丽珠集团(000513)丽珠Ｂ2004年年度报告（英文版）

LIVZON PHARMACEUTICAL GROUP INC. 2004 Annual Report I. IMPORTANT NOTICE Important Notice: The board of directors (“the Board”) of the Livzon Pharmaceutical Group Inc. (hereinafter referred to as “the Company”) confirms that there are no misleading statements or misrepresentation or material omissions contained in this report. The board of directors individually and collectively accepts responsibility for the truthfulness, accuracy and completeness of the contents of this report. Directors Guo Jiaxue, directors Zhang Yu, and directors Wang Xiaobin were absent from the Board meeting and all appointed directors Zhu Baoguo to attend and vote on their behalves, Directors Wang Yisheng, directors Gu Yueyue, and independent director Jiang Jian were absent from the Board meeting and respectively appointed directors Yi Zhenqiu, directors Xiao Siyang and independent director Qi Zhan to attend and vote on their behalves. Chairman of the Company Mr. Zhu Baoguo, Financial Controller Mr. An Ning and Chief Accountant Ms. Si Yanxia have declared that they are responsible for the truthfulness and completeness of the financial statements in this Annual Report. The 2004 annual report is written in Chinese and English ,the Chinese version is set to be accurate when ambiguities occur in understanding of such two versions. 1 II. COMPANY PROFILE 1. Legal name of the Company In Chinese: 丽珠医药集团股份有限公司 In English: Livzon Pharmaceutical Group Inc. Short form in Chinese: 丽珠集团 Short form in English: LIVZON GROUP 2. Legal representative: Zhu Baoguo CEO (President): Xiao Siyang 3. Secretary to the Board of Directors: Wang Wuping Representative in charge of securities affairs: Hong Lu Tel: (0756) 8135888 Fax: (0756) 8886002 Email: wangwuping@livzon.com.cn, honglu@livzon.com.cn Contact Address: Livzon Bldg., Guihua North Road, Gongbei, Zhuhai, Guangdong 4. Registered address: No. 132, Guihua North Road, Gongbei, Zhuhai, Guangdong Office address: Livzon Bldg., No. 132 Guihua North Road, Gongbei, Zhuhai, Guangdong Post code: 519020 Company’s internet website: http://www.livzon.com E-mail: zhlivzon@pub.zhuhai.gd.cn 5. Newspapers designated for disclosure of the Company’s information: Securities Times, Shanghai Securities News, and Wen Wei Pao (Hong Kong) (in Chinese), The Standard (Hong Kong) (in English) Internet Website Designated by China Securities Regulatory Commission for Publishing the Annual Report: http://www.cninfo.com.cn The Place where the Annual Report is available for inspection: Secretariat of the Board of Directors of Livzon Group 6. Stock exchange listing: Shenzhen Securities Exchange Short form of the stock and stock code: Livzon Group (000513) Livzon B (200513) 7. Other relevant information of the Company Initial registration date: 26 January 1985 Changed registrations date: 13 September 2002 2 Company’s registrar: Administrative Bureau for Industries & Commerce of Zhuhai Municipal Registration number of the Company’s corporate business license: QGYZZ Zi No.: 001111 Registration number of taxation: 440401617488309 8. Domestic certified public accountants engaged by the Company: Reanda Certified Public Accountants Co., Ltd. Office address: No. 215, Xing Ye Road, Zhuhai International certified public accountants engaged by the Company: BDO International Certified Public Accountants Office address: Unit 2008, Zhu Bang 2000 Building, Ba Li Zhuang, Chaoyang District, Beijing III. ACCOUNTING DATA AND BUSINESS SUMMARY 1. Major Accounting Data (Unit:RMB`000) items 2004 2003(as restated) Revenue 1,554,788 1,811，914 Gross profit 761,193 892,615 Share of profit of associates 1,791 1,484 Profit before tax 154,938 159,423 Income tax expense (19,945) (36,234) Profit after tax 134,993 123,189 Minority interests (10,687) (29,266) Net profit for the year 124,306 93,923 Share capital 306,035 306,035 Capital and reserves 1,125,364 1,029,958 Total assets 2,173,959 2,101,070 Net cash from operating activities 181,747 297,067 Net increase in cash and cash equivalents (120,464) 128,932 Earnings per share-basic RMB0.41 RMB0.31 Note: The data were audited by BDO International Certified Public Accountants according to IAS, for reference to investors of B share only. 3 2. Differences in Auditing of Net Profit The Company’s net profit for 2004 was 124,058（RMB’000）and RMB124,306（RMB’000）, respectively, as audited by Reanda Certified Public Accountants according to PRC Accounting Rules and Regulations and BDO International Certified Public Accountants according to the International Accounting Standards. Such difference of 248（RMB’000） were mainly due to the corrections made to Depreciation of property, plant and equipment which decreased profit by 535 （RMB’000）, to Amortisation of negative goodwill which increased profit by 295（RMB’000）, and to Long term deferred and prepaid expenses which increased profit by 488（RMB’000） according to the International Accounting Standards. 3. Major Accounting Data and Financial Indicators over the Past Three Years 2. (Unit: RMB’000) Major accounting data 2003 2002 2004 After Before After Before adjustment adjustment adjustment adjustment Revenues 1,554,788 1,811,914 1,811,914 1,601,206 1,601,206 Net profit 124,306 93,923 93,923 67,079 67,079 Capital and reserves 1,125,364 1,029,958 1,029,958 964,486 964,486 Total assets 2,173,959 2,101,070 2,101,070 1,820,896 1,820,896 Capital and reserves per share 3.68 3.37 3.37 3.15 3.15 Net profit per Capital and reserves (%) 11.05 9.12 9.12 6.95 6.95 Net cash flows per share from 0.59 0.97 0.97 1.00 1.00 operating activities Net profit per share 0.41 0.31 0.31 0.22 0.22 3. Change in Shareholders’ Fund (Unit:RMB`000) Properties Investment Foreign Share Share revaluation revaluation exchange capital premium reserve reserve reserve Surplus Retained Total profit Balance 306,035 417,689 9,609 2,531 508 234,000 59,586 1,029,958 at 1st January 2004 Net profit - - - - - - 124,306 124,306 for the year Transfer - - - - - 45,761 (45,761) - to surplus from 4 retained profits Dividend - - - - - - (30,603) (30,603) paid for 2003 Transfer - - 1,745 1,703 for the - (42) - - year Balance 306,035 417,689 9,609 4,276 466 279,761 107,528 1,125,364 at 31st December 2004 IV. CHANGES IN SHARE CAPITAL AND PARTICULARS ABOUT SHAREHOLDERS 1. Change in Share Capital (1) Table of changes in share capital (as at 31December 2004)Unit: Share Before the After the Increase/decrease during the year(+, - ) change change Share Share Bonus converted Additional Others Subtotal placement issue from public issuance reserve I. Non-circulating shares 1. Promoters’ shares 29,138,670 29,138,670 Including: State-owned shares Domestic legal person 29,138,670 29,138,670 shares Overseas legal person shares Others 2. Corporate shares 38,917,518 38,917,518 3. Staff shares 4. Preference share or others Total non-circulating 68,056,188 68,056,188 shares II. Circulating shares 1. Ordinary shares 115,672,310 115,672,310 denominated in RMB 2. Domestic listed 122,306,984 122,306,984 foreign shares 3. Overseas listed 5 foreign shares 4. Others Total circulating 237,979,294 237,979,294 shares III. Total shares 306,035,482 306,035,482 (2) Share issue and listing of shares over the recent three years The structure of the Company’s share capital remained unchanged over the recent three years ended 31 December 2004, and the total share capital was 306,035,482 shares. 2. Details of Shareholders (1) As at 31 December 2004, the total number of shareholders was 42,142, of which 13,711 were holders of B shares) (2) Particulars of shares held by the top ten shareholders (including the top ten shareholders of circulating shares) (as at 31 December 2004) Number of Percentage Number Increase / shares Class of shares Full name of to total of shares Nature of decrease in held at the (Circulating or shareholders share pledged/ shareholder the year end of the Non-circulating) capital frozen year Xi’an Topsun Group +38,917,518 38,917,518 12.72 Non-circulating 0 Company Limited Tiancheng Industrial B shares in Foreign 0 34,284,870 11.20 0 Company Limited circulation sharesholder Non-circulating: 0 Joincare 22,379,239 Pharmaceutical A shares in 0 32,285,116 10.55 Industry (Group) circulation: Company Limited 9,905,877 China Contruction 0 Bank - Huabao Xingye A Shares in +7,045,652 7,045,652 2.30 Multi-strategies circulation Growth Securities Investment Fund Shenzhen Haibin A Shares in 0 0 6,752,435 2.21 Pharmaceutical circulation 6 Company Limited Guangzhou Baokeli 6,059,428 0 6,059,428 1.98 Non-circulating Trading Company China Industrial and 0 Commercial Bank – Shenyin-Wanguo A Shares in +3,481,196 3,481,196 1.14 Paris Shengli circulation Premium Securities Investment Fund China Industrial and 0 Commercial Bank - A Shares in +3,000,000 3,000,000 0.98 Tianyuan Securities circulation Investment Fund China Industrial and 0 Commercial Bank - A Shares in +779,244 2,612,278 0.85 Pufeng Securities circulation Investment Fund China Industrial and 0 Commercial Bank – Guolianan Desheng A Shares in +2,454,523 2,454,523 0.80 Small Caps Prime circulation Securities Investment Fund B shares in 0 Foreign Yuan Lanxiang +2,022,983 2,161,983 0.71 circulation sharesholder Taihe Securities A Shares in 0 +1,802,400 1,802,400 0.59 Investment Fund circulation Notes: 1) On 26 November 2004, China Everbright (Group) Corp. (“China Everbright”) entered into a Share Transferral Agreement with Xi’an Topsun Group Company Limited (“Xi’an Topsun”), pursuant to which China Everbright agreed to transfer 38,917,518 desginated legal person shares in the Company held by it (representing 12.72% of the Company’s total share capital) to Xi’an Topsun. The nature of shares was changed to designated domestic legal person share. On 2 December 2004, the Company published the said transferral on the designated information disclosure newspaper. 2) Both Tiancheng Industrial Company Limited and Shenzhen Haibin Pharmaceutical Company Limited are subsidiaries of Joincare Pharmaceutical Industry (Group) Company Limited, which directly and indirectly holds 100% equity interests therein. 3) On 2 January 2004, Joincare Pharmaceutical Industry (Group) Company Limited, Guangzhou Baokeli Trading Company and Zhuhai Lishi Investment Company Limited entered into a Share 7 Transfer, Custody and Mortgage Agreement, and Joincare Pharmaceutical Industry (Group) Company Limited and Guangzhou Baokeli Trading Company entered into a Share Transfer and Custody Agreement as well as the Share Mortgage Agreement, pursuant to which Guangzhou Baokeli Trading Company agreed to directly transfer, place on custody and mortgage its 6,059,428 domestic legal person shares in the Company, representing 1.98% of the Company’s total share capital, to Joincare Pharmaceutical Industry (Group) Company Limited. As at 31 December 2003, Joincare Pharmaceutical Industry (Group) Company Limited and its subsidiaries held and controlled 79,381,849 shares of the Company in aggregation, representing 25.94% of the Company total issued share capital, and became the Company’s ultimate shareholder. (3) Particulars of the Controlling Shareholder Legal representative of Joincare Pharmaceutical Industry (Group) Company Limited: Zhu Baoguo Date of establishment: 18 December 1992 Business scope: R&D, manufacturing and operation of nutritious and healthcare essence, healthcare soluble table and granule (not including canned and Tetra-pak goods or under administration of export license), Chinese patent medicine, oral liquid, tablet, capsule, granule, hormonal troche, food, nutrition-added and healthcare foods; import and export activities (under SMJZ Zi [2001] No.1231 Qualification Certificate); investment in pharmaceutical industries and projects, high-tech projects and industrial projects (subject to approval for specific project); operations in domestic industries, supply and marketing of materials (not including goods under exclusive operation, control or distribution). Registered capital: RMB 609,930,000 Equity structure: Total share capital of 609,930,000 shares, including 452,430,000 legal person shares and 157,500,000 A shares in circulation. (4) Details of Joincare Pharmaceutical Industry (Group) Company Limited’s controlling shareholder Name of the controlling shareholder: Shenzhen Beiyeyuan Investment Company Limited Legal representative: Liu Guangli Date of establishment: 21 January 1999 Principal businesses: investment and setting up industrial projectss, domestic trading and supply and marketing of materials Registered capital: RMB80,000,000 Equity structure: Zhu Baoguo’s capital contribution: RMB72,000,000, constituting 90% of the total capital amount; Liu Guangxia’s capital contribution: RMB8,000,000, constituting 10% of the total capital amount. Mr.Zhu Baoguo:Chinese nationality, does not have the residentship in any other country or region. (5) Illustration of Shareholdings and Controlling Relations among the Company and the Ultimate 8 Shareholder Liu Gangxia Zhu Baoguo Liu Miao 100% 10% 90% Taitai Pharmaceutical Industry Group Limited 0.1% 99.9% Shenzhen Beiyeyuan Investment Company Limited Hongxin Limited 55.63% 18.54% Joincare Pharmaceutical Industry (Group) Company Limited Hold: 10.55% 100% 100% Place on custody: 1.98% Shenzhen Haibin Pharmaceutical Company Limited Tiancheng Industrial Company Limited 2.21% 11.20% Livzon Pharmaceutical Group Inc. (6) Particulars of other legal person shareholder holding over 10% of the total number of shares Xi’an Topsun Group Company Limited was established on 25 December 1996. It is mainly engaged in development, production and sale of scientific instrument and technological services; research and development (not including production and sale) of Chinese medicine, chemical medicine and narcotic drugs, healthcare food, beverage, birth-control product, medical equipment and sporting goods; planting of Chinese herb (only for its branches), investment in high-tech enterprise; real and estate development; export of self-produced products; import of machinery and equipment, components and spare parts, raw and ancillary materials for itself (excluding those prohibited by the State to be operated and imported/exported by the Company). Its legal representative is Guo Jiaxue with a registered capital of RMB150,000,000. (7) Other Shareholders among the top ten shareholders of circulating shares with connected relationship As at 31 December 2004, other than Joincare Pharmaceutical Industry (Group) Company Limited and its connected persons, the Company is not aware of any connection among the Company's 9 top ten shareholders nor any parties acting in concert as defined in Measures for Management on Information Disclosure of Changes in Shareholdings of Listed Company's Shareholders, V. PARTICULARS OF DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT AND EMPLOYEES I. Details of Directors, Supervisors and Senior Management (1) Basic information (as at 31 December 2004) Number of Number of shares shares Reasons Term of Name Title Gender Age held at the held at the for the appointment beginning end of the changes of the year year Chairman of Male Zhu Baoguo 42 2002.06-2005.06 0 0 - the Board Vice Chairman Male Yi Zhenqiu 60 2002.06-2005.06 0 0 - of the Board Vice Chairman Male Guo Jiaxue 38 2002.06-2005.06 0 0 - of the Board Gu Yueyue Director Female 54 2002.06-2005.06 0 0 - Xiao Siyang Director Male 42 2003.01-2005.06 0 0 - Wang Male Director 50 2002.06-2005.06 0 0 - Xiaobin Zhang Yu Director Male 44 2002.06-2005.06 0 0 - Wang Male Director 53 2003.05-2005.06 0 0 - Yisheng An Ning Director Male 32 2003.05-2005.06 0 0 - Dong Male Director 63 2003.05-2005.06 0 0 - Shaozhi Hua Independent Male 59 2003.05-2005.06 0 0 - Yizheng Director An Independent Male 65 2002.06-2005.06 0 0 - Chengxin Director Independent Male Jiang Jian 34 2002.06-2005.06 0 0 - Director Independent Male Gao Dianhe 61 2002.06-2005.06 0 0 - Director Independent Male Qi Zhan 39 2002.06-2005.06 0 0 - Director Chairman of Male - Yuan Guoliu the Supervisory 58 2002.06-2005.06 0 0 Committee Wang Bo Supervisor Male 38 2002.06-2005.06 0 0 - Cao Supervisor Male 45 2003.01-2005.06 0 0 - Pingwei 10 Wang Male Supervisor 44 2002.06-2005.06 0 0 - Congxin Qiu Male Supervisor 33 2002.06-2005.06 0 0 - Qingfeng Xiao Siyang President Male 42 2002.12-2005.06 0 0 - An Ning Vice President Male 32 2003.01-2005.06 0 0 - Liu Shuqing Vice President Female 41 2002.06-2005.06 0 0 - Fu Gang Vice President Male 34 2004.02-2005.06 0 0 - Wang Secretary to the Male 38 2002.06-2005.06 0 300 Increase Wuping Board Particulars of directors and supervisors holding position in holders or trustees of the Company's shares Whether Name of holders (or trustees) of Position Term of receiving Name the Company's shares held appointment allowance or not (Yes / No) Zhu Joincare Pharmaceutical Industry From November Chairman Yes Baoguo (Group) Company Limited 1999 Deputy Joincare Pharmaceutical Industry From October Gu Yueyue General Yes (Group) Company Limited 1997 Manager Deputy Cao Joincare Pharmaceutical Industry From January General Yes Pingwei (Group) Company Limited 1993 Manager Secretary Qiu Joincare Pharmaceutical Industry to the From November Yes Qingfeng (Group) Company Limited board of 1999 directors Guo Xi’an Topsun Group Company From March Chairman Yes Jiaxue Limited 2000 Wang Xi’an Topsun Group Company From March Director Yes Congxin Limited 2003 (II) Work experience of Directors, Supervisors and Senior Management 1. Mr. Zhu Baoguo, Chaiman of the Board. From 1986 to 1990 he was the Head of Henan Xinxiang Water Resin Institution, and from 1990 to 1992 has was the general manager of Henan Fenglong Fine Chemical Product Company Limited. He is the founder of and currently the Chairman of Joincare Pharmaceutical Industry (Group) Company Limited. He is also a vice chairman of the 4th council of Shenzhen Chambers of Commerce, and a member the 3rd 11 Shenzhen Municipal Committee of CPPCC. He has been elected as Chairman of the Company since 2002. In 2003 he was listed as one of "2002 Top 10 Private Entrepreneurs"; in 2004 he was awarded the Gold Prize for his contribution by Shenzhen Guangcai Association; in 2004 he was honored as an "Entrepreneur actively supporting the Communist Party" by Shenzhen Private Economy Commission. 