Wang On Group Limited — M&A Activity 2000

Dec 27, 2000

The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this announcement, 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 announcement.

WANG ON GROUP LIMITED

(Incorporated in Bermuda with limited liability)

PROPOSED MAJOR TRANSACTION

and

DISCLOSURE IN RESPECT OF A LOAN

On 19th December, 2000, RFL, a wholly-owned subsidiary of the Company, entered into the Sale and Purchase Agreement with BPL. Pursuant to the Sale and Purchase Agreement, RFL has conditionally agreed to purchase a 99.79% shareholding in WYT Medicine, a company which manufactures and sells Chinese medicine including products under its own brandname "Wai Yuen Tong", herbs and other medicinal products for a cash consideration of HK$126,831,680.

Upon completion of the Acquisition, RFL will also enter into the Call and Put Options with BPL relating to the sale and purchase of certain shares in WYT Medicine.

The Acquisition, if it proceeds, will constitute a major transaction for the Company under the Listing Rules and completion is therefore subject to the approval of shareholders. A special general meeting of the Company will be convened for this purpose as soon as practicable. A circular containing further details of the Acquisition will be despatched to the shareholders of the Company as soon as possible.

The Group had on 29th November, 2000 advanced a loan of approximately HK$125.7 million to BPL in order to secure its priority in negotiating for its possible acquisition of WYT Medicine and so that it would be able to carry out due diligence on WYT Medicine. The total amount repayable on 19th December, 2000, which was equal to the consideration payable by the Group for the Acquisition, was applied as deposit payment under the Sale and Purchase Agreement.

The shares of the Company were suspended from trading on the Stock Exchange at 10:00 a.m. on 20th December, 2000 pending the release of this announcement. Application has been made to resume trading of the shares of the Company at 10:00 a.m. on 27th December, 2000.

The Acquisition may or may not proceed subject to the approval of shareholders. Shareholders and potential investors should exercise caution before dealing in any shares of the Company.

THE SALE AND PURCHASE AGREEMENT

Date

19th December, 2000

Parties

(1) BPL (Vendor)

(2) RFL (Purchaser)

(3) BPL Shareholder (an independent third party who is the sole shareholder of BPL and who joined as a party to guarantee the performance by BPL of its obligations under the Sale and Purchase Agreement including the return of the deposit plus interest if the said agreement does not become unconditional.)

BPL is an independent third party not connected with the directors, chief executive and substantial shareholders of the Company or its subsidiaries or any of their respective associates (as defined in the Listing Rules).

The Acquisition

RFL has conditionally agreed to purchase a 99.79% shareholding in WYT Medicine from BPL.

WYT Medicine is principally engaged in the business of manufacturing, processing and retailing of traditional Chinese medicine which includes Chinese medicinal products sold under its own brandname "Wai Yuen Tong", herbs and other medicinal products. The consolidated net asset value of WYT Medicine as at 31st December, 1999 was approximately HK$35.9 million. The consolidated net profits before and after tax of WYT Medicine for the financial year ended 31st December, 1998 were approximately HK$11.2 million and HK$9.6 million respectively and for the financial year ended 31st December, 1999 were HK$12.3 million and HK$10.3 million respectively.

WYT Medicine has entered into the Management Agreement with BPL on 29th November, 2000 pursuant to which WYT Medicine appointed BPL for the provision of certain management services for a term commencing on 29th November, 2000 and expiring on 31st March, 2004 (the "Initial Term") renewable automatically for successive terms of 1 year each thereafter until terminated by WYT Medicine. WYT Medicine shall pay a management fee of HK$100,000 per month to BPL. The Management Agreement will continue after the Acquisition but may be terminated by WYT Medicine at its sole discretion at any time after the Initial Term if the audited profit after tax of WYT Medicine for a financial year after the Initial Term showed an increment of less than 10% from the audited profit after taxation of the immediately preceding financial year or a loss (as the case may be). The Group controls the board of directors of WYT Medicine given that it has appointed 3 out of 5 directors to the board on 29th November, 2000. As the Group has paid a deposit of HK$126,831,680 to BPL on 29th November, 2000, the appointment will safeguard the Group's assets. The Directors are of the view that the payment of the management fee to BPL is reasonable.

