中鲁Ｂ(200992)2002年年度报告（英文版）

SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. 2002 ANNUAL REPORT CONTENTS Ⅰ. IMPORTANT NOTES------------------------------------------------------------------------------------ Ⅱ. COMPANY PROFILE------------------------------------------------------------------------------------ Ⅲ. SUMMARY ACCOUNTING HIGHLIGHT AND BUSINESS HIGHLIGHT---------------- Ⅳ. CHANGES IN SHARE CAPITAL AND PARTICULARS ABOUT SHAREHOLDERS--- Ⅴ. PARTICULARS ABOUT DIRECTORS, SUPERVISORS, SENIOR EXECUTIVES AND EMPLOYEES-------------------------------------------------------------------------------------------- Ⅵ. ADMINISTRATIVE STRUCTURE-------------------------------------------------------------------- Ⅶ. BRIEF OF THE SHAREHOLDERS’ GENERAL MEETING----------------------------------- Ⅷ. REPORT OF BOARD OF DIRECTORS------------------------------------------------------------- Ⅸ. REPORT OF SUPERVISORY COMMITTEE------------------------------------------------------ Ⅹ. SIGNIFICANT EVENTS--------------------------------------------------------------------------------- Ⅺ. FINANCIAL REPORT------------------------------------------------------------------------------------ Ⅻ. DOCUMENTS AVAILABLE FOR REFERENCE-------------------------------------------------- I. IMPORTANT NOTES Board of Directors of Shandong Zhonglu Oceanic Fisheries Co., Ltd. (hereinafter referred to as the Company) individually and collectively accept responsibility for the correctness, accuracy and completeness of the contents of this report and confirm that there are no material omissions nor errors which would render any statement misleading. Director Mr. Yu Fenghua Mr. Wang Aimin and Mr. Liu Shijun were absent from the Board of meeting. PricewaterhouseCoopers Certified Public Accountants issued an Auditors’ Report with refusing to comment. The Board of Directors and the Supervisory Committee of the Company made explanations on the relevant matters in details, the investors are suggested to notice the content. Wang Zhaoan, General Manager of the Company (provisional Chairman of the Board), Xie Meilan, Chief Financial Supervisor and Tao Guirong, Manager of Financial Dept. hereby confirm that the Financial Report of the Annual Report is true and complete. II. COMPANY PROFILE 1. Name of the Company: In Chinese: 山东省中鲁远洋渔业股份有限公司 In English: Shandong Zhonglu Oceanic Fisheries Company Limited 2. Legal Representative: Yu Fenghua 3. Secretary of Board of Directors: Zhou Feng Authorized Representative in charge of Securities affairs: Jiang Peng Contact Address: No. 43, Heping Road, Jinan, Shandong Tel: (86) 531-6416949, 6553276 Fax: (86) 531-6943084 E-mail: zlzqb@163.com 4. Registered Address: No. 43, Heping Road, Jinan, Shandong Office Address: No. 43, Heping Road, Jinan, Shandong Post Code: 250014 The Company’s E-mail: zlzqb@163.com 5. Newspapers Chosen for Disclosing the Information of the Company: Securities Times and Ta Kung Pao Internet Web Site Designated by CSRC for Publishing the Annual Report: http://www.cninfo.com.cn The Place Where the Annual Report is Prepared and Placed: Securities Dept. of the Company 6. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: ZHONGLU B Stock Code: 200992 7. Other information about the Company The initial registered date: Jul. 23, 1999 The registered date after change: Nov. 30, 2000 The registered place after change: Administrative Bureau of Industrial and Commercial of Shandong Province Registered code for business license of corporation: 3700001803000 Registered code of tax: National Revenue: 440301192186267 Local Tax: 370001863043102 Name of the Certified Public Accountants engaged by the Company: Domestic: PricewaterhouseCoopers Zhongtian Certified Public Accountants International: PricewaterhouseCoopers Zhongtian Certified Public Accountants Address: 12th Floor, Ruian Plaza, No. 333, Huaihai Middle Road, Shanghai III. FINANCIAL HIGHLIGHT AND BUSINESS HIGHLIGHT 1. Abstract of accounting data as of the year 2002 Unit: In RMB Items Amount Total Profit -231,014,940 Net Profit -229,808,572 Net profit after deducting non-recurring gains and losses -187,139,612 Profit from core business 31,543,561 Profit from other business lines -200,442 Operating profit -188,350,638 Investment income 7,239,604 Subsidy income 1,191,464 Net income/expenditure from non-operating -51,095,370 Net cash flows arising from operating activities 47,911,169 Net increase/decrease in cash and cash equivalents -3,942,143 Unit: RMB Items of non-recurring gains and losses Amount Net income/expenditure from non-operating -51,095,370 Subsidy income 1,191,464 Income from equity investment transfer (Aihua Pharmaceutical) 7,234,946 Total -42,668,960 2. Explanation for the difference in net profit as audited by CAS and IAS: In 2002, the Company’s net profit as audited by PricewaterhouseCoopers Certified Public Accountants in accordance with CAS and IAS was RMB –229,809,000 and RMB –229,624,000 respectively. The differences are as follows: In: RMB’000 2002 Net assets Net profit Amount of accounting statement as reported under Accounting System for Enterprise 277,032 -229,809 Adjustment in accordance with IAS: 1. Adjustment of organization expenses of Yantai Foods -12 164 2. Adjustment of long-term unable to pay account payable - 21 Amount after adjustment according to IAS 277,020 -229,624 3. Major accounting data and financial indexes over the past three years ended by the report year Items Unit 2002 2001 2001* 2000 Income from core business RMB 310,982,756 341,055,565 332,560,732 592,182,400 Net profit RMB -229,808,572 23,835,352 5,507,444 72,418,801 Total assets RMB 804,177,030 1,031691,311 1,020,809,474 957,070,574 Shareholders’ equity RMB 277,032,440 514,356,377 496,028,469 503,813,295 (excluding minority interests) Earnings per share RMB/share -0.86 0.09 0.02 0.27 Net assets per share RMB/share 1.04 1.93 1.86 1.89 Net assets per share after RMB/share 1.02 1.90 1.86 1.89 adjustment Net cash flows per share arising from operating RMB/share 0.18 0.33 0.33 -0.12 activities Return on equity % -83.0 4.6 1.1 14.4 Weighted average return on equity after deducting % -24.21 4.6 2.28 21 non-recurring gains and losses Note: * Accountant made the relevant adjustment for 2001 Accounting Statement, this column is data after adjustment. 4. In accordant with Regulations on the Information Disclosure of Companies Publicly Issuing Shares (No. 9) released by CSRC, the Company’s return on equity and earnings per share as of the year 2002 as calculated based on calculating method of fully diluted and weighted average are as follows: Return on equity (%) Earnings per share (RMB) Profit in the report period Fully Weighted Fully Weighted diluted average diluted average Profit from core business 11.39 4.08 0.12 0.12 Operating profit -67.99 -24.36 -0.71 -0.71 Net profit -82.95 -29.73 -0.86 -0.86 Net profit after deducting non-recurring gains and losses -67.55 -24.21 -0.70 -0.70 5. Changes in shareholders’ equity as of the report year (Unit: In RMB) Items Share Capital Surplus Statutory Including: Shareholders’ capital public public reserve public welfare Retained equity funds profit reserve Amount at the 266,071,320 186,353,646 21,700,078 7,233,359 21,903,425 496,028,469 period-begin Increase in the 10,823,839 31,204 10,401 10,855,043 report period Decrease in the 11,296 229,839,776 229,851,072 report period Amount at the 266,071,320 197,107,550 21,731,282 7,243,760 -207,936,351 277,032,440 period-end Reason for change Price Withdrawal Withdrawal Deficit, Deficit difference of in the in the withdraw associated relationship report report al of and provision period period “two for equity reserve” investment reckoned in IV. CHANGES IN SHARES CAPITAL AND PARTICULARS ABOUT SHAREHOLDERS 1. Statement of change in shares Unit: Share Increase/decrease of this time (+, - ) Before the After the Items Bonus Capitalization of Additional Others Sub- change Share change shares public reserve issuance total Allotment I. Unlisted Shares 128071320 128071320 1. Promoters’ shares Including: State-owned shares 127811320 127811320 Domestic legal person’s shares 260000 260000 Foreign legal person’s shares Others 2. Raised legal person’s shares 3. Employees’ shares 4. Preference shares or others Including: Transferred / allotted shares Total Unlisted shares 128071320 128071320 II. Listed Shares 1. RMB ordinary shares 2.Domestically listed foreign 138000000 138000000 shares 3. Overseas listed foreign shares 4. Others Total Listed shares 138000000 138000000 III. Total shares 266071320 266071320 2. Issuance and listing of shares (1) Approved by China Securities Regulation Commission with ZJFXZ [2000] No. 82 document on June 26, 2000, the Company successfully issued 120 million domestically listed foreign shares (B-share) to foreign investors for the first time with par value RMB 1.00 per share from July 3, 2000 to July 5, 2000 at the issuance price of HKD 1.93 per share (converting into RMB 2.05 per share). The said domestically listed foreign shares were listed with Shenzhen Stock Exchange for trade on July 24, 2000. Authorized by the Company, the lead underwriter exercised its 15% over-allotment option to issue additional 18 million B shares to foreign investors with par value RMB 1.00 per share at the issuance price of HKD 1.93 (converting into RMB 2.05 per share) on Aug. 22, 2000. (2) In the report period, the Company had never been involved in any events which may cause change of the total shares and the structure of share capital such as bonus shares, public reserve converted into share capital, additional issuance, share allotment, absorption and combination, converting convertible company bonds into shares, listing the employees’ shares, etc. 3. Particulars about shareholders (1) Ended by the report year, the Company had totally 24,067 shareholders, including 5 initiators’ shareholders and 24,062 shareholders of domestically listed foreign share. (2) Particulars about shares held by main shareholders a. Shandong Group Corporation of Fishery Enterprises (“SGCFE”) held over 5% (including 5%) shares of the Company, which were state-owned legal person’s shares without circulating, taking 47.25% of the total shares. Increase/decrease in Holding shares at the Pledged or frozen Shareholder’s name Type of share the report period year-end (share) SGCFE had not repaid the guarantee Shandong Group loan on schedule which SGCFE State-owned provided to its subsidiary company Corporation of legal person’s according to civil judgement (2001) Nil 125,731,320 Fishery Enterprises share YJC Zi No. 208, 8,000,000 shares of (“SGCFE”) the Company held by SGCFE were judicially frozen dated Sep. 3, 2001. b. Particulars about the shares held by the top ten shareholders (Ended Dec. 31, 2002): Holding shares at the Proportion in the No. Shareholders’ name period-end (share) total shares (%) 1 Shandong Group Corporation of Fishery Enterprises 125,731,320 47.25 2 China Heavy Automobile Group Jinan Truck Co., Ltd. 1,950,000 0.73 3 YI YING 1,078,200 0.41 4 CHEN YUAN FENG 855,200 0.32 5 ZHOU XIAOHUA 640,000 0.45 6 WU YAN 620,650 0.24 7 LIAO QIANG 615,000 0.23 8 BEST RELIANCE INVESTMENTS LTD 606,700 0.23 9 ZHANG SHENG 580,000 0.22 10 LIANG YU ZHEN 572,600 0.22 Note: Among the top ten shareholders, Shandong Group Corporation of Fishery Enterprises and China Heavy Automobile Group Jinan Truck Co., Ltd. are initiators shareholders of the Company, there exists no associated relationship between them, or they do not belong to the consistent actor regulated by the Management Measure of Information Disclosure on Change of Shareholding for Listed Company; the other shareholders are ones of domestically listed foreign shares, the Company is unknown whether there exists associated relationship, or whether the rest shareholders belong to the consistent actor regulated by the Management Measure of Information Disclosure on Change of Shareholding for Listed Company. (3) The controlling shareholder of the Company Name of the controlling shareholder: Shandong Group Corporation of Fishery Enterprises Legal representative: Wang Aimin Date of foundation: Nov. 1988 Registered capital: RMB 380,000,000 Nature of Company: state-owned enterprise Structure of equity: Shandong Province State-owned Assets Management Office holds 100% equity of Fishery Enterprise Business scope: marine catching, aquiculture, resource development and technical service of aquatic product; sales of aquatic products and fishery resource (excluding special operating products); import and export business with the approval scope; sales of steels and woods; sending of work personnel of the fishery business to overseas. Note: In the report year, the controlling shareholder of the Company remained unchanged. (4) The actual controller of the controlling shareholder of the Comapny Shandong Group Corporation of Fishery Enterprises, the controlling shareholder of the Company, is state-owned enterprise under the director control of Shandong People’s Government, whose actual controller is Shandong Province State-owned Assets Management Office. The main information are as follows: The actual controller: Shandong Province State-owned Assets Management Office Legal representative: Song Wenping Nature of enterprise: administrative institution Main business: responsible department of provincial government for state-owned assets (5) Legal person shareholder holding over 10% of the Company’s total shares In the report period, there existed no legal person shareholder holding over 10% of the total shares in the Company. V. PARTICULARS ABOUT DIRECTORS, SUPERVISORS AND SENIOR EXECUTIVES AND EMPLOYEES (I) Basic information 1. Directors, supervisors and senior executives Holding Holding Reason for share at the share at the change year-begin year-end Name Title Gender Age Office term Yu Fenghua Chairman of the Board Male 51 Sep. 2002 – Sep. 2005 0 0 Wang Aimin Vice Chairman of the Male 61 Sep. 2002 – Sep. 2005 0 0 Board Wang Zhaoan Director, Male 51 Sep. 2002 – Sep. 2005 0 0 General Manager Li Wenyi Director, Deputy General Male 46 Sep. 2002 – Sep. 2005 0 0 Manager Xie Meilan Director, Chief Financial Female 52 Sep. 2002 – Sep. 2005 0 0 Supervisor Liu Qingfeng Director, Male 55 Sep. 2002 – Sep. 2005 0 0 Chief Economist Liu Shijun Director Male 60 Sep. 2002 – Sep. 2005 0 0 Shao Shijie Director Male 56 Sep. 2002 – Sep. 2005 0 0 Wang Hanmin Independent Director Male 42 Sep. 2002 – Sep. 2005 0 0 Liu Baoyu Independent Director Male 39 Sep. 2002 – Sep. 2005 0 0 Zhou Feng Secretary of the Board Male 47 Sep. 2002 – Sep. 2005 0 0 Zheng Guimin Chairman of the Male 59 Sep. 2002 – Sep. 2005 0 0 Supervisory Committee Yin Jixian Supervisor Male 43 Sep. 2002 – Sep. 2005 0 0 Li Junmei Supervisor Female 34 Sep. 2002 – Sep. 2005 0 0 Huang Qi Employee Supervisor Male 29 Sep. 2002 – Sep. 2005 0 0 Zhang Lei Employee Supervisor Male 29 Sep. 2002 – Sep. 2005 0 0 2. Particulars about directors or supervisors holding the position in Shareholding Company Name Shareholding company Title Office term Wang Aimin Shandong Group Corporation of Fishery Chairman of the Board Oct. 1988 – Apr. 2003 Enterprises Yu Fenghua Shandong Group Corporation of Fishery General Manager Mar. 2002 - Apr. 2003 Enterprises Liu Shijun Shandong Group Corporation of Fishery Deputy General Manager Dec. 1993 to now Enterprises Shao Shijie Qingdao Oceanic Fishery Co. – General Manager Jan. 1998 to now Subsidiary company of Shandong Group Corporation of Fishery Enterprises Zheng Guimin Shandong Group Corporation of Fishery Secretary of discipline Oct. 1996 to now Enterprises inspection committee Yin Jixian Shandong Group Corporation of Fishery Deputy director of Sep. 2000 to now Enterprises supervising office Li Junmei Shandong Group Corporation of Fishery Deputy manager of financial Feb. 2001 to now Enterprises department (II) About annual remuneration 1. The remuneration of directors, supervisors and senior executives were paid according to the relevant regulations and standards released by Notional Labor Department. The total annual remuneration (including base wage, rewards, welfare, subsidy, housing subsidy and others) of the present directors, supervisors and senior executives receiving from the Company was RMB 574,000; 2. Total annual remuneration of the top three directors drawing the highest payment was RMB 156,000, while the annual remuneration of the top three senior executives drawing the highest payment was RMB 134,000; 3. The Company respectively paid the allowance of RMB 20,000 (tax included) to independent directors per year. The Company reimbursed business charges and reasonable charges according to the actual situation which independent directors attended the meeting of the Board, shareholders’ general meeting or exercise their functions and powers in accordance with the relevant laws and regulations and Articles of Association. Decision-making procedure of the said allowance: the Board of Directors enacts the preplan and submits to shareholders’ general meeting for approval. 4. The Company has 16 directors, supervisors and senior executives at present in office. Nine persons drew the annual salary from the Company, among them, 4 enjoyed the annual remuneration between RMB 45000 and RMB 60,000 respectively; 3 enjoyed between RMB 30,000 and RMB 45,000 respectively; 6 enjoyed between RMB 20,000 and RMB 30,000 respectively. 5. Among directors, supervisors and senior executives, 7 persons received no pay from the Company, namely Chairman of the Board Yu Fenghua, Vice Chairman of the Board Wang Aimin, Director Liu Shijun and Shao Shijie, Chairman of the Supervisory Committee Zheng Guimin, Supervisor Yin Jixian and Li Junmei. Of them, the other persons drew the annual salary from Shandong Group Corporation of Fishery Enterprises, the controlling shareholders of the Company except that Yu Fenghua and Shao Shijie drew the annual salary from Municipal Party Committee of Qingdao Municipal and Qingdao Oceanic Fishery Co. respectively. (III) In the report year, particulars about changes in directors, supervisors and senior executives and the reason for changes (1) As approved by the 2001 Shareholders’ General Meeting, Wnag Hanmin and Liu Baoyu were engaged as Independent Director of the 1st Board of Directors of the company on Apr. 26, 2002. (2) On Jul 30, 2002, the 1st Board of Directors and the 1st Supervisory Committee has expired, and as approved by the 1st Extraordinary Shareholders’ General Meeting of 2002 held on Sep. 16, 2002, the proposals on reelection of the Board of Directors and reelection of the Supervisory Committee were examined and approved, Zhang Dongming, Li Dexin, Han Xuesen and Chen Xianhua were dismissed from the post of director, Xu Jianjun was dismissed from the post of supervisor. (3) On Sep. 16, 2002, Yu Fenghua and Wang Aimin were elected as Chairman of the Board and Vice Chairman of the Board respectively in the 1st meeting of the 2nd Board of Directors. As nominated by Chairman of the Board, Wang Zhaoan was engaged as General Manager of the Company, Zhou Feng was engaged as Secretary of the Board, Li Wenyi no longer took the post of secretary of the Board; as nominated by General Manager, Li Wenyi was engaged as Deputy General Manager of the Company, Xie Meilan was engaged as Chief Financial Supervisor and Liu Qingfeng was engaged as Chief Economist of the Company. (IV) About employees Ended the report year, the Company had totally 1,887 on-the-job employees, of them, 1,371 production personnel, 146 salespersons, 137 technicians, 56 financial personnel and 177 administrative personnel; 250 persons with 3-years regular college graduate or above, taking 13% of the total employees, 235 persons with polytechnic school graduate, taking 12% of the total employees. The Company needs to bear the expenses of 791 retirees. VI. ADMINISTRATIVE STRUCTURE 1. Company Administration (1) Administration of the Company in the report period The Company established modern enterprise system, operates the Company in a standardized way strictly according to the relevant demands of Company Law, the Securities Law and Administrative Rules of Listed Companies. Firstly, in accordance with the demands of Guidelines Opinion on Establishing Independent Director in Listed Companies issued by CSRC, the Company added two independent directors, further perfected administrative structure of the Company; secondly, Strategic Special Committee, Auditing Special Committee, Nomination Special Committee, Remuneration Special Committee and Checking Special Committee were set up under the Board of Directors, strengthened function of scientific decision-making and the daily supervision of the Board of Directors; thirdly, the Company additionally enacted standard document and inner controlling system document such as Work System of Independent Director, Management Regulation of Disclosing Information and implementation detailed rules of special committees, so as to cause the Company’s operation to follow the said rules, enhanced administration level of the Company; fourthly, the Company fulfilled Administrative Rules of Listed Companies, improved voting and election system of shareholders’ general meeting, and carried out the accumulative voting system when shareholders’ general meeting elected directors. (2) Difference in administration of the Company In accordance with Administrative Rules of Listed Company, there was no significant difference in administration of the Company, but existed shortage: a. Independent of listed company: the “Five Separations” between the Company and the controlling shareholder has not been given a thorough dividing; there existed mixed operation in subsidiary company, independent purchase, supply and sales system couldn’t give a full play; b. Related transaction: there was no a standardization way between the Company and the controlling shareholder in the related transaction, the largest shareholder occupied the funds of listed company. c. Encouragement and binding mechanism of senior executives: the Company didn’t establish encouragement and binding mechanism combining remuneration of manager with the Company’s performance and personal achievement for manager, and the inner controlling system need to improve. 