山航Ｂ(200152)2001年年度报告（英文版）

SHANDONG AIRLINES CO., LTD. 2001 ANNUAL REPORT March 2002 Jinan ·PRC Content Ⅰ . Company Profile ---------------------------------------------------------------------------1 Ⅱ. Financial Highlights and Business Highlights --------------------------------------- 2 Ⅲ. Particulars about the Changes in Capital Shares and Shareholders ------------4 Ⅳ. Particulars about Director, Supervisor, Senior Executive and staff ------------ 6 Ⅴ. Administrative Structure ----------------------------------------------------------------- 9 Ⅵ. Brief Introduction to the Shareholders’ General Meeting ---------------------- 9 Ⅶ. Report of the Board of Directors ----------------------------------- ------------------ 10 Ⅷ. Report of the Supervisory Committee------------------------------------------------ 16 Ⅸ. Important Events -------------------------------------------------------------------------- 17 Ⅹ. Financial Report--------------------------------------------------------------------------- 19 Ⅺ. Documents for Reference ---------------------------------------------------------------- 57 Important: Board of Directors of Shandong Airlines Co., Ltd. (hereinafter referred to as the Company) hereby confirms that there are no any important omissions, fictitious statements or serious misleading information carried in this report, and shall take all responsibilities, individual and/or joint, for the reality, accuracy and completion of the whole contents. This report has been prepared in Chinese version and English version respectively. In this event of difference in interpretation between the two versions, the Chinese report shall prevail. Notes: The Company: Shandong Airlines Co., Ltd. Shanhang Group: Shandong Airlines Limited; the control shareholder of the Company Shandong Steco Shandong Steco Aircrafts Engineer Co., Ltd.; the associated enterprise of the control shareholder Training company: Shandong International Airlines Training Co., Ltd.; the associated enterprise of the control shareholder 2 I. Company Profile 1. Legal Name of the Company In Chinese: 山东航空股份有限公司 In English: SHANDONG AIRLINES CO., LTD. 2. Legal Representative: Jia Fuwen 3. Secretary of Board of Directors: Zheng Baoan Liaison Address: Yaoqiang International Airport, Jinan, Shandong E-mail: zhengba@shandongair.com.cn Authorized Representative: Huang Haiming E-mail: huanghm@shandongair.com.cn Tel: (86) 531-8737888, 0531-8730777-1888 Fax: (86) 531-8737889 4. Registered Address and Office Address: Yaoqiang International Airport, Jinan, Shandong Post Code: 250107 Company’s Web Site: http://www.shandongair.com.cn E-mail: zqb@shandongair.com.cn 5. Newspapers for Disclosing the Information of the Company: China Securities (Domestic); Hong Kong Ta Kung Pao (Oversea) Internet Web Site for Publishing the Annual Report: http://www.cninfo.com.cn The Place Where the Annual Report is Prepared and Placed: Securities Department of the Company Liaison Tel: (86) 531-8737888 6. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: SHANHANG B Stock Code: 200152 7. Other Relevant Information of the Company About the changes in registration: On Feb. 14, 2001, the Company conducted registration for changes with Shandong Provincial Administration for Industry and Commerce; Registration code was changed into QGLZZ No. 003926, and the type of the Company changed into joint-stock company invested by foreigner. Registration code for business license of enterprise juristic person: LWS NO.01665 Registration code for tax: DSZ 370112720721201 Name and address of certified public accountants engaged by the Company: Chinese Accountants: Hujiangdeqing Certified Public Accountants Address: 16/F, Shanghaitan International Mansion, No. 99 Huangpu Rd., Shanghai International Accountants: Deloitte Touche Tohmatsu Certified Public Accountants Address: 26/F, Wing on Centre, 111 Connaught Rd. Central, Hong Kong II. Financial Highlights and Business Highlights (I) Financial Highlights and Related Indexes as of the Report Year (According to the International Accounting Standards) Items RMB’000 Net profit before taxation 79,493 Net profit for the year 69,570 Net profit after deducting non-recurring gains and losses 58,755 3 58,755 Net operating profit 141,989 Investment income - Subsidy income - Net cash from operating activities 93,996 Net increase in cash and cash equivalents 59,929 There existed differences in the net profit and net assets as calculated according to the Chinese Accounting Standards (“CAS”) and the International Accounting Standards (“IAS”), which are stated as following with their causes: Items Profit after taxation Net assets RMB'000 RMB'000 As reported under PRC GAAP 54,942 564,282 Adjustments to conform with IAS: Difference in depreciation charges of aircraft and related equipment 1,558 -27,244 Difference in deferred expenditure recognition 2,777 -61,674 Adjustment of provision for overhaul of aircraft and engines 730 21,521 Deferred taxation 9,563 22,242 Dividends declared after the balance sheet date - 24,000 As reported under IAS 69,570 543,127 (II) Major Accounting and Financial Highlights over the Past Two Years at the end of the Report Year (According to the International Accounting Standards) 1. Statement of Accounting Data and Financial Indexes Items 2001 2000 Total operating revenue (RMB’000) 1,287,982 1,013,524 Net profit for the year (RMB’000) 69,570 82,802 Total assets (RMB’000) 1,960,839 1,301,446 Shareholders’ equity (Excluding Minority 543,127 513,557 shareholders’equity) (RMB’000) Diluted Earnings per share (RMB) 0.17 0.21 Weighted average earnings per share(RMB) 0.17 0.27 Net assets per share (RMB) 1.36 1.28 Net cash flows per share arising from operating 0.23 0.24 activities (RMB) 2. Business Data 4 Number of Passengers (Person) １８０００００ １６０００００ １５２７７４６ １４０００００ １３２９０７１ １２０００００ １００００００ ８０００００ ６０００００ ４０００００ ２０００００ ０ ２０００ ２００１ Cargo and Mail（Ton） ２００００ １８８２８．５ １５０００ １３８３５．４ １００００ ５０００ ０ ２０００ ２００１ (III) Particulars about Changes in Shareholders’Equity during the Report Period RMB’000 Statutory Statutory Items Share Share Capital surplus public Retained capital premium reserve reserve welfare fund earnings Total Balance at December 31, 2000 & January 1, 2001 400,000 76,258 -40,886 9,708 4,854 63,623 513,557 Net profit for the year - - - - - 69,570 69,570 Transfer to statutory surplus reserve - - - 5,494 - -5,494 - Transfer to statutory public welfare fund - - - - 2,747 -2,747 - Dividends - - - - - -40,000 -40,000 Balance at December 31, 2001 400,000 76,258 -40,886 15,202 7,601 84,952 543,127 III. Particulars about the Changes in Shares Capital and Shareholders (I) Statement of Changes in Share Capital (unit: 0,000 shares) Before After Increase/decrease of this time (+ , - ) change change Others Share Bonus Capitalization of Additional Sub- Allotment shares public reserve issuance total I. Unlisted Shares 26000 26000 1. Promoters’shares 26000 Including: State-owned shares 25980.1 Domestic juristic person’ s shares 19.9 Foreign juristic person’s shares Others 2. Raised juristic person’s shares 5 3. Shares held by Senior executives 4. Preference shares or others Total Unlisted shares 26000 26000 Ⅱ. Listed Shares 14000 1. RMB ordinary shares 2.Domestically listed foreign shares 0 14000 3. Overseas listed foreign shares 4. Others Total Listed shares 14000 14000 Ⅲ. Total shares 26000 40000 (II) Particulars about Issuance and Listing of shares 1. Issuance and listing Approved by China Securities Regulation Commission with ZJFZ [2000] No. 116 document on Aug. 22, 2000, the Company issued 140 million domestically listed foreign shares with par value RMB 1.00 per share to foreign investors for the first time at a placing price of HKD1.58 per share (RMB 1.68 per share) from Aug. 28, 2000 to Sep. 1, 2000. The Company finished placing as scheduled and market profit ratio was 8.30 times. 140 million domestically listed foreign shares have been listed formally with Shenzhen Stock Exchange for circulation on Sep. 12, 2000. (2) In the report year, there was no change s in the number and structure of the Company’ s shares, due to bonus share distribution, capital public reserve transferring into share capital, share allotment, additional issuance, combination, T-bond transferring into share, disinvestments, employee’ s share, or listing of employee’ s share, etc. There exist no employee’ s shares in the Company. (III) About Shareholders 1. Total Shareholders at the end of the Report Year Ended on Dec. 31, 2001, the Company had totally 23,926 shareholders, including 5 ones of Promoters’shares (they are Shandong Airlines Limited, Luyin Investment Group Co., Ltd., Shandong Hualu Group Co., Ltd., Shandong Fisheries Group Corp., and Langchao Group Corp. respectively) and 23,921 ones of domestically listed foreign shares. In the report year, one of promoters, Langchao Electronics Information Industry Group Corp. changed its name into Langchao Group Corp. 2. The Company has no juristic person shareholders holding over 5% of shares of the Company except for the control shareholders. Particulars about the shares held by the top ten shareholders: Number of holding Proportion in the Type Shareholders’name shares (share) total shares (%) SHANDONG AIRLINES LIMITED 259204000 64.8 State-owned share BEST RELIANCE INVESTMENT LTD 1001000 0.25 Domestically listed foreign shares HE DA HONG 810200 0.20 Domestically listed foreign shares WU HAO YUAN 782800 0.196 Domestically listed foreign shares LI WEI GUANG 754800 0.189 Domestically listed foreign shares JIAN YANG 644000 0.16 Domestically listed foreign shares XU ZHAO HUAN 600000 0.15 Domestically listed foreign shares ZHANG LI PING 557600 0.14 Domestically listed foreign shares LIU JIN HANG 540600 0.135 Domestically listed foreign shares ZHANG XU BIN 450000 0.11 Domestically listed foreign shares As far as the Company knows, there no exists associated relationship among the said top ten shareholders. 3. Control shareholder of the Company Shandong Airlines Limited is the control shareholder of the Company, and the relevant matters are as follows: 6 Legal representative: Sun Dehan Date of foundation: Feb. 9, 1995 Scope of business: Maintaining of aerostat and surface facilities; agent of passenger and goods; domestic tourism (travel agency) and information consultation; handicraft article, souvenir (excluding gold and silver jewelry), sale of general merchandise, sale of general merchandise; accommodation and hotel (Red -crowned Crane Hotel). Registration capital: 100,000,000 (The control shareholder is implementing modification procedures of register capital in order to coincide with the real capital’s variation caused by adding investment.) Structure of share equity: (as follows) Number of Proportion of Name of shareholders shares holding shares Shandong Province Economic Development and Investment Co. 317,790,891.70 76.88% Shandong Province International Trust and Investment Co. 40,911,988.02 9.90% Shandong Jinqiao High-tech Development (Group) Co., Ltd. 9,467,073.31 2.29% Shandong Province People’s Government 9,072,902.07 2.19% Qingdao Municipality Financial Bureau 5,245,126.68 1.27% Jinan Municipality Financial Bureau 5,245,126.68 1.27% Jining United Airlines Co. 5,245,126.68 1.27% Yankuang Group Co., Ltd. 4,079,542.96 0.99% Jinan Iron and Steel Group Corp. 4,079,542.96 0.99% Qilu Petrochemical Co. China Petrochemical Group 4,079,542.96 0.99% Shengli Petroleum Management Bureau of China Petrochemical 4,079,542.96 0.99% Group Laiwu Iron and Steel Group Co. 4,079,542.96 0.99% Total 413,375,949.94 100% 4. Shandong Province Economic Development and Investment Co. is the control shareholder of Shandong Airlines Limited, and the relevant matter are as follows: Legal Representative: Jiang Yanwei Structure of share equity: the Ministry of Finance of Shandong Province holds 100% share equity Date of foundation: Apr. 10, 1992 Scope of business: compensated investment in development of science and technology, renovation and circulation of technology; construction of socialize service system, agriculture comprehensive development and development of education, science, culture and health (excluding socialize fund deposit and loan, finance business and capital construction investment) Registration capital: 100,000,000 5. The Company has no shareholders holding over 10% of shares of the Company except for the control shareholder. IV. Particulars about Directors, Supervisors, Senior Executives and Staff (I) Directors, Supervisors and Senior Executives Amounts at Amounts at Name Gender Age Title Office term beginning of the end of the report period report period Oct. 11, 2001 – Jia Fuwen Male 56 Chairman of the Board 0 0 Nov. 27, 2002 7 Director; Vice Secretary of Nov. 28, 1999 – Li Junhai Male 55 the Party Committee of 0 0 Nov. 27, 2002 Shanhang Group Oct. 11, 2001 – Gao Zhu Male 56 Director, General Manager 0 0 Nov. 27, 2002 Zeng Director, Nov. 28, 1999 – Male 48 0 0 Guoqiang Deputy General Manager Nov. 27, 2002 Su Director, Oct. 11, 2001 – Male 47 0 0 Zhongmin Deputy General Manager Nov. 27, 2002 Wang Director; Chief Accountant Nov. 28, 1999 – Male 48 0 0 Fuzhu of Shanhang Group Nov. 27, 2002 Director, Nov. 29, 2001 – Bai Weisan Male 44 0 0 Deputy General Manager Nov. 27, 2002 Zheng Director, Secretary of Board Nov. 29, 2001 – Male 39 0 0 Bao’an of Directors Nov. 27, 2002 Director, General Manager Nov. 28, 1999 – He Guobin Male 52 0 0 of Shandong Steco Nov. 27, 2002 Sun Nov. 29, 2001– Male 61 Independent director 0 0 Zhaokun Nov. 27, 2002 Liu Nov. 29, 1999 – Male 39 Independent director 0 0 Xingyun Nov. 27, 2002 Convener of Supervisory committee; Chairman of Wang Labor Union and secretary of Nov. 28, 1999 – Male 48 0 0 Kaixun the Commission for Nov. 27, 2002 Inspecting Disciplines of Shanhang Group Supervisor; Vice Chairman Liu Nov. 28, 1999 – Male 51 of Labor Union of Shanhang 0 0 Jianmin Nov. 27, 2002 Group Huang M ale 40 Chief of Personnel Dept of Nov. 28, 1999 – 0 0 Yuzhe Shanhang Group Nov. 27, 2002 Sun Lijun Male 39 Supervisor, Vice General Oct. 12, 2001 – 0 0 Manager of Qingdao Branch Nov. 27, 2002 Li Songlin Male 36 Supervisor, Vice General Nov. 28, 1999 – 0 0 Manager of Training Co. Nov. 27, 2002 Li Jiemin Male 44 Supervisor, Vice General Nov. 28, 1999 – 0 0 Manager of Beijing Nov. 27, 2002 Operating Dept. Zheng Male 26 Supervisor, Financial Oct. 12, 2001 – 0 0 Dianfu Manager of Shanghai Nov. 27, 2002 Operating Dept. Song Yuxia Female 45 Deputy General Manager Oct. 11, 2001 – 0 0 Nov. 27, 2002 Zhang Male 43 Chief Pilot Oct. 11, 2001 – 0 0 Qinshe Nov. 27, 2002 Yu Haitian Male 31 Chief Engineer Oct. 11, 2001 – 0 0 Nov. 27, 2002 (II) Particulars about annual salaries The salary standards of the directors, supervisors and senior executives are in accordance with the achievements and results salary system, in which results salary is linked with the Company’ s revenue. Directors, supervisors and senior executives received pay from the Company totally amounting to RMB 1.08 million (including base salary, reward, welfare, subsidy, housing allowance). The total amount of the top three directors was RMB 320,900. The total amount of the top three senior executives was RMB 288,200. The allowance for independent directors is RMB 400 per day, which will be fulfilled after being examined and passed by the shareholders’ general meeting. 