丽珠集团(000513)2005年年度报告（英文版）

LIVZON PHARMACEUTICAL GROUP INC. 2005 Annual Report February 2006 Content I. IMPORTANT NOTICE II. COMPANY PROFILE III. ACCOUNTING DATA AND BUSINESS SUMMARY IV. CHANGES IN SHARE CAPITAL AND PARTICULARS ABOUT SHAREHOLDERS V. PARTICULARS OF DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT AND EMPLOYEES VI. CORPORATE GOVERNANCE STRUCTURE VII. BRIEF INFORMATION OF SHAREHOLDERS’ GENERAL MEETING VIII.REPORT OF DIRECTORS IX. REPORT OF THE SUPERVISORY COMMITTEE X. SIGNIFICANT EVENTS XI. FINANCIAL REPORT XII. DOCUMENTS AVAILABLE FOR INSPECTION 1 I. IMPORTANT NOTICE Important Notice: The board of directors (“the Board”), the supervisory committee, all directors and supervisors and the senior management of Livzon Pharmaceutical Group Inc. (hereinafter referred to as “the Company”) confirm 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. 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. A standard unqualified auditors' report has been issued for the Company by BDO International Certified Public Accountants. This Annual Report is published in Chinese and English versions. In the event of inconsistency, the Chinese version shall prevail. 2 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 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 Postal code: 519020 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, 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 registration date: 13 September 2002 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. 3 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 2005 2004 Revenue 1,626,146 1,554,788 Gross profit 715,797 761,193 Share of profit of associates 749 1,791 Profit before tax 132,763 154,938 Income tax expense (15,815) (19,945) Profit after tax 116,948 134,993 Minority interests (8,380) (10,687) Net profit for the year 108,568 124,306 Share capital 306,035 306,035 Capital and reserves 1,190,709 1,125,364 Total assets 2,144,977 2,173,959 Net cash from operating activities 160,878 181,747 Net decrease in cash and cash (172,320) (120,464) equivalents Earnings per share - basic RMB 0.35 RMB0.41 Note: The data were audited by BDO International Certified Public Accountants according to IAS, for reference to investors of B share only. 2. Differences in Auditing of Net Profit The Company's net profit realized for 2005 was 107,892 (RMB'000) and 108,568 (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 676 (RMB'000) were mainly due to the corrections made to Depreciation of property, plant and equipment which reduced profit by 535 (RMB'000), to Amortisation of negative goodwill which decreased profit by 39 (RMB'000), to Accruals which decreased profit by 8,599 (RMB'000), to Amortisation of goodwill which increased profit by 8,874 (RMB'000)，to Share of profit of associates which increased profit by 508 (RMB'000), and to Deferred and prepaid expenses which increased profit by 467 (RMB'000) according to the International Accounting Standards. 3. Major Accounting Data and Financial Indicators over the Past Three Year (Unit: RMB’000) 4 Major accounting data 2005 2004 2003 Revenue 1,626,146 1,554,788 1,811,914 Net profit 108,568 124,306 93,923 Capital and reserves 1,190,709 1,125,364 1,029,958 Total assets 2,144,977 2,173,959 2,101,070 Major financial indicators Net assets per share 3.89 3.68 3.37 Yield on Net assets 9.12% 11.05% 9.12% Net cash flow from operating 0.53 0.59 0.97 activities per share Earnings per share 0.35 0.41 0.31 4. Change in Shareholders’ Fund (Unit: RMB’000) Properties Other Foreign Share Share revaluation capital exchange Surplus Retained capital premium reserve reserve reserve Reserve profit Total Balance at 1st January 2005 306,035 417,689 8,004 5,881 466 279,761 107,528 1,125,364 Net profit for the year - - - - - - 108,568 108,568 Transfer to surplus from - - - - - 26,983 (26,983) - retained profits Dividend paid for 2004 - - - - - - (45,906) (45,906) Transfer for the year - - - 5,736 (3,053) - - 2,683 Balance at 31st December 2005 306,035 417,689 8,004 11,617 (2,587) 306,744 143,207 1,190,709 IV. CHANGES IN SHARE CAPITAL AND PARTICULARS ABOUT SHAREHOLDERS 1. Change in Share Capital (1) Table of changes in share capital (as at 31 December 2005) Unit: share Before the change Increase/decrease during the year (+, - ) After the change Shares Percentage Share converted Percentage to Number of to total share placem Bonus from public Additional Number of total share shares capital ent issue reserve issuance Others Subtotal shares capital I. Unlisted non-circulating shares 1. Promoters' shares 29,138,670 9.52% 29,138,670 9.52% Including: State-owned shares 5 Domestic legal person shares 29,138,670 9.52% 29,138,670 9.52% Overseas legal person shares Others 2. Corporate shares 38,917,518 12.72% 38,917,518 12.72% 3. Staff shares 4. Preference share or others Total non-circulating shares 68,056,188 22.24% 68,056,188 22.24% II. Listed circulating shares 1. Ordinary shares denominated in RMB 115,672,310 37.80% 115,672,310 37.80% 2. Domestic listed foreign shares 122,306,984 39.96% 122,306,984 39.96% 3. Overseas listed foreign shares 4. Others Total listed circulating shares 237,979,294 77.76% 237,979,294 77.76% III. Total shares 306,035,482 100.00% 306,035,482 100.00% (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 and the total share capital was 306,035,482 shares. 2. Details of Shareholders (1) As at 31 December 2005, the total number of shareholders was 41,618, of which 13,551 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 2005) Number of Increase / Percentage Number of shares held at Class of shares decrease in the to total share shares pledged/ Nature of Full name of shareholders the end of the (Circulating or year capital frozen shareholder year Non-circulating) (share) (%) (share) (share) 6 38,917,518, Xi’an Topsun Group including 0 38,917,518 12.72 Non-circulating Company Limited 3,500,000 under judicial re-frozen Non-circulating: Joincare Pharmaceutical 22,379,239 Industry (Group) Company 0 32,285,116 10.55 0 A shares in circulation: Limited 9,905,877 First Shanghai Securities Foreign +10,756,560 10,756,560 3.51 B shares in circulation 0 Limited shareholder Tiancheng Industrial Foreign -25,106,560 9,178,310 3.00 B shares in circulation 0 Company Limited shareholder Guangzhou Baokeli Trading 0 6,059,428 1.98 Non-circulating 6,059,428 State-owned Company China Construction Bank - Huabao Xingye -1,557,798 5,487,854 1.79 A Shares in circulation 0 Multi-strategies Growth Securities Investment Fund Shenzhen Haibin Pharmaceutical Company -1,395,214 5,357,221 1.75 A Shares in circulation 0 Limited SUN INTELLIGENT Foreign +5,000,000 5,000,000 1.63 B shares in circulation 0 LIMITED shareholder DRACO EQUITY Foreign +4,580,000 4,580,000 1.50 B shares in circulation 0 INVESTMENT LIMITED shareholder Bank of Communications - 0 Kerui Securities Investment +3,268,360 3,268,360 1.07 A Shares in circulation Fund Agricultural Bank of China – 0 Fuguo Tianrui Strength Region Prime Mix +3,072,404 3,072,404 1.00 A Shares in circulation Open-ended Securities Investment Fund Tongyi Securities Investment 0 +2,069,764 2,948,055 0.96 A Shares in circulation Fund Notes: 1) From 19 January to 3 February 2005, Joincare Pharmaceutical Industry (Group) Company Limited ("Joincare Group") disposed 8.6597% of the Company's shares by way of block trade and centralised price bidding on Shenzhen Stock Exchange, whereby Joincare and its subsidiaries held in total 52,880,075 shares in the Company as of 3 February 2005, representing 17.2791% of the Company's total issued share capital. Joincare Group and Xi’an Topsun Group Company Limited ("Topsun Group") entered into Share Transfer Agreement and Share Mortgage Agreement on 4 February 2005, pursuant to which Topsun Group agreed to directly transfer 38,917,518 domestic legal person shares in the Company, representing 12.7167% of the Company’s total issued share capital, to Joincare Group at a consideration of RMB170,000,000, and Topsun Group shall mortgage and place on custody such shares to Joincare Group prior to completion of the transfer under the name of Joincare Group. On 4 February 2005, Topsun Group completed the mortgage registration for such 38,917,518 domestic legal person shares in the Company to Joincare Group. (The said transactions were published on the newspaper designated for information disclosure on 5 February 2005, Announcement No.: 2005-02). 7 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 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 and a 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 2005, Joincare Pharmaceutical Industry (Group) Company Limited and its subsidiaries held and controlled 91,797,593 shares in the Company in aggregation, representing 29.9957% of the Company's total issued share capital, and became the Company’s ultimate controlling shareholder. 4) During the judicial execution of the loan and guaranty litigation between Xi'an Commercial Bank, Gaoxin Road Branch as a party and Julang Juice Beverage Company Limited, Yangling Qinfeng Agricultural Science and Technology Co., Ltd. ("Yangling Qinfeng") and Topsun Group as another party, as Topsun Group failed to fulfil its guaranty obligation for the loans granted to Yangling Qinfeng and its subsidiaries, Shaanxi Provincial Higher People's Court awarded a civil ruling ((2005) SZEGZ No.25-10) on 9 May 2005, pursuant to which the 3,500,000 domestic legal person shares in the Company held by Topsun Group were judicial frozen with effect from 10 May 2005 to 9 May 2006. (3) Particulars of the Controlling Shareholder Name: Joincare Pharmaceutical Industry (Group) Company Limited Legal representative: Zhu Baoguo Date of establishment: 18 December 1992 Business scope: research and development and wholesale of Chinese herbs (procurement), Chinese medicines, antibiotic raw medicines and preparations, chemical preparations, foods, healthcare foods and cosmetics (not including Chinese herbs under the State's protection and R&D of Chinese secret recipe medicines); wholesale, import/export and ancillary services of traditional Chinese soluble tablets (subject to the State's regulations on relevant quota licensing and separate administration). Registered capital: RMB609,930,000 8 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 controlling shareholder of Joincare Pharmaceutical Industry (Group) Company Limited 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 projects, 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, has no right of residence in any other country or region. (5) Illustration of Shareholdings and Controlling Relations among the Company and the Ultimate Controlling Shareholder Liu Gangxia Zhu Baoguo Liu Miao 100% 10% 90% Taitai Pharmaceutical Industry Group Limited 0.1% 99.9% Shenzhen Beiyeyuan Investment Company Hongxin Limited 55.63% 18.54% Joincare Pharmaceutical Industry (Group) 100% Hold: 10.55% 100% Under mortgage and on custody: Shenzhen Haibin Pharmaceutical Company Limited Tiancheng Industrial Company Limited 1.75% 3.00% 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, with its legal 9 representative Mr. Guo Jiaxue and registered capital of RMB150,000,000. It is mainly engaged in development, research, 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, etc. It is owned as to 72.74% by Guo Jiaxue, 18.42% by Zhang Bin and 8.84% by Wang Ling. (7) Other Shareholders among the top ten shareholders of circulating shares with connected relationship As at 31 December 2005, other than Joincare Pharmaceutical Industry (Group) Company Limited and its connected persons, the Company is not aware of any connected relationship among the Company's 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 2005) 10 Number Annual of shares Number of remuneration held at shares Reasons from the Gen Name Title Age Term of appointment the held at the for the Company der beginnin end of the changes (RMB'000) g of the year year Zhu Mal Chairman 43 2005.07-2008.06 0 0 - 90 Baoguo e Mal Yi Zhenqiu Vice Chairman 61 2005.07-2008.06 0 0 - 555.48 e Fe Director Gu Yueyue mal 55 2005.07-2008.06 0 0 - 72 e Director， Mal Xiao Siyang 43 2005.07-2008.06 0 0 - 3805.48 President e Wang Mal Director 54 2005.07-2008.06 0 0 - 444.33 Yisheng e Director，Vice Mal An Ning 33 2005.07-2008.06 0 0 - 575.69 President e Hua Independent Mal 60 2005.07-2008.06 0 0 - 72 Yizheng Director e An Independent Mal 66 2005.07-2008.06 0 0 - 72 Chengxin Director e Independent Mal Gao Dianhe 62 2005.07-2008.06 0 0 - 72 Director e Chairman of the Qiu Mal Supervisory 34 2005.07-2008.06 0 0 - 42 Qingfeng e Committee Yuan Mal Supervisor 59 2005.07-2008.06 0 0 - 275.71 Guoliu e Cao Mal Supervisor 46 2005.07-2008.06 0 0 - 36 Pingwei e Fe Liu Shuqing Vice President mal 42 2005.07-2008.06 0 0 - 503.69 e Tao Mal Vice President 41 2005.07-2008.06 0 0 - 511.96 Desheng e Wang Secretary to the Mal 39 2005.07-2008.06 300 300 － 418.75 Wuping board of directors e Total 7547.09 Note: The remunerations of directors, supervisors and senior management members set out above represent the annual target salaries (inclusive of tax). The actual amounts are subject to appraisal on their performance. Particulars of directors and supervisors holding position in holders or trustees of the Company's shares Whether receiving Name of holders (or trustees) of the Company's Name Position held Term of appointment allowance or not (Yes / shares No) Joincare Pharmaceutical Industry (Group) Zhu Baoguo Chairman From November 1999 Yes Company Limited Joincare Pharmaceutical Industry (Group) Deputy General Gu Yueyue From October 1997 Yes Company Limited Manager Joincare Pharmaceutical Industry (Group) Secretary to the Qiu Qingfeng From November 1999 Yes Company Limited board of directors 11 Joincare Pharmaceutical Industry (Group) Deputy General Cao Pingwei From January 1993 Yes Company Limited Manager (II) Work experience of Directors, Supervisors and Senior Management 1. Mr. Zhu Baoguo, Chairman of the Company. 