丽珠集团(000513)丽珠Ｂ2001年年度报告（英文版）

Chapter 1 Important Notice and Table of Contents Important Notice: the Board of directors of our company guarantee that there is no false record, misleading statement or important pretermission in this report, and the directors have individual and joint liability for the truthfulness, accuracy and completeness to the contents in this report. Director Han Huanguang didn’t attend the meeting adopting this annual report.The report is published in Chinese and English. The Chinese version is set to be accurate if any ambiguities occur in the understanding of such two versions. LIST Chapter 1: Important Notice and Table of Contents 1 Chapter 2: Brief Introduction to Company 3 Chapter3: Summary of Accounting Data and Business Data 4 Chapter4:Introduction to Capitalization Alteration and Shareholders 4 Chapter 5:Introduction to Directors, Supervisors, Senior Managers and Staffs 7 Chapter 6: Administration of the Company 8 Chapter 7:Brief Introduction to Shareholders’ Conference 10 Chapter 8: Report of the Board of Directors 10 Chapter 9: Report of the Supervisory Committee 17 Chapter 10: Important Matters 18 Chapter 11: Financial Report 20 Chapter 12: Contents of Reference Documents 20 2 Chapter 2 Brief Introduction to Company 1. Name of our Company: LIVZON PHARMACEUTICAL GROUP INC. Abbreviation: LIVZON GROUP 2. Legal Representative: Yi Zhenqiu President: Xu Xiaoxian 3. Secretary of the Board of Directors: Wang Wuping Representative of securities work: Li Hao Tel: (0756) 8135888 Fax: (0756) 8886002 E-mail: wangwuping@livzon.com.cn lihao@livaon.com.cn Contact address: LIVZON Mansion, the North Guihua Road, Gongbei, Zhuhai City 4. Company registration address： No.132, the North Guihua Road, Gongbei, Zhuhai City, Guangdong Province. Company office address: LIVZON Mansion, the North Guihua Road, Gongbei, Zhuhai City, Guangdong Province Zip Code: 519020 Web-site: http://www.livzon.com E-mail: zhlivzon@pub.zhuhai.gd.cn 5. Selected newspaper throw daylight on: ‘ Stocks Times’, ‘ Shanghai Securities Paper’, Hongkong ‘ Wen wai Po’(Chinese, English language) The annual report throw daylight on the web-site appointed by CSRC: http://www.cninfo.com.cn 3 Annual report prepared place: Secretariat of LIVZON Group Board of Directors 6. Stock listed Exchange: Shenzhen Exchange Stock abbreviated and code: LIVZON GROUP (000513) LIVZON B (200513) 7. Other related information: Date of first registration: January 26, 1985 Date of alteration registration: May 29, 2001 Company register place: Zhuhai Industry and Commerce Administrative Bureau Company Business License Registered No.: QGYZZZi No.001111 Tax registered No.: 440401617488309 8. Name of invited domestic Accountant Office: Lianda Xinlong Accountant Office Co., Ltd. Address: No.1 of Building 252, Huwan Road, Xiangzhou District, Zhuhai City. Name of invited international Accountant Office: Ho and Ho & Company Address: Arion Commercial Center, No.2-12, Queen’s Road West, Hong Kong. Chapter 3 Summary of Accounting Data and Business Data I. Main Accounting Data (Unit: RMB’000) Major Accounting Figures 2001 2000 Revenue 1,395,792 1,154,706 Gross Profit 651,195 516,655 Share of Results of Associates (841) 542 Profit Before Tax 110,532 3,325 Income tax expense (27,175) (9,352) Profit after tax 83,357 (6,027) Minority Interests (24,308) (16,083) Net profit for the year 59,049 (22,110) Earnings per Share RMB0.19 (RMB0.07) Share capital 306,035 306,035 Capital and reserves 909,671 850,622 Total assets 1,641,717 1,516,276 Net cash inflow from operating activities 166,068 62,893 Net increase(decrease)in cash and cash equivalents 134,083 (53,806) Note s: The indicators above was audited by Ho and Ho & Company according to International Accounting Standard, which is given as reference for B shares investors. II. Net profit audit difference As examined and checked by Lianda Xinlong Accountant Company, Ltd. according to the 4 Chinese accounting norms, our company reaped a net profit of 50,392,136.63 yuan in 2001; alteration Current alteration (plus & minus) Alteration before after Allocated Presented Accumulation Appended Others Stock stock Fund transfer issue to stock Uncirculated Share Organizer Share: 1.Domestic 68,056,188 68,056,188 corporation stock 2.Foreign 18,893,448 -18,893,448 0 capital Corporation stock Total 86,949,636 -18,893,448 68,056,188 uncirculated Shares Circulated share 1. Class A 115,672,310 115,672,310 stock Thereinto: 80,798 80,798 Senior Manager Stock 2. Class B 103,413,536 +18,893,448 122,306,984 stock Total 219,085,846 +18,893,448 237,979,294 circulated Share Total shares 306,035,482 306,035,482 and according to the examination and check by Ho and Ho & Company in accordance with the international accounting norms, our company had a net profit of 59,049,000 yuan in 2001. The difference between the two is 8,656,863.37 yuan. The main reasons for the difference are: According to the international accounting norms, 6,886,000 yuan, 6,817,000 yuan, and 915,000 yuan will be added to the profits respectively for bad debts preparation, amortization of apportion expenses, and confirmation of investment returns. And 251,000 yuan, 3,524,000 yuan, 286,000 yuan and 1,900,000 yuan will be deducted respectively from the profits for amortization of business reputation, expenses collected in advance, the negative business reputation obtained when purchasing subcompanies and others. Chapter 4 Introduction to Capitalization Alteration and Shareholders I. Capitalization Alteration Situation a.Capitalization Alteration list (up to December 31, 2001) 5 b. Stock issue and market situation for recent 3 years There is no change in the capitalization construction for the recent 3 years in our company, the total capitalization is 306,035, 482 shares. The foreign capital corporation stock (18,893,448 shares) of our company which hold by Guangda Pharmaceutical Com. Ltd. of China (now rename as ‘Guangtai Pharmaceutical Com. Ltd. of China’) was approved by CSRC to circulate on the market on July 18, 2001, which has proclaim in Stocks Times, Shanghai Securities Paper and Hong Kong Wen Wai Po on July 12, 2001. //. Shareholders’situation 1. At the end of 2001: Total shareholders: including A-shair shareholders, class B stock shareholders: 2. Stock holding situations of first ten shareholders (up to December 31, 2001) Order Name Amount Alteration Proportion(%) Character 1 Guangda (group) 38,917,518 0 12.72 Domestic Company of corporation China stock 2 Zhuhai Lishi 22,379,239 +22,379,239 7.31 Domestic Investment Co. corporation Ltd. stock 3 Guangtai 15,628,395 -3,265,053 5.11 Class B Pharmaceutical common Co. Ltd. of China stock 4 Guangzhou 6,059,428 -5,000,000 1.98 Domestic Baokeli Trading corporation Company stock 5 Jinsheng 2,671,039 +663,421 0.87 Class A Securities common Investment Fund stock 6 Shanghai 1,561,793 +1,561,793 0.51 Class A Securities Co. common Ltd. stock 7 Tianhua 1,150,000 +1,150,000 0.38 Class A Securities common Investment Fund stock 8 Jingyang 1,144,252 +1,144,252 0.37 Class A Securities common Investment Fund stock 9 Han Gui Yi 1,017,464 +1,017,464 0.33 Class A common stock 10 Xibu Securities 899,232 +899,232 0.29 Class A Holdings Co. common Ltd. stock (Note: the above shareholders not exist associated relation) III. The principal shareholder of our Company: Up to the end of the report period, the principal shareholder is Guangda (group) Company of China. This Company was register on November 12, 1990. the Legal representative is Wang Mingquan, the register capital is RMB 20,000,000.00, mainly engage in bank, financial business, domestic stock exchange business,etc. 6 Chapter 5: Introduction to Directors, Supervisors, Senior Managers and Staffs 1.Introduction of Directors, Supervisors and Senior Managers (I.). Brief introduction Name Sex Age Title Employment Shares Shares Period holding at the holding by beginning of the end of this year this year Yi Zhenqiu Male 58 Chairman From Dec. 0 0 1998 to May 2002 Xu Xiaoxian Male 65 Deputy Ditto 48476 48476 Chairman President Dong Male 61 Director Ditto 0 0 Shaozhi Executive Vice Presidents WuYanpeng Male 39 Director Ditto 0 0 Han Male 41 Director Ditto 0 0 Huanguang Chen Male 52 Director Ditto 0 0 Danglin Cao Wenxia Female 57 Director Ditto 16158 16158 Yang Chu Male 36 Chairman of From Dec. 0 0 Supervisory 1998 to May 2002 Li Yufang Female 51 Supervisor From Dec. 16158 16158 1998 to May 2002 Huang Male 58 Supervisor From Dec. 0 0 Biran 1998 to May 2002 Liang Male 41 Supervisor From Dec. 0 0 Jinlong 2000 to May 2002 Zheng Male 61 Supervisor From Dec. 0 0 Wangong 1998 to May 2002 Shen Male 56 Deputy From April 0 0 Weijun Chairman 2001 President Liu Shuqing Female 38 Assistant From April 0 0 President 2001 Zhao Rui Male 36 General From April 0 0 Accountant 2001 (responsibl e person in charge of finance) Wang Male 36 Secretary to From Dec. 0 0 7 Wuping the board of 1998 to May directors 2002 (II) Information on annual remunerations The board directors and the supervisory directors of the Inc. do not receive remunerations from the Inc. The annual total of remunerations paid to the senior managerial staffs amounts to RMB 2,030 thousand yuan Among them,5 persons are paid by a level of RMB 100-450 thousand, and 1 is by a level of RMB 450 thousand. The total remuneration for the three senior managerial staff persons with the highest pay level amounts to RMB 1,280 thousand. The remuneration levels are determined on the basis of the importance of the job posts, the personal responsibilities, the individual contributions, and the efficiency of the Inc. (III) Information on the quits and appointments The 8th meeting of the 3rd session of the board of directors held in April of 22001 passed the resolution to appoint Mr. Dong Shaozhi to be the Deputy Chairman of Board of Directors. With the nomination by President Xu Xiaoxian, Mr. Shen Weijun and Mr. Dong Shaozhi were appointed to be the executive Vice Presidents, Mr. Liu Shuqing to be the Assistant President and Mr. Zhao Rui to be the General Accountant (responsible person in charge of finance). The Inc. shall not appoint a general manager and the deputy general managers. The persons who were originally appointed to take these posts shall not continue their job assignments. 2. Information on employees of the Inc. There are 2326 full-time employees in the Inc. at present (not including those in the shareholding companies). The Inc. is also responsible for the payments of pensions for 71 retired employees (including 26 persons who were treated as retired by the corporation). Among all the employees, 900 persons are engaged in production, 996 persons in marketing and sales, 135 technicians, 50 financial staff persons, and 245 administrative staff persons. Of all the employees, 1,203 persons have educational backgrounds above college level, accounting for 51.72 % of the total workforce. Chapter 6 Administration of the Company 1.State of Administration At the end of 2000 the supervision and control office of Guangzhou Stock Company made a routine inspection of our Company, pointed out some problems in our work and put forward many valuable suggestions on improving the administration structure of the legal person of our Company. In the following year our Company implemented measures for reform and consolidation item by item, amended some parts of the Company’s regulations, and basically completed the reform and consolidation as required in the notice of reform and consolidation. In accordance with the requirements of the Governing Principles of Listed Companies jointly issued by China Securities Regulatory Commission (CSRC) and State Economic and Trade Commission and Guide to the Regulations of Listed Companies 8 issued by CSRC, and in the light of the actual conditions of the Company, our Company will make great amendments about the company’s regulations this year. A new chapter on independent directors will be added to the regulations. We plan to further improve the election process of the directors, independent directors and supervisors, and to regulate the authority and process of such major fund operations as investment guarantee. We are also planning to formulate a series of rules and regulations, such as rules of procedures for the shareholders’conference, so as to make clearer the responsibilities and rights and work process. 