*ST舜喆B(200168)雷伊Ｂ2001年年度报告（英文版）

GUANGDONG RIEYS COMPANY LTD. 2001 ANNUAL REPORT GUANGDONG RIEYS COMPANY LTD. April 2002 GUANGDONG RIEYS COMPANY LTD. 2001 ANNUAL REPORT IMPORTANT NOTICE Board of Directors of GUANGDONG RIEYS COMPANY LTD. (hereinafter referred to as the Company) individually and collectively accept responsibility for the correctness, accuracy and completeness of the contents of this report and confirm that there are no material omissions nor errors which would render any statement misleading. Director Wang Jinfeng was absent from the recent Board meeting due to health imperfection. Board of Directors of GUANGDONG RIEYS COMPANY LTD. Chairman of the Board: Chen Hongcheng April 16, 2002 Content Ⅰ. Important Notices Ⅱ. Company Profile Ⅲ. Financial Highlight and Business Highlight Ⅳ. Changes in Share Capital and Particulars about Shareholders Ⅴ. Particulars About Director, Supervisor And Senior Executives And Staff Ⅵ. Administrative Structure Ⅶ. Brief Introduction to the Shareholders’ General Meeting Ⅷ. Report of the Board of Directors Ⅸ. Report of the Supervisory Committee Ⅹ. Significant Events Ⅺ. Financial Report Ⅻ. Documents for Reference GUANGDONG RIEYS COMPANY LTD. 2001 ANNUAL REPORT I. IMPORTANT NOTICE Board of Directors of GUANGDONG RIEYS COMPANY LTD. (hereinafter referred to as the Company) individually and collectively accept responsibility for the correctness, accuracy and completeness of the contents of this report and confirm that there are no material omissions nor errors which would render any statement misleading. Director Wang Jinfeng was absent from the recent Board meeting due to health imperfection. II. COMPANY PROFILE 1. Legal Name of the Company In Chinese: 广东雷伊股份有限公司 In English: GUANGDONG RIEYS COMPANY LTD. Abbreviation of English Name: RIEYS 2. Legal Representative: Chen Hongcheng 3. Secretary of the Board of Directors: Zhou Haolin Liaison Tel: (86) 755-2960823 E-mail: zhhl@200168.com Authorized Representative in Charge of the Securities Affairs: Xu Wei Liaison Tel: (86) 755-2960823 Liaison Address: Secretariat of the Board of Directors, 26/F of Jiangsu Bldg., Yitian Rd., Futian District, Shenzhen Fax: (86) 755-2960383 E-mail: xw@200168.com 4. Registered Address: Meixin Industrial Park of Jun Bu Town, Puning, Guangdong Office Address: 26/F of Jiangsu Bldg., Yitian Rd., Futian District, Shenzhen Post Code: 518000 Company’s Internet Website: http://www.rieys.com 5. Newspapers Chosen for Disclosing the Information of the Company: Securities Times, Ta Kung Pao Internet Website Designated by CSRC for Publishing the Annual Report: http://www.cninfo.com.cn The Place Where the Annual Report is Prepared and Placed: Secretariat of the Board of Directors, 26/F of Jiangsu Bldg., Yitian Rd., Futian District, Shenzhen 6. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: RIEYS-B Stock Code: 200168 7. Date of the Initial Registration: Nov. 17, 1997; Place of the Initial Registration: Guangdong Province Industrial and Commercial Administration Registration Number of Business License of Enterprise Juristic Person: 4400001000088 Registration Number of Taxation: 445281231131833 Domestic Certified Public Accountants Engaged by the Company: Name: Andersen·Huangqiang Certified Public Accountants Address: No. 1515-1525 of China International Trade Center Bldg., No. 1 of Jianguomenwai Street, Beijing Oversea Certified Public Accountants Engaged by the Company: Name: Arthur Andersen & Company Address: 21st Floor Edinburgh Tower The Landmark, No. 15 Queen’s Road, Central, Hong Kong III. FINANCIAL HIGHLIGHTS AND BUSINESS HIGHLIGHTS 1. Major accounting highlights and business highlights as of the year 2001 (Unit: In RMB’000) Consolidated Statement Item as of the year 2001 Total profit 52,698,787 Net profit 33,904,005 Net profit after deducting non-recurring gains and losses 26,144,396 Profit from main business lines 77,846,512 Profit from other business lines 10,200 Operating profit 43,278,618 Investment income 4,424,256 Subsidy income 3,371,440 Net income / expenditure from non-operating -36,087 Net cash flows arising from operating activities -67,124,879 Net increase in cash and cash equivalents -164,351,597 Note: Items of non-recurring gains and losses and the amounts: investing income amounting to RMB 41,418,058, net income / expenditure from non-operating amounting to RMB -36,087 and subsidy income amounting to RMB 3371440. The explanation on the difference between the auditing results under PRC GAAP and IAS: Profit after taxation of the Company as of the year 2001 as audited by Andersen·Huaqiang Certified Public Accountants under PRC GAAP and by Arthur Andersen & Company Certified Public Accountants under IAS was RMB 33,904,005 and RMB 36,326,005 respectively. The adjustment for the differences is as follows (Unit: In RMB) Profit after taxation for the year ended 2001 As reported in financial statements prepared in accordance with PRC GAAP 33,904,005 Adjustment to conform with IAS: Write off of goodwill Write off of amortization of goodwill 1,135,135 Write off of organization expenses 81,080 Dividend declared to be distributed after the year-end Deferred tax 1,206,000 Restatement in accordance with IAS 36,326,005 2. Accounting data and financial indexes over the recent three year at the end of report year (Unit: In RMB) Indexes 2001 2000 1999 Income from main business lines 401,930,781 599,059,225 459,294,172 Net profit 33,904,005 63,047,333 37,994,670 Total assets 732,757,864 680,123,471 270,353,908 Shareholder’s equity (excluding minority interests) 370,909,443 364,333,137 151,102,976 Earnings per share (RMB/share) 0.19 0.36 0.35 Weighted average earnings per share 0.19 0.52 0.35 Fully diluted earnings per share 0.19 0.36 0.35 Earnings per share after deducting non-recurring gains and losses 0.17 0.52 0.35 Net assets per share (RMB/share) 2.10 2.06 1.40 Net assets per share after adjustment (RMB/share) (2.09) 2.05 1.38 Net cash flows per share arising from operating activities -0.38 0.16 0.40 Return on equity (%) 9 17 25 Note: The said data were listed and calculated according to consolidated accounting statements of the Company. 3. Supplementary statement of profit in the report year Return on equity (%) Earnings per share (RMB) Profit as of the year 2001 Fully Weighted Fully Weighted diluted average diluted average Profit from main business lines 21 20 0.44 0.44 Operating profit 12 11 0.24 0.24 Net profit 9 9 0.19 0.19 Net profit after deducting 7.05 7.05 0.15 0.15 non-recurring gains and losses 4. Changes in shareholders’ equity in the report year (Unit: RMB) Capital Surplus Statutory Total Share Retained Items public public Public shareholder’s capital profit reserve reserve welfare fund equity Amount at the year-begin 177,000,000 92,786,895 34,709,437 6,569,813 59,836,805 363,555,438 Increase in the report year 17,085,601 1,695,200 7,354,005 Decrease in the report year 10,509,295 Amount at the year-end 177,000,000 51,795,038 8,265,013 49,327,510 370,909,443 Profit as of Profit as of Profit distri- Causes Profit as of 2001 2001 2001 bution IV. CHANGES IN SHARE CAPITAL AND PARTICULARS ABOUT SHAREHOLDERS (I) Particulars about the changes in share capital: 1. Statement of change in shares (Ended Dec. 31,2001) Statement of change in shares as of the year 2001 Unit: share Increase/decrease of this time (+, - ) Before the After the Items change Share Bonus Capitalization of Additional Sub- change Others Allotment shares public reserve issuance total I. Unlisted Shares 1. Promoters’ shares 108,000,000 108,000,000 Including: State-owned share Domestic juristic person’s shares 91,125,000 91,125,000 Foreign juristic person’s shares Others 16,875,000 16,875,000 2. Raised juristic person’s shares 3. Employees’ shares 4. Preference shares or others Including: Transferred / allotted shares Total Unlisted shares 108,000,000 108,000,000 II. Listed Shares 1. RMB ordinary shares 2.Domestically listed foreign shares 69,000,000 69,000,000 3. Overseas listed foreign shares 4. Others Total Listed shares III. Total shares 177,000,000 177,000,000 2. Issuance and listing of the share (1) By the end of the report year, particulars about issuance of the share: The Company is a limited company, which was established by means of reorganization of joint stock system and initiating in 1997, and at the same year, the Company issued 80 million shares to the promoters with issuance price of RMB 1 per share. In April 1999, as approved by Shareholders’ General Meeting, the Company implemented the Dividend Plan at the rate of 3.5 bonus shares for every 10 shares based on the total shares registered at the end of 1998. The total bonus shares amounts to 28 million shares, thus, the total shares of the Company increase to 108 million shares. As approve by CSRC with ZJFX Zi (2000) No. 133 document, the Company issued 60 million domestically listed foreign shares (B shares) from Oct. 17, to Oct. 18, 2000, and the issuance price is HKD 2.38 per share. The said 60 million domestically listed foreign shares were listed with Shenzhen Stock Exchange for trading on Oct. 27, 2000. After initial issuance, the Company authorized the lead underwriter to exercise over-allotment option; and the lead underwriter issued additionally 9 million domestically listed foreign shares with allotment price of RMB 1 per share. The said 9 million shares were listed with Shenzhen Stock Exchange for trading on Nov. 27, 2000. (2) In the report year, both the total share capital and its structure remained unchanged. (3) The Company has no employee’s shares. (II) About Shareholders 1. Ended Dec. 31, 2001, the Company has 15,668 shareholders in total. 2. Particulars about shares held by the top ten shareholders (Ended Dec. 31, 2001) Unit: share Number of holding Proportion No. Shareholders’ name shares at the in total Type year-end (share) shares (%) 1 Puning Haicheng Industrial Co., Ltd. 65,475,000 36.99% Promoter juristic person’s shares 2 CHENMEIXIANG 16,875,000 9.53% Promoter natural person’s shares 3 Puning Huilong Textile Co., Ltd. 12,150,000 6.86% Promoter juristic person’s shares Shantou Shengping District Lianhua 4 6,750,000 3.81% Promoter juristic person’s shares Industrial Co., Ltd Shenzhen Zhongshengke Investment 5 6,750,000 3.81% Promoter juristic person’s shares Co., Ltd. CBNY S/A PNC/SKAND SELECT 6 3,682,341 2.08% Foreign shares in circulating FUND/CHINA EQUITY 7 CHENLIQIONG 1,215,949 0.69% Foreign shares in circulating 8 ZHOUXIAOHUA 740,000 0.41% Foreign shares in circulating 9 WENHAIGEN 441,370 0.25% Foreign shares in circulating 10 HOUDEYU 291,456 0.16% Foreign shares in circulating Notes: (1) There was neither pledging nor freezing for the share held by the above shareholders. (2) Of aforesaid shareholders as listed above, there exist association relationship among Puning Haicheng Industrial Co., Ltd., Ms. Chen Meixiang, Puning Huilong Textile Co., Ltd., and Shantou Shengping District Lianhua Industrial Co., Ltd. 3. About holding shareholder (1) The holding shareholder of the Company is Puning Haicheng Industrial Co., Ltd. (“Haicheng Industrial”), who holds 65.475 million shares of the Company, taking 36.99% of the total shares of the Company. Haicheng Industrial was established in May 1997; registration place is Puning City, Guangdong province; registration capital: RMB 98 million; legal representative: Chen Honghai. Mr. Chen Honghai holds 30% share equity of Haicheng Industrial, Mr. Chen Hongcheng holds 70% share equity of Haicheng Industrial. The business scope of Haicheng Industrial: sales of hardware, AC parts, building material, electronic products and car fittings. (2) Mr. Cheng Hongcheng is actual controller of Haicheng Industrial. At present, Mr. Cheng Hongcheng holds Chairman of the Board of Directors and concurrent General Manager of the Company. Mr. Chen Hongcheng, 44, graduated from undergraduate. He is engaged in operation and management of the enterprise for 20 years. He was ever in charge of Chairman of the Board of Puning Hongxin Weaving and Clothing Co., Ltd., and executive director of Puning Haicheng Industrial Co., Ltd.. Mr. Chen Haicheng is the standing commissar of political consultative conference of Puning, Guangdong and the deputy to the National People’s Congress of Jieyang, Guangdong. In 1998, Mr. Chen was awarded as the excellent village and township entrepreneur of Guangdong province, the advanced member of Guangdong Industry and Commerce Union, and the advanced member of Guangdong Chamber of Commerce. In 1999, Jieyang municipality People’s Government awarded him as the advanced individual of splendor undertaking V. PARTICULARS ABOUT DIRECTOR, SUPERVISOR, SENIOR EXECUTIVE AND STAFF (I) Directors, supervisors and senior executives 1. Present directors, supervisors and senior executives in office Number of Number of Name Gender Age Title Office term holding shares at holding shares the year-begin at the year-end Chen Chairman of the Board, Male 44 Mar. 2000 – Mar. 2003 Hongcheng General Manager Zheng Yujian Male 37 Vice Chairman of the Board Mar. 2000 – Mar. 2003 Chen Honghai Male 48 Director Mar. 2000 – Mar. 2003 Chen Yuezhong Male 50 Director Mar. 2000 – Mar. 2003 Yan Mingfei Male 34 Director Mar. 2000 – Mar. 2003 Ding Lihong Male 31 Director Mar. 2000 – Mar. 2003 Wang Jinfeng Female 30 Director May 2001 – Mar. 2003 Chairman of the Zhang Jinjian Male 53 Mar. 2000 – Mar. 2003 Supervisory Committee Zeng Lin Male 29 Supervisor Mar. 2000 – Mar. 2003 Li Ning Male 33 Supervisor Mar. 2000 – Mar. 2003 Zhang Bin Male 30 Deputy General Manager Mar. 2000 – Mar. 2003 Li Guoqiang Male 53 Financial Chief Supervisor May 2001 – Mar. 2003 Zhou Haolin Male 32 Secretary of the Board May 2001 – Mar. 2003 Frances Male 56 Chief Designer Mar. 2000 – Mar. 2003 Jiang Yanxiang Male 67 Chief Engineer Mar. 2000 – Mar. 2003 Note: Particulars about directors or supervisors holding the position in Shareholding Company Director Mr. Chen Honghai took the position of Chairman of the Board of Puning Haicheng Industrial Co., Ltd. for a term of three years; Mr. Cheng Hongcheng took the position of Director of Puning Haicheng Industrial Co., Ltd. for a term of three years. 