CTI.L Regulatory News (CTI)

28 Jul 2005 18:01

Cathay International Holdings Ld28 July 2005 Cathay International Holdings Limited 28 July 2005 NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION IN WHOLE OR IN PART IN OR INTO THEUNITED STATES, AUSTRALIA, CANADA, FRANCE, JAPAN OR NEW ZEALAND Proposed Investments in Pharmaceutical Manufacturing and Distribution Companiesand Proposed Open Offer of 126,589,628 New Common Shares at 9 pence per NewCommon Share Introduction Cathay International Holdings Limited ("CIH" or the "Company") announces todaythat it has reached an agreement with a team of senior managers experienced inthe pharmaceutical manufacturing and distribution market in the PRC (the"Management") relating to: • the establishment of CI Pharma by the CIH Group and the Management, through which investments will be undertaken in the pharmaceutical industry in the PRC; • the proposed acquisition by Brilliant Manufacture (a wholly-owned subsidiary of CI Pharma) of Liwah, a company principally engaged in the manufacture and sale in the PRC of Chinese herbal medicine and herbal extracts, for US$1,121,202; • the proposed acquisition by Horizon Network (a wholly-owned subsidiary of CI Pharma) of Lansen, a company principally engaged in the marketing and distribution of pharmaceutical products in the PRC, for US$246,609; • the proposed contribution (in instalments and subject to certain conditions, including due diligence and, in the case of all instalments other than the initial instalment of US$4,440,000, CIH Board approval) of up to US$21,000,000 to be made by the CIH Group to the capital of CI Pharma. CIH also announces today that it proposes to make an Open Offer to QualifyingShareholders of 126,589,628 New Common Shares at 9 pence per New Common Share toraise up to £11,393,067 (US$19,853,558) (£10,991,368 (US$19,153,558) net ofexpenses). The net proceeds of the Open Offer will be used to fund the firstthree instalments of the capital contributions to be made by the CIH Group to CIPharma under the terms of the Shareholders' Agreement, amounting in aggregate toUS$16 million and the balance of US$3,153,558 will be used to fund advertisingand marketing expenses following the renovation of the Landmark Hotel, Shenzhenand expenses related to the development of new business and investmentopportunities in the PRC. CI Pharma's use of such capital contributions isdescribed below but will include the funding of the Acquisitions, which are tobe made by its wholly-owned subsidiaries. The Proposals and the Open Offer are not inter-conditional. The Proposals are conditional, owing to the size of the acquisitions of Liwahand Lansen and the proposed capital contributions to CI Pharma (on an aggregatedbasis), on the approval of Shareholders which will be sought at a SpecialGeneral Meeting to be held at the Yen Room, the Brussels Marriot Hotel, Rue A.Orts 3-7, B-1000 Brussels, Belgium on 16 August 2005 at 2.00 p.m. Theacquisition of Liwah is conditional upon, inter alia, the completion of duediligence on Liwah to the satisfaction of CIH. The acquisition of Lansen is alsoconditional upon, inter alia, the approval of the Ministry of Commerce of thePeople's Republic of China and upon the completion of due diligence on Lansen tothe satisfaction of CIH. The obligations of the CIH Group to make the capitalcontributions to CI Pharma are also conditional upon, inter alia, the completionof due diligence on Liwah and Lansen to the satisfaction of CIH and the second,third and fourth instalments of such capital contributions (US$16,560,000 inaggregate) are also each conditional upon the approval of the CIH Board at thetime each instalment would otherwise become due. The Open Offer is conditional upon the passing of the Resolutions at theforthcoming Special General Meeting and Admission having become effective by nolater than 8.00 a.m. on 19 August 2005 or such later time and/or date as theCompany may decide (but, in any event, not later than 8.00 a.m. on 26 August2005). The Open Offer is not conditional on the implementation of the Proposals. Cathay Enterprises, which controls Existing Shares representing approximately64.25% of the votes capable of being cast at the Special General Meeting, hasirrevocably undertaken to vote in favour of the Resolutions. The Open Offer has not been underwritten. If the Proposals are approved byShareholders but insufficient funds are raised by the Open Offer to fund thefirst three instalments of the capital contributions proposed to be made by theCIH group to CI Pharma (amounting in aggregate to US$16,000,000) CIH willexplore the possibility of funding the capital contributions by additional debtfacilities. Such facilities have not yet been sought and there can be noguarantee they will be forthcoming. If such facilities are not forthcoming CIHwill not proceed with the Proposals. The Board considers that the Proposals are in the best interests of CIH andShareholders as a whole, and is recommending that Shareholders vote in favour ofthe Resolutions to be proposed at the forthcoming Special General Meeting. A prospectus relating to the Company and providing details of the Proposals andthe Open Offer is being sent to Shareholders today. A copy of this document isavailable for inspection at the offices of the Company's solicitors, Hunton &Williams, located at Fleetway House, 25 Farringdon Street, London EC4A 4AB forthe period up to and including 18 August 2005 and two copies have been submittedto the Financial Services Authority and will be available shortly for inspectionat the Financial Services Authority's Document Viewing Facility, which issituated at Financial Services Authority, 25 The North Colonnade, Canary Wharf,London, E14 5HS. Background to and reasons for the Proposals The Board has identified the biotechnology and pharmaceutical market in the PRCas one with high growth potential and CIH has made a number of investments inthis market in line with the Company's objective of seeking new business andinvestment opportunities in the PRC which are expected to provide high growthrates and generate improved shareholder returns. The Company's investments in the PRC to date, Botai and Longbai, haveconcentrated on biotechnology and pharmaceutical research and developmentactivities. The rationale underlying the establishment of CI Pharma and the implementationof the Proposals is to combine the marketing and sales expertise of theManagement, the manufacturing capabilities and distribution network of Liwah andLansen and the financial and investment experience and research and developmentcapabilities of the CIH Group. This combination will enable the CIH Group toadvance its strategy of developing a complete value chain for its biotechnologyand pharmaceutical investments in the PRC, with a focus on research anddevelopment, manufacturing and marketing and distribution.The Board believes that the Liwah and Lansen businesses are also attractivebecause: • they have both passed the initial stage of their corporate development and are now entering into a growth stage of their existing businesses; • Liwah