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 Shenzhen Municipal Committee of CPPCC. 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 honoured as an "Entrepreneur actively supporting the Communist Party" by Shenzhen Private Economy Commission. He was elected as the Chairman of the fourth Board of the Company in 2002. Since June 2005 he has been the Chairman of the fifth Board of the Company. 2. Mr. Yi Zhenqiu, Vice Chairman 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. He was elected as the Vice Chairman of the fourth Board of the Company in 2002. Since June 2005 he has been the Vice Chairman of the fifth Board of the Company. 3. 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 marketing officer of Joincare Pharmaceutical Industry (Group) Company Limited. She was elected as a director of the fourth Board of the Company in 2002. Since June 2005 she has been a director of the fifth Board of the Company. 4. 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 12 President of the Company. He was elected as a director of the fourth Board of the Company in 2003. Since June 2005 he has been a director of the fifth Board of the Company. 5. 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 was elected as a director of the fourth Board of the Company in 2003. Since June 2005 he has been a director of the fifth Board of the Company. 6. 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 was elected as a director of the fourth Board of the Company in 2003. Since June 2005 he has been a director of the fifth Board of the Company. 7. 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 was elected as an independent director of the fourth Board of the Company in 2002. Since June 2005 he has been an independent director of the fifth Board of the Company. 8. 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 was elected as an independent director of the fourth Board of the Company in 2003. Since June 2005 he has been an independent director of the fifth Board of the Company. 9. Mr. Gao Dianhe, Independent Director of the Company. From 2002 he has been a partner of Shenzhen Zhongzhou Certified Public Accountants Company Limited. He was elected as an independent director of the fourth Board of the Company in 2002. Since June 2005 he has been an independent director of the fifth Board of the Company. 10. Mr. Qiu Qingfeng, Chairman of the Supervisor Committee 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 secretary to the board of directors of Joincare Pharmaceutical Industry (Group) Company Limited. He was elected as the Chairman of the fourth Supervisor Committee of the Company in 2002. He has been the Chairman of the fifth Supervisor Committee of the Company since June 2005. 11. Mr. Yuan Guoliu, Supervisor of the Company. He has served as the head of General Manger's Office, manager of Personal Department, chief information officer and chief administration officer 13 of the Company. He was elected as the Chairman of the fourth Supervisor Committee of the Company in 2002. He has been a supervisor of the fifth Supervisor Committee of the Company since June 2005. 12. 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 was elected as a supervisor of the fourth Supervisor Committee of the Company in 2003. He has been a supervisor of the fifth Supervisor Committee of the Company since June 2005. 13. 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 Company 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 a Vice President of the Company. She was elected as a member of the 6th Zhuhai Municipal Committee of CPPCC. 14. Mr. Tao Desheng, Vice President of the Company since June 2005. He was graduated from Drugs and Chemicals Department of Nanjing College of Pharmacy in 1985. He has been deputy head of research institute of Guangdong Limin Pharmaceutical Factory, deputy chief of Technology Division of Livzon Pharmaceutical Factory, manager of Advertisement Department of Livzon Group, general manager of Livzon (Group) Advertisement Company Limited, manager of Marketing Department of Livzon Group, deputy head of Livzon (Group) Limin Pharmaceutical Factory, chief Chinese medicine officer of Livzon Group and head of Livzon (Group) Limin Pharmaceutical Factory. 15. Mr. Wang Wuping, Secretary to the Board. 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 Board. Since 2005 he has also been the general manager of Guangdong New Bei Jiang Pharmaceutical Company Limited. (3) Details of annual remuneration The standards on allowance of directors and independent directors were established under the Resolution on Directors' Allowance of Livzon Group considered and approved at the 2nd meeting of the fourth Board. The standards on allowance of supervisors were established under the Resolution on Supervisors' Allowance of Livzon Group considered and approved at the 2nd meeting of the fourth Supervisory Committee. Under the Resolution on Senior Management's Remuneration of the Company considered and approved at the 19th meeting of the fourth Board, the annual remunerations for 2004, 2005 and onwards of senior management including President Mr. Xiao Siyang, Vice President Mr. An Ning, Vice President Ms. Liu Shuqing and Secretary to the Board Mr. Wang Wuping were determined, 14 and the remunerations for 2003 were considered and ratified. The annual remunerations of the senior management following 2005 are subject to adjustment within ±20% of the annual remuneration for 2005, based on their performance reviewed by Chairman as authorised by the Board. Adjustment beyond such ±20% range is subject to consideration and approval by the Board. (4) Details of resignation and appointment Under the Resolution on Appointment of Vice President Responsible for Research and Technology considered and approved by the 21st meeting of the fourth Board, Mr. Tao Desheng was decided to be engaged as Vice President of Livzon Group. In May 2005, the Company's marketing Vice President Mr. Fu Gang tendered a resignation due to private needs. 2. Details of Employees As at 31 December 2005, the Company had 4,353 employees (including subsidiaries in scope of consolidation) and had to bear the cost for 106 retired employees. Among the employees, 1,751 are involved in production, 869 are sales personnel, 754 are technicians and related personnel, and 323 are administrative personnel. Among them, 1.8% of the total employees hold master or higher degrees, 19.1% of the total employees hold bachelor degrees, 19.3% of the total employees hold tertiary education degrees and 59.8% of the total employees hold degrees below tertiary education. VI. CORPORATE GOVERNACE STRUCTURE 1. Corporate Governance 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 standardise its operations and strengthen information disclosure. 2. Discharge of Duties by Independent Directors During the reporting period, the 5 Independent Directors in the fourth Board and the 3 Independent Directors in the fifth Board of the Company were able to fully discharge their duties, focus on the operations and financial status of the Company and the corporate governance 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, capital transactions between the Company and its connected parties, guaranties granted to outside company and connected transactions, and fully implemented their functions as 15 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 in the fourth Board to the Board Meetings Name of Independent Director Board Meetings Required to Attend Attendance in Person Attendance by Proxy Absence An Chengxin 3 2 1 Gao Dianhe 3 3 Hua Yizheng 3 3 Jiang Jian 3 1 2 Qi Zhan 3 3 Attendance of Independent Directors in the fifth Board to the Board Meetings Name of Independent Director Board Meetings Required to Attend Attendance in Person Attendance by Proxy Absence An Chengxin 3 3 Gao Dianhe 3 3 Hua Yizheng 3 3 2) During the reporting period, none of the Independent Directors has any objection to relevant events of the Company. 3. Segregation of the Company with the Controlling Shareholder in terms of Business, Personnel, Assets, Organisation and Finance The Company is entirely independent from its controlling 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 controlling 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 control in assets and independent 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 controlling 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 16 as well as a finance management system for its subsidiaries. 4. Establishment and Implementation of Evaluation and Incentive Encouragement Mechanism for Senior Management In 2005, 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 Company's operation targets and payable on a floating basis. Salaries of senior management are divided into two parts of 77% and 23%, payable at the end of each month and following the assessment at the end of year respectively. VII. BRIEF INFORMATION OF SHAREHOLDERS' GENERAL MEETING 1. Holding of Shareholders’ General Meetings The 2004 Annual General Meeting (“AGM”) of the Company was convened at Zhuhai Holiday Resort Hotel on 30 June 2005, resolutions of which were published on the designated newspapers for disclosure of the Company’s information including Securities Times, Shanghai Securities News, Wen Wei Po (Hong Kong) (in Chinese) and The Standard (Hong Kong) (in English) (Announcement No.: 2005-17) on 1 July 2005. 2. Details of Election and Change of the Company’s Directors and Supervisors At the 21st meeting of the fourth Board of the Company, the Proposal for Re-election of the Board of Directors was considered and approved, pursuant to which Zhu Baoguo, Yi Zhenqiu, Gu Yueyue, Xiao Siyang, Wang Yisheng and An Ning were approved as director candidates and An Chengxin, Gao Dianhe and Hua Yizheng as independent director candidates. The proposal was approved at the 2004 AGM on 30 June 2005 and the aforesaid candidates became Directors or Independent Directors of the fifth Board of the Company. On 30 June 2005, the Proposal for Re-election of the Supervisory Committee was considered and approved at the 2004 AGM, pursuant to which Cao Pingwei and Qiu Qingfeng were approved as supervisor from shareholder representatives of the fifth Supervisory Committee. On 27 May 2005, Yuan Guoliu was elected as the supervisor from staff representatives of the fifth Supervisory Committee at the meeting of staff representatives. VIII. REPORT OF DIRECTORS 1. Discussions and Analysis on Business Operation Following our operation philosophy of practical, innovative and high performance, we furthered the in-depth reform of Livzon Group in marketing and other aspects and optimised the resource allocation in face of the considerable decrease in price of antibiotics in 2005. As a result, the competitiveness of the Company was improved and innovation and breakthrough were seen in many aspects. Net profit for 2005 amounted to RMB107.89 million. Earnings per share amounted 17 to RMB0.35 while the net cash flow per share from operating activities amounted to RMB0.53. Yield on net assets amounted to 8.96%. Revenue of major products such as anti-cold granule, Ceftriaxone, Shenqi Fuzheng for Injection, Menotrophin, Cefurorime sodium and Compound Cinnarizine Cap. increased by 46.07%, 19.29%,12.00%,23.59%,19.32% and 45.71% respectively from last year. Furthermore, the Company proactively increased the sales volume and cut down the cost to overcome the adverse impact from the substantial price cut of antibiotic preparations. The growth of sales volume of Cefurorime sodium was especially rapid. At the same time, the Company strengthened its control over operating expenses and administrative expenses, which recorded a year-on-year decrease of 10.57% and 2.58% respectively. 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.) series, 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, Mevastatin, Provastatin, Cefuroxime sodium, 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. Revenue from principal operations of the Company by geographical areas: (including wholly-owned and controlling subsidiaries) Revenue from principal Revenue from principal Percentage (%) of revenue Profit from principal Geographical operations in 2005 operations in 2004 from principal operations operations in 2005 areas (RMB'000) (RMB'000) increase (+)/ decrease (-) (RMB'000) North-eastern 123,045.37 110,320.80 11.53% 36,425.95 region Northern region 236,788.17 256,417.83 -7.66% 96,943.23 Central region 139,612.17 177,623.47 -21.40% 62,534.87 Eastern region 283,495.34 202,846.57 39.76% 95,754.34 Southern region 436,881.14 450,078.91 -2.93% 137,470.95 South-western 202,689.02 206,311.00 -1.76% 105,655.09 region North-western 62,013.61 67,228.35 -7.76% 33,449.70 region Export 131,721.80 67,321.22 95.66% 10,646.93 Revenue from principal operations of the Company during the reporting period by category (Unit: RMB'000) 18 Revenue from Cost incurred by Revenue from Cost incurred by principal principal principal principal Category operations in operations in operations in operations in 2005 2005 2004 2004 Digestive products 191,736 29,526 223,345 33,522 Cardio & cerebrovascular 86,950 20,705 65,094 10,206 products Chemical Antibiotics products 274,276 146,749 289,131 125,306 medicine Hormonal products 45,792 19,395 36,872 14,506 preparations Vascular & hematopoietic system 35,729 14,915 33,316 13,999 products Others 193,787 129,826 203,379 130,794 Raw medicines 500,873 448,175 404,446 348,183 Chinese medicine preparations 296,472 96,544 261,734 99,716 Agency of imported products 533 395 37,470 15,277 Including: connected transactions (amounts 5,327 4,976 32,957 14,558 included in revenue from principal operations) Total 1,626,146 906,231 1,554,788 791,508 Revenue from principal operations of the Company by product Percentage (%) of Revenue from principal Revenue from principal revenue from principal Product operations in 