2. Mr. Yi Zhenqiu, Vice Chaiman of the Board. From 1968 to 1970 he served in Guangdong Jiangmen Chemical Factory, and from 1971 to 1987 he had been deputy office head, deputy chief secretary and deputy party secretary of Jiangmen Municipal Commission of China Communist Party. From 1988 to 1996 he had been the head of Guangdong Provincial Reform Commission and the head of Securities Regulatory Commission; from 1997 to 2001 he was the chief investment officer of China Everbright (Group) Corporation. In 1998 he was elected as Chairman of the Company. He is currently the Chairman of Livzon (Hong Kong) Company Limited and a director of Antao (Hong Kong) Development Company Limited. Since 2002 he has been the Vice Chairman of the Company. 3. Mr. Guojiaxue, Vice Chaiman of the Board. From 1991 to 1995 he was the head of Xi'an People's Medical and Electric Science Institute and the Chairman of Jiabao Enterprise Company Limited. He is currently the Chairman of Topsun Technology Company Limited and Vice Chairman of Hubei Qianjiang Pharmaceutical Company Limited. He has been elected as Vice Chairman of the Company since 2002. 4. Ms. Gu Yueyue, Director of the Company. From 1989 to 1994 she had been the manager of Marketing Department and the manager of New Business Development of Unilever (Taiwan); from 1994 to 1997 she had been the chief marketing officer of Smithkline International Group; from 1997 she was the vice managing director and marketing controller of Shenzhen TAITAI Pharmaceutical Industry Company Limited. She is currently the deputy general manager and chief markeing officer of Joincare Pharmaceutical Industry (Group) Company Limited. She has been elected as Director of the Company since 2002. 5. Mr. Xiao Siyang, Director and President of the Company. From 1989 to 1995 he had been the product manager and the major client manager of Individual Clean Product, the national major client manager of food department and customer service manager of Unilever (Taiwan); from 1995 to 1996 he was the sale development manager of Tianjing Smith Kline & French Laboratories Limited. From 1996 to 1998 he had been the business development manager and the national sale operating manager of Unilever Sales Company Limited; from 1998 to 2002 he had been the Great China District General Manager of Consumer Product Department and the General Manager of Bayer Sino-western Home Consumer Product Company Limited. He is currently the President of the Company. He has been elected as Director of the Company since 2003. 6. Mr. Wang Xiaobin, Director of the Company. From 1986 to 1987 he served as an officer of Dongshan Branch of Guanzhou Municipal Administration of Industry and Commerce; from 1987 to 1992 he was the China District Sale Mnager of Heinz Unite Company Limited. From 1986 to 1995 12 was the China District Sale Mnager of Lijingji (Guangzhou) Food Company Limited; from 1995 to 1996 he was the South-China Business Manager of Nanjing Yingzhijie Development Company Limited. From 2001 to May 2004 he was the general manager of Joincare Pharmaceutical Industry (Group) Company Limited; and since May 2004 he has served as the general manager of Shenzhen Sun Bio-tech Company Limited. He has been elected as Director of the Company since 2002. 7. Mr. Zhang Yu, Director of the Company. From 2000 to 2001 he was the chief product officer of Nanjing Meirui Pharmaceutical Company Limited; he was also a director of Xi’an Topsun Group Company Limited. He is currently the vice president of Topsun Technology Company Limited. He has been elected as Director of the Company since 2002. 8. Mr. Wang Xuan, Director of the Company. He is currently the general manager of Livzon (Hong Kong) Company Limited and the Chairman of Antao (Hong Kong) Development Company Limited, a special assistant to Chairman of the Company and the head of Beijing Office of the Company. He has been elected as Director of the Company since 2003. 9. Mr. An Ning, Director and Vice President of the Company. In 2001 he was the deputy general manger of Shanghai Meike Investment Management Company Limited; from 2001 to 2003 he served as financial controller of Joincare Pharmaceutical Industry (Group) Company Limited. Since 2003 he has been the financial controller and vice president of the Company. He has been elected as Director of the Company since 2003. 10. Mr. Dong Shaozhi, Director of the Company. He had been the factory manager of Hebei Shijiazhuang 1st and 2nd Pharmacetical Factories, deputy head of Shijiazhuang Municipal Medicine Administration, director and general manager of Hebei Provincial Pharmaceutical Company Limited, general manager of Zhuhai Free Trade Zone Livzon Integrated Pharmacy Manufacturing Company Limited, and vice technological president of Livzon Pharmaceutical Group Inc. From August 2004 he has been the general manger of Dawnrays Pharmaceutical (Holding) Company Limited. He has been elected as Director of the Company since 2003. 11. Mr. An Chengxin, Independent Director of the Company. From 1993 to 2000 he was the vice chairman of China Council for the Promotion of International Trade; he is currently the chairman of Aoqi Power Technology Company Limited. He has been elected as an independent director of the Company since 2002. 12. Mr. Hua Yizheng, Independent Director of the Company. From 1981 to 1988 he had been a lecturer of Chemical Department and Management Science School of Fudan University; from 1988 to 1993 he was a full-time lawyer of Shenzhen Foreign Economic Law Firm; since 1994 he has been a partner of Guangdong Gaozhi Law office. He was a member of the 1st and 2nd Shenzhen Municipal Committee of CPPCC. He has been elected as an independent director of the Company since 2003. 13. Mr. Jiang Jian, Independent Director of the Company. From 1997 to 2002 he had been the head of News Department of China Asset News, vice general manager of Administration 13 Department of Xiangcai Securities and vice general manger of Investment Bank General Department of Haitong Securities. Since 2002 he has been the head of Beijing Branch and the general manger of Beijing Anyuan Road Exchange Branch of Dongfang Securities. He has been elected as an independent director of the Company since 2002. 14. Mr. Gao Dianhe, Independent Director of the Company. From 2002 he has been a partner of Shenzhen Zhongzhou Certified Public Accountants Company Limited. He has been elected as an independent director of the Company since 2002. 15. Mr. Qi Zhan, Independent Director of the Company. From 1995 to 1997 he served in Investment Bank Department of Huaxia Securities; from 2000 he had been the vice general manger of Investment Bank Department of Jutian Securities, senior consultant of Commerzbank Asset Management (Asia) Company Limited, etc. He is currently the vice general manger of Shenzhen Changna Investment Mangement Company Limited. He has been elected as an independent director of the Company since 2002. 16. Mr. Yuan Guoliu, Chaiman of the Supervisory Committee and chief officer of Administraton General Department. He has served as the head of General Manger's Office, manager of Personal Department and chief information officer of the Company. He has been elected as Chairman of the Supervisory Committee of the Company since 2002. 17. Mr. Wang Bo, Supervisor and chief officer of Law and Surveillance General Department. From 1987 to 1993 he had been the Youth League Secretary and head of Principal's Office of Hubei Provincial International Trade School; from 1993 to 1997 he was a department manager and legal adviser of China Hubei International Economy and Technology Cooperation Company Limited; from 1997 to 2001 he was a lawyer and partner of Chufeng Dehao Law Firm. He has been the chief officer of Law and Surveillance General Department of the Company since 2001. He has been elected as a Supervisor of the Company since 2002. 18. Mr. Cao Pingwei, Supervisor of the Company. From 1982 to 1990 he was an accountant in Financial Department and from 1990 to 1992 the deputy head of Financial Division of Henan Xinxiang Machine Tool Factory. From 1999 he was the vice general manager of Financial Department and is currently a director, vice general manger and chief financial officer of Joincare Pharmaceutical Industry (Group) Company Limited. He has been elected as a Supervisor of the Company since 2003. 19. Mr. Wang Chongxin, Supervisor of the Company. From 1999 to 2001 he was the general manager of Xi'an Pharmaceutical Company Limited. He is currently the president of Topsun Technology Company Limited, a director of Xi’an Topsun Group Company Limited and a director of Hubei Qianjiang Pharmaceutical Company Limited. He has been elected as a Supervisor of the Company since 2002. 20. Mr. Qiu Qingfeng, Supervisor of the Company. From 1993 to 1996 he served in Tianjing 1st Machine Tool General Factory; in 1996 he joined in Shenzhen TAITAI Pharmaceutical Industry Company Limited. He is currently the secetary to the board of directors of Joincare 14 Pharmaceutical Industry (Group) Company Limited. He has been elected as a Supervisor of the Company since 2002. 21. Ms. Liu Shuqing, Vice President of the Company. In 1989 she joined in the Company and had been the general manger of Livzon Financial Consultant Compnay Limited, manager of Equity and Securities Department of the Company, vice president of Livzon America Anshi Company and Assistant President of Livzon Group. Since 2003 she has been the vice investment president of the Company. She was elected as a member of the 6th Zhuhai Municipal Committee of CPPCC. 22. Mr. Fu Gang, Vice President of the Company. In 1993 he had been a doctor of Bejing Railway General Hospital; in 1994 he joined in the Company and had served as the product head of Marketing Department, manager of Qingdao Office, vice general manager and manager of Medical and Marketing Department of a distribution company, and the manager of Medical and Marketing Department of the Company. From 2000 to 2004 he was the general manger of the distribution company; since February 2004 he has been the vice president of the Company and the chief officer of Medical and Marketing General Department. 23. Mr. Wang Wuping, Secretary to the Company. In 1993 he joined in the Company and had been the manager of Equity and Securities Department and the general manager of Planning and Investment Management General Department. Since 1998 he has been the Secretary to the Company. Since 2005 he has also been the general manager of Guangdong New Bei Jiang Pharmaceutical Company Limited. (3) Details of annual remuneration The allowances for the Company’s directors (including independent directors) and supervisors for the year amounted to RMB1,320,000 (inclusive of tax, the same below), of which RMB360,000 was the total amount of allowances for the five independent directors. The Company has a total of 20 directors and supervisors, of which 3 directors receive an annual allowance of RMB90,000, the remaining 17 directors and supervisors receive an annual allowance in the band of RMB36,000, to RMB72,000. The total amount of annual allowances received by the top three highest paid directors amounted to RMB270,000. Allowances for directors and supervisors are payable on a monthly basis. The total annual remuneration received by the senior management of the Company (including president, vice president, and secretary to the Board, the same below) amounted to RMB5,316,570 (inclusive of tax, the same below). Among them, 2 persons received an annual remuneration in the band of RMB150,000 to RMB400,000, and 4 persons received an annual remuneration of over RMB400,000. The total amount of annual remuneration of the top three highest paid senior management members was RMB4,209,860. (4) Details of resignation and appointment On 13 February 2004, the 12th meeting of the 4th Board of Directors was held and the meeting examined and approved Proposal for Engagement of Mr. Fu Gang as Marketing Vice President of 15 Livzon Group, pursuant to which Mr. Fu Gang was engaged as Marketing Vice President of Livzon Group. On 6 August 2004, the 16th meeting of the 4th Board of Directors was held and the meeting examined and approved Proposal for Resignation of Mr. Dong Shaozhi from Vice President of the Company, pursuant to which Mr. Dong Shaozhi resigned from the position of Vice President of the Company. On 20 January 2005 Mr. Dong Shaozhi resigned from the position of Director of the Company since he is already occupied in his office as the president of Dawnrays Pharmaceutical (Holding) Company Limited. 2. Details of Employees As at 31 December 2004 the Company had 4,511 employees (including subsidiaries in scope of consolication) and has to bear the cost for 83 retired employees. Among the employees, 2,410 are involved in production, 1,210 are sales personnel, 316 are technicians and related personnel, and 575 are administrative personnel. Among them, 1.44% of the total number of employees has master or higher degrees, 17.56 of the total number of employees has a bachelor degree, 20.04% of the total number of employees has tertiary education and 60.96% of the total number of employees has education of lower than tertiary education. VI. CORPORATE GOVERNANCE STRUCTURE 1. Corporate Goverance In strict compliance with the relevant requirements of laws and regulations including the Company Law, the Securities Law and the Guidance in Establishment of Independent Directors System for Listed Companies, the Company gradually improved various rules, regulations and corporate governance system including Rules of Procedures of General Meetings, further refined the Company’s corporate governance structure and established a modern enterprise system to standardize its operations and strengthene information disclosure. 2. Discharge of Duties by Independent Directors During the reporting period, the 5 Independent Directors were able to fully discharge their duties, focus on the operations and financial status of the Company and corporate governace structure, and proactively participated in the decision making of the Company and learned about its status in the form of seminars. They had provided their independent opinions on the changes in senior management, connected transactions, major acquisition and provision for impairment of assets, and fully implemented their functions as Independent Directors, and safeguarded the interest of the Company as a whole and the legal interests of the medium and minority shareholders. 1). Attendance of Independent Directors to the Board Meetings Name of Board Meetings Required Attendance in Attendance by Independent to Attend Person Proxy Absence 16 Director An Chengxin 7 7 Qi Zhan 7 7 Jiang Jian 7 6 1 Gao Dianhe 7 7 Hua Yizheng 7 7 2). Objection of Independent Directors to the Company's Events Independent Director Mr. Jiang Jian voted agaist the Proposal for Authorisation to the Management for Full Acquisition of Fuzhou Fuxing Pharmaceutical Company in the 17th meeting of the 4th Board. The reason is "In my opinion the 50% cap for premium is too high and it would be more appropriate to be no more than 30% given its common growth and medium investment income therefrom. 3. Segregation of the Company with the control Shareholder in terms of Business, Personnel, Assets, Organisation and Finance The Company is entirely independent of its control shareholder in terms of business, personnel, assets, organisation and finance. With respect to business, the operation of the Company is entirely independent, and has its own production, purchase and sales systems. The purchase, production and sales the Company are conducted through its own production, purchase and sales systems; With respect to personnel, the labour, personnel and salary management of the Company are segregated from those of the control shareholders; With respect to assets, there is a clear delineation in property title between the Company and the controlling shareholder. The Company has a complete system in production, supply and sales respectively; With respect to organisation, the Company has its own independent and complete institutional establishments, which are strictly segregated from those of the control shareholders; With respect to finance, the Company has its independent financial department and established an independent financial auditing system, and a standardized and independent accounting system as well as a finance management system for its subsidiaries. 4. Establishment and Implementation of Evaluation and Incentive Encouragement Mechanism for Senior Management In 2004, the Company continued to implement annual target salary system for the senior management, pegging their annual salary to their personal performance and achievement of the Comapany’s operation targets and payable on a floating basis. Salaries of senior management are divided into two parts of 75% and 25%, payable at the end of each month and following the assessment at the end of year respectively. 