Consideration

The consideration payable by RFL in respect of the Acquisition will be HK$126,831,680. The consideration was determined by commercial negotiations between BPL and RFL on arm's length basis having regard to (i) the net profits of WYT Medicine in previous years; (ii) the profit guarantee to be provided by BPL; (iii) the put option to be granted by BPL to RFL under Option Deed 4; and (iv) the future growth potential in business and profitability of WYT Medicine. An amount equal to the consideration was paid in cash on 19th December, 2000 by way of deposit and was funded out of the Company's internal resources. If the Sale and Purchase Agreement does not become unconditional, BPL will refund the deposit paid by RFL in four equal instalments with interest at 15% per annum.

Condition Precedent

Completion of the Acquisition is conditional on approval being obtained from the shareholders of the Company of the Acquisition, including the various Call and Put Options to be granted under the Option Deeds. This condition has to be satisfied by 28 February, 2001 (or such later date as the parties may agree).

Completion

The Acquisition will be completed on the second business day following the fulfilment of the above mentioned condition.

CALL AND PUT OPTIONS

Upon completion of the Acquisition, RFL and BPL (together, except in two of the cases, with the BPL Shareholder) will enter into five option deeds providing for the Call and Put Options (each an "Option Deed").

OPTION DEED 1

Parties

(1) BPL

(2) RFL

(3) BPL Shareholder (an independent third party who will join as a party to provide undertakings to RFL to procure that BPL will comply with and perform all its obligations arising upon exercise of the option)

Options

(a) RFL will grant a call option to BPL which will entitle BPL to purchase a 24% shareholding in WYT Medicine from RFL for a consideration of HK$30,063,132. The consideration was determined by commercial negotiations carried out on arm's length basis. The option will be exercisable at any time from the date of execution of Option Deed 1 up to and including 31st January, 2001 and, if not exercised, shall lapse on 31st January, 2001.

(b) BPL will grant a put option to RFL which will entitle RFL to sell a 24% shareholding in WYT Medicine to BPL for a consideration of HK$30,063,132. The option may be exercised at any time from 1st February, 2001 up to and including 14th February, 2001 but shall lapse automatically after exercise of the call option mentioned in (a) above.

(c) RFL will grant a further call option to BPL which will entitle BPL to purchase a further 24% shareholding in WYT Medicine from RFL for a consideration equal to HK$30,063,132 plus interest calculated at the rate of 25% per annum provided that BPL has purchased a 24% shareholding in WYT Medicine as a result of the exercise of the call option or the put option referred to in (a) and (b) above. The option may be exercised from 1st February, 2001 up to and including 30th November, 2001 and, if not exercised, shall lapse on 30th November, 2001.

It is the intention of the Company that RFL will exercise the put option referred to in (b) above as soon as it becomes exercisable on 1st February, 2001 if BPL does not exercise the call option referred to in (a) above, thereby reducing the Group's shareholding in WYT Medicine to 75.79%.

OPTION DEED 2

Parties

(1) BPL

(2) RFL

(3) BPL Shareholder

Options

BPL will grant a call option to RFL which will entitle RFL to purchase from BPL the shares in WYT Medicine (if any) which BPL or its nominee has purchased from RFL as a result of the exercise of the call options and/or the put option pursuant to Option Deed 1 (the "Sale Shares"). The option is exercisable if the consolidated net profit after tax of WYT Medicine falls short of the warranted profit after tax for each of the financial years ending 31st March, 2002 and 31st March, 2003 by 10% or more. The consideration for the exercise is calculated to be

HK$125,000,000 x (A / 99.79) x (100% - 2 x B)

where A = % represented by the Sale Shares in the entire issued share capital of WYT Medicine

B = % in which the net profits after tax falls short of the warranted profits after tax of HK$14,500,000 for the financial year 2002 or HK$16,000,000 for the financial year 2003, as the case may be.

In the event that the net profit after tax of WYT Medicine from 1st January 2001 to 31st March 2001 falls short of HK$2,000,000, BPL shall pay to RFL an amount calculated to be

Amount of shortfall x 76% x 99.79%

The consideration for the exercise of the option was determined by commercial negotiations carried out on arm's length basis.

The option may be exercised only once within one month from the date of issue of the audited consolidated accounts of WYT Medicine either for the financial year ending 31st March, 2002 or for the financial year ending 31st March, 2003.

