CGN Mining Company Limited — Proxy Solicitation & Information Statement 2003

Oct 6, 2003

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in Vital BioTech Holdings Limited, you should at once hand this circular and the accompanying or transfer proxy to the purchaser or the transferee or to the bank, stockbroker or other agent through whom the sale was effected for transmission to the purchaser or the transferee.

The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this circular, makes no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.

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Vital BioTech Holdings Limited 維奧生物科技控股有限公司

(incorporated in the Cayman Islands with limited liability)

DISCLOSEABLE AND CONNECTED TRANSACTION

Financial adviser to the Company

Crosby Limited

Independent financial adviser to the Independent Board Committee

MasterLink Securities (Hong Kong) Corporation Limited

A letter from the board is set out on pages 5 to 12 of this circular and a letter from the Independent Board Committee is set out on page 13 of this circular. In addition, a letter from MasterLink, the independent financial adviser, containing its advice to the Independent Board Committee is set out on pages 14 to 23 of this circular.

A notice convening the EGM to be held at 10:00 a.m. on 31 October 2003 at 18th Floor, CRE Building, 303 Hennessy Road, Wanchai, Hong Kong is set out on pages 29 to 30 of this circular. A form of proxy for use at the EGM is also enclosed. Whether or not you intend to be present at the EGM, you are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon and deposit with the branch share registrar of the Company in Hong Kong, Computershare Hong Kong Investor Services Limited at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong, as soon as possible but in any event not less than 48 hours before the time appointed for the holding of the EGM or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM or any adjournment thereof should you so desire.

6 October 2003

CONTENTS

		Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		1
Letter from the Board
1.	Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
2.	The Agreement
	Assets to be acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
	Shareholding structure before and after Completion . . . . . . . . . . . . . . . . . . . . . . .	7
3.	Major terms of the Agreement
	Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
	Conditions Precedent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9
	Completion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
4.	Information on the Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
5.	Information on Sichuan Pharmaceutical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
6.	Reasons for entering into the Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
7.	EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
8.	General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		13
Letter from MasterLink . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		14
Appendix	– General information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	24
Notice of	the EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	29

DEFINITIONS

In this circular, unless the context otherwise requires, the following expressions have the following meanings:

• “30-day Average Price”

“30-day Average Price” means the average closing Share price for 30 consecutive trading days on the Stock Exchange “30-day Average Price means 1,335,696,502 Shares in issue upon Completion Enlarged Capital” (for information purposes only) assuming that there are no further issue of Shares from the Latest Practicable Date other than the maximum number of Consideration Shares calculated by using the 30-day Average Price prior to the Latest Practicable Date

“Acquisition”	means the acquisition contemplated by the Agreement
	whereby Yugofoil will acquire the remaining 15% equity
	interest in Sichuan Pharmaceutical from Harvest Time
“Agreement”	means the conditional sale and purchase agreement entered
	into between Yugofoil and Harvest Time in respect of the
	Acquisition on 22 September 2003
“Associates”	have the same meaning ascribed to the Listing Rules
“BVI”	means the British Virgin Islands
“Company”	means Vital BioTech Holdings Limited維奧生物科技控
	股有限公司, an exempted company incorporated in the
	Cayman Islands with limited liability on 30 May 2001 whose
	Shares are listed on the Stock Exchange
“Completion”	means completion of the Acquisition
“Completion Deadline”	means 120 days after the date of the Agreement or such
	other date as the parties may otherwise agree
“Consideration”	means the aggregate consideration in the amount of
	HK$47,169,810 (approximately RMB50,000,000) payable
	by the Company with respect to the Acquisition
“Consideration Shares”	means the Shares credited as fully paid at a conversion
	value to be determined, being the higher of (i) the then
	30-day Average Price prior to the date of the Notice given
	to the Vendor with respect to the Deferred Payment(s); or
	(ii) HK$0.46 per Share
“Deferred Payment(s)”	means the deferred payments to be paid to the Vendor
	according to the Deferred Payment Schedule as part of the
	Consideration

– 1 –

DEFINITIONS

“Director(s)”	means the director(s) of the Company
“EGM”	means the extraordinary general meeting of the Shareholders
	to be convened to consider and, if thought fit, approve the
	Acquisition and the transactions contemplated therein
“Existing Capital”	means 1,277,462,169 Shares in issue as at the Latest
	Practicable Date
“Group”	means the Company and its subsidiaries
“Harvest Time”	means Harvest Time (H.K.) Limited (廣泰（香港）有限公
	司), a company incorporated in Hong Kong. It and its
	beneficial owners are both independent third parties not
	connected with the Company, the Directors, the chief
	executive and the substantial Shareholders or any of its
	subsidiaries or any of their respective associates, other than
	by the virtue of Harvest Time’s shareholding in Sichuan
	Pharmaceutical
“HKGAAP”	means Hong Kong generally accepted accounting principle
“HK$”	means Hong Kong dollars
“Hong Kong”	means the Hong Kong Special Administrative Region of
	the PRC
“Independent Board Committee”	means an independent committee of the Directors
	comprising the independent non-executive Directors,
	namely, Mr. Lui Tin Nang and Mr. Lee Kwong Yiu
“Independent Shareholders”	means Shareholders other than Harvest Time and its
	associates
“Latest Practicable Date”	means 30 September 2003, being the latest practicable date
	prior to the printing of this circular for ascertaining certain
	information contained herein
“Listing Rules”	means the Rules Governing the Listing of Securities on the
	Stock Exchange
“Macao”	means Macao Special Administrative Region of the PRC
“MasterLink”	means MasterLink Securities (Hong Kong) Corporation
	Limited, the independent financial adviser appointed by the
	Company for the purpose of advising the Independent Board
	Committee in respect of the Acquisition

– 2 –

DEFINITIONS

“Minimum Share Price	means 1,338,988,008 Shares in issue upon Completion
Enlarged Capital”	(for information purposes only) assuming that there are no
	further issue of Shares from the Latest Practicable Date
	other than the maximum number of Consideration Shares
	calculated by using HK$0.46 per Share prior to the Latest
	Practicable Date
“Mr. Au Yeung”	means Mr. Au Yeung Ping Yuen, Terence, the Vice-chairman
	of the Company and an executive Director
“Mr. Ko”	means Mr. Ko Sai Ying, Thomas, the Chairman of the
	Company and an executive Director
“Mr. Liu”	means Mr. Liu Jin, James, an executive Director
“Mr. Tao”	means Mr. Tao Lung, an executive Director
“Opin”	the brandname of an interferon based vaginal pessary
	produced by the Group with indication for chronic viral
	cervicits
“Osteoform”	the brandname of a calcium amino acid chelate based
	capsule with indication for osteoporosis and calcium
	deficiency. Osteoform is a supplement of calcium, trace
	minerals, vitamin D and vitamin C
“Perfect Develop”	means Perfect Develop Holding Inc., a company
	incorporated in BVI on 3 August 2001 and the entire issued
	share capital of which is owned as to 49% by Mr. Tao, 33%
	by Mr. Ko, 12% by Mr. Liu and 6% by Mr. Au Yeung.
	Perfect Develop is an investment holding company and
	holding approximately 50.22% of the issued share capital
	of the Company as at the date of the Agreement
“PRC”	means the People’s Republic of China
“RMB”	means Renminbi
“SFO”	means the Securities and Futures Ordinance (Chapter 571
	of the Laws of Hong Kong)
“Share(s)”	means share(s) of par value of HK$0.01 each in the capital
	of the Company
“Shareholder(s)”	means holder(s) of Shares

