chapter 1 important notice and table of contents

Chapter 1 Important Notice and Table of Contents

Important Notice: the Board of directors of our company guarantee that there is no false

record, misleading statement or important pretermission in this report, and the directors

have individual and joint liability for the truthfulness, accuracy and completeness to the

contents in this report. Director Han Huanguang didn’t attend the meeting adopting this

annual report.The report is published in Chinese and English. The Chinese version is set to

be accurate if any ambiguities occur in the understanding of such two versions.

2

LIST

Chapter 1: Important Notice and Table of Contents

1

Chapter 2: Brief Introduction to Company

3

Chapter3: Summary of Accounting Data and Business Data

4

Chapter4:Introduction to Capitalization Alteration and Shareholders

4

Chapter 5:Introduction to Directors, Supervisors, Senior Managers and Staffs

7

Chapter 6: Administration of the Company

8

Chapter 7:Brief Introduction to Shareholders’ Conference

10

Chapter 8: Report of the Board of Directors

10

Chapter 9: Report of the Supervisory Committee

17

Chapter 10: Important Matters

18

Chapter 11: Financial Report

20

Chapter 12: Contents of Reference Documents

20

3

Chapter 2 Brief Introduction to Company

1. Name of our Company: LIVZON PHARMACEUTICAL GROUP INC.

Abbreviation: LIVZON GROUP

2. Legal Representative: Yi Zhenqiu

President: Xu Xiaoxian

3. Secretary of the Board of Directors: Wang Wuping

Representative of securities work: Li Hao

Tel: (0756) 8135888 Fax: (0756) 8886002

E-mail: [email protected] [email protected]

Contact address: LIVZON Mansion, the North Guihua Road, Gongbei, Zhuhai City

4. Company registration address：No.132, the North Guihua Road, Gongbei, Zhuhai City,

Guangdong Province.

Company office address: LIVZON Mansion, the North Guihua Road, Gongbei,

Zhuhai City, Guangdong Province

Zip Code: 519020

Web-site: http://www.livzon.com

E-mail: [email protected]

5. Selected newspaper throw daylight on:

‘Stocks Times’, ‘Shanghai Securities Paper’, Hongkong ‘Wen wai Po’ (Chinese, English

language)

The annual report throw daylight on the web-site appointed by CSRC:

http://www.cninfo.com.cn

4

Annual report prepared place: Secretariat of LIVZON Group Board of Directors

6. Stock listed Exchange: Shenzhen Exchange

Stock abbreviated and code: LIVZON GROUP (000513) LIVZON B (200513)

7. Other related information:

Date of first registration: January 26, 1985

Date of alteration registration: May 29, 2001

Company register place: Zhuhai Industry and Commerce Administrative Bureau

Company Business License Registered No.: QGYZZZi No.001111

Tax registered No.: 440401617488309

8. Name of invited domestic Accountant Office: Lianda Xinlong Accountant Office Co.,

Ltd.

Address: No.1 of Building 252, Huwan Road, Xiangzhou District, Zhuhai City.

Name of invited international Accountant Office: Ho and Ho & Company

Address: Arion Commercial Center, No.2-12, Queen’s Road West, Hong Kong.

Chapter 3 Summary of Accounting Data and Business Data

I. Main Accounting Data (Unit:

RMB’000)

Major Accounting Figures 2001 2000

Revenue 1,395,792 1,154,706

Gross Profit 651,195 516,655

Share of Results of Associates (841) 542

Profit Before Tax 110,532 3,325

Income tax expense (27,175) (9,352)

Profit after tax 83,357 (6,027)

Minority Interests (24,308) (16,083)

Net profit for the year 59,049 (22,110)

Earnings per Share RMB0.19 (RMB0.07)

Share capital 306,035 306,035

Capital and reserves 909,671 850,622

Total assets 1,641,717 1,516,276

Net cash inflow from operating activities 166,068 62,893

Net increase(decrease)in cash and cash equivalents 134,083 (53,806)

Notes: The indicators above was audited by Ho and Ho & Company according to

International Accounting Standard, which is given as reference for B shares investors.

II. Net profit audit difference

As examined and checked by Lianda Xinlong Accountant Company, Ltd. according to the

5

Chinese accounting norms, our company reaped a net profit of 50,392,136.63 yuan in 2001;

and according to the examination and check by Ho and Ho & Company in accordance with

the international accounting norms, our company had a net profit of 59,049,000 yuan in

2001. The difference between the two is 8,656,863.37 yuan. The main reasons for the

difference are: According to the international accounting norms, 6,886,000 yuan, 6,817,000

yuan, and 915,000 yuan will be added to the profits respectively for bad debts preparation,

amortization of apportion expenses, and confirmation of investment returns. And 251,000

yuan, 3,524,000 yuan, 286,000 yuan and 1,900,000 yuan will be deducted respectively from

the profits for amortization of business reputation, expenses collected in advance, the

negative business reputation obtained when purchasing subcompanies and others.

Chapter 4 Introduction to Capitalization Alteration andShareholders

I. Capitalization Alteration Situationa.Capitalization Alteration list (up to December 31, 2001)

alterationbefore

Current alteration (plus & minus) Alterationafter

AllocatedStock

Presentedstock

AccumulationFund transferto stock

Appendedissue

Others

UncirculatedShareOrganizerShare:1.Domesticcorporationstock

68,056,188 68,056,188

2.ForeigncapitalCorporationstock

18,893,448 -18,893,448 0

TotaluncirculatedShares

86,949,636 -18,893,448 68,056,188

Circulatedshare1. Class Astock

115,672,310 115,672,310

Thereinto:SeniorManagerStock

80,798 80,798

2. Class Bstock

103,413,536 +18,893,448 122,306,984

TotalcirculatedShare

219,085,846 +18,893,448 237,979,294

Total shares 306,035,482 306,035,482

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b. Stock issue and market situation for recent 3 years

There is no change in the capitalization construction for the recent 3 years in our company,

the total capitalization is 306,035, 482 shares.

The foreign capital corporation stock (18,893,448 shares) of our company which hold by

Guangda Pharmaceutical Com. Ltd. of China (now rename as ‘Guangtai Pharmaceutical

Com. Ltd. of China’) was approved by CSRC to circulate on the market on July 18, 2001,

which has proclaim in Stocks Times, Shanghai Securities Paper and Hong Kong Wen Wai

Po on July 12, 2001.

//. Shareholders’ situation1. At the end of 2001: Total shareholders: including A-shair shareholders, class B

stock shareholders:

2. Stock holding situations of first ten shareholders (up to December 31, 2001)

Order Name Amount Alteration Proportion(%) Character1 Guangda (group)

Company ofChina

38,917,518 0 12.72 Domesticcorporationstock

2 Zhuhai LishiInvestment Co.Ltd.

22,379,239 +22,379,239 7.31 Domesticcorporationstock

3 GuangtaiPharmaceuticalCo. Ltd. of China

15,628,395 -3,265,053 5.11 Class Bcommonstock

4 GuangzhouBaokeli TradingCompany

6,059,428 -5,000,000 1.98 Domesticcorporationstock

5 JinshengSecuritiesInvestment Fund

2,671,039 +663,421 0.87 Class Acommonstock

6 ShanghaiSecurities Co.Ltd.

1,561,793 +1,561,793 0.51 Class Acommonstock

7 TianhuaSecuritiesInvestment Fund


8 JingyangSecuritiesInvestment Fund


9 Han Gui Yi 1,017,464 +1,017,464 0.33 Class Acommonstock

10 Xibu SecuritiesHoldings Co.Ltd.

899,232 +899,232 0.29 Class Acommonstock

(Note: the above shareholders not exist associated relation)

III. The principal shareholder of our Company:

Up to the end of the report period, the principal shareholder is Guangda (group)

Company of China. This Company was register on November 12, 1990. the Legal

representative is Wang Mingquan, the register capital is RMB 20,000,000.00, mainly engage

in bank, financial business, domestic stock exchange business,etc.

7

Chapter 5: Introduction to Directors, Supervisors, SeniorManagers and Staffs

1.Introduction of Directors, Supervisors and Senior Managers

(I.). Brief introductionName Sex Age Title Employment

PeriodSharesholding at thebeginning ofthis year

Sharesholding bythe end ofthis year

Yi Zhenqiu Male 58 Chairman From Dec.1998 to May2002

0 0

Xu Xiaoxian Male 65 DeputyChairmanPresident

Ditto 48476 48476

DongShaozhi

Male 61 DirectorExecutiveVicePresidents

Ditto 0 0

WuYanpeng Male 39 Director Ditto 0 0HanHuanguang

Male 41 Director Ditto 0 0

ChenDanglin

Male 52 Director Ditto 0 0

Cao Wenxia Female 57 Director Ditto 16158 16158Yang Chu Male 36 Chairman of

SupervisoryFrom Dec.1998 to May2002

0 0

Li Yufang Female 51 Supervisor From Dec.1998 to May2002

16158 16158

HuangBiran

Male 58 Supervisor From Dec.1998 to May2002

0 0

LiangJinlong


0 0

ZhengWangong


0 0

ShenWeijun

Male 56 DeputyChairmanPresident

From April2001

0 0

Liu Shuqing Female 38 AssistantPresident

From April2001

0 0

Zhao Rui Male 36 GeneralAccountant(responsible person incharge offinance)

From April2001

0 0

Wang Male 36 Secretary to From Dec. 0 0

8

Wuping the board ofdirectors

1998 to May2002

(II) Information on annual remunerations

The board directors and the supervisory directors of the Inc. do not receive remunerations

from the Inc. The annual total of remunerations paid to the senior managerial staffs

amounts to RMB 2,030 thousand yuan Among them,5 persons are paid by a level of RMB

100-450 thousand, and 1 is by a level of RMB 450 thousand. The total remuneration for the

three senior managerial staff persons with the highest pay level amounts to RMB 1,280

thousand. The remuneration levels are determined on the basis of the importance of the job

posts, the personal responsibilities, the individual contributions, and the efficiency of the

Inc.

(III) Information on the quits and appointments

The 8th meeting of the 3rd session of the board of directors held in April of 22001 passed the

resolution to appoint Mr. Dong Shaozhi to be the Deputy Chairman of Board of Directors.

With the nomination by President Xu Xiaoxian, Mr. Shen Weijun and Mr. Dong Shaozhi were

appointed to be the executive Vice Presidents, Mr. Liu Shuqing to be the Assistant

President and Mr. Zhao Rui to be the General Accountant (responsible person in charge of

finance). The Inc. shall not appoint a general manager and the deputy general managers.

The persons who were originally appointed to take these posts shall not continue their job

assignments.

