中鲁Ｂ(200992)ST2003年年度报告（英文版）

SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. 2003 ANNUAL REPORT CONTENTS Ⅰ. IMPORTANT NOTES------------------------------------------------------------------------------------ Ⅱ. COMPANY PROFILE------------------------------------------------------------------------------------ Ⅲ. SUMMARY ACCOUNTING HIGHLIGHT AND BUSINESS HIGHLIGHT---------------- Ⅳ. CHANGES IN SHARE CAPITAL AND PARTICULARS ABOUT SHAREHOLDERS--- Ⅴ. PARTICULARS ABOUT DIRECTORS, SUPERVISORS, SENIOR EXECUTIVE S AND EMPLOYEES-------------------------------------------------------------------------------------------- Ⅵ. ADMINISTRATIVE STRUCTURE-------------------------------------------------------------------- Ⅶ. BRIEF OF THE SHAREHOLDERS’ GENERAL MEETING----------------------------------- Ⅷ. REPORT OF BOARD OF DIRECTORS------------------------------------------------------------- Ⅸ. REPORT OF SUPERVISORY COMMITTEE------------------------------------------------------ Ⅹ. SIGNIFICANT EVENTS--------------------------------------------------------------------------------- Ⅺ. FINANCIAL REPORT------------------------------------------------------------------------------------ Ⅻ. DOCUMENTS AVAILABLE FOR REFERENCE-------------------------------------------------- 1 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) SECTION I. IMPORTANT NOTES Board of Directors of Shandong Zhonglu Oceanic Fisheries Co., Ltd. (hereinafter referred to as the Company) individually and collectively accept responsibility for the correctness, accuracy and completeness of the contents of this report and confirm that there are no material omissions nor errors which would render any statement misleading. Independent director Liu Boayu was absent from the Board meeting due to some reasons; independent director Jiang Jin, Director Wang Zhao’an and Shao Shijie respectively entrusted in writing independent director Wang Hanmin and Director Li Wenyi to attend and vote on his behalf. Hubei Da Xin Certified Public Accountants Ltd. and Horwath International CPA Limited (China Hubei) issued an Auditors’ Report with reserved opinion and paragraph of emphasis events. The Board of Directors and the Supervisory Committee of the Company made explanations on the relevant matters in details, the investors are suggested to notice the content. Liu Changsuo, Chairman of the Board, Zhang Jinqing, CFO of the Company, and Wu Shuxian, Person in Charge of Accounting Organ hereby confirm that the Financial Report enclosed in the Annual Report is true and complete. SECTION II. COMPANY PROFILE 1. Name of the Company: In Chinese: 山东省中鲁远洋渔业股份有限公司 In English: Shandong Zhonglu Oceanic Fisheries Company Limited 2. Legal Representative: Liu Changsuo 3. Secretary of Board of Directors: Zhou Feng Authorized Representative in charge of Securities affairs: Jiang Peng Contact Address: No. 43, Heping Road, Jinan, Shandong Tel: (86) 531-6553278, 6553276 Fax: (86) 531-6943084 E-mail: zlzqb@163.com 4. Registered Address: No. 43, Heping Road, Jinan, Shandong Office Address: No. 43, Heping Road, Jinan, Shandong Post Code: 250014 The Company’s E-mail: zlzqb@163.com 5. Newspapers Chosen for Disclosing the Information of the Company: Securities Times and Ta Kung Pao 2 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) Internet Web Site Designated by CSRC for Publishing the Annual Report: http://www.cninfo.com.cn The Place Where the Annual Report is Prepared and Placed: Office of the Board of Directors 6. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: ST ZHONGLU B Stock Code: 200992 7. Other information about the Company Initial registration date: Jul. 23, 1999 Registration date after change: Nov. 30, 2000 The registration place after change: Shandong Province Administrative Bureau of Industrial and Commerce Registered number for business license of corporation: 3700001803000 Registered number of taxation: National Revenue: 370102863043102 Local Tax: 370001863043102 Name of the Certified Public Accountants engaged by the Company: International: Horwath International CPA Limited (China Hubei) Domestic: Hu Bei Da Xin Certified Public Accountants Ltd. Address: 7/F-8/F, Tower AB, Jinyuan World Center, No. 1166 of Zhongshan Av. Wuhan SECTION III. FINANCIAL HIGHLIGHT AND BUSINESS HIGHLIGHT 1. Abstract of accounting data as of the year 2002 Unit: In RMB Items Amount Total Profit -215,140,076.00 Net Profit -213,472,451.00 Net profit after deducting non-recurring gains and losses -193,771,219.00 Profit from main operations 58,343,596.00 Other operating profit ２６６，８３３．００ Operating profit -181,794,274.00 Investment income －８，５４６，９１６．００ Subsidy income － Net non-operating income/expenses -24,798,886.00 Net cash flow arising from operating activities -21,817,255.00 Net increase/decrease in cash and cash equivalents -37,342,779.00 Unit: RMB Items of non-recurring gains and losses Amount Other non-operating income/expenses -25,426,288 Income from equity investment transfer 1,350,134.00 3 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) Placing of stock investment 2,026.00 Switching back of reserve for falling price of inventory 193,951.00 Switching back of reserve for impairment of fixed assets 678,945.00 Government subsidy 3,500,000.00 Total -19,701,232.00 2. Explanation for the difference in net profit as audited by CAS and IAS: The Company’s net profit as of year 2003 as audited by Hubei Da Xin Certified Public Accountants Ltd. and Horwath International CPA Limited (China Hubei) in accordance with CAS and IAS was RMB –213,472,000 and RMB –209,398,000 respectively. The differences are as follows: In: RMB’000 2003 Net assets Net profit Amount of accounting statement as reported under Accounting System for Business Enterprise 72,398 -213,472 Adjustment in accordance with IAS: 1. Adjustment of organization expenses of Yantai Foods - 13 2. Adjustment of unrealized loss on investment - 4,061 Amount after adjustment according to IAS 72,398 -209,398 3. Major accounting data and financial indexes over the past three years ended by the report period 2002 Items Unit 2003 Before After 2001 adjustment adjustment Income from main operations RMB 318,865,044 310,982,756 310,982,756 332,560,732 Net profit RMB -213,472,451 -229,808,572 -225,282,438 5,507,444 Total assets RMB 562,738,775 804,177,030 804,879,214 1,020,809,474 Shareholders’ equity RMB 72,396,580 277,032,440 277,937,637 496,028,469 (excluding minority interests) Earnings per share RMB/share -0.80 -0.86 -0.85 0.02 Net assets per share RMB/share 0.27 1.04 1.04 1.86 Net assets per share after RMB/share 0.25 1.02 1.02 1.86 adjustment Net cash flow per share arising RMB/share -0.08 0.18 0.18 0.33 from operating activities Return on equity % -294.87 -82.95 -81.06 1.1 Weighted average return on equity after deducting % -113.18 -24.21 -47.19 2.28 non-recurring gains and losses Note: * Accountant made the relevant adjustment for 2001 Accounting Statement, this 4 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) column is data after adjustment. 4. In accordant with Regulations on the Information Disclosure of Companies Publicly Issuing Shares (No. 9) released by CSRC, the Company’s return on equity and earnings per share as of the year 2003 as calculated based on calculating method of fully diluted and weighted average are as follows: Return on equity (%) Earnings per share (RMB) Profit in the report period Fully Weighted Fully Weighted diluted average diluted average Profit from main operations 80.59 34.08 0.22 0.22 Operating profit -251.11 -106.19 -0.68 -0.68 Net profit -294.87 -124.69 -0.80 -0.80 Net profit after deducting non-recurring gains and losses -267.65 -113.18 -0.73 -0.73 5. Changes in shareholders’ equity as of the report period (Unit: RMB) Items Share Capital public Surplus Statutory Retained Shareholders’ capital reserve public reserve public welfare profit equity funds Amount at the 266,071,320 197,166,189.00 21,766,728.00 7,255,576 -203,209,359 277,937,637 period-begin Increase in the - 4,093,909 31,142 15,571 -213,472,451 - report period Decrease in the - 19,756 - - 46,713 205,541,057 report period Amount at the 266,071,320 201,240,342 21,813,441 7,271,147 416,728,523 72,396,580 period-end Reason for change Price Withdrawal in Withdrawal in Deficit, Deficit difference of the report the report withdrawal related period period of “two transaction reserves” SECTION IV. CHANGES IN SHARES CAPITAL AND PARTICULARS ABOUT SHAREHOLDERS 1. Statement of change in shares Unit: Share Increase/decrease of this time (+, - ) Before the After the Items Rationed Bonus Capitalization of Additional Others Sub- change change share shares public reserve issuance total 5 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) Ｉ． Unlisted Shares 128,071,320 128,071,320 1. Promoters’ shares Including: State-owned shares 127,811,320 127,811,320 Domestic legal person’s shares 260,000 260,000 Foreign legal person’s shares Others 2. Raised legal person’s shares 3. Inner employees’ shares 4. Preference shares or others Including: Transferred / allotted shares Total unlisted shares 128,071,320 128,071,320 II. Listed shares 1. RMB ordinary shares 2. Domestically listed foreign 138,000,000 138,,000,000 shares 3. Overseas listed foreign shares 4. Others Total listed shares 138,000,000 138,000,000 ＩＩＩ. Total shares 266,071,320 266,071,320 2. Issuance and listing of shares (1) Approved by China Securities Regulatory Commission with ZJFXZ [2000] No. 82 document on June 26, 2000, the Company successfully issued 120 million domestically listed foreign shares (B-share) to foreign investors for the first time with par value RMB 1.00 per share from July 3, 2000 to July 5, 2000 at the issuance price of HKD 1.93 per share (converting into RMB 2.05 per share). The said domestically listed foreign shares were listed with Shenzhen Stock Exchange for trade on July 24, 2000. Authorized by the Company, the lead underwriter exercised its 15% over-allotment option to issue additional 18 million B shares to foreign investors with par value RMB 1.00 per share at the issuance price of HKD 1.93 (converting into RMB 2.05 per share) on Aug. 22, 2000. (2) In the report period, the Company had never been involved in any events which may cause change of the total shares and the structure of share capital such as bonus shares, public reserve converted into share capital, rationed share, additional issuance, absorption and combination, converting convertible company bonds into shares, listing the employees’ shares, etc. 3. Particulars about shareholders (1) Ended by the report period, the Company had totally 21,446 shareholders, 6 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) including 5 sponsor’s shareholders and 21,441 shareholders of domestically listed foreign share. (2) Particulars about the shares held by the top ten shareholders (Ended Dec. 31, 2003): Increase/ Shares held Shares decrease at the Proportion pledged or Nature of No. Shareholders’ name in the Type of shares period-end (%) frozen shareholder report (share) (share) period 1 Shandong Group Corporation of State-owned Fishery Enterprises 0 125,731,320 47.25 Non-circulating 125,731,320 legal person shareholder 2 COREPACIFIC-YAMAICHI Unknown 6,046,649 2.27 Circulating Unknown NTERNATIONAL(H.K.)LIMITED 3 KINGSWAYFINANCIAL Foreign SERVICES GROUP Unknown 3,353,105 1.26 Circulating Unknown shareholder LIMITED-CLIENTS’A/C 4 China Heavy Automobile Group Foreign 0 1,950,000 0.73 Non-circulating Unknown Jinan Truck Company Limited* shareholder 5 Liu Dan State-owned Unknown 1,498,290 0.56 Circulating Unknown legal person shareholder 6 Yin Ying Foreign 0 1,078,200 0.41 Circulating Unknown shareholder 7 Chen Yuanfeng Foreign 0 855,200 0.32 Circulating Unknown shareholder 8 NATWEST SECURITIES HONG Foreign Unknown 773,230 0.29 Circulating Unknown KONG LIMITED shareholder 9 Foreign IP,HUNG FEI +349,000 700,000 0.26 Circulating Unknown shareholder 10 Liao Qiang Foreign 0 615,000 0.23 Circulating Unknown shareholder Note: a. China Heavy Automobile Group Jinan Truck Company Limited* is sponsor’s shareholder of the Company, whose name was changed into China Heavy Automobile Group Jinan Truck Co., Ltd. during the report period with listed in Shenzhen Stock Exchange; its short form of the stock is *ST Heavy Auto and stock code is 000951. b. Among the top ten shareholders, Shandong Group Corporation of Fishery Enterprises and China Heavy Automobile Group Jinan Truck Co., Ltd. are sponsor’s shareholders of the Company, there exists no associated rela tionship between them, or they do not belong to the consistent actor regulated by the Management Measure of Information Disclosure on Change of Shareholding for Listed Companies; the other 7 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) shareholders are ones of domestically listed foreign shares, the Company is unknown whether there exists associated relationship, or whether the rest shareholders belong to the consistent actor regulated by the Management Measure of Information Disclosure on Change of Shareholding for Listed Companies. (3) The controlling shareholder of the Company Name of the controlling shareholder: Shandong Group Corporation of Fishery Enterprises Legal representative: Liu Changsuo Date of foundation: Nov. 1988 Registered capital: RMB 380,000,000 Nature of Company: state-owned enterprise Structure of equity: Shandong Province State-owned Assets Administration Office holds 100% equity of Fishery Enterprise Business scope: marine catching, aquiculture, resource development and technical service of aquatic product; sales of aquatic products and fishery resource (excluding special operating products); import and export business with the approval scope; sales of steels and woods; sending of work personnel of the fishery business to overseas. Note: In the report year, the controlling shareho lder of the Company remained unchanged. (4) The actual controller of the controlling shareholder of the Company Shandong Group Corporation of Fishery Enterprises, the controlling shareholder of the Company, is state-owned enterprise under the director control of Shandong People’s Government, whose actual controller is Shandong Province State-owned Assets Administration Office. The main information is as follows: The actual controller: Shandong Province State-owned Assets Administration Office Legal representative: Song Wenping Nature of enterprise: administrative institution Main business: responsible department of provincial government for state-owned assets (5) Legal person shareholder holding over 10% of the Company’s total shares In the report period, there existed no legal person shareholder holding over 10% of total shares in the Company. (6) Particulars about shares held by the top ten shareholders of circulation share No Name of shareholders Number of circulation shares held Type (A-share, B-share, at the year-end (share) H-share and other) COREPACIFIC-YAMAICHI 1 6,046,649 B-share NTERNATIONAL(H.K.)LIMITED 8 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) KINGSWAYFINANCIAL 2 SERVICES GROUP 3,353,105 B-share LIMITED-CLIENTS’A/C 3 Liu Dan 1,498,290 B-share 4 Yin Ying 1,078,200 B-share 5 Chen Yu anfeng 855,200 B-share NATWEST SECURITIES HONG 6 773,230 B-share KONG LIMITED 7 IP,HUNG FEI 700,000 B-share 8 Liao Qiang 615,000 B-share 9 Liang Yuzhen 572,600 B-share 10 Weng Zhengwen 558,800 B-share The Company is unknown whether there exists associated relationship among the top ten shareholders of circulation share. SECTION V. PARTICULAR ABOUT DIRECTORS, SUPERVISORS, SENIOR EXECUTIVES AND EMPLOYEES Basic information I. Basic information (I) Directors, supervisors and senior executives Shares held at Shares held Name Title Gender Age Office term the at the year-beginning year-end Director, Chairman of Liu Changsuo Male 51 M ay 2003 – Sep. 2005 0 0 the Board Director, Wang Zhaoan Male 51 Sep. 2002 – Sep. 2005 0 0 General Manager Director, Deputy Li Wenyi Male 47 Sep. 2002 – Sep. 2005 0 0 General Manager Shao Shijie Director Male 57 Sep. 2002 – Sep. 2005 0 0 Wang Hanmin Independent Director Male 43 Sep. 2002 – Sep. 2005 0 0 Liu Baoyu Independent Director Male 40 Sep. 2002 – Sep. 2005 0 0 Jiang Jin Independent Director Male 35 M ay 2003 – Sep. 2005 0 0 Zhou Feng Secretary of the Board Male 49 Sep. 2002 – Sep. 2005 0 0 Chief Financial Zhang Jinqing Male 49 July 2003 – Sep. 2005 0 0 Supervisor Yin Jixian Supervisor Male 44 Sep. 2002 – Sep. 2005 0 0 Huang Qi Employee Supervisor Male 30 Sep. 2002 – Sep. 2005 0 0 Shang Qinghua Employee Supervisor Female 34 Oct. 2003 – Sep. 2005 0 0 2. Particulars about directors or supervisors holding the position in share-controlling 9 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) companies Name Share -controlling company Title Office term Shandong Group Corporation of Fishery Chairman of the Board, Wang Aimin Apr. 2003 to now Enterprises General Manager Shandong Group Corporation of Fishery Li Wenyi Deputy General Manager Sep. 2003 to now Enterprises Subsidiary of Shandong Group Shao Shijie Corporation of Fishery Enterprises General Manager Jan. 1998 to now –Qingdao Oceanic Fishery Co. Shandong Group Corporation of Fishery Section Chief of Yin Jixian Nov. 2003 to now Enterprises Personnel and Labor Dept. II. About annual remuneration 1. The remuneration of directors, supervisors and senior executives were paid according to the relevant regulations and standards released by Notional Labor Department. The total annual remuneration (including base wage, rewards, welfare, subsidy, housing subsidy and others) of the present directors, supervisors and senior executives receiving from the Company was RMB 359,000; 2. Total annual remuneration of the top three directors and senior executives drawing the highest payment annual remuneration was RMB 129,000. 3. The Company respectively paid the allowance of RMB 20,000 (tax included) to independent directors per year. The Company gave them subsidy of RMB 300 per day based on the actual working days when they attended the meetings of the Board of Directors and the Shareholders’ General Meeting. In addition, the reasonable expense needed by independent directors when performing duties can be reimbursed according to the actual situation. Decision- making procedure of the said allowance: the Board of Directors enacts the preplan and submits to the Shareholders’ General Meeting for approval. 4. The Company has 12 directors, supervisors and senior executives at present in office. Ten persons drew the annual salary from the Company, among them, 2 persons enjoyed the annual remuneration from RMB 45000 to RMB 60,000 respectively; 3 persons from RMB 30,000 to RMB 45,000 respectively; 5 persons from RMB 20,000 to RMB 30,000 respectively. 5. Among directors, supervisors and senior exe cutives, 2 persons received no pay from the Company, namely Director Shao Shijie, who drew remuneration from Qingdao Oceanic Fishery Co., and Supervisor Yin Jixian, who drew remuneration from Shandong Group Corporation of Fishery Enterprises, the share-controlling company of the Company. III. Name of directors, supervisors and senior executives leaving posts in the report period and reason of leaving 1. Yu Fenghua: because of the change of work, quitted the posts of Director and Chairman of the Board; 2. Wang Aimin: because of the change of work, quitted the posts of Director and 10 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) Deputy Chairman of the Board; 3. Liu Shijun: because of age, quitted the post of Director; 4. Xie Meilan: because of age, quitted the posts of Director and Chief Financial Supervisor; 5. Liu Qingfeng: because of age, quitted the posts of Director and Chief Economist; 6. Zheng Guimin: because of age, quitted the posts of Supervisor and Chairman of the Supervisors’ Committee; 7. Li Junmei: because of the change of work, quitted the post of Supervisor; 8. Zhang Lei: because of the change of work, quitted the post of Employee Supervisor. IV. About employees Ended the report year, the Company had totally 1,222 on-the-job employees, of them, 658 production personnel, 182 salespersons, 133 technicians, 82 financial personnel and 169 administrative personnel; in the staffs, 72 persons with bachelor degree or above, taking by 6% of the total employees; 152 persons with 3-years regular college graduate, taking 12.4% of the total employees, 170 persons with polytechnic school graduate, taking 13.9% of the total employees. The Company needs to bear the expenses of 601 retirees. SECTION VI. ADMINISTRATIVE STRUCTURE I. Administration of the Company (I) Administration of the Company in the report period 1. According to the requirement of Guidelines Opinion on Establishing Independent Director in Listed Companies issued by CSRC, the Company added one independent director and then the amount of independent directors reached one third of the amount of directors. 