2. Particulars about the annual salary The Board of Directors determines the recompense of directors, supervisors and senior executives based on the Articles of Association of the Company. The total amount of annual salary drew by directors, supervisors and senior executives in office at present from the Company is RMB 716,440. Of them, (1) one enjoys his annual salary over RMB 100,000; (2) four enjoy their annual salary from RMB 50,000 to RMB 100,000 respectively; (3) five enjoy their annual salary under RMB 50,000. The total amount of the top three directors is RMB 90,000. The total amount of the top three senior executives is RMB 360,000. In 2001, Directors received no pay from the Company are as follows: Dir. Zheng Yujian, Dir. Chen Honghai, Dir. Chen Yuezhong and Dir. Yan Mingfei draw no pay from the Company. Of them, Dir. Chen Honghai draw his annual salary from Puning Haicheng Industrial Co., Ltd. 3. Directors, supervisors and senior executives leaving the office and the reason in the report year Ms. Chen Meixiang resigned the position of director due to personal cause, Ms. Wang Jingfeng was elected as director; Ms. Wang Jingfeng and Mr. Yang Xinfa resigned the position of financial chief supervisor and secretary of the Board respectively due to work transfer, Mr. Li Guoqiang and Mr. Zhou Haolin were engaged as instead respectively. (II) About staff Ended Dec. 31, 2001, the Company and his subsidiary company have totally 1985 staff in office. The composing of P and background of education and the retiree are as follows: 1. Composing of professional: production personnel: 1660 persons; salespersons: 40 persons; technicians: 50 persons; personnel of quality inspection: 38 persons; financial personnel: 12 persons; administrative personnel: 185 persons. 2. Background of education: high-grand titles: 4 persons; secondary-grand titles: 28 persons; primary titles: 46 persons. 3.The Company has no retirees. VI. ADMINISTRATIVE STRUCTUR I. Administration of the Company Strictly according to the PRC Company Law, Securities Law and requirements of relevant normative documents released by CSRC and State Commission of Economy and Trade, the Board of Directors, after studying the above laws and legislation seriously, using the advanced experience of foreign countries for reference, and pooling the wisdom of the masses, submitted the revision of the Articles of Association, drafted a series of regulations and systems including Rules of Procedures of the Shareholders’ General Meeting, Rules of Procedures of the Board of Directors and Detailed Work Rules for President in the report year. The Board of Directors plans to further improve operation of the Company and establish a real modern enterprise system through establishing the aforesaid systems. The administration of the Company is as follows: 1. The Company has been ensuring all shareholders, especially medium and small shareholders enjoy equal status, and ensuring all shareholders fully perform their rights; The Company has proposed the Rules of Procedures of the Shareholders’ General Meeting, which is subject to approval of relevant authority for implementation. It could convene and hold the Shareholders’ General Meeting strictly according to the normative opinions for the Shareholders’ General Meeting; Correlative transactions were fair and reasonable, the pricing basis of which has been fully disclosed. 2. The controlling shareholder behaviors in a standardized way, and hasn’t overstepped the Shareholders’ General Meeting to directly or indirectly interfere in the Company’s decision-making and operating activities; The Company has pursued the “Five Independence” from its controlling shareholder in terms of personnel, assets, finance, organization and business. The Board of Directors, the Supervisory Committee and internal organizations could function independently. 3. The Company elected directors strictly according to the election and employment procedures as stated in the Articles of Association; The number of directors and the formation the Board are in line with requirements of laws and legislations; Every director could attend the Board meeting and the Shareholders’ General Meeting in a conscientious and responsible attitude and get an understanding of the right, obligation and responsibility of a director; The Company is setting about establishing independent director system according to relevant procedures. 4. The number of the Supervisory Committee members and its formation are in line with requirements of laws and legislations; The Company has established Rules of Procedures of the Supervisory Committee; Supervisors could perform their obligations seriously, and carried out supervision towards finance and performance of directors, president of the Company and other senior executives in terms of compliance with laws and legislations. 5. The Company is actively setting about establishing a fair and transparent performance evaluation criteria and encouragement and binding mechanism for directors, supervisors and senior executives. Engagement of senior executives is open, transparent and in line with stipulations of laws and legislations. 6. The Company has been fully respecting and safeguarding the legal rights and interests of the bank, other creditors, employees, customers and other parties of related interests so as to push the Company’s development forward in a sustained and healthy manner. 7. The Company could disclose relevant information in a true, accurate, complete and timely manner strictly according to regulations of laws, legislations and the Articles of Association so as to ensure equal chance for all shareholders to obtain information; The Board of Directors has established the relevant System of Information Disclosure; The Company has been disclosing detailed information as well as share changes of the large shareholder in time according to relevant stipulation. Although the Company has devoted to establishing modern enterprise system and achieved some results in accordance with laws and legislations such as PRC Company Law, there still existed a certain gap between its current administrative status and the requirements of Administrative Rules for Listed Companies. The Company shall keep on improving its administrative structure according to requirements of the Administrative Rule for Listed Companies. II. Performance of Independent Directors In the report year, the Company hadn’t engaged any independent director. The Board of Directors has decided on candidates of independent directors according to the Guide Opinions for Establishing Independent Director System in Listed Companies released by CSRC. The Board of Directors shall engage independent directors in accordance with the relevant engaging and removing procedures, and shall submit the materials of independent directors to Shenzhen Stock Exchange, the Securities Administration Office of Guangzhou and relevant departments of CSRC for archives. III. The Company has pursued the five separations from its controlling shareholder Puning Hai Cheng Industrial Co., Ltd. in terms of business, personnel, assets, organization and finance etc. 1. In respect of business, the Company has independent purchase and sales system as well as independent and integrated business and independent management capability. 2. In respect of personnel, the Company has established special human resource administration department that independent manages the Company’s labor and human affairs as well as payrolls. Senior executives including the chairman of the Board of Directors, the president, vice president, financial supervisor and the Board secretary haven’t taken any concurrent post or received salaries in the shareholders’ companies. 3. In respect of assets, the Company was established and rebuilt on the basis of original Puning Hong Xing Weaving and Clothes Manufacturing Co., Ltd. The original company’s whole assets were transferred to the Company. The Company independently holds production, administration and sales system as well as trademark and real estate. There exists no occupation of the Company’s assets by large shareholder and related parties. 4. In respect of organization, the Company has four independent administrative function department, namely, financial center, human resource administration department, capital operation department, office of the Board secretary. The offices of the Company are wholly separated from the controlling shareholder and large shareholder. 5. In respect of finance, the Company has established independent financial and accounting department as well as business accounting system and financial administration system according to relevant systems; It has independent bank account, pays taxes independently and hasn’t shared bank account with its controlling shareholder. VII. BRIEFINGS ON THE SHAREHOLDERS’ GENERAL MEETING In the report year, the Company held the 1st Provisional Shareholders’ General Meeting of 2001 and the Shareholders’ General Meeting of 2000. I. On December 13, 2000, the 3rd Meeting of the 2nd Board of Directors of 2000 reviewed and passed the proposal on holding the 1st Provisional Shareholders’ General Meeting of 2001, the notification on which was published in Securities Times and Hong Kong Wen Wei Po dated December 16, 2000. The 1st Provisional Shareholders’ General Meeting of 2001 was held in Shenzhen New Century Hotel on January 18, 2001, which was presided by Mr. Chen Hongcheng, the chairman of the Board of Directors. There were totally eight shareholders and shareholders’ proxies attended the meeting who represented 110,208,596 shares, taking 62.26% of total shares. Among the eight people, five were sponsor shareholders and shareholders’ proxies who represented 108,000,000 shares (of which 91,125,000 shares were domestic capital sponsor shares while 16,875,000 were foreign capital sponsor shares); there were 3 (B share) shareholders and shareholders’ proxies of domestically issued foreign capital shares, who represented 2,208,596 shares. The following resolutions were reviewed and passed through signing voting: 1. Reviewed and passed the proposal on revising the Articles of Association; 2. Reviewed and passed the proposal on establishing Shenzhen Rieys Industrial Co., Ltd; 3. Reviewed and passed the proposal on purchasing shares of China EverBright Bank; 4. Reviewed and passed the proposal on offering guarantee of loans for Palm Spring Estate Development (Shenzhen) Co., Ltd; 5. Reviewed and passed the proposal on authorization limit for the Board of Director by the Shareholders’ General Meeting. The resolutions of the meeting were published in Securities Times and Hong Kong Wen Wei Po dated January 19, 2001. II. On April 1, 2001, the 1st Meeting of the 2nd Board of Directors of 2001 reviewed and passed the proposal on holding the Shareholders’ General Meeting of 2001, the notification on which was published in Securities Times and Hong Kong Wen Wei Po dated April 3, 2001. The public notice on the holding Board meeting as provisionally proposed in the meeting was published in Securities Times and Hong Kong Wen Wei Po dated April 14, 2001. The Shareholders’ General Meeting of 2000 was held in the meeting room of Shenzhen New Century Hotel on Huaqiang North Road dated May 16, 2001. There were totally seven shareholders and shareholders’ proxies attended the meeting who held and represented 108,331,000 shares, taking 62.21% of total shares (of which 91,125,000 shares were domestic capital shares, taking 51.49% of total shares, while 17,206,000 shares were foreign capital shares, taking 9.72% of total shares). The directors, supervisors, senior executives and the engaged lawyer attended the meeting, which are in line with the regulation of PRC Company Law and Articles of Association. The following resolutions were reviewed and passed through signing voting: 1. Reviewed and passed 2000 Work Report of the Board of Directors; 2. Reviewed and passed 2000 Work Report of the Supervisory Committee; 3. Reviewed and passed 2000 Financial Report of Actual Budget; 4. Reviewed and passed 2000 Profit Distribution Plan; 5. Reviewed and passed 2000 Profit Distribution Policies; 6. Reviewed and passed the proposal on reengaging Anderson·Huaqiang Certified Public Accountants as the Company’s domestic accountants and reengaging Arthur Anderson Company as international accountants. 