安道麦A(000553)沙隆达2002年年度报告（英文）

HUBEI SANONDA CO., LTD. 2002 ANNUAL REPORT (B-share) Important: The Board of Directors of Hubei Sanonda Co., Ltd. (hereinafter referred to as the Company) and its directors hereby confirm that there are no important omissions, fictitious statements or serious misleading information carried in this report, and shall take all responsibilities, individual and/or joint, for the reality, accuracy and completion of the whole contents. No director stated that they couldn’t ensure the correctness, accuracy and completeness of the contents of the Annual Report or have objection for this report. Chairman of the Board of the Company Mr. Zhang Maoli, General Manager Mr. Liu Xingping and person in charge of Finance Mr. He Xuesong hereby confirm that the Financial Report of the Annual Report is true and complete. This report is prepared in both Chinese and English. Should there be any discrepancy in interpretation between the two versions, the Chinese one shall prevail. Accounting data of Chinese version is abstracted from Auditors’ Report audited by CAS, while accounting data of English version is abstracted from Auditors’ Report audited by IAS. Contents Ⅰ. Company Profile----------------------------------------------------------------------------- Ⅱ. Summary of Financial Highlight and Business Highlight--------------------------- Ⅲ. Changes in Capital Shares and Particulars about Shareholders------------------- Ⅳ. Particulars about Directors, Supervisors, Senior Executives and Employees--- Ⅴ. Administrative Structure------------------------------------------------------------------- Ⅵ. Brief Introduction to the Shareholders’ General Meeting -------------------------- Ⅶ. Report of the Board of Directors ----------------------------------- --------------------- Ⅷ. Report of the Supervisory Committee--------------------------------------------------- Ⅸ. Significant Events---------------------------------------------------------------------------- Ⅹ. Financial Report----------------------------------------------------------------------------- Ⅺ. Documents for Reference------------------------------------------------------------------ 1 I. COMPANY PROFILE 1. Legal name of the Company: In Chinese: 湖北沙隆达股份有限公司 (Abbr.: 沙隆达) Short Form of the A-share: Sanonda A Stock Code: 000553 Short Form of the B-share: Sanonda B Stock Code: 200553 In English: HUBEI SANONDA CO., LTD. (Abbr.: SANONDA) 2. Registered Address: No. 93, Beijing East Road, Jingzhou, Hubei Office Address: No. 93, Beijing East Road, Jingzhou, Hubei Post Code: 434001 Website of the Company: http://www.sanonda.com E-mail of the Company: sanondas@public.jz.hb.cn 3. Legal Representative: Zhang Maoli 4. Secretary of Board of Directors: Li Zhongxi Tel: (86) 716-8208632 Contact Address: No. 93, Beijing East Road, Jingzhou, Hubei Fax:(86) 716-8208899 Authorized Representative in Change of Securities Affairs: Wu Meng Contact Address: No. 172, Beijing Road, Jingzhou, Hubei Tel: (86) 0716-8114595 Fax:(86) 0716-8110066 5. Newspaper Chosen for Disclosing the Information of The Company: China Securities, Securities Times and Ta Kung Pao Internet Web Site for Publishing the Annual Report of the Company: http://www.cninfo.com.cn The Place Where the Annual Report is Prepared and Placed:Office of the Company 6. Stock Exchange Listed With: Shenzhen Stock Exchange Short Form of the Stock: Sanonda A (A-share), Sanonda B (B-share) Stock Code:000553 (A-share), 200553 (B-share) 7. Other Relevant Information of the Company Initial registered date: Nov. 30, 1993 Registered place: No. 93, Beijing East Road, Jingzhou, Hubei Registered code of enterprise legal person’s business license: QGEZ Zi No.:002523 Registered code of tax: 421001706962287 Name and office address of Certified Public Accountants engaged by the Company: Domestic: Tian Hua Certified Public Accountants Address: 17th Floor, Zhonghua Building, Fu Xing Men Wai Av., Xi Cheng Dis., Beijing Name: PricewaterhouseCoopers Certified Public Accountants Address: 16th Floor, Ruian Plaza, No 333 Huaihai Center Road, Shanghai II. SUMMARY OF ACCOUNTING HIGHLIGHTS AND BUSINESS HIGHLIGHTS (I) Profit indexes of the Company as of the year 2002 Unit: RMB’000 Items Amount Total Profit -141,555 Net Profit -153,652 Net profit after deducting non-recurring gains and losses -136,883 2 Profit from core business 84,750 Profit from other business 3,959 Operating profit -126,693 Investment income 568 Subsidy income 131 Net income/expenditure from non-operating 16,769 Net cash flows arising from operating activities 13,369 Net increase in cash and cash equivalents -143,445 *Note: Total of non-recurring gains and losses amounting to RMB –16,797,000, and items involved in: (1) Income from non-operating RMB 604,000 (2) Expenditure of non-operating RMB (16,165,000) 2. Notes to difference in the net profit as audited according to CAS and IAS The Company’s net profit as of 2002 was RMB -110,794,000 as audited by Tian Hua Certified Public Accountants under CAS, while net profit was RMB –153,652,000 as audited by PricewaterhouseCoopers Certified Public Accountants under IAS. The differences were as follows: Unit: RMB’000 Net profit Net assets 1. As reported under CAS -110,794 866,508 Impact on IAS adjustments: - Additional provision for doubtful debts -24,671 -46,623 - Depreciation of idle property, plant and equipment -4,187 -27,175 - Withdrawal of provision for price falling of inventories 5,934 2,336 - Withdrawal of provision for devaluation of property, plant and equipment -9,902 -6,156 - Recognition of deferred tax assets -11,796 - Adjustment of sales cut-off 4,914 5,189 - Others -3,150 -3,944 As restated to IAS -153,652 790,135 3. Accounting data and financial indexes over the previous three years at the end of report year Financial indexes Unit 2002 2001 2000 Income from core business RMB’000 652,210 955,663 913,328 Net assets RMB’000 -153,652 -20,916 6,486 Total assets RMB’000 1,506,764 1,617,077 1,857,804 Shareholders’ equity RMB’000 790,135 943,507 964,423 Earnings per share (diluted) RMB -0.517 -0.07 0.022 Earnings per share (weighted) RMB 5.074 -0.07 0.022 Earnings per share after deducting RMB -0.461 -0.073 -0.008 non-recurring gains and losses Net assets per share RMB 2.66 3.18 3.25 Net assets per share after adjustment RMB 2.51 2.99 3.1 Net cash flows per share arising from RMB 0.05 0.42 0.19 operating activities Return on equity (diluted) % -19.45 -2.22 0.67 3 Return on equity (weighted) % -17.73 -2.19 0.65 Return on equity after deducting % -21.57 -2.3 -0.25 non-recurring gains and losses 4. Supplementary statement of profit as calculated according to Regulations on the Information Disclosure of Companies Publicly Issuing Shares (No. 9) released by CSRC: Return on equity (%) Earnings per share (RMB) Profit in the report period Fully diluted Weighted average Fully diluted Weighted average 2002 2001 2002 2001 2002 2001 2002 2001 Income from core business 10.73% 13.17% 9.78% 13.02% 0.2854 0.4184 0.2854 0.4184 Operating profit -16.03% 0.77% -14.62% 0.76% (0.4266) 0.0244 (0.4266) 0.0244 Net profit -19.45% -2.22% -17.73% -2.19% (0.5174) -0.0704 (0.5174) -0.0704 Net profit after deducting non-recurring gains and losses -21.57% -2.29% -19.66% -2.27% (0.5739) -0.0729 (0.5739) -0.0729 5. Particulars about changes in shareholders' equity at the report period Capital Surplus Statutory Discretional Share Retained Shareholders’ Items public public public welfare surplus public capital profit equity reserve reserve fund reserve Amount at the 296,962 565,353 35,648 17,823 3,816 23,905 943,507 period-begin Increase in the 280 - - - - 280 report period Decrease in the - - - -159,041 -159,041 report period Amount at the 296,962 565,633 35,648 17,823 3,816 -135,136 784,746 period-end Reasons for change: In the report period, increase of capital public reserve was because the Company was unable to pay the account payable to Sanonda Qichun Ltd. and the Company appropriated money for technical reformation of Sanonda Tianmen Agricultural and Chemical Co., Ltd.. Decrease of retained profit was due to the deficit of the Company in this year. III. CHANGES IN SHARE CAPITAL AND PARTICULARS ABOUT SHAREHOLDERS (I) Particulars about changes in share capital Unit: share Increase/decrease of this time (+, - ) Before the After the Items change Allotment Bonus Capitalization of change Others Subtotal of share shares public reserve I. Unlisted Shares 1. Promoters’ shares Including: State-owned share 84,729,334 84,729,334 Domestic legal person’s shares Foreign legal person’s shares Others 2. Raised legal person’s shares 3. Inner employees’ shares 4. Preference shares or others Total unlisted shares 84,729,334 84,729,334 4 II. Listed Shares 1. Domestically RMB ordinary 97,232,276 97,232,276 shares Including: shares held by 40,158 40,158 senior executives 2.Domestically listed foreign 115,000,000 115,000,000 shares 3. Overseas listed foreign shares Total listed shares 212, 232,276 212, 232,276 III. Total shares 296,961,610 296,961,610 Note: Item of “others” is transferred allotted state-owned shares. In the report period, the structure of shares remained unchanged. 2. Particulars about shares held by the major shareholders (1) Ended Dec. 31, 2002, the Company had 32451 shareholders of A-share and B-share in total; including 9 inner employee shareholders (directors, supervisors and senior executives (2) Ended Dec. 31, 2002, particulars about shares held by the top ten shareholders: Number of Nature of Increase / Holding Type of shares share shareholders decrease in shares at the Proportion Full name of Shareholders (Circulating/No pledged/ (State-owned the report year-end (%) n-circulating) frozen shareholder/forei year (share) (share) (share) gn shareholder) Sanonda Group Corporation 0 81,726,625 27.52 Non-circulating 81,726, 625 State-owned legal person share Qichun County State Assets 0 3,002,709 1.01 Non-circulating Unknown State-owned share Management Bureau Wen Can Rong －491,907 1,296,804 0.43 Circulating Unknown Foreign share Taiji Investment Co., Ltd. 0 1,000,000 0.33 Circulating Unknown Foreign share Guangqi Investment Co., 0 1,000,000 0.33 Circulating Unknown Foreign share Ltd. Hubei Zhonglian 835,000 0.28 Circulating Unknown Circulation share Changjiang Soil Economic Development Company Anhui Huidu Heat Supply 787,500 0.26 Circulating Unknown Circulation share Engineering Co., Ltd. TAI FOOK SECURITIES 735,699 0.24 Circulating Unknown Foreign share CO LTD Zhang Yi Hua 702,500 0.23 Circulating Unknown Foreign share Zhou Wen Qin 698,220 0.23 Circulating Unknown Circulation share Explanation on associated relationship Among the top ten shareholders as listed above, there exists no associated among the top ten shareholders or relationship among legal person shareholders, and it does not belong to consistent action the consistent actionist regulated by the Management Measure of Information Disclosure on Change of Shareholding for Listed Company. For the shareholders of circulating share, the Company is unknown whether there exists associated relationship, or whether the shareholders belong to the consistent actionist regulated by the Management Measure of Information Disclosure on Change of Shareholding for Listed Company. (3) Sanonda Group Corporation, the controlling shareholder of the Company, held 17.84% equity of Hubei Hongcheng General Machine Co., Ltd. (stock code: 600566). (4) Brief introduction to shareholders holding over 10% of total shares of the company Name: Sanonda Group Corporation Shares in hold: 81,726,625 shares Proportion in the total share: 27.52% Legal representative: Zhang Maoli Scope of business: Agrochemical, chemical products, pharmaceutical products, 5 mechanical equipments and fittings, import and export of the Company’s products and the necessary raw and auxiliary material, etc. Date of establishment: 1994 Registered capital: RMB 311,101,000 Note: 1) Sanonda Group Corporation held state-owned shares of the Company, and there was no change in shares held by the controlingl shareholder in the report period. 