2. Performance of independent directors In the report period, the two independent directors of the Company brought the respective speciality into full play strictly according to Articles of Association of the Company and Work System of Independent Director and the relevant regulations issued by CSRC, and performed their duties trustily, diligently and independently, attended the meeting of the Board of Directors and Shareholders’ General Meeting on time; expressed independent opinion for significant related transaction, nomination, appointment and removal of directors, and engagement and demission of senior executives based on the position of independent judgment, gave the initiative function into full play in respect of scientific decision-making and standardized operation of the Board of Directors, safeguarded the whole benefit of the Company and rights and interests of medium and small shareholders. 3. Particulars about the Company’s “Five Separations” from the first largest Shareholder in Respect of Business, Personnel, Assets, Organization and Finance: (1) In respect of personnel: the Company has independent management system of labor, personnel and salary, General Manager, Deputy General Manager, Chief Financial Supervisor and Chief Economist and Secretary of the Board of the Company drew the salary from the Company without taking concurrent position and receiving the remuneration in Shareholding Company. (2) In respect of assets: As an independent corporation, the Company has integrated legal person property rights, during the initial stages of foundation, the assets invested by the controlling shareholders were transacted the change procedure of ownership. (3) In respect of finance: the Company has established independent financial department and financial personnel, owned independent and complete accounting system; financial personnel and financial system were completed independent from its controlling shareholder, the Company produced accounting statement according to the relevant regulations of the Ministry of Finance, and paid the tax in compliance with the laws. (4) In respect of organization: the Company’s Board of Directors, Supervisory Committee and the other Inner organization independently operated; the controlling shareholder recommended director and supervisor through the legal procedure, and didn’t meddle in personnel appointment and removal of listed company; (5) In respect of business: the Company was completely independent from the controlling shareholder, has independent and integrated business and autonomous operation capacity, there was no competition with the controlling shareholder in same trade. The Company owned independent production, supply and sale system. There existed mixed operation in subsidiary company; the Company asked the relevant company to adopt practical and effective measures, and solved the said problem at the end of the year 2003. IV. Performance Valuation, Encouragement and Binding Mechanism for Senior Executives The Company didn’t establish performance valuation and encouragement and binding mechanism for senior executives. Thus, Remuneration Special Committee and Checking Special Committee of the Board of Directors enacted fair and transparent performance valuation standard and procedure for directors, supervisors and senior executives according to the demand of Administration Rules of Listed Companies, which were in compliance with policies and combining with the achievement. Meanwhile, the Company will establish an encouragement mechanism combing the benefit of senior executives with long-term object, uniting responsibility and right. VII. ABOUT THE SHAREHOLDERS’ GENERAL MEETING (I) Notification, calling and holding of the Shareholders’ General Meeting In the report period, the Company totally held two Shareholders’ General Meetings with details as follows: 1.2001 Annual Shareholders’ General Meeting On Apr.26, 2002, the Company held 2001 Annual Shareholders’ General Meeting in 8F meeting room of the Company, No.43, Heping Road, Jinan, Shandong. The public notice of notification of holding the Shareholders’ General Meeting was published Securities Times and Ta Kung Pao dated Mar.23, 2002. 6 shareholders and shareholders’ proxies attended the meeting, representing 128,571,720 shares of total shares, taking 48.32% of the total shares. Among of them, the state-owned shareholders are 3 persons, representing 127,811,320 shares of the total shares, taking 99.41% of the present shares with voting right; domestic legal person shareholders are 2 persons, representing 260,000 shares of the total shares, taking 0.2% of the present shares with voting right; domestically listed foreign shareholder is 1 person, representing 500,400 shares of the total shares, taking 0.39% of the present shares with voting right. The meeting is conformity with Company Law and Articles of Association of the Company and was presided by Chairman of the Board, Wang Aimin. Part member of the Board of Directors and all members of the Supervisory Committee participated in the meeting as non-voting delegates. The meeting examined item by item and approved the following resolutions through voting with signature. (1) 2001 Work Report of the Board of Directors; (2) 2001 Work Report of the Supervisory Committee; (3) 2001 Financial Settlement Report; (4) 2001 Profit Distribution Preplan; (5) 2002 Profit Distribution Policy; (6) 2001 Annual Report and Summary; (7) Proposal on Reengaging Certified Public Accountants and Paying Remuneration; (8) Proposal on Candidates and Allowance of Independent Directors; (9) Proposal on Amending Articles of Association of the Company; (10) Proposal on Amending Rules of Procedure of the Shareholders’ General Meeting. Jiang Lu, the lawyer with securities work qualification of Shangdong Junyida Law Firms attended the meeting and issued law opinion and the public notice on resolutions of the meeting was published Securities Times and Ta Kung Pao dated Apr.27, 2002. 2.The 1st Extraordinary Shareholders’ General Meeting in 2002 On Sep.16, 2002, the Company held the 1st Extraordinary Shareholders’ General Meeting of 2002 in 8F meeting room of the Company, No.43, Heping Road, Jinan, Shandong. The public notice of notification of holding the Shareholders’ General Meeting was published Securities Times and Ta Kung Pao dated July 31, 2002. 6 shareholders and shareholders’ proxies attended the meeting, representing 128,571,720 shares of total shares, taking 48.31% of the total shares. Among of them, the state-owned shareholders are 3 persons, representing 127,811,320 shares of the total shares, taking 99.44% of the present shares with voting right; domestic legal person shareholders are 2 persons, representing 260,000 shares of the total shares, taking 0.2% of the present shares with voting right; domestically listed foreign shareholders are 6 persons, representing 459,689 shares of the total shares, taking 0.36% of the present shares with voting right. The meeting is conformity with Company Law and Articles of Association of the Company and was presided by Chairman of the Board, Wang Aimin. Part member of the Board of Directors and all members of the Supervisory Committee participated in the meeting as non-voting delegates. The meeting examined item by item and approved the following resolutions through voting with signature. (1) Examined and approved Proposal on Amending Articles of Association of the Company; (2) Examined and approved Proposal on Election at Expiration of Office Term of the Board of Directors; (3) Examined and approved Proposal on Election at Expiration of Office Term of the Supervisory Committee; (4) Examined and approved Proposal on Establishing Special Committees of the Board of Directors; (5) Examined and approved Proposal on Adjusting Use of Part Raised Capital; (6) Examined and approved Proposal on Work Rules of Independent Directors; (7) Examined and approved Proposal on Rules of Procedure of the Shareholders’ General Meeting. Mr. Xie Bing, the lawyer with securities work qualification of Shangdong Junyida Law Firms attended the meeting and issued law opinion and the public notice on resolutions of the meeting was published Securities Times and Ta Kung Pao dated Sep.17, 2002. (II) Election and Change of Directors and Supervisors of the Company 1. In the report period, 2001 Annual Shareholders’ General Meeting in April 2002 approved to engage Wang Hanmin and Liu Baoyu as the independent directors of the 1st Board of Directors. 2. In the report period, the 1st Board of Directors was at expiration of its office terms. The 1st Extraordinary Shareholders’ General Meeting of 2002 held in Sep.2002 approved to elect Wang Aimin, Yu Fenghua, Liu Shijun, Wang Zhaoan, Li Wenyi, Xie Meilan, Liu Qingfeng, Shao Shijie, Wang Hanmin and Liu Baoyu as the directors of the 2nd Board of Directors. Among of them, Wang Hanmin and Liu Baoyu as independent directors. 3.In the report period, the 1st Supervisory Committee was at expiration of its office terms. The 1st Extraordinary Shareholders’ General Meeting of 2002 held in Sep.2002 approved to elect Zheng Guimin, Yin Jixian and Li Junmei as the supervisors of the Company. The Employees Representatives Union elected Huang Qi and Zhang Lei as employee supervisor. The aforesaid five people combined the 2nd Board of Directors of the Company. VIII. Report of the Board of Directors I. Analysis of the whole operation in the report period In the report period, the Company continued to put efforts on expanding the non-deep ocean fishing, processing and export of aquatic products, development and manufacture of marine medicine and health care series products and product of core business of international refrigeration transportation etc. The business of production of oceanic medicine and health care products and lease of transportation boats and fishing boats developed in a comparatively stable way while in terms of oceanic fishing business, though the completion volume of whole business was expanded somewhat compared with the previous year, the oceanic fishing volume in the whole year reached 36,000 tons and the sales volume of fish goods was 31,000 tons, due to the influence of various unfavorable factors in the international economic environment, such as extraordinary low price of fish and sharply rising price of oil etc., the Company’s whole achievements of core business in 2002 still declined by a big margin compared with that of year 2001. Ended Dec.31, 2002, the Company accumulatively accomplished an income from core business of RMB 310,982,756 in the whole year, which decreased by RMB 21,577,976 than that of year 2001 and realized a profit from core business of RMB 31,543,561, which decreased by RMB 49,700,991 compared with that of year 2001. The profit of other business was RMB-200,442, which decreased by RMB 329,269 compared with that of year 2001 and the net profit was RMB-229,808,572, which decreased by RMB 235,316,016 compared with that of year 2001 in the report period. (I) Scope of core business and operation As a comprehensive enterprise in the oceanic fishery industry, the Company is principally engaged in the oceanic fishing; letting of trawlers and refrigerated transportation vessels; production and sales of marine pharmaceutical products represented by cod-liver oil and fish oil medicines; import and export, processing and cold storage of aquatic products, etc. 1. The income from core business and profit from core business is listed as follows classified according to industries and areas: (Unit: RMB) (1) Classified according to industries Industries Income from core business Profit of core business Oceanic fishing 130,568,622 -9,576,435 Aquatic products trade 42,230,519 6,064,038 Production of oceanic 40,997,406 17,962,789 biological pharmaceutical and healthcare products Letting of fishing ship 11,020,784 -2,081,263 Letting and management of 32,948,720 7,662,631 refrigerated vessel Processing, cold storage of 53,216,705 11,511,801 aquatic products and others (2) Classified according to areas Origin of income Income from core business Profit from core business Oceanic fishing 130,568,622 -9,576,435 Including: Mainland of China 15,930,376 1,951,422 Taiwan of China 38,171,053 -4,811,235 Japan 41,109,607 -7,484,107 Nigeria 35,357,586 767,485 Aquatic products trade (Mainland 42,230,519 6,064,038 of China) Production of oceanic biological 40,997,406 17,962,789 pharmaceutical and healthcare products (Mainland of China) Letting of fishing ship (Spain) 11,020,784 -2,081,263 Letting and management of 32,948,720 7,662,631 refrigerated vessels (Mainland of China) Processing, cold storage of 53,216,705 11,511,801 aquatic products and others (Mainland of China) 2. There was no any authoritative data of market share about the products produced and operated or service provided by the Company. Financial date of main products: Unit: RMB Products Sales income Cost of sales Gross profit ratio (%) Tunny 79,280,660 91,576,012 -15.51 Scad 35,357,586 34,590,091 2.17 Ling 15,930,376 13,978,954 12.25 Other fish goods 42,230,519 36,091,914 14.54 Cod-liver oil products 40,997,406 22,723,599 44.57 3. Except that as stated in the item (V) in this part of this section, the change of fishery policy of Russia resulted that “Taihe” and “Taiping” boats transformed the fishing grounds and changed the fishing varieties, which made the profitability capability of oceanic fishing business decline, the Company experienced no material change in the core business and its structure, products or service compared with the previous year in the report period. (II) Operation and achievements of main holding subsidiaries and share-holding companies of the Company Unit: RMB Name of companies Assets scale Registered Equity Investment Business quality and core Net profit capital amount business or products Shandong Zhonglu 30,249,733 22,505,600 95% 21,380,320 International shipping, -1,933,803 Aquatic productss transportation of frozen and Sea aquatic products Transportation Co., Ltd. Qingdao Double 59,203,616 9,341,700 95% 8,874,615 Production and -16,777,466 Whale processing of cod-liver Pharmaceutical Co., oil medicine series Ltd. Habitat International 17,346,546 12,476,146 100% 12,476,146 Self-support cold-storage 3,926,409 Corporation transportation Shandong Zhonglu 73,627,014 56,793,300 60.98% 32,280,000 Freezing, cold-storage, -2,978,027 Oceanic Foods processing and sales of (Yantai) Co., Ltd. aquatic products, *(“Yantai Foods”) livestock, fruit and vegetables * June 18, 2001, the Company and SGCFE jointly incorporated Yantai Foods into which the Company injected cash investment in return for 76.65% equity, and SGCFE injected land use rights as investment. On Sep. 17, 2001, the Company, SGCFE and Australian Landscape Trading Co., Ltd. (“Landscape Trading”), a subsidiary of SGCFE, entered into a agreement stating that Landscape Trading would invest US$ 1,780,000 (equivalent to RMB 14,680,000) in Yantai Foods. Accordingly, registered capital of Yantai Foods would be increased to RMB 56,793,300 and equity held by the Company was decreased to 56.84% of the total. Ended April 24, 2003, Landscape Trading has not implemented its investment fully and the actual proportion of equity of Yantai Foods held by the Company was 60.98%. On Dec.31, 2002, according to resolutions of the 4th meeting of the 2nd Board of Directors and the equity transfer agreement, the Company accepted the transfer of 17.31% equity of “Yantai Foods” held by Shangdong Group Corporation of Fisheries Enterprise, which is a holding shareholder of the Company. After completing the transaction, the equity of “Yantai Foods” held by the Company was increased to 74.15%. Ended the end of the report period, the endorser of the equity has not gained the approval document of Provincial State-owned Assets Management Department and thus the registration of this equity transfer has not yet finished. (III) Major suppliers and customers 1. In 2002, the total amount of purchase of the top five suppliers was RMB 108,543,219, taking 38% of the total annual amount of purchase of the Company. 2. In 2002, the total amount of sales of the top five customers was RMB 133,898,927, taking 43.06% of the total annual amount of sales of the Company. (IV) Problems and difficulties arising from operation and solutions 1. The market of aquatic products was in depression. Since the economy of Japan, America and Europe etc., which were large countries of consumption of aquatic products, was depressed and the consumption demand was not prosperous, the demand volume of market of aquatic products overseas decreased and the price of aquatic products and foods declined. At the same time, the price of aquatic products at home also has always been in a comparatively low level. All these factors have influenced on the development of trade of aquatic products of the Company, which made the sales income of import and export trade of aquatic products of the Company in 2002 decrease by 50% compared with the last year and the net profit decrease by 70%. Thus, the Company shall try hard to overcome the unfavorable influence arising from the market factor, adjust the operating means, operating measures and operating strategies, attach importance to catching the market opportunity, develop readily marketable products, reasonably adjust the proportion of business structure, transform the layout of extensive operation and try hard to raise the economic benefits. 2. The protection of native resources of all fishery countries was increasingly strict. At present, the excessive utility of the world fishery resources was a solid fact. All fishery countries generally strengthened the development of fishery resources and restricted the fishing right and fishing quota. The large trawlboat of the Company was forced to remove to fishing ground of South Pacific to trial fish scads due to the change of Russian fishery policies, which resulted in the decline of benefits by a big margin. At the same time, due to the need of environmental protection, the fishing boats of the Company paid more cost in order to comply with the relevant regulations of environmental protection of locality country and international organization and prevent from environmental pollution. Therefore, the Company shall continue to bring the advantage of group operation into play, actively adjust the fishery projects across ocean, focus efforts on developing oceanic fishery, reasonably develop some new potential fishing ground, consolidate the traditional fishing mode, probe into new mode of fishing, try fishing new fishery varieties and continuously seek new growth point of profit. 3. The international situation was fluctuating, which increased the uncertain factors. In recent years, the fluctuating international situation was intensified. The breakout of financial crisis in many countries, especially the happening of paroxysmal events of wars etc. impacted great negative influence on the world economy, thus the price of fuel in the international market was high. However, as mainly engaged in the industries of oceanic fishing and refrigerated transportation, the main running cost of the Company is fuel consumption, which shall result in the increase of operating cost by a big margin. Besides, as an extroverted enterprise, the fluctuation of exchange rate also shall probably lead to the large economic loss of the Company. Thus, the Company shall continuously raise the production efficiency, extensively increase income and decrease expenditure, positively make use of new equipments, new technology and new way to reduce the production and management cost, pay special attention to the development trend of work economy and estimate the large fluctuation of exchange rate occurring probably to avoid unnecessary economic losses. 