2.Duty performance of the independent directors At present there are no independent directors in the Company. In 2002, in accordance with the requirements as stated in On the Guiding Principles for the Establishment of Independent Directors System in Listed Companies issued by CSRC, our Company will make active efforts to introduce independent directors and to further regulate the legal person structure of the Company, so as to embody really the Company’s operation principle: being fair, just and open. 3.The Company is totally independent of its largest shareholder in business, personnel, assets, organizational setup and finance. In business, the Company is totally independent, having its own independent purchasing and marketing systems. The Company and its biggest shareholder do not engage in the production and operation of the same products, so there is nothing like competition within the same trade. In personnel, the Company is totally independent of the biggest shareholder in the management of labour, personnel and pay. In assets, the Company possesses its whole assets and has independent production, supply and marketing systems. The company has independent and complete organizational setup, which is strictly separated from that of its biggest shareholder. As for finance, the Company has its own independent financial department and has set up a standard and independent financial and accounting system and a system for the management of the finance of the enterprises affiliated to it. 4.The establishment and implementation of a system for the assessment, evaluation and encouragement of the senior managerial personnel of the Company In 2001 an annual salary system linked with objectives was carried out for the Company’s senior managerial personnel , with rewards floating based on the personal achievements linked with the target fulfillment of the Company’s business profits. Chapter 7 Brief Introduction to Shareholders’Conference I. The Company’s shareholders’ conference for the year 2001 (i.e. the Thirteenth Shareholders’ Conference of Livzon Pharmaceutical Group Inc.) was held at the Company’s office building on May 26, 2001. The notice for the meeting was announced in 9 Stocks Times, Shanghai Securities Paper and Wen Wai Po on April 26, 2001. Present at the conference were 21 shareholders, representing 94,798,523 shares, accounting for 30.98% of the total shares of the Company (including 19,410,148 class B stock, accounting for 6.34% of the Company’s total). The conference adopted the following resolutions: 1. The President’s Work Report for 2000 of Livzon Pharmaceutical Group Inc. 2. The Work Report of the Board of Directors for 2000 of Livzon Pharmaceutical Group Inc. 3. Proposal on the Amendment of the Company’s Regulations by Livzon Pharmaceutical Group Inc. 4. Work Report of the Supervisory Committee for 2000 of Livzon Pharmaceutical Group Inc. 5. Report on the Execution of the Finance for 2000 of Livzon Pharmaceutical Group Inc. 6. Allocation plan of the Profits for 2000 of Livzon Pharmaceutical Group Inc. 7. Proposal on Authorizing the Management of the Company to Select Accounting Firms outside China 8. Proposal on Straightening out the Property Right of the Twelve Second-class Enterprises of the Group Including Livzon Pharmaceutical Factory The resolutions of the Thirteenth Shareholders’Conference were published on May 29, 2001 in Stocks Times, Shanghai Securities Paper and Wen Wai Po (Hong Kong). No replacements of directors or supervisors were made at the Thirteenth Shareholders’ Conference. II. The provisional Shareholders’Conference for 2001 was held at the conference room on the second floor of the Company’s office building on July 13, 2001. The notice for the meeting was announced in Stocks Times, Shanghai Securities Paper and Wen Wai Po (Hong Kong) on June 12, 2001. Present at the conference were 8 shareholders, representing 87,014,267 shares, accounting for 28.43% of the total shares of the Company (including 18,893,448 B-shair, accounting for 6.17% of the Company’s total). The Proposal on the Amendment of the Company’s Regulations by Livzon Pharmaceutical Group Inc. was adopted at the conference by a vote in written form. And the resolution was published on July 16, 2001 in Stocks Times, Shanghai Securities Paper and Wen Wai Po (Hong Kong). Chapter 8 Report of the Board of Directors I. The operation of the Company 1. Main scope of business and the business state: a. The Company is chiefly engaged in the production, marketing and research of pharmaceutical products, the main products being Lizhu dele, Lizhu changle, Lizhu Huisanlian, Lizhuwei, Lizhufeng, etc. The Company produces about 100 varieties of medicines and drugs, including chemical reagents, biochemical medicines, bioengineering medicines, antibiotic, and prepared Chinese medicine, etc. b. The Company’s business income for 2001 was 1,395,792 thousand yuan, an increase of 10 18.43% over the previous year, with a net profit at 50,392 thousand yuan, an increase of 385.67% over the previous year. In view of the increasingly fierce competition in China’s domestic medical market, the big increase in the Company’s revenue is an important outcome of the Company’s reform in marketing as well as the great efforts of all the staff and workers of the Company. In 2001 the Company proceeded with its all-out reform in marketing. On the basis of the previous two marketing systems (System I and System II), the marketing system was further integrated, to achieve a combination of the market, business and finance in the marketing system of new drugs and common drugs, so that the resources were shared, the cost lowered, and the operational efficiency of the whole marketing system greatly enhanced. At the end of the year the Company put forward a new thinking—a new concept in the establishment of the circulation of Livzon drugs. The new circulation concept embodies a totally new ideal – to provide services to all the forces competing in the market. Its purpose is to combine all the forces in the research, production and marketing and, through reasonable distribution of interests, make fullest use of the resources that have been previously widely dispersed, so as to develop together and to enhance the capability to meet any emergencies. This new circulation concept is now only in the initial stage and the Company will accordingly consolidate and enlarge the current advantages in resources, in the hope that the enterprise will develop rapidly to become a leading enterprise in the trade. In 2001 several factories under the Company passed the GMP attestation by the state, including the diagnosing reagent production line of the Lizhu Reagent Factory, the infusion production line of the Limin pharmaceutical Factory and the newly-built production lines for frozen powder injection, solid preparation and paste of Hubei Keyi Pharmaceutical Com. Ltd. By the end of 2001, as many as 18 production lines of the companies either funded wholly or controlled by our Company had passed the GMP attestation of the state. There are no workshops or production lines of the companies either funded wholly or controlled by our Company whose GMP attestation time-limit is overdue and that have not passed the GMP attestation of the state. c. The composition of main business income and the classified marketing Unit: (RMB’000) 2001 2000 1999 Sales Percenta Sales Percenta Sales Percenta volme ge(%) volme ge volme ge Self-produced 1,314,209 94.16 1,002,268 85.04 1,024,093 90.32 drugs Anti-infectious 534,323 38.28 376,369 31.93 635,271 56.03 drugs Digestant 289,625 20.75 257,477 21.85 135,889 11.99 Cardio-cerebro 188,678 13.52 74,395 6.31 104,475 9.21 vascular drugs Others 301,582 21.61 294,027 24.95 148,459 13.09 Agent drugs 81,584 5.84 176,285 14.96 109,726 9.68 Total 1,395,792 100% 1,178,553 100% 1,133,820 100% 2. Business state of the main controlled companies of Livzon Group 11 a. Hubei Keyi Pharmaceutical Com. Ltd.: Its registered capital is 22 million yuan (RMB). It mainly engages in the production of preparation products and compound materials for drugs, the principal product being Likewei, a drug of which the company is the only producer in China. Our Company has 46% of the shares of the limited company. Up to December 31, 2001, the company’s total asset amounted to 110,916 thousand yuan, its main business income in 2001 was 111,876 thousand yuan, with a net profit of 23,476 thousand yuan. b. Sichuan Guangda Pharmaceutical Com. Ltd. of Livzon Pharmaceutical Group, Inc: Its registered capital is 59.89 million yuan (RMB). It mainly engages in the production and marketing of prepared Chinese medicine and the development of new drugs. Its principal products include antivirotic granules and nine-flavour beneficial-to-the-brain granules. Our Company has 52% of the shares of the limited company. Up to December 31, 2001, the company’s total asset amounted to 164,544 thousand yuan; its main business income in 2001 was 100,476 thousand yuan, with a net profit of 8,861 thousand yuan. c. Shanghai Livzon Pharmaceutical Com. Ltd.: Its registered capital is 45 million yuan (RMB). It mainly engages in the production and marketing of preparation products and biochemical materials for drugs. Its principal products are Yitaimei and keluoqu. Our Company has 85% of the shares of the limited company. Up to December 31, 2001, the company’s total asset amounted to 142,079 thousand yuan; its main business income in 2001 was 35,781 thousand yuan. Since it was set up not long ago, and the investment in the early stage was great, it has a deficit of 2,111 thousand yuan. d. Hubei Liyi Pharmaceutical Technological Co. Ltd.: Its registered capital is 10 million yuan (RMB). It mainly engages in research and development as well as technological consultation. Our Company has 50% of the shares of the limited company. Up to December 31, 2001, the company’s total asset amounted to 31.626 thousand yuan; its main business income in 2001 was 18,277 thousand yuan, with a net profit of 7,265 thousand yuan. e. Livzon Group Libao biochemical pharmaceutical Co.,Ltd.: Its registered capital is 50 million yuan (RMB). It mainly engages in manufacturing biochemical medicine such as “Lizhu Saile”. Our Company has 76.99% of the shares of the limited company. Up to December 31, 2001, the company’s total asset amounted to 64,284 thousand yuan; its main business income in 2001 was 109,521 thousand yuan, with a net profit of 14,323 thousand yuan 3. Customers and Suppliers The sales volume to the five biggest customers this year amounts to 204,869 thousand yuan, accounting for 14.68% of the total sales volume of the company; and the amount of purchase from the five biggest suppliers reaches 114,070 thousand yuan, accounting for 30.47% of the total purchase of the company. 