*ST石化Ａ(000013)ST石化Ｂ2002年年度报告（英文版）

SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (Incorporated in the People’s Republic of China) 2002 ANNUL REPORT I. Important Notes Board of Directors of the Shenzhen Petrochemical Industry (Group) Co., Ltd. (hereinafter referred to as the Company) individually and collectively accept responsibility for the correctness, accuracy and completeness of the contents of this report and confirm that there are no material omissions nor errors which would render any statement misleading. Director of the Company, Zhou Zhen, Liu Qingmin and Cai Jianping agreed other contents of 2002 Annual Report of the Company，excepted the following events: the Company signed Three Parties Agreement on Transferring Loan to Investment and Share Equity with Shenzhen Petrochemical Group Co., Ltd. (“Petrochemical Group”), Agricultural Bank of China Shenzhen Branch (“Agricultural Bank”) and China Greatwall Assets Management Corporation Shenzhen Office (“Greatwall Corporation”) in Dec.2000. Agricultural Bank agreed to transfer the loan of the Company converting into RMB 270,000,000 (including RMB 3,000,000 nominal loan of one related company) to Greatwall Corporation. Since the transfer date, Agricultural Bank of China has not executed the right of the creditor again and actually relieved the loan of the Company. Meanwhile, RMB 270,000,000 credit of the Company against Petrochemical Group amounting to RMB 270,000,000 was transferred to investment income with equal amount against Petrochemical Group and the Company correspondingly offset the account receivable against Petrochemical Group amounting to RMB 267,000,000. Because this agreement is not finished implementing so far, Greatwall Corporation did not gain the investment stipulated in the aforesaid agreement from Petrochemical Group. By the end of 2002, Agricultural Bank and Greatwall Corporation put forward to relieve the agreement and required to resume the relationship of credit and liability of the loan of the Company owed to Agricultural Bank. The aforesaid three directors believed; because Petrochemical Group actually carried on RMB 0.267 billion loan of the Company from Agricultural Bank in 2000, the Company should not undertake the RMB 0.267 billion direct liabilities owed to Agricultural Bank, but because the Company need to undertake corresponding law liability of all dissensions caused by Petrochemical Group’s not implementing agreement of transferring loan to investment and the financial status of Petrochemical Group was deteriorated, based on the principle of stability, the Company recorded RMB 0.267 billion possible losses caused by the aforesaid events this year into estimated liabilities and relevant accounts. It will influence the gains or losses of the Company this year. Moore Stephens Shenzhen Nanfang Minhe 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. Person in charge of the Company Mr. Xin Yu and Person in charge of Accounting mr. Yang Hanqing hereby confirm that the Financial Report of the Annual Report is true and complete. The report is compiled in Chinese and English languages should there be difference in interpretation of the two languages, the Chinese version shall prevail. 1 Content I. Important Notes 1 II. Company Profile 3 III. Financial Highlight and Business Highlight 4 IV. Changes in Share Capital and Particulars about Shareholders 5 V. Particulars about director, supervisor and senior executives and staff 6 VI. Administrative Structure 7 VII. Brief Introduction to the Shareholders’ General Meeting 8 VIII. Report of the Board of Directors 9 IX. Report of the Supervisory Committee 13 X. Significant Events 14 XI. Other significant events 16 XII. Items after period 16 XIII. Financial Report 17 XIV. Documents for Reference 17 2 I. Company Profile 1. Legal Name of the Company In Chinese: 深圳石化工业集团股份有限公司 In English: Shenzhen Petrochemical Industry (Group) Co., LTD. (Abbr. in English: SPEC) 2. Legal Representative: Mr. Xin Yu 3. Secretary of the Company: Mr. Cai Jianping Contact Address: SPEC Bldg., Hongli West Road, Futian District, Shenzhen Tel: (86) 755-83344355 Fax: (86) 755-83324057 E-mail: SPEC0013@vip.sina.com 4. Registered Address and Office Address: SPEC Bldg., Hongli West Road, Futian District, Shenzhen Post Code: 518028 E-mail: SPEC0013@ vip.sina.com 5. Newspapers Chosen for Disclosing Information of the Company: Securities Times and Ta Kung Pao Internet Web Site Designated by CSRC for Publishing the Annual Report: http://www.cninfo.com.cn Place Where the Annual Report is Prepared and Placed: Secretariat of the Board of Directors, on 5/F, SPEC Bldg., Hongli West Road, Futian District, Shenzhen 6. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock Name and Stock Code: ST SPEC – A 000013 ST SPEC– B 200013 7. Initial registration date: Jan. 14, 1992 Registered code of enterprise legal person’s business license: 4400001008296 Registered code of tax: 440301190325614 8. Certified Public Accountants engaged by the Company: Shenzhen Nanfang Minhe Certified Public Accountants (A-share) Moore Stephens Shenzhen Nanfang Minhe Certified Public Accountants (B-share) Address: 8th Floor, Electronics Tech. Bldg., No. 2072, Shennan Middle Road, Shenzhen 3 II. Summary of Financial Highlights and Business Highlights 1. Major accounting data and financial indexes (Calculated according to the IAS) (RMB’000) Items 2002 2001 Turnover 614,678 727,826 Gross Profit (526,422) (595,572) Profit (Loss) from operating activities (258,522) (1,200,520) Share of profit of associated companies (4,047) (7,022) Profit (Loss) before taxes (482,056) (2,216,603) Profit (Loss) attributable to shareholders (485,947) (2,212,642) Basic earnings (loss) per share (1.49) (7.29) Total assets 740,646 1,006,653 Shareholders’ Equity (2,097,001) (1,645,311) Net assets per share (RMB) (6.91) (5.42) Net assets-income ratio (%) --- --- Net cash inflow from operating activities 26,989 4,634 Increase in cash and cash equivalents (13,090) (3,733) 2. Impact of IAS adjustments on profit attributable to shareholders and net assets Profit attributable to Net assets shareholders RMB’000 RMB’000 As reported in the “A” shares consolidated (446,956) (2,097,001) audited statutory financial statements under the PRC accounting standards IAS adjustments: Net liabilities of the non-consolidated subsidiaries (4,848) __ Accounts payable written back 114 __ As reported after IFRS adjustments (451,690) (2,097,001) in the “B” shares financial statements 4 III. Change in Share Capital and Particulars about Shareholders 1. Change in share capital (1) Statement of change in share Before the Increase / After the change decrease in this change year (+ / -) I. Unlisted shares 1. Promoters’ shares 164,546,553 0 164,546,553 Including: State-owned shares 164,546,553 0 164,546,553 Domestic legal person’s shares Foreign legal person’s shares Others 2. Domestic legal person’s shares 54,724,424 0 54,724,424 3. Employees’ shares 4. Preference shares or others Total unlisted shares 219,270,977 0 219,270,977 II. Listed shares 1. RMB ordinary shares 51,324,002 0 51,324,002 2. Domestically listed foreign shares 32,760,000 0 32,760,000 3. Overseas listed foreign shares 4. Others Total listed shares 84,084,002 0 84,084,002 III. Total shares 303,354,979 0 303,354,979 (2) Issuance and listing of shares Over the past three years ended the report year, the Company didn’t issue new shares; the total shares of the Company and structure of shares remained unchanged. 2. About shareholders (1) Total shareholders at the end of the report period Ended Dec. 31, 2002, the Company had totally 38,008 registered shareholders (including legal person and natural person), including 29,429 shareholders of A-share and 8,579 shareholders of B-share. (2) Shares held by the top ten shareholders at the end of the report year Number of Percentage of total Name of Shareholders Style Shares share capital Shenzhen Petrochemical Corp. 164,546,553 54.24% State-owned share Shenzhen Investment Holding Corporation 23,400,000 7.71% Legal person’s share China Communication Securities Co., Ltd. 19,380,532 6.39% Legal person’s share Shenzhen Jingye Plastics Co., Ltd. 2,208,772 0.73% Legal person’s share Shenzhen Silverland Investment Co., Ltd. 1,560,000 0.51% Legal person’s share Quanzhou Fukang Investment Consultation 1,560,000 0.51% Legal person’s share Co., Ltd. Chian Everbright Bank of China, Shenzhen 1,484,936 0.49% Legal person’s share Securities Dept. China Prime Investment Management Co., Ltd. 936,000 0.31% Legal person’s share Chongqin Xinhua Trust Company 780,000 0.26% Legal person’s share NanHai Eastern Petrochemical Economic and 780,000 0.26% Legal person’s share technology Development Corp. Total 216,636,793 71.41% 5 Note: (1) In the report year, there was no pledge or freeze on shares held by the Shenzhen Investment Holding Corporation and China Communication Securities Co., Ltd. except that 54.24 % of the Company’s total shares held by Shenzhen Petrochemical Corp. were judicially frozen. (2) Shenzhen Investment Holding Corporation is only shareholder of Shenzhen Petrochemical Corp. 3. Particulars about holding shareholder of the Company a. Shenzhen Petrochemical Corp. is the controlling shareholder of the Company, who is a state-owned sole corporation. It has established in 1996; legal representative is Ding Fuyi; registered capital is RMB 537 million. Shenzhen Petrochemical Corp. is mainly engaged in investment and initiation of industrial, domestic trade, supply and marketing of material, development and technology of high-tech production. b. The controlling shareholder of Shenzhen Petrochemical Corp. is Shenzhen Investment Holding Corporation, who has established in 1988; legal representative is Li Heihu; registered capital is RMB 2 billion; operation manner: investment and management. IV. Particulars about Director, Supervisor and Senior Executives 1. Directors, supervisors and senior executives Shares held at Increase/ Holding the position in Name Title Gender Age Office term hareholding Company the year-end decrease Xin Yu Chairman of the Board, Male 39 Nov. 2001 - 2004 0 0 General Manager Ding Fuyi Chairman of the Board Male 48 Nov. 2001 - 2004 0 0 Chairman of the Board of Petrochemical Crop. Liu Chong Director, Male 42 Nov. 2001 - 2004 0 0 Director and concurrently chief financial supervisor of Petrochemical Crop. Li Linsen Director Male 56 Nov. 2001 - 2004 6,240 0 Liu Qingmin Director Male 40 Nov. 2001 - 2004 0 0 Zhou Zhen Director, Deputy Male 39 Nov. 2001 - 2004 0 0 General Manager Cai Jianping Director, Secretary of Male 39 Nov. 2001 - 2004 0 0 the Board Li Qinwen Chairman of the Male 55 Nov. 2001 - 2004 0 0 Deputy secretary of Party Supervisor Committee Committee Petrochemical Crop. Liao Hongli Supervisor Female 37 Nov. 2001 - 2004 0 0 Wu Sheng Supervisor Male 37 Nov. 2001 - 2004 0 0 Ren Zhenghua Supervisor Female Nov. 2001 - 2004 0 0 2. Particulars about the annual remuneration In the report year, 4 directors, supervisors or senior executives draw the annual remuneration from the Company, with total amounts of RMB 753,000. Among them, 3 enjoyed the annual remuneration over RMB 200,000; 1 enjoyed below RMB 200,000. Director Ding Fuyi and supervisor Li Qinwen drew their annual salary from the Shareholding Company; director Liu Chong received his annual salary from Shenzhen Investment Holding Corporation; Director Li Linsen, Liu Qingmin and Supervisor Mu Xiangfeng, Wu Sheng and Ren Zhenghua draw their annual salary from the subsidiary companies of the Company. Additional, according to resolution of 6 Shareholders’ General Meeting of the Company, directors (including independent directors) and supervisors drew the allowance of RMB 2500 (tax included) per month from the Company. 3. Change in directors, supervisors and senior executives (1) In May 2002, the original deputy general manger Mr. Bai Jinmin resigned from the post of deputy general manager of the Company due to work adjustment; (2) In June 2002, Mr. Hong Leping was elected as independent director of the Company in the 11th Annual Shareholders’ General Meeting; (3) In Aug. 2002, the original supervisor Mr. Mou Xiangfeng resigned from the post of supervisor of the Company due to work adjustment; (4) In Oct. 2002, the original director Mr. Tang Dongyuan and Mr. Wang Miaoquan resigned from the post of director respectively due to work changing; the original independent director Mr. Ying Qirui resigned from the post of director (independent director) due to retirement; (5) In Nov. 2002, Mr. Ding Fuyi resigned from the post of Chairman of the Board of the Company, while Mr. Xin Yu replaced him as Chairman of the Board of the Company (legal representative); meanwhile, Mr. Luo Hongchun resigned from the post of Vice Chairman of the Board and Director due to work adjustment; (6) In Dec. 2002, the original independent director Mr. Hong Leping submitted an application to resign from the post of director (independent director) because he is now takes the position in institution directly under the Shenzhen Municipal NPC, so he was not suitable for independent director of the Company. The resignation of the above directors (including independent director) and supervisors was determined by the 1st extraordinary shareholders’ general meeting of 2003 held on Feb. 18, 2003. 