4. The management and running mechanism was backward, which brought difficulties to the production and operation. At present, the management mechanism and running mechanism still could not adapt to the regulations of modern enterprise system. Besides, the legal person’s administrative structure had aspects of imperfect and existed the situation that the related parties occupied the capital of the Company by a big margin, which all brought unfavorable influence to the production and operation of the Company. In 2002, due to the reasons of appropriation of reserve for bad debts of related parties and inventory devaluation reserve etc., the period expense of the Company increased by a big margin compared with the planned amount. Thus, the Company shall further standardize the operation, stick to “Five Separations”, try hard to reduce the occupied accounts by related parties as soon as possible, lighten the burden of listed companies, raise and strengthen the decision-making capability, deepen the enterprise reform, reinforce the enterprise management, speed up the adjustment of structure of industries and products, persist on auxiliary development, well manage the comprehensive operation and raise the running quality of the Company. (V) Difference from the annual business plan disclosed and the reasons 1. In the report period, the Company realized an income from core business of RMB 310,982,756, which was less 22% than the plan amount of RMB 400,000,000. The change of Russian fishery policy forced “Taihe” boat and “Taiping” boat to transfer from Okhotsk to South Pacific to conduct trial fishing of scads. However, this fish variety was hard to be fished and the price of fish was low, thus the trial operation incurred a serious loss, which resulted in a big margin of decline of income from core business. 2. In the report period, the cost of core business was RMB 277,521,608, a decrease of 1% compared with the plan amount of RMB 280,000,000. 3. In the report period, the period expense was RMB 219,693,757, an increase of 266% compared with the plan amount of RMB 60,000,000, which was mainly due to appropriation of reserve for bad debts of related parties’ accounts receivable and inventory devaluation reserve. In the report period, the Company did not adjust the business plan of the report year. II. Investment (I) Application of raised proceeds 1. Ended Dec.31, 2002, the Company has put RMB 222,075,000 among the total amount of proceeds raised through previous B share offering amounting to RMB 255,340,000 into the projects invested with raised proceeds disclosed, taking 87% of the total amount of raised proceeds and the proceeds not used was RMB 33,265,000, taking 13% of the total amount of raised proceeds. 2. Ended Dec.31, 2002, only “ production project of marine pharmaceutical and health care series products” has not been finished in all projects invested with raised proceeds of the Company. The Company has invested RMB 14,565,000 accumulatively in this project and has accomplished the construction of basis and main body of comprehensive preparation workshop with a construction area of 12,000 sq. m.. The balance proceeds of this project were RMB 33,265,000, which shall be put into this project as per the engineering progress. Unit: RMB’0000 Total amount of raised 25,534.00 Total 475.80 Total amount of 22,207.50 proceeds amount of raised proceeds raised used proceeds accumulatively used in the report year Committed projects Planned Change Actual Accrued amount of Compliance with amount of projects or amount of earnings planned progress input not input and estimated earnings or not Project of ultra-low 4,343.00 No 4,474.00 -876.5 No temperature tuna long-line fishing in South Pacific* Project of marine 4,783.00 No 1,456.50 / No for the moment pharmaceutical and healthcare products series Project of purse seine for 4,100.00 No 4,102.00 392.5 Yes tuna fishing in Indian Ocean Project of hooks and 4,991.00 Yes 0.00 / / poles for tuna fishing in Guinea Bay Project of importing 3,984.00 No 1,240.00 581 Yes large cold-storage boat Project of building 4,929.00 No 2,466.80 189.20 No refrigeration dory trawlers* Total 27,130.00 / 13,739.30 286.2 / *Explanation of projects 1. Project of ultra-low temperature tuna long-line fishing in South Pacific. This project not reaching planned has been finished in investment and has been put into production in successive. In the progress and earnings report period, since the market countries of main products such as Japan etc. saw a successive depression in economy and the fish price declined, thus the income declined, adding the factors of fluctuating international oil price and increase of maintenance expense etc. resulted that the cost mounted up, which made the project incur a loss. 2. Project of building refrigeration dory trawlers. Totally four refrigeration dory trawlers were invested and constructed in this project. During the implementation of this project, due to the change of Russian fishery policy, the Company did not gain the fishing certificate of this fishing ground and thus these four fishing boats could not enter into this fishing ground to do fishing. In the report period, the Company has signed boat sales contract and sold all these four fishing boats with the price of USD 800,000 per boat, which totally amounted to USD 3.2 million. Ended the end of the report period, the contracts of two boats among them have been implemented and the total payments recovered were USD 800,000. The contracts of the other two boats have not been implemented due to the reason of buyers. (II) Particulars about change projects 1. The Company made use of the raised proceeds of the partial change projects to incorporate “Qingdao Zhonglu OUQD Aihua Pharmaceutical Co., Ltd.” with Ocean University of Qingdao. The committed investment of this project was RMB 43.2 million and this company has registered on Sept.28, 2001 with a registered capital of RMB 72 million. Among which, the Company invested with cash of RMB 43,115,300, taking 59.88% of the registered capital. Since the development plan of two national first-grade new medicines of this company was postponed, adding the existing problems of aging of variety structure and market development, which resulted that the running benefits of this company was not ideal and could not reach the objectives of realization of investment. In the report period, the Company signed Equity Transfer Agreement with Inner Mongolia Lantai Industrial Co., Ltd. and transferred all 59.88% equity of “Qingdao Zhonglu Aihua Pharmaceutical Co., Ltd.” held. The transfer income has been all recovered in form of monetary funds. The Company has disclosed the above as per legal procedures. 2. The Company used the raised proceeds of partial change projects of cash RMB 32.28 million to incorporate “Shangdong Zhonglu Oceanic (Yantai) Foods Co., Ltd.” and for other relevant information, please refer to notes of item (II) of Part I in this section. In the report period, the Company has accomplished all construction projects of factories in this project ad started to conduct trial running of partial equipments in November. The organization expense etc. happening in the report year has been reckoned in the gains and losses of the Company. It was estimated that this project started to be put into production formally in 2003 and gradually realized a full production. After approved by Shareholders’ General Meeting, the Company used the balance funds of partial raised proceeds investment projects amounting to RMB 9,286,700 to complement the current capital by the Company. Unit: RMB’0000 Total amount of capital 8,663.67 of change investment projects Projects after change Corresponding Planned Actual amount Accrued Compliance with projects committed input of input amount of planned progress originally amount of earnings and estimated change earnings or not projects Establishment of Project of hooks and 4,320.00 4,311.53 215.58 No Qingdao Zhonglu poles for tuna fishing OUQD Aihua in Guinea Bay Pharmaceutical Co., Ltd. Establishment of Balance capital of 3,415.00 3,228.00 -210.73 No for the moment Shangdong Zhonglu Project of importing Oceanic (Yantai) Foods large cold-storage boat Co., Ltd. and Project of hooks and poles for tuna fishing in Guinea Bay Total --- 7,735.00 7,539.53 4.85 --- Total investment of All projects 24,605.33 21,278.83 --- --- committed and change adjustment projects Surplus part of raised Balance capital of 928.67 928.67 --- --- proceeds’ projects completed in supplementing implementation enterprise current capital Explanation of not Establishment of Qingdao Zhonglu OUQD Aihua Pharmaceutical Co., Ltd.. This company has reaching planned registered on Sept.28, 2001 with a registered capital of RMB 72 million. Among which, the progress and earnings Company invested with cash of RMB 43,115,300, taking 59.88% of the registered capital. (differentiation of Since the development plan of two national first-grade new medicines was postponed, adding detailed projects) the existing problems of aging of variety structure and market development, which resulted that the running benefits of this company was not ideal. Reason of change and Since the project of “Qingdao Zhonglu OUQD Aihua Pharmaceutical Co., Ltd.” could not explanation of change reach the objectives of realization of investment, the Company signed Equity Transfer procedures Agreement with Inner Mongolia Lantai Industrial Co., Ltd. and transferred all 59.88% equity (differentiation of invested in “Qingdao Zhonglu OUQD Aihua Pharmaceutical Co., Ltd.”. The transfer income detailed projects) has been all recovered in form of monetary funds. The Company has disclosed the above as per legal procedures. 2. Particulars about proceeds not raised through share offering On Mar.22, 2002, the Company made use of bank loan and self-owned capital to purchase a large life boat of purse net for tuna fishing “Taishou” boat with the investment of USD 7.15 million (RMB 59.35 million). This boat has been put into production at the end of May. Ended the end of the report period, totally 1790 tons of tuna has been fished and the realized profit was RMB-11.04 million. III. Financial status 1. Data of financial indexes Unit: RMB Items In 2002 In 2001 Increase/decrease Growth rate (+/-) (+/-) Total assets 804,177,030 1,020,809,474 -216,632,444 -21.22% Shareholders’ 277,032,440 496,028,469 -218,996,029 -44.15% equity Profit of core 31,543,561 81,244,552 -49,700,991 -61.17% business Net profit -229,808,572 5,507,444 -235,316,016 -4272.69% Net increase of -3,942,143 125,967,644 -129,967,644 -103.13% cash and cash equivalents 2. Main reason of change Items Reason of change Total assets Appropriation of reserve for bad debts of accountants of related parties receivable, appropriation of fixed assets impairment loss and inventory devaluation reserve in the report period. Shareholders’ equity Incurring a loss in the report period. Profit of core business The extraordinary low price of fish and increase of price of oil resulted the decrease of income from core business and increase of cost of core business. Net profit (1) The profit from core business declined. (2) The appropriation of reserve for bad debts of accounts of related parties receivable, appropriation of fixed assets impairment losses and inventory devaluation reserve made the period expense increase. Net increase of cash and cash The net cash flow arising from operating activities and financing activities decreased. VI. Except that as stated in item (V) of the first part of this section, the change of Russian fishery policy resulted that the “Taihe” and “Taiping” boat transferred the fishing ground, which led to the decrease of income from core business, there was no any material change in other production and operating environment, macro-policies and regulations. V. Explanation of the Board of Directors on the Auditors’ Report. PricewaterhouseCoopers Certified Public Accountants Ltd. audited the accounting statements of year 2002 and produced the Auditors’ Report with objection of expressing an opinion. The Board of Directors explained the issues involved in the Auditors’ Report respectively as follows: (I) Ended Dec.31, 2002, the Company’s balance of accounts receivable from SGCFE was RMB 167,738,183 and the balance of accounts receivable from SGCFE S.A. was RMB 21,550,572, which totally amounted to RMB 189,288,755, approximately taking 68% of shareholders’ equity and 24% of total assets of the Company on Dec.31, 2002. SGCFE has planned to recover the above through way of canceling out liabilities by assets. In the attached accounting statements, the Company did not appropriate reserve for bad debts to this accounts receivable. The accountants thought that since the progress of plan of assets commuting liabilities had uncertainties, and the Company could not provide relevant materials about the recoverable amount of relevant assets that were used to cancel out liabilities, thus the accountants could not assess the recoverability of the aforesaid accounts receivable. The Board of Directors of the Company explained: At the beginning of year 2003, SGCFE committed the repayments and planned to use its owned excellent assets to cancel out the arrearage to the Company. In the commitment, SGCFE arranged the objective time of repayment and clearly listed all assets that were planned to use for repayment. After investigated and studied on the spot by the Company, these assets were all excellent assets and had mutual complementary function with the existing assets of the Company, which shall help to raise the future profitability capability of the Company after being put into the Company. Thus, the recovery of accounts receivable from SGCFE was guaranteed. (II) Ended Dec.31, 2002, SGCFE and its subsidiaries’ bank loan amounting to RMB 101,280,000 and bank loan amounting to USD 2,135,000 was guaranteed and borrowed by some companies that entered into the Company when your company was restructured to establish stock company in 1999. The accountants thought: if SGCFE and its subsidiaries could not clear the aforesaid loans, the bank possibly shall require the Company to take the joint recovery liabilities. The accountants could not gain the relevant evidence in order to confirm that if the Company should take joint recovery responsibility for the aforesaid loans. The Board of Directors explained: The origin of breakdown issues stated by the accountants, present situation and the solutions that the Company planned to adopt were as follows: 1. Both Qingdao Double Whale Pharmaceutical Co., Ltd., a subsidiary of the Company and Qingdao Refrigeration Branch, a branch of the Company, provided guarantee for the long-term loan amounting to RMB 21,510,000 of Qingdao Haiyu Co., Ltd. before the reorganization and restructuring. Ended Dec.31, 2002, this guarantee has not been released yet. In Dec.2002, the Company signed Letter of Intent with Haiyu, Qingdao Agricultural Bank and Qingyu Sifang, planned to use the real estate held by Qingyu in No.27, Xiaogang Er Road, Qingdao as mortgage to guarantee for the aforesaid loan, thus to release the guarantee responsibility of the Company. At present, the Company is negotiating with the aforesaid three parties and decided to sign the formal agreements of four parties before end of June 2003 in order to release the guarantee responsibility of the Company. 2. SGCFE Seawater Culturing Company (a trading branch of the Company and original legal person’s enterprise before the restructuring, still not be cancelled as per reorganization agreement), provided the guarantee for the short-term loan amounting to RMB 79,770,000 of SGCFE. Upon the lawsuit application of debit party Lixia Sub-branch of Agricultural Bank of China, on Feb.17, 2003, Jinan Lixia Court judged to freeze 80 million shares of state-owned legal persons shares of the Company held by SGCFE in order to save this arrearage. Thus the probability that the Company undertook the joint recovery responsibility and formed liabilities was very small. 3. Shangdong Aquatic Shipping Company (original legal person’s enterprise of Shangdong Zhonglu Aquatic Shipping Co., Ltd., which is a subsidiary of the Company, before the reorganization and restructuring, now has been cancelled), a former subsidiary of SGCFE, borrowed USD 2,135,000 from the bank before the reorganization and restructuring. Since this loan funds has been used by SGCFE, thus this loan was not reorganized to inject in the Company. This loan expired in Nov.2002 and ended Dec.31, 2002, this loan has not been recovered yet. During the reorganization, this loan has not been put into the Company, thus it was not the liability of the Company. Besides, this loan funds has all been used by SGCFE. After the reorganization, though the name of borrower was not changed in the loan agreement, the loan has been put into the accounts of SGCFE. After the establishment of this loan, SGCFE has always undertaken and substantially implemented the obligation of borrower. On Mar.12, 2003, SGCFE recovered part of this loan amounting to RMB 400,000 and promised to the bank that continued to repay this loan in stages. (III) The accountants thought: On Dec.31, 2002, the current liabilities of the Company exceeded the current assets (excluding the accounts receivable from SGCFE and SGCFE S.A.) by RMB 237,501,577. The future sustainable operation of the Company shall largely depend on that if the Company can get continuous capital support from the bank and if can timely recover the accounts receivable from SGCFE and its all subsidiaries. Ended the signing date of this report, the Company has not yet gained the confirmation of sustainable capital support provided by the bank and at the same time the influence of implementation time and implementation of assets commuting liabilities plan of SGCFE on the future operation and cash flow was uncertain. These reasons impacted material inquiry on the sustainable operating capability of the Company. The Board of Directors of the Company explained: in 2003, the Company shall adopt various measures to reinforce the recovery of arrearage from SGCFE and other related parties (including the enterprises that have been appropriated reserve for bad debts in full amount). For instance: to take the judicial save to partial arrearage and to partial enterprises that the assets can not commute the liabilities, the Company shall require them to conduct bankruptcy clearing. It is believed that along with the continuous recovery of funds, the current capital will also increase continuously. The Company always keeps good business relationships with all commercial banks. Along with the gradual settlement of internal problems of the Company at present, the image of the Company was improved and thus the Company shall gain support of enough bank capital. Therefore, the future sustainable operating capability of the Company exists no any problem. The Board of Directors of the Company thought, the financial report of the Company in 2002 did not disobey the regulations of Enterprise Accounting Standards and Enterprise Accounting System and the financial report is true and complete. The accountants produced Auditors’ Report with objection of expressing opinion for the accounting statements of the Company based on the view of cautiousness, but the Board of Directors of the Company reserved the opinion on this. This auditing opinion indicated risks for all shareholders and other related people of interests of the Company, also presented a direction for the Company’s next partial work. The Board of Directors shall try hard to work and solve the aforesaid problems as soon as possible as per the aforesaid plans and measures. VI. Reason of correction of meterial accounting errors of year 2002 and the influence 1. Since in 2001 one sales object and the contract price was adjusted and was not reflected in the accounts of the Company of 2001, it resulted the sales income was calculated excessively. In June 2001, Qingdao Fishing Branch, which is an affiliated company of the Company, sold a patch of fish goods and the contract was not implemented on time due to the change of sales price. After this patch of fish goods was sold in July 2001, it resulted that the sales income receivable decreased. Since the business department did not provide relevant documents as evidence in time and the accounting department did not dispose the gains and losses of that year and booked in the payments for goods receivable, it resulted that the sales income of that year was calculated excessively, which impacted on the net profit of year 2001 amounting to RMB 7,645,000. 