深粮控股(000019)深深宝2003年年度报告（英文版）

SHENZHEN SHENBAO INDUSTRIAL CO., LTD. 2003 ANNUAL REPORT (B-SHARE) April 2004 Important Note: Board of Directors of Shenzhen Shenbao Industrial Co., Ltd. (hereinafter referred to as the Company) and its directors 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. K.C.Oh & Company Certified Public Accountants issued standard unqualified auditor’s report for the Company. Chairman of the Board of the Company Mr. Zeng Pai as well as General Manager of the Company and Ms. Zeng Suyan, person in charge of accounting (namely head of the Plan and Financing Department) hereby confirm that the Financial Report of the Annual Report is true and complete. This report was prepared in both Chinese and English. Should there be any difference in interpretation between the two versions, the Chinese version shall prevail. Content Chapter 1 Company Profile………………………………………………………3 Chapter 2 Abstract of Financial Highlights and Business Highlights………….4 Chapter 3 Changes in Share Capital and Particulars about Shareholders…….6 Chapter 4 Particulars about Directors, Supervisors and Senior Executives and Staffs…………………………………………………………………………………..9 Chapter 5 Administrative Structure……………………………………………..11 Chapter 6 Particulars about Shareholders’ General Meeting…………………14 Chapter 7 Report of the Board of Directors…………………………………….16 Chapter 8 Report of the Supervisory Committee……………………………….29 Chapter 9 Significant Events……………………………………………………..31 Chapter 10 Financial Report……………………………………………………..34 Documents Available for Reference………………………………………………..65 Chapter 1. Company Profile I. Legal Name of the Company In Chinese: 深圳市深宝实业股份有限公司（Abbr. 深宝） In English: SHENZHEN SHENBAO INDUSTRIAL CO., LTD. (Abbr.: SB) II. Legal Representative: Mr. Zeng Pai III. Secretary of Board of Directors: Mr. Liu Xiongjia Liaison Address: 28/F, B&C Block of Bao’an Plaza, No. 1002 Sungang East Road, Shenzhen Tel: (86)755-25507480 Fax: (86)755-25507480 E-mail: a0019@21cn.com IV. Registered Address of the Company: 28/F, B&C Block of Bao’an Plaza, No. 1002 Sungang East Road, Shenzhen Office Address of the Company: 28/F, B&C Block of Bao’an Plaza, No. 1002 Sungang East Road, Shenzhen Post Code: 518020 Internet Web Site: http://www.sbsy.com.cn E-mail: sbsy@sbsy.com.cn V. Newspapers Chosen for Disclosing the Information of the Company: Securities Times (Domestic) and Ta Kung Pao (Overseas) Internet Web Site for Publishing the Annual Report Designated by CSRC: http://www.cninfo.com.cn Place Where the Annual Report is Prepared and Placed: Secretariat of the Board of Directors VI. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: SHENSHENBAO – A, SHENSHENBAO-B Stock Code: 000019, 200019 VII. Other Relevant Information of the Company 1. The initial registration date and place: July 30, 1981, Shenzhen The changed registration date and place: Dec. 3, 2003, Shenzhen 2. Registration code for business license of corporation: 4403011024443 3. Number of taxation registration: GSDZ 440301192180754 DSDZ 440303192180754 4. Name of the domestic certified public accountants engaged by the Company: Shenzhen Dahua Tiancheng Certified Public Accountants Address: 11/F., B Block of Confederation Square, No. 5022 Binhe Av. Futian Dis. Shenzhen Name of the overseas certified public accountants engaged by the Company: K.C.Oh & Company Certified Public Accountants Address: 8/F., New Henry House, No. 10 Ice House Street, Central, Hong Kong Chapter 2. Abstract of Financial Highlights and Business Highlights Section 1. Profit Index as of the Year 2003 I. Profit index of the year 2002 Unit: RMB ’000 Items Amount Profit before taxation (48,723) Profit held by shareholders (44,852) Operation profit （50,286） Other profit 32,157 Net cash flows arising from operating activities (42,015) Net increase in cash and cash equivalents (24,816) II. Discrepancy and explanation for the difference in the net profit as audited by domestic and international certified public accountants respectively. Net profit of the Company as of the year 2003 was respectively RMB (44,852,000) and RMB (44,852,000) as audited under Chinese Accounting Standard (CAS) and International Accounting Standard (IAS) and there is no difference between them. Section 2. Principal Accounting Data and Financial Index over Previous Three Years Ended the Report Year Unit: RMB ’000 Items 2003 2002 2001 Turnover 61,787 77,134 64,086 Profit held by shareholders (44,852) (53,394) (3,387) Total assets 446,314 455,161 402,677 Shareholders’ equity 231,290 276,142 338,842 Earnings per share (RMB) (0.2465) (0.2935) (0.0187) Earnings per share (weighted average) (RMB) (0.2465) (0.2935) (0.0187) Net assets per share (RMB) 1.2714 1.518 1.863 Return on equity (%) (0.1939) (19.34) (1.00) Section 3. Changes in Shareholders’ Equity for the Year 2003 and the Causes Unit: RMB’000 Share Capital public Surplus public Items Retained earnings Total capital reserve reserve Amount at 181,923 108,490 33,610 (47,881) 276,142 period-beginning Increase in the report 47,729 47,729 period Decrease in the report 27,486 20,243 44,852 92,581 period Amount at period-end 181,923 81,004 13,367 (45,004) 231,290 Make up for Make up for Losses in this year, Losses in this year, Reason of changes — losses of losses of make up for losses of make up for losses of previous years previous years previous years previous years Chapter 3. Changes in Share Capital and Particulars about Shareholders Section 1. Changes in Shares 1. Statement of changes in shares (Ended Dec. 31, 2003, Unit: In shares) Increase / decrease this time (+, -) Before the Shares After the Allotment Bonus Additional change transferred from Others Sub-total change of Shares shares issuance public reserve I. Unlisted shares 1. Promoters’ 115,838,611 115,838,611 shares Including: State-owned shares 105,938,611 -61,848,466 -61,848,466 44,090,145 Domestic legal 9,900,000 61,848,466 61,848,466 71,748,466 person’s share Foreign legal person’s share Others 2. Raised legal person’s shares 3. Employees’ shares 4. Shares held by 7,752 -71 -71 7,681 senior executives 5. Preference shares or others Total unlisted 115,846,363 -71 -71 115,846,292 shares II. Listed shares 1.RMB ordinary 39,940,725 71 71 39,940,796 shares 2.Domestically listed foreign 26,136,000 26,136,000 shares 3.Overseas listed foreign shares 4. Others Total listed shares 66,076,725 71 71 66,076,796 III. Total shares 181,923,088 181,923,088 Section 2. Issuance and listing of stock I. In the previous three years ended the report period, the Company has not issued shares. II. The procedure of equity’s owner change in register of Shenzhen Investment Holding Corporation (hereinafter referred to as Investment Company) transferring equity of the Company totally 61,848,466 shares and the allotted shares of the last allotment share totally 3,500,771 shares to Shenzhen Agricultural Products Co., Ltd. (hereinafter referred to as the Agricultural Products) has been finished in June 2003. Agricultural Products became the principal shareholder (please refer to the public notice of the Company on Securities Times and Ta Kung Pao dated June 24, 2003 for detail) and the type of share changed from sponsor’s state-owned share into oriented domestic legal person share. III. The previous senior executive of the Company, Ms. Luo Jiehua has retired and the 71 senior executive shares held by her have been authorized to be unfrozen. Section 3. Particulars about Shareholders I. Ended the report period, the Company had totally 30,028 shareholders, including 23,780 shareholders of A-share, 6,248 shareholders of B-share. II. Ended Dec. 31, 2003, particulars about shares held by the top ten shareholders Proportion Holding shares at the No. Name of Shareholder in total Types end of report year shares (%) SHENZHEN ARGICUTURAL 61,848,466 34% Legal person 1 PRODUCTS CO., LTD shares SHENZHEN INVESTMENT 53,990,145 29.68% State-owned 2 HOLDING CORPORATION shares 240,000 0.13% B-share in 3 XIAO LI ZHU circulation 210,800 0.12% B-share in 4 CHEN YONG QUAN circulation 201,000 0.11% B-share in 5 LU XIAO 卢晓 circulation 189,700 0.10% B-share in 6 ZENG XIAN BAO circulation 183,468 0.10% B-share in 7 KOTO TRANSPORT LTD. circulation 156,284 0.09% B-share in 8 XU ZHUANG GUO circulation 136,114 0.07% B-share in 9 ZANG LAI SUN circulation 127,150 0.07% B-share in 10 LIU XIAO CHUAN circulation Note: 1. On Sep. 25, 2002, Shenzhen Investment Holding Corporation signed the Agreement for Equity Transfer with Shenzhen Jindazhou Industrial Co., Ltd. (hereinafter referred to as Jindazhou Company), which 53,990,145 shares of the Company held by Shenzhen Investment Holding Corporation were transferred to Jindazhou Company (For detail, please refer to Public Notice published in Securities Times and Ta Kung Pao dated Sep. 27, 2002.). On Dec. 11, 2003, the Company received Notification on Relieving Agreement for Equity Transfer of Shenzhen Shenbao Industrial Co., Ltd. from Shenzhen Investment Holding Corporation (for details, please refer to the public notice of the Company in Securities Times and Ta Kung Pao dated Dec. 12, 2003). 2. In the report period, there was neither pledge nor frozen in the shares held by the shareholders holding over 5% of total shares of the Company. 3. Investment Company held 4,758,581 shares of the Agricultural Products, taking 2.21% of the total share capital of the Agricultural Products. 4. There exists no associated relationship among Agricultural Products, Investment Company, and No. 3 to No. 10 shareholders listed above the statement and they are consistent actionist regulated by the Management Regulation of Information Disclosure on Change of Shareholding for Listed Company; the Company is not aware whether No. 3 to No. 10 shareholders listed above the statement belong to consistent actionist regulated by the Management Regulation of Information Disclosure on Change of Shareholding for Listed Company or not. III. Particulars about controlling shareholders of the Company 1. Name of controlling shareholder: Shenzhen Agricultural Products Co., Ltd. Legal representative: Mr. Chen Shaoqun Date of foundation: Jan. 14, 1989 Main business and product: the company is engaged in constructing wholesale market of agricultural products; deals in market lease and sale; domestic trading, supply and marketing of materials (excluding monopoly products); and offer auxiliary establishment to market of agricultural products wholesale, for instance, rest house, canteen, restaurant, transportation, load and unload, storage, packing (business license of specific item is to be applied in addition); service of information counseling, and wholesale of sugar, tobacco and drink. Registration capital: RMB 387,663,000 2. The first largest shareholder of the controlling shareholder of the Company: Name: Shenzhen Commodity & Trade Investment Holdings Company Legal representative: Mr. Feng Yulin Date of foundation: Apr. 30, 1997 Main business scope: investment and setting up industry (specific item is to be applied in addition), domestic trading and supply and marketing of materials (excluding monopoly products). Registration capital: RMB 800,000,000 IV. Introduction to Shenzhen Investment Holding Corporation Legal representative: Mr. Li Heihu Date of foundation: Feb. 10, 1988 Main business and product: management and supervision of enterprise’s state assets, financing and property right; to share all kinds of enterprise and turn over investment, to offer credit and assurance; to impose profit after taxation and occupying expenses of assets of state enterprise and the other business authorized by municipal government. Registration capital: RMB 2,000,000,000 V. Ended as at Dec. 31, 2003, the top ten shareholders of circulating share of the Company No. Name of Shareholder Holding shares at the end of report year Types 1 XIAO LI ZHU 240,000 B share 2 CHEN YONG QUAN 210,800 B share 3 LU XIAO 卢晓 201,000 B share 4 ZENG XIAN BAO 189,700 B share 5 KOTO TRANSPORT LTD. 183,468 B share 6 XU ZHUANG GUO 156,284 B share 7 ZANG LAI SUN 136,114 A share 8 LIU XIAO CHUAN 127,150 B share 9 CHANG SHIFEN 120,000 B share 10 LIN CIBAO 120,000 A share The Company does not know whether there existed associated relationship among the top ten shareholders of circulating share or they belonged to consistent actionist regulated by the Management Regulation of Information Disclosure on Change of Shareholding for Listed Company. Chapter 4. Particulars about Directors, Supervisors and Senior Executives and Staffs Section 1. Particulars about the directors, supervisors and senior executives I. Basic status (ended the report date)\ Number of holding shares (share) At beginning of At end of the Name Gender Age Title Office term the report year report period Chairman of the Board, July 28, 2003- Zeng Pai Male 33 0 0 General Manager July 28. 2006 July 28, 2003- Tian Yanqun Male 57 Independent Director 0 0 July 28. 2006 July 28, 2003- Fan Zhiqing Male 55 Independent Director 0 0 July 28. 2006 July 28, 2003- Wu Ying Female 41 Independent Director 0 0 July 28. 2006 Zhao July 28, 2003- Female 53 Director 0 0 Guorong July 28. 2006 Chen July 28, 2003- Male 38 Director 0 0 Xiaohua July 28. 2006 July 28, 2003- Zhang Jian Male 31 Director 0 0 July 28. 2006 July 28, 2003- Chen Jie Male 48 Director 0 0 July 28. 2006 July 28, 2003- Cui Gang Male 31 Director 0 0 July 28. 2006 Chairman of Supervisor July 28, 2003- Zuo Heping Male 54 7680 7680 Committee July 28. 2006 July 28, 2003- Peng Ying Male 43 Supervisor 0 0 July 28. 2006 July 28, 2003- Li Yiyan Female 38 Supervisor 0 0 July 28. 2006 Standing Deputy July 28, 2003- Guan Lihua Male 50 0 0 General Manager July 28. 2006 Deputy General July 28, 2003- Fang Jianhui Male 38 0 0 Manager July 28. 2006 Deputy General July 28, 2003- Zheng Yuxi Male 42 0 0 Manager July 28. 2006 Zhang Standing Deputy Party Male 49 0 0 Wanqing Secretary Chairman of Planning July 28, 2003- Zeng Suyan Female 49 0 0 Financing Dept. July 28. 2006 Secretary of the Board July 28, 2003- Liu Xiongjia Male 31 0 0 of Directors July 28. 2006 Notes: 1. Particulars about directors, supervisors holding the position in Shareholding Company (1) Director of the Company Ms. Zhao Guorong held the position of director and chief financial supervisor of Agricultural Products, with office term from July 31, 2003 to July 31, 2006. (2) Director of the Company Mr. Chen Xiaohua held the position of director and secretary of the Board of Agricultural Products, with office term from July 31, 2003 to July 31, 2006. (3) Director of the Company Mr. Zhang Jian held the position of Director of HR Dept. of Agricultural Products. (4) Director of the Company Mr. Chen Jie held the position of Deputy General Manager of Jingdazhou Company. (5) Director of the Company Mr. Cui Gang held the position of Assistant of General Manager of Jingdazhou Company. (6) Supervisor of the Company Mr. Peng Ying held the position of Chairman of the Board of the share-controlling subsidiary of the Company, Shenzhen Agricultural Products Meet Distribution Co., Ltd.. II. Particulars about the annual salaries of directors, supervisors and senior executives In the report year, the annual remuneration of the directors, supervisors and senior executives drawing salaries from the Company is researched and confirmed based on the regulation of relevant wage management and rate standard of Shenzhen and the actual situation of the Company. The Company has 18 directors, supervisors and senior executives at present. Of them, 9 persons received their salary from the Company totally amounting to RMB 802,000, Among them, 2 persons enjoy an annual salary from RMB 100,000 to RMB 150,000; 4 persons enjoy from RMB 80,000 to RMB 100,000 and 3 persons enjoy an annual salary from RMB 50,000 to 70,000. Total remuneration of the top three directors was RMB 242,000 and total remuneration of the top three senior executives was RMB 333,000. According to the relevant regulation of Administration Rule of Listed Company and the Company’s actual situation, the Company respectively paid allowance of RMB 50,000 (tax included) to independent directors per year and necessary fees (included but not limited to traffic fees and accommodation etc.), when independent directors attend the Shareholders’ General Meeting and the Board meeting or exercise other authority according to the relevant laws, regulations and Articles of Association of the Company. In the report year, the Company respectively paid RMB 55,000 to Mr. Tian Yanqun and Mr. Fan Zhiqing and paid RMB 23,000 to Ms. Wu Ying (paid since Aug. 2003). Directors of the Company Ms. Zhao Guorong, Mr. Chen Xiaohua, Mr. Zhang Jian and supervisors of the Company Mr. Peng Ying received no remuneration from the Company, but received remuneration from Agricultural Products, the actual controlling shareholder of the Company, or share-controlling subsidiary of the Company. Director Mr. Chen Jie and Mr. Cui Gang received remuneration from Jindazhou Company. III. Particulars about name of directors, supervisors and senior executives leaving their position during the report year and the reason of leaving 1. On Jan. 8, 2003, the 13th meeting of the 4th Board of Directors of the Company examined and approved Mr. Lin Jiahong to quit the post of Chairman of the 4th Board of Directors of the Company and elected Mr. Zeng Pai as Chairman of the 4th Board of Directors of the Company. 