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WALCOM GROUP LIMITED (Incorporated in the British Virgin Islands with limited liability)

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CHAIRMAN’S STATEMENT REPORT OF THE DIRECTORS and FINANCIAL STATEMENTS YEAR ENDED 31 DECEMBER 2008

CONTENTS

PAGE Directors and Advisers

1

Chairman’s Statement

4

Report of the Directors

8

Report of the Auditor

14

Financial Statements

16

Notes to the Financial Statements

21

Five Year Financial Review

56

Biographies of the Directors

57

Summary of Patents Granted

59

Notice of Annual General Meeting

61


WALCOM GROUP LIMITED 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) Albert Chi Chiu Wong (Non-Executive Director)

COMPANY SECRETARY Albert Siu Fai Wong FCPA, ACA

PRINCIPAL PLACE OF BUSINESS Part D, Mingtai Bldg. 351 Guo Shou Jing Road, ZJ Hi-tech Park Shanghai 201203 People’s Republic of China

AUDITOR Lau & Au Yeung C.P.A. Limited 21st Floor Tai Yau Building 181 Johnston Road Wanchai Hong Kong

1


SOLICITOR Richards Butler 20/F Alexandra House 16-20 Chater Road Central Hong Kong

NOMINATED ADVISER and BROKER John East & Partners Limited 10 Finsbury Square London EC2A 1AD UK

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

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

2


PRINCIPAL BANKERS Shanghai Commercial Bank Limited Shop 83, Level 1, Uptown Plaza 9 Nam Wan Road, Tai Po, N.T. Hong Kong

Shanghai Pudong Development Bank 509 Jingang Road Jinqiao Export Processing Zone Shanghai 201206 People’s Republic of China

3


WALCOM GROUP LIMITED CHAIRMAN’S STATEMENT

I have pleasure in presenting the final results for the year ended 31 December 2008.

Overview of Results

Having taken into account the results of extra investment in our Thailand subsidiary, turnover and gross profit in the year under review showed considerable improvement compared with 2007. However, owing to the aggregate effect of escalating raw material and production costs and the appreciation in value of the Renminbi, the gross profit margin has fallen to 56.5 per cent. (2007: 64.8 per cent.). In view of the difficult operating environment ahead, the Group has decided to focus its financial resources on business operations and discontinue certain non-material patent applications. This has resulted in a write off of HK$2.3 million patent costs capitalised in previous years. Share option expenses of HK$0.5 million were amortised during the year relating to options issued in July 2008. Consequently, the loss before tax is considerably higher than that of last year.

The results are summarised as follows: Year ended

Year ended

31 December

31 December

2008

2007

HK$’000

HK$’000

per cent.

Turnover

26,027

18,454

41

Gross profit

14,707

11,966

23

Operating loss

(8,902)

(5,639)

58

2

367

(99)

(12)

507

n/a

(8,911)

(4,764)

87

Net finance income Share of (loss)/profit of associates Loss before tax Net asset value per share (HK$)

0.27

4

0.33

Change

(18)


Outlook

The global financial crisis and liquidity issues in credit markets have been well documented and although world-wide financial conditions appear to have shown a degree of improvement after the efforts of various central banks, we are now facing a world-wide economic recession, recovery from which is still uncertain. In view of the present economic climate and in order to be closer to its operational base, which services its key market, the Group has relocated its Hong Kong office to Shanghai.

The move will cut administration costs and, therefore, improve the Group’s operating

efficiency.

In the last annual report, we stated that we considered that there are new opportunities for our business as the world is facing a crisis in food production as well as the threat of avian influenza. This is still true despite the fact that the world’s attention has been drawn to the financial crisis. ¾ In 2008, the Group reported that with the help of various sophisticated computer simulation models, some feed companies had started to use the Group’s products to reformulate their own production mixes in order to reduce the level of corn consumption while maintaining the same energy utilisation and hence has lead to a reduction in manufacturing costs. This trend continued in the period under review and the Group’s customer base in this category is growing. The Group is going to expand the scale of this sales strategy and a sales campaign named the Energy Saving Program (the “ESP”) will be launched in the third quarter of 2009. By launching the ESP campaign successfully, the Board anticipates that demand for Walcom’s products will increase significantly. ¾ The threat of avian influenza to the world’s population continues to be unresolved.

Viral attacks

on the swine population in Asia and China are still present and these threats may create greater demand for the Group’s animal husbandry immunity enhancing products.

Recent Developments ¾

Sales in Philippines have shown slight growth despite the global recession. The Board expects this to continue in 2009.

5


¾

In addition to the effects of global economic conditions, Thailand’s economy has been badly affected by the continuous political turmoil in the country. The Directors expect that sales demand will improve once the political situation has stabilised.

¾

The Board believes that there is a potentially large market for the Group’s products in Vietnam, as there is considerable room for technical improvement in its swine and prawn feed markets. We have started a local product registration process, after which product trials can take place and sales can be made into the market.

¾

In order to further cut costs, the Group has changed its auditor to Lau and Au Yeung C.P.A. Limited, which is a highly reputable accounting firm in Hong Kong experienced in dealing with listed clients.

¾

In October 2008, the Group acquired the entire issued share capital of Beijing New World Bio-Technology Company Limited, which is engaged in sales of Chinese herb and natural plant extracts. Unfortunately, its business has been severely affected by the global economic situation and the Directors have now decided to suspend its operations until signs of improvement are seen.

Patents

At the end of 2008 the Group had been granted 32 patents in respect of: ¾ its core Cysteamine technology in China, Hong Kong, North Korea, New Zealand, Ukraine, Russia, South Africa, Australia, India and South Korea; ¾ poultry feed in the UK, North Korea, Taiwan, Hong Kong, Russia, China and Australia; ¾ dairy cow feed in New Zealand, the UK, Hong Kong, Europe, Mexico, India, China and Russia; ¾ antibodies to adipose tissues in the UK; ¾ fish feed in the UK, Hong Kong, Indonesia and Russia; and ¾ shellfish feed in Europe.

The Directors expect further patents to be granted in the future in line with the policy of the Group to pursue wide patent coverage in places where the Board believes there will be significant demands for 6


the Group’s products.

Debt

In January 2009, the Group repaid in full the bank loan of HK$1,160,000 taken out in 2007 for the purpose of the factory relocation in Shanghai. The Group is free of debt and currently has a cash balance of HK$3.7 million.

Dividend

The Directors do not recommend any dividend payment for the year ended 31 December 2008.

Annual General Meeting

The Annual General Meeting will be held at the offices of the Company’s solicitors, Richards Butler in Hong Kong at 2:30pm on Friday 29 May 2009.

On behalf of the Board, I would like to express my sincere thanks to the management team and staff, professional advisers and shareholders for their continuous support during the year. Although the world economy is being hit by the unprecedented financial crisis, the Directors are confident that the Group can achieve success in its business and maximise the return for the shareholders.

Eddie K.M. Chan Chairman 8 May 2009

7


WALCOM GROUP LIMITED REPORT OF THE DIRECTORS

The Directors present their Annual Report, together with the Audited Financial Statements of the Company and its subsidiaries for the year ended 31 December 2008.

Principal Activity

The Group is actively engaged in the research, development, commercialisation, production and marketing of animal feed additive products.

Results and dividends

Details of the Group’s results for the year ended 31 December 2008 are set out in the Consolidated Income Statement on page 16.

The Directors do not recommend the payment of any dividend for the year.

Financial Summary

A summary of the results and of the assets and liabilities of the Group for the past five financial years is set out on page 56 of the Annual Report.

Non-current Assets

The major non-current assets of the Group consist of plant and equipment, and patents, the movement of which are set out in Notes 13 and 14 to the financial statements on pages 39 and 40 respectively. A summary of the patents granted as at 31 December 2008 is also included in page 59.

Share Capital

Detailed movements in the share capital of the Company during the year are set out in Note 23 to the financial statements on page 48.

8


Directors

Eddie Kin Man Chan

Non-Executive Chairman

Francis Chi

Executive Director and Chief Executive Officer

Yong Chian Tan

Executive Director and Chief Executive Officer in PRC

Albert Siu Fai Wong

Executive Director, Secretary and Chief Financial Officer

Frankie Yuet Leung Wong

Non -Executive Director

Royston Frederick Drucker

Non -Executive Director

Timothy Robert Nelson

Non -Executive Director

Albert Chi Chiu Wong (appointed 12 December 2008)

Non -Executive Director

In accordance with the Company’s Articles of Association, Mr Albert Siu Fai Wong and Mr Timothy Robert Nelson retire by rotation and, being eligible, offer themselves for re-election at the forthcoming annual general meeting.

Brief biographies of each of the Directors are shown on page 57.

Directors’ Service Contracts

Mr Francis Chi, Mr Yong Chian Tan and Mr Albert Siu Fai Wong each entered into a service agreement with the Company for a term of three years from 21 December 2006, determinable by either party after the first year of service by giving six months’ prior written notice.

Each of the non-executive Directors entered into a letter of appointment with the Company for a continued term of one year from 21 December 2008, determinable by the director by giving a written notice to the Company before its expiration.

9


Directors’ Emoluments Directors’ emoluments for the year ended 31 December 2008 are set out as follows: (expressed in HK$’000) Retirement

Salaries and other

Share-based

benefits scheme

Total

Total

Fees

benefits

payments

contribution

2008

2007

Eddie K.M. Chan

116

-

-

-

116

120

Francis Chi

200

1,425

122

12

1,759

1,637

Yong Chian Tan

200

883

122

-

1,205

1,084

Albert S.F. Wong

200

883

122

12

1,217

1,095

Frankie Y.L. Wong

116

-

-

-

116

120

Royston F. Drucker

286

-

-

-

286

314

Timothy R. Nelson

286

-

-

-

286

314

-

-

-

-

-

-

_____

____

_____

4,985

Albert C.C. Wong

Total 2008

1,404

3,191

366

24

Total 2007

1,468

3,191

-

25

4,684

Share Option Scheme A share option scheme (“the scheme”) was adopted pursuant to a resolution passed at an extraordinary general meeting of the Company held on 20 September 2006 for the purpose of providing incentives or rewards to 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. The maximum number of shares in respect of which options or rights to subscribe for shares pursuant to the scheme when aggregated with number of shares in respect of which options or rights to subscribe for shares has been granted in previous years under the scheme and other share option or share incentive plans adopted by the Company shall not exceed 10% of the shares issued by the Company from time to time. An option share shall only be exercisable (a) after one year from date of grant, (b) before the expiry of the option period, (c) at a time permitted by the Model Code for Securities Transactions by Directors of Listed Issuers, and (d) if any performance 10


conditions imposed pursuant to the scheme rules have been fulfilled or obtained.

There are 1,760,000 share options outstanding as at 31 December 2008, details of which are set out in Note 24(a) to the financial statements on page 51.

Directors’ Interests in Contracts of Significance

Save as disclosed in Note 29 to the financial statements on page 53, no contract of significance, to which the Company or its subsidiaries was a party and in which a Director of the Company had a material interest, whether directly and indirectly, subsisted at the end of the year or at any time during the year.

Directors’ Interests in Shares

At 31 December 2008, the interests of the Directors and their associates in the shares and underlying shares of the Company and its associated corporations, as recorded in the register maintained by the Company, or as otherwise notified to the Company, were as follows:

No. of issued

Shareholding

ordinary shares held

percentage

1,233,652

1.79%

19,660,290

28.56%

2,056,085

2.99%

360,969

0.52%

Frankie Y.L. Wong

11,593,921

16.84%

Royston F. Drucker

103,960

0.15%

6

1,572,890

2.29%

Eddie K.M. Chan1 Francis Chi

2

Yong Chian Tan

3 4

Albert S.F. Wong

5

Timothy R. Nelson 1

held by Best Revenue Investments Limited, a nominee company.