8 There’s one person whose annual salary is over RMB 100,000; there were five whose annual salary was between RMB 80,000 and RMB 100,000 respectively; four enjoy RMB 60,000 to RMB 80,000 per year respectively and 2 persons enjoy below RMB 60,000 per year respectively. Director of the Company Mr. Li Junhai, Mr. Wang Fuzhu, Mr. He Guobin; Convener of Supervisory Committee Mr. Wang Kaixun; Supervisor Mr. Liu Jianmin, Mr. Huang Yuzhe, Mr. Li Songlin received no pay from the Company. Mr. He Guobin received pay from Shandong Steco Aircrafts Engineer Co., Ltd. which subsidiary company of the control shareholder of the Company, Mr. Li Songlin received pay from Shandong International Training Co., Ltd., and the rest received their pay from the control shareholder. (III) Particulars about changes in directors, supervisors and senior executive Based on the principal of high efficiency and standardized development, the Company made the adjustment on directors, supervisors and senior executives in order to implement the policy “three separation”, strengthen standardized management and perfect enterprise administrative structure. The Company accepted certain medium- level management personnel to the senior executive group, details as follows: 1. Director On Oct. 11, 2001, as approved by the 7th meeting of the 1st Board of Directors of the Company, Mr. Sun Dehan resigned the post of Chairman of the Board and Director of the Company; Mr. Ge Xuejin, Ms. Song Yuxia and Mr. Sun Lijun resigned the post of Director of the Company. In this Board of Directors, Mr. Sun Zhaokun and Mr. Liu Xingyun were nominated as the candidates for Independent Directors; and Mr. Bai Weisan and Mr. Zheng Bao’an were nominated as the candidates for Directors of the Company. The above two nomination has been examined and approved by the 2nd Extraordinary Shareholders’General Meeting 2001 dated Nov. 29, 2001. Mr. Jia Fuwen was engaged to take the post of Chairman of the Board. 2. Supervisor On Oct. 12, 2001, as approved by the 5th meeting of the 1st Supervisory Committee of the Company, Mr. Yu Haitian, Mr. Wang Wuping resigned the post of supervisor of the Company; 3. Senior executive The Company adjusted partial senior executive in the 7th meeting of the 1st Board of Directors: Board of Directors agreed to the application of Director and General Manager Mr. Jia Fuwen for resignation from the post of General Manager; Board of Directors agreed to the application of Director, Deputy General Manager and Chief Engineer Mr. Gao Zhu for resignation from the post of Deputy General Manager and Chief Engineer; Board of Directors agreed to the application of Director, Deputy General Manager and Chief Pilot Mr. Zeng Guoqiang for resignation from the post of Chief Pilot; Board of Directors agreed to the application of Director and Chief Accountant Mr. Wang Fuzhu for resignation from the post of Chief Accountant; Board of Directors agreed to the application of Director and Chief Economist Ms. Song Yuxia for resignation from the post of Chief Economist; Board of Directors agreed to the application of Director of the Company and General Manager of Qingdao Branch Mr. Su Zhongmin for resignation from the post of General Manager of Qingdao Branch; As recommended by Chairman of the Board, Mr. Gao Zhu was engaged as General Manager of the Comapny and General Manager of Qingdao Branch. As recommended by General Manager of the Company, Mr. Su Zhongmin, Mr. Bai Weisan and Ms. Song Yuxia were engaged as Deputy General Manager of the Company respectively; Mr. Zhang Qingshe was engaged as Chief Pilot; Mr. Yu Haitian was engaged as Chief Engineer and Mr. Li Qing’eng was engaged as Deputy Chief Accountant. 9 Board of Director of the Company consider: the aforesaid adjustment will meet the requirements of business development, and will be beneficial to strengthen the Company’s safety and administrative, and will promote the Company’ development with continuance, health and stabilization. (IV) About staff Ended Dec. 31, 2001, the Company has 1124 staff, including 21 persons held Master degree and Doctor degree or above, taking 1.87% of total staff of the Company; 869 persons graduated from 3-years regular college, taking 77.3% of total staff of the Company. Type Number Proportion holding total staff Flight personnel 252 22.42% Aircraft crew and maintenance man 168 14.95% Salespeople 157 13.97% Steward and stewardess (safety person) 181 16.1% Others 366 32.56% By the end of report year, there no exist retirees in the Company. V. Company Administration Structure (I) Particulars about Company Administration The Company strictly implements the Securities Law, the Company Law and other relevant laws and regulations issued by the CSRC, continuously improves its administration system, operates the Company in a standardized way, and has established modern business system. The Company has prepared administrative rules including the Rules of Procedures of Shareholders’General Meeting, the Rules of Procedures of Board of Directors, the Rules of Procedures of Supervisory Committee, the Rules of Work of General Manager and the Rules of Work of Independent Directors, etc. Generally speaking, administration of the Company was in conformity with the Administrative Standards for Listed Company issued jointly by the CSRC and State Economic and Trade Commission except that the Company has established neither professional committee on auditing, investing, nominating and salary, etc. nor standards and procedures for performance valuation on directors, supervisors and managers. The Company will improve its performance in these inadequate aspects. (II) Performance of the Independent Directors After their nomination being approved in the 2nd Extraordinary Shareholders’General Meeting 2001 dated Nov. 29, 2001, independent directors of the Company, Mr. Sun Zhaokun and Mr. Liu Xingyun conducted thorough investigation and research on the Company’ s basic status, business development and financial situation, etc. and proposed suggestions accordingly. In summary, independent directors implemented their duties perfectly. (III) Separation in Three Aspects The Company was completely independent of its control shareholders in terms of business, personnel, assets, organization and finance. Engaging principally in passenger and cargo aviation transportation, the Company was independent of its control shareholders in regard to both business and operation. The control shareholder operated in a standardized way without interfering the Company’s decision or operation directly and indirectly. Both the Board of Directors and the Supervisory Committee of the Company performed their duties independently. (IV) The Company is preparing for the establishment of performance valuation and encouraging system as well as other rewarding regulations for senior executives. VI. Particulars about Shareholders’General Meeting In the report period, the Company held one annual shareholders’general meeting and two extraordinary shareholders’general meeting. (I) April 12, 2001, the Company held its 2000 Shareholders’General Meeting in the conference room of Red-crown Crane Hotel, Yaoqiang Airport, Jinan. The Company noticed the shareholders of the meeting by means of Public Notice in China Securities and Hong Kong Ta Kung Pao dated March 8, 2001. Six shareholders/shareholder’s proxies attended the meeting, representing 262,772,545 shares, 65.69% of total shares of the Company (including 2,971,545 domestically-listed foreign shares, 1.13% of total present shares). Chairman of the Board, Mr. Sun Dehan, entrusted director and general manager, Mr. Jia Fuwen, to preside over the meeting, which directors, supervisors and senior executives of the Company attended. Notification, calling and holding of the meeting was in conformity with relevant regulations in Company Law, Rules on Regulations 10 of Shareholders’General Meeting and Articles of Association of the Company. Following proposals were examined item-by-item and approved by means of signed vote: 1. Work Report of the Board of Directors 2000; 2. Work Report of the Supervisory Committee 2000; 3. Financial Settlement Report 2000; 4. 2000 Profit Distribution Preplan and 2001 Profit Distribution Policy; 5. Proposal on Amending Articles of Association; 6. Proposal on Engaging Deloitte Touche Tohmatsu Certified Public Accountants and Hujiangdeqin Certified Public Accountants as the Company’s Auditors. 7. 2000 Annual Report and its summary. Resolutions of the meeting were published in China Securities and Ta Kung Pao dated April 13, 2001. (II) Sep. 11, 2001, the Company held its 1st Extraordinary Shareholders’ General Meeting 2001 in the conference room of Red-crown Crane Hotel, Qingdao. The Company noticed the shareholders of the meeting by means of Public Notice in China Securities and Hong Kong Ta Kung Pao dated Aug. 8, 2001. Seven shareholders/shareholder’s proxies attended the meeting, representing 261,410,200 shares of the Company, 65.35% of total shares of the Company (including 1,410,200 domestically-listed foreign shares, 0.54% of present shares). Chairman of the Board, Mr. Sun Dehan, entrusted director and general manager, Mr. Jia Fuwen, to preside over the meeting, which six directors, five supervisors and senior executives attended. Notification, calling and holding of the meeting was in conformity with relevant regulations in Company Law, Rules on Regulations of Shareholders’General Meeting and Articles of Association of the Company. Following proposals were examined item-by-item and approved by means of signed vote: 1. Report on Self-examining Qualification of A-share Additional Issuance 2. Proposal on Additionally Issuing no more than 110 million A-share 3. Proposal on Entrusting Board of Directors to Implement Affairs relevant to Additional Issuance; 4. Proposal on Investment Project funded by the Proceeds Raised from the A-share Additional Issuance; 5. Feasibility Analysis Report on Application of Proceeds Raised from RMB Ordinary Shares (A-share) 6. Proposal on Disposal of Retained Profits Accumulated before the A-share Additional Issuance; 7. Proposal on Entrusting Board of Directors to Amend Certain Items in Articles of Association of the Company and to Implement relevant Registration with Industrial and Commercial Department after Completion of the Additional Issuance; 8. Explanation to the Application of Previously-raised Proceeds by Board of Directors; 9. Special Report on Application of Previously-raised Proceeds 10. Rules of Procedures of Shareholders’General Meeting; 11. Proposal on Jointly Establishing Jinan International Airport Co., Ltd.; 12. Proposal on Establishment of International Aviation Logistics Center in Qingdao Liuting Airport. Resolutions of the meeting were published in China Securities and Ta Kung Pao dated Sep. 12, 2001. (III) Nov. 29, 2001, the Company held its 2nd Extraordinary Shareholders’General Meeting in the conference room of Red-crown Crane Hotel, Yaoqiang Airport, Jinan. The Company noticed the shareholders of the meeting by means of Public Notice in China Securities and Hong Kong Ta Kung Pao dated Oct. 27, 2001. Five shareholders/shareholder’s proxies attended the meeting, representing 260,000,000 shares of the Company, 65% of total shares of the Company. General manager, Mr. Jia Fuwen, to preside over the meeting, which all directors, supervisors and senior executives of the Company attended. Notification, calling and holding of the meeting was in conformity with relevant regulations in Company Law, Rules on Regulations of Shareholders’ General Meeting and Articles of Association. Following proposals were examined item-by-item and approved by means of