– 3 –

DEFINITIONS

• “Sichuan Kangao Pharmaceutical” means Sichuan Kangao Pharmaceutical Technology Development Co. Ltd. (四川康奧醫藥科技開發有限責任 公司 ), a private enterprise incorporated in the PRC and owned by the same independent third parties of Harvest Time who are not connected with the Company, the Directors, the chief executive and the substantial Shareholders or any of its subsidiaries or any of their respective associates, other than by the virtue of being the former shareholder of Sichuan Pharmaceutical

• “Sichuan Pharmaceutical” means Vital Pharmaceuticals (Sichuan) Co. Ltd. (四川維 奧製藥有限公司) which was established on 8 January 1998 (formerly known as Sichuan Weiao Pharmacy Co., Ltd. (四 川維奧製藥有限公司 ) prior to 2 June 2003 and known as Sichuan Kangbai Pharmacy Co., Ltd. (四川康拜製藥有限 公司 ) prior to 19 July 2001). Prior to 26 August 2003, Sichuan Pharmaceutical was a sino-foreign equity joint venture enterprise and owned as to 85% by the Company and 15% by Sichuan Kangao Pharmaceutical. On 21 August 2003, Sichuan Pharmaceutical obtained relevant regulatory approval approving the transfer of 15% equity interest in Sichuan Pharmaceutical from Sichuan Kangao Pharmaceutical to Harvest Time and the economic nature of Sichuan Pharmaceutical changed from a sino-foreign equity joint venture enterprise to a wholly-owned foreign enterprise. On 26 August 2003, Sichuan Pharmaceutical obtained its renewed business licence

“Stock Exchange” means The Stock Exchange of Hong Kong Limited “Vendor” means Harvest Time “Yugofoil” means Yugofoil Holdings Limited, a company incorporated in BVI on 11 May 1993, a wholly-owned subsidiary of the Company

For the purpose of this circular, translations of HK$ into RMB or vice versa have been calculated by using an exchange rate of HK$1.00 = RMB1.06.

– 4 –

LETTER FROM THE BOARD

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Vital BioTech Holdings Limited 維奧生物科技控股有限公司

(incorporated in the Cayman Islands with limited liability)

Directors: KO Sai Ying, Thomas, Chairman AU YEUNG Ping Yuen, Terence, Vice Chairman LIU Jin, James TAO Lung

Registered Office:

Century Yard, Cricket Square Hutchins Drive, George Town Grand Cayman, Cayman Islands British West Indies

Independent Non-executive Directors: LEE Kwong Yiu LUI Tin Nang

Principal place of business: 18th Floor, CRE Building 303 Hennessy Road Wanchai, Hong Kong

6 October 2003

To the Shareholders

Dear Sirs,

DISCLOSEABLE AND CONNECTED TRANSACTION

1. INTRODUCTION

On 22 September 2003, the board announced that Yugofoil, a wholly-owned subsidiary of the Company, entered into the Agreement with Harvest Time, under which and subject to the terms and conditions thereof, Yugofoil agreed to acquire from Harvest Time an aggregate of 15% equity interest in Sichuan Pharmaceutical, at an aggregate consideration of HK$47,169,810 (approximately RMB50,000,000).

HK$18,867,924 (approximately RMB20,000,000), being approximately 40% of the Consideration, has been satisfied by cash within 5 business days from the date of the Agreement. The remaining Deferred Payments, being an aggregate of HK$28,301,886 (approximately RMB30,000,000) or approximately 60% of the Consideration, will be payable by (i) cash; and/or (ii) Consideration Shares (credited as fully paid) at the option of the Company according to the Deferred Payment Schedule. The Consideration Shares will be issued at a price that is equal to the higher of (i) the then 30-day Average Price immediately prior to the date of the Notice; or (ii) HK$0.46 per Share.

– 5 –

LETTER FROM THE BOARD

Given that (a) the Consideration exceeds (i) 15% but is less than 50% of the Group’s net tangible assets and (ii) the higher of HK$10 million or 3% of the book value of the Group’s net tangible assets; and (b) the Vendor is a substantial shareholder of Sichuan Pharmaceutical, a nonwholly owned subsidiary of the Company, and thereby a connected person to the Company under the Listing Rules, the Acquisition constitutes a discloseable and connected transaction under Chapter 14 of the Listing Rules and will be subject to, among other things, the approval by the Independent Shareholders at the EGM.

Since (i) none of the substantial Shareholders, the Directors and chief executive of the Company or any of their respective associates is interested in the Acquisition; and (ii) the Vendor and its associates are not interested in any Shares, no Shareholder is required to abstain from voting at the EGM to approve the Acquisition and the transactions contemplated therein.

The purpose of this circular is to provide you with information relating to, inter alia, the details of the Acquisition, letter from the Independent Board Committee containing its advice to the Independent Shareholders and letter from the independent financial adviser, MasterLink, containing its advice to the Independent Board Committee; and to give notice of EGM to the Shareholders. Details of the Acquisition will be disclosed in the next and subsequent published annual report of the Company until Completion.

2. THE AGREEMENT

Date:	22 September 2003
Purchaser:	Yugofoil
Vendor:	Harvest Time

Assets to be acquired

An aggregate of 15% of the equity interest in Sichuan Pharmaceutical.

– 6 –

LETTER FROM THE BOARD

Shareholding structure before and after Completion

Shareholding structure of Sichuan Pharmaceutical before Completion:

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

The Company Harvest Time
100%
Yugofoil
85% 15%
Sichuan Pharmaceutical
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Shareholding structure of Sichuan Pharmaceutical immediately after Completion:

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

The Company
100%
Yugofoil
100%
Sichuan Pharmaceutical
----- End of picture text -----

Upon Completion, Sichuan Pharmaceutical will become a wholly-owned subsidiary of the Company.

3. MAJOR TERMS OF THE AGREEMENT

Consideration

Subject to the fulfillment of all the conditions precedent and warranties (as set out in the Agreement), the aggregate Consideration for the Acquisition of HK$47,169,810 (approximately RMB50,000,000) will be paid to the Vendor in the following manner:

• (a) HK$18,867,924 (approximately RMB20,000,000), being approximately 40% of the Consideration, will be satisfied by cash within 5 business days from the date of the Agreement.

• (b) Subject to (d) below, the Deferred Payments will be paid in cash to the Vendor in the following schedule (the “ Deferred Payment Schedule ”):

• (a) HK$9,433,962 (approximately RMB10,000,000), being approximately 20% of the Consideration, will be satisfied by cash within 6 months from the date of the Agreement;

• (b) HK$9,433,962 (approximately RMB10,000,000), being approximately 20% of the Consideration, will be satisfied by cash within 12 months from the date of the Agreement; and

– 7 –

LETTER FROM THE BOARD

• (c) HK$9,433,962 (approximately RMB10,000,000), being approximately 20% of the Consideration, will be satisfied by cash within 18 months from the date of the Agreement.

• (c) Under the Agreement, if Yugofoil fails to settle the Consideration according to the Deferred Payment Schedule, Yugofoil is required to pay to the Vendor interest at the rate of 1% per month from the date on which the payment should be made until the relevant payment has been fully settled.

• (d) At the sole option of the Company and upon (i) the Stock Exchange granting the listing of and permission to deal in the Consideration Shares; and (ii) the Independent Shareholders approving the issue and allotment of the Consideration Shares at the EGM, the Company would have the option to issue Consideration Shares to the Vendor (credited as fully paid), by giving not less than 10 business days’ notice (the “ Notice ”) to Harvest Time at any time after five months from the date of the Agreement until the Consideration is fully settled in lieu of cash to satisfy part or all of the outstanding Deferred Payments at the date of the Notice. The Consideration Shares will be issued at a price that is equal to the higher of (i) the then 30-day Average Price immediately prior to the date of the Notice; or (ii) HK$0.46 per Share.

