丽珠Ｂ(200513)2008年年度报告（英文版）

Livzon Pharmaceutical Group Inc. 2008 Annual Report April, 2009 Content Section 1 Important notice 2 Section 2 Brief Introduction of the Company 3 Section 3 Financial highlights 4 Section 4 Change of share capital and particulars of shareholders 6 Section 5 Directors, supervisors, senior executives and employees 12 Section 6 Company governance structure 18 Section 7 Briefing of Shareholders’ meeting 21 Section 8 Report of Board of Directors 22 Section 9 Report of Board of Supervisors 41 Section 10 Major events 43 Section 11 Financial Report 58 Section 12 Catalog of files for reference 155 1 Section 1 Important Notice Important notice： The Board of Directors (BOD), Board of Supervisors (BOS), directors, supervisors, senior executives hereby guarantee that the data in the present report contain no false representation, misleading statements and serious omissions, and shall be severally and jointly liable for the authenticity, accuracy and completeness of the content. Miss Gu Yueyue on of the independent directors , asked for leave for the work reason and didn’tattend the meeting. The Financial Statements have been audited, and for which Reanda Certified Public Accountants has been issued qualified opinions. Mr. Zhu Baoguo, Chairman of the company, Mr. An Ning, the principal in charge of accounting, and Ms. Si Yanxia, the principal of the Accounting Department hereby declare: We guarantee the authenticity and completeness of the Financial Report in this report. This report is made both in Chinese and English; in case there is any contraction between the Chinese and English versions, the Chinese version shall prevail. 2 Section 2 Brief Introduction of the Company 1. Chinese name:丽珠医药集团股份有限公司 English name: LIVZON PHARMACEUTICAL GROUP INC. Chinese abbreviation: 丽 珠 集 团 English abbreviation: LIVZON GROUP 2. Legal representative: Zhu Baoguo 3. Secretary of BOD: Li Rucai Representative of stock affairs: Wang Shuguang Telephone :( 0756)8135888 Fax :( 0756)8886002 Email：lirucai2008@livzon.com.cn wangshuguang2008@livzon.com.cn Contact address：Secretary Office of the Board of Directors, Floor 9, Livzon Building, No. 132, Guihua North Road, Gongbei, Zhuhai, Guangdong Province 4. Registered address: No. 132, Guihua North Road, Gongbei, Zhuhai, Guangdong Province Office address: Livzon Building, No. 132, Guihua North Road, Gongbei, Zhuhai, Guangdong Province Post code: 519020 Website: http://www.livzon.com.cn Email: zhlivzon@pub.zhuhai.gd.cn 5. Papers for information disclosure: Securities Times, China Securities and Hongkong Wen Hui Daily (English version) The website appointed by China Securities Regulatory Commission for publishing the annual report: http://www.cninfo.com.cn Location for filing the report: Secretary’ Office of BOD of Livzon Group 6. Stock exchange for listing of the Company: Shenzhen Stock Exchange Share abbreviation and code: Livzon Group (000513) Livzon B (200513) 7. Other relevant information: First registration date of the Company: January 26, 1985 Registration change date of the Company: September 13, 2002 Registration place of Company: Zhuhai Industrial & Commercial Administration Bureau Business licence No.: Qiguyuezhuzhongzhidi No. 001111 Tax Registration No.:440401617488309 Organization code: 61748830－9 8. Domestic public accountant firm engaged by the Company: Reanda Certified Public Accountants Co., Ltd Office address: No. 215, Xingye Road, Zhuhai 3 Section 3 Financial Highlights (The amount is expressed in RMB unless otherwise specified) 1. Main financial data in the report period (Unit：RMB Yuan) Business income 99,603,628.93 Total profit 105,654,084.65 Net profit attributable to the shareholders of listed companies 52,073,163.66 Net profit attributable to the shareholders of listed companies 237,770,433.23 after deduction of non-recurring profit and loss Net cash flows from operating activities 345,176,898.72 Note: Items and amounts of deducted non-recurring profit and loss: (Unit：RMB Yuan) Items 2008 2007 Profit and loss in disposal of non-current assets 1,398,009.66 804,986.06 Governmental allowance accrued to the current profit and loss 9,198,321.77 5,378,413.73 Profit and loss of investment or management of entrusted assets - 8,017,000.00 Except the effective hedge business related to the normal operation business of the company, the profit and loss in the changes of fair values caused by the holding of tradable financial assets and tradable financial liabilities as well as the investment returns in -214,961,122.23 330,276,862.40 disposal of tradable financial assets, tradable financial liabilities and saleable financial assets Other net non-operating income and payment except the above -2,050,603.70 39,604.10 items Other non-recurring profit and loss items 1,318,292.61 - Subtotal -205,097,101.89 344,516,866.29 Minus: effect of income tax -19,582,818.13 50,487,360.77 Minus: effect of equities of the minority of shareholders 182,985.81 207,314.60 Total -185,697,269.57 293,822,190.92 Note: this statement is prepared in accordance with the regulation of No. 1 Explanatory Announcement about Information Disclosure of Companies Making Public Offering of Securities – Non-recurring Profit and Loss(2008) (Zheng Jian Hui Gong Gao (2008) No. 43), and the data in 2007 have been correspondingly adjusted. II. Auditing Difference of Net Profit In accordance with the relevant regulations of the Notice on the Relevant Issue about the Auditing of the Companies That Issue the Domestically Listed B-shares for Overseas Investors issued by China Securities Regulatory Commission on September 12, 2007, (Zheng Jian Hui Ji Zi [2007] No. 30), the company did not perform the annual overseas auditing in 2008. III.Financial Highlights in Recent Three Years 4 (I) Financial data (Unit：RMB Yuan) Increase or decrease 2008 2007 compared with the 2006 previous year (%) Business income 2,058,640,573.53 1,748,108,397.65 17.76% 1,590,501,936.85 Total profit 105,654,084.65 619,978,804.87 -82.96% 202,058,359.87 Net profit attributable to the 52,073,163.66 508,451,060.67 -89.76% 153,465,140.36 shareholders of listed companies Net profit attributable to the shareholders of listed companies 237,770,433.23 214,628,869.75 10.78% 47,626,402.59 after deduction of non-recurring profit and loss Net cash flows from 345,176,898.72 248,553,495.13 38.87% 226,461,050.90 operating activities Increase or decrease End of year 2008 End of year 2007 compared with the End of year 2006 previous year (%) Total assets 2,923,813,250.23 2,945,723,444.38 -0.74% 2,515,146,718.64 Equities attributable to the owners 1,778,535,879.41 1,942,664,119.45 -8.45% 1,398,336,308.46 (shareholders) of listed companies Note: 1. The item “Net profit attributable to the shareholders of listed companies after deduction of non-recurring profit and loss” in the statement will be calculated and filled in accordance with the regulation of No. 1 Explanatory Announcement about Information Disclosure of Companies Making Public Offering of Securities – Non-recurring Profit and Loss (2008) (Zheng Jian Hui Gong Gao (2008) No. 43), and the data in the previous years will be correspondingly adjusted (the same below); 2. The relevant data in 2006 is the data that have been adjusted in accordance with the new accounting standard (the same below). (II) Main financial index (Unit：RMB Yuan) Increase or decrease compared 2008 2007 2006 with the previous year (%) Basic profit per 0.17 1.66 -89.76% 0.50 share Diluted profit per 0.17 1.66 -89.76% 0.50 share Basic profit per share after deduction of non- 0.78 0.70 11.43% 0.16 recurring profit and loss Full dilution of yield Down 23.24 2.93% 26.17% 10.97% rate of net asset percentage points Weighed average Down 27.70 yield rate of net 2.80% 30.50% percentage points 11.64% assets Full dilution of yiel 13.37% 11.05% Up 2.32 percentage 3.41% 5 d rate of net assets after deduction of points non-recurring profit and loss Weighed average yield rate of net assets after Down 0.08 12.80% 12.88% 3.61% deduction of non- percentage points recurring profit and loss Net cash flow per share from 1.14 0.81 40.74% 0.74 operating activities Increase or decrease compared End of year 2008 End of year 2007 with the end of End of year 2006 previous year (%) Net asset per share attributable to listed 5.86 6.35 -7.72% 4.57 companies Note; By December 31, 2008, the company has accumulatively repurchased the quantity of 2,290,620 B-shares; in calculating the above main financial index data, we have deducted the quantity of repurchased shares. Section 4 Change of Share Capital and Particulars of Shareholders I. Particulars of Share Capital Changes (I)Table of share capital changes (By December 31, 2008) (Unit: share) Beginning balance Increase(＋) or decrease(－) Closing balance Sha res tran sfer red fro m Percen Others Subtotal Quantity pub tage lic res Newly Bon erv issued us e Percent share sha fun Quantity age s res d I. Shares with trading 40,606,156 13.27% -15,301,774 -15,301,774 25,304,382 8.27% restriction 1.Shares held by the state 2.Shares held by state- 6,059,428 1.98% 6,059,428 1.98% owned legal person 6 3.Shares held by other 34,546,728 11.29% -15,301,774 -15,301,774 19,244,954 6.29% domestic shareholders Including: shares held by 34,546,728 11.29% -15,301,774 -15,301,774 19,244,954 6.29% domestic legal persons Shares held by domestic natural persons 4. Shares held by foreign investors Including: shares held by overseas legal persons Shares held by overseas natural persons II. Shares without 90.98 265,429,326 86.73% 13,011,154 13,011,154 278,440,480 trading restriction % 1.Renminbi ordinary 51.77 143,122,342 46.77% 15,301,774 15,301,774 158,424,116 shares % 2.Domestically-listed 39.22 Shares for Overseas 122,306,984 39.96% -2,290,620 -2,290,620 120,016,364 % Investors 3.Overseas-listed shares for overseas investors 4.Others Ⅲ. Treasury shares (B 2,290,620 2,290,620 2,290,620 0.75% shares) Ⅳ. Total of shares 306,035,482 100% 306,035,482 100% Note; from December 5, 2008, the company formally implemented the plan to repurchase B-shares; by December 31, 2008, the company has accumulatively repurchased the quantity of 2,290,620 B-shares, which have not been cancelled but is included in the treasury shares of the company. When the repurchase plan is completely implemented, the company will cancel all the repurchased shares in accordance with relevant regulations. (II) Change table of shares with trading restriction (By December 31, 2008) (Unit: share) Quantity of Quantity of shares with Decrease Increase of shares with trading of shares shares with Release date of trading Reason for trading Shareholder name restriction at with trading trading trading restriction restriction the restriction restriction in restriction at the end beginning of in the year the year of year year Joincare Shares with trading Pharmaceutical Group 34,546,728 15,301,774 - 19,244,954 restriction in the equity 2008.12.22 Industry Co., Ltd reform Shares with trading Guangzhou Begol 6,059,428 - - 6,059,428 restriction in the equity - Trading Corporation reform Total 40,606,156 15,301,774 - 25,304,382 - - Note: in the process of equity reform of the company, Joincare Pharmaceutical Group Industry Co., Ltd (hereinafter called as “Joincare”) paid the payable consideration shares of equity reform on behalf of Guangzhou Begol Trading Corporation (hereinafter called as “Begol”); When the trading restriction period expires, Begol will repay such consideration shares to Joincare or their trading restriction cannot be released without the approval of Joincare. 7 (III) Issuing of shares and listing of the company in the past three years 1. The total quantity of share capitals of the company has not been changed in the past three years and the total share capital amounts to 306,035,482 shares. 2. Change of equity structure: On May 31, 2006, the company began the share- trading procedures and the shareholder meeting concerning the share-trading reform of A-share market held on June 26, 2006 examined and passed the Proposal of Share-trading Reform Plans for Livzon Pharmaceutical Group Inc. The Company took 115,672,313 current tradable A-shares as the base, and the non-tradable shareholders would pay 11,567,231 shares to all tradable A-share holders listed on the registration date, i.e., the tradable A-share holders would have 1 price for every 10 shares. On December 7, 2006, the company issued the Implementation Announcement about Share-trading Reform Plans for Livzon Pharmaceutical Group Inc. and scheduled December 8, 2006 as the registration date of share changes. All transfer formalities would be handled on December 11, 2008. In accordance with the share-trading reform commitments, from December 11, 2006 to February 9, 2007, Joincare and its controlled subcompany Tiancheng Industry Co., Ltd increased 52,124,623 tradable A and B-shares through trading system of Shenzhen Securities Exchange. By August 27, 2007, the restriction of above increase shares was released and obtained the circulation right (for more details, please see the company announcement: 2007-39). On December 21, 2007, Joincare and Zhuhai Gongkong Group held 15,882,798 shares with trading restriction and the release formality of trading restriction was handled and such shares obtained the circulation right (for more details, please see the company announcement: 2007-45). On December 22, 2008, the quantity of shares of the company with trading restriction held by Joincare amounted to 15,301,774 shares, and their release formalities of trading restriction have been handled. Such shares obtained the circulation right (for more details, please see the company announcement: 2008-46). The 2008 First Temporary Shareholders’ Meeting of the company held on June 20, 2008 examined and passed the Proposal on Repurchasing Some of Domestically Listed Shares for Overseas Investors (B Shares) of Livzon Pharmaceutical Group Inc. On December 5, 2008, the company formally implemented the repurchase plan; by December 31, 2008, the company has accumulatively repurchased the quantity of 2,290,620 B-shares, which have not been cancelled but is included in the treasury shares of the company. By December 31, 2008, the quantity of shares with trading restriction amounted to 25,304,382 shares, accounting for 8.27% of total share capital, including: ① Joincare directly held 19,244,954 shares, accounting for 6.29% of total share capital; and ②Joincare indirectly held 6,059,428 shares, accounting for 1.98% of total share capital; The quantity of shares without trading restriction amounted to 278,440,480 shares, accounting for 90.98% of total share capital; the quantity of treasury shares of the company amounted to 2,290,620 B-shares, accounting for 0.75% of total share capital. 3. The company had no internal staff shares. 8 II. Particulars of shareholders (I) By December 31, 2008, the shareholder quantity amounted to 34,405 (including 12,806 B-share holders). (II) Particulars of shareholding of top ten shareholders and top ten tradable shareholders (By December 31, 2008)。 Total quantity of The shareholder quantity amounted to 34,405 (including 12,806 B-share holders) shareholders Shares held by top ten shareholders Shareholdin Total Total amount of Shares for the Shareholder g shareholding Shareholder name (full name) percentage quantity at the shares with mortgage or nature trading restriction freezing (％) end of year Domestic non- Joincare Pharmaceutical Group state-owned 25.33% 77,510,167 19,244,954 Industry Co., Ltd legal person Foreign legal Tiancheng Industry Co., Ltd 14.55% 44,537,733 person Foreign legal First Shanghai Securities Co., Ltd 3.44% 10,521,830 person Bank of Communications - Penghua China 50 Open-end Securities Others 2.29% 7,009,990 Investment Fund Bank of Communications- Hua’An Strategy Optimization Stock securities Others 2.28% 6,977,786 investment fund Bank of China - Huaxia Huibao Others 1.99% 6,100,096 Securities Investment Fund State-owned Guangzhou Begol Trading Corporation 1.98% 6,059,428 6,059,428 6,059,428 legal person National Social Securities Fund 104 Others 1.96% 5,999,866 Portfolio Domestic non- Shenzhen Haibin Pharmaceutical Co., state-owned 1.93% 5,892,943 Ltd legal person Domestic non- Shenzhen Shengjibaili Advertisement state-owned 1.63% 5,000,000 Co., Ltd legal person Shareholding particulars of top ten shareholders without trading restriction Quantity of shares without Shareholder name (full name) Share type trading restriction RMB Common Joincare Pharmaceutical Group Industry Co., Ltd 58,265,213 share Domestically-listed Tiancheng Industry Co., Ltd 44,537,733 shares for overseas investors Domestically-listed First Shanghai Securities Co., Ltd 10,521,830 shares for overseas investors Bank of Communications - Penghua China 50 Open-end Securities RMB Common 7,009,990 Investment Fund share Bank of Communications- Hua’An Strategy Optimization Stock RMB Common 6,977,786 securities investment fund share RMB Common Bank of China – Huaxia Huibao Securities Investment Fund 6,100,096 share RMB Common National Social Securities Fund 104 Portfolio 5,999,866 share 9 RMB Common Shenzhen Haibin Pharmaceutical Co., Ltd 5,892,943 share RMB Common Shenzhen Shengjibaili Advertisement Co., Ltd 5,000,000 share RMB Common Bank of China – LOF 4,251,176 share Description of relationship or concrete action of above shareholders: ① On January 2, 2004, Joincare, Begol and Zhuhai Lishi Investment Co., Ltd signed the Agreement on Equity Transfer, Custody and Mortgage. Joincare and Guangzhou Begol Trading Corporation signed the Agreement on Equity Transfer and Custody and the Agreement on Equity Mortgage, in which Guangzhou Begol Trading Corporation directly transferred, custodized and mortgaged 6,059,428 domestic legal person shares of our company (accounting for 1.98% of total shares) to Joincare. ② Tiancheng Industry Co., Ltd and Shenzhen Haibin Pharmaceutical Co., Ltd are the subcompanies directly or indirectly held 100% by Joincare. ③ all of Bank of Communications - Penghua China 50 Open-end Securities Investment Fund, Agricultural Bank of China – LOF and National Social Securities Fund 104 Portfolio belong to Penghua Fund Management Co., Ltd. ④Both of Bank of China - Huaxia Huibao Securities Investment Fund and Bank of China – LOF belong to Huaxia Fund Management Co., Ltd. ⑤The Company does not know whether there are relations between the other top 10 shareholders or top 10 circulation shareholders or whether they belong to the concreted actors stated in the Management Measures about Takeover of Listed Companies. (III) Shareholding quantity and trading restrictions of the top ten shareholders holding shares with trading restriction (by December 31, 2008) Shareholder Increased Quantity of name with the quantity of No. shares with Trading time Trading restriction trading new tradable trading restriction restriction shares Joincare December 21, 2007 15,301,774 Within 12 months from the Pharmaceutical implementation date of 1 49,848,502 December 22, 2008 30,603,548 reform plan, the shares will Group Industry Co., Ltd not be traded; after the expiry, December 11, 2009 49,848,502 the non-tradable shares may be traded through the listing Guangzhou in the Exchange, but their 2 Begol Trading 6,059,428 - - percentage accounting for Corporation total shares will not exceed 5% within 12 months and 10% within 24 months. Note: in the process of equity reform of the company, Joincare Pharmaceutical Group Industry Co., Ltd paid the payable consideration shares of equity reform on behalf of Guangzhou Begol Trading Corporation; when the trading restriction period expires, Begol will repay such consideration shares to Joincare or their trading restriction cannot be released without the approval of Joincare. (IV) Particulars of controlling shareholder of the company Name: Joincare Pharmaceutical Group Industry Co., Ltd Legal representative: Zhu Baoguo Establishment date: December 18, 1992 Scope: Development and wholesale of Chinese medicine (purchase), traditional Chinese medicine, antibiotic raw material and preparations, chemical preparations, food, health food and cosmetics (not including the development of Chinese medicine, traditional Chinese medicine formula products listed as the national protection resources), wholesale of Chinese pills, import and export business and other auxiliary services (The products administrated with quota licence or special regulations shall be subject to the relevant national rules.) Registered capital: RMB 1,097.874 million Yuan. 10 Equity structure: total share capitals: 1,097.874 million shares, including 487.0692 million shares with trading restriction and 610.8048 million shares without trading restriction. (V) Particulars of controlling shareholder of Joincare pharmaceutical Group Industry Co., Ltd Name of controlling shareholder: Shenzhen Baiyeyuan Investment Co., Ltd Legal representative: Liu Guangli Establishment date: January 21, 1999 Main business: investment in the industry; domestic business and supply and marketing of materials. Registered capital: RMB 80 million Yuan. Equity structure: Zhu Baoguo: investment amount-RMB 72 million Yuan, 90% of the total Liu Guangxia: investment amount-RMB 8 million Yuan, 10% of the total (VI) Particulars of natural persons and actual controllers Mr. Zhu Baoguo is the actual controller of the company and has the Chinese nationality with no right of abode in other countries and areas. (VII) Scheme of property right and controlling relationships between the Company and actual controllers (By December 31, 2008) Liu Guangxia Zhu Baoguo Liu Miao 100% 10% 90% Taitai Pharmaceutical Industry Group Limited 0.1% 99.9% Shenzhen Baiyeyuan Investment Co., Hongxinhang Co., Ltd Ltd 48.48% 16.09% Joincare Pharmaceutical Group Industry Co.Ltd 100% Hold 25.33% 100% Mortgage and custody: Shenzhen Haibin Pharmaceutical Co., Ltd 1.98% Tiancheng Industry Co., Ltd 1.93% 14.55% Livzon Pharmaceutical Co., Ltd 11 Note: in the above scheme, the quantity of shares directly and indirectly held and controlled by Joincare accounts for 43.7859% of total share capital of the company. If the repurchased quantity of 2,290,620 B-shares by December 31, 2008 is deducted from the total share capital, the share-holding percentage of Joincare will be 44.1161%. (VIII) Particulars about legal person shareholders holding over 10% of total shares. The company does not have any other legal person shareholders holding over 10% of total shares. Section 5 Particulars of Directors, Supervisors, Senior Executives and Staffs I. Particulars of Directors, supervisors and senior executives (I) Basic information (By December 31, 2008) Equity stimulation Total particulars in the report rewards period Whether Share given by Quant be given s held Share Reas the Quant ity of Marke by the at s held ons Company ity of share t price Gen Beginning and sharehol Name Position Age begin at end for in the share s that of der end of office term der units ning of chan report s have share Price or other of year ges period havin exerci s at associat year (RMB ten g the sed the ed units thousand voting the end of Yuan) rights voting period right Chairman 2008.06－2011.06 Zhu and Male 46 0 0 - 90.00 0 0 0.00 0.00 Yes Baoguo president Liu 2008.06－2011.06 Vice Fem Guangx 40 0 0 - 72.00 0 0 0.00 0.00 Yes Chairman ale ia Gu Fem Director 58 2008.06－2011.06 0 0 - 72.00 0 0 0.00 0.00 Yes Yueyue ale Director 2008.06－2011.06 and An Ning Executive Male 36 0 0 - 566.05 0 0 0.00 0.00 No vice president Qiu 2008.06－2011.06 Qingfen Director Male 37 0 0 - 72.00 0 0 0.00 0.00 Yes g Zhong Director Male 38 2008.06－2011.06 0 0 - 72.00 0 0 0.00 0.00 Yes Shan Hua Independ 2008.06－2011.06 Yizhen ent Male 63 0 0 - 96.00 0 0 0.00 0.00 No g Director 12 Luo Independ 2008.06－2011.06 Xiaoso ent Male 33 0 0 - 48.00 0 0 0.00 0.00 No ng Director Independ 2008.06－2011.06 Wang ent Male 39 0 0 - 96.00 0 0 0.00 0.00 No Junyan Director Cao Superviso 2008.06－2011.06 Male 49 0 0 - 42.00 0 0 0.00 0.00 Yes Pingwei r General Yang Superviso 2008.06－2011.06 Male 42 0 0 - 316.05 0 0 0.00 0.00 No Chu r Pang Superviso 2008.06－2011.06 Male 64 0 0 36.00 0 0 0.00 0.00 No Datong r 2008.06－2011.06 Tao Vice Deshen Male 43 0 0 - 502.17 0 0 0.00 0.00 No President g 2008.06－2011.06 Xu Vice Male 42 205 205 516.93 0 0 0.00 0.00 No Faguo President 2008.06－2011.06 Yang Vice Daihon Male 42 0 0 - 526.27 0 0 0.00 0.00 No President g 2008.06－2011.06 Lu Vice Male 41 0 0 - 494.05 0 0 0.00 0.00 No Wenqi President 2008.06－2011.06 Wang Vice Male 42 330 330 410.76 0 0 0.00 0.00 No Wuping President Xu 2008.06－2011.06 Vice Guoxia Male 45 0 0 - 305.37 0 0 0.00 0.00 No President ng Li Secretary Male 39 2008.06－2011.06 0 0 - 201.26 0 0 0.00 0.00 No Rucai of BOD Total - - - - 535 535 - 4534.91 0 0 - - - Note: the beginning dates of office term of above directors, supervisors and senior executives are respectively their election dates as the directors of the 6th Board of Directors, supervisors of 6th Board of Supervisors, vice presidents and secretary of Board of Directors; the rewards of directors, supervisors and senior executives are the incomes including taxes. Positions of directors and supervisors in its controlling shareholder Whether gets rewards Name Shareholder’ unit Position Office term or allowances(Yes or No) Zhu Joincare Pharmaceutical Group Industry Chairman Since November 1999 Yes Baoguo Co., Ltd Liu Joincare Pharmaceutical Group Industry Vice Chairman Since November 1999 Yes Guangxia Co., Ltd Gu Joincare Pharmaceutical Group Industry Vice general 1997.10-2008.10 Yes Yueyue Co., Ltd manger Secretary to BOD Since November 1999 Qiu Joincare Pharmaceutical Group Industry Vice general Yes Qingfeng Co., Ltd Since August 2006 manger Zhong Joincare Pharmaceutical Group Industry Vice general Since August 2006 Yes Shan Co., Ltd manger Cao Joincare Pharmaceutical Group Industry Vice general Since January 1993 Yes Pingwei Co., Ltd manger Note: the beginning dates of office term of above directors, supervisors and senior executives are respectively their election dates as the directors of the 3th Board of Directors, supervisors of 3th Board of Supervisors, vice 13 presidents and secretary of Board of Directors;in October 2008, Ms Gu Yueyue resigned her position as the vice general manger of Joincare Pharmaceutical Group Industry Co., Ltd for personal reasons. (II) Main working experiences of directors, supervisors and senior executives 1. Mr. Zhu Baoguo is now the chairman and president of the Company. He was also the initiator and chairman of Joincare pharmaceutical Group Industry Co., Ltd. Since 2002, he has been elected as Chairman of the 4th, 5th and 6th Board of Directors of the Company. Since April 2006, he has been elected as the President of the Company. 2. Ms Liu Guangxia is now the Vice Chairman of the company. Since November 1999, she has acted as the Vice Chairman of Joincare pharmaceutical Group Industry Co., Ltd; from April 2007 to June 2008, she was elected as the director the 5th Board of Directors of the company; in June 2008, she has acted as the Vice Chairman of the 6th Board of Directors of the company. 3. Ms. Gu Yueyue is now one of directors of the Company. From 1997 to October 2008, she ever acted as the vice general manager and market supervisor of Shenzhen Taitai Pharmaceutical Company Limited, and the vice general manager and market supervisor of Joincare pharmaceutical Group Industry Co., Ltd. Since 2002, she has been elected as the director of the 4th, 5th and 6th Board of Directors of the Company. 4. Mr. An Ning is now the director and executive vice president of the Company. He was appointed as the Financial Supervisor of Joincare Pharmaceutical Group Industry Co., Ltd from 2001 to 2003 and as the Financial Supervisor and vice president of the company in 2003. Since 2003, he has been elected as the director of the 4th, 5th and 6th Board of Directors of the Company; he has acted as the executive vice president of the company from July 2006 to now. 5. Mr. Hua Yizheng is the independent director of the Company. He was the tutor of Department of Chemistry and Management College in Fudan University. From 1988 to 1993, he became the professional lawyer in Shenzhen Foreign Affairs Law firm. Since 1994, he has been the partner of Guangdong Gaozi Law Firm. He was ever the commissioner of the 1st and 2nd Chinese People's Political Consultative Conference in Shenzhen city. Since 2003, he has been elected as the independent director of the 4th, 5th and 6th Board of Directors of the Company. 6. Mr. Luo Xiaosong is now the independent director of the company. He ever acted as the financial manager of Raystar Daily Necessaries (Shenzhen) Co. Ltd from 2002 to 2005 and the department manager of Shenzhen Greatwall Certified Public Accountants Co., Ltd in 2005. Since June 2008, he has acted as the Independent Director of the 6th Board of Directors of the Company. 7. Mr. Wang Junyan is the independent director of the Company. From October 1997 to December 2006, he acted as the director and general manger of First Shanghai Finance Co., Ltd, and director and general manager of First Shanghai Finance Group Co., Ltd, the fully-owned subcompany engaged in the financial services under First Shanghai Group. From December 1998 to December 2006, he acted as the executive director of China Capital (holding) Co., Ltd listed in Stock Exchange of Hong Kong. Since January 2007, he has acted the Chairman and investment 14 Supervisor General of China Shenghai Investment Management Co., Ltd. He was elected as the independent director of 5th and 6th Board of Directors of the Company in April 2007 and June 2008 respectively. 8. Mr. Qiu Qingfeng is the director of the Company. In 1996, he joined in Shenzhen Taitai Pharmaceutical Company Limited. Now, he acts as the vice general manager and secretary to the BOD of Joincare pharmaceutical Group Industry Co., Ltd. He was elected as the supervisor of the 4th Board of Supervisors of the Company in 2002 and as the director in the 5th and 6th Board of Supervisors in April 2007 and June 2008 respectively. 9. Mr. Zhongshan is the director of the company. from July 1994 to April 2000, he ever worked in Guangzhou Branch of deloitte touché tohmatsu and (Hongkong) Kwan Wong Tan & Fong and was engaged in the auditing and accounting consultancy. In 2001, he joined in Joincare Pharmaceutical Group Industry Co., Ltd and now acts as the vice general manager of the company. He was elected as the director in the 5th and 6th Board of Supervisors in April 2007 and June 2008 respectively. 10. Cao Pingwei is the supervisor general of the Company. Since 1999, he have acted as the vice general manager of Financial Department in Joincare pharmaceutical Group Industry Co., Ltd. Now, he is the director, vice general manager of the Company and principal of Financial Department. Since 2003, he has been elected as the supervisor of the 4th, 5th and 6th Board of Supervisors of the Company. He was elected as the supervisor general of the 5th and 6th Board of Supervisors in April 2007 and June 2008 respectively. 11. Mr. Pang Datong is the supervisor of the company. He ever worked as the President of Shenzhen Investment Management Co., Ltd from 2001 to 2004. Since November 2004, he has been the vice director of Shenzhen Technical and Professional Commission. Since November 2005, he was appointed as the President of Shenzhen General Chamber of Commerce, Director of China Commerce Management Institute and vice president of Guangdong General Chamber of Commerce, etc. From April 2007 to June 2008, he acted as the supervisor of the 5th Board of Supervisors; since June 2008, he has acted as the supervisor of the 6th Board of Supervisors 12. Mr. Yang Chu is now the staff representative supervisor of the company. Since 1996, he has ever acted as the director of general department under the general manager office, manager of auditing department, director of general manager office, supervisor of information head office, supervisor of investment head office and the supervisor of executive head office. Since June 2008, he has acted as the staff supervisor of the 6th Board of Supervisors. 13. Mr. Tao Desheng is the vice president of the Company. He graduated from the Medicine and Chemistry Department of Nanjing Pharmaceutical College and ever acted as the vice president of Guangdong Limin Pharmaceutical factory Research Institute, deputy director of Technology Department in Livzon Pharmaceutical factory, manager of Advertisement Department in Livzon Group, General Manager of Livzon Group Advertisement Co., Ltd, manager of Marketing Department in Livzon Group, vice president of Limin Pharmaceutical factory under Livzon Group, Supervisor of Chinese medicine in Livzon Group, president of Limin Pharmaceutical factory under 15 Livzon Group. Since June 2005, he has been the vice president of the Company. 14. As a licensed pharmacist, Mr. Xu Faguo is the vice president of the Company. He graduated from China Pharmaceutical University in 1988 and was awarded the bachelor's degree. From 2000 to 2002, he ever studied in the enterprise management in the Management College in Zhongshan University. From 1988 to 1992, he worked as the director in the marketing department of the pharmaceutical factory under Nanjing University. From 1992 to 2004, he acted as the sales manager, vice general manager and general manager of Libaosheng biochemical Pharmaceutical Co., Ltd under Livzon Group. In 2005, he was appointed as the general manger of Livzon Pharmaceutical Trading Co., Ltd. Since May 2006, he has been the vice president of the Company. 15. As a pharmaceutical engineer and licensed pharmacist, Mr. Yang Daihong is now the vice president of the Company. From 2000 to 2002, he ever studied in the enterprise management in the Management College in Zhongshan University. From 1988 to 1994, he worked as the director of preparations office in Chongqing Pharmaceutical Research Institute. he acted as the vice general manager of Zhuhai Jianxin Pharmaceutical Company from 1994 to 1997, and then as the director of executive office and assistant to general manager in Libaosheng biochemical Pharmaceutical Co., Ltd under Livzon Group from 1997 to 1999. Since 1999, he has ever been the vice director and director of Livzon Pharmaceutical factory. From May 2006, he has been the vice president of the Company. 16. Mr. Lu Wenqi graduated from automatic control department of Huazhong University of Science and Technology in 1989 and is the vice president of the Company. From 1989 to 1993, he acted as the director and manager of marketing department in Dongguan Jinlong Food Co., Ltd. From 1993 to 1994, he was appointed as the manger in the food department of Hongkong Baixin Group. In 1995, he worked as the manager of Development Management in Shenzhen Taitai Pharmaceutical Co., Ltd and then the director of research institute in Joincare Pharmaceutical Group Industry Co., Ltd. Since October 2006, he has been the vice president of the Company. In February 2007, he was also appointed as the general manger of trading company. 17. Mr. Wang Wuping is the vice president of the Company. He joined in the company in 1993 and worked as the manager in the Stock Department, general manager of Planning and Investment Management Department. From 1998 to 2007, he has acted as the secretary to the Board of Directors. From 2005 to 2007, he was also appointed as the general manager of Xinbeijiang Pharmaceutical Co., Ltd under Livzon Group. Since January 5, 2007, he has been the vice president of the Company. 18. Mr. Xu Guoxiang is now the vice president of the company. From 1996 to 2000, he studied the marketing profession in the Tongji Unniversity. He acted as the general manager of the provincial company of Yangtze River Pharmaceutical Co., Ltd from 1996 to 2005 and as the director of Yangtze River Pharmaceutical Co., Ltd From 2000 to 2005. In March 2007, he ever acted as the supervisor of marketing department of Livzon Pharmaceutical Group Inc. and the general manager of Branch Company in Henan Province. Since December 2007, he has been the vice president of the company. 16 19. Mr. Li Rucai is now the secretary of BOD in the company. In July 1992, he graduated from the auditing profession of Accounting Science Department of Shanghai University of Finance and Economics and held the bachelor degree and the title of accountant. From September 2000 to July 2002, he studied in the enterprise management profession at the Management College under Zhongshan University. From July 1992 to June 2003, he ever worked as the financial manager in Livzon Reagent Factory under Livzon Group, Hongkong Associated Finance Company, Biological Medicine Sales Company under Livzon Group. From July 2003 to May 2005, he acted as the manager of internal auditing center/management accounting center of the finance department of group headquarter; from June 2005 to August 2007, he was appointed as the Supervisor General in the finance department of Xinbeijiang Pharmaceutical Limited Liability Company. Since September 2007, he has acted as the secretary of BOD in the company. (III) Particulars of their annual rewards The 1st meeting of the 6th Board of Directors examined and passed the Proposal on the Engagement of Senior Executives and Their Rewards and formulated the reward standards of senior executives of the Company with the office term of the 6th Board of Directors. (IV) Resignation and engagement Within the report period, both the Board of Directors and Board of supervisors of the company have performed the new election. The 2008 2nd temporary shareholders’ meeting held on June 30, 2008 examined and passed the following appointments: to elect Zhu Baoguo, Liu Guangxia, Gu Yueyue, An Ning, Qiu Qingfeng and Zhong Shan as the directors of the 6th Board of Directors, Hua Yizheng, Wang Junyan and Luo Xiaosong as the independent director of the 6th Board of Directors, Cao Pingwei and Pang Datong as the supervisors of the 6th Board of Supervisors. On June 30, 2008, the company held the 2008 annual staff representative meeting and elected Yang Chu as the staff supervisor representative of the 6th Board of Supervisors. On June 30, 2008, the 1st meeting of the 6th Board of Directors examined and passed the Proposal on the Election of the Chairman and Vice Chairman, Secretary to the Board of Directors and Proposal on the Engagement of Senior Executives and Their Rewards, elected Zhu Baoguo and Liu Guangxia as the Chairman and Vice Chairman of the 6th Board of Supervisors respectively, engaged Mr. Zhu Baoguo as the President, Mr. An Ning as the executive vice president, Tao Desheng, Lu Wenqi, Yang Daihong, Xu Faguo, Wang Wuping and Xu Guoxiang as the vice presidents and Mr. Li Rucai as the secretary of the BOD. During the report period, the company will not renew the engagement of Mr. Gao Dianhe as the independent director for his office term has reached 6 years. The staff supervisor representative Mr. Yuan Guoliu has handled the retirement formalities, so he will not renew this position. The company hereby extends the heartfelt gratitude to Mr. Gao Dianhe and Mr. Yuan Guoliu for their great contributions to the company in their office terms. II. Company’s employees 17 By December 31, 2008, there were 4,241 staffs in the Company. The Company will support 135 retired people. The profession structure and education level of staffs are listed as follows: Profession structure Quantity Education level Quantity Worker 2,202 Doctor 5 Salesperson 987 Master 83 Technical person 640 Bachelor 838 Executive staff 315 College 933 Financial staffs 97 Lower than college 2,382 Section 6 Company Governance Structure I. Company Governance The Company will continuously perfect the legal person governance structure as per the relevant requirements concerning company governance in the Company Law, Securities Law and other regulation documents issued by China Securities Regulatory Commission, strive to strengthen the modern enterprise system construction and improve the governance level of the Company. During the report period, in accordance with the requirements of the [2008] No. 27 Announcement of China Securities Regulatory Commission and Guangdong Securities Regulatory Commission, the Company has performed the special governance activities, inspected the governance status, and prepared and published the Report about the Correction of Special Governance Activities and the Self- Inspection Report on Carrying out the Special Activities to Prevent the Controlling Shareholders from Appropriating the Capitals of Listed Companies in the appointed media. During the report period, the shareholders’ meeting, Board of Directors and Board of Supervisors shall operate strictly and efficiently subject to relevant rules to ensure that all shareholders of the Company shall fulfill their legal rights and protect the interests of investors and the Company. The directors shall perform their open undertaking and sincerely and diligently perform their duties. The supervisors shall independently and effectively supervise and inspect the directors, senior executives and financial status. The actual conditions of company management shall comply with the requirements of normative documents concerning the governance of listed companies issued by China Securities Regulatory Commission. II. Duty performance of independent directors In the report period, all independent directors of the Company fully and earnestly performed their duties, focused on the operation & financial status and legal person management structure of the Company, actively participated in the decision-making process, and grasped the latest development of the Company in the seminars. Concerning the appointment and dismissal of senior executives, fund transfer between the Company and affiliated parties, the external guaranty of the Company and associated transaction, they shall put forward their own opinions to play a good 18 role as the independent director and protect the legal benefits of the Company and legal interests of medium and small shareholders. 