7. Reviewed and passed the proposal on Ms. Chen Meixiang’s resignation as director and electing of Ms. Wang Jinfeng to be director; 8. Reviewed and passed the provisional proposal on the submission of Puning Hai Cheng Industrial Co., Ltd., the Company’s first large shareholder that holds 36.99% of shares, to relevant authority for application of changing to Sino-foreign Joint Holding Co., Ltd. The resolutions of the meeting were published in Securities Times and Hong Kong Wen Wei Po dated May 17, 2001. III. Election and Changing of Directors and Supervisors On May 15, 2001, the Shareholders’ General Meeting reviewed and passed the agreement to Ms. Chen Meixiang’s resignation as director due to personal reason, and augmenting Ms. Wang Jinfeng as director of the 2nd Board of Directors. VIII. REPORT OF THE BOARD OF DIRECTORS I. Operation (I) Business scope and the operation 1. Principal business The Company is principally engaged in the design, manufacture and sales of clothes including business suit, fashion dress, shirt, service dress and other textile goods. 2. Segment operation (1) Based on industry Revenue from main business lines Gross profit Textile industry 401,930,781 78,158,492 (2) Based on district Revenue from main business lines Gross profit Exported sales 320,338,374 59,679,045 Domestic sales 71,408,058 12,877,940 Entrusted processing 10,184,349 5,601,507 (II) Operation and achievements of main shareholder and investee subsidiaries Registered capital of Shenzhen Rieys Industrial Co., Ltd. is RMB 20 million; legal representative is Mr. Chen Xuewen, is principally engaged in the initiation of entity (detailed projects subject to application), domestic commerce and materials logistics (excluding monopolistic items) as well as import and export business. (III) Major suppliers and customers The calculated purchase amount of the top five suppliers accounted for 33.22% of the total purchase amount of the year; and the calculated sales amount of the top five customers accounted for 72.14% of the total sales amount of the year. (IV) Problems and difficulties occurred in the operation and the countermeasures Solely focusing on the international market, the Company, with comparatively weak anti-risk ability, was subject to the negative impact from the sluggish world economy. With principal engagement as processing with brand supplied by clients, the Company failed to possess a well-known self-owned brand, which hindered its development in domestic market; especially in aspects of business suit, fashion dress and shirt, the Company has only a small market share. Besides, single engagement in clothes business without expansion to relevant sections also influences the Company’s growth. To counter above problems, the Company, firstly, reinforced its exploration in domestic market through improving product quality, introducing high quality administrative personnel and increasing clients providing brand; secondly, actively improved the popularity of its self-owned brand by means of recruiting talented designer, upgrading the class and taste of the brand, reinforcing publicizing and establishing perfect and overall sales system; thirdly, increased the Company’s scale and strength by purchasing and integrating companies relevant to clothes business. II. Investment Long-term equity investment was increased by RMB 9,720,000 in the report period, which was mainly because the Company purchased 33% equity of Shenzhen Weisikang Communication Company in Sep. 2001. (I) Investment with raised proceeds Pursuant to ZJFXZ [2000] No. 133 Document, the Company issued 60 million domestically listed foreign shares (B shares) on Oct. 17 to 18, 2000 and 9 million in addition exercising the premium issuance rights at the price of HKD 2.38 per share. Proceeds raised from this issuance totaled HKD 164,220,000, after deducting the issuance expenditure, actual proceeds raised amounted to HKD 149,784,500 (or RMB 159,032,828.30) totally paid in cash HK dollar. Oct. 18 and Nov. 22, 2000, the said proceeds were transferred into the Company’s account. In the report period, RMB 98,944,000 raised proceeds was applied. 1. Application of raised proceeds Unit: RMB’000 Actual Actual Planned total No. Committed investment project investment in investment in Progress investment 2000 2000 (1) Project of business suit production 80,000,000 31,678,000 48,322,000 100% lines (2) Project of shirt production line 50,000,000 19,678,000 30,322,000 100% (3) Project of sweater production line 29,000,000 20,300,000 70% Total 159,000,000 51,356,000 98,944,000 Note: There is RMB 8.7 million balance proceeds deposited in bank. 2. Particulars about investment projects (1) Project of business suit production lines The imported equipments have been installed and the relevant adjustment was almost completed presently. The overall arrangement of the production line, operator training, and supporting facilities have been completed as committed in the Issuance Memorandum. Though the line can go into operation soon, no immediate profit may be realized due to shortage in order. (2) Project of shirt production line The imported equipments have been installed and the relevant adjustment was almost completed presently. The overall arrangement of the production line, operator training, and supporting facilities have been completed as committed in the Issuance Memorandum. Though the line can go into operation soon, no immediate profit may be realized due to shortage in order. (3) Project of sweater production line The imported equipments from the overseas have not been ready because being carefully selected, ordered, manufactured and transported; Preparing works like operator training expects the ending. It is estimated to complete the project and go into operation at the beginning of 2002. (II) Investment with non-raised proceeds 1. Purchasing Shenzhen Weisikang Communication Co., Ltd. Established on Sep. 29, 2001 with registered capital of RMB 20 million, Shenzhen Weisikang Communication is principally engaged in the development of net products, R&D, production and sales of telecommunication products (project subject to application), technology service, network system integration (excluding monopolistic items). The Company held 33% equity of this company. 2. Incorporating Puning Tian He Textile Manufactory In the report period, the Company invested totally HKD 37.5 million (75% of the total capital), in forms of production equipments valuing HKD 37.03 million and HKD 467,000 in cash, to incorporate Puning Tian He Textile Manufactory jointly with Hong Kong Xing Li Trading Company, who invested HKD 12.5 million (25% of the total share capital). The Company is under applying for establishment. 3. Shareholding Shenzhen Chuanger Fashion Co., Ltd. in the report year Principally engaged in the sales of MISSK high and medium grade lady dress, Shenzhen Chuanger Fashion Co., Ltd. owns dozens of branches and franchise stores in cities all around China. It boasts a whole business system covering R&D, design, marketing; and its sales network is strong enough to support further development of MISSK. In order to optimize the Company’s industrial structure, expand the business to relevant sections of clothes industry, the Company planed to increase the capital of and control Shenzhen Chuanger Fashion Co., Ltd. by shareholding. The registered capital of the company reached RMB 12 million after the capital increase including RMB 6.12 million, or 51% of the total, from the Company in form of cash. Since relevant payment has not been settled now, the Company did not acquire the said equity. III. Financial Highlights and Achievements in Operation in the report period Item As at the end of 2001 As at the end of 2000 +/- (%) Total assets 732,757,864 679,232,681 +7.88 Long-term liabilities 60,000,000 0 Shareholders’ equity 370,909,443 363,555,438 +2.02 Profit from main business lines 77,846,512 123,038,006 -36.73 Net profit 33,904,005 63,047,333 -46.22 Main causes of the changes: Total assets: profit as of 2001 and increase in liabilities; Long-term liabilities: loan credit; Shareholders’ equity: profit as of 2001; Profit from main business lines: sluggish world economy and keen competition; Net profit: sluggish world economy and keen competition. IV. Changes in production and operation environment and the effect 1. Exploring the international markets for years, the Company was quite dependent on the world economy. While the weak economic status triggered by the 9.11 Event reduced the Company’s orders. 2. Challenged by the enterprises from Southeast Asia bearing the advantages in aspects of government support, lower labor price and openness, the Company confronted a keen competition in the overseas market. 3. Challenged by enterprises from East China, esp. Jiangsu and Zhejiang Provinces bearing the advantages in aspects of lower labor price, fast development under the leading of Shanghai, the Company also confronted a keen competition in the domestic market. V. Operation plan for 2002 In the year 2002, the Company will continually stick to its targets as improving profitability and maximizing shareholders’ equity by increasing resources while decreasing expenditure. On one hand, the Company will actively search for appropriate partners, integrate resources by various means, cultivate new profit growth point and improve the profitability. On the other hand, the Company will further improve its efficiency by reinforcing internal management and cost control. Furthermore, the Company will realize a thorough upgrading in terms of rational introduction and innovation, standardized production and process, distribution network, regulated management and service, so to form a competitive clothes brand. To accomplish above targets, the Company take following measures: (1) To emphasize the main business, set the brand image, operate steadily and gradually expand the business scope. The Company will further explore the international market based on present clients. Enjoying a great potentiality in international market, the Company will initiate a self-owned brand and gradually establish a sales network for it with targeted market in Europe and West Asia. In aspect of domestic market, the Company will focus on purchasing national well-known companies and set up the corresponding sales network and channels. Presently, the Company is preparing for the capital increase and shareholding of Shenzhen Chuanger Fashion Co., Ltd., which is mainly engaged in the sales of dress in famous brand “MISSK”. (II) The Company will reinforce its capital operation, integrate assets and cultivate new profit growth point by various means. To enrich the Company’s operation and improve the management, the Company is implementing a series of measures including incorporating Tian He Textile Manufactory jointly with Hong Kong Xing Li Trading Company, shareholding Shenzhen Chuanger Fashion Co., Ltd. and purchasing agency companies engaging in the production and sales under the entrustment of SANTA BARBARA POLO. (III) The Company will further optimize its legal person administrative structure, establish and perfect the effective internal management and operation system, reinforce the operation and management, especially over the branches and subsidiaries, and motivate the whole staff. (IV) Since the personnel are the essential factor of enterprise, the Company set the human resources management as one of the significant tasks in 2002. The Company planned to introduce qualified technicians and management personnel by various means; establish and perfect the quality valuation system, implement the competitive organism; further perfect the encouraging and binding system and improve the overall qualification of the whole staff. VI. Routine work of the Board of Directors (I) Board meetings and resolutions The Company held totally three Board meetings in the report period 1. April 1, 2001, the Company held the 1st Meeting of the 2nd Board of Directors in the conference room on 22/F B block of Sheng Ting Yuan Hotel, Hua Qiang Rd. N., Shenzhen. All of the seven directors of the Company attended the meeting, which was in compliance with regulations in Company Law and Articles of Association. Chairman of the Board, Mr. Chen Hongcheng, presided over the meeting and supervisors and financial supervisor attended the meeting as non-voting delegates. Following items were examined and approved in the meeting: (1) 2000 Work Report of the Board of Directors; (2) 2000 Financial Settlement Report; (3) 2000 Annual Report and the summary; (4) 2000 Profit Distribution Preplan; (5) 2001 Profit Distribution Policy; (6) Reengaging Anderson · Huaqiang Certified Public Accountants and Arthur Andersen Certified Public Accountants as domestic and overseas auditors of the Company; (7) Approving Ms. Chen Meixiang to resign from the post of director and electing Ms. Wang Jinfeng as director candidate; (8) Approving Ms. Wang Jinfeng from the post of financial supervisor and engaging Ms. Li Guoqing to take the place; (9) Approving Mr. Yang Xinfa to resign from the post of secretary of the Board and engaging Mr. Zhou Haolin to take the place; (10) Resolving to hold 2000 Shareholders’ General Meeting. 