2) 81,726,625 shares of the Company held by Sanonda Group Corporation were pledged or judicially frozen. Of them, pledged shares were 55,770,000 shares (the Company published public notice on Aug. 17, 2000 in China Securies, Securities Times and Ta Kung Pao) and frozen shares were 25,956,625 shares. 3) On May 16, 2002, China Xinda Assets Management judicially frozen 13,040,000 shares of the Company (taking 4.39% of the total shares) held by Sanonda Group Corporation because Sanonda Group Corporation provided the loan of RMB 32,500,000 for guaranty in project of carbamide technical reformation to its subsidiary Hubei Datian Chemical Co., Ltd.. Duration of freezing was one year. (The Company has disclosed the said matter in 2002 Semi-Annual Report and the 3rd Quarterly Report). IV. PARTICULARS ABOUT DIRECTORS, SUPERVISORS AND SENIOR EXECUTIVES AND EMPLOYEES 1. Director, supervisor and senior executives Holding Holding Reason for Name Title Gender Age Office term shares at the shares at the change year-begin year-end May 2000- Zhang Maoli Chairman of the Board Male 59 11,830 11,830 - May 2003 Vice Chairman of the May 2000- Liu Xingping Male 40 2,000 2,000 - Board, General Manager May 2003 May 2000- Li Zuoping Director Male 53 3,000 3,000 - May 2003 Director, Deputy General May 2000- Deng Guobin Male 35 2,000 2,000 - Manager May 2003 May 2000- Zhang Jianguo Director Male 50 2,000 2,000 - May 2003 Director, Deputy General May 2000- He Fuchun Male 38 2,000 2,000 - Manager May 2003 May 2002- Tan Wenli Independent Director Male 55 0 0 - May 2005 May 2002- Liao Hong Independent Director Male 59 0 0 - May 2005 Chairman of the May 2000- Wan Zheming Male 54 7,098 7,098 - Supervisory Committee May 2003 Vice Chairman of the May 2000- Chen Changshun Male 55 9,230 9,230 - Supervisory Committee May 2003 May 2000- Sang Maoxiong Supervisor Male 52 0 0 - May 2003 May 2000- Hu Wanfeng Supervisor Female 54 1,000 1,000 - May 2003 May 2000- Xu Baojian Supervisor Male 47 0 0 - May 2003 May 2000- Wang Xuewen Deputy General Manager Male 36 0 0 - May 2003 Apr. 2002- He Xuesong Chief Accountant Male 48 0 0 - Apr. 2005 May 2000- Dai Juqing Chief Economist Male 52 0 0 - May 2003 May 2000- Li Zhongxi Secretary of the Board Male 33 0 0 - May 2003 6 2. In the report period, the Company elected independent director, namely Mr. Tan Wenli and Mr. Liao Hong in 2001 Annual Shareholders’ General Meeting dated May 28, 2002. The Public Notice of the meeting was disclosed in newspapers appointed by the Company on May 29, 2002. 3. Particulars about directors or supervisors holding the position in Shareholding Company: Name of Drawing the payment Title in Shareholding Name Shareholding Office term from the Shareholding Company Company Company (Yes / No) Zhang Maoli Sanonda Group Chairman of the Board 2000 No Corporation Liu Xingping Sanonda Group Director 2000 No Corporation Li Zuorong Sanonda Group Vice Chairman of the 2000 No Corporation Board, General Manager 4. Particulars about the annual payment of directors, supervisors and senior executives Total annual payment RMB 400000 Total annual payment of the top three directors RMB 90000 drawing the highest payment Total annual payment of the top three senior RMB 75000 executives drawing the highest payment Name of directors and supervisors receiving no No payment or allowance from the Company 5. Allowance of independent director and other treatment The allowance of independent director was RMB 20,000 per year respectively. The Company reimbursed the reasonable charges according to the actual situation, which independent directors attended the meeting of the Board, shareholders’ general meeting or exercise their functions and powers in accordance with the relevant laws and regulations and Articles of Association. 6. About employees In 2002, the Company had totally 2970 employees. Of them, 1925 production personnel, 260 salespersons, 497 technicians, 193 administrative personnel and 670 retirees. The Company had 998 persons graduated from 3-years regular college graduate or above, taking 33.6% of the total employees. V. ADMINISTRATIVE STRUCTURE (I) Administration of the Company Strictly according to the Company Law, Securities Law, Administrative Rules for Listed Companies and requirements of other relevant laws and regulations, the Company integrated the actual status, established and consummated every rule of procedure and system, continuously improved the administration structure of the Company and ensured the Shareholders’ General Meeting, the Board of Directors, the Supervisory Committee and the management to implement duties and execute right according to law. According to Guide of Articles of Association of Companies, Administrative Rules for Listed Companies, Standardized Opinion for the Shareholders’ General Meeting and so on, the Company amended Articles of Association, established Rules of Procedure of the Shareholders’ General Meeting, Rules of Procedure of the Board of Directors, Rules of Procedure of the Supervisory Committee, Independent Directors System, Information Disclosure System and other basic administration system. The Company is separated from the control shareholder in five respects as follows: 7 1.In respect of personal: the Chairman of the Board is the legal representative of the control shareholder. The procedure of pluralism as the directors of the Company by senior executives of the control shareholder is legal and their duties are clear. The directors could work in a patient and diligent way. The general manager, other senior executives and sole technical personal took the full time jobs in the Company and received the salary and remuneration. 2.In respect of assets: The Company has independent production and operation sites and system of production, supply and sale. The property right of the Company is separated from the control shareholder. The investment of the control shareholder has been finished. 3.In respect of financing: The Company has independent financing department and accounting settlement system and financing management system and made independently financing decision according to the requirement of the accounting system. The Company has independent bank account and independently declared tax and implemented tax liability as well as signed external contracts according to law. 4.In respect of business: The Company existed no competition in the same industry with the control shareholder. The related transactions between them are legal, transparent and fair and the price is reasonable. 5.In respect of organization: The function of the Three Committees and corresponding management institutions is complete and wholly independent. The control shareholders executed their rights strictly according to the legal procedure and did not interfere with the operation decision and appointing and removing of relevant personal of the Company. 6.Though it continuously improved the legal person administration structure, the Company has some difference compared with Administrative Rules for Listed Companies and modern enterprise system such as not establishing accumulated voting system and committees of stratagem, auditing, nomination and remuneration. (II) Performance evaluation standards and encouragement and binding mechanism: The Company is actively establishing just and transparent performance evaluation standards and encouragement and binding system for the directors, supervisors and senior executives. The engagement of the personals of the management is public and transparent in conformity with the regulations of laws and regulations. (III) Performance of Independent Directors 1.In the report period, according to Guide Opinion on Establishing Independent Directors System in Listed Companies promulgated by CSRC of the Company, as examined and approved by the Shareholders’ General Meeting held on May 28, 2002, the Company engaged Mr. Tan Liwen and Mr. Liao Hong as independent directors of the Company and established independent directors system. Since their office, the two independent directors patiently performed their duties, participated in the discussion and decision on relevant problems, expressed independent opinions and protected the interest of the vast shareholders. 2. In the report period, the independent directors expressed independent opinion on Self-inspection Report of Establishing Modern Enterprise System. VI. BRIEF INTRODUCTION OF SHAREHOLDERS’ GENERAL MEETING In the report period, the Company held 2001 Annual Shareholders’ General Meeting with details as follows: 2001 Annual Shareholders’ General Meeting was held in the Water Meeting Room of the Company on Mar.28, 2002. Relevant public notices on resolutions and law opinion was disclosed on China Securities, Securities Times and Ta Kung Pao dated May 29, 8 2002. VII. Report of the Board of Directors (I) Scope of core business and operation status The business scope of the Company is production and sales of pesticides and chemical products. In 2002, the income from core business of the Company was RMB 652,210,000 and the profit of core business was RMB 84,750,000. Foreign exchange earned through export was USD 16.20 million, an increase of 6% compared with that of the corresponding period of the previous year. The Company produced pesticides (converted into integer) of 29,000 tons, an increase of 6% than that of the corresponding period of the previous year and caustic soda (converted into integer) of 63,000 tons, an increase of 6% compared with that of the corresponding period of the previous year. (II) Operation and achievement of main holding subsidiaries Ended Dec.31, 2002, the holding subsidiaries of the Company include: Unit: RMB’0000 Name of Business Core business Registered Total Net profit Proportion of companies quality capital assets shares held Sanonda Production Pesticides and 40,000 26,152 -381 70.00% Zhengzhou enterprise chemicals Agrochemical Co., Ltd. Sanonda Production Pesticides 2,800 5,588 -653 87.50% (Jingzhou) enterprise Agrochemical and Chemical Co., Ltd. Sanonda Qichun Production Pesticides 8,000 9,618 -1,227 70.00% Co., Ltd. enterprise Sanonda Foreign Trade Import and 1,000 4,277 1,057 90.00% Trade Co., Ltd. export of pesticides Jingzhoiu Dali Production Packing 253 492 17 53.00% Industrial enterprise materials Company Hubei Sanonda Production Pesticides 800 5,372 560 85.00% Tianmen enterprise Agrochemical and Chemical Co., Ltd. Jingzhou Sanonda Real estate Real estate 1,000 4,250 90.00% Real Estate Company Jingzhou Sanonda Advertisement Advertisement 50 203 13 60.00% Advertisement Co., Ltd. Hubei Fengyuan Production Chemical 4,000 6,633 55.00% Chemical Industry enterprise fertilizers Co., Ltd. Including, basic particulars about investment earnings taking over 10% of the net profit of the Company: Name of companies Total assets Net assets Business quality Net profit (RMB’0000) (RMB’0000) (RMB’0000) Sanonda Foreign Trade Co., Ltd. 4,988 1,886 Export trade and service 1,057 Sanonda Tianmen Agrochemical 3,275 1,197 Production and sales of 560 and Chemical Co., Ltd. pesticide products (III) Major suppliers and customers The total amount of purchase of the top five suppliers was RMB 74.32 million, taking 9 19.95% of the total annual amount of purchase and the total amount of sales of the top five customers was RMB 76.63 million, taking 12.51% of the total annual amount of sales. (IV) Difficulties and problems arising from the