本钢板材(000761)本钢板Ｂ2001年年度报告（英文版）

BENGANG STEEL PLATES CO., LTD. 2001 Annual Report (Prepared in accordance with the Chinese Accounting Standards [CAS]) Important The Board and directors of the Company hereby confirms that there are no important omissions, fictitious statements or serious misleading information carried in this report, and shall take all responsibilities, individually and/or jointly, for the reality, accuracy and completion of the whole contents. Director Chen Jizhuang, Jie Houfu didn’t presented the meeting for reasons, and entrusted Mr. Li Yu and Guo Yanchang exercise the right of directors in the meeting. Table of Contents Ⅰ. Company Profile Ⅱ. Financial and Business Highlights Ⅲ. Change in Share Capital and Particulars about Shareholders Ⅳ. Directors, Supervisors, Senior Executives and Staff Ⅴ. Company Administrative Structure Ⅵ. Shareholders’ General Meeting Ⅶ. Report of the Board Ⅷ. Report of the Supervisory Committee Ⅸ. Important Ⅹ. Financial Report Ⅺ. Documents Available for Inspection -1- Ⅰ. Company Profile 1. Legal Name: In Chinese: 本钢板材股份有限公司 In English: BENGANG STEEL PLATES CO., LTD. 2. Legal Representative: Zhang Yingfu 3. Secretary of the Board: Liang Guangde Securities Affairs Representative: Sun Zhongzheng Address: 16 Renmin Rd., Pingshan District, Benxi, Liaoning Tel: 0414 7827344,7828360 Fax: 0414 7827004,7828009 E-mail: bgbcgdi@online.ln.cn Bgbcszz@online.ln.cn 4. Registered Address: Gangtie Rd., Pingshan District, Benxi, Liaoning Post Code: 117000 E-mial: bgbc761@online.ln.cn bgbctwg@mail.bxptt.ln.cn 5. Newspapers Designated for Disclosing the Information: China Securities Interactive, Securities Times, Hong Kong Commercial Daily Internet Web Site Designated by China Securities Regulatory Commission for Publishing the Annual Report: http://www.cninfo.com.cn Place Where the Annual Report is Prepared and Placed: The Company’s Securities Dept. at 16 Renmin Rd., Pingshan District, Benxi, Liaoning 6. Stock Exchange Listed with: Shanghai Stock Exchange Short Form and Code of the Stock: A-share: Bengangbancai, 200761 B-share: Bengang Steel-B, 000761 7. Other Related Information Date of the change of the registration: April 28, 1994 Registration with: Liaoning Provincial Administration for Industry and Commerce Entity Business License No.: 2100001049024 Taxation Registration No.: 210502242690243 Certified Public Accountants engaged: Arthur Andersen-Huaqiang Certified Public Accountants Address: 3308/Rm., Commercial Bldg., Zhongxin Plaza, 233 Tianhe N. Rd., Guangzhou Arthur Andersen & Co. Address: 25th Floor, Wing On Centre, 111 Connaught Road Central, Hong Kong -2- Ⅱ. Financial and Business Highlights 1. Major profit highlights as of the Year: In RMB Items Total profit 298,393 Net profit 266,131 Net profit after deduction of non- recurring loss/gain 266,131 Profit from principal businesses 446,857 Operating profit 338,967 Net amount of non-operating income and expenses 81,648 Net cash flows arising from operating activities 90,251 Net increase of cash and cash equivalents 179,045 2. Financial highlights over the past three years In RMB Items 2001 2000 1999 Income from principal businesses 5,242,814 6,993,594 5,578,168 Net profit 266,131 369,892 329,522 Total assets 5,574,148 4,736,564 4,382,051 Shareholders’ equity 4,026,747 3, 438,852 3,280,940 Earnings per share (Diluted) 0.2343 0.3256 0.2901 Earnings per share (Weighted) 0.2343 0.3256 0.2901 Earnings per share less the non-recurring gains and 0.2343 0.3256 0.2901 loss Net assets per share 3.5447 3.0272 2.8882 Net assets per share after adjustment 3.5422 3.0085 2.8681 Net cash flows per share arising from operating 0.0794 0.5343 0.6730 activities(%) Net assets-income ratio (diluted %) 6.61 10.76 10.04 Net assets-income ratio (Weighted %) 7.45 11.00 10.67 3. Analysis on net assets-income ratio and earnings per share Net assets-income ratio % Earnings per share (RMB/Share) Profit in the report period Fully diluted Weighted Fully Weighted average diluted average Profit from principal businesses 11.10 12.51 0.3934 0.3934 Operating profit 8.42 9.49 0.2984 0.2984 Net profit 6.61 7.45 0.2343 0.2343 Net profit less non- recurring losses/gains 6.61 7.45 0.2343 0.2343 4.Changes in Shareholders’ Equity in the Report Period In RMB’000 Items Share capital Reserves Total shareholders’ equity Year beginning 1,136,000 2,302,852 3,438,852 Increase in the report year 587,895 587,895 Year end 1,136,000 2,890,747 4,026,747 Reason of change Allotting based on 10% of net Due to the increase of the proft in the year and profit profit distribution in the interim year Ended December 31, 2001, the net profit calculated based on the International Accounting Standards (IAS) was RMB266,131,000. Which is RMB 8,713,958 less than that calculated based on the Chinese Accounting Standards (CAS). The difference is mainly due to the borrower’s payment for the housing circulating fund and the relevant -3- taxes were stated in the gains/losses in 2001 according to IAS. The shareholders’ equity calculated according to international accounting standard is RMB540,801,000 over than that of based on domestic accounting standard. The cause of the discrepency were: 1) The international auditors’ report hasn’t treated the cash dividend of the divident proposal at the end of 2001 as divident payable. 