4. About employees Ended the report year, the Company had totally 1,516 on-the-job employees; classified profession/occupation composition, 1,184 production personnel, 85 salespersons, 66 technicians, 31 financial personnel and 150 administrative personnel; classified based on education background, 15 persons with master degree or above, 232 persons with bachelor degree or 3-years regular college graduate, 1,269 persons graduated from junior college. The Company needs to bear the expenses of 168 retirees. VI. Administrative Structure 1. Administration of the Company In order to establish modern enterprise system and practically protect the interests of numerous investors, the Company, according to the Administrative Rules of Listed Company as well as the Company’s actual situation and need, further improved its administrative structure. Remarks on the particulars of the Company’s administrative structure expressed by the Board of Directors are as follows: (1) Shareholder and the Shareholders’ General Meeting. The Company’s administrative structure ensures the equal status for all shareholders, especially medium and small shareholders, and ensures that shareholders fully implement legal rights; In the report year, the Company convened and held the Shareholders’ General Meeting, of which the holding procedures, qualification of participators and voting procedures were all in line with the PRC Company Law, Normative Opinions for the Shareholders’ General Meeting of Listed Company as well as the regulations of 7 Articles of Association. (2) Relationship between Controlling Shareholder and Listed Company. The Company’s controlling shareholder implements its right of shareholder according to law, and undertakes obligations of shareholder; The Company is on the whole separated from the controlling shareholder in respect of business, assets, organization, personnel and finance etc., and carries out business accounting independently and undertakes liabilities and risks independently. However, since the Company and its holding shareholders all is under the serious financial crisis at present and majority management come off sentry duty, thus the Company has deficiency in the aspects of organization setting and staff setting and is unable to separate from holding shareholders really in the terms of organization and staff. (3) Directors and the Board of Directors. The Company elects directors according to election and engaging procedures as stated in the Articles of Association. Directors implement their obligations in a loyal, honest, reliable and diligent manner; The number of directors as well as the personnel formation are in line with relevant laws and regulations. Meetings of the Board of Directors are carried out according to stated procedures. (4) Supervisors and the Supervisory Committee. The formation of the Supervisory Committee and election of supervisors are in line with relevant laws and legislations. The members of the Supervisory Committee as well as its structure ensure that the Supervisory Committee could implement supervision and inspection on directors, senior executives and the Company’s finance. Meetings of the Supervisory Committee are held according to stated procedures. (5) Examination and encouragement mechanism. Since the Company has lost the capability of sustainable operation at present, thus, the Company does not establish the examination and encouragement mechanism to senior executives. 2. Performance of obligations by independent directors In the report period, the former independent directors of the Company can develop the work and implement their obligations according to relevant regulations of CSRC. However, to the end of the report period, two independent directors has resigned from the post of director (independent director) in succession and the Company has not engage new independent directors so far. 3. Improvement measures. According to the Administrative Rules of Listed Company, the Board of Directors believed that there was still a gap between the Company’s legal person administrative structure and the requirements of CSRC, which needed improvement. (1)The Company’s controlling shareholder owed the Company huge account receivables, which seriously affected the Company’s financial condition and normal operation. The Company shall positively negotiate with the controlling shareholder for this issue and avoid occurrence of similar case. (2) The Company has no independent directors at present. The Company shall seek suitable persons and engage new independent directors so as to improve the legal person’s administrative structure of the Company according to the relevant regulations of CSRC. VII. Brief introduction of Shareholders’ General Meeting The notification on holding the 11th Shareholders’ General Meeting was published in Securities Times and Hong Kong Ta Kung Pao dated May 25, 2002. The Meeting was 8 held on June 28, 2002 on schedule. The shareholders who attended the Meeting held and represented totally 166,761,565 shares (among which 0 share was B share), taking 54.97% of the Company’s total shares. The Annual Shareholders’ General Meeting reviewed and passed through written voting 2001 Work Report of the Board of Directors, 2001 Work Report of the Supervisory Committee, 2001 Audited Financial Statement and Auditors’ Report, 2001 Profit Distribution Proposal, Proposal on Reengaging Certified Public Accountants for 2002, Proposal on Election of Independent Directors, Proposal on Granting Allowance to Directors and Supervisors and Proposal on Authorization to the Board of Directors. The resolutions of the Meeting were published in Securities Times and Hong Kong Ta Kung Pao dated June 29,2002. VIII. Report of the Board of Directors 1. Operation In the report period, since the Company’s financial crisis in the previous year has not been solved, the clearing work of arrearage with large amount of large shareholders has not gained progress and the Company failed in large quantities of lawsuit cases, the equity of main affiliated enterprises has been sealed up by the court and the property rights of partial main enterprises has been sold by the court to cancel out the liabilities, which impacted on the production and operating activities of the Company strictly. What’s more, since the contingent liabilities of the Company formed due to partial external liabilities events were confirmed into estimated liabilities and book loss of assets was formed because the property rights of partial enterprises were sold, the Company still incurred a large loss in 2002. (1) Introduction of industry of the Company The Company belongs to enterprises of chemical type and is mainly engaged in the business of new chemical materials, plastic processing and bio-pharmaceutical manufacture etc.. (2) Core business of the Group in the report period In the report period, the existing several production enterprises of the Group overcame various unfavorable factors and still maintained the normal operation and running. In the year, three main production enterprises realized a sales income of RMB 600 million. Shenzhen SPEC Plastics Group Co., Ltd. (hereinafter referred to as Shensu Company), which is mainly engaged in the PVC plastic processing, totally processed various plastic products of 37,800 tons, including: Shenzhen SPEC Plastic Co. Ltd. totally produced 15,600 tons of PVC flake materials, 5,300 tons of color flakes and 4,700 tons of tube materials in the whole year. Zhusu Company, an affiliated company of Shensu Company, totally produced various PVC plastic products of 12,100 tons, whose total production volume decreased by 12% compared with the corresponding period of the previous year. Shenzhen SPEC Chemical Fiber Co., Ltd. (hereinafter referred to as Chemical Fiber Company), which is engaged in the production of PP polypropylene yarns, totally produced various PP polypropylene yarns of 13,800 tons. Shenzhen SPEC Chemical Fiber and Coating Material Co., Ltd. (hereinafter referred to as Coating Material Company), which is engaged in the production of chemical fiber coating materials, totally produced chemical fiber coating materials with high quality of 17.21 million yards, an increase of 20% compared with the corresponding period of the previous year. 9 (3) Operation of the main affiliated enterprises Name of companies Main operation Turnover Gross profit (RMB’000) (RMB’000) Shenzhen SPEC Plastic Group Production and sales of plastic 336,690 40,360 Co., Ltd. products of PVC flake materials etc. Shenzhen SPEC Chemical Fiber Production and sales of 152,420 33,430 Co., Ltd. polypropylene fiber yarn products Shenzhen SPEC Chemical Fiber Production and sales of chemical fiber 109,560 15,740 and Coating Material Co., Ltd. and coating material products (4) Problems and difficulties arising from operation and solutions In the report period, the Group encountered unprecedented problems in the operation, mainly because that the clearing work of arrearage with large amount of holding shareholders has not gained substantial progress and the Company failed in large quantities of lawsuit cases, resulting that the equity of main affiliated enterprises was all sealed up by the court and the property rights of partial main enterprises were sold by the court to cancel out the liabilities, which strictly impacted on the expansion of normal operating activities of the enterprise. On the one hand, the Group slowed down the further deterioration of the financial status through negotiating with creditors actively, on the other hand through digging potential, renovation and reducing staffs and increasing efficiency, to reduce the production cost of enterprise and try hard to maintain the existing production and operation activities of production enterprise. 2. Investment In the report period, the Company had no any new external investment. 3. Financial status (1) Financial status RMB’000 2002 2001 Increase/ Main reasons decrease Total assets Appropriation of 740,646 1,006,653 (266,007) impairment loss Shareholders’ equity Appropriation of (2,097,001) (1,645,311) (749,662) impairment loss Gross Profit Decrease of 88,256 132,254 (43,998) turnover Profit (Loss) attributable (451,690) (2,212,642) to shareholders (2) Explanation on issues involved in the Auditors’ Report with objection of expressing opinion provided by Certified Public Accountants The explanation on issues involved in the Auditors’ Report with objection of expressing opinion provided by Moore Stephens Shenzhen Nanfang Minhe Certified Public Accountants of the Board of Directors A. Particular about liabilities undertaken by the Company for RMB 0.27 billion loan of Petrochemical Group The Board of Directors believed: after Petrochemical Group signed agreement of transferring loan to investment with the Company, Agricultural Bank and Greatwall Corporation in 2000, Petrochemical Group actually carried on RMB 0.267 million loan of the Company from Agricultural Bank but Agricultural Bank required to resume the credit of RMB 0.267 billion principal and interest to the Company in 2002 not according to legal procedure, the direct debtor of the loan was Petrochemical 10 Group and the Company should not undertake RMB 0.267 billion direct debt owed to Agricultural Bank; in addition, through it was listed in relevant agreement that the Company should undertake corresponding legal liability caused by Petrochemical Group’s not implementing relevant agreement, but the characteristic and means of liabilities undertaken was not affirmed clearly, it should not be believed that the Company need to undertake the guarantee liabilities and the Company must implement the liability when Petrochemical Group can not implement the liabilities. Because the law characteristic, scope and degree of the liabilities was not certain, the possible liability undertaken by the Company and the possible losses on the aforesaid events should not be recorded into the estimated liabilities and relevant accounts. B. About sustainable operation of the Company There were following problems existing in the financial status of the Company at present: a, the status that the assets can not cancel out the liabilities was serious and the loss was large; b, it was hard to recover the principal and interests of expiring liabilities; c, the large shareholders did not repay the arrearage in the balance sheet date and had no further repayment plan; d, there existed lawsuit and guarantee issues with large amount; e, the held equity and majority fixed assets was frozen or pledged and partial entered into the procedure of being auctioned. The existence of the aforesaid problems has resulted in the very austere of operating environment of the Company. The Board of Directors thought, since the Company still had no effective reorganization plan and liabilities reorganization measures at present, the aforesaid existing problems can not be solved only depending on the self force of the Company. According to the actual situation at present, to change the status of the Company at present mainly depended on the settlement of payments with large amount receivable to controlling shareholders and release of joint recovery responsibility undertaken by the Company in several external guarantee issues, but the settlement of the aforesaid problems had no progress at present. Thus, it was necessary for the Company to seek suitable way of reorganization and measures of liabilities reorganization and gain the energetic support and cooperation of relevant departments and creditors to continue to maintain the sustainable operation of the Company and get rid of the corner facing at present. 