• (e) In the event that the Agreement is terminated as a result of the non-fulfillment of any of the conditions precedent as described in the section headed “Conditions Precedent” (or such conditions not having been waived by the Company and/or the Vendor) before the Completion Deadline, the Vendor shall return to the Company within 3 business days all amount received from the Company plus the accrued interest at the Hong Kong dollar prime rate quoted by the Hong Kong and Shanghai Banking Corporation Limited as at the date of such termination.

Pursuant to the Agreement, the Vendor agreed to waive all dividends from Sichuan Pharmaceutical which might be declared or paid on or after the date of the Agreement.

The funding of cash portion of the Consideration (including the Deferred Payments) will be financed by internal resources of the Group.

For information purposes, based on the 30-day Average Price prior to the Latest Practicable Date of HK$0.486 per Share, the Company will issue a maximum of 58,234,333 Consideration Shares to the Vendor (assuming all the Deferred Payments will be paid in Consideration Shares), representing a maximum of approximately 4.6% of the Existing Capital and approximately 4.4% of the 30-day Average Price Enlarged Capital. If the above calculation is based on the minimum Consideration Share issue price of HK$0.46 per Share, the Company will issue a maximum of 61,525,839 Consideration Shares to the Vendor (assuming all the Deferred Payments will be paid in Consideration Shares), representing a maximum of approximately 4.8% of the Existing Capital and approximately 4.6% of the Minimum Share Price Enlarged Capital.

– 8 –

LETTER FROM THE BOARD

The Consideration Shares will be issued and allotted subject to (i) the Stock Exchange granting the listing of and permission to deal in the Consideration Shares; and (ii) the Independent Shareholders approving the issue and allotment of the Consideration Shares at the EGM.

An application will be made to the Stock Exchange for the listing of, and permission to deal in, the Consideration Shares.

The terms and conditions of the Agreement, including the Consideration, were arrived at after arm’s length negotiations between the parties with reference to the PRC audited net profits of Sichuan Pharmaceutical of RMB47,635,263 (approximately HK$44,938,927) for the year ended 31 December 2002. The Consideration represents a historical P/E multiple ratio of approximately 7.0 times in relation to such net profits.

Conditions Precedent

Completion is conditional on, inter alia, the following conditions having been fulfilled or waived by the Company and/or the Vendor (except clauses (a) and (c), the Vendor has the right to waive clause (b) and Yugofoil has the right to waive clauses (d) and (e)) before the Completion Deadline or such other date as the parties may otherwise agree:–

• (a) the passing of ordinary resolution(s) approving the Acquisition and the terms of the Agreement by the Independent Shareholders at the general meeting of the Company or the obtaining of an approval from the Stock Exchange that the approval of the Acquisition by Independent Shareholders may be obtained by means of written certificate by Independent Shareholders who hold more than 50% in the nominal value of the issued share capital of the Company;

• (b) the initial consideration, that is HK$18,867,924 (approximately RMB20,000,000) in cash, being paid to the Vendor according to clause (a) of the section headed “Consideration”;

• (c) all necessary approvals having been obtained in respect of the Acquisition and related matters from the relevant government, regulatory authorities, the board and the shareholders of Sichuan Pharmaceutical and the Acquisition not being made subject to additional conditions or restrictions not acceptable to Yugofoil;

• (d) a PRC legal opinion in such form and substance satisfactory to Yugofoil in relation to the legality of the Agreement and the Vendor’s legal ownership of the equity interest in Sichuan Pharmaceutical and all other reasonable matters requested by Yugofoil having been obtained; and

• (e) no major breach of the representations and warranties as set out in the Agreement on or before Completion.

– 9 –

LETTER FROM THE BOARD

Completion

Completion shall take place on the 5th business day after the date on which all the conditions precedent as set out in the Agreement are fulfilled (or waived) or such other date as the parties may otherwise agree.

4. INFORMATION ON THE GROUP

The Group is a fully integrated, multinational biopharmaceutical corporation engaged in the research, development, manufacture, sale and distribution of biopharmaceutical and conventional pharmaceutical products. Currently, the Group has business operations in Australia, Hong Kong, Macao and the PRC. With its research and development focus on downstream value adding biotechnology processing systems, the Group develops protein stabilisation and various drug delivery technologies which may be adapted to a wide range of applications, such as in the areas of cytokines, probiotics and vaccine. The two current flagship products carried by the Group are Opin and Osteoform. In addition, the Group manufactures pharmaceutical products and distributes such products through its extensive distribution network in the PRC.

5. INFORMATION ON SICHUAN PHARMACEUTICAL

Sichuan Pharmaceutical is a pharmaceutical company which possesses a pharmaceutical production licence granted by 四川省藥品監督管理局 (Sichuan Provincial Drug Administration). It engages in the manufacturing, sale and distribution of Osteoform for the Company.

Prior to 26 August 2003, Sichuan Pharmaceutical was a sino-foreign equity joint venture established in the PRC and owned as to 85% by Yugofoil and 15% by Sichuan Kangao Pharmaceutical. On 21 August 2003, Sichuan Pharmaceutical obtained relevant regulatory approval approving the transfer of 15% equity interest in Sichuan Pharmaceutical from Sichuan Kangao Pharmaceutical to Harvest Time and the economic nature of Sichuan Pharmaceutical changed from a sino-foreign equity joint venture enterprise to a wholly-owned foreign enterprise. On 26 August 2003, Sichuan Pharmaceutical obtained its renewed business licence.

Based on the PRC audited accounts, turnover of Sichuan Pharmaceutical was approximately RMB459,822 (approximately HK$433,794) and approximately RMB122,733,887 (approximately HK$115,786,686) for the two years ended 31 December 2002. The audited profit before taxation of Sichuan Pharmaceutical were approximately RMB5,865 (approximately HK$5,533) and approximately RMB47,635,263 (approximately HK$44,938,927) for the two years ended 31 December 2002. The audited profit after taxation of Sichuan Pharmaceutical were approximately RMB5,865 (approximately HK$5,533) and approximately RMB47,635,263 (approximately HK$44,938,927) for the two years ended 31 December 2002. Since Sichuan Pharmaceutical’s production facilities did not commence operation until the first quarter of 2002, the turnovers and profits had significant increase when compared the year ended 31 December 2001 to the year ended 31 December 2002. As of 31 December 2002 and 30 June 2003, the audited and unaudited net tangible assets of Sichuan Pharmaceutical were approximately RMB71.22 million (approximately HK$67.19 million) and RMB77.54 million (approximately HK$73.15 million) respectively.

– 10 –

LETTER FROM THE BOARD

Since Sichuan Pharmaceutical is a 85%-owned subsidiary of the Company, the Directors do not expect the Acquisition of the additional 15% equity interest in Sichuan Pharmaceutical will have any material impact on either earnings or the assets and liabilities of the Group upon Completion. The Directors estimate that the goodwill of approximately HK$36.2 million calculated as of 30 June 2003 as a result of the Acquisition will be amortized in nine years and the annual amortisation will be approximately HK$4.0 million.

6. REASONS FOR ENTERING INTO THE AGREEMENT

Sichuan Pharmaceutical is a major subsidiary of the Company. Sichuan Pharmaceutical contributed approximately 93% and 64%, and 90% and 68% of turnover and net profit to the Company (after adjustments on Group’s consolidation level and allocation of overheads in accordance with HKGAAP) for the six months ended 30 June 2003 and for the year ended 31 December 2002 respectively. As such, the Company’s further purchase of 15% equity interest in Sichuan Pharmaceutical, thereby increasing its shareholding from 85% to 100%, would provide an opportunity to increase its consolidated profits thus enhancing shareholder value of the Company. Upon Completion, Sichuan Pharmaceutical will become a wholly-owned subsidiary of the Company, hence will also eliminate any potential connected transactions with the Group.

