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THIS DOCUMENT IS IMPORTANT. If you are in any doubt about the contents of this document you should consult your stockbroker, bank manager, accountant, solicitor or other independent professional adviser (being, if you are in the United Kingdom, an adviser authorised under the Financial Services and Markets Act 2000) who specialises in advising on the acquisition of shares and other securities, before taking any action.Your attention is also drawn to the section headed “Risk Factors” in Part II of this document. This document constitutes an admission document and has been prepared in accordance with the AIM Rules. This document does not constitute a prospectus for the purposes of sections 85 and 87 of FSMA and any offer to the public is exempt by virtue of section 86 of FSMA. A copy of this document has been delivered to the London Stock Exchange as an admission document in respect of the Shares. This document has been approved for issue in the United Kingdom as a financial promotion for the purposes of Section 21 of FSMA by King & Shaxson Capital Limited, which is authorised and regulated by the Financial Services Authority. The Company and the Directors, whose names appear on page 3, accept responsibility for the information contained in this document. To the best of the knowledge of the Directors (who have taken all reasonable care to ensure that such is the case) the information contained in this document is in accordance with the facts and contains no omission likely to affect the import of such information. Application will be made for the Shares, issued and to be issued, to be admitted to trading on AIM. AIM is a market designed primarily for emerging or smaller companies to which a higher investment risk than that associated with established companies tends to be attached. AIM securities are not admitted to the Official List of the United Kingdom Listing Authority. A prospective investor should be aware of the potential risks in investing in such companies and should make the decision to invest only after careful consideration and consultation with his or her own independent financial adviser. The rules of AIM are less demanding than those of the Official List. It is emphasised that no application is being made for admission of these securities to the Official List. Further, the London Stock Exchange plc has not itself approved the contents of this document. It is anticipated that Admission will become effective and trading in the Shares will commence on AIM on 21 December 2006.

Walcom Group Limited (Incorporated in the British Virgin Islands with limited liability with IBC number 584063) (ISIN No.VGG574851074)

Placing of 4,491,735 Shares at 35 pence per Share and

Admission to trading on AIM Nominated Adviser

Broker

John East & Partners Limited

King & Shaxson Capital Limited

The following table shows the authorised and issued share capital of the Company immediately following the Placing. Authorised HK$

Number

1,500,000

150,000,000

Issued and fully paid HK$ Number Shares of HK$0.01 each

649,108.91

64,910,891

The Placing Shares rank pari passu in all respects, including the right to receive all dividends and other distributions declared, made or paid on the Shares after the date of this document. This document constitutes an admission document in accordance with the rules of the AIM market of the London Stock Exchange. John East & Partners Limited, which is authorised and regulated by the Financial Services Authority, is acting as Nominated Adviser to Walcom Group Limited. John East & Partners Limited is not acting for anyone else and will not be responsible to anyone other than Walcom Group Limited for providing the protections afforded to clients of John East & Partners Limited or for providing advice in relation to the contents of this document and the admission of the Shares to trading on AIM. King & Shaxson Capital Limited, which is authorised and regulated by the Financial Services Authority, is acting as Broker to Walcom Group Limited. King & Shaxson Capital Limited is not acting for anyone else and will not be responsible to anyone other than Walcom Group Limited for providing the protections afforded to clients of King & Shaxson Capital Limited or for providing advice in relation to the contents of this document and the admission of the Shares to trading on AIM. In particular, John East & Partners Limited, as Nominated Adviser to the Company, and King & Shaxson Capital Limited, as Broker to the Company, owe certain responsibilities to the London Stock Exchange which are not owed to the Company or the Directors or to any other person in respect of his or her decision to acquire Shares in reliance on any part of this document. No liability is accepted by John East & Partners Limited or King & Shaxson Capital Limited for the accuracy of any information or opinions contained in or for the omission of any material information from this document, for which the Company and its Directors are solely responsible. The Shares have not been and will not be registered under the securities legislation of any province or territory of Australia, Canada, Japan, South Africa or USA. Accordingly, the Shares may not, subject to certain exceptions, be offered or sold, directly or indirectly in or into Australia, Canada, Japan, South Africa or USA, or to any national, citizen or resident of Australia, Canada, Japan, South Africa or USA. This document does not constitute an offer to sell or issue, or the solicitation of an offer to buy or subscribe for, Shares in any jurisdiction or to any person in which or to whom such offer or solicitation is unlawful. Prospective investors are advised to read, in particular, Part I “Information on the Company” and Part II “Risk Factors”, for a more complete discussion of the factors that could affect the Company’s future performance and the industry in which it operates.

1


Contents Page Directors, secretary and advisers

3

Definitions

4

Glossary of terms

7

Expected timetable of principal events

8

Placing statistics

8

PART I

Information on the Group History and background Walcom’s business Marketing strategy Intellectual property Competition Summary financial information Current trading Directors and senior management Employees Details of and reasons for the Placing and use of the proceeds Dealing restrictions Share Option Scheme Share Award Plan Warrants Taxation CREST Corporate governance Dividend policy Additional information

9 9 9 10 11 11 12 12 12 15 15 15 15 16 16 16 16 16 17 17

PART II

Risk factors

18

PART III Competent Person’s Report

23

PART IV Financial information on the Company Section A: Financial Information on the Company Section B: Accountants’ Report on the Company Section C: Unaudited Interim Financial Information for the six months ended 30 June 2006

74 75 98

PART V

Unaudited pro-forma statement of net assets of the Group Section A: Unaudited pro-forma statement of net assets of the Group Section B: Accountants’ Report on the unaudited pro-forma statement of net assets of the Group

100 104 104 105 107

PART VI Additional information

2


Directors, secretary and advisers Directors Eddie Kin Man Chan (Non-Executive Chairman) Francis Chi (Chief Executive Officer) Yong Chian Tan (Chief Executive Officer in the PRC) Albert Siu Fai Wong (Chief Financial Officer) Frankie Yuet Leung Wong (Non-Executive Director) Royston Frederick Drucker (Non-Executive Director) Timothy Robert Nelson (Non-Executive Director) all of: Unit 613, 6/F West Wing Office Building, New World Centre, 20 Salisbury Road, Tsimshatsui, Kowloon, Hong Kong

Company Secretary

Principal Place of Business

Albert Siu Fai Wong FCCA CPA

Unit 613, 6/F West Wing Office Building, New World Centre, 20 Salisbury Road Tsimshatsui, Kowloon, Hong Kong

Nominated Adviser

Broker

John East & Partners Limited Crystal Gate, 28-30 Worship Street, London EC2A 2AH

King & Shaxson Capital Limited 6th Floor, Candlewick House, 120 Cannon Street, London EC4N 6AS

Solicitors to the Nominated Adviser and Broker 7 Pilgrim Street, London EC4V 6LB

Faegre & Benson LLP and Shanghai Centre, Suite 425, 1376 Nanjing Road West, Shanghai 200040, China

Solicitors to the Company As to Hong Kong law Richards Butler 20F Alexandra House, 16-20 Chater Road, Central, Hong Kong

As to English law Richards Butler LLP Beaufort House, 15 St Botolph Street, London EC3A 7EE

As to Chinese law Fangda Partners 20/F Kerry Centre, 1515 Nanjing Road West, Shanghai 200040, China

As to British Virgin Islands law Maples & Calder 1504 One International Finance Centre, 1 Harbour View Street, Hong Kong

Auditors

Reporting Accountants

Chu and Chu Certified Public Accountants Suite 2302-7, ING Tower, 308 Des Voeux Road Central, Hong Kong

Baker Tilly 2 Bloomsbury Street, London WC1B 3ST and Baker Tilly Hong Kong 12th Floor, China Merchants Tower Shun Tak Centre, 168-200 Connaught Road Central, Hong Kong

Registrars

Depositary

Computershare Investor Services (Channel Islands) Limited P O Box 83, Ordinance House, 31 Pier Road, St Helier, Jersey JE4 8PW, Channel Islands

Computershare Investor Services PLC P O Box 82, The Pavilions, Bridgewater Road, Bristol BS99 7NH

3


Definitions The following definitions apply throughout this document unless the context requires otherwise: “Admission”

the admission of the Shares to trading on AIM in accordance with the AIM Rules

“AIM”

the AIM market of the London Stock Exchange

“AIM Rules”

the rules for AIM companies as published by the London Stock Exchange

“Bioglory”

Bioglory International Limited

“Board” or “Directors”

the directors of the Company whose names are set out on page 3 of this document

“BVI”

the British Virgin Islands

“Capitalisation”

the capitalisation of certain sums standing to the credit of the share premium account of the Company further details of which are contained in paragraph 3 of Part VI of this document

“Committee”

a committee delegated from time to time by the Board

“Company” or “Walcom”

Walcom Group Limited, a company incorporated in the BVI with limited liability on 2 March 2004

“Companies Act”

the BVI Business Companies Act (No. 16 of 2004)

“Companies Ordinance”

the Companies Ordinance (Chapter 32 of the Laws of Hong Kong)

“Computershare”

Computershare Investor Services PLC

“Corporate Governance Guidelines”

the Corporate Governance Guidelines for AIM Companies published by the Quoted Companies Alliance in July 2005

“CREST”

the computerised settlement system to facilitate the transfer of title of shares in uncertificated form, operated by CRESTCo Limited

“CREST Regulations”

the Uncertificated Securities Regulations 2001 of the UK (as amended)

“Donor”

a person or organisation which allocates cash or gift shares to the Trustee pursuant to the Share Award Plan Rules

“Enlarged Issued Share Capital”

the Shares in issue immediately following Admission

“EU”

the European Union

“Group”

the Company and its subsidiaries or any of them or, where the context requires in respect of the period before the Company became the holding company of its present Subsidiaries, the present Subsidiaries of the Company

4


Definitions (continued) “HK dollars” or “HK$” and “cents”

Hong Kong dollars and cents respectively, the lawful currency of Hong Kong

“HKSE”

Hong Kong Stock Exchange

“Hong Kong”

the Hong Kong Special Administrative Region of the PRC

“John East & Partners”

John East & Partners Limited

“King & Shaxson Capital”

King & Shaxson Capital Limited

“Leadton”

Leadton Resources Limited

“London Stock Exchange”

London Stock Exchange plc

“Longain”

Longain Trading Limited

“Omega”

Omega-BioPharma Holdings Limited

“Options” or “Share Options”

options to subscribe for new Shares under the Share Option Scheme

“Placing”

the placing of the Placing Shares at the Placing Price

“Placing Price”

35 pence per Placing Share

“Placing Shares”

the 4,491,735 new Shares being offered by the Company for subscription under the Placing

“PRC” or “China”

the People’s Republic of China, and except where the context requires, references in this document to the PRC or China do not include Hong Kong, the Macau Special Administrative Region of the PRC and Taiwan

“R&D”

Research and Development

“Renminbi” or “RMB”

Renminbi, the lawful currency of the PRC

“Share Award Plan”

the share award plan adopted by the Company on 20 September 2006, the principal terms of which are summarised in paragraph 12 of Part VI of this document

“Share Award Plan Rules”

the rules accompanying the Share Award Plan

“Shareholders”

the holders of Shares

“Shares”

shares of HK$0.01 each in the capital of the Company

“Share Option Scheme”

the Company’s 2006 unapproved executive share option scheme rules adopted by the Company on 20 September 2006, the principal terms of which are summarised in paragraph 11 of Part VI of this document

“Takeover Code”

The City Code on Takeovers and Mergers of the UK as amended from time to time

“Trust Deed”

in relation to the Share Award Plan, the trust deed entered into between (1) the Company and (2) the Trustee

5


Definitions (continued) “Trustee”

the trustee of the Share Award Plan, being Walcom China Staff Incentive Limited

“UK”

the United Kingdom of Great Britain and Northern Ireland

“UKLA”

the UK Listing Authority, being the Financial Services Authority acting in its capacity as the competent authority for the purposes of the UK Financial Services and Markets Act, 2000

“USA”

the United States of America

“Vuna”

Vuna Capital Partners Limited

“Walcom International”

Walcom International Limited, a company incorporated in the BVI on 20 March 2001 and a wholly-owned subsidiary of the Company

“Walcom Shanghai”

Shanghai Walcom Bio-Chemicals Industrial Limited

“Warrantholder”

in relation to a Warrant, the person in whose name such Warrant is registered in the register of Warrantholders for the time being

“Warrants”

The warrants to subscribe for Shares issued pursuant to a deed, described on page 16 of Part I of this document and a summary of which is set out in paragraph 13 of Part VI

“US dollars” or “US$”

United States dollars, the lawful currency of the USA

“£”

pounds sterling, the lawful currency of the UK

On 14 December 2006 the last practical date before printing this document, the rate of exchange was approximately HK$1 = £0.0655.

6


Glossary of terms The following definitions apply throughout this document unless the context requires otherwise: “aquaculture”

the cultivation of the natural produce of water, such as fish, crustaceans and molluscs

“Aquanin”

an aquaculture growth promotant

“Avianin”

a poultry growth promotant

“Beta-agonist”

beta-adrenergic agonists, a group of synthetic phenethanalomine derivatives that act as growth-modifying agents

“Bovinin”

a beef cattle growth promotant

“Cysteamine”

a component of Co-enzyme A which is a natural metabolite generated in animals’ bodies and which participates in animals’ physiological Growth Axis to stimulate the animal’s natural GH level

“Eggronin”

an egg laying rate promotant that also reduces egg shell breakage

“exogenous”

developed or originating outside the organism

“finisher”

livestock bred for meat which is in the last few weeks of growth before being taken to market

“GH”

Growth Hormone, a protein secreted by the anterior pituitary gland in all mammals although its structure differs between species. It is a major participant in control of several complex physiological processes, including growth and metabolism

“Lactonin”

a dairy cow milk production promotant

“metabolite”

any substance produced by metabolism or by a metabolic process

“polyclonal”

derived from different types of cells

“Porcinin”

a swine growth promotant

“titer”or “antibody titer”

a measurement of the amount of antibodies in the blood. The test to measure antibodies is usually performed by making a number of dilutions of the blood then measuring at which dilution there are sufficient antibodies to react to that test

“Walstrong”

a proprietary technology relating to the Cysteamine complex that retains the essential features of Cysteamine in an animal’s physiology, yet which is stable when subjected to prolonged storage and industrial processing. Formerly known as CT2000

7


Expected timetable of principal events Publication date of this document

15 December 2006

Admission and commencement of dealings on AIM and crediting of CREST accounts

21 December 2006

Share certificates in respect of Placing Shares expected to be despatched by no later than

29 December 2006

Placing statistics Placing Price

35 pence

Number of Placing Shares

4,491,735

Number of Shares in issue immediately following the Placing Percentage of Enlarged Issued Share Capital being placed by the Company

6.92 per cent.

Amount being raised under the Placing for the Company (before expenses)

£1.57 million

Estimated net proceeds of the Placing receivable by the Company

£1.01 million

Market capitalisation at the Placing Price at Admission

8

64,910,891

£22.72 million


PART I Information on the Group History and background The Group is actively engaged in the research, development, commercialisation, production and marketing of animal feed additives. The Group’s feed additives improve the health of the animals, reduce mortality rates, shorten the time taken to reach maturity, increase the protein content in animal food products, increase egg laying and reduce eggshell breakage and build resistance to disease. The Group has developed technology which stimulates an animal’s natural physiological systems, without the undesirable side effects commonly associated with hormones, Beta-agonists and antibiotics. The Directors believe that the Company is the only animal science company to have developed a “non hormonal”, “non antibiotic”, “non gene-altering” physiological regulation animal feed additive and the only animal science company to have commercially launched a full range of products in that sector. The Group is headquartered in Hong Kong with a research and manufacturing facility in Shanghai. Based on the discovery of the positive effect of Cysteamine, a natural metabolite existing in plants and animals, on animal health and productivity, the Group originally directed its research efforts towards stabilising Cysteamine, a naturally unstable compound, for commercial use in animal feed products. The Group has successfully developed Walstrong, a patented and proprietary Cysteamine compound, which retains the essential effects of Cysteamine in a way which is stable when subjected to prolonged storage and industrial processing. Walstrong, which is not a hormone, assists an animal to increase secretion of its own Growth Hormone, to enhance growth and general well-being of animals. GH injection is a popular treatment in the US. However, as it is administered by injection it also raises concerns about possibly harmful residues which might be left behind by an externally introduced GH. Walstrong is an attractive alternative in that it is in powder/granule form and can be easily administered as a feed additive.

Walcom’s business Product Range The Group has successfully produced a series of animal health and productivity enhancing products. At present, the Group has commercialised products which can be used to enhance productivity in swine (Porcinin) and broilers (Avianin), increase the yield and quality of milk (Lactonin) and promote higher laying and lower egg shell breakage ratios (Eggronin). The Group develops its Walstrong compound into feed additive and feed additive premix. Feed additive is the basic raw product to which buyers are able to add other vitamins before mixing with their stockfeeds (i.e. corn). Feed additive premix includes a dosage of vitamins which can be mixed directly into stockfeeds. Feed additive premix is more attractive to smaller farmers who do not have the knowledge or resources to add other products. Feed additive is attractive to feed integrators who prefer to mix all their own raw ingredients. The Directors believe that the Group’s products have a positive effect on the cost of animal husbandry. Based on trial evidence, the Directors have found that Porcinin and Avianin increase the average weight gain of swine and broilers by up to 14.3 per cent. and 17.8 per cent. respectively over a trial period of 54 and 43 days, respectively. Further trials have demonstrated that Porcinin can increase the lean meat percentage of swine by up to 4.6 per cent., Avianin can increase the breast yield of broilers by up to 6.3 per cent., Eggronin can improve the egg laying rate by up to 11.1 per cent. and reduce breakage by up to 49 per cent. and Lactonin can improve milk production by up to 4.9 per cent. whilst increasing the protein content of milk by up to 3.9 per cent. Two new products, Aquanin and Bovinin, are not currently being marketed. 9


Walcom Shanghai received approval from the PRC Ministry of Agriculture to manufacture feed additives in 2002. The Group has also received approval for its core Walstrong technology from the PRC Ministry of Agriculture, for production and usage in the livestock industry, and the product series based on this compound. Any new animal product derived from the approved Walstrong compound needs only to be registered with the local feed authorities in order to be granted PRC product approval. Sales of Avianin, Eggronin and Porcinin commenced in the PRC and, in the Philippines in 2002. Sales of Walstrong branded products commenced in Malaysia in 2002, in Taiwan in 2003, in Korea in 2004 and in Thailand in 2005. Avian Influenza The avian influenza threat is present and serious. Different countries are adopting different methods to stop it spreading from wild birds to farm poultry and thence to humans. The two most common are the mass slaughter of farm poultry on any occurrence of the disease in the flock and vaccination of farm poultry with H5N1 vaccine. The latter course is the one adopted by the PRC. Walcom has two products which solve part of the problem. They are the Walstrong Specific Vaccine Adjuvent, which increases the H5N1 antibody titer and is effective against the H5N1 virus, and the Walstrong Immunity Enhancer which is added to poultry feed and enhances the bird’s immunity to the disease. Research and Development The Group has adopted a strict set of guidelines in its R&D department; no research is undertaken into exogenous hormones and antibiotics; all research is focused on physiological related areas in order to maintain its leading position in that field; and any research undertaken is designed to give rise to new intellectual property. All initial research is undertaken by the Group’s internal R&D team to ensure that Walcom is entitled to all intellectual property rights. Once a patent application has been submitted, the Group engages universities and other institutions to perform further testing. New Products There are several potentially rewarding R&D projects in the pipeline. These include new formulations of Walstrong tailored for specific feed markets to enable the Group to diversify its product range. The Group has recently been awarded a UK patent relating to the development of antibodies to pig fat tissues to increase the percentage of lean meat. This is the first non-Cysteamine based patent to be awarded to Walcom. The Group has also developed Bovinin, a Cysteamine based growth promotant for beef cows at the finishing stage. Tests show that it can increase daily weight gain by as much as 15.9 per cent. This product has not been launched in the PRC because the local price of beef is only slightly higher than that of pork and therefore the use of Bovinin cannot demonstrate a high economic benefit. In due course the Board expects to launch Bovinin in Europe and Japan where beef fetches much higher prices than in the PRC. Aquanin has been developed as a Cysteamine based growth promotant in the aquaculture market and tests have shown that it can increase the weight gain of eel and grouper by up to 77.9 per cent. and 107.9 per cent., respectively. The Group has also developed a shrimp growth promotant which in trials increased the weight gain of shrimp by up to 11.9 per cent.

Marketing strategy The Group’s strategy is to focus its marketing efforts principally in the PRC which, with a population of approximately 1.3-1.4 billion people, is believed to account for one third of the world’s total output of livestock products. To serve this market, Walcom has employed its own sales force, as well as engaging independent sales agents, to conduct direct sales of Walstrong products to large-scale integrators, feed manufacturers and large-scale farmers. 10


In Asia, outside the PRC, the Directors have entered into exclusive distribution or agency arrangements with local and/or regional distributors. Sales operations have been established in Korea, Malaysia, the Philippines, Taiwan, and Thailand where the Group’s products are marketed through local feed distributors. The Group also intends to expand its distribution into Brazil.

Intellectual Property The Group has applied for some 96 patents across six technology areas. Those areas comprise (i) its core Cysteamine stabilised technology, as well as inventions specifically relevant to (ii) poultry feed; (iii) dairy cow feed and (iv) fish feed. The other areas are (v) antibodies to adipose tissues (as referred to in the section headed “New Products” above) and (vi) compositions for enhancing immunity to disease. Patent applications have been made throughout the World including in the Group’s target Asian markets, including the PRC, Taiwan, Korea, Malaysia, the Philippines and Thailand. They have also been filed in countries in, amongst other places, Europe, North and South America and Australasia. To date, the Group has been granted 11 patents in respect of: l

its core Cysteamine technology in the PRC, Hong Kong, North Korea and New Zealand;

l

poultry feed in the UK, North Korea, Taiwan and Hong Kong;

l

dairy cow feed in New Zealand and the UK; and

l

antibodies to adipose tissues in the UK.

The Directors propose to continue the Group’s policy of pursuing wide patent coverage for the Group’s new inventions, in particular, where the Directors believe that there will be significant potential demand for products that may result from those inventions. To accompany its patented technology, the Group has registered a number of trademarks, in the markets to which it sells and proposes to sell, including that of Walstrong, which mark is associated with its core Cysteamine-stabilised compound. In addition to the intellectual property rights described above, which are owned by the Group, it has also assigned and licensed certain intellectual property to Omega and its subsidiaries. Omega is a company owned by many of the existing shareholders of the Company and has been set up to pursue technology that may ultimately produce human applications. Omega is a private company and no shares in that company are being placed pursuant to this document. The features of products that could be developed by Omega may include (amongst others) immunoenhancement, metabolic syndrome improvement qualities and so-called ‘anti-ageing’ qualities. To develop products for humans is invariably a more expensive and time-consuming process than to develop animal applications and it was for this reason that Francis Chi and other shareholders common to both the Company and Omega chose to develop the technologies separately and to proceed with a listing of the Company as a priority. Subsidiaries of Omega have licensed the Group to use certain Cysteamine compositions designed to improve immunity in animals. The license is on an exclusive perpetual royalty free basis. Further details of these arrangements are set out in paragraph 10 of Part VI of this document.

Competition The Directors are aware of only one other company presently producing animal health and productivity solutions based on compounds similar to Walstrong, however, there are many companies involved in the production, development and research into animal health and productivity solutions. 11


Summary Financial Information The table below, which has been extracted from, and should be read in conjunction with, the financial information, set out in Part IV of this document, sets out a summary of the audited consolidated income statement of the Company for the three years ended 31 December 2005 and the unaudited interim income statement for the six month period ended 30 June 2006. Year ended 31 December 2003 HK$’000

2004 HK$’000

2005 HK$’000

Six months ended 30 June 2006 HK$’000

3,196 (2,636)

4,650 (3,008)

5,046 (2,595)

4,832 (1,693)

Gross profit Other revenue Gain on disposal of subsidiary Research and development expenses Selling and distribution expenses Administrative and other operating expenses Share of loss in associates

560 18 56 (1,251) (3,559) (10,998) (1)

1,642 – – (1,089) (3,387) (6,461) –

2,451 108 – (1,121) (5,484) (8,738) (22)

3,139 – – (693) (2,659) (3,809) –

Loss from operations Net finance costs (Note 1)

(15,175) (1,323)

(9,295) (1,236)

(12,806) (1,977)

(4,022) (7,762)

Loss before taxation

(16,498)

(10,531)

(14,783)

(11,784)

Turnover Cost of sales

Turnover and operating losses are derived from continuing operations. This table should be read in conjunction with the financial information set out in Part IV of this document. Note 1: Finance costs include a charge of HK$6.86 million relating to the issue of US$4.65 million of convertible loan notes during the period. The charge is required under IAS 32 and IAS 39 to reflect the discount arising on the conversion of the loan notes into the Company’s shares. Further details relating to the convertible loan notes are set out in paragraph 4 of Part VI of this document.

Current trading The Directors believe that the Group is now enjoying the benefits of its investment in R&D and personnel over the past eight years. There has been increased awareness of the Group’s products which has led to a considerable upturn in the number of enquiries being received and a consequential significant increase in the Group’s sales. Initial orders have been received from one of the world’s largest feed groups to supply five of its feed mills in the PRC and one of its mills in Thailand, which is expected to lead to further substantial orders in the future. Sales for the six months to 30 June 2006 amounted to HK$4.832 million compared to HK$5.046 million for the whole of the previous year. The Directors believe that sales will continue to increase and they look forward to the future with confidence.

Directors and Senior Management Directors Eddie Kin Man Chan, aged 45, (Non-Executive Chairman) is a practising accountant and a graduate of the Hong Kong Polytechnic University. In 1989, Mr Chan founded Chan, Wong, Chung & Co., a firm of certified public accountants. He is a Vice-President of the China Tax Society and a Fellow of The Association of Chartered Certified Accountants and a Fellow of the Hong Kong Institute of Certified Public Accountants. Eddie Chan originally joined the Group in 2002 as a part-time finance director. 12


Francis Chi, aged 45, (Chief Executive Officer) founded the Group and has played a leading role in developing the Company’s direction in pursuit of its business and operational objectives. He is responsible for business development and the commercial activities of the Group, including the manufacturing and marketing of all product applications. He holds a Bachelor of Arts degree in Business Administration from the University of Seattle, in the USA. Mr Chi has over 22 years of entrepreneurship experience, of which he has spent 16 years in the fields of organic and inorganic chemicals, fertilizers, pharmaceuticals, bio-chemicals and animal feeds. Yong Chian Tan, aged 43, (Chief Executive Officer in the PRC) holds a Bachelor of Science degree in Civil Engineering from the University of Seattle, in the USA. Prior to joining the Company in 2001, he worked for the Walsin Lihwa Group which is listed in Taiwan and has diversified operations in power, telecommunications, cable and wire, steel, electronic components and semiconductors. His most recent roles with the Walsin Lihwa Group were as President of HannHann Corporation and DongGuang Hannstar Electronics Company Limited where he was responsible for establishing operations in the PRC. He has had over 10 years senior experience in project management, and the operation and management of new businesses in the PRC and Taiwan. Albert Siu Fai Wong, aged 46, (Chief Financial Officer) has over 20 years financial and accounting experience. He is a Fellow of The Association of Chartered Certified Accountants and a member of the Hong Kong Institute of Certified Public Accountants. He has been group chief accountant of a business conglomerate and then finance director of a venture capital fund. Prior to joining Walcom in 2005 he was a consultant, assisting clients to prepare for listing on the HKSE. He is currently an independent non-executive director of TC Interconnect Holdings Limited, a company listed on the HKSE. Frankie Yuet Leung Wong, aged 57, (Non-Executive Director) holds a Master of Arts degree from the University of Lancaster and a Bachelor of Science degree in Economics from the London School of Economics and Political Science. Mr Wong joined the Shui On group of companies in 1981 and is the Managing Director of Shui On Holdings Limited, a position he has held since 1991. He is also Chief Executive Officer of Shui On Construction and Materials Limited, a company listed on the HKSE. Prior to his service in the Shui On group of companies, he had worked for a number of years for several major international banks in Hong Kong. He was appointed a Non-Executive Director in 2003. Royston Frederick Drucker, aged 53, (Non-Executive Director) graduated in Natural Sciences and was awarded a MA by Cambridge University. He qualified there as a physician being awarded MB, BChir, MRCS and LRCP. He is, inter alia, a Fellow of the Faculty of Pharmaceutical Medicine, a Founder and Honorary Member of the Association for Human Pharmacology in the Pharmaceutical Industry, a Fellow of the Royal Society of Medicine, a member of the British Association of Pharmaceutical Physicians and a member of the Securities & Investment Institute, London. Following an eight year clinical career, he joined Sterling-Winthrop’s research and development division, becoming a senior departmental manager of its department of biochemistry, Alnwick UK with responsibilities for clinical pharmacology, drug metabolism and bioanalysis in Europe. In 1985 he joined the Pharmaceutical Research Laboratories of the Upjohn Company and was appointed European head of Clinical Pharmacology. He was also appointed an Honorary Research Fellow in Clinical Pharmacology at Guy’s Hospital, London. He then became Executive Director and subsequently Corporate Vice President of drug development. Since 1996 he has acted as a consultant to life science companies worldwide through Technomark Consultancy Services Limited. He was appointed a Non-Executive Director in 2006. Timothy Robert Nelson, aged 33, (Non-Executive Director) has an MBA from Business School, Lausanne. He has worked in the insurance industry in Australia and in corporate finance in South Africa. He is chief executive of the Vuna Group, a London based finance and project development company. He was a founder director of Madagascar Oil Limited, an oil exploration company, and a cofounder of Oxford Pharma Limited, a drug discovery and development company associated with the Department of Pharmacology of Oxford University. He was appointed a Non-Executive Director in 2006. 13


Senior Management Dr Jiang Shulin, aged 50, (Group Chief Marketing Officer) has a Bachelor’s degree in Animal Husbandry, a Master’s degree in Animal Nutrition, an MBA in Managerial Science and Engineering and a Doctorate in Western Economy and Human Resources Management. A former visiting professor at the food faculty of Jiangnan University and member of the National Feed Industry Technical Standards Committee of the PRC he has also been a researcher in Animal Nutrition at the Research Institute of Sichuan University (PRC) and head of the aquatic feed research project of the Sichuan Science and Technical Committee. Apart from his academic posts he has held managerial and sales roles with several PRC companies. He joined the Group in 2004. Wei Chi, aged 61, (General Manager of Shanghai Walcom) graduated with a Bachelor of Science degree in Mechanical Engineering from Shanghai University. He has over 30 years of factory management experience, of which over 10 years was spent in setting up manufacturing plants and establishing facilities in Shanghai, Wuhan, Nanjing and Guangdong for Walsin (China) Investment Holding Company Limited. He is responsible for Group manufacturing operations and factory design. He joined the Group in 2001. Professor Chen Jie, aged 68, (Chief Research Officer) is a director of Shanghai Walcom. He is a Professor of Animal Physiology at Nanjing Agricultural University and a doctoral supervisor teaching courses for post-graduate students. He is also a Director of the Council of Teaching-Guidance in Veterinary Medicine, Degree Council of State Department of the PRC and a visiting scholar to the farming graduate school of the Swiss Federal Research Centre in Switzerland. He has over 42 years experience in the study of poultry nutrition physiology. He is head of Group new product research and development. Professor Chen joined the Group in 2001. Wen Qin Tang, aged 65, (Chief Engineer) is a director of Shanghai Walcom. He graduated from Tsinghua University, with a bachelor’s degree in chemistry. In 1967, he joined the PRC National Defence Ministry where he was a research officer working on the transformation of nuclear materials to industrial use. He then joined Wuxi Chemical Industrial Research and Design Institute, as senior engineer, later as deputy director, where he focused on chemical research for the electronic industry. He also spent six years as deputy head of Wuxi City Council Economic Research Centre. He joined the Group in 2001 and is primarily responsible for the Group’s production and technology division. Professor Lu Tian Shui, aged 70, (Senior Researcher) is a director of Shanghai Walcom and has over 40 years experience in animal physiology and feed nutrition. He is a former Professor of Nanjing Agricultural University, where he was engaged in teaching and research in animal physiology. He was also a visiting scientist at Cornell University in the USA. He is Secretary General of Shanghai Branch of the Animal Physiology and Biochemistry Academy of Farming and Veterinary Medicine of China. Due to his expertise in the animal husbandry industry and hands-on experience in the animal nutrition, feed, veterinary practice and farming industries he is involved in the Group’s research into animal growth. Professor Lu joined the Group in 2001. Xu Jinxian, aged 32, (Product Development) has bachelor’s and master’s degrees in agronomy and is currently a doctoral student attached to Nanjing Agricultural University. He joined the Group in 2001 and is a member of the research and development team. Consultants Professor Shen Zan Ming, aged 56, is a senior research officer to the Group and is an Associate Professor at Nanjing Agricultural University where she teaches courses for undergraduate and postgraduate students. She has a doctorate in agriculture and was a visiting scholar at Bern University, Switzerland, in 2001 and was one of the co-researchers in the Research Institute of Biology for Farm Animals in Germany for almost four years. Professor Shen specialises in nutritional physiology and biological regulation for cows and became a consultant to the Group in 2001. 14


Professor Zhao Ru Qian, aged 42, is a senior research officer to the Group. She graduated with a Ph.D in Animal Physiology and Biochemistry from Nanjing Agricultural University where she remains a Professor and head of the laboratory. Professor Zhao was a visiting scientist at the Federal Agricultural Research Center in Cella, Germany in 1994 and 1998, a research officer at Prince Henry’s Institute of Medical Research in Australia in 2000 and a Tang scholar and visiting professor at Cornell University, USA, in 2005. She specialises in Growth Axis studies in animals and became a consultant to the Group in 2001.

Employees Apart from the Directors, senior management and consultants, the Group employs approximately 73 people, including 8 employees in Hong Kong and 65 employees in the PRC. The Group is an equal opportunities employer and protects and respects the statutory rights of all its employees.

Details of and reasons for the Placing and use of the proceeds Under the Placing Agreement (details of which are set out in paragraph 10.2 of Part VI of this document) King & Shaxson Capital has agreed, as agent for the Company, to use all reasonable endeavours to procure placees for the Placing Shares at the Placing Price to raise £1.57 million (approximately £1.01 million net of expenses) for the benefit of the Company. The Placing is conditional (amongst other things) upon Admission and the Placing Agreement becoming unconditional and not being terminated in accordance with its terms. The Placing Shares, when issued and fully paid, will rank equally in all respects with the existing Shares, including the right to receive all dividends and other distributions declared, made or paid after Admission. The Placing Shares will be allotted and issued prior to Admission credited as fully paid subject only to Admission. The allotment and issue will become wholly unconditional on Admission, which is expected to occur on 21 December 2006. The Directors believe that the Placing and Admission will expand the Group’s capital base and enhance its profile, thereby enabling the Group to attract high calibre research scientists and other professionals, to increase its sales and marketing division and to forge strategic alliances and/or partnerships for future growth and development. Based on the Placing Price, the net proceeds from the Placing, after deducting related expenses to be borne by the Company, are estimated to amount to approximately £1.01 million. It is the present intention of the Directors to apply the net proceeds for general working capital purposes.

Dealing restrictions On Admission, the Directors will be interested in 36,581,767 Shares, representing 56.36 per cent. of the Enlarged Issued Share Capital of the Company which, on a fully diluted basis following exercise of the Warrants, would represent 50.10 per cent. of the further enlarged issued share capital. Details of these interests are set out in paragraph 7 of Part VI of this document. The Directors on behalf of themselves, their families and other persons and companies deemed to be connected with them (which for these purposes include Bioglory and Vuna), together with Longain, a company controlled by Dr Jiang Shulin hold 36,581,767 and 1,082,431 Shares respectively, have undertaken to John East & Partners and the Company, not to dispose of a total of 36,178,293 Shares (subject to certain limited exceptions) until 12 months after Admission and thereafter for a further period of 12 months without the prior written consent of John East & Partners, such consent not to be unreasonably withheld or delayed. Of their respective holdings, 390,967 Shares held by Longain and 1,094,938 Shares held by Bioglory are freely transferable. Further details of these arrangements are set out in paragraph 10 of Part VI of this document.

Share Option Scheme The Company has adopted the Share Option Scheme whereby full time and part time employees and Directors of the Group may be granted options which entitle them to subscribe for Shares. The Directors believe that the Share Option Scheme will assist the Group in its recruitment and retention of high calibre professionals, executives, employees and consultants to the Group. A summary of the principal terms of the Share Option Scheme is set out in the section headed “Options” in paragraph 11 of Part VI of this document. 15


Share Award Plan In order to encourage and facilitate the holding of Shares by employees of the Group in the PRC, the Share Award Plan was adopted by the Company on 20 September 2006. As at the date of this document, 433,163 Shares, which were gifted by the existing Shareholders, have been awarded or agreed to be awarded pursuant to the Share Award Plan, a summary of which is set out in the section headed “Share Award Plan” in paragraph 12 of Part VI of this document.

Warrants On 15 December 2006, the Company adopted a Warrant instrument constituting 8,107,320 Warrants. Each Warrant entitles the holder to subscribe for one new Share at the Placing Price. 214,286 Warrants were issued to Vuna, 214,286 Warrants were issued to John East & Partners and 7,507,320 Warrants were issued to existing Shareholders all of which may be exercised at any time up to five years from the date of Admission. On the same day 171,428 Warrants were issued to King & Shaxson Capital which may be exercised at anytime up to two years from the date of Admission. The Warrants are transferable but it is not the intention of the Directors to apply for the Warrants to be admitted to AIM. Further details of these are set out in paragraph 13 of Part VI of this document.

Taxation Details of certain taxation implications, which may be relevant to holding or dealing in the Shares, are set out in paragraph 16 of Part VI of this document. If you are in any doubt as to your tax position you should consult your own independent financial adviser immediately.

CREST CREST is a paperless settlement procedure enabling securities to be evidenced otherwise than by a physical certificate and transferred otherwise than by written instrument. The Board has resolved that the Shares may be held and transferred both in certificated form and in uncertificated form in accordance with the CREST Regulations and the Company’s memorandum and articles of association contains provisions implementing this. The Shares will not themselves be admitted to CREST; rather the Company has arranged for Computershare (“issuer”) to issue Depository Interests in respect of the underlying Shares (the “Depository Interests”) and which are expected to be admitted to CREST with effect from Admission. These Depository Interests may be held and transferred within CREST. The Depository Interests will be created and issued pursuant to a Deed Poll executed by Computershare under English law, copies of which are available from them, and the provisions of the Deed Poll are expressed to bind all holders present and future. In CREST, the Depository Interests will carry the same ISIN (“International Securities Identification Number”) as the Shares. It will of course remain open to members, should they wish to do so, to continue to hold the Walcom Shares as they now do and make use of the residual settlement mechanism. If CREST members wish to hold Depository Interests in CREST, they can do so by inputting a stock deposit in the usual way. The Company has informed CRESTCo that (1) a CREST transfer form or dematerialisation form lodged as a stock deposit will be deemed to constitute a transfer of the Shares to the issuer, who will issue corresponding Depository Interests in CREST to the depositing member/transferee; and (2) in a similar way, a stock withdrawal will be deemed to constitute an instruction to the issuer to cancel the Depository Interest and effect a transfer of the Shares to the person specified in the instruction.

