长虹美菱(000521)皖美菱Ｂ2001年年度报告（英文版）

HEFEI MEILING CO., LTD. 2001 ANNUAL REPORT Content . Important Notices-------------------------------------------------------------------------1 . Company Profile---------------------------------------------------------------------------1 . Financial Highlight and Business Highlight------------------------------------------2 . Changes in Share Capital and Particulars about Shareholders------------------2 . Particulars About Director, Supervisor And Senior Executives And Staff ---4 . Administrative Structure-----------------------------------------------------------------6 . Brief Introduction to the Shareholders’ General Meeting -----------------------10 . Report of the Board of Directors ---------------------------------- -------------------11 . Report of the Supervisory Committee------------------------------------------------16 . Significant Events-------------------------------------------------------------------------17 . Financial Report--------------------------------------------------------------------------20 . Documents Available for Reference---------------------------------------------------29 I. IMPORTANT NOTICES: Board of Directors of Hefei Meiling Co., Ltd. (hereinafter referred to as the Company) individually and collectively accept responsibility for the correctness, accuracy and completeness of the contents of this report and confirm that there are no material omissions nor errors which would render any statement misleading. Director Wu Yili was absent from the meeting without entrusting other directors to vote on behalf of him. Hua Zheng Certified Public Accountants and Pricewaterhouse Coopers Certified Public Accountants issued standard Auditors’ Report without reserved opinion for the Company. II. COMPANY PROFILE 1. Legal name of the Company In Chinese: 合肥美菱股份有限公司 In English: HEFEI MEILING CO., LTD. Abbr.: HFML 2. Legal Representative: Zhang Jusheng 3. Secretary of the Board of Directors: Xue Hui Tel: (86) 551-2884961 ext.394 Fax: (86) 551-2883122 4. Registered Address and Office Address: No. 48, Wuhu Road, Hefei City Post Code: 230001 Internet Website of the Company: http://www.meiling.com E-mail: secretary@mail.meiling.com 5. Newspapers Chosen for Disclosing the Information of the Company: Securities Times, China Securities and Ta Kung Pao Internet Website Designed by CSRC for Publishing the Annual Report: http://www.cninfo.com.cn The Place Where the Annual Report is Prepared and Placed: Secretariat of Board of Directors on 2/F of the Office Building of the Company 6. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of Stock: MEILINGDIANQI Stock Code: 000521 WANMEILING-B Stock Code: 200521 7. The initial registration of the Company: Date: Dec. 31, 1992 Address: Hefei Municipal Administration for Industry and Commerce The re-registration of the Company: Date: Dec. 17, 1997 Address: Anhui Provincial Administration for Industry and Commerce 1 Number of Industrial and Commerce registration: QGWZF Zi No. 001684 Number of taxation registration: GSW Zi 34010414918555X The Certified Public Accountants engaged by the Company: Domestic: Name: Hua Zheng Certified Public Accountants Address: International Enterprise Bldg., No. 35, Jinrong Av., Xicheng District Shenzhen Overseas: Name: Pricewaterhouse Coopers Certified Public Accountants Address: 23/F, Sunning Plaza, Causeway Bay, Hong Kong III. FINANCIAL HIGHLIGHTS AND BUSINESS HIGHLIGHTS 1. The Company’s net profit realized in the year 2001 was respectively RMB –349,550,000 and RMB –341,373,000 as audited under PRC GAAP and IAS, Specific difference are stated as follows: Unit: In ’000 RMB Net loss for the year Net assets as at ended 31 December, 2001 31 December, 2001 As reported under PRC GAAP 349,550 1,027,960 Adjustments to conform with IAS: Provision for maintenance expenses --- 14,000 Reversal of provision for inventory 5,325 --- Impairment loss of accounts receivable 8,193 268,808 Difference in devaluation of fixed assets 2,481 2,481 Difference in provisions 14,010 3,626 Others 484 1,344 As reported under IAS 341,373 737,701 IV. CHANGE IN SHARE CAPITAL AND PARTICULARS ABOUT SHAREHOLDERS 1. Particulars about change in shares (Ended Dec. 31, 2001) Unit: share Increase/decrease of this time (+, - ) Amount at the Amount at Items Share Bonus Capitalization of year-begin Others Sub- total the year-end Allotment shares public reserve I. Unlisted Shares 1. Promoters’ shares 126,982,650 126,982,650 Including: State-owned share 123,396,375 123,396,375 Domestic juristic person’s shares 3,586,275 3,586,275 Foreign juristic person’s shares Others 2. Raised juristic person’s shares 22,029,973 22,029,973 3. Employees’ shares 43,662 43,662 4. Preference shares or others 13,433,844 -13,433,844 -13,433,844 0 2 Total Unlisted shares 162,490,129 -13,433,844 -13,433,844 149,056,285 II. Listed Shares 1. Domestically RMB ordinary 138,052,820 +13,433,844 +13,433,844 151,486,664 shares 2.Domestically listed foreign shares 113,100,000 113,100,000 3. Overseas listed foreign shares 4. Others Total Listed shares 251,152,820 +13,433,844 +13,433,844 264,586,664 III. Total shares 413,642,949 413,642,949 Note: In the report period, there was no change in share capital due to bonus shares, capital public reserve transferring into share capital and shares allotment, and changing of the structure of share capital was due to listed of 13,433,844 transferred and allotted shares held by Hefei Meiling (Group) Holdings Co., Ltd.. The relevant Notice was published in Securities Times, Chain Securities and Ta Kung Pao dated Sep. 29, 2001. 2. Issuance and listing of the share As approved by CSRC, the Company issued 100 million domestically listed foreign shares (B shares) with the issuance price of RMB 3.30 per share dated Aug. 14, 1996. The aforesaid shares were listed for trading with Shenzhen Stock Exchange on Aug. 28, 1996. In June 1997, the Company implemented the Dividend Plan at the rate of 3.5 bonus shares for every 10 shares, and share capital was increased in 82,354,900 shares. The Company conducted A Shares Allotment Plan on basis of 2.22 for 10 from July 29 to Aug. 11, 1997 and actually raised 33,416,700 shares from the allotment. The said shares were listed for trading dated Aug. 23, 1997. Thus, the total share capital was increased to 413,642,949 shares. In accordance with the gist of the Announcement on Listing by Stages and In Group Of Transferred and Allotted Shares of the Listed Company issued by CSRC and the uniform arrangement of Shenzhen Stock Exchange, 39,214,961 transferred and allotted shares of the Company are listed for trading in May 2001 and Oct. 2002. Thus, the total number of unlisted shares amounts to 149,056,285 shares and the total number of listed shares amounts to 264,586,664 shares; and the share capital of the Company remained unchanged. 3. About shareholders (1) Ended Dec. 31, 2001, the Company has 103,960 shareholders in total, including 17,571 shareholders of B-share. (2) About the shares held by the top ten shareholders Type of Shares held at the Proportion of No. Shareholder’s name share year-end (share) total shares (%) 1 Hefei Meiling Group Company A shares 123,396,375 29.83% 3 2 Hefei Meiling Group Holdings Co., Ltd. A shares 9,643,172 2.33% 3 XIAO YANMEI B shares 2,305,949 0.56% 4 Yongsheng Industrial Co., Ltd. B shares 2,229,124 0.54% 5 Hefei Industrial and Commercial Bank A shares 1,707,750 0.41% 6 Hefei Refrigerator Fittings Factory A shares 1,707,750 0.41% 7 FANG JINGWEN B shares 1,616,200 0.39% 8 Hefei Agency of Anhui Agricultural Bank A shares 1,536,975 0.37% International Business Dept. of Anhui Industrial and 9 A shares 1,536,975 0.37% Commercial Bank 10 Anhui Province Technology Import & Export Corporation A shares 1,536,975 0.37% Note: (1) Shares held by Hefei Meiling Group Company on behalf of the state are promoters’ shares. The 2nd shareholder and the 3rd shareholder are actually the same company, they are shown separately due to the different registered name in the Company’s shareholder’s beadroll. In the report year, Hefei Meiling Group Holdings Co., Ltd. decreased the share in hold by 3,790,672 shares in the secondary stock exchange market; shares held by other shareholders are A and B shares in circulation, the Company is not aware of their relationship. (2) Shares held by shareholders holding over 5% (including 5%) of total shares have not been pledged and frozen. (3) Shareholder holding over 10% of the total shares of the Company Shareholder holding over 10% in the report year of total shares is Hefei Meiling Group Company. Legal representative: Zhang Jusheng; registration place: No. 48, Wuhu Rd., Hefei; registration capital: RMB 300 million; business scope: refrigerators, washing machine, VCD, water heater, plastic products, packing products, coppery products, hotel, transportation and property management. The said company holds 29.83% of total share capital of the Company without being pledged. (4) The control shareholder of the Company is a sole state-owned corporation under the control of Hefei Municipality State-owned Assets Management Committee (“the Committee”). The Committee is the determination and administration body exercising the owner’s function of the state assets upon the entrustment from the same rank government. It conductes comprehensive management and supervision over the operation, non-operation and resource state assets; and is responsible to coordinate and solve the significant problems occurred in the reform and operation of administrative system for state-owned assets. V. PARTICULARS ABOUT DIRECTOR, SUPERVISOR, SENIOR EXECUTIVE AND STAFF (I) Particulars about number of holding shares, office term and payment of directors, supervisors and senior executives 4 Number of Number of Name Gender Title holding shares at holding shares Office term the year-begin at the year-end Zhang Jusheng Male Chairman of the Board 17883 17883 May 1999 – May 2002 Wang Jiazhang Male Vice Chairman of the Board 13477 13477 Same as above Li Shijun Male Director, General Manager 0 0 Same as above Wang Yingmin Male Director, 0 0 Same as above Deputy General Manager Hu Zhengbin Male Deputy General Manager 0 0 Same as above Wei Wuzhou Male Deputy General Manager 0 0 Same as above Kong Tansheng Male Chief Accountant 0 0 Same as above Wei Wei Male Independent Director 0 0 Same as above Wu Yili Male Independent Director 0 0 Same as above Xu Guoping Male Director 12299 12299 Same as above Xue Hui Male Secretary of the Board 0 0 Same as above Wang Xuyin Male Chairman of the Supervisory 0 0 Same as above Committee Zhong Guopei Male Supervisor 0 0 Same as above Weng Jialin Male Supervisor 0 0 Same as above Total 43659 43659 Same as above Among Directors and Supervisors as listed above, Mr. Zhang Jusheng took the position of Chairman of the Board, Mr. Wang Jiazhang and Mr. Wang Yingmin took the position of Director in Hefei Meiling Group Holdings Co., Ltd., the control shareholder of the Company. Supervisor Zhong Guopei took the position in the subsidiary company of the control shareholder. (II) The determinate basis of the payment The determinate basis of the recompense to directors, supervisors and senior executives: The Company implemented the position wages system for directors, supervisors and senior executives; determined their annual salary according to wages management system, position estimation and annual performance as well as salary standards in the same trade. As discussed in the 14th meeting of the 3rd Board of Director of the Company, the annual salary of independent director was decided at RMB 20,000 per year. In 2001, the Company actually paid RMB 6,000 to every independent director. Total annual salary of the top three directors amounted to RMB 310,000 and total annual salary of the top three senior executives amounted to RMB 220,000. Particulars about recompense to directors and supervisors (the range of salary and number of person): The range of annual salary Number RMB 20,000 to RMB 30,000 2 persons 5 RMB 30,000 to RMB 60,000 2 persons RMB 60,000 to RMB 70,000 2 persons RMB 90,000 to RMB 120,000 3 persons (III) Particulars about changes in directors, supervisors and senior executives In the report year, as approved by Shareholders’ General Meeting, Zhang Wensheng no longer took the position of supervisor due to work transfer, and Zhong Guopei was elected to take his position; the Board of Directors examined and agreed to the application of Liu Yanming for resignation from the position of Secretary of the Board due to health problem; He Ping, Zang Yushun and Guo Huanbin were relieved from the position of deputy general manager, chief economist and chief accountant respectively due to work transfer. In the report year, as decided by the Board of Directors, Hu Zhengbing