山航Ｂ(200152)2002年年度报告（英文版）

SHANDONG AIRLINES CO., LTD. 2002 ANNUAL REPORT March 2003 Jinan · PRC Content . Company Profile -------------------------------------------------------------------------------- 2 . Summary Financial Data and Business Indexes ----------------------------------------- 3 . Changes in Capital Shares and Particulars about Shareholders --------------------- 5 . Particulars about Directors, Supervisors, Senior Executives and Employees ----- 7 . Administrative Structure --------------------------------------------------------------------- 9 . Brief Introduction to the Shareholders’ General Meeting ---------------------------- 11 . Report of the Board of Directors ----------------------------------------------------------- 12 . Report of the Supervisory Committee ----------------------------------------------------- 23 . Significant Events ------------------------------------------------------------------------------ 25 . Financial Report ------------------------------------------------------------------------------- 28 . Documents for Reference -------------------------------------------------------------------- 59 Important Notes: Board of Directors of Shandong Airlines Co., Ltd. (hereinafter referred to as the Company) and its directors hereby confirm that there are no any important omissions, fictitious statements or serious misleading information carried in this report, and shall take all responsibilities, individual and/or joint, for the reality, accuracy and completion of the whole contents. Director Mr. Gao Zhu and Mr. Su Zhongmin were absent from the Meeting of the Board of Directors and authorized Director Mr. Li Junhai and Mr. Zheng Bao’an to exercise the right of voting respectively. Deloitte Touche Tohmatsu Certified Public Accountants and Deloitte Touche Tohmatsu Certified Public Accountants Ltd. provided non-reserved Auditors’ Report with interpretative explanation. The Board of Directors and the Supervisory Committee of the Company also has particular explanation on the relevant issues. Welcome the investors to read carefully. The Company’s Chairman of the Board Mr. Li Junhai, General Manager Mr. Zeng Guoqiang and Chief Accountant Mr. Li Qing’eng hereby confirm that the Financial Report of the Annual Report is true and complete. This report has been prepared in Chinese version and English version respectively. In this event of difference in interpretation between the two versions, the Chinese report shall prevail. Notes: The Company: Shandong Airlines Co., Ltd. SDA: Shandong Aviation Group; the controlling shareholder of the Company Shandong TAECO: Shandong TAECO Aircrafts Engineering Co., Ltd., an associated company invested by the Company and the controlling shareholder Jet Company: Shandong Rainbow Jet Co., Ltd., an associated company invested by the Company and the controlling shareholder 1 I. Company Profile 1. Legal Name of the Company In Chinese: 山东航空股份有限公司 In English: SHANDONG AIRLINES CO., LTD. 2. Legal Representative: Li Junhai 3. Secretary of Board of Directors: Zheng Baoan Liaison Address: 18/F, SDA Building, No. 5746, Er Huan East Road, Jinan, Shandong E-mail: zhengba@shandongair.com.cn Authorized Representative: Huang Haiming E-mail: huanghm@shandongair.com.cn Tel: (86) 531-5698678 Fax: (86) 531-5698679 4. Registered Address: Yaoqiang International Airport, Jinan, Shandong Office Address: SDA Building, No. 5746, Er Huan East Road, Jinan, Shandong Post Code: 250014 Company’s Web Site: http://www.shandongair.com.cn E-mail: zqb@shandongair.com.cn 5. Newspapers for Disclosing the Information of the Company: Domestic: China Securities and Securities Time Overseas: Ta Kung Pao Internet Web Site for Publishing the Annual Report: http://www.cninfo.com.cn The Place Where the Annual Report is Prepared and Placed: Securities Department of the Company Liaison Tel: (86) 531-5698678 6. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: SHANHANG B Stock Code: 200152 7. Other Relevant Information of the Company The changes in registration: On Feb. 10, 2003, the Company conducted the change of registration with Industry and Commerce Administration Bureau of Shandong Provincial; and legal representative was changed into Li Junhai. Registered code for enterprise legal person’s business license: QGLZ Zi No. 003926 Registered code for tax: DSZ 370112720721201 Name and address of certified public accountants engaged by the Company: Domestic: Deloitte Touche Tohmatsu Certified Public Accountants Ltd. Address: 30/F, Waitan Centre, No. 222, Yan’an East Road, Shanghai Overseas: Deloitte Touche Tohmatsu Certified Public Accountants Address: 26/F, Wing On Centre, 111 Connaught Road Central, Hong Kong 2 II. Summary Financial Data and Business Indexes (I) Financial Highlights and Related Indexes as of the Report Year (According to the International Financial Reporting Standards (“IFRS”)) Items RMB’000 Net profit before taxation -83,789 Net profit for the year -80,384 Profit from operations 62,736 Loss on investments -21,200 Government grant 13,740 Net cash from operating activities 139,344 Net increase in cash and cash equivalents 164,382 There existed differences in the net profit and net assets as calculated according to the Chinese Accounting Standards (“CAS”) and IFRS, which are stated as following with their causes: (Loss) profit for the year Net assets 2002 2001 2002 2001 RMB'000 RMB'000 RMB'000 RMB'000 As reported under PRC GAAP -45,584 54,942 525,329 564,282 Adjustments to conform with IFRS: Difference in depreciation charges of aircraft and related equipment -22,925 1,558 -50,169 -27,244 Difference in deferred expenditure recognition 3,538 2,777 -58,136 -61,674 Adjustment of provision for overhaul of aircraft and engines -21,521 730 - 21,521 Deferred taxation - 9,563 22,242 22,242 Pre-operation expense of subsidiaries -523 - -523 - Interest income from holding company 6,631 - - - Dividends declared after the balance sheet date - - - 24,000 As reported under IFRS -80,384 69,570 438,743 543,127 (II) Major Accounting and Financial Highlights over the Past Three Years at the end of the Report Year (According to IFRS) 1. Statement of accounting data and financial indexes Items 2002 2001 2000 Total operating revenue (RMB’000) 1,614,271 1,287,982 1,013,524 Net profit for the year (RMB’000) -80,384 69,570 82,802 Total assets (RMB’000) 3,242,060 1,960,839 1,301,446 Shareholders’ equity (Excluding Minority 438,743 543,127 513,557 shareholders’ equity) (RMB’000) Diluted Earnings per share (RMB) -0.20 0.17 0.21 Weighted average earnings per share(RMB) -0.20 0.17 0.27 Net assets per share (RMB) 1.10 1.36 1.28 Net cash flows per share arising from 0.35 0.23 0.24 operating activities (RMB) Diluted net asset-income ratio(%) -18.32 12.81 16.12 3 3. Business Data Passengers Increase Rate million person 250 163 200 118 100 150 100 50 0 2000 2001 2002 Cargo and Mail Increase Rate Ton 30000 181% 25000 137% 20000 100% 15000 10000 5000 0 2000 2001 2002 (III) Particulars about changes in shareholders’ equity during the report year (According to IFRS) RMB’000 Statutory Items Share Share Capital surplus Statutory public Retained capital premium reserve reserve welfare fund earnings Total Balance at December 400,000 76,258 -40,886 15,202 7,601 84,952 543,127 31, 2001 & January 1, 2002 Net profit for the year - - - - - -80,384 -80,384 Transfer to statutory - - - 13 - -13 0 surplus reserve Transfer to statutory - - - - 6 -6 0 public welfare fund Dividends - - - - - -24,000 -24,000 Balance at December 400,000 76,258 -40,886 15,215 7,607 -19,451 438,743 31, 2002 4 III. Changes in Shares Capital and Particulars about the Shareholders (I) Statement of Changes in Share Capital (Unit: 0000 shares) Increase/decrease in this time (+ , - ) Before the After the Allotment Bonus Capitalization of Additional Others Sub- change change of Share shares public reserve issuance total I. Unlisted Shares 26000 26000 1. Promoters’ shares 26000 Including: State-owned shares 25980.1 Domestic legal person’s shares 19.9 Foreign legal person’s shares Others 2. Raised legal person’s shares 3. Employees’ shares 4. Preference shares or others Total Unlisted shares 26000 26000 . Listed Shares 14000 1. RMB ordinary shares 2.Domestically listed foreign shares 0 14000 3. Overseas listed foreign shares 4. Others Total Listed shares 14000 14000 . Total shares 26000 40000 (II) Particulars about issuance and listing of shares 1. Issuance and listing Approved by China Securities Regulation Commission with document ZJFZ [2000] No. 116, the Company issued 140 million domestically listed foreign shares with par value RMB 1.00 per share to foreign investors at an issuance price of HKD1.58 per share from Aug. 28, 2000 to Sep. 1, 2000. The Company’s 140 million domestically listed foreign shares were listed formally with Shenzhen Stock Exchange for trade on Sep. 12, 2000. 2. In the report year, there was no changes in the number and structure of the Company’s shares, due to bonus share, capital public reserve transferring into share capital, allotment of share, additional issuance, combination, T-bond transferring into share, disinvestments, listing of employees’ shares, etc. There exist no inner employees’ shares in the Company. (III) About Shareholders 1. Total shareholders at the end of the report year At the end of the report period, the Company had totally 24,064 shareholders, including 5 ones of Promoters’ shares (namely, Shandong Aviation Group, Luyin Investment Group Co., Ltd., Shandong Hualu Group Co., Ltd., Shandong Fisheries Group Corp., and Langchao Group Corp. respectively) and 24,059 ones of domestically listed foreign shares. Ended Dec. 31, 2002, the top ten shareholders of the Company are as following: Number of holding Proportion in the Type Shareholders’ name shares (share) total shares (%) SHANDONG AVIATION GROUP 259204000 64.8 State-owned legal person’s share BAI LING 1165091 0.29 Domestically listed foreign shares JIN BIN 1054700 0.26 Domestically listed foreign shares BEST RELIANCE INVESTMENT LTD 917900 0.23 Domestically listed foreign shares WU HAO YUAN 909300 0.23 Domestically listed foreign shares XU ZHAO HUAN 608000 0.15 Domestically listed foreign shares LI WEI GUANG 500985 0.13 Domestically listed foreign shares HE ZHI QIU 466700 0.12 Domestically listed foreign shares ZHANG XU BIN 450000 0.11 Domestically listed foreign shares MA DAI LING 413399 0.10 Domestically listed foreign shares Note 1: Approved by Industry and Commerce Administration Bureau of Shandong Provincial, the controlling shareholder of the Company changed its name from Shandong Airlines Limited into Shandong Aviation Group (hereinafter referred to as the SDA) dated Sep. 11, 2002. SDA holds the shares on behalf of the nation with unlisted shares. 5 Note 2: Among the above the top ten shareholders, there exist no associated relationship between SDA, shareholder of state-owned legal person’s share, and the other shareholders, and it does not belong to the consistent actionist regulated by the Management Regulation of Information Disclosure on Change of Shareholding for Listed Company with the other shareholders. The Company is not aware of their associated relationship among the other shareholders of circulation share, whether belongs to the consistent actionist regulated by the Management Regulation of Information Disclosure on Change of Shareholding for Listed Company. Note 3: SDA is the only legal person’s shareholder holding over 5% (including 5%) of shares of the Company. In the report year, there was no change in number of shares held by SDA, and was neither pledge nor frozen in the shares held by SDA. 2. The controlling shareholder of the Company The controlling shareholders of the Company completed the change of registration of industry and commerce on Sep. 11, 2002, and the basic matters after changing are as follows: Legal representative: Jia Fuwen Date of foundation: Feb. 9, 1995 Place of SDA: No. 5746, Er Huan East Road, Lixia District, Jinan, Shandong Scope of business: Maintaining of aerostat and surface facilities; handicraft article, souvenir (excluding gold and silver jewelry), sale of general merchandise; accommodation and hotel (Red -crowned Crane Hotel). Registration capital: 100,000,000 SDA actually received the capital of RMB 400 million, and the structure of share equity is as follows: Number of Proportion of Name of shareholders shares holding shares Shandong Province Economic Development and Investment Co. 317,790,891.70 76.88% Shandong Province International Trust & Investment Co. 40,911,988.02 9.90% Shandong Jinqiao High-tech Development (Group) Co., Ltd. 9,467,073.31 2.29% Shandong Province People’s Government 9,072,902.07 2.19% Qingdao Municipality Financial Bureau 5,245,126.68 1.27% Jinan Municipality Financial Bureau 5,245,126.68 1.27% Jining United Airlines Co. 5,245,126.68 1.27% Yankuang Group Co., Ltd. 4,079,542.96 0.99% Jinan Iron and Steel Group Corp. 4,079,542.96 0.99% Qilu Petrochemical Co. of China Petrochemical Group 4,079,542.96 0.99% Shengli Petroleum Management Bureau of China Petrochemical 4,079,542.96 0.99% Group Laiwu Iron and Steel Group Co. 4,079,542.96 0.99% Total 413,375,949.94 100% 6 3. The controlling shareholder of SDA is Shandong Province Economic Development and Investment Co., and the relevant matters are as follows: Legal Representative: Jiang Yanwei Structure of share equity: the Ministry of Finance of Shandong Province holds 100% share equity Date of foundation: Apr. 10, 1992 Scope of business: compensated investment in development of science and technology, renovation and circulation of technology; construction of socialize service system between urban and rural area, agriculture comprehensive development and development of education, science, culture and health (excluding socialize fund deposit and loan, finance business and capital construction investment) Registration capital: 100,000,000 4. The Company has no shareholders holding over 10% of shares of the Company except for the controlling shareholder. IV. Particulars about Directors, Supervisors, Senior Executives and Employees (I) Directors, Supervisors and Senior Executives Amounts at the Amounts at Name Gender Age Title Office term year-begin the year-end Dec. 25, 2002 – Li Junhai Male 56 Chairman of the Board 0 0 Dec. 24, 2005 Dec. 25, 2002 – Jia Fuwen Male 57 Vice Chairman of the Board 0 0 Dec. 24, 2005 Dec. 25, 2002 – Zeng Guoqiang Male 49 Director, General Manger 0 0 Dec. 24, 2005 Director, Executive Deputy Dec. 25, 2002 – Su Zhongmin Male 48 0 0 General Manager Dec. 24, 2005 Director, Deputy General Dec. 25, 2002 – Bai Weisan Male 45 0 0 Manager Dec. 24, 2005 Director, Deputy General Dec. 25, 2002 – Song Yuxia Female 46 0 0 Manager Dec. 24, 2005 Director, Deputy General Dec. 25, 2002 – Zheng Baoan Male 40 Manager, Secretary of the 0 0 Dec. 24, 2005 Board Dec. 25, 2002 – Gao Zhu Male 57 Director 0 0 Dec. 24, 2005 Dec. 25, 2002 – Wang Fuzhu Male 49 Director 0 0 Dec. 24, 2005 Dec. 25, 2002 – Wang Zhi Male 60 Independent Director 0 0 Dec. 24, 2005 Dec. 25, 2002 – Hu Jijian Male 60 Independent Director 0 0 Dec. 24, 2005 Convener of the Supervisory Dec. 25, 2002 – Wang kaixun Male 49 0 0 Committee Dec. 24, 2005 Dec. 25, 2002 – Wang Wuping Male 37 Supervisor 0 0 Dec. 24, 2005 Supervisor, Team Leader of Dec. 25, 2002 – Wang Xianlin Male 37 0 0 the 2nd flying Team Dec. 24, 2005 Supervisor, Deputy General Dec. 25, 2002 – Li Jiemin Male 44 Manager of Beijing Sales 0 0 Dec. 24, 2005 Department Dec. 25, 2002 – Guo Caisen Male 33 Supervisor 0 0 Dec. 24, 2005 Dec. 25, 2002 – Yu Haitian Male 32 Chief Engineer 0 0 Dec. 24, 2005 Dec. 25, 2002 – Zhang Qingshe Male 44 Chief Pilot 0 0 Dec. 24, 2005 Chief Accountant, Director Dec. 25, 2002 – Li Qing’eng Male 47 0 0 of Financing Dept. Dec. 24, 2005 Note 1: There was no change in the number of shares held by directors, supervisors and senior executives 7 in the report year. Note 2: Particulars about directors, supervisors holding the post in Shareholding Company (1) Chairman of the Board of the Company Mr. Li Junhai took the post of Secretary of Party Committee of SDA; (2) Vice Chairman of the Board of the Company Mr. Jia Fuwen took the post of Chairman of the Board and concurrently President of SDA; (3) Director of the Company Mr. Gao Zhu took the post of Vice-president of SDA; (4) Director Mr. Wang Fuzhu took the post of Chief Accountant of SDA; (5) Convener of the Supervisory Committee Mr. Wang Kaixun took the post of Secretary of Commission for Inspecting Discipline and concurrently Chairman of Labor Union of SDA; (6) Supervisor Mr. Wang Wuping took the post of Director of the Financing Department of SDA. (II) Particulars about annual payment The payments of the directors, supervisors and senior executives were determined according to the achievements and results salary system, in which wages is linked with the Company’s benefits. The total payments drew by directors, supervisors and senior executives received from the Company were RMB 1,433,830 (including base wage, reward, welfare, subsidy, housing allowance). The total payments of the top three directors drawing the highest payment were RMB 438,600. The total payments of the top three senior executives drawing the highest payment were RMB 386,850. The allowance of independent directors was RMB 400 per day respectively. Among directors, supervisors and senior executives drew payment from the Company, 10 enjoy the annual payment over RMB 100,00 respectively, 1 enjoys between RMB 80,000 to RMB 100,000, and 1 enjoys under RMB 80,000 in the report year. Directors of the Company Mr. Li Junhai, Mr. Wang Fuzhu, Convener of the Supervisory Committee Mr. Wang Kaixun, Supervisors of the Company Mr. Wang Wuping and MR. Guo Caisen received no pay from the Company, however, they drew their payments from SDA, the controlling shareholder of the Company. (III) Particulars about changes in directors, supervisors and senior executive On Nov. 28, 2002, the 1st Board of Directors and the 1st Supervisory Committee have expired. According to the Articles of Association of the Company and Rules of Procedure of Shareholders’ General Meeting, the Company held the shareholders’ general meeting and reelected the Board of Directors and Supervisory Committee. The new Board of Directors chose and engaged senior executives of the Company after test. 1. Director The Company held the 2nd Extraordinary Shareholders’ General Meeting 2002 dated Dec. 25, 2002. In this meeting, by nominated by the controlling shareholder, Mr. Jia Fuwen, Mr. Li Junhai, Mr. Gao Zhu, Mr. Zeng Guoqiang, Mr. Wang Fuzhu, Mr. Su Zhongmin, Mr. Bai Weisan, Ms. Song Yuxia and Mr. Zheng Bao’an were engaged as director of the 2nd Board of Directors respectively; by nominated by the Board of Directors, Mr. Wang Zhi and Mr. Hu Jijian were engaged as independent director of the 2nd Board of Directors respenctively. Mr. Li Junhai and Mr. Jia Fuwen were elected as Chairman of the Board and Vice Chairman of the Board respectively in the 1st meeting of the 2nd Board of Directors of the Company dated Dec. 25, 2002 8 2. Supervisor Nominated by the controlling shareholder, Mr. Wang Kaixun, Mr. Wang Wuping and Mr. Guo Caisen were elected as supervisor of the 2nd Supervisory Committee respectively in the 2nd Extraordinary Shareholders’ General Meeting 2002. Meanwhile, the 2nd Supervisory Committee engaged employee supervisor Mr. Wang Xianlin and Mr. Li Jiemin, which were elected by the general membership meeting of the employee representative of the Company. 