Corporate Governance The Board recognises the importance of sound corporate governance and the Board intends to ensure that, following Admission, the Company complies with the Corporate Governance Guidelines. The Company has established an Audit Committee and a Remuneration Committee with formally delegated duties and responsibilities. The Audit Committee comprises Albert Wong, Eddie Chan, Frankie Wong, Timothy Nelson and Royston Drucker. The Remuneration Committee comprises Eddie Chan, Timothy Nelson and Royston Drucker. 16


The duties of the Audit Committee include reviewing, in draft form, the Company’s annual and halfyearly report and accounts and providing advice to the board of Directors. In this regard, members of the Audit Committee will liaise with the Directors, senior management and the Company’s auditors. The Audit Committee will also consider any significant or unusual items that are, or may need to be, reflected in such reports and accounts and give consideration to any matters that may have been raised by the Company’s chief finance officer or auditors. Members of the Audit Committee are also responsible for reviewing and supervising the financial reporting process and internal control system of the Group. The Remuneration Committee will review the scale and structure of the executive Director’s remuneration and the terms of their service contracts, including share option schemes and any bonus arrangements. The terms and conditions of the arrangements, including remuneration, with NonExecutive Directors will be set by the entire Board. The Board intends to comply with Rule 21 of the AIM Rules relating to Directors’ dealings as applicable to AIM companies and will also take all reasonable steps to ensure compliance by any of the Group’s future employees.

Dividend Policy The Board’s objective is to maximize the capital value of the Company and it is not their present intention to recommend the payment of dividends, bearing in mind the financial resources which will be required for the development of the Company.

Additional information Your attention is drawn to the Risk Factors set out in Part II and to the information contained in Parts III, IV, V and VI of this document.

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PART II Risk factors An investment in the Shares is speculative and involves a high degree of risk. This document contains, in addition to historical information, forward-looking statements that involve risks and uncertainties, from which the Company’s actual performance could differ materially. There are various risk and other factors associated with an investment of the type described in this document. The risks listed below do not necessarily comprise all those associated with an investment in the Company and are not set out in any particular order of priority. In addition to the other information included in this document, the following specific factors should be considered carefully in evaluating whether to make an investment in the Company: History of losses and possibility of continuous losses As the Group only began commercial sales of Porcinin, Avianin and Eggronin in October 2002 and has been testing the acceptance of the products by the market in terms of its efficacy and pricing over the past 3 years, its full revenue and profit potential remain unproven. Since the Group was established, it has incurred operating losses although its operating revenues have been improving. For the period since incorporation up to 31 December 2005 the Group had accumulated losses of approximately HK$58.951 million. The Directors consider that the net proceeds of the Placing, together with the Group’s internally generated revenues, will be sufficient to finance the planned development of the Group. In the event that the Group cannot attain its projected level of revenues, the Group may be required to raise additional funding through equity and debt markets and bank financing or through a combination of those methods. In such an event a failure to obtain additional funding would have a material adverse effect on the Group. There is no certainty that all or any of the elements of the Group’s current strategy will develop as anticipated, or that the Group will be profitable. Liquidity and possible price volatility of the Shares AIM is not the Official List of the UKLA. The value of the Shares may go down as well as up. Furthermore, an investment in a share that is traded on AIM may carry a higher risk than an investment in a share listed on the Official List of the UKLA. The market for shares in smaller public companies is less liquid than for larger public companies. Accordingly the Company’s share price may be subject to greater fluctuation and the shares may be difficult to buy and sell. An active trading market for the Shares may not develop and the trading price for the Shares may fluctuate significantly. Prior to the Placing, there has been no public market for any of the Shares. The Placing Price may not be indicative of the price at which Shares will trade following listing. In addition, there is no assurance that an active trading market for Shares will develop, or, if it does develop, that it will be sustained following listing of the Shares, or that the market price of the Shares will not decline below the Placing Price. The trading price of the Shares could also be subject to significant volatility in response to, among other factors: l investors’ perceptions of the Group and the Group’s business plans; l variations in operating results of the Group; l announcements of new products; l technological innovations; l changes in pricing made by the Group, the Group’s competitors or the Group’s suppliers; l changes in senior management or key personnel; and l general economic and other factors. 18


Reliance on the Walstrong compound Reliance is placed on the successful commercialisation and customer acceptance of Walstrong, a proprietary compound which is applied for the development of different products for enhancing animal health and productivity. Failure to commercialise it could adversely affect the Group’s sales and operations significantly and the Group could continue to incur a loss. There are various factors which could affect the success of the Walstrong compound and the products derived there from, such as external competition, wider acceptance of other animal science solutions, failure to obtain approval or patents in some countries and lack of marketing and distribution support for the Group’s products. Although sales of the products have commenced in China, Thailand, the Philippines and some other Asian countries, the Group’s plans to sell its products into the USA and the EU have yet to be implemented. Product and technological advances Technologies similar in some respects to the Walstrong compound may become available in the market in the future. Developments in animal science processes and products are also expected to continue at a rapid pace. It is extremely difficult to predict the effect of future technological changes and discoveries on the competitiveness of the Group’s products. It is important for the Group to respond to technological changes by developing new and high quality products in a timely and cost efficient manner. The Directors consider that the Group must adopt and modify development methods, programs and processes in response to emerging technologies and new discoveries. If the Group fails to respond rapidly, the Group’s performance, reputation and viability could suffer. Furthermore, third parties may develop comparable or superior animal science technologies, processes or products with prices comparable to or lower than those developed and provided by the Group. Reliance on continuing research and development The market in which the Group operates is characterised by rapidly changing technology, evolving industry standards, frequent introduction of new technologies or products, and changing demands and requirements. Accordingly, the Group’s success in the future will depend on its ability to adapt to the rapidly changing technologies, to continue its research and development work, to improve, enhance and broaden the use of the Walstrong compound and to develop new technologies and products, which could open up new markets and business opportunities. Limited distribution network The Directors consider that success in commercialising the Group’s technologies and products is, to a certain extent, dependent on the coverage and effectiveness of its distribution network and the relationship with its distributors. However, the Group currently has limited sales, marketing and distribution capabilities. Developing a sales and marketing network may be expensive and time consuming. The Group is currently marketing its products directly in the PRC. Although there is a trend of increasing sales over the past 3 years, the Group’s business will suffer if it is unable to establish an effective marketing and sales network. In markets outside of the PRC, the Group will need to enter into arrangements with third parties to market, sell and distribute its products. Although sales in the Asian countries over the past 3 years have made significant progress, the Group’s revenues may depend on the terms of any such arrangements and the efforts of others. Reliance on the PRC market The Directors anticipate that sales of the Group’s products in the PRC will represent a significant proportion of the turnover of the Group in the near future. As a result, the Group may be affected by any adverse changes in the economic, political and social conditions in the PRC. There is no assurance that any such changes will not adversely affect the business and profitability of the Group. 19


Taxation Under current relevant PRC laws, Shanghai Walcom, as a foreign invested manufacturing enterprise, is subject to the preferential enterprise income tax rate of 15 per cent. on its assessable profits. However, it was granted exemption from paying the PRC enterprise income tax for two years commencing from its first profit-making year of operations to be followed by a 50 per cent. reduction on the PRC enterprise income tax for the three years thereafter. There is no guarantee that the above preferential tax treatments will not change in the future. Any change in the preferential tax treatments may have an adverse impact on the Group’s performance and profitability. No assurance on successful patent and product registrations For the Group’s newly developed products, the Group’s policy has been to file patent applications in countries where sales are anticipated. In addition, certain product registrations or approvals may be required to be made in such countries. Despite the fact that some patents have already been granted and certain product registrations have already been made in China and some Asian countries, there is no assurance that such patent or product registrations will be granted, and in the event that a patent or product registration is rejected, there may be an impact on the profitability and prospects of the Group. In addition, the scope of the patent claims, as granted, may be narrowed, thus limiting the scope of the patent rights. Limitations and infringement of intellectual property rights Although the Group has been granted patent protection for certain of its inventions from which products have been developed, no assurance can be given that the patents granted will be sufficiently broad in their scope to provide protection against competitors with similar products. In addition, even when the Group’s patents are granted, the patents may still be susceptible to revocation, rectification or challenge by third parties, albeit the Group has no such experience ever since the patents had been granted. In addition, the Group employs, and has entered into employment contracts with, a number of scientists who are PRC Citizens and who worked in the PRC prior to their employment by the Group. Although the directors believe that the Group’s processes and products were all developed by the Group’s scientists after they had joined the Group, the relevant regulatory bodies in the PRC may consider the group’s products or processes as incorporating the products or processes previously developed by such scientists in the PRC. As a result, such scientists or the Group could be found to be in breach of the laws and regulations restricting or prohibiting the transfer of intellectual property rights, including patents and patent applications, in respect of inventions developed in the PRC, from PRC citizens to foreign parties without having obtained approval from the relevant PRC regulatory bodies. Were this to be the case, there is a risk that the Group may not be able to obtain patent protection for such products or processes in the PRC. In addition, there is a risk that the Group may not be able to enforce the restrictive covenants in such scientist’s employment contracts with the Group and other contracts with the Group in the PRC courts. Majority Shareholder’s influence Immediately after the completion of the Placing, Francis Chi and his family members will beneficially own approximately 19,660,290 Shares, representing approximately 30 per cent. of the Enlarged Issued Share Capital of the Company. Accordingly, Francis Chi will have significant influence in determining the outcome of any corporate transaction or other matters submitted to shareholders for approval, including mergers, consolidations and sale of all or substantially all of the Group’s assets, and will have the power to prevent or cause a change in control. Francis Chi has entered into a relationship agreement with the Company details of which are set out in paragraph 10 of Part VI of this document. 20


Reliance on the Group’s management team and key personnel The Group’s success is to a certain extent, attributable to the expertise and experience of its Executive Directors and key personnel. Each of the Executive Directors has entered into a service agreement with the Group for an initial term of three years commencing from the date of Admission which will automatically continue unless and until terminated in accordance with the terms of their respective service agreements. Each of the Executive Directors has also undertaken to the Group not to divulge confidential information or to engage in a competing business with the Group during the term of his service agreement and for a period of six months thereafter. If any of the Executive Directors and/or key personnel ceases to be involved in the Group’s management and/or operations in the future and the Group fails to find any suitable personnel to replace him/her or them, the Group’s operations, profitability and prospects may be materially and adversely affected. Competition The animal science industry is highly competitive and subject to significant and rapid technological changes. There are a number of other companies that provide the animal husbandry industry with animal growth promotion solutions based on hormone and genetically engineered products. These companies, either alone or together with their customers, may have substantially greater financial resources and research and development capabilities and product commercialisation experience than the Group. Accordingly, the Group may be competing against companies with greater resources and in areas in which the Group has limited or no experience. The Group is aware that it may be subject to competition from other companies for agreements with multinational animal nutrition and husbandry companies, for relationships with academic and research institutions, and for licences to proprietary technology. These competitors, either alone or with their customers, may succeed in developing technologies or products that are more effective than those of the Group and there is no assurance that the Group will be able to compete successfully with these or other potential competitors. The Group’s business plans have also been formulated on the assumption that there will be no material changes in the technological development of the animal husbandry and feed industries and competition within the animal science industry. The failure of the Group to respond rapidly to changing technologies, new discoveries and increases in competition could have a material adverse impact on the Group’s business. Whilst Cysteamine is a product widely available to others, it is chemically unstable and must first be made stable to enable it to be used. The Group has a patent on the method it uses to make Cysteamine stable and useable. The Directors are not aware of any other company which has identified a procedure for stabilising Cysteamine, and therefore they consider that Walcom has no direct legal competitors. However, the Directors are aware of a number of ‘copy cat’ products on the market. The Directors believe that to undertake litigation to prevent this would be costly and would not prevent new ‘copy cats’ from starting up. Therefore, the Company is promoting Walstrong as a trademarked brand making it more difficult for ‘copy cats’ to market their own products. Foreign Currency risks The Group’s sales are denominated in US$ and Renminbi while its major costs are denominated in HK$ and Renminbi. At present, the Group has associate companies in Thailand and the Philippines. In the future, the Group may expand its business into other jurisdictions. This may result in revenues, expenses and liabilities in some other currencies. Accordingly, any exchange rate fluctuations with respect to any of these currencies could have a material adverse effect on the business, financial condition and operations of the Group. Increased administrative burden and restrictions on overseas and cross-border investment due to new regulations Recent PRC regulations relating to offshore investment activities by PRC residents may increase the Group’s administrative burden and restrict its overseas and cross-border investment activity and could adversely affect its business, financial condition and results of operations. 21


In October 2005, the PRC State Administration of Foreign Exchange, or State Administration of Foreign Exchange (“SAFE”), issued a circular entitled “Circular on several issues concerning foreign exchange regulation of corporate finance and roundtrip investments by PRC residents through special purpose companies incorporated overseas”, or Circular No. 75. Circular No. 75 states that if PRC residents establish or acquire control of an offshore company for the purposes of financing that offshore company with assets or equity interests in an onshore enterprise located in the PRC, they must register with local SAFE branches in advance with respect to their overseas investment in that offshore company and must also file amendments to their registrations with respect to any injection of equity interest or assets of an onshore enterprise into the offshore company or any overseas equity financing by such offshore company, or any other material events involving capital variation of the offshore company, such as changes in share capital, share transfers, mergers and acquisitions, spin-off transactions, long-term equity or debt investments or uses of assets in China to guarantee offshore obligations. Circular No. 75 also applies retroactively. As a result, PRC residents who have established or acquired control of offshore companies that have made onshore investments in the PRC in the past, were required to complete the relevant registration procedures with local SAFE branches by 31 March 2006. The Directors believe that Circular No. 75 does not apply to the Group’s shareholders who are PRC residents. However, as the regulations are relatively new, and it is unclear how these regulations, and any future legislation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities, the Group cannot assure investors that all Shareholders who are PRC residents will not fall into the governance of, or be required to comply with, relevant requirements under Circular No. 75. If SAFE determines that Circular No. 75 applies to Shareholders who are PRC residents, any failure by any Shareholder who is a PRC resident or controlled by a PRC resident to comply with relevant requirements under Circular No. 75 could subject the Group to fines or sanctions imposed by the PRC government, including restrictions on Walcom Shanghai’s ability to pay dividends and the Group’s ability to increase investment in Walcom Shanghai. Forward-looking statements contained in this document may not materialise Included in this document are various forward-looking statements which can be identified by the use of forward-looking terminology such as “may”, “will”, “expect”, “anticipate”, “estimate”, “continue”, “believe” and other similar words. The Group has made forward-looking statements with respect to the following, among other things: l l

the objectives and strategies of the Group; the importance and expected growth in the development of animal science products and the markets in which they are sold;

l

the growth in demand for the Group’s products;

l

the ability of the Group to execute its expansion plans; and

l

the ability of the Group to implement its plans for the proposed use of proceeds from the Placing.

Such forward-looking statements involve known risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Group to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such forward-looking statements are based on numerous assumptions regarding the present and the future business strategies of the Group and the environment in which the Group will operate in the future. Important factors that could cause the Group’s actual results, performance or achievements to differ materially from those in the forward-looking statements include, among others, the loss of its key personnel, failure to obtain grants of patent registrations or regulatory approvals, changes relating to the animal science industry and changes in general economic and business conditions. Additional factors that could cause actual results, performance or achievements to differ materially include, but are not limited to, those discussed above in this section.

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PART III Competent Person’s Report Techno-commercial Due Diligence Report on Walcom Group Limited Prepared by: Dr Derek A. Terrar Research Director CCTT Ltd The Oxford Science Park Robert Robinson Avenue Oxford OX4 4GA United Kingdom Tel: +441865784065

The Directors Walcom Group Limited Room 613 6/F West Wing New World Centre 20 Salisbury Road Tsimshatsui Kowloon Hong Kong and The Directors John East & Partners Limited Crystal Gate 28-30 Worship Street London EC2A 2AH

15 December 2006

CCTT Ltd Setting standards for the investigation of drug effects on cardiac tissue Fulfilling specific research needs in l Safety Pharmacology l Drug Development l Consultancy Services CCTT Ltd: Company profile CCTT Ltd was set up to provide expert research support to the pharmaceutical industry, supplying expertise that is not commonly available at other contract research organisations by specialising in electrophysiological and fluorescence techniques, CCTT Ltd specialises in research on the heart, and is proud to have provided unique research services, research expertise and advice to leading pharmaceutical companies over the last three years. The initial focus of CCTT Ltd was to provide tests for potential toxicity of New Chemical Entities on the heart, which is a matter that concerns drug regulatory authorities throughout the world for any new therapeutic compound, whatever its intended target in the body. However, the company also provides expert advice on drug development. CCTT Ltd offers Consultancy Services to the Pharmaceutical and Life Science industries. Key Personnel Research Scientists at CCTT have 20 years experience in academic research within Oxford University. Research Scientists at CCTT Ltd have extensive experience, particularly in the use of electrophysiological and fluorescent experimental techniques. l Sally Terrar Managing Director, CCTT Ltd l Dr Derek Terrar Research Director, CCTT Ltd Reader in Pharmacology, University of Oxford Department of Pharmacology l Dr Simon Bryant Research Manager, CCTT Ltd Previously Senior Research Fellow, University of Oxford Department of Cardiovascular Medicine

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Specialists in cardiac research Offering a wide range of contract research services using a variety of cardiac preparations that include: l Repolarisation assays in rabbit/dog/pig Purkinje fibres l Repolarisation assays in ventricular myocytes (many species) l Voltage-clamp studies of ion currents in ventricular myocytes l hERG channel assay (expressed in HEK293 or CHO cells) l Native IKr channel assay in cardiac myocytes (many species) l Papillary muscle preparations (many species) l Atrial muscle preparations (many species) l Isolated Langendorff heart preparations (many species) l Fluorescence measurements of cytosolic calcium An individual approach We encourage a personalised flexible approach to each study. Close consultation with clients means that all protocols are specifically designed and validated by scientists at CCTT Ltd for each project. With this approach CCTT Ltd can devise the best and most cost effective experimental design for the client’s individual needs.

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Derek A. Terrar B.Sc., M.A., Ph.D. Research Director CCTT Ltd Reader in Pharmacology, Department of Pharmacology University of Oxford Dr Terrar is a world leading Pharmacologist with extensive research and teaching experience. He has taught on a variety of undergraduate and postgraduate courses in Pharmacology in universities in the USA and UK since 1972. He is currently Reader in Pharmacology at the University of Oxford where he has carried out research and teaching for the last 21 years. During that time Dr Terrar has also been Tutorial Fellow in Physiological Sciences at Worcester College, Oxford, taking responsibility for all aspects of medical student admissions and teaching. In addition to his research and teaching activities at the University of Oxford, Dr Terrar was a founding member of CCTT Ltd, a company based in the Oxford Science Park, at the Magdalen Centre on the outskirts of Oxford. CCTT Ltd specialises in research on the heart. The company was set up to provide expert research support to the pharmaceutical industry. CCTT Ltd specialises in electrophysiological and fluorescence techniques, providing expertise that is not commonly available at other contract research organisations. CCTT Ltd is proud to have provided specialist research services, research expertise and advice to leading pharmaceutical companies over the last three years. The initial focus of the company was to provide tests for potential toxicity of New Chemical Entities on the heart, which is a matter that concerns drug regulatory authorities throughout the world for any new therapeutic compound, whatever its intended target in the body. However, the company also provides expert advice on drug development. Although the main focus of Dr Terrar’s research has been the heart, he has wide interests and expertise in Pharmacology and Physiology. He has taught over a broad range of Pharmacological subjects at Oxford over the last 21 years, both for preclinical medical student teaching and in the advanced Final Honours School (for which he has acted as Chairman of Examiners at The University of Oxford). Dr Terrar also helped set up the new MSc in Pharmacology at Oxford, and has contributed extensively to postgraduate teaching. He has extensive experience in examining PhD and DPhil candidates both at Oxford and in many other universities where he has been asked to carry out examining duties. Dr Terrar gained his BSc (Hons) and PhD at University College London (1969 and 1972). He has published over 60 research papers in leading scientific journals (one paper cited 434 times, three further papers with over 100 citations, and an additional ten papers with over 50 citations). He is a member of learned societies (The British Pharmacological Society, since 1976, The Physiological Society, since 1976 and The Biophysical Society, since 1994). He has been a member of the Editorial Board of The British Journal of Pharmacology (1985-1991) and Experimental Physiology (1997-2004). He has also acted as editor and referee for a variety of other scientific journals including Journal of Physiology, Current Biology, Circulation Research, Cardiovascular Research, Pflugers Archiv, American Journal of Physiology, Molecular Pharmacology, Journal of Pharmacology and Experimental Therapeutics, British Journal of Anaesthesia, Anesthesiology. Disclaimer This report has been produced by CCTT Ltd and reflects the judgement of CCTT Ltd in the light of information available to it at the time of preparation. We accept, and take seriously, our responsibility to exercise all due care and skill in the preparation of our reports. Beyond that, we do not accept responsibility for any mis-statement or omission of whatever nature. Any use that an intended third party makes of this report, or any reliance on the report, or any decisions to be made based on it, are the responsibility of the intended third party. CCTT Ltd accepts no responsibility for damages, if any, suffered by CCTT Ltd or any intended third party as a result of decisions made or actions taken based upon the content of this report.

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Contents Page Dr Derek A. Terrar

23

CCTT Ltd: Company Profile

23

Derek A. Terrar

25

Disclaimer

25

1.

EXECUTIVE SUMMARY

29

2.

INTRODUCTION

30

3.

CYSTEAMINE PROPERTIES AND EFFECTS ON GROWTH HORMONE RELEASE 3.1 Background 3.2 Cysteamine 3.3 Cysteamine hydrochloride 3.4 Chemical actions of cysteamine and cysteamine HCI 3.5 Uses of cysteamine and cysteamine hydrochloride in man 3.5.1 Effects in nephropathic cystinosis 3.5.2 Treatment of paracetamol (acetoaminophen) poisoning 3.5.3 Radioprotective effects 3.6 Cysteamine: a component of Co-enzyme A 3.7 Biological effects relating to veterinary use of cysteamine by Walcom 3.7.1 Somatostatin and its influence on Growth Hormone 3.7.2 Growth Hormone 3.7.3 Growth Hormone Releasing Hormone (GHRH) and GH release 3.7.4 Somatostatin (SS) 3.8 Actions of Growth Hormone (GH) 3.9 Growth Hormone and Immunity 3.10 Summary

31 31 31 31 32 32 32 32 32 33 33 33 33 34 34 36 37 38

4.

FORMULATION OF WALCOM PRODUCTS CONTAINING WALSTRONG 4.1 Formulation of the Walcom products Walstrong

38 39

5.

EVIDENCE FOR EFFECTIVENESS OF WALCOM COMPOUNDS 5.1 Evidence showing effects of Walcom products 5.2 Effects of Avianin in birds 5.2.1 Effects in Broiler chickens 5.2.2 Economic analysis of Avianin effects 5.3 Effects of Eggronin 5.4 Effects of Porcinin 5.5 Effects of Lactonin 5.6 Effects of Aquanin 5.7 Effects of cysteamine-containing products on the immune systems of animals and birds 5.7.1 Effects of cysteamine-containing products on stress associated with surgery and birds 5.7.2 Effects of cysteamien compound and the immune response in a murine model 5.7.3 Effects of cysteamine compound on IL-2 levels and Stimulation Index of T-cells in cows 5.7.4 Effects of cysteamine on immune function in mice 5.7.5 Effects of cysteamine on antibody production in SPF chickens exposed to Newcastle Disease vaccine 5.7.6 Effects of cysteamine on antibody production in AA broiler chickens exposed to H5N1 vaccine 5.8 Possible effects of yolk antibodies against adipocyte plasma membranes on growth and fat deposition in the rat

41 41 41 41 47 48 51 57 58 59 59 60 60 61 61 62 63

6.

TOXICITY OF CYSTEAMINE IN WALCOM PRODUCTS 6.1 Recommendation of the European Medicine Evaluation Agency (EMEA) 6.2 Conclusion of the EMEA report 6.3 Toxicity tables from National Library of Medicine

64 66 66 67

7.

MARKET, MARKETING STRATEGY AND COMPETITORS 7.1 Marketing Strategy 7.2 Competitors

70 70 70

8.

REFERENCES

71

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Table of Figures Figure 3.1 Figure 3.2 Figure 3.3 Figure 3.4 Figure 3.5 Figure 4.1 Figure 4.2 Figure 4.3 Figure 4.4 Figure 5.1 Figure 5.2 Figure 5.3 Figure 5.4 Figure 5.5 Figure 5.6 Figure 5.7 Figure 5.8 Figure 5.9 Figure 5.10 Figure 5.11 Figure 5.12 Figure 5.13 Figure 5.14 Figure 5.15 Figure 5.16 Figure 5.17 Figure 5.18 Figure 5.19 Figure 5.20 Figure 5.21 Figure 5.22 Figure 5.23 Figure 5.24 Figure 5.25 Figure 5.26 Figure 5.27 Figure 5.28 Figure 5.29 Figure 5.30 Figure 5.31 Figure 5.32 Figure 5.33 Figure 5.34 Figure 5.35 Figure 5.36

The structure of Cysteamine The structure of Cysteamine hydrochloride Relationship of Cysteamine of Co-enzyme A Summary diagram of inhibitory effect of SS (the target of SS) on GH release and actions of GH/IGF-1 Effects of GH on the immune system Structure of cystamine Structure of beta cyclodextrin; (a) chemical structure and (b) toroidal structure Structural model of beta-cyclodextrin Graphs showing the stability of Cysteamine microencapsulated granules with time and during the heat treatment Broiler – Yangzhou University (II), PRC Broiler – Changzhou Lihua, Jangsu, PRC Chinese Gongting Yellow Broiler Broiler – Lagman Farm Broiler – University of Philippines, Los Banos Broiler – Red Dragon 1 Broiler – Red Dragon 2 Broiler (Cobb) – LAO Farm, Vitarich Broiler – Beijing Huadou, China Broiler – Beijing Dafa, China Broiler (Cobb) – LAO Farm, Vitarich Broiler – Beijing Huadou, China Broiler – Beijing Dafa, China Broiler – Changzhou Lihua, Jangsu, PRC Beijing Dafa Zhengda Trial: Economic Benefit Analysis Breeder Layer – Shanghai, PRC Breeder Layer – Shanghai, PRC Commercial Egg Layer – Nanjing, PRC Commercial Egg Layer – Nanjing, PRC Breed Layer – Henan, PRC Henan Xiping Baiao Breeder Layer Trial Economic Benefit Analysis Grower – Hangzhou, PCR Finisher – Hangzhou, PCR Effect of Porcinin on weaned piglets and fattened pigs Economic evaluation of Porcinin Weaned Piglet – Shamus Farm (Bukidnon) 1 Weaned Piglet – Shamus Farm (Bukidnon) 2 Weaned Piglet – Shamus Farm (Bukidnon) 3 Weaned Piglet-Lopez Farm (Dipolog) 1 Weaned Piglet-Lopez Farm (Dipolog) 2 Weaned Piglet-Lopez Farm (Dipolog) 3 Weaned Piglet-Lopez Farm (Dipolog) 4 Weaned Piglet-Lopez Farm (Dipolog) 5 Weaned Piglet – Dalian, PRC Piglet weight gain, Shanghai Min Hang Food consumption and weight gain cost analysis

27

Page 31 31 33 36 37 38 39 40 41 42 42 43 43 44 44 44 45 45 45 46 46 47 47 47 48 48 49 49 50 50 51 51 52 52 53 53 53 54 54 54 55 55 55 56 56


Table of Figures (continued) Figure 5.37 Figure 5.38 Figure 5.39 Figure 5.40 Figure 5.41 Figure 5.42 Figure 5.43 Figure 5.44 Figure 5.45 Figure 5.46 Figure 5.47 Figure 5.48 Figure 5.49 Figure 5.50 Figure 5.51 Figure 5.52 Figure 6.1 Figure 6.2 Figure 6.3 Figure 6.4 Figure 7.1

Pork Quality Enhancement-Shanghai, PRC Pork Quality Enhancement-Ning Bo, PRC Lactonin® on Dairy Cattle Lactonin® on Dairy Cattle, 2 Anguilla japonica (Eel) – Shenzhen, PCR Anguilla japonica (Eel) – Guangdong, PCR Epinephelus coioides (Grouper) – Guangdong, PCR Penaeus vannamei (Shrimp) Effects of cysteamine of IL-2 levels after surgery in goats Effects of cysteamine on thymus weight in mice Effects of cysteamine of IL-2 levels in cows Effects of cysteamine of Stimulation Index in cows Effects of cysteamine of antibody production in mice Effects of cysteamine of antibody production in chickens exposed to Newcastle Disease vaccine Effects of cysteamine on antibody production in chickens exposed to H5N1 influenza vaccine Effects of cysteamine on antibody production with time in chickens exposed to H5N1 influenza vaccine Cysteamine content in foodstuffs Cysteamine levels in the normal human and animal tissue Metabolic pathway of Cysteamine Excretion Pathway of Cysteamine Scheme representing the sales and distribution network of Walcom

Page 57 57 57 58 58 58 59 59 60 60 61 61 61 62 62 63 64 64 64 65 70

Table of Tables Table 1 Table 2 Table 3

Summary of the differences between pure cysteamine and Walstrong Table of Toxicity of Cysteamine taken from National Library of Medicine ChemIDplus Table of Toxicity of Cysteamine HC1 taken from National Library of Medicine ChemIDplus

28

Page 39 67 69


1.

EXECUTIVE SUMMARY

Walcom Group Limited (Walcom) is a company specialising in food additives for the livestock industry. There is a large market for products that improve animal growth or health, particularly if the additives avoid the use of substances that might be regarded as suspicious by the general public, such as hormones, conventional drugs and genetically modified material. There is particular sensitivity to the possibility of unwanted residues in the meat, fish, milk or eggs that are to be sold to the public. Walcom products are available for use with poultry (both for meat and egg production), pigs, lactating cows and fish. These products have the desirable characteristic of promoting animal growth and health with an active ingredient that is not itself a hormone, and is a naturally occurring substance in the bodies of humans, other mammals, fish and birds. In the case of such a naturally occurring substance, the possibility of residues in the food to be sold to the public is not an issue. The active ingredient, cysteamine, acts by an indirect mechanism to promote the release of the naturally occurring Growth Hormone from the anterior pituitary gland of mammals, birds and fish. This increase in Growth Hormone release is thought to result from suppression by cysteamine of the inhibitory influence of somatostatin, a neuropeptide in the hypothalamus of the brain that is an important component of the normal control of Growth Hormone levels. The evidence both under experimental conditions and from large farm trials supports the contention that the Walcom products do indeed increase growth, often measured as daily weight gain. Quality of meat (in terms of the ratio of lean meat to fat) can also be improved by administration of the Walcom products. In addition, there is convincing evidence that under appropriate conditions the Walcom products can decrease mortality (for example in litters of piglets). In the particular cases of milk and egg production, the Walcom products can have beneficial effects (such as increasing milk yield and quality, and decreasing the tendency for eggs to break). The use of Walcom products can therefore be shown to have clear economic benefits to farmers under the conditions tested. A question arises concerning Intellectual Property since the active ingredient, cysteamine, is well known. However, the pure substance has several disadvantages that make it difficult to store and use (including oxidation in air to an inactive product, heat instability, and a bad odour). Walcom has developed a proprietary formulation of cysteamine (encapsulated in granules with an enteric coating to protect the product from acid in the stomach and containing cyclodextrin molecules to enclose the cysteamine). This formulation stabilises the cysteamine making it easy to store and use as a feed additive. Cyclodextrin also suppresses the bad odour of cysteamine, and additional flavourings are included in the final products if required. Walcom has been granted patents for this formulation of cysteamine in China, Hong Kong, New Zealand and North Korea. A more specific patent for the use of this formulation of cysteamine in poultry has been granted in the UK and North Korea. Consideration of any possible legal issues relating to the patents is beyond the scope of this report. Potential toxicity of the compounds must also be considered, although this appears not to be a concern at the recommended doses. Since cysteamine is a natural constituent of animal tissues, and indeed of many natural foods, at least low concentrations of this substance are expected not to be harmful. Cysteamine may also be released naturally in animal tissues as a consequence of a variety of metabolic reactions. High concentrations of cysteamine can nevertheless be toxic, and should be avoided, but Walcom products are not expected to produce adverse effects in animals when used in the amounts recommended for each species. In addition to effects on growth, cysteamine has been shown to enhance the activity of the immune system. Such actions are expected in the light of the observation that cysteamine promotes the release of Growth Hormone, since there is increasing evidence that Growth Hormone, and the subsequently formed Insulin-Like-GrowthFactor-1 (IGF-1) have a powerful influence on immunity. Walcom products containing cysteamine therefore have additional benefits in the context of the livestock industry. As well as contributing to the reduced mortality and general well being of animals when Walcom products are used primarily to enhance growth, a boosting of the immune system may be marketed for specific effects. For example, Avian Flu is a particular concern at the present time, and such infections have been especially problematic in Asian countries. Use of Walcom products to minimise the risk of Avian Flu therefore appears to be a very promising area for future sales of Walcom products. For development of future products, Walcom has a team of scientists with strong links with universities in China, particularly Nanjing Agricultural University (and with additional collaborations with universities in the USA and Europe). One project which is the subject of current patent applications concerns the development of antibodies to adipose (fat) tissue. Components of the adipose tissue are injected into hen’s eggs to provoke formation of polyclonal antibodies. The antibodies are isolated and administered to animals of other species with the aim of reducing fat content. Other products under development include anti-viral and anti-stress agents.

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2.

INTRODUCTION

Walcom develops and markets products for the livestock industry. It has headquarters in Hong Kong and a branch in Shanghai which is the site of Product Manufacturing, Research and Development. The company will be referred to below as Walcom. There is a very large market for food additives and other products intended to increase the efficiency of farming practices in the livestock industry, for example by increasing animal growth, reducing mortality or increasing animal health through improved immunity. One example of the potential profits to be earned in this context is provided by the Monsanto company who market bovine somatotropin (Posilac, bST). The product has been used very successfully to improve milk production. Gross profits for this product were 200 million USD in 1999, estimated to be 500 million USD for 2002. Bovine somatotropin (bST) is another name for the bovine form of Growth Hormone. Although bST has been very successful in the marketplace, there is still considerable hesitancy, particularly in certain sections of the public, in accepting food products where hormones have been used. There is often a particular resistance to accepting food products in cases where genetically modified material has been used in the food production process. In addition, there is also public concern about the use of conventional drugs in the livestock industry. The possibility of residues in the food products, whether hormone or drug, is an issue that worries many consumers. In this context, it is a particularly attractive aspect of Walcom’s marketing strategy that the food additives the company produces for a variety of purposes do not contain hormones, conventional drugs or genetically modified material. Many of the key products marketed by Walcom increase Growth Hormone levels in livestock by an indirect mechanism. The active constituent is cysteamine which depletes the levels of somatostatin (SS) in specialised secretory cells. The SS released from these secretory cells in the hypothalamus in the brain normally reduces the output of Growth Hormone by an inhibitory influence on other specialised secretory cells in the anterior pituitary gland that release Growth Hormone. Depletion of SS therefore removes this inhibitory influence and consequently increases Growth Hormone release. The cysteamine has the advantage that it is a naturally occurring substance in plant and animal tissues. It is therefore reasonable to argue that supplementation of animal feed with an appropriate formulation of the naturally occurring cysteamine can have the same final effect as bST, without the use of hormones, conventional drugs or genetically modified material. It is also much more convenient to administer cysteamine as a feed additive than would be the case for injection of bST. In addition to the use of appropriately formulated cysteamine to enhance milk output and quality, this substance can be used to increase farming efficiency in a number of other ways that are of financial benefit to the farmer. Since the principal effect of cysteamine is to increase Growth Hormone, it can be used in many animal species. A series of products containing cysteamine are marketed by Walcom. The effects will be discussed in detail in Section 5, but a brief summary of the products is listed here. Avianin is used to promote the growth of poultry, which can be beneficial in terms of growth, daily weight gain and food conversion efficiency (FCR, expressed as the weight of food necessary for a particular gain in weight of the livestock so that more efficient conversion is indicated by a lower FCR). Eggronin is used to improve production and quality of eggs. Porcinin is used in pig production, giving a desirable increase in the lean rather than fat meat as well as promoting growth. Lactonin is used to increase milk yield and improve milk quality. Aquanin is used to promote fish growth. In all cases an additional commercially important benefit is a decrease in mortality in poultry, pigs or fish, possibly as a consequence of an enhanced immunity in animals and fish treated with cysteamine containing products. Such an effect would not be surprising in the light of the known effects of Growth Hormone on the immune system. It is important to note that Walcom has developed a proprietary formulation of cysteamine that has been protected by several granted patents, with many more related patent applications under consideration in countries around the world. The pure cysteamine compound is very difficult to store and administer, since it is readily oxidised on exposure to air to an inactive compound. It also has the severe disadvantage for a feed additive of having a remarkably bad odour, akin to that of bad eggs. Cysteamine in the Walcom products is encapsulated in a proprietary formulation that includes cyclodextrin. This Walcom formulation gives granules in which the cysteamine is very stable (not readily oxidised in air and tolerant of the heat treatment that is routinely applied to feed additives). The granules are easy to add to feed and are very palatable for the livestock, since the cyclodextrin molecules that enclose the cysteamine also mask the bad odour. Additional flavourings appropriate for each species can also be included. China is among the countries where a patent has already been granted, and this is important not only because this is the location of Walcom but also because China forms a very large fraction of the world livestock market, particularly in pigs and poultry. In 2003 revenues for the food processing industry were over 122 billion USD. This is likely to continue to grow in parallel with strong economic growth combined with increasing disposable income of Chinese consumers. The population of China is 1.3 billion with an annual growth of nearly 10 million (0.57 per cent.). Per capita GDP is approximately 1,100 USD and the China economy is growing at 9 per cent. annually.

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The following quotation is from a GAIN (Global Agricultural Information Network) report from the US Department of Agriculture Foreign Agricultural Service: China is one of the world’s largest consumers of food. For example China consumes 51 percent of the world’s pork, 33 percent of rice, 19 percent of ice cream, 19 percent of poultry and 12 percent of beef. In raw figures China consumes 8.5 million tons of meat per year, 40 million tons of vegetables and over 12.5 million tons of fruit. The food sector accounted for approximately 28 percent of total consumer expenditure in 2003. Food categories such as milk, cheese & eggs, fish, vegetables, fruit and non-alcoholic beverages grew strongly in the range of 10 percent to 12 percent from 2002 to 2003. It is clear from this information that China provides a huge and increasing market for livestock, with corresponding potential for sales of Walcom products. The following sections of this report provide a scientific background to the actions of cysteamine (Section 3), a description of the proprietary formulation devised by Walcom for its cysteamine-containing compounds (Section 4), a discussion of evidence for the actions of Walcom products on livestock (Section 5), a discussion of the potential toxicity of cysteamine-containing products (Section 6) and a brief summary of the market strategy and competition faced by Walcom (Section 7). 3. 3.1

CYSTEAMINE PROPERTIES AND EFFECTS ON GROWTH HORMONE RELEASE Background Cysteamine is a sulphhydryl compound with biological effects that have been investigated since 1898 (Gabriel). Before listing the biological effects that are especially relevant to Walcom, other actions, particularly in man, will be briefly presented. Cysteamine is listed in Merck Index as entry 2785, from which the following chemical information is derived. Additional information is taken from the National Library of Medicine ChemIDplus web site (http://chem.sis.nlm.nih.gov/chemidplus). Synonyms: Cysteamine is also known as 2-aminoethanethiol, mercaptamine, ß-mercaptoethylamine, 2aminoethyl mercaptan, thioethanolamine, decarboxycysteine, MEA, mercamine, L-1573, Becaptan and Lambratene. Additional synonyms are listed in the Toxicity section. The active substance in Walstrong (the name used by Walcom for the active ingredient in many of its products) is cysteamine hydrochloride. The chemical properties of cysteamine and cysteamine hydrochloride are listed below.