2005 operations in 2004 operations increase (+)/ (RMB'000) (RMB'000) decrease (-) Ceftriaxone 168,077 140,894 19.29% Anti-cold granules 146,564 100,341 46.07% Livzon Dele series 116,221 148,867 -21.93% Shenqi Fuzheng for Injection 69,402 61,966 12.00% Colistin Sulfate 67,437 28,073 140.22% Sulbactam Sodium/Cefoperazone Sodium for Injection 48,023 60,020 -19.99% Cefuroxime sodium for injection 42,018 35,214 19.32% Valaciclovir hydrochloride tab. 40,891 39,775 2.80% Bifidobiogen Cap. 40,212 42,550 -5.49% Menotrophin 35,116 28,413 23.59% 6apa 33,316 54,866 -39.28% Ampicillin 32,070 59,531 -46.13% Including: connected transactions 5,327 31,096 -82.87% Note: Cost of products is of business secret of the Company and hence an application of a waiver from disclosure has been granted by Shenzhen Stock Exchange. (2) Operation and Results of the Major Subsidiaries and Investee Companies a) Zhuhai Free Trade Zone Integrated Pharmacy Manufacturing Company Limited is mainly engaged in production and operation of chemical crude medicine with a registered capital of RMB102.28 million and its main products are Cefuroxime sodium, Ceftriaxone sodium, etc. Total assets amounted to RMB279.39 million as of 31 December 2005. For the whole year of 2005, it 19 recorded revenue from principal operations of RMB339.35 million and profit from principal operations of RMB30.54 million. Net profit amounted to RMB21.99 million. b) Sichuan Everbright Pharmaceutical Company Limited is mainly engaged in the production and sale of Chinese patent medicine and development of new medicine with a registered capital of RMB66 million and its main products are Anti-cold Granule, De-stomatitis, etc. Total assets amounted to RMB148.27 million as of 31 December 2005. For the whole year of 2005, it recorded revenue from principal operations of RMB169.50 million and profit from principal operations of RMB96.03 million. Net profit amounted to RMB16.21 million. c) 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. Total assets amounted to RMB132.92 million as of 31 December 2005. For the whole year of 2005, it recorded revenue from principal operations of RMB111.86 million and profit from principal operations of RMB72.25 million. Net profit amounted to RMB44.77 million. d) Guangdong New Bei Jiang Pharmacy Manufacturing Company Limited is mainly engaged in operations of self-produced products and export and production of relevant technology, with a registered capital of RMB134.93 million and its main product is Provastatin, etc. The total assets amounted to RMB272.12 million as of 31 December 2005 and the net profit realised for the whole year of 2004 was –RMB1.65 million. The considerable fluctuation in operating results is attributable to the substantial reduction in sales and gross profit of Mevastatin raw products. e) Livzon (Group) Pharmaceutical Factory is mainly engaged in production and operation of Livzon Dele series, Bifidobiogen Cap. and Sulbactam Sodium/Cefoperazone Sodium for Injection, with a registered capital of RMB140.32 million. The total assets amounted to RMB381.83 million as of 31 December 2005, and the net profit realised for the whole year of 2005 amounted to RMB7.26 million. f) Lizhu Pharmaceutical Trading Company Limited is mainly engaged in import and export of Chinese and chemical medicine preparations and raw materials and intermediates, with a registered capital of RMB60 million and the main products under its operation include Valaciclovir Hydrochloride Tab., Prostant Suppository and Compound Cinnarizine Cap. Total assets amounted to RMB255.95 million as of 31 December 2005, and the net profit realised for the whole year of 2005 amounted to -RMB13.51 million. g) Livzon (Group) Fuzhou Fuxing Pharmaceutical Company Limited is mainly engaged in production of chemical raw materials for antibiotic raw medicine, intermediates and preparations and production of medicine with a registered capital of RMB2.92 million and its main products are Colistin Sulfate, Kanamycin Monosulfate, etc. Total assets amounted to RMB304.52 million as of 31 December 2005, and the net profit realised for the whole year of 2005 amounted to -RMB8.29 million. 20 h) Zhuhai Free Trade Zone Lida Pharmaceutical Company Limited is mainly engaged in production, processing and sale of self-produced chemical raw medicine with a registered capital of RMB26 million and its main product is CBS raw materials. Total assets amounted to RMB84.76 million as of 31 December 2005, and the net profit realised for the whole year of 2005 amounted to RMB7.02 million. i) Livzon Group Reagent Factory is mainly engaged in production and sale of testing diagnosis reagent and its main products are diagnostic kits of chlamydia trachomatis antigen and diagnostic kits of HIV antibody with a registered capital of RMB5.68 million. Total assets amounted to RMB42.31 million as of 31 December 2005, and the net profit realised for the whole year of 2005 amounted to RMB4.90 million. j) Shanghai Livzon Pharmaceutical Company Limited is mainly engaged in production of bio-chemical and polypeptide raw medicine and its main products are bio-chemical raw medicines including Livzon Saile with a registered capital of RMB87.33 million. Total assets amounted to RMB101.54 million as of 31 December 2005, and the net profit realised for the whole year of 2005 amounted to -RMB9.95 million. (3) Sales Customers and Suppliers During the year, the total amount of sales to the top five customers was RMB143,033,744.27, representing 8.80% of the total annual sales of the Company, and the total amount of purchase from the top five suppliers was RMB203,335,885.48, representing 25.92% of the total annual purchase of the Company. 3. Investment during Reporting Period (1) Use of Proceeds During the reporting period, the Company made no attempt to raise fund from the 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 RMB221.47 million, representing an increase of RMB56.49 million or 34.24% compared with the RMB164.98 million in 2004. The major investment activities are as follows: a) The 18th meeting of the Investment Decision Committee of Livzon Group considered and approved the Proposal for Further Investment in Livzon Group Reagent Factory, pursuant to which Livzon Group is approved to increase capital contribution of RMB5.1 million in Livzon Group Reagent Factory and Livzon Group Reagent Factory was approved to establish new production bases for its removal. Upon completion of the further investment, the registered capital of Livzon Group Reagent Factory will increase to RMB20 million, upon which Livzon Group will hold 51% equity interest, and Chuangan (Hong Kong) Limited will hold 49% equity interest. Therefore, the 21 enterprise will be transformed from a domestic-invested enterprise into a Sino-foreign joint venture. Up to date, the relevant matters have been filed with the Ministry of Commerce for approval. b) The 19th meeting of the Investment Decision Committee of Livzon Group considered and approved the Proposal for Purchase of Land for Establishment of the Production Base of Livzon Group, pursuant to which Livzon Group is approved to invest RMB17.93 million to acquire the land use right of the land at Shuanglin Area, Liangang Industrial District, Zhuhai City with an area of approximately 427,000 square metres for establishment of the production base by Livzon Pharmaceutical Group Inc. Currently, the Company has signed the contract on transfer of state-owned land use right with relevant authorities. c) The 20th meeting of the Investment Decision Committee of Livzon Group considered and approved the Proposal for Establishment of a Joint Venture in Hunyuan County, Shanxi, pursuant to which Livzon Group Limin Pharmaceutical Factory, a subsidiary of the Group, is approved to establish a joint venture in Hunyuan County, Shanxi engaging in plantation and processing of Radix astragali as well as acquisition and operation of Chinese medicine materials. The registered capital of the joint venture is RMB1 million, of which Livzon Group Limin Pharmaceutical Factory, Hunyuan Hengxin Agricultural Technology Promotion Company Limited and Hunyuan Hengqi Product Trading Company Limited will contribute RMB700,000, RMB75,000 and RMB225,000, representing 70%, 7.5% and 22.5% equity interests in the joint venture respectively. Currently, the relevant registration procedures have been completed. The registered name of the joint venture is Datong Livzon Qiyuan Medicine Materials Company Limited. d) The 22nd meeting of the Investment Decision Committee of Livzon Group considered and approved the Proposal for Registration of a Company in Fuzhou to Establish Jiangyin Factory, pursuant to which Livzon Group and Antao (Hong Kong) Company Limited are approved to establish a joint venture Livzon (Group) Fuzhou Lixing Pharmaceutical Company Limited in Fuzhou. The registered capital of the joint venture is RMB82 million, of which Livzon Group and Antao (Hong Kong) Company Limited will contribute RMB61.50 and RMB20.50 million, representing 75% and 25% of the total registered capital respectively. The registration of the new factory is postponed. e) The 23rd meeting of the Investment Decision Committee of Livzon Group considered and approved the Proposal on Change in Shareholder of and Increase in Capital Contribution in Lizhu Pharmaceutical Trading Company Limited, pursuant to which Lizhu Pharmaceutical Trading Company Limited is approved to change the shareholder Wang Hao to Livzon (Group) Pharmaceutical Factory. Upon completion of change of the shareholder, the two shareholders Livzon Group and Livzon (Group) Pharmaceutical Factory will, based on their current shareholding, invest additional RMB57 million in Lizhu Pharmaceutical Trading Company Limited, i.e. RMB38 million and RMB19 million respectively. Upon completion of change of the shareholder and increase in capital contribution, the registered capital of Lizhu Pharmaceutical Trading Company Limited will increase to RMB60 million, upon which Livzon Group and Livzon (Group) Pharmaceutical Factory will hold 66.7% and 33.3% equity interest respectively. Currently, the relevant registration procedures have been completed. 4. Analysis of Financial Status 22 As at the end of the reporting period, total assets of the Company decreased by RMB38.26 million or 1.74% to RMB2,163.64 million from RMB2,201.89 million at the beginning of the year. This is attributable to the decrease in bank balances and cash by RMB173.98 million as compared with beginning of the year to RMB129.50 million (mainly due to investment in Fuxing Pharmaceutical and repayment of due bills), which offsets the increase of RMB147.47 million in construction in progress (given considerable investments in establishment of Jiangyin production base for raw medicine by Livzon (Group) Fuzhou Fuxing Pharmaceutical Company Limited, establishment of a new production base by Livzon (Group) Pharmaceutical Factory, project of cephalosporin workshop of Zhuhai Free Trade Zone Lida Pharmaceutical Company Limited, and project of clavulanic acid (Lovastatin) workshop of Guangdong New Bei Jiang Pharmacy Manufacturing Company Limited). As at the end of the reporting period, shareholders' fund increased by RMB64.67 million or 5.67% to RMB1,204.39 million from RMB1,139.72 million at the beginning of the year, which is attributable to the increased net profit for the reporting period. The net decrease in cash and cash equivalents for the reporting period fell by RMB53.38 million or 44.26% to RMB173.98 million when compared to the net decrease of RMB120.60 million in 2004. The decrease is attributable to the decreased net cash flow in the operating activities and the increased net cash outflow of financing activities. During the reporting period, revenue from principal operations increased by RMB71.36 million to RMB1,626.15 million from RMB1,554.79 million in 2004 while it decreased by RMB32.32 million or 2.08%, net of the contribution from Fuxing Pharmaceutical. This is primarily attributable to the falling price of antibiotic preparations, the decline in sales volume of Livzon Dele series, expiry of agency sale of Dages and the decrease in the sales revenue of raw medicines Mevastatin, Ampicillin and 6-APA. During the third quarter of 2005, sales volume of LivzonDele (56 doses) decreased considerably, resulting in the year-on-year decrease of RMB29.23 million in the amount of sales for the reporting period. However, during the fourth quarter, the Company efficiently adjusted the strategy for Livzon Dele (56 doses), as a result of which sales volume increased by 730,000 boxes from the third quarter and the sales increased by 156.05%. Sales revenue of antibiotics products under price cut impact presented a year-on-year decrease of RMB12.46 million (decreased by RMB53.70 million due to price cut and increased by RMB41.24 million due to the rising sales volume). Expiry of agency sale of Dages decreased sales revenue by RMB34.40 million. Net the contribution from Fuxing Pharmaceutical, sales revenue of raw medicines decreased by RMB6.38 million compared with last year. Sale of Chinese medicine preparations increased by 13.27% compared with last year, mainly arising from anti-cold granule and Shenqi Fuzheng Injection. Profit realized from principal operations for the reporting period decreased by RMB45.40 million or 5.96% to RMB715.80 million from RMB761.19 million of last year. Expenses for the period decreased by RMB42.17 million (or RMB65.86 million, net the contribution from Fuxing Pharmaceutical) to RMB597.95 million as compared with last year and the major 3-expense ratio recorded a year-on-year decrease of 4.40% (or 3.45%, net the contribution from Fuxing Pharmaceutical). This is primarily attributable to the decreased three promotion expenses resulting in the decrease of 10.57% and 3.60% in operating expenses and the operating expenses ratio respectively, and the decreased advertising expenses resulting in the decrease of 2.58% and 1.08% in administrative expenses and the administrative expenses ratio respectively. Operating 23 profit for the reporting period decreased by RMB5.99 million, or 4.73%, as compared with the same period last year. This is mainly attributable to reduced expenses which offset the adverse impact from the decreased price of antibiotic preparations and sales volume of Livzon Dele series. Investment income decreased by RMB19.83 million to RMB11.13 million, which is mainly attributable to the decrease in income from equity transfer. Net profit for the reporting period decreased by RMB16.17 million, or 13.03% to RMB107.89 million from RMB124.06 million in 2004, which is primarily attributable to the decrease in extraordinary investment income. 