2. The Company performed internal organizations reform and further separated from the control shareholder, Shandong Group Corporation of Fishery Enterprises in the respects of personnel and organization establishment. 3. The Company newly established such internal control systems as Related Transaction System, Management System of Raised Capital and Management System of Guarantee for Others, which made the management of the Company have regulations for going by and improved the level of the Company’s administration. 4. The Company established management system of investors’ relationship, strengthened the communication and intercourse with the investors and furthered improved the voluntary information disclosure. (II) Difference in administration of the Company In accordance with Administrative Rules of Listed Company, there was no significant difference in administration of the Company, but existed shortage: 1. Not thorough in separation of personnel. (1) In the report period, the 7th meeting of the 2nd Board of Directors of the Company elected Mr. Liu Changsuo as Chairman of the Board of the Company and then there are the same legal representative between the Company and its control shareholder, Shandong Group Corporation of Fishery 11 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) Enterprises. At present, the situation will be favor of the Company’s work of cutting down and liquidating of the fund occupied in the related transactions of the control shareholder, Shandong Group Corporation of Fishery Enterprises and meanwhile will be favor of the carrying out of the reorganization work of the Company. With going deep of the reorganization progress, the Company will solve the problem at a appropriate time. (2) In the report period, receiving the notification of Organization Dept. of the Provincial Commission with LZRZ[2003] No. 62, the Director and Deputy General Manager of the Company, Mr. Li Wenyi was appointed as Deputy General Manager of Shandong Group Corporation of Fishery Enterprises. At present, he has formally submitted the application of quitting post of Deputy General Manager of Shandong Group Corporation of Fishery Enterprises to Organization Dept. of the Provincial Commission by himself. 2. The related transactions were not normative. The related transaction with the control shareholder were not normative and the phenomenon the principal shareholder occupied the capital of the listed company was serious. 3. The measure of evaluation and encouragement for the senior executives was not perfect. In the report period, the Company has not established the mechanism of evaluation and encouragement for the senior executives. At present, the Company has made proposal and planned to perform the annual remuneration plan for the senior executive. II. Performance of independent directors In the report period, the three independent directors of the Company brought the respective specialty into full play strictly according to Articles of Association of the Company and Work System of Independent Director and the relevant regulations issued by CSRC, and performed their duties trustily, diligently and independently, attended the meeting of the Board of Directors and Shareholders’ General Meeting on time; expressed independent opinion for significant related transaction, nomination, appointment and removal of directors, and engagement and demission of senior executives based on the position of independent judgment, gave the initiative function into full play in respect of scientific decision- making and standardized operation of the Board of Directors, safeguarded the whole benefit of the Company and rights and interests of medium and small shareholders. III. Particulars about the Company’s separation from the control shareholder in respect of business, personnel, assets, organization and finance: 1. In respect of personnel: the Company has independent management system of labor, personnel and salary, General Manager, Deputy General Manager, Chief Financial Supervisor and Chief Economist and Secretary of the Board of the Company drew the salary from the Company. 2. In respect of assets: as an independent corporation, the Company has integrated legal person property rights, during the initial stages of foundation, the assets invested by the controlling shareholder were transacted the change procedure of ownership. 3. In respect of finance: the Company has established independent financial 12 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) department and financial personnel, owned independent and complete accounting system; financial personnel and financial system were completed independent from its controlling shareholder, the Company produced accounting statement according to the relevant regulations of the Ministry of Finance, and paid the tax in compliance with the laws. 4. In respect of organization: the Company’s Board of Directors, Supervisory Committee and the other Inner organization independently operated; the controlling shareholder recommended director and supervisor through the legal procedure, and didn’t meddle in personnel appointment and removal of listed company; 5. In respect of business: the Company was completely independent from the controlling shareholder, has independent and integrated business and autonomous operation capacity. There was no competition with the controlling shareholder in THE same trade. SECTION VII. BRIEF INTRODUCTION OF THE SHAREHOLDERS’ GENERAL MEETING I. Notification, convening and holding of the Shareholders’ General Meeting In the report period, the Company totally held one Shareholders’ General Meeting, namely Annual Shareholders’ General Meeting for 2002 and the details are as follows: On May 30, 2003, the Company held Annual Shareholders’ General Meeting for 2002 in the meeting room on 8F of the Company, No.43, Heping Road, Jinan, Shandong. The public notice of notification of holding the Shareholders’ General Meeting was published in Securities Times and Ta Kung Pao dated Apr. 26, 2003. 6 shareholders and shareholders’ proxies attended the meeting, representing 128,556,309 shares, taking by 48.32% of the total shares. Among of them, the state-owned shareholders are 3 persons, representing 127,811,320 shares, taking by 99.42% of the present shares with voting right; domestic legal person shareholders are 2 persons, representing 260,000 shares, taking by 0.2% of the present shares with voting right; domestically listed foreign shareholder is 1 person, representing 484,989 shares, taking by 0.39% of the present shares with voting right. The meeting was presided by General Manager Wang Zhaoan and the directors, supervisors and senior executives of the Company attended the meeting as nonvoting delegates. The meeting was conformity with Company Law and Articles of Association of the Company. The meeting examined item by item and approved the following content through voting with signature: (1) Proposal on resignation application of partial directors; (2) Electing Mr. Liu Changsuo as the director of the 2nd Board of Director of the Company; (3) Examined and approved proposal on appropriating provision for doubtful debts and assets’ depreciation; (4) Examined and approved 2002 Work Report of the Board of Directors; (5) Examined and approved 2002 Work Report of the Supervisory Committee; (6) Examined and approved 2002 Financial Settlement Report; (7) Examined and approved 2002 Profit Distribution Preplan; 13 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) (8) Examined and approved 2002 Annual Report and Summary; (9) Examined and approved proposal on candidates of independent director and remuneration; (10) Examined and approved proposal on amendment of Articles of Association of the Company; (11) Examined and approved proposal on amendment of Rule for Procedure of the Shareholders’ General Meeting; (12) Examined and approved Related Transaction System; (13) Examined and approved Management System of Raised Capital; (14) Examined and approved System of Accumulated Vote and its Implementation Rules; (15) Examined and approved proposal on reengaging PricewaterhouseCoopers Zhongtian Certified Public Accountants Co., Ltd, as the financial auditing institution of the Company in 2002; (16) Examined and approved proposal on authorizing the Board of Directors to wholly deal with the engagement of the financial auditing institution of the Company in 2003 and confirmation of auditing expense. Jiang Lu, the lawyer with securities work qualification of Shandong Junyida Law Firms attended the meeting and issued law opinion and the public notice on resolutions of the meeting was published Securities Times and Ta Kung Pao dated May 31, 2003. II. Election and change of directors and supervisors of the Company 1. In the report period, Jiang Jin was elected as independent director of the 2nd Board of Directors of the Company and Liu Changsuo was elected as director of the 2nd Board of Directors of the Company. 2. In the report period, as commended by the Employees Representatives Union of the Company, Shang Qinghua took the post of employee supervisor. SECTION VIII. REPORT OF THE BOARD OF DIRECTORS I. Analysis to the whole operation in the report period In the report period, the Company further deepened the enterprise reform with adjusting industrial structure and optimizing and integrating assets as the main line, improved the legal person’s administrative structure and tried hard to increase income from main operations through reducing the redundant staffs and cutting down three expenses. Under the situation of very shortage in cash flow, the whole economic benefits increased obviously over the last year. The Company continued committing itself to catching oceanic fish in the upper and middle of the layer, which has strengthened the processing and export of aquatic products and lease and management of refrigeration sails, and disposed fishers with low income and high cost. In the whole year, the oceanic fishing volume reached 36,000 tons and the sales volume of fish goods reached 39,700 tons. The Company realized income from main operations amounting to RMB 318.87 million and profit from main operations amounting to 14 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) RMB 53.84 million, an increase of RMB 26.80 million over year 2002. In the report period, the net profit was RMB-213.47 million, an increase of RMB 11.80 million over year 2002. In 2003, the Company encountered various unprecedented difficulties in the operation: firstly, SARS impacted relatively large influence on the processing export, resulting in whole losses in the three refrigeration processing enterprises; secondly, the sources in the offing was further dried up, which pushed that the processing of materials supplied from offing was transferred into the processing of materials supplied from foreign countries, resulting in the increase in expenses and decrease in profits. For instance, Longkou Processing Plant purchased Spanish Mackerel to be processed, while crude fish decreased from nearly a thousand tons in previous years to lack of a hundred tons in the last year; thirdly, international fishery organization became tighter and tighter on the classification, supervision and control on the fishing ground, which resulted that the fisher task and fishing ground was restricted and volume of fish goods decreased; fourthly, the Company transferred the equity of Double Whale Pharmaceutical, which resulted in the decrease in the income from this assets. Besides, the negative report of all newspapers and media on the Company at the beginning of the year resulted the banks did not provided but just withdrew loans from us. Thus, the Company faced great pressure in the serious shortage of capital, which resulted that the Company could not realize the predicted operating objectives. Moreover, the large shareholder occupied the Company’s capital in long term by large quantities and was unable to refund it, the Company was hard to absorb the large quantities of bad debts depending on itself force and all equity of the controlling shareholder was frozen by the judiciary. Thus, the Company faced much larger pressure. At present, it just can be expected to settle the said problems through effective assets reorganization. However, due to the interest balance, the reorganization had no progress behindhand. (I) Scope of main operations and their operations As a comprehensive enterprise in the oceanic fishery industry, the Company is principally engaged in the oceanic fishing; letting of trawlers and refrigerated transportation vessels ; production and sales of marine pharmaceutical products represented by cod- liver oil and fish oil medicines; import and export, processing and cold storage of aquatic products, etc. 1. The income from main operations and profit from main operations is listed as follows classified according to industries and areas: (Unit: RMB) (1) Classified according to businesses Businesses Income from main operations Gross operating profit Oceanic fishing 128,250,437 32,026,850 Aquatic products trade 95,216,077 2,862,135 Production of physic 28,628,746 12,265,849 Letting of fishing ship 1,496,509 -2,501,336 Letting and management of 29,144,414 9,960,898 15 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) refrigerated vessel Processing, cold storage of 36,128,861 5,364,101 aquatic products and others Total 318,865,044 59,978,497 (2) Classified according to areas Areas Income from main operations Gross operating profit Mainland of China 152,672,332 29,100,344 Taiwan of China 67,063,597 16,373,888 Nigeria 36,479,718 11,474,851 Japan 51,165,093 2,616,357 Argentina 2,322,757 -2,006,124 Ghana 695,293 153,399 Korea 804,507 -208,571 America 7,661,747 2,474,353 Total 318,865,044 59,978,497 2. There was no any authoritative data of market share about the products produced and operated or service provided by the Company. Financial date of main products: Unit: RMB Products Sales income Cost of sales Gross profit ratio (%) Tunny 98,377,177 84,595,947 14.01 Scad 37,374,435 18,944,166 49.31 Other fish goods 91,900,323 87,207,590 5.11 Cod-liver oil products 28,628,746 16,362,897 42.84 3. Changes in main operations in the report period over the last year (1) Lease business of fishing sails. Due to slow recovery of capital and in order to reduce the related transactions at the same time, the Company stopped a series of lease agreements on April 1, 2003, resulting in the decrease in lease of fishing sails. (2) Production of oceanic biological pharmaceutical and healthcare products. In the report period, the Company sold and transferred all its equity of Qingdao Double Whale Pharmaceutical Co., Ltd. considering from the long-term interests and reduced the main operations of pharmaceutical and healthcare products since July 1, 2003. Besides, there was no other great change in the main operations and their structures, products and services in the report period. (II) Operation and achievements of main holding subsidiaries and share-holding companies of the Company Unit: RMB Name of companies Assets scale Registered Equity Investment Business quality and main Net profit 16 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) capital amount operations or products Shandong Zhonglu 54，412，523 22,505,600 95% 21,380,320 International shipping, 2,884,746 Aquatic productss and transportation of frozen Sea Transportation Co., aquatic products Ltd. Habitat International 33，375，349 12,476,146 100% 12,476,146 Self-support cold-storage 327,808 Corporation transportation Shandong Zhonglu 85,602,925 56,793,300 60.98% 32,280,000 Freezing, cold-storage, -11,217,915 Oceanic Foods (Yantai) processing and sales of Co., Ltd. aquatic products, livestock, fruit and vegetables (III) Major suppliers and customers In the report period, the total amount of purchase from the top five suppliers was RMB 73,219,477, taking 52% of the total annual amount of purchase of the Company; the total amount of sales of the top five customers was RMB 144,606,744, taking 45% of the total annual amount of sales of the Company. (IV) Problems and difficulties from the operation and their solutions 1. Unfavorable processing trade and import and export of aquatic products In 2003, influenced by SARS epidemic, the domestic consumption volume of aquatic products decreased by a large margin, especially the processing and import and export trade of aquatic products was impacted by a relatively large margin, which resulted that the sales income from import and export trade of aquatic products decreased by a big margin over the last year in 2003. Thus, the Company would try hard to overcome the unfavorable influence arising from the SARS factor, adjust the operating means, operating measures and operating strategies, attach importance to catching the market opportunity, reasonably adjust the proportion of business structure and try hard to raise the economic benefits. 2. Increasingly strict protection for oceanic fishery resources At present, it is reality the use of fishery resources in the world is excessive. World Fisheries Association has attached high importance to the control on development of oceanic fishery resources and has implemented satellitic supervision and control on the development and application of task fishery, which made the scope of task fishery be restricted, resulting in the decrease in output and glide-down. Therefore, the Company has strengthened the controlling command in the front line on sea, engaged foreign technical forces and reinforced the information communication so as to enhance the fishing output. 3. High price of fuel caused by War in Iraq The War in Iraq in the last year made the fuel price in the international market rank in 17 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) high level. As involved in the industry of oceanic fishing and refrigeration transport, the main running cost was consumption of fuel. In the report period, the average price of fuel increased by nearly 16% over the last year, resulting in the increase in cost of the Company by a large margin. Thus, the Company continued to enhance the production efficiency, reduced expenditure and expenses in a broad way, cut down the cost and increased the efficiency by making use of new equipments, new technologies and new measures. 