Extrawell Pharmaceutical Holdings Limited - Proxy Solicitation & Information Statement 2002

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in 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 Extrawell Pharmaceutical Holdings Limited, you should at once hand this circular to the purchaser or to the bank, stockbroker or other agent through whom the sale or transfer 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.

Extrawell Pharmaceutical Holdings Limited *

(incorporated in Bermuda with limited liability)

MAJOR TRANSACTION AND CONNECTED TRANSACTIONS

Financial adviser to Extrawell Pharmaceutical Holdings Limited

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Core Pacific - Yamaichi Capital Limited

Independent financial adviser to the Independent Board Committee

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A letter from the Independent Board Committee is set out on page 18 of this circular. A letter from NSC Securities, the independent financial adviser to the Independent Board Committee, containing its advice to the Independent Board Committee is set out on pages 19 to 33 of this circular.

A notice convening the SGM to be held at JW Marriot Hotel, Salon 2-3 (Level 3), Pacific Place, 88 Queensway, Hong Kong at 11:00 a.m. on Monday 8th July, 2002 is set out on pages 101 to 102 of this circular. A form of proxy for use at the SGM is enclosed with this circular. Whether or not you are able to attend and vote at the SGM, you are requested to complete the enclosed proxy form and return it to the Company’s branch share registrar in Hong Kong, Tengis Limited at 4th Floor, Hutchison House, 10 Harcourt Road, Central, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for holding the SGM. Completion and return of the form of proxy will not preclude you from subsequently attending and voting in person at the SGM or any adjourned meetings should you so wish.

* for identification purpose only

21st June, 2002

Extrawell Pharmaceutical Holdings Limited

		Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board
Introduction . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
The Agreement . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	8
Information on the Group . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
Financial and trading prospects of the Group	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
Information on Gene Generation . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	14
Financial effects of acquisition on the Group	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	15
Reasons for and benefits of the Acquisition	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16
Listing Rules implications for the Company	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16
The Independent Board Committee . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16
The SGM . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16
Recommendation . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	17
Additional information . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	17
Letter from the Independent Board Committee	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18
Letter from NSC Securities . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	19
Appendix I — Financial information on the Group . . . . . . . . . . . . . . . . . . . . . . . . . .		34
Appendix II — Accountants’ report on Gene Generation Group . . . . . . . . . . . . . . . .		76
Appendix III — Business valuation on Gene Generation Group . . . . . . . . . . . . . . . . .		89
Appendix IV — General information . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	95
Notice of SGM . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	101

Extrawell Pharmaceutical Holdings Limited

DEFINITIONS

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

“Acquisition” the proposed acquisition by Best-Bio of 55% of the issued share capital in Gene Generation together with 55% of the amount of indebtedness as at the Completion Date made by or on behalf of the Vendor to the Gene Generation Group for a consideration of HK$55 million “Agreement” the agreement dated 15th May, 2002 between Best-Bio and the Vendor in respect of the Acquisition “Announcement” the announcement dated 16th May, 2002 made by the Company in respect of the Acquisition “associate(s)” having the meaning as defined in the Listing Rules “Best-Bio” Best-Bio Developments Limited, a company incorporated in the BVI with limited liability and a wholly owned subsidiary of the Company “Bio-chip” (Bio-chip Co. Ltd., Shanghai), an enterprise established under the law of the PRC “Bioraise High Tech” (Bioraise High-Tech Investment Ltd., Shanghai), an enterprise established under the law of the PRC which is beneficially owned as to approximately 40% by Dr. Mao Yu Min, approximately 30% by Dr. Xie Yi and the remaining 30% by Mr. Li Jian He. Dr. Mao Yu Min and Dr. Xie Yi are Directors and also the ultimate beneficial owners of an existing substantial Shareholder, JNJ Investments while Mr. Li Jian He is an independent third party not connected with any of the Directors, chief executive or substantial shareholders of the Company or any of it subsidiaries or their respective associates (save for his shareholdings in United Gene and Shanghai Biowindow) “Bioword Genechips” (Bioword Genechips, Inc.*), an enterprise established under the law of the PRC and principally engaged in the manufacturing of Genechips “Board” the board of Directors “Business Day” a day (other than a Saturday) on which banks are open for business in Hong Kong “BVI” British Virgin Islands

Extrawell Pharmaceutical Holdings Limited

DEFINITIONS

“Company”	Extrawell Pharmaceutical Holdings Limited, a company
	incorporated in Bermuda with limited liability, the shares of
	which are listed on the Stock Exchange
“Completion”	completion of the Agreement
“Completion Date”	the date on which the Completion takes place
“Conditions”	conditions precedent to the Completion
“Consideration”	the aggregate consideration of HK$55 million payable by
	Best-Bio to the Vendor for the Acquisition
“Continuing Connected	a loan in the principal amount of approximately RMB20
Transaction”	million (equivalent to approximately HK$18.9 million) owing
	from Bioraise High Tech to Shanghai Biostar as at the Latest
	Practicable Date pursuant to the Loan Agreement
“Core Pacific - Yamaichi”	Core Pacific - Yamaichi Capital Limited, an investment
	adviser and a dealer registered under the Securities Ordinance
	(Chapter 333 of the Laws of Hong Kong) and the financial
	adviser to the Company in respect of the Acquisition
“Director(s)”	the director(s) of the Company
“Enlarged Group”	the Group together with Gene Generation Group
“Fudan Biotech”	Fudan Biotech (Hong Kong) Limited, a company incorporated
	in Hong Kong with limited liability on 28th February, 2001.
	It is owned as to 99% by Shanghai Fudan Biotech, 75% equity
	interest of which in turn is held by Shanghai Biowindow
“Genechips”	a technology of DNA (deoxyribonucleic acid) microarray to
	monitor the whole genome (i.e. the complete genetic blueprint
	of an organism) on a single chip, so that scientists can have
	a better picture of the interactions among thousands of genes
	simultaneously. Genechips has wide application purpose,
	which includes human genome expression genechips for
	research purposes, medical diagnosis, drug screening and
	medical research
“Gene Generation”	Gene Generation Limited, an investment company
	incorporated in the BVI and currently a wholly owned
	subsidiary of HK Biowindow
“Gene Generation Group”	Gene Generation and its subsidiaries
“Gene Inventions”	the 19 gene inventions referred to in the circular dated 11th
	January, 2002

Extrawell Pharmaceutical Holdings Limited

DEFINITIONS

“Group” “HK Biowindow” or “Vendor”

the Company and its subsidiaries

Biowindow Gene Development (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability on 28th February, 2001. It is owned as to 99.01% by United Gene and as to 0.99% by Shanghai Biowindow whose capital is 60% owned by United Gene and 13.575% owned by Dr. Xie Yi, a Director. The equity capital of United Gene is beneficially owned as to 33.5% by Dr. Mao Yu Min and as to 38.5% (including direct and indirect interests) by Dr. Xie Yi, both being Directors. The remaining 28% interest in United Gene is owned by Mr. Li Jian He, an independent third party not connected with any of the Directors, chief executive or substantial shareholders of the Company or any of its subsidiaries or their respective associates (save for his shareholdings in United Gene and Shanghai Biowindow)

“Hong Kong”
the Hong Kong Special Administrative Region of the PRC
“Independent Board Committee” the independent board committee of the Company comprising Messrs. Fang Lin Hu and Xue Jing Lun, independent nonexecutive Directors, duly appointed by the Board for the purpose of advising the Independent Shareholders in relation to the Acquisition
“Independent Shareholders” Shareholders other than JNJ Investments, Fudan Biotech, HK Biowindow, Dr. Mao Yu Min, Dr. Xie Yi and their respective associates
“JNJ Investments” JNJ Investments Ltd, a company incorporated in the BVI with limited liability and a substantial Shareholder which held, as at the Latest Practicable Date, approximately 21.84% of the entire existing issued share capital of the Company
“Latest Practicable Date” 19th June, 2002, being the latest practicable date prior to the printing of this circular for ascertaining certain information referred to in this circular
“Listing Rules” Rules Governing the Listing of Securities on the Stock Exchange
“Loan Agreement” an agreement dated 13th June, 2002 entered into between Shanghai Biostar as creditor, Bioraise High Tech as borrower and HK Biowindow as guarantor
“Lucky Element” (Lucky Element Biotech (Su Zhou) Limited*), an enterprise established under the law of the PRC and the holding company of Shanghai Bioway and Bio-chip

Extrawell Pharmaceutical Holdings Limited

DEFINITIONS

“NSC Securities”	NSC Securities (Asia) Limited, an investment adviser and a
	dealer registered under the Securities Ordinance (Chapter 333
	of the Laws of Hong Kong) and the independent financial
	adviser to the Independent Board Committee in respect of the
	Acquisition and the Continuing Connected Transaction
“Placement”	the placing of existing Shares and subscription of the then
	new Shares pursuant to the placing and subscription
	agreement dated 23rd May, 2002, which placing and
	subscription were completed prior to the Latest Practicable
	Date
“PRC”	the People’s Republic of China and for the purpose of this
	circular excluding Hong Kong, Macau and Taiwan
“PRC GAAP”	generally accepted accounting principles in the PRC
“PRC Legal Opinion”	the legal opinion to be issued before the Completion by a firm
	of PRC lawyers acceptable to Best-Bio in the agreed form
	covering such matters as to the due establishment and
	existence of Shanghai Biostar Group
“Promissory Notes”	five promissory notes for an aggregate amount of HK$55
	million bearing interest at the rate of 1% per annum which
	will be issued by Best-Bio to the Vendor upon Completion,
	the respective maturing dates are set out in the paragraph
	headed “The Agreement” in the section of “Letter from the
	Board” of this circular
“SDI Ordinance”	Securities (Disclosure of Interests) Ordinance (Chapter 396 of
	the Laws of Hong Kong)
“SGM”	a special general meeting of the Company to be convened to
	consider and, if thought fit, approve the Agreement (inclusive
“Shanghai Biochip”	of the subsisting continuing converted Transaction) (Shanghai Biochip Co., Ltd.*), an
	enterprise established under the law of the PRC and
“Shanghai Biostar”	principally engaged in the manufacturing of Genechips (Shanghai Biostar Genechip,
	Inc.*), an enterprise established under the law of the PRC and
	principally engaged in the research and development,
	manufacturing and distribution of Genechips
“Shanghai Biostar Group”	Shanghai Biostar, Shanghai Biostar Research, Shanghai
	Biochip and Bioword Genechips

Extrawell Pharmaceutical Holdings Limited

DEFINITIONS

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|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
|“Shanghai|Biostar|Research”|(Shanghai|Biostar|Genechip|Research|
|Institute),|an|entity|established|under|the|law|of|the|PRC|and|
|principally|engaged|in|the|research|on|genome|related|
|technology|
|“Shanghai|Bioway”|(Shanghai|Bioway|Limited),|an|
|enterprise|established|under|the|law|of|the|PRC|and|is|the|
|holding|company|of|Shanghai|Biostar|
|“Shanghai|Biowindow”|(Shanghai|Biowindow|Gene|
|Development|Co.,|Ltd.),|an|enterprise|established|under|the|
|law|of|the|PRC|
|“Shanghai|Fudan|Biotech”|(Shanghai|Fudan|Biotech|Ltd),|an|
|enterprise|established|under|the|law|of|the|PRC|
|“Shareholder(s)”|holder(s)|of|the|Shares|
|“Share(s)”|ordinary|share(s)|of|HK$0.01|each|in|the|share|capital|of|the|
|Company|
|“Stock|Exchange”|The|Stock|Exchange|of|Hong|Kong|Limited|
|“United|Gene”|United|Gene|Holdings|Limited,|an|enterprise|established|
|under|the|law|of|the|PRC|
|“Well|Success”|Well|Success|Limited,|a|company|incorporated|in|the|BVI|
|with|limited|liability|on|1st|October,|1998|which|held,|as|at|
|the|Latest|Practicable|Date,|approximately|4.45%|of|the|
|entire|existing|issued|share|capital|of|the|Company|
|“HK$”|and|“cents”|Hong|Kong|dollars|and|cents|respectively,|the|lawful|currency|
|of|Hong|Kong|
|“RMB”|Renminbi,|the|lawful|currency|of|the|PRC|
|“%”|per|cent.|

----- End of picture text -----

Unless otherwise specified, the conversion of RMB into HK$ in this announcement is based on the approximate exchange rate of RMB1.06 = HK$1.

for identification purpose only

Extrawell Pharmaceutical Holdings Limited

LETTER FROM THE BOARD

Extrawell Pharmaceutical Holdings Limited *

(incorporated in Bermuda with limited liability)

Directors: Mao Yu Min Ho Chin Hou Ho Yu Ling Li Qiang Yu Ying Zhou Xie Yi Zhang Xiao Qing Fang Lin Hu [#] Xue Jing Lun [#]

# Independent non-executive Directors

Registered office: Clarendon House 2 Church Street Hamilton HM11 Bermuda

Head office and principal place of business in Hong Kong: Suite 4701-4, 47th Floor NatWest Tower, Times Square 1 Matheson Street Causeway Bay Hong Kong

21st June, 2002

To the Shareholders

Dear Sir or Madam,

MAJOR TRANSACTION AND CONNECTED TRANSACTIONS

INTRODUCTION

Pursuant to the Agreement dated 15th May, 2002, Best-Bio, a wholly owned subsidiary of the Company, has conditionally agreed to acquire from the Vendor 55% of the issued share capital of Gene Generation together with 55% of the amount of indebtedness as at the Completion Date made by or on behalf of the Vendor to the Gene Generation Group.

Gene Generation is an investment holding company and through its non-wholly owned subsidiaries which are investment holding companies, effectively holds 49.5% interest in Shanghai Biostar. Shanghai Biostar Group is principally engaged in the research on genome related technology as well as the development, manufacturing and distribution of Genechips. As extracted from its unaudited PRC management accounts prepared in accordance with the PRC GAAP, the unaudited net profit after tax of Shanghai Biostar for the year ended 31st December, 2001 amounted to approximately RMB32.8 million (equivalent to approximately HK$30.9 million).

for identification purpose only

Extrawell Pharmaceutical Holdings Limited

LETTER FROM THE BOARD

The Consideration of HK$55 million payable by the Company to the Vendor has been determined after arm’s length negotiations between the parties to the Agreement with reference to the audited net asset value of Shanghai Biostar of approximately RMB206.6 million (equivalent to approximately HK$194.9 million) as at 31st December, 2001 as extracted from its audited balance sheet prepared in accordance with the PRC GAAP. 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 Shareholders are concerned. The Consideration payable will be satisfied in the form of the Promissory Notes which will be issued by Best-Bio to the Vendor upon Completion. The Promissory Notes will bear interest at the rate of 1% per annum.

Completion of the Acquisition is subject to the Conditions being fulfilled.

As at the Latest Practicable Date, a sum of RMB20 million (equivalent to approximately HK$18.9 million) was owing from Bioraise High Tech to Shanghai Biostar. The amount represented advances to Bioraise High Tech made between 1st July, 2001 and 31st December, 2001 to finance its business activities. To rationalise the above arrangement, the Loan Agreement was entered into between Bioraise High Tech as borrower, Shanghai Biostar as creditor and HK Biowindow as guarantor pursuant to which the maturity date of the unsecured loan (defined as the Continuing Connected Transaction in this circular) falls on 30th June, 2003. Interest at the rate of 2% per annum will accrue with effect from the Completion Date. Bioraise High Tech has the right to repay the loan before the expiry date. If the principal amount of the loan is not repaid by the expiry date, interest will be charged at the rate of 5% per annum with effect from 1st July, 2003 up to the date of repayment of the entire principal amount of the loan. In addition, HK Biowindow has undertaken to carry out, in the event of default by Bioraise High Tech, the obligations of Bioraise High Tech under the Loan Agreement on its behalf as if HK Biowindow is the borrower of the Loan. In the event that any sum is owing to Gene Generation or any of its subsidiaries from HK Biowindow or any of its associates (excluding (i) Gene Generation and its subsidiaries; and (ii) the Company and its subsidiaries) at Completion, such amount (deducting therefrom any sum repaid during the period up to the first anniversary of the Completion Date) shall be set off against the Promissory Note to be matured on the first anniversary of the Completion Date or Promissory Note(s) to be matured thereafter.

In view of the above, the Directors consider that the terms of the Loan Agreement were made on normal commercial terms and that such terms are fair and reasonable so far as the Independent Shareholders are concerned.

As the ultimate beneficial owners of Bioraise High Tech are Dr. Mao Yu Min and Dr. Xie Yi, both being Directors and each being an ultimate beneficial owner of an existing substantial Shareholder, JNJ Investments, the said loan will constitute a connected transaction upon Completion under the Listing Rules.

Pursuant to the Listing Rules, the Acquisition constitutes a major transaction for the Company. As the ultimate beneficial owners of the Vendor are Dr. Mao Yu Min and Dr. Xie Yi, both being Directors and also the ultimate beneficial owners of an existing substantial Shareholder, JNJ Investments, both the Acquisition and (upon the Completion) the Continuing Connected Transaction also constitute connected transactions for the Company under the Listing Rules.

Extrawell Pharmaceutical Holdings Limited

LETTER FROM THE BOARD

The Acquisition (inclusive of the subsisting Continuing Connected Transaction) are subject to, among other things, the approval of the Independent Shareholders. JNJ Investments, Fudan Biotech, HK Biowindow, Dr. Mao Yu Min, Dr. Xie Yi and their respective associates shall abstain from voting in respect of the Acquisition (inclusive of the subsisting Continuing Connected Transaction) at the SGM.

The Directors believe that the Acquisition represents an invaluable opportunity for the Group to expand its existing pharmaceutical business into the research and development, manufacturing and distribution of Genechips. The Acquisition also enables the Group to leverage on Shanghai Biostar Group’s technical expertise in Genechips to facilitate the Group’s research and development of new pharmaceutical products. The Directors also expect that the Acquisition may broaden the income stream of the Group and is in the interest of the Shareholders as a whole and beneficial to the Group.

The Acquisition will not be completed unless it is approved by the Independent Shareholders. The Board recommends you to read the advice given by the Independent Board Committee and NSC Securities before you decide whether or not to vote in favour of the ordinary resolution to be passed at the SGM for approving the Acquisition (inclusive of the subsisting Continuing Connected Transaction).

The purpose of this circular is to give you further information on the proposed Acquisition, to set out the advice of NSC Securities to the Independent Board Committee and the recommendation of the Independent Board Committee in respect of the proposed Acquisition (inclusive of the subsisting Continuing Connected Transaction) as well as to give you notice of the SGM at which the ordinary resolution will be proposed to approve the proposed Acquisition (inclusive of the subsisting Continuing Connected Transaction).

THE AGREEMENT

Parties:

Purchaser: Best-Bio, a wholly owned subsidiary of the Company Vendor: HK Biowindow which holds 100% equity interest in Gene Generation

Assets to be acquired:

Pursuant to the Agreement, Best-Bio, a wholly owned subsidiary of the Company, has conditionally agreed to acquire from the Vendor 55% of the issued share capital of Gene Generation together with 55% of the amount of indebtedness as at the Completion Date made by or on behalf of the Vendor to the Gene Generation Group. Gene Generation is an investment holding company which, through its non-wholly owned subsidiaries, effectively holds 49.5% interest in Shanghai Biostar. Shanghai Biostar Group is principally engaged in the research on genome related technology as well as development, manufacturing and distribution of Genechips.

Extrawell Pharmaceutical Holdings Limited

LETTER FROM THE BOARD

Consideration:

The Consideration payable by Best-Bio to the Vendor for the Acquisition is HK$55 million. The Consideration will be satisfied in the form of the Promissory Notes which will be issued by Best-Bio to the Vendor upon Completion. The Promissory Notes will be satisfied in cash and will bear interest at the rate of 1% per annum and the principal amount and maturity date are set out as follows:

Prinicpal amount Maturity date

HK$

5,000,000 1st anniversary of the Completion Date 8,000,000 2nd anniversary of the Completion Date 12,000,000 3rd anniversary of the Completion Date 15,000,000 4th anniversary of the Completion Date 15,000,000 5th anniversary of the Completion Date

The Consideration was determined after arm’s length negotiations between the parties to the Agreement with reference to the audited net asset value of Shanghai Biostar of approximately RMB206.6 million (equivalent to approximately HK$194.9 million) as at 31st December, 2001 as extracted from its audited balance sheet prepared in accordance with the PRC GAAP.

The principal activities of Gene Generation, Lucky Element and Bio-chip are investment holding in Shanghai Bioway, which in turn holds 50% equity interest in Shanghai Biostar. As the principal asset held by Gene Generation is its indirect interest in Shanghai Biostar and Shanghai Biostar Group is the revenue-generating business of the Gene Generation Group, the Directors consider that it is appropriate to make reference to the Consideration with the audited net asset value of Shanghai Biostar of approximately RMB206.6 million (equivalent to approximately HK$194.9 million) as at 31st December, 2001 as extracted from its audited balance sheet prepared in accordance with the PRC GAAP. In addition, the Directors have made reference to the Consideration with the fair market value of Gene Generation of approximately HK$134 million as set out in the valuation report prepared by an independent firm of valuers, Castores Magi Surveyors Limited. Please refer to appendix III of this circular for details.

Based on the above, 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 Shareholders are concerned.

Extrawell Pharmaceutical Holdings Limited

LETTER FROM THE BOARD

Conditions:

The Agreement is conditional upon the following conditions being fulfilled, or (in respect of (i) to (iv) only) waived by the Company:

(i) there being no matter adversely affecting the legal standing or continued existence of Best-Bio or its ability to continue to carry on its ordinary business;
(ii) the PRC Legal Opinion in the form and substance which are satisfactory to Best-Bio having been obtained;
(iii) none of the warranties given by the Vendor under the Agreement having been breached in any material respect (or, if capable of being remedied, has not been remedied), or is misleading or untrue in any material respect;
(iv) if required, all approvals, consents, authorisations and licences (so far as are necessary) in relation to the Agreement having been obtained from the relevant governmental authorities in the PRC; and
(v) the approval by the Independent Shareholders at the SGM and all other consents and acts required under the Listing Rules being obtained and completed or, as the case may be, the relevant waiver from compliance with any of such rules being obtained from the Stock Exchange.

In the event that any of the above conditions has not been fulfilled or in the case of conditions (i), (ii), (iii) and/or (iv), waived by the Company on or before 9th July, 2002 (or such later date as may be agreed between the parties), the Company shall not be bound to proceed with the Acquisition and the Agreement shall cease to be of any effect save in respect of claims arising out of any antecedent breach of the terms of the Agreement.

