国药一致(000028)一致Ｂ2005年年度报告（英文）

Shenzhen Accord Pharmaceutical Co., Ltd. 2005 Annual Report March 2006 Content Important Notes I. Company Profile II. Summary of Financial Highlights and Business Highlights III. Changes in Share Capital and Particulars about Shareholders IV. Particulars about Directors, Supervisors and Senior Executives and Employee V. Administrative Structure VI. Brief Introduction of Shareholders’ General Meeting VII. Report of the Board of Directors VIII. Report of the Supervisory Committee IX. Significant Events X. Financial Report XI. Documents Available for Reference 2 IMPORTANT NOTES Board of Directors and the Supervisory Committee of Shenzhen Accord Pharmaceutical Co., Ltd. (hereinafter referred to as the Company) and its directors, supervisors and senior executives 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 or errors which would render any statement misleading. Chairman of the Company Mr. Chen Weigang, General Manager Mr. Shi Jinming and Chief Financial Officer Mr. Wei Pingxiao hereby confirm that the Financial Report enclosed in the Annual Report is true and complete. Independent director Mr. Sui Guangjun did not attend the 11th meeting of the 4th Board for examining Annual Report 2005 but has reviewed materials before the meeting, and entrusted in writing independent director Ms. Chen Shu to present and vote with approval for various proposals. Domestic Shanghai Shu Lun Pan Certificated Public Accountants and overseas Horwath Certificated Public Accountants audited the Company’s Financial Report and issued a standard unqualified Auditors’ Report for the Company respectively. This report has been prepared in Chinese version and English version respectively. In the event of difference in interpretation between the two versions, the Chinese report shall prevail. 3 CHAPTER I. COMPANY PROFILE 1. Legal Name of the Company In Chinese: 深圳一致药业股份有限公司 In English: Shenzhen Accord Pharmaceutical Co., Ltd. Abbr. of English name: Accord Pharm. 2. Legal Representative: Chen Weigang 3. Secretary of the Board of Directors: Chen Changbing Contact Address: Accord Pharm. Bldg., No. 15, Ba Gua Si Road, Futian District, Shenzhen Guangdong Tel: (86) 755-25875195, 25875410 Fax: (86) 755-25875410 E-mail: investor@szaccord.com.cn 4. Registered Address: Accord Pharm. Bldg., No. 15, Ba Gua Si Road, Futian District, Shenzhen Guangdong Office Address: Accord Pharm. Bldg., No. 15, Ba Gua Si Road, Futian District, Shenzhen Guangdong Post Code: 518029 Company’s Internet Web Site: http://www.szaccord.com.cn E-mail: 0028@szaccord.com.cn 5. Newspapers for Disclosing the Information of the Company: Securities Times and Ta Kung Pao Internet Web Site for Publishing the Annual Report: http://www.szse.cn http://www.cninfo.com.cn The Place Where the Interim Report is Prepared and Placed: secretariat of the Board of Directors 6. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock (A-share): Accord Pharm. Stock Code: 000028 Short Form of the Stock (B-share): Accord Pharm.-B Stock Code: 200028 7. Other Information about the Company (1) Initial registration date: Aug. 2, 1986 Initial registration place: Shenzhen, China (2) Registration date after change: Dec. 24, 2001 Registration place after changed: Shenzhen, China (3) Registered number for business license of corporation: 4403011001677 (4) Registered number of taxation: GS Zi No. 440301192186267 SDSD Zi No. 440304192186267 (5) Name of the Certified Public Accountants engaged by the Company: Domestic: Shanghai Shu Lun Pan Certified Public Accountants & Co., Ltd. Address: 5/F, No. 61, Nanjing East Road, Shanghai International: Horwath Certified Public Accountants Address: Room 2001, Central Plaza, Harbour Road 18, Wan Chai District, Hong Kong 4 CHAPTER II. SUMMARY OF FINANCIAL HIGHLIGHTS AND BUSINESS HIGHLIGHTS Section I. Main business data as of the year 2005 1. Major profit indexes Unit: RMB Items Amount Total Profit 41,619,934.83 Net Profit 35,765,331.72 Net profit after deducting non-recurring gains and losses 35,956,065.32 Profit from main operations 370,982,909.93 Other operating profit 23,109,566.19 Operating profit 41,773,874.91 Investment income －83,885.09 Subsidy income Net non-operating income/expenses -70,054.99 Net cash flow arising from operating activities 148,275,068.00 Net increase in cash and cash equivalents 88,420,748.27 Note: Items of deducting non-recurring gains and losses and the relevant amounts Unit: RMB Items Amount Gains and losses rising from disposal of long-term equity investment, construction in-progress, fixed -1,471,198.52 assets, intangible assets and other long-term assets Net non-operating income and cost after 38,228.04 deducting withdrawal of depreciation reserve Switching back withdrawal of various 1,244,585.81 depreciation reserve in previous year Influenced amount by income tax -2,348.93 Total of non-recurring gains and losses -190,733.60 2. Difference in net profit as audited by Chinese and International auditors and explanation Unit: RMB’000 Net profit Net assets (2005) (Ended as of Dec. 31, 2005) As reported under Enterprise Accounting System of PRC 35,765 393,721 Adjustment under International Accounting Standards Balance of amortization of goodwill rising from 5,346 -3,627 purchasing subsidiaries Unconfirmed investment losses adjustment -242 Others 530 -83 As reported under International Accounting Standards 41,399 390,011 [Note] The net profit as of the year 2005 was RMB 41,399,000 as audited by overseas Certified Public Accountants. The main reason for the difference between the results under CAS and IAS is 5 because the different accounting policies were adopted in the treatment of assets replacement over the past years, occurring and amortization of balance of equity investment, and confirmation of investment losses arising from over deficit of subsidiary in the report period. Section II. Major accounting data and financial index over previous three years ended the report period Increase 2003 /decrease Financial indexes Unit 2005 2004 over last After Before year (%) adjustment adjustment Income from main RMB 1,635,568,517.10 1,576,085,283.69 3.77 1,729,174,762.27 1,780,873,731.82 operations Total profit RMB 41,619,934.83 25,657,456.44 62.21 11,745,225.46 12,233,020.20 Net profit RMB 35,765,331.72 27,254,148.36 31.23 15,190,725.18 15,190,725.18 Net profit after deducting RMB non-recurring gains and 35,956,065.32 23,700,002.32 51.71 7,969,026.63 7,969,026.63 losses Total assets RMB 1,072,448,048.81 846,186,796.73 26.74 984,428,227.33 1,008,326,556.03 Shareholders’ equity RMB (excluding minority 393,721,269.08 358,197,820.37 9.92 338,235,106.36 341,584,149.93 interests) Earnings per share RMB/share 0.124 0.095 30.53 0.053 0.053 Net assets per share RMB/share 1.366 1.243 9.9 1.174 1.185 Net assets per share after RMB/share 1.342 1.193 12.49 1.092 1.110 adjustment Net cash flow per share arising from operating RMB/share 0.515 0.452 13.94 0.236 0.282 activities Return on equity % 9.084 7.609 Up 1.475 4.491 4.447 Weighted average return on % 9.510 7.746 Up 1.764 4.456 4.456 equity Weighted average return on equity after deducting % 9.561 6.736 Up 2.825 2.337 2.337 non-recurring gains and losses Section III Supplemental statement of profit Return on equity (%) Earnings per share (RMB) Profit in the report period Fully diluted Weighted Fully diluted Weighted average average Profit from main operations 94.225 98.645 1.287 1.287 Operating profit 10.610 11.108 0.145 0.145 Net profit 9.084 9.510 0.124 0.124 Net profit after deducting 9.132 9.561 0.125 0.125 non-recurring gains and losses 6 Note: The data of profit listed in supplemental statement of profit are calculated according to the requirements of Regulations on the Information Disclosure of Companies Publicly Issuing Shares (No. 9) released by CSRC. Section IV. Changes in shareholders’ equity and reasons in the report year Surplus Total Capital Statutory public Unrecognized Items Share capital public Retained profit shareholders’ reserve welfare funds investment losses reserve equity Amount at the 288,149,400.00 17,741,872.48 57,970,596.76 8,555,270.80 15,553,905.74 -29,773,225.41 358,197,820.37 period-begin Increase in the 3,932,395.69 1,966,197.84 36,457,061.59 -241,883.01 42,113,772.11 report period Decrease in the 440,749.49 250,980.38 5,898,593.53 6,590,323.40 report period 288,149,400.00 17,741,872.48 61,462,242.96 10,270,488.26 46,112,373.80 -30,015,108.42 393,721,269.08 Amount at the period-end Note 1 Note 2 Note 3 Note 4 Reason for change Note 1& Note 2: Increase in the report period was because the Company and its affiliated company withdrew statuary surplus reserve and statuary welfare reserve according to regulations. Decrease in the report period was because the subsidiary of the Company, Shenzhen Accord Medicines Co., Ltd. reformed as company limited in 2005, and utilized statuary surplus reserve and statuary welfare to distribute profit, so the Company switched out recovering withdrawal of statuary surplus reserve and welfare reserve as of consolidated in previous years into undistributed profit; Note 3: Increase in the report period was due to the increased net profit of the Company, meanwhile because the subsidiary of the Company, Shenzhen Accord Medicines Co., Ltd. reformed as company limited in 2005, and utilized statuary surplus reserve and statuary welfare to distribute profit, so the Company switched out recovering withdrawal of statuary surplus reserve and welfare reserve as of consolidated in previous years into undistributed profit; Note 4: Increase in the report period was because Shenzhen Accord Pharmaceutical Franchise Co., Ltd., subsidiary of the Company, has a deficit in 2005. CHAPTER III. CHANGES IN SHARE CAPITAL AND PARTICULARS ABOUT SHAREHOLDERS Section I. Statement of change in share capital (Ended Dec. 31, 2005) Unit: share Increase/decrease in this time (+, -) Before the Capitalization After the Items Allotment Bonus Additional Sub- change of public Others change of share shares issuance total reserve I. Unlisted Shares 7 1. Sponsors’ shares 150,935,400 150,935,400 Including: State-owned shares 124,864,740 124,864,740 Domestic legal person’s shares 26,070,660 26,070,660 Foreign legal person’s shares Others 2. Raised legal person’s 27,442,800 27,442,800 shares 3. Inner employees’ shares 4. Preference shares or others Including: Transferred / allotted shares Total unlisted shares 178,378,200 178,378,200 II. Listed Shares 1. RMB ordinary shares 54,885,600 54,885,600 2. Domestically listed 54,885,600 54,885,600 foreign shares 3. Overseas listed foreign shares 4. Others Total listed shares 109,771,200 109,771,200 III. Total shares 288,149,400 288,149,400 Section II. Issuance and listing of shares In 2001, 2002, 2003 and 2004, it occurred no issuance and derived stocks or any changes in total shares and its structure resulted due to allotted share, bonus share, etc. in the Company, nor the Company carried out dividends or bonus shares. Section III. Particulars about Share Merger Reform On March 6, 2006, the Company has published the suggestive public notice on Share Merger Reform, and proclaimed scheme on Share Merger Reform on March 13, 2006 and pronounced the adjusted scheme on Share Merger Reform on March 22, 2006. The Company has notified to hold the related shareholders’ meeting of A-share market on April 14, 2006. Section IV. About shareholders 1. Ended Dec. 31, 2005, the Company had totally 31,026 shareholders, including 21,155 shareholders of A-share and 987,1shareholder of B-share. 2. Particulars about the shares held by the top ten shareholders (Ended Dec. 31, 2005) Increase/ Number of Type of share Number of Nature of Proportion Decrease shares held in (Circulating/no shares shareholder Shareholders’ name (%) in this the year-end n-circulating) pledged or (State-owned 8 year (share) frozen shareholder or (share) (share) foreign shareholder) State-owned SINOPHARM Medicine Holding Co., Ltd. 0 124,864,740 43.33 Non-circulating shareholder Shenzhen Baoan District Shiyan Town 0 26,070,660 9.05 Non-circulating 16,079,700 Other Economic and Development Corporation Shenzhen Baoan Shangwu Economic and 0 13,942,800 4.84 Non-circulating 13,846,000 Other Development Co., Ltd. Shenzhen Wangzong Industrial Co., Ltd. 0 5,303,200 1.84 Non-circulating Other Nanjing Junyue Investment and 0 5,000,000 1.74 Non-circulating Other Consultation Co., Ltd. Wuxi Huaxin Investment Management 0 1,396,800 0.48 Non-circulating Other Co., Ltd. Shanghai Shisheng Enterprise 0 1,000,000 0.35 Non-circulating Other Development Co., Ltd. Shanghai Huaxia Yifu Investment Co., 0 800,000 0.28 Non-circulating Other Ltd. CHEN YONGQUAN Unknown Circulating B-share in 509,922 0.17 circulating FAN HUIQIONG Unknown Circulating B-share in 484,900 0.17 circulating Explanation on associated relationship among Among the above top ten shareholders, there exists no associated the top ten shareholders or consistent actionist relationship among state-owned shareholder and each shareholders of legal person’s share, and they do not belong to the consistent actionist regulated by the Management Measure of Information Disclosure on Change of Shareholding for Listed Companies. For other shareholders of circulation share, the Company is unknown their relationship. 3. Particulars about pledging and freezing of the shares held by legal person shareholders holding over 5% of total shares of the Company 16,079,700 shares of the Company held by Shenzhen Bao’an District Shiyan Town Economic and Development Corporation (“Shiyan Company”) was frozen because Shiyan Company provided the said shares as mutual guarantee for loan to Shenzhen Bao’an District Investment Holding Corporation in 2000. 13,846,000 shares of the Company held by Shenzhen Bao’an Shangwu Economic and Development Co., Ltd. (“Shangwu Company”) was mortgaged and frozen to Industrial and Commercial Bank of China, Longhua Sub-branch; the duration of mortgage from Dec. 21, 2005 to Dec. 20, 2006. 4. The controlling shareholder of the Company Name of the controlling shareholder: SINOPHARM. Medicine Holding Co., Ltd. Legal representative: Zheng Hong Date of foundation: Jan. 8, 2003 Registered capital: RMB 1,027,953,725 Nature of economic: state-owned holding company Business scope: the wholesale of Chinese patent medicines (including ginseng, pilose antler and silver mushroom), chemical material, a chemical agent, antibiotics, biochemical, biological, 9 diagnosis drug, industry investment, entrusted management and assets reorganization of pharmaceutical enterprises, domestic trade (barring specific permission), logistics supply and relevant consultant services (in right of exequatur to run if refers to permission operation). 5. Particulars about the actual controller: Name of the actual controller: China Medicine Group Headquarter Legal representative: Zheng Hong Date of foundation: Mar. 1, 1988 Registered capital: RMB 857,490,000 Nature of economic: state-owned sole company Business scope: entrusted management and assets reorganization of pharmaceutical enterprises, consultant service of medicine industry investment project, holding exhibition and fair of surgical appliance, the wholesale of Chinese medicine, Chinese patent medicines, Chinese medicine herb in pieces, chemical material medicine, a chemical agent, antibiotics, biochemical, biological. The underling exclusively invested company and controlling subsidiary of China Medicine Group Headquarter includes: China Medicine Industry Co., SINOPHARM Medicine Co., Ltd., China Medicine Foreign Trade Co., China Medical Appliance Co., China Drugs Group, SINOPHARM Medicine Holding Co., Ltd., SINOPHARM Exhibition Co., Ltd., Sichuan Antibiotics Industrial Institute of China Medicine Group Headquarter, Union Engineering Co. of China Medicine Group and SINOPHARM Advertising Co., Ltd.. 6. The property and controlling relationship between the actual controller of the Company and the Company is as follows: The state-owned Assets Supervision & Administration Commission of the State 100% China Medicine Group Headquarter 51% SINOPHARM Medicine Holding Co., Ltd. 43.33% Shenzhen Accord Pharmaceutical Co., Ltd. 7. In the report period, there existed no change in the controlling shareholder. 