丽珠集团(000513)丽珠Ｂ2003年年度报告（英文版）

LIVZON PHARMACEUTICAL GROUP INC. 2003 ANNUAL REPORT I. IMPORTANT NOTICE Important Notice: The board of directors of the Livzon Pharmaceutical Group Inc. (hereinafter referred to as the Company) confirms that there are no misleading statements, or misrepresentation, or material omissions contained in this report. The board of directors individually and collectively accepts responsibility for the truthfulness, accuracy and completeness of the contents of this report. The 2003 annual report is written in Chinese and English, the Chinese version is set to be accurate when ambiguities occur in understanding of such two versions. Director Guo Jiaxue and Zhang Yu both voted abstained from voting at the Board of Directors’ meeting for the purpose of considering this annual report and the reason is that they cannot express approved or objective opinions because they cannot realize the background of CPA engaged by Livzon Group, so they suggested the company engage a international CPA in the year 2004. The investors must pay special attention. Director Guo Jiaxue, Wang Xiaobin and independent director Jiang Jian were absent from the Board meeting and respectively appointed director Zhang Yu, Gu Yueyue and independent director Qi Zhan to attend and vote on their behalfs. Chairman of the Company Mr. Zhu Baoguo and Chief Accountant, Mr. An Ning have declared that they are responsible for the truthfulness and completeness of the Financial Report of the Annual Report. II. COMPANY PROFILE 1. Legal name of the Company In Chinese: 丽珠医药集团股份有限公司 Short form in Chinese: 丽珠集团 In English: Livzon Pharmaceutical Group Inc. Short form in Chinese: LIVZON GROUP 2. Legal representative: Zhu Baoguo CEO(President): Xiao Siyang 3. Secretary to the Board of Directors: Wang Wuping Representative in charge of securities affairs: Hong Lu Tel: (0756) 8135888 Fax: (0756) 8886002 E-mail: wangwuping@livzon.com.cn, honglu@livzon.com.cn Contact Address: Livzon Bldg., Guihua North Road, Gongbei, Zhuhai, Guangdong 4. Registered address: No. 132, Guihua North Road, Gongbei, Zhuhai, Guangdong Office address: Livzon Bldg., No. 132 Guihua North Road, Gongbei, Zhuhai, Guangdong Post code: 519020 1 Company’s internet website: http://www.livzon.com E-mail: zhlivzon@pub.zhuhai.gd.cn 5. Newspapers designated for disclosure of the Company’s information: Securities Times, Shanghai Securities News, and Da Gong Pao (Hong Kong)( in Chinese), The Standard (Hong Kong) (in English) Internet Website Designated by China Securities Regulatory Commission for Publishing the Annual Report: http://www.cninfo.com.cn The Place where the Annual Report is available for inspection: Secretariat of the Board of Directors of Livzon Group 6. Stock exchange listing: Shenzhen Stock Exchange Short form of the stock and stock code: Livzon Group (000513) Livzon B (200513) 7. Other relevant information of the Company Initial registration date: January 26, 1985 Changed registrations date: September 13, 2002 Company’s registered address: Administrative Bureau for Industries & Commerce of Zhuhai Municipal Registration number of the Company’s legal person business license: QGYZZ Zi No.: 001111 Registration number of taxation: 440401617488309 8. Domestic certified public accountants engaged by the Company: Reanda Certified Public Accountants Co., Ltd. Office address: No. 215, Xing Ye Road, Zhuhai International certified public accountants engaged by BDO International Certified Public Accountants Office address: Unit 2008, Zhu Bang 2000 Building, Ba Li Zhuang, Chaoyang District, Beijing III. ACCOUNTING DATA AND BUSINESS SUMMARY 1. Major Accounting Data (Unit:RMB’000) Items 2003 2002 (as restated) Revenue 1,811,914 1,601,206 Gross profit 892,615 703,851 Share of profit of associates 1,484 1,447 Profit before tax 159,423 116,310 Income tax expense (36,234) (25,255) Profit after tax 123,189 91,055 Minority interests (29,266) (23,976) Net profit for the year 93,923 67,079 2 Earnings per share-basic RMB0.31 元 RMB0.22 元 Share capital 306,035 306,035 Capital and reserves 1,029,958 964,486 Total assets 2,101,070 1,820,896 Net cash from operating activities 297,067 305,616 Net increase in cash and cash equivalents 128,932 62,474 Note: The above data were audited by BDO International Certified Public Accountants according to IAS, for reference to investors of B share only. 2. Differences in Auditing of Net Profit The Company’s net profit for 2003 was respectively 92,201 (RMB’000) and 93,923 (RMB’000)as audited by Reanda Certified Public Accountants according to PRC Accounting Rules and Regulations and BDO International Certified Public Accountants according to the International Accounting Standards. The main reasons for the difference of net profit in the sum of 1,722(RMB’000) were the corrections made to deferred expenditure and Profit from investments for associates and long-term prepaid expenses and Amortization of negative goodwill increased profit by 838(RMB’000), 794(RMB’000),681(RMB’000) and 195(RMB’000) respectively, and provision for depreciation on property, plant and equipment ,together with amortization of goodwill decreased profit by 535(RMB’000) and 251(RMB’000) respectively according to the International Accounting Standards. 3. Major Accounting Data and Financial Indicators over the Past Three Years (Unit: RMB’000) Major accounting data 2002 2001 2003 After Before After Before adjustment adjustment adjustment adjustment Revenues 1,811,914 1,601,206 1,601,206 1,395,792 1,395,792 Net profit 93,923 67,079 67,079 58,073 59,049 Capital and reserves 1,029,958 964,486 964,486 906,588 909,671 Total assets 2,101,070 1,820,896 1,820,896 1,637,435 1,641,717 Capital and reserves per share 3.37 3.15 3.15 2.96 2.97 Net profit per Capital and 9.12 6.95 6.95 6.41 6.49 reserves (%) Net cash flows per share from 0.97 1.00 1.00 0.54 0.54 operating activities Net profit per share 0.31 0.22 0.22 0.19 0.19 3 4. Change in Shareholders’ Fund( According to PRC Accounting Rules and Regulations ) Statutory Capital Surplus Shareholders’ Items Share capital public Undistributed profit reserve reserve fund welfare fund As at 1 January 2003 306,035,482.00 422,642,384.45 204,724,049.01 35,769,759.83 16,802,129.97 950,204,045.43 Increase during the period 2,530,929.97 37,291,113.52 10,821,940.45 92,200,608.49 63,750,317.56 Decrease during the period 68,780,514.25 As at 31 December 2003 306,035,482.00 425,173,314.42 242,015,162.53 46,591,700.28 40,222,224.21 1,013,954,362.99 Reasons for The increase is The increase in The increase was transferred the changes due to surplus reserve from net profit, and the provision for (including decrease was due to equity statutory public appropriations to the investment of welfare fund) is surplus reserve and the RMB2,530,929 appropriated statutory public welfare .97 from net profit fund, reserve funds and corporate development fund of the parent company and the subsidiaries amounting to RMB38,176,966.05and distribution of profit of RMB30,603,548.2 IV. CHANGE IN SHARE CAPITAL AND PARTICULARS OF SHAREHOLDERS 1. Change in Share Capital (1) Table of changes in share capital (as at December 31, 2003) (Unit: share) Increase/decrease during the year (+, - ) Before the After the Items change Share Bonus Share converted from Additional Others change placement issue public reserve issuance I. Non-circulating shares 1. Promoters’ shares Including: Domestic legal person shares 68,056,188 68,056,188 Total non-circulating shares 68,056,188 68,056,188 II. Circulating shares 1. A shares 115,672,310 115,672,310 Including: shares held by 80,798 -80,798 senior management 2.B shares 122,306,984 122,306,984 Total circulating shares 237,979,294 237,979,294 III. Total shares 306,035,482 306,035,482 4 Note: The 80,798 shares held by the senior management, namely Director of the third Board of Directors Cao Wenxia, Supervisor of the third Supervisory Committee Li Yufang and former CEO and Director Xu Xiaoxian were circulated shares. (2) Share issue and listing of shares over the recent three years The structure of the Company’s share capital remained unchanged over the recent three years ended December 31, 2003, and the total share capital was 306,035,482 shares. 2. Details of Shareholders (1) As at December 31, 2003, the total number of shareholders was 51,067, of which 14,883 were holders of B shares). (2) Particulars of shares held by the top ten shareholders (including the top ten shareholders of circulating shares (as at December 31, 2003) Number of Number of Increase / Percentage to Class of shares shares held share Full name of shareholders decrease in total share (Circulating or at the end of pledged/ the year capital Non-circulating) the year frozen China Everbright (Group) Corp. 0 38,917,518 12.72 Non-circulating 0 Tiancheng Industrial Co., Ltd. B shares in +8,030,275 34,284,870 11.20 0 circulation Joincare Pharmaceutical Industry Non-circulating (Group) Co., Ltd 22,379,239 24,200 32,285,116 10.55 A shares in 0 circulation 9,905,877 Shenzhen Haibin Pharmaceutical Co., A shares in 0 6,752,435 2.21 0 Ltd. circulation Guangzhou Baokeli Trading Company 0 6,059,428 1.98 Non-circulating 6,059,428 Yulong Securities Investment Fund A shares in +836,614 2,006,329 0.66 0 circulation Pufeng Securities Investment Fund A shares in +1,716,151 1,833,034 0.60 0 circulation Kexun Securities Investment A shares in -606,350 1,611,850 0.53 0 circulation E-Fund Strategic Growth Securities A shares in +1,560,430 1,560,430 0.51 0 Investment Fund circulation Xiangcaihefeng Value Optimizing A shares in Type Growth Securities Investment +1,504,142 1,504,142 0.49 circulation 0 Fund E-Fund Stable Growth Securities A shares in +435,387 1,466,716 0.48 Investment Fund circulation Western Securities Investment A shares in +1,250,835 1,250,835 0.41 CO.,Ltd. circulation Note:(i) In June 4, 2003, Shenzhen TAITAI Pharmaceutical Industry Co., Ltd. obtained the approval from the Shenzhen Business and Administration Management Bureau and formally changed its name to Shenzhen Healthy Pharmaceutical Industry (Group) Co., Ltd.. In September 29, 2003, Shenzhen Healthy Pharmaceutical Industy (Group) Co., Ltd. changed its name again to Joincare Pharmaceutical Industry (Group) Co., Ltd. (ii) The aforesaid Tiancheng Industrial Co., Ltd. and Shenzhen Haibin Pharmaceutical Co., Ltd. are the subsidiary companies of Joincare Pharmaceutical Industry (Group) Co., Ltd., which directly and indirectly holds 100% equity interests in the two subsidiaries respectively. 5 (iii) On May 23, 2003, the Company published an announcement in designated newspapers for disclosure of information in respect of the acquisition of the Company’s 4,048,015 circulating B shares, representing 1.3227% of the total issue share capital of the Company, by Tiancheng Industrial Co., Ltd., whose entire equity interest is directly and indirectly owned by Joincare Pharmaceutical Industry (Group) Co., Ltd through the trading system of the Shenzhen Stock Exchange. (Announcement number: 2003-07); (iv) On August 21, 2003, the Company published an announcement in designated newspapers for disclosure of information in respect of the purchase of the Company’s 3,145,374 circulating B shares, representing 1.0278% of the total issue share capital of the Company, by Tiancheng Industrial Co., Ltd., whose entire equity interest is directly and indirectly owned by Joincare Pharmaceutical Industry (Group) Co., Ltd through the trading system of the Shenzhen Stock Exchange. (Announcement number: 2003-13); (v) On January 2, 2004, Joincare Pharmaceutical Industry (Group) Co., Ltd, Guangzhou Baokeli Trading Company and Zhuhai Lishi Investment Co.,Ltd. entered into the Share Transfer, Custody and Mortgage Agreement, and Joincare Pharmaceutical Industry (Group) Co., Ltd and Guangzhou Baokeli Trading Company entered into the Share Transfer and Custody Agreement as well as the Share Mortgage Agreement, pursuant to which Guangzhou Baokeli Trading Company agreed to directly transfer, place on custody and mortgage the 6,059,428 domestic legal person shares of the Company, representing 1.0278% of the Company’s total issued share capital, to Joincare Pharmaceutical Industry (Group) Co., Ltd. As at December 31, 2003, Joincare Pharmaceutical Industry (Group) Co., Ltd and its controlling subsidiaries together held and controlled 79,381,849 shares of the Company, representing 25.94% of the of the Company total issued share capital, and became the Company’s largest shareholder. (3) Particulars of the largest shareholder: Joincare Pharmaceutical Industry (Group) Co., Ltd Legal representative: Zhu Baoguo Date of establishment: December 18, 1992 Principal businesses and products: Manufacture and operation of medicinechina, essence, troche, capsule, granule and hormonal troche. At present, it is mainly engaged in manufacture and sale of healthcare products, such as Taitai Beauty Essence and Menocare Essence, etc. and western medicine products, such as Yiketie(Generic name dexamethasone acetate), Ampicillin sodium/sulbactam, sulbactam sodium/cefoperazone sodium and Ampicillin capsules, etc.. Its major products include Taitai Beauty Essence and Menocare Essence, Yiketie, Ampicillin sodium/sulbactam, sulbactam sodium/cefoperazone sodium and Ampicillin capsules, etc. Registered capital: RMB 609,930,000. Equity structure: Total share capital of 609,930,000 shares, including 452,430,000 legal person shares and 157,500,000 A shares in circulation. 