中鲁Ｂ(200992)ST2005年年度报告（英文版）

SHANDONG ZHONGLU OCEANIC FISHERIES CO., LTD. 2005 ANNUAL REPORT March 31, 2006 1 CONTENTS Ⅰ. IMPORTANT NOTES------------------------------------------------------------------------------------3 Ⅱ. COMPANY PROFILE------------------------------------------------------------------------------------4 Ⅲ. SUMMARY ACCOUNTING HIGHLIGHT AND BUSINESS HIGHLIGHT----------------5 Ⅳ. CHANGES IN SHARE CAPITAL AND PARTICULARS ABOUT SHAREHOLDERS---7 Ⅴ. PARTICULARS ABOUT DIRECTORS, SUPERVISORS, SENIOR EXECUTIVES AND EMPLOYEES---------------------------------------------------------------------------------------------------11 Ⅵ. ADMINISTRATIVE STRUCTURE--------------------------------------------------------------------15 Ⅶ. BRIEF OF THE SHAREHOLDERS’ GENERAL MEETING-----------------------------------16 Ⅷ. REPORT OF BOARD OF DIRECTORS-------------------------------------------------------------16 Ⅸ. REPORT OF SUPERVISORY COMMITTEE------------------------------------------------------25 Ⅹ. SIGNIFICANT EVENTS---------------------------------------------------------------------------------26 Ⅺ. FINANCIAL REPORT------------------------------------------------------------------------------------33 Ⅻ. DOCUMENTS AVAILABLE FOR REFERENCE--------------------------------------------------69 2 SECTION I. IMPORTANT NOTES Board of Directors, Supervisory Committee, all directors, supervisors and senior executives of Shandong Zhonglu Oceanic Fisheries Co., Ltd. (hereinafter referred to as the Company) individually and collectively accept responsibility for the correctness, accuracy and completeness of the contents of this report and confirm that there are no material omissions nor errors which would render any statement misleading. Director Liu Changsuo and Director Shao Shijie didn’t attend the meeting, and Diretor Shao Shijie entrusted in writting Director Li Wenyi to vote on his behalf. Da Xin Certified Public Accountants Ltd. and Horwath International CPA Limited (China Hubei) issued unqualified Auditors’ Report with paragraph of emphasis events. The Board of Directors and the Supervisory Committee of the Company made explanations on the relevant matters in details; the investors are suggested to notice the content. Wang Zhao’an, Principal of the Company; Zhang Jinqing, CFO of the Company, and Wu Shuxian, Person in Charge of Accounting Organ hereby confirm that the Financial Report enclosed in the Annual Report is true and complete. 3 SECTION II. COMPANY PROFILE 1. Name of the Company: In Chinese: 山东省中鲁远洋渔业股份有限公司 In English: Shandong Zhonglu Oceanic Fisheries Company Limited 2. Legal Representative: Liu Changsuo 3. Secretary of Board of Directors: Zhou Feng Authorized Representative in charge of Securities affairs: Jiang Peng Contact Address: No. 43, Heping Road, Jinan, Shandong Tel: (86) 531-86553278, 86553276 Fax: (86) 531-86943084 E-mail: zlzqb@163.com 4. Registered Address: No. 43, Heping Road, Jinan, Shandong Office Address: No. 43, Heping Road, Jinan, Shandong Post Code: 250014 The Company’s E-mail: zlzqb@163.com 5. Newspapers Chosen for Disclosing the Information of the Company: Domestic: Securities Times International: Hong Kong Wen Wei Po Internet Web Site Designated by CSRC for Publishing the Annual Report: http://www.cninfo.com.cn The Place Where the Annual Report is Prepared and Placed: Office of the Board of Directors 6. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: *ST ZHONGLU B Stock Code: 200992 7. Other information about the Company Initial registration date: Jul. 23, 1999 Registration date after recent change: June 12, 2003 The registration place after change: Shandong Province Administration for Industry and Commerce Registered number for business license of corporation: 3700001803000 Registered number of taxation: National Revenue: 370102863043102 Local Tax: 370001863043102 Name of the Certified Public Accountants engaged by the Company: Domestic: Da Xin Certified Public Accountants Ltd. Overseas: Horwath International CPA Limited (China Hubei) 4 Address: 15/F, Institute International bldg., Zhichun Road, Haidian District, Beijing 8. Paraphrase: Barring referring to other meanings in the context, the following paraphrases in this report possess the meanings as follow: “The Company” or “Company” refers to Shandong Zhonglu Oceanic Fisheries Company Limited “Shandong Group” and “Shandong Fishery Group” refer to Shandong Group Corporation of Fishery Enterprises “Luxin Group” or “Luxin Holding” refers to Luxin Investment Holding Company Limited “GZW” refers to the State-owned Assets Supervision and Administration Commission of the State Council “CSRC” refers to China Securities Regulatory Commission “The report” refers to 2005 Annual Report compiled by the Company SECTION III. FINANCIAL HIGHLIGHT AND BUSINESS HIGHLIGHT 1. Abstract of accounting data as of the year 2005 Unit: RMB Items Amount Total Profit -43,744,983 Net Profit -47,520,147 Net profit after deducting non-recurring gains and losses -53,483,373 Profit from main operations 20,792,678 Other operating profit 979,745 Operating profit -39,910,248 Investment income -3,306,918 Net non-operating income/expenses -527,817 Net cash flow arising from operating activities 18,728,672 Net increase/decrease in cash and cash equivalents 1,301,950 Unit: RMB Items of non-recurring gains and losses Amount Switching back of reserve for bad debts 6,169,083 Switching back of reserve for depreciation of inventories 299,148 Switching back of reserve for impairment of fixed assets - Non-operating incomes 43,108 Including: Net income received from the disposal of fixed assets 27,191 Other incomes 15,917 Non-operating expenses 548,113 Including: Net losses received from the disposal of fixed assets 523,978 Other expenses 24,135 5 Total 5,963,226 2. Explanation for the difference in net profit as audited by CAS and IAS: The Company’s net profit as of year 2005 as audited by Da Xin Certified Public Accountants Ltd. and Horwath International CPA Limited (China Hubei) in accordance with CAS and IAS was RMB -47, 520, 147 respectively. There existed no difference. 3. Major accounting data and financial indexes over the past three years ended by the report period Unit: RMB Items Unit 2005 2004 2003 Income from main operations RMB 167,184,320 224,089,193 318,865,044 Net profit RMB -47,520,147 3,398,218 -213,472,451 Total assets RMB 467,801,859 507,835,721 562,738,775 Shareholders’ equity RMB 30,953,977 76,749,570 72,396,580 (Excluding minority interests) Earnings per share RMB/share -0.18 0.01 -0.80 Net assets per share RMB/share 0.12 0.29 0.27 Net assets per share after RMB/share 0.11 0.29 0.25 adjustment Net cash flow per share arising from operating RMB/share 0.07 0.15 -0.08 activities Return on equity % -153.52 4.43 -294.87 Weighted average return on % -89.68 4.59 -124.69 equity Weighted average return on equity deducting % -100.93 -38.03 -113.18 non-recurring gains and losses 4. In accordant with Regulations on the Information Disclosure of Companies Publicly Issuing Shares (No. 9), the Company’s return on equity and earnings per share as of the year 2005 as calculated based on calculating method of fully diluted and weighted average are as follows: Return on equity Earnings per share (%) (RMB/share) Profit in the report period Fully Weighted Fully Weighted diluted average diluted average Profit from main operations 67.17 39.24 0.08 0.08 Operating profit -128.93 -75.32 -0.15 -0.15 Net profit -153.52 89.68 -0.18 -0.18 6 Net profit after deducting -172.78 -100.93 -0.20 -0.20 non-recurring gains and losses 5. Changes in shareholders’ equity as of the report period (Unit: RMB) Statutory Capital public Surplus public Retained Shareholders’ Items Share capital public welfare reserve reserve profit equity funds Amount at the 266,071,320 202,195,114 21,822,075 7,274,025 -413,338,939 76,749,570 period-begin Increase in the - 2,056,143 85，990 28,663 -47，520，147 -45,709,603 report period Decrease in the - - - - 85，990 85，990 report period Amount at the 266,071,320 204,251,257 21,908,065 7,302,688 -460，945，076 30,953,977 period-end - Increased Withdrawal in Withdrawal in Profit, Profit Reason for provision for the report the report withdrawal of change equity period period “two reserves” investment SECTION IV. CHANGES IN SHARES CAPITAL AND PARTICULARS ABOUT SHAREHOLDERS 1. Statement of change in shares Unit: Share Increase/decrease of this time (+, - ) Before the Capitalization Addition Items Rationed Bonus Sub- After the change change of public al Others share shares total reserve issuance I. Unlisted Shares 128,071,320 128,071,320 1. Promoters’ shares Including: 127,811,320 127,811,320 State-owned shares Domestic legal person’s 260,000 260,000 shares Foreign legal person’s shares Others 2. Raised legal person’s shares 7 3. Inner employees’ shares 4. Preference shares or others Including: Transferred / allotted shares Total unlisted shares 128,071,320 128,071,320 II. Listed shares 138,000,000 138,000,000 1. RMB ordinary shares 2. Domestically listed 138,000,000 138,,000,000 foreign shares 3. Overseas listed foreign shares 4. Others Total listed shares 138,000,000 138,000,000 III. Total shares 266,071,320 266,071,320 2. Issuance and listing of shares (1)Particulars about issuance of shares over all previous three years Ended by the end of the report period, there existed no particulars about listing of shares over all previous three years. (2) Changes on shares in the report period In the report period, there existed no bonus share, capitalization of public reserve, allotted share, additionally issue new shares, abstracting and merging, capitalization of transferable bond of the Company, decreasing capital and inner employee’s listing, and the total number of the share capital and structure remains unchanged. (3) About inner employee’s share There existed no inner employee’s share. 3. Particulars about shareholders (1) Total number of shareholders in the report period Ended Dec. 31, 2005, the Company had totally 17,886 shareholders, including 5 sponsor’s shareholders; they were Shandong Group Corporation of Fishery Enterprises, Luyin Investment Group Co., Ltd., China Heavy Automobile Group Jinan Truck Company Limited, SAG and Shandong Detai Decoration Company. 17,881 shareholders are domestically listed foreign share. (2) Particulars about Shareholders holding 5% (including 5%) shares of the Company Shares held at Increase/decrease Type of Shares pledged or Shareholder’ name the period-end in the report period shares frozen (share) (share) State-owned Shandong Group Wholly frozen by Legal Corporation of No 125,731,320 administration of person’s Fishery Enterprises justice share Particulars about the shares held by the top ten shareholders (Ended Dec. 31, 2005): 8 Increase/ Shares held at Shares decrease in the Proportion Nature of No. Shareholders’ name Type of shares pledged or the report period-end (%) shareholder frozen (share) period (share) SHANDONG GROUP State-owned legal 1 CORPORATION OF 0 125,731,320 47.25 Non-circulating 125,731,320 FISHERY ENTERPRISES person shareholder 2 XU XINHU 3,603,745 3,603,745 1.35 Non-circulating Unknown Foreign shareholder 3 LIU DAN 1,274,933 2,266,433 0.85 Circulating Unknown Foreign shareholder 4 LIANG YUZHEN 109,850 1,996,900 0.75 Circulating Unknown Foreign shareholder CHINA HEAVY AUTOMOBILE GROUP State-owned legal 5 0 1,950,000 0.73 Non-circulating Unknown JINAN TRUCK person shareholder COMPANY LIMITED SAHGNHAI WANGUO 6 SECURITIES HONG -7,101,517 1,479,431 0.56 Circulating Unknown Foreign shareholder KONG LIMITED 7 LIU YUAN Unknown 1,295,417 0.49 Non-circulating Unknown Foreign shareholder 8 YI YING 0 1,078,200 0.41 Circulating Unknown Foreign shareholder 9 WANG JINGHU Unknown 900,000 0.34 Non-circulating Unknown Foreign shareholder 10 HANG WENJIAN Unknown 853,000 0.32 Non-circulating Unknown Foreign shareholder Note: Among the top ten shareholders, Shandong Group Corporation of Fishery Enterprises and China Heavy Automobile Group Jinan Truck Co., Ltd. are sponsor’s shareholders of the Company, there exists no associated relationship between them, or they do not belong to the consistent actor regulated by the Management Measure of Information Disclosure on Change of Shareholding for Listed Companies; the other shareholders are ones of domestically listed foreign shares, the Company is unknown whether there exists associated relationship, or whether the rest shareholders belong to the consistent actor regulated by the Management Measure of Information Disclosure on Change of Shareholding for Listed Companies. (3) The controlling shareholder of the Company Name of the controlling shareholder: Shandong Group Corporation of Fishery Enterprises Legal representative: Liu Changsuo Date of foundation: Nov. 1988 Registered capital: RMB 380,000,000 Nature of Company: state-owned enterprise Structure of equity: the State-owned Assets Supervision and Administration Commission of Shandong Province Government holds 100% equity of Fishery Enterprise Business scope: marine catching, aquiculture, resource development and technical service of aquatic product; sales of aquatic products and fishery resource (excluding 9 special operating products); import and export business with the approval scope; sales of steels and woods; sending of work personnel of the fishery business to overseas. In the report year, the controlling shareholder of the Company remained unchanged. (4) The actual controller of the controlling shareholder of the Company Name of the actual controller: the State-owned Assets Supervision and Administration Commission of Shandong Province Government Legal representative: Zeng Zhaoqi Date of foundation: June 18, 2004 Nature of the unit: specific established organization directly under Shandong province government Main business: to implement the responsibility of subscriber, to supervise the inflation proof savings deposits and increment of the supervised state-owned assets The State-owned Assets Supervision and Administration Commission of Shandong Province Government 100% Shandong Group Corporation of Fishery Enterprises 47.25% The Company (5) Legal person shareholder holding over 10% of the Company’s total shares In the report period, there existed no legal person shareholder holding over 10% of total shares in the Company. (6) Particulars about shares held by the top ten shareholders of circulation share Number of circulation shares held Type (A-share, B-share, No Name of shareholders at the year-end (share) H-share and other) 1 XU XINHU 3,603,745 B-share 2 LIU DAN 2,266,433 B-share 3 LIANG YUZHEN 1,996,900 B-share SAHGNHAI WANGUO 4 SECURITIES HONG KONG 1,479,431 B-share LIMITED 5 LIU YUAN 1,295,417 B-share 6 YI YING 1,078,200 B-share 7 WANG JINGHU 900,000 B-share 8 HAN WENJIAN 853,000 B-share 10 9 WU YANG 775,708 B-share 10 HUANG JIAYI 758,779 B-share It is unknown whether there exists associated relationship among the top ten shareholders of circulation share in the Company. SECTION V. PARTICULAR ABOUT DIRECTORS, SUPERVISORS, SENIOR EXECUTIVES AND EMPLOYEES 1. Basic information on directors, supervisors and senior executives I. Basic information Shares held at Shares held Name Title Gender Age Office term the at the year-beginning year-end Liu Changsuo Chairman of the Board Male 55 May, 2003 – Sep. ,2005 0 0 Wang Zhaoan General Manager Male 55 Sep. ,2002 – Sep. ,2005 0 0 Deputy General Li Wenyi Male 50 Sep. ,2002 – Sep. ,2005 0 0 Manager Shao Shijie Director Male 60 Sep. ,2002 – Sep. ,2005 0 0 Wang Hanmin Independent Director Male 46 Sep., 2002 – Sep. ,2005 0 0 Jiang Jin Independent Director Male 37 May, 2003 – Sep. ,2005 0 0 Jiang Lu Independent Director Male 47 May ,2004 – Sep. ,2005 0 0 Zhou Feng Secretary of the Board Male 51 Sep., 2002 – Sep. ,2005 0 0 Chief Financial Zhang Jinqing Male 51 July ,2003 – Sep., 2005 0 0 Supervisor Chairman of the Li Ming Male 41 Mar. ,2004 – Sep. ,2005 0 0 Supervisor Committee Chi Ming Employee Supervisor Female 42 March, 2004 – Sep. ,2005 0 0 Yin Jixian Supervisor Male 46 Sep., 2002 – Sep. ,2005 0 0 Huang Qi Employee Supervisor Male 33 Sep. ,2002 – Sep. ,2005 Shang Qinghua Employee Supervisor Female 36 Oct., 2003 - Sep. ,2005 Note: The second office term of Board of Directors and Supervisory Committee of the Company came to end in Sep., 2005. Due to the unfinished reorganization, with the approval of 20 Meeting of 2nd Board of Directors and 11th Meeting of 2nd Supervisory Committee held on Aug.9, 2005, the changing of office term was deferred and would be taken up with considering the process of reorganization and matter on changing the equity ownership. The relevant notice was published on Securities Times and Hong Kong Ta Kung Pao dated Aug.11, 2005. II. Particulars about directors or supervisors holding the position in share-controlling companies Name