1. Attendance of independent directors of 5th Board of Directors to the BOD meetings in the report period Specified attendances of Attendances in Entrusted Name Absence BOD meeting person attendance Gao Dianhe 5 5 0 0 Hua Yizheng 5 5 0 0 Wang Junyan 5 5 0 0 2. Attendance of independent directors of 5th Board of Directors to the BOD meetings in the report period Name Specified Attendances Entrusted Absenc Luo Xiaosong attendances 4 of in person 4 attendance 0 e0 BOD meeting Hua Yizheng 4 4 0 0 4 4 0 0 Wang Junyan 3. The independent directors have no different opinions about relevant agendas of the company in the report period. III. The Company’s independence from controlling shareholders in business, personnel, assets, organization and finance The Company is completely independent from the controlling shareholders in business, personnel, assets, organization and finance, etc. (I) Business: the Company has the independent and complete capacity to deal with its businesses, owns its own production, purchase and marketing systems. The purchase, production and marketing of main materials and products are fulfilled by its production, purchase and marketing systems. (II) Personnel: the Company is completely independent from the controlling shareholders in labor, human resources and salary management. (III) Asset: the Company has the clear relationship with the controlling shareholders in property rights, and owns the complete assets and independent production, supply and marketing systems. (IV) Organization: the Company has established the independent and complete organization system and is strictly separated from the controlling shareholders in organizations. (V) Finance: the Company has the independent Financial Department, establishes the independent accounting system and owns the standardized and independent 19 accounting system and financial management system of the subordinate enterprises. IV. Establishment and Perfection of Internal Control Systems of the Company (I) Overview of Internal Control In accordance with the relevant laws and regulations such as the Company Law, the Securities Law and the Basic Regulations of Enterprise Internal Control, etc as well as the Articles of Association, the company has continuously perfected and regulated the internal control organization frame of the company, established and perfected the various internal control systems of the company; the internal control bodies such as the shareholders’ meeting, Board of Directors, Board of Supervisors and management can effectively operate and protect against and control the existing risks in the company operation in order to maintain the interests of all investors of the company. According to the Announcement ([2008] No. 27) of China Securities Regulatory Commission and the Guidelines for Internal Control of Listed Companies (hereinafter referred as Guidelines for Internal Control) issued by Shenzhen Stock Exchange as well as the relevant requirements of Guangdong Securities Regulatory Commission, the company has conducted the further self-inspection and correction about special activities on governance of listed companies, prepared the self-inspection reports, emphasized in strengthening internal corporate controlling systems, fully implemented, perfected and supervised the internal controlling systems. (II) Key Control Activities 1. Control management of controlled subcompanies: ① the company dispatches the directors, supervisors and key senior executives to the controlled subcompanies and specifies their duties and rights; ② the company regularly convenes the operation analysis meetings, and reviews the monthly, quarterly and annual operation and financial reports of all controlled subcompanies; ③ By the budget management, the company implements the effective performance assessment about the controlled subcompanies. 2. Internal control of associated transactions: the company established and perfects the Management System of Associated Transactions to detailedly specify the principles of associated transactions, association parties and association relationship, and decision-making and disclosure procedures of associated parties. Based on the needs of operation and development, in each year, the company will submit the proposals about daily associated transactions affairs to the Board of Directors and shareholders’ meeting. The associated transactions of the company will be strictly implemented in accordance with the Management System of Associated Transactions. 3. Internal control of external guaranty: in order to regulate the external guaranty of the company and effectively control the risks of such guaranty, the company has defined the approval authority of shareholders’ meeting and Board of Directors about guaranty affairs in the Articles of Association. In the report period, the Board of Directors has examined and passed the guaranties provided to the subcompanies and performed the approval procedures of guaranties and information disclosure obligations. The independent directors of the company have earnestly performed their duties and put forward their independent opinions about external guaranties. 20 4. Internal control of use of raised funds: in the report period, the company has not used the raised funds. The company has formulated the Use Management System of Raised Funds to further regulate the use and management of raised funds. 5. Internal control of key investments: the company formulated the Management System of External Investment to specify the basic principles of external investment, auditing procedures of external investment, approval and management procedures of external investment, etc. the company has strictly performed the approval procedures of investment decision-making in accordance with relevant laws and regulations, Articles of Association and other systems of the company. 6. Internal control of information disclosure: the company revises the management measures of information disclosure to detailedly specify the procedures of information disclosure and define the disclosure procedures of key temporary reports and key information; further specify the management and responsibilities of information disclosure and define the affairs about archives management, confidentiality and penalty, etc. The company will strictly implement this system, comply with relevant requirements of laws, regulations and normative documents, and seriously perform the information disclosure obligations. Overall assessment of the company about internal control: the existing internal control system of the company are perfect, reasonable and effective; the key activities of internal control will be carried out in accordance with various systems about internal control; the company is strictly and effectively implementing the internal control about subcompanies, association transactions, external guaranty, use of raised funds, key investments and information disclosure in order to ensure the normal operation and management of the company. V. Establishment and Implementation of the Assessment and Stimulation Systems of Senior Executives In 2008, the Company continued to implement the target annual reward system. The Company combines the personal performance with economic efficiency results and issues the floated annual rewards. The annual reward of senior executives is divided to two parts, namely, 77% and 23%. 77% of it will be issued each month and 23% issued after the annual assessment at the end of year. Section 7 Briefing on Shareholders’ Meeting I. Convening of shareholders’ meeting (I) Convening of Annual Shareholders’ Meeting The 2007 shareholder’s meeting was convened in the conference room, Floor 2, Livzon Building, No. 132, Guihua North Road, Gongbei, Zhuhai on March 21, 2008. The meeting resolution was published in Securities Times, China Securities Journal, Hongkong Wen Hui Daily (English version) and Juchao Website (Announcement No. 2008-08) on March 22, 2008. 21 (II) Convening of Temporary Shareholders’ Meetings 1. The 2008 first temporary shareholder’s meeting was convened in the conference room, Floor 2, Livzon Building, No. 132, Guihua North Road, Gongbei, Zhuhai on June 21, 2008. The meeting resolution was published in Securities Times, China Securities Journal, Hongkong Wen Hui Daily (English version) and Juchao Website (Announcement No. 2008-31) on June 21, 2008. 2. The 2008 second temporary shareholder’s meeting was convened in the conference room, Floor 2, Livzon Building, No. 132, Guihua North Road, Gongbei, Zhuhai on June 31, 2008. The meeting resolution was published in Securities Times, China Securities Journal, Hongkong Wen Hui Daily (English version) and Juchao Website (Announcement No. 2008-33) on July 1, 2008. Section 8 Report of the Board of Directors I. Review of company operation in the report period (I) Overview of overall operation of the company in the report period Influenced by the international financial crisis and economic recession in the whole world, the increase tendency of domestic pharmaceutical industry dropped to some extent in the second half of 2008. However, as the trial scope of basic medical insurance system for urban residents continuously expands, the new rural cooperation medical system is widely promoted and the new round of medical and health system reforms are being issued and implemented, the great potential of domestic medical consumption market is gradually appearing and will greatly push the continuous growth of domestic pharmaceutical industry. In 2008, the domestic pharmaceutical industry has kept the good development tendency; the production and sales are steadily increasing and the economic benefits are good. The company will grasp the golden opportunity of medical reforms, strengthen the internal management, further deepen the marketing reform, enhance the promotion of key products, actively develop the new markets, continuously enlarge the sales scale, achieve the growth in both the main business income and main business profit and basically complete the operation objective formulated at the beginning of year. For more information, please see the following: 1. Operating income Within the report period, the business income of the company amounted to RMB 2,058.64 million Yuan, up RMB 310.53 million Yuan from 1,748.11 million Yuan at the same period of previous year with the increase rate of 17.76%. The main causes are that the marketing reform has contributed to the increase of sales volume of medical products. The increase mainly comes from the sales increase of Chinese medicine preparation products, medicines for reproduction, diagnostic reagents and raw materials. The sales income of Chinese medicine preparation products increase by 25.90%; the sales income of medicines for reproduction increases by 44.99%; the sales income of diagnostic reagents increases by 24.05%; the sales income of the raw material medicines increases by 12.85%. 22 2. Operating profit In the report period, the company has made the operating profit of RMB 99.60 million Yuan, down RMB 514.16 million Yuan than RMB 613.76 million Yuan in the previous year with the decrease rate of 83.77%; the main cause is the huge decrease of returns from the changes of fair values and investment returns. 3. Net profit The company achieved a net profit attributable to the owners of parent company of RMB 52.07 million Yuan, down RMB 456.38 million Yuan than RMB 508.45 million Yuan over the previous year, with the decrease rate of 89.76%; the main cause is the huge decrease of returns from the changes of fair values and investment returns. If excluding the influence of securities investment and other factors, in terms of the main business, the company has made an operating profit of RMB 314.99 million Yuan, up RMB 37.37 million Yuan from RMB 277.62 million Yuan in the previous year, with the increase rate of 13.46%. The net profit attributable to the owners of parent company that is contributed by the main business is about RMB 237.77 million Yuan, up RMB 23.14 million Yuan from RMB 214.63 million Yuan, with the increase rate of 10.78%. (II) Business scope and analysis of operation status The company specializes in the production, marketing and scientific researches of medicine products. The main products are Bismuth Potassium Citrate Granules series, antivirus granules, Shenqifuzheng injection, Cefoperazone Sodium and Sulbactam Sodium for Injection, Live Bifidobacterium Preparation, Valaciclovir Hydrochloride Tablets, Qianliean Suppository, Naolilong, Urofollitropin for Injection (follicle stimulating), Factive film-coated tablets and other medical preparations, as well as Ceftriaxone sodium, Mevastatin, Pravachol, Cefuroxime, Phenylalanine and some other raw-material drugs, which involve chemical drugs, biochemical drugs, micro-ecological preparations, Chinese patent drugs, chemical raw materials, diagnostic reagents and so on, all together over 180 kinds of products in various medical fields. 1. In the report period, the income of the company’s main business is distributed as follows according to the regions (based on the data statistics of the main solely- invested and controlling subsidiary companies) (Unit: RMB 1000 Yuan) 23 Main business income Increase or decrease of main business Region income compared 2008 2007 with the previous year (%) Northeast China 116,497.95 -9.99% 104,857.05 North China 320,516.74 21.72% 390,137.97 Central China 180,221.10 -9.90% 162,370.59 East China 331,229.25 17.08% 387,803.22 South China 360,674.69 34.39% 484,706.62 Southwest China 214,512.83 10.72% 237,501.35 Northwest China 84,754.65 -9.84% 76,412.36 Export 179,767.15 167,549.11 7.29% 2. In the report period, the main business income is classified according to the profession status: (Unit: RMB 1000 Yuan) Increase or Increase or Business decrease of decrease of Increase or cost business business decrease of Business Operating income cost operating profit Profession income profit margin compared compared margin compared with the with the with the previous previous year previous year (%) (%) year (%) Down 1.00 Wes Digestive tract 219,969.36 34,502.14 84.32% 14.71% 22.51% percentage point tern Cardiac and cerebral 81,485.65 23,125.33 71.62% 0.21% -1.21% Up 0.41 percentage blood vessel point med Up 4.35 percentage Antimicrobial drugs 248,116.75 118,042.48 52.42% 6.29% -2.63% points icin Gonadotropic Up 6.41 percentage 143,470.78 51,418.20 64.16% 44.99% 23.00% e hormone points prep Blood and Down 22.15 hemopoietic system 15,342.26 9,088.74 40.76% -55.80% -29.39% percentage points arati drugs Up 8.85 percentage on Others 90,057.40 37,075.62 58.83% 154.03% 109.07% points Down 4.93 Raw material drugs 646,625.58 622,241.11 3.77% 12.85% 18.94% percentage points Chinese traditional drug Up 1.20 percentage 433,578.53 130,765.90 69.84% 25.90% 21.09% preparation points IClinical Diagnosis Up 6.53 percentage 144,660.61 68,008.17 52.99% 24.05% 8.93% Reagent points Agency of imported Up 2.94 percentage 1,645.96 414.03 74.85% 56.37% 39.99% products points 24 Up 0.83 percentage Total 2,024,952.87 1,094,681.71 45.94% 18.37% 16.57% points 3. Products that account for over 10% of total business income or total operating profit: (Unit: RMB 1000 Yuan) Increase or Increase or decrease of decrease of Increase or business business decrease of Business Business Operating income cost operating profit Product income cost profit margin compared compared margin compared with the with the with the previous previous previous year (%) year (%) year (%) Shenqifuzheng Down 5.83 200,927.60 34,681.79 82.74% 52.06% 56.59% injection solution percentage points Down 1.93 Dele series 129,119.89 24,106.02 81.33% 19.65% 33.37% percentage points Total 330,047.49 58,787.81 - - - - 4. Particulars about main clients and suppliers In this year, the total sales volume of products sold to the top 5 clients amounted to RMB 162.0387 million Yuan, accounting for 7.87% of total sales volume of the company; the total amount of top 5 suppliers reached RMB 252.98572 Yuan, accounting for 27.33% of total purchase amount of the company. (III) Particulars about company assets at the end of report period At the end of report period, the total assets of the company amounted to RMB 2,923.81 million Yuan, and the net assets RMB 1,834.52 million Yuan, including: ⑴ the current asset: RMB 1,609.85 million Yuan, accounting for 55.06% of total assets at the end of period, up RMB 23.78 million Yuan, with the increase rate of 1.50% over the beginning of year; Based on the analysis of main composition items, we find that: ① the main cause is the increase of currency capitals and notes receivable. At the end of period, the currency capitals of the company amounted to RMB 540.18 million Yuan, up RMB 257.52 million Yuan over the beginning of year with the increase rate of 91.11%; the main causes are the increase of both the sales incomes and the short-term loans; ② the notes receivable amounted to RMB 200.74 million Yuan, up RMB 75.62 million Yuan with the increase rate of 60.43%. The main causes are the increase of both the sales incomes and the bank acceptance bills. ⑵the non- current asset: RMB 1,313.96 million Yuan, accounting for 44.94% of total assets at the end of period, up RMB 45.69 million Yuan, with the decrease rate of 3.36% over the beginning of year. The main cause is that the saleable financial assets decreased 25 by RMB 51.90 million Yuan (disposal of the stocks of Huadong Medicine and Nanjing Medical) over the beginning of year. In terms of other items such as the long-term equity investment, fixed assets and engineering under construction, there are no major changes. At the end of report period, the total liabilities amounted to RMB 1,089.29 million Yuan, accounting for 37.26% of total assets at the end of period, including: current liabilities: RMB 967.37 million Yuan, accounting for 88.81% of total liabilities. Based on the analysis of main composition items, we find that: the short-term loans amounted to RMB 520.71 million Yuan, accounting for 47.80％ of total liabilities and 53.83％ of current liabilities, up RMB 141.70 million Yuan, with the increase rate of 37.39%;the main causes are: in 2008, the credit loan policies in China are intensified; to keep the sufficient capitals, the company reasonably uses the financial lever and increases the loans. The long-term loans amounted to RMB 100.70 million Yuan, accounting for 9.24 ％ of total liabilities and 83.00 ％ of non-current liabilities, up RMB 30.00 million Yuan, with the increase rate of 42.43%. The main cause is the increase of long-term loans from banks. The assets held by the company that are calculated with fair values as well as the foreign currency financial assets and financial liabilities are listed as follows: The assets that are calculated in fair values (Unit: RMB 1000 Yuan) Profit and loss Accumulative Depreciation Amount at the in the changes changes of fair amount Amount at Item beginning of of fair values values that are withdrawn in the end of period in the current accrued to the the current period period equities period Financial assets Including; 1. financial assets or financial liabilities that are calculated in the 448,101.01 -248,323.20 - - 121,777.82 fair values and whose changes are accrued to the current profit and loss Including: 1. derivative - - - - - financial assets 2. Saleable financial 58,571.94 - 50,606.99 - 6,674.80 assets Subtotal of financial assets 506,672.95 -248,323.20 50,606.99 - 128,452.62 Financial liabilities - - - - - Total 506,672.95 -248,323.20 50,606.99 - 128,452.62 Particulars about the foreign-currency financial assets and financial liabilities 26 (Unit: RMB 1000 Yuan) Deprecia Profit and Accumulative tion loss in the Amount at the changes of fair amount changes of Amount at the Item beginning of values that are withdraw fair values in end of period period accrued to the n in the the current equities current period period Financial assets Including; 1. financial assets or financial liabilities that are calculated in the fair values 118,222.46 -57,933.52 - - 33,807.26 and whose changes are accrued to the current profit and loss Including: 1. derivative - - - - - financial assets 2. Loans and accounts 74,784.09 - 630.89 76,486.39 - receivable 3. Saleable financial - - - - - assets 4. Investments that - - - - - are held to the expiry date Subtotal of financial assets 193,006.55 -57,933.52 - 630.89 110.293.64 Financial liabilities - - - - - Total 193,006.55 -57,933.52 - 630.89 110.293.64 Confirmation and Calculation of Financial Instruments: ⑴The financial assets that are calculated in the fair values and whose changes are accrued to the current profit and loss: the fair values to get them will be the initial confirmation amount and the relevant transaction expenses will be accrued to the current profit and loss at the time of occurrence. The cash dividends or bond interests in the payments that have been declared to be distributed will be separately confirmed as the receivable items. The interests or cash dividends obtained during the holding period will be confirmed as the investment gains. On the preparation date of financial statement, the changes of fair values will be accrued to the current profit and loss. ⑵Saleable financial assets: the sum of fair values and relevant expenses to get them will be deemed as the initial confirmation amount. The cash dividends or bond interests in the payments that have been declared to be distributed will be separately confirmed as the receivable items. The interests and cash dividends generated during the holding period will be accrued to the interest gains. At the end of the period, the saleable financial assets will be calculated in the fair values and the changes of fair values will be accrued to the capital reserves (other capital reserves). (V) Changes of three expenses and tax rate of the company in the report period 27 In the report period, the three expenses of the company totally amounted to RMB 601.56 million Yuan, up RMB 124.97 million Yuan, with the increase rate of 26.22%, including: 1. the sales expense amounted to RMB 377.28 million Yuan, up RMB 112.41 million Yuan, with the increase rate of 42.44%, the main causes are the increase of sales income and adjustment of sales policies; 2. the management expense amounted to RMB 197.77 million Yuan, up RMB 3.15 million Yuan, with the increase rate of 1.62%, and there were no key changes; 3. the financial expense amounted to RMB 26.52 million Yuan, up RMB 9.40 million Yuan, with the increase rate of 54.94%, and the main cause is that the increase of the paid interests for bank loans in the current period. In the report period, the total of payable income tax expense amounted to RMB 32.75 million Yuan, down RMB 63.85 million Yuan, with the decrease rate of 66.10%; based on the analysis of main composition items, we find that: ⑴ the income tax expense in the current period amounted to RMB 66.06 million Yuan, down RMB 11.69 million Yuan, with the decrease rate of 15.03%. The main cause is that the company and some of the controlled subcompanies have enjoyed the preferential tax rate policies for the hi-tech enterprises; ⑵ the deferred income tax expense amounted to RMB -33.32 million Yuan and the main cause is the increase of the deductible temporary difference caused by the changes in the fair values of tradable financial assets in the report period. (VI) Cash flow status of the company in the report period In the report period, the balance of cash and cash equivalents in the company amounted to RMB 540.18 million Yuan, with the net increase of RMB 258.96 million Yuan from RMB 281.23 million Yuan at the same period of previous year, including: ⑴ The net amount of cash flow from the operating activities in this period reached RMB 345,21 million Yuan, up RMB 96.66 million Yuan compared with RMB 248,55 million Yuan at the same time of previous year with the increase rate of 38.89％. Based on the analysis of main composition items, we find that: ①the cash received from the commodity sales and labor provision increased by RMB 360.01 million Yuan, with the increase rate of 24.99%, and the main cause is that the marketing reform 28 has improved the sales volume of medical products; ②. the cash paid for other operating activities increased by RMB 101.36 million Yuan, with the increase rate of 36.43%, and the main cause is that the adjustment of marketing systems have increased the business promotion expense; ③the taxes increased by RMB 57.79 million Yuan, with the increase rate of 27.96%, and the main cause is that the increase of paid income tax in the report period. ⑵ The net amount of cash flow from the investment activities in this period reached RMB － 20.05 million Yuan, down RMB 5.61 million Yuan compared with RMB － 14.41 million Yuan at the same period of previous year, with the decrease rate of 38.93％ . Based on the analysis of main composition items, we find that: ①the cash received from the investment return decreased by RMB 361.96 million Yuan, with the decrease rate of 73.95% and the main cause is the decrease of cash received from the securities investment; ② the cash paid to construct the fixed assets, intangible assets and other long-term assets decreased by RMB 15.76 million Yuan, with the decrease of 17.26%; ③ the net cash amount paid to acquire the subcompanies and other operating units increased by RMB 71.29 million Yuan, and the main cause is the purchase of Yuanxing company. ⑶ The net amount of cash flow from the raising activities in this period reached RMB － 63.37 million Yuan, up RMB 169.68 million Yuan compared with RMB －233.05 million Yuan at the same period of previous year. Based on the analysis of main composition items, we find that: ① Cash received from loans increased by RMB 463.54 million Yuan, with the increase rate of 54.08%, and the main cause is the increase of short-term loans from banks; ② Cash paid for distribution of dividends, profits and repayment of interests increased by RMB 161.52 million Yuan, with the increase rate of 407.17%, and the main cause is the implementation of the 2007 annual profit distribution plan; ③ Cash payments related to other financing activities increased by RMB 10.90 million Yuan, with the increase rate of 222.41%, and the main cause is the implementation of B-share repurchase plan. ④ In the report period, there is a great difference between the net cash flows from operating activities (RMB 345.18 million Yuan) and the consolidate net profit (RMB 29 70.92 million Yuan) and the main cause is the effects of fixed asset depreciation and changes of fair values. For more details, please see the “Supplementary Data of Cash Flow Statement” in the page 58 of the notes to the financial statement. (VII) Operation Status and Achievements of the Main Controlling Companies and Associated Companies 1. Livzon Syntpharm Co., Ltd in Zhuhai Bonded Area: its registered capital is RMB 102.28 million Yuan, mainly engaged in the production and operation of chemical raw materials. The main products are Cefuroxime Sodium, Cefodizime sodium, Ceftriaxone and so on. At the end of report period, the total assets had reached RMB 338.18 million Yuan, with the net assets of RMB 111.89 million Yuan. In 2008, the business income was RMB 428.08 million Yuan, the business profit RMB － 4.49 million Yuan and the net profit RMB － 3.33 million Yuan. The main cause of the loss is that the rise of raw material prices has caused the increase of production costs. 2. Sichuan Guangda Pharmaceutical Co., Ltd: its registered capital is RMB 95 million Yuan, mainly engaged in the production and marketing of Chinese patent drugs as well as the development of new drugs. The main products are antivirus granules, Kouyanning infusion and so on. At the end of report period, the total assets had reached RMB 205.66 million Yuan, with the net assets of RMB 159.75 million Yuan. In 2008, the business income was RMB 188.42 million Yuan, the business profit RMB 50.39 million Yuan and the net profit RMB 42.20 million Yuan. 3. Limin Pharmaceutical Co., Ltd under Livzon Group: its registered capital is 61.56 million Yuan, mainly engaged in the production and operation of Chinese traditional medicine preparations, medical raw materials and so on. The main products are Shenqifuzheng injection solution, Xueshuantong and so on. At the end of report period, the total assets had reached RMB 235.97 million Yuan, with the net assets of RMB 182.97 million Yuan. In 2008, the business income was RMB 187.04 million Yuan, the business profit RMB 106.51 million Yuan and the net profit RMB 92.54 million Yuan. 4. Xinbeijiang Pharmaceutical Limited Liability Company under Livzon Group: its registered capital is RMB 134.93 million Yuan, mainly engaged in the export and production of self-supporting and home-grown products and relevant technologies. 30 The main products are Mevastatin, Pravachol and so on. At the end of report period, the total assets had reached RMB 231.70 million Yuan, with the net assets of RMB 87.85 million Yuan. In 2008, the business income was RMB 116.42 million Yuan, the business profit RMB －24.54 million Yuan and the net profit RMB -27.78 million Yuan. The main causes of the loss include: (1) the prices decreased due to the intense competition of main products; (2) the prices of main raw materials increased and the costs went up; (3) the Renminbi appreciation went very fast and the exchange loss also increased. 5. Livzon Pharmaceutical Factory under Livzon Group: its registered capital is 177.11 million Yuan, mainly engaged in the production and operation of Bismuth Potassium Citrate Granules series, Live Bifidobacterium Preparation and Cefoperazone Sodium and Sulbactam Sodium for Injection. At the end of report period, the total assets had reached RMB 465.17 million Yuan, with the net assets of RMB 327.68 million Yuan. In 2008, the business income was RMB 442.69 million Yuan, the business profit RMB 113.97 million Yuan and the net profit RMB 98.02 million Yuan. 6. Zhuhai Livzon Medicine Trade Co., Ltd: its registered capital is RMB 60 million Yuan, mainly engaged in the import and export of traditional Chinese medicine and western medicine preparations, medical intermediates and so on. The main product varieties are Valaciclovir Hydrochloride Tablets, Qianliean Suppository and Naolilong. At the end of report period, the total assets had reached RMB 190.56 million Yuan, with the net assets of RMB 73.73 million Yuan. In 2008, the business income was RMB 314.04 million Yuan, the business profit RMB 15.30 million Yuan and the net profit RMB 12.79 million Yuan. 7. Fuzhou Fuxing Pharmaceutical Co., Ltd under Livzon Group: its registered capital is USD 33.70 million, mainly engaged in the production of the raw materials of antibiotics, intermediates, preparations and chemical raw materials for medicine production and so on. The main products are Colistin Sulfate, vancomycin and Kanamycin Monosulf. At the end of report period, the total assets had reached RMB 424.45 million Yuan, with the net assets of RMB 259.23 million Yuan. In 2008, the business income was RMB 191.79 million Yuan, the business profit RMB － 3.00 million Yuan and the net profit RMB －0.48 million Yuan. The main causes of the loss 31 are that: (1) influenced by the financial crisis, the product export decreased in the second half of 2008; (2) the product prices decreased due to the intense competition of products. 8. Lida Pharmaceutical Co., Ltd in Zhuhai Bonded Area: its registered capital is RMB 26 million Yuan, mainly engaged in the production, processing and marketing of home-grown chemical raw materials. The main products are the raw materials of Bismuth Potassium Citrate (CBS). At the end of report period, the total assets had reached RMB 119.39 million Yuan, with the net assets of RMB 52.26 million Yuan. In 2008, the business income was RMB 50.06 million Yuan, the business profit RMB 25.28 million Yuan and the net profit RMB 23.04 million Yuan. 9. Zhuhai Livzon Reagents Co., Ltd.: its registered capital is RMB 46.45 million Yuan, mainly engaged in the production and marketing of diagnostic reagents. The main products are Chlamydia trachomatis antigen diagnostic reagent kit and HIV antibody diagnostic regent kits. At the end of report period, the total assets had reached RMB 98.83 million Yuan, with the net assets of RMB 52.92 million Yuan. In 2008, the business income was RMB 144.71 million Yuan, the business profit RMB 30.07 million Yuan and the net profit RMB 24.53 million Yuan. 10. Shanghai Livzon Pharmaceutical Co., Ltd: its registered capital is RMB 87.33 million Yuan, mainly engaged in the production of biochemical and polypeptide raw- material drugs. The main products are the bio-chemical raw material medicines such as Menotrophin and Chorionic Gonadotrophin for Injection, etc. At the end of report period, the total assets had reached RMB 106.87 million Yuan, with the net assets of RMB 83.26 million Yuan. In 2008, the business income was RMB 75.26 million Yuan, the business profit RMB 6.63 million Yuan and the net profit RMB 6.69 million Yuan. II. Outlook of future development and operation plan in the new year (I) Outlook of development tendency of domestic pharmaceutical industry in 2009 In 2009, the demands of domestic pharmaceutical market will still be huge. With the growth of the participation ratio of new rural cooperation medical system increases, the continuous expansion of basic medical insurance system for urban residents and the promotion of the new round of medical and health system reforms, the scale of domestic medical market will continuously grow up and this will create a good external environment for the fast development of pharmaceutical industry. It is 32 forecast that the domestic pharmaceutical industry in 2009 will continue to keep the fast development tendency, and the production and sales and the efficiency level of pharmaceutical industry will be kept in the quick increase. (II) Main affecting factors in the future and counter-measures In 2009, the pharmaceutical industry will keep steadily increasing and the medical reform will also play the positive pushing role. However, due to the financial crisis, economic recession in the whole world and the implementation of national macro- control policies, there will also be some uncertain factors related to the industry development. 1. In 2009, there will still be the effects of economic recession in the whole world and Renminbi appreciation and the export of domestic pharmaceutical enterprises will face the severe challenge. For the company, the export business of material medicine manufacturers of raw will be affected. Company’s countermeasures: In 2009, the company will strengthen the improvement of production technologies in the raw material manufacturers, reduce the production costs, and improve the market competitiveness; in terms of the Renminbi appreciation, the company will formulate the corresponding financial measures and reduce the negative effect of Renminbi appreciation. 2. The medical system reform will directly affect the development of overall pharmaceutical economy and the further reform of medicine prices will bring the uncertainty of industry increase, so the pharmaceutical industry situation will continue to evolve. The expansion of medical products whose prices are specified by the government, the control of price addition in the circulation cycle and the possible separation policies of treatment and medical products will have the significant effect on the pharmaceutical industry. Company’s countermeasures: In line with the change of medical product prices and medical system reform, the company will continue to deepen the reform of marketing systems, strengthen the development of new markets, and actively promote the sales of new products and advantageous products. 3. The supervision of medical products will become stricter. The new policies about registration of medical products and the GMP revision will push the standardized development of pharmaceutical industry. In 2009, in order to strengthen the safety 33 supervision of medical products and regulate the market order, the new supervision policies of medical products will be issued. The pharmaceutical enterprises will need to rationally face the strict supervision environment and the standardized development will be the main subject in the development of pharmaceutical economy in the future. Company’s countermeasures: The company will continue to urge the subcompanies to perform the quality management in the process of production and circulation of medical products in accordance with the laws and regulations concerning the production and circulation of medical products issued by the nation, and further keep the advantage in the product quality and safety. (III) Strategic Outlook in the Future The company formulates the strategic development plan aiming to become the pharmaceutical production enterprise with advanced innovation ability in the country and international competitiveness in such aspects of the production, technology and management, etc. In the next several years, the company will, with the enlargement of sales scale and promotion of profit growth as the starting point, actively introduce and develop the new products, explore the potentials of the existing products, and formulate the promotion plans for key products so as to push the stable and steady development of the company. (IV) Operation Plan for the New Year According to the above strategic objective, the management plan of the company in year 2009 is as follows: 1. Quantitative arrangement of operation plan The overall operation plan of Livzon Group in 2009 is: the main business income will reach RMB 2.434 billion Yuan, the net profit RMB 0.31 billion Yuan. 2. Develop more sales channels and further enlarge the sales In 2009, the group will further make clear the sales thought, continue to perfect the sales frame, strengthen the overall and collaborative advance of the third end, OTC and prescription medicine, formulate and optimize the sales policies, strengthen the assessment, establish and perfect the supervision and guideline systems, fully track, supervise and direct all examination measures, stimulation policies and internal management, and enhance the implementation ability so as to ensure the 34 achievement of the annual sales tasks. At the same time, the company will continue to emphasize the product quality, reduce the production costs, properly tighten the payments and strictly control the expenses. 3. Perfect the quality assurance system and ensure the quality and safety of medical products In 2009, the group will continue to perfect the quality assurance system and ensure the quality and safety of medical products. The group will continue to insist on the operation principle of “the quality is the enterprise life” and the quality policy of “Human-oriented, quality excellence, continuous improvement, strictly implement GMP, and ensure the quality and safety of medical products”, strictly comply with implement the supervision regulations about medical products, and strengthen the basic work about quality management in terms of the equipments, technologies and personnel. (V) Plans about capital demands in the future In order to realize the group’s development strategy, the plan about capital demands and capital resources in the coming several years are listed as follows: 1. Invest RMB 887. 23 million Yuan in the project of relocation of Livzon Pharmaceutical Production Factory under Livzon Group; construct the new production base and auxiliary projects including cartons, package of medical products and healthcare products. The capital resource is the bank loans and self- owned capital; 2. Invest RMB 43.00 million Yuan in the enlargement project of the No. 2 packaging plant of Shenqifuzheng injection and the capital resource is the self-owned capital; 3. Invest RMB 5.00 million Yuan in the enlargement project of the pre-processing plant of Pilose Asiabell Root and Astragalus membranaceus and the capital resource is the self-owned capital; 4. Invest RMB 3.60 million Yuan in the preliminary processing plant project of Pilose Asiabell Root medicine and the capital resource is the self-owned capital. III. Particulars of Investment in the Report Period (I) Use of raised funds In the report period, the company didn’t raise any funds through securities market. (II) Investment 35 In the report period, the net amount of cash flow received from the investment activities amounted to RMB -20.05 million Yuan, down RMB 5.64 million Yuan compared with RMB -14.41 million Yuan at the same period of previous year. The main long-term investment events in the report period are listed as follows: 1. The 40th meeting of Investment & Decision-Making Committee of Livzon Group was convened by the mode of communication on March 31, 2008 and examined and passed the Proposal on Purchase of Shenzhen Yuanxing Pharmaceutical Co., Ltd, and determined to purchase the 100% of the equities of Shenzhen Yuanxing Pharmaceutical Co., Ltd held by Shenzhen Yuanzheng Investment Development Co., Ltd at the price of RMB 60.83 million Yuan. 2. The 42nd meeting of Investment & Decision-Making Committee of Livzon Group was convened by the mode of communication on July 8, 2008 and examined and passed the Proposal on Capital Increase of Fuzhou Fuxing Pharmaceutical Co., Ltd under Livzon Group and the Proposal on Capital Increase of Zhuhai Livzon Reagent Co., Ltd, and determined to increase the capital of Fuzhou Fuxing Pharmaceutical Co., Ltd under Livzon Group (hereinafter called as “Fuxing Company’) by USD 17.70 million: Livzon Group will increase a capital of USD 13.28 million and Antao Company will increase a capital of USD 4.43 million. The meeting determined that the company would increase the capital to the reagent company in the original share- holding proportion and transfer the undistributed book profit at the end of 2007 to the new registered capital in the original share-holding proportion. The newly added capitals in this transfer totaled RMB 21,446,983.64 Yuan and the newly added capitals of Livzon Group amounted to RMB 10,937,961.66 Yuan (accounting for 51% of all equities). The above plans about the purchase and capital increase have been completed in the report period. 