2

held by Leadton Resources Limited, a nominee company.

3

held by Granfuture Holdings Limited, a nominee company.

4

held by Faiton Industrial Limited, a nominee company.

5

includes 11,521,727 shares held by Bioglory International Ltd, which is a subsidiary of The Yangtze Ventures Limited, a

company of which he is a director. The remaining 72,194 shares are held in his own name. 6

held by Vuna Capital Partners Ltd., a company of which he is a director.

11


Corporate Governance

The Board recognises the importance of sound corporate governance and complies with the Corporate Governance Guidelines for AIM Companies published by the Quoted Companies Alliance in July 2005 and applies them to the extent considered appropriate by the Board given the size of the Group. ¾ The Board currently comprises three executive Directors and five non-executive Directors. The Chairman is a non-executive member of the Board. There is a clear division of responsibilities in running the Board and the Group’s business. ¾ The Board receives and reviews on a regular basis such financial and operating information appropriate to the Directors being able to discharge their duties. An annual budget is approved by the Board with revised forecast being prepared at the half year stage. ¾ Directors retire by rotation and offer themselves for re-election pursuant to the Articles of Association of the Company. ¾ The Board complies with Rule 21 of the AIM Rules relating to directors’ dealings as applicable to AIM companies and have also taken all reasonable steps to ensure compliance by any of the Group’s employees. ¾ The Company has established an Audit Committee and a Remuneration Committee with formally delegated duties and responsibilities.

Audit Committee

The Audit Committee comprises Mr Eddie Chan, Mr Frankie Wong, Mr Timothy Nelson, Mr Royston Drucker, Mr Albert C. C. Wong and Mr Albert S.F. Wong,.

The duties of the Audit Committee include reviewing, in draft form, the Company’s annual and half-yearly report and financial statements and providing advice to the Board. Members of the Audit Committee are also responsible for reviewing and supervising the financial reporting process and internal control system of the Group.

The terms of reference of the Audit Committee are available on the Company’s website 12


www.walcomgroup.com.

Remuneration Committee

The Remuneration Committee comprises Mr Eddie Chan, Mr Timothy Nelson and Mr Royston Drucker.

The Remuneration Committee is responsible for reviewing the scale and structure of the executive Directors’ 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

non-executive Directors are set by the entire Board.

The terms of reference of the Remuneration Committee are available on the Company’s website www.walcomgroup.com.

By Order of the Board, Albert S.F. Wong Secretary 8 May 2009

13


INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF WALCOM GROUP LIMITED (Incorporated in the British Virgin Islands with limited liability) We have audited the consolidated financial statements of Walcom Group Limited (the “Company”) and its subsidiaries (together, the “Group”) set out on pages 16 to 55, which comprise the consolidated and the Company balance sheets as at 31 December 2008, and the consolidated income statement, the consolidated statement of changes in equity and the consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. DIRECTORS’ RESPONSIBLITY FOR THE FINANCIAL STATEMENTS The directors of the Company are responsible for the preparation and the true and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards (“IFRSs”) promulgated by the International Accounting Standards Board (“IASB”). This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and the true and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. AUDITOR’S RESPONSIBILITY Our responsibility is to express an opinion on these consolidated financial statements based on our audit and to report our opinion solely to you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. We conducted our audit in accordance with International Standards on Auditing issued by the International Auditing and Assurance Standards Board (“IAASB”). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and true and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

14


INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF WALCOM GROUP LIMITED (CONTINUED) (Incorporated in the British Virgin Islands with limited liability) OPINION In our opinion, the consolidated financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 31 December 2008 and of the Group’s loss and cash flows for the year then ended in accordance with International Financial Reporting Standards.

Lau & Au Yeung C.P.A. Limited Certified Public Accountants Hong Kong, 28 April 2009 Franklin Lau Shiu Wai Director Practising Certificate Number P1886

15


Walcom Group Limited Consolidated income statement – by function of expense For the year ended 31 December 2008 (Expressed in Hong Kong dollars)

Note

2008 HK$

2007 HK$

26,027,300

18,453,608

Cost of sales

( 11,320,031 )

( 6,487,430 )

Gross profit

14,707,269

11,966,178

204,964

788,166

4

Revenue

Other income

5

Research and development expenses

( 1,418,445 )

( 1,207,926 )

(7,705,042 )

( 5,590,529 )

General and administrative expenses

(14,690,786 )

(11,594,555 )

Loss from operations

( 8,902,040 )

( 5,638,666 )

Selling and distribution expenses

Net finance income

6

Share of (loss) / profit of associates

(

2,475

367,286

11,523 )

507,362

Loss before income tax

7

( 8,911,088 )

Income tax expense

8

(

133,440 )

Loss for the year

9

(

9,044,528 )

( 4,764,018 )

Attributable to : Equity shareholders of the Company Minority interests

( 9,297,050 ) 252,522

( 4,764,018 ) -

Loss for the year

( 9,044,528 )

( 4,764,018 )

Loss per share - basic, HK cents - diluted, HK cents

11

( (

14.16 ) 14.16 )

( 4,764,018 ) -

( (

The notes on pages 21 to 55 form an integral part of these consolidated financial statements.

16

7.34 ) 7.34 )


Walcom Group Limited Consolidated balance sheet as at 31 December 2008 (Expressed in Hong Kong dollars) Note

2008 HK$

2007 HK$

2,646,404 5,558,118 127,857 -

1,243,656 6,967,172 718,078

8,332,379

8,928,906

1,420,547 3,968,044 2,229,334 212,071 8,328,032

1,551,916 2,424,421 3,552,714 9,144,259

16,158,028

16,673,310

24,490,407

25,602,216

688,344 17,704,252

649,109 20,796,592

18,392,596

21,445,701

375,868

-

18,768,464

21,445,701

22

-

1,160,000

21

3,042,923 17,928 1,501,092 1,160,000 5,721,943

1,898,530 1,097,985 2,996,515

5,721,943

4,156,515

TOTAL EQUITY AND LIABILITIES

24,490,407

25,602,216

NET CURRENT ASSETS

10,436,085

13,676,795

TOTAL ASSETS LESS CURRENT LIABILITIES

18,768,464

22,605,701

ASSETS NON-CURRENT ASSETS Property, plant and equipment Patents Goodwill Investment in associates

13 14 15 17

CURRENT ASSETS Inventories Trade and other receivables Amounts due from associates Tax recoverable Cash and cash equivalents

18 19 17 20

TOTAL ASSETS EQUITY Share capital Reserves

23 23

TOTAL EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY Minority interests TOTAL EQUITY

NON-CURRENT LIABILITIES Bank borrowings CURRENT LIABILITIES Trade and other payables Tax payables Bank overdrafts Bank borrowings

22 22

TOTAL LIABILITIES

The notes on pages 21 to 55 form an integral part of these consolidated financial statements. 17


Walcom Group Limited Balance sheet as at 31 December 2008 (Expressed in Hong Kong dollars) Note

2008 HK$

2007 HK$

16

384

384

16

2,351,134 10,574 23,045

104,351 26,258

2,384,753

130,609

2,385,137

130,993

688,344 1,449,457

649,109 (639,736 )

ASSETS NON-CURRENT ASSETS Investments in subsidiaries CURRENT ASSETS Amounts due from subsidiaries Other receivables Cash and cash equivalents

20

TOTAL ASSETS EQUITY CAPITAL AND RESERVES Share capital Reserves

23 23

2,137,801

9,373

247,336

121,620

TOTAL EQUITY AND LIABILITIES

2,385,137

130,993

NET CURRENT ASSETS

2,137,417

8,989

TOTAL ASSETS LESS CURRENT LIABILITIES

2,137,801

9,373

Total equity CURRENT LIABILITIES Other payables

The notes on pages 21 to 55 form an integral part of these consolidated financial statements.

18


Walcom Group Limited Consolidated statement of changes in equity For the year ended 31 December 2008 (Expressed in Hong Kong dollars)

Share capital HK$

HK$

Accumulated losses HK$

Total HK$

Minority interest HK$

Total equity HK$

23,852,469

-

125,768

(88,593,217)

25,876,899

-

25,876,899

-

-

-

332,820

-

332,820

-

332,820

-

-

-

-

(4,764,018)

(4,764,018)

-

(4,764,018)

-

-

-

332,820

(4,764,018)

(4,431,198)

-

(4,431,198)

Merger reserve HK$

649,109

89,842,770

Exchange difference on translation of financial statements of overseas subsidiaries

-

Loss for the year

-

At 1 January 2007

Total recognised loss for the year

-

Share-based compensation reserve

Exchange reserve HK$

Share premium HK$

At 31 December 2007

649,109

89,842,770

23,852,469

-

458,588

(93,357,235)

21,445,701

-

21,445,701

At 1 January 2008

649,109

89,842,770

23,852,469

-

458,588

(93,357,235)

21,445,701

-

21,445,701

Exchange difference on translation of financial statements of overseas subsidiaries

-

-

-

-

248,363

-

248,363

Loss for the year

-

-

-

-

-

(9,297,050)

(9,297,050)

252,522

(9,044,528)

Total recognised loss for the year

-

-

-

-

248,363

(9,297,050)

(9,048,687)

243,068

(8,805,619)

Acquisition of subsidiaries

-

-

-

-

-

-

-

791,305

791,305

39,235

5,455,874

-

-

-

-

5,495,109

-

5,495,109

-

-

500,473

-

-

500,473

-

500,473

Shares issued Recognition of equity-settled share-based payments Dividends to minority interests At 31 December 2008

688,344

95,298,644

23,852,469

500,473

The notes on pages 21 to 55 form an integral part of these consolidated financial statements. 19

706,951

(102,654,285)

18,392,596

(9,454)

238,909

(658,505)

(658,505)

375,868

18,768,464


Walcom Group Limited Consolidated cash flow statement For the year ended 31 December 2008 (Expressed in Hong Kong dollars) Note Cash flow from operating activities Loss for the year Amortisation of patents Interest received Depreciation Foreign exchange loss, net Interest paid (Gain) / loss on disposal of property, plant and equipment Patent written off Inventories written off Impairment on goodwills Impairment loss on trade receivables Issuance of share-based compensation Share of loss / (profit) of associates

2008 HK$

2007 HK$

( 8,911,088 ) ( 4,764,018 ) 7(b) 471,749 398,519 6 ( 119,571 ) ( 372,490 ) 7(b) 456,822 354,968 85,767 261,730 6 117,096 5,204 5,7(b) ( 47,850 ) 5,995 7(b) 2,307,615 7(b) 288,335 7(b) 2,658 7(b) 143,042 7(a) 500,473 11,523 ( 507,362 )

Operating loss before working capital changes Decrease / (increase) in inventories Decrease in trade and other receivables Decrease / (increase) in amount due from associate – trade related Decrease in trade and other payables

(4,836,471 ) 38,140 1,125,234 1,231,947 ( 421,329 )

Net cash used in operations Corporate income tax paid Interest paid

(2,862,479 ) (10,412,338 ) ( 327,583 ) ( 117,096 ) ( 5,204 )

Net cash used in operating activities

( 3,307,158 ) (10,417,542 )

Cash flow from investing activities Payment for patents Purchases of property, plant and equipment Proceeds from sales of property, plant and equipment Dividends received from an associate Acquisition of subsidiaries, net of cash acquired Amounts due from associates – non-trade related Interest received

( 1,370,310 ) ( 1,802,439 ) ( 1,184,614 ) ( 534,855 ) 50,000 1,300 371,855 4,698,585 185,428 91,433 372,490 119,571

15

2,404,665

Net cash generated from / (used in) investing activities Cash flow from financing activities Increase in restricted balance of cash and cash equivalents Dividends paid to minority interests Proceeds from new bank borrowings

( 4,474,412 ) ( 945,388 ) 209,873 ( 181,536 ) ( 5,020,875 )

(1,406,221 )

(

439,004 ) -

(3,000,000 ) 1,160,000

Net cash used in financing activities

(

439,004 )

(1,840,000 )

Net decrease in cash and cash equivalents

( 1,341,497 ) (13,663,763 )

Cash and cash equivalents at the beginning of the year Exchange gains on cash and cash equivalents Cash and cash equivalents at the end of the year

20

5,046,274

18,704,238

122,163

5,799

3,826,940

5,046,274

The notes on pages 21 to 55 form an integral part of these consolidated financial statements. 20


Walcom Group Limited Notes to the consolidated financial statements For the year ended 31 December 2008 (Expressed in Hong Kong dollars)

1

General information Walcom Group Limited is a company incorporated and domiciled in the British Virgin Islands. The shares of the company are traded on the Alternative Investment Market (“AIM”) of the London Stock Exchange. The address of the registered office of the Company is P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, the British Virgin Islands and its principal place of business is located at Unit 613, 6/F., West Wing Office Building, New World Centre, 20 Salisbury Road, Tsimshatsui, Kowloon, Hong Kong. The principal activity of the Company is investment holding. subsidiaries are set out in note 16.