has manufacturing facilities which meet Good Manufacturing Practice ("GMP") standards. It is a pre-requisite in the PRC that an application for new medicine production licenses must be submitted by an entity which has the manufacturing facilities meeting GMP standards. Liwah's facilities should therefore assist in license applications for some of Botai and Longbai's new medical products in the future; • the Management's expertise in marketing and distribution of medical products and the existing distribution network of Liwah and Lansen together (covering most major regions and cities in the PRC) should provide an effective distribution channel for Botai and Longbai's new medical products. The Board believes that the acquisitions of Liwah and Lansen would provide the Company with the alternative of either the commercial exploitation of Botai or Longbai's products or the outright sale of such pharmaceutical technologies. Expected Timetable of Principal Events Record Date for the Open Offer close of business on 22 July 2005 Posting date of the Prospectus and Application Form 28 July 2005 Latest time and date for receipt of Forms of Proxy 2.00 p.m. on 13 August 2005 Shareholder information session 2.00 p.m. on 15 August 2005 Special General Meeting 2.00 p.m. on 16 August 2005 Latest time and date for splitting Application Forms 3.00 p.m. on 16 August 2005(to satisfy bonafide market claims) Latest time and date for receipt of completed 3.00 p.m. on 18 August 2005Application Forms and payment in fullunder the Open Offer Dealings in the New Common Shares 8.00 a.m. on 19 August 2005expected to commence Expected date of despatch of share certificates in respect of 26 August 2005New Common Shares Details of the Management The Management has over ten years of experience in the manufacture, marketingand distribution sectors of the pharmaceutical industry in the PRC. Prior tobecoming senior managers of Liwah and/or Lansen as detailed below, theManagement was employed by the Sanjiu Enterprise Group ("Sanjiu Group"), one ofthe leading pharmaceutical companies in the PRC. Mr. Xu Jun, aged 34, is currently the Chairman and General Manager of both Liwahand Lansen. He received a bachelor's degree from the Planning Economy Departmentof the People's University of China in 1992, and an EMBA degree from theSino-European International Business College in 2003. Mr. Xu joined the SanjiuGroup after graduation from university, and he has been in charge of manyregional sales headquarters of several subsidiaries of the Sanjiu Group. Priorto joining Liwah and Lansen in 2002, Mr Xu was the executive deputy generalmanager of Shenzhen Sanjiu Trade Company, one of the major pharmaceuticaldistribution companies within the Sanjiu Group. Mr. Liu Xiao Dong, aged 35, is currently the Deputy General Manager of bothLiwah and Lansen. He received a bachelor's degree from the Audit Department ofWuhan University in 1992. He joined the Sanjiu Group after graduation and he hasheld senior positions in a number of pharmaceutical companies within the SanjiuGroup, including vice financial controller of Shenzhen Sanjiu Trade Company andfinancial controller and director of Shenzhen Sanjiu Digital HealthcareManagement Company. Mr. Liu joined Liwah and Lansen in 2002 as deputy generalmanager. He has extensive experience in corporate finance matters. Mr. Xie Hong Wei, aged 32, is currently the Deputy General Manager - Sales andMarketing of Lansen. Mr Xie received a bachelor's degree from the MedicalJournal Information Department of the Norman Bethune Medicine School in 1994.After graduation he joined the Sanjiu Group as a salesperson and worked in anumber of companies within the Sanjiu Group in different capacities. His lastposition with the Sanjiu Group was marketing director of Shenzhen Sanjiu TradeCompany. Mr. Xie gained extensive experience in sales and marketing ofpharmaceutical products during his time with the Sanjiu Group. Mr. Zhou Rong, aged 35, is currently Deputy General Manager of Liwah. Mr Zhougraduated from Shenyang Construction Engineering College in 1992. Aftergraduation, he initially worked for the Shenzhen Nanfang Pharmaceutical Companyand subsequently joined Shenzhen Sanjiu Trade Company as deputy director ofmedical equipment department and head of the administrative office. Mr. Wu Peng Fei, aged 37, is currently Deputy General Manager of Liwah. Mr. Wuholds a bachelor's degree from the Disease Control Department of ShanghaiMedical School. After graduation in 1993, he joined the Sanjiu Group. He hasheld a number of senior positions in the Sanjiu Group since then. His lastposition with the Sanjiu Group was as director of supply chain at ShenzhenSanjiu Trade Company. In 2002, the Management was delegated by the Sanjiu Group to Liwah. In the sameyear, the Management joined Lansen. From then on, the Management has been incharge of the entire operations of the two companies, particularly themanufacture and sale of herbal and plant extracts and the Traditional ChineseMedicine products of Liwah, and the establishment of the pharmaceutical salesnetwork for Lansen. Information on Liwah The principal business of Liwah is the manufacture and sale of Chinese herbalmedicine and herbal extracts, principally in the form of capsules, tablets,granules and liquid medication. The business activities of Liwah include the manufacture of Chinese medicine,invigorants, Chinese medicine in ready-to-use form and western medicine and alsothe import and export of its own and third parties' products and technologies. Liwah's production facilities are located in the Yin Zhou district of Ningbo.Liwah has two GMP production lines. The production plant has been awarded with aGMP certification by Zhejiang Medicine Bureau for the production of tablets,capsules, granules, syrup, oral solution, mixture, bulk (Huperzine A). This GMPcertificate remains valid until February 2009. Liwah previously held a GMPcertification by the same bureau for the production of medical products inointment form but this certificate expired in February 2005. Liwah applied forthe renewal of its GMP certification for its production line in ointment formand the management of Liwah does not foresee any difficulties in the renewal ofthe GMP certification. Liwah used to produce herbal and plant extracts in its own production facilitieslocated at a site in the downtown district of Ningbo, provided free by San JiuMedical and Pharmaceutical Company Limited ("Sanjiu"), a member of the SanjiuGroup. Part of the herbal and plant extracts production is used in theproduction of products such as Bofuling, Yahao, Gandapian and Yikuan for Sanjiu.As a result of the town planning of Ningbo, in January 2005, the site wasreturned by Sanjiu to the municipal government of Ningbo. Due to theenvironmental protection requirements, Liwah was not able to relocate the herbaland plant extraction production facilities to its own premises and Liwah istherefore currently planning to set up new production facilities for its herbaland plant extraction. Liwah is in the process of identifying a suitable site inNingbo for