The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of thisannouncement, makes no representation as to its accuracy or completeness and expressly disclaimsany liability whatsoever for any loss howsoever arising from or in reliance upon the whole or anypart of the contents of this announcement.
GREATERCHINA TECHNOLOGY GROUP LIMITED
(incorporated in the Cayman Islands with limited liability)
(Stock Code: 8032)
RESUMPTION OF TRADING
Reference is made to the January Announcement, the February Announcement, the MarchAnnouncement, the April Announcement and the November Announcement in relation to thedelay in release of the Company’s financial information.
Reference is also made to the October Announcement in relation to the change of auditors of theCompany.
At the request of the Company, trading in the Company’s shares has been suspended from9:30 a.m. on 30 October 2003 pending the release of final results of the Company for the yearended 31 July 2003. After the appointment of the New Auditors, the Company had announcedits FY2003 Final Results on 6 October 2004 and had despatched its 2003 annual report on1 December 2004. The Company had also announced its FY2004 First Quarterly Results on29 October 2004 and had despatched the first quarterly report for the same period on 1 December2004. The Company had also announced its FY2004 Interim Results on 1 November 2004 andhad despatched the interim report for the same period on 1 December 2004. The Company hadalso announced its FY2004 Third Quarterly Results on 8 November 2004 and had despatchedthe third quarterly report for the same period on 1 December 2004. The Company had alsoannounced its FY2004 Final Results on 23 November 2004 and had despatched its 2004 annualreport on 1 December 2004.
Upon the request of The Stock Exchange, the Company had appointed an independent accountingfirm to conduct the Special Review.
An application has been made to The Stock Exchange for resumption in trading of the shareswith effect from 9:30 a.m. Tuesday, 9 May 2006.
The board of directors (the “Board”) of GreaterChina Technology Group Limited (the “Company”,together with its subsidiaries, the “Group”) refers to the announcement of the Company dated27 January 2004 (the “January Announcement”), the announcement dated 27 February 2004 (the“February Announcement”), the announcement dated 12 March 2004 (the “March Announcement”),the announcement dated 16 April 2004 (the “April Announcement”) and the announcement dated9 November 2004 (the “November Announcement”) in relation to the delay in the release of theaudited final results for the year ended 31 July 2003 (the “FY2003 Final Results”) and 2003 annualreport, the unaudited results for the three months ended 31 October 2003 (the “FY2004 FirstQuarterly Results”) and the quarterly report for the same period, the unaudited interim results forthe six months ended 31 January 2004 (the “FY2004 Interim Results”) and the interim report for thesame period, the unaudited results for the three months ended 31 October 2004 (the “FY2004 ThirdQuarterly Results”) and the quarterly report for the same period, and the audited results for the yearended 31 July 2004 (“FY2004 Final Results”) and the 2004 annual report.
Reference is also made to the announcement of the Company dated 5 October 2004 in relation tothe change of auditors and the delay in the release of the financial information of the Company (the“October Announcement”).
RESIGNATION OF FORMER AUDITORS
The Company received a resignation letter dated 23 April 2004 (the “Resignation Letter”) fromErnst & Young, the former auditors of the Company (the “Former Auditors”) resigning as auditorsof the Company and certain subsidiaries of the Company. The Former Auditors indicated in itsresignation letter that owing to the prolonged delay in the audit of the Group for the financial yearended 31 July 2003 (“FY2003”) and the lack of responses from the Group’s management as to howthe Group would proceed further, the Former Auditors did not consider it would be appropriate forthem to continue as auditors of the Company and they therefore tendered their resignation. TheFormer Auditors also indicated in the Resignation Letter that they had provided the Board with adraft auditors’ report (the “Draft Report”) which contains various scope limitations and disclaimer(the “Draft Scope Limitations”) on their audit of the Group’s financial statements for FY2003 basedon the information obtained by the Former Auditors up to 11 March 2004. Save for the mattersaforementioned, the Former Auditors confirmed that there were no circumstances connected withtheir resignation which they consider should be brought to the attention of the shareholders orcreditors of the Company.
The directors of the Company (the “Directors”) wish to state that they do not agree that there hadbeen a lack of responses from the Company’s management on how the Group would proceedfurther with the audit of the Group for FY2003. And no prior consultation had been made by theFormer Auditors with the management of the Company before they tendered their resignation.
