*ST石化Ａ(000013)深石化Ｂ2001年年度报告（英文版）

SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD (Incorporated in the People’s Republic of China) 2001 ANNUL REPORT Content Ⅰ. Company Profile 1 Ⅱ. Financial Highlight and Business Highlight 2 Ⅲ. Changes in Share Capital and Particulars about Shareholders 3 Ⅳ. Particulars about director, supervisor and senior executives and staff 4 Ⅴ. Administrative Structure 6 Ⅵ. Brief Introduction to the Shareholders’ General Meeting 7 Ⅶ. Report of the Board of Directors 8 Ⅷ. Report of the Supervisory Committee 11 Ⅸ. Significant Events 12 Ⅹ. Financial Report 14 Ⅺ. Documents for Reference 14 Important: Board of Directors of the Shenzhen Petrochemical Industry (Group) Co., Ltd. (hereinafter referred to as the Company) individually and collectively accept responsibility for the correctness, accuracy and completeness of the contents of this report and confirm that there are no material omissions nor errors which would render any statement misleading. The report is compiled in Chinese and English languages should there be difference in interpretation of the two languages, the Chinese version shall prevail. Moore Stephens Shenzhen Nanfang-Minhe Certified Public Accountants issued an Auditors’ Report with adverse opinion. The Board of Directors and the Supervisory Committee of the Company made explanations on the relevant matters in details, the investors are suggested to notice the content. Director, Mr. Wang Miaoquan, unable to present the 2th conference of the forth Board of Directors of the Company due to some reasons. 0 I. COMPANY PROFILE 1. Legal Name of the Company In Chinese: 深圳石化工业集团股份有限公司 In English: Shenzhen Petrochemical Industry (Group) Co., LTD. (Short form in English: SPEC) 2. Legal Representative: Mr. Ding Fuyi 3. Secretary of the Company: Mr. Cai Jianping Liaison Address: SPEC Bldg., Hongli West Road, Futian District, Shenzhen Tel: (86) 755-3344355 Fax: (86) 755-3324057 E-mail: Caijp@spec.com.cn 4. Registered Address and Office Address: SPEC Bldg., Hongli West Road, Futian District, Shenzhen Post Code: 518028 E-mail: spec0013@spec.com.cn 5. Newspapers Chosen for Disclosing Information of the Company: Securities Times and Ta Kung Pao Internet Web Site Designated by CSRC for Publishing the Annual Report: http://www.cninfo.com.cn Place Where the Annual Report is Prepared and Placed: Secretariat of the Board of Directors, SPEC Bldg., Hongli West Road, Futian District, Shenzhen 6. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock Name and Stock Code: SHEN SHIHUA – A 0013 SHEN SHIHUA – B 2013 7. The initial registration of the Company: Date: Jan. 14, 1992 Registration number of enterprise juristic person’s business license: 4400001008296 Number of taxation (National Revenue/Local Revenue) registration: 440301190325614 8. Certified Public Accountants engaged by the Company: Shenzhen Nanfang-Minhe Certified Public Accountants (for A share) Moore Stephens Shenzhen Nanfang-Minhe Certified Public Accountants (for B share) Address: 8/F, Electronics Tech. Bldg., No. 2072, Shennan Middle Road, Shenzhen -1- II. FINANCIAL HIGHLIGHTS AND BUSINESS HIGHLIGHTS 1. Major Accounting data and financial indexes (Calculated according to the IAS) RMB’000 Items 2001 2000 Turnover 729,046 831,337 Gross profit 133,474 161,022 Profit from operating activities (28,200) 78,367 Share of profits in associated and (45,737) 6,962 unconsolidated companies Profit before taxation (2,212,221) 67,695 Profit attributable to shareholders (2,212,642) 36,711 Profit (loss) per share - basic (RMB) (7.29) 0.121 Total assets 423,152 1,901,175 Shareholders’ deficiency (1,645,311) 567,331 Net assets per share (RMB) 1.87 Net return on equity 6.47% Net cash flows from operating activities 4,634 27,012 Net increase in cash and cash equivalents (3,733) (30,113) 2. Supplementary statement of profit in the report year: Return on equity (%) Earnings per share (RMB) Items Fully Weighted Fully Weighted diluted average diluted average Gross profit --- --- 0.44 0.44 Net profit --- --- (5.23) (5.23) 3. Change in shareholders’ equity and the causes in the report year Amount at Increase in the Decrease in the Amount at Items year-begin report year report year year-end Share capital 303,354,979 - - 303,354,979 Reserves (363,623) 299 (1,585,274) (1,948,668) Shareholders’ equity (60,268) 299 (1,585,274) (1,645,313) Causes for change: decrease in reserves and shareholders’ equity was mainly due to the provision for bad debts due from the control shareholder and the provision for loss on guarantee. -2- 4. Impact of IAS Adjustments on the Profit attributable to shareholders Amount (RMB’000) Ax reported in the “A” shares consolidated audited statutory (1,575,991) financial statements under PRC accounting standards IAS and adjustments: Provision for impairment of fixed assets (1,350) Correcting accounting errors (635,530) Accounts payable written back 229 As reported after IAS adjustment in the “B” shares financial (2,212,642) statements III. CHANGE IN SHARE CAPITAL AND PARTICULARS ABOUT SHAREHOLDERS 1. Change in share capital (1) Statement of change in share Before the Increase / After the change decrease in this change year (+ / -) I. Unlisted shares (1) Promoters’ shares 164,546,553 0 164,546,553 Including: State-owned shares 164,546,553 0 164,546,553 Domestic juristic person’s shares Foreign juristic person’s shares Others (2) Domestic juristic person’s shares 54,724,424 0 54,724,424 (3) Employees’ shares (4) Preference shares or others Including: Transferred / allotted shares Total unlisted shares 219,270,977 0 219,270,977 II. Listed shares (1) RMB ordinary shares 51,324,002 0 51,324,002 (2) Domestically listed foreign shares 32,760,000 0 32,760,000 (3) Overseas listed foreign shares (4) Others Total listed shares 84,084,002 0 84,084,002 III. Total shares 303,354,979 0 303,354,979 (2) Over the past three years by the end of the report year, the Company has not issued any shares, and there was change neither the total number of share nor structure of share capital of the Company. 2. About shareholders (1) Total shareholders at the end of the report period -3- Ended Dec. 31, 2001, the Company has totally 39,147 registered shareholders (including legal person and natural person), including 30,313 shareholders of A-share and 8,834 shareholders of B-share. (2) Shares held by the top ten shareholders at the end of the report year Number of Percentage of Name of Shareholders Style Shares total share capital Shenzhen Petrochemical Corp. 164,546,553 54.24% State-owned share China Ping An Insurance Co., Ltd. 23,400,000 7.71% Juristic person’s share China Communication Securities Co., Ltd. 19,380,532 6.39% Juristic person’s share Shenzhen Jingye Plastics Co., Ltd. 2,208,772 0.73% Juristic person’s share Shenzhen Silverland Investment Co., Ltd. 1,560,000 0.51% Juristic person’s share Quanzhou Fukang Investment Consultation Co., Ltd. 1,560,000 0.51% Juristic person’s share Everbright Bank of China, Shenzhen Securities Dept. 1,484,936 0.49% Juristic person’s share China Prime Investment Management Co., Ltd. 936,000 0.31% Juristic person’s share Xinhua Trust Company 780,000 0.26% Juristic person’s share NanHai Eastern Petrochemical Economic and techno 780,000 0.26% Juristic person’s share Development Corp. Total 216,636,793 71.41% Note: In the report year, there was no change in quantity of shares held by the shareholders holding more than 5% of the total, namely Shenzhen Petrochemical Corp. (“Petrochemical Corp.”), China Ping An Insurance Co., Ltd. and China Communication Securities Co., Ltd. There was no pledge or freeze on shares held by the other two shareholders except that 54.24 % of the total shares of the Company held by Shenzhen Petrochemical Corp. were frozen. 3. Particulars about holding shareholder of the Company a. Shenzhen Petrochemical Corp. is the holding shareholder of the Company, who is a State-owned Sole Corporation, and has established in 1996; legal representative: Ding Fuyi; registration capital: RMB 537 million. Shenzhen Petrochemical Corp. is mainly engaged in investment and initiation of industrial, home commerce, supply and marketing of material, development of technology of high-tech production. b. The holding shareholder of Shenzhen Petrochemical Corp. is Shenzhen Investment Holding Corporation, who has established in 1988; legal representative is Li Heihu; registration capital: RMB 2 billion; operation manner: investment and management. IV. PARTICULARS ABOUT DIRECTOR, SUPERVISOR AND SENIOR EXECUTIVES 1. Directors, supervisors and senior executives Shares held at Increase/ Holding the position in Name Title Gender Age Office term the year-end decrease Shareholding Company Ding Fuyi Chairman of the Male 47 Nov. 2001 - 2004 0 0 Holding Chairman of the Board of Board Petrochemical Corp. Luo Hongchun Vice Chairman of the Male 51 Nov. 2001 - 2004 0 0 Holding Director and General Board Manager of Petrochemical Crop. -4- Xin Yu Director, Male 38 Nov. 2001 - 2004 0 0 General Manager Ying Qirui Independent director Male 64 Nov. 2001 - 2004 0 0 Tang Dongyuan Director Male 35 Nov. 2001 - 2004 0 0 Holding Deputy General Manager of Investment Dept. of China Communication Securities Wang Miaoquan Director Male 54 Nov. 2001 - 2004 0 0 Holding Deputy General Manager of Petrochemical Corp. Liu Cong Director Male 41 Nov. 2001 - 2004 0 0 Holding Director, Chief Financial Supervisor of Petrochemical Corp. Li Linsen Director Male 55 Nov. 2001 - 2004 6,240 0 Liu Qingmin Director Male 39 Nov. 2001 - 2004 0 0 Zhou Zhen Director, Deputy Male 38 Nov. 2001 - 2004 0 0 General Manager Cai Jianping Director, Secretary of Male 38 Nov. 2001 - 2004 0 0 the Board Li Qinwen Chairman of the Male 54 Nov. 2001 - 2004 0 0 Holding Deputy Secretary of Party Supervisor Committee Committee of Petrochemical Corp. Mu Xiangfeng Supervisor Male 45 Nov. 2001 - 2004 0 0 Liao Hongli Supervisor Female 36 Nov. 2001 - 2004 0 0 Wu Sheng Supervisor Male 36 Nov. 2001 - 2004 0 0 Ren Zhenghua Supervisor Female 47 Nov. 2001 - 2004 0 0 Bai Jinmin Deputy General Male 35 Nov. 2001 - 2004 0 0 Manager 2. Particulars about the annual salary The Board of Director, the Supervisory Committee and Operation Group have been reengaged in Nov. 2001, thus, in the report year, there are only 3 directors or supervisors or senior executives draw their annual salary from the Company, with total amounts of RMB 298,000. Director Ding Fuyi, Luo Hongchun, Tang Dongyuan, Wang Miaoquan and Liu Cong, supervisor Li Qinwen and Liao Hongli drew their annual salary from the Shareholding Company; director and general manager Xin Yu, director Li Linsen and Liu Qingmin, supervisor Mu Xiangfeng, Wusheng and Ren Zhenghua draw their annual salary from the subsidiary companies of the Company. Xin Yu and Liao Hongli drew their annual salary form the Company since Jan. 2002; independent director Ying Qirui drew his allowance from the Company since 2002. 