17 VII. DETAILS OF SHAREHOLDERS’ GENERAL MEETING 1. Holding of Shareholders’ General Meetings During the reporting period, the Company convened three shareholders’ general meetings. (1) The notice of the 2003 annual general meeting of the Company (“AGM”) was published on the designated newspapers for disclosure of information on 17 Febraury 2004, and the meeting was convened at Zhuhai Holiday Resort Hotel on 18 March 2004. The meeting's 15 participants comprised 3 shareholders and shareholders' proxies, representing 118,353,967 shares or 38.67% of the total share capital of the Company (of which, 34,284,870 shares were B shares, representing 11.20% of the total share capital of the Company). A lawyer from Guangdong Desai Law Firm witnessed the meeting. The following resolutions were considered and approved at the meeting in the form of written resolutions: a. The 2003 Work Report of the Board of Directors of Livzon Group was considered and approved b. The 2003 Work Report of the Supervisory Committee of Livzon Group was considered and approved c. The 2003 Financial Report of Livzon Group was considered and approved d. The 2003 Profit Distribution Proposal of Livzon Group was considered and approved e. The resolution regarding change of the international firm of accountants of Livzon Group for 2003 was considered and approved f. The resolution regarding the appointment of domestic and international firms of accountants of Livzon Group for 2004 was considered and approved The announcement of the resolutions passed at the AGM was published on the designated newspapers for disclosure of information on 19 March 2004. (2) The notice of the 2004 first extraordinary general meeting of the Company was published in the designated newspapers for disclosure of information on 5 June 2004, and the meeting was convened at Zhuhai Holiday Resort Hotel on 22 July 2004. The meeting's participants comprised 20 shareholders and shareholders' proxies, representing 141,382,868 shares or 46.2% of the total shares carrying voting rights in the Company (of which, 34,284,870 shares were B shares, representing 11.2% of the total shares carrying voting rights in the Company). A lawyer from Guangdong Desai Law Firm witnessed the meeting. The following resolutions were considered and approved at the meeting by way of poll: a. The Proposal for the Company's Compliance with Requirement on Share Placement was considered and approved b. The Proposal for the Company's Share Placement in 2004 was considered and approved on an itemised basis c. The Proposal for Period of Validity for the Share Placement was considered and approved d. The Proposal for Feasibility Study on Utilisation of Proceeds from the Share Placement was considered and approved e. The Proposal for Authorizaton by General Meeting to the Board for Handling Matters Regarding the Share Placement at its Discretion was considered and approved 18 f. The Proposal for Reviewing the Special Report of Reanda Certified Public Accountants for Utilisation of the Last Raised Proceeds of the Company was considered and approved g. The Statement of Utilisation of the Last Raised Proceeds by the Board of Livzon Pharmaceutical Group Inc. was considered and approved h. The Proposed Amendments to Articles of Association were considered and approved The announcement of the resolutions passed at the AGM was published on the designated newspapers for disclosure of information on 23 July 2004. (3) The notice of the 2004 2nd extraordinary general meeting of the Company was published in the designated newspapers for disclosure of information on 10 August 2004, and the meeting was convened at Zhuhai Holiday Resort Hotel on 10 September 2004. The meeting's participants comprised 4 shareholders and shareholders' proxies, representing 79,381,849 shares or 25.94% of the total shares carrying voting rights in the Company (of which, 34,284,870 shares were B shares, representing 11.20% of the total shares carrying voting rights in the Company). A lawyer from Guangdong Desai Law Firm witnessed the meeting. The following resolutions were considered and approved at the meeting by way of poll: a. The Proposed Amendments to Articles of Association were considered and approved on an itemised basis b. The Rules of Procedures for General Meetings of Livzon Pharmaceutical Group Inc. was considered and approved The announcement of the resolutions passed at the AGM was published on the designated newspapers for disclosure of information on 11 September 2004. 2. Details of Election and Change of the Company’s Directors and Supervisors There is no election or change of the Company’s directors and supervisors during the reporting period. VIII. Report of Directors 1. Discussions and analysis on business operation Year 2004 witnessed the further in-depth reform of Livzon Group. Following its practical, innovative and efficient operating philosophy, we overcame adverse impacts from a series of factors including price decrease of antibiotic raw medicines and preparations, expiry of agency distribution of D-Cal and Dages, and decline in sales of anti-cold granule and Roxithromycin due to aftermath of SARS. We made achievements in fields such as overall implementation of planned management, management restructuring, optimisation of resource allocation, improvements in investment and asset operation and promotion of key products, product restructuring, implementation of share placement plan, standardized and efficient production and operation, etc. Net profit for 2004 （The data were audited by BDO International Certified Public Accountants according to IAS）amounted to RMB124,306,000, a year-on-year growth of 32.35%. Earnings per 19 share amounted to RMB0.41, while the net cash flow per share from operating activities amounted to RMB0.59. Return on net asset amounted to 11.05%. The revenue of major products such as Shenqi Fuzheng for Injection, Ceftriaxone and Livzon Deles series increased 81.15%, 29.58% and 15.36% respectively compared with 2003. Despite the average price decrease of more than 20% of antibiotic preparations including Cefurorime sodium , the Company minimized its adverse impact through scale sales, with an increase of 83.89% in sales revenue over 2003. In addition, the Company improved its control on operating expenses and administrative expenses, both recording a year-on-year decrease. 2. Operation of the Company (1) Scope of Principal Business and the Operation Performance The Company is principally engaged in production, operation and sales and technological research of medicines. Its principal products include preparations such as Livzon Dele (generic name Colloidal Bismuth Citrate Granule/Cap./Tab.), anti-cold granule, Shenqi Fuzheng for Injection, Sulbactam Sodium/Cefoperazone Sodium for Injection, Bifidobiogen Cap., Valaciclovir Hydrochloride Tab., Prostant Suppository, and Compound Cinnarizine Cap.; and raw medicine such as Ceftriaxone, Ampicillin Trihydrate, 6-APA, Mevastatin, Cefuroxime sodium, Amoxicillin, etc.. Its products involve about 300 varieties covering the categories of chemical medicines, biochemical medicines, bio-engineering medicines, microzoology preparation, Chinese patent medicine, testing diagnosis reagent and chemical raw medicines. Principal operating revenue of the Company by geographical areas: (including wholly-owned and practically controlled subsidiaries) Principle operating Principle operating Percentage (%) of principal Principle operating Geographical areas revenue in 2004 revenue in 2003 operating revenue profit in 2004 (RMB'000) (RMB'000) increase (+)/ decrease (-) (RMB'000) North-eastern region 110,320.80 106,761.50 3.33% 41,072.78 Northern region 256,417.83 284,331.60 -9.82% 116,792.72 Central region 177,623.47 176,839.30 0.44% 99,980.11 Eastern region 202,846.57 312,534.50 -35.10% 98,368.16 Southern region 450,078.91 489,212.20 -8.00% 167,856.27 South-western region 206,311.00 247,317.00 -16.58% 110,768.22 North-western region 67,228.35 82,551.40 -18.56% 38,974.25 Export 67,321.22 46,880.00 43.60% 20,811.65 Principal operating revenue of the Company for the reporting period by category (Unit: RMB'000) Principle Principle Principle Principle operating Category operating cost operating operating cost revenue in 2004 in 2004 revenue in 2003 in 2003 20 Digestive products 223,345 33,522 204,254 32,420 Cardio & cerebrovascular products 65,094 10,206 70,116 10,393 Chemical Antibiotics products 289,131 125,306 229,773 75,481 medicine Hormonal products 36,872 14,506 27,765 11,148 preparati Vascular & hematopoietic system ons 33,316 13,999 28,118 11,905 products Others 203,379 130,794 456,187 228,065 Raw medicines 404,446 348,183 394,221 326,872 Chinese medicine preparations 261,734 99,716 296,965 126,873 Agency of Imported products 37,470 15,277 104,514 91,465 Including: connected transactions (amounts 32,957 14,558 ------- ------- included in principal operating revenue) Total 1,554,788 791,508 1,811,914 914,621 Principal operating revenue of the Company by product Principle operating Principle operating Percentage (%) of principal Product revenue in 2004 revenue in 2003 operating revenue increase (+)/ (RMB'000) (RMB'000) decrease (-) Livzon Dele series 148,867 129,045 15.36% Ceftriaxone raw medicine 140,894 108,731 29.58% Anti-cold granules 100,341 157,083 -36.12% Shenqi Fuzheng for Injection 61,966 34,207 81.15% Sulbactam Sodium/Cefoperazone Sodium 60,020 51,246 17.12% for Injection Ampicillin trihydrate raw medicines 59,531 73,270 -18.75% 6-APA raw medicine 54,866 67,582 -18.82% Mevastatin raw medicine 44,793 42,937 4.32% Bifidobiogen cap. 42,550 44,498 -4.38% valaciclovir hydrochloride tab. 39,775 45,204 -12.01% Including: connected transactions 31,096 34,560 46.21% (2) Operation and results of the major subsidiaryes and investee companies a) Zhuhai Free Trade Zone Integrated Pharmacy Manufacturing Company Limited is mainly engaged in the production and operation of chemical crude medicine with a registered capital of RMB102.28 million and its main products are Amoxicillin, Ampicillin, Ceftriaxone Sodium, etc. The total assets of this factory amounted to RMB249.56 million as of 31 December 2004, and net profit 21 realized for the whole year of 2004 is RMB11.28 million. b) Libao Bio-chemical Pharmaceutical Company Limited. is mainly engaged in the production and operation of bio-chemical medicine with a registered capital of RMB50 million and its main products are cerebroprotein hydrolysate for injection and urokinase etc. Its total assets amounted to RMB97.30 million as of 31 December 2004 and the net profit realized in the whole year of 2004 amounted to RMB23.75 million. c)Sichuan Everbright Pharmaceutical Company Limited. is mainly engaged in the production and sales of Chinese patent medicine and development of new medicine, with a registered capital of RMB66 million and its main products are Anti-cold Granule, Jiuwei Yinao Granule, etc.. The total assets of this company amounted to RMB166.32 million as of 31 December 2004, and the net profit realized for the whole year of 2004 amounted to RMB6.52 million. d)Livzon Group Limin Pharmaceutical Factory is mainly engaged in the production and operation of Chinese medical preparation and pharmaceutical crude materials, with a registered capital of RMB53.44 million and its main products are Shenqi Fuzheng for Injection, Xueshuantong Injection, etc.. The total assets of this company amounted to RMB102.81 million as of 31 December 2004, and the net profit realized for the whole year of 2004 amounted to RMB25.07 million. e) Zhuhai Special Economic Zone Li Kang Medicine Company Limited is mainly engaged in the production and operation of chemical antibiotic preparation, with a registered capital of RMB38.02 million and its main products are Cefoperazone Sodium for Injection and Sulbactam Sodium/Cefoperazone Sodium for Injection. The total assets of this company amounted to RMB36.87 million as of 31 December 2004, and the net profit realized for the whole year of 2004 amounted to RMB2.22 million. f) Guangdong New Bei Jiang Pharmacy Manufacturing Company Limited is mainly engaged in business of self-produced products and export of relevant technology, with a registered capital of RMB134.93 million. The total assets of this company amounted to RMB252.93 million as of 31 December 2004 and the net profit realized for the whole year of 2004 was RMB21.46 million. g) Livzon (Group) Pharmaceutical Factory is mainly engaged in production and operation of Livzon Dele series and Bifidobiogen Cap., with a registered capital of RMB30 million. The total assets of this company amounted to RMB226.95 million as of 31 December 2004, and the net profit realized for the whole year of 2004 amounted to RMB25.36 million. h) Zhuhai Livzon Pharmaceutical Trading Company Limited is mainly engaged in operation of Valaciclovir Hydrochloride Tab., Prostant Suppository and Compound Cinnarizine Cap., with a registered capital of RMB3 million. The total assets of this company amounted to RMB134.79 million as of 31 December 2004, and the net profit realized for the whole year of 2004 amounted to RMB2.27 million. (3) Sales customers and suppliers During the year, the total amount of sales to the top five customers （as audited by Reanda Certified Public Accountants according to PRC Accounting Rules and Regulations ） was RMB156,053,950.70, representing 10.04% of the total annual sales of the Company, and the total amount of purchase from the top five suppliers was RMB196,763,140.17, representing 24.11% of the total annual purchase of the Company. 22 3. Investment during reporting period (1) Use of proceeds During the reporting period, the Company made no attempt to raise fund from the securities market. (2) Investment During the reporting period, the net outflow of cash generated by investment activities of the Company （as audited by Reanda Certified Public Accountants according to PRC Accounting Rules and Regulations）amounted to RMB164.98 million, representing a decrease of RMB103.06 million or 38.45% compared with the RMB268.04 million in 2003. The major investment activities are as follows: a) The 13th meeting of the 4th Board considered and approved the Proposal for Acquisition of 2004 China Petroleum & Chemical Corporation's Corporate Bonds and the Relevant Authorisation to the Management, pursuant to which the Board agreed to subscript 2004 China Petroleum & Chemical Corporation's corporate bonds at fixed interest rate with RMB140,000,000 in value (SAY: One hundred and forty million Renminbi) and a term of 10 years (“04 Sinopec Bonds”). The face interest rate is 4.61% per annum. The subscription was completed. b) The 11th meeting of the Investment Decision Committee of the Company considered and approved: ⅰ) Proposal for Cooperation with Tongyi Chaoshang (Taiwan) Company Limited and Disposal of Zhuhai Livzon Drugstore Chain Company Limited, pursuant to which the Company was approved to cooperate with Tongyi Chaoshang (Taiwan) Company Limited and found a joint venture with registered capital of RMB50 million, of which RMB17.50 million is contributed by the Company, representing 35% of equity interest therein. Currently the registration procedures were completed. The registered name of the joint venture is "Tongyi Kangshimei Commercial Chain (Shenzhen) Company Limited". ⅱ ) Proposal for Acquisition of Equity Interest in Shanghai Livzon Dongfeng Biotechnical Company Limited and the Liquidation thereof, pursuant to which the Company was approved to acquire 50% equity interest, at a consideration of RMB6 million, in Shanghai Livzon Dongfeng Biotechnical Company Limited held by Shanghai Zhongke Shenglongda Bio-tech Company Limited and to effect cancellation and liquidation thereof in due course. Currently the procedures for registration change were completed. Shanghai Livzon Dongfeng Biotechnical Company Limited became a wholly-owned subsidiary of the Company subject to cancellation and liquidation in due course. ⅲ) Proposal for Transferral of Equity Interest in Zhuhai Livzon Meidaxin Technology Development Company Limited and the Liquidation thereof, pursuant to which Livzon (Group) Pharmaceutical Factory was approved to acquire 20% equity interest, at a consideration of RMB640,000, in Zhuhai Livzon Meidaxin Technology Development Company Limited held by Chen Yongle, and the management of the Company is authorized to effect liquidation thereof in due course upon completion of the equity transferal. Currently the procedures for registration change were 23 completed. Zhuhai Livzon Meidaxin Technology Development Company Limited became a wholly-owned subsidiary of the Company subject to cancellation and liquidation by the management of the Company in due course. c) The 12th meeting of the Investment Decision Committee of the Company considered and approved the Proposal for Acquisition of Equity Interest in Shanghai Lijin Bio-chemical Product Company Limited, pursuant to which Shanghai Livzon Pharmaceutical Company Limited was approved to acquire 82.17% equity interest, at a consideration of RMB1,354,900, in Shanghai Lijin Bio-chemical Product Company Limited ("Shanghai Lijin") held by its Staff Union, and Livzon (Group) Pharmaceutical Factory was approved to acquire 7.18% equity interest, at a consideration of RMB118.400, in Shanghai Lijin held by its Staff Union and 3.82% equity interest, at a consideration of RMB62,400, in Shanghai Lijin held by its Trade Union. Upon completion of the acquisition, Shanghai Lijin is 89% owned by Shanghai Livzon Pharmaceutical Company Limited and 11% owned by Livzon (Group) Pharmaceutical Factory. Currently the procedures for registration change have been completed. Shanghai Lijin became a wholly-owned subsidiary of the Company. d) The 13th meeting of the Investment Decision Committee of the Company considered and approved the Proposal for Acquisition of Equity Interest in Zhuhai Free Trade Zone Livzon Integrated Pharmacy Manufacturing Company Limited and in Zhuhai Free Trade Zone Lida Pharmaceutical Company Limited held by Kang Jian Investment Company Limited, pursuant to which Livzon (Group) Pharmaceutical Factory was approved to acquire 10% equity interest, at a consideration of RMB1.41 per share or RMB14,420,000 in aggregation, in Zhuhai Free Trade Zone Livzon Integrated Pharmacy Manufacturing Company Limited held by Zhuhai Kang Jian Investment Company Limited; and Livzon (Group) Pharmaceutical Factory was approved to acquire 10% equity interest, at a consideration of RMB1.03 per share or RMB2,680,000 in aggregation, in Zhuhai Free Trade Zone Lida Pharmaceutical Company Limited held by Zhuhai Kang Jian Investment Company Limited. Currently the procedures for registration change have been completed. Both Zhuhai Free Trade Zone Livzon Integrated Pharmacy Manufacturing Company Limited and Zhuhai Free Trade Zone Lida Pharmaceutical Company Limited became wholly-owned subsidiaries of the Company. e) The 15th meeting of the Investment Decision Committee of the Company considered and approved the Proposal for Acquisition of Additional Equity Interest in Sichuan Everbright Pharmaceutical Company Limited, pursuant to which the Company was approved to acquire 47.79% shares in Sichuan Everbright Pharmaceutical Company Limited held by Sichuan Xinguang Investment Company Limited, at a consideration of RMB58,350,000. Currently the procedures for registration change have been completed. Sichuan Everbright Pharmaceutical Company Limited became a wholly-owned subsidiary of the Company. 