4. Material change of production and operation environment of the Company In the report period, since the several unfavorable factors that affected the sustainable operation of the Company still existed, the Company did not gain substantial progress in the large amount of payments receivable from controlling shareholders and the Company needed to take joint recovery responsibility because the Company provided guarantee for the bank loans of other enterprises and these enterprises were unable to repay the loans, the equity of main production enterprises held by the Company all has been sealed up by the court and it was possible to be forced for implementation by the court. In 2002, the equity of part of enterprises of the Company was sold by the court and was used to cancel out the liabilities. The aforesaid problems seriously affected on the normal operating activities of the Group. The Board of Directors thought, it was impossible for the Company to improve the bad production and operation environment facing at present only depending on the its self force of the Group. 5. Business development plan of the new year Since great changes has taken place in the operating environment of the Company, the main work of the Company in 2002 was: 11 (1) To implement the clearing work of large amount of payments of receivable from controlling shareholders and related parties (2) To continue to negotiate with creditors about the settlement way and slow down the further breakout of the financial crisis of the Company (3) To maintain the existing production and operating activities of main production enterprises 6. Routine work of the Board of Directors (1) Meetings and resolutions of the Board of Directors in the report period In the report period, the Board of Directors of the Company totally held five formal meetings and six extraordinary meetings with details as follows: A. The 2nd meeting of the 4th Board of Directors was held on April 25, 2002 and the meeting examined and approved 2001 Auditors’ Report, 2001 Annual Report, 2001 Profit Distribution Preplan and Proposal on Requesting to Implement Special Disposal on the Company’s Stock. B. The 3th meeting of the 4th Board of Directors was held on April 28, 2002 and examined and approved Financial Statements of the 1st Quarter of 2002 and Report of the 1st Quarter. C. The 4th meeting of the 4th Board of Directors was held on May 24, 2002 and examined and approved Proposal on Nominators of Independent Director, Proposal on Renewal of 2002 Certified Public Accountants and Proposal on Holding Shareholders’ General Meeting. At the same time, the meeting discussed problems of if to amend relevant articles of Articles of Association according to the relevant requirements of legal person’s administrative structure stipulated by CSRC and relevant rules of procedures etc.. D. The 5th meeting of the 4th Board of Directors was held on Aug.22, 2002 and the meeting examined and approved Financial Report of the 1st Half Year of 2002 and Semi-annual Report of 2002. E. The 6th meeting of the 4th Board of Directors was held on Oct.28, 2002 and the meeting examined and approved Financial Statements of the 3rd Quarter of 2002 and Report of the 3rd Quarter F. In the report period, the Board of Directors of the Company held the 6th extraordinary meetings and the meeting Relevant Issues of External Guarantee of Listed Companies, Relevant Issues of Recalling Large Amount of Accountants Receivable from Controlling Shareholder SPEC Group, Issues on Investment Increase in Donggang by Chemical Fiber Company, Salary and Remuneration of Director, Selling Equity of Shenzhen SPEC Beauty Star Hotas Plastics Co., Ltd. and Precision Chemical Company to Cancel out Liabilities, Appropriation of Bad Debts, Problem of Sustainable Operation and Election of Xinyu as Chairman of the Board etc. and formed relevant resolutions. (2) Implementation of resolutions of Shareholders’ General Meeting by the Board of Directors In the report period, the Board of Directors of the Company seriously implemented all resolutions of Shareholders’ General Meeting and disposed relevant issues of external guarantee in the authorization scope of Shareholders’ General Meeting and disposed the issues of canceling out relevant liabilities with non-cash assets. 7. Preplan of profit distribution of the report year Since the Company incurred a loss in the report year, thus, the Company would neither distribute profit nor convert capital public reserve into share capital in 2002. 12 The aforesaid profit distribution preplan should be submitted to the 12th Shareholders’ General Meeting for examination and approval. 8. Other report issues The newspapers designated by the Company for information disclosure were Securities Times and Ta Kung Pao and remained no change in the report period. IX. Report of the Supervisory Committee In 2002, the Supervisory Committee seriously performed its obligations and correctly implemented its supervision functions according to the PRC Company Law, Administrative Rules of Listed Company, relevant laws and legislations for listed company as well as relevant regulations of the Articles of Association. In the report year, the supervisors of the Company were Li Qinwen, Mu Xiangfeng, Liao Hongli, Ren Zhenghua and Wu Sheng. In Aug. 2002, because of the job’s change, the Supervisory Committee agreed Mu Xiangfeng to resign the post as supervisor. In the report year, the Company held altogether five meetings of the Supervisory Committee. The 1st meeting of the Supervisory Committee was held on Jan.29, 2002 and decided to establish enterprise’s internal supervision group and implement system of associated seats meeting of the supervision work inside enterprise; the 2nd meeting of the Supervisory Committee was held on Apr.25, 2002 and examined 2001 Work Report, 2001 Annual Report of the Company and so on; the 3rd meeting of the Supervisory Committee was held on Apr.28, 2002 and examined the 1st Quarterly Report of the Company of 2002; the 4th meeting of the Supervisory Committee was held on May 24, 2002 and discussed the amendment of Articles of Association and other rules of procedure; the 5th meeting of the Supervisory Committee was held on Aug.23, 2002, examined the 1st Half Annual Report of 2002 and agreed Mu Xiangfeng to resign the post as supervisor. 1. Operation according to laws In the report year, the members of the Supervisory Committee attended Board meeting and work meeting of general manager frequently, and acquainted themselves with decisions made by the Board of Directors and management status of the Group. The Supervisory Committee believed that in the report year, the Board of Directors and management team made decisions on significant events according to the PRC Company Law and relevant regulations in the Articles of Association. There found no actions of breaking laws, regulations and Articles of Association or damaging the interest of the Company when the directors and senior executives performed their duties. Although the financial index of the Company was deteriorated, the Company still operated according to Company Law. 2. Financial Inspection In the report year, through inspecting the Company’s management and financial status and consulting accounting books and other relevant accounting information, the Supervisory Committee didn’t found any behavior breaking national laws and regulations as well as the Articles of Association. The account receivable to the principal shareholder due to assets reorganization still has not effective settlement method. The Company as guarantor was indicted by the creditor and required to take joint liabilities. The lawsuit is in the stage of implementation. In the report year, part assets have been used for offsetting debt presided by the court. The aforesaid event has significant influence on the operation 13 activities and financial status. The Board of Directors is positively negotiating with the controlling shareholder and the creditor for resolving relevant problems and will implement the liability of information disclosure according to relevant regulations in time The Supervisory Committee believed that the 2001 Auditors’ Report issued by Shenzhen Nanfang-Minhe Certified Public Accountants truly reflected the Company’s financial status and business results. 3. Purchase or Sales of Assets In the report period, two significant assets of the Company were used to offset debt presided by the court: the equity of SPEC Beauty Star Hotas Plastics Co., Ltd. and SPEC Fine Chemical Industry Company held by the Company were sold publicly as the retained price not less than the net assets according to legal procedure and used to repay the debt owed to the creditor. The Supervisory Committee believed the disposition of the aforesaid two assets was just and did not damage the interest of the Company. 4. Correlative Transactions In the report year, the Company conducted transactions with related companies according to common commercial clauses and the transactions did not damage the interest of the Company. Because the account receivable to the principal shareholder of the Company could not be taken back, it has significant disadvantageous influence on the Company’s operation. 5.Explanation on the items involved in the auditor’s report with rejected expression opinion issued by Certified Public Accountants. The Supervisory Committee noticed the items involved in the auditor’s report with rejected expression opinion issued by Certified Public Accountants and agreed the explanation on it by the Board of Directors. X. Significant Events (1). Significant Lawsuit and Arbitration 1.The progress of the unresolved lawsuits events disclosed in the intermediate report of 2002 and before: (1) The objects involved in the lawsuits events, which the Company as the debtor was indicted by the creditor and judged to lose by the court, was converted into RMB 423,305,600 and related interest. (2) The objects involved in the lawsuits events, which the Company as the guarantor for other companies’ loan from bank was indicted by the creditor and judged to take joint repayment liability by the court, converted into RMB 309,510,000 and related interest. (3) The objects involved in the lawsuits events, which was quashed by the court due to the accuser’s absence, converted into RMB 31,000,000 and related interest. (4) The objects involved in the lawsuits events, which was rejected by the court due to exceeding the term of lawsuit, converted into RMB 15,630,000 and related interest. 2.The lawsuits occurred in the 2nd half year: (1) the objects involved in the lawsuits events, which the Company as the debtor was indicted by the creditor, converted into RMB 73,130,000 and related interest. The court has not judged yet. (2) The objects involved in the lawsuits events, which the Company as the guarantor for other companies’ loan from bank was indicted by the creditor, converted into RMB 35,500,000 and related interest. The object, which the Company was judged to take joint repayment liability for, was RMB 25,000,000 and related interest. Others has not 14 been judged yet. Concerning the aforesaid lawsuits and their progress, please refer to the public notice of the Board of Directors disclosed on Securities Times and Ta Kung Pao dated July 13, 2002, Aug.13, 2002, Sep.28, 2002 and Dec.28, 2002. (II). Material purchase and sales of assets as well as absorbing and consolidation event. In the report period, because the Company had no ability of repaying the debt owed to Resources Petroleum Co., Ltd., 70% equity of SPEC Beauty Star Hotas Plastics Co., Ltd. and 95.12% equity of SPEC Fine Chemical Industry Co., Ltd. held by the Company were sealed up by the court. To fluently solve the problem, presided by the court, the Company sold the equity of the aforesaid two companies as the public sale price ensured by the assessment company entrusted by the court, namely RMB 22,290,000 and RMB 3,605,000 to Shentou Network Technology Co., Ltd.. The amount was used to repay part debt of the Company owed to Resources Petroleum Co., Ltd.. Please refer to the public notice of the Board of Directors on Securities Times and Ta Kung Pao dated Mar.14, 2003 and Apr.12, 2003 for relevant events. Except for the aforesaid events, the Company had no other material purchase and sale of assets, consolidation and merge. (III). Significant Correlative Transactions (1) By the end of report year, the account receivables of the Company to the control shareholder, Petrochemical Group and its subsidiaries is RMB 1.33 billion. Concerning the reason of this account receivable and the difficulty in the process of resolving, please refer to Significant Correlative Transactions in 2001 Annual Report. In the report period, the Company has altogether taken back debt of Petrochemical Group amounting to RMB 36,970,000. (2) In the report period, the Company and its subsidiary has not provided new guarantee for the loan of the related companies. (IV). In the report year, the Company offered guarantees for loans totaling RMB 1,614,070,000 billions, including RMB 881,570,000 guarantee for external enterprises, RMB 568,850,000 guarantee for related enterprises and RMB 163,650,000 guarantee for its subsidiaries. Please refer to Note.VIII-2 of the accounting statement. Among the said guarantees, except the Company continued to provide extended guarantee for the old loan of the companies with mutual guarantee amounting to RMB 271,780,000(including: the extended guarantee for Shenzhen Neptunus Group Co., Ltd. amounting to 163,000,000, the extended guarantee for China Aidi Group Co., Ltd. amounting to RMB 25,500,000, the extended guarantee for China Baoan Group Co., Ltd. amounting to RMB 83,280,000), the overdue guarantee is RMB 1,342,290,000 and the guarantee which was involved in the lawsuits or indicated the Company lost the ability of repayment with certain witnesses and was recorded as estimated liability is RMB 878,340,000. (V). In the report period, neither the Company nor its shareholder holding over 5% shares made any commitment. (VI). In the report period, the Company paid Certified Public Accountants (Shenzhen Nanfang Minhe Certified Public Accountants) RMB X financing audit expense. The Certified Public Accountants has provided audit service for the Company for two years. 