8. Particulars about the shares held by the top ten shareholders Shareholders’ name (full name) Number of circulation shares Type (A-share, B-share, held at the year-end H-share and other) CHEN YONG QUAN 509,922 B-share FAN HUI QIONG 484,900 B-share 10 YAO JIAN PING 341,800 A-share EVERPOINT INVESTMENTS 320,000 B-share LIMITED CHEN ZE BING 313,400 B-share JIANG XIAO MING 309,950 B-share WU XIN 300,000 A-share YANG YUAN ZHOU 294,500 B-share ZHANG YAN DONG 270,000 A-share NI WEI 210,100 B-share Explanation on associated Among the top ten shareholders of circulation share, the relationship among the top ten Company is unknown their relationship. shareholders of circulation share CHAPTER IV. PARTICULARS ABOUT DIRECTORS, SUPERVISORS, SENIOR EXECUTIVES AND EMPLOYEES Section I. Directors, supervisors and senior executives 1. Name list of directors, supervisors and senior executives at the end of the report period Number of shares Number of shares Name Title Sex Age Office term held at the held at the period-end period-begin Chen Weigang Chairman of the Board Jan. 13, 2005 – Male 47 0 0 Sep. 28, 2007 Wu Ai’ming Director Jan. 13, 2005 – Male 36 0 0 Sep. 28, 2007 Zuo Jie Director Jan. 13, 2005 – Male 34 0 0 Sep. 28, 2007 Shi Jinming Director, General Manager Jan. 13, 2005 – Male 38 0 0 Sep. 28, 2007 Yin Jumin Director Sep. 28, 2004 – Male 57 0 0 Sep. 28, 2007 Zou Jun Director Sep. 28, 2004 – Male 34 0 0 Sep. 28, 2007 Chen Shu Independent Director Sep. 28, 2004 – Female 51 0 0 Sep. 28, 2007 Sui Guangjun Independent Director Sep. 28, 2004 – Male 44 0 0 Sep. 28, 2007 Peng Juan Independent Director Sep. 28, 2004 – Female 41 0 0 Sep. 28, 2007 Zhu Dixin Convener of the supervisory Jan. 13, 2005 – Male 58 0 0 Committee Jan. 13, 2008 Shen Tianfang Supervisor Jan. 13, 2005 – Male 56 0 0 Jan. 13, 2008 Zhao Junpeng Supervisor Jan. 13, 2005 – Male 37 0 0 Jan. 13, 2008 11 Ou Jianneng Deputy General Manager Jan. 13, 2005 – Male 47 0 0 Sep. 28, 2007 Tian Guoshu Deputy General Manager Jan. 13, 2005 – Male 51 0 0 Sep. 28, 2007 Yan Zhigang Deputy General Manager Jan. 13, 2005 – Male 46 0 0 Sep. 28, 2007 Lin Xinyang Deputy General Manager Jan. 13, 2005 – Male 41 0 0 Sep. 28, 2007 Wei Pingxiao Financial chief supervisor Dec. 7, 2004 – Male 42 0 0 Sep. 28, 2007 Chen Secretary of the Board of Sep. 28, 2004 – Male 38 0 0 Changbing Directors Sep. 28, 2007 2. Particulars about the position held by directors and supervisors in Shareholding Company Name Shareholding company Position Office term Chen Weigang SINOPHARM Medicine Holding Co., Ltd. General manager From Jan. 2003 Wu Ai’min SINOPHARM Medicine Holding Co., Ltd. Financial chief From Jul. 2003 supervisor Zuo Jie SINOPHARM Medicine Holding Co., Ltd. Section chief From May 2003 Shi Jinming SINOPHARM Medicine Holding General manager From Apr. 2003 (Guangzhou) Co., Ltd. Yin Junmin Shenzhen Shiyan Town Investment Financial From Jan. 1996 Management Co., Ltd. Chief supervisor Zou Jun Shenzhen Wangzong Industrial Co., Ltd. Executive From May 2001 director Zhao Junpeng Shenzhen Baoan Shangwu Economic and Chairman From Jan. 2000 Development Co., Ltd. Of the Board 3. Main work experience of present directors, supervisors and senior executives: (1) Member of the Board of Directors Chairman of the Board——Mr. Chen Weigang, MBA and senior economist, worked at China Medicine Group (Shanghai) Company from Apr. 1976, took the turns of officer of enterprise management office, commissar of League Commission, associate dean or dean of GMO, manager of business department, manager associate and deputy manager, etc.; he takes the position of secretary of CPC and GM of China Medicine Group (Shanghai) Company from Dec. 1998 to Jan., 2003; and secretary of CPC and GM of SINOPHARM Medicine Holding Co., Ltd. from Jan. 2003 till now; and takes the post of chairman of the Board of the Company from Jan. 2005. Director——Mr. Wu Ai’min, an accountant with bachelor degree, took the turns of senior manager of Jiangsu Property Assessment Firm, copartner of Jiangsu Renhe Property Assessment Company, financial chief supervisor and manager of investment center of Xuzhou Huaihai Food Town, and so on from Aug. 1992; takes the position of financial chief supervisor of SINOPHARM Medicine Holding Co., Ltd. from Jul. 2003; and supplemented to be director by the Shareholders’ general meeting of the Company from Jan. 2005. Director——Mr. Zuo Jie, MBA and China economist, worked at the 1st department store Co., Ltd., 12 Shanghai, he took the turns of securities representative of the Board of Directors, deputy MB of finance securities department and of the 1st department store Co., MB of Investment Company and MB associate of the 1st department store east building, and so on from Jul. 1993; from May 2003 takes the post of deputy minister and minister of investment planning department SINOPHARM Medicine Holding Co., Ltd. till now; and supplemented to be director by the Shareholders’ general meeting of the Company from Jan. 2005. Director & General Manger——Mr. Shi Jinming, bachelor degree, took the turns of manager of China Medicine (Group) Guangzhou Yuexing Company, manager of medicine department of SINOPHARM Medicine Co., Ltd., deputy GM of China Medicine (Group) Guangzhou Yuexing Company and concurrently manager of Yuexing Company from Mar. 1995; he takes the post of GM of SINOPHARM Medicine Holding (Guangzhou) Co., Ltd. from Apr. 2003 till now; GM of the Company from Feb. 2004, he was elected as director by the shareholders’ general meeting in election at expiration of office term of the Board of Directors of the Company in Sep. 2004. Director——Mr. Yin Jumin, an accountant, from 1994 to 1996 took the post of project manager of Baoyong CPAs, Bao’an District, Shenzhen; from 1996 takes the post of general accountant and financial chief supervisor of Shiyan Town Investment Management Co., Ltd. Bao;an District, Shenzhen; he was elected as director by the shareholders’ general meeting in election at expiration of office term of the Board of Directors of the Company in Sep. 2004. Director——Mr. Zou Jun, bachelor degree, from Oct. 1997 to May 2001 worked as deputy GM at Shenzhen Taoxian Industrial Co., Ltd.; takes the post of executive director of Shenzhen Wangzong Industrial Co., Ltd. from May 2001 till now; he was elected as director by the shareholders’ general meeting in election at expiration of office term of the Board of Directors of the Company in Sep. 2004. Independent director——Ms. Chen Shu, bachelor, ever worked as cadre, secretary of court, judger and vice president, etc. at People’s Court of Huangling County, Shanxi province, from Oct. 1985 took the post of section chief of Law Firm of Liwan District, Guangzhou City, vice administrator of administration of justice till now; copartner and section chief of Guangzhou Law Firm from Jan. 1995; copartner and section chief of Guangzhou Jinpeng Law Firm from Feb. 1996; chief secretary of Guangzhou Lawyer Association and concurrently vice president of China National Lawyer Association and vice president of Guangdong province Lawyer Association, as well as NPC deputy of the 10th session from Mar. 2002 till now; she was elected as independent director by the shareholders’ general meeting in election at expiration of office term of the Board of Directors of the Company in Sep. 2004. Independent director— — Mr. Sui Guangjun, professor with doctor degree and instructor for doctorate, ever took the post of superintendent of special zone and pearl river delta economic institute of Jinan University, dean of marketing department, standing vice president and president of management institute of Jinan University, section chief of Oriental Thought Marketing Institute of Jinan University, dean of MBA Education Center and stationmaster of postdoctoral circling station; now he is in charge of vice president of Guangdong Foreign Trade & Language University; he was elected as independent director by the shareholders’ general meeting in election at expiration of office term of the Board of Directors of the Company in Sep. 2004. Independent director——Ms. Peng Juan, associate professor, mayor research direction is finance strategy and management, marketing auditing and financing marketing. From 1997 taught at financing and accounting department of management institute of Shanghai Jiaotong University till now, now is in charge of deputy dean and concurrently secretary of CPC; she was elected as independent director by the shareholders’ general meeting in election at expiration of office term of 13 the Board of Directors of the Company in Sep. 2004. 2. Members of supervisors: Convener of the Supervisory Committee——Mr. Zhu Dixin, senior politic engineer graduated from secondary technology school, from Oct. 1985 took the post of section chief of Shenzhen Discipline Supervision office, deputy director of Shenzhen Fighting Economic Crime Office, dean of supervision office of supervision administration bureau of Shenzhen, secretary of discipline supervision commission of Shenhua Industrial Trade Headquarter of Shenzhen, supervision office dean, secretary of discipline supervision commission and secretary of CPC of Shenzhen Medicine Produce and Supply Headquarter, chairman of the supervisory Committee, and so on; he was elected as supervisor by the shareholders’ general meeting in election at expiration of office term of the Board of Directors of the Company in Jan. 2005. Supervisor——Mr. Zhao Junpeng, three-year college degree, is now in charge of director of Villager Commission of Shangwu Village of Bao’an, Shenzhen and chairman of the Board of Shangwu Economic and Development Co., Ltd.; took the turns of supervisor of the Company; he was elected as supervisor by the shareholders’ general meeting in election at expiration of office term of the Board of Directors of the Company in Jan. 2005. Employee supervisor——Mr. Shen Tianfang, three-year college degree, from Nov. 1985 took the turns of sole duty DS cadre, deputy minister and minister of personnel ministry, chairman of Labor Union and commissar of CPC, etc. of Shenzhen Medicine Produce and Supply Headquarter; from 2001 took the post of chairman of LU, commissar of CPC and supervisor, etc. of the 3rd Supervisory Committee of Shenzhen Accord Pharmaceutical Co., Ltd.; he was elected as supervisor by the shareholders’ general meeting in election at expiration of office term of the Board of Directors of the Company in Jan. 2005. 3. Senior executives: Director and General Manager——Mr. Shi Jinming Referring to the aforesaid introduction of members of directors for details. Deputy General Manager——Mr. Ou Jianneng, chief chemist with on-job master degree, from Jul. 1981 took the post of Huiyang medicine testing institute, Guangdong, Shenzhen Jianmin Medicine Company, Shenzhen Medicine Company and Shenzhen Medicine Produce & Supply Headquarter; manager of sales center of the Company from Jan. 2001; took the post of standing deputy GM of Medicine Logistics department and minister of compound management department of the Company from May 2003, and held the position of deputy GM of the Company from Jun. 2003. Deputy General Manger——Mr. Tan Guoshu, on-study postgraduate, assistant economist and politic engineer, ever took the post of deputy director of Gongxiaoshe, Dalonghua, Fengshun County, manager of affiliated corporation, deputy GM of Labor Service Company, Labor Bueau, Fengshun, GM of Labor Service Company, Boned Zone, Shatoujiao District, Shenzhen, deputy GM of Shenzhen Best Machinery Electronic Company, organization charger of Labor Service Company of Shenzhen Food Headquarter, and so on; from Apr. 1996 took the post of deputy director, minister of personnel minister and GM associate, etc. of supervision administration office of Shenzhen Medicine Produce & Supply Headquarter, and concurrently GM of Shenhzen Xiannuo Medicine Company, manager of Shatoujiao Medicine Company and manager of Nanshan Medicine Company, etc. during that time; held the position of minister of talents resources department of the Company and later concurrently vice secretary of DSC of the Company from Jan. 2001, and deputy GM of the Company from Jun. 2003. Deputy General Manager——Mr. Yan Zhigang, MBA, chief chemist, took the turns of technician, section chief of QC department, deputy GM and manager, etc. of Guizhou Medicine Company from 14 Jul. 1983; held the position of plant manager of Shenzhen Medicinal Oil Plant, duputy GM of Shenzhen Medicine Company, deputy GM of Shenzhen Accord Pharmacy Franchise Company from Jun. 1996; from Feb. 2000 took the post of plant manager of Shenhzhen Pharmaceutical Factory; took the post of deputy GM of the Company from Jan. 2005. Deputy General Manger——Mr. Lin Yangxin, certified chemist with bachelor degree, from Jan. 1996 took the turns of deputy GM of Nanfang Pharm. Co., deputy GM of China Medicine Group (Guangzhou) Company Yuexing Company, general supervisor of PD of SINOPHARM Medicine Holding Guangzhou Company; took the post of deputy GM of SINOPHARM Medicine Holding Guangzhou Company from Jan. 2004; took the post of deputy GM of the Company from Jan. 2005. Chief Financial Office——Mr. Wei Xiaoping, MBA, a China accountant, took the turns of Financial department of State-owned Beijing Electronic Tube Plant, Modern Electronic Shenzhen Industrial Company, China Electronic Industrial Headquarter from Aug. 1985; and took the turns of deputy section chief of financial department of China Electronic Information Industry Group, financial director of AMOI, section chief of planning financial department of China Electronic Finance Leasing Company, Deputy GM of AMOI Beijing branch, financial charger of AMOI and director of its subsidiary from Apr. 1993; and hold the post of financial general supervisor of the Company. Secretary of the Board——Mr. Chen Changbing, double bachelor degree and master degree, China economist, ever took the post of Zhuhai Guangli Industrial Co., Ltd., took the post of minister of designing department and vice plant manager, etc.; from 1999 took the post of deputy office director of Shenzhen Medicine Produce and Supply Headquarter; the post of secretary of the Board of the Company from Dec. 2000; and took the post of secretary of the 4th Board of the Company from Sep. 2004. 