24 4. Analysis of financial position As at the end of the reporting period, total asset increased by RMB72.64 million or 3.41% to RMB2,201.89 million from RMB2,129.25 million at the beginning of the year. The increase is attributable to the consolidation of Livzon (Group) Fuzhou Fuxing Pharmaceutical Company Limited to be acquired during the reporting period and the increase in goodwill of Sichuan Everbright Pharmaceutical Company Limited. As at the end of the reporting period, shareholders’ equity increased by RMB95.16 million or 9.11% to RMB1,139.72 million from RMB1,044.56 million at the beginning of the year, which is attributable to the increased net profit for the reporting period. Cash and cash equivalents for the reporting period decreased by RMB249.39 million or 193.63% to a net decrease of RMB120.60 million from the net increase of RMB128.80 million in 2003.The decrease is attributable to the decreased net cash flow in the operating activities and the increased net cash outflow of financing activities. Principal operating revenue for the reporting period decreased by RMB257.13 million or 14.19% to RMB1,554.79 million from RMB1,811.91 million of last year. The decrease is attributable to the disposal of Hubei Keyi Pharmaceutical Company Limited ("Keyi") and Hubei Liyi Pharmaceutical Tech Company Limited ("Liyi"), declining sales anit-SARS medicines such as anti-cold granule and Roxithromycin, and expiry of agency sale of Dages and D-Cal. Principal operating profit for the reporting period decreased by RMB131.42 million or 14.72% to RMB761.19 million from RMB892.61 million of last year, mainly due to the decreased principal operating revenue. Expenses for the period decreased by RMB113.83 million, or 15.10%, to RMB640.12 million from RMB753.95 million of last year. The decrease is mainly due to the decrease of 9.38% and 3.36% respectively in operating expense and administrative expense for last year (net of impacts from disposal of Keyi and Liyi), Investment income increased by RMB16.53 million or 114.61% to RMB30.96 million from RMB14.43 million for last year, mainly due to the investment income from disposal of Keyi and Liyi. Income tax decreased by RMB16.29 million or 44.96% to RMB19.94 million from RMB36.23 million for last year, mainly due to the write-off of bad debts between the Company and its subsidiary Guangdong New Bei Jiang Pharmaceutical Company Limited and the allowance before enterprise income tax. Minority income/loss decreased by RMB18.58 million or 63.49% to RMB10.69 million from RMB29.27 million for last year, mainly due to the decrease in minority income/loss from Keyi and Liyi, and the decrease in minority interests in Sichuan Everbright Pharmaceutical Company Limited, Zhuhai Free Trade Zone Livzon Integrated Pharmacy Manufacturing Company Limited and Guangdong New Bei Jiang Pharmaceutical Company Limited arising from the acquisition of interests therein. Net profit increased by RMB31.86 million or 34.55% to RMB124.06 million from RMB92.20 million of last year, mainly attributable to the increased investment income, decreased minorities income/loss, and decreased income tax. The data above was audited by Reanda Certified Public Accountants according to PRC Accounting Rules and Regulations. 25 5. Business Plan of New Year In 2005, the Company will focus on the following aspects: a) Comprehensive implementation of its planned management system and reasonable utilisation of resources. In 2005 the Company will continue to fully carry out its planned management. Based on the business plan of 2005 and the breakdown of business planning indices for sales, profit and expense carefully prepared by its departments and subsidiaries, the Group will follow such indices to monitor and manage its subsidiaries and department, so as to optimize its resource allocation for better completion of the sales indices and maximisation of its benefits. b) Implementation of innovative reform in marketing system In light of its fundamental R&D and innovation strategy focusing on four major fields including chemical medicine, Chinese medicine, biological medicine and raw medicine, the Company will futher promote innovations and reforms in its marketing system. For medicine preparations, the Company will continue its marketing strategy of brand highlighting and cohesion. Taking efforts in market planning and promotion for its major brands such as Livzon Dele series (including Weisanlian, Xindele), anti-cold granule, Shenqi Fuzheng for Injection, Compound Cinnarizine Cap. , Valaciclovir Hydrochloride Tab. , etc. the Company will also attach importance to market exploration of key products including Bifidobiogen Cap., Prostant Suppository, cerebroprotein hydrolysate for injection, Pancreatic Kininogenase Enteric-coated tab. and Compoud sodium ferulate Cap.. By reasonably utilizing resources, elaborating brand advantages and expanding key products, the Company will optimize its product mix, aiming at a rapid growth in sales revenue and improvement in product competitiveness and profitabilities. For antibiotics, Lovastatin category medicines and aminoglycoside raw medicines, the Company will capture opportunies in reform of marketing system and take full use of its overall advantages in talents and technologies. By virtue of acquisition of production license, purchasing strains and more investment, the Company strives to enhance its products' core competitive edges, so as to foster its scale and low-cost advantages in commercial production of raw medicines, aiming at a fast expanding market share. c) In-depth adoption of supply chain management and comprehensive integration of human resources In 2005, the Company will further promote the supply chain management with emerging effects, as well as the ongoing comprehensive integration of human resources. Such two task, being part of our innovative reform, will contribute to the improvement in our core competitiveness and its effect which will in turn lead to our improving daily decision-making efficiency and high morale of the staff, laying a foundation for the Group to achieve exellent performance. d) Actively upgrading the level of quality and production technology and implementation the requirements in safety, environmental protection and healthcare Through integration internal technological workforce and experiences, production technology and quality were actively upgrade to reach an advance level within the Industry. Acting as a leader, the requirements for national and internal safety, environmental protection and healthcare were fully implemented so as to build up a strong and competitive workforce for the future. e) Faster paces of share placement for capital reserve for the Group's development In 2005, the Company expects to complete its share placement with a target proceed of approximately RMB720 million to finance its future development. Upon sufficient capital support, the Company plans to speed up certain major projects to rapidly build up new profit sources. 26 6. Daily work of the Board During the reporting period, there are a total of 7 meetings (the 12th to the 18th session) held by the 4th Board of the Company and 7 meetings (the 11th to 17th session) held by Investment Decision Committee. On 13 February 2004, the 12th meeting of the 4th Board was held in Shenzhen Kapok Hotel. At the meeting, certain resolutions were considered and approved, including President's Report of Livzon Group for 2003, Directors’ Report of Livzon Group for 2003, Financial Report of Livzon Group for 2003, Proposal for Profit distribution of Livzon Group for 2003, Annual Report of Livzon Group for 2003, Proposal for Engagement of Mr. Fu Gang as Vice Marketing President of LIvzon Group, Proposal for Authorisation to the Management to Integrate Certain Wholly-owned Productive Enterprises of the Group, Proposal for Credit Facilities Granted to Livzon Group, Proposal for Adjustment to Disposal of Interests in Suzhou Xinbao Pharmaceutical Factory, Proposal for Appointment of Domestic and International Firms of Accountants of Livzon Group, and Proposal for Convening of Annual General Meeting of Livzon Group for 2003. On 23 Febraury 2004, the 13th meeting of the 4th Board was convened by way of telecommunication. At the meeting, the Proposal for Acquisition of 2004 China Petroleum & Chemical Corporation's Corporate Bonds and the Relevant Authorisation to the Management was considered and approved. On 25 April 2005, the 14th meeting of the 4th Board was convened by way of telecommunication. At the meeting, certain resolutions were considerred and approved, including the First Quarterly Report of Livzon Group for 2003, the Report on Provisions for Losses and Write-off in 2003, and the Proposal for Connected Transactions between Livzon Pharmaceutical Group Inc. and Subsidiaries of Joincare Pharmaceutical Industry (Group) Company Limited. On 3 June 2004, the 15th meeting of the 4th Board was held in Shenzhen Kapok Hotel. At the meeting, certain resolutions were considered and approved, including Proposal for the Company's Compliance with Requirement on Share Placement, the Proposal for the Company's Share Placement in 2004, Proposal for Period of Validity for the Share Placement, the Proposal for Feasibility Study on Utilisation of Proceeds from the Share Placement, Proposal for Authorizaton by General Meeting to the Board for Handling Matters Regarding the Share Placement at its Discretion, Proposal for Reviewing the Special Report of Reanda Certified Public Accountants for Utilisation of the Last Raised Proceeds of the Company, Statement of Utilisation of the Last Raised Proceeds by the Board of Livzon Pharmaceutical Group Inc., Proposed Amendments to Articles of Association, and Proposal for Convening of the First Extraordinary General Meeting for 2004. On 6 August 2004, the 16th meeting of the 4th Board was convened by way of telecommunication. At the meeting, certain resolutions were considered and approved, including 2004 Interim President's Report of Livzon Group, 2004 Interim Financial Report, 2004 Interim Report of Livzon Group, Proposed Amendments to the Articles of Association, Rules of Procedures of General Meetings of Livzon Group, Proposal for Adjustment to Research and Development Facilities of the Compay, Proposal for Resignation of Mr. Dong Shaozhi from Vice President of the Company, Proposal for Extension of Registerred Term of Branches including Guangzhou and Hefei Offices, 27 Proposal for Convening of the Second Extraodinary General Meeting of Livzon Group for 2004, and Proposal for Authorisation to the Investment Decision COmmitttee for Disposal of Equity Interest in Suzhou Xinbao Pharmaceutical Factory. On 15 October 2004, the 17th meeting of the 4th Board was convened by way of telecommunication. At the meeting, the Proposal for Authorisation to the Management for 100% Acquisition of Fuzhou Fuxing Pharmaceutical Company Limited was considered and approved. On 20 October 2004, the 18th meeting of the 4th Board was convened by way of telecommunication. At the meeting, the 2004 3rd Quarterly Report of Livzon Pharmaceutical Group Inc. was considered and approved. On 10 Febraury 2004, the 11th meeting of the Investment Decision Committee of Livzon Group was convened by way of telecommunication. At the meeting, certain resolutions were considered and approved, including Proposal for Cooperation with Tongyi Chaoshang (Taiwan) Company Limited and Disposal of Zhuhai Livzon Drugstore Chain Company Limited, Proposal for Acquisition of Equity Interest in Shanghai Livzon Dongfeng Biotechnical Company Limited and the Liquidation thereof, and Proposal for Transferral of Equity Interest in Zhuhai Livzon Meidaxin Technology Development Company Limited and the Liquidation thereof. On 15 March 2004, the 12th meeting of the Investment Decision Committee of Livzon Group was convened by way of telecommunication. The meeting considered and approved the Proposal for Reform and Registration of Livzon (Group) Guangzhou Livzon Building Company Limited, and the Proposal for Acquisition of Equity Interest in Shanghai Lijin Bio-chemical Product Company Limited. On 5 July 2004, the 13th meeting of the Investment Decision Committee of Livzon Group was convened by way of telecommunication. At the meeting, the Proposal for Acquisition of Equity Interest in Zhuhai Free Trade Zone Livzon Integrated Pharmacy Manufacturing Company Limited and in Zhuhai Free Trade Zone Lida Pharmaceutical Company Limited held by Kang Jian Investment Company Limited was considered and approved. On 11 August 2004, the 14th meeting of the Investment Decision Committee of Livzon Group was convened by way of telecommunication. At the meeting, the Proposal for Takeover of Equity interest in Suzhou Xinbao Pharmaceutical Factory was considered and approved. On 24 August 2004, the 15th meeting of the Investment Decision Committee of Livzon Group was convened by way of telecommunication. At the meeting, the Proposal for Additional Acquisition of Equity Interest in Sichuan Everbright Pharmaceutical Company Limited was considered and approved. On 19 November 2004, the 16th meeting of the Investment Decision Committee of Livzon Group was convened by way of telecommunication. At the meeting, the Proposal for Transferral of Equity interest in Suzhou Xinbao Pharmaceutical Factory was considered and approved. 28 On 20 December 2004, the 17th meeting of the Investment Decision Committee of Livzon Group was convened by way of telecommunication. At the meeting, the Proposal for Transferral of Equity Interest in Bejing Xinghao Modern Pharmaceutical Company Limited was considered and approved. Investment Decision Committee of Livzon Group is established with authorisation of the Board, which is responsible for making investment decisions in accordance with Approval Procedures of the Board of Livzon Group and Work Rules of President of Livzon Group. Investment Decision Committee is entitled to considerate and approve capital operations including investments, acquisition or merges, asset disposal and guaranties to be granted to outside companies with an amount up to 10% (inclusive) of the Company’s latest audited net assets. Investment Decision Committee reports to the Board and is subject to its supervision. All the decisions are filed for the Board. The aforesaid meetings of Investment Decision Committee in 2004 have been reported to the Board and filed. 7. Directors’ Implementation of Resolutions of General Meetings In strict compliance with Articles of Association and the relevant PRC’s laws and regulations, the Board have implemented with due diligence the resolutions which were considered and approved at the general meetings in the reporting period. a) Implementation of Profit Distribution Proposal On 18 March 2004, a proposal of profit distribution for 2003 was considered and approved in the Company’s 2003 Annual General Meeting, pursuant to which RMB1.0 of cash (before tax) for every 10 shares will be distributed to all shareholders on a basis of the Company’s 306,035,482 shares in total. Neither bonus shares nor transfer of any public reserve to the capital is recommended for 2003. As stated in the announcement of the Company dated 20 April 2004, since the Company will deduct individual income tax for the State based on a tax rate of 20%, the actual cash dividend with respect to individual holders and trust fund of A public shares is RMB0.80 for every 10 shares. For holders of B shares, institutional holders of A shares and holders of non-circulating domestic legal person shares (including trustees of trust shares), the actual cash dividend is RMB1.0 for every 10 shares, pursuant to which cash dividend of RMB30,603,548.2 (before tax) in aggregation will be distributed. The date of record (for B share, the last trading day) is 26 April 204, and the ex dividend date is 27 April 2004. b) Authorisation to the Board for handling affairs regarding the share placement The Company's application materials for the share placement and its responses to the 1st and 2nd feedbacks were filed to China Securities Regulatory Commission respectively on 8 October 2004, 11 November 2004 and 18 Juanuary 2005. Currently the share placement is in progress of considering and approving. 8. Directors’ Proposal of Profit Distribution for the Reporting Period Pursuant to the PRC’s relevant accounting rules and based on the parent company’s net profit of 29 RMB141,071,615.11 for 2004 as audited by Reanda Certified Public Accountants (“Reanda”), the Company intends to respectively appropriate 10% of the net profit (RMB14,107,161.51) as statutory public reserve and statutory welfare fund. Subsidiaries intend to appropriate profits of RMB10,852,548.72 in aggregation into their statutory public reserves, statutory welfare funds and corporate development funds. A total of RMB39,066,871.74 of profits will be appropriated into surplus reserves. Net profit for 2004 as audited by the domestic auditor amounted to RMB124,058,279.08, pursuant to which undistributed profit attributable to shareholders for 2004, after including the said appropriation of surplus reserve of RMB39,066,871.74 and based on the undistributed profit of RMB70,825,772.41 at the beginning of the year, net of other in-transferral of RMB6,694,695.96 and payable dividends of RMB30,603,548.20 for ordinary shares, amounted to RMB118,518,935.59. Net profit for 2004 as audited by the overseas auditor amounted to RMB124,306,000, pursuant to which undistributed profit attributable to shareholders for 2004, after including appropriation of surplus reserve of RMB45,761,000 (including RMB39,067,000 of new surplus reserve and RMB6,694,000 of negative adjustment thereto) and based on the undistributed profit of RMB59,586,000 at the beginning of the year and after deducting RMB30,603,000 of dividend for 2003, amounted to RMB107,528,000. In accordance with the principle of a lower amount of profit attributable to shareholders, profit attributable to shareholders of RMB107,528,000 as audited by the overseas auditor is adopted as a basis. As a result, the Company will distribute cash RMB1.5 (before tax) for every 10 shares, pursuant to which profit to be distributed amounts to RMB45,905,322.3. The balance of retained earnings of RMB72,613,613.29 as audited by the domestic auditor (retained earnings as audited by the overseas auditor: RMB61,623,000) will be carried forward to the next year. Neither bonus shares nor transfer of any public reserve to capital is recommended for 2004. 