4. Business difficulties and their solutions 12 In 2001 the state government made further adjustment of the pharmaceutical market; in various places the purchase of drugs was made though public bidding; the prices of drugs were lowered as prescribed by the state Planning Commission—all this had some impact on the company’s profit. In 2001, in conforming to the reforms in medical system carried out by the state, the Company began to develop the ERP system in marketing, by which to do instant management, process management and links management, so as to optimize the resources inside and outside the Company to achieve high efficiency and to gain the upper hand in the competition. II.Investment during the period of report 1. Use of the fund raised: During the period of report, the Company did not raise fund though the stock market. 2. Investments: a.On March 31, 2001, our Company signed an agreement of transferring shareholder’s right with Chendu Yaoyou Scientific and Technological Development Com. Ltd. and bought from it 20% of the shareholder’s right of the Livzon Fine Scientific and Technological Investment Com. Ltd., with a transferring price of 2.3 million yuan. After the agreement goes into effect, our Company will own 80% of the shareholder’s right of the Livzon Fine Scientific and Technological Investment Com. Ltd. The company mainly engages in the research and development of the drugs and medical technology, scientific and technological consultation and investment in projects. b. On June 7, 2001, our Company and Antao Development Com. Ltd. (wholly funded by our Company) signed an agreement of transferring shareholder’s right with Xinli Pharmaceutical Import and Export Com. Ltd. and bought respectively from it 28% and 13%of the shareholder’s right of the Likang Pharmaceutical Com. Ltd. of Zhuhai Special Economic Zone, with a transferring price of 18.676 million yuan and 8.671 million yuan respectively. On June 15, 2001, our Company signed an agreement of transferring shareholder’s right with China Pharmaceutical (Group) Shanghai Company, and bought from it 6% of the shareholder’s right of the Likang Pharmaceutical Com. Ltd. of Zhuhai Special Economic Zone, with a transferring price of 4.002 million yuan. After the agreement goes into effect, our Company and Antao Development Com. Ltd. (wholly funded by our Company) will own 59% and 13% of the shareholder’s right of Likang Pharmaceutical Com. Ltd. of Zhuhai Special Economic Zone. The company mainly engages in the production and marketing of cephalosporin powder injection. c. On June 1, 2001, our Company made an investment of 1.0254 million yuan (in cash) in Chendu Kailekai Industrial Com. Ltd. which was jointly funded by Chendu Organic Chemistry Institute of the Academy of Sciences of China, Technological Development General Corporation of Chendu Organic Chemistry Institute of the Academy of Sciences of China, and Miaiqiao, with a registered capital of 600000 yuan, later increased to 1.23 million yuan when its name was changed to Chendu Likai Dry 13 Technological Com. Ltd. Our Company owns 40% of the shareholder’s right of the company. It mainly engages in the research and manufacturing of dry drugs. d. In May 2001, our Company and Guangzhou Chinese Medicine University jointly funded and set up Zhuhai Modern Chinese Medicine High-tech Com. Ltd. The company has a registered capital of 6 million yuan, of which 4.5 million was provided by our Company. Our Company owns 75% of the shareholder’s right. It mainly engages in the research and development of the Chinese medicine and Chinese medicine engineering technology and equipment, as well as in technical services and consultation. e. On October 18, 2001, our Company signed an agreement on the establishment of Zhuhai Li’ao Microecological Products Com. Ltd. with a registered capital of 1 million yuan, of which our Company provided 900000 yuan and owns 90% of the shareholder’s right The company mainly engages in the research and development of the new projects, new products and new technology as well as the transfer of results in the microecological field. f. Adopted by the 9th meeting of the Third Board of Directors, our Company made an investment of 3,703,700 yuan in the stocks of Beijing Xin hao Modern Pharmaceutical Development Com. Ltd., and owns 10% of the company’s shares. The original registered capital of the company was 20 million yuan (RMB). It mainly engages in the research and development of pharmaceutical products and chemical intermediate, as well as technical consultation and technical transfer. The registration of changes with the industrial and commercial administration is under way. III. An analysis of financial state For the year the main business income will be 1,395,792 thousand yuan, an increase of 217,239 thousand yuan (18.43%) from the previous year’s 1,178,553 thousand yuan. That’s because Lizhudele instant herbal mixture, Lizhudele capsules, Lizhu changle, and Lizhu Huisanlian, etc. sold well, because the sales of materials for drugs of the compound factories increased, and also because the likewei, a product of Hubei Keyi Pharmaceutical Com. Ltd., .saw a big increase in its sales volume. For the year the main business profit will be 651,215 thousand yuan, an increase of 108,743 thousand yuan (20.05 %) from the previous year’s 542,473 thousand yuan. That’s because the main business income and hence the gross profit increased. For the year the net profit is 50,392 thousand yuan, an increase of 40,040 thousand yuan (386.77%) from the previous year’s 10,352 thousand yuan.; that’s mainly because of the increase in sales and gross profit and also because of the lowering of cost and the increase of profits in other businesses. The total assets at the end of the year were 1,676,191 thousand yuan, an increase of 127,909 thousand yuan (8.26%) from the previous year’s 1,548,283 thousand yuan. The reasons for the increase are: More loans were paid back to us by our debtors and we could borrow more money from the banks at the end of the year. Our total debt at the end of the year was 639,371 thousand yuan, of which 550 thousand yuan was long-term debt ,49,970 thousand yuan less than that at the beginning of the year’s 50,520 thousand yuan. The reason for its decrease is that the long-term debts which were due within one year were transferred to the floating debts. The rights and interests of the shareholders were 918,972 14 thousand yuan, an increase of 42,445 thousand yuan (4.84%) from the previous year’s 876,527 thousand yuan. That’s because the profits that had not been allocated and the surplus accumulation fund had increased. IV. Business plan for the new year In 2002 the Company will continue to increase its superiority in the digestive , anti- infectious and cardio-cerebro vascular fields, and, centering around the strategic objective of “becoming large and powerful”, will renew the business concept, management concept and system concept, strengthen the core competitive power . 1. Vigorously promote overall budget and the regulation of the process to avoid business risks Further tighten the planning management and process regulation of the Company’s operation and vigorously promote the implementation of the overall financial budgetary system, strengthen the control of financial affairs, strictly control various budgetary items, supervise and monitor every link in the process of operation and every factor that will affect the realization of the business target, and improve the checking system within the Company to prevent business risks. 2. Strive to bring the core business into full play and become big and powerful in the main business Stress the core resources of the main business and exercise direct management of the market, research and flow of materials in the digestive, anti-infectious and cardio- cerebro vascular fields in the form of business management, and consolidate and enlarge the share of the market in those fields. As to other advantageous resources, the Company will gradually combine them into several groupings, such as biochemical, prepared Chinese medicine, antiviral, compound drugs, ferment and biotechnology and exercise management of them in the form of strategic control management, so as to make each grouping a market mainstay and profit center. In the meanwhile, in 2002 the Company will gradually implement the new concept of medical circulation, accelerate the ideological reform in the medical circulation field, and adopt the business concept of rendering services to the people in competition, to carry out the great changes in the marketing system, and to accelerate the process of the Group in realizing its objective of being big and powerful. The Livzon chain drugstores which the Company had intended to expand will maintain their present scope and will not for the moment be expanded. 3. Strengthen research and development and accelerate the market orientation of the new products Adhere to the market orientation of the research work, and, centering around the main business of the Company, improve the exchange and communication among various links of research, marketing and production, accelerate the transfer of research results into productivity, and promote the research and development of the new products that are highly technological 15 and of which our Company has property right. At the same time the company will pay more attention to scientific and technological innovation and to the establishment of a scientific base, so as to enable the Company to have more stamina in its development. 