*ST石化Ａ(000013)*ST石化Ｂ2003年年度报告（英文版）

SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. 2003 ANNUAL REPORT Section I. Important Notes and Contents The Board of Directors of the Shenzhen Petrochemical Industry (Group) Co., Ltd. (hereinafter referred to as the Company) individually and collectively accept responsibility for the correctness, accuracy and completeness of the contents of this report and confirm that there are no material omissions nor errors which would render any statement misleading. Huazheng Certified Public Accountants issued an Auditors’ Report with unable to express opinion for the Company, to which and the Board of Directors and the Supervisory Committee made detailed explanations, the investors are suggested to read the content. Person in Charge of the Company Mr. Li Nujiang and Person in Charge of Accounting Organ Mr. Wu Xianbiao hereby confirm that the Financial Report of the Annual Report veritably and completely reflect the present situation held by the Company. The report is compiled in Chinese and English languages should there be difference in interpretation of the two languages, the Chinese version shall prevail. 1 Content SectionⅠ. Important Notes SectionⅡ. Company Profile SectionⅢ. Financial Highlight and Business Highlight SectionⅣ. Changes in Share Capital and Particulars about Shareholders SectionⅤ. Particulars about director, supervisor and senior executives and staff SectionⅥ. Administrative Structure SectionⅦ. Brief Introduction to the Shareholders’ General Meeting SectionⅧ. Report of the Board of Directors SectionⅨ. Report of the Supervisory Committee SectionⅩ. Significant Events SectionⅪ. Financial Report SectionⅫ. Documents for Reference 2 SECTION II. COMPANY PROFILE 1. Legal Name of the Company In Chinese: 深圳石化工业集团股份有限公司 In English: Shenzhen Petrochemical Industry (Group) Co., LTD. (Abbr. in English: SPEC) 2. Legal Representative: Mr. Li Nujiang 3. Secretary of the Company: Mr. Cai Jianping Contact Address: No. 45, Wuhe Rd. S., Bantian, Buji, Longgang District, Shenzhen Tel: (86) 755-84190844 Fax: (86) 755-84190844 E-mail: SPEC0013@vip.sina.com 4. Registered Address: SPEC Bldg., Hongli West Road, Futian District, Shenzhen Office Address: No. 45, Wuhe Rd. S., Bantian, Buji, Longgang District, Shenzhen Post Code: 518112 E-mail: SPEC0013@ vip.sina.com 5. Newspapers Chosen for Disclosing Information of the Company: Securities Times and Ta Kung Pao Internet Website Designated by CSRC for Publishing the Annual Report: http://www.cninfo.com.cn Place Where the Annual Report is Prepared and Placed: No. 45, Wuhe Rd. S., Bantian, Buji, Longgang District, Shenzhen 6. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock Name and Stock Code: *ST SPEC – A 000013 *ST SPEC– B 200013 7. Initial registration date: Jan. 14, 1992 Registered number of enterprise legal person’s business license: 4400001008296 Registered number of taxation: 440301190325614 8. Certified Public Accountants engaged by the Company: Domestic: Huazheng Certified Public Accountants (A-share) Address: Tower A, Investment Plaza, No. 27, Finance Street, Xicheng District, Beijing International: Moore Stephens (Shenzhen) Nanfang Minhe Certified Public Accountants (B-share) Address: 8/F, Electronics Tech. Bldg., No. 2072, Shennan Middle Road, Shenzhen 3 Section III. Financial Highlight and Business Highlight 1. Major accounting data and financial indexes (Calculated according to the IAS) (RMB’000) Items 2002 2001 Turnover 0 614,678 Gross Profit 0 (526,422) Profit (Loss) from operating activities 30,912 (258,522) Share of profit of associated companies 0 (4,047) Profit (Loss) before taxes (309,773) (482,056) Profit (Loss) attributable to shareholders (309,773) (485,947) Basic earnings (loss) per share (1.02) (1.49) Total assets 212,084 740,646 Shareholders’ Equity (2,406,774) (2,097,001) Net assets per share (RMB) (7.93) (6.91) Net assets-income ratio (%) --- --- Net cash inflow from operating activities 504,821 26,989 Increase in cash and cash equivalents (70,992) (13,090) 2. Difference of net profit as audited by Chinese Accounting Standard (CAS) and International Accounting Standard (IAS) Unit: RMB’000 Loss attributable to Net liabilities shareholders RMB’000 RMB’000 As reported in the “A” shares consolidated (327,934) (2,406,260) audited statutory financial statements under the PRC accounting standards IFRS adjustments Adjustment to capital reserve 454 __ Adjustment to provision for guarantees given to banks 23,423 __ and customers/bank loans Effect of non-consolidation of subsidiaries __ (5,147) Others (514) (569) __________ __________ As reported after IFRS adjustments (309,773) (2,406,774) in the “B” shares financial statements ========= ========= 4 Section IV. CHANGE IN SHARE CAPITAL AND PARTICULARS ABOUT SHAREHOLDERS I. Change in share capital 1. Statement of change in share Before the Increase / After the change decrease in this change year (+ / -) I. Unlisted shares 1. Sponsors’ shares 164,546,553 0 164,546,553 Including: State-owned shares 164,546,553 -164,546,553 Domestic legal person’s shares 164,546,553 164,546,553 Foreign legal person’s shares Others 2. Domestic legal person’s shares 54,724,424 0 54,724,424 3. Inner employees’ shares 4. Preference shares or others Total unlisted shares 219,270,977 0 219,270,977 II. Listed shares 1. RMB ordinary shares 51,324,002 0 51,324,002 2. Domestically listed foreign shares 32,760,000 0 32,760,000 3. Overseas listed foreign shares 4. Others Total listed shares 84,084,002 0 84,084,002 III. Total shares 303,354,979 0 303,354,979 2. Issuance and listing of shares Over the past three years ended the report year, the Company didn’t issue new shares; the total shares of the Company and structure of shares remained unchanged. II. About shareholders 1. Total shareholders at the end of the report period Ended Dec. 31, 2003, the Company had totally 34,075 registered shareholders (including legal person and natural person), including 26,523 shareholders of A-share and 7,552 shareholders of B-share. 2. Shares held by the top ten shareholders at the end of the report period Number of Percentage in Name of Shareholders Type of share Shares held total share capital Guangzhou Puliqi Communication Investment Co., Ltd. 164,546,553 54.24% Legal person’s share Shenzhen Investment Holding Corporation 23,400,000 7.71% Legal person’s share China Merchants Securities Co., Ltd. 19,380,532 6.39% Legal person’s share Shenzhen Jingye Plastics Co., Ltd. 2,208,772 0.73% Legal person’s share Shenzhen Orient Fortune Investment Co., Ltd. 1,560,000 0.51% Legal person’s share Quanzhou Fukang Investment Consultation Co., Ltd. 1,560,000 0.51% Legal person’s share China Everbright Securities Co., Ltd. 1,484,936 0.49% Legal person’s share China Prime Investment Management Co., Ltd. 936,000 0.31% Legal person’s share Chongqin Xinhua Trust Investment Co., Ltd. 780,000 0.26% Legal person’s share NanHai Eastern Petrochemical Economic and 780,000 0.26% Legal person’s share Technology Development Corp. Total 216,636,793 71.41% Note: (1) In the report year, there was no change in quantity of shares held by the 5 shareholders holding over 5% of total shares of the Company, namely Shenzhen Investment Holding Corporation and China Merchants Securities Co., Ltd. Guangzhou Puliqi Communication Investment Co., Ltd. gained the shares of the Company held by Shenzhen Petrochemical Corp. by means of the judicial auction procedure (For details, please refer to the public notice of the Company published on Securities Times and Ta Kung Pao dated Dec. 17, 2003. There was neither pledge nor freeze on shares held by the aforesaid three shareholders. (2) Among the above top ten shareholders, the Company is unknown whether there exists associated relationship or consistent action. III. Particulars about controlling shareholder of the Company 1. Guangzhou Puliqi Communication Investment Co., Ltd. is the controlling shareholder of the Company, who has established in Dec. 30, 1998; registration address: Room F on 5/F, No. 36-38, Taojin Road, Dongshan District, Guangzhou; registered capital is RMB 100 million. It is mainly engaged in computer, network, communication equipment, integrated terminal communication electron technology, sales of electron products; communication consultation and investment project using self-owned funds. 2. The shareholder of Guangzhou Puliqi Communication Investment Co., Ltd. is Wang Guofeng (holding 55% shares of Guangzhou Puliqi Communication Investment Co., Ltd.) and Huang Qiwen (holding 45% shares of Guangzhou Puliqi Communication Investment Co., Ltd.). The basic information of the aforesaid two persons are as following: Wang Guofeng, female, nationality of Han, Chinese citizen, long-term residence: Guangzhou City of Guangdong Province; she did not took any post in other companies during from 1999 to Sep. 2003, while took the post of director of Guangzhou Pulioqi Communication Investment Co., Ltd. since Oct. 2003. Huang Wenqi, female, nationality of Han, Chinese citizen, longer-term residence: Guangzhou City of Guangdong Province. She even engaged in pre-settlement of project in the 5th Construction Engineering Company of Zhejiang Province, which registered in Hangzhou City of Zhejiang Province and was mainly engaged in construction. There exists no property right relationship between Huagn Qiwen and the said company. She retired from the business in Nov. 2001, and took the supervisor of Guangzhou Puliqi Communication Investment Co., Ltd. since Oct. 2003. IV. Particulars about shares held by the top ten shareholders of circulation share at the end of report period Name of shareholders Number of shares held Type of shares YU JIN XI 615,153 B ZHENG RUI HONG 300,500 B DING XIAO FENG 254,580 A SIU MAN 243,500 B CHENG SI YI 229,430 B YANG QUAN KAI 210,000 B QU KANG 199,200 B SHI MIN QIANG 168,600 B CHAN CHI KONG 158,950 B GONG FENG MING 150,000 A Total 2,529,913 6 Among the top ten shareholders of circulation share, the Company is unknown whether there exists associated relationship. SECTION V. PARTICULARS ABOUT DIRECTOR, SUPERVISOR AND SENIOR EXECUTIVES 1. Directors, supervisors and senior executives Increase/ Holding the position in Shares held at Name Title Gender Age Office term Shareholding Company the year-end decrease Xin Yu Chairman of the Board, Male 40 Nov. 2001 - 2004 0 0 General Manager Ding Fuyi Director Male 49 Nov. 2001 - 2004 0 0 Liu Cong Director, Male 43 Nov. 2001 - 2004 0 0 Li Linsen Director Male 57 Nov. 2001 - 2004 6,240 0 Liu Qingmin Director Male 41 Nov. 2001 - 2004 0 0 Zhou Zhen Director, Deputy General Male 40 Nov. 2001 - 2004 0 0 Manager Cai Jianping Director, Secretary of the Male 40 Nov. 2001 - 2004 0 0 Board Li Qinwen Chairman of the Supervisor Male 56 Nov. 2001 - 2004 0 0 Committee Liu Yayan Supervisor Female 31 Feb. 2003 - 2004 0 0 Wu Sheng Supervisor Male 38 Nov. 2001 - 2004 0 0 Ruan Kejian General Manager Male 37 Dec. 2003 - 2006 0 0 Du Baijun Deputy General Manager Male 40 Dec. 2003 - 2006 Director of controlling shareholder 2. Particulars about the annual remuneration In the report year, among the present directors, supervisors and senior executives, 9 persons received the annual remuneration from the Company with total amounts of RMB 862,000. Of them, 2 enjoyed the annual remuneration over RMB 200,000 respectively; 2 enjoyed between RMB 100,000 and RMB 200,000 respectively, 5 enjoyed below RMB 100,000 respectively. Director Ding Fuyi, Liu Cong and supervisor Li Qinwen drew their annual salary from the Shareholding Company. 3. Particulars about change of directors, supervisors and senior executives (1) In Feb. 2003, the 1st Extraordinary Shareholders’ General Meeting 2003 agreed that Luo Hongchun, Tang Dongyuan, Ying Qirui (Independent Director), Hong Leping (Independent Director) and Wang Miaoquan resigned from the post of Director of the Company; (2) In Feb. 2003, the 1st Extraordinary Shareholders’ General Meeting 2003 agreed that Mou Xiangfeng and Liao Hongli resigned from the post of Supervisor of the Company; (3) In Feb. 2003, the 1st Extraordinary Shareholders’ General Meeting 2003 elected Liu Yayan as Supervisor of the Company; (4) In Dec. 2003, Mr. Xi Yu resigned from the post of General Manager of the Company, the Board of Directors engaged Mr. Ruan Kejian and Mr. Du Baijun as General Manager and Deputy General Manager of the Company respectively. 4. About employees Ended the report period, the group had totally 197 on-the-job employees; classified profession/occupation composition, 144 production personnel, 14 salespersons, 12 7 technicians, 6 financial personnel and 21 administrative personnel; classified based on education background, 9 persons with master degree or above, 40 persons with bachelor degree or 3-years regular college graduate, 148 persons graduated from secondary specialized school. SECTION VI. ADMINISTRATIVE STRUCTURE I. Administration of the Company In order to establish modern enterprise system and practically protect the interests of numerous investors, the Company, according to the Administrative Rules of Listed Company as well as the Company’s actual situation and need, further improved its administrative structure. Remarks on the particulars of the Company’s administrative structure expressed by the Board of Directors are as follows: 1. Shareholders and the Shareholders’ General Meeting. The Company’s administrative structure ensures the equal status for all shareholders, especially medium and small shareholders, and ensures that shareholders fully implement legal rights; In the report year, the Company convened and held the Shareholders’ General Meeting, of which the holding procedures, qualification of participators and voting procedures were all in line with the PRC Company Law, Normative Opinions for the Shareholders’ General Meeting of Listed Company as well as the regulations of Articles of Association. 