Assets
HKAS 39	Financial Instruments: Recognition and Measurement
HKAS 40	Investment Property
HKFRS 2	Share-based Payment
HKFRS 3	Business Combinations
HK(SIC)-Int 21 Income Taxes – Recovery of Revalued Non-depreciable Assets
HK-Int 4	Leases – Determination of the Length of Lease Term in respect of Hong
	Kong Land Leases

– 126 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The adoption of the new HKFRSs, except those new HKFRSs mentioned below, had no material impact on the accounting policies of the Group and the methods of computation in the Group’s unaudited condensed consolidated interim financial statements. The impact of adopting the following new HKFRSs is summarised as follows:

(a) Presentation of financial statements

In prior years, minority interests at balance sheet date were presented separately in the consolidated balance sheet. With the adoption of HKAS 1 “Presentation of Financial statements” and HKAS 27 “Consolidated and Separate Financial Statements”, minority interests at the balance sheet date are presented within the Group’s equity, separately from the capital and reserves attributable to the equity holders of the Company.

(b) Investment Property

In prior years, the Group’s investment property is stated at its open market value on the basis of annual valuation. Any surplus or deficit on revaluation is taken to the investment property revaluation reserve unless the total of this reserve is insufficient to cover a deficit, in which case the amount by which the deficit exceeds the amount in the reserve is charged to the profit and loss account. Following the adoption of HKAS 40, changes in fair value of the investment property are included in the profit and loss account. The change in accounting policy has been applied retrospectively. There was no impact on opening retained profits from the adoption of HKAS 40.

(c) Share-based Payment

In prior years, no amounts were recognized when employees (which term includes directors) were granted share options over shares in the company. If the employees chose to exercise the options, the nominal amount of share capital and share premium were credited only to the extent of the option’s exercise price receivable.

With effect from 1 January 2005, in order to comply with HKFRS 2, the Group recognizes the fair value of such share options as an expense in the income statement, or as an asset, if the cost qualifies for recognition as an asset under the Group’s accounting policies. A corresponding increase is recognised in a capital reserve with equity.

Where the employees are required to meet vesting conditions before they become entitled to the options, the Group recognises the fair value of the options granted over the vesting period. Otherwise, the Group recognises the fair value in the period in which the options are granted.

If an employee chooses to exercise options, the related capital reserve is transferred to share capital and share premium, together with the exercise price. If the options lapse unexercised the related capital reserve is transferred directly to retained earnings.

However, the adoption of the HKFRS had no effect on the results for current nor prior accounting periods as the Company has taken advantage of the exemptions from applying the Standard to share options which had vested before the effective date.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(d) Goodwill

Goodwill represents the excess of the cost of an acquisition and the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary company, associated company or jointly controlled entity at the effective date of acquisition, and, in respect of an increase in holding in a subsidiary company, the excess of the cost of acquisition and the carrying amount of the proportion of the minority interests acquired. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition.

If the cost of acquisition is less than the fair value of the net assets acquired or the carrying amount of the proportion of the minority interests acquired, the difference is recognised directly in the profit and loss account. Goodwill on acquisitions of subsidiary companies is included in intangible assets. Goodwill on acquisitions of associated companies and jointly controlled entities is included in investment in associated companies and jointly controlled entities. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses.

In previous years, goodwill was amortised using the straight line method over its estimated useful life of not more than fifteen years. Where the fair values ascribed to the net assets exceed the purchase consideration, such differences were recognised as income in the year of acquisition or over the weighted average useful life of the acquired non-monetary assets. The carrying amount of goodwill was reviewed annually and provision was only made where, in the opinion of the Directors, there was impairment in value other than temporary in nature. This accounting policy has been changed to conform with HKFRS 3 “Business combinations” and this change does not have any financial impact to the Group.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. SEGMENT INFORMATION

The following tables present the Group’s revenue and results analysed, on a primary segment reporting basis, by business segments, for the six months ended 30 September.

Business segments

Sum yung and pharmaceutical products (Unaudited) 2005 2004 HK$’000 HK$’000 Segment revenue: Sales to external customers 20,956 23,555 Intersegment sales – 70 Other revenue 36 69 Total 20,992 23,694 Segment results (2) (841) Interest and dividend income Unallocated revenue and gains Unallocated expenses Profit/(Loss) from operating activities Finance costs Profit/(Loss) before tax Tax Profit/(Loss) before minority interests Minority Interests Net profit/(loss) from ordinary activities attributable to shareholders	Biotechnological and transgenic products (Unaudited) 2005 2004 HK$’000 HK$’000 – 5,995 – – – 358 – 6,353 – (694)	Property investment (Unaudited) 2005 2004 HK$’000 HK$’000 – 1,063 – – – – – 1,063 (6) (1,714)	Corporate and others (Unaudited) 2005 2004 HK$’000 HK$’000 723 575 – 8 3,941 1 4,664 584 2,867 (6,255)	Eliminations (Unaudited) 2005 2004 HK$’000 HK$’000 (106) – – (78) – – (106) (78) – –	Consolidated (Unaudited) 2005 2004 HK$’000 HK$’000 21,573 31,188 – – 3,977 428 25,550 31,616 2,859 (9,504) 351 445 – – – (8) 3,210 (9,067) (2,544) (4,099) 666 (13,166) – (1) 666 (13,167) – – 666 (13,167)	Consolidated (Unaudited) 2005 2004 HK$’000 HK$’000 21,573 31,188 – – 3,977 428 25,550 31,616 2,859 (9,504) 351 445 – – – (8) 3,210 (9,067) (2,544) (4,099) 666 (13,166) – (1) 666 (13,167) – – 666 (13,167)
						31,616

						(9,504) 445 – (8)
						(9,067) (4,099)
						(13,166) (1)
						(13,167) –
						(13,167)

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

4. TURNOVER AND OTHER REVENUE

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 and gains Interest income Dividend income Gain on disposal of investment Others	For the six months ended 30 September 2005 2004 (Unaudited) (Unaudited) HK$’000 HK$’000 21,573 23,554 – 5,995 – 1,063 – 576 21,573 31,188 351 444 – 1 3,941 – 36 429 4,328 874	For the six months ended 30 September 2005 2004 (Unaudited) (Unaudited) HK$’000 HK$’000 21,573 23,554 – 5,995 – 1,063 – 576 21,573 31,188 351 444 – 1 3,941 – 36 429 4,328 874
		31,188

		444 1 – 429
		874

5. PROFIT/(LOSS) FROM OPERATING ACTIVITIES

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

	For the six months	For the six months
	ended 30 September
	2005	2004
(Unaudited)		(Unaudited)
	HK$’000	HK$’000
Cost of inventories sold	13,160	15,734
Depreciation	268	687
Bad debts written off	–	574
Loss on disposal of fixed assets	6	2,630
Write back of provision for obsolete and slow moving stock	(946)	–
Provision for amount due from a director	–	161
Provision for amount due from an intermediate holding company	351	318
Provision for bad and doubtful debts	18	–
Provision for pending litigation	–	855

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

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 2005 2004 (Unaudited) (Unaudited) HK$’000 HK$’000 2,542 4,086 2 13 2,544 4,099	For the six months ended 30 September 2005 2004 (Unaudited) (Unaudited) HK$’000 HK$’000 2,542 4,086 2 13 2,544 4,099
		4,099

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 (2004: 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 the potential deferred tax assets relating to tax lossess and other deductible temporary differences have been made as the recoverability of the deferred tax assets is uncertain.

8. INTERIM DIVIDEND

The Provisional Liquidators do not recommend the payment of an interim dividend for the six months ended 30 September 2005 (2004: Nil).

9. PROFIT/(LOSS) PER SHARE

The calculation of basic profit/(loss) per share is based on the net profit/(loss) from ordinary activities attributable to shareholders for the Period of approximately HK$666,000 (2004: net loss of HK$13,167,000) and the weighted average number of 1,403,796,698 (2004: 1,403,796,698) ordinary shares in issue during the Period.

Diluted profit/(loss) per share amounts for the six months ended 30 September 2005 and 2004 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.

10. INVESTMENTS IN SECURITIES

Unlisted, investments at deconsolidated amounts	30 September 2005 (Unaudited) HK$’000 –	31 March 2005 (Audited) HK$’000 10,460

– 131 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Particulars of the investments are as follows:

		Place of	Nominal value of	Percentage of equity	Percentage of equity
		incorporation/	issued ordinary/	attributable to
		registration and	registered	the Company		Principal
Name	Note	operations	share capital	Direct	Indirect	activities
Guizhou Ensure	(i)	Mainland China	RMB10,000,000	–	51.00%	Retail of
Chain Pharmacy						pharmaceutical
Co., Ltd. (“Ensure						products
Chain”)
Guizhou Ensure	(i)	Mainland China	RMB3,000,000	–	45.82%	Retail of
Medical Company						pharmaceutical
Limited						products
Shanghai Hua Xin	(ii)	Mainland China	USD9,620,000	–	57.00%	Production and
High Biotechnology						sale of
Inc.						biotechnological
						products

Notes:

(i) Two of the Group’s subsidiaries, 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.

The Provisional Liquidators have deconsolidated the Ensure subsidiaries in 2004 as they considered that the Group was unable to exercise its rights as a major shareholder either to control the assets and operations or to exercise significant influence over the financial and operating policy decisions of the Ensure subsidiaries. The management of the Ensure subsidiaries has not provided the Company with any financial information subsequent to the provision of unaudited management accounts for the year ended 31 March 2004, and, accordingly, deconsolidation has been made as of this date.

In June 2005, the Provisional Liquidators agreed to dispose of Joinbest to the minority shareholders of the Ensure subsidiaries. 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 on 21 September 2005 (see also Note 21(c)).

(ii) One of the Group’s subsidiaries, Shanghai Hua Xin Biotechnology Inc. (“Hua Xin”) is a Sinoforeign 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.

The Provisional Liquidators have deconsolidated Hua Xin in 2004 as they considered that the Group was unable to exercise its rights as major shareholder either to control the assets and operations or to exercise significant influence over the financial and operating policy decisions of Hua Xin. The management of Hua Xin have not provided the Company with any financial information subsequent to the provision of unaudited management accounts for the period from 1 April 2004 to 30 November 2004, and, accordingly, deconsolidation has been made as of that date.

The deconsolidated assets and liabilities as at 30 November 2004 and stated at nil carrying value at 31 March 2005. Subsequent to the balance sheet date, the Provisional Liquidators have agreed to dispose of the Group’s interest in Hua Xin (see also Note 21(c)).

– 132 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

11. TRADE RECEIVABLES

The Group’s credit terms granted to customers of Chinese and other medicines, health products and dried seafoods range between 30 and 90 days. The credit terms granted to customers of biotechnological and pharmaceutical products range between 60 and 180 days.

An aged analysis of the trade receivables as at the balance sheet date, net of provisions, is as follows:

Within 3 months 4 to 6 months 7 to 12 months 13 to 24 months Over 24 months	30 September 2005 (Unaudited) HK$’000 792 1 – – 25 818	31 March 2005 (Audited) HK$’000 1,206 – 2 48 18
		1,274

12. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES

Included in the Group’s and Company’s prepayments, deposits and other receivables were the balance of working capital facility advanced by the investor and funds arising from realisation of assets being kept in escrow by the Provisional Liquidators of approximately HK$648,000 (2005: HK$1,183,000) and HK$2,333,000 respectively (2005: HK$785,000).

13. DUE FROM INTERMEDIATE HOLDING COMPANIES

(a) The amount of HK$13,472,000 (including interest amounting to approximately HK$2,490,000) (31 March 2005: HK$13,120,000, including interest amounting to approximately HK$2,139,000) due from Tin Ming Management Limited (“Tin Ming”) is unsecured, bearing interest at Hong Kong dollar prime rate plus 1% per annum. The amount of HK$6,744,000 was originally due on 28 March 2002 and was extended to 31 March 2003 and 31 March 2004, while the amount of HK$6,003,000 was due on 23 April 2003 and was extended to 31 March 2004. In 2004, the Company agreed to further extend the repayment date to 31 March 2005. On 21 December 2004, an amount of HK$374,000 was advanced to Tin Ming to repay its debt to Umbrella Finance Company Limited. This amount is unsecured and non-interest bearing. The Provisional Liquidators are pursuing all available avenues to recover the amounts due from Tin Ming including legal action, if necessary. However, to be prudent, full provisions have been made for these receivables.
(b) The amount of HK$1,202,000 (31 March 2005: HK$1,202,000) due from Hong Tau Investment Ltd. (“Hong Tau”) is unsecured, interest-free. The amount was originally due on 28 March 2002 and this was extended to 31 March 2004. In 2004, the Company agreed to further extend the repayment date to 31 March 2005. On 14 August 2003, Hong Tau settled approximately HK$700,000 with the remaining balance to be settled on 31 March 2005. The Provisional Liquidators are pursing all available avenues to recover the amounts due from Hong Tau including legal action, if necessary. However, to be prudent, full provisions have been made for these receivables.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

14. TRADE PAYABLES

An aged analysis of the trade payables as at the balance sheet date, based on invoice date, is as follows:

Within 3 months 4 to 6 months 7 to 12 months 13 to 24 months Over 24 months BANK AND OTHER BORROWINGS Note Current portion of bank and other borrowings Current portion of finance lease payables Convertible notes: Bank convertible note, secured Other convertible notes, unsecured Other loans, secured (i)	30 September 2005 (Unaudited) HK$’000 4,587 238 1 6 6,415 11,247 30 September 2005 (Unaudited) HK$’000 54,254 9 54,263 38,000 12,254 50,254 4,000 54,254	31 March 2005 (Audited) HK$’000 3,670 285 8 42 6,495
		10,500

		31 March 2005 (Audited) HK$’000 54,254 14
		54,268

		38,000 12,254
		50,254
		4,000
		54,254

15. BANK AND OTHER BORROWINGS

– 134 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Note Represented by: Convertible notes repayable: Within one year or on demand In the second year Other loans repayable: Within one year on demand (i) In the second year Total other borrowings Portion classified as current liabilities Long term portion	30 September 2005 (Unaudited) HK$’000 50,254 – 50,254 4,000 – 4,000 54,254 (54,254) –	31 March 2005 (Audited) HK$’000 50,254 – 50,254 4,000 – 4,000 54,254 (54,254) –

(i) On 28 January 2005, one of the Company’s subsidiaries entered into an agreement with Gain Alpha Finance Limited (“Gain Alpha”), being a potential investor of the Company. Pursuant to the agreement, Gain Alpha agreed to provide a loan facility of up to HK$8,000,000 to the Company’s subsidiary for working capital. The loan facility is guaranteed by Umbrella Finance Company Limited (Umbrella), a major creditor of the Company. Umbrella is secured by way of fixed and floating charges over the shares, undertakings, properties, assets and rights of certain of the Company’s subsidiaries. The facility bears interest at 5% per annum. As at 31 March 2005, an amount of HK$4,000,000 was drawn down by the subsidiary. The repayment date of this amount was on 30 June 2005, however on 28 September 2005, Gain Alpha agreed to extend the repayment date to 31 January 2006.

Save as disclosed above, there are no other material changes in the balances, the repayment dates and the status of other borrowings as disclosed in the annual report for the year ended 31 March 2005.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

16. SHARE CAPITAL

thorised 3,000,000,000 ordinary shares of HK$0.10 each ued and fully paid 1,403,796,698 ordinary shares of HK$0.10 each	30 September 2005 (Unaudited) HK$’000 300,000 140,379	31 March 2005 (Audited) HK$’000 300,000

		140,379

Authorised

Issued and fully paid

Share options

Details of the Company’s share options schemes are included in the section “Share options” of this interim report.