2. Aug. 28, 2001, the Company held the 2nd Meeting of the 2nd Board of Directors in the conference room on 22/F B block of Sheng Ting Yuan Hotel, Hua Qiang Rd. N., Shenzhen. All of the seven directors of the Company attended the meeting, which was in compliance with regulations in Company Law and Articles of Association. Chairman of the Board, Mr. Chen Hongcheng, presided over the meeting and supervisors and financial supervisor attended the meeting as non-voting delegates. Following items were examined and approved in the meeting: (1) 2001 Interim Report and the summary; (2) 2001 Interim Profit Distribution Plan: neither profit distribution nor capital public reserve transferring into share capital; (3) Resolution on Withdrawing Provisions for Devaluation of Assets including Fixed Assets, Construction-in-progress, intangible Assets and Entrusted Loan. 3. The Company held the 3rd Meeting of the 2nd Board of Directors in the conference room on 26/F Jiangsu Building, Yitian Rd. Shenzhen at 10 am, Dec. 12, 2001. Four directors of the total seven including chairman of the Board Chen Hongcheng, Dir. Chen Honghai, Dir. Chen Yuezhong and Dir. Ding Lihong attended the meeting. Vice chairman of the Board Zheng Yujian entrusted Chen Hongcheng and Dir. Yan Mingfei entrusted Dir. Ding Lihong to vote on behalf of them. Following items were examined and approved in the meeting: (1) Resolution on Establishing Puning Tian He Textile Manufactory; (2) Resolution on Increase Capital of and Shareholding Shenzhen Chuanger Fashion Co., Ltd. (II) Implementation of Resolutions of Shareholders’ General Meeting by the Board According to laws and regulations including Company Law, Securities Law and Articles of Association of the Company, the Board of Directors carefully implement all resolutions of and duteously treated all tasks set by the Shareholders’ General Meeting within the entrustment limit. 1. Implementation of 2000 profit distribution As examined and approved in the Company’s Shareholders’ General Meeting 2000, dividend totaling RMB 8.85 million was distributed to all shareholders at the rate of RMB 0.5 for every 10 shares (tax included). The dividend was converted to HK dollars for distribution at the average exchange rate on the first business date of People’s Bank of China after the publication date of resolutions of the General Meeting. 2. Implementation of resolution on participating in China Everbright Bank by shareholding Since the Company failed to subscribe for shares of China Everbright Bank, it cannot implement the resolutions on participating in China Everbright Bank by shareholding . 3. Implementation of resolution on Incorporating Shenzhen Rieys Industrial Co., Ltd. Shenzhen Rieys Industrial Co., Ltd. has been established according to relevant regulated procedures. 4. Implementation of resolution on Offering Guarantee to Palm Spring Property Development (Shenzhen) Co., Ltd. During the negotiation with this company, the Company considered the guaranteed amount was too large and the Company undertook too much risk. So it searched for new agreement in terms of guaranteed amount. 5. Implementation of resolution on Applying for Changing into Joint Venture Stock Limited Company Relevant local authority has handed in the application to relevant state authority, but no result was achieved so far. VII. Profit Distribution Preplan for 2001 and Profit Distribution Policy for 2002 Profit after tax as at Dec. 31, 2001 was respectively RMB 33,904,005 and RMB 36,326,005, as audited by Anderson · Huaqiang Certified Public Accountants under CAS and Arthur Andersen Certified Public Accountants under IAS. Based on the principal of taking the lower between the domestic auditing result and overseas auditing result as the basis of profit distribution, the domestic auditing result, RMB 33,904,005, will be regarded as the basis, 10% of which is withdrew as statutory surplus public reserve amounting to RMB 3,390,400.5; 5% of which is withdrew as welfare fund amounting to RMB 1,695,200.25; and RMB 12,000,000 is withdrew as discretional surplus public reserve. Plus retained profit carried down from 2000, RMB 59,836,805, total profit attributable to shareholders amounts to RMB 76,655,209.25. Based on the above figures and the Company’s actual situation, profit distribution preplan for 2001 is as follows: Dividend totaling RMB 26,550,000 is to be distributed to all shareholders at the rate of RMB 1.5 for every 10 shares (tax included). Dividend for B shares is to be converted to HK dollars for distribution at the average closing exchange rate one week prior to the ex-dividend date. 2. Estimated profit distribution policy for 2002 Based on the actual situation of the Company, estimated profit distribution policy for 2002 of the Company is as follows: (1) The Company plans to conduct once profit distribution in 2002. (2) 30% to 80% of net profit realized in 2002 will be distributed. (3) 30% to 80% of retained profit as of previous year will be distributed. (4) The profit will be distributed in forms of cash or bonus share or combination, and cash dividend will take 0% to 30% of the total distributed profit. (5) The Company estimates to conduct once transferring capital public reserve into share capital in 2002 with proportion of 30% to 80%. The detailed profit distribution method will be decided based on the actual situation of the Company in 2002. IX. REPORT OF THE SUPERVISORY COMMITTEE I. Work of the Supervisory Committee in the Report Year The Supervisory Committee held two meetings besides attending the Board meetings as non-voting delegates: 1. The Company held the 1st Meeting of the 2nd Supervisory Committee of 2001 on April 1, 2001, which reviewed and passed the following resolutions: (1) 2000 Work Report of the Supervisory Committee; (2) 2000 Report of Actual Budget; (3) 2000 Annual Report and Summary; (4) 2000 Profit Distribution Preplan; (5) Reviewed and passed the 2000 Auditors’ Report made by Anderson·Huaqiang Certified Public Accountants according to CAS and the 2000 Auditors’ Report made by Arthur Anderson Company according to IAS. The public notice on the resolutions of the meeting was published in Securities Times and Hong Kong Wen Wei Po dated April 3, 2001. 2. The Company held its 2nd Meeting of the 2nd Supervisory Committee on August 28, 2001, which reviewed and passed the following resolutions: (1) 2001 Interim Achievement Report and Interim Report Summary; (2) 2001 Interim Dividend Distribution Plan: the Company would neither implement interim dividend distribution nor transfer capital public reserve into share capital; (3) The proposal on provision of asset devaluation for fixed assets, construction in process, intangible assets and trust loans etc. The public notice on the resolutions of the meeting was published in Securities Times and Hong Kong Wen Wei Po dated August 30, 2001. II. Independent Opinions on the Company’s Operation by the Supervisory Committee In 2001, the Supervisory Committee strictly complied with PRC Company Law and Articles of Association, and seriously implemented its functions proceeding from the interests of the Company as well as the rights and interests of numerous shareholders. The Supervisory Committee made all-round inspection and supervision on the Company’s operation according to law, management, financial status and senior executives in terms of compliance with obligation and law etc. The Supervisory Committee concluded after careful review: (I) The Company’s Operation according to Law In 2001, the Board of Directors had seriously implemented various resolutions according to the resolutions of the Shareholders’ General Meeting, the decision-making procedures of which were in line with PRC Company Law and Articles of Association. In the principle of cautious management and keeping away risks of assets losses efficiently, the Company has established rather perfect internal control system, which shall come into effect after discussion and approval by the Board of Directors; The Supervisory Committee hasn’t found directors, president or other senior executives violating laws, regulations and the Articles of Association during their performance of obligations, or found any behavior of damaging the Company’s interests. (II) Financial Status Anderson·Huaqiang Certified Public Accountants and Arthur Anderson Company issued standard unqualified auditors’ report of 2001, which truly reflected the financial status and business results of the Company. (III) In the report year, the Company used raised funds according to prospectus. (IV) Purchase or Sale of Assets in the Report Year In the report year, the prices for purchasing and selling assets were reasonable. No inside trading was found, and no damaging of part of shareholders’ rights and interests or assets runoff occurred. (V) Correlative Transactions in the Report Year In the report year, the Company’s correlative transactions were fair and didn’t damaged the Company’s interests. X.SIGNIFICANT EVENTS I. Material Lawsuit and Arbitration The Company had no material lawsuit in the report year. II. Briefings and Progression on the Events of Purchase and Sales of Assets and Consolidation in the Report Year, Explanation of Impact of the above Events on the Company’s Financial Status and Management Results: The Company carried out production and management in the name of the listed company on the whole, and some of its subsidiaries were tending to end. In order to put various resources together, the Company reorganized and consolidated some of its subsidiaries, and transferred some unnecessary subsidiaries. Since these subsidiary companies had small registered capital and small business volume, their transfer resulted in no loss, had no impact on the Company’s financial status as well as on business results. III. Significant Correlative Transactions 1. There was no correlative transaction of purchase or sales of goods, or offering of labor. 2. There was no correlative transaction of transferring of assets or equity shares. 3. The Company should disclose any correlative transaction in terms of equity, debts, guarantee (including unconsolidated subsidiaries), the causes of these events and the impact on the Company: The Company owned RMB 14,687,855 as other receivables from Shenzhen Weisikang Co., Ltd., an associated company. 4、Other Correlative Transactions：One shareholder of the Company, Haicheng Industrial offered guarantee to the Company for its short-term loan totaling RMB 6,920,000 as at Dec. 31, 2001. IV. Significant Contracts and Implementation of Contracts in the Report Year (I) About significant guarantee in the report year The Company signed the Guarantee Contracts with Dixian B (stock code: 200160) each other. The Company offered the guarantee to Dixian B RMB 30 million, but Dixian B offered the guarantee to the Company RMB 30 million. The term of guarantee is one year and maturity is Sep. 2002. (II) In the report year, the Company entrusted other party to manage its cash assets in the following term: 1. The Company (the consigner) and Shenzhen Ying Hao Investment Co., Ltd. (the holder on trust) signed Trust Investment and Management Contract on December 25, 2000. It was stated in the contract that the Company would entrust the holder on trust to invest and manage RMB 30 million of its self-owned funds from January 1, 2001 for a trust term of 6 months; In the contracted term, the holder on trust would ensure safety of the consignor’s assets taking its own funds as guarantee; Upon completion of the contract, the Company should obtain an investment income ratio of 12% based on the principal. The contract was terminated on June 30, 2001. The Company withdrew all of its principal funds of RMB 30 million before June 30, 2001, and obtained RMB 1.8 million of investment income in August 24, 2001. 2. The Company (the consigner) and Shenzhen Zhong Sheng Ke Investment Co., Ltd. (the holder on trust) signed Trust Investment and Management Contract on January 3, 2001. It was stated in the contract that the Company would entrust the holder on trust to invest and manage RMB 20 million of its self-owned funds from January 1, 2001 for a trust term of 6 months; In the contracted term, the holder on trust would ensure safety of the consignor’s assets taking its own funds as guarantee; Upon completion of the contract, the Company should obtain an investment income ratio of 12% based on the principal. The contract was terminated on June 30, 2001. The Company withdrew all of its principal funds RMB 20 million before June 30, 2001, and obtained RMB 1.2 million of investment income in June 28, 2001. V. The Company or shareholder holding over 5% of shares had promised events in the report year or reports carried down to the report year. VI. In the report year, the Company reengaged Anderson·Huaqiang Certified Public Accountants and Arthur Anderson Company as its domestic accountants and overseas accountants respectively. The total auditing fees paid to Certified Public Accountants in 2001 were RMB 650,000. Comparison of fees in the recent two years paid to Certified Public Accountants: (Unit: RMB) To Anderson · Huaqiang To Arthur Anderson Company Certified Public Accountants Total amount in 2001 RMB 200,000 RMB 450,000 VII. Impact of relevant articles of WTO legal documents on the Company’s future operating activities since China’s entry into WTO: Since the Company is on the fully competitive market of the industry, the business environment for the Company and subsidiary holding companies had no remarkable change compared with that before China’s entry into WTO. So China’s entry into WTO will not have significant or unfavorable impact on the Company’s future operation. VIII. After report year events: 1. According to ZJGSZ [2002] No.6 Document, the Notification on Approving Circulation of Non-domestic Listed Foreign Shares of Guangdong Rieys Holding Co., Ltd, 16,875,000 non-domestic listed foreign shares held by Ms. Chen Meixiang, one of the Company’s shareholders, was transformed into B shares for circulation in Shenzhen Stock Exchange one year after March 2, 2002. As a result, the Company’s sponsor shares were changed to 91,125,000 shares and domestically listed foreign shares were change to 85,875,000 shares. 