Completion:

Completion shall take place on the 5th business day after the date on which all of the Conditions have been satisfied or waived (or such later date as the parties may agree in writing).

INFORMATION ON THE GROUP

The Group is principally engaged in (i) the marketing and distribution of pharmaceutical products, health care and nutritional products, and medical appliances and equipment to customers in the PRC; (ii) the development, manufacture and sale of pharmaceutical products in the PRC; and (iii) the holding of rights for commercial exploitation of certain Gene Inventions (which relate to genes found or believed to be closely associated with diabetes, and the Gene Inventions may be applied for diagnosis or therapy for diabetes).

Extrawell Pharmaceutical Holdings Limited

LETTER FROM THE BOARD

FINANCIAL AND TRADING PROSPECTS OF THE GROUP

As mentioned in the annual report of the Company for the year ended 31st March, 2001, the Group recorded a turnover of approximately HK$135.2 million, representing an increase of approximately 6.4% over that of the year ended 31st March, 2000. The net profit attributable to Shareholders amounted to approximately HK$20.5 million representing an increase of approximately 46.3% over that of the year ended 31st March, 2000.

According to the interim report of the Company for the six months ended 30th September, 2001, the Group recorded a turnover of approximately HK$63.7 million, representing an increase of about 21.8% over the corresponding period in the six months ended 30th September, 2000. The growth in turnover was due to the fact that the Group had overcome the temporary distribution disruption caused by licence renewal delays and production disruption caused by test running of certain manufacturing facilities experienced in the six months ended 30th September, 2000. Net profit attributable to Shareholders for the six months ended 30th September, 2001 was approximately HK$16.3 million, representing an increase of about 176.0% over the corresponding period in the six months ended 30th September, 2000. The increase in net profit attributable to Shareholders was due to growth in turnover and improved gross profit margin. The Group continued its through process of product mix adjustment and operation efficiency review by directing distribution and marketing resources to high profit margin products for both distribution and manufacturing segments.

As mentioned in the interim report of the Company for the six months ended 30th September, 2001, the Group will continue its current plans to (i) enhance the product portfolio of imported ethical drugs; (ii) broaden the Group’s base for research and development by co-operating with technical experts; and (iii) co-operate with strategic partners to tap commercially onto specialised genetically researched medical products.

As at 31st March, 2001, the audited consolidated net tangible asset of the Group was approximately HK$108.4 million. Based on the interim financial statements of the Group, the unaudited consolidated net tangible assets of the Group as at 30th September, 2001 was approximately HK$125.2 million.

Extrawell Pharmaceutical Holdings Limited

LETTER FROM THE BOARD

A simplified structure of the Group as at the Latest Practicable Date and immediately after Completion (assuming that there is not any change in the issued share capital of the Company or in the shareholdings of the relevant Shareholders, as named in the following dragram) is set out as follows:

As at the Latest Practicable Date (after completion of the Placement but immediately before the Acquisition)

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

United Gene
(Note 1)
60%
Shanghai Biowindow
(Note 2)
75% 0.99% 99.01%
Shanghai Fudan Biotech HK Biowindow
99% 100%
Well Success Fudan Biotech JNJ Investments Mr. Li Qiang Public
(Note 3) (Note 4) (Note 5)
4.45% 3.32% 21.84% 0.66% 3.23% 66.50%
The Company
100%
Other subsidiaries
Best-Bio
of the Company
100%
Gene Generation
100%
Lucky Element
90% 10%
Bio-chip
90% 10%
Shanghai Bioway
50%
Shanghai Biostar
100% 20% 50%
Shanghai Biostar Research Shanghai Biochip Bioword Genechips
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Extrawell Pharmaceutical Holdings Limited

LETTER FROM THE BOARD

Immediately after completion of the Acquisition

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

United Gene
(Note 1)
60%
Shanghai Biowindow
(Note 2)
75% 0.99% 99.01%
Shanghai Fudan Biotech HK Biowindow
99% 100%
Well Success JNJ Investments Mr. Li Qiang
Fudan Biotech Public
(Note 3) (Note 4) (Note 5)
4.45% 3.32% 21.84% 0.66% 3.23% 66.50%
The Company
100%
Other subsidiaries
Best-Bio
of the Company
55%
45%
Gene Generation
100%
Lucky Element
90%
10%
Bio-chip
90% 10%
Shanghai Bioway
50%
Shanghai Biostar
100% 20% 50%
Shanghai Biostar Research Shanghai Biochip Bioword Genechips
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Extrawell Pharmaceutical Holdings Limited

LETTER FROM THE BOARD

Notes:

The equity capital of United Gene is beneficially owned as to 33.5% by Dr. Mao Yu Min and as to 38.5% (including direct and indirect interests) by Dr. Xie Yi, both of whom are Directors. The remaining 28% interest in United Gene is owned by Mr. Li Jian He, an independent third party not connected with any of the Directors, chief executive or substantial shareholders of the Company or any of its subsidiaries or their respective associates (save for his shareholdings in United Gene and Shanghai Biowindow).
The capital of Shanghai Biowindow is 60% owned by United Gene, 13.575% owned by Dr. Xie Yi, a Director, 12.85% owned by Mr. Li Jian He and 13.575% by Ms. Xu Xiao Juan. Mr. Li Jian He and Ms. Xu Xiao Juan are independent third parties not connected with any of the Directors, chief executive or substantial shareholders of the Company or any of its subsidiaries or their respective associates (save for Mr. Li’s shareholdings in United Gene and Shanghai Biowindow and Ms. Xu’s shareholding in Shanghai Biowindow).
The entire issued share capital of Well Success is beneficially owned by Mr. Ho Yu Ling, a Director.
JNJ Investments and its respective associates (including HK Biowindow and Fudan Biotech) hold, in aggregate, 650,000,000 Shares, (500,000,000 Shares, 74,000,000 Shares and 76,000,000 Shares currently held by JNJ Investments, HK Biowindow and Fudan Biotech respectively), which represent approximately 28.39% of the issued share capital of the Company as at the Latest Practicable Date and immediately after the completion of the Acquisition respectively.
Mr. Li Qiang is a Director

INFORMATION ON GENE GENERATION

Gene Generation is an investment holding company and through its non-wholly owned subsidiaries which are investment holding companies, effectively holds 49.5% interest in Shanghai Biostar. Shanghai Biostar Group is principally engaged in the research on genome related technology as well as the development, manufacturing and distribution of Genechips. As at the Latest Practicable Date, Dr. Mao Yu Min was the sole director of Gene Generation. Upon Completion, the Company has the right to appoint any number of directors to the board of Gene Generation which the Company considers appropriate.

Gene Generation was incorporated as an investment holding company in the BVI on 25th May, 2001. Gene Generation has not carried on any business activities since the date of its incorporation, save for the acquisition on 30th December, 2001 of the entire registered capital of Lucky Element, which is the immediate holding company of the other companies comprising the Gene Generation Group, from Lucky Element Limited, a company incorporated in the BVI and whose sole beneficial owner is Ms. Liao Hui Li, an independent third party not connected with any of the Directors, chief executive or substantial shareholders of the Company or any of its subsidiaries or their respective associates. Based on the audited consolidated results of Gene Generation Group, Gene Generation Group have not generated any result for the period from 25th May, 2001 (being the date of incorporation) to 31st December, 2001 from its operation and all the expenses of Gene Generation

Extrawell Pharmaceutical Holdings Limited

LETTER FROM THE BOARD

incurred during the above period, comprising mainly incorporation expenses, and all the operating results of the other companies comprising the Gene Generation Group occurred since 30th December, 2001 and up to 31st December, 2001 were not significant and were borne by HK Biowindow. As at 31st December, 2001, the audited consolidated net asset value of Gene Generation Group amounted to approximately HK$0.4 million. Total net negative goodwill of approximately HK$109.2 million has arisen from the acquisition of Lucky Element and other companies comprising Gene Generation Group. As at 30th April, 2001, had no indebtedness made by or on behalf of HK Biowindow (the Vendor) to the Gene Generation Group.

The principal activities of Gene Generation, Lucky Element and Bio-chip are investment holding in Shanghai Bioway, which in turn holds 50% equity interest in Shanghai Biostar. The principal asset held by Gene Generation is its indirect interest in Shanghai Biostar and Shanghai Biostar Group is the revenue-generating business of the Gene Generation Group. Based on its unaudited PRC management accounts prepared in accordance with the PRC GAAP, Shanghai Biostar has not generated any profit for the year ended 31st December, 2000 and the unaudited net profit after tax of Shanghai Biostar for the year ended 31st December, 2001 amounted to approximately RMB32.8 million (equivalent to approximately HK$30.9 million). The audited net asset value of Shanghai Biostar prepared in accordance with the PRC GAAP amounted to approximately RMB160.0 million and RMB206.6 million (equivalent to approximately HK$150.94 million and HK$194.9 million) as at 31st December, 2000 and 2001 respectively.

The Directors confirmed that no consolidated balance sheet has been prepared for Shanghai Biostar Group as at 31st December, 2001. The unaudited net asset value of Shanghai Biostar Research as at 31st December, 2001 prepared in accordance with the PRC GAAP was approximately RMB10.0 million whereas the audited net asset value of Shanghai Biochip and Bioword Genechips prepared in accordance with the PRC GAAP amounted to approximately RMB60.0 million and RMB39.4 million respectively. Shanghai Biostar Research and Shanghai Biochip had no operations since their respective date of establishment up to 31st December, 2001. According to the audited financial statements of Bioword Genechips for the year ended 31st December, 2001 prepared in accordance with the PRC GAAP, Bioword Genechips incurred a loss of approximately RMB0.6 million.

The Company has appointed an independent firm of valuers, Castores Magi Surveyors Limited, to prepare a valuation report on Gene Generation Group. As set out in appendix III of this circular, the fair market value of Gene Generation as at 31st March, 2002 based on the Income Approach (as defined in appendix III of this circular) amounts to approximately HK$134 million.

FINANCIAL EFFECTS OF ACQUISITION ON THE GROUP

Upon Completion, the proforma unaudited adjusted consolidated net tangible assets of the Enlarged Group will decrease from approximately HK$149 million to approximately HK$131 million. The proforma unaudited adjusted consolidated net tangible assets per Share will decrease from approximately HK6.5 cents to approximately HK5.7 cents. The proforma statement of unaudited adjusted consolidated net tangible assets of the Enlarged Group is set out in appendix I to this circular.

Extrawell Pharmaceutical Holdings Limited

LETTER FROM THE BOARD

REASONS FOR AND BENEFITS OF THE ACQUISITION

In view of the recent growth and market prospect of the Group’s pharmaceutical business in the PRC, it is the Group’s intention to diversify its product range to capitalise on such growth. As such, the Directors believe that the Acquisition represents an invaluable opportunity for the Group to expand its existing pharmaceutical business into the research and development, manufacturing and distribution of Genechips. The Directors believe that the Acquisition also enables the Group to leverage on Shanghai Biostar Group’s technical expertise in Genechips to facilitate the Group’s research and development of new pharmaceutical products. The Directors have considered the satisfactory financial performance, reputation and proven track record of Shanghai Biostar Group as well as the synergy effect to be brought to the Group and believe that the Acquisition will enable the Group to maintain a competitive advantage in capturing the market opportunities in the pharmaceutical industry in the PRC. The Directors also expect that the Acquisition may broaden the income stream of the Group and is in the interest of the Shareholders as a whole and beneficial to the Group.

LISTING RULES IMPLICATIONS FOR THE COMPANY

Pursuant to the Listing Rules, the Acquisition constitutes a major transaction for the Company. As the ultimate beneficial owners of the Vendor and Bioraise High Tech are Dr. Mao Yu Min and Dr. Xie Yi, both being Directors and also the ultimate beneficial owners of an existing substantial Shareholder, JNJ Investments, each of the Acquisition and the Continuing Connected Transaction constitutes a connected transaction for the Company under the Listing Rules and is subject to, among other things, the approval of the Independent Shareholders. JNJ Investments, Fudan Biotech, HK Biowindow, Dr. Mao Yu Min, Dr. Xie Yi and their respective associates shall abstain from voting in respect of the Acquisition (inclusive of the subsisting Continuing Connected Transaction) at the SGM.

THE INDEPENDENT BOARD COMMITTEE

The Independent Board Committee comprising the independent non-executive Directors has been formed for advising the Independent Shareholders on the terms and conditions of the Agreement and the Continuing Connected Transaction.

NSC Securities has been appointed as independent financial adviser to advise the Independent Board Committee on the same. The letter is set out in the section headed “Letter from NSC Securities” of this circular.

THE SGM

Set out in this circular is a notice convening the SGM which will be held at JW Marriot Hotel, Salon 2-3 (Level 3), Pacific Place, 88 Queensway, Hong Kong at 11:00 a.m. on Monday 8th July, 2002 at which an ordinary resolution will be proposed to approve the Acquisition (inclusive of the subsisting Continuing Connected Transaction). In accordance with the Listing Rules, only the Independent Shareholders will be permitted to vote on the resolution approving the Acquisition

Extrawell Pharmaceutical Holdings Limited

LETTER FROM THE BOARD

(inclusive of the subsisting Continuing Connected Transaction). JNJ Investments, Fudan Biotech, HK Biowindow, Dr. Mao Yu Min, Dr. Xie Yi and their respective associates shall abstain from voting in respect of the Acquisition (inclusive of the subsisting Continuing Connected Transaction) at the SGM.

Your attention is drawn to that only one resolution is proposed to consider and, if thought fit, approve the Acquisition (inclusive of the subsisting Continuing Connected Transaction). Accordingly, if the resolution is passed, the Acquisition inclusive of the Continuing Connected Transaction (which subsisted prior to the entering into of the Agreement and will become a connected transaction upon Completion) will be approved and will be implemented upon the Conditions being fulfilled. Otherwise, the proposed Acquisition (inclusive of the subsisting Continuing Connected Transaction) will not proceed at all.

A form of proxy for use at the SGM is enclosed with this circular. Whether or not you are able to attend and vote at the SGM, you are requested to complete the enclosed proxy form and return it to the Company’s branch share registrar in Hong Kong, Tengis Limited at 4th Floor, Hutchison House, 10 Harcourt Road, Central, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for holding the SGM. Completion and return of the form of proxy will not preclude you from subsequently attending and voting in person at the SGM or any adjourned meetings should you so wish.

RECOMMENDATION

Your attention is drawn to the letter from the Independent Board Committee set out on page 18 which contains its recommendation to the Independent Shareholders on the terms of the Agreement and the Continuing Connected Transaction, and the letter of advice from NSC Securities, the text of which is set out on pages 19 to 33 of this circular containing its advice to the Independent Board Committee. The Shareholders are advised to read the aforesaid letters before deciding as to how to vote at the SGM.

ADDITIONAL INFORMATION

Your attention is also drawn to further information set out in the appendices to this circular.

Yours faithfully, For and on behalf of the Board Mao Yu Min Chairman

Extrawell Pharmaceutical Holdings Limited

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Extrawell Pharmaceutical Holdings Limited *

(incorporated in Bermuda with limited liability)

Suite 4701-4, 47th Floor NatWest Tower, Times Square 1 Matheson Street Causeway Bay Hong Kong

21st June, 2002

To the Independent Shareholders

Dear Sir or Madam,

MAJOR TRANSACTION AND CONNECTED TRANSACTIONS

We refer to the circular to the Shareholders dated 21st June, 2002 issued by the Company (the “Circular”) of which this letter forms part. Terms used in this letter shall have the same meanings as defined in the Circular unless the context otherwise requires.

We have been appointed by the Board as the Independent Board Committee to consider the terms of the Agreement and the Continuing Connected Transaction. NSC Securities has been appointed by the Board as the independent financial adviser to advise us in this respect. Details of its recommendations and principal factors taken into consideration in arriving at its recommendations are set out in the letter of advice from NSC Securities on pages 19 to 33 of the Circular.

Your attention is drawn to (i) the letter from the Board as set out on pages 6 to 17 of the Circular, (ii) the letter of advice from NSC Securities containing its advice to us together with principal factors taken into consideration as set out on pages 19 to 33 of the Circular; and (iii) the additional information set out in the appendices to the Circular.

RECOMMENDATIONS

Having taken into account the terms of the Agreement and the Continuing Connected Transaction and the advice from NSC Securities, we consider that the terms of the Agreement and the Continuing Connected Transaction are fair and reasonable so far as the Independent Shareholders as a whole are concerned. Accordingly, we recommend the Independent Shareholders to vote at the SGM in favour of the resolution as set out in the notice of the SGM included in the Circular to approve the Acquisition (inclusive of the subsisting Continuing Connected Transaction.)

Yours faithfully, For and on behalf of Independent Board Committee Fang Lin Hu Xue Jing Lun Independent non-executive Directors

* for identification purpose only

Extrawell Pharmaceutical Holdings Limited

LETTER FROM NSC SECURITIES

The following is the text of the letter from NSC Securities prepared for the purpose of incorporation in this circular, in connection with its advice to the Independent Board Committee in relation to the Acquisition and the Continuing Connected Transaction.

==> picture [256 x 41] intentionally omitted <==

Suite 1218, Central Building 1 Pedder Street Central Hong Kong

21st June, 2002

The Independent Board Committee Extrawell Pharmaceutical Holdings Limited Suite 4701-4, 47th Floor

NatWest Tower, Times Square 1 Matheson Street

Causeway Bay Hong Kong

Dear Sirs,

MAJOR TRANSACTION AND CONNECTED TRANSACTIONS

We refer to our engagement under which NSC Securities (Asia) Limited has been appointed to advise the Independent Board Committee in relation to the Acquisition and the Continuing Connected Transaction, details of which are contained in the circular dated 21st June, 2002 to the Shareholders (the “Circular”), of which this letter forms part. Expressions used in this letter have the same meanings as those defined in the Circular unless the context of this letter otherwise requires.

In formulating our advice, we have relied on the statements, information, opinions, representations and facts supplied to us by the Company. We have assumed that all information and representations contained or referred to in the Circular or otherwise supplied to us by the Company were true, accurate and complete at the time they were made and continue to be true, accurate and complete as at the date of the Circular. We have also relied on all statements of belief, opinion and intention made by the Directors in the Circular and have assumed that all such statements were reasonably made after due and careful enquiries. We have no reason to doubt the truth and accuracy of the information and facts provided to us.

Extrawell Pharmaceutical Holdings Limited

LETTER FROM NSC SECURITIES

We consider that we have been provided with sufficient information 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 advice. We have no reason to suspect that any material information and facts have been withheld by the Company. We have not, however, carried out any independent verification of the information, nor have we conducted any form of investigation into the businesses, operational aspects, financial standing and affairs of the Group.

BACKGROUND

On 16th May, 2002, the Company announced that pursuant to the Agreement, the Company, through its wholly owned subsidiary, Best-Bio, has conditionally agreed to acquire from the Vendor 55% of the issued share capital of Gene Generation together with 55% of the amount of indebtedness as at the Completion Date made by or on behalf of the Vendor to the Gene Generation Group. The Consideration payable by Best-Bio to the Vendor for the Acquisition is HK$55 million.

As at the Latest Practicable Date, a sum of RMB20 million (equivalent to approximately HK$18.9 million) was owing from Bioraise High Tech to Shanghai Biostar. The Loan Agreement was entered into between Shanghai Biostar, Bioraise High Tech and HK Biowindow on 13th June, 2002 pursuant to which the loan (defined as the Continuing Connected Transaction in the Circular) was agreed to be repaid in its entirety on 30th June, 2003. With effect from the Completion Date, interest at the rate of 2% per annum will accrue on the outstanding amount. If the principal amount of the loan is not repaid by the expiry date, interest will be charged at the rate of 5% per annum with effect from 1st July, 2003 up to the date of repayment of the entire principal amount of the loan. As each of Dr. Mao Yu Min and Dr. Xie Yi, both being Directors and each being an ultimate beneficial owner of an existing substantial Shareholder, JNJ Investments, is an ultimate beneficial owner of Bioraise High Tech, the said loan will constitute a connected transaction for the Company upon Completion.

As stated on page 7 of the letter from the Board contained in the Circular (“Letter from the Board”), the Acquisition constitutes a major transaction for the Company pursuant to the Listing Rules. We note that as the ultimate beneficial owners who individually hold 30% or more of the issued share capital of the Vendor are each of Dr. Mao Yu Min and Dr. Xie Yi, both being Directors and each being an ultimate beneficial owner of an existing substantial Shareholder, JNJ Investments, the Acquisition also constitutes a connected transaction for the Company.

The Acquisition (inclusive of the subsisting Continuing Connected Transaction) is subject to, among other things, the approval of the Independent Shareholders. JNJ Investments, Fudan Biotech, HK Biowindow, Dr. Mao Yu Min, Dr. Xie Yi and their respective associates shall abstain from voting in respect of the Acquisition (inclusive of the subsisting Continuing Connected Transaction) at the SGM.

Extrawell Pharmaceutical Holdings Limited

LETTER FROM NSC SECURITIES

A. THE AGREEMENT

Principal Factors And Reasons Considered

We have considered the following principal factors and reasons in providing our advice:

(1) Rationale for the Acquisition

We understand that it is the Group’s intention to diversify its product range to capitalise on the recent growth and market prospect of the Group’s pharmaceutical business in the PRC. In view of the nature of the existing business of Shanghai Biostar Group, we believe that the Acquisition may provide an opportunity for the Group to expand its existing pharmaceutical business into the research and development, manufacture and distribution of Genechips. In addition, we note that it is part of the Group’s business to develop, manufacture and sell pharmaceutical products in the PRC. The Directors believe that the Acquisition would enable the Group to leverage on Shanghai Biostar Group’s technical expertise in Genechips to facilitate the Group’s research and development of new pharmaceutical products. We note that Genechips has wide application purpose which includes human genome expression genechips for research purposes, medical diagnosis, drug screening and medical research. We concur with the Directors that the Acquisition may enable the Group to apply Genechips developed and manufactured by Shanghai Biostar Group in the development of new pharmaceutical products by the Group.

Extrawell Pharmaceutical Holdings Limited

LETTER FROM NSC SECURITIES

(2) Basis of consideration

Principal amount Maturity date HK$ 5,000,000 1st anniversary of the Completion Date 8,000,000 2nd anniversary of the Completion Date 12,000,000 3rd anniversary of the Completion Date 15,000,000 4th anniversary of the Completion Date 15,000,000 5th anniversary of the Completion Date

As stated in the Announcement, the Consideration was determined after arm’s length negotiations between the parties to the Agreement with reference to the unaudited net asset value of Shanghai Biostar of approximately RMB206.6 million (equivalent to approximately HK$194.9 million) as at 31st December, 2001 as extracted from its unaudited management accounts prepared in accordance with the PRC GAAP. 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 Shareholders are concerned. We noted from the audited balance sheet of Shanghai Biostar prepared using PRC GAAP for tax purposes that its audited net asset value remained unchanged.