5. Outlook and Business Plan for New Year (1) Industry Outlook and its Impact The growth of the pharmaceutical industry is higher than that of GDP although it slacked towards a stable growth in recent years. During January to September 2005, the pharmaceutical industry witnessed rising loss and lower economic efficiency despite the great increase in sales revenue in the industry. Losses of the loss-making enterprises totalled RMB2,762 million, a year-on-year increase of 17.59%. Due to the sluggish growth of medicines in the global market, the emphasis on the PRC medicine market and the enhanced expansion of multinational pharmaceutical enterprises and groups into the PRC market, there have been a total of 17 times of price cut for medicine since 1997. On 18 September 2005, National Development and Reform Commission issued Fa Gai Jia Ge (2005) Circular No.1762 (National Development and Reform Commission: Notice on Lowering Retail Prices of 22 Categories of Medicine including Cefuroxime Sodium) that the highest retail prices of 22 categories of medicine including Cefuroxime sodium shall be decreased by approximately 40%. Hence, based on their current sales volume, it is estimated that sales revenue will decrease by approximately RMB4,000 million. This is the 17th round and the largest price cut of medicine in China. (The above is abstracted from on Estimation on China Pharmaceutical Economy in 2006 issued by South Economy Research Institute). Amongst the 22 categories of medicine, Livzon products are involved in 13 categories in total, of which, prices of Sulbactam Sodium, Cefuroxime sodium and Levofloxacin decreased by 34%, 32% and 26% respectively, resulting in the decrease of RMB15.37 million, RMB16.70 million and RMB4.66 million in their respective gross profit. The decrease in gross profit arising from price cut of such 13 categories of antibiotics is expected to aggregate RMB53.70 million. As such, the Company took initiatives in sales expansion and cost reduction to work off the adverse impact from price cut. As a result, gross profit was increased by MRB12.97 million and RMB11.56 million respectively. Thanks to such favourable measures, for 2005, gross profit of the Company's antibiotics products involving in such price cut decreased by RMB29.17 compared with last year. (2) Risk Analysis and Countermeasures According to the officer of the Price Department of National Development and Reform Commission ("NDRC"), despite the great decrease in medicine prices in 2005, prices of many medicines would go down further. NDRC will improve its supervision on medicine prices to cut down retail prices of medicine. Meanwhile, it will cooperate with relevant authorities to implement the in-depth reform and integrated management of medicine prices aiming at both temporary and permanent cures to relieve the medical burden on the public. According to South Economy Research Institute, NDRC will tag medicine prices and include all prescription drugs into its management, thus further lowering medicine prices and the profit margin in the industry in 2006. 24 In view of that, the Company is taking effort to increase the percentage of self-pricing medicines in the total sales revenue by polishing the Livzon brand, developing new varieties and changing the dosage form and dosage for its current products, thereby minimising the risk from decrease in medicine prices with a high gross profit margin. Given the shrink in profitability due to the decrease in antibiotics prices, pharmaceutical enterprises had to focus their competitions on medicine procurement tendering and sales networks. With its remarkable advantages in the sales network of prescription drugs, the Company will strengthen the maintenance of sales network with better dealer service, while enhancing its integrated strengths and fostering advantages in medicine procurement tendering to boost sales and shrug off the adverse impact from price cut. (3) Strategic Outlook By 2010, Livzon Group is expected to build itself into a pharmaceutical enterprise group with innovative leadership in the PRC and international competitiveness in terms of production, technology and management. It is our strategic target that Livzon Group will advance into the top five PRC pharmaceutical enterprises by 2010. Focusing on key products such as anti-cold granule, Shenqi Fuzheng Injection, rat NGF, FSH, Dele series (including Livzon Dele and Jindele), Esaprazole Cap. (IY－81149), Gemifloxacin Cap., new Compound Cinnarizine Cap. and Prostant Suppository, we strive to roll out 8 brands with sales more than RMB100 million (including 1 brand exceeding RMB300 million, 2 brands exceeding RMB200 million and 5 brands exceeding RMB100 million). Therapy medicines including digestive medicines and cephalosporin antibiotics are expected to stand among the top three in the PRC while anti-virus and proconceptive drugs hold steadily the first position in the PRC. (4) Fund Requirement In achieving the Group's development strategies, the Company plans to use fund in the following way in coming years: Investment of RMB215.75 million in expansion of the phase I project of Livzon (Group) Pharmaceutical Factory - the construction project of the production line for dry-freezing powder Inj. and powder Inj. Investment of RMB35 million in the phase II project of Zhuhai Free Trade Zone Integrated Pharmacy Manufacturing Company Limited Investment of RMB39.029 million in high technology industrialization demonstration construction project for Shenqi Fuzheng Injection Investment of RMB28.68 million in the technology renovation project for production lines of Lovastatin category medicine Investment of RMB74.82 million in establishment of Jiangyin production base for raw medicine by Livzon (Group) Fuzhou Fuxing Pharmaceutical Company Limited Investment of RMB66.04 million in the industrialization project for the new medicine IY-81149 Investment of RMB63.36 million in the industrialization project for the new medicine Zn-5-ASA Investment of RMB49.73 million in the industrialization project for injection liquid Leuprorelin micropheres The above-mentioned projects will be financed by self-owned funds or stocks or loans. (5) Business Plan for New Year Aiming to the above strategic targets, the Company's business plan for 2006 is set out as follows: 25 a) Quantitative deployments Under its general business plan for 2006, the Company aims to realise principal operating revenue of RMB1,797 million and net profit of RMB133 million, representing a year-on-year increase of 10.52% and 23.15% respectively. b) More efforts in key fields and brands 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 adopt the following strategies in line with the strategic targets set for Year 2010: For medicine preparations, the Company will continue its marketing strategy of brand highlighting and cohesion with more expenses on key brand promotion to cover the target markets. A Brand Management Committee will be set up. The marketing team will be built into a professional, clear-cut, transparent and efficient organisation focusing on each variety. The brand mix comprises anti-cold granule, Shenqi Fuzheng Injection, rat NGF, FSH, Dele series (including Livzon Dele and Jindele), Esaprazole Cap. (IY－81149), Gemifloxacin Cap., new Compound Cinnarizine Cap. and Prostant Suppository. In addition, it will balance production capability and technology, properly utilising resources to strengthen product competitiveness and profitability. For antibiotics, Lovastatin category medicines and aminoglycoside raw medicines, capitalising on its advantageous human resources and technology, the Company will proactively introduce and develop new product lines, especially promising hi-end products with rigorous technical barriers, so as to foster the characteristic, large-scale and low-cost advantages and improve the core competitiveness of raw medicines. Meanwhile, the Company strives to expand the domestic and overseas markets to enhance the sale of raw medicines. c) Highlight research and technology The Company will put more effort in implementation of TPM (Total Productive Maintenance) project, technology updating project and cost reduction project and engagement of research staff to improve research equipment, environment and procedures. Taking full use of its experience in innovation of characteristic Chinese medicines including Shenqi Fuzheng Injection and its cooperation with overseas partners, the Company strives to develop the independency and creativeness of its research staff so as to foster its advantages in R&D and product diversity. d) Enhance performance assessment mechanism and accountability In realising its strategic targets, the Group will further strengthen the performance assessment mechanism and accountability for senior management members from all aspects. Responsibilities will be allocated reasonably. The senior management members will be supervised to undertake the responsibility for figures output, performance and project outcomes as well as the operation and development of the Group, with better execution force of the management. e) Reinforce budget management Since the execution of the budget management, resource utilisation of the Company has been obviously optimised and the control on administrative expenses and operating expenses has been improved. In 2006, the Company will continue to reinforce the budget management and to optimise the utilisation efficiency of expenses and improve the use of expenses. 26 6. Daily work of the Board During the reporting period, there are a total of 3 meetings (the 19th to the 21st session) held by the 4th Board of the Company, 3 meetings (the 1st to 3rd session) held by the 5th Board of the Company and 9 meetings (the 18th to 26th session) held by Investment Decision Committee, the details of which are as follows: On 18 February 2005, the 19th meeting of the fourth Board of the Company was held at 9:00 a.m. at Shenzhen Kapok Hotel, resolutions of which were published in the designated newspapers for disclosure of the Company's information on 22 February 2005 (Announcement No:2005-03). On 13 April 2005, the 20th meeting of the fourth Board of the Company was convened by way of telecommunication, resolutions of which were published in the designated newspapers for disclosure of the Company's information on 15 April 2005 (Announcement No:2005-08). On 28 May 2005, the 21st meeting of the fourth Board of the Company was held at 9:00 a.m. at Shenzhen Kapok Hotel, resolutions of which were published in the designated newspapers for disclosure of the Company's information on 31 May 2005 (Announcement No:2005-12). On 30 June 2005, the 1st meeting of the fifth Board of the Company was held at Zhuhai Holiday Resort Hotel, resolutions of which were published in the designated newspapers for disclosure of the Company's information on 1 July 2005 (Announcement No:2005-18). On 7 August 2005, the 2nd meeting of the fifth Board of the Company was convened by way of telecommunication, resolutions of which were published in the designated newspapers for disclosure of the Company's information on 9 August 2005 (Announcement No:2005-21). On 20 October 2005, the 3rd meeting of the fifth Board of the Company was convened by way of telecommunication, resolutions of which were published in the designated newspapers for disclosure of the Company's information on 22 October 2005 (Announcement No:2005-25). On 19 January 2005, the 18th meeting of the Investment Decision Committee was convened by way of telecommunication. At the meeting, the Proposal for Further Investment in Livzon Group Reagent Factory was considered and approved. On 18 April 2005, the 19th meeting of the Investment Decision Committee was convened by way of telecommunication. At the meeting, the Proposal on Purchase of Land for Establishment of Production Base of Livzon Group was considered and approved. On 17 May 2005, the 20th meeting of the Investment Decision Committee was convened by way of telecommunication. At the meeting, the Proposal for Establishment of a Joint Venture in Hunyuan County, Shanxi was considered and approved. On 8 June 2005, the 21st meeting of the Investment Decision Committee was convened by way of telecommunication. At the meeting, the Proposal for Cancellation and Liquidation of Gutian Keleli Bio-engineering Company Limited and the Proposal for Transfer of Equity Interest in Fuzhou Rongqing Bio-engineering Company Limited were considered and approved. On 11 July 2005, the 22nd meeting of the Investment Decision Committee was convened by way of telecommunication. At the meeting, the Proposal on Registration of a Company in Fuzhou for Establishment of a New Factory in Jiangyin was considered and approved. On 22 August 2005, the 23rd meeting of the Investment Decision Committee was convened by way of telecommunication. At the meeting, the Proposal on Change in Shareholder of and Capital 27 Increase in Lizhu Pharmaceutical Trading Company Limited was considered and approved. On 12 September 2005, the 24th meeting of the Investment Decision Committee was convened by telecommunication. At