3. The livzon industrial park project in which the company proposes to invest was launched in July 2008 and at present, the plants are being constructed. IV. Routine Work of the Board of Directors (I) Routine Work of the Board of Directors In the report period, the 5th Board of Directors of the Company convened 5 meetings (the 22nd to 26th meeting); the 6th Board of Directors of the Company convened 4 36 meetings (the 1st to 4th meeting). There are 9 meetings in total. 1. On February 19, 2008, the Company convened the 22nd meeting of the 5th Board of Directors at the No. 1 conference room, Joincare Pharmaceutical Group Building, Langshan Road, North Area, Hi-tech Zone, Nanshan District, Shenzhen. The resolution announcement was published in the appointed newspapers for public disclosure (Announcement No. 2008-8) on February 21, 2008. 2. On April 7, 2008, the Company convened the 23rd meeting of the 5th Board of Directors by the mode of communication. This meeting examined and passed the proposal on repurchasing some of B-shares and relevant affairs. For the repurchase will involve the administrative approval, there were no definite results and no resolutions about this meeting were announced. Later, the 25th meeting of 5th Board of Directors examined this agenda for the second time and announced the resolutions. 3. On April 18, 2008, the Company convened the 24th meeting of the 5th Board of Directors by the mode of communication. The resolution announcement was published in the appointed newspapers for public disclosure (Announcement No. 2008-12) on April 21, 2008. 4. On June 4, 2008, the Company convened the 25th meeting of the 5th Board of Directors by the mode of communication. The resolution announcement was published in the appointed newspapers for public disclosure (Announcement No. 2008-23) on June 5, 2008. 5. On June 13, 2008, the Company convened the 26th meeting of the 5th Board of Directors by the mode of communication. The resolution announcement was published in the appointed newspapers for public disclosure (Announcement No. 2008-27) on June 14, 2008. 6. On June 30, 2008, the Company convened the 1st meeting of the 6th Board of Directors by the mode of communication. The resolution announcement was published in the appointed newspapers for public disclosure (Announcement No. 2008-34) on July 2, 2008. 7. On July 30, 2008, the Company convened the 2nd meeting of the 6th Board of Directors by the mode of communication. The resolution announcement was published in the appointed newspapers for public disclosure (Announcement No. 2008-37) on July 31, 2008. 37 8. On August 8, 2008, the Company convened the 3rd meeting of the 6th Board of Directors by the mode of communication. The resolution announcement was published in the appointed newspapers for public disclosure (Announcement No. 2008-38) on August 11, 2008. 9. On October 22, 2008, the Company convened the 4th meeting of the 6th Board of Directors by the mode of communication. The resolution announcement was published in the appointed newspapers for public disclosure (Announcement No. 2008-42) on October 23, 2008. (II) Implementation of the shareholder meeting resolution by Board of Directors In 2008, the company convened three shareholders’ meetings with the following details: 1. The 2007 annual shareholder’s meeting of Livzon Group was convened in the conference room, Floor 2, Livzon Building, No. 132, Guihua North Road, Gongbei, Zhuhai on March 21, 2008. The meeting resolution examined and passed the following proposals: The 2007 Work Report of the Board of Directors, 2007 Work Report of the Board of Supervisors, 2007 Annual Report on Final Financial Accounts, 2007 Annual Plan on Profit Distribution, Proposal on Engaging the Accountants Firm in 2008, Proposal on Revising the Articles of Association, Work Report of Independent Directors 2. The 2008 first temporary shareholder’s meeting of Livzon Group was convened in the conference room, Floor 2, Livzon Building, No. 132, Guihua North Road, Gongbei, Zhuhai on June 20, 2008. The meeting resolution examined and passed the following proposals: Proposal on Repurchasing Some of Domestically Listed Shares for Overseas Investors (B Shares) of Livzon Pharmaceutical Group Inc., and Proposal on Authorizing the Board of Directors to Repurchase Some of Domestically Listed Shares for Overseas Investors (B Shares) 3. The 2008 second temporary shareholder’s meeting of Livzon Group was convened in the conference room, Floor 2, Livzon Building, No. 132, Guihua North Road, Gongbei, Zhuhai on June 30, 2008. The meeting resolution examined and passed the following proposals: Proposal on Electing Zhu Baoguo as the Director of the 6th Board of Directors, 38 Proposal on Electing Liu Guangxia as the Director of the 6th Board of Directors, Proposal on Electing Gu Yueyue as the Director of the 6th Board of Directors, Proposal on Electing An Ning as the Director of the 6th Board of Directors, Proposal on Electing Qiu Qingfeng as the Director of the 6th Board of Directors, Proposal on Electing Zhong Shan as the Director of the 6th Board of Directors, Proposal on Electing Hua Yizheng as the Independent Director of the 6th Board of Directors, Proposal on Electing Wang Junyan as the Independent Director of the 6th Board of Directors, Proposal on Electing Luo Xiaosong as the Independent Director of the 6th Board of Directors, Proposal on Electing Cao Pingwei as the Supervisor of the 6th Board of Supervisors, and Proposal on Electing Pang Datong as the Supervisor of the 6th Board of Supervisors 4. Implementation of profit distribution plan: on March 21, 2008, the 2007 shareholders’ meeting examined and passed the 2007 Annual Profit Distribution Plan : the company took the total share capital of 306,035,482 on December 31, 2007 as the base and distributed a cash bonus of RMB 5 Yuan (including the taxes) to every 10 shares of all shareholders. In the report period, the company has completed the bonus distribution work and distributed the bonus of RMB 153,017,741.00 Yuan (including the taxes; for more details, please see the company announcement No. 2008-18). In the report period, the Board of directors implemented all resolutions passed by shareholders’ meetings according to the requirements of national laws and regulations as well as the Articles of Association. (III) Work of the Investment & Decision-Making Committee of Livzon Group According to the Rules and Procedure of the Board of Directors of Livzon Pharmaceutical Group Co., Ltd and Work Rule of the President of Livzon Pharmaceutical Group Co., Ltd, the Investment and Decision-making Commission of Livzon Group is the organization authorized by the Board of Directors to make the decisions of investment and has the right to make decisions about the projects for approval such as the investment with the amount less than 10% of audited latest net asset value of the Company, Merger & Acquisition and asset disposal. The Investment and Decision-making Commission is responsible for and supervised by the Board of Directors and submits the decisions to the Board of Directors for file. In this year, The Investment and Decision-making Commission performed the following events: 1. On March 31, 2008, the Investment and Decision-making Commission of Livzon Group convened the 40th meeting by the mode of communication, and examined and 39 passed the Proposal on Purchasing Shenzhen Yuanxing Pharmaceutical Co., Ltd. 2. On April 3, 2008, the Investment and Decision-making Commission of Livzon Group convened the 41st meeting by the mode of communication, and examined and passed the Proposal on transferring the Equities of Changzhou Kangli Pharmaceutical Co., Ltd under Livzon Group. 3. On July 8, 2008, the Investment and Decision-making Commission of Livzon Group convened the 42nd meeting by the mode of communication, and examined and passed the Proposal on Capital Increase of Fuzhou Fuxing Pharmaceutical Co., Ltd under Livzon Group and the Proposal on Capital Increase of Zhuhai Livzon Reagent Co., Ltd. The above resolutions have been reported to the Board of Directors for file. (IV) Work of special commission of Board of Directors In the report period, the company did not establish the special commission of Board of Directors. In accordance with the requirements of the Notice about Site Inspection Results ([2008] No. 62) issued by the Guangdong Securities Regulatory Commission on November 3, 2008, the meeting of Board of Directors held on January 13, 2009 approved that the company established the various special commissions under the Board of Directors concerning the strategy, nomination, auditing, compensation and assessment, etc. V. Profit Distribution Plan of Board of Directors In accordance with relevant regulations of enterprise accounting standards issued by the Ministry of Finance and based on the auditing results of Reanda Certified Public Accountants Co., Ltd, the parent company achieved the net profit of RMB 1,984,104.76 Yuan and withdrawn 10% (RMB 198,410.48 Yuan) for the reserve in accordance with relevant regulations; after adding the undistributed profit of RMB 502,916,664.58 Yuan at the beginning of year and deducting the paid dividends of RMB 153,017,741.00 Yuan in the 2007 annual profit distribution plan, the undistributed profit of the parent company in 2008 amounted to RMB 351,684,617.86 Yuan. Based on the operation status and capital demands, the company proposes the 2008 annual profit distribution plan as follows: after deducting the quantity of B-shares that have actually been repurchased by the company, the company will distribute a cash bonus of RMB 1.00 Yuan (including the taxes) to every 10 shares of all ordinary shareholders; the distributed profit of the company is expected to amount to RMB 40 29,922,028.20 Yuan (we temporarily take the quantity of B-shares repurchased by the company on March 31, 2009 for calculation) and the remaining undistributed profit will be transferred to the next year. VI. Change of Newspapers for Information Disclosure Since February 21, 2008, the newspapers selected by the company to disclose the information will be Securities Times, China Securities News and Hongkong Wen Hui Daily (English version). Section 9: Report of Board of Supervisors I. Work of the Board of Supervisors (I) On February 19, 2008, the Company convened the 10th meeting of the 5th Board of Supervisors at the No. 1 conference room, Joincare Pharmaceutical Group Building, Langshan Road, North Area, Hi-tech Zone, Nanshan District, Shenzhen and examined and passed the 2007 Annual Report of Livzon Pharmaceutical Group Inc., Work Report of the Board of Supervisors and Proposal on Writing off the Bad Accounts of the Company. (II) On April 18, 2008, the Company convened the 11th meeting of the 5th Board of Supervisors by the mode of communication and examined and passed the 2008 First Quarterly Report of Livzon Pharmaceutical Group Inc. (III) On June 13, 2008, the Company convened the 12th meeting of the 5th Board of Supervisors by the mode of communication and examined and passed the Proposal on Electing the New Board of Directors. (IV) On June 30, 2008, the Company convened the 1st meeting of the 6th Board of Supervisors by the mode of communication and examined and passed the Proposal on Electing the Supervisor General. (V) On August 8, 2008, the Company convened the 2nd meeting of the 6th Board of Supervisors by the mode of communication and examined and passed the 2008 Semi-Annual Report of Livzon Pharmaceutical Group Inc. (VI) On October 16, 2008, the Company convened the 3rd meeting of the 6th Board of Supervisors by the mode of communication and examined and passed the 2008 Third Quarterly Report of Livzon Pharmaceutical Group Inc. II. Independent Opinions of Board of Supervisors 41 (I). The Board of supervisors has audited the operating status of this company according to the responsibility assigned by Company Law, Securities Law and Articles of Association. The company established internal control and administration code about asset decrement preparation and treatment of loss after auditing. Company shareholder meeting, directorate convened and the decision program is legal and in effect. Director and executive did their duties, and haven’t broken laws, acts, constitution and damaged stockholders’ and company’s benefits. (II) The Board of supervisors has checked and supervised company financial status and business result strictly. Reanda Certified Public Accountants Co., Ltd and BDO International have audited 2008 accounting report of company and issued the auditing report. Their clean opinion audit report reflected the company financial status and operation result truly, objectively and accurately. (III) The company has not raised any funds from the securities market in the past three years. (IV) The acquisition and selling prices in asset transaction of the company is carried out according to the principle of market, equity, publicity and justice. There are no conducts that have broken the laws, damaged the shareholders’ equities or caused the company to lose the assets. (V) The associated transaction in our company is equitable and its price is reasonable. The independent director expressed their independent opinions. The associated directors will take the challenge measure. The association transactions haven’t damaged the interests of shareholders and company, so they are legal and valid. (VI) The independent opinions of Board of Supervisors concerning the self-appraisal of internal control in the company: in accordance with relevant regulations about internal control systems in listed companies issued by China Securities Regulatory Commission and Shenzhen Stock Exchange, the company complies with the basic principle of internal control; based on the actual situation, the company has perfected the internal control system covering all processes about production and operation, ensured the normal and orderly operation of the company, and protected the asset safety of the company. The self-appraisal about internal control complies with the requirements of the Guidelines for Internal Control of Listed Companies issued by Shenzhen Stock Exchange and other relevant documents; the self-appraisal has truly and completely reflected the actual situation of internal control in the company and is the objective and accurate. Section 10 Major Events 42 I. There were no important lawsuits and arbitrations about the Company in this year. II. There were no bankruptcy or restructuring events about the Company in this report period. III. Particulars about securities investment, shareholding particulars of other listed companies and share participation to other financial enterprises such as the commercial banks (I) Particulars about Securities investment Unit: (RMB) Yuan Percentag e of total investment Securities Book Values Profit and loss Securiti Securiti Initial investment Holding in the No. abbreviatio at the end of during the es Type es Code amount (Yuan) quantity Securities n period report period at the end of period (%) Chenming 1 Stock 000488 Paper 188,749,356.29 16,828,000 86,495,920.00 71.03% -182,668,280.00 China 6.17% 7,518,198.38 - 2 Stock 0135 Hongkong 16,536,826.61 3,500,000 7,827,781.50 Petrol China 4,529,945.05 4.96% Shenhua 6,045,600.88 3 Stock 1088 Energy -11,250,343.33 Company Limited 418,000 Shenzhen 10,172,292.39 4.12% - 4 Stock 0152 International 17,000,000 5,022,420.52 10,277,940.75 Phoenix 21,025,238.76 3.37% - 5 Stock 2007 Island 2,450,000 4,105,244.50 15,903,760.95 China 2,889,770.23 2.87% National 3,496,204.36 - 6 Stock 0883 Offshore Oil 560,000 2,886,733.08 Corporation China 1,616,727.79 1.22% Railway 1,487,042.14 - 7 Stock 0390 1,532,990.55 Engineerin g Group Co. 314,000 Baili 2,363,822.55 1.05% 8 Stock 1880 Company 428,000 1,283,340.88 -3,260,793.76 Rainbow 6,304,144.98 1.01% 9 Stock 0438 -2,363,062.68 group 4,560,000 1,226,545.62 China 1,086,595.85 0.95% Railway 1,160,192.36 10 Stock 1186 Construction 75,870.59 Corporation 114,000 Other securities investment at the 8,772,290.09 - 3,937,107.51 3.23% -6,322,381.78 end of this period Profit and loss of sold Securities - - - - -4,586,231.40 investment during the report period 121,777,817.1 Total 264,047,010.60 - 100.00% -248,804,429.18 5 Note: the particulars about above securities investments cover those in A-share market of mainland and H-share market of Hongkong. The investment amount of H- 43 share has been converted to RMB amount at the exchange rate issued on December 31, 2008. (II) Shareholding particulars of other listed companies Unit: (RMB) Yuan Securitie Securiti Initial Percentag Book value Change of s code es investment e of total at the end Profit and owners’ abbrevi capital shares of of this loss during interests Accounting calculation Source ation this period the report during the subject Company period report period Bank of Saleable Share Commu - 601328 1,640,080.00 0.00262% 5,688,711.00 300,037.50 financial participati nication 13,057,632.00 assets on s Huado ng Saleable Share 31,447,115.1 - 000963 Medicin 1,200,000.00 0.02112% 986,089.96 4 34,813,761.90 financial participati e Co., assets on Ltd NanJin g Saleable Share Medical 600713 130,000.00 - - 2,096,154.31 -2,735,600.00 financial participati Compa assets on ny Limited 33,843,306.9 - Total 2,970,080.00 6,674,800.96 - - 5 50,606,993.90 (III) Shareholding particulars of non-listed financial enterprises Unit: (RMB) Yuan Company Initial Holding Percentag Book Profit Change of name investment quantity e of total value at and loss owners’ Accounting capital shares of the end of during interests calculation Source this this the during the subject Company period report report period period Zhuhai City Long-term Share Commercial 20,000,000 20,000,000 2.0252% - - - equity particip Bank investment ation Guangdong Long-term Share Development 105,000 49,844 0.0004% 105,000 - - equity particip Bank Co., Ltd investment ation Total 20,105,000 20,049,844 - 105,000 - - - - Note: 1. Zhuhai City Commercial Bank IV. Purchase and selling of assets (I) Purchase of assets (Unit: RMB 1000 Yuan) 44 Transacti Purcha Purcha Tran Net profit Whet Pricing Whether Whether the on party sed se date sact contributed her it principle the liabilities or asset ion to the is the ownershi rights of pric Company assoc p of creditors have e from the iated involved been purchase party assets completely date to has been transferred report date transferr ed Shenzhen Shenz No. Fair Yes Yes Yuanzhen hen transacti g Yuanxi on in 60,8 Investmen ng 2008.3.3 market 30.0 4,152.46 t Pharm 1 and 0 Developm aceutic negotiat ent Co., al Co., ed prices Ltd Ltd (II) Selling of asset (Unit: RMB 1000 Yuan) Net profit Wheth Pricing Whether Whether the contribute er it is principle the liabilities or rights Profit Tran d to the the ownershi of creditors have and loss sacti Trans Company associ p of been completely Sold Selling in the on action from the ated involved transferred asset date selling of part price beginning party asset this y of year to has been asset the selling transferr date ed Ding Changzh 2008.3.1 5,000. 500.00 2,517.52 No. Fair Yes Yes Gon ou 8 00 transaction gcai Kangli in market Pharmac eutical Co., Ltd under Livzon Group V. In the report period, the company has implemented no equity stimulation plans. VI. Associated transaction events (I) Sales of Commodities (Unit：RMB Yuan) Name of Associated Party 2008 2007 45 Amount Percentage Amount Percentage of of the total the total purchase purchase volume in volume in the the year year Guangdong Blue Treasure 1,777,946.68 0.0864% 1,316.24 0.0001% Pharmaceutical Co. Ltd. Tongyikangshimei Chain (Shenzhen) 13,825.57 0.0007% 38,141.93 0.0022% Co., Ltd Zhuhai Joincare Pharmaceutical 821.09 0.0000% 1,542.84 0.0001% Group Industry Co., Ltd Shenzhen Haibin Pharmaceutical Co., 0.00 0.0000% 637,215.38 0.0400% Ltd Jiaozuo Joincare Pharmaceutical 32,179.49 0.0016% 7,692.31 0.0004% Group Industry Co., Ltd Total 1,824,772.83 0.0886% 685,908.70 0.0428% Including: in the report period, the associated transaction amount that the listed company sold the products or provided the labors to controlling shareholders and its subcompanies reached RMB 33,000.58 Yuan. (II) Purchase of Commodities (Unit：RMB Yuan) 2008 2007 Amount Percentage Amount Percentage Name of associated party of the total of the total purchase purchase volume in volume in the year the year Changzhou Kangli Pharmaceutical Co., Ltd under Livzon Group 1,520,512.82 0.16% 4,958,119.67 0.51% Guangdong Blue Treasure Pharmaceutical Co. Ltd. 410,798.89 0.04% 16,021.26 0.00 Shenzhen Haibin Pharmaceutical Co., 1,856,000.00 0.00 Ltd 0.20% 0.00 Joincare Pharmaceutical Group 376,000.00 Industry Co., Ltd 0.04% 9,572.65 0.00 Jiaozuo Joincare Pharmaceutical 162,276,025.62 Group Industry Co., Ltd 17.53% 80,589,888.37 8.33% Total 166,439,337.33 17.98% 85,573,601.95 8.84% (III) Provisions of labors (water, electricity and power) (Unit：RMB Yuan) 2008 2007 Name of associated Percentage of Similar Percentage of Similar party Amount Amount Transaction Amount (%) Transaction Amount (%) Guangdong Blue Treasure Pharmaceutical Co. Ltd. 10,007,046.89 62.84% 7,937,152.00 65.48% (IV) Leasing (Unit：RMB Yuan) Name of associated part 2008 2007 46 Percentage of Percentage of Similar y Amount Similar Transaction Amount Transaction Amount (%) Amount (%) Zhuhai Joincare Pharmaceutical Group Industry Co., Ltd 103,428.00 7.29% 107,887.08 8.85% Health Pharmaceutical 0.00 (China) Co., Ltd 58,303.00 4.11% 0.00 Tongyikangshimei Chain 0.00 0.00 10,608.00 0.87% (Shenzhen) Co., Ltd Total 161,731.00 11.40% 118,495.08 9.72% (V) Renting of Assets (Unit：RMB Yuan) 2008 2007 Name of associated Percentage of Similar Percentage of Similar party Amount Transaction Amount Amount Transaction Amount (%) (%) Guangdong Blue Treasure Pharmaceutical Co. Ltd. 53,137.20 1.53% 0.00 0.00 (VI). Transfer of associated claims and debts (Unit：RMB Yuan) Funds that the Provision of funds to Associated Association Cause for use associated party associated party paid to relationship listed company party Amount Balance Amount Balance Jiaozuo Joincare Advance Subcompany of Pharmaceutical Group Industry Co., controlling payment and -30,994.76 0.00 191,730.49 222,691.25 shareholders fund transfer Ltd Zhuhai Joincare Subcompany of Pharmaceutical controlling Rental fee and -4,445.86 560,000.00 - - Group Industry Co., shareholders fund transfer Ltd Provide water, Guangdong Blue electricity, the Treasure Associated Pharmaceutical Co.company expense for -3,027,634.81 0.00 - - Ltd. power and leasing. Joincare Pharmaceutical Controlling Leasing of assets - - -5,313.12 13,653.11 Group Industry Co.,shareholder Ltd Total -3,063,075.43 Including: in the report period, the non-trade capital that the Company provides to the controlling shareholders and their subcompanies for other purposes was RMB - 35,440.62 Yuan and the balance was RMB 560,000.00 Yuan. 47 (VII) Pricing policy and pricing basis The pricing policy is: according to the marketization, the two parties determine the price with reference to the market price. The price basis is: adopt many methods such as enquiry, agreements or market status. (VIII) Transaction objective and effect of transaction on listed company The above-mentioned associated transaction came from the normal supply demand of the company. It is predicated that this associated transaction will continue during the production operations from now on. The associated transaction follows the principle of equity, justice and no damage to the company’s benefits. Because the associated transaction amount accounts for the small percentage of total sales revenue or purchasing amount, it makes no effect on financial status and operation result. And it also makes no effect on the independence of the company. The company also will not depend on associated persons due to this associated transaction. VII. Key Contracts and Their Implementation 1. During the report period, there are no events in which the company custodize, contract and lease the assets of other companies or other companies custodize and contract the assets of the company. 2. Guaranty The independent directors of the company made the special explanations and expressed independent opinions about the Notice of Standardizing the External Guaranty of Listed Company (Zheng Jian Fa [2005] No. 120). In accordance to the spirits of the Notice of Standardizing the External Guaranty of Listed Company (Zheng Jian Fa [2005] No. 120) (hereinafter called as the “Notice”) and the laws and regulations such as the Direction Opinions about Establishing the Independent Director Systems and the Articles of Association, as the independent director of Livzon Group, we take the principle of being practical and realistic to closely audit the capital use and external guaranty of the company to controlling shareholders and other associated parties. We will explain as follows: 1. The company has already engaged Reanda Certified Public Accountants Co., Ltd to make special explanation about the use of capitals by the company, controlling shareholders and other associated parties. We believe that the company, controlling 48 shareholders and other associated parties did not substantially break any regulations regarding the capital use in the above Notice issued by China Securities Regulatory Commission. 2. During the report period, the company has not provided any external guaranty to any parties except the controlled subcompanies. 3. During the report period, the guaranties provided by the company to the controlled subcompanies are listed as follows: (Unit: RMB 1 million Yuan) Name of Guarantee Occurrence Balance Guarantee Guaranty Period Date at the Amount type (Signing end of date of period agreement) Joint and 6.86 2007.8.3-2009.8.3 Limin Pharmaceutical Co., Ltd several 2007.8.3 0 (Shenzhen Branch of Citi under Livzon Group （USD100） liability Bank) guaranty Joint and Livzon Syntpharm Co., Ltd in several 2008.1.8 0 35.00 Zhuhai Bonded Area liability 2008.1.8-2011.1.8(Zhuhai guaranty Branch of Bank of China) Joint and Lida Pharmaceutical Co., Ltd several 2008.1.8 0 6.00 in Zhuhai Bonded Area liability 2008.1.8-2011.1.8(Zhuhai guaranty Branch of Bank of China) Joint and Zhuhai Livzon Reagents Co., several 2008.1.8 0 15.00 Ltd liability 2008.1.8-2011.1.8(Zhuhai guaranty Branch of Bank of China) Joint and several 2008.1.8 0 4.00 Zhuhai Livzon Medicine Trade liability 2008.1.8-2011.1.8(Zhuhai Co., Ltd guaranty Branch of Bank of China) Joint and several 2008.4.29-2011.4.29(Zhuhai 2008.4.29 0 12.00 Zhuhai Livzon Medicine Trade liability Branch of Bank of Co., Ltd guaranty Communications) Joint and 2008.11.25-2009.11.25 Fuzhou Fuxing several (Fuzhou State-owned Assets Pharmaceutical Co., Ltd 2008.11.25 1.20 1.20 liability Operation and Investment under Livzon Group guaranty Company) Joint and Livzon Pharmaceutical several 2007.10.31-2010.10.31 2007.10.31 43.22 120.00 Factory under Livzon Group liability (Shanghai Branch of guaranty Rabobank Nederland) Total guaranty amount to its controlled subcompanies in the report period 200.06 Total loan amount of its controlled subcompanies in the report period 44.42 Total balance of guaranty amount to its controlling subcompanies in the report period 44.42 By December 31, 2008, the actual guaranty amount provided to the controlled subcompanies is RMB 200.06 million Yuan, accounting for 10.91% of the unaudited net assets of the Company at the end of 2008; the total loan amount of its controlled 49 subcompanies is RMB 44.09 million Yuan, accounting for 2.40% of the unaudited net assets of the Company at the end of 2008. 4. Except the above guaranties, the Company has not provided any guaranty to any shareholders, actual controllers or associated parties, nor directly or indirectly provides the guaranty to any guarantees whose assets/liabilities ratio exceeds 70%. The total guaranty amount has not exceeded 50% of the latest audited net asset of the Company and the single guaranty amount has not exceeded 10% of the latest audited net asset of the Company. (III). Authorized Financial Management The Company has no events about authorized financial management and commission loans in the report period. VIII. Commitment (I) Commitment events of the company 1. This company signed the patent license agreement with Korea Yiyang Medicine Company. This agreement approves our company’s exclusive and irrevocable right to use the patent PPI(proton pump inhibitor) compound and Yiyang patent in China including Hong Kong and Macao in order to production, processing and distribution. The transfer fee will be USD 2.50 million, and it has paid USD 1.875 million and the unpaid amount is USD 0.625 million. The company agrees to deduct a percentage for Yiyang according to 10% of sales amount during the first three years when this product begins to be sold. And deduct a percentage according to 8% of sales amount during the next five years. And deduct a percentage according to 6% of sales amount from the remaining time to July 22, 2014 (the expiry date of agreement). 2. In 2005, the company signed the approval and supply agreement with Korea LG life science Ltd. (hereinafter referred to as LG Company), and it grants Gemifloxacin Mesylate with the relevant certificates about intellectual properties and specifies that the permission fees of the methanesulfonic acid spasmolytic and pellet will be USD1, 000,000 respectively (It has been fully paid by December 31, 2006). This agreement specifies as follows: Within the first five years from the validity date of the agreement, the company’s net sales volume of Jimishaxing pellet will amount to 1.5 million bags (3 pellets in each bag) and LG Company will refund USD 500,000 at one time within two months after the company has submitted the net sales volume certificate. At the same time, during 50 the validity period of the agreement (by the end of 2015), the company should pay a royalty of 1.5% of net sales to LG Company during 30 days after each quarter. Within the first five years from the validity date of the agreement, the company will pay a royalty of 10% of net sales volume about injection products to LG Company within 30 days after each quarter. The company will pay a royalty of 6% of net sales volume about injection products to LG Company within 30 days after each quarter from the sixth business year to the expiry date of agreement (by the end of 2019). (II) Commitments of shareholders holding over 5% of total shares of the company 1. In the report period, regarding the repurchase of the domestically listed shares for overseas investors (B shares) by the company, Tiancheng Industry Co., Ltd, the fully- owned subcompany of the controlling shareholder Joincare, committed that: From the announcement date of relevant resolutions passed by the Board of Directors about Livzon Group repurchasing the domestically listed shares for overseas investors (B shares) to 6 months after the completion date of repurchase, Tiancheng Industry will not sell all B-shares of Livzon Group that are held by it. This commitment is irrevocable. 2. In the report period, the controlling shareholder Joincare made the following commitments: (1) If Joincare transfers its tradable shares of Livzon Group whose trading restriction has been released, it will strictly comply with the relevant regulations of the Guiding Opinions on the Listed Companies’ Transfer of Original Shares Released from Trading Restrictions ([2008] No. 15 announcement) issued by China Securities Regulatory Commission. (2) If Joincare plans to reduce its tradable shares of Livzon Group whose trading restriction has been released through the competing price trading system in the stock exchange in the future and the reduced quantity of shares amounts to over 5% within 6 months from the first reduction, Joincare will disclose the reminder announcement about the selling affairs via Livzon Group in 2 trading days before the first reduction. IX. Repurchase On June 20, 2008, in the 2008 first temporary shareholders’ meeting, the company examined and passed the Proposal on Repurchasing Some of Domestically Listed Shares for Overseas Investors (B Shares) of Livzon Pharmaceutical Group Inc and relevant proposals and agreed that: on the condition that the repurchase price will not exceed HKD 16.00/share and the total amount of repurchase capitals will not 51 exceed HKD 160 million, the company plans to repurchase some of domestically listed shares for overseas investors (B shares) (for more details, please see the company announcement No. 2008-23 and 2008-31). On September 27, 2008, the company obtained the relevant replies of the Ministry of Commerce about principally approving the company to repurchase some of B-shares and reduce its capital. On November 28, 2008, the company obtained the relevant replies of Zhuhai Center Branch of the State Administration of Foreign Exchange about approving the company to purchase the foreign exchange of no more than HKD 160 million for the purpose of repurchasing some of the domestically listed shares for overseas investors of the company. From December 5, 2008, the company first implemented the plan to repurchase B- shares; by March 31, 2009, the company has accumulatively repurchased the quantity of 6,815,200 B-shares, accounting for 2.2269% of total share capitals of the company; the minimum repurchase price is HKD 8.38 per share and the maximum repurchase price HKD 10.00 per share; the total amount for the repurchase reaches RMB 64.7964 million Yuan. X. Particulars of Engagement and Dismissal of Domestic and Overseas Accountant Firm The 22ndh meeting of the 5th Board of Directors and the 2007 annual shareholder’s meeting examined and passed the Proposal on Engaging the Accountants Firm in 2008, and resolved to continue to engage Reanda Certified Public Accountants Co., Ltd as the domestic auditing body of the company in 2008 and pay it the annual auditing expense of RMB 780000 Yuan for 2008. Since 1997, Reanda Certified Public Accountants Co., Ltd has provided the company with the auditing service. In accordance with the spirits of the Notice about Relevant Auditing Issues of Listed Companies Issuing the Domestically Listed Shares for Overseas Investors (Zheng Jian Hui Ji Zi [2007] No. 30) issued by China Securities Regulatory Commission on September 12, 2007, the company would not continue to engage BDO international accountant firm for the overseas auditing in 2007. At the same time, in 2008 and next years, if no special cases occur, the company will not engage the overseas accountants firm for the overseas auditing. XI. Supervision of the Company by the Regulatory Departments 52 During the report period, no company, directors, supervisors, senior executives, shareholders and actual controllers have been investigated by the relevant authorities, enforced by legal and discipline departments, delivered to legal authorities or sued for the criminal punishment; there are also no auditing, executive penalty and refusal by China Securities Regulatory Commission, or the improper persons are openly blamed by the other administration management departments and the stock exchanges. XII. Activities that the Company receives the investigation, communication and interview, etc 53 Reception Reception Reception Objects Discussion topics and provided materials date place mode Local 2008.3.10 Headquarters Penghua Fund Operation status of the Company investigation Local China Securities Journal, Securities 2008.3.21 Headquarters Operation status of the Company investigation Times, Securities Daily Local Golden Eagle Asset Management 2008.3.29 Headquarters Operation status of the Company investigation Co. Local 2008.4.14 Headquarters Essence Securities Operation status of the Company investigation Local Over 100 investors organized by Operation status of the Company; visit the 2008.5.14 Headquarters investigation Guangfa Securities production plant of the company Local Operation status of the Company and Headquarters Penghua Fund investigation repurchase of B-shares Local Operation status of the Company and Headquarters HuaAn Funds investigation repurchase of B-shares Local China International Capital Operation status of the Company and Headquarters investigation Corporation Limited repurchase of B-shares Local Operation status of the Company and Headquarters 21st century business herald investigation repurchase of B-shares 2008.6.20 Operation status of the Company and Headquarters Local interview Beijing Business Today repurchase of B-shares Operation status of the Company and Headquarters Local interview Shanghai Securities News repurchase of B-shares Operation status of the Company and Headquarters Local interview Securities Times repurchase of B-shares Operation status of the Company and Headquarters Local interview China Medicine Paper repurchase of B-shares Local Operation status of the Company; provide 2008.07.24 Headquarters Essence Securities investigation no text materials Local Operation status of the Company; provide 2008.08.08 Headquarters E Fund Management Co., Ltd investigation no text materials Local Shenzhen Minsen investment Co., Operation status of the Company; provide 2008.08.08 Headquarters investigation Ltd no text materials Local Guangzhou Securities Company Operation status of the Company; provide 2008.08.13 Headquarters investigation Limited no text materials Local Operation status of the Company; provide 2008.08.22 Headquarters China Asset Management Co., Ltd investigation no text materials Local First State Cinda Fund Operation status of the Company; provide 2008.09.08 Headquarters investigation Management Co., Ltd no text materials Local Operation status of the Company; provide 2008.09.10 Headquarters China Times investigation no text materials Local Operation status of the Company; provide 2008.11.03 Headquarters Bosera Funds investigation no text materials Local Operation status of the Company; provide 2008.11.03 Headquarters Essence Securities investigation no text materials Operation status of the Company; provide 2008.11.10 Headquarters Local interview ZhuHai Special Zone Daily no text materials Telephone Operation status of the Company; provide 2008.11.12 Headquarters Nanfang Metropolis News interview no text materials Telephone 2008.11.12 Headquarters Securities Daily Operation status of the Company interview Local Operation status of the Company; provide 2008.11.19 Headquarters Penghua Fund investigation no text materials Local Great Wall Fund Management Co., Operation status of the Company; provide 2008.11.19 Headquarters investigation Ltd no text materials Local Operation status of the Company; provide 2008.11.19 Headquarters Guotai Junan Securities Co., Ltd. investigation no text materials Local Operation status of the Company; provide 2008.11.27 Headquarters Huaxia Fund investigation no text materials China Merchants Securities Co., Local Operation status of the Company; provide 2008.11.27 Headquarters Ltd China Merchants Securities Co., investigation no text materials Ltd Issues about relevant policies of the third Telephone 2008.11.28 Headquarters Nanfang Metropolis News end in the company after the new medical interview reform 2008.12.02 Telephone Development status of B-share Headquarters China Securities Journal 2008.12.03 interview repurchase China Merchants Fund Local Operation status of the Company; provide 2008.12.30 Headquarters Management Company Limited investigation no text materials 54 XIII. Indexes of interim announcement disclosure during the report period Disclosure No. Announcement name Newspaper name date 1 Announcement of the resolution passed at the 21st meeting of the Securities Times and 2008.01.03 5th Board of Directors Shanghai Securities News 2 Circular on the annual performance of 2007 The same as above 2008.01.10 3 Auditing report of 2007 annual financial report Securities Times and China 2008.02.21 Securities Journal 4 Announcement of resolutions passed at the 10th meeting of the 5th The same as above 2008. 02.21 Board of Supervisors 5 Notice about convening the 2007 annual shareholders’ meeting The same as above 2008. 02.21 6 Special explanation about the capital use of controlling The same as above 2008. 02.21 shareholders and other associated parties 7 Announcement of the resolution passed at the 22nd meeting of The same as above 2008. 02.21 the 5th Board of Directors 8 Supplementary announcement of 2007 annual report The same as above 2008.03.05 9 2007 annual work report of independent directors The same as above 2008. 03.22 10 Announcement of the resolution passed at the 2007 annual The same as above 2008. 03.22 shareholders’ meeting 11 Legal opinions about 2007 annual shareholders’ meeting The same as above 2008. 03.22 12 Announcement about suspension The same as above 2008.04.03 13 Circular on the first quarterly performance of 2008 The same as above 2008.04.08 14 Announcement The same as above 2008.04.14 15 The 2008 first quarterly report The same as above 2008.04.21 th th 16 Announcement of resolutions passed at the 24 meeting of the 5 The same as above 2008.04.21 Board of Supervisors 17 Announcement about the routine association transaction The same as above 2008. 04.21 18 Announcement The same as above 2008. 04.21 19 Report of Independent Financial Advisor on associated The same as above 2008. 04.21 transactions of Livzon Pharmaceutical Group Inc. by Reanda Certified Public Accountants Co., Ltd 20 Reminder announcement The same as above 2008.04.28 21 Reminder announcement The same as above 2008.05.05 22 Announcement about implementing the dividend distribution The same as above 2008.05.08 23 Reminder announcement The same as above 2008.05.12 24 Reminder announcement The same as above 2008.05.19 25 Reminder announcement The same as above 2008.05.26 26 Reminder announcement The same as above 2008.06.02 27 Announcement about Convening the First Interim Shareholders’ The same as above 2008.06.05 Meeting in 2008 28 Collection letter of authorized vote in the Board of Directors The same as above 2008. 