signed vote: 1. Proposal on Adjusting Orientation of Proceeds Raised from Additional Issuance; 2. Proposal on Amending Articles of Association of the Company; 3. Proposal on Engaging Independent Directors; 4. Proposal on By-electing Director for the Company. Resolutions of the meeting were published in China Securities and Ta Kung Pao dated Nov. 30, 2001. It was approved in the Extraordinary Shareholders’General Meeting that Mr. Sun Zhaokun and Mr. Lui Xingyun were engaged as independent director, Mr. Bai Weisan and Mr. Zheng Baoan were engaged as director of the Company as proposed by the 7th Meeting of the 1st Board of Directors. Relevant resumes and Announcement of Independent Directors were published in China Securities and Ta Kung Pao dated Oct. 12, 2001. VII. Report of the Board of Directors (I) Business Highlights 1. Business scope and operation of the main business lines The Company is in the civil aviation industry, mainly engaging in passenger and cargo air transportation within 11 Shandong province and from Shandong province to some cities of the state as approved by relevant authority, concurrently engaging in services and operating items related to air aviation. In the report period, the Company realized an income from main business lines of RMB1311,584,370 yuan, an increase of25.87% comparing to the previous year, including revenue from passenger transportation of RMB1,236,733,110 yuan, taking94.29% of the total income, revenue from cargo and mail transportation of RMB72,834,494 yuan, taking5.55 % of the total income. In the report period, the Company also realized a agency fee of RMB2,016,766 yuan for passenger and cargo air transportation, taking0.16% of the total income. In 2001, it continued to stick to the business policy of “Security First, Enhancing Benefits”and maintained a stable increase on various transportation indexes: it transported totally 1,572,200 passengers; total transport turnover reached 181,497,600 tons -kilometer; cargo & mail load was 18,828.5 tons, up 15%, 22.5% and 36% respectively comparing to the same period of previous year. Statistics provided by Civil Aviation Administration of China (hereinafter referred to as CAAC) showed that the Company’s average passenger load factor of various model aircrafts in 2001 was 66.8%. In the report period, the Company kept on a positive trend in respect of security without any contrived accident symptom. Ended Dec. 26, 2001, the Company realized safe aviation for complete seven years and gained the title of “Excellent Enterprise with Security Valuation”granted by South of China Dept of CAAC. The Company has received the award of “Satisfactory Enterprise”issued by the National Qualification Commission for consecutive years. The innovation of “operating single aircraft and casting accounts for single aircraft”gained the National Prize for Modern Management Innovation. By the end of report period, the Company has had 27 aircrafts and airlines operating authorities of more than 240, which expressed to 62 cities of the state. 2. Operation of the held companies (1) May 2000, the company invested RMB 6,690,000 to Travelsky Technology Limited, whose business scope is: contracting of computer software and hardware project; R&D, production, sales and rent of computer software, hardware, peripheral equipment, internet products, etc.; relevant technical consultant and services; advise on trade and travel information. Feb. 7, 2001, Travelsky Technology Limited has listed its shares in Hong Kong. Total share capital was 888,157,500 shares and the Company held 0.49% of the total capital after adjustment. May 28, 2001, Travelsky Technology Limited held its 2000 Shareholders’General Meeting and approved its 2000 Annual Report without profit distribution plan. (2) The Company invested RMB 784, 000, 49% of total share capital of RMB 1,600,000, in Shandong Airline Rainbow International Travel Agency Co., Ltd., who is mainly engaged in disembarkation travel and national travel registration procedures of the Company with industrial and commercial authorities have been completed on Dec. 30, 2001. (3) Dec. 8, 2001, the Company signed Agreement on Joint Establishment of Qingdao International Aviation Logistics Center Co., Ltd. with Hong Kong Hong An (Far East) Co., Ltd.. Business scope of the Company: storage and land service for air cargo transportation, E-commerce, logistics design and implementation for the third party; consultant and relevant service for logistics business. The Company invested RMB 70 million, 70% of total share capital. The company is in the progress of preparation without operation now. 3. Particulars about supplier and customer. The calculated purchase, main of that is aviation fuel, equipments and air catering and other supplies, amount to the top five suppliers accounts for 14.2% of the Company’ s total purchase amount. The calculated sales amount to the top five customers accounts for 6.8% of the Company’ s total sales amount. 4. Problems, Difficulties and Solutions Occurred during Company’s Operation (1) Influenced by the 9.11 Event, airplanes international insurance premium rate increased by great margin, which increase the insurance expenditure of the Company. Moreover, The average annual price was higher than that of the previous year. All of these factors influenced the Company’s profitability. (2) In the year 2001, the Company continued its strategy of western development. Following the new route from Jinan to Xining started from Nov. 28, 2000, new routes from Qingdao to Yinchuan to Xining, from Jinan to Zhengzhou to Xining, and from Xining to Golmud were started in two flights per week in average. June 2001, the Company established its Xining Base for staying over. Implementation of the western development demanded partial transportation forces from the Company for airline cultivation; and the profit from new routes was comparatively lower than the cultivated routes. But the Company believed the profitability of the west routes might increase greatly with the strong market potential there, the economic development in west and the 12 improvingly increased recognition of the Company in west. (3) As the first introduction in China, CRJ-200 jets for feeder routes cannot be put into operation until certain nonprofit flight practice without passengers and other practices and trainings were completed, which resulted in the low average usage rate of the jet. Therefore, avenue from CRJ-200 jets amounted to only RMB199521.7 Thousand by the end of the report period, much lower than the estimation. .In the year 2002, the Company will arrange transportation forces for Jinan, Qingdao, Yantai, Beijing, and Harbin Base flexibly, and increased forces on original advanced routes. CRJ-200 jets gradually went into normal operation upon the completion of the training. Passengers welcomed this type of plan warmly due to its security and comfort. It is firmly believed that profitability of CRJ-200 jets will increase continually with the growth in its usage rate, perfection in airlines plan as well as enlargement in market share. (II) Investment 1.Application of raised proceeds All of five CRJ-200 jets introduced by the Company with the proceeds raised from share offering reached in the report period. The actual application of raised proceeds was in conformity with the commitment in its Issuance Memorandum, details is as follows: Application of raised Investment project Investment amount (Unit: RMB) Process of proceeds 200 2001 the project Commitment in Issuance Purchasing five US$ 26,300,000 memorandum CRJ-200 Jets Purchasing five Actual application RMB 214,837,481.68 0 100% CRJ-200 Jets Information disclosed in Purchasing five RMB 214,837,481.68 0 100% the Annual Report CRJ-200 Jets Operation of the five CRJ-200 Jets was not favorable presently due to the low usage rate, reasons referring to VII. (I). 2. Investment by non-raised fund (1)Dec. 2001, the Company invested in Shandong Airline Rainbow International Travel Agency Co., Ltd., details referring to VII. (II). (2)Dec. 2001, the Company invested in Qingdao International Aviation Logistics Center, details referring to VII. (II). (3)In order to reinforce the construction of Jinan and Qingdao bases, the Company planed to purchase the house properties of Qingdao comprehensive building and Jinan official building at Airport from Shanhang Group. Both parties have begun to implement the legal procedures according to relevant contracts. (III) Financial Highlights 1. Financial highlights (According to the International Accounting Standards) RMB’000 Increase Increased proportion Items 2001 2000 amount (+/-) (+/-,%) Total assets 1,960,839 1,301,446 659,393 50.67 Long-term liabilities 625,565 283,430 342,135 120.71 Shareholders’equity 543,127 513,557 29,570 5.76 Net operating profit 141,989 142,188 -199 -0.14 Net profit 69,570 82,802 -13,232 -15.98 2. Cause of the changes Items Cause of the changes Total assets Profit of this period, development of the production scale Long-term liabilities Long-term load for purchasing aircrafts Shareholders’equity profit of this period Net operating profit Increase of operating expenses Net profit Increase of operating expenxes and finance costs (IV) Impact of Changes in Operation Circumstances, Macro Policy and Regulation on the Company 1. As released by Ministry of Foreign Trade and Economic Cooperation: China promised to open 13 the business of plan repair and maintenance as well as internet booking system service, etc to the world, and will broaden the openness of the aviation industry gradually in the future five years pursuant to the aviation freedom spirit emphasized in General Contract on Service Trade. The Board of Directors is of the opinion that China’s entering WTO may bring negative impact on its future operation because overseas airlines company is to enter national aviation market, impact the market to certain degree and increase the keen competition of the market. To cope with the challenge, the Company enthusiastically met the requirement of the market; improved its suitability to the market and the competitive ability. Also, the Board of Directors believed that as long as the Company insists on the policy of joint development of trunk routes and feeder routes; on reinforcing the transportation on feeder routes; on introducing advanced enterprise management experience; on exerting the advantages of the Company and further perfect the marketing network, the Company can doubtlessly increase its competitive ability, stabilize and enhance its position in China’s civil air aviation market and realize its development. 2. April 5, 2002, CAAC published its scheme on aviation innovation with two main points. One point is innovating civil air aviation system, implementing appanage management and enterprise modality operation. The other point is reorganization civil aviation companies, implementing dissociation of government and enterprise. Three aviation groups, China South Airline Company, China International Airline Company and China Orient Airline Company, will been established. The Company has fully recognized both the competitive pressure from the three Airline Groups and opportunities brought with the reoccupation of market and activation of resources. The Company will enthusiastically take part in the establishment of Shandong Airlines Group, sharing the resources within the Group including airport management, flight training and plane maintenance, developing advantages and discarding shortcoming, realizing development in a flexible way, and centralizing strengths to improve competitiveness. 