3. Senior executive As approved by the 1st meeting of the 2nd Board of Directors, the Company decided to engage Mr. Zeng Guoqiang as General Manager of the Company. By nominated by General Manager, the Board of Directors engaged Mr. Su Zhongmin as Executive Deputy General Manager of the Company; engaged Mr. Bai Weisan, Ms. Song Yuxia and Mr. Zheng Bao’an as Deputy General Manager respectively; engaged Mr. Yu Haitian as Chief Engineer; engaged Mr. Zhang Qingshe as Chief Pilot; and engaged Mr. Li Qing’eng as Chief Accountant. (IV) About staff Ended Dec. 31, 2002, the Company has 1202 employees, including 17 graduate students (Master degree and Doctor degree) or above, taking 1.41% of total employees of the Company; 876 persons graduated from 3-years regular college, taking 72.9% of total employees of the Company. Type of employee Number Proportion holding total staff Flight personnel 298 24.79% Aircraft crew and maintenance man 233 19.38% Salespeople 224 18.63% Steward and stewardess (safety person) 192 15.97% Accountant 81 6.74% Others 174 14.48% By the end of report year, the Company has two retirees. V. Administration Structure of the Company (I) Particulars about Company Administration Strictly according to Securities Law, Company Law and relevant laws and regulations promulgated by CSRC, the Company consummated consistently the Company’s administration structure, operated the Company in a normative way and improved the construction of modern enterprise management system. The Company set up and implemented patiently Rules of Procedure of the Shareholders’ General Meeting, Rules of Procedure of the Board of Directors, Rules of Procedure of the Supervisory Committee, Work Rule of General Manager and Work System of Independent Directors and other management systems of the Company and carried out the election at expiration of office terms of the 2nd Board of Directors and Supervisory Committee of the Company strictly according to Article of Association and Rules of Procedure of the Shareholders’ General Meeting. The 2nd Board of Directors established two special committees named Salary and Valuation, Stratagem and Nomination. The independent directors take the occupation of the caller of the committees. Independent directors occupy the most in Salary and Valuation Committee. The establishment of the special committees further perfected the Company’s administration structure and was favored to perform the function of scientific decision-making of the Board of Directors. According to Notification on Inspection of Establishment of Modern Corporation System in Listed Company promulgated associatively by CSRC and State Commission for Economy and Trade on April 29, 2002, the Company carried through self-inspection strictly in compliance with the relevant procedures, which pushed the construction of modern corporation system effectively. 9 Compared with Rules of Administration of Listed Company, The administration situation of the Company has a disadvantage that the proportion of independent directors in the constitution of the Board of Directors didn’t reach one third. The Company planed to engage two independent directors again before June 30, 2003 and now are looking for the fit ones. (II) Performance of Independent Directors Mr. Sun Zhaokun took the post of independent directors of the Company from Dec. 29, 2001 to Dec. 28, 2002. Mr. Liu Xingyun took the post of independent directors since Dec. 29, 2001 and resigned the position of independent directors due to the work’s change on May 22, 2002. During Mr. Sun and Mr. Liu’s incumbency, they supervised patiently over and guided the normative operation of the Company in an honest, diligent and responsible way, participated actively in the decision-making of the Board of Directors and expressed independent opinions on the nomination, appointing and removing of directors, engagement and disengagement of senior executives, suggestion and engagement of certified public accountants and significant related transactions of the Company. The Company is appreciated with their support and devotion for the Company. The 2nd Board of Directors engaged Mr. Wang Zhi and Mr. Hu Jijiang as independent directors of the Company and they took the occupation from Dec. 25, 2002. Mr. Wang and Mr. Hu conducted investigation and research on the Company’s basic status, business development and financial situation, etc. and set up the work plan. They implemented their duties perfectly. (III) Separation of the Company and control shareholder in business, personal, assets, organization and financing. The Company and the control shareholder are separated in business, personal, assets, organization and financing. 1.In respect of business Engaging principally in passenger and cargo aviation transportation, the Company was independent of its control shareholder in regard to both business and operation. The control shareholder had no actions interfering with the Company’s decision-making and operation directly exceeding the Shareholders’ General Meeting. 2.In respect of personal The Company operated independently in terms of labor, personal and wage management and has independent organizations and management regulations. The control shareholder commended directors and supervisors through legal procedure and didn’t interfered with the decision of appointing and removing on personal by the Board of Directors and Shareholders’ General Meeting. 3.In respect of assets The Company has independent aviation system, auxiliary system, auxiliary facilities, houses and land use right and etc. Meanwhile, the Company has independent and complete production and sales system and conducted independently the purchase of principal aviation materials and sales of passenger and cargo transportation. With regard to the unavoidable related transactions interfering with the control shareholder in operation, the Company implemented legal procedure in fair, honest and public principle and there existed no actions harmful of the interest of the small and medium shareholders. When voting in the Shareholders’ General Meeting, the related shareholders implemented the procedure of obviation strictly according to Article of Association. 4.In respect of organization The Company established perfect legal person administration structure according to relevant regulations of Company Law and set up the Shareholders’ General Meeting, the Board of Directors and the Supervisory Committee in a legal way and operated them in a normative way. The control shareholder didn’t intervene in the establishment of the Company’s organizations. There was no belongingness relationship between the control shareholder and its functional departments and the Company and its 10 functional departments. The office and production and operation site of the Company is separated from that of the control shareholder. 5.In respect of financing The Company has independent financing department and accounting personal and set up independent financial settlement system, financing and accounting system. The Company opened an independent account in bank. The Company paid tax independently and has independent taxation registration number. The Company is independent from the control shareholder in terms of financing. (IV) Evaluation and encouragement mechanism of senior executives In 2002, the Company established Regulation on Integrated Evaluation and Management of Leaders and conducted annual and integrated evaluation of senior executives according to the regulation. According to Proposal on Senior Executives’ Recompense examined and approved in the 13th meeting of the 1st Supervisory Committee, the wage system of senior executives is relating of recompense and achievement. Evaluation and encouragement mechanism of senior executives of the Company came into being initially. Salary and Valuation Committee of the 2nd Supervisory Committee is responsible for the consistent improvement of evaluation and encouragement mechanism. VI. Brief introduction to the Shareholders’ General Meeting In the report period, the Company held one annual shareholders’ general meeting and two extraordinary shareholders’ general meeting. On April 18, 2002, the Company held its 2001 Shareholders’ General Meeting in the conference room of Red-crown Crane Hotel, Jinan. The Company noticed the shareholders of the meeting by means of Public Notice in China Securities, Securities Times and Hong Kong Ta Kung Pao dated March 13, 2002. 5 shareholders and shareholder’s proxies attended the meeting, representing 260,000,000 shares, 65% of total shares of the Company. Chairman of the Board, Mr. Jia Fuwen presided the meeting. The directors, supervisors and senior executives of the Company attended the meeting. Notification, calling and holding of the meeting was in conformity with relevant regulations in Company Law, Rules on Regulations of Shareholders’ General Meeting in Listed Company and Articles of Association. Following proposals were examined item-by-item and approved by means of signed vote in the meeting: 1.2001 Annual Report and its summary; 2. 2001 Work Report of the Board of Directors; 3. 2001 Work Report of the Supervisory Committee; 4. 2001 Financial Settlement Report; 5. 2001 Profit Distribution Preplan and 2002 Profit Distribution Policy; 6. Proposal on Amending Articles of Association; 7.Proposal on Reengagement of Certified Public Accountants and Its Recompense; 8.Work System of Independent Directors; 9.Proposal on Selling Two Cessna Caravan Airplanes To Shandong Airlines Rainbow Jet Co., Ltd.; 10.Proposal on Transferring Four Challenger 604 Jets To Shandong Airlines Rainbow Jet Co., Ltd. For Operation and Use; 11.Proposal on Purchase of Part Productive and Operative Assets of Shandong Airlines Limited; 12.Proposal on Standard of Allowance of Independent Directors of the Company. The resolutions of the meeting were published on China Securities, Securities Times and Ta Kung Pao dated on April 19, 2002. (II) On June 26, 2002, the Company held its 1st Extraordinary Shareholders’ General Meeting of the year 2002 in the 26/F meeting room of Shandong Airlines Building. The Company noticed the shareholders of the meeting by means of Public Notice in China Securities, Securities Times and Ta Kung Pao dated May 23, 2002. 5 shareholders and shareholder’s proxies attended the meeting, representing 260,000,000 shares, 11 65% of total shares of the Company. Chairman of the Board, Mr. Jia Fuwen presided the meeting. The directors, supervisors and senior executives of the Company attended the meeting. Notification, calling and holding of the meeting was in conformity with relevant regulations in Company Law, Rules on Regulations of Shareholders’ General Meeting in Listed Company and Articles of Association. Following proposals were examined item-by-item and approved by means of signed vote in the meeting: 1.Proposal on Increasing Investment Parties and Adjusting Investment Proportion of Qindao International Airlines Logistics Center Co., Ltd.; 2.Proposal on Changing Lease Contract of Five B737-300 Airplanes; 3.Proposal on Supplement of Examining of Introducing Into Five Cessna Caravan Airplanes; 4. Proposal on Supplement of Examining of Introducing Into Two Challenger 604 Jets; 5.Proposal on Giving up Purchasing Qindao Synthesis Building of Shandong Airliness Limited. The resolutions of the meeting were published on China Securities, Securities Times and Ta Kung Pao dated on June 27, 2002. (III) On Dec. 25, 2002, the Company held its 2nd Extraordinary Shareholders’ General Meeting of the year 2002 in the 31/F meeting room of Shandong Airlines Building. The Company noticed the shareholders of the meeting by means of Public Notice in China Securities, Securities Times and Ta Kung Pao dated Nov. 22, 2002. 5 shareholders and shareholder’s proxies attended the meeting, representing 260,000,000 shares, 65% of total shares of the Company. Chairman of the Board, Mr. Jia Fuwen presided the meeting. The directors, supervisors and senior executives of the Company attended the meeting. Notification, calling and holding of the meeting was in conformity with relevant regulations in Company Law, Rules on Regulations of Shareholders’ General Meeting in Listed Company and Articles of Association. Following proposals were examined item-by-item and approved by means of signed vote in the meeting: 1.Proposal on Amendment of Article of Association of the Company; 2.Proposal on Election at Expiration of Office Terms of the 1st Board of Directors; 3.Proposal on Establishing Special Committee of the Board of Directors of the Company; 4.Proposal on Election at Expiration of Office Terms of the 1st Supervisory Committee; 5.Proposal on Lending Capital To Shandong Airlines Group Co., Ltd.; 6.Proposal on Introducing Into Two CRJ-700 Through Exchange; 7.Proposal on Holding Shares of Jinan International Airlines Co., Ltd.; The resolutions of the meeting were published on China Securities, Securities Times and Ta Kung Pao dated Dec. 27, 2002. VII. Report of the Board of Directors ( )Discussion and analysis of the operation of the Company The Company continued to stick to the work guideline of “Security First, Enhancing Benefits” in 2002 and every transportation index kept a steady growth. Totally 2,173,000 passengers were transported, an increase of 38.7% compared with the corresponding period of the previous year. It realized a total turnover volume of transportation of 250,660,000 tons kilometers and a transportation volume of cargo liner of 25,006 tons, which increased by 36.5% and 32.4% respectively than those of the corresponding period of the previous year. However, since the domestic market of lateral lines restricted by the policy environment and failed to reach the prospective level of development and the lateral airplanes were introduced into the country excessively with high rate of import customs, which led to the serious loss of lateral airplanes of the Company. Besides, the investment of the Company increased rather fast and the investment of jet project incurred comparatively large devaluation of investment. The increase of bank loan enhanced the interest expenditure. Simultaneously, the increases of each charge of the airport in 2002 also made the expenditure mount up. The aforesaid main factors resulted into the loss of operation 12 of the Company in 2002. ( )Operation of the report period 1. Principal business scopes and its operation The Company, a civil aviation and transportation enterprise, is mainly engaged in the business of passenger and cargo aviation transportation within Shandong province and from Shandong province to partial domestic cities as approved by the relevant authority and concurrently is engaged in services and operating projects related to aviation. In the report period, the Company realized an income from main business lines of RMB1,596,589,636, an increase of 21.73 % compared with the corresponding period of the previous year, including revenue from passenger aviation transportation of RMB1,503,632,643, taking 94.18% of the total income and revenue from cargo and post aviation transportation of RMB91,599,812, taking 5.74% of the total income. In the report period, the Company also realized an agent income from passenger and cargo aviation transportation of RMB1,357,181, taking 0.08% of the total income. (According to the Chinese Accounting Standards) In the report period, the Company passed ISO9001 quality authentication examination, further improved the system of operating management and quality control and guaranteed the safe operation effectively. On Dec. 4, 2002, the Company became a formal member of IATA. The Company continued to keep the security record that the artificial accident sign was zero. Ended Dec. 26, 2002, the Company had realized the safety flight for eight years and gained the Goldeagle Award, the highest security award of aviation, promulgated by Civil Aviation General Bureau. In the report period, the Company opened the lines such as Beijing-Xiangfan, Xining-Ge’ermu, Yantai-Ningbo, Yinchuan-Urumchi, Shenzhen-Jingdezhen, Lianyungang-Beijing, Beijing-Yiwu, Jinan-Hefei-Huangshan and Jinan-Wuyishan etc. in successive and further improved the line network. Ended the end of the report period, the lines opened by the Company reached over 260 pieces, which flied to over 60 large and medium cities in the country. 