2. On Feb. 18, 2003, the 1st Provisional Shareholders’ General Meeting in 2003 of the Company examined and approved Mr. Lin Jiahong, Mr. Guan Lihua and Mr. Xue Bo to quit the post of director of the 4th Board of Directors of the Company. 3. On July 28, 2003, because of the maturity of office term, Mr. Yang Shunjiang has not held the post of director of the Company again due to the work reason. 4. On July 28, 2003, Mr. Li Meisheng no longer took the post of Chairman of the Supervisory Committee due to retiring reason after his term has expired. 5. On July 28, 2003, Mr. Xie Zhenxian no longer took the post of Supervisor of the Company due to work reason after his term has expired. 6. Ms. Luo Jiehua no longer took the post of Chairman of the Labor Union of the Company since July 2003 due to retiring reason. IV. Particulars about leaving their position or engaging of senior executives As examined and approved by the 1st meeting of the 5th Board of Directors dated July 28, 2003, Mr. Zeng Pai was engaged as General Manager of the Company, Mr. Guan Lihua was engaged as Standing Deputy General Manager of the Company, Mr. Fang Jianhui and Mr. Zheng Yuxi were engaged as Deputy General Manager of the Company respectively, Ms. Zeng Suyan was engaged as Director of Plan & Financial Dept. and Mr. Liu Xiongjia was engaged as Secretary of the Board of the Company (for details, please refer to Public Notice of the Company published in Securities Times and Ta Kung Pao dated July 30, 2003). Section 2. About Employees At the end of the year 2003, the Company had totally 488 employees. Profession/occupation composition Education Background Profession Number Proportion Education Number Proportion (%) (%) Production personnel 126 25.82 Postgraduate or higher 8 1.63 Salesperson 58 11.89 Undergraduate 44 9.02 Technicians 46 9.43 3-years regular college 69 14.14 graduate Financial personnel 19 3.89 Polytechnic school 32 6.56 graduate Administrative 53 10.86 Senior middle school 335 68.65 personnel graduate or lower Laid-off worker 186 38.11 Total 488 100 Retirees whose expense needs to be 0 0 undertaken Total 488 100 Chapter 5. Administrative Structure Section 1. Company Administration The Company strictly implemented the PRC Company Law, the Securities Law as well as the requirements of relevant laws and regulations issued by CSRC, moreover, combined with the Company’s actual situation, so as to continuously perfected its structure of legal person administration and operates the Company in a standardized way. The details are set out as follows: 1. Shareholders and Shareholders’ General Meeting: The Company operates in accordance with the relevant standards, practically safeguard the interests of the medium and small shareholders, and ensures all shareholders to enjoy their full rights. The Company has established the Rules of Procedures of Shareholders’ General Meeting. In the report year, the Company held three shareholders’ general meeting. Furthermore, the Company convened and held shareholders’ general meeting strictly in compliance with the relevant provision of Company Law, Standardized Opinion for Shareholders’ General Meeting of Listed Company and Articles of Association of the Company. 2. Relationship between the controlling shareholder and the listed company: The actual controlling shareholder of the Company operated in line with rules and did not intervene decision or operation of the Company directly or indirectly exceeding authority of the shareholders’ general meeting. The Company is absolutely independent in personnel, assets, finance, organization and business from its controlling shareholder. The Board of Directors, the Supervisory Committee and the internal management organ perform their respective functions in an independent way. 3. Directors and the Board of Directors: The Company has elected directors strictly according to the election procedure regulated in the Articles of Association, decided to further perfect the election procedure and practice the accumulative voting system. Numbers and qualification of Board of Director are in compliance with requirements of laws and regulations. The Company has established the Rules of Procedures of Board of Directors, the Board meeting was held according to the relevant procedures; all directors attended the Board meetings and shareholders’ general meeting in a positive and responsible manner, and implemented the director’s responsibility of listed company carefully and strictly. The Company has established Rules for Independent Directors and gradually perfected it, and has elected three independent directors based on the relevant regulation and procedure. 4. Supervisors and the Supervisory Committee: Numbers and qualification of Supervisory Committee are in compliance with requirements of laws and regulations. The Company has established the Rules of Procedures of the Supervisory Committee. The supervisors have performed seriously their duties, taken responsible attitude to all the shareholders, and supervised the financial affairs, the duties performed by the Company’s directors, managers and other senior executives in terms of compliance with the laws and regulations. 5. Performance valuation, encouragement and binding mechanism: According to requirements of establishing modern enterprise system, the Company has established a fair and transparent performance evaluation plan, and combined with the reformation of remuneration mechanism to set up a reasonable encouragement mechanism of the remuneration. 6. Relevant Beneficiaries: The Company and parties of related interests such as the banks, creditors, employees, consumers, suppliers and community supplemented each other, advanced and developed jointly. The Company has been fully respecting and safeguarding the legal rights of the parties of related interests, cooperated with them, and developed the Company in a consistent and healthy way. 7. Information Disclosure: The Company has established the Rules of Information Disclosure Management and has authorized the secretary of the Board of Directors to take charge of disclosing information, receiving the visit and inquiry of the shareholders. The Company has been disclosing the relevant information in a real, accurate, complete and timely way strictly according to the law, regulations and the Articles of Association, ensured all the shareholders to have equal opportunity to obtain the information. According to Administration Rules of Listed Companies, the Board of Directors of the Company considered that the actual administration situation of the Company is basically consistent with the requirements of Administration Rules of Listed Companies. In the near future, according to the relevant laws and regulations of the nation and Notification on Several Problems of Standardizing Capital Current and Guarantee for External Parties of Listed Companies and Related Parties and with document ZJF [2003] No. 56, the Company amended and perfected the Articles of Association of the Company; revised the Company’s financial management and internal control system; set down rules and regulations such as the Management System of Investor Relationship. Meanwhile, the Company will establish the Special Committee of the Board of Directors in pudding time according to the Company’s actual requirement of development in future. Section 2. Particulars about Performance of Duties of Independent Directors The Company has established Rules for Independent Directors according to Guidelines Opinion on Establishing Independent Director System in Listed Companies and Administration Rules of Listed Companies. At present, the Company has three independent directors. In the report year, the Company held six meetings of the Board and three shareholders’ general meetings. Mr. Tian Yanqun and Mr. Fan Zhiqing, Independent Director of the Company, attended six meetings of the Board and three shareholders’ general meetings; Independent director Wu Ying attended two meetings of the Board and one shareholders’ general meeting after he was elected as independent director of the Company. In the report year, independent directors of the Company seriously performed their duties; practically safeguard the whole interests of the Company and legal rights of the medium and small shareholders according to the requirement of Articles of Association of the Company and the relevant laws and regulations. Section 3. Separation between the Company and its Controlling Shareholder in terms of Business, Personnel, Assets, Organization and Finance 1. In term of business: The Company is completely independent from the controlling shareholder in business and has independent and complete business and autonomous operation capacity. The Company owned independent purchase and sales system. The Company is responsible for purchasing all raw resources and distributing products. R&D, production, purchase and distribution departments are separate from each other. The Company has already been independent juristic person operating in the market. 2. In term of personnel: (1) The Company is absolutely independent in the management of labor, personnel and salaries. Office and production sites are different from those of the controlling shareholder. There is no such situation of operating and working together with controlling shareholder. (2) General manager, deputy general manager, financial supervisor, secretary of the Board and other senior executives work for the Company in full time and draw salary from the Company, without taking concurrent position in the controlling shareholder enterprises. (3) The controlling shareholder recommends directors according to relevant legal procedures. All personnel resolution made in Board meetings and shareholders’ general meetings may be effectively carried out. There is no such situation that the controlling shareholder intervenes engagement and dismission of the personnel of the Company. 3. In term of assets: The Company is totally independent from its controlling shareholder in term of assets and operates completely independent. The Company not only possesses independent production system, auxiliary production system and complementary facilities, but also enjoys such intangible assets as industrial property right, trademark, non-patent technology, etc. 4. In term of finance: (1) The Company has established independent financial department, independent and complete accounting system and financial management system. (2) The Company has financial decision-making right independently without interfere of its controlling shareholder. (3) The Company has independent bank account without depositing fund into accounts of the controlling shareholder, financial company or settlement center controlled by related parties 4) The Company pays the duties in compliance with laws. Section 4. Performance Valuation, Encouragement and Binding Mechanism for Senior Executives According to demands of establishing modern enterprise system, the Company has established a fair performance evaluation system for senior executives so as to confirm the rights and obligations of senior executive, exert the enthusiasm and creativity of senior executives, supervise and urge the senior executives to perform the obligations of being honest and diligent. According to the Articles of Association, Rules of Procedures of Board of Directors and Rules of Procedures of Supervisory Committee, the Board and Supervisory Committee carried through the process supervision on the routine performance of the senior executives; the Company implemented the year-end evaluation to the senior executives, whose results were directly related to their salaries and engagement, and made the encouragement and punishment according to the evaluation results. Chapter 6. Particulars about Shareholders’ General Meeting Section 1. About shareholders’ general meeting In the report period, the Company held three shareholders’ general meetings, namely Shareholders’ General Meeting 2002, the 1st Extraordinary Shareholders’ General Meeting 2003 and the 2nd Extraordinary Shareholders’ General Meeting 2003. I. Shareholders’ General Meeting 2002 of the Company 1. On May 24, 2003, the Company published Notification on Holding Shareholders’ General Meeting 2002 in Securities Times and Ta Kung Pao, which stated the date of the Shareholders’ General Meeting 2002 as Jun. 26, 2003 and the topic for discussion. 2. On Jun. 26, 2003, the Company held the Shareholders’ General Meeting 2002 in the conference room of the Company on 27/F, Tower C, Bao’an Square, No. 1002, Sungang East Road, Shenzhen. Three shareholders and shareholders’ representatives attended the meeting with representing 115,846,291 shares (all are A shares), taking 63.68% of total share capital of the Company. The following proposals were examined and approved item by item by means of signed voting in the Meeting: (1) 2002 Report of the Board of Directors; (2) 2002 Report of the Supervisory Committee; (3) 2002 Financial Settlement Report; (4) 2002 Annual Report and its Summary (A and B shares) (5) 2002 Profit Distribution Preplan; (6) Preplan on Making up the Deficit over the Previous Years with Surplus Capital Public Reserve and Capital Reserve; (7) Proposal on Engaging Auditors for the Company in 2003; 3. Public Notice on Resolutions of Shareholders’ General Meeting 2002 was published in Securities Times and Ta Kung Pao dated Jun. 27, 2003. II. The 1st Extraordinary Shareholders’ General Meeting 2003 of the Company 1. On Jan. 10, 2003, the Company published Notification on Holding the 1st Extraordinary Shareholders’ General Meeting 2003 in Securities Times and Ta Kung Pao, which stated the date of the 1st Extraordinary Shareholders’ General Meeting 2003 as Feb. 18, 2003 and the topic for discussion. 2. On Feb. 18, 2003, the Company held the 1st Extraordinary Shareholders’ General Meeting 2003 in the conference room of the Company on 27/F, Tower C, Bao’an Square, No. 1002, Sungang East Road, Shenzhen. Four shareholders and shareholders’ representatives attended the meeting with representing 115,846,362 shares (all are A shares), taking 63.68% of total share capital of the Company. The following proposals were examined and approved item by item by means of signed voting in the Meeting: (1) Proposal on the Partial Directors Resigned from the Post of Director of the Company; (2) Proposal on By-election of Directors of Company. 