2. Information on employees of the Inc.

There are 2326 full-time employees in the Inc. at present (not including those in the

shareholding companies). The Inc. is also responsible for the payments of pensions for 71

retired employees (including 26 persons who were treated as retired by the corporation).

Among all the employees, 900 persons are engaged in production, 996 persons in

marketing and sales, 135 technicians, 50 financial staff persons, and 245 administrative

staff persons. Of all the employees, 1,203 persons have educational backgrounds above

college level, accounting for 51.72 % of the total workforce.

Chapter 6 Administration of the Company

1.State of AdministrationAt the end of 2000 the supervision and control office of Guangzhou Stock Company made a

routine inspection of our Company, pointed out some problems in our work and put

forward many valuable suggestions on improving the administration structure of the legal

person of our Company. In the following year our Company implemented measures for

reform and consolidation item by item, amended some parts of the Company’s regulations,

and basically completed the reform and consolidation as required in the notice of reform

and consolidation. In accordance with the requirements of the Governing Principles of

Listed Companies jointly issued by China Securities Regulatory Commission (CSRC) and

State Economic and Trade Commission and Guide to the Regulations of Listed Companies

9

issued by CSRC, and in the light of the actual conditions of the Company, our Company will

make great amendments about the company’s regulations this year. A new chapter on

independent directors will be added to the regulations. We plan to further improve the

election process of the directors, independent directors and supervisors, and to regulate

the authority and process of such major fund operations as investment guarantee. We are

also planning to formulate a series of rules and regulations, such as rules of procedures

for the shareholders’ conference, so as to make clearer the responsibilities and rights and

work process.

2.Duty performance of the independent directorsAt present there are no independent directors in the Company. In 2002, in accordance with

the requirements as stated in On the Guiding Principles for the Establishment of

Independent Directors System in Listed Companies issued by CSRC, our Company will

make active efforts to introduce independent directors and to further regulate the legal

person structure of the Company, so as to embody really the Company’s operation

principle: being fair, just and open.

3.The Company is totally independent of its largest shareholder in business, personnel,

assets, organizational setup and finance. In business, the Company is totally independent,

having its own independent purchasing and marketing systems. The Company and its

biggest shareholder do not engage in the production and operation of the same products,

so there is nothing like competition within the same trade. In personnel, the Company is

totally independent of the biggest shareholder in the management of labour, personnel and

pay. In assets, the Company possesses its whole assets and has independent production,

supply and marketing systems. The company has independent and complete

organizational setup, which is strictly separated from that of its biggest shareholder. As for

finance, the Company has its own independent financial department and has set up a

standard and independent financial and accounting system and a system for the

management of the finance of the enterprises affiliated to it.

4.The establishment and implementation of a system for the assessment, evaluation and

encouragement of the senior managerial personnel of the Company

In 2001 an annual salary system linked with objectives was carried out for the Company’s

senior managerial personnel , with rewards floating based on the personal achievements

linked with the target fulfillment of the Company’s business profits.

Chapter 7 Brief Introduction to Shareholders’ Conference

I. The Company’s shareholders’ conference for the year 2001 (i.e. the Thirteenth

Shareholders’ Conference of Livzon Pharmaceutical Group Inc.) was held at the

Company’s office building on May 26, 2001. The notice for the meeting was announced in

10

Stocks Times, Shanghai Securities Paper and Wen Wai Po on April 26, 2001. Present at the

conference were 21 shareholders, representing 94,798,523 shares, accounting for 30.98%

of the total shares of the Company (including 19,410,148 class B stock, accounting for

6.34% of the Company’s total). The conference adopted the following resolutions:

1. The President’s Work Report for 2000 of Livzon Pharmaceutical Group Inc.

2. The Work Report of the Board of Directors for 2000 of Livzon Pharmaceutical Group

Inc.

3. Proposal on the Amendment of the Company’s Regulations by Livzon

Pharmaceutical Group Inc.

4. Work Report of the Supervisory Committee for 2000 of Livzon Pharmaceutical Group

Inc.

5. Report on the Execution of the Finance for 2000 of Livzon Pharmaceutical Group Inc.

6. Allocation plan of the Profits for 2000 of Livzon Pharmaceutical Group Inc.

7. Proposal on Authorizing the Management of the Company to Select Accounting

Firms outside China

8. Proposal on Straightening out the Property Right of the Twelve Second-class

Enterprises of the Group Including Livzon Pharmaceutical Factory

The resolutions of the Thirteenth Shareholders’ Conference were published on May 29,

2001 in Stocks Times, Shanghai Securities Paper and Wen Wai Po (Hong Kong). No

replacements of directors or supervisors were made at the Thirteenth Shareholders’

Conference.

II. The provisional Shareholders’ Conference for 2001 was held at the conference room on

the second floor of the Company’s office building on July 13, 2001. The notice for the

meeting was announced in Stocks Times, Shanghai Securities Paper and Wen Wai Po

(Hong Kong) on June 12, 2001. Present at the conference were 8 shareholders,

representing 87,014,267 shares, accounting for 28.43% of the total shares of the Company

(including 18,893,448 B-shair, accounting for 6.17% of the Company’s total). The Proposal

on the Amendment of the Company’s Regulations by Livzon Pharmaceutical Group Inc.

was adopted at the conference by a vote in written form. And the resolution was published

on July 16, 2001 in Stocks Times, Shanghai Securities Paper and Wen Wai Po (Hong Kong).

Chapter 8 Report of the Board of Directors

I. The operation of the Company1. Main scope of business and the business state:

a. The Company is chiefly engaged in the production, marketing and research of

pharmaceutical products, the main products being Lizhu dele, Lizhu changle, Lizhu

Huisanlian, Lizhuwei, Lizhufeng, etc. The Company produces about 100 varieties of

medicines and drugs, including chemical reagents, biochemical medicines,

bioengineering medicines, antibiotic, and prepared Chinese medicine, etc.

b. The Company’s business income for 2001 was 1,395,792 thousand yuan, an increase of

11

18.43% over the previous year, with a net profit at 50,392 thousand yuan, an increase of

385.67% over the previous year. In view of the increasingly fierce competition in China’s

domestic medical market, the big increase in the Company’s revenue is an important

outcome of the Company’s reform in marketing as well as the great efforts of all the staff

and workers of the Company.

In 2001 the Company proceeded with its all-out reform in marketing. On the basis of the

previous two marketing systems (System I and System II), the marketing system was

further integrated, to achieve a combination of the market, business and finance in the

marketing system of new drugs and common drugs, so that the resources were shared,

the cost lowered, and the operational efficiency of the whole marketing system greatly

enhanced. At the end of the year the Company put forward a new thinking—a new

concept in the establishment of the circulation of Livzon drugs. The new circulation

concept embodies a totally new ideal – to provide services to all the forces competing in

the market. Its purpose is to combine all the forces in the research, production and

marketing and, through reasonable distribution of interests, make fullest use of the

resources that have been previously widely dispersed, so as to develop together and to

enhance the capability to meet any emergencies. This new circulation concept is now

only in the initial stage and the Company will accordingly consolidate and enlarge the

current advantages in resources, in the hope that the enterprise will develop rapidly to

become a leading enterprise in the trade.

In 2001 several factories under the Company passed the GMP attestation by the state,

including the diagnosing reagent production line of the Lizhu Reagent Factory, the

infusion production line of the Limin pharmaceutical Factory and the newly-built

production lines for frozen powder injection, solid preparation and paste of Hubei Keyi

Pharmaceutical Com. Ltd. By the end of 2001, as many as 18 production lines of the

companies either funded wholly or controlled by our Company had passed the GMP

attestation of the state. There are no workshops or production lines of the companies

either funded wholly or controlled by our Company whose GMP attestation time-limit is

overdue and that have not passed the GMP attestation of the state.

c. The composition of main business income and the classified marketing

Unit: (RMB’000)

2001 2000 1999Salesvolme

Percentage(%)

Salesvolme

Percentage

Salesvolme

Percentage

Self-produceddrugs

1,314,209 94.16 1,002,268 85.04 1,024,093 90.32

Anti-infectiousdrugs

534,323 38.28 376,369 31.93 635,271 56.03

Digestant 289,625 20.75 257,477 21.85 135,889 11.99Cardio-cerebrovascular drugs

188,678 13.52 74,395 6.31 104,475 9.21

Others 301,582 21.61 294,027 24.95 148,459 13.09Agent drugs 81,584 5.84 176,285 14.96 109,726 9.68

Total 1,395,792 100% 1,178,553 100% 1,133,820 100%

2. Business state of the main controlled companies of Livzon Group

12

a. Hubei Keyi Pharmaceutical Com. Ltd.: Its registered capital is 22 million yuan (RMB). It

mainly engages in the production of preparation products and compound materials for

drugs, the principal product being Likewei, a drug of which the company is the only

producer in China. Our Company has 46% of the shares of the limited company. Up to

December 31, 2001, the company’s total asset amounted to 110,916 thousand yuan, its

main business income in 2001 was 111,876 thousand yuan, with a net profit of 23,476

thousand yuan.

b. Sichuan Guangda Pharmaceutical Com. Ltd. of Livzon Pharmaceutical Group, Inc: Its

registered capital is 59.89 million yuan (RMB). It mainly engages in the production and

marketing of prepared Chinese medicine and the development of new drugs. Its

principal products include antivirotic granules and nine-flavour beneficial-to-the-brain

granules. Our Company has 52% of the shares of the limited company. Up to December

31, 2001, the company’s total asset amounted to 164,544 thousand yuan; its main

business income in 2001 was 100,476 thousand yuan, with a net profit of 8,861

thousand yuan.

c. Shanghai Livzon Pharmaceutical Com. Ltd.: Its registered capital is 45 million yuan

(RMB). It mainly engages in the production and marketing of preparation products and

biochemical materials for drugs. Its principal products are Yitaimei and keluoqu. Our

Company has 85% of the shares of the limited company. Up to December 31, 2001, the

company’s total asset amounted to 142,079 thousand yuan; its main business income

in 2001 was 35,781 thousand yuan. Since it was set up not long ago, and the

investment in the early stage was great, it has a deficit of 2,111 thousand yuan.

d. Hubei Liyi Pharmaceutical Technological Co. Ltd.: Its registered capital is 10 million yuan

(RMB). It mainly engages in research and development as well as technological

consultation. Our Company has 50% of the shares of the limited company. Up to

December 31, 2001, the company’s total asset amounted to 31.626 thousand yuan; its


thousand yuan.

e. Livzon Group Libao biochemical pharmaceutical Co.,Ltd.: Its registered capital is 50

million yuan (RMB). It mainly engages in manufacturing biochemical medicine such as

“Lizhu Saile”. Our Company has 76.99% of the shares of the limited company. Up to

December 31, 2001, the company’s total asset amounted to 64,284 thousand yuan; its


thousand yuan

3. Customers and Suppliers

The sales volume to the five biggest customers this year amounts to 204,869 thousand

yuan, accounting for 14.68% of the total sales volume of the company; and the amount of

purchase from the five biggest suppliers reaches 114,070 thousand yuan, accounting for

30.47% of the total purchase of the company.