2. Operation and performance of holding companies and share-holding companies (1) In 2001, the Company invested and set up Qingdao International Airlines Logistics Center Co., Ltd. with a registered capital of RMB100 million. The Company holds 70% of its equity. The business scope of this company is: storage and ground distribution of aviation cargo, E-commerce, logistics design and implementation for the third party, consultation and relevant service for logistics business. The 1st Extraordinary Shareholders’ General Meeting of 2002 approved the resolution of adjustment to the investment party and investment proportion of Qingdao International Airlines Logistics Center Co., Ltd.. Since Xinhongji Logistics (China) Co., Ltd., which was a new investment party that signed the investment intent, changed its investment plan and evacuated unilaterally, the adjustment plan was not implemented. At present, the Company continued to steadily push the construction of the logistic center with Hong Kong Hong’an (Far East) Co., Ltd. and simultaneously positively looked for new cooperation partner with the advantage of logistics business. (2) Shandong Airlines Rainbow International Travel Agency Co., Ltd., relatively controlled by the Company (holding 49% equity of this company), is mainly engaged in the business of in and out border travel and domestic travel. In 2002 this company realized a profit of RMB620, 000. On Jan. 25, 2003, this company held its 2002 Shareholders’ General Meeting and approved the profit distribution project of 2002 with the proportion of profit sharing of 18%. 13 (3) In the report period, the Company participated to initiate and set up Sichuan Airlines Co., Ltd. and held 10% of equity of this company. On Aug. 29 Sichuan Airlines Co., Ltd. was formally established and was registered to be into operation. Ended the end of the report period, this company realized a net profit before taxation of RMB14.400,000. (4) China Civil Aviation Information Network Co., Ltd., initiated and established by the Company with share holding (holding 0.49% equity of this company), realized a profit of RMB453,200,000 in 2002. (5) On Feb. 22, 2003, Shenzhen SDA Seg Cargo Transportation Co., Ltd. held the meeting of the Board of Directors and its investment party Shenzhen Aosaike Industrial Development Co., Ltd. planned to transfer its holding equity of all 50%. The Company planned to accept 25% of the equity and the rest 25% was transferred to Shenzhen Hengjia Investment and Development Co., Ltd.. The relevant agreement of equity transfer was signed. Ended the end of the report period, this company realized a net profit of RMB256,600. (6) Ended the end of the report period, Shandong TAECO, invested by the Company with share holding, realized a profit of RMB8,895,560 in 2002. The Company had no investment earnings, which impacted on the net profit by over 10% from single holding company and share-holding company. 3.Particulars about major suppliers and customers The total amount of purchase of the top five suppliers of the Company took 24.16% of the total annual amount of purchase (mainly is purchase of aviation oil, aviation materials and plane supply products) and the total amount of sales of the top five customers took 9.92% of the total annual amount of sales of the Company. 4. Problems, difficulties and solutions occurred during the Company’s operation In 2002, the top three aviation groups completed registration formally and entered into the phase of integration, which made the market competition intensified. To solve the intense market competition and internal pressure of cost, the Company adopted a series of measures and strengthened the marketing. Aiming at the character of peak season and low season of the market and the change of demand, the Company adjusted the marketing strategy in time, established the network and spots of direct retail, increased the direct retail of market and implemented strict examination of achievements and encouragement and punishment to sales personnel. According to the statistic data provided by Planning Department of China Civil Aviation General Bureau, the passenger-seating rate of normal fight of each type of airplane of the Company was 71.9% in 2002, ranking the first in the national civil aviation. In order to reduce every cost and expenditure as much as possible, the Company adopted control measures actively of enhancing the control of aviation material and making purchase and management strict and various measures of establishing Oil Saving Award etc. to reduce the energy consumption. The Company has established management of strengthening foreign investment and shall continue to supervise and control the implementation and running of projects that have been invested to ensure the realization of prospective earning. 14 (II) Investment 1.Investment of proceeds raised through share offering In the report period, there were no application of proceeds raised through share offering or application of proceeds raised through previous share offering continued to the report period in the Company. 2. Investment of proceeds not raised through share offering (1) In the report period, the Company participated to initiate and set up Sichuan Airlines Co., Ltd. with an input cash of RMB35 million, taking 10% of the total share capital of this company. Please refer the details to the “ Operation of share-holding company” in Item (I), Section Seven in the report. (2) In the report period, the Company jointly invested and established Shandong Airlines Associated Express Co., Ltd. with Shandong Arts and Crafts Products Import and Export Group Co., Ltd. and Qingdao Huaqing Development Co., Ltd. (there was no associated relationship between the Company and this company). The registered capital of this company was RMB1 million and the Company held 65% of the total investment. At present, this company had been put into application and operation formally. (3) According to the relevant regulations of the nation on the airlines companies’ investment and management to the airports and considering the current development status and the future development prospect of the Company, the Board of Directors decided to adjust the Proposal on the Company’s Associated Initiation to Establish Jinan International Airport Co., Ltd. approved by the 1st Extraordinary Shareholders’ General Meeting of the Company in 2001 and adjusted to jointly hold Jinan International Airport Co., Ltd. (provisional name) with the amount of investment no more than RMB100 million. The Company have invested RMB20,000,000 in advance. In accordance with the planning of fully pushing the reform of civil aviation of 2003 in the National Conference of Work of Civil Aviation, three provinces of Shandong, Hunan and Qinghai was the experimental units of reform of civil aviation administration system and airport management system and it was estimated that Jinan International Airport Co., Ltd. was hopeful to be established formally soon. The construction of airport would be further quickened. (3) In the report period, the Company recomposed Shandong Airlines Rainbow Jet Co., Ltd. with Hong Kong Zhongfu Airlines Co., Ltd. and Shandong Aviation Group and has paid the account of investment of RMB 22 million in advance. In 2002 Rainbow Jet Co., Ltd. incurred a comparatively large loss. ( )Financial Status 1.Financial Status (According to IFRS) Items 2002 2001 Increased amount Increase proportion RMB’000 RMB’000 (+/-)RMB’000 (+/-) Total assets 3,242,060 1,960,839 1,281,221 65.34% Non-current liabilities 1,147,113 625,565 521,548 83.37% Property, plant and equipment 2,432,213 1,316,944 1,115,269 84.69% Bank loans - due within one year 1,220,219 596,377 623,842 104.61% Finance costs 125,513 62,496 63,017 100.83% General and administration 38,639 25,011 13,628 54.49% Shareholders’ equity 438,743 543,127 -104,384 -19.22% Profit from operations 62,736 141,989 -79,253 -55.82% Net profit before taxation -83,789 79,493 -163,282 -205.40% 15 Net profit for the year -80,384 69,570 -149,954 -215.54% 2.Main reason of change Items Cause of the changes Total assets 1. Leasing five Boeing 737 aircraft under finance leases.2. Production and operation were expanded, operation capital increased. Non-current liabilities Bank loans increased. Property, plant and equipment Leasing five Boeing 737 aircraft under finance leases. Bank loans increased for supplementing the circulating funds ,purchase Bank loans - due within one year and investments. 1.Leasing five Boeing 737 aircraft under finance leases.2. more newly Finance costs increased bank loan. General and administration Production and operation were expanded. Shareholders’ equity 1.Realization of loss.2. distribution of dividends Profit from operations Operating expenses increased. Net profit before taxation Increase of operating expenses and finance costs Net profit for the year Increase of operating expenses and finance costs ( )Impact of change of production and operation environment, macro-policy and regulations on the Company 1. According to the regulation of CS (2000) No.99 document of Ministry of Finance, commencing from Jan. 1, 2002, the Company no longer enjoyed the preference policy of income tax of levying 33% at first and then returning 18%. The cancellation of this preference policy resulted in the big increase of the income tax payable of the Company. 2.On June 21, 2002, after approved by the State Council, China Civil Aviation General Bureau promulgated Regulation of Foreign Investment in the Aviation Industry (CCAR-201) and started to implement it from Aug. 1, 2002. According to this regulation, the policy of the foreign investment in Chinese aviation industry would be further broadened, which expended the way of foreign investment, relaxed the foreign investment proportion and increased the foreign management right. The Board of Directors of the Company considered that the implementation of the new policy was favorable for the Company to introduce strategic international investors in the proper time, realize the internationalization of operating regions, assets, technology and management and answer the internal and external pressure of reorganization of civil aviation, competition of foreign aviation and necessary increase of core competitiveness. 3.China Civil Aviation General Bureau held the Work Conference of Civil Aviation on Jan. 23, 2003 and brought forward that the Chinese domestic reform of price of aviation transportation mainly was to implement government guidance price to price of domestic aviation freight and the price-governing department’s direct management of confirmation of specific ticket price of lines was changed into the indirect management to the basic price of aviation transportation and the floating scope. Aviation transportation enterprises established the multilevel system of airfare in the stipulated range of the government, implemented the differential airfare according to the factors such as peak and low season of 16 transportation, time limit of ticket purchase, number of people, specific consumption group, time of scheduled flight and type of plane etc. and carried out after being put on records by Civil Aviation General Bureau and National Planning Commission and being publicized externally in advance. The Board of Directors of the Company thought that the new policy would make aviation companies more independent and the market orientation of the price mechanism was definitely to intensify the competition. The Company now established the project of reinforcement and improvement of the earnings management so as to increase the level of passenger-seating rate and the income level. 4.According to the Notice on Adjustment of Aviation Charge Standard in All Airports promulgated associatively by China Civil Aviation General Bureau, National Planning Commission and Ministry of Finance on Sept. 12, 2002, commencing from Sept. 1, 2002, the aviation charge in domestic airports averagely increased by 10% to 15%. The implementation of this policy largely increased the operating cost of the Company and enhanced the difficulty of profitability. Besides, according to the relevant reform project of aviation system, the measure of application of line resource with charge would be promulgated soon. The implementation of policy of application of line resource with charge would increase the operating cost of the Company directly. 5. Since the Gulf situation was increasingly intense, the international price of aviation oil increased by a big margin. According to the change situation of price of oil in the international market, the National Planning Commission issued the notice several days ago and decided to enhance the price of product oil from Feb. 1, 2003. The Board of Directors of the Company predicted that the price of aviation oil, which is sensitive to the international situation, would be still in a situation of not stable in 2003. Since the expenditure of fuel took over 20% of the operating cost of the Company, the increase of price of plane fuel and oil would influence on the Company’s payoff a lot. Analyzing from the current operating situation, the operation of the Company in the 1st quarter would still incur a loss. ( ) Explanation of the Board of Directors on the issues involved in the non-reserved Auditors’ Report with interpretative explanation provided by Deloitte Touche Tohmatsu Certified Public Accoutants and Deloitte Touche Tohmatsu Certified Public Accountants Ltd. 1. It is stated in the Auditors’ Report that “ Ended Dec. 31, 2002, the Company’s current maturity of bank loan was RMB 1,366,247,294 and the total amount of current liabilities exceeded the total amount of current assets of RMB 823,574,723. However, based on the same reason stated in the Note 2 of Accounting Statement, the aforesaid Accounting Statement is organized with sustainable operation as the basic premise of accounting.” Regarding this problem, the Board of Directors thinks that: (1) The Company has gained the written commitment of the lending bank on the extension of maturity of the loan that will expire within the year of 2003 and the Company still has the balance in the credit line. (2) The principal business of the Company keeps growing in a sustainable, steady and rapid way . The average increase rate in the past three years is 26.3 and the cash flow arising from operating activities is ample. (3) In 2003, the Company shall not increase investment projects except for the necessity of the normal production and operation. To limit and adjust foreign investment strictly. For the projects that have been invested, to manage scientifically and increase the benefit. To adjust the projects that is being invested properly. (4) The management of the Company is adjusting the structure of airplane team of the Company, replacing partial lateral airplanes incurring loss with Boeing 737 series airplanes and pushing the adjustment of structure of equity actively so as to improve the status of cash flow through the mode 17 of pursuing new investors and adjusting the structure of airplane team. The Board of Directors believes that the aforesaid measures can ensure the cash flow necessary for maintaining the normal operation of the Company and will not impact on the sustainable operation of the Company substantially. 2. It is stated in Auditors’ Report that: (1) “ The Company’s calculation to significant maintenance costs of airplanes and engines. Originally the Company appropriated the significant maintenance costs of airplanes and engines in advance according to the proportion of the estimated expense as per the practical flight hours of the current period and the estimated flight hours during the two periods of significant maintenance. According to the regulations of rule of Fixed Assets promulgated newly, in the report year the Company changed to adopt the method of reckoning in the current gains and losses as per the accrued practically to calculate this expense and took future application method to the change of this policy. Due to the change of this accounting policy, the net profit of 2002 increased by RMB 3,619,026. This change was a corresponding adjustment as per the regulations of rule of Fixed Assets. (2) “ The Company’s calculation to high-priced turnover piece. Originally the Company amortized the high-priced turnover piece averagely in a five-year period from the next month after the purchase, in 2002 the Company changed to averagely amortize high-priced turnover piece in a five-year or six-year period classified according to type of airplane according to the practical usage of high-priced turnover piece. Due to the change of this accounting estimation, the net profit of 2002 increased by RMB 9,395,000. This change of accounting estimation was an adjustment considering the practical usage of aviation material and making reference on the standard of amortization year of aviation material in the same industry. Business plan of 2003 The Board of Directors of the Company estimates that the internal and external environment of the Company will change quite a lot in the year of 2003 and the Company shall face the austere challenge of market competition. In order to turn the loss and realize the profitability, after the overall research and analysis, guided by the spirit of “ The 16th NCCPC” and with the development of the Company as the theme and the adjustment of structure as the masterstroke, the Board of Directors reinforced the safety, increased the benefits and established business plan of 2003 and carried out the measures in detailed way so as to realize the long-term development objectives of “ Make SDA rich and strong”. 