2. Relationship between Controlling Shareholder and Listed Company. The Company’s controlling shareholder implements its right of shareholder according to law, and undertakes obligations of shareholder; The Company is on the whole separated from the controlling shareholder in respect of business, assets, organization, personnel and finance etc., and carries out business accounting independently and undertakes liabilities and risks independently. However, since the Company and its holding shareholders all is under the serious financial crisis at present and majority management come off sentry duty, thus the Company has deficiency in the aspects of organization setting and staff setting and is unable to separate from holding shareholders really in the terms of organization and staff. 3. Directors and the Board of Directors. The Company elects directors according to election and engaging procedures as stated in the Articles of Association. Directors implement their obligations in a loyal, honest, reliable and diligent manner; The number of directors as well as the personnel formation are in line with relevant laws and regulations. Meetings of the Board of Directors are carried out according to stated procedures. 4. Supervisors and the Supervisory Committee. The formation of the Supervisory Committee and election of supervisors are in line with relevant laws and legislations. The members of the Supervisory Committee as well as its structure ensure that the Supervisory Committee could implement supervision and inspection on directors, senior executives and the Company’s finance. Meetings of the Supervisory Committee are held according to stated procedures. 5. Examination and encouragement mechanism. Since the Company has lost the capability of sustainable operation at present, thus, the Company does not establish the examination and encouragement mechanism to senior executives. II. Performance of obligations by independent directors In the report period, the two directors of the Company resigned the post of Independent Director of the Company. At present, the Company didn’t reengage independent directors. 8 III. Existing problems According to the Administrative Rules of Listed Company, the Board of Directors believed that there was still a gap between the Company’s legal person administrative structure and the requirements of CSRC. The existing problems are as follows: 1. The Company has no independent directors at present. The Company shall seek suitable persons and engage new independent directors so as to improve the legal person’s administrative structure of the Company according to the relevant regulations of CSRC. 2. The Company didn’t work out procedure rules of the Board and the Supervisory Committee and amend the relevant articles of the Articles of the Association; the Company didn’t form achievements evaluation system of Directors, Supervisors and Executives. SECTION VII. BRIEF INTRODUCTION TO SHAREHOLDERS’ GENERAL MEETING The notification on holding 2003 1st Provisional Shareholders’ General Meeting was published in Securities Times and Hong Kong Ta Kung Pao dated Jan. 11, 2003. The Meeting was held on Feb. 18, 2003 on schedule. The shareholders who attended the Meeting held and represented totally 166,761,565 shares (among which 0 share was B share), taking 54.97% of the Company’s total shares. The 2003 1st Provisional Shareholders’ General Meeting reviewed and passed by way of voting in written form: Proposal on Resignation of Directors, Proposal on Resignation of Supervisors, Proposal on Electing Supervisors and Proposal on Amending the Articles of the Association. The resolutions of the Meeting were published in Securities Times and Hong Kong Ta Kung Pao dated Feb. 19, 2003. The notification on holding 12th (2003) Shareholders’ General Meeting was published in Securities Times and Hong Kong Ta Kung Pao dated May 27, 2003. The Meeting was held on Jun. 27, 2003 on schedule. The shareholders who attended the Meeting held and represented totally 166,761,565 shares (among which 0 share was B share), taking 54.97% of the Company’s total shares. The 2003 Shareholders’ General Meeting reviewed and passed proposals by voting in written form: Work Report 2002 of the Board, Work Report 2002 of the Supervisory Committee, 2002 Financial Statements audited and the Auditor’s Report, Proposal on Amending the Articles of the Association. The resolutions of the Meeting were published in Securities Times and Hong Kong Ta Kung Pao dated Jun. 28, 2003. SECTION VIII. REPORT OF THE BOARD OF DIRECTORS I. Operation In the report period, since the Company’s financial crisis in the previous year has not been solved, the clearing work of arrearage with large amount of large shareholders has not gained progress and the Company failed in large quantities of lawsuit cases, the equity of main affiliated enterprises has been sealed up by the court and the property rights of partial main enterprises has been sold by the court to cancel out the liabilities, which impacted on the production and operating activities of the Company strictly. What’s more, since the contingent liabilities of the Company was admitted as estimated liabilities for partial external guarantee and formed partial external liabilities events were confirmed into estimated liabilities and book loss of assets was formed because the property rights of partial enterprises were sold or auctioned, the Company still incurred a large loss in 2003. 1. Introduction of industry of the Company 9 The Company belongs to enterprises of chemical type and is mainly engaged in the business of new chemical materials, plastic processing etc.. 2. Core business of the Group in the report period In the report period, share equity of several industrial enterprises held by the Company, were sealed up by the court due to lawsuit. The main productive enterprise Donggang Company, which belonged to Chemical Company, was sold in August 2003 to cancel the debt; the main production equipment and production and office cites of Shenzhen Plastic Company and its main affiliated company, Chemical Construction Material Company was executed by the court in the beginning of 2003 to cancel relevant debts, which led to Shenzhen Plastic Company lack of production and operating ability; Another production enterprise Chemical Material Company produced chemical material amounting to 18,810,000 code, increasing compared with the same period of last year, but the share equity of the company held by the Company was going to be auctioned. 3. Problems and difficulties arising from operation and solutions In the report period, the Group encountered unprecedented problems in the operation, mainly because that the clearing work of arrearage with large amount of holding shareholders has not gained substantial progress and the Company failed in large quantities of lawsuit cases, resulting that the equity of main affiliated enterprises was all sealed up by the court and the property rights of partial main enterprises were sold by the court to cancel out the liabilities, which strictly impacted on the expansion of normal operating activities of the enterprise. Dated the end of the report period, the Company had no plan of assets reorganization and the Company could not dissolve the above questions on its own abilities. II. Investment In the report period, the Company had no any new external investment. III. Financial status 1. Financial status RMB’000 In 2003 In 2002 Increase/decrease Main reasons Total assets 212,084 740,646 (528,562) Change of consolidated scope Shareholders’ equity (2,406,774) (2,097,001) (309,773) Loss in the report period Profit from main operations 0 88,256 (88,256) Change of consolidated scope Net profit 176,174 Decrease in withdrawing (309,773) (485,947) impairment loss 2. Explanation on issues involved in the Auditors’ Report with objection of expressing opinion provided by Certified Public Accountants The explanation on issues involved in the Auditors’ Report with objection of expressing opinion provided by Huazheng Certified Public Accountants of the Board of Directors were as follows： A. About sustainable operation Concerning the following significant problems existing in the financial status of the Company at present: A. Dated the statement date，the former principal shareholder Shenzhen Petrochemical Corp. still owed RMB 1020 million to the Company and had no further repayment plan；B. The status that the assets can not cancel out the liabilities was serious and the loss was large; C. It was hard to recover the principal and interests of expiring liabilities; D. There existed lawsuit and guarantee issues with large amount; E. The held equity and majority fixed assets was frozen or pledged and partial entered into the procedure of auctioned or being auctioned compulsively. 10 The existence of the aforesaid problems has resulted in the very austere of operating environment of the Company. The Board of Directors thought, it is the premise of reorganization plan and liabilities reorganization of the Company to settle of payments with large amount receivable to controlling shareholders and release joint recovery responsibility undertaken by the Company in several external guarantee issues. In Dec. 2003, Shenzhen Investment Holding Corporation transferred 100% equity of Petrochemical Group held by it as RMB 10 to the persons in charge of Petrochemical Group and its affiliated companies. Shenzhen Investment Holding Corporation and Petrochemical Group made no essential arrangement for the huge debts of petrochemical Group owed to the Company. There was no essential development about repayment of external loan and release of joint recovery responsibility undertaken by the Company in guarantee issues. Thus, it was necessary for the Company to seek suitable way of reorganization and measures of liabilities reorganization and gain the energetic support and cooperation of relevant departments and creditors to continue to maintain the sustainable operation of the Company and get rid of the corner facing at present. B. About the responsibility problem undertaken by the Company about the arrearage of Shenzhen Petrochemical Corp. amounting to RMB 270 million The Board believed: after the Shenzhen Petrochemical Corp. signed “Debt converted into Investment” agreement with the Company, Agriculture Bank of China and China Great Wall Assets Corporation in 2000, due to this reason, in fact Shenzhen Petrochemical Corp. undertook the loan of the Company amounting to RMB 270 million in Agriculture Bank of China. Thus, the direct debtor of the loan was Shenzhen Petrochemical Corp. and the Company should not undertake the direct debts amounting to RMB 270 million in Agricultural Bank of China; In addition, in spite of listed explanation in relevant agreement, the company should undertake certain law responsibility for Shenzhen Petrochemical Corp. didn’t fulfilled the relevant agreements. However, there was no undefined limit in what way and what kind of responsibility the Company should take, so it’s not considered as guarantee responsibility that the Company bore and it’s not considered as the Company should fulfilled the obligation provided that Shenzhen Petrochemical Corp. couldn’t fulfilled the obligation. Due to the uncertainty of law essence, scope, and degree of the responsibility, the Company could not determine the probable responsibility and losses incurred probably. IV. Material changes in productive and operating environment of the Company In the report period, since the several unfavorable factors that affected the sustainable operation of the Company still existed, the Company did not gain substantial progress in the large amount of payments receivable from Shenzhen Petrochemical Corporation, the controlling shareholders, and the Company needed to take joint recovery responsibility because the Company provided guarantee for the bank loans of other enterprises and these enterprises were unable to repay the loans, the equity of main production enterprises held by the Company all has been sealed up by the court and it was possible to be forced for implementation by the court. In 2003, the equity of Shenzhen Petrochemical Donggang Chemical Fiber Co., Ltd. held by Shenzhen Petrochemical Fiber Co., Ltd., the main industrial enterprise of the Company, was sold by the court to cancel out the relevant liabilities and the main productive equipments and the productive and office location of Shenzhen Petrochemical Plastic Co., Ltd. (Hereinafter referred to as Shenzhen Plastic Company) and its subsidiaries 11 were also implemented forcibly so as to cancel out relevant liabilities. The aforesaid problems seriously affected on the normal operating activities of the Group. The Board of Directors thought, it was impossible for the Company to improve the bad production and operation environment facing at present only depending on the its self force of the Group. V. Business plan in the new year Since there was material change in the Company’s operating environment and the Company faced very much difficulties in the sustainable operation, thus, the main tasks in 2004 for the Company were as follows: 1. Continue to conduct clearing to the accounts in great amount receivable from Shenzhen Petrochemical Group, the original controlling shareholder of the Company. 2. Solve the management problems of the existing two industrial enterprises and try hard to maintain the daily operation of the Company. 3. Do the work of the Company after listing suspension. VI. Routine work of the Board of Directors 1. Meetings and resolutions of the Board of Directors in the report period In the report period, the Company totally held 2 formal meetings and 5 provisional meetings of the Board with details as follows: A. The 7th Meeting of the 4th Board of Directors of the Company was held on Apr. 21, 2003, where Auditors’ Report 2002, Annual Report 2002 and Profit Distribution Preplan 2002 were considered and passed. B. The 8th Meeting of the 4th Board of Directors of the Company was held on Dec. 17, 2003, where Xin Yu’s resignation from the position of General Manager was agreed, and at the same time, Ruan Keshu and Du Baijun were engaged as General Manager and Deputy General Manager of the Company respectively. C. In the report period, the Board of Directors of the Company held 5 provisional meetings, where the Board mainly considered such issues as selling 5% equity of Shenzhen Donnelley Bright Sun Printing Co., Ltd. held by the Company to cancel out relevant liabilities, transferring 90.57% equity of Shenzhen Spike Biology Pharmaceutics Co., Ltd. and 5% equity of Shenzhen ELCO Air-condition Co., Ltd. held by the Company to China Property (Holding) Co., Ltd. (Hereinafter referred to as China Property) so as to settle the dispute case between China Property and the Company, the 1st Quarterly, Semi-annual and the 3rd Quarterly Financial Statements and Report 2003 etc. and formed relevant resolutions. 