acquisition and for the construction of such production facilities.During the interim period, Liwah is leasing from a third party the productionfacilities in a herbal and plant extracts production plant in Ningbo.In March 2005, Liwah entered into a conditional technology and ownershiptransfer agreement with Sanjiu for the transfer by Sanjiu to Liwah of theProduction License and all the rights (including technology rights, know-how andtrademarks) of four drugs, namely, Bofuling (including Total Glucosides ofPaeony), Yahao, Gandapian and Yikuan. The transfer is subject to the receipt ofregulatory approvals, which have been received for all four drugs. Liwah's customers mainly comprise distributors in the PRC pharmaceuticalindustry who then distribute Liwah's products to hospitals, clinics andpharmacies. As at 31 December 2004 the gross assets of Liwah were US$11,854,712 and itsprofits for the year ended 31 December 2004 were US$302,282. Information on Lansen Lansen is principally engaged in the marketing and distribution ofpharmaceutical products in the PRC. Since its incorporation in 2002 Lansen hasestablished a marketing and distribution network covering national and majorhospitals and clinics in major provinces in China such as Guangdong, Sichuan,Zhejiang and Shangdong and in major cities such as Chongqing, Beijing, Tianjinand Shanghai. With over two hundred professional sales representatives locatedin 8 regional headquarters, Lansen's extensive sales network now covers almostall of the PRC. To date Lansen has focused on the sale and marketing of rheumatology andstomatological products. Lansen is the sole authorized distribution agent tosell the Bofuling, Yahao, Gandapian and Yikuan medicine. These four medicinecomprise four out of the five major products being marketed and distributed byLansen, and accounted for approximately 97.6%, 86.8% and 88.0% of total turnoverfor the 3 years ended 31 December 2004. As mentioned above Sanjiu has agreed totransfer to Liwah all of the rights to these four medicine, and the transfer ofall of the four drugs have received regulatory approvals. Lansen has a Drug Supply Certificate awarded by Guangdong Food and DrugAdministration which is valid until December 2009 and covers Chinese andchemical medicinal products. Lansen has also been awarded with a Good SupplyPractice Certificate by the same bureau which remains valid until December 2008. As at 31 December 2004 the gross assets of Lansen were US$5,236,615 and itsprofits for the year ended 31 December 2004 were US$109,847. Selected Financial Information The following summary historical financial data is extracted without materialadjustment from the annual audited accounts of the CIH Group. Group income statement data (year ended 31 December) 2004 2003 2002 US$'000 US$'000 US$'000 Revenue 6,918 9,896 32,586Cost of sales (6,099) (9,139) (25,491) _______ _______ _______ Gross Profit 819 757 7,095Administrative expenses (6,392) (3,442) (68,631) Loss from operations (5,573) (2,685) (61,536)Finance costs - net (1,259) (1,437) (2,512) _______ _______ _______ Loss before taxation (6,832) (4,122) (64,048)Taxation 16,882 57,807 _______ _______ _______ (Loss)/Profit on ordinary activitiesafter taxation (6,832) 12,760 (6,241)Minority interests 14 (6,645) 40,510 _______ _______ _______ Accumulated (Loss)/Profit attributable toEquity shareholders (6,818) 6,115 34,269 _______ _______ _______ 2004 2003 2002 US$'000 US$'000 US$'000 Assets and liabilities data (as at 31 December)Total fixed and other long-term assets 112,606 110,667 193,060 Net current assets/(liabilities) (3,670) 3,681 6,984Total debt (long-term and short-term) 25,722 26,947 36,025Shareholders' equity 72,341 77,190 108,042Minority interests 704 37,985 _______ _______ _______ Capital employed 98,063 104,841 182,052 _______ _______ _______ Capital resources and commitments Cash flow absorbed by operating activities of the CIH Group in 2004 wasUS$5,185,000 (US$22,716,000 was absorbed by operating activities in 2003 mainlydue to a decrease in creditors of US$18,082,000). The CIH Group's net cash (used in)/from investing activities in 2004 was(US$1,678,000) compared to US$26,676,000 in 2003. The main reason for theincrease in 2003 was due to the disposal of certain subsidiaries for netproceeds of US$30,416,000. The CIH Group's net cash used in financing activities in 2004 was US$1,404,000compared to US$30,198,000 in 2003. The main reason for the difference was due tothe repurchase of the Company's Common Shares in 2003. In January 2005 the Group's wholly owned subsidiary, Bon House DevelopmentLimited has arranged a bank facility of US$10,000,000 guaranteed by Sharp AssetDevelopment Limited. The loan will mature in 2006 and carries interest at 0.55percent above the London Interbank Offered Rate. As at 27 July 2005, US$10,533,000 had been committed for the renovation of theLandmark Hotel. Working Capital Statements CIH is of the opinion that the CIH Group does not have sufficient workingcapital for its present requirements, that is for at least the 12 monthsfollowing the date of this announcement. In making the above working capital statement, CIH has taken into considerationthe fact that the secured loan facility of US$24,166,000 (translated at RMB8.11:US$1, being the new exchange rate announced by People's Bank of China on 21 July2005) granted by the Agricultural Bank of China to Fuyuan Landmark (Shenzhen)Limited, a subsidiary of CIH which owns the Landmark Hotel, becomes due andpayable in January 2006. The loan facility is secured by a first priority legalcharge over the Landmark Hotel. CIH understands that it is the Agricultural Bankof China's usual practice to review the facility shortly before maturity. CIHhas no reason to believe that the facility will not be renewed. In addition, CIH Group's wholly owned subsidiary, Bon House Development Limited(''Bon House'') has arranged a bank facility of US$10,000,000 guaranteed bySharp Asset Development Limited. This bank facility will also mature in January2006. Although the Group has not commenced any discussion regarding the renewalof the facility, CIH has no reason to believe that the facility will not berenewed. If either or both of the above facilities were not to be renewed the Board wouldseek alternative debt facilities. The Landmark Hotel would be available tosecure any alternative debt facilities and the Board is therefore confident thatalternative debt facilities should be available to meet the CIH Group's ongoingworking capital requirements. CIH is of the opinion that the Enlarged Group does not have sufficient workingcapital for its present requirements, that is for at least the 12 monthsfollowing the date of this announcement. In making the above working capital statement, CIH has taken into considerationthe above matters. In addition the Enlarged Group requires US$16,000,000 to fundall of the capital contributions under the Shareholders' Agreement. In relationto the Proposals, the first capital contribution of US$4,440,000 is due to bemade in August 2005, the second capital contribution of US$2,289,000 is due