3. Seventeen routes of the Company were included in the joint operation after the adjustment by the end of report period. In the Company’s opinion, this joint operation regulated the disorder competition of the air aviation market to certain extend, but it also limited the exertion of the Company’s advantages of security, service and management in the competition, reducing the Company’s income. It is calculated that offset balance of the Company is RMB2,031,151. With overwhelming demand for free policy on ticket fee from various aspects of the society including the civil aviation section, CAAC has adopted multi-cabin sales policy on almost 15 routes passing Beijing, Guangzhou and Shanghai, and the lowest ticket fee may be 40% off. Although the Company was basically not included in the operation of said routes, the Board believed the policy will assure the fair competition, restrict the malignant competition and he lp the airline companies to improve the seat occupying rate and income. (V) Business Plan for 2002 1. Business development plan With China’s further development in market system and economic openness, the national economy will maintain a positive progress trend in 2002 in a general way. Both the development and competition in China’s civil aviation industry will increased. Confronting such situation, the Company resolved to adopt following measures in order to assure great progress in avenue and profit over 2001 and to realize concrete development in capital operation: (1) To reinforce the security management, the company will enhance the operating and technical level of pilot, maintenance person and cabin attendant with the thought of “the basis is maintenance, the working essence is flight”. Reinforce the security management to eradicate flight accident and maintain security record． (2) To perfect the service, the company will reduce the fault rate to assure the flight on schedule, regulate cabin service and improve the quality of catering. (3) To lower the operation cost, the company will organize cost control committee, formulate a policy about saving fuel, strength the management of flight equipment order and control the amount of flight equipment spare parts on the basis of good cooperation between company and workshops; perfect the check of consume supply for saving; to strengthen the capital management, rationalized the capital distribution and lower the financial cost. (4) To increase the profit for airlines. Fully develop Yantai, Beijing, and Xinning Base for night resting-place; to plan the trunk and feeder routes system centered the Base and optimize the resources collocation; to quick the construction of Qindao international logistical center, exert great efforts on logistics by air aviation for cargo 14 transportation; to advertise the good reputation of “feeder and tourism for aviation”; to join the China Express mail service net and improve two 737 cargo planes usage rate; cooperate with other airlines to start international cargo routes to circumjacent countries and districts (5) To set the ideology of customer as standards, the company will implement ISO9001 Qualification Management Certification System, and resolve to gain the international routes operating authorization approved by CAAC and OQS certification issued by IATA. In the year 2002, the Company will try to meet the new requirement from China’s WTO entrance, manage the Company in compliance with laws and operate in a steady development mode. Also, the Company will strive for the cooperation with other airlines companies in aspects of business and capital based on the principal of security and profit. In summary, the Company will make every effort to realize a consistent, rapid, healthy and overall development in the new year. 2. Investment plan in 2002 In 2002 and the period of tenth “Five Year Plan”, the Company will carefully conducted feasibility research decision procedure on the planed investment project. The Company planned to invest in or start following projects in 2002: m (1) To introduce B737-800 aircraft to support the original trunk flights, increase the number of runs and improve the competitiveness; (2) To complete the purchase and reconstruction of Qingdao integrate building. (3)To complete the purchase of Shandong Airlines Rainbow Official Airplane Company, and enthusiastically develop the market of official airplane; (4) To participate in the reorganization and Joint Operation with local airlines companies; (5) To establish Jinan International Airport Co., Ltd. as a promoter, and start the second phase construction of Jinan Airport. The aforesaid projects will be started upon necessary legal procedure. In the opinion of the Board of Directors, above investments will expand the Company’s business into relevant sections while stabilizing its main business, integrate the aircraft resources and optimize the resources collocation, so to promote the Company’ s development. In 2002, the Company will invest in and start aforesaid projects after careful schedule considering its actual capital status. (VI) Routine Work of the Board of Directors 1. Board of Directors held six meetings in 2001. March 6, 2001, the Company held the 5th Meeting of the 1st Board of Directors. All directors attended the meeting with all supervisors present as non-voting delegates, in which following resolutions were examined and adopted unanimously: (1) 2000 Work Report of the Board of Directors; (2) 2000 Work Report of the General Manager; (3) 2000 Financial Settlement Report; (4) 2000 Profit Distribution Plan and 2001 Profit Distribution Policy; (5) 2000 Annual Report and the summary; (6) Proposal on Amending Articles of Association of the Company, quality of the Company was changed to foreign funded joint limited company; (7) Proposal on Changing Representative in charge of Securities Affairs; (8) Proposal on Holding 2000 Shareholders’General Meeting; March 22, 2001, the Board held its first provisional meeting in 2001. All directors attended the meeting with all supervisors present as non-voting delegates, in which following resolutions were examined and adopted unanimously: (1) Resolved to rent two CRJ-200 aircrafts, further increase aircrafts operated in the feeder routes (2) Resolved to introduce five CESSNA “Caravan”aircrafts. May 8, 2001, the Board held its second provisional meeting in 2001. All directors attended the meeting with the convener of the Supervisory Committee present as non-voting delegates, in which it was examined and adopted unanimously to abandon the reorganization plan on Shanxi Airlines Co., Ltd.. July 20, 2001, the Company held the 3rd provisional meeting of the 1st Board of Directors. Eleven directors were expected to attend the meeting and actually nine of them were present, convener of the Supervisory Committee and senior executives of the Company also attended the meeting as non-voting delegates. Following resolutions were examined and adopted unanimously in the meeting: (1) Resolved to jointly establish Jinan International Airport Co., Ltd. as a promoter and start the initial construction of the second phase of Jinan Airport; (2) Resolved to establish an aviation logistics center in an area covering 133,332 square meter in Qingdao Liuting Airport to facilitate the aviation cargo transportation after the B737 cargo aircraft reaching in Sep; concrete complementation of the project was entrusted to the management group. The said project is subject to 15 the Shareholders’General Meeting for examination and approval. Aug. 6, 2001, the Company held the 6th Meeting of the 1st Board of Directors All directors attended the meeting with all supervisors present as non-voting delegates, in which following resolutions were examined and adopted unanimously: (1) 2001 Interim Report and the summary; (2) Report on Self-examining Qualification of A-share Additional Issuance; (3) Proposal on Additionally Issuing no more than 110 million A-share; (4) Proposal on Entrusting Board of Directors to Amend Certain Items in Articles of Association of the Company and to Implement relevant Registration with Industrial and Commercial Department after the Completion of the Additional Issuance (5) Feasibility Analysis Report on Application of Proceeds Raised from RMB Ordinary Shares (A-share) (6) Proposal on Disposal of Retained Profits Accumulated before the A-share Additional Issuance; (7) Explanation to the Application of Previously-raised Proceeds by Board of Directors; (8) Rules of Procedures of Shareholders’General Meeting, subject to the Shareholders’General Meeting for approval; (9) Rules for work of General Manager; (10) Proposal on Holding the 1st Extraordinary Shareholders’General Meeting 2001 Oct. 11, 2001, the Company held the 7th Meeting of the 1st Board of Directors All directors attended the meeting with all supervisors present as non-voting delegates, in which following resolutions were examined and adopted unanimously: (1) Resolved to reduce the proceeds from additional share offering from RMB 1 trillion to no more than 567 million, which would be used to introduce two B737-800 aircrafts and relevant aviation materials and land facilities; (2) Resolved to sell three caravan aircrafts to Shenzhen Finance Rent Co., Ltd. at the price of book value; (3) Resolved to purchase four Challenger 604 Official Aircrafts from Bombardier Aerospace of Canada; (4) Resolved to stop renting four SAAB340 aircrafts upon the expiration of the renting; (5) Proposal on Amending Articles of Association of the Company； (6) With a view to perfecting company administrative structure and scientific and fair decision, based on the principal of high efficiency and standardized development, pursuant to Guiding Opinion on Engaging Independent Directors in Listed Company (AJF [2201] No. 102 document), the Board of Directors of the Company proposed to engage independent director and made following adjustment on its personnel: A. resignation reports of Mr. Sun Dehan, Chairman of the Board and director of the Board, Mr. Ge Xuejin, Mr. Sun Lijun, and Ms. Song Yuxia, Directors of the Board, were approved in the meeting; B. Mr. Sun Zhaokun and Mr. Liu Xingyun were nominated as independent director; Mr. Bai Weisan and Mr. Zheng Bao’an were nominated as directors for the Company by the Board. The changes in directors of the Company are subject to the next Shareholders’General Meeting for examination and approval. (7) In order to regulate the company administrative structure and meet the requirements of business development, the Company accepted certain medium-level management personnel with thorough professional background and profound management experience to the senior executive group, details as follows: A. Resignation of following senior executives were approved in the meeting: Mr. Jia Fuwen, director and general manager; Mr. Gao Zhu, deputy general manager and general engineer; Mr. Zeng Guoqing, director, deputy general manager and general aviator; Mr. Wang Fuzhu, director, deputy general manager and general accountant; Ms. Song Yuxia, director and general economist. B. Director Jia Fuwen was elected as chairman of the Board; Mr. Gaozhu was engaged as general manager of the Company and concurrent general manager of Qingdao Branch as nominated by the chairman of the Board; Mr. Su Zhongmin, Mr. Bai Weisan and Ms. Song Yuxia were engaged as deputy general manager as nominated by the general manager; Mr. Zhang Qingshe was engaged as general aviator, Mr. Yu Haitian was engaged as general engineer, and Mr. Li Qing’en was engaged as vice general accountants. Position of general economist was approved cancel. 2. Implementation of resolutions of the shareholders’general meeting by the Board of Directors (1) According to 2000 Profit Distribution Preplan approved in 2000 Shareholders’General Meeting dated April 12, 2001, the Company’ s profit distribution plan of the previous year: cash bonus totaling RMB 40 million was distributed to the whole shareholders at the rate of RMB 1.0 for every 10 shares based on total share capital of 400 million shares as at Dec. 31. 2000. The remaining attributable profit RMB 23,621,900 was carried down the next year for distribution and no public reserve transferring into share capital. May 8, 2001, the Company published the Notice on Dividend Distribution and implemented the said profit distribution. According to 2001 profit distribution policy disclosed in 2000 Annual Report, the Company conducted neither profit distribution nor public reserve transferring into share capital in the interim of 2001. The Company conducted no share allotment in the report period. Proposal on Amending Articles of Association of the Company approved in 2000 Shareholders’General Meeting was fully implemented. 16 According to Proposal on Engaging Deloitte Touche Tohmatsu Certified Public Accountants and Hujiangdeqin Certified Public Accountants as the Company’s Auditors approved in 2000 Shareholders’General Meeting, the said two Certified Public Accountants was engaged as the Company’s auditors for one year. (2) According to resolutions relevant to the additional A-share issuance approved in the 1st Extraordinary Shareholders’General Meeting dated Sep. 11, 2001, Board of Directors has carried out relevant procedures authorized by the Shareholders’ General Meeting and relative regulations, as well as the preparation of necessary documents by the end of 2001. Since CSRC has not released additional issuance policies for B-share listed company and refused to accept the application materials, it is difficulties for the Company to additionally issue A share. Nevertheless, the Company will closely watch the policies made by the authority and try to complete the A-share issuance as soon as possible in 2002. According to Proposal on Establishing International Aviation Center in Qingdao Liuting Airport, approved in the 1st Extraordinary Shareholders’General Meeting 2001, the company and Hang Kong Hongan (Far East) made an investment agreement of BMB100,000,000 to establish Qingdao International Logistics Center. The Company promised to invest material and cash valued RMB 70 million (70% of the total share capital) totally in the International Logistics Center and actually RMB16,146 Thousand has been ready. (3) Procedure for implementing Proposal on Adjusting Investment Orientation of the Raised Proceeds approved in the 2nd Extraordinary Shareholders’General Meeting 2001 has been completed. Proposal on Amending Articles of Association approved in the 2nd Extraordinary Shareholders’General Meeting 2001 has been implemented. The Company has made adjustment on its Board of Directors and senior management group according to Proposal on Engaging Independent Director and By-electing director for the Company. 