2. Implementation of the Board of Directors on resolutions of Shareholders’ General Meeting In the report period, the Board of Directors of the Company seriously implemented all resolutions passed in the Shareholders’ General Meeting of the Company. VII. Profit distribution preplan in the year Since the Company incurred a loss in the year and the profit available for distribution to shareholders was in negative, thus, the Company would not distribute profits nor capitalize the capital reserve into share capital in 2003. The said profit distribution preplan for year 2003 should be submitted to Shareholders’ General Meeting of the Company for consideration and approval. VIII. Other reporting issues 12 The newspapers designated by the Company for information disclosure were Securities Times and Ta Kung Pao, which remained unchanged in the report period. SECTION IX. REPORT OF THE SUPERVISORY COMMITTEE In 2003, according to Company Law of the P.R.C., Rules on Administration of Listed Company and relevant laws and regulations of the listed company and relevant provisions in the Articles of Association of the Company, the Supervisory Committee seriously implemented its duties and exercised its function of supervision accurately. In the report period, the supervisors of the Company included Li Qinwen, Wu Sheng, Liao Hongli and Liu Yayan. In Jan. 2003, the Supervisory Committee agreed Liao Hongli to resign from the position of supervisor due to work change and supplemented Liu Yayan as supervisor. On Feb. 7, 2004, the Provisional Shareholders’ General Meeting of the Company reelected and formed a new supervisory committee. Chairman of the Supervisory Committee was Zhuang Yuexun and members of the Supervisory Committee were Yu Huaming and Liu Yayan. In the report period, the Supervisory Committee of the Company totally held 5 meetings. The 1st Meeting of the Supervisory Committee was held on Jan. 8, 2003, whose contents included passing proposal on equity disposal of Donnelley, passing proposal on amending the Articles of Association of the Company and agreeing proposal on members change in the Supervisory Committee etc.. The 2nd Meeting of the Supervisory Committee was held on Apr. 21, 2003, which passed the disposal opinion on credit-to-investment amounting to RMB 267 million in Annual Report 2002. The 3rd Meeting of the Supervisory Meeting was held on Jun. 27, 2003, where the agenda and topics of the 12th Shareholders’ General Meeting of the Company was considered and passed. The 4th Meeting of the Supervisory Committee of the Company was held on Aug. 25, 2003, where the Semi-annual Report 2003 of the Company was considered and passed. The 5th Meeting of the Supervisory Committee of the Company was held Oct. 30, 2003, where the 3rd Quarterly Report of the Company was considered and passed at the Meeting. 1. Operation according to laws In the year, the members in the Supervisory Committee of the Company attended the meetings of the Board and office meetings of General Manager as nonvoting delegates and learned about the decision-making of the Board and operation of the Group. The Supervisory Committee did not find out that the Board and the Management disobeyed the relevant provisions in Company Law of the P.R.C. and the Articles of Association of the Company while making decision on significant events nor find out that the Company’s directors and senior executives disobeyed laws and regulations, the Articles of Association or damaged the interests of the Company while implementing their duties. 2. Finance of the Company (1) The Supervisory Committee considered that the auditors’ report 2003 issued by Huazheng Certified Public Accountants and Moore Stephens Shenzhen Nanfang Minhe Certified Public Accountants has truly reflected the financial position and operating results of the Company. (2) On Oct. 16, 2003, since the Company provided guarantee and took on joint responsibility for Hangzhou SPEC Industrial & Trade Co., Ltd. to get loans, Guangzhou Puliqi Communication Investment Co., Ltd. purchased 54.12% equity of Shenzhen Petrochemical Industrial Group held by Shenzhen Petrochemical Corporation in the auction presided by the court. On Dec. 15, 2003, the registration of securities transfer was accomplished. 13 3. Acquisition and sales of assets of the Company (1) Due to the dispute case on loan guarantee contract between the Company, Shenzhen Petrochemical Fiber Co., Ltd. and Shenzhen Petrochemical Donggang Chemical Fiber Co., Ltd., affiliated companies of the Company, and Belgium United Bank Shenzhen Branch (The object was USD 2.10 million and relevant interests), Shenzhen Intermediate People’s Court forcibly auctioned 54.51% equity of Shenzhen Petrochemical Donggang Chemical Fiber Co., Ltd. held by Shenzhen Petrochemical Fiber Co., Ltd. so as to cancel the said liabilities in Aug. 2003. (2) Since Shenzhen Petrochemical Plastic Group Co., Ltd. (Hereinafter referred to as Shenzhen Plastic Company), an affiliated company of the Company, and its subsidiary Shenzhen SPC Chemical Construction Materials Co., Ltd. were unable to refund the principal and interests of Shenzhen Commercial Bank, the court has forcibly implemented lands, constructions, properties, machine equipments, vehicles and electronic equipments etc. of Shenzhen Plastic Company, which resulted that Shenzhen Plastic Company was not able to develop normal productive and operating activities. (3) Shenzhen Plastic Company, the affiliated company of the Company, took on joint discharging responsibility due to guarantees of the Company and Shenzhen Petrochemical Group Co., Ltd., which resulted that Shenzhen Plastic Company was in deficiency and stopped its normal productive and operating activities. China Property (Holdings) Co., Ltd. (Hereinafter referred to as China Property), another shareholder of Shenzhen Plastic Company appealed the Company for violating its legal rights and interests. In Mar. 2003, under the presiding over by the court, the Company reached reconciliatory agreement with China Property, where the Company would pledge its 90.57% equity of Shenzhen Spike Biology Pharmaceutics Co., Ltd. and 5% equity of Shenzhen ELCO Air-condition Co., Ltd. and net credit of legal recourse enjoyed by Shenzhen Spike Biology Pharmaceutics Co., Ltd. to China Property. (4) Shenzhen Plastic Company, an affiliated company of the Company, and its controlling subsidiary called Shenzhen SPC Chemical Construction Material Co., Ltd. signed Equity Transfer Agreement with Zhuzhou Plastic Co., Ltd. respectively on Dec. 26, 2003 and transferred 45% equity of Shenzhen Petrochemical Plastic Group Zhuzhou Plastic Co., Ltd. held by Shenzhen Plastic Company and 5% equity of Zhuzhou Plastic Co., Ltd. held by Shenzhen SPC Chemical Construction Material Co., Ltd. to Zhuzhou Plastic Co., Ltd. at price of RMB 830,000. Due to lose control on Shenzhen Plastic Company, the Company did not gain relevant information on the equity transfer. 4. Explanation on issues involved in the auditors’ report issued by certified public accountants The Supervisory Committee gave attention to the auditors’ report unable to form an opinion issued by Huazheng Certified Public Accountants and Moore Stephens Shenzhen Nanfang Minhe Certified Public Accountants. For the issues involved in the said auditors’ report, the Supervisory Committee agreed with the explanation made by the Board of Directors on this. SECTION X．SIGNIFICANT EVENTS I. Significant Lawsuit and Arbitration 1.The progress of the unresolved lawsuits events disclosed in the 1st half of 2003 and before: (1) The objects involved in the lawsuits, which the Company as the debtor was 14 indicted by the creditor and judged to lose lawsuit by the court, amounting to RMB 15 million and related interest. (2) The objects involved in the lawsuits events, which the Company as the guarantor for other companies’ loan from bank was indicted by the creditor and judged to take joint repayment liability by the court, amounting to RMB 0.9 million and related interest. 2.The lawsuits occurred in the 2nd half of 2003: (1) the objects involved in the lawsuits, which the Company as the debtor was indicted by the creditor, amounting to RMB 104,710,000 and related interest including the objects involved in the lawsuit the Company was judged to lose amounting to RMB 18.39 million and relevant interest. (2) The objects involved in the lawsuits, which the Company as the guarantor for other companies’ loan from bank was indicted by the creditor, converting into RMB 237.15 million and related interest including the object, which the Company was judged to take joint repayment liability for, converting into RMB 20.15 million and related interest. Concerning the aforesaid lawsuits involved in 1 and 2 and their progress, please refer to the public notice of the Board of Directors disclosed on Securities Times and Ta Kung Pao dated July 10, 2003, Nov. 6, 2003, Dec. 26, 2003 and Dec. 31, 2003. 3. Because of the dissension of loan guarantee contract among the affiliated company of the Company, Shenzhen SPEC Chemical Fiber Co., Ltd., Shenzhen SPEC Donggang Chemical Fiber Co., Ltd. and Belgium United Bank Shenzhen Branch (the object was USD 2.1 million and related interest), Shenzhen Intermediate People’s Court had a compulsive auction of 54.51% equity of Shenzhen SPEC Donggang Chemical Fiber Co., Ltd. held by Shenzhen SPEC Chemical Fiber Co., Ltd. in Aug. 2003 to commute the above debts. For its detail, please refer to the public notice on Securities Times and Ta Kung Pao dated Aug. 8, 2003. 4. Because the Company’s subsidiary, Shenzhen Plastic Company, and its subsidiary, Shenzhen Plastic Chemical Construction Material Co., Ltd. could not repay the principal and interest of loan from Shenzhen Commercial Bank, the court put teeth in the land, architecture, real estate, equipment, vehicle and electrical equipment of Shenzhen Plastic Company to offset the debt of Shenzhen Plastic Company and it caused Shenzhen Plastic Company could not carry out normal production and operation activities. Please refer to the public notice on Securities Times and Ta Kung Pao dated Mar. 29, 2003. II. Material purchase and sales of assets as well as absorbing and consolidation event. 1.The Company’s subsidiary, Shenzhen Petrochemical Plastic Group Co., Ltd. (“Shenzhen Plastic Company”) provided a large amount of guarantee for the Company and Shenzhen Petrochemical Group Co., Ltd. in recent years. Because the Company occurred financial crisis and was hard to repay the mature liabilities, Shenzhen Plastic Company undertook the joint repayment liabilities of the aforesaid guarantee and it caused Shenzhen Plastic Company was insolvency and stopped normal production and operation activities. The other shareholder, China Real Estate (Holdings) Co., Ltd. (China Real Estate) indicted the Company violated its legal right and interest and the court has judged the Company to repay RMB 70,776,000 losses. In Mar. 2003, being presided by the court, the Company and China Real Estate reached the pacification agreement and offset 90.57% equity of Shenzhen Spike Biology Pharmaceutics Co., Ltd., 5% equity of Shenzhen ELCO Air-condition Co., Ltd. held by the Company and RMB 42,866,400 net credit that Spike Biology Pharmaceutics Co., Ltd. had legal recourse for it to China Real Estate. After the aforesaid events was finished implementing, China Real Estate transferred 28.05% equity of Shenzhen Plastic Company legally held by China Real Estate to the 15 Company. Please refer to the public notice on Securities Times and Ta Kung Pao dated Mar. 5, 2003 and Mar. 29, 2003 for detail. 2. In Dec. 2003, the Company’s subsidiary, Shenzhen Plastic Company and its subsidiary, Shenzhen Plastic Chemical Construction Material Co., Ltd. respectively transferred 45% equity and 5% equity of Shenzhen Petrochemical Plastic Group Zhuzhou Plastic Co., Ltd. (“Zhuzhou Plastic Company”) to Zhuzhou Plastic Co., Ltd. actually controlled by its personnel of operation and management as RMB 0.75 million and 0.08 million and finished the change procedures of industrial and commercial register in Jan. 2004. Except for the aforesaid events, the Company had no other material purchase and sale of assets, consolidation and merge. III. Significant Correlative Transactions 1. In the report period, the Company has not occurred new significant related transactions. 