(incorporated in the Cayman Islands with limited liability) (Stock Code: 8222) Better Health Better Life Annual Report 2006 Annual Report2006 2 Dai Fu Street, Tai Po Industrial Estate, Hong Kong Tel: (852) 2126 1212 Fax: (852) 2126 1211 www.ck-lifesciences.com Characteristics of the Growth Enterprise Market (”GEM”) of The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) GEM has been established as a market designed to accommodate companies to which a high investment risk may be attached. In particular, companies may list on GEM with neither a track record of profi tability nor any obligation to forecast future profi tability. Furthermore, there may be risks arising out of the emerging nature of companies listed on GEM and the business sectors or countries in which the companies operate. Prospective investors should be aware of the potential risks of investing in such companies and should make the This annual report (“Annual Report”) is available in both decision to invest only after due and careful consideration. English and Chinese. Shareholders who have received either The greater risk profi le and other characteristics of GEM the English or the Chinese version of the Annual Report mean that it is a market more suited to professional and other may request a copy in the language different from that has sophisticated investors. been received by writing to: Computershare Hong Kong Investor Services Limited, 46th Floor, Hopewell Centre, 183 Given the emerging nature of companies listed on GEM, there Queen’s Road East, Hong Kong. is a risk that securities traded on GEM may be more susceptible to high market volatility than securities traded on the Main The Annual Report (in both English and Chinese versions) Board and no assurance is given that there will be a liquid has been posted on the Company’s website at market in the securities traded on GEM. http://www.ck-lifesciences.com. Shareholders who have chosen to rely on copies of the Company’s corporate The principal means of information dissemination on GEM communication (including but not limited to annual report, is publication on the internet website operated by the Stock summary fi nancial report (where applicable), half-year Exchange. Listed companies are not generally required to issue report, summary half-year report (where applicable), paid announcements in gazetted newspapers. Accordingly, quarter report, notice of meeting, listing document, circular prospective investors should note that they need to have access and proxy form) posted on the Company’s website in lieu of to the GEM website in order to obtain up-to-date information the printed copies thereof may request the printed copy of on GEM-listed issuers. the Annual Report. This document, for which the Directors of CK Life Sciences Int’l., Shareholders who have chosen to receive the corporate (Holdings) Inc. (the “Company”) collectively and individually accept full communication using electronic means through the responsibility, includes particulars given in compliance with the Rules Company’s website and who for any reason have diffi culty Governing the Listing of Securities on the Growth Enterprise Market in receiving or gaining access to the Annual Report posted of The Stock Exchange of Hong Kong Limited for the purpose of giving on the Company’s website will promptly upon request be information with regard to the Company. The Directors, having made all sent the Annual Report in printed form free of charge. reasonable enquiries, confi rm that, to the best of their knowledge and belief: (i) the information contained in this document is accurate and complete in Shareholders may at any time choose to change your all material respects and is not misleading; (ii) there are no other matters the choice as to the means of receipt (i.e. in printed form or by omission of which would make any statement in this document misleading; electronic means through the Company’s website) and/or and (iii) all opinions expressed in this document have been arrived at after the language of the Company’s corporate communication by due and careful consideration and are founded on bases and assumptions notice in writing to the Company’s Branch Share Registrar, that are fair and reasonable. Computershare Hong Kong Investor Services Limited at 46th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong. Contents 2 Corporate Profile 4 Achievement Highlights 6 2006 – Year in Review 8 Chairman’s Statement Business Review 12 Health 18 Agriculture 24 Directors and Senior Management 32 Financial Summary 33 Financial Review 35 Risk Factors 38 Report of the Directors 54 Corporate Governance Report 83 Independent Auditor’s Report 84 Consolidated Income Statement 85 Consolidated Balance Sheet 87 Consolidated Statement of Changes in Equity 88 Consolidated Cash Flow Statement 90 Notes to the Financial Statements 131 Principal Subsidiaries 134 Principal