Share-controlling company Title Office term 11 Secretary of Party Shandong Group Corporation of Fishery Liu Changsuo Committee, Apr. 2003-Feb. 2006 Enterprises General Manager Subsidiary of Shandong Group Shao Shijie Corporation of Fishery Enterprises General Manager Jan. 1998 till now –Qingdao Oceanic Fishery Co. Shandong Group Corporation of Fishery Section Chief of Yin Jixian Sep. 2004 till now Enterprises Personnel and Labor Dept. III. Main work experiences and part –job and concurrently post of present directors, supervisors and senior executives in the units barring the shareholders units (1) Members of the Board of Directors Mr. Liu Changsuo, a member of the Communist Party with junior college degree, ever took the post of deputy director and member of the Communist Party of Shandong province economic restructuring office over the latest five years. He is now in charge of Director and chairman of the Board of the Company and concurrently secretary of Party Committee, chairman of the Board and general manager of Shandong Fishery Group. Mr. Wang Zhao’an, a member of the Communist Party with technical secondary school degree, ever took the post of deputy general manager of Shandong Fishery Group over the latest five years. He is now in charge of director and general manager of the Company. Mr. Li Wenyi, a member of the Communist Party with junior college degree, ever took the post of principal chief of personnel and labor department and deputy general manager of Shandong Fishery Group; and director, deputy general manager and secretary of the Board of the Company over the latest five years. Now he is in charge of director and deputy general manager of the Company. Mr. Shao Shijie, a member of the Communist Party with technical secondary school degree, took the post of general manager of Oingdao Oceanic Fishery Co. over the latest five years. Now he is in charge of director of the Company and general manager of Oingdao Oceanic Fishery Co.. Mr. Wang Hanmin, professor of Auditing and instructor of master degree student, he is independent director of the Company and now is in charge of vice president of Commerce and Industry Management Institute of Shandong College of Economics. Mr. Jiang Jin, China finance economist with bachelor degree, takes the post of independent director of the Company. He was in charge of director and general manager of Shandong Pioneer Investment Developing Co., Ltd. over the latest five years till now. Mr. Jiang Lu, secondary lawyer with law bachelor degree, takes the post of director of the Company. Over the latest five years, he held the position of copartner of Shandong Junyida Law Firm, arbitrator of Jinan Arbitration Committee, senior chief of finance and securities SIC of Jinan Lawyer Association and independent director of Shandong Hengtong Chemical Co., Ltd. till now. (2) Members of supervisors: 12 Mr. Li Ming, China economist with bachelor degree, member of Communist Party, in the recent five years, took the position of manger of management department. Now he is Chairman of the Supervisory Committee, and concurrently manger of management department. Ms. Chi Ming, a member of Communist Party with secondary school degree, is employee supervisor of the Company. She ever took the post of deputy director of Administration and Inspection Office and section chief of personnel and labor department of Shandong Fishery Group over the latest five years, and now she is in charge of senior minister of human resources department of the Company. Mr. Yin Jixian, a member of Communist Party with secondary school degree, is supervisor of the Company. Over the latest five years, he took the post of deputy director of administrative supervision office and personnel and labor department of Shandong Fishery Group; he is now in charge of section chief of personnel and labor department of Shandong Fishery Group. Mr. Huang Qi, China economist with bachelor degree, a member of Communist Party and employee supervisor of the Company. He ever took the post of section chief of business management department and deputy director of Auditing Supervision Office of the Company over the latest five years, and now he is employer the Company. Ms. Shang Qinghua, a member of Communist Party with bachelor degree, is employee supervisor of the Company. She ever took the post of accountant of Finance Department over the latest five years, and now she is in charge of vice section chief of finance department of the Company. (3) Senior executives: Mr. Zhoufeng, a member of the Communist Party with bachelor degree, ever took the post of deputy general manager, general manager, and securities representative of the Securities Department of the Company over the five latest years. Now, he is the Secretary of the Board of Directors and concurrently director of office of Board of Directors of the Company. Mr. Zhang Jinqing, a member of the Communist Party and senior accountant with bachelor degree, took the post of assistant to general manager, deputy general manger, member of CPC committee of Oingdao Oceanic Fishery Co. Now, he is the chief financial officer of the Company. IV. About annual remuneration 1. The remuneration of directors, supervisors and senior executives were paid according to the relevant regulations and standards released by Notional Labor Department. Therein, the operating leaders of chairman of the Board, general manger, deputy general manager, financial chief supervisor and secretary of the Board, etc. implement annual pay system which includes basic wage and performance annual salary. The decision-making procedure of the remuneration is that the Board of Directors presents the proposal and reports to be approved by the shareholders’ general meeting of the Company. Confirmation of the remuneration refer to detailed manipulation rules on enterprise performance evaluation and enforcement measures of annual pay of 13 enterprise operator of other provinces or municipalities and so on documents, and methods of other listed company of Shandong province. The total annual remuneration (including base wage, rewards, welfare, subsidy, housing subsidy and others) of the present directors, supervisors and senior executives receiving from the Company was RMB 861,500 (including base pay, various bonuses, welfare, allowance and other subsidies, etc.) Name Title Annual remuneration(‘0000) Liu Changsuo Chairman of the Board 12 Wang Zhao’an General Manager 12 Li Wenyi Deputy General Manager 10.5 Shao Shijie Director 4.05 Wang Hanmin Independent Director 3 Jiang Jin Independent Director 3 Jiang Lu Independent Director 3 Zhou Feng Secretary of the Board 9 Zhang Jinqing Chief Financial Supervisor 9 Chairman of the Supervisor Li Ming 9 Committee Chi Ming Employee Supervisor 3.19 Yin Jixian Supervisor 3.49 Huang Qi Employee Supervisor 2.19 Shang Qinghua Employee Supervisor 2.73 Total 86.15 2. Among directors, supervisors and senior executives, 2 persons received no pay from the Company, namely Director Shao Shijie, who drew remuneration from Qingdao Oceanic Fishery Co., and Supervisor Yin Jixian, who drew remuneration from Shandong Group Corporation of Fishery Enterprises, the share-controlling company of the Company. V. Name of directors, supervisors and senior executives leaving posts in the report period and reason of leaving In the report period, directors, supervisors and senior executives of the Company remained unchanged respectively. 2. About employees Ended the report year, the Company had totally 658 on-the-job employees, of them, 425 production personnel 23 salespersons, 74 technicians, 30 financial personnel and 106 administrative personnel; in the staffs, 34 persons with bachelor degree or above, taking by 5.2 % of the total employees; 61 persons with 3-years regular college graduate, taking 9.3 of the total employees, 111 persons with polytechnic school graduate, taking 16.9 % of the total employees. 14 The Company needs to bear the expenses of 517 persons waiting for jobs and early retirement and 656 retirees. SECTION VI. ADMINISTRATIVE STRUCTURE I. Administration of the Company Strictly according to the requirements in Company Law of the P.R.C., Securities Law, and other relevant laws and regulations promulgated by CSRC and Shenzhen Stock Exchange, the Company continuously improved the legal person administration structure of the Company, established modern enterprise system, and normalized the operation of the Company. In the report period, according to the Rules on Strengthening the Protection of the Equity of Public Shareholders and Stock Listing Rules of Shenzhen Stock Exchange (revised in 2004) released by China Securities Regulatory Commission, combining with the actual conditions of the Company, the Company revised and perfected the rules and regulations to follow, such as the Articles of Association, Rules and Procedure of the Board of Directors, Rules and Procedure of the Supervisory Committee, Regulations of Independent Directors, Regulations of External Guarantee, System of the Related Transaction. In addition, Board of Director of the Company got down to learning the new-released Company Law of the P.R.C., Securities Law, and conducted actively the notice on Opinion of Improving the Quality of Listed Company (GF No. 34) released by State Department of PRC. II. Performance of independent directors In the report period, the three independent directors of the Company brought the respective specialty into full play strictly according to Articles of Association of the Company and Work System of Independent Director and the relevant regulations issued by CSRC, and performed their duties trustily, diligently and independently, attended the meeting of the Board of Directors and Shareholders’ General Meeting on time; expressed independent opinion for significant related transaction, nomination, appointment and removal of directors, and engagement and demission of senior executives based on the position of independent judgment, gave the initiative function into full play in respect of scientific decision-making and standardized operation of the Board of Directors, safeguarded the whole benefit of the Company and rights and interests of medium and small shareholders. (1) Particulars about independent directors attending the shareholders’ general meeting Name of This year times Entrusted Presence in person Absence independent of attending the presence Note (times) (Times) directors Board meeting (times) Wang Hanmin 5 5 0 0 Jiang Jin 5 4 1 0 Jiang Lu 5 5 0 0 15 II. Particulars about the objections on the relevant matters of the Company from the Independent Directors In the report period, there are no any objections on the relevant matters of the Company from Independent Directors. III. Particulars about the Company’s separation from the control shareholder in respect of business, personnel, assets, organization and finance: 1. In respect of personnel: the Company has independent management system of labor, personnel and salary, General Manager, Deputy General Manager, Chief Financial Supervisor and Chief Economist and Secretary of the Board of the Company drew the salary from the Company. 2. In respect of assets: as an independent corporation, the Company has integrated legal person property rights, during the initial stages of foundation, the assets invested by the controlling shareholder were transacted the change procedure of ownership. 3. In respect of finance: the Company has established independent financial department and financial personnel, owned independent and complete accounting system; financial personnel and financial system were completed independent from its controlling shareholder, the Company produced accounting statement according to the relevant regulations of the Ministry of Finance, and paid the tax in compliance with the laws. 4. In respect of organization: the Company’s Board of Directors, Supervisory Committee and the other Inner organization independently operated; the controlling shareholder recommended director and supervisor through the legal procedure, and didn’t meddle in personnel appointment and removal of listed company; 5. In respect of business: the Company was completely independent from the controlling shareholder, has independent and integrated business and autonomous operation capacity. There was no competition with the controlling shareholder in the same trade. IV. Evaluation and encouragement mechanism of performance of senior executives In the report period, the Company obeyed the principals of the operator’s remuneration connecting with responsibility, risks, performance of the operation, embodied modern enterprise distribution system of distribution according to work and more pay for more work, implement the annual pay system in the operation group. SECTION VII. BRIEF INTRODUCTION OF THE SHAREHOLDERS’ GENERAL MEETING In the report period, the Company totally held one shareholders’ general meeting. 2004 Annual Shareholder’s Meeting was held on May 20, 2005, and the relevant resolution was published on Securities Times and Hong Kong Ta Kung Pao dated May 21, 2005. SECTION VIII. REPORT OF THE BOARD OF DIRECTORS I. Review on the operation of the Company in the report period 1. Overall review on the operation of the Company in the report period In 2005, in order to maintain the industry of Shandong Oceanic Fisheries, assure the benign development of the Company after reorganization and keep the leading position 16 in Shandong fisheries, the Company operated around the working targets of normal running of the Company, united with each other, overcame the difficulties, made endeavors in normal operation, structural adjustment, enterprise reform, increasing incomes and reducing expenses, systematic management of the Company; and obtained good effects. In 2005, the fishing volume amounted to 18318 tons, among which 4951.12 tons of tuna seiner and 1414.21 tons of tuna longline fishing, and the volume of tow net amounted to11953.07. Comparing to last period, the volume decreased 24336.55 tons with -57.05%; the operating incomes realized amounted to RMB 167,180,000, RMB -56,910,000 decreased with -25%; the main business profit was amounting to RMB 20,790,000, RMB 27,580,000 decreased with -57%. In the report period, the net profit the Company realized RMB -47,250,000. The main reasons for decreasing: 1st, the national strike of Argentina sailors resulted in stopping production of Tai’an boat for half year, and influenced the launching out and the output decreased; 2nd, the repair of Tuna seiner held up the production and the incomes reduced; 3rd, Qingdao Refrigeration subsidiary of Zhonglu was listed in the Companies of significant securities hazards in Qingdao, and was gradually took measures on stopping production pf the Company, and the income from refrigeration reduced; 4th, the transferring of the whole assets of Trading subsidiary corporation in former of report period and logout of it resulted in the reduction of operating income of aquatic products; 5th, the bank sealed up the account of the Company, which resulted in halting in trading business of the Headquarters; 6th, the price of diesel rose up and the fishing cost increased. In order to maintain the production of the Company, the Company made every endeavor to negotiate with the suppliers and customs, and strove for deferred payment for the suppliers and extending the sales to get funds. In the report period, the net cash flow of operating activities was amounting to RMB 18,720,000. 