3. Change in directors, supervisors and senior executives (1) In July 2001, the original Chairman of the Board Chen Yongqing resigned from Director and Chairman of the Board due to retirement, and the Board of Directors elected Ding Fuyi as Chairman of the Board; (2) In the report year, the office term of 3rd Board of Directors, 3rd Supervisory Committee and operation group were expiration, and in Nov. 2001, the Company held the Extraordinary Shareholders’ General Meeting, Ding Fuyi, Luo Hongchun, Xin Yu, Ying Qirui, Tang Dongyuan, Wang Miaoquan, Liu Cong, Li Linsen, Liu Qingmin, Zhou Zhen and Cai Jianping were elected the members of the 4th Board of Directors, and the office term is three years; Li Qinwen, Mu Xiangfeng and Liao Hongli were elected as -5- members of the 4th Supervisory Committee, and the office term is three years, Wu Sheng and Ren Zhenghua were elected as employee supervisors. Meanwhile, the Board of Directors of the Company engaged Xin Yu as General Manager of the Company, and engaged Bai Jinmin and Zhou Zhen as Deputy General Manager respectively, and engaged Cai Jianping as Secretary of the Board. 4. About employees Ended the report year, the Company had totally 3,421 employees in office at present, classified Profession/occupation composition, Production personnel: 2,581 persons, sales personnel: 146 persons, Technicians: 493 persons, financial personnel: 64 persons, administrative personnel: 137 persons; classified based on education background, there were 52 persons with master degree or above, 791 persons with bachelor degree or 3-years regular college graduate, 2,578 persons graduated from junior college. The Company need to bear the expenses of 32 retirees. V. ADMINISTRATIVE STRUCTURE 1. Administration of the Company In order to establish modern enterprise system and practically protect the interests of numerous investors, the Company, according to the Administrative Rules of Listed Company as well as the Company’s actual situation and need, further improved its administrative structure. Remarks on the particulars of the Company’s administrative structure expressed by the Board of Directors are as follows: (1) Shareholder and the Shareholders’ General Meeting. The Company’s administrative structure ensures the equal status for all shareholders, especially medium and small shareholders, and ensures that shareholders fully implement legal rights; In the report year, the Company convened and held the Shareholders’ General Meeting, of which the holding procedures, qualification of participators and voting procedures were all in line with the PRC Company Law, Normative Opinions for the Shareholders’ General Meeting of Listed Company as well as the regulations of Articles of Association. (2) Relationship between Controlling Shareholder and Listed Company. The Company’s controlling shareholder implements its right of shareholder according to law, and undertakes obligations of shareholder; The Company is on the whole separated from the controlling shareholder in respect of business, assets, organization, personnel and finance etc., and carries out business accounting independently and undertakes liabilities and risks independently. (3) Directors and the Board of Directors. The Company elects directors according to election and engaging procedures as stated in the Articles of Association. Directors implement their obligations in a loyal, honest, reliable and diligent manner; The number of directors as well as the personnel formation are in line with relevant laws and regulations. Meetings of the Board of Directors are carried out according to stated procedures. (4) Supervisors and the Supervisory Committee. The formation of the Supervisory Committee and election of supervisors are in line with relevant laws and legislations. The members of the Supervisory Committee as well as its structure ensure that the Supervisory Committee could implement supervision and inspection on directors, senior executives and the Company’s finance. Meetings of the Supervisory Committee are held according to stated procedures. -6- (5) Relevant Stake Holder. The Company respects the legal rights and interests of bank, other creditors, employees and parties of related interests. (6) Information Disclosure and Transparency. The Company could, on the whole, implement its obligation of disclosing information according to relevant regulations, and assigned the secretary of the Board of Directors to be in charge of information disclosure work and receiving of inquiries from shareholders. 2. Performance of Obligations by Independent Directors. The Company engaged one independent director in November of 2001, who could carry out work according to CSRC’s relevant regulations. 3. Improvement Measures. According to the Administrative Rules of Listed Company, the Board of Directors believed that there was still a gap between the Company’s legal person administrative structure and the requirements of CSRC, which needed improvement. (1) The Company hasn’t established or improved Rules of Procedures of the Shareholders’ General Meeting, Rules of Procedures of the Board of Directors, Rules of Procedures of the Supervisory Committee and Detailed Work Rules for General Managers according to the Administrative Rules of Listed Company, and will finish establishing or improving the above documents before June 2002. (2) The Company’s controlling shareholder owed the Company huge account receivables, which seriously affected the Company’s financial condition and normal operation. The Company shall positively negotiate with the controlling shareholder for this issue and avoid occurrence of similar case. (3) The Company will establish and improve performance evaluation, encouragement and binding mechanism in proper time. VI. BRIEFINGS ON THE SHAREHOLDERS’ GENERAL MEETING 1.Notifying, Convening and Holding of the 10th Shareholders’ General Meeting (2000) The notification on holding the 10th Shareholders’ General Meeting was published in Securities Times and Hong Kong Ta Kung Pao dated May 29, 2001. The Meeting was held on May 29, 2000 on schedule. The shareholders who attended the Meeting held and represented totally 189,270,393 shares (among which 101,000 were B shares), taking 62.39% of the Company’s total shares. The Annual Shareholders’ General Meeting reviewed and passed through written voting 2000 Work Report of the Board of Directors, 2000 Work Report of the Supervisory Committee, 2000 Audited Financial Statement and Auditors’ Report, 2000 Profit Distribution Proposal, Proposal on Reengaging Certified Public Accountants for 2001, Proposal on Making up Housing Turnover Deficits Listed in Undistributed Profits with Surplus Public Reserve and the Proposal on Authorization to the Board of Directors. The resolutions of the Meeting were published in Securities Times and Hong Kong Ta Kung Pao dated June 30, 2001. 2. Notifying, Convening and Holding of the 1st Provisional Shareholders’ General Meeting of 2001 The notification on holding the 1st Provisional Shareholders’ General Meeting of 2001 was published in Securities Times and Hong Kong Ta Kung Pao dated October 20, 2001. On November 21, 2000, the 1st Provisional Shareholders’ General Meeting of 2001 was held on schedule. The shareholders who attended the Meeting held and represented totally 186,150,305 shares (among which there was no B share), taking 61.36% of the -7- Company’s total shares. The Meeting reviewed and passed through written voting Proposal on Electing Members of the 4th Board of Directors, Proposal on Electing Members of the 4th Supervisory Committee and Proposal on Changing Certified Public Accountants in 2001. The resolutions of the Meeting were published in Securities Times and Hong Kong Ta Kung Pao dated November 22, 2001. VII. REPORT OF THE BOARD OF DIRECTORS 1. Operation The year 2001 is the hardest year for the Company since it’s listing, firstly, it failed to collect the enormous amount of debts due from its control shareholder and secondly equity of its major subsidiaries were all frozen by the Court due to lawsuit failure. Under such tedious environment, the Company made series of measures overcoming many difficulties to safeguard the normal operation of the main industrial subsidiaries. However, it still suffered deficits by substantive amount because it withdrew provisions for the said bad debts at full value and provisions for losses on guarantees according to relevant accounting policies. (1) Industry engaged The Company is mainly engaged in business of new model chemical materials, plastics processing, fine chemicals and bio-pharmaceutical, under the classification of chemical and bio-pharmaceutical enterprise. (2) Main business in the report period In the report period, main industrial subsidiaries of the Company maintained a normal operation in spite of various unfavorable factors and realized a turnout totaling RMB 700 million. Engaging principally in PVC plastics processing, Shenzhen SPEC Plastics Group Co., Ltd. formally started the production of PPR flow pipe production line, symbolizing the company’s production capability of complete sets of indoor water supply pipe. In addition, innovation for heating system, powder materials blower system and power supply for Henggang Plastics City were completed, and accordingly the material and the energy cost was reduced. In the report period, Shenzhen SPEC Plastics Group Co., Ltd. made an output of various plastic products with PVC of 43,000 tons, a slight increase over the same period of the previous year. Engaging mainly in production of PP fiber and other chemical fiber materials, Shenzhen SPEC Chemical Fibers Co., Ltd. and Shenzhen SPEC Donghong Laminating and Coating Fibers Co., Ltd. maintained a strong competitiveness with famous brand through innovation on the existing equipments, application of computer color matching system and introduction of new models meeting the market demand. In the report period, the two companies realized a total output of 17,000 tons of PP fiber and 14.36 million yards of fine chemical fiber materials. (3) Operations of main consolidated subsidiaries Unit: RMB’000 Name Principal activities Turnover Gross profit Shenzhen SPEC Plastics Group Co., Ltd. Production and sales of plastics 39,103 7,067 products represented by PVC sheets Shenzhen SPEC Chemical Fibers Co., Ltd. Production and sales of 20,085 4,253 polypropylene filament -8- Shenzhen SPEC Donghong Laminating Production and sales of laminating 10,082 1,384 and Coating Fibers Co. and coating fibers (4) Problems and difficulties occurred in the operation and the solution In the report period, the Company confronted with unprecedented difficulties due to mainly two reasons. Firstly, no actual progress was achieved in its collection of the enormous amount of debts due from the control shareholder; and secondly the Company lost most legal cases involved, so equity of its major subsidiaries were frozen by the Court and normal operation of the Company was influenced. To counter the difficulties, the Company actively negotiated with its creditors preventing its financial status from further worsening on one hand, and on the other hand reduced the production cost by taping the potential, innovating, reducing overstaff and increasing efficiency. 