2) The international auditors’ report has treated the regular assets evaluation of assets increasing as assets increasing and increasing of shareholders’ equity. (For the detail, please refer to the note to the principal accounting statements.) Ⅲ. Changes in Share Capital and Particulars about Shareholders (Ⅰ) Changes in Share Capital 1. Statement of Changes in Shares (Ended Dec. 31, 2001) In Share Before the Increase/ Decrease (+ / -) resulting from the change change Shares Bonus Shares converted Additional Others Sub- After the change allotted shares from public issue total reserve I. Shares Unlisted 1. Promoters’ 616,000,000 616,000,000 shares Including: State owned shares 616,000,000 616,000,000 Domestic legal person shares Foreign legal person shares Others 2. Legal person shares placed 3. Employees’ 40,000 40,000 shares 4. Preference shares or others Total shares 616,040,000 616,040,000 unlisted II. Shares listed 1. RMB ordinary 119,960,000 119,960,000 shares 2. Foreign 400,000,000 400,000,000 investment shares listed domestically 3. Foreign investment shares listed abroad 4. Others Total shares listed 519,960,000 519,960,000 III. total shares 1,136,000,000 1,136,000,000 2. Issuing and Listing Bengang Steel Plates Co., Ltd. is a joint stock company with limited liabilities established through public offering with approval by Liaoning Provincial People’s Government with Document [1997] No. 57 with Benxi Iron & Steel (Group) Co. as the exclusive promoter and some of its subsidiaries, namely Steel Works, Preliminary Rolling Mill and Thermal Continuous Rolling Mill as the main body, with total share capital: 1,136,000 thousand shares, including 61600 promoter’s shares, 400,000 domestically listed foreign shares (B shares), par value per share: RMB 1.00, issuance price: HK$ 2.38/share. issue date: June 10 to12, 1997, listing date: July 8, 1997, shares listed through approval: 400,000 thousand shares; 120,000 thousand domestically listed -4- RMB ordinary shares (A shares). Of the 120,000 thousand RMB ordinary shares issued to the public, the Company issued 12,000 thousand employees’ shares on Nov. 3, 1997, with the issue price: RMB 5.40, custody date: Nov. 26, 1997, custodian: Liaoning Provincial Securities Registration Administration Center. The employees’ shares started to be listed for trading on July 16, 1998. There were 11,960 thousand shares listed for trading upon approval and the 40 thousand shares held by the senior executives frozen. (Ⅱ) Shareholders 1. There were totally 114,349 shareholders ended Dec. 31, 2001 including 1 legal person shareholdes, 43291 shareholders of B-shares and 71057 shareholders of A-shares. 2. Shares Held by Top 10 Shareholders No Shareholders Shares held Proportion of the total share capital 1 Benxi Iron & Steel (Group) Co., Ltd. (State-owned legal person 616,000,000 54.23 shares) 2 Zhang Xubin 3,590,020 0.32 3 DEUISCHE BANK AG LONDON 2,218,931 0.20 4 ZHOU XIAOHUA 1,900,000 0.17 5 Fang Yijun 1,815,740 0.16 6 NOMURA TB/NOMURA LTM 1,800,000 0.158 7 Huang Liandi 1,763,924 0.155 8 CHEN YIK KIAN 1,710,000 0.15 9 Zhang Zhicheng 1,654,195 0.146 10 BEST RELIANEC INYESTMENTSLTD 1,567,480 0.138 (3) Benxi Iron & Steel (Group) Co., Ltd. is the Company’s legal person shareholder holding over 10% of the total shares, its Legal Representative: Zhang Yingfu, Business Scope: iron and steel refining, mining, steel plate rolling, oxygen and pipe manufacture, power generation, coal chemical, special steel sections, heat supply, water, electric, pneumatic air supply, metal processing, machinery and electric equipment repairing and manufacture, equipment manufacture, building installation, railway and highway transportation, import and export, tourism, building materials, fire-proof materials, instruments and meters, materials supply and sales, real estate development, scientific research, design, information service, etc. (4) The actual controller of the Company’s control shareholder Benxi Iron & Steel (Group) Co., Ltd. (Bengang Group) is Liaoning Provincial Department of Finance. Ⅳ. Directors, Supervisors, Senior Executives and Staff (Ⅰ) Directors, Supervisors and Senior Executives Shares held at Shares held at Name Sex Age Title Office Term year beginning year end Zhang Yingfu Male 59 Chairman of the Board May 18, 2000 to Feb. 25, 2002 Yu Tianchen Male 49 Vice-chairman of the Board ″ 10000 10000 Chen Jizhuang Male 44 Director May 18, 2001 to May 18, 2003 Li Mohua Male 53 Vice-chairman of the Board and May 18, 2001 to -5- General Manager