2. Operation of the Company (I) Scope of main operations and their operations As a comprehensive enterprise in the oceanic fishery industry, the Company is principally engaged in the oceanic fishing; letting of trawlers and refrigerated transportation vessels; import and export, processing and cold storage of aquatic products, etc. (II) The income from main operations and profit from main operations is listed as follows: (Unit: RMB’0000) i. Classified according to industries Income Cost of Gross Increase/decrease Increase/decrease Increase/decrease from main main profit in income from in cost of main in gross profit Industry operations operations ratio (%) main operations operations over ratio over the last over the last year the last year (%) year (%) (%) Oceanic 8,737.85 8,808.49 -0.81 -17.33 8.57 -24.05 17 fishing Aquatic products 208.50 187.04 10.29 -93.46 -92.83 -7.92 trade Letting and management of 4,116.39 2,674.10 35.04 18.17 15.05 1.76 refrigerated vessel Processing, cold storage of aquatic 3,655.69 2,846.06 22.15 -29.25 -35.32 7.31 products and others Total 16,718.43 14,515.69 13.18 -25.39 -16.79 -8.97 Including: the related 197.43 293.85 -48.84 -52.30 -3.26 -75.44 transaction ii. Classified according to products Income Cost of Gross Increase/decrease Increase/decrease Increase/decrease from main main profit ratio in income from in cost of main in gross profit products operations operations (%) main operations operations over ratio over the last over the last year the last year (%) year (%) (%) Tunny 8,715.81 8,605.70 1.26 -8.45 20.02 -23.42 Other fish 2,312.78 1,919.06 17.02 -72.64 -74.11 4.72 goods iii. Classified according to areas Income from main Increase/decrease on income from main operation Areas operation over the last period（%） Mainland of China 1982.98 -66.52 Taiwan of China 7409.78 1.83 Nigeria 484.25 -72.60 Japan 6287.64 0.29 Argentina 189.34 597.64 Korea 364.44 -55.96 Total 16718.43 -25.39 (III) There was no any authoritative data of market share about the products produced and operated or service provided by the Company. (IV) Changes in main operations in the report period over the last year The reasons for decreasing of income from main operation, increasing of cost were as 18 follows: i. The transferring of the whole assets of Trading Subsidiary Corporation in former of report period and logout resulted in the reduction of income of aquatic products; ii.In the report period, the repairing of TAI SHOU vessel for oceanic fishing resulted in the reduction of fishing volume, the fishing income reduced and the price of fuels; iii.Qingdao Refrigeration subsidiary of the Company’s stopping production in Sep. 2005 resulted in the reduction of refrigeration income in the report period. (III) Operation and achievements of main holding subsidiaries and share-holding companies of the Company Unit: RMB Business quality and Assets Registered Investment Name of companies Equity main operations or Net profit scale capital amount products Shandong Zhonglu International shipping, Aquatic productss and 56,405,451 22,505,600 95% 21,380,320 transportation of frozen 603,444 Sea Transportation Co., aquatic products Ltd. Habitat International Self-support cold-storage 54,858,362 12,476,146 100% 12,476,146 8,367,522 Corporation transportation Freezing, cold-storage, Shandong Zhonglu processing and sales of Oceanic Foods (Yantai) 92,963,311 56,793,300 56.84% 32,280,000 aquatic products, 8,347,575 Co., Ltd. livestock, fruit and vegetables (IV) Major suppliers and customers In the report period, the total amount of purchase from the top five suppliers was RMB 24,727,484, taking 42.58% of the total annual amount of purchase of the Company; the total amount of sales of the top five customers was RMB 120,148,504, taking 72% of the total annual amount of sales of the Company. (V) Problems and difficulties from the operation and their solutions i. The protection of ocean fishery resources got stricter. At present, due to exceeding development and usages of ocean fishery resources in recent years, world fishery association paid high attention, adopted series of scientific supervision, limited the work fishery district, and restricted the usage of work boats. Based on the above reasons, the production volume decreased and the income decreased. For this, the Company strengthened control in the frontline at sea, reinforced information exchange and technology content, lengthened the work time of fishing boat to increase production volume. ii. The cost of operating rose up due to the continuously rising up of the fuel and brought difficulties of the Company. At present, the whole world came one period of high price of fuel and cannot fall down in short time. The continuous rising of fuel and fuel price became the key factor for increasing the fishing cost. In 2005, the fuel price 19 was 627 USD/ton of the maximum from the 427 USD/ton of year-begin. Considering that, the Company improved unceasingly the production efficiency, adjusted reasonably the fishing ground, and reduced the fuel consuming and improved benefits. iii. Shortage of capital was severe. Affected by the arrearages of related party, the principal shareholder, banks adopted policies of “only collecting, no lending” for three years and the Company operated with great difficulties. Considering that, the Company negotiated with the suppliers and customers to adopt deferred payment to get funds. Meanwhile, the Company speeded up returning the funds of sales. The Company adopted the method of “Supporting each other, united adjustment” to maintain the normal running of each companies and each aspects. iv. Quality of assets decreased. At present, old age, high purchasing costs and aging equipments of partial fishing boats of the Company resulted in low fishing capabilities. Considering that, the Company adjusted and optimized assets, disposed boats with old age and high purchasing costs, and decreased production scale while decreasing production costs. (VI) The Company didn’t publicly disclose profit estimation or operating plan of this year. 2. Investment (I) Application of raised proceeds In the report period, the Company didn’t raise proceeds to invest projects and there were no raised proceeds in last report period employed till the report period. Ended Dec. 31, 2005, the Company used up total raised proceeds amounting to RMB 255,340,000 through B-share offering, taking 100% of the total raised proceeds. (II) Material project invested with the proceeds not raised from public offer in the report period In the report period, there was no material project invested with the proceeds not raised from public offer. 3. Financial condition of the Company (1) Changes in assets structure Unit: RMB Dec. 31, 2005 Dec. 31, 2004 Increase/decrease Items of proportion in Proportion in Proportion in total assets（％） Amount Amount total assets（％） total assets（％） Account receivable 17,022,065 3.64 33,954,457 6.69 -3.05 Inventory 49,676,713 10.62 43,612,884 8.59 2.03 Long-term equity investment 0 - 3,300,000 0.65 -0.65 Fixed assets 259,301,899 55.43 277,066,626 54.56 0.87 Construction in-progress 0 - 66,000 0.01 -0.01 Short-term loans 230,721,032 49.32 240,168,957 47.29 2.03 20 Long-term loans within one year 35,307,126 7.55 23,793,688 4.69 2.86 Long-term loans 12,105,300 2.59 24,830,400 4.89 -2.30 (2) Change in costs: Unit: RMB Cost 2005 2004 Increase/ decrease（RMB） Operating cost 9,849,092 10,277,381 -428,289 Administration cost 30,974,768 4,762,170 26,212,598 Financial cost 20,858,811 11,746,308 9,112,503 Notes: ① Decrease in account receivable amounting to RMB 16,932,392 was due to tightening retrieving payment for goods so as to increase the retrieved amount. ② Increase in inventory was due to unsold fishes caught at the period-end. ③ Decrease in fixed assets was due to depreciation and sales of TAIHUI vessel ④ Increase in long-term loans within one year was due to overdue unpaid long-term loans amounting to RMB 23,201,825 ⑤ Decrease in long-term loans was due to long-term loans within one year amounting to RMB 12,725,100. ⑥ Increase in administration cost was because of switching back special bad debts reserve of related party’s arrearage in the same period of last year so as to decrease administration cost amounting to RMB 24,113,145, and withholding the fee for acceptance of the case amounting to RMB 1,397,980 in 2005. ⑦ Increase in financial cost was due to receiving subsidizing interest payment of loans amounting to RMB 3,515,000 from capital construction of central government in the same period of last year as well as subsidizing interest payment of loans of Oceanic Fisheries amounting to RMB 3,340,000. (3) Constitution of cash flows rising from various items Unit: RMB Items 2005 2004 Increase/decrease（%） Cash flow rising from operating activities Cash inflows 173,461,151 222,326,561 -21.98 Cash outflows 154,742,479 181,878,849 -14.92 Net cash flow rising from operating activities 18,718,672 40,447,712 -53.72 Cash flow rising from investment Cash inflows 331,063 2,307,058 -85.65 Cash outflows 2,511,968 2,833,694 -11.35 Net cash flow rising from investment activities -2,180,905 -526,636 314.12 Cash flow rising form financing Cash inflows 38,600,000 71,910,415 -46.32 21 Cash outflows 53,061,273 106,444,678 -50.15 Net cash flow rising from financing actitvites -14,461,273 -34,534,263 -58.12 Net increase of cash and cash equivalents 1,301,950.00 5,189,317 -74.91 Notes: ① decrease in cash flow rising from operating activities was due to: A. the Company transferred general capital of trading branch in last period and logged it off so as to decrease trading income of aquatic products in a large margin. B. in the report period, the Company’ oceanic dredge, TAISHOU Vessel, carried out overhaul so as to decrease fishing amount as well as fishing income; rise in fuel oil price in addition. C. the affiliated company of the Company, Qingdao Refrigerate Branch, has closed down since Sep., 2005 so as to decrease refrigerate income in the report period. ② Decrease in cash flow from operating activities was due to paying for dredges purchased in previous years. ③ Decrease in cash flow rising from financing was due to repaying loans from bank. ④ In the report period, the deficit amounted to RMB 47,520,147, net cash rising from operating activities amounting to RMB 18,718,672 was mainly due to provision for depreciation of assets amounting to RMB 8,239,392, withholding overdue interest of loans amounting to RMB 17, 419,549, depreciation of fixed assets amounting to RMB 25,878,292 and decrease of operating account receivable, etc.. (4) Changes in accounting policy and accounting evaluation and its influence There existed no changes in accounting policy and accounting evaluation in the report period. 4. Explanation on accountant’s presenting auditors’ report with emphasized events and without reservation opinion We completely agreed with accountant’s auditing opinion. In the light of accountant’ emphasizing the existing uncertainty in sustainable operation capacity of the Company, the Company plan to adopt the following measures to improve sustainable operation capacity: (1) With the support of local government, further accelerating external assets reorganization.. In Dec. 2004, controlling shareholder of the Company, Shandong Group Corporation of Fishery Enterprises (hereinafter referred to as “SGCFE”) signed the Agreement of Shares Transfer of Shandong Zhonglu Oceanic Fisheries Co., Ltd. and the Supplementary Agreement of Shares Transfer of Shandong Zhonglu Oceanic Fisheries Co., Ltd. with Shandong Luxin Investment Holding Co., Ltd. (hereinafter referred to as “Luxin Holding”), SGCFE transferred its 33.07% equity of the Company to Luxin Holding. At the same time, Luxin Holding and SGCFE issued together the Plan of Debt Refund and the Supplementary Explanation on Plan of Debt Refund: SGCFE repaid the partial debts to the Company with the funds received from auction after SGCFE auctioned its partial effective assets. After finishing the aforesaid debts paying duties, 22 SGCFE still could not liquidate its debts and guarantee completely, but Luxin Holding could refund and liquidate in cash instead of SGCFE. From the date of purchasing finished, Luxin Holding amortized the relevant debts instead of SGCFE and its affiliated companies to the Company and ensured the amount of capital occupation occurred due to non-operating current of SGCFE and its affiliated companies and the actual amount of debts occurred due to the Company providing guarantee for SGCFE and its affiliated companies has decreased 30% at least in every fiscal year. At the same time, SGCFE promised to refund accounts receivable of RMB 10,006,511 of SGCFE and its affiliated companies received by the Company ended Sep. 30, 2004 completely before finishing assets reorganization by means of the Commitment Letter. On Dec. 29, 2005, State-owned Assets Supervision & Administration of Commission of the State Council GZCQ [2005] No. 1593 Reply on Relevant Issues on State-owned Share Transfer of Shandong Zhonglu Oceanic Fisheries Limited Company, agreed that SGCFE transfer its shares up to 33.07% (amounting to 88,000,000) held from the Company to Luxin Holding. In addition, based on LRCZ 2005 No. [013] Written Confirmation for successful bidding promulgated by Shandong Qilu Ruifeng Auction Co., Ltd, Luxin Holding won the bidding for judicial frozen shares of the Company amounting to 37,731,320 (accounting for 14.18%) held by SGCFE at a price of RMB 8,760,000 on June 7, 2005. After finishing the said process of transferring ownership for share transfer, Luxin Holding became controlling shareholder of the Company due to holding 125m731,320 shares (accounting for 47.25%) of the Company. In 2006, the Company would further promote and quicken implementation of the aforesaid assets reorganization plan with the support of local government. (2) Strengthening inner management and improving. In the light of actual operation situation of the Company, the Company would enhance inner management in 2006. To make adjustment for vessels having long ages, high cost and low benefit, continuously promote driftwood fishing with master seiner; support to subsidiaries with high earnings power, to expand its throughput, carrying out reducing or ceasing production for subsidiary with poor operation and deficit profit so as to decrease deficit amount; meanwhile endlessly to promote control measure for cost and three expenses and improve earnings power. In addition, through negotiation with supplier and customer, the Company could obtain finance by delaying paying for supplier on the one hand, on the other hand, accelerate sales retrieves so as to reduce account receivable amounting to 16,532,969 the period-end to the period-begin. (3) Actively enhancing communication with credit bank so as to gain the support of bank for the Company In 2006, with the support of the local government, the Company actively enhances communication with credit bank; make use of arrearage repaid by large shareholder to repay partial bank loans and obtain capital support for the Company from bank by means of new shareholder guarantee, so as to release repaying pressure from bank and capital pressure of the Company’s normal operation. The Company thinks, after accomplishment of essential reorganization in 2006, the 23 Company could gain necessary Capital support, efficiently solve risks of paying debts of the Company; through strengthening inner management to perfect operation situation of the Company and improve earnings power. The said measures could ensure normal operating activities of the Company in 2006, as well as sustainable operating capacity through successful operation in the future. 5. Routine work of the Board of Directors (I) meetings and resolution of the Board of Directors in the report period In the report period, the Company held totally five meetings: (1) On April 13, 2005, the Company held the 17th meeting of the 2nd Board in live. Relevant resolution has been published on Securities Times and Ta Kung Pao dated April 16, 2005; (2) On April 27, 2005, the Company held the 18th meeting of the 2nd Board by means of communication. The meeting examined and approved the 1st Quarterly Report of the Company for the year 2005; (3) On May 30, 2005, the Company held the 19th meeting of the 2nd Board in live. Relevant resolution has been published on Securities Times and Ta Kung Pao dated June 3, 2005; (4) On Aug., 9, 2005, the Company held the 20th meeting of the 2nd Board in live. Relevant resolution has been published on Securities Times and Ta Kung Pao dated Aug., 11, 2005; (5) On Oct., 25, 2005, the Company held the 21st meeting of the 2nd Board by means of communication. The meeting examined and approved the 3rd Quarterly Report of the Company for the year 2005; (II) Implementation of resolutions of the Shareholders’ General Meeting by the Board of Directors In 2005, the Board of Director strictly implement various resolutions of the Shareholders’ General Meeting according to responsibilities endowed by Articles of Association, and revised Articles of Association and confirmed auditing fees of accountants, etc. in accordance with authority by the Shareholders’ General Meeting for the Board of Directors. 6. Preplan on the profit distribution in 2005 Audited by Hubei Daxin CPAs Co., Ltd. and Horwath International Certified Public Accountants (Hubei, China) according to Chinese Accounting Standards and International Accounting Standards respectively, the net profit realized by the Company in 2005 was RMB -47,520,147 and the profit available for distribution for all shareholders in the year was RMB -460,945,076. Therefore, the Board of Directors decided neither to distribute profits nor convert capital reserve into share capital. The said preplan should still be submitted to the Shareholders’ General Meeting 2005 for approval. 