1. To make the human as the base and to strengthen the security. To strongly establish the thought of making the human as the base, to reinforce the safety education and business training and to reinforce the implementation of regulations and system and clause of encouragement and punishment. The Company planned to strict the quantifying examination and the construction of safety system, to avoid the flight accident and to implement the duration of nigh years of safe flight. 2. To reinforce the measure of income increase and expenditure decrease and enhance the benefit level. To adjust layout of lines properly, mark out network of lines in a proper and flexible way with each base as the core, develop the cooperation of various business and try hard to develop the market of cargo transportation. According to the approval and reversion on the expansion of business scope of the Company by National Civil Aviation General Bureau, the Company shall open international lines as soon as possible, strengthen cooperation with other airlines companies, improve income management of flights and implement adjustment and control to the airfare in the scope allowed by the policy according to peak season and low season and the difference of time of ticket booking, cabin and type of airplane to increase 18 passenger-seating rate and earning level. At the same time the Company shall adopt every measure of strengthening control of cost positively, carry out the control of aviation material, aviation oil and period expense to departments and reduce the original cost combining the strategic adjustment of the Company. 3. To push the strategic adjustment in a serious and reliable way. In order to meet the development of civil aviation market and the change of industry policy, increase the operating efficiency and reduce the cost, the Company established the strategic adjustment plan with the implementation in stages and adjusted the orientation of the Company’s development strategy, structure of airplane teams, the existing resource, fixed assets and the structure of investment and human resources. After scientific argumentation, the Company planned to replace the partial medium airliners in the series of Boeing 737 which had over 100 seats with the planes of 4 pieces of SAAB-340, 2 pieces of B737-300QC and 5 pieces of CRJ-200 in order to realize the simplification of the main plane team in the Company, reduce the operating cost and enhance the profitability. 4. To further improve the administrative structure of the Company. To push the construction of the Company’s administrative structure strictly in accordance with the relevant laws and regulations of Securities Law, Company Law and Administrative Rules of Listed Company. To strengthen the decision-making and supervision mechanism of the Board of Directors in order to ensure the Company’s sustainable development in a steady and healthy way. To positively probe into the road of international operation and to introduce the strategic cooperation partner with good credit and strength so as to realize the internationalization of management, capital and technology. 5. To push the management innovation, to standardize the operation and to increase the whole making of the enterprise. The Company was to continue to carry through the innovation of management concept in order to set up the standard concept of users and to set up the service brand. To try best to push the innovation of the way of management so as to realize the objective cost management. Besides, to introduce into the advanced and scientific management means and establish the decision-making management system, to stick to improving the ISO9001 system of quality management and to implement the standardization management. The Board of Directors of the Company will go all out to ensure the realization of payoff in 2003 so as to boost the sustainable and healthy development of the Company. ( ) Routine work of the Board of Directors 1.The Board of Directors of the Company totally held nine meetings in 2002 (1) On Jan. 7, 2002, the Company held the 8th Meeting of the 1st Board of Directors. 11 Directors should be present while actually 9 attended the Meeting. All Supervisors and other Senior Executives of the Company attended the Meeting as nonvoting delegates. The following resolutions were examined and approved in the Meeting: a) Decision of strengthening the management of foreign investment and controlling the total amount of investment not to increase provisionally. The investment structure can be adjusted properly. b) Decision on the time of disclosure of annual report of the Company and the relevant contents c) Settlement proposal on the transfer and acceptance of assets of the related transaction between the Company and its control shareholder Shandong Airlines Limited d) Approval of production and business plan o 2002 and authorization of the operation management to carry out in a specific and dissembled way and to organize the implementation 19 e) Decision of as per the authorization of Shareholders’ General Meeting, to push the work of additional issuance in time according to the change of additional issuance policy of B share of CSRC f) Work System of Independent Director g) Proposal on Nominating Mr. Sun Dehan As the Honorary Chairman of the Company and agreement of engaging Mr. Sun Dehan as the honorary Chairman of the Company (2) On March 11, 2002, the Company held the 9th Meeting of the 1st Board of Directors. All Directors attended the Meeting and all Supervisors and Senior Executives of the Company attended the Meeting as nonvoting delegates. The following resolutions were examined and approved in the Meeting: a) 2001 Annual Report and its Summary b) 2001 Work Report of the Board of Directors c) 2001 Work Report of General Manager d) 2001 Financial Settlement Report e) 2001 Profit Distribution Preplan and 2002 Profit Distribution Policy f) Proposal on Revision of Articles of Association g) Proposal on Renewal of Certified Public Accountants and its Remuneration h) Proposal on Sales of Two CESSNA Caravan Planes to Shandong Airlines Rainbow Jet Co., Ltd. i) Proposal on Transfer of Four CRJ-604 Jets to Shandong Airlines Rainbow Jet Co., Ltd. for Operating Use j) Proposal on Acceptance of Partial Production and Operating Assets of Shandong Airline Limited k) Proposal on Allowance Standard of Independent Director of the Company l) Proposal on Holding 2001 Shareholders’ General Meeting (3) On April 25, 2002, the Company held 10th Meeting of the 1st Board of Directors. 10 Directors attended the Meeting and all Supervisors and Senior Executives attended the Meeting as nonvoting delegates. The Quarter Report of the 1st Quarter of 2002 was examined and approved conformably in the Meeting. (4) On May 22, 2002, the 11th Meeting of the 1st Board of Directors was held. All Directors attended the Meeting and the Company’s Supervisors and Senior Executives attended the Meeting as nonvoting delegates. The following resolutions were examined and approved conformably in the Meeting: a) Proposal on Increase of Investment Parties and Adjustment of Investment Proportion of Qingdao International Airlines Logistics Center Co., Ltd. b) Proposal on Purchase of Partial Equity of Shandong TAECO Aircraft Engineering Co., Ltd. c) Proposal on Change of Lease Contract of Five B737-300 Airplanes, and agreement of change from operating leasing five B737-300 airplanes from SDA Group to financing leasing directly from airplane’s owners d) Correction Report on the Relevant Issues of Examination of 2001 Annual Report e) Proposal on Mr. Liu Xingyun’s Resignation of Independent Director. Agreement of Independent Director of the Company Mr. Liu Xingyun resigning from the post of Independent Director due to the change of work f) Proposal on Quit the Purchase of Qingdao Comprehensive Building of Shandong Airlines Limited g) Proposal on Adjustment of Introducing In CRJ-604 Airplane h) Proposal on Holding the 1st Extraordinary Shareholders’ General Meeting of 2002 (5) On June 26, 2002, the 12th Meeting of the 1st Board of Directors was held. All Directors attended the Meeting and the Company’s Supervisors and other Senior Executives attended the Meeting as nonvoting 20 delegates. The following resolutions were examined and approved conformably in the Meeting: a) The Board of Directors’ agreement of purchase of partial land use right of Qingdao Liuting Airport and on-ground constructions in progress b) Proposal on Nominating Mr. Wang Zhi as Independent Director of the 1st Board of Directors of the Company, and nominating Mr. Wang Zhi as candidate of Independent Director of the 1st Board of Directors of the Company c) The Relevant Issues of Self-inspection Report on Establishment of Modern Enterprise System of Shandong Airlines Co., Ltd. (6) On Aug. 20, 2002, the Company held the 13th Meeting of the 1st Board of Directors. All Directors attended the Meeting and the Company’s Supervisors and other Senior Executives attended the Meeting as nonvoting delegates. The following resolutions were examined and approved conformably in the Meeting: a) 2002 Semi-annual Report of Shandong Airlines Co., Ltd. b) Proposal on Replacement and Introduction of Two CRJ-700 Airplanes and decision of replacement and introduction of two CRJ-700 airplanes c) Proposal on Salary and Remuneration Plan of Senior Executives of the Company and agreement of implementation of Salary System of binding remuneration and performance to Senior Executives in the Company to encourage the management effectively. d) Proposal on Investment and Establishment of Shandong Airlines Associated Express Co., Ltd. e) Proposal on Cooperation with China International Airlines Company in the Field of International Cargo Transportation. The Board of Directors decided to cooperate with China International Airlines Company in the field of international cargo transportation and expand the business of international cargo transportation by means of using the wet leased cargo airplanes and code share of scheduled flight to implement international line of cargo transportation. f) Proposal on Holding Jinan International Airlines Co., Ltd. by shares (7) On Oct. 25, 2002, the Company held the 14th Meeting of the 1st Board of Directors. 9 Directors attended the Meeting and the Company’s Supervisors and other Senior Executives attended the Meeting as nonvoting delegates. The following resolutions were examined and approved conformably in the Meeting: a) The 3rd Quarter Report of Shandong Airlines Co., Ltd. of 2002 b) Measure of Purchase of Constructed House of Proceeds Raised by Employees of SDA (8) On Nov. 21, 2002, The Company held the 15th Meeting of the 1st Board of Directors. 10 Directors should be present at the Meeting and actually 8 attended it. Director Bai Weisan and Mr. He Guobin could not attend the Meeting due to the work arrangement and authorized respectively Mr. Zheng Bao’an to vote instead. The Supervisors and Senior Executives of the Company attended the Meeting as nonvoting delegates. The following resolutions were examined and approved conformably in the Meeting: a) Proposal on Revision of Articles of Association of Shandong Airlines Co., Ltd. b) The term of the 1st Board of Directors of the Company expired on Nov. 28. According to the regulations of the Articles of Association, The control shareholder of the Company Shandong Airlines Group Co., Ltd. nominated Mr. Jia Fuwen, Mr. Li Junhai, Mr. Gao Zhu, Mr. Zeng Guoqiang, Mr. Wang Fuzhu, Mr. Su Zhongmin, Mr. Bai Weisan, Mr. Zheng Bao’an and Ms. Song Yuxia as Director candidates of the 2nd Board of Directors. The Board of Directors of the Company nominated Mr. Wang Zhi and Mr. Hu Jijian as candidates of Independent Director of the 2nd Board of Directors. 21 c) To further improve the Company’s administrative structure, according to the relevant regulations of Administrative Rules of Listed Companies and Articles of Association, the Board of Directors decided to establish Strategy and Nomination Committee and Remuneration and Examination Committee in the 2nd Board of Directors and requested Shareholders’ General Meeting to authorize the Board of Directors to set up other special committees as per the need of the Company. d) Proposal on Writing Off Guangdong SDA Trade Co., Ltd. and decision of writing off this company according to the law e) Proposal on Additional Establishment of Partial Ticket Offices f) Proposal on Holding the 2nd Extraordinary Shareholders’ General Meeting of 2002 g) Proposal on Financing Capital to Shandong Airlines Group Co., Ltd. (9) On Dec. 25, 2002, the Company held the 1st Meeting of the 2nd Board of Directors. 11 Directors should be present at the Meeting and actually 10 attended the Meeting. Independent Director Mr. Wang Zhi could not attend the Meeting. All Supervisors and Senior Executives of the Company attended the Meeting as nonvoting delegates. The following resolutions were examined and approved conformably in the Meeting: a) Proposal on Election of Chairman of the 2nd Board of Directors of Shandong Airlines Co., Ltd. b) Proposal on Committeeman Candidates of Each Special Committee of the 2nd Board of Directors of Shandong Airlines Co., Ltd. c) Proposal on Engagement of Senior Executives of Shandong Airlines Co., Ltd. d) Proposal on Structure Adjustment of Airplane Team of Shandong Airlines Co., Ltd. e) Proposal on Associated Reorganization of Shandong Airlines Rainbow Jet Co., Ltd. f) Proposal on Operating Lease of Two CRJ-200 Airplanes g) Proposal on Investment of the 2nd Stage Project of Qingdao Base. The Board of Directors planned to invest approximately RMB30 million into the construction of the 2nd stage project of Qingdao. 2. The implementation of the resolutions of Shareholders’ General Meeting by the Board of Directors In the report period, as per the requirements of the relevant laws and regulations of Company Law, Securities Law and Articles of Association, the Board of Directors of the Company earnestly implemented all resolutions approved by Shareholders’ General Meeting strictly in compliance with the resolutions and authorization of Shareholders’ General Meeting. (1) The implementation of profit distribution of the Company of 2002 According to 2000 Profit Distribution Preplan approved by 2001 Shareholders’ General Meeting held on April 18, 2001, the profit distribution project of the previous year of the Company was: based on the total share capital of 400 million shares ended Dec. 31, 2001, the Company distributed cash dividend to all shareholders at the rate of RMB0.6 for every 10 shares. The total cash dividend distributed amounted to RMB24 million and the balance RMB46, 323,700 was carried down to the next year for distribution. The Company would not convert public reserve into share capital. The Board of Directors of the Company publicized the public notice on dividend distribution on May 8, 2002 and implemented the aforesaid profit distribution policy. According to 2002 profit distribution policy disclosed in 2001 Annual Report of the Company, the Company planned not to distribute dividend and convert public reserve into share capital in the middle term of 2002. In the report period, the Company did not implement share distribution. (2) The implementation of authorization of Shareholders’ General Meeting by the Board of Directors According to Proposal on Revision of Articles of Association of 2001 Shareholders’ General Meeting and the 2nd Extraordinary Shareholders’ General Meeting of 2002, the Board of Directors revised the 22 Articles of Association respectively. The Board of Directors of the Company implemented all the orthers resolutions approved by Shareholders’ General Meeting in the report period. ( ) Profit distribution preplan or preplan of converting capital public reserve into share capital Audited by Deloitte Touche Tohmatsu Certified Public Accountants and Deloitte Touche Tohmatsu Certified Public Accountants Ltd. as per International Accounting Standards and Chinese Accounting Standards respectively, the Company incurred a loss in 2002 and the amount of loss was RMB 45,580,000 as per Chinese Accounting Standards. The Board of Directors decided neither to distribute profit nor convert public reserve into share capital in the year of 2002. This plan should be submitted to 2002 Shareholders’ General Meeting for examination and approval. VIII. Report of the Supervisory Committee (I) Particulars about work of Supervisory Committee The Company held seven meetings of the Supervisory Committee in the report period. 1. On Jan. 7, 2002, the Company held the 6th meeting of the 1st Supervisory Committee. 