17. RESERVES

	Share	Capital			Exchange
	premium	redemption	Capital	Contributed	fluctuation	Accumulated
	account	reserve	reserve	surplus	reserve	losses	Total
	(Unaudited)	(Unaudited)	(Unaudited)	(Unaudited)	(Unaudited)	(Unaudited)	(Unaudited)
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
At 1 April 2005	140,694	297	13,051	80,933	6	(462,531)	(227,550)
Net profit from
ordinary activities
attributable to
shareholders	–	–	–	–	–	666	666
At 30 September
2005	140,694	297	13,051	80,933	6	(461,865)	(226,884)

18. PLEDGE OF ASSETS

At 30 September 2005, the following assets of the Group were pledged to secure the Group’s banking facilities:

(a) fixed and floating charges over the shares, undertakings, properties, assets and rights of certain of the Company’s subsidiaries;
(b) Corporate guarantees executed by the Company and certain of its subsidiaries;
(c) charge over the share capital of certain of the Company’s subsidiaries.

19. CONTINGENT LIABILITIES

A full search for contingent liabilities of the Group and Company has not been conducted. However, suits or winding-up petitions, if any, against the Group and the Company will be subject to a formal adjudication process, dealt with and compromised under the restructuring scheme.

– 136 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Save as disclosed above, neither the Group nor the Company had any significant contingent liabilities as at 30 September 2005.

20. COMMITMENTS

At the balance sheet date, the Group had the following commitments:

(a) Capital commitments

Authorised, but not contracted for	30 September 2005 (Unaudited) HK$’000 8,420	31 March 2005 (Audited) HK$’000 8,240

(b) Commitments under operating leases as lessee

The Group leases certain of its office and retail properties under operating lease arrangements. Leases for properties are negotiated for terms ranging from 1 to 20 years.

At the balance sheet date, the Group had total future minimum lease payments under non-cancellable operating leases falling due as follows:

Within one year In the second to fifth years, inclusive After five years	30 September 2005 (Unaudited) HK$’000 4,065 3,121 – 7,186	31 March 2005 (Audited) HK$’000 4,397 5,005 –
		9,402

21. POST BALANCE SHEET EVENTS

(a) 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. On 21 September 2004, the Petitioning Creditor filed a petition for the winding up of the Company as a result of the Company’s failure to repay amounts due to the Petitioning Creditor. The petition has been adjourned on several occasions to provide the Provisional Liquidators with further time to negotiate and implement a restructuring proposal for the Company. The latest adjournment of 8 May 2006 was granted by the Court on 9 January 2006.

– 137 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(b) On 14 June 2005, the Company had, via its indirect wholly owned subsidiary, entered into an agreement to dispose of its 100% equity interest in 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. The terms of the disposal agreement had been sanctioned by the Court on 21 September 2005, and the disposal was completed on 5 October 2005.
(c) Subsequent to the balance sheet, on 15 November 2005, the Provisional Liquidators agreed to dispose of 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.

22. RELATED PARTY TRANSACTIONS

(a) As disclosed in Note 13 to the financial statements, as at the balance sheet date, the Group advanced HK$13,472,000 (31 March 2005: HK$13,121,000) and HK$1,202,000 (31 March 2005: HK$1,202,000) to Tin Ming and Hong Tau, the intermediate holding companies, respectively.
(b) In a previous year, Shenzhen Weiji, a company in which Mr. Sun Hiu Lu is both a director and shareholder, gave corporate guarantees in respect of bank loans of RMB10,000,000 (31 March 2005: RMB10,000,000) granted to Hua Xin, which was deconsolidated as of 30 November 2004.
(c) In a previous year, loans advanced by Shenzhen Weiji to Hua Xin with total outstanding balance of RMB4,421,000 (31 March 2005: RMB4,421,000) are unsecured and repayable on 31 December 2005.
(d) On 28 April 2003, Shenzhen Weiji entered into an agreement with Bank of Shanghai to give a corporate guarantee amounting to a maximum of RMB38,000,000 (31 March 2005: RMB38,000,000) for the period from 30 April 2003 to 29 April 2004, in respect of bank loans that were or will be granted to Hua Xin, which was deconsolidated as of 30 November 2004.

23. APPROVAL OF THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

The unaudited condensed consolidated interim financial statements were approved and authorized for issue by the Provisional Liquidators on 8 February 2006.

– 138 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

9. FIVE YEAR FINANCIAL SUMMARY

A summary of the results and of the assets, liabilities and minority interests of the Group for the last five financial years, as extracted from the published audited financial statements and reclassified as appropriate, is set out below.

RESULTS TURNOVER Continuing operations Discontinued operations PROFIT/(LOSS) FROM OPERATING ACTIVITIES Continuing operations Discontinued operations Finance costs LOSS BEFORE TAX Tax LOSS BEFORE MINORITY INTERESTS Minority interests NET LOSS FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO SHAREHOLDERS ASSETS, LIABILITIES AND MINORITY INTERESTS TOTAL ASSETS TOTAL LIABILITIES MINORITY INTERESTS NET (LIABILITIES)/ASSETS	2005 HK$’000 62,929 – 62,929 10,820 – 10,820 (7,098) (3,722) (1) (3,723) – (3,704) 26,292 (113,463) – (87,171)	As 2004 HK$’000 142,004 – 142,004 (83,503) – (83,503) (11,517) (95,020) (15) (95,035) 3,121 (91,914) 138,983 (222,431) – (83,448)	at 31 March 2003 HK$’000 108,321 – 108,321 (72,225) – (72,225) (6,683) (78,908) (1) (78,909) 19,646 (59,263) 249,936 (227,539) (13,931) 8,466	2002 HK$’000 71,063 – 71,063 (17,224) – (17,224) (6,385) (23,609) 433 (23,176) 3,617 (19,559) 314,962 (216,008) (33,577) 65,377	2001 HK$’000 39,006 – 39,006 (11,067) – (11,067) (5,869) (16,936) 1,640 (15,296) – (15,296) 293,173 (199,421) (21,816) 71,936

– 139 –

FINANCIAL INFORMATION OF THE GROUP UPON COMPLETION

APPENDIX II

1. UNAUDITED PRO FORMA ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS OF THE GROUP UPON COMPLETION

Set out below is a statement of the unaudited pro forma adjusted consolidated net tangible assets of the Restructured Group upon Completion based on the Group’s unaudited consolidated net liabilities as at 30 September 2005 and after making the following adjustments to reflect the effect of the Restructuring Proposal as if it had been consummated on 30 September 2005:

As at 30 September 2005 Unaudited HK$’000 Net (liabilities) tangible assets (86,505)	Adjustments HK$’000 (Note 1) 120,361	Pro forma HK$’000 (Note 2) 33,856

Notes:

(1) Following completion of the Restructuring Proposal, adjustments will be included as follows:

Estimated net proceeds from the Huaxin Disposal Net liabilities of the Group to be excluded from the Restructuring Proposal Estimated net proceeds from the Subscription Liabilities to be discharged under the Restructuring Proposal (2) Unaudited consolidated negative net tangible assets per share as at 30 September 2005 (based on 1,403,796,698 shares of HK$0.001 each as at the Latest Practicable Date) Unaudited pro forma adjusted consolidated net tangible assets value per share upon Completion but before conversion of the Subscription Preference Shares (based on 950,379,670 shares of HK$0.01 each) Unaudited pro forma adjusted consolidated net tangible assets value per share upon Completion and full conversion of the Subscription Preference Shares (based on 3,110,379,670 shares of HK$0.01 each)	HK’000 15,000 18,748 80,190 6,423
	120,361

	(6.2 cents)

	3.6 cents

	1.1 cents

– 140 –

FINANCIAL INFORMATION OF THE GROUP UPON COMPLETION

APPENDIX II

2. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET OF THE GROUP UPON COMPLETION

The following unaudited pro forma consolidated balance sheet of the Restructured Group is based on the unaudited consolidated balance sheet of the Group as at 30 September 2005 and adjusted to reflect the financial effect of the Restructuring Proposal.

Unaudited consolidated balance sheet of the Existing Group HK$’000 Non-current assets Property, plant and equipment 1,200 Investment in securities – Total non-current assets 1,200 Current assets Inventories 5,401 Trade and other receivables 818 Debtors, deposits and prepayments 4,879 Investment disposal receivable 15,254 Bank and cash balances 2,263 Total current assets 28,615 Trade payables 11,247 Creditors and accrued charges 49,665 Provision for long service payments 186 Taxation payable 651 Obligations under finance leases 9 Bank and other borrowings 54,254 Total current liabilities 116,012 Net current assets/(liabilities) (87,397 ) Total assets less current liabilities (86,197 ) Non-current liabilities Provision for long service payments 308 Obligations under finance leases – Total non-current liabilities 308 Net assets/(liabilities) (86,505 ) Represented by: Preference share capital – Ordinary share capital 140,379 Reserves (226,884 ) Shareholders’ fund/(Deficiency in shareholders’ fund) (86,505 )	Disposal of Joinbest HK$’000 (Note 1) – – – – – – (15,254 ) 3,000 (12,254 ) – – – – – (12,254 ) (12,254 ) – – – – – – – – – –	Companies to be excluded Disposal under the of Proposed Huaxin Restructuring HK$’000 HK$’000 (Note 2) (Note 3) – (843 ) – – – (843 ) – – – – – (304 ) – – 15,000 (30 ) 15,000 (334 ) – (6,234 ) – (13,040 ) – – – (651 ) – – – – – (19,925 ) 15,000 19,591 15,000 18,748 – – – – – – 15,000 18,748 – – – – 15,000 18,748 15,000 18,748	Capital Subscription Debt reduction of shares restructuring HK$’000 HK$’000 HK$’000 (Note 4) – – – – – – – – – – – – – – – – – – – – – – 80,190 (63,500 ) – 80,190 (63,500 ) – – – – – (25,500 ) – – – – – – – – – – – (38,000 ) – – (63,500 ) – 80,190 – – 80,190 – – – – – – – – – – – 80,190 – – 21,600 – (138,976 ) 8,100 – 138,976 50,490 – – 80,190 –	Pro forma net assets of Liabilities the Group to be upon discharged completion HK$’000 HK$’000 (Note 5) – 357 – – – 357 – 5,401 – 818 – 4,575 – – – 36,923 – 47,717 – 5,013 (6,423 ) 4,702 – 186 – – – 9 – 4,000 (6,423 ) 13,910 6,423 33,807 6,423 34,164 – 308 – – – 308 6,423 33,856 – 21,600 – 9,503 6,423 2,753 6,423 33,856	Pro forma net assets of Liabilities the Group to be upon discharged completion HK$’000 HK$’000 (Note 5) – 357 – – – 357 – 5,401 – 818 – 4,575 – – – 36,923 – 47,717 – 5,013 (6,423 ) 4,702 – 186 – – – 9 – 4,000 (6,423 ) 13,910 6,423 33,807 6,423 34,164 – 308 – – – 308 6,423 33,856 – 21,600 – 9,503 6,423 2,753 6,423 33,856
					357
					5,401 818 4,575 – 36,923
					47,717
					5,013 4,702 186 – 9 4,000
					13,910
					33,807
					34,164
					308 –
					308
					33,856

					21,600 9,503 2,753
					33,856

– 141 –

FINANCIAL INFORMATION OF THE GROUP UPON COMPLETION

APPENDIX II

Notes:

In June 2005, the Provisional Liquidators agreed to dispose of Joinbest to the minority shareholders of the Ensure subsidiaries. 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.
In November 2005, the Provisional Liquidators agreed to dispose of the Group’s 57% equity interest in Huaxin for a cash consideration of HK$15 million. The Huaxin Disposal also involves an assignment of debts to Golden Linker Limited of approximately (i) HK$28.2 million, being the principal amount of a claim by way of subrogation by the Company against Huaxin exclusive of interest as at 29 December 2004; (ii) HK$2.5 million, being the principal amount owing by Huaxin to the Company exclusive of interest; (iii) HK$36.1 million owing by China Genetic to Nam Pei Hong (Holding) Limited; and (iv) HK$0.6 million owing by Huaxin to Nam Pei Hong (Holding) Limited.
This reflects removal of the assets and liabilities of companies that will not remain with the Restructured Group upon Completion.
This reflects settlement of Creditors’ indebtedness pursuant to the Schemes.
The outstanding liabilities of the Company will be compromised and discharged in full pursuant to the Schemes.

– 142 –

FINANCIAL INFORMATION OF THE GROUP UPON COMPLETION

APPENDIX II

3. REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE GROUP UPON COMPLETION

The following is the text of a report received from Moore Stephens, Certified Public Accountants, in respect of the pro forma adjusted consolidated balance sheet of the Group as set out in the paragraph headed “Unaudited pro forma adjusted consolidated balance sheet of the Group” of this appendix for the incorporation in this document.

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20 February 2006

Joint and Several Provisional Liquidators of Hong Kong Pharmaceutical Holdings Limited (Provisional Liquidators Appointed) c/o 5/F., Allied Kajima Building 138 Gloucester Road Wan Chai Hong Kong

Dear Sirs,

We report on the unaudited pro forma financial information of Hong Kong Pharmaceutical Holdings Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”) set out in Appendix II to this document dated 20 February 2006 in connection with the restructuring proposal, which has been prepared by the Provisional Liquidators of the Company, for illustrative purposes only, to provide information about how the restructuring proposal might have affected the relevant financial information presented.

Responsibilities

It is solely the responsibility of the Provisional Liquidators of the Company to prepare the unaudited pro forma financial information in accordance with paragraph 29 of Chapter 4 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”).

It is our responsibility to form an opinion, as required by the Listing Rules, on the unaudited pro forma financial information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the unaudited pro forma financial information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

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FINANCIAL INFORMATION OF THE GROUP UPON COMPLETION

APPENDIX II

Basis of opinion

We conducted our work with reference to the Statements of Investment Circular Reporting Standards and Bulletin 1998/8 “Reporting on pro forma financial information pursuant to the listing rules” issued by the Auditing Practices Board in the United Kingdom, where applicable. Our work, which involved no independent examination of any of the underlying financial information, consisted primarily of comparing the unadjusted financial information with the source documents, considering the evidence supporting the adjustments and discussing the unaudited pro forma financial information with the Provisional Liquidators of the Company.

Our work does not constitute an audit or a review in accordance with the Hong Kong Standards of Auditing, Hong Kong Standards on Review Engagements on Hong Kong Standards on Assurance Engagements issued by the Hong Kong Institute of Certified Public Accountants and accordingly, we do not express any such assurance on the unaudited pro forma financial information.

The unaudited pro forma financial information has been prepared on the basis set out in Appendix II to this document for illustrative purposes only and, because of its nature, it may not give an indicative financial position of the Group as at 30 September 2005, or at any future date.

Opinion

In our opinion:

(a) the unaudited pro forma financial information has been properly compiled on the basis stated;
(b) such basis is consistent with the accounting policies of the Group; and
(c) the adjustments are appropriate for the purposes of the pro forma financial information as disclosed pursuant to Paragraph 29(1) of Chapter 4 of the Listing Rules.

Yours faithfully, Moore Stephens Certified Public Accountants Hong Kong

– 144 –

FINANCIAL INFORMATION OF THE GROUP UPON COMPLETION

APPENDIX II

4. PROFIT FORECAST AND CASH FLOW PROJECTIONS

Unaudited pro forma forecast earnings

The bases and assumptions on which the profit forecast of the Restructured Group for the 24-month ending 31 March 2007, for which the sole director of the Investor is responsible, has been prepared are summarised in the paragraph headed “Basis and assumptions” below.

The pro forma forecast earnings of the Restructuring Group for the 24-month ending 31 March 2007 are estimated to be not less than HK$6.0 million. It has been prepared based on the unaudited results of the Restructured Group for the period from 1 April 2005 to 31 December 2005 and a forecast for the period from 1 January 2006 to 31 March 2007, and on the basis of the accounting policies consistent in all material aspects with those currently adopted by the Group as set out in the financial statements for the year ended 31 March 2005 in Appendix I to this document.