3. Self-inspection on standardized operation and correspondent correcting measurements Pursuant to Circular on Conducting Self-inspection on Standardized Operation of Listed Company released by Jinan Securities Regulatory Office on Oct. 30, 2001, the Company conducted self-examination carefully and formulated following correspondent correcting measurements: (1) Nomination of two independent directors was approved in the 2nd Extraordinary Shareholders’General Meeting 2001 dated Nov. 29, 2001. The independent directors have not received the professional training organized by CSRC due to time problem. The Company has planned for the independent director to receive training. (2) The present trademark used by the Company belongs to Shandong Airline Group. The Company has negotiated with the Group to purchase the trademark based on the appraisal of professional valuation agency. (3) There existed difference between the actual profits from raised-proceeds with the estimation, details referring to V. (I). The Board has made and implemented measurements including increasing aircraft usage rate, etc. after careful analysis on the difference. The aforesaid inspection and correcting measurements has been examined and approved in the Board Meeting and included in 2002 Work Plan for further implementation. (VII) Profit Distribution Preplan and Capital Public Reserve Transferring into Share Capital Preplan According to the auditing result concluded by Deloitte Touche Tohmatsu Certified Public Accountants in line with international accounting standard and auditing result concluded by Hujiangdeqin Certified Public Accountants in line with Chinese accounting standard, the Company’ s net profit realized in 2001 was respectively RMB69,570 Thousand and RMB54,942 Thousand. According to the provisions of Detailed Implementation Rules on Listing Domestically Listed Foreign Shares by Company with Limited Liabilities and Articles of Association of the Company, between the index of accumulative distributable profit after tax in the financial statements formulated in line with Chinese accounting standard and audited by certified public accountants and the index of accumulative distributable profit after tax in the financial statements formulated in line with international accounting standard or accounting standard of place where the proceeds raising happened, the lower amount should be chosen as the distributable profit after tax. So the Company’ s distributable profit after tax was from the index of overseas financial statements but the statutory public reserve and public welfare fund were accrued according to the domestic financial statements. Based on the net profit realized this year RMB54,942 Thousand, deducting 10% statutory public reserve of RMB5,494 Thousand and 5% of statutory public welfare fund of RMB2,747 Thousand, adding undistributed profit at the beginning of the year RMB23,623 Tousand, distributable profit 17 as of the year available to all shareholders is RMB70323.7 Thousand. According to the 2001 Profit Distribution Policy adpoted by the Company’s 2000 Shareholders’General Meeting.The Preplan of Profit Distribution of 2001 is as follows: based on total share capital 400 million shares, the Company will distribute cash bonus totaling RMB 24,000 Thousand to all shareholders at the proportion of RMB 0.6 bonus for every 10 share. The remaining diatributable profit RMB 46,323.7 Thousand will be transferred to the next year. No public reserve transeferring into share capital will be comducted in this year. The forsaid distribution plan is subject to the Company’ s Shareholders’General Meeting 2001 for examination and approval. VIII. Report of the Supervisory Committee (I) Particulars about work of Supervisory Committee The Company held three meetings of Supervisory Committee in the report period. 1. March 6, 2001, the Company held the 3rd Meeting of the 1st Supervisory Committee with all supervisors present. Following proposals were examined and approved in the meeting: 2000 Work Report of the Supervisory Committee, 2000 Annual Report and the summary, 2000 Financial Settlement Report, 2000 Profit Distribution Preplan, 2001 Profit Distribution Policy, Proposal on Amending Articles of Association of the Company, Proposal on Self-examination of Standardized Regulation, Internal Management System on Provisions for Devaluation of Assets and Disposal of Losses, Internal Auditing Regulation and Provisional Rules on Investment Management. 2. Aug. 6, 2001, the Company held the 4th Meeting of the 1st Supervisory Committee with all supervisors present. Following proposals were examined and approved in the meeting: 2001 Interim Report and the summary, Rules for working of General Manager, Self-examination Report on Qualification of Additional A-share Issuance, Proposal on Additionally Issuing no more than 110 million A Share. The Supervisory Committee conducted careful inspection on duty performance of the Company’s director, manager and other senior executives, and found no action disobeying the national laws, regulations, or the Articles of Association or harming the interests of the Company. 3. Nov. 11, 2001, the Company held the 5th Meeting of the 1st Supervisory Committee with all supervisors present. It was approved that Mr. Yu Haitian and Mr. Wang Wuping resigned from the post of supervisor. In the Employee’s Representatives’ General Meeting, Mr. Sun Lijun and Mr. Zheng Dianfu were elected as employees’representative supervisor. (II) Report of the Supervisory Committee The Supervisory Committee of the Company believed that: 1. The Company conducted regulated operation in 2000 complying to Company Law, Securities Law, Articles of Association of the Company, and Rules for Shares Listed with Shenzhen Stock Exchange and other national relevant policies and regulations. It implemented the internal management systems as Internal Management System concerning Accruing Various Provisions for Price Falling of Assets and other Method for Limiting Losses, Management Regulations on Internal Auditing, Provisional Method for Investment Management, etc. Following the regulations and laws and being honest with faith and diligence, directors and senior executives of the Company carefully implemented every resolutions approved by shareholders’general meeting with a view to protecting the shareholders’interests. There was no such situation that directors or senior executives broke the laws, regulations, or Articles of Association or harmed the interests of the Company in their office term. 2. The accountant materials as accountant vouchers, books and statements were genuine and standard. 3. Total proceeds raised from placement of domestically listed foreign shares in 2000 were used for five CRJ-200 aircrafts as promised in the Placement Memorandum. The application of the previously-raised proceeds was audited by Hujiangdeqin Certified Public Accountants with Special Auditors’Report published on China Securities and Ta Kung Pao dated Aug. 8, 2001. 4. Related transaction of the Company was carried out strictly by the market discipline in reasonable price. The transaction was fair and just for preserving the interests of the shareholders and the Company. 5. Deloitte Touche Tohmatsu Certified Public Accountants and Hujiangdeqing Certified Public Accountants audited the Company’ s financial statements of 2001 respectively according to 18 international accounting standards and Chinese accounting standards, issued auditor’s reports without reserved opinion which genuinely, subjectively and exactly represented the Company’ s financial and operation situation. IX. Significant Event (I) In the report year, the Company had witnessed no important lawsuit or arbitration. (II) Purchase and sales of assets, Merger and Consolidation As Resolved in the 1st Provisional Meeting of the 1st Board of Directors in 2001, the Company planed to purchase five CESSNA “Caravan” aircrafts with self-raised fund. Three has been purchased in the first installation at the price of RMB 48, 597,082.67 in total. In the 3rd Meeting of the 1st Board of Directors 2000, the Company resolved to reorganize with Shanxi Airlines Company to form Shanxi Airlines Co., Ltd. However the reorganization plan was cancelled after approval in the 2nd Provisional Meeting of the 1st Board of Directors 2001 due to certain disagreement between the two parties. Relevant Notice was published on China Securities and Ta Kung Pao dated May 9, 2001. According to resolution of the 7th Meeting of the 1st Board of Directors, the Company sold three caravan aircrafts o Shenzhen Finance Renting Co., Ltd. at the price of book value of the three small-sized aircrafts, which is less than 10% of net assets of the Company and imposed no changes on the Company’s assets structure. Other two caravan aircrafts will be sold to Shandong Airlines Rainbow Official Aircrafts Co., Ltd.. The Company resolved in its 7th Meeting of the 1st Board of Directors to purchase two Challenger 604 Official Aircrafts from Bombardier Aerospace of Canada with loan borrowed home and abroad. According to the approved document [2002] No. 105,Shandong Airlines Rainbow Official Aircrafts Co. Ltd. will operate the two Aircrafts after delivery. The aforesaid purchase and sales of assets, merger and consolidation imposed no impact on the Company’ s consistency in business and stability of management. (III) Material Related Transaction The Company conducted related transactions with its control shareholder and its subsidiaries presently; and all these related transactions were inevitable and necessary for the Company. Quality, price and efficiency of the service or products involved in the related transaction as well as the market environment were carefully studied and analyzed before the related transaction. All related transactions were carried out at the fair price based on the principal of publicity, fairness and justice without harming interest of the Company other shareholders. Besides related transactions disclosed in the Issuance Memorandum, the Company had following related transactions in the report period: 1. The Company invested RMB 790 Thousand, 49% of total investment, to jointly establish Shandong Airlines Rainbow International Travel Agency Co., Ltd., total investment of RMB 1,600,000, with its control shareholder. 2. Aircrafts leasing income RMB1518 Thousand from Shandong International Airlines Training Co., Ltd.; the associated enterprise of the control shareholder. (IV ) Material Contract and the Implementation 1. Assets entrustment, contract and rent (1) March 22, 2001, the Company signed Contract with GENERAL ELECTRIC CAPITAL CORPORTATION and CHINA AVIATION SUPPLIES IMPORT & EXPORT CORPORATION to rent two CRJ-200 aircrafts, which were ready in Sep. and Oct. 2001 respectively to increase the flight forces in feeder routes. (2) March 28, 2001, the Company signed contract with AIRPLANES HOLDINGS LIMITED and CHINA AVIATION SUPPLIES IMPORT & EXPORT CORPORATION to rent two 737-300QC aircrafts, which was not ready due to the 9.11 Event rather than the planned Oct.. Purpose of renting these two aircrafts was to start cargo transportation routes and development the cargo transportation market, so to cultivate new economic growth point. The planes have been ready on Jan. 27 and 31, 2002 respectively and were gone into operation at Qingdao or other bases. Sep. 5, 2001, the Company signed Contract with GENERAL ELECTRIC CAPITAL CORPORTATION TO RENT TWO challenger 604 Official Aircrafts with rent period of 96 months. The two planes were expected to be ready in March and July 2002. According to the approved document [2002] No. 105,Shandong Airlines Rainbow Official Aircrafts Co. Ltd. will operate the two Aircrafts. Oct. 2001, Xinjiang Airlines Company singed Contract with the Company to rent one Boeing 737-300 aircrafts with rent period from Oct. 28, 2001 to June 30, 2002. Four SAAB340 aircrafts (nationality and record series number as B-3655, 3656, 3657, 3658) rented by the Company from Shandong Airplane Group were matured in term of rent on Nov. 26, Dec. 8, Dec. 16, Dec. 19, 2001 respectively and were all returned. Thus the related transaction no longer existed. 2. The Company provided no guarantee for others in the report period. 3. The Company had no entrusted financing in the report period. 19 4. Other material contract (1) The Company pledged five CRJ-200 Jets, two of which were pledged to Industrial and Commercial Bank of China, Shandong Branch and three of which were pledged to National Development Bank (pledge rate at 70.2%) as guarantee for loan original borrowed for purchasing the five aircrafts. Above payment method of purchasing aircrafts is normal and rational for Airlines Company. Currently, the Company enjoys a normal operation and implements its repaying obligation as scheduled. As for the five aircrafts, the Company owns all their usage rights. (2) Long-term and short-term liabilities of the Company totaled RMB 1,221,941,844 by the end of report period. The Company has disclosed all material contracts as above. (V) The Company has no entrust anyone to manage its cash assets in the report period. (VI) Commitment of the control shareholder and shareholder with over 5% shares of the Company Shanhang Group holds 64.8% equity of the Company presently as the control shareholder. Nov. 8, 1999, the control shareholder has made a written commitment on not engaging the same industry as the Company’s. In the report period, the control shareholder strictly obeyed its commitment. The Company had no other shareholder with over 5% shares of the Company. (VII) Engagement of Certified Public Accountants According to resolution of the 4th Meeting of the 1st Board of Directors, the Company decided to engage Hujiangdeqin Certified Public Accountants and Deloitte Touche Tohmatsu Certified Public Accountants as the Company’s auditor agents. 