6 (4) Details of Joincare Pharmaceutical Industry (Group) Co., Ltd’s controlling shareholder: Name of the controlling shareholder: Shenzhen Beiyeyuan Investment Co., Ltd. Legal representative: Liu Guangli Date of establishment: January 21, 1999 Principal businesses: investment and setting up industry, domestic trading and supply and marketing of materials Registered capital: RMB 80,000,000 Equity structure: Zhu Baoguo’s capital contribution: RMB72,000,000, constituting 90% of the total capital amount; Liu Guangxia’s capital contribution: RMB 8,000,000, constituting 10% of the total capital amount. Mr. Zhu Baoguo: 41, Chinese nationality, does not have the residentship in any other country or region and his main experience is as follows: he has been director of Henan Xinxiang Water Resin Institution, vice chairman of the Board and general manager of Henan Fenglong Fine Chemical Produce Co., Ltd., vice chairman of the Board of Directors and general manager of Shenzhen Amir Foods Co., Ltd., vice chairman of the Board of Directors and general manager of Shenzhen TAITAI Health Foods Co., Ltd., and chairman of the Board of Directors and general manager of Shenzhen TAITAI Pharmaceutical Industry Ltd.. He is currently Chairman of the Company and Joincare Pharmaceutical Industry (Group) Co., Ltd ’s Board of Directors. (5) Particulars of other legal person shareholder holding over 10% of the total number of shares China Everbright (Group) Company of China (“China Everbright”) entered into the Share Transfer, Custody and Mortgage Agreement with Xi’an Dongsheng Group Co., Ltd. (“Xi’an Dongsheng”) on April 12, 2002, pursuant to which China Everbright agreed to place the 38,917,518 domestic legal person shares held by it in the Company on custody to Xi’an Dongsheng. China Everbright was established on November 12, 1990. It is a State-owned conglomerate mainly engaged in the banking, securities and insurance sectors. Its legal representative is Wang Mingquan and its registered capital is RMB 20,000,000. Xi’an Dongsheng was established on March 10, 2000. It is mainly engaged in development, production and sale of scientific instrument; mechanical and electrical equipment, industrial raw materials and auxiliary materials, textile, construction materials, sales of metallic materials (excluding non-ferrous materials); automobile leasing, provision of training for expertise (excluding those required special national approvals), technological services, etc.. Its legal representative is Guo Jiaxue with a registered capital of RMB150,000,000. (6) Other Shareholders among the top ten shareholders of circulating shares with connected relationship As at December 31, 2003, other than Joincare Pharmaceutical Industry (Group) Co., Ltd, shareholders among the top ten shareholders of circulating shares with connected relationship 7 include Kexun Securities Investment Fund, E Fund Strategic Growth Securities Investment Fund and E Fund Stable Growth Securities Investment Fund The fund manager of the aforesaid three shareholders of the Company’s circulating A shares (together representing 1.52% of the Company’s total share capital) is E Fund Management Co.,Ltd. . V. PARTICULARS OF DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT AND EMPLOYEES 1. Details of Directors, Supervisors and Senior Management (1) Basic information (as at December 31, 2003) Number of Number of shares held at shares held at Reason for Name Title Gender Age Term of appointment the beginning the end of the the change of the year year Zhu Baoguo Chairman of Male June 2002 - the Board 41 June 2005 0 0 - Yi Zhenqiu Vice Chairman Male June 2002 - of the Board 59 June 2005 0 0 - Guo Jiaxue Vice Chairman Male June 2002- of the Board 37 June 2005 0 0 - Gu Yueyue Director Female June 2002 - 53 June 2005 0 0 - Xiao Siyang Director Male January 2003 – 41 0 0 June 2005 Wang Xiaobin Director Male June 2002 - 49 June 2005 0 0 - Zhang Yu Director Male June 2002 - 43 June 2005 0 0 - Wang Yisheng Director Male May 2003- 52 0 0 June 2005 An Ning Director Male May 2003- 31 0 0 June 2005 Dong Shaozhi Director Male May 2003- 62 0 0 June 2005 Hua Yizheng Independent Male May 2003- 58 0 0 Director June 2005 An Chengxin Independent Male June 2002- Director 64 June 2005 0 0 - Jiang Jian Independent Male June 2002- Director 33 June 2005 0 0 - Gao Dianhe Independent Male June 2002- Director 60 June 2005 0 0 - Qi Zhan Independent Male June 2002- Director 38 June 2005 0 0 - Yuan Guoliu Chairman of Male - June 2002 - the Supervisory 57 0 0 Committee June 2005 Wang Bo Supervisor Male June 2002 - 37 June 2005 0 0 - Cao Pingwei Supervisor Male January 2003- June 44 2005 0 0 - 8 Wang Congxin Supervisor Male June 2002- 43 June 2005 0 - Qiu Qingfeng Supervisor Male June 2002 - 32 June 2005 0 0 - Xiao Siyang President Male December 2002- 41 June 2005 0 0 - Dong Shaozhi Vice President Male June 2002 - 62 June 2005 0 0 - An Ning Vice President Male January 2003- 31 0 0 June 2005 Liu Shuqing Vice President Female June 2002 - 40 June 2005 0 0 - Wang Wuping Secretary of the Male June 2002 - company 37 June 2005 0 0 - Particulars of directors & supervisors holding position in shareholders company Whether receiving Name of shareholder (or Term of Name Position held allowance or not shareholding company) appointment (Yes / No) Zhu Baoguo Joincare Pharmaceutical Chairman of the Board From November Yes Industry (Group) Co., Ltd 1999 Wang Xiaobin Joincare Pharmaceutical General Manager From January Yes Industry (Group) Co., Ltd 2001 Gu Yueyue Joincare Pharmaceutical Deputy General From October Yes Industry (Group) Co., Ltd Manager 1997 Cao Pingwei Joincare Pharmaceutical Deputy General From January Yes Industry (Group) Co., Ltd Manager 1993 Qiu Qingfeng Joincare Pharmaceutical Secretary to the Board From November Industry (Group) Co., Ltd 1999 From March Guo Jiaxue Xi’an Dongsheng Group Co., Ltd. Chairman of the Board Yes 2000 (2) Details of annual remuneration The allowances for the Company’s directors (including independent directors) and supervisors for the year amounted to RMB1,200,000 (inclusive of tax, the same below), of which RMB 330,000 was the total amount of allowances for the five independent directors. The Company has a total of 20 directors and supervisors, of which 3 directors receive an annual allowance of RMB 90,000, the remaining 17 directors and supervisors receive an annual allowance in the band of RMB36000, to RMB 72000. The total amount of annual allowances received by the top three highest paid directors amounted to RMB 270,000 Allowances for directors and supervisors are payable on a monthly basis. The total annual remuneration received by the senior management of the Company (including president, vice president, and secretary to the Board, the same below) amounted to RMB2,245,000 (inclusive of tax, the same below). Among them, 3 persons received an annual remuneration in the band of RMB 150,000 to RMB 400,000, 2 persons received an annual remuneration of over RMB’000 400 respectively. The total amount of annual 9 remuneration of the top three highest paid senior management was RMB1,678,000. The Company implemented annual target salary system and individual performance merit system for senior management, pegging their annual remunerations to their personal performance and achievement of the Group’s operation targets and payable on a floating basis. (3) Details of resignation and appointment The 6th meeting of 4th Board of Directors was held on January 27, 2003, at which the resolution regarding the appointment of person-in-charge of finance of Livzon Group was considered and approved. An Ning was appointed as the Chief Accountant of the Company, and Zhao Rui resigned from the original position due to work deployment. The 1st extraordinary general meeting of Livzon Group in 2003 was held on January 27, 2003, at which the resolutions regarding the resignation of Mr. Xu Xiaoxian from the position of director of Livzon Group, the election of Mr. Xiao Siyang as director of Livzon Group and the resignation of Mr. An Ning from the position of supervisor of Livzon Group and the election of Mr. Cao Pingwei as supervisor of Livzon Group were considered and approved, and the resignation of Mr. Xu Xiaoxian from the position of the Company’s director due to health conditions and the election of Mr. Xiao Siyang as the Company’s director were agreed; and the resignation of Mr. An Ning from the position of supervisor of the Company due to work requirement and the election of Mr. Cao Pingwei as supervisor of the Company were agreed. The 7th meeting of the 4th Board of Directors of the Company was held on April 18, 2003, at which the resolution regarding changes of positions of certain senior management members and the organization structure was considered. The positions of certain senior management members of the Company have been changed as follows: Dong Shaozhi as the Company’s Technical Vice President (formerly as Deputy Executive Director), Liu Shuqing as the Company’s Investment Vice President (formerly as Assistant President); An Ning as the Company’s Financial Vice President (formerly as Chief Accountant). The 2002 annual general meeting of the Company was held on May 23, 2003, at which the election of additional directors of the Company was considered that Wang Yisheng, An Ning, Dong Shaozhi and Hua Yizheng were elected as members of 4th Board of Directors of the Company. Among them, Hua Yizheng was elected as Independent Director of the 4th Board of Directors of the Company. The number of members of the Company’s Board of Directors has increased from 11 to 15. 3. Details of Employees The Company has 2,898 employees (excluding investee and controlling companies) and has to bear the cost for 77 retired employees. Among the employees, 1,282 are involved in production, 1,057 are sales personnel, 58 are technicians, 90 are accounting personnel, 226 are administrative personnel, 185 are involved in logistics services. Among them, 1.73% of 10 the total number of employees has master or higher degrees, 21.33% of the total number of employees has a bachelor degree, 21.5% of the total number of employees has tertiary education and 55.45% of the total number of employees has education of lower than tertiary education. VI. CORPORATE GOVERNANCE STRUCTURE 1. Corporate Governance In strict compliance with the relevant requirements of laws and regulations of the Company Law, the Securities Law and the Guidance in Establishment of Independent Directors System for Listed Companies, the Company gradually improved various rules, regulations and corporate governance system, further refined the Company’s corporate governance structure and established a modern enterprise system to standardized its operations and strengthened information disclosure. 2. Discharge of Duties by Independent Directors In accordance with the requirements of the Guidance in Establishment of Independent Directors System for Listed Companies, the Company further standardized its legal person administration structure. The Company appointed an additional independent director in the 2002 annual general meeting. The Company now has 5 independent directors in its Board of Directors, which complied with the requirement of one-third of the total number of 15 directors. The Independent Directors were able to fully discharge their duties, focus on the operations and financial status of the Company and its legal person administration structure, and attended or appointed other Independent Directors to attend every meetings of the Board of Directors and the Shareholders’ General Meeting in 2003, and proactively participated in the decision making of the Company and learned about its status in the form of seminars. They had rendered their independent opinions on the changes of directors, senior management, connected transactions, etc. and fully implemented their functions as Independent Directors, and safeguarded the interest of the Company and the legal interests of the medium and minority shareholders as a whole. 3. Segregation of the Company with the Largest Shareholder in terms of Business, Personnel, Assets, Organization and Finance The Company is entirely independent of its largest shareholder in terms of business, personnel, assets, organization and finance. With respect to business, the operation of the Company is entirely independent, and has its own production, purchase and sales systems. The purchase, production and sales the Company are conducted through its own production, purchase and sales systems; With respect to personnel, the labour, personnel and salary management of the Company are 11 segregated from those of the major shareholders; With respect to assets, there is a clear delineation in property title between the Company and the controlling shareholder. The Company has a complete system in production, supply and sales respectively; With respect to organization, the Company has its own independent and complete institutional establishments, which are segregated from those of the major shareholders; With respect to finance, the Company has its independent financial department and established an independent financial auditing system, and a standardized and independent accounting system as well as a system for management of finance of its subsidiaries. 