The Directors (including the independent non-executive Directors) consider that the Acquisition is on normal commercial terms and in the ordinary course of business and in the interest of the Group and the Shareholders as a whole and the terms and conditions of the Acquisition are fair and reasonable so far as the Independent Shareholders are concerned.

7. EGM

A notice convening the EGM is set out on pages 29 to 30 of this circular for the purpose of considering and, if thought fit, passing the ordinary resolution to approve the Acquisition and the transactions contemplated therein to be proposed at the EGM.

A form of proxy for use at the EGM is also enclosed. Whether or not you are able to attend the EGM, you are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon and deposit with the branch share registrar of the Company in Hong Kong, Computershare Hong Kong Investor Services Limited at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong, as soon as possible but in any event not less than 48 hours before the time appointed for the holding of the EGM or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM or any adjournment thereof should you so desire.

8. GENERAL

Given that (a) the Consideration exceeds (i) 15% but is less than 50% of the Group’s net tangible assets and (ii) the higher of HK$10 million or 3% of the book value of the Group’s net tangible assets; and (b) the Vendor is a substantial shareholder of Sichuan Pharmaceutical, a nonwholly owned subsidiary of the Company, and thereby a connected person to the Company under the Listing Rules, the Acquisition constitutes a discloseable and connected transaction under Chapter 14 of the Listing Rules and will be subject to, among other things, the approval by the Independent Shareholders at the EGM.

– 11 –

LETTER FROM THE BOARD

Since (i) none of the substantial Shareholders, the Directors and chief executive of the Company or any of their respective associates is interested in the Acquisition; and (ii) the Vendor and its associates are not interested in any Shares, no Shareholder is required to abstain from voting at the EGM to approve the Acquisition and the transaction contemplated therein.

The purpose of this circular is to provide you with information relating to, inter alia, the details of the Acquisition, letter from the Independent Board Committee containing its advice to the Independent Shareholders and letter from the independent financial adviser, MasterLink, containing its advice to the Independent Board Committee; and to give notice of the EGM to the Shareholders. Details of the Acquisition will be disclosed in the next and subsequent published annual report of the Company until Completion.

Your attention is drawn to the letter from the Independent Board Committee, the letter from MasterLink, notice of the EGM and the additional information set out in the Appendix to this circular.

By Order of the board Vital BioTech Holdings Limited KO Sai Ying, Thomas Chairman

– 12 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

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Vital BioTech Holdings Limited 維奧生物科技控股有限公司

(incorporated in the Cayman Islands with limited liability)

6 October 2003

To the Independent Shareholders

DISCLOSEABLE AND CONNECTED TRANSACTION

Dear Sir and Madam,

We refer to the circular dated 6 October 2003 issued by the Company (the “ Circular ”), of which this letter forms part. Unless otherwise stated, terms defined in the Circular shall have the same meanings when used in this letter.

We have been appointed as members of the Independent Board Committee to advise the Independent Shareholders as to whether, in our view, the terms and conditions of the Acquisition, details of which are set out in the letter from the board in the Circular, are fair and reasonable so far as Independent Shareholders are concerned. MasterLink has been appointed as independent financial adviser to advise the Independent Board Committee on the fairness and reasonableness of the terms and conditions of the Acquisition.

Your attention is drawn to the advise of MasterLink in respect of the Acquisition as set out on pages 14 to 23 of the Circular. Having considered the information contained in the letter from the board and the principal factors and reasons and recommendation from MasterLink, we consider the terms and conditions of the Acquisition be fair and reasonable and the Acquisition is in the interest of the Company and the Independent Shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolution which will be proposed at the EGM to approve the Acquisition and the transaction contemplated therein.

Your attention is also drawn to the letter from the board as set out in the Circular and the additional information set out in the Appendix to the Circular.

Yours faithfully, LEE Kwong Yiu LUI Tin Nang Independent Board Committee

– 13 –

LETTER FROM MASTERLINK

The following is the text of a letter of advice to the Independent Board Committee from MasterLink, the independent financial adviser, prepared for the purpose of incorporation in this circular:

==> picture [52 x 45] intentionally omitted <==

MasterLink Securities (Hong Kong) Corporation Limited

Unit 2603, 26th Floor, The Center 99 Queen’s Road Central Central Hong Kong

6 October 2003

To the Independent Board Committee Vital BioTech Holdings Limited

Dear Sirs,

DISCLOSEABLE AND CONNECTED TRANSACTION: ACQUISITION OF THE REMAINING 15% EQUITY INTEREST IN A SUBSIDIARY

We refer to the announcement issued by the Company dated 22 September 2003 in respect of the acquisition of the remaining 15% equity interest in Sichuan Pharmaceutical, currently a 85%-owned subsidiary of the Company, from Harvest Time. Details of the terms of the Acquisition are set out in the circular (the “Circular”) issued by the Company to the Shareholders dated 6 October 2003 of which this letter forms part. Capitalised terms used in this letter shall have the same meanings ascribed to them in the Circular unless the context otherwise requires.

The Acquisition constitutes a discloseable and connected transaction under Chapter 14 of the Listing Rules and will be subject to, amongst other things, the approval of the Independent Shareholders at the EGM. The Independent Board Committee comprising Mr. Lee Kwong Yiu and Mr. Lui Tin Nang, all being independent non-executive Directors, has been established by the Company to give their opinion and recommendations to the Independent Shareholders in relation to the Acquisition. We, MasterLink, have been appointed by the Company to give opinion and recommendations to the Independent Board Committee as to whether the terms and conditions of the Agreement are fair and reasonable and the Acquisition is in the interest of the Company and the Independent Shareholders as a whole.

In formulating our opinion and recommendations to the Independent Board Committee in relation to the Acquisition, we have relied on the accuracy of the information and representations contained in the Circular which have been provided to us by the Directors and which the Directors consider to be complete and relevant. We are not aware that any statements, information and representations made or referred to in the Circular, for which the Directors are solely responsible, were untrue and incorrect in all respects at the time they were made and continued to be so as at

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LETTER FROM MASTERLINK

the date of despatch of the Circular. We are also not aware that any statements of belief, opinion and intention made by the Directors in the Circular were not reasonably made after due and careful enquiry and are not based on honestly-held opinions. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us by the Directors and we have been advised by the Directors that no material facts have been omitted from the information and representations provided in and referred to in the Circular.

We consider that we have received sufficient information to enable us to reach an informed view and to justify our reliance on the accuracy of the information and representations contained in the Circular and to provide a reasonable basis for our opinion. We have no reason to suspect that any material information has been withheld by the Company or by the Directors. We have not, however, carried out any independent in-depth investigation into the affairs of the Company and its subsidiaries.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our opinion and recommendations to the Independent Board Committee in relation to the Acquisition, we have considered the principal factors and reasons set out below:

1. Rationale for the Acquisition

The Group is a fully integrated, multinational biopharmaceutical corporation engaged in the research, development, manufacture, sale and distribution of biopharmaceutical and conventional pharmaceutical products. Currently, the Group has business operations in Australia, Hong Kong, Macao and the PRC. With its research and development focus on downstream value adding biotechnology processing systems, the Group develops protein stabilization and various drug delivery technologies which may be adapted to a wide range of applications, such as in the areas of cytokines, probiotics and vaccine. The two current flagship products carried by the Group are Opin and Osteoform. In addition, the Group manufactures pharmaceutical products and distributes such products through its extensive distribution network in the PRC.

On 22 September 2003, Yugofoil, a wholly-owned subsidiary of the Company, entered into the Agreement with Harvest Time under which Yugofoil agreed to acquire from Harvest Time an aggregate of 15% equity interest in Sichuan Pharmaceutical at an aggregate consideration of approximately HK$47.17 million (approximately RMB50 million).