and Wei Wuzhou were engaged as deputy general manager respectively; Xu Hui was engage as Secretary of the Board, Kong Tansheng was engage as chief accountant. (IV) About staff (number, speciality composing, education background and retirees) The Company has 2,363 employees at present, including 84 middle-class or high-class professional technicians, 1,558 production personnel, 510 salespersons, 182 administrative personnel; 786 persons graduated from 3-years regular college graduate or above. The Company has totally 298 internal retirees without bearing the costs of retiree. The staff composition is as follows: Professional Number Proportion Production personnel 1,558 65.93% Salespersons 510 21.595 Administrative personnel 182 7.7% Technicians 84 3.56% Financial personnel 29 1.22% VI. ADMINISTRATIVE STRUCTURE (I) Administration of the Company Strictly according to the PRC Company Law, Securities Law and relevant laws and regulations as released by CSRC, the Company has been improving legal person administrative structure, established modern enterprise system and operated the Company in a standardized way. The Company has established the Shareholders’ General Meeting, the Board of Directors, the Supervisory Committee and formulated the Articles of Association, the Rules of Procedures of the Shareholders’ General Meeting, the Rules of Procedures of the Board of Directors, the Rules of Procedures of the Supervisory Committee, the Work Rules for General Manager and Independent Director System, which are all in line with the Administration Rules for Listed Companies. The current administrative structure is as follow: 6 1. About Shareholder and the Shareholders’ General Meeting: The Company has been ensuring all shareholders, especially medium and small shareholders, could enjoy equal status and ensuring all shareholders could fully implemented their own rights; The Company has established the Rules of Procedures of the Shareholders’ General Meeting, and could convene and hold the Shareholders’ General Meeting strictly according to the normative opinions by the Shareholders’ General Meeting. Meanwhile, the Company could let the numerous medium and small shareholders to know about management status in time by carefully receiving and answering visits and letters and phone calls from shareholders. The Company reviewed correlative transactions strictly according to stated procedures, during which related shareholders avoided voting so as to ensure the principle of openness, fairness, equitability and reasonableness correlative transaction, and well disclosed the contents and implementation of correlative transactions promptly. 2. Controlling Shareholder and Public Company: The controlling shareholder, on the whole, behaviors in a standardized way, and hasn’t overstep the Shareholders’ General Meeting to directly and indirectly interfere in the Company’s decision-making and management; The Company, on the whole, is separated from the controlling shareholder in personnel, assets, finance, organization and business except that they shares the same chairman of Board of Directors, and it makes business accounting and undertakes responsibilities and risks independently; The Board of Directors, the Supervisory Committee and internal organization could function independently. 3. Directors and the Board of Directors: The Company elected directors strictly according to the stated procedures in the Articles of Association; The number of members of the Board and its formation are in line with requirements of law and regulations; The Board of Directors formulated the Rules of Procedures of the Board of Directors. Every director could attend the Board meeting and the Shareholders’ General Meeting with a conscientious and responsible attitude, study relevant laws and legislations, and get an understanding of the rights, obligations and responsibilities as director. The Company has engaged two independent directors and established the Independent Director System. The Board of Directors has established special committees for making strategies, auditing, nomination, salary and performance evaluation, and has formulated detailed work rules for each special committee. 4. Supervisors and the Supervisory Committee: The number of supervisors and the formation are in line with requirements of laws and legislations; The Supervisory Committee formulated the Rules of Procedures of the Supervisory Committee; The supervisors have been performing their obligations seriously, supervising the Company’s finance and performance of directors, managers and other senior executives in terms of compliance with laws and legislations in the principle of being responsible towards shareholders. 5. Performance Evaluation, Encouragement and Binding System: The Company has preliminarily established fair and transparent performance evaluation criteria and encouragement and binding system for directors, supervisors and managers; The 7 Company engaged managers in a fair and transparent way, which is in line with laws and legislations, and it will further improve the performance evaluation, encouragement and binding system for directors, supervisors and senior executives in the future according to relevant laws and legislations. 6. About Relevant Beneficiaries: The Company has been fully respecting and safeguarding the legal rights and interests of the bank, other creditors, employees, consumers and other parties of related interests so as to collectively push the Company to develop in a sustained and healthy way. 7. About Information Disclosure and Transparency: The Company has formulated the Information Disclosure System, could on the whole 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, and has been disclosing detailed information and share changes of the large shareholder and its actual controller in time. (II) Particulars about Performance of Independent Directors In order to perfect the Company’s legal person administrative structure and protect the interests of numerous shareholders especially medium and small shareholders, the Board of Directors began to introduce independent director system in 1999. After releasing of the Guide Opinions for Listed Companies to Establish Independent Director System, the Company further improved the independent director system against this document. The Company has engaged Wei Wei and Wu Yili as independent director, who have been performing obligations according to relevant requirements of laws and legislations since they took office, and has been positively partaking of decision-making and expressing viewpoints independently. Meanwhile, in order that independent directors could play a better role, the Company has established various measures such as information circular system to let independent directors have a prompt understanding of the Company’s management condition so that they could perform their obligations. In order to further improve the independent director system, the Board of Directors in 2002 will engage an independent director with financial background, which is to be submitted to 2001 Shareholders’ General Meeting for discussion. (III) Separation from Controlling Shareholder in Business, Personnel, Assets, Organization and Finance The controlling shareholder of the Company is Hefei Meiling Group. In the report year, the Company, on the whole, had realized “Five Separations” in business, personnel, assets, organization and finance from its controlling shareholder, and they functioned independently. 1. In Respect of Business The Company has independent core businesses, independent in management and decision-making of this business, and assumes sole responsibilities for its profits and losses. The controlling shareholder is mainly engaged in investment and administration and promises it won’t compete with the Company in the same field. 2. In Respect of Personnel The Company is independent in labor, human affairs and salary management. It is the 8 Board of Directors that engages or removes senior executives. Employees are engaged through employment system. The Company shared the same chairman of the Board of Directors with its controlling shareholder Hefei Meiling Group. The Company’s senior executives including general manager, vice manager, chief accountant and Board secretary all take full-time duties and receive salaries in the Company, and haven’t taken part-time positions in shareholders’ companies except as director. The controlling shareholder hasn’t interfered in the decisions on engaging and removing personnel as made in the Board Meeting and the Shareholders’ General Meeting. 3. In Respect of Assets The Company is independent from its controlling shareholder in holding production system, auxiliary production system and equipment as well as independent purchase and sales systems. The Company hasn’t relied on its controlling shareholder to purchase staple raw materials and sell products. (1) Now the Company’s products are all named after the trademark of “Meiling”, the proprietary right of which belongs to its first large shareholder Hefei Meiling Group. In December of 1995, the Company signed a five-year trademark using agreement with Hefei Meiling Group, which expired on December 31, 2000. Through friendly negotiation between the two parties as per international conventions, a one-year Trademark Using Agreement was signed in 2001, in which it is stated that the Company shall pay annual fees equivalent to 1% of its turnover to Hefei Meiling Group in 2001. The agreement was published in Securities Times, China Securities and Hong Kong Ta Kung Pao dated February 7, 2002. (2) Up to June 30, 2001, the large shareholder Hefei Meiling Group owed RMB 367,813,045.81 of account receivable to the Company (it mainly occurred from acquiring assets of the Company’s air conditioning factory, equity rights from wash machine factory and from the corresponding occupation fees for the sake of the Company’s development). According to WZJHZ [2001] No.101 Document, Notification on Liquidation of Arrears Owed by Large Shareholder and Related Parties as released by CSRC Hefei Special Office, the Company made corresponding plan, namely, from the total arrear of RMB 367,813,045.81, the Company shall draw in 8% in 2001, 20% in 2002, 30% in 2003, 30% in 2004 and 12% in 2005 respectively. In 2001, Hefei Meiling Group returned RMB 19,690,000, taking 5.35% of the total debts. Regarding the arrear issue of Hefei Meiling Group Holdings Co., Ltd., the Company has urged this holding company to expedite reimbursement and discussed the concrete reimbursement plan. The holding company said that although it hadn’t fulfilled the reimbursement goal in 2001, it should accomplish reimbursement on schedule with successive implementation of certain measures. This liquidation plan was published in Securities Times, China Securities and Hong Kong Ta Kung Pao dated December 28, 2001. 4. In Respect of Organization The Company has complete and independent legal person administrative structure. The Shareholders’ General Meeting, the Board of Directors, the Supervisory 9 Committee and management organizations are all set up according to law and function in a standardized way. The controlling shareholder hasn’t interfered in the establishment of the Company’s organizations, and the controlling shareholder and its function departments have no superior or subordinate relationship with the Company and its function departments. The controlling shareholder hasn’t interfered in the Company’s production and management activities. There exists no condition of “Two Signboards but Same Staffs” between the Company and the controlling shareholder, and no mixing of management and sharing of same offices. 