9. Special statement from the certified accountants for funds appropriated by the controlling shareholder and other connected parties of the Company To all shareholders of Livzon Pharmaceutical Group Inc.: We hereby refer to the engagement by Livzon Pharmaceutical Group Inc. ("the Company") to perform a special audit on funds appropriated by the controlling shareholder and other connected parties of the Company as at 31 December 2004 under the Notice of Certain Issues in Capital Transactions between Listed Companies and Associates thereof and Guaranties granted to Outside Companies ("the Notice", ZJF (2003) Circular No.56) promulgated by China Securities Regulatory Commission ("CSRC"). The responsibility of the Board is to provide truthful, legitimate and complete evidence, original manual material, transcript, verbal evidence and the other information which in our opinion is necessary in connection with the Company's funds appropriated by the controlling shareholder and other connected parties of the Company under the Notice. It is our responsibilities to audit, in accordance with the Notice, the fund transactions between the Company and the controlling shareholder and other connected parties of the 30 Company, and prepare the special statement thereon. During the auditing course, we have carried out acquaintance, inquiry and circumspect verification of the written evidence and the relevant audit procedures which in our opinion are necessary. According to our audit, details of the Company’s fund appropriated by its controlling shareholder and other connected parties are as follows: As at 31 December 2004, RMB4,990,347.32 of the Company was occupied by its controlling shareholder and other connected parties, including RMB380,670.02 occupied by Shenzhen Haibin Pharmaceutical Company Limited, a subsidiary of the Company's controlling shareholder (with RMB450,000.00 payable to Shenzhen Haibin Pharmaceutical Company Limited and RMB4,268.18 payable to Shenzhen TAITAI Pharmaceutical Trading Company Limited), and RMB4,609,677.73 occupied by other connected parties of the Company. The accumulative amount for 2004 of the Company's funds occupied by its controlling shareholder and other connected parties was RMB42,481,184.94, of which RMB7,390,770.00 was occupied by Shenzhen Haibin Pharmaceutical Company Limited, a subsidiary of the Company's controlling shareholder. In our opinion, there is no material violation of the aforesaid requirements in the Notice of CSRC in respect of the Company's funds occupied by its controlling shareholder and other connected parties. The special statement we announce is based on our circumspect verification and necessary audit procedures and we made our professional judgment based on the materials we obtained during the audit. The purpose of this statement is only for the Company to submit its annual report to CSRC and the resident audit offices thereunder. This report is not allowed for use for other purpose without our written prior consent. Reanda Certified Public Accountants Company Limited Suijing, the PRC public certified accountant Lin yunliang, the PRC public certified accountant 18 February 2005 31 Funds appropriated by the controlling shareholder and other connected parties 31 December 2004 Company name: Livzon Pharmaceutical Group Inc. Unit: RMB Reason Increase Payment for Open Close Payment Class Appropriated by Connection during the during the appropr balance balance method year year iation Shenzhen Haibin A subsidiary of By controlling Pharmaceutical the controlling Note 1 1,778,675.00 7,390,770.00 8,788,774.98 380,670.02 Cash shareholder Company Limited shareholder An associated Guangdong Lanbao company of Pharmaceutical Note 2 658,560.20 34,331,961.22 30,985,153.55 4,005,367.87 Cash the Company's Company Limited subsidiary By other Shanghai Livzon Due connected Dongfeng Biotechnical A subsidiary 823,133.18 218,823.75 604,309.43 Cash amount parties Company Limited An associated Livzon (Group) Suzhou Cash company of Xinbao Pharmaceutical Note 3 5,025,337.77 758,453.72 5,783,791.49 and the Company's Factory others subsidiary Total 8,285,706.15 42,481,184.94 45,776,543.77 4,990,347.32 Note 1: The amount is in the ordinary and usual course of busines (with RMB450,000.00 payable to Shenzhen Haibin Pharmaceutical Company Limited); Note 2: The amount is in the ordinary and usual course of business; Note 3: The amount included RMB693,975.70 written-off in the period, and RMB170,000.00 related to transferral of debt. 32 Funds appropriated by the connected parties Company name: Livzon Pharmaceutical Group Inc. Name of connected Connection with Accounting Open Amount Amount Close Provision Method party the listed ledger balance incurred in incurred in balance for bad reasons company the Debit the Credit debts appropriated side side fund Shenzhen Haibin A subsidiary of Accounts 1,778.68 7,390.77 8,788.77 380.67 Trading Pharmaceutical the controlling receivable account Company Limited shareholder Livzon (Group) An associated 0.00 80.19 80.19 0.00 Trading Suzhou Xinbao company of the Accounts account Pharmaceutical Company's receivable Factory subsidiary Guangdong Lanbao An associated 0.00 30,410.47 26,434.96 3,975.52 Trading Pharmaceutical company of the Accounts account Company Limited Company's receivable subsidiary Guangdong Lanbao An associated 658,.56 3,921.49 4,550.19 29.86 Trading Pharmaceutical company of the Other account Company Limited Company's receivables subsidiary Shanghai Livzon 823.13 0.00 218.82 604.31 loan Dongfeng A subsidiary of Other Biotechnical the Company receivables Company Limited Livzon (Group) Other 5,025.34 678.27 5,703.61 0.00 Trading An associated Suzhou Xinbao receivables account, company of the Pharmaceutical temporarily Company's Factory stated subsidiary investment Note: Among the amount incurred in the Credit side, 694 (RMB’000) was written off during the period. Transfer of the creditor’s interest amou 33 10. Guaranties The Company's independent directors hereby make the special statement and provide their independent opinion with respect to the Notice of Certain Issues in Capital Transactions between Listed Companies and Associates thereof and Guaranties granted to Outside Companies ("the Notice", ZJF (2003) Circular No.56): In accordance with the Notice of Certain Issues in Capital Transactions between Listed Companies and Associates thereof and Guaranties granted to Outside Companies ("the Notice", ZJF (2003) Circular No.56) promulgated by China Securities Regulatory Commission ("CSRC"), the Guidance in Establishment of Independent Directors System for Listed Companies, the Articles of Association and other laws and regulations, we act as independent directors of Livzon Group to perform prudent inspection in a practicable manner on the Company's funds occupied by its controlling shareholder and other connected parties and guaranties granted to outside companies. Details are set out as follows: a) According to the special statement of Reanda Certified Public Accountants Company Limited engaged by the Company with respect to the Company's funds occupied by its controlling shareholder and other connected parties, we are of opinion that there is no material violation of the aforesaid requirements in the Notice of CSRC in respect of the Company's funds occupied by its controlling shareholder and other connected parties. b) The guaranty of the Company granted to outside company (excluding those to subsidiaries) represent the incurred guaranties granted by Fuzhou Fuxing Pharmaceutical Company Limited (now change to: Livzon (Group) Fuzhou Fuxing Pharmaceutical Company Limited, hereinafter referred to as "Fuxing Pharmaceutical") to outside companies arising from the acquisition by the Company. The accumulative amount occurred in the reporting period is RMB20.71 million, and the balance of guaranties as at the end of period amounted to RMB33.71 million. (Unit: RMB million) Balance of guaranties Type of Whether Guaranty granted to Term of Loan under guaranty as at the end Guaranty expired of period Under joint and Fuzou Yihua Chemical Company Limited 2001.12.20-2004.11.15 3.00 No several liabilities Under joint and Fuzou Yihua Chemical Company Limited 2001.12.20-2005.11.15 3.00 No several liabilities Under joint and Fuzou Yihua Chemical Company Limited 2001.12.20-2006.11.15 6.00 No several liabilities Fujian Yatong New Material Technology 2004.4.29-2005.4.27 5.71 Under joint and No 34 Company Limited several liabilities Fujian Yatong New Material Technology Under joint and 2004.5.26-2005.5.25 5.00 No Company Limited several liabilities Fujian Yatong New Material Technology Under joint and 2004.5.28-2005.5.27 5.00 No Company Limited several liabilities Fujian Yatong New Material Technology Under joint and 2004.8.27-2005.8.26 3.74 No Company Limited several liabilities Fujian Yatong New Material Technology Under joint and 2004.9.14-2005.9.13 1.26 No Company Limited several liabilities Under joint and Fuzhou Boiler Factory 2003.12.15-2005.2.15 1.00 No several liabilities Total ------- 33.71 ------- ------- For the above-mentioned guaranties, the Company has adopted corresponding arrangements to control and avoid exposure to risks as follows: 1) For the guaranty of RMB1,000,000 granted to Fuzhou Boiler Factory by Livzon (Group) Fuzhou Fuxing Pharmaceutical Company Limited, currently the underlying loan is repayable by Fuzhou Municipal Land Development Centre under RCG [2005] Circular No.23 dated 5 January 2005 of Fuzhou Municipal Financial Bureau, pursuant to which Fuzhou Municipal Land Development Centre is required to repay in time the loan of Fuzhou Boiler Factory due to an industry and commerce bank, so as to defreeze the pledged land certificate of Fuzhou Boiler Factory. 2) For the guaranty of RMB20,710,000 granted to Fujian Yatong New Material Technology Company Limited by Fuxing Pharmaceutical, currently the Company's wholly-owned subsidiary Fuxing Pharmaceutical has entered into a counter-guarantee agreement with Fujian Yatai Construction Material Company Limited. 3) We understand the debt to assets ratio of Fuzou Yihua Chemical Company Limited was 74% based on its unaudited balance sheet as at 31 December 2004. In accordance with the Notice, the Company shall not directly or indirectly grant guaranty for debt of any party with a debt to assets ratio above 70%. Accordingly, the guaranty granted to Fuzou Yihua Chemical Company Limited by Fuxing Pharmaceutical is in violation of the above requirement. The guaranty amounted to RMB12,000,000, representing 1.05% of the Company's net assets. Currently, the Company's wholly-owned subsidiary Fuxing Pharmaceutical has entered into a counter-guarantee agreement with Fuzhou Yihua Group Company Limited with respect to the said guaranty. The Company is taking other initiatives to avoid exposure to risks from the guaranty (including but not limited to cancellation of this guaranty or change the guarantor). c) During the reporting period, guaranties granted by the Company to its subsidiaries are as follows: (Unit: RMB million) 35 Balance of Balance of guaranties as Increase Decrease Term of Loan under guaranties as Type of Guaranty granted to at the during the during the guaranty at the end of Guaranty beginning of period period period period Guangdong New Bei Under joint Jiang Pharmacy 2003.5.21-2005.6.30 30.00 50.00 55.00 25.00 and several Company Limited liabilities Under joint Fujian Gutian 2004.1.29-2007.1.28 28.90 27.50 41.50 14.90 and several Antibiotics Factory liabilities Note: Fujian Gutian Antibiotics Factory is a wholly-owned subsidiary of Fuxing Pharmaceutical. As at 31 December 2004, the Company's guaranties granted to outside companies and its subsidiaries aggregated to RMB73.61 million, of which guaranties granted to outside companies accounted for RMB33.71 million, representing 2.96% of the Company's audited net assets in 2004, and guaranties granted to the Company's subsidiaries accounted for RMB39.90 million, representing 3.50% of the Company's audited net assets in 2004, d) Save the aforesaid guaranties, the Company provided no other guaranty to any of controlling shareholder or its subsidiary, or any connected person with shareholding of below 50% (inclusive) therein held by the Company or any non-corporate party or individual. In view of the above, we are of opinion that the Company's guaranty granted to outside companies was a historical problem left from acquisition of Fuxing Pharmaceutical, for which the Company has already and will continue to take initiatives to effectively control and avoid exposure to risk. Therefore, the Company's capabilities of sustainable operation will not be impacted and the shareholders' legal interests will be effectively protected. IX. REPORT OF THE SUPERVISORY COMMITTEE 1. Work of the Supervisory Committee a) On 13 February 2004, the 6th meeting of the 4th Supervisory Committee was held in Shenzhen Kapok Hotel. At the meeting, the 2003 Annual Report of Livzon Pharmaceutical Group Inc. and the 2003 Work Report of Supervisory Committee were considered and approved. b) On 25 April 2004, the 7th meeting of the 4th Supervisory Committee was convened by way of telecommunication. At the meeting, the 2004 1st Quarterly Report of Livzon Pharmaceutical Group Inc. and the Report on Provisions for Losses and Write-off in 2003 were considered and approved. 2. Independent Opinions of the Supervisory Committee a) The Company’s operations under relevant laws 36 Pursuant to the power given by Company Law, Securities Law and Articles of Association, the Supervisory Committee has performed inspection on the Company’s operations under the relevant laws. The inspection demonstrated that the Company has established an internal control system for provision of impairment of assets and dealing with losses, and rules of management, with which the procedures for decision-making are legally effective. The directors and senior executives have performed their duties with due diligence in compliance with relevant laws. No breach of laws, regulations or Articles of Association or any damage to the interest of the Company and its shareholders is found. b) The Supervisory Committee has performed due supervision and inspection on the Company’s financial positions and results. No qualification were made in the audit reports with respect to the Company’s financial report for 2004 as audited by Reanda and BDO International respectively under domestic and overseas accounting standards. The financial report reflected the Company’s financial positions and results on a true, fair and accurate basis. c) No fund has been raised by the Company from the securities market for the past three years. d) Prices on asset acquisition and disposal of the Company are decided on market, arm’s length, fair, open and unbiased basis. No insider transaction or damage to certain shareholders’ interest or any outflow of the Company’s assets is found. e) Connected transactions are entered into by the Company on arm’s length bases and with reasonable considerations, and independent directors have expressed their independent opinions thereof. Connected directors have waived their rights on poll. No damage to the interest of the Company and its shareholders is found in relation to the connected transactions which are legally effective. X. SIGNIFICANT EVENTS 1. The Company was not involved in any litigation and arbitration of material importance during the year. 2. Other Significant Events a) At the 17th meeting of the 4th Board, the Proposal for Authorisation to the Management for Full Acquisition of Fuzhou Fuxing Pharmaceutical Company Limited was considered and passed, pursuant to which the management of the Company was authorised to acquire in full Fuxing Pharmaceutical’s equity interests at its discretion and within the term of reference to investment decision of the Board. On 19 October 2004, the Company entered into the Agreement on Transfer of State-owned Equity Interests with Fuzhou Pharmaceutical and Chemical Industry Administration Office in relation to the acquisition in full of Fuxing Pharmaceutical’). The Company paid RMB102 million for the said acquisition in full. Meanwhile, to further investigate and verify the assets and financial status of 37 Fuxing Pharmaceutical and its wholly-owned subsidiary Fujian Gutian Antibiotics Factory as well as the legal risks that may exist in the course of business operations of Fuxing Pharmaceutical, the Company appointed Reanda Certified Public Accountants Company Limited and Guangdong Desai Law Firm to conduct an investigation with due diligence on Fuxing Pharmaceutical and its wholly-owned subsidiary Fujian Gutian Antibiotics Factory. According to the balance sheet of Fuxing Pharmaceutical as at 31 December 2004 audited by Reanda Certified Public Accountants Company Limited, the goodwill to be amortised was estimated to be RMB4,687,168.94 per annum. As the Company cannot get through the procedures on the changes of equity interests in Fuxing Pharmaceutical solely by the aforesaid Agreement on Transfer of State-owned Equity Interests, the Company and Fuzhou 2nd Antibiotics Factory, Antao Development Company Limited (the wholly-owned subsidiary of the Company) and Fujian Provincial Jewellery Import and Export Company Limited entered into an agreements on transfer of equity interests dated 6 December 2004, pursuant to which the Company acquired 75% and 25% equity interests in Fuxing Pharmaceutical respectively. The procedures of registration change were completed on 31 December 2004, upon which Fuxing Pharmaceutical formally changed its named into Livzon (Group) Fuzhou Fuxing Pharmaceutical Company Limited. The Company and Ando Development Limited owned 75% and 25% equity interests inLivzon (Group) Fuzhou Fuxing Pharmaceutical Company Limited respectively. b) At the 14th meeting of the Investment Decision Committee of the Company, the Proposal for Takeover of Equity interest in