3.2

Cysteamine The chemical formula of cysteamine is C2H7NS The molecular weight of cysteamine is 77.15 (C 31.14 per cent., H 9.15 per cent., N 18.16 per cent., S 41.56 per cent.). The structure of cysteamine is HS-CH2-CH2-NH2. Figure 3.1 The structure of Cysteamine H2 N

SH

Crystals of cysteamine are formed by sublimation in vacuo. It has a disagreeable odour. Melting point 9798.5 degrees C. It oxidises to cystamine on standing in air. It is freely soluble in water, giving an alkaline reaction. 3.3

Cysteamine hydrochloride The chemical formula of the hydrochloride is C2H7NS.HCl. The molecular weight of cysteamine hydrochloride is 113.61. The structure is HS-CH2-CH2-NH2.HCl Figure 3.2 The structure of Cysteamine hydrochloride HS

N H2

HCI

The hydrochloride forms crystals from alcohol and has a melting point of 70.2-70.7 degrees C. Cysteamine hydrochloride is soluble in water and alcohol.

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3.4

Chemical actions of cysteamine and cysteamine HCl Whether as the free base or as the hydrochloride, cysteamine has several key chemical properties that underlie its main biological effects. These are listed below. l

Cysteamine is an antioxidant and scavenger of free radicals including oxygen.

l

Cysteamine is a reducing agent

l l

Cysteamine has nucleophilic properties resulting in its ability to interact with electrophilic substances such as paracetamol (acetoaminophen) metabolites. Cysteamine contains a thiol (SH) group that is important for many of its functions. Depending on the redox state, the thiol can either promote breakage of disulphide bonds or can interact with other SH groups allowing the cysteamine to form disulphide bonds with target molecules. Thiol窶電isulphide exchange reactions via redox active disulphides are essential in the control of protein function via the redox state of structural SH groups. This mechanism of thiol-redox control is a major regulatory mechanism in cell and tissue signalling, since reactive oxygen species oxidizing protein thiols have a wide range of functions in cellular physiology and pathological conditions.

Cysteamine interactions with disulphide bonds are particularly important for its actions since these disulphide bonds often bridge pairs of cysteine amino acids in a peptide or protein. These disulphide bridges are crucial for the function of the peptides or proteins since they determine the shape of these molecules. This is because the disulphide bonds hold different parts of a peptide chain in a particular configuration, forming precise links between specific strategically placed cysteine amino acids in the polypeptide chains. Shape is crucial for function since it determines how the proteins interact with ligands that bind to proteins or with other proteins. For example in the case of the peptide somatostatin, breakage of the disulphide bond in its structure will completely change its shape and therefore its ability to act on target receptors on cells, leading to inactivation of function. 3.5

Uses of cysteamine and cysteamine hydrochloride in man 3.5.1 Effects in nephropathic cystinosis Cysteamine is used to lower the intracellular cystine content of cells. Cystinosis appears to involve impaired transport of cystine from lysosomes. The gene coding for the normal transporter protein is known, and many mutations of this gene leading to the impaired cystine transport underlying cystinosis have been described. Cysteamine depletes cells of cystine by combining with cystine to produce cysteine and a cysteine-cysteamine mixed disulfide, which can be transported by a lysine carrier that remains functional in cells of cystinosis patients (Gahl et al, 1982; Pisoni et al, 1985; Kleta et al, 2004). Cysteamine delays renal glomerular deterioration, enhances growth, prevents hypothyroidism, and lowers muscle cystine content (Yudkoff et al, 1981; Gahl, 2003; Kleta and Gahl, 2004). 3.5.2 Treatment of paracetamol (acetoaminophen) poisoning Toxicity of paracetamol (acetoaminophen) is thought to result from metabolic activation to form reactive arylating intermediate compounds. These toxic intermediates are targeted by sulphhydryl compounds, such as cysteamine, leading to conjugation and inactivation of the metabolites. Early treatment with cysteamine can therefore greatly reduce liver damage, renal failure resulting from overdose with paracetamol (Prescott, 1976; Harris, 1982; Peterson and Brown, 1992). 3.5.3 Radioprotective effects It has been proposed that cysteamine might be used to treat the symptoms of acute radiation syndrome, after first using other methods to promote chelation and elimination of radioactive heavy metals. It is thought that cysteamine actions as a reducing agent may help prevent the formation of damaging free radicals (Bird, 1980; Koch and Howell, 1981; Bump et al, 1992).

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3.6

Cysteamine: a component of Co-enzyme A Cysteamine can also be viewed as a component of Co-enzyme A, as shown in the following diagram. 3.3 Relationship of Cysteamine A to Co-enzyme A Cysteamine Figure - Constituent of Co-enzyme Cysteamine – Constituent of Co-enzyme A Coenzyme A Pantetheine - 4’- phosphate

ADP

Pantothenic acid (B5) Cysteamine

Pantoic acid

Beta-Alanine O

O

OH OH

CH3

HS-CH2-CH2-NH -C-CH2-CH2-NH -C-CH-C-CH2-0 -P-O-P-O HO O HC

P

CH3

O

H O

CH2 H H

HC H

O

O

N N

N

NH2

N

(Robishaw & Neely, 1985; Scott & Eagleson, 1988)

3.7

Biological effects relating to veterinary use of cysteamine by Walcom Cysteamine was first found to deplete somatostatin concentration by Szabo, S and Reichlein, S (1981) Endocrinology 109:2255. In these experiments, cysteamine was administered to rats via a stomach tube, and somatostatin was measured by a radioimmunoassay technique. After cysteamine administration, somatostatin levels were found to fall in the hypothalamus and pancreas, in addition to the plasma, gastric mucosa and duodenal mucosa. It was suggested that the effects of cysteamine resulted from the in situ breakdown of the granule storage form of somatostatin, perhaps through activation of lysosomal activity. In the context of the Walcom products, the implication of these findings is that a fall in somatostatin levels would be expected to lead to increased levels of growth hormone, since somatostatin inhibits growth hormone release, as described in more detail below. A dose-dependent reduction of somatostatin levels in the hypothalamus caused by cysteamine administration was also observed by Sagar et al (1982). It appears from subsequent experiments that cysteamine reduces somatostatin levels by at least two mechanisms. There is evidence for an uptake of cysteamine, and once inside nerve terminals, cysteamine appears to cause chemical inactivation of somatostatin, probably involving a reducing action of cysteamine on SS bonds in the somatostatin molecules as described above (Widmann R, Sperk G. 1987; Kwok, RPS et al 1992). In addition there may be a short lived inhibition of somatostatin formation (Kwok et al, 1992) in the hypothalamus. 3.7.1 Somatostatin and its influence on Growth Hormone Since, as mentioned above, a major effect of cysteamine is depletion of somatosatin in the hypothalamus, and since this is thought to lead to an increase in the circulating levels of Growth Hormone (GH) as a consequence of release of GH from the anterior pituitary, the direct and indirect actions of GH will be discussed in detail below. The increase in GH levels is thought to be crucial for the actions of Walcom products containing Walstrong (the formulation of cysteamine HCl with betacyclodextrin and other substances that is discussed in detail in Section 4). 3.7.2 Growth Hormone Growth Hormone (GH) is the most abundant of the hormones of the anterior pituitary gland. It is secreted by somatotropes that make up about 40 per cent. of hormone-secreting cells and these cells cluster in the lateral wings of the gland. GH is a peptide of 191 amino acids, with two 2 disulphide bridges linking cysteines. The major form has a MW of 22 kDa, though there is also a minor component of GH that is slighter shorter version with a MW of approximately 20 kDa. GH is a member of the cytokine family.

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A healthy adult human secretes 19 nmol of GH per day, while growing adolescents secrete about 33 nmol per day. About half of the circulating GH is bound to binding proteins in the plasma (GHBPs). GH has a half life in the plasma of 20-50 minutes. Reviews of GH control and functions can be found in Brook and Marshall (2001), Greenspan and Gardner (2004) and Brunton, Lazo and Parker (2005). Information derived from these sources is not referenced specifically in the text below, though additional references are cited where appropriate. 3.7.3 Growth Hormone Releasing Hormone (GHRH) and GH release The release of GH from the anterior pituitary is stimulated by Growth Hormone Releasing Hormone (GHRH) from the hypothalamus. The anterior pituitary is connected to the hypothalamus via a portal system of blood vessels so that GHRH released from neurosecretory cells in the hypothalamus is carried in the blood through this portal circulation to cause release of GH by the somatotropes in the anterior pituitary gland. The cellular mechanism by which GHRH stimulates GH release involves cAMP-dependent pathways in the somatotrope cells. GHRH is a 44 amino acid peptide that binds to a specific receptor in the somotatrope cell membrane. The GHRH receptor is a member of the G-protein coupled receptor (GPCR) family. Receptors of this family mediate many cellular responses, and the general mechanism is that occupation of the receptor by a specific ligand, in this case GHRH, causes activation of a G protein which in turn sets in train a sequence of cellular events usually mediated by activation or inhibition of an enzyme in the cell membrane. There are a variety of such enzymes, as well as many different types of G proteins. Gs is a stimulatory G protein that can interact with the enzyme adenylyl cyclase, which in turn catalyses the formation of cyclic AMP (cAMP) from ATP. The GHRH receptor is an example of a GPCR coupled through Gs to adenylyl cyclase, and therefore the presence of GHRH causes elevation of cAMP. This elevation of cAMP is accompanied by a rise in cytosolic Ca2+ and secretion of GH. The elevation of cAMP also leads to activation of catalytic subunits of protein kinase A which in turn phophorylate a cAMP response element binding protein (CREB) at serine-133, leading to CREB activation and enhanced transcription of the gene encoding pituitary-specific transcription factor (Pit1). This leads to stimulation of transcription of the GH gene, leading to formation of the mRNA coding for GH to replenish stores of this hormone. The rise in cytosolic Ca2+ that triggers GH release occurs partly from activation of voltage-gated Ca2+ channels allowing Ca2+ entry across the surface membrane from the extracellular solution to the cytosol and partly from Ca2+ release from Ca2+ stores within the cell. The Ca2+ entry through voltagegated Ca2+ channels occurs because somatotropes are electrically excitable cells that fire spontaneous action potentials, and GHRH causes depolarization of the somatotrope. The depolarization increases firing of action potentials and consequently Ca2+ entry though the activated Ca2+ channels. The Ca2+ release from intracellular stores occurs because an additional action of GHRH at its G protein coupled receptor is to activate phospholipase C, which in turn leads to the formation of inositol trisphosphate (IP3), a potent activator of Ca2+ release channels in the intracellular stores. The rise in cytosolic Ca2+ triggers GH release from secretory granules in the cell. The mechanism involves a ‘porosome’, which is a structure at the cell surface where the GH secretory vesicles dock and transiently fuse to expel the contents of the vesicle so that the GH is released from the somatotrope cell (Lussier et al, 1991; Giustina and Veldhuis, 1998; Muller et al, 1999; McMahon et al, 2001; Moller et al, 2003; Anderson et al, 2004; Yunker and Chang, 2004; Scanes et al, 2005). It appears that nitric oxide (NO) pathways coupled to the synthesis of cGMP may also play a role in GH release (Anderson et al, 2004; Luque et al, 2005). Dopamine, a neurotransmitter, also stimulates GH release. GH may be released in response to another pathway (not mediated by the GHRH receptor but by another ‘orphan’ receptor, termed growth hormone secretagogue receptor or GHS-R). Ghrelin has recently been identified as an endogenous ligand for this receptor. Ghrelin (a 28 amino acid peptide with an octanoylated serine at residue 3) is synthesised predominantly in stomach, but lower levels are found at other sites (Yoshihara et al 2002; Anderson et al, 2005). 3.7.4 Somatostatin (SS) A major pathway for inhibition of GH secretion is mediated by the peptide hormone somatostatin (SS). Somatostatin partially blocks the effects of GHRH, though it inhibits both basal and GHRHstimulated secretion of GH. SS can also inhibit GHRH release providing an additional pathway for suppression of GH release.

34


SS is found in neurons and neuroendocrine cells in the brain, gut and pancreas. SS acts on a family of 5 different SS receptors. These receptors for SS are coupled to Gi causing an inhibition of adenylyl cyclase and therefore a reduction of cAMP formation. SS also causes inhibition of voltage-gated Ca2+ channels activation of potassium ion channels and activation of phosphotyrosine phosphatases. Some of the actions of SS are therefore the reverse of GHRH and would be expected to hyperpolarize the somatotrope cells and reduce spontaneous action potentials. This would be expected to reduce cytosolic Ca2+ and therefore discharge of GH from the secretory vesicles. There may, however, be additional inhibitory effects of SS to reduce GH release that are not dependent on reducing cytosolic Ca2+ (Yunker and Chang, 2004). The SS receptors most important for regulating GH secretion are SSTR2 and SSTR5. The secretions of GHRH and of SS are both under the control of the Central Nervous System so that various stresses can increase GH in plasma. Bursts of GH secretion occur during sleep. SS is found: in the hypothalamus; in D (r) cells of pancreatic islets; in the gastro-intestinal mucosa; and in C cells (parfollicular cells) of the thyroid gland. The major form of SS (at least in the context of the hypothalamus) is a tetradecapeptide (14 amino acids, SS-14), but there is also amino terminal extended form containing 28 amino acids (somatostatin-28), predominantly in the gut. SS is formed from a larger precursor peptide of approximately 100 amino acids (see Benoit et al, 1990; Jenecka et al, 2001). SS-14 contains one disulphide bridge between two cysteines. SS secretion is increased by increased levels of GH and of Insulin-like-growth-factor-1 (IGF-1, see below), as part of a negative feedback pathway. In addition to inhibiting GH secretion, SS also has an important inhibitory influence on other hormones, growth factors and cytokines that include: TSH from the pituitary gland; gastrin, motilin, VIP, gilectin and gastrointestinal peptide from the gut; insulin, glucagons and pancreatic polypeptide from the pancreas. Somatostatin analogues (such the octopeptide, octreotide) are used to treat the unwanted growth in acromegaly (for example as a consequence of excessive GH secretion by an adenoma tumor). Octreotide binds preferentially to SSTR-2 and SSTR-5 receptors (see Moller et al, 2003). SSmimetics are considered for eye diseases associated with excessive proliferation and inflammation and systemic diseases associated with inflammation, such as rheumatoid arthritis. Other recent evidence for an involvement of SS in inflammation is provided by Abdel Salam (2002). 3.8

Actions of Growth Hormone (GH) The major actions of GH are a stimulation of bone and muscle formation. Bone growth is promoted by effects that include differentiation of chodrocytes and osteoblasts that are essential for bone formation. In the case of muscle, GH causes differentiation of the myoblasts that are the precursors of muscle fibres, and also promotes an increase in muscle mass. GH also has a potent anti-insulin action on liver and at peripheral sites such as adipocytes and muscle. GH has been implicated in the development and function of the immune system (see below). The actions of GH are both direct (influencing tissues by an action on GH receptors) or indirect (by stimulation of the production of additional growth factors, predominantly in the liver, with subsequent action of the growth factors on growth factor receptors in the tissues). Direct actions of GH include the following: reduced glucose transport and metabolism (with a reduction in insulin receptors); effects on adipocytes to increase lipolysis (with a localised decrease in adipose tissue, and a release of free fatty acids that then provide an energy source for muscle); increased amino acid transport (into muscle, liver and adipose cells); increased protein synthesis (as a consequence of increases in transcription and translation, for example in the liver); actions on hepatocytes to stimulate gluconeogenesis; and increased fibroblast differentiation that leads to formation of chondrocyte, osteoblast and adipocyte formation. The direct effects of GH generally antagonise those of insulin, giving rise to diabetogenic properties of GH; the direct effects also tend to show synergy with those of cortisol. The growth promoting effects of GH are largely mediated by insulin-like-growth-factor 1 (IGF-1), which is predominantly formed in liver but is also produced locally in many tissues critical for growth. Major effects of IGF-1 produced in the liver are growth promotion of bones and increases in muscle mass. An example of additional GH stimulated local production of IGF-1 is in bone where autocrine and paracrine actions of the

35


released IGF-1 lead to clonal expansion of chondrocytes. An additional insulin-like-growth-factor (IGF-2) is also formed in the liver. IGF-I and IGF-II both have a MW of about 7.5 kDa. The indirect actions of GH via IGF-1 and IGF-II (for example on adipocytes) are often insulin like and antagonised by cortisol. There are six binding proteins for IGF in plasma. Insulin-like-growth factors were formerly known as somatomedins. There is a also family of GH binding proteins that serve as transport proteins, though they may also mediate some aspects of IGF-1 signalling – see Firth & Baxter (2002). The cell surface receptor for GH receptor belongs to the Class I cytokine receptor superfamily that also includes receptors for prolactin and erythropoietin, as well as several interleukins. The GH molecule first binds to one molecule of its receptor, and then to a second molecule of receptor to form a ternary complex. The dimerisation of the cytoplasmic regions of the two receptor molecules is important for signal transduction. The GH-receptor ternary complex then provides docking for two JAK-2 molecules leading to transphosphorylation and autoactivation of JAK-2, with consequent tyrosine phosphorylation of STAT proteins. These STAT proteins are so called because they have the dual function of signal transduction in the cytoplasm followed by activation of transcription in nucleus. These STAT proteins are latent transcription factor proteins that are activated by phosphorylation. The phosphorylated STAT proteins dissociate from the receptor kinase complex and form homo and heterodimers in the cytosol (note that there are different forms of STAT). The dimerisation of STAT proteins is necessary for translocation of these proteins into nucleus. In the nucleus, STAT dimers activate immediate early response genes that regulate proliferation, or other specific genes that control differentiation of target cells. GH may additionally activate MAPK and PI3-kinase pathways in the target cells. In the case of the insulin-like-growth-factors, the IGF-1 receptor is closely related to the insulin receptor. The IGF-1 receptor pe-exists in a dimer form, even in the absence of the ligand, IGF-1. The dimer comprises two glycoprotein subunits (MW 450 kDa) that span the membrane and have integral cytoplasmic tyrosine protein kinase domains. Occupation by an IGF-1 molecule of the ligand-binding pocket formed by the two alpha subunits of the receptor causes activation of the tyrosine kinase in the cytoplasmic domain. The IGF-1 receptor is said to be present in all tissues. The IGF-II receptor is single chain structure (some sequence homology with mannose 6-phosphate which has a role in transferring lysosomal enzymes from the Golgi apparatus to lysosomes). Figure 3.4 Summary diagram of inhibitory effect of SS (the target of SS) on GH release and actions of GH/IGF-1 Hypothalamus stimulates

inhibits

GHRH

SS

Anterior Pituitary

GH Muscle, Skeleton and Adipose tissue

Liver

Growth and development

IGF-1

Note that depletion of SS by cysteamine would be expected to increase release of GH and therefore to promote growth and development. (Note that actions of grhelin are omitted for simplicity, and would not be expected to prevent the consequences of SS depletion by cysteamine.)

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3.9

Growth Hormone and Immunity Abundant evidence supports a role for GH in modulating the immune system (reviewed by Clark, 1997). It is argued that GH controls growth, maintenance, repair, and function of the immune system by mechanisms that parallel effects of GH on other tissues in the body. The figure below is adapted from Clark (1997). Just as for effects described above, there appear to be both direct effects of GH and indirect effects resulting from GHstimulated synthesis of IGF-1 in the liver. In addition, IGF-1 may be synthesized locally in other tissues in response to GH. Both GH and IGF-1 are thought to act on the haemopoietic tissues such as bone marrow, spleen and thymus. For example, there is evidence that IGF-1 acts to promote both proliferation and maturation of B cells. The Clark (1997) review also summarises evidence that IGF-I treatment increases T and B cell number and improves antibody responses, suggesting that it might have a normal role in B and T cell function. Although many of the early experiments were on rodents, these effects have been seen in many other species. For example GH increased thymus weight in ‘middle-aged’ dogs (Monroe et al, 1987). Actions of GH and IGF-1 have also been observed in monkeys (LeRoith, 1996). It has been argued that GH may be a ‘natural antagonist’ of glucocorticoids in immunoregulation (Kelly & Dantzer, 1991, noting that glucorticoids are well recognised as having potent immunosuppressant activity). The view that GH may enhance the activity of the immune system in this way is becoming widely accepted, and it follows that GHRH and somatostatin by regulating GH release may also have an effect on immune function. Campbell & Scanes (1995) have referred to endocrine peptides, including somatostatin and GHRH as ‘moonlighting’ as immune modulators. The Clark (1997) review concludes: Aging, stress, and nutrition affect blood concentrations of the anabolic hormones GH and IGF-I, which in turn modulate immune function. Recent studies show that IGF-I plays an important role in the maturation of lymphocytes in bone marrow and assists their function in the periphery. In rodents, treatment with IGF-I can restore age-related thymic involution, increase lymphocyte number and activity and improve the reduced antibody response to an antigen challenge, and accelerate lymphoid reconstitution after radiation and bone marrow transplantation. IGF-I may act on lymphoid tissues via its potent anti-apoptotic effects. Perhaps the anabolic hormones have a dual role in regulating lymphopoiesis. First, in the well-fed, nonstressed state, normal bone marrow may utilize the IGFs as cofactors for ongoing lymphopoiesis. Second, during stress, IGF may be protective from tissue damage, but if damage occurs it may also help restore a damaged immune system. For these latter effects there may be a requirement for endocrine IGF-I. These results imply that IGF-I may be useful as a therapeutic in immunodeficient states. Further recent evidence (Savin et al, 2003) supports a role for GH in improving the function of the thymus, acting on T cells to increase their proliferation and ability to migrate. Actions of GH on B cell differentiation and maturation have also been recently described (Sumita et al, 2005). Figure 3.5 Effects of GH on the immune system

Hypothalamus GHRH Somatostatin

-

+

Pituitary GH

+

+

+

+

Liver

Spleen

Bone Marrow

Thymus

+

+

+

IGF-1

The scheme above (based on Clark, 1997) summarises effects of GH either directly or indirectly via the production of IGRF-1 on the main sources of cells involved in the immune system (spleen, bone marrow and thymus).

37


3.10 Summary The discussion above provides evidence for the direct and indirect actions of Growth Hormone both in normal growth (controlling animal size, muscle mass and lean/fat ratio) and in the control of the immune system. Since somatostatin from the hypothalamus inhibits release of Growth Hormone and since cysteamine (the active ingredient of many Walcom products) depletes active somatostatin in hypothalamic neurons, cysteamine is expected to increase Growth Hormone release. Cysteamine would therefore be expected to increase growth and immunity by indirectly increasing Growth Hormone levels. The next section (Section 4) describes the proprietary formulation of cysteamine in Walcom products, and Section 5 discusses evidence for the actions of cysteamine in Walcom products on a variety of commercially important livestock animals.

4.

FORMULATION OF WALCOM PRODUCTS CONTAINING WALSTRONG

A crucial part of the proprietary technology of Walcom products concerns the formulation of the active ingredient cysteamine hydrochloride. This proprietary formulation is referred to by Walcom as Walstrong. The active ingredient cysteamine HCl has a number of properties that make it very difficult to use as a pure substance. The proprietary formulation of cyteamine products devised by Walcom is therefore a crucial component of the intellectual property of Walcom. The first property of cysteamine HCl that makes it difficult to use as a pure substance is that it is chemically unstable, since it is easily oxidised on standing in air to inactive cystamine (in effect two molecules of cysteamine joined together in such a way that their SH groups form a linking disulphide bond with very different chemical properties). The structure of cystamine below can be contrasted with that of cysteamine shown in Section 2. Figure 4.1 Structure of cystamine S H2N

S

NH2

In addition, cysteamine is sensitive to light and humidity. It also dissolves easily in water. As a consequence of all these properties, the pure cysteamine and cysteamine hydrochloride are difficult to store. Another factor that might make the pure substance unsuitable as a feed substance is that it has a strong bad odor (perhaps resembling bad eggs) and the pure substance is therefore likely to be unpalatable. In the context of feed substances and feed additives, it is also important for the substance to withstand heat treatment. This is not the case with pure cysteamine or cysteamine hydrochloride, since high temperatures promote degradation. As a consequence of all the above properties, pure cysteamine and cysteamine hydrochloride are very difficult to use as feed additives. The instability of the pure compounds also causes problems in ensuring that the required dose is given consistently. A further problem with pure cysteamine or cysteamine hydrochloride concerns gastrointestinal toxicity. The pure compound can have local effects on the stomach to increase acid secretion leading to duodenal ulceration. It is argued that at least the direct effects are avoided in a formulation that passes through the stomach before release of the active substance. The Walcom product with its chemical formulation and coating is thought to avoid or minimize all the above problems. The table below summarises differences between pure cysteamine and Walstrong, and is based on information supplied by Walcom.

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Table 1 Summary of the differences between pure cysteamine and Walstrong Comparison of Cysteamine and Walstrong Cysteamine(during the fundamental research period)

Walstrong Product

Physical and chemical properties

White tiny granule with bad odor Oxidized easily Sensitive to light Sensitive to humidity Dissolves in water and alcohol easily Not easy to store Cannot endure high temperature Sensitive to metal

Encapsulated particle Fragrant Good fluidity Good stability Resists oxidation Absorption in intestine rather than stomach (slow release) Easy to store for long (one year) periods Tolerates exposure to high temperature

Pathway for application

In Water By injection Every six days, inconvenient Cannot be added in feed stuff directly

Can be take every day Can be added directly to feed stuff Convenient Can be easily incorporated in feed granules

Side effects

Local side effects in stomach

No local side effects in stomach

Dosage

Difficult to determine because of poor stability

Dosage determined with specific recommendations for different kinds of animals, different ages and different productive purposes

Efficiency

Unstable Cannot be used as feed additives directly

Stable Can be used as feed additive directly to enhance animals growth and immunity

4.1

Formulation of the Walcom product Walstrong A key component of the Walcom product Walstrong is beta cyclodextrin. Cyclodextrins are ring shaped molecules which are formed from several sugar molecules. In the case of beta cyclodextrin there are seven sugar molecules forming the ring. This molecular structure provides a central cavity within the ring, and appropriate additional molecules can fit in this cavity. The size and shape of cysteamine hydrochloride molecule are well suited for it to fit well in the cavity of the beta cyclodextrin. Diagrams of the structure of beta cyclodextrin are shown below (note the cavity for inclusion of cysteamine hydrochloride). Figure 4.2 Structure of beta cyclodextrin; a, chemical structure and b, toroidal structure

(From: Loftsson T & Brewster ME. (1996) Pharmaceutical applications of cyclodextrins. 1. Drug solubilization and stabilization. J Pharm Sci. 85:1017-25.)

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Figure 4.3 Structural model of beta-cyclodextrin

(From National Library of Medicine ChemIDplus website.) Although beta cyclodextrin appears to be well suited in size and shape to contain the cysteamine molecules, the patent specification of the formulation (see below for more details) is sensibly drafted in very broad terms referring to a ‘macromolecular substance having inclusion property’. Where the micro-encapsulation method in the patent refers to a cyclic polysaccharide more precisely, it mentions cyclodextrins with between 6 and 12 glucose molecules, again a sensibly broad definition in the context of Intellectual Property claims. In addition to beta cyclodextrin (or similar microencapsulation molecule) the formulation also refers to binders and disintegrants including hydropropyl starch, microbial alginate, microcrystalline cellulose and starch. Another important component of the formulation is an enteric coating that is designed to remain undissolved in the acid of the stomach (pH 1.5 to 3.5) but to allow release of cysteamine in an alkaline environment (as would be the case as the food passes from the stomach to the rest of the gut). This is designed to minimize unwanted effects on the stomach including excessive acid secretion (see above). The formulation also allows the granules containing cysteamine to be mixed with a suitable amount of flavouring and smelling agents. The formulation contains one other ingredient that was disclosed to the author of this report, and I confirm that this additional substance is well known and without adverse effects under the conditions used. The granules formed by the manufacturing process are said to be between 0.28 and 0.90 mm in diameter. Microencapsulation of cysteamine in these granules avoids many of the undesirable properties of the pure cysteamine or cysteamine hydrochloride. The compound is said to show excellent stability. The properties remain unchanged after one year of storage in sealed plastic bags in a cool, dark, dry place. The recommended shelf life of Walcom products containing cysteamine is 12 months for premix products and 18 months for feed additives (with the recommendation that products are stored in a dry, cool place avoiding direct sunlight). Walcom has been granted patents for its proprietary formulation of cysteamine (encapsulated in granules with an enteric coating to protect the product from acid in the stomach and containing cyclodextrin molecules to enclose the cysteamine) in China, Hong Kong, New Zealand and North Korea. A more specific patent for the use of this formulation of cysteamine in poultry has been granted in the UK and North Korea. Other patent applications have been submitted. Consideration of any possible legal issues relating to the patents is beyond the scope of this report. Cysteamine microencapsulated in the granules is also stable during heat treatment. The following graphs illustrate the stability of the granules over time and during heat treatment.

40


Figure 4.4 Graphs showing the stability of Cysteamine microencapsulated granules with time andStability during heat treatment Walstrong - Shelf Life Walstrong Stability – Shelf Life 29.75

29.68

0

3

29.45

29.39

29.21

6

9

12

30

Cysteamine HCI Content (%)

25 20 15 10 5 0

Storage duration (months)

Walstrong HeatResistance Resistance Stability –– Heat WalstrongStability

Cysteamine HCI Content (%)

40

30.2

30.0

100 °C

120 °C

30

20

10

0

5. 5.1

EVIDENCE FOR EFFECTIVENESS OF WALCOM COMPOUNDS Evidence showing effects of Walcom products The actions of cysteamine that lead indirectly to increased levels of hormones, particularly Growth Hormone, as outlined in the previous section, are thought to underlie the beneficial effects of Walcom products in a variety of animal species. Evidence supporting beneficial effects of cysteamine in Walcom products is presented below. In the data presented, particular attention should be paid to the measured variables that could indicate a beneficial effect. In some cases a beneficial effect of cysteamine administration might be on final weight of the animal, but in many cases other commercially relevant features are important, such as average daily weight gain (and related to this the time taken for an animal to reach a target weight), as well as the efficiency with which food is converted into animal weight (expressed as a Food Conversion ratio, FCR, determined as weight of feed divided by animal weight, so that a reduced FCR reflects more efficient conversion of animal feed to animal weight). Other commercially important variables that might be improved by Walcom products are the ratio of protein to fat, and survivability (for example in the case of a greater number of piglets surviving to maturity). In addition there may be effects that relate to particular animals such as increased lactation in cows, or in the case of poultry, effects on egg laying and egg shell thickness.

5.2

Effects of Avianin in birds 5.2.1 Effects in Broiler chickens Evidence concerning effects of Avianin to be presented below has been collected in two settings. Some experiments are done under well controlled conditions, often in a university setting, where individual measurements allow a rigorous statistical analysis. These observations are supplemented by extensive farm trials, where although statistical variability has not been analysed in detail, the very large numbers of animals make it possible to draw reliable conclusions, particularly when data from many such trials are available Experiments at Yangzhou University (I), PRC provide evidence of effects of Avianin on broiler growth. In preliminary experiments it appeared that timing of application and concentration of Avianin were important. Following on from these experiments, a trial with 100 broilers per group was undertaken. The observations from this trial are summarized in Fig 5.1. The trial appeared to be carefully planned, and the experimental conditions were well controlled.

41


Figure 5.1 shows that at the end of the treatment period there were increases both in body weight, and in body weight gain in broilers fed with a diet supplemented with Avianin as compared to controls on a normal diet without Avianin. These changes were statistically significant (a 7.3 per cent. increase in the case of the increase in body weight from 2.38 ± 0.02 to 2.34 ± 0.02 kg for the most favourable feeding regime; P < 0.01, Student’s ‘t’ test; mean ± SE of mean). Timing was again important, and it appeared that the largest weight gain occurred when Avianin was administered after day 22. The Avianin was added as 400 mg/kg of feed. Figure 5.1 Broiler – Yangzhou University (II), PRC Broiler – Yangzhou University (II), PRC Trial with 100 birds per group

In the same experiments there was a trend towards a decrease in Food Conversion Ratio (FCR), in other words a more efficient conversion of feed weight to body weight (data not shown in Table) but this did not reach statistical significance (taken as P < 0.05) with the number of observations made. However, in large farm trials it was consistently found that broilers on a diet of food supplemented with Avianin showed increases both in weight gain and in Food Conversion Ratio compared to control animals fed on the same diet but without Avianin (and this is illustrated in more detail below). Similar findings were made in another trial with 1000 birds per group, as illustrated in Figure 5.2. Figure 5.2 Broiler – Changzhou Lihua, Jangsu, PRC Broiler – Changzhou Lihua, Jangsu, PRC Trial with 1000 birds per group (endemic breed)

It can be seen that in this second trial, Avianin (400 mg/kg feed) treatment caused a increases in the final weight of the broilers (from 1137 ± 3 to 1200 ± 3 g, mean ± SE of mean), and in the average body weight gain (from 348 ± 3 to 410 ± 3). These effects were statistically significant (P < 0.01). There was again a fall in the FCR (from 7.05 to 5.81) supporting a more efficient conversion of feed weight to body weight, but statistics were not collected for this measurement, since feed per bird was not measured separately. It appears, however, that this observation of a fall in FCR with Avianin treatment is reliable since it has been made consistently in the farm trials listed below.

42


In a third trial with 100 birds illustrated in Figure 5.3 below, Avianin treatment again caused a rise in body weight (in this case by approximately 8 per cent., from 679 ± 4 to 732 ± 4 g for day 31-50, P < 0.01). Once more FCR was reduced from 3.70 to 3.48, but again statistical analysis was not possible because feed per bird was not measured separately. Figure 5.3 Chinese Gongting Yellow Broiler Chinese Gongting Yellow Broiler Trial with 100 birds per group

The three trials described above with broiler chickens have been supplemented with several large farm trials. In these additional trials, very large numbers of birds have been investigated, increasing the confidence in the observations, though it was the nature of these trials that measurements of individual birds were not made and so statistical analysis cannot be applied in the way that was done above. These observations are shown in Figures 5.4 to 5.10. They include the following trials (with the numbers of birds in the Avianin treated group listed in brackets): Lagman farm (5758 birds); Los Banos (500 birds in AA broiler study, 350 birds in Cobb study); Red Dragon 1 (3660 birds); Red Dragon 2 (3744 birds); LAO farm,Vitarich (4996 birds); Beijing, Huadu (19,498 birds). In every case, Avianin treatment caused an increase in the weight gain, and a reduction in the FCR (with the exception of the Red Dragon 2 trial, where the birds were harvested at a particular weight, which was reached sooner in the Avianin-treated group, though obviously there was still a decrease in FCR). The reliability of these observations does not depend just on the large numbers of birds involved: a simple sign test can be applied to the observations made, with the argument that the probability of observing a decrease in FCR seven times in a row (the seven farm trials) is less than 5 per cent. (in other words, P < 0.05), provided that we can take these trials as representative (as we are assured is the case). Figure 5.4 Broiler – Lagman Farm Broiler – Lagman Farm Commercial trial: large number of birds studied, but lack of individual measurements for statistics

43


Figure 5.5 Broiler – University of Philippines, Los Banos Broiler – University of Philippines, Los Banos Large number of birds studied, but lack of individual measurements for statistics

Figure 5.6 Broiler – Red Dragon 1

Figure 5.7 Broiler – Red Dragon 2 Broiler – Red Dragon 2 Commercial trial: large number of birds studied, but lack of individual measurements for statistics

44


Figure 5.8 Broiler (Cobb) – LAO Farm, Vitarich Broiler (Cobb) – LAO Farm, Vitarich Commercial trial: large number of birds studied, but lack of individual measurements for statistics

Figure 5.9 Broiler – Beijing Huadou, China Broiler – Beijing Huadou, China Commercial trial: large number of birds studied, but lack of individual measurements for statistics

Figure 5.10 Broiler – Beijing Dafa, China Broiler – Beijing Dafa, China Commercial trial: large number of birds studied, but lack of individual measurements for statistics

It therefore appears from the broiler trials described above that Avianin treatment can cause an increase in the weight gain and a reduction in FCR (reflecting a more efficient conversion of feed weight to broiler body weight).

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Another point from the Changzhou Lihua, Jangsu trial shown in Fig. 5.2 above is that Avianin treatment also reduced mortality from 16 to 2 per cent. This is further illustrated in Figure 5.11 to 5.13. In the LAO Farm, Vitarich trial (Fig 5.11), 373 of 6349 birds died in the control group, whereas in Avianin treated group 204 died from an initial population of 5200 (representing a decrease in mortality of 33 per cent.). In the Beijing Huadou trial (Fig 5.12) 1,853 of 19,265 birds died in the control group, whereas in the Avianin treated group 932 of 19,498 birds died (a decrease in mortality of 50 per cent.). In the Beijing Dafa trial (Fig. 5.13), 163 of 6,350 control group birds died, while 119 of the 6,226 Avianin treated group died (an improvement in mortality rate of 26 per cent.). Although these observations are not easily amenable to statistical treatment, the consistency with which a reduction in mortality has been observed, together with the very large numbers of birds in the trials give reason for confidence in the conclusion that Avianin reduces mortality rates under these conditions, while also increasing weight gain and reducing FCR. Figure 5.11 Broiler (Cobb) – LAO Farm, Vitarich Broiler (Cobb) – LAO Farm, Vitarich Commercial trial: large number of birds studied, but lack of individual measurements for statistics

Figure 5.12 Broiler – Beijing Huadou, China Broiler – Beijing Huadou, China Commercial trial: large number of birds studied, but lack of individual measurements for statistics

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Figure 5.13 Broiler – Beijing Dafa, China Broiler – Beijing Dafa, China Commercial trial: large number of birds studied, but lack of individual measurements for statistics

5.2.2 Economic analysis of Avianin effects Figure 5.14 Broiler – Changzhou Lihua, Jangsu, PRC Broiler – Changzhou Lihua, Jangsu, PRC Trial with 1000 birds per group (endemic breed)

Figure 5.15 Beijing Dafa Zhengda Trial: Economic Benefit Analysis

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5.3

Effects of Eggronin Eggronin is the Walcom product used to improve farming practice concerning egg production. In the Breeder Layer, Shanghai trial illustrated in Fig 5.14, a large number of birds (1,200 in the control group and 842 in the Eggronin treated group) were investigated. Eggronin treatment caused statistically significant (P < 0.01) increases in both Laying Rate (from 79.0 ± 0.1 per cent. to 82.0 ± 0.1 per cent., mean ± SE of mean) and Breed Egg Rate (from 75.7 ± 0.1 per cent. to 80.0 ± 0.1 per cent.). There were also larger percentage improvements in breakage rate (from 1.33 ± 0.01 per cent. to 0.68 ± 0.01 per cent.) and abnormal egg rate (from 2.80 ± 0.03 per cent. to 1.83 ± 0.01 per cent.). In the broiler trials described above, Avianin caused a consistent reduction in FCR, and the observations with Eggronin also show a statistically significant (P < 0.01) decrease in FCR (from 2.78 ± 0.01 to 2.51 ± 0.01) reflecting a 9.7 per cent. improvement in the efficiency of converting feed weight to egg weight. Figure 5.16 Breeder Layer – Shanghai, PRC Breeder Layer – Shanghai, PRC

The improvement in Breed Egg Rate is shown with time of exposure to Eggronin in Fig. 5.17. The enhancing effect of Eggronin is clearly evident, particularly in the second half of the trial. Figure 5.17 Breeder Layer – Shanghai, PRC Eggronin® for Layer/breeder (Hailan)

The Laying Rate over time of exposure to Eggronin is shown in Fig. 5.18 for another larger trial, with 500 birds in the control group and 500 birds treated with Eggronin. The improvement in Laying Rate (amounting to 11.1 per cent. at the end of the trial) is clear throughout the period of Exposure to Eggronin.