2000 Shareholders’General Meeting of the Company dated April 12, 2001 has examined and approved the engagement. The Company has paid the two Certified Public Accountants RMB1200 Thousand totally (include Interim Audition). (VIII) No punishment was imposed on the Company, its directors or senior executives by the supervisory authorities in the report period. (IX) The Company experienced neither material events as stated in Article 62, Securities Law and Article 17, Detailed Rules for Information Disclosure of Company Publicly Issuing Shares (Draft) nor material events decided by the Board to disclose. (X) Other Material Events (1)April 18, 2001, the Company signed Agreement on Establishing China Zhongtian Airlines Enterprise Group with Shanghai Airlines Company, Shenzhen Airlines Company, Sichuan Airlines Company, Wuhan Airlines Company, and China Post Airlines Company. Now, comprehensive cooperation within the parties were conducted including route joint operation and connection, code sharing, transmit services, E-commerce platform development, passenger, cargo and post transportation, entrustment and cooperation of land services, support of aircraft and flight materials, aircrafts maintenance and flight training, etc. (2)According to article four of CS [2000] No. 99 Document, the company has not enjoy favorable income Tax Policy of paying tax at 33% first with 18% return later from Jun. 1, 2002. X. Financial Report AUDITORS' REPORT TO THE SHAREHOLDERS OF SHANDONG AIRLINES CO., LTD. 山东航空股份有限公司 (Established in the People's Republic of China) We have audited the accompanying balance sheet of Shandong Airlines Co., Ltd. as of December 31, 2001 and the related statement of operations, cash flows and changes in equity for the year then ended. These financial statements are the responsibility of the Company's management and have been prepared in accordance with International Accounting Standards. 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. Thos e 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 20 financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2001 and the results of its operations and its cash flows for the year then ended, in accordance with International Accounting Standards. Deloitte Thouche Tohmatsu Certified Public Accountants Hong Kong, March 11, 2002 21 STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001 NOTES 2001 2000 RMB'000 RMB'000 OPERATING REVENUE 4 Passenger 1,199,586 959,630 Cargo and mail 70,647 46,148 Interest income 7,830 1,955 Others 9,919 5,791 _________ _________ TOTAL OPERATING REVENUE 1,287,982 1,013,524 _________ _________ OPERATING EXPENSES Depreciation and amortisation 93,222 43,321 Take-off and landing charges 118,495 104,630 Personnel 77,895 53,077 Fuel 260,932 223,865 Maintenance and overhaul 98,768 88,889 Catering 45,143 36,286 Rental 278,722 199,515 Insurance 10,318 4,644 Promotion and sales 96,755 64,747 General and administration 25,011 16,637 Others 40,732 35,725 _________ _________ TOTAL OPERATING EXPENSES 1,145,993 871,336 _________ _________ PROFIT FROM OPERATIONS 6 141,989 142,188 FINANCE COSTS 7 (62,496) (11,990) _________ _________ PROFIT BEFORE TAXATION 79,493 130,198 INCOME TAX EXPENSE 8 (9,923) (47,396) _________ _________ NET PROFIT FOR THE YEAR 69,570 82,802 _________ _________ TRANSFER TO RESERVES 19 Statutory surplus reserve (5,494) (9,313) Statutory public welfare fund (2,747) (4,656) _________ _________ (8,241) (13,969) _________ _________ PROFIT CARRIED FORWARD 61,329 68,833 21 RMB RMB Basic earnings per share 10 17.4 cents 27.1 cents _________ _________ _________ _________ 22 BALANCE SHEET AT DECEMBER 31, 2001 NOTES 2001 2000 RMB'000 RMB'000 ASSETS Non-current assets Property, plant and equipment 11 1,316,944 675,356 Intangible asset 12 26,519 - Investment in an associate 13 784 - Advances on aircraft and related equipment 63,026 149,331 Advances on land and buildings 39,000 - Unlisted investment 14 6,690 6,690 Deferred taxation 23 22,242 12,679 _________ _________ 1,475,205 844,056 _________ _________ Current assets Flight equipment spare parts and other inventories 15 27,773 21,564 Trade and other receivables 166,238 166,423 Amount due from holding company 16 638 3,056 Amounts due from related parties 17 2,148 - Bank term deposits 106,700 144,139 Bank balances and cash 182,137 122,208 _________ _________ 485,634 457,390 _________ _________ Total assets 1,960,839 1,301,446 _________ _________ _________ _________ LIABILITIES AND SHAREHOLDERS' EQUITY Shareholders' equity Share capital 18 400,000 400,000 Reserves 19 143,127 113,557 _________ _________ 543,127 513,557 _________ _________ Non-current liabilities Bank loans - due after one year 20 592,459 283,430 Other loan 21 33,106 - _________ _________ 625,565 283,430 23 _________ _________ Current liabilities Trade and other payables 168,950 197,482 Sales in advance of carriage 10,412 11,944 Amounts due to related parties 22 4,692 5,540 Taxation payable 11,716 6,069 Bank loans - due within one year 20 596,377 283,424 _________ _________ 792,147 504,459 _________ _________ Total liabilities and shareholders ' equity 1,960,839 1,301,446 _________ _________ _________ _________ The financial statements on pages 2 to 25 were approved by the board of directors and authorised for issue on March 11, 2002 and are signed on its behalf by: Zeng Guoqiang Zheng Baoan DIRECTOR DIRECTOR 24 STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED DECEMBER 31, 2001 Reserves Statutory Statutory Share Share Capital surplus public Retained capital premium reserve (note) reserve welfare fund earnings Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 Balance at January 1, 2000 260,000 1,421 (40,886) 395 198 (5,210) 215,918 Issue of shares, net of expense 140,000 74,837 - - - - 214,837 Net profit for the year - - - - - 82,802 82,802 Transfer to statutory surplus reserve - - - 9,313 - (9,313) - Transfer to statutory public welfare fund - - - - 4,656 (4,656) - _________ _________ __________ _________ _________ _________ _________ Balance at December 31, 2000 & January 1, 2001 400,000 76,258 (40,886) 9,708 4,854 63,623 513,557 Net profit for the year - - - - - 69,570 69,570 Transfer to statutory surplus reserv e - - - 5,494 - (5,494) - Transfer to statutory public welfare fund - - - - 2,747 (2,747) - Dividends - - - - - (40,000) (40,000) _________ _________ __________ _________ _________ _________ _________ Balance at December 31, 2001 400,000 76,258 (40,886) 15,202 7,601 84,952 543,127 _________ _________ __________ _________ _________ _________ _________ _________ _________ __________ _________ _________ _________ _________ Note: Capital reserve arose from the reorganisation, in which the Company took over the air transportation service business from the holding company, Shandong Airlines Limited 山东航空 有限责任公司, by issuing the Company's shares to the holding company. The transfer of the Company's assets under the reorganisation was calculated based on the financial statements prepared in accordance with accounting standards and regulations applicable to enterprises in the People's Republic of China. 25 CASH FLOW STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2001 2001 2000 RMB'000 RMB'000 OPERATING ACTIVITIES Net profit before taxation 79,493 130,198 Adjustments for: Depreciation and amortisation 93,222 43,321 (Gain) loss on disposal of property, plant and equipment (2,552) 36 Interest expenses 62,496 11,990 Interest income (7,830) (1,955) _______ _______ Operating cash flows before movements in working capital 224,829 183,590 Increase in trade and other receivables (19,713) (58,084) Increase in amounts due from related parties (2,148) - Increase in flight equipment spare parts and other inventories (6,209) (4,048) (Decrease) increase in trade and other payables (28,532) 45,847 Decrease in amount due to holding company - (5,844) (Decrease) increase in amounts due to related parties (848) 1,848 (Decrease) increase in sales in advance of carriage (1,532) 4,130 _______ _______ Net cash generated from operations 165,847 167,439 Interest paid (65,842) (17,953) Taxation paid (13,839) (53,659) Interest received 7,830 1,955 _______ _______ Net cash generated from operating activities 93,996 97,782 _______ _______ INVESTING ACTIVITIES Purchase of aircraft and related equipment (744,965) (401,034) Addition of intangible asset (27,915) - Repayment from (advance to) holding company 2,418 (3,056) Purchase of other equipment (11,249) (11,652) Investment in an associate (784) - Decrease (increase) in advances on aircraft and related equipment 86,305 (82,536) Increase in advances on land and buildings (39,000) - Proceeds from disposal of property, plant and equipment 48,596 4 Decrease (increase) in bank term deposits 37,439 (144,139) Purchase of unlisted investments - (6,690) _______ _______ Net cash used in investing activities (649,155) (649,103) 26 2001 2000 RMB'000 RMB'000 FINANCING ACTIVITIES New bank loans obtained 1,600,908 682,987 New other loan obtained 33,106 - Proceeds from issue of shares, net of expenses - 214,837 Repayment of bank loans (978,926) (321,232) Dividend paid (40,000) - _________ _________ Net cash generated from financing activities 615,088 576,592 _________ _________ NET INCREASE IN CASH AND CASH EQUIVALENTS 59,929 25,271 CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 122,208 96,937 _________ _________ CASH AND CASH EQUIVALENTS AT END OF THE YEAR, represented by bank balances and cash 182,137 122,208 _________ _________ _________ _________ 27 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2001 GENERAL Shandong Airlines Co., Ltd. (the "Company") was established in the People's Republic of China ("PRC") on December 13, 1999 and is responsible for its own operations, subject to the supervision and regulation of the Civil Aviation Administration of China ("CAAC"), a regulatory authority of the civil aviation industry in the PRC. Its B shares are listed on the Shenzhen Stock Exchange (the "Stock Exchange") with effect from September 12, 2000. Its holding company is Shandong Airlines Limited 山东航空有限责任 公司, a company also established in the PRC. The Company maintains its accounting records and prepares its statutory financial statements in Renminbi, in which the majority of the Company's transactions are denominated. The statutory financial statements are prepared in accordance with accounting standards and regulations applicable to enterprises in the PRC ("PRC GAAP"). However, these financial statements have been prepared in accordance with International Accounting Standards ("IAS") for the shareholders of the Company's B shares listed on the Stock Exchange. Differences between IAS and PRC GAAP are stated in note 30. The principal activities of the Company are the provision of domestic passenger and cargo air transportation services. ADOPTION OF INTERNATIONAL ACCOUNTING STANDARDS In the current year, the Company has adopted the IAS 39, "Financial Instruments: Recognition and Measurement", for the first time. The adoption of this standard has had no material effect on the results of the Company for the current or prior periods. 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. 28 SIGNIFICANT ACCOUNTING POLICIES The financial statements have been prepared under the historical cost convention and in accordance with IAS. The principal accounting policies adopted are set out below: Revenue recognition Passenger and cargo sales are recognised as operating revenue when the transportation service is provided rather than when a ticket is sold. Such revenue is reported net of business tax. The value of unflown passenger and cargo sales is recorded as a current liability in the sales in advance of carriage account. Interest income is accrued on a time basis, by reference to the principal outstanding and at the interest rate applicable. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation or amortisation. Depreciation and amortisation are provided to write off the cost of property, plant and equipment to their estimated residual values over their estimated operational lives. Operational lives and residual values are reviewed annually in light of experience and changing circumstances. (i) Aircraft and related equipment Aircraft are depreciated, using the straight-line method, over their estimated operational lives of 12 to 15 years with a residual value of 5% of the original cost. Related equipment is depreciated, using the straight-line method, over 12 to 18 years. (ii) Other equipment Other equipment are depreciated, using the straight-line method, over their estimated operational lives of 8 to 10 years with a residual value of 5% on the cost of the property, plant and equipment. Construction in progress Construction in progress, being equipment under construction and equipment pending installation in the aircraft, is carried at cost. Cost comprises the direct cost of construction, the cost of equipment as well as finance charges from borrowings used to finance these assets during the construction or installation period. No depreciation is provided on construction in progress until the asset is completed and put into use. 29 3. SIGNIFICANT ACCOUNTING POLICIES - continued Intangible asset Intangible asset represents re-imbursable recruitment and initial training costs incurred for pilots, which is measured initially at purchase cost and amortised on a straight-line basis over the average years of services of the pilots. Investment in an associate An associate is an enterprise over which the Company is in a position to exercise significant influence, through participation in the 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 investments is reduced to recognise any impairment in the value of individual investments. Investments Long-term investments are stated at cost less impairment loss, where the investment's company amount exceeds its estimated recoverable amount. Capitalisation of borrowing costs Interest on advances made in connection with the acquisition of aircraft is capitalised as an additional cost of the aircraft. Interest is capitalised at the weighted average interest rate on the total borrowings or, where applicable, the actual interest rate applicable to the specific borrowings . Capitalisation of interest ceases when the aircraft is placed into revenue earning service. All other borrowing costs are recognised in net profit or loss in the period in which they are incurred. Flight equipment spare parts and other inventories Flight equipment spare parts and other inventories are stated at the lower of cost and net realisable value. Cost is calculated using the weighted average method. Manufacturers' credits In connection with the acquisition of certain aircraft and related equipment, various credits are received from the manufacturers. These credits are applied as a reduction of the acquisition costs of the related aircraft and related equipment. Aircraft maintenance and overhaul costs Costs for routine maintenance and over haul of aircraft and related equipment are charged to operating expenses as and when incurred. 