OPTION DEED 3

Parties

(1) BPL

(2) RFL

Option

RFL will grant a call option to BPL which will entitle BPL to purchase all of the shares in WYT Medicine owned by RFL other than those which have been sold to BPL or its nominee pursuant to the exercise of the call options and the put option pursuant to Option Deed 1 (the "Called Shares"). The option may be exercised either from 14th February, 2002 up to and including 31st March, 2002 (the "First Call Option") or if the First Call Option is not exercised, from 14th February, 2003 up to and including 31st March, 2003 (the "Second Call Option) for a consideration calculated to be

HK$125,000,000 x (A / 99.79 )

where A = % represented by the Called Shares in the entire issued share capital of WYT Medicine plus interest at the rate of 40% per annum (in the case of the First Call Option) and 23.9% per annum (in the case of the Second Call Option) upon exercise of the First Call Option or the Second Call Option. As the Company intends that RFL will exercise its put option described under Option Deed 1 above even if BPL does not exercise its call option also described under Option Deed 1 above, thereby selling a 24% shareholding in WYT Medicine to BPL, the Called Shares will represent, at most, a 75.79% shareholding in WYT Medicine.

The consideration for the exercise of the option was determined by commercial negotiations carried out on arm's length basis.

OPTION DEED 4

Parties

(1) BPL

(2) RFL

(3) BPL Shareholder

Option

BPL will grant a put option to RFL which will entitle RFL to sell all of the shares in WYT Medicine owned by RFL at the time of the exercise of the put option (the "Sale Shares") to BPL for a consideration calculated to be

HK$125,000,000 x ( A / 99.79)

where A = % of the Sale Shares in the entire issued share capital of WYT Medicine plus interest at the rate of 15% per annum.

The consideration for the exercise of the option was determined by commercial negotiations carried out on arm's length basis.

The said option may be exercised from 1st February, 2001 up to and including 15th August, 2003.

OPTION DEED 5

Parties

(1) BPL

(2) RFL

Option

RFL will grant a put option to BPL which will entitle BPL to sell all of the shares in WYT Medicine owned by BPL or its nominee at the time of the exercise of the put option to RFL for a consideration calculated to be

7 x A x I

Where A = latest audited profit after tax of WYT Medicine

I = % holding of BPL or its nominee in WYT Medicine as at the date of the exercise of the put option.

The consideration for the exercise of the option was determined by commercial negotiations carried out on arm's length basis.

The said option may be exercised at any time within a period of three (3) months after the termination of the Management Agreement by WYT Medicine if at the time of such termination RFL controls a majority of the board of directors of WYT Medicine (that is, at least 3 out of 5 directors are appointed by RFL). Under the Management Agreement, WYT Medicine may terminate at its sole discretion the agreement at any time after 31st March, 2004 if the audited profit after tax of WYT Medicine for a financial year after 31st March, 2004 showed an increment of less than 10% from the audited profit after taxation of the immediately preceding financial year or a loss (as the case may be).

REASONS FOR AND BENEFITS OF THE ACQUISITION

The Group is principally engaged in the activities of commercial management of wet markets, shopping centres, car parks and construction, renovation and decoration services. The Directors believe that the business of manufacture and sale of Chinese medicine has a good prospect and a promising outlook, particularly in view of the long established brandname of "Wai Yuen Tong" and Chinese medicine sold under that name. The Directors believe that the Acquisition will provide a good opportunity for the Group to diversify into the Chinese medicine business and will complement the Group's existing business. The business of WYT Medicine will be managed by BPL, being the party which will be selling its shareholding in WYT Medicine to the Group, pursuant to the Management Agreement with supervision and control by the board of directors of WYT Medicine which the Group will control after the Acquisition. The board of directors of WYT Medicine comprises of 5 directors of which 3 are nominated by RFL and 2 are nominated by BPL (having regard to the profit guarantee to be provided by BPL and the appointment of BPL for the provision of certain management services to WYT Medicine pursuant to the Management Agreement). Apart from the profit guarantee to be provided by BPL, the Group will also have the ability, if necessary, to sell its interest in WYT Medicine back to BPL by exercising the put option granted under Option Deed 4.

LOAN TO BPL

Upon commencement of preliminary discussions regarding the Group's initial interest in acquiring an interest in WYT Medicine, when BPL offered to sell its 99.79% shareholding in WYT Medicine at the price of HK$125,000,000, the Group on 3rd November, 2000 advanced a loan of HK$39,175,000 to BPL, which was guaranteed by BPL Shareholder, at the interest rate of 25% per annum. (The amount of HK$39,175,000 represented approximately 12.91% of the Company's consolidated net tangible assets of HK$303,359,000.)