3. Public Notice on Resolutions of the 1st Extraordinary Shareholders’ General Meeting 2003 was published in Securities Times and Ta Kung Pao dated Feb. 19, 2003. III. The 2nd Extraordinary Shareholders’ General Meeting 2003 of the Company On Jun. 24, 2003, the Company published Notification on Holding the 2nd Extraordinary Shareholders’ General Meeting 2003 in Securities Times and Ta Kung Pao, which stated the date of the 2nd Extraordinary Shareholders’ General Meeting 2003 as Jul. 28, 2003 and the topic for discussion. 2. On Jul. 28, 2003, the Company held the 2nd Extraordinary Shareholders’ General Meeting 2003 in the conference room of the Company on 27/F, Tower C, Bao’an Square, No. 1002, Sungang East Road, Shenzhen. Three shareholders and shareholders’ representatives attended the meeting with representing 115,846,291 shares (all are A shares), taking 63.68% of total share capital of the Company. The following proposals were examined and approved item by item by means of signed voting in the Meeting: (1) Proposal on Reelecting the Board of Directors; (2) Proposal on Reelecting the Supervisory Committee. 3. Public Notice on Resolutions of the 2nd Extraordinary Shareholders’ General Meeting 2003 was published in Securities Times and Ta Kung Pao dated Jun. 29, 2003. Section 2. Election and change of directors and supervisors 1. As approved by the 13th meeting of the 4th Board of Directors of the Company dated Jan. 8, 2003, which agreed that Mr. Lin Jiahong resigned from the posts of Chairman of the Board and Director of the 4th Board of Directors of the Company, Mr. Xue Bo and Mr. Guan Lihua resigned from the post of Director of the 4th Board of Directors of the Company; Mr. Zeng Pai was elected as Chairman of the Board of the 4th Board of Directors of the Company, Mr. Chen Jie and Mr. Cui Gang was additionally elected as Director of the 4th Board of Directors of the Company (for details, please refer to Public Notice of the Company published in Securities Times and Ta Kung Pao dated Jan. 10, 2003). The aforesaid relevant proposals were examined and approved in the 1st Extraordinary Shareholders’ General Meeting 2003 held on Feb. 18, 2003. 2. As approved by the 16th meeting of the 4th Board of Directors of the Company dated Jun. 20, 2003, Mr. Zeng Pai, Ms. Zhao Guorong, Mr. Chen Xiaohua, Mr. Zhang Jian, Mr. Chen Jie and Mr. Cui Gang were nominated as candidates of Director of the 5th Board of Directors of the Company since the term of the 4th Board of Directors has expired, Mr. Tian Yanqun, Mr. Fan Zhiqing and Ms. Wu Ying were nominated as candidates of Independent Director of the 5th Board of Directors of the Company; Mr. Yang Shunjiang, Director of the 4th Board of Directors, no longer took the post of Director due to work reason (for details, please refer to Public Notice of the Company published in Securities Times and Ta Kung Pao dated Jun. 24, 2003). The aforesaid proposals were examined and approved in the 2nd Extraordinary Shareholders’ General Meeting 2003 held on Jul. 28, 2003. As examined and approved by the 1st meeting of the 5th Board of Directors of the Company held on Jul. 28, 2003, Mr. Zeng Pai was elected as Chairman of the 5th Board of Directors of the Company (for details, please refer to Public Notice of the Company published in Securities Times and Ta Kung Pao dated Jul. 30, 2003). 3. As approved by the 10th meeting of the 4th Supervisory Committee of the Company dated Jun. 20, 2003, Ms. Zuo Heping, Mr. Peng Ying and Ms. Li Yiyan were nominated as candidates of Supervisor of the 5th Supervisory Committee since the term of the 4th Supervisory Committee has expired; Mr. Li Meisheng, Chairman of the 4th Supervisory Committee, no longer took the said position due to retiring reason, and Mr. Xie Zhenxian, Supervisor of the Company, no longer took the position of Supervisor of the Company due to work reason (for details, please refer to Public Notice of the Company published in Securities Times and Ta Kung Pao dated Jun. 24, 2003). The aforesaid proposals were examined and approved in the 2nd Extraordinary Shareholders’ General Meeting 2003 held on Jul. 28, 2003. As examined and approved by the 1st meeting of the 5th Supervisory Committee of the Company held on Jul. 28, 2003, Ms. Zuo Heping was elected as Chairman of the 5th Supervisory Committee of the Company (for details, please refer to Public Notice of the Company published in Securities Times and Ta Kung Pao dated Jul. 30, 2003). Chapter 7. Report of the Board of Directors Section I. Discussion and analysis of the Management Year 2003 was a year when the Company pushed on and tried for long-term development in the difficulties. In the report period, the precipitate SARS epidemic brought materially adverse influence on the product sales of the Company. Such events left in the history as contingent liabilities, bad long-term investments and guarantee lawsuit etc. seriously influenced on the Company’s gains and losses in the report period. Moreover, the cancellation of preferential policy of local production and local sales also made the Company’s profit decrease accordingly. Facing these objective difficulties, the Company has adopted active measures to reply composedly with a view to the long-term development of the Company as well, on the one hand, to continue to reinforce the internal management and emphasize on marketing, quality control and R&D of new products; on the other hand, to vigorously prop up the controlling subsidiaries so as to make them grow in a quick way and thus to strengthen the sustainable development capability of the Company. 1. In the aspect of marketing, to pay more attention to the maintenance and management of sales channels. Especially after SARS epidemic, the Company enlarged the market input, restored the sales channels impacted by SARS epidemic and harmonized the relationships with dealers actively. Based on consolidating old markets, the Company developed new markets in an active and stable way and continued to expand the sales regions. Based on consolidating old dealers, the Company developed new dealers with strength, enriched distributing networks and lost no time to vigorously develop various kinds of promotions and market expansions according to various market statuses in all areas, which made the marketing of the Company more active and has founded a foundation for the market expansion in the future. The Company continued to strengthen and improve the construction o sales teams and fully pushed the sales encouragement mechanism with combination of sales volume and getting-back rate of payments as standard for assessment, especially he Company increased the investment to brand “San Jing”, which made it further more famous in the dominant market with its brand value being further enhanced. Moreover, 2. In the aspect of internal management, the Company further improved all bylaws, pushed institutional management, especially reinforced internal management to such key links as purchase, sales and management of monetary funds etc. and edited and improved internal control system, which has walled up the management holes. Moreover, the Company established cost center inside the Company and disassembled the cost control indexes to all centers so as to strictly control the productive and operative cost. 3. The Company always emphasized on product quality, strictly carried out ISO9000: 2000 standard and strengthened the management and control on productive quality and safety. “San Jing” brand products were acquired “QS certification”. Shenzhen Shenbao Huacheng Food Co., Ltd. (hereinafter referred to as Shenbao Huacheng) successfully passed processing certification and product certification of organic tea of Chinese Academy of Agricultural Science as the first company and passed all certifications without social effects of pollution. 4. In the aspect of R&D of new products, under the guidance of R&D concept of “Nature, Nutrition and Health”, the Company has developed over ten new products of condiments and drinks oriented to market demand and promoted them in a selective way in a reasonable time, which has founded a foundation for the upgrading of products and further adjustment of product structure in the future. 5. Shenbao Huacheng, a controlling subsidiary of the Company, grew in a quick way with the Company’s strong support. As a supplier of semi-finished products of teas such as condensed tea powder and tea juice etc., the domestic and foreign customer resources of Shenbao Huacheng grew in a rapid way. Moreover, majority of them was famous enterprises with much strength. As a producer and seller of such terminal products as “Fast Tea”, the famous degree of its products was rapidly enhanced in Pearl River Delta, Hong Kong and other large cities etc. and gained relatively high recognition from objective consumption groups. In 2004, Shenbao Huacheng would further adopt the most advanced inspection and analysis instruments in the world and modernized production pipelines in the production and R&D and would push the management of HACCP to the whole course, which would gain a much higher enhancement in the aspect of safety and sanitation of foods and in the aspect of quality control of products. Section II. Operation of the Company I. Scope of main operations and its operation 1. Scope of main operations of the Company: production of food can, beverage and local products; domestic commerce and supply and marketing of materials; import and export business. 2. Main operations of the Company were under the classification of food and beverage industry. In the report period, the Company realized turnover of RMB 61,787,000 and gross profit of RMB 15,236,000. (1) Formation of income from main operations and profit classified according to industries and products: Unit: RMB’000 Industries Turnover Gross profit Manufacture of condiments 22,598 9,195 Manufacture of soft drinks 24,446 1,319 Manufacture of teas 13,845 3,870 Service of lease 89.88 100.00 Products “San Jing” brand condiments 22,598 9,195 Lactobacillus milk series 6,006 353 Soft packing drinks 18,440 966 Tea powder and tea juice series 13,845 3,870 (2) Main operations classified according to areas Unit: RMB’000 Sales areas Income from main operations Gross profit South China 39,002 6,088 North China 4,947 1,969 East China 16,940 6,328 (3) Sales of products taking over 10% of income from main operations of the Company Turnover Sales cost Gross profit Main products (RMB’000) (RMB’000) rate (%) “San Jing” brand condiments 22,598 13,435 40.55 Lactobacillus milk series 6,006 5,666 5.66 Soft packing drinks 18,440 17,523 4.97 Tea powder and tea juice series 13,845 9,927 28.30 3. In the report period, the Company realized income from main operations and gross profit amounting to RMB 61,787,000 and RMB 15,236,000 respectively, a decrease of 19.89% and 8.66% respectively over the same period of the last year, which was mainly because that the sales volume of products decreased influenced by SARS epidemic in the report period, resulting in the decrease of profitability of main operations somewhat. II. Operations and achievements of main holding and share-holding companies of the Company (1) Shenzhen Shenbao San Jing Food & Beverage Development Co., Ltd.: a wholly-owned subsidiary of the Company, whose registered capital is RMB 25,000,000, legal representative is Mr. Zheng Yuxi. Business scope of this company: production and sales of beverage, by-food, additives (excluding limited items) and operation of import and export business (the details in compliance with SMGZZZI No. 2002-352 Qualification Certificate). At the end of the report period, the total assets of this company reached RMB 108,483,000. In 2003, this company realized the income from main operations of RMB 46,789,000 and net profit of RMB (14,137,000). (2) Shenzhen Shenbao Industrial and Trade Development Company: as a sole subsidiary of the Company, this company has a registered capital of RMB 5,500,000 and legal representative as Mr. Fang Jianhui. Business scope of this company: food can, beverage, condiment and its packing materials, raw and auxiliary materials, hardware and alternating current, chemical products, daily used china, automobile fittings, electrical products, agricultural byproducts, local products, daily used general merchandise, products of arts and crafts, textiles and operation of import and export business. At the end of the report period, the total assets of this company reached RMB 3,017,000. In 2003, this company realized the income from main operations of RMB 18,463,000 and net profit of (RMB 5,969,000). (3) Shenzhen Pepsi Cola Beverage Co., Ltd.: the Company holds 40% equity of this company, whose registered capital is RMB 12,250,000 and legal representative is Mr. Lin Jiahong. Main business of this company covers production and sales of carbonic acid beverage represented by Pepsi Cola in districts of Shenzhen, Huizhou, Shantou and Meizhou, etc.. At the end of report period, the total assets of this company amounted to RMB 527,073,000. In 2003, this company realized the income from main operations of RMB 717,921, 000 and net profit of RMB 81,085,000. (4) Shenzhen Shenbao Huacheng Food Co., Ltd.: The Company holds 51.67% equity of this company, whose registered capital is RMB 30 million and legal representative is Mr. Ceng Pai. The business scope of this company: investment and establishment of industries (the detailed item is to be applied otherwise); information inquiry (excluding limited items); development of food technology, sales of beverages and additives series products such as ginger tea, condensed pumpkin powder, liquid drinks, condensed tea juice, fast tea powder etc. (excluding special operating, special selling and special controlling merchandise); import and export business (the detailed transaction in compliance with qualification certificate). At the end of report period, the total assets of this company reached RMB 75,238,000. In 2003, this company realized the income from main operations of RMB 13,806,000 and net profit of RMB (9,040,000). III. Main suppliers and customers In the report period, the purchase amount from the top five suppliers totally amounted to RMB 7,471,000, taking 20.67% of total annual purchase, while the sales amount to the top five customers totally amounted to RMB 19,174,000, taking 30.89% of total annual sales. IV. Problems and difficulties from the operation and solutions (I) Problems and difficulties from the operation 1. The competition in the food and beverage industry was intense with low entry doorsill, thus it was hard to from competitive bulwark. In the intensified competition, the profit of traditional products decreased, appearing the situation of low gross profit and even negative gross profit, which made the Company’s profitability capability and competitive capability weakened; on the other hand, large quantities of human resources, materials and finance needed to be put into the new products of beverage still under the market cultivation period. 2. In the report period, the precipitate SARS epidemic made the product sales market and channels suffer very great impact, directly resulting in the decrease in the Company’s operating achievements. 3. In the report period, the Company has disposed a set of guarantee lawsuits left in the history, directly resulting in the large outflow of the Company’s cash, which made the Company’s whole financial status suffer relatively large influence. (II) Solutions 1. Aiming at the status in the food and beverage industry, being established in quality, R&D and service, the Company attached importance to the product quality management, reinforced service marketing, enlarged the strength in R&D of new products and sped up the adjustment steps to product structure so as to get through the interim of alternation of new and old products. In the aspect of input of new products, the Company emphasized to put the limited resources into the new products with market potential and profitability potential. To the end of the report period, the series tea products from Shenbao Huacheng, a controlling subsidiary of the Company, have gained preliminary success in its objective market. Along with its use of modernized production lines, Shenbao Huacheng has entered into the phase of rapid development. 