4. Difficult production caused by decrease in assets quality At present, partial fishers of the Company were old with high cost and backward equipments, which resulted that the fishing capability was low, leading to the decrease in efficiency. Aiming at the said situation, the Company adjusted and optimized the assets, disposed the sails with backward equipments and also reduced the production scale at the same time. 5. Difficult operation caused by lagging management system At present, the management mechanism and running mechanism still could not adapt to the regulations of modern enterprise system. Besides, the legal person’s administrative structure was imperfect and existed the situation that the related parties occupied the capital of the Company by a big margin, which all brought unfavorable influence to the operation of the Company. In 2003, due to the reasons of appropriation of reserve for bad debts of related parties, the Company incurred a loss. Therefore, through organizational reform, taking positions by competitions and carrying out “Five separations” with strong forces, the Company reduced the organizations, cut down the staffs, reduced three expenses and strictly controlled and reduced the related transactions. II. Investment (I) Application of raised proceeds 1.Ended Dec.31, 2003, the Company has put RMB 222,135,000 among the total amount of proceeds raised through previous B share offering amounting to RMB 255,340,000 into the projects invested with raised proceeds disclosed, taking 87% of the total amount of raised proceeds and the proceeds not used was RMB 33,205,000, taking 13% of the total amount of raised proceeds. In the report period, the auditing expense paid to the total investment in the project of Double Whale Industrial Park was RMB 60,000. The actual progress and earnings of all investment projects were as follows: Unit: RMB’0000 Total amount of raised 25,534.00 Total amount of raised proceeds used in the report year 6.00 proceeds Total amount of raised proceeds used accumulatively 22,213.50 Committed projects Planned Change Actual Accrued amount of Compliance with 18 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) amount of projects or not amount of earnings planned progress and input input estimated earnings or not Project of ultra-low 4,343.00 No No temperature tuna long-line 4,474.00 -663.00 fishing in South Pacific* Project of marine 4,783.00 Yes / pharmaceutical and healthcare 1,462.50 / products series Project of purse seine for tuna 4,100.00 No Yes 4,102.00 735.50 fishing in Indian Ocean Project of hooks and poles for 4,991.00 Yes / 0.00 / tuna fishing in Guinea Bay Project of importing large 3,984.00 No Yes 1,240.00 858.00 cold-storage boat Project of building 4,929.00 No No 2,466.80 208.20 refrigeration dory trawlers* Total 27,130.00 / 13,745.30 1138.70 / *Explanation on not reaching 1. Project of ultra-low temperature tuna long-line fishing in South Pacific. This project has been planned progress and earnings finished in investment and has been put into production in successive. In the report period it realized operating profit amounting to RMB 0.56 million. Since the market countries of main products such as Japan etc. saw a successive depression in economy and the fish price declined, thus the income declined, adding the factors of fluctuating international oil price and increase of maintenance expense etc. resulted that the cost mounted up, which made the project incur a loss. 2. Project of building refrigeration dory trawlers. Totally four refrigeration dory trawlers were invested and constructed in this project. During the implementation of this project, due to the change of Russian fishery policy, the Company did not gain the fishing certificate of this fishing ground and thus these four fishing boats could not enter into this fishing ground to do fishing. According to the boat sales contract, the Company sold 2 of the 4 fishing boats with the price of USD 160,000. Ended the end of the report period, the total payments recovered were USD 800,000. The other two boats were sent to West African to do some catching in July of 2003. Ended Dec. 31, 2003, the preparation relevant to production of the said two fishing boats in the prophase had been accomplished and they would be put into production formally since year 2004. 19 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) Explanation on reasons and 1. Project of marine pharmaceutical and healthcare products series: This project was construction procedures of change expansion to the original production scale of Qingdao Double Whale Pharmaceutical Co., Ltd. (hereinafter referred to as Qingdao Double Whale) and the detailed implementation was burdened by Qingdao Double Whale. Since the Company has transferred all the equity of Qingdao Double Whale (For details, please refer to Public Notice on Resolutions of the 9th Meeting of the 2nd Board of Directors dated Aug. 23, 2003 and Public Notice on Implementation of Equity Transfer dated Sept. 27, 2003 of the Company published on Securities Times and Ta Kung Pao), the capital was not necessary to be put into this project. This project was approved for construction by Shandong Plan Commission with LJNJZ [1998] No. 989 document on Sept. 29, 1998 and the planned amount of input was RMB 47.83 million with predicted annual total profit amounting to RMB 13.75 million. Ended Aug. 2003, the actual input was RMB 14.625 million and the balance of capital in this project was RMB 33.205 million. The 11th Meeting of the 2nd Board of Directors of the Company held on Dec. 30, 2003 considered and approved to agree to supplement the Company’s current capital with the partial capital, which should still be submitted to Shareholders’ General Meeting for approval. 2. Project of hooks and poles for tuna fishing in Guinea Bay: In order to enhance the capital use efficiency, after being considered and approved by Annual Shareholders’ General Meeting 2000, the Company suspended the implementation of “Project of hooks and poles for tuna fishing in Guinea Bay” and established “Qingdao Zhonglu OUQD Aihua Pharmaceutical Co., Ltd.” with this partial raised proceeds amounting to RMB 43.20 million. 3. Since there was capital amounting to RMB 27.44 million carried down from “Project of importing large cold-storage boat” and rest capital optimized amounting to RMB 6.71 million from “Project of hooks and poles for tuna fishing in Guinea Bay”, after being considered and passed by Annual Shareholders’ General Meeting 2000, the Company used the said capital to establish “Shandong Zhonglu Oceanic Foods (Yantai) Co., Ltd.”. (II) In the report period, there was no material project invested with the proceeds not raised from public offer. III. Financial position of the Company 1. Financial indexes and data Unit: RMB Items In 2003 In 2002 Increase/decrease Rate of growth amount (%) Total assets 562,738,775 804,879,214 -242,140,439 -30.08 Shareholders’ 72,396,580 -205,541,057 -73.95 equity 277,937,637 Profit from main 58,343,596 26,800,035 84.96 operations 31,543,561 Net profit -213,472,451 -225,282,438 11,809,987 5.24 Net increase in cash and cash -37,342,779 -3,942,143 -33,400,636 -847.27 equivalents 20 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) 2. Main reasons of changes Items Reasons of changes Total assets Appropriating provision for bad debts to arrearages from related parties and appropriating impairment losses of long-term equity investments of Southern Securities Shareholders’ equity Losses Profit from main operations Increase in international price of fish and selling oceanic fishing boats with relatively high fixed cost Net profit Increase in international price of fish and selling oceanic fishing boats with relatively high fixed cost Net increase in cash and cash equivalents Refunding bank loans 3. Reasons and influences of correction to material accounting errors (1) Audited by Hubei Daxin CPAs Co., Ltd., there was error in financial disposal in the subject called “Unconfirmed investment losses” in the consolidated accounting statements for year 2002 and the Company made correction in the report period: adjusting to decrease unconfirmed investment losses amounting to RMB 3,857,241 and minority equity amounting to RMB 203,013 and adjusting to increase retained earnings amounting to RMB 4,060,254 in the consolidated balance sheet for year 2002; adjusting to decrease unconfirmed investment losses amounting to RMB 3,857,241 and minority gains and losses amounting to RMB 203,013 in the consolidated income statement; adjusting to decrease estimated liabilities amounting to RMB 4,060,254 and retained earnings amounting to RMB 4,060,254 in the balance sheet of the parent company in 2002; adjusting to decrease the management expense amounting to RMB 4,060,254 in the income statement of the parent company. (2) Audited by Hubei Daxin CPAs Co., Ltd., in 2001, the Company purchased land use right amounting to RMB 22,684,710 from SGCFE to offset its liabilities owed to the Company, which was reckoned in intangible assets under the situation that the land transfer procedures were not transacted and was started amortization in that year. In 2003, the land amounting to RMB 18,808,789 in the said land use rights was applied for being legally frozen by the bank due to the liabilities dispute between SGCFE and the bank. The Company’s reckoning the said value of land use right in intangible assets in 2001 was not in compliance with the relevant provisions and the Company made correction in the period: adjusting to decrease intangible assets amounting to RMB 21,982,526 and adjusting to increase other receivables amounting to RMB 22,684,710 in the accounting statements for year 2002; adjusting to increase retained earnings amounting to RMB 666,738 and surplus reserve amounting to RMB 35,446 at the end of year 2002. 21 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) IV. Explanation on accountant’s presenting auditors’ report with reservation and emphasized events Since Hubei Daxin CPAs Co., Ltd. has audited the Company’s accounting statements in 2003 and has presented auditors’ report with reservation and emphasized events, now the Board of Directors of the Company made the fo llowing explanations on the events involved in the auditors’ report respectively: 1.Explanation on the reservation in the auditors’ report: The Board of the Company considered that the event that SGCFE Seawater Culturing Company provided guarantee for Shandong Shanhai Fishery Business Center, a subsidiary of SGCFE was real, which probably impacted influence on the Company’s estimated liabilities. The Board of the Company is actively seeking for basic approach for settling the problem so as to protect the interests of the Company’s shareholders from violation in a maximum way and the Board shall timely disclose the progress of guarantee settlement. 2. Explanation on the emphasized events in the auditors’ report: At present, the Company’s production and operation is normal. However, since the Company continued to incur losses in 2002 and 2003, all relevant credit banks has adopted cautious policies of granting loans to the Company, thus the Company’s cash flow is restricted and shortage of operating capital is the biggest difficult the Company faces. The Board of the Company shall actively seek for the support from the local government, try for external reorganization and try its best to coordinate the relationships between the bank and enterprise so as to continuously gain capital support from the bank, ensure the Company’s continuous operating capability and thus realize the profitability finally. V. Routine work of the Board of Directors (I) Convening and resolutions of the meetings In the report period, the Board of the Company totally held seven meetings: 1. On April 14, 2003, the Company held the 5th Meeting (Temporary Meeting) of the 2nd Board of Directors, which considered and passed: (1) Proposal on Resignation Application of Chairman and Vice-chairman of the Board (2) Proposal on Resignation Application of Partial Directors (3) Proposal on Mr. Wang Zhao’an’s Acting the Authorities of Chairman of the Board and Legal Representative of the Company Provisionally (4) Proposal on Nominating Candidates for Directors 2. On April 29, 2003, the Company held the 6th Meeting of the 2nd Board of Directors, which considered and passed: (1) Proposal on Appropriating Bad Debts and Impairment Losses of Assets (2) Work Report of the Board of Directors 2002 (3) Work Report of General Manager 2002 22 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) (4) Financial Settlement Report 2002 (5) Profit Distribution Preplan 2002 (6) Annual Report and its Summary 2002 (7) The 1st Quarterly Report 2003 (8) Proposal on Application for Special Treatment to the Company’s Stock (9) Proposal on Candidates of Independent Directors and their Allowances (10) Proposal on Amending the Articles of Association of the Company (11) Proposal on Amending Rules of Procedure of Shareholders’ General Meeting (12) Proposal on Amending Detailed Rules on Work of the Board of Directors (13) Proposal on Related Transaction System (14) Proposal on Management System on Raised Proceeds (15) Proposal on Cumulative Voting System and Detailed Rules on its Implementation (16) Proposal on Holding Annual Shareholders’ General Meeting 2002 3. On May 30, 2003, the Company held the 7th Meeting of the 2nd Board of Directors, which considered and passed Proposal on Electing Liu Changsuo as the Chairman of the Board of the Company. 4. On July 29, 2003, the Company held the 8th Meeting of the 2nd Board of Directors, which considered and passed: (1) Proposal on Resignation Application of Partial Directors (2) Proposal on Appointing and Removing Partial Senior Executives (3) Proposal on Supplemental Agreement on Operating “Tai’an” Boat (4) Semi-annual Report and its Summary 2003 5. On Aug. 22, 2003, the Company held the 9th Meeting of the 2nd Board of Directors, which considered and passed Proposal on Transferring the Equity of Qingdao Double Whale Pharmaceutical Co., Ltd.. 6. On Oct. 29, 2003, the Company held the 10th Meeting of the 2nd Board of Directors, which considered and passed: (1) Self- inspection Report on Capital Current with Related Parties and External Guarantees (2) Proposal on Amending the Articles of Association of the Company (3) Proposal on Amending Detailed Rules on Work of the Board of Directors (4) Proposal on Management System on External Guarantees (5) Proposal on Management System on Investors’ Relationships (6) Proposal on Adjusting the Organizational Setting of the Company (7) The 3rd Quarterly Report for 2003 7. On Oct. 29, 2003, the Company held the 11 th Meeting of the 2nd Board of Directors, which considered and passed: 23 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) (1) Proposal on Changing the Application of the Raised Proceeds (2) Proposal on Changing Certified Public Accountants (3) Proposal on Withdrawing Shandong Zhonglu Oceanic Fisheries Company Limited Qingdao Branch and Establishing Qingdao Zhonglu Haijin Co., Ltd. (II) Implementation of the Board on resolutions of Shareholders’ General Meeting: In the report period, according to such relevant laws and regulations as Company Law of the P.R.C. and Securities Law of the P.R.C etc. and relevant provisions in the Articles of Association, the Board of the Company seriously implemented all resolutions passed in the Shareholders’ General Meeting strictly in compliance with the resolutions and authorizations of the Shareholders’ General Meeting. 1. Implementation on profit distribution for year 2002 In 2002, the Company did not distribute profits or convert capital reserve into share capital. 2. Implementation on authorizations of Shareholders’ General Meeting In 2002, the Shareholders’ General Meeting passed Proposal on Amending the Articles of Association of the Company and the Board of the Company transacted the change procedures of industrial and commercial registration according to the authorization of the Shareholders’ General Meeting. 3. Implementation on all systems passed by Shareholders’ General Meeting In 2002, Shareholders’ General Meeting passed System on Related Transactions, Management System on the Raised Proceeds and Cumulative Voting System and Detailed Rules on its Implementation and the Board of the Company has carried out them according to the requirements of all systems. VII. Preplan on profit distribution and converting reserve into share capital for 2003 Audited by Hubei Daxin CPAs Co., Ltd. and Horwath International Certified Public Accountants (Hubei, China) according to Chinese Accounting Standards and International Accounting Standards respectively, the net profit realized by the Company in 2003 was RMB-213,472,451 and RMB-209,398,000 respectively and the profit available for distribution for all shareholders in the year was RMB-416,728,523 and RMB-416,707,000 respectively. After research, the Board of Directors decided neither to distribute profits nor convert capital reserve into share capital. The said preplan should still be submitted to Shareholders’ General Meeting 2003 for approval. VIII. Special explanation of accountants on the capital occupied by the controlling shareholder and other related parties of the Company DXHZ (2004) No. 046 To all shareholders of Shandong Zhonglu Oceanic Fisheries Company Limited: With commission, we have audited the accounting statements of Shandong Zhonglu Oceanic Fisheries Company Limited (hereinafter referred to as the Company) in 2003 24 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) and have conducted special audit on the capital occupied by the Company’s controlling shareholder and other related parties in the report period according to provisions in Circular on Standardizing Listed Companies’ Capital Current with Related Parties, External Guarantees and Other Several Problems released by China Securities Regulatory Commission with ZJF [2003] No. 56 document. Now the particulars about capital occupied by the Company’s controlling shareholder and other related parties in the report period is as follows: 1. Names of capital occupiers and their relationships with the Company’s related parties Names of companies Relationships with the Reasons and ways of capital Company occupation Shandong Group Corporation Parent Company of the Other receivables and accounts of Fishery Enterprises Company receivable Shandong Longkou Fishery Controlled by the Parent Other receivables Comprehensive Company Company Qingdao Oceanic Fishery Controlled by the Parent Other receivables and accounts Company Company receivable SGCFE S.A. Controlled by the Parent Other receivables Company Shandong Haitian Fishery Controlled by the Parent Other receivables Business Company Limited Company (Haitian) Shandong Shanhai Fishery Controlled by the Parent Other receivables Trade Center Company Qingdao Anning Shipping Controlled by the Parent Other receivables Engineering Co., Ltd. Company Qingdao Lubao Fishery Foods Controlled by the Parent Other receivables Co., Ltd. Company Qingdao Fishery Aquatic Controlled by the Parent Other receivables and accounts Foods Processing Plant Company receivable Qingdao Meilai Foods Co., Controlled by the Parent Other receivables Ltd. Company Qingdao Haiyu Fishery Co., Controlled by the Parent Other receivables Ltd. Company Prodesur S.A. Controlled by the Parent Other receivables and accounts Company receivable Longkou Tenglong Aquatic Controlled by the Parent Other receivables Foods Co., Ltd. Company Qingdao Animal Controlled by the Parent Other receivables Pharmaceutical Co., Ltd. Company Qingyu Haifeng Shipping Controlled by the Parent Other receivables and accounts 25 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) Company Company receivable 2. Capital occupied by the controlling shareholder and other related parties in the report period: (1) Accounts receivable Names of companies Amount of capital occupation (RMB) Accumulative amount of capital occupation (RMB) Beginning-balance at Ending-balance Total debit Total credit the period at the period 1. Shandong Group Corporation of Fishery 1,659 1,659 - - Enterprises 2. Qingdao Oceanic 202,190 202,190 - - Fishery Company 3. Qingdao Fishery Aquatic Products 96,382 96,382 - - Processing Plant 4. Prodesur S.A. 2,440,826 2,351,995 3,763,956 3,852,787 5. Qingyu Haifeng - 293,512 5,248,600 4,955,088 Shipping Company Total 2,741,057 2,945,738 9,012,556 8,807,875 Note: There was basically no change in beginning-balance and ending-balance at the period in accounts receivable from the Company’s controlling shareholder and other related parties in accounts receivable. (2) Other receivables Names of companies Amount of capital occupation (RMB) Accumulative amount of capital occupation (RMB) Beginning-balance at the Ending-balance at Total debit Total credit period the period 1. Shandong Group 190,422,893(Note 1) 217,753,069 42,156,506(Note 2) 14,826,330(Note 3) Corporation of Fishery Enterprises 2. Shandong Longkou Fishery 6,383,036 6,383,036 - - Comprehensive Company 3.Qingdao Oceanic Fishery 62,009,316 53,008,961 1,605,785(Note 4) 10,606,140(Note 5) Company 4.SGCFE S.A. 21,550,572 22,362,506 2,467,414 1,655,480 5.Shandong Shanhai Fishery 366,147 4,863,914 94,569,050(Note 6) 90,071,282(Note 6) Trade Center 6.Qingdao Anning Shipping 2,352,479 1,666,241 3,747,388(Note 7) 4,433,627(Note 7) 26 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) Engineering Co., Ltd. 8.Qingdao Fishery Aquatic 7,462,935 7,761,350 298,415 - Foods Processing Plant 9.Qingdao Meilai Foods Co., 3,664,602 3,169,882 2,002,476(Note 8) 2,497,196(Note 8) Ltd. 10.Prodesur S.A. 2,865,326 886,794 30,560,470(Note 9) 32,539,002(Note 9) 11.Longkou Tenglong Aquatic 15,526,657 14,057,790 - 1,468,867 Foods Co., Ltd. 12.Qingdao Animal 395,544 345,544 - 50,000 Pharmaceutical Co., Ltd. 13.Qingyu Haifeng Shipping 500,427 500,427 - - Company 14.Qingdao Lubao Fishery Foods Co., Ltd. 408,295 402,799 - 5,496 Total 322,574,408 341,199,872 177,407,504 158,782,040 Notes: 1. Beginning-balance at the period was originally RMB 167,738,183. In 2001, the Company purchased land use right amounting to RMB 22,684,710 from SGCFE to offset its liabilities owed to the Company, which was reckoned in intangible assets under the situation that the land transfer procedures were not transacted and was started amortization in that year. In 2003, the land amounting to RMB 18,808,789 in the said land use rights was applied for being legally frozen by the bank as the assets of SGCFE due to the liabilities dispute between SGCFE and the bank. The Company’s reckoning the said value of land use right in intangible assets in 2001 was wrong and the Company made correction in the period: adjusting to increase other accounts receivable from SGCFE at the beginning of the period amounting to RMB 22,684,710 and the ending-balance at the period after adjustment was RMB 190,422,893. 