4. Business difficulties and their solutions

13

In 2001 the state government made further adjustment of the pharmaceutical market; in

various places the purchase of drugs was made though public bidding; the prices of drugs

were lowered as prescribed by the state Planning Commission—all this had some impact

on the company’s profit. In 2001, in conforming to the reforms in medical system carried

out by the state, the Company began to develop the ERP system in marketing, by which to

do instant management, process management and links management, so as to optimize

the resources inside and outside the Company to achieve high efficiency and to gain the

upper hand in the competition.

II.Investment during the period of report1. Use of the fund raised:

During the period of report, the Company did not raise fund though thestock market.

2. Investments:

a.On March 31, 2001, our Company signed an agreement of transferring shareholder’s right

with Chendu Yaoyou Scientific and Technological Development Com. Ltd. and bought

from it 20% of the shareholder’s right of the Livzon Fine Scientific and Technological

Investment Com. Ltd., with a transferring price of 2.3 million yuan. After the agreement

goes into effect, our Company will own 80% of the shareholder’s right of the Livzon

Fine Scientific and Technological Investment Com. Ltd. The company mainly engages

in the research and development of the drugs and medical technology, scientific and

technological consultation and investment in projects.

b. On June 7, 2001, our Company and Antao Development Com. Ltd. (wholly funded by our

Company) signed an agreement of transferring shareholder’s right with Xinli

Pharmaceutical Import and Export Com. Ltd. and bought respectively from it 28% and

13%of the shareholder’s right of the Likang Pharmaceutical Com. Ltd. of Zhuhai

Special Economic Zone, with a transferring price of 18.676 million yuan and 8.671

million yuan respectively. On June 15, 2001, our Company signed an agreement of

transferring shareholder’s right with China Pharmaceutical (Group) Shanghai

Company, and bought from it 6% of the shareholder’s right of the Likang

Pharmaceutical Com. Ltd. of Zhuhai Special Economic Zone, with a transferring price

of 4.002 million yuan. After the agreement goes into effect, our Company and Antao

Development Com. Ltd. (wholly funded by our Company) will own 59% and 13% of the

shareholder’s right of Likang Pharmaceutical Com. Ltd. of Zhuhai Special Economic

Zone. The company mainly engages in the production and marketing of cephalosporin

powder injection.

c. On June 1, 2001, our Company made an investment of 1.0254 million yuan (in cash) in

Chendu Kailekai Industrial Com. Ltd. which was jointly funded by Chendu Organic

Chemistry Institute of the Academy of Sciences of China, Technological Development

General Corporation of Chendu Organic Chemistry Institute of the Academy of

Sciences of China, and Miaiqiao, with a registered capital of 600000 yuan, later

increased to 1.23 million yuan when its name was changed to Chendu Likai Dry

14

Technological Com. Ltd. Our Company owns 40% of the shareholder’s right of the

company. It mainly engages in the research and manufacturing of dry drugs.

d. In May 2001, our Company and Guangzhou Chinese Medicine University jointly funded

and set up Zhuhai Modern Chinese Medicine High-tech Com. Ltd. The company has a

registered capital of 6 million yuan, of which 4.5 million was provided by our Company.

Our Company owns 75% of the shareholder’s right. It mainly engages in the research

and development of the Chinese medicine and Chinese medicine engineering

technology and equipment, as well as in technical services and consultation.

e. On October 18, 2001, our Company signed an agreement on the establishment of Zhuhai

Li’ao Microecological Products Com. Ltd. with a registered capital of 1 million yuan, of

which our Company provided 900000 yuan and owns 90% of the shareholder’s right

The company mainly engages in the research and development of the new projects,

new products and new technology as well as the transfer of results in the

microecological field.

f. Adopted by the 9th meeting of the Third Board of Directors, our Company made an

investment of 3,703,700 yuan in the stocks of Beijing Xin hao Modern Pharmaceutical

Development Com. Ltd., and owns 10% of the company’s shares. The original

registered capital of the company was 20 million yuan (RMB). It mainly engages in the

research and development of pharmaceutical products and chemical intermediate, as

well as technical consultation and technical transfer. The registration of changes with

the industrial and commercial administration is under way.

III. An analysis of financial stateFor the year the main business income will be 1,395,792 thousand yuan, an increase of

217,239 thousand yuan (18.43%) from the previous year’s 1,178,553 thousand yuan. That’s

because Lizhudele instant herbal mixture, Lizhudele capsules, Lizhu changle, and Lizhu

Huisanlian, etc. sold well, because the sales of materials for drugs of the compound

factories increased, and also because the likewei, a product of Hubei Keyi Pharmaceutical

Com. Ltd., .saw a big increase in its sales volume. For the year the main business profit will

be 651,215 thousand yuan, an increase of 108,743 thousand yuan (20.05 %) from the

previous year’s 542,473 thousand yuan. That’s because the main business income and

hence the gross profit increased. For the year the net profit is 50,392 thousand yuan, an

increase of 40,040 thousand yuan (386.77%) from the previous year’s 10,352 thousand

yuan.; that’s mainly because of the increase in sales and gross profit and also because of

the lowering of cost and the increase of profits in other businesses.

The total assets at the end of the year were 1,676,191 thousand yuan, an increase of

127,909 thousand yuan (8.26%) from the previous year’s 1,548,283 thousand yuan. The

reasons for the increase are: More loans were paid back to us by our debtors and we could

borrow more money from the banks at the end of the year. Our total debt at the end of the

year was 639,371 thousand yuan, of which 550 thousand yuan was long-term debt ,49,970

thousand yuan less than that at the beginning of the year’s 50,520 thousand yuan. The

reason for its decrease is that the long-term debts which were due within one year were

transferred to the floating debts. The rights and interests of the shareholders were 918,972

15

thousand yuan, an increase of 42,445 thousand yuan (4.84%) from the previous year’s

876,527 thousand yuan. That’s because the profits that had not been allocated and the

surplus accumulation fund had increased.

IV. Business plan for the new year

In 2002 the Company will continue to increase its superiority in the digestive , anti-

infectious and cardio-cerebro vascular fields, and, centering around the strategic

objective of “becoming large and powerful”, will renew the business concept,

management concept and system concept, strengthen the core competitive power .

1. Vigorously promote overall budget and the regulation of the process to avoid business

risks

Further tighten the planning management and process regulation of the Company’s

operation and vigorously promote the implementation of the overall financial budgetary

system, strengthen the control of financial affairs, strictly control various budgetary

items, supervise and monitor every link in the process of operation and every factor that

will affect the realization of the business target, and improve the checking system within

the Company to prevent business risks.

2. Strive to bring the core business into full play and become big and powerful in the main

business

Stress the core resources of the main business and exercise direct management of the

market, research and flow of materials in the digestive, anti-infectious and cardio-

cerebro vascular fields in the form of business management, and consolidate and

enlarge the share of the market in those fields. As to other advantageous resources, the

Company will gradually combine them into several groupings, such as biochemical,

prepared Chinese medicine, antiviral, compound drugs, ferment and biotechnology and

exercise management of them in the form of strategic control management, so as to

make each grouping a market mainstay and profit center. In the meanwhile, in 2002 the

Company will gradually implement the new concept of medical circulation, accelerate

the ideological reform in the medical circulation field, and adopt the business concept

of rendering services to the people in competition, to carry out the great changes in the

marketing system, and to accelerate the process of the Group in realizing its objective

of being big and powerful.

The Livzon chain drugstores which the Company had intended to expand will maintain

their present scope and will not for the moment be expanded.

3. Strengthen research and development and accelerate the market orientation of the new

products

Adhere to the market orientation of the research work, and, centering aroundthe main business of the Company, improve the exchange andcommunication among various links of research, marketing and production,accelerate the transfer of research results into productivity, and promote theresearch and development of the new products that are highly technological

16

and of which our Company has property right. At the same time the companywill pay more attention to scientific and technological innovation and to theestablishment of a scientific base, so as to enable the Company to havemore stamina in its development.

4. Recreate corporate culture to bring about the realization of the new strategy

Corporate culture is a great cohesive force for the Company, and at a time when the

Company is starting an undertaking for the second time, it is of vital importance to

recreate corporate culture. In 2002 the Company will strengthen the building of

corporate culture, arouse the enthusiasm and sense of responsibility of the staff and

workers in their participation in the renewed undertaking of the Company, to create a

good environment for competition and development. In the meanwhile promote the

implementation of the Company’s new strategy by the recreation of the corporate

culture, strengthen the integration of the Company’s resources, make clear as soon as

possible the organizational framework and the position of each grouping, strive to do

some things by leaving other things undone, so as to make new breakthrough for the

Company in the near future.

V. Routine work of the Board of DirectorsDuring the period of the report, we held three meetings (the 7th, 8th, and 9th) of the Third

Board of Directors.

On February 9, 2001, the 7th meeting of the Third Board of Directors was held at the

conference room on the third floor of the Company’s office building. The meeting adopted

Explanations on Making Joint Investment to Set up Hubei Liyi Pharmaceutical

Technological Com. Ltd., Proposal on the Transfer of Shareholder’s Right of Liyi Company

and Turning it into a Limited Company, Proposal on the Cooperation of Property Right with

Chendu Organic Chemistry Institute, Proposal on the Implementation of the the Regulation

and Reform Plan of the Group (draft), and Proposal on Authorizing the Right of Approving

Investment Projects to the Top Managerial Level of the Group.

On April 24, 2001, the 8th meeting of the Third Board of Directors was held at the


Annual Report for 2000 of Livzon Group, President’s Annual Report for 2000 of Livzon

Group, Annual Report of the Board for 2000 of Livzon Group, Proposal on the Amendment

of the Company’s Regulations by Livzon Pharmaceutical Group Inc., Proposal on the

Adjustment of the Organizational Framework and Senior Managerial Personnel of Livzon

Group, Report on the Execution of the Finance for 2000 of Livzon Pharmaceutical Group

Inc., Allocation Plan of the Profits for 2000 of Livzon Pharmaceutical Group Inc.,

Allocation Policy of the Profits for 2001 of Livzon Pharmaceutical Group Inc., Proposal on

the Purchase of the Shareholder’s Right of the Likang Pharmaceutical Com. Ltd., Proposal

on the Authorization of Raising Fund, Proposal on Authorizing the Management of the

Company to Select Accounting Firms outside China, Proposal on Straightening out the

Property Right of the Twelve Second-class Enterprises of the Group Including Livzon

Pharmaceutical Factory, and Proposal on the Convening of the Thirteenth Shareholders’

17

Conference.