2. In the report period, the Company and its subsidiaries have not provided new guarantee for the loan of the related companies. IV. In the report year, the Company offered guarantees for loans totaling RMB 1,596,730,000, including RMB 881,380,000 guarantee for external enterprises, RMB 532,850,000 guarantee for related enterprises and RMB 163,650,000 guarantee for its subsidiaries. Please refer to Note.VIII-2 of the accounting statement for the details. The aforesaid guarantees were overdue excluding RMB 50 million. Among it, the guarantees that were involved in the lawsuits or indicated the Company to lost the ability of repayment with certain witnesses and was recorded as estimated liability were RMB 942,950,000. V. In the report year, the controlling shareholder of the Company, Guangzhou Puliqi Communications Investment Co., Ltd. made the following commitment on relevant events of obtaining the share-controlling right of the Company through judicial procedures: if CSRC did not exempt the comprehensive offer purchase liabilities, Guangzhou Puliqi Communications Investment Co., Ltd. would reduce the held shares of the Company below 30% through transfer but keep the share-controlling position of the Company. VI. In the report period, the Company paid Certified Public Accountants (Shenzhen Nanfang Minhe Certified Public Accountants and Moore Stephens (Shenzhen) Nanfang Minhe Certified Public Accountants) financing audit expense amounting to RMB 0.45 million. The Certified Public Accountants has provided audit service for the Company for three years. VII. Other Significant Events 1. Because of the dissension of loan contract of the original controlling shareholder of the Company, Shenzhen Petrochemical Corp., the state-owned legal person shares amounting to 164,546,553 shares of the Company held by it (taking by 54.24% of the total share capital of the Company) were given public auction in Hangzhou on Oct. 16, 2003 and Guangzhou Puliqi Communications Investment Co., Ltd. obtained the aforesaid shares as RMB 0.131 per share through competitive auction. The procedure of owner change in register of the aforesaid shares has been finished in China Securities Depository and Clearing Corporation Limited Shenzhen Branch on Dec. 15, 2003. The procedures of the application of exempting offer purchase liabilities of Guangzhou Puliqi Communications Investment Co., Ltd. for CSRC is in process. Please refer to the public notices on Securities Times and Ta Kung Pao dated Sep. 11, 2003, Sep. 25, 2003, Oct. 17, 2003, Nov. 6, 2003, Nov. 25, 2003 and Dec. 17, 2003 for the details. 16 2. By the end of report year, the account receivables of the Company from the original control shareholder, Petrochemical Group is RMB 1.02 billion. Concerning the reason of this account receivable and the difficulty in the process of resolving, please refer to Significant Correlative Transactions in 2001 Annual Report. Furthermore, in Dec. 2003, Shenzhen Investment Holding Corporation transferred 100% equity of Petrochemical Group held by it as RMB 10 to the persons in charge of Petrochemical Group and its affiliated companies. Shenzhen Investment Holding Corporation and Petrochemical Group made no essential arrangement for the huge debts of Petrochemical Group owed to the Company, so the possibility of callback of the accounts receivables is very small. 3. The Company signed Three Parties Agreement on Transferring Loan to Investment and Share Equity with China Agricultural Bank of China Shenzhen Branch (“Agricultural Bank”) and China Great Wall Assets Management Corporation Shenzhen Office (“Great Wall Corporation”) in Dec.2000. Agricultural Bank agreed to transfer the loan of the Company converting into RMB 270,000,000(including RMB 3,000,000 nominal loan of one related company) to Great Wall Corporation. Since the transfer date, Agricultural Bank of China has not executed the right of the creditor again and actually relieved the loan of the Company. Meanwhile, RMB 270,000,000 credit of the Company against Petrochemical Group amounting to RMB 270,000,000 was transferred to investment income with equal amount against Petrochemical Group and the Company correspondingly offset the account receivable against Petrochemical Group amounting to RMB 267,000,000 but should take corresponding responsibility in the process of establishing the objective company relating with loan-to-investment by Petrochemical Group and Great Wall Corporation. By the end of the report period, because the objective company is not established, the agreement of loan-to-investment has not been finished execution and Great Wall Corporation has not obtained the investment stated in the aforesaid agreement. Agricultural Bank and Great Wall Corporation has put forward to release the agreement to Petrochemical Group and the Company and required to recover the credit and liabilities relationship of loan between Agricultural Bank and the Company. But according to the regulations of the above agreement and contract, Petrochemical Group is the direct debtor of the above loan totaling RMB 270 million and the nature and scope of the corresponding responsibilities that the Company should take in process of establishment of the objective company is not clear, so the corresponding responsibilities that the Company should take for the direct debtor is hard to estimate and record in account. 3. Items after period (1) According to the suggestion of the principal shareholder of the Company, Guangzhou Puliqi Communications Investment Co., Ltd., the Board of Directors agreed to engage Huazheng Certified Public Accountant Co., Ltd. as the audit organization of the financial report 2003 (A-share) of the Company in Mar. 2004 and submit it to the next Shareholders’ General Meeting for examination. (2) On Feb. 27, 2004, CSRC Shenzhen Check Bureau issued Notification of Register and Investigation (2004SJLTZ NO. 002) to the Company that decided to put on record and investigate the Company because the Company was suspected of breaking securities laws and regulations. (3) Concerning the lawsuit that Commercial Bank indicted the Company not to repay the mature loan, Shenzhen Intermediate People’s Court made the civil judgement with (2001) SZFJYCZ NO. 269 and sealed up the house property in No. 401, Shangbu Industrial Zone, Futian District, Shenzhen. On Mar. 17, 2003, Shenzhen Intermediate 17 People’s Court judged that the house property was entrusted Shenzhen Land Property Exchange Center for auction and was obtained by Shenzhen Success Digit Technology Co., Ltd. as RMB 52 million through competitive auction. (4) According to the suggestion of the control shareholder of the Company, Guangzhou Puliqi Communications Investment Co., Ltd., the Company held the provisional Shareholders’ General Meeting on Feb. 7, 2004 and the Shareholders’ General Meeting reelected the Board of Directors and the Supervisory Committee of the Company of the Company. After reelection, the Board of Directors of the Company is composed of five people including Li Nujiang, Ruan Keshu, Du Baijun, Zhou Zhen and Cai Jianping. Li Nujiang is Chairman of the Board of the Company (legal representative); the Supervisory Committee is composed of three people including Zhuang Yuexun, Yu Huming and Liu Yayan. Zhuang Yuexun is Chairman of the Supervisory Committee. V. About management control of two industrial enterprises of the Company A. According to relevant laws, regulations and Articles of Association of the Company, the Company held the provisional Shareholers’ General Meeting of the affiliated company, Shenzhen Petrochemical Plastic Group Co., Ltd. on Mar. 24, 2004 and elected the new Board of Directors of Shenzhen Plastic Company and the Board of Directors appointed new management team. So far, the original operation team of Shenzhen Plastic Company refused to transfer work and the Company could not make effective management for Shenzhen Plastic Company. B. According to relevant laws, regulations and Articles of Association of the Company, the Company changed three directors expedited to Shenzhen Petrochemical Donghong Chemical Fiber Material Co., Ltd. and changed the legal representative. So far, the original legal representative of Shenzhen Petrochemical Donghong Chemical Fiber Material Co., Ltd. did not transfer the business license, seal and so on to the appointed legal representative and the Company could not make effective management for Shenzhen Petrochemical Donghong Chemical Fiber Material Co., Ltd.. SECTION XI. FINANCIAL REPORT (Attachment) SECTION XII. DOCUMENTS AVAILABLE FOR REFERENCE 1. Accounting Statements with the personal signatures and seals of legal representative, person in charge of the accounting affairs and person in charge of accounting institutions; 2. Original of Auditor’s Report with the seals of Moore Stephens Nanfang Minhe Certified Public Accountants and Huazheng Certified Public Accountants; 3. Originals of all documents and manuscripts of Public Notices of the Company disclosed in public on the newspapers designated by China Securities Regulatory Commission in the report period. Board of Directors of Shenzhen Petrochemical Industry (Group) Co., Ltd. April 28, 2004 18 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE ’S REPUBLIC OF CHINA) CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 CONTENTS PAGE(S) REPORT OF THE AUDITORS 1-2 CONSOLIDATED INCOME STATEMENT 3-4 CONSOLIDATED BALANCE SHEET 5-6 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 7 CONSOLIDATED CASH FLOW STATEMENT 8-9 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 10-42 1 REPORT OF THE AUDITORS TO THE HOLDERS OF B SHARES OF SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. 深圳石化工业集团股份有限公司 (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA WITH LIMITED LIABILITY) We have audited the accompanying consolidated balance sheets of the Shenzhen Petrochemical Industry (Group) Co., Ltd (the “Company”) and its subsidiaries (the “Group”) as of 31 December 2003, and the related consolidated income statement, cash flow and changes in equity for the year then ended. These financial statements set out on pages 3 to 41are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. Except as discussed in the following paragraphs, 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, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our ability to obtain reasonable assurance on the financial statements was impeded as stated in the following paragraphs: As discussed in Notes 14 and 16 to the financial statements, the Company was unable to implement controls over certain of its subsidiaries and, as a result, did not include these subsidiaries in the consolidated financial statements. Owing to the inability of management to estimate the effect of non-consolidation, we cannot substantiate the effects of not incorporating the financial statements of the subsidiaries in the Company’s financial statements. As discussed in Note 34 to the financial statements, there exists uncertainty relating to the proper transfer of a bank loan in the amount of RMB$270,000,000 from the Company to another company and whether the Company should recognize this bank loan. We were not provided with adequate financial information in respect of this event and there were no other satisfactory audit procedures that we could adopt to assess the impact of this event to the financial statements as at 31 December 2003. As discussed in Note 2 to the financial statements concerning the adoption of the going concern basis on which the financial statements have been prepared, the Group has incurred a net loss for the year ended 31 December 2003 of RMB309,773,000 and, as of that date, the Group’s liabilities exceeded its assets by RMB2,406,774,000. Notwithstanding the loss for the year and the deficiency of net assets at 31 December 2003, the directors have prepared the financial statements on the going concern basis. In the opinion of the directors, in order for the Group to continue as a going concern, a restructuring of the Group’s debts will be required and such restructuring will require the strong support of both the relevant government authorities and the Group’s creditors. At the date of this report, the aforementioned issues have not been successfully resolved and it is likely that the Company will be de-listed as it has experienced losses for three consecutive years. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Because of the significance of the matters referred to in the preceding paragraphs, we do not express an opinion on the financial statements. 2 Moore Stephens Shenzhen Nanfang Minhe Certified Public Accountants 26 April 2004 3 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2003 Notes 2003 2002 RMB’000 RMB’000 Turnover 4 ____ 614,678 Cost of sales ____ (526,422) ________ _______ Gross profit ____ 88,256 Other revenue 6 4,561 6,786 Distribution costs ____ (29,752) Administrative expenses (8,518) (76,461) Write-back of / (provision for) doubtful debts 10,777 (59,616) Provision for compensation payment for litigation ____ (42,866) Provision for payment for breach of contracts ____ (9,856) Provision for economic compensation for employees (1,714) (36,036) Other operating expenses (761) (2,161) Write-back of / (provision for) impairment loss on fixed assets 12 26,567 (91,110) Provision for impairment loss on construction in progress ____ (5,346) Provision for impairment loss on intangible assets ____ (360) _______ _______ Profit /(loss) from operating activities 7 30,912 (258,522) Finance costs 8 (68,361) (102,359) Share of results of associates ____ (4,047) Provision for impairment loss on interests in non-consolidated 16 (66,230) ____ subsidiaries Provision for impairment loss on long term investments ____ (14,091) Gain on disposal of long term investments and subsidiaries 496 13,974 Loss on disposal of other investments ____ (167) Provision for guarantees given to banks 22 (206,590) (116,844) ________ _______ Loss before taxation (309,773) (482,056) Taxation 9 ____ (4,891) ________ ________ Loss before minority interests (309,773) (486,947) Minority interests ____ 35,257 ________ ________ Loss attributable to shareholders (309,773) (451,690) ======= ======= 4 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2003(continued) Loss per share ---basic 11 RMB(1.02) RMB (1.49) ---diluted 11 N/A N/A The notes on page 10 to 42 form part of these financial statements 5 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2003 Notes 2003 2002 RMB’000 RMB’000 Non-current assets Fixed assets 12 88,004 330,487 Construction in progress 13 ____ 14,736 Intangible assets 15 ____ 10,366 Interests in non-consolidated subsidiaries 16 108,394 30,762 Interests in associates 17 (46) 2,977 Long term investments 18 12,172 29,766 ________ ________ 208,524 419,121 ________ ________ Current assets Inventories 19 ____ 88,457 Accounts receivable, other receivables and prepayments 2,075 160,591 Short term investments 20 ____ 200 Cash and bank balances 1,485 72,277 ________ ________ 3,560 321,525 ________ ________ Current liabilities Accounts payable and other payables 812,306 520,862 Bank and government loans due within