2. In other receivables, the debit amount to Shandong Group Corporation of Fishery Enterprises (the controlling shareholder of the Company and hereinafter referred to as SGCFE) in the period was RMB 42,156,506 with main formations as follows: A. Qingdao Double Whale Pharmaceutical Co., Ltd. (hereinafter referred to as Qingdao Double Whale), a subsidiary of the Company, happened other receivables to SGCFE at the beginning of the period amounting to RMB-3,982,337 and the Company transferred the equity of Qingdao Double Whale in the period and transferred out this account accordingly, which made the debit amount in other receivables to SGCFE in the consolidated accounting statements increase by RMB 3,982,337. B. Shandong Fishery Shipping Company (the former enterprise of legal person before the reorganization and restructure of Zhonglu Shipping, which has been written off now), the originally subsidiary of SGCFE, gained loan amounting to USD 2,135,000 from Bank of China Shandong Branch before its reorganization and restructure. Since 27 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) this loan capital has been used by SGCFE, this loan has not been brought into the Company. The said loan expired in Nov. 2002 and ended June 21, 2003, the total loan principal and interests amounting to USD 1,706,127.06 were owed to Bank of China Shandong Branch. On Aug. 6, 2003, Bank of China Shandong Branch prosecuted the Company, Shandong Zhonglu Fishery Shipping Co., Ltd. (hereinafter referred to as Zhonglu Shipping) and SGCFE to Qingdao Admiralty Court. According to Agreement on Refund reached by Bank of China Shandong Branch, the Company, Zhonglu Shipping and SGCFE and Civil Intermediation released by Qingdao Admiralty Court with (2003) QHFSCZ No. 235 document, Zhonglu Shipping should refund USD 500,000 to Bank of China Shandong Branch on Aug. 18, 2003 and the rest amount of USD 1,206,129.06 should be repaid before Dec. 10, 2005 at twice. The Board of the Company proclaimed the said event as material lawsuit on Aug. 20, 2003. Ended Dec. 31, 2003, Zhonglu Shipping still owed loan amounting to USD 1,136,163.76 to Bank of China Shandong Branch. In the period, according to the said judgment, Zhonglu Shipping should refund bank loan amounting to USD 1,050,072.26 (converted into RMB 8,691,133) and reckon the rest amounting to USD 1,136,163.76 converted into RMB 9,403,687) in short-term loans while other receivables to SGCFE amounting to RMB 18,094,820 was increased accordingly. Besides, Zhonglu Shipping, SGCFE and Qingdao Anning Shipping Engineering Co., Ltd. (controlled by SGCFE and hereinafter referred to as Anning) reached Offset Agreement of Three Parties in the period, which made Zhonglu Shipping increase other receivables to SGCFE amounting to RMB 1,399,427. The said events totally made other receivables of SGCFE increase by RMB 19,494,247. C. In 2003, the Company reached Offset Agreement of Three Parties with HIC (a subsidiary of the Company) and SGCFE, which made HIC’s other receivables from SGCFE increase by RMB 12,602,154 and made debit amount in other receivables to SGCFE in the consolidated accounting statements of the Company increase by RMB 12,602,154. D. In 2003, the Company paid wages and lawsuit expenses amounting to RMB 158,493 and RMB 515,530.00 respectively for SGCFE, which made other receivables from SGCFE increase by RMB 674,023. 3. The credit amount in other receivables from SGCFE in the period was RMB 14,826,330 with main formations as follows: A. In 2003, the Company reached Offset Agreement of Three Parties with HIC and SGCFE, which made the Company’s other receivables from SGCFE decrease by RMB 12,602,154. (For details, please refer to Notes 2B) B. In 2003, the Company should pay shipping lease expenses amounting to RMB 1,240,000 to SGCFE, which made other receivables from SGCFE decrease by RMB 1,240,000 accordingly. 4. The debit amount in other receivables to Qingdao Oceanic Fishery Company (a 28 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) subsidiary of SGCFE and hereinafter referred to as Qingyu) in the period increased by RMB 1,605,785, which was mainly because that Qingdao Refrigeratio n Branch, owned by the Company, paid wages, social plans and reserve totally amounting to RMB 842,574 for Refrigeration Sub-plant, owned by Qingdao Oceanic Fishery Company, in 2003. 5. The credit amount in other receivables to Qingyu in the period increased by RMB 10,606,140, which was mainly because that other receivables of Qingdao Double Whale, a subsidiary of the Company, to Qingyu at the beginning of the period was RMB 9,447,830. While the Company transferred the equity of Qingdao Double Whale in the period and transferred out this account accordingly, which thus made credit amount in other receivables to Qingyu in the consolidated accounting statements increase by RMB 9,447,830. 6. The debit amount in other receivables to Shandong Shanhai Fishery Trade Center (a subsidiary of SGCFE and hereinafter referred to as Shanhai) in the period increased by RMB 94,569,050, which was mainly because that Trade Branch, owned by the Company, paid payment for goods amounting to RMB 41,720,418 to Shanhai and paid operating accounts amounting to RMB 52,848,632 for Shanhai in 2003; the credit amount increased by RMB 90,071,282, which was mainly because that Trade Branch purchased fishing goods amounting to RMB 41,720,418 from Shanhai in 2003 and Shanhai refunded the operating prepayment amounting to RMB 48,350,864. 7. In other receivables, the debit amount to Anning in the period increased by RMB 3,747,388, which was mainly because that the Company paid shipping maintenance account to Anning; the credit amount increased by RMB 4,433,627, which was mainly because that Anning provided shipping maintenance service for the Company and Zhonglu Shipping, SGCFE and Anning offset their accounts one another, which made Zhonglu Shipping’s other receivables to Anning decrease by RMB 1,399,427. (For details, please refer to Notes 2B) 8. In other receivables, the debit amount to Qingdao Meilai Foods Co., Ltd. (controlled by SGCFE and hereinafter referred to as Meilai) in the period increased by RMB 2,002,476, which was mainly because that Refrigeration Branch, owned by the Company, sold goods amounting to RMB 1,322,268 to Meilai and paid wages amounting to RMB 61,454 for Qingdao Meilai Foods Co., Ltd.; the credit amount increased by RMB 2,497,196, which was mainly because that Meilai paid payment for goods amounting to RMB 1,322,268 to Refrigeration Branch. 9. In other receivables, the debit amount to Prodesur S.A. (a subsidiary of SGCFE) increased by RMB 30,560,470, which was mainly because the Company provided oil plants and maintenance expenses amounting to RMB 30,560,470 necessary for 29 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) “Tai’an” Boat according to the entrusted operation agreement signed with Prodesur S.A.; the credit amount increased by RMB 32,539,002, which was mainly because that the Company carried back and sold fishing goods amounting to RMB 30,779,971 from “Tai’an” Boat. After auditing, we have found that the Company had capital occupied by the controlling shareholder and other related parties stated in Paragraph 2 of Item 1 in Circular and paid such period expenses as wages, welfare and insurance etc. and costs and other expenditures for the controlling shareholder and other related parties in 2003 with details as follows: Way of occupation Controlling shareholder Other related parties (SGCFE) Refunding loans 18,094,820 - Paying wages instead 158,493 904,028 Paying lawsuit expense instead 515,530 - Paying operating accounts instead - 4,497.768 Total 18,768,843 5,401,796 Daxin CPAs Co., Ltd. Chinese CPA: Hu Yonghua Wuhan · China Chinese CPA: Li Fei Mar. 29, 2004 IX. Special explanations and independent opinions of independent directors on the Company’s accumulative and current external guarantees According to the spirit in Circular on Standardizing Listed Companies’ Capital Current with Related Parties, External Guarantees and Other Several Problems released by ZJF (2003) No. 56 document, the independent directors of the Company have seriously inspected the Company’s external guarantees with relevant situations explained and independent opinions expressed as follows: (I) Ended Dec. 31, 2003, the Company totally had the following guarantees: 1. The Company provided guarantee amounting to RMB 5,250,000 and USD 3,383,322 for the subsidiary of SGCFE, of which, SFCFE Seawater Culturing Company (the former enterprise of legal person before the restructure of Trade Branch, owned by the Company, which was still not cancelled according to the reorganization agreement, and Trade Branch still developed operating activities with the name of SGCFE Seawater Culturing Company) provided guarantee amounting to RMB 5,000,000 and USD 3,383,322 for Shandong Shanhai Fishery Trade Center, a subsidiary of SGCFE, which happened before reorganization. We considered the said guarantee would impact influence on the Company’s estimated liabilities if the joint guarantee responsibility of SGCFE Seawater Culturing Company has formed. At 30 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) present, the Board of the Company is actively trying hard to settle this event. 2.Qingdao Refrigeration Branch, a subsidiary of the Company, provided guarantee for the loan amounting to RMB 250,000 of Qingdao Meilai Foods Co., Ltd. and the loan was used for supplementing current capital by Qingdao Refrigeration Branch. We considered that the said guarantee belonged to internal guarantee actually. 3. Before the Company’s listing and reorganization, SGCFE Seawater Culturing Company (the former enterprise of legal person before the restructure of Trade Branch, owned by the Company, which was still not cancelled according to the reorganization agreement) provided guarantee for short-term loan amounting to RMB 79,770,000 of SGCFE. Ended Dec. 31, 2003, there was still a balance of the said guarantee amounting to RMB 70,270,000 left. The bank did not require the Company to burden the joint responsibility of refund and the credit bank has frozen 80 million equity of the Company held by SGCFE for refunding assurance for the said guarantee. If the value of 80 million equity could not offset the loan amounting to RMB 70,270,000, the credit bank would probably require the Company to burden the joint responsibility for refunding the rest amount. Due to the relatively large uncertainties in the event, we also would timely pay attention to the progress of the event and push the Board of the Company to settle the said event as soon as possible. 4. The Company’s branches and subsidiaries provided guarantee for long-term loans amounting to RMB 21,510,000 of Qingdao Haiyu Fishery Co., Ltd. (the affiliated subsidiary of SGCFE, the controlling shareholder) and the said guarantee was still not relieved ended Dec. 31, 2003. The event was the problem formed in the reorganization and restructure before the Company’s listing. The Board of the Company has done large quantities of work to settle the guarantee. However, since Qingdao Haiyu Co., Ltd. became serious insolvency, we agreed to reckon full amount of the said loan guarantee amounting to RMB 21,510,000 in estimated liabilities in the period. 5. In the report period, the Company provided guarantee amounting to RMB 31,500,000 and USD 1,000,000 for Shandong Zhonglu Oceanic (Yantai) Foods Co., Ltd., its subsidiary, which was internal guarantee, not disobeying the provisions. (II) Procedures of decision-making of external guarantees According to the provisions in ZJF (2003) No. 56 document, the Company amended the Articles of Association of the Company, established Management System on External Guarantees and regulated the examining procedures of external guarantees, credit standard of guaranteed objects and etc., for instance, the external guarantees should be approved with signatures and agreements of over two third of all members in the Board. According to ZJF (2003) No. 56 document, we considered that the Company could standardize the Company’s external guarantees in compliance with laws and regulations and relevant provisions in the Articles of Association of the Company. 31 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) SECTION IX. REPORT OF THE SUPERVISORY COMMITTEE (I) Meetings held in the report year In the report year, the Supervisory Committee had held five meetings with the details as follows: 1.On Apr. 24, 2003, the Company held the 3rd Meeting of the 2nd Supervisory Committee, which examined and approved: (1) Proposal on Withdrawing Reserve for Doubtful Debts and Impairment of Assets; (2) Work Report 2002 of the Supervisory Committee; (3) 2002 Financial Settlement Report; (3) 2002 Profit Distribution Preplan; (4) Annual Report 2002 and Summary; (6) The 1st Quarterly Report2003. 2.On May 16, 2003, the Company held the 4th meeting of the 2nd Supervisory Committee, which examined and approved: (1) Proposal on Reengaging the PrincewaterhouoseCoopers Zhongtian Certified Public Accountants as 2002 overseas and domestic auditors submitted at 2002 Shareholders’ General Meeting; (2) Proposal on Authorizing the Board of the Company Carte Blanche to Handling the Engagement of 2003 Certified Public Accountants as Overseas Auditors and Domestic Auditors and Determination of the Remuneration submitted at 2002 Shareholders’ General Meeting, and later confirmed at the next Shareholders’ General Meeting. 3. On July 29, 2003, the Company held the 5th meeting of the 2nd Supervisory Committee, which examined and approved: (1) Proposal on 2003 Semi-Annual Report of the Company and the summary; (2) Proposal on the Resignation Application of Employee Supervisor Mr. Zhang Lei 4.On Oct. 29, 2003, the Company held the 6th meeting of the 2nd Supervisory Committee, which examined and approved: (1) The 3rd Quarterly Report 2003; (2) Proposal on Resignation Application of Several Supervisors. 5.On Dec. 30, 2003, the Company held the 7th meeting of the 2nd Supervisory Committee, which examined and approved: (1) Proposal on Adjusting Use of Part Raised Capital; (2) Proposal on Changing Certified Public Accountants; (II) Independent opinions expressed by the Supervisory Committee on the related affairs of the year 2003: 1. Operation according to laws. In the report period, the significant decisions of the Company accords with the requirements of the Articles of the Association and the decision- making procedure abides by the law; the Company establishes perfect internal control system in substance while there still exists certain distance towards fulfillment and implementation, and the Company is not totally separated from the controlling shareholder in five aspects, and one or two senior executives concurrently 32 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) take the post in the controlling shareholder’s company; In the business ,there exists mixed operation between the Company and the controlling shareholder’s company. When the directors, general manager and other senior executives performed their duties, they were probity, autonomic, self-conscious, devoted and made contribution for the development of the Company. 2. Inspection of finance. The Company paid attention to the work of financing, improved consistently the quality of financial personnel and consummated the financial management systems. Hubei Daxin Certified Public Accountants audited the financial statements of the Company in 2002 and issued auditor’s report with reserved opinion and emphasizing matters. We believed that the auditor’s report reflected the financial status and operation result in 2003. To Auditors’ Report with reserved opinion and emphasizing matters issued by auditors in charge of the auditing of the Company from the cautious point of view, the Supervisory Committee unanimously agreed. 3. Use of raised capital of the Company. The raised capital from domestically listed foreign shares in 2000 was put into use in conformity with the items disclosed in Prospectus according to the actual situation. In the report period, the Company adjusted use of part raised capital. We believed that it was in conformity with Company Law, Securities Law and Articles of Association of the Company. 4. Purchase and sale of assets. Concerning the purchase and sale of assets occurred in the report period, the transaction was fair and the price was reasonable. There found no internal transactions or behavior of damaging the right and interest of the shareholders. 5. Related transaction. The related transactions involved in the report period were mainly purchase and sale of trade, receiving and paying of rent of vessel and so on. We believed that related transaction had a distance towards standardization and up to now the Company hadn’t got breakthroughs on the problem that there still existed capital occupation by the big shareholders. 6. The Board of the Company gave the explanations on the auditor’s report with reserved opinion and emphasizing matters issued by the Certified Public Accountants. We give assent the explanation of the Board and we will supervise and urge the Board to propose dissolving schemes on the existent problem to protect the interests of the shareholders of the Company utmost. SECTION X. SIGNIFICANT EVENTS (I) Significant lawsuits and arbitration. 1. In the report period, the Company appealed to the court against the controlling shareholder SGCFE because of the arrears conflict and claimed to judge the defendant to pay back the arrearage RMB 50,232,114.37 immediately and bear the total litigate costs. The relevant details were disclosed in the significant lawsuit public notice published in Securities Times and Ta Kung Pao dated Feb. 28, 2003. Up to now, according to (2003) LMC No.747 written civil ruling issued by the People’s Court of 33 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) Lixia District, Jinan dated Aug. 26, 2003, SGCFE should pay back advance RMB 50,232,114.37 and interest. The significant lawsuit availed to protect the Company and the shareholders’ interest and didn’t affect the profit of the report period and caused little effect on the profit after the period. 2. In the report period, 3 lots of the Company located in Qingdao were sequestrated. The details were disclosed in the significant lawsuit public notice published in Securities Times and Ta Kung Pao dated July 15, 2003. Up to now, there is no progress about the lawsuit. 3. In the report period, “Tai Xing” Trawler owned by the subsidiary of the Company Shandong Zhonglu Oceanic Fisheries Transportation Co., Ltd, (Zhonglu Transportation) was ordered and distraint by Qingdao Court of Admiralty. The details were disclosed in the significant lawsuit public notice published in Securities Times and Ta Kung Pao dated Aug. 20, 2003. This resulted in the increase of debt USD2,157,212.65 of Zhonglu Transportation. Meanwhile, the profit of the Company was affected. 4. In the report period, the Company received the arbitration notification about “No.G20030234 Vessel Business Agreement Dispute issued by China International Economic and Trade Arbitration Commission (hereinafter referred as CIETAC), in which Japan San Wa Trading Co., Ltd. claimed the Company to pay back USD643,324.76 composing of 20% remaining payment for buying vessels in the Vessel Business Agreement (hereinafter referred as “the agreement”) between the Company and Japan San Wa Trading Co., Ltd. in Feb 2001 and current payment of small amount; Japan San Wa Trading Co., Ltd. also claimed the Company to pay USD60,000 for interest and penalty and bear the arbitration costs etc.. However, through the research of the Company, the Company found there existed some problems about the quality of the vessels consigned by Japan San Wa Trading Co., Ltd.; some vessels fell short of the promises in the agreement ; five vessels were unable to be approved by the departments of the State to get registered in China because of age problems; the obligations fulfilled by Japan San Wa Trading Co., Ltd. were not complete----the documents about the vessels were not complete etc.; there existed some problem about effectiveness of that part of the agreement. Therefore, in Oct. 2003, the Company proposed written plea and counterclaimed CIETAC to judge part of the agreement took no effect and also counterclaimed Japan San Wa Trading Co., Ltd. to compensate for the economic loss USD616,000. CIETAC heard the vessel business dispute case for the fist time, and conciliated in court: to dissolve the dispute for one and for ever the Company should pay USD450,000 to the opposite party totally. At present both parties are still in the negotiation and conciliation beyond the court. 