tobe made three months after the first capital contribution, and the third capitalcontribution of US$9,271,000 is due to be made three months after the secondcontribution. In order to fund the capital contributions in relation to theProposals, CIH is carrying out the Open Offer. The Open Offer is notunderwritten and there can be no guarantee that sufficient funds will be raised.If the Open Offer raises net proceeds of less than US$16,000,000 the Board willexplore the possibility of funding any such shortfall by additional debtfacilities. Such facilities have not yet been sought and there can be noguarantee that they will be forthcoming. Even if Shareholders vote in favour ofthe resolutions to be proposed at the forthcoming Special General Meeting, inthe event that the Open Offer does not raise sufficient funds and CIH is unableto obtain alternative financing, the Proposals will not proceed. Indebtedness As at 30 April 2005 the CIH Group had outstanding borrowings and indebtedness inthe nature of borrowings of US$32,462,000. As at 30 April 2005 the CIH Group had cash and cash equivalents balances ofUS$3,041,000. The net indebtedness of the CIH Group as at 30 April 2005 was US$29,421,000. All the above indebtedness is secured borrowing and non-recourse to the Company.A bank loan of US$23,782,000 was secured by a first priority legal charge overthe Hotel. The loan will mature in January 2006, is repayable in RMB and carriesinterest at the RMB borrowing rate as declared by the People's Bank of China. Afurther bank loan of US$463,000 was secured by a first priority legal chargeover the Hotel's staff dormitory. This loan will mature in July 2006, isrepayable in RMB and carries interest at the RMB borrowing rate as declared bythe People's Bank of China. Principal terms of the Transaction Agreements Shareholders' Agreement The establishment of CI Pharma by the CIH Group and the Management has alreadybeen completed. The strategy of CI Pharma is to combine the marketing and sales,manufacturing and management expertise of the Management with the financial andinvestment experience and research and development capabilities of the CIHGroup. CI Pharma is an investment holding company and shall establish subsidiaries forthe purpose of investment in manufacturing, distribution, marketing and salescompanies in the pharmaceutical industry in the PRC. The initial objective of CI Pharma is the acquisition of Liwah and Lansen. The first instalment of the capital contributions to be made by the CIH Group toCI Pharma of US$4,440,000 in cash in exchange for the issue of 4,440,000 sharesof US$1 each in CI Pharma is subject to, inter alia, the completion of duediligence on Liwah and Lansen to the satisfaction of CIH. Subject tosatisfaction of these conditions, the first instalment is currently expected tobe paid during August 2005. If the CIH Group makes the first instalment ofcapital contributions then, in accordance with the terms of the Shareholders'Agreement and in part consideration for (i) the Management's procuring the saleand transfer of Liwah to Brilliant Manufacture; (ii) the establishment of thekey management team of CI Pharma; and (iii) the contribution of the Management'sexpertise to CI Pharma, CI Pharma is obliged to issue 337,952 shares of US$1each in CI Pharma to the Management and pay US$143,440 in cash to the Managementat that time and a further US$225,301 in cash to the Management if and when thethird instalment of capital contributions is made by the CIH Group to CI Pharma(which capital contribution is subject to, inter alia, the completion of duediligence on Liwah and Lansen to the satisfaction of CIH and the approval of theCIH Board and the Shareholders of CIH which will be sought at the forthcomingSpecial General Meeting). Following the payment of such first instalment and theissue of such shares to the Management the CIH Group will have a 92.9% equityinterest in CI Pharma and the Management will have a 7.1% equity interest in CIPharma. The second instalment of the capital contributions to be made by the CIH Groupto CI Pharma of US$2,289,000 in cash in exchange for the issue of 2,289,000shares of US$1 each in CI Pharma is subject to, inter alia, the completion ofdue diligence on Liwah and Lansen to the satisfaction of CIH and the approval ofthe CIH Board and the Shareholders of CIH which will be sought at theforthcoming Special General Meeting. The second instalment is targeted to occurthree months after the first instalment but could be paid earlier if theconditions are satisfied before that time. If the CIH Group makes the secondinstalment of capital contributions then, in accordance with the terms of theShareholders' Agreement and in part consideration for (i) the Management'sprocuring the sale and transfer of Lansen to Horizon Network; (ii) theestablishment of the key management team of CI Pharma; and (iii) thecontribution of the Management's expertise to CI Pharma, CI Pharma is obliged toissue 759,036 shares of US$1 each in CI Pharma to the Management. Following thepayment of such second instalment and the issue of such shares to the Managementthe CIH Group will have an 86% equity interest in CI Pharma and the Managementwill have a 14% equity interest in CI Pharma. The third instalment of the capital contributions to be made by the CIH Group toCI Pharma of US$9,271,000 in cash in exchange for the issue of 9,271,000 sharesof US$1 each in CI Pharma is subject to, inter alia, the completion of duediligence on Liwah and Lansen to the satisfaction of CIH and the approval of theCIH Board and the Shareholders of CIH which will be sought at the forthcomingSpecial General Meeting. The third instalment is targeted to occur three monthsafter the second instalment but could be paid earlier if the conditions aresatisfied before that time. If the CIH Group makes the third instalment ofcapital contributions then, in accordance with the terms of the Shareholders'Agreement and in part consideration for (i) the establishment of the keymanagement team of CI Pharma; and (ii) the contribution of the Management'sexpertise to CI Pharma, CI Pharma is obliged to make interest-bearing loans tothe Management in an aggregate amount of US$616,523. Following the payment ofsuch third instalment the CIH Group will have a 93.6% equity interest in CIPharma and the Management will have a 6.4% equity interest in CI Pharma. If thethird instalment of the capital contribution is made by the CIH Group, CI Pharmamust use RMB40,000,000 (US$4,932,182) of such contribution to acquire six oralfast release drugs (including Amoxicillin and Paracetemol) from Longbai inaccordance with the Technology Transfer Agreement which is now final, bindingand effective. The fourth instalment of the capital contributions to be made by the CIH Groupto CI Pharma of up to US$5,000,000 in cash is subject to, inter alia, thecompletion of due diligence on Liwah and Lansen to the satisfaction of CIH andthe approval of the CIH Board and, if necessary, the Shareholders of CIH. TheCIH Board would only expect to approve all or part of the fourth instalment inthe event