one year 21 722,581 1,230,163 Tax payable 1,059 6,784 Staff bonus and welfare fund 441 1,518 Provision for guarantees given to banks 22 1,063,627 878,341 Provision for guarantees given to customers 22 18,844 18,850 Provision for compensation payment for litigation ____ 42,866 Provision for payment for breach of contracts ____ 9,856 Provision for economic compensation for staffs 23 ____ 35,030 ________ ________ 2,618,858 2,744,270 ________ ________ Net current liabilities (2,615,298) (2,422,745) ________ ________ Total assets less current liabilities (2,406,774) (2,003,624) ________ ________ 6 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) CONSOLIDATED BALANCE SHEET (continued) AS AT 31 DECEMBER 2003 Notes 2003 2002 RMB’000 RMB’000 Non-current liabilities Long term bank loans 21 ____ 3,106 Long term payables 24 ____ 7,596 Minority interests ____ 82,675 ________ ________ Net liabilities (2,406,774) (2,097,001) ======= ======= Equity Share capital 25 303,355 303,355 Reserves 26 (2,710,129) (2,400,356) ________ ________ Shareholders’ deficiency (2,406,774) (2,097,001) ======= ======= The notes on page 10 to 42 form part of these financial statements Approved and authorized for issue by the board of directors on 26 April 2004 DIRECTOR DIRECTOR 7 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) CONSOLIDATED STATEMENT OF CHANGES IN EQUITY AS AT 31 DECEMBER 2003 Accumulated Share capital Capital losses reserve Total RMB’000 RMB’000 RMB’000 RMB’000 (Note 25) At 1 January 2002 303,355 233,386 (2,182,052) (1,645,311) Net loss for the year — — (451,690) (451,690) _______ _______ _______ ________ At 31 December 2002 303,355 233,386 (2,633,742) (2,097,001) ====== ====== ====== ======= 303,355 233,386 (2,633,742) (2,097,001) At 1 January 2003 Net loss for the year ____ ____ (309,773) (309,773) _______ _______ ________ _______ At 31 December 2003 303,355 233,386 (2,943,515) (2,406,774) ====== ====== ====== ======= 8 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2003 2003 2002 RMB’000 RMB’000 CASH FLOWS FROM OPERATING ACTIVITIES Loss for operating activities (309,773) (451,690) Adjustments for: Loss attributable to minority shareholders __ (35,257) Depreciation 1,666 30,207 Amortization of intangible assets __ 5,034 Loss on disposal of and scrapped fixed assets 379 1,518 Interest received (15) (776) Interest paid __ 19,029 Exchange loss __ 445 Share of loss in associates __ 4,047 Provision for impairment loss on interests in non-consolidated subsidiaries and long term investments 66,230 14,091 Gain on disposal of long term investments (496) (13,974) Gain on disposal of other investments __ 167 (Write-back of )/provision for impairment loss on (26,567) 96,816 fixed assets and other assets Decrease in inventories 88,457 39,629 Increase in interests payable 68,374 79,520 Decrease in accounts receivable 158,516 95,663 Decrease/(increase) in accounts payable 272,769 (60,049) Provision for guarantees given 185,286 204,595 Income tax paid __ (2,157) Others (5) 131 ________ ________ Net cash generated from operating activities 504,821 26,989 ________ ________ 9 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) CONSOLIDATED CASH FLOW STATEMENT (continued) FOR THE YEAR ENDED 31 DECEMBER 2003 CASH FLOWS FROM INVESTING ACTIVITIES Interest received 15 776 Interest paid __ (19,029) Dividends received __ 2,721 Purchases of fixed assets __ (14,946) Proceeds from disposal of fixed assets 460 2,573 Increase in cash from return of investments 14 16 Cash equivalents in non-consolidated subsidiaries (68,720) (1,633) at beginning of year ________ ________ Net cash used in investing activities (68,231) (29,522) ________ ________ CASH FLOWS FROM FINANCING ACTIVITIES New bank loans raised __ 19,200 Repayment of bank loans (507,582) (30,642) New long term bank loans raised __ 1,150 Payment of financing expenses __ (265) ________ ________ Net cash used in financing activities (507,582) (10,557) ________ ________ Net decrease in cash and cash equivalents held (70,992) (13,090) Cash and cash equivalents at beginning of the year 72,477 85,567 ________ ________ Cash and cash equivalents at end of year 1,485 72,477 ======== ======== CASH AND CASH EQUIVALENTS AT END OF YEAR Cash and bank balances 1,485 72,277 Short term investments __ 200 ________ ________ 1,485 72,477 ======== ======== 10 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 1. ORGANISATION AND PRINCIPAL ACTIVITIES Shenzhen Petrochemical Industry (Group) Co., Ltd. (the “Company”), formerly known as Shenzhen Petrochemical Holding Company Limited was formed by the merger of two state-owned enterprises, Shenzhen Petrochemical Industry Company (established in February 1983), and Shenzhen Gulf Petrochemical Industry Corporation (established in September 1984). On 12 November 1991, the Company obtained approval from the Shenzhen Municipal People’s Government to reorganize into a joint stock limited company. Under the approval of the People’s Bank of China Shenzhen Branch, the Company issued A Shares for the PRC investors and B Shares for the overseas investors. Both A Shares and B Shares are listed on the Shenzhen Stock Exchange and carry equal rights. On 28 October 1999, the Company changed its name from Shenzhen Petrochemical Holding Company Limited to Shenzhen Petrochemical Industry (Group) Co., Ltd following its strategic restructuring. The principal activities of the Company and its subsidiaries (the “Group”) include manufacturing and trading of new chemical materials, fine chemicals, bio-engineering products, chemical fiber, plastic and related products, new and high-tech products development, investments, import and export. 2. BASIS OF PRESENTATION The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board and are prepared under the historical cost convention. The accounting policies adopted by the Group under IFRS differ from the accounting policies adopted in the preparation of the PRC statutory financial statements of the Group, which were prepared in accordance with the Accounting Standards for Enterprise Business and Accounting Systems for Enterprise Business in the PRC. To conform with IFRS, adjustments have been made to the PRC statutory financial statements. Details of the impacts of such adjustments on the net liabilities as at 31 December 2003 and net loss for the year then ended are included in note 36 of the financial statements. The preparation of financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. The directors are of the opinion that the going concern of the Group will be dependent upon a successful debt restructuring of the Group and such restructuring will require the strong support of 11 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2003 both the relevant government authorities and the creditors. As at the date of this report, the above issues have not been successfully resolved. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of consolidation ----------------------------- The consolidated financial statements include the audited financial statements of the Company and its subsidiaries as set out in note 14 as at 31 December 2003 and of the results for the year then ended. The results of subsidiaries acquired or disposed of during the year are consolidated from or to their effective dates of acquisition or disposal respectively and the share attributable to minority interests is deducted from or added to profit from ordinary activities after taxation. All significant inter-company transactions and balances within the Group are eliminated on consolidation. Subsidiaries ----------------- A subsidiary is a company, other than a jointly-controlled entity, in which the Company, directly or indirectly, controls more than half of its voting power or issued share capital or right to participate in a distribution of either profits and capital for long term purposes. Non-consolidated subsidiaries ---------------------------------- In the consolidated balance sheet, the non-consolidated subsidiaries are stated at cost less impairment loss. Associates -------------- An associate is a company over which the Group is in the position to exercise significant influence, but not control, through participation in the financial and operating policy decisions of the investee. The interests in associates are accounted for under the equity method of accounting in the Group’s financial statements. Such interests are stated in the consolidated balance sheet at cost as adjusted by post-acquisition changes in the Group’s share of the net assets of the associates and include goodwill on acquisition, if any, less any impairment losses of individual investment. Goodwill or negative goodwill 12 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2003 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Associates (continued) -------------- arising from the acquisition of associates, which was not previously eliminated or recognised in reserves, is included as part of the Group’s interests in associates. Where a group enterprise transacts with an associate of the Group, unrealized profits and losses are eliminated to the extent of the Group’s interest in the relevant associate, except to the extent that unrealized losses provide evidence of an impairment of the asset transferred. Investments ---------------- Listed and unlisted investments held for long term investment purposes are stated at cost less any impairment losses. Short-term investments are stated at market value at the balance sheet date. Dividend income from investments is recognized when the shareholder’s right to receive payment is established. Goodwill ----------- Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary or associate at the date of acquisition. Goodwill is recognized as an asset and amortised on a straight-line basis over its estimated useful life. Goodwill arising on the acquisition of an associate is included within the carrying amount of the associate. Goodwill arising on the acquisition of subsidiaries is presented separately in the balance sheet. On disposal of a subsidiary or associate, the attributable amount of unamortised goodwill is included in the determination of the profit or loss on disposal. Negative goodwill ----------------------- Negative goodwill represents the excess of the Group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary or associate at the date of acquisition over the cost of acquisition. Negative 13 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2003 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Negative goodwill (continued) ----------------------- 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 recognized as income on a straight-line basis over the remaining average useful life of the identifiable acquired depreciable assets. To the extent that such negative goodwill exceeds the aggregate fair value of the acquired identifiable non-monetary assets, it is recognized as income immediately. Negative goodwill arising on the acquisition of an associate is deducted from the carrying amount of that associate. Negative goodwill arising on the acquisition of subsidiaries is presented separately in the balance sheet as a deduction from assets. Fixed assets --------------- Fixed assets are stated at cost, less provisions for depreciation and any impairment losses. Details are set out in note 12. The cost of an asset comprises its purchase price and any directly attributable cost of bringing the asset to its working condition and location for its intended use. Expenditure incurred after the asset has been put into operation, such as repairs and maintenance and overhaul costs, is normally charged to the income statement in the year in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the asset, the expenditure is capitalised as an additional cost of the asset. When an asset is sold, any gain or loss resulting from the disposal, being the difference between the sales proceeds and the carrying amount of the asset, is included in the income statement. Fixed assets are depreciated, over their estimated useful lives, using the straight-line method, taking into account an estimated residual value of 5 percent of the asset value. The annual rates of depreciation of fixed assets are set out as follows: Estimated useful lives Depreciation rate Land and buildings 40-50 years 2%-2.38% Machinery and equipment 14 years 6.79% Motor vehicles 10 years 9.5% Furniture, fixtures and office equipment 8-12 years 7.92%-11.88% Leasehold improvements 3-5 years 20%-33% 14 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2003 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Construction in progress ----------------------------- Construction in progress is stated at cost, less any impairment loss. Cost includes all direct construction.expenditure and other indirect costs attributable to such construction in accordance with the Group’s accounting policy. No depreciation is provided on these assets prior to its completion Intangible assets --------------------- Intangible assets mainly represent the cost of acquisition of technical know-how and die expenses and are stated at cost less amortization and provision, if necessary, for any impairment loss. Amortization is provided on a straight-line basis over the estimated useful lives of relevant intangible assets. The estimated useful lives are as follows: Technical know-how 10 years Die expenses and others 5 years or benefit periods, if shorter Inventories -------------- Inventories are stated at the lower of cost and net realizable value. Cost is determined on the first-in, first-out or weighted average basis and comprises direct materials and, where applicable, direct labor, other direct costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Net realizable value represents the estimated selling prices in the ordinary course of business less any all estimated costs of completion and costs to be incurred in marketing, selling and distribution. Provisions, contingent liabilities and contingent assets ------------------------------------------------------------------- Provisions are recognized when the Group has a present legal or constructive obligation as a result of past events, and it is probable that an outflow of resources will be required to settle the obligation of which a reliable estimate can be made. Where the Group expects a provision to be reimbursed, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. 