5. On Jan.18, 2004, the Company received (2003) QMSCZ No.378 court verdict issued by the Middle People ‘s Court of Qingdao, Shangdong. The court judged “Japan Pingcheng Trading Co., Ltd. recovered in the suit about the loan agreement of USD500,000 between Qingdao Fishing Branch of the company and Japan Pingcheng 34 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) Trading Co., Ltd. at the first instance. The Company believed that the verdict deviated from the fact because the matter occurred in the establishment of Qingdao Fishing branch of the Company. The Company has appealed to the Supreme Court of Shangdong Province. At present there is no progress about the lawsuit temporarily. (II) Briefing and progress of purchase and sale of assets, consolidation and merge in the report period and its influence on the Company 1. Dated the end of the report period, not having approved by the state assets administration department, the assignment about 17.31% shares of Shangdong Zhonglu Oceanic (Yantai) Food Co., Ltd held by SGCFE to the company (See the public notice on related transaction in Securities Times and Ta Kung Pao dated Jan. 3, 2003) was still in progress. 2. According to Contract of Trawlers’ Sale, the Company sold all 4 refrigeration dory trawlers built by itself and total sale amount was USD3,200,000. The contract of 2 trawlers (the amount of contract was USD 1.60 million) has been implemented and USD 0.8 million vessel amount was received. Due to the reason of the buyer, the contract of the other two trawlers can’t be implemented. In July, the Company has dispatched the 2 trawlers in West Africa to conduct fishing operation. Dated Dec. 31, 2003, the 2 trawlers have accomplished the preparation for the relevant early production and will be put into production in 2004. 3. On Mar. 31, 2003, the Company signed Vessel Business Agreement with Morocco G.A.T Company and sold 3 vessels of Type 8154. The sale total amount USD360,000 was received. The book value of the vessels was RMB 3,868,300. The book loss of the sale was RMB 880,300. In the report period, the vessels connection of both parties has been finished. 4. On Mar. 25, 2003, the Company signed Vessel Business Agreement with Shadui Dulian Rolling Mill, Xinhui District, Jiangmen, Guangdong to sell “Taihe” trawel and the sale amount RMB 5,020,000 was received. On Mar. 26, 2003, the vessels connection of both parties was finished in Qingdao port. The book value of “Taihe trawel” was RMB 9,320,000. Deducting the disposing value of other equipments, which belonged to the trawler formerly and were not sold with the trawler, amounted to RMB 600, 000, the book loss of the sale was RMB 3,700,000. The Company has published public notice in Securities Times and Ta Kung Pao dated Mar. 28, 2003. 5. On Feb.19, 2003, the Company signed Vessel Business Agreement with Taiwan Yunman Fishing Co., Ltd. to sell “Taihui 1” trawler and the sale amount RMB 1,300,000 was received. The book value of the “Taihui 1” trawler was RMB 3, 270,100. The book loss of the sale was RMB 1,970,100. In the report period, the connection of both parties has finished. 6. On Jun. 26, 2003, the Company signed Vessel Business Agreement with Qingdao Huanhai Marine Co., Ltd. to sell “Taijin” trawler and the sale amount RMB 6,500,000 was received. The book value of the “Taijin” trawler was RMB 2,000,900. The book loss of the sale was RMB 1,350,900. In the report period, the connection of both parties has finished. 35 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) With respect to the aforesaid book loss of the vessel sale, the Company has withdrawn the assets depreciation reserve at the previous year to expend, so it did not impact the profit of the report period. 7. On Aug. 23, 2003, the Company signed the equity transfer agreement with Zhong Chan Jing Investment Co., Ltd. to transfer 95% share equity of Qingdao Double Whale Pharmaceutical Co., Ltd. held by the Company with the transferring price RMB 1,374,964 and to transfer RMB 14,625,036 encumbrance etc. of Qingdao Double Whale Pharmaceutical Co., Ltd. held by the Company. The total transactio n amount was RMB16,000,000. Ended Dec. 31, 2003, the Company received the share equity transfer amount RMB1,374,964 and the encumbrance transfer amount RMB 2,225,036. In the transfer of share equity the Company realized direct transaction income RMB 2,367,800. The Company has published the public notice about the share equity transfer and its progress in Securities Times and Ta Kung Pao dated Aug. 23, 2003 and Sep. 27, 2003 respectively. The aforesaid purchase and sale of assets facilitated optimizing the structure of the company, reduced the factors impacting the achievements of the Company and had no influence on the consistency of business and the stability of the management of the Company. (III) Related transaction 1. Sales of commodity Unit: RMB Accumulated Principle of Proportion in Influence on the Content of transaction pricing and Related party the same kind of profit of the transaction amount in settlement transaction Company 2003 method Fishing SGCFE 695,293 66.5% Negotiated price 150,000 Materials Fishing PRODESUR S.A. 350,218 33.50% Negotiated price 30,000 Materials Qingyu Haifeng Refrigeration 423,300.00 1.17% Negotiated price 56,300 Shipping Company 2. Purchase of commodity Unit: RMB Principle of Accumulated Proportion in Influence on Content of pricing and Related party transaction the same kind the profit of the transaction settlement amount in 2002 of transaction Company method Shandong Shanhai Purchase of Negotiated Aquaculture Trade 41,720,418 100% -30,000 commodity price Center Purchase of Carry back at PRODESUR S.A. 30,779,971 100% 1,010,000 commodity the price of cost 36 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) 3. Revenue from the rent and management of vessel and Costs from the rent of vessel and shipman Unit: RMB Costs on the rent of vessel and shipman (1) SGCFE 2003 -Rent of shipman 843,530 -Rent of vessel 396,354 Revenue from the rent and management of vessel (2) SGCFE S.A. 2,467,414 Notes: (1) Pursuant to certain agreements with effect till 1 April 2003, the Company had leased from SGCFE six trawlers and relating crew at an annual rental of RMB 496,800 to RMB 780,000 per trawler and USD 6,000 per person. (2) Pursuant to certain agreements with effect till 1 April 2003, the Company had leased its 3 trawlers, together with the 6 trawlers rented from SGCFE, and related crew to SGCFE S.A. at an annual rental of USD 80,000 to USD 155,000 per trawler and USD 9,700 to USD 9,900 per person to SGCFE S.A. These trawlers are ultimately leased to other two related parties. 4. Entrusted operation of vessel Unit: RMB Name of the Company 2003 Prodesur S.A. 3,579,279 Pursuant to the signed agreement about entrusted operation by both parties, the Company has entrusted Prodesur S.A. to operate a vessel (Taian trawler) owned by the Company, and is entitled to obtain or assume an annual entrust fee based on 70% of the net profit or loss generated from the operation of the vessel. In 2003, the Company obtained revenue of RMB3, 579,279. (IV) Other significant related transactions 1. The Company signed the supplement agreement about operation of “Taian” trawler with Prodesur S.A., which belongs to SGCFE. Please refer to the note of X (V) 1.(2). 2. The related transaction on the Company provided the guarantee for the others, please refer to X (V).2.(3) (V) Implementation of significant contracts 1. Custody, contract and lease (1) Pursuant to certain leasehold agreements, the Company continued renting 6 trawlers from SGCFE and the Company leased them together with its 3 trawlers to SGCFE S.A. and other related companies. The leasehold agreements expired on Apr. 1, 2003. (2) Pursuant to certain entrusted operation agreements, the Company has entrusted Prodesur S.A. to operate “Taian” trawel owned by the Company, and is entitled to obtain or assume an annual entrust fee based on 70% of the net profit or loss generated from the operation of the vessel. The agreement took effect on Jan.1, 1999. In the report period, according to the signed supplement agreement about operation of 37 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) “Taian” trawler between the Company and Prodesur S.A., the operating means of “Taian” trawler was adjusted to the direct management operation of the Company. The supplement agreement took effect on Jan. 1, 2003. The duration of the supplement agreement accords with the former agreement. The Company published the related transaction in the public notice in Securities Times and Ta Kung Pao dated Aug. 1, 2003. 2. Significant guarantee (1) Guarantee for the controlling shareholder and controlling shareholder’s subsidiaries (i) Qingdao refrigeration branch of the Company provided guarantee for Qingdao Meilai Foods Co., Ltd. (which was the subsidiary of the controlling shareholder SGCFE) about RMB 250,000 to supplement current capital of the branch. The guarantee accounted for 0.35% of the net assets of the Company. (ii) SGCFE Aquaculture Company (which is the predecessor of Trading Branch of the Company before the Reorganization of the Group and has not deregistered as required by the reorganization agreement) guaranteed for Shandong Shanhai Aquaculture Trade Center, the subsidiary of the SGCFE about RMB 5,000,000 and USD 3,383,322. (2) Guarantee for the holding subsidiaries In the report period, the Company provide guarantee of RMB 31,500,000 and USD 1,000,000 for Shandong Zhonglu Oceanic (Yantai) Foods Co., Ltd . (3) Guarantee before the reorganization (i) Prior to the Reorganization of the Group, branch and subsidiary of the Company provided guarantee for the long-term bank borrowing amounting to RMB 21,510,000 granted to Haiyu (the subsidiary of the controlling shareholder SGCFE. For details, please refer to the public notice of related transaction published in Securities Times and Ta Kung Pao dated Jan. 25, 2003). As of 31 December 2002, the aforementioned guarantee is still in place. (ii) SGCFE Aquaculture Company, which is the predecessor of Trading Branch of the Company before the Reorganization of the Group and has not deregistered as required by the reorganization agreement, stood as the guarantor for the short-term bank borrowings amounting to RMB 79,770,000 granted to SGCFE. Ended Dec. 31, 2003, the guarantee remained RMB 70,270,000 and the banks have not held the Group collateral responsibility for these borrowings. If SGCFE is unable to pay back the above loan, the banks will possibly asked the Company to bear collateral responsibility for these borrowings. 4. The Company did not entrust others to manage cash assets in the report period. 5. Other material contract and the implementation in the report period In the report period, other material contract and the implementation see X (II).1-7 (VI) Commitment Neither the Company nor its shareholder with over 5% shares of the Company made any commitment in designated newspapers or Internet website in the report period. 38 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) (VII) Engagement and Disengagement of the Certified Public Accountants In the report period, the engagement term of former auditor PricewaterhouseCoopers Zhongtian Certified Public Accountants has expired, and the Company and PricewaterhouseCoopers Zhongtian Certified Public Accountants didn’t get assent on the auditing expenses and the method of payment. Therefore, the Company will engage Hubei Daxin Certified Public Accountants Ltd. and Horwath International Certified Public Accountants (China Hubei) as the domestic auditor and overseas auditor in the year 2003. It’s the first time that the said two auditors provided auditing reserve for the Company. The aforesaid event will submit to the Shareholders’ General Manager 2003 for approval. (VIII) In the report period, the inspection and supervision by CSRC and denouncement by Shenzhen Stock Exchange 1. On Feb. 25, 2003, Jinan Branch of CSRC came to the Company and investigated some relevant matters (Please refer to the Public Notice on Significant Events of the Company published in Securities Times and Ta Kung Pao dated Feb. 27, 2003). As of the end of the report period, there is still no result about the investigation of CSRC on the Company. 2. On Feb. 28, 2003, the Company didn’t fulfill the obligation of information disclosure about the related transactions and provided guarantee for the controlling shareholders repetitiously, which violated the relevant regulations of Share Listing Rules of Shenzhen Stock Exchange to some great extent. Shenzhen Stock Exchange condemned publicly the Company and relevant person in charge. The Company published public notice oo apology in Securities Times and Ta Kung Pao on Feb. 28, 2003. SECTION XI. FINANCIAL REPORT 39 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) REPORT OF THE AUDITORS To the Shareholders of Shandong Zhonglu Oceanic Fisheries Co., Ltd. We were engaged to audit the accompanying consolidated balance sheet of Shandong Zhonglu Oceanic Fisheries Co., Ltd. (the “Company”) and its subsidiaries (the “Group”) as of 31 December 2003 and the related consolidated income statement, statement of changes in shareholders’ equity and cash flow statement for the year then ended, prepared in accordance with International Financial Reporting Standards. These consolidated financial statements are the responsibility of the Company’s management. As of 31 December 2003, SGCFE Aquaculture Company, which is the predecessor of Trading Brach of the Company before the Reorganisation of the Group and has not deregistered as required by the reorganization agreement and still operate by the name of SGCFE Aquaculture Company. As set forth in the section “Contingencies”, SGCFE had bank borrowings of RMB 70,270 thousand guaranteed by SGCFE Aquaculture Company. The banks may hold the group responsible for these borrowings if SGCFE default on the repayments. We are unable to obtain evidence on whether the Group would be held liable for the aforementioned borrowings. Except for the aforementioned qualified matter, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as of 31st December, 2003, the result of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards promulgated by the International Accounting Standards Board. We would mention the investor to notice that the consolidated financial statements are prepared on the basis of going concern assumption. As set forth in the sectinon “GOING CONCERN ASSUMPTION”, the Group incurred a net loss 209,398 thousand for the year ended 31 December 2003. As of that date, the Group’s current liabilities exceeded its current assets RMB209,565 thousand. Although the group has disclosed intended improvement measures in the section “GOING CONCERN ASSUMPTION”, it still exist material uncertainty for the Group’s ability to continue as a going concern. HORWATH CHINA (HUBEI) Certified Public Accountants March , 2004 40 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands, except for (losses) earnings per share) Ｎｏｔｅ ２００３ ２００２ Sales, net ２ 317,230 309,065 Cost of sales 258,887 277,522 Gross profit 58,343 31,543 Other operating income 1,244 2,969 Distribution costs 29,269 35,385 Administrative expenses 23(c) 216,952 214,725 Other operating expenses 10,044 4,498 (Loss) profit from operations (196,678) (220,096) Finance cost, net 3 17,075 18,649 Investment income from trading and long-term 6 23 investments Gain on disposal of investment in a subsidiary 1,350 7,235 Subsidy income 0 1,191 (Loss) profit before tax and minority interests 4 (212,397) (230,296) Income tax expense 5 1,654 1,059 (Loss) profit before minority interests (214,051) (231,355) Minority interests 21 4,653 2,197 Net (loss) profit (209,398) (229,158) (Losses) earnings per share - Basic 6 RMB(0.79) RMB(0.86) - Diluted The accompanying notes are an integral part of the financial statements. 41 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) CONSOLIDATED BALANCE SHEET FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands) Note 2003 2002 ASSETS Non-current assets Leasehold lands 8 9,315 9,550 Property, plant and equipment 9 303,181 349,262 Intangible assets 10 73 2,378 Long-term investments 11 23,207 33,157 335,776 394,347 Current assets Inventories, net 12 75,060 84,252 Due from related parties, net 23(c) 76,869 214,499 Prepayments and other current assets 3,242 1,993 Other receivables, net 13 34,896 16,190 Trade receivables, net 14 20,065 38,248 Trading investments 15 56 62 Restricted bank deposits 22(b) 1,158 Cash and cash equivalents 22(b) 16,788 54,131 226,976 410,533 Total Assets 562,752 804,880 EQUITY AND LIABILITIES Shareholders’ equity Share capital 19 266,071 266,071 Reserves 20 (193,673) 11,651 72,398 277,722 Minority interests 21 16,568 21,221 LIABILITIES Non-current liabilities Long-term bank borrowings, non-current portion 18 37,245 69,740 Long-term payables 136 37,245 69,876 Current liabilities Current portion of long-term bank borrowings 18 12,415 36,290 Taxes payable 9,693 11,549 Due to related parties 23(c) 1,155 1,217 Other payables and accruals 16 83,560 42,883 Dividends payable 7 459 509 Advances from customers 5,323 9,800 42 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) Trade payables 25,176 40,431 Short-term borrowings 17 298,760 293,382 436,541 436,061 Total liabilities 473,786 505,937 Total Equity and Liabilities 562,752 804,880 Approved by the Board of Directors on 29 March 2004 Liu Chang Suo Zhang Jin Qing Director & General Manager Director & Finance Controller The accompanying notes are an integral part of the financial statements. 43 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands) Note 2003 2002 CASH FLOWS FROM OPERATING ACTIVITIES Cash generated from operations 22(a) (19,047) 47,893 Income taxes paid (1,291) (2,727) Interest expenses paid (18,345) (21,901) Net cash generated from operating activities (38,683) 23,265 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment (37,447) (137,117) Purchase of intangible assets (65) (2,563) Cash paid for trading investments (4) 0 Proceeds from disposal of subsidiary, net of cash disposed (1,364) 44,440 Proceeds from investment income of trading investments 0 Proceeds from investment income of long-term investments 1 23 Proceeds from disposal of trading investments 7 72 Proceeds from disposal of property, plant and equipment 18,050 21,757 Interest income received 1,479 1,751 Net cash used in investing activities (19,343) (71,637) CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid 50 (7,017) Net (decrease) increase in borrowings 22,514 40,636 Proceeds from capital injection of minority shareholder 10,822 Proceeds from acquisition of a subsidiary 0 others (1,900) Net cash generated from financing activities 20,664 44,441 Currency translation difference 20 (11) Net decrease in cash and cash equivalents (37,342) (3,942) Cash and cash equivalents, beginning of year 54,131 58,073 Cash and cash equivalents, end of year 22(b) 16,789 54,131 The accompanying notes are an integral part of the financial statements. 44 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands) Reserves Statutory Unappro-priated Total Translation Statutory public profits Share capital Capital reserve Total reserves shareholders’ reserve surplus reserve welfare (accumulated equity reserve losses) (Note19) Note(20(a)) Note(20(b)) Note(20(b)) Balance as of 1 January 2003 - As previously reported 266,071.00 59.00 197,088.00 14,511.00 7,255.00 -207,262.00 11,651.00 277,722.00 - As reported 266,071.00 59.00 197,088.00 14,511.00 7,255.00 -207,262.00 11,651.00 277,722.00 Currency translation difference Net loss for 2003 -209,398.00 -209,398.00 -209,398.00 Pricing difference associated with related party 4,074.00 4,074.00 4,074.00 transactions Profit appropriations - Appropriations to reserves by subsidiaries 31.00 16.00 -47.00 - Dividends (Note 7) Balance as of 31 December 2003 266,071.00 59.00 201,162.00 14,542.00 7,271.00 -416,707.00 -193,673.00 72,398.00 The accompanying notes are an integral part of the financial statements. 