REACH RESOURCES LIMITED — M&A Activity 2003

Jul 13, 2003

EXPANSION OF LOBSTER TRADING BUSINESS - MERGER OF INF PTY LTD

ANNOUNCEMENT

14 JULY 2003

The Board of Cervantes Seafood Limited (Company) wish to advise shareholders that the Company has executed a Heads of Agreement (HOA) with INF Pty Ltd (INF), under which the Company will merge its operations and assets with those of INF's lobster trading business (INF Assets).

Background to Merger

INF runs a successful lobster trading business which has been in operation in Western Australia for over 28 years. The merger of the INF business will more than double the Company's catch-base per season to over 900 tonnes. In the 2002/03 season which has just finished, INF achieved a turnover of approximately $13.7m (Cervantes Seafood - $11.0m) This expansion of the Company's business will significantly improve the costs and operational structure of the Company. The expanded catch base will also optimise the use of the Company's processing arrangements which has a capacity of over 1500 tonnes. INF has an established marketing focus in Japan, Taiwan and Europe while the Company has established marketing focus in China, Taiwan, Hong Kong and the USA. The combined market focus of the Company and INF will enhance the marketing and pricing strategies of the Company.

The Board of the Company regards the INF merger as a key strategy for growth and consolidation within the lobster export business. The proposed merger will also contribute significant working capital resources to the Company. The expanded catch base and working capital resource will improve the Company's ability to retain existing boats and fishermen and at the same time, enhance its control over this important supply factor.

Chunagon Co Ltd, the sole Japanese shareholder of INF, has formed the clear intention of entering into this merger with a view to ensuring that its foundation investment in the Western Australian Rock Lobster industry will remain secure. Chunagon intends to maintain its long-term position in the industrv.

Upon the completion of the merger, Mr Masaaki Tani and Mr Paul Rengel will be appointed as nonexecutive directors of the Company.

Mr Tani resides in Hyogo Prefecture in Japan and is a Commerce Graduate of Keio University, Tokyo, He is Director of Chunagon Co Ltd, a Japanese public company which is the sole shareholder of INF Pty Ltd. Mr Rengel is a Fellow of the Institute of Chartered Accountants in Australia. He is one of the senior partners of an accounting practice in Perth. He has over 30 years experience in corporate services, audit and business consulting. Mr Rengel is chairman and director of a number of companies listed on ASX. The senior operational staff of INF will also remain with the business.

Further details of the merger and its financial implications will be set out in the notice of general meeting to shareholders referred to below.

ABN 79 097 982 235

-6 219-221 York Street. Subjaco Western Australia 6008 Telephone: (61-8) 9382 1311 Facsimile: (61-8) 9382 1322

Financial background of INF and Proforma Balance Sheet

INF has the following history of revenue and earnings:

	REVENUE	EBIT*
7 months period to 30 June 2003	$13,688.131	$504.000
Year ended 30 November 2002	$14,573,008**	$560,000
Year ended 30 November 2001	$13,694,184**	$813.000
Year ended 30 November 2000	$17,476,000**	$464,000

*EBIT: Earnings before Interest and Tax adjusted for abnormal and non-recurring items.

** The revenue history for these three years have been audited.

Based on the merger terms and the assets being acquired, the unaudited Proforma Balance Sheet of Cervantes Seafood Limited as at 31 May 2003 is as follows:

Current Assets	$\overline{\mathfrak{s}}$
Cash at Bank	1,800,440
Receivables	2,396,383
Prepayments	42,813
Inventories	2,037,079
Total Current Assets	6,276,715
Non Current Assets
Land and Buildings	1,763,771
Plant And Equipment	1,693,634
Lobster Pot Licences	200,000
Goodwill	2,701,097
Total Non Current Assets	6,358,502
TOTAL ASSETS	12,635,217
Current Liabilities
Trade and other payables	2,539,688
Non Current Liabilities
Secured Bank Loans	978,779
TOTAL LIABILITIES	3,518,467
NET ASSETS	9,116,750
EQUITY
Issued Capital	11,611,840
Accumulated losses	(2,495,090)
NET EQUITY	9,116,750

Consideration for the Merger

The INF Assets, valued at approximately $6.2m comprise the following:

Freehold land and buildings (at independent valuation)	$1.7m
Plant and Equipment (at net written down value)	$0.2m
Net working capital	$2.0m
Lobster pot licences	$0.2m
Goodwill	$2.1m

In consideration of the merger of the INF Assets, the Company will:

• assume certain employment-related liabilities of INF; and $(a)$
• issue to INF, 57,527,778 fully paid ordinary shares in the capital of the Company at an issue $(b)$ price of $0.107 (Transaction Shares).

Conditions Precedent

The HOA is subject to certain conditions including, without limitation:

• $(a)$ the Company conducting a legal and financial due diligence on INF and the Company being satisfied with the outcome of that due diligence in its sole and absolute discretion;
• $(b)$ INF conducting a legal and financial due diligence on the Company and INF being satisfied with the outcome of that due diligence in its sole and absolute discretion (Note: INF has confirmed that it has completed a legal and financial due diligence on the Company and is satisfied with the outcome of that due diligence);
• $(c)$ written confirmation from INF that the working capital being acquired by the Company and which will be transferred to the Company at settlement is not less than $2.0m;
• all relevant consents being obtained from third party financiers to the merger of the INF $(d)$ Assets by the Company; and
• all necessary shareholder approvals required by the Corporations Act and the Listing Rules $(e)$ of Australian Stock Exchange Limited (ASX) being obtained by the Company.

Shareholder Approvals

Completion of the merger requires the approval of the Company's shareholders for the following purposes:

• $(a)$ Section 611 Item 7 of the Corporations Act; and
• $(b)$ ASX Listing Rule 7.1.

Approval is required pursuant to Section 611 Item 7 of the Corporations Act, because the issue of the Transaction Shares will cause INF's voting power in the Company to increase to greater than 20%.

Approval is required pursuant to ASX Listing Rule 7.1, because the issue of the Transaction Shares will require the Company to issue equity securities in excess of 15% of its issued capital.

The Company is in the process of preparing a notice of general meeting and the necessary expert's report to seek the shareholder approvals set out above. It is anticipated that the general meeting will be held in late August 2003.

AUTHORISED BY:

Chen Hao Managing Director Cervantes Seafood Limited