operation and solutions In 2002 the order and environment of agricultural materials market did not recover fundamentally. Under the grim situation of continuous lowering of profit level of the industry, outstanding contradiction of product structure, damaged price system, continuously depressed chemical industry market and difficulty in balancing production, the Company took measures in three respects: Firstly, it strengthened marketing coordination, highlighted key varieties and markets, innovated marketing system and ensured the growth of sales volume of partial products to certain extent, especially the market of external sales had obvious growth and prosperous trend. Secondly, it strengthened internal management, enhanced the quality of economic operation and basically accomplished the objectives of decrease of the total cost of production in the whole year. Thirdly, it completed a series of technology renovation projects of Sanzuolin, Pichonglin, Jingzhidibaichong and Lvqingjuzhi etc. and new projects of NF3, national debt discount project and 200,000 tons NPK, which established foundation for the increase of immediate benefits of the enterprise. (V) Investment 1. The Company had no proceeds raised through share offering in the report period 2. Application of proceeds raised through previous share offering continuing to the report period: On May 1997, the Company issued 115 million shares of B share with the issuance price of HKD 3.48 per share (equivalent to RMB 3.73 per share) and totally raised funds (deducting issuance expense) of RMB 403,731,330. Ended Dec.31, 2001, the Company had used raised proceeds of B share amounting to RMB 357,361,300 as per the use plan and the balance funds amounting to RMB 46.37 million had been deposited in the bank temporarily (disclosed already for several times). On April 18, 2002, the Board of Directors approved the resolution and decided to use all the balance funds of B share amounting to RMB 46.37 million to supplement the circulating funds after examined and approved by 2001 Shareholders’ General Meeting (the resolution had been published on the designated newspapers as public notice). Ended the report period, all the aforesaid funds had been used up. 3. Investment of proceeds not raised through share offering: Unit: RMB’0000 Name of projects Investment Progress of projects Estimated time of completion Acetyl methyl amine 476 95.00% The 1st half year of phosphor 2003 Multi-functional 958 80.00% In 2003 setting engineer Salt well project 920 90.00% The 1st half year of 2003 NPK (compound 1,466 90.00% The 1st half year of fertilizer) projects 2003 (VI) Financial status (1) Financial status 10 Unit: RMB’000 Items Dec. 31, 2002 Dec.31, 2001 Increase/decrease Lease land 148,631 71,889 106.75% Intangible assets 5,676 1,772 220.32% Accounts of related 11,222 85,619 -86.89% transaction receivable Restricted bank loan 30,780 14,726 109.02% Cash and cash 163,173 306,618 -46.78% equivalents Total assets 1,506,764 1,617,077 -6.82% Explanation: 1. The lease land increased by 106.75% compared with that of the beginning of the year and the main reason was: On Dec.31, 2001, the Company had accounts receivable from two subsidiaries of Sanonda Group amounting to RMB 49,974,000 and had accounts receivable from Jingzhou Government amounting to RMB 36,698,000. According to JCGH (2001) No.19 document promulgated by Jingzhou Government on Nov.26, 2001 and Meeting Summary of Jingzhou Government on Dec.31, 2001, Jingzhou Government appropriated the use right of a piece of land in the suburb of Jingzhou to the Company in April 2002. According to these documents and the agreement signed by the Company and Sanonda Group Company, the Company no longer accepted the aforesaid credit totally amounting to RMB 86,672,000. The period of validity of this lease land was for fifty years from Nov.28, 2001. As per the internal evaluation of the Management of the Company, the fair value of this lease land was RMB 78,000,000. The balance of this fair value less than the amount of credit that would no longer be received by the Company amounting to RMB 8,672, 000 was reckoned into the consolidated income statements of 2002 as bad debts losses. The undistributed profit decreased by 191.34% compared with the end of the previous year, which was mainly due to the loss of the report year. 2. The intangible assets increased by 220.32% compared with the beginning of the year and the main reason was because that the Company had purchased Baicaoku new technical technology with the use expense of RMB 5,000,000. 3. Accounts of related transaction receivable decreased by 86.32% than that of the beginning of the report period and for the main reasons, please refer to explanation of intangible assets. 4. The restricted bank loan increased by 109.02% compared with the beginning of the report period and the main reason was that the restricted bank loan was the Company accepted commercial notes for bank and thus increased the accounts deposited in the bank. 5. Cash and cash equivalent decreased by 46.78%, which was mainly due to repaying the long-term loan and short-term loan and increasing the long-term investment etc.. 6. The assets decreased, which was mainly due to repaying long-term and short-term loan and increasing intangible assets and loss. (2) Operating results Unit: RMB’000 Items Dec.31, 2002 Dec.31, 2001 Increase/decrease Gross profit of sales 84,750.00 124,249.00 -31.79% Sales expense 65,998 31,407 110.14% Management expense 121,915 81,784 49.07% Financial cost, net 25,294 16,605 52.33% amount 11 Impairment loss of 17,015 4,666 264.66% estate, workshops and equipments Net loss -153,652 -20,916 634.61% Explanation: 1. The gross profit of sales decreased by 31.79% compared with that of the previous year and the main reason was: in 2002, affected by the climate and structural adjustment of crop planting, the stop of using highly poisonous pesticides and the country’s reinforcement of management of acute poisons transportation and adding the disorder competition of medium and small enterprises, the sales work of the Company encountered great pressure, which resulted the decrease of sales of the Company’s products in the domestic market, especially the decrease of sales of profitable products; the product structure had not been fully adjusted and had not formed new products with market scale when the traditional products market was restricted; the price of products continued to decline and the price of energy and raw materials mounted up, which made the cost of products increase. 2. The sales expense increased by 110.14% than that of the previous year and the main reason was: in order to expand the sales and increase the market share of the Company’s products, the market promotion expense increased by a big margin; and due to the reinforcement of transport management of chemical hazards of the country, the transport expense increased. 3. The management expense increased by 49.07% compared with that of the previous year, which was mainly due to the increase of reserve for bad debts, impairment loss of inventory, shutdown loss and amortization of intangible assets. 5. The financial cost and net amount increased by 52.33% compared with that of the previous year, which was mainly due to the decrease of interests income of deposit of the report period. 6. The impairment loss of estate, workshops and equipments increased by 264.66% compared with the previous year, which was mainly due to the appropriation of impairment loss of fixed assets. 7. The net loss increased by 646.61% compared with that of the previous year and the main reasons were: the sales price continued to decline; the management expense increased due to the appropriation of reserve for bad debts, reserve for devaluation of inventory and impairment loss of fixed assets; financial expense increased due to the decrease of interests income etc.. (VII) Routine work of the Board of Directors 1. Meetings: On March 18, 2002, the Board of Directors held the meeting and examined and approved proposals of change of Certified Public Accounts and Postponing the proclamation time of Annual Report etc.. On April 18, 2002, the Board of Directors held the meeting and examined and approved 14 proposals on 2001 Annual Report etc.. On June 13, 2002, the Board of Directors held the meeting and examined and approved Resolution on Self-inspection Report of Establishment of Modern Enterprise System. On Aug.7, 2002, the Board of Directors held the meeting and examined and approved resolutions of Semi-annual Report and Summary etc.. On Aug.5, 2002, the Board of Directors held the meeting and examined and approved the Resolution on Accepting 28.75% Equity of the Company’s holding subsidiary 12 Sanonda Tianmen Agrochemical and Chemical Co., Ltd. held by Hongfeng (Beihai) Company. On Oct.27, 2002, the Board of Directors held the meeting and examined and approved the Resolution on Writing off the Assets Impairment Loss appropriated amounting to RMB 23,461,000. On Oct.28, 2002, the Board of Directors held the meeting and examined and approved the 3rd Quarter Report of 2002. The aforesaid public notice of resolutions has been disclosed in China Securities, Securities Times and Ta Kung Pao designated by the Company. 2. Implementation of resolutions of Shareholders’ General Meeting by the Board of Directors In the report period, the Board of Directors seriously implemented all resolutions of Shareholders’ General Meeting according to the authorization of Shareholders’ General Meeting and accepted the supervision of the Supervisory Committee. (VIII) 2002 Profit Distribution Preplan 1.2002 profit distribution preplan. Audited as per Domestic Accounting Standards and International Accounting Standards respectively, the profit after taxation of the Company in 2002 was RMB-110,194,100 and RMB-153,652,600 respectively. According to the principle of taking the lower amount, the profit available for distributing to shareholders was RMB-153,652,600 and adding the undistributed profit of the end of the previous year amounting to RMB 57,902,100, the actual profit available for distributing to shareholders was RMB-95,750,500. Thus, the Board of Directors decided neither to distribute profit nor convert capital public reserve into share capital in 2002. This preplan still should be submitted to 2002 Shareholders’ General Meeting for examination. (IX) The newspapers designated by the Company for information disclosure were China Securities, Securities Times and Ta Kung Pao. VIII. REPORT OF THE SUPERVISORY COMMITTEE (I) Meetings of the Supervisory Committee in 2001 On Apr.18, 2002, the Supervisory Committee held the meeting, examined and approved 14 resolutions including 2001 Annual Report. On Apr.24, 2002, the Supervisory Committee held the meeting, examined and approved the 1st Quarter Report of 2002. On Aug.7, 2002, the Supervisory Committee held the meeting, examined and approved 2002 Semi Annual Report and its Summary. On Oct.28, 2002, the Supervisory Committee held the meeting, examined and approved the 3rd Quarter Report of 2002. Relevant public notices were published on China Securities, Securities Times and Ta Kung Pao. (II) Report of Independent Work 1. Operation according to law: the procedure of decision-making is legal and the Company established more complete internal control system. The directors and managers of the Company has neither violated laws, regulations and Articles of Association nor the interest of the Company. 2.Inspection of financing: the Supervisory Committee believed that 2002 Auditor’s Report with non-reservation opinion issued by Tianhua Certified Public Accountants 13 and PricewaterhouseCoopers Certified Public Accountants reflected objectively and truly the financial status and operation result of the Company. 