2. The company designated Hong Kong Ta Kung Pao as its overseas information disclosure newspaper for 2002. XI. FINANCIAL REPORT 1. Auditors’ Report (enclosed herewith) 2. Financial Report (enclosed herewith) 3. Financial Statement and Notes (enclosed herewith) XII. DOCUMENTS FOR REFERENCE 1. The financial statement carried with signatures and seals of legal representative, financial clerk and financial supervisor. 2. The master copy of auditors’ report carried with seal of Anderson·Huaqiang Certified Public Accountants as well as signatures and seals of certified public accountants. The master copy of auditors’ report carried with seal of Arthur Anderson Company as well as signatures and seals of certified public accountants. 3. The master copies of documents and original copies of public notices that had been disclosed in Securities Times and Hong Kong Wen Wei Po, the newspapers as designated by CSRC, in the report year. This annual report is prepared in both Chinese and English. Should there be any difference in interpretation between the two versions, the Chinese version shall prevail. Board of Directors of Guangdong Rieys Holding Co., Ltd. April 18, 2002 GUANGDONG RIEYS COMPANY LIMITED AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2001 TOGETHER WITH AUDITORS’ REPORT The reader is advised that this report has been prepared originally in Chinese. In the event of a conflict between this report and the original Chinese version or difference in interpretation between the versions of the report, the Chinese language report shall prevail. AUDITORS’ REPORT HK-FA-2002-0231 TO THE SHAREHOLDERS OF GUANGDONG RIEYS COMPANY LIMITED: (Incorporated in the People’s Republic of China with limited liability) We have audited the accompanying consolidated balance sheet of Guangdong Rieys Company Limited (the “Company”) and its subsidiaries (the “Group”) as of December 31, 2001, and the related consolidated statements set out on pages 2 to 30 of income, changes in equity and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements give a true and fair view of the financial position of the Group as of December 31, 2001 and of the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards, as published by the International Accounting Standards Board. ARTHUR ANDERSEN & CO Certified Public Accountants Hong Kong April 16, 2002 GUANGDONG RIEYS COMPANY LIMITED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2001 (Expressed in thousands of Renminbi) Note 2001 2000 ASSETS Current assets Cash and cash equivalents 22(b) 105,567 286,419 Trade and other receivables, net 4 158,449 110,994 Inventories, net 5 40,843 43,354 Prepayments 137,353 81,286 442,212 522,053 Non-current assets Prepayments for property, plant and equipment 35,600 23,536 Prepayments for long-term investments 6 51,500 16,000 Investment in an associate 8 23,928 - Property, plant and equipment, net 9 165,017 102,273 Land use rights, net 10 10,803 9,891 Deferred tax assets 11 1,206 - Other non-current assets 1,915 2,594 289,969 154,294 Total assets 732,181 676,347 LIABILITIES AND EQUITY Current liabilities Trade payables 46,000 52,318 Accruals and other payables 17,079 12,976 Due to related company 23 - 3,794 Short-term bank loans 12 198,700 202,870 Taxes payable 11,627 28,311 273,406 300,269 Non current liabilities Long-term bank loan 13 60,000 - Minority interests 1,893 6,672 Equity Share capital 14 177,000 177,000 Reserves 15 132,582 112,496 Retained earnings 87,300 79,910 396,882 369,406 Total liabilities and equity 732,181 676,347 2 The accompanying notes are an integral part of these financial statements. 3 GUANGDONG RIEYS COMPANY LIMITED AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2001 (Expressed in thousands of Renminbi except earnings per share data) Note 2001 2000 Sales 401,619 596,911 Cost of sales (323,772) (474,383) Gross profit 77,847 122,528 Other operating income 16 5,111 951 Distribution costs (7,766) (6,112) General and administrative expenses (20,381) (17,593) Profit from operations 54,811 99,774 Finance costs, net 17 (2,397) (4,291) Share of loss of an associate 8 (402) - Gains on disposal of subsidiaries 3 1,903 - Profit before tax 18 53,915 95,483 Income tax expenses 19(a) (17,693) (32,323) Profit after tax 36,222 63,160 Minority interests 104 163 Net profit for the year 36,326 63,323 Dividends 20 8,850 - Earnings per share - Basic and diluted 21 RMB0.21 RMB0.52 4 The accompanying notes are an integral part of these financial statements. 5 GUANGDONG RIEYS COMPANY LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED DECEMBER 31, 2001 (Expressed in thousands of Renminbi) Reserves Share Statutory Discretionary Retained Note Share capital premium reserves reserve profits Total Balances at January 1, 2000 108,000 2,754 10,252 - 26,044 147,050 Net profit for the year - - - - 63,323 63,323 Issuance of domestically listed foreign shares ("B shares") 1, 14 69,000 - - - - 69,000 Premium from issuance of B shares (net of underwriting commission and listing expenses of approximately RMB15,327,000) - 90,033 - - - 90,033 Appropriation from retained profits - statutory reserves 15 - - 9,457 - (9,457) - Balances at January 1, 2001 177,000 92,787 19,709 - 79,910 369,406 Net profit for the year - - - - 36,326 36,326 Dividends 20 - - - - (8,850) (8,850) Appropriation from retained profits - statutory reserves 15 - - 5,086 - (5,086) - - discretionary reserve 15 - - - 15,000 (15,000) - Balances at December 31, 2001 177,000 92,787 24,795 15,000 87,300 396,882 6 The accompanying notes are an integral part of these financial statements. 7 GUANGDONG RIEYS COMPANY LIMITED AND SUBSIDIARIES CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2001 (Expressed in thousands of Renminbi) Note 2001 2000 CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES: Cash (used in) generated from operations 22(a) (29,595) 39,768 Interest paid (17,144) (4,476) Income taxes paid (35,583) (20,165) Net cash (used in) from operating activities (82,322) 15,127 CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES: Purchase of property, plant and equipment (91,722) (35,217) Increase in land use rights (981) (6,920) Increase in investment in an associate (24,408) - Increase in prepayments for property, plant and equipment (12,064) (8,536) Increase in prepayments for long-term investment (35,500) (16,000) Net proceeds from disposal of subsidiaries 3 3,630 - Interest received 11,856 305 Proceeds from disposal of short-term investments 3,000 - Decrease in other non-current assets 679 1,292 Net cash used in investing activities (145,510) (65,076) CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES: (Decrease) increase in short-term bank loans (4,170) 163,500 Increase in long-term bank loan 60,000 - Proceeds from issuance of B shares - 159,033 Increase in minority interests - 2,000 Dividends paid (8,850) - Net cash from financing activities 46,980 324,533 Net (decrease) increase in cash and cash equivalents (180,852) 274,584 Cash and cash equivalents, beginning of year 286,419 11,835 Cash and cash equivalents, end of year 22(b) 105,567 286,419 The accompanying notes are an integral part of these 8 financial statements. 9 GUANGDONG RIEYS COMPANY LIMITED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2001 (Expressed in Renminbi (“RMB”) unless otherwise stated) 1. ORGANIZATION AND OPERATIONS Guangdong Rieys Company Limited (the “Company”) was incorporated as a joint stock limited company in the People’s Republic of China (the “PRC”) on November 17, 1997. The five promoters of the Company were Puning Haicheng Industrial Co., Ltd. (“Haicheng Co.”), Hong Kong Hoi Yeung Co. (“Hoi Yeung Co.”), Puning Huilong Textile Co., Ltd. (“Huilong Co.”), Puning Jianyang Industrial Co., Ltd. (“Jianyang Co.”) and Puning Zhaoye Trading Co., Ltd. (“Zhaoye Co.”). The registered capital of the Company upon its incorporation was RMB80,000,000, dividing into 80,000,000 share with a par value of RMB1 each. In June 1998, Hoi Yeung Co. stopped operation and all its shares in the Company were assumed by its owner, Ms. Chen Meixiang. In April 2001, Zhaoye Co. transferred all its shares in the Company to Zhongshengke Investment Co., Ltd. Pursuant to the resolution of shareholders meeting in April 1999, the Company issued to all its shareholders bonus shares at the rate of 10:3.5 based on the total number of shares of 80,000,000 shares as of December 31, 1998, totaling 28,000,000 shares. After the bonus shares issued, the total number of shares of the Company increased to 108,000,000 shares with a par value of RMB1 each. Pursuant to approval document No. [2000] 133 issued by the China Securities Regulatory Commission dated September 29, 2000, the Company issued 69,000,000 domestically listed foreign shares (“B shares”) with a par value of RMB1 each which were listed on the Shenzhen Stock Exchange on October 17, 2000. The Company and its subsidiaries (hereinafter referred to as the “Group”) are principally engaged in the production and sale of clothes. The address of the registered office of the Company is Meixin Industry Park, Jun Bu Town, Puning, Guangdong, PRC. The total number of employees of the Group as of December 31, 2001 was approximately 2,000 (2000: approximately 1,900). 2. PRINCIPAL ACCOUNTING POLICIES The principal accounting policies adopted in preparing the consolidated financial statements of the Group are as follows: (a) Basis of presentation The accompanying consolidated financial statements of the Group are prepared in accordance with International Financial Reporting Standards (“IFRS”) as published by the International Accounting Standards Board. They are prepared under the historical cost convention, except that available-for-sale investments are stated at their fair value. 10 (b) Adoption of new accounting principle Effective from January 1, 2001, the Group has adopted IAS 39, Financial Instruments: Recognition and measurement, for the first time, the adoption IAS 39 had no material effect on amounts reported in prior year. 11 2. PRINCIPAL ACCOUNTING POLICIES (Cont’d) (c) Principles of consolidation The consolidated financial statements include the Company and its subsidiaries and also incorporate the Group’s interest in associates on the basis as set out in Note 2(g) below. The purchase method of accounting is used for acquired businesses. Results of subsidiaries and associates acquired or disposed of during the year are included in the consolidated financial statements from the date of acquisition or to the date of disposal. The equity and net income attributable to minority shareholders’ interests are shown separately in the balance sheet and statement of income, respectively. All significant intercompany balances and transactions, including intercompany profits and unrealized profits and losses, are eliminated on consolidation. Consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances. (d) Cash and cash equivalents Cash represents cash on hand and deposits with banks which are repayable on demand. Cash equivalents represent short-term, highly liquid investments which are readily convertible into known amounts of cash with original maturities of three months or less and that are subject to an insignificant risk of change in value. (e) Receivables Receivables are initially recorded at the fair value of the consideration given and are subsequently carried at amortized cost, after provision for impairment. (f) Inventories Inventories are stated at the lower of cost and net realizable value. Cost, calculated on the weighted average basis, comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. When inventories are sold, the carrying amount of those inventories is recognized as an expense in the period in which the related revenue is recognized. The amount of any write-down of inventories to net realizable value and all losses of inventories are recognized as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realizable value, is recognized as a reduction in the amount of inventories recognized as an expense in the period in which the reversal occurs. 12 (g) Subsidiaries A subsidiary is a company in which the Company controls. Control exists when the Company has the power to govern the financial and operating policies of the subsidiary so as to obtain benefits from its activities. 