May 18, 2003 Jie Houfu Male 57 Director May 18, 2000 to May 18, 2003 Guo Yanchang Male 55 Director May 18, 2000 to May 18, 2003 Liang Guangde Male 47 Director, Deputy General Manager May 18, 2000 to 10000 10000 and Secretary of the Board May 18, 2003 Li Yu Male 46 Director May 18, 2000 to May 18, 2003 Liu Junyou Male 49 Chairman of Supervisory May 18, 2001 to Committee May 18, 2003 He Xusheng Male 51 Vice-Chairman of Supervisory May 25, 2000 to Committee May 18, 2003 Sun Xiao Male 56 Supervisor May 18, 2000 to May 18, 2003 Wang Yunhe Male 55 Supervisor May 18, 2000 to 10000 10000 May 18, 2003 Wu Wei Male 47 Supervisor May 18, 2000 to 10000 10000 May 18, 2003 Note: There are six members of the Company’s Board of Directors concurrently taking office in Bengang Group: Mr. Zhang Yingfu, Chairman of the Board, is concurrently the Chairman of the Board of Bengang Group; Mr. Yu Tianzhen, vice Chairman of the Board, is concurrently the General Manager of Bengang Group; Mr. Chen Jizhuang, a director, is concurrently deputy General Manager of Bengang Group; Mr. Jie Houfu, a director, is concurrently assistant General Manager and manager of the production department of Bengang Group; Mr. Guo Yanchang, a director, is concurrently director of the Technology Center of Bengang Group; Mr. Li Yu, a director, is concurrently the manager of the financial department of Bengang Group. Mr. Liu Junyou, Chairman of the Supervisory Committee, is concurrently the Secretary of the Discipline Committee of Bengang Group; Mr. He Xusheng, vice Chairman of the Supervisory Committee, is concurrently the manager of the operation planning department of Bengang Group; Mr. Sun Xiao, a supervisor, is concurrently manager of the audit division of Bengang Group. (Ⅱ) Annual Remuneration 1. There were 4 directors, supervisors and senior executives enjoying their pays from the Company in 2001, with total remuneration: RMB 102,286.66. The total remuneration to the three directors enjoying the highest pays was RMB 55,458.66, the total remuneration to the three senior executives enjoying the highest pays was RMB 83,458.66, There were 3 persons enjoying annual pay amounting to RMB 20,000 to RMB 30,000, 1 person enjoying annual pay amounting to RMB 10,000 to RMB 20,000 2. Directors Zhang Yingfu, Yu Tianzhen, Chen Jizhuang, Jie Houfu, Guo Yanchang and Li Yu, and supervisors He Xusheng and Sun Xiao received their pays from Bengang Group. (Ⅲ) Resignation of directors, supervisors and senior executives in the report period, and the reasons The 3rd meeting of the 2nd Board of Directors was held on April 24, 2001. The meeting approved Mr. Wu Maoqing’s application for resigning director due to job change. Mr. Wang Qingyang was disengaged as director due to his death of illness, Mr. Wang Qingyang was disengaged as deputy General Manager. The 3rd meeting of the 2nd Board of Directors was held on April 24, 2001. The meeting approved Mr. Wang Yinglie’s -6- application for resigning supervisor due to job change. (Ⅳ) Staff Ended December 31, 2001, there were 4348 staff members in the Company. (1) Classified according to the education background: there were 24 persons holding master’s degree, taking 0.55% of the total staff; there were 530 persons holding university degree, taking 12.2%; there were 667 persons holding college degree, taking 15.34%; there were 1450 persons graduated from secondary technical school, vocational school and senior middle school, taking 33.34%; 1677 persons with lower education background, taking 38.6%. (2) The professional composition is as follows: There are 257 technical personnel, taking 5.9% of the total staff; 34 financial personnel, taking 0.78%, 172 marketing personnel, taking 3.96%, 308 administrative personnel, taking 7%, 3577 production workers, taking 82.27%. Ⅴ. Company Control Structure (Ⅰ) Status of company control The Company has constantly improved its legal person control structure and standardized its operation strictly according to the requirements of the Company Law, Securities Law and relevant laws and regulations issued by CSRC. For ensuring the standardization of its internal operation, the Company formulated the Articles of Association of the Company, the Rules of Procedure of Shareholders’ General Meeting, the Rules of Procedure of the Board of Directors, the Rules of Procedure of the Supervisor Committee, Detailed Work Rules of General Manager and Independent Director Working System in succession and improved and supplemented them in accordance with the Standards of the Control of Listed Companies. 1. Shareholders and shareholders’ general meeting: The Company will ensure all shareholders, especially middle and small shareholders, enjoy equal position and can fully exercise their own rights. It formulated Rules of Procedure of Shareholders’ General Meeting. The Company is able to convene and hold shareholders’ general meeting and shareholders exercise voting rights strictly according to the requirements of the Standard Opinions on the Shareholders’ General Meeting of Listed Companies issued by CSRC. The related transactions of the Company were fair and reasonable. The Company fully disclosed the pricing basis. 