2. Investment The Company made no new investment in the report period. 3. Financial highlights (1) Financial status RMB’000 Item 2001 2000 + /- Main causes Total assets 423,152 1,901,175 (1,478,023) Provision for devaluation Long-term liabilities 16,794 172,819 (156,025) Transfer to short-term liabilities Shareholders’ equity (1,645,313) 567,331 (2,212,644) Provision for devaluation Gross profit 133,474 161,022 (27,548) Changes in consolidation scope Net profit (2,212,642) 36,711 (2,175,931) Provision for devaluation (2) Notice to the matters as mentioned in the Auditors’ Report which carrying adverse opinion by Moore Stephens Shenzhen Nanfang-Minhe Certified Public Accountants Presently, the Company suffered following significant problems in its financial status: A. Liabilities over-exceeding assets and enormous amount of deficits; B. difficulties in timely repaying due loan and according interest; C. Failure in collecting receivables from the control shareholder before the statement date and no further settlement plan; D. lawsuits and guarantee events involving tremendous amount of fund; E. All equity and partial assets being frozen or pledged. Since the Company had no effective restructure plan and liabilities reorganization measure, it is difficult for the Company to solve above problems independently. To change the Company’s present sorry plight, the enormous amount of debts owned by the control shareholder should be settled and the joint payment liabilities for guarantee should be released, which expected no improvement so far. Therefore, the Company needs to find the proper restructure method and liabilities reorganization measure with the support and cooperation of relevant authorities and creditors to continue its operation and break away from the existing difficulties. 4. Significant changes in the production and operation environment No actual progress was made in the report period regarding the due accounts receivable from the control shareholder, the Company was subject to the joint repayment liabilities of guarantor due to the failure of timely settlement of loan by the first debtor. All these resulted in the serious shortage in the Company’s fund; equity of the Company’s major -9- industrial subsidiaries being frozen by the Court, and eternally significantly affected the Company’s normal operation. The Board of Directors was of the opinion that it was out of the Company’s ability to improve the present dreadful production and operation environment. 5. Business plan for 2002 Based on the significant changes in operation environment, the Company will focus on following works in 2002: (1) to continually collect the accounts receivable from the control shareholder and other related parties; (2) to continually negotiate with creditors for solutions concerning the debts, prevent the financial crisis from happening; (3) to promote the technical advance and innovation, improve the product quality and variety, increase the competitiveness while stabilizing the production and operation of present main industrial subsidiaries. 6. Daily Work of the Board of Directors (1) Particulars about meetings of the Board of Directors and resolutions in the report year In the report year, the Company altogether held four formal Board meetings and one provisional Board meeting, details of which are as follows: B. The 9th Meeting of the 3rd Board of Directors was held on April 2, 2001, which reviewed and passed 2000 Auditors’ Report, 2000 Annual Report, 2000 Profit Distribution Preplan and 2001 Profit Distribution Policies. C. The 10th Meeting of 3rd Board of Directors was held on July 28, 2001, in which the attendant directors unanimously chose Ding Fuyi to be chairman of the Board of Directors and discussed relevant issues on disclosure of 2001 Interim Report. D. The 11th Meeting of the 3rd Board of Directors was held on October 19, 2001, which reviewed and passed Proposal on Reelecting of the Board of Directors, Proposal on Changing Certified Public Accountants in 2001, and Proposal on Holding Provision Shareholders’ General Meeting. The attendant directors listened to the report on management status from January to September of 2001 made by the Company’s general manager and discussed issue of encouragement to the management team. E. The 1st Meeting of the 4th Board of Directors was held on November 21, 2001, in which the attendant directors unanimously elected Ding Fuyi to be chairman of the new Board of Directors, Luo Hongchun to be vice chairman, Yin Yu to be general manager of the Company, Bai Jinmin and Zhou Zhen to be vice general manager, and Cai Jianping to be secretary of the Board of Directors. F. The Provisional Meeting of the 4th Board of Directors was held on December 28, 2001, which reviewed and passed Proposal on Terminating Real Estate Transaction with Related Company and Reclaiming Plan of Account Receivables Owed by Big Shareholder, and discussed relevant issues of the Company’s recent lawsuit cases. (2) Implementation of resolutions of Shareholders’ General Meeting by the Board of Directors In the report year, the Board of Directors seriously implemented each resolution as passed in the Shareholders’ General Meeting, and continually offered equivalent guarantee to several original mutual guarantee enterprises. 7. Profit Distribution Preplan of the Year - 10 - As a result of deficit in the report year, the Company would neither distribute profits of 2001 nor transfer capital public reserve to share capital. The above profit distribution preplan of 2001is subject to discussion and approval in the 11th Shareholders’ General Meeting. 8. Other Reporting Events The Company designated Securities Times and Hong Kong Ta Kung Pao as its information disclosure newspapers, which hadn’t been changed in the report year. VIII. REPORT OF THE SUPERVISORY COMMITTEE In 2001, the Supervisory Committee seriously performed its obligations and correctly implemented its supervision functions according to the PRC Company Law, Administrative Rules of Listed Company, relevant laws and legislations for listed company as well as relevant regulations of the Articles of Association. In the report year, the Li Qinwen, Mu Xiangfeng and Liao Hongli were elected supervisor in the Provisional Shareholders’ General Meeting, meanwhile, in the Company’s Employee Representatives’ General Meeting, Wu Sheng and Ren Zhenghua, being representatives of employees, were elected supervisors. In the report year, the Company held altogether three meetings of the Supervisory Committee. The 6th Meeting of the 3rd Supervisory Committee was held on April 2, 2001, which reviewed 2000 Annual Report etc.; The 7th Meeting of the 3rd Supervisory Committee was held on August of 2001, which reviewed 2001 Interim Report; The 1st Meeting of the 4th Supervisory Committee was held on November 21, 2001, in which Mr. Li Qinwen was elected chairman of the Supervisory Committee. 1. Operation according to Law In the report year, the members of the Supervisory Committee attended Board meeting and work meeting of general manager frequently, and acquainted themselves with decisions made by the Board of Directors and management status of the Company. The Supervisory Committee believed that in the report year, the Board of Directors and management team made significant decisions according to the PRC Company Law and relevant regulations in the Articles of Association, and that the Company had rather perfect regulatory system and internal control system in respect of internal administration. The Directors and senior executives didn’t violated laws, legislations, the Articles of Association or damaged the interest of the Company when they were performing obligations. 2. Financial Inspection In the report year, through inspecting the Company’s management and financial status and consulting accounting books and other relevant accounting information, the Supervisory Committee didn’t found any violation behavior of national laws and regulations as well as the Articles of Association. The account receivables owed by the Company’s large shareholder due to assets reorganization and the joint liability aroused from the lawsuit case taken by the creditor against the Company had significant impact on the Company’s operation activities and financial status. The Board of Directors is positively negotiating with the controlling shareholder, the enterprises guaranteed and financial institution on the relevant issues and has implemented its obligation of information disclosure in time according to relevant regulations. - 11 - 3. Purchase or Sales of Assets In the report year, the Company had no material purchase or sales of assets. 4. Correlative Transactions In the report year, the Company conducted transactions with related companies according to common commercial clauses, and the correlative transactions didn’t damaged its interests. 5. Remarks on the Involved Issues in the Non-explanatory Auditors’ Report as Released by Certified Public Accountants The Supervisory noticed the involved issues in the adverse opinion auditors’ report as released by Moore Stephens Shenzhen Nanfang-Minhe CPAs, and agreed to the remarks expressed by the Board of Directors on these issues. 6. Others In 2001, the Company suffered huge losses for various complex historical reasons, on which the Supervisory Committee would further reinforce its supervision function. IX. SIGNIFICANT EVENTS 1. Significant Lawsuit and Arbitration In the second half of 2001, the Company was involved in many lawsuit cases, namely, the Company was proceeded against by the creditor, which involved RMB 225.4 millions (among which RMB 5.81 millions was adjudged to be paid by the Company, RMB 4,280,000 was in the session of court but hadn’t been adjudged, and RMB 215.3 millions hadn’t been processed by the court); The Company was proceeded against by the creditor to undertake joint liability of the lawsuit case for offering guarantee of bank loans to following companies, which involved RMB 290.4 millions (among which RMB 82.9 millions was adjudged to be paid by the Company who undertook joint discharge liability, RMB 37.5 millions was in the session of court but hadn’t been adjudged, and RMB 167 millions hadn’t been processed by the court yet). Details see the public notice of the Board of Directors published in Securities Times and Hong Kong Ta Kung Pao dated December 31, 2001. 2. In the report year, the Company had no material purchase and sales of assets as well as absorbing and consolidation event. 