06.05 29 Report of Independent Financial Advisor on Livzon Pharmaceutical The same as above 2008. 06.05 Group Inc. Repurchasing Some of Domestically Listed Shares for Overseas Investors (B Shares) 30 Temporary announcement The same as above 2008. 06.05 31 Proposal on Repurchasing Some of Domestically Listed Shares for The same as above 2008. 06.05 Overseas Investors (B Shares) of Livzon Pharmaceutical Group Inc. 32 Opinions of independent directors at the 25th meeting of the 5th The same as above 2008. 06.05 Board of Directors 33 Announcement of resolutions passed at the 25th meeting of the 5th The same as above 2008. 06.05 Board of Directors 55 34 Announcement of abnormal fluctuation of B shares trading The same as above 2008.06.11 35 Declaration of the nominees for independent directors The same as above 2008.06.14 36 Announcement of resolutions passed at the 12th meeting of the 5th The same as above 2008. 06.14 Board of Supervisors 37 Announcement of the resolution passed at the 26th meeting of the The same as above 2008. 06.14 5th Board of Directors 38 Independent opinions of independent directors about nominating The same as above 2008. 06.14 the candidates for the directors of 6th Board of Directors 39 Announcement about Convening the Second Interim The same as above 2008. 06.14 Shareholders’ Meeting in 2008 40 Temporary announcement The same as above 2008. 06.17 41 Announcement of the resolution passed at the 2008 first temporary The same as above 2008. 06.21 shareholders’ meeting 42 Legal opinions about witnessing the 2008 first temporary The same as above 2008. 06.21 shareholders’ meeting 43 Notice about the creditors who have repurchased Some of The same as above 2008. 06.24 Domestically Listed Shares for Overseas Investors (B Shares) 44 Legal opinions about witnessing the 2008 second temporary The same as above 2008. 07.01 shareholders’ meeting 45 Announcement of the resolution passed at the 2008 second The same as above 2008. 07.01 temporary shareholders’ meeting 46 Announcement of resolutions passed at the 1st meeting of the 6th The same as above 2008. 07.02 Board of Supervisors 47 Announcement of resolutions passed at the 1st meeting of the 6th The same as above 2008. 07.02 Board of Directors 48 Independent opinions of independent directors about engaging the The same as above 2008. 07.02 senior management 49 Circular on the mid-term performance of 2008 The same as above 2008. 07.12 50 Report of Livzon Pharmaceutical Group Inc. about the Correction The same as above 2008. 07.31 of Special Governance Activities 51 Self-Inspection Report on Carrying out the Special Activities to The same as above 2008. 07.31 Prevent the Controlling Shareholders from Appropriating the Capitals of Listed Companies 52 Announcement of resolutions passed at the 2nd meeting of the 6th The same as above 2008. 07.31 Board of Directors 53 Announcement of resolutions passed at the 3rd meeting of the 6th The same as above 2008. 08.11 Board of Directors 54 Special explanation about the capital use of controlling The same as above 2008. 08.11 shareholders and other associated parties 55 Special explanation and independent opinions of independent The same as above 2008. 08.11 directors about the capital use of associated parties and external guaranty 56 Circular on the third quarterly performance of 2008 The same as above 2008. 10.11 57 Announcement about development in repurchasing some of B- The same as above 2008. 10.15 shares 58 The 2008 third quarterly report The same as above 2008. 10.23 59 Announcement of resolutions passed at the 4th meeting of the 6th The same as above 2008. 10.23 Board of Directors 60 Report about Repurchasing Some of Domestically Listed Shares The same as above 2008. 12.02 for Overseas Investors (B Shares) 56 61 Legal opinions of Deheng Law Firm about Livzon Pharmaceutical The same as above 2008. 12.02 Group Inc. Repurchasing Some of Domestically Listed Shares for Overseas Investors (B Shares) 62 Reminder announcement about development in repurchasing The same as above 2008. 12.02 some B-shares 63 Announcement about implementation of repurchasing some B- The same as above 2008. 12.06 shares 64 Reminder announcement about restriction release of shares with The same as above 2008. 12.18 trading restriction 65 Reminder announcement about apply for the granting of hi-tech The same as above 2008. 12.24 enterprise All above announcements are carried by the designated website for information disclosure by China Securities Regulatory Commission – Juchao website（http://www.cninfo.com.cn/） 57 Section 11 Financial Report Auditing Report Li An Da Shen Zi [2009] No. 1087 To all shareholders of Livzon Pharmaceutical Group Inc., We were entrusted to audit the accompanying financial statements of your company, including the balance sheet and consolidated balance sheet as of December 31, 2008, the 2008 profit statement and consolidated profit statement, the cash flow statement and consolidated cash flow statement, the change statement of shareholders’ equities and consolidated change statement of shareholders’ equities, and the explanatory notes to the financial reports. I. Responsibilities of the Management about Financial Statement The Company’s management is responsible for the preparation of these financial statements in accordance with the Accounting Standard for Enterprises , including: (1) to design, implement and maintain the internal control related to the preparation fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; (2) to select and apply the appropriate accounting policies; (3) to make the reasonable accounting estimation. II. Responsibilities of the Certified Accountants Our responsibility is to express an opinion on these financial statements. We conducted our audit in accordance with the Auditing Standards for CPAs of China . The Auditing Standards for CPAs of China requires that the certified publish accountants will abide by the norms of occupational ethics and plan and perform the auditing to obtain reasonable assurance whether the financial statements are free from material misstatement The audit involves the performance of auditing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The auditing procedures are selected subject to the judgment of certified public accountants, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In assessing the risks, the auditors consider the internal control related to the company’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control. The audit also assesses the appropriateness of used accounting policies and the reasonableness of accounting estimation made by the management as well as evaluating the overall presentation of the financial statements. 58 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. III. Auditing Opinion In our opinion, the financial statements represent fairly, in all material respects, the financial position of the company as of December 31, 2008, and its financial performance and its cash flows for the year then ended in accordance with the Accounting Standard for Enterprises . Reanda Certified Public Accountants Co., Ltd Certified Public Accountant Certified Public Accountant Beijing, China Date: April 16, 2009 59 Consolidated Balance Sheet 2008年12月31日 Kuai He Statement No. 01 Prepared by: Livzon Pharmaceutical Group Inc. Unit: RMB Yuan Balance at the Balance at the Balance at the Balance at the Assets Notes beginning of Liabilities and Owners' Equities (or Shareholders' Equities) Notes beginning of end of year end of year year year Current assets: Current liability: Currency capital VII.1 540,183,900.36 282,663,137.40 Short-term loan VII.20 520,714,775.00 379,012,440.00 Tradable financial assets VII.2 121,777,817.15 448,101,008.02 Tradable financial liability Note receivable VII.3 200,743,296.63 125,126,670.90 Notes payable VII.21 1,581,261.45 Accounts receivable VII.4 343,386,691.32 319,992,271.78 Accounts payable VII.22 159,486,983.56 179,977,871.17 Advance money VII.5 34,582,521.10 68,145,117.12 Deposit receivable VII.23 12,802,764.02 5,049,839.20 Interests receivable Payroll payable VII.24 33,458,734.45 36,842,186.73 Dividend receivable Tax payable VII.25 77,142,056.03 68,618,281.04 Other receivables VII.6 23,100,296.48 16,634,847.44 Interests payable Inventory VII.7 346,075,150.03 325,407,503.85 Dividend payable VII.26 2,531,984.01 3,056,984.01 Non-current assets due within one year Other accounts payable VII.27 150,836,568.52 120,914,228.98 Other current assets Non-current liabilities due within one year VII.28 10,400,000.00 41,400,000.00 Total of current assets 1,609,849,673.07 1,586,070,556.51 Other current liabilities Non-current assets: Total of current liabilities 967,373,865.59 836,453,092.58 Saleable financial assets VII.8 6,674,800.96 58,571,943.00 Non-current liabilities Investment held to the maturity date Long-term loan VII.29 100,700,000.00 70,700,000.00 Long-term accounts receivable Securities payable Long-term equity investment VII.9 45,128,539.14 42,458,141.63 Long-term accounts payable Real estate for Investment Special accounts payable Fixed assets VII.10 922,704,199.55 955,219,314.25 Deferred profit VII.30 19,300,344.26 15,256,355.92 Engineering under construction VII.11 38,117,555.88 38,843,295.19 Anticipation liability Engineering goods VII.12 2,528,232.88 13,818,462.57 Liabilities with the deferred income taxes VII.31 1,914,761.87 32,388,941.72 Liquidation of fixed assets Other non-current liabilities Production biology assets Subtotal of non-current liabilities 121,915,106.13 118,345,297.64 Oil and gas assets Total of liabilities 1,089,288,971.72 954,798,390.22 Intangible assets VII.13 154,395,927.44 154,567,265.87 Owners' equity: Development expenses VII.14 4,010,294.70 1,534,836.06 Share capital VII.32 306,035,482.00 306,035,482.00 Goodwill VII.15 103,040,497.85 67,179,327.97 Capital reserve VII.33 437,314,834.44 478,651,639.99 Long-term deferred and prepaid expenses VII.16 5,642,572.45 7,689,542.27 Minus: treasury share VII.34 15,798,067.52 Assets with deferred income taxes VII.17 31,720,956.31 19,607,993.75 Surplus reserve VII.35 353,298,521.02 348,091,204.65 Other non-current assets 162,765.31 Undistributed profit VII.36 711,151,149.38 817,303,043.09 Subtotal of non-current assets 1,313,963,577.16 1,359,652,887.87 Conversion margin in foreign currency statement -13,466,039.91 -7,417,250.28 Subtotal of equities attributable to the owners of parent company 1,778,535,879.41 1,942,664,119.45 Equities of the minority of shareholders VII.37 55,988,399.10 48,260,934.71 Subtotal of owners’ equities 1,834,524,278.51 1,990,925,054.16 Total of assets 2,923,813,250.23 2,945,723,444.38 Total of liabilities and owners’ equities 2,923,813,250.23 2,945,723,444.38 Legal representative Principal of the Financial Department: Principal of the Accounting Department: 60 Consolidated Profit Statement for 2008 Kuai He Statement No. 02 Prepared by : Livzon Pharmaceutical Group Inc . Unit: RMB Yuan Amount in previous Item Note Amount in this year year 1. Total operating income VII.38 2,058,640,573.53 1,748,108,397.65 VII.38 1,116,317,635.33 973,620,679.21 Minus: operating cost Operating taxes and additional charge VII.39 4,464,634.72 4,065,731.82 Sales expense VII.40 377,276,784.87 264,866,280.65 197,767,274.68 194,614,337.79 Management expense Financial expenses VII.41 26,516,142.99 17,113,804.13 Loss for asset depreciation VII.42 21,301,909.44 16,202,051.35 Plus: profits from the fair value changes (The loss is listed beginning with “ -“) VII.43 -272,043,891.80 113,455,275.89 Investment gains (The loss is listed beginning with “ -“) VII.44 56,651,329.23 222,675,012.39 -1,659,087.28 -3,814,741.54 Including: the investment gains from the associated enterprises and joint ventures II. Operating profitII . Operating profit (The loss is listed beginning with “ -“) 99,603,628.93 613,755,800.98 Plus: non-operating income VII.45 11,093,620.56 7,991,660.08 Minus: non-operating expense VII.46 5,043,164.84 1,768,656.19 1,897,603.10 726,457.22 Including: loss in disposal of non-current assets III. Total profit (The loss is listed beginning with “ -“) 105,654,084.65 619,978,804.87 Minus: income tax expense VII.47 32,746,767.36 96,597,880.21 72,907,317.29 523,380,924.66 IV. Net profit (the net loss is listed beginning with “-”) 52,073,163.66 508,451,060.67 Net profit attributable to the owners of parent company 20,834,153.63 14,929,863.99 Profit and loss of the minority of shareholders V. Profit per share: 0.17 1.66 (1) Basic profit per share 0.17 1.66 (2) Diluted profit per share 61 C o n so lid a te d C a sh F lo w S ta te m e n t fo r 2 0 0 8 K u a i H e S ta te m e n t N o . 0 3 P re p a re d b y : L iv z o n P h a rm a c e u tic a l G ro u p In c . U n it: R M B Y u a n Ite m N o te A m o u n t in th is y e a r A m o u n t in p r e v io u s y e a r I. C a sh flo w s fr o m o p e r a tin g a c tiv itie s C a sh re c e iv e d fro m sa le s o f g o o d s o r re n d e rin g o f 1 ,8 0 0 ,7 9 3 ,2 1 5 .6 4 1 ,4 4 0 ,7 8 2 ,7 8 3 .5 3 se rv ic e s T a x re fu n d in g 6 ,0 1 9 ,4 3 9 .1 6 1 1 ,8 6 4 ,0 2 6 .1 4 C a sh re c e iv e d re la te d to o th e r o p e ra tin g a c tiv itie s V II.4 8 3 4 ,1 7 8 ,4 4 2 .4 2 3 1 ,0 8 6 ,1 8 9 .3 0 S u b to ta l o f c a sh in flo w fro m th e o p e ra tin g 1 ,8 4 0 ,9 9 1 ,0 9 7 .2 2 1 ,4 8 3 ,7 3 2 ,9 9 8 .9 7 a c tiv itie s C a sh p a id fo r p u rc h a se o f g o o d s o r re c e iv in g o f 6 3 7 ,7 7 5 ,4 2 9 .1 8 5 5 6 ,4 9 9 ,4 6 4 .0 6 se rv ic e s C a sh p a id to a n d o n b e h a lf o f e m p lo y e e s 2 1 3 ,8 5 3 ,0 9 7 .3 6 1 9 3 ,6 8 0 ,3 6 1 .5 1 T a x p a y m e n ts 2 6 4 ,4 7 2 ,1 1 6 .1 1 2 0 6 ,6 8 0 ,0 1 7 .7 7 O th e r c a sh e s p a id to o p e ra tin g a c tiv itie s V II.4 9 3 7 9 ,7 1 3 ,5 5 5 .8 5 2 7 8 ,3 1 9 ,6 6 0 .5 0 S u b to ta l o f c a sh o u tflo w fro m o p e ra tin g a c tiv itie s 1 ,4 9 5 ,8 1 4 ,1 9 8 .5 0 1 ,2 3 5 ,1 7 9 ,5 0 3 .8 4 N e t c a sh flo w fr o m o p e r a tin g a c tiv itie s 3 4 5 ,1 7 6 ,8 9 8 .7 2 2 4 8 ,5 5 3 ,4 9 5 .1 3 II. C a sh flo w fr o m in v e stm e n t a c tiv itie s: C a sh re c e iv e d fro m d isp o sa l o f in v e stm e n ts 1 2 7 ,4 9 3 ,5 8 1 .2 1 4 8 9 ,4 5 2 ,7 4 2 .0 3 C a sh re c e iv e d fro m in v e stm e n t re tu rn s 6 ,3 1 7 ,1 6 5 .6 5 1 3 ,6 6 8 ,1 1 5 .9 9 N e t c a sh re c e iv e d fro m d isp o sa l o f fix e d a sse ts, 1 1 ,1 7 8 ,2 5 2 .8 8 4 ,1 9 1 ,3 0 9 .5 6 in ta n g ib le a sse ts a n d o th e r lo n g -te rm a sse ts N e t c a sh a m o u n t re c e iv e d fro m th e d isp o sa l o f su b c o m p a n ie s a n d o th e r b u sin e ss u n its C a sh re c e iv e d re la te d to o th e r in v e stm e n t a c tiv itie s S u b to ta l o f c a sh in flo w fro m th e in v e stm e n t 1 4 4 ,9 8 8 ,9 9 9 .7 4 5 0 7 ,3 1 2 ,1 6 7 .5 8 a c tiv itie s C a sh p a id to a c q u ire a n d c o n stru c t fix e d a sse ts, 7 5 ,5 1 9 ,8 1 7 .7 3 9 1 ,2 7 7 ,8 6 5 .6 9 in ta n g ib le a sse ts a n d o th e r lo n g -te rm a sse ts C a sh p a id to a c q u ire in v e stm e n ts 1 8 ,1 9 2 ,1 5 2 .1 8 4 3 0 ,4 4 1 ,0 6 0 .7 1 N e t c a sh a m o u n t p a id to a c q u ire th e su b c o m p a n ie s 7 1 ,2 9 2 ,9 4 5 .0 0 a n d o th e r o p e ra tin g u n its C a sh p a id re la te d to o th e r in v e stm e n t a c tiv itie s S u b to ta l o f c a sh o u tflo w fro m in v e stm e n t 1 6 5 ,0 0 4 ,9 1 4 .9 1 5 2 1 ,7 1 8 ,9 2 6 .4 0 a c tiv itie s N e t a m o u n t o f c a sh flo w r e c e iv e d fr o m th e -2 0 ,0 1 5 ,9 1 5 .1 7 -1 4 ,4 0 6 ,7 5 8 .8 2 in v e stm e n t a c tiv itie s III. C a sh flo w fr o m fin a n c in g a c tiv itie s: C a sh re c e iv e d b y in v e sto rs C a sh re c e iv e d fro m lo a n s 1 ,3 2 0 ,7 1 7 ,1 0 7 .0 0 8 5 7 ,1 7 9 ,0 9 8 .6 0 C a sh re c e iv e d re la te d to o th e r fin a n c in g a c tiv itie s V II.5 0 4 ,0 4 7 ,0 3 6 .6 5 S u b to ta l o f c a sh in flo w fro m th e fin a n c in g 1 ,3 2 4 ,7 6 4 ,1 4 3 .6 5 8 5 7 ,1 7 9 ,0 9 8 .6 0 a c tiv itie s R e p a y m e n ts o f lo a n s 1 ,1 6 6 ,6 5 7 ,2 8 2 .0 0 1 ,0 4 4 ,7 7 0 ,8 7 3 .6 7 C a sh p a id fo r d istrib u tio n o f d iv id e n d s, p ro fits a n d 2 0 5 ,6 7 7 ,1 9 9 .8 4 4 0 ,5 5 4 ,0 2 1 .1 9 re p a y m e n t o f in te re sts In c lu d in g : th e d iv id e n d s a n d p ro fits p a id to th e 1 3 ,1 0 5 ,7 0 7 .7 7 6 ,9 2 1 ,9 9 8 .7 7 m in o rity o f sh a re h o ld e rs b y th e su b c o m p a n ie s C a sh p a y m e n ts re la te d to o th e r fin a n c in g a c tiv itie s V II.5 1 1 5 ,7 9 8 ,0 6 7 .5 2 4 ,9 0 0 ,0 0 0 .0 0 S u b -to ta l o f c a sh o u tflo w fr o m th e fin a n c in g 1 ,3 8 8 ,1 3 2 ,5 4 9 .3 6 1 ,0 9 0 ,2 2 4 ,8 9 4 .8 6 a c tiv itie s N e t c a sh flo w fr o m fin a n c in g a c tiv itie s -6 3 ,3 6 8 ,4 0 5 .7 1 -2 3 3 ,0 4 5 ,7 9 6 .2 6 IV . E ffe c t o f fo r e ig n e x c h a n g e flu c tu a tio n o n -2 ,8 3 3 ,9 1 0 .3 7 -3 ,7 2 8 ,1 9 4 .2 6 c a sh a n d c a sh e q u iv a le n ts V . N e t in c r e a se a m o u n t o f c a sh a n d c a sh 2 5 8 ,9 5 8 ,6 6 7 .4 7 -2 ,6 2 7 ,2 5 4 .2 1 e q u iv a le n ts P lu s: B a la n c e o f c a sh a n d c a sh e q u iv a le n ts a t th e 2 8 1 ,2 2 5 ,2 3 2 .8 9 2 8 3 ,8 5 2 ,4 8 7 .1 0 b e g in n in g o f th e p e rio d V I B a la n c e o f c a sh a n d c a sh e q u iv a le n ts a t th e 5 4 0 ,1 8 3 ,9 0 0 .3 6 2 8 1 ,2 2 5 ,2 3 2 .8 9 e n d o f th e p e r io d 62 Change Statement of Shareholders’ Equities for 2008 Kuai He Statement No . 04 Prepared by: Livzon Pharmaceutical Group Inc. Unit: RMB Yuan Amount in this year Item Equities attributable to owners of parent company Equities of the Minority Total of Shareholders’ Conversion Difference of Foreign of Shareholders Equities Share capital Capital reserve Minus: treasury shares Surplus Reserve Undistributed Profit Currency Statement I. Balance at the end of previous year 306,035,482.00 478,651,639.99 348,091,204.65 817,303,043.09 -7,417,250.28 48,260,934.71 1,990,925,054.16 Plus: changes of accounting policies Correction of errors in the early stage II. Balance at the beginning of this year 306,035,482.00 478,651,639.99 348,091,204.65 817,303,043.09 -7,417,250.28 48,260,934.71 1,990,925,054.16 III. Increase or decrease of change amount in this year -41,336,805.55 15,798,067.52 5,207,316.37 -106,151,893.71 7,728,445.86 -150,351,004.55 (I)Net profit 52,073,163.66 20,834,153.63 72,907,317.29 (II)Profit and loss directly accrued to owners’ equities -41,336,805.55 -41,336,805.55 1．Net amount of fair value changes of saleable financial assets -41,347,882.40 -41,347,882.40 2．Effect of changes of other owners' equities in the invested units in accordance with the Equity Law 3．Income tax effect related to the items accrued to owners’ equities 4．Others 11,076.85 11,076.85 Subtotal of above (I) and (II) -41,336,805.55 52,073,163.66 20,834,153.63 31,570,511.74 (III) Increase and decrease of capitals by the owners 15,798,067.52 -15,798,067.52 1.Capital investment by owners 2. Repurchase of treasury shares in the year 15,798,067.52 -15,798,067.52 3．Others (IV)Profit distribution 5,207,316.37 -158,225,057.37 -13,105,707.77 -166,123,448.77 1．Withdrawal of surplus reserve -153,017,741.00 -13,105,707.77 -166,123,448.77 2. Withdrawal of general risk reserve 5,207,316.37 -5,207,316.37 3．Distribution to the owners (or shareholders) 4．Others (V) Internal settlement and transfer of owners’ equities 1. Transfer of capital reserve to capital (or share capital) 2. Transfer of surplus reserve to capital (or share capital) 3. Surplus reserve makes up for the loss 4．Others IV. Others -6,048,789.63 -981.47 -6,049,771.10 V. Balance at the end of this year 306,035,482.00 437,314,834.44 15,798,067.52 353,298,521.02 711,151,149.38 -13,466,039.91 55,988,399.10 1,834,524,278.51 63 Consolidated Change Statement of Shareholders’ Equities for 2007 Kuai He Statement No . 04 Prepared by: Livzon Pharmaceutical Group Inc. Unit: RMB Yuan Amount in previous year Equities attributable to owners of parent company Item Equities of the Minority Total of Shareholders’ Minus: treasury Conversion Difference of of Shareholders Equities Share capital Capital reserve Surplus Reserve Undistributed Profit shares Foreign Currency Statement I. Balance at the end of previous year 306,035,482.00 433,227,215.91 339,622,130.39 267,809,675.47 -7,167,556.52 40,110,863.94 1,379,637,811.19 Plus: changes of accounting policies 9,297,980.00 -39,486,618.25 88,997,999.46 160,099.32 58,969,460.53 Correction of errors in the early stage II. Balance at the beginning of this year 306,035,482.00 442,525,195.91 300,135,512.14 356,807,674.93 -7,167,556.52 40,270,963.26 1,438,607,271.72 III. Increase or decrease of change amount in this year 36,126,444.08 47,955,692.51 460,495,368.16 8,007,865.22 552,585,369.97 (I)Net profit 508,451,060.67 14,929,863.99 523,380,924.66 (II)Profit and loss directly accrued to owners’ equities 36,126,444.08 36,126,444.08 1．Net amount 2．Effect of fair value of changes changes of other of saleable owners' financial equities in theassets 44,663,063.00 44,663,063.00 invested units in accordance with the Equity Law 3．Income tax effect related to the items accrued to -8,367,515.34 -8,367,515.34 owners’ equities 4．Others -169,103.58 -169,103.58 Subtotal of above (I) and (II) 36,126,444.08 508,451,060.67 14,929,863.99 559,507,368.74 (III) Increase and decrease of capitals by the owners 1.Capital investment by owners 2. Repurchase of treasury shares in the year 3．Others (IV)Profit distribution 47,955,692.51 -47,955,692.51 -6,921,998.77 -6,921,998.77 1．Withdrawal of surplus reserve 47,955,692.51 -47,955,692.51 2. Withdrawal of general risk reserve 3．Distribution to the owners (or shareholders) -6,921,998.77 -6,921,998.77 4．Others (V) Internal settlement and transfer of owners’ equities 1. Transfer of capital reserve to capital (or share capital) 2. Transfer of surplus reserve to capital (or share capital) 3. Surplus reserve makes up for the loss 4．Others IV. Others -249,693.76 -17,893.77 -267,587.53 V. Balance at the end of this year 306,035,482.00 478,651,639.99 348,091,204.65 817,303,043.09 -7,417,250.28 48,260,934.71 1,990,925,054.16 64 Balance Sheet 2008-12-31 Kuai Qi Statement No. 01 Prepared by: Livzon Pharmaceutical Group Inc. Unit: RMB Yuan Balance at the Balance at the Balance at the Liabilities and Owners' Equities (or Balance at the Assets Notes beginning of Notes beginning of end of year Sareholders' Equities) end of year year year Current assets: Current liability: 465,301,653.09 214,055,704.00 476,299,225.00 308,129,820.00 Currency capital Short-term loan Tradable financial assets 80,393,200.00 306,657,653.50 Tradable financial liability Note receivable 29,231,539.08 35,195,356.91 Notes payable Accounts receivable VIII.1 144,321,719.40 106,882,468.01 Accounts payable 114,072,354.87 76,272,159.17 Advance money 8,826,526.19 11,492,061.89 Deposit receivable 2,872,035.13 1,622,162.02 Interests receivable Payroll payable 16,598,171.56 16,707,303.02 Dividend receivable 717,057.69 717,057.69 Tax payable 15,704,237.77 34,800,301.61 Other receivables VIII.2 597,968,454.42 695,435,374.35 Interests payable Inventory 59,282,216.75 28,020,202.93 Dividend payable 20,174.01 545,174.01 Non-current assets due within one year Other accounts payable 412,814,666.41 280,959,754.36 Other current assets Non-current liabilities due within one year 10,000,000.00 40,000,000.00 Total of current assets 1,386,042,366.62 1,398,455,879.28 Other current liabilities Non-current assets: Total of current liabilities 1,048,380,864.75 759,036,674.19 Saleable financial assets 6,674,800.96 58,571,943.00 Non-current liabilities Investment held to the maturity date Long-term loan 100,000,000.00 70,000,000.00 Long-term accounts receivable Securities payable Long-term equity investment VIII.3 898,086,492.34 744,666,811.51 Long-term accounts payable Real estate for Investment Special accounts payable Fixed assets 106,219,049.50 117,351,062.47 Deferred profit 10,266,816.45 6,052,444.71 Engineering under construction 54,670.40 Anticipation liability 749,223.84 26,719,392.32 Engineering goods Liabilities with the deferred income taxes Liquidation of fixed assets Other non-current liabilities Subtotal of non-current 111,016,040.29 102,771,837.03 Production biology assets liabilities Oil and gas assets Total of liabilities 1,159,396,905.04 861,808,511.22 39,152,640.11 42,259,834.33 Intangible assets Owners' equity (or shareholders’ equities ): Development expenses 2,460,860.10 1,534,836.06 Paid-up capital (share capital) 306,035,482.00 306,035,482.00 Goodwill Capital reserve 428,125,637.76 469,476,289.38 Long-term deferred and prepaid expenses Minus: treasury share 15,798,067.52 Assets with deferred income taxes 24,462,136.75 10,797,270.89 Surplus reserve 233,653,771.24 233,455,360.76 Other non-current assets Undistributed profit 351,684,617.86 502,916,664.58 Subtotal of owners’ equities (or 1,077,055,979.76 975,236,428.66 1,303,701,441.34 1,511,883,796.72 Subtotal of non-current assets shareholders’ equities ) Total of liabilities and owners’ equities Total of assets 2,463,098,346.38 2,373,692,307.94 2,463,098,346.38 2,373,692,307.94 (or shareholders’ equities ) 65 Profit Statement for 2008 Kuai Qi Statement No . 02 Prepared by: Livzon Pharmaceutical Group Inc. Unit: RMB Yuan Item Note Amount in this year Amount in previous year VIII.4 714,405,049.43 617,371,943.39 1. Total operating income VIII.4 417,979,042.47 334,771,714.67 Minus: operating cost VIII.5 165,000.00 180,000.00 Operating taxes and additional charge 169,634,510.42 108,336,343.78 Sales expense 76,020,949.67 82,301,933.93 Management expense 22,044,725.02 13,804,845.40 Financial expenses 4,569,146.48 501,521.72 Loss for asset depreciation Plus: profits from the fair value changes (The loss is listed -190,648,198.10 77,923,501.33 beginning with “ -“) VIII.6 148,577,274.83 210,988,829.27 Investment gains (The loss is listed beginning with “ -“) Including: the investment gains from the associated -3,103,791.67 -4,374,002.87 enterprises and joint ventures -18,079,247.90 366,387,914.49 II. Operating profit (The loss is listed beginning with “ -“) 2,571,112.13 354,624.95 Plus: non-operating income 1,967,366.56 455,309.32 Minus: non-operating expense 192,620.84 415,161.26 Including: loss in disposal of non-current assets -17,475,502.33 366,287,230.12 III. Total profit (The loss is listed beginning with “ -“) -19,459,607.09 46,708,450.81 Minus: income tax expense 1,984,104.76 319,578,779.31 IV. Net profit (the net loss is listed beginning with “ -”) V. Profit per share: (I) Basic profit per share (II) Diluted profit per share 66 Cash Flow Statement For 2008 Kuai Qi Statement No . 03 Prepared by: Livzon Pharmaceutical Group Inc. Unit: RMB Yuan Item Note Amount in this year Amount in previous year I. Cash flows from operating activities Cash received from sales of goods or rendering of services 685,857,133.83 594,047,310.07 Tax refunding Cash received related to other operating activities 12,910,906.92 68,615,219.24 Subtotal of cash inflow from the operating activities 698,768,040.75 662,662,529.31 Cash paid for purchase of goods or receiving of services 393,524,390.37 295,292,844.53 Cash paid to and on behalf of employees 64,460,685.15 60,356,904.57 Tax payments 82,998,985.35 65,491,096.86 Other cashes paid to operating activities 149,128,103.61 109,072,723.71 Subtotal of Cash outflow from operating activities 690,112,164.48 530,213,569.67 Net cash flow from operating activities 8,655,876.27 132,448,959.64 II. Cash flow from investment activities: Cash received from disposal of investments 107,489,567.54 361,120,877.60 Cash received from investment returns 101,875,754.14 3,644,374.05 Net cash received from disposal of fixed assets, intangible assets and 1,299,510.79 2,492,848.77 other long-term assets Net cash amount received from the disposal of subcompanies and other business units Cash received related to other investment activities 34,918,846.21 Subtotal of cash inflow from the investment activities 210,664,832.47 402,176,946.63 Cash paid to acquire and construct fixed assets, intangible assets and 9,699,295.68 15,139,420.89 other long-term assets Cash paid to acquire investments 106,223,451.64 405,755,684.82 Net cash amount paid to acquire the subcompanies and other operating 71,330,000.00 units Cash paid related to other investment activities Subtotal of cash outflow from investment activities 187,252,747.32 420,895,105.71 Net amount of cash flow received from the investment activities 23,412,085.15 -18,718,159.08 III. Cash flow from financing activities: Cash received by investors Cash received from loans of subcompanies 244,484,821.27 186,248,754.11 Cash received from loans 1,250,351,937.00 744,660,510.00 Cash received related to other financing activities 4,047,036.65 Subtotal of cash inflow from the financing activities 1,498,883,794.92 930,909,264.11 Repayments of loans 1,072,192,112.00 973,694,039.50 Cash paid for distribution of dividends, profits and repayment of 190,848,440.05 30,398,785.56 interests Cash payments related to other financing activities 15,798,273.43 Sub-total of cash outflow from the financing activities 1,278,838,825.48 1,004,092,825.06 Net cash flow from financing activities 220,044,969.44 -73,183,560.95 IV. Effect of foreign exchange fluctuation on cash and cash -866,981.77 -55,949.32 equivalents V. Net increase amount of cash and cash equivalents 251,245,949.09 40,491,290.29 Plus: Balance of cash and cash equivalents at the beginning of the 214,055,704.00 173,564,413.71 period VI Balance of cash and cash equivalents at the end of the period 465,301,653.09 214,055,704.00 67 Change Statement of Shareholders’ Equities for 2008 Kuai Qi Statement No . 04 Prepared by: Livzon Pharmaceutical Group Inc. Unit: RMB Yuan Amount in this year Item Note Paid-up capital Capital reserve treasury shares (Minus) Surplus Reserve Undistributed Profit Total of Shareholders’ Equities I. Balance at the end of previous year 306,035,482.00 469,476,289.38 233,455,360.76 502,916,664.58 1,511,883,796.72 Plus: 1. changes of accounting policies 2. Correction of errors in the early stage II. Balance at the beginning of this year 306,035,482.00 469,476,289.38 233,455,360.76 502,916,664.58 1,511,883,796.72 III. Increase or decrease of change amount in this year (the decrease is listed beginning with “ -”) -41,350,651.62 15,798,067.52 198,410.48 -151,232,046.72 -208,182,355.38 (I)Net profit in this year 1,984,104.76 1,984,104.76 (II)Profit and loss directly accrued to owners’ equities -41,350,651.62 -41,350,651.62 1．Net amount of fair value changes of saleable financial assets -41,347,882.40 -41,347,882.40 2．Effect of changes of other owners' equities in the invested units in accordance with the Equity Law 3．Income tax effect related to the items accrued to owners’ equities 4．Others -2,769.22 -2,769.22 Subtotal of above (I) and (II) -41,350,651.62 1,984,104.76 -39,366,546.86 15,798,067.52 -15,798,067.52 (III) Increase and decrease of capitals by the owners 1.Capital investment by owners 2. Repurchase of treasury shares in the year 15,798,067.52 -15,798,067.52 3．Others (IV)Profit distribution in this year 198,410.48 -153,216,151.48 -153,017,741.00 1．Withdrawal of surplus reserve 198,410.48 -198,410.48 3．Distribution to the owners (or shareholders) -153,017,741.00 -153,017,741.00 4．Others (V) Internal settlement and transfer of owners’ equities 1. Transfer of capital reserve to capital (or share capital) 2. Transfer of surplus reserve to capital (or share capital) 3. Surplus reserve makes up for the loss 4．Others IV. Balance at the end of this year 306,035,482.00 428,125,637.76 15,798,067.52 233,653,771.24 351,684,617.86 1,303,701,441.34 68 Change Statement of Shareholders’ Equities for 2007 Kuai Qi Statement No . 04 Prepared by: Livzon Pharmaceutical Group Inc. Unit: RMB Yuan Amount in previous year Item Note Paid-up capital Capital reserve treasury shares (Minus) Surplus Reserve Undistributed Profit Total of Shareholders’ Equities I. Balance at the end of previous year 306,035,482.00 433,227,215.91 242,066,332.09 387,905,092.68 1,369,234,122.68 Plus: 1. changes of accounting policies -270,065.97 -40,568,849.26 -172,609,329.48 -213,448,244.71 2. Correction of errors in the early stage II. Balance at the beginning of this year 306,035,482.00 432,957,149.94 201,497,482.83 215,295,763.20 1,155,785,877.97 III. Increase or decrease of change amount in this year 36,519,139.44 31,957,877.93 287,620,901.38 356,097,918.75 (I)Net profit in this year 319,578,779.31 319,578,779.31 (II)Profit and loss directly accrued to owners’ equities 36,519,139.44 36,519,139.44 1．Net amount of fair value changes of saleable financial assets 34,654,727.66 34,654,727.66 2．Effect of changes of other owners' equities in the invested units in accordance with the Equity Law 3．Income tax effect related to the items accrued to owners’ equities 4．Others 1,864,411.78 1,864,411.78 Subtotal of above (I) and (II) 36,519,139.44 319,578,779.31 356,097,918.75 (III) Increase and decrease of capitals by the owners 1.Capital investment by owners 2．Amount paid for share payment that is accrued to owners’ equities 3．Others (IV)Profit distribution in this year 31,957,877.93 -31,957,877.93 1．Withdrawal of surplus reserve 31,957,877.93 -31,957,877.93 3．Distribution to the owners (or shareholders) 4．Others (V) Internal settlement and transfer of owners’ equities 1. Transfer of capital reserve to capital (or share capital) 2. Transfer of surplus reserve to capital (or share capital) 3. Surplus reserve makes up for the loss 4．Others IV. Balance at the end of this year 306,035,482.00 469,476,289.38 233,455,360.76 502,916,664.58 1,511,883,796.72 69 2008 Annual Report of Livzon Pharmaceutical Group Inc. Livzon Pharmaceutical Group Inc. Notes to Consolidated Financial Statement December 31, 2008 (The amount is expressed in RMB unless otherwise specified) I. Company Profile 1 History In March 1992, approved by Zhu Ti Gai Wei［ 1992］ No. 29 document issued by Zhuhai Economic System Reform Commission and ［1992］No. 45 document issued by the joint examination team under Guangdong Enterprise Shareholding System Pilot Reform and Guangdong Economic System Reform Commission, the company is a limited company raising funds from targeted sources that has been sponsored by Macau Nanyue (Group) Co., Ltd, Zhuhai Credit Cooperative, Guangdong Medicine Group Co., Ltd, Zhuhai Medicine Company, Guangdong Medicines & Health Products IMP.& EXP. CORP, Zhuhai branch of Bank of China, Zhuhai Guihua Staff Mutual Help Association, contributed with the net assets of the original joint venture Co., Ltd as the shares, and raised other funds from the domestic legal persons and internal staffs. In 1993, approved by Yue Zheng Jian Fa Zi ［ 1993 ］ No. 001 document issued by Guangdong Securities Regulatory Commission, Shen Ren Yin Fu Zi ［1993］No. 239 document issued by Shenzhen Special Economic Zone branch of the People’s Bank of China and Zheng Jian Fa Shen Zi ［1993］No. 19 document issued by China Securities Regulatory Commission, the company was listed in Shenzhen Stock Exchange. In 1998, the sponsoring shareholders of company including Zhuhai Credit Cooperative, Guangdong Pharmaceutical Industry Company, Zhuhai Guihua Staff Mutual Help Association and Zhuhai branch of Bank of China signed the Equity Transfer Agreement with China Everbright Bank (Group) Co., Ltd and transferred all their equities to China Everbright Bank (Group) Co., Ltd ,the foreign-owned sponsor Macau Nanyue (Group) Co., Ltd signed the Equity Transfer Agreement with China Everbright Medicine Co., Ltd and transferred all its equity (18,893,448 shares) to China Everbright Medicine Co., Ltd. After the transfer, China Everbright Bank (Group) Co., Ltd held 38,917,518 domestic legal person shares of the company. On April 12, 2002, China Everbright Bank (Group) Co., Ltd and Xi’an Topsun Group Co., Ltd signed the Equity Custody Agreement and China Everbright Bank (Group) Co., Ltd put all its domestic legal person shares (38,917,518 shares) under the custody of Xi’an Topsun Group Co., Ltd. On December 21, 2004, Xi’an Topsun Group Co., Ltd received the 38,917,518 legal person shares of the company from China Everbright Bank (Group) Co., Ltd. By December 31, 2004, China Everbright Bank (Group) Co., Ltd did not hold any of the company shares, and Xi’an Topsun Group 70 2008 Annual Report of Livzon Pharmaceutical Group Inc. Co., Ltd directly held 38,917,518 shares of the company, accounting for 12.72％ of total shares. On February 4, 2005, Joincare Pharmaceutical Group Industry Co., Ltd (hereinafter referred to as Joincare) and Xi’an Topsun Group Co., Ltd signed the Equity Transfer Agreement and Equity Mortgage Agreement. Xi’an Topsun Group Co., Ltd directly transferred and mortgaged 38,917,518 domestic legal person shares of our company to Joincare (accounting for 12.72％ of total shares) and handled the formalities for equity transfer on August 3, 2006. By December 31, 2008, Joincare Group and its holding subcompanies has owned 134,000,271 shares of the company through the agreement transfer and direct purchase from the secondary markets, accounting for 44.0754% of total shares and becoming the largest shareholder, so it has owned the actual control right of the company. The formalities for transferring the equities of 6,059,428 legal person shares held in the name of Guangzhou Begol Trading Corporation to Joincare Group have not been handled. On June 18, 1998, the company was registered with the State Administration of Industry and Commerce for the second time and obtained the Qi He Yue Zhu Zong Fu Zi No. 001111 enterprise legal person business license. 2 Industry The company is in the pharmacy industry. 3 Business scope The approved business scope of the company: the company mainly deals with the medicines (Chinese and western finished medicines, raw materials for medicines, medicine intermediate, Chinese medicine materials, tablet of Chinese medicines, healthcare and invigorative products, healthcare foodstuff, healthcare drinking, cosmetics, sanitation materials, biological products, bio-chemical reagents, medical instruments, etc) and also handles the chemical industry, food, real estate, tourism and information, etc. 4 Change of main business During the report period, the company has not changed its main business. II. Preparation Basis for Financial Statements Based on the continuous operation assumption of company and the actual transactions and items, in accordance with the Enterprise Accounting Standards- Basic Standards(No. 33 decree of the Ministry of Finance) and the Notice of the Ministry of Finance on Printing and Issuing 38 Standards including the No. 1 Enterprise Accounting Standard – Inventory (Cai Kuai [2006] No. 3) issued by the Ministry of Finance in February 15, 2006, and the Notice of the Ministry of Finance about Printing and Issuing the Enterprise Accounting Standard – Application Guidelines (Cai Kuai [2006] No. 18) issued by the Ministry of Finance in October 30, 2006, No. 7 Questions and Answers about the Standardization of Information Disclosure of Companies Making Public Offering of Securities – Comparison about Preparation and Disclosure of Accounting Information in the Transition Period of New and Old Accounting Standards, the No. 1 Enterprise Accounting Standard, the No. 2 Enterprise Accounting Standard, and the No. 1 Explanatory Announcement about Information Disclosure of 71 2008 Annual Report of Livzon Pharmaceutical Group Inc. Companies Making Public Offering of Securities issued by China Securities Regulatory Commission, this financial statement is prepared under the following important accounting and valuation policies. III. Declaration of Compliance with the Enterprise Accounting Standards The financial statement prepared by the company meets the requirements of the enterprise accounting standards, and exactly and completely reflects the financial status, operation result and cash flow, etc of the company. IV. Main Accounting Policies and Preparation Methods of Accounting Evaluation and Consolidated Financial Statement of the Company (I) AccountingYear The company employs the period of the calendar days from the January 1 to December 31 each year as the accounting year. (II) Currency Used in Book-keeping The Company takes the RMB as the currency in book-keeping. (III) Calculation Natures and Statement Items with the Changes of Calculation Natures in the Report Period In calculating the accounting factors, the company takes the historical cost method; in case the determined accounting factor amount can be obtained or reliably calculated, the replacement cost, net realizable value, current value and fair value of the individual accounting factor may be employed. By using the historical cost calculation method, the assets will be calculated on the basis of the cash paid to purchase them or the cash equivalents or the fair value of the considerations paid to purchase such assets. The liabilities will be calculated on the basis of the actually received amount or asset amount for performing the current obligations, or the contract amount for performing the current obligations, or the paid cash amount or cash equivalent amount to repay the debts in the daily activities There are no changes about calculation natures of statement items during the report period. (IV) Standard for Cash Equivalent In preparing the cash flow statement, the cash equivalents of the company include the investments with short period (it usually expires within three months from the purchase date), characteristics of high flow, easy conversion to the known amount of cash and little risk of value change. The equity investment will not be deemed as the cash equivalents. (V) Calculation Method of Foreign Currency Business The foreign currency business will be converted to RMB for book-keeping in accordance with the spot exchange rate on the current transaction day. On the preparation date of the balance sheet, the balance of foreign currency items will be adjusted after the conversion to the RMB in accordance with the spot exchange rate that day; the 72 2008 Annual Report of Livzon Pharmaceutical Group Inc. difference of spot exchange rates between the preparation date of the balance sheet and the initial confirmation or the previous date of the balance sheet will be accrued to the current profits and losses; to add or reduce the amount of foreign currency items used in book-keeping. The non-currency items of foreign currency calculated with the historical cost method will be converted at the spot exchange rate on the transaction day and the amount of currency used in book-keeping will not be changed. (VI) Conversion of Financial Statement in Foreign Currency The asset and liability items in the balance sheet will be converted at the spot exchange rate on the preparation date of balance sheet. Among the equity items of shareholders, all items except the “undistributed profit” will be converted at the spot exchange rate on the occurrence date. The income and expense items in the profit statement will be converted at the average exchange rate that is determined by using the reasonable methods of systems and is similar to the spot exchange rate on the occurrence date. The conversion difference of financial statement in foreign currency caused by the above conversion will be separately listed in the equity item of shareholders in the balance sheet. (VII) Confirmation and Calculation of Financial Instruments 1. Classification. The financial instruments may be classified to five categories based on the investment purpose and economic essence: ①The financial assets or financial liabilities that are calculated in the fair values and whose changes are accrued to the current profit and loss, including the tradable financial assets or financial liabilities; the financial assets or financial liabilities that are designated to be calculated in the fair values and whose changes will be accrued to the current profit and loss; ② The investments that are held to the expiry dates; ③ Loans and accounts receivable; ④ Saleable financial assets; ⑤ Other financial liabilities. 