45 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) I.GENERAL INFORMATION Shandong Zhonglu Oceanic Fisheries Co., Ltd. (the “Company”) was incorporated as a joint stock limited company in the People’s Republic of China (the “PRC”) on 30 July 1999, subsequent to a corporate reorganisation on Shandong Group Corporation of Fisheries Enterprise (“SGCFE”, the holding company of the Company) (the “Reorganisation”) to rationalise the Company’s structure in preparation for the listing of domestically listed foreign investment shares (the “B shares”). The B shares have been listed on the Shenzhen Stock Exchange since July 2000. The Company is principally engaged in fishing, processing and trading of seafood. These activities are carried out by the following departments, branches and subsidiaries of the Company: Name of Departments Principal Activities Trading Department Trading of frozen seafood Western Africa Development Department Letting of trawlers Southern America Development Department Letting of trawlers Name of Branches Principal Activities Trading Branch Sale of frozen seafood Qingdao Fishing Branch Oceanic fishing Qingdao Branch Oceanic fishing Longkou Branch Processing of seafood Qingdao Refrigerating Branch Processing and trading of frozen seafood 46 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) Name of subsidiaries Place of incorporation/ Date Principal activities Cost of investment Percentage of equity of registration interest actually held Shandong Zhonglu Oceanic The PRC/3 January 1994 Letting of refrigerated RMB 95% Fisheries Transportation Co., vessels and international 21,380,000 Ltd.(“ZhongluTransportation”) vessel transportation HabitatInternationalCorporation The Republic of Panama/ Letting of refrigerated RMB 100% (“HIC”) 13 October 1997 vessels 12,476,000 Shandong Zhonglu Oceanic The PRC/18 June 2001 Cold storage and RMB 60.98% (Yantai) Food Co., Ltd. (“Yantai processing of seafood 32,280,000 Food”) etc. On 18 June 2001, the Company and SGCFE incorporated Yantai Food, an equity joint venture enterprise, by means of capital contributions of cash and leasehold land respectively. The Company holds 76.65% of equity interest in Yantai Food. On 17 September 2001, the Company, SGCFE and Australian Shanshui Trading Co., Ltd. (“Shanshui Trading”), a subsidiary of SGCFE, reached into an agreement to accept Shanshui Trading’s equity investment of USD 1,780,000 into Yantai Food. Consequently, the registered capital of Yantai Food increased to RMB 56,793,300, in which the Company holds 56.84% of equity interest. As of 24 April 2003, Shanshui Trading has not completed its capital contribution. In 2003, the company signed an agreement with ZhongChanJing investment Co., Ltd to fully dispose its equity interest of 95% in Qingdao Double Wale Ocean Pharmaceutical Co. , Ltd. The equity interest transfer was completed on 30 June 2003. The excess of the consideration over the Company’s interest in the fair value of net identifiable assets and liabilities disposed was approximately RMB 1,374,964. The Company and its subsidiaries are collectively referred to as the “Group”. 47 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) The address of the Company’s registered office is 43 Heping Road, Jinan, Shandong province, the PRC. As of 31 December 2003, there were 1,222 (2002: 1,887) employees in the Group. II. GOING CONCERN ASSUMPTION For the year end 31 December 2003, the Group incurred a net loss 209,398 thousand for the year ended 31 December 2003. As of that date, the Group’s current liabilities exceeded its current assets RMB 209,565 thousand. In 2004, the group will seek to gain the support from local government, investigate the possibility of outside reorganization, actively negotiate with banks in order to obtain the financial support. The company intends to disposal its assets to repay the debts if the group face the repaying crisis in the future. The board of directors think that the group is able to keep its normal operating activities and guarantee its going concern ability. Therefore, the financial statements are prepared on the going concern assumption. III. Explanation to the qualified matters in 2002 audit report The former auditor(PricewaterhouseCoopers Zhong Tian CPA) didn’t express an opinion on the consolidated financial statements of the group in 2002. The related matters mentioned in 2002 annual audit report is as follows in 2003: In 2002, “AMOUNTS DUE FROM SGCFE AND ITS SUBSIDIARY SGCFE S.A.” to the consolidated financial statements, as of 31 December 2002, the Group had RMB 167,738 thousand due from Shandong Group Corporation of Fisheries Enterprise (“SGCFE”, the ultimate holding company of the Group) and RMB 21,551 thousand due from SGCFE’s subsidiary, Shandong Group Corporation of Fis heries Enterprise S.A. (“SGCFE S.A.”), totalling RMB 189,289 thousand and representing 68% of the shareholders’ equity, or 24% of the total assets, of the Group. SGCFE has plans to settle the aforementioned amounts through transfers of certain assets to the Group (“Assets Transfer”). The Group’s management considers it unnecessary to make any provisions in the respect of these amounts because of the planned Assets 48 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) Transfer. Due to the uncertainties in the implementation of the Assets Transfer plan, and the failure of the Group to provide us with evidence supporting the recoverable amounts of the assets to be transferred, the former auditor are unable to ascertain the recoverability of these amounts. By the end of 31 December 2003, “AMOUNTS DUE FROM SGCFE AND ITS SUBSIDIARY SGCFE S.A.” to the consolidated financial statements, as of 31 December 2003, the Group had RMB 217,755 thousand due from Shandong Group Corporation of Fisheries Enterprise (“SGCFE”, the ultimate holding company of the Group) and RMB 22,362 thousand due from SGCFE’s subsidiary, Shandong Group Corporation of Fisheries Enterprise S.A. (“SGCFE S.A.”), totalling RMB 240,117 thousand. In 2003, the group has seek to collect the above amounts. Because SGCFE AND ITS SUBSIDIARY SGCFE S.A are unable to repay the amounts, the group has appealed to the court for freezing the assets worth RMB 63,304 thousand of SGCFE . After considering the bad financial situation of SGCFE and its subsidiary SGCFE S.A, the group provided bad debt worth RMB176,812 thousand after deducting the frozen assets values according to the resolution made by the twelfth meeting of the second board of directors. as of 31 December 2002, SGCFE and its subsidiary had bank borrowings of RMB 101,280 thousand, guaranteed by, and USD 2,135 thousand, borrowed by, certain entities which had been reorganised into the Group upon the restructuring to incorporate the Company into a joint stock limited company in 1999. The banks may hold the Group responsible for these borrowings if SGCFE and its subsidiary default on the repayments. The former auditor are unable to obtain evidence on whether the Group would be held liable for the aforementioned borrowings. Certain entities before reorganised into the Group on the restructuring provided guarantee for Haiyu on its bank borrowing(Directly-owned by SGCFE). By the end of 49 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) 2003, the aforementioned guarantee still exist, the group has provided full liability, as Haiyu is involving serious financial situation. Haiyun, the company’s current subsidiary, before the reorganisation of the group, borrowed USD2,135,000 from Shandong branch, bank of China. The bank borrowing expired in November 2002. By the end of 21 June 2003, the interest plus corpus amounted to USD1,706,127.06. On 6 August 2003, the bank has appealed to QinDao maritime court. According to the Judgement(2003)QinHaiFaShongChuZi No 235 issued by QinDao maritime court, Haiyun should repay borrowing worth USD500,000 by the end of 18 August 2003, and the remaining amounts should be repaid by the end of 10 December 2005. By the end of 31 December 2003, the group has provided USD1,136,164 in its liability. SGCFE Aquaculture Company, which is the predecessor of Trading Branch of the Company before the Reorganisation of the Group and has not deregistered as required by the reorganisation agreement, stood as the guarantor for the short-term bank borrowings amounting to RMB 70,270,000 granted to SGCFE and the banks have not held the Group collateral responsibility for these borrowings. The auditor has qualified this matter in 2003 annual report. ( c) For “GOING CONCERN ASSUMPTION” to the consolidated financial statements, the Group incurred a net loss of RMB 229,624 thousand for the year ended 31 December 2002. As of that date, the Group’s current liabilities exceeded its current assets, excluding the amounts due from SGCFE and SGCFE S.A., by RMB 237,502 thousand. The former auditor thought the Group has not obtained acknowledgement from its bankers for their ongoing financial support for the Group. It is also difficult to ascertain when the Assets Transfer plan will be implemented and to assess the related impact on the future operations and cash flows of the Group. These factors raise substantial doubt on the Group’s ability to continue as a going 50 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) concern. The group incurred a net loss of RMB 229,624 thousand for the year ended 31 December 2002 mainly due to provision of RMB172,783 thousand. In 2003, the group has actively negotiated with various banks and obtained new bank borrowings to repay the old borrowing or extend the expiration date. Also, it disposed several fishing boats with high fixed cost to repay the borrowing. Through implementing aforementioned measures, the group keeps the normal operating activities. In 2003, the group realized net sales RMB317,230 thousand, gross profit RMB58,343 thousand . IV.ACCOUNTING POLICIES The principal accounting policies adopted in preparation of these consolidated financial statements of the Group are set out below: A Basis of presentation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board. These consolidated financial statements have been prepared under the historical cost conversion except as disclosed in the accounting polices below. This basis of accounting differs from that used in the preparation of the Group’s statutory accounts which are prepared in accordance with PRC Accounting Standards for Business Enterprises and the Accounting System for Business Enterprises (“Statutory Accounts”). The adjustments made to conform the Statutory Accounts of the Group to IFRS are shown in “SUPPLEMENTORY INFORMATION”. The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting 51 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) period. Actual results could differ from those estimates. B Group accounting Subsidiaries, which are those entities in which the Group has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies are consolidated. Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries. Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are also eliminated unless cost cannot be recovered. Where necessary, accounting policies of subsidiaries have been changed to ensure consistency with the policies adopted by the Group. C Foreign currency translation The Company and its subsidiaries maintain their books and records in RMB. Transactions in other currencies are translated into the reporting currency at exchange rates prevailing at the time of the transactions. Monetary assets and liabilities denominated in other currencies at the balance sheet date are re-translated at exchange rates prevailing at that date. Non- monetary assets and liabilities in other currencies are translated at historical rates. Exchange differences, other than those capitalised as a component of borrowing costs, are recognised in the income statement in the period in which they arise. Income statements and cash flows of foreign entities are translated into the Group’s reporting currency at average exchange rates for the year and their balance sheets are translated at the exchange rates prevailing at balance sheet date. Exchange differences arising from the translation of the net investment in foreign entities and of borrowings are taken to shareholders’ equity. When a foreign entity is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale. 52 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) D Leasehold lands Leases of lands acquired are classified as operating leases. The pre-paid lease payments are amortised on a straight-line basis over the lease period of 41 to 48 years. E Property, plant and equipment and depreciation Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment loss. The initial cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Depreciation is calculated using the straight- line method to write off the cost, after taken into account the estimated residual value of each asset over its expected useful life. The expected useful lives are as follows: Buildings 20-40 years Vessels 15-20 years Machinery and fishing equipment 8-20 years Furniture and office equipment 5 years Motor vehicles 5 years The useful lives of assets and depreciation method are reviewed periodically to ensure that the method and period of depreciation are consistent with the expected pattern of economic benefit from items of property, plant and equipment. E Property, plant and equipment and depreciation (continued) Expenditures incurred after the property, plant and equipment have been put into operation, such as repairs and maintenance and overhaul costs, are recognised as expense in the period in which they are incurred. In situations where it is probable that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of the asset beyond its originally assessed standard of performance, the expenditures are capitalised as an additional cost of the asset. 53 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) When assets are sold or retired, their costs and accumulated depreciation are eliminated from the accounts and any gain or loss resulting from their disposal is included in the income statement. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Interest costs on borrowings to finance the construction and installation of property, plant and equipment are capitalised, during the period of time that is required to complete and prepare the asset for its intended use. Other borrowing costs are expensed. F Construction-in-progress Construction-in-progress represents buildings and plant under construction and machinery and equipment under installation and testing, and is stated at cost. This includes cost of construction, plant and equipment and other direct costs plus borrowing costs which include interest charges and exchange differences arising from foreign currency borrowings used to finance these projects during the construction period, to the extent these are regarded as an adjustment to interest costs. Construction-in-progress is not depreciated until such time as the assets are completed and put into operational use. G Intangible assets Intangible assets are measured initially at cost. Intangible assets are recognised if it is probable that the future economic benefits that are attributable to the assets will flow to the Group; and the cost of the asset can be measured reliably. After initial recognition, intangible assets are measured at cost less accumulated amortisation and any accumulated impairment losses. Intangible assets are amortised on a straight- line basis over the best estimate of their useful lives. The amortisation period and the amortisation method are reviewed periodically to ensure that the method and period of amortisation are consistent with the expected pattern of 54 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) economic benefits from intangible assets. G Intangible assets (continued) Production licenses Expenditure to acquire production licenses is capitalised at cost and amortised using the straight-line method over 5 years. Electricity use right and water use right Expenditure to acquire electricity use right and water use right is capitalised at cost and amortised using the straight-line method over 3-10 years. H Impairment of long lived assets Property, plant and equipment and other non-current assets, including long-term investments, leasehold lands and intangible assets are reviewed for impairment losses whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount of the asset exceeds its recoverable amount which is the higher of an asset’s net selling price and value in use. For the purposes of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash flows. I Investments The Group classified its investments in debt and equity securities into the following categories: trading, held-to-maturity and available- for-sale. The classification is dependent on the purpose for which the investments were acquired. Management determines the classification of its investments at the time of the purchase and re-evaluates such designation on a regular basis. Investments that are acquired principally for the purpose of generating a profit from short-term fluctuations in price are classified as trading investments and included in current assets. Investments with a fixed maturity that management has the intent and ability to hold to maturity are classified as held-to- maturity and are included in 55 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) non-current assets, except for maturities within 12 months from the balance sheet date which are classified as current assets. Investments intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, are classified as available- for-sale; and are included in non-current assets unless management has the express intention of holding the investment for less than 12 months from the balance sheet date or unless they will need to be sold to raise operating capital, in which case they are included in current assets. Purchases and sales of investments are recognised on the trade date, which is the date that the Group commits to purchase or sell the asset. Cost of purchase includes transaction costs. Trading and available- for-sale investments are subsequently carried at fair value. Held-to-maturity investments are carried at amortised cost using the effective yield method. Realised and unrealised gains and losses arising from changes in the fair va lue of trading and available- for-sale investments are included in the income statement in the period in which they arise. J Operating leases The Group is the lessee Leases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net off any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. The Group is the lessor Assets leased out under operating leases are included in property, plant and equipment in the balance sheet. They are depreciated over their expected useful lives on a basis consistent with similar owned property, plant and equipment. Rental income is recognised on a straight-line basis over the lease term. K Inventories Inventories are stated at the lower of cost and net realisable value. Cost, calculated 56 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) on the weighted average basis, comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. L Trade receivables Trade receivables are carried at original invoice amount less provision made for impairment of these receivables. A provision for impairment of trade receivables is established when there is an objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. M Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise cash on hand, deposits held at call with banks, short-term highly liquid investments with original maturities of three months or less. N Borrowings and borrowing costs Borrowings are initially recognised at the proceeds received, net of transaction costs. They are subsequently carried at amortised costs using the effective interest rate method, the difference between net proceeds and redemption value being recognised in the net profit or loss for the period over the life of the borrowings. Borrowing costs include interest charges and exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. Borrowing costs are expensed as incurred, except when they are directly attributable to the acquisition, construction or production of the property, plant and equipment that necessarily take a substantial period of time to get ready for its intended use in which case they are capitalised as part of the cost of that asset. Capitalisation of borrowing costs commences when expenditures for the asset and borrowing costs are being incurred and the activities to prepare the asset for its intended use are in progress. Borrowing costs are capitalised at the weighted average cost of the related borrowings 57 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) until the asset is ready for its intended use. If the resulting carrying amount of the asset exceeds its recoverable amount, an impairment loss is recorded. O Deferred income taxes Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Currently enacted tax rates are used in the determination of deferred income tax. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. P Pension scheme Pursuant to the PRC laws and regulations, contributions to the basic pension insurance for the Group’s local staff are to be made monthly to a government agency based on the rates (23% for Jinan, 20% for Longkou and Yantai, and 25.5% for Qingdao) of the standard salary set by the provincial government. The government agency is responsible for the pension liabilities relating to such staff on their retirement. The Group accounts for these contributions on an accrual basis. The Group has no obligation for the payment of pension benefits beyond the contribution described above. Q Provisions A provision is recognised when, and only when the Group has a present obligation (legal or constructive) as a result of a past event and it is probable (i.e. more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. Where the effect of the time value of money is material, the amount of a provision is the present value of the expenditures expected to be required to settle the obligation. 58 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) When a provision is no longer probable that an outflow of resources embodying economic benefit will be required to settle the obligation, the provision will be reversed. R Revenue recognition Provided it is probable that the economic benefits associated with a transaction will flow to the Group and the revenue and costs, if applicable, can be measured reliably, revenue is recognised on the following basis: Sales of goods Revenue is recognised when the significant risks and rewards of ownership of goods have been transferred to the buyer (normally upon delivery of goods to customers). Rental income Rental income from letting trawlers and refrigerated vessels is recognised on the straight-line basis over the period of relevant leases. Interest income Interest income is recognised on a time proportion basis that takes into account the effective yield on the assets. S Dividends Dividends are recorded in the Group’s consolidated financial statements in the period in which they are approved by the Group’s shareholders. T Segments Business segments: for management purposes the Group is organised into six major operating businesses. The divisions are the basis upon which the Group reports its primary segment information. Financial information on business and geographical segments is presented in Note 1. U Comparatives Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current year. V. FINANCIAL RISK MANAGEMENT (1) Financial risk factors and financial risk management 59 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) The Group activities expose it to a variety of financial risks, including credit risk, liquidity risk, interest rate risk and foreign exchange risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. Financial risk management is carried out by the Finance Department under policies approved by the Board of Directors. Credit risks The Group has no significant concentration of credit risk with any single counterparty or group counterparties. The Group has policies in place to ensure that sales of products are made to customers with an appropriate credit history. Liquidity risks Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Interest rate risk The Group’s income and operating cash flows are substantially independent of changes in market interest rates. The Group has no significant interest-bearing assets. The Group policy is to maintain all its borrowings in fixed rate instruments. Foreign exchange risk The Group has no significant foreign exchange risk due to limited foreign currency transactions. (2) Fair value estimation In assessing the fair value of non-trading securities and other financial instruments, the Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date. The face values less any estimated credit adjustments for financial assets and liabilities with a maturity of less than one year are assumed to approximate their fair values. 60 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) VI 1 SEGMENT INFORMATION Business segments An analysis by business segment was as follows: Business Sales Costs Gross profit rate 2003 2002 2003 2002 2003 2002 (%) (%) Oceanic fishing 128,250 130,569 96,224 140,145 24.97 -7.33 Trading of seafood 95,216 42,231 92,354 36,092 3.01 14.54 Oceanic pharmacy 28,629 40,996 16,363 22,724 42.84 44.57 Letting of trawlers 1,497 11,021 3,998 13,102 -167.07 -18.88 Letting of refrigerated vessel and vessel management 29,144 32,949 19,184 24,697 34.18 25.04 Seafood processing, cold storage and others 36,129 53,217 30,764 40,762 14.85 23.40 Total 318,865 310,983 258,887 277,522 18.81 10.76 Geographical segments District Sales Costs Gross profit rate (%) PRC 219,735 174,261 20.69 Overseas 99,130 84,626 14.63 Total 318,865 258,887 18.81 2 Sales, net Sales comprised: 2003 2002 Gross sales (excluding Value-added Tax (“VAT”)), less discounts and returns Oceanic fishing 128,250 130,569 Trading of seafood 95,216 42,231 Oceanic pharmacy 28,629 40,996 Letting of trawlers 1,497 11,021 Letting of refrigerated vessel and vessel management 29,144 32,949 Seafood processing, cold storage and others 36,129 53,217 61 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) 318,865 310,983 Less: Sales surtaxes (1,635) (1,918) 317,230 309,065 3 Finance costs, net 2003 2002 Interest income - Bank deposits 1,479 1,751 - Others 1,619 1,479 3,370 Interest expense on borrowings (18,554) (23,106) Less :Amount capitalised in construction-in-progress 1,087 (18,554) (22,019) (17,075) (18,649) 4 (Loss) profit before tax and minority interests (Loss) profit before tax and minority interests was determined after crediting and charging the following: 2003 2002 Crediting: Gain on disposal of subsidiary 1,350 7,235 Trade and other receivables - reversal of impairment charge for doubtful debts 4,236 2,441 Interest income from bank deposits 1,479 1,751 Interest income from SGCFE - 1,619 Gain on disposal of long-term investments - 23 Gain on disposal of property, plant and equipment 655 2,156 Investment income from long-term investments - - Charging: Staff cost - Salaries and wages 31,023 40,249 - Provision for welfare and other benefits 4,343 5,330 62 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) - Contribution to statutory pension scheme 3,448 4,005 38,814 49,584 Loss on disposal of property, plant and equipment 188 923 Depreciation of property, plant and equipment 24,793 30,979 Amortisation of intangible assets (included in administrative expenses) 274 3,280 Operating lease for office buildings - 2,386 Operating lease for vessels from SGCFE (Note 23(b)) 1,240 9,767 Trade and other receivables - impairment charge for doubtful debts (included in administrative expenses) - - Due from related parties - impairment charge for doubtful debts (included in administrative expenses, Note 23(c)) 160,304 106,973 Inventory - impairment charge for obsolescence 1,538 13,484 Impairment losses of long-term investments (included in administrative expenses) 9,900 - Impairment losses of property, plant and equipment (included in administrative expenses) 52 52,084 Interest expenses on bank borrowings 18,554 22,019 Exchange loss 562 275 Trading investments - fair value loss (Note 15) 3 18 5 TAXATION VAT Except for that documented in the following paragraph, the Group’s sales of merchandise and products is subject to VAT, which is charged on the selling price at a rate of 17% (normal products) or 13% (agricultural products). An input credit is available whereby input VAT previously paid on purchases of seafood merchandise and raw materials can be used to offset the output VAT on sales to determine the net VAT payable. Pursuant to a government notice issued by the Ministry of Finance, the State Commission of Customs Duty and the State Administration of Taxation on 10 March 1997, the import of self-caught seafoods is exempted from import VAT, and the VAT 63 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) treatment on the sale of self- caught seafoods is same as that for self-produced agricultural product that is exempted from output VAT. Therefore, the Group’s revenue generated from trading of self-caught seafoods was exempted from VAT. Enterprise income tax (“EIT”) Details of taxation charged were as follows: 2003 2002 Income tax expense (Note 22 (a)) 1,654 1,059 Business tax The Group is subject to PRC business tax at a rate of 5% of rental income received from provision of cold storage and 3% from letting of refrigerated vessels within the PRC, respectively. Surtaxes The Group is subject to the following surtaxes in the PRC: City development tax, a tax levied at 7% of net VAT and business tax payable; and Education supplementary tax, a tax levied at 3% of net VAT and business tax payable. 6 (Losses) earnings per share Basic (losses) earnings per share is calculated by dividing the net (loss) profit by the weighted average number of ordinary shares in issue during the year. 2003 2002 Net (loss) profit (209,398) (229,158) Weighted average number of ordinary shares in issue (thousands) 266,071 266,071 Basic (losses) earnings per share RMB (0.79) RMB (0.86) The diluted (losses) earnings per share was not calculated, because no potential dilutive shares existed during the year. 7 Dividends In accordance with the relevant regulations in the PRC, after issuance of the B shares, the amount of profit available for distribution to the shareholders (after appropriations 64 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) to the statutory surplus reserve and statutory public welfare reserve ) shall be determined based on the lower of the unappropriated profit determined in accordance with (i) accounting principles and relevant regulations applicable in the PRC and (ii) IFRS. On 29 May 2001, the shareholders’ meeting approved to appropriate 10% and 5% of the statutory net profit of year 2000 to the statutory surplus reserve and the statutory public welfare reserve respectively, and then distribute to all the shareholders of the Company a cash dividend of RMB 0.1 (including tax) per share, totalling RMB 26,608,000. On 26 April 2002, the shareholders’ meeting approved to appropriate 10% and 5% of the statutory net profit of year 2001 to the statutory surplus reserve and the statutory public welfare reserve respectively, and then distribute to all the shareholders of the Company a cash dividend of RMB 0.05 (including tax) per share, totalling RMB 13,304,000. Pursuant to a resolution of board of directors dated 24 April 2003, the Company resolved no appropriation of dividends for the year ended 31 December 2002, as the Group reported accumulated losses. Pursuant to a resolution of board of directors dated 29 March 2004, the Company resolved no appropriation of dividends for the year ended 31 December 2003, as the Group reported accumulated losses. 8 Leasehold lands 2003 2002 Cost Beginning of year 9,930 18,447 Additions - 96 Capital contributions in subsidiaries by minority shareholders - - Deduction due to change of consolidation scope (Note 22 (d)) - (8,613) 65 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) End of year 9,930 9,930 Accumulated amortisation Beginning of year 379 273 Charges for year 236 423 Capital contributions in subsidiaries by minority shareholders - - Deduction due to change of consolidation scope (Note 22 (d)) - (316) End of year 615 380 Net book value End of year 9,315 9,550 Beginning of year 9,550 18,174 Leasehold lands represented land use fees paid for the right to use the parcels of land where the Group’s premise is located. Since all land in the PRC is owned by the State or is subject to collective ownership, the risks and rewards of the parcel of land remain with the State. As a result, such lease payments are accounted for under operating leases and are charged to the income statement on a straight-line basis over the lease period of 40 years. 9 Property, plant and equipment 2003 Buildings Vessels Machinery and Furniture and Motor Construction Total fishing office vehicles -in-progres equipment equipment s Cost Beginning of year 63,943 435,831 40,627 2,950 6,067 65,960 615,378 Additions 35,649 14,012 18,291 462 513 29,683 98,610 Deduction (5,553) (78,178) (14,905) (1,493) (1,928) (94,370) (196,427) End of year 94,039 371,665 44,013 1,919 4,652 1,273 517,561 Accumulated depreciation and impairment losses 66 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) Beginning of year 37,551 202,714 22,340 1,425 2,086 - 266,116 Depreciation charge for the year 2,907 18,054 2,204 714 678 - 24,557 Impairment charge for the year - - 52 - - - 52 Deduction (5,201) (61,759) (7,589) (831) (965) - (76,345) End of year 35,257 159,009 17,007 1,308 1,799 - 214,380 Net book value End of year 58,783 212,656 27,006 611 2,832 1,454 303,181 Beginning of year 26,392 233,117 18,287 1,525 3,981 65,690 349,262 2002 Buildings Vessels Machinery and Furniture and Motor Construction- Total fishing office equipment vehicles in-progress equipment Cost Beginning of year 83,862 377,864 42,910 2,191 3,951 35,427 546,205 Additions 3,459 91,543 7,965 949 2,572 112,352 218,840 Deduction (23,378) (33,576) (10,248) (190) (456) (81,819) (149,667) End of year 63,943 435,831 40,627 2,950 6,067 65,960 615,378 Accumulated depreciation and impairment losses Beginning of year 32,669 148,193 23,481 1,175 1,654 - 207,172 Depreciation charge for the year 3,683 22,352 3,376 364 781 - 30,556 Impairment charge for the year 4,699 46,411 974 - - - 52,084 Deduction (3,500) (14,242) (5,491) (114) (349) - (23,696) End of year 37,551 202,714 22,340 1,425 2,086 - 266,116 Net book value End of year 26,392 233,117 18,287 1,525 3,981 65,960 349,262 Beginning of year 51,193 229,671 19,429 1,016 2,297 35,427 339,033 (a) As of 31 December 2003, the Group had mortgaged tewelve vessels with the net 67 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) book value of approximately RMB 190,140,000 ( 2002: RMB 116,074,000 of seven vessels ) to bank as security for short-term bank borrowings of RMB 122,700,000( 2002: RMB 85,000,000 ) (Note 17(a)). (b) As of 31 December 2003, the Group had mortgaged a plant building with the net book value of approximately RMB 30,812,000 (2001: RMB 6,559,000) to bank as security for a short-term bank borrowing of RMB 5,000,000 (2001: RMB 3,000,000) (Note 17(a)). (c) Analysis of construction-in-progress as of 31 December 2003 is as follows: 2003 2002 Costs of construction, installation, machinery and equipment and other direct costs 1,273 65,432 Interest capitalised - 528 1,273 65,960 Average capitalisation rate - 5.93% (d) In 2003,the net book value of Property, plant and equipment were deduced RMB 52,169 due to the change of consolidated scope. 10 Intangible assets 2003 Trademarks and Others Total production licenses Cost Beginning of year 2,465 141 2,606 Additions - 65 65 Deduction due to change of consolidation scope (2,465) (129) (2,594) End of year - 77 77 Accumulated amoetisation and inpairment losses Beginning of year 175 53 228 Charge for the year 272 2 274 Deduction due to change of consolidation scope (447) (51) (498) 68 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) End of year - 4 4 Net book value End of year - 73 73 Beginning of year 2,290 88 2,378 The production licenses of certain medicines were purchased by Double Wale Pharmaceutical from a third party in 2002 and are amortised in an estimated beneficial period of 5 years.In 2003,the production licenses of certain medicines were deduced due to the disposal of the subsidiary. 2002 Trademarks and Electricity Water Others Total production licenses use rights use rights Cost Beginning of year 15,340 2,961 485 43 18,829 Additions 2,465 - - 98 2,563 Deduction due to change of consolidation scope (15,340) (176) (180) - (15,696) End of year 2,465 2,785 305 141 5,696 Accumulated amortisation and impairment losses Beginning of year 383 993 132 7 1,515 Charge for the year 1,152 1,845 237 46 3,280 Deduction due to change of consolidation scope (1,360) (53) (64) - (1,477) End of year 175 2,785 305 53 3,318 Net book value End of year 2,290 - - 88 2,378 Beginning of year 14,957 1,968 353 36 17,314 11 Long-term investments 2003 2002 69 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) Debentures - 50 Unlisted investments - Jinan City Bank Wanzi Branch 107 107 - Southern China Securities Co., Ltd. 33,000 33,000 33,107 33,107 Less: impairment of long-term investments (9,900) 23,207 33,157 Investment in unlisted shares represented investment in PRC incorporated companies of not more than 20% of their paid-up capital. As of 31 December 2003, the Company had pledged legal person shares of Southern China Securities Co., Ltd. with the net book value of RMB 33,000,000 (2002: RMB 33,000,000) to bank as security for a short-term bank borrowing of RMB 8,700,000 (2002: RMB 20,000,000) (Note 17 (a)). According to the formal announcements issued by Southern China Securities Co., Ltd, it is now facing a degree of operational risk. And the SEC of China and Shenzhen local government has now entered into Southern China Securities Co for administrative management. Considering the operational risk, the company has provided impairment of 30% based on its investment value. 12 Inventories, net 2003 2002 Raw materials (at cost) 14,652 17,749 Work-in-process (at cost) 24,318 27,590 Finished goods (at cost) 39,890 58,975 78,860 104,314 Less: Provision for inventory obsolescence (3,800) (20,062) 75,060 84,252 Included in work-in-process were approximately RMB 24 million (2002: RMB 25 million) of deferred oceanic fishing expenditures. Deferred oceanic fishing 70 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) expenditures represented deferred operating expenses for oceanic fishing and seafood processing, which would be transferred to cost of sales upon sale of the related fishery products. 13 Other receivables, net 2003 2002 Other receivables 38,112 17,136 Less: Provision for doubtful debts (3,216) (946) 34,896 16,190 14 Trade receivables, net 2003 2002 Accounts receivable 26,852 50,448 Notes receivable 100 1,194 Less: Provision for doubtful debts (6,887) (13,394) 20,065 38,248 15 Trading investments 2003 2002 Marketable securities - PRC listed equity securities, at market value 56 62 The trading investments are traded in active markets and are valued at market value at the close of business on 31 December 2003 by reference to Stock Exchange quoted bid prices. Trading investments are classified as current assets because they are expected to be realised within twelve months of the balance sheet date. In the cash flow statement, trading investments are presented within the section of operating activities as part of changes in working capital. 