3. Significant Correlative Transactions (1) By the end of report year, the account receivables owed by the Company’s controlling shareholder Shenzhen Petrochemical Corp. (“ the Group”) and the subsidiary companies amounted to RMB 1.2 billion, which was mainly because of debt transfer in the assets reorganization carried out between the Company and the Group in the recent years: A. In early1997, as approved by relevant authority of Shenzhen, the Group merged Shenzhen Raybo Industrial Company (“Raybo Co.”), the Company’s original wholly-owned subsidiary, so that all the liabilities undertaken by Raybo Co. were transferred to the Group and thus the Company had RMB 600 millions of account receivables in the Group; B. In June of 1999, in order to clarify development direction of the industry and centralize resources to develop leading business, the Company carried out its first strategic reorganization with the Group, in which the Company transferred non-industrial enterprises and long-term investment to the Group. The net assets value of the transferred enterprises was RMB 465 millions. The cash paid to the Group and property rights of the enterprises amounted to RMB 113 millions, meanwhile, - 12 - the Group undertook RMB 150 millions of the Company’s bank debts. The rest amount of money and the loans offered to the transferred enterprises by the Company amounted to RMB 570 millions, which was transformed into account receivables owed by the Group; C. The Group hadn’t paid interests for the bank loans that were applied in the name of the Company. It is quite hard to reclaim the above arrears owed by the Group in a short time, mainly because: A. Most of banks didn’t agree that the Company transferred its bank loans to the Group, so that it couldn’t finish continuing bank debts; B. The Group’s subsidiaries were almost all transferred from the Company in the recent years’ reorganization, which had poor assets quality and most of which had terminated operation. As a result, there seems to be little possibility for the Group to refund the Company’s account receivables solely by investing efficient assets; C. The Group is not able to refund arrears by means of paying huge amount of cash. (2) Dec. 2001, the Company cancelled the implementation of the Property Assignment Agreement signed with Shenzhen SPEC Property Management Company and recovered its property, SPEC Building and SPEC Trading Building whose assignment and relevant property transfer procedure were not completed, at the carrying amount of RMB 125.66 million. This related transaction was published in Securities Times and Ta Kung Pao dated Dec. 31, 2001 in details. (3) In the report period, the Company offered no new guarantee for bank loan, except the prolonged guarantee for the overdue loans. 4. In the report year, the Company offered guarantees for loans totaling RMB 1.87 billions including mutual guarantees for RMB 940.46 million, guarantees to related companies for loans of RMB 661.8 million, guarantees to subsidiaries for loans of RMB 265.84 million. The related guarantees referred to Auditor’s Report note 23. Among the said guaranteed loans, RMB1.49 billions was overdue and RMB 761.5 million were involved in lawsuits or approved to be unplayable by the first debtor. 5. In the report period, neither the Company nor its shareholder holding over 5% shares made any commitment. 6. In the report period, since business license of Shenzhen Zhong Tian Qin Certified Public Accountants (former auditor engaged by the Company) was to be canceled by the Ministry of Finance, the Company engaged Shenzhen Nanfang-Minhe Certified Public Accountants as its auditor for 2001 as examined and approved in the Company’s 1st Extraordinary Shareholders’ General Meeting 2001. The Company paid RMB 840,000 to the Certified Public Accountants for its auditing work in 2001. 7. In the report period, SSE has publicly criticized the Company due to its failure in timely disclosing the guarantees and false information disclosure concerning the receivables from the control shareholders. The Board of Directors has made supplementary public notice as required by the SSE and promised to strictly implement the Listing Rules to timely, precisely and fully disclose necessary information. 8. Other significant events A. Raybo Co., former wholly owned subsidiary of the Company, stopped operation in Sep. 1995. At the beginning of 1997, the Group merged Raybo Co. as approved by Shenzhen Investment Holding Corp. and promised to undertake all accounts and according interests of Raybo Co. due to the Company. But till now, these accounts has not been settled and hard to be settled in short term. Therefore, the Company withdrew - 13 - a provision for bad debts at the full balance amount of the loan and reduced the according due interest from the account receivable for the year ended 2001, in addition, retroactive adjustment was made to relevant items as of previous years. (Details referred to financial report of the Company.) B. Ended the report period, the Company should collect receivables from the Group totaling RMB 500 million (excluding the amount concerning Raybo Co.). The main reason is that while implementing the strategic reorganization with the Group in 1999, the Company assigned all share equity of its subsidiaries of non-industrial sector to the Group. After the assignment, the original borrowings and unsettled payment of the said subsidiaries from the Company had turned into receivables of the Company from the Group. In the second half year of 1999 and 2000, both the Group and the Company made actively measures to solve above receivables and reached certain progress. In the year 2001, financial status of the Group worsened and no actual progress or plan made in the collection except for that the Group transferred back the SPEC Building and SEPC Trading building to the Company and paid partial cash. The Company withdrew provisions for bad debts at the full value of the said receivables based on the prudent principal since: A. the banks refused to the transfer the loans due from the Company to the loans due from the Group, so the Group cannot take the repayment liabilities of the Company; B. since most existing subsidiaries of the Group were transferred from the Company in the strategic reorganization in recent years with low quality assets, it is hard for the Group to settle its debts by introducing effective assets; C. in short-term, it is difficult for the Group to settle its payables to the Company in cash. Meanwhile, the Company will continue its negotiation with the Group for a effective solution and safeguard the interests of other stakeholders. 9. Post event Since the Company failed to repay the overdue accounts owned to Chime Resources Petroleum Co., Ltd., 70% of Shenzhen SPEC Beauty Star Hotas Plastics Co., Ltd. and 95.12% equity of Shenzhen SPEC Fine Chemical Co., Ltd. originally held by the Company were frozed by Shenzhen Municipal Intermediate People’s Court. To solve this problem, the Company sold, under the supervision of the Court, the said share equity to Shenzhen Shentou Internet Technology Co., Ltd at the price of RMB 22.29 million and RMB 36.05 million respectively, the conserved appraisal value made by professional appraising organ under the entrustment of the Court. The said income from equity assignment was used to repay the debts owned to Chime Resources Petroleum Co., Ltd. On April 11, 2002, the Company signed the Equity Assignment Agreement with the said acquirer. IX. ACCOUNTING REPORT Attached hereafter. X. DOCUMENTS AVAILABLE FOR REFERENCE 1. Accounting Statements with the personal signatures and seals of legal representative, person in charge of the financial affairs and person in charge of handing accounting affairs; 2. Original of Auditor’s Report with the seal of Moore Stephens Shenzhen Nanfang-Minhe Certified Public Accountants as well as personal signatures and seal - 14 - of and the certified public accountants; 3. Originals of all documents and manuscripts of Public Notices of the Company disclosed in public on the newspapers designated by China Securities Regulatory Commission in the report period. Board of Directors of Shenzhen Petrochemical Industry (Group) Co., Ltd. April 30, 2002 - 15 - SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (INCORPORATED IN THE PEOPLE ’ S REPUBLIC OF CHINA) CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER, 2001 We have audited the consolidated financial statements on pages 2 to 32 which have been prepared in accordance with International Accounting Standards. RESPECTIVE RESOPONSIBILITIES OF DIRECTORS AND AUDITORS The Company’s directors are responsible for the preparation of financial statements which give a true and fair view. In preparing financial statements, which give a true and fair view, it is fundamental that appropriate accounting policies are selected and applied consistently. It is our responsibility to form an independent opinion, based on our audit, on those statements and to report our opinion to you. BASIS OF OPINION We conducted our audit in accordance with International Standards of Auditing. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. We believe that our audit provides a reasonable basis for our opinion. QUALIFIED OPINION: ADVESE OPINION The Group has incurred a net loss for the year ended 31 December 2001 of RMB2,212,642 and a net deficiency at 31 December 2001 of RMB1,645,311. The directors have prepared the financial statements on the going concern basis notwithstanding the loss for the year and the deficiency of net assets at 31 December 2001. In our opinion, however, there is no realistic alternative available to the directors of the Group but to cease trading and therefore we believe the going concern basis should not have been used in preparing these financial statements. Had the going concern basis not been used, adjustments would have been needed to the classification of recorded asset amounts, with these assets being written down to their recoverable amounts, and to the amounts and classification of liabilities, to reflect the fact that the company may be required to realize its assets and extinguish its liabilities other than in the normal course of business, additional liabilities may crystallize and the resulting amounts may differ materially from those stated in the 16 financial statements. As referred to notes 4 (a) and (b), certain subsidiaries have not been consolidated. In our opinion, there are no appropriate reasons to justify their non-consolidation. In view of the significance of the matters referred to above, in our opinion the financial statements do not give a true and fair view of the financial position of the Group at 31 December 2001 and of the results of the Group’s operations and its cash flows for the year then ended and are not in accordance with International Accounting Standards. Moore Stephens