2. During the period of SARS epidemic, the Company has strengthened the communication with its dealers and faced the bad market environment together so as to protect the market in a maximum way. At the same time, catching the chance, the Company reinforced the withdrawal of payments for goods, thus the withdrawal rate of payments reached to 100%. After SARS epidemic, the Company enlarged the market investment and fully repaired the impacted markets and channels. According to the logistics features and sales rules of the Company’s products, the Company integrated the resources again, reinforced internal management, quantified the duties, reduced the links, smoothed the relationships and enhanced the efficiency. 3. While actively disposing the guarantee lawsuits left in the history, on the one hand, the Company exerted the recourse right through legal way and recalled relevant accounts from the guaranteed objects so as to protect the Company’s interests in a maximum way; on the other hand, the Company has gained understanding and support from relevant departments through large quantities of meticulous work and has softened the lawsuit and implementation pressure. Section III. Investment of the Company I. Use of the raised proceeds In the report period, the Company used the raised proceeds to increase investment amounting to RMB 13,250,000 to Shenbao Industrial City. Ended the end of the report period, the actual use of the raised proceeds of the Company was as follows: Unit: RMB’000 Investment project committed Investment amount Actual Progress in Prospectus committed in Prospectus investment (%) Project of Henggang new plant 29,000 15,606 53.82 of Shenzhen Pepsi Cola Beverage Co., Ltd. Project of Shenbao Industrial 58,000 13,250 22.85 City There were still the raised proceeds amounting to RMB 45,137,000 deposited in the bank without using. The project of Henggang new plant of Shenzhen Pepsi: the project of Henggang new plant of Shenzhen Pepsi is under the operating management of Shenzhen Pepsi and its situation of earnings is reflected in the whole achievements of Shenzhen Pepsi. In 2003, Shenzhen Pepsi realized net profit amounting to RMB 81,085,000. The part of not invested shall be dicided according to the resolutions of the Board of Directors of Shenzhen Pepsi depending on the expansion situation of Shenzhen Pepsi in the market of East Guangdong and Dongguan. The project of Shenbao Industrial City: in compliance with the principle of cautious investment, based on adjusting the design of relevant engineering accordingly after adjusting product structure according to the changes in the market, the Company invested RMB 13,250,000 into the said project in the report period. The part that was still not invested would be invested gradually by stages according to the progress of the said project. II. Investment of the proceeds not raised through shares offering in the report period In the report period, the Company had no material investment invested with the proceeds not raised through shares offering. Section IV. Financial position and operating results of the Company In the report period, K.C.Oh & Company Certified Public Accountants has presented unqualified auditors’ report for the Company with detailed analysis as follows: (1) At the end of the report period, the total assets of the Company amounted to RMB 446,314,000, a decrease of 1.94% over the amount at the beginning of the year amounting to RMB 455,161,000, which was mainly because that the Company incurred a loss in the report period while the short-term loans increased. (2) At the end of the report period, the shareholders’ equity of the Company was RMB 231,290,000, a decrease of 16.24% over the amount at the beginning of the year amounting to RMB 276,142,000, which was mainly because that the Company incurred a loss in the year. (3) In the year, the gross profit of the Company was RMB 15,236,000, a decrease of 8.66% over the gross profit amounting to RMB 16,682,000 in the last year, which was mainly due to the decrease in sales volume influenced by SARS epidemic. (4) In the year, the net profit was (RMB 44,852,000), an increase of 15.99% over the net profit amounting to (RMB 53,394,000) in the last year, which was mainly because that the losses from guarantees decreased compared with those in the last year (For details, please refer to Notes 7 of the financial report) while the sales volume and amount decreased influenced by SARS epidemic. (5) At the end of the report period, the net increase in cash and cash equivalents of the Company was (RMB 24,816,000), a decrease of 352.96% over the amount at the beginning of the year amounting to RMB 9,810,000, which was mainly because that such problems as investment in the project of Shenbao Industrial City, enlargement of market input and disposal of guarantees left in the history resulted in the outflow of cash. (6) The case that the Company provided joint guarantee for Shenzhen China Bicycle Company (Holdings) Limited (hereinafter referred to as Shenzhonghua) to get loan amounting to RMB 7,000,000 from China Construction Bank Shenzhen Branch has been compromised and settled. The Company refunded the principal amounting to RMB 7,000,000 instead for Shenzhonghua and the interest was exempted. Ended the end of the report period, the Company had refund all principals for Shenzhonghua. The case that the Company provided guarantee amounting to USD 800,000 for Shenzhonghua to apply for opening letter of credit in Bank of China Shenzhen Branch was judged by Guangdong Higher People’s Court with (1999) YFJYZZ No. 26 document Civil Judgment, where the Company took on the joint discharging responsibility. Ended the notice date, the Company had refunded RMB 3,600,000 for Shenzhonghua. Both the said two guarantees belonged to problems left in the history, which was a link in “Guarantee chain” of listed companies in Shenzhen. At present, the reorganization of liabilities of Shenzhonghua has gained material progress. The Company would continuously adopt practical measures actively and forwardly to strive for the support of the government and relevant departments and would settle the said guarantees through legal way. (7) The Company has settled the guarantee that the Company provided for Shenzhen Tellus Holding Co., Ltd. (hereinafter referred to as Shen Tellus) to get loan amounting to RMB 5,280,000. Ended the notice date, the Company had withdrawn the principal amounting to RMB 5,280,000 and compensation fund amounting to RMB 200,000 refunded by the Company for Shen Tellus. (8) In the report period, the Company had no change in accounting policy and accounting estimate or correction in material accounting errors. Section V. Influence of changes in productive and operative environment and macro policies and regulations on the Company In the first half of year 2003, SARS epidemic had great impact o the food and beverage industry and affected serious influence on the sales of the Company’s products, thus the Company’s income from main operations decreased, resulting in the large increase in the Company’s expenses of market maintenance and expansion. The Company’s profit after taxation has decreased because Shenzhen Municipal stopped performing favorable policy of reducing of remitting VAT of “local manufacturing local vendition” since Jan.1, 2003, Section VI. Routine work of the Board of Directors I. Meetings and resolutions of the Board of Directors in the report period In the report period, the Board of Directors of the Company totally held six meetings of the Board: 1. The 13th Meeting of the 4th Board of Directors of the Company was held on Jan. 8, 2003 and the following resolutions have been considered and passed in the Meeting: (1) Proposal on Partial Directors’ Resigning from the Positions of Directors (2) Proposal on By-electing Directors of the Company (3) Proposal on Mr. Lin Jiahong’s Resigning from the Position of Chairman of the Board (4) Proposal on Electing Mr. Zeng Pai as Chairman of the Board (5) Proposal on Holding the 1st Temporary Shareholders’ General Meeting for 2003 The said resolutions were published on Securities Times and Ta Kung Pao dated Jan. 10, 2003. 2. The 14th Meeting of the 4th Board of Directors of the Company was held on Mar. 12, 2003 and the following resolutions have been considered and passed in the Meeting: (1) Report of the Board of Directors 2002 (2) Financial Settlement Report 2002 (3) Annual Report 2002 and its Summary (A and B Shares) (4) Profit Distribution Preplan 2002 (5) Preplan on Using Surplus Reserve and Capital Reserve to Offset the Losses in Previous Years (6) Preplan on Engaging Auditors of the Company for 2003 (7) Proposal on Issuing the Notice on Holding Annual Shareholders’ General Meeting 2002 Separately The said resolutions were published on Securities Times and Hong Kong Ta Kung Pao dated Mar. 13, 2003. 3. The 15th Meeting of the 4th Board of Directors of the Company was held on Apr. 15, 2003 and the following resolution has been considered and passed in the Meeting: (1) The 1st Quarterly Report of the Company 2003 The said resolution was published on Securities Times and Hong Kong Ta Kung Pao dated Apr. 16, 2003. 4. The 16th Meeting of the 4th Board of Directors of the Company was held on June 20, 2003 and the following resolutions have been considered and passed in the Meeting: (1) Rectification Report of Shenzhen Shenbao Industrial Co., Ltd. on Problems Discovered by Shenzhen Securities Regulatory Office in Routine and Tour Inspection for 2003 (2) Proposal on Changing Office Term of the Board of Directors (3) Proposal on Holding the 2nd Temporary Shareholders’ General Meeting for 2003 The said resolutions were published on Securities Times and Ta Kung Pao dated June 24, 2003. 5. The 1st Meeting of the 5th Board of Directors of the Company was held on July 28, 2003 and the following resolutions have been considered and passed in the Meeting: (1) Proposal on Electing Chairman of the Board of the Company (2) Proposal on Engaging Such Senior Executives of the Company as General Manager (3) Project on Salary and Remuneration of Senior Executives (4) Semi-annual Report 2003 and its Summary (A and B Shares) The said resolutions were published on Securities Times and Ta Kung Pao dated July 30, 2003. 6. The 2nd Meeting of the 5th Board of Directors of the Company was held on Oct. 23, 2003 and the following resolution has been considered and passed in the Meeting: (1) The 3rd Quarterly Report 2003 The said report was published on Securities Times and Ta Kung Pao dated Oct. 24, 2003. II. Implementation of the Board on resolutions of Shareholders’ General Meeting In the report period, the Board of the Company seriously implemented all resolutions passed by Shareholders’ General Meeting strictly in compliance with the resolutions and authorizations of Shareholders’ General Meeting. In 2002, the Company did not distribute profits or convert capital reserve into share capital. According to the resolutions of Shareholders’ General Meeting 2002, the Company used capital reserve and surplus reserve amounting to RMB 27,486,000 and RMB 20,243,000 respectively to offset the losses amounting to RMB 47,729,000 in the previous years. Section VII. Profit distribution plan for 2003 Audited by Shenzhen Dahua Tiancheng Certified Public Accountants under Chinese Accounting Standards, the Company’s net profit was (RMB 44,852,000) in 2003; audited by K.C.Oh & Company Certified Public Accountants under International Accounting Standards, the Company’s net profit was (RMB 44,852,000) in 2003. According to the relevant provisions in Company Law of the P.R.C. and the Articles of Association of the Company, based on the net profit of the Company amounting to (RMB 44,852,000) audited by Shenzhen Dahua Tiancheng Certified Public Accountants in 2003, the retained earnings of the Company amounted to (RMB 44,852,000) in 2003. According to the relevant provisions in Company Law of the P.R.C. and Standardized Interlocution No. 3 of Information Disclosure on Publicly Issuing Securities – Origin, Procedures and Information Disclosure of Losses Offsetting released by CSRC, before the Company’s accumulative losses being offset at full amount, it was forbidden to distribute dividends to shareholders or convert capital reserve into share capital. In 2003, the Board of the Company decided to neither distribute profits nor convert capital reserve into share capital. The said preplan should be submitted to Annual Shareholders’ General Meeting 2003 for consideration. Section VIII. Other important events I. Special explanation of CPA on the capital occupied by the Company’s controlling shareholder and other related parties Special Opinion on Capital Occupation and Guarantee of Large Shareholder and Related Parties of Shenzhen Shenbao Industrial Co., Ltd. SH (2004) ZSZ No. 072 China Securities Regulatory Commission Shenzhen Securities Regulatory Bureau: As a CPA auditing the accounting statements of Shenzhen Shenbao Industrial Co., Ltd. for 2003, we have presented the Special Explanation on the relevant issues of the Listed Company according to Circular on Standardizing Listed Companies’ Capital Current with Related Parties, External Guarantees and Other Several Problems (ZJF [2003] No. 56) released by CSRC. In SH (2004) GSZ No. 025 auditors’ report, the capital of the Listed Company occupied by the large shareholder and related parties of Shenzhen Shenbao Industrial Co., Ltd. (hereinafter referred to as Shenshenbao) and relevant illegal guarantees of the Listed Company were as follows: I. The large shareholder of Shenzhen Shenbao Industrial Co., Ltd. Originally Shenzhen Investment Management Company held 115,838,611 shares of Shenshenbao (including 9,900,000 shares from its affiliated company called China Ping An Insurance Co., Ltd.), taking 63.7% of its total share capital, as the first largest shareholder of Shenshenbao. At the end of 1999, Shenzhen Investment Management Company transferred its 61,848,466 shares of Shenshenbao (taking 34% of its total share capital) to Shenzhen Agricultural Products Co., Ltd., who thus became the first largest shareholder of the Company. The equity transfer procedure was accomplished within year 2003 while Shenzhen Investment Management was the nominal controlling shareholder of Shenshenbao from signing of equity transfer agreement to accomplishment of equity transfer procedure. II. Capital occupation 1. The originally nominal controlling shareholder, namely Shenzhen Investment Management Company, did not occupy the capital of Shenzhen Shenbao Industrial Co., Ltd.. 2. Capital current between Shenzhen Shenbao Industrial Co., Ltd. with Shenzhen Nanfang Tongfa Industrial Company, an associated company of the Company Shenzhen Nanfang Tongfa Industrial Company is a subsidiary of Shenzhen Investment Management Company. In 1995, Shenshenbao provided guarantee for its loan amounting to RMB 30,000,000 and this company did not refund the loan at expiration. After mediating by the court and compromising by such three parties as the bank, the court and this company, Shenshenbao paid the principal and interest amounting to RMB 38,074,000 for this company by stages. In 2002, Shenshenbao paid RMB 24,371,000 and has paid up the rest amount in the year. 3. Capital current between Shenzhen Shenbao Industrial Co., Ltd. with Guangdong Sunrise Holdings Co., Ltd., an associated company of the Company Guangdong Sunrise Holdings Co., Ltd. is a sub-subsidiary of Shenzhen Investment Management Company. In 1997, Shenshenbao provided guarantee for its loan amounting to RMB 8,000,000 and HKD 9,000,000 and this company did not refund the loan at expiration. After compromising by the court and this company, Shenshenbao paid partial principal and interest for this company and provided guarantee continuously for the rest amount. In 2001, Shenshenbao totally paid RMB 4,182,000; totally paid RMB 4,671,000 in 2002 and totally paid RMB 744,000 in the year. The Company totally paid partial principal and interest amounting to RMB 9,597,000 for this company. 