16 Other payables and accruals 2003 2002 Salaries payable 14,184 21,254 Welfare payables 1,383 2,098 71 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) Accrued expenses 1,274 6,005 Other payables 66,719 13,526 83,560 42,883 17 Short-term borrowings 2003 2002 Short-term bank borrowings (a) 298,760 285,213 298,760 285,213 (a) Short-term bank borrowings 2003 Principal Annual interest Guaranteed or secured by rate 47,180 4.04%-6.37% - 28,000 5.84%-6.04% SGCFE 20,000 5.84% Shandong Airline Co., Ltd. 28,730 5.84%-7.14% Qingdao Double Wale Pharmaceutical Co.,Ltd 22,200 5.84%-6.37% Shandong Shanhai Seafood Trading Center (“Shanhai Seafood”) 16,250 6.37% Shandong Shanhai Seafood Trading Center (“Shanhai Seafood”) and Shandong Changtian Trade Co.,Ltd 122,700 5.84% Vessels (Note 9) 8,700 5.84% Shares of Southern China Securities Co., Ltd. (Note 11) 5,000 6.37% A plant building (Note 9) 298,760 2002 Principal Annual interest Guaranteed or secured by rate 76,763 3.70%-6.53% - 76,450 5.84%-6.59% SGCFE 12,500 5.04%-5.31% Shandong Airline Co., Ltd. 10,000 6.44% Shandong Shanhai Seafood Trading Center (“Shanhai Seafood”) 85,000 5.84% Vessels (Note 9) 20,000 5.84% Shares of Southern China Securities Co., Ltd. (Note 11) 72 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) 3,000 6.05% A plant building (Note 9) 1,000 6.37% Bank time deposit of USD 139,912 500 6.05% Machinery and equipment (Note 9) 285,213 18 Long-term bank borrowings 2003 2002 Interest rate Amount Interest rate Amount per annum per annum - Guaranteed LIBOR+2% 49,660 6.53%-6.86% 98,030 - Pledged 6.53% 8,000 49,660 39,070 As of 31 December 2003, all of the guaranteed bank borrowings are guaranteed by Shandong Airline Co., Ltd. Long-term bank borrowings are repayable in the following periods: 2003 2002 Amount repayable within a period - not exceeding one year 12,415 36,290 - more than one year but not exceeding two years 12,415 12,435 - more than two years but not exceeding five years 24,830 57,305 - more than five years - - 49,660 106,030 Less: Current portion of long-term bank borrowings (12,415) (36,290) 37,245 69,740 19 Share capital As of 31 December 2003, the outstanding share capital represented legal person shares and B shares. The B shares rank pari passu in all aspects with the legal person shares except that B shares can only be owned and traded by overseas and qualified domestic investors. As of 31 December 2003, the details of ordinary shares were as follows: Number of shares’000 2003 2002 Registered, issued and fully paid: Legal person shares of RMB 1 each 128,071 128,071 B shares of RMB 1 each 138,000 138,000 266,071 266,071 Amount 73 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) 2003 2002 Balance, beginning and end of year: Legal person shares 128,071 128,071 B shares 138,000 138,000 266,071 266,071 Among the 125,731,320 legal person shares owned by SGCFE, accounting for 47.25% of the total shares of the Company, including: (1) 8,000,000 shares, accounting for 3% of the total shares of the Company, are frozen by the court due to the failure of SGCFE to repay the matured borrowing granted to one of SGCFE’s subsidiaries, for which SGCFE stood as a guarantor; (2) 80,000,000 shares, accounting for 30.07% of the total shares, are frozen by Jinan Lixia District Court on 17 February 2003 as the result of the onging litigation between SGCFE and Agricultural Bank of China Jinan Branch Lixia District Sub-branch over a dispute on bank borrowings; and (3) 37,731,320 shares, accounting for 14.18% of the total shares, are frozen by the Supreme Court of Shandong Province on 19 February 2003 as the result of the ongoing litigation between SGCFE and Bank of China Jinan Branch over a dispute on bank borrowings. 20 Reserves (a) Capital surplus The following are recorded as capital surplus: (i) share premium; (ii) donations; (iii) appreciation arising from revaluation of assets; and (iv) other items in accordance with the Company's articles of association and relevant regulations in the PRC. Capital surplus can be utilised to offset prior years’ losses or for the issuance of bonus shares. As of 31 December 2003, capital surplus of the Company mainly included share premium and pricing difference associated with related party transactions. Share premium represents proceeds from the issuance of its shares in excess of their par value, net of underwriting commissions and professional fees. (b) Statutory surplus reserve and statutory public welfare reserve In accordance with the PRC Company Law and the Company’s articles of association, the Company and its domestic subsidiaries (excluding Yantai Food) are required to set aside 10% of their statutory profit after tax and minority interests, after offsetting prior years’ losses, to the statutory surplus reserve (except where the reserve balance has reached 50% of the company’s paid-up share capital, any further appropriation is optional), and 5% to 10% to the statutory public welfare reserve. These reserves cannot be used for purposes other than those for which they are created and are not distributable as cash dividends. Statutory surplus reserve can only be used, upon approval by the relevant authority, to offset accumulated losses or increase capital. However, such statutory surplus reserve must be maintained at a minimum of 25% of its paid-up capital after such issuance. Statutory public welfare reserve is to be utilised to build or acquire capital items, such as dormitories and other facilities for the Group’s employees, and cannot be used to pay for staff welfare expenses. Title to these capital items will remain with the Group. 74 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) (c) Discretionary surplus reserve Discretionary surplus reserve is appropriated after the appropriation of statutory surplus reserve and statutory public welfare reserve at the resolution of the Board of Directors and the discretion of the general shareholders’ meeting. 20 Reserves (continued) (d) Reserve fund, enterprise expansion fund and staff welfare and bonus fund In accordance with the relevant laws and regulations of the PRC, Yantai Food, a foreign joint venture company, is required to set up a reserve fund, an enterprise expansion fund and a staff welfare and bonus fund by way of appropriations from the annual statutory net profit. The reserve fund can only be used, upon approval, to offset accumulated losses or increase capital; and the enterprise expansion fund can only be used, upon approval, to increase capital. The staff welfare and bonus fund can only be used for special bonuses or collective welfare of these subsidiaries’ employees, and assets acquired through this fund shall not be taken as these subsidiaries’ assets. For IFRS purposes, the appropriation to the staff welfare and bonus fund is charged to current year’s administrative expenses while the balance of the staff welfare and bonus fund is included in other payables in the consolidated financial statements. 21 Minority interests 2003 2002 Beginning of year 21,221 38,257 Share of net profit of subsidiaries (Note 22 (a)) (4,653) (2,197) Share of capital contributions in subsidiaries 10,822 Change of consolidation scope (25,661) End of year 16,568 21,221 22 Supplemental cash flows information (a) Reconciliation from net (loss) profit to cash generated from operations 2003 2002 Net (loss) profit （２０９，３９８） (229,158) Adjustments for: Minority interests (Note 21) （４，６５３） (2,197) Tax (Note 5) １，６５４ 1,059 Depreciation of plant, property and equipment ２４，７９３ 30,978 (Gain) loss on disposal of property, plant and equipment （４６７） (1,233) Amortisation of intangible assets ２７４ 3,280 Gain on disposal of subsidiary （１，３５０） (7,235) Gain on disposal of long-term investments (23) 75 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) Gain on disposal of trading investments （６） - Impairment loss of trading investments ３ 18 Impairment loss of long-term investments ９，９００ Impairment loss of property, plant and equipment （１０，５７５） 52,084 Provision for inventory obsolescence （１４，５２５） 13,484 (Reversal of) provision for doubtful debts 170,962 104,532 Interest expense １８，５４４ 22,019 Interest income （１，４７９） (3,370) Operating (loss) profit before changes in working capital (16,323) (15,762) Changes in working capital: Increase in inventories ６，５４３ (26,084) Decrease (increase) in trading investments, trade and （６６，４０４） 63,120 other receivables, prepayments ,due from related party and other current assets Increase (decrease) in trade payables, advances from customers, taxes payable, other payables and accruals ５７，１９９ 28,236 Decrease in due to related parties （６２） (1,617) Cash generated from operations (19,047) 47,893 22 Supplemental cash flows information (continued) (b) Analysis of the balances of cash and cash equivalents 2003 2002 Cash on hand 362 783 Bank current deposits 16,427 53,348 Bank time deposits 1,158 55,289 Less: Restricted bank deposits (1,158) Cash and cash equivalents 16,789 54,131 76 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) As of 31 December 2002, bank time deposit of USD 139,912 (equivalent to approximately RMB 1,158,000) was pledged as collateral of a short-term bank borrowing. 23 Related party transactions Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party, or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. (a) Name of related parties and nature of relationship Name Relationship with the Company SGCFE The 47.25% shareholder of the Company LSPC Directly-owned by SGCFE QMFC Directly-owned by SGCFE SGCFE S.A. Directly-owned by SGCFE Shandong Haitian Seafood Trading Co., Ltd. (“Haitian”) Directly-owned by SGCFE Shanhai Seafood Directly-owned by SGCFE An’ning Directly-owned by SGCFE QMFC-APPP Indirectly-owned by SGCFE Mellow Indirectly-owned by SGCFE Haiyu Indirectly-owned by SGCFE Prodesur S.A. Indirectly-owned by SGCFE Tenglong Indirectly-owned by SGCFE Animal Medicine Indirectly-owned by SGCFE Ａｆｒｉｋ Indirectly-owned by SGCFE Zhengxin Indirectly-owned by SGCFE HaiFeng Indirectly-owned by SGCFE luBao Indirectly-owned by SGCFE 77 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) ZhengYun Indirectly-owned by SGCFE (b) Transactions with related parties 2003 2002 Sales to related parties: -SGCFE 695 - QMFC 14,531 - Tenglong 3,490 - Mellow 1,322 HaiFeng 423 - Prodesur S.A 350 - 1,468 19,343 2003 2002 Rental expenses for vessels and crews paid to a related party: - SGCFE * 1,240 9,767 Letting and management income of vessels from a related party: - SGCFE S.A. ** 2,467 11,021 * Pursuant to certain agreements with effect till 1 April 2003, the Company had leased from SGCFE six trawlers and relating crew at an annual rental of RMB 496,800 to RMB 780,000 per trawler and USD 6,000 per person. No further agreement signed subsequently. ** Pursuant to certain agreements with effect till 1 April 2003, the Company had leased its 3 trawlers, together with the 6 trawlers rented from SGCFE, and related crew to SGCFE S.A. at an annual rental of USD 80,000 to USD 155,000 per trawler and USD 9,700 to USD 9,900 per person to SGCFE S.A. These trawlers are ultimately leased to other two related parties. 2003 2002 Purchases of seafood from related parties: - Shanhai Seafood 41,720 28,506 - Prodesur S.A. 30,780 18,668 - Tenglong - - SGCFE - - LSPC - 72,500 47,174 2003 2002 78 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) Profit/Loss from vessel entrust - Prodesur S.A. 3,579 -300 Pursuant to an agreement with effect from 1 January 1999 for ten years, the Company has entrusted Prodesur S.A. to operate a vessel owned by the Company, and is entitled to obtain or assume an annua l entrust fee based on 70% of the net profit or loss generated from the operation of the vessel. (c) Balances with related parties as of 31 December 2003 2003 Due from related parties -SGCFE 217,754 - QMFC 53,211 - QMFC-APPP 7,858 Ｐrodesur S.A. 3,239 HaiFeng 794 - LSPC 6,383 ＳＧＣＦＥ Ｓ ．Ａ． 22,362 - Shanhai Seafood 4,864 - An’ning 1,666 - Mellow 3,170 - Haiyu 8,038 - Tenglong 14,058 - Animal Medicine 346 -LuBao 403 Total: 344,146 Less: Provision for doubtful debts 267,277 Due from related parties, net 76,869 prepayments An’ning 874 Due to related parties - Zhengxin 1,000 - ZhengYun 155 Due to related parties 1,155 79 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) Note: According to resolution made by the second meeting of the twelfth Board of director, the company provided general and specific doubtful debts this year. The details are as follows: (1) The company didn’t provide any doubtful debts for “LSPC”, as the company has made freezing application to the court. Pursuant to Judgement (2003)LiLiBaoZi No.12 issued by Jinan TianQiao District court in 2003, the land use right of “LSPC” with 48,133.45 square meters amounting to RMB 13,342,592 was frozen. (2) In 2003, The company has filed several lawsuit against SGCFE on the repayment of due from SGCFE and the court has approved several assets freezing application. So, Before calculating the specific doubtful debts for “SGCFE”, it has deducted the following frozen assets: A: Pursuant to Judgement (2003) LiLiBaoZi No.118 issued by Jinan Lixia District court on 26 February 2003, the basement, first to third floors and six to twelfth floors of SGCFC’s office building located on No.43, Road Heping, Lixia District, Jinan, Shandong Province and the related leasehold land are frozen. According to the valuation consultation report(2004)GuoRunZhiXunZi No 001 issued by ShanDong GuoRun Assets valuation Co.,Ltd, the above assets which are frozen is worth RMB 55,160,000 Ｂ： In 2003, the Company filed a lawsuit against SGCFE on the repayment of a portion of due from SGCFE. Pursuant to Judgement (2003) TianMinChuZi No.1632 issued by Jinan TianQiao District court in 2003, the equity interest of 17.31% of Shandong Zhonglu Oceanic(Yantai)Food Co.,Ltd held by SGCFE are frozen. The equity interest frozen is worth RMB6,705,892 after formal audit. Ｃ： Pursuant to Judgement (2003) TianMinTwoChuZi No.1763 issued by Jinan 80 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) TianQiao District court in 2003, the equity interest of 5% of Zhonglu Transportation Co.,Ltd held by SGCFE are frozen. The equity interest frozen is worth RMB1,439.000 after formal audit. (3) Due from Ｐrodesur S.A. and Shanhai Seafood are provided the general debts on the basis of debt ages with the amount of RMB 678,597 and 243,196. (4)Except the above mentioned related party, the other due from related parties are provided full bad debts. (d)Guarantees (The company provided the guarantees for the following related parties) Name of related party Amount Period Shanhai RMB5,000 11.10.2003-10.14.2004 Shanhai USD266 11.17.2003-12.16.2003 Shanhai USD966 11.17.2003-1.16.2004 Shanhai USD511 7.16.2003-8.15.2003 Shanhai USD575 7.17.2003-8.15.2003 Shanhai USD143 11.24.2003-1.21.2004 Shanhai USD439 11.28.2003-1.21.2004 Shanhai USD 479 12.26.2003-1.21.2004 Mellow RMB250 10.22.2003-10.22.2004 Yantai Food RMB31,500 2.2003-10.2004 Yantai Food USD1,000 1.2003-2.2004 Note: By the end of 31 December, 2003, the group has provided guarantee amounting to RMB5,250,000,USD3,383,322. Among these, SGCFE Aquaculture Company, which is the predecessor of Trading Brach of the Company before the Reorganisation of the Group and has not deregistered as required by the reorganization agreement and still operate by the name of SGCFE Aquaculture Company. SGCFE Aquaculture Company provided guarantee amounting to 81 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) RMB5,000,000, USD3,383,322 for Shanhai. And The company provided guarantee amounting to RMB31,500,000 , USD1,000,000 for Yantai Food. （e）Guarantees (The following related parties provided guarantees for the Company) Name of related party Amount Period SGCFE RMB5,000 11.19.2002-11.18.2003 SGCFE RMB 18,000 4.29.2003-4.28.2004 SGCFE RMB 5,000 07.12.2003-07.11.2003 SGCFE plus Shandong Oceanic fisheries Co.,Ltd RMB 10,000 10.30.2003-10.30.2004 Shanhai plus Shandong ChangTianCo.,Ltd RMB 3,250 11.13.2003-.11.12.2004 Shanhai RMB 2,200 11.5.2003-11.4.2004 Shanhai plus Shandong ChangTianCo.,Ltd RMB 5,000 11.11.2003-10.26.2004 Shanhai plus Shandong ChangTianCo.,Ltd RMB 8,000 8.11.2003-8.10.2004 Shanhai RMB 10,000 4.23.2003-4.23.2004 Shanhai RMB 10,000 5.14.2003-5.14.2004 (f) Other transactions The company freely use the office of SGCFE for 2003.The Longkou branch and Qingdao Refrigerating branch freely use the land of SGCFE for 2003 24 Contingencies As of 31 December 2003, the Group had following contingencies not provided for in the consolidated financial statements: (a) Contingent guarantees Name Amount Period Double Wale Pharmaceutical 74,250 2.2002-7.2006 SGCFE 70,270 3.2002-9.2003 Mellow 250 10.2003-10.2004 As of 31 December 2003, SGCFE Aquaculture Company, which is the predecessor of Trading Branch of the Company before the Reorganisation of the Group and has not deregistered as required by the reorganisation agreement, stood as the guarantor for 82 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) the short-term bank borrowings amounting to RMB 70,270,000 granted to SGCFE and the banks have not held the Group collateral responsibility for these borrowings. (b) Other guarantee Name of related party Amount Period Shanhai Seafood RMB5,000 11.10.2003-10.14.2004 Shanhai USD266 11.17.2003-12.16.2003 Shanhai USD966 11.17.2003-1.16.2004 Shanhai USD511 7.16.2003-8.15.2003 Shanhai USD575 7.17.2003-8.15.2003 Shanhai USD143 11.24.2003-1.21.2004 Shanhai USD439 11.28.2003-1.21.2004 Shanhai USD479 12.26.2003-1.21.2004 Yantai Food RMB31,500 2.2003-10.2004 Yantai Food USD1,000 1.2003-2.2004 Note: By the end of 31 December, 2003, the group has provided guarantee amounting to RMB5,250,000,USD3,383,322. Among these, SGCFE Aquaculture Company, which is the predecessor of Trading Brach of the Company before the Reorganisation of the Group and has not deregistered as required by the reorganization agreement and still operate by the name of SGCFE Aquaculture Company. SGCFE Aquaculture Company provided guarantee amounting to RMB5,000,000, USD3,383,322 for Shanhai. And The company provided guarantee amounting to RMB31,500,000 , USD1,000,000 for Yantai Food. 25 Subsequent events (a)Guarantee The company provided guarantee for ShanHai(the related party) for its bank borrowing amounting to RMB8,000,000. The guarantee period is from Jan 2004 to July 2004 83 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) The company provided guarantee for its subsidiary(“Yantai Food”) for its bank borrowing amounting to RMB13,000,000. (b)Litigation The company bought five fishing boat from Japanese ShanHe Co.,ltd in 2001 with the contract value of USD616,000. After receiving the boats, the company found that it existed quality problems and didn’t obtain Chinese government bureau permission. Because of the reasons, the company didn’t pay the full amounts. On July 10, 2003, The Japanese party has appeal to the Chinese international economic trade arbitration committee asking the company to pay back USD643,225 plus interest and compensation with USD60,000. The company has also appealed to the committee asking to announce the part of the contract nullity, and asking the Japanese party to pay for USD616,000 as economic compensation. The aforementioned litigation are in the stage of negotiation between the company and Japanese party. 26 changes in accounting estimates According to the >(2002)LongYuFa No 8 issued by state safety production supervisory bureau and the notice (2003)LongYuFa No 20 issued by agriculture department, the company adjusted the estimated useful life for the fishing boats and provided depreciation on the basis of new estimated useful life. The impact of this change in accounting estimate decreased the current group’s net profit of RMB3,252,034. 27Correction of significant accounting errors The company bought leasehold lands of RMB22,684,710 from SGCFE in order to reduce its due from SGCFE, but the transfer of the titles for all the above leasehold lands haven’t been implemented until now. In 2003, among these leasehold lands, the leasehold lands with value of RMB18,808,789 was frozen by the court because SGCFE was appealed for its bank borrowings. Considering its impacts, the group 84 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) retroactively adjusted the 2003 beginning unappropriated profit for RMB666,738 for a decrease and the 2003 beginning reserve RMB35,446 for an increase, increase due from SGCFE RMB 22,684,710 in 2002, decrease the leasehold lands of RMB 21,982,526 in 2002. 28 Comparative figures Certain prior year figures have been retroactively adjusted and reclassified to conform to the current year presentation. 29 Approval of financial statements The consolidated financial statements were approved by the Board of Directors on 29 March 2004. Impact of IFRS adjustments on net (loss) profit and net assets Net (loss) profit Net assets 2003 2002 2003 2002 As reported in the Statutory Accounts of the Group (213,472) (225,282) 72,398 277,938 Adjustment for the dividends declared after balance sheet date - - (Reversal of)Adjustment for the excess loss applicable to the minority 4,061 (4,061) (204) Written off pre-operation expenses 13 164 (12) Others 21 - As restated in accordance with IFRS (209,398) (229,158) 72,398 277,722 85 SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. AND ITS SUBSIDIAIRIES FOR THE YEAR ENDED 31 DECEMBER 2003 (All amounts in RMB thousands unless otherwise stated) SECTION XII. DOCUMENTS AVAILABLE FOR REFERENCE 1. Accounting Statement carried with the personnel signature and seal of legal representative, person in charge of the financial affairs and person in change of the handing accounting affairs; 2.Original of Auditor’s Report with signature and seal of Certified Public Accountants as well as personal signatures and seal of and the certified public accountants; 3. Originals of all documents as disclosed in public on the newspapers as designated by China Securities Regulatory Commission as well as the original manuscripts of the public notices published in the report period. 4. Annual Report disclosed in other Securities Market. Shandong Zhonglu Oceanic Fisheries Company Limited Chairman of the Board：------------------------------------- March 31, 2004 86