Cash flow projections

The following is the summary of the cash flow projections of the Restructured Group period from 1 April 2005 to 31 March 2007 (the “Projection Period”) after taking into account the unaudited results of the Group for period from 1 April 2005 to 31 December 2005:

Audited cash balance of the Group as at 31 March 2005
Less: net cash outflow for the period from 1 April 2005
to 30 September 2005 per interim report of the Group
Less: net cash inflow for the period from 1 October 2005
to 31 December 2005 per unaudited management accounts
of the Restructured Group
Less: expected net cash outflow from business activities
for the period from 1 January 2006 to 31 March 2007
Add: Proceeds from the Subscription
Less: Payment to the Creditors under the Scheme
Expected cash balance at the end of the Projection Period

HK$’000
3,174
(911)
388
(12,532)
80,190
(45,500)
24,809

Basis and assumptions

The sole director of the Investor is of the opinion that, in the absence of unforeseen circumstances as well as taking into account the present working capital and the cash flow to be generated from the Subscription committed by the Investor, the Restructured Group will have sufficient working capital for the 12-month period starting from the date of this document.

– 145 –

FINANCIAL INFORMATION OF THE GROUP UPON COMPLETION

APPENDIX II

The Group currently operates a chain of TCM and health food retailers in Hong Kong operating under Nam Pei Hong and a medical clinic in Wan Chai operating under NPH Sino-Meditech. Nam Pei Hong is an indirect wholly-owned subsidiary of the Company which has 11 retail outlets throughout Hong Kong and a warehouse facility located in Shatin.

The profit forecast and the cash flow projections from 1 April 2005 to 31 March 2007 have been prepared by the Investor for the Projection Period on the basis of the assumptions as set out below, taking into account the results of the Group for the period from 1 April 2005 to 31 December 2005 prepared by the Provisional Liquidators and based on the latest books and records available to them and the future intentions of the Investor in respect of the Restructured Group as set out on pages 37 to 40 of this document.

The profit forecast and the cash flow projections have been compiled on the basis of certain principal assumptions as set out below. Shareholders should note that these assumptions relate to the future events and the actual profit and cash flows are likely to be different since anticipated events frequently do not occur as expected and the variations may be material.

the Restructuring Proposal is successfully implemented in May 2006;
the Group is currently operating 11 retail outlets, including a flagship store opened in December 2005;
there will be two flagship and nine medium stores opened during the forecast period;
based on historical trends, sales during September to December and the Chinese New Year are approximately 1.2 times and 2 times, respectively, of the offseason. The average monthly turnover for the existing stores (excluding the flagship stores opened in December 2005) and the new stores (including the flagship stores opened in December 2005) is forecast to be approximately HK$400,000 and HK$418,000 per store, respectively, for the year ending 31 March 2007;
the gross profit margin for the year ending 31 March 2007 is forecast to be approximately 41% as the sole director of the Investor believes that the existing purchasing costs could be lower in the forecast period;
the head office and accounting function is sufficient to accommodate and support the expanded number of retail outlets;
the Restructured Group’s logistics and packaging capacity will be expanded to handle the additional volume of products through the new stores;

– 146 –

FINANCIAL INFORMATION OF THE GROUP UPON COMPLETION

APPENDIX II

there will be no material changes in existing political, legal, foreign trade or economic conditions in Hong Kong or other countries or regions in which in the Restructured Group carry or intend to carry on business;
the Restructured Group will be able to obtain stable sources of raw materials for Nam Pei Hong in terms of quality and price;
there will be no material changes in existing receipt and payment patterns of sales, purchases and expenses;
there will be no material changes in the bases or rates of taxation applicable to the activities of the Restructured Group;
there will be no material changes in interest rates and foreign exchange rates from those currently prevailing; and
there will be no disasters, natural, political or otherwise, which would materially disrupt the business or operations of the Restructured Group or cause substantial loss, damage or destruction to its facilities.

– 147 –

FINANCIAL INFORMATION OF THE GROUP UPON COMPLETION

APPENDIX II

5. COMFORT LETTERS FOR THE CASH FLOW PROJECTIONS AND PROFIT FOREAST OF THE RESTRUCTURED GROUP

Letter from Moore Stephens

Set out below is the text of the letter from Moore Stephens in connection with the cash flow projections and forecast of the consolidated profit of the Restructured Group as set out on page 145 of this document prepared for the purpose of inclusion in this document.

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20 February 2006

Joint and Several Provisional Liquidators of Hong Kong Pharmaceutical Holdings Limited (Provisional Liquidators Appointed) 5/F Allied Kajima Building 138 Gloucester Road Wan Chai Hong Kong

Dear Sirs,

We refer to this document dated 20 February 2006 issued in connection with a restructuring proposal for Hong Kong Pharmaceutical Holdings Limited (Provisional Liquidators Appointed) (the “Company”) involving, inter alia, a capital restructuring, a debt restructuring involving creditors’ schemes of arrangement under Section 99 of the Companies Act 1981 of Bermuda (as amended) and Section 166 of the Companies Ordinance (Chapter 32 of the Laws of Hong Kong), a subscription of new restructured shares (the “New Shares”) and preference shares, a whitewash waiver and general mandates to issue and repurchase New Shares (the “Document”).

Terms defined in the Document shall bear the same meaning in this letter, unless otherwise defined herein.

In accordance with the instructions of the Provisional Liquidators, we have reviewed the compilation of the cash flow projections of the Restructured Group for the period from 1 April 2005 to 31 March 2007 (the “Cash Flow Projections”). The Cash Flow Projections are based on the Restructured Group’s cash flows in the period from 1 April 2005 to 31 December 2005 per the Restructured Group’s unaudited accounts and the forecast cash flows of the Restructured Group for the period from 1 January 2006 to 31 March 2007 (the “Forecast Cash Flows”).

– 148 –

FINANCIAL INFORMATION OF THE GROUP UPON COMPLETION

APPENDIX II

In our review of the compilation of the Cash Flow Projections and the requirements of the Restructured Group, we have taken into account the future intentions of the Investor in respect of the Restructured Group as set out on pages 36 to 40 of the Document. The intentions of the Investor include a commitment to subscribe for new shares in the amount of HK$80,190,000 and the Investor has confirmed in writing that such funds exist.

We have also reviewed the accounting policies and calculations adopted in arriving at the forecast combined profit attributable to equity holders of the Restructured Group for the period from 1 April 2005 to 31 March 2007 (the “Forecast”), for which the sole director of the Investor (the “Director”) is responsible, as set forth in Section 4 of Appendix II in the Document in accordance with the Auditing Guideline Statement 3.341 “Accountants’ report on profit forecasts” issued by the Hong Kong Institute of Certified Public Accountants (“Statement 3.341”). The Forecast has been prepared by the Director based on the combined results of the Restructured Group for the period from 1 April 2005 to 31 December 2005 per the Restructured Group’s unaudited accounts and a forecast of the combined results of the Restructured Group for the period from 1 January 2006 to 31 March 2007.

The Cash Flow Projections and the Forecast have been compiled on the basis of certain principal assumptions (the “Assumptions”) as set out in Section 4 of Appendix II to the Document. We emphasize that the Cash Flow Projections and the Forecast and the assumptions on which they are based, relate to the future and the actual cash flows and profit are likely to be different since anticipated events frequently do not occur as expected and the variations may be material. Accordingly, Cash Flow Projections and Forecast cannot be relied upon to the same extent as information derived from audited financial statements for completed financial accounting periods.

We also understand that the Director proposes to make the following statement on page 145 of the Document:

“The sole director of the Investor is of the opinion that, in the absence of unforeseen circumstances as well as taking into account the present working capital and the cash flow to be generated from the Subscription committed by the Investor, the Restructured Group will have sufficient working capital for the 12-month period starting from the date of this Document.”

Notwithstanding the forecast period covering a longer period than recommended under Statement 3.341, in our opinion:

(i) so far as the calculations are concerned, the Cash Flow Projections for which the Director is solely responsible have been properly compiled on the basis of the Assumptions and the above statement as to the sufficiency of working capital made by the Director has been made after due care and consideration and due and careful enquiry; and
(ii) so far as the accounting policies and calculations are concerned, the Forecast has been properly compiled on the bases and assumptions adopted by the Director as set out in Section 4 of Appendix II to the Document and is presented on a basis consistent in all material respects with the accounting policies normally adopted by the Group as set out in the financial statements for the year ended 31 March 2005 in Appendix I to the Document.

Yours faithfully, Moore Stephens Certified Public Accountants Hong Kong

– 149 –

FINANCIAL INFORMATION OF THE GROUP UPON COMPLETION

APPENDIX II

Letter from Quam Capital

Set out below is the text of the letter from Quam Capital in connection with the cash flow projections and forecast of the consolidated profit of the Restructured Group as set out on page 145 of this document prepared for the purpose of inclusion in this document.

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20 February 2006

Joint and Several Provisional Liquidators of Hong Kong Pharmaceutical Holdings Limited (Provisional Liquidators Appointed) c/o 5/F Allied Kajima Building 138 Gloucester Road Wan Chai Hong Kong

Dear Sirs,

We refer to the cash flow projections of the Restructured Group for the period from 1 April 2005 to 31 March 2007 (the “Cash Flow Projections”) and the forecast of the consolidated profit of the Restructured Group for the 24-month ending 31 March 2007 (the “Forecast”) as set out on page 145 of the document issued by the Company and the Investor on 20 February 2006. Terms used in this letter shall have the same meanings as defined in the Document, unless the context would require otherwise.

The Cash Flow Projections and the Forecast, for which the sole director of the Investor is solely responsible, have been prepared on the basis that the Restructuring Proposal will be successfully implemented in May 2006.

We have reviewed the Cash Flow Projections and discussed the principal bases and assumptions adopted with the sole director of the Investor and senior management of the Group. We have also considered the letter dated 20 February 2006 addressed to the Provisional Liquidators from Moore Stephens regarding the accounting policies and calculations upon which the Cash Flow Projections have been made.

Based on our review of the Cash Flow Projections, our aforementioned discussion of the principal bases and assumptions adopted and the accounting policies and calculations adopted and reviewed by Moore Stephens, we are of the opinion that the Cash Flow Projections for which the sole director of the Investor is solely responsible, have been made after due care and consideration and due and careful enquiry.

– 150 –

FINANCIAL INFORMATION OF THE GROUP UPON COMPLETION

APPENDIX II

We have also reviewed the Forecast and discussed the principal bases and assumptions adopted with the sole director of the Investor and senior management of the Group. We have also considered the letter dated 20 February 2006 addressed to the Provisional Liquidators from Moore Stephens regarding the accounting policies and calculations upon which the Forecast have been made.

Based on our review and aforementioned discussion of the principal bases and assumptions adopted in preparing the Forecast and the accounting policies and calculations adopted and reviewed by Moore Stephens, we are of the opinion that the Forecast for which the sole director of the Investor is solely responsible, has been made after due care and consideration and due and careful enquiry.

Yours faithfully, For and on behalf of Quam Capital Limited Karen C. Wong Director

– 151 –

EXPLANATORY STATEMENT

APPENDIX III

1. LISTING RULES FOR REPURCHASE OF SECURITIES

The Listing Rules permit companies whose primary listing are on the Stock Exchange to repurchase their securities on the Stock Exchange subject to certain restrictions amongst which the Listing Rules provide that the shares proposed to be repurchased by a company must be fully paid-up and all repurchases of shares by a company with a primary listing on the Stock Exchange must be approved in advance by an ordinary resolution of shareholders, either by way of a specific approval or a general mandate to the directors of the company to make such repurchases.

The information set out below serves as the explanatory statement required under Rule 10.06(1)(b) of the Listing Rules to provide Shareholders with all the information reasonably necessary for them to make an informed decision on whether to vote for or against the ordinary resolution approving the repurchase mandate and constitutes the memorandum of the terms of the proposed repurchases required under the memorandum of association and bye-laws of the Company.

2. SHARE CAPITAL OUTSTANDING

As at the Latest Practicable Date, the aggregate nominal amount of issued share capital of the Company was HK$140,379,669.80 comprising 1,403,796,698 Shares. Immediately upon Completion but before full conversion of the Subscription Preference Shares, the aggregate nominal amount of issued ordinary share capital of the Company will be HK$9,503,796.69 comprising 950,379,669 New Shares. Subject to Completion and the passing of the relevant ordinary resolution approving the repurchase mandate at the SGM and no further New Shares are issued prior to the SGM, the Company will be allowed under the repurchase mandate to repurchase a maximum of 14,037,966 New Shares immediately following Completion.

3. REASONS FOR REPURCHASES

The proposed new Directors believe that the repurchase mandate is in the interests of the Company and the Shareholders since it will give the Restructured Group the flexibility to do so if and when appropriate. Such repurchases may, depending on market conditions and funding arrangements at the time, lead to an enhancement of the net asset value per New Share and/or its earnings per New Share. The proposed new Directors of the Restructured Group will only exercise such power in such circumstances that they believe such repurchase will benefit the Company and Shareholders.

4. FUNDING OF REPURCHASE

Repurchases of the Company’s securities must be funded out of funds legally available for the purpose in accordance with the Memorandum of Association and Bye-Laws of the Company and the applicable laws of Bermuda.

There may be a material adverse impact on the working capital or gearing position of the Company (as compared with the position disclosed in the latest published audited financial statement as at 31 March 2005) in the event that the repurchase mandate is exercised in full. However, the proposed new Directors do not propose to exercise the repurchase mandate to such an extent as would, in the circumstances, have a material adverse effect on the working capital requirements of the Company or the gearing levels which in the opinion of the proposed new Directors are from time to time appropriate for the Company.

– 152 –

EXPLANATORY STATEMENT

APPENDIX III

5. DISCLOSURE OF INTEREST

None of the proposed new Directors nor, to the best of their knowledge having made all reasonable enquiries, any of their respective associates (as defined in the Listing Rules), has a present intention to sell securities to the Company if the repurchase mandate is approved by the Shareholders.

To the best of the knowledge of the Provisional Liquidators and having made all reasonable enquiries, no connected person (as defined in the Listing Rules) of the Company has notified the Company that he/she has a present intention to sell securities to the Company, or has undertaken not to do so, in the event that the Company is authorised to make repurchases of its own securities.

6. UNDERTAKING OF THE PROPOSED NEW DIRECTORS

The Investor and its sole director and the Provisional Liquidators will procure the proposed new Directors to undertake to the Stock Exchange that they will exercise the power of the Company to make repurchases pursuant to the repurchase mandate in accordance with the Listing Rules, the laws of Bermuda, the memorandum of association and bye-laws of the Company. The Provisional Liquidators emphasise that they have no control or influence on the future operations and management of the Restructured Group post Completion as the Provisional Liquidators will leave office, subject to the Courts’ approval, on Completion.

During each of the six months preceding the date of this document, the Company has not repurchased any securities of the Company.

7. SHARE PRICES

Trading in the Shares has been suspended at the request of the Company on 5 August 2004. The closing price before suspension was HK$0.194 per Share.

– 153 –

EXPLANATORY STATEMENT

APPENDIX III

The highest and lowest closing prices at which the Shares were traded on the Stock Exchange during each of the previous 12 calendar months preceding the suspension were as follows:

	Highest	Lowest
	HK$	HK$
2003
August	0.380	0.315
September	0.360	0.330
October	0.490	0.315
November	0.445	0.360
December	0.365	0.240
2004
January	0.310	0.250
February	0.290	0.265
March	0.280	0.238
April	0.245	0.219
May	0.240	0.210
June	0.250	0.220
July	0.230	0.190
1 to 4 August	0.194	0.194

Trading in the Shares has been suspended at the request of the Company at 9:39 a.m. on 5 August 2004 and the closing price before suspension was HK$0.194 per Share, which is therefore the closing price immediately preceding on the date of the Announcement and that of the Latest Practicable Date.