15 XI. Other significant events The Company signed Three Parties Agreement on Transferring Loan to Investment and Share Equity with China Agricultural Bank of China Shenzhen Branch (“Agricultural Bank”) and China Greatwall Assets Management Corporation Shenzhen Office (“Greatwall Corporation”) in Dec.2000. Agricultural Bank agreed to transfer the loan of the Company converting into RMB 270,000,000(including RMB 3,000,000 nominal loan of one related company) to Greatwall Corporation. Since the transfer date, Agricultural Bank of China has not executed the right of the creditor again and actually relieved the loan of the Company. Meanwhile, RMB 270,000,000 credit of the Company against Petrochemical Group amounting to RMB 270,000,000 was transferred to investment income with equal amount against Petrochemical Group and the Company correspondingly offset the account receivable against Petrochemical Group amounting to RMB 267,000,000 but should be responsible for all law dissension caused by the aforesaid transfer from loan to investment. Because this agreement is not finished implementing so far, Greatwall Corporation did not gain the investment stipulated in the aforesaid agreement from Petrochemical Group, Agricultural Bank and Greatwall Corporation suggested Petrochemical Group and the Company to relieve the agreement and required to resume the relationship of the credit and liability of Agricultural Bank against the Company. XII. Items after period 1.The Company’s subsidiary, Shenzhen SPEC Plastic Co., Ltd. (“Shenzhen Plastic Company”) provided a large amount of guarantee for the Company and Shenzhen Petrochemical Group Co., Ltd. in recent years. Because the Company occurred financial crisis and was hard to repay the mature liabilities, Shenzhen Plastic Company undertook the joint repayment liabilities of the aforesaid guarantee and it caused Shenzhen Plastic Company was insolvency and stopped normal production and operation activities. The other shareholder, China Assets (Holdings) Co., Ltd. (China Real Estate) indicted the Company violated its legal right and interest and the court has judged the Company to repay RMB 70,776,000 losses. The Company reached pacification agreement with China Real Estate and offset 90.57% equity of Shenzhen SPEC Bio-Pharmaceutical Industry Co., Ltd., 5% equity of Shenzhen Electra Air-condition Co., Ltd. held by the Company and RMB 42,866,400 net credit that SPEC Bio-Pharmaceutical Industry Co., Ltd. had legal recourse for it to China Real Estate. After the aforesaid events was finished implementing, China Real Estate transferred 28.05% equity of Shenzhen Plastic Company legally held by China Real Estate to the Company. Please refer to the public notice on Securities Times and Ta Kung Pao dated Mar.5, 2003 and Mar.29, 2003 for detail. The Company recorded in RMB 42,866,400estimated liabilities on the aforesaid events in 2002. 2.Because the Company’s subsidiary, Shenzhen Plastic Company, and its subsidiary, Shenzhen SPEC Chemical Building Materials Co., Ltd., could not repay the principal and interest of loan from Shenzhen Commercial Bank, the court put teeth in the land, architecture, real estate, equipment, vehicle and electrical equipment of Shenzhen Plastic Company to offset the debt of Shenzhen Plastic Company and it caused Shenzhen Plastic Company could not carry out normal production and operation activities. Please refer to the public notice on Securities Times and Ta Kung Pao dated Mar.29, 2003. 16 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE ’S REPUBLIC OF CHINA) CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2002 CONTENTS PAGE(S) REPORT OF THE AUDITORS 1 CONSOLIDATED INCOME STATEMENT 2 CONSOLIDATED BALANCE SHEET 3-4 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 5 CONSOLIDATED CASH FLOW STATEMENT 6-7 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 8-36 REPORT OF THE AUDITORS TO THE HOLDERS OF B SHARES OF SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. 深圳石化工業集團股份有限公司 (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA WITH LIMITED LIABILITY) We have audited the accompanying consolidated balance sheets of the Shenzhen Petrochemical Industry (Group) Co., Ltd (the “Company”) and its subsidiaries (the “Group”) as of 31 December 2002, and the related consolidated income statement, cash flow and changes in equity for the year then ended. These financial statements set out on pages 2 to 36 are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes an assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We planned our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. However, the evidence available to us was limited in respect of the event referred to note 35 to the financial statements in the amount of RMB$270,000,000 as we were not provided with adequate financial information in respect of this event, and there were no other satisfactory audit procedures that we could adopt to assess that the impact of this event to the financial statements as at 31 December 2002. In forming our opinion, we believe that our audit provides a reasonable basis for our opinion and we have considered the adequacy of the disclosures made in Note 2 to the financial statements concerning the adoption of the going concern basis on which the financial statements have been prepared. The Group has incurred a net loss for the year ended 31 December 2002 of RMB 451,690,000 and, as of that date, the Group’s liabilities exceeded its assets by RMB 2,097,001,000. Notwithstanding the loss for the year and the deficiency of net assets at 31 December 2002, the directors have prepared the financial statements on the going concern basis. In the opinion of the directors, in order for the Group to continue as a going concern, a restructuring of the Group’s debts will be required and such restructuring will require the strong support of both the relevant government authorities and the Group’s creditors. At the date of this report, the aforementioned issues have not been successfully resolved. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Due to the significance of the fundamental uncertainty relating to the going concern basis as set out in the preceding paragraph, we are unable to form an opinion as to whether the consolidated financial statements present fairly, in all material respects, the financial position of the Group as of 31 December 2002 and of the results of operations and cash flows of the Group for the year then ended in accordance with International Financial Reporting Standards. Moore Stephens Shenzhen Nanfang Minhe Certified Public Accountants 21 April 2003 1 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2002 Notes 2002 2001 RMB’000 RMB’000 Turnover 4 614,678 727,826 Cost of sales (526,422) (595,572) _______ _______ Gross profit 88,256 132,254 Other revenue 6 6,786 3,378 Distribution costs (29,752) (29,574) Administrative expenses (136,077) (1,286,642) Provision for compensation payment for litigation 22 (42,866) ____ Provision for payment for breach of contracts 23 (9,856) ____ Provision for economic compensation for staffs 24 (36,036) ____ Other operating expenses (2,161) (2,732) Provision for impairment loss on fixed assets, construction in 12,14 (96,816) (17,204) progress and intangible assets _______ _______ Loss from operating activities 7 (258,522) (1,200,520) Finance costs 8 (102,359) (126,183) Share of loss in associates (4,047) (7,022) Share of loss in non-consolidated subsidiaries ____ (38,715) Provision for impairment loss on long term investments (14,091) (67,861) Gain on disposal of long term investments 13,974 3,815 (Loss)/gain on disposal of other investments (167) 4,613 Provision for guarantees given to banks 21 (116,844) (780,348) _______ _______ Loss before taxation (482,056) (2,212,221) Taxation 9 (4,891) (4,382) ________ ________ Loss before minority interests (486,947) (2,216,603) Minority interests 35,257 3,961 ________ ________ Loss attributable to shareholders (451,690) (2,212,642) ======= ======= Loss per share ---basic 11 RMB (1.49) RMB (7.29) ---diluted 11 N/A N/A The notes on page 8 to 36 form part of these financial statements 2 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2002 Notes 2002 2001 RMB’000 RMB’000 Non-current assets: Fixed assets 12 345,250 459,101 Intangible assets 14 10,366 17,045 Interests in non-consolidated subsidiaries 15 30,762 58,558 Interests in associates 16 2,977 23,936 Long term investments 17 29,766 24,861 ________ ________ 419,121 583,501 ________ ________ Current assets Inventories 18 88,457 122,805 Accounts receivable, other receivables and prepayments 160,591 214,780 Short term investments 19 200 16 Cash and bank balances 72,277 85,551 ________ ________ 321,525 423,152 ________ ________ Current liabilities Accounts payable and other payables 520,862 503,285 Bank and government loans due within one year 20 1,230,163 1,227,363 Tax payable 6,784 4,051 Staff bonus and welfare fund 1,518 1,375 Provision for guarantees given to banks 21 878,341 761,498 Provision for guarantees given to customers 21 18,850 18,850 Provision for compensation payment for litigation 22 42,866 ___ Provision for payment for breach of contracts 23 9,856 ___ Provision for economic compensation for staffs 24 35,030 ___ ________ ________ 2,744,270 2,516,422 ________ ________ Net current liabilities (2,422,745) (2,093,270) ________ ________ Total assets less current liabilities (2,003,624) (1,509,769) ________ ________ 3 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) CONSOLIDATED BALANCE SHEET (continued) AT 31 DECEMBER 2002 Notes 2002 2001 RMB’000 RMB’000 Non-current liabilities Long term bank loans 20 3,106 17,348 Long term payables 25 7,596 6,446 Minority interests 82,675 111,748 ________ ________ Net liabilities (2,097,001) (1,645,311) ======= ======= Equity Share capital 26 303,355 303,355 Reserves 27 (2,400,356) (1,948,666) ________ ________ Shareholders’ deficiency (2,097,001) (1,645,311) ======= ======= The notes on page 8 to 36 form part of these financial statements Approved and authorized for issue by the board of directors on 21 April 2003 DIRECTOR DIRECTOR 4 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) CONSOLIDATED STATEMENT OF CHANGES IN EQUITY AT 31 DECEMBER 2002 Capital Surplus Accumulated Share capital reserve reserve losses Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Note 26) At 1 January 2001 303,355 233,386 91,852 (61,262) 567,331 Net loss for the year — — — (2,212,642) (2,212,642) Transfer to make up losses — — (91,852) 91,852 —- _______ _______ _______ _______ _______ At 31 December 2001 303,355 233,386 — (2,182,052) (1,645,311) ======= ======= ======= ======= ======= At 1 January 2002 303,355 233,386 — (2,182,052) (1,645,311) Net loss for the year — — — (451,690) (451,690) _______ _______ _______ _______ ________ At 31 December 2002 303,355 233,386 — (2,633,742) (2,097,001) ====== ====== ====== ====== ======= 5 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2002 2002 2001 RMB’000 RMB’000 CASH FLOWS FROM OPERATING ACTIVITIES Loss for operating activities (451,690) (2,212,642) Adjustments for: Loss attributable to minority shareholders (35,257) (3,961) Depreciation 30,207 22,112 Amortization of intangible assets 5,034 9,828 Loss on disposal of and scrapped fixed assets 1,518 77 Interest received (776) (2,851) Interest paid 19,029 12,592 Exchange loss 