4. Position or part-time job in other shareholder’s unit held by directors, supervisors and senior executives: Relationship with the Name Position/part-time job Office duty Company China National Pharmaceutical Group Co. Holding shareholder of Deputy GM Chen Weigang SINOPHARM Holding SINOPHARM Medicine Holding Subsidiary of holding Legal representative Shanghai Co., Ltd. shareholder SINOPHARM Medicine Holding Subsidiary of holding Legal representative Guangzhou Co., Ltd. shareholder SINOPHARM Medicine Holding Subsidiary of holding Legal representative Shenyang Co., Ltd. shareholder SINOPHARM Medicine Holding Guoda Subsidiary of holding Legal representative Pharmacy Co., Ltd. shareholder SINOPHARM Medicine Holding Liuzhou Subsidiary of holding Legal representative Co., Ltd. shareholder SINOPHARM Medicine Holding Hubei Subsidiary of holding Legal representative Co., Ltd. shareholder SINOPHARM Medicine Holding Shanxi Subsidiary of holding Legal representative Co., Ltd. shareholder 15 SINOPHARM Group Chemicals Co. Ltd. Subsidiary of holding Legal representative shareholder Shanghai SINOPHARM Logistics Co. Subsidiary of holding Legal representative Ltd. shareholder Beijing Huahong of SINOPHARM Co., Subsidiary of holding Legal representative Ltd. shareholder Shi Jinming SINOPHARM Medicine Holding Subsidiary of holding GM Guangzhou Co., Ltd. shareholder Ou Jianneng Shenzhen Accord Pharmacy Franchise Subsidiary of the Company Chairman of the Co., Ltd. Board Yan Zhigang Shenzhen Pharmaceutical Factory Subsidiary of the Company Factory manager Sui Guangjun Guangdong Foreign Trade & Language No relation Vice president University Chen Shu Guangdong Lawyers’ Association No relation Chief secretary Peng Juan Management Institute of Shanghai No relation Deputy dean of Jiaotong University department 5. Particulars about the annual remuneration of directors, supervisors and senior executives Order Name Remunerations (RMB’0000) 1 CHEN WEI GANG Drawing no remuneration from the Company 2 WU AI MING Drawing no remuneration from the Company 3 ZUO JIE Drawing no remuneration from the Company 4 SHI JIN MING 40 5 YIN JU MIN Drawing no remuneration from the Company 6 ZOU JUN Drawing no remuneration from the Company Drawing allowance for independent director 7 CHEN SHU amounting to RMB 60,000 Drawing allowance for independent director 8 SUI GUANG JUN amounting to RMB 60,000 Drawing allowance for independent director 9 PENG JUAN amounting to RMB 60,000 10 ZHU DI XIN 24 11 SHEN TIAN FANG 21 12 ZHAO JUN PENG Drawing no remuneration from the Company 13 OU JIAN NENG 30 14 TAN JIAN SHU 30 15 YAN ZHI GANG 30 16 16 LIN YANG XIN 30 17 WEI XIAO PING 30 Total 253 6. Particulars about directors and senior executives leaving their post or engaging in the report period (1) On Jan.13, 2005, the 1st 2005 Extraordinary Shareholders’ General Meeting of the Company additionally elected Mr. Chen Weigang, Mr. Wu Ai’min and Mr. Zuojie directors of the 4th Board of Directors, the resolution of the Meeting has been published on Securities Times and Ta Kung Pao dated Jan. 14, 2005. (2) On Jan. 13, 2005, the 1st 2005 Extraordinary Shareholders’ General Meeting of the Company carried out election at a expiration of office term for the Supervisory Committee, and elected Mr. Zhu Dixin, Mr. Zhao Junpeng and Mr. Shen Tianfang supervisors of the 4th Supervisory Committee, the resolution of the meeting has been published on Securities Times and Ta Kung Pao dated Jan.14, 2005. (3) On Jan. 13, 2005, the 5th meeting of the 4th Board of Directors elected Mr. Chen Weigang Chairman of the Board of the Company. The 1st Meeting of the 4th Board elected Mr. Zhu Dixin Convener of the Supervisory Committee. The resolution of the meeting has been published on Securities Times and Ta Kung Pao dated Jan. 14, 2005. Section II. Number of employees and professional quality At end of the year 2005, the Company had totally 2,636 on-the-job employees. Profession/occupation composition Education Background Proportion Proportion Profession Number Education Number (%) (%) Production personnel 463 17.56 Master degree or above 29 1.10 Salespersons 1490 56.53 Bachelor degree 339 12.86 Technicians 3-years regular 621 23.56 102 3.87 college graduate Financial Polytechnic school 948 35.96 92 3.49 personnel graduate Administrative Senior high school 699 26.52 personnel and 489 18.55 graduate or below others Total 2636 100 Total 2636 100 At the end of the report period, the Company had totally 237 retirees, whose pensions were born by Shenzhen Municipal Social Insurance Bureau. The Company took on the expenses of 103 employees who retired early. CHAPTER V ADMINISTRATIVE STRUCTURE Section I. Company Administration According to the requirements of the laws and regulations including Company Law, Administration 17 Rules for listed Companies, Guideline on Establishing Independent Director System in Listed Companies, Stock Listed Rules of Shenzhen Stock Exchange, etc., in the report period, the Company further enacted and perfected the other management regulations, continually perfected administration structure in accordance with the requirement of modern enterprise system, based on setting down rules of procedure of “three meetings and one team” (namely shareholders’ general meeting, board of directors, supervisory committee and management team) and work detailed rules; according to the actual requirement of enterprise development, established the specific commission of the Board of Directors, began to form the scientific decision-making mechanism, implement mechanism and supervision mechanism, step by step, were able to protect the reasonable right interests of shareholders, creditor and the Company, the material situations are as following: 1. Shareholders and Shareholders’ General Meeting: The Company operated in a standardized way, safeguards rights and interests of all shareholders especially those medium and small shareholders, and ensured they all fully implement their own rights; The Company established the Rules of Procedures of the Shareholders’ General Meeting, called and held shareholders’ general meeting strictly according to the rules for shareholders’ general meeting. 2. Relationship between the controlling shareholder and the listed Company: The controlling shareholder performed their duties in a standardized way and never overstepped the Shareholders’ General Meeting to interfere in the Company’s decision-making and operation directly and indirectly; The Company pursued the “five separations” in personnel, assets, finance, organization and business from its controlling shareholder, and its Board of Directors, Supervisory Committee and internal organs operated independently. 3. Directors and the Board of Directors: The election and engaging procedures of director was regulated in the Articles of Association of the Company, and adopted the accumulative voting system. The Company elected directors strictly according to the election and engaging procedures stipulated in the Articles of Association; All directors attended the Board meeting and the shareholders’ general meeting diligently and responsibly and strictly implemented duties of directors of listed companies. The Company established Rules of Procedures of Board of Directors; routine meeting of the Board of Directors and decision-making work 4. Supervisors and the Supervisory Committee: The number of supervisors and their formation are in compliance with requirements of laws, regulations and the Articles of Association. The Company established the Rules of Procedures of Supervisory Committee. The members of Supervisory Committee performed seriously their duties, taken responsible attitude to all the shareholders, supervised the financial affairs, the duties performed by the Company’s directors, managers and other senior executives. 5. Performance Evaluation, Encouragement and Binding Mechanism: The Company engaged senior executives openly and transparently in compliance with the laws and regulations. The Company currently applies annual benefit bonus system for senior executives, and is gradually establishing fair and transparent performance evaluation criteria and encouragement and binding mechanism for directors, supervisors and senior executives. 6. Relations with the Relevant Beneficiaries: The Company could fully respect and safeguard the legal rights and interests of the banks, other creditors, employees, consumers and other parties of related interests, and jointly promoted sustainable and healthy development with these parties. 7. Information Disclosure: The Company authorized the secretary of the Board to take charge of information disclosing, receiving visits and inquiries of the shareholders. The Company could strictly disclose the relevant information in a real, accurate, complete and timely way according to the law, regulations and the Articles of Association, and Management System of Information 18 Disclosure in order to ensure all the shareholders have equal opportunity to obtain the information; in the report period, the Company established Office Procedure on Investor Investment Relationship so as to enhance benign interaction between senior executives and investors of the Company. Section II. Performance of the Independent Directors The Company has engaged 3 independent directors, taking up one third of the total members of directors in accordance with the regulation of Guideline on Establishing Independent Director System in Listed Companies. During the report period, they could attended the Board Meeting and the Shareholders’ general meeting according to requirement, independent directors guided the daily operating, legal affairs and financing management of the Company; actively make their suggestion and opinion under the full understanding situation on the significant related transactions, current related transactions, engagement of CPAs and Share Merger Reform, etc; performed their relevant duties. Section III. Particulars about the Company’s “Five Separations” from the first largest Shareholder in Respect of Business, Personnel, Assets, Organization and Finance: 1. In respect of business: The Company is completely independent from the controlling shareholder in business, the Company has independent and integrated business system, and autonomous operation capacity; The Company owned independent purchase and sales system. The purchasing center, subsidiaries and production enterprises are responsible for purchasing all medicine, appliance and raw resources used in production and distributing products. Production, supply and distribution departments and R&D are separate from each other. The Company was independent legal person facing the market. 2. In respect of personnel: (1) The Company is absolutely independent in the management of labor, personnel and salaries. Office address, organization and production sites are different from the controlling shareholder. There existed no such situation of operating and working together with controlling shareholder. (2) Senior executives of the Company are full time employees in the Company without taking concurrent position in Shareholding Company, and receive salary from the Company. (3) The controlling shareholder recommends directors according to legal procedures. The appointment and removing of personnel made in Board meetings and shareholders’ general meetings can be effectively implemented. 3. In term of assets: The Company is completed independent from its controlling shareholder in term of assets and independently operates. The Company not only possesses independent production system, auxiliary production system and complementary facilities, but also enjoys such intangible assets as industrial property right, trademark, non-patent technology, etc. 4. In term of finance: (1) The Company has established independent financial department, independent and complete accounting system and financial management system. (2) The Company cam make the financial decision independently without interfere of its controlling shareholder. (3) The Company has independent bank account without depositing fund into accounts of the controlling shareholder, finance company or settlement center controlled by related parties 4) The Company pays the tax in compliance with laws. Section IV. Performance Valuation, Encouragement and Binding Mechanism for Senior Executives According to requirements of establishing modern enterprise system, the Company has established a 19 fair and transparent procedure and system of engaging for senior executives so as confirm the rights and obligations of senior executive. The Company implemented the performance checking system by the month from the year 2005, and carried out the level checking system for the senior executives, whose results were directly related to their benefit wages. According to the Articles of Association, Rules of Procedures of Board of Directors and Rules of Procedures of Supervisory Committee, the Board and Supervisory Committee carried through the process supervision on the routine performance for senior executives; the Company is establishing the relevant encouragement and binding mechanism gradually in order to further exert the enthusiasm and creativity of senior executives, urge the senior executives to perform the obligations of being honest and diligent. CHAPTER VI PARTICULARS ABOUT THE SHAREHOLDER’S GENERAL MEETING In the report period, the Company held three Shareholders’ General Meetings: I. The first Extraordinary Shareholder’s General Meeting of 2005 The first Extraordinary Shareholder’s General Meeting was held at the meeting hall on the 5/F of the Company, No. 15, Ba Gua Si Road, Futian Dis. Shenzhen on Jan. 13, 2005. The relevant notice was published on Securities Times and Ta Kung Pao dated Jan.14, 2005. II. The 2004 Annual Shareholders’ General Meeting The 2004 Annual Shareholders’ General Meeting was held at the meeting hall on the 5/F of the Company, No. 15, Ba Gua Si Road, Futian Dis. Shenzhen on May 27, 2005. The relevant notice was published on Securities Times and Ta Kung Pao dated May 28, 2005. I. The 2nd Extraordinary Shareholder’s General Meeting of 2005 The 2nd Extraordinary Shareholder’s General Meeting was held at the meeting hall on the 5/F of the Company, No. 15, Ba Gua Si Road, Futian Dis. Shenzhen on Dec.20, 2005. The relevant notice was published on Securities Times and Ta Kung Pao dated Dec.21, 2005. CHAPTER VII REPORT OF THE BOARD OF DIRECTORS Section I. General operation of the Company in the report period In 2005, it is the first year of substantive operation for State-controlling into the Company. Taking around the ideas of “Taking care of the life, protecting the health” and the policies of “Persisting in the quality management, striving for one famous enterprise”; building integrated operation platform with conformity of the administrative structure and property reorganization of the Company; optimizing unceasingly the business flow and interior controlling system; strengthening the control in the expenses; transforming the management ideas; and promoting the operation quality of the Company. Under the environment of drop of profit-gaining in medicine, three businesses of the Company still kept fast development and completed the management target the Company preplanned. In the aspect of pharmaceuticals wholesaling, the Company integrated the internal resources, adjusted the organization structure, strengthened credit administration to realize effective sales, optimized the supply chain system of “Purchase-Flow-Sale”, realized advantageous supplements in type and sales network of large shareholder Sinopharm Medicine Holding Co., Ltd with new structures and business operation of the Company; and stabilized Medicine top one in the Shenzhen Market. 