Shenzhen Nanfang Minhe Certified Public Accountants - 17 - SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (INCORPORATED IN THE PEOPLE’S REPUBLIC OF CHINA) CONSOLIDATED INCOME STATEMENT AS 31 DECEMBER, 2001 Notes 2001 2000 RMB’000 RMB’000 Turnover 3,22 729,046 831,337 Cost of sales (595,572) (670,315) _______ _______ Gross profit 133,474 161,022 Other revenue 2,158 9,154 Distribution costs (29,574) (26,874) Administrative expenses (114,322) (62,286) Other operating expenses (19,936) (2,649) _______ _______ (Loss)/profit from operating activities (28,200) 78,367 Finance costs (126,183) (19,673) Share of (Loss)/profit in associates and unconsolidated (45,737) 6,962 companies (Provision) / recovery of provision for loss on investment (9,521) 2,039 Provision for impairment of subsidiaries (58,340) － Surplus on disposal of long term investments 3,815 ___ Income from other investments 4,613 ___ Provision for guarantees 18 (780,348) ___ Provision for amount due from holding company (1,172,320) ___ _______ _______ (Loss)/profit before taxation 5 (2,212,221) 67,695 Taxation 6 (4,382) (7,626) ________ ________ (Loss)/profit before minority interests (2,216,603) 60,069 Minority interests 3,961 (23,358) ________ ________ (Loss)/profit attributable to shareholders (2,212,642) 36,711 Accumulated losses at beginning of year (61,262) (97,973) ________ ________ Accumulated losses (2,273,904) (61,262) ======= ======= (Loss) / Earning per share 8 RMB (7.29) RMB 0.121 - 18 - SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (INCORPORATED IN THE PEOPLE’S REPUBLIC OF CHINA) CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER, 2001 The Group has no recognized gains or losses other than those included in the consolidated income statement for the above two years. The information relating to capital transactions, balance of accumulated profit and loss at the beginning of the year and at the balance sheet date and their movements for the year and the movement or reserves is disclosed in the notes as appropriate. - 19 - SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (INCORPORATED IN THE PEOPLE’S REPUBLIC OF CHINA) CONSOLIDATED BALANCE SHEET AT 31 DECEMBER, 2001 Notes 2001 2000 RMB’000 RMB’000 Non-current assets: Fixed assets 9 459,101 444,302 Intangible assets 10 17,045 56,038 Investments in unconsolidated subsidiaries 11 58,558 50,000 Interests in associates 12 23,936 38,888 Long term investments 13 24,861 37,894 ________ ________ 583,501 627,122 ________ ________ Current assets Inventories 14 122,805 144,850 Accounts receivable, other receivables and prepayments 15 214,780 1,667,025 Short term investments 16 16 3,789 Cash and bank balances 85,551 85,511 ________ ________ 423,152 1,901,175 ________ ________ Current liabilities Accounts payable and other payables 503,285 536,003 Tax payable 4,051 7,078 Staff bonus and welfare fund 1,375 2,749 Bank loans due within one year 17 1,234,363 1,092,617 Provision for guarantees given to banks 18 761,498 ___ Provision for guarantees given to customers 18 18,850 ___ ________ ________ 2,523,422 1,638,447 ________ ________ Net current (liabilities)/assets (2,100,270) 262,728 ________ ________ Total assets less (current liabilities) (1,516,769) 889,850 ________ ________ - 20 - SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (INCORPORATED IN THE PEOPLE’S REPUBLIC OF CHINA) CONSOLIDATED BALANCE SHEET (continued) AT 31 DECEMBER, 2001 Notes 2001 2000 RMB’000 RMB’000 Non-current liabilities Long term bank loans 17 10,348 168,078 Long term payables 19 6,446 4,741 Minority interests 111,748 149,700 ________ ________ Net liabilities (1,645,311) 567,331 ======= ======= Equity Share capital 20 303,355 303,355 Reserves 21 (1,948,666) 263,976 ________ ________ Shareholders’ deficiency (1,645,311) 567,331 ======= ======= The accompanying notes form an integral part of these financial statements. The financial statements on pages 2 to 49 were approved and authorized for issue by the Board of Directors and are signed on its behalf by DIRECTOR DIRECTOR - 21 - SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (INCORPORATED IN THE PEOPLE’S REPUBLIC OF CHINA) CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER, 2001 2001 2000 RMB’000 RMB’000 CASH FLOWS FROM OPERATING ACTIVITIES Operating (loss)/profit (2,212,642) 36,711 Adjustments for: Loss/profit attributable to minority shareholders (3,961) 23,358 Depreciation 22,112 26,921 Amortization of deferred assets 9,828 2,393 Loss on disposal of fixed assets 77 835 Interest received (2,851) (1,575) Interest paid 12,592 32,666 Exchange loss 2,953 1,327 Share of profits(loss) in associates and unconsolidated subsidiaries 45,737 (6,962) Provision for impairment of subsidiaries 58,340 ___ Surplus on disposal of long term investments (3,815) ___ _ Gain on other investments (4,613) ___ Provision for impairment of assets － long-term investments 9,521 (2,039) － fixed assets and other assets 16,448 ___ Decrease/(increase) in inventories 17,426 (27,732) Increase in interest accrued 112,099 － Decrease/ (Increase) in accounts receivable 1,222,578 (55,503) (Decrease)/ Increase in accounts payable (71,645) 2,792 Provision for inventories/ (recovery of provision) 952 (129) Provision for guarantees given 780,348 ___ Income tax paid (7,409) (6,131) Others 559 80 ________ ________ Net cash from operating activities 4,634 27,012 ________ ________ Cash flows from investing activities Interest received 2,851 3,308 Interest paid (12,592) (33,582) Dividends received 2,726 3,137 Purchases of fixed assets (19,542) (40,499) Proceeds from disposal of fixed assets 198 182,668 Increase in cash from return of investments 4,976 36,548 Cash paid to acquire equity investment 30 (33,007) Cash equivalents in unconsolidated subsidiaries - 22 - at beginning of year (12,654) (27,665) Investment in future contracts 3,816 (3,101) ________ ________ NET CASH USED IN INVESTING ACTIVITIES (30,191) 87,807 CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from new bank loans 293,980 358,297 Repayment of bank loans (225,997) (636,725) Payment of finance lease commitments __ (1,165) Proceeds from new long term bank loans 4,832 134,335 Payment of other long term payables (33,098) (20,180) Increase in minority shareholders’ investment __ 24,414 Dividend paid minority shareholders (34) (3,384) Other payments relating to financing activities (17,755) (150) Payment of financing expenses (104) (374) _________ _________ Net cash from/(used) financing activities 21,824 (144,932) _________ _________ Decrease in cash and cash equivalents (3,733) (30,113) Cash and cash equivalents at beginning of year 89,300 119,413 _________ _________ Cash and cash equivalents at end of year 85,567 89,300 ========= ========= ANALYSIS OF CASH AND CASH EQUIVALENTS Cash and bank balances 85,551 85,511 Short term investments 16 3,789 _________ _________ 85,567 89,300 ========= ========= The accompanying notes form an integral part of these financial statements. - 23 - SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (INCORPORATED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER, 2001 1. ORGANISATION AND PRINCIPAL ACTIVITIES Shenzhen Petrochemical Industry (Group) Co., Ltd. (the “Company”), formerly known as Shenzhen Petrochemical Holding Company Limited was formed by the merger of two state-owned enterprises, Shenzhen Petrochemical Industry Company (incorporated in February 1983), and Shenzhen Gulf Petrochemical Industry Corporation (incorporated in September 1984). On 12 November, 1991, the Company obtained approval from the Shenzhen Municipal People’s Government to reorganize into a joint stock limited company. Under the approval of the People’s Bank of China Shenzhen Branch, the Company issued A Shares for the PRC investors and B Shares for the overseas investors. Both A Shares and B Shares are listed on the Shenzhen Stock Exchange and carry equal rights. On 28 October,1999, the Company changed its name from Shenzhen Petrochemical Holding Company Limited to Shenzhen Petrochemical Industry (Group) Co., Ltd after following its strategic restructuring. The principal activities of the Company and its subsidiaries (the “Group”) include manufacturing and trading of new chemical materials, fine chemicals, bio-engineering products, chemical fiber, plastic and related products, new and high-tech products development, investments, import and export. 2. BASIS OF PRESENTATION The consolidated financial statements of the Group have been prepared in accordance with International Accounting Standards (“IAS”) issued by the International Accounting Standards Board. This basis of accounting differs from that adopted in the preparation of the PRC statutory financial statements of the Group, which were prepared in accordance with the PRC Accounting Standards. To conform to IAS, adjustments have been made to the PRC statutory financial statements. Details of impact of such adjustments on the net liabilities as at 31 December, 2001 and net loss for the year then ended are included in note 29 to the financial statements. - 24 - SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (INCORPORATED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER, 2001 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of consolidation ----------------------------- The consolidated financial statements include the audited financial statements of the Company and its subsidiaries as set out in note 4 as at 31 December, 2001 and of the results for the year then ended. All significant inter-company transactions and balances within the Group are eliminated on consolidation. Subsidiaries ----------------- A subsidiary is a company, in which the Group directly or indirectly holds more than 50 percent of its equity or voting right for long-term investment purposes. Non-consolidated subsidiaries ---------------------------------- In the consolidated balance sheet, the unconsolidated subsidiaries are accounted for, using the equity method as described in IAS28, at cost and adjusted thereafter for post acquisition change in the Group’s share of net assets of the subsidiaries. The consolidated income statement reflects the Group’s share of the results of operations of the subsidiaries. Associates ---------------------------- An associate is a company, other than a subsidiary, in which the group holds not less than 20% of the equity as a long-term investment and has the ability to exercise a significant influence in its management. - 25 - SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (INCORPORATED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER, 2001 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) The Group accounts for the results of associates under the equity method of accounting. At the balance sheet date, the Group’s investment in associates is stated at its share of net assets, other than goodwill. Turnover ------------- Turnover represents the proceeds