6 supervisors attended the meeting. The meeting examined and approved the filling in Investigation Table on the Company’s Normative Operation of Listed Companies Supervised By Jinan Securities Management Office, Proposal on Reform of Self-examination of the Company and 2002 production and operation plan of the Company. 2. On March 11, 2002, the Company held the 7th meeting of the 1st Supervisory Committee. All supervisors attended the meeting. The meeting examined and approved 2001 Work Report of the Supervisory Committee, 2001 Annual Report and its summary, 2001 Financial Settlement Report, 2001 Profit Distribution Preplan and 2002 Profit Distribution Policy and Proposal on Amending Articles of Association. 3. On June 26, 2002, the Company held the 8th meeting of the 1st Supervisory Committee. All supervisors attended the meeting. The meeting examined and approved Self-examining of Establishment of Modern Enterprise System of the Company. 4. On Aug. 20, 2002, the Company held the 9th meeting of the 1st Supervisory Committee. All supervisors attended the meeting. The meeting examined and approved conformably 2002 Semi Annual Report of the Company. 5. On Oct. 25, 2002, the Company held the 10th meeting of the 1st Supervisory Committee. All supervisors attended the meeting. The meeting examined and approved the 3rd Quarter Report of 2002 of the Company. 6. On Nov. 21, 2002, the Company held the 11th meeting of the 1st Supervisory Committee. 7 supervisors should be present and 6 supervisors attended the meeting. The supervisor, Mr. Li Songlin entrusted the supervisor of Mr. Li Jiemin for voting. The meeting examined and approved conformably Proposal on Election at Expiration of Office Terms of the 1st Supervisory Committee 7.On Dec. 25, 2002, the Company held the 1st meeting of the 2nd Supervisory Committee. All supervisors attended the meeting. The meeting elected conformably Mr. Wang Kaiyun as the caller of the 2nd Supervisory Committee of the Company. (II) Independent Opinions of the Supervisory Committee on relevant events in 2002 1.Operation according to laws In the report period, the Company conducted regulated operation complying to Company Law, Securities Law, Articles of Association of the Company, and Rules for Shares Listed with Shenzhen Stock Exchange and other national relevant policies and regulations. It implemented the internal management 23 systems as Internal Management System concerning Accruing Various Provisions for Price Falling of Assets and other Method for Limiting Losses, Management Regulations on Internal Auditing, Provisional Method for Investment Management, etc. Following the regulations and laws and being honest with faith and diligence, directors and senior executives of the Company carefully implemented every resolutions approved by shareholders’ general meeting with a view to protecting the shareholders’ interests. There was no such situation that directors or senior executives broke the laws, regulations, or Articles of Association or harmed the interests of the Company in their office term. 2.Inspection of financing The Supervisory Committee examined patiently and meticulously the financing situation of the Company. In opinion of the Supervisory Committee, 2002 Financial Report of the Company reflected truly the financing situation and operation result of the Company. The accountant materials as accountant vouchers, books and statements were genuine and standard. 3.Use of raised capital In 2002, the raised capital through issuing domestically listed foreign shares was used to pay for five CRJ-200 airplanes introduced in conformity with the investment project promised in the prospectus. 4.Purchase and sale of assets The trading prices for purchase or sales of assets of the Company were reasonable. Neither inside trading has been found, nor there occurred damage of the interests and rights of some shareholders or loss of the Company’s assets. 5.Related transactions The Company conducted related transactions strictly according to market principle in fair and juristic way. The price of the transactions was reasonable. The Company vindicated the interest of the shareholders and listed company. 6. Deloitte Touche Tohmatsu Certified Public Accountants and Deloitte Touche Tohmatsu Certified Public Accountants Ltd. audited the financial statements of the Company of 2002 respectively according to International Accounting Standards and Chinese Accounting Standards and provided non-reserved Auditors’ Report with interpretative explanation. The Supervisory Committee considers that the Auditors’ Report reflects the financial status and operation of the Company in a real, objective and accurate way. The Company incurred a loss in operation of 2002, thus the Board of Directors commented on this and established measure of turning the loss.. 7. Opinion on the relevant explanation of the Board of Directors of the issues involved in the non-reserved Auditors’ Report with interpretative explanation provided by Deloitte Touche Tohmatsu Certified Public Accoutants and Deloitte Touche Tohmatsu Certified Public Accountants Ltd. The Supervisory Committee considers that the relevant explanation of the Board of Directors of the issues involved in the non-reserved Auditors’ Report with interpretative explanation provided by Deloitte Touche Tohmatsu Certified Public Accoutants and Deloitte Touche Tohmatsu Certified Public Accountants Ltd. is true and reasonable. The proposals of problem settlement of the management in keeping the sustainable development of the Company involved in the explanation are feasible with proper measures and the work that has been adopted or will be adopted is reliable and effective, which can maintain the interests of the Company and the majority shareholders. The Supervisory Committee carried through special research on the Company’s problem of sustainable operation, the problem of circulating capital to its control shareholder, the problem of energy saving and consumption reducing and decrease of production cost and requested the management of the Company to pay attention and solve the aforesaid problems according to the planned measures. 24 IX. Significant Events (I) The Company has no significant lawsuits and arbitrations in the report period. (II) Purchase, sale, consolidation and merge of assets in the report period 1.The 12th meeting of the 1st Board of Directors held on June 26, 2002 approved to purchase use right of land named QZDZI [1997] No. 136 which locates in Qindao Liuting Airport and has 8244.8 square meters’ acreage and construction in process with 12330 square meters from Qindao Airport Frontier Deference Checkpoint of PRC. The price of the purchase is RMB 13,000,000. (Relevant public notice was published on China Securities, Securities Times and Ta Kung Pao dated June 27, 2002.) 2.According to Proposal on Introducing Into Two CRJ-700 Airplanes Through Exchange approved by the 13th meeting of the 1st Board of Directors held on Aug. 20, 2002, the Company raised capital by itself to introduce into two CRJ-700 airplanes. The plan of introducing into airplanes through exchange has been approved by State Development Plan Commission in the report period. The Company signed relevant agreement with Bombardier Aerospace of Canada on Sep. 3, 2002 and estimated to get the airplanes before the end of 2003. 3.According to Resolution on Writing Off Guangdong Luhang Trading Limited approved by the 15th meeting of the 1st Supervisory Committee held on Nov. 21, 2002, the Company appointed person to join in Liquidation Committee that has been conducting relevant actions of liquidation. The aforesaid purchase, sale, consolidation and merge of assets had no influence on the consistence of business and stability of managers of the Company. (III) Material Related Transaction At present, there exists related transactions between the Company and control shareholders in some degree that are necessary to the Company and belong to unavoidable related transactions or necessary for relieving related transactions in last period and pushing the Company’s normative development. The Company made full consideration of quality, price and efficiency of the service and product provided by the transaction party and analyzed and compared the market environment before conducting the transactions. The independent directors, independent financing and consultant expressed opinions respectively on these related transactions and considered that the Company and related party are in conformity with the principle of publicity, fairness and honesty, the trading price was fair and there existed no actions harmful of the interest of issuer and other shareholders. 1.In the report period, in order to increase the cooperation of the Company and TAECO in the fields of airplanes’ reparation and other operation, according to Proposal on Purchase of Past Equity of TAECO approved by the 11th meeting of the 1st Board of Directors held on May 22, 2002, the Company and SDA, the endorser, signed Equity Assignment Agreement. The Company purchased 12% equity of TAECO held by TAECO by means of cash. The price was based on Assets Evaluation Report of Shandong TAECO issued by Certified Public Accountants and approved by two parties. The amount of assignment is RMB 8,500,000. The public notice of the related transaction was published on China Securities, Securities Times and Ta Kung Pao dated Dec.7, 2002. So far, the agreement has been implemented completely. 2. In the report period, in order to realize completely the separation of assets and independence of businesses between the Company and SDA and perfect the administrative structure, the 9th meeting of the 1st Board of Directors held on March 11, 2002 examined and approved Proposal on Purchase of Part Productive and Operative Assets of Shandong Airlines Limited. The related transaction was examined and approved by 2001 Annual Shareholders’ General Meeting of the Company (The public notice of the related transaction was published on China Securities, Securities Times and Ta Kung Pao dated March 26, 2002.). Concerning Qindao Base Synthesis Building planed to purchase by the Company, because SDA can’t provide house property certification and other procedure documents, the Company decided to give up the purchase. The proposal was examined and approved by the 1st extraordinary Shareholders’ 25 General Meeting of 2002. The advance payment of RMB 12,000,000 the Company paid to SDA was repaid on schedule. (Relevant public notice was published on China Securities, Securities Times and Ta Kung Pao dated June 27, 2002.) At present, the work has been ended and the total amount of the assignment assets is RMB 70,861,100. The related transaction interfered in Office Building Agreement signed by the Company and SDA was released. 3. The 9th meeting of the 1st Board of Directors held on March 11, 2002 examined and approved Proposal on Selling Two Cessna Caravan Airplanes To Shandong Airlines Rainbow Jet Co., Ltd.. The related transaction was examined and approved by 2001 Annual Shareholders’ General Meeting of the Company. In the report period, two airplanes has been delivered to Shandong Airlines Rainbow Jet Co., Ltd. and it has paid the Company the payment of purchasing airplanes and relevant taxation of RMB 34,300,000. (The public notice of the related transaction was published on China Securities, Securities Times and Ta Kung Pao dated Apr. 12, 2002.) 4. The 9th meeting of the 1st Board of Directors held on March 11, 2002 examined and approved Proposal on Transferring Four Challenger 604 Jets To Shandong Airlines Rainbow Jet Co., Ltd. For Operation and Use. The related transaction was examined and approved by 2001 Annual Shareholders’ General Meeting of the Company. (The public notice of the related transaction was published on China Securities, Securities Times and Ta Kung Pao dated Apr. 12, 2002.) The 1st extraordinary Shareholders’ General Meeting of 2002 examined and approved the adjustment of the quantity of introduced challenger 604 airplanes from four to two. According to Reply on Agreement of Shandong Airlines Rainbow Jet Co., Ltd. ’s Operation and Use of Four Challenger 604 Airplanes promulgated by CAAC (MHGH [2002] No.105), two challenger 604 airplanes has been delivered to Shandong Airlines Rainbow Jet Co., Ltd. for operation and use. 5. On Dec.18, 1999, the Company and Shandong Airlines Rainbow Jet Co., Ltd. signed Contract of Reletting Five Boeing Airplanes to relet five B737-300 airplanes. (Disclosed in Prospectus of the Company). Because the Company was the actual operator and user of the five airplanes, the lessor and the guarantors after negotiation decided to change the contract from operative leasehold to financing leasehold from the owner of airplanes directly. At present, the change has been implemented. The primary Contract of Reletting Five Boeing Airplanes signed by the Company and SDA ended automatically and the related transaction was relieved. (Relevant public notice was published on China Securities, Securities Times and Ta Kung Pao dated June 27, 2002 and July 13, 2002). 6. According to Proposal on Lending Capital Shandong Airlines Group Co., Ltd. approved by the 2nd extraordinary Shareholders’ General Meeting of 2002, the Company and SDA signed the agreement of raising capital that the Company lent capital of RMB 70,000,000 to SDA . In the report period, the total number of raising capital is RMB 56,133,000. The capital was repaid completely before the end of 2002. The Company received capital use expenditure according to relevant regulations. (IV) Material Contract and the Implementation 1.Assets entrustment, contract and rent (1) In the report period, the Company stopped the lease of two CRJ200-200 airplanes from Tyrolean Airways in Austria due to the lease’s expiration. (2) In the report period, two Boeing 737-300QC airplanes the Company leased from Airplanes Holdings Limited were received respectively on Jan. 27 and 31. So far, the operation is normal. (3) In the report period, two challenger 604 jets the Company leased from General Electric Capital Corporation were received respectively in March and July. At present, the two airplanes has been transferred to Shandong Airlines Rainbow Jet Co., Ltd. for operation and use. (4) In the report period, one Boeing 737-200 airplane the Company leased from Sinkiang Airlines Co., Ltd. was stopped leasing due to expiration on June 30. (5) Two CRJ-200 airplanes operated and leased by the Company were received in Jan. 2003 and the 26 operation is normal. 2.Significant guarantee: The Company provided no guarantee for others in the report period. 3. The Company had no entrusted financing in the report period. 4. Other material contract By the end of the report period, the total amount of long-term and short-term loan of the Company is RMB 1,609,766,024. The Company had no other significant contracts not disclosed. (V) The Company has no entrust anyone to manage its cash assets in the report period. (VI) Commitment Events Ended Dec.31, 2001, the Company or shareholders holding over 5% equity has no significant commitment events necessary to be disclosed. (VII) Engagement of Certified Public Accountants According to the 4th meeting of the 1st Board of Directors of the Company, the Company engaged Deloitte Touche Tohmatsu Certified Public Accountants Ltd. and Deloitte Touche Tohmatsu Certified Public Accountants as the Company’s auditor agents. 2001 Annual Shareholders’ General Meeting of the Company held on Apr. 18, 2002 approved the proposal of reengagement. The Company paid audit expense of RMB 800,000 to Deloitte Touche Tohmatsu Certified Public Accountants Ltd. and Deloitte Touche Tohmatsu Certified Public Accountants in the report year. (VIII) No punishment was imposed on the Company, its directors or senior executives by the supervisory authorities in the report period. (IX) The Company experienced neither material events as stated in Article 62 of Securities Law and Article 17 of Detailed Rules for Information Disclosure of Company Publicly Issuing Shares (Draft) nor material events decided by the Board to disclose. (X) Other Material Events The Company had no other significant events necessary to be disclosed. 27 X. Financial Report AUDITORS' REPORT TO THE SHAREHOLDERS OF SHANDONG AIRLINES CO., LTD. 