that appropriate medical products have been identified foracquisition. If the CIH Group makes the fourth instalment of capitalcontributions then, in accordance with the terms of the Shareholders' Agreement,the Management may elect to make cash contributions to CI Pharma in an aggregateamount not exceeding US$1,211,121 and, if the Management do so elect, CI Pharmais obliged to make interest-bearing loans to the Management for the sole purposeof funding such contributions. Following the payment of such fourth instalmentand assuming that the Management makes the maximum contribution the CIH Groupwill have a 90.1% equity interest in CI Pharma and the Management will have a9.9% equity interest in CI Pharma. In accordance with the Shareholders' Agreement, if specified profit targets areachieved by Liwah and Lansen during the next three years further shares in CIPharma ("Earnout Shares") must be issued to the Management. If the highestprofit targets are achieved in each year Earnout Shares must be issued whichwill result in the Management having a total equity interest in CI Pharma of 25%(when aggregated with the other shares issued to the Management and assumingthat all of CIH Group's instalments of capital contributions have been paid). Atthe sole discretion of the CIH Group the Management may be permitted tosubscribe in cash for any Earnout Shares that do not fall to be issued onachievement of the profit targets and CI Pharma may at its sole discretion makeinterest-bearing loans to the Management for the sole purpose of funding suchsubscriptions. In the event that the CIH Group fails to make the second and/or third instalmentpayments of the capital contributions on the targeted dates (namely three monthsafter the first instalment and three months after the second instalmentrespectively) the Management shall be entitled within 6 months following therelevant dates to secure other funding sources and to acquire the CIH Group'sequity interest in CI Pharma for a consideration equal to the total amount ofcapital contributions made by the CIH Group. Following the completion of the Acquisitions, the Management will be considered"related parties" under the Listing Rules. Any transactions or arrangements withthe Management which are not pursuant to binding obligations under theShareholders' Agreement may be subject to shareholder approval and a statementby the Directors that the transaction or arrangement is fair and reasonable asfar as Shareholders are concerned and that the Directors have been so advised byan independent adviser acceptable to the FSA. Under the Shareholders' Agreement the CIH Group has the right to appoint 5 ofthe 7 directors of CI Pharma.Liwah Acquisition Agreement Brilliant Manufacture has agreed to acquire Liwah for US$1,121,202 in cash.Completion of the Liwah Acquisition is subject to further due diligence beingsatisfactory to the CIH Group and is also conditional on receiving the approvalof Shareholders which will be sought at the forthcoming Special General Meeting.Cathay Enterprises, which holds Shares which represent approximately 64.25% ofthe votes capable of being cast at the Special General Meeting, has irrevocablyundertaken to vote in favour of the resolution to be proposed approving theLiwah Acquisition. If any of such approvals and consents are not obtained theLiwah Acquisition will not take place. Lansen Acquisition Agreement Horizon Network has agreed to acquire Lansen for US$246,609 in cash. Completionof the Lansen Acquisition is subject to further due diligence being satisfactoryto the CIH Group and to the receipt of certain regulatory and governmentalconsents in the PRC, including the approval of the Ministry of Commerce of thePeople's Republic of China, which the Directors expect to be forthcoming.Completion of the Lansen Acquisition is also conditional on receiving theapproval of Shareholders which will be sought at the forthcoming Special GeneralMeeting. Cathay Enterprises, which holds Shares which represent approximately64.25% of the votes capable of being cast at the Special General Meeting, hasirrevocably undertaken to vote in favour of the resolution to be proposedapproving the Lansen Acquisition. The consideration due in respect of the LansenAcquisition is not payable until the third instalment of capital contributionsis made by the CIH Group to CI Pharma (which capital contribution is subject to,inter alia, the completion of due diligence on Liwah and Lansen to thesatisfaction of CIH and the approval of the CIH Board and, if necessary, theShareholders of CIH). Use by CI Pharma of the capital contributions The first three instalments of capital contributions proposed to be made by theCIH Group to CI Pharma under the Shareholder's Agreement amount in aggregate toUS$16,000,000. It is proposed that these capital contributions be utilised by CIPharma as follows: US$ Acquisition of Liwah 1,121,202 (from the first instalment) Acquisition of Lansen 246,609 (from the third instalment) Payments and loans to the Management 985,246 (as to 143,440 from the first instalment and as to the balance from the third instalment) Acquisition of drugs from Longbai 4,932,182 (from the third instalment) Discharge of consideration due to 350,801Sanjiu by Liwah for purchase of (from the first instalment) Production LicensesDischarge of debt due to Sanjiu by 3,082,614Lansen for supply of drugs distributed (from the first and secondby Lansen (RMB 25 million) instalment) Purchase of land and construction of 1,849,568facilities for Liwah's herbal and (from the third instalment)plant extract business Working capital for Liwah and Lansen, 3,431,760including additional marketing and (from the first, second anddistribution costs resulting from drug third instalment)acquisitions Total 16,000,000 The fourth instalment of capital contributions proposed to be made by the CIHGroup to CI Pharma of up to US$5,000,000 is only expected to be approved by theCIH Board in the event that appropriate medical products have been identifiedfor acquisition by CI Pharma. No appropriate medical products have beenidentified for acquisition and there is therefore no current funding requirementin respect of the fourth instalment. When such products are identified CIH willexplore the possibility of funding the fourth instalment by debt and/or equityfinancing. Financial effects of the Acquisitions CIH intends to fund the capital contributions proposed to be made to CI Pharmaunder the terms of the Shareholders' Agreement through the net proceeds of theOpen Offer and through its existing resources. The Acquisitions will be fundedby CI Pharma from the capital contributions received from CIH. In the event that the Open Offer does not raise sufficient net proceeds to fundthe capital contributions proposed to be made to CI Pharma, the Board willexplore the possibility of funding such contributions by additional debtfacilities. It is provided in the Shareholders' Agreement that in the event thatthe CIH Group fails to make the second and/or third instalment payments of thecapital contributions to CI Pharma on the targeted