and receivables of goods sold to customers outside the group, less sales tax, returns and discounts. Provisions ------------- A provision is recognized in the balance sheet when the Group has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. - 26 - SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (INCORPORATED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER, 2001 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Depreciation --------------- Fixed assets are depreciated at rates sufficient to write off their costs or valuations over their estimated useful lives on a straight-line basis, taking into account an estimated residual value of 5 percent of the asset value. The Board of Directors held that the actual useful lives of fixed assets can be extended compared with the original estimates. The annual rates of depreciation of fixed assets are set out below: Estimated useful lives Depreciation rate Land and buildings 40-50 years 2%-2.38% Machinery and equipment 14 years 6.79% Motor vehicles 10 years 9.5% Furniture, fixtures and office 8-12 years 7.92%-11.88% equipment Leasehold improvements 3-5 years 20%-33% No depreciation is provided on construction in progress prior to its completion. Operating leases ---------------------- The income and expenses under operating leases are dealt with in income statement on a straight-line basis over the lease terms. Cash and cash equivalents ---------------------------------- Cash and cash equivalents are short term, highly liquid investments that are readily convertible into cash and are subject to an insignificant risk of changes in value. Revenue recognition ------------------------- Revenue from the sale of goods is recognized when the risks and rewards of title of the goods are transferred to customers, provided that the Group maintains neither managerial involvement to the degree usually associated with title, nor effective control over the goods sold. - 27 - SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (INCORPORATED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER, 2001 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Foreign currency translation ------------------------------------ The financial statements are expressed in Renminbi. Transactions in foreign currencies are translated into Renminbi at the applicable rates of exchange prevailing at the respective dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into Renminbi at the exchange rates quoted by the People’s Bank of China prevailing at the balance sheet date. Exchange differences are dealt with in the income statement. Deferred taxation --------------------- Deferred taxation arising from the tax effect of material timing differences is computed using the liability method. It is recognized in the financial statements to the extent that it is probable a liability will crystallize in the foreseeable future. Intangible assets ----------------------------- Intangible assets are amortized on a straight-line basis over their estimated useful lives. The estimated useful lives are as follows: Technical know-how 10 years Dies expenses and others 5 years or benefit periods, if shorter Investments ---------------- Listed and unlisted investments held for long term investment purposes are stated at cost less provision for permanent diminution in value. Short-term investments are stated at market value at the balance sheet date. Dividend income from investments is recognized when the shareholder’s right to receive payment is established - 28 - SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (INCORPORATED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER, 2001 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Borrowing costs -------------------- Borrowing costs are expended in the income statement in the period in which they are incurred except to the extent that they are capitalized as being directly attributable to the acquisition, construction or production of an asset which necessarily takes a substantial period of time to get ready for its intended use or sale. Inventories -------------- Inventories are stated at the lower of cost and net realizable value. Cost is determined on the first-in, first-out or weighted average basis and comprises direct materials, direct labor and an appropriate proportion of overheads. Net realizable value is based on estimated selling prices less any further costs expected to be incurred to completion and disposal. Value added tax ------------------- Value added tax is calculated in accordance with the relevant tax laws of the PRC, expressed by way of the difference between the output tax on local sales and the input tax on local purchases. These taxes are not included in the sales and purchases respectively in the income statement. For goods manufactured and sold in Shenzhen SEZ, the value-added tax is exempted in accordance with the local tax regulations of the Shenzhen SEZ. Excess of output over input value added tax is dealt with in the income statement as other operating income. Related parties Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions, parties are also considered to be related if they are subject to common control or common significant influence, related parties may be individuals or corporate entities. Impairment --------------- The carrying amounts of long term assets are reviewed periodically in order to assess whether the - 29 - recoverable amounts have declined below the carrying amounts . These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable . When such a decline has occurred , the carrying amount is reduced to the recoverable amount. The recoverable amount is the greater of the net selling price and the value in use. In determining the value in use, expected future cash flows generated by the asset are discounted to their present value. The amount of the reduction is recognized as an expense in the income statement unless the asset is carried at a revalued amount for which an impairment loss is recognized directly against any related revaluation reserve to the extent that the impairment loss does not exceed the amount held in the revaluation reserve for that same asset. The Group assesses at each balance sheet date whether there is any indication that an impairment loss recognized for an asset in prior years may no longer exist. An impairment loss is reversed if there has been a favorable change in the estimate used to determine the recoverable amount .A subsequent increase in the recoverable amount of an asset, when the circumstances and events that led to the write down or write off cease to exist, is recognized as income unless the asset is carried at revalued amount. Reversal of an impairment loss on a revalued asset is credited to the revaluation reserve except for impairment loss previously recognized as an expense in the income statement; a reversal of such impairment loss is recognized as income. The reversal is reduced by the amount that would have been recognized as depreciation had the write down or write off not occurred. - 30 - SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (INCORPORATED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER, 2001 4. SUBSIDIARIES Particulars of the subsidiaries as at 31 December 2001 are as follows: Company Name Note Registered Proportion of Shares Principal Activities Consolidated Capital Directly Held or not ‘000 2001 2000 2001 2000 Shenzhen SPEC Investment RMB40,000 100% 100% Security investment and Yes Yes & Development Co., Ltd. consulting Shenzhen SPEC Fine *c RMB2,870 100% 100% Petrochemical products No Yes Chemical Co., Ltd. manufacturing and trading Shenzhen SPEC (Holding) *a RMB2,100 100% 100% Petrochemical products No Yes Technical Center development Shenzhen SPEC Printing RMB1,510 100% 100% Printing Yes Yes Co., Ltd. Shenzhen SPEC Keyi Fine *a RMB1,000 100% 100% Fine chemicals No No Chemical Co., Ltd manufacturing and trading Shenzhen SPEC Donghong RMB80,000 75% 75% Laminating and coating Yes Yes Laminating & Coating Fabrics Co., Ltd. Shenzhen SPEC Beauty Star *c USD2,300 70% 70% Plastic products No Yes Fotas Plastics Co., Ltd. manufacturing Shenzhen SPEC Plastics RMB99,300 65.405% 65.405% PVC material Yes Yes Co., Ltd. manufacturing and trading Shenzhen SPEC Fibers USD3,203 51% 51% Chemical fibers Yes Yes Co., Ltd. manufacturing Shenzhen SPEC RMB53,000 100% 100% Bio-engineering Yes Yes Bio-Pharmaceutical Industry products development Co., Ltd. Shenzhen Tongda Packing *a RMB3,500 100% 100% Packing materials No No Products Co., LTD. manufacturing Shenzhen SPEC Home *a RMB4,130 51.57% 51.57% Home appliances No No Appliance Accessory Co., repairing and Ltd. maintenance Shenzhen Lanbo Industrial *b RMB9,300 100% 100% Manufacturing and sales No No Co., Ltd. of air-condition Shanghai Meixing Plastics USD350 70% 70% Plastic products Yes No Co., Ltd. manufacturing Shenzhen SPEC Oil *a RMB50,000 100% 100% Oil refining services No No Refining Services Co., Ltd. - 31 - SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (INCORPORATED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER, 2001 4.SUBSIDIARIES (continued) *(a) These subsidiaries are not included in the preparation of the consolidated financial statements because of the suspension of their normal operations, and the provision for diminution in value of the subsidiaries has been made, or the value of long-term investment has been offset directly. The operating results and net assets of these companies have no significant effect on the Group. *(b) This subsidiary is insolvent and its normal operations have ceased. Provision for bad debts has been made, and the contingent liabilities resulting from the guarantees for bank loans and customers have been dealt with as liabilities in the balance sheet. *(c) These subsidiaries were sold by auction by the Court after the balance sheet date. Therefore, they are not been included in the consolidation. *(d) All subsidiaries are incorporated in the Peoples’s Republic of China. - 32 - SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (INCORPORATED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER, 2001 5. LOSS BEFORE TAXATION 2001 2000 RMB’000 RMB’000 Loss before taxation has been arrived at after charging: Staff costs 71,465 69,649 Depreciation of fixed assets 22,112 26,921 Provision for bad and doubtful debts 42,503 2,242 Amortization of intangible assets 9,828 2,393 Loss on disposal of fixed assets 34 835 Rentals in respect of premises under operating leases 1,747 4,392 Interest on bank loans 124,691 32,666 Exchange losses 3,153 1,327 Auditors’ remuneration 800 800 (Gain)/Loss on disposal of short term listed investments (610) 1,037 Provision for guarantees 780,348 ____ Provision for amount due form holding company 1,172,320 ____ and after crediting: Interest income 2,851 16,245 Exchange gains 200 ___ Rental income 1,297 9,093 6. TAXATION Taxation in the consolidated income statement represents the PRC income tax provided for the year. Profits earned by the Group are charged for income tax at rates ranging from 15% to 33% except for certain subsidiaries and associates, which have been granted exemption. In accordance with the relevant income tax laws applicable to Sino-foreign joint venture enterprises in the PRC, certain Sino-foreign joint venture enterprises of the Group have been granted full exemption from income taxes for two years starting from the first profitable year of operation and a 50 percent reduction for the following three years. 