the meeting, the Proposal for Transfer of Equity Interests in Shanghai Lijin Bio-chemical Product Company Limited was considered and approved. On 2 November 2005, the 25th meeting of the Investment Decision Committee was convened by telecommunication. At the meeting, the Proposal for Transfer of Equity Interests in Zhuhai Commercial Bank was considered and approved. On 5 December 2005, the 26th meeting of the Investment Decision Committee was convened by telecommunication. At the meeting, the Proposal for Transfer of Equity Interests in Guangdong Central South Pharmacy Co., Ltd. and the Proposal for Transfer of Equity Interests in Fuzhou Kaili were considered and approved. Investment Decision Committee of Livzon Group is established with authorisation by 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 and asset disposal 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 2005 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. (1) Implementation of Profit Distribution Proposal On 30 June 2005, a proposal of profit distribution for 2004 was considered and approved at the Company’s 2004 AGM, pursuant to which RMB1.5 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. Accordingly, cash dividend of RMB45,905,322.3 (before tax) in aggregation will be distributed. Currently, no tax is charged on B share. Since the Company will deduct individual income tax for the State based on a tax rate of 10%, the actual cash dividend with respect to individual holders and trust fund of A public shares is RMB1.35 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 RMB1.50 for every 10 shares. The date of record for A share is 2 August 2005, and the ex dividend date is 3 August 2005. For B share, the last trading day is 2 August 2005, and the ex dividend date is 3 August 2005 while the date of record is 5 August 2005. (2) Authorisation to the Board for handling affairs regarding the share placement 28 The Company's application materials for share placement, Supplementary Document for 2004 Annual Report and Updated Supplementary Prospectus of Share Placement, were filed to China Securities Regulatory Commission respectively on 22 February 2005 and 25 April 2005. Implementation of share placement is subject to completion of the state-owned share reform of the Company. 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 RMB82,697,396.52 for 2005 as audited by Reanda Certified Public Accountants (“Reanda”), the Company intends to respectively appropriate 10% of the net profit (RMB8,269,739.65) as statutory public reserve and statutory welfare fund. Subsidiaries intend to appropriate profits of RMB10,692,160.41 in aggregation into their statutory public reserves, statutory welfare funds and corporate development funds. A total of RMB27,231,639.71 of profits will be appropriated into surplus reserves. Net profit for 2005 as audited by the domestic auditor amounted to RMB107,891,938.59, pursuant to which undistributed profit attributable to shareholders for 2005, after including the said appropriation of surplus reserve of RMB27,231,639.71 and based on the undistributed profit of RMB118,518,935.59 at the beginning of the year and other in-transferral of RMB248,603.80, net of payable dividends of RMB45,905,322.30 for ordinary shares, amounted to RMB153,522,515.97. Net profit for 2005 as audited by the overseas auditor amounted to RMB108,568,000 pursuant to which undistributed profit attributable to shareholders for 2005, after including appropriation of surplus reserve of RMB26,983,000 and based on the undistributed profit of RMB107,528,000 at the beginning of the year and after deducting RMB45,906,000 of dividend for 2004, amounted to RMB143,207,000. As i) the Company has distributed a dividend of RMB107,112,418.70 in aggregation for 2002, 2003 and 2004; and ii) the Group invested in 2005 and will increase its investment in 2006 in the two key projects including the raw medicine production base of Livzon (Group) Fuzhou Fuxing Pharmaceutical Company Limited in Jiangyin and establishment of a new production base for Livzon Group by Livzon (Group) Pharmaceutical Factory, no cash dividend or bonus shares or transfer of any public reserve to the capital is recommended for 2005 so as to ensure the fund arrangement for key projects and the sustainable development of the Company. The undistributed profit for the reporting period is retained to next year. 9. Guaranties The Company's independent directors hereby make the special statement and provide their independent opinion with respect to the Notice of Regulation on Guaranties Granted to Outside Companies by Listed Companies (ZJF[2005] Circular No.120): In accordance with relevant laws and regulations including the Notice of Regulation on Guaranties Granted to Outside Companies by Listed Companies (the "Notice", ZJF[2005] Circular No.120) promulgated by China Securities Regulatory Commission ("CSRC") and China Banking 29 Regulatory Commission on 1 January 2006, which took effect on the same day, and the Guidance in Establishment of Independent Directors System for Listed Companies as well as the Articles of Association, we act as independent directors of Livzon Group to perform prudent inspection in a practicable and justice 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。No guaranty occurred in the reporting period and the balance of guaranties as at the end of period amounted to RMB9 million. (Unit: RMB million) Balance of guaranties as Whether Guaranty granted to Term of Loan under guaranty Type of Guaranty at the end of expired the period Under joint and Fuzhou Yihua Chemical Company Limitedq 2001.12.20-2005.11.15 3.00 No several liabilities Under joint and Fuzhou Yihua Chemical Company Limited 2001.12.20-2006.11.15 6.00 No several liabilities Total ------- 9.00 ------- ------- i) The guaranty of RMB1 million granted to Fuzhou Boiler Factory, the guaranty of RMB20.71 million granted to Fujian Yatong New Material Technology Company Limited and the guaranty of RMB3 million granted to Fuzhou Yihua Chemical Company Limited (the term of loan is from 20 December 2001 to 15 November 2004) by former Livzon (Group) Fuzhou Fuxing Pharmaceutical Company Limited have been released. iii) For the above-mentioned guaranties, the Company has adopted corresponding arrangements to control and avoid exposure to risks as follows: We understand the debt to assets ratio of Fuzhou Yihua Chemical Company Limited was 71.92% based on its unaudited balance sheet as at 31 December 2005. 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 Fuzhou Yihua Chemical Company Limited by Fuxing Pharmaceutical is in violation of the above requirement. The guaranty amounted to RMB9 million, representing 0.75% of the Company's net assets. For the guaranty granted to 30 Fuzhou Yihua Chemical Company Limited, Livzon (Group) Fuzhou Fuxing Pharmaceutical Company Limited has entered into a counter-guarantee agreement with Fuzhou Yihua Group Company Limited. Under the support from Fuzhou Municipal Government, Livzon (Group) Fuzhou Fuxing Pharmaceutical Company Limited, a wholly-owned subsidiary of the Company, has proposed to release the mutual-guarantee relationship between itself and Fuzhou Yihua Chemical Company Limited by transforming the guaranteed loan of Fuzhou Yihua Chemical Company Limited with Industrial and Commercial Bank of China, Yongtaixing Branch into a mortgage loan with Industrial and Commercial Bank of China, Mindu Branch. Currently, the assets valuation for the mortgage loan is in progress. Upon completion of the transformation procedures for the loan, the said guaranty may be released. c) During the reporting period, guaranties granted by the Company to its subsidiaries are as follows: (Unit: RMB million) Balance of Balance of Increase Decrease Guaranty granted guaranties as at guaranties as at Type of Term of Loan under guaranty during the during the to the beginning of the end of the Guaranty period period period period Guangdong New Under joint Bei Jiang 2005.11.11-2006.11.07 25.00 0 0 25.00 and several Pharmacy liabilities Company Limited Under joint Fujian Gutian 2004.1.29-2007.1.28 14.90 0 14.90 0 and several Antibiotics Factory liabilities Note: Fujian Gutian Antibiotics Factory is a wholly-owned subsidiary of Fuxing Pharmaceutical. As at 31 December 2005, the Company's guaranties granted to outside companies and its subsidiaries aggregated to RMB34 million, of which guaranties granted to outside companies accounted for RMB9 million, representing 0.75% of the Company's audited net assets in 2005, and guaranties granted to the Company's subsidiaries accounted for RMB25 million, representing 2.08% of the Company's audited net assets in 2005. d) Save as aforesaid guaranties, the Company provided no other guaranty to any of its shareholders, the de facto controller or connected parties. Nor did it provide, directly or indirectly, any guaranty to a company with a gearing ratio exceeding 70%. Total loans under guarantee did not exceed 50% of the last audited net assets while there is no single loan under guarantee exceeding 10% of the last audited net assets. 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 18 February 2005, the 8th meeting of the fourth Supervisory Committee was held in 31 Shenzhen Kapok Hotel. At the meeting, the 2004 Annual Report of Livzon Pharmaceutical Group Inc. and the 2004 Work Report of Supervisory Committee were considered and approved. b) On 13 April 2005, the 9th meeting of the fourth Supervisory Committee was convened by way of telecommunication. At the meeting, the 2005 1st Quarterly Report of Livzon Pharmaceutical Group Inc. was considered and approved. c) On 28 May 2005, the 10th meeting of the fourth Supervisory Committee was held in Shenzhen Kapok Hotel. At the meeting, Proposal for Amendment to Rules of Procedures of Supervisory Meeting and Proposal for Change and Re-election of the Supervisory Committee were considered and approved. 2. Independent opinions of the Supervisory Committee a) The Company’s operations under relevant laws Pursuant to the power given by Company Law, Securities Law and Articles of Association, the Supervisory Committee has performed inspection on the Company's operations under the relevant laws. The inspection demonstrated that the Company has established an internal control system for provision of impairment of assets and dealing with losses, and rules of management, With which the procedures for general meeting of the Company as well as the convention and decision-making of the board are legally effective. The directors and senior executives have perform their duties with due diligence in compliance with the 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 Committed 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 2005 as audited respectively by Reanda and BDO International 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 were 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 or arbitration of material importance during the year. 2. Other Significant Events (1) The 21st meeting of Investment Decision Committee of Livzon Group considered and approved: 1) Proposal for Cancellation and Liquidation of Gutian Keleli Bio-engineering Company Limited, 32 pursuant to which the Company was approved to liquidate and cancel the registration of Gutian Keleli Bio-engineering Company Limited. The liquidation and cancellation was completed and filed with registration authorities in April 2005; and 2) Proposal for Transfer of Equity Interest in Fuzhou Rongqing Bio-engineering Company Limited, pursuant to which Livzon (Group) Fuzhou Fuxing Pharmaceutical Company Limited was approved to transfer all its equity interest in Fuzhou Rongqing Bio-engineering Company Limited to Heyuan Huiying Bio-engineering Company Limited, at a consideration of RMB878,718.58, and acquire all fixed assets (save for office computers) of Fuzhou Fuxing Pharmaceutical Company Limited, at a consideration of RMB554,199.39, while providing free of charge to Fuzhou Fuxing Pharmaceutical Company Limited certain idle equipments as compensation for relocation. Currently the procedures for registration change have been completed. (2) The 24th meeting of Investment Decision Committee of Livzon Group considered and approved Proposal for Transfer of Equity Interest in Shanghai Lijin, pursuant to which certain Livzon (Group) subsidiaries were approved to transfer to Mr Wu Qingshi and other natural persons designated by him all equity interest in Shanghai Lijin Biology & Chemistry Company Limited held by the Livzon (Group) subsidiaries, at a consideration of RMB1.69 million. The 89% equity interest held by Shanghai Livzon Pharmaceutical Company Limited was transferred at a consideration of RMB1.50 million; the 11% equity interest held by Livzon Pharmaceutical Factory was transferred at a consideration of 185.9 (RMB'000). Currently the procedures for registration change have been completed. (3) The 25th meeting of Investment Decision Committee of Livzon Group considered and approved Proposal for Transfer of Equity Interest in Zhuhai Commercial Bank, pursuant to which Livzon (Group) Pharmaceutical Factory was approved to transfer its legal person share of 20,000,000 shares in Zhuhai Commercial Bank, at a consideration no less than RMB12.0 million. Currently the equity interest transfer agreement has not been signed. (4) The 26th meeting of Investment Decision Committee of Livzon Group considered and approved: 1) Proposal for Transfer of Equity Interest in Guangdong Central South Pharmacy Company Limited, pursuant to which Livzon Group was approved to transfer its equity interest of 70% in Guangdong Central South Pharmacy Company Limited to Mr Ke Yiping and other natural persons designated by him, at a consideration of RMB3.38 million. 