According to the “CONSOLIDATED BALANCE SHEET” as set out in the Accountants’ Report on Gene Generation Group in Appendix II to the Circular, no indebtedness was owing to the Vendor from the Gene Generation Group as at 31st December, 2001. We have also been informed that such situation remained unchanged up to the Latest Practicable Date. On the assumption that there would not be any change in such indebtedness since the Latest Practicable Date up to the Completion Date, the Consideration of HK$55 million would represent the purchase price to be paid by Best-Bio for acquiring from the Vendor 55% of the issued share capital of Gene Generation (“Purchase Price”).

(a) Price earnings multiple

We note from the Accountants’ Report on Gene Generation Group as set out in Appendix II to the Circular that no consolidated profit and loss account of the Gene Generation Group has been prepared as Gene Generation has been dormant since its incorporation, save for the acquisition of Lucky Element and its subsidiaries, associate and jointly-controlled entity (together the “Acquired Group”) on 30th December, 2001. In addition, the operating results of the Acquired Group occurred since 30th December, 2001 and up to 31st December, 2001 were not significant.

Extrawell Pharmaceutical Holdings Limited

LETTER FROM NSC SECURITIES

We understand that Gene Generation is an investment holding company and through its non-wholly owned subsidiaries which are investment holding companies, effectively holds 49.5% interest in Shanghai Biostar. The Directors have confirmed that those non-wholly owned subsidiaries do not have any investments other than those disclosed in the “CONSOLIDATED BALANCE SHEET” as set out in the Accountants’ Report on Gene Generation Group in Appendix II to the Circular. As the principal asset held by Gene Generation is its indirect interest in Shanghai Biostar, we consider that it is appropriate to use the relevant financial information of Shanghai Biostar instead of Gene Generation in assessing the Purchase Price. Apart from this, we have been informed that no consolidated financial statements have been prepared for Shanghai Biostar for the year ended 31st December, 2001. We have also been informed that both Shanghai Biostar Research and Shanghai Biochip had no operations since the date of establishment on 19th April, 2001 and 31st July, 2001 respectively up to 31st December, 2001. According to the audited financial statements of Bioword Genechips for the year ended 31st December, 2001 prepared in accordance with the PRC GAAP, Bioword Genechips incurred a loss of approximately RMB0.6 million (equivalent to approximately HK$0.54 million). In the absence of consolidated financial statements of Shanghai Biostar and in view of the insignificant loss of approximately HK$0.27 million of Bioword Genechips attributable to Shanghai Biostar, we based our assessment of the Purchase Price solely on the relevant financial information of Shanghai Biostar, but not on a consolidated level.

The Purchase Price represents a price earnings multiple of approximately 6.54 times based on the unaudited net profit after tax of Shanghai Biostar for the year ended 31st December, 2001 of approximately RMB32.8 million (equivalent to approximately HK$30.9 million) according to the unaudited management accounts of Shanghai Biostar prepared in accordance with PRC GAAP.

We have looked into the price earnings multiples (calculated on the basic earnings per share as per latest published announcement of final results) of eight comparable companies listed on the Stock Exchange which are in the range of 5.73

Extrawell Pharmaceutical Holdings Limited

LETTER FROM NSC SECURITIES

times to 16.67 times based on the closing prices of such companies as quoted on the Stock Exchange as at 16th May, 2002, being the date of the Announcement, as set out in the following table.

		Price earnings	Price earnings
		multiple as at
			16th May,	Financial
Name of company			2002	year-end
			(times)
(i)	MAIN BOARD
	Far East Pharmaceutical Technology Co.	Ltd.	9.08	30th June
	Shanxi Central Pharmaceutical
	International Ltd.		16.67	31st May
(ii)	GROWTH ENTERPRISE MARKET
	China Medical Science Ltd.		6.17	31st July
	Everpride Biopharmaceutical Co. Ltd.		6.79	31st December
	Jilin Province Huinan Changlong
	Bio-pharmacy Co. Ltd.		13.88	31st December
	Northeast Tiger Pharmaceutical Co., Ltd.		9.28	31st December
	SIIC Medical Science and Technology
	(Group) Ltd.		5.73	31st December
	Vital BioTech Holdings Ltd.		10.33	31st December

We notice that the price earnings multiple of approximately 6.54 times at the Purchase Price fell within the above range of price earnings multiples.

(b) Net asset value

According to the “CONSOLIDATED BALANCE SHEET” as set out in the Accountants’ Report on Gene Generation Group in Appendix II to the Circular, the audited consolidated net asset value of Gene Generation Group amounted to HK$390,000 as at 31st December, 2001. The Company would have an effective interest of 55% in Gene Generation upon Completion. The Purchase Price represents a premium of approximately 255.41 times over the audited consolidated net asset value of Gene Generation Group attributable to the Company after Completion. It should be noted that negative goodwill of approximately HK$110,034,000 which represents the excess of the Gene Generation Group’s share of the fair values of the identifiable assets and liabilities acquired as at the date of acquisition of subsidiaries, the associate and jointly-controlled entity over the cost of the acquisition has been included in the aforesaid consolidated balance sheet of Gene Generation Group, resulting in a reduction in asset position of the Gene Generation Group. In view of the negative goodwill and as explained in the sub-paragraph headed “Price earnings multiple” above, we consider that it is appropriate to use the relevant financial

Extrawell Pharmaceutical Holdings Limited

LETTER FROM NSC SECURITIES

information of Shanghai Biostar instead of Gene Generation in assessing the Purchase Price. However, we have been informed that no consolidated balance sheet has been prepared for Shanghai Biostar for the year ended 31st December, 2001. We have also been informed that both Shanghai Biostar Research and Shanghai Biochip had no operations since their respective date of establishment up to 31st December, 2001. According to the audited financial statements of Bioword Genechips for the year ended 31st December, 2001 prepared in accordance with the PRC GAAP, Bioword Genechips incurred a loss of approximately RMB0.6 million (equivalent to approximately HK$0.54 million). We note that for the year ended 31st December, 2001, the unaudited net asset value of Shanghai Biostar Research was approximately RMB10 million whereas the audited net asset value of Shanghai Biochip and Bioword Genechips prepared in accordance with the PRC GAAP was approximately RMB60 million and RMB39.4 million respectively. The aggregate net asset value of Shanghai Biostar Research, Shanghai Biochip and Bioword Genechips attributable to Shanghai Biostar was approximately RMB41.7 million which is not significantly different from the long-term investment figure of approximately RMB41.7 million as shown in the audited balance sheet of Shanghai Biostar as at 31st December, 2001 prepared in accordance with the PRC GAAP. In the absence of consolidated balance sheet of Shanghai Biostar and in view of the above, we based our assessment of the Purchase Price solely on the net asset value of Shanghai Biostar, but not on a consolidated level.

As stated in the Announcement, the unaudited net asset value of Shanghai Biostar amounted to approximately RMB206.6 million (equivalent to approximately HK$194.9 million) as at 31st December, 2001 based on its unaudited management accounts prepared in accordance with the PRC GAAP. We noted from the audited balance sheet of Shanghai Biostar prepared using PRC GAAP for tax purposes that its audited net asset value remained unchanged. Upon Completion, the Company would have an effective interest of 27.225% in Shanghai Biostar and thus the Purchase Price represents a premium of approximately 3.66% over the aforesaid audited net asset value of Shanghai Biostar attributable to the Company after Completion. We have reviewed relevant information of placing exercises carried out recently by two comparable companies listed on the Stock Exchange as set out in the following table.

		Number of
	Premium of	placing shares
	placing price	to issued shares
	over net asset	as at date of	Date of
Name of company	*value per share**	announcement	announcement
	%	%
Far East Pharmaceutical
Technology Co. Ltd.	182.03	13.69	9.5.2002
LifeTec Group Ltd.	745.32	16.44	17.12.2001

As per latest published interim report

Extrawell Pharmaceutical Holdings Limited

LETTER FROM NSC SECURITIES

		Effective
		interest in
		Shanghai
		Biostar to be
	Premium of	acquired by
	Purchase Price	the Company
	over net asset	under the	Date of
Name of company	value	Acquisition	Announcement
(Shanghai Biostar
Genechip, Inc.)	3.66%	27.225%	16.5.2002

We note that the premium reflected in the placing price over the net asset value per share (based on the latest published interim report of such companies) was in the range of approximately 182.03% to approximately 745.32% for a block of shares representing approximately 13.69% to approximately 16.44% of the issued share capital of the relevant companies as at the respective date of announcement of the placing exercise by each of such companies. Hence, we are of the view that the premium of approximately 3.66% reflected in the Purchase Price over the audited net asset value of Shanghai Biostar as at 31st December, 2001 which was far below the above range of premium is reasonable.

(c) Valuation of the Gene Generation Group

The Company has appointed Castores Magi Surveyors Limited (“Valuer”), an independent valuer, to carry out the valuation of Gene Generation Group as at 31st March, 2002. A letter from the Valuer in this respect is set out in Appendix III to the Circular (“Valuation Report”). Based on the Valuation Report, the fair market value of the equity of Gene Generation as at 31st March, 2002 was HK$134,014,000 (the “Valuation”).

We understand from the Valuation Report that the Valuer considered three appraisal approaches in the process of valuing the equity of Gene Generation, namely the Market Approach, Cost Approach and Income Approach. The Valuer has not relied on the Market Approach as there have not been any sales of similar business nature corporations that were completed in the PRC recently. The Cost Approach would assume that Gene Generation’s value is indicated by the cost of replacing the manufacturing capabilities of the firm and may therefore not be appropriate. The Income Approach focuses on the income-producing capability of Gene Generation. We concur with the Valuer that the Income Approach is most appropriate in valuing Gene Generation. We have discussed the principal bases and assumptions used by the Valuer in carrying out the Valuation and believe that such bases and assumptions are reasonable.

Upon Completion, the Company would have an effective interest of 55% in Gene Generation. The Consideration represents a discount of approximately 25.38% to the Valuation attributable to the Company after Completion.

Extrawell Pharmaceutical Holdings Limited

LETTER FROM NSC SECURITIES

(d) Interest rate and terms of payment

We note that the Consideration will be satisfied in the form of the Promissory Notes which will bear interest at the rate of 1% per annum and mature over a period of five years from the Completion Date.

We have reviewed relevant information of issue of convertible notes/bonds recently by certain companies listed on the Stock Exchange as set out in the following table.

			Maturity
		Interest	date from
	Amount	rate per	date of	Date of
Name of company	involved	annum	issue	announcement
	HK$’ million	%	(years)
Hikari Tsushin International
Ltd.	175	5	2	9.5.2002
Interchina Holdings Co. Ltd.	200	3	3	23.8.2001
Prosper eVision Ltd.	35	3	3	6.2.2002
Shougang Concord
International Enterprises
Co. Ltd.	200	3	2	12.4.2002
Terabit Access Technology
International Ltd.	15.6	4	1	22.5.2002

We note that the convertible notes/bonds issued by the relevant companies bear interest in the range of 3% to 5% per annum. We also note that the 12 month HIBOR rate as at 16th May, 2002 (being the date of the Announcement) was 2.77009%. Hence, we consider that (i) the settlement of the Consideration over a period of five years; and (ii) the interest rate of 1% per annum of the Promissory Notes which fell below the above range of interest rate and HIBOR rate as being quite favourable.

In view of (i) the Consideration which was determined after arm’s length negotiations between the parties to the Agreement with reference to the unaudited net asset value of Shanghai Biostar as at 31st December, 2001; (ii) the price earnings multiple of approximately 6.54 times at the Purchase Price which is acceptable as it fell within the range of price earnings multiples as set out in the sub-paragraph headed “Price earnings multiple” above; (iii) the premium of approximately 3.66% reflected in the Purchase Price over the audited net asset value of Shanghai Biostar attributable to the Company upon Completion which is reasonable; (iv) the discount of approximately 25.38% to the Valuation attributable to the Company after Completion; and (v) the settlement of the Consideration over a period of five years and the favourable interest rate of 1% per annum of the Promissory Notes, we are of the opinion that the Consideration is fair and reasonable.

Extrawell Pharmaceutical Holdings Limited

LETTER FROM NSC SECURITIES

(3) Financing of the Acquisition

We note that the Consideration will be satisfied in the form of the Promissory Notes which will be satisfied in cash during a period of five years from the Completion Date and hence, there will not be any dilution in the interest of the Shareholders as a result of the Acquisition.

We have been advised by the Directors that the Group intends to repay the Promissory Notes by internal resources. Based on the published unaudited consolidated balance sheet of the Company as at 30th September, 2001, the consolidated current assets of the Company amounted to approximately HK$142,325,000 out of which cash and bank balances (excluding pledged bank deposits) amounted to approximately HK$18,345,000. We have also been informed that the Group had unutilised banking facilities of approximately HK$49.45 million as at 13th June, 2002, being the latest practicable date prior to the printing of the Circular for ascertaining such information. Hence, barring unforeseen circumstances, we believe that the Group would not have any liquidity problem in repaying HK$5 million of the Promissory Notes within one year from the Completion Date.

Apart from this, we note from two announcements of the Company dated 13th December, 2001 and 30th January, 2002 respectively that out of the aggregate consideration payable by Best-Bio for the acquisition of the entire share capital in Right & Rise Limited by Best-Bio, HK$27.5 million will be satisfied in the form of a promissory note pursuant to which Best-Bio will pay the said amount to HK Biowindow within one year from the completion date, that is, on or about 6th February, 2003.

The Directors have confirmed that the Company has received net proceeds of approximately HK$52 million from the subscription of 120,000,000 new Shares (the “Subscription”) on 29th May, 2002.

Given that the Group is equipped with the resources from the Subscription in addition to the existing internal resources and unutilised banking facilities, we believe it would not pose any financial burden to the Group when both the HK$5 million of the Promissory Notes and the aforesaid HK$27.5 million become due for payment in 2003.

(4) Benefits and effects of the Acquisition on the Company

As stated on page 16 of the Letter from the Board, the Directors have considered the satisfactory financial performance, reputation and proven track record of Shanghai Biostar Group as well as the synergy effect to be brought to the Group and believe that the Acquisition will enable the Group to maintain a competitive advantage in capturing the market opportunities in the pharmaceutical industry in the PRC. The Directors also expect that the Acquisition may broaden the income stream of the Group and is in the interest of the Shareholders as a whole and beneficial to the Group.

Extrawell Pharmaceutical Holdings Limited

LETTER FROM NSC SECURITIES

In our opinion, the chief effects are as follows:

(a) Earnings

After Completion, the Company will effectively consolidate 55% of the results of the Gene Generation Group.

We note that the Promissory Notes will bear interest at the rate of 1% per annum, equivalent to maximum interest expenses of approximately HK$550,000 per annum which will be reduced gradually upon repayment of the Promissory Notes over a period of five years from the Completion Date. Given that the Group’s profit attributable to shareholders for each of the past five years ended 31st March, 2001 was above HK$14 million, we regard that the effect of the interest expenses that will be incurred by Best-Bio on the earnings of the Group as immaterial.

On the other hand, the Acquisition may also have a positive impact on the future earnings of the Group as we understand that income may be derived from, but not limited to, (i) the development, manufacture and distribution of Genechips; and (ii) the development, manufacture and sale of new pharmaceutical products by applying Genechips developed and manufactured by Shanghai Biostar Group. We believe that the Acquisition would provide additional income to the Group from the research on genome related technology as well as the development, manufacture and distribution of Genechips as we noted that Shanghai Biostar was a profitable enterprise with an unaudited net profit after tax of approximately HK$30.9 million for the year ended 31st December, 2001. However, unless the Group is able to successfully develop, manufacture and distribute new pharmaceutical products by applying Genechips developed and manufactured by Shanghai Biostar Group within a short period of time (of which we are doubtful), it is most likely that there would not be any immediate income contribution arising therefrom. Please also refer to the paragraph headed “Future plans” of this letter.

Barring unforeseen circumstances, we consider that the income arising from the existing business of Shanghai Biostar Group attributable to the Company after Completion would exceed the negative effects on earnings as described above.

(b) Net tangible assets

We note from the section headed “STATEMENT OF PROFORMA UNAUDITED ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS OF THE ENLARGED GROUP” of Appendix I on page 68 of the Circular that the proforma unaudited adjusted consolidated net tangible assets of the Enlarged Group upon completion of the Agreement (and the Subscription) of approximately HK$130,771,000 represents a decrease of approximately 12.22% from the unaudited adjusted consolidated net tangible assets of the Group after completion of the Subscription but before the Acquisition of approximately HK$148,975,000. Despite the decrease in the net tangible assets of the Enlarged Group immediately after Completion, we are of the

Extrawell Pharmaceutical Holdings Limited

LETTER FROM NSC SECURITIES

view that the Acquisition would (i) provide an opportunity for the Group to expand its existing pharmaceutical business into the research and development, manufacture and distribution of Genechips thus broadening the Group’s income stream arising therefrom; and (ii) facilitate the Group’s research and development of new pharmaceutical products, which would be beneficial to the Group and the Shareholders in the long run leading to possible future improvement in the net tangible assets of the Group.

(c) Amount due from Bioraise High Tech

It should be noted that according to the Accountants’ Report on Gene Generation Group, an amount of approximately HK$18,868,000 was due from Bioraise High Tech as at 31st December, 2001. Such amount due from Bioraise High Tech was unsecured, interest-free and had no fixed terms of repayment. Upon entering into of the Loan Agreement, such amount due will bear interest at 2% per annum with effect from the Completion Date and will be repayable on 30th June, 2003. Pursuant to the Loan Agreement, such amount due from Bioraise High Tech is guaranteed by HK Biowindow. Upon repayment of the outstanding amount by Bioraise High Tech, the liquidity of Shanghai Biostar will be improved.

(5) PRC Legal Opinion

According to the PRC Legal Opinion, the exclusive right of Shanghai Biostar to use the Genechips during Shanghai Biostar’s existence is effective under the laws of the PRC.

(6) Future plans

It is the intention of the Group to diversify its product range. We concur with the Directors that the Acquisition may provide an opportunity for the Group to expand its existing pharmaceutical business into the research and development, manufacture and distribution of Genechips and broaden the income stream of the Group arising therefrom. The Directors believe that the Acquisition also enables the Group to leverage on Shanghai Biostar Group’s technical expertise in Genechips to facilitate the Group’s research and development of new pharmaceutical products.

We believe that the Group has to invest considerable resources in the research and development of new pharmaceutical products by applying Genechips developed and manufactured by Shanghai Biostar Group in order to have future income deriving from such source. Such investment may not guarantee the successful development of new pharmaceutical products by the Group nor the launching of such products to the market. So far, we have been informed by the Directors that the Group currently does not have any concrete plans (including the amount of funding that would be required by the Group) to conduct such research and development. We understand that the normal development cycle from research and development, pre-clinical tests, clinical trials, drug approval to market introduction of new pharmaceutical products may take a number of years and requires substantial funding. Accordingly, we believe there will not be any immediate significant

Extrawell Pharmaceutical Holdings Limited

LETTER FROM NSC SECURITIES

contribution to the Group’s results by applying Genechips developed and manufactured by Shanghai Biostar Group in the research and development of new pharmaceutical products by the Group. Nonetheless, if the Group is able to successfully launch new pharmaceutical products to the market in the future, the financial performance of the Group would be enhanced which would ultimately benefit the Shareholders in the long run.

Advice

Based on the above principal factors and reasons, we consider that the terms of the Agreement are fair and reasonable so far as the Independent Shareholders are concerned.

B. CONTINUING CONNECTED TRANSACTION

Principal Factors Considered

We have considered the following principal factors in providing our advice:

(1) Reason for the loan

As at the Latest Practicable Date, a sum of RMB20 million (equivalent to approximately HK$18.9 million) was owing from Bioraise High Tech to Shanghai Biostar (the “Loan”). The amount represented advances made between 1st July, 2001 to 31st December, 2001 to finance the business activities of Bioraise High Tech. It should be noted that the Continuing Connected Transaction subsisted prior to the entering into of the Agreement and will become a connected transaction upon Completion.

(2) Security

Pursuant to the Loan Agreement entered into between Shanghai Biostar (as creditor), Bioraise High Tech (as borrower) and HK Biowindow (as guarantor) on 13th June, 2002, the Loan was agreed to be repaid in its entirety on 30th June, 2003. HK Biowindow has unconditionally and irrevocably undertaken to Shanghai Biostar that in any event that Bioraise High Tech fails to carry out any of its obligations under the Loan Agreement, HK Biowindow will carry out the obligations of Bioraise High Tech on its behalf as if HK Biowindow is the borrower of the Loan. We consider that this guarantee arrangement is acceptable.

(3) Interest rate

We understand that the Loan is interest-free prior to the Completion Date. Interest will accrue at the rate of 2% per annum with effect from the Completion Date and would be payable when the Loan becomes due. If the principal amount of the Loan in not repaid by the expiry date (being 30th June, 2003), interest will be charged at the rate of 5% per annum during the period from the date immediately after the aforesaid expiry date to the day when the Loan is fully repaid.

Extrawell Pharmaceutical Holdings Limited

LETTER FROM NSC SECURITIES

We observe from the audited balance sheet of Shanghai Biostar prepared in accordance with the PRC GAAP that its cash and bank balances were approximately RMB49.3 million (equivalent to approximately HK$46.5 million) as at 31st December, 2001. We have been informed that the bank deposits of Shanghai Biostar bore an average interest rate of approximately 1.71% per annum during the year ended 31st December, 2001. In view of the excess cash position of Shanghai Biostar net of the aggregate amount due from related companies as at 31st December, 2001 of approximately HK$26.8 million as shown in the Accountants’ Report on Gene Generation Group in Appendix II to the Circular, we consider that any interest rate not less than the opportunity cost of 1.71% per annum in respect of such excess cash is reasonable and in the interest of Shanghai Biostar.