7. Other events need to be disclosed (1) The Company designated Securities Times and Ta Kung Pao as information disclosure newspaper in the report period. Newspaper for domestic information 24 disclosure has transferred from Hong Kong Ta Kung Pao into Hong Kong Wen Wei Po on Jan., 7, 2006. The changing public notice has published on Securities Times and Hong Kong Ta Kung Pao and Wen Wei Po dated Jan., 7, 2006. (2) The Company’s affiliated company, Qingdao Refrigerate Branch Company, was listed as “close or relocate” enterprise because of its refrigerated warehouse, etc. equipment existing significant potential safety hazard. In Aug., 2005, Qingdao Safety Production Committee make known to lower level about urging notice, so Qingdao Refrigerate Branch Company began to stop production from Sep. 2005 and problems rising from an accident is under solving. Section IX. Report of the Supervisory Committee I Meetings by the Supervisory Committee in the report period In the report period, the Supervisory Committee of the Company held totally two meetings: (I) On Apr. 13, 2005, the Company held the 10th meeting of the 2nd Supervisory Committee. The topics of the meeting were as follows: 1. 2004 work report of the Supervisory Committee; 2. 2004 financial settlement report; 3. 2004 profit distribution budget; 4. Proposal on Provision for Impairment Loss of Long-term Equity Investment of 2004 5. Full text of the 2004 Annual Report and its summary; 6. Proposal on Amendment of Work Details of the Supervisory Committee; 7. Opinion on Estimation of 2004 Routine Related Transaction 8. Opinion on the Board of Director Special Explanation on Accountant’s Auditing Opinion Events Concerned The resolution of the meeting has published on Securities Times and Hong Kong Ta Kung Pao dated April 16, 2005. (II) On Aug., 9, 2005, the Company held the 11th meeting of 2nd Supervisory Committee. The topics of the meeting are as follows: 1. Full text of 2005 Semi-annual Report and its summary; 2. Proposal on Delaying Change Term of the Supervisory Committee. The resolution of the meeting has published on Securities Times and Hong Kong Ta Kung Pao dated Aug., 11, 2005. II.The Supervisory Committee had expressed independent opinions on the following issues. 1. The Company’s operation according to law In the report period, process of decision-making of the Company was legal, inner control system was going to perfect, it found no directors and mangers of the Company violating laws, regulations and Articles of Association or damaging interest of the Company when exerting its post in the Company. 2. Inspection of the financial status of the Company During the report period, the Supervisory Committee carried out inspection to financial system and financial condition of the Company and thought that financial & accounting 25 inner control system of the Company was sound and there existed no significant omits or false record in accounting. The financial report audited by accountant truly reflected financial condition and operation performances of the Company in 2005 and the Supervisory Committee had no objection. 3. Related transactions In the report period, the related transactions the Company had involved in were mainly equity purchase, normal purchases and sales of goods, advance money for another and the continuance of former management on a commission basis. We believed that the above-mentioned transactions had abided by the principle of being fair and square, and no deeds that would do harm to the interests of the Company had ever been discovered. However, the problems left over by history as of huge amounts of related transaction arrearage by large shareholders had still not been finally resolved. 4. The use of raised proceeds of the Company In the report period, the Company had neither use of raised proceeds nor delayed use of raised proceeds from previous report period to the report period. 5. Purchases and sales of assets As to the sales of assets of the Company occurred in the report period, it was believed that the resolutions had been reasonable and the transactions fair. No insider dealings had ever been discovered; no harm had ever been done to the shareholders’ rights or interests; no loss had occurred to the assets. 6. Opinion on the Board of Director special explanation on events concerned with accountant auditing opinion. In 2005 our engaged accountant organ audited the financial report and issued unqualified with emphasized paragraph of modified report. The Board of Director had made a special explanation on it and made a solving scheme. The Supervisory Committee agreed with explanation of the Board and would actively cooperate and urge it to adopt strong measures to improve sustainable operation capacity of the Company and release operation risks. 7. Examining opinion on 2005 Annual Report During weaving and drafting the 2005 Annual Report, relevant persons of the Supervisory Committee actively took part in it. The Supervisory Committee thinks that procedure of the 2005 Annual Report’ weaving and drafting was in compliance with related rules of laws, regulations and Articles of Association; the content and format of the report meet related requirements of Shenzhen Stock Exchange, its contents could truly reflects production operation and financial condition of the Company in 2005; there are no material omissions or errors which would render any statement misleading, it found no violated action against secret rules for people participating weaving and examination of the Annual Report before presenting this opinion. Section X Significant Events I. Significant lawsuits and arbitrations (I) In the report period, due to the loan contract dispute between the Company and Jinan 26 Pearl Spring Subbranch of China Construction Bank (Jinan Construction Bank) and according to (2004) JMSCZI No. 175 Civil Judgment issued by Jinan Intermediate People’s Court, the Company should pay up the loan principal amounting to RMB 28 million and the interest RMB 539,069.24 to Construction Bank within 10 days from the day when the judgment takes effect. The litigation fee of the case totaling RMB 152,855 and the cost of property preservation amounting to RMB 143,215 should be paid jointly by the two defendants. (II) In the report period, due to the loan contract dispute between the Company and Jinan Branch of Bank of China, according to (2004) JMSCZI No. 87 Civil Order issued by Shandong Province Jinan Intermediate People’s Court, adjudged that the Company repay the loan principal amounting to RMB 4 million with interest RMB182,613.42 to Jinan Bank of China and compensate for economic losses amounting to RMB 20,000; Shanhai Trade Co. shall assume joint responsibility for payoff. The litigation fee of the case totaling RMB 30,050 and the cost of property preservation amounting to RMB 21,270 should be paid jointly by the Company and Shanhai Trade Co. The public notice on the aforesaid two lawsuits has been published on Secirities Times and Hong Kong Ta Kung Pao dated Feb., 19, 2005 and also disclosed in 2005 Semi-annual Report of the Company. Which lawsuits had a certain impact on profit in and after the period. (III) In the report period, due to case of loan dispute between the Company and controlling shareholder Shandong Group Corporation of Fishery Enterprises (“SFCFE”), 5% of share equity of Aquatic Products Group held from Shandong Zhonglu Aquatic Products Marine Co., Ltd. was sealed up according to (2005) TMYCZI No. 127 Civil Ruling issued by People’s Court in Tianqiao District, Jinan. (IV) In the report period, due to case of loan dispute between the Company and SFCFE and Shandong Shandong Longkou Fishery Comprehensive Company, the land of Shandong Longkou Fishery Comprehensive Company amounting to 48133.45 sq.m located Huanhai Road No. 27-2, Long kou City was sealed up according to (2005) TMYCZI No. 243 Civil Ruling issued by People’s Court in Tianqiao District, Jinan. The aforesaid two lawsuits has been disclosed in 2005 1st Quarterly Report and 2005 Semi-annual Report, which made for interests of the Company and shareholders, produced no impact on profit of the period and few impact on profit after the period. (V) In the report period, due to case of loan contract dispute between Qingdao Fishing Branch of the Company and the 2nd Branch of South District of Qingdao of Agricultural Bank of China (plaintiff), according to (2005) NCZI No.20493 Civil Ruling issued by South District of Qingdao People’s Court, adjudged Qingdao Fishing Branch of the Company as follows: 1. to repay loan principal RMB 1 million and overdue penalty from March 21, 2003 to date of the judge taking effect to plaintiff within 10 days after the judge taking effect; 2. to pay lawyer agency fee amounting to RMB 30,000 within one day after the judge taking effect. 3. Qingdao Double Whale Pharm. Co., Ltd. assumes joint responsibility for payoff; 4. The litigation fee of the case totaling RMB 15,010 should be paid jointly by Qingdao Fishing Branch of the Company and Qingdao Double Whale Pharm. Co., Ltd. 27 (VI) in the report period, due to case of loan contract dispute between Qingdao Refrigeration Branch of the Company and sales department of Qingdao Branch of Agricultural Bank of China (plaintiff), according to (2005) NCZI No.20487 Civil Ruling issued by Qingdao People’s Court, adjudged Qingdao Refrigeration Branch of the Company as follows: 1. to repay loan principal RMB 3 million and overdue penalty from Dec., 21, 2003 to date of the judge taking effect to plaintiff within 10 days after the judge taking effect; 2. to pay lawyer agency fee amounting to RMB 90,000 within one day after the judge taking effect. 3. Qingdao Double Whale Pharm. Co., Ltd. assumes joint responsibility for payoff; 4. The litigation fee of the case totaling RMB 25,010 should be paid jointly by Qingdao Refrigeration Branch of the Company and Qingdao Double Whale Pharm. Co., Ltd. (VII) In the report period, due to case of loan contract dispute between Qingdao Fishing Branch of the Company and the 2nd Branch of South District of Qingdao of Agricultural Bank of China (plaintiff), according to (2005) NCZI No.20488 Civil Ruling issued by South District of Qingdao People’s Court, adjudged Qingdao Fishing Branch of the Company as follows: 1. to repay loan principal RMB 2 million and overdue penalty from March 21, 2003 to date of the judge taking effect to plaintiff within 10 days after the judge taking effect; 2. to pay lawyer agency fee amounting to RMB 60,000 within one day after the judge taking effect. 3. Qingdao Double Whale Pharm. Co., Ltd. assumes joint responsibility for payoff; 4. The litigation fee of the case totaling RMB 20,010 should be paid jointly by Qingdao Fishing Branch of the Company and Qingdao Double Whale Pharm. Co., Ltd. The aforesaid lawsuits have been disclosed in 2005 Semi-Annual Report of the Company, which had no impact on profit in this period and little impact on profit after the period. (VIII) In the report period, due to case of loan dispute between the Company and Jinan Branch of Bank of China (Jinan BC), according to Civil Ruling (2005) QHFHSCZI No. 27 issued by Qingdao Maritime Court, the judges as follows: 1. the Company should repay loan principal RMB 30 million to plaintiff Jinan BC with interest totaling RMB 2,099,769.28. 2. The Company carrying out amortization, auction and selling-off for “TAIPING” Vessel as well as Zhonglu Marine for “TAINING” Vessel and “TAIXING” Vessel should legally give refund priority to plaintiff Jinnan BC within various vessels’ highest amount of mortgage. The Company should pay off the said amounts within 10 days of the date of judge taking effect and doubly repay the liability interest during delaying implementation if overdue. The litigation fee of the case totaling RMB 160,010 and financial cost of preservation amounting to RMB 150,520 should be assumed by the Company. The progression of the aforesaid lawsuits has been disclosed on Securities Times and Ta Kung Pao dated Sep., 26, 2005, which had a certain impact on profit of the Company in and after the period. II. Briefs on the purchases and sales of assets, takeovers and mergers in the report period, as well as their influence on the Company 28 (I) State-owned legal share transfer of the Company On Dec., 21, 2004, controlling shareholder of the Company Shandong Group Corporation of Fishery Enterprises (SGCFE) signed Equity Transfer Agreement with Shandong Luxin Investment Holding Group CO., Ltd.(Luxin Group), and totally transferred its 125,731,320 shares of state-owned legal share (accounting for 47.25% of the total shares of the Company) held from the Company to Luxin Group at price of RMB 0.55 per share; on March 10, 2005, the two parties signed Supplementary Agreement on Equity Transfer, SGCFE transferred its 88,000,000 shares of state-owned legal share (accounting for 33.07% of the total shares of the Company) held from the Company to Luxin Group at price of RMB 0.55 per share, otherwise, other state-owned legal shares amounting to 37,731,320 (accounting for 14.18% of the total shares of the Company) would not sign agreement on equity transfer but carry out judicially auction judged by Shandong Superior People’s Court. On June 17, 2005, Luxin Group won the bid for state-owned legal shares amounting to 37,731,320 at a price of RMB 0.232 per share with business volume RMB 8.76 million. Ended the disclosing date, the equity transfer is not finished yet. In addition the transfer for state-owned legal shares amounting to 88,000,000 has reported to state-owned assets supervision & administration commission of the state council for examination with approval of Shandong Government. On Dec., 31, 2005, the equity transfer had been approved by state-owned assets supervision & administration commission of the state council, however, had not received trans-reply from state-owned assets supervision & administration commission of the Shandong Province till now. (II) Vessel sales 1. On April 10, 2005, the Company (first party) sold its own “TAIHUI” Vessel to ZhouShan Dongyi Shipping Co., Ltd. (second party) at a price of RMB 993,000 according to Vessel Purchase & Sales Agreement signed between them, which have entered into account. Gains and losses for selling vessel amounting to RMB -517,400, and the transaction have accomplished. 2. The Company’s selling two frozen trawlers disclosed in pervious report period, totally retrieved amounting to USD 1.16 million ended the report period and amounting to USD 437,500 has not been retrieved yet. (III) Equity purchased by HABITAT Corp. On May 30, 2005, overseas sole subsidiary and affiliated company of the Company, (Panama) HABITAT INTERNATIONAL CORP. (“HABITAT” Corp.), and overseas sole subsidiary and affiliated company of controlling shareholder Shandong Group Corporation of Fishery Enterprises (SGCFE), (Australia) SHANSHUI ENTERPRISEPTY LTD (SHANSHUI LTD) signed Equity Transfer Agreement, transaction target was 25.85% share equity of SHANSHUI LTD held from Shandong Zhonglu Yantai Food Co., Ltd. (hereinafter referred to as “Yantai Food”). Including: 20.44% share equity transferred amounting to RMB 7,460,495.16. HABITAT Corp. invested USD 470,455 to purchase 5.41% of share equity of Yantai Food. The transaction constituted of related transaction. The 19th meeting of the 2nd Board of 29 Directors had examined and approved Equity Transfer Agreement. On June 9, 2005, Shanshui Ltd sent letter to Yantai Food and HABITAT Corp., according to Liability Transfer Agreement singed between Shanshui Ltd and SGCFE, Shanshui Ltd will represent SGCFE to repay liability amounting to RMB 7,460,495016 of Yantai Food. In order to deal with credit and liability, Shanshui Ltd especially asked HABITAT Corp. for giving equity transfer amounting to RMB 7,460,495016 to Yantai Food so as to settle liability amounting to RMB 7,460,495.16 which Shanshui Ltd representing SGCFE to repay. After that, Shanshui Ltd will no longer ask HABITAT Corp. to repay its equity transfer amount, which exact to Shanshui Ltd retrieving its equity transfer amount. On June 23, 2005, the equity transfer events received reply from Yantai Economic and Technology Development Zone Administration Commission to agree Shanshui Ltd to totally transfer its equity of Yantai Food to HABITAT Corp., and the equity transfer agreement would take effect. On July 19, 2005, the relevant registration formalities of industrial and commercial exchange have finished and equity transfer has completely accomplished. Which transaction could rich capital of Yantai Food so as to smoothly carry out its annual audition, as well as in favor of its development and the Company. The equity transfer this time increased net assets amounting to RMB 2.06 million. III. Important related transactions (I) related transaction concerned with routine operation Unit: RMB’0000 Proportion to Parties of related principal for Price of Amount of Mode of Matters the same type transaction price setting transaction transaction settlement of transaction Prodesur S.A Materials Contract price Market 32.26 100% Cash for fishing price settlement Qingyu Haifeng Electricity Contract price Market 8.09 100％ Cash Shipping Corp. price settlement Total 40.35 100% (II) Other related transactions 1. Entrusted operation Accumulated amount in Name of enterprise The same period of last year (RMB) 2005 (RMB) Prodesur S.A. 1,570,779 3,302,891 Note: according to entrusted operation agreement signed between the Company and 30 Prodesur S.A., the Company entrusted Prodesur S.A. to operate TAI’AN Vessel, and obtained (or assumed) income/losses from operation lease as per 70% of operation profit (losses). The agreement went into effect on Jan., 1, 1999 with terms of 10 years, obtained income from entrusted operation amounting to RMB 1,570,779 in the period. 