On August 17, 2001, the 9th meeting of the Third Board of Directors was held at the


Mid-term Report for 2001 of Livzon Group, Proposal on Not Making Mid-term allocation of

Profits and Transfer of Accumulation Fund to Capital Stock, Report on the Execution of the

Finance for the First Half of 2000 of Livzon Pharmaceutical Group Inc., Proposal on the

Amendment of the Internal Control System of the Devaluation of the Various Assets of the

Livzon Group, Being Prepared to Withdraw and Losses Management, and Proposal on the

Engagement of Accountant’s Office outside China by Livzon Group.

VI. Profit Allocation PlanAccording to the principle of allocating the lowest distributable profits to the

shareholders, and on the basis of 10,851,000 yuan as the distributable profits to the

shareholders according to the foreign accounting (the merged reported figure), 0.3 yuan in

cash will be distributed to every ten shares, but there will be no dividends on shares, nor is

there an increase of capital stock from the accumulation fund.

Chapter 9 Report of the Supervisory Committee

I. The work of the Supervisory Committee

On April 24, 2001, the 4th meeting of the Third Supervisory Committee was held at the


Work Report of the Supervisory Committee for 2000 of Livzon Pharmaceutical Group Inc.,

Proposal on the Amendment of the Regulations of Supervisory Committee.

II. Independent opinions of the Supervisory Committee1. The Company operates in accordance with the law

The Supervisory Committee conscientiously performed its duties as prescribed by

Corporate Law and Corporate Regulations, and exercised its rights as the Supervisory

Committee, examine and check the operation of the Company in the light of law. After

examination and check, it found that the Board of Directors has carried the resolutions

adopted by the shareholders conference to the letter, its decision-making procedure

conforms to the stipulations of the Corporate Regulations, and also it has established

the Internal Control System of the Devaluation of the Various Assets of the Livzon

Group, Being Prepared to Withdraw and Losses Management. When carrying out their

duties, the Directors and senior managerial personnel have not violated the law, rules

and regulations, nor have they jeopardized the interests of the shareholders and the

Company.

2. Lianda Xinlong Accountant Office Com. Ltd. and Ho and Ho & Company respectively

audited the financial statement for 2001 of the Company according to the domestic

and international accounting norms and presented auditing reports in which they

18

stated they had no reservations. The Supervisory Committee holds that the

auditing reports reflect the actual financial state of the Company and its production

and business results.

3. The changing procedure of the actual invested project for the funds which the

Company raised last time is in conformity with the regulations of the Shenzhen

Stock Exchange and the CSRC.

4. The trading prices for the purchase and selling of assets by the Company are

reasonable. There is no behind-the-scenes deal, no conduct that damages the right

and interests of some of the shareholders, and that causes the loss of the

Company’s assets.

5. The related deals the Company made are in conformity with the market economic

principle: fair deal, and reasonable price. There is no infringement on the interests

of the Company and shareholders.

Chapter 10 Important MattersI. This year no major lawsuits or arbitration happened to the Company.

II. Other important matters:

1. Shanghai Livzon Pharmaceutical Com. Ltd. (Shanghai Livzon for short) and Shanghai

Livzon Dongfeng Biotechnology Com. Ltd. (Shanghai Livzon Dongfeng for short),

both affiliated to the Company, are planning to reorganize their assets. The matter

was examined and agreed to by the Company’s Board of Directors. Shanghai Livzon

is to absorb and annex Shanghai Livzon Dongfeng with its own registered capital as

the basis. Upon completion of the reorganization of assets, the registered capital of

Shanghai Livzon will be increased from 45 million yuan to 57.6711 million yuan, the

shareholders being Livzon Pharmaceutical Com. Ltd., Shanghai Jinqiao Company,

and Shanghai Shenglongda Company, respectively with 80.09%, 11.7% and 8.21% of

the shareholder’s rights. The reorganization of the assets is still under way.

2. The Company plans to buy 5% right of the Hubei Keyi Pharmaceutical Com. Ltd., of which

our Company is the holding company, from Shenzhen Guangzhu Investment Com.

Ltd., thus enabling our Company to become holding 51% shareholder’s right of Hubei

Keyi Pharmaceutical Com. having, a 5% increase from 46%.

3. The Company decided to reorganize the shareholder’s rights of Hubei Keyi

Pharmaceutical Com. Ltd. (Keyi Company for short) and Hubei Liyi Pharmaceutical

Technological Com. Ltd. (Liyi Company for short), so as to guarantee a steady

development of the two companies and to establish a link between research and

production. The Company and Hubei Pharmaceutical Industrial Research Institute

decided to increase investments in their shares of Liyi Company (each having 25.5%).

After that Liyi Company will hold 51% of the shares of Keyi Company, making it the

19

holding company of Keyi Company. Our Company will increase our investment in the

shares of Liyi Company once more, and our Company will hold 59% of the

stockholder’s right of Liyi Company and Hubei Pharmaceutical Industrial Research

Institute will hold 41% of its stockholder’s right. Liyi Company will gradually become a

scientific and technological center of the Livzon Group.

4. The Board meeting of the Livzon (Hong Kong) Company, Ltd., a subcompany wholly

funded by our Group, passed the following resolution: Livzon (Hong Kong) Company

is to transfer the 45% stockholder’s right of Geneharbor Technologies Inc. which it

owns directly or indirectly to Being Base Investments Limited at a price of 2.5 million

HK dollars

III. Connective deals1. Purchasing of commodities

Name of the related party 2001 2000

Suzhou Xinbao Pharmaceutical Factory 6,426,622.83 6,034,352.56

Changzhou Kangli Pharmaceutical

Com. Ltd. of Livzon Group 16,279,107.60 17,259,360.68

For the purchases of pharmaceutical products from the associated suppliers, the accountsof the purchase prices are settled in accordance with the market prices for the similarproducts.

(2) Balance of receivables of the associated suppliers 2001/12/31 2000/12/31Zhuhai Livzon Medical-Purpose Electronic Equipment Co. Ltd 4,739,344.31 4,388,823.36

(3) Balance of payables of the associated suppliers 2001/12/31 2000/12/31Suzhou Xinbao Pharmaceutical Factory 2,631,969.344,284,173.50Livzon Group Inc. Changzhou Kangli Pharmaceutical Co. Ltd — — 4,406,786.33

(4) During the time period covered by the report, Livzon Group Inc. did not enter anyassociated transactions related with the transfers of assets or equities.

IV. Surety Terms1. Shanghai Livzon Pharmaceutical Co. Ltd, a shareholding subsidiary company under this

Inc., signed a loan contract with a borrowing value of RMB 49.97 million from ShanghaiBank in the year of 1998. This Inc. provided the guarantee of joint liabilities for this loan,which will be mature by the year of 2002.

2. Shanghai Livzon Pharmaceutical Co. Ltd, a shareholding subsidiary company under thisInc., signed a loan contract of flowing capital with a borrowing value of RMB 15 millionfrom Shanghai Pudong Development Bank on December 8 of 2001. This Inc. providedthe surety for this loan.

3. By the date of December 31 of 2001, the total value of loans that this Inc. has borrowed

20

RMB 20 million from China Agricultural Bank Zhuhai Branch 2nd Business Office. LivzonSynthetic Pharmaceutical Factory, provides surety for all the loans.

4. This Inc. made a borrowing of RMB 10 million from Construction Bank Zhuhai GongbeiBranch in January of 2001. Livzon Synthetic Pharmaceutical Factory, provides suretyfor the loan.

5. This Inc. made a borrowing of RMB 30 million from Shenzhen Merchants Bank inNovember of 2001. Livzon Synthetic Pharmaceutical Factory, provides surety for theloan.

6. Livzon Synthetic Pharmaceutical Factory, made a borrowing of RMB 25 million fromChina Agricultural Bank Zhuhai Branch in November of 2001. This Inc. provided suretyfor the loan.

V. By the date of the presentation of this report, there has been no significant issue of

commitments for this Inc. to release.

VI. Information concerning the appointment of overseas certified public accountants firmsWith the authorization by the shareholders meeting, the 9th conference of the 3rd session ofboard of directors passed the resolution of the Motion Concerning the Appointment ofOverseas Certified Public Accountants Firms by Livzon Inc., appointing Lianda XinlongCertified Public Accountants Limited Liability Co. and Hongkong He Xilin Certified PublicAccountants to be the accountants firms for this Inc. to undertake related issues at homeand aboard in the year of 2001. The validity term for the appointment was one year. Theremunerations paid to the domestic accountants firm in the fiscal year covered by thisreport were RMB 330 thousand yuan , and the remunerations paid to the overseasaccountants firm were RMB 400 thousand yuan

VII. Miscellaneous China Everbright (Group) General Corp., the biggest shareholder of this Inc. proposedto transfer its stock rights that it holds in this Inc. The Board of Directors of this Inc. hasmade public announcements concerning this issue in Stocks Times, ShanghaiSecurities Paper and Wen Wai Po (Hong Kong) on the respective dates of January 4 of2001, March 14 of 2001 and January 16 of 2002.

Section 11 Financial Report(attached)

Section 12 Contents of Reference Documents

I. Contents of reference documents:1. Original copy of the auditing report that was signed by and stamped with the seals of

the legal representative, the responsible person in charge of accounting, and thechief director of accounting;

2. Original copy of the auditing report that was stamped with the seals of the certifiedpublic accountants firms and signed by the certified public accountants;

3. Original scripts of all the documents and announcements of this Inc. publiclyreleased in the newspapers designated by China Securities SupervisionCommission during the time period covered by the report.

21

LIVZON PHARMACEUTICAL GROUP

INC.

Chairman: Yi Zhenqiu

22

LIVZON PHARMACEUTICAL GROUP INC.麗珠醫藥集團股份有限公司

REPORT AND CONSOLIDATED FINANCIAL STATEMENTS

YEAR ENDED 31ST DECEMBER 2001

CONTENTSPAGES

Report of the auditors 1

Consolidated income statement 2

Consolidated balance sheet 3

Consolidated statement of changes in equity 4

Consolidated cash flow statement 5

Notes to the consolidated financial statements 6 – 38

1

REPORT OF THE AUDITORS

To the shareholders of B shares ofLivzon Pharmaceutical Group Inc.麗珠醫藥集團股份有限公司(incorporated in the People’s Republic of China

with limited liability)

We have audited the accompanying consolidated balance sheet of Livzon Pharmaceutical Group Inc., (“theGroup”) as of 31st December 2001 and the related consolidated statements of income, cash flows and changesin equity for the year then ended. These financial statements are the responsibility of the Group’smanagement. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with International Standards on Auditing. Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by the management, as well as evaluating the overall financial statementspresentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements presents fairly, in all material aspects, the financial position of theGroup as of 31st December 2001 and the results of its operations and its cash flows for the year then ended, inaccordance with International Accounting Standards.