2. At the beginning of 2002, the Management approved and disposed a boat and did not appropriate corresponding impairment losses in 2001. Since the “Taishui Boat” of Zhonglu Aquatic Shipping Company, which is a subsidiary of the Company, had a bad shipping status, the Company decided to sell it. In the auditing of 2001, the Management of this company and the persons handling this matter did not pay enough attention to it and did not provide the relevant materials to accounting personnel and auditing personnel in time, thus it resulted that the impairment losses of that year that should be appropriated were not disposed, which impacted on the net profit of 2001 amounting to RMB 5,846,000. 3. Since the Company did not timely calculated the fuel cost of boats that should be estimated, it resulted in the less appropriation of sales cost. The oceanic fishing production boats do fishing in the mare liberum all the year and one time of voyage lasts for ten months and spans the year during the course. In terms of their consumptions of fuel etc., the Fishery Department of the country establishes agency aboard to deal with the relevant issues and is supplied through transportation boats, while the accounting calculation is carried through at home, thus Qingdao Fishing Branch, an affiliated company of the Company, did not transmit expense invoices of fuel cost that should be listed in 2001 timely, which resulted that the accounting personnel less calculated the current cost and impacted on the net profit of 2001 amounting to RMB 4,836,000. 4. Due to the aforesaid errors, the Company appropriated the statutory surplus public reserve and statutory public welfare fund of that year excessively. The aforesaid correction of material accounting errors and retroactive adjustment to the financial statements of 2001 impacted on the total amount of profit of 2001 amounting to RMB 18,327,000. Since CSRC Jinan Securities Regulatory Office examined the aforesaid problems in the special examination of the Company in Sept.2002 and instructed the Company and the accountant to explain, thus, in the auditing of 2002, the auditor accountant PricewaterhouseCoopers Certified Public Accountants Ltd. requested to do additional auditing and retroactively adjusted the detailed accounts. In July, 2002, Arthur Andersen & Co. and Andersen· Huaqiang Certified Public Accountants responsible for the auditing of the Company of 2001 were merged into PricewaterhouseCoopers. The auditor responsible for the auditing of the Company in 2002 was PricewaterhouseCoopers Zhongtian Certified Public Accountants Ltd.. In the aspect of the aforesaid correction of material accounting errors, the Company has conducted necessary communication with it. VII. Routine work of the Board of Directors (I) Meetings and resolutions of the Board of Directors in the report period In the report period, the Company totally held ten Board of Directors: 1. On Mar.21, 2002, the Company held the 16th meeting of the first Board of Directors, which examined and approved: (1) 2001 Work Report of the Board of Directors (2) 2001 Work Report of General Manager (3) 2001 Financial Settlement Report (4) 2001 Profit Distribution Preplan (5) 2002 Profit Distribution Policy (6) 2001 Annual Report and its Summary (7) Proposal on Renewal of Certified Public Accountants and Payment of Remuneration (8) Proposal on Candidates of Independent Directors and Allowance (9) Proposal on Purchase of Large Purse Net Boat of Tuna (10) Proposal on Amendment of Articles of Association (11) Proposal on Amendment of Rules of Procedures of Shareholders’ General Meeting (12) Proposal on Amendment of Rules of Procedures of the Board of Directors (13) Proposal on Rules of Work of General Manager (14) Proposal on Management Regulations of Information Disclosure (15) Contents of Questionnaire of Normative Operation of Listed Companies and Proposal on Rectification Report on Self-inspection of Normative Operation (16) Proposal on Increase of Operating Projects of Zhonglu Qingdao Refrigeration Branch (17) Proposal on Holding 2001 Shareholders’ General Manager 2. On April 9, 2002, the Company convened the first extraordinary Board of Directors of 2002, which examined and approved Proposal on Answer of Inquiry Letter on Relevant Particulars About Achievements Warning of Year 2001. 3. On April 24, 2002, the Company held the 17th meeting of the first Board of Directors by means of communication, which examined and approved First Quarterly Report of Year 2002. 4. On July 4, 2002, the Company held the 18th meeting of the first Board of Directors, which examined and approved Self-inspection Report of Establishment of Modern Enterprise System of Listed Companies. 5. On July 29, 2002, the Company held the 19th meeting of the first Board of Directors, which examined and approved: (1) 2002 Semi-annual Report and its Summary (2) 2002 Semi-annual Profit Distribution Preplan (3) Proposal on Amendment of Articles of Association (4) Proposal on Election of Term of the Board of Directors (5) Proposal on Establishment of Special Committee of the Board of Directors (6) Proposal on Adjustment of Partial Raised Proceeds (7) Proposal on Withdrawal of Zhonglu Fast East Limited Company (8) Proposal on Work System of Independent Directors (9) Proposal on Amendment of Rules of Procedures of Shareholders’ General Manager (10) Proposal on Holding the 1st Extraordinary Shareholders’ General Manager of Year 2002 6. On Sept.4, 2002, the Company held the 20th meeting of the first Board of Directors, which examined and approved Proposal on Importing Large Purse Net Boat of Tuna to Fishing in South Pacific. 7. On Sept.16, 2002, the Company held the 1st meeting of the 2nd Board of Directors, which examined and approved: (1) Proposal on Engagement of Chairman and Vice Chairman of the Board of Directors (2) Proposal on Engagement of Senior Executives of the Company (3) Proposal on Implementation Rules of All Special Committees of the Board of Directors (4) Proposal on Election of Committeemen of All Special Committees of the Board of Directors (5) Proposal on Amendment of Work Rules of the Board of Directors 8. On Sept.30, 2002, the Company held the 2nd meeting of the 2nd Board of Directors, which examined and approved Proposal on Transfer the Equity of Qingdao Zhonglu OUQD Aihua Pharmaceutical Co., Ltd. 9. On Oct.25, 2002, the Company held the 3rd meeting of the 2nd Board of Directors, which examined and approved Third Quarterly Report of Year 2002. 10. On Dec.31, 2002, the Company held the 4th meeting of the 2nd Board of Directors, which examined and approved Proposal on Accepting the Transfer of Equity of Shangdong Zhonglu Oceanic (Yantai) Foods Co., Ltd.. (II) Implementation of resolutions of Shareholders’ General Meeting by the Board of Directors In the report period, according to 2001 Profit Distribution Preplan approved by 2001 Shareholders’ General Meeting, the Board of Directors of the Company announced the public notice of dividends distribution of 2001 on June 19, 2002 and implemented this profit distribution plan. (III) Implementation of authorization of Shareholders’ General Meeting by the Board of Directors According to Proposal on Amendment of Articles of Association approved by 2001 Shareholders’ General Meeting and the 1st Extraordinary Shareholders’ General Meeting of 2002, the Board of Directors of the Company transacted the registration procedures of industrial and commercial change as per the authorization of Shareholders’ General Meeting. VIII. 2002 profit distribution preplan As audited by PricewaterhouseCoopers Zhongtian Certified Public Accountants according to Chinese Accounting Standards and International Accounting Standards respectively, the net profit realized in 2002 was RMB-229,808,572 and RMB-229,624,000 respectively while the profit available for distribution to all shareholders in the report year was RMB-207,936,351 and RMB-207,929,000 respectively. After studied by the Board of Directors, the Company decided neither to distribute profit nor to convert public reserve into share capital. This preplan should be submitted to Shareholders’ General Meeting for approval. IX. REPORT OF THE SUPERVISORY COMMITTEE (I) Meetings held in the report year In the report year, the Supervisory Committee had held six meetings with the details as follows: (1) 2001 Work Report of the Supervisory Committee; (2) 2001 Financial Settlement Report; (3) 2001 Profit Distribution Preplan; (4) 2002 Profit Distribution Policy; (5) 2001 Annual Report and Summary; (6) Proposal on Reengaging Certified Public Accountants and Paying Remuneration; (7) Proposal on Amending Rules of Procedure of the Supervisory Committee; (8) Content of Investigation Table on Normative Operation in Listed Companies and Proposal on Correction Report of Self-inspection Problems of Normative Operation. 2.On Apr.24, 2002, the Company held the 8th meeting of the 1st Supervisory Committee, which examined and approved the 1st Quarterly Report of 2002. 3.On July 4, 2002, the Company held the 9th meeting of the 1st Supervisory Committee, which examined and approved Self-inspection Report on Establishing Modern Enterprise System in Listed Companies. 4.On July 29, 2002, the Company held the 10th meeting of the 1st Supervisory Committee, which examined and approved the following content: (1) 2002 Semi Annual Report and Summary; (2) 2002 Semi Annual Profit Distribution Preplan; (3) Proposal on Election at Expiration of Office Term of the Supervisory Committee; (4) Proposal on Adjusting Use of Part Raised Capital 5.On Sep.16, 2002, the Company held the 1st meeting of the 2nd Supervisory Committee, which approved to elect Mr. Zheng Guimin as Chairman of the Supervisory Committee 6.On Oct.25, 2002, the Company held the 2nd meeting of the 2nd Supervisory Committee, which approved the 3rd Quarterly Report of 2002. (II) Work of the Supervisory Committee in the report period 1. Enhanced self-study of the supervisors. Through the patient study of relevant national laws and regulations, detail regulations and requirement of CSRC for listed companies and relevant management regulations of the Company, the members of the Supervisory Committee improved the level of supervision and check and the consciousness of operation according to laws.. 2. Enhanced the supervision and check of the Company’s financing. In 2002, the Supervisory Committee patiently implemented the function of supervision, nearly concentrated on the operation status of the Company and significant measures, supervised over the directors and senior executives according to laws, checked the financial status of the Company, examined every work report and financial report, specially supervised over the implementation of the resolutions of the Shareholders’ General Meeting to protect the interest of the investors. (III) The Supervisory Committee expressed independent opinions on the following events in the spirit of being responsible for the Shareholders’ General Meeting: 1. Operation according to laws. In the report period, the Company was separated from the control shareholder in five respects, made an active self-inspection according to relevant requirement of supervision and management authorities and made a patient correction on the problems of the Company. But because the legal person administrative structure of the Company was not perfect, in the process of significant decision-making, there existed the situation that the large shareholder and inner personnel controlled it, and there existed phenomenon of mixed operation between the subsidiaries and filiales. When the directors, general manager and other senior executives performed their duties, they were probity, autonomic, self-conscious, devoted and made contribution for the development of the Company. 2. Inspection of financing. The Company paid attention to the work of financing, improved consistently the quality of financial personnel and consummated the financial management systems. PricewaterhouseCoopers Certified Public Accountants audited the financial statements of the Company in 2002 and issued auditor’s report with being unable to form an opinion. We believed that the auditor’s report reflected the financial status and operation result in 2002. To Auditors’ Report with being unable to form an opinion issued by auditors in charge of the auditing of the Company, the Supervisory Committee reserved the opinion. The Supervisory Committee will urge the Board of Directors of the Company to solve the problems existed in the Company as soon as possible. 3. Use of raised capital of the Company. The raised capital from domestically listed foreign shares in 2000 was put into use in conformity with the items disclosed in Prospectus according to the actual situation. In the report period, the Company adjusted use of part raised capital from B shares and relevant adjustment proposal has been examined and approved by the Shareholders’ General Meeting. We believed that it was in conformity with Company Law, Securities Law and Articles of Association of the Company, the procedure of decision-making was legitimate and did not damage the legal right and interest of all shareholders. 4. Purchase and sale of assets. Concerning the purchase and sale of assets occurred in the report period, the transaction was fair and the price was reasonable. There found no internal transactions or behavior of damaging the right and interest of the shareholders. 5. Related transaction. The related transactions involved in the report period was mainly purchase and sale of trade, receiving and paying of rent of vessel, supplying short-term loan and receiving of interest and so on. We believed that the Company still existed occupying of capital by the big shareholder and abnormal related transaction could not be ended. X. SIGNIFICANT EVENTS (I) The Company had no significant lawsuits and arbitration. (II) Briefing and progress of purchase and sale of assets, consolidation and merge in the report period and its influence on the Company 1.On Mar.12, 2002, according to Vessel Business Contract, the Company sold Taishui Watercraft, which belonged to the Company’s subsidiaries and the transaction amount was RMB 3.9 million. The transaction was not related transaction. The two parties of the transaction finished exchange of payment and vessel on Aug.28, 2002. The Company published on Securities Times and Ta Kung Pao dated Nov.14, 2003. 2.On Mar.22, 2002, according to the resolution of the 16th meeting of the 1st Board of Directors and a Vessel Agreement, the Company purchased production vessel of purse seine for tuna fishing and the amount of the transaction was USD 7.15 million. The transaction was not related transaction. The Company published on Securities Times and Ta Kung Pao dated Mar.25, 2002. The purchase of assets enlarged the scale of the vessel teams of the Company, will performed active push function for the more rapid and better development of every careers of the Company. 3. On July 29, 2002, according to the resolutions of the 19th meeting of the 1st Board of Directors, the Company repealed its wholly owned subsidiaries-Zhonglu Far East Co., Ltd.. 4.On Sep.21, 2002, according to the resolutions of the 2nd meeting of the 2nd Board of Directors and an Equity Assignment Agreement, the Company transferred all equity of Qingdao Zhonglu Ouqd Aihua Pharmaceutical Co., Ltd. held by the Company to Neimenggu Lantai Industrial Co., Ltd.. The transaction was not related transaction. Ended as of Nov.13, 2002, the equity transfer was finished implementing. The equity transfer and implementation was published on Securities Times and Ta Kung Pao dated Oct.9, 2002 and Dec.3, 2002. The equity transfer can improve the industry structure and financial status of the Company, collect advantage of capital to develop the main business of the Company and meanwhile removed the investment risk and gained some investment earnings. 5. The Company purchase equity of Yantai Foodstuff. Please refer to the note of VIII.(I).2. The purchase of equity reduced accountant receivable for the related party and was favor of the Company. The aforesaid purchase and sale of assets, consolidation and merge had no influence on the consistency of business and the stability of the management of the Company. (III) Related transaction 1.Transactions of purchase Unit: RMB Principle of Accumulated Proportion in Influence on Content of pricing and Related party transaction the same kind the profit of the transaction settlement amount in 2002 of transaction Company method Seafood Market price, SSSC purchase 28，506，193 41.57% settled in cash 1,230,700 Price of cost; PRODESUR Seafood 18,668,083 100% remittance and 378,200 S.A. purchase virement 2.Transactions of sale Unit: RMB Principle of Accumulated Proportion in Influence on the Content of pricing and Related party transaction the same kind of profit of the transaction settlement amount in 2002 transaction Company method Sale of Negotiated QMFC 14,530,459 15% 230,500 commodity price, virement Negotiated Sale of Tenglong 3,490,367 26% price, settle in 113,450 commodity cash Negotiated Sale of Mailai 1,322,268 5% price, settle in 21,200 commodity cash 3.Paying and receiving rent of vessel and shipman Principle of Accumulated Proportion in Influence on the Content of pricing and Related party transaction the same kind of profit of the transaction settlement amount in 2002 transaction Company method Market price Paid rent of SGCFE shipman 6,473,500 67% Remittance and virement Market price Paid rent of SGCFE vessel 3,293,333 67% Remittance and 731,863 virement Received rent of Market price vessel and SGCFE S.A. 18,668,083 100% Remittance and management virement income 4.Other related transactions Principle of Accumulated Proportion in Influence on the Content of pricing and Related party transaction the same kind of profit of the transaction settlement amount in 2002 transaction Company method Market price SGCFE Interest income 4,775,647 100% virement 1,618,864 Purchased fixed Market price SGCFE assets 1,070,000 100% virement 35,000 Entrusted Market price PRODESUR operation of -229,950 100% Remittance and -299,950 S.A. vessels virement 5.The assets organization when the Company was established and all kinds of businesses after establishment produced the debt of the related companies owed to the Company. On Dec.31, 2002, the total amount of account receivable of the Company for the related parties before appropriating bad debt reservation was RMB 298,580,144. According to the Company’s financial system and relevant regulations of Ministry of Finance, in the report period, the Company appropriated equivalent bad debt reservation for RMB 106,460,747 account receivable with over three years account age against eight related enterprises including QMFC and Haiyu and appropriated RMB 511,385 bad debt for RMB 192,324,941 account receivable against several related enterprises including SGCFE, SGCFE S.A., PRODESUR S.A. and so on. 6.In the production and operation, advanced money produced RMB 1，038，511 account payable to SSSC. 7.Explanation on the necessity and consistency of the aforesaid related transactions by the Company: (1) The purchase of seafood and sale of commodity between the Company and the related companies were regular business among the enterprises engaging in aquatic products. In future, the Company will continue to carry out this kind of business with related enterprises under the aim of earning and the principle of fair transaction. (2) Although the proportion of the profit from the business relevant with lease of vessel in the total profit of the Company was larger, the speed of the capital’s reclaiming was slower and it was easy to produce more current debt of related parties. So, the Board of Directors of the Company has decided to end the kind of business in April 2003. Note: *According to the agreement signed by the Company and SGCFE, SGCFE sold its seven automobiles with RMB 1,791,211 as RMB 1,070,000 market price at that time to offset the debt owed to the Company through virement. The transaction value was less RMB 721,211 than the par value and the main reason was that the rapid dropping of the market price of automobile when China entered WTO. (IV) Other significant related transactions 1. The Company purchase equity of Yantai Foodstuff. Please refer to the note of VIII.(I).2. 2. The related transaction on the Company provided the guarantee for the others, please refer to X.