山东航空股份有限公司 (Established in the People's Republic of China) We have audited the accompanying balance sheet of Shandong Airlines Co., Ltd. as of December 31, 2002 and the related statements of income, cash flows and changes in equity for the year then ended. These financial statements are the responsibility of the Group's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the 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 financial statements present fairly, in all material respects, the financial position of the Group as of December 31, 2002 and the results of its operations and its cash flows for the year then ended, in accordance with International Financial Reporting Standards. Without qualifying our opinion we draw attention to note 2 to the financial statements which explains that the Group is dependent upon the support of its bankers and in particular on the renewal of existing, and the obtaining of new, bank loan facilities within the next twelve months. Provided that the bankers continue to support the Group, the directors are satisfied that the Group will have sufficient financial resources to meet in full its financial obligations as they fall due for the foreseeable future. Accordingly, the financial statements have been prepared on a going concern basis. Deloitte Touche Tohmatsu Certified Public Accountants Hong Kong, March 27, 2003 28 CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2002 NOTES 2002 2001 RMB'000 RMB'000 OPERATING REVENUE 4 Passenger 1,458,361 1,199,586 Cargo and mail 88,987 70,647 Interest income 13,325 7,830 Leasing income 29,284 1,518 Government grant 6 13,740 - Others 10,574 8,401 __________ __________ TOTAL OPERATING REVENUE 1,614,271 1,287,982 __________ __________ OPERATING EXPENSES Depreciation and amortisation 176,694 93,222 Take-off and landing charges 179,536 118,495 Personnel 88,886 77,895 Fuel 335,379 260,932 Maintenance and overhaul 161,001 98,768 Catering 68,140 45,143 Rental 274,686 278,722 Insurance 26,525 10,318 Promotion and sales 116,929 96,755 General and administration 38,639 25,011 Others 85,120 40,732 __________ __________ TOTAL OPERATING EXPENSES 1,551,535 1,145,993 __________ __________ PROFIT FROM OPERATIONS 7 62,736 141,989 FINANCE COSTS 8 (125,513) (62,496) INCOME FROM AN ASSOCIATE 188 - LOSS ON INVESTMENTS 9 (21,200) - __________ __________ (LOSS) PROFIT BEFORE TAX (83,789) 79,493 INCOME TAX CREDIT (EXPENSE) 10 3,029 (9,923) __________ __________ (LOSS) PROFIT AFTER TAX (80,760) 69,570 MINORITY INTERESTS 376 - __________ __________ NET (LOSS) PROFIT FOR THE YEAR (80,384) 69,570 __________ __________ TRANSFER TO RESERVES Statutory surplus reserve (13) (5,494) Statutory public welfare fund (6) (2,747) __________ __________ (19) (8,241) __________ __________ (LOSS) PROFIT CARRIED FORWARD (80,403) 61,329 __________ __________ __________ __________ RMB RMB Basic (loss) earnings per share 12 (20.1 cents) 17.4 cents __________ __________ __________ __________ 29 CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 2002 NOTES 2002 2001 RMB'000 RMB'000 ASSETS Non-current assets Property, plant and equipment 13 2,432,213 1,316,944 Negative goodwill 14 - - Intangible asset 15 44,192 26,519 Investment in an associate 17 831 784 Advances on aircraft and related equipment 81,724 63,026 Advances on land and buildings - 39,000 Unlisted investments 18 45,940 6,690 Long-term prepayments 19 20,000 - Deferred taxation 29 22,242 22,242 __________ __________ 2,647,142 1,475,205 __________ __________ Current assets Flight equipment spare parts and other inventories 20 35,886 27,773 Trade and other receivables 195,616 166,238 Amount due from holding company 21 936 638 Amounts due from related parties 22 14,577 2,148 Tax recoverable 1,384 - Bank term deposits - 106,700 Bank balances and cash 346,519 182,137 __________ __________ 594,918 485,634 __________ __________ TOTAL ASSETS 3,242,060 1,960,839 __________ __________ __________ __________ 30 NOTES 2002 2001 RMB'000 RMB'000 LIABILITIES AND SHAREHOLDERS' EQUITY Shareholders' equity Share capital 23 400,000 400,000 Reserves 24 38,743 143,127 __________ __________ 438,743 543,127 __________ __________ MINORITY INTERESTS 6,986 - __________ __________ Non-current liabilities Bank loans - due after one year 25 465,977 592,459 Other loan 26 - 33,106 Obligations under finance leases - due after one year 27 681,136 - __________ __________ 1,147,113 625,565 __________ __________ Current liabilities Trade and other payables 264,217 168,950 Sales in advance of carriage 9,873 10,412 Amounts due to related parties 28 8,881 4,692 Tax liabilities - 11,716 Bank loans - due within one year 25 1,220,219 596,377 Obligations under finance leases - due within one year 27 146,028 - __________ __________ 1,649,218 792,147 __________ __________ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 3,242,060 1,960,839 __________ __________ __________ __________ The financial statements on pages 2 to 32 were approved by the board of directors and authorised for issue on March 27, 2003 and are signed on its behalf by: Li Junhai Zeng Guoqiang DIRECTOR DIRECTOR 31 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED DECEMBER 31, 2002 Statutory Statutory Retained Share Share Capital surplus public earnings capital premium reserve (note) reserve welfare fund (Deficits) Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 Balance at January 1, 2001 400,000 76,258 (40,886) 9,708 4,854 63,623 513,557 Net profit for the year - - - - - 69,570 69,570 Transfer to statutory surplus reserve - - - 5,494 - (5,494) - Transfer to statutory public welfare fund - - - - 2,747 (2,747) - Dividends - - - - - (40,000) (40,000) __________ __________ __________ __________ __________ __________ __________ Balance at December 31, 2001 and January 1, 2002 400,000 76,258 (40,886) 15,202 7,601 84,952 543,127 Net loss for the year - - - - - (80,384) (80,384) Transfer to statutory surplus reserve - - - 13 - (13) - Transfer to statutory public welfare fund - - - - 6 (6) - Dividends - - - - - (24,000) (24,000) __________ __________ __________ __________ __________ __________ __________ Balance at December 31, 2002 400,000 76,258 (40,886) 15,215 7,607 (19,451) 438,743 __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ Note: Capital reserve arose from the reorganisation, in which the Company took over the air transportation service business from the holding company, Shandong Airlines Limited 山东航空集团 有限公司, by issuing the Company's shares to the holding company. The transfer of the Company's assets under the reorganisation was calculated based on the financial statements prepared in accordance with accounting standards and regulations applicable to enterprises in the People's Republic of China. 32 CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2002 NOTE 2002 2001 RMB'000 RMB'000 OPERATING ACTIVITIES (Loss) profit before tax (83,789) 79,493 Adjustments for: Depreciation and amortisation 176,694 93,222 Loss (gain) on disposal of property, plant and equipment 130 (2,552) Interest expenses 125,513 62,496 Interest income (13,325) (7,830) Impairment loss recognised in respect of property, plant and equipment 6,900 - Impairment loss on long-term prepayments 22,000 Dividend from unlisted investment (800) - Income from an associate (188) - Negative goodwill released to income (74) - _________ _________ Operating cash flows before movements in working capital 233,061 224,829 Increase in flight equipment spare parts and other inventories (8,113) (6,209) Increase in trade and other receivables (44,944) (19,713) Increase in amounts due from related parties (12,429) (2,148) Increase (decrease) in trade and other payables 93,863 (28,532) Decrease in sales in advance of carriage (539) (1,532) Increase (decrease) in amounts due to related parties 4,189 (848) _________ _________ Net cash generated from operations 265,088 165,847 Interest paid (128,998) (65,842) Income tax paid (10,071) (13,839) Interest received 13,325 7,830 _________ _________ Net cash generated from operating activities 139,344 93,996 _________ _________ INVESTING ACTIVITIES (Advance to) repayment from holding company (223,581) 2,418 Purchase of property, plant and equipment other than aircraft and related equipment (131,162) (11,249) Purchase of aircraft and related equipment (73,264) (744,965) Prepayment for long-term investments (42,000) - Purchase of unlisted investments (39,250) - Additions of intangible asset (19,557) (27,915) (Increase) decrease in advances on aircraft and related equipment (18,698) 86,305 Decrease in bank term deposits 106,700 37,439 Decrease (increase) in advances on land and buildings 39,000 (39,000) Proceeds from disposal of property, plant and equipment 33,218 48,596 Acquisition of subsidiaries 30 1,695 - Dividend received from unlisted investment 800 - Dividend received from an associate 141 - Acquisition of investment in an associate - (784) _________ _________ Net cash used in investing activities (365,958) (649,155) _________ _________ 33 2002 2001 RMB'000 RMB'000 FINANCING ACTIVITIES New bank loans obtained 1,635,017 1,600,908 Investment received from minority shareholders 5,729 - Repayment of bank loans (1,137,657) (978,926) Repayment of obligations under finance leases (54,987) - Repayment of other loans (33,106) - Dividend paid (24,000) (40,000) New other loan obtained - 33,106 _________ _________ Net cash generated from financing activities 390,996 615,088 _________ _________ NET INCREASE IN CASH AND CASH EQUIVALENTS 164,382 59,929 CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 182,137 122,208 _________ _________ CASH AND CASH EQUIVALENTS AT END OF THE YEAR 346,519 182,137 _________ _________ _________ _________ 34 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2002 1. GENERAL Shandong Airlines Co., Ltd. (the "Company") was established in the People's Republic of China ("PRC") on December 13, 1999 and is responsible for its own operations, subject to the supervision and regulation of the Civil Aviation Administration of China ("CAAC"), a regulatory authority of the civil aviation industry in the PRC. Its B shares are listed on the Shenzhen Stock Exchange (the "Stock Exchange") with effect from September 12, 2001. Its holding company is Shandong Airlines Limited 山东航空集团有限公司 (formerly 山东航空有限责任公司), a company also established in the PRC. The Company maintains its accounting records and prepares its statutory financial statements in Renminbi, in which the majority of the Company's transactions are denominated. The statutory financial statements are prepared in accordance with accounting standards and regulations applicable to enterprises in the PRC ("PRC GAAP"). However, these financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") for the shareholders of the Company's B shares listed on the Stock Exchange. Differences between IFRS and PRC GAAP are stated in note 37. The Company is engaged in the provision of domestic passenger and cargo air transportation services. The principal activities of the subsidiaries and an associate are set out in notes 16 and 17, respectively. The Company and its subsidiaries are hereinafter collectively referred to as "the Group". 2. BASIS OF PREPARATION In preparing the financial statements the directors have given careful consideration to the future liquidity of the Group. The Group is dependent upon the support of its bankers and in particular on the renewal of existing, and the obtaining of new, bank loan facilities within the next twelve months. Provided that the bankers continue to support the Group, the directors are satisfied that the Group will be able to meet in full its financial obligations as they fall due for the foreseeable future. Accordingly the financial statements have been prepared on a going concern basis. 3. SIGNIFICANT ACCOUNTING POLICIES The financial statements have been prepared under the historical cost convention and in accordance with IFRS. The principal accounting policies adopted are set out below: Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and enterprises controlled by the Company ("its subsidiaries") made up to 31 December each year. Control is achieved where the Company has the power to govern the financial and operating policies of an investee enterprise so as to obtain benefits from its activities. 35 3. SIGNIFICANT ACCOUNTING POLICIES - continued On acquisition, the assets and liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess (deficiency) of the cost of acquisition over (below) the fair values of the identifiable net assets acquired is recognised as goodwill (negative goodwill). The interest of minority shareholders is stated at the minority's proportion of the fair values of the assets and liabilities recognised. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effect date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by other members of the Group. All significant intercompany transactions and balances between group enterprises are eliminated on consolidation. Investments in associates An associate is an enterprise over which the Group is in a position to exercise significant influence, but not control, through participation in the financial and operating policy decisions of the investee. The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting. Investments in associates are carried in the balance sheet at cost as adjusted by post-acquisition changes in the Group's share of the net assets of the associate, less any impairment in the value of individual investments. Any excess (deficiency) of the cost of acquisition over (below) the Group's share of the fair values of the identifiable net assets of the associate at the date of acquisition is recognised as goodwill (negative goodwill). Where a group enterprise transacts with an associate of the Group, unrealised profits and losses are eliminated to the extent of the Group's interest in the relevant associate, except to the extent that unrealised losses provide evidence of an impairment of the asset transferred. Negative goodwill Negative goodwill represents the excess of the Group's interest in the fair value of the identifiable assets and liabilities of a subsidiary and associate at the date of acquisition over the cost of acquisition. Negative goodwill is released to income based on an analysis of the circumstances from which the balance resulted. To the extent that the negative goodwill is attributable to losses or expenses anticipated at the date of acquisition, it is released to income in the period in which those losses or expenses arise. The remaining negative goodwill is recognised as income on a straight-line basis over the remaining average useful life of the identifiable acquired depreciable assets. To the extent that such negative goodwill exceeds the aggregate fair value of the acquired identifiable non-monetary assets, it is recognised as income immediately. Negative goodwill arising on the acquisition of an associate is deducted from the carrying amount of that associate. Negative goodwill arising on the acquisition of subsidiaries is presented separately in the balance sheet as a deduction from assets. 36 3. SIGNIFICANT ACCOUNTING POLICIES - continued Revenue recognition Passenger and cargo sales are recognised as operating revenue when the transportation service is provided rather than when a ticket is sold. Such revenue is reported net of business tax. The value of unflown passenger and cargo sales is recorded as a current liability in the sales in advance of carriage account. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable. Dividend income from investments is recognised when the shareholder's rights to receive payment have been established. Rental income from operating leases is recognised on a straight-line basis over the terms of the relevant leases. Leasing Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. The Group as lessor Rental income from operating leases is recognised on a straight-line basis over the term of the relevant lease. The Group as lessee Assets held under finance leases are recognised as assets of the Group at their fair value at the date of acquisition or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income, unless they are directly attributable to qualifying assets, in which case they are capitalised in accordance with the Group's general policy on borrowing costs (see below). Rentals payable under operating leases are charged to income on a straight-line basis over the tem of the relevant lease. Foreign currencies Transactions in currencies other than Renminbi are initially recorded at the rates of exchange prevailing on the dates of the transactions. Monetary assets and liabilities denominated in such currencies are retranslated at the rates prevailing on the balance sheet date. Profits and losses arising on exchange are included in net profit or loss for the period. 37 3. SIGNIFICANT ACCOUNTING POLICIES - continued Capitalisation of borrowing costs Interest on advances made in connection with the acquisition of aircraft is capitalised as an additional cost of the aircraft. Interest is capitalised at the weighted average interest rate on the total borrowings or, where applicable, the actual interest rate applicable to the specific borrowings. Capitalisation of interest creases when the aircraft is placed into revenue earning service. All other borrowing costs are recognised in net profit or loss in the period in which they are incurred. Government grants Government grants towards the technology upgrade of the aircrafts are recognised as income over the periods necessary to match them with the related costs and are deducted in reporting the related expense. Retirement scheme The Group participates in a defined contribution retirement scheme organised by the municipal government of the province in which it operates. The contributions to the scheme are charged to operating expenses as and when incurred. Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on the taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill (or negative goodwill) or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction which affects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. 38 3. SIGNIFICANT ACCOUNTING POLICIES - continued Taxation - continued The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled. Deferred tax is charged or credited in the income statement, except when it relates to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation or amortisation and any recognised impairment loss. Depreciation and amortisation are charged so as to write down the cost of property, plant and equipment to their estimated residual values over their estimated useful lives. Useful lives and residual values are reviewed annually in the light of experience and changing circumstances. (i) Aircraft and related equipment Aircraft are depreciated, using the straight-line method, over their estimated useful lives of 12 to 20 years with a residual value of 5% of the original cost. Related equipment is depreciated, using the straight-line method, over 12 to 18 years. (ii) Buildings Buildings are depreciated, using the straight-line method, over their estimated useful lives of 27 to 33 years with a residual value of 5% on the original cost. (iii) Other equipment Other equipment are depreciated, using the straight-line method, over their estimated useful lives of 5 to 10 years with a residual value of 5% on the cost of the property, plant and equipment. Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the terms of the relevant leases. The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in income. 39 3. SIGNIFICANT ACCOUNTING POLICIES - continued Construction in progress Construction in progress, being equipment under construction and equipment pending installation in the aircraft, is carried at cost. Cost comprises the direct cost of construction, the cost of equipment as well as finance charges from borrowings used to finance these assets during the construction or installation period. No depreciation is provided on construction in progress until the asset is completed and put into use. Intangible asset Intangible asset is measured initially at purchase cost and amortised on a straight-line basis over its estimated useful life. Impairment At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Recoverable amount is the greater of net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of it recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately. Flight equipment spare parts and other inventories Flight equipment spare parts and other inventories are stated at the lower of cost and net realisable value. Cost is calculated using the weighted average method. Manufacturers' credits In connection with the acquisition of certain aircraft and related equipment, various credits are received from the manufacturers. These credits are applied as a reduction of the acquisition costs of the related aircraft and related equipment. 40 3. SIGNIFICANT ACCOUNTING POLICIES - continued Aircraft maintenance and overhaul costs Costs for routine maintenance and overhaul of aircraft and related equipment are charged to operating expenses as and when incurred. Financial instruments Financial assets and financial liabilities are recognised on the Group's balance sheet when the Group becomes a party to the contractual provisions of the instrument. Trade and other receivables, amount due from holding company and amounts due from related parties are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts. Investments are recognised on a trade-date basis and are measured at cost, including transaction costs. Trade and other payables and amounts due to related parties are stated at their nominal value. Interest-bearing bank loans and other loans are recorded at the proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption, are accounted for on an accrual basis and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. 4. OPERATING REVENUE Operating revenue represents revenue earned principally from the carriage of passengers, cargo and mail. Operating revenue from other services represents services provided to third parties as well as commission income earned on tickets sold by the Group for which the carriage is provided by other airlines. Operating revenue is net of sales tax which are calculated at the following rates: Tax Applicable rates on revenues Sales tax 3% traffic revenue from domestic flights Sales tax 5% on other revenue, except for interest income 5. BUSINESS AND GEOGRAPHICAL SEGMENTS The Group is mainly engaged in the provision of domestic passenger, cargo and mail air transportation services and it contributes over 90% of the Group's operations, and identifiable assets, sales revenue and loss for the year. The operations of the Group are all located in PRC. 41 6. GOVERNMENT GRANT The government grant was obtained specifically for the Group's maintenance of the aviation security system and was recognised as income when, and only when, the government grant became receivable and the attached conditions were met. 7. PROFIT FROM OPERATIONS 2002 2001 RMB'000 RMB'000 Profit from operations has been arrived at after charging (crediting): Rental expenses under operating leases Aircraft and related equipment 274,686 278,722 Land and buildings 6,936 5,595 Impairment loss recognised in respect of property, plant and equipment (included in operating expenses - others) 6,900 - Retirement scheme contributions (note 34) 9,331 5,862 Loss (gain) on disposals of property, plant and equipment 130 (2,552) Net foreign exchange loss (gain) 92 (52) Release of negative goodwill to income (included in operating revenue - others) (74) - _______ _______ _______ _______ 8. FINANCE COSTS Finance costs comprise the following: 2002 2001 RMB'000 RMB'000 Interest on bank loans 77,250 65,635 Interest on other loans 3,485 207 Interest on obligations under finance leases 48,263 - _______ _______ 128,998 65,842 Less: Amounts capitalised (3,485) (3,346) _______ _______ 125,513 62,496 _______ _______ _______ _______ Borrowing costs included in the cost of qualifying assets arose on other loan utilised in financing the acquisition of aircraft and related equipment. 42 9. LOSS ON INVESTMENTS 2002 2001 RMB'000 RMB'000 Dividend from unlisted investment 800 - Impairment loss on long-term prepayments (22,000) - _______ _______ (21,200) - _______ _______ _______ _______ 10. INCOME TAX CREDIT (EXPENSE) 2002 2001 RMB'000 RMB'000 The credit (charge) comprises: PRC income tax – the Group (60) (25,115) Over provision of PRC income tax in prior years 3,089 5,629 Deferred taxation (note 29) - 9,563 _______ _______ 3,029 (9,923) _______ _______ _______ _______ Provision for PRC income tax is calculated at 33% of the estimated assessable income for the year. The charge for the year can be reconciled to the net profit before tax as follows: 2002 2001 RMB'000 % RMB'000 % Net (loss) profit before tax (83,789) 79,493 __________ __________ __________ __________ Tax at the PRC tax rate of 33% (27,650) 33.0 26,233 33.0 Tax effect on PRC allowable tax loss not recognised as an asset 16,760 (20.0) - - Tax effect of other deductible temporary differences arising in the current year not considered to be recoverable 13,252 (15.8) Tax effect of expenses that are not deductible in determining taxable profit (2,302) 2.7 555 0.7 Additional deferred tax provision in respect of previous year resulting from cancellation of tax incentive - - (11,236) (14.1) Over provision for PRC income tax in prior years (3,089) 3.7 (5,629) (7.1) __________ _________ __________ _________ Tax (credit) expense and effective tax rate for the year (3,029) 3.6 9,923 12.5 __________ _________ __________ _________ __________ _________ __________ _________ 43 11. DIVIDENDS On June 27, 2002, a dividend of RMB 6 cents per share for 2001 was paid to the shareholders. In respect of current year, the directors do not recommend the payment of a dividend and propose that the retained earnings be retained. 12. BASIC (LOSS) EARNINGS PER SHARE The calculation of the basic (loss) earnings per share is based on the net loss for the year of RMB80,384,000 (2001: net profit of RMB69,570,000) and on the 400,000,000 shares (2001: 400,000,000 shares) in issue during the year. No diluted earnings per share has been presented as there were no dilutive potential ordinary shares in issue in either 2002 or 2001. 13. PROPERTY, PLANT AND EQUIPMENT Aircraft and related Other Motor Construction Buildings equipment equipment vehicles in progress Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 COST At January 1, 2002 - 1,451,684 25,339 23,457 4,456 1,504,936 Additions arising from acquisition of subsidiaries - - 153 611 - 764 Additions 55,537 1,182,183 10,685 4,620 76,874 1,329,899 Reclassification 33,674 - - - (33,674) - Disposals - (33,198) (58) (379) - (33,635) ___________ _____________ ___________ ___________ __________ _____________ At December 31, 2002 89,211 2,600,669 36,119 28,309 47,656 2,801,964 ___________ _____________ ___________ ___________ __________ _____________ DEPRECIATION AND AMORTISATION At January 1, 2002 - 172,489 5,940 9,563 - 187,992 Additions arising from acquisition of subsidiaries - - 105 231 - 336 Provided for the year 1,296 167,477 3,481 2,556 - 174,810 Impairment loss recognised - 6,900 - - - 6,900 Eliminated on disposals - (113) (4) (170) - (287) ___________ _____________ ___________ ___________ __________ _____________ At December 31, 2002 1,296 346,753 9,522 12,180 - 369,751 ___________ _____________ ___________ ___________ __________ _____________ NET BOOK VALUES At December 31, 2002 87,915 2,253,916 26,597 16,129 47,656 2,432,213 ___________ _____________ ___________ ___________ __________ _____________ ___________ _____________ ___________ ___________ __________ _____________ At December 31, 2001 - 1,279,195 19,399 13,894 4,456 1,316,944 ___________ _____________ ___________ ___________ __________ _____________ ___________ _____________ ___________ ___________ __________ _____________ The net book value of property, plant and equipment held under finance leases at December 31, 2002 amounted to approximately RMB1,047,813,000(2001: nil). 44 14. NEGATIVE GOODWILL 2002 RMB'000 GROSS AMOUNT Arising on acquisition of subsidiaries and balance at December 31, 2002 74 RELEASED TO INCOME Release in the year and balance at December 31, 2002 74 _______ CARRYING AMOUNT At December 31, 2002 - _______ _______ At December 31, 2001 - _______ _______ 15. INTANGIBLE ASSET RMB'000 AT COST At January 1, 2002 27,915 Additions 19,557 _______ At 31 December 2002 47,472 _______ AMORTISATION At January 1, 2002 1,396 Charge for the year 1,884 _______ At December 31, 2002 3,280 _______ CARRYING AMOUNT At December 31, 2002 44,192 _______ _______ At December 31, 2001 26,519 _______ _______ Intangible asset represents recruitment and initial training costs incurred for pilots, which is measured initially at purchase cost and amortised on a straight-line basis over the average years of services of the pilots. 45 16. SUBSIDIARIES Details of the Company's subsidiaries at December 31, 2002 are as follows: Place of incorporation Proportion Proportion (or registration) of ownership of voting Principal Name of subsidiary and operation interest power held activity % % Qingdao Int'l Aviation Logisitics Center Co., Ltd. 青岛国际航空物流中心有限公司 PRC 70 70 Transportation agency Union Express Service Shandong Airlines Co., Ltd. 山东航空联合快运有限公司 PRC 65 65 Cargo agency SDA-SEG Cargo Co., Ltd. 深圳市山航赛格航空货运有限公司 PRC 50 50 Cargo agency ("SDA-SEG") (Note) Guangdong Lumao Trading Co., Ltd. 广东鲁航贸易有限公司 ("LUMAO") PRC 50 50 Cargo agency (Note) Note: In the opinion of the directors, the Company controls the operational and financial activities of SDA-SEG and LUMAO and accordingly they are considered as subsidiaries of the Company. 17. INVESTMENT IN AN ASSOCIATE 2002 2001 RMB'000 RMB'000 Cost of investment 784 784 Share of post-acquisition profit, net of dividends received and receivable 47 - _______ _______ 831 784 _______ _______ _______ _______ 46 17. INVESTMENT IN AN ASSOCIATE - continued Details of the Group's associate at December 31, 2002 are as follows: Place of Proportion Proportion incorporation of ownership of voting Principal Name of associate and operation interest power held activity % % Shandong Aviation Rainbow PRC 49 49 Inbound and International Travel Service local tours Co., Ltd. 山东航空彩虹国际旅行社有限公司 ("SARITS") The remaining 51% interest in SARITS is held by Shandong Airlines Limited. 18. UNLISTED INVESTMENTS 2002 2001 RMB'000 RMB'000 Legal person share, at cost (Note i) 6,690 6,690 Unlisted shares, at cost (Note ii) 39,250 - _______ _______ 45,940 6,690 _______ _______ _______ _______ Note: (i) In the opinion of the directors, the investment held by the Group is in the form of legal person share in PRC, which is not freely transferrable in the market. Accordingly, it is not practical to determine the fair value and thus the investment is stated at cost. (ii) In the opinion of the directors, the fair value of the investments are not materially different from their cost. 19. LONG-TERM PREPAYMENTS 2002 2001 RMB'000 RMB'000 At cost 42,000 - Less: impairment loss recognised (22,000) - _______ _______ 20,000 - _______ _______ _______ _______ 47 19. LONG-TERM PREPAYMENTS - continued The long-term prepayments are paid for the purpose of obtaining the interest in Shandong Jinan Yaoqiang Airport Co., Ltd. ("SJYA") and Shandong Airlines Rainbow-Jet Co., Ltd. 山东航空彩虹公务机有限公司 ("SARJ"). The relevant agreements are in the progress of being finalised at the balance sheet date. The directors have reviewed the carrying value of the prepayment at the balance sheet date and identified that the recoverable amount of the prepayment for SARJ to be lower than the carrying value in view of the future operations of SARJ. Accordingly, impairment loss on the full amount of the prepayment for SARJ of RMB22,000,000 was recognised in the consolidated income statement during the year. 20. FLIGHT EQUIPMENT SPARE PARTS AND OTHER INVENTORIES 2002 2001 RMB'000 RMB'000 Flight equipment spare parts 32,556 25,445 Other inventories 3,330 2,328 _______ _______ 35,886 27,773 _______ _______ _______ _______ Included above are flight equipment spare parts of approximately RMB23,866,000 (2001: RMB18,205,000) which are carried at net realisable value. 21. AMOUNT DUE FROM HOLDING COMPANY The amount due from Shandong Airlines Limited is unsecured, interest bearing and repayable on demand. 22. AMOUNTS DUE FROM RELATED PARTIES 2002 2001 RMB'000 RMB'000 Shandong International Aviation Training Co., Ltd. 山东国际航空培训有限公司 ("SIATC") 6,308 1,518 SARITS 425 500 SDA-SEG (Note) - 130 山东航空大厦管理有限公司 27 - 山东翔宇航空技术服务有限责任公司 410 - SARJ 7,036 - 青岛飞圣国际航空技术培训中心有限公司 171 - 青岛升平航空食品有限公司 200 - _______ _______ 14,577 2,148 _______ _______ _______ _______ Note: The Group acquired SDA-SEG as its subsidiary in 2002. All the above mentioned companies are subsidiaries of Shandong Airlines Limited while SARITS is an associate of the Company. The amounts are unsecured, non-interest bearing and repayable on demand. 48 23. SHARE CAPITAL 2002 & 2001 RMB'000 Registered, issued and fully paid 260,000,000 shares of domestic shares of RMB 1 each 260,000 140,000,000 shares of B shares of RMB 1 each 140,000 _______ 400,000 _______ _______ 24. RESERVES Statutory surplus reserve and statutory public welfare fund, which consist of appropriations from the profit after taxation, form part of the shareholders' equity. Statutory surplus reserve In accordance with the PRC Company Law and the Company's Articles of Association, the Company is required to appropriate 10% of its profit after taxation as reported in its PRC statutory financial statements to the statutory surplus reserve. The appropriation to statutory surplus reserve may cease to apply if the balance of the statutory surplus reserve has reached an amount equal to 50% of the Company's registered capital. Surplus reserves can be used to offset prior year accumulated losses, to expand the Company's operations or for conversion into share capital. The Company may, upon the approval by a resolution at the Annual General Meeting, convert its surplus reserve into share capital and issue new shares to existing shareholders in proportion to their original shareholdings to increase the nominal value of each share. When converting the Company's statutory surplus reserves into share capital, the amount of such reserves remaining unconverted must not be less than 25% of the registered capital. Statutory public welfare fund In accordance with the PRC Company Law and the Articles of Association, the Company is required to appropriate 5% to 10% of the profit after taxation as reported in its PRC statutory financial statements to the statutory public welfare fund. The appropriation in the current year to the statutory public welfare fund is made at 5%. The statutory public welfare fund shall only be applied to collective welfare of staff and workers and welfare facilities remain as property of the Company. Profits available for distribution The profit of the Company available for appropriations will be the lesser of the profit reported in its financial statements prepared under PRC GAAP or under IFRS. There is no retained earnings available for future distribution at December 31, 2002. The deficits at December 31, 2002, based on the IFRS financial statements, amounted to approximately RMB19,451,000. 49 25. BANK LOANS 2002 2001 RMB'000 RMB'000 The bank loans are repayable as follows: Within one year 1,220,219 596,377 In the second year 76,430 126,376 In the third to fifth year, inclusive 217,547 229,129 After five years 172,000 236,954 _________ _________ 1,686,196 1,188,836 Less: Amounts due within one year shown under current liabilities (1,220,219) (596,377) _________ _________ Amounts due after one year 465,977 592,459 _________ _________ _________ _________ Secured 542,407 618,836 Unsecured 1,143,789 570,000 _________ _________ 1,686,196 1,188,836 _________ _________ _________ _________ The terms of non-current bank loans are summarised as follows: 2002 2001 RMB'000 RMB'000 Denominated in RMB Fixed interest rate at 6.21% per for the acquisition of aircraft annum, repayable in 10 years and related equipment with final maturity in 2012 342,000 376,000 Denominated in USD Interest at market rate, for the acquisition of repayable in 5 years with aircraft and related equipment final maturity in 2007 200,407 242,836 Denominated in RMB Fixed interest rate at 5.94% per for working capital annum, repayable in one year with final maturity in 2003 - 50,000 _______ _______ 542,407 668,836 Less: Amounts due within one year shown under current liabilities (76,430) (76,377) _______ _______ Amounts due after one year 465,977 592,459 _______ _______ _______ _______ Of the unsecured bank loans of RMB1,143,789,000 (2001: RMB570,000,000), RMB429,663,000 (2001: RMB310,000,000) is guaranteed by Shandong Airlines Limited, RMB237,937,000 (2001: RMB230,000,000) is guaranteed by a shareholder of the Shandong Airlines Limited., RMB270,000,000 (2001: Nil) is guaranteed by the other two unrelated companies. Bank loans repayable within one year bear interest rates ranging from 2.81 % to 6.21% per annum. 