15 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2003 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Provisions, contingent liabilities and contingent assets (continued) ------------------------------------------------------------------- A contingent liability is a possible obligation that arises from past events and its existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group. It can also be a present obligation arising from past events that is not recognized because it is not probable that outflow of economic resources will be required or the amount of obligation cannot be measured reliably. A contingent liability is not recognized but is disclosed in the notes to the accounts. When a change in the probability of an outflow occurs so that it is probable, it will be recognized as a provision. A contingent asset is a possible asset that arises from past events and its existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain events not wholly within the control of the Group. Contingent assets are not recognized but are disclosed in the notes to the accounts when an inflow of economic benefits is probable. Only when an inflow is virtually certain, a contingent asset is recognized. Foreign currency translation ------------------------------------ The financial statements are expressed in Renminbi. All transactions in foreign currencies during the year are translated into Renminbi at the applicable rates of exchange prevailing at the respective dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into Renminbi at the exchange rates quoted by the People’s Bank of China prevailing at the balance sheet date. Exchange differences arising in these transactions are included in the income statement. On consolidation, the financial statements of overseas subsidiaries maintained in foreign currencies are translated at exchange rates ruling on the balance sheet date. Exchange differences arising on consolidation, if any, are included in reserves. Deferred taxation ------------------------ The charge for current income tax is based on the results for the year as adjusted for items which are 16 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2003 non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from 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. In principle, deferred tax liabilities are 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) from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction which affects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in jointly controlled entities, 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. Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled. Deferred tax is charged or credited in the income statement, except when it relates to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Operating leases ---------------------- The income and expenses under operating leases are dealt with in the income statement on a straight-line basis over the period of the respective leases. Revenue recognition ------------------------- Revenue from the sale of goods is recognized on the transfer of risks and rewards of ownership, 17 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2003 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) which generally coincides with the time when goods are delivered to customers and the title has passed. Interest income is recognized on a time proportion basis, taking into account the principal amounts outstanding and the interest rates applicable. Rental income is recognized on time proportion basis over lease term. Cash and cash equivalents --------------------------------- Cash and cash equivalents comprise cash at bank and on hand, demand deposits with banks and other financial institutions and short term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, having been within three months of maturity at acquisition. Value added tax ------------------- Value added tax is calculated in accordance with the relevant tax laws of the PRC, expressed by way of the difference between the output tax on local sales and the input tax on local purchases. These taxes are not included in the sales and purchases respectively in the income statement. For goods manufactured and sold in Shenzhen SEZ, the value-added tax is exempted in accordance with the local tax regulations of the Shenzhen SEZ. Excess of output over input value added tax is dealt with in the income statement as other operating income. Segment reporting ----------------------- A segment is a distinguishable component of the Group that is engaged either in providing products or services within a particular operating divisions/(business segment) which subject to risks and rewards that are different from the other segments. Related parties ------------------ 18 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2003 3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence, related parties may be individuals or corporate entities Impairment --------------- At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Recoverable amount is the greater of net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. Impairment losses are recognized as an expense immediately, unless the relevant asset is land or buildings other than investment property carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverse, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognized as income immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. Retirement benefits costs ------------------------------- Payments to defined contribution retirement benefits plans are charged as expenses as they fall due.. 19 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2003 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Payments made to the retirement schemes operated by the Bureau of Social Security Administration of Shenzhen SEZ are dealt with as payments to defined contribution plans where the Group’s obligations under the schemes are equivalent to those arising in a defined contribution retirement benefit plans Research and development costs ----------------------------------------- Research and development costs are written off as incurred, except for development expenditure incurred on an individual project or process which is capitalized and carried forward when its future recoverability can be regarded as reasonably assured. Financial instruments --------------------------- Financial Assets The Group’s principal financial assets are bank balances and cash and trade receivable and equity investments. Trade receivables are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts. Long-term investments, where the Group is not in a position to exercise significant influence or joint control, are stated at cost less any impairment losses, where the investments’ carrying amount exceeds its estimated recoverable amount. Financial Liabilities Financial liabilities are classified according to the substance of the contractual arrangements entered into. Debt instruments issued which carry a right to convert to equity that is dependent on the outcome of uncertainties beyond the control of both the Group and the holder, are classified as liabilities except where the possibility of non-conversion is remote. Significant financial liabilities include interest-bearing bank loans and overdrafts and trade and other payables. Interest-bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption, are accounted for on an accrual basis and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. Trade and other payables are stated at their nominal value. 20 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2003 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Borrowing costs -------------------- All borrowing costs are expended in the income statement in the period in which they are incurred except to the extent that they are capitalized as being directly attributable to the acquisition, construction or production of qualifying asset which necessarily take a substantial period of time to get ready for its intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization. 4. TURNOVER Turnover represents gross invoiced sales less sales tax, returns and discounts. There was no turnover for the year as there were no manufacturing and selling of products business activities during the year. 5. SEGMENT REPORTING (a) Business segments During the year, there were no manufacturing and selling of products business activities. Therefore, analysis of the business segments cannot be provided. (b) Geographical segments The Group’s operations and markets are all located in the PRC and no business on manufacturing and sales of products. Therefore, analysis of the geographical segment is not required. 6. OTHER REVENUE 2003 2002 RMB’000 RMB’000 Rental income 4,107 4,172 Net income from sale of raw materials __ 710 Export subsidies __ 315 Value-added tax return from local sales __ 1,463 Accounts payable written off __ 114 Others 454 12 ________ ________ Total 4,561 6,786 ======= ======= 21 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2003 7. PROFIT/(LOSS) FROM OPERATING ACTIVITIES 2003 2002 RMB’000 RMB’000 Profit / (loss) from operating activities is arrived at after charging / (crediting): Staff costs 1,346 70,164 Cost of inventories __ 526,422 Depreciation of fixed assets 1,666 30,207 (Write-back of) / provision for bad and doubtful debts (10,777) 59,616 Amortization of intangible assets __ 5,034 Loss on disposal of fixed assets 379 174 Loss on scrapped fixed assets __ 1,344 Rentals in respect of premises under operating leases 479 3,996 Auditors’ remuneration 650 650 8. FINANCE COSTS 2003 2002 RMB’000 RMB’000 Interest paid 68,374 101,564 Interest income (15) (776) Exchange difference __ 445 Bank expenses 2 1,126 _______ _______ Total 68,361 102,359 ======= ======= 9. TAXATION 2003 2002 RMB’000 RMB’000 The charge comprises: 22 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2003 9. TAXATION(continued) PRC income tax for the year __ 4,891 ======= ======= Domestic income tax is calculated in accordance with applicable income tax regulations and at 15% (2002:15%) of the estimated assessable profit determined in accordance with the accounting principles and the relevant financial regulations applicable to enterprises in the PRC. Taxation for other jurisdiction is calculated at rates prevailing in the respective jurisdictions, details of which are as follows: 2003 2002 RMB’000 RMB’000 PRC enterprises income tax -enterprises in Shenzhen 15% 15% -enterprises outside Shenzhen 33% 33% Reconciliation to the domestic tax expense is as follows: 2003 2002 RMB’000 RMB’000 Accounting profit under IFRS (309,773) (482,056) Difference arising from accounting policies based on IFRS (18,161) (114) _________ _________ Accounting profit under Accounting Standards for Business (327,934) (482,170) Enterprises of the PRC Tax at the domestic rate of 15% (49,190) (72,326) Tax effect of unrecognized tax losses 22,863 15,053 Net tax effect of expenses not deductible for tax purposes and other factors 26,327 52,382 _________ _________ Tax expense __ 4,891 ======== ======== In accordance with the tax law of the PRC, in a maximum period of 5 successive years, operating loss made in the year by a company can be used to offset against the profits earned in the following years. Therefore, the Group has unused tax losses of approximately RMB129,573,000 (2002: RMB100,350,000 ) available for offsetting against future profits. No deferred tax asset has been recognized in the financial statements due to the unpredictability of the future profit streams. 23 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2003 10. DIVIDENDS The directors of the Company do not recommend the payment of a dividend for the year. 11. LOSS PER SHARE The calculation of loss per share is based on the net loss attributable to shareholders of RMB309,773,000(2002: RMB451,690,000) on 303,354,979 A and B shares of RMB 1.00 each in issue during the year. No diluted loss per share has been presented as there were no dilutive potential shares during the year ended 31 December 2003 and 2002. 12. FIXED ASSETS Land and Machinery Motor V Furniture, Leaseholds Total Items Buildi and ehicles Fixtures and Improvemen ngs Equip Office ts ment Equipment RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Cost or Valuation At 1 January 2003 374,888 270,386 17,465 21,912 8,371 693,022 Additions __ __ __ __ __ __ Disposals (7,736) __ (765) __ __ (8,501) Effect of (199,875) (270,386) (15,407) (16,152) (8,371) (510,191) non-consolidation of subsidiaries (Note 14) _______ _______ _______ ________ ________ _______ At 31 December 167,277 __ 1,293 5,760 __ 174,330 2003 _______ _______ _______ _______ ________ _______ Accumulated Depreciation At 1 January 2003 145,139 184,399 9,457 15,343 8,197 362,535 Additions 1,508 __ 102 56 __ 1,666 Disposals (1,568) __ (643) __ __ (2,211) Effect of (38,627) (184,399) (8,051) (9,823) (8,197) (249,097) non-consolidation of subsidiaries 24 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2003 12. FIXED ASSETS (continued) (Note 14) (Reversal (26,775) __ 104 104 __ (26,567) of )/provision for impairment _______ _______ _______ ________ ________ _______ At 31 December 79,677 __ 969 5,680 __ 86,326 2003 Net Book Value ________ _______ _______ ________ ________ _______ At 31 December 87,600 __ 324 80 __ 88,004 2003 ====== ====== ====== ======== ====== ===== At 31 December 229,749 85,987 8,008 6,569 174 330,487 2002 ====== ====== ====== ======== ====== ===== An impairment loss recognized for an asset in prior years has been reversed in 2003 as there has been a change in the estimates used to determine the property’s recoverable amount since the last impairment loss was recognized. The impairment loss was previously recognized based on the professional valuation results performed in the past years. Subsequent to the balance sheet date, the property was auctioned at a consideration which was significantly higher than its recoverable amount and therefore, an impairment loss has been reversed. Land and buildings include properties which net book value are RMB52,718,000 were auctioned by the court in February and March 2004 at a consideration of RMB57,622,000. The Group’s land and buildings are located in the PRC and are held under long-term leases up to a maximum of 50 years. In the opinion of the directors, the carrying value of the fixed assets is not less than their fair value. 