445 2,953 Share of loss in associates 4,047 7,022 Share of loss in non-consolidated subsidiaries ___ 38,715 Gain on disposal of long term investments (13,974) (3,815) Gain on disposal of other investments 167 (4,613) Provision for impairment loss of assets － long-term investments 14,091 67,861 － fixed assets and other assets 96,816 16,448 ________ ________ Operating cash used before working capital changes (330,343) (2,050,274) ________ ________ Decrease in inventories 34,348 17,426 Increase in interests payable 79,520 112,099 Decrease in accounts receivable 95,663 1,222,578 Decrease in accounts payable (60,049) (71,645) Provision for inventories 5,281 952 Provision for guarantees given 204,595 780,348 ________ ________ Cash generated from operations 29,015 11,484 ________ ________ Income tax paid (2,157) (7,409) Others 131 559 ________ ________ Net cash from operating activities 26,989 4,634 ________ ________ CASH FLOWS FROM INVESTING ACTIVITIES Interest received 776 2,851 Interest paid (19,029) (12,592) Dividends received 2,721 2,726 Purchases of fixed assets (14,946) (19,542) Proceeds from disposal of fixed assets 2,573 198 6 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) CONSOLIDATED CASH FLOW STATEMENT (continued) FOR THE YEAR ENDED 31 DECEMBER 2002 2002 2001 RMB’000 RMB’000 Increase in cash from return of investments 16 4,976 Purchases of equity investment __ 30 Cash equivalents in non-consolidated subsidiaries (1,633) (12,654) at beginning of year Investment in future contracts __ 3,816 ________ ________ Net cash used in investing activities (29,522) (30,191) ________ ________ CASH FLOWS FROM FINANCING ACTIVITIES New bank loans raised 19,200 293,980 Repayment of bank loans (30,642) (225,997) New long term bank loans raised 1,150 4,832 Repayments of other long term payables __ (33,098) Dividend paid minority shareholders __ (34) Other payments relating to financing activities __ (17,755) Payment of financing expenses (265) (104) ________ ________ Net cash (used in )/from financing activities (10,557) 21,824 ________ ________ Net decrease in cash and cash equivalents held (13,090) (3,733) Cash and cash equivalents at beginning of the year 85,567 89,300 ________ ________ Cash and cash equivalents at end of year 72,477 85,567 ======== ======== CASH AND CASH EQUIVALENTS AT END OF YEAR Cash and bank balances 72,277 85,551 Short term investments 200 16 ________ ________ 72,477 85,567 ======== ======== 7 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2002 1. ORGANISATION AND PRINCIPAL ACTIVITIES Shenzhen Petrochemical Industry (Group) Co., Ltd. (the “Company”), formerly known as Shenzhen Petrochemical Holding Company Limited was formed by the merger of two state-owned enterprises, Shenzhen Petrochemical Industry Company (established in February 1983), and Shenzhen Gulf Petrochemical Industry Corporation (established in September 1984). On 12 November 1991, the Company obtained approval from the Shenzhen Municipal People’s Government to reorganize into a joint stock limited company. Under the approval of the People’s Bank of China Shenzhen Branch, the Company issued A Shares for the PRC investors and B Shares for the overseas investors. Both A Shares and B Shares are listed on the Shenzhen Stock Exchange and carry equal rights. On 28 October 1999, the Company changed its name from Shenzhen Petrochemical Holding Company Limited to Shenzhen Petrochemical Industry (Group) Co., Ltd following its strategic restructuring. The principal activities of the Company and its subsidiaries (the “Group”) include manufacturing and trading of new chemical materials, fine chemicals, bio-engineering products, chemical fiber, plastic and related products, new and high-tech products development, investments, import and export. 2. BASIS OF PRESENTATION The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board and are prepared under the historical cost basis. The accounting policies adopted by the Group under IFRS differ from the accounting policies adopted in the preparation of the PRC statutory financial statements of the Group, which were prepared in accordance with the Accounting Standards For Enterprise Business and Accounting Systems for Enterprise Business in the PRC. To conform with IFRS, adjustments have been made to the PRC statutory financial statements. Details of the impacts of such adjustments on the net liabilities as at 31 December 2002 and net loss for the year then ended are included in note 37 of the financial statements. The preparation of financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the 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 year. Actual results could differ from those estimates. The directors are of the opinion that the going concern of the Group will be dependent upon a successful debt restructuring of the Group and such restructuring will require the strong support of both the relevant government authorities and the creditors. As at the date of this report, the above issues have not been successfully resolved. 8 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2002 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of consolidation ----------------------------- The consolidated financial statements include the audited financial statements of the Company and its subsidiaries as set out in note 13 as at 31 December 2002 and of the results for the year then ended. The results of subsidiaries acquired or disposed of during the year are consolidated from or to their effective dates of acquisition or disposal respectively and the share attributable to minority interests is deducted from or added to profit from ordinary activities after taxation. All significant inter-company transactions and balances within the Group are eliminated on consolidation. Subsidiaries ----------------- A subsidiary is a company, other than a jointly-controlled entity, in which the Company, directly or indirectly, controls more than half of its voting power or issued share capital or right to participate in a distribution of either profits and capital for long term purposes. Non-consolidated subsidiaries ---------------------------------- In the consolidated balance sheet, the non-consolidated subsidiaries are accounted for, using the equity method as described in IFRS28, at cost and adjusted thereafter for post acquisition change in the Group’s share of net assets of the non-consolidated subsidiaries. The consolidated income statement reflects the Group’s share of the results of operations of the non-consolidated subsidiaries. Associates -------------- An associate is a company over which the Group is in the position to exercise significant influence, but not control, through participation in the financial and operating policy decisions of the investee. The interests in associates are accounted for under the equity method of accounting in the Group’s financial statements. Such interests are stated in the consolidated balance sheet at cost as adjusted by post-acquisition changes in the Group’s share of the net assets of the associates and include goodwill on acquisition, if any, less any impairment losses of individual investment. Goodwill or negative goodwill arising from the acquisition of associates, which was not previously eliminated or recognised in reserves, is included as part of the Group’s interests in associates. 9 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2002 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Associates (continued) -------------- Where a group enterprise transacts with an associate of the Group, unrealized profits and losses are eliminated to the extent of the Group’s interest in the relevant associate, except to the extent that unrealized losses provide evidence of an impairment of the asset transferred. Investments ---------------- Listed and unlisted investments held for long term investment purposes are stated at cost less, if necessary, any impairment losses. Short-term investments are stated at market value at the balance sheet date. Dividend income from investments is recognized when the shareholder’s right to receive payment is established. Goodwill ----------- Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary or associate at the date of acquisition. Goodwill is recognized as an asset and amortised on a straight-line basis over its estimated useful life. Goodwill arising on the acquisition of an associate is included within the carrying amount of the associate. Goodwill arising on the acquisition of subsidiaries is presented separately in the balance sheet. On disposal of a subsidiary or associate, the attributable amount of unamortised goodwill is included in the determination of the profit or loss on disposal. Negative goodwill ----------------------- Negative goodwill represents the excess of the Group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary or associate at the date of acquisition over the cost of acquisition. Negative goodwill is released to income based on an analysis of the circumstances from which the balance resulted. To the extent that the negative goodwill is attributable to losses or expenses anticipated at the date of 10 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2002 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Negative goodwill (continued) ----------------------- acquisition, it is released to income in the period in which those losses or expenses arise. The remaining negative goodwill is recognized as income on a straight-line basis over the remaining average useful life of the identifiable acquired depreciable assets. To the extent that such negative goodwill exceeds the aggregate fair value of the acquired identifiable non-monetary assets, it is recognized as income immediately. Negative goodwill arising on the acquisition of an associate is deducted from the carrying amount of that associate. Negative goodwill arising on the acquisition of subsidiaries is presented separately in the balance sheet as a deduction from assets. Fixed assets --------------- Fixed assets are stated at cost, less provisions for depreciation and any impairment losses. Details are set out in note 12. The cost of an asset comprises its purchase price and any directly attributable cost of bringing the asset to its working condition and location for its intended use. Expenditure incurred after the asset has been put into operation, such as repairs and maintenance and overhaul costs, is normally charged to the income statement in the year in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the asset, the expenditure is capitalised as an additional cost of the asset. When an asset is sold, any gain or loss resulting from the disposal, being the difference between the sales proceeds and the carrying amount of the asset, is included in the income statement. Fixed assets are depreciated, over their estimated useful lives, using the straight-line method, taking into account an estimated residual value of 5 percent of the asset value. The annual rates of depreciation of fixed assets are set out as follows: Estimated useful lives Depreciation rate Land and buildings 40-50 years 2%-2.38% Machinery and equipment 14 years 6.79% Motor vehicles 10 years 9.5% Furniture, fixtures and office equipment 8-12 years 7.92%-11.88% Leasehold improvements 3-5 years 20%-33% Construction in progress is stated at cost, less any impairment loss. Cost includes all direct construction expenditure and other indirect costs attributable to such construction in accordance with the Group’s accounting policy. No depreciation is provided on these assets prior to its completion. 11 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2002 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Intangible assets --------------------- Intangible assets mainly represent the cost of acquisition of technical know-how and die expenses and are stated at cost less amortization and provision, if necessary, for any impairment loss. Amortization are provided on a straight-line basis over the estimated useful lives of relevant intangible assets. The estimated useful lives are as follows: Technical know-how 10 years Dies expenses and others 5 years or benefit periods, if shorter Inventories -------------- Inventories are stated at the lower of cost and net realizable value. Cost is determined on the first-in, first-out or weighted average basis and comprises direct materials and, where applicable, direct labor, other direct costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Net realizable value represents the estimated selling prices in the ordinary course of business less any all estimated costs of completion and costs to be incurred in marketing, selling and distribution. Provisions, contingent liabilities and contingent assets ------------------------------------------------------------------- Provisions are recognized when the Group has a present legal or constructive obligation as a result of past events, and it is probable that an outflow of resources will be required to settle the obligation of which a reliable estimate can be made. Where the Group expects a provision to be reimbursed, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. A contingent liability is a possible obligation that arises from past events and its existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group. It can also be a present obligation arising from past events that is not recognized because it is not probable that outflow of economic resources will be required or the amount of obligation cannot be measured reliably. A contingent liability is not recognized but is disclosed in the notes to the accounts. When a change in the probability of an outflow occurs so that it is probable, it will be recognized as a provision. 