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Figure 5.18 Commercial Egg Layer – Nanjing, PRC Commercial Egg Layer – Nanjing, PRC 500 birds in control group and 500 birds in Eggronin treated group

Further details of this trial are shown in Fig. 5.19. It can be seen that Eggronin treatment also statistically significant (P < 0.01) decreases in egg breakage rate and FCR (an 11 per cent. improvement from 2.92 ± 0.01 to 2.60 ± 0.01, mean ± SE of mean). Figure 5.19 Commercial Egg Layer – Nanjing, PRC Commercial Egg Layer – Nanjing, PRC

Observations from a large commercial trial (with 4,969 birds in the control group and 2,516 birds in the Eggronin treated group) are shown in Fig. 5.20. It can be seen that Eggronin treatment again caused improvements in Egg Laying Rate (increased by 2.9 per cent.), Breakage Rate (decreased by 14.3 per cent.), Mortality Rate (decreased by 31.8 per cent.) and FCR (decreased by 3.3 per cent.).

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Figure 5.20 Breed Layer â&#x20AC;&#x201C; Henan, PRC Breed Layer â&#x20AC;&#x201C; Henan, PRC Commercial trial: large number of birds studied, but lack of individual measurements for statistics

The improvements caused by Eggronin treatment are expected to be associated with economic gains. Figure 5.21 shows an economic analysis based on the trial shown in Fig. 5.20. Figure 5.21 Henan Xiping Baiao Breeder Layer Trial Economic Benefit Analysis

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5.4

Effects of Porcinin Porcinin is the Walcom product prepared for use in pig farming, and has been used for piglets, grower pigs and finisher pigs. The trial in Fig 5.22 shows Porcinin use in grower pigs with 96 animals in the treatment groups. Although there were trends for improvement in FCR, the statistically significant change (P < 0.05) was for an increase in Average Daily Weight Gain (ADG). Figure 5.22 Grower – Hangzhou, PCR Grower – Hangzhou, PCR Trial with 96 animals per group

In the case of finisher pigs, the Porcinin treated pigs again showed statistically significant (P < 0.05) increases (5 per cent. and 4 per cent.) in Average Daily Weight Gain (Fig. 5.23). Figure 5.23 Finisher – Hangzhou, PCR Finisher – Hangzhou, PCR Trial with 96 animals per group

Similar findings were made in a trial in the Philippines with 100 pigs in the control and Porcinin treatment groups (Fig. 5.24). Observations showing effects of Porcinin on piglets (80 animals per group) are also shown on the same figure. Although statistics are not available for these trials, both showed that there was an increase in the daily weight gain in the Porcinin treated groups compared with controls, and the economic benefits of these effects of Porcinin are shown in Fig. 5.25.

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Figure 5.24 Effect of Porcinin on weaned piglets and fattened pigs

Figure 5.25 Economic evaluation of Porcinin Economic evaluation of Porcinin: •

On the weaned piglets, during the 28 days of treatment with Porcinin, each piglet had consumed 19.028 kg of feeds, and each kg of feeds had input 500 mg of Porcinin, totaling 9.514 g.

On the fattening pigs, during the 95 days of treatment with Porcinin, each pig had consumed 190.216 kg of feeds, and each kg of feeds had input 700 mg of Porcinin, totaling 133.1512 g.

The 2 stages of growth have totally consumed 142.67 g of Porcinin.

Assuming the final price of Porcinin to the farmers is US$6.024/kg (RMB49.82/kg), the 2 stages together consumed US$0.859 (RMB7.11) of Porcinin.

The Porcinin treated piglets and fattening pigs had increased weight by 1.6 kg and 9.3 kg respectively, totaling 10.9 kg (actually it may not be entirely appropriate to add the 2 numbers together). Usually the slaughtering ratio of pigs is 70 %, therefore the 10.9 kg will come down to a carcass weight of 7.63kg. As far as we know, the average pork price in the Philippines is approximately US$1.4/kg, the additional carcass weight of 7.63 kg will come out as an additional economic value of USD10.682 (RMB87.24).

In another words, the input and output ratio is 1 :12.44. Within a treating period of 4 months, USD1 worth of Porcinin can yield additional pork value of USD12, we believe this experiment has clearly demonstrated the economic value of Porcinin.

Moreover, each pig can reduce the consumption of feeds by (0.432 kg + 24.18 kg) 24.61 kg, and also saving the breeding time from weaned piglet to ready for slaughter by half a month, this represents a tremendous savings on labour, farm facilities/equipment, energy and sanitary/veterinary consumables.

The above trial of Porcinin performed on Swine has shown remarkable combined growth effect and economic values for the pig farms.

In the case of piglets, a series of trials is shown in Figures 5.26 to 5.34. An increase in Average Daily Weight Gain (ADG) was consistently seen, and the increases in these trials were: 28 per cent., 28 per cent., 7 per cent., 14 per cent., 33 per cent., 23 per cent., 18 per cent., 36 per cent., 5 per cent. Decreases in FCR (showing a more efficient conversion of feed weight to pig body weight) were also seen in the trials where this was measured, and the decreases were: 18 per cent., 22 per cent., and 20 per cent. In the Porcinin treated groups in these trials mortality rates, as compared to the corresponding control groups, were reduced by: 71 per cent., 45 per cent., 75 per cent., 100 per cent., 0 per cent., 60 per cent., 0 per cent., 44 per cent. and 59 per cent. (and in the cases where the change was 0 per cent., mortality was already low with 0 pigs dying in one study and two in the other so that there was little scope for improvement with Porcinin). Taken together these studies (on a total of 1000 piglets treated with Porcinin) show clear effects of Porcinin to increase Average Daily Weight Gain and reduce Mortality.

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Figure 5.26 Weaned Piglet – Shamus Farm (Bukidnon) 1 Weaned Piglet – Shamus Farm (Bukidnon) 1

Figure 5.27 Weaned Piglet – Shamus Farm (Bukidnon) 2 Weaned Piglet – Shamus Farm (Bukidnon) 2

Figure 5.28 Weaned Piglet – Shamus Farm (Bukidnon) 3 Weaned Piglet – Shamus Farm (Bukidnon) 3

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Figure 5.29 Weaned Piglet – Lopez Farm (Dipolog) 1 Weaned Piglet – Lopez Farm (Dipolog) 1

Figure 5.30 Weaned Piglet – Lopez Farm (Dipolog) 2 Weaned Piglet – Lopez Farm (Dipolog) 2

Figure 5.31 Weaned Piglet – Lopez Farm (Dipolog) 3 Weaned Piglet – Lopez Farm (Dipolog) 3

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Figure 5.32 Weaned Piglet – Lopez Farm (Dipolog) 4 Weaned Piglet – Lopez Farm (Dipolog) 4

Figure 5.33 Weaned Piglet – Lopez Farm (Dipolog) 5 Weaned Piglet – Lopez Farm (Dipolog) 5

Figure 5.34 Weaned Piglet – Dalian, PRC Weaned Piglet – Dalian, PRC

In the piglet trial shown in Fig 5.35, there is an increase in Average Daily Weight Gain in the animals treated with Porcinin as compared to controls, and the economic benefits of this are shown in Fig. 5.36.

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Figure 5.35 Piglet weight gain, Shanghai Min Hang Piglet weight gain, Shanghai Min Hang

Figure 5.36 Food consumption and weight gain cost analysis

Another factor that is of interest to the pig farmer, in addition to simple weight gain of the pigs, is the quality of the meat produced. Figures 5.37 and 5.38 show observations concerning the effect of Porcinin treatment on Pork Quality. In Fig. 5.37, it can be seen that the higher dose of Porcinin caused statistically significant (P < 0.05) increases in lean meat percentage and decreases in fat percentage. Similar statistically significant improvements in pork quality (an increase in percentage of lean meat and a decrease in fat) were also seen in the trial shown in Fig. 5.38.

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Figure 5.37 Pork Quality Enhancement – Shanghai, PRC Pork Quality Enhancement – Shanghai, PRC

Figure 5.38 Pork Quality Enhancement – Ning Bo, PRC Pork Quality Enhancement – Ning Bo, PRC

5.5

Effects of Lactonin The effects of Lactonin in milk production in cows are illustrated in Figure 5.39. In this trial of 30 animals per group, both doses of Lactonin caused statistically significant (P < 0.05) increases in milk yield, 3.5 per cent. FCM and milk protein yield. In another study with 8 animals per group (Fig 5.40), Lactonin again caused statistically significant increases in milk yield and 4 per cent. FCM. Figure 5.39 Lactonin® on Dairy Cattle Lactonin® on Dairy Cattle

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Figure 5.40 Lactonin® on Dairy Cattle, 2 Lactonin® on Dairy Cattle, 2

5.6

Effects of Aquanin Walcom products are also available for fish farming, and in this case the product of interest is Aquanin. Two trials with eels (Anguilla Japonica) are shown in Figs 5.41 (study with 150 fish per group) and 5.42 (study with 750 fish per group). In both cases, treatment with Aquanin caused statistically significant increases in final body weight and body weight gain as compared with untreated controls. The Aquanin treated groups also showed significantly reduced FCR reflecting a more efficient conversion of feed weight to fish body weight. Figure 5.41 Anguilla japonica (Eel) – Shenzhen, PCR Anguilla japonica (Eel) – Shenzhen, PCR

Figure 5.42 Anguilla japonica (Eel) – Guangdong, PCR Anguilla japonica (Eel) – Guangdong, PCR

Effects of Aquanin were also studied on the grouper fish (Epinephelus Coioides), and the results of this trial are shown in Fig 5.43. There were substantial increases in final body weight and in weight gain that were statistically significant (P < 0.05) in the fish treated with Aquanin as compared with the control untreated fish. There were also large reductions in the FCR in Aquanin treated fish as compared to untreated controls (reflecting a more efficient conversion of feed weight to fish weight), although the feed data were not collected in a way that would allow statistical analysis.

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Figure 5.43 Epinephelus coioides (Grouper) â&#x20AC;&#x201C; Guangdong, PCR Epinephelus coioides (Grouper) â&#x20AC;&#x201C; Guangdong, PCR

Note : * indicates P < 0.05; **indicates P < 0.01

Studies were also carried out on the shrimp (Penaeus vannamei). It can be seen from the observations in Fig. 5.44 that Aquanin treatment caused statistically significant (P < 0.05) increases in final body weight and weight gain. In the case of FCR, there was a trend towards reduction, but this did not reach significance. Figure 5.44 Penaeus vannamei (Shrimp) Penaeus vannamei (Shrimp)

Note : * indicates P < 0.05

5.7

Effects of cysteamine-containing products on the immune systems of animals and birds. In Section 3.9 it was pointed out that extensive experimental evidence supports the contention that the immune system is regulated by both Growth Hormone and IGF-1 (formed from Growth Hormone, particularly in the liver). Since cysteamine promotes Growth Hormone release by suppressing the inhibitory influence of somatostatin, (and since increased levels of Growth Hormone are also expected to lead to increased levels of IGF-1), it would be expected that cysteamine administration should increase the activity of the immune system. Evidence supporting actions of cysteamine-HCl-containing Walcom products on the immune systems of animals is presented in the following paragraphs. 5.7.1 Effects of cysteamine-containing products on stress associated with surgery in goats Stress accompanying surgery may lead to increased levels of cortisol (a hormone associated with stress) and to decreased levels of interleukin-2 (IL-2). It was reported that, in goats not exposed to cysteamine (control group), surgery caused a decrease in IL-2 levels. When the same surgical procedures were carried out on goats that had received the cysteamine-HCl-containing Walcom product (45 mg/kg), IL-2 levels were observed not to be reduced following surgery and appeared to be higher than the IL-2 levels in the control group that did not receive cytsteamine-HCl-containing Walcom compound (8 goats in both the control untreated group and in the group in which cysteamine-HCl-containing Walcom compound was administered).

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Figure 5.45 Effects of cysteamine on IL-2 levels after surgery in goats Cysteamine effect on IL-2 serum concentration in pre-, post-operation periods

Group

After 1st Operation (mg/L)

Pre-operation

After 2nd Operation

(n=8)

Roughage phase

Concentrate Phase

Day 10

Day 6

Day 17

Control Treatment

1.21 ± 0.10 0.92 ± 0.11

0.80 ± 0.05 0.97 ± 0.15

0.65 ± 0.05 1.32 ± 0.10

0.49 ± 0.07* 0.95 ± 0.06

0.52 ± 0.11 1.02 ± 0.08

Note: * indicates P < 0.05 compared to pre-operation level (concentrate phase)

In the same series of experiments on goats, it was also reported that in both the control and treatment groups, surgery caused a decrease in the transformation rate of lymphatic cells (P < 0.05); the decrease in transformation rate was, however, significantly smaller in the animals treated with cysteamine-HClWalcom compound than was the case in the control group (P < 0.05). Six days after suregery, the lymphatic transformation rate of the control group decreased to 12 per cent. of the rate before the operation, while in the animals treated with cysteamine-HCl-containing Walcom compound the rate of lymphatic cell transformation had increased by 3.5 fold (P < 0.05) when compared to the rate of the control group. In the following days, the lymphatic transformation rate started to recover (control group P < 0.05) and the difference between the two groups eventually disappeared (P > 0.05). The experimental observations support an effect of cysteamine to enhance immune system function. 5.7.2 Effects of cysteamine compound and the immune response in a murine model In an experiment on mice, the effects of cysteamine (40 mg/kg in Treatment Group 1 and 80 mg/kg in Treatment Group 2) on the weight of the thymus and spleen organs was investigated. 8 mice were used for each group. Treatment with cysteamine increased the weight of the thymus (P < 0.05 for 40 mg/kg as compared with control, and P < 0.01 for 80 mg/kg). Figure 5.46 Effects of cysteamine on thymus weight in mice Measurement of Organ Weight (mg/100g of body weight) Organ Control Treatment 1 Thymus 534 ± 5 549 ± 2* Spleen 290 ± 6 298 ± 5

Treatment 2 567 ± 7** 296 ± 8

Note: * indicates P < 0.05 compared to control and ** indicates P < 0.01 compared to control

In the same series of experiments, lymphocyte transformation rate was increased (1.10 ± 0.05 in control group, 1.15 ± 0.02 in Treatment Group 1 given 40 mg/kg cysteamine compound and 1.24 ± 0.05 in Treatment Group 2 given 80 mg/kg cysteamine compound; P < 0.05 for Treatment Group 1 as compared with control and P < 0.01 for Treatment Group 2). The experimental observations support an effect of cysteamine to enhance immune system function. 5.7.3 Effects of cysteamine compound on IL-2 levels and Stimulation Index of T-cells in cows The effects of cysteamine (50 mg/kg) on IL-2 plasma levels were investigated in cows (50 cows per group). Cysteamine caused a significant (P < 0.05) increase in plasma IL-2 levels. In another series of experiments (32 cows per group), blood samples were taken from the cows, and lymphocytes grown in tissue culture. The Stimulation Index of the lymphocytes was measured as the increase in lymphocyte cell number in tissue culture following exposure to phytohaemaglutinin. The Stimulation Index was significantly greater (P < 0.01) for lymphocytes from cows treated with cysteamine. The experimental observations again support an effect of cysteamine to enhance immune system function.

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Figure 5.47 Effects of cysteamine on IL-2 levels in cows IL-2 (ng/mL)

Leukocytes 109/L

IL-6 in plasma (pg/mL)

Control cows

4.3 ± (n=50)

10.8 (n=15)

252 ± 21 (n=39)

Test cows

5.5 ± 0.3 (n=50)** 9.1 (n=20)

309 ± 21 (n=37)

Note: ** indicates P < 0.01 compared to control

Figure 5.48 Effects of cysteamine on Stimulation Index in cows Stimulation Index

Control Group 21.9 ± 2.1

Test Group 29.7 ± 3.5*

Note: * indicates P < 0.05 compared to control

5.7.4 Effects of cysteamine on immune function in mice Effects of cysteamine on immune function in mice were investigated in another experiment in which antibody production was measured in response to immunization in C3H mice. The antigen was albumin and antibody production was measured from blood samples using an appropriate immunoassay technique. The animals were divided into three groups (n = 10 animals per group). Animals in the control group received 0.4 mL of saline injected by the intraperitoneal route. In the two Treatment Groups the 0.4 mL saline was supplemented by cysteamine using one of the following two recipes. For Treatment Group 1, the saline was supplemented using the following formulation: cysteamine 300 g, vitamin C 5.0 g, mannan-oligosaccharide 20.0 g dissolved and mixed in 300 mL saline in a sealed plastic bottle. For Treatment Group 2, the saline was supplemented using the following formulation: cysteamine hydrochloride 450 g, taurine 50.0 g, vitamin C 5.0 g, water soluble vitamin E 10.0 g, mannan-oligosaccharide 10.0 g, D-ribose 15.0 g dissolved and mixed in 1000 mL saline in a sealed plastic bottle. The observations are shown in Figure 5.49. It can be seen that both treatments caused substantial and statistically significant (P < 0.01) increases in antibody production, again supporting an action of cysteamine to enhance immune function. Figure 5.49 Effects of cysteamine on antibody production in mice Group Control Treatment 1 Treatment 2

Antibody (mean ± SE) 563 ± 33 986 ± 43** 992 ± 35**

( per cent.) 100 175 176

Note: ** indicates P < 0.01 compared to control

5.7.5 Effects of cysteamine on antibody production in SPF chickens exposed to Newcastle Disease vaccine In view of the prevalence and commercial significance of viral infections in chickens, it is important to determine whether the observations reported above concerning enhancement by cysteamine of immune function in a variety of animal species can be repeated in birds. In another series of experiments, the effects of cysteamine on antibody production were investigated in SPF chickens immunized with Newcastle Disease vaccine. Birds in the Control group were injected with 0.5 mL saline before immunization. In the case of Treatment Group 1, the 0.5 mL saline injection solution given before immunization was supplemented using the following formulation: cysteamine 300 g, vitamin C 5.0 g, mannan-oligosaccharide 20.0 g dissolved and mixed in 300 mL saline in a sealed plastic bottle. In the case of Treatment Group 2, the 0.5 mL saline injection solution given before immunization was supplemented using the following formulation: cysteamine hydrochloride 450 g, taurine 50.0 g, vitamin C 5.0 g, water soluble vitamin E 10.0 g, mannan-oligosaccharide 10.0 g, D-ribose 15.0 g dissolved and mixed in 1000 mL saline in a sealed plastic bottle. 20 chickens were used for each group.

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After 7 days, the level of antibody produced in response to the Newcastle Disease vaccine was measured in the three groups (shown as 14-day-old antibody level), and the observations are shown in Figure 5.50. It can be seen that injection with cysteamine-containing formulation significantly (P < 0.01) increased antibody production in response to Newcastle Disease vaccine. Figure 5.50 Effects of cysteamine on antibody production in chickens exposed to Newcastle Disease vaccine Group

8-day-old antibody level

Control Treatment 1 Treatment 2

1.04 ± 0.12 1.05 ± 0.10 1.10 ± 0.15

14-day-old antibody level 2.01 ± 0.16 2.86 ± 0.09** 2.94 ± 0.14**

Note: ** indicates P < 0.01 compared to control

These observations in birds again support an action of cysteamine to enhance immune function that was observed in other animal species. 5.7.6 Effects of cysteamine on antibody production in AA broiler chickens exposed to H5N1 vaccine ‘Bird flu’ is a current concern with high commercial significance. In another series of experiments, the effects of cysteamine on antibody production were investigated in AA broiler chickens immunized with H5N1 influenza vaccine. 120 broilers were divided into three groups (40 birds per group). In the Treatment Group 1, broiler chickens were fed a basal diet supplemented with cysteamine-containing Walcom compound (using a formulation in which cysteamine is associated with cyclodextrin, and the pellets encased in an enteric coating, in a similar manner to that described in Section 4 of this report). The amount of the supplement was 200 mg/kg for the first 20 days (approximately 4.5 mg cysteamine per kg body weight per day), and 400 mg/kg from day 21 onwards. Chickens in the Control Group were fed basal diet supplemented with the carrier mixture without any active ingredient. The observations are shown in Table form in Figure 5.51 and in the form of a graph in Figure 5.52. It can be seen that treatment with cysteamine-containing formulation significantly (P < 0.01) increased antibody production in response to H5N1 influenza vaccine. Figure 5.51 Effects of cysteamine on antibody production in chickens exposed to H5N1 influenza vaccine. Day-old 1 14 19 24 29 34 39 44 49

Control 1 1.09 ± 0.30 3.80 ± 0.12 2.84 ± 0.27 4.50 ± 0.26 5.54 ± 0.16 5.50 ± 0.26 5.22 ± 0.21 5.19 ± 0.18 6.08 ± 0.18

Treatment 1 1.09 ± 0.30 3.50 ± 0.46 2.23 ± 0.31 2.53 ± 0.33*** 7.81 ± 0.20*** 6.06 ± 0.35 6.17 ± 0.31** 6.29 ± 0.29** 6.93 ± 0.27*

Note: * indicates P < 0.05 compared to control, ** indicates P < 0.01 compared to control and *** indicates P < 0.001 compared to control

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Figure 5.52 Effects of cysteamine on antibody production with time in chickens exposed to H5N1 influenza vaccine

Note: * indicates P < 0.05 compared to control, ** indicates P < 0.01 compared to control and *** indicates P < 0.001 compared to control

These observations in birds again support an action of cysteamine to enhance immune function that was observed in other animal species. 5.8

Possible effects of yolk antibodies against adipocyte plasma membranes on growth and fat deposition in the rat Interesting observations have also been reported by Walcom scientists concerning a new approach in which antibodies were raised against adipocyte plasma membranes. It was proposed that these antibodies might have beneficial effects on fat content when administered to livestock animals. The effects of IgY antibody against adipocyte cell membranes were investigated in rats (90 animals allotted randomly to four groups, two control groups, one given yolk IgY antibody by subcutaneous injection and another given yolk IgY antibody by oral administration). Walcom scientists report that there were significant (P < 0.05) beneficial effects on fat content, as well as a significant reduction (P < 0.01) in serum leptin levels in rats given the yolk IgY antibody by oral administration. In contrast, while IgY antibody given by subcutaneous injection did cause a significant reduction in leptin levels (P < 0.01), there were no significant changes in fat content in these animals. This is very surprising given that the antibody is not expected to survive in the gut (since gastric pH and peptidases in other parts of the gut would be expected to degrade the peptide antibody) and therefore if there were an effect of antibody this would be expected to be seen in the subcutaneous rather than in the oral administration group. The reported beneficial effects on fat content of yolk IgY antibody given by oral administration are nevertheless interesting and perhaps reflect an unknown mechanism (possibly involving breakdown products of the IgY antibody) that require further experimental observation.

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6.

TOXICITY OF CYSTEAMINE IN WALCOM PRODUCTS

Cysteamine is a natural constituent of animal tissues, and indeed of many natural foods, and therefore low concentrations are expected not to be harmful. Cysteamine may also be released naturally in animal tissues as a consequence of a variety of metabolic reactions. Figure 6.1 Cysteamine content in foodstuffs Cysteamine in Food

Estimated values of cysteamine from natural concentration of pantotheic acid (Schaz & Senser, 1994; Finglas et al., 1988; Johnston et al., 1981) Figure 6.2 Cysteamine levels in the normal human and animal tissue Cysteamine levels in the normal human and animal tissue

Figure 6.3 Metabolic pathway of cysteamine Metabolic Pathway of Cysteamine

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Figure 6.4 Excretion Pathway of Cysteamine Excretion Pathway of Cysteamine

Cysteamine is also used for various conditions in man, as well as being a possible treatment for ketosis in cows. The European Medicine Evaluation Agency (EMEA) report (EMEA/MRL/518/98-FINAL) on veterinary use of mercaptamine (cysteamine) makes the following recommendation: For cattle and horses, maximal recommended doses of mercaptamine (cysteamine) administered with the combined products are 0.75 g mercaptamine (cysteamine) hydrochloride (equivalent to 0.51 g mercaptamine (cysteamine) base)/animal intravenous route, 1 to 3 doses at intervals of 24 to 36 hours) and for pigs (sows and gilts) 0.38 g mercaptamine (cysteamine) hydrochloride (equivalent to 0.20 g mercaptamine (cysteamine) base)/animal (intramuscular route, each injection is divided over two sites, 2 to 3 doses at intervals of 24 hours). The dose ranges per kg bw for cattle or horses weighing 200 to 700 kg or pigs weighing 100 kg are approximately 1 to 3.8 mg mercaptamine (cysteamine) hydrochloride (equivalent to 0.7 to 2.5 mg mercaptamine (cysteamine) base)/kg bw. However, mercaptamine (cysteamine) is known to be used in younger pigs (bodyweight 20 to 50 kg) at doses of 3.6 to 9 mg (as the hydrochloride)/kg bw. In human patients, mercaptamine (cysteamine) has been used to protect against hepatotoxic compounds and it is used orally to reduce cystine levels in cystinosis patients. Therapaeutic doses in humans are 50 mg/kg bw/day and higher. Mercaptamine (cysteamine) is present in the normal diet as it occurs naturally in animal tissue and vegetable foods. Other information concerning therapeutic doses of cysteamine for use in man is listed below. For the treatment of nephropathic cystinosis, cysteamine is used at doses of 60-90 mg/kg/day, for example as 20 mg/kg every 8 hours (Yudkoff et al, 1981; Kleta and Gahl, 2004). British National Formulary quotes a dose of approximately 50 mg/kg/day. In the case of treatment of paracetamol (acetoaminophen) poisoning, cysteamine has been used at doses of up to 500 mg/kg (Prescott, LF, 1976; Harris, 1982). The risks of harm to the patient are high in this context, so a high concentration applied acutely may be justified. High concentrations of cysteamine can nevertheless be toxic, and should be avoided, but Walcom products are not expected to produce adverse effects in animals when used in the amounts recommended for each species (commonly in the range 10 to 30 mg/kg). When cysteamine is used for human therapy for the conditions described above (for cystinosis and against hepatotoxic compounds) some side effects have been observed after oral administration of cysteamine at doses of approximately 50-60 mg/kg per day (Corden et al., 1981; Gahl et al., 1995; Thoene, 1995), particularly gastrointestinal side-effects, including nausea, vomiting, abdominal cramps, flushing, irritability, meningism and lethargy. However, the EMEA report quoted above notes that in patients experiencing side effects at high concentrations of cysteamine â&#x20AC;&#x2DC;these patients tolerated daily doses of 10 mg/kgâ&#x20AC;&#x2122;. Tests carried commissioned by Walcom and carried out by the Shanghai Institute of Chemical Toxicity show LD50 values for male and female mice as over 2000 mg/kg. An Ames test was used to detect mutagenicity and was concluded to be negative (no effect at up to 5 mg per plate). In another test at the same institute a test of chromosomal aberration was concluded to be negative up to the maximum tested dose of 395 mg/kg. Cysteamine has been used as an experimental tool to provoke duodenal ulceration (an effect originally attributed to the excessive production of growth hormone, but more recently found to be associated with additional redoxdependent regulatory mechanisms) though the concentrations used are normally 250 mg/kg or above (Szabo, 1981, 1982; Khomenko et al, 2004).

65


Although such ulceration can occur at high concentrations of cysteamine, ulceration was not observed under the following conditions: a chromic oral application, three times per day (up to 5 weeks), at a dose of 25 mg cysteamine hydrochloride/kg b.w. of 4 years old children (Da Silva et al., 1985); an oral daily application at a dose of 30 mg (4 weeks) followed by 60 mg (4 weeks), and 90 mg (28 month) cysteamine/kg b.w. of 2-7 years old children (Yudkoff et al., 1981); a 2-3 times daily intravenous administration in cows, at a dose of 750 mg cysteamine hydrochloride (Bach & Hibbit, 1960). A further point is that the Walcom poduct formulation is specifically designed, with its enteric coating, to avoid uptake in the stomach. This would be expected to minimise any local effects of absorbed cysteamine on somatostatin containing cells in the stomach. The avoidance of high local concentrations of cysteamine following absorption from the stomach may perhaps be beneficial in reducing excessive acid secretion that would otherwise result from removal of the inhibitory influence of somatostatin. However, presumably cysteamine absorbed in the duodenum and passing into the bloodstream could reach the somatostatin containing cells in the stomach, just as the cysteamine reaches the somatostatin containing cells in the hypothalamus to cause its beneficial effects. Nevertheless it remains possible that potentially harmful effects of cysteamine involving excessive acid secretion and ulceration could be reduced when absorption in the stomach is avoided. 6.1

Recommendation of the European Medicine Evaluation Agency (EMEA) The European Medicine Evaluation Agency (EMEA) has categorised cysteamine as an organic substance for which it is not required to establish â&#x20AC;&#x153;Maximum Residue Levelâ&#x20AC;? (MRL) and that it can be used for all mammalian food producing species. The EMEA report (EMEA/MRL/518/98-FINAL) includes the following: Mercaptamine (cysteamine) and some of its precursors are normal consitituents of the daily diet in appreciable amounts, and because mercaptamine (cysteamine) is also produced endogenously a purely toxicological approach was not considered to be justified in this case. Published data indicate that concentrations (expressed as mercaptamine/cysteamine base) in untreated bovines were: liver 1.5 to 4.0 mg/kg. Concentrations (expressed as mercaptamine/cysteamine base) in untreated pigs were: liver 0.08 to 0.35 mg/kg, kidney 0.77 to 2.3 mg/kg and heart 0.12 mg/kg. In untreated sheep a concentration of 0.93 mg (as base)/kg was found in liver. Based on these data, the estimated daily intake from tissues of untreated animals is about 1 mg/day. No residue data in target animals treated in accordance with recommendations were available. Considering the available data, it is unlikely that residues in mercaptamine (cysteamine) treated animals would represent a significant risk for human health, provided that they do not increase the normal total daily intake by more than 1 mg.

6.2

Conclusion of the EMEA report The EMEA report (EMEA/MRL/518/98-FINAL) on veterinary use of mercaptamine (cysteamine) concludes: Conclusions and recommendation Having considered the criteria laid down by the Committee for Veterinary Medicinal Products for the inclusion of substances in Annex II of Council Regulation (EEC) No 2377/90 and in particular that: l

mercaptamine (cysteamine) is a compound of the normal diet,

l

mercaptamine (cysteamine) hydrochloride is intended for treatment of individual animals,

l

mercaptamine (cysteamine) is rapidly and extensively metabolised and excreted, mercaptamine (cysteamine) is produced enedogenously in the human body and in animals;

the Committee for Veterinary Medicinal Products concludes that there is no need to establish an MRL for mercaptamine (cysteamine) hydrochloride and recommends its inclusion in Annex II of Council Regulation (EEC) No 2377/90 in accordance with the following table: Pharmacologically active substance(s)

Animal species

Mercaptamine (cysteamine) hydrochloride

All mammalian food producing species

Other provisions

In addition to the above categorization, residues of cysteamine would be expected to be small. Experiments in rats show that, following parenteral administration of cysteamine at doses of 200 mg/kg, cysteamine levels in the tissues are depleted quickly to physiological levels (with half-time of less than 0.5 h). For humans treated by cysteamine at doses of 5 or 10 mg/kg (patients with nephropathic cystinosis), half-times for loss of cysteamine from the plasma were approximately 20 min. Although similar information is not available for livestock, such as cattle and pigs, the rate of loss of cysteamine is unlikely to be far from this range.

66


6.3

Toxicity tables from National Library of Medicine Table 2 Table of Toxicity of Cysteamine taken from National Library of Medicine ChemIDplus Test Organism Type

Route

mouse

LD50

intraperitoneal

250mg/kg (250 mg/kg)

Journal of Medicinal Chemistry. Vol. 12, Pg. 510, 1969.

mouse

LD50

intravenous

190mg/kg (190 mg/kg)

Comptes Rendus des Seances de lâ&#x20AC;&#x2122;Academie des Sciences, Serie D: Sciences Naturelles. Vol. 262, Pg. 206, 1966.

mouse

LD50

oral

625mg/kg

Journal of Medicinal

(625 mg/kg)

Chemistry. Vol. 18, Pg. 798, 1975.

mouse

LD50

subcutaneous

Reported Dose (Normalized Dose) Effect

84mg/kg (84 mg/kg)

PERIPHERAL NERVE AND SENSATION: SPASTIC PARALYSIS WITH OR WITHOUT SENSORY CHANGE

Source

Osaka Shiritsu Daigaku Igaku Zasshi. Journal of the Osaka City Medical Center. Vol. 5, Pg. 128, 1956.

SKIN AND APPENDAGES (SKIN): HAIR: OTHER BEHAVIORAL: CONVULSIONS OR EFFECT ON SEIZURE THRESHOLD mouse

LD50

unreported

350mg/kg (350 mg/kg)

Arzneimittel-Forschung. Drug Research. Vol. 5, Pg. 421, 1955.

rabbit

LD50

intravenous

150mg/kg (150 mg/kg)

Arzneimittel-Forschung. Drug Research. Vol. 5, Pg. 421, 1955.

rat

LD50

intraperitoneal

232mg/kg (232 mg/kg)

Arzneimittel-Forschung. Drug Research. Vol. 5, Pg. 421, 1955.

rat

LD50

subcutaneous

84mg/kg (84 mg/kg)

PERIPHERAL NERVE AND SENSATION: SPASTIC PARALYSIS WITH OR WITHOUT SENSORY CHANGE BEHAVIORAL: CONVULSIONS OR EFFECT ON SEIZURE THRESHOLD SKIN AND APPENDAGES (SKIN): HAIR: OTHER

67

Osaka Shiritsu Daigaku Igaku Zasshi. Journal of the Osaka City Medical Center. Vol. 5, Pg. 128, 1956.


Names and Synonyms

MeSH Heading i Cysteamine Name of Substance i Cysteamine i Cysteamine [USAN:BAN] Synonyms i (2-Mercaptoethyl)amine i 1-Amino-2-mercaptoethylamine i 2-Amino-1-ethanethiol i 2-Aminoethanethiol i 2-Aminoethyl mercaptan i 2-Mercaptoethanamine i Becaptan i CCRIS 3083 i Cisteamina [Italian] i Cystagon i Cysteamin i Cysteamine i Cysteinamine i DRG-0003 i Decarboxycysteine i EINECS 200-463-0 i L 1573 i L-1573 i Lambraten i Lambratene i MEA i MEA (mercaptan) i Mercamine i Mercaptamina [INN-Spanish] i Mercaptamine i Mercaptaminum [INN-Latin] i Mercaptoethylamine i NSC 647528 i Riacon i Thioethanolamine i WR 347 i beta-Aminoethanethiol i beta-Aminoethylthiol i beta-Mercaptoethylamine Systematic Name i Cysteamine i Ethanethiol, 2-aminoi Mercaptamine

Registry Numbers

CAS Registry Number i 60-23-1 Other Registry Number i 139720-70-0 Related Registry Number i 156-57-0 (hydrochloride) i 16904-32-8 (di-hydrochloride) i 27761-19-9 (tartrate (1:1)) i 3037-04-5 (tosylate) i 42954-15-4 (hydrobromide) i 93965-19-6 (maleate (1:1)) System Generated Number i 000060231

68


Table 3 Table of Toxicity of Cysteamine HCl taken from National Library of Medicine ChemIDplus Test Organism Type

Route

mouse

LD50

intraperitoneal

250mg/kg (250 mg/kg)

Journal of Medicinal Chemistry. Vol. 12, Pg. 510, 1969.

mouse

LD50

oral

1352mg/kg (1352 mg/kg)

Chemical and Pharmaceutical Bulletin. Vol. 20, Pg. 721, 1972.

mouse

LD50

unreported

244mg/kg (244 mg/kg)

Pharmazie. Vol. 14, Pg. 132, 1959.

mouse

LDLo

subcutaneous

900mg/kg (900 mg/kg)

Names and Synonyms

Reported Dose (Normalized Dose) Effect

BEHAVIORAL: SOMNOLENCE (GENERAL DEPRESSED ACTIVITY)

Source

Acta Biologiae Experimentalis Vol. 12, Pg. 142, 1938.

Name of Substance i Cysteamine HCl i Cysteamine hydrochloride [USAN] Synonyms i 1-Amino-2-mercaptoethane hydrochloride i 1-Aminoethane-2-thiol hydrochloride i 2-Aminoethanethiol hydrochloride i 2-Mercaptoethylamine hydrochloride i 2-Mercaptoethylammonium chloride i 2-Thioethylamine hydrochloride i A-889 i AI3-26089 i Bekaptan i CCRIS 3926 i CI 9148 i Cysteamine chlorohydrate i Cysteamine hydrochloride i Cysteaminhydrochlorid [German] i Cysteaminium chloride i EINECS 205-858-1 i Ethylamine, 2-mercapto-, hydrochloride i Mercamine hydrochloride i Mercaptoethylamine hydrochloride i Merkamin hydrochloride i NSC 21116 i USAF EE-3 i beta-Mercaptoaethylamin chlorhydrat [German] i beta-Mercaptoethylamine hydrochloride Systematic Name i Cysteamine hydrochloride i Ethanethiol, 2-amino-, hydrochloride i Mercaptamine hydrochloride

Registry Numbers

CAS Registry Number i 156-57-0 Other Registry Number i 116962-86-8 Related Registry Number i 60-23-1 (Parent) System Generated Number i 000156570

69


7.

MARKET, MARKETING STRATEGY AND COMPETITORS

The following quotation (already mentioned in Section 2, but worth repeating in this context) is from a GAIN (Global Agricultural Information Network) report from the US Department of Agriculture Foreign Agricultural Service: China is one of the world’s largest consumers of food. For example China consumes 51 percent of the world’s pork, 33 percent of rice, 19 percent of ice cream, 19 percent of poultry and 12 percent of beef. In raw figures China consumes 8.5 million tons of meat per year, 40 million tons of vegetables and over 12.5 million tons of fruit. The food sector accounted for approximately 28 percent of total consumer expenditure in 2003. Food categories such as milk, cheese & eggs, fish, vegetables, fruit and non-alcoholic beverages grew strongly in the range of 10 percent to 12 percent from 2002 to 2003. It is clear from this information that China provides a huge and increasing market for livestock, with corresponding potential for sales of Walcom products. In addition Walcom is already marketing its products in a variety of other countries in Asia, and has plans to develop sales worldwide. 7.1

Marketing Strategy For sales in China the marketing strategy is aimed at several categories of target companies: Feed Companies, Big Farms, Group Companies and Integrators. The intention is to build a Walcom Nationwide Sales and Distribution network to augment these distributors’ efforts. In the last two years, Walcom has developed a range of appropriate product lines to target different groups of consumers ranging from the sophisticated big farmers/integrators to individual backyard farmers. Walcom feels that with their own sales and distribution network, Walcom would be able to distribute their products both in bulk and in small packs of animal- and solution-specific formulations. These formulations efficiently combine the Walcom core “Walstrong” technology with other nutritional ingredients. Walcom expects to be able to monitor customers’ needs effectively and develop a closer working relationship with the customers throughout China. In relation to sales structures, Walcom is adopting a strategy of direct sales to the feed mill and integrator market sector, while for the backyard market sector Walcom is cooperating with local distributors. In addition, Walcom is also building up a kind of strategic partnership relationship with certain feed mills, and Walcom believes that this approach will make sure that these companies buy Walcom products in long term. In other countries, Walcom relies on local distributors to take care of marketing activities. At the present time, Walcom has distributors in Korea, Malaysia, Taiwan, Philippines, and Thailand. Plans are in place for distributors in Pakistan, Brazil, and Australia, where the trials are under preparation. For USA and EU, Walcom is looking for strategic partners to develop the market. Figure 7.1 Scheme representing the sales and distribution network of Walcom

Sales and Distribution

7.2

Competitors Following consultation with Walcom it is clear that Walcom are of the opinion that they do not have any direct competitors in the market place as a consequence of the special nature of their product. However, it could be argued that companies providing food additives for the livestock industry might be considered as competitors.. There are a large number of such companies . In addition companies using injectable growth hormone e.g. Monsanto might also be considered to be competitors.