4. Establishment and Implementation of Evaluation and Incentive Encouragement Mechanism for Senior Management In 2003, the Company continued to implement annual target salary system for the senior management, pegging their annual salary to their personal performance and achievement of the Comapany’s operation targets and payable on a floating basis. VII. DETAILS OF SHAREHOLDERS’ GENERAL MEETING 1. Holding of Shareholders’ General Meetings During the reporting period, the Company convened two shareholders’ general meetings. (1) The notice of an extraordinary general meeting of the Company (“EGM”) in 2003 was published in the designated newspapers for disclosure of information on December 28, 2002 and the meeting was convened at the International Meeting Room of Zhuhai Hotel on January 27, 2003. 5 persons attended the meeting, representing 110,244,892 shares or 36.02% of the total share capital of the Company (of which, 26,254,595 shares were B shares, representing 8.57% of the total share capital of the Company). A lawyer from Guangdong Desai Law Firm witnessed the meeting. The following resolutions were considered and approved at the meeting in the form of written resolutions: 1. The resolution regarding the resignation of Mr. Xu Xiaoxian from the position of director of Livzon Group was considered and approved 2. The resolution regarding the election of Mr. Xiao Siyang from the position of director of Livzon Group was considered and approved 3. The resolution regarding the resignation of Mr. An Ning from the position of supervisor of Livzon Group was considered and approved 4. The resolution regarding the election of Mr. Cao Pingwei from the position of supervisor of Livzon Group was considered and approved 5. The resolution regarding allowances for directors of Livzon Group was considered and approved 12 6. The resolution regarding allowances for supervisors of Livzon Group was considered and approved The announcement resolutions passed at the EGM was published in Shanghai Securities News, Securities Times, Da Gong Pao (Hong Kong) on January 28, 2003. (2) The notice of the 2002 annual general meeting of the Company (“AGM”) was published in the designated newspapers for disclosure of information on April 22, 2003, and the meeting was convened at the International Meeting Room of Zhuhai Hotel on May 23, 2003. 27 persons attended the meeting, representing 96,988,705 shares or 31.69% of the total share capital of the Company (of which, 28,942,210 shares were B shares, representing 9.46% of the total share capital of the Company). A lawyer from Guangdong Desai Law Firm witnessed the meeting. The following resolutions were considered and approved at the meeting in the form of written resolutions: 1. The 2002 Work Report of the Board of Directors of Livzon Group was considered and approved 2. The 2002 Work Report of the Supervisory Committee of Livzon Group was considered and approved 3. The 2002 Financial Report of Livzon Group was considered and approved 4. The 2002 Profit Distribution Proposal of Livzon Group was considered and approved 5. The resolution regarding the appointment of domestic and international firms of accountants of Livzon Group for 2003 was considered and approved 6. The resolution regarding amendments to the Articles of Association of Livzon Group was considered and approved 7. The resolution regarding election of new director of Livzon Group was considered and approved The announcement of the resolutions passed at the AGM was published in Shanghai Securities News, Securities Times, Da Gong Pao (Hong Kong) on May 24, 2003. 2. Details of Election and Change of the Company’s Directors and Supervisors The 1st extraordinary general meeting of the Company in 2003 was held on January 27, 2003, at which the resignation of Xu Xiaoxian from the position of director of the Company, and the election of Xiao Siyang as director of Livzon Group were agreed; and the resignation of An Ning from the position of supervisor of the Company, and the election of Cao Pingwei as supervisor of the Company were agreed. The 2002 annual general meeting of the Company was held on May 23, 2003, at which Wang Yisheng, An Ning, Dong Shaozhi and Hua Yizheng were elected as members of the 4th Board of Directors of the Company. Among them, Hua Yizheng was elected as independent director of the 4th Board of Directors. The number of directors of the Company has been increased from 11 to 15, of whom 5 are independent directors. 13 VIII. REPORT OF DIRECTORS 1. Discussions and analysis on business operation(according to PRC Accounting Rules) The year of 2003 is critical for the Company with the material changes in the shareholding structure of the Company. The Company undergone rapid growth in various aspects by capitalizing the opportunities and challenges brought forth by “atypical pneumonia”, overcoming the adverse effects brought about by falling prices of raw medicine, strengthening planning management, giving prominence to major brands, regulating structure and operation and increasing strength of investment. Revenues from principal operations amounted to RMB1.812 billion in 2003, representing a growth of 13.16%, whereas net profit amounted to RMB 92,200,600representing a growth of 46.96%. Earning per share amounted to RMB0.3, while the net cash flow per share from operating activities amounted to RMB0.98. Return on net asset amounted to 9.09%. The revenue of the sales of major products such as series of Livzon Deles, anti-cold granule, Livzon Changle increased 25.62%, 50.53% and 30.19% respectively compared with 2002. Meanwhile, as market competition intensified, which results in strengthened market promotion needed, together with the growth of operation expenditure is not yet under control, as well as the price of semi-integrated raw medicine lack momentum to rebound, the Company is still facing pressure in its operation. 2. Operation of the Company (1) Scope of Principal Business and the Conditions of Operations (a) The Company is principally engaged in the production, operations and sales and technological research of medicines. Its principal products include Livzon Dele(generic name Colloidal Bismuth Citrate Granule/Cap./Tab.), Livzon Changle(generic name Bifidobiogen Cap.), Livzon Weisanlian(generic name Combinative Packag of Colloidal Bismuth Citrate Tab.Clarithromycin Tab.and Tinidazole Tab.), Livzon Wei(generic name Valaciclovir Hydrochloride Tab.), Livzon Feng(generic name Famciclovir), Livzon Saile (generic name Cerebroprotein Hydrolysate for Injection) and Shengqi Fuzheng for injection. Its products with about 100 brands cover the categories of chemical medicines, biochemical medicines, chemical synthetic materials, antibiotics, microzoology preparation, medicinechina and testing diagnosis reagent . (b) Revenues from the Company's principal operations by geographical areas: including 100% equity interests companies and practically controlled companies Revenues from Revenues from Change from the principal principal operations corresponding Areas operations in 2003 in 2002 period of last year (RMB'000) (RMB'000) (%) Northeastern region 106,761.5 97,465.1 9.54 Northern region 284,331.6 268,382.3 5.94 Central region 176,839.3 137,016.2 29.06 Eastern region 312,534.5 248,606.7 25.71 14 Southern region 489,212.2 412,461.2 18.61 Southwestern region 247,317.0 196,342.8 25.96 Northwestern region 82,551.4 53,676.5 53.80 Export 46,880.0 - - (c) Revenues from the Company’s principal operations by products Revenue from Revenue from Change from the principal principal corresponding Products operations in 2003 operations in period of last year (RMB’000) 2002 (RMB’000) (%) Anti-cold granule 157,080 104,350 50.53 Livzon Dele series 129,050 102,730 25.62 Ceftriaxone Sodium 108,730 107,540 1.11 D-Cal 80,240 67,770 18.40 Ampicillin 73,270 81,190 -9.75 6-APA 67,580 74,300 -9.04 Sulbactam Sodium/Cefoperazone 50,670 14,050 260.64 Sodium for Injection Valaciclovir 45,200 44,790 0.92 Hydrochloride Tab. (2) Operation and results of the major controlling companies and investee companies 1. Zhuhai Free Trade Zone Integrated Pharmacy Manufacturing Company Limited is mainly engaged in the production and operation of chemical crude medicine with a registered capital of RMB102.28 million and its main products are Amoxicillin, Ampicillin and Ceftriazone etc. The total assets of this factory amounted to RMB193.05 million as of December. 31, 2003, and net profit realized for the whole year of 2003 is RMB13.93 million. 2. Libao Bio-chemical Pharmaceutical Co., Ltd. is mainly engaged in the production and operation of bio-chemical medicine with a registered capital of RMB50 million and its main products are Livzon Saile and Urine Induced Enzyme etc. Its total assets amounted to RMB36.10 million as of December. 31, 2003 and the net profit realized in the whole year of 2002 amounted to RMB36.1 million, and net profit realized for the whole year of 2003 is RMB15.39 million. 3.Sichuan Everbright Pharmaceutical Co., Ltd. is mainly engaged in the production and sales of patent Chinese medicine and development of new medicine, with a registered capital of RMB66 million and its main products are Anti-Cold Granule and Jiuwei Yinao Granule etc.. The total assets of this company amounted to RMB146.28 million as of December 31, 2003, and the net profit realized for the whole year of 2003 amounted to RMB22.45 million. 4.Livzon Group Limin Pharmaceutical Factory is mainly engaged in the production and operation of Chinese medical preparation and pharmaceutical crude materials etc., with a registered capital of RMB53.44 million and its main products are Shenqi Fuzheng for 15 Injection and Xueshuantong Injection etc.. The total assets of this company amounted to RMB89.09 million as of December 31, 2003, and the net profit realized for the whole year of 2003 amounted to RMB10.36 million. 5.Zhuhai Special Economic Zone Li Kang Medicine Company Limited is mainly engaged in the production and operation of chemical antibiotic preparation, with a registered capital of RMB38.02 million and its main products are Cefoperazone Sodium for Injection and Sulbactam Sodium/Cefoperazone Sodium for .Injection The total assets of this company amounted to RMB45.67 million as of December 31, 2002, and the net profit realized for the whole year of 2003 amounted to RMB8.94 million. 6. Guangdong New Bei Jian Pharmacy Manufacturing Company Limited is mainly engaged in the self-produced products and the business of production and export of relevant technology, with a registered capital of RMB78.63 million and its main products are Livzon Qile and Livzon Ruixin etc.. The total assets of this company amounted to RMB187.55 million as of December 31, 2003 and the net profit realized for the whole year of 2003 was RMB16.07 million. (3) Sales customers and suppliers During the reporting period, the total amount of sales of the top five customers was RMB154.3522 million, representing 8.52% of the total annual sales of the Company, and the total amount of purchase of the top five suppliers was RMB210.2446 million, representing 29.44% of the total annual purchase of the Company. 3. Investment during reporting period (1) Use of proceeds During the reporting period, the Company made no attempt to raise fund from the security market. (2) Investment During the reporting period, the net outflow of cash generated by investment activities of the Company amounted to RMB268 million, representing an increase of RMB160 million or 148% compared with the RMB108 million in 2002. The major investment activities are as follows: 1. The 1st and 5th meeting of the Investment Decision Committee has considered and approved that the Company made investment in project of Clavulanic acid in its subsidiary Guangdong New Bei Jiang Pharmacy Manufacturing Company Limited, with total investment amounted to RMB56.30 million. The Company resolved unanimously to realize the increase in investment and expansion of capital in Guangdong New Bei Jiang Pharmacy Manufacturing Company Limited by way of debt-transfer. For the coming two years, disregarding the 16 changes of the net asset value of New Bei Jiang, the Company shall have the right to increase capital of New Bei Jiang at any time for a consideration of RMB1 per share. At present, in order to satisfy the needs of capital for the investment of the project of Clavulanic Acid for New Bei Jiang, the Company has granted a loan of RMB56.30 million to New Bei Jiang, and New Bei Jiang will make payment of interest to the Company in accordance with relevant bank loan interest rate in the corresponding period. The said debt will be changed to equity investment in New Bei Jiang upon the exercise of the aforementioned rights by the Company. 2. The 2nd meeting of the Investment Decision has considered and approved the resolution in relation to the assignment of shareholdings held by Gui Hua Hui in Li Bao Company to Livzon Group. The Company was assigned with the shareholdings of 11.506 million shares held by Zhuhai Gui Hua Staff Association in Livzon Group Li Bao Bio-chemical Pharmacy Company Limited for a consideration of RMB2.1 per share. Upon the completion of the share transfer, Livzon Group Li Bao Bio-chemical Pharmacy Company Limited becomes a 100% directly and indirectly wholly owned equity interest of the Company. The formalities in respect of changes of the industrial and commercial registration have been completed. 