2. Initial confirmation and subsequent calculation ① The financial assets or financial liabilities that are calculated in the fair values and whose changes are accrued to the current profit and loss: the fair values to get them will be the initial confirmation amount and the relevant transaction expenses will be accrued to the current profit and loss at the time of occurrence. The cash dividends or bond interests in the payments that have been declared to be distributed will be separately confirmed as the receivable items. The interests or cash dividends obtained during the holding period will be confirmed as the investment gains. On the preparation date of financial statement, the changes of fair values will be accrued to the current profit and loss. ② The investments that are held to the expiry dates: the sum of fair values and relevant expenses to get them 73 2008 Annual Report of Livzon Pharmaceutical Group Inc. will be deemed as the initial confirmation amount. The cash dividends or bond interests in the payments that have been declared to be distributed will be separately confirmed as the receivable items. The interest incomes confirmed in accordance with the actual interest rate method during the holding period will be accrued to the investment gains. ③ Receivable account: the prices in the contracts and agreements with the purchasers will be the initial book- keeping amount. ④ Saleable financial assets: the sum of fair values and relevant expenses to get them will be deemed as the initial confirmation amount. The cash dividends or bond interests in the payments that have been declared to be distributed will be separately confirmed as the receivable items. The interests and cash dividends generated during the holding period will be accrued to the investment gains. At the end of the period, the saleable financial assets will be calculated in the fair values and the changes of fair values will be accrued to the capital reserves (other capital reserves). ⑤ Other financial liabilities: the sum of fair values and relevant expenses to get them will be deemed as the initial book-keeping amount. The subsequent calculation will employ the amortized cost method. 3. Determination Method about Fair Values of Main Financial Assets and Financial Liabilities ① For the active financial assets or financial liabilities in the market, the quotations will be used for determination of their fair values. ② For the inactive financial instruments, the enterprises will employ the evaluation technology to determine their fair values. ③ The financial assets that are initially obtained or derived or financial liabilities will take the market transaction prices as the basis to determine their fair values. ④ In case the enterprise employs the discounted cash flow method to determine the fair values, the market return rates of other financial instruments with the essentially same contract terms and characteristics may be used as the discounting rate. In case the short-term accounts receivable without indicating the interest rate and current values of payable accounts have the very small price difference with the actual transaction prices, they will be calculated at the actual transaction prices. ⑤ Other financial liabilities: the sum of fair values and relevant expenses to get them will be deemed as the initial book-keeping amount. The subsequent calculation will employ the amortized cost method. 3. Determination Method about Fair Values of Main Financial Assets and Financial Liabilities ① For the active financial assets or financial liabilities in the market, the quotations will be used for determination of their fair values. ② For the inactive financial instruments, the enterprises will employ the evaluation technology to determine their fair values. 74 2008 Annual Report of Livzon Pharmaceutical Group Inc. ③ The financial assets that are initially obtained or derived or financial liabilities will take the market transaction prices as the basis to determine their fair values. ④ In case the enterprise employs the discounted cash flow method to determine the fair values, the market return rates of other financial instruments with the essentially same contract terms and characteristics may be used as the discounting rate. In case the short-term accounts receivable without indicating the interest rate and current values of payable accounts have the very small price difference with the actual transaction prices, they will be calculated at the actual transaction prices. 4. Disposal of Financial Asset Depreciation At the end of the period, in case enough evidences prove that all financial assets except those that are calculated in the fair values and whose changes are accrued to the current profit and loss have been depreciated, the depreciation reserve will be withdrawn based on the difference between the expected currency flow values in the future and the book values. (1)Accounts receivable At the end of the period, in case enough evidences prove that the accounts receivable have been depreciated, the depreciation loss will be calculated and confirmed based on the difference between the book values and the expected currency flow values in the future. At the end of the period, the depreciation test will be made about the individual accounts receivable with huge amounts. In case enough evidences prove that they have been depreciated, the depreciation loss will be confirmed and withdrawn based on the difference between the expected currency flow values in the future and the book values. For the individual accounts receivable with small amounts at the end of the period, classify them along with the accounts receivable that have not proved to be depreciated after the single test to numbers of packages in line with the similar credit risk characteristics; then determine and withdraw the depreciation loss based on the percentage of these receivable items to the balances on the preparation date of balance sheet. This percentage reflects the actual depreciation loss in each item, i.e., the exceeding amount of book values of each package over their currency flow values in the future. On the basis of the actual loss rate of receivable account package (i.e., age package) with the same or similar credit risk characteristics in the previous year, the company will consider the current situation to determine the percentage of withdrawing the bad debt reserve for the following receivable account package: Age Withdrawal Percentage Less than one year (including one year) 5% One to two years (including two years) 6% 75 2008 Annual Report of Livzon Pharmaceutical Group Inc. Two to three years (including three years) 20% Three to four years (including four years) 70% Four to five years (including five years) 90% Over five years 100% For the fund transfer between the companies within the consolidation scope, no bad debt reserve will be withdrawn. In making the group testing, if any signs indicate that the receivability of a certain account receivable is obviously different from other accounts receivable at the same age and therefore, the withdrawal of bad debt reserve at the specified percentage will not actually reflect its receivable amount, the individual confirmation method will be employed for withdrawal of bad debt reserve. Confirmation standard of bad debts: ① the debtors are bankrupt or dead and their remaining assets or the heritage are not enough to write off the accounts receivable; ②the debtors fail to repay the debt overdue and there are obvious signs that the accounts receivable cannot be returned. For the accounts that cannot finally be returned, report to the Board of Directors for the approval of writing off such bad debts. (2) The investments that are held to the expiry dates For the investments that are held to the expiry dates, the depreciation test will be made based on numbers of packages of the individual or accounts receivable with similar credit risk characteristics. In case enough evidences prove that they have been depreciated, the depreciation loss will be confirmed and withdrawn based on the difference between the expected currency flow values in the future and the book values. If the depreciation reserves are withdrawn for the investments that are held to the expiry dates, and enough evidences prove that their values have been restored and actually it is related to the facts after confirmation of such loss, the originally confirmed depreciation reserve will be reversed in case it does not exceed the amortized cost on the transfer date of such financial assets without withdrawing the depreciation reserve and will be accrued to the current profit and loss. (3) Saleable Financial Assets In case the fair values of saleable financial assets have greatly dropped, or after considering various relevant factors, this drop tendency is deemed as long-term, the depreciation reserve will be withdrawn based on the difference between the expected currency flow values in the future and the book values. In case the saleable financial assets have been depreciated, the accumulated loss caused by the drop of fair values that have been accrued to the owners’ equities will be transferred, and then the depreciation reserve will be confirmed and withdrawn. For the saleable liability instruments whose depreciation loss has been confirmed, if their fair values during the 76 2008 Annual Report of Livzon Pharmaceutical Group Inc. subsequent accounting period have gone up and it is actually related to the facts occurring after the confirmation of original depreciation loss, the originally confirmed depreciation reserve will be reversed and accrued to the current profit and loss. The depreciation loss of the investments in saleable liability instruments will not be reversed through the profit and loss. (3) Saleable Financial Assets In case the fair values of saleable financial assets have greatly dropped, or after considering various relevant factors, this drop tendency is deemed as long-term, the depreciation reserve will be withdrawn based on the difference between the expected currency flow values in the future and the book values. In case the saleable financial assets have been depreciated, the accumulated loss caused by the drop of fair values that have been accrued to the owners’ equities will be transferred, and then the depreciation reserve will be confirmed and withdrawn. For the saleable liability instruments whose depreciation loss has been confirmed, if their fair values during the subsequent accounting period have gone up and it is actually related to the facts occurring after the confirmation of original depreciation loss, the originally confirmed depreciation reserve will be reversed and accrued to the current profit and loss. The depreciation loss of the investments in saleable liability instruments will not be reversed through the profit and loss. (VIII) Inventory Calculation Method: 1. Inventory Classification Inventory classification: the inventories of the company mainly include the raw materials, packaging materials, products under production, products at stock, processing materials and low-value consumable products, etc. 2. The company employs the perpetual inventory method. 3. Pricing method in purchasing and delivery: The purchased inventories shall be accrued at the actual cost. The purchase and warehousing of various inventories in the company are priced based on the actual cost; The delivery of stock commodities shall be calculated by the weighted average method; whiling the low-value consumable products and packaging materials are taken, they will be accrued to the cost at one time. 4. Confirmation standard and withdrawal method of inventory depreciation reserve After the complete check about the inventories at the end of the period, the inventory depreciation reserve will be withdrawn or adjusted based on the lower between the inventory cost and discountable net value. The discountable net value will be determined after the deduction of the possible cost, marketing expense and relevant taxes from the current evaluation of inventories in the normal production and operation period. Normally, the inventory depreciation reserve will be withdrawn in accordance with the individual inventory item, but for the large quantity of low-unit-price inventories, the inventory depreciation reserve will be withdrawn in accordance with the inventory type; for the inventories that are related to the product series produced and sold in 77 2008 Annual Report of Livzon Pharmaceutical Group Inc. the same area, have the same or similar final usage and purposes and are hard to be separately calculated from other items, their depreciation reserves will be consolidated. On the preparation date of balance sheet, in case the impact factors of the withdrawn inventory depreciation reserve disappear, the deducted inventory values will be restored and reversed in the originally withdrawn inventory depreciation reserve; the transferred amount will be accrued to the current profit and loss. (IX) Long-term Equity Investment 1. Initial Calculation （1） Long-term equity investment caused by the enterprise merger ① In case the long-term equity investment are made to obtain the equities of the enterprises under the same control and the company pays the cash, transfers the non-cash assets or bears the liabilities as the consideration for the merger, the book value share on the merging date to obtain the owners’ equities of the merging party will be deemed as the initial investment cost of long-term equity investment. The difference between the initial investment cost of long-term equity investment and paid cash, transferred non-cash assets and book values of liabilities will be supplemented by the capital reserve; in case the capital reserve is not enough, the remaining gains will be adjusted. In case the company issues the equity securities as the merger consideration, the book value share on the merging date to obtain the owners’ equities of the merging party will be deemed as the initial investment cost of long-term equity investment. If the book value amount of the issued shares is deemed as the capital, the difference between the initial investment cost of long-term equity investment and the book value amount of the issued shares will be supplemented by the capital reserve; in case the capital reserve is not enough, the remaining gains will be adjusted. All direct expenses related to the enterprise merger, including the auditing expense, evaluation expense, legal service expense, etc will be accrued to the current profit and loss. ②In case the long-term equity investment are made to obtain the equities of the merging enterprises which are not under the same control, the merger cost will be the paid assets, existing liabilities and fair values of the issued equity securities on the purchasing date to purchase the control right of such enterprises. In case the absorption merger method is employed, the difference between the enterprise merger cost and the identifiable net asset values of such enterprises will be confirmed as the goodwill or accrued to the current profit and loss. In case the controlling merger is employed and the enterprise merger cost is more than the identifiable net asset values of such enterprises in the merger, the difference between them will be confirmed as the goodwill in the consolidated balance sheet. In case the enterprise merger cost is less than the identifiable net asset values of such enterprises in the merger, the difference between them will be accrued to the current profit and loss. All direct expenses related to the enterprise merger will be accrued to the enterprise merger cost. （2） Other types of long-term equity investment ① In case the cash investment is made to obtain the long-term equity, the actual payment amount will be 78 2008 Annual Report of Livzon Pharmaceutical Group Inc. deemed as the initial investment cost. The initial investment costs also include the direct expenses related to the long-term equity investment, taxes and other necessary expenses. ② In case the long-term equity investment is made by issuing the equity securities, the fair values of issued equity securities will be deemed as the initial investment cost. ③For the long-term equity investment made by the investors, the values agreed in the investment contracts or agreements will be deemed as the initial investment cost, except that the contracts or agreements provide that the values are not fair. ④In case the long-term equity investment is made by exchanging the non-currency assets, and this exchange has the commercial substance and the fair values of said assets can be reliably calculated, the fair values of the assets and relevant taxes will be deemed as the initial investment cost; the difference between the fair values of the assets and book values will be accrued to the current profit and loss; in case the non-currency asset exchange does not have the above two conditions, the book values of the assets and relevant taxes will be deemed as the initial investment cost. ⑤ In case the long-term equity investment is made by the mode of liability restructure, the fair values of the obtained equities will be deemed as the initial investment cost; the difference between the initial investment cost and book values of liabilities will be accrued to the current profit and loss. 2. Subsequent Calculation (1) The cost method is employed to calculate the long-term equity investment of subcompanies and will be adjusted in accordance with the equity method in the preparation of the consolidated financial statements. (2) The cost method is used to calculate the long-term equity investments in the invested units which are not under the common control or of important impact, are not quoted in the active market or whose fair values cannot be reliably calculated. In employing the cost method, add or return the cost used for adjusting the long-term equity investment. The current investment gains are only limited to the distributed amount of accumulative net profit generated by the investment in the invested units since the investment completion. The profits or cash dividends exceeding the above amount that are declared to be distributed by the invested units will be deemed as the return of initial investment cost, deducting the book values of investments. (3) The equity method is used to calculate the long-term equity investments in the invested units, which are under the common control or of important impact. In employing the cost method, in line with the net profit and loss share of invested units to be distributed or borne, confirm the profit and loss of investments and adjust the book values of long-term equity investments. The profit and loss of current investment will be the net profit or net loss share of invested units to be distributed or borne in the current year. In confirming the net loss of invested units to be borne, the limit is the zero of book values of investment (except that the investment enterprises bear the obligations for additional loss); in case the invested units make the net profits in the future and the distribution 79 2008 Annual Report of Livzon Pharmaceutical Group Inc. amount of gains exceeds the unconfirmed loss amount, the book values of investment will be restored subject to the unconfirmed loss amount to be borne. (4) In case the invested units employs the different accounting policies and accounting periods from the investment enterprises, the accounting policies and accounting periods of the investment enterprises will be employed to adjust the financial statements of invested units and confirm the investment gains. As regards the other changes of owners’ equities except the net profit and loss of the invested units, the investment units will adjust the book values of long-term equity investments and accrue them to the owners’ equities. (5) In disposing of the long-term equity investment, the difference between the book values and actual payments will be accrued to the current profit and loss. In case the equity method is employed to calculate the long-term equity investment and the other changes of owners’ equities except the net profit and loss of the invested units are accrued to the owners’ equities, the part that has been accrued to the owners’ equities will be proportionally transferred to the current profit and loss. 3. Confirmation standard and withdrawal method of depreciation reserve for long-term equity investment In case the cost method is used to calculate the long-term equity investments which are not quoted in the active market or whose fair values cannot be reliably calculated, the depreciation loss will be determined based on the difference between the book values and current values determined by the discounting of future cash flow in line with the current market return rate of similar financial assets. For the other long-term equity investments, in case the calculation results of receivable amounts indicate that the receivable amount of this long-term equity investment is less than their book values, the difference will be confirmed as the asset depreciation losses. Once the depreciation loss of long-term equity investment is confirmed, they will not be reversed. (X) Real Estate for Investment The real estates for investment refer to the real estates that are held for the purpose of earning the rent or capital increment, or for both of them, including the land use rights that have been rented or will be transferred after the value increment, or the structures that have been rented. The company employs the cost mode to calculate the current real estates for investment and withdraws the depreciation or amortization in accordance with the same depreciation or amortization policies of fixed assets and intangible assets in the company. In case the real estates for investment are transferred to other assets or other assets are transferred to the real estates for investment, the book values of real estates before the transfer will be the book values after the transfer. In case the company sells, transfers and rejects the real estates for investment or the real estates for investment are damaged, the remaining amount after the deduction of book values and relevant taxes from disposal incomes will be accrued to the current profit and loss. In case the received amount is less than the book values, the depreciation reserve will be withdrawn based on the difference between the receivable amount of individual real estate for investment and their book values; Once the depreciation losses are withdrawn, they will not be reversed. 80 2008 Annual Report of Livzon Pharmaceutical Group Inc. (XI)Fixed Asset Pricing and Depreciation Method 1. Confirmation condition for fixed assets The fixed assets refer to the tangible assets with the usage life of over one accounting year that are held for commodity production, labor provision, renting or operational management The fixed assets will be confirmed if they meet the following conditions: (1) The economic benefits related to this fixed asset probably flow to the enterprise; (2) The cost of this fixed asset may be reliably calculated. 2. Classification of Fixed Assets The fixed assets may be classified into the following items: houses and structures, machine equipments, transportation equipments, electronic equipment and others. 3. Calculation of fixed assets The actual costs of fixed assets will be deemed as the initial calculation amount. (1) In case the prices to purchase the fixed assets exceed the normal credit conditions and cause the payment deferment and are characteristic of the financing nature, the costs of fixed assets will be determined based on the current values of purchase prices. (2) In case the fixed assets are obtained by the liability restructure to write off the liabilities of debtors, their book values will be determined based on the fair values of this fixed asset. The difference between the book values of restructuring liabilities and the fair values of this fixed asset will be accrued to the current profit and loss. In case the non-currency asset exchange is characteristic of commercial substance and the fair values of received or delivered assets can be reliably calculated, the book values of received fixed assets in the non- currency asset exchange will normally be determined based on the fair values of delivered assets, except that the accurate evidences indicate that the fair values of received assets are more reliable. In case any non-currency asset exchange does not meet the above conditions, the book values of delivered assets and the payable taxes will be deemed as the costs of received fixed assets. No profit and loss will be confirmed. (3) The book values of fixed assets to be obtained by the absorption merger from the enterprises which are under the same control will be determined based on the book values of merging party; the book values of fixed assets to be obtained by the absorption merger from the enterprises which are not under the same control will be determined based on their fair values. The rejection expenses of fixed assets will be calculated and accrued to the book values of fixed assets based on the current values. In case the subsequent payments related to the fixed assets make the economic benefits generated by the inflow of this fixed asset to the enterprise exceed the original evaluations, the exceeding part will be accrued to the book values of fixed assets. The increased amount will not exceed the receivable amount of this fixed asset. 81 2008 Annual Report of Livzon Pharmaceutical Group Inc. 4. The depreciation method of fixed assets: the average life method is used to calculate the depreciation of fixed assets in the company from the next month after such fixed assets meet the expected usable conditions. The depreciation life, annual depreciation rate and assessed residual value rate of various fixed assets are listed as follows: Fixed Asset category Depreciation life (years) Annual depreciation rate Assessed residual value rate Houses and structures 20 4.5%-4.75% 5%-10% Machine equipments 10 9%-9.5% 5%-10% Transportation 5 18%-19% 5%-10% equipments Electronic equipment 5 18%-19% 5%-10% and others 5. Confirmation about the depreciation reserve of fixed assets: at the end of each period, the company will judge if relevant assets have any signs of possible depreciation. If so, the company will evaluate the receivable amount. The receivable amount will be determined based on the larger one between the net amount after the deduction of disposal expenses from the fair values of this asset and the current values of expected cash flow of this asset in the future. If the receivable amount of this asset is less than the book values, the difference will be confirmed as the depreciation loss of assets. The depreciation reserves of fixed assets will be withdrawn subject to the individual asset. Once the depreciation losses of assets are confirmed, they will not be reversed in the future accounting period. In withdrawing the depreciation for the fixed assets whose depreciation reserves have been withdrawn, based on the book values of this fixed asset and the remaining usage life, the depreciation rate and depreciation amount will be calculated and determined once again. The fixed assets whose depreciation reserves have been fully withdrawn will not be withdrawn once again. (XII) Calculation Method of Projects under Construction 1. Classification of projects under construction The projects under construction will be calculated based on the classification of proposed projects. 2. Transfer time of projects under construction to fixed assets For the projects under construction, all expenses occurring before they are ready for the use will be the book values as the fixed assets. In case the projects under construction has been ready for use but the final accounts for completion have not been handled, from the date when such projects has been ready for use, the company will evaluate the values and determine the costs based on the project budgets, prices or actual costs of projects, etc 82 2008 Annual Report of Livzon Pharmaceutical Group Inc. and the depreciation amount will also be withdrawn; when the final accounts for completion are handled, the company will adjust the originally evaluated values subject to the actual costs, but will not adjust the withdrawn depreciation amount. 3. Depreciation of projects under construction: at the end of the period, the company will judge if the depreciation reserves are withdrawn based on the depreciation signs of such projects. In case the projects that have been stopped for a long time and will not be rebuilt within three years are expected to be depreciated, the depreciation reserves for such projects will be withdrawn for the difference amount between the receivable amount and the book values. Once the depreciation reserves for such projects are withdrawn, they will not be reversed. (XIII) Pricing and Amortization Method of Intangible Assets 1. Confirmation condition of intangible assets The intangible assets mean the identifiable non-currency assets without the actual substance status that are owned or controlled by the enterprises. Only the intangible assets meeting the following conditions will be confirmed: (1) The economic benefits related to this intangible asset probably flow to the enterprise; (2) The cost of this fixed asset may be reliably calculated. 2. Pricing of intangible assets The intangible assets will be originally calculated based on the actual costs. (1)In case the prices to purchase the intangible assets exceed the normal credit conditions and cause the payment deferment and are characteristic of the financing nature, the costs of intangible assets will be determined based on the current values of purchase prices. (2) In case the intangible assets are obtained by the liability restructure to write off the liabilities of debtors, their book values will be determined based on the fair values of this intangible asset. The difference between the book values of restructuring liabilities and the fair values of this intangible asset will be accrued to the current profit and loss. In case the non-currency asset exchange is characteristic of commercial substance and the fair values of received or delivered assets can be reliably calculated, the book values of received intangible assets in the non- currency asset exchange will normally be determined based on the fair values of delivered assets, except that the accurate evidences indicate that the fair values of received assets are more reliable. In case any non-currency asset exchange does not meet the above conditions, the book values of delivered assets and the payable taxes will be deemed as the costs of received intangible assets. No profit and loss will be confirmed. (3) The book values of intangible assets to be obtained by the absorption merger from the enterprises which are under the same control will be determined based on the book values of merging party; the book values of intangible assets to be obtained by the absorption merger from the enterprises which are not under the same 83 2008 Annual Report of Livzon Pharmaceutical Group Inc. control will be determined based on their fair values. 3. Usage life and amortization of intangible assets In obtaining the intangible assets, the company will analyze and judge their usage life. In case their usage life is limited, the company will evaluate the usage years or the quantity of calculation units such as the capacity constituting the usage life; in case it’s impossible to evaluate the usage life when the intangible assets bring the benefits to enterprises, it will be deemed that the usage life of such intangible assets is uncertain. Amortization method of intangible assets: for the intangible assets with the limited usage life, the average amortization amount in the usage life will be accrued to the profit and loss. For the intangible assets with the uncertain usage life, no amortization will be made. At the end of each year, the company will recheck the usage life of intangible assets with the limited usage life and amortization method. In case the usage life and amortization method are different from the original ones, the amortization life and method after the recheck will be employed. 4. The depreciation of intangible assets will be handled in accordance with the accounting polices about asset depreciation. Once the depreciation losses of intangible assets are confirmed, they will not be reversed in the future accounting period. (XIV) Research and Development Expenses The expenses for the research and development of projects in the company include the expenses for the research stage and development stage. The expense for the research stage means the expense occurring for the planned investigations of the company about the innovative exploration in order to obtain and understand the latest science and technical knowledge, which are the preparations made for the further development activities; whether the already done research activities will be transferred to the development or the development will turn to the intangible assets has a lot of uncertainty. The expense for the development stage means the expense occurring to apply the research results or other knowledge to a certain plan or design and produce the new or substantially improved materials, equipments and products, etc before the launch of commercial production and use. Compared with the research stage, the development stage comes on the basic condition that the research stage work is completed and has greatly turned to a new product or technology. The expense in the research stage of projects in the company will be accrued to the current profit and loss in the time of occurrence; the expense in the development stage will be confirmed as the intangible assets if the following conditions are met: 1. The completion of this intangible asset will make it have the feasibility to be able to be used or sold. 2. Complete this intangible asset for the purpose of use and selling. 84 2008 Annual Report of Livzon Pharmaceutical Group Inc. 3. The means by which the intangible assets bring the economic benefits. 4. Have enough technical and financial resources and other supports to complete the development of this intangible asset and be able to use and sell this intangible asset. 5. The expense attributable to the development stage of this intangible asset can be reliably calculated. (XV) Amortization Method of Long-termAmortization Expenses The expense occurring during the construction period will be transferred to the profit and loss at one time in the current month of starting the production and operation; the overhaul payment of fixed assets will be averagely amortized during the overhaul interval; other long-term amortization expenses will be averagely amortized during the benefiting period. (XVI) Asset Depreciation 1. Definition of asset depreciation The asset depreciation means that the receivable amount of assets is less than their book values. On the preparation date of balance sheet, the company will judge if relevant assets have any signs of possible depreciation. If so, the company will evaluate the receivable amount. In case the receivable amount of assets is less than their book values, such book values will be deducted to the receivable amount and the deducted amount is confirmed as the depreciation loss of assets and accrued to the current profit and loss; at the same time, the relevant depreciation reserves of assets will be withdrawn. Once the depreciation losses of assets are confirmed, they will not be reversed in the future accounting period. After the confirmation of depreciation losses of assets, the depreciation or amortization expenses of assets will be adjusted in the future period so that in the remaining usage life of this asset, the company will systemically amortize the adjusted book values of assets. The following signs indicate that the assets are possibly depreciated: (1) The market prices of assets drop greatly and the drop extent is clearly higher than the expected drop for the time passage or normal use. (2) The economic, technical or legal environments and markets where the company is operating are greatly changing in the current period or in the near future, which will exercise the unfavorable impacts on the company. (3) The interest rate or other investment return rate in the market have been enhanced in the current period, which will influence on the calculation of the discounting rate of cash flow values in the future and lead to the great decrease of receivable amount of assets. (4) The evidences indicate that the assets have been too old or the substances have been damaged. (5) The assets have been or will be left unused, stopped to be used or planned to be disposed in advance. (6) The evidences from the internal reports in the company indicate that the economic performance of assets have been or will be less than the expected performance. For example, the net cash flow or operating profits (or losses) created by the assets are greatly less (more) than the expected amounts. etc. 85 2008 Annual Report of Livzon Pharmaceutical Group Inc. (7) Other signs that indicate the assets may possibly be depreciated. 2.Determination of depreciation loss of assets (1) At the end of the period, the company will inspect the long-term equity investment, fixed assets, projects under construction, intangible assets and goodwill, etc to judge if there are any signs of possible depreciation. For the goodwill caused by the enterprise merger and the intangible assets with the uncertain usage life, whether there are signs of possible depreciation, the depreciation tests will be made each year. (2) If the assets have any signs of possible depreciation, the company will evaluate the receivable amount. The receivable amount will be determined based on the larger one between the net amount after the deduction of disposal expenses from the fair values of this asset and the current values of expected cash flow of this asset in the future. If the receivable amount of this asset is less than the book values, such book values will be deducted to the receivable amount and the deducted amount is confirmed as the depreciation loss of assets and accrued to the current profit and loss. The depreciation tests of goodwill and its relevant asset groups (or asset group combination, the same below) will be made. The goodwill reflected in the consolidated financial statement will not include the goodwill of subcompany attributable to the equity for the minority of shareholders; but the tests of the depreciation about relevant asset groups will include the goodwill attributable to the equity for the minority of shareholders; the company will adjust the book values of asset groups and compare the adjusted book values of asset groups with their receivable amounts to determine if the asset groups (including the goodwill) are depreciated. If so, the company will deduct the equity share of the minority of shareholders from the above losses to determine the depreciation losses of goodwill attributable to the parent company. Once the depreciation losses of assets such as the long-term equity investment, the real estates for investment calculated by the cost mode, fixed assets, intangible assets and goodwill are confirmed, they will not be reversed in the future accounting period. 