8. GENERAL

If as a result of a repurchase of the New Shares, a Shareholder’s proportionate interest in the voting rights of the Company increases, such increase will be treated as an acquisition for the purpose of the Takeovers Code. As a result, a Shareholder or a group of Shareholders, acting in concert with each other could, depending on the level of increase of the Shareholders’ interest, obtain or consolidate control of the Company and become obliged to make a mandatory offer in accordance with Rule 26 of the Takeovers Code. The proposed new Directors have no intention to exercise the repurchase mandate to such an extent that will result in a requirement of a Shareholder, or a group of Shareholders acting in concert, to make a general offer under the Takeovers Code.

– 154 –

EXPLANATORY STATEMENT

APPENDIX III

Immediately upon Completion but before the Placement and conversion of any Subscription Preference Shares, the Investor and its Concert parties will be interested in an aggregate of approximately 85.2% of the enlarged issued ordinary share capital of the Company. The proposed new Directors are not aware of any consequences which would arise under the Takeovers Code as a result of any repurchases pursuant to the repurchase mandate.

The Listing Rules prohibit a company from making repurchase on the Stock Exchange if the result of the repurchase would be that less than 25% (or such other prescribed minimum percentage as determined by the Stock Exchange) of the issued share capital would be in public hands. The proposed new Directors do not propose to repurchase New Shares which would result in less than the prescribed minimum percentage of New Shares in public hands.

– 155 –

TERMS OF THE PREFERENCE SHARES

APPENDIX IV

The convertible preference shares of HK$0.01 each (“ Preference Shares ”) to be issued by Hong Kong Pharmaceutical Holdings Limited (Provisional Liquidators Appointed) (the “ Company ”) which are convertible into new ordinary shares of HK$0.01 each (“ Ordinary Shares ”) in the capital of the Company at an initial conversion price of HK$0.027 per Ordinary Share shall have the following rights, privileges and restrictions:

(1) Dividends .

(A) The holders of Preference Shares shall be entitled to receive dividends (“ Dividends ”) at the rate of 5% per annum of the issue price of each Preference Share. The holders of Preference Shares shall be entitled to receive Dividends prior to and in preference to the holders of Ordinary Shares or any other class or series of shares of the Company. No dividend, whether in cash, in property or in shares of the Company, shall be allowed to be paid on any other class or series of shares of the Company unless and until all accrued Dividends are first paid or granted in full on the Preference Shares. The Dividends payable to the holders of Preference Shares shall be cumulative.
(B) Subject to the applicable laws, the Dividends shall be paid, if and so far as in the opinion of the directors of the Company, the Company has retained earnings lawfully available for distribution and there is positive cash flow available on 30 September and 31 March (each a “ Payment Date ”) in each year (or, if such date is not a Business Day, the preceding Business Day) to the holders of Preference Shares on the register on such dates in respect of the 6 month period ending on that date, except that the first such payment shall be payable on 30 September (or, if such date is not a Business Day, the preceding Business Day) next following the date of issue of the Preference Shares, and shall be payable in respect of the period from the date of issue to (but excluding) such Payment Date.
(C) Subject to paragraph (D) of this section (1), a Preference Share shall carry the right to Dividends in respect of all periods up to the end of the 6 month period ending on (but excluding) the Payment Date immediately preceding the date of conversion in respect of that Preference Share but not in respect of any subsequent period.
(D) Any Preference Share which is compulsorily converted under paragraph (B) of section 4 shall carry the right to the Dividends calculated down to and inclusive of the date of the Mandatory Conversion (as defined hereinafter).
(E) The amount of Dividends payable in respect of a period of less than six months shall be calculated on the basis of a 365-day year and the actual number of days elapsed.

For the purpose of the provisions herein, “ Business Day ” means a day (other than a Saturday or Sunday or any day on which a tropical cyclone warning No. 8 or above or a “ black rainstorm warning signal ” is hoisted in Hong Kong at any time between 9:00 a.m. and 5:00 p.m.) on which banks are open for business in Hong Kong.

– 156 –

TERMS OF THE PREFERENCE SHARES

APPENDIX IV

(2) Liquidation . In the event of any liquidation, dissolution, winding up of the Company, or a return of capital (other than upon conversion, redemption or repurchase of shares or with respect to a dividend) whether voluntary or not, or a sale of all or substantially all of the assets of the Company (each a “ Liquidation Event ”) distributions to the members of the Company shall be made in the following manner:
(A) Each holder of Preference Shares shall be entitled to receive, prior and in preference to any distribution of any assets, surplus or funds of the Company to the holders of the Ordinary Shares or any other class or series of shares of the Company by reason of their ownership of such shares, an amount per Preference Share held by him which shall be equal to (i) the aggregate amount of the issue price of all Preference Shares then in issue and outstanding divided by (ii) the total number of all Preference Shares then in issue and outstanding, for each Preference Share then held by such holder, plus all declared but unpaid Dividends and distributions on such Preference Shares (collectively, the “ Preference Amount ”). All declared but unpaid Dividends and distributions on Preference Shares shall be calculated up to and including the date of commencement of the Liquidation Event. If, upon the occurrence of a Liquidation Event, the assets and funds available to be distributed among the holders of Preference Shares shall be insufficient to permit the payment to such holders of the Preference Amount, then the entire assets and funds of the Company legally available for distribution to such holders shall be distributed rateably among the holders of the Preference Shares in proportion to the aggregate Preference Amount for the Preference Shares owned by each such holder.
(B) After payment has been made to the holders of Preference Shares of the full Preference Amount to which they are entitled pursuant to paragraph (A) of this section (2), the remaining assets and funds of the Company available for distribution to members shall be distributed among the holders of Ordinary Shares in proportion to their respective Shareholding Proportions only. “ Shareholding Proportion ” in respect of each shareholder means the proportion which the aggregate number of Ordinary Shares held by such shareholder bears to the aggregate number of all Ordinary Shares held by all shareholders.
(C) If the consideration received by the Company is other than cash or partly in cash, the value of securities and property paid or distributed pursuant to this section (2) shall be computed at fair market value at the time of payment to the Company or at the time made available to members, all as determined by the Board in good faith and in its reasonable business judgement, provided that (i) if such securities are listed on any established stock exchange or a national market system, their fair market value shall be the closing trading price for such securities as quoted on such system or exchange (or the largest such exchange) for the date the value is to be determined (or if there are no trading for such date, then for the last preceding Business Day on which there was trading), as reported in the newspaper; and (ii) if such securities are regularly quoted by a recognised securities dealer but trading prices are not reported, their fair market value shall be the average of the high bid and low asked prices for such securities on the date the value is to be determined (or if there are no quoted prices for such date, then for the last preceding Business Day on which there were quoted prices).

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(D) Nothing herein shall affect in any way the right of each holder of Preference Shares to convert such shares at any time and from time to time into Ordinary Shares in accordance with section (4) hereof. Any holder may expressly condition any such conversion upon the closing or consummation of a specific anticipated Liquidation Event, in which case the conversion shall take effect immediately prior to and conditional upon such closing or consummation.
(3) Voting Rights . The holder of each Preference Share shall be entitled to receive notice of, but shall not have any right to attend and vote at, general meetings of the Company unless:
(A) as at the date when the notices of a general meeting of the Company are given any Dividend that is payable remains unpaid 6 months after it has been declared in which event the Preference Shares shall confer on the holders thereof the right to, unless all such arrears have been paid prior to the time for the holding of the meeting, attend and vote at that general meeting; or
(B) a resolution is to be proposed at a general meeting of the Company for winding up the Company or a resolution is to be proposed which, if passed, would (subject to any consents required for such purpose being obtained) vary or abrogate the rights or privileges of the holders of Preference Shares, save that such holders may not vote upon any business dealt with at such general meeting except the election of a chairman, any motion for adjournment and the resolution for winding up or the resolution which, if passed, would (subject to any consents required for such purpose being obtained) so vary or abrogate the rights and privileges of the holders of Preference Shares.

If the holders of Preference Shares are entitled to vote on any resolution, then at the relevant general meeting or separate general meeting of the holders of Preference Shares, on a show of hands every holder of Preference Share who is present in person or by proxy or attorney or (being a corporation) by a duly authorised representative shall have one vote and on a poll every holder of Preference Share who is present in person or by proxy or attorney or (being a corporation) by a duly authorised representative shall have one vote for each Conversion Share which would have been issued to it had it exercised the conversion right attached to the Preference Shares 48 hours preceding the date of such general meeting or separate general meeting of the holders of Preference Shares.

(4) Conversion . The holders of Preference Shares shall have conversion rights as follows:
(A) Right to Convert . Each Preference Share shall be convertible, at the option of the holder thereof, on any Business Day after the date of issuance of such share but before the fifth anniversary thereof, into such number of fully-paid Ordinary Shares to be determined by the issue price of such Preference Shares divided by the conversion price (the “ Conversion Price ”) of HK$0.027 per Ordinary Share. The initial Conversion Price shall be subject to adjustment as provided in accordance with section (4)(D). For the avoidance of doubt, no payment shall be made by the holder of Preference Shares to the Company upon or in connection with the conversion of Preference Shares into Ordinary Shares.

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(B) Mandatory Conversion . Each Preference Share shall automatically be converted into such number of Ordinary Shares to be determined by the issue price of such Preference Shares divided by the then effective applicable Conversion Price on the fifth anniversary of the date of issuance of the Preference Share (such event being referred to herein as the “ Mandatory Conversion ”).
(C) Mechanics of Conversion . No fractional Ordinary Shares shall be issued upon conversion of the Preference Shares. All Ordinary Shares (including any fractions thereof) issuable upon conversion of more than one Preference Share by a holder thereof shall be aggregated for purposes of determining whether the issuance would result in the issuance of any fractional share. Any holder of Preference Shares shall, to the extent possible, convert the Preference Shares in board lots of Ordinary Shares. One Ordinary Share shall be issued and allotted in respect of any fractional Ordinary Share arising on conversion of the Preference Shares being converted by a holder. For the purpose of the conversion hereunder, if the Ordinary Shares to be issued on the conversion of any Preference Shares have an aggregate par value greater than the aggregate par value of the Preference Shares being converted, the Company shall, subject to applicable laws, capitalise any part of the surplus and apply the same in paying up at par the requisite number of Ordinary Shares or, where there is insufficient surplus, effect a fresh issue of Shares at a premium and apply the proceeds thereof in paying up at par the required number of additional Ordinary Shares to be issued on the conversion of the Preference Shares so as to satisfy the provisions hereunder. All Ordinary Shares so issued shall be credited as fully paid at par and rank pari passu in all respects with the Ordinary Shares then in issue.

Before any holder of Preference Shares shall be entitled to convert the same into Ordinary Shares and to receive certificates therefor, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Company in Hong Kong and shall give written notice to the Company at such office that he or she elects to convert the same; provided, however, that in the event of the Mandatory Conversion pursuant to section (4)(B), the outstanding Preference Shares shall be converted mandatorily without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Company and provided further that the Company shall not be obligated to issue certificates evidencing the Ordinary Shares issuable upon the Mandatory Conversion unless the certificates evidencing such Preference Shares are delivered to the Company as provided above, or the holder notifies the Company that such certificates have been lost, stolen, or destroyed and provides such indemnity as may be reasonably required by the Company.

The Company shall, as soon as practicable and in any event not later than seven (7) Business Days after such delivery, or such notification in the case of a lost, stolen, or destroyed certificate, issue and deliver at such office to such holder of the Preference Shares, a certificate or certificates for the number of Ordinary Shares to which such holder shall be entitled as aforesaid. Such conversion shall

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be deemed to have been made immediately prior to the close of business on the date of such surrender of the Preference Shares to be converted, or in the case of Mandatory Conversion, on the fifth anniversary of the issue of the Preference Shares, and the person or persons entitled to receive the Ordinary Shares issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Ordinary Shares at such time. For the avoidance of doubt, no conversion shall prejudice the right of a holder of Preference Shares to receive Dividends and other distributions declared but not paid as at the date of conversion of the Preference Shares.

(D) Adjustments to Conversion Price. The adjustments to the Conversion Price is to ensure that the shareholding of the holders of the Preference Shares shall not be affected by any change in the share capital of the Company.
(a) Subject as hereinafter provided, the Conversion Price, shall from time to time be adjusted in accordance with the following relevant provisions:
- (i) If and whenever the Ordinary Shares by reason of any consolidation or sub-division become of a different nominal amount, the Conversion Price in force immediately prior thereto shall be adjusted by multiplying it by the following fraction:

==> picture [15 x 23] intentionally omitted <==

where:

A = the nominal amount of the Ordinary Shares immediately after such alteration; and
B = the nominal amount of the Ordinary Shares immediately before such alteration.

Each such adjustment shall be effective from the close of business in Hong Kong on the date on which the consolidation or sub-division becomes effective.

(ii) If and whenever the Company shall issue (other than in lieu of the whole or any part of a cash dividend or specie distribution which the holders of the Ordinary Shares concerned would or could otherwise have received and which would not have constituted a capital distribution (as referred to in sub-paragraph (iii) below)) any Ordinary Shares credited as fully paid by way of capitalisation of profits or reserves (including any share premium account or capital redemption reserve fund), the Conversion Price in force immediately prior to the record date therefor shall be adjusted by multiplying it by the following fraction:

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in each case, where:

C = the aggregate nominal amount of the issued Ordinary Shares immediately before such issue; and
D = the aggregate nominal amount of the issued Ordinary Shares immediately after in such capitalisation issue.

Each such adjustment shall be effective (if appropriate retroactively) from the commencement of the day next following the record date for such issue.

(iii) If and whenever the Company shall make any capital distribution to holders (in their capacity as such) of Ordinary Shares (whether on a reduction of capital or otherwise) or shall grant to such holders rights to acquire for cash assets of or any of its subsidiaries, the Conversion Price in force immediately prior to such distribution or grant shall be adjusted by multiplying it by the following fraction:

==> picture [35 x 23] intentionally omitted <==

where:

A = the closing price of one Ordinary Share (which, if the Ordinary Shares are not trading, will be as determined in good faith by an approved merchant bank or the auditors for the time being of the Company) on the trading day immediately preceding the date on which the capital distribution or, as the case may be, the grant is publicly announced or (failing any such announcement), the trading day immediately preceding the record date for the capital distribution or, as the case may be, the grant; and
B = the fair market value on the day of such announcement or (as the case may require) the trading day immediately preceding the record date for the capital distribution or, as the case may be, of the grant, as determined in good faith by an approved merchant bank or the auditors for the time being of the Company of the portion of the capital distribution or of such rights to the grant which is attributable to one Ordinary Share,

provided that:

(aa) if in the opinion of the relevant approved merchant bank or the auditors for the time being of the Company the use of the fair market value as aforesaid produces a result which is significantly inequitable, it may instead determine the amount of the said market price which should properly be attributed to the value of the capital distribution or rights to the grant (and in such event B in the above formula shall be construed accordingly); and

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(bb) the provisions of this sub-paragraph (iii) shall not apply in relation to the issue of Ordinary Shares paid out of profits or reserves and issued in lieu of a cash dividend nor to a purchase by the Company of its own Ordinary Shares in accordance with the applicable rules, regulations and laws.

Each such adjustment shall be effective (if appropriate retroactively) from the commencement of the day next following the record date for the capital distribution or the grant.