3. The 3rd meeting of the Company’s Investment Decision Committee has considered and approved the resolution in relation to the acquisition of the shareholdings held by Shanghai Jin Qiao Company in Shanghai Livzon Compan. Livzon Group Livzon Pharmaceutical Manufacturing Factory acquired the shareholdings held by Shanghai Jin Qiao Export Processing Zone Development Shareholding Company Limited in Shanghai Livzon Pharmaceutical Manufacturing Company Limited for a consideration of RMB8.8 million. In the meantime, after the increase of capital of RMB42.3289 million in Shanghai Livzon Pharmaceutical Manufacturing Company Limited, the registered capital of Shanghai Livzon amounted to RMB87.3289 million. Upon completion of the share transfer, Shanghai Livzon Pharmaceutical Manufacturing Company Limited becomes a directly and indirectly 100% wholly owned equity interest of the Company. At present, the formalities in respect of changes of the industrial and commercial registration have been completed. 4. The 5th meeting of the Investment Decision Committee has considered and approved: (1) The resolution in relation to the establishment of Zhuhai Freetrade Zone Li Da Pharmacy Company Limited, of which the Zhuhai Free Trade Zone Li Da Pharmacy Company Limited was newly established, with a registered capital of RMB26 million. The shareholders are: Livzon (Hong Kong) Company Limited, which invested RMB13.0104 million, representing shareholdings of 50.04%, An Tou Development Company Limited, which invested RMB10.3896 million, representing shareholdings of 39.96%, Zhu Hai Kang Jian Investment Company Limited, which invested RMB2.6 million, representing shareholdings of 10%. The formalities in respect of industrial and commercial registration have been completed and the land and building construction is under progress. (2) With regard to the resolution in relation to the acquisition of share equity of Sichuan 17 Everbright Plantation Chemical Industry Company Limited by Sichuan Everbright Pharmacy Company Limited, it is consented that Zhu Hai Li Shi Investment Company and 60% of share equity held by the staff representative Fu Zi Hua of Sichuan Everbright Plantation Chemical Industry Company Limited be acquired by Sichuan Everbright Pharmacy Company Limited for a consideration of RMB3.8 million. Upon completion of the share transfer, Sichuan Everbright Plantation Chemical Industry will be liquidated and its status of legal entity will be cancelled. The formalities in respect of changes of the industrial and commercial registration have been completed. 5. The 7th meeting of The Investment Decision Committee has considered and approved the resolution in relation to acquisition of equity interest of Li Kang Medicine Company Limited. It is consented that Livzon Group is assigned with a total of 15% equity interest of Li Kang Company held by other shareholders of Li Kang Medicine Company Limited, such as China Medicine Group Shanghai Company, China Medicine Industry Company and China Medicine Group Company for a consideration of RMB10.005 million, and that the wholly owned subsidiary of the Group Hong Kong An Tou Development Company Limited is assigned with a total of 13% equity interest held by the other shareholders of Li Kang Medicine Company Limited, namely Hoi Shing Enterprises Limited (Virgin Islands) and Century Partner Group (Virgin Islands) for a consideration of RMB8.671 million. Upon completion of the share transfer, the Company will directly hold 74% equity interest in Li Kang Medicine Company Limited, whereas An Tou Development Company Limited will directly hold 26% equity interest in Li Kang Medicine Company Limited. Therefore, Li Kang Medicine Company will become a directly and indirectly wholly owned subsidiary of the Company. The formalities in respect of changes of the commercial and industrial registration mentioned above are under progress. 6. The 8th and 10th meetings of the Investment Decision Committee has respectively considered and approved the resolution in relation to the acquisition of 20.01% of the state-owned shares of Guangdong New Bei Jiang Pharmacy Manufacturing Holding Company Limited and the resolution in relation to the acquisition of the equity interest held by Tsing Yuen Construction Finance Company in Guangdong New Bei Jiang Pharmacy Manufacturing Holding Company Limited. The acquisition of 15.7342 million shares held by Tsing Yuen Municipality Finance Department and Tsing Yuen Medicine Group Company Limited in Guangdong New Bei Jiang Pharmacy Manufacturing Holding Company Limited, representing 20.01 % of the state-owned shares, for a consideration of RMB13.1538 million, and the acquisition of 5 million shares held by Tsing Yuen Construction Finance Company in Guangdong New Bei Jiang Pharmacy Manufacturing Holding Company Limited, representing shareholding of 6.359%, for a consideration of RMB4.18 million are consented. Upon acquisition of the above shares, the Company holds directly 86.50% of the shares of Guangdong New Bei Jiang Pharmacy Manufacturing Holding Company Limited. The formalities in respect of the above shareholding transfer and changes of the industrial and 18 commercial registration have been completed. 7. The 9th meeting of The Investment Decision Committee has considered and approved the resolution in relation to the acquisition of the shareholdings and liquidation of Li Zhu Mei Hao Technology Investment Company Limited, by which Li Zhu Group Li Zhu Pharmacy Manufacturing Factory is assigned with the 20% shareholdings held by Beijing Mei Hao Oriental Investment Consulting Company Limited in Li Zhu Mei Hao Technology Investment Company Limited for a consideration of RMB6 million. Upon completion of the share transfer, the liquidation of such company will be carried out in due course. The formalities in respect of the industrial and commercial registration have been completed and Li Zhu Mei Hao Technology Investment Company Limited becomes a directly and indirectly 100% wholly owned equity interest of the Company. The liquidation process is being carried out. 8. The 11th meeting of the 4th Board of Directors of the Company has considered and approved the resolution in relation to the acquisition of the corporate bonds of China Network Communication Group Company in 2003, by which the fixed rate corporate bonds of China Network Communication Group Company in 2003 valued at RMB140,000,000 is consented, with a term of 10 years and 4.6% of par value per annum. The subscription of these bonds had been completed by the end of 2003. 4. Analysis on financial position As at the end of the reporting period, total asset increased by RMB272 million to RMB2,129 million from RMB1,857 million at the beginning of the year. The increase is attributable to the increased sales revenue and rapid turnover of trade receivables. As at the end of the reporting period, shareholders’ equity increased by RMB64 million to RMB1,014 million from RMB950 million at the beginning of the year, representing a growth of 6.7%, which is attributable to the increased net profit for the reporting period. Cash and cash equivalents for the reporting period increased by RMB67 million to RMB129 million from RMB62 million in 2002.The increase is attributable to the increased net cash flow in the operating activities. Sales revenue for the reporting period increased by RMB211 million to RMB1,812 million from RMB1,601 million of last year, representing a growth of 13.16%. The increase is attributable to the increased sales of the Company and its subsidiaries, including Sichuan Everbright Pharmaceutical Co., Ltd., Hubei Keyi Pharmaceutical Co., Ltd., Guangdong New Bei Jiang Pharmacy Manufacturing Company Limited, Libao Bio-chemical Pharmaceutical Co., Ltd.. Net profit for the reporting period increased by RMB30.26 million to RMB 92.2 million from RMB61.94 million of last year, representing a growth of 48.85%. The increase is attributable to the increased sales revenue. 5. Business Plan of Next Year 19 In 2004, the Company will focus on the following aspects: 1. To comprehensively implement its planned management system, utilise resources reasonably, strengthen marketing plan and improve promotion of its key products including Livzon Deles, Livzon Changle, Anti-Cold Granule, Dages, Shenqi Fuzheng for Injection, Compound Cinnarizine Cap. and Prostant Suppository, aiming for a better product structure, fast-growing sales revenue as well as effective control of operating and management costs. 2. To improve synergy of research and development, project application, market strategy and planning as well as promotion to facilitate introduction of new products; introduce interactive communication of senior executives in the front end of marketing; strengthen the bridge between the Company’s operating decisions and market demands, marketing policies and resource allocation; analyse the rationality, efficiency and performance of use of cost, so as to enhance the utilization of the Group’s resources. 3. To build the Company’s manpower pool by introducing profound international experience in human resources, selection and training systems, and adopting strategies integrating efforts of the Company and the market in promotion and recruitment. To enhance employees’ fidelity and trust in the Company . 4. The Company will take opportunities arising from government stimulations for expansion of leading enterprises. In addition to normal operation, the Company will secure more funds, attract and build alliances with enterprises complementary to the Company’s industry and having quality assets. 6. Daily work of the Board During the reporting period, there are a total of 6 meetings (the 6th to the 11th session) held in the 4th Board of the Company and 9 meetings (the 2nd to 10th session) held in Investment Decision Committee. On January 27, 2003, the 6th meeting of the 4th Board was held at Zhuhai Hotel. At the meeting, certain resolutions were considered and approved, including Resolution for Amendment to the Work Rules of President of Livzon Group, Resolution for Appointment of Financial Officer of Livzon Group, Resolution for Approval of the Board’s Fees of Livzon Group, Resolution for Change of Financial Facilities of Livzon Group, Proposal for Cancellation of Livzon Bio-Pharmaceutical Trading Co., Ltd., Resolution for Liquidation of Zhuhai Li Ao Wei Sheng Tai Products Co., Ltd., and Resolution for the Establishment of Branches in 10 Cities including Tangshan and Ningbo. On April 18, 2003, the 7th meeting of the 4th Board was held in Yinhu Tour Centre, Yinhu 20 Road, Shenzhen. At the meeting, certain reports and proposals were considered and approved, including President Report of Livzon Group for 2003, Directors’ Report of Livzon Group for 2002, Proposal of Profit distribution of Livzon Group for 2003, Annual Report of Livzon Group for 2002, First Quarterly Report of Livzon Group for 2003, Resolution of Appointment of Overseas Accountant for 2003, Proposal for Change of Certain Members’ Titles and Organisation Structure of Livzon Group, Resolution of Amendment of Articles of Association of Livzon Group, Resolution of Appointment of Additional Directors of Livzon Group, Resolution of Livzon Group’s Connected Transactions with Shenzhen Haibin Pharmaceutical Co., Ltd., and Resolution of Annual General Meeting of Livzon Group for 2002. On July 28, 2003, the 8th meeting of the 4th Board was convened by way of facsimile. At the meeting, certain proposals were considered and approved, including Proposal for Livzon Group’s Connected Transactions with Subsidiaries of Shenzhen Taita Pharmaceutical Co., Ltd, Proposal for Liquidation of Winded-up Companies of Livzon Group (including Livzon Advertising Co., Ltd.), Proposal for Additional Registered Capital of Livzon (Hong Kong), and Proposal for Change of Personnel in Guangzhou Branch of Livzon Group. On August 25, 2003, the 9th meeting of the 4th Board was held in Shenzhen Kapok Hotel. At the meeting, certain reports and proposals were considered and approved, including President Report for the First Half Year of 2003, Financial Report for the First Half Year of 2003, Interim Report of Livzon Group for 2003, and Proposal for Refit Budget of Headquarter Building of Livzon Group. On October 23, 2003, the 10th meeting of the 4th Board was convened by way of telecommunication. At the meeting, the 3rd Quarterly Report of Livzon Group for 2003 proposals were considered and approved. On December 6, 2003, the 11th meeting of the 4th Board was convened by way of telecommunication. At the meeting, certain proposals were considered and approved, including Proposal of Equity Transferral in whole of Hubei Liyi Pharmaceutical Tech Co., Ltd. and Hubei Keyi Medicine Inc., Proposal for Appointment of Overseas Accountant for 2003, and Proposal for Subscription of 2003 Corporate Debenture of China Netcom Group. On January 20, 2003, the 2nd meeting of the Investment Decision Committee was convened by way of telecommunication. At the meeting, certain proposals were considered and approved, including Proposal for Livzon Group’s Acceptance of Equity in Libo Company held by Guihua Club, and Proposal for Disposal of Certain Residence of Livzon Group. On February 10, 2003, the 3rd meeting of the Investment Decision Committee was convened by way of telecommunication. At the meeting, Proposal for Equity Acquisition in Shanghai Livzon held by Shanghai Jinqiao was considered and approved. 