7. DIVIDENDS A detailed profit distribution proposal, if any, is presented by the Board of Directors according to the operational results and development requirements of the company and is submitted to the shareholders at the annual general meeting for approval every year. Under the proposal of the Board of Directors, no bonus shares nor cash dividends were distributed for the year of 2001 (2000 Nil). - 33 - SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (INCORPORATED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER, 2001 8. LOSS PER SHARE The calculation of loss per share is based on the net loss of RMB2,212,642 to shareholders for the year 2001 (2000: gain of RMB23,154,000) on 303,354,979 A and B shares of RMB 1.00 each in issue. 9. FIXED ASSETS Items Opening Additions Disposals Provision for Closing Balance Impairment Balance RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Cost or valuation Construction in progress 73,941 21,634 76,669 18,906 Land and buildings 211,675 176,055 35,740 4,493 347,497 Machinery and equipment 327,324 19,940 87,434 1,569 258,261 Motor vehicles 23,594 1,267 3,704 10 21,147 Furniture, fixtures and 38,875 2,622 17,175 93 24,229 office equipment Leaseholds improvements 17,583 1,739 — — 19,322 _______ _______ _______ _______ _______ Total 692,992 223,257 220,722 6,165 689,362 ====== ====== ====== ====== ====== Depreciation Construction in progress — — — — — Land and buildings 36,624 1,913 2,722 — 35,815 Machinery and equipment 176,539 11,368 30,810 — 157,097 Motor vehicles 10,666 1,695 2,185 — 10,176 Furniture, fixtures and office equipment 17,186 1,672 4,824 — 14,034 Leasehold improvements 7,675 5,464 — — 13,139 _____ ______ ______ ______ _____ Total 248,690 22,112 40,541 — 230,261 _____ ______ ______ ______ _____ Net book value 444,302 459,101 ====== ====== Land and buildings include properties which were revalued at RMB126,870,000 on 1st November, 2000 by Shenzhen Guo Zi Yuan Property Valuation Co. Ltd. - 34 - SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (INCORPORATED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER, 2001 9. FIXED ASSETS(continued) The Group’s land and buildings are located in the PRC and are held under long-term leases up to maximum of 50 years. In the opinion of the directors, the carrying value of the fixed assets is not less than the fair value. Disposals include adjustments to costs totaling RMB121,023,000 and to accumulated depreciation totaling RMB28,165,000 relating to subsidiaries as at 31 December 2000 as a result of their ceasing to be subsidiaries during the year under review or their financial statements not being consolidated as at 31 December 2001. 10. INTANGIBLE ASSETS Pre-operating Technical Dies Expenses Others Total Expenses Know-how RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Net book value at 1 6,382 49,280 376 56,038 January, 2001 Additions __ __ 2,368 3,467 5,835 Amortization (6,382) (1,428) (698) (1,320) (9,828) Provision for Impairment (7,000) (7,000) Transfer out (28,000) (28,000) ____ _____ _____ ____ ____ Net book value at 31 － December, 2001 12,852 1,670 2,523 17,045 ===== ===== ===== ==== ===== 11.INVESTMENTS UNCONSOLIDATED SUBSIDIARIES 2001 2000 RMB’000 RMB’000 Unlisted shares - stated at value under the equity method 32,662 50,000 - at cost less impairment* 25,896 - ________ _______ 58,558 50,000 ======= ====== * Impairment arising from disposal of subsidiaries below book value subsequent to the balance sheet date. (Note 28) 12. INTERESTS IN ASSOCIATES 2001 2000 RMB’000 RMB’000 Share of net assets 23,670 23,089 Amount due from associates 312 17,320 Amount due to associates (46) (1,521) - 35 - _____ _____ 23,936 38,888 ===== ===== The amounts due to/from the associates are unsecured, interest-free and there are no fixed terms for repayment. Particulars of the principal associates are set out as follows: Name of Associates Place of Percentage of Shares Held Principal Activities Registration 2001 2000 Shenzhen SPEC Kinglion Shenzhen 48% 48% Plastic products manufacturing and Plastics Co., Ltd. trading Shenzhen SPEC Electronic Shenzhen 30% 30% Plastic products manufacturing and Appliance Industrial Co., Ltd. trading Shenzhen SPEC Jinxin Shenzhen 30% 30% Chemical and electronic instruments Chemical Electronics Co., Ltd. manufacturing and trading Shenzhen Best Plastics Shenzhen 25% 25% Printing Color-Printing Co., Ltd. Shenzhen SPEC Biltrite Soling Shenzhen 25% 25% Soling materials manufacturing Co., Ltd. In the opinion of directors, the carrying value of aoociates is not less than the fair value. - 36 - SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (INCORPORATED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER, 2001 13. LONG TERM INVESTMENTS 2001 2000 RMB’000 RMB’000 Unlisted shares, at cost 35,113 61,857 Less: provision for impairment (10,252) (23,963) ______ ______ 24,861 37,894 ====== ====== 14. INVENTORIES 2001 2000 RMB’000 RMB’000 Raw materials 111,878 48,065 Work in progress 536 10,079 Finished goods 10,391 86,706 _______ _______ 122,805 144,850 ====== ====== 15. ACCOUNTS RECEIVABLE, OTHER RECEIVABLES AND PREPAYMENTS Provisions have been made for the following receivables and hence excluded from accounts receivable, other receivable and prepayments in the balance sheet:- (1) Unpaid share capital and share premium of RMB 26,233,250 receivable from corporate shareholders and amount of capital together with accrued interests totaling RMB 4,133,009. The Board of Directors is of the opinion that the above amount is possibly uncollectible. Therefore, full provision for the said amounts has been made. (2) Receivable of RMB 1,069,017,000 from the holding company, Shenzhen Petrochemical (Holdings) Co. Ltd. is uncollectible in the opinion of the directors. Therefore, full provision for this amount has been made. - 37 - SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (INCORPORATED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER, 2001 16. SHORT TERM INVESTMENTS 2001 2000 RMB’000 RMB’000 Listed shares, at cost 16 3,889 Provision － (100) _____ _____ 16 3,789 ==== ==== Market value of listed shares 16 3,789 ==== ==== 17. LOANS 2001 2000 RMB’000 RMB’000 Bank Loans – secured -within one year 97,554 7,670 Unsecured -within one year 1,116,809 1,064,947 -two to five years 10,348 168,078 Loan from Government-Unsecured -within one year 20,000 20,000 ________ ________ 1,244,711 1,260,695 ======= ======= Payable: -within one year 1,234,363 1,092,617 -two to five years 10,348 168,078 ________ ________ 1,244,711 1,260,695 ======= ======= Interest rates on the above loan vary between the range of 4.11% and 19.95% per annum. - 38 - SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (INCORPORATED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER, 2001 18. PROVISION FOR GUARANTEES GIVEN TO BANKS AND CUSTOMERS 2001 2000 RMB’000 RMB’000 a. To banks in respect of bank loans for third parties 233,058 __ b. To banks in respect of bank loans of associates and fellow subsidiaries 528,440 __ c. To customers in respect of sales by a subsidiary 18,850 __ __________ _________ 780,348 __ ======== ======== a) The Group has provided guarantees to banks in respect of bank loans granted by the banks to third parties as follows- Guaranteed Loans Dealt with in RMB’000 income statement RMB’000 Shenzhen Neptune Group Co., Ltd. 177,000 — Gintian Industry ( Group ) Co., Ltd. 130,064 26,900 China Aidi Group Corporation 33,500 — Shenzhen Shun Kong Industrial & 24,090 24,090 Trading Co. China Baoan Group Co., Ltd. 92,711 — Shenzhen Sunlight Industrial Co., Ltd. 43,953 38,753 Shenzhen Lionda Holdings Co., Ltd. 263,769 53,653 Shenzhen Zhonghao Group Co., Ltd. 104,734 68,600 Shenzhen Tellus Holdings Co., Ltd. 49,680 — Shenzhen Hongling Investment & 2,000 2,000 Development Co., Ltd. Shenzhen SPEC Jiankun Holdings 18,751 18,751 Co., Ltd. China Kejian Co., Ltd.* 310 310 __________ ________ Total 940,562 233,057 ======== ======= RMB233,057,000 has been provided in the income statement for guarantees in respect of which legal action has been taken against the Group. The remaining RMB707,505,000 has been treated as contingent liabilities as referred to in note 24. - 39 - b) The Group has provided guarantees to banks in respect of bank loans granted by the banks to associates and fellow subsidiaries as follows:- Guaranteed Loans Dealt with in RMB’000 income statement RMB’000 Shenzhen Best Plastics Color-Printing Co., Ltd. 7,500 — Shenzhen Electric Appliance Co., Ltd. 7,000 — Shenzhen SPEC Jinxin Chemical Electronics 221,522 216,772 Co.,Ltd. Shenzhen SPEC Petroleum storage., Co.,Ltd. 44,765 44,765 Shenzhen SPEC Petroleum Co., Ltd. 23,844 23,844 Shenzhen SPEC Real Estate Co., Ltd. 56,450 11,000 Shenzhen SPEC Chemicals Co., Ltd. 86,980 77,480 Shenzhen SPEC Bonded trading Petrochemical 5,000 — Co., Ltd. Hangzhou SPEC Industrial & Trading Co. 7,000 7,000 Shenzhen Dahua Chemicals Co., Ltd. 15,370 10,620 Shenzhen Jinliyu Petroleum Co. 37,538 37,538 Shenzhen Haipeng Import & Export Co., Ltd 10,610 10,610 Shenzhen Lanbo Industrial Co., Ltd. 7,500 7,500 Huizhou Daya Bay Shencheng Petrochemical 15,690 15,690 Co., Ltd. Tianjin SPEC Chemistry Co., Ltd. 49,400 — Shenzhen Petrochemical (Holdings) Co.,Ltd.*1 52,421 52,421 Shenzhen SPEC Liquid Chemicals Co., Ltd. 10,200 10,200 Shenzhen SPEC Import & Export Co., Ltd.*1 3,000 3,000 ___________ ________ Total 661,790 528,440 ========= ======= RMB528,440,000 has been provided in the income statement on either of the following grounds:- 1. Where legal action has already been taken against the Group, or 2. Where repayment of the loans has been overdue and the financial position of the debtors concerned has deteriorated. The remaining guarantees of RMB133,350,000 are treated as contingent liabilities as referred to note 24. c) The Company has provided guarantees to customers generally in respect of products sold by a subsidiary totaling RMB18,850,000. Provision has been made in the income statement for these guarantees as the subsidiary is unable to pay the claims by the customers. d) The company has provided guarantees to banks in respect of bank loans granted to subsidiaries as follows:- Guaranteed Loans Dealt with in income RMB’000 statement RMB’000 - 40 - Shenzhen SPEC Silicon Material Co., 8,908 _____ Ltd. Shenzhen SPEC Fine Chemical Co., 8,650 _____ Ltd. Shenzhen SPEC Fibers Co., Ltd. 90,172 _____ Shenzhen SPEC Beauty Star Fotas 12,100 _____ Plastics Co., Ltd. Shenzhen SPEC Plastics Co., Ltd. 146,010 _____ __________ ________ Total 265,840 _____ ========= ======= The above guarantees of RMB265,840,000 are treated as contingent liabilities as referred to in note 24. 