20 In the aspect of manufacturing pharmaceuticals industry, with the influence of policy dropping in the price of antibiotic drugs, the Company adjusted timely the marketing strategies, promoted unceasingly the sales scale and market shares; meanwhile, emphasized the development and sales scales of antibiotic products, expanded positively the marketing network, and the management achievements were upgraded. In the aspect of pharmaceuticals retailing, Accord Chain was in ultra-saturated retail sales terminal market and keen competition environment. On the one hand, the Company adjusted the type structures; on the other hand, continued to develop the medicine chain networks in Pearl Delta; enhanced the market coverage; took actively the measures like promotion activities, enhancement of service level, taking in special counter products; researching for new growth of profits and obtained obvious economic results and market effects. Section II. Operation Result and main business of the Company I. The scope of main operations was R&D and production of pharmaceuticals, wholesales and chain retails of Chinese and western patent medicine, Chinese traditional medicine, biological products, bio-chemical medicine, health care products and medical apparatus and instruments, of which wholesale and retailing of pharmaceuticals mainly were selling pharmaceuticals produced in factories home and aboard. The sale types reached over 10,000 and sales market mainly were Shenzhen municipality and adjacent areas. II. Formation of income from main operations 1. Formation of income from main operations classified according to industries and products Unit: RMB’0000 Main operations classified according to industries Increase/decrease Increase/decrea Increase/decrease Income from Gross in income from se in cost of Classified according to Cost of main in gross profit main profit main operations main operations industries or products operations ratio over the last operations ratio (%) over the last year over the last year (%) (%) year (%) Medical industry 50,787.09 24,886.55 51.00 11.32 19.55% -3.37 Medical wholesale 169,199.65 162,430.54 4.00 2.06 2.53% -0.44 Medical retail 22,126.98 17,524.66 20.80 -4.06 -2.81% -1.02 Less: Counteracting between internal 78,556.86 78,599.42 - - - - industries Total 163,556.85 126,242.33 22.81 3.77 4.95 -0.87 Including: related 11,278.08 5,455.84 51.62 223.48 211.49 1.86 transactions Note: 1. The price of related transactions were on the basis of market price. 2. Combining the Jan. to Oct. sales of Chinese and Western Medicine Industry in 2004, excluding 2005; influence the sales income of decreasing of RMB67, 943,000; combining the Jan. to Dec. sales of Chinese and Western Medicine Industry in 2004, combining the Jan. to July sales of Chinese Medicine Factory in 2005, influence the sales income of decreasing RMB21,991,120; if excluding the reason of consolidating sheet and calculated on calibration, 2004 actual income of the Company amounted to RMB1,486,151,100 .RMB149,417,400 increased in the report period compared to the last period, and the ratio of increasing was 10.05%. Main operations classified according to products 21 Isedyl cough syrup 24,299.84 4,632.63 80.94 49.74 38.10 1.61% Cef- series products 22,865.11 18,509.95 19.05 -3.34 26.38 -19.03% Jian Er Qing Jie Ye 1,795.87 623.09 65.30 -35.75 -49.16 9.15% Including the related transaction (Isedyl 7,350.14 1,637.97 77.72 118.70 97.97 2.34% contained) Pricing principle Market price adopted 1. Related transactions of the Company, with making profit as objective, transacted fairly based on market price, accorded with market economy principles. Necessity and durative 2. Related transactions took small part of the total sales amount, which didn’t impact the Company of related transactions severely. 3. To enlarge market share and decrease costs, relevant related transactions of the Company would be necessary and durative. Note: In the report period, the amount in the related transaction for the Company to sell the products and provide labor forces to the controlling shareholders and its subsidiaries amounted to RMB 112,780,800. 2. Income from main operations classified according to areas Unit: RMB’0000 Item Income from main operations Cost of main operations Domestic sales 163,195.80 4.61% Oversea sales 361.06 -77.48% Note: The main sales area of the Company was Shenzhen Area. 3. Major suppliers and customers Unit: RMB’0000 Total amount of purchase of Proportion in the total 20,339.74 13.24% the top five suppliers amount of purchase Total amount of sales of the Proportion in the total 23,108.29 14.13% top five sales customers amount of sales III．Constitution of the assets for the Company in the report period (Unit’0000) Dec.31, 2005 Dec.31, 2004 Increasing Proportion in Item Proportion in the ratio in the Amount Amount the total assets total assets (％) total assets (％) Total assets 107,245 100 84,619 100 Monetary fund 16,929 15.79 8,087 9.56 6.23 Accounts 34,337 32.02 31,262 36.94 -4.93 receivable Inventories 20,969 19.55 16,248 19.20 0.35 Long-term equity 7,625 7.11 5,713 6.75 0.36 investments Net fixed assets 11,686 10.9 13,668 16.15 -5.26 22 Construction in 8,125 7.58 4,096 4.84 2.74 progress Other long-term 206 0.19 705 0.83 -0.64 assets Short-term loans 1,000 0.93 1,050 1.24 -0.31 Notes payable 4,185 3.90 1,243 1.47 2.43 Accounts payable 33,434 31.17 26,855 31.74 -0.56 Advance receivable 2,580 2.41 1,941 2.29 0.11 Taxation payable 590 0.55 635 0.75 -0.20 Other payables 19,667 18.34 14,570 17.22 1.12 Reasons for changing compared to last year: 1. Accounts receivable: the main reason was adding of the sales scale comparing to last period and the non-expired loans. 2. Inventories: the reason was that the outputs and sales of Pharmaceutical Manufacturing of the Company increased fast, and the raw material and finished products correspondingly increase, even adding the inventories in January influenced by the spring. 3. Long-term equity investments: the main reason was the increasing in the investment incomes of the shares and associated enterprises in the report period. 4. Notes payable: the reason was promotion of the use of bank notes and settling in notes with part of agreement suppliers. 5. Accounts payable: the reason was the increasing of production sales and enlarging of Spring Festival preparation of goods in the year-end, and causing the increasing of the amount of buying on tally. IV. Changes on operating expenses, Administrative expenses, financial expenses and income tax Unit: RMB’0000 Increase/decrease Item 2005 2004 Reason for changing ratio(％) Operating Classified calibration in the report period changed 24,832 29,461 -15.71 expenses due to the adjustment of administrative structure of the Company; thus, the operation and administrative expenses changed a lot. However, the two expenses decreased RMB10, 500,000 compared to last period. RMB24,940,000 decreased in the expenses of AD exhibition due to the reducing in advertisements and sales promotion; RMB3,660,000 decreased in Administrative 10,563 6,985 51.22 expenses of commodity wastage due to the expenses strengthening of the management of inventories ; RMB3,100,000 decreased in the expenses of operating due to the controlling in expenses;RMB8,230,000 increased in labor cost due to increasing of personnel, RMB5,450,000increased in the R&D of Pharmaceutical products. Financial No interest expenses of the bank loans in the report -164 324 -150.62 expenses period 23 Increasing of the investment income of participating Investment -8 -23 65.22 and associated enterprises, and decreasing of the incomes amortization of the share investment balance Mainly influenced by the decreasing of clearing net Non-operating 33 91 -63.87 incomes of fixed assets and penalty earnings in the incomes report period compared to last period. Mainly influenced by the decreasing of clearing loss Non-operating 40 182 -78.02 of fixed assets and penalty expenses in the report expenses period compared to last period. Mainly influenced by decreasing half of 2005 income Income tax 610 694 -12.10 tax of the Pharmaceutical Manufactures V. Changes on the financial data for the cash flow of the Company in the report period Unit: RMB Item and reasons for changes compared Increase/decrease 2005 2004 to last period (%) Cash flow arising from the operating activities Subtotal of cash inflow 1,883,720,276.60 1,913,863,820.07 -1.58 Subtotal of cash outflow 1,735,445,208.60 1,783,568,813.92 -2.70 Net cash flow arising from operating 148,275,068.00 130,295,006.15 13.80 activities Cash flow arising from investing activities Subtotal of cash inflow 5,099,094.23 5,991,027.68 -14.89 Subtotal of cash outflow 88,448,075.60 18,114,944.28 388.26 Net cash flow arising from investing -83,348,981.37 -12,123,916.60 587.48 activities Cash flow arising from financing activities Subtotal of cash inflow 36,302,800 119,004,500.00 -69.49 Subtotal of cash outflow 12,808,138.36 301,983,250.39 -95.76 Net cash flow arising from financing 23,494,661.64 -182,978,750.39 -112.84 activities Explanations: 1. The reason for the decreasing of operating cash flow was that the cash receiving from the sales of commodities increased RMB 30, 264,500 compared to same period; the cash receiving from other operating activities decreased RMB 52,798,900; the return of tax received decreased RMB 7, 609,100. 2. The reason for the decreasing of operation cash flow was that the cash for purchasing of commodities increased RMB 64, 308,300; the cash for other operating activities decreased RMB 100, 972,200. 3. The reason for the decreasing of cash inflow arising from investing activities was that cash receiving from the withdrawal of investment from the disposal of shares of Shenzhen Jian’an increased RMB 2,233,200; the cash from obtaining from investing income decreased RMB 24 1,498,800; cash from the disposal of fixed assets decreased RMB 1,626,300. 4. The reason for the increasing of cash outflow arising from investing activities was that the investment on fixed assts increased RMB 36, 438,300; January to July cash flow sheet of Shenzhen Traditional Chinese Pharmaceutical Factory was brought into the scope of consolidation, and the balance of cash and cash equivalents at the end July of the report period amounting to RMB 38, 482,700 was listed in the expenses arising from other investing activities. 5. The reason for the decreasing of cash inflow arising from financing activities was that the bank loans received decreased RMB 1, 090,045,00;the cash receiving from the withdrawal of investment due to the transforming of Shenzhen Traditional Chinese Pharmaceutical Factory of the Company. 6. The reason for the decreasing of the cash flow arising from the financing activities was that the cash of expenses for returning the bank loan decreased RMB 282, 607,000; and the cash of expenses for repaying the interests decreased RMB 6,568,200. In the report period, net profits of the Company amounted to RMB 35, 765,300; net cash flow arising from the operating activities decreased RMB 148, 275,100. There existed great differences between the net profits and net cash flow arising from the operation activities, and the reasons were as follows: (1) In the report period, the expenses for amortizations which were reckoned in losses and gains but not concerning the cash flow (Preparation for asset devaluation, Depreciation of fixed assets, and Amortization of long-term expenses to be apportioned, Amortization of intangible assets) made the differences amounted to RMB 29,980,000 between them. (2) In the report period, the amounts of changing on the operation receivable concerning the cash flow but not-reckoned in losses and gains, items receivable, increase and decrease of inventory made the differences amounted to RMB 81,070,000 between them. VI. Operation and business analysis to the main holding companies and participating companies of the Company 1. Shenzhen Pharmaceutical Plant: wholly-owned subsidiary of the Company. Its registered capital was amounting to RMB 24.19 million, and it deals with the manufacturing of the original chemical medicine, processing with the traditional medicine, the R&D and management of chemical raw material of medicine. It mainly produced respiratory medicines; and has main products such as isedyl cough syrup and Cefuroxime Sodium, etc. ended Dec.31, 2005, the total assets of the Company realized amounted to RMB 442.87 million, income from main operation in 2005 amounted to RMB 487.49 million, profit from main operation amounted to RMB 241.29 million and net profit amounted to RMB 660.9 million. 2. Shenzhen Accord Pharm Chain Store Co., Ltd.: wholly-owned subsidiary of the Company. Its registered capital was amounting to RMB 10.8 million, and it deals with the retailed sales of the traditional medicine, western medicine and medical equipments. ended Dec.31,2005, the total assets of the Company realized amounted to RMB 52.3 million, income from main operation in 2005 amounted to RMB 221.27 million, profit from main operation amounted to RMB 45.76 million and net profit amounted to RMB -240,000. The losses of the company reduced gradually due to adjust positively the type structure and strengthen to controlling the expenses according to the demand of market. 3. Sinopharm Medicine Holding Shenzhen Traditional Medicine Co., Ltd.: Its registered capital was amounting to RMB 50million, 47.39% shares were held by the Company. It deals with the production and sales of pieces, lotion, troche, capsule, the oral and compound, and the hygienic products (antibacterial lotion). ended Dec.31,2005, the total assets of the Company realized amounted to RMB67.59 million, 25 income from main operation in 2005 amounted to RMB 55.78 million, profit from main operation amounted to RMB 29.87 million and net profit amounted to RMB980,000. 4. Shenzhen Main Luck Pharmaceutical Inc.: Its registered capital was amounting to USD 5million, 35.19% shares were held by the Company. It deals with the development, research, production and management of anti-cancer drugs, Famotidine Injection and anti-viral injection. ended Dec.31,2005, the total assets of the Company realized amounted to RMB 148.85 million, income from main operation in 2005 amounted to RMB 214.86 million, profit from main operation amounted to RMB 140.25 million and net profit amounted to RMB 20.69 million. Section III. The Prospect for the future of the Company Looking at the overall development tendency in the medicine industry of the Company, in 2006 the Company will continue to face high speed of development of medical economy but more keen competition. It will cause the medicine market to concentrate, the polarization of medicine further appear, meanwhile, it will be helpful to the fast development of region economy and clarified of top one in regional medicine. Although the market price of drug kept slowly, the policy-based dropping of price continued and influenced the profit-gaining level; it also provided new chances for enterprises with scale superiority, the management superiority and the cost superiority. Along with the undertaking of 2005 significant property reorganization, under the great support of the major stockholder Sinopharm Medicine Holding Co., Ltd., and the Company double expanded the scales of assets and sales; the Company developed into one trans-regional comprehensive medicine manufacturer from one regional enterprise. All these promoted the status of the Company in medicine over the Guangdong Province and even the entire south China, comprehensively enhanced the core competitive forces and brand competitive advantages in south China and realized new development. Faced with the unprecedented opportunity and the challenge, the company will comprehensively integrate the high quality and resources of the companies, optimize the organization structure and management pattern, share the effective resources, promote management quality, reduce the operation cost, gain scale benefit, develop the Company into one large-scale medicine enterprise with medicine manufacturing, drugs distribution and retail chain, promote the market share and controlling, improve the status in the medicine industry and regional core competition, form the south China network with the leading position of Shenzhen Accord, and exert to realize the goal of “The first medicine brand of South China” Section IV. Market operation environment and macro policy, influences of the Company caused by laws and regulations 1. The national policy-based dropping of price influenced the medicine industry. The implementation of Purchasing System of Drug Bidding proposed higher requests for the purchasing of drugs and allocated services and influenced the gross ration of the sales of the Company. 