2. The Company made use of office building of SGCFE without payments 3. The underling company of the Company, Longkou Branch and Qingdao Refrigeration Branch made use of partial land owned by SGCFE without payments. (III) Related transaction occurred in joint investment with related party There occurred no related transaction in joint investment with related party (IV) Current credit and liability of related party 1. Procession of funds of listed company by controlling shareholder and other related party The Company existed procession of funds by controlling shareholder and other related party due to assets reorganization when the Company was founded and various current business after foundation. Ended as of Dec., 31, 2005, procession of funds by controlling shareholder and other related party amounting to RMB 299,011,000, in addition, violated guarantee amounting to RMB 21.51 million supplied for controlling shareholder and other related party has not been dissolved due to historical reason, 2. Plan for pay off debts Because of serious insolvency of controlling shareholder of the Company, SGCFE, it had no ability to completely repay procession of funds, with the support of province government, the Company started with reorganization in 2004, hope to solve procession of funds and violation guarantee through reorganization. At present the work is under way. In view of current condition the Company made a safety plan for pay-off debts: (1) Before June 2006, by means of judicial auction and arbitration, etc., 5% of share equity of Shandong Zhonglu Aquatic Products Shipping Co., Ltd amounting to RMB 1.47 million and 17.31% of share equity of Shandong Zhonglu Oceanic (Yantai) Food Co., Ltd. amounting to RMB 9 million held by SGCFE which had been judicially frozen by the Company had been used to repay the liability of the Company amounting to RMB 10.47 million; (2) Before August 2006, by means of judicial auction and arbitration, etc., office building owned by SGCFE amounting to RMB 55 million which had been judicially frozen by the Company had been used to repay the liability of the Company amounting to RMB 55 million. (3) For paying off the rest procession of funds amounting to RMB 233,541,000, the only is to quickening reorganization to realize it. Luxin Group and SGCFE have report the severe difficulty against reorganization, claim for strong support of government and take care of relevant policy, based on fulfillment of refunds through various measures, accelerate general reorganization so as to reach the target of paying off full debts before 2006. 3. External guarantee In the report period there occurred no external guarantee. Ended the report period, external guarantee of the Company amounted to RMB 71.51 million. 31 (1) The subsidiary of the Company supplied guarantee for long-term loans amounting to RMB 21.51 million of Qingdao Haiyu Co., Ltd. (subsidiary of SGCFE) before reorganization, ended as of Dec., 31, 2005, the guarantee is still unrelieved; in view of insolvency of Qingdao Haiyu Co., Ltd., the Company shall assume joint responsibility for repay. (2) The Company supplied guarantee for long-term loans amounting to RMB 50 million of original subsidiary Qingdao Double Whale Parm. Co., Ltd. (transfer its ownership in Aug. 2003), because the Company sold share equity of it so the guarantee transferred into external guarantee. Ended Dec., 31, 2005, the guarantee contract is still under implementation (note: the said company has dated with assignee Zhongchanjing Investment Co., Ltd. for relieving their guarantees each other and the events concerned is underway). (V) In the report period, there existed no purchase and sale transaction of fixed assets between the Company and related party (VI) No other significant related transaction IV. Significant contract and its implementation (I) there existed no entrustment, contracting and leasing in the report period (II) In the report period, the Company signed Vessel Purchase & Sale Agreement, and sold its own vessel “TAIHUI”, the contract has finished. (III) Entrustment of assets management In this period, the Company had not entrusted others with cash assets management. V. Commitments In the report period, the holding shareholder of the Company Shandong Fishery Group promised: the receivables amounting to RMB 10,006,511 of the Company from Shandong Fishery Group and its affiliated enterprises would be paid back before Mar. 31, 2005. By the disclosure day of this report, this commitment had still not been performed. VI. Engagement and disengagement of Certified Public Accountants In the report period, the Company engaged Daxin Certified Public Accountants Co., Ltd. and Horwath International CPA Limited (Hubei, China) as the domestic and overseas financial auditing institutions of the Company in 2005 respectively. This was the third time that these two auditing institutions had provided auditing services to the Company. VII. Briefs on the public criticisms from CSRC and Stock Exchange In the report, the Company and its Board of Director received no inspection, administrative penalty and criticism by circulating a notice from China Securities Regulatory Commission and public censure from Stock Exchange. 32 THE AUDITOR’S REPORT To the shareholders of Shandong Zhonglu Oceanic Fisheries Co., Ltd., We were engaged to audit the accompanying consolidated balance sheet of Shandong Zhonglu Oceanic Fisheries Co., Ltd. (the “Company”) and its subsidiaries (the “Group”) as of 31 December 2005 and the related consolidated income statement, statement of changes in shareholders’ equity and cash flow statement for the year then ended. These consolidated financial statements are the responsibility of the Group's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audits of these statements in accordance with International Standards on Auditing, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as of December 31, 2005 and the consolidated result of its operations and its consolidated cash flows for the year then ended, in accordance with International Financial Reporting Standards. We would mention the investors who may use these consolidated financial statements to notice that the consolidated financial statements are prepared on the basis of going concern assumption. As set forth in the section II, “GOING CONCERN ASSUMPTION”, at the end of 2005, the accumulated deficit was RMB 460,945 thousand. On Dec. 31, 2005, the Group’s current liabilities exceeded its current assets RMB 214,466 thousand. In addition, the holding shareholders and related parties keep occupying the company’s capital for long time, and the amount was RMB 299,011 thousand. By Dec. 31, 2005, the company’s overdue bank loans had been amounting to RMB 218,323 thousand, and part of the fixed assets have been mortgaged. Although the group has disclosed intended improvement measures in the section “GOING CONCERN ASSUMPTION”, it still exist uncertainty for the Group’s ability to continue as a going concern. However, this section does not influence the audit opinion stated above. HORWATH CHINA (HUBEI) Certified Public Accountants March, 2006 33 I.GENERAL INFORMATION Shandong Zhonglu Oceanic Fisheries Co., Ltd. (the “Company”) was incorporated as a joint stock limited company in the People’s Republic of China (the “PRC”) on 30 July 1999, subsequent to a corporate reorganization on Shandong Group Corporation of Fisheries Enterprise (“SGCFE”, the holding company of the Company) (the “Reorganization”) to rationalized the Company’s structure in preparation for the listing of domestically listed foreign investment shares (the “B shares”). The B shares have been listed on the Shenzhen Stock Exchange since July 2000. The Company is principally engaged in fishing, processing and trading of seafood. These activities are carried out by the following departments, branches and subsidiaries of the Company: Name of Departments Principal Activities Trading Department Trading of frozen seafood Western Africa Development Department Letting of trawlers Southern America Development Department Letting of trawlers Name of Branches Principal Activities Qingdao Fishing Branch Oceanic fishing Qingdao Branch Oceanic fishing Longkou Branch Processing of seafood Qingdao Refrigerating Branch Processing and trading of frozen seafood 34 Name of subsidiaries Place of incorporation/ Date of Principal activities Cost of investment Percentage of equity registration interest actually held Shandong Zhonglu Oceanic Fisheries Transportation The PRC/3 January 1994 Letting of refrigerated vessels and RMB 95% Co., Ltd.(“Zhonglu Transportation”) international vessel transportation 21,380,000 Habitat International Corporation (“HIC”) The Republic of Panama/ Letting of refrigerated vessels RMB 100% 13 October 1997 12,476,000 Shandong Zhonglu Oceanic (Yantai) Food Co., Ltd. The PRC/18 June 2001 Cold storage and processing of RMB 56.84% (“Yantai Food”) seafood etc. 32,280,000 On 18 June 2001, the Company and SGCFE incorporated Yantai Food, an equity joint venture enterprise, by means of capital contributions of cash and leasehold land respectively. The Company holds 76.65% of equity interest in Yantai Food. On 17 September 2001, the Company, SGCFE and Australian Shanshui Trading Co., Ltd. (“Shanshui Trading”), a subsidiary of SGCFE, reached into an agreement to accept Shanshui Trading’s equity investment of USD 1,780,000 into Yantai Food. Consequently, the registered capital of Yantai Food increased to RMB 56,793,300, in which the Company holds 56.84% of equity interest. As of 31 December 2004, Shanshui invested USD 1,309,545 and hold 20.44% of equity interest. On 30 May 2005, Shanshui and Habitat Interoational Coporation（“HIC”） reached into an agreement of equity transferring, Shanshui transferred the equity interest of Yantai Food to HIC with RMB 7,460,495. On 12 July 2005 HIC invested USD 470,455 into Yantai Food. According to the capital verification report (2005) GuoXinKuaiYanZi No.3205 issued by ShanDong GuoXin Certified PublicAccountants, Yantai Food received the equity investment of RMB 56,793,300 from all shareholders, Consequently, the Company holds 56.84% of equity interest in Yantai Food. The Company and its subsidiaries are collectively referred to as the “Group”. The address of the Company’s registered office is 43 Heping Road, Jinan, Shandong province, the PRC. As of 31 December 2005, there were 927 (2004: 1,071) employees in the Group. 35 II. GOING CONCERN ASSUMPTION 1. The company believes that the following facts have a great influence on going concern assumption. A. As of Dec. 31, 2005, the accumulated deficit is RMB 460,945thousand. B. As of Dec. 31, 2005, the company’s operational capital was negative. The current liabilities exceeded its current assets RMB 214,466 thousand. C. The holding shareholders and related parties keep occupying the company’s capital for long time. As of Dec. 31, 2005, the occupied capital reached RMB 299,011 thousand. D. By Dec. 31, 2005, the company’s overdue bank loans had been amounting to RMB 218,323 thousand, that the company is not able to repay. And part of the fixed assets have been mortgaged, whose net value is RMB 204,528 thousand. 2. The measures that the company would take to improve the operation abilities. Because of the facts stated above, the going concern assumption was seriously affected. Therefore, the company would take the following measures to improve the operation abilities. A. Seek support from local government to accelerate the assets reorganization. In Dec. 2004, the company’s holding shareholder, SGCFE and Shandong Luxin Investment Holding Ltd (“Luxin”) signed two agreements, SGCFE Shares Transferring Agreement and Supplement of SGCFE Shares Transferring Agreement. In accordance with these two agreements, SGCFE agreed to transfer 33.07% of its shares to Luxin. And SGCFE and Luxin made Debt Repayment Scheme and Supplement of Debt Repayment Scheme together. They agreed that SGCFE would repay its debt with part of its effective assets by auction. After these procedures of auction, the rest of the debt and the guaranty would be repaid by Luxin with cash. After accomplishing all these procedures, Luxin would repay all the debts instead of SGCFE and its subsidiaries step by step. Luxin should make sure that SGCFE and its subsidiaries occupy enough money to repay the non-operational accounts, and 36 SGCFE and its subsidiaries’ liabilities to the company caused by guarantees decrease by 30% annually at least. At the same time, the company and SGCFE agreed that SGCFE should repay all the company’s accounts receivable to SGCFE and its subsidiaries, which was amounting to RMB 10,007 thousand of Sep. 30, 2004, by the way of Assurance Letter before the assets reorganization. On Dec.19, 2005 , State-owned Assets Supervision and Administration Commission of the State Council agreed SGCFE to transfer 33.07% of its shares(88,000,000 shares) to Luxin. Otherwise, according to confirmation letter LuRuiChengZi(2005)No.013 by Shandong Qilu Ruifeng Auction Co., Ltd, Luxin purchased the 37,731,320 shares of SGCFE which had been judicial blocked with RMB 8,760,000 on Jun. 7, 2005. If the shares above being transferred, Luxin will be the controlling shareholder by holding 47.25% of equity interest (125,731,120 shares). In 2006, the company will push the assets reorganization with the support from the local government. B. Strengthen the interior management and improve the capacities to earn profits. Considering the actual situation, the company will strengthen the interior management in 2006. The company will adjust the vessels which are obsolete with high cost and low efficiency and promote the master seines. The company will also support the subsidiaries which have higher capacities to earn profit, while it will take measures to reduce the operations of the subsidiaries which had bad performance in order to decrease the deficit. And at the same time, the company will continue controlling the cost, expenses and overheads in order to improve the capacities to earn profit. C. Improve communication with creditor bank to get support. The company will improve communication with creditor bank with the support from the local government. The amount repaid by the holding shareholders will be used to repay the part of the bank loan. The company will finance with the new holding 37 shareholder’s guaranties to release the repayment pressure and operational capital shortage. The board of directors believed that after the assets reorganization, the company could get necessary capital support, which could reduce the financial risk. Stronger interior management will improve the company’s operation and capacities to earn the profit. The measures stated above will ascertain that the company will keep normal operations in 2006 and fulfill the going concern assumption with the future’s successful operations. III. Explanation to the matters in 2004 audit report 1. The auditor issued an unqualified opinion with explanation paragraph in 2004. The matters mentioned in 2004 annual audit report is as follows in 2005: At the end of 2004, the accumulated deficit was RMB 413,339 thousand, and the current liabilities exceeded its current assets RMB 171,053 thousand. In addition, the holding shareholders and related parties keep occupying the company’s capital for long time, and the amount was RMB 301,576 thousand. By Dec. 31, 2004, the company’s overdue bank loans had been amounting to RMB 207,148 thousand, and part of the fixed assets have been mortgaged. In auditors’ opinion, though the company has disclosed intended improvement measures, it still exist uncertainty for the Group’s ability to continue as a going concern. In 2004, the net profit is RMB 3,398 thousand, but the current liabilities exceeded its current assets RMB 171,053 thousand, and the overdue bank loans had been amounting to RMB 207,148 thousand. This year, the company tried to seek outside assets reorganization. And at the same time, the company negotiated with bank actively. It received some new bank loans by the way of mortgage and guaranty. Besides, the Company rent out or sold those vessels which have high fishing cost in order to reduce the cost and expenses. At the same time, the company get financing by delayed payment and improving the collection cycle after negotiating with the 38 suppliers and the clients. Though the company was prosecuted by the bank for the overdue loans, it still made an effort to keep normal operations. In 2005, the group realized net sales RMB167,184 thousand, gross profit RMB20,793 thousand. IV.ACCOUNTING POLICIES The principal accounting policies adopted in preparation of these consolidated financial statements of the Group are set out below: A Basis of presentation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board. These consolidated financial statements have been prepared under the historical cost conversion except as disclosed in the accounting polices below. This basis of accounting differs from that used in the preparation of the Group’s statutory accounts which are prepared in accordance with PRC Accounting Standards for Business Enterprises and the Accounting System for Business Enterprises (“Statutory Accounts”). The adjustments made to conform the Statutory Accounts of the Group to IFRS are shown in “SUPPLEMENTORY INFORMATION”. The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. B Group accounting Subsidiaries, which are those entities in which the Group has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies are consolidated. Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries. 39 Intercompany transactions, balances and unrealized gains on transactions between group companies are eliminated; unrealized losses are also eliminated unless cost cannot be recovered. When necessary, accounting policies of subsidiaries have been changed to ensure consistency with the policies adopted by the Group. C Foreign currency translation The Company and its subsidiaries maintain their books and records in RMB. Transactions in other currencies are translated into the reporting currency at exchange rates prevailing at the time of the transactions. Monetary assets and liabilities denominated in other currencies at the balance sheet date are re-translated at exchange rates prevailing at that date. Non-monetary assets and liabilities in other currencies are translated at historical rates. Exchange differences, other than those capitalized as a component of borrowing costs, are recognized in the income statement in the period in which they arise. Income statements and cash flows of foreign entities are translated into the Group’s reporting currency at average exchange rates for the year and their balance sheets are translated at the exchange rates prevailing at balance sheet date. Exchange differences arising from the translation of the net investment in foreign entities and of borrowings are taken to shareholders’ equity. When a foreign entity is sold, such exchange differences are recognized in the income statement as part of the gain or loss on sale. D Leasehold lands Leases of lands acquired are classified as operating leases. The pre-paid lease payments are amortized on a straight-line basis over the lease period of 41 to 48 years. E Property, plant and equipment and depreciation Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment loss. The initial cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Depreciation is calculated using the straight-line method to write off the cost, after taken into account the estimated residual value of each asset over its expected useful life. The expected useful lives are as follows: 40 Buildings 20-40 years Vessels 15-20 years Machinery and fishing equipment 8-20 years Furniture and office equipment 5 years Motor vehicles 5 years The useful lives of assets and depreciation method are reviewed periodically to ensure that the method and period of depreciation are consistent with the expected pattern of economic benefit from items of property, plant and equipment. E Property, plant and equipment and depreciation (continued) Expenditures incurred after the property, plant and equipment have been put into operation, such as repairs and maintenance and overhaul costs, are recognized as expense in the period in which they are incurred. In situations where it is probable that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of the asset beyond its originally assessed standard of performance, the expenditures are capitalized as an additional cost of the asset. When assets are sold or retired, their costs and accumulated depreciation are eliminated from the accounts and any gain or loss resulting from their disposal is included in the income statement. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Interest costs on borrowings to finance the construction and installation of property, plant and equipment are capitalized, during the period of time that is required to complete and prepare the asset for its intended use. Other borrowing costs are expensed. F Construction-in-progress Construction-in-progress represents buildings and plant under construction and machinery and equipment under installation and testing, and is stated at cost. This includes cost of construction, plant and equipment and other direct costs plus 41 borrowing costs which include interest charges and exchange differences arising from foreign currency borrowings used to finance these projects during the construction period, to the extent these are regarded as an adjustment to interest costs. Construction-in-progress is not depreciated until such time as the assets are completed and put into operational use. G Intangible assets Intangible assets are measured initially at cost. Intangible assets are recognized if it is probable that the future economic benefits that are attributable to the assets will flow to the Group; and the cost of the asset can be measured reliably. After initial recognition, intangible assets are measured at cost less accumulated amortization and any accumulated impairment losses. Intangible assets are amortized on a straight-line basis over the best estimate of their useful lives. The amortization period and the amortization method are reviewed periodically to ensure that the method and period of amortization are consistent with the expected pattern of economic benefits from intangible assets. G Intangible assets (continued) Production licenses Expenditure to acquire production licenses is capitalized at cost and amortized using the straight-line method over 5 years. Electricity use right and water use right Expenditure to acquire electricity use right and water use right is capitalized at cost and amortized using the straight-line method over 3-10 years. H Impairment of long lived assets Property, plant and equipment and other non-current assets, including long-term investments, leasehold lands and intangible assets are reviewed for impairment losses whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the carrying amount of the asset exceeds its recoverable amount which is the higher of an asset’s net selling price and value in use. For the purposes of assessing impairment, 42 assets are grouped at the lowest levels for which there are separately identifiable cash flows. I Investments The Group classified its investments in debt and equity securities into the following categories: trading, held-to-maturity and available-for-sale. The classification is dependent on the purpose for which the investments were acquired. Management determines the classification of its investments at the time of the purchase and re-evaluates such designation on a regular basis. Investments that are acquired principally for the purpose of generating a profit from short-term fluctuations in price are classified as trading investments and included in current assets. Investments with a fixed maturity that management has the intent and ability to hold to maturity are classified as held-to-maturity and are included in non-current assets, except for maturities within 12 months from the balance sheet date which are classified as current assets. Investments intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, are classified as available-for-sale; and are included in non-current assets unless management has the express intention of holding the investment for less than 12 months from the balance sheet date or unless they will need to be sold to raise operating capital, in which case they are included in current assets. Purchases and sales of investments are recognized on the trade date, which is the date that the Group commits to purchase or sell the asset. Cost of purchase includes transaction costs. Trading and available-for-sale investments are subsequently carried at fair value. Held-to-maturity investments are carried at amortized cost using the effective yield method. Realized and unrealized gains and losses arising from changes in the fair value of trading and available-for-sale investments are included in the income statement in the period in which they arise. J Operating leases The Group is the lessee 43 Leases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net off any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. The Group is the lessor Assets leased out under operating leases are included in property, plant and equipment in the balance sheet. They are depreciated over their expected useful lives on a basis consistent with similar owned property, plant and equipment. Rental income is recognized on a straight-line basis over the lease term. K Inventories Inventories are stated at the lower of cost and net realizable value. Cost, calculated on the weighted average basis, comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. L Trade receivables Trade receivables are carried at original invoice amount less provision made for impairment of these receivables. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. M Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise cash on hand, deposits held at call with banks, short-term highly liquid investments with original maturities of three months or less. N Borrowings and borrowing costs Borrowings are initially recognised at the proceeds received, net of transaction costs. They are subsequently carried at amortised costs using the effective interest rate method, the difference between net proceeds and redemption value being recognised 44 in the net profit or loss for the period over the life of the borrowings. Borrowing costs include interest charges and exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. Borrowing costs are expensed as incurred, except when they are directly attributable to the acquisition, construction or production of the property, plant and equipment that necessarily take a substantial period of time to get ready for its intended use in which case they are capitalized as part of the cost of that asset. Capitalization of borrowing costs commences when expenditures for the asset and borrowing costs are being incurred and the activities to prepare the asset for its intended use are in progress. Borrowing costs are capitalized at the weighted average cost of the related borrowings until the asset is ready for its intended use. If the resulting carrying amount of the asset exceeds its recoverable amount, an impairment loss is recorded. O Deferred income taxes Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Currently enacted tax rates are used in the determination of deferred income tax. Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. P Pension scheme Pursuant to the PRC laws and regulations, contributions to the basic pension insurance for the Group’s local staff are to be made monthly to a government agency based on the rates (23% for Jinan, 20% for Longkou and Yantai, and 25.5% for Qingdao) of the standard salary set by the provincial government. The government agency is responsible for the pension liabilities relating to such staff on their retirement. The Group accounts for these contributions on an accrual basis. The Group has no obligation for the payment of pension benefits beyond the contribution described above. 45 Q Provisions A provision is recognized when, and only when the Group has a present obligation (legal or constructive) as a result of a past event and it is probable (i.e. more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. Where the effect of the time value of money is material, the amount of a provision is the present value of the expenditures expected to be required to settle the obligation. When a provision is no longer probable that an outflow of resources embodying economic benefit will be required to settle the obligation, the provision will be reversed. R Revenue recognition Provided it is probable that the economic benefits associated with a transaction will flow to the Group and the revenue and costs, if applicable, can be measured reliably, revenue is recognized on the following basis: Sales of goods Revenue is recognized when the significant risks and rewards of ownership of goods have been transferred to the buyer (normally upon delivery of goods to customers). Rental income Rental income from letting trawlers and refrigerated vessels is recognised on the straight-line basis over the period of relevant leases. Interest income Interest income is recognized on a time proportion basis that takes into account the effective yield on the assets. S Dividends Dividends are recorded in the Group’s consolidated financial statements in the period in which they are approved by the Group’s shareholders. 46 T Segments Business segments: for management purposes the Group is organized into six major operating businesses. The divisions are the basis upon which the Group reports its primary segment information. Financial information on business and geographical segments is presented in Note 1. U Comparatives Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current year. V. FINANCIAL RISK MANAGEMENT (1) Financial risk factors and financial risk management The Group activities expose it to a variety of financial risks, including credit risk, liquidity risk, interest rate risk and foreign exchange risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the financial performance of the Group. Financial risk management is carried out by the Finance Department under policies approved by the Board of Directors. Credit risks The Group has no significant concentration of credit risk with any single counterparty or group counterparties. The Group has policies in place to ensure that sales of products are made to customers with an appropriate credit history. Liquidity risks Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Interest rate risk The Group’s income and operating cash flows are substantially independent of changes in market interest rates. The Group has no significant interest-bearing assets. The Group policy is to maintain all its borrowings in fixed rate instruments. 