2. The relationship between the controlling shareholder and the Company: Bengang Group Co., the controlling shareholder of the Company, performs obligation of good faith go the Company and other shareholders and its actions are standardized. It did not overstep the authority of the shareholders’ general meeting so as to directly or indirectly intervene with the decision making and operating activites of the Company, paying full -7- respect to the independence of the Company. The Company is independent of its controlling shareholder in respect of personnel, assets, finance, internal structure and business. The problems that the deputy mayor of Benxi and the chairman of the board of directors of Bengang Group once concurrently acted as the chairman of the board of directors of the Company and that the Company did not set up its own purchase department existed. The Company held a boad meeting on February 25, 2002 to solve these two problems. 3. The directors and the board of directors: The Company selected and elected directors strictly according to the procedure provided by the Articles of Association of the Company and will further perfected the selection and election procedure and actively implement the accumulative voting system. The number and composition of the Board of Directors of the Company complied with the requirements of laws and regulations. The board of directors of the Company amended the Rules of Procedure of the Board of Directors according to the requirements of the Standards of the Control of Listed Companies. Meanwhile, it established Independent Director Working System. It will appoint independent directors according to the requirements of regulatory department to make the composition of the board of directors more reasonable. 4. Supervisors and the supervisory committee: The number and composition of the supervisory committee of the Company comply with the requirements of laws and regulations. The supervisory committee formulated the Rules of Procedure of the Supervisory Committee. The supervisors of the Company are able to perform their duties seriously, take the attitude of being responsible to all shareholders and supervise the legality and regulation conformity of the Company’s finance and the duty performance of the directors, managers and other senior executives of the Company. 5. Performance appraisal and stimulation and restriction mechanism: The Company is actively trying to establish fair and transparent performance appraisal standards and stimulation and restriction mechanism for the directors, supervisors and senior executives of the Company. 6. Interested parties: The Company is respecting the legal rights of the interested parties including banks, creditors, employees and consumers and actively cooperate with them to jointly promote its sustained and healthy development. 7. Information disclosure and transparency: The Company designated the secretary to the board of directors and securities affair representative to be responsible for information disclosure. The Company is able to truly, accurately, completely and timely disclose information strictly according to the provisions of laws, regulations and the Articles of Association of the Company and ensure all shareholders have equal opportunities to obtain information. (Ⅱ) The separation from the controlling shareholder in respect of business, assets, personnel, internal structure and finance The Company has been separated from Bengang Group, its controlling shareholder, in respect of business, assets, personnel, internal structure and finance. The Company -8- independently selects, appoints, dismisses and uses personnel and conducts independent wage management. The Company owns independent finance department and financial and accounting system. It opened independent bank account and independently pays taxes. The assets of the Company include steel-making and steel-rolling system. The property right is clear and complete. The controlling shareholder has not occupied the assets of the Company. The internal organ of the Company operates independently and the structural establishment and work functions are completely independent. The Company owns independent production and sales system. By contrast to relevant laws, regulations and standards, the Company has been independent of its controlling shareholder. However, due to the restriction of the steel industry featuring large scale of assets and continuous, complicated, strict and complete process and the limit of the issuance of shares for the first time, the Company has been involved in a great deal of related transactions. The reasons are as