3.The trading price of purchase and sale of assets was reasonable. No internal transactions of were found and there were no damage of the interest of part shareholders and assets run off of the Company. 4.The related transactions were fair and evenhanded and did not damage the interest of the Company. IX.SIGNIFICANT EVENTS 1.In the report period, the Company has no significant lawsuits and arbitrations 2.In the report period, the Company has no significant purchase and sale of assets, consolidation and merge. 3.In the report period, the Company has not kept as custodian, contracted and leased assets of other companies and vice visa. 4.In the report period, the Company has no significant guarantee for others. 5.In the report period, the Company has not entrusted others to manage cash assets and loan. 6.In the report year, the Company, the Board of Directors or its directors, supervisors and senior executives had neither been checked, given administrative punishment or given circular notices of criticism by China Securities Regulatory Commission nor been condemned publicly by the Stock Exchange. 7.Significant related events in the report period 1) Related transaction Significant transactions between the Company and related parties in 2002 are as follows: Unit: RMB’000 2002 2001 Purchasing raw material from SANONDA GROUP 19,929 28,662 and its subsidiaries Purchasing raw material from non-consolidated 14,023 6,169 subsidiaries and affiliated companies Selling products to SANONDA GROUP and its 2.557 134 subsidiaries Selling products to non-consolidated subsidiaries 133 1,244 and affiliated companies Advance of project money and expenditure for 9,643 46,093 SANONDA GROUP and its subsidiaries 2) Related current Balance of significant current between the Group and related parties ended as of Dec.31, 2002: Unit: RMB’000 Ended Dec.31, 2002 Ended Dec.31, 2001 Account receivable from related parties -SANONDA GROUP and its subsidiaries Account receivable 8,739 2,259 Loan 800 82,360 -Non-consolidated subsidiaries and affiliated companies Account receivable 1,683 Loan 1000 Total 11,222 85,619 14 Unit: RMB’000 Ended Dec.31, 2002 Ended Dec.31, 2001 Account payable to related parties -SANONDA GROUP and its subsidiaries 11,847 5,411 -Non-consolidated subsidiaries and affiliated 2,004 2,068 companies Total 13,851 7,479 Ended as of Dec.31, 2002, RMB 800,000 (In 2001: 83,360,000) is loan with interest and its year rate is between 0% and 6% (In 2001, between 2% and 12%). In 2002, the income on interest of the aforesaid account is RMB 573,000 (In 2001, RMB 4,009,000). Other account receivable and account payable of related parties has neither interest nor guarantee and fixed repayment term. 8. In the report period, the Company reengaged Tianhua Certified Public Accountants as the Company’s domestic auditor. The Company paid the auditing fee amounting to RMB 280,000 for the said year according to the agreement the two parties signed and its travel expenses for the work. Tianhua Certified Public Accountants and its preexistence, Zhongxin Certified Public Accountants and Zhongtianxin Certified Public Accountants havs provided audit service for the Company for 10 years. The Company engaged PricewaterhouseCoopers Certified Public Accountants as the Company’s international auditor. The Company paid the auditing fee amounting to HK$ 620,000 for the said year according to the agreement the two parties signed and its travel expenses for the work. PricewaterhouseCoopers Certified Public Accountants provided audit service for the Company in 2002 for the first year. (The item is subject to 2002 Annual Shareholders’ General Meeting of the Company.) 9.Items after period In the report period, the Company has no items after period. 10.Liability reorganization In the report period, the Company has no liability reorganization. XI. DOCUMENTS FOR REFERENCE 1. Original of Annual Report carried with the signature of Chairman of the Board. 2. Financial statements carried with the personal signatures and seals of legal representative and accounting supervisor. 3. Original of auditor’s report carried with seal of the Certified Public Accountants as well as personal signatures and seals of certified public accountants. 4. All of the Company’s original documents and announcements, which were published in China Securities, Securities Times and Ta Kung Pao. 5. Articles of Association of the Company. Chairman of the Board: Zhang Maoli Hubei Sanonda Co., Ltd. Apr.17, 2003 15 To the shareholders of Hubei Sanonda Co., Ltd. We have audited the accompanying consolidated balance sheet of Hubei Sanonda Co., Ltd. (hereinafter referred to as “the Company”) and its subsidiaries (hereinafter together with the Company referred to as “the Group”) as of 31 December 2002 and the related consolidated statements of income, cash flow and changes in shareholders’ equity for the year then ended. These consolidated financial statements set out on page 2 to 41 are the responsibility of the Group’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as of 31 December 2002 and the results of its operations and cash flows for the year then ended in accordance with International Financial Reporting Standards. 12 April 2003 Shanghai, the People's Republic of China HUBEI SANONDA CO., LTD. AND ITS SUBSIDIARIES CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in Renminbi (“RMB”) thousands, except for loss per share) Year ended 31 December Notes 2002 2001 Sales 652,210 955,663 Cost of sales (567,460) (831,414) Gross profit 84,750 124,249 Other operating income 4,694 5,407 Distribution costs (65,998) (31,407) Administrative expenses (121,915) (81,784) Impairment loss of property, plant and equipment 6 (17,015) (4,666) Income from trading investments 2,005 5,117 Impairment loss of investments 8,9 (1,515) (17,500) Other operating expenses (1,267) (3,940) Loss from operations 2 (116,261) (4,524) Finance costs, net 1 (25,294) (16,605) Loss before tax and minority interests (141,555) (21,129) Income tax expense 3 (17,876) (6,104) Loss before minority interests (159,431) (27,233) Minority interests 19 5,779 6,317 Net loss (153,652) (20,916) 16 Loss per share - Basic 4 RMB (0.52) RMB (0.07) - Diluted Not applicable Not applicable HUBEI SANONDA CO., LTD. AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS OF 31 DECEMBER 2002 (All amounts in RMB thousands) As of 31 December Notes 2002 2001 ASSETS Non-current assets Leasehold land 5 148,631 71,889 Property, plant and equipment 6 504,666 482,646 Intangible assets 7 5,676 1,772 Investments in unconsolidated subsidiaries 2,653 2,575 Investments in associates 8 2,138 2,423 Deferred tax assets 3 - 11,796 Other long-term investments 9 14,192 12,158 Total non-current assets 677,956 585,259 Current assets Inventories 10 327,324 256,076 Due from related parties 22 11,222 85,619 Prepayments 22,753 30,047 Trade and other receivables 5,11 204,303 268,450 Trading investments 12 69,253 70,282 Restricted bank deposits 13 30,780 14,726 Cash and cash equivalents 20(b) 163,173 306,618 Total current assets 828,808 1,031,818 Total Assets 1,506,764 1,617,077 HUBEI SANONDA CO., LTD. AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEET (continued) AS OF 31 DECEMBER 2002 (All amounts in RMB thousands) As of 31 December Notes 2002 2001 EQUITY AND LIABILITIES Shareholders’ equity Ordinary shares 17 296,962 296,962 Reserves 18 493,173 646,545 Total shareholders’ equity 790,135 943,507 Minority interests 19 37,091 30,610 Non-current liabilities Deferred revenue 16 2,487 - Long-term bank borrowings, non-current portion 15 37,480 86,380 Total non-current liabilities 39,967 86,380 Current liabilities Due to related parties 22 13,851 7,479 17 Trade and other payables 14 342,283 261,004 Current portion of long-term bank borrowings 15 87,133 115,223 Short-term bank borrowings 15 196,304 172,874 Total current liabilities 639,571 556,580 Total liabilities 679,538 642,960 Total Equity and Liabilities 1,506,764 1,617,077 HUBEI SANONDA CO., LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands) Reserves Retained Statutory Statutory Discretionary profits/ Total Ordinary Capital surplus public surplus (accumulated Total shareholders’ shares reserve reserve fund welfare fund reserve fund losses) reserves equity (Note 17) (Note 18(a)) (Note 18(b)) (Note 18(b)) (Note 18(c)) Balance as of 1 January 2001 296,962 565,353 39,091 19,545 3,816 39,656 667,461 964,423 Net loss of 2001 - - - - - (20,916) (20,916) (20,916) Restatement of reserves in the statutory accounts - - (4,493) (2,247) - 6,740 - - Profit appropriations from net profit of 2001 - Statutory surplus reserve fund - - 1,050 - - (1,050) - - - Statutory public welfare fund - - - 525 - (525) - - Balance as of 1 January 2002 296,962 565,353 35,648 17,823 3,816 23,905 646,545 943,507 Waiver of a payable in a subsidiary’s books - 280 - - - - 280 280 Net loss of 2002 - - - - - (153,652) (153,652) (153,652) Profit appropriations from net profit of 2002 - Statutory surplus reserve fund - - 3,592 - - (3,592) - - - Statutory public welfare fund - - - 1,797 - (1,797) - - Balance as of 31 December 2002 296,962 565,633 39,240 19,620 3,816 (135,136) 493,173 790,135 HUBEI SANONDA CO., LTD. AND ITS SUBSIDIARIES CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands) Year ended 31 December Notes 2002 2001 CASH FLOWS FROM OPERATING ACTIVITIES Cash generated from operations 20(a) 52,139 115,288 Interest paid (31,415) (36,231) Income tax paid (7,355) (12,909) Net cash from operating activities 13,369 66,148 CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of minority interests 20(d) (2,300) - Acquisition of unconsolidated subsidiaries - (1,095) Acquisition of an associate (1,230) (250) Purchase of other long-term investments (2,034) (66) Purchase of leasehold land 20(c) (2,162) - 18 Purchase of property, plant and equipment (98,817) (25,514) Purchase of intangible assets (5,000) - Proceeds from disposal of property, plant and equipment 20(c) 1,691 4,860 Interest received 3,859 16,462 Government grants received 16 3,908 - Net cash used in investing activities (102,085) (5,603) CASH FLOWS FROM FINANCING ACTIVITIES Dividend paid to minority investors 19 (3,115) (4,312) Capital injection from a minority investor 19 18,000 - Repayment of long-term bank borrowings (76,990) (39,337) Repayment of short-term bank borrowings (172,874) (366,050) Proceeds from short-term bank borrowings 196,304 172,874 (Increase) decrease in restricted bank deposits (16,054) 11,019 Net cash used in financing activities (54,729) (225,806) Net decrease in cash and cash equivalents (143,445) (165,261) Cash and cash equivalents, beginning of year 306,618 471,879 Cash and cash equivalents, end of year 20(b) 163,173 306,618 GENERAL INFORMATION Hubei Sanonda Co., Ltd. (“the Company”) was established as a joint stock limited company in the People’s Republic of China (“the PRC”) on 30 September 1992. Its domestically listed ordinary public shares (A shares) and domestically listed foreign ordinary public shares (B shares) have been listed on the Shenzhen Stock Exchange since December 1993 and May 1997, respectively. The Company considers that Sanonda Group Company (“SGC”) is its parent and ultimate parent company. The Company together with its consolidated subsidiaries are hereinafter collectively referred to as the Group. The principal activities of the Group are the manufacture and sale of agrochemical and chemical products. The registered office of the Company is 93 East Beijing Road, Jingzhou City, Hubei Province, China 434001. As of 31 December 2002, the Group had 5,363 employees (2001: 5,837). As of 31 December 2002, the Company’s