13 2. PRINCIPAL ACCOUNTING POLICIES (Cont’d) (h) Associates An associate is a company, not being a subsidiary or a joint venture, in which the Company has significant influence. Significant influence exists when the Company has the power to participate in, but not control, the financial and operating decisions of the associate. Investments in associates are accounted for using the equity method. An assessment of investments in associates is performed when there is an indication that the asset has been impaired or the impairment losses recognized in prior years no longer exist. (i) Property, plant and equipment and depreciation Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment loss. The initial cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditure incurred after the property, plant and equipment have been ready for its intended use, such as repairs and maintenance and overhaul costs, are recognized as expense in the period in which they are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of the asset beyond its originally assessed standard of performance, the expenditures are capitalized as an additional cost of the asset. Depreciation is calculated using the straight-line method to write off the cost, after taking into account the estimated residual value (10% of the initial cost), of each asset over its expected useful life. The expected useful lives are as follows: Buildings 35 years Machinery and equipment 10 years Motor vehicles and office equipment 5-8 years The useful life and depreciation method are reviewed periodically to ensure that the method and period of depreciation are consistent with the expected pattern of economic benefits from items of property, plant and equipment. When assets are sold or retired, their cost and accumulated depreciation and accumulated impairment loss are eliminated from the accounts and any gains or losses resulting from their disposal is included in the consolidated income statement. Construction-in-progress represents plant and properties under construction and is stated at cost. This includes cost of construction, plant and equipment and other direct costs plus borrowing costs which include interest charges and exchange differences arising from foreign currency borrowings used to finance these projects during the construction period, to the extent that they are regarded as adjustment to interest costs. Construction-in-progress is not depreciated until such time as the relevant assets are completed and ready for use. 14 2. PRINCIPAL ACCOUNTING POLICIES (Cont’d) (j) Land use rights Land use rights are stated at cost less accumulated amortization and accumulated impairment loss. Amortization is calculated using the straight-line method to write off the cost over the useful lives (fifty years). (k) Goodwill The excess of the cost of an acquisition over the Company’s interest in the fair value of the net identifiable assets and liabilities acquired as at the date of the exchange transaction is recorded as goodwill and recognized as an asset in the balance sheet. With respect to investments in associates, goodwill is included in the carrying amount of the investment. The identifiable assets and liabilities recognized upon acquisition are measured at their fair values as at that date. Any minority interest is stated at the minority’s proportion of the fair values. Goodwill is carried at cost less accumulated amortization and accumulated impairment losses. Goodwill is amortized on a straight-line basis over its useful life. Amortization of goodwill is included in operating profit. The unamortized balances are reviewed at each balance sheet date to assess the probability of continuing future benefits. If there is an indication that goodwill may be impaired, the recoverable amount is determined for the cash-generating unit to which the goodwill belongs. If the carrying amount is more than the recoverable amount, an impairment loss is recognized. (l) Long-term investments Investments are initially measured at cost, which is the fair value of the consideration given for them, including transaction costs. Available-for-sale investments are subsequently carried at fair value without any deduction for transaction costs by reference to their quoted market price at the balance sheet date. Gains or losses on measurement to fair value of available-for-sale investments are recognized directly in the fair value reserve in shareholders’ equity, until the investment is sold or otherwise disposed of, or until it is determined to be impaired, at which time the cumulative gains or losses previously recognised in equity is included in the consolidated income statement for the period. Available-for-sale investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured by alternative valuation methods should be measured at cost. In such case, the carrying amounts of such investments should be reviewed at each balance sheet date for impairment. 15 2. PRINCIPAL ACCOUNTING POLICIES (Cont’d) (m) Operating leases Leases of assets under which substantially all the risks and rewards of ownership are effectively retained by the lessor are classified as operating leases. Leases payments under operating leases are recognized as an expense on a straight-line basis over the lease term. Aggregate benefit of incentives provided by the lessor is recognized as a reduction of rental expense over the lease term on a straight-line basis. (n) Provisions A provision is recognized when, and only when an enterprise has a present obligation (legal or constructive) as a result of a past event and it is probable (i.e. more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. Where the effect of the time value of money is material, the amount of a provision is the present value of the expenditures expected to be required to settle the obligation. (o) Minority interests Minority interests include their proportion of the fair values of identifiable assets and liabilities recognized upon acquisition of a subsidiary. (p) Revenue recognition Provided it is probable that the economic benefits associated with a transaction will flow to the Group and the revenue and costs, if applicable, can be measured reliably, revenue is recognized on the following bases: (i) Sale of goods Revenue is recognized when the significant risks and rewards of ownership of the goods have been transferred to the buyer. (ii) Interest income Interest income from bank deposits is recognized on a time proportion basis that takes into account the effective yield on the assets. 16 2. PRINCIPAL ACCOUNTING POLICIES (Cont’d) (q) Taxation The income tax charge is based on profit for the year and considers deferred taxation. Deferred taxes are calculated using the balance sheet liability method. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets and liabilities are measured using the tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled based on tax rates enacted or substantially enacted at the balance sheet date. The measurement of deferred tax liabilities and deferred tax assets reflects the tax consequences that would follow from the manner in which the Group expects, at the balance sheet date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are recognized regardless of when the timing difference is likely to reverse. Deferred tax assets and liabilities are not discounted and are classified as non-current assets (liabilities) in the balance sheet. Deferred tax assets are recognized when it is probable that sufficient taxable profits will be available against which the deferred tax assets can be utilized. At each balance sheet date, the Group re-assesses unrecognized deferred tax assets and the carrying amount of deferred tax assets. The Group recognizes a previously unrecognized deferred tax assets to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. The Group conversely reduces the carrying amount of a deferred tax asset to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilized. Current tax and deferred tax are charged or credited directly to equity if the tax relates to items that are credited or charged, in the same or a different period, directly to equity. A deferred tax liability is recognized for all taxable temporary differences, unless the deferred tax liability arises from goodwill for which amortization is not deductible for tax purposes. Other taxation is provided on the basis of the relevant PRC tax regulations. (r) Subsidy income Subsidy income from government is recognized only when there is reasonable assurance that the company has complied with the conditions attaching to them and the subsidy income will be received. 17 2. PRINCIPAL ACCOUNTING POLICIES (Cont’d) (s) Foreign currency translation Each entity within the Group maintains its books and records in RMB, which is not freely convertible. The measurement currency of each entity within the Group is considered to be RMB. Transactions in other currencies are translated into RMB at exchange rates prevailing at the time of transactions. Monetary assets and liabilities denominated in other currencies at the balance sheet date are re-translated at exchange rates prevailing at that date. Non-monetary assets and liabilities in other currencies are translated at historical rates. Exchange differences arising on the settlement of monetary items at rates different from those at which they were initially recorded during the periods are recognized in the statement of income in the period in which they arise. (t) Borrowing costs Borrowing costs include interest charges and other costs incurred in connection with the borrowing of funds, including amortization of discounts or premiums relating to borrowings, amortization of ancillary costs incurred in connection with arranging borrowings and exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. Borrowing costs are expensed as incurred, except when they are directly attributable to the acquisition, construction or production of a qualifying asset that necessarily takes a substantial period of time to get ready for its intended use in which case they are capitalized as part of the cost of that asset. Capitalization of borrowing costs commences when expenditures for the asset and borrowing costs are being incurred and the activities to prepare the asset for its intended use are in progress. Borrowing costs are capitalized at the weighted average cost of the related borrowings until the asset is substantially ready for its intended use. If the resulting carrying amount of the asset exceeds its recoverable amount, an impairment loss is recorded. (u) Pension scheme Pursuant to the PRC laws and regulations, contributions to the basic old age insurance for the Group’s local staff are to be made monthly to a government agency based on 10%~25% of the standard salary set by the provincial government, of which 7%~19% is borne by the Group and the remainder is borne by the staff. The pension scheme meets the criteria of a defined contribution in accordance with IAS 19, “Employee Benefits”. The government agency is responsible for the pension liabilities relating to such staff upon their retirement. The Group accounts for these contributions on an accrual basis. 18 2. PRINCIPAL ACCOUNTING POLICIES (Cont’d) (v) Financial instruments Financial assets and financial liabilities carried on the balance sheet include cash and cash equivalents, trade and other receivables, long-term investments, investment in an associate, payables, balances with related party and borrowings. The accounting policies on recognition and measurement of these items are disclosed in the respective accounting policies mentioned in Note 2. Financial instruments are classified as liabilities or equity in accordance with the substance of the contractual arrangement on initial recognition. Interest, dividends, gains, and losses relating to a financial instrument classified as a liability are reported as expense or income. Distributions to holders of financial instruments classified as equity are charged directly to equity. When the rights and obligations regarding the manner of settlement of financial instruments depend on the occurrence or non-occurrence of uncertain future events or on the outcome of uncertain circumstances that are beyond the control of both the issuer and the holder, the financial instruments is classified as a liability unless the possibility of the issuer being required to settle in cash or another financial asset is remote at the time of issuance, in which case the instrument is classified as equity. (w) Impairment of assets (i) Financial instruments Financial instruments are reviewed for impairment at each balance sheet date. For financial assets carried at amortized cost, whenever it is probable that the company will not collect all amounts due according to the contractual terms of loans, receivables or held-to-maturity investments, an impairment or bad debt loss is recognized in the consolidated income statement. Reversal of impairment losses previously recognized is recorded when the decrease in impairment loss can be objectively related to an event occurring after the writedown. Such reversal is recorded in income. However, the increased carrying amount is only recognized to the extent it does not exceed what amortized cost would have been had the impairment not been recognized. For available-for-sale financial assets, an impairment is recognized in the statement of income when there is objective evidence that the asset is impaired. The recoverable amount of a debt instrument remeasured to fair value is the present value of expected future cash flows discounted at the current market interest rates for a similar financial assets. A reversal of an impairment loss is recorded when the decrease in the impairment loss can be objectively related to an event occurring after the write down. Such reversal is recorded in income. 