30 3. SIGNIFICANT ACCOUNTING POLICIES - continued 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 balance sheet liability method in respect of temporary 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 all 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 tax profit nor the accounting profit. 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. Impairment At each balance sheet date, the Company reviews the carrying amounts of its tangible 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 Company 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. Impairments losses are recognised as an expense immediately. Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of it 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. Leasing Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease. 31 3. SIGNIFICANT ACCOUNTING POLICIES - continued Financial instruments Financial assets and financ ial liabilities are recognised on the Company's balance sheet when the Company has become a party to the contractual provisions of the instrument. Trade and other receivables, amount due from holding company, amounts due from related parties and advances on aircraft and related equipment are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts. Long-term investments are stated at cost less impairment loss, where the investment's carrying amount exceeds its estimated recoverable account. Trade and other payables and amounts due to related parties are stated at their nominal value. Interest-bearing bank loans and other loans 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. Provisions Provisions are rec ognised when the Company 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. Provisions for restructuring costs are recognised when the Company has a detailed formal plan for the restructuring which has been notified to affected parties. Foreign currencies Transactions in currencies other than Renminbi are initially recorded at the rates of exchange prevailing on the dates of the transactions. Monetary assets and liabilities denominated in such currencies are retranslated 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. Retirement scheme The Company participates in a defined contribution retirement scheme organised by the municipal government of the province in which it operates. The contributions to the scheme are charged to operating expenses as and when incurred. Cash equivalents Cash equivalents represent short-term, highly liquid investments which are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. 32 OPERATING REVENUE Operating revenue represents revenue earned principally from the carriage of passengers, cargo and mail. Operating revenue from other services represents services provided to third parties as well as commission income earned on tickets sold by the Company for which the carriage is provided by other airlines. Operating revenue is net of sales tax which are calculated at the following rates: Tax Applicable rates on revenues Sales tax 3% on traffic revenue from domestic flights Sales tax 5% on other revenue, except interest income BUSINESS AND GEOGRAPHICAL SEGMENTS The Company is engaged only in the provision of domestic passenger, cargo and mail air transportation services and its operations are all located in the PRC. PROFIT FROM OPERATIONS 2001 2000 RMB'000 RMB'000 Profit from operations has been arrived at after charging (crediting): Rental expenses under operating leases Aircraft and related equipment 278,722 199,515 Land and buildings 5,595 4,708 Retirement scheme contributions (note 27) 5,862 3,776 Net foreign exchange gains (52) (224) _______ _______ _______ _______ FINANCE COSTS Finance costs comprise the following: 2001 2000 RMB'000 RMB'000 Interest on bank loans 65,635 17,953 Interest on other loans 207 - _______ _______ 65,842 17,953 Less: Amounts capitalised (3,346) (5,963) _______ _______ 62,496 11,990 _______ _______ 33 7. FINANCE COSTS - continued Borrowing costs included in the cost of qualifying assets arose on bank loans and other loan utilised in financing the acquisition of aircraft and related equipment and the capitalisation rate is 6.2% (2000: 4.9%). 8. INCOME TAX EXPENSE 2001 2000 RMB'000 RMB'000 The (credit) charge comprises: PRC income tax 25,115 50,259 Over provision of PRC income tax in prior years (5,629) - Deferred taxation (note 23) (9,563) (2,863) _______ _______ 9,923 47,396 _______ _______ _______ _______ Provision for PRC income tax is calculated at 33% of the estimated assessable income for the year. The charge for the year can be reconciled to the net profit before taxation as follows: 2001 2000 RMB'000 % RMB'000 % Net profit before taxation 79,493 130,198 __________ __________ __________ __________ Tax at the PRC tax rate of 33% 26,233 33.0 42,965 33.0 Tax effect of expenses that are not deductible in determining taxable profit 555 0.7 2,941 2.3 Additional deferred tax provision in respect of previous years resulting from cancellation of tax incentive (11,236) (14.1) - - Over provision on PRC income tax in prior years (5,629) (7.1) - - Other - - 1,490 1.1 __________ _________ __________ _________ Tax expense and effective tax rate for the year 9,923 12.5 47,396 36.4 __________ _________ __________ _________ __________ _________ ___________ _________ 34 DIVIDENDS On May 11, 2001, a dividend of RMB10 cents per share for the year 2000 was paid to the shareholders. In respect of current year, the directors propose that a dividend of RMB6 cents per share will be paid to shareholders on March 11, 2002. This dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in the financial statements. EARNINGS PER SHARE The calculation of the basic earnings per share is based on the net profit for the year of RMB69,570,000 (2000: RMB82,802,000) and on the 400,000,000 shares (2000: weighted average number of 305,136,612 shares) in issue during the year. PROPERTY, PLANT AND EQUIPMENT Aircraft and related Other Motor Construction equipment equipment vehicles in progress Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 COST OR VALUATION At January 1, 2001 732,072 18,011 20,636 3,382 774,101 Additions 768,209 6,098 2,821 2,330 779,458 Reclassification - 1,256 - (1,256) - Disposals (48,597) (26) - - (48,623) ____________ __________ __________ __________ ____________ At December 31, 2001 1,451,684 25,339 23,457 4,456 1,504,936 ____________ __________ __________ __________ ____________ DEPRECIATION AND AMORTISATION At January 1, 2001 87,366 3,914 7,465 - 98,745 Provided for the year 87,688 2,040 2,098 - 91,826 Eliminated on disposals (2,565) (14) - - (2,579) ____________ __________ __________ __________ ____________ At December 31, 2001 172,489 5,940 9,563 - 187,992 ____________ __________ __________ __________ ____________ NET BOOK VALUES At December 31, 2001 1,279,195 19,399 13,894 4,456 1,316,944 ____________ __________ __________ __________ ____________ ____________ __________ __________ __________ ____________ At December 31, 2000 644,706 14,097 13,171 3,382 675,356 ____________ __________ __________ __________ ____________ ____________ __________ __________ __________ ____________ 35 INTANGIBLE ASSET Pilot service rights RMB'000 COST Additions and balance at December 31, 2001 27,915 AMORTISATION Charge for the year and balance at December 31, 2001 1,396 ____________ CARRY AMOUNT At December 31, 2001 26,519 ____________ ____________ At December 31, 2000 - ____________ ____________ INVESTMENT IN AN ASSOCIATE 2001 2000 RMB'000 RMB'000 Cost of investment 784 - _______ _______ _______ _______ Details of the Company's associate at December 31, 2001 are as follows: Place of Proportion Proportion Name of incorporation of ownershipof voting Principal associate and operation interestpower held activity Shandong Aviation Rainbow Inte rnational PRC 49% 49% Inbound and Travel Service Co., Ltd. ("SARITS") local tours 山东航空彩虹国际旅行社有限公司 The Company's share of the post-acquisition results of SARITS is not significant as the associate was incorporated on December 30, 2001. Shandong Airlines Limited owns the other 51% interest in SARITS. 36 UNLISTED INVESTMENT 2001 & 2000 RMB'000 Unlisted investment, at cost 6,690 _______ _______ In the opinion of the directors, the investment held by the Company is in the form of legal person share in PRC, which is not freely transferable in the market. Accordingly, it is not practical to determine the fair value and thus the investment is stated at cost. FLIGHT EQUIPMENT SPARE PARTS AND OTHER INVENTORIES 2001 2000 RMB'000 RMB'000 Flight equipment spare parts 25,445 19,687 Other inventories 2,328 1,877 _______ _______ 27,773 21,564 _______ _______ _______ _______ Included above are flight equipment spare parts of approximately RMB18,205,000 (2000: RMB9,410,000) which are carried at net realisable value. AMOUNT DUE FROM HOLDING COMPANY The amount due from Shandong Airlines Limited is unsecured, non-interest bearing and repayable on demand. AMOUNTS DUE FROM RELATED PARTIES 2001 2000 RMB'000 RMB'000 Shandong International Aviation Training Co., Ltd. 山东国际航空培训有限公司 ("SIATC") 1,518 - SDA-SEG Cargo Co., Ltd.深圳山航赛格航空货运有限公司 ("SDA-SEG") 130 - SARITS 500 - _______ _______ 2,148 - _______ _______ _______ _______ 37 SIATC and SDA-SEG are subsidiaries of Shandong Airlines Limited while SARITS is an associate of the Company. The amounts are unsecured, non-interest bearing and repayable on demand. SHARE CAPITAL 2001 & 2000 RMB'000 Registered, issued and fully paid 260,000,000 shares of domestic shares of RMB1 each 260,000 140,000,000 shares of B shares of RMB1 each 140,000 _______ 400,000 _______ _______ RESERVES Statutory surplus reserve and statutory public welfare fund, which consist of appropriations from the profit after taxation, form part of the shareholders' equity. Statutory surplus reserve In accordance with the PRC Company Law and the Company's Articles of Association, the Company is required to appropriate 10% of its profit after taxation as reported in its PRC statutory financial statements to the statutory surplus reserve. The appropriation to statutory surplus reserve may cease to apply if the balance of the statutory surplus reserve has reached an amount equal to 50% of the Company's registered capital. Surplus reserves can be used to offset prior year accumulated losses, to expand the Company's operations or for conversion into share capital. The Company may, upon the approval by a resolution at the Annual General Meeting, convert its surplus reserve into share capital and issue new shares to existing shareholders in proportion to their original shareholdings to increase the nominal value of each share. When converting the Company's statutory surplus reserves into share capital, the amount of such reserves remaining unconverted must not be less than 25% of the registered capital. Statutory public welfare fund In accordance with the PRC Company Law and the Articles of Association, the Company is required to appropriate 5% to 10% of the profit after taxation as reported in its PRC statutory financial statements to the statutory public welfare fund. The appropriation in the current year to the statutory public welfare fund is made at 5%. The statutory public welfare fund shall only be applied to collective welfare of staff and workers and welfare facilities remain as property of the Company. Profits available for distribution The profit of the Company available for appropriations will be the lesser of the profit reported in its 38 financial statements prepared under PRC GAAP or under IAS. The retained profits available for future distribution at December 31, 2001, based on the IAS financial statements, amounted to approximately RMB84,952,000. BANK LOANS 2001 2000 RMB'000 RMB'000 The bank loans are repayable as follows: Within one year 596,377 283,424 In the second year 126,376 70,424 In the third to fifth year, inclusive 229,129 148,271 After five years 236,954 64,735 _________ _________ 1,188,836 566,854 Less: Amounts due within one year shown under current liabilities (596,377) (283,424) _________ _________ Amounts due after one year 592,459 283,430 _________ _________ _________ _________ Secured 618,836 356,854 Unsecured 570,000 210,000 _________ _________ 1,188,836 566,854 _________ _________ _________ _________ The terms of non-current bank loans are summarised as follows: 2001 2000 RMB'000 RMB'000 Denominated in RMB Fixed interest rate at 6.21% per for the acquisition of aircraft annum, repayable in 11 years and related equipment with final maturity in 2012 376,000 90,000 Denominated in RMB Fixed interest rate at 5.94% per for working capital annum, repayable in 2 years with final maturity in 2003 50,000 - Denominated in USD Interest at market rate, for the acquisition of repayable in 6 years with 39 aircraft and related equipment final maturity in 2007 242,836 245,860 _______ ______ 668,836 335,860 Less: Amounts due within one year shown under current liabilities (76,377) (52,430) _______ ______ Amounts due after one year 592,459 283,430 _______ ______ _______ ______ Of the unsecured bank loans of RMB570,000,000 (2000: RMB210,000,000), RMB310,000,000 (2000: RMB85,000,000) is guaranteed by Shandong Airlines Limited whereas RMB230,000,000 (2000: RMB125,000,000) is guaranteed by a shareholder of the Shandong Airlines Limited. Bank loans repayable within one year bear interest rates ranging from 5.58 % to 6.21% per annum. OTHER LOAN The balance represents the loan borrowed from General Electric Capital Corporation for the acquisition of aircraft and related equipment. The amount is unsecured, bearing interest at 7.5% per annum and repayable within two years. AMOUNTS DUE TO RELATED PARTIES 2001 2000 RMB'000 RMB'000 Shandong Taeco Aircraft Engineering Co., Ltd. 