19. LONG TERM PAYABLES 2001 2000 RMB’000 RMB’000 Government funds-Unsecured 6,446 4,741 ====== ====== 20. SHARE CAPITAL 2001 2000 RMB’000 RMB’000 Registered, issued and paid-up (303,354,979 shares in total) 270,595,000 “A” Shares of RMB 1.00 each 270,595 270,595 32,760,000 “B” Shares of RMB 1.00 each 32,760 32,760 ______ ______ 303,355 303,355 ====== ====== - 41 - SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (INCORPORATED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER, 2001 21. RESERVES Capital Surplus Accumulated Total reserve reserve losses RMB’000 RMB’000 RMB’000 RMB’000 At 1 January 2000 233,386 91,852 (97,973) 227,265 Net profit for the year 2000 36,711 36,711 _______ _______ _______ ________ At 31 December 2000 233,386 91,852 (61,262) 263,976 ====== ====== ====== ======= At 1 January, 2001 233,386 91,852 (61,262) 263,976 Net loss for the year 2001 (2,212,642) (2,212,642) Transfer to make up losses (91,852) 91,852 - _______ _______ _______ _______ At 31 December, 2001 233,386 — (2,182,052) (1,948,666) ======= ======= ======= ======= - 42 - SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (INCORPORATED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER, 2001 21 RESERVES (continued) Capital reserve According to relevant PRC regulations, capital reserve can only be utilized to increase share capital. Surplus reserve Statutory surplus reserve and discretionary surplus reserve can be used to make up losses or to increase share capital. Except for the reduction of reserves due to losses incurred, any other usage must not result in the balance thereof falling below 25% of the registered capital. Statutory public welfare fund According to relevant PRC regulations, the usage of the statutory public welfare fund is restricted to capital expenditures for employee facilities. The statutory public welfare fund is not available for distribution to shareholders except in the event of liquidation. 22. SEGMENTAL SALES AND PROFIT BEFORE TAXATION 1.Analysis by principal activities: Manufacturing Trading Total 2001 2000 2001 2000 2001 2000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Revenue Segment results 726,862 821,730 2,184 9,607 729,046 831,337 Operating profit 106,058 143,302 — — 106,058 143,302 Unallocated corporate expense (1,432,761) (84,608) Share of profits of associates (45,737) 6,962 Provision for impairment (9,521) —— Income from long-term investment 4,613 2,039 Loss from disposal of (54,525) ____ subsidiaries Provision for guarantees given (780,348) —— Profit before taxation (2,212,221) 67,695 Taxation (4,382) (7,626) Profit after taxation (2,216,603) 60,069 Minority interest 3,961 (23,358) Net (loss)/profit for the year (2,212,642) 36,711 Segment assets 726,432 1,010,259 280,221 1,518,038 1,006,653 2,528,297 - 43 - SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (INCORPORATED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER, 2001 22 SEGMENTAL SALES AND PROFIT BEFORE TAXATION (continued) 2. Analysis by geographical location: PRC Outside PRC region Total 2001 2000 2001 2000 2001 2000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Turnover 729,046 831,157 —— —— 729,046 831,157 Segment assets 1,006,653 2,528,297 —— —— 1,006,653 2,528,297 23. PRINCIPAL RELATED PARTY TRANSACTIONS 2001 2000 RMB’000 RMB’000 Sale of land and building to fellow subsidiary ____ 130,489 Purchase of land and building to fellow subsidiary 125,660 _____ Interest income from holding company. —— 118,702 Interest income from unconsolidated subsidiaries 1,485 —— Interest income from associate 776 ____ Rental from fellow subsidiary ____ 8,519 Rental paid to fellow subsidiary 694 ____ ====== ====== Interest rates on borrowings are determined by reference to the interest rates announced by respective banks during the year. 24. CONTINGENT LIABILITIES Guarantees given by the Group to banks in respect of bank loans granted to group companies totaling RMB399,190,000 and to third parties totaling RMB707,505,000. (note 18) - 44 - SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (INCORPORATED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER, 2001 25. PLEDGE OF ASSETS At 31 December, 2001, the Company pledged fixed assets with a net book value totaling RMB132,592,000 to secure bank and other loans obtained in the PRC totaling RMB65,754,000 and HKD30,000,000 respectively. 26. OPERATING LEASE COMMITMENTS As at 31 December, 2001, the Group had the following operating lease commitments under irrevocable leases in respect of properties: Amount due Amount RMB’000 Within one year 967 In the second to fifth years, inclusive 1,830 27. FINANCIAL INSTRUMENTS Financial assets of the Group include cash and cash equivalents, time deposits with financial institutions, investments, trade accounts receivable, bills receivable, amount due from fellow subsidiaries, loans to third parties, due from associates and jointly controlled entities, and other receivables. Financial liabilities of the Group include bank and other loans, trade accounts payable, bills payable, amount due to fellow subsidiaries, receipts in advance, and advances from third parties, The Group does not hold or issue financial instruments for trading purposes. The Group had no positions in derivative contracts at 31 December 2001 and 2000. Credit risk The carrying amounts of cash and cash equivalents, time deposits with financial institutions, trade accounts and bills receivable, and other current assets, except for prepayments, represent the Group’s maximum exposure to credit risk in relation to financial assets. The majority of the Group’s trade account relate to sales of petrochemical and plastic products etc. to third parties operating in these industries. The Group performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral on trade accounts receivable. The Group maintains an allowance for doubtful accounts and actual losses have been within management’s expectations. No single customer accounted for greater than 10% of total revenues. No other financial assets carry a significant exposure to credit risk. Currency risk Substantially all of the revenue generating operations of the Group are transacted in Renminbi, which is not freely convertible into foreign currencies. On 1 January 1994, the PRC government abolished the dual rate - 45 - system and introduced a single rate of exchange as quoted by the People’s Bank of China. However, the unification of the exchange rate does not imply convertibility of Renminbi into United States dollars or other foreign currencies. All foreign exchange transactions continue to take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts. Interest rate risk The interest rates and terms of repayment of short term and long term debts of the Group are disclosed in Note 17. The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of IAS 32. Fair value estimates, methods and assumptions, set forth below for the Group’s financial instruments, are made solely to comply with the requirements of IAS32 and should be read in conjunction with the Group’s consolidated financial statements and related notes. The estimated fair value amounts have been determined by the Group using market information and valuation methodologies considered appropriate . However, considerable judgment is required to interpret market data to develop the estimated of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Group could realize in a current market exchange. The use of different market assumptions and /or estimation methodologies may have a material effect on the estimated fair value amounts. Investments in unlisted equity securities have no quoted market prices in the PRC. Accordingly, a reasonable estimate of fair value could not be made without incurring excessive costs. The fair values of all other financial instruments approximate their carrying amounts due to the nature or short-term maturity of these instruments. 28 POST BALANCE SHEET EVENTS (1) The Company announced on 14th March, 2002 that its 70% shares in Shenzhen SPEC Beauty Star Fotas Plastics Co., Ltd.(the“Beauty Star Company”) had been sealed by the Shenzhen Intermediate People’s Court because of defaults in payment of goods purchased from China Resources Petroleum Co. The Company negotiated with the Court and reached an agreement on 11 April, 2002, as approved by the Board of Directors to transfer the 70% shares held in Beauty Star Company to Shenzhen Shentou Network Technical Co. Ltd. at the auction base price of RMB22,290,600 as assessed by Shenzhen Guosong Certified Public Valuer, appointed by the Court. At 31 December,2001, the value of the said shares based on the audited results of the subsidiary at 31st December 2001 amounted to RMB36,110,300 and based on the professional valuation, amounted to RMB55,726,500. Provision for impairment of the investment in the subsidiary amounting to RMB40,350,000 has been made in the income statement for the year. - 46 - SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (INCORPORATED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER, 2001 28 POST BALANCE SHEET EVENTS (continued) (2) 95.12% shares in Shenzhen SPEC Fine Chemical Co., Ltd..(the“Fine Chemical Company”)held by the Company were sealed by the Shenzhen Intermediate People’s Court because of defaults in payment of goods purchased from China Resources Petroleum Co., Ltd.. The Company negotiated with the Court and reached an agreement on 11 April, 2002 as approved by the Board of Directors to transfer these shares to Shenzhen Shentou Network Technical Co. Ltd. at the auction base price of RMB3,605,000 as assessed by Shenzhen Guozonglian Certified Public Valuer, appointed by the Court. At 31 December,2001, the value of the said shares based on the audited results of the subsidiary at 31 December 2001 amounted to RMB8,689,200 and based on the professional valuation, amounted to RMB5,150,000. Provision for impairment of the investment in the subsidiary amounting to RMB17,990,000 has been made in the income statement for the year. 29 IMPACT OF IAS ADJUSTMENTS ON PROFIT ATTRIBUTABLE TO SHAREHOLDERS AND NET ASSETS Profit attributable to Net assets shareholders RMB’000 RMB’000 As reported in the “A” shares consolidated audited statutory financial statements under PRC accounting standards (1,575,991) (1,645,311) IAS adjustments: Provision for impairment of fixed assets (1,350) __ Correcting accounting errors (635,530) __ Accounts payable written back 229 __ ————— ————— As reported after IAS adjustments in the “B” shares financial statements (2,212,642) (1,645,311) ========= ========= - 47 -