2) Proposal for Transfer of Equity Interest in Fuzhou Kaili, pursuant to which Livzon (Group) Fuzhou Fuxing Pharmaceutical Company Limited was approved to transfer its equity interest of 20% in Fuzhou Kaili Biological Product Company Limited to Mr Lin Lidong, at a consideration of RMB1. Currently the procedures of registration change are in progress. (5) The 11th meeting of Investment Decision Committee of Livzon Group considered and approved Proposal for Cooperation with President Chain Store Corporation (Taiwan) and Disposal of Zhuhai Livzon Drugstore Chain Company Limited, pursuant to which the Company was approved to cooperate with President Chain Store Corporation (Taiwan) and found a joint venture "Tongyi Kangshimei Commercial Chain (Shenzhen) Company Limited" (details disclosed in 2004 annual report). In August 2005, Lizhu Pharmaceutical Trading Company Limited and Mr Wang Hao (as shareholder proxy of Livzon Group), being shareholders of Zhuhai Livzon Drugstore Chain Company Limited ("Drugstore Chain"), transferred their respective equity interest of 90% and 10% in Drugstore Chain to Tongyi Kangshimei Commercial Chain (Shenzhen) Company Limited and natural person Ms Luo Liping, at respective consideration of RMB3.78 million and RMB0.42 million. 33 Currently the procedures of registration change have been completed. (6) The 11th meeting of Investment Decision Committee of Livzon Group considered and approved Proposal for Acquisition of Equity Interest in Shanghai Livzon Dongfeng Biotechnical Company Limited and the Liquidation thereof (disclosed in 2004 annual report). The acquisition of equity interest was completed in 2004 and Shanghai Livzon Dongfeng Biotechnical Company Limited was cancelled and liquidated upon approval by registration authorities in June 2005. (7) Fujian Gutian Antibiotics Factory ("Gutian Antibiotics"), a state-owned enterprise, was a wholly-owned subsidiary 100% owned by Livzon (Group) Fuzhou Fuxing Pharmaceutical Company Limited ("Fuxing Pharmaceutical"). To streamline its shareholding structure and safeguard investors' legal interest in compliance with regulations, in August 2005 Fuxing Pharmaceutical carried out restructuring for Gutian Antibiotics. After the restructuring, Gutian Antibiotics became a company with limited responsibilities and was changed to Gutian Fuxing Pharmaceutical Company Limited. Based on the former paid-up capital, its original registered capital of RMB28.50 million was changed to RMB26.70 million. As Fuxing Pharmaceutical transferred 25% of Gutian Antibiotics' equity interest to Livzon (Group) Pharmaceutical Factory, the structure of equity interest of Gutian Antibiotics was changed into: a contribution of RMB20.025 million or 75% from Fuxing Pharmaceutical; a contribution of RMB6.675 million or 25% from Livzon (Group) Pharmaceutical Factory. (8) On 15 March 2004, the 12th meeting of the Investment Decision Committee of the Company considered and approved Proposal for Restructuring and Registration of Livzon (Group) Guangzhou Livzon Building Company Limited (disclosed in 2004 annual report). The said restructuring was completed in June 2005, and the company was changed from a collectively-owned enterprise to a company with limited liabilities. As a result, the shareholding was changed into: a contribution of RMB0.90 million or 90% from Lizhu Pharmaceutical Trading Company Limited, and 10% equity interest held by Mr Wang Hao as shareholder proxy of Lizhu Pharmaceutical Trading Company Limited. The total registered capital was RMB1 million. 3. Connected Transactions (according to the PRC Accounting Rules and regulations) (1) Sales of Products (Unit: RMB) Connected Person 2005 2004 Amount Percentage in the Amount Percentage in the total annual sales total annual sales Guangdong Lanbao Pharmaceutical Company Limited 52,430.57 0.0032% 29,343,556.60 1.89% Shenzhen Haibin Pharmaceutical Company Limited 5,326,585.48 0.3276% 6,316,897.44 0.41% Total 5,379,016.05 0.3308% 35,660,454.04 2.29% Including: RMB5,326,585.48 of connected transactions for products sold or services provided by the Company to its controlling shareholder and subsidiaries during the reporting period (2) Purchase of Products (Unit: RMB) 2005 2004 Amount Percentage in the Amount Percentage in the Connected Person total annual total annual purchase purchase Livzon(Group) Changzhou Kangli 8,806,376.06 16,960,209.04 2.08% Pharmaceutical Company Limited 1.12% 34 Shenzhen Haibin Pharmaceutical Company 8,455,794.91 7,385,237.66 0.90% Limited 1.08% Joincare Pharmaceutical Industry (Group) 695,999.98 —— —— Company Limited 0.09% New Bei Jiang Pharmaceutical Limited (Hong 474,349.02 —— —— Kong) 0.06% Total 18,432,519.97 2.35% 24,345,446.70 2.98% (3) Supply of Service (water, electricity and power) (Unit: RMB) Connected Person 2005 2004 Guangdong Lanbao Pharmaceutical Company 3,209,406.00 —— Limited (4) Disposal of Fixed Assets and Intangible Assets (Unit: RMB) Connected Person 2005 2004 Guangdong Lanbao Pharmaceutical Company 2,075,921.43 —— Limited (5) Amounts due to and from connected persons (Unit: RMB) Amount due from connected persons Amount due to connected persons Connected Connection Reason for person occupied fund Amounts in total Balance Amounts in total Balance Guangdong Supply of An associated Lanbao services and company of a 5,953,383.46 ----- ----- ----- Pharmaceutical transfer of fixed subsidiary Company Limited assets Livzon (Group) Guangzhou Subsidiary Venue fee 2,710,000.00 1,150,000.00 ----- Livzon Building ----- Company Limited Jiaozuo Joincare A subsidiary of Bio-products the controlling Fund transfer 2,099,819.45 ----- ----- ----- Company Limited shareholder Total 10,763,202.91 1,150,000.00 ----- ----- Including: RMB2,099,819.45 of non-trading working capital provided by the Company to its controlling shareholder and subsidiaries during the reporting period (closing balance: nil) (6) Pricing Policy and Basis The policy of pricing is: on the market-oriented principle, both parties shall determine framework price with reference to market price. The pricing is based on various means such as enquiry, negotiation or market situation. (7) Transaction Purpose and Effect on the Company As such connected transactions are required in the normal course of the Company's business, The Company expects that the connected transactions will continue in its future production and operation. The connected transactions are conducted on a fair, impartial and transparent basis without detriment to the Company's interests as a whole. As the connected transactions accounted for a small part of the Company's total sales revenue or total procurement, the financial position and operating results of the Company for the period or in the future or its independency was not 35 affected. The connected transactions will not result in the dependence of the Company on the connected parties. 4. Undertakings 1. 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 the exclusive use of Yiyang’s patent in PRC (including Hong Kong and Macau) for the relevant production, manufacture and sales. Under the agreement, a Transfer 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 RMB 7,464,935) 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 6% of its sales until 22 July 2014 (expiring date of the agreement). 2. 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. 3. 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 controlling subsidiaries excluding Livzon Group ("other controlling subsidiaries"), save for Ampicillin sodium/Sulbactam and Quanying being same (in terms of their chemical structure) as Sulbactam Sodium/ Cefoperazone Sodium for Injection / New Sulbactam Sodium/New Cefoperazone Sodium for Injection which were produced and manufactured by Livzon Group, Joincare Pharmaceutical Industry and other controlling 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 did not operate any businesses 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 controlling 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. 36 (2) From the date of this undertaking, Joincare Pharmaceutical Industry and other controlling 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 controlling 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 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 controlling 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 controlling 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 controlling 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. 4. 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 37 following the completion, it will remain as the ultimate controlling shareholder of the Company. 5. 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 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) In the event that the Company violates any regulation mentioned above, the Company will accept all legal responsibilities incurred therefrom. 6. Livzon Pharmaceutical Group Inc. maintained favourable performance as from its incorporation; the fully diluted returns on net assets for 2002, 2003 and 2004 are 6.40%, 8.83% and 10.89% respectively. On the basis of current condition of production, operation and the market, all members of the Board of Directors of the Company undertook on 22 February 2005 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. 7. All members of the Board of Directors have read the full set of application files for the proposed share placement and undertook on 22 February 2005 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. 8. Undertaking on State Shares Reform: The Company undertakes that it will embark on the State Shares Reform not later than 30 June 2006. 5. Appointment and Dismissal of Domestic and Overseas Accountants As considered and approved by the 19th meeting of the fourth Board and 2004 Annual General Meeting, the Company determined to retain Reanda Certified Public Accountants Company Limited and BDO International Certified Public Accountants (Hong Kong) as its domestic and overseas accountants respectively for 2005. Remunerations paid during the reporting period by the Company to the domestic and overseas accountants for the 2004 auditing were 600 (RMB'000) and 300 (RMB'000) respectively. Reanda Certified Public Accountants Company Limited 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 fourth Board. 6. Material Contract (1) On 17 August 2005, Livzon Group entered into an Agreement of Licensing and Supply of Products in relation to Gemifloxacin with LG Life Sciences, Ltd (Korea) ("LG Life") in Seoul, the capital of Korea. Pursuant to the agreement, LG Life shall grant Livzon Group a sole and exclusive license that Livzon Group is entitled to use of patent, know-how and GSK patent of LG Life, and is granted the right in the PRC (including Hong Kong and Macau) of exclusive production and 38 distribution of Gemifloxacin Cap. (Commodity name: Jisuxing). The agreement is effective from 17 August 2005 to 31 December 2015. Subsequent to the signature of the agreement Livzon Group shall pay in instalment totalling US$1 million (after tax) as license fee. Within 10 business days following coming into effect of the agreement and 10 business days following receipt of Import Drug License of Gemifloxacin Cap., Livzon Group shall pay to LG Life US$0.5 million (after tax) as license fee; over the effective period of the agreement, Livzon Group shall pay to LG Life 1.5% of net sales (after tax) as royalty fee within 30 days following the end of each quarter; in case that the sales volume of the product reaches 4.5 million tablets, LG Life shall in a lump repay US$0.5 million (after tax) to Livzon Group within two months following Livzon Group's produce of written evidence of the said sales volume. (2) On 19 December 2005, Livzon Group duly entered into the Agreement of Licensing and Supply of Products in relation to Gemifloxacin with LG Life. Pursuant to the agreement, LG Life shall grant Livzon Group a sole and exclusive license that Livzon Group is entitled to use of patent, know-how and GSK patent of LG Life, and is granted the right in the PRC (including Hong Kong and Macao) of exclusive development, production and distribution of Gemifloxacin for injection made from Gemifloxacin raw materials supplied by LG Life under the agreement. The agreement is effective from 9 December 2005 to 31 December 2019. Subsequent to the signature of the agreement Livzon Group shall pay in instalment totalling US$1 million (after tax) as license fee, comprising US$0.5 million (after tax) within 3 months following coming into effect of the agreement and US$0.5 million (after tax) within 3 months thereafter. During the first five years of sales, Livzon Group shall pay to LG Life a royalty fee amounting to 10% of net sales (after tax) within 30 days from the end of each calendar quarter; during the period from the sixth year to the expiration or termination date of the agreement, Livzon Group shall pay to LG Life a royalty fee amounting to 6% of net sales (after tax) within 30 days from the end of each calendar quarter. 