Suzhou Xinbao Pharmaceutical Factory was considered and passed, pursuant to which Livzon (Group) Pharmaceutical Factory was approved to take over 22.92%, 11.57% and 6.48% equity interests in Suzhou Xinbao Pharmaceutical Factory of Livzon Group ("Suzhou Xinbao") respectively held by Shanghai Shengning Research Institute, Shanghai Huaxin Company Limited and Suzhou Bio-chemical Factory, at considerations of RMB1.98 million, 1 million and 0.56 million respectively. Following completion of this acquisition, at the 16th meeting of the Investment Decision Committee of the Company, the Proposal for Disposal of Interests in Suzhou Xinbao Pharmaceutical Factory was considered and passed, pursuant to which Livzon (Group) Libao Bio-chemical Pharmaceutical Company Limited ("Libao", a subsidiary of the Company) and Livzon (Group) Pharmaceutical Factory were approved dispose 100% equity interests in Suzhou Xinbao at a consideration of RMB7.48 million. Upon completion of this disposal, the Company will recover RMB4.20 million due from Suzhou Xinbao which was non-recurring amounts in business course of Libao. Due to Suzhou Xinbao's long-term operating loss, Libao has made a provision for bad debt on a full basis in view of the failure in collection. Thus, despite that loss in cost of equity investments of RMB2.44 million was covered in the Company’s financial statements, a profit of RMB1.77 million was recorded in book value. c) At the 17th meeting of Investment Decision Committee, the Proposal for Transferral of Equity Interest in Bejing Xinghao Modern Pharmaceutical Company Limited was considered and passed, pursuant to which the Company was approved to transfer 10% equity interests in Bejing Xinghao 38 Modern Pharmaceutical Company Limited held by Livzon Pharmaceutical Group Inc., at a consideration of the Company's initial investment therein amounting to RMB3.71 million. d) Currently, the Company intends to increase equity investment in New Bei Jiang at a conversion price of RMB1 per share, totalling RMB56.3 million for the capital increase. The capital increase of New Bei Jiang was approved under YFH [2004] Circular No.316 of the Guangdong Provincial People’s Government. Upon the capital increase, the registered capital of New Bei Jiang will increase to RMB134.93 million from RMB78.63 million, and the shareholding of the Company will increase to 92.14% from 86.5% accordingly. Currently the procedures of registration change have been completed. e) The 2004 China Petroleum & Chemical Corporation’s corporate bonds with RMB140,000,000 in value and fixed interest rate for a term of 10 years, which were approval to be subscribed at the 13th meeting of the 4th Board, was sold out during the period from 2 November 2004 to 27 January 2005, with a investment loss of RMB4.84 million. 3. Connected transactions(according to the PRC Accounting Rules and regulations) (1). Sales of Products (Unit: RMB) 2004 2003 Connected Person Amount Percentage in the Amount Percentage in the total annual sales total annual sales Guangdong Lanbao Pharmaceutical Company Limited 29,343,556.60 1.89% 35,632,653.74 1.97% Shenzhen Haibin Pharmaceutical Company Limited 6,316,897.44 0.41% 5,306,020.00 0.29% Livzon(Group) Suzhou Xinbao Pharmaceutical Factory 648,251.05 0.04% - - Joincare Pharmaceutical Industry (Group) Company - 1,500.00 0.0001% Limited Total 36,308,705.09 2.34% 40,940,173.74 2.26% (2). Purchase of Products (Unit: RMB) 2004 2003 Connected Person Amount Percentage in the total Amount Percentage in the total annual purchase annual purchase Livzon(Group) Changzhou Kangli 16,960,209.04 2.08% 13,270,214.20 1.86% Pharmaceutical Company Limited Livzon(Group) Suzhou Xinbao Pharmaceutical 1,203,562.39 0.15% 1,763,660.72 0.25% Factory Guangdong Lanbao Pharmaceutical Company 1,206,377.70 0.15% - - Limited Shenzhen Haibin Pharmaceutical Company 7,385,237.66 0.90% 6,326,334.03 0.89% 39 Limited Joincare Pharmaceutical Industry (Group) - - 877,500.00 0.12% Company Limited Shanghai Livzon Dongfeng Biotechnical Company - - 152,232.26 0.02% Limited Shenzhen Taitai Pharmaceutical Trading - - 1,214,550.53 0.17% Company Limited Total 26,755,386.79 3.28% 23,604,491.74 3.31% Prices of products sold to and purchased from connected companies were determined based on the market prices of similar products for the same period of time. (3). Amounts due to and from connected persons (Unit: RMB) Reason for Amount due from Amount due to occupied fund connected persons connected persons Connected person Connection Amounts in Balance Amounts in Balanc total total e An associated ordinary and Guangdong Lanbao company of a usual course of 3,921,488.59 29,856.00 ---- ---- Pharmaceutical Company Limited subsidiary business Shanghai Livzon Dongfeng Loan - 604,309.43 - - Subsidiary Biotechnical Company Limited Livzon(Group) Suzhou Xinbao ordinary and 678,268.42 - 5,704,727.57 - An associated Pharmaceutical Factory usual course of company of a business and subsidiary investment Total 4,599,757.01 634,165.43 5,704,727.57 - As disclosed above, the Company provided no working capital for the purpose other than trading to its controlling shareholder and subsidiaries during the reporting period. 4. Undertakings a) The Company entered into a Patent License Agreement with Korea Yiyang Medicine Company Limited (“Yiyang”), pursuant to which both parties agreed that the Company was granted an exclusive and irrevocable patent use right of PPI compound and an exclusive use of Yiyang’s patent in PRC (including Hong Kong and Macau) for the relevant production, manufacture and sales. Under the agreement, a transferral fee of US$2.5 million is payable by the Company, of which US$1.575 million have been paid and US$0.925 million (equivalent to RMB7,655,762.50) remain outstanding. The Company agreed to pay Yiyang 10% of sales in respect of this tablet product in the first three years since the commencing date of its sales, 8% of its sales within the five years following the aforesaid three years, and afterward 6% of its sales until 22 July 2014 40 (expiring date of the agreement). b) Pursuant to the Notice of Certain Issues in Capital Transactions between Listed Companies and Associates thereof and Guaranties granted to Outside Companies (ZJF (2003) Circular No.56, "Circular No.56") promulgated by CSRC, the Company undertook on 27 September 2004 that: (1) as at the date of filing applications for share placement, no violation of Circular No.56 occurred for the Company as an issuer; (2) after the filing date for the proposed placement, no violation of any provision set out in Circular No.56 will occur for the Company; (3) in event of any violation of Circular No.56 during the approval time for the proposed placement, the Company will revoke the placement application on its own initiative. c) Joincare Pharmaceutical Industry (Group) Company Limited (“Joincare Pharmaceutical Industry”), the shareholder of the Company, undertook and guaranteed on 27 September 2004 as follows: 1) As at the date of this undertaking, among the products manufactured and sold by Joincare Pharmaceutical Industry and other shareholding subsidiaries excluding Livzon Group ("other shareholding subsidiaries"), save for Haishubi and Quanying being same (in terms of their chemical structure) as Sulbactam Sodium/ Cefoperazone Sodium for Injection and levofloxacin for injection which were produced and manufactured by Livzon Group, Joincare Pharmaceutical Industry and other shareholding subsidiaries were not engaged in production and manufacturing of any product as same as or capable of substituting the products of Livzon Group. Joincare Pharmaceutical Industry operated no business which were competitive with and had material impact on Livzon Group's profitability. In event of any material impact by the said products on the profitability of Livzon Group at any time following the date of this undertaking, Joincare Pharmaceutical Industry and other shareholding subsidiaries will adopt measures (including but not limited to paid transferal of relevant assets/business/interest to Livzon Group and other independent third parties), so as to avoid the competitive situation occurred to the production and manufacturing of Livzon Group as a result of the production and sale for such products. 2) From the date of this undertaking, Joincare Pharmaceutical Industry and other shareholding subsidiaries will not directly or indirectly engaged or involve in development or investment in any product as same (in terms of chemical structure) as those produced or sold by Livzon Group, so as to avoid business competition with Livzon Group either directly or indirectly. Joincare Pharmaceutical Industry and its shareholding subsidiaries will grant Livzon Group the pre-emptive right of development or investment should there be any form of development or investment in those products capable of substituting the products produced and sold by Livzon Group. Approvals from half of the members or more of the independent directors shall be obtained prior to a decision of Livzon Group as to whether the said pre-emptive right shall be exercised. Joincare 41 Pharmaceutical Industry and its related persons as the connected parties of Livzon Group shall abstain from voting. Joincare Pharmaceutical Industry shall not use its controlling power or any other relationship over Livzon Group to run any business which was harmful to benefits of Livzon Group and other shareholders of Livzon Group. 3) From the date of this undertaking: (1) In case of that Joincare Pharmaceutical Industry or other shareholding subsidiaries conduct proprietary researches / introduce from overseas / cooperate with others new pharmaceutical technologies which are connected to products with major contribution to profit of Livzon Group, Livzon Group shall be entitled to paid permission on using such technology exclusively. (2) In case of that Joincare Pharmaceutical Industry or other shareholding subsidiaries intend to dispose assets, business or interests which have material impact on Livzon Group's business, Livzon Group shall have the right of first refusal. Joincare Pharmaceutical Industry guarantees to grant Livzon Group the conditions which are not less favourable to those granted to any independent third parties at any time. In event of the above circumstances, Joincare Pharmaceutical Industry will give written notice to Livzon Group as soon as possible and provide Livzon Group information at its reasonable request. Livzon Group may decide whether it will exercise its right within 45 days upon receipt of the notice. 4) Joincare Pharmaceutical Industry confirms that: (1) From the date of signature and chopping, this undertaking will bind for Joincare Pharmaceutical Industry and other shareholding subsidiaries; (2) Each undertaking stated in this undertaking is independently practicable. Invalidation or termination of any of the undertakings shall not affect the effectiveness of any other undertakings. d) Joincare Pharmaceutical Industry (Group) Company Limited, the controlling shareholder of the Company, undertook on 16 September 2004 that: (1) it will subscribe by cash all the placing shares in Livzon Group in 2004 based on the underlying shares directly or indirectly held or controlled by Joincare Pharmaceutical Industry. As at 31 December 2003, Joincare Pharmaceutical Industry directly or indirectly held or controlled 79,381,849 shares in the Company, representing 25.94% of total share of the Company. (2) prior to completion of the share placement and within 12 months following the completion, it will remain as the ultimate controlling shareholder of the Company. e) On 27 September 2004, the Company undertook to the CSRC that: (1) within the application period for the issuance, the Company will not offer any capital, goods or other benefits to the Approval Committee directly or indirectly and that the Company will not affect the judgment of 42 Approval Committee towards the issuers by means of illegal methods; (2) the Company will not disturb the approval work of Approval Committee by any way; (3) With response to the enquiry at the meetings with Approval Committee, the statement and representation are true, objective, accurate and concise without any irrelevant matters for the proposed issuance subject to approval; (4) Should the Company violate any regulation mentioned above, the Company will accept all legal responsibilities incurred therefrom. f)The Company undertook on 28 September 2004 that: if the Company completes the proposed share placement in 2005, the return on net assets (fully diluted in the issuance year) will not lower than the bank deposit rate for the same period of time. g) All members of the Board of Directors have read the full set of application files for the proposed share placement and undertook on 26 September 2004 that: there are no misleading statements or misrepresentation or material omissions contained in the application files, and the Directors individually and collectively accept responsibility for the truthfulness, accuracy and completeness of the application files. 5. Appointment and Dismissal of Domestic and Overseas Accountants As considered and approved by the 12th meeting of the 4th Board and 2003 Annual General Meeting, the Company intends to retain Reanda Certified Public Accountants Company Limited and BDO International Certified Public Accountants (Hong Kong) as its domestic and overseas accountants respectively for 2004. Remunerations paid during the reporting period by the Company to the domestic and overseas accountants for the 2003 auditing were 420 (RMB'000) and 300 (RMB'000) respectively. Reanda has been appointed as domestic accountant since 1997. BDO International Certified Public Accountants (Hong Kong) has been appointed as overseas accountant since its engagement for 2003 auditing as approved at the 11th meeting of the 4th Board. 6. Material Contract There is no other contract of material importance during the reporting period. 7. During the reporting period, neither the Company nor the Board of Directors or any of the Directors had been under investigation or received any administrative penalty or public criticism by the China Securities Regulatory Commission or received any public censure by any securities 43 exchange of the PRC. 8. Others The announcement of resolution passed at the general meetings of the Company on amendment to its Articles of Association were disclosed on the designated newspaper for information disclosure and the web pages of CNINFO (http://www.cninfo.com.cn) on 23 July 2004 and 11 September 2004 respectively. The press for overseas information disclosure has been changed from Ta Kung Po (Hong Kong) (in Chinese) to Wen Wei Pao (Hong Kong) (in Chinese) 44 XI. REPORT OF THE AUDITORS REPORT OF THE AUDITORS BDO Reanda (2005) No.1019B To the shareholders of B shares of Livzon Pharmaceutical Group Inc. 麗珠醫藥集團股份有限公司 (incorporated in the People’s Republic of China with limited liability) We have audited the accompanying consolidated balance sheet of Livzon Pharmaceutical Group Inc., (“the Group”) as at 31st December 2004 and the related consolidated statements of income, cash flows and changes in equity for the year then ended. These financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, the evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall presentation of financial statements. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements presents fairly, in all material aspects, the financial position of the Group as at 31st December 2004 and the results of its operations and its cash flows for the year then ended, in accordance with International Financial Reporting Standards. BDO Reanda Certified Public Accountants Beijing, China, 18th February 2005 45 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31ST DECEMBER 2004 NOTES 2004 2003 RMB’000 RMB’000 Revenue (4) 1,554,788 1,811,914 Cost of sales (793,595) (919,299) Gross profit 761,193 892,615 Other operating income 10,042 11,479 Selling expenses (417,779) (515,908) Administrative expenses (213,339) (234,383) Other operating expenses (7,090) (6,871) Profit from operations (6) 133,027 146,932 Finance costs (7) (9,048) (2,925) Profit from investments (8) 29,168 13,932 Share of profit of associates 1,791 1,484 Profit before tax 154,938 159,423 Income tax expense (9) (19,945) (36,234) Profit after tax 134,993 123,189 Minority interests (10,687) (29,266) Net profit for the year 124,306 93,923 Dividend (10) - - Earnings per share – basic (11) RMB0.41 RMB0.31 46 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 CONSOLIDATED BALANCE SHEET AT 31ST DECEMBER 2004 NOTES 2004 2003 RMB’000 RMB’000 Assets Non-current assets Property, plant and equipment (12) 761,970 717,559 Construction in progress (13) 209,254 61,450 Goodwill (14) 85,016 25,796 Negative goodwill - (1,292) Intangible assets (15) 30,342 26,877 Investments in associates (17) 18,087 17,080 Other investments (18) 23,981 190,973 1,128,650 1,038,443 Current assets Inventories (19) 212,618 188,001 Trade and other receivables (20) 403,007 373,223 Amounts due from associates 11,101 16,867 Other investments (18) 115,108 60,464 Bank balances and cash (20) 303,475 424,072 1,045,309 1,062,627 Total assets 2,173,959 2,101,070 Equity and liabilities Capital and reserves Share capital (21) 306,035 306,035 Reserves (22) 819,329 723,923 1,125,364 1,029,958 Minority interests 31,710 129,497 1,157,074 1,159,455 Non-current liabilities Bank loans – due after one year (23) 90,180 25,000 Current liabilities Trade and other payables (25) 476,027 395,038 Amounts due to associates 818 4,335 Tax liabilities 1,634 24,742 Bank loans – due within one year (23) 448,226 492,500 926,705 916,615 Total equity and liabilities 2,173,959 2,101,070 The financial statements on pages 2 to 33 were approved and authorised for issue by the Board of Directors on 18th February 2005 and are signed on its behalf by: Director Director 47 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31ST DECEMBER 2004 Properties Investment Foreign Share Share revaluation revaluation exchange capital premium reserve reserve reserve Surplus Reta RMB’000 RMB’00 RMB’000 RMB’000 RMB’000 RMB’000 R 0 Balance at 1st January 2004 306,035 417,689 9,609 