12 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2002 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Provisions, contingent liabilities and contingent assets (continued) ------------------------------------------------------------------- A contingent asset is a possible asset that arises from past events and its existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain events not wholly within the control of the Group. Contingent assets are not recognized but are disclosed in the notes to the accounts when an inflow of economic benefits is probable. Only when an inflow is virtually certain, a contingent asset is recognized. Foreign currency translation ------------------------------------ The financial statements are expressed in Renminbi. All transactions in foreign currencies during the year are translated into Renminbi at the applicable rates of exchange prevailing at the respective dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into Renminbi at the exchange rates quoted by the People’s Bank of China prevailing at the balance sheet date. Exchange differences arising in these transactions are included in the income statement. On consolidation, the financial statements of overseas subsidiaries maintained in foreign currencies are translated at exchange rates ruling on the balance sheet date. Exchange differences arising on consolidation, if any, are included in reserves. Deferred taxation ------------------------ Deferred taxation is provided for by using the liability method, for all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. The principal temporary differences arise from depreciation on fixed assets and tax losses carried forward. Tax rates enacted or substantially enacted by the balance sheet date are used to determine deferred taxation. Deferred taxation is charged or credited in the income statement, except when it relates to items credited or charged directly to equity, in which case the deferred taxation is also dealt with in equity. 13 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2002 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Deferred taxation (continued) ------------------------ Deferred tax assets relating to the carry forward of unused tax losses are recognized to the extent that it is probable that future taxable profit will be available against which the unused tax losses can be utilized. Deferred tax liabilities are provided on temporary differences arising on investments in subsidiaries, associates and joint ventures, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Operating leases ---------------------- The income and expenses under operating leases are dealt with in the income statement on a straight-line basis over the period of the respective leases. Revenue recognition ------------------------- Revenue from the sale of goods is recognized on the transfer of risks and rewards of ownership, which generally coincides with the time when goods are delivered to customers and the title has passed. Interest income is recognized on a time proportion basis, taking into account the principal amounts outstanding and the interest rates applicable. Dividend income from investments is recognized when the shareholders’ rights to receive payment have been established. Rental income is recognized on time proportion basis over lease term. 14 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2002 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Cash and cash equivalents --------------------------------- Cash and cash equivalents comprise cash at bank and on hand, demand deposits with banks and other financial institutions and short term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, having been within three months of maturity at acquisition. Value added tax ------------------- Value added tax is calculated in accordance with the relevant tax laws of the PRC, expressed by way of the difference between the output tax on local sales and the input tax on local purchases. These taxes are not included in the sales and purchases respectively in the income statement. For goods manufactured and sold in Shenzhen SEZ, the value-added tax is exempted in accordance with the local tax regulations of the Shenzhen SEZ. Excess of output over input value added tax is dealt with in the income statement as other operating income. Segment reporting ----------------------- A segment is a distinguishable component of the Group that is engaged either in providing products or services within a particular operating divisions/(business segment) which subject to risks and rewards that are different from the other segments. Related parties ------------------ Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence, related parties may be individuals or corporate entities 15 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2002 3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Impairment --------------- At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Recoverable amount is the greater of net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. Impairment losses are recognized as an expense immediately, unless the relevant asset is land or buildings other than investment property carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverse, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognized as income immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. Retirement benefits costs ------------------------------- Payments to defined contribution retirement benefits plans are charged as expenses as they fall due. Payments made to the retirement schemes operated by the Bureau of Social Security Administration of Shenzhen SEZ are dealt with as payments to defined contribution plans where the Group’s obligations under the schemes are equivalent to those arising in a defined contribution retirement benefit plans. 16 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2002 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Research and development costs ----------------------------------------- Research and development costs are written off as incurred, except for development expenditure incurred on an individual project or process which is capitalised and carried forward when its future recoverability can be regarded as reasonably assured. Financial instruments --------------------------- Financial Assets The Group’s principal financial assets are bank balances and cash and trade receivable and equity investments. Trade receivables are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts. Long-term investments, where the Group is not in a position to exercise significant influence or joint control, are stated at cost less any impairment losses, where the investments’ carrying amount exceeds its estimated recoverable amount. Financial Liabilities Financial liabilities are classified according to the substance of the contractual arrangements entered into. Debt instruments issued which carry a right to convert to equity that is dependent on the outcome of uncertainties beyond the control of both the Group and the holder, are classified as liabilities except where the possibility of non-conversion is remote. Significant financial liabilities include interest-bearing bank loans and overdrafts and trade and other payables. Interest-bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption, are accounted for on an accrual basis and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. Trade and other payables are stated at their nominal value. 17 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2002 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Borrowing costs -------------------- All borrowing costs are expended in the income statement in the period in which they are incurred except to the extent that they are capitalized as being directly attributable to the acquisition, construction or production of qualifying asset which necessarily take a substantial period of time to get ready for its intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization. 4. TURNOVER Turnover represents gross invoiced sales less sales tax, returns and discounts. 5. SEGMENT REPORTING (a) Business segments During the year, the Group is engaged in the business of manufacturing and sales of new chemical materials ,fine materials,bio-engineering products ,chemical fiber, plastic and related products. Therefore, analysis of the business segments is not required. (b) Geographical segments The Group’s operations and markets are mainly located in the PRC. Therefore, analysis of the geographical segment is not required. 6. OTHER REVENUE 2002 2001 RMB’000 RMB’000 Gains on disposal of properties 4,172 1,297 Net income from sale of raw materials 710 (77) Export subsidies 315 25 Value-added tax return from local sales 1,463 1,539 Accounts payable written off 114 229 Gains on disposal of fixed assets ___ 72 Penalties income ___ 36 Others 12 257 ________ ________ Total 6,786 3,378 ======= ======= 18 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2002 7. LOSS FROM OPERATING ACTIVITIES 2002 2001 RMB’000 RMB’000 Loss from operating activities has been arrived at after charging: Staff costs 70,164 71,465 Cost of inventories 526,422 595,572 Depreciation of fixed assets 30,207 22,112 Provision for bad and doubtful debts 59,616 1,214,823 Amortization of intangible assets 5,034 9,828 Loss on disposal of fixed assets 174 77 Loss on scrapped fixed assets 1,344 ___ Rentals in respect of premises under operating leases 3,996 1,747 Interest on bank loans 101,564 124,691 Exchange losses (net) 445 2,953 Auditors’ remuneration 650 800 Loss on disposal of other investment 167 ___ and after crediting: Interest income 776 2,851 Rental income 4,527 1,297 Gain on disposal of short term listed securities ___ 610 8. FINANCE COSTS 2002 2001 RMB’000 RMB’000 Interest paid 101,564 124,691 Interest income (776) (2,851) Exchange gain (69) (200) Exchange loss 514 3,153 Bank expenses 1,126 1,390 _______ _______ Total 102,359 126,183 ======= ======= 9. TAXATION 2002 2001 RMB’000 RMB’000 The charge comprises: PRC income tax for the year 4,891 4,382 ======= ======= 19 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 200 9. TAXATION(continued) Domestic income tax is calculated in accordance with applicable income tax regulations and at 15% (2001:15%) of the estimated assessable profit determined in accordance with the accounting principles and the relevant financial regulations applicable to enterprises in the PRC. Taxation for other jurisdiction is calculated at rates prevailing in the respective jurisdictions, details of which are as follows: 2002 2001 RMB’000 RMB’000 PRC enterprises income tax -enterprises in Shenzhen 15% 15% -enterprises outside Shenzhen 33% 33% Reconciliation to the domestic tax expense as follows: 2002 2001 RMB’000 RMB’000 Accounting profit under IFRS (482,056) (2,212,221) Difference arising from accounting policies based on (114) 636,651 IFRS _________ ________ Accounting profit under Accounting Standards for (482,170) (1,575,570) Business Enterprises of the PRC Tax at the domestic rate of 15% — — Net tax effect of expenses not deductible for tax purposes and other factors 4,891 4,382 _________ ________ Tax expense 4,891 4,382 ======== ======== In accordance with the tax law of the PRC, in a maximum period of 5 successive years, operating loss occurred in the year by a company can be used to offset against the profits earned in the following years. Therefore, the Group’s deferred income tax assets arising from the loss for the year of 2002 amounted to RMB100,350,000. (2001:RMB120,326,000) 10. DIVIDENDS A detailed profit distribution proposal, if any, is presented by the Board of Directors according to the operational results and development requirements of the Company and is submitted to the shareholders at the annual general meeting for approval every year. Under the proposal of the Board of Directors, neither bonus shares nor cash dividends will be distributed for the year of 2002 (2001:Nil). 20 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2002 11. LOSS PER SHARE The calculation of loss per share is based on the net loss attributable to shareholders of RMB451,690,000 (2001: RMB2,212,642,000) on 303,354,979 A and B shares of RMB 1.00 each in issue during the year. No diluted loss per share has been presented as there were no dilutive potential shares during the year ended 31 December 2002 and 2001. 