dates, the Management shallbe entitled within 6 months following the relevant dates to secure other fundingsources and to acquire the CIH Group's equity interest in CI Pharma for aconsideration equal to the total amount of capital contributions made by the CIHGroup to CI Pharma. Under such circumstances, there would be no materialfinancial effect on the CIH Group. In the event that the Open Offer proceeds but the Proposals are not implemented,the Company intends to retain the net proceeds of the Open Offer and the Boardexpects to utilise such proceeds in making other investments in the PRC in linewith its strategy of developing a complete value chain for its biotechnology andpharmaceutical investments, with a focus on research and development,manufacturing and marketing and distribution. There is no assurance that theCompany may find equally or more attractive investment opportunities for suchproceeds in the future. If this is the case, the Group's profitability may onlybe marginally enhanced by the interest income generated from deposits of the netproceeds. In the event that the Open Offer is successfully completed and the Proposals areimplemented, the Directors believe that the Acquisitions will be earningsenhancing (before goodwill amortisation and exceptional items) in the yearending 31 December 2005. These statements should not, however, be interpreted as a forecast of theresults of CIH either with or without the successful completion of the OpenOffer and/or the implementation of the Proposals in the year ending 31 December2005. Open Offer The Company is proposing to raise up to £11,393,067 (US$19,853,558) (£10,991,368(US$19,153,558) net of expenses) by the issue of up to 126,589,628 New CommonShares at 9 pence per share pursuant to the terms of the Open Offer. The Open Offer has not been underwritten. Reasons for the Open Offer and use of proceeds The Board intends to use the net proceeds of the Open Offer to fund the firstthree instalments of the capital contributions to be made to CI Pharma under theterms of the Shareholders' Agreement, amounting in aggregate to US$16,000,000and the balance of US$3,153,558 will be used to fund advertising and marketingexpenses following the renovation of the Landmark Hotel, Shenzhen and expensesrelated to the development of new business and investment opportunities in thePRC. It is proposed that CI Pharma in turn utilises these capital contributionsas described above. Implementation of the Proposals is subject to certain conditions as describedabove, including the completion of due diligence on Liwah and Lansen to thesatisfaction of CIH. If the Proposals are not implemented the Company intends toretain the net proceeds of the Open Offer and the Board expects to utilise suchproceeds in making other investments in the PRC in line with its strategy ofdeveloping a complete value chain for its biotechnology and pharmaceuticalinvestments, with a focus on research and development, manufacturing andmarketing and distribution. To the extent that any such investments requireadditional funding it is the expectation of the Board that those requirementswill be met from existing resources of the Group and, if necessary, furtherequity issues and/or additional debt facilities. A non-underwritten Open Offer was considered by the Board to be a cost effectivemethod of raising finance whilst at the same time ensuring Shareholders wereentitled to participate pro rata to their existing shareholdings in the Company. Principal terms of the Open Offer The Company proposes to invite Qualifying Shareholders to apply for New CommonShares at the Offer Price, payable in cash in full on application on the basisset out below. Qualifying Shareholders may apply for New Common Shares on the following basis: 7 New Common Shares for every 10 Existing Shares registered in the names of Qualifying Shareholders on the Record Date and so onin proportion for any other number of Existing Shares then held. Whereappropriate, entitlements of Qualifying Shareholders will be rounded down to thenearest whole number of New Common Shares and any fractional entitlements to NewCommon Shares that would otherwise have arisen will be disregarded incalculating Qualifying Shareholders' pro rata entitlements. Such fractionalentitlements will not be issued. As is the case for Existing Shares the NewCommon Shares will be issued in registered form and will not be capable of beingheld in uncertificated form. Basic Entitlement A Qualifying Shareholder may apply for any number of New Common Shares up to hisBasic Entitlement as set out on his Application Form. Excess Application Facility An Excess Application Facility is also available for Qualifying Shareholdersunder which they can apply for New Common Shares in excess of their BasicEntitlement in multiples of 1,000 Excess Shares. Any New Common Shares appliedfor in excess of their Basic Entitlement will be satisfied only to the extentthat other Shareholders do not apply or make applications for less than theirBasic Entitlement. Such applications will be satisfied pro rata to theapplicant's holding of Existing Shares. Fractional entitlements in respect ofany such allocations will be ignored for all purposes. To the extent thatfurther Excess Shares remain unallocated, such Excess Shares shall be allocatedon a pro rata basis amongst those Qualifying Shareholders who have capacitywithin their applications for Excess Shares. The Company shall have absolutediscretion as to the application of the principles of the Excess ApplicationFacility described above. No announcement of the allocations of Qualifying Shareholders under the ExcessApplication Facility will be made and, accordingly, Qualifying Shareholdersmaking an application under the Excess Application Facility will not necessarilyknow the exact number of New Common Shares they will receive until settlementtakes place. Any allocation of Excess Shares by the Company shall be final andbinding on the Qualifying Shareholder. The New Common Shares will be offered at the Offer Price to QualifyingShareholders on a pre-emptive basis under the terms of the Open Offer. They willbe issued fully paid and will be identical to and rank pari passu in allrespects with the Existing Common Shares and will rank in full for all dividendsand other distributions declared, made or paid on or after Admission in respectof the share capital of the Company. Qualifying Shareholders should note that the Open Offer is not a "rights issue"and that the Application Form is not a negotiable document and cannot be traded.Shareholders should also be aware that any New Common Shares not applied for(or, under the terms of the Open Offer, not deemed to be applied for) or whichthe Company determines not to allocate in accordance with the terms of the OpenOffer will not be issued by the Company. If a Shareholder does not acquire any New Common Shares under the Open Offer andall the New Common Shares are issued, that Shareholder's interest in the issuedshare capital of the Company will be diluted by 41.18%. If applications for New Common Shares are received which, if