follows: Due to the restriction of the limit of issuance of shares for the first time, the Company had to select three processes, i.e., steel making, blooming and continuous hot rolling from Bengang Group’s production processes of ordinary steel covering iron making, steeling making, blooming, continuous hot rolling and cold rolling. The Company is composed of steel plant, blooming plant and continuous hot rolling plant. As a result of this manner of structuring, the iron making plant and cold rolling plant left in the Group Co. So the main raw material, molten iron, should be purchased from the Group Co. The supplier of molten iron is irreplaceable. Nearly one third of the leading product of Company, i.e., hot rolled coiled sheet, is supplied to cold rolled sheet of Bengang Group Co. as raw materials. Therefore, a great deal of related transactions between the Company and Bengang Group Co. are naturally formed. (Ⅲ) The appraisal of senior managing personnel and stimulation mechanism The Company is actively trying to establish fair and transparent performance appraisal standards and stimulation and restriction mechanism for the directors, supervisors and senior executives of the Company, reform the current remuneration system and formulate remuneration policies and appraisal plan that match the modern enterprise system and different control structure. Ⅵ. Shareholders’ General Meeting The Company held 2001 Shareholders’ General Meeting once. 1. The notice for holding 2000 Shareholders’ General Meeting was published on China Securities Interactive, Securities Times and Hong Kong Commercial Daily on April 24, 2001. 2. 2000 Shareholders’ General Meeting was held on May 25, 2001 at Bengang Hotel, Benxi City. 16 shareholders and shareholders’ representatives attended the meeting, representing 618,245,579 voting bearing shares, taking 54.42% of the Company’s total share capital, including 4 shareholders and shareholders’ representatives of B shares, -9- representing 2,210,579 voting bearing shares, taking 0.55% of the Company’s total share capital. The Company’s directors, supervisors and senior executives were present at the meeting as non-voting delegates. The meeting made the following resolutions through examination: (1) Reviewed and passed 2000 Work Report of Board of Directors; (2) Reviewed and passed 2000 Work Report of the Supervisory Committee; (3) Reviewed and passed 2000 Annual Report and the Summary; (4) Reviewed and passed 2001 Financial Settlement Report and 2001 Financial Budget Report; (5) Reviewed and passed 2001 Production and Operation Plan; (6) Reviewed and passed 2000 Profit Distribution Plan; (7) Reviewed and passed the Proposal on the Company’s Additional Issue in Compliance with the Measures for Control over the New Issues of Listed Companies promulgated by China Securities Regulatory Commission; (8) Reviewed and passed the Proposal for Additionally Issuing no more than4200 Million A shares; (9) Reviewed and passed the Proposal on Related Transactions - the Acquisition of No. 2 Iron Works and the Cold Rolling Mill of Benxi Iron & Steel ( Group) Co., Ltd. with the Proceeds to be Raised through the Coming Additional Offering; (10) Reviewed and passed the Proposal for Revising the Original “Comprehensive Service Agreement” upon Completion of the Additional Issue; (11) Reviewed and passed the Statement of the Application of the Proceeds Raised in the Previous Share Offering; (12) Reviewed and passed the Proposal for the Designated Auditors’ Report on Application of the Proceeds Raised from the Previous Offering Produced by Arthur Andersen & Co. and Andersen-Huaqiang Certified Public Accountants (13) Reviewed and passed the Proposal for Reengaging Arthur Andersen & Co. and Andersen-Huaqiang Certified Public Accountants as the Company’s International and Domestic Auditors in 2001; (14) Reviewed and passed the Proposal for Election for New Board of Directors and the Supervisory Committee. The public notice of the resolutions was published on China Securities Interactive, Securities Times and Hong Kong Commercial Daily respectively dated May 26, 2001. - 10 - Ⅶ. Report of the Board of Directors (Ⅰ) Scope of key business and particulars about operation 1. The Company is mainly engaged in steel smelting, plate rolling and the sales of relevant products. The final products mainly include hot rolled plate and continuous cast billet. 