2,531 508 234,000 Net profit for the year - - - - - - Transfer to surplus from - - - - - 45,761 retained profits Dividend paid for 2003 - - - - - - Transfer for the year - - - 1,745 (42) - Balance at 31st December 2004 306,035 417,689 9,609 4,276 466 279,761 48 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31ST DECEMBER 2004 2004 2003 RMB’000 RMB’000 Operating activities: Profit from operations 133,027 146,932 Adjustments for: Negative goodwill released to income (295) (934) Construction in progress written-off 934 3,567 Amortization of intangible assets 13,110 15,017 Depreciation of property, plant and equipment 145,086 78,550 Amortization of goodwill - 2,936 Loss/(profit) on disposal of property, plant and equipment 420 (86) Operating cash flows before movements in working capital 292,282 245,982 Movements in working capital (99,853) 78,773 Cash generated from operations 192,429 324,755 Income tax paid (1,634) (24,742) Interest paid (9,048) (2,946) Net cash from operating activities 181,747 297,067 49 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 CONSOLIDATED CASH FLOW STATEMENT (CONTINUED) FOR THE YEAR ENDED 31ST DECEMBER 2004 NOTES 2004 2003 RMB’000 RMB’000 Investing activities Movements in profit and loss from investments 9,883 3,927 Disposal of investments 241,425 92,565 Proceeds on disposal of property, plant and equipment, intangible assets and other assets 11,755 8,020 Purchases of property, plant and equipment, intangible assets and other assets (146,481) (104,125) Purchases of investments (281,579) (268,430) Net cash used in investing activities (164,997) (268,043) Financing activities Dividend and interests paid (53,843) (73,828) New bank loans raised 941,129 693,675 Repayments of bank loans (1,024,500) (519,939) Net cash (used in) / from financing activities (137,214) 99,908 Net (decrease)/ increase in cash and cash equivalents (120,464) 128,932 Effect of exchange differences (133) (137) Cash and cash equivalents at beginning of year 424,072 295,277 Cash and cash equivalents at end of year Bank balances and cash 303,475 424,072 50 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2004 1. CORPORATE INFORMATION Livzon Pharmaceutical Group Inc. (the “Company”) is a joint stock company incorporated in the People’s Republic of China (the “PRC”) and its A shares and B shares are listed on the Shenzhen Stock Exchange. The Company and its subsidiaries (together referred to as the “Group”) are principally engaged in the production and sales of medical products and the trading of imported medical products in the PRC. The largest shareholder of the Company is Jian Kang Yuan Pharmaceutical Group Inc. Limited, a limited company incorporated in PRC and listed in Shenzhen Stock Exchange. 2. BASIS OF PREPARATION OF FINANCIAL STATEMENTS The consolidated financial statements have been prepared in Renminbi (“RMB”), being the currency in which the majority of the Group’s transactions are denominated. The Group maintains its accounting records and prepares its statutory financial statements in accordance with the accounting principles and the relevant financial regulations applicable to foreign investment enterprises in the PRC. These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). The accounting policies and basis adopted for the preparation of the statutory financial statements differ in certain respects from IFRS. The differences arising from the restatement of the results of operations and the net assets for compliance with IFRS are adjusted in these financial statements but will not be taken up in the accounting records of the Group. 51 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2004 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements have been prepared on the historical basis. The principal accounting policies adopted are set out below: (a) Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and enterprises controlled by the Company (“its subsidiaries”) made up to 31st December each year. Control is achieved where the Company has the power to govern its financial and operating policies of an investee enterprise so as to obtain benefits from its activities. On acquisition of subsidiaries, the assets and liabilities are stated at the fair value at the date of acquisition. The interest of minority shareholders is stated at the minority’s proportion of the fair values of the assets and liabilities recognised. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by other members of the Group. All significant intercompany transactions and balances between the Group are eliminated on consolidation. (b) Investments in associates An associate is an enterprise over which the Group is in a position to exercise significant influence, but not control, through participation in the financial and operating policy decisions of the investee. The operating results, assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting. Investments in associates are carried in the balance sheet at cost as adjusted by post-acquisition changes in the Group’s share of the net assets of the associate, less any impairment in the value of individual investments. 52 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2004 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued (b) Investments in associates - continued Where the Group transacts with an associate of the Group, unrealised profits and losses are eliminated to the extent of the Group’s interest in the relevant associate. (c) Goodwill Goodwill arising from consolidation represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets and liabilities of subsidiary or associate at the date of acquisition. In prior years, goodwill was recognized as an asset and amortised on a straight-line basis over its estimated useful life. In accordance with IFRS 3, the Group has discontinued the amortization of goodwill. Goodwill is tested for impairment at least annually. Goodwill arising on the acquisition of an associate is included within the carrying amount of the associate. Goodwill arising on the acquisition of subsidiaries is presented separately in the balance sheet. On disposal of a subsidiary or an associate, the attributable amount of unamortised goodwill is included in the determination of the profit or loss on disposal. (d) Negative goodwill Negative goodwill represents the excess of the Group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary or associate at the date of acquisition over the cost of acquisition. In prior years, negative goodwill is released to income based on an analysis of the circumstances from which the balance resulted. In accordance with IFRS 3, negative goodwill is recognized immediately in the income statement as a gain. 53 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2004 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued (e) Revenue recognition Sales of goods are recognised when goods are delivered and title has passed. Interest income is accrued on a time basis, by reference to the principal outstanding and at the interest rate applicable. Dividend income from investments is recognised when the shareholders’ rights to receive payment have been established. (f) Foreign currencies Transactions in currencies other than RMB are initially recorded at the rates of exchange prevailing on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated at the rates prevailing on the balance sheet date. Profits and losses arising on exchange are included in net profit or loss for the year. On consolidation, the assets and liabilities of the Group’s overseas operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the year. Exchange differences arising, if any, are classified as equity and transferred to the Group’s translation reserve. Such translation differences are recognised as income or as expenses in the year in which the operation is disposed of. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. (g) Borrowing costs Borrowing costs attributable directly to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from borrowing costs eligible for capitalisation. All other borrowing costs are recognised as expenses in the period in which they are incurred. 54 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2004 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued (h) Retirement benefit costs Payments to defined contribution retirement benefit plans are charged as an expense as they fall due. Payments made to state-managed retirement benefit schemes are dealt with as payments to defined contribution plans where the Group’s obligations under the schemes are equivalent to those arising in a defined contribution retirement benefit plan (i) Government grants Government grants subsidizing the Group’s research project are recognised as income. Government grants subsidizing the purchase of assets are deducting from the purchase cost of such asset. (j) Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill (or negative goodwill) or from the initial recognition (other than in a business combination )of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. 55 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2004 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued (j) Taxation - continued Deferred tax liabilities are recognised for taxable temporary differences arising from investments in subsidiaries and associates except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no larger probable that sufficient taxable profit will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. (k) Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment loss. Depreciation is charged so as to write off the cost of assets over their estimated useful lives, using the straight-line method, on the following bases : Buildings 5% Machinery 10% Electronic equipment 20% Transport equipment 20% Other equipment 20% The gain or loss arising from disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement. 56 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2004 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (l) Construction in progress Construction in progress represents properties under construction for production, rental or administrative purposes, or for purposes not yet determined and equipment purchased prior to installation and is stated at cost less any recognised impairment loss. Cost comprises direct costs and, where applicable, professional fees and borrowing costs capitalised in accordance with the Group’s accounting policy. Costs on completed construction works are transferred to the appropriate asset category. Costs incurred on construction in progress are recognised as an expense immediately when the work is terminated. No depreciation is provided on construction in progress until it is completed and put into commercial operation (m) Intangible assets - research and development expenditure Expenditure on research activities is recognised as an expense in the year in which it is incurred. Development expenditure arising from the Group’s development is recognised as an asset only if all of the following conditions are met: ‧it is probable that the asset created will generate future economic benefits; and •the development cost of the asset can be measured reliably. Otherwise, development expenditure is recognized as an expense in the year in which it is incurred. The development expenditure recognized as an assets are amortised on a straight-line basis over their useful lives. (n) Impairment At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. 57 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2004 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued (n) Impairment - continued Recoverable amount is the greater of net selling price and value in use. In assessing the value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of the time value of money and the risks specific to the assets. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. Impairment losses are recognised as an expense immediately. Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined as no impairment loss had been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately. (o) Inventories Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Cost is calculated using the weighted average method. Net realisable value represents the estimated selling prices less all estimated costs to completion and costs to be incurred in marketing, selling and distribution. (p) Financial instruments Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument. (i) Trade and other receivables Trade receivables are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts. 58 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2004 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued (p) Financial instruments - continued (ii) Investments Investments are recognised on a trade-date basis and are initially measured at cost. Investments other than held-to-maturity debt securities are classified as either held-for-trading or available-for-sale, and are measured at subsequent reporting dates at fair value. Where securities are held for trading purposes, gains and losses arising from changes in fair value are included in net profit or loss for the period. For available-for-sale investments, gains and losses arising from changes in fair value are recognised directly in equity, until the security is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in equity is included in the net profit or loss for the period. (iii) Bank borrowings Interest-bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption, are accounted for on an accrual basis and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. (iv) Trade and other payables Trade payables are stated at their nominal value. (q) Provisions Provisions are recognised when the Group has a present obligation as a result of a past event which it is probable will result in an outflow of economic benefits that can be reasonably estimated. (r) Cash equivalents Cash equivalents represent short-term, highly liquid investments that are readily convertible to a known amount of cash and subject to an insignificant risk of changes in value. 59 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2004 4. REVENUE 2004 2003 RMB’000 RMB’000 Sales of medical products 1,554,788 1,811,914 5. BUSINESS AND GEOGRAPHICAL SEGMENTS As the Group is engaged only in the production and sales of medical products and the trading of imported medical products in the PRC, no segment information is presented. 6. PROFIT FROM OPERATIONS Profit from operations has been arrived at after charging / (crediting) : 2004 2003 RMB’000 RMB’000 Depreciation of property, plant and equipment 145,086 78,550 Amortization of intangible assets 13,110 15,017 Amortization of goodwill - 2,936 Loss/(profit) on disposal of property, plant and equipment 420 (86) Release of negative goodwill to income (295) (934) Staff costs 183,349 188,825 Research and development costs 11,384 17,515 Government grants (1,657) (1,805) 7. FINANCE COSTS 2004 2003 RMB’000 RMB’000 Interest on bank loans 10,267 2,946 Less : Amounts included in the cost of qualifying assets (1,219) (21) 9,048 2,925 Borrowing cost included in the cost of qualifying assets during the year arose on the general borrowing pool and are calculated by applying a capitalization rate of 5% (2003: 5%) on expenditure on such assets. 60 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2004 8. PROFIT FROM INVESTMENTS 2004 2003 RMB’000 RMB’000 Interests on bank deposits 8,036 3,684 Dividends from other investments 47,719 3,861 Provision for impairment loss of investments in associates (14,724) (2,195) Provision for impairment loss of long-term other investments (32,993) 2,251 Loss on disposal of a subsidiary - 63 Profit on partial disposal of interests in subsidiaries 26,441 6,226 Profit on disposal of other investments (5,311) 42 29,168 13,932 9. INCOME TAX EXPENSE 2004 2003 RMB’000 RMB’000 Income tax 19,945 36,234 The basis tax rate applicable to the Group is 15%. According to the relevant tax policies of PRC, income tax of Livzon (Group) Syntpharm Factory is charged at 10 % on its estimated assessable profit, Livzon (Group) Liman Chemical Pharmaceutical Factory is charged at 24% on its estimated assessable profit, Hubei Keyi Pharmaceutical Holdings Company Ltd. and Li Wei Branch of Livzon (Group) Pharmaceutical Trading Co., Ltd. are charged at 33% on their estimated assessable profit. And other subsidiaries are at 15%. 61 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2004 9. INCOME TAX EXPENSE - continued As the tax effect on temporary timing difference is insignificant, no deferred taxation is provided. 10. DIVIDEND According to the decision of the No.9-12 Board as at February 13 2005, the cash dividend in respect of 2003 is RMB 1.5 per 10 shares. 11. EARNINGS PER SHARE The earnings per share is calculated based on the Group’s profit attributable to shareholders of RMB124,306,000 (2003: RMB93,129,000), and 306,035,482 shares (2003: 306,035,482 shares) in issue during the year. As the Group did not have diluting instrument in issue, no diluted earnings per share information is presented . 62 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 12. PROPERTY, PLANT AND EQUIPMENT Land and Transport Elec buildings Machinery equipment Other RMB’000 RMB’000 RMB’000 RM COST At 1st January 2004 671,376 408,435 22,493 Additions 48,373 123,069 2,872 Transfer from construction in progress 30,337 33,920 653 Other transfer in 5,242 - - Disposal or reduction (61,736) (47,801) (4,951) At 31st December 2004 693,592 517,623 21,067 ACCUMULATED DEPRECIATION At 1st January 2004 223,809 187,235 12,890 Charge for the year 40,305 87,410 3,303 Eliminated on disposals (18,570) (24,798) (2,899) At 31st December 2004 245,544 249,847 13,294 CARRYING AMOUNT At 31st December 2004 448,048 267,776 7,773 At 31st December 2003 447,567 221,200 9,603 63 Livzon Group’s 2004 Annual Report LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2004 13. CONSTRUCTION IN PROGRESS 2004 2003 RMB’000 RMB’000 At 1st January 61,450 67,344 Acquired on acquisition of a subsidiary 101,529 - Additions 130,695 91,579 Interest capitalized 2,036 1,642 Transfer to property, plant and equipment (68,542) (70,719) Others (16,530) (22,511) Written-off 934 (3,567) At 31st December 211,572 63,768 Accumulated impairment loss (2,318) (2,318) 209,254 61,450 As at 31st December 2004, the construction in progress includes the capitalized interest RMB 2,036,000. (2003: RMB 20,630). 