13. CONSTRUCTION IN PROGRESS RMB’000 Cost At 1 January 2003 14,763 Effect of non-consolidation of subsidiaries (Note 14) (9,053) Less:Impairment loss (5,710) At 31 December 2003 ___ 25 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (continued) 14. SUBSIDIARIES Details of the subsidiaries as at 31 December 2003 are as follows: Company Name Note Registered Proportion of Sh Principal Activities Consolidated Capital Directly Held or not ‘000 2003 2002 2003 2002 Shenzhen SPEC RMB40,000 100% 100% Security investment Yes Yes Investment & and consulting Development Co., Ltd. Shenzhen SPEC (Holding) *a RMB2,100 100% 100% Petrochemical No No Technical Center products development Shenzhen SPEC Keyi Fine *a RMB1,000 100% 100% Fine chemicals No No Chemical Co., Ltd manufacturing and trading Shenzhen SPEC *c RMB80,000 75% 75% Laminating and No Yes Donghong Laminating & coating Coating Fabrics Co., Ltd. Shenzhen SPEC Plastics *d RMB99,300 65.405 65.405 PVC material No Yes Co., Ltd. % % manufacturing and trading Shenzhen SPEC Fibers *e USD3,203 51% 51% Chemical fibers No Yes Co., Ltd. manufacturing Shenzhen Tongda Packing *a RMB3,500 100% 100% Packing materials No No Products Co., Ltd. manufacturing Shenzhen SPEC Home *a RMB4,130 51.57 51.57 Home appliances No No Appliance Accessory Co., % % repairing and Ltd. maintenance Shenzhen Lanbo Industrial *b RMB9,300 100% 100% Manufacturing and No No Co., Ltd. sales of air-condition Shenzhen SPEC Oil *a RMB50,000 100% 100% Oil refining services No No Refining Services Co., Ltd. 26 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2003(continued) 14. SUBSIDIARIES(continued) *(a) These companies have not been included in the consolidated financial statements because of the suspension of their normal operations. Provisions for impairment loss have been made, and the value of long-term investments has been offset directly. The operating results and net assets of these companies.have no significant effect on the Group. *(b) This subsidiary is insolvent and ceased its normal operations. Investment in this subsidiary has been written off in full. Provision for bad debts has been made, and the contingent liabilities resulting from the guarantees for bank loans and customers have been dealt with as liabilities in the balance sheet. *(c). The company has not been included in the consolidated financial statements because it was sealed by the court and in the process of being auctioned. Therefore the Group has lost its control on this subsidiary at the balance sheet date and was reclassified as long-term investment. Provision for impairment loss has been provided on this long-term investments, according to estimated losses. *(d). The company has not been included in the consolidated financial statements because of the suspension of their normal operations, and the Group has lost its control on this subsidiary at the balance sheet date and was reclassified as long-term investment. Provision for impairment loss has been provided on this long-term investment, according to estimated losses. *(e). The company has not been included in the consolidated financial statements because it was auctioned by the court for settling bank loans in February 2004. The Group has lost its control on this subsidiary at the balance sheet date and was reclassified as long-term investment. Provision for impairment loss has been provided on this long-term investment, according to estimated losses. All subsidiaries are incorporated in the People’s Republic of China. 15. INTANGIBLE ASSETS Technical Know-how Dies Expenses Others Total RMB’000 RMB’000 RMB’000 RMB’000 Net book value at 1 January 2003 8,600 572 1,194 10,366 Additions __ __ __ __ Amortization __ __ __ __ Provision for impairment __ __ __ __ Effect of non-consolidation of (8,600) (572) (1,194) (10,366) subsidiaries (Note 14) ________ ________ ________ ________ Net book value at 31 December 2003 __ __ __ __ ======== ======== ======== ======== 27 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2003(continued) 16. INTERESTS IN NON-CONSOLIDATED SUBSIDIARIES __2003_ __2002_ RMB’000 RMB’000 Unlisted shares – stated at cost 197,247 53,385 - provision for impairment (88,853) (22,623) ________ ________ 108,394 30,762 ======== ======== a. The investments of unlisted shares Company Name 2003 Cost Provision for Net amount impairment Shenzhen SPEC Donghong Laminating & Coating Fabrics __ 75,522 75,522 Co., Ltd. Shenzhen SPEC Plastics Co., Ltd. 59,780 (59,780) ___ Shenzhen SPEC Fibers Co., Ltd. 26,685 (24,575) 2,110 Shenzhen SPEC (Holding) Technical Center 2,100 (880) 1,220 Shenzhen SPEC Keyi Fine Chemical Co., Ltd 501 (501) __ Shenzhen Tongda Packing Products Co., Ltd. 1,485 (1,485) __ Shenzhen SPEC Home Appliance Accessory Co., Ltd. 1,632 (1,632) __ Shenzhen Lanbo Industrial Co., Ltd. __ __ __ Shenzhen SPEC Oil Refining Services Co., Ltd. 29,542 __ 29,542 Total 197,247 (88,853) 108,394 The impairment arose from the disposal of subsidiaries below book value subsequent to the balance sheet date. 28 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2003 17. INTEREST IN ASSOCIATES 2003 2002 RMB’000 RMB’000 Share of net assets ___ 2,477 Amount due from associates ___ 546 Amount due to associates (46) (46) ________ ________ (46) 2,977 ===== ===== The amount due from/to associate are unsecured, interest-free and they are not repayable within the next 12 months. Details of the principal associates are as follows: Name of Associate Place of Percentage of Sh Principal Activities Registrati Held n 2003 2002 Shenzhen SPEC Jinxin * Shenzhen 30% 30% Chemical and electronic instruments Chemical Electronics Co., manufacturing and trading Ltd. Shenzhen Best Plastics * Shenzhen 25% 25% Printing Color-Printing Co., Ltd. Shenzhen SPEC Biltrite * Shenzhen 25% 25% Soling materials manufacturing Soling Co., Ltd. * These companies ceased trading and the relevant investments have been fully written off. Accordingly, full provisions for the amounts due from these companies and the guarantees given to banks have been made. 29 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2003 18. LONG TERM INVESTMENTS 2003 2002 RMB’000 RMB’000 Unlisted shares, at cost 22,414 40,152 Less: provision for impairment ( 10,242) (10,386) ______ ______ 12,172 29,766 ====== ====== 19. INVENTORIES 2003 2002 RMB’000 RMB’000 Raw materials ___ 40,627 Work in progress ___ 4,694 Finished goods ___ 43,136 _______ _______ ___ 88,457 ====== ====== 20. SHORT TERM INVESTMENTS 2003 2002 RMB’000 RMB’000 Listed securities, at cost __ 200 Listed funds, at cost __ __ ________ ________ __ 200 ======== ======== Market value of listed securities __ 198.4 ==== ==== 30 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2003 21. LOANS 2003 2002 RMB’000 RMB’000 Bank Loans – secured -within one year 99,800 155,124 Bank Loans –unsecured -within one year 622,781 1,055,039 -two to five years __ 3,106 Loan from Government-unsecured __ 20,000 -within one year ________ ________ 722,581 1,233,269 ======= ======= Payable: -within one year 722,581 1,230,163 -two to five years ___ 3,106 ________ ________ 722,581 1,233,269 ======= ======= Interest rates on bank loans vary between the range of 4.11% and 19.95% per annum. 22. PROVISION FOR GUARANTEES GIVEN TO BANKS AND CUSTOMERS/BANK LOANS 2003 2002 RMB’000 RMB’000 A. Provision for guarantees given to banks: a. To banks in respect of bank loans provided to third parties 516,067 341,887 b. To banks in respect of bank loans provided to associates and fellow 547,560 536,454 subsidiaries B. Provision for guarantee to customers in respect of sales made in 18,844 18,850 previous years by a non-consolidated subsidiary _________ _________ 1,082,471 897,191 ======== ======== 31 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2003 22. PROVISION FOR GUARANTEES GIVEN TO BANKS AND CUSTOMERS/BANK LOANS (continued) The provision for the year 2002 includes RMB21,310,000 provision for providing guarantees to banks by Shenzhen SPEC Plastics Co. Ltd. Which does not show in 2003. A(a)The Group has provided guarantees to banks in respect of bank loans granted by the banks to third parties as follows: Company name 2003 2002 Guaranteed Dealt with in Guaranteed Dealt with in loans income loans income statement statement RMB’000 RMB’000 RMB’000 RMB’000 Shenzhen Neptune Group Co., Ltd. 163,000 — 163,000 — Gintian Industry ( Group ) Co., Ltd. 185,735 152,734 116,945 49,781 China Aidi Group Corporation 33,500 8,000 33,500 — Shenzhen Shun Kong Industrial & Trading 24,090 24,090 24,090 24,090 Co. China Baoan Group Co., Ltd. 61,071 24,810 46,761 10,500 Shanghai Baoan Group Co.,Ltd 50,000 — 50,000 — Shenzhen Sunlight Industrial Co., Ltd. 46,953 46,953 43,953 43,953 Guangdong Shengrun Group Co., Ltd. 312,005 212,370 290,977 165,902 Shenzhen Zhonghao Group Co., Ltd. 41,600 26,600 41,600 26,600 Shenzhen Tellus Holdings Co., Ltd. 49,680 — 49,680 — Shenzhen Hongling Investment & 1,759 1,759 2,000 2,000 Development Co., Ltd. Shenzhen SPEC Jiankun Holdings Co., Ltd. 18,751 18,751 18,751 18,751 China Kejian Co., Ltd. — — 310 310 ________ ________ ________ ________ Total 988,144 561,067 881,567 341,887 ======= ======== ======= ======= RMB561,067,000 has been provided in the income statement for guarantees in respect of which legal action has been taken by the banks against the Group. The remaining RMB472,077,000 has been treated as contingent liabilities as referred to in Note 28. 32 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2003 22. PROVISIONS FOR GUARANTEES GIVEN TO BANKS AND CUSTOMERS/BANK LOANS (continued) A(b) The Group has provided guarantees to banks in respect of bank loans granted by the banks to associates and fellow subsidiaries as follows: Company name 2003 2002 Guaranteed Dealt with in Guaranteed Dealt with in Loans income loans income statement statement RMB’000 RMB’000 RMB’000 RMB’000 Shenzhen SPEC Jinxin Chemical Electronics Co.,Ltd. 279,259 279,259 234,328 234,328 Shenzhen SPEC Petroleum storage Co.,Ltd. 26,150 26,150 44,765 44,765 Shenzhen SPEC Petroleum Co., Ltd. 23,789 23,789 23,999 23,999 Shenzhen SPEC Real Estate Co., Ltd. 30,450 23,150 31,450 24,150 Shenzhen SPEC Chemicals Co., Ltd. 82,539 82,539 82,539 82,539 Shenzhen SPEC Bonded trading Petrochemical Co., Ltd. ___ ___ 5,000 ___ Hangzhou SPEC Industrial & Trading Co. ___ ___ 7,000 7,000 Shenzhen Dahua Chemicals Co., Ltd. 4,620 4,620 10,620 10,620 Shenzhen Jinliyu Petroleum Co. 37,538 37,538 37,538 37,538 Shenzhen Haipeng Import & Export Co., Ltd 10,610 10,610 10,610 10,610 Shenzhen Lanbo Industrial Co., Ltd. 7,500 7,500 7,500 7,500 Huizhou Daya Bay Shencheng Petrochemical Co., Ltd. 15,690 15,690 15,690 15,690 Shenzhen SPEC Silicon Material Co., Ltd. 7,000 ___ 7,000 ___ Shenzhen SPEC Fine Chemical Co., Ltd. 1,900 ___ 1,900 ___ Shenzhen SPEC Beauty Star Fotas Plastics Co., Ltd. 600 ___ 11,200 ___ Shenzhen Petrochemical (Holdings) Co.,Ltd. 36,715 36,715 34,715 34,715 Shenzhen SPEC Liquid Chemicals Co., Ltd. ___ ___ 3,000 3,000 Shenzhen SPEC Import & Export Co., Ltd. _________ ________ _________ ________ 564,360 547,560 568,854 536,454 Total ========= ======= ========= ======= RMB547,560,000 has been provided in the income statement on either of the following grounds: 1. Where legal action has already been taken by the banks against the Group, or 2. Where, in the opinion of directors, the repayment of the loans has been overdue and the financial 33 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2003 22. PROVISIONS FOR GUARANTEES GIVEN TO BANKS AND CUSTOMERS/BANK LOANS (continued) position of the associates and fellow subsidiaries concerned has seriously deteriorated. The remaining guarantees of RMB16,800,000 were treated as contingent liabilities as referred to in note 28. B. The Company has provided guarantees to customers generally in respect of products sold by a subsidiary totaling RMB18,844,000. Provision has been made in the income statement for these guarantees since the subsidiary is unable to pay the claims made by the customers. C.The Company has provided guarantees to banks in respect of bank loans granted to non-consolidated subsidiaries as follows: Company name 2003 2002 Guaranteed Dealt with in Guaranteed Dealt with Loan income Loans in statement income statement RMB’000 RMB’000 RMB’000 RMB’000 Shenzhen SPEC Fibers Co., Ltd. 96,099 ___ 90,172 ____ Shenzhen SPEC Plastics Co., Ltd. 61,509 ___ 73,479 ____ ________ ________ ________ _______ Total 157,608 ___ 163,651 ____ ======= ======= ======= ======= The above guarantees of RMB157,608,000 were treated as contingent liabilities as referred to in Note 28. 23. PROVISION FOR ECONOMIC COMPENSATION FOR STAFFS Some of the subsidiaries may be subject to restructuring or being disposed of by auction due to continuing operating losses and the inability to continue as a going concern. In view of the above circumstances, a provision of RMB35,030,000 was made for economic compensation for these subsidiaries’ employees. 