Ho and Ho & CompanyCertified Public Accountants

Hong Kong16th April 2002

2


CONSOLIDATED INCOME STATEMENT

FOR THE YEAR ENDED 31ST DECEMBER 2001

NOTES 2001 2000RMB’000 RMB’000

(Restated)

Revenue (5) 1,395,792 1,154,706Cost of sales (744,597) (638,051)

Gross profit 651,195 516,655Other operating income 22,817 8,225Distribution costs (374,511) (306,156)Administrative expenses (161,480) (203,906)Other operating expenses (11,515) (4,006)

Profit from operations (7) 126,506 10,812Finance costs (8) (14,112) (13,114)(Loss)/income from investments (9) (1,021) 5,085Share of results of associates (841) 542

Profit before tax 110,532 3,325Income tax expense (10) (27,175) (9,352)

Profit/(loss) after tax 83,357 (6,027)Minority interest (24,308) (16,083)

Net profit/(loss) for the year 59,049 (22,110)

Dividend (11) 9,181 -

Earnings/(loss) per share – basic (12) RMB0.19 (RMB0.07)

3


CONSOLIDATED BALANCE SHEET AT31ST DECEMBER 2001NOTES 2001 2000

RMB’000 RMB’000(Restated)

Assets

Non-current assetsProperty, plant and equipment (13) 590,481 565,938Construction in progress (14) 76,372 46,660Goodwill (15) 12,493 7,190Negative goodwill (16) (6,338) (9,480)Intangible assets (17) 20,458 36,234Investments in a subsidiary not consolidated - 810Investments in associates (19) 9,153 38,806Other investments (20) 33,976 36,040

736,595 722,198

Current assetsInventories (21) 197,571 205,400Trade and other receivables (22) 458,560 463,870Amounts due from associates 233 4,388Other investments (20) 15,955 10,700Bank balances and cash (22) 232,803 109,720

905,122 794,078

Total assets 1,641,717 1,516,276

Equity and liabilities

Capital and reservesShare capital (23) 306,035 306,035Reserves (24) 603,636 544,587

909,671 850,622

Minority interest 117,836 90,424

1,027,507 941,046

Non-current liabilitiesBank loans – due after one year (25) 550 50,520

Current liabilitiesTrade and other payables (27) 286,033 339,893Amounts due to associates 81 4,698Tax liabilities 25,926 6,629Bank loans – due within one year (25) 301,620 173,490

613,660 524,710

4

Total equity and liabilities 1,641,717 1,516,276

The financial statements on pages 2 to 38 were approved by the Board of Directors and authorized for issueon 16th April 2002 and are signed on its behalf by :

Director Director

5


CONSOLIDATED STATEMENT OF CHANGES IN EQUITY


Share capitalShare

premium

Statutorysurplusreserve

Discretionarysurplusreserve

Propertiesrevaluation

reserve

Publicwelfare

fundAccumulated

profits/(losses) TotalRMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000

Balance at 1st January 2000 306,035 417,689 23,586 76,685 9,609 28,023 11,105 872,732Proposed transfer to statutory surplus reserve

and public welfare fund from accumulatedprofits - - 1,037 - - 1,037 (2,074) -

Profit/(loss) for the year - As previously stated - - - - - - 14,931 14,931

- Prior year adjustment (note 28) - - - - - - (37,041) (37,041)- As restated - - - - - - (22,110) (22,110)

Balance at 1st January 2001 (As restated) 306,035 417,689 24,623 76,685 9,609 29,060 (13,079) 850,622Profit for the year - - - - - - 59,049 59,049Transfer to statutory surplus reserve and

public welfare fund from accumulatedprofits

- Proposed transfer for the year - - 10,584 - - 10,193 (20,777) - - Understatement of transfer for prior year - - 10,269 - - 4,073 (14,342) -

- - 20,853 - - 14,266 (35,119) -

Balance at 31st December 2001 306,035 417,689 45,476 76,685 9,609 43,326 10,851 909,671

6


CONSOLIDATED CASH FLOW STATEMENT


NOTES 2001 2000

RMB’000 RMB’000

(Restated)

Operating activities

Cash generated from operations (29) 189,938 86,618

Income taxes paid (7,878) (8,981)

Interest paid (15,992) (14,744)

Net cash inflow from operating activities 166,068 62,893

Investing activities

Interest received 9,546 6,080

Disposal of subsidiary - 8,687

Proceeds on disposal of property, plant and equipment 2,565 49

Acquisition of subsidiaries (30) 870 1,875

Dividends received from an associate 966 -

Dividends received from other investments 388 -

Proceeds on disposal of a subsidiary not consolidated 2,661 -

Proceeds on disposal of long-term other investments 173 -

Proceeds on disposal of short-term other investments 14,378 -

Purchases of property, plant and equipment and construction in

progress (90,199) (66,143)

Purchases of intangible assets (13,442) (44,862)

Acquisition of a subsidiary not consolidated - (810)

Acquisition of investment in associates (1,026) (19,694)

Purchases of current investments (21,234) (10,700)

Purchases of non-current investments (1,960) (8,970)

Further acquisition of investments in a subsidiary not consolidated (1,326) -

Further acquisition of investments in a subsidiary (9,205) -

Decrease/(increase) in fixed deposits – mature over 3 months 11,000 (11,000)

Net cash used in investing activities (95,845) (145,488)

Financing activities

Capital injection from minority shareholders 1,600 -

Dividend paid to minority shareholders (15,900) (1,656)

New bank loans raised 327,550 199,040

Repayments of bank loans (249,390) (168,595)

Net cash from financing activities 63,860 28,789

Net increase/(decrease) in cash and cash equivalents 134,083 (53,806)

Cash and cash equivalents at the beginning of year 98,720 152,526

7

Cash and cash equivalents at end of year

Bank balances and cash 232,803 98,720

8


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


1. CORPORATE INFORMATION

Livzon Pharmaceutical Group Inc. (the “Company”) is a joint stock company registered in thePeople’s Republic of China (the “PRC”) and its A shares and B shares are listed on the ShenzhenStock Exchange. The Company and its subsidiaries (together referred to as the “Group”) areprincipally engaged in the production and sales of medical products and the trading of importedmedical products in the PRC.

The largest shareholder of the Company is China Everbright Group Limited, a limited companyincorporated in Beijing, PRC.

2. PRESENTATION OF FINANCIAL STATEMENTS

The consolidated financial statements have been prepared in Renminbi (“RMB”), the currencyin which the majority of the Group’s transactions are denominated.

The Group maintains its accounting records and prepares its statutory financial statements inaccordance with the accounting principles and the relevant financial regulations applicable to foreigninvestment enterprises in the PRC.

The consolidated financial statements have been prepared in accordance with InternationalAccounting Standards (”IAS”). The accounting policies and basis adopted to the preparation of thestatutory financial statements differ in certain respects from IAS. The differences arising from therestatement of the results of operations and the net assets for compliance with IAS are adjusted infinancial statements but will not be taken up in the accounting records of the Group.

3. ADOPTION OF INTERNATIONAL ACCOUNTING STANDARDS

In the current year, the Group has adopted the following IAS for the first time :

IAS 39 Financial Instruments : Recognition and Measurement

IAS 40 Investment Property

Revisions to a number of other IAS also took effect in 2001. Those revisions concernedmatters of detailed application which have no significant effect on amounts reported for the current orprior accounting periods.

9




4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The financial statements have been prepared on the historical basis, except for therevaluation of land and building and certain financial instruments. The principalaccounting policies adopted are set out below :

(a) Basis of consolidation

The consolidated financial statements incorporate the financial statements ofthe Company and enterprises controlled by the Company (“its subsidiaries”) madeup to 31st December each year. Control is achieved where the Company has thepower to govern its financial and operating policies of an investee enterprise so asto obtain benefits from its activities.

On acquisition, the assets and liabilities of the relevant subsidiaries aremeasured at their fair values at the date of acquisition. The interest of minorityshareholders is stated at the minority’s proportion of the fair values of the assets andliabilities recognised.

The results of subsidiaries acquired or disposed of during the year are includedin the consolidated income statement from the effective date of acquisition or up tothe effective date of disposal, as appropriate.

Where necessary, adjustments are made to the financial statements ofsubsidiaries to bring the accounting policies used into line with those used by othermembers of the Group.

All significant intercompany transactions and balances between groupenterprises are eliminated on consolidation.

10




4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

(b) Interests in associates

An associate is an enterprise over which the Group is in a position to exercise significantinfluence, through participation in financial and operating policy decisions of the investee.

The results and assets and liabilities of associates are incorporated in these financialstatements using the equity method of accounting. The carrying amount of such interest isreduced to recognise any decline, other than a temporary decline, in the value of individualinvestments.

Where a group enterprise transacts with an associate of the Group, unrealised profits andlosses are eliminated to the extent of the Group’s interest in the relevant associate, except whereunrealised losses provide evidence of an impairment of the asset transferred.

(c) Goodwill

Goodwill arising on consolidation represents the excess of the cost of acquisition over theGroup’s interest in the fair value of the identifiable assets and liabilities of a subsidiary orassociate at the date of acquisition. Goodwill is recognised as an asset and amortised on astraight-line basis following an assessment of its useful life.

Goodwill arising on the acquisition of subsidiaries and associates is presented separatelyin the balance sheet.

On disposal of a subsidiary or an associate, the attributable amount of unamortisedgoodwill or negative goodwill is included in the determination of the profit or loss on disposalof the subsidiary.

11





(d) Negative goodwill

Negative goodwill represents the excess of the Group’s interest in the fair value of theidentifiable assets and liabilities of a subsidiary or associate at the date of acquisition over thecost of acquisition. Negative goodwill is released to income based on an analysis of thecircumstances from which the balance resulted. To the extent that the negative goodwill isattributable to losses or expenses anticipated at the date of acquisition, it is released to incomein the period in which those losses or expenses arise. The remaining negative goodwill isrecognised as income on a straight-line basis over the remaining average useful life of theidentifiable acquired depreciable assets. To the extent that such negative goodwill exceeds theaggregate fair value of the acquired identifiable non-monetary assets, it is recognised in incomeimmediately.

Negative goodwill arising on the acquisition of subsidiaries or associates is presentedseparately in the balance sheet as a deduction from assets.

(e) Revenue recognition

Sale of goods is recognised when goods are delivered and title has passed.

Interest income is accrued on a time basis, by reference to the principal outstanding andat the interest rate applicable.