4. Recreate corporate culture to bring about the realization of the new strategy Corporate culture is a great cohesive force for the Company, and at a time when the Company is starting an undertaking for the second time, it is of vital importance to recreate corporate culture. In 2002 the Company will strengthen the building of corporate culture, arouse the enthusiasm and sense of responsibility of the staff and workers in their participation in the renewed undertaking of the Company, to create a good environment for competition and development. In the meanwhile promote the implementation of the Company’s new strategy by the recreation of the corporate culture, strengthen the integration of the Company’s resources, make clear as soon as possible the organizational framework and the position of each grouping, strive to do some things by leaving other things undone, so as to make new breakthrough for the Company in the near future. V. Routine work of the Board of Directors During the period of the report, we held three meetings (the 7th, 8th, and 9th) of the Third Board of Directors. On February 9, 2001, the 7th meeting of the Third Board of Directors was held at the conference room on the third floor of the Company’s office building. The meeting adopted Explanations on Making Joint Investment to Set up Hubei Liyi Pharmaceutical Technological Com. Ltd., Proposal on the Transfer of Shareholder’s Right of Liyi Company and Turning it into a Limited Company, Proposal on the Cooperation of Property Right with Chendu Organic Chemistry Institute, Proposal on the Implementation of the the Regulation and Reform Plan of the Group (draft), and Proposal on Authorizing the Right of Approving Investment Projects to the Top Managerial Level of the Group. On April 24, 2001, the 8th meeting of the Third Board of Directors was held at the conference room on the third floor of the Company’s office building. The meeting adopted Annual Report for 2000 of Livzon Group, President’s Annual Report for 2000 of Livzon Group, Annual Report of the Board for 2000 of Livzon Group, Proposal on the Amendment of the Company’s Regulations by Livzon Pharmaceutical Group Inc., Proposal on the Adjustment of the Organizational Framework and Senior Managerial Personnel of Livzon Group, Report on the Execution of the Finance for 2000 of Livzon Pharmaceutical Group Inc., Allocation Plan of the Profits for 2000 of Livzon Pharmaceutical Group Inc., Allocation Policy of the Profits for 2001 of Livzon Pharmaceutical Group Inc., Proposal on the Purchase of the Shareholder’s Right of the Likang Pharmaceutical Com. Ltd., Proposal on the Authorization of Raising Fund, Proposal on Authorizing the Management of the Company to Select Accounting Firms outside China, Proposal on Straightening out the Property Right of the Twelve Second-class Enterprises of the Group Including Livzon Pharmaceutical Factory, and Proposal on the Convening of the Thirteenth Shareholders’ 16 Conference. On August 17, 2001, the 9th meeting of the Third Board of Directors was held at the conference room on the third floor of the Company’s office building. The meeting adopted Mid-term Report for 2001 of Livzon Group, Proposal on Not Making Mid-term allocation of Profits and Transfer of Accumulation Fund to Capital Stock, Report on the Execution of the Finance for the First Half of 2000 of Livzon Pharmaceutical Group Inc., Proposal on the Amendment of the Internal Control System of the Devaluation of the Various Assets of the Livzon Group, Being Prepared to Withdraw and Losses Management, and Proposal on the Engagement of Accountant’s Office outside China by Livzon Group. VI. Profit Allocation Plan According to the principle of allocating the lowest distributable profits to the shareholders, and on the basis of 10,851,000 yuan as the distributable profits to the shareholders according to the foreign accounting (the merged reported figure), 0.3 yuan in cash will be distributed to every ten shares, but there will be no dividends on shares, nor is there an increase of capital stock from the accumulation fund. Chapter 9 Report of the Supervisory Committee I. The work of the Supervisory Committee On April 24, 2001, the 4th meeting of the Third Supervisory Committee was held at the conference room on the third floor of the Company’s office building. The meeting adopted Work Report of the Supervisory Committee for 2000 of Livzon Pharmaceutical Group Inc., Proposal on the Amendment of the Regulations of Supervisory Committee. II. Independent opinions of the Supervisory Committee 1. The Company operates in accordance with the law The Supervisory Committee conscientiously performed its duties as prescribed by Corporate Law and Corporate Regulations, and exercised its rights as the Supervisory Committee, examine and check the operation of the Company in the light of law. After examination and check, it found that the Board of Directors has carried the resolutions adopted by the shareholders conference to the letter, its decision-making procedure conforms to the stipulations of the Corporate Regulations, and also it has established the Internal Control System of the Devaluation of the Various Assets of the Livzon Group, Being Prepared to Withdraw and Losses Management. When carrying out their duties, the Directors and senior managerial personnel have not violated the law, rules and regulations, nor have they jeopardized the interests of the shareholders and the Company. 2. Lianda Xinlong Accountant Office Com. Ltd. and Ho and Ho & Company respectively audited the financial statement for 2001 of the Company according to the domestic and international accounting norms and presented auditing reports in which they 17 stated they had no reservations. The Supervisory Committee holds that the auditing reports reflect the actual financial state of the Company and its production and business results. 3. The changing procedure of the actual invested project for the funds which the Company raised last time is in conformity with the regulations of the Shenzhen Stock Exchange and the CSRC. 4. The trading prices for the purchase and selling of assets by the Company are reasonable. There is no behind-the-scenes deal, no conduct that damages the right and interests of some of the shareholders, and that causes the loss of the Company’s assets. 5. The related deals the Company made are in conformity with the market economic principle: fair deal, and reasonable price. There is no infringement on the interests of the Company and shareholders. Chapter 10 Important Matters I. This year no major lawsuits or arbitration happened to the Company. II. Other important matters: 1. Shanghai Livzon Pharmaceutical Com. Ltd. (Shanghai Livzon for short) and Shanghai Livzon Dongfeng Biotechnology Com. Ltd. (Shanghai Livzon Dongfeng for short), both affiliated to the Company, are planning to reorganize their assets. The matter was examined and agreed to by the Company’s Board of Directors. Shanghai Livzon is to absorb and annex Shanghai Livzon Dongfeng with its own registered capital as the basis. Upon completion of the reorganization of assets, the registered capital of Shanghai Livzon will be increased from 45 million yuan to 57.6711 million yuan, the shareholders being Livzon Pharmaceutical Com. Ltd., Shanghai Jinqiao Company, and Shanghai Shenglongda Company, respectively with 80.09%, 11.7% and 8.21% of the shareholder’s rights. The reorganization of the assets is still under way. 2. The Company plans to buy 5% right of the Hubei Keyi Pharmaceutical Com. Ltd., of which our Company is the holding company, from Shenzhen Guangzhu Investment Com. Ltd., thus enabling our Company to become holding 51% shareholder’s right of Hubei Keyi Pharmaceutical Com. having, a 5% increase from 46%. 3. The Company decided to reorganize the shareholder’s rights of Hubei Keyi Pharmaceutical Com. Ltd. (Keyi Company for short) and Hubei Liyi Pharmaceutical Technological Com. Ltd. (Liyi Company for short), so as to guarantee a steady development of the two companies and to establish a link between research and production. The Company and Hubei Pharmaceutical Industrial Research Institute decided to increase investments in their shares of Liyi Company (each having 25.5%). After that Liyi Company will hold 51% of the shares of Keyi Company, making it the 18 holding company of Keyi Company. Our Company will increase our investment in the shares of Liyi Company once more, and our Company will hold 59% of the stockholder’s right of Liyi Company and Hubei Pharmaceutical Industrial Research Institute will hold 41% of its stockholder’s right. Liyi Company will gradually become a scientific and technological center of the Livzon Group. 4. The Board meeting of the Livzon (Hong Kong) Company, Ltd., a subcompany wholly funded by our Group, passed the following resolution: Livzon (Hong Kong) Company is to transfer the 45% stockholder’s right of Geneharbor Technologies Inc. which it owns directly or indirectly to Being Base Investments Limited at a price of 2.5 million HK dollars III. Connective deals 1. Purchasing of commodities Name of the related party 2001 2000 Suzhou Xinbao Pharmaceutical Factory 6,426,622.83 6,034,352.56 Changzhou Kangli Pharmaceutical Com. Ltd. of Livzon Group 16,279,107.60 17,259,360.68 For the purchases of pharmaceutical products from the associated suppliers, the accounts of the purchase prices are settled in accordance with the market prices for the similar products. (2) Balance of receivables of the associated suppliers 2001/12/31 2000/12/31 Zhuhai Livzon Medical-Purpose Electronic Equipment Co. Ltd 4,739,344.31 4,388,823.36 (3) Balance of payables of the associated suppliers 2001/12/31 2000/12/31 Suzhou Xinbao Pharmaceutical Factory 2,631,969.34 4,284,173.50 Livzon Group Inc. Changzhou Kangli Pharmaceutical Co. Ltd — — 4,406,786.33 (4) During the time period covered by the report, Livzon Group Inc. did not enter any associated transactions related with the transfers of assets or equities. IV. Surety Terms 1. Shanghai Livzon Pharmaceutical Co. Ltd, a shareholding subsidiary company under this Inc., signed a loan contract with a borrowing value of RMB 49.97 million from Shanghai Bank in the year of 1998. This Inc. provided the guarantee of joint liabilities for this loan, which will be mature by the year of 2002. 2. Shanghai Livzon Pharmaceutical Co. Ltd, a shareholding subsidiary company under this Inc., signed a loan contract of flowing capital with a borrowing value of RMB 15 million from Shanghai Pudong Development Bank on December 8 of 2001. This Inc. provided the surety for this loan. 3. By the date of December 31 of 2001, the total value of loans that this Inc. has borrowed 19 RMB 20 million from China Agricultural Bank Zhuhai Branch 2nd Business Office. Livzon Synthetic Pharmaceutical Factory, provides surety for all the loans. 4. This Inc. made a borrowing of RMB 10 million from Construction Bank Zhuhai Gongbei Branch in January of 2001. Livzon Synthetic Pharmaceutical Factory, provides surety for the loan. 5. This Inc. made a borrowing of RMB 30 million from Shenzhen Merchants Bank in November of 2001. Livzon Synthetic Pharmaceutical Factory, provides surety for the loan. 6. Livzon Synthetic Pharmaceutical Factory, made a borrowing of RMB 25 million from China Agricultural Bank Zhuhai Branch in November of 2001. This Inc. provided surety for the loan. V. By the date of the presentation of this report, there has been no significant issue of commitments for this Inc. to release. VI. Information concerning the appointment of overseas certified public accountants firms With the authorization by the shareholders meeting, the 9th conference of the 3rd session of board of directors passed the resolution of the Motion Concerning the Appointment of Overseas Certified Public Accountants Firms by Livzon Inc., appointing Lianda Xinlong Certified Public Accountants Limited Liability Co. and Hongkong He Xilin Certified Public Accountants to be the accountants firms for this Inc. to undertake related issues at home and aboard in the year of 2001. The validity term for the appointment was one year. The remunerations paid to the domestic accountants firm in the fiscal year covered by this report were RMB 330 thousand yuan , and the remunerations paid to the overseas accountants firm were RMB 400 thousand yuan VII. Miscellaneous China Everbright (Group) General Corp., the biggest shareholder of this Inc. proposed to transfer its stock rights that it holds in this Inc. The Board of Directors of this Inc. has made public announcements concerning this issue in Stocks Times, Shanghai Securities Paper and Wen Wai Po (Hong Kong) on the respective dates of January 4 of 2001, March 14 of 2001 and January 16 of 2002. Section 11 Financial Report (attached) Section 12 Contents of Reference Documents I. Contents of reference documents: 1. Original copy of the auditing report that was signed by and stamped with the seals of the legal representative, the responsible person in charge of accounting, and the chief director of accounting; 2. Original copy of the auditing report that was stamped with the seals of the certified public accountants firms and signed by the certified public accountants; 3. Original scripts of all the documents and announcements of this Inc. publicly released in the newspapers designated by China Securities Supervision Commission during the time period covered by the report. 