19 2. PRINCIPAL ACCOUNTING POLICIES (Cont’d) (v) Impairment of assets (Cont’d) (ii) Other assets Other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Whenever the carrying amount of an asset exceeds its recoverable amount, an impairment loss is recognized in income or treated as a revaluation decrease for an asset that is carried at revalued amount to the extent that the impairment loss does not exceed the amount held in the revaluation surplus for that same asset. The recoverable amount is the higher of an asset’s net selling price and value in use. The net selling price is the amount obtainable from the sale of an asset in an arm’s length transaction less the costs of disposal while value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. Recoverable amounts are estimated for individual assets or, if it is not possible, for the cash-generating unit to which the asset belongs. Reversal of impairment losses recognized in prior years is recorded when there is an indication that the impairment losses recognized for the asset no longer exist or has decreased. The reversal is recorded in income or as a revaluation increase. However, the increased carrying amount of an asset due to a reversal of an impairment loss is recognized to the extent it does not exceed the carrying amount that would have been determined (net of amortization and depreciation) had no impairment loss been recognized for that asset in prior years. (x) Segment reporting The Group is organized on a worldwide basis into one major operating business. The divisions are the basis upon which the Group reports its primary segment information. Financial information on business and geographical segments is presented in Note 26. (y) Contingencies Contingent liabilities are not recognized in the financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. A contingent asset is not recognized in the financial statements but disclosed when an inflow of economic benefits is probable. (z) Subsequent events Post-year-end events that provide additional information about a company’s position at the balance sheet date or those that indicate the going concern assumption is not appropriate are reflected in the financial statements. Post-year-end events that are not adjusting events are disclosed in the notes when material. 20 3. CHANGES IN GROUP’S ORGANIZATION During the year ended December 31, 2001, the Company sold the following subsidiaries all incorporated in the PRC: Original attributable Name Date of disposal equity interests Principal activities Puning Weitian Garments Co., Ltd. May 11, 2001 76.92% Clothes processing Puning Tianwan Garments Co., Ltd. May 14, 2001 68.18% Clothes processing Puning Kewei Garments Co., Ltd. May 7, 2001 88.95% Clothes processing Puning Changhong Garments Co., Ltd. July 7, 2001 90.00% Clothes processing Puning Guocheng Garments Co., Ltd. June 9, 2001 88.24% Clothes processing Puning Changtai Garments Co., Ltd. June 12, 2001 92.41% Clothes processing Shanghai Rieys Import & Export Co., Ltd. August 8, 2001 90.00% Import and export The above subsidiaries did not generate any sales or net profit from January 1, 2001 up to the date of disposal. In 2000, sales and net loss from those subsidiaries amounted to RMB15,082,000 and RMB991,000 respectively. The disposal of the above subsidiaries had the following effects on the financial position and the income statement of the Group: 2001 RMB’000 Cash and cash equivalents 4,914 Other receivables 7,157 Due from the Company 28,112 Prepayments 5,286 Property, plant and equipment, net 22,085 Trade payables (20,972) Accruals and other payables (7,154) Net identifiable assets and liabilities 39,428 Minority interests (4,675) Net identifiable assets and liabilities attributable to the Company 34,753 Gains on disposal 1,903 Consideration received 36,656 Settlement of the amount due to the above subsidiaries (28,112) Cash disposed of (4,914) Net cash inflow 3,630 21 4. TRADE AND OTHER RECEIVABLES, NET 2001 2000 RMB’000 RMB’000 Trade receivables 134,244 94,127 Other receivables 26,859 18,344 Less : provision for doubtful debts (2,654) (1,477) 158,449 110,994 5. INVENTORIES, NET 2001 2000 RMB’000 RMB’000 Raw materials At net realizable value 112 - At cost 2,895 35,248 Subtotal 3,007 35,248 Work-in-progress, at cost 20,466 1,512 Finished goods At net realizable value 1,101 901 At cost 16,269 5,693 Subtotal 17,370 6,594 40,843 43,354 6. PREPAYMENTS FOR LONG-TERM INVESTMENTS Prepayment for long-term investments represent the amount prepaid to acquire equity interests in certain companies incorporated in the PRC. As of December 31, 2001, the transfers of equity interest were still in progress. 7. INVESTMENT IN A SUBSIDIARY As of December 31, 2001, the Company directly owned equity interests in the following subsidiary, which was incorporated in the PRC: Registered Attributable Name Date of incorporation capital equity interests Principal activities RMB’000 Shenzhen Rieys Industrial Co., Ltd. December 7, 2000 20,000 90% Investment and liaison of export business 22 8. INVESTMENT IN AN ASSOCIATE As of December 31, 2001, the Company directly owned equity interests in the following associate which was incorporated in the PRC: Register Attributable Date of ed equity Name incorporation capital interest Principal activities RMB’00 0 Shenzhen Wis September 29, 20,000 33% Development, Communicat 2001 manufacturing and ion Co., Ltd. sales of (“Wis communication Communicat products and ion”) provision of technical services As of December 31, 2001, investment in the associate comprised: 2001 2000 RMB’000 RMB’000 Unlisted shares, at cost 6,600 - Due from an associate 14,688 - Less: share of post-acquisition loss (402) - 20,886 - Goodwill arising from acquisition 3,120 - Less: accumulated amortization (78) - 3,042 - 23,928 - The amount due from the associate was unsecured, non-interest bearing and had no fixed repayment terms. The directors of the Company are of the opinion that the underlying value of the associate was not less than its carrying value as of December 31, 2001. 23 9. PROPERTY, PLANT AND EQUIPMENT, NET Movements in property, plant and equipment were as follows: 2001 2000 Motor vehicles Machinery and and office Construction-in- Buildings equipment equipment progress Total Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Cost Beginning of year 35,995 58,567 5,459 21,680 121,701 86,484 Additions 15,291 24,331 4,040 48,060 91,722 35,217 Disposals in connection with the sales of subsidiaries (14,700) (8,177) (1,007) - (23,884) - Other disposals - - (197) - (197) - Transfers 40,720 20,582 4,159 (65,461) - - End of year 77,306 95,303 12,454 4,279 189,342 121,701 Accumulated depreciation Beginning of year 2,431 14,896 2,101 - 19,428 12,745 Depreciation for the year 682 5,220 801 - 6,703 6,683 Write back upon the sales of subsidiaries (266) (1,422) (111) - (1,799) - Other disposals - - (7) - (7) - End of year 2,847 18,694 2,784 - 24,325 19,428 Net book value End of year 74,459 76,609 9,670 4,279 165,017 102,273 Beginning of year 33,564 43,671 3,358 21,680 102,273 73,739 As of December 31, 2001 and 2000, the amount of property, plant and equipment did not include any capitalized borrowing costs. As of December 31, 2001, buildings of the Company with net book value of approximately RMB22,530,000 (2001: Nil) were pledged as collateral for the Group’s short-term bank loans (see Note 12). The directors are of the opinion that the underlying values of property, plant and equipment as of December 31, 2001 were not less than their carrying values. 24 10. LAND USE RIGHTS, NET 2001 2000 RMB’000 RMB’000 Cost Beginning of year 10,404 3,484 Additions 981 6,920 End of year 11,385 10,404 Accumulated amortization Beginning of year 513 443 Additions 69 70 End of year 582 513 Net book value End of year 10,803 9,891 Beginning of year 9,891 3,041 Land use rights comprise land use fees paid to the land administration authorities for the rights to use the lands where the Group companies’ factory buildings in Punning are located. As of December 31, 2001, land use rights at cost of approximately RMB 4,050,000 (2000: Nil) were pledged for the Group’s short-term bank loans (see Note 12). 11. DERFERRED TAX ASSETS 2001 2000 RMB’000 RMB’000 Deferred tax relating to provision for doubtful debts 876 - Deferred tax relating to provision for inventory obsolescence 330 - 1,206 - 25 12. SHORT-TERM BANK LOANS 2001 2000 RMB’000 RMB’000 Secured 198,700 39,870 Unsecured - 163,000 198,700 202,870 As of December 31, 2001, the Group had short-term bank loans bearing interests ranging from 5.265% to 8.775% (2000: from 5.265% to 8.775%) per annum. Among these bank loans, RMB19,100,000 (2000: Nil) were secured by certain buildings and land use rights of the Group (see Note 9 and Note 10), RMB114,000,000 (2000: Nil) were guaranteed by independent third parties and RMB65,600,000 (2000: Nil) were guaranteed by Haicheng Co., a shareholder of the Company. As of December 31, 2000, RMB39,870,000 were guaranteed by Zhaoye Co., a former shareholder of the Company. 13. LONG-TERM BANK LOAN As of December 31, 2001, the Group had a long-term bank loan at fixed interest rate of 5.94% per annum maturing in 2003. The long-term bank loan was guaranteed by an independent third party. 14. SHARE CAPITAL As of December 31, 2001, the share capital included promoters’ shares and B shares, which ranked pari passu. The details of share capital were as follows: 2001 2000 2001 2000 Number of shares RMB’000 RMB’000 (in thousands) Registered, issued and fully paid: Unlisted – Promoters’ shares of RMB1 each 108,000 108,000 108,000 108,000 Listed – B shares of RMB1 each 69,000 69,000 69,000 69,000 177,000 177,000 177,000 177,000 Movements in share capital during the year were as follows: 2001 2000 2001 2000 Number of shares RMB’000 RMB’000 (in thousands) Balances, beginning of year 177,000 108,000 177,000 108,000 26 Issuance of B shares (see Note 1) - 69,000 - 69,000 Balances, end of year 177,000 177,000 177,080 177,000 27 15. RESERVES According to the Company Laws of the PRC and Articles of Association of the Company, the Company is required to provide certain statutory reserves which are appropriated from the net profit as reported in the statutory accounts prepared in accordance with the PRC accounting standards and the relevant accounting regulations (“PRC GAAP”). Accordingly, the Company shall set aside 10% of its net profit for statutory revenue reserve fund (except where the fund has reached 50% of the Company’s registered capital) and 5% for the statutory common welfare fund. The Company may make appropriations from its net profit to the discretionary revenue reserve fund upon approval by shareholders. These reserves cannot be used for purposes other than those of which they are created and are not distributed as cash dividends without the prior approval by shareholders under certain conditions. The directors have resolved that the statutory common welfare fund is to be utilized to build or acquire capital items, such as dormitories and other facilities for the Group’s employees, and cannot be used to pay for staff welfare expenses. Title to these capital items will remain with the Group. For the year ended December 31, 2001, the directors proposed that 10% and 5% (2000: 10% and 5%) of the net profit as reported in the statutory accounts be appropriated to statutory revenue reserve fund and statutory common welfare fund, totaling approximately RMB5,086,000 (2000: approximately RMB9,457,000). The resolution is subject to approval by shareholders in the annual general meeting. Pursuant to the resolution of the board of directors’ meeting dated April 1, 2001, the Company made appropriation of RMB12,000,000 from its net profit to the discretionary reserve. 16. OTHER OPERATING INCOME 2001 2000 RMB’000 RMB’000 Subsidy income 5,032 - Others 79 951 5,111 951 Pursuant to the relevant document issued by the Financial Bureau of Puning City in 2001, the Company is entitled to a subsidy income for the business expansion of the Company. The Company recognized it as other operating income. 