subsidiaries and associates, which are all incorporated in the PRC, are as follows: Attributable Date of Equity Registered Principal Name of Company Establishment Interest Capital Activity Direct Indirect (a) Consolidated subsidiaries Qichun Agrochemical Co., Ltd 25 June 1998 70% - 80,000 Manufacture and sale of (沙隆达蕲春有限公司) agrochemicals Jingzhou Agrochemical Co., Ltd. 8 April 1993 87.5% - 28,000 Manufacture and sale of （沙隆达(荆州)农药化工有限公司） agrochemicals Hubei Sanonda International Trade Co., Ltd. 29 July 1998 90% - 10,000 Import and export sales of （湖北沙隆达对外贸易有限公司） agrochemical, chemical and medicinal products Sanonda Zhengzhou Agrochemical Co., Ltd. 10 December 1998 70% - 40,000 Manufacture and sale of （沙隆达郑州农药有限公司） agrochemical and chemical products 19 Sanonda Tianmen Agrochemical Co., Ltd. 18 July 1994 85% - 8,000 Manufacture and sale of （”Tianmen”, 湖北沙隆达天门农化有限责 agrochemicals 任公司） Jingzhou Sanonda Real Estate Development 15 March 2001 90% - 10,000 Real estate development Co., Ltd. （荆州市沙隆达房地产开发有限公司） Hubei Feng Yuan Chemical Co., Ltd. 27 May 2002 55% - 40,000 Manufacture and sale of （”Feng Yuan”, 湖北丰源化工有限公司） chemical products (pre-operating stage in 2002) 20 GENERAL INFORMATION (continued) Attributable Date of Equity Registered Principal Name of Company Establishment Interest Capital Activity Direct Indirect (b) Unconsolidated subsidiaries Sanonda Dali Co., Ltd. 18 September 53% - 2,830 Manufacture and sale of （荆州市达利实业公司） 1992 packaging materials Jingzhou Sanonda Advertisement Co., Ltd. 1 January 1999 60% - 500 Design, make, release and （荆州沙隆达广告有限公司） agency of domestic advertisement (c) Associates Jingzhou Sida Chemical Plant 17 February 50% - 1,690 Manufacture and sale of （荆州市四达化工厂） 1988 agrochemicals Zhengzhou Sanonda Weixin Agrochemical 13 April 1999 - 21% 7,900 Manufacture and sale of Co., Ltd. agrochemicals （”Weixin”, 郑州沙隆达伟新农药有限公 司） Jingzhou Sanonda Jianghan Pharmaceutical 20 June 2001 - 1,000 Manufacture and sale of Co., Ltd. 25% pharmaceutical products （荆州市沙隆达江汉制药有限公司） Jingzhou Tianyang Huibao Micro Chemical 15 August 2002 41% - 3,000 Manufacture and sale of Co., Ltd. chemical products （荆州市天氧汇宝精细化工有限公司） (pre-operating stage in 2002) In August 2002, Yichang Changda Real Estate Development Company, one of the Company’s associates, was dissolved and no significant loss was incurred by the Company. During the year ended 31 December 2002, the Company acquired an additional 28.75% equity interest in Tianmen. Effective from 1 July 2002, the Company’s equity interest in Tianmen increased from 56.25% to 85%. On 27 May 2002 and 15 August 2002, the Company invested RMB 22,000 and RMB 1,230 to set up Feng Yuan and Jingzhou Tianyang Huibao Micro Chemical Co., Ltd., respectively, together with other investors. 21 ACCOUNTING POLICIES The principal accounting policies adopted in preparation of these consolidated financial statements of the Group are set out below: A Basis of presentation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) which include International Accounting Standards and Interpretations issued by the International Accounting Standards Board. These consolidated financial statements have been prepared under the historical cost convention except as disclosed in the accounting polices below. This basis of accounting differs from that used in the preparation of the Group’s statutory accounts which are prepared in accordance with PRC Accounting Standards for Business Enterprises and the Accounting System for Business Enterprises (“Statutory Accounts”). The Group adopted IAS 39 Financial Instruments: Recognition and Measurement and revised IAS 12 Income Taxes in 2001. The financial effects of adopting these standards on the 2001 opening balances of the Group’s consolidated financial statements were not significant. The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. B Group accounting and subsidiaries Subsidiaries, which are those entities in which the Group has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies, are consolidated. Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given up, shares issued or liabilities undertaken at the date of acquisition plus costs directly attributable to the acquisition. The excess of the cost of acquisition over the fair value of the net assets of the subsidiary acquired is recorded as goodwill. 22 ACCOUNTING POLICIES (continued) B Group accounting and subsidiaries (continued) Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are also eliminated unless cost cannot be recovered. Where necessary, accounting policies of subsidiaries have been changed to ensure consistency with the policies adopted by the Group. C Foreign currency translation The Company and its subsidiaries maintain their books and records in RMB, which is the Group’s measurement currency. Transactions in other currencies are translated into the measurement currency at exchange rates prevailing at the time of the transactions. Monetary assets and liabilities denominated in other currencies at the balance sheet date are re-translated at exchange rates prevailing at that date. Non-monetary assets and liabilities in other currencies are translated at historical rates. Exchange differences, other than those capitalised as a component of borrowing costs, are recognised in the consolidated income statement in the period in which they arise. D Leasehold land Leases of land acquired are classified as operating leases. The prepaid lease payments are amortised over the lease period (fifty years) on a straight-line basis. E Property, plant and equipment and depreciation Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment loss. The initial cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Depreciation is calculated using the straight-line method to write off the cost, after taken into account the estimated residual value of each asset over its expected useful life. The expected useful lives are as follows: Buildings 24 years Machinery and equipment 9-18 years Motor vehicles 9 years The useful lives of assets and depreciation method are reviewed periodically to ensure that the method and period of depreciation are consistent with the expected pattern of economic benefit from items of property, plant and equipment. 23 ACCOUNTING POLICIES (continued) E Property, plant and equipment and depreciation (continued) Expenditures incurred after the property, plant and equipment have been put into operation, such as repairs and maintenance and overhaul costs, are recognised as expense in the period in which they are incurred. In situations where it is probable that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of the asset beyond its originally assessed standard of performance, the expenditures are capitalised as an additional cost of the asset. When assets are sold or retired, their costs and accumulated depreciation are eliminated from the accounts and any gain or loss resulting from their disposal is included in the consolidated income statement. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Interest costs on borrowings to finance the construction of property, plant and equipment are capitalised, during the period of time that is required to complete and prepare the asset for its intended use. Other borrowing costs are expensed. F Construction-in-progress Construction-in-progress represents buildings and plant under construction and machinery and equipment under installation and testing, and is stated at cost. This includes cost of construction, plant and equipment and other direct costs plus borrowing costs which include interest charges and exchange differences arising from foreign currency borrowings used to finance these projects during the construction period, to the extent these are regarded as an adjustment to interest costs. Construction-in-progress is not depreciated until such time as the assets are completed and ready for their intended use. G Operating leases Leases of assets under which substantially all the risks and rewards of ownership are effectively retained by the lessor are recognised as operating leases. Lease payments under an operating lease are recognised as an expense on a straight-line basis over the lease term. 24 ACCOUNTING POLICIES (continued) H Intangible assets Intangible assets are measured initially at cost. Intangible assets are recognised if it is probable that the future economic benefits that are attributable to the assets will flow to the Group; and the cost of the asset can be measured reliably. After initial recognition, intangible assets are measured at cost less accumulated amortisation and any accumulated impairment losses. Intangible assets are amortised on a straight-line basis over the best estimate of their useful lives. The amortisation period and the amortisation method are reviewed periodically to ensure that the method and period of amortisation are consistent with the expected pattern of economic benefits from intangible assets. Intangible assets of the Group represent expenditures incurred to acquire technical know-how. Such expenditures are capitalised and amortised using the straight-line method over 10 years. Intangible assets are not revalued. I Impairment of long lived assets Property, plant and equipment and other non-current assets, including leasehold land, long-term investments and intangible assets are reviewed for impairment losses whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount of the asset exceeds its recoverable amount which is the higher of an asset’s net selling price and value in use. For the purposes of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash flows. J Investments The Group classified its investments in debt and equity securities into the following categories: trading, held-to-maturity and available-for-sale. The classification is dependent on the purpose for which the investments were acquired. Management determines the classification of its investments at the time of the purchase and re-evaluates such designation on a regular basis. Investments that are acquired principally for the purpose of generating a profit from short-term fluctuations in price are classified as trading investments and included in current assets. Investments with a fixed maturity that management has the intent and ability to hold to maturity are classified as held-to-maturity and are included in non-current assets, except for maturities within 12 months from the balance sheet date which are classified as current assets. Investments intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, are classified as available-for-sale; and are included in non-current assets unless management has the express intention of holding the investment for less than 12 months from the balance sheet date or unless they will need to be sold to raise operating capital, in which case they are included in current assets. 