On 29th November, 2000, for the purpose of securing its priority in negotiating for its possible acquisition of WYT Medicine, the Group advanced to BPL an amount of HK$125,697,637 by way of an interest-bearing loan so that the Group would be able to continue negotiation with BPL and to carry out due diligence on WYT Medicine. BPL's repayment obligations were guaranteed by BPL Shareholder. The loan principal amount of HK$125,697,637 represented the loan of HK$39,175,000 which had been advanced on 3rd November, 2000 together with interest of HK$697,637 accrued up to 29th November, 2000 (making a total of HK$39,872,637) and an additional advance of HK$85,825,000, and would be repayable by BPL on demand by the Group at any time on or before 31st January, 2001. Interest was payable at 25% per annum on HK$39,872,637 of the total principal amount of the loan and at 12.5% on the balance of HK$85,825,000. The interest accrued up to 19th December, 2000 amounted to HK$1,134,043 and the total amount of HK$126,831,680 repayable by BPL on 19th December, 2000, being the principal amount of HK$125,697,637 plus the above accrued interest, and which was equal to the consideration payable by the Group for the Acquisition, was applied as the deposit to be paid to BPL upon execution of the Sale and Purchase Agreement on 19th December, 2000. The total deposit paid to BPL as at 19th December, 2000, which amounted to HK$126,831,680, which is repayable when the Sale and Purchase Agreement does not become unconditional, represents 41.8% of the Group's net assets as at 31st March, 2000 after adjustment for the net proceeds received by the Company under the placing and subscription of 135 million shares announced on 29th June, 2000 of approximately HK$38 million. As such, a disclosure obligation arises under paragraph 3.2.1 of Practice Note 19 of the Listing Rules ("PN19"). The Company omitted to make the announcement under PN19 at the time when the loan was made to BPL due to an oversight on the part of the Directors. This constitutes a breach of the Listing Rules. The Stock Exchange reserves its right to take further action against the Company and/or its director.

GENERAL

The Acquisition constitutes a major transaction of the Company under the Listing Rules and may only be proceeded with the approval of the shareholders of the Company. A circular containing further details of the Acquisition will be despatched to the shareholders of the Company as soon as practicable, together with a notice convening a special general meeting of the Company at which a resolution will be proposed for the approval of the Acquisition, the options to be granted under the Option Deeds and related matters.

RESUMPTION OF TRADING

The shares of the Company were suspended from trading on the Stock Exchange at 10:00 a.m. on 20th December, 2000 pending the release of this announcement. Application has been made to resume trading of the shares of the Company at 10:00 a.m. on 27th December, 2000.

The Acquisition may or may not proceed subject to the approval of shareholders. Shareholders and potential investors should exercise caution before dealing in any shares of the Company.

DEFINITIONS

"Acquisition" the proposed purchase by RFL of a 99.79% shareholding in WYT Medicine from BPL as provided in the Sale and Purchase Agreement;

"BPL" Bio-Project Limited, a company incorporated in the British Virgin Islands;

"BPL Shareholder" the sole shareholder of BPL;

"Call and Put Options" Option Deeds 1-5 to be made between BPL, RFL and (except in two cases) the BPL Shareholder;

"Company" Wang On Group Limited, a company incorporated in Bermuda with limited liability whose shares are listed on the Stock Exchange;

"Directors" the directors, including the independent non-executive directors, of the Company;

"Group" the Company and its subsidiary;

"Listing Rules" Rules Governing the Listing of Securities on the Stock Exchange;

"Management Agreement" a management agreement between BPL and WYT Medicine in respect of the appointment of BPL as an independent contractor for the provision of certain management services;

"RFL" Royal Focus Limited, a wholly-owned subsidiary of the Company, is a company incorporated in Hong Kong;

"Sale and Purchase a sale and purchase agreement dated 19th December,

Agreement" 2000 between BPL and RFL in respect of the conditional sale and purchase of a 99.79% shareholding in WYT Medicine;

"Stock Exchange" The Stock Exchange of Hong Kong Limited; and

"WYT Medicine" Wai Yuen Tong Medicine Company Limited, a company incorporated in Hong Kong.

By Order of the Board

Wang On Group Limited

Chan Chun Hong, Thomas

Director and Company Secretary

Hong Kong, 22nd December, 2000

Please also refer to the published version of this announcement in the i-Mail.