(iv) (aa) If and whenever the Company shall issue wholly for cash any securities which by their terms are convertible into or exchangeable for or carry rights of subscription for new Ordinary Shares, and the Total Effective Consideration per Ordinary Share (as defined below) initially receivable for such securities is less than ninety-five per cent. (95%) of the closing price of one Ordinary Share (which, if the Ordinary Shares are not trading, will be as determined in good faith by an approved merchant bank or the auditors for the time being of the Company) as at the date of the announcement of the terms of issue of such securities, the Conversion Price shall be adjusted by multiplying the Conversion Price in force immediately prior to the issue by the following fraction:

==> picture [35 x 23] intentionally omitted <==

where:

A = the number of Ordinary Shares in issue immediately before the date of the issue;
B = the number of Ordinary Shares which the Total Effective Consideration receivable for the securities issued would purchase at such market price; and
C = the maximum number of Ordinary Shares to be issued upon full conversion or exchange of, or the exercise in full of the subscription rights conferred by, such securities at the initial conversion or exchange rate or subscription price. Such adjustment shall become effective (if appropriate retrospectively) from the close of business in Hong Kong on the Business Day next preceding whichever is the earlier of the date on which the issue is announced and the date on which the Company determines the conversion or exchange rate or subscription price provided however that no such adjustment shall be made if the Company shall make a like offer or grant (as the case may be) at the same time to the holder of Preference Shares (subject to such exclusions or

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other arrangements as the directors of the Company may deem necessary or expedient in relation to fractional entitlements or having regard to any restriction or obligations under the laws of, or the requirements of any recognised regulatory body or any stock exchange in, any territory in or outside Hong Kong) as if they had exercised the conversion rights attached to the Preference Shares in full on the day immediately preceding the record date for such offer or grant.

(bb) If and whenever the rights of conversion or exchange or subscription attached to any such securities as are mentioned in section (aa) of this sub-paragraph (iv) are modified so that the Total Effective Consideration per Ordinary Share (as defined below) initially receivable for such securities shall be less than ninety-five per cent. (95%) of the market price of one Ordinary Share (which, if the Ordinary Shares are not trading, will be as determined in good faith by an approved merchant bank or the auditors for the time being of the Company) as at the date of announcement of the proposal to modify such rights of conversion or exchange or subscription, the Conversion Price shall be adjusted by multiplying the Conversion Price in force immediately prior to such modification by the following fraction:

==> picture [35 x 23] intentionally omitted <==

where:

A = the number of Ordinary Shares in issue immediately before the date of such modification;
B = the number of Ordinary Shares which the Total Effective Consideration receivable for the securities issued at the modified conversion, exchange or subscription price would purchase at such closing price; and
C = the maximum number of Ordinary Shares to be issued upon full conversion or exchange of, or the exercise in full of the subscription rights conferred by, such securities at the modified conversion or exchange rate or subscription price. Such adjustment shall become effective (if appropriate retrospectively) as at the date upon which such modification shall take effect. A right of conversion or exchange or subscription shall not be treated as modified for the foregoing purpose where it is adjusted to take account of rights or capitalisation issues and other events normally giving rise to adjustment of conversion or exchange terms.

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For the purpose of this sub-paragraph (iv), the “ Total Effective Consideration ” receivable for the securities issued shall be deemed to the consideration receivable by the Company for any such securities plus the additional minimum consideration (if any) to be received by the Company upon (and assuming) the full conversion or exchange thereof or the exercise in full of such subscription rights, and the Total Effective Consideration per Ordinary Share initially receivable for such securities shall be such aggregate consideration divided by the number of Ordinary Shares to be issued upon (and assuming) such conversion or exchange at the initial conversion or exchange rate or the exercise of such subscription rights at the initial subscription price, in each case without any deduction for any commissions, discounts or expenses paid, allowed or incurred in connection with the issue.

(v) If and whenever the Company shall issue wholly for cash any Ordinary Shares (other than Ordinary Shares issued pursuant to the share option scheme adopted by the Company in compliance with the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “ Stock Exchange ”)) at a price per Ordinary Share which is less than ninety-five per cent. (95%) of the closing price of one Ordinary Share (which, if the Ordinary Shares are not trading, will be as determined in good faith by an approved merchant bank or the auditors for the time being of the Company) as at the date of the announcement of the terms of such issue, the Conversion Price shall be adjusted by multiplying the Conversion Price in force immediately before the date of such announcement by the following fraction:

==> picture [35 x 23] intentionally omitted <==

where:

A = the number of Ordinary Shares in issue immediately before the date of such announcement;
B = the number of Ordinary Shares which the aggregate amount payable for the issue would purchase at such market price; and
C = the number of Ordinary Shares so issued.

Such adjustment shall become effective on the date of the issue.

(vi) If and whenever the Company shall issue Ordinary Shares for the acquisition of asset at a Total Effective Consideration per Ordinary Share (as defined below) which is less than ninety-five per cent. (95%) of the closing price of one Ordinary Share (which, if the

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Ordinary Shares are not trading, will be as determined in good faith by an approved merchant bank or the auditors for the time being of the Company) as at the date of the announcement of the terms of such issue, the Conversion Price shall be adjusted in such manner as may be determined by an approved merchant bank or the auditors for the time being of the Company. Such adjustment shall become effective on the date of issue.

For the purpose of this sub-paragraph (vi) “ Total Effective Consideration ” shall be the aggregate consideration credited as being paid for such Ordinary Shares by the Company on acquisition of the relevant asset without any deduction of any commissions, discounts or expenses paid, allowed or incurred in connection with the issue thereof, and the “ Total Effective Consideration per Ordinary Share ” shall be the Total Effective Consideration divided by the number of Ordinary Shares issued as aforesaid.

(b) If the Company shall in any way modify the rights attached to any share or loan capital so as wholly or partly to convert or make convertible such share or loan capital into, or attach thereto any rights to acquire, Ordinary Shares, the Company shall appoint an approved merchant bank to consider whether any adjustment to the Conversion Price is appropriate (and if such approved merchant bank shall certify that any such adjustment is appropriate the Conversion Price shall be adjusted accordingly).
(c) Notwithstanding the provisions of paragraph (a), in any circumstances where the directors of the Company shall consider that an adjustment to the Conversion Price provided for under the said provisions should not be made or should be calculated on a different basis or that an adjustment to the Conversion Price should be made notwithstanding that no such adjustment is required under the said provisions, the directors of the Company may appoint an approved merchant bank to consider whether for any reason whatever the adjustment to be made (or the absence of adjustment) would or might not fairly and appropriately reflect the relative interests of the persons affected thereby and, if such approved merchant bank shall consider this to be the case, the adjustment shall be modified or nullified or an adjustment made instead of no adjustment in such manner (including without limitation making an adjustment calculated on a different basis) as shall be certified by such approved merchant bank to be in its opinion appropriate.
(E) Restrictions on Conversion
(a) Notwithstanding anything to the contrary herein contained, a holder of Preference Shares may not exercise any conversion rights attaching to the Preference Shares if, as a result of such exercise, the number of Ordinary Shares which are in public hands (within the meaning of the Rules Governing the Listing of Securities on the Stock Exchange) is reduced to

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below twenty-five per cent. (25%) of all Ordinary Shares in issue immediately following such exercise or such other minimum percentage applicable to the Company for the time being as prescribed by the Stock Exchange. Any notice served by a holder of the Preference Shares which requires conversion to be effected in contravention of section (4)(C) will be deemed withdrawn by that holder and the portion of the conversion rights stated in such notice will remain attached to its Preference Shares and be available for subsequent exercises subject to and in accordance with the rights and restrictions attached to the Preference Shares.

(b) No conversion rights attaching to the Preference Shares may be exercised by any holder thereof who is a Restricted Holder (as hereinafter defined), and the exercise of any such conversion rights by a holder thereof shall constitute a confirmation, representation and warranty by the converting holder to the Company that such holder is not a Restricted Holder and that all necessary governmental, regulatory or other consents or approvals and all formalities have been obtained and observed by such holder to enable him to exercise legally and validly the relevant conversion rights, to hold the Ordinary Shares allotted and issued upon exercise of the conversion rights and the Company to legally and validly allot the Ordinary Shares. For the purposes of this paragraph (b), a “Restricted Holder” means a holder of the Preference Shares who is a resident or national of any jurisdiction other than Hong Kong under the laws and regulations of which an exercise of conversion rights by such holder of Preference Shares or the performance by the Company of the obligations expressed to be assumed by it under these terms or the allotment and issue and holding of the Ordinary Shares cannot be carried out lawfully or cannot be carried out lawfully without the Company first having to take certain actions in such jurisdiction.
(5) Extension of General Offer . So long as any Preference Shares are outstanding and the Company becomes aware that an offer is made or an invitation is extended to all holders of Ordinary Shares generally to acquire all or some of the Ordinary Shares or any scheme or arrangement is proposed for that acquisition, the Company shall forthwith give notice to all holders of Preference Shares and the Company shall use reasonable endeavours to ensure that there is made or extended at the same time a similar offer or invitation, or that the scheme or arrangement is extended, to each holder of Preference Shares, as if its conversion rights had been fully exercised on a date which is immediately before the record date for the offer or invitation or the scheme or arrangement at the Conversion Price applicable at that time.
(6) No Impairment . The Company shall not, by amendment of its memorandum of association, its bye-laws or through any reorganisation, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company.

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(7) Certificate as to Adjustments . Upon the occurence of each adjustment or readjustment of the Conversion Price pursuant to section (4), the Company, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and upon the written request of any holder of Preference Shares, such adjustment or readjustment shall be certified by either the auditors of the Company for the time being or by a merchant bank of repute in Hong Kong selected by the Company (at the option of the Company), and furnish to each holder of Preference Shares subject to such adjustment or readjustment, a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, upon the written request of any holder of Preference Shares, furnish or cause to be furnished to such holder a like certificate setting forth:
(A) such adjustments and readjustments,
(B) the applicable Conversion Price then in effect, and
(C) the number of shares of Ordinary Shares and the amount, if any, of other property which at the time would be received upon the conversion of the Preference Shares, together with a copy of the certificate of the auditors or the merchant bank aforesaid (as the case may be).

In giving any certificate, the auditors of the Company or the merchant bank (as the case may be) shall be deemed to be acting, as experts and not as arbitrators and in the absence of manifest error, their decision shall be conclusive and binding on the Company and the holders of Preference Shares and all persons claiming, through or under them respectively.

(8) Notices of Record Date . In the event that the Company shall propose at any time to:
(A) declare any dividend or distribution upon the Ordinary Shares or other class or series of shares, whether in cash, property, share, or other securities, and whether or not a regular cash dividend;
(B) offer for subscription pro rata to the holders of any class or series of its capital any additional shares of any class or series or other rights;
(C) effect any reclassification or recapitalisation of the Ordinary Shares outstanding involving a change in the Ordinary Shares; or
(D) merge or consolidate with or into any other corporation, or sell, lease, or convey all or substantially all its property, assets or business, or a majority of the capital of the Company, or to liquidate, dissolve, or wind up;

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then, in connection with each such event, the Company shall send to the holders of Preference Shares:

(a) at least 14 days’ prior written notice of the date on which a record shall be taken for such dividend, distribution, or subscription rights (and specifying the date on which the holders of Ordinary Shares shall be entitled thereto) or for determining rights to vote in respect of the matters referred to in subparagraphs (A) to (C) of this section 8; and
(b) in the case of the matters referred to in subparagraphs (A) to (D) of this section 8, at least 14 days’ prior written notice of the date when the same shall take place (and specifying the date on which the holders of Ordinary Shares shall be entitled to exchange their Ordinary Shares for securities or other property deliverable upon the occurrence of such event or the record date for the determination of such holders if such record date is earlier).

Each such written notice shall be delivered personally or given by first class mail, postage prepaid, addressed to the holders of Preference Shares at the address for each such holder as shown on the share register of the Company.

(9) Issue Taxes .
(A) The Company shall pay any and all issue and other taxes (other than income taxes) that may be payable in respect of any issue or delivery of shares of Ordinary Shares on conversion of the Preference Shares pursuant hereto; provided, however, that the Company shall not be obligated to pay any transfer taxes resulting from any transfer requested by any holder in connection with any such conversion.
(B) All payments and Dividends in respect of Preference Shares shall be made without withholding or deduction for or on account of any present or future taxes, duties, assessments or governmental charges of whatever nature imposed or levied by or on behalf of Bermuda or Hong Kong or any authority therein or thereof (other than any withholding or deduction on account of any income tax, capital gains tax or other tax or duties of a similar nature) unless the withholding or deduction of such taxes, duties, assessments or governmental charges is required by law. In that event, subject to the Company having sufficient profits available for distribution, the Company shall pay such additional amounts as may be necessary in order that the net amounts received by the holders of Preference Shares after such withholding or deduction shall equal the respective amounts of the payments and Dividends which would have been receivable in respect of the Preference Shares in the absence of such withholding or deduction.
(C) To the extent that the Company shall have insufficient profits available for distribution in order to permit it to pay all or any of such additional amounts as referred to in section (9)(B) the amount of any such shortfall shall be treated for all purposes as arrears of Dividends.

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(10) Reservation of Ordinary Shares Issuable Upon Conversion . The Company shall at all times reserve and keep available out of its authorised but unissued share capital, solely for the purpose of effecting the conversion of the Preference Shares, such number of Ordinary Shares as shall from time to time be sufficient to effect the conversion of all outstanding Preference Shares, and if at any time the number of authorised but unissued Ordinary Shares shall not be sufficient to effect the conversion of all then outstanding Preference Shares, the Company will take such corporate action within its control as may be necessary to increase its authorised but unissued share capital as shall be sufficient for such purpose.

(11) Transfer and certificates .

(A) The provisions of the bye-laws of the Company relating to the transfer of shares and share certificates shall apply in relation to the Preference Shares, subject to these provisions.
(B) The Company shall maintain and keep a full and complete register at such location in Bermuda or such other places (but not in Hong Kong) as it shall from time to time determine the number of the Preference Shares and the holders of Preference Shares from time to time, such register shall contain details of conversion and/or cancellation and the destruction of any Preference Shares and the issue of any replacement certificates therefor issued in substitution for any mutilated, defaced, lost, stolen or destroyed certificates and of sufficient identification details of all holders of Preference Shares from time to time.
(C) If any certificate is mutilated, defaced, destroyed, stolen or lost, it may be replaced at the office of the registrar of the Company upon payment by the claimant of such costs as may be incurred in connection therewith and on such terms as to evidence and indemnity as the Company may reasonably require and on payment of such fee not exceeding HK$50 as the Company may determine. Mutilated or defaced Certificates must be surrendered before replacements will be issued.
(12) Severability . If at any time one or more provisions hereof is or becomes invalid, illegal, unenforceable or incapable of performance in any respect under any applicable laws, the validity, legality, enforceability or performance of the remaining provisions hereof or the validity, legality, enforceability or performance under such applicable laws these or any other provisions hereof shall not thereby in any way be affected or impaired.
(13) Undertaking . So long as any Preference Share remains capable of being converted into Ordinary Shares:
(A) the Company will use its reasonable endeavours (a) to maintain a listing for all the issued Ordinary Shares on the Stock Exchange; and (b) to obtain and maintain a listing on the Stock Exchange for all Ordinary Shares to be issued upon the conversion of the Preference Shares;

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(B) the Company will send to each holder of Preference Share, by way of information, one copy of every circular, notice of other document sent to any holder of Ordinary Shares in their capacity as shareholders, at the same time as it is sent to such other shareholders;
(C) the Company shall not, without the consent of the holders of Preference Shares as a class (obtained in the manner provided in the bye-laws of the Company) or unless otherwise permitted pursuant to these provisions:
- (a) modify, vary, alter or abrogate the rights attaching to the Preference Shares as a class, which (for the avoidance of doubt) shall not be deemed to be so modified, varied, altered or abrogated by the creation or issue of any shares or securities contemplated by these provisions; or
- (b) effect any repayment of the Preference Shares otherwise than as provided for in these provisions; or
(D) except in such manner as may be permitted by the bye-laws of the Company or applicable laws, the Company shall not reduce its share capital or any uncalled liability in respect thereof or any share premium account.
(14) Notices . Except in the case of a notice of conversion of the Preference Shares, a notice given pursuant to these provisions may be revoked with the consent in writing of the Company. Notices to holders of Preference Shares shall be given in accordance with the bye-laws of the Company.