The principal activities of the

These consolidated financial statements were authorised for issue by the board of directors on 29 April 2009.

2

Summary of significant accounting policies The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. (a) Basis of preparation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). They have been prepared under the historical cost convention. The preparation of financial statements 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 areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in note 31. For the year ended 31 December 2008, the Group has adopted new standards, amendments and interpretations, which are relevant to its operations : (i)

Interpretation effective in 2008 IFRIC 11

Group and Treasury Share Transactions

The adoption of this new interpretation does not have any significant impact on the results and financial position or changes to the accounting policies of the Group.

21


2

Summary of significant accounting policies (continued) (ii)

Interpretations effective in 2008 but not relevant The following interpretations to published standards is mandatory for accounting periods beginning on or after 1 January 2008 or later periods, but is not relevant to the Group’s operations : IFRIC 12 IFRIC 13 IFRIC 14

(iii)

Service Concession Arrangements Customer Loyalty Programme IAS 19 - The Limited on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction

Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Group The following standards and amendments to existing standards have been published and are mandatory for the Group’s accounting periods beginning on or after 1 January 2009 or later periods, but the Group has not early adopted them : IAS 1 (Revised) IAS 16 (Amendment) IAS 19 (Amendment) IAS 23 (Amendment) IAS 27 (Amendment) IAS 28 (Amendment) IAS 32 (Amendment) IAS 36 (Amendment) IAS 38 (Amendment) IAS 39 (Amendment) IFRS 1 (Amendment) IFRS 2 (Amendment) IFRS 3 (Revised) IFRS 8

(iv)

Presentation of Financial Statements Property, Plant and Equipment Employee Benefits Borrowing Costs Consolidated and Separate Financial Statements Investments in Associates Financial Instruments : Presentation Impairment of Assets Intangible Assets Financial Instruments : Recognition and Measurement First-time Adoption of IFRS Share-based Payment Business Combinations Operating Segment

Interpretations and amendments to existing standards that are not yet effective and not relevant for the Group’s operations The following interpretations and amendments to existing standards have been published and are mandatory for the Group’s accounting periods beginning on or after 1 January 2009 or later periods but not relevant for the Group’s operations : IAS 29 (Amendment) IAS 31 (Amendment) IAS 40 (Amendment) IAS 41 (Amendment) IAS 20 (Amendment) IFRIC 15 IFRIC 16 IFRIC 17 IFRIC 18

Financial Reporting in Hyperinflationary Economies Interests in Joint Ventures Investment Property Agriculture Accounting for Government Grants and Disclosure of Government Assistance Agreements for Construction of Real Estates Hedges of a Net Investment in a Foreign Operation Distributions of Non-cash Assets to Owners Transfers of Assets from Customers

The Group has already commenced an assessment of the impact of these new IFRSs but is not yet in a position to state whether these new IFRSs would have a material impact on its results of operations and financial position. 22


2

Significant accounting policies (continued)

(b) Basis of consolidation The consolidated financial statements include the financial statements of the Company and its subsidiaries made up to 31 December 2008.

(c)

Subsidiaries Subsidiaries are all entities over which the Group has control. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group has control. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liability and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement. The gain or loss on the disposal of a subsidiary represents the difference between the proceeds of the sale and the Group’s share of its net assets together with any goodwill relating to the subsidiary which was not previously charged or recognised in the consolidated income statement and also any related accumulated exchange reserve. Inter-company transactions, balances and unrealised gains on transaction between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. In the Company’s balance sheet, the investments in subsidiaries are stated at cost less provision for impairment losses. The results of the subsidiaries are accounted by the Company on the basis of dividend received and receivables.

(d) Associate Associates are entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting right. Investment in an associate are accounted for by the equity method of accounting and is initially recognised at cost. The Group’s investment in an associate includes goodwill, net of any accumulated impairment loss, identified on acquisition. The Group’s share of its associates post-acquisition profits or losses is recognised in the consolidated income statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses of the associates equals or exceeds its interest in the associates, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associates. 23


2

Significant accounting policies (continued)

(d) Associate (continued) Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of the associates have been changed where necessary to ensure consistency with the policies adopted by the Group. Dilution gains and losses in associates are recognised in the income statements.

(e)

Property, plant and equipment Property, plant and equipment are stated at historical cost less accumulated depreciation and any impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the assets. Subsequent costs are included in the assets’ 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 Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are expensed in the consolidated income statement during the financial period in which they are incurred. Depreciation of both owned and leased property, plant and equipment is calculated using the straight-line method to allocate the costs to their residual value over their estimated useful lives, as follows: Leasehold improvements Furniture and fixtures Office equipment Plant and machinery Motor vehicles

20% or term of lease, whichever is shorter 20% 20% 10% - 30% 20%

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. Gains or losses on disposal of plant and equipment are determined by comparing proceeds with carrying amount. These are included in the consolidated income statement.

(f)

Patents Patents that are acquired by the Group and/or self-invented are stated in the balance sheet at cost less accumulated amortisation (where the estimated useful life is finite) and impairment losses (see note 2(g)). Amortisation of patents is charged to the consolidated income statement on a straight line basis over the assets’ estimated useful lives. The patents 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 are reviewed annually.

24


2

Significant accounting policies (continued)

(g)

Impairment of investments in subsidiaries, associates and non-financial assets Assets that have an indefinite useful life or have not yet available for use are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation and depreciation are reviewed for impairment whenever events or changes in circumstances indicated that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount of the assets exceeds its recoverable amount. The recoverable amount is the higher of the fair value of an asset less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). Assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting time.

(h) Recognition and derecognition of financial instruments Financial assets and financial liabilities are recognised in the balance sheet when the Group becomes a party to the contractual provisions of the instruments. Financial assets are derecognised when the contractual rights to receive cash flows from the assets expire; the Group transfers substantially all the risks and rewards of ownership of the assets; or the Group neither transfers nor retains substantially all the risks and rewards of ownership of the assets but has not retained control on the assets. On derecognition of a financial asset, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognised directly in equity is recognised in the income statement. Financial liabilities are derecognised when the obligation specified in the relevant contract is discharged, cancelled or expires. The difference between the carrying amount of the financial liability derecognised and the consideration paid is recognised in the income statement.

(i)

Inventories Inventories are carried at the lower of cost and net realisable value. Cost is calculated using the weighted average cost method and comprises 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 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. When inventories are sold, the carrying amount of those inventories is recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all losses of inventories are recognised as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories is recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs.

25


2

Significant accounting policies (continued) (j) Trade and other receivables Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost less provision for impairment, except where the receivables are interest-free loans made to related parties without any fixed repayment terms or the effect of discounting would be immaterial. In such cases, the receivables are stated at cost less provision for impairment. A provision for impairment of trade and other receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the assets’ carrying amount and the present value of estimated future cash flow, discounted at the original effective interest rate. The amount of provision is recognised in the consolidated income statement.

(k) Cash and cash equivalents Cash and cash equivalents are carried in the balance sheet at cost. For the purpose of the cash flow statement, cash and cash equivalents comprise cash at bank and on hand, demand deposits with banks and other financial institutions, 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 an integral part of the Group’s cash management are also included as a component of cash and cash equivalents for the purpose of the cash flow statement.

(l)

Trade and other payables Trade and other payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.

(m) Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the consolidated income statement over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.

(n) Contingent liabilities A contingent liability is a possible obligation that arises from past events and whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events not wholly within the control of the Group. It can also be a present obligation arising from past events that is not recognised because it is not probable that outflow of economic resources will be required or the amount of obligation cannot be measured reliably. A contingent liability is not recognised but is disclosed in the notes to the consolidated financial statements.

26


2

Significant accounting policies (continued) (o) Revenue recognition Revenue is recognised when it is probable that the economic benefits will flow to the Group and when the revenue can be measured reliably on the follow basis : (i)

Sale of goods Revenue from the sales of goods is recognised on the transfer of significant risks and rewards of ownership, which generally coincides with the time when the goods are delivered and the title has passed to the customers. Revenue excludes value added tax or other sales taxes and is after deduction of any trade discounts.

(ii)

Management and technical support services Revenue from provision of management and technical support services are recognised when the related services are rendered.

(iii)

Interest income Interest income is recognised on a time-proportion basis, taking into account the principal amounts outstanding and using the effective interest method.

(p) Research and development expenditure Expenditure on research activities is recognised as an expense in the period as incurred. Expenditure on development activities is capitalised only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Group intends to and has sufficient resources 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. Other development expenditure is charged to the consolidated income statement in the period incurred.

(q) Segment reporting A business segment is a Group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and return that are different from those of segments operating in other economic environments. 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.

(r)

Operating leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases, net of any incentives received from the lessor, are charged to the consolidated income statement on the straight line basis over the relevant lease periods.

27


2

Significant accounting policies (continued)

(s) Foreign currency translation Functional and presentation currency Items included in the financial statements of each of the entities within the Group are measured using the currency of the primary economic environment in which the entity operates (the “functional currency�). The consolidated financial statements are presented in Hong Kong dollars, which is the functional and presentation currency of the Company. Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchanges gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated income statement. Translation on consolidation The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: -

assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;

-

income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and

-

all resulting exchange differences are recognised as a separate component of equity.

On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings, are taken to shareholders’ equity. When a foreign operation is disposed of or sold, exchange differences that were recorded in equity are recognised in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.

28


2

Significant accounting policies (continued)

(t)

Employee benefits Pension obligations The Group contributes to defined contribution plans including the Hong Kong Mandatory Provident Fund Scheme and the People’s Republic of China Central Pension Scheme. The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. For defined contribution plans, the Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available. Share-based payment The Group operates an equity-settled compensation plan. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed is determined by reference to the fair value of the options granted, excluding the impact of any non-market service and performance vesting conditions (for example, profitability, sales growth targets and remaining an employee of the entity over a specified time period). Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. The total amount expensed is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At each balance sheet date, the entity revises its estimated of the number of options that are expected to vest based on the non-marketing vesting conditions. It recognises the impact of the revision of original estimates, if any, in the consolidated income statement with a corresponding adjustment to equity. The proceeds revised net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are exercised.