17. FINANCE COSTS, NET 28 2001 2000 RMB’000 RMB’000 Interest income from bank deposits 11,856 305 Interest expenses on bank loans (17,144) (4,476) Gains on disposal of short-term investments 3,000 - Others (109) (120) (2,397) (4,291) 29 18. PROFIT BEFORE TAX Profit before tax was determined after charging (crediting) the following: 2001 2000 RMB’000 RMB’000 Staff costs - salaries and wages 23,786 25,411 - provision for staff and workers’ bonus and welfare fund 2,802 3,383 - contribution to defined contribution pension schemes 850 1,016 Depreciation of property, plant and equipment 6,703 6,683 Loss on disposal of property, plant and equipment 190 - Amortization of land use rights 69 70 Amortization of goodwill 78 - Cost of inventories 323,772 474,383 Rental of office buildings under operating leases 105 670 Provision for inventory obsolescence - 510 Provision for doubtful debts 1,177 980 Exchange (gains) losses, net (65) 47 19. TAXATION (a) Income tax expense Details of income tax expense charged during the year are as follows: 2001 2000 RMB’000 RMB’000 Current income tax expense 18,899 32,323 Deferred tax relating to the origination of temporary differences (1,206) - 17,693 32,323 The Group is subject to income tax at the rate of 33%, of which the enterprise income tax ("EIT") rate is 30% and the local income tax rate is 3%. 30 19. TAXATION (Cont’d) The reconciliation of the statutory tax rate to the effective tax rate was as follows: 2001 2000 RMB’000 RMB’000 Accounting profit 53,915 100.0% 95,483 100.0% Tax at the statutory tax rate of 33% 17,792 33.0% 31,509 33.0% Tax effect of income that are not subject to income tax (99) (0.2%) - - Tax effect of expenses that are not deductible (assessable) in determining taxable profit - - 814 0.9% Income tax expense 17,693 32.8% 32,323 33.9% (b) Turnover tax Pursuant to the “Provisional Regulations on VAT of the PRC”, the Group is subject to VAT at the rate of 17%. An input credit is available whereby VAT previously paid on purchases of semi-finished products or raw materials etc. can be used to offset the VAT on sales to determine that net VAT payable. In addition, the Group is subject to City Maintenance and Construction Tax and Education Surcharge at rates of 5% and 3% based on tax payments of VAT respectively. 31 20. DIVIDENDS 2001 2000 RMB’000 RMB’000 Dividends declared before year end 8,850 - Dividends declared after year end (See Note 28) 26,550 8,850 In accordance with the relevant regulations in the PRC and the Articles of Association of the Company, the Company declares dividends based on the lower of retained profits as reported in the statutory accounts and the financial statements prepared in accordance with IFRS. As the statutory accounts have been prepared in accordance with PRC GAAP, the retained profits as reported in the statutory accounts will be different from the amount reported in the accompanying consolidated financial statements. As of December 31, 2001, the retained profits before final dividends reported in the statutory accounts were approximately RMB87,878,000 (2000: approximately RMB82,909,000). 21. EARNINGS PER SHARE The calculation of basic earnings per share was based on the consolidated net profit attributable to shareholders for the year ended December 31, 2001 of approximately RMB36,326,000 (2000: approximately RMB63,323,000), divided by the weighted average number of shares in issue during the year of 177,000,000 shares (2000: 122,367,000 shares). Diluted earnings per share do not differ from basic earnings per share as there were no dilutive potential ordinary shares as of year end. 32 22. NOTES TO THE CASH FLOW STATEMENT (a) Reconciliation from profit before tax to cash generated from operations: 2001 2000 RMB’000 RMB’000 CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES: Profit before tax 53,915 95,483 Adjustments for: Provision for doubtful debts 1,177 980 Provision for inventory obsolescence - 510 Depreciation of property, plant and equipment 6,703 6,683 Amortization of land use rights 69 70 Loss on disposal of property, plant and equipment 190 - Amortization of goodwill 78 - Share of loss of an associate 402 - Gains on disposal of subsidiaries (1,903) - Interest expenses 17,144 4,476 Interest income (11,856) (305) Gains on disposal of short-term investments (3,000) - Operating profit before working capital changes 62,919 107,897 Decrease in inventories 2,511 18,407 Increase in trade and other receivables (55,789) (27,965) Increase in prepayments (61,353) (68,766) Increase in trade payables 14,654 10,797 Increase (decrease) in accruals and other payables 11,257 (3,159) (Decrease) increase in due to related company (3,794) 2,557 Cash (used in) generated from operations (29,595) 39,768 (b) Analysis of the balances of cash and cash equivalents 2001 2000 RMB’000 RMB’000 Cash on hand 2,175 2,108 Bank current deposits 103,392 254,311 Bank time deposits - 30,000 105,567 286,419 33 23. RELATED PARTY TRANSACTIONS Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party, or exercise significant influence over the party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. (a) Relationship Name Relationship Haicheng Co. Major shareholder holding 37% equity interest of the Company Wis Communication An associate of the Company (b) Transactions During the year, the Group did not have any significant related party transactions except for the guarantee provided by related party mentioned in Note 12. (c) Balances with related parties The amount due from an associate as of December 31, 2001 and the amount due to a related company as of December 31, 2000 were unsecured, interest free and repayable on demand. 24. CONTINGENT LIABILITIES As of December 31, 2001, the Company provided a guarantee to an independent third party for a short-term bank loan amounting to RMB30,000,000 (2000: Nil). 25. FINANCIAL INSTRUMENTS (a) Financial risk management The Group’s activities expose it to a variety of financial risks, including credit risk, interest rate risk, liquidity risk and foreign exchange risk. Financial risk management is carried out by the Finance Department under policies approved by the Board of Directors. (i) Credit risk The carrying amounts of cash and cash equivalents, trade and other receivables represent the Group’s maximum exposure to credit risk in relation to financial assets. Cash is placed with reputable banks and the weighted average effective interest rate on deposits was approximately 0.98% per annum. 34 25. FINANCIAL INSTRUMENTS (Cont’d) (a) Financial risk management (Cont’d) (i) Credit risk (Cont’d) The majority of the Group’s trade receivables related to sales of goods from third party customers. The Group performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral on trade receivables. The Group maintains a provision for doubtful debts and actual losses have been within management’s expectations. For the year ended December 31, 2001, approximately 70% of the Group’s turnover was made to top five customers (2000: approximately 50%). As of December 31, 2001, no single customer accounted for greater than 15% of total trade receivables. No other financial assets carry a significant exposure to credit risk. (ii) Interest rate risk The directors believe that the Group’s exposure to interest rate risk of financial assets and liabilities as of December 31, 2001 was minimal since their deviation from their respective fair values was not significant. (iii) Liquidity risk The Group policy is to maintain sufficient cash and cash equivalents or have available funding through an adequate amount of committed credit facilities to meet its current use in operations. (iv) Foreign exchange risk The foreign exchange risks of the Group occur due to the fact that the Group has business activities denominated in foreign currencies. The Group did not enter into any foreign exchange forward contracts to hedge against foreign currency fluctuations. However, the directors believe that the Group’s exposure to foreign exchange risk was minimal since most of the Group’s foreign currency transactions are denominated in HKD and USD and, over the past five years, there has been no significant fluctuation in the exchange rates between RMB and USD and HKD. (b) Fair value estimation In assessing the fair value of other financial instruments, the Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date as follows: (i) Cash and cash equivalents and short-term bank loans The carrying amount of cash and cash equivalents and short-term bank loans approximates their fair value due to the short-term maturity of these financial instruments. 35 (ii) Receivables and payables The carrying amount of receivables and payables, which are all subject to normal trade credit terms, approximates their fair values. 36 25. FINANCIAL INSTRUMENTS (Cont’d) (b) Fair value estimation (Cont’d) (iii) Balances with related parties No disclosure of fair values is made for balances with related parties as it is not practicable to determine their fair values with sufficient reliability since these balances are non-interest bearing and have no fixed repayment terms. (iv) Long-term investment and investment in an associate The fair value of long-term investment and investment in an associate cannot be reliably estimated and disclosed because these investments do not have quoted market price in an active market and other methods for estimating fair value for these investments are clearly inappropriate or unworkable. (v) Long-term bank loans The fair value of long-term bank loans is based on the current rates available for debt with the same maturity and credit-rating risk profile. As of December 31, 2001, the difference between the fair values and carrying amounts of the Group’s long-term bank loans was minimal since the difference between the current rates and the historical rates of such long-term bank loans was not significant. 26. SEGMENT INFORMATION (a) Business segment The Group conducts its business within one business segment - the business of production and sales of clothes. 37 26. SEGMENT INFORMATION (Cont’d) (b) Geographical segments The Group’s activities are mainly conducted in Mainland China and Hong Kong in the PRC and in the United States. The geographical segments are primary reporting segments of the Group. An analysis by geographical segments is as follows: Mainland China Hong Kong The United States Unallocated Total 2001 2000 2001 2000 2001 2000 2001 2000 2001 2000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Revenue from external customers 81,089 287,883 230,928 242,202 89,602 66,826 - - 401,619 596,911 Segment result 17,977 63,996 44,557 47,213 15,313 11,319 - - 77,847 122,528 Other operating income 5,111 951 - - - - - - 5,111 951 Unallocated expenses - - - - - - (28,147) (23,705) (28,147) (23,705) Profit from operations 23,088 64,947 44,557 47,213 15,313 11,319 (28,147) (23,705) 54,811 99,774 Finance costs, net - - - - - - (2,397) (4,291) (2,397) (4,291) Share of loss of an associate (402) - - - - - - - (402) - Gains on disposal of subsidiaries 1,903 - - - - - - - 1,903 - Income tax expense - - - - - - (17,693) (32,323) (17,693) (32,323) Minority interest - - - - - - 104 163 104 163 Net profit (loss) for the year 24,589 64,947 44,557 47,213 15,313 11,319 (48,133) (60,156) 36,326 63,323 Segment assets 41,182 82,372 75,102 11,755 13,645 - - - 129,929 94,127 Investment in an associate 23,928 - - - - - - - 23,928 - Unallocated assets - - - - - - 578,324 582,220 578,324 582,220 Total assets 65,110 82,372 75,102 11,755 13,645 - 578,324 582,220 732,181 676,347 Total liabilities - - - - - - 333,406 300,269 333,406 300,269 Substantially all the capital expenditures of the Group are in Mainland China. 27. COMMITMENTS (a) Capital commitments As of December 31, 2001, the Group had the following capital commitments: - Investment in subsidiaries amounting to approximately RMB5,120,000 (2000: Nil). (b) Operating lease commitments Total future minimum lease payments under non-cancelable operating leases are as follows: 2001 2000 RMB’000 RMB’000 Office buildings - not later than one year - 189 38 28. SUBSEQUENT EVENTS Pursuant to the resolution of the Board of Directors’ meeting dated April 16, 2002, the Company declared final dividends to all shareholders in the ratio of RMB1.5 (2000: RMB0.5) for every 10 shares, based on the total number of shares of 177,000,000 shares as of December 31, 2001. The total amount of cash dividends proposed was RMB26,550,000 (2000: RMB8,850,000). In addition, the Company made appropriation of RMB 12,000,000 (2000: RMB15,000,000) from its net profit to the discretionary revenue reserve fund. The resolutions are subject to approval by shareholders in the annual general meeting. 29. IMPACT OF IFRS ADJUSTMENTS ON NET PROFIT/NET ASSETS The Group’s consolidated financial statements were prepared in conformity with IFRS as if those standards had been applied consistently throughout the years. This basis of accounting differs from that used in the statutory accounts of the Group prepared in accordance with PRC GAAP. The principal adjustments made to conform to IFRS are as follows: Net profit for the year ended Net assets as of December 31, December 31, 2001 2000 2001 2000 RMB’000 RMB’000 RMB’000 RMB’000 As reported in the statutory accounts 33,904 63,047 370,909 363,555 Impact of adjustments: - Reversal of recognition and amortization of trademark 1,135 1,135 (1,783) (2,918) - Reversal of pre-operating expenses 81 (859) - (81) - Deferred tax 1,206 - 1,206 - - Dividends proposed after year end - - 26,550 8,850 As restated in the Group’s IFRS financial statements 36,326 63,323 396,882 369,406 30. APPROVAL OF FINANCIAL STATEMENTS The financial statements were approved by the board of directors on April 16, 2002. 10101b/VVE 39