4. Capital current between Shenzhen Shenbao Industrial Co., Ltd. and Shenzhen China Bicycle Company (Holdings) Limited, an associated company of the Company Shenzhen China Bicycle Company (Holdings) Limited is a sub-subsidiary of Shenzhen Investment Management Company, an associated company of Guangdong Sunrise Holdings Co., Ltd. (1) In 1996, Shenshenbao provided guarantee for its loan amounting to RMB 7,000,000 and this company did not refund the loan at expiration. On June 17, 1998, Guangdong Shenzhen Intermediate People’s Court confirmed that Shenshenbao should take on the joint discharging responsibility with (1998) SZFJTCZ No. 210 Civil Intermediation. In Sept. 2003, Shenshenbao reached Agreement on Interests Reduction and Exemption after negotiating with the bank, where agreed after Shenshenbao refunding RMB 7,000,000, the bank agreed to reduce and exempt the said interests of liabilities. After the agreement signing, Shenshenbao had paid RMB 7,000,000. (2) In July 1996, Shenzhen China Bicycle Company (Holdings) Limited applied for opening a letter of credit amounting to USD 1,000,000 from Bank of China Shenzhen Branch and at the same time required the said bank to exempt from receiving the deposit of opening amounting to USD 800,000. Shenshenbao presented irrevocable warranty to Bank of China Shenzhen Branch and agreed to provide guarantee for Shenzhen China Bicycle Company (Holdings) Limited to open the said letter of credit with guarantee amount of USD 800,000. After expiration of the letter of credit, Shenzhen China Bicycle Company (Holdings) Limited did not transact procedure of payment to Bank of China Shenzhen Branch. On Nov. 23, 1999, Guangdong Higher People’s Court judged Shenshenbao to take on the joint discharging responsibility with (1999) YFJYZZ No. 26 Civil Judgment. In 2003, Shenshenbao paid RMB 3,100,000. 5. Shenzhen Agricultural Products Co., Ltd., the actually controlling shareholder of the Company, did not occupy the capital of Shenzhen Shenbao Industrial Co., Ltd. III. Guarantees 1. Current guarantees Names of related companies Guarantee Way of guarantee Term of Relationships with amount guarantee Shenshenbao Guangdong Sunrise HKD 32,000,000 Credit Till paid up Sub-subsidiary of the Holdings Co., Ltd. former nominal controlling shareholder Shenzhen China Bicycle USD 800,000 Credit Till paid up Associated company of Company (Holdings) sub- subsidiary of the Limited former nominal controlling shareholder 2. Ended the date of auditors’ report, Shenshenbao did not provide loan guarantee for its actually controlling shareholder, namely Shenzhen Agricultural Products Co., Ltd. and its related parties. The Special Opinion is presented by us according to the requirements of CSRC and its dispatching authorities and can not be used for other purposes. The results caused by misuse are irrelevant to CPA and certified public accountants implementing this business. Appendix: Statement of capital occupied by the large shareholder and related parties Shenzhen Dahua Tiancheng Certified Public Accountants Statement of Capital Occupied by the Large Shareholder and Related Parties Ended: Dec. 31, 2003 Amount: RMB’000 I. Statement of capital occupied by the controlling shareholder and its related parties Names of Relationships Quality of Beginning-balance at Debit Credit Ending-balance Way of Reasons of Implementing related with listed occupation the period amount amount at the period occupation occupation what kind of parties company examining procedures Shezhen - - - - - - - - - Agricultural Products Co., Ltd. II. Statement of capital occupied by other related parties Names of Relationships Quality of Beginning-balance at Debit Credit Ending-balance Way of Reasons of Implementing related with listed occupation the period amount amount at the period occupation occupation what kind of parties company examining procedures Shenzhen Subsidiary of Non-operating Estimated Implementing Examined by Nanfang the former first occupation liabilities guarantee Chairman of Tongfa largest 24,371.20 13,632.10 - 38,003.30 joint the Board and Industrial shareholder responsibility General Company Manager Guangdong Sub-subsidiary Non-operating Estimated Implementing Examined by Sunrise of the former occupation liabilities guarantee Chairman of Holdings first largest 8,853.30 744.00 - 9,597.4 joint the Board and Co., Ltd. shareholder responsibility General Manager Shenzhen Associated Non-operating Estimated Implementing Examined by China company of occupation liabilities guarantee Chairman of Bicycle sub-subsidiary joint the Board and - 10,100.00 - 10,100.00 Company of the former responsibility General (Holdings) first largest Manager Limited shareholder II. Special explanation and independent opinion of independent directors on the Company’s accumulative and current external guarantees and implementing provisions Shenzhen Shenbao Industrial Co., Ltd. Special explanation and independent opinion of independent directors on the Company’s external guarantees According to Rules on Administration of Listed Companies, Guidance Opinion on Establishing Independent Director System in Listed Companies, Circular on Standardizing Listed Companies’ Capital Current with Related Parties, External Guarantees and Other Several Problems, the Articles of Association of the Company and other relevant provisions, we have seriously inspected the Company’s accumulative and current external guarantees and provisions on implementing Circular on Standardizing Listed Companies’ Capital Current with Related Parties, External Guarantees and Other Several Problems and have checked the relevant contents in auditors’ report for 2003. Now the special explanation is made and the independent opinion is expressed on relevant situations as follows: I. Special explanation 1. The Company did not provide loan guarantee for its controlling shareholder, namely Shenzhen Agricultural Products Co., Ltd., and its related parties, or did not provide guarantees for other related parties where the Company held below 50% shares, any non-legal person companies or individuals. 2. Before year 1999, under the historical background that the Company and Shenzhen Nanfang Tongfa Industrial Company, Guangdong Sunrise Holdings Co., Ltd., Shenzhen China Bicycle Company (Holdings) Limited and Shenzhen Tellus Holdings Co., Ltd. were all controlling subsidiaries or wholly owned subsidiaries of Shenzhen Investment Management Co., Ltd., the Company provided loan guarantee for the said four companies. Now the relevant guarantees left in the history and their progresses are as follows: (1) Shenzhen Nanfang Tongfa Industrial Company is a subsidiary of Shenzhen Investment Management Company. In 1995, the Company provided guarantee for its loan amounting to RMB 30,000,000 and this company did not refund the loan at expiration. After mediating by the court and compromising by such three parties as the bank, the court and this company, the Company paid the principal and interest amounting to RMB 38,074,000 for this company by stages. In 2002, the Company paid RMB 24,371,000 and has paid up the rest amount in the year. Sunrise Holdings Co., Ltd., an associated company of the Company (2) Guangdong Sunrise Holdings Co., Ltd. is a sub-subsidiary of Shenzhen Investment Management Company. In 1997, the Company provided guarantee for its loan amounting to RMB 8,000,000 and HKD 9,000,000 and this company did not refund the loan at expiration. After compromising by the court and this company, the Company paid partial principal and interest for this company and provided guarantee continuously for the rest amount. In 2001, the Company totally paid RMB 4,182,000; totally paid RMB 4,671,000 in 2002 and totally paid RMB 744,000 in the year. The Company totally paid partial principal and interest amounting to RMB 9,597,000 for this company. In 1998, the Company provided joint guarantee for this company to get loan amounting to HKD 32,000,000 from Bank of China Shenzhen Branch. Ended the end of the report period, this company still did not refund the said principal and interest of loan. In 2003, Bank of China Shenzhen Branch required the Company to provide pledge articles for the said guarantee. In Sept. 2003, the Company agreed to pledge its 51.6% equity of Shenzhen Shenbao Huacheng Food Co., Ltd. to Bank of China Shenzhen Branch. (3) Shenzhen China Bicycle Company (Holdings) Limited is a sub-subsidiary of Shenzhen Investment Management Company, an associated company of Guangdong Sunrise Holdings Co., Ltd.. In 1996, the Company provided guarantee for it to get loan amounting to RMB 7,000,000 from China Construction Bank Shenzhen Branch and this company did not refund the loan at expiration. On June 17, 1998, Guangdong Shenzhen Intermediate People’s Court confirmed that the Company should take on the joint discharging responsibility with (1998) SZFJTCZ No. 210 Civil Intermediation. In Sept. 2003, the Company reached Agreement on Interests Reduction and Exemption after negotiating with the bank, where agreed after the Company refunding RMB 7,000,000, the bank agreed to reduce and exempt the said interests of liabilities. After the agreement signing, the Company had paid RMB 7,000,000. In July 1996, Shenzhen China Bicycle Company (Holdings) Limited applied for opening a letter of credit amounting to USD 1,000,000 from Bank of China Shenzhen Branch and at the same time required the said bank to exempt from receiving the deposit of opening amounting to USD 800,000. The Company presented irrevocable warranty to Bank of China Shenzhen Branch and agreed to provide guarantee for Shenzhen China Bicycle Company (Holdings) Limited to open the said letter of credit with guarantee amount of USD 800,000. After expiration of the letter of credit, Shenzhen China Bicycle Company (Holdings) Limited did not transact procedure of payment to Bank of China Shenzhen Branch. On Nov. 23, 1999, Guangdong Higher People’s Court judged the Company to take on the joint discharging responsibility with (1999) YFJYZZ No. 26 Civil Judgment. In 2003, the Company paid RMB 3,100,000. (4) In 1997, the Company provided joint guarantee for Shenzhen Tellus Holdings Co., Ltd. (hereinafter referred to as Shen Tellus) to get loan amounting to RMB 5,280,000 from Shenzhen International Trust Investment Company. In 2002, this case was compromised and settled. In Mar. 2002, the Company refunded RMB 5,280,000 for Shen Tellus. Ended the report date, the Company had withdrawn the principal amounting to RMB 5,280,000 and compensation fund amounting to RMB 200,000 refunded for Shen Tellus. 3. Except for relevant issues of renewal of loans and guarantees caused from proper settlement of guarantees left in the history, since Shenzhen Agricultural Products Co., Ltd. occupied the Company, the Company had no any external guarantee newly increased. 4. According to the relevant spirit in Circular on Standardizing Listed Companies’ Capital Current with Related Parties, External Guarantees and Other Several Problems, the Company has conducted serious self-inspection on the external guarantees and at the same time, we required the Company to amend the Articles of Association of the Company according to the relevant provisions in the Circular so as to strictly control the external guarantees. 5. There are specific persons in Planning & Financial Department and Law Office in the Company to conduct track on the guarantees in time. II. Independent opinion 1. The decision-making and examination procedures of the Company’s external guarantees were legal, reasonable and fair. 2. The Company has implemented the information disclosure of external guarantees timely. 3. The said renewal of guarantees caused by the proper settlement of external guarantees left in the history was in compliance with the maximum principle of interests of the Company, not harming the Company and its shareholders, especially the interests of middle and small shareholders. Shenzhen Shenbao Industrial Co., Ltd. Independent Directors in the 5th Board Tian Yanqun, Fan Zhiqing and Wu Ying Apr. 8, 2004 Chapter VIII. Report of the Supervisory Committee I. Particular about work of the Supervisory Committee in the report period In the report period, the Supervisory Committee had held three meetings, examined and adopted and the following resolutions: (I) The 9th meeting of the 4th Supervisory Committee was held on Mar.12, 2003. The following resolutions were examined and approved at the Meeting: (i) 2002 Report of the Supervisory Committee; (ii) Financial Settlement Report 2002; (iii) Annual Report 2002 and its Summary (A share and B share respectively); (iv) 2002 Profit Distribution Preplan. (v) Preplan about Using Surplus Public Reserve and Capital Reserve to make up losses in the previous years The public notice on the aforesaid resolutions of the meeting was published in Securities Times and Hong Kong Ta Kung Pao respectively dated Mar.13, 2003. (II) The 10th meeting of the 4th Supervisory Committee was held on Jun. 20, 2003. The following resolutions were examined and approved in the Meeting: (i) Renovation Report of Shenzhen Shenbao Industrial Co., Ltd. about the problems found in the 2003 routine inspection by Shenzhen branch of CSRC; (ii) Proposal on Expiration and Election of the Supervisory Committee. The public notice on the aforesaid resolutions was published in Securities Times and Hong Kong Ta Kung Pao respectively dated Jun. 24, 2003. (III) The 1st meeting of the 5th Supervisory Committee was held on July 28,2003. The following resolutions were examined and approved in the meeting: (i)Proposal on the Election of Chairman of the 5th Supervisory Committee of the Company; (ii) 2003 Semi-annual report and its summaries (A share and B share respectively). The public notice on the aforesaid resolutions was published in Securities Times and Hong Kong Ta Kung Pao respectively dated July 30, 2003. II. Independent opinion of the Supervisory Committee on certain issues (I) Operation According to the Law In the report period, the Supervisory Committee conducted supervision over the procedures of holding Board meetings and Shareholders’ General Meeting, resolutions, implementation of the resolutions of the Shareholders’ General Meeting by the Board of Directors, status of the senior executives in implementing their duties and the Company’s management system according to the relevant laws and regulations. In our opinion, in 2003, the Board of Directors carried out the operation in a standardized way strictly according to the PRC Company Law, the Securities Law, the Listing Rules, the Articles of Association and other relevant regulations. The Company’s directors and general managers worked carefully; the Company’s decision-making was religious and solid. We have found no directors or senior executives ever involved in any actions against the law, rules and regulations, or the Articles of Association or harmful to the interest of the Company and the shareholders in the process of implementation of their duties. (II). Financial Inspection We have made careful and serious inspection of the Company’s financial system and financial position. In our opinion, 2003 Financial Report of the Company has truly reflected the Company’s financial position and operation achievements. The auditors’ report and the auditors’ opinion on the relevant issues produced by Shenzhen Dahua Tiancheng Certified Public Accountants and Hong Kong