Sichuan Pharmaceutical is a pharmaceutical company which possesses a pharmaceutical production licence granted by四川省藥品監督管理局 (Sichuan Provincial Drug Administration). It engages in the manufacturing, sale and distribution of Osteoform for the Company.

Based on the PRC audited accounts, turnover of Sichuan Pharmaceutical were approximately RMB0.46 million (approximately HK$0.43 million) and RMB122.73 million (approximately HK$115.79 million) for each of the two years ended 31 December 2002. The audited profit before and after taxation of Sichuan Pharmaceutical were approximately RMB5,865 (approximately HK$5,533) and RMB47.64 million (approximately HK$44.94

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LETTER FROM MASTERLINK

million) for each of the two years ended 31 December 2002. As of 31 December 2002, the audited net tangible assets of Sichuan Pharmaceutical was approximately RMB71.22 million (approximately HK$67.19 million). Based on the PRC unaudited accounts for the six months ended 30 June 2003, the turnover and net profit of Sichuan Pharmaceutical amounted to approximately RMB131.93 million (approximately HK$124.47 million) and RMB46.73 million (approximately HK$44.08 million) respectively while the unaudited net tangible assets of Sichuan Pharmaceutical was approximately RMB77.54 million (approximately HK$73.15 million) (after the declaration of dividend of approximately RMB37.29 million (approximately HK$35.17 million)).

We have reviewed the Company’s unaudited interim accounts and audited annual accounts for each of the six months ended 30 June 2003 and the year ended 31 December 2002 respectively and noted that Sichuan Pharmaceutical contributed approximately 93% and 64%, and 90% and 68% of turnover and net profit to the Company (after adjustments on the Group’s consolidation level and allocation of overheads in accordance with HKGAAP) for the six months ended 30 June 2003 and for the year ended 31 December 2002 respectively. As such, we concur with the Directors’ belief that the Acquisition will provide an opportunity to increase the Group’s consolidated profits thus enhancing shareholder value of the Company.

In addition, following the Completion, Sichuan Pharmaceutical will become a whollyowned subsidiary of the Company and therefore the Acquisition could strengthen the Group’s management position in Sichuan Pharmaceutical and enable the Group to consolidate a full control over Sichuan Pharmaceutical. Given the significant contribution by Sichuan Pharmaceutical to the Group’s financial results, we consider that it is beneficial to the Group to enhance its control in such a major subsidiary.

2. Conditions of the Agreement

The Agreement is conditional on, inter alia , a number of conditions precedent, details of which are set out in the sub-paragraph headed “Conditions precedent” under the paragraph headed “Major terms of the Agreement” in the letter from the board. Amongst these conditions we note that three of them include (i) a PRC legal opinion in such form and substance satisfactory to Yugofoil in relation to the legality of the Agreement and the Vendor’s legal ownership of the equity interest in Sichuan Pharmaceutical and all other reasonable matters requested by Yugofoil having been obtained; (ii) all necessary approvals having been obtained in respect of the Acquisition and related matters from the relevant government, regulatory authorities, the board and the shareholders of Sichuan Pharmaceutical and the Acquisition not being made subject to additional conditions or restrictions not acceptable to Yugofoil; and (iii) no major breach of the representations and warranties as set out in the Agreement on or before Completion.

We have reviewed the PRC legal opinion and according to which the PRC legal adviser is of the view that the Vendor’s legal ownership in Sichuan Pharmaceutical is true and in accordance with the relevant PRC laws. We also consider that conditions (ii) and (iii) as mentioned above have sufficiently protected the Company in respect of the Acquisition and therefore are of the opinion that the conditions precedent as set out in the Agreement are fair and reasonable and are in the interest of the Company and the Independent Shareholders as a whole.

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LETTER FROM MASTERLINK

3. Basis of the Consideration

The Consideration payable by Yugofoil to the Vendor for the Acquisition is approximately HK$47.17 million which will be settled in the following manner:

Consideration	Payment date	Payment method
HK$	(from the date of the Agreement)
18,867,924	Within 5 business days	Cash
9,433,962	6 months	Cash/Share1
9,433,962	12 months	Cash/Share1
9,433,962	18 months	Cash/Share1
47,169,810

As stated in the letter from the board, the Consideration was arrived at after arm’s length negotiations between the parties with reference to the net profits as stated in the PRC audited accounts of Sichuan Pharmaceutical of approximately RMB47.64 million (approximately HK$44.94 million) for the year ended 31 December 2002. The Consideration represents a historical price earnings multiple of approximately 7 times in relation to such net profits. The Directors consider that the terms of the Acquisition are on normal commercial terms and the Consideration is fair and reasonable so far as the Independent Shareholders are concerned.

• (a) Price earnings multiple attributed to Sichuan Pharmaceutical

The Consideration represents a price earnings multiple of approximately 7 times based on the profit after taxation of Sichuan Pharmaceutical for the year ended 31 December 2002 which amounted to approximately RMB47.64 million (approximately HK$44.94 million) according to its PRC audited accounts.

1 At the sole option of the Company and upon (i) the Independent Shareholders approving the issuance and allotment of the Consideration Shares at the EGM; and (ii) the Stock Exchange granting the listing of, and permission to deal in, the Consideration Shares, the Company would have the option to issue the Consideration Shares to satisfy part or all of the outstanding Deferred Payments at a price that is equal to the higher of (i) the then 30-day Average Price immediately prior to the date of the Notice; or (ii) HK$0.46 per Share.

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LETTER FROM MASTERLINK

We have examined the price earnings multiples of a sample of 16 comparable companies listed on the Stock Exchange (calculated based on the basic earnings per share as per their respective latest published annual results and the closing prices of such companies as quoted on the Stock Exchange on 22 September 2003, being the date of the Agreement) which are set out in the following table:

Stock	Stock name	Price at	Latest earnings	Latest earnings	Price earnings
code	(in short form)	22/9/2003		per share	multiple
329	Golden Dragon	0.390		0.0225	17.33
399	FE Pharma Tech	3.275		0.3349	9.78
719	Shandong Xinhua	1.840		0.1410	13.05
809	Global Bio-Chem	2.700		0.2127	12.69
858	Extrawell Phar	0.197		0.0206	9.56
874	Guangzhou Phar	1.900		0.1100	17.27
1093	China Pharma	2.375		0.1662	14.29
2898	Long Far Pharma	0.520		0.0290	17.93
8027	Sino Biopharm	2.550		0.1886	13.52
8049	Jilin Changlong	0.410		0.0179	22.91
8067	Changchundaxing	0.350		0.0679	5.15
8069	Tong Ren Tang	12.450		0.7599	16.38
8120	China Medical	0.200		0.0410	4.88
8180	Golden Meditech	1.710		0.1653	10.34
8186	Medical China	0.116		0.0282	4.11
8197	Northeast Tiger	0.180		0.0170	10.59
				Mean	12.49
				Median	12.87

As shown in the above table, the price earnings multiples of the 16 comparable companies are in the range of 4.11 times to 22.91 times. The mean and median of these price earnings multiples are 12.49 times and 12.87 times respectively. In addition, the price earnings multiple of the Company calculated on the above basis is 13.41 times. Under the Acquisition, the price earnings multiple of approximately 7 times not only falls within the range of the 16 comparable companies’ price earnings multiples but also below their mean and median and the Company’s price earnings multiple. As such, it could be considered that the Consideration for the Acquisition is below the industry average and therefore is considered fair and reasonable so far as the Company is concerned.