Associates 135 Corporate Information and Key Dates CK LIFE SCIENCES INT’L., (HOLDINGS) INC. ANNUAL REPORT 2006 1 Corporate Profile About CK Life Sciences CK Life Sciences has been listed on the Growth Enterprise Market of the Stock Exchange of Hong Kong Limited (stock code: 8222) since July 2002. Bearing the mission of improving the quality of life, the Group is engaged in the business of research and development, commercialization, marketing and sale of biotechnology products. Products developed by CK Life Sciences are categorized into the areas of human health and environmental sustainability. A number of the Group’s inventions have been granted patents by the US Patent and Trademark Office. CK Life Sciences has also been selected as one of 30 global “Technology Pioneers 2004” by the World Economic Forum. 2 CK LIFE SCIENCES INT’L., (HOLDINGS) INC. ANNUAL REPORT 2006 Better Health Better Life CK LIFE SCIENCES INT’L., (HOLDINGS) INC. ANNUAL REPORT 2006 3 Achievement Highlights Strong Growth Total Revenue 2,197 (HK$million) Increased 2 Times over 2005 +216% 694 05 06 4 CK LIFE SCIENCES INT’L., (HOLDINGS) INC. ANNUAL REPORT 2006 102 (HK$million) Profit Up 7 – fold over 2005 +734% 12 05 06 CK LIFE SCIENCES INT’L., (HOLDINGS) INC. ANNUAL REPORT 2006 5 2006 – Year in Review JAN – FEB CK Life Sciences acquired an 80% stake in Vitaquest International Holdings LLC, the largest custom contract nutraceutical manufacturer in the United States. MAR – APR The Adrien Gagnon or “AG” brand of natural health supplements was launched in Hong Kong. An extensive range of AG health products are now exclusively available at Watsons Your Personal Stores throughout the territory. MAY – JUNE A new distributor, PhilAgrow, Inc. was appointed in the Philippines to drive sales of NutriSmart®. 6 CK LIFE SCIENCES INT’L., (HOLDINGS) INC. ANNUAL REPORT 2006 2006 – Year in Review (cont’d) JUL – AUG NutriWizTM, a new fertilizer product developed by CK Life Sciences from microbial technology, was launched in Mainland China. Encouraging sales have been reported to date. SEP – OCT The AG Natural Health brand was launched in over 700 Kruidvat stores in the Netherlands. This represents CK Life Sciences’ first foray into the European market. Adrien Gagnon was the recipient of the “Gold Award” for “Bestselling Nutraceutical Brand” at Watsons 2006 7th Annual Health & Beauty Awards. At the same time, VitaGain® received the “Silver Award” in the “Bestselling ard" Food Brand in the Immunity Category”. NOV – DEC The latest VitaGain® products, Lingzhi Guard and Cordyceps Guard, were launched and have fast become popular items in the range. CK LIFE SCIENCES INT’L., (HOLDINGS) INC. ANNUAL REPORT 2006 7 Chairman’s Statement 2006 A Noteworthy Year It has been a very exciting year for CK Life Sciences, with achievements on all fronts. 1 Sales Up 2 /2 Times; Revenue Increased 2 Times; and Profit Grew 7 Times HK$’000 2006 2005 Variance Sales revenue 1,938,557 542,484 +257% Investment proceeds 258,561 151,895 +70% Total revenue 2,197,118 694,379 +216% Profit attributable to shareholders 102,022 12,234 +734% 8 CK LIFE SCIENCES INT’L., (HOLDINGS) INC. ANNUAL REPORT 2006 Chairman’s Statement (cont’d) 2006 marked a noteworthy year for CK Life Sciences: 1 Sales from environmental and health businesses about HK$2 billion; 2 Total revenue approaching HK$2.2 billion; 3 Profit attributable to shareholders over HK$100 million; 4 First full year contributions from the newly acquired Santé Naturelle A.G. Ltée in Canada and Envirogreen and Nuturf in Australia recorded; 5 Acquired Vitaquest, the largest custom contract nutraceutical manufacturer in the US, strengthening profit contribution for the Group; 6 Launched the Adrien Gagnon (or “AG”) nutraceutical brand internationally, firstly in Hong Kong in the earlier half of the year and then in the Netherlands in the second half. All in all, it has been a very exciting year for CK Life Sciences, with achievements on all fronts. We look forward to capitalizing on this momentum in 2007 and beyond. The financial performance of CK Life Sciences Int’l., Health Sales Up 10 Times (Holdings) Inc. (“CK Life Sciences” or the “Group”) for Sales from health-related business approached the year ended 31 December 2006 has been very strong. HK$1.4 billion, representing an increase of more than Sales revenue increased 21/ times to approximately 2 10 times over 2005. HK$2 billion, while investment proceeds increased 70% to The performance of our health business was boosted by approximately HK$260 million. Total revenue reached contributions from Vitaquest International Holdings LLC nearly HK$2.2 billion, an increase of more than 2 times (“Vitaquest”), which was acquired in early 2006. Vitaquest over last year. Profit attributable to shareholders grew generated strong results over the course of the year and 7-fold to HK$102 million. expanded the scope of our nutraceutical business.