(f) Foreign currencies

Transactions in currencies other than RMB are initially recorded at the rates of exchangeprevailing on the dates of the transactions. Monetary assets and liabilities denominated in suchcurrencies are re-translated at the rates prevailing on the balance sheet date. Profits and lossesarising on exchange are included in net profit or loss for the period.

On consolidation, the assets and liabilities of the Group’s overseas operations aretranslated at exchange rates prevailing on the balance sheet date. Income and expense itemsare translated at the average exchange rates for the period. Exchange differences arising, ifany, are classified as equity and transferred to the Group’s translation reserve. Such translationdifferences are recognised as income or as expenses in the period in which the operation isdisposed of.

12





The financial statements of foreign subsidiaries and associates that report in the currencyof a hyperinflationary economy are restated in terms of the measuring unit currency at thebalance sheet date before they are translated into RMB.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity aretreated as assets and liabilities of the foreign entity and translated at the closing rate.

(g) Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production ofqualifying assets, which are assets that necessarily take a substantial period of time to get readyfor their intended use or sale, are added to the cost of those assets, until such time as the assetsare substantially ready for their intended use or sale. Investment income earned on thetemporary investment of specific borrowings pending their expenditure on qualifying asset isdeducted from borrowing costs capitalised.

All other borrowing costs are expensed in the period in which they are incurred.

(h) Taxation

The charge for current tax is based on the results for the year as adjusted for items whichare non-assessable or disallowed. It is calculated using tax rates that have been enacted orsubstantively enacted by the balance sheet date.

Deferred tax is accounted for using the liability method in respect of timing differencesarising from differences between the carrying amount of assets and liabilities in the financialstatements and the corresponding tax basis used in the computation of taxable profit. Inprinciple, deferred tax liabilities are recognised for all taxable temporary differences anddeferred tax assets are recognised to the extent that it is probable that taxable profit will beavailable against which deductible temporary differences can be utilised. Such assets andliabilities are not recognised if the temporary difference arises from goodwill (or negativegoodwill) or from the initial recognition (other than in a business combination) of other assetsand liabilities in a transaction which affects neither the taxable profit nor the accounting profit.

13





Deferred tax liabilities are recognised for taxable temporary differences arising oninvestments in subsidiaries and associates except where the Group is able to control the reversalof the temporary difference and it is probable that the temporary difference will not reverse inthe foreseeable future.

Deferred tax is calculated at the tax rates that are expected to apply to the period when theasset is realised or the liability is settled. Deferred tax is charged or credited in the incomestatement, except when it relates to items credited or charged directly to equity, in which casethe deferred tax is also dealt with in equity.

Deferred tax assets and liabilities are offset when they relate to income taxes levied by thesame taxation authority and the Group intends to settle its current tax assets and liabilities on anet basis.

(i) Property, plant and equipment

Land and buildings held for use in the production or supply of goods or services, or foradministrative purpose, are stated in the balance sheet at their revalued amounts, being the fairvalue on the basis of their existing use at the date of revaluation, less any subsequentaccumulated depreciation. Revaluations are performed with sufficient regularity such that thecarrying amount does not differ materially for that which would be determined using fair valuesat the balance sheet date.

Any revaluation increase arising on the revaluation of such land and buildings is creditedto the properties revaluation reserve, except to the extent that it reverses a revaluation decreasefor the same asset previously recognised as an expense, in which case the increase is credited tothe income statement to the extent of the decrease previously charged. A decrease in carryingamount arising on the revaluation of land and buildings is charged as an expense to the extentthat it exceeds the balance, if any, held in the properties revaluation reserve relating to aprevious revaluation of that asset.

14





Properties in the course of construction for production, rental or administrative purposes,or for purposes not yet determined, are carried at cost, less any identified impairment loss.Cost includes professional fees and, for qualifying assets, borrowing costs capitalised inaccordance with the Group’s accounting policy. Depreciation of these assets, on the samebasis as other property assets, commences when the assets are ready for their intended use.

Fixtures and equipment are stated at cost less accumulated depreciation.

Depreciation is charged so as to write off the cost or valuation of assets, other than landand properties under construction, over their estimated useful lives, using the straight-linemethod, on the following bases :

Land and buildings 5%Machinery 10%Electronic equipment 20%Transport equipment 20%Other equipment 20%

The gain or loss arising from disposal or retirement of an asset is determined asthe difference between the sales proceeds and the carrying amount of the asset and isrecognised in the income statement.

(j) Construction in progress

Construction in progress represents properties under construction andequipment purchased prior to installation and is stated at cost. Cost comprisesdirect costs and, where applicable, finance costs arising from borrowings usedspecifically to finance the construction of the properties and the acquisition of theequipment until the construction and installation, respectively, are complete. Costson completed construction works are transferred to the appropriate asset category.Costs incurred on construction in progress are recognised as an expenseimmediately when the work is terminated.

No depreciation is provided on construction in progress until it is completedand put into commercial operation.

15





(k) Impairment

At each balance sheet date, the Group reviews the carrying amounts of itstangible and intangible assets to determine whether there is any indication that thoseassets have suffered an impairment loss. If any such indication exists, therecoverable amount of the asset is estimated in order to determine the extent of theimpairment loss (if any). Where it is not possible to estimate the recoverableamount of an individual asset, the Group estimates the recoverable amount of thecash-generating unit to which the asset belongs.

If the recoverable amount of an asset (or cash-generating unit) is estimated tobe less than its carrying amount, the carrying amount of the asset (cash-generatingunit) is reduced to its recoverable amount. Impairment losses are recognised as anexpense immediately, unless the relevant asset is land or buildings at a revaluedamount, in which case the impairment loss is treated as a revaluation decrease.

Where an impairment loss subsequently reverses, the carrying amount of theasset (cash-generating unit) is increased to the revised estimate of its recoverableamount, but so that the increased carrying amount does not exceed the carryingamount that would have been determined had no impairment loss been recognisedfor the asset (cash-generating unit) in prior years. A reversal of an impairment lossis recognised as income immediately, unless the relevant asset is carried at arevalued amount, in which case the reversal of the impairment loss is treated as arevaluation increase.

(l) Inventories

Inventories are stated at the lower of cost and net realisable value. Cost comprises directmaterial and, where applicable, direct labour costs and those overheads that have been incurredin bringing the inventories to their present location and condition. Cost is calculated using theweighted average method. Net realisable value is determined by reference to the sale proceedsof items sold in the ordinary course of business subsequent to the balance sheet date orestimated selling prices less estimated costs to completion and costs to be incurred in marketing,selling and distribution.

16





(m) Financial instruments

Financial assets and financial liabilities are recognised on the Group’s balance sheet whenthe Group has become a party to the contractual provisions of the instrument.

(i) Trade receivables

Trade receivables are stated at their nominal value as reduced by appropriateallowances for estimated irrecoverable amounts.

(ii) Investments in securities

Investments in securities are recognised on a trade-date basis and are initiallymeasured at cost.

(iii) Bank borrowings

Interest-bearing bank loans and overdrafts are recorded at the proceeds received, netof direct issue costs. Finance charges, including premiums payable on settlement orredemption, are accounted for on an accrual basis and are added to the carrying amount ofthe instrument to the extent that they are not settled in the period in which they arise.

(iv) Trade payables

Trade payables are stated at their nominal value.

(n) Provisions

Provisions are recognised when the Group has a present obligation as a result of a pastevent which it is probable will result in an outflow of economic benefits that can be reasonablyestimated.

(o) Cash equivalents

Cash equivalents represent short-term, highly liquid investments that arereadily convertible to a known amount of cash and subject to an insignificant risk ofchanges in value.

17




5. REVENUE2001 2000

RMB’000 RMB’000

Sales of medical products 1,395,792 1,154,706

6. BUSINESS AND GEOGRAPHICAL SEGMENTS

As the Group is engaged only in the production and sales of medical products andthe trading of imported medical products in the PRC, no segment information ispresented.

7. PROFIT FROM OPERATIONS

Profit from operations has been arrived at after charging / (crediting) :-

2001 2000RMB’000 RMB’000

(Restated)

Depreciation of property, plant and equipment 54,824 50,148Amortisation of intangible assets 5,548 20,301Amortisation of goodwill 1,444 -Written-off of intangible assets 23,670 25,569(Profit)/loss on disposal of property, plant and

equipment (2,556) 360Revaluation deficit of property, plant and equipment

(note 28) - 37,041Release of negative goodwill to income (1,005) (1,220)Staff costs 71,621 77,731

18




8. FINANCE COSTS2001 2000

RMB’000 RMB’000

Interest on bank loans 14,643 16,765Less : Amounts included in the cost of qualifying assets

(531) (3,651)

14,112 13,114

Borrowing cost included in the cost of qualifying assets during the year arose on the generalborrowing pool and are calculated by applying a capitalization rate of 7% to expenditure on suchassets.

9. (LOSS)/INCOME FROM INVESTMENTS2001 2000

RMB’000 RMB’000

Interests on bank deposits 9,546 6,080Dividends from other investments 388 -Provision for diminution in value of investments in associates

(6,028) -Provision for diminution in value of long-term other

investments (3,924) (5,109)Provision for diminution in value of short-term other

investments (5,279) -Profit on disposal of a subsidiary not consolidated 525 -Profit on disposal of a subsidiary - 8,263Profit/(loss) on disposal of other investments 3,751 (4,149)

(1,021) 5,085

19




10. INCOME TAX EXPENSE2001 2000

RMB’000 RMB’000PRC income tax

- The Company and its subsidiaries 27,175 9,352

PRC income tax is calculated at the rates of 10% to 33% on the estimated assessable profits forthe respective years.

No deferred tax has been provided for in the financial statements as the directors are of theopinion that no such liability is expected to crystallise in the foreseeable future.

There was no material unprovided deferred tax for the year.

11. DIVIDEND

A dividend of RMB0.03 per share, resulting in a total dividend payment of RMB9,181,000, inrespect of the year ended 31st December 2001 is to be proposed at the Company’s forthcomingannual general meeting. The dividends have not been provided for in the financial statements.

12. EARNINGS/(LOSS) PER SHARE

The calculation of earnings per share is based on the Group’s profit attributable to shareholdersof RMB59,049,000 (2000: loss of RMB22,110,000) and 306,035,482 shares (2000: 306,035,482shares) in issue during the year.