20 LIVZON PHARMACEUTICAL GROUP INC. Chairman: Yi Zhenqiu 21 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 REPORT AND CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED 31ST DECEMBER 2001 CONTENTS PAGES Report of the auditors 1 Consolidated income statement 2 Consolidated balance sheet 3 Consolidated statement of changes in equity 4 Consolidated cash flow statement 5 Notes to the consolidated financial statements 6– 38 22 REPORT OF THE AUDITORS To the shareholders of B shares of Livzon Pharmaceutical Group Inc. 麗珠醫藥集團股份有限公司 (incorporated in the People’s Republic of China with limited liability) We have audited the accompanying consolidated balance sheet of Livzon Pharmaceutical Group Inc., (“the Group”) as of 31st December 2001 and the related consolidated statements of income, cash flows and changes in equity for the year then ended. These financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements presents fairly, in all material aspects, the financial position of the Group as of 31st December 2001 and the results of its operations and its cash flows for the year then ended, in accordance with International Accounting Standards. Ho and Ho & Company Certified Public Accountants Hong Kong 16th April 2002 1 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31ST DECEMBER 2001 NOTES 2001 2000 RMB’000 RMB’000 (Restated) Revenue (5) 1,395,792 1,154,706 Cost of sales (744,597) (638,051) Gross profit 651,195 516,655 Other operating income 22,817 8,225 Distribution costs (374,511) (306,156) Administrative expenses (161,480) (203,906) Other operating expenses (11,515) (4,006) Profit from operations (7) 126,506 10,812 Finance costs (8) (14,112) (13,114) (Loss)/income from investments (9) (1,021) 5,085 Share of results of associates (841) 542 Profit before tax 110,532 3,325 Income tax expense (10) (27,175) (9,352) Profit/(loss) after tax 83,357 (6,027) Minority interest (24,308) (16,083) Net profit/(loss) for the year 59,049 (22,110) Dividend (11) 9,181 - Earnings/(loss) per share – basic (12) RMB0.19 (RMB0.07) 2 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 CONSOLIDATED BALANCE SHEET AT 31ST DECEMBER 2001 NOTES 2001 2000 RMB’000 RMB’000 (Restated) Assets Non-current assets Property, plant and equipment (13) 590,481 565,938 Construction in progress (14) 76,372 46,660 Goodwill (15) 12,493 7,190 Negative goodwill (16) (6,338) (9,480) Intangible assets (17) 20,458 36,234 Investments in a subsidiary not consolidated - 810 Investments in associates (19) 9,153 38,806 Other investments (20) 33,976 36,040 736,595 722,198 Current assets Inventories (21) 197,571 205,400 Trade and other receivables (22) 458,560 463,870 Amounts due from associates 233 4,388 Other investments (20) 15,955 10,700 Bank balances and cash (22) 232,803 109,720 905,122 794,078 Total assets 1,641,717 1,516,276 Equity and liabilities Capital and reserves Share capital (23) 306,035 306,035 Reserves (24) 603,636 544,587 909,671 850,622 117,836 90,424 Minority interest 1,027,507 941,046 Non-current liabilities Bank loans – due after one year (25) 550 50,520 Current liabilities Trade and other payables (27) 286,033 339,893 Amounts due to associates 81 4,698 Tax liabilities 25,926 6,629 Bank loans – due within one year (25) 301,620 173,490 613,660 524,710 3 1,641,717 1,516,276 Total equity and liabilities The financial statements on pages 2 to 38 were approved by the Board of Directors and authorized for issue on 16th April 2002 and are signed on its behalf by : Director Director 4 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31ST DECEMBER 2001 Statutory Discretionary Properties Public Share surplus surplus revaluation welfare Accumulated Share capital premium reserve reserve reserve fund profits/(losses) Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Balance at 1st January 2000 306,035 417,689 23,586 76,685 9,609 28,023 11,105 872,732 Proposed transfer to statutory surplus reserve and public welfare fund from accumulated profits - - 1,037 - - 1,037 (2,074) - Profit/(loss) for the year - As previously stated - - - - - - 14,931 14,931 - Prior year adjustment (note 28) - - - - - - (37,041) (37,041) - As restated - - - - - - (22,110) (22,110) Balance at 1st January 2001 (As restated) 306,035 417,689 24,623 76,685 9,609 29,060 (13,079) 850,622 Profit for the year - - - - - - 59,049 59,049 Transfer to statutory surplus reserve and public welfare fund from accumulated profits - Proposed transfer for the year - - 10,584 - - 10,193 (20,777) - - Understatement of transfer for prior year - - 10,269 - - 4,073 (14,342) - - - 20,853 - - 14,266 (35,119) - Balance at 31st December 2001 306,035 417,689 45,476 76,685 9,609 43,326 10,851 909,671 5 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31ST DECEMBER 2001 NOTES 2001 2000 RMB’000 RMB’000 (Restated) Operating activities Cash generated from operations (29) 189,938 86,618 Income taxes paid (7,878) (8,981) Interest paid (15,992) (14,744) Net cash inflow from operating activities 166,068 62,893 Investing activities Interest received 9,546 6,080 Disposal of subsidiary - 8,687 Proceeds on disposal of property, plant and equipment 2,565 49 Acquisition of subsidiaries (30) 870 1,875 Dividends received from an associate 966 - Dividends received from other investments 388 - Proceeds on disposal of a subsidiary not consolidated 2,661 - Proceeds on disposal of long-term other investments 173 - Proceeds on disposal of short-term other investments 14,378 - Purchases of property, plant and equipment and construction in progress (90,199) (66,143) Purchases of intangible assets (13,442) (44,862) Acquisition of a subsidiary not consolidated - (810) Acquisition of investment in associates (1,026) (19,694) Purchases of current investments (21,234) (10,700) Purchases of non-current investments (1,960) (8,970) Further acquisition of investments in a subsidiary not consolidated (1,326) - Further acquisition of investments in a subsidiary (9,205) - Decrease/(increase) in fixed deposits – mature over 3 months 11,000 (11,000) Net cash used in investing activities (95,845) (145,488) Financing activities Capital injection from minority shareholders 1,600 - Dividend paid to minority shareholders (15,900) (1,656) New bank loans raised 327,550 199,040 Repayments of bank loans (249,390) (168,595) Net cash from financing activities 63,860 28,789 Net increase/(decrease) in cash and cash equivalents 134,083 (53,806) Cash and cash equivalents at the beginning of year 98,720 152,526 6 Cash and cash equivalents at end of year Bank balances and cash 232,803 98,720 7 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2001 1. CORPORATE INFORMATION Livzon Pharmaceutical Group Inc. (the “Company”) is a joint stock company registered in the People’s Republic of China (the “PRC”) and its A shares and B shares are listed on the Shenzhen Stock Exchange. The Company and its subsidiaries (together referred to as the “Group”) are principally engaged in the production and sales of medical products and the trading of imported medical products in the PRC. The largest shareholder of the Company is China Everbright Group Limited, a limited company incorporated in Beijing, PRC. 2. PRESENTATION OF FINANCIAL STATEMENTS The consolidated financial statements have been prepared in Renminbi (“RMB”), the currency in which the majority of the Group’s transactions are denominated. The Group maintains its accounting records and prepares its statutory financial statements in accordance with the accounting principles and the relevant financial regulations applicable to foreign investment enterprises in the PRC. The consolidated financial statements have been prepared in accordance with International Accounting Standards (”IAS”). The accounting policies and basis adopted to the preparation of the statutory financial statements differ in certain respects from IAS. The differences arising from the restatement of the results of operations and the net assets for compliance with IAS are adjusted in financial statements but will not be taken up in the accounting records of the Group. 3. ADOPTION OF INTERNATIONAL ACCOUNTING STANDARDS In the current year, the Group has adopted the following IAS for the first time : IAS 39 Financial Instruments : Recognition and Measurement IAS 40 Investment Property Revisions to a number of other IAS also took effect in 2001. Those revisions concerned matters of detailed application which have no significant effect on amounts reported for the current or prior accounting periods. 8 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2001 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements have been prepared on the historical basis, except for the revaluation of land and building and certain financial instruments. The principal accounting policies adopted are set out below : (a) Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and enterprises controlled by the Company (“its subsidiaries”) made up to 31st December each year. Control is achieved where the Company has the power to govern its financial and operating policies of an investee enterprise so as to obtain benefits from its activities. On acquisition, the assets and liabilities of the relevant subsidiaries are measured at their fair values at the date of acquisition. The interest of minority shareholders is stated at the minority’s proportion of the fair values of the assets and liabilities recognised. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by other members of the Group. All significant intercompany transactions and balances between group enterprises are eliminated on consolidation. 9 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2001 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (b) Interests in associates An associate is an enterprise over which the Group is in a position to exercise significant influence, through participation in financial and operating policy decisions of the investee. The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting. The carrying amount of such interest is reduced to recognise any decline, other than a temporary decline, in the value of individual investments. Where a group enterprise transacts with an associate of the Group, unrealised profits and losses are eliminated to the extent of the Group’s interest in the relevant associate, except where unrealised losses provide evidence of an impairment of the asset transferred. (c) Goodwill Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary or associate at the date of acquisition. Goodwill is recognised as an asset and amortised on a straight-line basis following an assessment of its useful life. Goodwill arising on the acquisition of subsidiaries and associates is presented separately in the balance sheet. On disposal of a subsidiary or an associate, the attributable amount of unamortised goodwill or negative goodwill is included in the determination of the profit or loss on disposal of the subsidiary. 