(u) Current and deferred income tax The tax expense for the year comprises current and deferred tax. Tax is recognised in the consolidated income statement, except to the extent that it relates to items recognised directly in equity. In this case, the tax is also recognised in equity. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Company and its subsidiaries and associates operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. 29


2

Significant accounting policies (continued)

(v)

Related parties For the purposes of these financial statements, a party is considered to be related to the Group if: (i)

the party has the ability, directly or indirectly through one or more intermediaries, to control the Group or exercise significant influence over the Group in making financial and operating policy decisions, or has joint control over the Group;

(ii)

the Group and the party are subject to common control;

(iii)

the party is an associate of the Group or a joint venture in which the Group is a venturer;

(iv)

the party is a member of key management personnel of the Group or the Group’s parent, or a close family member of such an individual, or is an entity under the control, joint control or significant influence of such individuals;

(v)

the party is a close family member of a party referred to in (i) or is an entity under the control, joint control or significant influence of such individuals; or

(vi)

the party is a post-employment benefit plan which is for the benefit of employees of the Group or of any entity that is a related party of the Group.

Close family members of an individual are those family members who may be expected to influence, or be influenced by, that individual in their dealings with the entity.

3

Financial risk management The Group’s activities expose it to a variety of financial risks, including foreign currency risk, price risk, credit risk, liquidity risk and interest rate risk. The Group does not hold or issue derivative financial instruments either for hedging or for trading purposes. These risks are managed by the Group’s financial management policies and practices as described below to minimise potential effects on the Group’s financial performance.

a)

Foreign currency risk The Group has certain exposure to foreign currency risk as most of its business transactions, assets and liabilities are principally denominated in Hong Kong dollars, United States dollars (“US dollars”) and Renminbi (“RMB”). Certain Group sales are denominated in US dollars. As the Hong Kong dollars is pegged to the United States dollars, the Group does not expect any significant exposure to foreign currency risk on revenue. However, the Group is exposed to foreign currency risk primarily through the majority of purchases of raw materials, manufacturing costs and certain group sales which are settled and received in RMB. The Group does not employ any financial instruments for hedging purposes but monitors the situation closely to reduce foreign currency risks.

30


3

Financial risk management (continued)

b)

Equity securities price risk The Company is not exposed to any equity securities price risk because the unquoted investments are held for long term strategic purposes. Their performance is assessed and monitored by the management on an on going basis.

c)

Raw material price risk The Group is exposed to risk from increases in the price of raw materials, cysteamine hydrochloride and cyclodexin, labour cost and rental expense which are used in the production of inventories. To minimise this risk, the Group closely monitors its inventories level and enters into contracts with suppliers in advance and make prepayments to suppliers to secure future supplies.

d)

Credit risk Credit risk is the risk of financial loss to the Group if a counterparty to a financial instrument fails to meet its contractual obligations. The Group’s credit risk is primarily attributable to trade and other receivables. The Group trades only with recognised, creditworthy customers and hence there is no requirement for collateral. The Group has a policy in place that all customers who are offered credit terms are subject to credit verification procedures. The credit period granted to customers ranges from 30 days to 120 days, extending up to 180 days for the associates. All trade receivables are monitored on an ongoing basis and overdue balances are reviewed regularly by Credit Committee. The continued supply of goods to customers with trade debts past due are reviewed and approved by the management on an individual basis. At the balance sheet date, the Group had a certain concentration of credit risk as 35% (2007: 59%) of total trade and other receivables which were due from its associates. With respect to credit risk arising from the other financial assets of the Group which comprise cash and cash equivalents, the Group’s exposure to credit risk arising from default of the counterparties is limited as the counterparties have good credit standing and the Group does not expect to incur significant loss for uncollected deposits from these entities. The maximum exposure to credit risk in the event of the counterparties’ failure to perform their obligations is represented by the carrying amount of each financial asset in the consolidated balance sheet. The Group does not provide any other guarantees which expose the Group to credit risk. Further quantitative disclosures in respect of the Group’s exposure to credit risk arising from trade and other receivables are set out in note 19.

31


3

Financial instruments (continued)

e)

Liquidity risk The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank loans and overdrafts. The Group’s policy is to regularly monitor current and expected liquidity requirements and its compliance with lending covenants, to ensure that it maintains sufficient reserves of cash and adequate committed lines of funding from major financial institutions to meet its liquidity requirements in the short and longer term. The table analyses the Group’s financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flow. 2008

Trade and other payables Bank overdrafts Bank borrowings

Within 1 year or on demand HK$

Between 1 to 2 years HK$

Between 2 to 5 years HK$

Over 5 years HK$

Total HK$

3,060,851 1,501,092 1,160,000

-

-

-

3,060,851 1,501,092 1,160,000

5,721,943

-

-

-

5,721,943

Within 1 year or on demand HK$

Between 1 to 2 years HK$

Between 2 to 5 years HK$

Over 5 years HK$

Total HK$

1,898,530 1,097,985 -

747,034

412,966

2,996,515

747,034

412,966

2007

Trade and other payables Bank overdrafts Bank borrowings

-

1,898,530 1,097,985 1,160,000 4,156,515

In order to manage the above liquidity demands, at 31 December 2008, HK$8,328,032 (2007: HK$9,144,259) of the Group’s assets respectively were held as cash that are considered readily realisable.

32


3

Financial instruments (continued)

f)

Interest rate risk The Group’s interest rate risk arises from bank borrowings, bank overdrafts and deposits. Borrowings and deposits issued at variable rates expose the Group to cash flow interest-rate risk. Borrowings and deposits issued at fixed rates expose the Group to fair value interest-rate risk. At the balance sheet date, if interest rates had been increased or decreased by 25 basis-point and all other variables were held constant, the Group’s loss before income tax for the year ended 31 December 2008 would decrease or increase by HK$14,167 (2007: HK$20,115). Decrease/ (increase) in loss before income tax HK$

Increase of 25 basis points

Decrease of 25 basis points

Decrease/ (increase) in loss before income tax HK$

2008 On bank deposits On bank borrowings

0.25% 0.25%

20,820 (6,653)

0.25% 0.25%

(20,820) 6,653

2007 On bank deposits On bank borrowings

0.25% 0.25%

22,860 (2,745)

0.25% 0.25%

(22,860) 2,745

The sensitivity analysis above has been determined assuming that the change in interest rates had occurred at the balance sheet date and had been applied to the exposure to interest rate risk for financial instruments in existence at that date. The 25 basis-point increase or decrease represents management’s assessment of a reasonably possible change in interest rates over the period until the next annual balance sheet date. The analysis performed on the same basis for 2007.

g)

Fair values All financial assets and liabilities are carried at amounts not materially different from their fair values as at 31 December 2008 and 2007.

4

Revenue The principal activities of the Group are manufacturing and sale of chemical feed and additive products. Revenue represents the sales value of goods supplied to customers less returns, discounts, value added tax and sales taxes.

33


5

Other income

Gain on disposal of plant and equipment Exchange gains, net Over-provision of accruals Technical support fee income Service income (note 29(b)) Sundry income

6

2007 HK$

47,850 60,000 97,114 204,964

418,399 117,000 72,755 180,012 788,166

2008 HK$

2007 HK$

119,571 (72,124) (37,561) (7,411)

372,490 (5,204) -

2,475

367,286

2008 HK$

2007 HK$

9,213,351 478,866 500,473 2,860,809

7,979,056 341,411 2,093,869

13,053,499

10,414,336

2008 HK$

2007 HK$

471,749 303,134 11,320,031 456,822 420,119 2,658 288,335 2,307,615

398,519 354,436 6,487,430 354,968 143,042 5,995 -

1,847,525

1,161,685

Net finance income

Bank interest income Interest on bank loan Interest on bank overdrafts Other interest

7

2008 HK$

Loss before income tax Loss before income tax is stated after charging the following items :-

(a)

Staff costs (including directors’ emoluments)

Salaries, wages and commission Contributions to defined contribution retirement plans Share-based compensation Other staff benefits

(b)

`

Other items

Amortisation of patents Auditor’s remuneration Cost of inventories sold # (note 18) Depreciation Exchange losses, net Impairment loss on trade receivables Impairment loss on goodwill Loss on disposal of property, plant and equipment Inventories written off Patents written off Rental charges under operating leases in respect of land and buildings

# Cost of inventories sold includes HK$2,335,018 (2007: HK$1,405,201) relating to staff costs, depreciation and amortisation expenses and operating lease charges, of which amount is also included in the respective total amounts disclosed separately above or in note 7(a). 34


8

Income tax expense

Current income tax - Thailand corporate income tax

(a)

2008 HK$

2007 HK$

133,440

-

Taxation for the Company No provision for profits tax has been made for the Company as it is exempted from taxation in the British Virgin Islands. No deferred taxation has been provided as the Company has no material unprovided deferred tax assets or liabilities which are expected to be crystallized in the foreseeable future (2007: HK$nil).

(b)

Taxation for the Group

(i)

Taxation on overseas profits has been calculated on the estimated assessable profit for the year at the rate of taxation prevailing in the countries in which the Group companies operate. The income tax expense stated in consolidated income statement represented the corporate income tax arisen from the business of a subsidiary operating in Thailand. On 26 June 2008, the Hong Kong Legislative Council passed the Revenue Bill 2008 which reduced corporate profits tax rate from 17.5% to 16.5% effective from the year of assessment 2008/2009. Therefore, Hong Kong Profits Tax is calculated at 16.5% (2007: 17.5%) of the estimated assessable profit for the year. However, no provision for Hong Kong profits tax has been made (2007: HK$nil) as the Group did not have assessable profit subject to Hong Kong profits tax for the year. No provision for foreign enterprise income tax (“FEIT”) in the People’s Republic of China (“PRC”) has been made (2007: HK$nil) as Shanghai Walcom Bio-Chem Co., Ltd. (“Shanghai Walcom”) and Beijing New World Bio-technology Co., Ltd, wholly owned subsidiaries operating in Shanghai and Beijing, respectively in the PRC, have agreed tax losses brought forward in excess of the assessable profits for the FEIT purposes for the year. Pursuant to the relevant income tax rules and regulations in the PRC, Shanghai Walcom is granted certain tax relief whereby it is exempted from FEIT for the first two years and 50% reduction for the following three years commencing from the first profitable year of operation after fully set off against the accumulated losses brought forward. On 16 March 2007, the National People’s Congress approved the Corporate Income Tax Law of the People’s Republic of China (“the new tax law”), which will take effect on 1 January 2008. Under the new tax law, the PRC income tax rate will be gradually increased to a standard rate of 25% for all domestic and foreign enterprises over the next five years with effective from 1 January 2008. According to the Circular 39 passed by the State Council on 26 December 2007, the tax exemption and reduction will be terminated latest by 2012. Accordingly, Shanghai Walcom is exempted from PRC income tax for the years from 1 January 2008 to 31 December 2009, followed by a 50% reduction in the tax rate for the remaining three years from 1 January 2010 to 31 December 2012. The applicable income tax rate would be 11%, 12% and 12.5% for the year 2010, 2011 and 2012 respectively.