2000RMB

Earnings per share as previously reported 0.05Prior year adjustment (note 28) (0.12)Loss per share as restated (0.07)

20




13. PROPERTY, PLANT AND EQUIPMENTLand and buildings Machinery Electronic equipment Transport equipment Other equipment Total

RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000

COST OR VALUATION

At 1st January 2001 (As restated) 499,177 248,748 27,607 24,833 13,579 813,944

Additions 19,430 9,079 3,854 2,226 3,071 37,660

Transfer from construction in progress 14,990 6,574 1,318 314 192 23,388

Acquired on acquisition of subsidiaries 21,301 29,320 592 845 1,471 53,529

Disposals (19,875) (6,627) (1,079) (7,821) (2,371) (37,773)

Reclassification - (7,006) 921 - 6,085 -

At 31st December 2001 535,023 280,088 33,213 20,397 22,027 890,748

Comprising :

At cost 504,337 258,621 33,213 20,397 22,027 838,595

At valuation 2000 30,686 21,467 - - - 52,153

535,023 280,088 33,213 20,397 22,027 890,748

ACCUMULATED DEPRECIATION

At 1st January 2001 112,643 93,491 14,478 19,215 8,179 248,006

Charge for the year 23,312 21,573 4,441 1,790 3,708 54,824

Acquired on acquisition of subsidiaries 5,848 7,331 216 555 855 14,805

Eliminated on disposals (3,903) (4,236) (887) (6,568) (1,774) (17,368)

Reclassification - (1,874) 65 - 1,809 -

At 31st December 2001 137,900 116,285 18,313 14,992 12,777 300,267

CARRYING AMOUNT

At 31st December 2001 397,123 163,803 14,900 5,405 9,250 590,481

At 31st December 2000 386,534 155,257 13,129 5,618 5,400 565,938

21




13. PROPERTY, PLANT AND EQUIPMENT (Continued)

The land and buildings are situated in the PRC.

Certain land and buildings and machinery were revalued by Reanda Xinlong Certified PublicAccountants Company Limited on 31st December 2000 on an open market existing use basis. Therevalued carrying value of these assets was RMB25,949,000 at 31st December 2000. ReandaXinlong Certified Public Accountants Company Limited is the domestic statutory auditors of theGroup. At 31st December 2001, had the land and buildings and machinery for the Group beencarried at historical cost less accumulated depreciation, their carrying values would have beenapproximately RMB34,483,000 (2000: RMB46,605,000) and RMB13,669,000 (2000:RMB16,385,000) respectively.

14. CONSTRUCTION IN PROGRESS

The construction in progress represents properties under construction and equipment purchasedprior to installation. Included in the amount is interest capitalised of approximately RMB764,000(2000: RMB 1,704,000).

2001 2000RMB’000 RMB’000

At 1st January 2001 46,660 141,859Acquisition of subsidiaries 30 -Additions 52,539 59,045Interest capitalized 531 3,651Transfer to property, plant and equipment (23,388) (152,152)Written off - (5,743)

At 31st December 2001 76,372 46,660

22




15. GOODWILL

Fromacquisitions of

subsidiaries

Fromacquisitions of

associates TotalRMB’000 RMB’000 RMB’000

COSTAt 1st January 2001 - 7,690 7,690Arising from further acquisition of

investments in associates (note 15b) 14,149 (7,690) 6,459

Acquisition of an associate - 288 288

At 31st December 2001 14,149 288 14,437

AMORTISATIONAt 1st January 2001 - 500 500Reclassification 500 (500) -Charge for the year 1,415 29 1,444

At 31st December 2001 1,915 29 1,944

CARRYING AMOUNTAt 31st December 2001 12,234 259 12,493

At 31st December 2000 - 7,190 7,190

(a) Goodwill is amortised over its estimated useful life. The estimated foreseeable life of thegoodwill arising on acquisitions is ten years.

(b) The goodwill was arising from further acquisition of investments in associates which becomesubsidiaries of the Group.

23




16. NEGATIVE GOODWILL

Fromacquisitions of

subsidiaries

Fromacquisitions of

associates TotalRMB’000 RMB’000 RMB’000

GROSS AMOUNTAt 1st January 2001 10,697 1,495 12,192Decrease from further acquisition of

investments in a subsidiary (2,137) - (2,137)

At 31st December 2001 8,560 1,495 10,055

RELEASED TO INCOMEAt 1st January 2001 2,562 150 2,712Released in the year 856 149 1,005

At 31st December 2001 3,418 299 3,717

CARRYING AMOUNTAt 31st December 2001 5,142 1,196 6,338

At 31st December 2000 8,135 1,345 9,480

The negative goodwill is released to income on a straight-line basis over the remainingestimated weighted average useful life of the depreciable assets acquired of ten years.

24




17. INTANGIBLE ASSETS

Developmentcosts

Deferredexpenditure Total

RMB’000 RMB’000 RMB’000COST

At 1st January 2001 19,531 20,835 40,366Additions 10,607 2,835 13,442Written off - (23,670) (23,670)

At 31st December 2001 30,138 - 30,138

AMORTISATIONAt 1st January 2001 4,132 - 4,132Charge for the year 5,548 - 5,548

At 31st December 2001 9,680 - 9,680

CARRYING AMOUNTAt 31st December 2001 20,458 - 20,458

At 31st December 2000 15,399 20,835 36,234

At 31st December 2001, intangible assets represent development costs whichcomprise costs for acquisition of technical knowhow and other expenses incurred in developingnew pharmaceutical products.

25




18. SUBSIDIARIES

Details of the Company’s subsidiaries at 31st December 2001 are as follows :-

Name of subsidiary

Place ofincorporationand operation

Proportion ofownership

interestPrincipalActivity

Livzon (Group) PharmaceuticalFactory

Zhuhai, PRC 100% Production of biologicaltablets, hard capsules andpowder

Livzon (Group) HealthcareProduct Factory

Zhuhai, PRC 100% Production of Chinesepatent medicines andhealth tonics

Livzon (Group) ReagentFactory

Zhuhai, PRC 100% Production ofbiochemical reagent andenzyme linked immunereagent

Livzon (Group) Livzon MedicalBiomaterials Factory

Zhuhai, PRC 100% Production of sanitarymaterials and medicalcosmetics

Livzon (Group) PharmaceuticalTrading Co., Ltd.

Zhuhai, PRC 100% Sale of the Group’spharmaceutical products

Livzon (Group) SyntpharmFactory

Zhuhai, PRC 100% Production of chemicalmedicinal materials andmedical reagent

Livzon (Group) LimanChemical PharmaceuticalFactory

Shaoguan,PRC

100% Production and sale ofbiochemical reagent

26




18. SUBSIDIARIES (Continued)

Name of subsidiary


Proportionof ownership

interestPrincipalActivity

Livzon (Group) BiotechnologyPharmaceutical Factory

Zhuhai, PRC 100% Manufacture and sale ofproducts made frommicrobio fermentation,blood products,recombinant DNAproducts andbiochemical reagent

Livzon (Group) Livzon TraditionalChinese Medicine Factory

Zhuhai, PRC 100% Production of Chinesemedicines and healthtonics

Livzon (Group) Livzon-bamBiomaterials Co., Ltd.

Zhuhai, PRC 82% Manufacture and sale ofhydroxyapatite productsand coated titaniumdental implant

Hubei Keyi PharmaceuticalHoldings Company Limited *

Hubei, PRC 46% Manufacture and sale ofChinese and foreignpatent medicines,biochemical reagent andhealth tonics

Hubei Liyi PharmaceuticalTechnology Company Limited *

Hubei, PRC 50% Research anddevelopment ofmedicine anddevelopment of medicaland pharmaceuticaltechnology,technological consultingand project investment

* The Company has consolidated the financial statements of Hubei Keyi Pharmaceutical HoldingsCompany Limited and Hubei Liyi Pharmaceutical Technology Company Limited as theCompany exercises control over the management of both companies.

27





Name of subsidiary



interestPrincipalactivity

Livzon (Group) LibaoBiochemical &Pharmaceutical Co., Ltd.

Zhuhai, PRC 70% Manufacture and sale ofpharmaceutical products

Shanghai LivzonPharmaceutical Co., Ltd.

Shanghai, PRC 85% Manufacture and sale ofpharmaceutical products

Sichuan EverbrightPharmaceutical Co., Ltd.

Pangzhou,PRC

52% Manufacture and sale ofpharmaceutical products

Zhuhai Livzon WonderfulTechnology Investment Co.,Ltd.

Zhuhai, PRC 80% Research anddevelopment of medicineand pharmaceuticaltechnology, technologicalconsulting and projectinvestment

Zhuhai Livzon PharmaceuticalTrading Co., Ltd.

Zhuhai, PRC 100% Import and exportbusiness ofpharmaceutical reagent,raw material

Livzon Chainstore OperationCo., Ltd.

Zhuhai, PRC 90% Investment, chain storeoperation, economic andtechnological operation,consulting andtechnological service

Ando Development Limited Hong Kong 100% General trading

Lizhu (Hong Kong) Co.,Limited

Hong Kong 100% General trading

Guangdong Central SouthPharmacy Co., Ltd.

Shenzhen,PRC

70% Retail and wholesale ofmedicines

28





Name of subsidiary




Zhuhai Medicine TechnologyDevelopment Co., Ltd.

Zhuhai, PRC 80% Research anddevelopment of medicineand pharmaceuticaltechnology, technologicalconsulting and projectinvestment

Zhuhai S.E.Z. LikangPharmaceutical Co., Ltd.

Zhuhai, PRC 72% Manufacture and sale ofpharmaceutical products

Livzon (Group) PharmaceuticalResearch Institute

Zhuhai, PRC 100% Research anddevelopment ofbiochemical reagent andpharmaceutical materials

Livzon (Group) AdvertisingCo., Ltd.

Zhuhai, PRC 100% Operation in advertisingbusiness

Livzon (Group) InvestmentConsultant Co., Ltd.

Zhuhai, PRC 100% Economic andinformation consultantservice

Zhuhai Modern ChineseMedicine High TechnologyCo., Ltd.

Zhuhai, PRC 75% Research anddevelopment ofpharmaceuticaltechnology

Zhuhai Li Ao Wei Sheng TaiProducts Co., Ltd.

Zhuhai, PRC 90% Research ofpharmaceutical product

29




19. INVESTMENTS IN ASSOCIATES2001 2000

RMB’000 RMB’000

Cost of investment less goodwill and negative goodwill9,398 35,813

Share of post-acquisition (loss)/profit, net of dividendsreceived (245) 2,993

Share of net assets 9,153 38,806

Details of the Group’s associates at 31st December 2001 are as follows :-

Name of associate




Shanghai Lizhu-DongfengBiotechnology Co., Ltd.

Shanghai,PRC

50% Manufacture and sale ofbiochemical products

Livzon Group Changzhou KangliPharmaceutical Co., Ltd.

Changzhou,PRC

30% Manufacture and sale ofpharmaceutical products

Livzon Electomedical InstrumentCo., Ltd.

Zhuhai, PRC 28% Manufacture and sale ofelectromedicalinstrument

Chengdu Li Hai Shou XinTechnology Co., Ltd.