10 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2001 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (d) Negative goodwill Negative goodwill represents the excess of the Group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary or associate at the date of acquisition over the cost of acquisition. Negative goodwill is released to income based on an analysis of the circumstances from which the balance resulted. To the extent that the negative goodwill is attributable to losses or expenses anticipated at the date of acquisition, it is released to income in the period in which those losses or expenses arise. The remaining negative goodwill is recognised as income on a straight-line basis over the remaining average useful life of the identifiable acquired depreciable assets. To the extent that such negative goodwill exceeds the aggregate fair value of the acquired identifiable non-monetary assets, it is recognised in income immediately. Negative goodwill arising on the acquisition of subsidiaries or associates is presented separately in the balance sheet as a deduction from assets. (e) Revenue recognition Sale of goods is recognised when goods are delivered and title has passed. Interest income is accrued on a time basis, by reference to the principal outstanding and at the interest rate applicable. (f) Foreign currencies Transactions in currencies other than RMB are initially recorded at the rates of exchange prevailing on the dates of the transactions. Monetary assets and liabilities denominated in such currencies are re-translated at the rates prevailing on the balance sheet date. Profits and losses arising on exchange are included in net profit or loss for the period. On consolidation, the assets and liabilities of the Group’s overseas operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period. Exchange differences arising, if any, are classified as equity and transferred to the Group’s translation reserve. Such translation differences are recognised as income or as expenses in the period in which the operation is disposed of. 11 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2001 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The financial statements of foreign subsidiaries and associates that report in the currency of a hyperinflationary economy are restated in terms of the measuring unit currency at the balance sheet date before they are translated into RMB. 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. (g) Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying asset is deducted from borrowing costs capitalised. All other borrowing costs are expensed in the period in which they are incurred. (h) Taxation The charge for current tax is based on the results for the year as adjusted for items which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is accounted for using the liability method in respect of timing differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of taxable profit. In principle, deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill (or negative goodwill) or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction which affects neither the taxable profit nor the accounting profit. 12 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2001 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled. Deferred tax is charged or credited in the income statement, except when it relates to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. (i) Property, plant and equipment Land and buildings held for use in the production or supply of goods or services, or for administrative purpose, are stated in the balance sheet at their revalued amounts, being the fair value on the basis of their existing use at the date of revaluation, less any subsequent accumulated depreciation. Revaluations are performed with sufficient regularity such that the carrying amount does not differ materially for that which would be determined using fair values at the balance sheet date. Any revaluation increase arising on the revaluation of such land and buildings is credited to the properties revaluation reserve, except to the extent that it reverses a revaluation decrease for the same asset previously recognised as an expense, in which case the increase is credited to the income statement to the extent of the decrease previously charged. A decrease in carrying amount arising on the revaluation of land and buildings is charged as an expense to the extent that it exceeds the balance, if any, held in the properties revaluation reserve relating to a previous revaluation of that asset. 13 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2001 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Properties in the course of construction for production, rental or administrative purposes, or for purposes not yet determined, are carried at cost, less any identified impairment loss. Cost includes professional fees and, for qualifying assets, borrowing costs capitalised in accordance with the Group’s accounting policy. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use. Fixtures and equipment are stated at cost less accumulated depreciation. Depreciation is charged so as to write off the cost or valuation of assets, other than land and properties under construction, over their estimated useful lives, using the straight-line method, on the following bases : Land and buildings 5% Machinery 10% Electronic equipment 20% Transport equipment 20% Other equipment 20% The gain or loss arising from disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement. (j) Construction in progress Construction in progress represents properties under construction and equipment purchased prior to installation and is stated at cost. Cost comprises direct costs and, where applicable, finance costs arising from borrowings used specifically to finance the construction of the properties and the acquisition of the equipment until the construction and installation, respectively, are complete. Costs on completed construction works are transferred to the appropriate asset category. Costs incurred on construction in progress are recognised as an expense immediately when the work is terminated. No depreciation is provided on construction in progress until it is completed and put into commercial operation. 14 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2001 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (k) Impairment At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. Impairment losses are recognised as an expense immediately, unless the relevant asset is land or buildings at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. (l) Inventories Inventories are stated at the lower of cost and net realisable value. Cost comprises direct material and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Cost is calculated using the weighted average method. Net realisable value is determined by reference to the sale proceeds of items sold in the ordinary course of business subsequent to the balance sheet date or estimated selling prices less estimated costs to completion and costs to be incurred in marketing, selling and distribution. 15 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2001 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (m) Financial instruments Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group has become a party to the contractual provisions of the instrument. (i) Trade receivables Trade receivables are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts. (ii) Investments in securities Investments in securities are recognised on a trade-date basis and are initially measured at cost. (iii) Bank borrowings Interest-bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption, are accounted for on an accrual basis and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. (iv) Trade payables Trade payables are stated at their nominal value. (n) Provisions Provisions are recognised when the Group has a present obligation as a result of a past event which it is probable will result in an outflow of economic benefits that can be reasonably estimated. (o) Cash equivalents Cash equivalents represent short-term, highly liquid investments that are readily convertible to a known amount of cash and subject to an insignificant risk of changes in value. 16 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2001 5. REVENUE 2001 2000 RMB’000 RMB’000 Sales of medical products 1,395,792 1,154,706 6. BUSINESS AND GEOGRAPHICAL SEGMENTS As the Group is engaged only in the production and sales of medical products and the trading of imported medical products in the PRC, no segment information is presented. 7. PROFIT FROM OPERATIONS Profit from operations has been arrived at after charging / (crediting) :- 2001 2000 RMB’000 RMB’000 (Restated) Depreciation of property, plant and equipment 54,824 50,148 Amortisation of intangible assets 5,548 20,301 Amortisation of goodwill 1,444 - Written-off of intangible assets 23,670 25,569 (Profit)/loss on disposal of property, plant and equipment (2,556) 360 Revaluation deficit of property, plant and equipment (note 28) - 37,041 Release of negative goodwill to income (1,005) (1,220) Staff costs 71,621 77,731 17 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2001 8. FINANCE COSTS 2001 2000 RMB’000 RMB’000 Interest on bank loans 14,643 16,765 Less : Amounts included in the cost of qualifying assets (531) (3,651) 14,112 13,114 Borrowing cost included in the cost of qualifying assets during the year arose on the general borrowing pool and are calculated by applying a capitalization rate of 7% to expenditure on such assets. 9. (LOSS)/INCOME FROM INVESTMENTS 2001 2000 RMB’000 RMB’000 Interests on bank deposits 9,546 6,080 Dividends from other investments 388 - Provision for diminution in value of investments in associates (6,028) - Provision for diminution in value of long-term other investments (3,924) (5,109) Provision for diminution in value of short-term other investments (5,279) - Profit on disposal of a subsidiary not consolidated 525 - Profit on disposal of a subsidiary - 8,263 Profit/(loss) on disposal of other investments 3,751 (4,149) (1,021) 5,085 18 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2001 10. INCOME TAX EXPENSE 2001 2000 RMB’000 RMB’000 PRC income tax - The Company and its subsidiaries 27,175 9,352 PRC income tax is calculated at the rates of 10% to 33% on the estimated assessable profits for the respective years. No deferred tax has been provided for in the financial statements as the directors are of the opinion that no such liability is expected to crystallise in the foreseeable future. There was no material unprovided deferred tax for the year. 11. DIVIDEND A dividend of RMB0.03 per share, resulting in a total dividend payment of RMB9,181,000, in respect of the year ended 31st December 2001 is to be proposed at the Company’s forthcoming annual general meeting. The dividends have not been provided for in the financial statements. 