35


8

Income tax expense (continued)

(b)

Taxation for the Group (continued)

(ii) A reconciliation between the Group’s income tax expense and the accounting loss, at the applicable tax rate, is set out below :2008 2007 HK$ HK$ Loss before income tax Share of (loss) / profits of associated companies

Notional tax credit on loss before income tax, calculated at the rates applicable to profits in the countries concerned Tax effect of: Different income tax rates in other countries Expenses not deductible for tax purpose Income tax exemption Non-taxable revenue Temporary differences not recognised Prior years’ tax losses utilised this year Unused tax losses not recognised Income tax charges

( 8,911,088) ( 11,523)

( 4,764,018) 507,362

( 8,899,565)

( 5,271,380)

(1,470,328)

(

10,038 1,259,367 ( 259,081) 385 593,059 133,440

995,942)

759,514 ( 83,997 ) 1,603 ( 460,680 ) 779,502 -

(iii) A deferred tax asset amounting to HK$7,511,190 (2007 : HK$8,465,000) in respect of tax losses of a subsidiary incorporated in Hong Kong of approximately HK$45,522,000 (2007 : HK$48,192,000) has not been recognised in the financial statements as it is not certain that future taxable profit will be available against which these losses can be utilised. Tax losses of a subsidiary incorporated in the PRC of approximately HK$2,598,000 and HK$2,337,000 will expire at the end of years 2010 and 2011 respectively. The tax losses do not expire under the current tax legislation. Other temporary differences are not material.

9

Loss attributable to shareholders Loss attributable to equity shareholders of the Company for the year ended 31 December 2008 dealt with in the financial statements of the Company was approximately HK$3,867,154 (2007: HK$66,584,165).

10

Dividends The Company does not recommend the payment of any dividend for the year ended 31 December 2008 (2007: HK$nil).

36


11

Loss per share

(a) Basic loss per share is calculated by dividing the Group’s loss attributable to equity shareholders of the Group of HK$9,297,050 (2007: loss of HK$4,764,018) by the weighted average number of 65,661,287 ordinary shares in issue during the year (2007: 64,910,891 shares). Weighted average number of ordinary shares

Issued ordinary shares at 1 January New issue during the year Weighted average number of ordinary share for the year

2008

2007

64,910,891 750,396 65,661,287

64,910,891 64,910,891

(b) Diluted loss per share The diluted loss per share is calculated by dividing the Group’s loss attributable to ordinary equity shareholders of the Company of HK$9,297,050 (2007: HK$4,764,018) by the weighted average number of 65,661,287 ordinary shares during the year adjusted for the number of dilutive potential shares under the share option scheme (2007 : 64,910,891).

37


12

Segment reporting

(a) Primary reporting format - Geographical Segment The Group’s operations are mainly located in Hong Kong, PRC, Thailand and the Philippines. The Group’s sales revenue by geographical location of customers are analysed as follows: (i)

Sales revenue by geographical location of customers

PRC Taiwan Thailand The Philippines Others

(ii)

2007 HK$

17,147,036 340,236 4,948,141 3,249,464 342,423

9,678,737 291,470 4,861,178 3,032,640 589,583

26,027,300

18,453,608

2008 HK$

2007 HK$

4,857,866 10,573,714 2,433,571 2,022,644 442,723 1,307,168 1,452,137 580,513 820,071

6,688,958 8,199,350 3,032,850 1,681,470 521,859 1,830,929 1,437,384 1,361,404 848,012

24,490,407

25,602,216

Segment assets by geographical location of the assets

Hong Kong PRC The Philippines Thailand Taiwan Other Asia-Pacific countries Europe and United Kingdom America and Canada Others

(iii)

2008 HK$

Capital additions, including property, plant and equipment and patents, by geographical location of the assets 2008 2007 HK$ HK$ Hong Kong PRC The Philippines Thailand Taiwan Other Asia-Pacific countries Europe and United Kingdom America and Canada Others

2,190 1,858,500 45,075 80,384 86,525 496,589 307,963 227,478 62,400

67,169 544,527 34,760 78,617 130,913 550,762 329,808 453,393 147,345

3,167,104

2,337,294

(b) Secondary reporting format - Business Segment The Group is principally engaged in the manufacture, distribution and sale of chemical feed and additive products. All of the Group’s products are of similar nature and subject to similar risk and returns. Accordingly, the Group’s activities are attributable to a single business segment and no business segmental analysis is presented. 38


13

Property, plant and equipment

Leasehold improvements HK$

Furniture and fixtures HK$

Office equipment HK$

Plant and machinery HK$

Motor vehicles HK$

Total HK$

1,510,078 308,519 (1,414,981)

79,911 1,210 -

687,326 168,900 (27,771)

1,415,373 4,432 -

838,711 51,794 -

4,531,399 534,855 (1,442,752)

88,857

2,668

31,495

104,143

26,934

254,097

At 31.12.2007

492,473

83,789

859,950

1,523,948

917,439

3,877,599

At 1.1.2008 Additions Acquisition of subsidiaries Disposals Exchange realignment

492,473 783,540

83,789 -

859,950 93,443

1,523,948 307,631

917,439 -

3,877,599 1,184,614

510,703 (88,857)

(240)

101,477 (14,632)

(5,760)

(472,651)

612,180 (582,140)

18,632

2,408

28,832

94,178

27,487

171,537

1,716,491

85,957

1,069,070

1,919,997

472,275

5,263,790

1,327,759

74,113

486,216

976,604

660,934

3,525,626

176,592

784

100,293

21,084

56,215

354,968

(1,414,981)

-

(20,476)

-

-

(1,435,457)

79,135

2,404

21,557

71,857

13,853

188,806

At 31.12.2007

168,505

77,301

587,590

1,069,545

731,002

2,633,943

At 1.1.2008 Charge for the year Eliminated on disposals Exchange realignment

168,505

77,301

587,590

1,069,545

731,002

2,633,943

239,162

791

101,407

55,460

60,002

456,822

(88,857)

(132)

(13,167)

(5,183)

(472,651)

(579,990)

681

2,166

20,811

66,472

16,481

106,611

319,491

80,126

696,641

1,186,294

334,834

2,617,386

At 31.12.2008

1,397,000

5,831

372,429

733,703

137,441

2,646,404

At 31.12.2007

323,968

6,488

272,360

454,403

186,437

1,243,656

Group Cost At 1.1.2007 Additions Disposals Exchange realignment

At 31.12.2008

Accumulated depreciation At 1.1.2007 Charge for the year Eliminated on disposals Exchange realignment

At 31.12.2008

Net book value

39


14

Patents Group HK$ Cost At 1.1.2007 Additions

6,400,033 1,802,439

At 31.12.2007 Additions Patent written off

8,202,472 1,370,310 (2,781,207)

At 31.12.2008

6,791,575

Accumulated amortisation At 1.1.2007 Charge for the year

836,781 398,519

At 31.12.2007 Charge for the year Patent written off

1,235,300 471,749 (473,592)

At 31.12.2008

1,233,457

Carrying amount At 31.12.2008

5,558,118

At 31.12.2007

6,967,172

The remaining amortisation period of the patents range from 12 years to 19 years. The amortisation charge is included in selling and distribution expenses in the consolidated income statement.

15

Goodwill Group HK$ Cost At 1 January 2008

-

Acquisition of subsidiaries

130,515

At 31 December 2008

130,515

Impairment losses At 1 January 2008

-

Impairment loss

2,658

At 31 December 2008

2,658 127,857

Net book value at 31 December 2008

40


15

Goodwill (continued) On 25 January 2008, the Group completed the acquisition of further 18 per cent interest in Walcom Bio-Chem (Thailand) Company Limited (“Walcom Thailand”), thereby the total shareholding increased to 55 per cent, at which point Walcom Thailand became a subsidiary of the Group. Walcom Thailand is engaged in the trading of chemical feed and additive products. The consideration, before expenses, of Thai Baht 1.8 million (HK$444,379), was satisfied by cash. On 23 October 2008, the Group completed the acquisition of the entire issued share capital of Beijing New World Bio-Technology Company Limited (‘BNW’). BNW is engaged in the sales of Chinese herb and natural plant extracts. The consideration, before expenses, was satisfied by the issue to the vendor of 3,923,497 new shares in the capital of the Company at an issue price of GBP0.11 per share. The acquisition was classified as a related party transaction under the AIM Rules as a shareholder of the Company indirectly held a beneficial interest in the transaction (note 29). The net assets acquired in the above transactions, and the goodwill arising, are as follows:

Acquirees’ fair value on combination HK$ Net assets acquired: Property, plant and equipment

612,180

Inventories

195,106

Trade and other receivables

2,668,857

Cash and cash equivalents

2,761,201

Trade and other payables

(1,368,201)

Net assets

4,869,143

Minority interest

(791,305)

Transfer from interest of an associate

(650,628) 130,515

Goodwill on acquisition

3,557,725

Total consideration

Total consideration, satisfied by Share consideration, at fair value

5,495,109

Cash consideration

444,379

Assignment of loan

(2,381,763) 3,557,725

Net cash inflow arising on acquisition Cash consideration paid

(444,379)

Cash and cash equivalents acquired

2,761,201

Cash received from settlement of loan

2,381,763 4,698,585 41


15

Goodwill (continued) The new subsidiaries contributed revenue of approximately HK$5,760,562 to the Group’s revenue and profit of approximately HK$481,968 to the Group’s loss after income tax for the period between the respective dates of acquisition and the balance sheet date. If the acquisitions had been completed on 1 January 2008, total Group revenue would have been increased by approximately HK$813,472 and loss after income tax for the year would have been increased by approximately HK$3,340,628. The proforma information is for illustrative purposes only and is not necessarily an indicative turnover and results of operations of the Group that actually would have been achieved had the acquisition been completed on 1 January 2008, nor is it intended to be a projection of future results.

16

Investments in subsidiaries Company 2008 2007 HK$ HK$ Unlisted investment, at cost

384

Amounts due from subsidiaries - Non-trade related balances - Impairment losses on non-trade related balances

384

65,884,617 63,533,483 (63,533,483) (63,533,483) 2,351,134

-

(a) The amounts due from subsidiaries are unsecured, interest-free and have no fixed terms of repayment.

42


16

Investments in subsidiaries (continued)

(b)

Listed below are the Group’s principal subsidiaries:

Name Walcom International Limited

Particulars of Place of issued / registered incorporation/ and fully paid establishment share capital

Ownership interest Indirect Direct

Principal activities

The British Virgin Islands

4,000,000 ordinary shares of US$1 each

100%

-

Investment holding

Shanghai Walcom Bio-Chem Co., Ltd.