We note that the one year RMB fixed deposit interest rate as quoted by the Industrial and Commercial Bank of China as at the Latest Practicable Date was 1.98% per annum. We also note that the interest rate applicable to six months to one year loan as promulgated by the Industrial and Commercial Bank of China as at the Latest Practicable Date was 5.31% per annum. We notice that the interest rate payable under the Loan will be below the bank lending rate in the PRC but above the aforesaid opportunity cost of 1.71% per annum. However, one should note that the Loan subsisted prior to the entering into of the Agreement. The terms of the Loan were re-negotiated as the Loan will become a connected transaction upon Completion. After arm’s length negotiations, the unsecured and interestfree Loan will bear interest upon Completion and will be guaranteed by HK Biowindow. Apart from this, the Loan will ultimately be repaid under the set-off arrangements, details of which are set out in the paragraph headed “Repayment” below. In view of the above, we consider that the interest rate of 2% per annum is acceptable despite being below the bank lending rate. Hence, we consider that (i) the interest rate of 2% per annum of the Loan which is slightly above the aforesaid fixed deposit interest rate of 1.98% per annum and slightly higher than the aforesaid average interest rate of the bank deposits of Shanghai Biostar; and (ii) the interest rate of 5% per annum in the event that the Loan is not repaid by the expiry date which is not significantly different from the aforesaid interest rate applicable to six months to one year loan of 5.31% per annum as reasonable.

(4) Repayment

Pursuant to the Loan Agreement, the Loan was agreed to be repaid on 30th June, 2003. Bioraise High Tech has the right to repay the Loan before the expiry date. As explained in the paragraph headed “Security” above, HK Biowindow has undertaken to carry out the obligations of Bioraise High Tech under the Loan Agreement on its behalf as if HK Biowindow is the borrower of the Loan in the event of default by Bioraise High Tech. We understand from the Agreement that in the event that any sum is owing to Gene Generation or any of its subsidiaries from HK Biowindow or any of its associates (excluding (i) Gene Generation and its subsidiaries; and (ii) the Company and its subsidiaries) at Completion, such amount (deducting therefrom any sum repaid during the period up to the first anniversary of the Completion Date) shall be set off against the Promissory Note to be matured on the first anniversary of the Completion Date or Promissory Note(s) to be matured thereafter. We observe from the Loan Agreement that in the event that Best-Bio intends to repay any of the Promissory Notes prior to their respective maturity date and any

Extrawell Pharmaceutical Holdings Limited

LETTER FROM NSC SECURITIES

amount of the Loan remains outstanding at the relevant time of early repayment by Best-Bio falling on or after 30th June, 2003, HK Biowindow has undertaken to instruct Best-Bio to repay directly to Shanghai Biostar. As such and barring any early repayment of the Promissory Notes prior to 30th June, 2003, the Loan will ultimately be settled in full in 2005. We consider that the aforesaid late payment arrangement at a higher interest rate as fair and reasonable.

Advice

Based on the above principal factors, we consider that the terms of the Continuing Connected Transaction are fair and reasonable so far as the Independent Shareholders are concerned.

C. GENERAL

Your attention is drawn to that only one resolution is proposed to consider and, if thought fit, approve the Acquisition (inclusive of the subsisting Continuing Connected Transaction). Accordingly, if the resolution is passed, both the Acquisition and the Continuing Connected Transaction (which subsisted prior to the entering into of the Agreement and will become a connected transaction upon the Completion) will be approved and the Acquisition will be implemented upon the Conditions being fulfilled. Otherwise, the Acquisition will not proceed at all.

Yours faithfully, For and on behalf of

NSC Securities (Asia) Limited Fiona M.Y. Lau Director

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

1. SUMMARY OF CONSOLIDATED PROFIT AND LOSS ACCOUNTS

The following is a summary of the unaudited consolidated profit and loss account of the Group for the six months ended 30th September, 2001 and the audited combined/consolidated profit and loss accounts of the Group for the last five financial years ended 31st March, 2001.

Six months ended 30th September, Year ended 31st March, 2001 2001 2000 1999 1998 1997 (unaudited) (audited) (audited) (audited) (audited) (audited) HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 Turnover 63,670 135,159 126,978 226,063 193,694 166,509 Operating profit 20,419 25,442 16,113 48,730 27,160 20,665 Share of profit of an associate — — — — — 100 Profit before tax 20,419 25,442 16,113 48,730 27,160 20,765 Tax (2,511) (3,313) (1,988) (4,832) (2,745) (2,139 Profit before minority interests 17,908 22,129 14,125 43,898 24,415 18,626 Minority interests (1,636) (1,589) (82) (1,560) (423) (508 Net profit from ordinary activities attributable to shareholders 16,272 20,540 14,043 42,338 23,992 18,118 (Note 2) Dividends — — 10,000 64,000 — — cents cents cents cents cents cents Earnings per Share — basic (Note 1) 0.86 1.08 0.74 2.96 1.71 1.29 — diluted N/A N/A N/A N/A N/A N/A (Note 2) Dividend per Share (Note 1) — — 0.52 N/A — —	Six months ended 30th September, Year ended 31st March, 2001 2001 2000 1999 1998 1997 (unaudited) (audited) (audited) (audited) (audited) (audited) HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 Turnover 63,670 135,159 126,978 226,063 193,694 166,509 Operating profit 20,419 25,442 16,113 48,730 27,160 20,665 Share of profit of an associate — — — — — 100 Profit before tax 20,419 25,442 16,113 48,730 27,160 20,765 Tax (2,511) (3,313) (1,988) (4,832) (2,745) (2,139 Profit before minority interests 17,908 22,129 14,125 43,898 24,415 18,626 Minority interests (1,636) (1,589) (82) (1,560) (423) (508 Net profit from ordinary activities attributable to shareholders 16,272 20,540 14,043 42,338 23,992 18,118 (Note 2) Dividends — — 10,000 64,000 — — cents cents cents cents cents cents Earnings per Share — basic (Note 1) 0.86 1.08 0.74 2.96 1.71 1.29 — diluted N/A N/A N/A N/A N/A N/A (Note 2) Dividend per Share (Note 1) — — 0.52 N/A — —	) )
	20,665 100
	20,765 (2,139
	18,626 (508
	18,118
	—
	cents 1.29
	N/A
	—

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Notes:

The earnings per Share and the dividend per Share for the three years ended 31st March, 1999 had been adjusted to take into account the effect of the subdivision of 1 ordinary share of HK$0.10 each into 10 ordinary shares of HK$0.01 each of the Company effective from 17th February, 2000.
In respect of the dividends of HK$64,000,000 declared and paid for the year ended 31st March, 1999, HK$56,000,000 was declared and paid as interim dividends by certain subsidiaries of the Group to their respective shareholders prior to the Group reorganisation for the purpose of listing the Shares on the Stock Exchange, and the remaining HK$8,000,000 was declared and paid to the then shareholders of the Company after the listing of the Shares. As such, the calculation of dividend per Share for the year ended 31st March, 1999 is not applicable for the purpose of this circular.
The summary of the combined results of the Group for each of the two years ended 31st March, 1998 has been extracted from the Company’s prospectus dated 25th February, 1999 (the “Prospectus”). This summary was prepared based on the audited financial statements of the companies now comprising the Group, after appropriate adjustment and reclassifications as if the Group structure as set out in the Prospectus had been in existence throughout these financial years.

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

2. INTERIM RESULTS

CONDENSED CONSOLIDATED PROFIT AND LOSS ACCOUNT (UNAUDITED)

Notes TURNOVER 2 Cost of sales Gross profit Other revenue Selling and distribution expenses Administrative expenses PROFIT FROM OPERATING ACTIVITIES 3 Finance costs 4 PROFIT BEFORE TAX Tax 5 PROFIT BEFORE MINORITY INTERESTS Minority interests NET PROFIT FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO SHAREHOLDERS Dividend 6 EARNINGS PER SHARE 7 — Basic — Diluted DIVIDEND PER SHARE	For the six months ended 30th September, 2001 2000 HK$’000 HK$’000 63,670 52,274 (29,207) (29,283 34,463 22,991 4,281 2,448 (7,121) (6,777 (10,393) (9,412 21,230 9,250 (811) (890 20,419 8,360 (2,511) (916 17,908 7,444 (1,636) (1,549 16,272 5,895 — — HK0.86 cent HK0.31 cent N/A N/A — —	For the six months ended 30th September, 2001 2000 HK$’000 HK$’000 63,670 52,274 (29,207) (29,283 34,463 22,991 4,281 2,448 (7,121) (6,777 (10,393) (9,412 21,230 9,250 (811) (890 20,419 8,360 (2,511) (916 17,908 7,444 (1,636) (1,549 16,272 5,895 — — HK0.86 cent HK0.31 cent N/A N/A — —	) ) ) ) ) )
		22,991 2,448 (6,777 (9,412
		9,250 (890
		8,360 (916
		7,444 (1,549
		5,895
		—
		HK0.31 cent
		N/A
		—

Other than the net profit from ordinary activities attributable to Shareholders, the Group had no recognised gains or losses. Accordingly, a condensed consolidated statement of recognised gains and losses is not presented in the condensed financial statements.

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONDENSED CONSOLIDATED BALANCE SHEET

		(Unaudited)	(Audited)
		At 30th September,	At 31st March,
		2001	2001
	Notes	HK$’000	HK$’000
NON-CURRENT ASSETS
Fixed assets		78,144	60,974
Intangible assets		10,234	10,727
		88,378	71,701
CURRENT ASSETS
Inventories		28,950	12,626
Accounts receivable	8	60,226	74,794
Prepayments, deposits and other receivables		16,496	6,211
Pledged bank deposits	11	18,308	13,345
Cash and bank balances		18,345	24,891
		142,325	131,867
CURRENT LIABILITIES
Accounts and bills payable	9	2,181	3,948
Tax payable		11,198	10,334
Accrued liabilities and other payables		15,161	24,890
Due to minority equity holders of subsidiaries	10	2,770	2,402
Trust receipt loans, secured	11	7,680	9,233
Bank loans, secured	11	16,038	—
Bank overdrafts, secured	11	15,593	10,587
		70,621	61,394
NET CURRENT ASSETS		71,704	70,473
TOTAL ASSETS LESS CURRENT LIABILITIES		160,082	142,174
NON-CURRENT LIABILITY
Due to a minority equity holder of a subsidiary	10	9,091	9,091
MINORITY INTERESTS		15,589	13,953
		135,402	119,130
CAPITAL AND RESERVES
Issued share capital		19,000	19,000
Reserves	12	116,402	100,130
		135,402	119,130

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONDENSED CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED)

CONDENSED CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED)	CONDENSED CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED)	CONDENSED CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED)
For the six months ended 30th September, 2001 2000 HK$’000 HK$’000 NET CASH INFLOW FROM OPERATING ACTIVITIES 3,963 3,685 RETURNS ON INVESTMENTS AND SERVICING OF FINANCE — Net interest received/(paid) 140 (440 TAX — Overseas taxes paid (1,647) (1,540 INVESTING ACTIVITIES — Purchases of fixed assets (18,935) (152 — Increase in pledged bank deposits (4,963) — Net cash outflow from investing activities (23,898) (152 NET CASH INFLOW/(OUTFLOW) BEFORE FINANCING ACTIVITIES (21,442) 1,553 FINANCING ACTIVITIES — New bank loans 16,038 — — Advance from minority equity holders of subsidiaries 368 — Net cash inflow from financing activities 16,406 — INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (5,036) 1,553 Cash and cash equivalents at beginning of period 18,416 11,532 CASH AND CASH EQUIVALENTS AT END OF PERIOD 13,380 13,085		) ) ) )
	(152
	1,553 — —
	—
	1,553 11,532
	13,085
Notes: 1. Basis of Preparation These unaudited condensed consolidated interim financial statements have not been audited by the Company’s auditors but have been reviewed by the Company’s Audit Committee. The Directors are responsible for the preparation of the Group’s unaudited condensed consolidated interim financial statements. In preparing these unaudited condensed consolidated interim financial statements, the Directors confirm that the accounting policies and method of computation applied are consistent with those used in the audited consolidated financial statements for the year ended 31st March, 2001 except as disclosed below.

Notes:

Basis of Preparation

These unaudited condensed consolidated interim financial statements have not been audited by the Company’s auditors but have been reviewed by the Company’s Audit Committee.

The Directors are responsible for the preparation of the Group’s unaudited condensed consolidated interim financial statements. In preparing these unaudited condensed consolidated interim financial statements, the Directors confirm that the accounting policies and method of computation applied are consistent with those used in the audited consolidated financial statements for the year ended 31st March, 2001 except as disclosed below.

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

The Group has adopted the following new Statements of Standard Accounting Practice (“SSAP”) issued by the Hong Kong Society of Accountants which are effective for accounting period commencing on or after 1st January, 2001:

SSAP	28	Provisions, contingent liabilities and contingent assets
SSAP	29	Intangible assets
SSAP	30	Business combinations
SSAP	31	Impairment of assets
SSAP	32	Consolidated financial statements and accounting for investments in subsidiaries

The unaudited condensed consolidated financial statements have been prepared under the historical cost convention and have been prepared in accordance with SSAP 25 “Interim Financial Reporting”.

2. Turnover and Segmental Information

Turnover represents the invoiced value of goods sold, net of trade discounts and returns, and after elimination of all significant intra-group transactions.

An analysis of turnover is as follows:

Products distributed by the Group Products manufactured by the Group	(Unaudited) For the six months ended 30th September, 2001 2000 HK$’000 HK$’000 33,872 24,141 29,798 28,133 63,670 52,274	(Unaudited) For the six months ended 30th September, 2001 2000 HK$’000 HK$’000 33,872 24,141 29,798 28,133 63,670 52,274
		52,274

An analysis of profit before tax is as follows:

Products distributed by the Group Products manufactured by the Group	(Unaudited) For the six months ended 30th September, 2001 2000 HK$’000 HK$’000 6,942 1,244 13,477 7,116 20,419 8,360	(Unaudited) For the six months ended 30th September, 2001 2000 HK$’000 HK$’000 6,942 1,244 13,477 7,116 20,419 8,360
		8,360

The Group’s turnover and contribution to profit before tax were derived from operations in relation to customers located in the People’s Republic of China (the “PRC”).

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

3. Profit from Operating Activities

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

		(Unaudited)
	For	the six months
	ended 30th September,
	2001		2000
	HK$’000	HK$’000
Cost of inventories sold	29,207		29,283
Staff costs (excluding directors’ remuneration)	5,410		4,907
Directors’ remuneration	1,240		1,968
Depreciation	1,765		1,472
Operating lease rentals in respect of land and buildings	676		686
Exchange losses, net	235		684
Amortisation of intangible assets	493		287
Interest income on bank balances	(951)		(450)

Cost of inventories sold includes HK$916,000 (2000: HK$943,000) relating to staff costs and depreciation, which are also included in the respective total amounts disclosed separately above for each of these types of expenses.

4. Finance Costs

Interest expense on: Bank overdrafts and loans wholly repayable within five years Other loan Due to minority equity holders of subsidiaries	(Unaudited) For the six months ended 30th September, 2001 2000 HK$’000 HK$’000 703 637 — 253 108 — 811 890	(Unaudited) For the six months ended 30th September, 2001 2000 HK$’000 HK$’000 703 637 — 253 108 — 811 890
		890

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

5. Tax

Current: Hong Kong Outside Hong Kong Tax charge for the period	(Unaudited) For the six months ended 30th September, 2001 2000 HK$’000 HK$’000 — 31 2,511 885 2,511 916	(Unaudited) For the six months ended 30th September, 2001 2000 HK$’000 HK$’000 — 31 2,511 885 2,511 916
		916

No provision for Hong Kong profits tax has been provided (six months ended 30th September, 2000: provided at the rate of 16%) because the Group did not generate any assessable profits arising in Hong Kong during the period ended 30th September, 2001. Taxes on profits of subsidiaries operating outside Hong Kong during the period have been calculated at the rates of the tax applicable in the respective jurisdictions, based on existing legislation, interpretations and practices.

No deferred tax has been provided (31st March, 2001: Nil) because the Group had no significant timing differences at balance sheet date.

6. Dividend

The Directors do not recommend the payment of any interim dividend for the period (2000: Nil).

7. Earnings Per Share

Basic

The calculation is based on the net profit from ordinary activities attributable to shareholders for the period of HK$16,272,000 (2000: HK$5,895,000) on the weighted average of 1,900,000,000 (2000: 1,900,000,000) ordinary shares in issue during the period.

Diluted

Diluted earnings per share for the periods have not been calculated as no dilutive events existed during the respective periods.

8. Accounts Receivable

Trading terms with customers are largely on credit, except for new customers where payment in advance is normally required. Invoices are normally payable within 120 days of issuance, except for certain well-established customers, where the terms are extended. Each customer has a maximum credit limit. The Group seeks to maintain strict control over its outstanding receivables and has a credit control department to minimise credit risk. Overdue balances are regularly reviewed by senior management.

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

The ages of the Group’s accounts receivable are analysed as follows:

	(Unaudited)	(Audited)
	At 30th September,	At 31st March,
	2001	2001
	HK$’000	HK$’000
Outstanding balances with ages:
Within 90 days	41,742	57,881
Between 91 to 180 days	8,641	9,310
Between 181 to 365 days	6,290	8,283
Between 1 to 2 years	5,510	3,171
Over 2 years	5,442	7,129
	67,625	85,774
Less: Provision for bad and doubtful debts	(7,399)	(10,980)
	60,226	74,794

Accounts and Bills Payable

The ages of the Group’s accounts and bills payable are analysed as follows:

	(Unaudited)	(Audited)
	At 30th September,	At 31st March,
	2001	2001
	HK$’000	HK$’000
Outstanding balances with ages:
Within 90 days	1,876	1,641
Between 91 to 180 days	9	2,231
Between 181 to 365 days	219	—
Over 1 year	77	76
	2,181	3,948

10. Due to Minority Equity Holders of Subsidiaries

The current portion of the amounts due to minority equity holders of subsidiaries of HK$2,770,000 (31st March, 2001: HK$2,402,000) is unsecured, bears interest at 12% per annum (2000: interest-free) and is repayable on demand. The long term portion of the amount due to a minority equity holder of a subsidiary of HK$9,091,000 (31st March, 2001: HK$9,091,000) is unsecured, interest-free and repayable on 21st April, 2014.

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

11. Banking Facilities

At 30th September, 2001, the Group’s banking facilities were supported by the following:

(a) fixed deposits of approximately HK$18.3 million (31st March, 2001: HK$13.3 million) of certain of its subsidiaries; and
(b) corporate guarantees from the Company and certain of its subsidiaries.

12. Reserves

At 1st April, 2001 (audited) Net profit for the period (unaudited) At 30th September, 2001 (unaudited)	Share premium HK$’000 19,321 — 19,321	Capital reserve Contributed surplus HK$’000 HK$’000 1,192 4,839 — — 1,192 4,839	Retained profits HK$’000 74,778 16,272 91,050	Total HK$’000 100,130 16,272
				116,402

Contingent Liabilities

As at 30th September, 2001, the Group had no significant contingent liabilities (31st March, 2001: Nil).

14. Commitments

At the balance sheet date, the Group had the following commitments in respect of the construction of a new manufacturing plant in the PRC:

						(Unaudited)	(Audited)
					At	30th September,	At 31st March,
						2001	2001
						HK$’000	HK$’000
Contracted	for					6,986	3,000
Authorised	but	not	contracted	for		16,301	29,455
						23,287	32,455

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

15. Related Party Transactions

During the period ended 30th September, 2001, the Group had the following transactions with the following related parties:

			(Unaudited)
		For	the six months
		ended 30th September,
		2001	2000
	Notes	HK$’000	HK$’000
Rental expenses to Extrawell Holdings Limited (“EHL”)	(a)	405	351
Interest expense to minority equity holders of subsidiaries	(b)	108	—

Notes:

(a) The rental expenses paid to EHL, a company in which certain directors and/or beneficial shareholders of the Company have beneficial interests therein, were determined by the Directors with reference to the then market conditions and after obtaining independent opinion from a professional valuer.
(b) Interest expense to minority equity holders of subsidiaries arose from amounts due to minority equity holders of subsidiaries of HK$2,770,000 which bear interest at 12% per annum.

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

3. AUDITED FINANCIAL STATEMENTS

Set out below is the audited financial statements of the Group for the year ended 31st March, 2001 as extracted from pages 22 to 40 of the annual report of the Company. References to page numbers are to page numbers of such annual report of the Company for the year ended 31st March, 2001.