2. The market structure of medicine changed a lot; the traditional advantages of the Company were stricken by many new comers and the management pressure gradually increased. The retail stores in Shenzhen turned to be in saturated condition and the retail market of drugs became intense. 3. Along with the continuously good condition of national economy, the per capital medicine-using level improved; the transform in national medicine system made the price of medicine dropped continually and further stimulate the growth of consumption market of drugs. China carried on the System of “New countryside” to bring in new chances for the Company’s development into the suburbs and countryside which provided good environment for the business of the Company. 26 Section V. Investment and application of raised proceeds 1. Investment (1) In August 2005, Share Merger Reform was conducted in former wholly-owned subsidiary of the Company, Shenzhen Traditional Factory, of which 47.39% shares were held by Shenzhen Accord and 52.61% shares were held by Sino Pharm Medicine Holding Co., Ltd. The registered capital was amounting to RMB 50 million. (2) Project of Medicine R& D Base established through self-financed by the Company costing for this project amounted to RMB 40,267,700 in the report period and totaled 49,267,700 and accounting for 21% ended the report period, the said project has not been accomplished yet ended the report period. 2. Application of raised proceeds In the report period, the Company had no proceeds raised through share offering or there was no such situation that the proceeds raised through previous share offering went down to the report period for application. Section VI. Routine work of the Board of Directors In the year 2005, the Board of the Company held the Meetings and made the resolutions with details as follows: (1) On Jan. 13, 2005, the 5th meeting of the 4th Board of Directors of the Company was held. The resolution of the meeting was published on Securities Times and Ta Kung Pao dated Jan. 14, 2005. (2) On April 18, 2005, the 6th meeting of the 4th Board of Directors of the Company was held. The resolution of the meeting was published on Securities Times and Ta Kung Pao dated Apr. 20, 2005. (3) On April 25, 2005, 7th meeting of the 4th Board of Directors of the Company was held by means of communications. The resolution of the meeting was published on Securities Times and Ta Kung Pao dated Apr. 20, 2005. (4) On June 21, 2005, 8th meeting of the 4th Board of Directors of the Company was held. The resolution of the meeting was published on Securities Times and Ta Kung Pao dated June 23, 2005. (5) On Aug. 3, 2005, 9th meeting of the 4th Board of Directors of the Company was held by means of communications. The resolution of the meeting was published on Securities Times and Ta Kung Pao dated Aug. 5, 2005. (6) On Oct. 26, 2005, 10h meeting of the 4th Board of Directors of the Company was held by means of communications. The resolution of the meeting was published on Securities Times and Ta Kung Pao dated Oct. 28, 2005. Section VII. 2005 Profit Distribution Plan and Converting Capital Reserve into Share Capital According to the provisions in Letter on How to Confirm Profit Distribution Standard for Enterprises Issuing B Shares During Dividends Distribution released by China Securities Regulatory Commission with ZJHZ [1994] No. 1 document, the principle of taking the lower amount of the two was adopted in the profit distribution. In 2005, the net profits the Company realized amounted to RMB35, 765,331.72, and the actual distributive profits after offsetting the accumulative losses of Share was amounted to RMB 17,134,827.17. According to the related laws and the Articles of Association, the profit distribution plan for 2005 was as follows: after 10% net profit appropriating as statutory reserve amounted to RMB 27 3,932,395.69 confirmed by CAS and 5% net profit appropriating as statutory reserve amounted to RMB 1,966,197.84confirmed by CAS, in the report period, the profit for distribution of the shareholders were amounting to RMB 11236233.64. Calculated on the released shares of 288,149,400, cash dividends for every 10 share was RMB 0.38(including tax), and the total amount for cash dividend was amounting to RMB 10,949,677.20; the surplus of profits for distribution amounted to RMB 286,556.44 and were transferred to annual distribution. The Company did not convert capital reserve into share capital. The said distribution plan should be submitted to the 2005 Annual Shareholders’ General Meeting for consideration. Chapter VIII. Report of the Supervisory Committee I. In the report year, the Supervisory Committee, in accordance with regulations of Company Law and Articles of Association, strictly implemented various functions of inspection and supervision prescribed in its duties, attended the meeting of the management team and the Board of Directors as non-voting delegates, and participated in the Company’s decision-making of significant issues. The details of the meetings were as follows: 1. All supervisors had attended each meeting of the Board of Directors as non-voting delegates and supervised over the content of the meetings of the Board and operation decision-making procedure. 2. The 2nd meeting of the 4th Supervisory Committee held on Apr. 18, 2005 examined and approved 2004 Annual Report and its Summary, 2004 Work Report of the Supervisory Committee, 2004 Profit Distribution Preplan, Proposal on the Related Transaction between the Company and Related Parties, and Proposal on Modification of Articles of Associations. The resolutions of the meeting were published on Securities Times and Ta Kung Pao dated Apr. 20, 2005. 3. Part of the supervisors of the Company had attended the meetings of the management team as non-voting delegates and put forward opinions and suggestions for significant events of management and operation for the management team. II. The Supervisory Committee had strictly supervised over the Company’s operation and decision-making in 2005, and expressed independent opinions concerning relevant issues as follows: 1. In the report year, the Supervisory Committee supervised over the Company’s various work in terms of the procedures of holding the Shareholders’ General Meeting and the Board of Directors, resolutions, implementation of the resolutions of the Shareholders’ General Meeting by the Board of Directors, the Company’s production and operation and management of decision-making according to the law, regulations and Articles of Association, and believed the Company had abided by the Company Law and the Articles of Association in terms of management and operation and ensured its operation according to law. 2. The Supervisory Committee supervised over the duties performed by the directors and senior executives and believed that in daily operation and administration, they were patient and responsible, made decisions in scientific and reasonable way and the procedure of decision-making was normative and legal. They had neither violated the laws, regulations, Articles of Association and resolutions of the Shareholders’ General Meeting, nor had they abused their posts and rights or done harm to the interests of shareholders, the Company or employees. 3. The Supervisory Committee believed the Financial Report of 2005 had objectively and truly reflected the Company’s financial status and operation achievements, and agreed with the standard unqualified Auditors’ Reports issued by Shu Lun Pan Certified Public Accountants Co., Ltd. and 28 Horwath Certified Public Accountants. 4.In the report period, the significant related transaction on the purchasing of significant assets between the Company and the larger shareholder did not do harm to the interest of the Company and its shareholders. The prices of other related transactions had been set based on the market principle and been fair. No actions that would do harm to the interest of the Company had been discovered. Chapter IX. Significant Events I. Significant lawsuits and arbitrations There had been no significant lawsuits or arbitrations in the report period. II. Purchases and sales of assets 1. On June 21, 2005, the Company signed the Agreement on Share Transfer which was about purchasing 90% equity of Sinopharm Medicine Holding Guangzhou Co., Ltd between the larger shareholder Sinopharm Medicine Holding Co., Ltd. The purchase was on the basis of auditing the corresponding shareholder’s equity of transferring with taking the base day (April 30, 2005) provided by Shu Lun Pan Certified Public Accountants Co., Ltd with the premium price of 16%, and the price for transaction was RMB 10,673.11. The relevant notice was published on Securities Times and Hong Kong Ta Kung Pao dated June 23, 2005. The Company has been paid RMB 60 million for the share rights on Jau. 12, 2006, the remained amount will be paid in March of 2006. On Jan. 17, 2005, Sinopharm Medicine Holding Guangzhou Co., Ltd has changed the procedures of industry and commerce. 2. On Oct. 20. 2005, the Company signed the Agreement on Share Transfer which was about sales of 21% equity of Shenzhen Jian An Medicine Co., Ltd between Shantou Xinyuan Trading Co., Ltd. The sales were on the basis of net profits after appraisal and confirmation on files with taking the base day May 31, 2005 of the transferring of Jian An Medicine Co., Ltd. The price for sales was RMB 2,251,200. III. Important related transactions (I) Related transactions of purchases of goods 1. Purchases of goods from related parties: Full name In the report period In last report period Amount (RMB) Amount (RMB) Sinopharm Medicine Holding 45,802,196.75 26,809,298.49 Guangzhou Co., Ltd. Guangdong Yuexing Medicine 27,902,070.66 Co., Ltd. China National Medicines 4,849,009.20 Corporation Ltd. Sinopharm Medicine Holding 4,130,343.50 Xinlong (Guangdong) Co., Ltd. Guangdong Nanfang Medicine 969,310.68 315,429.09 Corporation 29 Sinopharm Medicine Holding 432,651.28 Shenzhen TCM China Medicine Group Company 369,426.28 Sinopharm Medicine Guoda 282,291.75 Pharmacy Co., Ltd. Sinopharm Medicine Holding 132,845.16 203,903.02 Shanghai Co., Ltd. Shenzhen Chinese and Western 5,347,688.37 2,131,799.16 Pharmaceutical Company Guangzhou Xinte Pharmacy 382,674.11 Corporation Shenzhen Main Luck 856,477.72 311,311.10 Pharmaceutical Inc. Total 91,074,311.35 30,154,414.97 Note: the purchase prices had all been set according to market prices. 2. Sales of goods to related parties: Full name The report period last report period Amount (RMB) Amount (RMB) Sinopharm Medicine Holding Shanghai 26,829,117.38 23,331,739.49 Co., Ltd. Sinopharm Medicine Holding 17,480,537.77 2,960,555.56 Shenyang Co., Ltd. Sinopharm Medicine Holding 17,098,461.55 34,611.45 Guangzhou Co., Ltd. Sinopharm Medicine Holding Tianjin 17,141,707.87 1,421,420.45 Co., Ltd. Sinopharm Medicine Guoda Pharmacy 9,949,589.74 78,888.89 Co., Ltd. Guangdong Guoda Pharmacy 5,880,557.30 1,362,643.33 Franchise Co., Ltd. Sinopharm Medicine Holding Hubei 5,124,676.04 1,653,567.95 Xinlong Co., Ltd. Sinopharm Medicine Holding Xinlong 3,503,232.26 (Guangdong) Co., Ltd. Shenzhen Chinese and Western 6,979,381.43 1,448,502.50 Pharmaceutical Company China National Pharmaceutical Group 699,688.89 762,943.59 Southwest Medicine Co., Ltd. Sinopharm Medicine Holding Shanxi 474,358.97 577,692.31 Co., Ltd. China National Pharmaceutical Group 384,615.38 Northwest Medicine Co., Ltd. China National Pharmaceutical Group 139,655.56 30 Guangzhou Company Sinopharm Medicine Holding Nanning 95,785.85 Co., Ltd China National Pharmaceutical Group 262,415.38 538,685.47 Shanghai Likang Medicine Co., Ltd. Shanxi Kaiyue Sinnopharm Co., Ltd. 360,897.44 Sinopharm Medicine Holding Shanxi 127,362.39 Co., Ltd. Guangdong Nanfang Medicine 560,472.48 114,771.01 Corporation Shanghai Guoda Pharmacy Franchise 41,410.26 51,282.05 Co., Ltd. China National Pharmaceutical Group 37,179.49 Hangzhou Xinya Co., Ltd. Shanxi Guoda Pharmacy Franchise 2,595.73 2,538.38 Co., Ltd. Shanghai Donghong Medicine Co., 132,512.82 Ltd. Total 112,780,772.66 34,865,281.75 Notes: (1) The prices of related transactions had all been set according to market prices; (2) Explanation on the necessity and continuity of related transactions: A) The related transaction, aiming at making profit and based on the market prices and fair principle, all were in accordance with the principles of market economy; B) The amount involved in the related transactions took up a very small part of the Company’s total sales amount, and thus they bore no great influence on the Company. (II) Other related transactions 1. The Company had not provided guarantees for related parties. (III) Creditor’s rights and liabilities between related parties and the Company: Please refer to the Notes in III. Accounting Statement of the 10th Chapter: Financial Report. IV Important contracts and implementation 1. Entrustment, contracting and leasing In the report period, the Company had not entrusted, contracted or leased assets of other companies, nor had other companies ever entrusted, contracted or leased the assets of the Company. 2. Important guarantees By Dec. 31, 2005, contingent liabilities that had occurred due to the debt guarantees provided by the Company for other units were as follows: 3. Entrustment of cash assets management The Company had not entrusted others with its cash assets management in the report period, nor had it entrusted others with cash assets management in previous period and continued in the report period. 4. Other important contracts In the report period, the Company had no other important contracts. 31 V. Commitments of the Company or shareholders holding over 5% shares of the Company 1. Commitment of assets reorganization On Feb.18, 2004 Purchase and Sales Agreement was signed between the original principal shareholder Shenzhen Investment& Management Corporation and Sinopharm Medicine Holding Co., Ltd, of which Sinopharm Medicine Holding Co., Ltd committed that the assets and business of its Guangzhou Branch were merged into the Company and carry out resource integration. Since June, 2005, the reorganization between the related parties began, and at the end of 2005 it was completely finished. 2. Commitment of Share Merger Reform On Nov.14, 2005, the principal shareholder Sinopharm Medicine Holding Co., Ltd issued Commitment on Share Merger Reform of Shenzhen Accord Pharmaceutical Co.,Ltd, in which after the approval of the proposal of significant assets reorganization on purchasing 90% equity of Sinopharm Medicine Holding Guangzhou Co., Ltd. In the Shareholder meeting of the Company, the relevant Share Merger Reform would begin, and the relevant plans would be submitted to State-owned Assets Supervision and Administration Commission of the State Council for approval within three months after the publishing of Notice of shareholders’ meeting. On March 6, 2005, the Company released the notice on Share Merger Reform, issued the plans on Share Merger Reform on March 13, 2006 and adjustment plan on Share Merger Reform on March 22, 2006. The Company informed that it would hold the shareholders’ meeting of A-shares on Apr. 14, 2006. VI. Engagement of Certified Public Accountants 1. Engagement of Certified Public Accountants In the report period, the Company’s 1st Provisional Shareholders’ General Meeting of 2005 decided to reengage Shu Lun Pan Certified Public Accountants Co., Ltd. and Horwath Certified Public Accountants as the auditing institutions for the A-share and B-share of the Company on Jan. 13, 2005. Relevant notifications had been published on Securities Times and Ta Kung Pao dated Jan. 14, 2005. 