accepted, wouldlead to less than 25% of the issued Common Share capital of the Company being inthe hands of the public (as defined in the Listing Rules) these applicationswill be scaled back, on a pro rata basis if necessary, to levels which ensurethat at least 25% of the issued Common Share capital of the Company is in thehands of the public on completion of the Open Offer. The Open Offer is conditional upon: (i) the passing of the Resolutions; and (ii) Admission having become effective by no later than 8.00 a.m. on 19 August 2005 or such later time and/or date as the Company may decide (but, in any event, not later than 8.00 a.m. on 26 August 2005). If either of these conditions is not satisfied, the New Common Shares will notbe issued under the Open Offer and all monies received by the Company'sreceiving agent, Capita Registrars, will be returned to the applicants (at theapplicants' risk and without interest) as soon as possible thereafter. Applications will be made to the UKLA and to the London Stock Exchange for theNew Common Shares respectively to be admitted to the Official List and totrading on the London Stock Exchange's market for listed securities. It isexpected that Admission will become effective and that dealings in the NewCommon Shares will commence at 8.00 a.m. on 19 August 2005. Current trading and future prospects Landmark Hotel (Shenzhen) On 20 December 2004, the Landmark Hotel (the "Hotel"), the Company's 351 room 5-star hotel located in Shenzhen, was closed for extensive renovations. During therenovation programme, all rooms in the Hotel will be completely redesigned andenlarged to reflect the market trend toward larger rooms for five-star hotels inChina and to meet the new "platinum five-star" hotel rating of the ChinaNational Tourism Administration which is the highest standard for hotels inChina. When finished, the Hotel will have 235 renovated and enlarged rooms andsuites. The Hotel will have a new and enlarged banqueting facility, a newexecutive lounge, a new Italian restaurant and coffee shop and a new spa. Theexisting common areas of the Hotel will also be refurbished. The estimated costof the renovation programme is US$10 million to US$12 million. The Company willfinance the renovation from existing cash resources and bank financing. Theobjective of this programme which is the first major upgrade of all areas of theHotel since 1994 is to position the Hotel as one of the most luxurious platinumfive-star hotels in China. Although the closure of the Hotel until the thirdquarter of 2005 will negatively impact the Company's results, the Companybelieves that the renovation will significantly enhance the revenue and capitalvalue of the Hotel in the future. During the closure of the Hotel, staff training will be emphasized. The Hotelhas engaged a firm associated with Singapore Airlines that specializes indeveloping and enhancing service quality to provide training to all staff of allranks in the Hotel. Butler service will be introduced into the Hotel when itreopens. A UK firm specializing in butler training has been engaged to providetuition in this unique service for the Hotel. Training will also be provided toa sales and marketing team, and new efforts will be made to position the Hotelaggressively in the high end of the corporate and business market segment. Inshort, the Company is not only investing in the improvement of the physicalassets of the Hotel, but is also investing in the improvement of its staff andits service quality. The Landmark is an extremely important and valuable assetwhich the Company believes will make a major contribution to results starting inthe fourth quarter of 2005. With regard to future prospects, the Directors are hopeful that the continuedrecovery of the tourism and hotel industry in the PRC will have a positiveimpact on the Hotel. Hotels in Shenzhen have, in general, maintained averageoccupancy rates of 65% during the last six months. As far as the Directors areaware, there is currently no hotel in Shenzhen that has been awarded platinumfive-stars. It is hoped that the Hotel will be the first hotel in Shenzhen tomeet this standard and the Directors expect that this will enable the Hotel tocapture a significant market share following its reopening. Biotechnology and Pharmaceutical Projects On 3 September 2004, the Company announced an additional investment of US$1.81million in Botai, to fund the construction of a new research, development andproduction centre (the "Centre") in Changchun New and High-Tech IndustriesDevelopment Zone. The Centre consists of office space, a R&D laboratory withGood Laboratory Practice qualities, and four Good Manufacturing Practice ("GMP")production lines that allow Botai to develop and manufacture medical products informs of tablet, capsule, granule and ointment. The new GMP facilities shouldenable Botai to obtain Production Licences for the drugs it has developed, aswell as bringing forward the commercialization of those drugs. The construction was completed on schedule at the end of 2004, and the officeand R&D laboratory have been in operation since January 2005. It is estimatedthat the GMP certificates for the four production lines will be granted to Botaifrom the Jilin Provincial Food and Drug Administration in the second half of2005, by which time this new centre will be in full operation. GMP certificatesgranted by provincial authorities for the drugs being produced are recognizedthroughout China. Botai's portfolio of technologies under research and development include drugdelivery systems, various forms of collagen and diagnostic kits. By March 2005,applications for New Drug Licences and Production Licences for five products hadbeen submitted to the State Food and Drug Administration (the "SFDA") forapproval, of which four are diagnostic kits for prostate and cardiovascularconditions and one medical ointment product for pain relief of rheumatoidarthritis. It is estimated that the New Drug Licences Botai's new research anddevelopment centre and the Production Licences for these five products will beobtained respectively in the latter part of 2005 and 2006. After the granting ofthe New Drug Licences and the Production Licences, Botai will choose either tosell the Production Licences or to manufacture and market the drugs itself usingits new GMP production lines. Since November 2004, Longbai's operations have been moved to a new laboratoryspace in the Tianjin Huayuan Hi-Tech Industry Park, a major science park on theoutskirts of Tianjin City. Investments in additional R&D facilities andequipment have also been made to accelerate the commercialization oftechnologies under development by Longbai. Longbai has been concentrating on the research and development of drug deliveryformats, and it has successfully developed a series of oral fast release drugproducts. Applications for New Drug Licence and Production Licence for one ofits oral fast release drugs, an analgesic which is expected to be sold over thecounter, have already been submitted to the SFDA for approval. It is estimatedthat the New Drug Licence and