47 Foreign exchange risk The Group has no significant foreign exchange risk due to limited foreign currency transactions. (2) Fair value estimation In assessing the fair value of non-trading securities and other financial instruments, the Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date. The face values less any estimated credit adjustments for financial assets and liabilities with a maturity of less than one year are assumed to approximate their fair values. VI 1 SEGMENT INFORMATION Business segments An analysis by business segment was as follows: Business Sales Costs Gross profit rate 2005 2004 2005 2004 2005 2004 (%) (%) Oceanic fishing 87,378 105,692 88,085 81,131 -0.80 23.23 Trading of seafood 2,085 31,890 1,870 26,081 10.31 18.21 Letting of refrigerated vessel and vessel management 41,164 34,835 26,741 23,242 35.03 33.28 Seafood processing, cold storage and others 36,557 51,672 28,461 44,002 22.14 14.84 Total 167,184 224,089 145,157 174,456 13.17 22.15 Geographical segments District Sales Costs Gross profit rate(%) PRC 19,830 17,069 13.92 Overseas 147,355 128,088 13.07 Total 167,185 145,157 13.17 2 Sales, net 48 Sales comprised: 2005 2004 Gross sales (excluding Value-added Tax (“VAT”)), less discounts and returns 87,378 105,692 Oceanic fishing 2,085 31,890 Trading of seafood - - Oceanic pharmacy - - Letting of trawlers 41,164 34,835 Letting of refrigerated vessel and vessel management 36,557 51,672 Seafood processing, cold storage and others 167,184 224,089 Less: Sales surtaxes (1,235) (1,258) 165,949 222,831 3 Finance costs, net 2005 2004 Interest income - Bank deposits 172 668 - Others 172 668 Interest expense on borrowings (21,248) (12,092) Less: Amount capitalized in construction-in-progress (21,248) (12,092) (21,076) (11,424) 4 (Loss) profit before tax and minority interests (Loss) profit before tax and minority interests was determined after crediting and charging the following: Crediting: 2005 2004 Gain on disposal of subsidiary Trade and other receivables - reversal of impairment charge for doubtful debts Interest income from bank deposits 172 668 Gain on disposal of property, plant and equipment 28 952 49 Crediting: 2005 2004 Charging: Staff cost - Salaries and wages 11,359 10,271 - Provision for welfare and other benefits 1,590 1,438 - Contribution to statutory pension scheme 2,900 1,141 15,849 12,850 Loss on disposal of property, plant and equipment 524 364 Depreciation of property, plant and equipment 25,878 28,469 Amortization of intangible assets (included in administrative expenses) 269 264 Operating lease for vessels from SGCFE (Note 23(b)) - - Trade and other receivables - impairment charge for doubtful debts (included in administrative expenses) 2,324 7,151 Due from related parties - impairment charge for doubtful debts (included in administrative expenses, Note 23(c) (5,804) (24,113) Inventory - impairment charge for obsolescence 8,413 1,215 Impairment losses of long-term investments (included in administrative expenses) 3,300 19,800 Impairment losses of property, plant and equipment (included in administrative expenses) - (1,195) Interest expenses on bank borrowings 21,248 12,092 Exchange loss -437 197 Trading investments - fair value loss (Note 15) 7 16 5 TAXATION VAT Except for that documented in the following paragraph, the Group’s sale of merchandise and products is subject to VAT, which is charged on the selling price at a rate of 17% (normal products) or 13% (agricultural products). An input credit is available whereby input VAT previously paid on purchases of seafood merchandise and raw materials can be used to offset the output VAT on sales to determine the net VAT payable. Pursuant to a government notice issued by the Ministry of Finance, the State Commission of Customs Duty and the State Administration of Taxation on 10 March 50 1997, the import of self-caught seafood is exempted from import VAT, and the VAT treatment on the sale of self-caught seafood is same as that for self-produced agricultural product that is exempted from output VAT. Therefore, the Group’s revenue generated from trading of self-caught seafood was exempted from VAT. Enterprise income tax (“EIT”) Details of taxation charged were as follows: 2005 2004 Income tax expense (Note 22 (a)) 515 292 Business tax The Group is subject to PRC business tax at a rate of 5% of rental income received from provision of cold storage and 3% from letting of refrigerated vessels within the PRC, respectively. Surtaxes The Group is subject to the following surtaxes in the PRC: City development tax, a tax levied at 7% of net VAT and business tax payable; and Education supplementary tax, a tax levied at 3% of net VAT and business tax payable. 6 (Losses) earnings per share Basic (losses) earnings per share is calculated by dividing the net (loss) profit by the weighted average number of ordinary shares in issue during the year. 2005 2004 Net (loss) profit (47,520) 3,398 Weighted average number of ordinary shares in issue (thousands) 266,071 266,071 Basic (losses) earnings per share (RMB 0.179) RMB 0.013 The diluted (losses) earnings per share was not calculated, because no potential dilutive shares existed during the year. 7 Dividends In accordance with the relevant regulations in the PRC, after issuance of the B shares, 51 the amount of profit available for distribution to the shareholders (after appropriations to the statutory surplus reserve and statutory public welfare reserve) shall be determined based on the lower of the inappropriate profit determined in accordance with (i) accounting principles and relevant regulations applicable in the PRC and (ii) IFRS. On 29 May 2001, the shareholders’ meeting approved to appropriate 10% and 5% of the statutory net profit of year 2000 to the statutory surplus reserve and the statutory public welfare reserve respectively, and then distribute to all the shareholders of the Company a cash dividend of RMB 0.1 (including tax) per share, totaling RMB 26,608,000. On 26 April 2002, the shareholders’ meeting approved to appropriate 10% and 5% of the statutory net profit of year 2001 to the statutory surplus reserve and the statutory public welfare reserve respectively, and then distribute to all the shareholders of the Company a cash dividend of RMB 0.05 (including tax) per share, totaling RMB 13,304,000. Pursuant to a resolution of board of directors dated 24 April 2003, the Company resolved no appropriation of dividends for the year ended 31 December 2002, as the Group reported accumulated losses. Pursuant to a resolution of board of directors dated 29 March 2004, the Company resolved no appropriation of dividends for the year ended 31 December 2003, as the Group reported accumulated losses. Pursuant to a resolution of board of directors dated 13 April 2005, the Company resolved no appropriation of dividends for the year ended 31 December 2004, as the Group reported accumulated losses. Pursuant to a resolution of board of directors dated 28 March 2006, the Company resolved no appropriation of dividends for the year ended 31 December 2005, as the Group reported accumulated losses. 52 8 Leasehold lands 2005 2004 Cost Beginning of year 9,930 9,930 Additions Capital contributions in subsidiaries by minority shareholders Deduction due to change of consolidation scope (Note 22 (d)) End of year 9,930 9,930 Accumulated amortization Beginning of year 851 615 Charges for year 236 236 Capital contributions in subsidiaries by minority shareholders Deduction due to change of consolidation scope (Note 22 (d)) End of year 1,087 851 Net book value End of year 8,843 9,079 Beginning of year 9,079 9,315 Leasehold lands represented land use fees paid for the right to use the parcels of land where the Group’s premise is located. Since all land in the PRC is owned by the State or is subject to collective ownership, the risks and rewards of the parcel of land remain with the State. As a result, such lease payments are accounted for under operating leases and are charged to the income statement on a straight-line basis over the lease period of 40 years. 9 Property, plant and equipment 2005 Buildings Vessels Machinery and Furniture and office Motor Construction-in-progr Total fishing equipment equipment vehicles ess Cost Beginning of year 94,441 363,743 38,529 2,254 3,067 66 502,100 Additions 171 66,233 2,056 275 206 66,396 135,336 Deduction - (79,858) (53) (4) (137) (66,462) (146,514) 53 2005 Buildings Vessels Machinery and Furniture and office Motor Construction-in-progr Total fishing equipment equipment vehicles ess End of year 94,613 350,118 40,532 2,525 3,136 - 490,922 Beginning of year 37,464 172,617 11,287 1,697 1,902 - 224,967 Depreciation charge for the year 2,711 20,045 2,334 306 484 - 25,879 Impairment charge for the year - - - - Deduction (19,012) (80) (1) (132) - (19,225) End of year 40,175 173,650 13,541 2,002 2,254 - 231,621 Net book value End of year 54,438 176,468 26,991 523 882 - 259,302 Beginning of year 56,977 191,126 27,242 557 1,165 66 277,133 2004 Buildings Vessels Furniture and office Motor Construction-i Total Machinery and equipment vehicles n-progress fishing equipment Cost Beginning of year 94,039 371,665 44,013 1,919 4,652 1,273 517,561 Additions 1,210 - 1,800 427 450 587 4,474 Deduction (808) (7,922) (7,284) (92) (2,035) (1,794) (19,935) End of year 94,441 363,743 38,529 2,254 3,067 66 502,100 Accumulated depreciation and impairment losses Beginning of year 35,257 159,009 17,007 1,308 1,799 - 214,380 Depreciation charge for the year 3,056 22,692 1,576 447 697 - 28,468 Impairment charge for the year - - - - - - - Deduction (849) (9,084) (7,296) (58) (594) - (17,881) End of year 37,464 172,617 11,287 1,697 1,902 - 224,967 Net book value End of year 56,977 191,126 27,242 557 1,165 66 277,133 Beginning of year 58,782 212,656 27,006 611 2,853 1,273 303,181 (a) As of 31 December 2005, the Group had mortgaged eleven vessels with the net book value of approximately RMB 165,202,000 (2004: RMB 176,690,000 of twelve vessels) to bank as security for short-term bank borrowings of RMB 54 120,100,000(2004: RMB 121,500,000) (Note 17(a)). (b) As of 31 December 2005, the Group had mortgaged a plant building with the net book value of approximately RMB 29,784,000 (2004: RMB 34,648,000) and leasehold lands with the cost of RMB 9,930,000 to bank as security for a short-term bank borrowing of RMB 25,800,000 (2004: RMB 9,800,000) (Note 17(a)). (c) Analysis of construction-in-progress as of 31 December 2005 is as follows: 2005 2004 Costs of construction, installation, machinery and equipment and other direct costs 66 Interest capitalized 66 Average capitalization rate 10 Intangible assets 2005 Trademarks and Others Total production licenses Cost Beginning of year 125 125 Additions Deduction due to change of consolidation scope End of year 125 125 Beginning of year 32 32 Charge for the year 33 33 Deduction due to change of consolidation scope End of year 65 65 Net book value End of year 60 60 Beginning of year 93 93 2004 Trademarks and Others Total 55 production licenses Cost Beginning of year 77 77 Additions 48 48 Deduction due to change of consolidation scope - - End of year 125 125 Accumulated amortization and impairment losses Beginning of year 4 4 Charge for the year 28 28 Deduction due to change of consolidation scope - - End of year 32 32 Net book value End of year 93 93 Beginning of year 73 73 11 Long-term investments 2005 2004 Debentures Unlisted investments - Southern China Securities Co., Ltd. 33,000 33,000 33,000 33,000 Less: impairment of long-term investments (33,000) (29,700) 3,300 Note: (1) The proportion of the shares that the company holds is 0.87% of the share capital of Southern China Securities Co., Ltd. (2)As of 31 December 2005, the Company had pledged legal person shares of Southern China Securities Co., Ltd. with the net book value of RMB 33,000,000 (2004: RMB 33,000,000) to bank as security for a short-term bank borrowing of RMB 8,700,000 (2004: RMB 8,700,000). (3) As Southern China Securities Co., Ltd. has been governed by China Securities Regulatory Commission and Shenzhen People’s Government since January 2, 2004, 56 the company has provided impairment of 90% based on its investment value last period. On April 29,2005, China Securities Regulatory Commission announced that Southern China Securities Co., Ltd. was closedown. Since the possibility of getting back the expected value was small, the long-term investment impairment was added to RMB 3,300 thousand. As of Dec 31, 2005, the accumulated long-term investment impairment was RMB 33,000 thousand, about 100% of the book value. 12 Inventories, net 2005 2004 Raw materials (at cost) 16,873 9,867 Work-in-process (at cost) 29,146 28,840 Finished goods (at cost) 12,961 5,797 58,980 44,503 Less: Provision for inventory obsolescence (9,303) (890) 49,677 43,613 Note: (1) Included in work-in-process were approximately RMB 29 million (2004: RMB 29 million) of deferred oceanic fishing expenditures. Deferred oceanic fishing expenditures represented deferred operating expenses for oceanic fishing and seafood processing, which would be transferred to cost of sales upon sale of the related fishery products. (2) Compared to the last year, the inventories increased by 33%. The main cause is that fishes that fished in the end of the year had not been sold. (3) Provision for inventory obsolescence increased along with the difference between cost and the net realizable value of fishes at the end of the year. 13 Other receivables, net 2005 2004 Other receivables 33,230 41,101 Less: Provision for doubtful debts (9,318) (6,179) 23,912 34,922 57 14 Trade receivables, net 2005 2004 Accounts receivable 17,704 35,700 Notes receivable 200 Less: Provision for doubtful debts (5,715) (6,531) 11,989 29,369 15 Trading investments 2005 2004 Marketable securities - PRC listed equity securities, at market value 38 45 The trading investments are traded in active markets and are valued at market value at the close of business on 31 December 2005 by reference to Stock Exchange quoted bid prices. Trading investments are classified as current assets because they are expected to be realized within twelve months of the balance sheet date. In the cash flow statement, trading investments are presented within the section of operating activities as part of changes in working capital. 16 Other payables and accruals 2005 2004 Salaries payable 15,848 13,913 Welfare payables 1,395 1,408 Accrued expenses 26,830 9,410 Other payables 64,765 72,082 108,838 96,813 17 Short-term borrowings 2005 2004 Short-term bank borrowings (a) 230,721 240,169 230,721 240,169 Short-term bank borrowings 2005 58 Principal Annual interest Guaranteed or secured by rate 4,000 6.37% - 28,000 5.84%-6.04% SGCFE 20,000 5.84% Shandong Airline Co., Ltd. 24,121 5.84%-7.14% Qingdao Double Wale Pharmaceutical Co., Ltd 120,100 5.31%-6.04% Vessels (Note 9) 8,700 5.84% Shares of Southern China Securities Co., Ltd. (Note 11) 25,800 6.37%-6.90% A plant building (Note 9) and leasehold hold (Note 8) 230,721 2004 Principal Annual interest Guaranteed or secured by rate 2,546 6.37% - 28,000 5.84%-6.04% SGCFE 20,000 5.84% Shandong Airline Co., Ltd. 26,223 5.84%-7.14% Qingdao Double Wale Pharmaceutical Co., Ltd 1,900 6.37% Shandong Zhonglu Oceanic Fisheries Transportation Co., Ltd 121,500 5.31%-6.04% Vessels (Note 9) 8,700 5.84% Shares of Southern China Securities Co., Ltd. (Note 11) 28,300 6.37%-6.90% A plant building (Note 9) 3,000 6.37% Leasehold lands of SGCFE 240,169 18 Long-term bank borrowings 2005 2004 Interest rate Amount Interest rate Amount per annum per annum - Guaranteed LIBOR+2% 47,412 LIBOR+2% 48,624 47,412 48,624 59 As of 31 December 2005, all of the guaranteed bank borrowings are guaranteed by Shandong Airline Co., Ltd. Long-term bank borrowings are repayable in the following periods: 2005 2004 Amount repayable within a period - not exceeding one year 35,307 23,794 - more than one year but not exceeding two years 12,105 12,415 - more than two years but not exceeding five years - 12,415 47,412 48,624 Less: Current portion of long-term bank borrowings (35,307) (23,794) 12,105 24,830 19 Share capital As of 31 December 2005, the outstanding share capital represented legal person shares and B shares. The B shares rank pari passu in all aspects with the legal person shares except that B shares can only be owned and traded by overseas and qualified domestic investors. As of 31 December 2005, the details of ordinary shares were as follows: Number of shares’000 2005 2004 Registered, issued and fully paid: Legal person shares of RMB 1 each 128,071 128,071 B shares of RMB 1 each 138,000 138,000 266,071 266,071 Amount 2005 2004 Balance, beginning and end of year: Legal person shares 128,071 128,071 B shares 138,000 138,000 266,071 266,071 (1)Among the 125,731,320 legal person shares owned by SGCFE, accounting for 47.25% of the total shares of the Company, including: A. 8,000,000 shares, accounting for 3% of the total shares of the Company, are frozen by Yantai District court due to the failure of SGCFE to repay the matured borrowing granted to one of SGCFE’s subsidiaries, for which SGCFE stood as a guarantor; B. 80,000,000 shares, accounting for 30.07% of the total shares, are frozen by Jinan Lixia District Court on 17 February 2003 as the result of the ongoing litigation between SGCFE and Agricultural Bank of China Jinan Branch Lixia District Sub-branch over a dispute on bank borrowings; and C. 37,731,320 shares, accounting for 14.18% of the total shares, are frozen by the Supreme Court 60 of Shandong Province as the result of the ongoing litigation between SGCFE and Bank of China Jinan Branch over a dispute on bank borrowings of RMB 73,345 thousand(Bank of China Jinan Branch had transferred the creditor’s right to China Cinda Asset Management Co., Ltd in 2004). According to certification document LuRuiChengZi(2005)No.013 by Shandong Qilu Ruifeng Auction Co., Ltd, Luxin purchased the 37,731,320 shares of SGCFE which had been judicial blocked with RMB 8,760,000 on Jun. 7, 2005. As of the report date, the shares above have not been transferred. (2) In Dec. 2004, the company’s holding shareholder, SGCFE and Shandong Luxin Investment Holding Ltd (“Luxin”) signed two agreements, SGCFE Shares Transferring Agreement and Supplement of SGCFE Shares Transferring Agreement. In accordance with these two agreements, SGCFE agreed to transfer 33.07% of its shares to Luxin(See Section II). On Dec.19, 2005 , State-owned Assets Supervision and Administration Commission of the State Council agreed SGCFE to transfer 33.07% of its shares(88,000,000 shares) to Luxin. As of the report date, the shares above have not been transferred. 