5. In Respect of Finance The Company has established independent finance department as well as independent business accounting system and healthy financial management system, which is operating in a standardized way. The financial personnel all take full-time duties in the Company and keep no personnel relationships with the controlling shareholder. The Company has independent bank account, makes business accounting and pays taxes independently, and doesn’t share same bank account with the controlling shareholder. (IV) Evaluation and Encouragement Mechanism for Senior Executives The Company has primarily established the performance evaluation mechanism for senior executives. The Board of Directors has made strict evaluation on the performance of senior executives, the main evaluation indexes include: index of economic results, index of quality and security and index of completion of key work etc. The salary consisting of basic salary and benefit salary is mainly determined against evaluation of position and annual performance. VII. BRIEFINGS ON THE SHAREHOLDERS’ GENERAL MEETING In the report year, the Company held one Shareholders’ General Meeting, namely, the 2000 Shareholders’ General Meeting. The notification on holding the meeting as well as the time, venue, agenda of the meeting were published in China Securities, Securities Times and Hong Kong Ta Kung Pao dated April 14, 2001. The meeting was held on schedule in the multi-function room of Meiling Building on May 18, 2001. There were 14 shareholders (or shareholders’ representatives) attended the meeting, who represented 144,259,039 shares, taking 34.88% of the Company’s total shares. The meeting was in line with relevant stipulations of the PRC Company Law and the Articles of Association. The following resolutions were reviewed and passed through voting: (1) 2000 Work Report of the Board of Directors; (2) 2000 Work Report of the Supervisory Committee; (3) 2000 Work Report of General Manager; (4) 2000 Financial Report of Actual Budget; (5) 2000 Profit Distribution Preplan and 2001 Profit Distribution Policies; (6) the Proposal on Engaging Certified Public Accountants; (7) the Proposal on Financial Handling of Employees’ Housing Revolving Funds; (8) the Proposal on Changing Supervisors; The public notice of resolutions was published in China Securities, Securities Times and Hong Kong Ta Kung Pao dated May 19, 2001. 10 VIII. REPORT OF THE BOARD OF DIRECTORS (I) Particulars about Management in the Report Year: 1. The Scope of Main Business Lines and Management Status The Company is an enterprise of household electric appliance industry, mainly engaged in the production, sale and providing service of different types of household refrigerators and auxiliary parts as well as sales and service of other household electric products. In 2001, Meiling refrigerators won the title of Chinese famous brand, the market share of which ranked the third place in China, and continuously keep a leading position in the industry. (1) Formation of Main Business Lines Income and Profits in the Report Year according to Products and Regions: Classified according to products: Product Sales income Sales cost Gross profit (%) Refrigerator 1,249,382,663.13 1,058,087,852.83 13.15 Washer 40,335,684.56 40,935,821.61 -14.88 Air conditioner 811.95 928,207.61 -1143.52 Classified according to regions: Income of main Increasing Profits of main Increasing Region business lines ratio (%) business lines ratio (%) Northeast China 131,821,584.04 -0.56 20,455,021.77 2.86 North China 261,883,317.40 -1.14 38,663,664.44 -2.70 East China 374,250,153.89 -0.38 64,395,021.54 14.27 North China 157,625,307.87 -0.73 24,067,543.10 1.05 Northwest China 64,057,129.69 -0.15 10,967,998.16 12.43 Southwest China 172,126,687.48 -25.75 27,880,772.70 -44.82 Overseas 1,30,911,887.86 17.65 3,283,854.51 105.27 Total 1,292,676,068.23 185,631,449.27 (II) In 2001, the Company altogether sold 1,038,000 sets of refrigerators and realized RMB 1,292,680,000 sales income. Because on the one hand, in 2001 risk control measures were not implemented strongly, the operation costs increased, and resource utilization ratio, administration efficiency and reaction speed were all not ideal, and on the other hand, the overall market demands declined, the market of household electric appliances was over-competing and the Company handled losses caused by some non-recurring facts, the Company suffered fairly large deficits for the first time in the report year. The Board of Directors believes that 2001 was the year for adjusting, stabilizing and standardizing, and although there occurred deficits in its overall achievement, in respects of production administration, risk management, and administrative management, the Company was further standardized and blind spots in management were eliminated so as to firm the development foundation and provide guarantee in organization and administration for further development; In respect of capital running, the Company has cleared up relationships with related parties, solved 11 part of management risks and safeguarded its good image in the capital market. 2.Management and Achievement of Major Holding Company and Participating Company: 3. The top five suppliers shared 34.75% in the Company’s total annual purchase amount or RMB 372,730,000; the first five customers shared 12.60 % in the Company’s total sales amount or RMB 163,380,000. 4. Problems and Difficulties Occurring in Management and Solutions: A. Difficulties and Problems In the report year, there was no remarkable weakening in price competition and disorderly competition. In the environment of over-competing market, the Company has reinforced internal cost management, adjusted the Company’s management strategies, conducted operation activities normally and accomplished the sales target of annual business plan, however, the Company didn’t make profits. There still exists a gap between the Company and famous household electric appliance enterprises of developed countries in management level, and the product structure and core competitiveness could not fully fulfill the demand of internationalized competition. The running efficiency especially sales network does not adapt to the current market competition and further development of the Company as well. B. Strategies The Company sticks to the development strategy of “keeping calm and making the business bigger and stronger”. To reinforce management of budget and business goals; To optimize sales network construction; To implement integration of management system and optimization of procedures, simplify organizational structure, and perfect scientific salary system; To effectively and promptly manage and monitor flowing of goods and funds through implementation of ERP projects; To optimize product structure and shorten product development period; To develop overseas market and increase overseas market share so as to ensure realizing of estimated profits. (II) Particulars about Investment in the Report Year 1. Application of Raised Funds in the Report Year: In the report year, the Company had neither allotted shares nor carried down the raised funds to the report year. 2. Investment Projects of Non-raised Funds In the report year, the Company offered US$ 200,000 (taking 20% shares in this company) to jointly establish Meiling Sigma Electric Appliance Co., Ltd. with Germany Sigma Electric Appliance Co., Ltd. and Shanghai Xi Ling Investment and Administration Company. The public notice of investment was published in Securities Times, China Securities, and Hong Kong Ta Kung Pao dated November 3, 2001. (III) The Impact of Significant Changes Occurring in Production Management Environment, Macro-policies and Legislations 1. The Impact of China’s Entry into WTO The international base of household electric appliances will further move to China after China’s entry into WTO so that competition of market and talents will become even more intense. The traditional marketing mode of urban market will be 12 challenged. Foreign competitors will hinder our exporting by means of technical barrier and anti-dumping strategies. However, at the same time, China’s entry into WTO will result in decrease of tariff barriers and other non-tariff barriers of some countries by a wide range, which is beneficial to enlarging export. The average tariffs of some directly imported spare parts will also decrease, which is beneficial to reducing cost and enhancing competitiveness. China’s entry into WTO is beneficial to international cooperation so that refrigerator technology will be enhanced. The progress of domestic economic system reform will be further pushed, which is beneficial to keeping on strengthening economic system reform and improving business environment. Generally speaking, China’s entry into WTO hasn’t impacted the Company much. 1. Impact of Price Competition on the Company Since the drastic price competition in household electric appliance industry in the year had negative effect on making profits, the Company will implement several measures including reinforcing development of new product, increasing added value of products, controlling costs, enhancing after-sales service quality and applying marketing strategies smartly etc. so as to eliminate deficits in 2002 and keep a stable development. 3. The Impact of Canceling the Income Tax Policy of “Levying at First & Refunding Later” According to CS [2000] No. 534 Document released by the Finance Department of Anhui Province, the Company enjoyed the income tax policy, namely, it was levied 33% at first and refunded 18% later. This preferential policy should not be implemented as of year 2002 according to relevant national stipulation. The Company shall be imposed 33% income tax should the government release no relevant policies in 2002. (IV) Auditors’ Report Issued by the Certified Public Accountants: Hua Zheng Certified Public Accountants and Pricewaterhouse Coopers Certified Public Accountants issued standard Auditors’ Report without reserved opinion for the Company. (V) Business Plan for 2002 Based on the operation principal of “Client first, Profit first, and Investor first”, the Company will carry out its work mainly focusing onfollowing aspects in 2002: (1) Making full use of its famous brand, the Company is to map the different sales strategy based on different districts and products for maximizing the profit. While maintaining the major market, the Company will develop the second and third markets. Through reforming the sales channels and reinforcing the construction of representative offices especially in terms of swift suitability to market, the company will strive for a larger market share. As for overseas market, the Company will increase its investment in the resources for import and export trade and adopt various means to enlarge the market share. (2) The Company will expedite the R&D for new products and improve the commercial consciousness of the research personnel; speed up the development and application of new technology, new materials, and new functions sot to reduce 13 the design cost; strengthen the technique management for better technique level. (3) The Company will reinforce its budget management system based on the target profit. According to the market principals, the Company valued the performance of its five major operation sections, as independent entities, by their respective investment and turnout rate. (4) The Company will adopt the ERP management system to enhance its business flow management to be more effective and assure the information being transferred in a genuine and timely manner. (5) Meeting the market requirements, the Company will continue to upgrade the traditional technique of the refrigeration industry with innovation in mainly eight aspects including fast mould, fresh keeping, environmental protection, auto-freezing, deep-freezing, frequency conversion, network, and evaporative freezing, etc., so as to grasp the most advanced technology and promote the Company with technology. (VI) Routine Work of the Board of Directors 1. Board meeting in the report period and the resolutions The 3rd Board of Directors held totally nine meetings in the report period. -----The 11th Meeting of the 3rd Board of Directors was held on Jan. 6, 2001, in which following resolutions were examined and adopted: a. Proposal on Reform on Salary System; b. Proposal on Administrative Restructure; c. Engagement of Partial Senior Executives. Notice on Resolutions of the meeting was published in Securities Times, China Securities and Ta Kung Pao dated Jan. 6, 2001. -----The 12th Meeting of the 3rd Board of Directors was held on Feb. 15, 2001, Changes in Partial Senior Executives was examined and adopted in the meeting. Notice on resolution of the meeting was published in Securities Times, China Securities and Ta Kung Pao dated Feb. 16, 2001. ----- The 13th Meeting of the 3rd Board of Directors was held on April 8, 2001, in which following resolutions were examined and adopted: a. 2000 Annual Report and the summary; b. 2000 Work Report of the Board of Directors; c. 2000 Financial Settlement Report; d. 2000 Profit Distribution Preplan and 2001 Profit Distribution Policy; e. Proposal on Accounting Treatment of House Revolving Fund; f. Proposal on Four Itmes of Provisions for Devaluation; g. Proposal on Engaging Certified Public Accountants; h. Convening 2000 Shareholders’ General Meeting. Notice on Resolutions of the meeting was published in Securities Times, China Securities and Ta Kung Pao dated April 14, 2001. -----The 14th Meeting of the 3rd Board of Directors was held on July 7, 2001, Proposal on Allowance to Independent Directors and Changes in Partial Senior Executives were examined and adopted in the meeting. Notice on resolutions of the meeting was published in Securities Times, China Securities and Ta Kung Pao dated July 10, 2001. 