3. Calculation method of asset group (1) Generally, the company will evaluate the receivable amount subject to the individual asset. In case the receivable amount of individual asset cannot be evaluated, the receivable amount of asset groups will be determined based on the asset groups containing this asset. The determination of asset groups will be based on whether the main cash inflow generated by the asset groups are independent from other assets or cash inflow of asset groups; at the same time, it’s necessary to consider the production and operation management mode of the company and the policy-deciding mode about the continuous use or disposal of assets, etc. Once the asset groups are determined, they will not be changed in each accounting period. (2) The receivable amount of asset groups will be determined based on the larger one between the net amount after the deduction of disposal expenses from the fair values of this asset group and the current values of 86 2008 Annual Report of Livzon Pharmaceutical Group Inc. expected cash flow in the future.. (3) If the receivable amount of the asset group or asset group combination is less than the book values, the relevant depreciation loss will be confirmed. The depreciation loss amount will at first write off the book values of goodwill that are amortized to the asset groups or asset group combinations, then based on the percentage of book values of various other assets except the goodwill in the asset groups or asset group combination, write off the book values of various other assets in the above proportion. (XVII) Capitalization of loan expenses 1. Confirmation principle of capitalization of loan expenses In case the loan expenses occurring in the company may directly be attributable to the construction and productions of assets complying with the capitalization conditions , they will be capitalized and accrued to the relevant capital costs; other loan expenses will be confirmed as the expenses based on the actual amount in the time of occurrence and accrued to the current profit and loss. The assets complying with the capitalization conditions mean the assets such as fixed assets, real estates for investment and inventory, etc that need a long time of construction and production activities before being ready for use or for sales. The loan expenses begin to be capitalized under the following circumstances: （1） The asset payments that have been made include the payments such as the paid cashes, transferred non-currency assets or borne liabilities with the interests to construct or produce the assets complying with the capitalization conditions; （2） The loan expenses have occurred; （3） The necessary construction or production activities to make the assets ready for use or sales have been launched. In case during the construction or production period the assets complying with the capitalization conditions are abnormally suspended and the suspension period exceeds 3 months continuously, the capitalization of loan expenses will also be suspended. The capitalization of loan expenses for the assets that have been constructed or produced and are ready for use or sales will be stopped. 1. Capitalization period of loan expenses In case the assets that have been constructed and produced comply with the capitalization conditions, all expenses occurring before this asset complies with the expected use or sales status will be accrued to the cost of this assets; all expenses occurring after this asset complies with the expected use or sales status will be directly accrued to the current financial expense. 2. Calculation method about capitalization amount of loan expenses The interest expenses for special loans (after the deduction of interest income generated by the unused loan 87 2008 Annual Report of Livzon Pharmaceutical Group Inc. capitals or the investment return obtained from the temporary investments) and auxiliary expenses will be capitalized before the assets complying with the capitalization conditions are ready for the expected use or sales. The interest amount of general loans to be capitalized will be determined by multiplying the weighed average amount of the asset payments by which the accumulated assets exceed the special loans with the capitalization rate of general loans. The capitalization rate will be determined based on the weighed average interest rate of general loans. In case the loans have the discounts or premiums, the company will adjust the interest amount in each period based on the amortized discount and premium amount in each accounting period in accordance with the actual interest rate method. (XVIII) Confirmation Principle of Expected Liabilities 1. Confirmation Principle of Expected Liabilities The obligations related to contingent events that meet the following conditions at the same time will be confirmed as the liabilities: (1) This obligation is the current obligation of the company; (2) The performance of this obligation will probably cause the economic benefits to flow out of the company; (3) The amount of this obligation can be reliably calculated. In case the loss contracts and restructuring obligations of the company meet the above conditions, they will be confirmed as the expected liabilities. 2. Determination method about optimum evaluation amount of expected liabilities In case the necessary payments have a amount scope, the optimum evaluation amount will be determined based on the average amount between the upper and lower limits of amounts; in case the necessary payments do not have such a amount scope, the optimum evaluation amount will be determined in the following method: (1) If the contingent events involve the individual project, the optimum evaluation amount will be determined based on the possible amount; (2) If the contingent events involve many projects, the optimum evaluation amount will be determined based on the possible amount and occurrence probability. In case all or part of payments about the confirmed liquidation liabilities are expected to be compensated by the third parties or other parties and the compensation amount are surely received, such amounts will be separately confirmed. The confirmed compensation amounts will not exceed the book values of confirmed liabilities. (XIX)Confirmation Principle of Income 1. Commodity sales The company has transferred the main risks and rewards about commodity ownership to the purchasers; the company does not reserve any continuous management rights normally related to the ownership nor performs 88 2008 Annual Report of Livzon Pharmaceutical Group Inc. any effective control about the sold commodities; the income amounts will be reliably calculated; the relevant economic benefit will probably flow into the enterprise; in case the relevant costs that have occurred or will occur may be reliably calculated, the achievement of operating incomes will be confirmed. 2. Provision of labors In case on the preparation date of balance sheet the results about labor provision transaction can be reliably evaluated, the labor income will be confirmed by the completion percentage method. Based on the actual situation, the completion progress of labor provision will be determined in the following methods: (1) Measurement about the work that has already been completed. (2) The percentage of the provided labors to the total labor capacity. (3) The percentage of the occurring costs to the total costs. The company will determine the total amount of labor provision based on the prices in contracts and agreements that have been received or will be receivable, except that such prices are not fair. On the preparation date, the current labor incomes will be determined based on the amount after the total labor income amount multiplied by the completion progress deducts the accumulated labors in the past accounting periods. In case the labor transaction results on the preparation date of balance sheet cannot be reliably evaluated, they will be handled by the following means: (1) In case the labor costs that have occurred can be compensated, the labor income will be confirmed based on such labor costs and the same amounts will be settled as the labor costs. (2) In case the labor costs that have occurred cannot be compensated, such labor costs will be accrued to the current profit and loss and will not be confirmed as the labor costs. 3. Use right of transferred assets In case the economic benefits related to the transaction will probably flow into the enterprise and the income amounts can be reliably calculated, the company will determine the income amount about use right of transferred assets by the following means: (1) The interest income amount will be calculated and determined based on the use time of currency capital from the company by others and actual interest rate. (2) The income amount of use expenses will be calculated and determined subject to the charging time and method agreed in the relevant contracts and agreements. (XX) Accounting Processing Method of Income Tax The accounting processing of income tax in the company employs the balance sheet liability method. The deferred taxes will be calculated by the balance sheet liability method based on the temporary difference. 1. Confirmation of deferred income tax assets (1) The company will confirm the deferred income tax assets generated by the deductible temporary difference 89 2008 Annual Report of Livzon Pharmaceutical Group Inc. within the limit of taxable income amount that may be obtained and used to deduct such difference. But, at the same time, the deferred income tax assets generated by the initial confirmation of assets or liabilities in the transactions with the following characteristics will not be confirmed: ① This transaction is not the enterprise merger; ②The occurrence of transactions will not affect the accounting profits nor affect the taxable income amount (or the deductible loss). (2) In case the deductible temporary difference related to the investments in the subcompany, affiliated companies and joint ventures by the company meet the following conditions at the same time, they will be confirmed as the corresponding deferred income tax assets: ① The temporary difference will probably be reversed in the foreseeable future; ② The taxable income tax amount that is used to deduct the temporary difference will probably be obtained in the future. (3) If the company can settle the deductible loss and tax deduction in the coming years, the company will confirm the relevant deferred income tax assets within the limit of taxable income amount in the future that may be obtained and used to deduct such deductible loss and tax deduction. 2. Confirmation of deferred income tax liabilities Except the deferred income tax liabilities generated by the following cases, the company will confirm the deferred income tax liabilities generated by the all taxable temporary difference. (1) Initial confirmation of goodwill; (2) Initial confirmation of assets or liabilities generated by the transactions complying with the following characteristics at the same time: ① This transaction is not the enterprise merger; ② The occurrence of transactions will not affect the accounting profits nor affect the taxable income amount (or the deductible loss). (3) The taxable temporary difference related to the investments in the subcompany, affiliated companies and joint ventures by the company meet the following conditions at the same time: ① The investment enterprises can control the reversion time of temporary difference; ② The temporary difference will not probably be reversed in the foreseeable future. 3. Calculation of income tax expenses The company will accrue the current income taxes and deferred income taxes to the current profit and loss as the income tax expenses and benefits, but will not include the income taxes generated in the following cases: ① Enterprise merger; ② Transactions or items that are directly confirmed in the owners’ equities. 90 2008 Annual Report of Livzon Pharmaceutical Group Inc. (XXI) Preparation Method of Consolidated Financial Statements The consolidated financial statements will be subject to the No. 33 Enterprise Accounting Standards – Consolidated Financial Statement. The combination scope of the consolidated financial statement will be determined on the basis of the control; the special objectives controlled by the parent company will also be concluded in the combination scope of the consolidated financial statement. The consolidated financial statement will be based on the individual financial statements and other data about the parent company and involved subcompanies. After adjusting the long-term equity investments in the subcompanies in accordance with the equity method and offsetting the effects of key internal transactions between the parent company and subcompany or subcompany and subcompany on the consolidated financial statements, consolidated profit statements, consolidated cash flow statements, consolidated statements about equity changes of shareholders and notes to the financial statements, the parent company will consolidate the preparation. In case the accounting policies and accounting periods of subcompanies differ from those of parent company, the financial statements of subcompanies will be adjusted. (XXII) Accounting Policies,Accounting Evaluation Changes and Correction of Accounting Errors During this period, the company has not made any changes about accounting policies and accounting evaluation or any correction of accounting errors. V. Taxes The applicable tax items and tax rate of the company are listed as follows: Tax Item Tax Basis Tax Rate Sales income of products and Value-added tax 17% materials Sales tax Taxable sales income 5% Urban maintenance and construction Payable circulating tax amount 5%. 7% tax Educational surtax Payable circulating tax amount 3% Enterprise income tax Payable income tax amount Note Note: the enterprise income tax rates will be subject to the following regulations: Company Name Actual Tax Note Rate Lida Pharmaceutical Co., Ltd in Zhuhai Bonded 9% It is a foreign-invested production enterprise and Area enjoys the preferential policies of income tax - “ 91 2008 Annual Report of Livzon Pharmaceutical Group Inc. Two Exemptions and Three Reduction ” from the first profit-making year; the year of 2008 is the second year to implement the “Three Reduction ” policy. Sichuan Guangda Pharmaceutical Co., Ltd 15% The preferential policies about enterprise income tax for the Grand Development of Western Regions in accordance with the Notice of Preferential Policies about Enterprise Income Tax in the Transitional Period (Guo Fa [2007] No. 39) and the Notice of the Issues on Tax Preferential Policies for the Grand Development of Western Regions Jointly Issued by the Ministry of Finance, the State Administration of Taxation and the General Administration of Customs (Cai Shui [2001] No. 202) will continue to be implemented. The enterprise income tax of 15% will be applied by the year of 2010. Livzon (Hongkong) Co., Ltd and Hongkong 16.5% The policies about enterprise income taxes in Hongkong Antao Development Limited area will be applied. Xinbeijiang Pharmaceutical Co., Ltd under 25% Livzon Group, Liwei Branch of Zhuhai Livzon Medicine Trade Co., Ltd, Fuzhou Fuxing Pharmaceutical Co., Ltd under Livzon Group, Gutian Fuxing Pharmaceutical Co., Ltd and Shanxi Datong Livzon Qiyuan Medicine Co., Ltd Parent Company, Limin Pharmaceutical Co., Ltd 15% In 2008, they are granted as the hi-tech enterprises. under Livzon Group, Livzon Pharmaceutical Factory under Livzon Group, Livzon Syntpharm Co., Ltd in Zhuhai Bonded Area and Shanghai Livzon Pharmaceutical Co., Ltd Other subcompanies 18% In accordance with the Notice of Preferential Policies about Enterprise Income Tax in the Transitional Period (Guo Fa [2007] No. 39) issued by the State Council, from the date of January 1st, 2008, the legal tax rate will, within 5 years after the implementation of new laws, be gradually applied to the enterprises that ever enjoyed the low preferential tax rate. The enterprises enjoying the tax rate of 15% will pay the income tax at 18% in 2008. 92 2008 Annual Report of Livzon Pharmaceutical Group Inc. VI. Particulars about subcompanies, joint venture and affiliated enterprises (I) Subcompanies that are obtained by the merger of enterprises that are not under the same control 1. Subcompanies that are included in the consolidated financial statements Regist Percent Actual ered Registered age of Company Name Investment Business Scope Addre Capital Voting Amount ss Rights HongkongAntao Development Limited Hongko HKD50 万元 HKD50 万元 100% ng Livzon (Hongkong)Co., Ltd Hongko HKD 61 million HKD 61 million 100% ng Zhuhai Modern Chinese Medicine Zhuhai RMB 6 million Yua RMB6 million Yu 100% Research and development of Chinese medicines Hi-tech Co., Ltd City n an and Chinese medicine technologies and equipments; technical service and consultancy Livzon Pharmaceutical Factory under Zhuhai 100% RMB 192.42 RMB 177.11 Production and sales of Chinese and western Livzon Group City million Yuan million Yuan medicines, medical instruments and sanitation materials Livzon Medicine Marketing Co., Ltd Zhuhai RMB 20 RMB 20 100% Sales of products from the company and all under Livzon Group City million Yuan million Yuan medical subcompanies Zhuhai Livzon Medicine Trade Co., Ltd Zhuhai RMB 60 RMB 60 100% Import and export of Chinese and western City million Yuan million Yuan medicine preparations and materials and medical intermediates, etc. Chinese and western medicine preparations and materials, medical intermediates, chemical materials, sanitation materials, sanitation products, healthcare foodstuffs, invigorant, biological products, bio-chemical preparations, medical cosmetics and medical instruments. Sichuan Guangda PharmaceuticalCo., Ltd Pengz RMB 95 RMB 95 100% Research, development, production and sales of hou million Yuan million Yuan Chinese and western medicines and finished City medicines Shanghai Livzon PharmaceuticalCo., Ltd 100% Shang RMB 87.33 RMB 87.33 Production and sales of water injection, capsules, hai million Yuan million Yuan power, tablets, lyophilized preparation, bio- Munic chemical and peptide material medicines ipality Xinbeijiang Pharmaceutical Co., Ltd Qingy RMB 124.32 RMB 134.93 92.14% Export and production of its products and under Livzon Group uan million Yuan million Yuan relevant technologies City Livzon Syntpharm Co., Ltd in Zhuhai Bon Zhuhai 100% RMB 102.28 RMB 102.28 Export and production of chemical material medi 93 2008 Annual Report of Livzon Pharmaceutical Group Inc. ded Area City million Yuan million Yuan cine, medical preparations, medical intermediates and chemical products Zhuhai Livzon Reagent Co., Ltd Zhuhai 51% RMB 6.53 RMB 12.81 Production and sales of bio-chemical, immune City million Yuan million Yuan and chemical reagents, biological products, sanitation products and medical analyzer equipments Limin Pharmaceutical Co., Ltd under Shaogua RMB 56.18 RMB 61.56 88.09% Production and sales of various medical Livzon Group n City million Yuan million Yuan preparations, medical materials, various foodstuff additives, feedstuff additives and nutrition health- care products Lida Pharmaceutical Co., Ltd in Zhuhai Zhuhai RMB 26 RMB 26 100% Production, processing and sales of chemical BondedArea City million Yuan million Yuan material medicines, medical preparations, medical intermediates, chemical products; warehousing. Fuzhou Fuxing Pharmaceutical Co., Ltd Fuzhou USD 33.7 million USD 33.7 million 100% Production of material medicines such as under Livzon Group *1 City bacteriophage, intermediates, preparations and chemical materials for the purpose of medical production (not including the inflammable and dangerous chemical products; if required, the license must be obtained) Production of material medicine such as bacteriophage, intermediates, preparations and chemical materials for the purpose of medical production (not including the inflammable and dangerous chemical products; if required, the license must be obtained) Gutian Fuxing PharmaceuticalCo., Ltd Gutian RMB 26.7 RMB 26.70 100% Manufacturing and sales of material medicines Count million Yuan million Yuan (Kanamycin sulfate, Tetracycline Hydrochloride y and Chlortetraccline Hydrochloride) Shanxi Datong Livzon Qiyuan Medicine Shanx RMB 3.7 RMB 4 81.48% Plantation and processing of astragalus Co., Ltd i million Yuan million Yuan membranaceus; purchase and sales of Chinese medicines (except those that are restricted by the nation) Zhuhai Livzon Advertising Co., Ltd Zhuha RMB 1 RMB 1 100% Design, production, agency and publication of i million Yuan million Yuan various advertisements at home and abroad Zhuhai Livzon – Bai A Meng Biological Zhuhai RMB 9.84 RMB 12 82% Production and sales of Hydroxyapatite materials, Materials Co., Ltd City million Yuan million Yuan plasma spraying HA-Ti artificial tooth and artificial hip, HA porous ceramic grains, and porous hydroxyapatite ceramic products. Zhuhai Livzon Meidaxin Technology Zhuhai RMB 1 RMB 1 100% Technical research and development of Development Co., Ltd City million Yuan million Yuan information and products related to medicines and health-care products; technical consultancy and service Shenzhen Yuanxing Pharmaceutical Co., Shenzhe RMB 60.83 RMB 95 100% Production of medical products (subject to the Ltd *2 n City million Yuan million Yuan business licence of pharmaceutical production enterprises); research and development of materia 94 2008 Annual Report of Livzon Pharmaceutical Group Inc. l medicines, oral preparations, injection products and external preparations (not including the items that are restricted), import and export businesses (subject to Shen Mao Guan Deng Zheng Zi Di No. 182). *1 In June 2008, the Board of Directors of Fuzhou Fuxing Pharmaceutical Co., Ltd under Livzon Group resolved to increase the registered capital of USD 17.7 million and the original shareholders made the contributions in cashes. The changed registered capital amounted to USD 33.7 million. The increased capital has been verified by the “Li An Da Yan Zi [2008] No. B-2048” capital verification report of our firm and the registration formalities of Industrial and Commercial Change have been handled. *2 On March 31, 2008, the company signed the Equity Transfer agreement of Shenzhen Yuanxing Pharmaceutical Co., Ltd with Shenzhen Yuanzheng Investment Development Co., Ltd and the company agreed to purchase the 100% of the equities of Shenzhen Yuanxing Pharmaceutical Co., Ltd held by it at the price of RMB 60.83 million Yuan. The registration formalities of equity transfer have been handled. 2. Subcompanies that are not included in the consolidated financial statements Actual Investment Percentage of voting Company Name Registered Address Business Scope Amount rights MolecularTaq Limited Hongkong HKD3 million 100% —— MolecularTaq Limited has stopped its business for many years; this investment has been fully withdrawn as the depreciation reserve of long-term equity investment and is not included in the consolidation scope. (II) Subcompanies that are obtained by the merger of enterprises which are under the same control: None. (III) Associated Enterprises Percentage Registered Actual Investment Company Name Registered Capital of voting Business Scope Address Amount rights Guangdong Blue Treasure Qingyuan RMB 10.5386 milli RMB 59.67 million 35.91% Bio-chemical material medicines Pharmaceutical Co. Ltd. City on Yuan Yuan Livzon Medical Electronic Zhuhai City RMB 1.2 million RMB 3.62 million 28% Production and sales of medical Equipment (Factory) Co., Ltd Yuan Yuan instruments, electronic equipments for medical purposes, and electronic information system for medical purposes Livzon Tingen Company Limited Hongkong HKD 0.5 million —— 30% Tablets and capsules (in case the above Fujian Gutian Huamin Poultry Gutian RMB 2.4 million RMB 10 million 24% business scope is controlled by the Medicine Co., Ltd County Yuan Yuan special regulations issued by the nation, s 95 2008 Annual Report of Livzon Pharmaceutical Group Inc. uch regulations will be applicable). Sales of general merchandises; import of commodities; export of commodities made in China; other relevant accessory service. Sales of general merchandises; import of commodities; export of Tongyikangshimei Chain (Shenzhen) RMB 28 million RMB100 million Shenzhen 35% commodities made in China; other Co., Ltd Yuan Yuan relevant accessory service. Sales of general merchandises; import of commodities; export of commodities made in China; other relevant accessory service. In February 2008, in accordance with the resolutions of shareholders’ meeting of Tongyikangshimei Chain (Shenzhen) Co., Ltd dated February 21, 2008 as well as the amended articles of association and contracts, the company, the company applied to increase its registered capital by RMB 50 million Yuan and the changed registered capital amounted to RMB 100 million Yuan. All shareholders would fully make the contributions within 2 years from the change date of business licence. In this year, the company has paid the increased capital of RMB 10.5 million Yuan. The increased capital has been verified by the [2008] No. 104 capital verification report of Shenzhen Yongming Accountants Firm. (IV) Change of Consolidation Statement Scopes during the Report Period The subcompanies which are obtained by the merger of enterprises not under the same control: In the current period, the company acquired all equities of Shenzhen Yuanxing Pharmaceutical Co., Ltd. For the basic information of this subcompany, please see the content in VI-(I)-1. The purchase date of Shenzhen Yuanxing Pharmaceutical Co., Ltd was March 31, 2008 and the relevant financial data are listed as follows: (a) Financial Status of Shenzhen Yuanxing Purchase date Formula Pharmaceutical Co., Ltd: Book value Fair value Identifiable assets: Current assets (1) 25,601,273.30 25,601,273.30 Non-current assets (2) 8,851,713.62 8,851,713.62 Subtotal (3)=(1)+(2) 34,452,986.92 34,452,986.92 Identifiable liabilities: Current liabilities (4) 9,484,156.80 9,484,156.80 Non-current liabilities (5) 0.00 0.00 Subtotal (6)=(4)+(5) 9,484,156.80 9,484,156.80 96 2008 Annual Report of Livzon Pharmaceutical Group Inc. Total of net assets (7)=(3)-(6) 24,968,830.12 24,968,830.12 Minus: Equities of the minority of shareholders (8) Equities attributable to the shareholders of parent company (9)=(7)-(8) 24,968,830.12 24,968,830.12 Considerations for purchase (10) 60,830,000.00 Goodwill (11)=(10)-(9) 35,861,169.88 (b) Cash flow to obtain the subcompanies: Cash and cash equivalents as the considerations for (13) 60,830,000.00 purchase Minus: Cash and cash equivalents held by the merged (14) 37,055.00 subcompanies Cash and cash equivalents paid to obtain the subcompanies (15)=(13)-(14) 60,792,945.00 (c) Operation results and net cash flow from the purchase Formula date to the end of year: Operating income (1) 39,255,734.01 Operating costs and expenses (2) Total profit (3) 35,121,452.06 Net profit (4) 4,152,455.10 Net cash flows from operating activities (5) Net cash flows from investment activities (6) 4,152,455.10 Net cash flows from financing activities (7) Net increase of cash and cash equivalents (8)=(5)+(6)+(7) 5,466,705.71 VII. Notes of Main Items in the Consolidated Financials Statements 1. Currency Capital 2008.12.31 2007.12.31 Item Original Exchange r Book-keeping Book-keeping Original Currency Exchange rate Currency ate Currency Currency Cash at stock 60,167.77 96,314.30 Including: 96,278.49 RMB 60,135.13 Hongkong 38.24 0.9364 35.81 Dollar 37.00 0.8819 32.64 Deposits in ban 526,594,000.11 282,766,450.28 97 2008 Annual Report of Livzon Pharmaceutical Group Inc. ks Including: 255,838,715.85 RMB 519,981,329.70 Hongkong 0.9364 22,561,650.03 Dollar 5,807,764.58 0.8819 5,121,867.58 24,094,030.36 USD 109,810.79 6.8346 750,512.83 17,845.44 7.3046 130,353.80 Japanese Yuan 10,000,000.00 0.074029 740,290.00 64,412,628.00 0.0657593 4,235,730.60 Other Currency Capital 13,529,732.48 -199,627.18 Including: 1,615,960.06 RMB 2,450,490.78 Hongkong Dollar 12,562,922.90 0.8819 11,079,241.70 -1,938,901.37 0.9364 -1,815,587.24 Total 540,183,900.36 282,663,137.40 The main cause of the increase of 91.11% over the beginning of this period is the loan increase. Other currency capitals at the end of this period include: the investment amount of RMB 11,379,732.48 Yuan and deposits for L/C of RMB 2,150,000.00 Yuan. 2. Tradable financial assets 2008.12.31 2007.12.31 Item Changes of Fair Fair Values Changes of Fair Fair Values Cost Cost Values Values Stock 263,897,010.60 -142,510,835.34 121,386,175.26 318,485,417.71 128,972,392.49 447,457,810.20 Fund 150,000.00 241,641.89 391,641.89 150,000.00 493,197.82 643,197.82 Total 264,047,010.60 -142,269,193.45 121,777,817.15 318,635,417.71 129,465,590.31 448,101,008.02 The decrease by 72.82% over the beginning of this period is mainly caused by the sales of stocks and changes of fair values. 3. Receivable Bills Item 2008.12.31 2007.12.31 Bank Acceptance Drafts 200,743,296.63 125,126,670.90 By December 31, 2008, the bills that have been endorsed but have not been due are listed as follows: Bill Type Due Time Amount Bank Acceptance Drafts Before June 30, 2009 74,388,817.21 98 2008 Annual Report of Livzon Pharmaceutical Group Inc. The main causes of the increase by 60.43% over the beginning of this period are the changes about the sales performance and credit policies. 4. Accounts Receivable (1) Composition of Accounts Receivable 2008.12.31 2007.12.31 Item Amount Percentage Reserves for Bad De Net Value Amount Percentage Reserve for Bad Net Value bts Debts The individual 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 amount is large The individual amount is not large; however, the risk of this combination is very great after the combination subject to the credit risk characteristics. 5,920,613.11 1.61% 4,974,419.49 946,193.62 10,694,670.22 3.08% 9,758,172.65 936,497.57 Other Minor Amounts 362,341,053.30 98.39% 19,900,555.60 342,440,497.70 336,526,729.02 96.92% 17,470,954.81 319,055,774.21 Total 368,261,666.41 100% 24,874,975.09 343,386,691.32 347,221,399.24 100% 27,229,127.46 319,992,271.78 (2) Age analysis 2008.12.31 2007.12.31 Age Amount Percentage Reserve for Bad Net Value Amount Percentage Reserve for Net Value Debts Bad Debts Within 1 323,959,486.13 93.30% 16,197,974.30 307,761,511.83 year 347,774,309.36 94.43% 17,388,715.50 330,385,593.86 1-2 years 8,718,512.77 2.37% 696,435.90 8,022,076.87 8,860,486.18 2.55% 531,629.17 8,328,857.01 2-3 years 5,848,231.17 1.59% 1,815,404.20 4,032,826.97 3,706,756.71 1.07% 741,351.34 2,965,405.37 99 2008 Annual Report of Livzon Pharmaceutical Group Inc. Over 3 10,694,670.22 3.08% 9,758,172.65 936,497.57 years 5,920,613.11 1.61% 4,974,419.49 946,193.62 Total 368,261,666.41 100% 24,874,975.09 343,386,691.32 347,221,399.24 100% 27,229,127.46 319,992,271.78 （1） In 2008, the accounts receivable with the non-associated parties that have been actually written off amount to RMB 6,488,044.34 Yuan and are listed as follows: Name of Debtor Writing-off Nature Cause Whether the Amount debtor is the associated party Guangzhou Taixing The age is very long and it cannot be 3,262,491.17 Pharmaceutical Co., Ltd Loan received. No The company has entered the ROMIT Pharmaceutical 2,217,017.25 bankruptcy procedure and the Corporation Jiangsu Loan possibility of receiving it is very slim No （2） By December 31, 2008 there are no debts with the shareholder units holding over 5% (including 5%) voting rights. （3） The total amount of top 5 amounts receivable is RMB 47,207,477.07 Yuan, accounting for 12.82% of the receivable balance. 2008.12.31 2007.12.31 Age Amount Percentage Amount Percentage Within 1 year 47,207,477.07 12.82% 59,444,556.03 17.12% （4） At the end of this period, the reserves for individual bad accounts are fully withdrawn: the reserve for 1- 2 years amounts to RMB 184,388.44 Yuan, the reserve for 2-3 years amounts to RMB 807,197.46 Yuan and the reserve for 3-5 years amounts to RMB 242,747.95 Yuan. （5） Other particulars: ① The accounts receivable with large individual amount mean the accounts receivable whose individual amount accounts for over 10% (including 10%) of receivable balance at the end of this period. ② The accounts receivable whose individual amount is not large but the risk of this combination is very great after the combination subject to the credit risk characteristics: the accounts receivable with the age of over 3 years whose individual amount is not large are the accounts receivable whose individual amount is not large but the risk of this combination is very great after the combination subject to the credit risk characteristics. 100 2008 Annual Report of Livzon Pharmaceutical Group Inc. ③ Other minor accounts receivable: all other accounts receivable except the above ① and ②. 5. PrepaidAccounts (1) Age analysis Age 2008.12.31 Percentage 2007.12.31 Percentage Within 1 year 22,824,077.85 66.00% 48,011,357.22 70.45% 1-2 years 3,438,958.59 9.94% 13,380,945.00 19.64% 2-3 years 2,431,703.26 7.03% 5,718,000.00 8.39% Over 3 years 5,887,781.40 17.03% 1,034,814.90 1.52% Total 34,582,521.10 100.00% 68,145,117.12 100.00% (2) The prepaid accounts with the age of over 1 year are mainly the prepaid accounts for goods and development expenses for projects that have not been settled. (3) The top 5 prepaid accounts total RMB 13,335,209.64 Yuan, accounting for 38.56% of prepaid account balance. (4) By December 31, 2008, there are no debts with the shareholder units holding over 5% (including 5%) voting rights. 6. Other Accounts receivable (1) Composition of other accounts receivable 2008.12.31 2007.12.31 Amount Perce Reserves for Net Value Amount Perce Reserves for Net Value Item ntage Bad ntage Bad Accounts Accounts The individual amount is large 0.00 0.00 0.00 0.00 3,027,634.81 14.59% 151,381.74 2,876,253.07 The accounts receivable whose individual amount is not 4,609,339.38 16.07% 4,121,964.57 487,374.81 2,797,852.90 13.48% 2,700,797.80 97,055.10 101 2008 Annual Report of Livzon Pharmaceutical Group Inc. large but the risk of this combination is very great after the combination subject to the credit risk characteristic s: Other minor accounts 24,080,811.90 83.93% 1,467,890.23 22,612,921.67 14,926,902.91 71.93% 1,265,363.64 13,661,539.27 Total 28,690,151.28 100% 5,589,854.80 23,100,296.48 20,752,390.62 100% 4,117,543.18 16,634,847.44 (2) Age analysis 2008.12.31 2007.12.31 Age Amount Percenta Reserves for Bad Net Value Amount Percentage Reserves for Bad Net Value ge Accounts Accounts Within 1 15,130,221.96 72.91% 756,511.11 14,373,710.85 year 22,148,297.89 77.20% 1,107,414.90 21,040,882.99 1-2 years 1,173,731.58 4.09% 70,423.89 1,103,307.69 2,205,567.85 10.63% 296,721.28 1,908,846.57 2-3 years 758,782.43 2.64% 290,051.45 468,730.98 618,747.91 2.98% 363,512.99 255,234.92 Over 3 2,797,852.90 13.48% 2,700,797.80 97,055.10 years 4,609,339.38 16.07% 4,121,964.56 487,374.82 Total 28,690,151.28 100% 5,589,854.80 23,100,296.48 20,752,390.62 100% 4,117,543.18 16,634,847.44 (3) At the end of this period, the main cause of the increase by 38.25% over the beginning of this period is the increase of reserve funds due to the expansion of sales businesses. (4) In 2008, the other accounts receivable with the non-associated parties that have been actually written off amount to RMB 72,142.10 Yuan. (5) By December 31, 2008, there are no debts with the shareholder units holding over 5% (including 5%) voting rights. (6) The top 5 other accounts receivable total RMB 7,388,916.09 Yuan, accounting for 25.75% of other receivable 102 2008 Annual Report of Livzon Pharmaceutical Group Inc. account balance and are listed as follows: Percentage of Debtor Name Debt Amount Nature or Content Debt Time Total Amount Within 1 Receivable Export Rebate Export Rebate 4,000,964.24 year 13.95% Fund Xue Jiong 968,777.00 Reserve fund transfer 3.38% Fujian Gutian Huamin Poultry Medicine Co., Ltd 869,177.03 Fund transfer Over 3 years 3.03% Within 1 Kong Wenkai 832,707.82 Reserve fund year 2.90% Within 1 Ni Linfei 717,290.00 Reserve fund year 2.50% Total 7,388,916.09 25.75% (7) At the end of this period, the reserves for individual bad accounts are fully withdrawn: the reserve for 2-3 years amounts to RMB 172,868.70 Yuan, the reserve for 3-5 years amounts to RMB 2,101,399.00 Yuan. (8) Other particulars: ① The other accounts receivable with large individual amount mean the accounts receivable whose individual amount accounts for over 10% (including 10%) of other receivable balance at the end of period. ② The other accounts receivable whose individual amount is not large but the risk of this combination is very great after the combination subject to the credit risk characteristics: the other accounts receivable with the age of Over 3 years whose individual amount is not large are the other accounts receivable whose individual amount is not large but the risk of this combination is very great after the combination subject to the credit risk characteristics. ③ Other minor accounts receivable: all other accounts receivable except the above ① and ②. 7. Inventory 2008.12.31 2007.12.31 Item Amount Depreciation Reserve Net Value Amount Depreciation Reserve Net Value Raw materials 92,322,606.12 2,560,564.13 89,762,041.99 94,649,678.05 3,234,019.64 91,415,658.41 103 2008 Annual Report of Livzon Pharmaceutical Group Inc. Packages 16,585,698.92 326,158.17 16,259,540.75 10,439,625.12 280,073.13 10,159,551.99 Products 66,872,945.94 2,085,416.87 64,787,529.07 70,962,673.74 1,822,782.42 69,139,891.32 Inventory commodities 187,885,556.46 13,991,790.49 173,893,765.97 158,286,118.31 5,423,168.64 152,862,949.67 Entrusted materials for processing 834,271.18 0.00 834,271.18 1,527,656.27 0.00 1,527,656.27 Low-value consumables 494,039.81 0.00 494,039.81 301,796.19 0.00 301,796.19 Delivered commodities 43,961.26 0.00 43,961.26 0.00 0.00 0.00 Total 365,039,079.69 18,963,929.66 346,075,150.03 336,167,547.68 10,760,043.83 325,407,503.85 Depreciation reserve for inventory will be withdrawn based on the difference between the inventory book values and their net realizable values on December 31, 2008. The net realizable values means the values after deduction of the costs, sales expenses and relevant taxes from the evaluated selling prices in the daily activities at the time of completion. 8. Saleable Financial Assets (1) Classification Item 2008.12.31 2007.12.31 Saleable equity instruments 6,674,800.96 58,571,943.00 (2) At the end of period, the main cause of the decrease of 88.60% over the beginning of period is the sales of stocks and changes in fair values. 