CONSOLIDATED PROFIT AND LOSS ACCOUNT

		Year ended	31st March,
		2001	2000
	Notes	HK$’000	HK$’000
TURNOVER	3	135,159	126,978
Cost of sales		(73,743)	(85,102)
Gross profit		61,416	41,876
Other revenue		3,590	3,736
Selling and distribution expenses		(10,022)	(12,904)
Administrative expenses		(23,452)	(14,014)
Other operating expenses		(4,324)	(987)
PROFIT FROM OPERATING ACTIVITIES	4	27,208	17,707
Finance costs	5	(1,766)	(1,594)
PROFIT BEFORE TAX		25,442	16,113
Tax	7	(3,313)	(1,988)
PROFIT BEFORE MINORITY INTERESTS		22,129	14,125
Minority interests		(1,589)	(82)
NET PROFIT FROM ORDINARY ACTIVITIES
ATTRIBUTABLE TO SHAREHOLDERS	8, 21	20,540	14,043
Dividend	9	—	10,000
EARNINGS PER SHARE	10
Basic		HK1.08 cents	HK0.74 cents
Diluted		N/A	N/A

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONSOLIDATED STATEMENT OF RECOGNISED GAINS AND LOSSES

		Year ended 31st March,	Year ended 31st March,
		2001	2000
	Note	HK$’000	HK$’000
Net profit for the year attributable to shareholders		20,540	14,043
Goodwill eliminated against reserves	21	—	(6,500)
		20,540	7,543

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONSOLIDATED BALANCE SHEET

		As at 31st March,	As at 31st March,
		2001	2000
	Notes	HK$’000	HK$’000
NON-CURRENT ASSETS
Fixed assets	11	60,974	45,825
Intangible assets	12	10,727	9,091
Deposits paid	14	—	20,500
		71,701	75,416
CURRENT ASSETS
Inventories	15	12,626	19,311
Accounts receivable	16	74,794	45,177
Prepayments, deposits and other receivables		6,211	13,370
Pledged bank deposits	19	13,345	12,543
Cash and bank balances		24,891	10,315
		131,867	100,716
CURRENT LIABILITIES
Accounts and bills payable	17	3,948	6,365
Tax payable	7	10,334	9,051
Accrued liabilities and other payables		24,890	21,478
Due to minority equity holders	18	2,402	—
Other loan, unsecured	19	—	6,363
Trust receipt loans, secured	19	9,233	5,151
Bank overdrafts, secured	19	10,587	6,175
		61,394	54,583
NET CURRENT ASSETS		70,473	46,133
TOTAL ASSETS LESS CURRENT LIABILITIES		142,174	121,549
NON-CURRENT LIABILITY
Due to a minority equity holder	18	9,091	9,091
MINORITY INTERESTS		13,953	13,868
		119,130	98,590
CAPITAL AND RESERVES
Issued share capital	20	19,000	19,000
Reserves	21	100,130	79,590
		119,130	98,590

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

BALANCE SHEET

		As at 31st March,	As at 31st March,
		2001	2000
	Notes	HK$’000	HK$’000
NON-CURRENT ASSETS
Interests in subsidiaries	13	98,339	99,268
CURRENT ASSETS
Cash and bank balances		2,002	2
Prepayments and deposits		171	189
Dividend receivable		—	5,000
		2,173	5,191
CURRENT LIABILITIES
Accrued liabilities		506	530
NET CURRENT ASSETS		1,667	4,661
		100,006	103,929
CAPITAL AND RESERVES
Issued share capital	20	19,000	19,000
Reserves	21	81,006	84,929
		100,006	103,929

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONSOLIDATED CASH FLOW STATEMENT

CONSOLIDATED CASH FLOW STATEMENT	CONSOLIDATED CASH FLOW STATEMENT	CONSOLIDATED CASH FLOW STATEMENT
Year ended 31st March, 2001 2000 Notes HK$’000 HK$’000 NET CASH INFLOW FROM OPERATING ACTIVITIES 22(a) 20,832 25,059 RETURNS ON INVESTMENTS AND SERVICING OF FINANCE Interest received 793 1,052 Interest paid (1,766) (1,594 Dividend paid — (18,000 Net cash outflow from returns on investments and servicing of finance (973) (18,542 TAX Hong Kong profits tax paid — (112 Overseas taxes paid (2,030) (1,729 Taxes paid (2,030) (1,841 INVESTING ACTIVITIES Purchases of fixed assets (737) (28,018 Proceeds from disposal of fixed assets 125 24 Acquisition of a subsidiary 22(c) — (6,410 Increase in long term deposits — (20,500 Increase in pledged bank deposits (4,868) — Repayment from a minority equity holder — 23 Net cash outflow from investing activities (5,480) (54,881 NET CASH INFLOW/(OUTFLOW) BEFORE FINANCING ACTIVITIES 12,349 (50,205 FINANCING ACTIVITIES 22(b) New other loans 6,363 6,363 Repayment of other loans (12,726) — Advance from a minority equity holder 898 — Net cash inflow/(outflow) from financing activities (5,465) 6,363 INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 6,884 (43,842		) ) ) ) ) ) ) ) ) ) ) )
	(18,542
	(112 (1,729
	(1,841
	(28,018 24 (6,410 (20,500 — 23
	(54,881
	(50,205 6,363 — —
	6,363
	(43,842

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

	Year ended 31st March,	Year ended 31st March,
	2001	2000
	HK$’000	HK$’000
INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS	6,884	(43,842)
Cash and cash equivalents at beginning of year	11,532	55,374
CASH AND CASH EQUIVALENTS AT END OF YEAR	18,416	11,532
ANALYSIS OF BALANCES OF CASH AND
CASH EQUIVALENTS
Cash and bank balances	24,891	10,315
Pledged bank deposits	8,477	12,543
Bank overdrafts, secured	(10,587)	(6,175)
Trust receipt loans with original maturity within three
months	(4,365)	(5,151)
	18,416	11,532

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

1. 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. The financial statements have been prepared under the historical cost convention.

Basis of consolidation

The consolidated financial statements include the financial statements of the Company and all of its subsidiaries for the year ended 31st March. 2001. 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 have been eliminated on consolidation.

Subsidiaries

A subsidiary is a company in which the Company, directly or indirectly, controls more than 50% of its voting power or issued share capital or controls the composition of its board of directors.

Interests in subsidiaries are stated at cost unless, in the opinion of the directors, there have been permanent diminutions in values, when they are written down to values determined by the directors.

Equity joint venture companies established in The People’s Republic of China (the “PRC”)

Equity joint venture companies comprise companies operating in the PRC as independent business entities. The joint venture agreements stipulate the composition of the equity joint venture parties’ capital contributions, the duration of the joint venture, and the basis on which assets are to be realised upon its dissolution. The profits and losses from operations and any distribution of surplus assets are shared by the joint venture parties in proportion to their respective capital contributions.

An equity joint venture is treated as a subsidiary if, under the joint venture agreement, the Group controls the composition of the board of directors and has control over the financial and operating policies of the joint venture company.

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) 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; and
(b) interest income, on a time proportion basis, taking into account the principal outstanding and the effective interest rate applicable.

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Fixed assets and depreciation

Fixed assets are stated at cost less accumulated depreciation.

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. The principal annual rates used for this purpose are as follows:

Medium and short term leasehold land and buildings outside Hong Kong Over the lease terms Plant and machinery 10% to 20% Furniture, fixtures and office equipment 10% to 30% Motor vehicles 20%

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.

Where, in the opinion of the directors, the recoverable amounts of fixed assets have declined below their carrying amounts, provisions are made to write down the carrying amounts of such assets to their recoverable amounts. Recoverable amounts are not determined using discounted cash flows.

Goodwill

Goodwill arising on acquisition of a subsidiary represents the excess of the purchase consideration paid for the subsidiary over the fair values ascribed to the net underlying assets acquired and is eliminated against reserves in the year of acquisition. On disposal of a subsidiary, the relevant portion of attributable goodwill previously eliminated against reserves is written back and is included in the calculation of the gain or loss on disposal.

Intangible assets

Intangible assets comprise technical knowhow and trademarks which are stated at cost less accumulated amortisation.

The cost of acquiring the rights to technical knowhow for the production of new pharmaceutical products is amortised on a straight-line basis over the estimated economic lives of the knowhow of a maximum of five years commencing in the year when the new pharmaceutical products are put into commercial production. The cost of acquiring the trademarks is amortised on a straight-line basis over the estimated economic lives of the trademarks of up to a maximum of twenty years.

Accounts receivable

Trading terms with customers are largely on credit, except for new customers, where payment in advance is normally required. Invoices are normally payable within 120 days of issuance, except for certain well established customers, where the terms are extended to a maximum of one year. Each customer has a maximum credit limit. The Group seeks to maintain strict control over its outstanding receivables and has a credit control department to minimise credit risk. Overdue balances are regularly reviewed by senior management.

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined on the first-in, first-out basis and, in the case of work in progress and finished goods, comprises direct materials, direct labour and an appropriate proportion of manufacturing overheads based on normal levels of activity. Net realisable value is based on estimated selling prices less any further costs expected to be incurred to completion and 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.

Deferred tax

Deferred tax is provided, using the liability method, on all significant timing differences in the recognition of revenue and expenses for tax and for financial reporting purposes, to the extent it is probable that the liability will crystallise in the foreseeable future. A deferred tax asset is not recognised unless its realisation is assured beyond reasonable doubt.

Operating leases

Leases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. The rentals applicable to such operating leases are charged to the profit and loss account on the straight-line basis over the lease terms.

Foreign currencies

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

On consolidation, the financial statements of overseas subsidiaries are translated into Hong Kong dollars at the applicable rates of exchange ruling at the balance sheet date. The resulting translation differences are included in the exchange fluctuation reserve.

Pension scheme

The Group operates a defined contribution Mandatory Provident Fund retirement benefits scheme (the “Hong Kong Scheme”) under the Mandatory Provident Fund Schemes Ordinance, for those employees who are eligible to participate in the Hong Kong Scheme. The Hong Kong Scheme became effective from 1st December, 2000. 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 Hong Kong Scheme. The assets of the Hong Kong Scheme are held separately from those of the Group in an independently administered fund. The Group’s employer contributions vest fully with the employees when contributed into the Hong Kong Scheme.

The Company’s subsidiaries in the PRC are members of the state-managed retirement benefits scheme operated by the government of the PRC. The retirement scheme contributions, which are based on a certain percentage of the salaries of the relevant subsidiaries’ employees, are charged to the profit and loss account in the period to which they relate and represent the amount of contributions payable by these subsidiaries to this scheme.

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Cash equivalents

For the purpose of the consolidated cash flow statement, cash equivalents represent short term highly liquid investments which are readily convertible into known amounts of cash and which were within three months of maturity when acquired, less advances from banks repayable within three months from the date of the advance. For the purpose of balance sheet classification, cash and bank balances represent assets similar in nature to cash, which are not restricted as to use.

2. CORPORATE INFORMATION AND RELATED PARTY TRANSACTIONS

The principal activity of the Company is investment holding. During the year, the Group was involved in the following principal activities:

marketing and distribution of pharmaceutical products, health care and nutritional products, and medical appliances and equipment; and
development, manufacture and distribution of pharmaceutical products.

During the year, the Group paid rental expenses amounting to HK$703,000 and nil (2000: HK$703,000 and HK$579,000) to Extrawell Holdings Limited (“EHL”) for the leasing of properties in Hong Kong and the PRC, respectively, for use as office premises. EHL is a related company of the Group in which Messrs. Ho Chin Hou, Ho Yeong Fan, Ho Yu Ling and Li Qiang, certain of the directors and/or beneficial shareholders of the Company, have beneficial interests. The rental expenses were determined by the directors with reference to the then market conditions.

During the year ended 31st March, 2000, the Group acquired its existing office premises in the PRC from EHL at a consideration of HK$18,000,000, which represented the then market value of the property as confirmed by LCH (Asia-Pacific) Surveyors Limited, an independent firm of professional valuers.

3. TURNOVER

Turnover represents the invoiced value of goods sold, net of trade discounts and returns, and after elimination of all significant intra-group transactions.

An analysis of the Group’s turnover by principal activity disclosed pursuant to Appendix 16 of the Rules Governing the Listing of Securities (the “Listing Rules”) on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) is as follows:

Products distributed by the Group: Pharmaceutical products Health care and nutritional products Medical appliances and equipment Products manufactured by the Group	2001 HK$’000 63,739 6,466 6,901 58,053 135,159	2000 HK$’000 69,978 15,026 13,862 28,112
		126,978

The Group’s turnover was derived from sales to customers based in the PRC.

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

4. PROFIT FROM OPERATING ACTIVITIES

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

	2001	2000
	HK$’000	HK$’000
Cost of inventories sold	73,743	85,102
Staff costs (excluding directors’ remuneration, note 6)	11,178	9,603
Depreciation	3,468	2,320
Amortisation of intangible assets	864	—
Provision for bad and doubtful debts	4,324	987
Auditors’ remuneration	740	720
Loss/(gain) on disposal of fixed assets	(5)	2
Operating lease rentals in respect of land and buildings	1,268	2,103
Exchange losses, net	641	1,895
Interest income on bank balances	(793)	(1,052)

The pension scheme contributions for the two years ended 31st March, 2001 were insignificant.

Cost of inventories sold includes HK$4,202,000 (2000: HK$1,617,000) relating to staff costs and depreciation, which is also included in the respective total amounts disclosed separately above for these types of expenses.

5. FINANCE COSTS

Interest expense on: Bank overdrafts and loans wholly repayable within five years Other loans	Group 2001 HK$’000 1,236 530 1,766	2000 HK$’000 1,043 551
		1,594

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

6. DIRECTORS’ REMUNERATION AND FIVE HIGHEST PAID EMPLOYEES

Directors’ remuneration

Details of the remuneration of the Company’s directors disclosed pursuant to Appendix 16 of the Listing Rules on the Stock Exchange and Section 161 of the Hong Kong Companies Ordinance are as follows:

Fees: Executive Independent non-executive Other emoluments of executive directors: Basic salaries, housing benefits, other allowances and benefits in kind	Group 2001 HK$’000 20 — 20 3,940 3,960	2000 HK$’000 — —
		— 4,644
		4,644

The remuneration of each of the directors fell within the nil — HK$1,000,000 band for each of the two years ended 31st March, 2001.

There was no arrangement under which a director waived or agreed to waive any remuneration during the year (2000: Nil).

Five highest paid employees

The five highest paid employees during the year included four (2000: Four) directors, details of whose remuneration are set out above. The details of the remuneration of the remaining highest paid, non-director employee, which fell within the nil — HK$1,000,000 band (2000: One) are as follows:


										2001	2000
										HK$’000	HK$’000
Basic	salaries,	housing	benefits,	other	allowances	and	benefits	in	kind	455	455

During the year, no emoluments were paid by the Group to the directors, or the highest paid, non-director employee as an inducement to join, or upon joining, the Group, or as compensation for loss of office (2000: Nil).

In the opinion of the directors of the Company, the Group had no significant obligations for long service payments to its employees pursuant to the requirements under the Employment Ordinance, Chapter 57 of the Laws of Hong Kong, at 31st March, 2001 and 2000.

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

7. TAX

Current: Hong Kong Overseas Tax charge for the year	Group 2001 HK$’000 — 3,313 3,313	2000 HK$’000 18 1,970
		1,988

Hong Kong profits tax has not been provided (2000: provided at 16%) as the Group did not generate any assessable profits arising in Hong Kong during the year. Taxes on profits of subsidiaries operating overseas during the year have been calculated at the rates of taxes applicable in the respective jurisdictions, based on existing legislation, interpretations and practices.

No deferred tax has been provided (2000: Nil) as the Company and the Group had no significant timing differences at the balance sheet date.

8. NET LOSS FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO SHAREHOLDERS

The net loss from ordinary activities attributable to shareholders for the year dealt with in the financial statements of the Company amounted to HK$3,923,000 (2000: Profit of HK$9,962,000).

9. DIVIDEND

										2001	2000
										HK$’000	HK$’000
Interim	dividend	—	Nil	(2000:	HK0.53	cents)	per	ordinary	share	—	10,000

10. EARNINGS PER SHARE

The calculation of basic earnings per share is based on the net profit from ordinary activities attributable to shareholders for the year of HK$20,540,000 (2000: HK$14,043,000) and the weighted average of 1,900,000,000 (2000: 1,900,000,000) ordinary shares in issue during the year.

Diluted earnings per share for the two years ended 31st March, 2001 have not been calculated as no diluting events existed during these two years.

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

11. FIXED ASSETS

Group

Leasehold land and buildings outside Hong Kong Plant and machinery Furniture, fixtures and office equipment HK$’000 HK$’000 HK$’000 Cost: At 1st April, 2000 30,232 13,523 6,181 Additions 18,000 33 227 Disposals — — (121) At 31st March, 2001 48,232 13,556 6,287 Accumulated depreciation: At 1st April, 2000 1,314 1,587 1,824 Provided during the year 1,184 1,445 662 Disposals — — (31) At 31st March, 2001 2,498 3,032 2,455 Net book value: At 31st March, 2001 45,734 10,524 3,832 At 31st March, 2000 28,918 11,936 4,357	Motor vehicles HK$’000 1,810 477 (447) 1,840 1,196 177 (417) 956 884 614	Total HK$’000 51,746 18,737 (568
		69,915
		5,921 3,468 (448
		8,941
		60,974
		45,825

An analysis of the Group’s cost of land and buildings outside Hong Kong at the balance sheet date is as follows:

Leasehold land and buildings held under: Medium term leases Short term leases	2001 HK$’000 45,448 2,784 48,232	2000 HK$’000 27,448 2,784
		30,232

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

12. INTANGIBLE ASSETS

Group

	Technical
	knowhow	Trademarks	Total
	HK$’000	HK$’000	HK$’000
Cost:
At 1st April, 2000	9,091	—	9,091
Additions	—	2,500	2,500
At 31st March, 2001	9,091	2,500	11,591
Accumulated amortisation:
At 1st April, 2000	—	—	—
Provided during the year	739	125	864
At 31st March, 2001	739	125	864
Net book value:
At 31st March, 2001	8,352	2,375	10,727
At 31st March, 2000	9,091	—	9,091

13. INTERESTS IN SUBSIDIARIES

Unlisted investments, at cost Due from subsidiaries Due to subsidiaries Loan to a subsidiary	Company 2001 2000 HK$’000 HK$’000 52,990 83,222 68,346 34,305 (24,088) (18,259 1,091 — 98,339 99,268	Company 2001 2000 HK$’000 HK$’000 52,990 83,222 68,346 34,305 (24,088) (18,259 1,091 — 98,339 99,268
		99,268

The balances with subsidiaries are unsecured, interest-free and, except for an amount due from a subsidiary of HK$13,929,000 which is repayable on 21st April, 2014, have no fixed terms of repayment.

The loan to a subsidiary is unsecured, bears interest at 12% per annum and has no fixed terms of repayment.

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Particulars of the subsidiaries are as follows:

	Place of		Percentage	Percentage	Percentage
	incorporation/	Nominal value of	of	equity
	registration and	issued share/	attributable to			Principal
Name	operations	registered capital	the Company			activities
			2001	2000
Directly held
Extrawell (BVI) Limited	British Virgin	US$10,000	100%	100%		Investment
	Islands	Ordinary				holding
Jilin Extrawell	People’s Republic	RMB33,000,000	60%		60%	Development,
Changbaishan	of China					manufacture
Pharmaceutical						and
Co., Ltd. (“JECP”)#						distribution of
						pharmaceutical
						products
Indirectly held
Extrawell Enterprises	Hong Kong	HK$20	100%	100%		Investment
Limited		Ordinary				holding and
		HK$1,000,000				provision of
		Non-voting				agency services
		deferred*
South Asia	British Virgin	US$50,000	100%	100%		Marketing and
Pharmaceutical (China)	Islands/	Ordinary				distribution of
Limited	Malaysia					pharmaceutical
						products, and
						medical
						appliances and
						equipment
Changchun Extrawell	People’s Republic	RMB7,980,000	80%		80%	Development,
Pharmaceutical Co.,	of China					manufacture
Ltd. (“CEP”)#						and
						distribution of
						pharmaceutical
						products
GSA Services (L) Bhd	Malaysia	US$1,000	100%	100%		Investment
						holding
Austcow Limited	Malaysia	US$1,000	90%		90%	Investment
						holding and
						trading of
						health care and
						nutritional
						products
Australia Austcow	Australia	AUD10	90%		90%	Trading of
Enterprise Pty. Ltd.		Ordinary				health care and
						nutritional
						products

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

	Place of		Percentage	Percentage
	incorporation/	Nominal value of	of	equity
	registration and	issued share/	attributable to		Principal
Name	operations	registered capital	the Company		activities
			2001	2000
Extrawell Pharmaceutical	Hong Kong	HK$2	100%	100%	Dormant
(HK) Limited		Ordinary
Extrawell Pharmaceutical	Hong Kong	HK$2	100%	100%	Dormant
(China) Limited		Ordinary
Pacific Dragon	British Virgin	US$1,000	100%	100%	Dormant
Enterprises Ltd.	Islands/	Ordinary
	Malaysia

The non-voting deferred shares carry no rights to dividends, no rights to vote at general meetings and no rights to receive any surplus in a return of capital in a winding-up or otherwise.
CEP and JECP are established by the Group and its partners in the PRC both for a period of fifteen years commencing from the date of the issuance of their respective business licences on 8th August, 1992 and 22nd April, 1999, respectively. In accordance with the joint venture agreements, the Group is entitled to share the results of CEP and JECP and, upon termination of their joint venture agreements, to take back the assets contributed by it and is responsible for its share of the debts and liabilities, according to its equity interests therein.

14. DEPOSITS PAID

Last year’s balances represented full payments made for the purchase of office premises and trademarks in the PRC of HK$18,000,000 and HK$2,500,000, respectively. The Group obtained the realty title certificates in respect of the office premises and the registration certificates of the trademarks during the year ended 31st March, 2001. As a result, the respective deposits were transferred to the respective categories of assets.

15. INVENTORIES

Raw materials Work in progress Finished goods	Group 2001 HK$’000 1,504 720 10,402 12,626	2000 HK$’000 1,117 709 17,485
		19,311

At the balance sheet date, no inventories (2000: Nil) were stated at net realisable values.

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

16. ACCOUNTS RECEIVABLE

The ages of the Group’s accounts receivable are analysed as follows:

Outstanding balances with ages: Within 90 days Between 91 to 180 days Between 181 to 365 days Between 1 to 2 years Over 2 years Less: Provision for bad and doubtful debts	Group 2001 HK$’000 57,881 9,310 8,283 3,171 7,129 85,774 (10,980) 74,794	2000 HK$’000 24,722 8,152 5,442 7,712 5,805
		51,833 (6,656
		45,177

17. ACCOUNTS AND BILLS PAYABLE

The ages of the Group’s accounts and bills payable are analysed as follows:

Outstanding balances with ages: Within 90 days Between 91 to 180 days Between 181 to 365 days Between 1 to 2 years Over 2 years	Group 2001 HK$’000 1,641 2,231 — 1 75 3,948	2000 HK$’000 3,410 2,255 617 13 70
		6,365

18. DUE TO MINORITY EQUITY HOLDERS

The amounts due to minority equity holders are unsecured, interest-free and, except for an amount due to a minority equity holder of HK$9,091,000 which is repayable on 21st April, 2014, are repayable on demand.

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

19. BANKING AND OTHER LOAN FACILITIES

At 31st March, 2001, the Group’s banking facilities were supported by the following:

(a) fixed deposits of approximately HK$13.3 million (2000: HK$12.5 million) of a wholly-owned subsidiary of the Company; and
(b) corporate guarantees from the Company and certain subsidiaries of the Company.

Last year’s unsecured other loan, which represented a loan from an independent third party and bore interest at 6.43% per annum, was settled during the year.

20. SHARE CAPITAL

Authorised: 20,000,000,000 ordinary shares of HK$0.01 each Issued and fully paid: 1,900,000,000 ordinary shares of HK$0.01 each	Company 2001 2000 HK$’000 HK$’000 200,000 200,000 19,000 19,000	Company 2001 2000 HK$’000 HK$’000 200,000 200,000 19,000 19,000
		19,000

A summary of the movements in the issued share capital of the Company during the year ended 31st March, 2000 is as follows:

Number of shares issued (’000) Balance at 1st April, 1999 190,000 Subdivision of 1 ordinary share of HK$0.10 each into 10 ordinary shares of HK$0.01 each 1,710,000 Balance at 31st March, 2000, 1st April, 2000 and 31st March, 2001 1,900,000	Par value HK$’000 19,000 —
	19,000

Share options

Pursuant to the Company’s share option scheme adopted on 16th January, 1999, the board of directors of the Company are authorised, on or before 9th March, 2009, at their discretion, to invite any employee, including any executive director of the Company or any of its subsidiaries, to take up options to subscribe for shares of the Company. The scheme subscription price will be the higher of 80% of the average of the closing price of the shares on the Stock Exchange for the five trading days immediately preceding the date of the offer of the option and the nominal value of the shares. The maximum number of shares in respect of which options may be granted under the share option scheme may not exceed, in nominal amount, 10% of the issued share capital of the Company from time to time which has been duly allotted and issued.