14 -----The 15th Meeting of the 3rd Board of Directors was held on Aug. 8, 2001, 2001 Interim Report and Proposal on Offsetting Partial Losses from Long-term Investment were examined and adopted in the meeting. Notice on resolutions of the meeting was published in Securities Times, China Securities and Ta Kung Pao dated Aug. 14, 2001. -----The 16th Meeting of the 3rd Board of Directors was held on Aug. 10, 2001, Material Event Disclosed in 2001 Interim Report was examined and approved in the meeting. -----The 17th Meeting of the 3rd Board of Directors was held on Sep. 27, 2001, Proposal on Partial Assets Reorganization and Changes in Partial Senior Executives were examined and approved in the meeting. -----The 18th Meeting of the 3rd Board of Directors was held on Nov. 1, 2001, Proposal on Establishing Meiling Xigema Electronic Appliances Co., Ltd. was examined and approved in the meeting. Notice on Resolution of the meeting was published in Securities Times, China Securities and Ta Kung Pao dated Nov. 3, 2001. -----The 19th Meeting of the 3rd Board of Directors was held on Dec. 22, 2001, Report on Operation in 2001 and Operation Plan for 2002 were examined and approved in the meeting. -----The 20th Meeting of the 3rd Board of Directors was held on Dec. 26, 2001, in which the Company analyzed subjectively the causes and risks of the accounts receivable from associated companies including the largest shareholder pursuant to WZJHZ [2001] No. 101 Document “Circular on Settlement of Accounts due from the Largest Shareholder and other Associated Parties” released by CSRC Hefei Special Office; and reached a settlement plan. Notice on Resolution of the meeting was published in Securities Times, China Securities and Ta Kung Pao dated Dec. 28, 2001. 2. Implementation of resolutions of Shareholders’ General Meeting by the Board Bearing the strong sense of social responsibility and professional spirits of loyalty and diligence, the Board of Directors carefully held and reported work to the Shareholders’ General Meeting 2000; basically implement all resolutions of the Meeting. (VII) Profit Distribution Preplan for 2001 and Profit Distribution Policy for 2002 1. Profit distribution preplan for 2001 Since the Company suffered deficits in 2001, it decided to conduct neither profit distribution nor capital public reserve transferring into share capital in 2001. After the deficits being offset, profit distribution will be considered. Such preplan is subject to examination and approval of the Board of Director at first, then to the Shareholders’ General Meeting 2001 for implementation. 2. 2002 Profit Distribution Policy Profit realized in 2002 will be used to make up deficits, so no profit distribution will be conducted. 15 IX. REPORT OF THE SUPERVISORY COMMITTEE According to relevant regulations of the PRC Company Law and the Articles of Association, in 2001, the Supervisory Committee holding a responsible attitude towards all shareholders seriously implemented superintend duty, ensured the resolutions of the Shareholders’ General Meeting could be performed and finalized, safeguarded the legal rights and interests of shareholders, accomplished the tasks assigned in the Articles of Association and the Shareholders’ General Meeting, and played a positive role in the Company’s standardized operation and sustained development. (I) The Meeting of the Supervisory Committee: In the report year, the Supervisory Committee held two meetings besides attending 2000 Shareholders’ General Meeting as well as attending all Board meetings of 2001 as non-voting delegates: -----The following resolutions were reviewed and passed in the 5th Meeting of the 3rd Supervisory Committee: (1) Reviewed and passed 2000 Annual Report and Summary; (2) 2000 Work Report of the Supervisory Committee. The public notice on the resolutions was published in Securities Times, China Securities, and Hong Kong Ta Kung Pao dated April 14, 2001. -----The following resolutions were reviewed and passed in the 6th Meeting of 3rd Supervisory Committee: Reviewed and passed 2000 Interim Report and Summary; (2) Resolution Report of the Supervisory Committee. (II) Independent Viewpoints Expressed by the Supervisory Committee: In the report year, the Supervisory Committee made supervision and inspection seriously in terms of the Company’s finance, the Board’s performance of resolutions of the Shareholders’ General Meeting, decision-making of management, the Company’s operation according to law, behaviors of directors, managers, senior managers and correlative transactions with controlling shareholder, and expressed the following viewpoints: (1) The Company and the controlling subsidiary established rather perfect internal control system in operating activities in 200l, and established the rules of procedures for the Shareholders’ General Meeting and the Board of Directors. Decision-making procedures were in line with relevant laws and legislations, and there existed no violation of the PRC Company Law, the Articles of Association, financial accounting system, national laws and legislations. (2) Directors, managers and senior executives were devoted to their duties, ran the Company according to law, carried out management in a standardized way, made development and renovation, respected and safeguarded the interests of all shareholders, and hadn’t violated the PRC Company Law, the Articles of Association and national laws and legislations. (3) In the report year, the Company had no event of purchase or sales of assets. (4) The Supervisory Committee believed that the correlative transactions between the Company and the controlling shareholder were based on faire market price and hadn’t 16 damaged the interests of the Company and shareholders. (5) CSRC Hefei special office made a tour inspection in the Company in November of 2001 and pointed out what were not normative in the Company’s operation, towards which the Board of Directors and the Supervisory Committee held special discussion meeting, worked out rectification measures and finalized these measures quickly. The Supervisory Committee will reinforce superintendence, ensure smooth management and keep away risks. (6) The Certified Public Accountants issued unqualified auditors’ report without explanatory remarks, which reflected the Company’s financial status in a real, objective and accurate way. X. SIGNIFICANT EVENTS (I) Material Lawsuits and Arbitration Guarantee provided to Anhui Wanyan Electronics Co., Ltd. (“Wanyan”) and Hefei Overseas Chinese Economic Development Company (“HOCED”) (1) Guarantee offered to Wanyan At the beginning of 1994, the Company offered guarantee to Wanyan for the loan of USD 2.5 million with a view to supporting Wanyan to develop. June 2000, Anhui Branch of People’s Bank of China transferred this loan to China Eastern Assets Management Company (CEAM) as a bad loan. July 2001, Hefen Office of CEAM brought litigation to Anhui High People’s Court regarding the loan and the according guarantee. (2) Guarantee offered to HOCED May 1994, HOCED suffered a capital shortage for purchasing farm and sideline products, so it borrowed a loan amounting to USD 23.5 million, for which Heli Company and the Company were required by certain authority to offered guarantee as joint guarantors (Heli Company as the first guarantor). Upon the expiration of the loan, HOCED failed to repay it in time. May 1999, Anhui High People’s Court ruled HOCED to repay the loan; Heli Company and the Company jointly took the principal repayment responsibility in case of the un-repayment of HOCED. Reconciliation of the above two issues: During the effective period of the above two guarantees, the Company had repetitively declared its position to relevant authorities by means of written form and meeting that: since the two guarantees were offered as required by certain authority at the beginning of 1994, when the Company was under the restructuring from state-owned enterprise to joint limited company and the relevant laws and regulations were imperfect, such guarantees were sole state administrative behaviors rather than the Company’s decision. Therefore, the Company shall be free from the according responsibility. After the High People’s Court ruled, the Company again reported to relevant authorities requiring settling the problem with financial fund or others. As a reply, relevant authorities agreed that Hefei Meiling Group Holdings Co., Ltd. (“Meiling Group Holdings”) pledge the state assets for the overdue loan provided Wanyan and HOCED failed to repay and Meiling Group Holdings also made commitment to make up the losses from the said guarantees with its state assets, 17 preventing the Company from suffering losses. March 2002, relevant authorities reexamined the said two guarantees and considered the corresponding responsibilities should be born by the Company. While in order to avoid the negative impact on the Company’s normal operation, it was approved that Meiling Group Holdings pledged its state assets for the overdue loan and settled all issues relevant to the guarantees in return for the exemption of account due to the Company. After overall consideration, the Board of Directors accept the solution, which effected the Company’s profit as of 2001. The said two guarantees were published in Securities Times, China Securities and Ta Kung Pao dated Dec. 14, 2001 and April 4, 2002 respectively. (II) In the report period, the Company conducted no purchase or sales of assets. (III) Material Related Transactions (1) Payment for guarantee offered by Meiling Group Holdings June 2000, Meiling Group Holdings made commitments to relevant financing organization to offer guarantee for the Company’s bank loan and bank acceptance bill. Since the Company had neither offered counter guarantee nor pledged assets to Meiling Group Holdings, its guarantee was a unilateral behavior, for which the Company should pay certain amount of fee according to business convention (not necessary for bank acceptance bill). Upon negotiation, Meiling Group Holdings exempted the Company from the charges in 2000. In the year 2001, the Company paid RMB 5,000,000 to Meiling Group Holdings for the guarantee provided by it at the rate of 1% of the balance guaranteed loan at the end of 2001. (2) Apportionment of publicizing expenditure As negotiated and agreed between the Company and Meiling Group Holdings, publicizing expenditure of Meiling Group Holdings was advanced by the Company and apportioned among the Company, the Group and its subsidiaries at an agreed rate. Since large part of the advertisement and publication aimed at improving the enterprise image and goodwill of “Meiling” and demonstrating the series products of “Meiling”, and small part aimed at publicizing the Company’s products; Meiling Group Holdings born 72.5% of the total expenditure and the Company born 27.5%, which was maintained in 1998, 1999, 2000 and 2001. So in the year 2001, the Company born RMB 23,333,136.47 and Meiling Group Holdings bore RMB 61,514,632.51 of publicizing expenditure. (3) “Meiling” Brand use fee paid to Meiling Group Holdings Dec. 1995, the Company signed Contract on ‘Meiling’ Brand Use Certificate with Meiling Group Holdings with a duration period of five years, which was expired on Dec. 31, 2000. From the end of 2000, the two companies started to negotiate regarding the brand use fee. Meiling Group Holdings insisted on two options: it charged the company an annual use fee at the rate of 3% to 5% of the Company’s total turnover based on the international business convention; or it sold the brand at one-off to the Company. Considering the first option was high costly, the Company planned to accept the second option. While due to many reasons, the brand assignment was not completed till now. After times of negotiation, the two parties reached the agreement on the annual use fee at the rate of 1% of the Company’s turnover as of 2001. 