Chengdu,PRC

40% Manufacture and sale ofchemical products

MolecularTaq Limited Hong Kong 30% Research ofpharmaceutical products

30




20. OTHER INVESTMENTS

Non-current investments2001 2000

RMB’000 RMB’000

Unlisted investment, at cost less provision for diminutionin value 33,976 36,040

Current investments2001 2000

RMB’000 RMB’000

Listed investment, at fair value 15,955 10,700

The other investments included above represent both unlisted investments and investments inlisted equity securities which present the Group with opportunity for return through dividend incomeand trading gains. The fair values of listed equity securities are based on quoted market prices.

21. INVENTORIES2001 2000

RMB’000 RMB’000

Raw materials 60,142 46,060Work in progress 21,649 26,561Finished goods 115,780 132,779

197,571 205,400

Included above are finished goods of RMB19,555,000 (2000: RMB25,471,000) carried at netrealisable value.

31




22. OTHER FINANCIAL ASSETS

Trade and other receivables comprise gross amounts receivable from the sale of goods ofRMB342 million (2000: RMB369 million).

An allowance has been made for estimated irrecoverable amounts from the sale of goods ofRMB89.5 million (2000: RMB85.1 million). This allowance has been determined by reference topast default experience.

The directors consider that the carrying amount of trade and other receivables approximatestheir fair value.

Bank balances and cash comprise cash and short-term deposits held by the group treasuryfunction. The carrying amount of these assets approximates their fair value.

The Group’s credit risk is primarily attributable to its trade receivables. The amountspresented in the balance sheet are net of allowances for doubtful receivables, estimated by theGroup’s management based on prior experience and the current economic environment.

The Group has no significant concentration of credit risk, with exposure spread over a largenumber of counterparties and customers.

23. SHARE CAPITAL2001 2000

No. ofshares

No. ofshares

’000 RMB’000 ’000 RMB’000Registered, issued and fully

paid :A shares of RMB1 each 183,728 183,728 183,728 183,728B shares of RMB1 each 122,307 122,307 122,307 122,307

306,035 306,035 306,035 306,035

There were no movements in the share capital of the Company in either the 2001 or 2000reporting periods.

32




24. RESERVES

Notes 2001 2000RMB’000 RMB’000

(Restated)

Share premium (a) 417,689 417,689Statutory surplus reserve (a) 45,476 24,623Discretionary surplus reserve (b) 76,685 76,685Properties revaluation reserve 9,609 9,609Public welfare fund (c) 43,326 29,060Accumulated profits/(losses) 10,851 (13,079)

603,636 544,587

According to the PRC company law, the reserve available for distribution is the lower of theamount determined under PRC Accounting Regulations and the amount determined under IAS. As31st December 2001, the reserve available for distribution was RMB1,670,000, after taking intoaccount the current year’s proposed dividend.

Notes:

(a) Statutory reserves

As a company limited by shares, the Company is required under the laws and regulations of thePRC to transfer an amount of not less than 10% of its profit for the year, determined under PRCaccounting regulations for companies limited by shares, to a statutory reserve, namely the statutorysurplus reserve, until the aggregate of the statutory surplus reserves is equal to 50% of the Company’sissued share capital.

The share premium and the statutory surplus reserve constitute statutory reserves for theCompany, the usage of which is governed by PRC laws and regulations. In accordance with thelaws and regulations, the statutory reserves can be utilised as follows :

(i) to make up losses of the Company (the losses must be charged firstly against the statutorysurplus reserve); and

33




24. RESERVES (Continued)

(ii) to distribute to shareholders in the form of a bonus issue. The balance of the statutory surplusreserve in excess of 50% of issued share capital of the Company can be distributed to existingshareholders by means of a bonus issue, provided that the balance of the statutory surplusreserve after such distribution is not less than 25% of the issued share capital of the Company.

(b) Discretionary surplus reserve

The Company may transfer an amount from its profit for the year calculated under PRCaccounting regulations to the discretionary surplus reserve in accordance with the Company’s Articlesof Association or Resolutions of shareholders in the general meeting. The discretionary surplusreserve can be utilised to make up losses of the Company and to distribute to shareholders in the formof dividend. The resolution for the appropriation of profit for the year calculated under PRCaccounting regulations to the statutory and the discretionary surplus reserves for the year ended 31stDecember 2001 will be considered and approved by the shareholders in the general meeting to beheld in 2001.

(c) Public welfare fund

According to the Company’s Articles of Association, the Company is required to transfer10% of its profit after taxation to the public welfare fund. The public welfare fund can only be usedfor the collective benefits of the Group’s employees such as the construction of dormitories, canteenand other staff welfare facilities. Individual employees can only use these facilities, the titles ofwhich will remain with the Group. The public welfare fund forms part of the shareholders’ equityand is non-distributable other than in liquidation. The transfer to the public welfare fund must bemade before distribution of dividend to shareholders.

34




25. BANK LOANS

2001 2000RMB’000 RMB’000

Bank loans 302,170 224,010

The borrowings are all denominated in RMB andrepayable as follows :

On demand or within one year 301,620 173,490In the second year 550 49,970In the third to fifth years inclusive - 550

302,170 224,010Less : Amount due from settlement within one year

(shown under current liabilities) (301,620) (173,490)

Amount due for settlement after one year 550 50,520

The average interest rates paid were as follows :2001 2000

Bank loans 6.0% 4.9%

At 31st December 2001, bank loans of approximately RMB302 million (2000 : RMB224million) were arranged at fixed interest rates.

The directors estimate the fair value of the Group’s borrowings as follows :

2001 2000RMB’000 RMB’000

Bank loans 302,510 223,933

At 31st December 2001, bank loans of approximately RMB117 million (2000 : RMB92 million)were secured by a charge over certain of the Group’s properties.

35




26. PLEDGE OF ASSETS

At the balance sheet date, the Group had land and buildings with a carrying amount ofapproximately RMB79,224,000 (2000 : RMB71,920,000) was pledged to banks as security for bankloans granted to the Group.

27. OTHER FINANCIAL LIABILITIES

Trade and other payables principally comprise amounts outstanding for trade purchases andongoing costs. The directors consider that the carrying amount of trade payables approximates totheir fair value.

28. PRIOR YEAR ADJUSTMENT

Certain land and buildings and machinery were revalued by Reanda Xinlong Certified PublicAccountants Company Limited on 31st December 2000. There was an understatement ofrevaluation deficit on property, plant and equipment totalling RMB37,041,000 for the year ended 31stDecember 2000. Therefore, during the year, the Group made a related prior year adjustment toreduce each of the carry value of property, plant and equipment at 31st December 2000, results for theyear ended 31st December 2000 and the accumulated profits as at 1st January 2001 byRMB37,041,000.

36




29. RECONCILIATION OF PROFIT FROM OPERATIONS TO NET CASH FROMOPERATING ACTIVITIES

2001 2000RMB’000 RMB’000

(Restated)

Profit from operations 126,506 10,812

Adjustments for:Negative goodwill released to income (1,005) (1,220)Written-off of intangible assets 23,670 25,569Amortisation of intangible assets 5,548 20,301Depreciation of property, plant and equipment 54,824 50,148Amortisation of goodwill 1,444 -Revaluation deficit on property, plant and equipment

- 37,041(Profit)/loss on disposal of property, plant and

equipment (2,556) 360

Operating cash flows before movements in workingcapital 208,431 143,011

Decrease/(increase) in inventories 11,707 (2,418)Decrease in trade and other receivables and amounts

due from associates 16,777 33,563Decrease in trade and other payables and amounts due

to associates (46,977) (87,538)

Cash generated from operations 189,938 86,618

37




30. ACQUISITION OF SUBSIDIARIES

Net assets acquired :2001

RMB’000

Property, plant and equipment 38,724Construction in progress 30Inventories 3,878Trade and other receivables 7,312Bank balances and cash 32,219Trade and other payables (10,245)Minority interests (24,472)

47,446Goodwill 6,459

53,905Investments in associates previously acquired (22,556)

Total consideration satisfied by cash 31,349

Net cash inflow arising on acquisition :

Cash consideration (31,349)Bank balances and cash acquired 32,219

870

The subsidiaries acquired during the year contributed RMB24.8 million of revenue andRMB8.1 million of profit before tax for the period between the date of acquisition and the balancesheet date.

38




31. CAPITAL COMMITMENTS2001 2000

Capital expenditure contracted for but not provided RMB’000 RMB’000in respect of :

Purchase of property, plant and equipment andconstruction in progress 5,661 233

Purchase of intangible assets 5,495 -Acquisition of investment in a subsidiary 17,550 1,328

28,706 1,561

32. OPERATING LEASE COMMITMENTS

2001 2000RMB’000 RMB’000

Minimum lease payments under operating leases recognisedas expenses for the year 3,430 521

At the balance sheet date, the Group had outstanding commitments under non-cancellableoperating leases, which fall due as follows :-

2001 2000RMB’000 RMB’000

Within one year 1,155 1,025In the second to fifth year inclusive 1,463 1,163

2,618 2,188

Operating lease payments represent rentals payable by the Group for certain of its officeproperties.

33. CONTINGENT LIABILITIES

The Group had no significant contingent liabilities at the balance sheet date.

39




34. RELATED PARTY TRANSACTIONS

Trading transactions

During the year, group companies entered into the following transactions with related parties who are not members of the Group :

Purchase of goodsAmounts owed by

associatesAmounts owed to associates

2001 2000 2001 2000 2001 2000RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000

AssociatesShanghai Lizhu-Dongfeng Biogtechnology Co.,

Ltd. - - 233 4,388 81 -

Livzon Group Changzhou Kangli PharmaceuticalCo., Ltd. 14,267 17,259 - - - -

Livzon Group Suzhou Xinbao PharmaceuticalFactory 5,166 6,034 - - - 4,698

In the opinion of the directors, the above transactions were carried out at estimated fair market price or, where no market price was available, at cost plus apercentage profit mark-up.

40




35. ACCOUNTING TREATMENT

The Group has prepared a separate set of accounts for the year ended 31st December 2001 in accordancewith the PRC accounting standards. The major differences between the accounts prepared under the PRCAccounting Standards and those under IAS are summarized as follows:

Net profitfor the year

NetassetsRMB’000 RMB’000

Under PRC accounting standards 50,392 928,153Adjustments:

Elimination of interest capitalised for property, plant andequipment - (25,568)

Provision for bad and doubtful debts 6,886 (14,784)Written off of deferred expenditure 6,817 (1,952)Amortisation of goodwill (251) (251)Recognition of investment income 915 -Goodwill arising from acquisition of associates - 2,690Accrual of expenses (3,524) 15,886Negative goodwill arising from acquisition of a

subsidiary (286) (1,638)Gain on disposal of a subsidiary - 8,262Others (1,900) (1,127)

Under IAS 59,049 909,671