12. EARNINGS/(LOSS) PER SHARE The calculation of earnings per share is based on the Group’s profit attributable to shareholders of RMB59,049,000 (2000: loss of RMB22,110,000) and 306,035,482 shares (2000: 306,035,482 shares) in issue during the year. 2000 RMB Earnings per share as previously reported 0.05 Prior year adjustment (note 28) (0.12) Loss per share as restated (0.07) 19 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2001 13. PROPERTY, PLANT AND EQUIPMENT Land and buildings Machinery Electronic equipment Transport equipment Other equipment Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 COST OR VALUATION At 1st January 2001 (As restated) 499,177 248,748 27,607 24,833 13,579 813,944 Additions 19,430 9,079 3,854 2,226 3,071 37,660 Transfer from construction in progress 14,990 6,574 1,318 314 192 23,388 Acquired on acquisition of subsidiaries 21,301 29,320 592 845 1,471 53,529 Disposals (19,875) (6,627) (1,079) (7,821) (2,371) (37,773) Reclassification - (7,006) 921 - 6,085 - At 31st December 2001 535,023 280,088 33,213 20,397 22,027 890,748 Comprising : At cost 504,337 258,621 33,213 20,397 22,027 838,595 At valuation 2000 30,686 21,467 - - - 52,153 535,023 280,088 33,213 20,397 22,027 890,748 ACCUMULATED DEPRECIATION At 1st January 2001 112,643 93,491 14,478 19,215 8,179 248,006 Charge for the year 23,312 21,573 4,441 1,790 3,708 54,824 Acquired on acquisition of subsidiaries 5,848 7,331 216 555 855 14,805 Eliminated on disposals (3,903) (4,236) (887) (6,568) (1,774) (17,368) Reclassification - (1,874) 65 - 1,809 - At 31st December 2001 137,900 116,285 18,313 14,992 12,777 300,267 CARRYING AMOUNT At 31st December 2001 397,123 163,803 14,900 5,405 9,250 590,481 At 31st December 2000 386,534 155,257 13,129 5,618 5,400 565,938 20 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2001 13. PROPERTY, PLANT AND EQUIPMENT (Continued) The land and buildings are situated in the PRC. Certain land and buildings and machinery were revalued by Reanda Xinlong Certified Public Accountants Company Limited on 31st December 2000 on an open market existing use basis. The revalued carrying value of these assets was RMB25,949,000 at 31st December 2000. Reanda Xinlong Certified Public Accountants Company Limited is the domestic statutory auditors of the Group. At 31st December 2001, had the land and buildings and machinery for the Group been carried at historical cost less accumulated depreciation, their carrying values would have been approximately RMB34,483,000 (2000: RMB46,605,000) and RMB13,669,000 (2000: RMB16,385,000) respectively. 14. CONSTRUCTION IN PROGRESS The construction in progress represents properties under construction and equipment purchased prior to installation. Included in the amount is interest capitalised of approximately RMB764,000 (2000: RMB 1,704,000). 2001 2000 RMB’000 RMB’000 At 1st January 2001 46,660 141,859 Acquisition of subsidiaries 30 - Additions 52,539 59,045 Interest capitalized 531 3,651 Transfer to property, plant and equipment (23,388) (152,152) Written off - (5,743) At 31st December 2001 76,372 46,660 21 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2001 15. GOODWILL From From acquisitions of acquisitions of subsidiaries associates Total RMB’000 RMB’000 RMB’000 COST At 1st January 2001 - 7,690 7,690 Arising from further acquisition of investments in associates (note 15b) 14,149 (7,690) 6,459 Acquisition of an associate - 288 288 At 31st December 2001 14,149 288 14,437 AMORTISATION At 1st January 2001 - 500 500 Reclassification 500 (500) - Charge for the year 1,415 29 1,444 At 31st December 2001 1,915 29 1,944 CARRYING AMOUNT At 31st December 2001 12,234 259 12,493 At 31st December 2000 - 7,190 7,190 (a) Goodwill is amortised over its estimated useful life. The estimated foreseeable life of the goodwill arising on acquisitions is ten years. (b) The goodwill was arising from further acquisition of investments in associates which become subsidiaries of the Group. 22 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2001 16. NEGATIVE GOODWILL From From acquisitions of acquisitions of subsidiaries associates Total RMB’000 RMB’000 RMB’000 GROSS AMOUNT At 1st January 2001 10,697 1,495 12,192 Decrease from further acquisition of investments in a subsidiary (2,137) - (2,137) At 31st December 2001 8,560 1,495 10,055 RELEASED TO INCOME At 1st January 2001 2,562 150 2,712 Released in the year 856 149 1,005 At 31st December 2001 3,418 299 3,717 CARRYING AMOUNT At 31st December 2001 5,142 1,196 6,338 At 31st December 2000 8,135 1,345 9,480 The negative goodwill is released to income on a straight-line basis over the remaining estimated weighted average useful life of the depreciable assets acquired of ten years. 23 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2001 17. INTANGIBLE ASSETS Development Deferred costs expenditure Total RMB’000 RMB’000 RMB’000 COST At 1st January 2001 19,531 20,835 40,366 Additions 10,607 2,835 13,442 Written off - (23,670) (23,670) At 31st December 2001 30,138 - 30,138 AMORTISATION At 1st January 2001 4,132 - 4,132 Charge for the year 5,548 - 5,548 At 31st December 2001 9,680 - 9,680 CARRYING AMOUNT At 31st December 2001 20,458 - 20,458 At 31st December 2000 15,399 20,835 36,234 At 31st December 2001, intangible assets represent development costs which comprise costs for acquisition of technical knowhow and other expenses incurred in developing new pharmaceutical products. 24 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2001 18. SUBSIDIARIES Details of the Company’s subsidiaries at 31st December 2001 are as follows :- Place of Proportion of incorporation ownership Principal Name of subsidiary and operation interest Activity Livzon (Group) Pharmaceutical Zhuhai, PRC 100% Production of biological Factory tablets, hard capsules and powder Livzon (Group) Healthcare Zhuhai, PRC 100% Production of Chinese Product Factory patent medicines and health tonics Livzon (Group) Reagent Zhuhai, PRC 100% Production of Factory biochemical reagent and enzyme linked immune reagent Livzon (Group) Livzon Medical Zhuhai, PRC 100% Production of sanitary Biomaterials Factory materials and medical cosmetics Livzon (Group) Pharmaceutical Zhuhai, PRC 100% Sale of the Group’s Trading Co., Ltd. pharmaceutical products Livzon (Group) Syntpharm Zhuhai, PRC 100% Production of chemical Factory medicinal materials and medical reagent Livzon (Group) Liman Shaoguan, 100% Production and sale of Chemical Pharmaceutical PRC biochemical reagent Factory 25 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2001 18. SUBSIDIARIES (Continued) Place of Proportion incorporation of ownership Principal Name of subsidiary and operation interest Activity Livzon (Group) Biotechnology Zhuhai, PRC 100% Manufacture and sale of Pharmaceutical Factory products made from microbio fermentation, blood products, recombinant DNA products and biochemical reagent Livzon (Group) Livzon Traditional Zhuhai, PRC 100% Production of Chinese Chinese Medicine Factory medicines and health tonics Livzon (Group) Livzon-bam Zhuhai, PRC 82% Manufacture and sale of Biomaterials Co., Ltd. hydroxyapatite products and coated titanium dental implant Hubei Keyi Pharmaceutical Hubei, PRC 46% Manufacture and sale of Holdings Company Limited * Chinese and foreign patent medicines, biochemical reagent and health tonics Hubei Liyi Pharmaceutical Hubei, PRC 50% Research and Technology Company Limited * development of medicine and development of medical and pharmaceutical technology, technological consulting and project investment * The Company has consolidated the financial statements of Hubei Keyi Pharmaceutical Holdings Company Limited and Hubei Liyi Pharmaceutical Technology Company Limited as the Company exercises control over the management of both companies. 26 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2001 18. SUBSIDIARIES (Continued) Place of Proportion of incorporation ownership Principal Name of subsidiary and operation interest activity Livzon (Group) Libao Zhuhai, PRC 70% Manufacture and sale of Biochemical & pharmaceutical products Pharmaceutical Co., Ltd. Shanghai Livzon Shanghai, PRC 85% Manufacture and sale of Pharmaceutical Co., Ltd. pharmaceutical products Sichuan Everbright Pangzhou, 52% Manufacture and sale of Pharmaceutical Co., Ltd. PRC pharmaceutical products Zhuhai Livzon Wonderful Zhuhai, PRC 80% Research and Technology Investment Co., development of medicine Ltd. and pharmaceutical technology, technological consulting and project investment Zhuhai Livzon Pharmaceutical Zhuhai, PRC 100% Import and export Trading Co., Ltd. business of pharmaceutical reagent, raw material Livzon Chainstore Operation Zhuhai, PRC 90% Investment, chain store Co., Ltd. operation, economic and technological operation, consulting and technological service Ando Development Limited Hong Kong 100% General trading Lizhu (Hong Kong) Co., Hong Kong 100% General trading Limited Guangdong Central South Shenzhen, 70% Retail and wholesale of Pharmacy Co., Ltd. PRC medicines 27 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2001 18. SUBSIDIARIES (Continued) Place of Proportion of incorporation ownership Principal Name of subsidiary and operation interest activity Zhuhai Medicine Technology Zhuhai, PRC 80% Research and Development Co., Ltd. development of medicine and pharmaceutical technology, technological consulting and project investment Zhuhai S.E.Z. Likang Zhuhai, PRC 72% Manufacture and sale of Pharmaceutical Co., Ltd. pharmaceutical products Livzon (Group) Pharmaceutical Zhuhai, PRC 100% Research and Research Institute development of biochemical reagent and pharmaceutical materials Livzon (Group) Advertising Zhuhai, PRC 100% Operation in advertising Co., Ltd. business Livzon (Group) Investment Zhuhai, PRC 100% Economic and Consultant Co., Ltd. information consultant service Zhuhai Modern Chinese Zhuhai, PRC 75% Research and Medicine High Technology development of Co., Ltd. pharmaceutical technology Zhuhai Li Ao Wei Sheng Tai Zhuhai, PRC 90% Research of Products Co., Ltd. pharmaceutical product 28 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2001 19. INVESTMENTS IN ASSOCIATES 2001 2000 RMB’000 RMB’000 Cost of investment less goodwill and negative goodwill 9,398 35,813 Share of post-acquisition (loss)/profit, net of dividends received (245) 2,993 Share of net assets 9,153 38,806 Details of the Group’s associates at 31st December 2001 are as follows :- Place of Proportion of incorporation ownership Principal Name of associate and operation interest activity Shanghai Lizhu-Dongfeng Shanghai, 50% Manufacture and sale of Biotechnology Co., Ltd. PRC biochemical products Livzon Group Changzhou Kangli Changzhou, 30% Manufacture and sale of Pharmaceutical Co., Ltd. PRC pharmaceutical products Livzon Electomedical Instrument Zhuhai, PRC 28% Manufacture and sale of Co., Ltd. electromedical instrument Chengdu Li Hai Shou Xin Chengdu, 40% Manufacture and sale of Technology Co., Ltd. PRC chemical products MolecularTaq Limited Hong Kong 30% Research of pharmaceutical products 29 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2001 20. OTHER INVESTMENTS Non-current investments 2001 2000 RMB’000 RMB’000 Unlisted investment, at cost less provision for diminution in value 33,976 36,040 Current investments 2001 2000 RMB’000 RMB’000 Listed investment, at fair value 15,955 10,700 The other investments included above represent both unlisted investments and investments in listed equity securities which present the Group with opportunity for return through dividend income and trading gains. The fair values of listed equity securities are based on quoted market prices. 21. INVENTORIES 2001 2000 RMB’000 RMB’000 Raw materials 60,142 46,060 Work in progress 21,649 26,561 Finished goods 115,780 132,779 197,571 205,400 Included above are finished goods of RMB19,555,000 (2000: RMB25,471,000) carried at net realisable value. 