Up to the date of approval of the financial statements, no share options have been granted under the scheme.

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

21. RESERVES

Group

At 1st April, 1999 Elimination of goodwill Transfer to capital reserve Net profit for the year Dividend At 31st March, 2000 and 1st April, 2000 Transfer to capital reserve Net profit for the year At 31st March, 2001	Share premium HK$’000 19,321 — — — — 19,321 — — 19,321	Capital reserve Contributed surplus HK$’000 HK$’000 107 4,839 — — 494 — — — — — 601 4,839 591 — — — 1,192 4,839	Retained profits HK$’000 57,780 (6,500) (494) 14,043 (10,000) 54,829 (591) 20,540 74,778	Total HK$’000 82,047 (6,500) — 14,043 (10,000)
				79,590 — 20,540
				100,130

In accordance with the relevant PRC regulations, CEP and JECP may transfer part of their profit after tax, subject to the discretion of their boards of directors, to the capital reserve. Subject to certain restrictions set out in the relevant PRC regulations and the articles of association of CEP and JECP, the capital reserve may be used to offset losses or for capitalisation as paid-up capital.

The contributed surplus of the Group represents the difference between the nominal value of the share capital of the subsidiaries acquired pursuant to the Group reorganisation in 1999 over the nominal value of the share capital of the Company issued in exchange therefor.

Company

At 1st April, 1999 Net profit for the year Dividend At 31st March, 2000 and 1st April, 2000 Net loss for the year At 31st March, 2001	Share premium Contributed surplus Retained profits/ (accumulated losses) HK$’000 HK$’000 HK$’000 19,321 64,636 1,010 — — 9,962 — — (10,000) 19,321 64,636 972 — — (3,923) 19,321 64,636 (2,951)	Total HK$’000 84,967 9,962 (10,000)
		84,929 (3,923)
		81,006

The contributed surplus of the Company represents the excess of the then combined net asset value of the subsidiaries acquired pursuant to the Group reorganisation in 1999 over the nominal value of the Company’s shares issued in exchange therefor. Under the Companies Act 1981 of Bermuda, the Company may make distributions to its members out of the contributed surplus under certain circumstances.

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

22. NOTES TO CONSOLIDATED CASH FLOW STATEMENT

(a) Reconciliation of profit from operating activities to net cash inflow from operating activities

Profit from operating activities Interest income Depreciation Amortisation of intangible assets Loss/(gain) on disposal of fixed assets Provision for bad and doubtful debts Increase in accounts receivable Decrease in inventories Decrease in prepayments, deposits and other receivables Increase in trust receipt loans Increase/(decrease) in accounts and bills payable, and accrued liabilities and other payables Net cash inflow from operating activities	2001 HK$’000 27,208 (793) 3,468 864 (5) 4,324 (33,941) 6,685 7,159 4,868 995 20,832	2000 HK$’000 17,707 (1,052) 2,320 — 2 987 (2,834) 7,152 4,666 — (3,889)
		25,059

(b) Analysis of changes in financing during the years

			Minority interest
	Share capital		and amounts due
	and share		to minority
	premium account	Other loans	equity holders
	HK$’000	HK$’000	HK$’000
Balance at 1st April, 1999	38,321	—	3,043
Net cash inflow from financing	—	6,363	—
Share of profit for the year	—	—	82
Capital contribution from a minority equity
holder	—	—	12,000
Dividend distributed to a minority equity holder	—	—	(1,257)
Balance at 31st March, 2000 and 1st April, 2000	38,321	6,363	13,868
Net cash inflow/(outflow) from financing	—	(6,363)	898
Share of profit for the year	—	—	1,589
Increase in amount due to a minority equity
holder	—	—	1,504
Dividend distributed to a minority equity holder	—	—	(1,504)
Balance at 31st March, 2001	38,321	—	16,355

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(c) Acquisition of a subsidiary

	2001	2000
	HK$’000	HK$’000
Net assets acquired:
Fixed assets	—	36
Cash and bank balances	—	90
Other receivables	—	24
Accrued liabilities	—	(150)
	—	—
Goodwill on acquisition	—	6,500
Consideration	—	6,500
Satisfied by:
Cash	—	6,500

An analysis of the net outflow of cash and cash equivalents in respect of the acquisition of the subsidiary is as follows:

		2001	2000
		HK$’000	HK$’000
Cash	consideration paid	—	6,500
Cash	and bank balances acquired	—	(90)
		—	6,410

The subsidiary acquired during the year ended 31st March, 2000 had no material effect on the cash flows of the

Group.

(d) Major non-cash transactions

(i) During the year, a dividend of HK$1,504,000 (2000: HK$1,257,000) distributed by CEP to its minority equity holder was settled through the current account with the minority equity holder.
(ii) During the year ended 31st March, 2000, the Company entered into a joint venture agreement (“JV Agreement”) with a third party to establish JECP. Pursuant to the JV Agreement, the third party satisfied its contribution of RMB23,200,000 (HK$21,091,000 equivalent) by injecting fixed assets and technical knowhow of HK$12,000,000 and HK$9,091,000, respectively.

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

23. CONTINGENT LIABILITIES

At 31st March, 2001, the Company had provided guarantees of banking facilities utilised by certain subsidiaries of approximately HK$22,029,000 (2000: HK$13,048,000).

At 31st March, 2001, the Group had no significant contingent liabilities (2000: Nil).

24. COMMITMENTS

(i) At 31st March, 2001, the Group had the following commitments in respect of the construction of a new manufacturing plant in the PRC:

Contracted for Authorised but not contracted for	2001 HK$’000 3,000 29,455 32,455	2000 HK$’000 — —
		—

(ii) At 31st March, 2001, the Group had annual commitments payable in the following year under non-cancellable operating leases of land and buildings expiring:

Within one year In the second to fifth years, inclusive	2001 HK$’000 896 18 914	2000 HK$’000 113 790
		903

The Company had no significant commitments as at 31st March, 2001 (2000: Nil).

25. APPROVAL OF THE FINANCIAL STATEMENTS

The financial statements were approved by the board of directors on 29th June, 2001.

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

4. STATEMENT OF PROFORMA UNAUDITED ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS OF THE ENLARGED GROUP

The following statement of the proforma unaudited adjusted consolidated net tangible assets of the Enlarged Group is prepared based on the audited consolidated net assets of the Group as at 31st March, 2001, taking into account the effects of certain other subsequent events of the Group since 31st March, 2001 and the Completion, as described below:

Audited consolidated net assets of the Group as at 31st March, 2001 Less: Intangible assets of the Group as at 31st March, 2001 Audited consolidated net tangible assets of the Group as at 31st March, 2001 Add: Unaudited net profit attributable to Shareholders for the six months ended 30th September, 2001 Net proceeds from placing 120,000,000 new Shares in December 2001 Acquisition of Right & Rise Limited (Note) Less: Intangible assets of Right & Rise Limited (Note) Add: Net proceeds from subscription of 120,000,000 new Shares announced on 24th May, 2002 Unaudited adjusted consolidated net tangible assets of the Group before the Acquisition Attributable tangible assets to the Enlarged Group Less: Consideration of the Acquisition Proforma unaudited adjusted consolidated net tangible assets of the Enlarged Group upon completion of the Acquisition Proforma unaudited adjusted consolidated net tangible assets per Share before the Acquisition based on 2,290,000,000 Shares in issue Proforma unaudited adjusted consolidated net tangible assets per Share after the Acquisition based on 2,290,000,000 Shares in issue	HK$’000 119,130 (10,727	) ) )
	108,403 16,272 29,800 37,500 (95,000 52,000
	148,975 36,796 (55,000
	130,771
	HK6.5 cents
	HK5.7 cents

Note: Details of the acquisition are set out in the circular to the Shareholders dated 11th January, 2002.

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Consolidated assets and liabilities

The following is a summary of the proforma unaudited adjusted consolidated assets and liabilities of the Enlarged Group, based on the unaudited consolidated balance sheet of the Group as at 30th September, 2001 and the audited consolidated balance sheet of Gene Generation Group as at 31st December, 2001, and taking into account the effects of certain other subsequent events of the Group since 30th September, 2001.

						Audited
	Unaudited		Acquisition			consolidated		Proforma
	consolidated		of Right &			balance		unaudited
	balance sheet	Placement	Rise Limited			sheet of Gene		adjusted
	of the Group	of new	as announced	Placement		Generation		consolidated
	as at	Shares on	on	of existing	Acquisition of	Group as at		balance
	30th	28th	13th	Shares on	Gene	31st		sheet of the
	September,	December,	December,	6th June,	Generation	December,		Enlarged
	2001	2001	2001	2002	Group	2001	Adjustment	Group
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
Non-current assets	88,378		95,000		55,000	25,392	48,908	312,678
Current assets	142,325	29,800	(30,000)	52,000		85,345		279,470
Current liabilities	(70,621)					(2,397)		(73,018)
	160,082					108,340		519,130
Capital and reserves	135,402	29,800	37,500	52,000		390	(390)	254,702
Non-current
liabilities	9,091		27,500		55,000	18,868		110,459
Minority interests	15,589					89,082	49,298	153,969
	160,082					108,340		519,130

Note: As no profit and loss account has been prepared and presented by Right & Rise Limited as it has been dormant since its incorporation, save for the acquisition of certain gene inventions rights on 6th November, 2001 and all of the expenses of Right & Rise Limited incurred for the period from 18th July, 2001 (date of incorporation) to 30th November, 2001 were borne by its shareholders, no proforma statement on profit and loss has been prepared.

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

5. INDEBTEDNESS STATEMENT

Borrowings

At the close of business on 30th April, 2002, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, the Group had outstanding borrowings of a total of approximately HK$70.7 million comprising secured trust receipt loans of approximately HK$12.2 million; secured bank loans of approximately HK$28.3 million; secured bank overdrafts of approximately HK$2.7 million; and an unsecured promissory note payable to a related company of approximately HK$27.5 million.

Security

At the close of business on 30th April, 2002, the Group’s banking facilities were supported by pledge of bank deposits of approximately HK$26.5 million; corporate guarantees from the Company and certain subsidiaries of the Company; and legal charges over certain of the leasehold land and buildings, and plant and machinery of a subsidiary of the Company.

Disclaimer

Save as aforesaid or as otherwise mentioned herein, and apart from intra-group liabilities, the Group did not, at the close of business on 30th April, 2002, have any outstanding loan capital issued and outstanding or agreed to be issued, bank overdrafts, charges or debentures, mortgages, loans, or other similar indebtedness or any finance lease commitments, hire purchase commitments, liabilities under acceptances (other than normal trade bills), acceptance credits or any guarantees or other material contingent liabilities.

The Directors have confirmed that there have been no material changes in the indebtedness and contingent liabilities of the Group since 30th April, 2002.

Foreign currency transactions

Foreign currency amounts have, for the purpose of this indebtedness statement, been translated into Hong Kong dollars at the rate of exchange prevailing at the close of business on 30th April, 2002.

6. WORKING CAPITAL

The Directors are of the opinion that, taking into consideration the banking facilities available and internally generated funds, the Group will have sufficient working capital for its present requirements after the completion of the Agreement.

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

7. MATERIAL CHANGES

According to the interim report of the Company for the six months ended 30th September, 2001, the turnover of the Company had increased by 21.8% over the corresponding period in 2000. The growth in turnover was due to the fact that the Group had overcome the temporary distribution disruption caused by licence renewal delays and production disruption caused by test running of manufacturing facilities experienced in the six months ended 30th September, 2000. Net profit attributable to Shareholders had increased by 176.0% over the corresponding period in 2000. The increase in net profit attributable to Shareholders was due to growth in turnover and improved gross profit margin resulting from the Group’s continuous product mix adjustment and operation efficiency review by directing distribution and marketing resources to high profit margin products for both distribution and manufacturing segments.

Save as aforesaid and disclosed in the statement of proforma unaudited adjusted consolidated net tangible assets of the Enlarged Group as set out in this circular, the Directors are not aware of any material changes in the financial or trading position or prospects of the Group since 31st March, 2001, the date to which the latest published audited consolidated financial statements of the Company were made up.

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

8. ACCOUNTANTS’ REPORT ON RIGHT & RISE LIMITED

Pursuant to a sale and purchase agreement dated 9th December, 2001 (as amended by a supplemental agreement dated 13th December, 2001) the Group acquired Right & Rise Limited and, accordingly, we have set out below the accountants’ report of Right & Rise Limited as extracted from the circular of the Company dated 11th January, 2002:

15th Floor Hutchison House 10 Harcourt Road Central Hong Kong

11th January, 2002

The Directors

Extrawell Pharmaceutical Holdings Limited

Dear Sirs,

We set out below our report on the financial information regarding Right & Rise Limited (“R&R”) for inclusion in the circular of Extrawell Pharmaceutical Holdings Limited (the “Company”) dated 11th January, 2002 (the “Circular”) in connection with the proposed acquisition of R&R by Best-Bio Developments Limited (“Best-Bio”), a wholly-owned subsidiary of the Company.

R&R was incorporated with limited liability in the British Virgin Islands on 18th July, 2001. R&R has not carried on any business since the date of its incorporation, save for the acquisition on 6th November, 2001 of certain gene inventions rights as described more fully in the section headed “Information on Right & Rise” in the “Letter from the Board” contained in the Circular.

As at the date of this report, no audited financial statements have been prepared for R&R since its incorporation. We have, however, for the purpose of this report, performed an independent audit of the management accounts of R&R for the period from 18th July, 2001 (date of incorporation) to 30th November, 2001 (the “Period”), in accordance with Statements of Auditing Standards and the Auditing Guideline “Prospectuses and the reporting accountant” issued by the Hong Kong Society of Accountants.

As R&R has been dormant since its incorporation save for the aforementioned acquisition of certain gene inventions rights, no profit and loss account of R&R has been prepared and presented for the Period. All of the expenses of R&R incurred during the Period, comprising mainly incorporation expenses, were not significant and were borne by its shareholders.

The summary of the balance sheet of R&R as at 30th November, 2001 set out in this report has been prepared from the audited management accounts of R&R.

In our opinion, the balance sheet of R&R together with the notes thereon give, for the purpose of this report, a true and fair view of the state of affairs of R&R as at 30th November, 2001.

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

1. PRINCIPAL ACCOUNTING POLICIES

The principal accounting policies adopted by R&R in arriving at the financial information set out in this report conform with accounting principles generally accepted in Hong Kong and are as follows. The financial information set out in this report has been prepared under the historical cost convention.

(a) Intangible assets

Intangible assets comprise technical knowhow which is stated at cost less accumulated amortisation. The cost of acquiring the rights to the technical knowhow for the production of new pharmaceutical products is amortised on a straight-line basis over the estimated economic useful lives of the pharmaceutical products of a period up to a maximum of ten years commencing in the year when the new pharmaceutical products are put into commercial production.

At each balance sheet date an assessment is made as to whether there is any indication of impairment of the 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 is estimated. An impairment loss is recognised whenever the carrying amount of an asset exceeds its recoverable amount.

A previously recognised impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount, however not to an amount higher than the carrying amount that would have been determined (net of amortisation) had no impairment loss been recognised in prior years.

(b) Deferred tax

(c) Foreign currency transactions

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(d) Related parties

2. RESULTS

(a) No profit and loss account has been prepared and presented by R&R as it has been dormant since its incorporation, save for the acquisition of certain gene inventions rights on 6th November, 2001. All of the expenses of R&R incurred for the Period were borne by its shareholders.

No director received any fees or other emoluments in respect of services rendered to R&R during the Period.

(b) No provision for Hong Kong profits tax has been made as R&R had no assessable profits for the Period.

3. BALANCE SHEET

The following is the balance sheet of R&R as at 30th November, 2001:

	Notes	HK$’000
NON-CURRENT ASSETS
Intangible assets	(a)	95,000
CAPITAL AND RESERVES
Issued capital	(b)	390
Share premium		94,610
		95,000

Except for the issue by R&R of its share capital, which was taken up by Biowindow Gene Development (Hong Kong) Limited (“Biowindow Gene”) and Fudan Biotech (Hong Kong) Limited (“Fudan Biotech”) at a total consideration of HK$95,000,000 as settlement for the acquisition of certain intangible assets as detailed above, R&R had no other transactions during the Period and, accordingly, a statement of movements in equity and a cashflow statement have not been presented.

Extrawell Pharmaceutical Holdings Limited

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Notes:

(a) Intangible assets

Technical knowhow (b) Share capital Authorised, issued and fully paid: 50,000 ordinary shares of US$1 each	As at 30th November, 2001 Cost Accumulated amortisation Net book value HK$’000 HK$’000 HK$’000 95,000 — 95,000 HK$’000 390	As at 30th November, 2001 Cost Accumulated amortisation Net book value HK$’000 HK$’000 HK$’000 95,000 — 95,000 HK$’000 390
		HK$’000 390

The Company was incorporated with an authorised share capital of US$50,000 divided into 50,000 ordinary shares of US$1 each. On 6th November, 2001, all of the ordinary shares were taken up by Biowindow Gene and Fudan Biotech at a total consideration of HK$95,000,000 as settlement for the acquisition of certain intangible assets owned by Shanghai Biowindow Gene Development Co., Ltd. (“Shanghai Biowindow”), the holding company of Biowindow Gene and Fudan Biotech. Shanghai Biowindow is a related party of R&R as Dr. Mao Yu Min, the director of Shanghai Biowindow, is also the director of R&R. The consideration was determined based on terms set out in the gene inventions contract dated 6th November, 2001 entered into between relevant parties.

(c) Commitments and contingent liabilities

As at 30th November, 2001, R&R did not have any material commitments or contingent liabilities.

(d) Distributable reserves

As at 30th November, 2001, the share premium of R&R of HK$94,610,000 may be distributed under certain circumstances.

4. SUBSEQUENT EVENTS

On 9th December, 2001, a conditional sale and purchase agreement (the “Agreement”) was entered into between Biowindow Gene, Fudan Biotech and Best-Bio (as amended by a supplemental agreement dated 13th December, 2001 (the “Supplemental Agreement”)), for the acquisition of the entire issued share capital of R&R. Immediately prior to the Agreement, R&R was owned as to 80% by Biowindow Gene and as to 20% by Fudan Biotech. Biowindow Gene and Fudan Biotech are owned by Dr. Mao Yu Min and Dr. Xie Yi, who are also directors and beneficial shareholders of the Company. Upon completion of the Agreement and the Supplemental Agreement, R&R will become a wholly-owned subsidiary of Best-Bio, which is a wholly-owned subsidiary of the Company.

5. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by R&R in respect of any period subsequent to 30th November, 2001.

Yours faithfully, Ernst & Young Certified Public Accountants Hong Kong

Extrawell Pharmaceutical Holdings Limited

ACCOUNTANTS’ REPORT ON GENE GENERATION GROUP

APPENDIX II

15th Floor Hutchison House 10 Harcourt Road Central Hong Kong

21st June, 2002

The Directors Extrawell Pharmaceutical Holdings Limited

Dear Sirs,

We set out below our report on the financial information regarding Gene Generation Limited (“GGL”) and its subsidiaries (hereinafter collectively referred to as the “Gene Group”) for inclusion in a circular of Extrawell Pharmaceutical Holdings Limited (the “Company”) dated 21st June, 2002 (the “Circular”) in connection with the proposed acquisition of the Gene Group by Best-Bio Developments Limited (“Best-Bio”), a wholly-owned subsidiary of the Company.

GGL was incorporated with limited liability in the British Virgin Islands on 25th May, 2001. GGL has not carried on any business activities since the date of its incorporation, save for the acquisition on 30th December, 2001 of the entire registered capital of Lucky Element Biotech (Su Zhou) Limited (“Lucky Element”), a company registered in the People’s Republic of China (the “PRC”), which is at the date of this report the intermediate holding company of the other companies (together the “Acquired Group”) set out below.

As at the date of this report, GGL has interests in the following subsidiaries.

			Percentage	Percentage
			of	equity
	Place and date	Paid-up	attributable		Principal
Company	of registration	capital	to	GGL	activities
			Direct	Indirect
Lucky Element Biotech	PRC	HK$980,000	100	—	Investment
(Su Zhou) Limited	19th November,				holding
	2001
Bio-chip Co. Ltd.,	PRC	RMB500,000	—	90	Investment
Shanghai	5th June, 2000				holding
(“Bio-chip”)
Shanghai Bioway	PRC	RMB500,000	—	99	Investment
Limited (“Shanghai	13th June, 2000				holding
Bioway”)

Extrawell Pharmaceutical Holdings Limited

ACCOUNTANTS’ REPORT ON GENE GENERATION GROUP

APPENDIX II

			Percentage	Percentage
			of	equity
	Place and date	Paid-up	attributable		Principal
Company	of registration	capital	to	GGL	activities
			Direct	Indirect
Shanghai Biostar	PRC	RMB160,000,000	—	49.5*	Investment
Genechip, Inc.	26th September,				holding,
(“Shanghai Biostar”)	2000				research on
					genome related
					technology and
					development and
					manufacturing of
					genechips
Shanghai Biostar	PRC	RMB10,000,000	—	49.5*	Research on
Genechip Research	19th April, 2001				genome related
Institute (“Biostar					technology
Research”)

Shanghai Biostar and Biostar Research are subsidiaries of Shanghai Bioway and, accordingly, are accounted for as subsidiaries by virtue of GGL’s control over Shanghai Bioway.

As at the date of this report, Lucky Element, Bio-chip and Shanghai Bioway which were registered in the PRC have prepared audited financial statements using generally accepted accounting principles in the PRC for tax purposes. Save for the above, no audited financial statements have been prepared for the companies comprising the Gene Group. For the purpose of this report, we have performed our independent audit of the management accounts of the companies comprising the Gene Group, and its associate and jointly-controlled entity for the period from 25th May, 2001, being the date of incorporation of GGL, to 31st December, 2001 (the “Period”) or from their respective dates of registration or acquisition where this is a shorter period, in accordance with Hong Kong Statements of Auditing Standards and the Auditing Guideline “Prospectuses and the reporting accountant” issued by the Hong Kong Society of Accountants.