7. During the reporting period, none of the Company, the Board of Directors or any of the Directors had been a subject of investigation or any administrative penalty or public criticism by China Securities Regulatory Commission or received any public censure by any securities exchange of the PRC. 8. Others On 1 July 2005 the announcement of resolution passed at the general meeting of the Company on amendment to the Articles of Association, Rules of Procedures of General Meetings, Rules of Procedures of the Board and Rules of Procedures of Supervisory Committee was disclosed on newspapers designated for information disclosure and the web pages of CNINFO (http://www.cninfo.com.cn), and full text (amended) thereof was disclosed on the web pages of CNINFO on the same day. 39 XI. FINANCIAL REPORT REPORT OF THE AUDITORS BDO Reanda (2006) No.1012B 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 2005 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 2005 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, 9th, February 2006 40 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 2005 NOTES 2005 2004 RMB’000 RMB’000 Revenue (4) 1,626,146 1,554,788 Cost of sales (910,349) (793,595) Gross profit 715,797 761,193 Other operating income 7,007 10,042 Selling expenses (354,250) (417,779) Administrative expenses (235,656) (213,339) Other operating expenses (3,935) (7,090) Profit from operations (6) 128,963 133,027 Finance costs (7) (16,201) (9,048) Profit from investments (8) 19,252 29,168 Share of profit of associates 749 1,791 Profit before tax 132,763 154,938 Income tax expense (9) (15,815) (19,945) Profit after tax 116,948 134,993 Minority interests (8,380) (10,687) Net profit for the year 108,568 124,306 Dividend (10) - - Earnings per share – basic (11) RMB0.35 RMB0.41 41 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 CONSOLIDATED BALANCE SHEET AT 31ST DECEMBER 2005 NOTES 2005 2004 RMB’000 RMB’000 Assets Non-current assets Property, plant and equipment (12) 771,753 761,970 Construction in progress (13) 357,757 209,254 Goodwill (14) 85,203 85,016 Intangible assets (15) 27,493 30,342 Investments in associates (17) 33,792 18,087 Other investments (18) 24,758 23,981 1,300,756 1,128,650 Current assets Inventories (19) 238,911 212,618 Trade and other receivables (20) 404,905 403,007 Amounts due from associates 406 11,101 Other investments (18) 70,500 115,108 Bank balances and cash (20) 129,499 303,475 844,221 1,045,309 Total assets 2,144,977 2,173,959 Equity and liabilities Capital and reserves Share capital (21) 306,035 306,035 Reserves (22) 884,674 819,329 1,190,709 1,125,364 Minority interests 33,548 31,710 1,224,257 1,157,074 Non-current liabilities Bank loans – due after one year (23) 700 90,180 Current liabilities Trade and other payables (25) 309,825 476,027 Amounts due to associates 16,775 818 Tax liabilities (679) 1,634 Bank loans – due within one year (23) 594,099 448,226 920,020 926,705 Total equity and liabilities 2,144,977 2,173,959 The financial statements on pages 2 to 36 were approved and authorized for issue by the Board of Directors on 9th February 2006 and are signed on its behalf by: Director Director 42 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 2005 Properties Other Foreign Share Share revaluation capital exchange S capital premium reserve reserve reserve R RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RM Balance at 1st January 2005 306,035 417,689 8,004 5,881 466 2 Net profit for the year - - - - - Transfer to surplus from - - - - - retained profits Dividend paid for 2004 - - - - - Transfer for the year - - - 5,736 (3,053) Balance at 31st December 2005 306,035 417,689 8,004 11,617 (2,587) 3 43 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 2005 2005 2004 RMB’000 RMB’000 Operating activities: Profit from operations 128,963 133,027 Adjustments for: Negative goodwill released to income 39 (295) Construction in progress written-off - 934 Amortization of intangible assets 9,812 13,110 Depreciation of property, plant and equipment 121,095 145,086 Loss/(profit) on disposal of property, plant and equipment (393) 420 Operating cash flows before movements in working capital 259,516 292,282 Movements in working capital (64,309) (99,853) Cash generated from operations 195,207 192,429 Income tax paid (18,128) (1,634) Interest paid (16,201) (9,048) Net cash from operating activities 160,878 181,747 44 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 2005 2005 2004 RMB’000 RMB’000 Investing activities Movements in profit and loss from investments 9,047 9,883 Disposal of investments 164,611 241,425 Proceeds on disposal of subsidiary 4,562 - Proceeds on disposal of property, plant and equipment, intangible assets and other assets 10,001 11,755 Purchases of property, plant and equipment, intangible assets and other assets (256,717) (146,481) Purchases of investments (152,498) (281,579) Net cash used in investing activities (220,994) (164,997) Financing activities Dividend and interests paid (70,136) (53,843) New bank loans raised 779,596 941,129 Repayments of bank loans (821,664) (1,024,500) Net cash used in financing activities (112,204) (137,214) Net decrease in cash and cash equivalents (172,320) (120,464) Effect of exchange differences (1,656) (133) Cash and cash equivalents at beginning of year 303,475 424,072 Cash and cash equivalents at end of year Bank balances and cash 129,499 303,475 45 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 2005 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. 46 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 2005 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. 47 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 2005 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. 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. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognized for goodwill is not reversed in a subsequent period. (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. Negative goodwill is recognized immediately in the income statement as a gain. LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 48 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2005 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. 49 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 2005 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. 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 2005 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. 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 2005 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 52 unit to which the asset belongs. 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 2005 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. 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 2005 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. 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 2005 4. REVENUE 2005 2004 RMB’000 RMB’000 Sales of medical products 1,626,146 1,554,788 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): 2005 2004 RMB’000 RMB’000 Depreciation of property, plant and equipment 121,095 145,086 Amortization of intangible assets 9,812 13,110 Loss/(profit) on disposal of property, plant and equipment (393) 420 Release of negative goodwill to income 39 (295) Staff costs 220,106 183,349 Research and development costs 13,796 11,384 Government grants (1,390) (1,657) 7. FINANCE COSTS 2005 2004 RMB’000 RMB’000 Interest on bank loans 20,511 10,267 mounts included in the cost of qualifying assets (4,310) (1,219) 16,201 9,048 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 5.18% (2004: 5%) on expenditure on such assets. 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 2005 8. PROFIT FROM INVESTMENTS 2005 2004 RMB’000 RMB’000 Interests on bank deposits 23,275 8,036 Dividends from other investments 28,709 47,719 Provision for impairment loss of investments in associates (7,260) (14,724) Provision for impairment loss of long-term other investments (26,981) (32,993) Profit on partial disposal of interests in subsidiaries (5,409) 26,441 Profit on investment in subsidiaries 8,874 - Profit on disposal of other investments (1,956) (5,311) 19,252 29,168 9. INCOME TAX EXPENSE 2005 2004 RMB’000 RMB’000 Income tax 15,815 19,945 The basis tax rate applicable to the Group is 15%. According to the relevant tax policies of PRC, income tax of Livzon (Group) Pharmaceutical Co., Ltd is charged at 10 % on its estimated assessable profit, Livzon (Group) Liman Chemical Pharmaceutical Factory is charged at 24% on its estimated assessable profit, Li Wei Branch of Lizhu Pharmaceutical Trading Co., Ltd. are charged at 33% on their estimated assessable profit, Livzon Fuzhou Fuxing Pharmaceutics Co., Ltd are charged at 27% on their estimated assessable profit, Gutian Fuxing Pharmaceutics Co., Ltd are charged at 23% on their estimated assessable profit. And other subsidiaries are at 15%. As the tax effect on temporary timing difference is insignificant, no deferred taxation is provided. LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 57 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2005 10. DIVIDEND There is no the cash dividend to be distributed for 2005. 11. EARNINGS PER SHARE The earnings per share is calculated based on the Group’s profit attributable to shareholders of RMB108,568,000 (2004: RMB124,306,000), and 306,035,482 shares (2004: 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. 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 2005 12. PROPERTY, PLANT AND EQUIPMENT Land and Transport Electronic and buildings Machinery equipment Other equipment RMB’000 RMB’000 RMB’000 RMB’000 COST At 1st January 2005 693,592 517,623 21,067 91,777 Additions 18,895 52,807 6,286 18,464 Transfer from construction in progress 34,530 39,507 243 2,935 Other transfer in 11,744 - - - Disposal or reduction (36,676) (42,821) (3,548) (12,629) At 31st December 2005 722,085 567,116 24,048 100,547 ACCUMULATED DEPRECIATION At 1st January 2005 245,544 249,847 13,294 53,404 Charge for the year 34,934 64,981 2,964 18,216 Eliminated on disposals (19,917) (28,555) (781) (9,145) Transfer in (out) 17,257 - - - At 31st December 2005 277,818 286,273 15,477 62,475 CARRYING AMOUNT At 31st December 2005 444,267 280,843 8,571 38,072 At 31st December 2004 448,048 267,776 7,773 38,373 59 Livzon Group 2005 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 2005 13. CONSTRUCTION IN PROGRESS 2005 2004 RMB’000 RMB’000 At 1st January 211,572 61,450 Acquired on acquisition of a subsidiary - 101,529 Additions 235,685 130,695 Interest capitalized 3,127 2,036 Transfer to property, plant and equipment (77,215) (68,542) Others (13,904) (16,530) Written-off - 934 At 31st December 360,075 211,572 Accumulated impairment loss (2,318) (2,318) 357,757 209,254 As at 31st December 2005, the construction in progress includes the capitalized interest of RMB 3,127,000. (2003: RMB 20,630,000). 14. GOODWILL RMB’000 COST At 1st January 2005 92,405 Additions 536 Adjustments (349) At 31st December 2005 92,592 AMORTISATION At 1st January 2005 7,389 At 31st December 2005 7,389 CARRYING AMOUNT At 31st December 2005 85,203 At 31st December 2004 85,016 LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 60 Livzon Group 2005 Annual Report NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2005 15. INTANGIBLE ASSETS 2005 2004 RMB’000 RMB’000 COST At 1st January 61,731 78,306 Additions 11,425 5,675 Acquired on acquisition of a subsidiary - 11,603 Transfer (4,462) (703) At 31st December 85,269 78,306 AMORTISATION At 1st January 34,854 47,964 Charge for the year 9,812 13,110 At 31st December 57,776 47,964 CARRYING AMOUNT At 31st December 27,493 30,342 At 31st December 2005, intangible assets represent costs for acquisition of technical knowhow and other expenses incurred in developing new pharmaceutical products. 61 Livzon Group 2005 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 2005 16. SUBSIDIARIES (a) Consolidated 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 *1 medicine and medical equipment. Livzon (Group) Pharmaceutical Zhuhai, PRC 100% Production of biological tablets, Factory *1 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 *1 products made from microbio fermentation, blood products, recombinant DNA products and biochemical reagent Lizhu Pharmaceutical Trading Co., Ltd Zhuhai, PRC 100% Import and Export of medical *2 materials and products. Livzon (Group) Libao Biochemical Zhuhai, PRC 100% Manufacture and sale of & Pharmaceutical Co., Ltd. *1 pharmaceutical products Zhuhai Likang Medicine Co., Ltd Zhuhai, PRC 100% Production and sale of *1 antibiotics products. Sichuan Everbright Pharmaceutical Pangzhou, 100% Manufacture and sale of Co., Ltd. PRC pharmaceutical products 62 Livzon Group 2005 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 2005 16. SUBSIDIARIES – continued Guangdong Central South Pharmacy Shenzhen, 70% Retail and wholesale of Co., Ltd. *3 PRC medicines Livzon Chainstore Operation Co., Zhuhai, PRC 90% Investment, chain store Ltd. *3 operation, economic and technological operation, consulting and technological service Shanghai Livzon Pharmaceutical Shanghai, 100% Manufacture and sale of Co., Ltd. PRC pharmaceutical products Guangdong Xinbeijiang Qingyuan, 92.14% Export and domestic sale of Pharmaceutics Co., Ltd PRC 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 *3 Shenzhen Sanxin Medicine Shenzhen, PRC 63% Retailing of pharmaceutical Chain-store Co., Ltd *3 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 & Chemistry Shanghai, PRC 100% Manufacture and sale of Co., Ltd *3 pharmaceutical products Gutian Fuxing Pharmaceutics Co., Gutian, PRC 100% Manufacture and sale of Ltd *4 pharmaceutical products 63 Livzon Group 2005 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 2005 16. SUBSIDIARIES – continued *1 According to Zhuhai Foreign Economy and Trade Bureau [2005]11“Approval of Livzon (Group) Pharmaceutical Factory acquired four companies i.e. Livzon (Group) Livzon Chinese Medicine Factory etc”, Livzon (Group) Livzon Chinese Medicine Factory 、 Livzon (Group) Biotechnology Pharmaceutical Factory、 Livzon (Group) Libao Biochemical & Pharmaceutical Co., Ltd.、Zhuhai Likang Medicine Co., Ltd were acquired by Livzon (Group) Pharmaceutical Factory, their assets and liabilities were transferred to Livzon (Group) Pharmaceutical Factory, the four companies’ Income Statement were consolidated in the Consolidate Income Statement of Livzon Group. The authorized share capital of Livzon (Group) Pharmaceutical Factory were increased from RMB30,000,000 to RMB 143,010,851.90. *2 The authorized share capital of Lizhu Pharmaceutical Trading Co., Ltd were increased from RMB3,000,000 to RMB60,000,000, including its own RMB40,000,000 and Livzon (Group) Pharmaceutical Factory’s RMB20,000,000. *3 The shareholding of Guangdong Central South Pharmacy Co., Ltd.( Shenzhen Takun Information and Consulting Co., Ltd and Shenzhen Sanxin Medicine Chain-store Co., Ltd)、Livzon Chainstore Operation Co., Ltd. 