21 On March 10, 2003, the 4th meeting of the Investment Decision Committee was convened by way of telecommunication. At the meeting, Proposal for Disposal of Equity in Dasheng Company was considered and approved. On April 30, 2003, the 5th meeting of the Investment Decision Committee was convened by way of telecommunication. At the meeting, certain proposals were considered and approved, including Proposal for Incorporation of Zhuhai Lida Pharmaceutical Co., Ltd., Proposal for Acquisition of Equity in Sichuan Everbright phytochemistry Co. by Sichuan Everbright Pharmaceutical Co., Proposal for Adjustment to Investment Plan of Clavulanate Project. On May 22, 2003, the 6th meeting of the Investment Decision Committee was convened by way of telecommunication. At the meeting, certain proposal were considered and approved, including Proposal for Guaranty Granted by Livzon Group for Financial Facilities of Guangdong New Bei Jiang Pharmaceutical Co., Ltd. and Proposal for Cessation of Project Undertaken by Apotex Bio-pharmaceutical Co., Ltd. On May 27, 2003, the 7th meeting of the Investment Decision Committee was convened by way of telecommunication. At the meeting, Proposal for Acquisition of Equity in Likang Pharmaceutical Co., Ltd was considered and approved. On July 8, 2003, the 8th meeting of the Investment Decision Committee was convened by way of telecommunication. At the meeting, certain proposal were considered and approved, including Proposal for Authorisation of Management of Livzon Group and Livzon (Hong Kong) to conduct Capital Operation, Proposal for Disposal of Unused Properties of Livzon Group, and Proposal for Acquisition of 20.01% of State-owned shares in Guangdong New Bei Jiang Pharmaceutical Co., Ltd. On August 20, 2003, the 9th meeting of the Investment Decision Committee was convened by way of telecommunication. At the meeting, Proposal for Equity Acquisition and Liquidation of Livzon Meihao Technology Investment Co., Ltd was considered and approved. On December 10, 2003, the 10th meeting of the Investment Decision Committee was convened by way of telecommunication. At the meeting, Proposal for Acquisition of Equity in Guangdong New Bei Jiang Pharmaceutical Co. held by Qingyuan Construction Financial Company was considered and approved. Investment Decision Committee of Livzon Group is established under authorisation of the Board, which is responsible for making investment decisions in accordance with Approval Procedures of the Board of Livzon Group and Work Rules of President of Livzon Group. Investment Decision Committee is entitled to consider and approve capital operations 22 including investments, acquisition or merges, asset disposal and guaranties to be granted to outside companies with an amount up to 10% (inclusive) of the Company’s latest audited net assets. Investment Decision Committee reports to the Board and is subject to its supervision. All the decisions are filed for the Board. The aforesaid meetings of Investment Decision Committee in 2003 have been reported to the Board and filed. 7. Directors’ Implementation of Resolutions of General Meetings In strict compliance with Articles of Association and the relevant PRC’s laws and regulations, the Board have implemented with due diligence the resolutions which were considered and approved at the general meetings in the reporting period. On May 23, 2003, a proposal of profit distribution for 2002 was considered and approved in the Company’s 2002 General Meeting, pursuant to which RMB1.0 of cash (before tax) for every 10 shares will be distributed to all shareholders on a basis of the Company’s 306,035,482 shares in total. Neither bonus shares nor transfer of any public reserve to the capital is recommended for 2003. As stated in the announcement of the Company dated June 19, 2003, since the Company will deduct individual income tax for the State based on a tax rate of 20%, the actual cash dividend with respect to individual holders and trust fund of A public shares is RMB0.80 for every 10 shares. For holders of B shares, institutional holders of A shares and holders of non-listed domestic legal person shares (including trustees of trust shares), the actual cash dividend is RMB1.0 for every 10 shares, pursuant to which cash dividend of RMB30,603,548.2 (before tax) in aggregation will be distributed. The date of record (for B share, the last trading day) is June 25, 2003, and the ex dividend date is June 26, 2003. 8. Directors’ Proposal of Profit Distribution for the Reporting Period Pursuant to the PRC’s relevant accounting rules and based on the parent company’s net profit of RMB99,332,589.96 for 2003 as audited by Reanda Certified Public Accountants (“Reanda”), the Company intends to respectively appropriate 10% of the net profit (RMB9,933,259.00) as statutory public reserve and statutory welfare fund. Subsidiaries intend to appropriate profits of RMB18,310,448.05 in aggregation into their statutory public reserves, statutory welfare funds and corporate development funds. A total of RMB38,176,966.05 of profits will be appropriated into surplus reserves. Net profit for 2003 as audited by the domestic auditor amounted to RMB92,200,608.49, pursuant to which profit attributable to shareholders for 2003, after including the said appropriation of surplus reserve of RMB38,176,966.05 and based on the retained earnings of RMB16,802,129.97 at the beginning of the year, amounted to RMB70,825,772.41. Net profit for 2003 as audited by the overseas auditor amounted to RMB93,923,000, pursuant to which 23 profit attributable to shareholders for 2003, after including appropriation of surplus reserve of RM38,335,000 (including an increase of RMB159,000 as adjusted under international accounting standards) and based on the retained earnings of RMB34,602,000 at the beginning of the year and after deducting RMB30,604,000 of dividend for 2002, amounted to RMB59,586,000. In accordance with the principle of a lower amount of profit attributable to shareholders, profit attributable to shareholders of RMB59,586,000 as audited by the overseas auditor is adopted as a basis. As a result, the Company will distribute cash RMB1.0 (before tax) for every 10 shares, pursuant to which profit to be distributed amounts to RMB30,603,548.2. The balance of retained earnings of RMB40,222,224.21 as audited by the domestic auditor (retained earnings as audited by the overseas auditor: RMB28,982,000) will be carried forward to the next year. Neither bonus shares nor transfer of any public reserve to capital is recommended for 2003. 9. Others 1. Ta Kung Pao (Chinese) and The Standard (English) were selected for information to be disclosed overseas instead of the previous Chinese and English versions of Ta Kung Pao. 2. The Company have duly performed internal audit under the Notice of Certain Issues in Capital Transactions between Listed Companies and Associates thereof and Guaranties granted to Outside Companies. No capital is occupied by controlling shareholders or other associates, nor breach of laws in guaranties is found. IX. REPORT OF THE SUPERVISORY COMMITTEE 1. Work of the Supervisory Committee 1. On Jan 27, 2003, the 4th meeting of the 4th Supervisory Committee was held in Zhuhai Hotel. At the meeting, Proposal for Allowance to Supervisors of Livzon Group was considered and approved. 2. On April 18, 2003, the 5th meeting of the 4th Supervisory Committee was held in Yinhun Tour Centre, Yinhu Road, Shenzhen. At the meeting, certain reports were considered and approved, including Interim Report for 2002 of Livzon Group, the 1st Quarterly Report for 2003 of Livzon Group and Report of the Supervisory Committee for 2002. 2. Independent Opinions of the Supervisory Committee 24 1. The Company’s operations under relevant laws Pursuant to the power given by Company Law, Securities Law and Articles of Association, the Supervisory Committee has performed inspection on the Company’s operations under the relevant laws. The inspection demonstrated that the Company has established an internal control system for provision of impairment of assets and dealing with losses, and rules of management, with which the procedures for decision-making are legally effective. The directors and senior executives have performed their duties with due diligence in compliance with relevant laws. No breach of laws, regulations or Articles of Association or any damage to the interest of the Company and its shareholders is found. 2. The Supervisory Committee has performed due supervision and inspection on the Company’s financial positions and results. No qualification were made in the audit reports with respect to the Company’s financial report for 2003 as audited by Reanda and BDO International respectively under domestic and overseas accounting standards. The financial report reflected the Company’s financial positions and results on a true, fair and accurate basis. 3. No fund have been raised by the Company from the security market for the past three years. 4. Prices on asset acquisition and disposal of the Company are decided on market, arm’s length, fair, open and unbiased basis. No insider transaction or damage to certain shareholders’ interest or any outflow of the Company’s assets is found. 5. Connected transactions are entered into by the Company on arm’s length bases and with reasonable considerations, and independent directors have expressed their independent opinions thereof. Connected directors have waived their rights on poll. No damage to the interest of the Company and its shareholders is found in relation to the connected transactions. X. SIGNIFICANT EVENTS 1. The Company was not involved in any litigation and arbitration of material importance during the year. 2. Other Material Events 1. At the 6th meeting of the 4th Board, Resolution for Liquidation of Li Ao micro zoology Products Co., Ltd. was considered and approved to effect liquidation of the company, the formalities in respect of the cancellation of industrial and commercial registration have been 25 completed. 2. At the 8th meeting of the 4th Board, Resolution for Liquidation of Winded-up Companies of Livzon Group (including Livzon Advertising Co., Ltd.) was considered and approved. The Company’s management was authorised by the Board to effect liquidation of certain winded-up subsidiaries, including Livzon (Group) Livzon Advertising Co., Ltd., Livzon (Group) Livzon Financial Consultant Co., Ltd., Livzon (Group) Livzon Healthcare Product Factory, Zhuhai Meidaxin Technology Development Co., Ltd., Zhuhai Livzon Hospital Electronic Equipment (Factory) Co., Ltd. and Zhuhai Livzon-bam Biomaterials Co., Ltd., among which the formalities in respect of the cancellation of industrial and commercial registration of Livzon (Group) Livzon Financial Consultant Co., Ltd., and Livzon (Group) Livzon Healthcare Product Factory have been completed and the remaining companies are in progress of liquidation. 3. At the 11th meeting of the 4th Board, Resolution of Equity Transferral in whole of Hubei Liyi Pharmaceutical Tech Co., Ltd. and Hubei Keyi Medicine Inc. was considered and approved. Pursuant to the resolution, the Company intends to transfer 15.75% equity in Hubei Liyi Pharmaceutical Tech Co., Ltd. and 59% equity in Hubei Keyi Medicine Inc. held by the Company to Wuhan Xinyi Investment Co., Ltd, with a consideration of RMB18,585,000 and RMB61,415,000 respectively. The relevant registration procedures are in progress. Based on the book value of the said long-term investments on equity as audited on June 30, 2003, the Company will realise an investment earning of RMB30,803,519.3 in total for such transactions. (The actual amount of investment earning will be calculated on the basis of the Company’s long-term investments on equity upon completion of such equity transfer. According to the operations of Liyi and Keyi in recent years, annual combined sales revenue and combined net profits of the Company will respectively drop by approximately RMB100,000,000 and RMB3,000,000 following the equity transfer. 4. At the 1st meeting of the Investment Decision Committee, Proposal for Increase of Shares Capital of Limin Pharmaceutical Factory was considered and approved. Pursuant to the proposal, Shares Capital of Limin Pharmaceutical Factory will be increased by RMB29,000,000. Following the shares capital increase, the Company will directly and indirectly held a total of 86.28% of equity in Livzon Group’s Limin Pharmaceutical Factory, registered capital of which will accordingly increase to RMB53,436,800 from RMB24,436,800. The relevant registration procedures have been completed. 5. At the 5th meeting of the 4th Board and the 6th meeting of the Investment Decision Committee, Resolution for Cessation of Project Undertaken by Apotex Bio-pharmaceutical Co., Ltd. was considered and approved. Due to a number of variable factors, the joint-venture of Apotex Bio-pharmaceutical Co., Ltd. co-invested by Guangdong New Bei Jiang Pharmaceutical Co. and Canada was terminated. Currently, business related to the project is still being undertaken by Guangdong New Bei Jiang Pharmaceutical Co. 26 3. Connected Transactions (1). Sales of Products (according to PRC Accounting Rules) (Unit: RMB) Connected Person 2003 2002 Guangdong Lanbao Pharmaceutical Co., Ltd. 35,632,653.74 1,199,967.72 Shenzhen Haibin Pharmaceutical Co., Ltd. 5,306,020.00 1,051,000.00 Livzon(Group) Suzhou Xinbao Pharmaceutical Co. -- 1,736,591.30 Joincare Pharmaceutical Industry (Group) Co., Ltd 1,500.00 -- (2). Purchase of Products Connected Person 2003 2002 Livzon(Group) Changzhou Kangli Pharmaceutical Co., Ltd. 13,270,214.20 18,324,780.00 Livzon(Group) Suzhou Xinbao Pharmaceutical Co. 1,763,660.72 1,692,397.00 Guangdong Lanbao Pharmaceutical Co., Ltd. -- 1,162,000.00 Shenzhen Haibin Pharmaceutical Co., Ltd. 6,326,334.03 2,212,464.96 Joincare Pharmaceutical Industry (Group) Co., Ltd 877,500.00 -- Shanghai Livzon Dongfeng biotechnical Co., Ltd 152,232.26 -- Shenzhen Taitai Pharmaceutical Trading Co.,Ltd. 1,214,550.53 -- Prices for products purchased from connected companies were based on the market prices of similar products. 