18 Relevant Notice was published in Securities Times, China Securities and Ta Kung Pao dated Feb. 8, 2002. Other related transactions occurred in the report period were all ordinary ones, details of which were stated in Notes to Financial Statements. (IV) In the Report period, the Company did not hold in trust, contract or lease the assets from other companies and the Company did not put in trust, contract or lease its assets to other companies. The Company did not entrust others with cash management in report period. (V) Implementation of Public Commitment Made by the Company or Shareholders holding over 5% shares of the Company (1) The Board of Directors examined and approved 2001 Profit Distribution Policy in April 2000 and planned to distribute 40% to 50% net profit realized in 2001 in form of cash. In April 2002, the Board of Directors examined and approved 2001 Profit Distribution Preplan without implementing profit distribution. Since the Company suffered deficits in 2001, the Board failed to implement the commitment. (2) Pursuant to Circular on Recovering Account Receivable from Related Parties including Control Shareholder, Meiling Group Holdings has repaid RMB 19.69 million, 5.35% of the total overdue account due RMB 367,813,045.81 to the Company in 2001. Moreover, the Company required Meiling Group Holdings reinforcing its overdue account repayment and negotiated the detailed recover plan, which was ensure by Meiling Group Holdings with commitment on gradual implementation of relevant measures. (VI) In the report period, the Company engaged Pricewaterhouse Coopers Certified Public Accountants and Hua Zheng Certified Public Accountants Co., Ltd. (the former Anhui Jingcheng Certified Public Accountants) as the overseas and domestic auditors with annual recompense of respectively HKD 800,000 and RMB 300,000. (VII) In the report period, neither the Company nor its Board or any director was punished or criticized publicly by CSRC or publicly scolded by the SSE. (VIII) Other Significant Event Tax dispute: March 31, 1997, the Company established a sales branch in Wuhu Economic Development Zone and recieved the business license and tax registration certificate strictly obeying the law. From April to Dec. 1997, total sales volume of the Company through the Wuhu Branch reached RMB 254,183,655.59, which was fully reported to the State Tax Bureau of Wuhu Economic Development Zone. Based on the sales, the Company paid RMB 43.16 million VAT and RMB 6,737,530.55 income tax to State Tax Bureau of Wuhu Economic Development Zone. According to the advantageous policy enjoyed by the Economic Development Zone, Ministry of Finance of Wuhu Municipal granted the Company a subsidy of RMB 20,416,759.26, which was stated under “subsidy income” in the Company’s accounting statements as of the year. While State Tax Bureau of Hefei Municipal judged the said subsidy to be recollected as VAT. In the Reply to Tax Collection Paper, the Company made a clear statement that “RMB 20,416,759.26 is paid as advanced VAT”. Pricewaterhouse Coopers Certified Public 19 Accountants and Jing Cheng Certified Public Accountants issued Professional Opinion on Tax Payment and Consultants’ Opinion on Tax Payment and expressed opinion regarding the issue. Besides, the Company made special report to relevant provincial and municipal People’s Government including explanations on the establishment background of Wuhu Sales branch, its sales status, advantageous policy enjoyed by Wuhu Economic Development Zone and relevant state regulations on VAT. Till now, this issue is still unsettled. With the principal of prudence, the Company stated the involved amount as estimated liabilities under expenses of non-operating in the financial statements as of 2001. Settlement of the issue will be timely disclosed in the future. The said tax matter was published in Securities Times, China Securities and Ta Kung Pao Dated Dec. 14, 2001. XI. FINANICAL REPORT HEFEI MEILING COMPANY LIMITED INTERNATIONAL AUDITORS’ REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2001 20 HEFEI MEILING COMPANY LIMITED Contents Pages International auditors’ report 1 Consolidated income statement 2 Consolidated balance sheet 3-4 Consolidated statement of changes in shareholders’ equity 5 Consolidated cash flow statement 6 Notes to the consolidated financial statements 7 – 28 Supplementary information 29 PricewaterhouseCoopers 22nd Floor Prince’s Building Central Hong Kong Telephone (852) 2289 8888 Facsimile (852) 2577 2692 International auditors’ report To the shareholders of Hefei Meiling Company Limited (Incorporated as a joint stock limited company in the People's Republic of China) We have audited the accompanying consolidated balance sheet of Hefei Meiling Company Limited (the “Company”) and its subsidiaries (the “Group”) as of 31 December 2001 and the related consolidated income and cash flow statements for the year then ended. These financial statements set out on pages 2 to 28 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 31 December 2001 and of the results of its operations and its cash flows for the year then ended in accordance with International Accounting Standards. PricewaterhouseCoopers Certified Public Accountants Hong Kong, 15 April 2002 HEFEI MEILING COMPANY LIMITED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2001 Notes 2001 2000 RMB’000 RMB’000 Sales 3 1,260,209 1,277,725 Cost of sales (1,104,164) (1,099,960) Gross profit 156,045 177,765 Government subsidies 4 1,614 8,979 Other operating income 5 15,362 8,123 Selling expenses (216,584) (142,054) Administrative expenses (262,779) (63,814) Other operating expenses (1,330) (299) Operating loss 6 (307,672) (11,300) Finance costs, net 8 (33,598) (2,004) Loss before tax (341,270) (13,304) Tax 9 (38) (14,544) Loss after tax (341,308) (27,848) Minority interests 25 (65) (127) Net loss (341,373) (27,975) Loss per share 10 (RMB0.83) (RMB0.07) The accompanying notes form an integral part of these consolidated financial statements. 2 HEFEI MEILING COMPANY LIMITED CONSOLIDATED BALANCE SHEET (continued) AS AT 31 DECEMBER 2001 Notes 2001 2000 RMB’000 RMB’000 ASSETS Non-current assets Land use rights 11 5,900 6,450 Property, plant and equipment 12 536,451 470,607 Construction in progress 13 9,183 48,507 Available-for-sale investments 14 11,730 11,150 Investment in an associated undertaking 15 1,660 - Amount due from controlling shareholder 16 375,970 370,526 Amount due from a related company 17 145,795 300,284 Deferred value added tax recoverable - 2,003 1,086,689 1,209,527 Current assets Inventories 18 294,723 350,628 Trade receivables 19 389,128 723,033 Trade receivables from related companies 31(f) 11,773 13,719 Bills receivable 66,263 38,905 Other receivables, deposits and prepayments 20 63,620 134,794 Cash and bank balances 21 126,426 126,565 951,933 1,387,644 Total assets 2,038,622 2,597,171 The accompanying notes form an integral part of these consolidated financial statements. 3 HEFEI MEILING COMPANY LIMITED CONSOLIDATED BALANCE SHEET (continued) AS AT 31 DECEMBER 2001 Notes 2001 2000 RMB’000 RMB’000 EQUITY AND LIABILITIES Capital and reserves Share capital 22 413,643 413,643 Capital reserve 571,429 571,429 Reserve funds 23 284,889 284,889 (Accumulated losses)/retained earnings (532,260) 62,477 737,701 1,332,438 Minority interests 25 2,081 2,016 Non-current liabilities Borrowings 26 8,920 23,920 Current liabilities Trade payables 342,881 410,246 Trade payables to related companies 31(f) 35,025 50,202 Bills payable 140,000 200,260 Other payables, receipts in advance and accruals 27 227,274 136,792 Borrowings 26 527,940 424,360 Dividend payable 2,800 2,937 Provision for warranty 28 14,000 14,000 1,289,920 1,238,797 Total liabilities 1,298,840 1,262,717 Total equity and liabilities 2,038,622 2,597,171 The accompanying notes form an integral part of these consolidated financial statements. 4 HEFEI MEILING COMPANY LIMITED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEAR ENDED 31 DECEMBER 2001 (Accumulated Share Reserve losses)/ capital Capital funds retained (Note 22) reserve (Note 23) earnings Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Year ended 31 December 2000 Balance at 1 January 2000 413,643 571,429 287,905 87,436 1,360,413 Adjustments arising from restatement of retained earnings of PRC statutory financial statements (Note 23 (c)) - - (4,122) 4,122 - Loss for the year - - - (27,975) (27,975) Transfer to reserve funds (Note 23) - - 1,106 (1,106) - Balance at 31 December 2000 413,643 571,429 284,889 62,477 1,332,438 Year ended 31 December 2001 Balance at 1 January 2001 As previously reported 413,643 571,429 284,889 62,477 1,332,438 Effect of adopting IAS 39 (Note (a)) - - - (253,364) (253,364) As restated 413,643 571,429 284,889 (190,887) 1,079,074 Loss for the year - - - (341,373) (341,373) Balance at 31 December 2001 413,643 571,429 284,889 (532,260) 737,701 (a) In accordance with the transitional requirements of IAS 39, the Group recorded an impairment charge of RMB253,364,000 in retained earnings for the remeasurement of the trade receivables, amount due from controlling shareholder and amount due from a related company at their recoverable amounts, being the present value of expected cash flows discounted at the market rate of interest for similar borrowers. The accompanying notes form an integral part of these consolidated financial statements. 5 HEFEI MEILING COMPANY LIMITED CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2001 Notes 2001 2000 RMB’000 RMB’000 Cash flows from operating activities Cash generated from/(used in) operations 29 (a) 64,278 (6,697) Interest paid (33,177) (34,812) Income tax paid (136) (5,907) Net cash generated from/(used in) operating activities 30,965 (47,416) Cash flows from investing activities Proceeds from disposal of property, plant and equipment 10 225 Investment in an associated undertaking 15 (1,660) - Purchase of property, plant and equipment (46,636) (6,941) Payments for construction in progress (25,878) (10,666) Repayment from a related company 2,710 61,545 (Increase)/decrease in amount due from controlling shareholder (52,114) 10,419 Dividends received 1,229 872 Interest received 3,372 4,213 Short-term bank deposits (placed)/withdrawn (961) 3,502 Increase in available-for-sale investments (580) - Net cash (outflow)/inflow from investing activities (120,508) 63,169 Cash flows from financing activities Proceeds from bank loans 767,830 770,860 Repayments of bank loans (679,250) (790,860) Dividends paid (137) (94) Decrease/(increase) in bank deposits pledged 11,545 (15,621) Net cash inflow/(outflow) from financing activities 99,988 (35,715) Increase/(decrease) in cash and cash equivalents 10,445 (19,962) Movements in cash and cash equivalents At start of year 52,077 72,039 Increase/(decrease) 10,445 (19,962) At end of year 21 62,522 52,077 The accompanying notes form an integral part of these consolidated financial statements. 6 HEFEI MEILING COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 General Hefei Meiling Company Limited (the “Company”) is a joint stock limited company incorporated in the People’s Republic of China (the “PRC”). The Company and its subsidiaries (the “Group”) are mainly engaged in the manufacturing and sale of household refrigerators and accessories of household appliances. The Company’s A shares and B shares are listed on the Shenzhen Stock Exchange. The Company’s controlling shareholder is Hefei Meiling Holding Company (“HMHC”), a state-owned enterprise established in the PRC. Currently, 32% (2000: 33%) of the Company’s issued shares are held by HMHC. Transactions with HMHC during the year and amounts due from HMHC are summarised in Note 31 and Note 16, respectively. 2 Principal accounting policies The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below: (a) Basis of preparation The consolidated financial statements have been prepared in accordance with International Accounting Standards (“IAS”). This basis of accounting differs in certain material respects from that used in the preparation of the statutory financial statements in the PRC. The PRC statutory financial statements of the Company and its subsidiaries have been prepared in accordance with the accounting principles and regulations applicable in the PRC. Appropriate adjustments have been made to these PRC statutory financial statements to conform with IAS. Differences arising from these adjustments are not incorporated in the Company’s and its subsidiaries’ statutory accounting records. The consolidated financial statements have been prepared under the historical cost convention except as disclosed in the accounting policies below. In 2001, the Group adopted IAS 39 “Financial Instruments: Recognition and Measurement”. In accordance with IAS 39, the comparative financial statements for the year ended 31 December 2000 are not restated, the effect of adopting this new standard is shown in the consolidated statement of changes in shareholders’ equity. (b) Subsidiary undertakings Subsidiary undertakings, which are those companies in which the Group has an interest of more than one half of the voting rights or otherwise has power to exercise control over the operations, have been consolidated. Subsidiaries are consolidated from the date on which effective control is transferred to the Group and are no longer consolidated from the date that control ceases. All significant intercompany transactions, balances and unrealised gains and losses on transactions between group companies have been eliminated. Where necessary, accounting policies for subsidiaries have been changed to ensure consistency with the policies adopted by the Company. Details of the Group’s subsidiary undertakings is shown in Note 32. 