25 ACCOUNTING POLICIES (continued) J Investments (continued) Purchases and sales of investments are recognised on the trade date, which is the date that the Group commits to purchase or sell the asset. Cost of purchase includes transaction costs. Trading investments are subsequently carried at fair value. Realised and unrealised gains and losses arising from changes in the fair value of trading investments are included in the consolidated income statement in the period in which they arise. Held-to-maturity investments are carried at amortised cost using the effective yield method. The Group’s available-for-sale investments are unlisted investments that do not have quoted market price in an active market, and there are no other practical methods of reasonably estimating their fair values. Accordingly, they are stated at cost less provision for impairment loss. An assessment of available-for sale investments is performed when there is an indication that the asset has been impaired or the impairment losses recognized in prior years no longer exist. Impairment losses and reversal of impairment provision are recorded in the consolidated income statement. The Group’s available-for-sale investments include: (1) Investments in associates Associates are entities over which the Group generally has between 20% and 50% of the voting rights, or over which the Group has significant influence, but which it does not control. Investments in associates are not material to the consolidated financial statements of the Group both individually and taken as a whole. They are not accounted for by the equity method of accounting. Instead, they are regarded as available-for-sale financial assets, and are stated at cost less provision for impairment loss. (2) Investments in unconsolidated subsidiaries Investments in unconsolidated subsidiaries are not material to the consolidated financial statements of the Group both individually and taken as a whole. Their assets, liabilities and results are not consolidated. Instead, they are regarded as available-for-sale financial assets, and are stated at cost less provision for impairment loss. (3) Other long-term investments Other long-term investments represent equity investments in unlisted investees that are neither unconsolidated subsidiaries nor associates. They are accounted for as available-for-sale financial assets, and are stated at cost less provision for impairment loss. 26 ACCOUNTING POLICIES (continued) K Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined on the weighted average basis. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity) but excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses. L Trade receivables Trade receivables are carried at original invoice amount less provision made for impairment of these receivables. A provision for impairment of trade receivables is established when there is an objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the carrying amount and the recoverable amount, being the present value of expected cash flows, discounted at the market rate of interest for similar borrowers. M Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise cash on hand, deposits held at call with banks, short-term highly liquid investments with original maturities of three months or less. N Borrowings and borrowing costs Borrowings are initially recognised at the proceeds received, net of transaction costs. They are subsequently carried at amortised costs using the effective interest rate method, the difference between net proceeds and redemption value being recognised in the net profit or loss for the period over the life of the borrowings. Borrowing costs include interest charges and other costs incurred in connection with arranging borrowings and exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. Borrowing costs are expensed as incurred, except when they are directly attributable to the acquisition, construction or production of the property, plant and equipment that necessarily take a substantial period of time to get ready for its intended use in which case they are capitalized as part of the cost of that asset. Capitalisation of borrowing costs commences when expenditures for the asset and borrowing costs are being incurred and the activities to prepare the asset for its intended use are in progress. Borrowing costs are capitalised at the weighted average cost of the related borrowings until the asset is ready for its intended use. If the resulting carrying amount of the asset exceeds its recoverable amount, an impairment loss is recorded. 27 ACCOUNTING POLICIES (continued) O Deferred income taxes Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Currently enacted tax rates are used in the determination of deferred income tax. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. P Pension scheme Pursuant to the PRC laws and regulations, defined contributions to the basic old age insurance for the Group’s local staff are made monthly to a government agency based on 25% (2001: 25%) of the standard salary set by the provincial government, of which 20% (2001: 20%) is borne by the Group and the remainder is borne by the staff. The government agency is responsible for the pension liabilities relating to such staff on their retirement. The Group accounts for these defined contributions on an accrual basis. The Group has no obligation for the payment of pension benefits beyond the contributions described above. Q Provisions A provision is recognised when, and only when: (i) The Group has a present obligation (legal or constructive) as a result of a past event; (ii) It is probable (i.e. more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation; and (iii) A reliable estimate can be made of the amount of the obligation. At balance sheet date, if it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision will be reversed. 28 ACCOUNTING POLICIES (continued) R Government grants Grants from the government in the form of subsidy or financial refunds are recognised when there is reasonable assurance that the grants will be received and all attached conditions are complied with. Government grants relating to costs are initially recorded as deferred revenue, and are recognised in the consolidated income statement over the period necessary to match them with the costs they are intended to compensate. Government grants relating to purchase of property, plant and equipment are initially recorded as deferred revenue, and are credited to the consolidated income statement on a straight-line basis over the expected useful lives of the related assets. S Revenue recognition Revenue from the sale of goods is recognised when significant risks and rewards of ownership of the goods are transferred to the buyer. Revenue comprises the invoiced value for the sale of goods and services net of value-added tax (VAT), rebates and discounts, and after eliminating sales within the Group. Interest income is recognised on a time proportion basis, taking account of the principal outstanding and the effective rate over the period to maturity, when it is determined that such income will accrue to the Group. Dividends are recognised when the right to receive payment is established. T Dividends Dividends are recorded in the Group’s consolidated financial statements as liability in the period in which they are approved by the Group’s shareholders. U Segment reporting Business segments provide products or services that are subject to risks and returns that are different from those of other business segments. Geographical segments provide products or services within a particular economic environment that is subject to risks and returns that are different from those of components operating in other economic environments. For management purposes the Group is organised into two major business segments, agrochemical and chemical, upon which basis the Group reports its primary segment information. All the Group’s assets are located in the PRC, but the Group’s products are sold to customers located in the PRC, South East Asia, Europe and the Middle East. Financial information on business and geographical segments is presented in Note 21. 29 ACCOUNTING POLICIES (continued) V Subsequent events Post year-end events that provide additional information about the Group’s position at the balance sheet date or those that indicate the going concern assumption is not appropriate (adjusting events), are reflected in the consolidated financial statements. Post year-end events that are not adjusting events are disclosed in the notes when material. W Contingencies Contingent liabilities are not recognised in the consolidated financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. A contingent asset is not recognised in the consolidated financial statements but disclosed when an inflow of economic benefits is probable. X Comparatives Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current year. 30 FINANCIAL RISK MANAGEMENT (1) Financial risk factors and financial risk management The Group activities expose it to a variety of financial risks, including credit risk, liquidity risk, interest rate risk and foreign exchange risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. Financial risk management is carried out by the finance department under policies approved by the Board of Directors. (i) Credit risks The Group has no significant concentration of credit risk with any single counterparty or group counterparties. The Group has policies in place to ensure that sales of products are made to customers with an appropriate credit history. The maximum exposure to credit risk is represented by the carrying amount of each financial asset, including bank deposits, receivables and investments. Cash is placed with reputable banks. (ii) Liquidity risks The Group implements prudent liquidity risk management, which implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities, and the ability to close out market positions. (iii) Interest rate risk The Group’s income and operating cash flows are substantially independent of changes in market interest rates. The Group has no significant interest-bearing assets. The Group policy is to maintain all its borrowings in fixed rate instruments. (iv) Foreign exchange risk The Group has no significant foreign currency transactions other than its overseas sales. Substantially all of the Group’s overseas sales are denominated in United States dollars (“USD”). The Group does not enter into any foreign exchange forward contracts or use other means to hedge its exposure to USD. However, the Group’s management closely monitor the fluctuation of the exchange rate of USD against that of RMB. Management of the Group believe that the Group’s net exposure to USD will not result in significant exchange loss to the Group. 31 FINANCIAL RISK MANAGEMENT (continued) (2) Fair value estimation The fair value of the Group’s trading investments is based on quoted market prices at the balance sheet date. In assessing the fair value of non-trading securities and other financial instruments, the Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date. The face values less any estimated credit adjustments for financial assets and liabilities with a maturity of less than one year are assumed to approximate their fair values. 32 HUBEI SANONDA CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in RMB thousands unless otherwise stated) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 Finance costs, net 2002 2001 Interest income - From bank deposits (5,052) (12,453) - From related parties (Note 22) (573) (4,009) (5,625) (16,462) Interest expense on borrowings 32,951 36,074 Less : Amount capitalised in construction-in-progress (2,032) (3,007) 30,919 33,067 25,294 16,605 For the year ended 31 December 2002, a capitalisation rate of 6.03% (2001: 6.03%) per annum was used to capitalise borrowing costs into the Group’s construction-in-progress. 33 2 Loss from operations Loss from operations was determined after crediting and charging the following: 2002 2001 Crediting: Realised gain from sale of trading investments 3,957 5,581 Charging: Staff costs - Salaries and wages 51,005 50,133 - Provision for welfare and other benefits 7,065 6,574 - Contribution to statutory pension scheme 5,398 5,659 63,468 62,366 Loss on disposal of property, plant and equipment 491 11,474 Depreciation of property, plant and equipment 57,600 55,933 Amortisation of leasehold land 3,420 1,593 Amortisation of intangible assets 1,096 519 Operating lease for plant and machinery 2,091 732 Write-down of inventories to net realisable value 11,463 4,324 Trade and other receivables – impairment charge for bad and doubtful debts 26,188 11,676 Trading investments - fair value adjustment 1,952 464 3 Income tax expense The Group is subject to enterprise income tax levied at a rate of 33%. According to the relevant document issued by the Hubei Provincial Government and Jingzhou City Local Tax Bureau, the Company was entitled to a financial refund equivalent to 18% of taxable income in 2001. Pursuant to Cai Shui [2000] No.99 issued in October 2000, the above preferential tax treatment relating to the Company remained effective until 31 December 2001. 