No consolidated profit and loss account of the Gene Group has been prepared and presented for the Period as GGL has been dormant since its incorporation, save for the aforementioned acquisition of Lucky Element and its subsidiaries, associate and jointly-controlled entity on 30th December, 2001. All the expenses of GGL incurred during the Period, comprising mainly incorporation expenses, and the operating results of the Acquired Group since 30th December, 2001 and up to 31st December, 2001, were not significant and were borne by Biowindow Gene Development (Hong Kong) Limited (“Biowindow Gene”), the beneficial shareholder of GGL during the Period.

The summary of the consolidated balance sheet of the Gene Group as at 31st December, 2001 set out in this report has been prepared from the management accounts of the Gene Group.

In our opinion, the consolidated balance sheet of the Gene Group together with the notes thereon give, for the purpose of this report, a true and fair view of the state of affairs of the Gene Group as at 31st December, 2001.

Extrawell Pharmaceutical Holdings Limited

ACCOUNTANTS’ REPORT ON GENE GENERATION GROUP

APPENDIX II

1. PRINCIPAL ACCOUNTING POLICIES

The principal accounting policies adopted by the Gene Group in arriving at the financial information set out in this report conform with accounting principles generally accepted in Hong Kong and are as follows. The financial information set out in this report has been prepared under the historical cost convention.

(a) Basis of consolidation

The consolidated balance sheet includes the management accounts of GGL and its subsidiaries as at the balance sheet date. All significant intercompany balances within the Gene Group are eliminated on consolidation.

(b) Subsidiaries

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

(c) Joint venture companies

A joint venture company is a company set up by contractual arrangement, whereby the Gene Group and other parties undertake an economic activity. The joint venture company operates as a separate entity in which the Gene Group and the other parties have an interest.

The joint venture agreement between the venturers stipulates the capital contributions of the joint venture parties, the duration of the joint venture and the basis on which the assets are to be realised upon its dissolution. The profits and losses from the joint venture company’s operations and any distributions of surplus assets are shared by the venturers, either in proportion to their respective capital contributions, or in accordance with the terms of the joint venture agreement.

A joint venture company is treated as:

(i) a subsidiary, if GGL has unilateral control over the joint venture company;
(ii) a jointly-controlled entity, if GGL does not have unilateral control, but has joint control over the joint venture company;
(iii) an associate, if GGL does not have unilateral or joint control, but holds generally not less than 20% of the joint venture company’s registered capital and is in a position to exercise significant influence over the joint venture company; or
(iv) a long term investment, if GGL holds less than 20% of the joint venture company’s registered capital and has neither joint control of, nor is in a position to exercise significant influence over, the joint venture company.

Extrawell Pharmaceutical Holdings Limited

ACCOUNTANTS’ REPORT ON GENE GENERATION GROUP

APPENDIX II

(d) Jointly-controlled entity

A jointly-controlled entity is a joint venture company which is subject to joint control, resulting in none of the participating parties having unilateral control over the economic activity of the jointly-controlled entity.

The Gene Group’s interest in the jointly-controlled entity is stated in the consolidated balance sheet at the Gene Group’s share of net assets under the equity method of accounting, less any impairment losses.

(e) Associate

An associate is a company, not being a subsidiary or a jointly-controlled entity, in which the Gene Group has a 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 Gene Group’s interest in the associate is stated in the consolidated balance sheet at the Gene Group’s share of net assets under the equity method of accounting, less any impairment losses.

(f) Goodwill

Goodwill arising on the acquisition of subsidiaries, associate and jointly-controlled entity represents the excess of the cost of the acquisition over the Gene 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 a period up to a maximum of twenty years. In the case of the associate and jointly-controlled entity, any unamortised goodwill is included in the carrying amount thereof, rather than as a separately identified asset on the consolidated balance sheet.

On disposal of subsidiaries, the associate or jointly-controlled entity, 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.

The carrying amount of goodwill 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.

(g) Negative goodwill

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

Extrawell Pharmaceutical Holdings Limited

ACCOUNTANTS’ REPORT ON GENE GENERATION GROUP

APPENDIX II

To the extent that negative goodwill relates to 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 of a period up to a maximum of twenty years. The amount of any negative goodwill in excess of the fair values of the acquired non-monetary assets is recognised as income immediately.

In the case of the associate and jointly-controlled entity, any negative goodwill not yet recognised in the consolidated profit and loss account is included in the carrying amount thereof, rather than as a separately identified item on the consolidated balance sheet.

On disposal of subsidiaries, the associate or jointly-controlled entity, 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 profit and loss account and any relevant reserves as appropriate.

(h) Fixed assets and depreciation

Fixed assets 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 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, less any estimated residual value, over its estimated useful life. The principal annual rates used for this purpose are as follows:

Leasehold improvements 20% or over the lease terms, whichever is shorter Furniture, fixtures and equipment 10% to 20% Motor vehicles 12.5%

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.

Extrawell Pharmaceutical Holdings Limited

ACCOUNTANTS’ REPORT ON GENE GENERATION GROUP

APPENDIX II

(i) Intangible assets

Intangible assets, which comprise rights to technical knowhow on genome related technology for the development and manufacturing of pharmaceutical products, are stated at cost less accumulated amortisation and any impairment losses.

The cost of acquiring the rights to technical knowhow for the development and manufacturing of genome related products is amortised on the straight-line basis over the estimated economic lives of the knowhow of a period up to a maximum of twenty years.

(j) Inventories

(k) 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 is estimated. An asset’s recoverable amount is calculated as 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.

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.

(l) Related parties

(m) Deferred tax

Extrawell Pharmaceutical Holdings Limited

ACCOUNTANTS’ REPORT ON GENE GENERATION GROUP

APPENDIX II

(n) Foreign currencies

On consolidation, the financial statements of overseas subsidiaries, associate and jointlycontrolled entity are translated into Hong Kong dollars at the applicable rates of exchange ruling at the balance sheet date. The resulting translation differences are included in the exchange fluctuation reserve.

(o) Retirement benefits scheme

According to the relevant PRC regulations, certain subsidiaries of GGL are required to participate in the employee retirement scheme administered by the relevant local government bureau in the PRC, and to make contributions for its employees who are eligible to participate in the scheme. The contributions to be borne by the Gene Group are calculated at a certain percentage of the salaries and wages for those eligible employees.

2. RESULTS

(a) No consolidated profit and loss account of the Gene Group has been prepared and presented for the Period as GGL has not carried out any business since its incorporation, save for the aforementioned acquisition of Lucky Element and its subsidiaries, associate and jointlycontrolled entity on 30th December, 2001. All the expenses of GGL incurred during the Period, comprising mainly incorporation expenses, and the operating results of the Acquired Group since 30th December, 2001 and up to 31st December, 2001, were not significant and were borne by Biowindow Gene.

No director received any fees or other emoluments in respect of their services rendered to the Gene Group during the Period. The Audit fees of the Gene Group during the Period were borne by Biowindow Gene.

(b) No provision for Hong Kong profits tax has been made as the Gene Group did not generate any assessable profits arising in Hong Kong for the Period.

No PRC corporate income tax has been provided as the Gene Group had no assessable profits arising in the PRC for the Period.

Extrawell Pharmaceutical Holdings Limited

ACCOUNTANTS’ REPORT ON GENE GENERATION GROUP

APPENDIX II

3. CONSOLIDATED BALANCE SHEET

The following is the consolidated balance sheet of the Gene Group as at 31st December, 2001:

Notes NON-CURRENT ASSETS Fixed assets (a) Intangible assets (b) Goodwill (c) Negative goodwill (c) Interest in an associate (d) Interest in a jointly-controlled entity (e) Due from a related company (h) CURRENT ASSETS Inventories (f) Accounts receivable (g) Prepayments, deposits and other receivables Due from a related company (h) Cash and bank balances CURRENT LIABILITIES Accounts payable (i) Accrued liabilities and other payables NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITY Due to a minority equity holder of a subsidiary (j) MINORITY INTERESTS CAPITAL Issued capital (k)	HK$’000 4,208 86,163 872 (110,034 11,321 13,994 18,868	)
	25,392
	4,687 10,055 659 7,963 61,981
	85,345
	270 2,127
	2,397
	82,948
	108,340 18,868
	89,472 89,082
	390
	390

Extrawell Pharmaceutical Holdings Limited

ACCOUNTANTS’ REPORT ON GENE GENERATION GROUP

APPENDIX II

Except for the issue of the above share capital and cash inflow from acquisition of the Acquired Group on 30th December, 2001 of HK$61,981,000, there were no other movements in equity and cash flows of the Gene Group during the Period and, accordingly, a consolidated statement of movements in equity and cash flows have not been presented. The proceeds from issuance of the above share capital of HK$390,000 and consideration for acquisition of the Acquired Group of HK$1,860,000 were included in the above amount due from a related company and accrued liabilities and other payables, respectively, at the balance sheet date.

Notes:

(a) Fixed assets

Leasehold improvements Furniture, fixtures and equipment Motor vehicles (b) Intangible assets Technical knowhow (c) Goodwill and negative goodwill Goodwill Negative goodwill (d) Interest in an associate Share of net assets	Cost Accumulated depreciation Net book value HK$’000 HK$’000 HK$’000 879 — 879 2,146 — 2,146 1,183 — 1,183 4,208 — 4,208 Cost Accumulated amortisation Net book value HK$’000 HK$’000 HK$’000 86,163 — 86,163 Cost Accumulated amortisation/ (recognised as income) Net book value HK$’000 HK$’000 HK$’000 872 — 872 (110,034) — (110,034) HK$’000 11,321	Cost Accumulated depreciation Net book value HK$’000 HK$’000 HK$’000 879 — 879 2,146 — 2,146 1,183 — 1,183 4,208 — 4,208 Cost Accumulated amortisation Net book value HK$’000 HK$’000 HK$’000 86,163 — 86,163 Cost Accumulated amortisation/ (recognised as income) Net book value HK$’000 HK$’000 HK$’000 872 — 872 (110,034) — (110,034) HK$’000 11,321
		HK$’000 11,321

Extrawell Pharmaceutical Holdings Limited

ACCOUNTANTS’ REPORT ON GENE GENERATION GROUP

APPENDIX II

Particulars of the associate at the balance sheet date are as follows:

				Percentage
				of equity
		Place and		attributable
	Business	date of	Paid-up	to the Gene
Name	structure	registration	capital	Group	Principal activities
Shanghai Biochip Co.,	Corporate	PRC	RMB	9.9	Research on genome
Ltd. (“Shanghai		31st July,	60,000,000		related technology,
Biochip”)		2001			and development and
					manufacturing of
					genechips

Shanghai Biochip is an associate of Shanghai Biostar and accordingly, is accounted for as an associate by virtue of GGL’s control over Shanghai Biostar.

(e) Interest in a jointly-controlled entity

				HK$’000
Share	of	net	assets	13,994

Particulars of the jointly-controlled entity at the balance sheet date are as follows:

				Percentage
				of equity
		Place and		attributable
	Business	date of	Paid-up	to the Gene
Name	structure	registration	capital	Group	Principal activities
Bioword Genechips,	Corporate	PRC	RMB	24.8	Research on genome
Inc. (“Bioword”)		13th June,	40,000,000		related technology,
		2000			and development and
					manufacturing of
					genechips

Bioword is a jointly-controlled entity of Shanghai Biostar and, accordingly, is accounted for as a jointly-controlled entity by virtue of GGL’s control over Shanghai Biostar.

Extrawell Pharmaceutical Holdings Limited

ACCOUNTANTS’ REPORT ON GENE GENERATION GROUP

APPENDIX II

(f) Inventories

Raw materials Work in progress Finished goods	HK$’000 514 3,150 1,023
	4,687

At 31st December, 2001, no inventories were stated at net realisable value.

(g) Accounts receivable

The Gene Group normally grants credit terms ranging from 60 to 120 days to customers. Full provision is made for doubtful debts.

The ages of the Gene Group’s accounts receivable at the balance sheet date are analysed as follows:

Within 90 days Between 91 days to 180 days	HK$’000 10,003 52
	10,055

(h) Due from related companies

Particulars of the amounts due from related companies disclosed pursuant to Section 161B of the Hong Kong Companies Ordinance are as follows:

		Maximum
		amount outstanding
	25th May, 2001	during the Period 31st December, 2001
	HK$’000	HK$’000	HK$’000
Bioraise High-Tech Investment Ltd.,
Shanghai (“Bioraise”)	—	18,868	18,868
Biowindow Gene	—	7,963	7,963

Dr. Mao Yu Min, the director of GGL, has beneficial interest in Bioraise and Biowindow Gene. The amount due from Bioraise was unsecured, interest free and had no fixed terms of repayment. Upon completion of the proposed acquisition of the Gene Group by Best-Bio, the amount due from Bioraise will bear interest at 2% per annum for the period up to 30th June, 2003 and 5% per annum thereafter if the amount due from Bioraise is not settled on 30th June, 2003. Further, the amount due from Bioraise of HK$18,868,000 is guaranteed by Biowindow Gene pursuant to a loan agreement entered into amongst Bioraise, Biowindow Gene and Shanghai Biostar dated 13th June, 2002. The amount due from Biowindow Gene is unsecured, interest-free and was settled in May 2002.

Extrawell Pharmaceutical Holdings Limited

ACCOUNTANTS’ REPORT ON GENE GENERATION GROUP

APPENDIX II

(i) Accounts payable

The ages of the Gene Group’s accounts payable at the balance sheet date are analysed as follows:

Within 90 days Between 91 days to 180 days	HK$’000 257 13
	270

(j) Due to a minority equity holder of a subsidiary

The amount due to a minority equity holder of a subsidiary is unsecured, interest-free and repayable upon the end of the operating period of the subsidiary, which is 25th September, 2030.

(k) Share capital

											HK$’000
Authorised,	issued	and	fully	paid:	50,000	ordinary	shares	of	US$1	each	390

The Company was incorporated with an authorised share capital of US$50,000 divided into 50,000 ordinary shares of US$1 each. On 16th August, 2001, all the ordinary shares were taken up by Biowindow Gene at par for a total consideration of HK$390,000.

(l) Commitments and contingent liabilities

As at 31st December, 2001, the Gene Group did not have any material commitments or contingent liabilities.

4. SEGMENT INFORMATION

All the assets and liabilities of the Gene Group are located in the PRC and its operations are considered by the directors to belong to one business segment.

Extrawell Pharmaceutical Holdings Limited

ACCOUNTANTS’ REPORT ON GENE GENERATION GROUP

APPENDIX II

5. SUBSEQUENT EVENT

On 15th May, 2002, a conditional sale and purchase agreement (the “Agreement”) was entered into between Biowindow Gene and Best-Bio, for the acquisition of 55% of the issued share capital of GGL by Best-Bio. Immediately prior to the Agreement, GGL was a wholly-owned subsidiary of Biowindow Gene. Biowindow Gene is beneficially owned by Dr. Mao Yu Min and Dr. Xie Yi, who are also directors and beneficial shareholders of the Company. Upon completion of the Agreement, GGL will become a subsidiary of Best-Bio, which is a wholly-owned subsidiary of the Company.

6. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by the Gene Group in respect of any period subsequent to 31st December, 2001.

Yours faithfully, Ernst & Young

Certified Public Accountants Hong Kong

Extrawell Pharmaceutical Holdings Limited

BUSINESS VALUATION ON GENE GENERATION GROUP

APPENDIX III

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Suites 402-3,

Unicorn Trade Centre, 131 Des Voeux Road Central, Hong Kong.

21st June, 2002

The Directors

Extrawell Pharmaceutical Holdings Limited Suite 4701-4, 47th Floor,

NatWest Tower,

Times Square, 1 Matheson Street, Causeway Bay, Hong Kong.

Dear Sirs,

In accordance with your instructions, we have made an investigation and appraisal of the fair market value of the equity of Gene Generation Limited (hereinafter known as “Gene Generation”) to be acquired by Extrawell Pharmaceutical Holdings Limited (hereinafter known as the “Company”) and its subsidiaries (hereinafter known as the “Group”) as at 31st March, 2002 (hereinafter known as “the relevant date”).

The purpose of this appraisal is to formulate and express an independent opinion on the fair market value of the equity of Gene Generation at the relevant date as an ongoing concern. The term “Fair Market Value” as used herein is defined as the estimated amount at which the company might be expected to exchange hands between a willing buyer and a willing seller, neither under compulsion to buy or sell, both having reasonable knowledge of the relevant facts, with equity to both, and with the buyer and seller contemplating the retention of the firm at its present location for the continuation of the current operations.

Introduction

Gene Generation, an investment holding company, was incorporated in the British Virgin Islands on 25th May, 2001 with its office registered at Sea Meadow House, Blackburne Highway, Road Town, Tortola, in the Territory of the British Virgin Islands. Gene Generation, through its non-wholly owned subsidiaries which are investment holding companies, effectively holds 49.5% interest in Shanghai Biostar Genechip Inc. ( ) (hereinafter known as “Shanghai Biostar”).

Extrawell Pharmaceutical Holdings Limited

BUSINESS VALUATION ON GENE GENERATION GROUP

APPENDIX III

Shanghai Biostar Group, which consists of Shanghai Biostar, Shanghai Biostar Genechip Research Institute ( ), Shanghai Biochip Company Limited ( ) and Bioword Genechips, Inc. ( ), is principally engaged in the research on genome related technology as well as the development, manufacturing and distribution of Genechips.

The Basis of Valuation

The equity of Gene Generation is valued on the basis of “Fair Market Value” in continued use or as an ongoing concern. The continued use premise assumes that the property will be used for the purpose for which the property was conceived or is currently used. Implicit in this definition is the fact that the willing buyer would not pay more to acquire the property appraised than he could reasonably expect to earn in the future from an investment in the property.

The valuation of Gene Generation’s equity required consideration of all pertinent factors affecting the operations of the business and its ability to generate future investment returns. The factors considered in the appraisal including, but were not limited to, the following:

The nature of the business;
Projected future results of the company’s operations;
The economic and industry data affecting the company’s operations;
Market-derived investment returns of entities in similar line of business; and
The risks facing the company.

Approach to Value

In the process of valuing the equity of Gene Generation, we considered the classical appraisal approaches to value, namely the Market Approach, Cost Approach and Income Approach. In valuing firms, the Market Approach is basically a comparison method which estimates fair market value from analyzing sales and financial data and ratios of comparable public and, whenever possible, private companies. To the best of our understanding, there have not been any sales of similar business nature corporations that completed in the PRC recently. Under such circumstances, we have not relied on the Market Approach in our estimate of the fair market value of Gene Generation. We did not use the New York Stock Exchange Index in the U.S. as this market index contains older and more traditional companies (like heavy manufacturing, automobile, mining and utilities) that have been in existence long before the high technology and bio-technology related areas boomed since 1995. We desisted from using the Market Approach, since these firms were already listed in a stock exchange and had already been in operation whereas Gene Generation Group is a start-up and have no sufficient historical track record. We, however, used them indirectly in our “sanity” checks to evaluate whether the value we reached was sustainable from an adversary perspective. More importantly, we used these firms in building a model for our representative industry as explained below.

Extrawell Pharmaceutical Holdings Limited

BUSINESS VALUATION ON GENE GENERATION GROUP

APPENDIX III

The Cost Approach seeks to estimate the fair market value of Gene Generation by quantifying the amount of money that would be required to replace the manufacturing capabilities of the firm. In other words, this approach assumes that Gene Generation’s value is indicated by the cost of reproducing or replacing its manufacturing assets less an allowance for physical deterioration and obsolescence.

The Income Approach focuses on the income-producing capability of Gene Generation. This approach’s underlying theory is that the value of Gene Generation can be measured by the present worth of the net economic benefit to be received over the useful life of Gene Generation. In our opinion, this approach is the most appropriate in valuing Gene Generation since a rational buyer normally will purchase a firm only if the present value of the expected economic benefits is at least equal to the purchase price. Likewise, a rational seller normally will not sell if the present value of the expected economic benefits is more than the selling price. Thus, a sale generally will occur only at an amount equal to the economic benefits of ownership. Based on this valuation principle, the Income Approach estimates the future economic benefits and discounts these benefits to its present value using a discount rate suitable for the risks associated with realizing those benefits.

Valuation Methodology

In choosing the Income Approach as the most appropriate method, we have used the Discounted Cash Flow (hereinafter known as “DCF”) Method, which estimates the fair market value of the equity of Gene Generation by discounting the future cash flows to its present value. This would necessitate the subtraction, from net income, the capital expenditures and changes in working capital and the addition of depreciation in the computation of cash flow. DCF analysis reflects investment criteria and requires the appraiser to make empirical and subjective assumptions.

In using the DCF Method, we adopted the Free Cash Flows to Equity (hereinafter known as “FCFE”) Technique. The FCFE Technique values the enterprise by estimating the fair market value of the ownership interests (equity) of the enterprise. This technique requires that the firm’s interest expenses, if any, be excluded from the free cash flows and the resulting cash flows to be discounted at the relevant rate of return required by equity. This technique then equates the value of the ownership interests as the value of the enterprise. In our opinion, using the FCFE Technique is the most appropriate method in valuing Gene Generation, because Gene Generation does not have any long-term debt.

We derived the discount rate using the Capital Asset Pricing Model (hereinafter known as “CAPM”). The CAPM derives the required rate of return of an asset by adding the risk-free rate to the risk premium of the asset. The CAPM is built on the premise that the variance in returns is the appropriate measure of risk but only that portion of the variance of the returns of an asset that is not reduced by diversification has to be compensated, therefore the appropriate return required of an asset is determined by the volatility of the asset’s returns relative to the returns that can be achieved by a broad market portfolio. This measured nondiversifiable risk is represented by the beta of the asset and the risk premium of the asset is its beta multiplied to the risk premium of a broad market portfolio.

Extrawell Pharmaceutical Holdings Limited

BUSINESS VALUATION ON GENE GENERATION GROUP

APPENDIX III

In identifying the guideline companies in the relevant industries, we have referred to Standard Industrial Classification (hereinafter known as “SIC”) Code. The SIC is the statistical classification standard underlying all establishment-based Federal economic statistics classified by industry. The SIC is used to promote the comparability of establishment data describing various facets of the U.S. economy. The classification covers the entire field of economic activities and defines industries in accordance with the composition and structure of the economy.

In the course of our valuation, we used the large composite compound annual equity return of 5 years (SIC Code 283) from Ibbotson Associates as the broad market portfolio return in our CAPM computations. The category of SIC Code 283 comprises 204 companies which primarily engaged in manufacturing, fabricating, or processing drugs in pharmaceutical products and primarily engaged in the grading, grinding and milling of botanicals. Some of these companies are operating the businesses of similar nature though they do not solely or primarily derive revenues as Gene Generation but have other and more diversified revenue bases from the same business. Examples of these companies are: Digene Corp., Epoch Biosciences Inc., Human Genome Science Inc., and Vical Inc., which are selected as guideline companies in our valuation.