(V).2 (V) Implementation of significant contracts 1.Custody, contract and lease (1) On June 30, 2002, according to Agreement of Ending Lease signed by the Company and SGCFE, the Lease Agreement signed on Dec.31, 2001 that the Company leased the office house of SGCFE with 2340 sq.m., RMB 2,562,300 and terms of 10 years was ended and the rent before ending need not be paid. Meanwhile, according to Agreement of Borrowing House between two parties, the Company freely used the office houses of SGCFE (2) In the report period, the Company signed Contract Agreements with SGCFE to lease three self-owned drawlers and six drawlers leased from SGCFE to it for a period of one year till April 1, 2003. (4) According to a Contract Agreement with effect from Jan. 1, 1999 for ten years, the Company leased its Taian Ship to Prodesur S.A. at a rental of 70% of annual net profit (net loss) in operating. 2. Significant guarantee In June 2002, SGCFE asked for a loan of RMB 150,000,000 from People’s Bank of China, Jinan Branch and Fujian Industrial Bank in order to repay the arrearage to the Company. The Company signed Pledge Contract of Bank Deposit amounting to RMB 150,000,000 with the aforesaid two banks for five times so as to provide the guarantee for the said loan. In Oct. 2002, the loan fell in, the said two banks executed the Pledge Contract, the Company commuted the loan principal and interests amounting to RMB 151,084,000 with the pledge deposit of the Company and the partial self-owned funds. The said related transaction was not been approved by the Board of Directors and Shareholders’ General Meeting. The public notice of related transaction was published in Securities Times and Ta Kung Pao in Feb. 2003. Thus, company and the relevant principal were reprimanded openly by Shenzhen Stock Exchange. 3.The Company did not entrust others to manage cash assets in the report period. 4.Other material contract and the implementation in the report period (1) On Apr.1, 2002, according to a sale contract, the Company sold three refrigeration dory trawlers with 8154 Type to Morocco G.A.T Company and the transaction amount was USD 0.52 million. Ended as of the report period, USD 0.3 million vessel amount was received. (2) According to Contract of Trawlers’ Sale signed in the report period, the Company sold four refrigeration dory trawlers manufactured by itself and total sale amount was USD 3.2 million. Ended as of the report period, the contract of 2 trawlers (the amount of contract was USD 1.60 million) has been implemented and USD 0.8 million vessel amount was received and other vessel amount will be reclaimed step by step. Due to the reason of the buyer, the contract of the other two trawlers can not be implemented and still stayed in the port. The Company will explore the possibility of self-operation. (3) In the report period, the Company signed agreement with SGCFE that the Company received RMB 4,775,646 interest for the account receivable of the Company against SGCFE and the funds occupied by related parties as 5.841% year-rate of loan in the market. (VI) Neither the Company nor its shareholder with over 5% shares of the Company made any commitment in designated newspapers or internet website in the report period. (VII) As approved by 2001 Annual Shareholders’ General Meeting, the Company engaged Arthur Andersen & Co. and Andersen·Huaqiang Certified Public Accountants as the audit organization of the Company in 2002. In the report period, the Company received letter of PricewaterhouseCoopers Zhongtian Certified Public Accountants Co., Ltd. (PricewaterhouseCoopers) that the business of Arthur Andersen & Co. and Andersen·Huaqiang Certified Public Accountants which were responsible for the audit of the Company in Hong Kong and the mainland of China was formally merged into PricewaterhouseCoopers since July 1, 2002. According to Agreement of Audit Business signed on Dec.26, 2002, the Company engaged PricewaterhouseCoopers as domestic and overseas audit organization the remuneration the Company paid to Certified Public Accountants was HKD 1.1 million. (VIII) In the report period, the Company, the Board of Director of the Company, the directors and senior executives had never been checked, given administrative punishment and circling criticism by CSRC nor been publicly condemned by Stock Exchange. (IX) Since Jan.1, 2002, the Company the preferential policy of tax return as the rate of 18%. The change of this preferential policy of tax had no influence on the future operation of the Company. XII.DOCUMENTS AVAILABLE FOR REFERENCE 1. Accounting Statement carried with the personnel signature and seal of legal representative, person in charge of the financial affairs and person in change of the handing accounting affairs; 2.Original of Auditor’s Report with signature and seal of Certified Public Accountants as well as personal signatures and seal of and the certified public accountants; 3. Originals of all documents as disclosed in public on the newspapers as designated by China Securities Regulatory Commission as well as the original manuscripts of the public notices published in the report period. 4. Annual Report disclosed in other Stock Exchange. Shandong Zhonglu Oceanic Fisheries Company Limited Chairman of the Board: Wang Zhaoan (Attorney) March 26, 2003 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS TOGETHER WITH AUDITORS' REPORT FOR THE YEAR ENDED 31 DECEMBER 2002 The reader is advised that this report has been prepared originally in Chinese. In the event of a conflict between this report and the original Chinese version or difference in interpretation between the versions of the report, the Chinese language report shall prevail. 普华永道中天会计师事务所有限公司 12th Floor, Shui On Plaza 333 Huai Hai Zhong Lu Shanghai 200021 People's Republic of China Telephone +86 (10) 6561 2233 Facsimile +86 (10) 8529 9000 REPORT OF THE AUDITORS To the Shareholders of Shandong Zhonglu Oceanic Fisheries Co., Ltd. We were engaged to audit the accompanying consolidated balance sheet of Shandong Zhonglu Oceanic Fisheries Co., Ltd. (the “Company”) and its subsidiaries (the “Group”) as of 31 December 2002 and the related consolidated income statement, statement of changes in shareholders’ equity and cash flow statement for the year then ended, prepared in accordance with International Financial Reporting Standards. These consolidated financial statements are the responsibility of the Company’s management. As set forth in the section “AMOUNTS DUE FROM SGCFE AND ITS SUBSIDIARY SGCFE S.A.” to the consolidated financial statements, as of 31 December 2002, the Group had RMB 167,738 thousand due from Shandong Group Corporation of Fisheries Enterprise (“SGCFE”, the ultimate holding company of the Group) and RMB 21,551 thousand due from SGCFE’s subsidiary, Shandong Group Corporation of Fisheries Enterprise S.A. (“SGCFE S.A.”), totalling RMB 189,289 thousand and representing 68% of the shareholders’ equity, or 24% of the total assets, of the Group. SGCFE has plans to settle the aforementioned amounts through transfers of certain assets to the Group (“Assets Transfer”). The Group’s management considers it unnecessary to make any provisions in the respect of these amounts because of the planned Assets Transfer. Due to the uncertainties in the implementation of the Assets Transfer plan, and the failure of the Group to provide us with evidence supporting the recoverable amounts of the assets to be transferred, we are unable to ascertain the recoverability of these amounts. As set forth in Note 24 to the consolidated financial statements, as of 31 December 2002, SGCFE and its subsidiary had bank borrowings of RMB 101,280 thousand, guaranteed by, and USD 2,135 thousand, borrowed by, certain entities which had been reorganised into the Group upon the restructuring to incorporate the Company into a joint stock limited company in 1999. The banks may hold the Group responsible for these borrowings if SGCFE and its subsidiary default on the repayments. We are unable to obtain evidence on whether the Group would be held liable for the aforementioned borrowings. As set forth in the section “GOING CONCERN ASSUMPTION” to the consolidated financial statements, the Group incurred a net loss of RMB 229,624 thousand for the year ended 31 December 2002. As of that date, the Group’s current liabilities exceeded its current assets, excluding the amounts due from SGCFE and SGCFE S.A. mentioned above, by RMB 237,502 thousand. The continuation of operations of the Group largely depends on its ability to secure on-going financing from its bankers and timely collection of the amounts due from SGCFE and its subsidiaries. As of the date of our report, the Group has not obtained acknowledgement from its bankers for their ongoing financial support for the Group. It is also difficult to ascertain when the Assets Transfer plan will be implemented and to assess the related impact on the future operations and cash flows of the Group. These factors raise substantial doubt on the Group’s ability to continue as a going concern. Because of the significance of the above-mentioned uncertainties and the doubt on the Group’s ability to continue as a going concern, we do not express an opinion on the accompanying consolidated financial statements of the Group. PricewaterhouseCoopers Zhong Tian CPAs Co., Ltd. Shanghai, the People's Republic of China 24 April 2003 2 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands, except for (losses) earnings per share) Note 2002 2001 Sales, net 2 309,065 330,432 Cost of sales (277,522) (251,274) Gross profit 31,543 79,158 Other operating income 2,969 151 Distribution costs (35,385) (26,819) Administrative expenses 23(c) (215,191) (43,273) Other operating expenses (4,498) (1,859) (Loss) profit from operations (220,562) 7,358 Finance cost, net 3 (18,649) (1,067) Investment income from trading and long-term investments 23 781 Gain on disposal of investment in a subsidiary 22(d) 7,235 - Subsidy income 1,191 - (Loss) profit before tax and minority interests 4 (230,762) 7,072 Income tax expense 5(2) (1,059) (4,395) (Loss) profit before minority interests (231,821) 2,677 Minority interests 21 2,197 2,654 Net (loss) profit (229,624) 5,331 (Losses) earnings per share - Basic 6 RMB (0.86) RMB 0.02 - Diluted Not applicable Not applicable The accompanying accounting policies and notes form an integral part of these consolidated financial statements. 3 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES CONSOLIDATED BALANCE SHEET AS OF 31 DECEMBER 2002 (All amounts in RMB thousands) Note 2002 2001 ASSETS Non-current assets Leasehold lands 8 31,533 40,622 Property, plant and equipment 9 349,262 339,033 Intangible assets 10 2,378 17,314 Long-term investments 11 33,157 33,266 416,330 430,235 Current assets Inventories, net 12 84,252 75,869 Due from related parties, net 23(c) 191,814 196,515 Prepayments and other current assets 1,993 12,095 Other receivables, net 13 16,190 11,026 Trade receivables, net 14 38,248 65,303 Trading investments 15 62 80 Restricted bank deposits 22(b) 1,158 171,383 Cash and cash equivalents 22(b) 54,131 58,073 387,848 590,344 Total Assets 804,178 1,020,579 4 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES CONSOLIDATED BALANCE SHEET (CONTINUED) AS OF 31 DECEMBER 2002 (All amounts in RMB thousands) Note 2002 2001 EQUITY AND LIABILITIES Shareholders’ equity Share capital 19 266,071 266,071 Reserves 20 10,949 243,084 277,020 509,155 Minority interests 21 21,221 38,257 LIABILITIES Non-current liabilities Long-term bank borrowings, non-current portion 18 69,740 31,000 Long-term payables 136 - 69,876 31,000 Current liabilities Current portion of long-term bank borrowings 18 36,290 8,070 Taxes payable 11,549 15,650 Due to related parties 23(c) 1,217 2,834 Other payables and accruals 16 42,883 33,621 Dividends payable 7 509 509 Advances from customers 9,800 7,202 Trade payables 40,431 26,785 Short-term borrowings 17 293,382 347,496 436,061 442,167 Total liabilities 505,937 473,167 Total Equity and Liabilities 804,178 1,020,579 Approved by the Board of Directors on 24 April 2003 _________________________________________ _________________________________________ Wang Zhao An Xie Mei Lan Director & General Manager Director & Finance Controller The accompanying accounting policies and notes form an integral part of these consolidated financial statements. 5 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands) Reserves Statutory Unappro-priated Statutory public profits Total Share Translation Capital surplus welfare (accumulated shareholders’ capital reserve reserve reserve reserve losses) Total reserves equity (Note 19) (Note 20 (a)) (Note 20 (b)) (Note 20 (b)) Balance as of 1 January 2001 266,071 59 186,284 12,406 6,203 59,398 264,350 530,421 Currency translation difference - 11 - - - - 11 11 Net profit for 2001 - - - - - 5,331 5,331 5,331 Profit appropriations - Statutory surplus reserve - - - 1,799 - (1,799) - - - Statutory public welfare reserve - - - - 900 (900) - - - Appropriations to reserves by subsidiaries - - - 261 131 (392) - - - Dividends (Note 7) - - - - - (26,608) (26,608) (26,608) Balance as of 31 December 2001 as restated 266,071 70 186,284 14,466 7,234 35,030 243,084 509,155 Balance as of 1 January 2002 - As previously reported 266,071 70 186,284 15,051 7,526 52,480 261,411 527,482 - Correction on significant accounting errors (Note 27) - - - (585) (292) (17,450) (18,327) (18,327) As restated 266,071 70 186,284 14,466 7,234 35,030 243,084 509,155 Currency translation difference - (11) - - - - (11) (11) Net loss for 2002 - - - - - (229,624) (229,624) (229,624) Pricing difference associated with related party transactions - - 10,804 - - - 10,804 10,804 Profit appropriations - Appropriations to reserves by subsidiaries - - - 21 10 (31) - - - Dividends (Note 7) - - - - - (13,304) (13,304) (13,304) Balance as of 31 December 2002 266,071 59 197,088 14,487 7,244 (207,929) 10,949 277,020 The accompanying accounting policies and notes form an integral part of these consolidated financial statements. 6 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands) Note 2002 2001 CASH FLOWS FROM OPERATING ACTIVITIES Cash generated from operations 22(a) 47,893 80,116 Income taxes paid (2,727) (5,706) Interest expenses paid (21,901) (17,003) Net cash generated from operating activities 23,265 57,407 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment (137,117) (161,350) Purchase of intangible assets (2,563) (9) Cash paid for trading investments - (13) Proceeds from disposal of subsidiary, net of cash disposed 22(d) 44,440 - Proceeds from investment income of trading investments - 2,000 Proceeds from investment income of long-term investments 23 114 Proceeds from disposal of trading investments 72 50,035 Proceeds from disposal of property, plant and equipment 22(c) 21,757 451 Interest income received 1,751 19,724 Net cash used in investing activities (71,637) (89,048) CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid (7,017) (14,103) Net (decrease) increase in short-term borrowings (30,824) 25,332 Repayment of long-term bank borrowings (8,070) (4,000) Proceeds from long-term bank borrowings 79,530 20,000 Proceeds from capital injection of minority shareholder 10,822 - Proceeds from acquisition of a subsidiary - 369 Net cash generated from financing activities 44,441 27,598 Currency translation difference (11) 11 Net decrease in cash and cash equivalents (3,942) (4,032) Cash and cash equivalents, beginning of year 58,073 62,105 Cash and cash equivalents, end of year 22(b) 54,131 58,073 The accompanying accounting policies and notes form an integral part of these consolidated financial statements. 7 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) GENERAL INFORMATION Shandong Zhonglu Oceanic Fisheries Co., Ltd. (the “Company”) was incorporated as a joint stock limited company in the People’s Republic of China (the “PRC”) on 30 July 1999, subsequent to a corporate reorganisation on Shandong Group Corporation of Fisheries Enterprise (“SGCFE”, the holding company of the Company) (the “Reorganisation”) to rationalise the Company’s structure in preparation for the listing of domestically listed foreign investment shares (the “B shares”). The B shares have been listed on the Shenzhen Stock Exchange since July 2000. The Company is principally engaged in fishing, processing and trading of seafood. These activities are carried out by the following departments, branches and subsidiaries of the Company: Name of Departments Principal Activities Trading Department Trading of frozen seafood Western Africa Development Department Letting of trawlers Southern America Development Department Letting of trawlers Name of Branches Principal Activities Trading Branch Sale of frozen seafood Qingdao Fishing Branch Oceanic fishing Qingdao Branch Oceanic fishing Longkou Branch Processing of seafood Qingdao Refrigerating Branch Processing and trading of frozen seafood 8 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) GENERAL INFORMATION (continued) Place of Percentage of incorporation/ Date Cost of equity interest Name of subsidiaries of registration Principal activities investment actually held Shandong Zhonglu Oceanic The PRC/ Letting of refrigerated RMB 95% Fisheries Transportation 3 January 1994 vessels and 21,380,000 Co., Ltd. (“Zhonglu international vessel Transportation”) transportation Qingdao Double Wale The PRC/ Manufacturing and RMB 95% Ocean Pharmaceutical Co., 29 April 1994 processing of fish-liver 8,875,000 Ltd. (“Double Wale oil products Pharmaceutical”) Habitat International The Republic of Letting of refrigerated RMB 100% Corporation (“HIC”) Panama/ vessels 12,476,000 13 October 1997 Shandong Zhonglu Oceanic The PRC/ Cold storage and RMB 60.98% (Yantai) Food Co., Ltd. 18 June 2001 processing of seafood 32,280,000 (“Yantai Food”) etc. On 18 June 2001, the Company and SGCFE incorporated Yantai Food, an equity joint venture enterprise, by means of capital contributions of cash and leasehold land respectively. The Company holds 76.65% of equity interest in Yantai Food. On 17 September 2001, the Company, SGCFE and Australian Shanshui Trading Co., Ltd. (“Shanshui Trading”), a subsidiary of SGCFE, reached into an agreement to accept Shanshui Trading’s equity investment of USD 1,780,000 into Yantai Food. Consequently, the registered capital of Yantai Food increased to RMB 56,793,300, in which the Company holds 56.84% of equity interest. As of 24 April 2003, Shanshui Trading has not completed its capital contribution. On 28 September 2001, the Company and Qingdao Oceanic University (“QOU”) incorporated Qindao Zhonglu Haida Aihua Oceanic Pharmaceutical Co., Ltd. (“Aihua Pharmaceutical”), an equity joint venture enterprise, by means of capital contributions of cash and the net assets, in relation to manufacture of pharmaceutical products, of Huahai Pharmaceutical Plant, a subsidiary of QOU, respectively. The Company holds 59.88% of equity interest in Aihua Pharmaceutical. On 21 September 2002, the Company signed agreement with Inner-Mongolia Lantai Co., Ltd. to fully dispose its equity interest in Aihua Pharmaceutical at the consideration of approximately RMB 45,271,000. The equity interest transfer was completed on 13 November 2002. The excess of the consideration over the Company’s interest in the fair value of net identifiable assets and liabilities disposed was approximately RMB 7,235,000. 9 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) GENERAL INFORMATION (continued) The Company and its subsidiaries are collectively referred to as the “Group”. The address of the Company’s registered office is 43 Heping Road, Jinan, Shandong province, the PRC. As of 31 December 2002, there were 1,887 (2001: 1,950) employees in the Group. 10 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) AMOUNTS DUE FROM SGCFE AND ITS SUBSIDIARY SGCFE S.A. As of 31 December 2002, the Group had RMB 167,738,000 due from SGCFE and RMB 21,551,000 due from SGCFE’s subsidiary - Shandong Group Corporation of Fisheries Enterprise S.A. (“SGCFE S.A.”). These receivables, totalling RMB 189,289,000, represented for 68% of the shareholders’ equity or 24% of the total assets of the Group as of 31 December 2002. SGCFE has plans to settle the amounts through transfers of certain assets to the Group (“Assets Transfer”). In this connection, no provision for these receivables has been made in the consolidated financial statements. AMOUNTS DUE FROM OTHER SUBSIDIAIRIES OF SGCFE In accordance with a guarantee letter issued by SGCFE on 18 June 2001, SGCFE assumes collateral responsibilities of the repayment for the Group’s receivables due from certain subsidiaries of SGCFE (namely, Qingdao Marine Fisheries Corporation (“QMFC”), Longkou Tenglong Aquatic Product Co., Ltd. (“Tenglong”), Qingdao Haiyu Fishery Co., Ltd. (“Haiyu”), Aquatic Products Processing Plant of QMFC (“QMFC-APPP”), Longkou Seafood Processing Company (“LSPC”), Qingdao Mellow Foods Co., Ltd. (“Mellow”), Qingdao An’ning Vessel Construction Co., Ltd. (“An’ning”) and Qingdao Animal Medicine Company (“Animal Medicine”)) with effective period of five years. No provision for these receivables has been made in prior years. In 2002, the Group noted that except for the settlement plan disclosed in above section “AMOUNTS DUE FROM SGCFE AND ITS SUBSIDIARY SGCFE S.A.”, most likely SGCFE has no further capacity to fulfil its collateral responsibilities for repayments of the liabilities due to the Group. Hence, the Group fully provided specific provision for doubtful debts for the amounts due from these subsidiaries of SGCFE, totalling RMB 106,461,000 (Note 23 (c)), due to all these subsidiaries are incapable to repay the debts under either to be liquidated or negative net worth situation. GOING CONCERN ASSUMPTION For the year ended 31 December 2002, the Group incurred a net loss of approximately RMB 229,624,000. As of that date, the Group’s current liabilities exceeded its current assets, excluding the amounts due from SGCFE and SGCFE S.A., referred to in the section “AMOUNTS DUE FROM SGCFE AND ITS SUBSIDIARY SGCFE S.A.”, by RMB 237,502,000. The directors of the Company consider that the continuation of operation of the Group can be assured by the ability of the Group to secure ongoing financing from its bankers, the success of the Group’s future business and the timely collection of the amounts due from SGCFE and its subsidiaries. In this connection, the consolidated financial statements have been prepared on a going concern basis, and do not include any adjustments relating to the recoverability and classification of assets or to the amounts and classification of liabilities that may be necessary if the Group were unable to continue as a going concern. 