Thanks Jhill, I just removed the insinde chaingring, after shortening the chain to the right length I just pulled the rear wheel back as far as I could making sure the wheel/tire doenst hit the frame and it all naturally came in place. As you can see in the pic I used couple of nuts instead of spacer, but dont know if that made any difference. Oh almost forgot, I had to take the rear axel apart to space the thread a little to make it all look straight.
Hope that helps