70


8.

REFERENCES

Anderson LL, Jeftinija S & Scanes CG. (2004). Growth hormone secretion: molecular and cellular mechanisms and in vivo approaches. Exp Biol Med (Maywood) 229, 291-302. Anderson LL, Jeftinija S, Scanes CG, Stromer MH, Lee JS, Jeftinija K & Glavaski-Joksimovic A. (2005). Physiology of ghrelin and related peptides. Domest Anim Endocrinol 29, 111-144. Bach SJ & Hibbitt KG. (1960). Biochemistry of bovine ketosis: the therapeutic use of fumarate and cysteamine. Nature 188, 382-383. Benoit R, Esch F, Bennett HP, Ling N, Ravazzola M, Orci L & Mufson EJ. (1990). Processing of prosomatostatin. Metabolism 39, 22-25. Bird RP. (1980). Cysteamine as a protective agent with high-LET radiations. Radiat Res 82, 290-296. Brook CGD & Marshall NJ. (2001). Essential endocrinology. Blackwell Science, Oxford. Bump EA, Cerce BA, al-Sarraf R, Pierce SM & Koch CJ. (1992). Radioprotection of DNA in isolated nuclei by naturally occurring thiols at intermediate oxygen tension. Radiat Res 132, 94-104. Campbell RM & Scanes CG. (1995). Endocrine peptides ‘moonlighting’ as immune modulators: roles for somatostatin and GH-releasing factor. J Endocrinol 147, 383-396. Clark R. (1997). The somatogenic hormones and insulin-like growth factor-1: stimulators of lymphopoiesis and immune function. Endocr Rev 18, 157-179. Corden BJ, Schulman JD, Schneider JA & Thoene JG. (1981). Adverse reactions to oral cysteamine use in nephropathic cystinosis. Dev Pharmacol Ther 3, 25-30. da Silva VA, Zurbrugg RP, Lavanchy P, Blumberg A, Suter H, Wyss SR, Luthy CM & Oetliker OH. (1985). Longterm treatment of infantile nephropathic cystinosis with cysteamine. N Engl J Med 313, 1460-1463. Firth SM, McDougall F, McLachlan AJ & Baxter RC. (2002). Impaired blockade of insulin-like growth factor I (IGF-I)-induced hypoglycemia by IGF binding protein-3 analog with reduced ternary complex-forming ability. Endocrinology 143, 1669-1676. Gahl WA. (2003). Early oral cysteamine therapy for nephropathic cystinosis. Eur J Pediatr 162 Suppl 1, S38-41. Gahl WA, Bashan N, Tietze F, Bernardini I & Schulman JD. (1982). Cystine transport is defective in isolated leukocyte lysosomes from patients with cystinosis. Science 217, 1263-1265. Gahl WA, Ingelfinger J, Mohan P, Bernardini I, Hyman PE & Tangerman A. (1995). Intravenous cysteamine therapy for nephropathic cystinosis. Pediatr Res 38, 579-584. Giustina A & Veldhuis JD. (1998). Pathophysiology of the neuroregulation of growth hormone secretion in experimental animals and the human. Endocr Rev 19, 717-797. Goodman LS, Gilman A, Brunton LL, Lazo JS & Parker KL. (2005). Goodman & Gilman’s the pharmacological basis of therapeutics. McGraw-Hill, New York; London. Greenspan FS & Gardner DG. (2004). Basic & clinical endocrinology. Lange Medical Books/McGraw-Hill, New York; London. Harris AL. (1982). Paracetamol-induced acute renal failure. Br Med J (Clin Res Ed) 284, 825. Herrington J & Carter-Su C. (2001). Signaling pathways activated by the growth hormone receptor. Trends Endocrinol Metab 12, 252-257. Janecka A, Zubrzycka M & Janecki T. (2001). Somatostatin analogs. J Pept Res 58, 91-107. Johnston L, Vaughan L & Fox HM. (1981). Pantothenic acid content of human milk. Am J Clin Nutr 34, 2205-2209. Khomenko T, Deng X, Sandor Z, Tarnawski AS & Szabo S. (2004). Cysteamine alters redox state, HIF-1alpha transcriptional interactions and reduces duodenal mucosal oxygenation: novel insight into the mechanisms of duodenal ulceration. Biochem Biophys Res Commun 317, 121-127. Kleta R & Gahl WA. (2004). Pharmacological treatment of nephropathic cystinosis with cysteamine. Expert Opin Pharmacother 5, 2255-2262.

71


Koch CJ & Howell RL. (1981). Combined radiation-protective and radiation-sensitizing agents: II. Radiosensitivity of hypoxic or aerobic Chinese hamster fibroblasts in the presence of cysteamine and misonidazole: implications for the â&#x20AC;&#x153;oxygen effectâ&#x20AC;? (with appendix on calculation of dose-modifying factors). Radiat Res 87, 265-283. Kwok RP, Cameron JL, Faller DV & Fernstrom JD. (1992). Effects of cysteamine administration on somatostatin biosynthesis and levels in rat hypothalamus. Endocrinology 131, 2999-3009. LeRoith D, Yanowski J, Kaldjian EP, Jaffe ES, LeRoith T, Purdue K, Cooper BD, Pyle R & Adler W. (1996). The effects of growth hormone and insulin-like growth factor I on the immune system of aged female monkeys. Endocrinology 137, 1071-1079. Loftsson T & Brewster ME. (1996). Pharmaceutical applications of cyclodextrins. 1. Drug solubilization and stabilization. J Pharm Sci 85, 1017-1025. Luque RM, Rodriguez-Pacheco F, Tena-Sempere M, Gracia-Navarro F, Malagon MM & Castano JP. (2005). Differential contribution of nitric oxide and cGMP to the stimulatory effects of growth hormone-releasing hormone and low-concentration somatostatin on growth hormone release from somatotrophs. J Neuroendocrinol 17, 577-582. Lussier BT, French MB, Moor BC & Kraicer J. (1991a). Free intracellular Ca2+ concentration and growth hormone (GH) release from purified rat somatotrophs. III. Mechanism of action of GH-releasing factor and somatostatin. Endocrinology 128, 592-603. Lussier BT, French MB, Moore BC & Kraicer J. (1991b). Free intracellular Ca2+ concentration ([Ca2+]i) and growth hormone release from purified rat somatotrophs. I. GH-releasing factor-induced Ca2+ influx raises [Ca2+]i. Endocrinology 128, 570-582. Lussier BT, Wood DA, French MB, Moor BC & Kraicer J. (1991c). Free intracellular Ca2+ concentration ([Ca2+]i) and growth hormone release from purified rat somatotrophs. II. Somatostatin lowers [Ca2+]i by inhibiting Ca2+ influx. Endocrinology 128, 583-591. McMahon CD, Radcliff RP, Lookingland KJ & Tucker HA. (2001). Neuroregulation of growth hormone secretion in domestic animals. Domest Anim Endocrinol 20, 65-87. Moller LN, Stidsen CE, Hartmann B & Holst JJ. (2003). Somatostatin receptors. Biochim Biophys Acta 1616, 1-84. Monroe WE, Roth JA, Grier RL, Arp LH & Naylor PH. (1987). Effects of growth hormone on the adult canine thymus. Thymus 9, 173-187. Muller EE, Locatelli V & Cocchi D. (1999). Neuroendocrine control of growth hormone secretion. Physiol Rev 79, 511-607. Palkovits M, Brownstein MJ, Eiden LE, Beinfeld MC, Russell J, Arimura A & Szabo S. (1982). Selective depletion of somatostatin in rat brain by cysteamine. Brain Res 240, 178-180. Peterson TC & Brown IR. (1992). Cysteamine in combination with N-acetylcysteine prevents acetaminopheninduced hepatotoxicity. Can J Physiol Pharmacol 70, 20-28. Pisoni RL, Thoene JG & Christensen HN. (1985). Detection and characterization of carrier-mediated cationic amino acid transport in lysosomes of normal and cystinotic human fibroblasts. Role in therapeutic cystine removal? J Biol Chem 260, 4791-4798. Prescott LF, Sutherland GR, Park J, Smith IJ & Proudfoot AT. (1976). Cysteamine, methionine, and penicillamine in the treatment of paracetamol poisoning. Lancet 2, 109-113. Roberts JC, Koch KE, Detrick SR, Warters RL & Lubec G. (1995). Thiazolidine prodrugs of cysteamine and cysteine as radioprotective agents. Radiat Res 143, 203-213. Robishaw JD & Neely JR. (1985). Coenzyme A metabolism. Am J Physiol 248, E1-9. Sagar SM, Landry D, Millard WJ, Badger TM, Arnold MA & Martin JB. (1982). Depletion of somatostatin-like immunoreactivity in the rat central nervous system by cysteamine. J Neurosci 2, 225-231. Salam OM. (2002). Modulation of inflammatory paw oedema by cysteamine in the rat. Pharmacol Res 45, 275-284.

72


Salvador RA, Davison C & Smith PK. (1957). Metabolism of cysteamine. J Pharmacol Exp Ther 121, 258-265. Savino W, Smaniotto S, Binart N, Postel-Vinay MC & Dardenne M. (2003). In vivo effects of growth hormone on thymic cells. Ann N Y Acad Sci 992, 179-185. Scanes CG, Jeftinija S, Glavaski-Joksimovic A, Proudman J, Aramburo C & Anderson LL. (2005). The anterior pituitary gland: lessons from livestock. Domest Anim Endocrinol 29, 23-33. Schneider JA, Clark KF, Greene AA, Reisch JS, Markello TC, Gahl WA, Thoene JG, Noonan PK & Berry KA. (1995). Recent advances in the treatment of cystinosis. J Inherit Metab Dis 18, 387-397. Scott T & Eagleson M. (1988). Concise encyclopedia biochemistry. Walter de Gruyter, Berlin. Sumita K, Hattori N & Inagaki C. (2005). Effects of growth hormone on the differentiation of mouse B-lymphoid precursors. J Pharmacol Sci 97, 408-416. Szabo S & Reichlin S. (1981). Somatostatin in rat tissues is depleted by cysteamine administration. Endocrinology 109, 2255-2257. Szabo S, Reynolds ES & Unger SH. (1982). Structure-activity relations between alkyl nucleophilic chemicals causing duodenal ulcer and adrenocortical necrosis. J Pharmacol Exp Ther 223, 68-76. Thoene JG. (1995). Cystinosis. J Inherit Metab Dis 18, 380-386. Weckbecker G, Lewis I, Albert R, Schmid HA, Hoyer D & Bruns C. (2003). Opportunities in somatostatin research: biological, chemical and therapeutic aspects. Nat Rev Drug Discov 2, 999-1017. Widmann R & Sperk G. (1987). Cysteamine-induced decrease of somatostatin in rat brain synaptosomes in vitro. Endocrinology 121, 1383-1389. Wilmore BH, Cassidy PB, Warters RL & Roberts JC. (2001). Thiazolidine prodrugs as protective agents against gamma-radiation-induced toxicity and mutagenesis in V79 cells. J Med Chem 44, 2661-2666. Yoshihara F, Kojima M, Hosoda H, Nakazato M & Kangawa K. (2002). Ghrelin: a novel peptide for growth hormone release and feeding regulation. Curr Opin Clin Nutr Metab Care 5, 391-395. Yudkoff M, Foreman JW & Segal S. (1981a). Effects of cysteamine therapy in nephropathic cystinosis. N Engl J Med 304, 141-145. Yudkoff M, Nissim I, Schneider A & Segal S. (1981b). Cysteamine inhibition of [15N]-glycine turnover in cystinosis and of glycine cleavage system in vitro. Metabolism 30, 1096-1103. Yunker WK & Chang JP. (2004). Somatostatin-14 actions on dopamine- and pituitary adenylate cyclase-activating polypeptide-evoked Ca2+ signals and growth hormone secretion. J Neuroendocrinol 16, 684-694.

73


PART IV Financial Information on the Company FINANCIAL INFORMATION RELATING TO WALCOM GROUP LIMITED The consolidated historical financial information for the Company for the three years ended 31 December 2005 is set out in Section A of Part IV of this document. The consolidated financial information in respect of the three years ended 31 December 2005 does not constitute statutory accounts for each of the years. The Company has not published consolidated statutory accounts for the three years ended 31 December 2005. The non-statutory accounts of the Company, for the three years ended 31 December 2005, have been audited by Chu and Chu Certified Public Accountants (the Companyâ&#x20AC;&#x2122;s auditors) who have issued an unqualified audit report thereon. The Directors are required to prepare the financial information in a form consistent with that which will be adopted in the issuerâ&#x20AC;&#x2122;s next published annual financial statements having regard to the accounting standards and policies and legislation applicable to such annual financial statements. The financial information is required to give a true and fair view of the state of affairs of the Group for that period. In preparing that financial information, the Directors are required to: (a)

select suitable accounting policies and apply them consistently;

(b)

make judgements and estimates that are reasonable and prudent; and

(c)

prepare the financial information on the going concern basis unless it is inappropriate to presume that the Group will continue in business.

Section B of Part IV of this document sets out a report from Baker Tilly, the Reporting Accountants, required by Paragraph 20.1 of Annex I of the AIM Rules and is given for the purpose of complying with that paragraph and for no other purpose. The unaudited consolidated interim financial information for the Company for the six months ended 30 June 2006 is set out in Section C of Part IV of this document.

74


PART IV SECTION A – FINANCIAL INFORMATION ON THE COMPANY CONSOLIDATED INCOME STATEMENTS For the year ended 31 December Note

2003 HK$’000

2005 HK$’000

3,196 (2,636)

4,650 (3,008)

5,046 (2,595)

(9e)

560 18 56 (1,251) (3,559) (10,998) (1) (1,323)

1,642 – – (1,089) (3,387) (6,461) – (1,236)

2,451 108 – (1,121) (5,484) (8,738) (22) (1,977)

Loss before taxation Income taxes

(9) (10)

(16,498) –

(10,531) –

(14,783) –

Net loss for the year attributable to shareholders

(23)

(16,498)

(10,531)

(14,783)

Loss per share – Basic

(11)

HK$(429)

HK$(250)

HK$(330)

2003 HK$’000

2004 HK$’000

2005 HK$’000

2,155 – 2,089

1,703 – 4,229

1,225 49 4,927

4,244

5,932

6,201

810 690 291

551 2,312 11,325

559 2,293 430

1,791

14,188

3,282

– 8,884

– 5,320

11,460 6,916

8,884

5,320

18,376

Net current (liabilities)/assets

(7,093)

8,868

(15,094)

Total assets less current liabilities

(2,849)

14,800

(8,893)

11,920

8,970

(14,769)

5,830

(8,893)

1 (14,770)

1 5,829

1 (8,894)

(14,769)

5,830

(8,893)

Turnover Cost of sales Gross profit Other revenue Gain on disposal of a subsidiary Research and development expenses Selling and distribution expenses Administrative and other operating expenses Share of loss in associates Net finance costs

(7)

2004 HK$’000

(8) (25) (9b) (9c) (9d)

Turnover and operating losses are derived from continuing operations. CONSOLIDATED BALANCE SHEETS As at 31 December Note

Assets and liabilities Non-current assets Property, plant and equipment Interests in associates Patents

Current assets Inventories Trade and other receivables Cash and cash equivalents

Current liabilities Convertible loan notes Trade and other payables

Non-current liabilities Interest-bearing borrowings

(12) (14) (15)

(16) (17) (18)

(19) (20)

(21)

Net (liabilities)/assets Equity Capital and reserves Share Capital Reserves

(22) (23)

75


CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY For the year ended 31 December Share capital HK$’000

Share premium HK$’000

Merger reserve HK$’000

At 1/1/2003

1

18,899

Net loss for the year

Total recognised income and expense for the period

At 31/12/2003

Exchange Accumulated reserve losses HK$’000 HK$’000

Total HK$’000

(32)

(17,139)

1,729

(16,498)

(16,498)

(16,498)

(16,498)

1

18,899

(32)

(33,637)

(14,769)

Exchange differences on translation of financial information of overseas subsidiaries

8

Expenses incurred for shares issued Net loss for the year

– –

(1,138) –

– –

– –

– (10,531)

(1,138) (10,531)

Total recognised income and expense for the period

(1,138)

8

(10,531)

(11,661)

Equity raised by a subsidiary prior to Group reorganisation

4,953

4,953

Issue of shares

27,307

27,307

At 31/12/2004

1

26,169

23,852

Exchange differences on translation of financial information of overseas subsidiaries

60

Net loss for the year

(14,783)

(14,783)

Total recognised income and expense for the period

60

(14,783)

(14,723)

At 31/12/2005

1

26,169

23,852

36

(58,951)

(8,893)

76

(24)

(44,168)

8

5,830

60


CONSOLIDATED CASH FLOW STATEMENTS For the year ended 31 December Note

Cash flows from operating activities Cash used in operations Interest received Interest paid

(26)

Net cash used in operating activities

2003 HK$’000

2004 HK$’000

2005 HK$’000

(12,837) 12 –

(8,669) 54 –

(8,742) 40 (804)

(12,825)

(8,615)

(9,506)

Cash flows from investing activities Payment to acquire an associate Payments to acquire property, plant and equipment Sale proceeds from disposal of property, plant and equipment Payments to acquire patents Advances to associates

(1) (439)

– (368)

(71) (173)

– (1,528) (80)

– (2,314) (667)

1 (944) (1,038)

Net cash used in investing activities

(2,048)

(3,349)

(2,225)

Cash flows from financing activities Equity raised by a subsidiary prior to Group Reorganisation Issue of shares by the Company Expenses incurred for shares issued Proceeds from issue of convertible loan notes Advances from/(to) related companies Advances from Directors Repayment of advances from a related company Loans received from a related company Repayments of loans from a related company

– – – – 7,831 – – 1,000 –

4,953 27,307 (1,138) – (2,054) – (3,120) – (2,950)

– – – 3,900 (1,678) 954 – – (2,340)

Net cash from financing activities

8,831

22,998

(6,042)

11,034

Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year

(18)

77

836 (10,895)

6,333

291

11,325

291

11,325

430


NOTES TO THE FINANCIAL INFORMATION For the three years ended 31 December 2005 (1)

General The Company was incorporated in British Virgin Islands on 2 March 2004 with limited liability. The address of its registered office is P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands. The principal place of business of the Company is Unit 613, 6/F., West Wing Office Building, New World Centre, 20 Salisbury Road, Tsimshatsui, Kowloon. The principal activities of the Group during the year were the manufacture, distribution and selling of biochemical products in Hong Kong and the People’s Republic of China.

(2)

Adoption of International Financial Reporting Standards The Company’s consolidated financial information has been prepared in accordance with International Financial Reporting Standards (“IFRSs”), which collective terms includes all applicable individual International Financial Reporting Standards, International Accounting Standards (“IASs”) and Interpretations issued by the International Accounting Standards Board. IFRS 1 “First-time Adoption of International Financial Reporting Standards” has been applied in preparing this financial information. This consolidated financial information is the Group’s first financial information prepared in accordance with IFRSs. In preparing this financial information in conformity with IFRSs since the financial year ended 31 December 2003, the Group has adopted/early adopted all the new and revised IFRSs, which are effective for annual accounting periods beginning on or after 1 January 2006 and are relevant to its operations. The Group has not early adopted any new or revised IFRSs, which have been issued and are effective for annual accounting periods beginning subsequent to 1 January 2006, in the financial information for the year ended 31 December 2005. Up to the date of issue of the financial information, the IASB has issued the following new or revised IFRS which are not yet effective for the annual accounting period beginning on or after 1 January 2006 and which have not been adopted in the financial information: Effective for accounting period beginning on or after

IFRS 7, Financial instruments: disclosures

1 January 2007

IFRS 9, Operating segments

1 January 2009

IFRIC 7, Applying the restatement approach under IAS 29, Financial reporting in hyperinflationary economies

1 March 2006

IFRIC 8, Scope of IFRS 2

1 May 2006

IFRIC 9, Reassessment of embedded derivatives

1 June 2006

IFRIC 10, Interim Financial Reporting and Impairment IFRIC 11, Group and treasury share transactions

1 November 2006 1 March 2007

Amendment to IAS 1, Presentation of financial statements: capital disclosures

1 January 2007

The Group is in the process of making an assessment of what the impact of these amendments, new standards and new interpretations is expected to be in the period of initial application. Up to the date of issue of the financial information, the Group believes that the adoption of the above amendments, new standards and new interpretations is unlikely to have a significant impact on the Group’s results of operations and financial position. (3)

Critical accounting estimates and judgements The preparation of financial information in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. (a)

Recoverability of patents The carrying amount of patents representing mainly legal costs for application of patents in respect of the various uses of formulation of cysteamine in various regions is HK$4,927,386 (2003: HK$2,089,355, 2004: HK$4,228,725). The Group carried an impairment test based on a variety of assumptions of the possibilities that the pending patents could be circumvented and concluded that no

78


impairment was required. Should the pending patents be circumvented for example by an alternative formulation of cysteamine, then an impairment might arise and could have significant effect on the carrying amount of the patents stated at the balance sheet date. (b)

(4)

Realisation of convertible loan notes During the year, the Group initiated an exercise of Placing and Admission in order to finance the future expansion of operations. Prior to any new funds received from a successful Placing and Admission of the Group, short-term convertible loan notes as further detailed in note (19) to the financial information were raised to fund the daily business operations, the further development of the products and the preparation cost of the Placing and Admisison. The Group considered that it is highly likely that the Placing and Admission will take place in December 2006 and the short-term convertible loan notes were converted to shares on 30 November 2006 as described in Note (31) below. Management believes that the Group would not be in any predicament in seeking new funds for the future operations and expansion.

Group reorganisation Prior to 22 April 2004, Walcom (BVI) Company Limited (“WBVICL”) was the parent company of the Group. On 22 April 2004, pursuant to a group reorganisation scheme (“Group Reorganisation”) to rationalise the structure of the Group in preparation for the proposed subscription of shares from potential investors, 38,441 shares of HK$0.01 each were issued by the Company (being Walcom Group Limited) and were allotted and issued, all credited as fully paid, to the shareholders of WBVICL in proportion to their respective shareholdings in WBVICL in consideration and in exchange for the assets and liabilities of WBVICL including the entire issued share capital of Walcom International Limited (“WIL”). The Company thereby became the holding company of the Group. The Group resulting from the Group Reorganisation is regarded as a continuing entity. Accordingly, the consolidated financial information for the year ended 31 December 2005, together with the comparative figures, has been prepared as if the current Group structure had been in existence throughout the periods presented by using the principles of merger accounting.

(5)

Significant accounting policies The financial information has been prepared under the historical cost convention, except that, as disclosed in accounting policies below, certain financial assets and liabilities are stated at fair value. The accounting policies set out below have been applied consistently to all periods presented in the financial information and in preparing the Group’s opening IFRS balance sheet at the date of transition of IFRSs for the purposes of the transition to IFRSs as further explained in notes (2) and (4) to the financial information. (a)

Basis of preparation of financial information The financial information has been prepared on a going concern basis.

(b)

Basis of consolidation The consolidated financial information comprise the financial information of the Company and its subsidiaries made up to 31 December each year. An investment in a controlled subsidiary is consolidated into the consolidated financial information from the date that control commences until the date that control ceases. All intra-group transactions and balances, and any unrealised profits arising from intra-group transactions, are eliminated in full on consolidation. Unrealised losses resulting from intra-group transactions are eliminated in the same way as unrealised gains but only to the extent that there is no evidence of impairment.

(c)

Subsidiaries Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain benefits from their activities.

79


(d)

Associates An associate is an entity, in which the Group or Company has significant influence, but does not have control or joint control over its management, including participation in the financial and operating policy decisions. An investment in an associate is accounted for in the consolidated financial information using the equity method and is initially recorded at cost and adjusted thereafter for the post acquisition change in the Group’s share of the associate’s net assets. The consolidated income statement includes the Group’s share of the post-acquisition, post-tax results of the associates for the year, including any impairment loss on goodwill relating to the investment in associates recognised for the year. When the Group’s share of losses exceeds its interest in the associate, the Group’s interest is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate. For this purpose, the Group’s interest in the associate is the carrying amount of the investment under the equity method together with the Group’s long-term interests that in substance form part of the Group’s net investment in the associate. Unrealised profits and losses resulting from transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associate, except where unrealised losses provide evidence of an impairment of the asset transferred, in which case they are recognised immediately in the income statement.

(e)

Goodwill Goodwill represents the excess of the cost of a business combination or any investment in an associate over the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities. Goodwill is stated at cost less accumulated impairment losses. Goodwill is allocated to cashgenerating units and is tested annually for impairment as set out in note (5)(j) below. In respect of associates, the carrying amount of goodwill, if any, is included in the carrying amount of the interest in the associate. Any excess of the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of a business combination or an investment in an associate is recognised immediately in the income statement. On disposal of a cash generating unit or an associate during the year, any attributable amount of purchased goodwill is included in the calculation of the profit or loss on disposal.

(f)

Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses as stated in note (5)(j) below. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to working condition and location for its intended use. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. All repairs and maintenance are normally expensed in profit or loss in the period in which they are incurred. Depreciation is calculated to write off the cost of items of property, plant and equipment, less their estimated residual value, if any, over their estimated useful lives using the straight-line method. The annual rates used are as follows: Leasehold improvements Furniture and fixtures Office equipment Plant and machinery Motor vehicles

20 per cent. or over the lease terms, if shorter 20 per cent. 20 per cent. 10 per cent. to 30 per cent. 30 per cent.

The useful life of an asset and its residual value, if any, are reviewed and adjusted if appropriate, annually at the balance sheet date. Gains or losses arising from the retirement or disposal of an item of property, plant and equipment are determined as the difference between the net disposal proceeds and the carrying amount of the item and are recognised in the income statement on the date of retirement or disposal.

80


(g)

Construction in progress Construction in progress represents leasehold improvements under construction. It is included in property, plant and equipment and stated at cost less accumulated impairment losses as set out in note (5)(j) below. Cost comprises direct costs of construction during the period of construction. Capitalisation of these costs ceases and the construction in progress is transferred to the relevant class of property, plant and equipment when the asset is substantially ready for its intended use.

(h)

Research and development expenditure Expenditure on research activities is recognised as an expense in the period in which it is incurred. Expenditure on development activities is capitalised if the product or process is technically and commercially feasible and the Group has sufficient resources and the intention to complete development. The expenditure capitalised includes the costs of materials, direct labour and an appropriate proportion of overheads. Capitalised development costs are stated at cost less accumulated amortisation and accumulated impairment losses as set out in note (5)(j) below. Other development expenditure is recognised as an expense in the period in which it is incurred. Amortisation of development costs is charged to the income statement on a straight line basis over the estimated commercial lives of the underlying products.

(i)

Patents Patents are stated in the balance sheet at cost less accumulated amortisation and accumulated impairment losses as set out in note (5)(j) below. Amortisation of patents is charged to the income statement on a straight-line basis over the assetsâ&#x20AC;&#x2122; estimated useful lives unless such lives are indefinite. The patents with finite useful lives are amortised from the date they are available for use and their estimated useful lives are 20 years. Both the period and method of amortisation and any conclusion that the useful life of a patent is indefinite are reviewed annually at the balance sheet date.

(j)

Impairment of assets At each balance sheet date, an assessment is made of whether there is any indication that property, plant and equipment, investments in subsidiaries and associates, goodwill, capitalised development costs and patents have suffered an impairment loss. If such an indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. The recoverable amount is the higher of the fair value less costs to sell and value in use of an asset. The fair value less costs to sell is the amount that could be obtained from the sale of an asset in an armâ&#x20AC;&#x2122;s length transaction between knowledgeable and willing parties less the costs of disposal, while value in use is the present value of future cash flows expected to be derived from an asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independent (i.e. a cash-generating unit). If the recoverable amount of an asset or a cash-generating unit is estimated to be less than its carrying amount, the carrying amount of the asset or cash-generating unit is reduced to its recoverable amount. Impairment losses are recognised as an expense immediately. Where an impairment loss subsequently reverses, the carrying amount of the asset or cash-generating unit is increased to the revised estimate of its recoverable amount, which is restricted to the carrying amount that would have been determined had no impairment loss been recognised for the asset or cashgenerating unit in prior years. A reversal of an impairment loss is recognised as income immediately. An impairment loss in respect of goodwill is not reversed.

(k)

Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined on a weighted average cost method and includes all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Net realisable value is based on the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

81


(l)

Trade and other receivables Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less impairment losses. An impairment loss of receivables is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of receivables. The amount of the impairment loss is the difference between the assetâ&#x20AC;&#x2122;s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the impairment loss is recognised in the income statement.

(m) Trade and other payables Trade and other payables are initially recognised at fair value and thereafter stated at amortised cost using the effective interest method. (n)

Interest-bearing borrowings Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings using the effective interest method.

(o)

Convertible loan notes Loan notes issued by the Company on which conversion occurs on flotation are classified as financial liabilities. The convertible loan note is recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, the convertible loan note is stated at amortised cost with any difference between the proceeds of issue of the convertible loan note and the redemption value, taking into account the probability of the occurrence of the contingent settlement provision, being recognised in the income statement over the life of the contract using the effective interest method.

(p)

Income taxes Income taxes for the year comprise current tax and movements in deferred tax assets and liabilities. Current tax and movements in deferred tax assets and liabilities are recognised in the income statement except to the extent that they relate to items recognised directly in equity, in which case they are recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax assets and liabilities arise from deductible and taxable temporary differences respectively, being the differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax losses and unused tax credits. Generally all deferred tax liabilities, and all deferred tax assets to the extent that it is probable that future taxable profits will be available against which the asset can be utilised, are recognised. The amount of deferred tax recognised is measured based on the expected manner of realisation or settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. Deferred tax assets and liabilities are not discounted. The carrying amount of a deferred tax asset is reviewed at each balance sheet date and is reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow the related tax benefit to be utilised. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profits will be available. Current tax balances and deferred tax balances, and movements therein, are presented separately from each other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets against deferred tax liabilities if, and only if, the Group or the Company has the legally enforceable right to set off current tax assets against current tax liabilities. The principle of offsetting usually applies to income taxes levied by the same tax authority on the same taxable entity.

82


(q)

Translation of foreign currencies Items included in the financial information of each of the Group’s companies are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated financial information is presented in Hong Kong dollars (“HKD”), which is the Company’s functional and presentation currency. Foreign currency transactions during the year are translated into functional currency at the foreign exchange rates ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated into functional currency at the foreign exchange rates ruling at the balance sheet date. Exchange differences resulting from the settlement of transactions denominated in foreign currency are included in the income statement using exchange rates ruling on that date. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated into functional currency using the foreign exchange rates ruling at the transaction dates. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated into functional currency using the foreign exchange rates ruling at the dates the fair value was determined. The results of foreign operations are translated into presentation currency at the exchange rates approximating the foreign exchange rates ruling at the dates of the transactions. Balance sheet items are translated into presentation currency at the foreign exchange rates ruling at the balance sheet date. The resulting exchange differences are recognised directly in a separate component of equity. On disposal of a foreign operation, the cumulative amount of the exchange differences recognised in equity which related to that foreign operation is included in the calculation of the profit or loss on disposal.

(r)

Borrowing costs Borrowing costs are expensed in the income statement in the period in which they are incurred, except to the extent that they are capitalised as being directly attributable to the acquisition, construction or production of an asset which necessarily takes a substantial period of time to get ready for intended use or sale.

(s)

Provisions, contingent liabilities and contingent assets A provision is recognised when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of obligation can be made. Expenditures for which a provision has been recognised are charged against the related provision in the year in which the expenditures are incurred. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. Where the effect of the time value of money is material, the amount provided is the present value of the expenditures expected to be required to settle the obligation. Contingent liabilities are not recognised in the financial information. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. A contingent asset is not recognised in the consolidated financial information but disclosed when an inflow of economic benefits is probable.

(t)

Revenue recognition (i) Sales of goods Revenue is recognised when goods are delivered to the customers which is taken to be the point in time when the customer has accepted the goods and the related risks and rewards of ownership. Revenue excludes value added tax or other sales taxes and is after deduction of any trade discounts. (ii)

Interest income Interest income is recognised as it accrues using the effective interest method.

83


(u)

Operating leases Leases where substantially all the risks and rewards of ownership of assets remain with the lessor are accounted for as operating leases. Payments made under operating leases are accounted for in the income statement on a straight line basis over the periods of the respective leases.

(v)

Employee benefits Salaries, annual bonuses, paid annual leave, contributions to defined contribution plans and the cost of non-monetary benefits are accrued in the year in which the associated services are rendered by employees. Where payment or settlement is deferred and the effect would be material, these amounts are stated at their present values.

(w) Related parties Parties are considered to be related to the Group if the Group has the ability, directly or indirectly, to control the party or exercise significant influence over the party in making financial and operating decisions, or vice versa, or where the Group and the party are subject to common control or common significant influence. Related parties may be individuals (being members of key management personnel, significant shareholders and/or their close family members) or other entities and include entities which are under the significant influence of related parties of the Group where those parties are individuals, and post-employment benefit plans which are for the benefit of employees of the Group or of any entity that is a related party of the Group. (x)

Cash and cash equivalents Cash and cash equivalents comprise cash on hand, deposits with banks, and short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, having been within three months of maturity at acquisition. Bank overdrafts that are repayable on demand and form a integral part of the Groupâ&#x20AC;&#x2122;s cash management are also included as a component of cash and cash equivalents for the purpose of the cash flow statement.

(y)

Segments A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments. Segment revenue, expenses, results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis to that segment. For example, segment assets may include inventories, trade receivables and property, plant and equipment. Segment revenue, expenses, assets, and liabilities are determined before intra-group balances and intra-group transactions are eliminated as part of the consolidation process, except to the extent that such intragroup balances and transactions are between group entities within a single segment. Inter-segment pricing is based on similar terms as those available to other external parties. Segment capital expenditure is the total cost incurred during the period to acquire segment assets (both tangible and intangible) that are expected to be used for more than one period. Unallocated items mainly comprise financial and corporate assets, interest-bearing borrowings, tax balances, corporate and financing expenses.

84


(6)

Business and geographical segments (a) Business segments – primary reporting format The Group is principally engaged in the manufacture, distribution and sale of bio-chemical products. All of the Group’s products are of a similar nature and subject to similar risk and returns. Accordingly the Group’s activities are attributable to a single business segment. (b)

Geographical segments – secondary reporting format The Group’s operations are located in Hong Kong and PRC. The following table provides an analysis of the Group’s geographical segment information. (i)

Sales revenue by geographical location of customers 2003 HK$’000

2004 HK$’000

2005 HK$’000

2,478 318 – 384 16

2,703 1,438 – – 509

3,203 751 465 463 164

3,196

4,650

5,046

2003 HK$’000

2004 HK$’000

2005 HK$’000

2,806 3,229

16,092 4,028

7,009 2,474

6,035

20,120

9,483

2003 HK$’000

2004 HK$’000

2005 HK$’000

1,535 432

2,349 333

1,057 60

1,967

2,682

1,117

PRC Taiwan Thailand The Philippines Others

(ii)

Segment assets by geographical location of the assets

Hong Kong PRC

(iii) Capital additions by geographical location of the assets

Hong Kong PRC

(7)

Turnover Turnover represents the value of goods supplied to customers less returns, discounts, value added tax and sales taxes.

(8)

Other revenue

2003 HK$’000

2004 HK$’000

2005 HK$’000

Exchange gain Sundry income

18 –

– –

– 108

18

108

85


(9)

Loss before taxation Loss before taxation is arrived at after charging: (a)

2003 HK$’000

2004 HK$’000

2005 HK$’000

10 365

12 339

3 353

375 511 809 285 916 (260)

351 495 1,296 243 882 (259)

356 441 1,192 235 379 (8)

2,636

3,008

2,595

2003 HK$’000

2004 HK$’000

2005 HK$’000

Research and development expenses Employee benefit expenses: Contribution to defined contribution retirement plans Other employee benefit expenses

10 835

10 731

10 703

Depreciation Exchange loss Rent Others

845 83 – 41 282

741 85 1 39 223

713 54 2 39 313

1,251

1,089

1,121

2003 HK$’000

2004 HK$’000

2005 HK$’000

Selling and distribution expenses Employee benefit expenses: Contribution to defined contribution retirement plans Other employee benefit expenses

43 1,742

42 1,278

60 2,476

Amortisation of patents Trade receivables written off Depreciation Exchange loss Rent Others

1,785 82 28 19 – 34 1,611

1,320 175 33 21 – 34 1,804

2,536 245 471 71 5 44 2,112

3,559

3,387

5,484

Cost of sales Employee benefit expenses: Contribution to defined contribution retirement plans Other employee benefit expenses Depreciation Purchase of raw materials Rent Others Change in inventory level

(b)

(c)

86


(9)

Loss before taxation (continued) (d)

(e)

2003 HK$’000

2004 HK$’000

2005 HK$’000

Administrative and other operating expenses Employee benefit expenses: Contribution to defined contribution retirement plans Other employee benefit expenses

103 4,030

102 3,767

88 2,993

Amount due from a related company written off Auditors’ remuneration Depreciation Exchange loss Impairment loss on amount due from an associate Loss on disposal of property, plant and equipment Prelisting expenses on abortive Initial Public Offer Rent Others

4,133 – 197 263 – – 6 4,335 682 1,382

3,869 – 180 211 22 – 8 187 560 1,424

3,081 553 180 123 5 1,712 11 – 626 2,447

10,998

6,461

8,738

2003 HK$’000

2004 HK$’000

2005 HK$’000

Net finance costs Interest income Interest on convertible loan notes Interest on loans from a related company

(12) – 1,335

(54) – 1,290

(40) 1,213 804

1,323

1,236

1,977

(10) Income taxes The Company, its subsidiaries and an associate are subject to income tax on an entity basis on income arising in or derived from the tax jurisdiction in which they operate. Pursuant to the relevant laws and regulations in the People’s Republic of China (“PRC”), Shanghai Walcom Bio-Chem Co. Ltd. which is a subsidiary of the Company is exempted from PRC income tax for two years starting from the first profit-making year, followed by a 50 per cent. reduction for the next three years. No provision for PRC income tax has been made in the financial information as the subsidiary incurred operating losses during each of the three years ended 31 December 2005. Provision for Hong Kong profits tax has not been made as the companies in the Group incurred operating losses during each of the years ended 31 December 2005 Reconciliation between actual tax expense and accounting loss at applicable rate: 2003 HK$’000

Loss before taxation Notional tax credit on loss before taxation calculated at the applicable tax rate of 17.5 per cent. (2003: 16 per cent.) Tax effect of non-deductible expenses in determining taxable profit Tax effect of non-taxable revenue Tax effect of tax losses not recognised Tax effect of unrecognised temporary difference Effect of different tax rates of subsidiaries and associates operating in other jurisdictions Tax expense for the year

2004 HK$’000

(16,498)

(10,531)

(14,783)

(2,639)

(1,843)

(2,587)

956 (5) 1,598 55

325 (9) 1,449 14

896 (6) 1,576 61

35

64

60

Details of the deferred taxation are shown in note (24) to the financial information.