9. Long-term Equity Investment (1) Long-term equity investment and depreciation reserve 2008.12.31 2007.12.31 Item Depreciation Depreciation Book Balance Book Values Book Balance Book Values Reserve Reserve Calculation by Cost Method 30,759,300.00 23,704,300.00 7,055,000.00 33,241,776.66 23,704,300.00 9,537,476.66 Calculation by Equity Metho 42,207,589.14 4,134,050.00 38,073,539.14 37,054,714.97 4,134,050.00 32,920,664.97 104 2008 Annual Report of Livzon Pharmaceutical Group Inc. d Total 72,966,889.14 27,838,350.00 45,128,539.14 70,296,491.63 27,838,350.00 42,458,141.63 (2) Long-term equity investment calculated by cost method Name of Invested Units Initial Amount 2007.12.31 Increase in Decrease in the 2008.12.31 the current current period period Zhuhai Branch of Guangdong Development Bank 105,000.00 105,000.00 0.00 0.00 105,000.00 Beijing Medical Goods Joint Operation Company 100,000.00 100,000.00 0.00 0.00 100,000.00 Doumen Sanzhou Industry City Co., Ltd 500,000.00 500,000.00 0.00 0.00 500,000.00 Zhuhai City Commercial Bank 20,000,000.00 20,000,000.00 0.00 0.00 20,000,000.00 Changzhou Kangli Pharmaceutical Co., Ltd under Livzon Group 2,989,200.00 2,482,476.66 0.00 2,482,476.66 0.00 Ruiheng Pharmaceutical Technology Investment Co., Ltd 6,250,000.00 6,250,000.00 0.00 0.00 6,250,000.00 Shanghai Haixin Pharmaceutical Co., Ltd 500,000.00 500,000.00 0.00 0.00 500,000.00 Zhuhai Lixin Health-care Foodstuff Co., Ltd 100,000.00 100,000.00 0.00 0.00 100,000.00 MolecularTaq Limited 3,204,300.00 3,204,300.00 0.00 0.00 3,204,300.00 Total 33,748,500.00 33,241,776.66 0.00 2,482,476.66 30,759,300.00 The equities of Changzhou Kangli Pharmaceutical Co., Ltd under Livzon Group held by the company have been transferred. (3) Long-term equity investment calculated by the equity method Name of Invested Units Investment Cost 2007.12.31 Increase in the Decrease in 2008.12.31 Cash current period the current Dividends period Livzon Medical Electronic Equipment (Factory) Co., Ltd 1,200,000.00 1,200,000.00 0.00 0.00 1,200,000.00 0.00 Guangdong Blue Treasure Pharmaceutical 0.00 Co. Ltd. 11,227,540.45 26,933,669.11 1,885,588.40 28,819,257.51 0.00 Tongyikangshimei Chain (Shenzhen) Co., Ltd 28,000,000.00 5,294,229.32 3,960,052.31 0.00 9,254,281.63 0.00 Xinbeijiang Pharmaceutical Co., Ltd 221,870.60 692,766.54 0.00 692,766.54 0.00 0.00 105 2008 Annual Report of Livzon Pharmaceutical Group Inc. Livzon Tingen Company Limited 534,050.00 534,050.00 0.00 0.00 534,050.00 0.00 Fujian Gutian Huamin Poultry Medicine 0.00 Co., Ltd 2,400,000.00 2,400,000.00 0.00 2,400,000.00 0.00 Total 43,583,461.05 37,054,714.97 5,845,640.71 692,766.54 42,207,589.14 0.00 During this period, Xinbeijiang Pharmaceutical Co., Ltd has stopped its business and been liquidated, and the cancellation formalities are being handled. (4) Depreciation reserve for long-term equity investment Withdrawal Transfer in Withdrawal in the the Cause Investment Projects 2007.12.31 2008.12.31 Current Current Period Period The net assets Doumen Sanzhou Industry City Co., Ltd 500,000.00 500,000.00 are less than 0.00 0.00 zero. Zhuhai City Commercial Bank 20,000,000.00 0.00 0.00 20,000,000.00 Loss MolecularTaq Limited 3,204,300.00 0.00 0.00 3,204,300.00 Closed The net assets Livzon Medical Electronic Equipment 1,200,000.00 1,200,000.00 are less than (Factory) Co., Ltd 0.00 0.00 zero. Livzon Tingen Company Limited 534,050.00 0.00 0.00 534,050.00 Loss Fujian Gutian Huamin Poultry Medicine 2,400,000.00 2,400,000.00 Loss Co., Ltd 0.00 0.00 Total 27,838,350.00 0.00 0.00 27,838,350.00 10. FixedAssets andAccumulated Depreciation (1) Particulars Item Increase in the Decrease in the 2007.12.31 2008.12.31 current period current period Original values of fixed assets Houses and buildings 761,300,036.62 21,796,936.79 5,097,194.61 777,999,778.80 Machine equipments 800,639,822.10 71,126,812.97 26,298,651.37 845,467,983.70 Transportation 21,321,063.87 4,353,412.12 1,457,548.33 24,216,927.66 106 2008 Annual Report of Livzon Pharmaceutical Group Inc. equipments Electronic equipments and others 127,357,365.25 23,491,956.12 5,107,678.49 145,741,642.88 Total 1,710,618,287.84 120,769,118.00 37,961,072.80 1,793,426,333.04 Accumulated depreciation: Houses and buildings 264,164,098.72 37,036,656.02 533,274.48 300,667,480.26 Machine equipments 357,305,130.68 74,129,252.46 13,987,138.91 417,447,244.23 Transportation equipments 13,364,309.57 2,667,650.29 1,295,244.27 14,736,715.59 Electronic equipments and others 83,612,583.19 24,110,177.16 4,519,094.64 103,203,665.71 Total 718,446,122.16 137,943,735.93 20,334,752.30 836,055,105.79 Net value of fixed assets: 992,172,165.68 957,371,227.25 Depreciation reserve for fixed assets Houses and buildings 17,084,689.70 0.00 3,517,137.80 13,567,551.90 Machine equipments 19,176,989.43 821,483.15 1,082,537.79 18,915,934.79 Transportation 135,912.80 equipments 0.00 18,824.76 117,088.04 Electronic equipments and others 555,259.50 1,565,013.40 53,819.93 2,066,452.97 Total 36,952,851.43 2,386,496.55 4,672,320.28 34,667,027.70 Net values of fixed assets: 955,219,314.25 922,704,199.55 (2) The projects under construction that have been transferred to the fixed assets amount to RMB 64,684,281.51 Yuan. (3) The fixed assets that are temporarily unused are listed as follows: Original Book Accumulated Depreciation Estimated Time to put it into Item Net Amount Values Depreciation Reserve use Houses and Uncertain buildings 2,440,541.28 1,982,317.64 0.00 458,223.64 107 2008 Annual Report of Livzon Pharmaceutical Group Inc. Machine Uncertain equipments 9,160,520.38 8,338,102.34 0.00 822,418.04 Office Uncertain equipments and others 742,697.15 706,649.48 0.00 36,047.67 Total 12,343,758.81 11,027,069.46 0.00 1,316,689.35 (4) The company has no fixed assets that are proposed to be disposed. (5) The company has not leased any fixed assets in the mode of financing lease. (6) The fixed assets that have been rented out are listed as follows: Item Accumulated Depreciation Reserve Net Amount Original Book Values Depreciation Houses and buildings 5,115,622.18 2,210,467.84 26,479.77 2,878,674.57 (7) Particulars about fixed assets whose property certificates have not been handled: Item Original Book Accumulated Depreciation Net Amount Cause Values Depreciation Reserve Houses and They are the newly built projects buildings 153,809,281.76 and the handling of certificates is 167,917,652.63 14,108,370.87 0.00 still under way. (8) The particulars about fixed assets used for the mortgage and guaranty are listed in the article 19 in VII. 11. Projects under Construction (1) Projects under Construction 2008.12.31 2007.12.31 Project Name Book-keeping Depreciation Book-keeping Depreciation Net Value Net Value Amount Reserve Amount Reserve Newly built plants 24,083,097.44 0.00 24,083,097.44 21,488,204.41 0.00 21,488,204.41 Technical improvement 5,463,236.89 0.00 5,463,236.89 11,579,954.51 0.00 11,579,954.51 Plant improvement 34,233,898.88 27,365,074.82 6,868,824.06 31,843,114.15 27,365,074.82 4,478,039.33 Others 1,702,397.49 0.00 1,702,397.49 1,297,096.94 0.00 1,297,096.94 Total 65,482,630.70 27,365,074.82 24,083,097.44 66,208,370.01 27,365,074.82 38,843,295.19 (2) Particulars 108 2008 Annual Report of Livzon Pharmaceutical Group Inc. Fixed Assets Percentage of Increase in the Transferred in Other Project Project Name Budget Amount 2007.12.31 2008.12.31 Capital Source Current Period the Current Decrease Investment to Period Budget Loans and available Newly built capitals owned plants 129,978,000.00 21,488,204.41 44,458,641.90 40,943,348.87 920,400.00 24,083,097.44 by the company 50.74% Available Technical capitals owned improvement 49,880,714.19 11,579,954.51 6,911,769.22 12,951,326.82 77,160.02 5,463,236.89 by the company 37.07% Plant Available improvement capitals owned 48,820,329.97 31,843,114.15 10,713,660.52 8,322,875.79 0.00 34,233,898.88 by the company 87.17% Others Available capitals owned 5,493,442.15 1,297,096.94 2,926,700.98 2,466,730.03 54,670.40 1,702,397.49 by the company 76.89% Total 234,172,486.31 66,208,370.01 65,010,772.62 64,684,281.51 1,052,230.42 65,482,630.70 (3) By December 31, 2008, the capitalization amounts of interests for the products under construction are listed as follows: Fixed Assets Increase in the Project Name 2007.12.31 Transferred in the Other Decrease 2008.12.31 current period Current Period Newly built plants 5,831,330.73 2,108,684.95 2,923,412.83 0.00 5,016,602.85 Plant improvement 1,496,583.90 0.00 1,496,583.90 0.00 0.00 Total 7,327,914.63 2,108,684.95 4,419,996.73 0.00 5,016,602.85 The capitalization of projects under construction will apply the interest rates for special loans of banks. (4) Depreciation Reserve for Projects under Construction Increase in the Transfer in the Project Name 2007.12.31 2008.12.31 current period Current Period Plant improvement 27,365,074.82 0.00 0.00 27,365,074.82 109 2008 Annual Report of Livzon Pharmaceutical Group Inc. The depreciation reserve for the plant improvement of the subcompany Xinbeijiang Pharmaceutical Co., Ltd under Livzon Group is withdrawn for it has been stopped for a long time. 12. Projects Goods Goods name 2008.12.31 2007.12.31 Special materials 74,273.28 2,258,023.27 Special equipments 2,453,959.60 11,560,439.30 Total 2,528,232.88 13,818,462.57 At the end of period, the main cause of the decrease by 81.70% over the beginning of period is that the newly built plants of Limin Pharmaceutical Co., Ltd under Livzon Group have been completed and the auxiliary equipments are transferred to the fixed assets. 13. Intangible Asset andAccumulatedAmortization Increase in the Decrease in the 2007.12.31 2008.12.31 Item current period current period ① Original price Use rights of lands 154,028,444.89 918,500.00 0.00 154,946,944.89 Special techniques 74,491,115.27 10,278,436.73 0.00 84,769,552.00 Software 4,199,751.03 2,250,471.00 0.00 6,450,222.03 Trademark rights 0.00 24,000.00 0.00 24,000.00 Total 232,719,311.19 13,471,407.73 0.00 246,190,718.92 ②Accumulated amortization Use rights of lands 34,271,361.42 2,929,239.32 0.00 37,200,600.74 Special techniques 40,495,779.65 8,137,675.17 0.00 48,633,454.82 Software 2,403,077.31 1,171,831.78 0.00 3,574,909.09 Trademark rights 0.00 24,000.00 0.00 24,000.00 Total 77,170,218.38 12,262,746.27 0.00 89,432,964.65 ③Depreciation reserve for intangible assets Use rights of lands 981,826.94 0.00 0.00 981,826.94 Special techniques 0.00 1,379,999.89 0.00 1,379,999.89 Software 0.00 0.00 0.00 0.00 Trademark rights 0.00 0.00 0.00 0.00 Total 981,826.94 1,379,999.89 0.00 2,361,826.83 110 2008 Annual Report of Livzon Pharmaceutical Group Inc. Increase in the Decrease in the 2007.12.31 2008.12.31 Item current period current period ④ Total of book values of intangible assets Use rights of lands 118,775,256.53 918,500.00 2,929,239.32 116,764,517.21 Special techniques 33,995,335.62 10,278,436.73 9,517,675.06 34,756,097.29 Software 1,796,673.72 2,250,471.00 1,171,831.78 2,875,312.94 Trademark rights 0.00 24,000.00 24,000.00 0.00 Total 154,567,265.87 13,471,407.73 13,642,746.16 154,395,927.44 The intangible assets are obtained in the way of purchase. 14. Development payment Increase in the current Reversion in the curr Item 2007.12.31 period ent period 2008.12.31 Capitalization 3,394,899.99 1,534,836.06 4,010,294.70 payment 919,441.35 Expense payment 0.00 24,614,726.81 24,614,726.81 0.00 Total 1,534,836.06 28,009,626.80 25,534,168.16 4,010,294.70 15. Goodwill 2008.12.31 2007.12.31 Item Depreciation Depreciation Book balance Book Values Book balance Book Values Reserve Reserve Good will 121,799,561.00 18,759,063.15 103,040,497.85 85,938,391.12 18,759,063.15 67,179,327.97 The book balances of goodwill are listed as follows Decrease Increase in the in the Name of Invested Units 2007.12.31 2008.12.31 Formation Source current period current period 111 2008 Annual Report of Livzon Pharmaceutical Group Inc. Livzon Pharmaceutical Factory under Merger of enterprises which Livzon Group are not under the same 12,051,099.78 0.00 0.00 12,051,099.78 control Sichuan Guangda Pharmaceutical Co., Merger of enterprises which Ltd are not under the same 13,863,330.24 0.00 0.00 13,863,330.24 control Fuzhou Fuxing Pharmaceutical Co., Ltd Merger of enterprises which under Livzon Group are not under the same 46,926,155.25 0.00 0.00 46,926,155.25 control Xinbeijiang Pharmaceutical Co., Ltd Merger of enterprises which under Livzon Group are not under the same 7,271,307.03 0.00 0.00 7,271,307.03 control Zhuhai Livzon Meidaxin Technology Merger of enterprises which Development Co., Ltd are not under the same 287,756.12 0.00 0.00 287,756.12 control Shanghai Livzon Pharmaceutical Co., Ltd Merger of enterprises which are not under the same 2,045,990.12 0.00 0.00 2,045,990.12 control Livzon Syntpharm Co., Ltd in Zhuhai Merger of enterprises which Bonded Area are not under the same 3,414,752.58 0.00 0.00 3,414,752.58 control Lida Pharmaceutical Co., Ltd in Zhuhai Merger of enterprises which Bonded Area are not under the same 78,000.00 0.00 0.00 78,000.00 control Shenzhen Yuanxing Pharmaceutical Co., Merger of enterprises which Ltd are not under the same 0.00 35,861,169.88 0.00 35,861,169.88 control Total 85,938,391.12 35,861,169.88 0.00 121,799,561.00 The goodwill depreciations are listed as follows: Decrease in Increase in the Name of Invested Units 2007.12.31 the current 2008.12.31 current period period 112 2008 Annual Report of Livzon Pharmaceutical Group Inc. Fuzhou Fuxing Pharmaceutical Co., Ltd under Livzon Group 11,200,000.00 0.00 0.00 11,200,000.00 Xinbeijiang Pharmaceutical Co., Ltd under Livzon Group 7,271,307.03 0.00 0.00 7,271,307.03 Zhuhai Livzon Meidaxin Technology Development Co., Ltd 287,756.12 0.00 0.00 287,756.12 Total 18,759,063.15 0.00 0.00 18,759,063.15 16. Long-term Amortization Expense Project Name Original 2007.12.31 Increase in the Transfer in Amortization in 2008.12.31 Accumulated Remaining Amount current period the Current the Current Amortization Amortization Period Period Period Overhaul expense of fixed assets 4,422,724.89 2,953,807.22 450,000.00 0.00 982,097.17 2,421,710.05 2,001,014.84 5-93 months Decoration expense of offices 315,618.00 18,820.00 292,093.00 0.00 82,916.07 227,996.93 87,621.07 23-51 months Decoration expense of plants 1,280,550.66 805,841.59 298,071.00 0.00 420,622.24 683,290.35 597,260.31 36-59 months Publicly amortized expense of public utilities 5,928,608.31 970,449.25 162,765.31 0.00 777,984.51 355,230.05 5,573,378.26 3-81 months Resin 7,687,554.00 1,875,847.26 1,031,419.84 0.00 1,774,457.18 1,132,809.92 6,554,744.08 3-33 months Others 2,391,583.21 1,064,776.95 491,522.80 0.00 734,764.60 821,535.15 1,570,048.06 6-36 months Total 22,026,639.07 7,689,542.27 2,725,871.95 0.00 4,772,841.77 5,642,572.45 16,384,066.62 17. Deferred Income Tax Asset Type 2008.12.31 2007.12.31 Withdrawal of the deductible temporary difference caused 13,361,945.28 by the asset depreciation reserve 16,348,586.67 The deductible temporary difference caused by the long-term equity investment out of the scope of consolidation statement 2,023,961.67 1,435,028.21 113 2008 Annual Report of Livzon Pharmaceutical Group Inc. The deductible temporary difference caused by the 456,934.70 amortization of intangible assets 585,317.61 The deductible temporary difference caused by the operating 62,413.59 expense 106,670.50 The deductible temporary difference caused by the 1,144,352.16 withdrawal expense 1,132,390.76 The deductible temporary difference caused by the changes 14,671,348.91 in the fair values of tradable financial assets 0.00 Total 31,720,956.31 19,607,993.75 18. Asset Depreciation Reserve Increase in the Decrease in the current period Item 2007.12.31 2008.12.31 current period Reversion Resale Reserves for Bad Accounts 31,346,670.64 5,239,358.51 -438,987.18 6,560,186.44 30,464,829.89 Depreciation Reserve for inventory 10,760,043.83 14,513,934.41 0.00 6,310,048.58 18,963,929.66 Depreciation reserve for long-term equity investment 27,838,350.00 0.00 0.00 0.00 27,838,350.00 Depreciation Reserve for fixed assets 36,952,851.43 2,386,496.55 0.00 4,672,320.28 34,667,027.70 Depreciation Reserve for projects under construction 27,365,074.82 0.00 0.00 0.00 27,365,074.82 Depreciation Reserve for intangible assets 981,826.94 1,379,999.89 0.00 0.00 2,361,826.83 Depreciation Reserve for goodwill 18,759,063.15 0.00 0.00 0.00 18,759,063.15 Total 154,003,880.81 23,519,789.36 -438,987.18 17,542,555.30 160,420,102.05 The resale of the reserves for bad accounts means the writing-off of the bad accounts; the resale of depreciation reserve of fixed assets and depreciation reserve for inventory means the rejection or disposal transfer. 19. Assets whose ownership rights are controlled Increase in the current Decrease in the current Item 2007.12.31 2008.12.31 period period Assets used for mortgage: 114 2008 Annual Report of Livzon Pharmaceutical Group Inc. Use rights of lands 15,835,050.34 0.00 15,835,050.34 0.00 Houses and buildings 48,686,694.28 0.00 18,683,249.29 30,003,444.99 Total 64,521,744.62 0.00 34,518,299.63 30,003,444.99 The causes of assets ownership’s control: the company mortgages the houses and buildings located at No. 132, Guihua North Road, Gongbei, Zhuhai, Guangdong Province (49,130.04 square meters), original book value of RMB 69,802,894.77 Yuan, accumulated depreciation of RMB 39,799,449.78 Yuan, net amount of RMB 30,003,444.99 Yuan to Zhuhai Branch of Xiamen International Bank for the loan of HKD 49 million and the mortgage period is from March 28, 2008 to March 27, 2009. 20. Short-time Loan a) Types of short-term loans Type 2008.12.31 2007.12.31 Credit loan 316,299,225.00 274,129,820.00 Guaranty loan 144,415,550.00 0.00 Mortgage loan 60,000,000.00 70,882,620.00 Other loans 0.00 34,000,000.00 Total 520,714,775.00 379,012,440.00 （2）By December 31, 2008, there are no due short-term loans that have not been repaid. （3）Guaranty loan: ①Zhuhai Branch of China Construction Bank issues the guaranty letter to the Company for a loan of RMB 100 million Yuan from China Foreign Economy and Trade Trust Co., Ltd. ② The Company provides the guaranty to Livzon Pharmaceutical Factory under Livzon Group for a loan of HKD 49 million from Rabobank Nederland. ③ The Company provides the guaranty to Fuzhou Fuxing Pharmaceutical Co., Ltd under Livzon Group for an interest-free loan of RMB 1.2 million Yuan from Fuzhou Finance Bureau. (4) Please see the article 19 of VII in the notes to the accounting statement for more details about the mortgage. 21. Payable Bills Item 2008.12.31 2007.12.31 Bank acceptance bills 0.00 1,581,261.45 At the end of period, the main cause of the decrease over the beginning of period is that the payable bills in the current period are due and paid. 22. PayableAccounts Item 2008.12.31 2007.12.31 115 2008 Annual Report of Livzon Pharmaceutical Group Inc. Payable accounts 159,486,983.56 179,977,871.17 (1) By December 31,2008, there are no debts with the shareholder units holding over 5% (including 5%) voting rights. (2) The payable accounts with the age of over 1 year amount to RMB 12,028,207.48 Yuan, accounting for 7.54% of the balance at the end of period. (3) Please see the note IX for the details about the payments of associated parties. 23、Advance accounts Item 2008.12.31 2007.12.31 Advance accounts 12,802,764.02 5,049,839.20 (1) By December 31,2008, there are no debts with the shareholder units holding over 5% (including 5%) voting rights. (2) The advance accounts with the age of over 1 year amount to RMB 592,615.96 Yuan, accounting for 4.63% of the balance at the end of period. (3) At the end of this period, the main causes of the increase by 153.53% over the beginning of period is that the advance accounts of the subcompany Zhuhai Livzon Reagent Co., Ltd during the current period have greatly increased. (4) Please see the note IX for the details about the accounts received in advance of associated parties. 24. Rewards paid to the staffs Item 2007.12.31 Increase in the Payment in the 2008.12.31 current period current period Salary, bonus and allowance 31,746,729.20 155,884,891.69 156,874,163.63 30,757,457.26 Welfare expense for staffs 1,867,332.51 13,851,693.18 15,719,025.69 0.00 Social insurance fees 859,761.16 27,046,560.94 27,694,873.10 211,449.00 Including: medical insurance fees 157,254.35 9,677,353.18 9,770,296.53 64,311.00 Endowment Insurance 615,185.68 13,888,507.99 14,397,946.67 105,747.00 Unemployment insurance fees 52,018.91 2,106,072.39 2,132,676.30 25,415.00 Occupational Injury Insurance 17,889.12 874,265.40 881,941.52 10,213.00 Childbirth insurance 17,413.10 500,361.98 512,012.08 5,763.00 Reserves for houses 647,140.82 8,925,082.54 9,039,247.04 532,976.32 Trade union expense and staff education expense 1,066,170.43 1,732,609.86 1,507,687.99 1,291,092.30 116 2008 Annual Report of Livzon Pharmaceutical Group Inc. Compensation for the cancellation of work relationship 0.00 397,694.49 397,694.49 0.00 Others 655,052.61 1,319,847.96 1,309,141.00 665,759.57 Total 36,842,186.73 209,158,380.66 212,541,832.94 33,458,734.45 At the end of period, there are no cases about failure to pay the rewards of staffs. 25. Payable Taxes Tax 2008.12.31 2007.12.31 Value-added tax 36,245,402.00 21,692,376.09 Operating tax 7,856.79 7,700.69 City construction tax 209,875.00 260,939.01 Enterprise income tax 35,343,748.61 42,723,718.49 Real estate tax 1,544,826.77 589,567.75 Utilization tax of lands 1,636,704.71 1,096,514.36 Personal income tax 1,611,952.89 1,972,976.45 Stamp tax 244,715.63 15,233.26 Education surtax 140,968.02 125,953.12 Embankment protection 111,444.33 cost 88,821.08 Others 44,561.28 44,480.74 Total 77,142,056.03 68,618,281.04 26. Payable dividends Investor name 2008.12.31 2007.12.31 Cause for Debts Dividends for common shares 20,174.01 545,174.01 Not paid Qingyuan Xinbeijiang Enterprise (Group) Company 1,200,710.00 1,200,710.00 Not paid Other legal person shares and personal shares in the subcompanies 1,051,300.00 1,051,300.00 Not paid Internal staff share of subcompanies 259,800.00 259,800.00 Not paid Total 2,531,984.01 3,056,984.01 27. Other payable accounts Item 2008.12.31 2007.12.31 Other payable accounts 150,836,568.52 120,914,228.98 117 2008 Annual Report of Livzon Pharmaceutical Group Inc. (1) At the end of period, the advance withdrawn expenses from the balance amounts to RMB 95,024,995.88 Yuan, accounting for 63.00% of the balance and are listed as follows: Item 2008.12.31 2007.12.31 Cause of Settlement at the end of period Sales discounting 0.00 14,210.11 Interest 2,952,700.47 0.00 Not paid Water and electricity Not paid expense 380,699.25 936,780.74 Scientific research Not paid expense 9,990.00 443,486.00 Business promotion Not paid expense 76,315,513.52 66,419,374.18 Leasing expense 580,932.80 299,799.08 Not paid Advertisement expense 3,554,590.70 1,129,806.64 Not paid Meeting expense 3,044,913.82 6,472,789.14 Not paid Auditing expense 1,510,410.47 1,017,493.20 Not paid Risk fund for medicine Not paid research 300,000.00 344,000.00 Operating expense of Not paid branches 2,387,446.08 1,215,008.90 Drainage expense 691,358.90 695,197.50 Not paid Others 3,296,439.87 3,470,513.70 Not paid Total 95,024,995.88 82,458,459.19 (2) The other payable accounts with the age of over 1 year amount to RMB 12,737,628.93 Yuan, accounting for 8.44% of the balance at the end of period. The main cause is that the deposit for goods amounts to RMB 4,671,791.54 Yuan. (3) By December 31, 2008, the company has paid RMB 13,653.11 Yuan to the shareholder unit Joincare Pharmaceutical Group Industry Co., Ltd which holds over 5% (including 5%) voting rights. (4) Please see the note IX for more details about the payments of associated parties. 28. Non-current Liabilities Due within 1 Year Borrowing Unit 2008.12.31 2007.12.31 Interest Loan Period Condition Rate Fujian Huaqiao Trust & Investment Interest-free Not specified Credit Company 400,000.00 400,000.00 118 2008 Annual Report of Livzon Pharmaceutical Group Inc. Gutian County National Land Interest-free Not specified Credit Resource Bureau 0.00 1,000,000.00 Zhuhai Branch of Bank of 6.804% 2006-9-28 to 2008-9-28 Credit Communications 0.00 20,000,000.00 Zhuhai Branch of Bank of 6.804% 2006-9-30 to 2008-9-30 Credit Communications 0.00 20,000,000.00 Zhuhai Branch of Bank of China 5.427% 2006-6-30 to 2009-6-29 Credit Limited 10,000,000.00 0.00 Total 10,400,000.00 41,400,000.00 29. Long-tern Loans (1) Types of Long-term Loans Type 2008.12.31 2007.12.31 Credit loans 100,700,000.00 10,700,000.00 Guaranty loan 0.00 60,000,000.00 Total 100,700,000.00 70,700,000.00 (2) List of loan units 2008.12.31 Annual Loan Loan Unit Principal Payable Total Interest Loan Period Conditions Interests Rate Loans from banks: Zhuhai Branch of Agricultural Bank of China 20,000,000.00 0.00 20,000,000.00 6.075% 2008-11-7 to 2011-11-7 Credit Zhuhai Branch of Agricultural Bank of China 20,000,000.00 0.00 20,000,000.00 6.075% 2008-11-24 to 2011-11-24 Credit Zhuhai Branch of Agricultural Bank of China 20,000,000.00 0.00 20,000,000.00 6.075% 2008-11-24 to 2011-11-24 Credit Floating Zhuhai Branch of Bank of interest Communications 20,000,000.00 0.00 20,000,000.00 rate 2008-7-3 to 2010-7-2 Credit 119 2008 Annual Report of Livzon Pharmaceutical Group Inc. Floating Zhuhai Branch of Bank of interest Communications 20,000,000.00 0.00 20,000,000.00 rate 2008-9-24 to 2010-9-24 Credit Subtotal 100,000,000.00 0.00 100,000,000.00 Loans from non-bank financial institutions: Interest-fr Not specified Credit Fuzhou Finance Bureau 700,000.00 0.00 700,000.00 ee Subtotal 700,000.00 0.00 700,000.00 Total 100,700,000.00 0.00 100,700,000.00 (3) By December 31, 2007, there are no due long-term loans which have not been repaid. 30. Deferred Gains Resale in the Total Allowance Increase in the Item 2007.12.31 Current 2008.12.31 Amount current period Period L－Phenylalanine project 3,884,702.80 1,430,967.70 1,784,702.80 2,915,670.50 300,000.00 Non-PVE bag improvement project 4,840,000.00 3,887,315.00 840,000.00 0.00 4,727,315.00 Famciclovir Sustained Release Capsules 0302 project 1,100,000.00 132,684.26 0.00 2,300.92 130,383.34 Enzymatic technology innovation project 1,042,631.00 944,812.90 0.00 0.00 944,812.90 Shenchang Drop Pills (Bid-invitation project expense of provincial science and technology department) 4,300,000.00 2,133,993.30 0.00 0.00 2,133,993.30 5- 4-aminosalicylic acid (0001 project) 1,200,000.00 538,031.10 0.00 93.00 537,938.10 Salvianolic acid B 300,000.00 150,000.00 0.00 0.00 150,000.00 Bifidoboigen preparations 600,000.00 560,070.01 0.00 63,020.32 497,049.69 Research, development and production transfer of Jimishaxing pellets 300,000.00 274,902.13 0.00 0.00 274,902.13 Experiments and research about the anti- Avian influenza of antivirus granules 600,000.00 337,613.15 0.00 0.00 337,613.15 Process improvement of ValaciclovirHydrochloride 200,000.00 200,000.00 0.00 28,193.50 171,806.50 Industry research of potassium citrate 920,000.00 540,337.86 320,000.00 320,000.00 540,337.86 120 2008 Annual Report of Livzon Pharmaceutical Group Inc. sustained release pellets Development and industry of the anti- gastrointestinal ulcer medicine 960,000.00 160,000.00 0.00 160,000.00 0.00 Depth development of Mesylate Jimishaxing series (pellet) 80,000.00 80,000.00 0.00 0.00 80,000.00 Compound Sodium Ferulate and Aspirin 400,000.00 0.00 400,000.00 400,000.00 0.00 IY81149 anti-gastrointestinal ulcer medicine 4,800,000.00 0.00 4,800,000.00 332,020.52 4,467,979.48 Demonstration project of managing the high-concentration organic wastewater 4,000,000.00 3,549,599.00 0.00 394,404.00 3,155,195.00 Others 950,000.00 336,029.51 610,000.00 95,011.70 851,017.81 30,477,333.8 Total 0 15,256,355.92 8,754,702.80 4,710,714.46 19,300,344.26 31. Deferred Income Tax Liabilities Type 2008.12.31 2007.12.31 Temporary difference of payable taxes caused by the fair values of tradable financial assets 0.00 21,707,392.50 Temporary difference of payable taxes caused by the saleable financial assets 749,223.84 10,008,335.34 Temporary difference of payable taxes caused by the calculation of long-term equity investment with the equity method 1,165,538.03 549,914.43 Others 0.00 123,299.45 Total 1,914,761.87 32,388,941.72 At the end of this period, the main cause of the decrease by 94.09% over the beginning of period is the decrease of fair values of tradable financial assets and saleable financial assets in the current period. 32. Capital Increase or Decrease (+ or －) Unit: share Shares Item 2007.12.31 Share-rationing Gift transferred Others Subtotal 2008.12.31 from public Amount share reserve fund amount I. Shares with trading rest 121 2008 Annual Report of Livzon Pharmaceutical Group Inc. riction ① Sponsor’s shares 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Including: State-owned shares 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Shares held by domestic 0.00 0.00 0.00 0.00 0.00 0.00 0.00 legal persons Shares held by foreign legal 0.00 0.00 0.00 0.00 0.00 0.00 0.00 persons Others 0.00 0.00 0.00 0.00 0.00 0.00 0.00 ② Raising legal person 0.00 0.00 0.00 0.00 0.00 0.00 0.00 shares ③ Internal staff shares 0.00 0.00 0.00 0.00 0.00 0.00 0.00 ④ Preference shares or 0.00 0.00 0.00 0.00 0.00 0.00 0.00 others ⑤ Circulation share with 0.00 0.00 0.00 trading restriction 40,606,156 -15,301,774 -15,301,774 25,304,382 Total of non-circulation 0.00 0.00 0.00 shares 40,606,156 -15,301,774 -15,301,774 25,304,382 II.Shares without trading restriction ① Domestically-listed 0.00 0.00 0.00 Renminbi ordinary shares 143,122,342 15,301,774 15,301,774 158,424,116 Including: Management 0.00 0.00 0.00 0.00 0.00 shares 535.00 535.00 ② Domestically-listed 0.00 0.00 0.00 0.00 0.00 shares for overseas investors 122,306,984 122,306,984 Total of circulation 0.00 0.00 0.00 ordinary shares 265,429,326 15,301,774 15,301,774 280,731,100 III. Total shares 306,035,482 0.00 0.00 0.00 0.00 0.00 306,035,482 33. Capital Reserve Increase in the current Decrease in the Type 2007.12.31 2008.12.31 period current period Share Premium 412,457,694.25 0.00 0.00 412,457,694.25 122 2008 Annual Report of Livzon Pharmaceutical Group Inc. Other Capital 66,193,945.74 24,857,140.19 Reserve 13,846.07 41,350,651.62 Total 478,651,639.99 13,846.07 41,350,651.62 437,314,834.44 The main cause of the decrease in this period is the sales and transfer of saleable financial assets as well as the decrease of capital reserve due to changes of fair values. 34. Inventory share Repurchase in this yea Item 2007.12.31 r Decrease in this year 2008.12.31 Domestically Listed Shares for Overseas Investors (B Shares) 0.00 15,798,067.52 0.00 15,798,067.52 In the 2008 First Temporary Shareholders’ Meeting, the company examined and passed the Proposal on Repurchasing Some of Domestically Listed Shares for Overseas Investors (B Shares) of Livzon Pharmaceutical Group Inc: on the condition that the total amount of repurchase capitals does not exceed HKD 160 million and the repurchase price does not exceed HKD 16.00/share, the company plans to repurchase 10 million domestically listed shares for overseas investors (B shares) (the quantity of repurchased shares will be subject to that of actually repurchased shares at the expiry of repurchase period), and these repurchased shares will be legally cancelled. The repurchase period is within 12 months from the announcement date of the repurchase report. By December 31, 2008, the company has accumulatively repurchased 2,010,580 B-shares, accounting for 0.6570% of total share capital of the company. 35. Surplus Reserve Increase in the current Decrease in the Type 2007.12.31 2008.12.31 period current period Legal Surplus Reserve 180,502,884.25 5,207,316.37 0.00 185,710,200.62 Other Surplus Reserves 63,796,201.34 0.00 0.00 63,796,201.34 Reserve Fund 82,108,376.71 0.00 0.00 82,108,376.71 Enterprise Development Fund 21,683,742.35 0.00 0.00 21,683,742.35 Total 348,091,204.65 5,207,316.37 0.00 353,298,521.02 36. Undistributed Profit Item 2008.12.31 2007.12.31 123 2008 Annual Report of Livzon Pharmaceutical Group Inc. Undistributed profit at the beginning of 817,303,043.09 356,807,674.93 period Plus: profit transfer in the current period 52,073,163.66 508,451,060.67 Other transfers 0.00 0.00 Minus ： Withdrawal of Legal Surplus Reserve 5,207,316.37 33,566,504.06 Withdrawal of staff awards or welfare funds 0.00 0.00 Withdrawal of reserve fund 0.00 14,389,188.45 Withdrawal of enterprise development fund 0.00 0.00 Profits capitalized on return of investment 0.00 0.00 Minus: Payable dividends for preference shares 0.00 0.00 Withdrawal of other surplus reserves 0.00 0.00 Payable dividends for ordinary shares 153,017,741.00 0.00 Dividends for ordinary shares that are transferred to capitals 0.00 0.00 Undistributed profit at the end of period 711,151,149.38 817,303,043.09 37. Equities of the minority of shareholders Increase or decrease in 2008 Extra losses Equities of the Shareholding that are borne Equities of the minority of percentage by the parent minority of shareholders on of the Profit and loss company for shareholders on December 31. Net profits of minority of of the minority the minority of December 31. Company name 2007 subcompanies shareholders of shareholders shareholders Other changes 2008 Zhuhai Livzon Reagent Co., Ltd 18,808,194.79 24,531,998.51 49% 12,020,679.27 0.00 -4,900,000.00 25,928,874.06 Xinbeijiang Pharmaceutical Co., Ltd under Livzon Group 9,088,464.49 -27,777,968.04 7.86% -2,183,348.29 0.00 0.00 6,905,116.20 Limin Pharmaceutical Co., Ltd under 18,964,625.44 92,542,816.15 11.91% 11,006,959.45 0.00 -8,206,689.24 21,764,895.65 124 2008 Annual Report of Livzon Pharmaceutical Group Inc. Livzon Group Shanxi Datong Livzon Qiyuan Medicine Co., Ltd 288,182.04 -135,157.39 18.52% -10,136.80 0.00 0.00 278,045.24 Zhuhai Livzon – Bai A Meng Biological Materials Co., Ltd 1,111,467.95 0.00 18% 0.00 0.00 0.00 1,111,467.95 Total 48,260,934.71 89,161,689.23 20,834,153.63 0.00 -13,106,689.24 55,988,399.10 Other changes are about the profit distribution among the minority of shareholders. 38. Operating Income and Cost a) Project list 2008 2007 Item Gross operating Gross operating Operating Income Operating Cost Operating Income Operating Cost Profit Profit Main Business 2,024,952,870.14 1,094,681,709.90 930,271,160.24 1,710,694,661.31 939,074,194.20 771,620,467.11 Other 2,867,251.33 Business 33,687,703.39 21,635,925.43 12,051,777.96 37,413,736.34 34,546,485.01 Total 2,058,640,573.53 1,116,317,635.33 942,322,938.20 1,748,108,397.65 973,620,679.21 774,487,718.44 In this period, the main causes of the increase of operating income by 17.76% are the increase of selling prices as well as the income increase contributed to by enhancing the sales expense through the expense-driven marketing mode. b) The main businesses are listed as follows as per the region: 2008 2007 Item Income from Main Gross profit from Income from Main Cost of Main Gross profit from Cost of Main Business Business Main Business Business Business Main Business Guangdong 639,233,977.36 Province 2,403,444,584.47 1,602,191,160.99 801,253,423.48 1,889,781,723.78 1,250,547,746.42 Sichuan 161,982,041.69 70,553,899.08 91,428,142.61 Province 188,406,694.85 84,882,992.41 103,523,702.44 Fujian Province 234,315,326.13 199,199,176.56 35,116,149.57 290,426,028.22 274,118,095.51 16,307,932.71 Others 77,248,018.45 49,268,168.10 27,979,850.35 56,179,749.14 36,478,383.82 19,701,365.32 Subtotal 2,903,414,623.90 1,935,541,498.06 967,873,125.84 2,398,369,542.83 1,631,698,124.83 766,671,418.00 Internal 687,674,881.52 692,623,930.63 -4,949,049.11 Writing-off in the Company 878,461,753.76 840,859,788.16 37,601,965.60 Total 2,024,952,870.14 1,094,681,709.90 930,271,160.24 1,710,694,661.31 939,074,194.20 771,620,467.11 125 2008 Annual Report of Livzon Pharmaceutical Group Inc. c) Incomes and costs from main businesses are listed as follows as per the business: Item 2008 2007 Income from Main Income from Main Cost of Main Business Cost of Main Business Business Business Sales of Commodities 2,024,952,870.14 1,094,681,709.90 1,710,694,661.31 939,074,194.20 Total 2,024,952,870.14 1,094,681,709.90 1,710,694,661.31 939,074,194.20 d) Sales volume of top 5 clients Client Name 2008 2007 Percentage of Total Percentage of Total Sales Sales Volume Sales Volume Sales Volume (%) Volume (%) Total sales volume of top 5 clients 162,038,702.25 7.87% 169,127,959.69 9.67% e) Incomes and costs from other businesses are listed as follows as per the business: 2008 2007 Item Incomes from Other Incomes from Other Costs of Other Costs of Other Businesses Businesses Businesses Businesses Sales of raw materials 14,480,540.15 5,683,876.55 23,110,993.82 20,315,068.85 Processing expense 508,777.32 445,399.26 369,468.32 2,468,713.68 Transfer royalty of technologies 400,000.00 0.00 0.00 0.00 Leasing expense 1,419,221.99 38,925.59 1,218,503.80 218,070.19 Inspection expense 121,391.45 56,349.40 129,680.37 85,869.34 Power expense 15,925,003.83 15,232,429.26 12,121,162.99 11,386,910.98 Others 832,768.65 178,945.37 463,927.04 71,851.97 Total 33,687,703.39 21,635,925.43 37,413,736.34 34,546,485.01 39. Business Tax and Surtax Item 2008 2007 City construction tax 2,000,528.73 1,893,711.15 Education surtax 1,232,856.02 1,066,985.37 126 2008 Annual Report of Livzon Pharmaceutical Group Inc. Embankment protection cost 1,153,917.79 1,030,718.39 Business Tax 31,667.00 22,824.07 Others 45,665.18 51,492.84 Total 4,464,634.72 4,065,731.82 Please see the note V for the withdrawal standard of taxes. 40. Sales Expense Item 2008 2007 Sales expense 377,276,784.87 264,866,280.65 In this period, the main cause of the huge increase of sales expense over the same period of previous year is: in order to push the increase of sales, the promotion expense for business also increases. 41. Financial Expense Item 2008 2007 Interest payment 43,926,410.33 30,387,911.25 Minus: Interest income 7,450,296.41 3,656,402.98 Profit and loss in the exchange -12,825,662.65 -10,503,629.68 Formality expense charged by banks 2,865,691.72 885,925.54 Total 26,516,142.99 17,113,804.13 In this period, the main cause of the increase of financial expense by 54.94% over the same period of previous year is that the loans in this year have greatly increased. 42. Loss of asset depreciation Item 2008 2007 Loss of bad debts 5,253,364.66 7,864,388.94 Loss of inventory depreciation 14,513,934.41 7,493,706.31 Loss of long-term investment depreciation 0.00 0.00 Loss of other investment depreciations 0.00 0.00 Loss of fixed assets depreciation 154,610.48 556,199.98 Depreciation loss of projects under 0.00 0.00 construction Loss of intangible asset depreciation 1,379,999.89 0.00 Loss of goodwill depreciation 0.00 287,756.12 Total 21,301,909.44 16,202,051.35 In this period, the main cause of the increase of loss of assets depreciation by 31.48% over the same period of previous year is that the sales of individual minor products are stopped and the loss of inventory depreciation is fully withdrawn. 127 2008 Annual Report of Livzon Pharmaceutical Group Inc. 43. Profit and loss from changes of fair values Sources of profits caused by the changes of 2008 2007 fair values Tradable financial assets -272,043,891.80 113,455,275.89 Including: shares -271,792,335.87 113,103,513.07 Fund -251,555.93 351,762.82 44. Investment returns Item 2008 2007 1. Returns in the holding period: 1,789,506.44 1,354,372.15 ① profits distributed by the associated or joint 500,000.00 companies 500,000.00 Including:Changzhou Kangli Pharmaceutical Co., Ltd under Livzon Group 500,000.00 500,000.00 ②Tradable financial assets 4,416,181.29 3,039,531.27 ③Saleable financial assets 300,037.50 478,415.00 ④Profits distributed by other equity investments 1,281,065.50 352,785.83 Including: Ruiheng Pharmaceutical Technology 1,281,065.50 327,760.83 Investment Co., Ltd Shanghai Haixin Pharmaceutical Co., Ltd 0.00 25,025.00 ⑤ Net increase and decrease of adjusted shareholders’ -4,654,359.29 -4,314,741.54 equities of invested companies at the end of year Including:Guangdong Blue Treasure Pharmaceutical Co. Ltd. 1,885,588.40 778,139.85 Tongyikangshimei Chain (Shenzhen) Co., Ltd -6,539,947.69 -5,068,076.17 Xinbeijiang Pharmaceutical Co., Ltd 0.00 -24,805.22 ⑥ Others -53,418.56 1,298,381.59 2. Returns from transfers： 54,861,822.79 213,303,640.24 Including: Sales of tradable financial assets 18,823,281.33 213,303,640.24 Sales of saleable financial assets 33,543,269.45 0.00 Returns from the equity transfer and investments 2,495,272.01 0.00 3. Returns from entrusted investments: 0.00 8,017,000.00 Total 56,651,329.23 222,675,012.39 In this year, the main cause of the decrease of investment returns by 74.56% over the previous year is that the returns from the sales of tradable financial assets have greatly decreased. 