2. Composition of income and profit from key business The income and total profit of the Company from the key business in 2001 were RMB 524.281 million and RMB 44.686 million. The composition of income and profit from key business is shown in the following table: Product Income from the key Proportion % Profit from the key Proportion business (RMB M) business (RMB M) Continuous cast billet 281.39 5.37 12.64 2.83% Coiled sheet 4372.61 83.40 381.67 85.41% Flat plate 329.19 6.28 29.84 6.68% The composition of the sales income from hot rolled plate in terms of regions: Northeast: 50.24%; North China: 28.35%; East China: 18.65%; Middle South: 1.94%; Northwest: 0.55%; Southwest: 0.27%. (Ⅱ) Main suppliers and customers In 2001, the total amount of purchase from the top five suppliers was RMB 4,012,620,000 and accounted for 60.08% of the total purchase amount of the year. The total amount of sales to the top five customers was RMB1,040,060,000 and accounted for 27.94% of the total sales amount of the Company. (Ⅲ) Problems and difficulties existing in operation and their solutions 2001 is an extraordinary year when the Company endured severe test. Facing continuous depression of steel market caused by world economic recession, unfavorable external environment including unsmooth export channels and adverse influence of online production suspense and renovation of continuous hot rolling plant, the whole staff of the company aimed the production and operation target for the whole year, forged ahead despite difficulties and actively take countermeasures according to the changed market situation so as to promote the production and operation, remarkably improve technical equipment level and further enhance its competing strength. 1. The Company carried out both production and renovation at the same time and tried to minimize the influence of online renovation on production and operation. In 2001, the Company carried out both production and renovation at the same time, which affected normal production and renovation. The Company strengthened production dispatching and planned management, reasonably organized production, insisted on being market oriented and ensure balanced and steady production. As for - 11 - technical renovation, the Company ensured the smooth progress of the key technical renovation projects including the modernization technical renovation of 1700mm continuous hot rolling unit and automation renovation of steelmaking converter. The total investment of 1700mm continuous hot rolling unit has reached up to over RMB 0.814 billion. After renovation, the equipment level and product quality will reach world level and the production ability and new product development ability will also be further enhanced. Meanwhile, computer control of converter smelting and production of pure steel were basically realized through the smoke control and automation renovation of No. 1 and 2 converter of steel plant and the smooth manufacturing of LF finery. The technical renovation laid solid foundation for the Company to fulfill the target of establishing base of internationally competitive plate. However, due to the online production suspension and renovation of continuous hot rolling plant, the output decreased by 756,000 tons over the previous year, which is the main reason for profit reduction. 2. The Company focused on implementing low cost strategy and steadily promoted its management Aiming at the advanced level of the industry, the Company all-roundly implemented low cost strategy and steadily enhanced its management level. As for fund management, the Company insisted on the principle of making both ends meet, actively tapped fund potential, realized all possible income, strictly and separately managed income and expenditure, quickened fund turnover and enhanced use efficiency. As for cost management, the Company tried to fulfill the target in respect of main technical and economic index, process cost, consumption quota and engineering investment and actively implemented low cost strategy. As for quality management, the Company actively implemented famous brand strategy to enhance product quality, tackled quality problems and tapped potential with the advanced industrial level as target. 3. The Company laid foundation for development and improved its marketing in domestic and international market For the year of 2001, facing the grim market situation of continuous depression of international steel market and the increase of domestic output and import volume at the same time, the Company timely adjusted marketing strategy and actively developed both domestic and international market. As for international market, it actively adjusted export strategy and target market, increased export channels by various means, exported slab of over 100,000 tons to countries including U.S.A. and Thailand and Taiwan area and developed Korean and South African market. For restoring the export to U.S.A. and Canada, the Company actively prepared for responding to anti-dumping actions. As for domestic market development, the Company signed network agreement with the users that used homemade products instead of imported ones to protect them and developed such users. It strengthened the sales to important users of key industries. For seizing the opportunities brought by west development, the Company established northwest sales branch company, which laid foundation for the enlargement of the share of northwest market. 