、 Livzon Lijin Biology & Chemistry Co., Ltd were transferred out, their Income Statements (from the beginning of the year to the date of disposal) were consolidated, their Balance Sheet were not consolidated. *4 Fujian province Gutian Bacteriophage Factory has changed its name to Gutian Fuxing Pharmaceutics Co., Ltd. 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 2005 16. SUBSIDIARIES – continued (b) Unconsolidated subsidiaries 1. Livzon Shanghai Biology & Chemistry Co., Ltd was deregistered. 64 Livzon Group 2005 Annual Report 2. Chuangnian Hongkong Co., Ltd has ceased operation, and the whole investment in this company has provided for as impairment loss on long term investment, hence it has not been consolidated. 3. Livzon Zhuhai Baiameng Co., Ltd、Livzon Zhuhai Meidaxin Co., Ltd have ceased operation, their assets were mainly within Livzon Group, hence they have not been consolidated. 4. Livzon Group Guangzhou Co., Ltd has reorganised from Livzon Pharmaceutical Group Guangzhou Co., Ltd. All of its assets, revenues, net profit were smaller than 10% of the Group and subsidiaries. According to the Finance Bureau [1996] 2, it has not been consolidated. 5. Livzon Shiyuan Shanxi Datong Co., Ltd were during in the period of starting up, so it has not been consolidated. (c) The effect of disposal subsidiary on cash flow is: 2005 RMB’000 Disposal of assets Property, plant and equipment 1,503 Intangible assets and other assets 368 Inventories 5,187 Trade receivables 33,569 Bank and cash balances 4,286 Retirement benefit obligation (341) Tax payable (9) Trade payables (37,321) Total consideration 7,242 Cash consideration (4,286) Bank balances and cash disposed 2,956 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 2005 17. INVESTMENTS IN ASSOCIATES 2005 2004 RMB’000 RMB’000 Cost of investment 33,792 18,087 Details of the Group’s associates at 31st December 2005 are as follows :- Place of Proportion incorporation of ownership Princ ipal Name of associate and operation interest Activity 65 Livzon Group 2005 Annual Report Guangdong Lanbao Manufacture and sale of Pharmaceutical Co., Ltd Qingyuan, PRC 35.91% biochemical products Livzon Electomedical Zhuhai, PRC 28% Manufacture and sale of Instrument Co., Ltd. electromedical instrument Livzon Group Changzhou Changzhou, Manufacture and sale of Kangli Pharmaceutical Co., PRC 30% pharmaceutical products Ltd. Xinbei Jiang Pharmaceutical Hong Kong 50% Sale of pharmaceutical Co., Ltd. products President Cosmed Chainstore Shenzhen, PRC 35% Sale , import and export of (Shenzhen) Co., Ltd. general merchandise, Fujian Gutian Huamin Gutian, PRC 24% Manufacture and sale of Antibiotics Co., LTd antibiotics products Tianjia Livzon Biology & Hong Kong, Manufacture and sale of Technology Co., Ltd PRC 30% biochemical products 18. OTHER INVESTMENTS Non-current investments 2005 2004 RMB’000 RMB’000 Investment in unconsolidated subsidiaries 7,098 - Other investment 17,660 23,981 24,758 23,981 Current investments 2005 2004 RMB’000 RMB’000 Other investment 70,500 115,108 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 2005 18. OTHER INVESTMENTS - continued 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. 19. INVENTORIES 2005 2004 RMB’000 RMB’000 Raw materials 53,936 54,518 Work in progress 60,915 39,651 Finished goods 124,060 118,449 66 Livzon Group 2005 Annual Report 238,911 212,618 The above inventories are carried at net realizable value. The provision for inventories of 2004 is RMB 9,498,500.39 (2004: RMB11,033,000) 20. OTHER FINANCIAL ASSETS Trade and other receivables at the balance sheet date comprise gross amounts receivable from the sale of goods of RMB516,533,000 (2004: RMB530,920,000). An allowance of RMB111,628 (2004: RMB127,913,000) 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 2005 is 89 days (2004: 90 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. 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 2005 20. OTHER FINANCIAL ASSETS - continued 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 past 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. 21. SHARE CAPITAL 2005 2004 No. of No. of shares shares ’000 RMB’000 ’000 RMB’000 67 Livzon Group 2005 Annual Report 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 2004 or 2005. 22. RESERVES 2005 2004 RMB’000 RMB’000 Share premium 417,689 417,689 Properties revaluation reserve 8,004 8,004 Other capital reserve 11,617 5,881 Exchange difference (2,587) 466 Surplus reserve 306,744 279,761 Retained profits 108,568 107,528 884,674 819,329 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 2005 22. RESERVES - continued According to the PRC companies’ law, the reserve available for distribution is the lower of the amount determined under PRC Accounting Regulations and the amount determined under IFRS. Notes: (a) Statutory surplus reserve The 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 utilized 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. 68 Livzon Group 2005 Annual Report (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. 69 Livzon Group 2005 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 2005 23. BANK LOANS 2005 2004 RMB’000 RMB’000 Secured - 242,120 Unsecured 594,799 296,286 594,799 538,406 2005 2004 RMB’000 RMB’000 The borrowings are all denominated in RMB and repayable as follows : On demand or within one year 594,099 448,226 In the second year 700 90,180 594,799 538,406 Less: Amount due from settlement within one year (shown under current liabilities) (594,099) (448,226) Amount due for settlement after one year 700 90,180 2005 2004 Interest rates 4.7%-5.7% 4.2%-7.6% At 31st December 2005, all the bank loans of the Group were arranged at fixed interest rates. 24. PLEDGE OF ASSETS At the balance sheet date, the bank loans granted to the Group do not include the pledged assets as security. (2004: RMB5,756,000) 70 Livzon Group 2005 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 2005 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 154days (2004: 198). 26. CAPITAL COMMITMENTS 2005 2004 RMB’000 RMB’000 Capital expenditure contracted for but not provided in respect of : Purchase of intangible assets 11,425 7,656 27. OPERATING LEASE COMMITMENTS 2005 2004 RMB’000 RMB’000 Minimum lease payments under operating leases recognized 8,859 11,569 as expenses for the year At the balance sheet date, the Group had outstanding commitments under non-cancelable operating leases, which fall due as follows:- 2005 2004 RMB’000 RMB’000 Within one year 6,646 9,356 In the second to fifth years inclusive 2,213 2,213 After five year - - 8,859 11,569 Operating lease payments represent rentals payable by the Group for its office properties. 71 Livzon Group 2005 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 2005 28. CONTINGENT ASSETS A subsidiary of the Group has commenced legal proceeding against a Guangzhou Taixing Pharmaceutical Co., Ltd. for the payments of RMB 43,638,596.44 in the Guangzhou Intermediate People’s Court on July 9, 2003. The court outcome was determined that the defendant should make a repayment of RMB 30,498,178.74 and the overdue penalty (from January 12, 2000 to the judged date of repayment, based on the one year loan interest rate of the People’s Bank of China of the same year.) to the plaintiff. At the balance sheet date, the subsidiary has not received this amount yet. 29. GUARANTEE A subsidiary has provided guarantee to the followings: Warrantee Amount Bank Period Fuzhou Yihua Chemosmosis Industry and Commerce 2001/12/20-2005/11/15 3,000,000.00 Co., Ltd Bank-Yongtaixing Branch Fuzhou Yihua Chemosmosis Industry and Commerce 2001/12/20-2006/11/15 6,000,000.00 Co., Ltd Bank-Yongtaixing Branch Total 9,000,000.00 Fuzhou Yihua Group provided the counter guarantee to the above items. 30. COMMITMENT The group signed an exclusive and irrevocable patent use agreement for PPI chemical product with Yiyang (Korea) Co., Ltd., allowing the Group to manufacture and sell this patented product in China including Hong Kong and Macao. According to the agreement, an admission fee of US$2,500,000 is required. US$1,570,500 has been paid by the Group and the balance of US$925,000 is to be paid. The Group will pay Yiyang 10% of its revenue for the first three years from the commencement of the sale of the product. In the subsequent next five years, the payment ratio will be to 8%. For the rest of the years until July 22th , 2014 (expiration date of the agreement) the ratio will be 6%. LIVZON PHARMACEUTICAL GROUP INC. 麗珠醫藥集團股份有限公司 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 72 Livzon Group 2005 Annual Report FOR THE YEAR ENDED 31ST DECEMBER 2005 31. SIGNIFICANT EVENTS (a) Transfer of shareholdings A contract for transfer of shareholdings was signed with President Cosmed Chainstore (Shenzhen) Co., Ltd. on June 7th, 2004. The 90%shareholdings in Livzon Zhuhai Chainstore Co., Ltd was transferred to President Cosmed Chainstore (Shenzhen) Co., Ltd, at a price of RMB 3,780,000, the whole amount has been received during the reporting period. A contract for transfer of shareholdings was signed between Livzon (Group) Livzon Pharmaceutical Factory and Cai Weifang on August 31th, 2005. The 11%shareholdings in Livzon Lijin Biology & Chemistry Co., Ltd was transferred to Cai Weifang, at a price of RMB 185,900; A contract for transfer of shareholdings was signed between Livzon (Group) Shanghai Pharmaceutical Factory and Wu Qingshi. The 89% shareholdings of Livzon Lijin Biology & Chemistry Co., Ltd was transferred to Wu Qingshi, at a price of RMB 1,504,100. The whole amount has been received during the reporting period. A contract for transfer of shareholdings was signed with Ke Yiping on December 5th, 2005. The 70%shareholdings of Guangdong Midsouth Pharmaceutical Co., Ltd was transferred to Ke Yiping, at a price of RMB 3,380,000, the amount of RMB 3,37,800 has been received during the reporting period. (b) Foreign Investment On April 9th, 2004, the Group and a BVI Tongyi Chaoshang Yaozhuang China Holding Company agreed to establish a joint-venture President Cosmed Chainstore (Shenzhen) Co., Ltd, with total investment of RMB120 million and total registered capital of RMB50 million. The joint-venture has been officially incorporated during the year. Of the total registered capital, RMB17.5 million was paid by the Group, accounting to 35% of the total. 32. 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. 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 2005 32. RETIREMENT BENEFIT PLANS - continued The Group also operates defined contribution retirement benefit plans for all qualifying employees in 73 Livzon Group 2005 Annual Report 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 RMB 15,283,000 (2004:RMB15,346,000) represents contributions payable to these plans by the Group at rates specified in the rules of the plans. As at 31 December 2003, contributions of RMB3,496,000 (2004:RMB5,143,000)due in respect of the current reporting period had not been paid over to the plans. 33. RELATED PARTY TRANSACTIONS (a)The Group entered into the following transactions with the associate during the year: 2005 2004 RMB’000 RMB’000 Sales of goods 5,379 35,660 Purchase of goods 18,433 25,552 Service income 3,209 - Sales of fixed assets 2,076 - The amounts due from associates represent advances and payments made on behalf which are unsecured, interest-free and have no fixed terms of repayment. 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 2005 32. RELATED PARTY TRANSACTIONS - continued (b) Balances with related parties 2005 2004 RMB’000 RMB’000 Trade receivables： Guangdong Lanbao Pharmaceutical Co., Ltd - 3,975 Shenzhen Haibin Pharmaceutical Co., Ltd 1,252 381 1,252 4,356 Other receivables： Xinbei Jiang Pharmaceutical Co., Ltd - 30 Livzon Shanghai Dongfeng Biology & Technology Co., Ltd - 604 74 Livzon Group 2005 Annual Report Livzon (Group) Guangzhou Livzon Building Co., Ltd 1,150 - 1,150 634 Trade payables： Livzon Group Changzhou Kangli Pharmaceutical Co., Ltd 958 18 Shenzhen Haibin Pharmaceutical Co., Ltd 1,603 450 Xinbei Jiang Pharmaceutical Co., Ltd 546 - 3,107 468 Other payables： Livzon Group Changzhou Kangli Pharmaceutical Co., Ltd - 50 HongKong Chuangnian Co., Ltd - 41 Livzon （Group） Zhuhai Baiameng Biology Co., Ltd 6,474 - Livzon （Group） Zhuhai Meidaxin Technology Co., Ltd 939 - 7,413 91 Dividend payable： Jiankangyuan Pharmaceutical Co., Ltd 1,125 - 75 Livzon Group 2005 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 2005 34. RECONCILIATION The Group prepared a separate set of accounts for the year ended 31st December 2005 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: 2005 2004 Assets Net Assets Net Net Profit Value Net Profit Value RMB’000 RMB’000 RMB’000 RMB’000 Under PRC accounting standards 107,892 1,204,386 124,058 1,139,715 Adjustments: Elimination of interest capitalized for property, plant and equipment - (25,354) - (25,354) Depreciation on property, plant and equipment (535) (2,890) (535) (2,355) 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 8,874 5,937 (2,937) Amortization of negative goodwill (39) 2,991 295 3,032 Share of results of associates 508 - - (508) Long-term prepayment - - 488 - Deferred expenditure 467 - - (467) Accruals (8,599) 4,881 - 13,480 Advance from customers - (400) - (400) Profit from investments for associates - - - - 676 (13,677) 248 (14,351) Under IFRS: 108,568 1,190,709 124,306 1,125,364 76 Livzon Group 2005 Annual Report XII. DOCUMENTS AVAILABLE FOR INSPECTION 1. 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 auditor’s report with chop of accountant firm and signature and chop of certified public accountants. (3) Original copies of all documents and text of all announcements of the Company which are publicly disclosed on newspapers designated by China Securities Regulatory Commission during the reporting period. LIVZON PHARMACEUTICAL GROUP INC. Chairman: Zhu Baoguo 11 February 2006 77