Please refer to the October Announcement for further details in relation to the resignation of theFormer Auditors.
APPOINTMENT OF NEW AUDITORS AND RELEASE OF DELAYED FINANCIAL
The Board appointed Horwath Hong Kong CPA Limited (“Horwath” or the “New Auditors”) as theauditors of the Company on 9 September 2004 to fill the casual vacancy arising from the resignationof the Former Auditors.
After the appointment, the New Auditors had reviewed the Draft Auditors’ Report as indicated inthe Former Auditors’ resignation letter and had obtained all the necessary information or documentsfor their purposes of audit. The Company had announced its FY2003 Final Results on 6 October2004 and had despatched its 2003 annual report on 1 December 2004. The Company had alsoannounced its FY2004 First Quarterly Results on 29 October 2004 and had despatched the firstquarterly report for the same period on 1 December 2004. The Company had also announced itsFY2004 Interim Results on 1 November 2004 and had despatched the interim report for the sameperiod on 1 December 2004. The Company had also announced its FY2004 Third Quarterly Resultson 8 November 2004 and had despatched the third quarterly report for the same period on 1December 2004. The Company had also announced its FY2004 Final Results on 23 November 2004and had despatched its 2004 annual report on 1 December 2004.
The Company had released on schedule its subsequent financial information including the unauditedresults and the quarterly report for the three months ended 31 October 2004, the unaudited resultsand the interim report for the six months 31 January 2005, the unaudited results and the quarterlyreport for the nine months ended 30 April 2005, the audited results and the annual report for theyear ended 31 July 2005, the unaudited results and the quarterly report for the three months ended31 October 2005, and the unaudited results and the interim report for the six months ended 31January 2006 under the requirements of Rules Governing the Listing of Securities on the GrowthEnterprise Market of The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) (the“GEM Listing Rules”). The Company will ensure on time release of financial information in thefuture in order to comply with the GEM Listing Rules.
Horwath had issued a “disclaimer” opinion and an “except for” opinion respectively in the auditors’reports for the Company for FY2003 and the financial year ended 31 July 2004 (“FY2004”). TheNew Auditors indicated in their reports that in respect of the limitations on their audit work as setout in the basis of opinion section of the reports: (i) they had not obtained all the information andexplanations that they considered necessary for the purpose of their audit; and (ii) they were unableto determine whether proper books of accounts had been kept.
The qualifications in FY2003 were in relation to the following:
Impairment provision in respect of intellectual properties
The Group had made a full provision in respect of its traditional Chinese medicine formulaeand protocols for herbal medicine (the “Intellectual Properties”) with a carrying value ofHK$58,302,048. As the Group did not perform a formal valuation of the Intellectual Properties,the New Auditors were unable to determine the recoverable amount of the Intellectual Propertiesand whether or not it was appropriate for the Group to fully provide for their carrying value.
However, the New Auditors agreed with the Company’s treatment to fully provide for thecarrying value of the Intellectual Properties after observing the actual results and projectionsfor year 2005 of the Group in year 2004, which indicated the future economic benefits to bebrought in by the Intellectual Properties would unlikely cover their costs. Therefore therewere no outstanding concerns in this respect for FY2004 and the financial year ended 31 July2005 (“FY2005”). The Company will seek additional advice from more professionals includingauditors before entering into material transactions of this nature in the future to reduce potentialbusiness risk and hence to avoid the occurrence of limitation of audit scope.
Recoverability of remaining prepayments for advertising campaigns
The New Auditors were unable to assess the recoverability of the prepayment of approximatelyHK$4,780,000 as at 31 July 2003, which were held on account and to be deducted from thefuture fees payable for advertising services and marketing services to be provided by twoagencies. The prepayments were in connection with the marketing and promotion of theGroup’s trademarks and products in the People’s Republic of China (the “PRC”) when theapproval of these trademarks and products were obtained. As there was no information toindicate when the Group would be able to obtain approval of its trademarks and products, theCompany had written off the prepayments in the accounts for the year ended 31 July 2004after discussion with the New Auditors for prudence purposes. The Company had signedrevised agreements dated 1 September 2003 with the agents to ensure the Group could utilizethe prepaid amounts for service rendered by the two agents in future. There were no outstandingconcerns in this respect for FY2004 and FY2005. The Company will seek additional advicefrom more professionals including our auditors before entering into any material transactionsof this nature in the future to reduce potential business risk and hence to avoid the occurrenceof limitation of audit scope.