11 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) ACCOUNTING POLICIES The principal accounting policies adopted in preparation of these consolidated financial statements of the Group are set out below: A Basis of presentation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board. These consolidated financial statements have been prepared under the historical cost conversion except as disclosed in the accounting polices below. This basis of accounting differs from that used in the preparation of the Group’s statutory accounts which are prepared in accordance with PRC Accounting Standards for Business Enterprises and the Accounting System for Business Enterprises (“Statutory Accounts”). The adjustments made to conform the Statutory Accounts of the Group to IFRS are shown in “SUPPLEMENTORY INFORMATION”. The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. B Group accounting Subsidiaries, which are those entities in which the Group has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies are consolidated. Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries. Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are also eliminated unless cost cannot be recovered. Where necessary, accounting policies of subsidiaries have been changed to ensure consistency with the policies adopted by the Group. 12 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) ACCOUNTING POLICIES (continued) C Foreign currency translation The Company and its subsidiaries maintain their books and records in RMB. Transactions in other currencies are translated into the reporting currency at exchange rates prevailing at the time of the transactions. Monetary assets and liabilities denominated in other currencies at the balance sheet date are re-translated at exchange rates prevailing at that date. Non-monetary assets and liabilities in other currencies are translated at historical rates. Exchange differences, other than those capitalised as a component of borrowing costs, are recognised in the income statement in the period in which they arise. Income statements and cash flows of foreign entities are translated into the Group’s reporting currency at average exchange rates for the year and their balance sheets are translated at the exchange rates prevailing at balance sheet date. Exchange differences arising from the translation of the net investment in foreign entities and of borrowings are taken to shareholders’ equity. When a foreign entity is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale. D Leasehold lands Leases of lands acquired are classified as operating leases. The pre-paid lease payments are amortised on a straight-line basis over the lease period of 41 to 48 years. E Property, plant and equipment and depreciation Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment loss. The initial cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Depreciation is calculated using the straight-line method to write off the cost, after taken into account the estimated residual value of each asset over its expected useful life. The expected useful lives are as follows: Buildings 20-40 years Vessels 15-20 years Machinery and fishing equipment 8-20 years Furniture and office equipment 5 years Motor vehicles 5 years The useful lives of assets and depreciation method are reviewed periodically to ensure that the method and period of depreciation are consistent with the expected pattern of economic benefit from items of property, plant and equipment. 13 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) ACCOUNTING POLICIES (continued) E Property, plant and equipment and depreciation (continued) Expenditures incurred after the property, plant and equipment have been put into operation, such as repairs and maintenance and overhaul costs, are recognised as expense in the period in which they are incurred. In situations where it is probable that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of the asset beyond its originally assessed standard of performance, the expenditures are capitalised as an additional cost of the asset. When assets are sold or retired, their costs and accumulated depreciation are eliminated from the accounts and any gain or loss resulting from their disposal is included in the income statement. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Interest costs on borrowings to finance the construction and installation of property, plant and equipment are capitalised, during the period of time that is required to complete and prepare the asset for its intended use. Other borrowing costs are expensed. F Construction-in-progress Construction-in-progress represents buildings and plant under construction and machinery and equipment under installation and testing, and is stated at cost. This includes cost of construction, plant and equipment and other direct costs plus borrowing costs which include interest charges and exchange differences arising from foreign currency borrowings used to finance these projects during the construction period, to the extent these are regarded as an adjustment to interest costs. Construction-in-progress is not depreciated until such time as the assets are completed and put into operational use. G Intangible assets Intangible assets are measured initially at cost. Intangible assets are recognised if it is probable that the future economic benefits that are attributable to the assets will flow to the Group; and the cost of the asset can be measured reliably. After initial recognition, intangible assets are measured at cost less accumulated amortisation and any accumulated impairment losses. Intangible assets are amortised on a straight-line basis over the best estimate of their useful lives. The amortisation period and the amortisation method are reviewed periodically to ensure that the method and period of amortisation are consistent with the expected pattern of economic benefits from intangible assets. 14 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) ACCOUNTING POLICIES (continued) G Intangible assets (continued) (1) Production licenses Expenditure to acquire production licenses is capitalised at cost and amortised using the straight-line method over 5 years. (2) Electricity use right and water use right Expenditure to acquire electricity use right and water use right is capitalised at cost and amortised using the straight-line method over 3-10 years. H Impairment of long lived assets Property, plant and equipment and other non-current assets, including long-term investments, leasehold lands and intangible assets are reviewed for impairment losses whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount of the asset exceeds its recoverable amount which is the higher of an asset’s net selling price and value in use. For the purposes of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash flows. I Investments The Group classified its investments in debt and equity securities into the following categories: trading, held-to-maturity and available-for-sale. The classification is dependent on the purpose for which the investments were acquired. Management determines the classification of its investments at the time of the purchase and re-evaluates such designation on a regular basis. Investments that are acquired principally for the purpose of generating a profit from short-term fluctuations in price are classified as trading investments and included in current assets. Investments with a fixed maturity that management has the intent and ability to hold to maturity are classified as held-to-maturity and are included in non-current assets, except for maturities within 12 months from the balance sheet date which are classified as current assets. Investments intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, are classified as available-for-sale; and are included in non-current assets unless management has the express intention of holding the investment for less than 12 months from the balance sheet date or unless they will need to be sold to raise operating capital, in which case they are included in current assets. 15 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) ACCOUNTING POLICIES (continued) I Investments (continued) Purchases and sales of investments are recognised on the trade date, which is the date that the Group commits to purchase or sell the asset. Cost of purchase includes transaction costs. Trading and available-for-sale investments are subsequently carried at fair value. Held-to-maturity investments are carried at amortised cost using the effective yield method. Realised and unrealised gains and losses arising from changes in the fair value of trading and available-for-sale investments are included in the income statement in the period in which they arise. J Operating leases (1) The Group is the lessee Leases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net off any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. (2) The Group is the lessor Assets leased out under operating leases are included in property, plant and equipment in the balance sheet. They are depreciated over their expected useful lives on a basis consistent with similar owned property, plant and equipment. Rental income is recognised on a straight-line basis over the lease term. K Inventories Inventories are stated at the lower of cost and net realisable value. Cost, calculated on the weighted average basis, comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. L Trade receivables Trade receivables are carried at original invoice amount less provision made for impairment of these receivables. A provision for impairment of trade receivables is established when there is an objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. 16 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) ACCOUNTING POLICIES (continued) M Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise cash on hand, deposits held at call with banks, short-term highly liquid investments with original maturities of three months or less. N Borrowings and borrowing costs Borrowings are initially recognised at the proceeds received, net of transaction costs. They are subsequently carried at amortised costs using the effective interest rate method, the difference between net proceeds and redemption value being recognised in the net profit or loss for the period over the life of the borrowings. Borrowing costs include interest charges and exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. Borrowing costs are expensed as incurred, except when they are directly attributable to the acquisition, construction or production of the property, plant and equipment that necessarily take a substantial period of time to get ready for its intended use in which case they are capitalised as part of the cost of that asset. Capitalisation of borrowing costs commences when expenditures for the asset and borrowing costs are being incurred and the activities to prepare the asset for its intended use are in progress. Borrowing costs are capitalised at the weighted average cost of the related borrowings until the asset is ready for its intended use. If the resulting carrying amount of the asset exceeds its recoverable amount, an impairment loss is recorded. O Deferred income taxes Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Currently enacted tax rates are used in the determination of deferred income tax. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. 17 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) ACCOUNTING POLICIES (continued) P Pension scheme Pursuant to the PRC laws and regulations, contributions to the basic pension insurance for the Group’s local staff are to be made monthly to a government agency based on the rates (23% for Jinan, 20% for Longkou and Yantai, and 25.5% for Qingdao) of the standard salary set by the provincial government. The government agency is responsible for the pension liabilities relating to such staff on their retirement. The Group accounts for these contributions on an accrual basis. The Group has no obligation for the payment of pension benefits beyond the contribution described above. Q Provisions A provision is recognised when, and only when the Group has a present obligation (legal or constructive) as a result of a past event and it is probable (i.e. more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. Where the effect of the time value of money is material, the amount of a provision is the present value of the expenditures expected to be required to settle the obligation. When a provision is no longer probable that an outflow of resources embodying economic benefit will be required to settle the obligation, the provision will be reversed. R Revenue recognition Provided it is probable that the economic benefits associated with a transaction will flow to the Group and the revenue and costs, if applicable, can be measured reliably, revenue is recognised on the following basis: (1) Sales of goods Revenue is recognised when the significant risks and rewards of ownership of goods have been transferred to the buyer (normally upon delivery of goods to customers). (2) Rental income Rental income from letting trawlers and refrigerated vessels is recognised on the straight-line basis over the period of relevant leases. (3) Interest income Interest income is recognised on a time proportion basis that takes into account the effective yield on the assets. 18 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) ACCOUNTING POLICIES (continued) S Dividends Dividends are recorded in the Group’s consolidated financial statements in the period in which they are approved by the Group’s shareholders. T Segments Business segments: for management purposes the Group is organised into six major operating businesses. The divisions are the basis upon which the Group reports its primary segment information. Financial information on business and geographical segments is presented in Note 1. U Comparatives Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current year. 19 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) FINANCIAL RISK MANAGEMENT (1) Financial risk factors and financial risk management The Group activities expose it to a variety of financial risks, including credit risk, liquidity risk, interest rate risk and foreign exchange risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. Financial risk management is carried out by the Finance Department under policies approved by the Board of Directors. (i) Credit risks The Group has no significant concentration of credit risk with any single counterparty or group counterparties. The Group has policies in place to ensure that sales of products are made to customers with an appropriate credit history. (ii) Liquidity risks Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. (iii) Interest rate risk The Group’s income and operating cash flows are substantially independent of changes in market interest rates. The Group has no significant interest-bearing assets. The Group policy is to maintain all its borrowings in fixed rate instruments. (iv) Foreign exchange risk The Group has no significant foreign exchange risk due to limited foreign currency transactions. 20 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) FINANCIAL RISK MANAGEMENT (continued) (2) Fair value estimation In assessing the fair value of non-trading securities and other financial instruments, the Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date. The face values less any estimated credit adjustments for financial assets and liabilities with a maturity of less than one year are assumed to approximate their fair values. 21 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 SEGMENT INFORMATION (a) Business segments An analysis by business segment was as follows: Letting of refrigerated vessels and vessel Trading of seafood Oceanic fishing Letting of trawlers management Oceanic pharmacy 2002 2001 2002 2001 2002 2001 2002 2001 2002 2001 SALES, net To external customers 42,155 83,840 130,569 93,454 11,021 33,208 32,360 30,063 40,747 47, RESULT Segment (loss) profit from operations (13,344) 6,355 (69,542) (17,942) (2,081) 13,164 2,387 9,342 (14,511) (2, Unallocated expenses Unallocated income tax (Loss) profit after taxation but before minority interests OTHER INFORMATION Segment assets 669,465 623,958 (78,531) 21,815 42,156 66,099 51,992 46,602 59,599 148, Unallocated corporate assets Total assets Segment liabilities 324,148 321,935 60,809 39,985 - - 4,716 5,618 63,659 70, Unallocated corporate liabilities Total liabilities Capital expenditures 2,181 360 78,770 109,002 3,458 - 3,703 9,644 15,954 62, Depreciation and amortisation 859 40 15,128 4,676 3,036 2,414 4,495 3,165 4,654 7, (Provision for) write-back of doubtful debts and inventory obsolescence (5,809) 1,892 (24,534) (3,797) - - (2,153) 157 (14,703) (4, 22 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 1 SEGMENT INFORMATION (continued) (b) Geographical segments PRC Overseas Total 2002 2001 2002 2001 2002 2001 External sales 283,421 316,845 25,644 13,587 309,065 330,432 Segment assets 728,802 921,134 42,156 66,099 770,958 987,233 Capital expenditures 136,126 226,920 3,458 9,417 139,584 236,337 2 Sales, net Sales comprised: 2002 2001 Gross sales (excluding Value-added Tax (“VAT”)), less discounts and returns Oceanic fishing 130,569 93,454 Trading of seafood 42,231 83,897 Oceanic pharmacy 40,997 47,659 Letting of trawlers 11,021 33,208 Letting of refrigerated vessel and vessel management 32,949 30,625 Seafood processing, cold storage and others 53,216 43,718 310,983 332,561 Less: Sales surtaxes (1,918) (2,129) 309,065 330,432 23 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 3 Finance costs, net 2002 2001 Interest income - Bank deposits 1,751 7,477 - Others 1,619 8,741 3,370 16,218 Interest expense on borrowings (23,106) (17,285) Less : Amount capitalised in construction-in-progress 1,087 - (22,019) (17,285) (18,649) (1,067) 4 (Loss) profit before tax and minority interests (Loss) profit before tax and minority interests was determined after crediting and charging the following: 2002 2001 Crediting: Gain on disposal of subsidiary 7,235 - Trade and other receivables - reversal of impairment charge for doubtful debts 2,441 - Interest income from bank deposits 1,751 7,477 Interest income from SGCFE (Note 23(b)) 1,619 8,741 Gain on disposal of long-term investments 23 - Gain on disposal of property, plant and equipment 2,156 - Investment income from long-term investments - 781 24 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 4 (Loss) profit before tax and minority interests (continued) 2002 2001 Charging: Staff cost - Salaries and wages 40,249 25,109 - Provision for welfare and other benefits 5,330 2,096 - Contribution to statutory pension scheme 4,005 4,364 49,584 31,569 Loss on disposal of property, plant and equipment 923 140 Depreciation of property, plant and equipment 31,444 20,045 Amortisation of intangible assets (included in administrative expenses) 3,280 723 Operating lease for office buildings 2,386 894 Operating lease for vessels from SGCFE (Note 23(b)) 9,767 16,429 Trade and other receivables - impairment charge for doubtful debts (included in administrative expenses) - 5,054 Due from related parties - impairment charge for doubtful debts (included in administrative expenses, Note 23(c)) 106,973 - Inventory - impairment charge for obsolescence 13,484 861 Impairment losses of property, plant and equipment (included in administrative expenses) 