It is our opinion that the SIC composite compound annual equity return of 5 years represents the most reliable objective market rate of return to be used in valuing Gene Generation’s equity, since it captures investors’ expectations, prevailing market conditions and the accompanying risks associated with them.

In addition to the compound annual equity return, to derive the required cost of equity in our valuation, we have added the country risk for the PRC in which Gene Generation operates. Majority of the guideline companies mentioned above are based and listed in the U.S., which has a more developed and liquid capital market than in the PRC, thus it has the necessity to add the relevant country risk premiums to the compound annual equity return.

This study is fully cognizant of the fact that there are other relevant companies that are privately held, or is not listed in the stock exchanges, or is not headquartered in the U.S..

In valuing the equity of Gene Generation, we determined an unlevered sum beta by deriving a representative industry beta based on a select group of companies under SIC Code 283 that approximate the companies’ products as mentioned above. An unlevered beta is the beta a Gene Generation would have if it had no debt. It removes a company’s financing decision from the beta calculation and reflects a Gene Generation’s business risks. The sum beta of a company is computed using a multiple regression of the monthly excess returns of Gene Generation stock over Treasury bill yields. There are two independent variables, the monthly excess returns of the market over Treasury bill yields and the monthly excess returns of the market lagged one month. Sum beta is the sum of the coefficient on the excess market return and the coefficient on the lagged excess market return. The motivation for including a sum beta (including lag) estimate is that for all but the largest companies, the prices of individual stocks tend to react in part to movements in the overall market with a lag. The smaller the company, the greater is the lagged price reaction.

Extrawell Pharmaceutical Holdings Limited

BUSINESS VALUATION ON GENE GENERATION GROUP

APPENDIX III

The equity risk premiums of the company were reached by multiplying the unlevered sum beta to the difference between the SIC composite compound annual equity return of 5 years and the risk-free rate.

By definition, ownership interests in closely held companies are typically not readily marketable, and, by definition not as liquid and as easily converted to cash compared to similar interests in public companies. Therefore, a share of stock in a privately held company is usually worth less than an otherwise comparable share in a publicly held company. Numerous studies have been made showing that the Lack of Marketability (hereinafter known as “LOM”) discount for a closely held stock compared with a publicly traded counterpart averages between 10% and 50%, and many different researchers have obtained these averages over a wide span of years. We have opted to apply a LOM discount to the company for Gene Generation does not yet have a historical financial track record, since it is a start-up with no audited financial statements for the past five years.

General Comments

We understand that you will use our appraisal as part of your business due diligence and we have not been engaged to make specific purchase or sale recommendations. We further understand that the use of our work product will not supplant other due diligence which you should conduct in reaching business decisions regarding Gene Generation. Our work is designed solely to provide information that will allow you to make an informed decision.

In using the FCFE Technique, we relied on Gene Generation’s pro forma financial projections during the 4 years’ forecast period. We have tested this estimate against relevant data pertaining to the various economies and the replication industry, and find it reasonable.

In arriving at our opinion, we have assumed that Gene Generation has adopted necessary security measures and has considered several contingency plans against intellectual property rights infringement and commercial spy affecting its business.

We have assumed that the appraised equity of Gene Generation is freely disposable and transferable for its existing or alternative uses in the open market without payment of any premium to the government.

No investigation has been made of the legal title or any liabilities attached to Gene Generation. All legal documents disclosed (if any) are for reference only and no responsibility is assumed for any legal matters concerning the legal title and the rights (if any) to Gene Generation. We have not verified the original documents furnished to us, any responsibility for our misinterpretation of the legal documents, therefore, cannot be accepted. Besides, we are not in a position to advise and comment on the title and encumbrances to Gene Generation.

For the purpose of this appraisal, we were furnished with audited financial statements, detailed pro forma projections of revenue and expense, and other documents germane to the appraisal. These data have been utilized without further verification as correctly representing the results and future prospects of the operation and the financial condition of Gene Generation.

Extrawell Pharmaceutical Holdings Limited

BUSINESS VALUATION ON GENE GENERATION GROUP

APPENDIX III

To the best of our knowledge, all data set forth in this report are true and accurate. Although gathered from reliable sources, no guarantee is made nor liability assumed for the accuracy of any data, opinions, or estimates identified as being furnished by others, which have been used in formulating this analysis.

We are unable to accept any responsibilities for the operation and financial information that have not been supplied to us by Gene Generation. We have had no reason to doubt the truth and accuracy of the information provided to us by the Group. We also sought and received confirmation from the Group that no materials factors have been omitted from the information supplied.

No allowance has been made in our valuation for any charges, mortgages or amounts owing neither on Gene Generation nor for any expenses or taxation, which may be incurred in effecting a sale. It is assumed that Gene Generation will be rendered free from encumbrances, restrictions and outgoings of any onerous nature, which could affect its value.

Unless otherwise stated, the base currency of this report is Hong Kong Dollars.

Opinion of Value

Based on the investigation, analysis, reasoning and data outlined as above, and on the appraisal method employed, it is our opinion that as at 31st March, 2002, the Fair Market Value of the equity of Gene Generation is reasonably stated by the amount of HK$134,014,000 (HONG KONG DOLLARS ONE HUNDRED AND THIRTY-FOUR MILLION AND FOURTEEN THOUSAND ONLY).

The conclusion of value is based on generally accepted appraisal procedures and practices that rely extensively on assumptions and considerations, not all of which can be easily quantified or ascertained exactly. While we have exercised our professional judgement in arriving at the appraisal, you are urged to consider carefully the nature of such assumptions which are disclosed in this report and should exercise caution interpreting this report.

We hereby certify that we have neither present nor prospective interest in Gene Generation or the value reported.

Yours faithfully, For and on behalf of Castores Magi Surveyors Limited Deret Au Chi Chung B.Sc. MRICS AHKIS RPS MCIArb AHKIArb Director

Note: Mr. Deret Au Chi Chung is a professional valuer, who possesses extensive experience in valuing the businesses of various enterprises in the Asia-Pacific region.

Extrawell Pharmaceutical Holdings Limited

GENERAL INFORMATION

APPENDIX IV

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Company.

The information contained in this circular is supplied by the Company. The Directors jointly and severally 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, their opinions expressed in this circular have been arrived at after due and careful consideration and there are no other facts not contained in this circular, the omission of which would make any statement in this circular misleading.

2. SHARE CAPITAL

Set out below are details of the authorised and issued share capital of the Company as at the Latest Practicable Date.

Authorised share capital HK$ 20,000,000,000 200,000,000

Issued and fully paid Shares
2,290,000,000	22,900,000

3. DISCLOSURE OF INTERESTS

As at the Latest Practicable Date, the interests of the Directors in the share capital of the Company or any associated corporation (within the meaning of the SDI Ordinance) notifiable to the Company and the Stock Exchange under Section 28 of the SDI Ordinance and including interests in which a Director has taken under Section 31 or Part I of the Schedule to the SDI Ordinance or required to be entered into the register under Section 29 of the SDI Ordinance or required pursuant to the Model Code for Securities Transaction by Directors of Listed Companies under the Listing Rules are as follow:

(a) The Company

		Number of ordinary Shares	Number of ordinary Shares
		Personal	Corporate
Directors	Notes	interests	interests
Mao Yu Min	1	—	650,000,000
Xie Yi	1	—	650,000,000
Ho Yu Ling	2	—	102,000,000
Li Qiang		15,000,000	—

Extrawell Pharmaceutical Holdings Limited

GENERAL INFORMATION

APPENDIX IV

Notes:

These Shares are owned by JNJ Investments and its respective associates, HK Biowindow and Fudan Biotech. JNJ Investments, HK Biowindow and Fudan Biotech hold 500,000,000 Shares and 74,000,000 Shares and 76,000,000 Shares respectively. The entire issued share capital of JNJ Investments is owned by HK Biowindow, the issued share capital of which is owned as to 99.01% by United Gene and as to 0.99% by Shanghai Biowindow. The capital of Shanghai Biowindow is 60% owned by United Gene and 13.575% owned by Dr. Xie Yi, a Director. The equity capital of United Gene is beneficially owned as to 33.5% by Dr. Mao Yu Min and as to 38.5% (including direct and indirect interests) by Dr. Xie Yi.
These Shares are owned by Well Success, the entire issued share capital of which is beneficially owned by Mr. Ho Yu Ling.

(b) Associated Corporation

100,000 non-voting deferred share of HK$10 each in Extrawell Enterprise Limited, a wholly owned subsidiary of the Company, are beneficially owned by Extrawell Holdings Limited, a related company of the Group in which Messrs. Ho Chin Hou, Ho Yu Ling and Li Qiang, certain of the Directors, have beneficial interests.

Save as disclosed above, as at the Latest Practicable Date, none of the Directors has for the purposes of section 28 of SDI Ordinance, nor are they taken to or deemed to have under section 31 of, or Part 1 of the Schedule to, the SDI Ordinance, any interests in the equity or debt securities of the Company or any associated corporation with in the meaning of the SDI Ordinance or any interests which are required to be entered in the register kept by the Company pursuant to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies under the Listing Rules.

Save as disclosed in this circular, none of the Directors had been materially interested in any contract or arrangement entered into by any member of the Group since 31st March, 2001 being the date of the Company’s latest published audited accounts and which was significant in relation to the business of the Group.

As at the Latest Practicable Date, none of NSC Securities, Ernst & Young and Castores Magi Surveyors Limited had any 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.

Save as disclosed in this circular, none of the Directors, NSC Securities, Ernst & Young and Castores Magi Surveyors Limited had interest, directly or indirectly, in any assets which had since 31st March, 2001 (being the date to which the latest published audited financial statements of the Company were made up) 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.

Extrawell Pharmaceutical Holdings Limited

GENERAL INFORMATION

APPENDIX IV

4. SUBSTANTIAL SHAREHOLDERS

As at the Latest Practicable Date, so far as is known to, or can be ascertained after reasonable enquiry by, the Directors, the following persons 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 any member of the Group.

		Number of
Name of Shareholders	Note	ordinary Shares
JNJ Investments	1	500,000,000
HK Biowindow	1	574,000,000
Shanghai Biowindow	1	650,000,000
United Gene	1	650,000,000

Note:

These Shares are owned by JNJ Investments and its respective associates, HK Biowindow and Fudan Biotech. JNJ Investments, HK Biowindow and Fudan Biotech hold 500,000,000 Shares and 74,000,000 Shares and 76,000,000 Shares respectively. The entire issued share capital of JNJ Investments is owned by HK Biowindow, the issued share capital of which is owned as to 99.01% by United Gene and as to 0.99% by Shanghai Biowindow. The capital of Shanghai Biowindow is 60% owned by United Gene and 13.575% owned by Dr. Xie Yi, a Director. The equity capital of United Gene is beneficially owned as to 33.5% by Dr. Mao Yu Min and as to 38.5% (including direct and indirect interests) by Dr. Xie Yi.

5. MATERIAL CHANGE

Save as disclosed in this circular and the interim report for the six months ended 30th September, 2001, the Directors are not aware of any material adverse change in the financial or trading position or contingent liabilities of the Group since 31st March, 2001, being the date to which the latest published audited financial statements of the Group were made up.

6. SUMMARY OF MATERIAL CONTRACTS

Within the period commencing two years immediately prcceding the date of the Announcement and ending on the Latest Practicable Date, other than the Agreement and the agreements stated below, no contract that is or may be material, not being contracts entered into in the ordinary course of business, has been entered into by members of the Group:

(1) an agreement dated 6th December, 2001 and made between the Company and Mr. Lee Tak Lun for the subscription of 56 million Shares at HK$0.25 per Share;
(2) an agreement dated 6th December, 2001 and made between the Company and Great Approach Group Limited for the subscription of 32 million Shares at HK$0.25 per Share;

Extrawell Pharmaceutical Holdings Limited

GENERAL INFORMATION

APPENDIX IV

(3) an agreement dated 6th December, 2001 and made between the Company and Dynamic Year Group Limited for the subscription of 32 million Shares at HK$0.25 per Share;
(4) an agreement dated 9th December, 2001 and made between (a) Best-Bio (a wholly owned subsidiary of the Company) as purchaser and (b) HK Biowindow and Fudan Biotech as purchasers (as amended by a supplemental agreement dated 13th December, 2001 and made between the same parties), in respect of the acquisition of the entire issued share capital in Right & Rise Limited by Best-Bio for a consideration of HK$95 million, of which as to HK$30 million was paid in cash, as to HK$37.5 million was satisfied by the allotment and issue by the Company of 150 million new ordinary Shares at an issue price of HK0.25 per Share, and the balance of HK$27.5 million was satisfied by way of issuing a non-interest bearing promissory note due one year from the date of completion of the said agreement;
(5) the supplemental agreement referred to in paragraph (4) above;
(6) the placing and subscription agreement dated 23rd May, 2002 entered into between the Company, JNJ Investments and Core Pacific - Yamaichi International (H.K.) Limited in relation to the Placement;
(7) the Agreement; and
(8) the Loan Agreement (on the assumption that Shanghai Biostar had been a member of the Group as at the Latest Practicable Date).

7. LITIGATION

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

8. QUALIFICATION OF EXPERTS

The following are the qualifications of the professional advisers whose opinions or advice are contained in this circular:

Name

Qualification

NSC Securities an investment adviser and a dealer registered under the Securities Ordinance (Chapter 333 of the Laws of Hong Kong) Ernst & Young Certified public accountants Castores Magi Surveyors Limited Chartered surveyors

Extrawell Pharmaceutical Holdings Limited

GENERAL INFORMATION

APPENDIX IV

9. CONSENTS

NSC Securities, Ernst & Young and Castores Magi Surveyors Limited have given and have not withdrawn their respective written consents to the issue of this circular with the inclusion of their respective letters and/or reports and/or references to their names, as the case may be, in the form and context in which they respectively appear.

10. SERVICE CONTRACTS

Each of Messrs. Ho Chin Hou, Ho Yu Ling and Li Qiang has entered into service agreements with the Company for an initial term of three years and three months commencing on 1st January, 1999. The initial term expired on 31st March, 2002 but the terms of the agreements will continue thereafter until terminated by not less than three months’ written notice served by either party on the other.

The current annual remuneration payable to each of the executive Directors under the respective service contracts are as follow:

	Annual remuneration
Name	payable
	HK$
Ho Chin Hou	995,000
Ho Yu Ling	995,000
Li Qiang	633,208

Under the service contracts, the remuneration payable to each of the executive Directors may, subject to the discretion of the Directors, be increased by not more than 15% per annum and they will be entitled to a 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 5% of the audited consolidated or combined net profit of the Company (after taxation and minority interest and payment of such bonuses but excluding extraordinary and exceptional items) in respect of that financial year of the Company.

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)).

Extrawell Pharmaceutical Holdings Limited

GENERAL INFORMATION

APPENDIX IV

11. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection during normal business hours at the head office and principal place of business in Hong Kong of the Company at Suite 4701-4, 47th Floor, NatWest Tower, Times Square, 1 Matheson Street, Causeway Bay, Hong Kong up to 8th July, 2002:

(a) the memorandum of association and bye-laws of the Company;
(b) the letter from the Indpendent Board Commitee dated 21st June, 2002, the text of which is set on page 18 of this circular;
(c) the letter of advice from NSC Securities dated 21st June, 2002, the text of which is set out on pages 19 to 33 of this circular;
(d) the business valuation report from Castores Mogi Surveyors Limited dated 21st June, 2002, the text of which is set out in appendix III to this circular;
(e) the service contracts referred to in the paragraph headed “Services contracts” in this appendix;
(f) the material contracts referred to in this appendix;
(g) the annual report of the Company for each of the two years ended 31st March, 2001;
(h) the interim report of the Company for the six months ended 30th September, 2001;
(i) the written consents referred to in the paragraph headed “Consent” in this appendix; and
(j) the circular of the Company dated 11th January, 2002.

12. MISCELLANEOUS

(a) The secretary of the Company is Ms. Elsie Wong, who is an associate member of the Hong Kong Society of Accountants and a fellow member of the Association of Chartered Certified Accountants.
(b) The registered office of the Company is at Clarendon House, 2 Church Street, Hamilton HM11, Bermuda and its head office and principal place of business in Hong Kong is at Suite 4701-4, 47th Floor, NatWest Tower, Times Square, 1 Matheson Street, Causeway Bay, Hong Kong.
(c) The share registrar and transfer office of the Company in Hong Kong is Tengis Limited at 4th Floor, Hutchison House, 10 Harcourt Road, Central, Hong Kong.
(d) The English text of this circular and the form of proxy shall prevail over the Chinese text.

100

Extrawell Pharmaceutical Holdings Limited

NOTICE OF SGM

Extrawell Pharmaceutical Holdings Limited *

(incorporated in Bermuda with limited liability)

NOTICE IS HEREBY GIVEN that a special general meeting of Extrawell Pharmaceutical Holdings Limited (the “Company”) will be beld at JW Marriot Hotel, Salon 2-3 (Level 3), Pacific Place, 88 Queensway, Hong Kong at 11:00 a.m. on 8th July, 2002 for the purpose of considering and, if thought fit, passing the following resolution as resolution:

ORDINARY RESOLUTION

“ THAT (i) the agreement dated 15th May, 2002 (the “Agreement”) and entered into between Best-Bio Developments Limited (“Best-Bio”), a wholly owned subsidiary of the Company and Biowindow Gene Development (Hong Kong) Limited, for the acquisition by Best-Bio of 55% of issue share capital in Gene Generation Limited together with 55% of the amount of indebtedness as at the completion of the Agreement made by or on behalf of the Vendor to the Gene Generation Limited and its subsidiaries for a consideration of HK$55 million, a copy of which has been produced to the meeting marked “A” and has been initialled by the chairman of the meeting for the purpose of identification, and (ii) the subsistence of the loan in the principal amount of approximately RMB20 million (equivalent to approximately HK$18.9 million) owing from (Bioraise High-Tech Investment Ltd., Shanghai) to (Shanghai Biostar Genechip, Inc.) and the maturity date of which falls on 30th June, 2003 with interest of 2 per cent. per annum accruing from the Completion Date be and it is hereby approved and (where applicable) confirmed and ratified; and that all the transactions contemplated therein be and the same are hereby approved and that any one Director 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, 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 or expedient.”

By order of the board of directors of Extrawell Pharmaceutical Holdings Limited Mao Yu Min Chairman

Hong Kong, 21st June, 2002

Head office and principal place of business in Hong Kong: Suite 4701-4, 47th Floor

NatWest Tower, Times Square 1 Matheson Street Causeway Bay Hong Kong

for identification purpose only

101

Extrawell Pharmaceutical Holdings Limited

NOTICE OF SGM

Notes:

A member entitled to attend and vote at the meeting convened by the above notice is entitled to appoint one or more proxy to attend and, subject to the provision of the bye-laws of the Company, vote in his stead. A proxy need not be a member of the company.
A form of proxy for use at the special general meeting 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 deposited 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, at the offices of the Company’s branch share registrar in Hong Kong, Tengis Limited at 4th Floor, Hutchison House, 10 Harcourt Road, Hong Kong not less than 48 hours before the time for holding the meeting or adjourned meeting.
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 be so wish.

102

Extrawell Pharmaceutical Holdings Limited

AI assistant

Extrawell Pharmaceutical Holdings Limited — Proxy Solicitation & Information Statement 2002

49517_rns_2002-06-21_600ecd0c-7551-4968-b556-6f823e20ac0d.pdf

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

**Extrawell Pharmaceutical Holdings Limited ***

MAJOR TRANSACTION AND CONNECTED TRANSACTIONS

Financial adviser to Extrawell Pharmaceutical Holdings Limited

Core Pacific - Yamaichi Capital Limited

Independent financial adviser to the Independent Board Committee

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

**Extrawell Pharmaceutical Holdings Limited ***

MAJOR TRANSACTION AND CONNECTED TRANSACTIONS

INTRODUCTION

LETTER FROM THE BOARD

LETTER FROM THE BOARD

THE AGREEMENT

Parties:

Assets to be acquired:

Consideration:

Prinicpal amount Maturity date

Conditions:

Completion:

INFORMATION ON THE GROUP

FINANCIAL AND TRADING PROSPECTS OF THE GROUP

LETTER FROM THE BOARD

As at the Latest Practicable Date (after completion of the Placement but immediately before the Acquisition)

Immediately after completion of the Acquisition

LETTER FROM THE BOARD

INFORMATION ON GENE GENERATION

LETTER FROM THE BOARD

FINANCIAL EFFECTS OF ACQUISITION ON THE GROUP

REASONS FOR AND BENEFITS OF THE ACQUISITION

LISTING RULES IMPLICATIONS FOR THE COMPANY

THE INDEPENDENT BOARD COMMITTEE

THE SGM

LETTER FROM THE BOARD

RECOMMENDATION

ADDITIONAL INFORMATION

**Extrawell Pharmaceutical Holdings Limited ***

MAJOR TRANSACTION AND CONNECTED TRANSACTIONS

RECOMMENDATIONS

LETTER FROM NSC SECURITIES

MAJOR TRANSACTION AND CONNECTED TRANSACTIONS

LETTER FROM NSC SECURITIES

BACKGROUND

A. THE AGREEMENT

Principal Factors And Reasons Considered

(2) Basis of consideration

(a) Price earnings multiple

LETTER FROM NSC SECURITIES

(b) Net asset value

LETTER FROM NSC SECURITIES

(c) Valuation of the Gene Generation Group

(4) Benefits and effects of the Acquisition on the Company

(a) Earnings

(b) Net tangible assets

LETTER FROM NSC SECURITIES

(c) Amount due from Bioraise High Tech

(5) PRC Legal Opinion

(6) Future plans

Advice

B. CONTINUING CONNECTED TRANSACTION

Principal Factors Considered

(1) Reason for the loan

(2) Security

(3) Interest rate

LETTER FROM NSC SECURITIES

(4) Repayment

Advice

C. GENERAL

1. SUMMARY OF CONSOLIDATED PROFIT AND LOSS ACCOUNTS

2. INTERIM RESULTS

CONDENSED CONSOLIDATED PROFIT AND LOSS ACCOUNT (UNAUDITED)

CONDENSED CONSOLIDATED BALANCE SHEET

CONDENSED CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED)

Extrawell Pharmaceutical Holdings Limited Proxy Solicitation & Information Statement 2002

Extrawell Pharmaceutical Holdings Limited *

Extrawell Pharmaceutical Holdings Limited *

Extrawell Pharmaceutical Holdings Limited *