2. Remuneration paid to Certified Public Accountants The auditing fees the Company paid to the Certified Public Accountants for the Annual Report 2005 totaled RMB 600,000 (A-share, B-share), and the fees for the business trips the Certified Public Accountants took for the Company’s auditing affairs had been paid by the Company. 3. Years of auditing service the audit institutions had provided the Company Since initially signing audit business agreement, Shu Lun Pan Certified Public Accountants Co., Ltd. and Horwath Certified Public Accountants had provided auditing service consistently for the Company for two years. 4. In the report period, the Company, the Board of Directors and directors had not been inspected by CSRC, or received administrative penalty, or circulating criticism, nor had them ever been criticized publicly by Stock Exchange. VII. Explanation on change of consolidated scope compared with the latest annual report 1. From Jan. to Oct. of 2004, 26% equity of another shareholder of Shenzhen Chinese and Western Pharmaceutical Company entrusted the Company to vote and the entrusting period will last to the date of changing legal representative. On Nov.11, 2004, the legal representative of the Company changed, thus the Company actually operated the Shenzhen Chinese and Western Pharmaceutical 32 Company from Jan. to Oct. of 2004 and consolidated its profit distribution and cash flow statement of Jan. to Oct. of 2004, and in the report period, it did not consolidate the statements. 2. The wholly-owned subsidiary of the Company, Shenzhen Traditional Medicine Plant were changed into Shenzhen Traditional Medicine Co., Ltd, the registered capital was changed to RMB 50,000,000 of which 47.39% equity was held by the Company and 52.61% was held by Sinopharm Medicine Holding Co., Ltd. Thus, in the report period, it just consolidated profit distribution and cash flow statements of Jan. to June of 2005, in 2004 it consolidated Year-end balance sheet and Annual profit distribution and cash flow statements. 3. In Sep., 2005, the Company established Shenzhen Accord Logistics Co., Ltd, of which 90% equity was held by the Company and 10% equity was held by Shenzhen Pharmaceutical Plant. In the report period, it did not bring into the scope of consolidation. 33 Chapter X Financial Report AUDITORS’ REPORT TO THE SHAREHOLDERS OF SHENZHEN ACCORD PHARMACEUTICAL CO., LTD. (Incorporated in the People’s Republic of China with limited liability) We have audited the financial statements on pages 2 to 33 which have been prepared in accordance with International Financial Reporting Standards. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS The Company’s directors are responsible for the preparation of financial statements which give a true and fair view. In preparing financial statements which give a true and fair view, it is fundamental that appropriate accounting policies are selected and applied consistently. It is our responsibility to form an independent opinion, based on our audit, on those statements and to report our opinion to you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. BASIS OF OPINION We conducted our audit in accordance with International Standards on Auditing. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the Directors in the preparation of the financial statements and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. We believe that our audit provides a reasonable basis for our opinion. OPINION In our opinion the financial statements give a true and fair view of the state of affairs of the Group as at 31 December 2005 and of its results and cash flows for the year then ended. HORWATH HONG KONG CPA LIMITED 2001 Central Plaza Certified Public Accountants 18 Harbour Road Wanchai 28 March 2006 Hong Kong Chan Kam Wing, Clement Practising Certificate number P02038 34 CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2005 (Expressed in Renminbi thousands) 2005 2004 Notes RMB’000 RMB’000 Turnover 5 1,635,569 1,576,085 Cost of sales (1,264,585) (1,205,295) Gross profit 370,984 370,790 Other operating revenue 6 25,403 29,275 Selling and distribution costs (248,325) (294,613) Administrative expenses (105,648) (76,668) Other operating expenses (552) (1,817) Profit from operations 7 41,862 26,967 Finance costs 8 (401) (7,192) Share of results of associates 6,707 6,406 Loss on disposal of an associate (673) - Profit before taxation 47,495 26,181 Taxation 9(a) (6,096) (6,944) Profit for the year 41,399 19,237 Attributable to: Equity holders of the parent 41,399 19,907 Minority interests - (670) Profit attributable to shareholders 41,399 19,237 Earnings per share 10 RMB0.144 RMB0.069 CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2005 (Expressed in Renminbi thousands) 2005 2004 Notes RMB’000 RMB’000 Non-current assets Property, plant and equipment 11 118,840 143,544 Construction in progress 12 76,568 40,963 Interests in associates 13 53,373 24,069 Goodwill 14 19,348 23,476 Other investments 284 284 268,413 232,336 Current assets Inventories 15 209,692 162,484 Accounts receivable and other receivables 370,772 338,410 Amounts due from related companies 22(b) 16,729 8,529 Prepayments 28,216 11,521 Cash and bank balances 169,288 80,867 794,697 601,811 Current liabilities Bank loans - due within one year 16 10,000 12,500 Accounts payable, other payables and accruals 616,947 444,053 Receipts in advance 25,804 19,413 Amounts due to related companies 22(b) 19,760 7,184 Tax payable 588 2,385 673,099 485,535 Net current assets 121,598 116,276 Net assets 390,011 348,612 Representing: Share capital 17 288,149 288,149 Reserves 101,862 60,463 Total equity 390,011 348,612 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEAR ENDED 31 DECEMBER 2005 (Expressed in Renminbi thousands) Statutory and discre- tionary Attributable surplus to equity Share Capital reserve Retained holders of Minority Total capital reserve fund earnings the parent interest Equity RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Note 17) (Note 18) At 1 January 2004 288,149 18,891 57,040 (35,375) 328,705 1,276 329,981 Profit for the year - - - 19,907 19,907 (670) 19,237 Change of status from a subsidiary to an associate - - - - - (606) (606) Profit appropriations - - 9,486 (9,486) - - - At 31 December 2004 288,149 18,891 66,526 (24,954) 348,612 - 348,612 Profit for the year - - - 41,399 41,399 - 41,399 Transfer on reorganisation of a subsidiary - - (692) 692 - - - Profit appropriations - - 5,898 (5,898) - - - At 31 December 2005 288,149 18,891 71,732 11,239 390,011 - 390,011 CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2005 (Expressed in Renminbi thousands) 2005 2004 RMB’000 RMB’000 Operating activities Profit before taxation 47,495 26,181 Adjustments for: Interest income (2,041) (3,948) Interest expenses 308 6,524 Depreciation 23,389 26,321 Loss on disposal of property, plant and equipment 34 480 Amortisation of goodwill - 3,913 Goodwill written off 718 2,155 Provision for impairment on revaluation of property, plant and equipment and construction in progress 228 62 Share of results of associates (6,707) (6,406) Gain on disposal of an associate (45) - Loss on short term investments - 5 Provision for impairment in value of other investments - 50 Cash flow from operations before changes in working capital 63,379 55,337 (Increase)/decrease in inventories (52,658) 37,343 (Increase)/decrease in accounts receivables, other receivables and amounts due from related parties (51,065) 1,415 Increase in prepayments (17,345) (6,171) Increase in accounts payable, other payables and accruals receipts in advance and amounts due to related companies 231,246 48,032 Cash generated from operating activities 173,557 135,956 Interest paid (308) (6,524) Income taxes paid (6,958) (7,418) Net cash generated from operating activities 166,291 122,014 CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2005 (Expressed in Renminbi thousands) 2005 2004 Notes RMB’000 RMB’000 Investing activities Interest received 2,041 3,948 Dividend received 2,669 4,168 Purchase of property, plant and equipment (9,073) (6,008) Proceeds from disposal of property, plant and equipment 206 1,542 Payment for construction in progress (35,638) (10,546) Proceeds from disposal of an associate 2,251 - Proceeds from disposal of other investments - 2 Cash outflow on change of status of a consolidated subsidiary to an associate 19 (37,826) (3,933) Net cash used in investing activities (75,370) (10,827) Financing activities New bank loans raised 10,000 119,005 Repayment of bank loans (12,500) (295,000) Net cash used in financing activities (2,500) (175,995) Net increase/(decrease) in cash and cash equivalents 88,421 (64,808) Cash and cash equivalents, at beginning of year 80,867 145,675 Cash and cash equivalents, at end of year 169,288 80,867 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Renminbi thousands) 1. ORGANISATION AND OPERATIONS Shenzhen Accord Pharmaceutical Co., Ltd. (the “Company”) was established as a joint stock company with limited liability through the reorganisation for the joint stock system on 1 February 1993 with the approval from the Shenzhen Municipal People’s Government under the document: Shenzhen Government-Office Reply (1993) No.356. The principal activities of the Company and its subsidiaries (collectively referred to as the “Group”) are manufacture and trading of Chinese medical materials, Chinese patent drugs and western patent drugs. The registered office of the Company is located at Accord Pharmaceutical Building, No.15 Ba Gua Si Road, Futian District, Shenzhen, Guangdong, the People’s Republic of China (the “PRC”). The Group principally operates in the PRC. 2. ADOPTION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS In the current year, the Group has adopted all of the new and revised Standards and Interpretations issued by the International Accounting Standards Board (the “IASB”) and the International Financial Reporting Interpretations Committee (“IFRIC”) of the IASB that are relevant to its operations and effective for accounting periods beginning on 1 January 2005. The adoption of these new and revised Standards and Interpretations has resulted in changes to the Group’s accounting policies in the following areas that have affected the amounts reported for the current or prior years: IFRS 3, Business Combinations Goodwill IFRS 3 has been adopted for business combinations for which the agreement date is on or after 31 March 2004. The option of limited retrospective application of the Standard has not been taken up, thus avoiding the need to restate past business combinations. 2. ADOPTION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (CONTINUED) After initial recognition, IFRS 3 requires goodwill acquired in a business combination to be carried at cost less any accumulated impairment losses. Under IAS 36 Impairment of Assets (as revised in 2004), impairment reviews are required annually, or more frequently if there are indications that goodwill might be impaired. IFRS 3 prohibits the amortisation of goodwill. Previously, under IAS 22, the Group carried goodwill in its balance sheet at cost less accumulated amortisation and accumulated impairment losses. Amortisation was charged over the estimated useful life of goodwill, subject to the rebuttable presumption that the maximum useful life of goodwill was 20 years. In accordance with the transitional rules of IFRS 3, the Group has applied the revised accounting policy for goodwill prospectively from the beginning of its first annual period beginning on or after 31 March 2004, i.e. 1 January 2005, to goodwill acquired in business combinations for which the agreement date was before 31 March 2004. Therefore, from 1 January 2005, the Group has discontinued amortising such goodwill and has tested the goodwill for impairment in accordance with IAS 36. At 1 January 2005, the carrying amount of amortisation accumulated before that date of RMB15,651,000 has been eliminated, with a corresponding decrease in the cost of goodwill. Because the revised accounting policy has been applied prospectively, the change has had no impact on amounts reported for 2004 or prior periods. No amortisation has been charged in 2005. The charge in 2004 was RMB3,913,000. Excess of acquirer’s interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent liabilities over cost (previously known as negative goodwill) IFRS 3 requires that, after reassessment, any excess of acquirer’s interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent liabilities over cost of the business combination should be recognised immediately in profit or loss. IFRS 3 prohibits the recognition of negative goodwill in the balance sheet. Previously, under IAS 22 (superceded by IFRS 3), the Group released negative goodwill to income over a number of accounting periods, based on an analysis of the circumstances from which the balance resulted. Negative goodwill was reported as a deduction from assets in the balance sheet. In accordance with the transitional rules of IFRS 3, the Group has applied the revised accounting policy prospectively from 1 January 2005. Therefore, the change has had no impact on amounts reported for 2004 or prior periods. 2. ADOPTION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (CONTINUED) At the date of authorisation of these financial statements, the following Standards and Interpretations were in issue but not yet effective: IFRS 7 Financial instrument: Disclosure IFRIC 4 Determining whether an Arrangement contains a Lease IFRIC 8 Scope of IFRS 2 The directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material impact on the financial statements of the Group. 3. PRINCIPAL ACCOUNTING POLICIES The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (“IFRS”) on a historical cost basis, except for other investments, as further explained below. The Group also prepares consolidated financial statements which comply with accounting regulations in the PRC. A reconciliation of the Group’s results and shareholders’ equity under IFRS and PRC accounting regulations is presented in Note 26. The principal accounting policies adopted by the Group are as follows: Basis of consolidation The consolidated financial statements of the Group incorporate the financial statements of the Company and all operating subsidiaries that are controlled by the Company. Where an entity either began or ceased to be controlled by the Company during the year, the results are included only from the date control commenced or up to the date control ceased. All material intra-group transactions and balances are eliminated on consolidation. Minority interests in the net assets of consolidated subsidiaries are identified separately from the Group’s equity therein. Minority interests consist of the amount of those interests at the date of the original business combination and the minority’s share of changes in equity since the date of the combination. Losses applicable to the minority in excess of the minority’s interest in the subsidiary’s equity are allocated against the interests of the Group except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses. 3. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) Business combinations The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquire, plus any costs directly attributable to the business combination. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IRFS 3 are recognised at their fair values at the acquisition date. Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in profit or loss. The interest of minority shareholders in the acquiree is intitially measured at the minority’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised. Subsidiaries A subsidiary is a company in which the Company has control. Control exists when the Company has the power to govern the financial and operating policies of the subsidiary so as to obtain benefits from its activities. Details of the Company’s subsidiaries as of 31 December 2005 are set out in Note 24 to the consolidated financial statements. Interests in associates An associate is a company, not being a subsidiary or a joint venture, in which the Company has significant influence. Significant influence exists when the Company has the power to participate in, but not control, the financial and operating decisions of the associate. Investments in associates are accounted for using the equity method of accounting. The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting. Under the equity method, investments in associates are carried in the consolidated balance sheet at cost as adjusted for post-acquisition changes in the Group’s share of the net assets of the associate, less any impairment in the value of individual investments. Losses of an associate in excess of the Group’s interest in that associate (which includes any long-term interests that, in substance, form part of the Group’s net investment in the associate) are not recognised, unless the Group has incurred obligations or made payments on behalf of the associate. (d) Interests in associates (continued) Any excess of the cost of acquisition over the Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities of the associate recognised at the date of acquisition is recognised as goodwill. The goodwill is included within the carrying amount of the investment and is assessed for impairment as part of the investment. Any excess of the Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognised immediately in profit or loss. Where a group entity transacts with an associate of the Group, profits and losses are eliminated to the extent of the Group’s interest in the relevant associate. (e) Goodwill Goodwill arising on the acquisition of a subsidiary or a jointly controlled entity represents the excess of the cost of acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary or jointly controlled entity recognised at the date of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period. On disposal of a subsidiary or a jointly controlled entity, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. The Group’s policy for goodwill arising on the acquisition of an associate is described under “Interests in associates” above. (f) Property, plant and equipment and depreciation Property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its present working condition and location for its intended use. Expenditure incurred after the assets have been put into operation, such as repairs and maintenance and overhaul costs, is normally charged to the income statement in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the assets, the expenditure is capitalised as an additional cost of the assets. Depreciation is provided to write off the costs or valuation of other fixed assets, after taking into account their estimated residual value, over their anticipated useful lives using the straight line method. The rates of depreciation used are based on the following estimated useful lives: Land use rights Over the lease terms Buildings 20 - 35 years Motor vehicles 5 - 10 years Electronic equipment, office equipment and software 5 - 14 years Leasehold improvements 10 years The useful lives of assets and depreciation method are reviewed periodically. When assets are sold or retired, their cost and accumulated depreciation are eliminated from the consolidated financial statements and any gain or loss resulting from their disposal is included in the income statement (g) Construction in progress Construction in progress represents factory buildings, plant and machinery and other fixed assets under construction and is stated at cost. Cost comprises direct costs of construction as well as interest charges during the period of construction, installation and testing and certain exchange differences on any related borrowed funds. Capitalisation of interest charges ceases when substantially all the activities necessary to prepare the asset for its intended use are complete. Construction in progress is transferred to property, plant and equipment when it is completed and ready for its intended use, notwithstanding any delays in the issue of the relevant commissioning certificates by the appropriate PRC authorities. No depreciation is provided on construction in progress until the asset is completed and is ready for its intended use. (h) Impairment of tangible and intangible assets excluding goodwill At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduce to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. (i) Inventories Inventories comprise raw materials, work-in-progress and finished goods. Inventories are stated at the lower of cost and net realisable value. Cost includes direct materials, direct labour costs and overheads that have been incurred in bringing the inventories and work in progress to their present location and condition and is calculated using the weighted average method. Net realisable value is estimated by management and is determined by reference to the selling price less all costs to completion and costs to be incurred in selling and distribution. Spare parts and consumables are stated at cost less any provision for obsolescence. (j) Financial instruments Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument. (i) Trade receivables Trade receivables are carried at anticipated realisable value. An estimate is made for doubtful receivables based on a review of all outstanding amounts at the year-end. Bad debts are written off during the year in which they are identified. (ii) Investments Investments are recognised and derecognised on a trade date basis where the purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at fair value, plus directly attributable transaction costs. At subsequent reporting dates, debts securities that the Group has the expressed intention and ability to hold to maturity (held-to-maturity debt securities) are measured at amortised cost using the effective interest rate method, less any impairment loss recognised to reflect irrecoverable amounts. An impairment loss is recognised in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the investment’s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition. Impairment losses are reversed in subsequent periods when an increase in the investment’s recoverable amount can be related objectively to an event occurring after the impairment was recognised, subject to the restriction that the carrying amount of the investment at the date the impairment is reversed shall not exceed what the amortised cost would have been had the impairment not been recognised. (j) Financial instruments (continued) (ii) Investments (continued) Investments other than held-to-maturity debt securities are classified as either investments held for trading or as available-for-sale, and are measured at subsequent reporting dates at fair value. Where securities are held for trading purposes, gains and losses arising from changes in fair value are included in profit or loss for the period. For available-for-sale investments, gains and losses arising from changes in fair value are recognised directly in equity, until the security is disposed of or is determined to be impaired, at which time the cumulate gain or loss previously recognised in equity is included in the profit or loss for the period. For investment in an equity instrument that does not have a quoted market price in active market and for which other methods of reasonably estimating fair value are clearly inappropriate or unworkable, the instrument would be measured at cost, subject to review of impairment. Impairment losses recognised in profit or loss for equity investments classified as available-for-sale are not subsequently reversed through profit or loss. Impairment losses recognised in profit or loss for debt instruments classified as available-for-sale are subsequently reversed if an increase in the fair value of the instrument can be objectively related to an event occurring after the recognition of the impairment loss. (iii) Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise cash in hand, deposits held at call with banks and net of bank overdrafts. In the consolidated balance sheet, bank overdrafts are included in borrowings in current liabilities. (iv) Bank borrowings Interest-bearing bank loans and overdrafts are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest rate method. Any difference between the proceeds (net of transaction costs) and the settlement or redemption of borrowings is recognised over the term of the borrowings in accordance with the Group’s accounting policy for borrowing costs (see below). (v) Trade payables Trade payables initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest rate method. (k) Operating leases Leases are classified as operating leases whenever substantially all the risks and rewards incidental to the ownership of the leased assets remain with the lessor. Lease payments under operating leases are recognised as an expense in the consolidated income statement on a straight line basis over the lease term. Aggregate benefit of incentives on operating leases is recognised as a reduction of rental expense over the lease term on a straight line basis. (l) Provisions A provision is recognised when, and only when an enterprise 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 expenditure expected to be required to settle the obligation. (m) Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the income statement because it excludes items of income or expenses that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. (m) Taxation (continued) Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, associated companies and joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised. Deferred tax is charged or credited to profit or loss, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. (n) Revenue recognition Revenue is recognised when it is probable that the economic benefits will flow to the Group and when the revenue can be measured reliably, on the following basis: (i) In relation to the sale of goods, revenue is recognised upon delivery of goods to customers, and no significant uncertainties remain regarding the derivation of consideration, associated costs or the possible return of goods. (ii) Service income is recognised when services are rendered (iii) Interest income is accrued on a time proportion basis on the principal outstanding and at the applicable rate. (o) Borrowing costs Borrowing costs that are directly attributable to the acquisition, construction or production of assets that necessarily take a substantial period of time to be ready for their intended use or sale are capitalised as part of the assets. All other borrowing costs are recognised as an expense in the period in which they are incurred. (p) Foreign currencies The individual financial statements of each group entity are presented in the currency of the primary economic environment in which the entity operates (its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each entity are expressed in RMB, which is the functional currency of the Company, and the presentation currency for the consolidated financial statements. Foreign currency transactions during the year are translated into RMB at the rates of exchange prevailing at the transaction dates as quoted by the People’s Bank of China (“PBOC”). Monetary assets and liabilities denominated in foreign currencies are translated into RMB at the rates prevailing at the balance sheet date as quoted by the PBOC. Non-monetary assets and liabilities denominated in other currencies are translated at historical rates. Exchange differences other than those capitalised as a component of borrowing costs, are recognised in the income statement in the period in which they arise. (q) Pension obligations As a statutory requirement, the Company and its subsidiaries have to contribute 25.5% of total salaries as retirement benefits for employees to a government agency. All contributions are dealt with in the consolidated income statement. (r) Contingencies Contingent liabilities are not recognised in the consolidated financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. A contingent asset is not recognised in the consolidated financial statements but disclosed when an inflow of economic benefits is probable. (s) Use of estimate The preparation of the financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 4. SEGMENT INFORMATION (a) Primary reporting format - business segments In 2005, the major products of the Group are Chinese medical materials, Chinese patent drugs and western patent drugs. (b) Secondary reporting format - geographical segments In 2005, the revenue of the Group mainly arises from the operations in the PRC and the related operating assets are located in the PRC. 5. TURNOVER Turnover represents the gross value of goods, net of value-added tax and allowances for discounts and returns. 6. OTHER OPERATING REVENUE 2005 2004 RMB’000 RMB’000 Commission income 18,043 9,604 Rental income 2,793 6,215 Others 2,475 3,980 Interest income 2,041 3,948 Sale of sundry materials 51 219 Financial subsidies - 5,141 Network service income - 168 25,403 29,275 7. PROFIT FROM OPERATIONS 2005 2004 RMB’000 RMB’000 Profit from operations is arrived at after charging:- Provision for obsolete inventories 3,232 3,556 Amortisation of goodwill - 3,913 Depreciation on property, plant and equipment 23,389 26,321 Loss on disposal of property, plant and equipment 34 480 Impairment loss on property, plant and equipment 228 62 Provision for impairment on other investments - 50 Provision for bad debts 929 1,019 Staff costs 123,253 117,921 Staff benefit costs 9,792 8,829 8. FINANCE COSTS 2005 2004 RMB’000 RMB’000 Interest expenses 308 6,524 Bank charges 541 606 Exchange (gain)/loss, net (448) 62 401 7,192 9. TAXATION (a) Taxation in the consolidated income statement represents: 2005 2004 RMB’000 RMB’000 Current year taxation 6,096 6,944 Provision for PRC income taxes is calculated based on the estimated assessable profits for the year determined in accordance with the relevant tax rules and regulations applicable in the PRC. The Company is subject to income tax at the rate of 15%. Certain subsidiaries of the Company are entitled to certain tax exemption and tax reduction benefits granted by the local tax bureau which led to a lower effective tax. The income tax rate applicable to subsidiary companies range from 7.5% to 15% (2004: 15%). (b) The reconciliation between taxation charge and the accounting profit as shown in these financial statements multiplied by the tax rate of 15% is follows 2005 2004 RMB’000 RMB’000 Profit before taxation 47,495 26,181 Income tax calculated at the tax rate of 15% 7,124 3,927 Tax effect of share of results of associates (1,006) (961) Effect of different tax rates or tax exemption for certain subsidiaries and joint ventures (5,249) - Tax effect of expenses that are not deductible in determining taxable profit 89 466 Tax effect of income that are not taxable in determining taxable profit - (471) Under-provision in prior year 8 631 Effect of unrecognised tax losses and temporary differences 5,130 3,352 Tax expense for the year 6,096 6,944 (b) Deferred taxation No provision for deferred taxation has been made in the consolidated financial statements as the directors are of opinion that the recognition of deferred tax assets arising on the temporary differences is uncertain. 10. EARNINGS PER SHARE The calculation of the basic profit per share is based on the profit for the year of RMB41,399,000 (2004: RMB19,907,000) and the number of shares outstanding during the year of 288,149,400 (2004: 288,149,400). 