(iii) Deposit paid for the construction of a pharmaceutical plant in the PRC
The New Auditors were unable to ascertain the recoverability of the amount of HK$15,630,000being deposit paid for the construction of a pharmaceutical plant in the PRC as at 31 July2003 as there was no information to indicate the stage of completion of the work performed, ifand when the GMP certificates would be granted or the fair value of the pharmaceuticalproduction facilities as and when it was fully constructed. However, the Company is of theview that there should not be any recoverability problem for the deposit because in accordancewith the agreement dated 16 May 2003 entered into between the Company and the contractor,the Company has the right to demand the refund of the deposit. There was qualified opinion oflimitation of audit scope for the same reason for FY2004. The construction work on thepharmaceutical plant continued to be suspended and the New Auditors could not ascertain thestage of completion of construction work at 31 July 2004. On 29 July 2005, the contractoragreed in writing to refund the unutilized amount of the deposit to the Group. The Group alsoappointed an independent valuer, who advised that the depreciated replacement cost of thepharmaceutical plant in October 2005 exceeded the utilized portion of the deposit. Thereforethe New Auditors were satisfied with the recoverability of the unutilized amount of thedeposit and the carrying value of the construction work at 31 July 2005 and thus there was noqualified opinion in respect of limitation of audit scope in this respect for FY2005. As of todate, although the full amount has not been fully refunded, however the contractor had paidapproximately HK$3 million to the Company. The original repayment schedule is runningbehind due to foreign currency restriction as the Company insisted on getting the refund inHong Kong Dollars rather than Renminbi. The Company has followed up with the contractoron a regular basis regarding the repayment status and will continue to pursue the refund of thedeposit. Beside seeking additional advice from more professionals, the Company willcommunicate and discuss with auditors to ensure any potential issues are addressed andresolved beforehand to avoid the occurrence of limitation of audit scope in the future.
(iv) Consolidation of a subsidiary based on its unaudited management accounts for the year
ended 31 July 2001
The consolidation of a subsidiary of the Company was based on the subsidiary’s unauditedmanagement accounts for the year ended 31 July 2001, which included bad debts written offof HK$579,000 and creditors and accrued charges of HK$785,000. There were no financialstatements prepared after 31 July 2001 because the subsidiary was dormant with no materialtransactions subsequent to that date. The subsidiary was disposed of in December 2003 at again. There was qualified opinion of limitation of audit scope due to the same reason forFY2004 and the New Auditors were unable to ascertain the gain on disposal. The subsidiarywas disposed in December 2003 and there was no limitation of audit scope in this respect forFY2005 after the disposal of the subsidiary. The Company has strengthened its financialreporting procedures to ensure audited accounts to be prepared for every group companies andhence to avoid the occurrence of limitation of audit scope in the future.
Due to the lack of adequate documentary evidence for consultancy fee of HK$3,800,000,the New Auditors were unable to ascertain whether such expenditure should be includedas part of the cost of finished products and therefore cost of sales for FY2003. Althoughthe Company had tried to take remedial action to request the suppliers to provide therelevant invoices, the suppliers were unable to provide the invoices in relation to theconsultancy fee for transactions occurred two years ago. The Company has strengthenedits internal control to ensure proper books and records are kept and hence to avoid theoccurrence of limitation of audit scope in the future.
As the New Auditors were appointed after the financial year-end date, they were unableto carry out auditing procedures necessary to obtain adequate assurance regarding thequantities and condition of inventories at 31 July 2003. There were no outstandinginformation or unresolved issues with regard to the audit of the inventories of the Groupat 31 July 2004 and FY2005.
(vi) Balances due from subsidiaries
The limitation of audit scope was due to the lack of sufficient information to access therecoverability of the amounts of HK$274,000,000 due from the subsidiaries of the Companyand whether or not the provision of HK$155,000,000 made by the Company as at 31 July2003 was adequate. As a result of the limitation of audit scope in (iii) above, the NewAuditors were unable to assess whether or not the provision made by the Company in respectof the subsidiary concerned was adequate at 31 July 2004. The Company had provided againstthe net deficit of the subsidiaries and the matter in (iii) above was resolved, there was notqualified opinion of limitation of audit scope in this respect for FY2005.