4. Guaranties 1. During the reporting period, no guaranty of material importance has been granted to outside companies by the Company 2. During the reporting, guaranties granted by the Company to subsidiaries are as follows (Unit RMB’000) Commencing Parties under guaranties Amount Type Term Expired from Zhuhai Likang July 2003 50,000 Guaranty under 3 years no Medicine Co., Ltd. joint and several 27 liabilities Zhuhai Likang July 2003 20,000 Guaranty under 3 years Medicine Co.Ltd. joint and several no liabilities Zhuhai Likang August 2003 10,000 Guaranty under 1 year Medicine Co., Ltd. joint and several no liabilities Zhuahi Livzon August 2003 20,000 Guaranty under 4 years Syntpharm Co., Ltd joint and several no liabilities Zhuahi Livzon May 2002 25,000 Guaranty under 5 years Syntpharm Co., Ltd joint and several no liabilities Guangdong New Bei May 2003 64,000 Guaranty under 4 years Jiang Pharmaceutical joint and several no liabilities Co. 5. Undertakings The Company entered into the Patent License Agreement with Korea Yiyang Medicine Co., Ltd. (“Yiyang”), pursuant to which both parties agreed that the Company was granted an exclusive and irrevocable patent use right of PPI compound and an exclusive use of Yiyang’s patent in PRC (including Hong Kong and Macau) for the relevant production, manufacture and sales. Under the agreement, a transferral fee of US$ 2,500,000 is payable by the Company, of which US$1,250,000 have been paid and US$1,250,000 (equivalent to RMB 10,346,625.00) remain outstanding. The Company agreed to pay Yiyang 10% of sales in respect of this tablet product in the first three years since the commencing date of its sales, 8% of its sales within the five years following the aforesaid three years, and afterward 6% of its sales until July 22, 2014 (expiring date of the agreement). 6. Appointment and Dismissal of Domestic and Overseas Accountants As considered and approved by the 7th meeting of the 4th Board and 2002 Annual General Meeting, the Company intends to re-appoint Reanda and Hong Kong Ho and Ho & Company as its domestic and overseas accountants respectively for 2003. Remunerations paid by the Company to the domestic and overseas accountants for the reporting period were RMB330,000 and RMB400,000, respectively. In order to enhance efficiency, as considered and approved by the 11th meeting of the 4th Board, the Company determined to appoint Hong Kong BDO International as its overseas accountant for 2003, with a term of 1 year. The Hong Kong Ho and Ho & Company will cease to perform 2003 overseas audit work of the Group, and Reanda will continue to perform 2003 domestic audit work of the Group. Remunerations payable to the two accountants for 2003 are as follows: RMB420,000 (not including potential fees for interim audit) payable to 28 Reanda, or no more than RMB700,000 (including potential fees for interim financial report); RMB300,000 (excluding potential fees for interim audit) payable to Hong Kong BDO International, or no more than RMB600,000 (including potential fees for interim financial report).The said remunerations shall be confirmed and ratified by shareholders at the next General Meeting. 29 XI. REPORT OF THE AUDITORS BDO.REANDA-(2004) No.1010 To the shareholders of B shares of Livzon Pharmaceutical Group Inc. (incorporated in the People’s Republic of China with limited liability) We have audited the accompanying consolidated balance sheet of Livzon Pharmaceutical Group Inc., (“the Group”) as at 31st December 2003 and the related consolidated 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. These 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, the 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 presentation of financial statements. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements presents fairly, in all material aspects, the financial position of the Group as at 31st December 2003 and the results of its operations and its cash flows for the year then ended, in accordance with International Financial Reporting Standards. BDO International Certified Public Accountants Beijing, China, 13th February 2004 30 LIVZON PHARMACEUTICAL GROUP INC. CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31ST DECEMBER 2003 NOTES 2003 2002 RMB’000 RMB’000 Revenue (4) 1,811,914 1,601,206 Cost of sales (919,299) (897,355) Gross profit 892,615 703,851 Other operating income 11,479 22,620 Selling expenses (515,908) (376,249) Administrative expenses (234,383) (190,153) Other operating expenses (6,871) (5,978) Profit from operations (6) 146,932 154,091 Finance costs (7) (2,925) (21,725) Profit from investments (8) 13,932 (17,503) Share of profit of associates 1,484 1,447 Profit before tax 159,423 116,310 Income tax expense (9) (36,234) (25,255) Profit after tax 123,189 91,055 Minority interests (29,266) (23,976) Net profit for the year 93,923 67,079 Dividend (10) - - Earnings per share – basic (11) RMB0.31 RMB0.22 31 LIVZON PHARMACEUTICAL GROUP INC. CONSOLIDATED BALANCE SHEET AT 31ST DECEMBER 2003 NOTES 2003 2002 RMB’000 RMB’000 Assets Non-current assets Property, plant and equipment (12) 717,559 698,775 Construction in progress (13) 61,450 67,344 Goodwill (14) 25,796 20,950 Negative goodwill (15) (1,292) (5,355) Intangible assets (16) 26,877 25,148 Investments in associates (18) 17,080 17,230 Other investments (19) 190,973 22,797 1,038,443 846,889 Current assets Inventories (20) 188,001 199,334 Trade and other receivables (21) 373,223 457,539 Amounts due from associates 16,867 4,979 Other investments (19) 60,464 16,878 Bank balances and cash (21) 424,072 295,277 1,062,627 974,007 Total assets 2,101,070 1,820,896 Equity and liabilities Capital and reserves Share capital (22) 306,035 306,035 Reserves (23) 723,923 658,451 1,029,958 964,486 Minority interests 129,497 173,041 1,159,455 1,137,527 Non-current liabilities Bank loans – due after one year (24) 25,000 71,500 Current liabilities Trade and other payables (26) 395,038 407,573 Amounts due to associates 4,335 3,750 Tax liabilities 24,742 17,379 Bank loans – due within one year (24) 492,500 183,167 916,615 611,869 Total equity and liabilities 2,101,070 1,820,896 The financial statements on pages 2 to 33 were approved and authorised for issue by the Board of Directors on 13th February 2004 and are signed on its behalf by: Director Director 32 LIVZON PHARMACEUTICAL GROUP INC. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31ST DECEMBER 2003 Properties Investment Share Share revaluatio revaluation Exchange Ac capital premium n reserve reserve difference Surplus prof RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 R Balance at 1st January 2003 306,035 417,689 9,609 - - 196,551 Net profit for the year - - - - - - Transfer to surplus from - - - - - 38,335 accumulated profits Dividend paid for 2002 - - - - - - Transfer for the year - - - 2,531 508 (886) Balance at 31st December 2003 306,035 417,689 9,609 2,531 508 234,000 33 LIVZON PHARMACEUTICAL GROUP INC. CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31ST DECEMBER 2003 2003 2002 RMB’000 RMB’000 Profit from operations 146,932 154,091 Adjustments for: Negative goodwill released to income (934) (1,264) Written-off the construction in process 3,567 3,931 Written-off of intangible assets - 3,254 Amortization of intangible assets 15,017 12,396 Depreciation of property, plant and equipment 78,550 74,328 Amortization of goodwill 2,936 2,540 Loss/(profit) on disposal of property, plant and equipment (86) 2,159 Operating cash flows before movements in working capital 245,982 251,435 Movements in working capital 78,773 113,872 Cash generated by operations 324,755 365,307 Income tax paid (24,742) (37,165) Interest paid (2,946) (22,526) Net cash from operating activities 297,067 305,616 34 LIVZON PHARMACEUTICAL GROUP INC. CONSOLIDATED CASH FLOW STATEMENT (CONTINUED) FOR THE YEAR ENDED 31ST DECEMBER 2003 NOTES 2003 2002 RMB’000 RMB’000 Net cash from operating activities 297,067 305,616 Investing activities Movements in profit and loss from investments 3,927 (5,120) Disposal of investments 92,565 28,232 Proceeds on disposal of property, plant and equipment, intangible assets and other assets 8,020 28,291 Purchases of property, plant and equipment, intangible assets and other assets (104,125) (119,469) Purchases of investments (268,430) (70,507) Net cash used in investing activities (268,043) (138,573) Financing activities Capital injection from minority shareholders - 10,128 Dividend paid to minority shareholders (73,828) (4,494) New bank loans raised 693,675 191,417 Repayments of bank loans (519,939) (301,620) Net cash (used in) / from financing activities 99,908 (104,569) Net increase in cash and cash equivalents 128,932 62,474 Effect on exchange difference (137) - Cash and cash equivalents at beginning of year 295,277 232,803 Cash and cash equivalents at end of year Bank balances and cash 424,072 295,277 35 LIVZON PHARMACEUTICAL GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2003 1. CORPORATE INFORMATION Livzon Pharmaceutical Group Inc. (the “Company”) is a joint stock company registered in the People’s Republic of China (the “PRC”) and its A shares and B shares are listed on the Shenzhen Stock Exchange. The Company and its subsidiaries (together referred to as the “Group”) are principally engaged in the production and sales of medical products and the trading of imported medical products in the PRC. The largest shareholder of the Company is Shenzhen Tai Tai Pharmaceutical Group Inc. Limited, a limited company incorporated in PRC and listed in Shenzhen Stock Exchange 2. PRESENTATION OF FINANCIAL STATEMENTS The consolidated financial statements have been prepared in Renminbi (“RMB”), the currency in which the majority of the Group’s transactions are denominated. The Group maintains its accounting records and prepares its statutory financial statements in accordance with the accounting principles and the relevant financial regulations applicable to foreign investment enterprises in the PRC. The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). The accounting policies and basis adopted to the preparation of the statutory financial statements differ in certain respects from IFRS. The differences arising from the restatement of the results of operations and the net assets for compliance with IFRS are adjusted in financial statements but will not be taken up in the accounting records of the Group. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Except for certain financial instruments which are stated at their fair value, the financial statements have been prepared on the historical basis. The principal accounting policies adopted are set out below: (a) 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 31st December each year. Control is achieved where the Company has the power to govern its financial and operating policies of an investee enterprise so as 36 to obtain benefits from its activities. On acquisition of subsidiaries, the assets and liabilities are stated at the fair value at the date of acquisition. 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 effective 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. (b) 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 operating results 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. 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. (c) Goodwill Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary or associate at the date of acquisition. Goodwill is recognized as an asset and amortised on a straight-line basis over its estimated useful life. Goodwill arising on the acquisition of an associate is included within the carrying amount of the associate. Goodwill arising on the acquisition of subsidiaries is presented separately in the balance sheet. On disposal of a subsidiary or an associate, the attributable amount of unamortised goodwill is included in the determination of the profit or loss on disposal. (d) Negative goodwill 37 Negative goodwill represents the excess of the Group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary or associate at the date of acquisition over the cost of acquisition. Negative goodwill is released to income based on an analysis of the circumstances from which the balance resulted. To the extent that the negative goodwill is attributable to losses or expenses anticipated at the date of 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. (e) Revenue recognition Sales of goods are recognised when goods are delivered and title has passed. Interest income is accrued on a time basis, by reference to the principal outstanding and at the interest rate applicable. Dividend income from investments is recognised when the shareholders’ rights to receive payment have been established. (f) Foreign currencies Transactions in currencies other than RMB are initially recorded at the rates of exchange prevailing on the dates of the transactions. Monetary assets and liabilities denominated in such currencies are re-translated at the rates prevailing on the balance sheet date. Profits and losses arising on exchange are included in net profit or loss for the year. On consolidation, the assets and liabilities of the Group’s overseas operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the year. Exchange differences arising, if any, are classified as equity and transferred to the Group’s translation reserve. Such translation differences are recognised as income or as expenses in the year in which the operation is disposed of. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. (g) Borrowing costs Borrowing costs directly attributable to the acquisition, construction or 38 production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from borrowing costs eligible for capitalisation. All other borrowing costs are recognised as expenses in the period in which they are incurred. (h) Retirement benefit costs Payments to defined contribution retirement benefit plans are charged as an expense as they fall due. Payments made to state-managed retirement benefit schemes are dealt with as payments to defined contribution plans where the Group’s obligations under the schemes are equivalent to those arising in a defined contribution retirement benefit plan (i) Government grants Government grants subsidizing the Group’s research project are recognised as income when the relevant cost incurred. Government grants subsidizing the purchase of assets are deducting from the purchase cost of such asset. (j) Taxation Income tax expense represents the sum of the tax currently payable and deferred tax The tax currently payable is based on 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 profits 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 that affects neither the tax profit nor the accounting profit. 39 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. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no larger 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 in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited 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. (k) Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and any recognised impairment loss. Depreciation is charged so as to write off the cost of assets over their estimated useful lives, using the straight-line method, on the following bases : Buildings 5% Machinery 10% Electronic equipment 20% Transport equipment 20% Other equipment 20% The gain or loss arising from 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 the income statement. (l) Construction in progress Construction in progress represents properties under construction for production, rental or administrative purposes, or for purposes not yet determined and equipment purchased prior to installation and is stated at cost less any recognised impairment loss. Cost comprises direct costs and, where applicable, professional fees and borrowing costs capitalised in accordance with the Group’s accounting policy. Costs on completed construction works are transferred to the appropriate asset category. Costs incurred on construction in progress are recognised as an expense immediately when the work is terminated. No depreciation is provided on construction in progress until it is completed and put into commercial operation 40 (m) Intangible assets - research and development expenditure Expenditure on research activities is recognised as an expense in the year in which it is incurred. Development expenditure arising from the Group’s development is recognised as an asset only if all of the following conditions are met: • an asset is created that can be identified; • it is probable that the asset created will generate future economic benefits; and • the development cost of the asset can be measured reliably. Otherwise, development expenditure is recognized as an expense in the year in which it is incurred. The development expenditure recognised as an assets are amortised on a straight-line basis over their useful lives. (n) 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. 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 the value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of the time value of money and the risks specific to the assets. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. Impairment losses are recognised as an expense immediately. Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined as no impairment loss had been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately. (o) Inventories Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Cost is calculated using the weighted average method. Net realisable value represents the estimated selling prices less all estimated costs to 41 completion and costs to be incurred in marketing, selling and distribution. (p) 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. (i) Trade receivables Trade receivables are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts. (ii) Investments Investments are recognised on a trade-date basis and are initially measured at cost. Investments other than held-to-maturity debt securities are classified as either held-for-trading or available-for-sale, and are measured at subsequent reporting dates at fair value. Where securities are held for trading purposes, gains and losses arising from changes in fair value are included in net profit or loss for the period. For available-for-sale investments, gains and losses arising from changes in fair value are recognised directly in equity, until the security is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in equity is included in the net profit or loss for the period. (iii) Bank borrowings Interest-bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption, are accounted for on an accrual basis and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. (iv) Trade payables Trade payables are stated at their nominal value. (q) Provisions Provisions are recognised when the Group has a present obligation as a result of a past event which it is probable will result in an outflow of economic benefits that can be reasonably estimated. (r) Cash equivalents Cash equivalents represent short-term, highly liquid investments that are readily convertible to a known amount of cash and subject to an insignificant risk of changes in value. 42 4. REVENUE 2003 2002 RMB’000 RMB’000 Sales of medical products 1,811,914 1,601,206 5. BUSINESS AND GEOGRAPHICAL SEGMENTS As the Group is engaged only in the production and sales of medical products and the trading of imported medical products in the PRC, no segment information is presented. 6 PROFIT FROM OPERATIONS Profit from operations has been arrived at after charging / (crediting) :- 2003 2002 RMB’000 RMB’000 Depreciation of property, plant and equipment 78,550 74,328 Amortization of intangible assets 15,017 12,396 Amortization of goodwill 2,936 2,540 Written-off of intangible assets - 3,254 Loss/(profit) on disposal of property, plant and equipment (86) 2,159 Release of negative goodwill to income (934) (1,264) Staff costs 188,825 124,226 Research and development costs 17,515 21,209 Government grants (1,805) (2,395) 7. FINANCE COSTS 2003 2002 RMB’000 RMB’000 Interest on bank loans 2,946 22,526 Less : Amounts included in the cost of qualifying assets (21) (801) 2,925 21,725 Borrowing cost included in the cost of qualifying assets during the year arose on the general borrowing pool and are calculated by applying a capitalization rate of 5% (2002: 5%) to expenditure on such assets. 43 8. PROFIT FROM INVESTMENTS 2003 2002 RMB’000 RMB’000 Interests on bank deposits 3,684 2,284 Dividends from other investments 3,861 458 Provision for impairment loss of investments in associates (2,195) (1,602) Provision for impairment loss of long-term other investments 2,251 (10,813) Provision for impairment loss of short-term other investments - (7,766) Loss on disposal of a subsidiary 63 (1,205) Profit on disposal of partial interests in subsidiaries 6,226 1,227 Loss on disposal of associate - (264) Profit on disposal of other investments 42 178 13,932 (17,503) 9. INCOME TAX EXPENSE 2003 2002 RMB’000 RMB’000 Profits tax - current year 36,234 24,455 - under-provision for prior years - 800 PRC income tax 36,234 25,255 The basis tax rate applicable to the Group is 15%. According to the relevant tax policies of PRC, income tax of Livzon (Group) Syntpharm Factory is charged at 10 % on its estimated assessable profit, Livzon (Group) Liman Chemical Pharmaceutical Factory is charged at 24% on its estimated assessable profit, Hubei Keyi Pharmaceutical Holdings Company Ltd. and Li Wei Branch of Livzon (Group) Pharmaceutical Trading Co., Ltd. are charged at 33% on their estimated assessable profit. And other subsidiaries are at 15%. As the tax effect on temporary timing difference is insignificant, no deferred taxation is provided. 10. DIVIDEND According to the decision of the No.4-12 Board as at February 13 2004, the cash dividend in respect of 2003 is RMB 1 per 10 shares. Approved by shareholders at the Annual General Meeting of 2002, the dividends in respect of 2002 of RMB0.1 per shares have been paid to shareholders in 2003. (2001: RMB 0.03 per shares) 11. EARNINGS PER SHARE The calculation of earnings per share is based on the Group’s profit attributable to shareholders of RMB93,129,000 (2002: RMB67,079,000), and 306,035,482 shares (2002: 306,035,482 shares) in issue during the year. As the Group did not have diluting instrument in issue, no diluted earnings per share information is presented . 44 12. PROPERTY, PLANT AND EQUIPMENT Land and Transport Elect buildings Machinery equipment Other RMB’000 RMB’000 RMB’000 RM COST At 1st January 2003 662,636 377,017 22,971 Additions 35,023 43,771 6,026 Transfer from construction in progress 6,995 5,990 327 Disposals (15,404) (12,647) (7,154) Transfer in (out) (17,874) (5,696) 323 At 31st December 2003 671,376 408,435 22,493 ACCUMULATED DEPRECIATION At 1st January 2003 200,751 173,115 15,788 Charge for the year 37,435 30,221 3,197 Eliminated on disposals (8,867) (8,280) (6,122) Transfer in (out) (5,510) (7,821) 27 At 31st December 2003 223,809 187,235 12,890 CARRYING AMOUNT At 31st December 2003 447,567 221,200 9,603 At 31st December 2002 461,885 203,902 7,183 45 13. CONSTRUCTION IN PROGRESS 2003 2002 RMB’000 RMB’000 At 1st January 67,344 78,690 Acquired on acquisition of a subsidiary - 2,222 Additions 91,579 68,606 Interest capitalized 1,642 801 Government grant received - (801) Transfer to property, plant and equipment (70,719) (75,925) Others (22,511) - Written-off (3,567) (4,357) At 31st December 63,768 69,236 Provision for impairment loss (2,318) (1,892) 61,450 67,344 As at 31st December 2003, the construction in progress include the capitalized interest RMB 20,630. (2002:None). 14. GOODWILL RMB’000 COST At 1st January 2003 25,405 Arising from acquisition of subsidiaries 7,780 At 31st December 2003 33,185 AMORTISATION At 1st January 2003 4,455 Charge for the year 2,934 At 31st December 2003 7,389 CARRYING AMOUNT At 31st December 2003 25,796 At 31st December 2002 20,950 Goodwill is amortised over its estimated useful life. The estimated foreseeable life of the goodwill arising on acquisitions is ten years. 46 15. NEGATIVE GOODWILL RMB’000 GROSS AMOUNT At 1st January 2003 9,764 Increase from further acquisition of investments in a subsidiary (3,129) At 31st December 2003 6,635 RELEASED TO INCOME At 1st January 2003 4,409 Released in the year 934 At 31st December 2002 5,343 CARRYING AMOUNT At 31st December 2002 1,292 At 31st December 2001 5,355 The negative goodwill is released to income on a straight-line basis over, a period of 10 years, the remaining estimated weighted average useful life of the depreciable assets acquired. 16. INTANGIBLE ASSETS RMB’000 COST At 1st January 2003 47,171 Additions 17,510 Acquired on acquisition of a subsidiary - Written off (2,950) At 31st December 2003 61,731 AMORTISATION At 1st January 2003 22,023 Charge for the year 15,017 Eliminated on disposal (2,186) At 31st December 2003 34,854 CARRYING AMOUNT At 31st December 2003 26,877 At 31st December 2002 25,148 At 31st December 2003, intangible assets represent costs for acquisition of technical knowhow and other expenses incurred in developing new pharmaceutical products. 