11. PROPERTY, PLANT AND EQUIPMENT Electronic equipment, Machinery office Leasehold Land and and Motor equipment improve- Buildings equipment vehicles Total and software ments RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Cost: At 1 January 2004 120,672 71,425 26,623 41,134 26,471 286,325 Additions 699 1,313 1,678 1,246 1,072 6,008 Transfer from construction in progress - - 1,178 - - 1,178 Disposals (1,100) (3,677) (5,250) (1,111) - (11,138) Other decrease - - (654) (551) - (1,205) At 31 December 2004 120,271 69,061 23,575 40,718 27,543 281,168 Additions 1,421 1,053 2,656 3,148 795 9,073 Disposals - (1,179) (408) (607) - (2,194) Other decrease (Note) (9,760) (9,142) (1,417) (1,587) (3,110) (25,016) Reclassification - (113) (107) 220 - - At 31 December 2005 111,932 59,680 24,299 41,892 25,228 263,031 Accumulated depreciation and impairment loss: At 1 January 2004 29,129 43,196 14,123 18,942 14,476 119,866 Charge for the year 6,267 4,017 2,925 6,271 6,841 26,321 Impairment loss - - - 62 - 62 Written back on disposal - (3,375) (3,616) (1,025) - (8,016) Other decrease - - (277) (332) - (609) At 31 December 2004 35,396 43,838 13,155 23,918 21,317 137,624 Charge for the year 6,569 3,586 2,355 6,247 4,632 23,389 Written back on disposal - (1,036) (330) (588) - (1,954) Impairment loss - 228 - - - 228 Other decrease (Note) (3,363) (6,724) (893) (1,155) (2,961) (15,096) Reclassification (350) (51) 350 51 - - At 31 December 2005 38,252 39,841 14,637 28,473 22,988 144,191 Net book value: At 31 December 2005 73,680 19,839 9,662 13,419 2,240 118,840 At 31 December 2004 84,875 25,223 10,420 16,800 6,226 143,544 Note: Other decrease represented the elimination of the assets of a former subsidiary which became an associate on 1 August 2005. 12. CONSTRUCTION IN PROGRESS 2005 2004 RMB’000 RMB’000 At 1 January 40,963 31,595 Additions 35,638 10,546 Transferred to property, plant and equipment - (1,178) Other decrease (note) (33) - At 31 December 76,568 40,963 Note: Other decrease represented the elimination of the assets of a former subsidiary which became an associate on 1 August 2005. 13. INTERESTS IN ASSOCIATES 2005 2004 RMB’000 RMB’000 Cost of investment in associates 42,838 25,208 Share of post-acquisition profits/(losses), net of dividend received 10,157 (1,354) 52,995 23,854 Amounts due from associates 1,239 373 Amounts due to associates (861) (158) 53,373 24,069 Details of the associates, all of which were incorporated and operated in the PRC, at 31 December 2005 are as follows: Percentage of Registered equity interest held Name of associate capital by the Group Principal activity USD5, 000,000 35.19% Research and development, Shenzhen Wanle Manufacture of anticancer Pharmaceutical Co., Drugs, antivirus injection Ltd. (深圳萬樂藥業有 限公司) and α interferon powder 13. INTERESTS IN ASSOCIATES (CONTINUED) Percentage of Registered equity interest held Name of associate capital by the Group Principal activity Shenzhen Chinese and RMB3, 000,000 30% Trading of Chinese patent WesternPharmaceutical drugs including capsule, Company (深圳市中西 granule or powder 藥業有限公司) preparations Dongyuan & Accord RMB5, 000,000 45% Retailing of Chinese patent Pharm Chain Store Co., drugs and western drugs Ltd. (東源一致醫藥連 鎖有限公司) SinoPharm Holdings RMB50, 000,000 47.39% Manufacture and trading of Shenzhen Chinese oral liquid, tablets and Medicine Co., Ltd. (國 external lotion 藥控股深圳中藥有限 公司) (Formerly known as Shenzhen Chinese Medicine General Plan) (Note) Note: The Company’s subsidiary, SinoPharm Holdings Shenzhen Chinese Medicine Co., Ltd. was reorganised in August 2005. After reorganisation, the equity interest in the company held by the Group decreased from 100% to 47.39%. Accordingly, the company was accounted for as an associate of the Group. The names of the above companies are directly translated from their registered names in Chinese and may not represent their legal names. Summarised financial information in respect of the Group’s associates is set out below: 2005 2004 RMB’000 RMB’000 Total assets 255,131 391,410 Total liabilities (135,283) (320,925) Net assets 119,848 70,485 Group’s share of associates’ net assets 52,995 23,854 Revenue 979,488 1,031,728 Profit for the year 21,617 21,687 Group’s share of associates’ profit for the year 6,707 6,406 14. GOODWILL RMB’000 Cost: At 1 January 2004 42,718 Written off (3,591) At 31 December 2004 39,127 Elimination of amortisation accumulated prior to the adoption of IFRS 3 (Note 2) (15,651) Written off (718) Other decrease (note) (3,410) At 31 December 2005 19,348 Accumulated amortisation: At 1 January 2004 13,174 Amortisation for the year 3,913 Written off s (1,436) At 31 December 2004 15,651 Elimination of amortisation accumulated prior to the adoption of IFRS 3 (Note 2) (15,651) At 31 December 2005 - Net book value: At 31 December 2005 19,348 At 31 December 2004 23,476 Note: Other decrease represented the exclusion of the assets of a former subsidiary which became an associate on 1 August 2005. 15. INVENTORIES 2005 2004 RMB’000 RMB’000 Raw materials 28,840 18,208 Work in progress - 1,143 Finished goods 180,852 143,133 209,692 162,484 16. BANK LOANS As at 31 December 2005, the bank loans are unsecured, interest bearing of annual rate at 5.58% (2004: 4.49% to 5.84%) and repayable within a year. 17. SHARE CAPITAL As of 31 December 2005, outstanding share capital represented ordinary shares (“A Shares”) and domestically listed foreign investment shares (“B Shares”). The B Shares ranked pari passu in all respects with the A Shares. 2005 2004 Number RMB’000 Number RMB’000 Issued and fully paid shares of RMB1 each: State owned shares 124,864,740 124,865 124,864,740 124,865 Legal person shares 53,513,460 53,513 53,513,460 53,513 Other A shares 54,885,600 54,885 54,885,600 54,885 B shares 54,885,600 54,886 54,885,600 54,886 288,149,400 288,149 288,149,400 288,149 18. RESERVES Movements in reserves are set out in the consolidated statement of changes in shareholders' equity. (a) Statutory surplus fund In accordance with PRC Companies Law, the Company shall appropriate 10% of its annual statutory net profit (after offsetting any losses of prior years) to statutory surplus fund. When the balance of such reserve reaches 50% of the registered share capital of the Company, any further appropriation is optional. Statutory surplus fund can be utilised to offset losses of prior years or for the issuance of bonus shares. Except for the reduction of losses incurred, other usage should not result in the statutory surplus reserve falling below 25% of the registered capital. (b) Statutory public welfare fund The Company is required by PRC Companies Law to appropriate 5% to 10% of its annual statutory net profit to the statutory public collective welfare fund, which is restricted to capital expenditure for the collective welfare of their employees. This reserve is non-distributable other than in liquidation. (c) Discretionary surplus reserve Discretionary surplus reserve is appropriated based on resolution passed at the directors’ meeting. The discretionary reserve can be used to make good previous years’ losses, if any, and may be utilised for the issuance of bonus shares. 19. NOTE TO CONSOLIDATED STATEMENT OF CASH FLOWS Change of status of a consolidated subsidiary to an associate During the year, Shenzhen Chinese Medicine General Plant (深圳市中藥總廠), a wholly-owned subsidiary of the Company, was reorganised into a limited liability company in August 2005 and renamed as SinoPharm Holdings Shenzhen Chinese Medicine Co., Ltd. ( 國 藥 控 股 深 圳 中 藥 有 限 公 司 ) (“SHSCM”). SHSCM’s registered capital was increased to RMB50,000,000. At the same time, the Company’s holding company injected capital of RMB26,302,800 into SHSCM in cash, resulting a decrease in equity interest in SHSCM held by the Company to 47.39%. As a result, the status of SHSCM was changed from a subsidiary to an associate. As at 31 July 2005 the assets and liabilities of SHSCM were as follows: RMB’000 Net assets: Property, plant and equipment 9,920 Construction in progress 33 Inventories 5,450 Accounts receivable and other receivables 10,534 Prepayment 650 Cash and bank balance 37,826 Accruals, accounts payable and other payables (39,594) Receipts in advance (403) 24,416 Cash outflow on change of status of a consolidated subsidiary to an associate: Cash and bank balance (37,826) 20. OPERATING LEASE COMMITMENTS At 31 December 2005, the Group had minimum rental payments under irrevocable operation leases as follows: 2005 2004 RMB’000 RMB’000 Within one year 13,948 18,435 Over one year but less than 5 years 11,941 26,275 25,889 44,710 21. CAPITAL COMMITMENTS At 31 December 2005, capital expenditure commitments, which were not provided in financial statements, but for which contracts had been signed, were as follows: 2005 2004 RMB’000 RMB’000 Property, plant and equipment 54,146 - 22. RELATED PARTY TRANSACTIONS The ultimate holding company of the Group is SinoPharm Holdings Co., Ltd. (“SinoPharm”) (國藥控股有限公司) which was incorporated in the PRC. Transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note. Details of transactions between the Group and other related parties are disclosed below. (a) Trading transactions During the year, the Group had the following transactions with its related parties which, in the opinion of the Directors, were entered into in the normal course of business: 2005 2004 RMB’000 RMB’000 Sales to associated companies 6,979 1,449 Sales to related companies under common control 105,801 33,417 Purchases from associated companies 6,637 2,443 Purchases from related companies under common control 84,437 27,989 (b) Balances with related parties Amounts due from/to related companies are unsecured, interest free and have no fixed repayment terms. (c) Compensation of key management personnel The remuneration of directors and other members of key management during the year was as follows: 2005 2004 RMB’000 RMB’000 Remuneration 8,153 8,581 Pension funds 387 352 Medical insurance and others 370 319 8,910 9,252 23. FINANCIAL INSTRUMENTS (a) Interest rate risk The interest rates and terms of repayment of bank borrowings of the Group are disclosed in Note 16. Other financial assets and financial liabilities do not have material interest rate risk. (b) Credit risk Accounts receivable of the Group are spread among a number of customers in the PRC and cash is deposited with registered banks in the PRC. The Directors are of the opinion that the Group has no significant concentrations of credit risk on financial assets. (c) Foreign currency risk Most of the transactions of the Group are settled in Renminbi. In the opinion of the Directors, the Group does not have significant foreign currency risk exposure. (d) Fair value The carrying amounts of the following financial assets and financial liabilities approximate their fair value: cash and bank balances, investments and trade receivables. Financial assets of the Group include bank balances, accounts receivable, bills receivable, other receivables and short and long term investments. Financial liabilities of the Group include short term bank and other loans, accounts payable, bills payable and other payables. 24. SUBSIDIARIES Details of the Company’s subsidiaries at 31 December 2005, all of which were incorporated and are operated in the PRC, as follows:- Registered Effective interest held Name of company capital by the Group Principal activity RMB’000 Shenzhen Pharmaceutical 24,190 100% Manufacture of raw material Plant (深圳市制藥廠) for chemical medicine, processing of Chinese patent drugs and medical chemical raw materials Shenzhen Baokang 1,890 100% Sale of Chinese medical Pharmaceutical Co., Ltd. materials, Chinese patent (深圳市保康醫藥有限公 drugs, medical chemical 司) materials, antibiotic preparations Shenzhen Accord Pharm 6,000 100% Sale of Chinese patent drugs Materials Co., Ltd. (深 and western patent drugs 圳市一致藥材有限公 司) (Formerly known as Shenzhen Accord Pharm Materials Ltd.) Shenzhen Pharmaceutical 1,250 100% Sale of western medicine, Company (深圳市醫藥 chemical reagent, Chinese 公司) medical crop, Chinese patent drug Shenzhen Accord Pharm 10,800 100% Retailing of Chinese patent Chain Store Co., Ltd. drugs and western medicine (深圳市一致醫藥連鎖 有限公司) Shenzhen Accord Pharm 500 100% Wholesale and retailing of Co., Ltd. (深圳市一致醫 Chinese patent drugs and 藥有限公司) western medicine Shenzhen Accord 1,000 100% Provision of logistic and Pharmaceutical Logistic storage services Co., Ltd. (深圳一致藥業 物流有限公司) The names of the above companies are directly translated from their registered names in Chinese and may not represent their legal names. 25. RETIREMENT BENEFIT PLANS As a statutory requirement, the Group has to contribute 25.5% of total salaries as retirement benefits for employees to a government agency. Upon retirement of the employees, the government agency will be responsible for the retirement benefits to the employees. During the year, total expenses charged to the consolidated income statement for the retirement benefits of the employees were as follows: 2005 2004 RMB’000 RMB’000 Pension funds 8,985 8,479 Medical expenses 4,899 3,178 13,884 11,657 26. IMPACT OF IFRS ADJUSTMENTS ON PROFIT FOR THE YEAR AND EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT The statutory accounts of the Group are prepared in accordance with PRC accounting regulations applicable to joint stock limited companies. These accounting principles differ in certain significant respects from IFRS. The effects of these differences on the profit for the year ended 31 December 2005 and equity at that date attributable to equity holders of the parent are summarised as follows: Profit after taxation and minority Shareholders' interests funds RMB’000 RMB’000 As determined pursuant to PRC accounting regulations 35,765 393,721 Recognition of losses of subsidiaries in excess of the Company’s investment costs in profit and loss account (242) - Goodwill on acquisition of subsidiaries and amortisation 5,346 (3,627) Others 530 (83) As determined pursuant to IFRS 41,399 390,011 27. POST BALANCE SHEET EVENTS (a) Subsequent to the balance sheet date, the directors propose to pay a dividend of RMB0.38 per 10 shares held. The payment of this dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. The estimated dividend to be paid is RMB10,950,000. (b) In January 2006, the Group acquired a 90% equity interest of SinoPharm Holdings Guangzhou Co., Ltd., a subsidiary of SinoPharm Holdings Co., Ltd. for a total consideration of RMB106,731,000. (c) On 13 March 2006, the Company announced a Share Restructure Proposal under which all holders of the non-publicly trading shares of the Company will transfer the their shares to holders of A shares at the rate of 2.5 shares for every 10 A shares held free of charge in exchange for the public trading rights of the non-publicly trading shares. The proposal will be put to holders of A shares at a meeting to be held on 14 April 2006. Chapter XI Documents for Reference 1. Accounting Statement carrying the signatures and seals of the legal representative, financial chief and person in charge of accounting. 2. Original of Auditors’ Report carrying the seals of Certified Public Accountants, and signatures and seals of the CPAs. 3. Originals of all the documents and notifications of the Company ever disclosed in the report period in Securities Times and Ta Kung Pao designated by CSRC. 4. Original of the Annual Report carrying the signature of the Chairman of the Board. Place the documents stored: Office of the Secretary of the Board, Accord Pharm Bldg., No. 15, Ba Gua Si Road, Futian District, Shenzhen. Chairman of the Board: Chen Weigang Board of Directors of Shenzhen Accord Pharmaceutical Co., Ltd. March 28, 2006