The People’s Republic of China

US$1,500,000 registered capital

-

100%

Manufacturing of chemical feed and additive products

Beijing New World Bio-Tech Company Limited

The People’s Republic of China

US$1,000,000 registered capital

-

100%

Trading of chinese herb and natural plant extracts

Walcom Bio-Chemicals Industrial Limited

Hong Kong

100 ordinary shares of HK$1 each 10,000 non-voting deferred shares of HK$1 each *

-

100%

Investment holding and trading of chemical feed and additive products

Walcom Nutritions International Limited

Hong Kong

2 ordinary shares of HK$1 each

-

100%

Investment holding

Thailand 100,000 ordinary shares of THB 10 each

-

55%

Walcom Bio-Chem (Thailand) Company Limited

Trading of chemical feed and additive products

Walcom Bio-Chemicals (USA) LLC

Delaware, United States of America

US$100 registered capital

-

100%

Investment holding

Walcom Animal Science (I.P) Limited

Republic of Mauritius

1 ordinary share of US$1 each

-

100%

Holding of patents

Walcom Animal Science (I.P. 2) Limited

Republic of Mauritius

1 ordinary share of US$1 each

-

100%

Holding of patents

Walcom Animal Science (I.P. 3) Limited

Republic of Mauritius

1 ordinary share of US$1 each

-

100%

Holding of patents

Walcom Animal Science (I.P. 4) Limited

Republic of Mauritius

1 ordinary share of US$1 each

-

100%

Holding of patents

Walcom Animal Science (I.P. 5) Limited

Republic of Mauritius

1 ordinary share of US$1 each

-

100%

Holding of patents

*

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 subsidiaries nor to participate in any distribution or winding up. 43


17

Investments in associates Group 2008 HK$ Unlisted investments - net Share of net assets

-

Amounts due from associates - Trade related balances - Non-trade related balances - Provision for impairment losses on non-trade related balances

2007 HK$

718,078 718,078

1,989,078 1,952,275 (1,712,019 )

3,221,025 2,043,708 (1,712,019 )

2,229,334

3,552,714

The amounts due from associates are denominated in United States dollars. The credit period granted for the trade related balances ranges from 90 days to 180 days. The non-trade related balances are unsecured, interest free and have no fixed terms of repayment. Details of associate at 31 December 2008 are as follows:Name

Place of incorporation

Issued and fully paid capital

Assets HK$

Liabilities HK$

(3,974,809)

Revenues Profit / (loss) HK$ HK$

Group’s interest

2008 Walcom Bio-Chemicals Philippines Inc

The Philippines

10,000 ordinary shares of Php 1 each

2,545,525

The Philippines

10,000 ordinary shares of Php 1 each

3,447,362

100,000 ordinary shares of Thb 10 each

3,594,823

4,030,590

(394,470)

40%

3,069,859

984,480

40%

11,189,157

1,371,249

37%

2007 Walcom Bio-Chemicals Philippines Inc Walcom Bio-Chem (Thailand) Company Limited

Thailand

(4,679,773)

(1,726,440)

On 25 January 2008, the Group acquired a further 18 per cent interest in Walcom Bio-Chem (Thailand) Company Limited (“Walcom Thailand”), thereby increasing its total shareholding to 55 per cent, at which point Walcom Thailand became a subsidiary of the Group.

44


18

Inventories Group

Raw materials Finished goods

2008 HK$

2007 HK$

560,539 860,008

478,317 1,073,599

1,420,547

1,551,916

The cost of inventories sold recognised as expenses and included in cost of sales amounted to HK$11,320,031 (2007: HK$6,487,430).

19

Trade and other receivables Group 2008 HK$

2007 HK$

Trade receivables Less: provision for impairment loss Trade receivables – net

3,360,089 (635,701) 2,724,388

2,097,384 (635,701) 1,461,683

Deposits and prepayments Other receivables

908,799 334,857 3,968,044

763,620 199,118 2,424,421

All trade and other receivables, are expected to be recovered within one year. (a)

Impairment of trade receivables The movement in the provision of impairment for doubtful debts during the year, including both specific and collective loss components, is as follows: 2008 HK$

2007 HK$

At 1 January Impairment loss recognised

635,701 -

492,659 143,042

At 31 December

635,701

635,701

At 31 December 2008, the Group’s trade receivables of HK$635,701 (2007: HK$635,701) have been outstanding for a certain period of time. The management assessed that only a portion of the receivables is expected to be recoverable. No further individually provision of impairment for doubtful debts was provided in the year ended 31 December 2008 (2007: HK$143,042). The Group does not hold any collateral over these balances.

45


19

Trade and other receivables (Continued)

(b) Trade receivables that are not impaired Majority of the Group’s turnover are entered into on credit terms ranging from 30 to 60 days. Ageing analysis of trade receivables that are neither individually nor collectively considered to be impaired are as follows: 2008 2007 HK$ HK$ Neither past due nor impaired

1,882,005

1,192,546

Less than one month past due 1 to 3 months past due Over 3 months past due

602,765 186,437 53,181

121,209 56,386 91,542

842,383

269,137

2,724,388

1,461,683

Receivables that were neither past due nor impaired relate to a wide range of customers for whom there was no recent history of default. Receivables that were past due but not impaired relate to a number of independent customers that have a good track record with the Group. Based on past experience, management believes that no impairment allowance is necessary in respect of these balances as there has not been a significant change in credit quality and the balances are considered fully recoverable. The Group does not hold any collateral over these balances. (b)

The carrying amounts of trade receivables are denominated in the following currencies: Group

Thai Baht Renminbi 20

2008

2007

THB 3,549,500 RMB 1,715,640

RMB 1,368,720

Cash and cash equivalents Group 2008) HK$) Cash and cash equivalents Less: cash at bank - restricted Bank overdrafts (note 22) Cash and cash equivalents in the cash flow statement

2007 HK$

8,328,03288 8 9,144,259 (3,000,000) (3,000,000) 5,328,032 6,144,259 (1,501,092) (1,097,985) 3,826,940) 5,046,274 The Company 2008) 2007 HK$) HK$

Cash and cash equivalents in the balance sheet 46

23,045)

26,258


20

Cash and cash equivalents (continued) Included in the restricted cash and cash equivalents in the consolidated balance sheet, there is a short-term bank deposit amounting to HK$500,000 (2007: HK$500,000) pledged to secure the Group’s available banking facilities (note 22). Included in the cash and cash equivalents of the Group, HK$3,292,754 (2007: HK$2,849,955) were denominated in RMB and kept in PRC. The remittance of these funds out of the PRC is subject to the foreign exchange control restrictions imposed by the PRC government. Included in cash and cash equivalents in the consolidated balance sheet are the following amounts denominated in a currency other than the functional currency of the entity to which they relate: 2008 United States dollars British Pound Euro Vietnam Dong

21

US$ GB£ EUR VND

544,507 1,504 103 563,939

2007 US$ GB£ EUR VND

21,960 66,275 297,548 -

Trade and other payables Group 2008 HK$ Trade payables Other payables and accrued expenses

2007 HK$

813,328 2,229,595

586,888 1,311,642

3,042,923

1,898,530

All of the trade and other payables are expected to be settled within one year. The carrying amounts of trade payables are denominated in the following currencies: 2008 Renminbi

22

RMB

717,274

2007 RMB

549,562

Bank borrowings and overdrafts At 31 December 2008, the bank borrowings and overdrafts were secured and repayable as follows: Group 2008 2007 HK$ HK$ Non-current liabilities Long-term bank borrowings, secured

-

Current liabilities Short-term bank borrowings, secured Bank overdraft

1,160,000 1,501,092 2,661,092

Total borrowings 47

1,160,000 1,097,985 2,257,985


22

Bank borrowings and overdrafts (continued) (a)

The maturity of borrowings is as follows: Group 2008 HK$ Within 1 year or on demand After 1 year but within 5 years

(b)

2007 HK$

2,661,092 2,661,092

1,097,985 1,160,000 2,257,985

The effective interest rate per annum for bank borrowings and bank overdrafts at balance sheet date is 1% and 1.5% over Hong Kong dollars prime rate respectively (2007: 1% and 1.5% over Hong Kong dollars prime rate respectively). At 31 December 2008, banking facilities to the extent of HK$2,660,000 (2007: HK$ 2,660,000) were secured by a charged deposit of HK$500,000. The Group also undertook to maintain at any time deposits of not less than HK$3,000,000 with the bank. The facilities were utilised to the extent stated above. On 13 January 2009, the Group fully repaid the short-term secured bank borrowings.

All of the Group’s banking facilities are subject to the fulfilment of covenants relating to deposits placed with the lender, which are commonly found in lending arrangements with financial institutions. If the Group were to breach the covenants the drawn down facilities would become payable on demand. The Group regularly monitors its compliance with these covenants. Further details of the Group’s management of liquidity risk are set out in note 3. As at 31 December 2008 and 2007, none of the covenants relating to drawn down facilities had been breached. 23

Capital and reserves

(a)

Share capital 2008 No. of Shares

2007 HK$

No. of shares

HK$

150,000,000

1,500,000

150,000,000

1,500,000

Ordinary shares, issued and fully paid: At 1 January Issue of shares

64,910,891 3,923,497

649,109 39,235

64,910,891 ______ -

649,109 -

At 31 December

68,834,388

688,344

64,910,891

649,109

Authorised: Ordinary shares of HK$0.01 each

The holders of ordinary shares 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 ordinary shares rank equally with regard to the Company’s residual assets. On 23 October 2008, the Company issued 3,923,497 new ordinary shares of HK$0.01 each to the vendor of Beijing New World Bio-Technology Company Limited. The ordinary shares issued during the year rank pari passu with the existing ordinary shares in all respects. 48


23 (b)

Capital and reserves (continued) Nature and purpose of reserves (continued) Company Share premium HK$

Capital reserve HK$

Accumulated losses HK$

Total HK$

89,842,770

4,841,424

(28,739,765)

65,944,429

-

-

(66,584,165)

(66,584,165)

Balance at 31.12.2007

89,842,770

4,841,424

(95,323,930)

(639,736)

Balance at 1.1.2008

89,842,770

4,841,424

(95,323,930)

(639,736)

Shares issued

5,455,874

-

-

5,455,874

-

500,473

-

500,473

-

-

(3,867,154)

(3,867,154)

95,298,644

5,341,897

(99,191,084)

1,449,457

Balance at 1.1.2007 Loss for the year

Recognition of equity-settled share-based payment Loss for the year Balance at 31.12.2008

(i)

Share premium The application of the share premium account is governed by the Memorandum and Articles of the Association of the Company. In accordance with the Companies Law of the British Virgin Islands, the share premium account is distributable to the shareholders of the Company provided that immediately following the date on which the dividend is proposed to be distributed, the Company will be in a position to pay off its debts as they fall due in the ordinary course of business. The share premium may also be distributed in the form of fully paid bonus shares.

(ii)

Merger reserve The merger reserve arose in the Group reorganisation before Admission to AIM. There was no movement during the year.

(iii)

Exchange reserve The exchange reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations. The reserve is dealt with in accordance with the accounting policies set out in note 2(s).

(iv)

Capital reserve of the Company The capital reserve comprises the followings: -

The fair value of the actual or estimated number of unexercised share options granted to employees of the Group recognized in accordance with the accounting policy adopted for share-based payment in note 2(t); and

-

There was HK$4,841,424 balance brought forward as a result of the Group reorganization in 2004. 49


23 (c)

Capital and reserves (continued) Distributability of reserves No reserves were available at 31 December 2007 and 2008 for cash distribution as the Company recorded accumulated losses for the year.