87

2005 HK$’000


(11) Loss per share Under merger accounting, the 38,441 ordinary shares issued by the Company to the shareholders of WBVICL to effect the group reorganisation described in note (4) are deemed to be issued on 1 January 2003 for the purpose of calculating the loss per share. The calculation of basic loss per share for the year was based on the loss attributable to shareholders of HK$14,783,189 (2003: HK$16,497,695, 2004: HK$10,530,739) and on the weighted average number of 44,851 (2003: 38,441, 2004: 42,203) shares in issue during the year. No diluted loss per share is presented as there were no dilutive potential shares during each of the three years ended 31 December 2005. (12) Property, plant and equipment Leasehold Furniture Improvements and fixtures HK$’000 HK$’000

Cost At 1/1/2003 Additions Disposal Transfer from construction in progress to leasehold improvements

795 9 –

77 – –

587

At 31/12/2003 Additions Disposal

1,391 – –

77 – –

At 31/12/2004 Additions Disposal Exchange realignment

1,391 95 (61) 37

At 31/12/2005

Office equipment HK$’000

Motor Construction vehicles in progress HK$’000 HK$’000

585 – –

518 77 (18)

1,166 57 –

585 234 –

– – –

3,737 368 (18)

77 1 – 1

577 77 (30) 9

1,223 – – 31

819 – – 7

– – – –

4,087 173 (91) 85

1,462

79

633

1,254

826

4,254

Accumulated depreciation At 1/1/2003 206 Provided for the year 307 Written back on disposal –

22 16 –

77 98 (3)

176 291 –

228 164 –

– – –

709 876 (3)

At 31/12/2003 Provided for the year Written back on disposal

513 259 –

38 15 –

172 106 (10)

467 303 –

392 129 –

– – –

1,582 812 (10)

At 31/12/2004 Provided for the year Written back on disposal Exchange realignment

772 277 (61) 15

53 15 – –

268 118 (18) 3

770 213 – 16

521 66 – 1

– – – –

2,384 689 (79) 35

1,003

68

371

999

588

3,029

Carrying amount At 31/12/2003

878

39

346

699

193

2,155

At 31/12/2004

619

24

309

453

298

1,703

At 31/12/2005

459

11

262

255

238

1,225

88

587 – –

Total HK$’000

897 269 –

At 31/12/2005

366 161 (9)

Plant and machinery HK$’000

(587)

3,307 439 (9)


(13) Interests in subsidiaries Particulars of the subsidiaries at the respective balance sheet dates are as follows:

Name of subsidiaries

Place of incorporation/ establishment

Walcom International Limited

British Virgin Islands

Shanghai Walcom Bio-Chem Co. Ltd.

Peopleâ&#x20AC;&#x2122;sRepublic of China

Walcom Bio-Chemicals Industrial Limited

Hong Kong

Walcom Nutritions International Limited Walcom Bio-Chemicals (USA) LLC

Hong Kong

Walcom Animal Science (I.P.) Limited Walcom Animal Science (I.P. 2) Limited Walcom Animal Science (I.P. 3) Limited Walcom Animal Science (I.P. 4) Limited Walcom Animal Science (I.P. 5) Limited

Delaware United States of America Republic of Mauritius Republic of Mauritius Republic of Mauritius Republic of Mauritius Republic of Mauritius

Issued and fully paid share capital/ Registered capital

4,000,000 ordinary shares of US$1 each US$1,500,000 registered capital

Percentage of equity interest attributable to the Group as at December 31 2003 2004 2005

Principal activity

100

100

100

Investment holding

100

100

100

100 ordinary 100 shares of HK$1 each 10,000 non-voting deferred shares of HK$1 each (Note) 2 ordinary shares 100 of HK$1 each US$100 100 registered capital

100

100

Manufacturing of chemical feed and additive products Investment holding and trading of chemical feed and additive products

100

100

100

100

1 ordinary share of US$1 each 1 ordinary share of US$1 each 1 ordinary share of US$1 each 1 ordinary share of US$1 each 1 ordinary share of US$1 each

100

100

100

Holding of patents

100

100

100

Holding of patents

100

100

100

Holding of patents

100

100

100

Holding of patents

100

100

100

Holding of patents

Investment holding Investment holding

Note: The deferred shares, which are not held by the Group, carry practically no rights to dividends nor to receive notice of nor attend or vote at any general meeting of the subsidiary nor to participate in any distribution or winding up.

89


(14) Interests in associates

2003 HK$’000

2004 HK$’000

2005 HK$’000

49

Share of net assets

Particulars of the associates at the respective balance sheet dates are as follows: Percentage of equity interest attributable to the Group as at December 31 2003 2004 2005

Place of incorporation and operation

Issued and fully paid share capital

Walcom Bio-Chemicals Philippines Inc.

The Philippines

Walcom Bio-Chem (Thailand) Company Limited

Thailand

PHP10,000 ordinary shares (PHP: Philippine Peso) THB1,000,000 ordinary shares (THB: Thai Baht)

Name of associate

Principal activity

40

40

40

Trading of chemical feed and additive products

37

Trading of chemical feed and additive products

The Group’s share of post-acquisition losses not recognised were HK$304,341 (2003: HK$37,373, 2004: HK$243,397). The accumulated post-acquisition losses not recognised were HK$585,110 (2003: HK$37,373, 2004: HK$280,770). The Group has no obligation in respect of these losses. Summary of management financial information on the associates: 2003 HK$’000

Assets Liabilities Equity Turnover Loss for the year

– (93) (93) – (95)

(15) Patents

2003 HK$’000

2004 HK$’000

73 (775) (702) – (608)

2005 HK$’000

1,627 (2,956) (1,328) 359 (821)

2004 HK$’000

2005 HK$’000

Cost At the beginning of the year Additions Exchange realignment Transfer out due to disposal of a subsidiary

717 1,528 – (48)

2,197 2,314 1 –

4,512 944 – –

At the end of the year

2,197

4,512

5,456

25 83

108 175

283 246

At the end of the year

108

283

529

Carrying amount At the beginning of the year

692

2,089

4,229

2,089

4,229

4,927

Accumulated amortisation At the beginning of the year Provided for the year

At the end of the year

90


(16) Inventories Raw materials Work in progress Finished goods

2003 HK$’000

2004 HK$’000

2005 HK$’000

109 – 701

220 – 331

193 35 331

810

551

559

The cost of inventories recognised as expenses and included in cost of sales amounted to HK$2,475,490 (2003: HK$2,609,213, 2004: HK$2,974,237). (17) Trade and other receivables Trade receivables from associates Other trade receivables Other amounts due from associates Deposits and prepayments Other receivables

2003 HK$’000

2004 HK$’000

2005 HK$’000

– 292 80 291 27

– 1,334 747 214 17

928 773 74 505 13

690

2,312

2,293

All of the trade and other receivables are expected to be recovered within one year and as the discounting effect will be immaterial, their carrying amounts are reasonable approximations of their fair values. The amounts due from associates are unsecured, interest free and with no fixed terms of repayment. Included in amounts due from associates, an impairment loss of HK$1,712,019 (2003: Nil; 2004: Nil) has been provided. (18) Cash and cash equivalents

2003 HK$’000

2004 HK$’000

2005 HK$’000

Cash and bank balances

291

11,325

430

(19) Convertible loan notes

2003 HK$’000

2004 HK$’000

2005 HK$’000

– –

– –

7,312 4,148

11,460

12 per cent. convertible loan notes 8 per cent. convertible loan notes

During 2005, the Company issued two types of convertible loan notes, namely 8 per cent. convertible loan note and 12 per cent. convertible loan notes. The 8 per cent. convertible loan note was issued on 29 September 2005 with the principal amount of US$500,000 (approximately HK$3,900,000). The note bears interest at the rate of 8 per cent. per annum and with a maturity date of 30 September 2006. The 12 per cent. convertible loan notes were originally issued by a related company of the Group who provided interest-bearing loans to the Group as stated in note (21) to the financial information. On 1 October 2005, the remaining principal balance of the convertible loan notes amounting US$850,000 (approximately HK$6,630,000) in total from this related company were assigned to the Company. Thus, pursuant to the terms of the convertible loan notes, these notes bear interest at the rate of 12 per cent. per annum and with a maturity date of 30 September 2006. All the loan notes were converted into Shares on 30 November 2006, as described in note 31 below.

91


(20) Trade and other payables Trade payables Accruals Amounts due to Directors Amount due to related companies Other payables

2003 HK$’000

2004 HK$’000

2005 HK$’000

542 1,661 – 6,640 41

488 2,003 – 2,757 72

407 3,866 954 1,633 56

8,884

5,320

6,916

All of the trade and other payables are expected to be settled within one year and as the discounting effect will be immaterial, their carrying amounts are reasonable approximations of their fair values. The amounts due to related parties are unsecured, interest-free and with no fixed terms of repayment. (21) Interest-bearing borrowings Unsecured loans from a related company with no fixed terms of repayment and interest-bearing at annual rate of: – 7 per cent. – 12 per cent.

2003 HK$’000

2004 HK$’000

2005 HK$’000

1,000 10,920

– 8,970

– –

11,920

8,970

As at 31 December 2003 and 2004, in the opinion of the Company’s Directors, the above loans were not expected to be settled within one year from the balance sheet date. (22) Share capital

Number of shares

HK$

Issued and fully paid shares of HK$0.01 each Issue of new shares as at 31/12/2002 and 31/12/2003

36,000

360

Issued and fully paid shares of HK$0.01 each Issue of new shares on incorporation and on 22/4/2004 (note i, ii and iii) Issue of new shares on 29/4/2004 (note iv) Issue of new shares on 26/10/2004 (note v)

38,442 5,493 916

384 55 9

At 31/12/2004 and 31/12/2005

44,851

448

(i)

On incorporation, the authorised share capital of the Company was HK$50,000 and one share of HK$0.01 each was allotted and issued nil paid (“Initial Share”).

(ii)

On 3 February 2004, new equity funds were raised by WBVICL, before the Group Reorganisation as set out in note (4) to the financial information, by the issue of 2,441 shares of HK$0.01 each at a subscription price of approximately HK$2,029 each for an aggregate amount of HK$4,952,789.

(iii) On 22 April 2004, 38,441 shares of HK$0.01 each of and in the Company were allotted and issued, all credited as fully paid, to the shareholders of WBVICL in proportion to their respective shareholdings in WBVICL and crediting as fully paid at par the Initial Share in consideration and in exchange for the assets and liabilities of WBVICL including the entire issued share capital of WIL. (iv) On 29 April 2004, the Company issued 5,493 shares of HK$0.01 each at a subscription price of HK$4,260.75 (equivalent to US$546.25) each for an aggregate consideration of approximately HK$23,404,300 to provide additional capital for expansion. The share capital account and the share premium account were credited by HK$55 and HK$23,404,245 respectively. (v)

On 26 October 2004, the Company issued 916 shares of HK$0.01 each at a subscription price of HK$4,260.75 (equivalent to US$546.25) each for an aggregate consideration of HK$3,902,847 to provide additional capital for expansion. The share capital account and the share premium account were credited by HK$9 and HK$3,902,838 respectively.

(vi) The shareholders are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. All shares rank equally with regard to the Company’s residual assets.

92


(23) Reserves

Share premium HK$’000

Merger reserve HK$’000

At 1/1/2003 Net loss for the year

– –

18,899 –

(32) –

(17,139) (16,498)

1,728 (16,498)

At 31/12/2003 Equity raised by a subsidiary prior to Group Reorganisation (note i) Issue of shares Expenses incurred for share issued Exchange differences on translation of financial information of overseas subsidiaries Net loss for the year

18,899

(32)

(33,637)

(14,770)

4,953 – –

– – –

– –

– –

8 –

– (10,531)

8 (10,531)

At 31/12/2004 Exchange differences on translation offinancial information of overseas subsidiaries Net loss for the year

26,169

23,852

(24)

(44,168)

5,829

– –

– –

60 –

– (14,783)

60 (14,783)

At 31/12/2005

26,169

23,852

36

(58,951)

(8,894)

(i)

– 27,307 (1,138)

Exchange Accumulated reserve losses HK$’000 HK$’000

– – –

Total HK$’000

4,953 27,307 (1,138)

On 3 February 2004, new equity funds were raised by WBVICL, before the Group Reorganisation as set out in note (4) to the financial information, by the issue of 2,441 shares of HK$0.01 each at a subscription price of approximately HK$2,029 each for an aggregate amount of HK$4,952,789.

(24) Deferred taxation Deferred tax assets are recognised for tax loss carried forward to the extent that the realisation of the related tax benefit through the future taxable profits is probable. At 31 December 2005, the Group did not recognise deferred tax assets of HK$7,356,000 (2003: HK$4,001,000, 2004: HK$5,757,000) approximately in respect of losses amounting to HK$43,395,000 (2003: HK$25,313,000, 2004: HK$33,956,000) approximately that can be carried forward against future taxable income. Losses of HK$1,556,000 approximately will expire at the end of year 2007, HK$3,397,000 approximately will expire at the end of year 2008, HK$2,596,000 approximately will expire at the year of 2009, HK$1,980,000 approximately will expire at the end of year 2010. Other losses may be carried forward indefinitely. At 31 December 2005, the Group did not have any material deferred tax liabilities. (25) Disposal of subsidiary (i) On 8 November 2003, the Group sold a subsidiary, Walcom Animal Science (I.P.6) Ltd. The fair value of assets disposed of and liabilities assumed at the date of disposal were as follows: 2003 HK$’000

Intangible assets Other payable

47 (75)

Gain on disposal

(28) 56

Deemed sale proceeds

28

93


(26) Reconciliation of loss before taxation to cash used in operations 2003 HK$’000

2004 HK$’000

2005 HK$’000

Loss before taxation Adjustments for: Depreciation Amortisation of patents Amount due from a related company written off Impairment loss on amount due from an associate Loss on disposal of property, plant and equipment Gain on disposal of a subsidiary Share of loss in associates Interest income Interest expenses Exchange realignment

(16,498)

(10,531)

(14,783)

876 83 – – 6 (56) 1 (12) 1,335 –

812 175 – – 8 – – (54) 1,290 8

689 245 553 1,712 11 – 22 (40) 2,017 10

Operating loss before working capital changes Decrease/(Increase) in inventories Decrease/(Increase) in other trade receivables (Increase) in trade receivables from associates Decrease/(Increase) in deposits and prepayments Decrease in other receivables Increase/(Decrease) in trade payables Increase in accruals Increase/(Decrease) in other payables

(14,265) 260 129 – 15 146 387 450 41

(8,292) 259 (1,042) – 77 10 (54) 342 31

(9,564) (8) 561 (928) (291) 4 (81) 1,581 (16)

Cash used in operations

(12,837)

(8,669)

(8,742)

(27) Commitments (a) Operating lease arrangements The Group as leasee The amount charged to the income statement in relation to non-cancellable operating lease is HK$944,577 (2004: HK$876,473: 2003: HK$1,041,361). At 31 December the Group had total future minimum lease payments in respect of property under noncancellable operating leases as follows:

Within one year In the second to fifth years inclusive

2003 HK$’000

2004 HK$’000

2005 HK$’000

876 157

809 –

907 433

1,033

809

1,340

The Group leases certain factory facilities and office premises under operating leases. The leases typically run for period of one to three years, with an option to renew the lease when all terms are renegotiated. None of these leases includes contingent rentals. (b)

Capital commitments outstanding at 31 December not provided for in the financial information were as follows:

Contracted for

94

2003 HK$’000

2004 HK$’000

2005 HK$’000

27


(28) Related party disclosures Transactions between the Company and its subsidiary which are related parties of the Company have been eliminated on consolidation are not disclosed in this note. The Directors considered the ultimate controlling party since date of incorporation to 31 December 2005 was Mr Francis Chi. The following were the material transactions carried out with related parties: (i)

Trading transactions

2003 HK$’000

2004 HK$’000

2005 HK$’000

Trade sale to associates

928

Consultancy fee paid to a shareholder

288

These transactions are carried out on the basis determined by the parties concerned. (ii)

Year-end balances arising from trading transactions Trade receivables from associates

(iii) Key management compensation Salaries Provident fund contribution Consultancy fee

2003 HK$’000

2004 HK$’000

2005 HK$’000

928

2003 HK$’000

2004 HK$’000

2005 HK$’000

2,101 24 707

2,101 24 707

2,131 24 707

2,832

2,832

2,862

(iv) Total loans/advances from other related companies, (being companies that are controlled by Mr Francis Chi, the Group’s ultimate controlling party): 2003 HK$’000

Beginning of the year Interest bearing borrowing from a related company Repayment of loans from a related company Interest-free advances from related companies Interest-free advances to related companies Interest charged by a related company Repayment of advances from a related company Sales proceeds agreed on disposal of a subsidiary Other payables of the disposed subsidiary transferred to a related company Interest-bearing borrowing swapping to convertible loan notes Amount written off

8,497 1,000 – 8,700 (869) 1,336 – (28)

2004 HK$’000

18,561 – (2,950) 89 (2,143) 1,290 (3,120) –

2005 HK$’000

11,727 – (2,340) 1,225 (3,707) 804 – –

(75)

– –

– –

18,561

11,727

1,632

2003 HK$’000

2004 HK$’000

2005 HK$’000

Beginning of the year Advances to associates Impairment loss

– 80 –

80 667 –

End of the year

80

747

73

(vi) Amount due to Directors

2003 HK$’000

2004 HK$’000

2005 HK$’000

Beginning of the year Advances from Directors

– –

– –

– 954

End of the year

954

End of the year (v)

Amount due from associates

– (6,630) 553

747 1,038 (1,712)

The terms of the loans/advances are set out in notes (17), (20) and (21) to the financial information.

95


(29) Contingent liabilities Since the financial year ended 31 December 2003, a subsidiary of the Company, Walcom Bio-Chemicals Industrial Limited (“WBCIL”), has been involved in a litigation regarding a dispute with one of its customers in Philippines who had filed a claim of PHP1,100,000 (approximately HK$160,000) against WBCIL. The litigation is still at the early stage of the proceedings and the outcomes cannot be determined at present. However, in the opinion of the Directors, the claim by the customer is unlikely to be successful and any potential liability of WBCIL would be minimal. (30) Financial risk management The Group has considered their mode of operation and summarised below the Group’s possible financial risk exposure and risk management policies: Credit risk The Group’s credit risk is primarily attributable to trade and other receivables. Management is responsible for monitoring the exposures to these credit risks on an ongoing basis so as to ensure that sale of goods are made to customers with an appropriate credit history. The maximum exposure to credit risk is represented by the carrying amount of each financial asset. The Group does not provide any other guarantees which would expose the Group to credit risk. Foreign currency risk The Group is exposed to foreign currency risk primarily through sales and purchases that are denominated in a currency other than the functional currency of the operations to which the Group relate. The currencies giving rise to this risk are primarily Renminbi and United States Dollars. The Group monitors its policy closely to reduce the foreign currency risk. Interest rate risk As the Group has no significant interest-bearing assets, the Group’s income and operating cash flows are substantially independent of changes in market interest rates. The Group’s interest rate risk arises from interest bearing borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. Group policy is to maintain all of its borrowings in fixed rate instruments. Liquidity risk The basis of preparation of the consolidated financial information is set out in note (5)(a) to the financial information.

96


(31) Subsequent events (a) Subsequent to the balance sheet date, the Company issued several 8 per cent. convertible loan notes with the principal amounts of US$1,650,000 (approximately HK$12,870,000) in total. One of the convertible loan notes of US$800,000 (approximately HK$6,240,000) originally matured on 31 May 2006, however it was extended to 30 September 2006 whereas the others matured on 30 September 2006. The loan notes were converted into Shares on 30 November 2006 as described at note 31(e) below. (b)

Pursuant to a deed of variation made on 17 February 2006, a 12 per cent. convertible loan note with the principal amount of US$100,000 (approximately HK$780,000) with a conversion price of 75 per cent. of the issue price of the Company’s Shares for the purpose of Placing and Admission was varied to be an 8 per cent. convertible loan note with a conversion price of 50 per cent. of the issue price of the Company’s Shares for the purpose of Placing and Admission.

(c)

On 19 September 2006, Walcom Bio-Chemicals Industrial Limited, a subsidiary of the Company, entered into a patent assignment agreement with its related companies to sell, assign and transfer the technology relating the Group’s existing inventions in the area of human application or consumption in consideration of the sum of US$200,000 (approximately HK$1,560,000). The related parties have licensed back to the Group the technology within the assigned patents, on an exclusive, perpetual and royalty free basis for use in the Group’s areas of business.

(d)

On 19 September 2006 the Group entered into a licence agreement with a related party for the use of technology within the Group’s portfolio of patents, for use by the related party on an exclusive basis in the field of human application of the relevant technology. The initial licence term is for 5 years and the consideration to be received is a 3 per cent royalty of net sales of the related party’s products.

(e)

Subsequent events that will impact the share capital of the Group are as follows: (i)

On 20 September 2006 the then existing authorised share capital of the Company of HK$50,000 divided into 5,000,000 Shares was increased to HK$1,500,000 by the creation of 145,000,000 shares of HK$0.01 each.

(ii)

Pursuant to a resolution passed at an EGM of the Company held on 20 September 2006, the sum of HK$523,848, standing to the credit of the Company’s share premium account, was capitalised on 30 November 2006 by the issue of Shares to the Shareholders of the Company appearing on the register of members on the date of the notice of such EGM, in proportion to their then existing shareholdings in the Company, credited as fully paid representing 1,168 Shares for each Share held by each member, (with the exception of Leadton, as holder of the subscriber share, who agreed to waive its entitlement in respect of that share, to receive 1,167 Shares in respect of another share held by it and otherwise to receive 1,168 Shares for each of the balance of the Shares so held by it).

(iii) On 30 November 2006, 7,989,506 Shares were allotted to the holders of convertible loan notes, referred to in notes 19 and 31(a) and 31(b) above. (f)

On 15 December 2006, the Company adopted a Warrant instrument constituting 8,107,320 Warrants. Each Warrant entitles the holder subscribe for one new Share at the Placing Price, exercisable for a period of up to five years from the date of Admission.

(g)

On 20 September 2006, the Company approved the Share Option Plan and the Share Award Plan, which are described in paragraphs 11 and 12 of Part VI of the Admission Document.

97


PART IV SECTION B – ACCOUNTANTS’ REPORT The following is the full text of a report on Walcom Group Limited from Baker Tilly, the Reporting Accountants, to the Directors of Walcom Group Limited.

2 Bloomsbury Street London WC1B 3ST www.bakertilly.co.uk The Directors Walcom Group Limited Room 613 6/F West Wing New World Centre 20 Salisbury Road Tsimshatsui Kowloon Hong Kong

15 December 2006

Dear Sirs

Walcom Group Limited (“the Company”)

together with its subsidiaries (“the Group”) We report on the financial information set out in Part IV of Section A of this document. This financial information has been prepared for inclusion in the Company’s Admission Document dated 15 December 2006 (“Admission Document”) on the basis of the accounting policies set out in note 5. This report is required by Paragraph 20.1 of Annex I of the Prospectus Rules as applied by part (a) of Schedule Two to the AIM Rules and is given for the purpose of complying with that paragraph and for no other purpose. Save for any responsibility arising under paragraph 20.1 of Annex I of the Prospectus Rules as applied by part (a) of Schedule Two to the AIM Rules to any person as and to the extent there provided, to the fullest extent permitted by law we do not assume any responsibility and will not accept any liability to any other person for any loss suffered by any such other person as a result of, arising out of, or in connection with this report or our statement, required by and given solely for the purposes of complying with paragraph 20.1 of Annex I of the Prospectus Rules as applied by part (a) of Schedule Two to the AIM Rules, consenting to its inclusion in the Admission Document. Responsibilities As described in Section A of Part IV of this document the directors of the Company are responsible for preparing the financial information on the basis of preparation set out in note 5 to the financial information and in accordance with International Financial Reporting Standards (“IFRS”). It is our responsibility to form an opinion as to whether the financial information gives a true and fair view, for the purposes of the Admission Document, and to report our opinion to you Basis of opinion We conducted our work in accordance with the Standards for Investment Reporting issued by the Auditing Practices Board in the United Kingdom. Our work included an assessment of evidence relevant to the amounts and disclosures in the financial information. It also included an assessment of significant estimates and judgments made by those responsible for the preparation of the financial information and whether the accounting policies are appropriate to the entity’s circumstances, consistently applied and adequately disclosed. We planned and performed our work so as to obtain all the information and explanations we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial information is free from material misstatement whether caused by fraud or other irregularity or error.

98


Opinion In our opinion, the financial information gives, for the purposes of the Admission Document, a true and fair view of the state of affairs of the Group as at the dates stated and of its profits, cash flows and changes in equity for the periods then ended in accordance with the basis of preparation set out in note 5 and in accordance with International Financial Reporting Standards as described in note 2. Declaration For the purposes of part (a) of Schedule Two to the AIM Rules we are responsible for this report as part of the Admission Document and declare that we have taken all reasonable care to ensure that the information contained in this report is, to the best of our knowledge, in accordance with the facts and contains no omission likely to affect its import. Yours faithfully

Baker Tilly Regulated for audit work by the Institute of Chartered Accountants of Scotland

99


PART IV SECTION C – UNAUDITED INTERIM FINANCIAL INFORMATION FOR THE SIX MONTHS ENDED 30 JUNE 2006 UNAUDTED CONSOLIDATED INCOME STATEMENT For the six months ended 30 June 2006 2005 (Unaudited) HK$’000

2006 (Unaudited) HK$’000

Turnover Cost of sales

1,981 (1,207)

4,832 (1,693)

Gross profit Research and development expenses Selling and distribution expenses Administrative and other operating expenses Net finance costs

774 (563) (2,376) (2,801) (502)

3,139 (693) (2,659) (3,809) (7,762)

Loss before taxation Income taxes

(5,468) –

(11,784) –

Net loss for the year attributable to shareholders

(5,468)

(11,784)

HK$(122)

HK$(263)

Loss per share – Basic Turnover and operating losses are derived from continuing operations. UNAUDITED CONSOLIDATED BALANCE SHEET As at 30 June 2006

Note

Assets and liabilities Non-current assets Property, plant and equipment Interests in associates Patents

As at 31/12/2005 30/06/2006 (Audited) (Unaudited) HK$’000 HK$’000

1,225 49 4,927

1,108 49 5,316

6,201

6,473

559 2,293 430

547 6,116 2,297

3,282

8,960

11,460 6,916

31,187 4,922

18,376

36,109

(15,094)

(27,149)

Net liabilities

(8,893)

(20,676)

Equity Capital and reserves Share capital Reserves

1 (8,894)

1 (20,677)

(8,893)

(20,676)

Current assets Inventories Trade and other receivables Cash and cash equivalents Current liabilities Convertible loan notes Trade and other payables

(2)

Net current liabilities

100


UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the six months ended 30 June 2006 Share capital HK$’000

Share premium HK$’000

Merger reserve HK$’000

Exchange Accumulated reserve losses HK$’000 HK$’000

At 31/12/05 and 01/01/2006

1

26,169

23,852

36

(58,951)

(8,893)

Exchange differences on translation of financial information of overseas subsidiaries Net loss for the period

– –

– –

– –

1 –

– (11,784)

1 (11,784)

Total recognised income and expenses for the period

1

(11,784)

(11,783)

At 30/06/2006

1

26,169

23,852

37

(70,735)

(20,676)

Total HK$’000

UNAUDITED CONSOLIDATED CASH FLOW STATEMENT For the six months ended 30 June 2006 2005 (Unaudited) HK$’000

2006 (Unaudited) HK$’000

(4,805) 32 (533)

(8,126) 41 (555)

(5,306)

(8,640)

(62) (322) (638)

(152) (536) (622)

Net cash used in investing activities

(1,022)

(1,310)

Cash flows from financing activities Proceeds from issue of convertible loan notes Advances to related companies Repayment of advance to Directors

– (1,896) –

12,870 (100) (953)

Net cash (used in)/generated from financing activities

(1,896)

11,817

Net (decrease)/increase in cash and cash equivalents

(8,224)

1,867

Cash and cash equivalents at the beginning of the period

11,325

430

3,101

2,297

Note

Cash flows from operating activities Cash used in operations Interest received Interest paid

(1)

Net cash used in operating activities Cash flows from investing activities Payment to acquire property, plant and equipment Payments to acquire patents Advances to associates

Cash and cash equivalents at the end of the period

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NOTES TO THE UNAUDTED INTERIM FINANCIAL INFORMATION (1) Reconciliation of loss before taxation to cash used in operations For the six months ended 30/06/2005 30/06/2006 HK$’000 HK$’000

(2)

Loss before taxation Adjustment for: Depreciation Amortisation of patents Loss on disposal of property, plant and equipment Interest income Interest expenses Exchange realignment

(5,468)

(11,784)

384 118 4 (32) 533 (1)

270 147 – (40) 7,802 –

Operating loss before working capital changes (Increase)/decrease in inventory Decrease/(increase) in other trade receivables Increase in trade receivable from associates Decrease/(increase) in deposits and prepayments Decrease in other receivables Increase in trade payables Decrease in accruals (Decrease)/ increase in tax payables

(4,462) (232) 311 (75) 5 – 80 (404) (28)

(3,605) 12 (696) (540) (1,701) (265) 159 (1,493) 3

Cash used in operating

(4,805)

(8,126)

Convertible loan notes During the period, the Company issued several 8 per cent. convertible loan notes with the principal amounts of US$1,650,000 (approximately HK$12,870,000) in total. One of the convertible loan notes of US$800,000 (approximately HK$6,240,000) originally matured on May 31, 2006, however it was extended to September 30, 2006 whereas the others matured on September 30, 2006. Pursuant to a deed of variation made on February 17, 2006, a 12 per cent. convertible loan note with the principal amount of US$100,000 (approximately HK$780,000) with a conversion price of 75 per cent. of the issue price of the Company’s Shares for the purpose of Placing and Admission was varied to be an 8 per cent. convertible loan note with a conversion price of 50 per cent. of the issue price of the Company’s Shares for the purpose of Placing and Admission. The loan notes were converted into Shares on 30 November 2006, as described in note 3 below.

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(3)

Subsequent events (a) On 19 September 2006, Walcom Bio-Chemicals Industrial Limited, a subsidiary of the Company, entered into a patent assignment agreement with its related companies to sell, assign and transfer the technology relating the Group’s existing inventions in the area of human application or consumption in consideration of the sum of US$200,000 (approximately HK$1,560,000). The related parties have licensed back to the Group the technology within the assigned patents, on an exclusive, perpetual and royalty free basis for use in the Group’s areas of business. (b)

On 19 September 2006 the Group entered into a license agreement with a related party for the use of technology within the Group’s portfolio of patents, for use by the related party on an exclusive basis in the field of human application of the relevant technology. The initial licence term is for 5 years and the consideration to be received is a 3 per cent royalty of net sales of the related party’s products.

(c)

Subsequent events that will impact the share capital of the Group are as follows: (i)

On 20 September 2006 the then existing authorised share capital of the Company of HK$50,000 divided into 5,000,000 Shares was increased to HK$1,500,000 by the creation of 150,000,000 shares of HK$0.01 each.

(ii)

Pursuant to a resolution passed at an EGM of the Company held on 20 September 2006, the sum of HK$523,848, standing to the credit of the Company’s share premium account, was capitalised on 30 November 2006 by the issue of Shares to the Shareholders of the Company appearing on the register of members on the date of the notice of such EGM, in proportion to their then existing shareholdings in the Company, credited as fully paid representing 1,168 Shares for each Share held by each member, (with the exception of Leadton, as holder of the subscriber share, who agreed to waive its entitlement in respect of that share, to receive 1,167 Shares in respect of another share held by it and otherwise to receive 1,168 Shares for each of the balance of the Shares so held by it).

(iii) On 30 November 2006, 7,989,506 Shares were allotted to the holders of convertible loan notes. (d)

On 15 December 2006, the Company adopted a Warrant instrument constituting 8,107,320 Warrants. Each Warrant entitles the holder subscribe for one new Share at the Placing Price, exercisable for a period of up to five years from the date of Admission.

(e)

On 20 September 2006, the Company approved the Share Option Plan and the Share Award Plan, which are described in paragraphs 11 and 12 of Part VI of the Admission Document.

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PART V Unaudited Pro Forma Statement of Net Assets of the Group SECTION A – UNAUDITED PRO FORMA STATEMENT OF NET ASSETS OF THE GROUP The following unaudited pro forma statement of net assets of the Group has been produced to illustrate the impact of the Placing which will have occurred since 31 December 2005 as if it had occurred on 31 December 2005. The unaudited pro forma financial information is based on: (i)

the financial information relating to the Group as at 31 December 2005 extracted from the audited financial information as at 31 December 2005 as set out in Section A of Part IV of this document;

(ii)

the estimated impact of the conversion of loan notes into equity in the Company; and

(iii) the estimated net proceeds of the Placing adjusted for the matters set out below: The unaudited pro forma statement of net assets has been prepared for illustrative purposes only and, because of its nature, may not give a true picture of the financial position or results of the Group.

Assets Non-current assets Property, plant and equipment Interest in associates Patents Current assets Inventories Trade and other receivables Cash and cash equivalents

Total assets

Net assets of the Group at 31 December 2005 HK$’000

Pro forma net assets of the Group following The Placing the Placing HK$’000 HK$’000

Conversion of loan notes HK$’000

1,225 49 4,927

– – –

– – –

1,225 49 4,927

6,201

6,201

559 2,293 430

– – –

– – 15,373

559 2,293 15,803

3,282

15,373

18,655

9,483

15,373

24,856

Current liabilities Convertible loan notes Trade and other payables

11,460 6,916

(11,460) –

– –

– 6,916

Total liabilities

18,376

(11,460)

6,916

(15,094)

11,460

15,373

11,739

(8,893)

11,460

15,373

17,940

Net current (liabilities)/assets Net (liabilities)/assets

Notes to the unaudited pro forma financial information 1. The unaudited pro forma statement of net assets of the Group is shown as if convertible loan notes (as described in note 19 of the financial information set out in Section A of Part IV of this document) had been converted into equity in the Company on 31 December 2005. 2.

The unaudited pro forma statement of net assets of the Group is shown as if the Placing had taken place on 31 December 2005. The proforma assumes that the net proceeds of the Placing, receivable by the Company, will amount to approximately £1.01 million net of costs amounting to approximately £560,000 (inclusive of VAT). The net proceeds amount to approximately HK$15.373 million.

3.

No adjustment has been made for any movement in net assets of the Group since 31 December 2005.

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PART V SECTION B – ACCOUNTANTS’ REPORT ON THE UNAUDITED PRO FORMA STATEMENT OF NET ASSETS OF THE GROUP

2 Bloomsbury Street London WC1B 3ST www.bakertilly.co.uk The Directors Walcom Group Limited PO Box 957 Offshore Incorporations Centre Road Town Tortola British Virgin Islands

15 December 2006

Dear Sirs

Walcom Group Limited (“the Company”)

and its subsidiary undertakings (“the Group”) We report on the Company’s unaudited Pro Forma Statement of Net Assets of the Group as at 31 December 2005 (“Pro-forma Statement of Net Assets”), as set out in Part V of the Company’s AIM Admission Document (“Document”). The Pro Forma Statement of Net Assets has been prepared on the basis described in Part V for illustrative purposes only, to provide information about how the placing of new ordinary shares in the Company (“Placing”) and conversion of loan notes into new ordinary shares might have affected the Pro Forma Statement of Net Assets as if they had occurred on 31 December 2005, on the basis of the accounting policies to be adopted by the Company in preparing its financial statements for the year ending 31 December 2006. This report is required by paragraph 20.2 of Annex I of the Prospectus Rules as applied by part (a) of Schedule Two to the AIM Rules and is given for the purpose of complying with that paragraph and for no other purpose. Save for any responsibility arising under paragraph 20.2 of Annex I of the Prospectus Rules if it had been applied by part (a) of Schedule Two to the AIM Rules to any person as and to the extent there provided, to the fullest extent permitted by law we do not assume any responsibility and will not accept any liability to any other person for any loss suffered by any such other person as a result of, arising out of, or in connection with this report or our statement, and given solely for the purposes of complying with paragraph 20.2 of Annex I of the Prospectus Rules as applied by part (a) of Schedule Two to the AIM Rules, consenting to its inclusion in the Admission Document. Responsibilities It is the responsibility of the directors of Company to prepare the Pro Forma Statement of Net Assets in accordance with paragraph 20.2 of Annex I of the Prospectus Rules as applied by part (a) of Schedule Two to the AIM Rules. It is our responsibility to form an opinion, as required by paragraph 7 of Annex II of the Prospectus Rules as applied by part (a) of Schedule Two to the AIM Rules, as to the proper compilation of the Pro Forma Statement of Net Assets and to report that opinion to you. In providing this opinion we are not updating or refreshing any reports or opinions previously made by us on any financial information used in compilation of the Pro Forma Statement of Net Assets, nor do we accept responsibility for such reports or opinions beyond that owed to those to whom those reports or opinions were addressed by us at the dates of their issue. Basis of Opinion We conducted our work in accordance with the Standards for Investment Reporting issued by the Auditing Practices Board in the United Kingdom. The work that we performed for the purpose of making this report, which involved no independent examination of any of the underlying financial information, consisted primarily of comparing the unadjusted financial information with the source documents, considering the evidence supporting the adjustments and discussing the Pro Forma Statement of Net Assets with the directors of the Company.

105


We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with reasonable assurance that the Pro Forma Statement of Net Assets has been properly compiled on the basis stated and that such basis is consistent with the accounting policies of the Company. Opinion In our opinion: (a)

the Pro Forma Statement of Net Assets has been properly compiled on the basis stated; and

(b)

such basis is consistent with the accounting policies of the Company.

Declaration For the purposes of part (a) of Schedule Two to the AIM rules we are responsible for this report as part of the Admission Document and declare that we have taken all reasonable care to ensure that the information contained in this report is, to the best of our knowledge, in accordance with the facts and contains no omission likely to affect its import. Yours faithfully

Baker Tilly Regulated for audit work by the Institute of Chartered Accountants of Scotland

106


PART VI Additional Information 1.

Responsibility The Directors accept responsibility for the information contained in this document. To the best of the knowledge and belief of the Directors (who have taken all reasonable care to ensure that such is the case), the information contained in this document is in accordance with the facts and does not omit anything likely to affect the import of such information.

2. 2.1

The Company The Company was incorporated in the BVI on 2 March 2004 under the International Business Companies Act with registered number 584063 and will automatically be re-registered under the Companies Act on 1 January 2007. The liability of the members of the Company is limited. The Companyâ&#x20AC;&#x2122;s principal activity is to act as a holding company in respect of the Group.

2.2

The Company currently has ten wholly owned subsidiaries: Name

Place of registration

Walcom International Limited Walcom Bio-Chemicals Industrial Limited Shanghai Walcom Bio-Chem., Co Ltd Walcom Bio-Chemicals (USA) LLC Walcom Nutritions International Limited Walcom Animal Science (I.P.) Limited Walcom Animal Science (I.P.2) Limited Walcom Animal Science (I.P.3) Limited Walcom Animal Science (I.P.4) Limited Walcom Animal Science (I.P.5) Limited

BVI Hong Kong PRC Delaware, USA Hong Kong Republic of Mauritius Republic of Mauritius Republic of Mauritius Republic of Mauritius Republic of Mauritius

The Company also has two associated companies, namely, Walcom Bio-Chemicals Philippines, Inc. (incorporated in the Philippines) and Walcom Bio-Chem (Thailand) Co., Ltd (incorporated in Thailand). 2.3

The registered office of the Company is at P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands and the principal place of business of the Company is at Unit 613, 6/F West Wing Office Building, New World Centre, 20 Salisbury Road, Tsimshatsui, Kowloon, Hong Kong (Telephone number: +852 24 94 01 33).