52,084 5,846 Interest expenses on bank borrowings 22,019 17,285 Exchange loss 275 1,347 Trading investments - fair value loss (Note 15) 18 - 25 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 5 TAXATION (1) VAT Except for that documented in the following paragraph, the Group’s sales of merchandise and products is subject to VAT, which is charged on the selling price at a rate of 17% (normal products) or 13% (agricultural products). An input credit is available whereby input VAT previously paid on purchases of seafood merchandise and raw materials can be used to offset the output VAT on sales to determine the net VAT payable. Pursuant to a government notice issued by the Ministry of Finance, the State Commission of Customs Duty and the State Administration of Taxation on 10 March 1997, the import of self-caught seafoods is exempted from import VAT, and the VAT treatment on the sale of self-caught seafoods is same as that for self-produced agricultural product that is exempted from output VAT. Therefore, the Group’s revenue generated from trading of self-caught seafoods was exempted from VAT. (2) Enterprise income tax (“EIT”) Details of taxation charged were as follows: 2002 2001 Income tax expense (Note 22 (a)) 1,059 4,395 The reconciliation of the applicable tax rate to the effective tax rate is as follows: 2002 2001 Accounting (loss) profit before tax and minority interests (230,762) 7,072 Tax calculated at the effective tax rate of 33% (2001: 33%) (76,151) 2,334 Effect of different tax rates of subsidiaries 78 3 Effect of various preferential policies 42,132 (6,539) Effect of tax losses of subsidiaries 6,545 2,329 Tax losses to be carried forward (1,163) - Tax effect of expenses that are not deductible in determining taxable profit 29,618 6,268 1,059 4,395 26 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 5 TAXATION (continued) (2) Enterprise income tax (“EIT”) (continued) Based on a notice issued by the Ministry of Finance and the State Administration of Taxation on 20 October 1997, all domestic enterprises, granted with a valid certificate of engaging in oceanic fishing by the Ministry of Agriculture, are exempted from EIT for the income generated from oceanic fishery activity. The Company has obtained the certificate with effect for the year 2002 and year 2001, and therefore is exempted from EIT for the income from oceanic fishing, trading of self-caught seafoods and letting of fishing trawlers in 2002 and 2001. Pursuant to an approval (Luzhengzi [1999]206) from the Shandong provincial government, the Company was granted a financial refund at 18% of the Company’s taxable income in respect of EIT paid at a rate of 33% commencing from the listing of B Shares (i.e. 24 July 2000). The refund was recorded as deduction of EIT expense during the year 2002 when it was received in cash. Pursuant to Caishui [2000] 99 issued in October 2000, however, the above preferential tax treatment of effective 15% EIT remained effective only till 31 December 2001. During the year ended 31 December 2002, the Company’s statutory accounts reported loss after taking into account for certain non-assessable income and non-deductible expenses. No EIT expense is applicable to the Company. Taxation on profits of subsidiaries is calculated at the applicable rates in compliance with the relevant tax regulations. As some consolidated subsidiaries enjoy preferential EIT policies with approvals from tax authorities, the consolidated subsidiaries of the Company are subject to EIT at a rate ranging from 33% to 35% on their taxable income. The 2002 EIT provision of the Group represents the EIT of subsidiaries calculated based on the statutory profits before taxation of individual subsidiaries adjusted for certain non-assessable income and non-deductible expenses. As of 31 December 2002, there was no (2001: Nil) material unprovided deferred tax liability. 27 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 5 TAXATION (continued) (2) Enterprise income tax (“EIT”) (continued) As of 31 December 2002, the impact of deferred tax assets is approximately RMB 37,499,000 (2001: RMB 7,881,000), mainly resulted from provision for doubtful debts, provision for inventory obsolescence and provision for impairment losses for property, plant and equipment. As there is no evidence to indicate that the Group may have sufficient taxable profits against which the deductible temporary difference can be utilised, no such deferred tax assets were recognised or included in the consolidated financial statements. (3) Business tax The Group is subject to PRC business tax at a rate of 5% of rental income received from provision of cold storage and 3% from letting of refrigerated vessels within the PRC, respectively. (4) Surtaxes The Group is subject to the following surtaxes in the PRC: • City development tax, a tax levied at 7% of net VAT and business tax payable; and • Education supplementary tax, a tax levied at 3% of net VAT and business tax payable. 6 (Losses) earnings per share Basic (losses) earnings per share is calculated by dividing the net (loss) profit by the weighted average number of ordinary shares in issue during the year. 2002 2001 Net (loss) profit (229,624) 5,331 Weighted average number of ordinary shares in issue (thousands) 266,071 266,071 Basic (losses) earnings per share RMB (0.86) RMB 0.02 The diluted (losses) earnings per share was not calculated, because no potential dilutive shares existed during the year. 28 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 7 Dividends In accordance with the relevant regulations in the PRC, after issuance of the B shares, the amount of profit available for distribution to the shareholders (after appropriations to the statutory surplus reserve and statutory public welfare reserve) shall be determined based on the lower of the unappropriated profit determined in accordance with (i) accounting principles and relevant regulations applicable in the PRC and (ii) IFRS. On 29 May 2001, the shareholders’ meeting approved to appropriate 10% and 5% of the statutory net profit of year 2000 to the statutory surplus reserve and the statutory public welfare reserve respectively, and then distribute to all the shareholders of the Company a cash dividend of RMB 0.1 (including tax) per share, totalling RMB 26,608,000. On 26 April 2002, the shareholders’ meeting approved to appropriate 10% and 5% of the statutory net profit of year 2001 to the statutory surplus reserve and the statutory public welfare reserve respectively, and then distribute to all the shareholders of the Company a cash dividend of RMB 0.05 (including tax) per share, totalling RMB 13,304,000. Pursuant to a resolution of board of directors dated 24 April 2003, the Company resolved no appropriation of dividends for the year ended 31 December 2002, as the Group reported accumulated losses. 29 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 8 Leasehold lands 2002 2001 Cost Beginning of year 41,131 - Additions 96 22,685 Capital contributions in subsidiaries by minority shareholders - 18,446 Deduction due to change of consolidation scope (Note 22 (d)) (8,613) - End of year 32,614 41,131 Accumulated amortisation Beginning of year 509 - Charges for year 888 419 Capital contributions in subsidiaries by minority shareholders - 90 Deduction due to change of consolidation scope (Note 22 (d)) (316) - End of year 1,081 509 Net book value End of year 31,533 40,622 Beginning of year 40,622 - Leasehold lands represented land use fees paid for the right to use the parcels of land where the Group’s premise is located. Since all land in the PRC is owned by the State or is subject to collective ownership, the risks and rewards of the parcel of land remain with the State. As a result, such lease payments are accounted for under operating leases and are charged to the income statement on a straight-line basis over the lease period of 41 to 48 years. In 2001, the Group purchased certain leasehold lands from SGCFE at the cost of RMB 22,685,000 in total. As of 24 April 2003, the transfer of the titles for all the above leasehold lands are still in progress. In 2001, the leasehold land of Yantai Food with original cost of RMB 9,930,000 was contributed by SGCFE. 30 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 8 Leasehold lands (continued) In 2001, the leasehold land of Aihua Pharmaceutical with original cost and net book value of RMB 8,613,000 and RMB 8,477,000, respectively, was contributed by QOU. In 2002, the leasehold land was disposed along with the change of consolidation scope. 9 Property, plant and equipment 2002 Machinery Furniture and and fishing office Motor Construction-i Buildings Vessels equipment equipment vehicles n-progress Total Cost Beginning of year 83,862 377,864 42,910 2,191 3,951 35,427 546,205 Additions 3,038 13,088 5,022 949 2,572 112,352 137,021 Transfers 421 78,455 2,943 - - (81,819) - Deduction due to change of consolidation scope (Note 22 (d)) (22,465) - (9,790) (133) (418) - (32,806) Disposals (Note 22 (c)) (913) (33,576) (458) (57) (38) - (35,042) End of year 63,943 435,831 40,627 2,950 6,067 65,960 615,378 Accumulated depreciation and impairment losses Beginning of year 32,669 148,193 23,481 1,175 1,654 - 207,172 Depreciation charge for the year 3,683 22,352 3,376 364 781 - 30,556 Impairment charge for the year 4,699 46,411 974 - - - 52,084 Deduction due to change of consolidation scope (Note 22 (d)) (3,354) - (5,385) (90) (349) - (9,178) Disposals (Note 22 (c)) (146) (14,242) (106) (24) - - (14,518) End of year 37,551 202,714 22,340 1,425 2,086 - 266,116 Net book value End of year 26,392 233,117 18,287 1,525 3,981 65,960 349,262 Beginning of year 51,193 229,671 19,429 1,016 2,297 35,427 339,033 31 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 9 Property, plant and equipment (continued) 2001 Machinery Furniture and and fishing office Motor Construction-i Buildings Vessels equipment equipment vehicles n-progress Total Cost Beginning of year 57,053 269,387 31,020 1,300 3,057 3,658 365,475 Additions 1,295 55,901 1,688 745 973 88,908 149,510 Capital contributions in subsidiary by minority shareholder 22,465 - 9,791 187 453 - 32,896 Transfers 3,049 52,576 1,137 - 377 (57,139) - Disposals (Note 22 (c)) - - (726) (41) (909) - (1,676) End of year 83,862 377,864 42,910 2,191 3,951 35,427 546,205 Accumulated depreciation and impairment losses Beginning of year 27,160 129,200 17,336 609 1,233 - 175,538 Depreciation charge for the year 2,976 13,147 2,389 558 556 - 19,626 Impairment charge for the year - 5,846 - - - - 5,846 Capital contributions in subsidiary by minority shareholder 2,533 - 4,373 49 292 - 7,247 Disposals (Note 22 (c)) - - (617) (41) (427) - (1,085) End of year 32,669 148,193 23,481 1,175 1,654 - 207,172 Net book value End of year 51,193 229,671 19,429 1,016 2,297 35,427 339,033 Beginning of year 29,893 140,187 13,684 691 1,824 3,658 189,937 (a) As of 31 December 2002, the Group had mortgaged a vessel named “Taihe” with the net book value of approximately RMB 4,894,000 (2001: RMB 10,842,000) to bank as security for a long-term bank borrowing of RMB 8,000,000 (2001: a long-term bank borrowing of RMB 8,000,000 and a short-term bank borrowing of RMB 20,000,000) (Note 17(a) and 18). The mortgage has been cancelled in March 2003 with the maturity of the long-term bank borrowing. (b) As of 31 December 2002, the Group had mortgaged seven vessels with the net book value of approximately RMB 116,074,000 ( 2001: RMB 105,005,000 of six vessels) to bank as security for short-term bank borrowings of RMB 85,000,000 ( 2001: RMB 65,000,000 ) (Note 17(a)). (c) As of 31 December 2002, the Group had mortgaged a plant building with the net book value of approximately RMB 6,559,000 (2001: RMB 8,547,000) to bank as security for a short-term bank borrowing of RMB 3,000,000 (2001: RMB 3,000,000) (Note 17(a)). (d) As of 31 December 2002, the Group had mortgaged certain machinery and equipment with the net book value of approximately RMB 750,000 (2001: Nil) to bank as security for a short-term bank borrowing of RMB 500,000 (2001: Nil) (Note 17(a)). 32 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 9 Property, plant and equipment (continued) (e) Analysis of construction-in-progress as of 31 December 2002 is as follows: 2002 2001 Costs of construction, installation, machinery and equipment and other direct costs 65,432 35,427 Interest capitalised 528 - 65,960 35,427 Average capitalisation rate 5.93% - 33 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 10 Intangible assets 2002 Trademarks and production Electricity Water use licenses use rights rights Others Total Cost Beginning of year 15,340 2,961 485 43 18,829 Additions 2,465 - - 98 2,563 Deduction due to change of consolidation scope (Note 22 (d)) (15,340) (176) (180) - (15,696) End of year 2,465 2,785 305 141 5,696 Accumulated amortisation and impairment losses Beginning of year 383 993 132 7 1,515 Charge for the year 1,152 1,845 237 46 3,280 Deduction due to change of consolidation scope (Note 22 (d)) (1,360) (53) (64) - (1,477) End of year 175 2,785 305 53 3,318 Net book value End of year 2,290 - - 88 2,378 Beginning of year 14,957 1,968 353 36 17,314 The production licenses of certain medicines were purchased by Double Wale Pharmaceutical from a third party in 2002 and are amortised in an estimated beneficial period of 5 years. 34 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 10 Intangible assets (continued) 2001 Trademarks and production Electricity Water use licenses use rights rights Others Total Cost Beginning of year - 2,785 305 34 3,124 Acquisitions 15,340 - - 9 15,349 Capital contribution in subsidiary by minority shareholder - 176 180 - 356 End of year 15,340 2,961 485 43 18,829 Accumulated amortisation and impairment losses Beginning of year - 674 72 - 746 Charge for the year 383 292 41 7 723 Capital contribution in subsidiary by minority shareholder - 27 19 - 46 End of year 383 993 132 7 1,515 Net book value End of year 14,957 1,968 353 36 17,314 Beginning of year - 2,111 233 34 2,378 35 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 11 Long-term investments 2002 2001 Debentures 50 159 Unlisted investments - Jinan City Bank Wanzi Branch 107 107 - Southern China Securities Co., Ltd. 33,000 33,000 33,107 33,107 33,157 33,266 Investment in unlisted shares represented investment in PRC incorporated companies of not more than 20% of their paid-up capital. As of 31 December 2002, the Company had pledged legal person shares of Southern China Securities Co., Ltd. with the net book value of RMB 33,000,000 (2001: RMB 33,000,000) to bank as security for a short-term bank borrowing of RMB 20,000,000 (2001: RMB 20,000,000) (Note 17 (a)). 12 Inventories, net 2002 2001 Raw materials (at cost) 17,749 26,062 Work-in-process (at cost) 27,590 22,157 Finished goods (at cost) 58,975 34,405 104,314 82,624 Less: Provision for inventory obsolescence (20,062) (6,755) 84,252 75,869 Included in work-in-process were approximately RMB 25 million (2001: RMB 20 million) of deferred oceanic fishing expenditures. Deferred oceanic fishing expenditures represented deferred operating expenses for oceanic fishing and seafood processing, which would be transferred to cost of sales upon sale of the related fishery products. 36 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 13 Other receivables, net 2002 2001 Other receivables 17,136 12,750 Less: Provision for doubtful debts (946) (1,724) 16,190 11,026 14 Trade receivables, net 2002 2001 Accounts receivable 50,448 82,899 Notes receivable 1,194 1,387 Less: Provision for doubtful debts (13,394) (18,983) 38,248 65,303 15 Trading investments 2002 2001 Marketable securities - PRC listed equity securities, at market value 62 80 The trading investments are traded in active markets and are valued at market value at the close of business on 31 December 2002 by reference to Stock Exchange quoted bid prices. Trading investments are classified as current assets because they are expected to be realised within twelve months of the balance sheet date. In the cash flow statement, trading investments are presented within the section of operating activities as part of changes in working capital. 16 Other payables and accruals 2002 2001 Salaries payable 21,254 13,010 Welfare payables 2,098 3,683 Accrued expenses 6,005 4,991 Other payables 13,526 11,937 42,883 33,621 37 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 17 Short-term borrowings 2002 2001 Short-term bank borrowings (a) 285,213 322,120 Other short-term borrowings (b) 8,169 25,376 293,382 347,496 (a) Short-term bank borrowings 2002 Annual interest Principal rate Guaranteed or secured by 76,763 3.70%-6.53% - 76,450 5.84%-6.59% SGCFE 12,500 5.04%-5.31% Shandong Airline Co., Ltd. 10,000 6.44% Shandong Shanhai Seafood Trading Center (“Shanhai Seafood”) 85,000 5.84% Vessels (Note 9) 20,000 5.84% Shares of Southern China Securities Co., Ltd. (Note 11) 3,000 6.05% A plant building (Note 9) 1,000 6.37% Bank time deposit of USD 139,912 (Note 22 (b)) 500 6.05% Machinery and equipment (Note 9) 285,213 38 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 17 Short-term borrowings (continued) (a) Short-term bank borrowings (continued) 2001 Annual interest Principal rate Guaranteed or secured by 88,100 3.60%-7.52% - 100,450 5.85%-7.02% SGCFE 3,670 6.53% Qingdao Oceanic Chemical Co., Ltd. 1,900 7.49% Qingdao Haida High-tech Development Co., Ltd. 85,000 6.44% Vessels (Note 9) 20,000 6.44% Shares of Southern China Securities Co., Ltd. (Note 11) 20,000 6.14% Bank time deposit of USD 5,000,000 (Note 22(b)) 3,000 6.44% A plant building (Note 9) 322,120 (b) Other short-term borrowings 2002 2001 Borrowing from Aquatic Product Bureau of 2,230 2,230 Shandong Province * Other short-term borrowings ** 5,939 23,146 8,169 25,376 * Aquatic Product Bureau of Shandong Province is a government body of Shandong province, the PRC. The borrowing is denominated in RMB, unsecured, non-interest bearing and does not have pre-determined repayment terms. ** Other short-term borrowings are obtained from certain trading partners, denominated in RMB, unsecured, non-interest bearing and do not have pre-determined repayment terms. 39 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 18 Long-term bank borrowings 2002 2001 Interest rate Interest rate per annum Amount per annum Amount - Guaranteed 6.53%-6.86% 98,030 6.53% 20,000 - Pledged 6.53% 8,000 6.53% 8,000 - Unsecured - 7.13% 11,070 106,030 39,070 As of 31 December 2002, all of the guaranteed bank borrowings are guaranteed by Shandong Airline Co., Ltd. As of 31 December 2002, all of the pledged bank borrowings are pledged by a vessel of the Group (Note 9). Long-term bank borrowings are repayable in the following periods: 2002 2001 Amount repayable within a period - not exceeding one year 36,290 8,070 - more than one year but not exceeding two years 12,435 28,000 - more than two years but not exceeding five years 57,305 3,000 - more than five years - - 106,030 39,070 Less: Current portion of long-term bank borrowings (36,290) (8,070) 69,740 31,000 19 Share capital As of 31 December 2002, the outstanding share capital represented legal person shares and B shares. The B shares rank pari passu in all aspects with the legal person shares except that B shares can only be owned and traded by overseas and qualified domestic investors. 40 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 19 Share capital (continued) As of 31 December 2002, the details of ordinary shares were as follows: Number of shares’000 2002 2001 Registered, issued and fully paid: Legal person shares of RMB 1 each 128,071 128,071 B shares of RMB 1 each 138,000 138,000 266,071 266,071 Amount 2002 2001 Balance, beginning and end of year: Legal person shares 128,071 128,071 B shares 138,000 138,000 266,071 266,071 Among the 125,731,320 legal person shares owned by SGCFE, accounting for 47.25% of the total shares of the Company, including: (1) 8,000,000 shares, accounting for 3% of the total shares of the Company, are frozen by the court due to the failure of SGCFE to repay the matured borrowing granted to one of SGCFE’s subsidiaries, for which SGCFE stood as a guarantor; (2) 80,000,000 shares, accounting for 30.07% of the total shares, are frozen by Jinan Lixia District Court on 17 February 2003 as the result of the onging litigation between SGCFE and Agricultural Bank of China Jinan Branch Lixia District Sub-branch over a dispute on bank borrowings; and (3) 37,731,320 shares, accounting for 14.18% of the total shares, are frozen by the Supreme Court of Shandong Province on 19 February 2003 for a period of one year (from 24 February 2003 to 23 February 2004) as the result of the ongoing litigation between SGCFE and Bank of China Jinan Branch over a dispute on bank borrowings. As of 24 April 2003, all the 47.25% of the shares held by SGCFE are frozen by the courts. The aforementioned events were announced to the public on 1 March and 8 March 2003. 