34 3 Income tax expense (continued) (1) Income tax expense in the consolidated income statements comprised: 2002 2001 Current tax 6,080 7,878 Deferred tax 11,796 - Financial refund - (1,774) Income tax expense 17,876 6,104 (2) Movement of deferred taxation for the year ended 31 December 2002 is as follow: 2002 2001 Deferred tax assets, beginning of the year 11,796 11,796 Current year movement (i) (11,796) - Deferred tax assets, end of the year - 11,796 (i) No deferred tax assets are recognised for the Group’s deductible temporary differences as of 31 December 2002 and all the deferred tax assets recognised in previous years are reversed as of 31 December 2002 because it is uncertain as to whether sufficient taxable profits will be available against which the deferred tax assets can be utilised. (3) The reconciliation of the applicable tax rate to the effective tax rate is as follows: 2002 2001 Accounting loss before tax and minority interest (141,555) (21,129) Tax credit calculated at the effective tax rate of 33% (46,713) (6,973) Prior year deferred tax asset written off (see (2)(i) above) 11,796 - Tax effect of unrecognised temporary differences arise in the current year (i) 52,235 12,595 Tax effect of expenses that are not deductible in determining taxable profit 558 2,256 Total tax expense before financial refund 17,876 7,878 35 3 Income tax expense (continued) (i) Tax effect of unrecognised temporary differences arise in the current year is analysed as follow: 2002 2001 Effect of impairment charge for bad and doubtful debts 8,642 3,853 Effect of impairment loss of property, plant and equipment 5,615 1,540 Effect of tax loss 33,052 - Others 4,927 7,202 52,235 12,595 No deferred tax assets are recognised for temporary differences arise in year 2002 because it is uncertain as to whether sufficient taxable profits will be available against which the deferred tax assets can be utilised. 4 Loss per share Basic loss per share is calculated by dividing the net loss by the weighted average number of ordinary shares in issue during the year: 2002 2001 Net loss 153,652 20,916 Weighted average number of ordinary shares in issue (thousands) 296,962 296,962 Basic loss per share (in RMB) 0.52 0.07 The diluted loss per share was not calculated, because no potential dilutive shares existed during the year. 36 5 Leasehold land 2002 2001 Cost Beginning of year 79,785 79,785 Exchange of receivables for leasehold land (i) 78,000 - Other addition 2,162 - End of year 159,947 79,785 Accumulated amortisation Beginning of year 7,896 6,303 Amortisation charge for the year 3,420 1,593 End of year 11,316 7,896 Net book value End of year 148,631 71,889 Beginning of year 71,889 73,482 (i) As of 31 December 2001, the Company had receivables from subsidiaries of SGC amounting to RMB 49,974 and receivables from local government institutions of Jingzhou City amounting to RMB 36,698. Pursuant to Circular Jin Cai Gong (2001) No.19 dated 26 November 2001 and certain directives issued by Jingzhou Municipal Government dated 31 December 2001, the Jingzhou Municipal Government allocated to the Company the land use right of a parcel of land located in the suburb area of Jingzhou City in April 2002. In return, the above receivables amounting to RMB 86,672 in total were extinguished based on the above documents and an agreement with SGC. The lease period of this leasehold land is from 28 November 2001 to 28 November 2051. Based on directors’ valuation, the fair value of this leasehold land is RMB 78,000. The difference amounting to RMB 8,672 between the fair value of the leasehold land and the amount of receivables extinguished was accounted for as bad debt loss in the consolidated income statement. As of 31 December 2002, certain of the Group’s leasehold land amounting to RMB 7,800 (2001: nil) were mortgaged as collateral for bank loans (Note 15). 37 6 Property, plant and equipment Movement in property, plant and equipment for the year ended 31 December 2002 is as follow: Machinery and Construction-i Buildings equipment Motor vehicles n-progress Total Cost Beginning of year 239,432 486,663 14,582 72,320 812,997 Additions 2,619 12,495 1,693 82,010 98,817 Reclassification 11,986 46,396 - (58,382) - Disposals - (3,309) (2,854) - (6,163) End of year 254,037 542,245 13,421 95,948 905,651 Accumulated depreciation and impairment losses Beginning of year 67,125 254,984 8,242 - 330,351 Depreciation charge for the year 9,484 46,866 1,250 - 57,600 Impairment losses - 17,533 (518) - 17,015 Disposals - (2,361) (1,620) - (3,981) End of year 76,609 317,022 7,354 - 400,985 Net book value End of year 177,428 225,223 6,067 95,948 504,666 Beginning of year 172,307 231,679 6,340 72,320 482,646 Management’s current forecast indicates that the economic performance of certain production facilities is worse than originally expected. The impaired assets are written down to their recoverable value which is their value in use. The value in use is the present value of estimated future cash flows expected to arise from the continuing use of the relevant assets and from their disposals at the end of their useful lives. The discount rate used is 5.31% per annum (2001: 5.85%). As described in Note 21, these facilities cannot be divided between the Group’s two business segments because they basically share the same production process. As of 31 December 2002, certain of the Group’s property, plant and equipment amounting to RMB 210,075 (2001: RMB 134,115) were mortgaged as collateral for bank loans (Note 15). 38 7 Intangible assets Intangible assets comprised technical know-how and the movement during the year is as follow: 2002 2001 Cost Beginning of year 5,592 5,592 Additions 5,000 - End of year 10,592 5,592 Accumulated amortisation Beginning of year 3,820 3,301 Charge for the year 1,096 519 End of year 4,916 3,820 Net book value End of year 5,676 1,772 Beginning of year 1,772 2,291 8 Investments in associates 2002 2001 Beginning of year 2,423 2,173 Acquisition of investments 1,230 250 3,653 2,423 Impairment provision-Weixin (1,515) - End of year 2,138 2,423 The financial statements of Weixin, an associate, indicated a substantial accumulated loss. Management believed that the business prospect of Weixin is uncertain and its recoverable value is insignificant. Accordingly, a full impairment provision is made against this investment. 39 9 Other long-term investments 2002 2001 Investment in Jingzhou Commercial Bank 20,000 20,000 Real estate venture 6,010 6,010 Investments in unlisted shares 2,190 2,190 Investments in debentures - 400 Other long-term investments 3,492 1,058 31,692 29,658 Less: Provision for impairment loss for investment in Jingzhou Commercial Bank (17,500) (17,500) 14,192 12,158 The financial statements of Jingzhou Commercial Bank indicated a substantial accumulated loss. The impaired asset was written down to its recoverable value which is its expected net selling price. The expected net selling price is estimated to be the Group's share of the net assets of Jingzhou Commercial bank as of 31 December 2002 because management believe this amount can best approximate the disposal proceeds that the Company is likely to obtain should the investment be disposed in an arm’s length transaction between knowledgeable, willing parties. For the year ended 31 December 2001, the Company recorded an impairment loss of RMB 17,500 related to this investment. 10 Inventories 2002 2001 Raw materials 48,736 54,554 Work-in-process 25,561 32,796 Real estate in development 37,148 10,692 Finished goods 215,879 158,034 327,324 256,076 For the year ended 31 December 2002, inventories expensed in the consolidated income statement amounted to approximately RMB 567,400 (2001: approximately RMB 831,400). Finished goods inventories with a total carrying amount of RMB 90,474 (2001: RMB 61,424) were stated at net realisable value. 40 11 Trade and other receivables 2002 2001 Accounts receivable 217,358 264,619 Notes receivable 1,000 750 218,358 265,369 Less: Provision for doubtful accounts (72,078) (60,717) Total trade receivables 146,280 204,652 Add: Other receivables 58,023 63,798 Trade and other receivables 204,303 268,450 12 Trading investments 2002 2001 Marketable securities - PRC listed equity securities, at market value 69,253 70,282 The trading investments are traded in active markets and are valued at market value at the close of business on 31 December 2002 by reference to Stock Exchange quoted bid prices. In the consolidated income statement, changes in fair values of trading investments are recorded in “income from trading investments”. In the cash flow statement, trading investments are presented within the section of operating activities as part of changes in working capital. 13 Restricted bank deposits Restricted bank deposits represented deposits with banks pledged for acceptance of commercial bills. 41 14 Trade and other payables 2002 2001 Accounts payable 165,650 156,745 Notes payable 39,566 15,042 Advances from customers 96,412 54,027 Accrued staff salaries and bonuses 454 1,430 Accrued staff welfare 5,011 2,127 Accrued expenses 3,971 9,199 Other payables 31,219 23,294 342,283 261,864 15 Borrowings (a) Short-term bank borrowings 2002 2001 Interest rate Interest rate per annum Amount per annum Amount Interest-free borrowings - Guaranteed 0% 950 0% - Other borrowings - Secured 5.31%-8.78% 124,909 2.88%-7.56% 24,859 - Guaranteed 5.84%-6.90% 35,000 5.85%-7.02% 98,600 - Unsecured and not guaranteed 5.31%-7.56% 35,445 2.9%-7.56% 49,415 195,354 172,874 196,304 172,874 As of 31 December 2002, short-term bank borrowings amounting to RMB 124,909 (2001: RMB 24,859) were secured by certain property, plant and equipment and leasehold land of the Group (Notes 5 and 6). Other short-term bank borrowings of RMB 35,000 (2001: RMB 98,600) and RMB 950 (2001: nil) were guaranteed by SGC and a third party, respectively. 