The Company has taken steps to improve its financial reporting and internal control to avoidthe recurrence of the qualified opinions in respect of limitations of audit scope. Please refer tothe “Special review” and “Other actions taken to strengthen internal control and financialreporting systems” sections of this announcement.
The qualifications in FY2004 were mainly related to the following:
The New Auditors were appointed subsequent to the year ended 31 July 2003 and accordinglywere unable to carry out auditing procedures necessary to obtain adequate assurance regardingthe quantities and condition of the inventories as at 31 July 2003. Any adjustment to theopening inventory might have a consequential significant effect on the net loss of the Groupfor FY2004. However, there were no outstanding concerns in this respect for FY2005. Pleaserefer to the limitation of audit scope in respect of the “inventory” in FY2003 as mentionedabove.
Gain on disposal of a subsidiary based on its unaudited management accounts for the
year ended 31 July 2001
The New Auditors were also unable to carry out alternative procedures to satisfy themselvesthat the gain on disposal of a subsidiary of approximately HK$1,055,000 which was based onthe unaudited management accounts of the subsidiary for the year ended 31 July 2001 wasfairly stated in the consolidated income statement for FY2004. The subsidiary was disposed ofin December 2003 and there was no limitation of audit scope in this respect for FY2005.
Please refer to the limitation of audit scope in respect of the “consolidation of a subsidiarybased on its unaudited management accounts” in FY2003 as mentioned above.
(iii) Deposits paid for the construction of a pharmaceutical plant in the PRC and amounts
due from subsidiaries
The New Auditors were unable to ascertain the recoverability of a deposit of HK$15,630,000paid to a contractor for the construction of a pharmaceutical production facilities in the PRCand the recoverability of the amount of HK$17,300,000 due from the subsidiary which recordedthe aforementioned deposit and whether or not the provision made by the Company againstthe subsidiary’s net deficit of approximately HK$1,600,000 as at 31 July 2004 was adequate.
As the Group has appointed an independent valuer and terminated the construction project,and the contractor agreed to refund the deposit in writing, there was no qualified opinion oflimitation of audit scope in this respect for FY2005. Please refer to the limitation of auditscope in respect of the “deposit paid for the construction of a pharmaceutical plant in thePRC” in FY2003 as mentioned above.
Please refer to the respective auditors’ reports in the 2003 and 2004 annual reports of the Companyfor full details. The New Auditors issued an unqualified opinion for FY2005.
The Board, at the request of The Stock Exchange, appointed an independent accounting firm, BakerTilly, to conduct a special review (the “Special Review”) to assess the Group’s systems andprocedures are in place to properly discharge its obligations under the GEM Listing Rules includingthe financial reporting obligations. The fieldwork of the Special Review was commenced on20 June 2005 and was completed in mid of July 2005.
In the report of internal control review dated 29 July 2005 (the “Control Report”), Baker Tillyopined that the overall system of internal controls and business risk management of the Group wasadequate for the size and nature of the business of the Company, except for some specific concernsrelating to high priority control and business issues. The following summarised the findings andrecommendations of Baker Tilly, and the actions which were already taken by the Company:
Business risk management
Executive management should establish a program for formalreviews of significant business risks facing the Company at leaston an annual basis, preferably as part of the initial phases of itsannual budgeting cycle. The risk review program should bedocumented, with a summary of the results of the review distributedto the Board and to shareholders, when appropriate. The businessrisk review program should include consideration of issues of (i)markets; (ii) products or services; (iii) employees; and (iv)financials.
There was no formal, documented business risk managementprocess. Although business risks were discussed informally, thatthere was little consistency and continuity in the approach whichwas used to identity and assess business risk.
Lack of a formal, documented business risk assessment program,reduces the potential for Management to be able to respond quicklyand effectively to events that occur that have the potential foradverse effects on the Company’s financial condition.
Management agrees with the recommendation and has increasedformalization and expansion of its risk management procedures.