47 17. SUBSIDIARIES Details of the Company’s subsidiaries at 31st December 2003 are as follows :- Place of Proportion of incorporation ownership Principal Name of subsidiary and operation interest Activity Ando Development Limited Hong Kong 100% Sale of pharmaceutical products Livzon (Group) Advertising Co., Zhuhai, PRC 100% Operation in advertising Ltd. business Livzon (Group) Biotechnology Zhuhai, PRC 100% Manufacture and sale of Pharmaceutical Factory products made from microbio fermentation, blood products, recombinant DNA products and biochemical reagent Livzon (Group) Liman Chemical Shaoguan, PRC 86.281% Production and sale of Pharmaceutical Factory biochemical reagent Livzon (Group) Livzon Zhuhai, PRC 100% Production of Chinese Traditional Chinese Medicine medicines and health tonics Factory Livzon (Group) Pharmaceutical Zhuhai, PRC 100% Production of biological tablets, Factory hard capsules and powder Livzon (Group) Pharmaceutical Zhuhai, PRC 100% Sale of the Group’s Trading Co., Ltd. pharmaceutical products Zhuhai Livzon (Group) Reagent Zhuhai, PRC 51% Production of biochemical Co., Ltd. reagent and enzyme linked immune reagent Livzon (Group) Syntpharm Zhuhai, PRC 90% Production of chemical Factory medicinal materials and medical reagent 48 17. SUBSIDIARIES - continued Place of Proportion of incorporation ownership Principal Name of subsidiary and operation interest Activity Livzon (Hong Kong) Co., Limited Hong Kong 100% Sale of pharmaceutical products Zhuhai Livzon Pharmaceutical Zhuhai, PRC 100% Import and export business of Trading Co., Ltd. pharmaceutical reagent and raw material Guangdong Central South Shenzhen, PRC 70% Retail and wholesale of Pharmacy Co., Ltd. medicines Guangdong New north River Qingyuan, PRC 86.50% Manufacture and sale of Pharmacy Co., Ltd. pharmaceutical products and related knowhow Livzon Chainstore Operation Co., Zhuhai, PRC 90% Investment, chain store Ltd. operation, economic and technological operation, consulting and technological service Livzon (Group) Libao Zhuhai, PRC 100% Manufacture and sale of Biochemical & Pharmaceutical pharmaceutical products Co., Ltd. Livzon (Group) Livzon-bam Zhuhai, PRC 82% Manufacture and sale of Biomaterials Co., Ltd. hydroxyapatite products and coated titanium dental implant Shanghai Livzon Pharmaceutical Shanghai, PRC 100% Manufacture and sale of Co., Ltd. pharmaceutical products Sichuan Everbright Pangzhou, PRC 52.21% Manufacture and sale of Pharmaceutical Co., Ltd. pharmaceutical products Zhuhai Li Ao Wei Sheng Tai Zhuhai, PRC 90% Research of pharmaceutical Products Co., Ltd. product Zhuhai Livzon Wonderful Zhuhai, PRC 100% Research and development of Technology Investment Co., medicine and pharmaceutical Ltd. technology, technological consulting and project investment Zhuhai Medicine Technology Zhuhai, PRC 80% Research and development of Development Co., Ltd. medicine and pharmaceutical technology, technological consulting and project investment 49 17. SUBSIDIARIES - continued Place of Proportion of incorporation ownership Principal Name of subsidiary and operation interest Activity Zhuhai Modern Chinese Medicine Zhuhai, PRC 100% Research and development of High Technology Co., Ltd. pharmaceutical technology Zhuhai S.E.Z. Likang Zhuhai, PRC 100% Manufacture and sale of Pharmaceutical Co., Ltd. pharmaceutical products Shenzhent Takun information Shenzhen, PRC 52.5% Provision of consultation service consulting Co., Ltd. Shenzhen Sanxin chain Pharmacy Shenzhen, PRC 63% Retailing of pharmaceutical Store Co., Ltd. products Hubei Keyi Pharmaceutical Hubei, PRC 45.84% Manufacture and sale of Holdings Company Limited * Chinese and foreign patent medicines, biochemical reagent and health tonics Hubei Liyi Pharmaceutical Hubei, PRC 59% Research and development of Technology Company Limited * medicine and development of medical and pharmaceutical technology, technological consulting and project investment * The Company has consolidated the financial statements of Hubei Keyi Pharmaceutical Holdings Company Limited and Hubei Liyi Pharmaceutical Technology Company Limited as the Company exercises unilateral control over the financial and operating policies of both companies. 18. INVESTMENTS IN ASSOCIATES 2003 2002 RMB’000 RMB’000 Cost of investment 15,687 17,067 Share of post-acquisition profit/ (loss) net of dividends received and goodwill amortization 1,393 163 17,080 17,230 50 Details of the Group’s associates at 31st December 2003 are as follows :- Place of Proportion incorporation of ownership Principal Name of associate and operation interest Activity Guangdong lanbao Qingyuan, 26% Manufacture and sale of Pharmaceutical Co., Ltd. PRC biochemical products Livzon Electomedical Zhuhai, PRC 28% Manufacture and sale of Instrument Co., Ltd. electromedical instrument Livzon Group Changzhou Changzhou, 30% Manufacture and sale of Kangli Pharmaceutical Co., PRC pharmaceutical products Ltd. Xinbei Jiang Pharmaceutical Hong Kong 50% Sale of pharmaceutical Co., Ltd. products Shanghai Livzon-Dongfeng Shanghai, 50% Manufacture and sale of Biotechnology Co., Ltd. PRC biochemical products 19. OTHER INVESTMENTS Non-current investments 2003 2002 RMB’000 RMB’000 Available for sale investment at cost less provision for impairment loss 190,973 22,797 Current investments 2003 2002 RMB’000 RMB’000 Available for trading investment at fair value 60,464 16,878 The investments included above represent investments in listed and unlisted equity securities that contribute the Group with dividend income and trading gains. The fair value of listed securities are based on quoted market prices. 20. INVENTORIES 2003 2002 RMB’000 RMB’000 Raw materials 46,990 57,655 Work in progress 31,112 18,054 Finished goods 109,899 123,625 188,001 199,334 The above inventories are carried at net realizable value. The provision for inventories 51 of 2003 is RMB 8,886,000 (2002: 7,841,000) 21. OTHER FINANCIAL ASSETS Trade and other receivables at the balance sheet date comprise gross amounts receivable from the sale of goods of RMB399,312,000 (2002: RMB426,687,000). An allowance has been made for estimated irrecoverable amounts from the sale of goods of RMB135,552,000 (2002: RMB138,128,000). This allowance has been determined by reference to past default experience. The directors consider that the carrying amount of trade and other receivables approximates their fair value. Bank balances and cash comprise cash held by the Group and short-term bank deposits with an original maturity of three months or less. The carrying amount of these assets approximates their fair value. The Group’s credit risk is primarily attributable to its trade receivables. The amounts presented in the balance sheet are net of allowances for doubtful receivables, estimated by the Group’s management based on prior experience and the current economic environment. The Group has no significant concentration of credit risk, with exposure spread over a large number of counterparties and customers. 22. SHARE CAPITAL 2003 2002 No. of No. of shares shares ’000 RMB’000 ’000 RMB’000 Registered, issued and fully paid : A shares of RMB1 each 183,728 183,728 183,728 183,728 B shares of RMB1 each 122,307 122,307 122,307 122,307 306,035 306,035 306,035 306,035 There were no movements in the share capital of the Company in either the 2002 or 2003 reporting periods. 52 23. RESERVES 2003 2002 RMB’000 RMB’000 (As restated) Share premium 417,689 417,689 Properties revaluation reserve 9,609 9,609 Investment revaluation reserve 2,531 - Exchange difference 508 - Surplus 234,000 196,551 Accumulated profits 59,586 34,602 723,923 658,451 According to the PRC companies law, the reserve available for distribution is the lower of the amount determined under PRC Accounting Regulations and the amount determined under IFRS. Notes: (a) Statutory surplus reserve The Company is required under the laws and regulations of the PRC to transfer an amount of 10% of its profit for the year, determined under PRC accounting regulations for companies limited by shares, to the statutory surplus reserve, until the balance of the statutory surplus reserve is equal to 50% of the Company’s issued share capital. In accordance with the laws and regulations, the statutory reserves can be utilised as follows: (i) to make up losses of the Company; (ii) to distribute to shareholders in the form of a bonus issue which is subject to approval in the general meeting. The balance of the statutory surplus reserve after such distribution is not less than 25% of the issued share capital of the Company. (b) Discretionary surplus reserve The Company may transfer an amount from its profit for the year calculated under PRC accounting regulations for companies limited by shares to the discretionary surplus reserve in accordance with the resolutions of shareholders in the general meeting. The discretionary surplus reserve can be utilised to make up losses of the Company and to distribute to shareholders in the form of bonus issue. (c) Public welfare fund According to the law and regulations of the PRC, the Company is required to transfer 5-10% of its profit after tax calculated under PRC accounting regulations for companies limited by shares to the public welfare fund. The public welfare 53 fund can only be used for the collective benefits of the Group’s employees. 24. BANK LOANS 2003 2002 RMB’000 RMB’000 Secured 297,500 181,900 Unsecured 220,000 72,767 517,500 254,667 The borrowings are all denominated in RMB and repayable as follows: On demand or within one year 492,500 183,167 In the second year 25,000 71,500 517,500 254,667 Less: Amount due from settlement within one year (shown under current liabilities) (492,500) (183,167) Amount due for settlement after one year 25,000 71,500 2003 2002 Interest rates 4.2%-7.6% 4.2%-7.6% At 31st December 2003, all the bank loans of the Group were arranged at fixed interest rates. 25. PLEDGE OF ASSETS At the balance sheet date, the Group’s land and buildings with an aggregate carrying amount of approximately RMB5,756,000 (2002 : RMB122,211,000) were pledged to banks as security for bank loans granted to the Group. 26. OTHER FINANCIAL LIABILITIES Trade and other payables principally comprise amounts outstanding for trade purchases and ongoing costs. The directors consider that the carrying amount of trade payables approximates to their fair value. 27. CAPITAL COMMITMENTS 2003 2002 RMB’000 RMB’000 Capital expenditure contracted for but not provided in respect of : Purchase of property, plant and equipment and construction in progress - 17,671 Purchase of intangible assets 10,346 17,713 Acquisition of investment in a subsidiary - 72,941 10,346 108,325 54 28. OPERATING LEASE COMMITMENTS 2003 2002 RMB’000 RMB’000 Minimum lease payments under operating leases recognized as expenses for the year 10,960 9,932 At the balance sheet date, the Group had outstanding commitments under non-cancellable operating leases, which fall due as follows :- 2003 2002 RMB’000 RMB’000 Within one year 1,073 959 In the second to fifth years inclusive 1,140 1,159 After five year - 3,283 2,213 5,401 Operating lease payments represent rentals payable by the Group for certain of its office properties. 29. CONTINGENT LIABILITY 2003 2002 RMB’000 RMB’000 Negotiated bills - 4,380 30. RETIREMENT BENEFIT PLANS The employees in the PRC of the Group are the qualifying member of the state-managed retirement benefit scheme, which required the Group to contribute a standard proportion of salaries paid to the government department. The Group’s obligation under the schemes is required to contribute the amount of the standard proportion in the above. The Group operates defined contribution retirement benefit plans for all qualifying employees in Hong Kong of the Group. The assets of the plans are held separately from those of the Group in funds under the control of trustees. Where there are employees who leave the plans prior to vesting fully in the contributions, the contributions payable by the Group are reduced by the amount of forfeited contributions. The total cost charged to income of RMB40,684,000 (2002:RMB15,468,000) represents contributions payable to these plans by the Group at rates specified in the rules of the plans. As at 31 December 2003, contributions of RMB8,508,000 (2002:RMB463,530)due in respect of the current reporting period had not been paid over to the plans. 55 31. RELATED PARTY TRANSACTIONS In addition to the amounts due from/(to) associates as set out in the balance sheet, the Group also entered into the following transactions with the associate during the year: 2003 2002 RMB’000 RMB’000 Sales of goods 40,941 1,200 Purchase of goods 23,605 49,033 Other operating income 595 6,665 32. ACCOUNTING TREATMENT The Group has prepared a separate set of accounts for the year ended 31st December 2003 in accordance with the PRC accounting standards. The major differences between the accounts prepared under the PRC Accounting Standards and those under IFRS are capitalize as follows: Net profit for the year Net assets RMB’000 RMB’000 Under PRC accounting standards 92,201 1,013,954 Adjustments: Elimination of interest capitalized for property, plant and equipment - (25,354) Depreciation on property, plant and equipment (535) (1,820) Negative goodwill arising from purchasing subsidiaries - (1,182) Negative goodwill arising from partial purchasing of interest in subsidiaries - 1,068 Negative goodwill arising from purchasing associates - (497) Goodwill arising from purchasing subsidiaries - 1,894 Disposal of subsidiaries - 12 Partial disposal of interest in subsidiaries - (137) Amortization of goodwill (251) (2,937) Amortization of negative goodwill 195 2,736 Share of results of associates - (508) Long-term prepaid expenses 681 (488) Deferred expenditure 838 (467) Accrual of expenses - 13,480 Advance from customers - (400) Proposed dividend - 30,604 Profit from investments for associates 794 - 1,722 16,004 Under IFRS 93,923 1,029,958 56 XII. DOCUMENTS AVAILABLE FOR INSPECTION 1. Documents available for inspection are as follows: (1) The original copy of auditor’s report with the signatures and seals of the legal representative, financial officer and the chief accountant. (2) The original copy of the auditor’s report with seal of the Certified Public Accountants and the signatures and seals of the certified public accountants. (3) The original copy of documents and the draft of the announcements disclosed publicly in newspapers designated by CSRC in the reporting period LIVZON PHARMACEUTICAL GROUP INC. Chairman of the Board: 57