Production Licence will be granted by the SFDA inthe second half of 2005. Another of Longbai's oral fast release drug foranti-infection, has completed bioavailability tests (tests which are broadlyequivalent to clinical trials for this type of technology), and is ready toapply for the New Drug Licence and Production Licence from the SFDA. Another twoof its oral fast release drugs are currently undergoing the bioavailabilitytests, which are estimated to be completed in 2005. Longbai has also obtainedapproval from the SFDA to carry out bioavailability tests for another six drugs. With regard to future prospects, the Board believes that the biotechnology andpharmaceutical market in the PRC is one of high growth potential. Theestablishment of CI Pharma and the implementation of the Proposals will combinethe marketing and sales expertise of the Management, the manufacturingcapabilities and distribution network of Liwah and Lansen and the financial andinvestment experience and research and development capabilities of the CIHGroup. This combination will enable the CIH Group to advance it strategy ofdeveloping a complete value chain for its biotechnology and pharmaceuticalinvestments in the PRC, with a focus on research and development, manufacturingand marketing and distribution. The Board believes that the acquisition of Liwahand Lansen will be beneficial to the CIH Group since they have both passed theinitial stage of their corporate development and are now entering into a growthstage of their existing business. In addition, the fact that Liwah'smanufacturing facilities meet GMP standard should assist in license applicationsfor some of Botai and Longbai's new medical products in the future. Save for the closure of the Landmark Hotel for extensive renovations, there hasbeen no significant change in the financial or trading position of the Groupsince 31 December 2004, the date to which the last audited accounts of CIH wereprepared. The future prospects of the Enlarged Group are in line with theDirectors' expectations. Special General Meeting and Shareholder information session A Special General Meeting will be held at the Yen Room, the Brussels MarriottHotel, Rue A. Orts 3-7, B-1000 Brussels, Belgium on 16 August 2005 at 2.00 p.m.at which the Resolutions will be proposed to approve the Proposals and to permitthe implementation of the Open Offer. In addition to the Special General Meeting to be held on 16 August 2005, therewill also be an information session for Shareholders to be held on 15 August2005 at 2.00 p.m. at the Staple and Gray's Inn Suite, the Renaissance ChanceryCourt Hotel, 252 High Holborn, London WC1V 7EN. This will be an opportunity forShareholders to put questions to the Directors attending such session about theProposals, the Open Offer and the performance of the Group generally. However,there shall not be an opportunity to vote at the information session on theResolutions to be proposed at the Special General Meeting. No informationprovided at the information session should be deemed to be investment advice oran attempt to influence Shareholders in their decision as to how to vote at theSpecial General Meeting. If you are in doubt as to what action you should take,please consult your stockbroker, bank manager, accountant or other independentprofessional adviser who specialises in advising on the acquisition of shares orother transferable securities and who is duly authorised under the FinancialServices and Markets Act 2000. Enquiries to: Cathay International Holdings Limited25/F Standard Chartered Bank Building4-4A Des Voeux RoadCentralHong Kong Attention: Stephen Hunt, DirectorTel: +852 2828 9289 Grant Thornton UK LLPJames Hannon 0870 991 2356Gerry Beaney 0870 991 2589 This press release does not constitute, or form part of the Open Offer or anyinvitation to sell or issue, or any solicitation of any offer to purchase orsubscribe for, any shares in the Company nor shall this press release or anypart of it, or the fact of its distribution, form the basis of, or be relied on,in connection with or act as any inducement to enter into any contract orcommitment whatsoever with respect to the Open Offer or otherwise. The distribution of the press release in certain jurisdictions may be restrictedby law and therefore persons into whose possession this press release comesshould inform themselves about and observe any such restrictions. Any suchdistribution could result in a violation of the law of such jurisdictions.Neither this press release nor any copy of it may be taken or transmitted ordistributed (directly or indirectly) in or into the United States, Australia,Canada, Japan, the Republic of Ireland or South Africa or to any national,citizen or resident thereof or any corporation, partnership or other entitycreated or organised under the laws thereof. The New Common Shares in theCompany have not been and will not be registered under the United StatesSecurities Act 1933, as amended ("U.S. Securities Act") or under the applicablelaws of Australia, Canada, Japan, the Republic of Ireland or South Africa and,subject to certain exemptions, may not be offered for sale or subscription, orsold or subscribed directly or indirectly, within the United States, Australia,Canada, Japan, the Republic of Ireland or South Africa to or by any national,resident or citizen of such countries. Grant Thornton UK LLP, which is regulated in the United Kingdom by the FinancialServices Authority, is acting as sponsor and financial adviser to CIH and no oneelse in connection with the Proposals and Open Offer and will not be responsibleto anyone other than CIH for providing the protections afforded to its customersor for providing advice in relation to the Proposals and Open Offer. This announcement has been issued by the Company and is the sole responsibilityof the Company. It has not been independently verified by Grant Thornton UK LLPor any other person. This announcement does not purport to be comprehensive orto contain all the information that a recipient may need in order to evaluatethe Company. No representation or warranty, express or implied, is given and, sofar as is permitted by law and except in the case of fraud, no responsibility orliability is accepted by any person, with respect to the accuracy orcompleteness of the announcement or its contents or any oral or writtencommunication in connection with the Proposals and Open Offer. In particular,but without limitation, no representation or warranty is given as to theachievement or reasonableness of, and no reliance should be placed on, anyprojections, targets, estimates or forecasts contained in this announcement. Inall cases, interested parties should conduct their own investigation andanalysis of the Company and the data contained in this announcement. DEFINITIONS The following definitions apply throughout this announcement, unless the contextotherwise requires: "Acquisitions" the proposed acquisitions of Lansen and Liwah on the terms of the Acquisition Agreements "Acquisition Agreements" the Liwah Acquisition Agreement and the Lansen Acquisition Agreement