20 Reserves (a) Capital surplus The following are recorded as capital surplus: (i) share premium; (ii) donations; (iii) appreciation arising from revaluation of assets(iv) restricted reserve arising from equity investment ;and (v) other items in accordance with the Company's articles of association and relevant regulations in the PRC. Capital surplus can be utilized to offset prior years’ losses or for the issuance of bonus shares. As of 31 December 2005, capital surplus of the Company mainly included share premium and pricing difference associated with related party transactions and restricted reserve arising from equity investment. Share premium represents proceeds from the issuance of its shares in excess of their par value, net of underwriting commissions and professional fees. Restricted reserve arising from equity investment increased RMB 375,250. (b) Statutory surplus reserve and statutory public welfare reserve In accordance with the PRC Company Law and the Company’s articles of association, the Company and its domestic subsidiaries (excluding Yantai Food) are required to set aside 10% of their statutory profit after tax and minority interests, after offsetting prior years’ losses, to the statutory surplus reserve (except where the reserve balance has reached 50% of the company’s paid-up share capital, any further appropriation is optional), and 5% to 10% to the statutory public welfare reserve. These reserves cannot be used for purposes other than those for which they are created and are not distributable as cash dividends. Statutory surplus reserve can only be used, upon approval by the relevant authority, to offset accumulated losses or increase capital. However, such statutory surplus reserve must be maintained at a minimum of 25% of its paid-up capital after such issuance. Statutory public welfare reserve is to be utilized to build or acquire capital items, such as dormitories and other facilities for the Group’s employees, and cannot be used to pay for staff welfare expenses. Title to these capital items will remain with the Group. (c) Discretionary surplus reserve Discretionary surplus reserve is appropriated after the appropriation of statutory surplus reserve and statutory public welfare reserve at the resolution of the Board of Directors and the discretion 61 of the general shareholders’ meeting. 20 Reserves (continued) (d) Reserve fund, enterprise expansion fund and staff welfare and bonus fund In accordance with the relevant laws and regulations of the PRC, Yantai Food, a foreign joint venture company, is required to set up a reserve fund, an enterprise expansion fund and staff welfare and bonus fund by way of appropriations from the annual statutory net profit. The reserve fund can only be used, upon approval, to offset accumulated losses or increase capital; and the enterprise expansion fund can only be used, upon approval, to increase capital. The staff welfare and bonus fund can only be used for special bonuses or collective welfare of these subsidiaries’ employees, and assets acquired through this fund shall not be taken as these subsidiaries’ assets. For IFRS purposes, the appropriation to the staff welfare and bonus fund is charged to current year’s administrative expenses while the balance of the staff welfare and bonus fund is included in other payables in the consolidated financial statements. 21 Minority interests 2005 2004 Beginning of year 16,983 16,568 Share of net profit of subsidiaries (Note 22 (a)) 3,260 415 Share of capital contributions in subsidiaries Change of consolidation scope 9,564 End of year 10,679 16,983 22 Supplemental cash flows information (a) Reconciliation from net (loss) profit to cash generated from operations 2005 2004 Net (loss) profit (47,520) 3,398 Adjustments for: Minority interests (Note 21) 3,260 415 Tax (Note 5) 515 292 Depreciation of plant, property and equipment 25,878 28,469 (Gain) loss on disposal of property, plant and equipment 496 (588) Amortization of intangible assets 269 264 Gain on disposal of subsidiary Gain on disposal of long-term investments Gain on disposal of trading investments Impairment loss of trading investments 7 16 Impairment loss of long-term investments 3,300 19,800 62 2005 2004 Impairment loss of property, plant and equipment (7,287) Provision for inventory obsolescence 8,413 (1,215) (Reversal of) provision for doubtful debts (3,480) (16,963) Interest expense 21,248 12,092 Interest income (172) (668) Operating (loss) profit before changes in working capital 12,214 38,025 Changes in working capital: Increase in inventories 14,477 (3,412) Decrease (increase) in trading investments, trade and other receivables, prepayments ,due from related party and other current assets 30,576 (22,696) Increase (decrease) in trade payables, advances from customers, taxes payable, other payables and accruals (36,005) 36,060 Decrease in due to related parties - Cash generated from operations 21,262 47,977 22 Supplemental cash flows information (continued) (b) Analysis of the balances of cash and cash equivalents 2005 2004 Cash on hand 982 4,205 Bank current deposits 22,298 17,772 Bank time deposits Less: Restricted bank deposits Cash and cash equivalents 23,280 21,977 23 Related party transactions Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party, or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. (a) Name of related parties and nature of relationship Name Relationship with the Company SGCFE The 47.25% shareholder of the Company LSPC Directly-owned by SGCFE 63 QMFC Directly-owned by SGCFE SGCFE S.A. Directly-owned by SGCFE Shandong Haitian Seafood Trading Co., Ltd. (“Haitian”) Directly-owned by SGCFE Shanhai Seafood Directly-owned by SGCFE An’ning Directly-owned by SGCFE QMFC-APPP Indirectly-owned by SGCFE Mellow Indirectly-owned by SGCFE Haiyu Indirectly-owned by SGCFE Prodesur S.A. Indirectly-owned by SGCFE Tenglong Indirectly-owned by SGCFE Animal Medicine Indirectly-owned by SGCFE Afrik Indirectly-owned by SGCFE Zhengxin Indirectly-owned by SGCFE HaiFeng Indirectly-owned by SGCFE luBao Indirectly-owned by SGCFE Zhenyuan Indirectly-owned by SGCFE (b) Transactions with related parties 2005 2004 Sales to related parties: -SGCFE - QMFC 220 HaiFeng 81 344 - Prodesur S.A 323 271 404 835 2005 2004 Purchases of seafood from related parties: - Shanhai Seafood 9,960 64 - Prodesur S.A. 17,960 27,920 2005 2004 Profit/Loss from vessel entrust - Prodesur S.A. 1,571 3,303 Pursuant to an agreement with effect from 1 January 1999 for ten years, the Company has entrusted Prodesur S.A. to operate a vessel owned by the Company, and is entitled to obtain or assume an annual entrust fee based on 70% of the net profit or loss generated from the operation of the vessel. (c) Balances with related parties as of 31 December 2005 2005 Due from related parties -SGCFE 158,551 - QMFC 53,642 - QMFC-APPP 7,858 Prodesur S.A. 15,118 HaiFeng 896 - LSPC 10,718 SGCFE S .A. 22,362 - An’ning 1,666 - Mellow 3,865 - Haiyu 8,037 - Tenglong 14,058 - Animal Medicine 346 -LuBao 403 -Haiyang 1,454 Total: 298,974 Less: Provision for doubtful debts 212,313 Due from related parties, net 86,661 Due to related parties - Zhengxin 1,000 - Zhenyuan 155 65 2005 Due to related parties 1,155 Note: (1) SGCFE and Shanshui trading Co., Ltd(“Shangshui”)signed an agreement to deal with the debts of RMB 7,460 thousand on Jun. 2, 2005. Shangshui agreed to pay the debts for. Shanshui and Habitat Interoational Coporation（“HIC”） reached into an agreement of equity transferring, Shanshui transferred the equity interest of Yantai Food to HIC with RMB 7,460 thousand and required HIC paid to Yantai Food directly. And the company would also wipe out the accounts receivable from SGCFE, which was RMB 7,460 thousand, and also the relevant provision for bad debts of RMB 7,460 thousand. (2) Before calculating the specific doubtful debts for “SGCFE”, it has to deduct the following frozen assets: A. Pursuant to Judgement (2003) LiLiBaoZi No.118 issued by Jinan Lixia District court on 26 February 2003, the basement, first to third floors and six to twelfth floors of SGCFC’s office building located on No.43, Road Heping, Lixia District, Jinan, Shandong Province and the related leasehold land are frozen. According to the valuation consultation report (2004) GuoRunZhiXunZi No.001 issued by ShanDong GuoRun Assets valuation Co., Ltd, the above assets which are frozen is worth RMB 55,160,000. B. In 2003, the Company filed a lawsuit against SGCFE on the repayment of a portion of due from SGCFE. Pursuant to Judgement (2003) TianMinChuZi No.1632 issued by Jinan TianQiao District court in 2003, the equity interest of 17.31% of Shandong Zhonglu Oceanic (Yantai) Food Co., Ltd held by SGCFE are frozen. The equity interest frozen is worth RMB 9,001 thousand after formal audit. C. Pursuant to Judgement (2005) TianMinYuanChuZi No.127 issued by Jinan TianQiao District court in 2005, the equity interest of 5% of Zhonglu Transportation 66 Co.,Ltd held by SGCFE are frozen. The equity interest frozen is worth RMB1,472 thousand after formal audit. (4) The company didn’t provide any doubtful debts for “LSPC”, as the company has made freezing application to the court. Pursuant to Judgement (2005)TianMinYuanChuZi No.243 issued by Jinan TianQiao District court in 2005, the land use right of “LSPC” with 48,133.45 square meters was frozen. According to the valuation report Luyitong [2005] No.026 issued by Shandong Yitong Real Estate Appraisal Co., Ltd, the land use right above was RMB 12,082 thousand. (5) Due from Prodesur S.A. is provided the general bad debts on the basis of debt ages with the amount of RMB 4,810 thousand. (6) Except the above mentioned related party, the other due from related parties are provided full bad debts. （d）Guarantees (The following related parties provided guarantees for the Company) Name of related party Amount (thousand) Period SGCFE RMB5,000 11.19.2002-11.18.2003 SGCFE RMB 18,000 4.29.2003-4.28.2004 SGCFE RMB 5,000 07.12.2003-07.11.2003 SGCFE RMB 9,800 10.18.2005-10.18.2006 (f) Other transactions The company freely use the office of SGCFE for 2005. The Longkou branch and Qingdao Refrigerating branch freely use the land of SGCFE for 2005 24 Contingencies As of 31 December 2005, the Group had following contingencies not provided for in the consolidated financial statements: Name Amount (thousand) Period Double Wale Pharmaceutical 50,000 2.2002-7.2006 67 25 Subsequent events On Jan.16, 2006, Qingdao Refrigerating Branch repaid overdue loan of RMB1,000 thousand to Qingdao ZhongShanLu Branch of China Construction Bank. 26 Approval of financial statements The consolidated financial statements were approved by the Board of Directors on 28 March, 2006. Impact of IFRS adjustments on net (loss) profit and net assets Net (loss) profit Net assets 2005 2004 2005 2004 As reported in the Statutory Accounts of the Group (47,520) 3,398 30,954 76,750 Adjustment for the dividends declared after balance sheet date (Reversal of)Adjustment for the excess loss applicable to the minority Written off pre-operation expenses Others As restated in accordance with IFRS (47,520) 3,398 30,954 76,750 68 Section XII. Documents for Reference 1. Accounting Statement carrying the personnel signatures and seals of legal representative, person in charge of the financial affairs and person in change of accounting institutions 2. Original of Auditors’ Report with seals of Certified Public Accountants as well as personal signatures and seal of the certified public accountants 3. Originals of all documents disclosed in public on the newspapers designated by China Securities Regulatory Commission, as well as the original manuscripts of the public notices published in the report period 4. Original of Annual Report 2005 carrying the signature and seal of the Chairman of the Board Chairman of the Board Shandong Zhonglu Oceanic Fisheries Company Limited March 31, 2006 69 CONSOLIDATED BALANCE SHEET FOR THE YEAR ENDED 31 DECEMBER 2005 (All amounts in RMB thousands) Note 2005 2004 ASSETS Non-current assets Leasehold lands 8 8,843 9,079 Property, plant and equipment 9 259,302 277,133 Intangible assets 10 60 93 Long-term investments 11 - 3,300 268,205 289,605 Current assets Inventories, net 12 49,677 43,613 Due from related parties, net 23(c) 86,661 83,459 Prepayments and other current assets 4,040 4,858 Other receivables, net 13 23,912 34,922 Trade receivables, net 14 11,989 29,369 Trading investments 15 38 45 Restricted bank deposits 22(b) Cash and cash equivalents 22(b) 23,280 21,977 199,597 218,243 Total Assets 467,802 507,848 EQUITY AND LIABILITIES Shareholders’ equity Share capital 19 266,071 266,071 Reserves 20 (234,785) (189,321) Foreign currency re-translated diffierence (331) 30,955 76,750 Minority interests 21 10,679 16,983 LIABILITIES Non-current liabilities Long-term bank borrowings, non-current portion 18 12,105 24,830 Long-term payables 12,105 24,830 Current liabilities Current portion of long-term bank borrowings 18 35,307 23,794 Taxes payable 2,849 2,092 Due to related parties 23(c) 1,155 1,155 Other payables and accruals 16 108,838 96,813 Dividends payable 7 459 459 Advances from customers 510 305 Trade payables 34,224 24,498 Short-term borrowings 17 230,721 240,169 414,063 389,285 Total liabilities 426,168 414,115 Total Equity and Liabilities 467,802 507,848 Approved by the Board of Directors on 28 March 2006 Wang Zhao An Zhang Jin Qing Director & General Manager Director & Finance Controller The accompanying notes are an integral part of the financial statements. 70 CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2005 (All amounts in RMB thousands, except for (losses) earnings per share) Note 2005 2004 Sales, net 2 165,949 222,831 Cost of sales 145,157 174,456 Gross profit 20,792 48,375 Other operating income 1,479 1,255 Distribution costs 9,849 10,277 Administrative expenses 34,592 23,464 Other operating expenses 499 364 (Loss) profit from operations (22,669) 15,525 Finance cost, net 3 21,076 11,424 Investment income from trading and long-term investments 0 4 Gain on disposal of investment in a subsidiary 0 0 Subsidy income 0 0 (Loss) profit before tax and minority interests 4 (43,745) 4,105 Income tax expense 5 515 292 (Loss) profit before minority interests (44,260) 3,813 Minority interests 21 (3,260) (415) Net (loss) profit (47,520) 3,398 (Losses) earnings per share - Basic 6 (RMB0.17) RMB0.01 - Diluted The accompanying notes are an integral part of the financial statements. 71 CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2005 (All amounts in RMB thousands) Note 2005 2004 CASH FLOWS FROM OPERATING ACTIVITIES Cash generated from operations 22(a) 21,262 47,977 Income taxes paid (2,715) (8,198) Interest expenses paid (3,559) (10,810) Net cash generated from operating activities 14,988 28,969 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment (2,512) (1,941) Purchase of intangible assets 0 (48) Cash paid for trading investments (6) Proceeds from disposal of subsidiary, net of cash disposed 0 (839) Proceeds from investment income of trading investments Proceeds from investment income of long-term investments 0 4 Proceeds from disposal of trading investments 1 1 Proceeds from disposal of property, plant and equipment 330 2,302 Interest income received 172 668 Net cash used in investing activities (2,009) 141 CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid Net (decrease) increase in borrowings (10,902) (23,724) Proceeds from capital injection of minority shareholder Proceeds from acquisition of a subsidiary others Net cash generated from financing activities (10,902) (23,724) Currency translation difference (775) (197) Net decrease in cash and cash equivalents 1,302 5,189 Cash and cash equivalents, beginning of year 21,977 16,788 Cash and cash equivalents, end of year 22(b) 23,279 21,977 The accompanying notes are an integral part of the financial statements. 72 CONSOLIDATED STATEMENT OF SHAREHOLDERS FOR THE YEAR ENDED 31 DECEMBER 200 Reserves Unappro-priated Share Translation Capital Statutory surplus Statutory public profits capital reserve reserve reserve welfare reserve (accumulated losses) (Note19) Note(20(a)) Note(20(b)) Note(20(b)) Balance as of 1 January 2005 - As previously reported 266,071.00 59.00 202,116.00 14,548.00 7,274.00 -413,318.00 - As reported 266,071.00 59.00 202,116.00 14,548.00 7,274.00 -413,318.00 Currency translation difference Net profit for 2005 -47,520.00 Pricing difference associated with related party transactions Profit appropriations - Appropriations to reserves by 2,056.00 57.00 29.00 -86.00 subsidiaries - Dividends (Note 7) - Foreign currency re-translated diffierence Balance as of 31 December 2005 266,071.00 59.00 204,172.00 14,605.00 7,303.00 -460,924.00 The accompanying notes are an integral part of the financial statements. 73