14. GOODWILL 2004 2003 RMB’000 RMB’000 Goodwill 85,016 25,796 In accordance with IFRS 3, the Group has discontinued the amortization of goodwill. Goodwill is tested for impairment at least annually. In accordance with the transitional provision of IFRS 3, the carrying amount of the accumulated amortization and the previously recognized goodwill has been eliminated. 64 Livzon Group’s 2004 Annual Report LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2003 15. INTANGIBLE ASSETS RMB’000 COST At 1st January 2004 61,731 Additions 5,675 Acquired on acquisition of a subsidiary 11,603 Transfer (703) At 31st December 2004 78,306 AMORTISATION At 1st January 2004 34,854 Charge for the year 13,110 At 31st December 2004 47,964 CARRYING AMOUNT At 31st December 2004 30,342 At 31st December 2003 26,877 At 31st December 2004, intangible assets represent costs for acquisition of technical knowhow and other expenses incurred in developing new pharmaceutical products. 65 Livzon Group’s 2004 Annual Report LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2004 16. SUBSIDIARIES Place of Proportion of incorporation ownership Principal Name of subsidiary and operation interest Activity Ando Development Limited Hong Kong, 100% Sale of pharmaceutical products PRC Lizhu (Hong Kong) Co., Limited Hong Kong, 100% Sale of pharmaceutical products PRC Zhuhai Modern Medicine Zhuhai, PRC 100% Research and development of Technology Co., Ltd medicine and pharmaceutical technology, technological consulting and project investment Livzon (Group) Livzon Chinese Zhuhai, PRC 100% Manufacture and sale of Medicine Factory medicine and medical equipment. Livzon (Group) Pharmaceutical Zhuhai, PRC 100% Production of biological tablets, Factory hard capsules and powder Livzon (Group) Livzon Marketing Zhuhai, PRC 100% Sale of manufactured products. Co., Ltd Livzon (Group) Biotechnology Zhuhai, PRC 100% Manufacture and sale of Pharmaceutical Factory products made from microbio fermentation, blood products, recombinant DNA products and biochemical reagent Zhuhai Livzon Medicine Trading Zhuhai, PRC 100% Import and Export of medical Co., Ltd materials and products. Livzon (Group) Libao Zhuhai, PRC 100% Manufacture and sale of Biochemical & Pharmaceutical pharmaceutical products Co., Ltd. Livzon (Group) Livzon-bam Zhuhai, PRC 82% Manufacture and sale of Biomaterials Co., Ltd. hydroxyapatite products and coated titanium dental implant Zhuhai Likang Medicine Co., Ltd Zhuhai, PRC 100% Production and sale of antibiotics products. Sichuan Everbright Pangzhou, PRC 100% Manufacture and sale of Pharmaceutical Co., Ltd. pharmaceutical products 66 Livzon Group’s 2004 Annual Report LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2004 16. SUBSIDIARIES – continued Guangdong Central South Shenzhen, PRC 70% Retail and wholesale of Pharmacy Co., Ltd. medicines Livzon Chainstore Operation Co., Zhuhai, PRC 90% Investment, chain store Ltd. operation, economic and technological operation, consulting and technological service Shanghai Livzon Pharmaceutical Shanghai, PRC 100% Manufacture and sale of Co., Ltd. pharmaceutical products Zhuhai Livzon Meidaxin Zhuhai, PRC 100% Research and development of Technology Investment Co., Ltd. medicine and pharmaceutical technology, technological consulting and project investment Guangdong Xinbeijiang Qingyuan, PRC 92.14% Export and domestic sale of Pharmaceutics Co., Ltd manufactured products. Zhuhai Free Trade Zone Livzon Zhuhai, PRC 100% Manufacture and sale of Pharmaceutics Co., Ltd pharmaceutical products Zhuhai Livzon Reagent Co., Ltd Zhuhai, PRC 51% Research and development of medicine and pharmaceutical technology, technological consulting and project investment Livzon Limin Pharmaceutics Co., Shaoguan, PRC 86.281% Manufacture and sale of Ltd pharmaceutical products Shenzhen Takun Information and Shenzhen, PRC 52.5% Provision of consultation service Consulting Co., Ltd Shenzhen Sanxin Medicine Shenzhen, PRC 63% Retailing of pharmaceutical Chain-store Co., Ltd products Zhuhai Free Trade Zone Lida Zhuhai, PRC 100% Production and sale of Pharmaceutics Co., Ltd manufactured products. Livzon Fuzhou Fuxing Fuzhou, PRC 100% Manufacture and sale of Pharmaceutics Co., Ltd pharmaceutical products Livzon Lijin Biology & Shanghai, PRC 100% Manufacture and sale of Chemistry Co., Ltd pharmaceutical products 67 Livzon Group’s 2004 Annual Report LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2004 16. SUBSIDIARIES - continued 1.The shares holdings by the Group in Zhuhai Free Trade Zone Livzon Pharmaceutics Co., Ltd, Guangdong Xinbeijiang Pharmaceutics Co., Ltd, Sichuan Everbright Pharmaceutics Co., Ltd. Zhuhai Livzon Wonderful Technology Development Co., Ltd, and Shanghai Lijin Biology & Chemistry Co., Ltd increased and all the above companies are included into consolidation. 2.Zhuhai Livzon Meihao Technology Investment Co., Ltd, Zhuhai Li Ao Pharmaceutics Co., Ltd, and Livzon Ads. Co., Ltd had been liquidated in the last accounting period. 3.The company has transferred all the shareholders’ rights of Hubei Keyi Pharmaceutics Co., Ltd and Hubei Liyi Technology Co., Ltd to Wuhan Xinyi Investment Co., Ltd and the companies are not included into consolidation in this period. 4.Zhuhai Baoshuiqu Lida Pharmaceutics Co., Ltd was founded in August, 2003 and is included into consolidation in this period. 5.The company purchased the shares of Livzon Fuzhou Fuxing Pharmaceutics Co., Ltd during current accounting period and this company is included into consolidation. 6.During the year, the Group acquired new two subsidiaries: Livzon Fuzhou Fuxing Pharmaceutics Co., Ltd and Livzon Lijin Biology & Chemistry Co., Ltd The effect on consolidated balance sheet is: 2004 RMB’000 Property, plant and equipment 173,691 Long-term investment 750 Inventories 38,954 Accounts receivable 26,576 Cash and cash equivalents 39,197 Long-term loans (10,180) Accounts payable (211,173) Net assets 57,815 68 Livzon Group’s 2004 Annual Report LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2004 16. SUBSIDIARIES - continued The effect on consolidated income statement is: 2004 RMB’000 Revenue 997 Cost of sales (562) Gross profit 435 Administrative expenses (272) Other operating expenses (50) Profit from operations 113 Profit before tax 113 Income tax expense (53) Net profit for the year 60 17. INVESTMENTS IN ASSOCIATES 2004 2003 RMB’000 RMB’000 Cost of investment 18,087 17,080 69 Livzon Group’s 2004 Annual Report LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2004 17. INVESTMENTS IN ASSOCIATES – continued Details of the Group’s associates at 31st December 2004 are as follows :- Place of Proportion incorporation of ownership Principal Name of associate and operation interest Activity Guangdong Lanbao Qingyuan, PRC 34.23% Manufacture and sale of Pharmaceutical Co., Ltd biochemical products Livzon Electomedical Zhuhai, PRC 28% Manufacture and sale of Instrument Co., Ltd. electromedical instrument Livzon Group Changzhou Changzhou, 30% Manufacture and sale of Kangli Pharmaceutical Co., PRC pharmaceutical products Ltd. Xinbei Jiang Pharmaceutical Hong Kong 46.07% Sale of pharmaceutical Co., Ltd. products Fuzhou Rongjqing Biology Fuzhou, PRC 43% Manufacture and sale of Co., LTd biochemical products Fujian Gutian Huamin Gutian, PRC 24% Manufacture and sale of Antibiotics Co., LTd antibiotics products Tianjia Livzon Biology & Hong Kong, 30% Manufacture and sale of Technology Co., Ltd PRC biochemical products 18. OTHER INVESTMENTS Non-current investments 2004 2003 RMB’000 RMB’000 Available for sale investment 23,981 190,973 Current investments 2004 2003 RMB’000 RMB’000 Available for trading investment 115,108 60,464 The investments included above represent investments in listed and unlisted equity securities that contribute the Group with dividend income and trading gains. The fair value of listed securities are based on quoted market prices. 70 Livzon Group’s 2004 Annual Report LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2004 19. INVENTORIES 2004 2003 RMB’000 RMB’000 Raw materials 54,518 46,990 Work in progress 39,651 31,112 Finished goods 118,449 109,899 212,618 188,001 The above inventories are carried at net realizable value. The provision for inventories of 2004 is RMB 11,033,000 (2003: RMB 8,886,000) 20. OTHER FINANCIAL ASSETS Trade and other receivables at the balance sheet date comprise gross amounts receivable from the sale of goods of RMB530,920,000 (2003: RMB541,638,000). An allowance of RMB127,913,000 (2003: RMB168,415,000) has been made for estimated irrecoverable amounts from the sale of goods. This allowance has been determined by reference to past default experience. The directors consider that the carrying amount of trade and other receivables approximates their fair value. The Group’s average credit period in 2004 is 90 days (2003: 83 days). Bank balances and cash comprise cash held by the Group and short-term bank deposits with an original maturity of three months or less. The carrying amount of these assets approximates their fair value. The Group’s credit risk is primarily attributable to its trade receivables. The amounts presented in the balance sheet are net of allowances for doubtful receivables, estimated by the Group’s management based on prior experience and the current economic environment. The Group has no significant concentration of credit risk, with exposure spread over a large number of counterparties and customers. 71 Livzon Group’s 2004 Annual Report LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2004 21. SHARE CAPITAL 2004 2003 No. of No. of shares shares ’000 RMB’000 ’000 RMB’000 Registered, issued and fully paid : A shares of RMB1 each 183,728 183,728 183,728 183,728 B shares of RMB1 each 122,307 122,307 122,307 122,307 306,035 306,035 306,035 306,035 There were no movements in the share capital of the Company in either the 2003 or 2004 reporting periods. 22. RESERVES 2004 2003 RMB’000 RMB’000 Share premium 417,689 417,689 Properties revaluation reserve 9,609 9,609 Investment revaluation reserve 4,276 2,531 Exchange difference 466 508 Surplus 279,761 234,000 Retained profits 107,528 59,586 819,329 723,923 According to the PRC companies’ law, the reserve available for distribution is the lower of the amount determined under PRC Accounting Regulations and the amount determined under IFRS. 72 Livzon Group’s 2004 Annual Report LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2004 22. RESERVES (Continued) Notes: (a) Statutory surplus reserve The Companies incorporated in PRC are required under the laws and regulations of the PRC to transfer an amount of 10% of its profit for the year, determined under PRC accounting regulations for companies limited by shares, to the statutory surplus reserve, until the balance of the statutory surplus reserve is equal to 50% of the Company’s issued share capital. In accordance with the laws and regulations, the statutory reserves can be utilised as follows : (i) to make up losses of the Company; (ii) to distribute to shareholders in the form of a bonus issue which is subject to approval in the general meeting. The balance of the statutory surplus reserve after such distribution is not less than 25% of the issued share capital of the Company. (b) Discretionary surplus reserve The Companies incorporated in PRC may transfer an amount from its profit for the year calculated under PRC accounting regulations for companies limited by shares to the discretionary surplus reserve in accordance with the resolutions of shareholders in the general meeting. The discretionary surplus reserve can be utilised to make up losses of the Company and to distribute to shareholders in the form of bonus issue. (c) Public welfare fund According to the law and regulations of the PRC, the Companies incorporated in PRC are required to transfer 5-10% of its profit after tax calculated under PRC accounting regulations for companies limited by shares to the public welfare fund. The public welfare fund can only be used for the collective benefits of the Company’s employees. 23. BANK LOANS 2004 2003 RMB’000 RMB’000 Secured 242,120 297,500 Unsecured 296,286 220,000 538,406 517,500 73 Livzon Group’s 2004 Annual Report LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2004 23. BANK LOANS – continued 2004 2003 RMB’000 RMB’000 The borrowings are all denominated in RMB and repayable as follows : On demand or within one year 448,226 492,500 In the second year 90,180 25,000 538,406 517,500 Less: Amount due from settlement within one year (shown (44,826) (492,500) under current liabilities) Amount due for settlement after one year 90,180 25,000 2004 2003 Interest rates 4.2%-7.6% 4.2%-7.6% At 31st December 2004, all the bank loans of the Group were arranged at fixed interest rates. 24. PLEDGE OF ASSETS At the balance sheet date, the Group’s land and buildings with an aggregate carrying amount of approximately RMB5,756,000 (2003 : RMB5,756,000) were pledged to banks as security for bank loans granted to the Group. 25. OTHER FINANCIAL LIABILITIES Trade and other payables principally comprise amounts outstanding for trade purchases and ongoing costs. The directors consider that the carrying amount of trade payables approximates to their fair value. The average credit period taken for trade payables is 198 days (2003: 157). 74 Livzon Group’s 2004 Annual Report LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2004 26. CAPITAL COMMITMENTS 2004 2003 RMB’000 RMB’000 Capital expenditure contracted for but not provided in respect of : Purchase of intangible assets 7,656 10,346 27. OPERATING LEASE COMMITMENTS 2004 2003 RMB’000 RMB’000 Minimum lease payments under operating leases recognized 11,569 10,960 as expenses for the year At the balance sheet date, the Group had outstanding commitments under non-cancellable operating leases, which fall due as follows:- 2004 2003 RMB’000 RMB’000 Within one year 9,356 1,073 In the second to fifth years inclusive 2,213 1,140 After five year - - 11,569 2,213 Operating lease payments represent rentals payable by the Group for certain of its office properties. 75 Livzon Group’s 2004 Annual Report LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2004 28. CONTINGENT ASSETS A subsidiary of the Group has commenced legal proceeding against a debtor for the payments of RMB 43,638,596.44 in the Guangzhou Intermediate People’s Court on July 9, 2003. The court has started the hearing in July, 2004. Currently, the outcome is still unable to be determined. 29. RETIREMENT BENEFIT PLANS The employees in the PRC companies of the Group are the qualifying member of the state-managed retirement benefit scheme, which required the Group to contribute a standard proportion of salaries paid to the government department. The Group’s obligation under the schemes is required to contribute the amount of the standard proportion in the above. The Group also operates defined contribution retirement benefit plans for all qualifying employees in Hong Kong of the Group. The assets of the plans are held separately from those of the Group in funds under the control of trustees. Where there are employees who leave the plans prior to vesting fully in the contributions, the contributions payable by the Group are reduced by the amount of forfeited contributions. The total cost charged to income of RMB20,453,000 (2003:RMB40,684,000) represents contributions payable to these plans by the Group at rates specified in the rules of the plans. 30. RELATED PARTY TRANSACTIONS The Group entered into the following transactions with the associate during the year: 2004 2003 RMB’000 RMB’000 Sales of goods 36,340 40,941 Purchase of goods 25,583 23,605 Other operating income (450) 595 The amounts due from associates represent advances and payments made on behalf which are unsecured, interest-free and have no fixed terms of repayment. 76 Livzon Group’s 2004 Annual Report LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2004 31. RECONCILIATION The Group prepared a separate set of accounts for the year ended 31st December 2003 in accordance with the PRC accounting standards. The reconciliation between the accounts prepared under the PRC Accounting Standards and those under IFRS are summarised as follows: 2004 2003 Assets Net Assets Net Revenue Value Revenue Value RMB’000 Rmb’000 RMB’000 Rmb’000 Under PRC accounting standards 124,058 1,139,715 92,201 1,044,558 Adjustments: Elimination of interest capitalized for property, plant and equipment - (25,354) - (25,354) Depreciation on property, plant and equipment (535) (2,355) (535) (1,820) Negative goodwill arising from purchasing subsidiaries - (1,182) - (1,182) Negative goodwill arising from partial purchasing of interest in subsidiaries - 1,068 - 1,068 Negative goodwill arising from purchasing associates - (497) - (497) Goodwill arising from purchasing subsidiaries - 1,894 - 1,894 Disposal of subsidiaries - 12 - 12 Partial disposal of interest in subsidiaries - (137) - (137) Amortization of goodwill - (2,937) (251) (2,937) Amortization of negative goodwill 295 3,032 195 2,736 Share of results of associates (508) - (508) Long-term prepayment 488 - 681 (488) Deferred expenditure (467) 838 (467) Accruals - 13,480 - 13,480 Advance from customers - (400) - (400) Profit from investments for associates - - 794 - 248 (14,351) 1,722 (14,600) Under IFRS: 124,306 1,125,364 93,923 1,029,958 77 Livzon Group’s 2004 Annual Report XII. DOCUMENTS AVAILABLE FOR INSPECTION I) Documents Available for Inspection: 1. The financial statements with the signature and chop of the legal representative, financial controller and chief accountant of the Company. 2. The original copy of auditors' report with signature and chop of certified public accountants and the chop of accountant firm. 3. Original copies of all documents and text of all announcements of the Company which are public disclosed on the newspapers designated by the China Securities Regulatory Commission during the reporting period. Livzon Pharmaceutical Group Inc. Chairman of the Board Zhu Baoguo 78