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GENERAL INFORMATION

APPENDIX V

1. RESPONSIBILITY STATEMENTS

This document includes particulars given in compliance with the Takeovers Code and the Listing Rules for the purpose of giving information with regard to the Company and the Investor. The Provisional Liquidators jointly and severally accept full responsibility for the accuracy of the information contained in this document (other than that relating to the Investor, its sole director and the proposed new Directors) and confirm, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed in this document (other than those relating to the Investor, its sole director and the proposed new Directors) have been arrived at after due and careful consideration and there are no other facts not contained in this document the omission of which would make any statement in this document (other than that relating to the Investor, its sole director and the proposed new Directors) misleading.

The sole director of the Investor accepts full responsibility for the accuracy of information contained in this document (other than that relating to the Group and the Provisional Liquidators) and confirms, having made all reasonable enquiries, that to the best of his knowledge, opinions expressed by him in this document (other than those relating to the Group and the Provisional Liquidators) have been arrived at after due and careful consideration and there are no other facts not contained in this document, the omission of which would make any statement in this document (other than that relating to the Group and the Provisional Liquidators) misleading.

2. MARKET PRICES

Trading in the Shares has been suspended since 9:39 a.m. on 5 August 2004 and will remain suspended until Completion and sufficient public float has been restored. The closing price before suspension was HK$0.194 per Share which is therefore the closing price prior to the date of the Announcement and the Latest Practicable Date.

As the trading in the Shares has been suspended since 5 August 2004, information about the closing prices of the Shares on the Stock Exchange at the end of each of the 6 calendar months preceding the date of the Announcement are not available, and neither are the highest and lowest closing prices of the Shares during the Relevant Period.

3. INTEREST IN SECURITIES OF THE COMPANY

(a) Interests and short positions of the Directors in the share capital of the Company and its associated corporations

As at the Latest Practicable Date, to the best of the knowledge of the Provisional Liquidators, based on publicly available information provided by the Hong Kong Stock Exchange website for the Company and a company search of the Company, the interest or short position of the Directors in the shares, underlying shares or debentures of the Company and its associated corporations (as defined in Part XV of the SFO) which would be required to be: (i) notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which a director or a chief executive would be taken or deemed to have under such provisions of the SFO); or (ii) entered in the register kept by the Company pursuant to section 352 of

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the SFO; or (iii) notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers set out in Appendix 10 to the Listing Rules were as follows:

Interests in Shares

Name	Capacity/	Number of	Percentage
of director	Nature of interest	shares held	of holding
Sun Hiu Lu_(Note 1)_	Corporate	943,400,000	67.2%
Chu Kwan_(Note 1)_	Corporate	943,400,000	67.2%

Interests in underlying Shares held under equity derivatives (excluding share options)

		Number of
		underlying
		Shares held
		under equity
		derivatives
Name	Capacity/	(excluding share	Percentage
of director	Nature of interest	options)	of holding
Sun Hiu Lu_(Note 2)_	Corporate	380,000,000	27.07%
Chu Kwan_(Note 2)_	Corporate	380,000,000	27.07%

Interests in shares of associated corporations of the Company

Name		Capacity/	Number of	Percentage
of director	Name of Company	Nature of interest	shares held	of holding
Sun Hiu Lu	Welcome Success Worldwide Ltd.
	(Note 3)	Personal	1	50%
	Hong Tau Investment Ltd.(Note 4)	Corporate	51	51%
	Victory Hunter Holdings Limited_(Note 5)_	Corporate	1	100%
	Wai Fat International Limited_(Note 6)_	Corporate	1	100%
	Tin Ming Management Limited_(Note 7)_	Corporate	1	100%
Chu Kwan	Welcome Success Worldwide Ltd.(Note 3)	Personal	1	50%
	Hong Tau Investment Ltd.(Note 4)	Corporate	51	51%
	Victory Hunter Holdings Limited_(Note 5)_	Corporate	1	100%
	Wai Fat International Limited_(Note 6)_	Corporate	1	100%
	Tin Ming Management Limited_(Note 7)_	Corporate	1	100%

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Rights to acquire Shares

			Number of share
			options outstanding
		Exercise	as at the
Name of director	Exercise period	price	Latest Practicable Date
		HK$
Sun Hiu Lu	16 May 2000 to 15 May 2010	0.639	27,000,000
Huang Shuyun	16 May 2000 to 15 May 2010	0.639	25,000,000
	30 October 2000 to 29 October 2010	0.460	2,000,000
Chu Kwan	16 May 2000 to 15 May 2010	0.639	25,200,000
	30 October 2000 to 29 October 2010	0.460	1,000,000
Zhao Dake	16 May 2000 to 15 May 2010	0.639	27,000,000
Zhang Ke, Winston	10 July 2001 to 9 July 2011	1.000	3,000,000
	22 February 2004 to 21 February 2012	0.880	1,500,000
	22 February 2005 to 21 February 2012	0.880	1,500,000
Ng Wing Hang	2 May 2003 to 1 May 2013	0.380	300,000
	1 March 2004 to 28 February 2006	0.285	1,000,000
Melvin Wong	2 May 2003 to 1 May 2013	0.380	300,000
	1 March 2004 to 28 February 2006	0.285	1,000,000
Chu Yu Lin, David	1 March 2004 to 28 February 2006	0.285	1,000,000

Notes:

Hong Tau Investment Ltd. (“Hong Tau”) through its wholly-owned subsidiaries, Victory Hunter Holdings Limited (“Victory Hunter”), Wai Fat International Limited (“Wai Fat”) and Tin Ming Management Limited (“Tin Ming”) holds an aggregate of 943,400,000 Shares. Hong Tau is owned as to 51% by Welcome Success Worldwide Ltd. (“Welcome Success”), which is in turn owned equally as to 50% by each of Mr. Sun Hiu Lu (“Mr. Sun”) and Mr. Chu Kwan (“Mr. Chu”), and as to 49% by H.H.K. Finance Company Limited (“HHK”). HHK is 80%-owned by 黑龍江中盟集團有限公司 (Heilongjiang China United Group Company Limited) (“HCUGCL”).

Accordingly, each of Mr. Sun and Mr. Chu is deemed to be interested in the aggregate of 943,400,000 Shares held by Tin Ming, Wai Fat and Victory Hunter.

Pursuant to an option agreement dated 27 February 2000 signed by Hong Tau and Sin Hua Bank Limited (now known as Bank of China) (the “Bank”), the Bank has agreed to grant to Hong Tau a first right of refusal for the acquisition of any Shares converted under the Umbrella Convertible Notes issued by the Company to the Bank on 27 April 2000 at the same price as the Bank has paid for them at conversion if the Bank wishes to sell the Shares. The Umbrella Convertible Notes were subsequently transferred from the Bank in the course of a transfer of a portfolio of loans to Umbrella in December 2003.

Hong Tau is owned as to 51% by Welcome Success which is in turn owned equally as to 50% by Mr. Sun and Mr. Chu. Accordingly, each of Mr. Sun and Mr. Chu has a long position of 380,000,000 Shares.

Welcome Success is owned equally as to 50% by Mr. Sun and Mr. Chu.
Welcome Success holds 51% of the total issued share capital of Hong Tau.
Victory Hunter holds 23,400,000 Shares and is wholly-owned by Hong Tau.
Wai Fat holds 130,000,000 Shares and is wholly-owned by Hong Tau.
Tin Ming holds 790,000,000 Shares and is wholly-owned by Hong Tau.
The above information is based on the Company’s record as at the Latest Practicable Date.

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Save as disclosed above, as at the Latest Practicable Date, to the best of the knowledge of the Provisional Liquidators, based on publicly available information provided by the Hong Kong Stock Exchange website for the Company and a company search of the Company, none of the chief executive of the Company or the Directors had any interest or short position in any shares, underlying shares or debentures of the Company or any associated corporations (as defined in Part XV of the SFO) which would be required to be: (i) notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which a director or a chief executive would be taken or deemed to have under such provisions of the SFO); (ii) entered in the register kept by the Company pursuant to section 352 of the SFO; or (iii) notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers set out in Appendix 10 to the Listing Rules.

(b) Interests and short positions of substantial shareholders in the share capital of the Company

Save as disclosed below, as at the Latest Practicable Date, to the best of the knowledge of the Provisional Liquidators, based on publicly available information provided by the Hong Kong Stock Exchange website for the Company and a company search of the Company, the Provisional Liquidators are not aware of any person (other than a Director or chief executive of the Company) who has an interest or short position in the Shares and underlying shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or, who is, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the Group, or options to subscribe for 10% or more of the nominal value of such capital:

Name of	Number of shares held	Number of shares held	Long position in Shares	Long position in Shares
shareholder	Direct interest	Deemed interest	Direct interest Deemed interest
Gain Alpha Finance Limited_(Note 1)_	–	–	2,970,000,000	–
Ko Chun Shun, Johnson_(Note 1)_	–	–	–	2,970,000,000
Umbrella Finance Company Limited
(Note 2)	20,000,000	–	794,343,200	–
Citigroup Financial Products Inc.
(Note 2)	–	19,800,000	–	786,399,768
Citigroup Global Markets Holdings Inc.
(Note 2)	–	20,000,000	–	794,343,200
Citigroup Inc.(Note 2)	–	20,000,000	–	794,343,200
HCUGCL_(Notes 3 & 4)_	–	943,400,000	–	380,000,000
HHK_(Notes 3 & 4)_	–	943,400,000	–	380,000,000
Welcome Success_(Notes 3 & 4)_	–	943,400,000	–	380,000,000
Hong Tau_(Notes 3 & 4)_	–	943,400,000	380,000,000	–
Cai Ling Ti_(Note 5)_	–	943,400,000	–	427,000,000
Wong Yee Lan_(Note 6)_	-	943,400,000	–	426,200,000
Tin Ming	790,000,000	–	–	–
Wai Fat	130,000,000	–	–	–
Xu Yao Chang	91,000,000	–	–	–

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Notes:

Gain Alpha Finance Limited has a long position in 2,970,000,000 New Shares pursuant to the Restructuring Agreement and the Subscription Agreement. Gain Alpha is wholly-owned by Mr. Ko Chun Shun, Johnson and therefore Mr. Ko is deemed to be interested 2,970,000,000 New Shares.
Umbrella Finance Company Limited is owned as to 99% by Citigroup Financial Products Inc. and as to 1% by Citigroup Global Markets Holdings Inc.. Citigroup Financial Products Inc. is a 99% owned subsidiary of Citigroup Global Markets Holdings Inc. which is in turn a wholly-owned subsidiary of Citigroup Inc..
Hong Tau Investment Ltd. (“Hong Tau”) through its wholly-owned subsidiaries, Victory Hunter Holdings Limited (“Victory Hunter”), Wai Fat International Limited (“Wai Fat”) and Tin Ming Management Limited (“Tin Ming”) holds an aggregate of 943,400,000 Shares. Hong Tau is owned as to 51% by Welcome Success Worldwide Ltd. (“Welcome Success”), which is in turn owned equally as to 50% by each of Mr. Sun Hiu Lu (“Mr. Sun”) and Mr. Chu Kwan (“Mr. Chu”), and as to 49% by H.H.K. Finance Company Limited (“HHK”). HHK is 80%-owned by 黑龍江中盟集團有限公司 (Heilongjiang China United Group Company Limited) (“HCUGCL”).

Accordingly, each of Mr. Sun and Mr. Chu is deemed to be interested in the aggregate of 943,400,000 Shares held by Tin Ming, Wai Fat and Victory Hunter.

Pursuant to an option agreement dated 27 February 2000 signed by Hong Tau and Sin Hua Bank Limited (now known as Bank of China) (the “Bank”), the Bank has agreed to grant to Hong Tau a first right of refusal for the acquisition of any Shares converted under the Umbrella Convertible Notes issued by the Company to the Bank on 27 April 2000 at the same price as the Bank has paid for them at conversion if the Bank wishes to sell the Shares. The Umbrella Convertible Notes were subsequently transferred from the Bank in the course of a transfer of a portfolio of loans to Umbrella in December 2003.

Hong Tau is owned as to 51% by Welcome Success which is in turn owned equally as to 50% by Mr. Sun and Mr. Chu. Accordingly, each of Mr. Sun and Mr. Chu has a long position of 380,000,000 Shares.

Ms. Cai Ling Ti is the wife of Mr. Sun and is therefore deemed to be interested in those Shares through the interests of Mr. Sun.
Ms. Wong Yee Lan is the wife of Mr. Chu and is therefore deemed to be interested in those Shares through the interests of Mr. Chu.

As at the Latest Practicable Date, so far as is known to, or can be ascertained after reasonable enquiry by the Provisional Liquidators, the following parties were, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of another member of the Group:

Name of subsidiary	Name of substantial	Percentage of
of the Company	shareholder	holding
Huaxin	Shanghai International Asset	20%
	Management (HK) Co., Ltd.
	Shanghai CSA Shenglongda Biotech (Group)	10%
	Co., Ltd.

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(c) Others

As at the Latest Practicable Date, to the best of the knowledge of the Provisional Liquidators and having made all reasonable enquiries:

(i) none of the subsidiaries or associates (as defined in the Takeovers Code) of the Company, nor any pension funds of the Company or of any of its subsidiaries, nor the Provisional Liquidators, advisers to the Company as specified in class (2) of the definition of associate (as defined in the Takeovers Code) including Altus Capital, Moore Stephens and Quam Capital or any of their respective holding companies or subsidiaries has any interest in the securities of the Company;
(ii) no person had any arrangement of the kind referred to in Note 8 to Rule 22 of the Takeovers Code with the Company, the Investor, their respective Concert Parties or with any person who is an associate (as defined in the Takeovers Code) of the Company by virtue of classes (1), (2), (3) and (4) of the definition of associate (as defined in the Takeovers Code);
(iii) no shareholding in the Company was managed on a discretionary basis by fund managers (other than exempt fund managers) connected with the Company; and
(iv) no person who, prior to the posting of this document, has irrevocably committed themselves to vote for or against the Restructuring Proposal or the Whitewash Waiver in respect of their own beneficial shareholdings.

4. DEALINGS IN SECURITIES OF THE COMPANY

(a) The Directors

To the best of the knowledge of the Provisional Liquidators, having made all reasonable enquiries, none of the Directors nor its Concert Parties has dealt in any securities of the Company during the Relevant Period.

(b) The Investor

Save for the entering into the Restructuring Agreement and the Subscription Agreement, none of the Investor together with its sole director and its Concert Parties had any interest in, or had dealt in, any securities of the Company during the Relevant Period.

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(c) Others

During the Relevant Period, to the best of the knowledge of the Provisional Liquidators, having made all reasonable enquiries:

(i) none of the subsidiaries or associates (as defined in the Takeovers Code) of the Company, nor any pension funds of the Company or of any of its subsidiaries, nor the Provisional Liquidators, the advisers to the Company as specified in class (2) of the definition of associate (as defined in the Takeovers Code) including Altus Capital and Quam Capital or any of their respective holding companies or respective subsidiaries had dealt in any interest in the securities of the Company;
(ii) no person who had any arrangement of the kind referred to in Note 8 to Rule 22 of the Takeovers Code with the Company, the Investor, their respective Concert Parties or with any person who is an associate (as defined in the Takeovers Code) of the Company by virtue of classes (1), (2), (3) and (4) of the definition of associate as defined in the Takeover Code, had dealt in any securities of the Company;
(iii) no person including the Directors, who, prior to the posting of this document, has irrevocably committed themselves to accept or reject the Restructuring Proposal or the Whitewash Waiver had deal in any securities of the Company; and
(iv) no fund managers (other than exempt fund managers) connected with the Company or any of its subsidiaries had dealt in any securities of the Company.