128 2008 Annual Report of Livzon Pharmaceutical Group Inc. 45. Non-operating Income (1) List about non-operating incomes Item 2008 2007 Total profit of non-current asset 1,531,443.28 disposal 796,285.80 Including: Profit of fixed asset 1,531,443.28 disposal 796,285.80 Penalty income 123,114.00 132,502.52 Waste income 265,190.15 234,459.54 Governmental allowance 9,198,321.77 5,378,413.73 Others 710,708.84 714,841.01 Total 11,093,620.56 7,991,660.08 (2) Governmental allowance Type 2008 2007 Source unit Approval document Special management expense for environmental 500,000.00 Cheng Cai Jian [2006] No. production 0.00 Chengdu Finance Bureau 193 Funds for the key province-level industry technology innovation project Compound Sodium 300,000.00 Shao Cai Qi [2006] No. 1 Ferulate and Aspirin Capsules 0.00 Shaoguan Finance Bureau 15 Research expense of Xueshuantong Sodium Guangdong Science Technology Yue Ke Ji Zi [2005] No. 1 Chloride Injection 0.00 200,000.00 Department and guan Finance Bureau 95 Depth research and application expenses of Cenqi Shaoguan Science Information Bureau Shao Cai Jiao [2007]No. Fuzheng injection 0.00 400,000.00 and Shaoguan Finance Bureau 3 Awards for the famous brand products and famous trademark enterprises in Guangdong Province 0.00 200,000.00 Shaoguan Finance Bureau Shao Cai Qi [2007]No.6 Research and application expenses of Compound Shao Cai Jiao [2007]No. Sodium Ferulate and Aspirin Capsules 0.00 200,000.00 Shaoguan Finance Bureau 26 Guangdong Science and Technology Technical research and development funds of 400,000.00 Department and Guangdong Finance Yue Ke Ji Zi [2007] No. 1 digital Chinese medicine projects 0.00 Department 53 Funds for the energy-saving and cycling economic projects 0.00 400,000.00 Gutian County Finance Bureau Gu Cai Qi [2007] No.1 Awards for famous trademark 0.00 100,000.00 Zhuhai Economic and Trade Bureau Zhu Fu[2007] No. 24 Accessory expense of province-level technology Fuzhou Science and Technology project 0.00 300,000.00 Bureau Rong Ke[2007] No. 55 Rong Cai Gong [2007] N Special allowance for energy-saving 0.00 300,000.00 Fuzhou Finance Bureau o. 867 Rong Cai Gong [2007] N Discounting for the technical improvement loans 0.00 800,000.00 Fuzhou Finance Bureau o. 195 Demonstration project of managing the high- Zhuhai Environmental Protection concentration organic wastewater 0.00 394,401.00 Bureau —— Allowance for enterprise innovation granted by Yue Jing Mao Ji Gai the province 0.00 400,000.00 Qingyuan Finance Bureau (2007)892 People’s Government of Qingyuan Award for export increase of export enterprises 307,762.85 0.00 City Qing Fu [2007] No. 86 Special award for invigorating trade through sci 215,700.00 0.00 Qingyuan Finance Bureau Qing Cai Wai [2008] No. 129 2008 Annual Report of Livzon Pharmaceutical Group Inc. ence and technology 26 Production project of L － Phenylalanine by utilizing the gene engineering strains for Rong Cai Shi [2006] No. fermentation 1,815,670.50 0.00 Fuzhou Finance Bureau 2302 Shao Cai Gong〔2008〕 Special research fund 1,634,000.00 0.00 Shaoguan Finance Bureau No. 5 Shaoguan Science and Technology Special research fund (Anshen Capsule project） 580,000.00 0.00 Bureau Development contract Discounting for the technical improvement loans and science and technology three expenses 814,000.00 0.00 Zhuhai Finance Bureau Production project of L － Phenylalanine by utilizing the gene engineering strains for Min Cai (Jiao) Zhi [2008] fermentation 600,000.00 0.00 Fuzhou Finance Bureau No. 25 Compound Sodium Ferulate and Aspirin 400,000.00 0.00 Zhuhai Finance Bureau Zhu Ke [2008] No. 65 Research and development of high production Rong Cai Gong [2008]No. technologies of antivirus granules 150,000.00 0.00 Fuzhou Finance Bureau 1979 Cleaning and production technologies of Min Cai (Jiao) Zhi [2008] aminoglycoside antibiotics 200,000.00 0.00 Fuzhou Finance Bureau No. 84 Special award for invigorating trade through Yue Cai Wai [2008] No. science and technology in Guangdong Province 300,000.00 0.00 Guangdong Finance Department 80 People’s Government of Qingyuan Others 2,181,188.42 484,012.73 City Qing Fu [2007] No. 86 Total 9,198,321.77 5,378,413.73 46. Non-operating Expense Item 2008 2007 Total of loss for disposal of the non-current assets 1,893,548.15 726,457.22 Including: Loss for disposal of fixed assets 1,893,548.15 726,457.22 Loss of fixed assets 4,054.95 0.00 Loss for rejection of fixed 0.00 94,977.91 130 2008 Annual Report of Livzon Pharmaceutical Group Inc. assets Penalty payments 116,689.48 826,664.26 Penalty for breach 500,000.00 0.00 Public welfare donations 2,332,879.68 55,846.86 Extraordinary loss 70,766.42 0.00 Others 125,226.16 64,709.94 Total 5,043,164.84 1,768,656.19 47. Income Taxes Item 2008 2007 Current income tax 66,064,621.42 77,754,162.37 Deferred income 18,843,717.84 tax -33,317,854.06 Total 32,746,767.36 96,597,880.21 48. Other Received Cashes Related to the OperatingActivities Item 2008 2007 Deposit 3,039,232.70 8,031,333.00 Fund transfer 7,331,308.45 2,587,108.61 Governmental allowance 12,221,419.01 9,557,323.24 Interest income 7,450,296.41 3,656,402.98 Penalty income 106,948.00 132,502.52 Deposit 162,254.03 870,516.66 Staff loan 1,801,755.48 4,333,292.43 Waste income 115,067.67 234,459.54 Others 1,950,160.67 1,683,250.32 Total 34,178,442.42 31,086,189.30 49. Other Paid Cashes Related to the OperatingActivities Item 2008 2007 Office expense 11,630,032.68 11,807,562.98 Traveling expense 11,933,811.98 14,579,167.55 Communication expense 12,620,651.36 10,960,796.20 131 2008 Annual Report of Livzon Pharmaceutical Group Inc. Water and electricity expenses 3,692,682.13 2,773,460.64 Transportation expense 23,406,389.59 20,615,494.09 Advertising expense 14,875,502.51 21,873,883.72 Meeting expense 14,272,997.84 10,718,668.72 Lease expense 3,473,492.1 2,415,534.27 Maintenance expense 2,620,032.28 3,006,043.96 Environment Protection Cost 139,591.00 1,140,899.66 Auditing expense and information disclosure expense 2,838,368.56 2,998,359.40 Insurance 1,000,105.80 873,039.26 Meeting expense of Board of Directors 264,021.15 493,784.70 Consultancy expense of consultants 882,930.13 1,108,440.90 Research and development expense 13,087,506.93 9,795,176.04 Lawsuit expense 819,586.62 1,347,916.64 Bid-invitation expense 3,125,601.94 3,268,439.12 Testing and inspection expenses 360,155.56 612,642.86 Formality expenses charged by banks 2,865,691.72 885,925.54 Penalty payment 64,041.14 826,664.26 Reserve fund 2,929,095.97 3,244,659.04 Refunding of deposit 1,194,354.62 6,904,115.96 Fund transfer 12,253,379.64 470,496.35 Bill deposit 0.00 1,437,904.51 Low-value consumables 43,131.59 737,840.71 Business promotion expense 229,574,911.39 134,577,305.17 Transfer royalty of technologies 1,856,395.28 0.00 Loss of stopping the production 2,293,607.77 0.00 Others 5,595,486.57 8,845,438.25 Total 379,713,555.85 278,319,660.50 50. Other Received Cashes Related to the FinancingActivities Item 2008 2007 Deducted personal income tax in the dividend distribution 4,047,036.65 0.00 132 2008 Annual Report of Livzon Pharmaceutical Group Inc. 51. Other Paid Cashes Related to the FinancingActivities Item 2008 2007 Repurchase of B shares 15,798,067.52 0.00 Return of temporarily received investment funds 0.00 4,900,000.00 52. Supplementary Data of Consolidated Cash Flow Statement Item 2008 2007 1.Adjust the net profit to the cash flow of operating activities: Net profit 72,907,317.29 523,380,924.66 Plus: Reserve for asset depreciation 21,301,909.44 16,202,051.35 Fixed asset depreciation, consumption of oil and gas assets and production biology asset depreciation 119,613,877.02 110,998,324.67 Amortization of intangible assets 12,262,746.27 11,456,697.46 Amortization of long-term amortization expense and long-term assets 4,772,841.77 4,417,096.02 Loss in disposal of fixed assets, intangible assets and other long- term assets (the profits will be listed beginning with "-") 1,097,262.35 -804,986.06 Loss in the rejection of fixed assets (the profits will be listed beginning with "-") 94,977.91 Loss in the changes of fair values (the profits will be listed beginning with "-") 272,043,891.80 -113,455,275.89 Financial expense (the profits will be listed beginning with "-") 31,100,747.65 24,093,408.71 Investment loss (the profits will be listed beginning with "-") -56,651,329.23 -222,675,012.39 Decrease of deferred income tax assets (the increase will be listed beginning with "-") -12,112,962.56 -1,446,328.38 Increase of deferred income tax liabilities (the decrease will be listed beginning with "-") -21,215,068.35 28,472,578.65 Decrease of inventory (the increase will be listed beginning with "-") -32,557,673.74 -51,690,380.31 Decrease of receivable operating items (the increase will be listed beginning with "-") -51,177,884.83 -129,272,119.81 Increase of receivable operating items (the decrease will be listed beginning with "-") -16,208,776.16 48,781,538.54 Others Net amount of cash flow from the operating activities 345,176,898.72 248,553,495.13 2.Key investment and financing activities not involving the cash income and payment Transfer from liabilities to share capital Transferable company bonds due within one year Financing leasing of fixed assets Item 2008 2007 3.Change of cash and cash equivalents: Cash balance at the end of period 540,183,900.36 281,225,232.89 Minus: cash balance at the beginning of period 281,225,232.89 283,852,487.10 Plus: cash equivalent balance at the end of period 133 2008 Annual Report of Livzon Pharmaceutical Group Inc. Minus: cash equivalent balance at the beginning of period Net increase of cash and cash equivalent 258,958,667.47 -2,627,254.21 53. Cash and Cash Equivalents Item 2008.12.31 2007.12.31 I. Cash 540,183,900.36 281,225,232.89 Including: Cash at stock 60,167.77 96,314.30 Deposits in banks that may be used for 281,328,545.77 payment randomly 526,594,000.11 Other Currency Capitals that may be -199,627.18 used for payment randomly 13,529,732.48 II. Cash equivalents 0.00 0.00 Including: Bond investment due within 3 0.00 0.00 months III. Cash and cash equivalent balances at the end of period 540,183,900.36 281,225,232.89 VIII. Notes to the Relevant Items in the Financial Statements of Parent company 1. Accounts Receivable (1) Composition of accounts receivable 2008.12.31 2007.12.31 Item Amount Percentage Reserves for Bad Net Value Amount Percentage Reserves for Net Value Accounts Bad Accounts The individual amount is 0.00 0.00 0.00 0.00 23.35% large 26,505,953.53 1,325,297.68 25,180,655.85 The accounts receivable whose individual amount is not large but the risk of this combination is very great after the combination subject to the credit risk characteristics 979,802.67 0.64% 721,901.70 257,900.97 1,023,977.79 0.90% 759,280.08 264,697.71 134 2008 Annual Report of Livzon Pharmaceutical Group Inc. Other minor accounts receivable 151,925,643.58 99.36% 7,861,825.15 144,063,818.43 85,983,038.12 75.75% 4,545,923.67 81,437,114.45 Total 152,905,446.25 100.00% 8,583,726.85 144,321,719.40 113,512,969.44 100.00% 6,630,501.43 106,882,468.01 (2) Age analysis 2008.12.31 2007.12.31 Age Amount Percentage Reserves for Bad Net Value Amount Percentage Reserves for Bad Net Value Accounts Accounts Within 1 year 146,653,365.25 95.91% 7,328,716.27 139,324,648.98 108,572,692.00 95.65% 5,428,634.60 103,144,057.40 1-2 years 3,723,905.58 2.44% 223,434.33 3,500,471.25 2,433,379.85 2.14% 146,002.79 2,287,377.06 2-3 years 1,548,372.75 1.01% 309,674.55 1,238,698.20 1,482,919.80 1.31% 296,583.96 1,186,335.84 Over 3 years 979,802.67 0.64% 721,901.70 257,900.97 1,023,977.79 0.90% 759,280.08 264,697.71 Total 152,905,446.25 100.00% 8,583,726.85 144,321,719.40 113,512,969.44 100% 6,630,501.43 106,882,468.01 (1) In 2008, the accounts receivable with the non-associated parties that have actually been written off amount to RMB 271,443.64 Yuan. (2) By December 31, 2008, there are no debts with the shareholder units holding over 5% (including 5%) voting rights. (3) The total amount of the top 5 accounts receivable is RMB 34,558,155.71 Yuan, accounting for 22.60% of receivable balance. 2008.12.31 2007.12.31 Age Amount Percentage Amount Percentage Within 1 year 34,558,155.71 22.60% 40,215,739.13 35.43% Total 34,558,155.71 22.60% 40,215,739.13 35.43% 2. Other Accounts Receivable (1) Composition of other accounts receivable 2008.12.31 2007.12.31 Item Amount Percentage Reserves for Net Value Amount Percentage Reserves for Net Value Bad Accounts Bad Accounts The individual amount is large 531,280,132.25 88.52% 0.00 531,280,132.25 667,671,304.07 95.88% 0.00 667,671,304.07 The accounts receivable whose individual amount is not large but the risk of 2,113,138.98 0.35% 1,674,892.65 438,246.33 698,559.92 0.10% 662,887.30 35,672.62 135 2008 Annual Report of Livzon Pharmaceutical Group Inc. this combination is very great after the combination subject to the credit risk characteristics Other minor accounts receivable 66,787,576.85 11.13% 537,501.01 66,250,075.84 27,980,692.82 4.02% 252,295.16 27,728,397.66 Total 600,180,848.08 100.00% 2,212,393.66 597,968,454.42 696,350,556.81 100.00% 915,182.46 695,435,374.35 (2) Other accounts receivable with the large individual amount Debtor Name Debt Amount Withdrawal Cause Percentage The debtor is the subcompany controlled by Livzon Syntpharm Co., Ltd in Zhuhai the company and there are no risks in Bonded Area 147,168,541.69 0.00 receiving the debts.. The debtor is the subcompany controlled by Fuzhou Fuxing Pharmaceutical Co., Ltd the company and there are no risks in under Livzon Group 136,560,351.49 0.00 receiving the debts.. The debtor is the subcompany controlled by Xinbeijiang Pharmaceutical Co., Ltd the company and there are no risks in under Livzon Group 127,789,903.15 0.00 receiving the debts.. The debtor is the subcompany controlled by the company and there are no risks in Hongkong Antao Development Limited 119,761,335.92 0.00 receiving the debts.. Total 531,280,132.25 (3) Age analysis 2008.12.31 2007.12.31 Age Amount Percentage Reserves for Bad Net Value Amount Percentage Reserves for Net Value Accounts Bad Accounts Within 1 year 596,822,385.15 99.44% 338,058.95 596,484,326.20 695,148,240.92 99.82% 128,733.58 695,019,507.34 1-2 years 827,305.24 49,638.31 777,666.93 392,675.86 0.06% 101,345.56 291,330.30 0.14% 2-3 years 418,018.71 149,803.75 268,214.96 111,080.11 0.02% 22,216.02 88,864.09 0.07% Over 3 years 2,113,138.98 0.35% 1,674,892.65 438,246.33 698,559.92 0.10% 662,887.30 35,672.62 Total 600,180,848.08 100.00% 2,212,393.66 597,968,454.42 696,350,556.81 100.00% 915,182.46 695,435,374.35 136 2008 Annual Report of Livzon Pharmaceutical Group Inc. (4) By December 31, 2008, there are no debts with the shareholder units holding over 5% (including 5%) voting rights. (5) The total amount of top 5 other accounts receivable is RMB 570,342,405.53 Yuan, accounting for 95.03% of total of other accounts receivable and is listed as follows:. Debtor Name Debt Amount Percentage of Nature or Content Debt Time Total Amount Livzon Syntpharm Co., Ltd in Zhuhai Within 1 Bonded Area 147,168,541.69 Fund transfer year 24.52% Fuzhou Fuxing Pharmaceutical Co., Ltd Within 1 under Livzon Group 136,560,351.49 Fund transfer year 22.75% Xinbeijiang Pharmaceutical Co., Ltd Within 1 under Livzon Group 127,789,903.15 Fund transfer year 21.29% Within 1 Hongkong Antao Development Limited 119,761,335.92 Fund transfer year 19.95% Lida Pharmaceutical Co., Ltd in Zhuhai Within 1 Bonded Area 39,062,273.28 Fund transfer year 6.51% Total 570,342,405.53 95.03% (6) At the end of this period, the reserves for individual bad accounts are fully withdrawn: the reserve for 2-3 years amounts to RMB 82,750.01 Yuan, the reserve for 3-5 years amounts to RMB 529,651.20 Yuan. 3. Long-term Equity Investment (1) Long-term equity investment and depreciation reserve 2008.12.31 2007.12.31 Item Depreciation Depreciation Book Balance Book Values Book Balance Book Values Reserve Reserve Calculation by Cost Method 921,399,238.31 38,971,307.03 882,427,931.28 772,358,242.47 38,971,307.03 733,386,935.44 Calculation by Equity Method 16,858,561.06 1,200,000.00 15,658,561.06 12,479,876.07 1,200,000.00 11,279,876.07 137 2008 Annual Report of Livzon Pharmaceutical Group Inc. Total 938,257,799.37 40,171,307.03 898,086,492.34 784,838,118.54 40,171,307.03 744,666,811.51 (2) Long-term equity investment calculated by cost method Name of Invested Units Initial Amount 2007.12.31 Increase in the Decrease in the 2008.12.31 current period current period Zhuhai Branch of Guangdong Development 0.00 0.00 105,000.00 105,000.00 Bank 105,000.00 Beijing Medical Goods Joint Operation 0.00 0.00 100,000.00 100,000.00 Company 100,000.00 Doumen Sanzhou Industry City Co., Ltd 500,000.00 500,000.00 0.00 0.00 500,000.00 Zhuhai City Commercial Bank 20,000,000.00 20,000,000.00 0.00 0.00 20,000,000.00 Changzhou Kangli Pharmaceutical Co., Ltd 2,482,476.66 0.00 2,482,476.66 0.00 under Livzon Group 2,989,200.00 Ruiheng Pharmaceutical Technology 6,250,000.00 0.00 0.00 6,250,000.00 Investment Co., Ltd 6,250,000.00 Zhuhai Livzon – Bai A Meng Biological Materials Co., Ltd 3,934,721.95 3,934,721.95 0.00 0.00 3,934,721.95 Zhuhai Livzon Meidaxin Technology Development Co., Ltd 800,000.00 800,000.00 0.00 0.00 800,000.00 Livzon Pharmaceutical Factory under 0.00 Livzon Group 122,339,752.98 122,339,752.98 0.00 122,339,752.98 Sichuan Guangda Pharmaceutical Co., Ltd 116,872,457.35 116,872,457.35 0.00 0.00 116,872,457.35 Shanghai Livzon Pharmaceutical Co., Ltd 74,229,565.00 74,229,565.00 0.00 0.00 74,229,565.00 Zhuhai Modern Chinese Medicine Hi-tech 0.00 0.00 Co., Ltd 4,539,975.00 4,539,975.00 4,539,975.00 Livzon (Hongkong) Co., Ltd 64,770,100.00 64,770,100.01 0.00 0.00 64,770,100.01 Hongkong Antao Development Limited 534,050.00 534,050.00 0.00 0.00 534,050.00 Xinbeijiang Pharmaceutical Co., Ltd under 0.00 0.00 Livzon Group 116,446,982.80 116,446,982.80 116,446,982.80 Livzon Reagent Co., Ltd under Livzon 0.00 0.00 Group 2,021,378.68 2,896,800.00 2,896,800.00 Livzon Medicine Marketing Co., Ltd under 0.00 Livzon Group 12,008,000.00 12,008,000.00 0.00 12,008,000.00 Limin Pharmaceutical Co., Ltd under Livzon 32,768,622.72 32,768,622.72 0.00 0.00 32,768,622.72 138 2008 Annual Report of Livzon Pharmaceutical Group Inc. Group Zhuhai Livzon Medicine Trade Co., Ltd 40,020,000.00 40,020,000.00 0.00 0.00 40,020,000.00 Fuzhou Fuxing Pharmaceutical Co., Ltd 0.00 under Livzon Group 150,759,738.00 150,759,738.00 90,693,472.50 241,453,210.50 Shenzhen Yuanxing Pharmaceutical Co., Ltd 60,830,000.00 0.00 60,830,000.00 0.00 60,830,000.00 Total 832,819,544.48 772,358,242.47 151,523,472.50 2,482,476.66 921,399,238.31 (3) Long-term equity investment calculated by equity method Name of Invested Units Investment Cost 2007.12.31 Increase in the Decrease in 2008.12.31 Cash current period the current Dividends period Livzon Medical Electronic Equipment (Factory) Co., Ltd 1,200,000.00 1,200,000.00 0.00 0.00 1,200,000.00 0.00 Guangdong Blue Treasure Pharmaceutical Co. Ltd. 2,462,407.50 5,985,646.75 418,632.68 0.00 6,404,279.43 0.00 Tongyikangshimei Chain (Shenzhen) Co., Ltd 17,500,000.00 5,294,229.32 3,960,052.31 0.00 9,254,281.63 0.00 Total 21,162,407.50 12,479,876.07 4,378,684.99 0.00 16,858,561.06 0.00 (4) Depreciation Reserve for long-term equity investment Withdrawal in the Transfer in Investment Items Withdrawal Current the Current 2007.12.31 Period Period 2008.12.31 Cause The net assets Doumen Sanzhou Industry City Co., are less than Ltd 500,000.00 0.00 0.00 500,000.00 zero. Zhuhai City Commercial Bank 20,000,000.00 0.00 0.00 20,000,000.00 Loss The net assets Livzon Medical Electronic Equipment are less than (Factory) Co., Ltd 1,200,000.00 0.00 0.00 1,200,000.00 zero. Fuzhou Fuxing Pharmaceutical Co., The depreciation Ltd under Livzon Group 11,200,000.00 0.00 0.00 11,200,000.00 has occurred. 139 2008 Annual Report of Livzon Pharmaceutical Group Inc. Xinbeijiang Pharmaceutical Co., Ltd under Livzon Group 7,271,307.03 0.00 0.00 7,271,307.03 Operation loss Total 40,171,307.03 0.00 0.00 40,171,307.03 4. Operating Income and Operating Cost (1) Project list 2008 2007 Item Gross operating Gross operating Operating Income Operating Cost Operating Income Operating Cost Profit Profit Main Business 713,675,208.88 417,944,286.88 295,730,922.00 616,635,602.59 334,703,696.75 281,931,905.84 Other Business 729,840.55 34,755.59 695,084.96 736,340.80 68,017.92 668,322.88 Total 714,405,049.43 417,979,042.47 296,426,006.96 617,371,943.39 334,771,714.67 282,600,228.72 (2) Incomes from main business and businesses are listed as follows as per the business types: 2008 2007 Item Income from Main Cost of Main Gross Profit from Income from Main Cost of Main Gross Profit from Business Business Main Business Business Business Main Business Sales of Commodities 713,675,208.88 417,944,286.88 295,730,922.00 616,635,602.59 334,703,696.75 281,931,905.84 (3) Sales volume of top 5 clients 2008 2007 Client Name Percentage of Total Percentage of Total Sales Volume Sales Volume Sales Volume (%) Sales Volume (%) Total sales volume of top 5 clients 117,218,721.77 16.41% 107,923,419.65 17.48% 5. Business Tax and surtax Item Tax rate 2008 2007 Business Tax 5% 0.00 0.00 Embankment protection cost 0.07% 165,000.00 180,000.00 140 2008 Annual Report of Livzon Pharmaceutical Group Inc. Total 165,000.00 180,000.00 6. Investment Return Item 2008 2007 1. Returns during the holding period: 95,880,061.63 41,741,527.80 ① Profits distributed by the associated or joint companies 500,000.00 500,000.00 Including:Changzhou Kangli Pharmaceutical Co., Ltd 500,000.00 500,000.00 under Livzon Group ②Tradable financial assets 2,668,000.00 2,338,198.22 ③Bonus return of saleable financial assets 300,037.50 478,415.00 ④Profits distributed by other equity investment 1,281,065.50 327,760.83 Including:Ruiheng Pharmaceutical Technology Investment Co., Ltd 1,281,065.50 327,760.83 ⑤ Net increase or decrease of adjusted shareholder equities of invested companies at the end of year -6,121,315.01 -4,874,002.87 Including: Guangdong Blue Treasure Pharmaceutical Co. Ltd. 418,632.68 194,073.30 Tongyikangshimei Chain (Shenzhen) Co., Ltd -6,539,947.69 -5,068,076.17 ⑥Investment return of subcompanies 97,306,673.64 41,690,668.81 Including:Livzon Pharmaceutical Factory under Livzon 15,932,407.30 213,241.34 Group Sichuan Guangda Pharmaceutical Co., Ltd 36,653,558.25 10,554,586.34 Livzon Medicine Marketing Co., Ltd under 3,401.60 Livzon Group 5,150.46 Limin Pharmaceutical Co., Ltd under Livzon 34,084,527.38 30,919,439.53 Group Zhuhai Livzon Advertising Co., Ltd 2,529.01 0.00 Zhuhai Livzon Medicine Trade Co., Ltd 5,528,501.24 0.00 Zhuhai Livzon Reagent Co., Ltd 5,100,000.00 0.00 ⑦Others -54,400.00 1,280,487.81 2. Transfer return: 52,697,213.20 169,247,301.47 Including: Sales of tradable financial assets 16,636,420.41 169,247,301.47 Sales of saleable financial assets 33,543,269.45 0.00 Returns from equity transfer investment 2,517,523.34 0.00 141 2008 Annual Report of Livzon Pharmaceutical Group Inc. Total 148,577,274.83 210,988,829.27 7. Supplementary Data of Cash Flow Statement of Parent Company Item 2008 2007 1.Adjust the net profit to the cash flow of operating activities: Net profit 1,984,104.76 319,578,779.31 Plus: Reserve for asset depreciation 4,569,146.48 501,521.72 Fixed asset depreciation, consumption of oil and gas assets and production biology asset depreciation 15,117,559.49 13,716,599.32 Amortization of intangible assets 6,477,106.57 6,016,757.96 Amortization of long-term amortization expense and long-term assets Loss in disposal of fixed assets, intangible assets and other long-term assets (the profits will be listed beginning with "-") -304,538.98 294,693.16 Loss in the rejection of fixed assets (the profits will be listed beginning with "-") Loss in the changes of fair values (the profits will be listed beginning with "-") 190,648,198.10 -77,923,501.33 Financial expense (the profits will be listed beginning with "-") 44,480,113.31 14,596,689.95 Investment loss (the profits will be listed beginning with "-") -148,577,274.83 -210,988,829.27 Decrease of deferred income tax assets (the increase will be listed beginning with "-") -13,664,865.86 490,524.79 Increase of deferred income tax liabilities (the decrease will be listed beginning with "-") -16,711,056.98 22,841,216.70 Decrease of inventory (the increase will be listed beginning with "-") -32,309,280.04 -209,155.02 Decrease of receivable operating items (the increase will be listed beginning with "-") -20,747,747.09 -35,175,551.77 Increase of receivable operating items (the decrease will be listed beginning with "-") -22,305,588.66 78,709,214.12 Others Net amount of cash flow from the operating activities 8,655,876.27 132,448,959.64 2.Key investment and financing activities not involving the cash income and payment Transfer from liabilities to share capital Transferable company bonds due within one year Financing leasing of fixed assets 3.Change of cash and cash equivalents: Cash balance at the end of period 465,301,653.09 214,055,704.00 Minus: cash balance at the beginning of period 214,055,704.00 173,564,413.71 Plus: cash equivalent balance at the end of period Minus: cash equivalent balance at the beginning of period Net increase of cash and cash equivalent 251,245,949.09 40,491,290.29 IX. Relationship and Transaction of Associated Parties 1. Confirmation Standard of associated parties 142 2008 Annual Report of Livzon Pharmaceutical Group Inc. The other party which is controlled, jointly controlled or substantially influenced by the company, or controls, jointly controls or substantially influences the company, or is under the same control, joint control or substantial influence of the same parties as the company will be deemed as the associated party of the company. 2. Relationship of associated parties (1) Associated party with the control relationship Relationship Registered Organization Economic Legal Enterprise Name Main Business with the Address Code Nature Representative Company Joincare Production and Company Pharmaceutical sales of oral liquids, Parent Limited Shenzhen 61887436-7 Zhu Baoguo Group Industry medicines and company (Listed Co., Ltd health-care food company) Please see the note VI for the details of the subcompanies held by the company. (2) Registered capitals and changes of associated parties with the control relationship Enterprise Name 2007.12.31 Increase in the Decrease in the 2008.12.31 current period current period Joincare Pharmaceutical Group 609,993,000 487,994,400 0.00 1,097,874,000 Industry Co., Ltd On April 24, 2008, Joincare Pharmaceutical Group Industry Co., Ltd implemented the bonus distribution and gift share plan by giving 8 shares and the 1-yuan cash to every 10 shares. Please see the note VI for the details of the registered capitals and changes of subcompanies held by the company. (3) Shares and changes of associated parties with the control relationship Enterprise Name 2007.12.31 Percentage Increase in the Decrease in 2008.12.31 Percentage(%) (%) current period the current period Joincare Pharmaceutical Group Industry Co., Ltd and its subcompanies 134,000,271 43.7859% 0.00 0.00 134,000,271 44.0754% In the above equities held by Joincare Pharmaceutical Group Industry Co., Ltd, the formalities for transferring the equities of 6,059,428 legal person shares held in the name of Guangzhou Begol Trading Corporation have not been handled and the transfer formalities of other equities have been handled (4) Details about associated parties without any control relationship 143 2008 Annual Report of Livzon Pharmaceutical Group Inc. Enterprise Name Organization Code Relationship with the Company Guangdong Blue Treasure Pharmaceutical Co. Ltd. 61806410-2 Associated company Changzhou Kangli Pharmaceutical Co., Ltd under Livzon Group 71689963-X Associated company Tongyikangshimei Chain (Shenzhen) Co., Ltd 76046936-2 Associated company Shenzhen Haibin Pharmaceutical Co., Ltd 61885517-4 Company controlled by parent company Jiaozuo Joincare Pharmaceutical Group Industry Co., Ltd 77512952-0 Company controlled by parent company Zhuhai Joincare Pharmaceutical Group Industry Co., Ltd 75788087-1 Company controlled by parent company Health Pharmaceutical (China) Co., Ltd 61749891-0 Company controlled by parent company 3. Transactions between associated parties （1） The pricing principle of transactions between the company and associated parties: the transactions will be settled at the prices of similar products in the market （2） Transaction of associated parties ① Sales of Commodities 2008 2007 Percentage of Percentage of Name of Associated Parties Amount Transaction Amount Transaction Amount (%) Amount (%) Guangdong Blue Treasure Pharmaceutical Co. Ltd. 1,777,946.68 0.09% 1,316.24 0.00 Tongyikangshimei Chain (Shenzhen) Co., 38,141.93 Ltd 13,825.57 0.00 0.00 Zhuhai Joincare Pharmaceutical Group 1,542.84 Industry Co., Ltd 821.09 0.00 0.00 Shenzhen Haibin Pharmaceutical Co., Ltd 0.00 0.00 637,215.38 0.04% Jiaozuo Joincare Pharmaceutical Group Industry Co., Ltd 32,179.49 0.00 7,692.31 0.00 Total 1,824,772.83 0.09% 685,908.70 0.04% ② Provision of labors (water, electricity and power) 144 2008 Annual Report of Livzon Pharmaceutical Group Inc. 2008 2007 Percentage of Percentage of Name of Associated Parties Amount Transaction Amount Transaction Amount (%) Amount (%) Guangdong Blue Treasure Pharmaceutical Co. Ltd. 10,007,046.89 62.84% 7,937,152.00 65.48% ③ Purchase of commodities 2008 2007 Percentage of Percentage of Name of Associated Parties Amount Transaction Amount Amount Transaction (%) Amount (%) Changzhou Kangli Pharmaceutical Co., Ltd under Livzon Group 1,520,512.82 0.16% 4,958,119.67 0.51% Guangdong Blue Treasure Pharmaceutical Co. Ltd. 410,798.89 0.04% 16,021.26 0.00 Shenzhen Haibin Pharmaceutical Co., 0.00 Ltd 1,856,000.00 0.20% 0.00 Joincare Pharmaceutical Group Industry Co., Ltd 376,000.00 0.04% 9,572.65 0.00 Jiaozuo Joincare Pharmaceutical Group Industry Co., Ltd 162,276,025.62 17.53% 80,589,888.37 8.33% Total 166,439,337.33 17.97% 85,573,601.95 8.84% ④ Leasing of assets 2008 2007 Percentage of Percentage of Name of Associated Parties Amount Transaction Amount Amount Transaction Amount (%) (%) Zhuhai Joincare Pharmaceutical Group Industry Co., Ltd 103,428.00 7.29% 107,887.08 8.85% Health Pharmaceutical (China) Co., Ltd 58,303.00 4.11% 0.00 0.00 145 2008 Annual Report of Livzon Pharmaceutical Group Inc. Tongyikangshimei Chain (Shenzhen) Co., 0.00 Ltd 0.00 10,608.00 0.87% Total 161,731.00 11.40% 118,495.08 9.72% ⑤ Renting of Assets 2008 2007 Percentage of Percentage of Name of Associated Parties Amount Transaction Amount Amount Transaction Amount (%) (%) Guangdong Blue Treasure Pharmaceutical Co. Ltd. 53,137.20 1.53% 0.00 0.00 ⑥ Receivable and payable balances with associated parties 2008.12.31 2007.12.31 Enterprise Name Amount Percentage Amount Percentage Accounts receivable: Tongyikangshimei Chain (Shenzhen) Co., 0.00 0.00 1,229.70 0.00 Ltd Zhuhai Joincare Pharmaceutical Group 0.00 0.00 571.52 0.00 Industry Co., Ltd Shenzhen Haibin Pharmaceutical Co., Ltd 0.00 0.00 7,052.56 0.00 Jiaozuo Joincare Pharmaceutical Group 0.00 0.00 0.00 0.00 Industry Co., Ltd Total 0.00 0.00 8,853.78 0.00 Other accounts receivable: Guangdong Blue Treasure Pharmaceutical 0.00 0.00 Co. Ltd. 3,027,634.81 14.59% Zhuhai Joincare Pharmaceutical Group 560,000.00 Industry Co., Ltd 1.95% 564,445.86 2.72% Total 560,000.00 1.95% 3,592,080.67 17.31% Enterprise name 2008.12.31 2007.12.31 146 2008 Annual Report of Livzon Pharmaceutical Group Inc. Amount Percentage Amount Percentage Payable accounts: Changzhou Kangli Pharmaceutical Co., Ltd 0.00 under Livzon Group 0.00 1,143,454.82 0.64% Shenzhen Haibin Pharmaceutical Co., Ltd 1,036,800.00 0.65% 0.00 0.00 Guangdong Blue Treasure Pharmaceutical 0.00 Co. Ltd. 0.00 18,744.87 0.01% Jiaozuo Joincare Pharmaceutical Group Industry Co., Ltd 22,257,840.92 13.96% 14,415,384.59 8.01% Total 23,294,640.92 14.61% 15,577,584.28 8.66% Other Payable Accounts: Joincare Pharmaceutical Group Industry Co., Ltd 13,653.11 0.01% 18,966.23 0.02% Jiaozuo Joincare Pharmaceutical Group Industry Co., Ltd 222,691.25 0.15% 30,994.76 0.03% Total 236,344.36 0.16% 49,960.99 0.05% Advance accounts: Shenzhen Haibin Pharmaceutical Co., Ltd 738,489.44 5.77% 0.00 0.00 Payable dividends: Joincare Pharmaceutical Group Industry 0.00 525,000.00 17.17% Co., Ltd 0.00 X. Contingent Events By December 31, 2007, the company has no contingent key events for disclosure. XI. Commitments 1. This company signed the patent license agreement with Korea Yiyang Medicine Company. This agreement approves our company’s exclusive and irrevocable right to use the patent PPI(proton pump inhibitor) compound and Yiyang patent in China including Hong Kong and Macao in order to production, processing and distribution. 147 2008 Annual Report of Livzon Pharmaceutical Group Inc. The transfer fee will be USD 2.50 million, and by December 31, 2007, it has fully paid it. The company agrees to deduct a percentage for Yiyang according to 10% of sales amount during the first three years when this product begins to be sold. And deduct a percentage according to 8% of sales amount during the next five years. And deduct a percentage according to 6% of sales amount from the remaining time to July 22, 2014 (the expiry date of agreement). 2. In 2005, the company signed the approval and supply agreement with Korea LG life science Ltd. (hereinafter referred to as LG Company), and it grants Gemifloxacin Mesylate with the relevant certificates about intellectual properties and specifies that the permission fees of the methanesulfonic acid spasmolytic and pellet will be USD1, 000,000 respectively (It has been fully paid by December 31, 2006). This agreement specifies as follows: Within the first five years from the validity date of the agreement, the company’s net sales volume of Jimishaxing pellet will amount to 1.5 million bags (3 pellets in each bag) and LG Company will refund USD 500,000 after the taxation at one time within two months after the company has submitted the net sales volume certificate. At the same time, during the validity period of the agreement (by the end of 2015), the company should pay a royalty of 1.5% of net sales volume after the taxation to LG Company during 30 days after each quarter. The company has begun the selling activities in 2008 and paid a royalty of USD 1,346.75. Within the first five years from the validity date of the agreement, the company will pay a royalty of 10% of net sales volume after the taxation about injection products to LG Company within 30 days after each quarter. The company will pay a royalty of 6% of net sales volume after the taxation about injection products to LG Company within 30 days after each quarter from the sixth business year to the expiry date of agreement (by the end of 2019). 3. On April 2, 2007, the fifth Board of Supervisors of Livzon Pharmaceutical Group Inc. passed the Proposal on Construction of Livzon Industrial Park Project and Relevant Financing Plans and approved that, to satisfy the demands of development strategy of the Company, the Company would invest a total of RMB 467.06 million Yuan (including RMB 334.84 million Yuan loaned from the financial institutions and RMB 132.22 million Yuan raised by the Company in other ways) to build the Livzon Industrial Park Project in the Shuanglin Zone, Liangang Industrial Park, Jinwan, Zhuhai. Main construction items of the project: ① the production lines of current solid preparations (tablet agent, capsule agent, granular agent, suppository, ointment and soft capsule agent), oral drinking biological products and sterile preparations produced by Livzon Pharmaceutical Factory under Livzon Group (hereinafter referred to as “Livzon Pharmaceutical Factory”) will be relocated and 148 2008 Annual Report of Livzon Pharmaceutical Group Inc. constructed; ② The auxiliary projects such as box production, medicine packing materials (box, manual and label) and health products will be constructed. According to the plan, it will take three years(2007-2010) from the commencement in design and construction to the engineering completion and production launch. Based on the project construction schedule, it’s proposed that the investment percentage of construction capitals in the three-year construction period will be 50%,30% and 20%. The flow capitals will be invested in the first year of operation period; the yearly investment plan is shown in the following table: Investment(RMB 2008 2009 2010 2011 10 thousand Yuan) Construction investment 21,428 12,856 8,571 0.00 Flow capital 0.00 0.00 0.00 3,851 Total 21,428 12,856 8,571 3,851 At present, influenced by the financial environments and the overall capital plans of the company, this project has not entered the actual construction stage. XII. Non-adjusting Events occurring after the Balance Sheet Date By the reporting date, the company has no non-adjusting events occurring after the balance sheet date that need to be disclosed. XIII. Other Key Events 1. Bank loan guaranties that the company provides to the controlling subcompanies during the report period are listed as follows: (RMB 10 thousand Yuan) Name of Guarantee Occurrence Balance Guarantee Guaranty type Period Date at the Amount (Signing end of date of period agreement) Joint and 2007.8.3-2009.8.3 Limin Pharmaceutical Co., Ltd under 686 several 2007.8.3 0 (Shenzhen Branch of Citi Bank) Livzon Group （USD100） liability guaranty Joint and Livzon Syntpharm Co., Ltd in Zhuhai several 2008.1.8 0 3,500 Bonded Area liability 2008.1.8-2011.1.8(Zhuhai Branch of guaranty Bank of China) 149 2008 Annual Report of Livzon Pharmaceutical Group Inc. Joint and Lida Pharmaceutical Co., Ltd in several 2008.1.8 0 600 Zhuhai Bonded Area liability 2008.1.8-2011.1.8(Zhuhai Branch of guaranty Bank of China) Joint and several Zhuhai Livzon Reagent Co., Ltd 2008.1.8 0 1500 liability 2008.1.8-2011.1.8(Zhuhai Branch of guaranty Bank of China) Joint and several 2008.1.8 0 400 Zhuhai Livzon Medicine Trade Co., liability 2008.1.8-2011.1.8(Zhuhai Branch of Ltd guaranty Bank of China) Joint and several 2008.4.29 0 1200 Zhuhai Livzon Medicine Trade Co., liability 2008.4.29-2011.4.29(Zhuhai Branch of Ltd guaranty Bank of Communications) Joint and Fuzhou Fuxing Pharmaceutical Co., Ltd several 2008.11.25-2009.11.25 (Fuzhou State- 2008.11.25 120 120 under Livzon Group liability owned Assets Operation and guaranty Investment Company) Joint and Livzon Pharmaceutical Factory under several 2007.10.31-2010.10.31 2007.10.31 4,289 12,000 Livzon Group liability (Shanghai Branch of Rabobank guaranty Nederland) Total guaranty amount to its controlling subcompanies in the report period 4,409 Total balance of guaranty amount to its controlling subcompanies in the report period 4,409 2. In the 2008 First Temporary Shareholders’ Meeting, the company examined and passed the Proposal on Repurchasing Some of Domestically Listed Shares for Overseas Investors (B Shares) of Livzon Pharmaceutical Group Inc: on the condition that the total amount of repurchase capitals does not exceed HKD 160 million and the repurchase price does not exceed HKD 16.00/share, the company plans to repurchase 10 million 150 2008 Annual Report of Livzon Pharmaceutical Group Inc. domestically listed shares for overseas investors (B shares) (the quantity of repurchased shares will be subject to that of actually repurchased shares at the expiry of repurchase period), and these repurchased shares will be legally cancelled. The repurchase period is within 12 months from the announcement date of the repurchase report. On September 27, 2008, the company obtained the relevant replies of the Ministry of Commerce about principally approving the company to repurchase some of B-shares and reduce its capital. On November 28, 2008, the company obtained the relevant replies of Zhuhai Center Branch of the State Administration of Foreign Exchange about approving the company to purchase the foreign exchange of no more than HKD 160 million Yuan in order to repurchase some of the domestically listed shares for overseas investors of the company. By December 31, 2008, the company has accumulatively repurchased the quantity of 2,290,620 B-shares, accounting for 0.7485% of total share capital of the company; the book repurchase quantity is 2,010,580 shares; for the settlement and delivery system of B-shares employs the T+3 mode, the settlement formalities of 280,040 shares have not been handled. XIV. Non-Recurring Profit and Loss In accordance the No. 1 Explanatory Announcement about Information Disclosure of Companies Making Public Offering of Securities – Non-recurring Profit and Loss(2008) (Zheng Jian Hui Gong Gao (2008) No. 43), the non-recurring profit and loss items of the company are listed as follows: Item 2008 2007 Profit and loss in disposal of non-current assets 1,398,009.66 804,986.06 Tax rebate and exemption due to the approval without the appropriate authority or the formal approval documents, or the accidental tax rebate and exemption Governmental allowance accrued to the current profit and loss 9,198,321.77 5,378,413.73 Capital occupancy expense from the non-financial enterprises that is accrued to the current profit and loss 0.00 0.00 The investment costs of enterprises to obtain the subcompanies, associated enterprises and joint enterprises are less than the returns from the fair values of identifiable net assets of invested units that should be available at the time of investment 0.00 0.00 Profit and loss of non-currency assets exchange 0.00 0.00 Profit and loss of investment or management of entrusted assets 0.00 0.00 151 2008 Annual Report of Livzon Pharmaceutical Group Inc. Item 2008 2007 The various withdrawn reserves for assets depreciation due to the force majeures such as the natural calamities 0.00 0.00 Profit and loss of liabilities restructuring 0.00 0.00 Enterprise restructuring expenses 0.00 0.00 Profit and loss from the amount exceeding the fair values in the transactions in which the transaction prices are obviously unfair. 0.00 0.00 The current profit and loss from the establishment date to the merger date of subcompanies that are established by the merger of enterprises under the same control. 0.00 0.00 The profit and loss caused by the contingent events that are not related to the normal operation business of the company 0.00 0.00 Except the effective hedge business related to the normal operation business of the company, the profit and loss in the changes of fair values caused by the holding of tradable financial assets and tradable financial liabilities as well as the investment returns in disposal of tradable financial assets, tradable financial liabilities and saleable financial assets -214,961,122.23 330,276,862.40 Reversion of depreciation reserves for accounts receivable whose depreciation testing have been individually made. 0.00 0.00 Profit and loss from the externally entrusted loans 0.00 0.00 Profit and loss caused by the changes of fair values of invested real estates in the subsequent calculation by utilizing fair value mode 0.00 0.00 Effect of the one-time adjustment of the current profit and loss in accordance with the requirements of laws and regulations concerning the taxes and accounting, etc. on the current profit and loss 0.00 0.00 Custody income due to the entrusted custody 0.00 0.00 Other net non-operating income and payment except the above items -2,050,603.70 39,604.10 Other non-recurring profit and loss items 1,318,292.61 0.00 Total of non-recurring profit and loss (the effect of the total profits) -205,097,101.89 344,516,866.29 Minus: effect of income tax -19,582,818.13 50,487,360.77 Net non-recurring profit and loss (the effect of the net profit) -185,514,283.76 294,029,505.52 Including: the effect of profit and loss of the minority of shareholders 182,985.81 207,314.60 The effect of the net profit attributable to the ordinary shareholders of parent company -185,697,269.57 293,822,190.92 XV. Yield Rate of Net Assets and Profit Per Share Profit in the report period Yield Rate of Net Assets (%) Profit per share (Yuan/share) 152 2008 Annual Report of Livzon Pharmaceutical Group Inc. Weighed Basic profit per Profit per share Full dilution average share after dilution Net profit attributable to the ordinary shareholders 52,073,163.66 2.93% 2.80% 0.17 0.17 Net profit attributable to the ordinary shareholders after deduction of non- recurring profit and loss 237,770,433.23 13.37% 12.80% 0.78 0.78 Calculation Steps: 1. Basic profit per share After deduction of non- Items Calculation Steps Amount recurring profit and loss Net profit attributable to the ordinary shareholders P 52,073,163.66 237,770,433.23 Total quantity of shares in the beginning of period S0 306,035,482 306,035,482 Increase of shares in the current period Si -2,010,580 -2,010,580 Length from the next month after share increase to the end of report period (unit: month) Mi 0.5 0.5 Length of report period (unit: month) M0 12 12 The weighted average number of ordinary shares which are issued to the public S=S0＋Si×Mi÷M0 305,951,708 305,951,708 Basic profit per share P÷S 0.17 0.78 2. Dilution of profit per share: After deduction of Item Calculation Steps Amount non-recurring profit and loss Current net profit attributable to ordinary shareholders P 52,073,163.66 237,770,433.23 Dividends and interests related to the diluted potential A1 ordinary shares 0.00 0.00 Returns or expenses caused by the dilution of the A2 conversion of potential ordinary shares 0.00 0.00 Total quantity of shares in the beginning of period S0 306,035,482 306,035,482 Increase of shares in the current period Si -2,010,580 -2,010,580 Length from the next month after share increase to the Mi end of report period (unit: month) 0.5 0.5 153 2008 Annual Report of Livzon Pharmaceutical Group Inc. Length of report period (unit: month) M0 12 12 The weighted average number of ordinary shares S=S0＋Si×Mi÷M0 which are issued to the public 305,951,708 305,951,708 Weighed average number in the conversion from X diluted potential ordinary shares to ordinary shares 0.00 0.00 Diluted profit per share (P＋A1±A2)÷(S＋X) 0.17 0.78 XVI. Approval of Financial Statement This financial statement is passed and issued by the Board of Direction on , 2009. Company Name：Livzon Pharmaceutical Group Inc. Principal of the Company: Principal of the Financial Principal of the Accounting Department: Department: 154 2008 Annual Report of Livzon Pharmaceutical Group Inc. Section 12: Catalog of files for reference I. Files for future reference: 1 Accounting reports with signature and seal of legal representative, principal of Financial Department and principal of Accounting Department. 2 The original audit report with the seal of accountants firm and with the signature and seal of certified public accountants. 3 All original files and announcement manuscript that have been published in newspaper appointed by China Securities Regulatory Commission during the report period. Livzon Pharmaceutical Group Inc. Chairman: Zhu Baoguo Date: April 18 ,2009 155