7 HEFEI MEILING COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2 Principal accounting policies (continued) (c) Associated undertaking Investment in associated undertaking is accounted for by the equity method of accounting. An associated undertaking is an undertaking over which the Group has between 20% and 50% of the voting rights, or over which the Group exercises significant influence, but which it does not control. Unrealised gains and losses on transactions between the Group and the associated undertaking are eliminated to the extent of the Group’s interest in the associated undertaking. Equity accounting involves recognising in the consolidated income statement the Group’s share of the associated undertaking’s profit or loss for the year. The Group’s interest in the associated undertaking is carried in the consolidated balance sheet at an amount that reflects its share of the net assets of the associated undertaking. Details of the Group’s associated undertaking is shown in Note 15. (d) Foreign currency translation The Group maintains its books and records in Renminbi (“RMB”). Foreign currency transactions are accounted for at the applicable rates of exchange prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into RMB at the exchange rates prevailing at the balance sheet date. Exchange differences are included in the consolidated income statement. (e) Land use rights Land use rights are stated at cost less accumulated amortisation. Land use rights are amortised over their lease terms using the straight-line method. (f) Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment loss. Depreciation is calculated on the straight-line method to write off the cost of each asset to their residual values over their estimated useful lives as follows: Buildings 30 - 40 years Plant and machinery 10 - 16 years Furniture, fixtures and office equipment 8 - 12 years Motor vehicles 8 - 15 years Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Gain or loss on disposal of property, plant and equipment is the difference between the net sales proceeds and the carrying amount of the relevant asset, and is recognised in the consolidated income statement. 8 HEFEI MEILING COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2 Principal accounting policies (continued) (f) Property, plant and equipment (continued) Major costs incurred in restoring property, plant and equipment to their normal working condition are charged to the consolidated income statement. Improvements of property, plant and equipment are capitalised and depreciated over their estimated useful lives. (g) Construction in progress Construction in progress represents premises under construction, plant and machinery under installation and is stated at cost. Cost includes all expenditures and other direct costs, prepayments and deposits attributable to the construction and installation. No depreciation is provided on construction in progress until the related asset is completed and transferred for production use. Interest costs on borrowings to finance the construction are capitalised, during the period of time that is required to complete and prepare the asset for its intended use, as part of the cost of the asset. Other borrowing costs are recognised as an expense in the period in which they are incurred. (h) Investments At 1 January 2001 the Group adopted IAS 39 and classified its investments into the following categories: (i) Trading; (ii) Held-to-maturity; and (iii) Available-for-sale. Investments that are acquired principally for the purpose of generating a profit from short-term fluctuations in price are classified as trading investments and included in current assets. Investments with fixed maturity that management has the intent and ability to hold to maturity are classified as held-to-maturity and are included in non-current assets. Investments intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, are classified as available-for-sale; these are included in non-current assets unless management has the express intention of holding the investment for less than twelve months from the balance sheet date or unless they will need to be sold to raise operating capital, in which case they are included in current assets. Management determines the appropriate classification of its investments at the time of the purchase and re-evaluates such designation on a regular basis. All purchases and sales of investments are recognised on the trade date, which is the date that the Group commits to purchase or sell the asset. Cost of purchase includes transaction cost. Trading and available-for-sale investments are subsequently carried at fair value, whilst held-to-maturity investments are carried at amortised cost using the effective yield method. Realised and unrealised gains and losses arising from changes in the fair value of trading investments and of available-for-sale investments are included in the consolidated income statement in the period in which they arise. During the current year, the Group did not hold any trading and held-to-maturity investments. 9 HEFEI MEILING COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2 Principal accounting policies (continued) (i) Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined on the weighted average method. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads. Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses. (j) Trade receivables Trade receivables are carried at original invoice amount less provision made for impairment of these receivables. Such provision for impairment of trade receivables is established if there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of provision is the difference between the carrying amount and the recoverable amount, being the present value of expected cash flows, discounted at the market rate of interest for similar borrowers. (k) Cash and cash equivalents Cash and cash equivalents are carried in the consolidated balance sheet at cost. For the purposes of the consolidated cash flow statement, cash and cash equivalents comprise cash on hand and deposits held at call with banks, other short-term highly liquid investments, net of bank fixed deposits with maturity over three months. (l) Borrowings Borrowings are recognised initially at the proceeds received, net of transaction costs incurred. In subsequent periods, borrowings are stated at amortised cost using the effective yield method; any difference between proceeds (net of transaction costs) and the redemption value is recognised in the consolidated income statement over the period of the borrowings. (m) Warranty The Group recognises the estimated liability to repair or replace products still under warranty at the balance sheet date. This provision is calculated based on past history of the level of repairs and replacements. (n) Retirement scheme The Group participates in a defined contribution retirement scheme operated by the local government. The Group is required to make contributions for its employees in accordance with prescribed rules and regulations of the retirement scheme. Contributions to the scheme are charged to the consolidated income statement in the year to which they relate. 10 HEFEI MEILING COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2 Principal accounting policies (continued) (o) Income tax The charge for PRC income tax is based on the result for the year as adjusted for items which are non-taxable or non-deductible and is provided at the rates applicable to the Company and its subsidiaries. Deferred income tax is provided, using the liability method, for all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Currently enacted tax rates are used to determine deferred income tax. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. (p) Revenue recognition Sales are recognised upon delivery of products and customer acceptance. Sales are shown net of sales taxes and discounts and after eliminating sales within the Group. Interest income is recognised on the accrual basis, taking into account the principals outstanding and the interest rates applicable. Dividend income is recognised when the right to receive payment is established. Government subsidies are recognised when the right to receive payment is established. (q) Operating leases Leases where a significant portion of the risks and the rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the consolidated income statement on the straight-line basis over the period of the lease. (r) Research and development costs Research expenditure is recognised as an expense as incurred. Cost incurred on development projects (relating to the design and testing of new or improved products) are recognised as intangible assets to the extent that such expenditure is expected to generate future economic benefits. Other development expenditures are recognised as an expense as incurred. (s) Financial instruments Financial instruments carried in the consolidated balance sheet include cash and bank balances, available-for-sale investments, receivables, payables and borrowings. The particular recognition methods adopted are disclosed in the individual policy statements associated with each item. Disclosures about financial assets and liabilities of the Group are provided in Note 33. 11 HEFEI MEILING COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3 Sales Sales represents revenue from the sale of household refrigerators and accessories of household appliances to external customers at invoiced value net of discounts, value added tax and returns. Business segment information is not shown as the sale of household refrigerators accounted for more than 90% (2000: more than 90%) of the consolidated revenue and result of the Group. All assets and operations of the Group are located in the PRC, which is considered as one geographic location in an environment with similar risks and returns. More than 90% (2000: more than 90%) of the Group’s sales were made in the PRC. Accordingly, no geographical segment information is shown. 4 Government subsidies 2001 2000 RMB’000 RMB’000 Income tax refund (Note 9 (a)) - 1,800 Tax refund on export sales and new products 1,614 3,327 Others - 3,852 1,614 8,979 5 Other operating income Other operating income recognised during the year is as follows: 2001 2000 RMB’000 RMB’000 Sale of scrap materials 14,459 7,676 Others 903 447 15,362 8,123 12 HEFEI MEILING COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6 Operating loss The following items have been included in arriving at operating loss: 2001 2000 RMB’000 RMB’000 (Reversal of)/provision for inventories (17,169) 3,455 Provision for impairment of receivables 146,854 3,047 Provision for guarantee (Note (a)) 55,500 - Provision for impairment of construction in progress (included in administrative expenses) (Note 13) 1,308 - Depreciation of property, plant and equipment (Note 12) 43,695 40,758 Amortisation of land use rights (Note 11) 550 550 Warranty expense (Note 28) 12,780 12,149 Research and development expenditure 2,773 3,885 Operating lease rentals for buildings 5,292 5,127 Subsidies paid for staff quarters - 11,851 Staff costs (Note 7) 49,023 42,913 (a) The Company is a secondary guarantor for certain bank borrowings of third parties. During the year, the Company has been advised that it is required to pay an amount of approximately RMB 55,500,000 to the lenders as the borrowers and the primary guarantors failed to fufill their obligations. HMHC and the Company have entered into an agreement on 2 April 2002 under which HMHC would pay the amount to the lenders on behalf of the Company and in return, the Company agreed to set off the payment against the amount due by HMHC. The loss on the guarantee has been recorded in the administrative expenses for the year in the consolidated financial statements. 