2.4

The principal legislation under which the Company operates is the International Business Companies Act and will, from 1 January 2007, be the Companies Act of the British Virgin Islands and regulations made thereunder.

3. 3.1

Share Capital The authorised and issued share capital of the Company, which has been created under BVI law, at the date of this document and as it will be following Admission is as follows: At present Number of Nominal Shares Value

Authorised share capital Issued and fully paid up share capital

150,000,000 60,419,156

HK$0.01 HK$0.01

Following Admission Number of Nominal Shares Value

150,000,000 64,910,891

HK$0.01 HK$0.01

3.2

At the date of its incorporation, the authorised share capital of the Company was HK$50,000 divided into 5,000,000 ordinary shares of HK$0.01 each of which one subscriber share was in issue, fully paid.

3.3

Since the date of incorporation, up to the date of this document there have been the following changes in the authorised and issued share capital of the Company: (a)

On 8 March 2004, one Share was allotted for cash at par.

(b)

On 22 April 2004, 38,441 Shares were allotted in consideration of the Company acquiring the entire issued capital of WIL.

(c)

On 29 April 2004, 5,493 Shares were allotted at US$546.25 per Share.

(d)

On 26 October 2004, 916 Shares were allotted at US$546.25 per Share.

107


(e)

Pursuant to a resolution passed at an EGM of the Company held on 20 September 2006 the then existing authorised share capital of the Company of HK$50,000 divided into 5,000,000 Shares was increased to HK$1,500,000 by the creation of 145,000,000 shares of HK$0.01 each.

(f)

Pursuant to a resolution passed at an EGM of the Company held on 20 September 2006, the sum of HK$523,848, standing to the credit of the Company’s share premium account, was capitalised on 30 November 2006 by the issue of Shares to the Shareholders of the Company appearing on the register of members on the date of the notice of such EGM, in proportion to their then existing shareholdings in the Company, credited as fully paid representing 1,168 Shares for each Share held by each member (with the exception of Leadton, as holder of the subscriber share, who agreed to waive its entitlement in respect of that share, to receive 1,167 Shares in respect of another share held by it and otherwise to receive 1,168 Shares for each of the balance of the Shares so held by it).

(g)

On 30 November 2006, 7,989,506 Shares were allotted to the holders of the convertible loan notes referred to in paragraph 4 below.

3.4

During the period covered by the Financial Information contained in Section A of Part IV of this document, more than 10 per cent. of the Company’s issued share capital has been allotted other than for cash. As set out in paragraph 3.3(b) above, 38,441 Shares (representing approximately 86 per cent. of the issued share capital immediately prior to the Capitalisation) were allotted in consideration for the acquisition of Walcom International.

3.5

Warrants will remain outstanding as at the date of Admission which entitle the holders (being Vuna, John East & Partners, King & Shaxson and certain of the existing Shareholders) to subscribe for a total of 8,107,320 Shares (representing approximately 12.49 per cent. of the issued share capital of the Company on Admission) at the Placing Price, exercisable for a period of five years (in respect of Vuna, John East & Partners and the relevant Shareholders) and two years (in respect of King & Shaxson) from the date of Admission. Details of the Warrant instrument are set out in paragraph 13 of this Part VI.

3.6

Save as referred to in paragraph 3.5 above and paragraph 11 and 13 of this Part VI, no share or loan capital of the Company is under option or has been agreed, conditionally or unconditionally, to be put under option and no share capital of the Company is to be issued to capitalise outstanding fees owed by the Company.

3.7

The Placing Shares will rank pari passu in all respects with the existing Shares, including the right to receive all dividends and other distributions declared, made or paid after Admission on the issued share capital.

4. Convertible loan notes The Company issued convertible loan notes at 12 per cent. and eight per cent., details of which are set out below. All the loan notes were converted into 7,989,506 Shares on 30 November 2006.

Noteholder

Associated Equipment Pte Ltd Mercator Ltd TAN Fook Ming Benedict CHAN Kin-Meng CHAN Wing-Cheng LU Chuang, Su-Kwang lll Tan Lai Suo (a PRC national) AOK International Holding Ltd* Bioglory International Limited* Longain Trading Limited* Morval Bank & Trust Cayman Ltd* BNP Paribas (Suisse) SA* Mirage Asia Investment Limited* Silvia Albertoli* Benjamin Pierre Zumstein* BSI, SA*

Principal value (US$)

Interest Payable per annum

Conversion rate (percentage of Placing Price)

100,000 100,000 100,000 100,000 200,000 250,000 500,000 800,000 350,000 125,000 15,000 160,000 50,000 5,000 5,000 140,000

12 per cent. 12 per cent. 12 per cent. 8 per cent. 12 per cent. 12 per cent. 8 per cent. 8 per cent. 8 per cent. 8 per cent. 8 per cent. 8 per cent. 8 per cent. 8 per cent. 8 per cent. 8 per cent.

75 75 75 50 75 75 80 50 50 50 50 50 50 50 50 50

Note: 1. Any outstanding interest was also converted into new Shares at the same rate as at the date of conversion. 2. All interest was paid up to 30 June 2006 (save for those denoted by * which were issued in 2006). 3. The conversion formula was as follows: No. of conversion shares = Y x £ /US$ exchange rate quoted by HSBC on the Conversion Date No. of conversion shares = Conversion Price “Y” is the whole principal amount (in US$) of the convertible note and unpaid accrued interest thereon to be converted into conversion shares

108


5. Memorandum and Articles of Association The objects of the Company as set out in clause 5 of its Memorandum of Association are unrestricted and the Company shall have full power and authority to carry out any object not prohibited by the Companies Act and other laws of the BVI and, subject to the limitations set out in clause 6 of its Memorandum of Association, the Company has full power and authority to carry out any object not prohibited by the Companies Act or any law of the BVI. The Articles of Association of the Company (the â&#x20AC;&#x2DC;Articlesâ&#x20AC;&#x2122;), amended in anticipation of the Companyâ&#x20AC;&#x2122;s automatic re-registration under the Companies Act on 1 January 2007, contain, inter alia, provisions to the following effect: (i)

Distributions Subject to the provisions of the Companies Act, the Company may authorise a distribution by the Company at a time, and of an amount and to any members they think fit, if the Directors are satisfied, on reasonable grounds, that the Company will, immediately after the payment of the dividend, satisfy the solvency test as prescribed by the Companies Act. The directors may, before recommending any distribution, set aside out of the profits of the Company such sums as they think proper as a reserve fund, and may at their discretion, either be employed in the business of the Company or be invested in such investments as the Directors may from time to time think fit. Notice of any distribution that may have been declared shall be given to each member in the manner set out in the Articles and all distributions unclaimed for three years after having been declared may be forfeited by the directors for the benefit of the Company.

(ii)

Distribution of Assets on Winding Up The Company may be voluntarily liquidated under the Companies Act if it has no liabilities and it is able to pay its debts as they become due. If the Company shall be wound up, the liquidator may, in accordance with a resolution of members, divide amongst the members in specie or in kind the whole or any part of the assets of the Company (whether they shall consist of property of the same kind or not) and may for such purpose set such value as he deems fair upon any such property to be divided as aforesaid and may determine how such division shall be carried out as between the members or different classes of members. The liquidator may vest the whole or any part of such assets in trustees upon such trust for the benefit of the contributors as the liquidator shall think fit, but so that no member shall be compelled to accept any shares or other securities whereon there is any liability.

(iii) Voting Votes at general meetings may be given either personally or by proxy, whether on a show of hands or on a poll every holder of a voting share present in person or by proxy shall have one vote for every voting share of which he is a holder. The chairman of a meeting at which there is an equality of votes shall be entitled to a second or casting vote. (iv) Variation of Rights Whenever the share capital is divided into different classes of shares, the rights attached to any class may (unless otherwise provided by the terms of issue of the shares of that class) be varied with the consent in writing of the holders of not less than three-fourths of the issued shares of that class, or with the sanction of Extraordinary Resolution passed at a separate general meeting of the holders of the shares of that class. (v)

Alteration of Share Capital The Company may by a resolution of directors amend the Memorandum to increase or reduce its authorised capital and in connection therewith the Company may in respect of any unissued shares increase or reduce the number of such shares, increase or reduce the par value of any such shares or effect any combination of the foregoing. The Company may amend the Memorandum to : (a)

divide the shares, including issued shares, of a class or series into a larger number of shares of the same class or series; or

(b)

combine the shares, including issued shares, of a class or series into a smaller number of shares of the same class or series;

provided, however, that where shares are divided or combined under (a) or (b) above, the aggregate par value of the new shares must be equal to aggregate par value of the original shares. (vi) Allotment and Issue of Shares Subject to the provisions of its Articles and any resolution of members the unissued shares of the Company shall be at the disposal of the directors who may, without limiting or affecting any rights previously conferred on the holders of any existing shares or class or series of shares, offer, allot, grant options over or otherwise dispose of shares to such persons, at such times and upon such terms and conditions as the Company may by resolution of directors determine.

109


(vii) Redeemable Shares and Purchase of Own Shares Subject to the provisions of the Companies Act, any shares may be issued on the terms that they are, or are liable at the option of the Company or the holder, to be redeemed on such terms and in such manner as may be provided by the Articles. Subject to the provisions of the Companies Act, the Company may purchase its own shares (including redeemable shares) at any price but, if shares are in issue which are listed on the Official List of the London Stock Exchange or traded on AIM and are convertible into, or carry a right to subscribe for, shares of the class to be purchased, the Company may not purchase them without the prior sanction of an Extraordinary Resolution passed at a separate meeting of the holders of the shares which are convertible or carry that right to subscribe. Shares that the Company purchases, redeems or otherwise acquires may be cancelled or held as treasury shares except to the extent that such shares are in excess of 80 per cent. of the issued shares of the Company in which case they shall be cancelled but they shall be available for reissue. (viii) Transfer of Shares Subject to any limitations in the Memorandum and Articles, registered shares in the Company may be transferred by a written instrument of transfer signed by the transferor and containing the name and address of the transferee, but in the absence of such written instrument of transfer the directors may accept such evidence of a transfer of shares as they consider appropriate. Subject to the Companies Act and any limitations in the Memorandum and Articles, the Company must on the application of the transferor or transferee of a registered share in the Company enter in the share register the name of the transferee of the share save that the registration of transfers may be suspended and the share register closed at such times and for such periods as the Company may from time to time by resolution of directors determine provided always that such registration shall not be suspended and the share register closed for more than 30 days in any period of twelve months. Where any class of share is, for the time being, a participate security, title to shares of that class which are recorded on a register of members of a person approved by the UK Treasury under the English Uncertificated Securities Regulations 2001 (and any modifications to them and any substitutions for them for the time being in force) (“Relevant System”) as being held in uncertificated form maybe transferred by means of the Relevant System concerned. (ix) Borrowing Powers The directors may by resolution of directors exercise all the powers of the Company to borrow money and to mortgage or charge its undertakings and property or uncalled capital or any part thereof, to issue debentures, debenture stock and other securities whenever money is borrowed or as security for any debt, liability or obligation of the Company or of any third party. (x)

Directors’ Remuneration Remuneration of directors (other than executive officers and alternate directors) shall be determined by the Board (or a committee of the Board), such amount (excluding amounts payable under other provisions of these Articles) shall not exceed £100,000 per annum subject to upward-only adjustment (in line with the percentage increase in the retail prices index published by the Department of Employment of Great Britain) (or by any government department upon which duties in connection with such index shall have devalued) after the date of the adoption of the Articles or a higher amount decided by ordinary resolution. The fees shall be divided amongst the directors entitled to them in the proportions and the manner the Board determines or, in default of a determination, equally (except that, if a director holds office for less than the whole of the period to which the fees relate, his share shall be reduced in proportion to the part of the period for which he did not hold office). A director who does not hold executive office and serves on a committee or devotes special attention to the business of the Company, or otherwise performs services which in the opinion of the Board are outside the scope of the ordinary duties of a directors, may be paid extra remuneration by way of salary, participation in profits or otherwise as the Board determines. The directors may be paid all expenses properly incurred by them in connection with their services. A director appointed to hold an employment or executive office in accordance with the provisions of the Articles shall receive the remuneration (by way of salary, commission, participation in profits or otherwise) which the Board or a committee of the Board may decide, either in addition to, or in lieu of, his remuneration as a director.

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(xi) Company Meetings There is no requirement under the Companies Act to hold an Annual General Meeting. The directors may convene meetings of the members of the Company at such times and in such manner and places as the directors consider necessary or desirable. Meetings may also be convened upon the written request of members entitled to exercise at least ten percent of the voting rights in respect of the matter for which the meeting is requested. At least seven daysâ&#x20AC;&#x2122; notice specifying the place, the day and the hour of the meeting and general nature of the business to be conducted shall be given to such persons whose names on the date the notice is given appear as members in the share register of the Company and are entitled to vote at the meeting. No business shall be transacted at any meeting unless a quorum of members is present at the time when the meeting proceeds to business. A quorum shall consist of two persons (or in the case of a member being a corporation, its duly authorised representative) in person or by proxy. If, within half an hour from the time appointed for the meeting (or such longer period as the chairman may allow), a quorum is not present or if during the meeting a quorum ceases to be present, the meeting if convened by members, shall be dissolved and in any other case, it shall stand adjourned to the same day in the next week at the same time and place, or to such other day, time and place as the chairman may determine. If at the adjourned meeting a quorum is not present within half an hour after the time appointed for the meeting, any two persons entitled to be counted in a quorum at the meeting shall be a quorum. (xii) Directorsâ&#x20AC;&#x2122; Interests Notwithstanding his office, a director may, subject to the relevant provisions of the UK Companies Act 1985 and provided that he has disclosed to the board of directors the nature and extent of any material interest of his (1) be a party to, or otherwise interested in, any contract, transaction or arrangement with the Company or with a body corporate in which the Company is interested or any transaction or arrangement in which the Company or any such body corporate is otherwise interested; (2) be a director or other officer and/or be employed (and be remunerated) by or be otherwise interested in any such body corporate; and (3) act (and be remunerated for acting) by himself or his firm in a professional capacity for the Company (otherwise than as auditor). A director shall not, by reason of his office, be accountable to the Company for any benefit which he (or his firm) derives from any such contract, transaction, action or arrangement or from any such office or employment or from any interest in any such body corporate, and no such transaction or arrangement shall be liable to be avoided by reason of his office. 6. BVI company law The Company was incorporated in the BVI under the International Business Companies Act and will automatically be reregistered under the Companies Act on 1 January 2007. The Companies Act applies to all companies incorporated or reregistered under its provisions, and will be the principal companies legislation in force in the BVI from 1 January 2007. The Company is subject to BVI law. Set out below is a summary of certain provisions of the BVI company law. This summary does not purport to contain all applicable qualifications and exceptions or to be a complete review of all matters of BVI company law and taxation, which may differ from equivalent provisions in jurisdictions with which interested parties may be more familiar. (i)

Shares and Share capital The Companies Act provides that a company is required to state in its Memorandum of Association the maximum number of shares that it is authorised to issue. The Company is authorised to issue up to 100,000,000 shares of HK$0.01 each. The concept of authorised share capital has been abolished in the BVI. A company may divide its shares (including those shares already in issue) into a larger number of shares or combine them into a smaller number of shares, provided that the maximum number of shares the company is authorised to issue is not exceeded. On any such division or combination of shares, the aggregate par value of the new shares must be equal to the aggregate par value of the original shares. The directors of a company can, at their discretion, issue shares in registered or bearer form (although in order to issue shares in bearer form, there must be an express authorisation in the companyâ&#x20AC;&#x2122;s Memorandum of Association) for such consideration and on such terms as they may determine. In the case of the Company, it is only authorised to issue registered shares. Shares can be issued for consideration in any form, provided such consideration is not less than the par value.

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If so authorised by its Memorandum of Association, a company can issue more than one class of shares and, if so, the Memorandum of Association must also specify the rights, privileges, restrictions and conditions which attach to each class. The Companies Act provides that companies may issue redeemable shares, shares with no rights, limited rights or preferential rights to share in distributions of capital or income, or shares with no or special or limited or conditional voting rights. They may also, subject to their Memorandum and Articles of Association, issue bonus shares, partly paid or nil paid shares, and fractional shares. (ii)

Financial assistance to purchase shares of a company or its holding company Subject to all applicable laws, a company may give financial assistance to directors and employees of the company, its subsidiaries, its holding company or any subsidiary of such holding company in order that they may buy shares in the company or shares in any subsidiary or holding company. Further, subject to all applicable laws, a company may give financial assistance to a trustee for the acquisition of shares in the company or shares in any such subsidiary or holding company to be held for the benefit of employees of the company, its subsidiaries, any holding company of the company or any subsidiary of any such holding company (including salaried directors). There is no statutory restriction in the BVI on the provision of financial assistance by a company to another person for the purchase of, or subscription for, its own or its holding company’s shares. Accordingly, a company may provide financial assistance if the directors of the company consider, in discharging their duties of care and acting in good faith, for a proper purpose and in the interests of the company, that such assistance can properly be given. Such assistance should be on an arm’s-length basis.

(iii) Companies may acquire their own shares A company may, purchase, redeem or otherwise acquire its own shares, either in accordance with the procedure set out in the Companies Act, or any other procedure as provided for in the company’s Articles of Association. Under the statutory provisions, the directors may make an offer to purchase, redeem or otherwise acquire the shares in the company provided that the offer is either (a) to all shareholders and would, if successful, leave the relative voting and distribution rights unaffected, or (b) to one or more shareholders and consented to in writing by all shareholders, or otherwise permitted by the Memorandum or Articles of Association. Where the offer is to one or more shareholders, the directors must have passed a resolution to the effect that in their opinion the purchase, redemption or other acquisition would benefit the remaining shareholders, and that the proposed offer is fair and reasonable to the company and the remaining shareholders. Where an acquisition by a company of its own shares would be treated as a distribution, the conditions imposed on distributions must be met. The purchase, redemption or other acquisition by a company of its own shares is not deemed to be a distribution where it is effected pursuant to, amongst other things, a right of a shareholder to have his shares redeemed or exchanged for money or other property of the company or where the share is redeemable at the option of the company. (iv) Dividends and distributions The directors of a company may only declare a distribution (which includes a dividend) by the company if they are satisfied, on reasonable grounds, that the company will, immediately after the distribution, satisfy the solvency test. A company will satisfy the solvency test if the value of its assets exceeds its liabilities, and it is able to pay its debts as they fall due. (v)

Protection of minorities The BVI court ordinarily would be expected to follow English case law precedents which permit a minority shareholder to commence a representative action against or derivative actions in the name of the company to challenge (a) an act which is ultra vires the company or illegal, (b) an act which constitutes a fraud against the minority and the wrongdoers are themselves in control of the company, and (c) an irregularity in the passing of a resolution which requires a qualified (or special) majority. Under the provisions of the Companies Act, where a company conducts some activity which breaches the Companies Act, or the company’s Memorandum or Articles of Association, the court can issue a restraining or compliance order. Members can also bring an action on the basis that the affairs of the company have been, are being or are likely to be conducted in a manner likely to be oppressive, unfairly discriminatory or unfairly prejudicial to him, he may now apply to the court for appropriate orders in relation to such conduct. Any shareholder of a company may make an application to the court, which may make an order appointing a liquidator to the company if (a) the court is of the opinion that it is just and equitable that the company should be wound up, or (b) the court is satisfied that there is a prima facie case that the company is insolvent.

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The Companies Act provides that any member of a company is entitled to payment of the fair value of his shares upon dissenting from any of the following: (a)

a merger, if the company is a constituent company, unless the company is the surviving company and the member continues to hold the same or similar shares;

(b)

a consolidation, if the company is a constituent company;

(c)

any sale, transfer, lease, exchange or other disposition of more than 50 per cent. of the assets or business of the company if not made in the usual or regular course of the business carried on by the company but not including (i) a disposition pursuant to an order of the court having jurisdiction in the matter, (ii) a disposition for money on terms requiring all or substantially all net proceeds to be distributed to the members in accordance with their respective interests within one year after the date of disposition or (iii) a transfer pursuant to the power of the directors to transfer assets for the protection thereof;

(d)

a redemption of 10 per cent. or fewer of the issued shares of the company required by the holders of 90 per cent. or more of the shares of the company pursuant to the terms of the Companies Act; and

(e)

an arrangement, if permitted by the court.

Generally any other claims against a company by its shareholders must be based on the general laws of contract or tort applicable in the BVI or their individual rights as shareholders as established by the company’s Memorandum and Articles of Association. (vi) Management The Companies Act vests the power to manage, direct and supervise the business and affairs of the company in its directors (subject to any modification or limitation in the company’s memorandum or Articles of Association). At all times after the appointment of its first director(s), every company must have at least one director, and no person may be a director of a company unless he has consented in writing to being a director. The names and addresses of all directors are entered on a register of directors. Directors are entitled to establish committees of directors, to which they may delegate their powers. However, the Companies Act specifies certain powers that may not be delegated, including the powers to amend the company’s Memorandum or Articles of Association, to appoint directors or agents, and to make a declaration of solvency or approve a liquidation plan. The directors retain responsibility for the exercise of any power delegated to a committee, unless they believed on reasonable grounds that the committee would in fact exercise the power in accordance with the duties imposed on directors by the Companies Act. The fiduciary duties of good faith, honesty and loyalty are enshrined in the Companies Act. Furthermore, the Companies Act reflects the common law duties of care, skill and diligence, and imposes on directors the duty to act for a proper purpose and not in a manner that contravenes either the Companies Act or the company’s Memorandum or Articles of Association. A director is obliged to disclose any interests he may have in a transaction to be entered into by the company (although he remains entitled to vote on the transaction, attend meetings in relation to it and be counted for the purposes of the quorum). Should he fail to do so, the transaction will be voidable by the company, unless the material facts of the interest are disclosed to the members and the members nevertheless ratify or approve the transaction, or the company receives fair value for it. (vii) Record-keeping The Companies Act sets out the various records which a company must keep. Every company must keep at the office of its registered agent in the BVI (a) its Memorandum and Articles of Association; (b) its register of members (or a copy thereof, in which case the company must notify the registered agent in writing of the physical location where the original is kept); (c) its register of directors (or a copy thereof, in which case the company must notify the registered agent in writing of the physical location where the original is kept); and (d) copies of all notices and documents filed by the company in the previous ten years. A company is required to keep a register of members containing, inter alia, the names and addresses of the persons who hold registered shares in the company. The share register may be in any form as the directors may approve but, if it is in magnetic, electronic or other data storage form, the company must be able to produce legible evidence of its contents. The entry of the name of a person in the register of members as a holder of a share in a company is prima facie evidence that legal title to the share vests in that person. A company is required to keep a register of directors containing, inter alia, the names and addresses of the persons who are directors and the date on which each person whose name is entered on the register was appointed and ceased to be a director. The register of directors may be in such form as the directors approve, but if it is in magnetic, electronic or other data storage form, the company must be able to produce legible evidence of its contents. The register of directors is prima facie evidence of any matters directed or authorised by the Companies Act to be contained therein.

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A company must keep minutes of all meetings and resolutions of the members and directors, either at the office of its registered agent or at such other place as the directors may determine (in which case the company must notify the registered agent in writing of the physical location where the original is kept). In addition, all companies must keep records that adequately show and explain the companyâ&#x20AC;&#x2122;s transactions, and enable the financial position of the company to be determined with reasonable accuracy. (viii) Exchange control There are no exchange control regulations or currency restrictions in the BVI. (ix) Loans to directors There is no express provision in the Companies Act prohibiting the making of loans by a company to any of its directors. (x)

Taxation in the BVI The company is exempt from all provisions of the Income Tax Act of the BVI (including with respect to all dividends, interests, rents, royalties, compensation and other amounts payable by the company to persons who are not persons resident in the BVI). Capital gains realised with respect to any/shares, debt obligations or other securities of a company by persons who are not persons resident in the BVI are also exempt from all provisions of the Income Tax Act of the BVI. No estate, inheritance, succession or gift tax, rate, duty, levy or other charge is payable by persons who are not persons resident in the BVI with respect to any shares, debt obligations or other securities of the company, save for interest payable to or for the benefit of an individual resident in the European Union.

(xi) Stamp duty on transfer No stamp duty is payable in the BVI on a transfer of shares in a BVI international business company. (xii) Inspection of corporate records Members of the general public, on payment of a nominal fee, can inspect the public records of a company available at the office of the BVI Registrar of Corporate Affairs which will include the companyâ&#x20AC;&#x2122;s certificate of incorporation, its memorandum and articles of association (with any amendments) and the records of licence fees paid to date and will also disclose any articles of dissolution, articles of merger and a register of mortgages, charges and other encumbrances if the company has elected to file such a register. A member of a company is entitled, on giving written notice to the company, to inspect and make copies of (a) the Memorandum and Articles of Association; (b) the register of members and/or the register of directors; and (c) minutes of meetings and resolutions of members and of those classes of members of which he is a member. This right of inspection is subject to the consent of the directors, who are entitled to refuse inspection if they consider it to be contrary to the companyâ&#x20AC;&#x2122;s best interests. A member is entitled to challenge any such refusal by the directors by applying to court. (xiii) Winding up Different regimes apply to the winding up of a company, which depend on whether the company in question is solvent or insolvent. The voluntary liquidation of solvent companies is governed by the Companies Act, whilst the voluntary liquidation of insolvent companies is governed by the provisions of the Insolvency Act 2003. The latter Act also applies to all liquidations where the liquidator has been appointed by the court. (xiv) Reconstructions There are statutory provisions which facilitate arrangements which involve a plan of arrangement being approved by a resolution of directors of the company and application being made to the court for approval of the proposed arrangement. Upon approval by the court, the directors of the company are required to approve the plan of arrangement as approved by the court whether or not the court has directed any amendments to be made thereto and give notice to the persons whom the court requires notice to be given or submit the plan of arrangement to those person for such approval, if any, as the court order required. (xv) Compulsory acquisition Subject to any limitations in the Memorandum or Articles of Association of a company, members holding 90 per cent of the votes of the outstanding shares may give a written instruction to a company directing the company to redeem the shares held by the remaining members. Upon receipt of the written instruction, the company is required to redeem the shares and give written notice to each member whose shares are to be redeemed stating the redemption price and the manner in which the redemption is to be effected.

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(xvi) Indemnification The Companies Act entitles a company to indemnify against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative, or investigative proceedings any person who is or was a party to any threatened, pending or contemplated proceedings, whether civil, criminal administrative or investigative, by reason of the fact that the person is or was a director of the company. This indemnity is only permissible if the indemnified person acted honestly and in good faith and in what he believed to be in the best interests of the company and, in the case of criminal proceedings, the indemnified person had no reasonable cause to believe that his conduct was unlawful. BVI law does not have a particular body of rules known as a ‘corporate governance regime’ with which the Company is obliged to comply over and above the relevant provisions of the Companies Act. 7. 7.1

Interests of the Directors and others The interests of the Directors and their associates in the share capital of the Company, all of which interests are beneficial, are as follows: As at the date of this document

Director

Francis Chi1 Frankie Yuet Leung Wong2 Yong Chian Tan3 Eddie Kin Man Chan4 Timothy Robert Nelson5 Albert Siu Fai Wong6 Royston Frederick Drucker

Number of Shares

Percentage of Existing Share Capital

19,660,290 11,593,921 2,056,085 1,233,652 1,572,890 360,969 103,960

32.54 19.19 3.40 2.04 2.60 0.60 0.17

On Admission Percentage of Enlarged Number of Issued Shares Share Capital

19,660,290 11,593,921 2,056,085 1,233,652 1,572,890 360,969 103,960

30.29 17.86 3.17 1.90 2.42 0.56 0.16

Notes: 1 held by Leadton Resources Limited, a nominee company. 2 includes Shares held by Bioglory International Ltd, which is a subsidiary of Yangtze Ventures Limited, a company of which he is a director. 3 held in Granfuture Holdings Limited, a nominee company. 4 held in Best Revenue Investments Limited, a nominee company. 5 Timothy Nelson’s holdings include Shares held by Vuna, a company of which he is a director. 6 held by Faiton Industrial Limited, a nominee company.

7.2

Save as disclosed in paragraph 7.1 above, as at the date of this document and immediately on Admission, so far as the Directors are aware, the following persons are or will be, directly or indirectly, interested in 3 per cent. or more of the issued share capital of the Company: As at the date of this document

Name

Number of Shares

Percentage of Existing Share Capital

BSI SA AOK International Holding Ltd Fortune Success Holdings Ltd. BNP Paribas (Suisse) SA

3,370,131 2,979,182 – 2,313,787

5.58 4.93 – 3.83

On Admission Percentage of Enlarged Number of Issued Shares Share Capital

3,370,131 2,979,182 2,600,000 2,313,787

5.19 4.59 4.01 3.56

7.3

Save as disclosed in paragraphs 7.1 and 7.2 above, the Directors are not aware of any interest in the Company’s share capital which, at the date of this document and/or immediately on Admission, would amount to three per cent. or more of the Company’s issued share capital.

7.4

As at 15 December 2006 and save as disclosed in this paragraph 7, the Directors are not aware of any person or persons who, directly or indirectly, jointly or severally, exercise or could exercise control over the Company.

7.5

Save as set out in this paragraph 7, following Admission none of the Directors or any connected person is expected to have any interest, beneficial or non-beneficial, in the share or loan capital of the Company.

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7.6

Save as disclosed in this document, none of the Directors has any interest, direct or indirect, in any assets which have been or are proposed to be acquired or disposed of by, or leased to, the Company and no contract or arrangement exists in which a Director is materially interested and which is significant in relation to the business of the Company.

7.7

There are no outstanding loans granted by the Company to any of the Directors, or any connected persons, nor are there any guarantees provided by the Company for their benefit.

7.8

Save as disclosed in this paragraph 7 and in paragraphs 10.5, 10.6 and 10.7 of this Part VI, none of the Directors has any interest, whether direct or indirect, in any transaction which is or was unusual in its nature or conditions or significant to the business of the Company taken as a whole and which was effected by the Company since its incorporation and which remains in any respect outstanding or unperformed.

7.9

None of the Directors, or member of their respective families, has a related financial product (as defined in the AIM Rules) referenced to the Shares.

7.10 The Company is not aware of any person who, directly or indirectly, has an interest in the Company’s capital or voting rights which is notifiable under the laws of the British Virgin Islands. 8. 8.1

Directors’ Service Contracts Francis Chi has entered into a service agreement with the Company dated 20 July 2006, effective from Admission. Under the service agreement, Mr Chi is appointed as an Executive Director and Chief Executive Officer of the Group and will carry out such duties and functions, exercise such powers and comply with such instructions in connection with the business of the Company as the Board reasonably determines from time to time. His remuneration is HK$1,500,000 per annum, to be reviewed from time to time. In addition, Mr Chi is entitled to an annual discretionary bonus as determined by the Board. The service agreement is for a fixed period of three years and shall continue thereafter. The agreement may be terminated by either party after the first year of service by serving on the other six months’ written notice or payment in lieu of notice.

8.2

Yong Chian Tan has entered into a service agreement with the Company dated 20 July 2006, effective from Admission. Under the service agreement, Mr Tan is appointed as an Executive Director of the Company and the Chief Executive Officer (China) of the Group and will carry out such duties and functions, exercise such powers and comply with such instructions in connection with the business of the Company and the Group as the Board reasonably determines from time to time. His remuneration is HK$1,000,000 per annum, to be reviewed from time to time. In addition, Mr Tan is entitled to an annual discretionary bonus as determined by the Board. The service agreement is for a fixed period of three years and shall continue thereafter. The agreement may be terminated by either party after the first year of service by serving on the other six months’ written notice or payment in lieu of notice.

8.3

Albert Siu Fai Wong has entered into a service agreement with the Company dated 20 July 2006, effective from Admission. Under the service agreement, Mr Wong is appointed as an Executive Director of the Company, Chief Financial Officer and Secretary of the Group and will carry out such duties and functions, exercise such powers and comply with such instructions in connection with the business of the Group as the Board reasonably determines from time to time. His remuneration is HK$1,000,000 per annum, to be reviewed from time to time. In addition, Mr Wong is entitled to an annual discretionary bonus as determined by the Board. The service agreement is for a fixed period of three years and shall continue thereafter. The agreement may be terminated by either party after the first year of service by serving on the other six months’ written notice or payment in lieu of notice.

8.4

The Company has entered into a letter of appointment with Eddie Kin Man Chan dated 17 August 2006 with effect from Admission in respect of his non-executive directorship of the Company. Under the letter of appointment, Mr Chan is entitled to an annual fee of HK$120,000 and reimbursement of reasonable expenses.

8.5

The Company has entered into a letter of appointment with Frankie Yuet Leung Wong dated 17 August 2006 with effect from Admission in respect of his non-executive directorship of the Company. Under the letter of appointment, Mr Wong is entitled to an annual fee of HK$120,000 and reimbursement of reasonable expenses.

8.6

The Company has entered into a letter of appointment with Royston Frederick Drucker dated 17 August 2006 with effect from Admission in respect of his non-executive directorship of the Company. Under the letter of appointment, Royston Drucker is entitled to an annual fee of £20,000 and reimbursement of reasonable expenses.

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8.7

The Company has entered into a letter of appointment with Timothy Robert Nelson dated 17 August 2006 with effect from Admission in respect of his non-executive directorship of the Company. Under the letter of appointment, Timothy Nelson is entitled to an annual fee of £20,000 and reimbursement of reasonable expenses.

8.8

The aggregate remuneration payable (and benefits in kind to be granted) to the Directors in the current financial year ending 31 December 2006 under the arrangements in force at the date of this document is estimated to be HK$3,101,454.

8.9

There are no Directors’ service contracts, or contracts in the nature of services, with the Company, other than those which expire or are terminable without payment of compensation on no more than 12 months’ notice.

8.10 Save as referred to above none of the service contracts referred to in this paragraph have been amended in the past six months. 9. 9.1

Additional Information on the Directors In addition to the Company, the Directors hold or have held the following directorships or are or have been partners in the following partnerships within the five years prior to the date of this document: Name Eddie Kin Man Chan

Current Directorships/Partnerships Best Revenue Investments Limited China Tax Society Limited Citiline Logistics Limited CWCC Co. Limited E.V. Services Limited Edtoma Consultancy Limited Edtoma Nominees Limited Edtoma Secretarial Services Limited Federal Consultants Limited Gateway (Macao Commercial Offshore) Milly Investments Limited Nong’s Corporation Limited Omega Bio-Pharma (I.P.) LLC Omega Bio-Pharma (I.P.1) Limited Omega Bio-Pharma (I.P.2) Limited Omega Bio-Pharma (I.P.3) Limited Omega-BioPharma Holdings Limited Polyman Business Consultants Limited Purapharm Corporation Limited Purapharm Information Technology Limited Stockwell Consultants Limited Unite Service Limited Walcom Animal Science (I.P.) Limited Walcom Animal Science (I.P.2) Limited Walcom Animal Science (I.P.3) Limited Walcom Animal Science (I.P.4) Limited Walcom Animal Science (I.P.5) Limited Walcom Bio-Chemicals (USA) LLC Walcom Bio-Chemicals Industrial Limited Walcom (BVI) Company Limited Walcom International Limited Walcom Nutritions International Limited Wellson Nominees Limited

Francis Chi

F&P International Limited Gatton Enterprises Limited Glorytide Development Limited Leadton Resources Limited Link Asia Investment Limited Omega Bio-Pharma (I.P.) LLC Omega Bio-Pharma (I.P.1) Limited Omega Bio-Pharma (I.P.2) Limited Omega Bio-Pharma (I.P.3) Limited Omega Bio-Pharma (USA) LLC Omega Bio-Pharma International Limited Omega-BioPharma (H.K.) Limited Omega-BioPharma Holdings Limited Shanghai Walcom Bio-Chem Co., Ltd Walcom Animal Science (I.P.) Limited Walcom Animal Science (I.P.2) Limited Walcom Animal Science (I.P.3) Limited

117

Past Directorships/Partnerships/ Dissolved Companies Chinainfobase.com Limited (Dissolved) Chinainfobase Limited (Dissolved) Didit Corporation (Dissolved) Edtoma Financial Consultants Limited (Dissolved) Goldview Management Limited (Dissolved) Hintway Investment Limited (Dissolved) Internet One Chinese Limited (Dissolved) Leadton Resources Limited LOSON Consultants Limited (Dissolved) Majestic Associates Limited (Dissolved) Ourflats Investments Company Limited (Dissolved) Polyman Investments Limited (Dissolved) Walcom (BVI) Company Limited (Dissolved) Wo Loong Ho Marine Products Co., Limited (Dissolved)

Becoin Limited (Deregistered) F&P Industrial Limited (Deregistered) F&P Technologies Limited (Deregistered) Giancarlo International Limited (Dissolved) Global Network Property Pty Limited Kelfook Industrial Limited (Dissolved) Mate Plaza Limited (Struck off) Whittam Consultants Limited (Dissolved) Wiseco Technologies Limited (Deregistered)


Past Directorships/Partnerships/ Dissolved Companies

Name Francis Chi (continued)

Current Directorships/Partnerships Walcom Animal Science (I.P.4) Limited Walcom Animal Science (I.P.5) Limited Walcom Bio-Chem (Thailand) Co., Ltd Walcom Bio-Chemicals (Holdings) Limited Walcom Bio-Chemicals (USA) LLC Walcom Bio-Chemicals Industrial Limited Walcom Bio-Chemicals Philippines Inc Walcom (BVI) Company Limited Walcom Chemicals Industrial Limited Walcom China Staff Incentive Ltd Walcom International Limited Walcom Nutritions International Limited

Yong Chian Tan

Granfuture Holdings Limited Omega Bio-Pharma (I.P.) LLC Omega Bio-Pharma (I.P.1) Limited Omega Bio-Pharma (I.P.2) Limited Omega Bio-Pharma (I.P.3) Limited Omega Bio-Pharma (USA) LLC Omega-BioPharma Holdings Limited Shanghai Walcom Bio-Chem Co., Ltd Tiger Concept International Limited Walcom Animal Science (I.P.) Limited Walcom Animal Science (I.P.2) Limited Walcom Animal Science (I.P.3) Limited Walcom Animal Science (I.P.4) Limited Walcom Animal Science (I.P.5) Limited Walcom Bio-Chemicals (USA) LLC Walcom Bio-Chemicals Industrial Limited Walcom Chemicals Industrial Limited Walcom China Staff Incentive Ltd Walcom International Limited Walcom Nutritions International Limited

China Pioneer Trading Limited China United Investment Limited Dongguan Hannstar Electronic Corporation HannHann.com Corporation

Albert Siu Fai Wong

Faiton Industrial Limited Phinic Hospitality Limited TC Interconnect Holdings Limited Walcom China Staff Incentive Ltd

Fullness Limited (Dissolved) Grace Luck Limited (Dissolved) L.V.O. Property Consultants Limited (Dissolved) Peipus Worldwide Limited (Dissolved) Profit Access Group Limited (Dissolved) Tinkerbelle Services Limited (Dissolved) Winlok Assets Management Limited (Dissolved)

Frankie Yuet Leung Wong

1414 Holding Limited 1441 Holding Limited 8808 Holding Limited Ace Achieve Investments Limited Acme Partner International Limited Advantek Biologics Limited Apexone Microelectronics (Shanghai) Co., Limited Apexone Microelectronics Inc. Apexone Microelectronics Limited Ascoli Enterprises Limited Asia Materials Limited Asia Materials Trading Company Limited Asia Trend Development Limited AsiaMaterials Technologies Limited AsiaMaterials Trading (Shanghai) Co., Ltd. Bellini Limited Beijing Hua Wei Center Co. Ltd. Big Winner Enterprises Ltd. Billion Century Limited Bioglory Intâ&#x20AC;&#x2122;l Limited Bognor Limited Capebridge Group Limited Casa Growth Limited Channel Pacific Limited China Infrastructure Group Holdings PLC China National New Building Materials Industry Investment Limited Chongqing Desheng Engineering Co., Ltd. Chongqing Foreign Investment Consultation and Services Co., Ltd. Chongqing T.H. Holding Management Co., Ltd

All Billion Limited (Deregistered) Asia Materials Enterprises Limited (Deregistered) Asia Materials Holdings Limited (Deregistered) Asia Materials Holdings Limited (Struck off) Asia Materials International Limited (Struck off) Asia Materials Limited (Struck off) Asia Materials Trading Corporation (Struck off) Asia Materials Trading Limited (Dissolved) AsiaMaterials Consulting (Shanghai) Co., Ltd AsiaMaterials Informational Services (Wuhan) Co., Ltd. (Deregistered) AsiaMaterials International Trading (Shenzhen) Co., Ltd. (Deregistered) AsiaMaterials International Trading (Tianjin) Co., Ltd. (Deregistered) AsiaMaterials Technologies (Beijing) Co. Ltd. (Deregistered) AsiaMaterials Technologies (Hangzhou) Co., Ltd. (Deregistered) AsiaMaterials Technologies (Shenzhen) Co., Ltd. (Deregistered) AsiaMaterials Trading (Guangzhou) Co., Ltd. (Deregistered) Asiamaterials.com Limited (Deregistered) Atlantic Best Limited Bonafide Profits Limited (Struck off) Bondwise Profits Limited Brixworth International Limited Century Team Limited Cititop Pacific Limited Costworth Investments Limited East Trend Limited

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Name Frankie Yuet Leung Wong (continued)

Current Directorships/Partnerships Chongqing T.H. White Cement Co., Ltd. CIG International Limited CIG Yangtze Ports PLC. Comtel Development Limited Coral Waters (Barbados) SRL Cosmedia Group Holdings Limited Dalian Xiwang Building Co., Ltd. Digital First International Limited Elite Crest Investments Limited Equity Leader International Limited Eventful Time Investments Limited Expert Aim Investments Limited Extreme Performance Limited First Direction Limited Focus Well Limited Fortune Up Investments Limited Fran Vick & Co. Ltd. Gainsworth Limited Glory Year Mark Limited Glorycrest Holdings Limited Goldcrest Development Limited Grand More Management Limited Great Market Limited Guangzhou Shui Yung Co. Ltd. Han Sheng Tang Herbal (Holdings) Limited Han Sheng Tang Herbal Pharmaceutical Co. Limited Han Sheng Tang Herbal Technologies Co. Limited Harbour Master Limited Honest Choice International Limited Hudson Waterfront Corporation Hudson Westside Corporation Huanghe Venture Capital Limited Ideanew Profits Limited Jade City International Limited Jesca Limited Jumbo Crown International Limited Keygrow Investments Limited Kinford Enterprises Limited Kinscore Limited Kotemax Limited Kroner Investments Limited Lafarge Shui On Cement Limited Lamma Rock Products Limited Landstar Development Limited Lenten Lily Limited Lokeren Company Limited Max Advance Investments Limited Mountain Air (Barbados) SRL Mountain Breeze (Barbados) SRL Mountain Mist (Barbados) SRL Mountain Sun (Mauritius) Ltd. Nanjing Jiangnan Cement Company Limited Net Gain Group Limited New Rainbow Investments Limited Omega-BioPharma Holdings Limited On Capital China Tech Fund P.D. (Contractors) Limited Paradigm Finance S.A. Pat Davie Limited Peak Fortune Assets Limited Pinetop Limited Prime Allied Enterprises Limited (BVI) Prime Allied Enterprises Limited (Mauritius) Prosper Idea Limited Qingdas Zhongcheng Yinchu Development Co. Ltd. Real Profit Enterprises I Inc. Real Profit Enterprises II Inc. Real Profit Enterprises III Inc. Real Profit Enterprises Inc.