(b) Comparison to net asset value of Sichuan Pharmaceutical

Based on the PRC unaudited accounts, the net tangible asset value of Sichuan Pharmaceutical as at 30 June 2003 was approximately RMB77.54 million (approximately HK$73.15 million). The attributable interest of 15% in the net tangible assets of Sichuan Pharmaceutical would be approximately RMB11.63 million (approximately HK$10.97 million). Therefore, the Consideration represents about 4.30 times of the 15% attributable interest in the net tangible assets of Sichuan Pharmaceutical as at 30 June 2003.

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LETTER FROM MASTERLINK

However, since the commencement of production in the first quarter of 2002, the audited turnover and profit after taxation of Sichuan Pharmaceutical for the year ended 31 December 2002 were approximately RMB122.73 million (approximately HK$115.79 million) and RMB47.64 million (approximately HK$44.94 million) respectively. For the six months ended 30 June 2003, the unaudited turnover and net profit of Sichuan Pharmaceutical even reached approximately RMB131.93 million (approximately HK$124.47 million) and RMB46.73 million (approximately HK$44.08 million) respectively. Therefore, it is reasonable to believe that the business of Sichuan Pharmaceutical is in a growing period. In addition, we consider that Sichuan Pharmaceutical is not an asset-based company such as those properties investment companies and therefore, based on the above reasons, we consider that the use of the price earnings multiples as a basis for our analysis is more appropriate.

Notwithstanding the above, we have reviewed certain similar acquisitions carried out by companies in the same industry as to the Company which are also listed on the Stock Exchange and noted that the considerations paid by these companies over the attributable net tangible assets of the acquired companies were ranged from 1.0 time to 44.5 times. As compared to the present case for the Company, the Consideration under the Acquisition is not only within the above range but also in the lower bound of the range.

Having considered the above, we are of the view that the Consideration is fair and reasonable and is in the interest of the Company and the Independent Shareholders as a whole.

4. Payment terms of the Consideration

We note that the terms of payment for the Consideration offer a great flexibility to the Group. A deposit of approximately HK$18.87 million (approximately RMB20 million) was paid within 5 business days of the date of the Agreement and the balance of the Consideration in the amount of approximately HK$28.30 million (approximately RMB30 million) would be payable by 3 equal installments of approximately HK$9.43 million (approximately RMB10 million) on or before the 6 months, 12 months and 18 months after the date of the Agreement. At the sole option of the Company and upon (i) the Independent Shareholders approving the issuance and allotment of the Consideration Shares at the EGM; and (ii) the Stock Exchange granting the listing of, and permission to deal in, the Consideration Shares, the Company would have the option to issue the Consideration Shares to the Vendor by giving not less than 10 business days’ notice (the “Notice”) at any time after 5 months from the date of the Agreement in lieu of cash to satisfy part or all of the outstanding Deferred Payments at the date of the Notice. The Consideration Shares will be issued at a price that is equal to the higher of (i) the then 30-day Average Price immediately prior to the date of the Notice; or (ii) HK$0.46 per Share.

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LETTER FROM MASTERLINK

(a) Financing

The Directors confirm that the deposit of approximately HK$18.87 million (approximately RMB20 million) was financed by internal resources of the Group. In the case that the balance of the Consideration is to be satisfied by cash, it will also be financed by internal resources of the Group. According to the unaudited interim report of the Company for the six months ended 30 June 2003, the Group’s net current assets and the bank and cash balances amounted to approximately HK$85.14 million and HK$69.08 million respectively. The Consideration of approximately HK$47.17 million (approximately RMB50 million) represents approximately 55.40% and 68.28% respectively of the net current assets and the bank and cash balances of the Group as at 30 June 2003. In addition, based on the Group’s unaudited interim accounts and audited annual accounts for each of the six months ended 30 June 2003 and the year ended 31 December 2002, the Group generated cash flow from operating activities of approximately HK$20.01 million and HK$19.71 million respectively for each of the respective periods. Hence, barring unforeseen circumstances, we believe that the Group has sufficient cash resources to satisfy the Consideration.

(b) Consideration Shares

Under the Agreement, the Deferred Payments could be settled at the discretion of the Company by the issue of the Consideration Shares at the price being the higher of (i) the then 30-day Average Price immediately prior to the date of the Notice; or (ii) HK$0.46 per Share (being the closing price of the Shares at the date of the Agreement). Such option is favourable to the Group because (i) if the price of the Shares after the date of the Agreement is higher than HK$0.46 per Share, it would ensure the Company to issue the Consideration Shares at nearly the market price around the time of payments so that no discount would be needed to further dilute the shareholding of the Independent Shareholders; (ii) if the price of the Shares after the date of the Agreement is lower than HK$0.46 per Share, the minimum issue price of HK$0.46 per Share would prevent the Company from issuing more Consideration Shares than expected; and (iii) the cash position of the Company would not be affected by issuing the Consideration Shares. Therefore, we are of the view that the option given in the Agreement is also in the interest of the Company and the Independent Shareholders as a whole.

Since (i) the then 30-day Average Price immediately prior to the date of the Notice represents a fair reference to the then market price at the time of exercising the option; and (ii) the minimum issue price of HK$0.46 represents a discount of only approximately 2.13% of the average closing price of the Shares of HK$0.47 for the 30 consecutive trading days up to the date of the Agreement, we consider that the basis of determination of the issue price of the Consideration Shares under the Agreement is fair and reasonable as far as the Company and the Independent Shareholders are concerned.

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LETTER FROM MASTERLINK

For information purposes, based on the minimum issue price of HK$0.46 per Share, the Company will issue a maximum of 61,525,839 Consideration Shares, representing approximately 4.82% of the Existing Capital and approximately 4.59% of the then issued share capital of the Company as enlarged by the issuance of the 61,525,839 Consideration Shares, to the Vendor (assuming all the Deferred Payments will be paid in Consideration Shares). The shareholding percentage of the Independent Shareholders will then be diluted by approximately 4.59%. Given that the Acquisition would provide an opportunity for the Group to increase its consolidated profits thus enhancing shareholder value of the Company, we consider that the maximum possible dilution effect of shareholding to the Independent Shareholders as a result of the Acquisition (assuming all the Deferred Payments will be paid in Consideration Shares) of approximately 4.59% is not material.

Having considered the above, we are of the view that the payment terms of the Consideration under the Agreement, including the issuance of the Consideration Shares to the Vendor which is a connected person of the Company (assuming any portion of the Deferred Payments is to be paid in Consideration Shares), are fair and reasonable and are in the interest of the Company and the Independent Shareholders as a whole.

5. Financial effect of the Acquisition

(a) Net tangible assets

The Company reported unaudited net tangible assets of approximately HK$191.14 million as at 30 June 2003. Based on the PRC unaudited accounts, the net tangible assets of Sichuan Pharmaceutical as at 30 June 2003 was approximately RMB77.54 million (approximately HK$73.15 million). Upon Completion and assuming that:–

• (i) the Deferred Payments would be fully settled by issuing the Consideration Shares, the pro forma net tangible assets of the Group will be decreased by approximately HK$7.90 million or approximately 4.13%; and

• (ii) the Deferred Payments would be fully settled by cash, the pro forma tangible assets of the Group will be decreased by approximately HK$36.20 million or approximately 18.94%.

The decrease in the Group’s pro forma net tangible assets is mainly due to the premium of the Consideration to the 15% attributable interest of the Group in the net tangible assets of Sichuan Pharmaceutical based on the PRC unaudited accounts as at 30 June 2003. Even though there is a reduction in the pro forma net tangible assets resulting from the Acquisition, given that (i) under the Agreement the Company, depending on its then financial position, could satisfy part or all of the outstanding Deferred Payments by issuance of the Consideration Shares in lieu of cash; (ii) there could have viable positive impact to the Group’s earnings as stated below; and (iii) the reduction in the pro forma net tangible assets is mainly due to the exclusion of goodwill arisen from the Acquisition in the above calculation, we consider that the Acquisition is still beneficial to the Group as a whole.