(d)

Capital management The Group’s primary objectives when managing capital are to safeguard the Group’s ability to continue as a going concern, so that it can continue to provide returns for shareholders, by pricing products and services commensurately with the level of risk and by securing access to finance at a reasonable cost. The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns that might be possible with higher levels of borrowings and the advantages and security afforded by a sound capital position, and makes judgements to the capital structure in light of changes in economic conditions. Consistent with industry practice, the Group monitors its capital structure using a gearing ratio, which is total debts divided by adjusted capital. Total debts represent total bank overdrafts and borrowings. Adjusted capital includes all components of shareholders’ equity less unrealised reserves. In order to maintain or adjust the gearing ratio, the Group may issue new shares, return capital to shareholders, raise new debt financing or sell assets to reduce debt. The gearing at 31 December 2008 and 2007 was 15% and 11% respectively, calculated as follows : 2008 HK$

2007 HK$

Current liabilities: - Bank overdrafts - Bank borrowings

1,501,092 1,160,000

1,097,985 1,160,000

Total debts

2,661,092

2,257,985

Shareholders’ equity Less : Exchange reserve

18,392,597 (706,951)

21,445,701 (458,588)

Adjusted capital

17,685,646

20,987,113

15%

11%

Gearing ratio

50


24

Share option scheme A share option scheme (the “scheme”) was adopted pursuant to a resolution of an extraordinary general meeting of the Company held on 20 September 2006 for the purpose of providing incentives and rewards to 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 (the “eligible directors and employees”). The maximum number of shares in respect of which options or rights to subscribe for shares pursuant to the scheme when aggregated with number of shares in respect of which options or rights to subscribe for shares has been granted in previous years under the scheme and other share option or share incentive plan adopted by the Company shall not exceed 10% of the shares issued by the Company from time to time. An option share shall only be exercisable (a) after one year from date of grant, (b) before the expiry of the option period, (c) at a time permitted by the Model Code for Securities Transactions by Directors of Listed Issuers, and (d) if any performance conditions imposed pursuant to the scheme rules have been fulfilled or obtained. As at 31 December 2008, 1,760,000 ordinary shares option has been granted to directors and employees of the Company under the Share Option Scheme. All share options granted under the Scheme were still outstanding. No options were exercised, cancelled or lapsed during the year. (a)

The terms and conditions of the grants that existed during the period are as follows, hereby all options are settled by physical delivery of shares:

Participant

Date of grant

No. of options outstanding as at 31 December 2008

Vesting period

Exercise period

Exercise price

From 16 July 2009 to 16 July 2013 (both days inclusive)

GB£ 0.11

400,000

1 year commencing from 16 July 2008

From 16 July 2009 to 16 July 2013 (both days inclusive)

GB£ 0.11

400,000

1 year commencing from 16 July 2008

From 16 July 2009 to 16 July 2013 (both days inclusive)

GB£ 0.11

400,000

1 year commencing from 16 July 2008

560,000

1 year commencing from 16 July 2008

From 16 July 2009 to 16 July 2013 (both days inclusive)

Options granted to directors: Francis Chi

Yong Chian Tan

Albert Siu Fai Wong

16 July 2008

16 July 2008

16 July 2008

Options granted to employees: Employees of the Group

(b)

16 July 2008

Fair value of share options The fair value of the share options granted during the year ended 31 December 2008 has been valued by an independent qualified valuer using Binomial Option Pricing Model.

51

GB£ 0.11


25

Warrants The Company adopted a warrant instrument constituting 8,107,320 warrants pursuant to a resolution of an extraordinary general meeting of the Company held on 20 September 2006. Each warrant entitles the holder to subscribe for one new ordinary share at GB£0.35, exercisable for a period of five years from the date of admission. As at 31 December 2008, the total warrants outstanding were 7,935,891 (2007: 8,107,320).

26

Share award plan The Company’s share award plan (the “plan”) was adopted pursuant to a resolution of an extraordinary general meeting of the Company held on 20 September 2006 for the purpose of providing incentives or rewards to selected PRC employees and officers of the Group but excluding officers of the Company (the “eligible PRC officers”). Prior to the Admission to AIM, 433,163 ordinary shares were transferred to Walcom China Staff Incentive Limited (the “trustee”) by certain of the then existing shareholders of the Company, to hold pursuant to the terms of the trust deed applicable to the plan. These shares are held on trust for the eligible PRC officers. The 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 and the trustee in accordance with the provisions of the trust deed and plan rules. There were 70,163 (2007: 70,163) ordinary shares held by the trustee at 31 December 2008.

27

Major non-cash transactions On 27 June 2008, the Group completed the acquisition of the entire issued share capital of Beijing New World Bio-Technology Company Limited (‘BNW’). BNW is engaged in the sale of Chinese herb and natural plant extracts. The consideration, before expenses, was satisfied by the issue to the vendor of 3,923,497 new shares in the capital of the Company at an issue price of GBP0.11 per share. The acquisition was classified as a related party transaction under the AIM Rules as a shareholder of the Company indirectly held a beneficial interest in the transaction.

28

Contingent liabilities Walcom Bio-Chemicals Industrial Limited (“WBCIL”), a subsidiary Company of the Company, has been involved in a litigation since 2003 regarding a dispute with one of its customers in the Philippines who had filed a claim of PHP1,100,000 (approximately HK$178,763) against WBCIL. The litigation is still proceeding and the outcome cannot be determined at present. In the opinion of the directors, the claim by the customer is unlikely to be successful and the potential liability of WBCIL, if any, would be minimal.

52


29

Related party transactions

(a)

The management considered the ultimate controlling party since date of incorporation to 31 December 2008 was Mr. Francis Chi. 2008 2007 Note HK$ HK$ Transactions with key management personnel Salaries and other short term employee benefits

(b)

4,985,178

4,683,925

Transactions with other related parties Associates Sales of goods Technical support fee income

(i) (ii)

3,249,464 -

7,893,818 72,755

Related companies Acquisition of patent Legal and professional fees Service income (note 5)

(iii) (iv) (v)

279,382 60,000

804,112 304,245 -

(vi)

5,495,109

-

Beneficial shareholders Acquisition of a subsidiary Notes: (i)

Sales to associates were made at similar terms as the Group grants to other customers.

(ii)

The technical support fee was fixed at THB25,000 per month.

(iii) The acquisition of patent was made in accordance with an assignment dated 2 April 2007. Payments were made to companies controlled by Francis Chi, Yong Chian Tan, Frankie Yuet Leung Wong and Chan Kin Man, Eddie, directors of the Company. (iv) The legal and professional fees represented company secretarial fees and tax consultancy fees, and were charged on similar terms of other service providers. Payments were made to companies controlled by Chan Kin Man, Eddie, a director of the Company. (v)

The service income was charged on similar terms of other service providers. The income received was from a company controlled by Francis Chi, Yong Chian Tan, Frankie Yuet Leung Wong and Chan Kin Man, Eddie, directors of the Company.

(vi) The acquisition of a subsidiary was made in accordance with a sales and purchase agreement dated 27 June 2008. The beneficial owner of Fortune Success Holdings Limited, a shareholder of the Company, indirectly held a beneficial interest in the acquiree to the transaction. Balances with related parties are disclosed in the balance sheet and in notes 16 and 17.

53


30

Commitments

(a)

Capital commitments Capital expenditure contracted for at the balance sheet date but not yet incurred is as follows: 2008 HK$ Contracted for – property, plant and equipment

(b)

867,991

2007 HK$ 198,100

Operating lease commitments The future aggregate minimum lease rental expenses in respect of the manufacturing plants and office premises under non-cancellable operating lease are payable in the following periods:

Within one year In the second to fifth years inclusive

31

2008 HK$

2007 HK$

390,272 -

1,640,054 1,357,772

390,272

2,997,826

Critical accounting estimates and judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment of assets and liabilities with the next financial year are discussed below.

(a)

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$5,558,118 (2007: HK$6,967,172). 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 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)

Depreciation The measurement determines the estimated useful lives and residual values for its property, plant and equipment. Property, plant and equipment are depreciated on a straight-line basis over the estimated useful lives. The Group reviews annually the useful life of an asset and its residual value, if any. The depreciation expense for future periods is revised if there are significant changes from previous estimation.

54


31

Critical accounting estimates and judgements (continued)

(c)

Impairments In considering the impairment loss that may be required for certain property, plant and equipment, investments in subsidiaries and interests in associates of the Group, recoverable amount of the asset needs to be determined. The recoverable amount is the greater of the net selling price and the value in use. It is difficult to precisely estimate selling price because quoted market prices for these assets may not be readily available. In determining the value in use, expected cash flows generated by the asset are discounted to their present value, which requires significant judgement relating to items such as level of turnover and amount of operating costs. The Group uses all readily available information in determining an amount that is reasonable approximation of recoverable amount, including estimates based on reasonable and supportable assumptions and projections of items such as turnover and operating costs. Impairment losses for bad and doubtful debts are assessed and provided based on the directors’ regular review of ageing analysis and evaluation of collectability. A considerable level of judgement is exercised by the directors when assessing the credit worthiness and past collection history of each individual customer. An increase or decrease in the above impairment loss would affect the net loss in the year and in future years.

(d)

Income taxes Determining income tax provisions involves judgement on the future tax treatment of certain transactions and interpretation of tax rules. The Group carefully evaluates tax implications of transactions and tax provisions are set up accordingly. The tax treatment of such transactions is reconsidered periodically to take into account all changes in tax legislation. Deferred tax assets are recognised for tax losses not yet used and temporary deduction differences. As those deferred tax assets can only be recognised to the extent that it is probable that future profit will be available against which the unused tax credit can be utilised, management’s judgement is required to assess the probability of future taxable profits. Management’s assessment is constantly reviewed and additional deferred tax assets are recognised if it becomes probable that future taxable profits will allow the deferred tax asset to be recovered.

(e)

Inventory provision The Group performs regular reviews of the carrying amounts of inventories with reference to aged inventories analyses, projections of expected future saleability of goods and management experience and judgement. Based on this review, write-down of inventories will be made when the carrying amounts of inventories decline below their estimated net realisable value. Due to changes in customers’ performance, actual saleability of goods may be different from estimation and profit or loss could be affected by differences in this estimation.

55


WALCOM GROUP LIMITED FIVE YEAR FINANCIAL REVIEW FOR THE YEAR ENDED 31 DECEMBER

CONSOLIDATED INCOME STATEMENT 2008

2007

HK$’000

2006

2005

HK$’000 HK$’000

2004

HK$’000 HK$’000

Turnover

26,027

18,454

14,168

5,046

4,650

Gross profit

14,709

11,966

9,374

2,451

1,642

Loss from operations

(8,902)

(5,639)

(11,744)

(12,784)

(9,295)

Loss before income tax

(8,911)

(4,764)

(29,643)

(14,783)

(10,531)

(0.13)

(0.07)

(0.56)

(0.28)

(0.22)

Loss per share – basic (HK$)

(restated) (restated)

CONSOLIDATED BALANCE SHEET

Non-current assets Net current assets/(liabilities)

2008

2007

2006

2005

2004

HK$’000

HK$’000

HK$’000

HK$’000

HK$’000

8,332

8,929

7,152

6,201

5,932

10,436

13,677

18,725

(15,094)

8,868

-

(1,160)

-

-

(8,970)

18,393

21,446

25,877

(8,893)

5,830

0.27

0.33

0.40

(0.17)

0.11

(restated)

(restated)

Non-current liabilities Equity/(deficit) Net asset/(liability) value per share (HK$)

56


WALCOM GROUP LIMITED BIOGRAPHIES OF THE DIRECTORS Eddie Kin Man Chan, aged 48, (Non-Executive Chairman) is a practicing accountant and a graduate of the Hong Kong Polytechnic University. In 1989, Mr Chan founded Chan, Wong, Chung & Co. (now CWCC), a firm of certified public accountants in Hong Kong. He is a Vice-President of the China Tax Society. He is a Fellow of both the Association of Chartered Certified Accountants and the Hong Kong Institute of Certified Public Accountants and also a member of the Institute of Chartered Accountants in England and Wales. Mr Chan originally joined the Group in 2002 as a part-time finance director. Francis Chi, aged 48, (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 Seattle University in the USA. Mr Chi has 23 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 46, (Chief Executive Officer in the PRC) holds a Bachelor of Science degree in Civil Engineering from the Seattle University 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 49, (Chief Financial Officer and Secretary) has over 25 years financial and accounting experience. He is a Fellow of the Hong Kong Institute of Certified Public Accountants and also a member of the Institute of Chartered Accountants in England and Wales. He had been the group chief accountant of a business conglomerate and then the finance director of a venture capital fund. Prior to joining Walcom in 2006, he was a consultant assisting clients to prepare for listing on the Hong Kong Stock Exchange (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 60, (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. He is currently the Chief Executive Officer of Shui On Construction and Materials Limited, an Independent Non-executive Director of Solomon Systech (International) Limited and a Non-executive Director of CIG Yangtze Ports PLC, companies being listed on The Stock Exchange of Hong Kong Limited, as well as a Non-executive Director of China Central Properties Limited, a company being listed on the AIM Board of London Stock Exchange. He was also a Non-executive Director of Cosmedia Group Holdings Limited, a company which had been listed on the AIM Board of London Stock Exchange since 2006 but delisted in December 2008. He was appointed a Non-Executive Director in 2003. Royston Frederick Drucker, aged 55, (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 57


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. From 1996 he acted as a consultant to life science companies worldwide through Technomark Consultancy Services Limited. He is currently the Chief Medical Officer and an Executive Director of e-Therapeutics plc. He also serves on the boards of several private life science companies. He was appointed a Non-Executive Director in 2006. Timothy Robert Nelson, aged 35, (Non-Executive Director) has an MBA from Business School, Lausanne. He had worked in the insurance industry in Australia and in corporate finance in South Africa. He is the chief executive of the Vuna Group, a London based finance and project development company and is a founder non-executive director of Red Island Minerals Ltd and Bekitoly Resources Ltd. He was also a founder director of Madagascar Oil Limited, an oil exploration company, and a co-founder 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. Albert Chi Chiu Wong, aged 52, (Non-Executive Director) holds a Bachelor degree in Engineering and a MBA from the University of Hong Kong, and is a member of the Institute of Electrical Engineer (IEE) UK and the Hong Kong Institution of Engineers (HKIE). He has more than 30 years’ experience in telecom, media and technology industry and was appointed Executive Director in 2003 and subsequently Chief Executive Officer of New World TMT Limited in March 2004 after joining the New World Group in 1992. Mr Wong has become a member of the Chongqing Committee of Chinese People’s Political Consultative Conference since January 2008. He was appointed non-executive director in 2008.