K.C. Oh & Company Certified Public Accountants are objective and fair. (III). The actual investment project funded by the latest proceedings is the same as the commitment. (IV) In the report period, there has existed no insider transaction or action harmful to the part shareholders’ right and interest or in connection with loss of the Company’s assets. (V) In the report period, the Company had no significant related transactions and no actions harmful to the interest of the Company. Chapter IX. Significant Events Section I. Material Lawsuits and Arbitration (I) The lawsuit case of the Company as warrantor for Shenzhen Nanfang Tongfa Industrial Company (hereinafter referred to as “Nanfang Tongfa”) for loan amounting to RMB 30,000,000 was settled through reconciliation on Jan.11, 2002(For details, please refer to Public Notice on Material Lawsuits of the Company published on Securities Times and Hong Kong Ta Kung Pao dated Mar. 13, 2002). Dated the end of the report period, according to the requirements of Civil Mediation Letter, the Company respectively repaid the principal, interest and lawsuit expense for the 1st trial and expense of save from damage amounting to RMB 38,003,000(The event didn’t affect the income of the company in the report period). At present, the Company would execute the relevant recourse right pursuant to the law approaches. (II). The lawsuit case that the Company provided guarantee for Guangdong Sunrise Holdings Co., Ltd. (the former Shenzhen Lionda Holdings Co., Ltd., hereinafter referred to as Sunrise Company) concerning the loan of HKD 3,000,000, which Sunrise Company asked for a loan from Shenzhen Branch of Industrial and Commercial Bank of China, has been settled through reconciliation in Dec, 2002. The Company in place of Sunrise Company repaid the principal of HKD 3,000,000and the interest of HKD 100,000 on Jan.13, 2003. The rest interest has been exempted. The company would execute the relevant rights by legal approaches. (III) The lawsuit case that the Company offered guarantee for Sunrise Company’s loan amounting to HKD 6,000,000 from Nantou sub-branch of Shenzhen Development Bank was settled with compromise. The Company has repaid the principal amounting to HKD 2,000,000 and interest for Sunrise Company, and the residuals of the principal amounting to RMB 4,000,000 were transferred to loan and guaranteed by the Company continuously (For details, please refer to Public Notice of the Company published on Securities Times and Hong Kong Ta Kung Pao dated May 13, 2003) (IV) The lawsuit case that the Company offered guarantee for Sunrise Company’s loan amounting to RMB 8,000,000 from Shenzhen Nanyuan sub-branch of Gongdong Development Bank (former Nanyuan sub-branch of Shenzhen branch of Guangdong Development Bank) was settled with comprimise. Dated the end of the report period, the Company has repaid and interest amounting to RMB 1,939,000 for Sunrise Company, the residuals amounting to RMB8,580,000 were transferred to loan and guaranteed jointly by the Company continuously. (V) The lawsuit case that the Company offering joint guarantee for Shenzhen Tellus Holding Co., Ltd. of borrowing RMB 5,280,000 from Shenzhen International Trust and Investment Corporation was settled with compromise. The Company has repaid RMB 5,280,000 to Shenzhen International Trust and Investment Corporation for Tellus Company in March 2002. Dated the end of the report period, the Company has retrieved the principal loan amounting to RMB 5,280,000 and the compensation amounting to RMB 200,000. (VI) The lawsuit case that the Company offering joint guarantee for Shenzhen China Bicycle Company (Holdings) Limited of borrowing RMB 7,000,000 from Shenzhen branch of China Construction Bank (hereinafter referred to as “ construction bank”) was settled through reconciliation. The Company and construction bank made terms on exempting the interest (For details, please refer to Public Notice of the Company published on Securities Times and Hong Kong Ta Kung Pao dated on Sep. 18, 2003 and on Jan. 10, 2004). In the report period, the Company paid RMB 7,000,000 fro Shen Zhonghua in two installments according to the terms. The Company would execute the relevant rights by legal ways. (VII) In the case that the Company provided guarantee for Shenzhen China Bicycle Company (Holdings) Limited to apply for opening the letter of credit amounting to USD 800,000 from Shenzhen Branch of Bank of China. According to the (1999) YFJYZ ZI No.26 Civil Judgment of Guangdong Higher People’s Court, the Company took the joint clearing responsibility. Shenzhen Intermediate People’s Court had also issued the implementation order. The Company paid back RMB 3,600,000 for Shen Zhonghua dated the report day. Section II. Purchase and Sales of Assets In the report period, there were no significant purchase and sale of assets or significant merge about the Company. Section III. Material Related Transaction The Company conducted no material transaction with its related parties in the report period. Section IV. Material Contract and the Implementation (I) Entrustment, contracting and lease The Company has no material transaction of entrustment, contracting and lease. (II) Material guarantee (i) On Apr.30, 2003, the wholly owned subsidiary of the Company, Shenzhen Shenbao Sanjing Food & Beverage Investment Co., Ltd. (hereinafter referred to as “Sanjing Company”) obtained the comprehensive credit line amounting to RMB60, 000,000 of Shenzhen branch of China Everbright Bank. The company provided guarantee for the credit line for one year. (Please refer to the details in the public notice in Securities Times and Hong Kong Ta Kung Pao dated May. 13, 2003.) By the end of the report period, Shenzhen branch of China Everbright Bank lent payment amounting to RMB60, 000,000; On Mar. 25, 2003, Sanjing obtained loan amounting to RMB20, 000,000 from Luohu sub-branch of China Mingsheng Bank and the Company provided warrant guarantee for the loan. Dated the report day, Sanjing Company has paid off the loan on due; On Jun. 25, 2003, Sanjing company obtained the credit line amounting to RMB20, 000,000 from Luohu sub-branch of China Mingsheng Bank and the Company provided warrant guarantee for the loan for one year (Please refer to the details in the public notice in Securities Times and Hong Kong Ta Kung Pao dated Jun.26, 2003.) Dated the report day, Luohu sub-branch of China Mingsheng Bank lent payment amounting to RMB20, 000,000; On Dec. 24, 2003, Sanjing company borrowed payment amounting to RMB20, 000,000 from Jingtian sub-branch of Shenzhen Commercial Bank and the Company provided warrant guarantee for the loan. (ii) On Jun.24, 2003, the shareholding subsidiary of the Company, Shenbao Huacheng Company obtained comprehensive credit line amounting to RMB 20,000,000 from Jintian sub-branch of Shenzhen Commercial Bank and the Company provided warrant guarantee for the credit line for one year. Dated the end of the report period, Jintian sub-branch of Shenzhen Commercial Bank lent payment amounting to RMB 20,000,000. (iii) After the lawsuit case that the Company offered guarantee for Sunrise Company’s loan amounting to HKD 6,000,000 from Nantou sub-branch of Shenzhen Development Bank was settled with compromise. Except for the principal and the interest repaid by the Company for Sunrise Company, the rest principal and interest amounting to RMB4, 000,000 has been transferred to the loan and the Company continued to supply the guarantee for it (Please refer to the details in the public notice in Securities Times and Hong Kong Ta Kung Pao dated May. 13, 2003). (iv) After the lawsuit case that the Company offered guarantee for Sunrise Company’s loan amounting to RMB 8,000,000 from Shenzhen branch of Guangdong Development Bank was settled with compromise. Except for the part of the principal and the interest repaid by the Company for Sunrise Company, the rest principal and interest amounting to RMB8, 580,000 has been transferred to the loan and the Company continued to supply the guarantee for it. (v) In Dec.1998, the Company provided the guarantee for the loan amounting to HKD32, 000,000 of Sunrise Company from Shenzhen Branch of Bank of China. The duration of the guarantee was from Dec. 31, 1998 to Oct. 31, 1999. Dated the end of the report period, Sunrise Company didn’t repay the aforeaid loan and the interest. In 2003, Shenzhen branch of Bank of China required the Company to provide the pledge assets for the aforesaid guarantee. On Sep.22, 2003, the Company agreed to pledge 51.6% share equity of Shenzhen Shenbao Huacheng Foods Co., Ltd. held by the Company to Shenzhen branch of Bank of China (Please refer to the details in the public notice of the company in Securities Times and Hong Kong Ta Kung Pao dated Sep.27, 2003.) (III) Entrusted financing The Company has no entrusted financing in the report period. Section V. Commitment From Mar. 31, 2003 to Apr. 17, 2003, Shenzhen branch of CSRC conducted routine inspection about the Company. On May 23, 2003, the Company received SZBFZ [2003] No. 94 Notification on requiring the renovation of Shenzhen Shenbao Industrial Co., Ltd. in the regulated term. The directors, supervisors, and senior executives of the Company seriously studied and discussed about the renovation notification; according to the Company Law, Securities Law, Shares listing rules in Shenzhen Stock Exchange and relevant laws, regulations, and the Articles of the Association, retrospect and checked the operation status in recent years in further step; analyzed the existing problem seriously in the spirit of strictly self-discipline and standardized operation and in the attitude of responsibility to the shareholders; proposed the effective renovation measures. Dated the end of the report period, majority of the renovation matters were accomplished. Section VI. Engagement and Disengagement of Certified Public Accountants In 2003, the Company reengaged Shenzhen Dahua Certified Public Accountants as the 2003 domestic accountant and K.C.Ho & Company Certified Public Accountants as the 2003 international accountant. Remuneration paid to Certified Public Accountants by the Company in recent two years: Unit: RMB’000 Name of Certified Public Financial audit fee Other fee Notes Accountants 2002 2003 2002 2003 Shenzhen Dahua Tiancheng Certified 200 200 -- -- -- Public Accountants K.C.Oh & Company Certified Public 180 180 -- -- -- Accountants Section VII. Other Significant Events I There were no such situation occurred in the report period that the Company, its Board of Directors or its Directors were checked or administratively punished or publicly criticized by CSRC or condemned publicly Shenzhen Stock Exchange. II Please refer to “Section 5 commitment” t about the renovation of the Company. III The Company has no other important events occurred which are not disclosed in the provisional report in the report period. Documents available for Reference There are complete following documents in Secretary to the Board of Directors of the Company provided for reference upon demand of China Securities Regulatory Commission, Shenzhen Stock Exchange and the shareholders of the Company: I. Accounting statements carried with the signatures and seals of legal representative, principal in charge of the accounting and principal in charge of accounting organizations; II. Original of the Auditors’ Report carried with the seal of Certified Public Accountants as well as the signature and seal of the certified public accountant; III. Originals of all the documents as disclosed on Securities Times and Hong Kong Ta Kung Pao as well as the manuscripts of the public notices as published in the report period; and IV. Original of 2003 Annual Report carried with the autograph of the Chairman of the Board of Directors of the Company. Shenzhen Shenbao Industrial Co., Ltd. Chairman of the Board:ZengPai Apr. 8, 2004 Shenzhen Shenbao Industrial Co., Ltd. (Incorporated in the People’s Republic of China) Report of the auditors and financial statements for the year ended December 31, 2003 Report of the auditors to the members of Shenzhen Shenbao Industrial Co., Ltd. (Incorporated in the People’s Republic of China with limited liability by shares) We have audited the accompanying balance sheet of Shenzhen Shenbao Industrial Co., Ltd. as of December 31, 2003 and the related statements of income, cash flows and changes in equity for the year then ended. These financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In forming our opinion, we have considered the adequacy of the disclosures made in the financial statements concerning the contingent loss the Group may have to suffer in respect of the guarantees it had given to various companies that had defaulted the banks. The defaulting companies are continuing to negotiate with the banks for settlement of the outstanding loans so that the guarantors may not have any eventual loss. Details of the circumstances relating to this fundamental uncertainty are described in note 22 to the financial statements. The Group’s management is responsible for the disclosure and possible results of the above matter and our opinion is not qualified in this respect. In our opinion, the financial statements present fairly, in all material respects, the financial position of the Group as of December 31, 2003 and the results of its operations and its cash flows for the year then ended, in accordance with International Financial Reporting Standards. K. C. Oh & Company Certified Public Accountants Hong Kong : April 8, 2004 Shenzhen Shenbao Industrial Co., Ltd. Consolidated income statement for the year ended December 31, 2003 2003 2002 Note RMB’000 RMB’000 Turnover (5) 61,787 77,134 Cost of sales ( 46,551 ) ( 60,452 ) Gross profit 15,236 16,682 Other revenue (6) 1,351 24,011 16,587 40,693 Distribution costs ( 27,372 ) ( 16,386 ) Administrative expenses ( 39,365 ) ( 37,081 ) Other operating expenses ( 136 ) ( 142 ) Operating loss ( 50,286 ) ( 12,916 ) Finance costs ( 4,368 ) ( 2,508 ) Operation loss before exceptional items ( 54,654 ) ( 15,424 ) Exceptional items (7) ( 26,226 ) ( 57,380 ) Loss after exceptional items ( 80,880 ) ( 72,804 ) Share of profit from associates 32,157 20,016 Loss before taxation (8) ( 48,723 ) ( 52,788 ) Taxation (9) ( 499 ) ( 590 ) Loss before minority interests ( 49,222 ) ( 53,378 ) Minority interests 4,370 ( 16 ) Loss attributable to shareholders ( 44,852 ) ( 53,394 ) Accumulated profit/(loss) brought forward ( 47,881 ) 1,502 Loss before transfers and set off ( 92,733 ) ( 51,892 ) Transfers from reserves and loss set off : Transfers from reserves - 4,011 Loss set off 47,729 - 47,729 4,011 Accumulated loss carried forward ( 45,004 ) ( 47,881 ) Loss per share – basic (10) RMB(0.2465) RMB(0.2935) Shenzhen Shenbao Industrial Co., Ltd. Consolidated balance sheet as at December 31, 2003 2003 2002 Note RMB’000 RMB’000 Non-current assets Fixed assets (11) 68,969 47,348 Intangible assets (12) 39,156 40,714 Interests in associates (13) 148,572 135,484 Other investments (14) 37,745 42,558 294,442 266,104 Current assets Tax recoverable 1,512 1,401 Inventories (15) 16,126 18,492 Amount due from a related company (16) - 1,160 Accounts receivable (17) 23,382 28,814 Prepayments, deposits and others receivable (18) 57,365 60,887 Cash and bank balances 53,487 78,303 151,872 189,057 Current liabilities Dividends payable ( 218 ) ( 218 ) Amount due to a related company (19) ( 6,201 ) ( 6,201 ) Accounts payable ( 11,564 ) ( 10,151 ) Receipts in advance ( 14,040 ) - Others payable and accrued expenses ( 19,557 ) ( 21,415 ) Anticipated liabilities ( 23,298 ) ( 26,518 ) Short-term bank loans (20) ( 130,000 ) ( 100,000 ) ( 204,878 ) ( 164,503 ) Net current assets/(liabilities) ( 53,006 ) 24,554 Assets less current liabilities 241,436 290,658 Minority interests ( 10,146 ) ( 14,516 ) Net assets employed 231,290 276,142 Financed by : Share capital (21) 181,923 181,923 