A risk review program has been established as follows:
Weekly meetings are held amongst all staff to discuss all business issues includingbusiness risks. On a quarterly basis, the management of the Company, which includesthe Chief Executive Officer (the “CEO”), the Chief Financial Officer (the “CFO”) andthe managers (the “Management”) meet formally to evaluate the business risk environmentfor the Company. The related business risk issues are summarized and distributed to theBoard. The Board reviews and discusses with the Management the business risk issues.
Formal procedures are implemented to collect and analyse the market and competitors’information, to track market changes due to technological, environmental and regulatoryfactors, and to identify new potential markets.
Analytical review is performed by the sales and marketing manager in relation to theadvertising or marketing expenses for three years to evaluate its relationship with salesvolume and hence to ensure the effective allocation of resources. The analytical reviewis reviewed by the CEO and CFO.
Responsible staff is appointed for regulatory compliance policies. Testing is performedfor all products of the Group to ensure products’ safety and quality.
Annual budgets within the 3-year business plans
Executive management should prepare annual operating budgetsbased on the information developed in the formal business riskassessment process and perform analysis of actual results comparedto budget at least on a quarterly basis.
While reviewing controls over capital budgeting and maintenancecosts, it was found that no budgets had been prepared since 2003,except on a limited basis for certain departments or functions.
Further research and discussion with Management indicated thatbudgets were prepared only for years in which significant capitalexpenditures were anticipated.
Without formal, annual business plans and budgets Managementlosses a key tool in monitoring financial performance and inidentifying possible significant financial reporting errors, internalcontrol failures, and employee dishonesty or fraud.
Management agrees with the recommendation and in year 2006has developed overall budgets within the three-year plan updateprocess and has progressed towards a variance reporting andanalysis process as controls over transactions and financial reportingare increased by implementation of other recommendations in theControl Report.
The Management has compiled the budgets prepared by differentdepartments in Hong Kong as well as the PRC to develop anoverall budget within the three-year business plan of the Company.
The Board has reviewed and approved the budget. The Managementuses the budget as guidelines for business operations, evaluationof company performance, and for the monitoring financial results.
The Management also compares budgets against actual figures ascontrols over transactions and financial reporting.
Numeric controls of key documents supporting the completeness and accuracy of financial
Executive management should implement a consistent, continuoussequential numbering scheme for all primary control documentsused for key control points in all significant processes. At all keycontrol points over the initiation of a transaction, the sequentialnumbering should be applied either before the document isprepared, or immediately upon preparation of the document.
Whenever possible, the documents should be pre-numbered withthe supply of pre-numbered documents strictly controlled. A masterfile should be kept for sequential usage control copies for everydocument included in the sequential numbering scheme, includingthose documents that were skipped, voided, or damaged.
Although the use of sequential numbering schemes was identifiedat several points in the purchasing and sales processes, thesequential numbers were assigned manually and controlled in aseparate log or document registered. In addition, the numbers wereoften assigned primarily to documents that were created after thetransaction was initiated. Finally, the numbering schemes used forsome documents were sequential within a time period, but startedover with a new sequence for the next time period. As a result, thelack of a consistent, continuous pre-numbering scheme for primarycontrol documents increased the potential for transactions to notbe recorded on a timely basis and increased the opportunity for theexistence of fraud or employee dishonesty related to unprocessedtransactions to go undetected.
Lack of a consistent, continuous pre-numbering scheme for primarycontrol documents increases the potential for transactions to notbe recorded on a timely basis and increases the opportunity for theexistence of fraud or employees dishonestly related to unprocessedtransactions to go undetected.
Management agrees with the recommendation and has developedan effective control document numbering scheme in coordinationwith implementation of Recommendation #4. The sequentialnumbering scheme is assigned and controlled by the automatedsystems to assure accuracy and consistency.
The sequential numbers are currently assigned by the accountingsoftware to invoices or purchase order upon processing of therelevant transactions. The sequential numberings scheme ensuresthe consistency and continuity of the primary control documents.
Automation of accounting systems and business processes
Management should assure implementation of the new inventorycontrol application as planned and more rapidly implement theplanned increase in the use of other modules beyond the GeneralLedger Maintenance in the accounting software purchased early in2005. In particular, the accounting application modules forAccounts Receivable and Accounts Payable should be planned forimmediate implementation with modules for Sales Order Entryand Purchase Order to be implemented as business demands makethem necessary.