41 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 20 Reserves (a) Capital surplus The following are recorded as capital surplus: (i) share premium; (ii) donations; (iii) appreciation arising from revaluation of assets; and (iv) other items in accordance with the Company's articles of association and relevant regulations in the PRC. Capital surplus can be utilised to offset prior years’ losses or for the issuance of bonus shares. As of 31 December 2002, capital surplus of the Company mainly included share premium and pricing difference associated with related party transactions. Share premium represents proceeds from the issuance of its shares in excess of their par value, net of underwriting commissions and professional fees. (b) Statutory surplus reserve and statutory public welfare reserve In accordance with the PRC Company Law and the Company’s articles of association, the Company and its domestic subsidiaries (excluding Yantai Food) are required to set aside 10% of their statutory profit after tax and minority interests, after offsetting prior years’ losses, to the statutory surplus reserve (except where the reserve balance has reached 50% of the company’s paid-up share capital, any further appropriation is optional), and 5% to 10% to the statutory public welfare reserve. These reserves cannot be used for purposes other than those for which they are created and are not distributable as cash dividends. Statutory surplus reserve can only be used, upon approval by the relevant authority, to offset accumulated losses or increase capital. However, such statutory surplus reserve must be maintained at a minimum of 25% of its paid-up capital after such issuance. Statutory public welfare reserve is to be utilised to build or acquire capital items, such as dormitories and other facilities for the Group’s employees, and cannot be used to pay for staff welfare expenses. Title to these capital items will remain with the Group. (c) Discretionary surplus reserve Discretionary surplus reserve is appropriated after the appropriation of statutory surplus reserve and statutory public welfare reserve at the resolution of the Board of Directors and the discretion of the general shareholders’ meeting. 42 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 20 Reserves (continued) (d) Reserve fund, enterprise expansion fund and staff welfare and bonus fund In accordance with the relevant laws and regulations of the PRC, Yantai Food, a foreign joint venture company, is required to set up a reserve fund, an enterprise expansion fund and a staff welfare and bonus fund by way of appropriations from the annual statutory net profit. The reserve fund can only be used, upon approval, to offset accumulated losses or increase capital; and the enterprise expansion fund can only be used, upon approval, to increase capital. The staff welfare and bonus fund can only be used for special bonuses or collective welfare of these subsidiaries’ employees, and assets acquired through this fund shall not be taken as these subsidiaries’ assets. For IFRS purposes, the appropriation to the staff welfare and bonus fund is charged to current year’s administrative expenses while the balance of the staff welfare and bonus fund is included in other payables in the consolidated financial statements. 21 Minority interests 2002 2001 Beginning of year 38,257 2,016 Share of net profit of subsidiaries (Note 22 (a)) (2,197) (2,654) Share of capital contributions in subsidiaries 10,822 38,895 Change of consolidation scope (25,661) - End of year 21,221 38,257 43 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 22 Supplemental cash flows information (a) Reconciliation from net (loss) profit to cash generated from operations 2002 2001 Net (loss) profit (229,624) 5,331 Adjustments for: Minority interests (Note 21) (2,197) (2,654) Tax (Note 5) 1,059 4,395 Depreciation of plant, property and equipment 31,444 20,045 (Gain) loss on disposal of property, plant and equipment (1,233) 140 Amortisation of intangible assets 3,280 723 Gain on disposal of subsidiary (7,235) - Gain on disposal of long-term investments (23) - Gain on disposal of trading investments - (781) Impairment loss of trading investments 18 - Impairment loss of property, plant and equipment 52,084 5,846 Provision for inventory obsolescence 13,484 861 (Reversal of) provision for doubtful debts of trade and other receivables (2,441) 5,054 Provision for doubtful debts of amounts due from related parties 106,973 - Interest expense 22,019 17,285 Interest income (3,370) (16,218) Operating (loss) profit before changes in working capital (15,762) 40,027 Changes in working capital: Increase in inventories (26,084) (16,026) Decrease (increase) in trading investments, trade and other receivables, prepayments and other current assets 165,392 (61,427) (Increase) decrease in due from related parties (102,272) 160,365 Increase (decrease) in trade payables, advances from customers, taxes payable, other payables and accruals 28,236 (29,297) Decrease in due to related parties (1,617) (13,526) Cash generated from operations 47,893 80,116 44 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 22 Supplemental cash flows information (continued) (b) Analysis of the balances of cash and cash equivalents 2002 2001 Cash on hand 783 2,007 Bank current deposits 53,348 186,066 Bank time deposits 1,158 41,383 55,289 229,456 Less: Restricted bank deposits (1,158) (171,383) Cash and cash equivalents 54,131 58,073 As of 31 December 2002, bank time deposit of USD 139,912 (equivalent to approximately RMB 1,158,000) (2001: USD 5,000,000, equivalent to approximately RMB 41,383,000) was pledged as collateral of a short-term bank borrowing (Note 17(a)). As of 31 December 2001, bank current deposits of RMB 130,000,000 was pledged as collateral of the short-term bank borrowings granted to SGCFE. (c) Proceeds from disposal of property, plant and equipment comprise: 2002 2001 Net book value (Note 9) 20,524 591 Add (less): Gain (loss) on disposal of property, plant and equipment 1,233 (140) 21,757 451 45 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 22 Supplemental cash flows information (continued) (d) Disposal of a subsidiary In 2002, the Company sold all its 59.88% equity interests in Aihua Pharmaceutical to a third party at a consideration of RMB 45,271,100. The fair value of assets and liabilities disposed were as follows: As of the date of equity interest transfer (Unaudited) Leasehold land, net (Note 8) 8,297 Property, plant and equipment, net (Note 9) 23,628 Intangible assets, net (Note 10) 14,219 Inventories, net 4,217 Other receivables, net 37,968 Prepayments 159 Trade receivables, net 7,312 Cash and cash equivalents 831 Short-term bank borrowings (23,290) Other payables (2,085) Advances from customers (80) Trade payables (1,644) Other current liabilities (1,511) Long-term bank borrowings (4,500) Net assets at the date of disposal 63,521 Share percentage of disposal 59.88% Share of net assets disposed 38,036 Gain on disposal 7,235 Disposal consideration 45,271 Less: Cash and cash equivalents (831) Net cash inflow from disposal of the subsidiary 44,440 46 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 22 Supplemental cash flows information (continued) (e) Segment information 2002 Letting of refrigerated vessels and Seafood Trading of Oceanic vessel Oceanic processing and seafood fishing management pharmacy cold storage Total Cash flows from: Operating activities 7,208 9,782 5,274 2,683 (1,682) 23,265 Investing activities (12,640) (8,544) 727 (16,689) (34,491) (71,637) Financing activities (7,695) 3,000 - 16,820 32,316 44,441 Currency translation difference - (11) - - - (11) (13,127) 4,227 6,001 2,814 (3,857) (3,942) 2001 Letting of refrigerated vessels and Seafood Trading of Oceanic vessel Oceanic processing and seafood fishing management Pharmacy cold storage Total Cash flows from: Operating activities (78,649) 87,005 10,176 6,930 31,945 57,407 Investing activities 36,405 (88,527) (9,394) (5,330) (22,202) (89,048) Financing activities 20,610 2,000 - 5,288 (300) 27,598 Currency translation difference - 11 - - - 11 (21,634) 489 782 6,888 9,443 (4,032) 23 Related party transactions Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party, or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. 47 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 23 Related party transactions (continued) (a) Name of related parties and nature of relationship Name Relationship with the Company SGCFE The 47.25% shareholder of the Company LSPC Directly-owned by SGCFE QMFC Directly-owned by SGCFE SGCFE S.A. Directly-owned by SGCFE Shandong Haitian Seafood Trading Co., Ltd. Directly-owned by SGCFE (“Haitian”) Shanhai Seafood Directly-owned by SGCFE An’ning Directly-owned by SGCFE QMFC-APPP Indirectly-owned by SGCFE Mellow Indirectly-owned by SGCFE Haiyu Indirectly-owned by SGCFE Prodesur S.A. Indirectly-owned by SGCFE Tenglong Indirectly-owned by SGCFE Animal Medicine Indirectly-owned by SGCFE QOU The investor of Aihua Pharmaceutical, former subsidiary of the Company before September 2002 48 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 23 Related party transactions (continued) (b) Transactions with related parties In addition to guarantees provided by related parties as described in Note 17, other significant transactions with related parties for the year ended 31 December 2002 were as follows: 2002 2001 Sales to related parties: - QMFC 14,531 - - Tenglong 3,490 17,025 - Mellow 1,322 - - LSPC - 449 19,343 17,474 2002 2001 Rental expenses for vessels and crews paid to a related party: - SGCFE * 9,767 16,429 Letting and management income of vessels from a related party: - SGCFE S.A. ** 11,021 33,208 * Pursuant to certain agreements with effect till 1 April 2003, the Company had leased from SGCFE six trawlers and relating crew at an annual rental of RMB 496,800 to RMB 780,000 per trawler and USD 6,000 per person. No further agreement signed subsequently. ** Pursuant to certain agreements with effect till 1 April 2003, the Company had leased its 3 trawlers, together with the 6 trawlers rented from SGCFE, and related crew to SGCFE S.A. at an annual rental of USD 80,000 to USD 155,000 per trawler and USD 9,700 to USD 9,900 per person to SGCFE S.A. These trawlers are ultimately leased to other two related parties. In 2002, the above letting and management income, amounting to approximately RMB 7,647,000 was recorded in capital surplus as pricing difference associated with related party transactions. 49 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 23 Related party transactions (continued) (b) Transactions with related parties (continued) 2002 2001 Purchases of seafood from related parties: - Shanhai Seafood 28,506 13,630 - Prodesur S.A. 18,668 - - Tenglong - 10,729 - SGCFE - 6,171 - LSPC - 2,356 47,174 32,886 2002 2001 Loss from vessel entrust - Prodesur S.A. 300 343 Pursuant to an agreement with effect from 1 January 1999 for ten years, the Company has entrusted Prodesur S.A. to operate a vessel owned by the Company, and is entitled to obtain or assume an annual entrust fee based on 70% of the net profit or loss generated from the operation of the vessel. 2002 2001 Interest income charged on amount due from a related party: - SGCFE 4,776 8,741 Pursuant to an agreement entered into with SGCFE, the Company charged interest during the year 2002 at the prevailing market rate of 5.841% per annum on the amounts, which did not relate to trading activities, due from SGCFE. In 2002, the above interest income, amounting to approximately RMB 3,157,000 was recorded in capital surplus as pricing difference associated with related party transactions. 2002 2001 Purchase of property, plant and equipment: - SGCFE 1,070 - 50 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 23 Related party transactions (continued) (c) Balances with related parties as of 31 December 2002 2002 2001 Due from related parties - QMFC 62,009 58,285 - Tenglong 15,527 14,297 - Haiyu 8,666 8,815 - QMFC-APPP 7,463 7,102 - LSPC 6,383 3,205 - Mellow 3,665 2,954 - An’ning 2,352 1,798 - Animal Medicine 396 346 106,461 96,802 Less: Provision for specific doubtful debts (included in administrative expenses) (106,461) - - 96,802 - SGCFE 167,738 - - SGCFE S.A. 21,551 35,338 - Prodesur S.A. 2,865 13,268 - Shanhai Seafood - 35,058 - QOU - 14,956 - Others 172 1,093 192,326 99,713 Less: Provision for general doubtful debts (512) - 191,814 99,713 Due from related parties, net 191,814 196,515 2002 2001 Due to related parties - Shanhai Seafood 1,039 - - Haitian - 2,834 - Others 178 - Due to related parties 1,217 2,834 51 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 23 Related party transactions (continued) (c) Balances with related parties as of 31 December 2002 (continued) Except for the amount due from SGCFE that bears interest at the prevailing market rate of 5.841% per annum, amounts due from (to) related parties are unsecured, interest-free and with no fixed receivable or payable dates. The balances with related parties were mainly generated from the transactions as set in Note 23(b) and other transactions, such as expense paid on behalf of each other. As of 24 April 2003, SGCFE has planned to repay the balances of SGCFE and SGCFE S.A. due to the Group by means of transferring of certain assets to the Group in 2003. 24 Contingencies As of 31 December 2002, the Group had following contingencies not provided for in the consolidated financial statements: (a) Contingent guarantees Prior to the Reorganisation of the Group, Double Wale Pharmaceutical and Qingdao Refrigerating Branch of the Company jointly stood as the guarantors for the long-term bank borrowing amounting to RMB 21,510,000 granted to Haiyu. As of 31 December 2002, the aforementioned guarantee is still in place and the bank has not held the Group collateral responsibility for this borrowing. As of 31 December 2002, SGCFE Aquaculture Company, which is the predecessor of Trading Branch of the Company before the Reorganisation of the Group and has not deregistered as required by the reorganisation agreement, stood as the guarantor for the short-term bank borrowings amounting to RMB 79,770,000 granted to SGCFE and the banks have not held the Group collateral responsibility for these borrowings. 52 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 24 Contingencies (continued) (b) Contingent liability Prior to the Reorganisation of the Group, SGCFE Transportation Company, which is previously the subsidiary of SGCFE and the predecessor of Zhonglu Transportation and has deregistered, borrowed long-term bank borrowing amounting to USD 2,135,000. Since the proceeds of the borrowing were actually used by SGCFE, the borrowing did not constitute the Group’s liability after the Reorganisation of the Group. However, the legal title for such liability is not transferred so far. The long-term bank borrowing matured in November 2002. As of 31 December 2002, the outstanding balance is USD 2,135,000 (equivalent to approximately RMB 17,672,000) and the bank has not held the Group collateral responsibility for this borrowing. (c) Other guarantee As of 31 December 2002, the Group stood as the guarantor for the bank acceptance notes issued by SGCFE amounting to RMB 1,600,000. 25 Commitments (a) Capital commitments Capital expenditure contracted for at the balance sheet date but not recognised in the financial statements is as follows: 2002 2001 Property, plant and equipment 22,512 82,664 Intangible assets - 1,145 22,512 83,809 (b) Operating lease commitments The future aggregate minimum lease payments under non-cancellable operating leases are as follows: 2002 2001 Land use rights and buildings - no later than one year 375 2,622 - later than one year and no later than five years 240 10,629 - later than five years 470 13,202 1,085 26,453 53 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 25 Commitments (continued) (b) Operating lease commitments (continued) Pursuant to an agreement, the Company had leased from SGCFE, with effect from 1 January 2002 to 31 December 2011, certain office building (area of 2,340 square meters) at an annual rental of RMB 2,562,300. On 30 June 2002, the aforementioned agreement was cancelled after negotiation between the two parties and SGCFE waived the Company’s rental expenses for the period from 1 January 2002 to 30 June 2002. 2002 2001 Vessels (Note 23(b)) - no later than one year 1,283 3,150 - later than one year and no later than five years - 420 1,283 3,570 (c) Other commitments According to an agreement, the Company committed to acquire 17.31% equity interests in Yantai Food from SGCFE at the price of RMB 9,357,000. As of 24 April 2003, no investment has been made by the Company. 26 Subsequent events (a) Disposal of trawlers In February 2003, the Company disposed a trawler named “Taihui I” to Taiwan Yunman Oceanic Co., Ltd. at a consideration of RMB 1.4 million, with a disposal loss of approximately RMB 2,145,000. In March 2003, the Company disposed a trawler named “Taihe” to Jiangmen Dulian Steel Rolling Company at a consideration of RMB 5.02 million with, a disposal loss of approximately RMB 4,724,000. In March 2003, the Company disposed three trawlers to General Atlantic Trawlers S.A. at a consideration of USD 360,000 in total, with disposal losses of approximately RMB 880,000. 54 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 26 Subsequent events (continued) (b) Litigation On 25 February 2003, the Company filed a lawsuit against SGCFE on the repayment of a portion of due from SGCFE of approximately RMB 50,232,000. Pursuant to Judgement (2003) LiLiBaoZi No.118 issued by Jinan Lixia District court on 26 February 2003, the basement, first to third floors and six to twelfth floors of SGCFC’s office building located on No.43, Road Heping, Lixia District, Jinan, Shandong Province and the related leasehold land are put on lien and thus cannot be sold, transferred or mortgaged. The aforementioned litigation was announced to the public on 28 February 2003. 27 Correction of significant accounting errors There have been changes in the composition of the board of directors of the Company in 2002. The new board re-examined the Group’s financial position for the year ended 31 December 2001 and had identified certain significant unrecorded accounting errors as follows: (i) The overstatement of the sales resulted from the change in customers as well as adjustments on selling prices for one sales contract, which were not timely reflected in the Group’s books and records in 2001; (ii) Failure of management to make provision for impairment losses for a vessel, which was approved by management and disposed in early 2002; (iii) The understatement of cost of sales resulted from the under-accrual of fuel costs for trawlers incurred in 2001; and (iv) Excessive appropriation to statutory surplus reserve and statutory public welfare reserve as a result of the above accounting errors. The Company has raised retroactive adjustments to the consolidated financial statements of 2001 to correct the above significant accounting errors. 55 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 27 Correction of significant accounting errors (continued) The impact of correction of above accounting errors is as follows: 2002 2001 beginning beginning Correction of significant unappropriated unappropriated 2001 accounting errors profit profit net profit Retroactive adjustment on overstatement of sales (i) (7,645) - (7,645) Retroactive adjustment on under-provision for impairment losses for a vessel (ii) (5,846) - (5,846) Retroactive adjustment on under-accrual of cost of sales (iii) (4,836) - (4,836) Reversal of excessive appropriation to statutory surplus reserve and statutory public welfare reserve as a result of the above retroactive adjustments (iv) 877 - - Total (17,450) - (18,327) 28 Comparative figures The consolidated financial statements of the Group for the year ended 31 December 2001 were audited by other certified public accountants, who expressed an unqualified opinion in their report dated 21 March 2002. Certain prior year figures have been retroactively adjusted and reclassified to conform to the current year presentation. 29 Approval of financial statements The consolidated financial statements were approved by the Board of Directors on 24 April 2003. 56 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) SUPPLEMENTORY INFORMATION Impact of IFRS adjustments on net (loss) profit and net assets Net (loss) profit Net assets 2002 2001 2002 2001 As reported in the Statutory Accounts of the Group (229,809) 5,508 277,032 496,028 Adjustment for the dividends declared after balance sheet date - - - 13,304 Written off pre-operation expenses 164 (177) (12) (177) Others 21 - - - As restated in accordance with IFRS (229,624) 5,331 277,020 509,155 57