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LETTER FROM MASTERLINK

(b) Earnings

For the financial year ended 31 December 2002, the Group recorded audited profit attributable to shareholders of approximately HK$40.6 million. For the six months ended 30 June 2003, the Group’s unaudited profit attributable to the Shareholders amounted to approximately HK$24.96 million. For the year ended 31 December 2002, Sichuan Pharmaceutical recorded the audited profit before and after taxation amounting to RMB47.64 million (approximately HK$44.94 million). For the six months ended 30 June 2003, the unaudited net profit of Sichuan Pharmaceutical was approximately RMB46.73 million (approximately HK$44.08 million).

The Directors estimate that the goodwill of approximately HK$36.20 million arisen as a result of the Acquisition will be amortised in nine years and the annual amortisation will be approximately HK$4.02 million. As the amortisation of goodwill can be off-set by the potential profit contribution from Sichuan Pharmaceutical as a result of the consolidation of its entire equity interest, it is expected that the Acquisition would not have material adverse impact to the future earnings of the Group.

In addition, Sichuan Pharmaceutical will become a wholly-owned subsidiary of the Company after the Completion and therefore the acquisition of further interest in Sichuan Pharmaceutical pursuant to the Agreement could strengthen the Group’s management position in Sichuan Pharmaceutical and enable the Group to consolidate a full control over Sichuan Pharmaceutical.

Based on the above, we consider that it is a fair expectation that the Acquisition would have a positive impact to the earning base of the Group.

(c) Working capital

The Consideration under the Agreement is approximately HK$47.17 million. The deposit for the Consideration, being approximately HK$18.87 million, was payable in cash and the Deferred Payments could be payable either in cash or by issuing the Consideration Shares at the option of the Company. In the case that any portion of the Consideration was paid or to be payable by cash, the Directors confirmed that they would be financed by internal resources of the Group.

The Company reported unaudited current assets of approximately HK$175.60 million (including cash and bank balances of approximately HK$69.08 million) and unaudited current liabilities of approximately HK$90.45 million as at 30 June 2003. Based on the Group’s financial position as at 30 June 2003, we consider the Group has sufficient financial resources to satisfy the Consideration. Should any of the Deferred Payments being settled by issuing the Consideration Shares, the working capital position of the Group would not be further affected and should be more beneficial to the Group.

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LETTER FROM MASTERLINK

RECOMMENDATIONS

Having taken into consideration of the above principal factors and reasons, we consider that the terms and conditions of the Agreement are fair and reasonable and the Acquisition is in the interests of the Company and the Independent Shareholders as a whole. Accordingly, we advise the Independent Board Committee to recommend the Independent Shareholders to vote in favour of the ordinary resolution which will be proposed at the EGM to approve the Acquisition and the transaction contemplated therein.

Yours faithfully, For and on behalf of

MasterLink Securities (Hong Kong) Corporation Limited Lai Voon Wai Director

– 23 –

GENERAL INFORMATION

APPENDIX

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Group. The Directors collectively and individually accept full responsibility for the accuracy of the information contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief, there are no other facts not contained herein the omission of which would make any statement contained in this circular misleading.

2. SHARE CAPITAL

The authorised and issue share capital of the Company as at the Latest Practicable Date were as follows:

Par value Number of Share per Share HK$ Authorised: As at the Latest Practicable Date 50,000,000,000 0.01 Issued and fully paid: As at the Latest Practicable Date 1,277,462,169 0.01	Amount HK$’000 500,000
	12,774

3. DISCLOSURE OF INTERESTS

(a) Interests of the Directors

• (i) Ordinary Shares

As at the Latest Practicable Date, the interests and short positions of each Director in the shares and underlying shares of the Company and its associated corporations (within the meaning of the SFO) which will have to be 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 he was taken or deemed to have under such provisions of the SFO), or which will be required, pursuant to section 352 of the SFO, to be entered in the register referred to therein, or which will be required to be notified to the Company and the Stock Exchange pursuant to the Model Code

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GENERAL INFORMATION

APPENDIX

for Securities Transactions by Directors of Listed Companies contained in the Listing Rules were as follows:

				Percentage	Percentage
	Company/name			shareholding in
Name of	of associated		Number and	the same class
Director	corporation	Capacity	class of securities	of	securities
			(Note 1)
Mr. Ko	Company	Beneficial owner	51,362,600 (L)		4.02%
Mr. Au Yeung	Company	Beneficial owner	8,507,200 (L)		0.67%
Mr. Liu	Company	Beneficial owner	15,849,600 (L)		1.24%
Mr. Tao	Company	Beneficial owner	108,480,960 (L)		8.49%
	Company	Interest of a controlled	641,525,370 (L)		50.22%
		corporation_(Note 2)_
	Perfect Develop	Beneficial owner	49 ordinary shares		49%
			of US$1 each (L)

Notes:

1. The letter “L” stands for the Director’s long position in such securities.

2. The interest in the Shares are held by Perfect Develop. The entire issued share capital of Perfect Develop is beneficially owned as to 33% by Mr. Ko, 6% by Mr. Au Yeung, 12% by Mr. Liu and 49% by Mr. Tao. Accordingly, Mr. Tao is deemed to be interested in all the Shares which Perfect Develop is interested by virtue of the SFO.

(ii) Service contracts

Each of Mr. Ko, Mr. Au Yeung, Mr. Liu and Mr. Tao, being all the executive Directors, has entered into a service contract with the Company for an initial term of two years commencing from 1 December 2001, and will continue thereafter until terminated by not less than three months’ notice in writing served by either party on the other. Each of these executive Directors is entitled to the respective basic annual salary set out below (subject to an annual increment at the discretion of the Directors). In addition, the executive Directors are also entitled to a discretionary management bonus provided that the aggregate amount of the bonuses payable to all the executive Directors for any financial year of the Company may not exceed 10% of the audited combined profit attributable to the Shareholders (after taxation and minority interests but before extraordinary and exceptional items and the payments of such bonuses) in respect of that financial year of the Company. An executive Director may not vote on any resolution of the Directors regarding the amount of the discretionary management bonus payable to him. The current basic annual salaries of the executive Directors are as follows:

Name Amount Mr. Ko HK$720,000 Mr. Au Yeung HK$720,000 Mr. Liu HK$720,000 Mr. Tao HK$720,000

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GENERAL INFORMATION

APPENDIX

The independent non-executive Directors, Mr. Lui Tin Nang and Mr. Lee Kwong Yiu have been appointed for a term of two years expiring on 1 July 2004 and 25 January 2004 respectively. Save for a director fee of HK$120,000 per annum for each of them, the independent non-executive Directors are not entitled to any other remuneration.

Save as aforesaid, none of the Directors has or is proposed to have a service contract with the Company or any of its subsidiaries (other than contracts expiring or determinable by the employer within one year without the payment of compensation (other than statutory compensation)).

(b) Discloseable interest under Divisions 2 and 3 of Part XV of the SFO and substantial shareholders

So far as is known to the Directors, as at the Latest Practicable Date, the following Shareholders had an interest or a short position in the shares and underlying shares in the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of the Part XV of the SFO, or will be 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 meeting of any other member of the Group:

	Company/			Approximate
	name of Group			percentage of
Name	member	Capacity	Number of Shares	shareholding
			(Note 1)
Perfect Develop_(Note 2)_	Company	Beneficial owner	641,525,370 (L)	50.22%
Mr. Tao_(Note 3)_	Company	Beneficial owner	108,480,960 (L)	8.49%
		Interest of a controlled	641,525,370 (L)	50.22%
		Corporation
Ms. Li Chun Yi_(Note 4)_	Company	Interest of spouse	750,006,330 (L)	58.71%

Notes:

1. The letter “L” denotes for the person’s/entity’s long position in the Shares.

2. The entire issued share capital of Perfect Develop is beneficially owned as to 33% by Mr. Ko, 6% by Mr. Au Yeung, 12% by Mr. Liu and 49% by Mr. Tao.