42 15 Borrowings (continued) (b) Long-term bank borrowings (i) Details of long-term bank borrowings are as follows: 2002 2001 Interest rate Interest rate per annum Amount per annum Amount Interest-free borrowings - Guaranteed 0% 25,480 0% 35,080 - Unsecured and not guaranteed 0% 2,400 0% 1,700 27,880 36,780 Other borrowings - Secured 5.94%-10.8% 32,633 5.94%-10.8% 107,633 - Guaranteed 5.76%-10.08% 60,800 5.94%-10.08% 53,800 - Unsecured and not guaranteed 7.56% 3,300 7.56% 3,390 96,733 164,823 124,613 201,603 As of 31 December 2002, long-term bank borrowings amounting to RMB 32,633 (2001: RMB 107,633) were secured by certain property, plant and equipment and leasehold land of the Group (Notes 5 and 6). Other long-term bank borrowings of RMB 79,880 (2001: RMB 81,080) and RMB 6,400 (2001: RMB 7,800) were guaranteed by SGC and third parties, respectively. (ii) Long-term bank borrowings are repayable in the following periods: 2002 2001 Amount repayable within a period - not exceeding one year 87,133 115,223 - more than one year but not exceeding two years 8,800 - - more than two years but not exceeding five years 28,680 86,380 124,613 201,603 Less: Current portion of long-term bank borrowings (87,133) (115,223) 37,480 86,380 43 16 Deferred revenue Deferred revenue represents a government grant from the finance bureau of Tianmen City of RMB 3,908 received by Tianmen in 2002 for purchase of plant and equipment. Such plant and equipment was put into operational use in July 2002 and has an average useful life of 10 years. This government grant, net of the related enterprise income tax payable calculated at 33% of the gross amount, was recorded as deferred revenue in the consolidated balance sheet. Movement of deferred revenue during the year ended 31 December 2002 is as follow: 2002 2001 Beginning of year - - Addition during the year 2,618 - Transferred to the consolidated income statement (131) - End of year 2,487 - 17 Ordinary shares As of 31 December 2002, the public listed ordinary shares included A Shares and B Shares. The B Shares ranked pari passu in all respects with the A Shares except that A Shares can only be owned and traded by investors in the PRC and qualified foreign institutional investors; B Shares can only be owned and traded by overseas investors and qualified domestic investors. As of 31 December 2002, the details of ordinary shares were as follows: Number of shares (’000) 2002 2001 Authorised, issued and fully paid: State-owned A shares of RMB 1 each 84,730 84,730 Public-owned A shares of RMB 1 each 97,232 97,232 B shares of RMB 1 each 115,000 115,000 296,962 296,962 Amount 2002 2001 Balance, beginning and end of year: State-owned A shares 84,730 84,730 Public-owned A shares 97,232 97,232 B shares 115,000 115,000 296,962 296,962 18 Reserves (a) Capital reserve In accordance with the articles of association, the Company shall record the following as capital reserve: (i) share premium; (ii) donations; (iii) appreciation arising from revaluation of assets; and (iv) other items in accordance with the articles of association and relevant regulations in the PRC. Capital reserve may be utilised to offset prior years’ losses or for the issuance of bonus shares. 44 As of 31 December 2002, the capital reserve of the Company mainly represents share premium, that is, net assets acquired from SGC in excess of par value of state shares issued and proceeds from the issuance of A shares and B shares in excess of their par value, net of expenses directly relating to the issue of the shares. (b) Statutory surplus reserve and public welfare reserve In accordance with the PRC Company Law and the Company’s articles of association, the Company and its subsidiaries are required to set aside 10% of their statutory profit after tax and minority interests, after offsetting prior years’ losses, to the statutory surplus reserve fund (except where the reserve balance has reached 50% of each entity’s share capital, any further appropriation is optional), and 5% to 10% to the statutory public welfare reserve fund. These reserves cannot be used for purposes other than those for which they are created and are not distributable as cash dividends. Statutory surplus reserve fund can only be used, upon approval by the relevant authority, to offset accumulated losses or increase capital. However, such statutory surplus reserve fund must be maintained at a minimum of 25% of share capital after such issuance. Statutory public welfare reserve fund is to be utilised to build or acquire capital items, such as dormitories and other facilities, for employees and cannot be used to pay for staff welfare expenses. (c) Discretionary surplus reserve Discretionary surplus reserve fund is appropriated after the appropriation of statutory surplus reserve and statutory public welfare reserve at the resolution of the Board of Directors and the discretion of the general shareholders’ meeting. 45 19 Minority interests 2002 2001 Beginning of year 30,610 41,239 Investment in a newly established subsidiary - Feng Yuan 18,000 - Share of net loss of subsidiaries (5,779) (6,317) Dividend paid to minority investors of subsidiaries (3,115) (4,312) Acquisition of additional equity interest in Tianmen (Note 20(d)) (2,745) - Others 120 - End of year 37,091 30,610 46 20 Supplemental cash flows information (a) Reconciliation from loss before taxation and minority interests to cash generated from operations: 2002 2001 Loss before taxation and minority interests (141,555) (20,916) Adjustments for: Depreciation of plant, property and equipment 57,600 55,933 Loss on disposal of property, plant and equipment 491 11,474 Amortisation of intangible assets 1,096 519 Amortisation of leasehold land 3,420 1,593 Realised gain from trading investments (3,957) (5,581) Impairment loss of associates 1,515 - Impairment loss relating to other long-term investments - 17,500 Write-off of negative goodwill to the profit and loss accounts upon acquisition of minority interests (Note 20(d)) (445) - Impairment loss relating to property, plant and equipment 17,015 4,666 Write-down of inventories to net realisable value 11,463 4,324 Impairment charge for bad and doubtful debts 26,188 11,676 Unrealised loss on fair value adjustment of trading investments 1,952 464 Amortisation of government grants received (131) - Interest expense 30,919 33,067 Interest income (5,625) (16,462) Changes in working capital: Inventories (82,711) (10,548) Trading investments, trade and other receivables and prepayments (28,025) (67,655) Due from related parties 74,397 60,953 Trade and other payables 82,160 60,669 Due to related parties 6,372 (25,573) Cash generated from operations 52,139 115,288 47 20 Cash flows from operating activities (continued) (b) Analysis of the balances of cash and cash equivalents: 2002 2001 Cash on hand 341 119 Demand deposits 41,845 296,499 Fixed deposits 120,987 10,000 163,173 306,618 (c) Other supplementary information: (i) Cash outflows for exchange of leasehold land: 2002 2001 Increase in leasehold land 80,162 - Less: Exchange receivables for leasehold land (Note 5) (78,000) - 2,162 - (ii) Proceeds from disposal of property, plant and equipment: 2002 2001 Net book amount of assets disposed (Note 6) 2,182 16,334 Less: Loss on disposal of property, plant and equipment (491) (11,474) 1,691 4,860 48 20 Cash flows from operating activities (continued) (d) Acquisition of minority interests: During the year ended 31 December 2002, the Company acquired an additional 28.75% equity interest in Tianmen. The related net cash outflow was as follow: Fair value of the additional net assets acquired (Note 19) 2,745 Negative goodwill recognised in the consolidated income statement (445) Total acquisition consideration paid in cash 2,300 A negative goodwill of RMB 445 arose as a result of this acquisition. The Company recorded this negative goodwill directly in the consolidated income statement as the amount involved was not significant. 21 Segment information (a) Primary reporting format – Business segment: The Group conducts majority of its activities in two business segments, which are manufacturing and sale of agrochemical products and chemical products. An analysis by business segment is as follows: Agrochemical Chemical Others Total 2002 2001 2002 2001 2002 2001 2002 2001 Segment revenue 434,962 717,232 202,869 238,431 14,379 - 652,210 955,663 Segment gross profit 72,637 112,337 8,490 11,912 3,623 - 84,750 124,249 Segment notes and accounts receivable 107,987 173,981 30,937 30,671 7,356 - 146,280 204,652 A substantial portion of the Group’s chemical products are the by-products manufactured during the production of its agrochemical products. As such, the two segments share the same production process and raw materials. Accordingly, segment results, segment assets (other than segment accounts receivable), segment capital expenditures and segment liabilities for the two business segments are not divisible. 49 21 Segment information (continued) (b) Secondary reporting format – Geographical segment: All the Group’s assets are located in the PRC, but the Group’s agrochemical and chemical products are sold to customers located in the PRC, South East Asia, Europe and the Middle East. An analysis by geographical segment is as follows: Sales Notes and accounts receivable 2002 2001 2002 2001 The PRC 526,628 832,546 129,508 189,601 South East Asia 85,409 89,337 7,310 10,757 Europe 27,579 21,545 5,738 854 The Middle East 9,556 8,561 3,257 2,069 Others 3,038 3,674 467 1,371 Total 652,210 955,663 146,280 204,652 22 Related party transactions Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party, or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. (a) Name of related parties and nature of relationship Name Relationship SGC Parent company Subsidiaries of SGC Unconsolidated subsidiaries and associates 50 22 Related party transactions (continued) (b) Significant transactions and balances with related parties For the year ended 31 December 2002, the Group had the following material transactions with related parties: 2002 2001 Purchases of raw materials from SGC and its subsidiaries 19,929 28,662 Purchases of raw materials from unconsolidated subsidiaries and associates 14,023 6,169 Sales of products to SGC and its subsidiaries 2,557 134 Sales of products to unconsolidated subsidiaries and associates 133 1,244 Construction costs and miscellaneous expenses paid on behalf of SGC and its subsidiaries 9,643 46,093 51 22 Related party transactions (continued) (b) Significant transactions and balances with related parties (continued) As of 31 December 2002, the Group had the following material balances with related parties: 2002 2001 Due from SGC and its subsidiaries: - Trade and other receivables and prepayments 8,739 2,259 - Loans 800 82,360 Due from unconsolidated subsidiaries and associates: - Trade and other receivables and prepayments 1,683 - - Loans - 1,000 Total 11,222 85,619 2002 2001 Trade and other payables to SGC and its subsidiaries 11,847 5,411 Trade and other payables to unconsolidated subsidiaries and associates 2,004 2,068 Total 13,851 7,479 Included in the balance of due from related parties are loans of RMB 800 (2001: RMB 83,360) which bear interest at rates ranging from 0% to 6% per annum (2001: 2% to 12% per annum). The interest income from these balances for the year ended 31 December 2002 was RMB 573 (2001: RMB 4,009). Other balances due from and due to related parties are interest-free, unsecured and have no fixed repayment date. 23 Contingencies As of 31 December 2002, the Group had no material contingent liabilities. 52 24 Commitments As of 31 December 2002, the Group had no material commitments. 25 Comparative figures The consolidated financial statements of the Group for the year ended 31 December 2001 were audited by another firm of certified public accountants, who expressed an unqualified opinion in their report dated 17 April 2002. 26 Approval of financial statements The consolidated financial statements were approved by the Board of Directors on 12 April 2003. 53 The impact of IFRS and other adjustments on net (loss) profit and assets is as follows: Net (loss) profit Net assets 2002 2001 2002 2001 As reported in the statutory accounts of the Group (110,794) 10,497 866,508 973,700 Impact of IFRS and other adjustments - Additional impairment charge for bad and doubtful debts (24,671) (12,978) (46,623) (21,952) - Depreciation of idle property, plant and equipment (4,187) (3,878) (27,175) (22,988) - Provision to reduce inventories to net realizable value 5,934 1,427 2,336 (3,598) - Provision for impairment loss of property, plant and equipment (9,902) (4,666) (6,156) 3,746 - Provision for impairment loss of other long-term investments - (15,200) - - - (Reversal)/recognition of deferred tax assets (11,796) - - 11,796 - Adjustment of sales cut-off errors 4,914 338 5,189 275 - Others (3,150) 3,544 (3,944) 2,528 As restated in accordance with IFRS (153,652) (20,916) 790,135 943,507 54