24. LONG TERM PAYABLES 2003 2002 RMB’000 RMB’000 Government loans-unsecured ___ 7,596 ====== ====== 34 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2003 25. SHARE CAPITAL 2003 2002 RMB’000 RMB’000 Registered, issued and paid-up (303,354,979 shares in total) 270,594,979 “A” Shares of RMB 1.00 each 270,595 270,595 32,760,000 “B” Shares of RMB 1.00 each 32,760 32,760 ________ ________ 303,355 303,355 ======== ======== 26. RESERVES Accumulated Capital reserve losses Total RMB’000 RMB’000 RMB’000 At 1 January 2002 233,386 (2,182,052) (1,948,666) ___ (451,690) (451,690) Net loss for the year 2002 _______ _______ _______ At 31 December 2002 233,386 (2,633,742) (2,400,356) ======= =========== ========== At 1 January 2003 233,386 (2,633,742) (2,400,356) Net loss for the year 2003 ___ (309,773) (309,773) _______ _______ ________ At 31 December 2003 233,386 (2,943,515) (2,710,129) ======= ========= =========== 35 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2003 26. RESERVES (continued) Capital reserve According to the relevant PRC regulations, capital reserve can only be utilized to increase share capital. Surplus reserve Statutory surplus reserve and discretionary surplus reserve can be used to make up losses or to increase share capital. Except for the reduction of reserves due to losses incurred, any other usage must not result in the balance thereof falling below 25% of the registered capital. According to the relevant PRC regulations, the usage of the statutory public welfare fund is restricted to capital expenditures for employee facilities. The statutory public welfare fund is not available for distribution to shareholders except in the event of liquidation. 27. RELATED PARTY TRANSACTIONS A. Rental arrangement with a related party 2003 2002 RMB’000 RMB’000 Rental income from a fellow subsidiary __ 2,085 Rental expense paid to a fellow subsidiary 360 ____ B.Settlement of liabilities owing to a related party During the year, the Company has entered an arrangement with Shenzhen SPEC Donghong Laminating & Coating Co. Ltd. (“SPEC Donghong”) to settle an amount of RMB4,192,179 payable to SPEC Donghong by transferring its land to SPEC Donghong. The land is located in Bujibantian Longgang District Shenzhen City. C. Liabilities paid for a related party Shenzhen SPEC Fibres Co. Ltd. (“SPEC Fibres”) was unable to settle the bank loan of USD5,180,000 and related interest amounts from the Chinese Merchantics Bank at the maturity date. A verdict was issued by the Shenzhen Intermediate People’s Court on 20 November 2003 that SPEC Fibres’s liabilities should be borne by the Company, as its guarantor. A flat, which is located at Room 1505, North Tower, International Commercial Plaza, was valued at an estimated amount of RMB346,840 and was used to pay off the said liabilities. D. Liabilities paid by a related party a) KBC Bank took legal actions against the Company for failure to repay bank loans amounting to 36 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2003 27. RELATED PARTY TRANSACTIONS(continued) D. Liabilities paid by a related party(continued) USD1,000,000 (RMB8,280,000) and all the related interests. On 4 September 2003, the Shenzhen Intermediate People’s Court issued a verdict stating that SPEC Fibres should bear the liabilities for the Company and SPEC Fibres’s shareholding in Shenzhen SPEC Donggang Fibers Co. Ltd was auctioned at a consideration of RMB29,786,800 to pay off the liabilities. b) Shenzhen Commercial Bank took legal actions against the Company for failure to repay the bank loans and related interest in 2003; Shenzhen SPEC Plastics (Group) Co Ltd (the “SPEC Plastics”) subsequently settled partially in cash for the Company with a total amount of RMB7,931,700. Furthermore, on 31 March 2003, the Shenzhen Intermediate People’s Court issued a verdict stating that the SPEC Plastics, the guarantor of the Company, should bear the liabilities. Properties and the leasehold land located at 3006 Shuibei Road West Luohu District Shenzhen City was valued at RMB 5,300,000 and was used to pay off the liabilities for the Company. c) The Company was unable to settle the bank loan principals and related interests payable to the Bank of China – Zhuzhou Branch, SPEC Plastics settled partially with a total amount of USD1,262,000 (RMB10,484,000) in February 2003. d) On 11 April 2003, a debts restructuring agreement was signed among the Company, the Industrial and Commercial Bank of China (“the bank”), Shenzhen Investment Management Co. Ltd (“SIM”) as the Company was unable to repay two bank loans amounting to RMB65,000,000 and RMB14,350,000 and all the related interests. The agreement stipulates that the bank loan of RMB65,000,000 should be borne by SIM while the related interests should be borne by the Company. The bank will not demand temporarily for repayment of loan principal of RMB14,350,000, but in future, the debts should be paid off by SIM. However, the Company is still liable to pay the interest portion but no penalized interest would be charged by the bank. e) There is an amount of RMB70,000,000 relating to bank loans and related interest owing to the China Construction Bank Shenzhen Shangbu Branch at 31 December 2003 included within other payables. According to the bank audit confirmation letter, the balance is nil at 31 December 2003 and the debt was repaid by the guarantee company, Shenzhen Investment Management Co Ltd. 28. CONTINGENT LIABILITIES At 31 December 2003，guarantees given by the Group to banks in respect of bank loans granted to companies within the Group totaling RMB174,408,000 and to third parties totaling RMB472,077,000. (Note 22) 37 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2003 29. PLEDGE OF ASSETS At 31 December 2003, the Company pledged fixed assets with an aggregate net book value of RMB80,126,000 to secure bank loans obtained in the PRC totaling RMB68,000,000, and HKD30,000,000 respectively. 30. COMMITMENTS (a) Capital commitment Contracted for but not provided for in the financial statement: 2003 2002 RMB’000 RMB’000 Purchase of fixed assets ____ 6,298 Purchase of intangible assets ____ 31,220 Construction contract ____ 1,766 No other capital commitments are authorized. (b) Operating lease commitment As at 31 December 2003, the Group has minimum outstanding operating lease commitments under non-cancelable operating leases in respect of buildings which fall due as follows: 2003 2002 RMB’000 RMB’000 Within one year ____ 1,774 In the second to fifth years, inclusive ____ 2,995 31. LITIGATION As at 31 December 2003, the Company’s had been involved in litigation with a total value of RMB1,763,240,000. Provision of RMB1,006,417,000 has been made. Amount RMB’000 Overdue bank loans and interests 563,496 Repaying acquired by the guarantees arising from bank loans paid for the Company 28,119 Defaults in payment for construction contract 3,895 Capital of related parties 16,326 Joint liabilities arising from guarantees to banks for bank loans granted to subsidiaries 144,987 38 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2003 31. LITIGATION (continued) Joint liabilities arising from guarantees to banks for bank loans granted to associates 534,560 Joint liabilities arising from guarantees to banks for bank loans granted to third parties 471,857 32. FINANCIAL INSTRUMENTS Financial assets of the Group include cash and cash equivalents, time deposits with financial institutions, investments, trade accounts receivable, bills receivable, amount due from fellow subsidiaries, loans to third parties, due from associates and jointly controlled entities, and other receivables. Financial liabilities of the Group include bank and other loans, trade accounts payable, bills payable, amount due to fellow subsidiaries, receipts in advance, and advances from third parties. The Group does not hold or issue financial instruments for trading purposes. The Group had no positions in derivative contracts at 31 December 2003 and 2002. Credit risk The carrying amounts of cash and cash equivalents, time deposits with financial institutions, trade accounts and bills receivable, and other current assets, except for prepayments, represent the Group’s maximum exposure to credit risk in relation to financial assets. The majority of the Group’s trade account relates to sales of petrochemical and plastic products etc. to third parties operating in these industries. The Group performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral on trade accounts receivable. The Group maintains an allowance for doubtful accounts and actual losses have been within management’s expectations. No other financial assets carry a significant exposure to credit risk. Currency risk Substantially all of the revenue generating operations of the Group is transacted in Renminbi, which is not freely convertible into foreign currencies. At 1 January 1994, the PRC government abolished the dual rate system and introduced a single rate of exchange as quoted by the People’s Bank of China. However, the unification of the exchange rate does not imply convertibility of Renminbi into United States dollars or other foreign currencies. All foreign exchange transactions continue to take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts. 39 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2003 32. FINANCIAL INSTRUMENTS (continued) Interest rate risk The interest rates and terms of repayment of short term and long term debts of the Group are disclosed in Note 21. The disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of IFRS 32. Fair value estimates, methods and assumptions, set forth below for the Group’s financial instruments, are made solely to comply with the requirements of IFRS 32 and should be read in conjunction with the Group’s consolidated financial statements and related notes. The estimated fair value amounts have been determined by the Group using market information and valuation methodologies considered appropriate. However, considerable judgment is required to interpret market data to develop the estimated of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Group could realize in a current market exchange. The use of different market assumptions and /or estimation methodologies may have a material effect on the estimated fair value amounts. Investments in unlisted equity securities have no quoted market prices in the PRC. Accordingly, a reasonable estimate of fair value could not be made without incurring excessive costs. The fair values of all other financial instruments approximate their carrying amounts due to the nature or short-term maturity of these instruments. 33. POST BALANCE SHEET EVENTS a. Due to the inability to repay the bank loans, the Company’s property located in No.401 Shenzhen SEZ Industry Zone, was frozen and auctioned by the Shenzhen Intermediate People‘s Court at a consideration of RMB52million subsequent to the balance sheet date. Since the net book value of the property as at the balance sheet date was RMB76,290,000, and the consideration is substantially lower than the net book value, an impairment loss has been provided during the year. b. Due to the joint liabilities arising from the Company’s provision of guarantees in respect of bank loans for an ex-shareholder, Shenzhen SPEC (Group) Holding Co Ltd, the Company’s 54 properties which are located at 402B Shenzhen Shangbu Industry Zone at an aggregate net book value of RMB718,300 at 31 December 2003, were auctioned at a total consideration of RMB5,622,000 by the Shenzhen Intermediate People’s Court in February 2004. 40 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD. (ESTABLISHED IN THE PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2003 33. POST BALANCE SHEET EVENTS(continued) c. As the Company was unable to repay the bank loan, its shares in SPEC Fibres were auctioned at a consideration of RMB2,110,000 by the Shenzhen Intermediate People’s Court in February 2004. An impairment loss of RMB375,900 has been made against investment cost. 34. OTHER SIGNIFICANT EVENT a. In December 2000, the Company signed an agreement relating to the conversion of bank loans into investment with the Agriculture Bank of China, Shenzhen Branch (the “Agriculture Bank”) and the China Great-wall Asset Management Co., Shenzhen Representative Office (the “Great-wall Asset Management Company”). According to the terms of the agreement, the Agriculture Bank agrees to transfer bank loans of RMB 270,000,000 (including a loan of RMB3,000,000 borrowed in the name of a related company) due from the Company to Great-wall Asset Management through the holding company, Shenzhen Petrochemical (Holdings) Co. Ltd. (the “SPH”) conditionally. The company reflected this assignment through SPH in its books thereby the bank loan had been treated as fully repaid. Since the condition had not been fulfilled up to 11 December 2002, the Agriculture Bank demanded to restore its rights as the creditor for the above loans on the same date. As the position relating to the restoration of the bank loans has not been established, the Company did not restore this bank liability. b. As the ex-shareholder, Shenzhen SPEC (Group) Co. Ltd. (“SPEC Co”) has joint liability arising from providing guarantees in relation to bank loans borrowed from the Guangdong Development Bank Hangzhou Branch for the Hangzhou SPEC Industrial and Commercial Co.Ltd which failed to pay off its bank loans, SPEC Co’s 164,546,553 shares in the Company were auctioned by Zhejiang, Hangzhou Intermediate People’s Court in November 2003. These shares were acquired by Guangzhou City Puliqi Communication Investment Co. 35. COMPARATIVES Certain significant comparative figures have been appropriately reclassified to conform to the presentation of the financial statement of the current year. 41 SHENZHEN PETROCHEMICAL INDUSTRY (GROUP) CO., LTD (ESTABLISHED IN TH E PEOPLE’S REPUBLIC OF CHINA) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED 31 DECEMBER 2003 36. IMPACT OF IFRS ADJUSTMENTS ON LOSS ATTRIBUTABLE TO SHAREHOLDERS AND NET LIABILITIES Loss attributable to Net liabilities shareholders RMB’000 RMB’000 As reported in the “A” shares consolidated (327,934) (2,406,260) audited statutory financial statements under the PRC accounting standards IFRS adjustments Adjustment to capital reserve 454 __ Adjustment to provision for guarantees given to banks 23,423 __ and customers/bank loans Effect of non-consolidation of subsidiaries (5,147) __ Others (569) (514) __________ __________ As reported after IFRS adjustments (309,773) (2,406,774) in the “B” shares financial statements ========= ========= 42