5. INTERESTS AND DEALINGS IN SECURITIES OF THE INVESTOR

The Provisional Liquidators have written to each of the existing Directors to enquire as to whether he or she or his or her Concert Parties had any interest in the securities of the Investor and had dealt in the securities of the Investor during the Relevant Period. Not all of the existing Directors have been co-operative with the Provisional Liquidators and the Provisional Liquidators have only received a complete response from three of the existing Directors as at the Latest Practicable Date. Therefore, to the best of the knowledge of the Provisional Liquidators, having made all reasonable enquiries, the Directors and his or her Concert Parties did not have any interest in the securities of the Investor nor had they dealt with the securities of the Investor during the Relevant Period.

To the best of the knowledge of the Provisional Liquidators, having made all reasonable enquiries, the Company had no interest in the securities of the Investor as at the Latest Practicable Date and had not dealt in the securities of the Investor during the Relevant Period.

6. ARRANGEMENTS AFFECTING THE DIRECTORS

To the best of the knowledge of the Provisional Liquidators, having made all reasonable enquiries:

(a) none of the Directors has any service contract with any subsidiary or associated company of the Group which is a continuous contract with a notice period of 12 months or more or which is a fixed term contract with more than 12 months to run irrespective of the notice period and no service contract has been entered into or amended during the Relevant Period;

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(b) As at 31 March 2005 (being the date to which the latest published audited accounts of the Company were made up), none of the Directors nor the proposed new Directors as set out in the “Letter from the Investor” of this document has any interest, direct or indirect, in any assets which have been acquired or disposed of by or leased to any member of the Group, or are proposed to be acquired or disposed of by or leased to any member of the Group;
(c) except for the Restructuring Agreement and the Subscription Agreement, there is no agreement or arrangement or understanding between (i) the Investor or its Concert Parties and any of the Directors or recent Directors, Shareholders or recent Shareholders; and (ii) any Director and any other person which is conditional on or dependent upon the outcome of the Restructuring Proposal or otherwise in connection therewith;
(d) except for the Restructuring Agreement, the Subscription Agreement, the Ensure Settlement Agreement and the Huaxin Agreement, there is no material contract or arrangement entered into by any of the Provisional Liquidators, the Directors and the Investor or their respective Concert Parties in which any of the Provisional Liquidators or the Directors have a material personal interest and which is significant in relation to the business of the Group; and
(e) no other benefits have been or will be given to the Directors as compensation for loss of office or otherwise in connection with the Restructuring Agreement.

7. EXPERTS

(a) The following are the qualifications of the experts who have given an opinion or advice which is contained or referred to in this document:

Name Qualification

Quam Capital

a licensed corporation under the SFO permitted to conduct Type 6 (advising on corporate finance) of the regulated activities under the SFO

Altus Capital

a licensed corporation under the SFO permitted to conduct Type 4 (advising on securities), Type 6 (advising on corporate finance) and Type 9 (asset management) of the regulated activities under the SFO

Moore Stephens

Certified Public Accountants, Hong Kong

(b) Each of the Provisional Liquidators, Altus Capital, Quam Capital and Moore Stephens (i) has no shareholding in any member of the Group nor any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group; (ii) has given and has not withdrawn its written consent to the issue of this document with the inclusion of its respective letter and references to its name, as the case may be, in the form and context in

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which they respectively appear; and (iii) does not have any direct or indirect interest in any assets which have been, since 31 March 2005, the date to which the latest published audited accounts of the Group were made up, acquired or disposed of by or leased to any member of the Group, or are proposed to be acquired or disposed of by or leased to any member of the Group.

8. MATERIAL LITIGATION

Save as disclosed below, to the best of the knowledge of the Provisional Liquidators having made all reasonable enquiries, neither the Company nor any other members of the Group is engaged in any litigation or arbitration of material importance and no material litigation or claim of material importance is pending or threatened against any member of the Group as at the Latest Practicable Date. In any event, pursuant to section 186 of the Companies Ordinance and section 167(4) of the Companies Act, upon the appointment of the Provisional Liquidators to the Company, no action or proceeding shall be proceeded with or commenced against the Company except by leave of the Courts. As at the Latest Practicable Date, to the best of the knowledge of the Provisional Liquidators and having made all reasonable enquiries, no party has sought leave of the Courts to continue any of the following actions involving the Company. All contingent liabilities of the Company arising from the actions as set out below will be dealt with under the Schemes. Under the Schemes, admissible claims include contingent liabilities (subject to formal adjudication by the Scheme Administrators) and creditors with the benefit of claims against the Company that arose on or before the Schemes becomes effective. Accordingly, parties with contingent liabilities may participate in the Schemes. If the Proposed Restructuring is successfully implemented, all of the contingent claims against the Company will be compromised and discharged in full pursuant to the Schemes.

9. MATERIAL CONTRACTS

Save for the Restructuring Agreement, the Subscription Agreement, the Ensure Settlement Agreement and the Huaxin Agreement, to the best of the knowledge of the Provisional Liquidators, having made all reasonable enquiries, neither the Company nor any other members of the Group have entered into any material contracts (not being contracts entered into in the ordinary course of business carried out by the Group) from the two years preceding the date of the Announcement up to the Latest Practicable Date.

10. MATERIAL CHANGES IN THE FINANCIAL OR TRADING POSITION

On 7 December 2005, the Company announced that the Ensure Settlement Agreement was signed on 14 June 2005 by, amongst others, the Company and the GH Noteholders. Under the Ensure Settlement Agreement, HKPDL returned its 51% equity interest in Ensure originally acquired from the GH Noteholders by transferring the shares in Joinbest to the GH Noteholders. In return, the GH Noteholders returned the GH Convertible Notes to the Company for cancellation, paid HK$3 million cash to HKPDL, and provided a release of all claims against the Company and HKPDL.

On 24 January 2006, the Company announced that Market Strategy, amongst others, entered into the Huaxin Agreement with Golden Linker on 15 November 2005 for the sale of the Huaxin Interest at the consideration of HK$15 million. The transaction also involved an assignment of various debts, owing by Huaxin and China Genetic to the Company and Nam Pei Hong (Holding) Limited, to Golden Linker.

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Save for the foregoing, to the best of the knowledge of the Provisional Liquidators, having made all reasonable enquires, as at the Latest Practicable Date, there were no material change in the financial or trading position or outlook of the Group subsequent to the last published audited accounts of the Company for the year ended 31 March 2005.

11. COMPETING INTERESTS

As at the Latest Practicable Date, none of the Directors of the Company had any interest in a business, which competes or may compete with the business of the Company.

12. PROCEDURES FOR DEMANDING A POLL

A resolution put to the vote of a meeting of the Company shall be decided on a show of hands unless (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) a poll is demanded:

(a) by the chairman of such meeting; or
(b) by at least three members present in person (or in the case of a member being a corporation by its duly authorised representative) or by proxy for the time being entitled to vote at the meeting; or
(c) by a member or members present in person (or in the case of a member being a corporation by its duly authorised representative) or by proxy and representing not less than one-tenth of the total voting rights of all members having the right to vote at the meeting; or
(d) by a member or members present in person (or in the case of a member being a corporation by its duly authorised representative) or by proxy and holding shares in the Company conferring a right to vote at the meeting being shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all shares conferring that right.

A demand by a person as proxy for a member or in the case of a member being a corporation by its authorised representative shall be deemed to be the same as a demand by a member.

13. MISCELLANEOUS

(a) As at the Latest Practicable Date, there were no agreements, arrangements or understanding as to the transfer, charge or pledge of any New Shares to be subscribed for by the Investor or its Concert Parties pursuant to the Restructuring Agreement to any other persons.
(b) The qualified accountant of the Company is Mr. Jim Pak Keung, a fellow member of The Association of Chartered Certified Accountants.
(c) The Hong Kong branch share registrar of the Company is Tengis Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wan Chai, Hong Kong.

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(d) The registered office of the Company is Clarendon House, 2 Church Street, Hamilton, HM11, Bermuda.
(e) The principal place of the Company’s business in Hong Kong is 5th Floor, Allied Kajima Building, 138 Gloucester Road, Wan Chai, Hong Kong.
(f) The office of Messrs. Kelvin Edward Flynn and Cosimo Borrelli is 5th Floor, Allied Kajina Building, 138 Gloucester Road, Wan Chai, Hong Kong and the office of Mr. R. Craig Christensen is Century House, 16 Par-la-Ville Road, Hamilton HM08, Bermuda.
(g) The registered office of the Investor is P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands.
(h) The registered office of Altus Capital is 8th Floor, Hong Kong Diamond Exchange Building, 8 Duddell Street, Central, Hong Kong.
(i) The registered office of Quam Capital is Room 3208, Gloucester Tower, The Landmark, 11 Pedder Street, Central, Hong Kong.
(j) The registered office of Moore Stephens is 905 Silvercord Tower 2, 30 Canton Road, Tsimshatsui, Kowloon, Hong Kong.
(k) The English text of this document and form of proxy shall prevail over the Chinese text in the case of any inconsistency.

14. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection during normal business hours from 9:00 a.m. to 5:30 p.m. (except Saturdays and public holidays) at the office of the Provisional Liquidators at 5th Floor, Allied Kajima Building, 138 Gloucester Road, Wan Chai, Hong Kong from the date of this document up to and including 14 March 2006:

(a) the memorandum of association and bye-laws of the Company;
(b) the memorandum of association and bye-laws of the Investor;
(c) the annual reports of the Company for the two years ended 31 March 2005;
(d) the auditors’ report and financial statements of the Group for the year ended 31 March 2005 and the auditors’ review reports and financial statements of the Group for the six months ended 30 September 2004 and the six months ended 30 September 2005 respectively;
(e) the Restructuring Agreement, the Subscription Agreement, the Ensure Settlement Agreement and the Huaxin Agreement;

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(f) the draft new bye laws of the Company;
(g) the report from Moore Stephens in respect of the unaudited pro forma adjusted consolidated balance sheet of the Group, the text of which is set out on pages 143 to 144 of this document;
(h) the comfort letters from Moore Stephens and Quam Capital, the text of which is set out on pages 148 to 151 of this document;
(i) the letter of advice from Altus Capital, the text of which is set out on pages 41 to 59 of this document;
(j) the letter from the Provisional Liquidators, the text of which is set out on pages 10 to 35 of this document;
(k) the letter from the Investor, the text of which are set out on pages 36 and 40 of this document; and
(l) the written consents referred to in the paragraph headed “Experts” in this Appendix.

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NOTICE OF THE SGM

HONG KONG PHARMACEUTICAL HOLDINGS LIMITED 香港葯業集團有限公司 *

(PROVISIONAL LIQUIDATORS APPOINTED)

(Incorporated in Bermuda with limited liability)

NOTICE IS HEREBY GIVEN that a SPECIAL GENERAL MEETING of Hong Kong Pharmaceutical Holdings Limited (Provisional Liquidators Appointed) (the “ Company ”) will be held at Room 204, The Duke of Windsor Social Service Building, 15 Hennessy Road, Wan Chai, Hong Kong, on Tuesday, 14 March 2006, at 10:00 a.m. for the purpose of considering and, if thought fit, passing the following resolutions which will be proposed, with or without modification, in the case of resolutions numbered 1, 2, 3, 5 and 12 to 14 as special resolutions, and in the case of resolutions numbered 4 and 6 to 11, as ordinary resolutions:

SPECIAL RESOLUTIONS

CAPITAL REDUCTION OF THE COMPANY

THAT, conditional upon the Listing Committee of The Stock Exchange of Hong Kong Limited (the “ Stock Exchange ”) granting its approval to the listing of, and permission to deal in, the new ordinary shares of the Company of HK$0.01 each (the “ New Shares ”) resulting from the reorganisation of the share capital of the Company (the “ Capital Reorganisation ”) to be effected pursuant to the restructuring agreement dated 7 September 2005 entered into by the Company and, among others, Gain Alpha Finance Limited as may be amended from time to time (the “ Restructuring Agreement ”) and in compliance with the Companies Act 1981 of Bermuda as amended (the “ Companies Act ”),
(a) the issued share capital of HK$140,379,669.80 of the Company be reduced by HK$138,975,873.11 to HK$1,403,796.69 by cancelling the paid-up capital to the extent of HK$0.099 on each of the 1,403,796,698 issued shares of HK$0.10 each in the share capital of the Company so THAT each of such issued share shall be treated as one fully paid share of HK$0.001 each;
(b) the surplus which will arise as a result of the reduction of the issued share capital of the Company to be effected pursuant to paragraph (a) of this resolution above in the amount of HK$138,975,873.11 shall be applied to eliminate the same amount of the Company’s accumulated losses on a dollar for dollar basis and the future directors of the Company appointed pursuant to resolution numbered 9 as set out in the notice of which this resolution forms part (the “ Future Directors ”) be and are hereby authorised to apply such surplus in such manner as may be permitted by the ByeLaws of the Company; and

for identification purposes only

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NOTICE OF THE SGM

(c) the provisional liquidators of the Company (the “ Provisional Liquidators ”) and the Future Directors be and are hereby generally and unconditionally authorised to do all things they consider necessary, expedient and appropriate to effect and implement any of the foregoing.

SHARE CONSOLIDATION

THAT, conditional upon approval of resolution numbered 1 set out in the notice of which this resolution forms part:
(a) every 10 issued shares of par value HK$0.001 each in the capital of the Company (the “ Reduced Shares ”) be consolidated into one New Share (as defined in resolution numbered 1 set out in the notice of which this resolution forms part) (the “ Share Consolidation ”);
(b) any fractions of New Shares arising from the Share Consolidation pursuant to paragraph (a) of this resolution shall not be allocated to the holders of the Reduced Shares otherwise entitled thereto but such fractions shall be aggregated and sold for the benefit of the Company;
(c) for the purposes of implementing the Share Consolidation, the Provisional Liquidators and the Future Directors (as defined in resolution numbered 1 set out in the notice of which this resolution forms part) be and are hereby generally and unconditionally authorised to appoint some other person to execute transfers or renunciations on behalf of persons otherwise entitled to any such fractions and generally to make all arrangements and execute all documents which they consider necessary, expedient or appropriate for the settlement and disposal of fractional entitlement; and
(d) all of the New Shares resulting from the Share Consolidation shall rank pari passu in all respects and have the same rights and privileges and be subject to the restrictions contained in the bye-laws of the Company.

SHARE CANCELLATION

THAT, conditional upon approval of resolution numbered 2 set out the notice of which this resolution forms part, the unissued share capital of HK$298,596,203.31 in the authorised share capital of HK$300,000,000 of the Company be cancelled and diminished resulting in an authorised and issued share capital of the Company becoming HK$1,403,796.69.

ORDINARY RESOLUTION

AUTHORISED SHARE CAPITAL INCREASE

THAT, conditional upon approval of resolutions numbered 2 and 3 set out the notice of which this resolution forms part,
(a) the authorised share capital of the Company be increased from HK$1,403,796.69 to HK$60,000,000 divided into 3,500,000,000 New Shares (as defined in resolution numbered 1 set out in the notice of which this resolution forms part) and

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2,500,000,000 preference shares of HK$0.01 each in the capital of the Company (the “ Preference Shares ”) having the rights and being subject to the restrictions set out in the new Bye-Laws of the Company proposed to be adopted pursuant to resolution 5 set out in the notice of which this resolution forms part;

(b) all of the New Shares after completion of the Capital Reorganisation (as defined in resolution numbered 1 set out in the notice of which this resolution forms part) shall rank pari passu in all respects with each other (including for the avoidance of doubt the New Shares created following the Share Conversion) and have the same rights and privileges and be subject to the restrictions contained in the new bye-laws of the Company proposed to be adopted in resolution numbered 5 set out in the notice of which this resolution forms part; and
(c) the Provisional Liquidators and the Future Directors (as defined in resolution numbered 1 set out in the notice of which this resolution forms part) be and are hereby generally and unconditionally authorised to exercise up to Completion (as defined in the Document referred to in resolution numbered 6 set out in the notice of which this resolution forms part) all the powers of the Company to allot, issue and deal with New Shares (as defined in resolution numbered 1 set out in the notice of which this resolution forms part) and the Preference Shares (as defined in this resolution) and to do all things they consider necessary, expedient and appropriate to effect and implement any of the foregoing.