The systems relied heavily on the use of manually updated controllogs and transaction registers. The inventory balance controlsrequired manual entry of quantities received and shipped and ofcosts related to the inventory units. Manual updating of recordsoften is subject to the possibility of clerical errors and transactionsnot recorded on a timely basis, thus creating errors in the controldocumentation.
Reliance on manual control logs, balance control records, andtransaction registers increases the potential for accounting errorsresulting from manual, clerical procedures and delayed processingof transaction data.
Management agrees with the recommendation and has proceededwith expended implementation of additional modules of newcomputer applications as they are appropriate for businessrequirements.
The new inventory application has been implemented and the othermodules beyond the General Ledger Maintenance, including theapplication modules for Accounts Receivable, Accounts Payable,Sales Order and Purchase Order has been in use.
Increased segregation of duties in purchasing procedures
Management should increase the segregation of duties in purchasingprocedures by assigning a separate employee to place the actualorders for purchases based on the approved purchase requisitionforms. The employee should not report to, nor be under the directcontrol of, the personnel responsible for the most frequent, mostsignificant, or most critical purchase requests.
There was minimal segregation of duties within the purchasingactivities as the person who requested the purchase also placed theorder after receiving the approved purchase requisition back fromthe authorized reviewer and approver.
Purchasing is an area in which significant opportunities exist fordevelopment of inappropriate business relationships, improperbuying (either by error or deliberate action), and fraud and employeedishonestly. The opportunities increase significantly in situationsin which there are little or no segregation of duties. Managementreview and approval alone may not be sufficient to assure thaterroneous, inappropriate, or dishonest purchasing is discovered.
Increased segregation of duties is a primary preventive control toincrease Management’s assurance of effective operational controlof this area.
Management agrees with the recommendation and has identifiedappropriate personnel to whom portions of the purchasingprocedures can be shifted in order to increase the segregation ofduties for the purchasing function in the Hong Kong offices and atJianlibao Pharmaceuticals Company Limited (“JLB”), which is theGroup’s subsidiary in the PRC.
Portions of the purchasing procedures have been shifted toappropriate personnel to increase the segregation of duties for thepurchasing function.
As of to date, the Company has fully implemented the recommendations of Baker Tilly in relationto the high priority control and business issues.
Additional Internal Controls Observations
Additional internal controls observations relating to some special errors and lower priority controlsconcerns about the Company, with primary emphasis on the Hong Kong headquarters (the “HongKong Business Operations”) and the pharmaceutical plant in the PRC (the “China BusinessOperation”), together with the recommendations of Baker Tilly and actions taken or to be taken bythe Company are as follows:
HONG KONG BUSINESS OPERATIONS
No formal written corporate policies and procedures are in place for finance, administration,sales & marketing, production and human resources departments.
Formal corporate policies and procedures covering the areas offinance, administration, sales and marketing, production and humanresources should be established and made known to all staff withinthe company, to ensure all business activities are properlyperformed, effectively monitored and consistently evaluated.
Some exceptions to control procedures were identified in petty cash disbursements.
It is recommended that all petty cash disbursement should beproperly supported with receipts and invoices, formally approvedand acknowledged by designated personnel.
No insurance policy coverage is taken out for stocks of raw materials and finished goods.
Inventory should be covered by appropriate insurance policy.
The Sales Manager and Accounts Assistant who is in-charge-of stock keeping cannot providethe records of monthly stock-take documentation.
Periodical stock takes should be properly supported by stock-takedocumentation.
CHINA BUSINESS OPERATION
During petty cash count, the amount of petty cash float exceeds the authorized monthly fixedbalance.
It is recommended that management should maintain authorizedmonthly fixed balance of cash float for petty cash in order toensure a better control over petty cash disbursement.
No detail maintenance budget is prepared and no preventive maintenance program established.
It is recommended that Management should maintain a maintenancebudget and establish preventive maintenance program so thatproduction and manufacturing activities can be carried outeffectively and efficiently. Management should compare the actualmaintenance cost to the budget, as they can know which machineshould be replaced or phased out in the production line.
The Company has implemented the recommendations of Baker Tilly in relation to observations 2 to6 above. The Company will set up formal corporate policies and procedures as described inobservation 1 by the end of year 2006.