7 Staff costs 2001 2000 RMB’000 RMB’000 Wages, salaries and bonuses 37,550 37,228 Staff welfare 7,116 3,875 Contribution to retirement scheme 4,357 1,810 49,023 42,913 13 HEFEI MEILING COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 8 Finance costs, net 2001 2000 RMB’000 RMB’000 Interest income from - bank deposits 3,372 4,213 - HMHC (Note 31 (a)) - 16,876 - Washing Machine Co. (Note 31 (a)) - 10,851 3,372 31,940 Dividend income 1,229 872 Net exchange gain/(loss) 17 (4) Interest expense on bank borrowings (33,177) (34,812) Finance charge paid to HMHC for guarantee of bank borrowings (Note 31 (d)) (5,039) - (33,598) (2,004) 9 Tax 2001 2000 RMB’000 RMB’000 PRC income tax Current tax 38 2,770 Deferred income tax (Note (d)) - 11,774 38 14,544 (a) PRC income tax mainly comprises income tax of the Company and its subsidiaries, namely, Hefei Meiling Electrical Parts Manufacture Co., Ltd. and Anhui Anhong Plastics Co., Ltd., and is calculated at a rate of 33%. Pursuant to the document “Wan Zheng [1996] No. 90” issued by the Anhui Provincial Government, the Company is entitled to a tax refund of 18% by way of government subsidies. No income tax refund was received for the year (2000: RMB1,800,000) as the Company incurred a loss and no income tax was paid during the year (Note 4). (b) Pursuant to the circular “Guo Fa [2000] No. 2” issued by the State Council on 11 January 2000, effective from 1 January 2000, any tax refund or subsidies granted by local government authorities will need to be approved by the State Council. However, pursuant to the circular “Cai Shui [2000] No. 99” subsequently issued by the Ministry of Finance of the PRC on 13 October 2000, the income tax refund subsidy arrangements granted by local government authorities could be extended to 31 December 2001. As of the date of approval of the consolidated financial statements, the Company has not been notified by the relevant local government authorities of any changes or cancellation of the current subsidy arrangement. 14 HEFEI MEILING COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 9 Tax (continued) (c) The tax on the Group’s loss before tax differs from the theoretical amount that would arise using the effective tax rate of the Group as follows: 2001 2000 RMB’000 RMB’000 Loss before tax (341,270) (13,304) Tax calculated at a tax rate of 33% (2000: 33%) (112,619) (4,390) Deferred income tax utilised - 11,774 Deferred income tax not recognised 112,975 3,615 Expenses not deductible for tax purposes 88 4,627 Income not subject to tax (406) (1,082) Tax charge 38 14,544 (d) The movements in deferred income tax asset account in the consolidated balance sheet are as follows: 2001 2000 RMB’000 RMB’000 At beginning of year - 11,774 Transfer to consolidated income statement - (11,774) At end of year - - Deferred income tax assets mainly arose from temporary differences on provisions and tax losses. As at 31 December 2001, deferred income tax assets arising from temporary differences on provisions and tax losses amounting to RMB200,200,000 (2000: RMB3,615,000) were not recognised in these consolidated financial statements. 10 Loss per share The calculation of loss per share is based on the net loss attributable to shareholders for the year of RMB341,373,000 (2000: RMB27,975,000) and the number of shares in issue during the year of 413,643,000 (2000: 413,643,000) shares. Fully diluted loss per share is not shown since the Company has no dilutive potential ordinary shares. 11 Land use rights 2001 2000 RMB’000 RMB’000 Opening net book amount 6,450 7,000 Amortisation charge (550) (550) Closing net book amount 5,900 6,450 Cost 11,000 11,000 Accumulated amortisation (5,100) (4,550) Net book amount 5,900 6,450 15 HEFEI MEILING COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 12 Property, plant and equipment Furniture, fixtures Plant and and office Motor Buildings machinery equipment vehicles Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Opening net book amount 171,364 269,515 20,618 9,110 470,607 Transfer from construction in progress 1,996 61,198 700 - 63,894 Additions 6,388 37,409 1,095 1,744 46,636 Disposals - (753) (5) (233) (991) Depreciation charge (8,595) (28,277) (5,236) (1,587) (43,695) Closing net book amount 171,153 339,092 17,172 9,034 536,451 At 31 December 2001 Cost 201,603 528,488 34,779 21,054 785,924 Accumulated depreciation (30,450) (189,396) (17,607) (12,020) (249,473) Net book amount 171,153 339,092 17,172 9,034 536,451 At 31 December 2000 Cost 193,219 431,691 32,989 19,942 677,841 Accumulated depreciation (21,855) (162,176) (12,371) (10,832) (207,234) Net book amount 171,364 269,515 20,618 9,110 470,607 13 Construction in progress 2001 2000 RMB’000 RMB’000 Balance at beginning of year 48,507 51,467 Additions 25,878 10,666 Impairment (1,308) - Transfer to property, plant and equipment (63,894) (13,626) Balance at end of year 9,183 48,507 An impairment charge of RMB1,308,000 (2000: nil) was made for certain construction in progress during the year. The charge was determined by the directors based on the estimated recoverable amount of the assets’ determined by reference to their value in use. 16 HEFEI MEILING COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 14 Available-for-sale investments 2001 2000 RMB’000 RMB’000 At beginning of year 11,150 11,150 Additions 580 - At end of year 11,730 11,150 Available-for-sale investments include investments in listed and unlisted companies. Investment in a listed company represents legal person shares in the listed company. Pursuant to the “Standard Opinion on Joint Stock Companies Limited by Shares” issued by relevant PRC authorities, legal person shares are not transferable or allowed to be traded on the stock markets except with the approval of relevant authorities. For available-for-sale investments without active market, fair value is determined by reference to the directors’ best estimate. 15 Investment in an associated undertaking 2001 2000 RMB’000 RMB’000 At beginning of year - - Additions 1,660 - At end of year 1,660 - Particulars of the associated undertaking, which is an unlisted company, is as follows: Registered Equity Name capital Principal activities interest held 2001 2000 Hefei Meiling-Sigema Manufacturing and sale of USD1,000,000 20% - Applicances Co., Ltd. air conditioners On 12 October 2001, the Company entered into an agreement with Sigema Electronic GmbH (“Sigema”), Shanghai Xi Ling Investment Management Co., Ltd. (“Xi Ling”), both of which are third parties, to establish Hefei Meiling-Sigema Applicances Co., Ltd. (“Meiling-Sigema”). The equity interest in Meiling-Sigema held by Sigema, Xi Ling and the Company is 25%, 55% and 20% respectively. 17 HEFEI MEILING COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 16 Amount due from controlling shareholder 2001 2000 RMB’000 RMB’000 Amount due from controlling shareholder 405,156 370,526 Less: Provision for impairment (29,186) - Amount due from controlling shareholder, net 375,970 370,526 The amount mainly represents recharge of advertising and other selling expenses to HMHC, interest charge on the outstanding balance and receivables arising from disposal of equity interests in certain companies to HMHC. The amount is secured by certain of HMHC’s land use rights with an approximate value of RMB157,000,000. According to an agreement dated 20 March 2001, no interest will be charged to HMHC on the outstanding balance (2000: RMB283,077,000 of the outstanding balance bore interest at a rate of 5.85% per annum) commencing on 1 January 2001. Pursuant to an agreement dated 5 March 2002 entered into between the Company and HMHC, the outstanding balance at 31 December 2001 will be fully repaid within four years by way of off-setting the balance against the consideration in relation to the businesses and certain assets to be injected by HMHC to the Company and by cash. Revaluation of certain intangible assets included in the transfer from HMHC to the Company is in progress. In the opinion of the directors, the transfer will be completed in 2002 and 2003 and majority of the debt will be offset or repaid by the proceeds of such transfer. An impairment of RMB29,186,000 determined by comparing the present value of expected cash flows discounted at market interest rate for similar borrowers according to the repayment schedule and its carrying amount has been made. 17 Amount due from a related company 2001 2000 RMB’000 RMB’000 Amount due from a related company 297,574 300,284 Less: Provision for impairment (151,779) - Amount due from a related company, net 145,795 300,284 The amount was due from Hefei Meiling Washing Machine Co., Ltd. (“Washing Machine Co.”), a subsidiary of HMHC. The year end balance mainly represents advances to Washing Machine Co. for the purchase of property, plant and machinery, for financing its operations, and interest charge on the outstanding balance. According to an agreement dated 20 March 2001, no interest will be charged to Washing Machine Co. on the outstanding balance (2000: RMB194,471,000 of the outstanding balance bore interest at a rate of 5.85% per annum) commencing on 1 January 2001. Pursuant to an agreement dated 5 March 2002 entered into between the Company and Washing Machine Co., the outstanding balance at 31 December 2001 will be repaid according to a repayment schedule in ten years commencing on 1 January 2003. 18 HEFEI MEILING COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 17 Amount due from a related company (continued) An impairment of RMB151,779,000 determined by comparing the present value of expected cash flows discounted at market interest rate for similar borrowers according to the repayment schedule and its carrying amount has been made. The amount due from Washing Machine Co. is guaranteed by HMHC. 18 Inventories 2001 2000 RMB’000 RMB’000 Raw materials - At cost 46,713 115,592 - At net realisable value 17,562 386 Work in progress - At cost 9,080 12,006 Finished goods - At cost 206,821 191,716 - At net realisable value 14,547 30,928 294,723 350,628 19 Trade receivables 2001 2000 RMB’000 RMB’000 Trade receivables 603,267 756,232 Less: Provision for impairment (214,139) (33,199) Trade receivables, net 389,128 723,033 20 Other receivables, deposits and prepayments 2001 2000 RMB’000 RMB’000 Other receivables 62,251 121,625 Less: Provision for impairment (21,657) (13,816) Other receivables, net 40,594 107,809 Deposits and prepayments 23,026 26,985 63,620 134,794 19 HEFEI MEILING COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 21 Cash and bank balances For the purpose of the consolidated cash flow statement, cash and cash equivalents comprise the following: 2001 2000 RMB’000 RMB’000 Cash and bank balances 126,426 126,565 Less: Pledged bank deposits (Note (a)) (57,878) (69,423) Short-term bank deposits with maturity over 3 months (6,026) (5,065) 62,522 52,077 (a) The deposits are pledged to secure the bills payable of the Group. 22 Share capital Registered, issued and fully paid ordinary shares of RMB1 each: Unlisted Unlisted A shares A shares held by held by legal A shares, B shares, HMHC persons listed listed Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Year ended 31 December 2000 At 1 January 2000 136,830 51,397 112,316 113,100 413,643 Listing of unlisted shares - (25,737) 25,737 - - At 31 December 2000 136,830 25,660 138,053 113,100 413,643 Year ended 31 December 2001 At 1 January 2001 136,830 25,660 138,053 113,100 413,643 Listing of unlisted shares (Note (b)) (13,434) - 13,434 - - At 31 December 2001 123,396 25,660 151,487 113,100 413,643 (a) Pursuant to the Company's articles of association, except for the currency in which dividends are payable, both A and B shares are registered ordinary shares and carry equal rights. (b) Unlisted 13,434,000 shares held by HMHC were approved to be listed on the Shenzhen Stock Exchange during the year. 20 HEFEI MEILING COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 23 Reserve funds Statutory Statutory Discretionary common public common reserve welfare reserve fund fund fund (Note (a) (i)) (Note (a) (ii)) (Note (a) (iii)) Total RMB’000 RMB’000 RMB’000 RMB’000 Year ended 31 December 2000 Balance at 1 January 2000 66,934 67,151 153,820 287,905 Adjustments arising from restatement of retained earnings of PRC statutory financial statements (Note (c)) (2,061) (2,061) - (4,122) Appropriated from retained earnings 553 553 - 1,106 Balance at 31 December 2000 65,426 65,643 153,820 284,889 Year ended 31 December 2001 Balance at 1 January 2001 and balance at 31 December 2001 65,426 65,643 153,820 284,889 (a) In accordance with relevant PRC regulations applicable to joint stock limited companies and the Company’s articles of association, the Group is required to allocate its profit after taxation to the following reserves. (i) Statutory common reserve fund The Group is required each year to transfer 10% of the profit after taxation as reported under the PRC statutory financial statements to the statutory common reserve fund until the balance reaches 50% of the paid up share capital. This reserve can be used to make up prior years’ losses or to increase share capital. Except for the making up of prior years’ losses, any other usage should not result in this reserve balance falling below 25% of the registered capital. (ii) Statutory public welfare fund The Group is required each year to transfer 5% to 10% of the profit after taxation as reported under the PRC statutory financial statements to the statutory public welfare fund. This reserve is restricted to