50 26. OTHER LOAN The balance in 2001 represented the loan borrowed from General Electric Capital Corporation for the acquisition of aircraft and related equipment. The amount was unsecured, bore interest at 7.5% per annum and was fully repaid during the year. 27. OBLIGATIONS UNDER FINANCE LEASES Present value Minimum of minimum Lease payments lease payment 2002 2001 2002 2001 RMB'000 RMB'000 RMB'000 RMB'000 Amounts payable under finance leases: With in one year 195,840 - 146,028 In the second to fifth years inclusive 583,814 - 468,079 - Over five years 208,776 - 213,057 - _______ _______ _______ _______ 988,430 - 827,164 - Less: future finance charges (161,266) - N/A N/A _______ _______ _______ _______ Present value of lease obligations 827,164 - 827,164 - _______ _______ _______ _______ Less: Amount due for settlement within 12 months (shown under current liabilities) (146,028) - _______ _______ Amount due for settlement after 12 months 681,136 - _______ _______ _______ _______ It is the Group's policy to lease five Boeing 737 aircraft under finance leases. The average lease term is 6 - 8 years. For the year ended December 31, 2002, the average effective borrowing rate was 6.48%. Interest rates are fixed at the contract date. All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments. All lease obligations are denominated in United States Dollars. The fair value of the Group's lease obligations approximates their carrying amount. The Group's obligations under finance leases are secured by the lessor's charge over the leased assets. 51 28. AMOUNTS DUE TO RELATED PARTIES 2002 2001 RMB'000 RMB'000 Shandong Taeco Aircraft Engineering Co., Ltd. 山东太古飞机工程公司 ("SDTAE") 7,648 3,693 Shandong Shengping Catering Co., Ltd. 山东升平航空食品公司 ("SDSCC") 1,233 999 _______ _______ 8,881 4,692 _______ _______ _______ _______ The above companies are subsidiaries of Shandong Airlines Limited. The amounts are unsecured, non-interest bearing and repayable on demand. 29. DEFERRED TAXATION 2002 2001 RMB'000 RMB'000 At January 1 22,242 12,679 Credit for the year (note 10) - 9,563 _______ _______ At December 31 22,242 22,242 _______ _______ _______ _______ Deferred tax assets (liabilities) recognised are made up of the taxation effect of: Depreciation Major of aircraft overhaul and related Deferred provision equipment expenditure for aircraft Total RMB'000 RMB'000 RMB'000 RMB'000 (note i) (note ii) (note iii) At January 1, 2001 5,511 10,287 (3,119) 12,679 Credit (charge) for the year 3,480 10,066 (3,983) 9,563 _______ _______ _______ _______ At December 31, 2001, January 1, 2002 and December 31, 2002 8,991 20,353 (7,102) 22,242 _______ _______ _______ _______ _______ _______ _______ _______ (i) The amount represents the tax effect of temporary differences attributable to the excess of depreciation charges over depreciation allowances. (ii) The amount represents the tax effect on training costs where under PRC GAAP, which is the basis for the PRC tax computation, the training costs are capitalised and amortised, while under IFRS, such costs are charged to the income statement when incurred before 2000. (iii) The amount represents the tax effect of major overhaul provision for aircraft which is provided for under PRC GAAP and allowed for tax purposes, but can only be recognised when there is a present obligation as a result of a past event under IFRS. 52 29. DEFERRED TAXATION - continued Details of unrecognised deferred tax assets (liabilities) are as follows: Depreciation Major of aircraft overhaul Pre-operating and related Deferred provision expenses of Tax losses equipment expenditure for aircraft subsidiaries Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 At January 1, 2001 and January 1, 2002 - - - - - - Credit (charge) for the year 16,760 7,146 (1,168) 7,102 172 30,012 _______ _______ _______ _______ _______ _______ At December 31, 2002 16,760 7,146 (1,168) 7,102 172 30,012 _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ A net deferred tax asset has not been recognised in respect of the amount due to the uncertainty as to the availability of future profits against which the deductible temporary differences can be utilised. The tax losses will expire in 2007. 30. ACQUISITION OF SUBSIDIARIES On March 31, 2002, the Group acquired a 50% interest in SDA-SEG and LUMAO for cash consideration of RMB 1.6 million from Shandong Airlines Limited. This transaction has been accounted for by the purchase method of accounting. 2002 RMB'000 Net assets acquired: Property, plant and equipment 428 Trade and other receivables 988 Bank balances and cash 3,254 Trade and other payable (1,404) Minority interests (1,633) _______ 1,633 Goodwill (74) _______ Total consideration 1,559 _______ _______ Satisfied by cash 1,559 _______ _______ Net cash inflow arising on acquisition: Cash consideration (1,559) Bank balances and cash acquired 3,254 _______ 1,695 _______ _______ SDA-SEG and LUMAO did not contribute significantly to the Group's revenue and profit before tax for the period subsequent to the date of acquisition. 53 31. MAJOR NON-CASH TRANSACTIONS During the year, purchase of aircraft and related equipment amounting to RMB16,554,000 (2001: RMB19,898,000) were settled by manufacturers' credits. During the year, the Group acquired five Boeing 737 aircraft from its holding company at a consideration of RMB1,105,434,000. The consideration was settled by taking over the existing finance leases of RMB882,151,000 from the holding company and setting off an amount due from holding company of RMB223,283,000. 32. CONTINGENT LIABILITIES According to the regulations of the Ministry of Finance and CAAC, the Company was required to pay domestic aviation infrastructure levies to CAAC, calculated at the rate of 4.835% on the traffic revenue. In the second half of 2001, the levies were increased from 4.835% to 5%. The amount of domestic aviation infrastructure levies, which should be paid for the current year, is RMB79,762,000 (2001: RMB65,478,000). The Finance Department of Shandong Province agreed on August 30, 1999 that it would make every endeavour to settle the payment of domestic aviation infrastructure levies on behalf of the Company. At the same time, Shandong Airlines Limited has also undertaken to compensate the Company for any payment of such levies. Under such an arrangement, in the opinion of the directors, the Company has been released from the requirement to pay domestic aviation infrastructure levies to CAAC. No accruals has been made in the financial statements accordingly. 33. COMMITMENTS The Group had the following commitments at the balance sheet date: (i) Capital commitments 2002 2001 RMB'000 RMB'000 Aircraft and related equipment 414,904 379,734 Land and buildings 8,070 73,000 Unpaid investment 4,250 70,000 Training costs to be incurred for pilots 7,636 - _______ _______ 434,860 522,734 _______ _______ _______ _______ Apart from the above, the Group has also placed refundable deposits to manufacturers for intended purchases of aircraft. 54 33. COMMITMENTS - continued (ii) Lease commitments At the balance sheet date, the Group had outstanding commitments under non-cancellable operating leases which fall due as follows: 2002 2001 RMB'000 RMB'000 Aircraft and related equipment Within one year 187,182 359,253 In the second to fifth year inclusive 622,409 1,233,666 Over five years 202,440 834,824 _________ _________ 1,012,031 2,427,743 _________ _________ _________ _________ Land and buildings Within one year 4,920 1,747 In the second to fifth year inclusive 6,140 3,677 Over five years - 420 _________ _________ 11,060 5,844 _________ _________ _________ _________ Included in the above are outstanding commitments under operating leases in respect of aircraft and related equipment amounting to approximately RMB2,004,400 (2001: RMB682,777,000) entering into with Shandong Airlines Limited. The decrease was due to the termination of operating lease agreement with Shandong Airlines Limited after the Group acquired the five Boeing 737 aircraft from Shandong Airlines Limited, the transaction of which is disclosed in note 31 and 35(3). The remaining commitments under operating leases are entered into with independent third parties. Leases are negotiated for an average term of 7 to 9 years for aircraft and related equipment and 1 to 8 years for land and buildings, respectively. The rentals are fixed throughout the lease periods, except that an annual increment of 6% has been imposed on one of the lease arrangements in respect of land and buildings. 34. RETIREMENT SCHEME CONTRIBUTIONS The Group participates in a defined contribution retirement scheme organised by the municipal government of Shandong Province. All qualifying employees of the Group are participants of the scheme. Under this scheme, the Group is required to make contributions to the scheme at 23% of the employee salaries, and the employees are required to contribute at 4% of their salaries. The average number of employees for the year is 1,168 (2001: 1,122). 55 35. RELATED PARTY TRANSACTIONS In addition to the disclosure set out in notes 21, 22, 25, 28, 30, 31, 32 and 33, during the year, the Group entered into the following transactions with related parties: Name of related party Nature of transaction 2002 2001 RMB'000 RMB'000 Shandong Airlines Limited Operating lease charges in respect of aircraft and related equipment 17,161 154,736 General service charges 1,110 967 Rental charges in respect of land and buildings 476 225 Room and restaurant service charges 2,281 2,550 Interest income 11,888 - Purchase of property, plant and equipment 70,861 - Transfer to finance leasing right 223,283 - Purchase of unlisted investments in SDTAE 4,250 - Long-term prepayment for investment in SARJ 22,000 - SDTAE Repairs and maintenance charges 35,665 21,268 SDSCC Air catering services and purchase of other supplies 17,945 13,572 SIATC Rental income in respect of aircraft 1,410 1,518 SARITS Sales of airtickets 8,846 - SARJ Rental income in respect of aircraft 27,874 - Disposal of aircraft and related equipment 33,198 - 山东航空大厦管理有限公司 Rental changes in respect of buildings 852 - Room and restaurant service charges 240 - 青岛飞圣国际航空技术 培训中心有限公司 Training fee 5,014 - _______ _______ _______ _______ In the opinion of the directors, all the above transactions were carried out in the Company's ordinary course of business and with reference to the market rates. 56 35. RELATED PARTY TRANSACTIONS - continued Shandong Airlines Limited is the holding company of the Group while SARITS is an associate of the Company. The other companies are subsidiaries of Shandong Airlines Limited. (1) During the year, the Group disposed of two new aircraft and related equipment to SARJ at the net book value of approximately RMB33,198,000. SARJ is an associate of Shandong Airlines Limited. (2) During the year, the Group made numerous advances to Shandong Airlines Limited and the monthly average outstanding amounted to approximately RMB56,133,000. (3) During the year, the Group acquired five Boeing 737 aircraft from its holding company at a consideration of RMB1,105,434,000. The amount was settled by taking over the existing finance leases of RMB882,151,000 from the holding company and setting off an amount due from holding company of RMB223,283,000. 36. PLEDGE OF ASSETS Aircraft and related equipment of the Group with a net book value of approximately RMB1,954,300,000 (2001: RMB966,456,000) have been pledged to banks to secure bank loans granted to the Group. 37. SUMMARY OF DIFFERENCES BETWEEN IFRS AND PRC GAAP These financial statements are prepared in conformity with IFRS which differ from the Company's statutory financial statements prepared in accordance with the PRC GAAP. The statutory financial statements for the year ended December 31, 2002 reported loss after taxation of RMB45,584,000 (2001: profit of RMB54,942,000) and net assets of RMB525,329,000 (2001: RMB564,282,000). A reconciliation between (loss) profit for the year and net assets reported under PRC GAAP and those reported under IFRS are as follows: (Loss) profit for the year Net assets 2002 2001 2002 2001 RMB'000 RMB'000 RMB'000 RMB'000 As reported under PRC GAAP (45,584) 54,942 525,329 564,282 Adjustments to conform with IFRS: Difference in depreciation charges of aircraft and related equipment (22,925) 1,558 (50,169) (27,244) Difference in deferred expenditure recognition 3,538 2,777 (58,136) (61,674) Adjustment of provision for overhaul of aircraft and engines (21,521) 730 - 21,521 Deferred taxation - 9,563 22,242 22,242 Pre-operation expense of subsidiaries (523) - (523) - Interest income from holding company 6,631 - - - Dividends declared after the balance sheet date - - - 24,000 _______ _______ _______ _______ As reported under IFRS (80,384) 69,570 438,743 543,127 _______ _______ _______ _______ _______ _______ _______ _______ 57 38. SUBSEQUENT EVENT On March 12, 2003, the Company announced that it has reached an agreement with Shandong Airlines Limited and CR Airways Ltd., an independent Hong Kong company, to reorganise the shareholding of SARJ into a sino-foreign equity joint venture with a registered capital of RMB50,000,000. The Company, Shandong Airlines Limited and CR Airways Ltd. will hold 45%, 6% and 49%, respectively, of the shareholding of SARJ. The reorganisation was approved by the Committee of Foreign Economics and Trade on March 5, 2003. 39. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF RISK Financial assets of the Group include bank balance and cash, trade and other receivables, amount due from holding company and amounts due from related parties. Financial liabilities of the Group include bank loans, other loan, trade and other payables and amounts due to related companies. Business risk The Group conducts its principal operations in the PRC and accordingly is subject to special considerations and significant risks not typically associated with companies in the United States of America and Western European companies. These include risks associated with, among others, the political, economic and legal environment, competition in the passenger and cargo air transportation services, and influence of CAAC on pricing of air tickets, take-off and landing charges at certain PRC airports, commission rates and the adjustment on fuel prices. Interest rate risk The interest rates and terms of repayment of the borrowings made to the Group are disclosed in note 25, 26 and 27. Foreign currency risk Certain of the Group's bank loans and other loan are denominated in United States dollars but the group's revenue is denominated in Renminbi. The Group is exposed to foreign currency risk. Credit risks (i) Bank balances and cash Substantially all of the Company's bank balance and cash are deposited with PRC financial institutions. (ii) Trade receivables These are mainly ticket sale receivables from sale agents and receivables related to uplifts by the Group on behalf of other carriers. These receivables are spread among numerous parties. (iii) Other receivables The amounts mainly comprise outstanding balances due from third parties. 58 39. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF RISK - continued The carrying amount of financial assets best represent their maximum credit risk exposure at the balance sheet date. Fair value The fair value of bank balances and cash, trade and other receivables, amount due from holding company, amount due from related companies, bank loans, other loan, obligations under finance lease, trade and other payables and amounts due to related parties are not materially different from their carrying amounts. Fair value estimates are made at specific point in time and are based on relevant market information. The estimate is subjective in nature and involved uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in valuation methods and assumptions could significantly affect the estimates. 40. LANGUAGE The English text of the financial statements is a translated version for reference only. The Chinese text of the financial statements will prevail over the English text. XI. Documents Available for Reference 1. Financial statements carried with the personal signatures and seals of Chairman of the Board, general accountants and accounting departments; 2. Original of Auditors’ Report carried with the seal of Certified Public Accountants as well as personal signatures and seals of certified public accountants; 3. Originals of all documents and notices publicly disclosed on newspapers designated by CSRC in the report period; The Company will offer above documents for reference timely provided that CSRC or Stock Exchange demands or shareholders requires according to the regulations and Articles of Association. LI Junhai Board of Directors of Shandong Airlines Co., Ltd. March 27, 2003 59