OTHER ACTIONS TAKEN TO STRENGTHEN INTERNAL CONTROL AND FINANCIAL
In addition to the implementation of the recommendations addressed by Baker Tilly as aforementionedin relation to high priority control and business issues, the Board has tightened its monitoringfunctions as follows:
The Directors are involved in the discussion and formulation of the overall strategies of theGroup, review of the financial performance and decision-making on significant matters.
The Chairman has assured the Directors’ access to relevant and timely information and thatthe Management will supply the Board and the Audit Committee with all relevant informationin a timely manner.
(iii) The Directors have unrestricted access to all board papers and related materials to ensure that
all proper board procedures are followed and that all applicable laws and regulations arecomplied with.
(iv) The Management has to satisfy the Directors by providing all relevant information and record
to the Board to enable the Board to make the assessment about the Group’s performance andprospects, and to prepare the accounts and other financial disclosures, which give a true andfair view of the financial position of the Group.
The Audit Committee of the Company, through meetings with management and auditors, hasfully discharged its duties in ensuring the Group’s financial statements, annual and interimreports, and the auditors’ report which present a true and balanced assessment of the Group’sfinancial position. The Audit Committee’s last meeting with the auditors and management wason 26 October 2005. The Audit Committee’s members will meet at least quarterly to reviewthe Group’s financial control, internal control and risk management systems, and the Group’sfinancial and accounting policies. The last Audit Committee Meeting of the Company washeld on 13 March 2006, in which the Audit Committee reviewed the Company’s financialreporting, internal control and business risk. The Audit Committee considered that the internalcontrol system of the Company had been improved, and the recommendations of Baker Tillyin relation to high priority issues had been implemented.
(vi) The Board will from time to time, at least on quarterly basis, conduct a review of the Group’s
internal control systems, the progress of the management in implementation of the controls asrecommended by the internal auditors.
REVIEW OF INDEPENDENT NON-EXECUTIVE DIRECTOR AND AUDIT COMMITTEE
The independent non-executive directors of the Company (the “INEDs”) and the audit committeehad reviewed the accounting systems and internal control procedures of the Group and consider thatthe Management has taken steps to improve the internal control of the Group. The INEDs and theaudit committee are of the view that the Group has in place systems and procedures to properlydischarge its obligation under the GEM Listing Rules including financial reporting obligations. TheINEDs and the audit committee will continue to reassess the Group’s policies, procedures and keybusiness areas to strive for the continuous improvement of the Group’s internal control system.
BUSINESS ACTIVITIES AND FINANCIAL INFORMATION
The principle activities of the Group are trading of healthcare and Chinese herbal products, andwestern medicines:
Trading of healthcare and Chinese herbal products:
The Group is in the pursuit of promoting and distributing its Traditional Chinese Medicine (“TCM”),which include nutraceutical and healthcare products, in Hong Kong and PRC. Its goals are alsoaimed at the production of high quality and safe health supplements with the assistance of advancedbiotechnology in which it maintains stable chemical ingredients and efficacies of which most TCMis lacking. Research and development of product lines will be executed either in cooperation withexternal research institutions or carried out in-house. The manufacturing of the product is contractedto GMP certified pharmaceutical and nutraceutical manufacturing companies. Thus far, the Grouphas successfully launched their first, second and third series of products, Cordyceps Series, LingzhiSeries and Polysaccharides Series in Hong Kong. The Group is in the course of establishing itsdistribution channels in other countries such as Canada and Thailand and plans to penetrate into thePRC market. Recently, the Group had been granted licenses for three of its products in the PRC,“Polysaccharides Liver Enrich”, “Cordyceps Polysaccharides Platinum” and “Cordyceps FruitingBodies” and is in the course of applying for licenses for its other products. The Group has enteredinto cooperative arrangement with a strategic partner to launch and distribute “Liver Enrich”,“Cordyceps Polysaccharides” and “Cordyceps fruiting bodies” in the Guangdong Province of thePRC. These products will be officially launched in the PRC in May 2006. Basically, this strategicpartner will utilize its distribution network and advertising channels. The Group is also in thecourse of discussing with other potential partners to launch the products to other locations of thePRC. Besides, the Group has another product line, functional foods, which include Herbal TeaSeries, Pear Fruit Bar and Perilla Seed Oil. Currently, the Group’s products are available at Watsons,Mannings, CRCare, Seiyu, Yue Hwa, New World Store, and all major pharmacies like VictoriaDispensary. In June 2005, the Group opened its first concept store at Windsor House Seibu.