Reserves 49,367 94,219 Shareholders’ equity 231,290 276,142 The financial statements on pages 2 to 24 were approved and authorised for issue by the board of directors on April 8, 2004 and are signed on its behalf by : Director Director Shenzhen Shenbao Industrial Co., Ltd. Consolidated statement of changes in equity for the year ended December 31, 2003 Retained Share Capital Surplus earnings/ capital reserves reserves (loss) Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 As at January 1, 2002 181,923 37,621 1,502 329,746 Loss for the year of 2002 - - - ( 53,394 ) ( 53,394 ) Transfer from surplus reserves as a result of over-transfer in prior years - - ( 4,011 ) 4,011 - Interests in associates over- provided - ( 210 ) - - ( 210 ) As at December 31, 2002 181,923 33,610 ( 47,881 ) 276,142 As at January 1, 2003 181,923 33,610 ( 47,881 ) 276,142 Loss for the year of 2003 - - - ( 44,852 ) ( 44,852 ) Accumulated loss set off ( ) ( 20,243 ) 47,729 - As at December 31, 2003 181,923 13,367 ( 45,004 ) 231,290 According to the corporation law and relevant regulations of a joint stock limited company, the Company’s specified profit should be classified as capital reserves, which include share premium, surplus on revaluation of assets and other investments, etc. Capital reserves are normally used for issue of new shares, or for write-off or other-than-temporary provision when other investments are revalued downwards. Surplus reserves comprise statutory reserve, statutory public welfare fund and discretionary surplus reserve. The Company is required to transfer an amount of not less than 10% of the profit after making up the accumulated loss to statutory reserve until it is up to 50% of the registered share capital. Statutory reserve can be used to cover current year loss or for issue of new shares. The amount of statutory reserve to be utilized for issue of new shares should not exceed an amount such that the balance of the reserve will fall below 25% of the registered share capital after the issue of new shares. The Company is also required to transfer 5% of the profit after making up the accumulated loss to statutory public welfare fund. Statutory public welfare fund shall only be applied for the collective welfare of the Company’s employees. Discretionary surplus reserve is applied in accordance with the shareholders’ resolutions passed in the annual general meeting and can be used to cover current year loss or for issue of new shares. Pursuant to the resolutions passed by the shareholders in the 2002 annual general meeting held on June 26, 2003, the Company’s capital reserves and surplus reserves were used to set off against the accumulated loss. Shenzhen Shenbao Industrial Co., Ltd. Consolidated cash flow statement for the year ended December 31, 2003 2003 2002 RMB’000 RMB’000 Cash flow from operating activities Operating loss before taxation ( 48,723 ) ( 52,788 ) Adjustment items : Loss on disposal of fixed assets 582 38 Depreciation 6,426 19,559 Amortization of intangible assets 1,558 1,207 Provision for impairment loss of other investments 4,630 - Loss from guarantees 21,257 53,742 Provision/(reversal) for impairment loss of assets ( 385 ) 3,622 Amortization of deferred assets - 23 Share of profit from associates ( 32,157 ) ( 20,016 ) Amortization of premium in associates 339 1,695 Profit from disposal of other investments ( 750 ) ( 15,842 ) Dividends from other investments - ( 1,535 ) Interest income ( 881 ) ( 744 ) Interest expense 5,266 3,241 Adjustment of interest in associates - ( 210 ) Operating cash flows before movements in working capital ( 42,838 ) ( 8,008 ) (Increase)/decrease in inventories 3,218 ( 5,331 ) Increase in amount due from a related company - ( 1,160 ) (Increase)/decrease in accounts receivable 4,915 ( 15,912 ) (Increase)/decrease in prepayments, deposits and others receivable 3,572 ( 7,114 ) Increase/(decrease) in accounts payable 1,413 ( 1,000 ) Increase in receipts in advance 14,040 - Increase/(decrease) in others payable and accrued expenses ( 1,858 ) 12,077 Decrease in anticipated liabilities ( 24,477 ) ( 29,042 ) Cash outflow from operating activities before interest and tax payments ( 42,015 ) ( 55,490 ) Interest paid ( 5,378 ) ( 3,241 ) Income tax paid ( 610 ) ( 1,400 ) Net cash outflow from operating activities c/f ( 48,003 ) ( 60,131 ) (to be cont’d) Shenzhen Shenbao Industrial Co., Ltd. Consolidated cash flow statement for the year ended December 31, 2003 (cont’d) 2003 2002 RMB’000 RMB’000 Net cash outflow from operating activities b/f ( 48,003 ) ( 60,131 ) Investing activities Interest received 881 744 Proceeds from disposal of fixed assets 404 697 Purchases of fixed assets ( 27,761 ) ( 16,577 ) Purchases of intangible assets - ( 24,236 ) Dividends received from associates 18,730 9,534 Dividends received from other investments - 1,535 Premium paid for investments in associates - ( 3,390 ) Proceeds from disposal of other investments 933 31,339 Net cash outflow from investing activities ( 6,813 ) ( 354 ) Net cash outflow before financing activities ( 54,816 ) ( 60,485 ) Financing activities Dividends paid - ( 6,405 ) Increase in short-term bank loans 62,200 Minority interests - 14,500 Net cash inflow from financing activities 30,000 70,295 Increase/(decrease) in cash and cash equivalents ( 24,816 ) 9,810 Cash and cash equivalents as at beginning of year 78,303 68,493 Cash and cash equivalents as at end of year 53,487 78,303 Analysis of cash and cash equivalents Cash and bank balances 53,487 78,303 Shenzhen Shenbao Industrial Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 1. General information Shenzhen Shenbao Industrial Co., Ltd. (the “Company”), formerly a state-owned enterprise incorporated in the People’s Republic of China (“PRC”) in 1975, obtained approval from the Shenzhen Municipal People’s Government to reorganize to a company limited by shares in 1991. On the approval of the People’s Bank of China, Shenzhen Branch, the Company issued A shares and B shares. They are listed on the Shenzhen Stock Exchange and carry equal rights. The principal activity of the company is investment holding and the principal activities of its principal subsidiaries are described in note 3. 2. Basis of presentation of the financial statements The consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (“IFRS”). These accounting standards differ from those used in the preparation of the PRC statutory financial statements, which are prepared in accordance with the PRC Accounting Standards. To conform to IFRS adjustments have been made to the PRC statutory financial statements. Details of the impact of such adjustments on the net asset value as at December 31, 2003 and on the operating results for the year then ended are included in note 26 to the financial statements. In addition, the financial statements have been prepared under the historical cost convention except for certain fixed asset items that are recorded at valuation less accumulated depreciation. 3. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and of its subsidiaries (the “Group”) made up to December 31 each year. Except for those subsidiaries not consolidated for the reasons stated below, all significant inter-company transactions and balances within the Group have been eliminated on consolidation. (a) Subsidiaries A subsidiary is a company in which the Company holds, directly or indirectly, more than 50% of the equity interest as a long-term investment and/or has the power to cast the majority of votes at meetings of the board of directors/management committee. As at December 31, 2003, the Company held the following subsidiaries, all of which are incorporated in the PRC : Shenzhen Shenbao Industrial Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 3. Basis of consolidation (cont’d) (a) Subsidiaries (cont’d) i) Subsidiaries consolidated Effective Year of equity held Company name registration by the Company Principal activities Shenzhen Shenbao Industrial 1989 100% Trading and wholesaling Trading & Development Co., Ltd. Shenzhen Shenbao Properties 1998 100% Property management of Management Co., Ltd. Group’s properties Shenzhen Shenbao Bioproducts 1998 100% Manufacture of healthy Co., Ltd. food and additives, etc. Shenzhen Shenbao Tri-well Food & 1998 100% Manufacture of soft drinks, Beverage Co., Ltd. canned food and additives, etc. Shenzhen Shenbao Huacheng Foods 2002 51.67% Tea concentrates and Co., Ltd. instant brew ii) Subsidiaries not consolidated Effective Year of equity held Company name registration by the Company Principal activities Chaozhou Shenbao Development 1993 70% Property development Co., Ltd. Shenzhen Shenbao Fruit Juice 1994 70% Fruit juice Co., Ltd. Shenzhen Shenbao (Liaoyuan) 1992 53.5% Soft drinks Co., Ltd. The board of directors is of the opinion that the above subsidiaries not consolidated are not fully put into operation and their operating results and net assets have no significant effect on the Group. Therefore, they have not been included in the consolidation. After taking into consideration the expected impairment loss, investments in above companies are accounted for at cost less provision for diminution in value. Shenzhen Shenbao Industrial Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 3. Basis of consolidation (cont’d) (b) Associates An associate is a company in which the Company holds, directly or indirectly, not less than 20% and not more than 50% equity interest as a long-term investment and is able to exercise significant influence on this company. Except for the associate that is shown in note 14, investments in associates are accounted for by the Group using the equity method of accounting. The associates held by the Company as at December 31, 2003 are shown in note 13 to the financial statements. 4. Summary of significant accounting policies (a) Turnover Turnover represents the proceeds from the sales of goods, net of returns, discounts and sales tax, supplied to customers outside the Group. Turnover and profit of the Group are from the manufacture and sale of soft drinks and food products and leasing business. (b) Revenue recognition Revenue is recognized when it is probable that the benefits will flow to the Group and the revenue can be measured reliably. i) Sales of goods are recognized when the goods are delivered and the title has passed. ii) Income from services is recognized when it is probable that the economic benefits associated with the transaction will flow to the Group, the stage of completion of the transaction can be measured reliably and the costs incurred and expected to be incurred for the transaction can be measured reliably. iii) Leasing income under operating leases is accounted for in the income statement on a straight-line basis over the terms of the respective leases. iv) Interest income is accrued on a time proportion basis by reference to the principal outstanding and at the interest rate applicable. v) Dividend income from investments is recognized when the shareholders’ right to receive payment has been established. Shenzhen Shenbao Industrial Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 4. Summary of significant accounting policies (cont’d) (c) Fixed assets and depreciation Fixed assets are stated at cost or valuation less accumulated depreciation. Depreciation of fixed assets is provided using the straight-line method over the estimated useful lives, taking into account the estimated residual value of 5% of the cost or revalued amount, as follows : Plants and buildings 5-40 years Machinery and equipment 12 years Transport equipment 9 years Furniture, fixtures and office equipment 5-6 years Construction-in-progress - Construction-in-progress represents the factory and office buildings under construction and is stated at cost. This includes costs of construction, machinery and furniture as well as interest charges and exchange differences arising from borrowings that are used to finance the construction during the construction period. No depreciation is provided on construction-in-progress prior to its completion. However, for construction-in-progress that are pending for further process and are functionally or technologically obsolete, their carrying amounts are reduced to their recoverable amounts by reference to the impairment loss. (d) Intangible assets The cost of land use rights is amortized on a straight-line basis over the lease term. The cost of technical know-how is amortized on a straight-line basis over its expected useful life of 20 years. (e) Deferred assets Deferred assets are amortized on a straight-line basis over 5 years. (f) Investments Long-term investments are stated at cost less provision for diminution in value that is other than temporary whilst short-term investments are stated at the lower of cost and market value or net realizable value. (g) Inventories Inventories are valued at the lower of cost (using weight-average method) and net realizable value. Cost comprises direct materials, direct labor cost and an appropriate portion of overheads. Net realizable value is calculated as the estimated selling price less all further costs of production and the related costs of marketing, selling and distribution. Shenzhen Shenbao Industrial Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 4. Summary of significant accounting policies (cont’d) (h) Cash and cash equivalents Cash and cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. (i) Foreign currency conversion The financial statements are expressed in Renminbi. Transactions in foreign currencies are translated at the rates prevailing at the dates of the transactions. Monetary assets and liabilities in foreign currencies are translated at the rates prevailing at the balance sheet date. Exchange differences that are attributable to the translation of foreign currency borrowings for the purpose of financing the construction of factory and office buildings, plant and machinery and other major fixed assets for periods prior to their being in a condition to enter into services are included in the cost of the fixed assets concerned. Other exchange differences are dealt with in the consolidated income statement. (j) Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization. (k) Impairment loss At each balance sheet date, the Group reviews the carrying amounts of its 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. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. Any impairment loss arising is recognized as an expense immediately. A reversal of impairment loss is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognized in prior years. Reversals of impairment loss are credited to the income statement in the year in which the reversals are recognized. Shenzhen Shenbao Industrial Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 4. Summary of significant accounting policies (cont’d) (l) Provisions Provisions are recognized when the Group has a present legal or constructive obligation subsequent to a past event, which will result in a probable outflow of economic benefits that can be reasonably estimated. (m) Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognized if the temporary difference arises from goodwill (or negative goodwill) or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognized for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed as at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. 