58


WALCOM GROUP LIMITED SUMMARY OF PATENTS GRANTED AS AT 31 DECEMBER 2008 Patent Invention 1.

Dairy cow feed and the use thereof

UK

2.

Composition comprising cysteamine for improving lactation in dairy animals

New Zealand

3.

Composition for promoting growth in animals containing cysteamine or its salt and the use of the same

4.

HK

Composition for regulating animal growth, method of manufacture and the use thereof

5.

North Korea

Composition for promoting growth in animals containing cysteamine or its salt and the use of the same

6.

China

Composition for regulating animal growth, method of manufacture and the use thereof

7.

New Zealand

Composition for regulating animal growth, method of manufacture and the use thereof

8. 9.

Ukraine

Composition for regulating animal growth, method of manufacture and the use thereof

Russia

Feed for fish and the use thereof

UK

10. Antibodies to adipose tissues

UK

11. Poultry feed and the use thereof

UK

12. Poultry feed and the use thereof

HK

13. Composition comprising cysteamine for specific use in poultry raising and egg production

North Korea

14. Composition with multiple uses for poultry

Taiwan

15. Dairy cow feed and the use thereof

Hong Kong

16. Feed for fish and the use thereof

Hong Kong

17. Composition comprising cysteamine for improving lactation in dairy animals (a divisional application)

New Zealand

18. Composition comprising cysteamine for specific use in poultry raising and egg production

Russia

19. Composition for regulating animal growth, method of manufacture and the use thereof

South Africa

20. Composition comprising cysteamine for improving lactation in dairy animals

Europe

21. Composition for regulating animal growth, method of manufacture and the use

Australia

thereof 59


22. Composition comprising cysteamine for improving lactation in dairy animals

Mexico

23. Composition comprising cysteamine for improving lactation in dairy animals

India

24. Composition comprising cysteamine for specific use in poultry raising and egg

Australia

production 25. Composition for regulating animal growth, method of manufacture and the use

South Korea

thereof 26. Composition comprising cysteamine for improving lactation in dairy animals

Russia

27. Materials and methods for improving shellfish health, immunity and growth

Europe

28. Feed for fish and the use thereof

Russia

29. Orally administrable animal growth regulating Cysteamine composition

India

30. Feed for fish and the use thereof

Indonesia

31. Composition comprising cysteamine for specific use in poultry raising and egg China

production 32. Composition comprising cysteamine for improving lactation in dairy animals

60

China


NOTICE OF ANNUAL GENERAL MEETING WALCOM GROUP LIMITED (Incorporated in the British Virgin Islands with limited liability)

NOTICE IS HEREBY GIVEN that an Annual General Meeting of Walcom Group Limited (the "Company") will be held at the offices of Richards Butler, 20th Floor, Alexandra House, 16-20 Chater Road, Central, Hong Kong on Friday, 29 May, 2009 at 2:30 p.m. for the following purposes: Ordinary Business 1.

To receive and adopt the audited consolidated financial statements of the Company and the reports of the directors of the Company (the "Directors") and the auditors for the year ended 31st December, 2008.

2.

(i) To consider the reappointment as Director Mr. Albert Siu Fai Wong who retires by rotation. (ii) To consider the reappointment as Director Mr. Timothy Robert Nelson who retires by rotation.

3.

To consider the re-appointment of Lau and Au Yeung C.P.A. Limited as auditor of the Company and to authorise the board of Directors to fix their remuneration.

Special Business To consider and, if thought fit, pass the following as an Ordinary Resolution: 4.

"That the Directors be and they are hereby generally and unconditionally authorised to exercise all the powers of the Company to allot shares in the Company (other than shares allotted pursuant to the Company's share option scheme and share award plan) up to an aggregate nominal amount of HK$229,447.96 (representing one third of the Company's present issued ordinary share capital) at any time before the earlier of (i) the conclusion of the Company's next annual general meeting and (ii) the date falling 15 months after the date of the passing of this resolution, but the Company may before such expiry make an offer or agreement which would or might require relevant securities to be allotted after such expiry and the Directors may allot relevant securities in pursuance of such offer or agreement notwithstanding that the authority conferred hereby has expired." 61


To consider and, if thought fit, pass the following as an Extraordinary Resolution: 5.

"That subject to the passing of the previous resolution the Directors be and they are empowered to allot equity securities wholly for cash pursuant to the authority conferred by the previous resolution, provided that this power shall be limited to the allotment of equity securities: a.

in connection with an offer of such securities by way of rights to holders of ordinary shares in proportion (as nearly as may be practicable) to their respective holdings of such shares, but subject to such exclusions or other arrangements as the Directors may deem necessary or expedient in relation to fractional entitlements or any legal or practical problems under the laws of any territory, or the requirements of any regulatory body or stock exchange; and

b.

otherwise than pursuant to sub-paragraph (a) above up to an aggregate nominal amount of HK$32,455.45 representing five per cent. of the Company's issued ordinary share capital as stated in the Company's latest published annual financial statements

and shall expire before the earlier of (i) the conclusion of the Company's next annual general meeting and (ii) the date falling 15 months after the date of the passing of this resolution, save that the Company may, before such expiry make an offer or agreement which would or might require equity securities to be allotted after such expiry and the Directors may allot equity securities in pursuance of any such offer or agreement notwithstanding that the power conferred by this resolution has expired."

By Order of the Board WALCOM GROUP LIMITED Albert Siu Fai Wong Secretary Hong Kong, 8 May 2009 Registered Office: P.O. Box 957 Offshore Incorporations Centre Road Town, Tortola British Virgin Islands

62


Principal Place of Business: Part D, Mingtai Building No. 351 Guo Shou Jing Road ZJ High-tech Park Shanghai 201203 People’s Republic of China Notes: 1.

Any member entitled to attend and vote at the meeting is entitled to appoint more than one proxy to attend and vote instead of him. A proxy need not be a member of the Company.

2.

To be valid, a form of proxy together with the power of attorney or other authority (if any) under which it is signed (or a notarially certified true copy thereof) must be deposited at the Company's principal place of business at Part D, Mingtai Building, No. 351 Guo Shou Jing Road, ZJ High-tech Park, Shanghai 201203, People’s Republic of China not less than 48 hours before the time appointed for the holding of the meeting or any adjourned meeting thereof. Completion and return of the form of proxy will not preclude a member from attending and voting in person at the Annual General Meeting or any adjourned meeting thereof should he so wishes.

3.

In order to be entitled to attend and vote at the meeting, all transfers accompanied by the relevant share certificates must be lodged for registration with the Company's registrars, Computershare Investor Services (Channel Islands) Limited, at PO Box 83, Ordinance House, 31 Pier Road, St Helier, Jersey JE48PW, Channel Islands, no later than 4pm (GMT) on Friday, 22 May 2009.

63


WALCOM GROUP LIMITED (Incorporated in the British Virgin Islands with limited liability)

PROXY FORM Form of proxy for the Annual General Meeting to be held at the offices of Richards Butler, 20th Floor, Alexandra House, 16-20 Chater Road, Central, Hong Kong on Friday, 29 May, 2009 at 2:30 p.m.. I/We1 of shares of HK$0.01 each in the capital of Walcom Group being the registered holder(s) of2 Limited (the "Company"), hereby appoint3 of or failing him, the Chairman of the meeting, as my/our proxy to attend on my/our behalf at the meeting (and at any adjournment thereof) to vote for me/us in my/our name(s) in respect of the resolutions set out in the notice of the meeting (with or without modifications) as hereunder indicated.

1.

2. 3.

4. 5.

Resolutions To receive and adopt the audited consolidated financial statements of the Company and the Reports of the Directors and the Auditor for the year ended 31st December, 2008. (i) To consider the re-election of Mr. Albert Siu Fai Wong as a Director (ii) To consider the re-election of Mr. Timothy Robert Nelson as a Director. To consider the re-appointment of Lau & Au Yeung C.P.A. Limited as Auditor of the Company and to authorise the board of Directors to fix their remuneration. To authorise the Directors to allot and issue additional shares of the Company. To disapply pre-emptive provisions.

Dated this

day of

For4

Against4

Signature(s)7 ______________________________

2009

Note:1. Full name(s) and address(es) to be inserted in BLOCK CAPITALS. 2. Please insert the number of shares of HK$0.01 each in the capital of the Company registered in your name(s). If no number is inserted, this form of proxy will be deemed to relate to all the shares in the capital of the Company registered in your name(s). 3. Full name and address of proxy to be inserted In BLOCK CAPITALS. IF NOT COMPLETED, THE CHAIRMAN OF THE MEETING WILL ACT AS YOUR PROXY. 4. IMPORTANT: IF YOU WISH TO VOTE FOR ANY RESOLUTION, TICK IN THE BOX MARKED "FOR" BESIDE THE APPROPRIATE RESOLUTION. IF YOU WISH TO VOTE AGAINST ANY RESOLUTION, TICK IN THE BOX MARKED "AGAINST" BESIDE THE APPROPRIATE RESOLUTION. If no direction is given, the proxy will be entitled to vote or abstain as he thinks fit. Your proxy will be entitled to vote or abstain at his discretion on any resolution properly put to the meeting other than those referred to in the notice convening the meeting. 5. To be valid, this form of proxy, together with any power of attorney or other authority, if any, under which it is signed or a notarially certified true copy of such power of authority, must be deposited at the Company's principal place of business at Part D, Mingtai Building, No. 351 Guo Shou Jing Road, ZJ High-tech Park, Shanghai 201203, People’s Republic of China not less than 48 hours before the time appointed for the holding of the meeting or any adjourned meeting thereof. 6. In the case of joint holders of a share, the vote of the person, whether attending in person or by proxy, whose name stands first on the register of members in respect of such share shall be accepted to the exclusion of the vote(s) of the other joint holder(s). 7. This form of proxy must be signed by you or your attorney duly authorised in writing or, if you are a corporation, must either be executed under seal or under the hand of an officer or attorney duly authorised. 8. The proxy need not be a member of the Company but must attend the meeting in person to represent you. 9. Completion and delivery of this form of proxy shall not preclude you from attending and voting in person if you so wish. 10. Any alterations of this form of proxy must be initialled by the person who signs it.

64


2008年报