Manufacturing and distribution of western medicines:
The Group has further diversified its business into an acquisition of a 80% equity interest in JLB, amanufacturing plant in the PRC. JLB is a large-scale pharmaceutical products manufacturing companywith an area of around 300 acres situated in Sanshui. It has obtained the pharmaceutical GMPcertificate for its tablets and capsulation production lines. It has annual production capacity ofapproximately one billion tablets and capsulation production lines. Its major production facilitiesinclude capsule filling, aluminum plastic packaging and most of the equipments are imported fromGermany and Western Europe. Currently, it has already established more than 10 distributionoffices in major cities and there are over 10 kinds of pharmaceutical products available for distributionbut are currently focused on selling 5 of the products, Nimesulide Tablets, Isosorbide MononitrateSustained-released Capsules, Cetirizine Hydrochloaride Capsules, Clarithromycin Dispersible Tabletsand Procateroal Hydrochloride Capsules. In view of the large production capacity of JLB and vastpopulation in the PRC, the Directors are confident that the contribution from JLB to the Group willincrease significantly in the forthcoming years. After the Group gained control of JLB in November2004, the Group had started immediately the development plan for JLB, which included restructuringof the sales team and sales channels, and establishing cooperation plans with many strategic partnersin the PRC. Besides, there are also some medicines under research and development, which theGroup believes there is a very great demand in the market.
For the six months ended 31 January 2006, the Group recorded total revenue of HK$11.8 million,represented an increase of approximately 81.9% as compared to the total revenue of HK$6.5 millionin the corresponding period last year. The overall revenue increase was due to the Group’s majorrevenue from sales of herbal products increased by 128.4% due to the Group’s continued effort inexploring new sales network. Besides, the sales from western medicine in the six months ended31 January 2006 was also increased by 95.4% because the results of the operation of a pharmaceuticalplant was consolidated for the whole period, while that in the corresponding period last year wasonly; accounted for after the Group gained control of the pharmaceutical plant in November 2004.
The losses attributable to equity holders of the Company for the six months ended 31 January 2006were reduced by 19.4% to HK$9.3 million as compared to the losses attributable to equity holdersfor the corresponding period last year of HK$11.5 million. The cash and cash equivalents includingavailable for sale securities of the Group at 31 March 2006 were HK$4.32 million.
The Directors confirm that there are no negotiations or agreements relating to intended acquisitionsor realizations which are discloseable under Chapters 19 to 20 of the GEM Listing Rule, neither arethe Directors aware of any other matter discloseable under the general obligation imposed by rule17.10 of the GEM Listing Rules, which is or may be a price-sensitive nature.
At the request of the Company, trading in the Company’s shares has been suspended form 9:30 a.m.
on 30 October 2003 pending the release of financial information of the Company. An applicationhas been made to The Stock Exchange for resumption in trading of the shares with effect from9:30 a.m. Tuesday, 9 May 2006.
As at the date of this announcement, the directors of the Company are as follows:
Ms. CHENG Kit Yin, Kelly (Chairman)
Ms. KUO Kwan
Independent non-executive directors:
Dr. LAU Lap PingMr. MAN Kong YuiMr. YEUNG Chi Hung
This announcement, for which the directors of the Company collectively and individually accept fullresponsibility, includes particulars given in compliance with the GEM Listing Rules for the purposeof giving information with regard to the Company. The directors of the Company, having made allreasonable enquiries, confirm that, to the best of their knowledge and belief: (i) the informationcontained in this announcement is accurate and complete in all material respects and not misleading;(ii) there are no other matters the omission of which would make any statement in this announcementmisleading; and (iii) all opinions expressed in this announcement have been arrived at after dueand careful consideration and are founded on bases and assumptions that are fair and reasonable.
This announcement will remain on the GEM website on the “Latest Company Announcements”page for 7 days from the day of its posting
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Conforms to EU Directive 91/155/EEC, as amended by 2001/58/EC - United Kingdom (UK) SAFETY DATA SHEET Neisseria Selective Supplements Identification of the substance/preparation and company/undertaking Identification of the substance or preparation Product name : Neisseria Selective Supplements Trade name Use of the : PRO-LAB Neisseria Selective Supplements