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. Shenzhen Shenbao Industrial Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 5. Turnover 2003 2002 RMB’000 RMB’000 Sales and service income 61,167 76,457 Leasing income 899 912 62,066 77,369 Taxes and charges ( 279 ) ( 235 ) 61,787 77,134 6. Other revenue 2003 2002 RMB’000 RMB’000 Investment income 750 17,377 Transfer from VAT of local-product-local-sale - 1,957 Rental income from equipment - 2,559 Revenue from staff housing scheme 575 1,831 Other income 26 287 1,351 24,011 7. Exceptional items 2003 2002 RMB’000 RMB’000 Loss from guarantees 21,257 53,742 Provision for impairment loss of other investments 4,630 - Additional premium of land use rights - 1,943 Amortization of premium in associates 339 1,695 26,226 57,380 Loss from guarantees The Group had provided irrevocable guarantees to the banks in respect of the loans advanced to Shenzhen China Bicycle Company (Holdings) Limited and Guangdong Sunrise Holdings Co., Ltd. (formerly known as Shenzhen Lionda Holdings Company Limited). These two companies defaulted payments upon maturity and the court had made the rulings that the Group was jointly liable for the banks’ claims. In addition and based on the assessments on other overdue guaranteed loans, the Group provided loss from guarantees of RMB13,616,000 and RMB7,641,000 for the loans that were overdue by Shenzhen China Bicycle Company (Holdings) Limited and Guangdong Sunrise Holdings Co., Ltd. (formerly known as Shenzhen Lionda Holdings Company Limited) respectively. The amount was treated as an exceptional item for the year. Shenzhen Shenbao Industrial Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 7. Exceptional items (cont’d) Provision for impairment loss of other investments During the year, the Group made provision for impairment loss on investments in Shenzhen Shenbao Fruit Juice Co., Ltd. and Chaozhou Shenbao Development Co., Ltd. amounting to RMB1,630,000 and RMB3,000,000 respectively, the details of which are shown in note 14. Amortization of premium in associates The Group previously transferred certain land use rights as part of investment cost to an associate. In accordance with the regulations, the Group needed to pay additional premium payment of the above land use rights. The resulting difference between the revised cost of investment and the equity interest of this associate was recorded as premium. The premium is amortized on a straight-line basis over the period of 10 year with an annual amortization amount of RMB339,000. The amortization charge of RMB1,695,000 in previous year included an amount of RMB1,356,000 that was related to the charge for 2001 and before. 8. Loss before taxation 2003 2002 RMB’000 RMB’000 Loss before taxation has been arrived at : After charging : Provision for impairment loss of fixed assets - 8 Loss on disposal of fixed assets 582 38 Depreciation 6,426 19,559 Amortization of intangible assets 1,558 Amortization of deferred assets - 23 Provision for obsolete inventories - 257 Provision for bad debts 467 3,357 Interest expense 5,266 Exchange loss - 2 and after crediting : Profit from disposal of other investments 750 15,842 Dividends from other investments - 1,535 Reversal of provision for obsolete inventories 852 - Exchange gain 2 - Interest income 881 744 Shenzhen Shenbao Industrial Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 9. Taxation PRC income tax is determined by reference to the profit reported in the audited financial statements under PRC Accounting Standards, and after adjustments for income and expense items that are not assessable or deductible for income tax purposes. It is provided at the rates of 15% and 33% on the estimated assessable income for the year. 2003 2002 RMB’000 RMB’000 Current tax Income tax 482 590 Under-provision in prior years 17 - 499 590 Deferred tax - - 499 590 The reconciliation between tax expense and accounting profit/loss at is as follows : 2003 2002 RMB’000 RMB’000 Loss before taxation ( 48,723 ) ( 52,788 ) Tax at the income tax rate of 15% (2002 - 15%) ( 7,308 ) ( 7,918 ) Tax effect of retrospective adjustments - 9,629 Tax effect of unrecognised tax losses ( 1,121 ) Effect of different tax rates of subsidiaries operating in different jurisdictions 252 - Under-provision in prior years 17 - 499 590 10. Loss per share The calculation of the basic loss per share is based on the current year’s loss of RMB44,852,000 (2002 - loss of RMB53,394,000) attributable to the shareholders and on the existing number of 181,923,088 shares (2002 - 181,923,088 shares) in issue during the year. Shenzhen Shenbao Industrial Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 11. Fixed assets Furniture, Plants & Machinery Transport fixtures & buildings & equipment equipment office equipment RMB’000 RMB’000 RMB’000 RMB’000 Cost/valuation Balance as at January 1, 2003 54,839 98,581 13,521 4,869 Increase 1,195 707 810 Decrease ( 41,130 ) ( 5,260 ) ( 2,010 ) ( 103 Reclassification - ( 130 ) 130 - Balance as at December 31, 2003 14,904 93,898 12,451 8,564 Accumulated depreciation/impairment loss Balance as at January 1, 2003 ( 48,715 ) ( 74,887 ) ( 9,515 ) ( 3,494 Increase ( 186 ) ( 4,419 ) ( 772 ) ( 1,049 Decrease 40,371 5,233 1,820 93 Reclassification - ( 51 ) - 51 Balance as at December 31, 2003 ( 8,530 ) ( 74,124 ) ( 8,467 ) ( 4,399 Net book value Balance as at December 31, 2003 6,374 19,774 3,984 4,165 Balance as at December 31, 2002 6,124 23,694 4,006 1,375 The Group’s fixed assets were revalued by Shenzhen Assets Valuation Office on July 31, 1991. The revaluation surplus had been credited to capital reserv During the year, interest payment of RMB112,000 (2002 - nil) was capitalized in construction-in-progress. Shenzhen Shenbao Industrial Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 12. Intangible assets Technical know-how RMB’000 Cost Balance as at January 1, 2003 and as at December 31, 2003 30,848 17,000 47,848 Accumulated amortization Balance as at January 1, 2003 ( 6,397 ) ( 737 ) ( 7,134 ) Increase ( 602 ) ( 956 ) ( 1,558 ) Balance as at December 31, 2003 ( 6,999 ) ( 1,693 ) ( 8,692 ) Net book value Balance as at December 31, 2003 23,849 15,307 39,156 Balance as at December 31, 2002 24,451 16,263 40,714 Land use rights : (1) Land use rights for land of 80,408 square meters located at Henggang Town, Shenzhen : These have a useful life of 50 years up to December 2043. (2) Land use rights for land of 3,000 square meters located at the center of Longgang Town, Shenzhen : This piece of land is for commercial use and has a total construction area of 5,856 square meters. The land use rights have a useful life of 70 years up to February 2063 and their entitlement was due to an exchange of land use rights for land located at Huaqiao Village, Henggang Town, Shenzhen, which had been taken back by the local government. Technical know-how is related to tea products. Shenzhen Shenbao Industrial Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 13. Interests in associates 2003 2002 RMB’000 RMB’000 Share of net assets 147,216 133,789 Premium in associates 3,390 3,390 Amortization of premium ( 2,034 ) ( 1,695 ) 1,356 1,695 Interest in associates 148,572 135,484 As at December 31, 2003, particulars of the associates are set out as follows : Effective Place of equity held Company name registration by the Company Principal activities Shenzhen Pepsi-Cola Beverage Co., Ltd. Shenzhen 40% Pepsi-Cola beverages Shenzhen Agriculture Business Co., Ltd. Shenzhen 20% Agricultural technology and consultancy, internet development, etc. 14. Other investments 2003 2002 RMB’000 RMB’000 Subsidiaries not consolidated, at cost 37,570 42,887 Associate not accounted for under equity method 2,870 2,870 Listed shares, at cost - 183 Unlisted shares, at cost 17,809 17,809 58,249 63,749 Provision for impairment loss ( 20,504 ) ( 21,191 ) 37,745 42,558 Unconsolidated subsidiaries Shenzhen Shenbao Fruit Juice Co., Ltd. wih registered share capital of RMB16,500,000, was planned to be involved in fruit juice production. The Company fully paid the investment amounting to RMB16,500,000, which had exceeded the agreed 70 percent of its share capital. However, it has not been put into actual production after its establishment. Currently, Shenzhen Shenbao Fruit Juice Co., Ltd. owns a set of fruit juice production facilities. On September 30, 2003, this set of production facilities was revalued at RMB14,369,000. Based on the anticipated loss, the Group made a further provision for impairment loss of RMB1,630,000 on this investment. Shenzhen Shenbao Industrial Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 14. Other investments (cont’d) Unconsolidated subsidiaries (cont’d) Chaozhou Shenbao Development Co., Ltd. with registered share capital of RMB14,280,000, was planned to be a property development enterprise. The actual investment of RMB21,026,000, which had been fully paid by the Company, had exceeded the agreed 70 percent of its share capital. However, it has not been put into normal operation since its establishment. Currently, Chaozhou Shenbao Development Co., Ltd. owns a piece of land of 72,000 square meters at cost of RMB17,753,000 with a useful life until December 2043. It also owns fixed assets, including properties, at cost of RMB2,070,000. During the year, the Group received proceeds of RMB14,040,000 from the Management Committee of Chaozhou City Economic Development And Testing Zone for the disposal of the above land. Based on the anticipated loss, the Group made a further provision for impairment loss of RMB3,000,000 on this investment. Shenzhen Shenbao (Liaoyuan) Co., Ltd. is registered at Liaoyuan. The effective equity interest held by the Company is 53.5%. Its principal activity is soft drinks production. It has been dormant since its establishment because of the lack of capital. Thus, impairment loss has been fully provided. Shenzhen Shenbao (Xinmin) Duoweijian Co., Ltd. was disposed of at a consideration of RMB200,000 during the year. Associate not accounted for under equity method The Company held an effective equity interest of 49.14% in Shenzhen Shenbao (Xinmin) Food Co., Ltd. It has been dormant since its establishment because of the lack of capital. Thus, impairment loss has been fully provided. 15. Inventories 2003 2002 RMB’000 RMB’000 Raw materials 5,753 6,694 Packing materials 1,712 8,025 Finished goods 1,336 4,763 Work-in-progress 3,985 1,042 Sub-contracting, consignment and other materials 10,103 5,583 Provision for obsolescence ( 6,763 ) ( 7,615 ) 16,126 18,492 Shenzhen Shenbao Industrial Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 16. Amount due from a related company 2003 2002 RMB’000 RMB’000 Shenzhen Agricultural Products Co., Ltd. - 17. Accounts receivable 2003 2002 RMB’000 RMB’000 Amounts receivable 39,332 44,247 Provision for bad debts ( 15,950 ) ( 15,433 ) 23,382 28,814 18. Prepayments, deposits and others receivable 2003 2002 RMB’000 RMB’000 Advance payments 2,222 1,764 Prepayments 61 27 Fixed assets on disposal 3 - Others receivable 76,026 80,093 78,312 81,884 Provision for bad debts ( 20,947 ) ( 20,997 ) 57,365 60,887 19. Amount due to a related company 2003 2002 RMB’000 RMB’000 Shenzhen Investment Administration Company 6,201 Shenzhen Shenbao Industrial Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 20. Short-term bank loans 2003 2002 RMB’000 RMB’000 Bank loans - secured - 40,000 Bank loans - unsecured 130,000 60,000 130,000 100,000 The above loans bear interest at normal commercial lending rates. 21. Share capital 2003 2002 RMB’000 RMB’000 Registered, issued and paid-up A shares of RMB1 each 155,787 155,787 B shares of RMB1 each 26,136 26,136 181,923 181,923 A shares, listed and tradable 39,941 39,941 B shares, listed and tradable 26,136 26,136 66,077 66,077 A shares, listed but temporarily not tradable 115,846 115,846 181,923 181,923 Shenzhen Shenbao Industrial Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 22. Contingent liabilities As at December 31, 2003, the Group had provided irrevocable guarantees for bank loans granted to other related companies as set out below : Guarantee Contingent Contingent Name of related company amounts Provision liabilities liabilities Equivalent to . ’000 ’000 ’000 RMB ’000 Guangdong Sunrise Holdings HKD 32,000 HKD ( 6,400 ) HKD 25,600 27,392 Co., Ltd. HKD 4,000 HKD ( 4,000 ) HKD - - RMB 8,580 RMB ( 8,580 ) RMB - - Shenzhen China Bicycle Company (Holdings) Limited USD 80 USD ( 80 ) USD - - 27,392 Guangdong Sunrise Holdings Co., Ltd. (formerly known as Shenzhen Lionda Holdings Company Limited) is a listed company. Its major shareholder Shenzhen Investment Administration Company is at present the Company’s second major shareholder. Shenzhen China Bicycle Company (Holdings) Limited is a listed company. The major shareholder of this company is China Huarong Asset Management Corporation. 23. Related parties and transactions The Group had material transactions with the following related parties : 2003 2002 Name of company Particulars RMB’000 RMB’000 Guangdong Sunrise Holdings Loan principal and interest Co., Ltd. * - expense 7,641 21,668 - payment 744 4,671 Shenzhen China Bicycle Company Loan principal and interest (Holdings) Limited - expense 13,616 - - payment 10,100 - Shenzhen South Tongfa Loan principal and interest Co., Ltd. - expense - 32,074 - payment 13,632 24,371 * Formerly known as Shenzhen Lionda Holdings Company Limited Shenzhen Shenbao Industrial Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 24. Pledge of assets The Group had pledged the 51.67% shareholdings of Shenzhen Shenbao Huacheng Foods Co., Ltd. to secure the loan of HK$32,000,000 granted to Guangdong Sunrise Holdings Co., Ltd. (formerly known as Shenzhen Lionda Holdings Company Limited). The Group had already made a provision of HKD6,400,000 (equivalent to RMB6,848,000), the details of which are shown in note 22. The Group had pledged the 100% shareholdings of Shenzhen Shenbao Tri-well Food & Beverage Co., Ltd., to secure the loan of HK$8,580,000 granted to Guangdong Sunrise Holdings Co., Ltd. (formerly known as Shenzhen Lionda Holdings Company Limited). The Group had already made a full provision thereon, the details of which are shown in note 22. 25. Financial instruments Financial assets of the Group include cash and bank balances, accounts receivable, others receivable, prepayments and deposits. Financial liabilities include short-term bank loans, accounts payable, others payable, receipts in advance, amount due to a related company, accrued expenses and anticipated liabilities, etc. (a) Credit risk Cash and bank balances : The Group’s bank balances are mainly deposited in the banks and financial institutions situated in the PRC. They do not have a significant exposure to credit risk. Accounts receivable : As adequate provision has been made, the Group does not have a significant exposure to any individual customer or counterpart. The major concentrations of credit risk arise from exposures to a substantial number of accounts receivable that are mainly located in the PRC. (b) Fair value The fair value of financial assets and financial liabilities is not materially different from their carrying amount. The carrying value of short-term borrowings is estimated to approximate its fair value based on the borrowing terms and rates of similar loans. Fair value estimates are made at a specific point in time and based on relevant market information and information about the financial instruments. These estimates are subjective in nature and involve uncertainties on matters of significant judgement, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Shenzhen Shenbao Industrial Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 26. Impact on loss attributable to shareholders and net asset value as reported by the PRC Certified Public Accountants Profit/(loss) attributable to Net shareholders asset value RMB’000 RMB’000 As reported by PRC Certified Public Accountants ( 44,852 ) 229,350 Adjustments to conform to IFRS : Unidentified payable reversed as income - 1,067 Interest capitalization on land use rights - 873 As restated in conformity with IFRS ( 44,852 ) 231,290 27. Language The translated English version of the financial statements is for reference only. Should any disagreement arise, the Chinese version shall prevail. 28. Comparative figures Certain comparative figures have been reclassified so as to conform to the current year’s presentation.