3. Mr. Tao owns in aggregate 49 shares in, representing approximately 49% of the issued share capital of Perfect Develop. Accordingly, Mr. Tao is deemed, by virtue of the SFO, to be interested in all the Shares in which Perfect Develop is interested, amounting to 641,525,370 Shares. Together with 108,480,960 Shares registered in his own name, Mr. Tao is deemed, by virtue of the SFO, to be interested in, 750,006,330 Shares in aggregate, amounting to approximately 58.71% of the issued share capital of the Company.

4. Ms. Li Chun Yi is the wife of Mr. Tao and is taken to be interested in the Shares in which Mr. Tao is interested by virtue of the SFO.

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GENERAL INFORMATION

APPENDIX

(c) Disclaimers

As at the Latest Practicable Date, saved as disclosed in this circular:

• (i) none of the Directors or chief executive of the Company has any interest and short positions in the Shares, underlying Shares or debentures of the Company or any of its associated corporations (within the meaning of the SFO) which will have to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interest and short positions which he will be taken or deemed to have under such provisions of the SFO), or which will be required, pursuant to section 352 of the SFO, to be entered in the register referred to therein, or pursuant to the Model Code for Securities Transactions by Directors of Listed Companies in the Listing Rules;

• (ii) none of the Directors or the experts whose name is referred to in the section “Consent” of this Appendix has any direct or indirect interest in any assets which have been, since 31 December 2002 being the date to which the latest published audited accounts of the Company 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 of the Group;

• (iii) none of the Directors is materially interested in any contract or arrangement entered into by any member of the Group which contract or arrangement is subsisting at the date of this circular and which is significant in relation to the business of the Group; and

• (iv) none of the experts whose name is referred to in the section headed “Consent” of this Appendix has any shareholding in any member of the Group or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for shares in any member of the Group.

4. MATERIAL ADVERSE CHANGES

The Directors are not aware of any material adverse change in the financial or trading position of the Group since 31 December 2002 (being the date to which the latest published audited consolidated financial statement of the Company were made up).

5. CONSENT

MasterLink is a deemed licensed corporation for types 1, 4, 6 and 9 regulated activities under SFO. MasterLink has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter dated 6 October 2003 and references to its name in the form and context in which they appear.

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GENERAL INFORMATION

APPENDIX

6. LITIGATION

Neither the Company nor any of its subsidiaries is engaged in any litigation or arbitration of material importance and no litigation or claim of material importance is known to the Directors to be pending or threatened against the Company or any of its subsidiaries.

7. MISCELLANEOUS

• (a) The secretary of the Company is Mr. Lam Kai Cheung, who is an associate member of the Hong Kong Society of Accountants and a fellow member of the Association of Chartered Certified Accountants of United Kingdom.

• (b) The principal share registrar and transfer office of the Company is situated at Bank of Bermuda (Cayman) Limited of 36C Bermuda House, 3rd Floor, P.O. Box 513 G.T., Dr. Roy’s Drive, George Town, Grand Cayman, Cayman Islands, British West Indies.

• (c) The registered office of the Company is located at Century Yard, Cricket Square, Hutchins Drive, George Town, Grand Cayman, Cayman Islands, British West Indies. The principal place of business of the Company is 18th Floor, CRE Building, 303 Hennessy Road, Wanchai, Hong Kong.

• (d) The branch share registrar of the Company in Hong Kong is Computershare Hong Kong Investor Services Limited of Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong.

• (e) In the event of inconsistency, the English text of this circular shall prevail over the Chinese text.

8. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection at the office of Chiu & Partners, 41st Floor, Jardine House, 1 Connaught Place, Hong Kong during normal business hours up to and including 20 October 2003:

• (a) the Agreement;

• (b) the letter of recommendation from the Independent Board Committee to the Shareholders, the text of which is set out on page 13 of this circular;

• (c) the letter from MasterLink , the text of which is set out on pages 14 to 23 of this circular;

• (d) the written consent from MasterLink referred to in this Appendix; and

• (e) the service contracts referred to in paragraph 3(ii) of this Appendix.

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NOTICE OF THE EGM

==> picture [32 x 76] intentionally omitted <==

Vital BioTech Holdings Limited 維奧生物科技控股有限公司

(incorporated in the Cayman Islands with limited liability)

NOTICE IS HEREBY GIVEN that an extraordinary general meeting of Vital BioTech Holdings Limited (the “ Company ”) will be held at 10:00 a.m. on 31 October 2003 at 18th Floor, CRE Building, 303 Hennessy Road, Wanchai, Hong Kong for the purpose of considering and, if thought fit, passing, with or without modifications, the following resolution which will be proposed as an ordinary resolution:

ORDINARY RESOLUTION

“ THAT

• (a) the acquisition agreement (the “ Agreement ”) dated 22 September 2003 and entered between Yugofoil Holdings Limited, a wholly owned subsidiary of the Company, as purchaser and Harvest Time (H.K.) Limited (廣泰（香港）有限公司 ) (“ Harvest Time ”), as vendor in connection with the acquisition of 15% equity interest in the registered capital of Vital Pharmaceuticals (Sichuan) Co. Ltd. (四川維奧製藥有限 公司 ) (a copy of which has been produced to the meeting marked “A” and has been initiated by the chairman of the meeting for the purpose of identification) be and it is hereby approved;

• (b) conditional upon the Listing Committee of The Stock Exchange of Hong Kong Limited (the “ Stock Exchange ”) granting and agreeing to grant the listing of and permission to deal in the Consideration Shares (as defined below), the directors of the Company (the “ Directors ”) be and they are herby authorised to allot and issue up to a maximum of 61,525,839 shares (the “ Consideration Shares ”) of HK$0.01 each in the Company, all of which to Harvest Time, being part consideration for the said acquisition and that the Consideration Shares shall, when allotted and issued, rank pari passu in all respects with all other shares of HK$0.01 each in the capital of the Company in issue at the date of such allotment and issue; and

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NOTICE OF THE EGM

• (c) any one of the Directors be and he is hereby authorised to do or execute for and on behalf of the Company all such acts and things and such other documents by hand and where required, under the common seal of the Company together with such other Director or person authorised by the board of Directors, which in his or their opinion may be necessary, desirable or expedient to carry into effect or to give effect to the Agreement and all the transactions contemplated therein, including such changes and amendments thereto as any one Director may consider necessary, desirable and expedient.”

By Order of the board Vital BioTech Holdings Limited KO Sai Ying, Thomas Chairman

Hong Kong, 6 October 2003

Registered office: Principal place of business: Century Yard 18th Floor, CRE Building Cricket Square, Hutchins Drive 303 Hennessy Road George Town Wanchai, Hong Kong Grand Cayman, Cayman Islands British West Indies

Notes:

• (1) A member of the Company entitled to attend and vote at the EGM convened by the above notice is entitled to appoint one or more proxies to attend and, subject to the provisions of the articles of association of the Company, vote in his stead. A proxy need not be a member of the Company.

• (2) A form of proxy for use at the EGM is enclosed. In order to be valid, the form of proxy must be duly completed and signed in accordance with the instructions printed thereon and together with a power of attorney or other authority (if any), under which it is signed or a notarially certified copy of that power or authority must be deposited at the branch share registrar of the Company in Hong Kong, Computershare Hong Kong Investor Services Limited at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong not less than 48 hours before the time holding the meeting or any adjournment thereof.

• (3) Completion and return of the form of proxy will not preclude members of the Company from attending and voting in person at the meeting should he so wish.

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