12. FIXED ASSETS Opening Provision for Closing Items Balance Additions Disposals Transfer Impairment Balance RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Cost or valuation Construction in progress 24,616 9,135 ___ 7,932 ___ 25,819 Land and buildings 378,820 1,717 5,649 ___ ___ 374,888 Machinery and equipment 260,693 16,169 6,476 ___ ___ 270,386 Motor vehicles 21,077 401 4,013 ___ ___ 17,465 Furniture, fixtures and 24,635 1,262 3,985 ___ ___ 21,912 office equipment Leaseholds improvements 7,903 468 ___ ___ ___ 8,371 ______ _______ _______ _______ _______ _______ Total 717,744 29,152 20,123 7,932 ___ 718,841 ====== ====== ====== ====== ====== ====== Depreciation Construction in progress 5,710 — — ___ 5,346 11,056 Land and buildings 67,182 8,387 1,681 71,251 145,139 Machinery and equipment 159,238 12,064 3,256 ___ 16,353 184,399 Motor vehicles 10,116 1,429 3,234 ___ 1,146 9,457 Furniture, fixtures and 14,676 1,851 3,544 ___ 2,360 15,343 office equipment Leasehold improvements 1,721 6,476 ___ ___ ___ 8,197 ______ _______ _______ _______ _______ _______ Total 258,643 30,207 11,715 ___ 96,456 373,591 _____ ______ ______ _______ ______ ______ Net book value 459,101 345,250 ====== ====== Land and buildings include properties which were revalued at RMB54,501,000 (2001 : RMB126,870,000) on 14 October 2002 by Shenzhen Zundi Real Estate Consultant Co., Ltd. The Group’s land and buildings are located in the PRC and are held under long-term leases up to a maximum of 50 years. In the opinion of the directors, the carrying value of the fixed assets is not less than their fair value. 21 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2002 13. SUBSIDIARIES Details of the subsidiaries as at 31 December 2002 are as follows: Company Name Note Registered Proportion of Principal Activities Consolidated Capital Shares Directly or not Held ‘000 2002 2001 2002 2001 Shenzhen SPEC Investment & RMB40,000 100% 100% Security investment and Yes Yes Development Co., Ltd. consulting Shenzhen SPEC (Holding) *a RMB2,100 100% 100% Petrochemical products No No Technical Center development Shenzhen SPEC Printing Co., RMB1,510 100% 100% Printing Yes Yes Ltd. Shenzhen SPEC Keyi Fine *a RMB1,000 100% 100% Fine chemicals No No Chemical Co., Ltd manufacturing and trading Shenzhen SPEC Donghong RMB80,000 75% 75% Laminating and coating Yes Yes Laminating & Coating Fabrics Co., Ltd. Shenzhen SPEC Plastics Co., RMB99,300 65.405% 65.405% PVC material manufacturing Yes Yes Ltd. and trading Shenzhen SPEC Fibers Co., USD3,203 51% 51% Chemical fibers Yes Yes Ltd. manufacturing Shenzhen SPEC RMB53,000 100% 100% Bio-engineering products Yes Yes Bio-Pharmaceutical Industry development Co., Ltd. Shenzhen Tongda Packing *a RMB3,500 100% 100% Packing materials No No Products Co., Ltd. manufacturing Shenzhen SPEC Home *a RMB4,130 51.57% 51.57% Home appliances repairing No No Appliance Accessory Co., Ltd. and maintenance Shenzhen Lanbo Industrial Co., *b RMB9,300 100% 100% Manufacturing and sales of No No Ltd. air-condition Shanghai Meixing Plastics USD350 70% 70% Plastic products Yes Yes Co., Ltd. manufacturing Shenzhen SPEC Oil Refining *a RMB50,000 100% 100% Oil refining services No No Services Co., Ltd. *(a) These companies have not been included in the consolidated financial statements because of the suspension of their normal operations. Provisions for impairment loss have been made, and the value of long-term investments has been offset directly. The operating results and net assets of these companies have no significant effect on the Group. 22 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2002 13. SUBSIDIARIES (continued) *(b) This subsidiary is insolvent and ceased its normal operations. Investment in this subsidiary has been adjusted to nil. Provision for bad debts has been made, and the contingent liabilities resulting from the guarantees for bank loans and customers have been dealt with as liabilities in the balance sheet. All subsidiaries are incorporated in the People’s Republic of China. 14. INTANGIBLE ASSETS Technical Know-how Dies Expenses Others Total RMB’000 RMB’000 RMB’000 RMB’000 Net book value at 1 January 2002 12,852 1,670 2,523 17,045 Additions 428 1,037 570 2,035 Amortization (1,000) (2,135) (1,899) (5,034) Provision for impairment (360) __ __ (360) Transfer out (3,320) __ __ (3,320) ______ ______ ______ ______ Net book value at 31 December 2002 8,600 572 1,194 10,366 ===== ===== ===== ===== 15. INTERESTS IN NON-CONSOLIDATED SUBSIDIARIES __2002_ _2001_ RMB’000 RMB’000 Unlisted shares – stated at value under the equity method 30,762 32,662 - at cost less impairment ____ 25,896 ________ ________ 30,762 58,558 ======= ======= The impairment arose from the disposal of subsidiaries below book value subsequent to the balance sheet date. 23 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2002 16. INTERESTS IN ASSOCIATES 2002 2001 RMB’000 RMB’000 Share of net assets 2,477 23,670 Amount due from associates 546 312 Amount due to associates (46) (46) ________ _____ 2,977 23,936 ===== ===== The amount due from/to associate are unsecured, interest-free and they are not repayable within the next 12 months. Details of the principal associates are as follows: Name of Associate Place of Percentage of Principal Activities Registratin Shares Held 2002 2001 Shenzhen SPEC Kinglion *a Shenzhen 48% 48% Plastic products manufacturing and trading Plastics Co., Ltd. Shenzhen SPEC Jinxin *b Shenzhen 30% 30% Chemical and electronic instruments Chemical Electronics Co., Ltd. manufacturing and trading Shenzhen Best Plastics *b Shenzhen 25% 25% Printing Color-Printing Co., Ltd. Shenzhen SPEC Biltrite Soling *b Shenzhen 25% 25% Soling materials manufacturing Co., Ltd. Shenzhen Silicon Material *b Shenzhen 25% 25% Silicon material manufacturing Co.,Ltd *a This company has been transferred to a third party at nil consideration and investment in this company has been adjusted to nil. *b These companies ceased trading and the relevant investments have been fully written off. Accordingly, full provisions for the amounts due from these companies and the guarantees given to banks have been made. 24 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2002 17. LONG TERM INVESTMENTS 2002 2001 RMB’000 RMB’000 Unlisted shares, at cost 40,152 35,113 Less: provision for impairment (10,386) (10,252) ______ ______ 29,766 24,861 ====== ====== 18. INVENTORIES 2002 2001 RMB’000 RMB’000 Raw materials 40,627 111,878 Work in progress 4,694 536 Finished goods 43,136 10,391 _______ _______ 88,457 122,805 ====== ====== The carrying value of raw materials and finished goods which stated at net realizable value are RMB 41,629,000 and RMB 46,148,000 respectively. 19. SHORT TERM INVESTMENTS 2002 2001 RMB’000 RMB’000 Listed securities, at cost － 16 Listed funds, at cost 200 － _____ _____ 200 16 ==== ==== Market value of listed securities __ 16 Market value of listed funds 198.4 __ ==== ==== 25 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2002 20. LOANS 2002 2001 RMB’000 RMB’000 Bank Loans – secured -within one year 155,124 97,554 Bank Loans –unsecured -within one year 1,055,039 1,109,809 -two to five years 3,106 17,348 Loan from Government-unsecured -within one year 20,000 20,000 ________ ________ 1,233,269 1,244,711 ======= ======= Payable: -within one year 1,230,163 1,227,363 -two to five years 3,106 17,348 ________ ________ 1,233,269 1,244,711 ======= ======= Interest rates on bank loans vary between the range of 4.11% and 19.95% per annum, whereas interest rates on government loans vary between 3% to 3.5% per annum.. 21. PROVISION FOR GUARANTEES GIVEN TO BANKS AND CUSTOMERS/BANK LOANS 2002 2001 RMB’000 RMB’000 A. Provision for guarantees given to banks: a. To banks in respect of bank loans for third parties 341,887 233,058 b. To banks in respect of bank loans of associates and fellow subsidiaries 536,454 528,440 B. Provision for guarantee to customers in respect of sales by a subsidiary 18,850 18,850 _________ ________ 897,191 780,348 ======== ======== 26 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2002 21. PROVISION FOR GUARANTEES GIVEN TO BANKS AND CUSTOMERS/BANK LOANS (continued) A(a)The Group has provided guarantees to banks in respect of bank loans granted by the banks to third parties as follows: Company name 2002 2001 Guaranteed Dealt with in Guaranteed Dealt with in loans income loans income statement statement RMB’000 RMB’000 RMB’000 RMB’000 Shenzhen Neptune Group Co., Ltd. 163,000 — 177,000 — Gintian Industry ( Group ) Co., Ltd. 116,945 49,781 130,064 26,900 China Aidi Group Corporation 33,500 — 33,500 — Shenzhen Shun Kong Industrial & Trading Co. 24,090 24,090 24,090 24,090 China Baoan Group Co., Ltd. 46,761 — 92,711 — Shanghai Baoan Group Co.,Ltd 50,000 10,500 Shenzhen Sunlight Industrial Co., Ltd. 43,953 43,953 43,953 38,753 Guangdong Shengrun Group Co., Ltd. 290,977 165,902 263,769 53,653 Shenzhen Zhonghao Group Co., Ltd. 41,600 26,600 104,734 68,600 Shenzhen Tellus Holdings Co., Ltd. 49,680 — 49,680 — Shenzhen Hongling Investment & Development 2,000 2,000 2,000 2,000 Co., Ltd. Shenzhen SPEC Jiankun Holdings Co., Ltd. 18,751 18,751 18,752 18,752 China Kejian Co., Ltd. 310 310 310 310 ________ ________ ________ ________ Total 881,567 341,887 940,563 233,058 ======== ======== ======== ======= RMB341,887,000 has been provided in the income statement for guarantees in respect of which legal action has been taken by the banks against the Group. The remaining RMB539,680,000 has been treated as contingent liabilities as referred to in note 29. 27 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2002 21. PROVISIONS FOR GUARANTEES GIVEN TO BANKS AND CUSTOMERS/BANK LOANS (continued) A(b) The Group has provided guarantees to banks in respect of bank loans granted by the banks to associates and fellow subsidiaries as follows: Company name 2002 2001 Guaranteed Dealt with in Guaranteed Dealt with in loans income loans income statement statement RMB’000 RMB’000 RMB’000 RMB’000 Shenzhen Best Plastics Color-Printing Co., Ltd. ___ ___ 7,500 ___ Shenzhen Electric Appliance Co., Ltd. ___ ___ 7,000 ___ Shenzhen SPEC Jinxin Chemical Electronics 234,328 234,328 221,522 216,772 Co.,Ltd. Shenzhen SPEC Petroleum storage Co.,Ltd. 44,765 44,765 44,765 44,765 Shenzhen SPEC Petroleum Co., Ltd. 23,999 23,999 23,844 23,844 Shenzhen SPEC Real Estate Co., Ltd. 31,450 24,150 56,450 11,000 Shenzhen SPEC Chemicals Co., Ltd. 82,539 82,539 86,980 77,480 Shenzhen SPEC Bonded trading Petrochemical Co., Ltd. 5,000 ___ 5,000 ___ Hangzhou SPEC Industrial & Trading Co. 7,000 7,000 7,000 7,000 Shenzhen Dahua Chemicals Co., Ltd. 10,620 10,620 15,370 10,620 Shenzhen Jinliyu Petroleum Co. 37,538 37,538 37,538 37,538 Shenzhen Haipeng Import & Export Co., Ltd 10,610 10,610 10,610 10,610 Shenzhen Lanbo Industrial Co., Ltd. 7,500 7,500 7,500 7,500 Huizhou Daya Bay Shencheng Petrochemical 15,690 15,690 15,690 15,690 Co., Ltd. Tianjin SPEC Chemistry Co., Ltd. ___ ___ 49,400 ___ Shenzhen SPEC Silicon Material Co., Ltd. 7,000 ___ 8,908 ___ Shenzhen SPEC Fine Chemical Co., Ltd. 1,900 ___ 8,650 ___ Shenzhen SPEC Beauty Star Fotas Plastics Co., Ltd. 11,200 ___ 12,100 ___ Shenzhen Petrochemical (Holdings) Co.,Ltd. 34,715 34,715 52,421 52,421 Shenzhen SPEC Liquid Chemicals Co., Ltd. ___ ___ 10,200 10,200 Shenzhen SPEC Import & Export Co., Ltd. 3,000 3,000 3,000 3,000 ___________ ________ ___________ ________ Total 568,854 536,454 691,448 528,440 ========= ======= ========= ======= RMB536,454,000 has been provided in the income statement on either of the following grounds: 1. Where legal action has already been taken by the banks against the Group, or 2. Where repayment of the loans has been overdue and the financial position of the debtors concerned has deteriorated. The remaining guarantees of RMB32,400,000 were treated as contingent liabilities as referred to in note 29. 28 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2002 21. PROVISIONS FOR GUARANTEES GIVEN TO BANKS AND CUSTOMERS/BANK LOANS (continued) B. The Company has provided guarantees to customers generally in respect of products sold by a subsidiary totaling RMB18,850,000. Provision has been made in the income statement for these guarantees since the subsidiary is unable to pay the claims made by the customers. C.The Company has provided guarantees to banks in respect of bank loans granted to subsidiaries as follows: Company name 2002 2001 Dealt with in Dealt with in Guaranteed income Guaranteed income Loans statement Loans statement RMB’000 RMB’000 RMB’000 RMB’000 Shenzhen SPEC Fibers Co., Ltd. 90,172 ___ 90,172 ____ Shenzhen SPEC Plastics Co., Ltd. 73,479 ___ 146,010 ____ __________ __________ __________ ________ Total 163,651 ___ 236,182 ____ ========= ========= ========= ======= The above guarantees of RMB163,651,000 were treated as contingent liabilities as referred to in note 29. 22. PROVISION FOR COMPENSATION PAYMENT FOR LITIGATION Details of provision for compensation payment for litigation are referred to in note 34(1) 23. PROVISION FOR PAYMENT FOR BREACH OF CONTRACTS A subsidiary company did not fulfill the obligations for the purchase of equipment according to the contract signed with the supplier. On the basis of the legal advice, a provision of RMB9,856,000 has been made for payment for the breach of contract. 