30 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2001 22. OTHER FINANCIAL ASSETS Trade and other receivables comprise gross amounts receivable from the sale of goods of RMB342 million (2000: RMB369 million). An allowance has been made for estimated irrecoverable amounts from the sale of goods of RMB89.5 million (2000: RMB85.1 million). This allowance has been determined by reference to past default experience. The directors consider that the carrying amount of trade and other receivables approximates their fair value. Bank balances and cash comprise cash and short-term deposits held by the group treasury function. The carrying amount of these assets approximates their fair value. The Group’s credit risk is primarily attributable to its trade receivables. The amounts presented in the balance sheet are net of allowances for doubtful receivables, estimated by the Group’s management based on prior experience and the current economic environment. The Group has no significant concentration of credit risk, with exposure spread over a large number of counterparties and customers. 23. SHARE CAPITAL 2001 2000 No. of No. of shares shares ’000 RMB’000 ’000 RMB’000 Registered, issued and fully paid : A shares of RMB1 each 183,728 183,728 183,728 183,728 B shares of RMB1 each 122,307 122,307 122,307 122,307 306,035 306,035 306,035 306,035 There were no movements in the share capital of the Company in either the 2001 or 2000 reporting periods. 31 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2001 24. RESERVES Notes 2001 2000 RMB’000 RMB’000 (Restated) Share premium (a) 417,689 417,689 Statutory surplus reserve (a) 45,476 24,623 Discretionary surplus reserve (b) 76,685 76,685 Properties revaluation reserve 9,609 9,609 Public welfare fund (c) 43,326 29,060 Accumulated profits/(losses) 10,851 (13,079) 603,636 544,587 According to the PRC company law, the reserve available for distribution is the lower of the amount determined under PRC Accounting Regulations and the amount determined under IAS. As 31st December 2001, the reserve available for distribution was RMB1,670,000, after taking into account the current year’s proposed dividend. Notes: (a) Statutory reserves As a company limited by shares, the Company is required under the laws and regulations of the PRC to transfer an amount of not less than 10% of its profit for the year, determined under PRC accounting regulations for companies limited by shares, to a statutory reserve, namely the statutory surplus reserve, until the aggregate of the statutory surplus reserves is equal to 50% of the Company’s issued share capital. The share premium and the statutory surplus reserve constitute statutory reserves for the Company, the usage of which is governed by PRC laws and regulations. In accordance with the laws and regulations, the statutory reserves can be utilised as follows : (i) to make up losses of the Company (the losses must be charged firstly against the statutory surplus reserve); and 32 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2001 24. RESERVES (Continued) (ii) to distribute to shareholders in the form of a bonus issue. The balance of the statutory surplus reserve in excess of 50% of issued share capital of the Company can be distributed to existing shareholders by means of a bonus issue, provided that the balance of the statutory surplus reserve after such distribution is not less than 25% of the issued share capital of the Company. (b) Discretionary surplus reserve The Company may transfer an amount from its profit for the year calculated under PRC accounting regulations to the discretionary surplus reserve in accordance with the Company’s Articles of Association or Resolutions of shareholders in the general meeting. The discretionary surplus reserve can be utilised to make up losses of the Company and to distribute to shareholders in the form of dividend. The resolution for the appropriation of profit for the year calculated under PRC accounting regulations to the statutory and the discretionary surplus reserves for the year ended 31st December 2001 will be considered and approved by the shareholders in the general meeting to be held in 2001. (c) Public welfare fund According to the Company’s Articles of Association, the Company is required to transfer 10% of its profit after taxation to the public welfare fund. The public welfare fund can only be used for the collective benefits of the Group’s employees such as the construction of dormitories, canteen and other staff welfare facilities. Individual employees can only use these facilities, the titles of which will remain with the Group. The public welfare fund forms part of the shareholders’equity and is non-distributable other than in liquidation. The transfer to the public welfare fund must be made before distribution of dividend to shareholders. 33 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2001 25. BANK LOANS 2001 2000 RMB’000 RMB’000 Bank loans 302,170 224,010 The borrowings are all denominated in RMB and repayable as follows : On demand or within one year 301,620 173,490 In the second year 550 49,970 In the third to fifth years inclusive - 550 302,170 224,010 Less : Amount due from settlement within one year (shown under current liabilities) (301,620) (173,490) Amount due for settlement after one year 550 50,520 The average interest rates paid were as follows : 2001 2000 Bank loans 6.0% 4.9% At 31st December 2001, bank loans of approximately RMB302 million (2000 : RMB224 million) were arranged at fixed interest rates. The directors estimate the fair value of the Group’s borrowings as follows : 2001 2000 RMB’000 RMB’000 Bank loans 302,510 223,933 At 31st December 2001, bank loans of approximately RMB117 million (2000 : RMB92 million) were secured by a charge over certain of the Group’s properties. 34 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2001 26. PLEDGE OF ASSETS At the balance sheet date, the Group had land and buildings with a carrying amount of approximately RMB79,224,000 (2000 : RMB71,920,000) was pledged to banks as security for bank loans granted to the Group. 27. OTHER FINANCIAL LIABILITIES Trade and other payables principally comprise amounts outstanding for trade purchases and ongoing costs. The directors consider that the carrying amount of trade payables approximates to their fair value. 28. PRIOR YEAR ADJUSTMENT Certain land and buildings and machinery were revalued by Reanda Xinlong Certified Public Accountants Company Limited on 31st December 2000. There was an understatement of revaluation deficit on property, plant and equipment totalling RMB37,041,000 for the year ended 31st December 2000. Therefore, during the year, the Group made a related prior year adjustment to reduce each of the carry value of property, plant and equipment at 31st December 2000, results for the year ended 31st December 2000 and the accumulated profits as at 1st January 2001 by RMB37,041,000. 35 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2001 29. RECONCILIATION OF PROFIT FROM OPERATIONS TO NET CASH FROM OPERATING ACTIVITIES 2001 2000 RMB’000 RMB’000 (Restated) Profit from operations 126,506 10,812 Adjustments for: Negative goodwill released to income (1,005) (1,220) Written-off of intangible assets 23,670 25,569 Amortisation of intangible assets 5,548 20,301 Depreciation of property, plant and equipment 54,824 50,148 Amortisation of goodwill 1,444 - Revaluation deficit on property, plant and equipment - 37,041 (Profit)/loss on disposal of property, plant and equipment (2,556) 360 Operating cash flows before movements in working capital 208,431 143,011 Decrease/(increase) in inventories 11,707 (2,418) Decrease in trade and other receivables and amounts due from associates 16,777 33,563 Decrease in trade and other payables and amounts due to associates (46,977) (87,538) Cash generated from operations 189,938 86,618 36 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2001 30. ACQUISITION OF SUBSIDIARIES Net assets acquired : 2001 RMB’000 Property, plant and equipment 38,724 Construction in progress 30 Inventories 3,878 Trade and other receivables 7,312 Bank balances and cash 32,219 Trade and other payables (10,245) Minority interests (24,472) 47,446 Goodwill 6,459 53,905 Investments in associates previously acquired (22,556) Total consideration satisfied by cash 31,349 Net cash inflow arising on acquisition : Cash consideration (31,349) Bank balances and cash acquired 32,219 870 The subsidiaries acquired during the year contributed RMB24.8 million of revenue and RMB8.1 million of profit before tax for the period between the date of acquisition and the balance sheet date. 37 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2001 31. CAPITAL COMMITMENTS 2001 2000 Capital expenditure contracted for but not provided RMB’000 RMB’000 in respect of : Purchase of property, plant and equipment and construction in progress 5,661 233 Purchase of intangible assets 5,495 - Acquisition of investment in a subsidiary 17,550 1,328 28,706 1,561 32. OPERATING LEASE COMMITMENTS 2001 2000 RMB’000 RMB’000 Minimum lease payments under operating leases recognised as expenses for the year 3,430 521 At the balance sheet date, the Group had outstanding commitments under non-cancellable operating leases, which fall due as follows :- 2001 2000 RMB’000 RMB’000 Within one year 1,155 1,025 In the second to fifth year inclusive 1,463 1,163 2,618 2,188 Operating lease payments represent rentals payable by the Group for certain of its office properties. 33. CONTINGENT LIABILITIES The Group had no significant contingent liabilities at the balance sheet date. 38 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2001 34. RELATED PARTY TRANSACTIONS Trading transactions During the year, group companies entered into the following transactions with related parties who are not members of the Group : Amounts owed by Amounts owed to associates Purchase of goods associates 2001 2000 2001 2000 2001 2000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Associates Shanghai Lizhu-Dongfeng Biogtechnology Co., Ltd. - - 233 4,388 81 - Livzon Group Changzhou Kangli Pharmaceutical Co., Ltd. 14,267 17,259 - - - - Livzon Group Suzhou Xinbao Pharmaceutical Factory 5,166 6,034 - - - 4,698 In the opinion of the directors, the above transactions were carried out at estimated fair market price or, where no market price was available, at cost plus a percentage profit mark-up. 39 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2001 35. ACCOUNTING TREATMENT The Group has prepared a separate set of accounts for the year ended 31st December 2001 in accordance with the PRC accounting standards. The major differences between the accounts prepared under the PRC Accounting Standards and those under IAS are summarized as follows: Net profit for the year Net assets RMB’000 RMB’000 Under PRC accounting standards 50,392 928,153 Adjustments: Elimination of interest capitalised for property, plant and equipment - (25,568) Provision for bad and doubtful debts 6,886 (14,784) Written off of deferred expenditure 6,817 (1,952) Amortisation of goodwill (251) (251) Recognition of investment income 915 - Goodwill arising from acquisition of associates - 2,690 Accrual of expenses (3,524) 15,886 Negative goodwill arising from acquisition of a subsidiary (286) (1,638) Gain on disposal of a subsidiary - 8,262 Others (1,900) (1,127) Under IAS 59,049 909,671 40