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Past Directorships/Partnerships/ Dissolved Companies Focus Top Limited Foresight Profits Limited Galore Profits Limited Globaland Limited Globe State Properties Limited Glory Limited (Struck off) Guangan TH Cement Co. Ltd. Honest China Limited Interchina International Limited Kindwin Investment Limited (Deregistered) Kinmax Limited Landton Limited Legend City Limited Lucky Gain Limited Marble Way Limited Onfair Limited Onwin Limited Oriental Gain Limited Portspin Limited Princemax Limited Profitstock Holdings Limited Rich Development Limited (Deregistered) Shanghai Chengli Properties Co., Ltd. Shanghai Fu Ji Properties Co., Ltd. Shanghai Le Fu Properties Co., Ltd. Shanghai Li Xing Hotel Co., Ltd. Shanghai Tai Ping Qiao Properties Management Co., Ltd. Shanghai Xing Qiao Properties Co., Ltd. Shui Bo Development Company Limited (Deregistered) Shui On Cement Company Limited Shui On Land Limited Sino Eagle Limited (Deregistered) Sinoco Limited Solomon Systech Limited Union Grow Limited Victorious Run Limited Wealth Grand Development Limited (Deregistered)


Name Frankie Yuet Leung Wong (continued)

Current Directorships/Partnerships Real Profit Enterprises IV Inc. Real Profit Enterprises V Inc. Rimmer Investments Limited Rise Huge International Limited Selfers Limited Shanghai City Hotel Shanghai Jiu Hai Rimmer Properties Co. Ltd. Shanghai Ruichen Property Co. Ltd. Shanghai Shui On Property Development Management Co., Ltd. Shine Honest Investments Limited Shui On (Contractors) Limited Shui On Building Contractors Limited Shui On Building Materials Limited Shui On Centre Company Limited Shui On Company Limited Shui On Concrete Specialists Limited Shui On Construction and Materials Limited Shui On Construction Company Limited Shui On Contractors Limited Shui On Corporate Services Limited Shui On Finance Company Limited Shui On Graceton Limited Shui On Granpex Limited Shui On Holdings Limited Shui On Investment Company Limited Shui On Materials Limited Shui On Properties Limited Shui On Rock Products Limited Shui On Secretarial Services Limited Shui On Strategic Investments Limited Sinodon Limited SO Hudson Westside Corp. SO Hudson Westside I Corp. SO Hudson Westside II Corp. SO Hudson Westside III Corp. SO Hudson Westside IV Corp. SO Hudson. Westside V Corp SOCAM.com Limited Solomon Systech (International) Limited Sowin Enterprises Limited Star Focus Investments Limited Super Asset International Limited TH Cement Holdings Limited TH Industrial Management Limited TH Industry I Limited TH Industry II Limited TH Industry III Limited The Yangtze Ventures II Limited The Yangtze Ventures Limited Total Trend Investments Limited Triprofit Enterprises Limited Turbo Speed Technology Limited Upper Aim Group Limited Ventureadd Investments Limited Victory Fame Investment Limited Walcom Animal Science (I.P.) Limited Walcom Animal Science (I.P.2) Limited Walcom Animal Science (I.P.3) Limited Walcom Animal Science (I.P.4) Limited Walcom Animal Science (I.P.5) Limited Walcom International Limited Walcom Nutritions International Limited Wininer Technologies Limited Wuhan Huali Environment Protection Science & Technology Co. Ltd. Wuhan Intâ&#x20AC;&#x2122;l Container Transshipment Company Limited Yunnian Shui On Construction Materials Investment Holding Co. Ltd.

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Past Directorships/Partnerships/ Dissolved Companies


Name Current Directorships/Partnerships Royston Frederick Genesis Management Consulting Drucker Services Pvt Ltd Inrotis Ltd MDD Ltd Technomark Consulting Services Ltd Timothy Robert Nelson

9.2

Atholl Corporate Finance Ltd Bonchar Resources LLC Charbon Resources LLC Galene Resources LLC Grace Holdings Limited IIBT International Limited Oxford Pharma Limited Red Island Oil Ltd Vuna Capital Partners Ltd Vuna Energy Resources Ltd Willis Holdings

Past Directorships/Partnerships/ Dissolved Companies None

Madagascar Oil Limited

None of the Directors has: 9.2.1 any unspent convictions in relation to indictable offences; 9.2.2 any bankruptcy order made against him or entered into any voluntary arrangements; 9.2.3 been a director of a company which has been placed in receivership, creditorsâ&#x20AC;&#x2122; voluntary liquidation, compulsory liquidation, administration, been subject to a voluntary arrangement or any composition or arrangement with its creditors generally or any class of its creditors whilst he was a director of that company or within the 12 months after he ceased to be a director of that company; 9.2.4 been a partner in any partnership which has been placed in compulsory liquidation, administration or been the subject of a partnership voluntary arrangement whilst he was a partner in that partnership or within the 12 months after he ceased to be a partner in that partnership; 9.2.5 been the owner of any assets or a partner in any partnership which has been placed in receivership whilst he was a partner in that partnership or within the 12 months after he ceased to be a partner in that partnership; 9.2.6 been publicly criticised by any statutory or regulatory authority (including recognised professional bodies); or 9.2.7 been disqualified by a court from acting as a director of any company or from acting in the management or conduct of the affairs of a company.

10. Material contracts The following contracts, not being contracts entered into in the ordinary course of business, have been entered into by the Company or any of its subsidiaries within the two years preceding the date of this document and are, or may be, material: 10.1 A Relationship Agreement dated 15 December 2006 between (1) the Company, (2) Francis Chi pursuant to which, conditionally on Admission, Francis Chi (the â&#x20AC;&#x153;Major Shareholderâ&#x20AC;?) has undertaken to exercise all his powers and, so far as he is able, to procure that any related party of his and any other director who has a material relationship, association or interest with him shall exercise their respective powers to ensure (a) when he is not an executive director, inter alia, that (i) the Company shall operate and make decisions and shall be managed by the Board in accordance with the memorandum and articles of association and all applicable law for the benefit of shareholders as a whole and independently of the Major Shareholder; (ii) unless agreed between the Board and the nominated adviser a majority of directors on the Board and on all standing committees of the Board and any other significant committees of the Board will have no material relationship, association or interest with the Majority Shareholder; (iii) the Remuneration Committee shall have a majority of and shall be chaired by non-executive directors who have no material relationship, association or interest with the Major Shareholder; (iv) a Board quorum shall include at least one such nonexecutive director unless consented to by one such non-executive and the nominated adviser; (v) the Company shall comply with the Corporate Governance Guidelines for AIM companies published by the Quoted Companies Alliance save with the consent of the nominated adviser and with the AIM rules and (b) at all times that no material agreement, arrangement or transaction between any Group Company and the Major Shareholder and/or any related party of his shall be entered into, novated, varied or abrogated and no material amendments to any agreements between the Group and the Major Shareholder and/or any

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related party of his shall be made without a Board resolution on which the directors who have a material relationship, association or interest with him do not vote and in respect of which at least one non-executive director who has no material relationship, association or interest with the Majority Shareholder shall be in the majority or approve the resolution in writing. In addition the Company has undertaken to, and to procure each member of the Group shall, enforce all agreements with the Major Shareholder and any related party of his in accordance with their terms unless approved by a Board resolution on which the directors who have a material relationship, association or interest with him do not vote and in respect of which at least one non-executive director who has no material relationship, association or interest with the Major Shareholder shall be in the majority or approve the resolution in writing. 10.2 A Placing Agreement dated 15 December 2006 between (1) the Company, (2) the Directors, (3) John East & Partners and (4) King & Shaxson, pursuant to which conditional upon, amongst other things, Admission having occurred not later than 8.00am on 21 December 2006 or such later date as the Company, John East & Partners and King & Shaxson may agree, but in any event not later than 8.00am on 12 January 2006, King & Shaxson has agreed to use reasonable endeavours to procure subscribers for the Placing Shares at the Placing Price. The agreement contains warranties and indemnities from the Company and certain of its Directors in favour of King & Shaxson and John East & Partners. It also contains provisions which enable John East & Partners and King & Shaxson to terminate the agreement before Admission including where the warranties are found not to be true and accurate in any material respect. The Company has agreed to pay a fee to John East & Partners of £100,000, to King & Shaxson a broking fee of £10,000 and a commission of 5 per cent on the aggregate value, at the Placing Price, of the Placing Shares placed by King & Shaxson. In addition, John East & Partners will be issued with warrants to subscribe for Ordinary Shares at the Placing Price up to an aggregate value of £75,000 and King & Shaxson will be issued with warrants to subscribe for Ordinary Shares at the Placing Price up to an aggregate value of £60,000, such warrants to be exercisable in the case of John East & Partners Ltd at any time prior to the fifth anniversary of Admission and in the case of King & Shaxson, at any time prior to the second anniversary of Admission. 10.3 A Broker Agreement dated 15 December 2006 between (1) the Company, (2) the Directors and (3) King & Shaxson pursuant to which, conditionally upon and with effect from Admission, the Company has appointed King & Shaxson as its broker for the purposes of the AIM Rules for an initial term of one year and thereafter until terminated by either party giving the other two months’ notice in writing. The Company has agreed to pay King & Shaxson an annual retainer of £20,000 (plus any applicable VAT) and out of pocket expenses reasonably and properly incurred. The agreement may also be terminated by the Company or King & Shaxson where a liquidator, receiver, administrative receiver or administrator is appointed over substantially the whole of the other’s assets. In addition King & Shaxson may terminate the appointment, inter alia, where the Company or any of the Directors commits an unremedied material breach of the agreement or the Company or any Director commits any material breach of the AIM Rules or any other laws or regulations to which the Company and/or the Directors are subject. The Company may also terminate the appointment where King & Shaxson commits an unremedied material breach of the agreement. 10.4 A Nominated Adviser’s Agreement dated 15 December 2006 between (1) the Company (2) the Directors and (3) John East & Partners pursuant to which, conditionally upon Admission, the Company has appointed John East & Partners as its Nominated Adviser for the purposes of the AIM Rules for an initial period of two years and thereafter until terminated on three months’ written notice by either party. The Company has agreed to pay John East & Partners an annual fee of £25,000 (plus any applicable VAT) and out of pocket expenses reasonably and properly incurred. The agreement contains an indemnity in favour of John East & Partners and may also be terminated by the Company or John East & Partners in the event of material breach by the other, if trading in the Company’s securities on AIM is cancelled (other than a temporary suspension or cancellation of trading in accordance with the AIM Rules) and by the Company if John East & Partners is removed for any reason from the register of Nominated Advisers maintained by the London Stock Exchange. 10.5 Lock-ins and orderly market undertakings dated 15 December 2006 have been granted by the Directors, on behalf of themselves, their families and other persons and companies deemed to be connected with them and by Dr Jiang Shulin , Bioglory and Vuna in favour of the Company, John East & Partners and King & Shaxson. Pursuant to the terms of these undertakings, each of the aforementioned has undertaken (subject to certain limited exceptions including disposals by way of acceptance of a recommended takeover offer for the entire issued share capital of the Company) not to dispose of the Shares held by him or persons connected with him (or any interest therein) at any time prior to the first anniversary of Admission nor for a period of 12 months thereafter without the prior written consent of John East & Partners, for so long as John East & Partners is the Company’s nominated adviser, and, for so long as King & Shaxson is the Company’s broker, without the prior written consent of King & Shaxson, in every such case such consent not to be unreasonably withheld or delayed.

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10.6 A patent assignment agreement dated 19 September 2006 (the “Patent Assignment”) between (1) Walcom Industrial, (2) Omega-Biopharma (H.K.) Limited, (3) Omega Bio-Pharma (I.P.1) Limited, (4) Omega BioPharma (I.P.2) Limited, (5) Omega Bio-Pharma (I.P.3) Limited and (6) Omega (2) to (6) together, the “Omega Companies”). Pursuant to the Patent Assignment: (a)

the patents that have been assigned in the Patent Assignment are patents which derived from the Group’s core technology, but are in respect of potential human application, and which are not the Group’s area of business focus. The patent applications themselves were originally filed in the name of the relevant Omega Companies, and the Patent Assignment is to give effect to the assignment of such patent rights with effect from their date of creation or filing of any patent applications;

(b)

the total consideration for the patent assignment was US$200,000. In addition, the Omega Companies are obliged to pay to the Group a royalty of three (3) percent of the net sales value (as defined in the Patent Assignment) of any products that are produced by the Omega Companies or their sub-licensee, in the human application field, arising from the benefit of the patents assigned. Such royalties are payable for so long as the Omega Companies or their sub-licensees produce such products; and

(c)

the Omega Companies have licensed back to the Group the technology within the assigned patents, on an exclusive, perpetual and royalty free basis for use in the Group’s area of business. There is also an obligation upon the Omega Companies to give disclosure to the Group of any invention by the Omega Companies in the human application field, and the Omega Companies have licensed the group the rights to use such new inventions in the Group’s area of business.

10.7 An exclusive licence agreement dated 19 September 2006 (the “Licence Agreement”) between (1) Walcom Industrial, (2) Walcom IP, (3) Walcom IP2, (4) Walcom IP3, (5) Walcom IP4, (6) Walcom IP5 and (7) Omega. Pursuant to the Licence Agreement: (a)

the Group has licensed Omega the technology within the Group’s portfolio of patents, for use by Omega on an exclusive basis in Omega’s field of interest, namely, human application of the relevant technology;

(b)

the initial term is for 5 years. Within the initial term Omega is expected to apply for food and drugs administration (or equivalent) approval (“FDA Approval”) of products for human consumption using the technology in Omega’s own patents and with the benefit of the license from the Group. Failure to apply for FDA Approval would either mean an end of the license or a 1 year extension if Omega can prove to the Group’s satisfaction that FDA Approval will shortly be applied for;

(c)

upon FDA Approval being granted or upon legal sales of products being achieved without FDA Approval, there is then a license of the Group’s patents for a sales term of 10 years. Renewal is subject to further negotiation; and

(d)

the consideration for the License Agreement is for the Group to receive a three (3) percent royalty of net sales of Omega’s products. In addition, the Group has an exclusive, perpetual and royalty free license back of Omega’s inventions for use by the Group in the Group’s area of business.

Note: The Omega Companies are related parties of Francis Chi, the Company’s largest indirect shareholder and its Chief Executive Officer. In addition, each of Eddie Kin Man Chan and Yong Chian Tan, who are also Directors, have minority shareholding interests in Omega (and therefore indirect interests in the other Omega Companies). Accordingly, each of Mr Chi, Mr Chan and Mr Tan is interested in the Patent Assignment and the Licence Agreement.

10.8 An employment contract signed on 28 December 2004 between Walcom Bio-Chemicals Industrial Limited and Dr Jiang Shulin as supplemented by an undated supplemental agreement between the same parties. Dr Jiang was appointed as vice president in charge of sales and marketing from 1 January 2005 to 31 December 2007. The contract had an initial period of 12 months and is terminable on 3 months’ written notice thereafter subject to 3 months’ notice of termination by either party. Dr Jiang’s remuneration comprises the following elements: (i)

a monthly after tax salary of HK$55,000, subject to annual review;

(ii)

a monthly housing allowance of RMB5,000;

(iii) an entitlement to Shares equivalent to 3 per cent. of the Company’s issued share capital should the Company achieve a listing on any stock exchange or should the Group’s profit before tax for 12 months reach RMB 5,000,000 (based on a valuation of the Company of US$24,000,000); (iv) a cash bonus equal to 5 per cent. of the Group’s annual audited profit before tax if such profit is up to RMB5,000,000, or 3 per cent. if such profit is in excess of RMB5,000,000. In addition, he is entitled to a one-off cash bonus of RMB500,000 on the occasion that the Group’s annual audited profit before tax exceeds RMB5,000,000 for the first time. To date, the Group has not made profits before tax, so no such bonus has been payable; and (v)

a discretionary annual bonus.

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The shares referred to in (iii) above, comprising a total of 691,464 Shares, were transferred to Longain, a company controlled by Dr Shulin, shortly before Admission by certain of the existing shareholders of the Company. 10.9 A shareholders’ agreement dated 15 August 2005 entered into between (1) Paitoon Buddhinunta-opas, (2) Walcom Bio-Chemicals Industrial Limited and (3) Walcom Bio-Chem (Thailand) Company Limited setting out the rights and obligations of the shareholders and provisions as to the management and operation of Walcom Bio-Chem (Thailand) Company Limited. Pursuant to the agreement, Walcom Bio-Chem (Thailand) Company Limited can only sell products of Walcom Bio-Chemicals Industrial Limited and Paitoon Buddhinunta-opas cannot sell or distribute products for other companies in the feed industry in Thailand without the consent of Walcom Bio-Chemicals Industrial Limited. The agreement also provides that unless otherwise agreed in writing, no shareholder may sell, transfer, or otherwise dispose of shares in Walcom Bio-Chem (Thailand) Company Limited. The agreement is valid for 15 years and may be extended 6 months prior to its expiration. 10.10 Pursuant to a Representative Agent Mandate Letter between Walcom Bio-chemical (Holdings) Limited (“Walcom Holdings”), whose obligations the Company has in practice agreed to assume and Vuna, dated 7 October 2005 (and effective for a period of six months from 1 October 2005) it was agreed that on a successful listing of Walcom Holdings (but, now, in practice, the Company) on AIM, Walcom Holdings would grant an option of 3 per cent. of the total pre-listing share capital to Vuna or its nominated company at the exercise price of £0.01 per share, to be exercised within 5 years from the date of listing. In addition, it was also agreed that on Admission, Vuna would be entitled to be issued warrants to subscribe for new shares to the value of £75,000 (disclosed at paragraph 13 below), exercisable at any time from the date of issue for a period of 5 years. Pursuant to a Representative Agent Mandate Extension letter dated 5 April 2006 from Vuna to Walcom Holdings whose obligations the Company has in practice agreed to assume, it was agreed that the terms and conditions of the existing signed agreement be extended for a period of six months from 1 April 2006. Rather than proceed with the grant of the option referred to above, Vuna had transferred to it Shares equivalent to 3 per cent. of the total issued share capital (before the allotment of Shares on conversion of the convertible notes referred to in paragraph 4 above) prior to Admission. 11. Options A summary of the Share Option Scheme is as follows: 11.1 Eligibility 11.1.1 The Share Option Scheme is available for any director of any member of the Group who is in service with any such company or any employee of any member of the Group (other than one who is a director). 11.1.2 No person shall be entitled as of right to participate in the Share Option Scheme. 11.2 Limitations on grant and rights to exercise 11.2.1 The maximum number of shares in respect of which options or right to subscribe for shares pursuant to the Share Option Scheme when aggregated with the number of shares in respect of which options or rights to subscribe for shares has been granted in previous years under the Shares Option Scheme and any other share option or share incentive plan adopted by the Company after the date of Admission shall not exceed 10 per cent. of the shares issued in the capital of the Company from time to time. 11.2.2 An option shall only be exercisable (a) after three years from date of grant, (b) before the expiry of the option period, (c) at a time permitted by the Model Code and (d) if any performance conditions imposed pursuant to the share option scheme rules have been fulfilled or obtained. 11.2.3 If a participant dies, his legal personal representatives may exercise his options granted under the Share Option Scheme within one year from the date of his death not withstanding the expiry of three years from the date of grant and notwithstanding that any performance conditions may not have been fulfilled or attained.

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11.3 Grant of Options 11.3.1 Subject to the restrictions and limitations imposed by the Share Option Scheme rules, at any time while the Share Option Scheme is in operation, the Directors may at their discretion (subject to the recommendation of the Remuneration Committee) offer to grant options under the Share Option Scheme to participants at an option price determined by the Directors as the “Market Value” (being if at the relevant time the shares are admitted to AIM, an amount equal to the middle market quotation of a share (as derived from the Daily Official List of the London Stock Exchange) or (as the case may be) the last price of a share published in the Daily Official List of the London Stock Exchange on a dealing day immediately preceding the date of grant or if the foregoing does not apply, the market value of a share as determined by the Directors. If any share is to be subscribed for, then the option price shall be, not less than whichever shall be the greater of the market value and the nominal value of a share provided that no option may be granted on the basis of the value of a share on a day earlier than the first dealing day of the period of 42 days from the date of adoption of the Share Option Scheme or during each period of 42 days from the date of announcement of the Company’s results from the previous financial year, half year or other period. 11.4 Exercise of Options 11.4.1 An option may be exercised by returning a notice in writing to the Company in the prescribed form in respect of all or any of the shares to which it relates, but only in the multiples of 10,000 shares or the whole of the balance (if less than that number), together with the payment for the aggregate option price together with the opinion certificate in the prescribed form. 11.4.2 As soon as practicable but in any event within 30 days of receipt of payment, the Directors shall, within 30 days, allot and issue the appropriate number of shares to the participant and deliver to him a definitive share certificate. 11.5 Alteration of Capital of the Company In the event of issue of shares or reorganisation of the Company (i) the number of shares outstanding options and option price thereof and/or (ii) the number of shares in respect of which any option is capable of being exercised in any period, and/or (iii) the aggregate maximum number and/or nominal value of shares available under the Share Option Scheme, shall be varied or adjusted by the Directors (on the recommendation of the Remuneration Committee) in such manner as the auditors shall have confirmed in writing to be fair and reasonable. 11.6 Takeover, liquidation or reconstruction of the Company If at any time an offer is made to all the holders of fully-paid ordinary shares in the capital of the Company (or all such holders other than the offeror and/or any persons controlled by the offeror and/or persons acting in concert with the offeror) to acquire all or part of such ordinary shares held by them and such offer is, becomes, or is declared unconditional in all respects and as a result of such offer the offeror obtains “Control” (as defined therein) of the Company then (1) any outstanding options may, subject to the rules, be exercised within six months after the time when the offeror has obtained Control and any condition subject to which the offer is made has been satisfied notwithstanding that any performance condition(s) may not have been fulfilled or attained; and (2) if the offeror becomes bound or entitled to acquire any ordinary shares pursuant to the take over provisions of the UK Companies Act 1985, the Directors shall notify all option holders within fourteen days of the offeror becoming so bound or entitled and subject to the rules any outstanding options may be exercised at any time while the offeror remains so bound or entitled notwithstanding that any performance condition(s) may not have been fulfilled or attained. If the outstanding Options are not exercised during that period they shall lapse. In the event of a winding up of the Company an Option Holder may, in respect of any option then capable of exercise by him by notice in writing to the Directors within 30 days of commencement of the winding up elect to be treated as if that option had been exercised in whole or in part immediately before the commencement of the winding up notwithstanding that any performance condition(s) may not have been fulfilled or attained. If the Court sanctions a compromise or arrangement proposed for the purposes of or in connection with a scheme for the reconstruction of the Company or its amalgamation with any other company or companies any outstanding option may subject to the relevant rules be exercised within six months of the Court sanctioning the compromise or arrangement notwithstanding that any performance condition(s) may not have been fulfilled or attained and if the outstanding Options are not exercised during that period they shall lapse.

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11.7 Governing Law The Share Option Scheme is governed and construed in accordance with the laws of England. 12. Share Award Plan A summary of the Share Award Plan is as follows: 12.1 Purpose and Objective Prior to Admission, 433,163 Shares were transferred to the Trustee by certain of the existing shareholders of the Company to hold pursuant to the terms of the trust deed applicable to the Share Award Plan. These Shares will be held on trust for selected PRC employees and officers of the Group (but excluding officers of the Company). 12.2 Duration and Administration The Share Award Plan shall be valid and effective for a term of ten years from the date of adoption and it shall be subject to the administration of a committee delegated from time to time by the Board (“the Committee”) and the Trustee in accordance with the provisions of the Trust Deed and Share Award Plan rules. 12.3 Source of award The Shares available under this Share Award Plan will come from such Shares as may be gifted to the Trustee by donors or pursuant to funds provided by such donors to the Trustee for the acquisition of Shares in the Company. 12.4 Selection of an award to Selected Employees The Committee may from time to time at its absolute discretion select a Selected Employee for participation in this plan and determine the number of shares to be awarded but no employee shall as of right be entitled to participate in this plan. In determining the award, the Committee may take into consideration matters set out in the rules relating to the Share Award Plan and the Committee shall be entitled to impose conditions with respect to such award as it deems appropriate. 12.5 Plan Limits In any given financial year of the Company, the maximum number of shares to be subscribed, purchased or transferred by the Trustee pursuant to the Share Award Plan shall not exceed 1 per cent. of the total issued shares of the Company as at the beginning of each such financial period. The Trustee shall not accept any funding to subscribe and/or purchase any Shares or transfer any Shares gifted to the Trustee for the purposes of this Plan when such subscription, purchase or transfer (as the case may be) will result in the said limit of 1 per cent. being exceeded. 13. Summary of the Warrant instrument The Warrants are constituted by a Warrant instrument dated 15 December 2006. Each Warrant entitles the holder to subscribe in cash at the Placing Price for one Share during the period set out in the relevant certificate (the “Subscription Period”). The Warrants will not be listed or dealt in on AIM, the market known as OFEX or any recognised investment exchange (as defined in the Financial Services and Markets Act 2000 of the United Kingdom). Shares allotted on the exercise of Warrants will rank for all dividends and distributions declared on any date on or after the date on which the relevant notice of exercise is lodged and otherwise shall have the rights and privileges prescribed in the Articles in relation to Shares. If, at the time of issue of Shares pursuant to the exercise of Warrants, the Shares are quoted on the Official List or are traded on AIM or permission has been granted for dealings therein on any other recognised investment exchange in any part of the world, the Company will apply to such body for permission to deal in or for quotation or admission of such Shares (as the case may be) and shall use its reasonable endeavours to secure such permission, quotation or admission, as the case may be. The Warrant instrument contains provisions to adjust the subscription price and/or the number and/or nominal amount of Shares to be subscribed following a capitalisation or profits or reserves or a sub-division or consolidation of the Shares and to allow warrant holders to participate in any offer or invitation made to the holders of Shares as if the subscription rights had been exercised before the record date of such offer or invitation or, in the case of a takeover offer, to exercise the Warrants.

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If, prior to the end of the Subscription Period, an order is made or an effective resolution is passed for winding up the Company and there is a surplus available for distribution to the holders of Ordinary Shares exceeding the subscription price, the Warrantholders will be treated as if they had exercised their subscription rights in full (less an amount equal to the subscription price in respect of the relevant Shares arising). Prior to the end of the Subscription Period the Company shall not, without the prior sanction of a resolution passed by a majority of not less than three-fourths of the Warrantholders voting, modify the rights attached to the Shares in any way which has a material, adverse effect on the rights of the Warrantholders or the holder of Shares or the respective abilities of such persons to enjoy such rights (but so that such restriction shall not be a restriction or prohibition on sub-division or consolidation of shares) or amend any provision of its Articles (or pass any resolution, whether by way of temporary or permanent relaxation or disapplication of any provision of its Articles having a like or similar effect) which will have a material, adverse effect on the rights of the Warrantholders or the holder of Shares or the respective abilities of such persons to enjoy such rights The Warrants may be freely transferred in whole or in part at any time. The Company shall send to Warrantholders a copy of its Annual Report together with all documents required by law to be annexed thereto and copies of every statement, notice or circular issued to the members of the Company concurrently with the issue of the same to its members. Warrantholders shall have the right to attend and speak (but not to vote) at all meetings of members of the Company at which any business is to be moved which has any effect (actually or reasonably foreseeable) on the value of the Warrants or the rights attaching thereto or the enjoyment thereof. 14. Litigation The Company is not involved in any legal or arbitration proceedings which may have or have had during the twelve months preceding the date of this document a significant effect on the Group’s financial position and, so far as the Directors are aware, there are no such proceedings pending or threatened against the Group. 15. Working capital The Directors are of the opinion that, having made due and careful enquiry, the working capital available to the Company, taking into account the estimated net proceeds of the Placing, will be sufficient for its present requirements, that is for at least twelve months from Admission. 16. Taxation 16.1 Taxation implications for UK residents 16.1.1 Introduction The Company is in the process of applying to be registered for tax in Hong Kong. The statements below are intended only as a general guide and UK resident shareholders and do not constitute advice to any shareholder on his or her personal tax position and may not apply to certain classes of investor (such as dealers, charities or pension providers). The comments are based on current legislation and Inland Revenue practice. Levels of taxation may change from time to time. Any investor who is in any doubt as to his or her tax position, or who may be subject to tax in any other jurisdiction, should consult his or her professional adviser. 16.1.2 Taxation of Dividends Where dividends are paid by the Company to a non-corporate shareholder, the taxation of the shareholder depends on their domicile situation. If the shareholder is UK domiciled they will be liable to UK income tax under Schedule D Case V on an arising basis. If they are non UK domiciled, they will only be liable to UK income tax on amounts remitted to or received in the UK. Shareholders must consult their own tax advisors on their domicile, residence and ordinary residence status and on what amounts to “remitted or received in” the UK. Non-corporate shareholders whose income, including the dividend, is within the lower or basic rate bands will be liable to “Schedule F Ordinary Rate” of income tax at 10 per cent. Individual shareholders who are liable to income tax at the higher rate of tax will be charged to “Schedule F Upper Rate” of tax of 32.5 per cent. A UK corporate shareholder who receives a dividend paid by the Company will be taxable on the gross amount of the dividend under Schedule D Case V and taxed at the company’s marginal rate of corporation tax. The gross dividend includes withholding tax, if any, and underlying taxes, if a certain percentage of the shares are held by the corporate shareholder. Relief may be given for any withholding taxes paid or underlying taxes suffered overseas. Certain non-corporate shareholders may also be subject to UK tax on the group’s profits on an arising basis whether or not those profits are distributed to shareholders by Company. To the extent that those profits are subsequently paid out as Company dividends relief should be available to avoid double taxation.

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16.1.3 Taxation of chargeable gains If a UK resident (or ordinarily resident) shareholder disposes of all or any of the Shares acquired they may, depending on their particular circumstances, incur a liability to UK taxation on chargeable gains. Individuals, personal representatives and trustees may be entitled to taper relief, which will serve to reduce the chargeable gain. UK resident companies are not entitled to taper relief, but are due indexation allowance, which may also reduce any chargeable gain, but will not create nor enhance a capital loss. UK domiciled non-corporate shareholders who, with connected persons, hold more than a 10 per cent. interest in the Company will be subject to the attribution of gains arising to the Company, if the Company, if UK tax resident, would be regarded as a UK close company. 16.1.4 Stamp duty and stamp duty reserve tax Generally, no UK stamp duty or stamp duty reserve tax will be payable by subscribers on the issue to them of Shares pursuant to the Placing. 16.2 Taxation implications for Hong Kong Residents Residents of Hong Kong will not be taxable on dividends received from the Company, or gains made on the disposal of shares in the Company. No Hong Kong stamp duty will be payable on the issue or transfer of shares in the Company. 16.3 Taxation Implications for PRC Residents Individuals resident in PRC will be subject to Individual Income Tax at a rate of 20 per cent. on dividends from the Company and on any gains that such individuals make from the disposal of shares in the Company. PRC domestic enterprises will be subject to Enterprise Income Tax at a rate of 33 per cent. on dividends from the Company and gains made from the disposal of shares in the Company. No PRC stamp duty will be payable on the issue or transfer of shares in the Company. The above is a summary of certain aspects of current law and practice in the UK, Hong Kong and PRC, and is not tax advice to any Shareholder. Each prospective holder of Shares should consult that holder’s own tax advisor with respect to the tax consequences of the ownership and disposal of Shares. 17. General 17.1 The gross proceeds of the Placing are expected to be approximately £1.57 million. The total costs and expenses relating to the Placing and Admission are payable by the Company and are estimated to amount to approximately £0.56 million (including Value Added Tax where applicable). 17.2 Other than the current application for Admission, the Shares have not been admitted to dealings on any recognised investment exchange nor has any application for such admission been made nor are there intended to be any other arrangements for there to be dealings in the Shares. 17.3 CCTT Ltd has given and not withdrawn its written consent to the inclusion of references to its name herein in the form and context in which it appears and to the inclusion of its report in Part III of this document. 17.4 Baker Tilly has given and not withdrawn its written consent to the inclusion in this document of references to its name herein in the form and context in which it appears and to the inclusion of its report in Section B of Part IV of this document. 17.5 Where information has been sourced from a third party, this information has been accurately reproduced and so far as the Directors are aware, and are able to ascertain from information published by that third party, no facts have been omitted which would render the reproduced information inaccurate or misleading. 17.6 Each of John East & Partners and King & Shaxson Capital has given and not withdrawn their written consent to the inclusion in this document of references to its name in the form and context in which it appears. 17.7 The Placing Price represents a premium over nominal value of HK$5.34 (equivalent to approximately 34.9 pence) per Share. 17.8 It is expected that definitive share certificates will be despatched by hand or first class post by 29 December 2006. In respect of shares in uncertificated form, it is expected that Shareholders’ CREST stock accounts will be credited on 21 December 2006. 17.9 The Directors are not aware of any exceptional factors which have influenced the Company’s activities.

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17.10 Save as set out in this document, the Directors are not aware of any patents or other intellectual property rights, licences or particular contracts which are or may be of fundamental importance to the Company’s business. 17.11 Chu and Chu Certified Public Accountants, were auditors of the Company for the period relating to the accounts set out in Part IV of this document. 17.12 Save as disclosed in this document, there has been no significant change in the trading or financial position of Walcom since 31 December 2005, the date to which the Financial Information on the Company in Section A of Part IV of this document was prepared. 17.13 Save as disclosed in this document, as far as the Directors are aware there are no known trends, uncertainties, demands, commitments or events that are reasonably expected to have a material effect on the Group’s prospects for at least the current financial year. 17.14 The Directors are not aware of any environmental issues that may affect the Group’s utilisation of its tangible fixed assets. 17.15 AOK International Holdings Limited was paid HK$212,000 in respect of consultancy services provided for the period 1 January 2006 to 31 December 2006. 17.16 Save as disclosed at 17.15 no person directly or indirectly (other than the Company’s professional advisers and trade suppliers or save as disclosed in this document) has in the last twelve months received or is contractually entitled to receive, directly or indirectly, from the Company on or after Admission: 17.16.1 fees totalling £10,000 or more; 17.16.2 or securities in the Company with a value of £10,000 or more calculated by reference to the Placing Price; or 17.16.3 any other benefit with a value of £10,000 at the date of Admission. 17.17 Other than in the ordinary course of business, there are no significant investments in progress by the Company. 17.18 The Directors are, or may be deemed to be, promoters of the Company. 17.19 The minimum amount which, in the opinion of the Directors, must be raised by the Company under the Placing is approximately £1.57 million, which will be applied as follows: (a)

approximately £0.56 million (including VAT) in respect of the expenses of the Placing; and

(b)

the balance of the proceeds of the Placing receivable by the Company after payment of the sums described above will be used as set out in the section headed “Details of and reasons for the Placing and use of the proceeds” in Part I of this document.

17.20 There are no amounts to be provided otherwise than from the proceeds of the Placing in respect of the matters specified in paragraph 17.19 above. 18. Availability of Document Copies of this Document are available, free of charge, from the registered office of the Company and the office of John East & Partners, Crystal Gate, 28-30 Worship Street, London EC2A 2AH and King & Shaxson, 6th Floor, Candlewick House, 120 Cannon Street, London EC4N 6AS during normal business hours on any weekday (Saturdays and public holidays excepted) from the date of this document until at least one month after Admission. Dated 15 December 2006

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