24. PROVISION FOR ECONOMIC COMPENSATION FOR STAFFS Some of the subsidiaries have the possibilities to restructure and sell by auction or suffer from operating losses so as not be unable to continue as a going concern.. In view of the above circumstances, a provision of RMB35,030,000 was made for economic compensation for staffs. 29 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2002 25. LONG TERM PAYABLES 2002 2001 RMB’000 RMB’000 Government loans-unsecured 7,596 6,446 ====== ====== Of the above loans, RMB2,500,000 is interest bearing. The interest rates vary between 3% to 3.5% per annum. 26. SHARE CAPITAL 2002 2001 RMB’000 RMB’000 Registered, issued and paid-up (303,354,979 shares in total) 270,594,979 “A” Shares of RMB 1.00 each 270,595 270,595 32,760,000 “B” Shares of RMB 1.00 each 32,760 32,760 _______ ______ 303,355 303,355 ======= ====== 27. RESERVES Capital reserve Surplus reserve Accumulated losses Total RMB’000 RMB’000 RMB’000 RMB’000 At 1 January 2001 233,386 91,852 (61,262) 263,976 Net loss for the year 2001 ___ ___ (2,212,642) (2,212,642) Transfer to make up losses ___ (91,852) 91,852 ___ _______ _______ _______ _______ At 31 December 2001 233,386 ___ (2,182,052) (1,948,666) ======= ======= ======= ======= At 1 January 2002 233,386 ___ (2,182,052) (1,948,666) Net loss for the year 2002 ___ ___ (451,690) (451,690) _______ _______ _______ ________ At 31 December 2002 233,386 ___ (2,633,742) (2,400,356) ====== ====== ====== ======= 30 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2002 27. RESERVES (continued) Capital reserve According to the relevant PRC regulations, capital reserve can only be utilized to increase share capital. Surplus reserve Statutory surplus reserve and discretionary surplus reserve can be used to make up losses or to increase share capital. Except for the reduction of reserves due to losses incurred, any other usage must not result in the balance thereof falling below 25% of the registered capital. According to the relevant PRC regulations, the usage of the statutory public welfare fund is restricted to capital expenditures for employee facilities. The statutory public welfare fund is not available for distribution to shareholders except in the event of liquidation. 28. RELATED PARTY TRANSACTIONS 2002 2001 RMB’000 RMB’000 Purchase of land and buildings to fellow subsidiary ____ 125,660 Interest income from non-consolidated subsidiaries ____ 1,485 Interest income from associate ____ 776 Rental income from fellow subsidiary 2,085 ____ Rental paid to fellow subsidiary ____ 694 Interest rates on borrowings are determined by reference to the interest rates announced by the respective banks during the year. The transaction was entered into at the agreed price and terms between the parties. 31 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2002 29. CONTINGENT LIABILITIES At 31 December 2002，guarantees given by the Group to banks in respect of bank loans granted to companies within the Group totaling RMB196,051,000 and to third parties totaling RMB539,680,000. (note 21) 30. PLEDGE OF ASSETS At 31 December 2002, the Company pledged fixed assets with a net book value totaling RMB159,626,000 to secure bank loans obtained in the PRC totaling RMB116,329,000, HKD33,497,000 and USD 397,200 respectively. 31. COMMITMENTS (a) Capital commitment Contracted for but not provided for in the financial statement: 2002 2001 RMB’000 RMB’000 Purchase of fixed assets 6,298 4,538 Purchase of intangible assets 31,220 31,220 Construction contract 1,766 1,766 _______ _______ 39,284 37,524 ====== ====== No other capital commitments are authorized. (b) Operating lease commitment As at 31 December 2002, the Group has minimum outstanding operating lease commitments under non-cancelable operating leases in respect of buildings which fall due as follows: 2002 2001 RMB’000 RMB’000 Within one year 1,774 967 In the second to fifth years, inclusive 2,995 1,830 _______ _______ 4,769 2,797 ====== ====== 32 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2002 32. LITIGATION As at 31 December 2002, the Company’s had been involved in litigation with a total value of RMB 1,493,244,900 including principal and interests amounting to RMB841,205,600, HKD167,246,000 and USD 57,338,000 respectively. Provision of RMB777,865,300 has been made. Amount RMB’000 Overdue bank loans and interests 637,097 Defaults in payment for construction contract and capital of related parties 80,779 Joint liabilities arising from guarantees to banks for bank loans granted to subsidiaries 138,974 Joint liabilities arising from guarantees to banks for bank loans granted to associates 317,457 Joint liabilities arising from guarantees to banks for bank loans granted to third parties 318,938 33. FINANCIAL INSTRUMENTS Financial assets of the Group include cash and cash equivalents, time deposits with financial institutions, investments, trade accounts receivable, bills receivable, amount due from fellow subsidiaries, loans to third parties, due from associates and jointly controlled entities, and other receivables. Financial liabilities of the Group include bank and other loans, trade accounts payable, bills payable, amount due to fellow subsidiaries, receipts in advance, and advances from third parties. The Group does not hold or issue financial instruments for trading purposes. The Group had no positions in derivative contracts at 31 December 2002 and 2001. Credit risk The carrying amounts of cash and cash equivalents, time deposits with financial institutions, trade accounts and bills receivable, and other current assets, except for prepayments, represent the Group’s maximum exposure to credit risk in relation to financial assets. The majority of the Group’s trade account relates to sales of petrochemical and plastic products etc. to third parties operating in these industries. The Group performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral on trade accounts receivable. The Group maintains an allowance for doubtful accounts and actual losses have been within management’s expectations. 33 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2002 33. FINANCIAL INSTRUMENTS (continued) No other financial assets carry a significant exposure to credit risk. Currency risk Substantially all of the revenue generating operations of the Group is transacted in Renminbi, which is not freely convertible into foreign currencies. On 1 January 1994, the PRC government abolished the dual rate system and introduced a single rate of exchange as quoted by the People’s Bank of China. However, the unification of the exchange rate does not imply convertibility of Renminbi into United States dollars or other foreign currencies. All foreign exchange transactions continue to take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts. Interest rate risk The interest rates and terms of repayment of short term and long term debts of the Group are disclosed in Note 20 and note 25. The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of IFRS32. Fair value estimates, methods and assumptions, set forth below for the Group’s financial instruments, are made solely to comply with the requirements of IFRS32 and should be read in conjunction with the Group’s consolidated financial statements and related notes. The estimated fair value amounts have been determined by the Group using market information and valuation methodologies considered appropriate. However, considerable judgment is required to interpret market data to develop the estimated of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Group could realize in a current market exchange. The use of different market assumptions and /or estimation methodologies may have a material effect on the estimated fair value amounts. Investments in unlisted equity securities have no quoted market prices in the PRC. Accordingly, a reasonable estimate of fair value could not be made without incurring excessive costs. The fair values of all other financial instruments approximate their carrying amounts due to the nature or short-term maturity of these instruments. 34 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2002 34. POST BALANCE SHEET EVENTS (1) The Company announced on 5 March 2003 that a subsidiary company, Shenzhen SPEC Plastics Co., Ltd (the “SPEC Plastics Company”) had provided guarantees totaling RMB151,884,000 to banks in respect of bank loans granted to the Company and Shenzhen SPEC Group Co., Ltd. The Company is in a bad financial condition and unable to repay the bank loans and related interests. The SPEC Plastics Company ceased trading and has been insolvent because of being responsible for the joint liability for repayment of the said loans and related interests. One of the shareholders of the SPEC Plastics Company, China Assets (Holdings) Ltd.(the “China Assets Company”)sued the Company for infringement of legitimate interests. According to the judgment of the court, the Company has to pay RMB7,777,600 to the China Assets Company as financial compensation. On March 2003, the Company and China Assets Company reached a conciliatory agreement to repay the above amount by transferring of 90.57% shares with a value of RMB21,591,110 and net creditor’s right amounting to RMB9,178,396.84 held in Shenzhen SPEC Bio-pharmaceutical Industry Co., Ltd and 5% shares with a value of RMB12,096,900 in Shenzhen Electra Air-conditioning Co.,Ltd. After completion of the above transactions, 28.5% shares in the SPEC Plastics Company originally owned by the China Assets Company will be owned by the Company instead. In 2002, provision of RMB 42,866,400 was made for the above financial arrangement. (2) 95% shares held in the Shenzhen SPEC Printing Co., Ltd (the “SPEC Printing Company” ) have been sealed by the Shenzhen Intermediate People’s Court because of taking responsibility for the joint liability arising from providing guarantees in respect of debts to Xingangao Co., Ltd . The Company negotiated with the Court and reached an agreement by selling the 95% shares held in SPEC Printing Company at the auction base price of RMB209,200 as repayment funds. Under the approval of the Board of Directors, the shares were sold to an individual shareholder, Mr. Huang Yingchun at a public auction organized by the court. The lawsuit was concluded on 13 January 2003. Loss of RMB278,600 on disposal of the shares in SPEC Printing Company has been dealt with as impairment loss on investment. The above post balance sheet events are adjusting events and have been dealt with in the accounts for 2002. 35. OTHER SIGNIFICANT EVENT In December 2000, the Company signed an agreement relating to the conversion of bank loans into investment with the Agriculture Bank of China, Shenzhen Branch (“the Agriculture Bank”) and the China Great-wall Asset Management Co., Shenzhen Representative Office (the “Great-wall Asset Management Co.”). According to the terms of the agreement, the Agriculture Bank agrees to transfer bank loans of RMB 270,000,000 (including a loan of RMB3,000,000 borrowed in the name of a related company) due from the Company to Great-wall Asset Management through the holding company, Shenzhen Petrochenmical (Holdings) Co., Ltd. (“the SPH”) conditionally. The company reflected this assignment through SPH in its books thereby the bank loan had been treated as fully repaid. Since the condition had not been fulfilled up to 11 December 2002, the Agriculture Bank demanded to restore its rights as the creditor for the above loans on the same date. As the position relating to the restoration of the bank loans has not been established, the company did not restore this bank liability. 35 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2002 36. COMPARATIVES Certain significant comparative figures have been appropriately reclassified to conform to the presentation of the financial statement of the current year. 37. IMPACT OF IFRS ADJUSTMENTS ON LOSS ATTRIBUTABLE TO SHAREHOLDERS AND NET LIABILITIES Loss attributable to Net liabilities shareholders RMB’000 RMB’000 As reported in the “A” shares consolidated (446,956) (2,097,001) audited statutory financial statements under the PRC accounting standards IFRS adjustments: Net liabilities of the non-consolidated subsidiaries (4,848) __ Accounts payable written off 114 __ __________ __________ As reported after IFRS adjustments (451,690) (2,097,001) in the “B” shares financial statements ========= ========= 36 XIII. Financial Report (Attachment) XIV. Documents Available for Reference 1. Accounting Statements with the personal signatures and seals of legal representative, person in charge of the accounting affairs and person in charge of accounting institutions; 2. Original of Auditor’s Report with the seal of Moore Stephens Shenzhen Nanfang-Minhe Certified Public Accountants and Shenzhen Nanfang-Minhe Certified Public Accountants as well as personal signatures and seal of and the certified public accountants; 3. Originals of all documents and manuscripts of Public Notices of the Company disclosed in public on the newspapers designated by China Securities Regulatory Commission in the report period. Shenzhen Petrochemical Industry (Group) Co., Ltd. Board of Directors April 25, 2003 17