SPECIAL RESOLUTION

ADOPTION OF NEW BYE-LAWS OF THE COMPANY

THAT the existing bye-laws of the Company be and they are hereby submitted and replaced in their entirety by the new bye-laws of the Company a copy of which has been produced at this meeting marked “A” and, initialled by the chairman of this meeting for the purpose of identification (the “ New Bye-Laws ”). The Provisional Liquidators and the Future Directors (as defined in resolution numbered 1 set out in the notice of which this resolution forms part) be and are generally and unconditionally authorised to do all things necessary, expedient and appropriate to effect and implement the foregoing.

ORDINARY RESOLUTIONS

IMPLEMENTATION OF THE RESTRUCTURING PROPOSAL

THAT, conditional upon approval of resolution numbered 8 set out in the notice of which this resolution forms part,
(a) the entry by the Company into the Restructuring Agreement (as defined in the resolution numbered 1 as set out in the notice of which this resolution forms part), a copy of which together with a copy of the document sent to the shareholders of the Company dated 20 February 2006 (the “ Document ”) have been produced to the SGM marked “B” and “C” respectively and in each case initialled by the chairman of this meeting of the purpose of identification, the transactions contemplated by the Restructuring Agreement and the performance thereof by the Company, be and are hereby confirmed, ratified and approved; and

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(b) the Provisional Liquidators and the Future Directors (as defined in resolution numbered 1 set out in the notice of which this resolution forms) part be and are hereby generally and unconditionally authorised to the extent of their authority so to act, to do all such things and take all such actions as they may consider to be necessary or desirable, expedient or appropriate to give effect to the terms of the Restructuring Agreement including, without limiting the foregoing, completion of the transactions contemplated by the Restructuring Agreement.
THAT, conditional upon approval of resolution numbered 8 set out in the notice of which this resolution forms part,
(a) the entry by the Company into the Subscription Agreement (as defined in the Document referred to in resolution numbered 6 as set out in the notice of which this resolution forms part), a copy of which has been produced to this meeting marked “D” and initialled by the chairman of this meeting for identification purposes, the transactions contemplated by the Subscription Agreement and the performance thereof by the Company, be and are hereby confirmed, ratified and approved;
(b) conditional upon the Capital Reorganisation (as defined in resolution numbered 1 of the notice of which this resolution forms part) being effected and the approval from the Bermuda Monetary Authority, the Provisional Liquidators and the Future Directors (as defined in resolution numbered 1 of which this resolution forms part) and are hereby generally and unconditionally authorised to allot and issue the New Shares (as defined in resolution numbered 1 of the notice of which this resolution forms part) and the Preference Shares (as defined in the Document referred to in resolution numbered 6 of which this resolution forms part) pursuant to the terms of the Subscription Agreement and such new Shares upon conversion of the Preference Shares in accordance with the New Bye-Laws (as defined in resolution numbered 5 of which this resolution forms part); and
(c) the Future Directors (as defined in resolution numbered 1 set out in the notice of which this resolution forms part) and any directors of the Company appointed from time to time after this meeting be and are hereby generally and unconditionally authorised from time to time to issue New Shares upon conversion of the Preference Shares by the holders thereof subject to the terms of the Preference Shares and to take all such actions as they may consider to be necessary or desirable, expedient or appropriate to give effect to the terms of the Preference Shares.

WHITEWASH WAIVER

THAT the waiver (the “ Whitewash Waiver ”) granted or to be granted by the Executive Director of the Corporate Finance Division of the Securities and Futures Commission of Hong Kong (or any delegate of the Executive Director) pursuant to Note 1 on dispensations from Rule 26 of the Hong Kong Code on Takeovers and Mergers in respect of the obligation on the part of Gain Alpha Finance Limited and any parties acting in concert with it, to make a mandatory general offer to shareholders of the Company for all the issued New Shares (as defined in resolution numbered 1 set out in the notice of which this resolution forms part) of the Company not already owned or agreed to be acquired by them upon Completion (as defined in the Restructuring Agreement referred to in the

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NOTICE OF THE SGM

resolution numbered 4 set out in the notice of which this resolution forms part) be and is hereby approved and the Provisional Liquidators and the Future Directors (as defined in resolution numbered 1 set out in the notice of which this resolution forms part) be and are hereby generally and unconditionally authorised to do all such things and take all such action as they may consider necessary or desirable, expedient or appropriate to give effect to any of the matters relating to, or incidental to, the Whitewash Waiver.

APPOINTMENT OF DIRECTORS

THAT, with effect from Completion (as defined in the Document referred to in resolution numbered 6) in the place of Mr. Sun Hiu Lu, Ms. Huang Shuyun, Mr. Chu Kwan, Mr. Zhao Dake, Mr. Zhang Ke, Winston, Mr. Ng Wing Hang, Dr. Melvin Wong and Mr. Chu Yu Lin, David:
(a) each of Mr. Ko Chun Shun, Johnson, Mr. Tsoi Tong Hoo, Tony, Mr. Chan Kam Kwan, Jason, Mr. Wong Fan, Frank and Mr. Yeung Heung Yeung or such other nominees to be determined by Gain Alpha Finance Limited upon Completion (as defined in the Document referred to in resolution numbered 6 set out in the notice of which this resolution forms part) be appointed as executive directors of the Company; and
(b) such other nominees to be determined by Gain Alpha Finance Limited upon Completion (as defined in the Document referred to in resolution numbered 6 set out in the notice of which this resolution forms part) be appointed as non-executive directors of the Company,

and THAT the future directors appointed pursuant to this resolution be and are hereby generally and unconditionally authorised to appoint such other new executive directors and new non-executive directors of the Company during the Relevant Period (such number of new executive and new non-executive to be determined by the future directors of the Company appointed pursuant to this resolution during the Relevant Period).

For the purpose of this resolution, “Relevant Period” means the period from Completion (as defined in the Document referred to in resolution numbered 6 set out in the notice of which this resolution forms part) until whichever is the earliest of:

(i) the conclusion of the next annual general meeting of the Company;
(ii) the revocation or variation of the authority given under this resolution by ordinary resolution of the shareholders in general meeting; and
(iii) the expiration of the period within which the next annual general meeting of the Company is required by the New Bye-Laws (as defined in resolution numbered 5 set out in the notice of which this resolution forms part), or any applicable laws, to be held.

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NOTICE OF THE SGM

ENSURE SETTLEMENT AGREEMENT

THAT, the entry by the Company into the Ensure Settlement Agreement (as defined in the Document referred to in resolution numbered 6 as set out in the notice of which this resolution forms part), a copy of which has been produced to this Meeting marked “E” and initialled by the chairman of this meeting for the purpose of identification, the transaction contemplated by the Ensure Settlement Agreement and the performance thereof by the Company, be and are hereby confirmed and ratified and approved.

HUAXIN AGREEMENT

THAT, the entry by the Company into the Huaxin Agreement (as defined in the Document referred to in resolution numbered 6 as set out in the notice of which this resolution forms part), a copy of which has been produced to this meeting marked “F” and initialled by the chairman of this meeting for the purpose of identification, the transaction contemplated by the Huaxin Agreement and the performance thereof by the Company, be and are hereby confirmed and ratified and approved.

SPECIAL RESOLUTION

REMOVAL OF CURRENT DIRECTORS

THAT, with effect from Completion (as defined in the Document referred to in resolution numbered 6 set out in the notice of which this resolution forms part), each of Mr. Sun Hiu Lu, Ms. Huang Shuyun, Mr. Chu Kwan, Mr. Zhao Dake, Mr. Zhang Ke, Winston, Mr. Ng Wing Hang, Dr. Melvin Wong and Mr. Chu Yu Lin, David be removed as directors of the Company with effect from Completion (as defined in the Document referred to in resolution numbered 6 set out in the notice of which this resolution forms part).

GENERAL MANDATE TO ALLOT, ISSUE AND DEAL WITH ADDITIONAL NEW SHARES

THAT, conditional upon Completion (as defined in the Document referred to in resolution numbered 6 set out in the notice of which this resolution forms part):
(a) subject to paragraph (b) below, the Future Directors (as defined in resolution numbered 1 as set out in the notice of which this resolution forms part), be and are hereby generally and unconditionally authorised to exercise during the Relevant Period (as defined below) all the powers of the Company to allot, issue and deal with additional New Shares (as defined in resolution numbered 1 set out in the notice of which this resolution forms part) and to make or grant offers, agreements and options (including warrants, bonds and debentures, notes and any securities which carry rights to subscribe for or are convertible into ordinary shares of the Company) which would or might require the exercise of any of such powers during or after the end of the Relevant Period;
(b) the aggregate nominal amount of New Shares allotted, issued or otherwise dealt with or agreed conditionally or unconditionally to be allotted, issued or otherwise dealt with (whether pursuant to an option or otherwise) by the Future Directors pursuant to

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NOTICE OF THE SGM

approval of paragraph (a) above, other than pursuant to (i) a Right Issue (as defined below); or (ii) an issue of ordinary shares of the Company upon the exercise of the rights of subscription or conversion under the terms of any preference shares of the Company; or (iii) an issue of ordinary shares of the Company by way of scrip dividend pursuant to the bye-laws of the Company from time to time; or (iv) the exercise of any option granted under any option scheme or similar arrangement for the time being adopted for the grant or issue to eligible participants of the Company and/or its subsidiaries, of options to subscribe for, or rights to acquire, shares of the Company, shall not in total exceed 20% of the aggregate nominal amount of the share capital of the Company in issue as at the date hereof;

(c) for the purpose of this resolution, “Relevant Period” means the period from Completion (as defined in the Document referred to in resolution number 6 set out in the notice of which this resolution forms part) until whichever is the earliest of:
(i) the conclusion of the next annual general meeting of the Company;
(ii) the revocation of variation of the authority given under this resolution by ordinary resolution of the shareholders in general meeting; and
(iii) the expiration of the period within which the next annual general meeting or the Company, or any applicable laws, to be held.

“Right Issue” means an offer of shares for subscription open for a fixed period by the Company to holders of shares on the register of members of the Company on a fixed record date in proportion to their holdings of shares (subject to such exclusion or other arrangements as the Future Directors appointed pursuant to resolution number 11 as set out in the notice of which this resolution forms part may deem necessary or expedient in relation to fractional entitlements or having regard to any restrictions or obligations under the laws of, or the requirements of any recognised regulatory body or any stock exchange in, any territory outside Hong Kong).

GENERAL MANDATE TO PURCHASE NEW SHARES

“THAT, conditional upon Completion (as defined in the Document referred to in resolution numbered 6 set out in the notice of which this resolution forms part),
(a) the Future Directors (as defined in resolution numbered 1 as set out in the notice of which this resolution forms part), be and are hereby generally and unconditionally authorised to exercise during the Relevant Period (as defined below) all the powers of the Company to purchase its New Shares (as defined in resolution numbered 1 set out in the notice of which this resolution forms part) in the capital of the Company, subject to and in accordance with applicable laws;
(b) the aggregate nominal amount of New Shares which may be purchased pursuant to the approval in paragraph (a) above shall not in total exceed 10% of the aggregate nominal amount of the share capital of the Company as at the date hereof;

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NOTICE OF THE SGM

(c) for the purpose of this resolution, “Relevant Period” means the period from Completion (as defined in the Document referred to in resolution numbered 6 set out in the notice of which this resolution forms part) until whichever is the earliest of:
(i) the conclusion of the next annual general meeting of the Company; or
(ii) the revocation of variation of the authority given under this resolution by ordinary resolution of the shareholders in general meeting; and
(iii) the expiration of the period within which the next annual general meeting or the Company, or any applicable laws, to be held.

As at the date of this notice, 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.

Date: 20 February 2006, Hong Kong

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AI assistant

Bloks Group Limited — Proxy Solicitation & Information Statement 2006

49127_rns_2006-02-20_0cabf8f2-ceab-4be7-8551-f59fec89dba5.pdf

HONG KONG PHARMACEUTICAL HOLDINGS LIMITED

香港葯業集團有限公司[*]

GAIN ALPHA FINANCE LIMITED

(1) RESTRUCTURING OF HONG KONG PHARMACEUTICAL HOLDINGS LIMITED (PROVISIONAL LIQUIDATORS APPOINTED) INVOLVING, INTER ALIA, THE CAPITAL RESTRUCTURING, THE DEBT RESTRUCTURING, THE SUBSCRIPTION, THE GROUP REORGANISATION AND THE WHITEWASH WAIVER;

(5) GENERAL MANDATES TO ISSUE AND REPURCHASE NEW SHARES

Provisional Liquidators

ALTUS CAPITAL LIMITED

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

EXPECTED TIMETABLE

INTRODUCTION AND BACKGROUND

REASONS FOR THE RESTRUCTURING PROPOSAL

THE RESTRUCTURING PROPOSAL

The Capital Restructuring

1. Capital Reduction

2. Share Consolidation

The Debt Restructuring

The Subscription

The Group Reorganisation

CONDITIONS PRECEDENT TO COMPLETION

LETTER FROM THE PROVISIONAL LIQUIDATORS

PRINCIPAL TERMS OF THE PREFERENCE SHARES

EFFECTS OF THE RESTRUCTURING PROPOSAL

Share capital

Shareholding structure

Working capital

Indebtedness

Net tangible assets

THE WHITEWASH WAIVER

FUTURE INTENTIONS OF THE INVESTOR REGARDING THE RESTRUCTURED GROUP

Business plan

Directors and management

MAINTAINING THE LISTING STATUS OF THE COMPANY

THE ENSURE SETTLEMENT

Background

Principal terms of the Ensure Settlement Agreement

Completion

THE HUAXIN DISPOSAL

Background

Principal terms of the Huaxin Agreement

Completion

ADOPTION OF NEW BYE-LAWS

GENERAL MANDATES TO ISSUE AND REPURCHASE NEW SHARES

LISTING AND DEALINGS

TRADING ARRANGEMENTS

Documents of title

Facilities for odd lot holders

Taxation

RESUMPTION OF TRADING IN THE NEW SHARES

THE SGM

GENERAL

RECOMMENDATIONS

ADDITIONAL INFORMATION

GAIN ALPHA FINANCE LIMITED

RESTRUCTURING OF HONG KONG PHARMACEUTICAL HOLDINGS LIMITED (PROVISIONAL LIQUIDATORS APPOINTED) INVOLVING, INTER ALIA, THE CAPITAL RESTRUCTURING, THE DEBT RESTRUCTURING, THE SUBSCRIPTION, THE GROUP REORGANISATION AND THE WHITEWASH WAIVER

INTRODUCTION

BACKGROUND INFORMATION ON THE INVESTOR

FUTURE INTENTION OF THE INVESTOR REGARDING THE RESTRUCTURED GROUP

Business plan

Directors and management

Executive Directors

LETTER FROM THE INVESTOR

Non-executive Director

Independent non-executive Directors

Maintaining the listing status of the Company

LETTER FROM THE INVESTOR

THE WHITEWASH WAIVER

GENERAL INFORMATION

LETTER FROM ALTUS CAPITAL

(1) RESTRUCTURING OF HONG KONG PHARMACEUTICAL HOLDINGS LIMITED (PROVISIONAL LIQUIDATORS APPOINTED) INVOLVING, INTER ALIA, THE CAPITAL RESTRUCTURING, THE DEBT RESTRUCTURING, THE SUBSCRIPTION, THE GROUP REORGANISATION AND THE WHITEWASH WAIVER; AND

Bloks Group Limited Proxy Solicitation & Information Statement 2006