capital expenditure for staff welfare facilities which are owned by the Group. The statutory public welfare fund is not available for distribution to shareholders (except upon liquidation of the Company). Once the capital expenditure on staff welfare facilities has been made, an equivalent amount must be transferred from the statutory public welfare fund to the discretionary common reserve fund. 21 HEFEI MEILING COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 23 Reserve funds (continued) (iii) Discretionary common reserve fund The discretionary common reserve fund can be set up by means of appropriation from retained earnings or transferred from the statutory public welfare fund. The reserve can be used to reduce losses, to increase share capital or for payment of dividends. Any transfer to the reserve requires the approval of shareholders in general meeting. (b) The amount transferred to the statutory common reserve fund and statutory public welfare fund shall be based on the profit after taxation in the PRC statutory financial statements prepared in accordance with PRC accounting standards. (c) Pursuant to a document “Cai Kuai [2001] No. 17” promulgated by the Ministry of Finance, the Group adopted the new accounting standard with respect to provision for impairment of property, plant and equipment, intangible assets and construction in progress. The change in accounting policies have been accounted for in the statutory financial statements retrospectively. These changes have resulted in a decrease in reserve funds as at 1 January 2000 and an increase in retained earnings as at that date by RMB4,122,000. The change in accounting policies as mentioned above in the preparation of the PRC statutory financial statements has no impact on these consolidated financial statements which are prepared in accordance with IAS. 24 Distributable profit Pursuant to relevant PRC regulations and the articles of association of the Company, profit distributable to shareholders shall be the lower of the distributable profit determined according to PRC accounting standards as stated in the PRC statutory financial statements and the distributable profit adjusted according to IAS. 25 Minority interests 2001 2000 RMB’000 RMB’000 At beginning of year 2,016 1,889 Share of net profit of subsidiary undertakings 65 127 At end of year 2,081 2,016 22 HEFEI MEILING COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 26 Borrowings 2001 2000 RMB’000 RMB’000 Short-term bank loans 512,940 357,560 Long-term bank loans Portion due within 1 year 15,000 66,800 Portion due between 1 and 2 years 8,920 23,920 Total borrowings 536,860 448,280 Included in: Current liabilities 527,940 424,360 Non-current liabilities 8,920 23,920 536,860 448,280 As at 31 December 2001, borrowings of the Group to the extent of RMB23,920,000 (2000: RMB90,520,000) and RMB503,740,000 (2000: RMB354,760,000) were guaranteed by a third party and HMHC respectively. On 29 March 2002, one of the Group’s major bankers has confirmed that it would extend the credit facilities totalling RMB600,000,000 provided to the Group to 31 December 2003. The carrying amounts and fair values of non-current borrowings are as follows: Carrying amounts Fair values 2001 2000 2001 2000 RMB’000 RMB’000 RMB’000 RMB’000 Non-current bank borrowings 8,920 23,920 8,982 24,245 The fair values are based on discounted cash flows using a discount rate based upon the borrowing rate which the directors expect would be available to the Group for similar indebtedness at the balance sheet date. The carrying amounts of short-term borrowings approximate their fair values. The interest rate exposure of the borrowings of the Group is as follows: 2001 2000 RMB’000 RMB’000 Total borrowings - at fixed rates 536,860 448,280 2001 2000 Weighted average effective interest rate is as follows: - bank borrowings 5.90% 6.05% 23 HEFEI MEILING COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 27 Other payables, receipts in advance and accruals 2001 2000 RMB’000 RMB’000 Other payables and accruals 134,715 53,373 Receipts in advance 92,559 83,419 227,274 136,792 28 Provision for warranty 2001 2000 RMB’000 RMB’000 Balance at beginning of year 14,000 14,000 Additional provision charged to consolidated income statement (Note 6) 12,780 12,149 Utilised during the year (12,780) (12,149) Balance at end of year 14,000 14,000 The Group provides a three-year warranty on compressors of refrigerators and undertakes to repair or replace items that fail to perform satisfactorily during the warranty period. A provision of RMB14,000,000 (2000: RMB14,000,000) has been recognised at the year end for expected warranty claims based on past experience of the level of repairs and returns. It is expected that RMB6,897,000 will be used in 2002, RMB4,641,000 in 2003 and RMB2,462,000 in 2004. 24 HEFEI MEILING COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 29 Cash generated from/(used in) operations (a) Reconciliation of loss before tax to cash generated from/(used in) operations: 2001 2000 RMB’000 RMB’000 Loss before tax (341,270) (13,304) Adjustments for: (Reversal of)/provision for inventories (Note 6) (17,169) 3,455 Provision for impairment of receivables (Note 6) 146,854 3,047 Trademark fee (Note (b) (i)) 12,445 - Finance charge paid to HMHC for guarantee of bank 5,039 - borrowings (Note (b) (ii)) Depreciation of property, plant and equipment (Note 12) 43,695 40,758 Provision for impairment of construction in progress (Note 13) 1,308 - Amortisation of land use rights (Note 11) 550 550 Loss/(gain) on disposal of property, plant and equipment 981 (96) Dividend income (Note 8) (1,229) (872) Interest income (Note 8) (3,372) (31,940) Interest expense (Note 8) 33,177 34,812 Changes in working capital: Decrease/(increase) in inventories 73,074 (58,574) Decrease in trade receivables, bills receivable, other receivables, deposits and prepayments 162,515 18,686 Decrease in trade payables, bills payable, other payables, receipts in advance and accruals (52,320) (3,219) Cash generated from/(used in) operations 64,278 (6,697) (b) Non-cash transactions (i) The trademark fee was satisfied by setting off against the amount due from HMHC. (ii) The finance charge was satisfied by setting off against the amount due from HMHC. 30 Commitments As at the balance sheet date, the Group had the following commitments: Capital commitments 2001 2000 RMB’000 RMB’000 Capital commitments in respect of construction projects contracted but not provided for 11,045 14,200 25 HEFEI MEILING COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 Related party transactions The Group had the following material transactions with related parties during the year: Note 2001 2000 RMB’000 RMB’000 HMHC - Interest income (a) - 16,876 - Recharge of advertisement and other selling expenses (b) 60,199 60,379 - Payment of staff quarters subsidies - 11,851 - Payment of trademark fee (c) 12,445 - - Payment of finance charge for guarantee of bank borrowings (d) 5,039 - - Purchase of property, plant and equipment 28,400 - Washing Machine Co. - Purchase of raw materials (e) 13,237 10,520 - Purchase of goods (e) 36,027 25,980 - Sale of raw materials (e) 9,149 20,300 - Interest income (a) - 10,851 Other subsidiaries of HMHC - Purchase of raw materials (e) 175,602 169,700 - Sale of goods (e) 4,877 30,850 (a) Pursuant to agreements dated 20 March 2001, no interest would be charged to HMHC and Washing Machine Co. from 1 January 2001 onwards. (b) Certain advertisement and other selling expenses incurred for the “Meiling” brand name were recharged to HMHC at cost based on an agreement which was entered into by the two parties on 25 December 2001. (c) On 25 December 2001, the Company and HMHC entered into an agreement under which trademark fee would be charged to the Company annually from 1 January 2001 onwards. (d) On 25 December 2001, the Company and HMHC entered into an agreement under which a fee of 1% of the bank borrowings guaranteed by HMHC as at 31 December 2001 would be charged to the Company. (e) The directors are of the opinion that these transactions were carried out on normal commercial terms and conditions and at market prices. (f) Trade receivables and payables with related companies are unsecured, interest free and repayable on demand. (g) Directors’ emoluments The total remuneration of the directors for the year was RMB402,000 (2000: RMB338,000). 26 HEFEI MEILING COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 32 Subsidiary undertakings As at 31 December 2001, the Company held interests in the following unlisted subsidiary undertakings which are limited liability companies incorporated in the PRC: Registered Attributable equity Name capital interest Principal activities 2001 2000 Hefei Meiling Electrical RMB5,000,00 100% 100% Manufacturing and sale Parts Manufacture Co., 0 of accessories of Ltd. (Note (a)) household appliances Anhui Anhong Plastics USD1,000,000 75% 75% Manufacturing and sale Co., Ltd. of accessories of household appliances (a) The Company has not obtained official approval from the relevant anthorities for the acquisition of this company as at 31 December 2001. Pursuant to the resolution by the Board of Directors dated 5 February 2002, Hefei Meiling Electrical Parts Manufacture Co., Ltd. will be liquidated in 2002 and all the assets and liabilities will be taken over by the Company. 33 Financial assets and liabilities (a) Interest rate risk The interest rates of the Group’s borrowings are disclosed in Note 26. Other financial assets and liabilities do not have material interest rate risk. (b) Credit risk At 31 December 2001, the trade receivables of the Group were spread among a number of customers in the PRC. Details of amounts due from HMHC and a related company are included in Note 16 and Note 17 respectively. The other financial assets of the Group do not represent a concentration of credit risk. (c) Foreign currency risk The Group’s transactions are primarily denominated in RMB. In the opinion of the directors, the Group does not have significant foreign currency exposure. 27 HEFEI MEILING COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 33 Financial assets and liabilities (continued) (d) Fair values The Group’s available-for-sale investments are investments in listed and unlisted companies. As there is no market value available, their fair values are based on the directors’ best estimate of their net assets, profit generating ability and other circumstances as considered appropriate. The fair values of cash and bank balances, trade receivables and payables, other receivables and payables, amount due from HMHC, amounts due from and to related companies, and bank loans are not materially different from their carrying amounts. The fair values of non-current borrowings are disclosed in Note 26. Fair value estimates are made at specific point in time and are based on relevant market information. These estimates are subjective in nature and involved uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in valuation methods and assumptions could significantly affect the estimates. 34 Approval of financial statements The consolidated financial statements were approved by the board of directors on 15 April 2002. 28 HEFEI MEILING COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The impact of IAS and other adjustments on the PRC statutory financial statements are as follows: Net loss Net assets for the year ended as at 31 31 December 2001 December 2001 RMB’000 RMB’000 As reported under PRC statutory financial statements (349,550) 1,027,960 IAS and other adjustments: Under-provision for warranty expenses - (14,000) Reversal of provision for inventories 5,325 - Impairment of receivables (8,193) (268,808) Under-provision of depreciation (2,481) (2,481) Difference in accrual of expenses 14,010 (3,626) Others (484) (1,344) As restated after IAS and other adjustments (341,373) 737,701 XII. DOCUMENTS AVAILABLE FOR REFERENCE 1. Accounting statements carried with personal signatures and seals of legal representative, chief accountant and person in charge of the financial affairs. 2. Original of Auditors’ Report carried with the seal of Certified Public Accountants as well as personal signatures and seals of certified public accountants; 3. Originals of all documents and manuscripts of all public notices disclosed in Securities Times and Ta Kung Pao designated by CSRC in the report year. The said documents are placed in headquarter of the Company. The Company will provide the above documents for reference timely provided that CSRC or Stock Exchange demands or shareholders requires according to the regulations and Articles of Association. Chairman of the Board: Mr. Zhang Jusheng Board of Directors of Hefei Meiling Co., Ltd. April 19, 2002 29