山东太古飞机工程公司 ("SDTAE") 3,693 4,300 Shandong Shengping Catering Co., Ltd. 山东升平航空食品公司 ("SDSCC") 999 466 SDA-SEG - 774 _______ _______ 4,692 5,540 _______ _______ _______ _______ The above companies are subsidiaries of Shandong Airlines Limited. The amounts are unsecured, non-interest bearing and repayable on demand. DEFERRED TAXATION 40 2001 2000 RMB'000 RMB'000 At January 1 12,679 9,816 Credit for the year (note 8) 9,563 2,863 _______ _______ At December 31 22,242 12,679 _______ _______ _______ _______ 23. DEFERRED TAXATION - continued Deferred tax assets (liabilities) are made up of the taxation effect of: Depreciation Major of aircraft overhaul and related Deferred provision equipment expenditure for aircraft Total RMB'000 RMB'000 RMB'000 RMB'000 (note i) (note ii) (note iii) At January 1, 2000 1,876 10,141 (2,201) 9,816 Credit (charge) for the year 3,635 146 (918) 2,863 __________ __________ _________ _________ At December 31, 2000 and January 1, 2001 5,511 10,287 (3,119) 12,679 Credit (charge) for the year 3,480 10,066 (3,983) 9,563 __________ __________ _________ _________ At December 31, 2001 8,991 20,353 (7,102) 22,242 __________ __________ _________ _________ __________ __________ _________ _________ (i) The amount represents the tax effect of temporary differences attributable to the excess of depreciation charges over depreciation allowances. (ii) The amount represents the tax effect on training costs where under PRC GAAP, which is the basis for the PRC tax computation, the training costs are capitalised and amortised, while under IAS, such costs are charged to the income statement when incurred. (iii) The amount represents the tax effect of major overhaul provision for aircraft which is provided for under PRC GAAP, but can only be recognised when there is a present obligation as a result of a past event under IAS. MAJOR NON-CASH TRANSACTIONS 41 During the year, additions to aircraft and related equipment amounting to RMB19,898,000 (2000: RMB46,603,000) were settled by manufacturers' credits. CONTINGENT LIABILITIES According to the regulations of the Ministry of Finance and CAAC, the Company was required to pay domestic aviation infrastructure levies to CAAC, calculated at the rate of 4.835% on the traffic revenue. In the second half of 2000, the levies were increased from 4.835% to 5%. The amount of domestic aviation infrastructure levies, which should be paid for the current year, is approximately RMB65,478,000 (2000: RMB51,245,000). The Finance Department of Shandong Province agreed on August 30, 1999 that it will make every endeavour to settle the payment of domestic aviation infrastructure levies on behalf of the Company. At the same time, Shandong Airlines Limited has also undertaken to compensate the Company for any payment of such levies. Under such an arrangement, in the opinion of the directors, the Company has been released from the requirement to pay domestic aviation infrastructure levies to CAAC. No accruals has been made in the financial statements accordingly. COMMITMENTS The Company had the following commitments at the balance sheet date: (i) Capital commitments 2001 2000 RMB'000 RMB'000 Aircraft and related equipment 379,734 351,999 Land and buildings 73,000 - Unpaid investment in a subsidiary in which the Company has not paid up the capital 70,000 - _______ _______ 522,734 351,999 _______ _______ _______ _______ Apart from the above, the Company has also placed refundable deposits to manufacturers for intended purchases of aircraft. 42 26. COMMITMENTS - continued (ii) Lease commitments At the balance sheet date, the Company had outstanding commitments under non-cancellable operating leases which fall due as follows: 2001 2000 RMB'000 RMB'000 Aircraft and related equipment Within one year 359,253 239,682 In the second to fifth year inclusive 1,233,666 732,904 Over five years 834,824 183,940 _________ _________ 2,427,743 1,156,526 _________ _________ _________ _________ Land and buildings Within one year 1,747 2,006 In the second to fifth year inclusive 3,677 4,761 Over five years 420 597 _________ _________ 5,844 7,364 _________ _________ _________ _________ Included in the above are outstanding commitments under operating leases in respect of aircraft and related equipment amounting to approximately RMB682,777,000 (2000: RMB834,840,000) entering into with Shandong Airlines Limited. The remaining commitments under operating leases are entered into with independent third parties. Leases are negotiated for an average term of 7 to 9 years for aircraft and related equipment and 1 to 8 years for land and buildings, respectively. The rentals are fixed throughout the lease periods, except that an annual increment of 6% has been imposed on one of the lease arrangements in respect of land and buildings. RETIREMENT SCHEME CONTRIBUTIONS The Company participates in a defined contribution retirement scheme organised by the municipal government of Shandong Province. All qualifying employees of the Company are participants of the scheme. Under this scheme, the Company is required to make contributions to the scheme at 23% of the employee salaries, and the employees are required to contribute at 4% of their salaries. The average number of employees for the year is 1,122 (2000: 957). 43 RELATED PARTY TRANSACTIONS In addition to the disclosure set out in notes 16, 17, 20, 22, 25 and 26, during the year, the Company entered into the following transactions with related parties: Name of related party Nature of transaction 2001 2000 RMB'000 RMB'000 Shandong Airlines Limited Operating lease charges in respect of aircraft and related equipment 154,736 156,691 General service charges 967 1,127 Rental charges in respect of land and buildings 225 225 Room and restaurant service charges 2,550 2,130 SDTAE Repairs and maintenance charges 21,268 23,453 SDSCC Purchase of air catering and other supplies 13,572 11,562 SDA-SEG Cargo handling charges 1,857 3,289 SIATC Rental income in respect of aircraft 1,518 - _______ _______ _______ _______ In the opinion of the directors, all the above transactions were carried out with reference to the market rate. Shandong Airlines Limited is the holding company of the Company. The other four companies are subsidiaries of Shandong Airlines Limited. During the year, the Company disposed of three new aircraft to a leasing company and, on the same date, the leasing company entered into finance lease arrangements with Shandong Aviation Rainbow Business Airplane Co., Ltd. ("SARBA") 山东航空彩虹公务机有限公司 to lease the three aircraft to SARBA. SARBA is an associate of Shandong Airlines Limited. The Company has placed deposits of RMB39,000,000 to Shandong Airlines Limited for the purchases of land and buildings, the capital commitments of which is disclosed in note 26(i). During the year, the Company made numerous advances to Shandong Airlines Limited and the monthly average outstanding amount was approximately RMB190,000,000. PLEDGE OF ASSETS Aircraft and related equipment of the Company with a net book value of approximately RMB966,456,000 (2000: RMB373,524,000) have been pledged to banks to secure bank loans granted to the Company. 44 SUMMARY OF DIFFERENCES BETWEEN IAS AND PRC GAAP These financial statements are prepared in conformity with IAS, which differ from the Company's statutory financial statements prepared in accordance with the PRC GAAP. The statutory financial statements for the year ended December 31, 2001 reported profit after taxation of RMB54,942,000 (2000: RMB93,129,000) and net assets of RMB564,282,000 (2000: RMB533,340,000). A reconciliation between profit after taxation and net assets reported under PRC GAAP and those reported under IAS are as follows: Profit after taxation Net assets 2001 2000 2001 2000 RMB'000 RMB'000 RMB'000 RMB'000 As reported under PRC GAAP 54,942 93,129 564,282 533,340 Adjustments to conform with IAS: Difference in depreciation charges of aircraft and related equipment 1,558 (18,335) (27,244) (28,802) Difference in deferred expenditure recognition 2,777 (973) (61,674) (64,451) Adjustment of provision for overhaul of aircraft and engines 730 6,118 21,521 20,791 Deferred taxation 9,563 2,863 22,242 12,679 Dividends declared after the balance sheet date - - 24,000 40,000 _______ _______ _______ _______ As reported under IAS 69,570 82,802 543,127 513,557 _______ _______ _______ _______ _______ _______ _______ _______ FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF RISK Financial assets of the Company include bank term deposits, bank balance and cash, trade and other receivables, amount due from holding company and amounts due from related parties. Financial liabilities of the Company include bank loans, other loan, trade and other payables and amounts due to related companies. Business risk The Company conducts its principal operations in the PRC and accordingly is subject to special considerations and significant risks not typically associated with companies in the United States of America and Western European companies. These include risks associated with, among others, the political, economic and legal environment, competition in the passenger and cargo air transportation services, and influence of CAAC on pricing air tickets, take-off and landing charges at certain PRC airports, commission rates and the adjustment on fuel prices. Interest rate risk 45 The interest rates and terms of repayment of the borrowings made to the Company are disclosed in note 20 and 21. 31. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF RISK - continued Foreign currency risk Certain of the Company's bank loans and other loan are denominated in United States dollars but the Company's revenue is denominated in Renminbi. The Company is exposed to foreign currency risk. Credit risks (i) Bank term deposits and bank balances and cash Substantially all of the Company's bank term deposits and bank balance and cash are deposited with PRC financial institutions. (ii) Trade receivables These are mainly ticket sale receivables from sale agents and receivables related to uplifts by the Company on behalf of other carriers. These receivables are spread among numerous parties. (iii) Other receivables The amounts mainly comprise outstanding balances due from third parties, holding company and related parties. The carrying amount of financial assets best represent their maximum credit risk exposure at the balance sheet date. Fair value In the opinion of the directors, the fair value of bank terms deposits, bank balances and cash, trade and other receivables, amount due from holding company, amount due from related companies, bank loans, other loan, trade and other payables and amounts due to related parties are not materially different from their carrying amounts. Fair value estimates are made at specific point in time and are based on relevant market information. The estimate is subjective in nature and involved uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in valuation methods and assumptions could signific antly affect the estimates. LANGUAGE The English text of the financial statements is a translated version for reference only. The Chinese text of the financial statements will prevail over the 46 English text. XI. Documents Available for Reference 1. Financial statements carried with the personal signatures and seals of Chairman of the Board, vice general accountants and accounting departments; 2. Original of Auditors’Report carried with the seal of Certified Public Accountants as well as personal signatures and seals of certified public accountants; 3. Originals of all documents and notices publicly disclosed on newspapers designated by CSRC in the report period; The Company will offer above documents for reference timely provided that CSRC or Stock Exchange demands or shareholders requires according to the regulations and Articles of Association. Board of Directors of Shandong Airlines Co., Ltd. March 13, 2002 47