4. The Company strengthened R&D and obtained remarkable results of new product - 12 - development As for new product development, the Company developed new types of steel including steel for container, cold rolled deep-drawing steel, cold rolled chain steel, welding bottle plat and pipeline steel with high strength and toughness according to the varieties and specifications of imported steel. It actively conducted certification and appraisal of its products. Continuous cast slab for ship board produced by the Company smoothly passed the certification of the classification society of Norway, Britain, America and China and obtained international pass. Atmospheric-corrosion-resisting low alloy hot rolled plate produced by the Company passed the certification of the experts of the Ministry of Railway so that the Company obtained the qualification certificate for its weather-resistant steel to enter railway vehicle market. As for scientific research, the Company actively cooperated with scientific research institutes and universities and seriously revised and certified technological standards and product standards with reference of standards of US and Japan, which ensured the enhancement of its competitiveness in international market. 5. The Company is actively preparing for the issuance of A shares. According to the authorization of the 2000 annual general meeting held on May 25, 2001 in connection with the matters concerning the Company’s issuance of no more than 400 million A shares, the Company submitted the Application of the Company for Issuing No More Than 400 million A shares and relevant materials. The application is now under examination. (Ⅳ) The Investment of the Company The utilization of raised funds The funds previously raised were used up in 2000, which was disclosed in 2000 interim report and annual report. The utilization of non-raised funds: 1. Continuous hot rolling renovation project: The planned investment: RMB 1.24 billion. The projected started in March 1999. By the end of 2001, the accumulated investment was RMB 815.17 million (including previously raised funds of RMB 214.5 million). By the end of 2001, non-raised funds of RMB 599.56 million were used. The project is estimated to be completed in 2002. 2. Phase-II slab continuous casting project: The planned total investment: RMB 0.43 billion. The projected started in June 1999. The project was completed in 2001. By the end of 2001, accumulated investment of RMB 355.80 million was made. The project was put into production in 2001. And has been disclosed. 3. Tapping device of steel plant: The planned total investment: RMB 26 million. The projected started in 2000. By the end of 2001, accumulated investment of RMB 24.55 million was made. The project is estimated to be completed in 2002. 4. No. 2 continuous rolling coiler renovation: The planned total investment: RMB 130 - 13 - million. By the end of 2001, accumulated investment of RMB 48.04 million was made. The project is estimated to be completed in 2002. 5. Continuous flattening coiler renovation: The planned total investment: RMB 88.58 million. By the end of 2001, accumulated investment of RMB 37.27 million was made. The project is estimated to be completed in 2002. 6. Converter automation renovation project: The planned total investment: RMB 111.34 million. By the end of 2001, accumulated investment of RMB 109.89 million was made. The project is estimated to be completed in 2002. 7. Outside-furnace refinery project: The planned total investment: RMB 98,84 million. By the end of 2001, accumulated investment of RMB 37.93 million was made. The project is estimated to be completed in 2002. 8. Smoke control project of steel plant: The planned total investment: RMB 101.47 million. By the end of 2001, accumulated investment of RMB 40.98 million was made. The project is estimated to be completed in 2002. (Ⅴ) Financial position of the Company (RMB’000) Financial indicator 2001 2000 Increase/decrease (%) Total assets 5,574,148 4,736,564 17.68 Long-term liabilities 866,043 464,000 86.65 Shareholders’ equity 4,026,747 3,438,852 17.10 Profit from key business 446,857 567,577 -21.27 Net profit 266,131 369,892 -28.05 Note: Reasons for change: The total assets increased due to the increase of shareholders’ equity. The long-term liabilities increased due to the increase of long-term loan. The shareholders’ equity increased due to the increase of net profits The profit from key business decreased due to the renovation of main equipment and reduction of output and sales volume The net profit decreased due to the decrease of the income from the key business. (Ⅵ) The influence of the change of the production and operation environment and macro-economic policies on the Company 1. The influence of China’s entry to WTO The main influence of China’s entry to WTO on domestic iron and steel industry is as follows: (1) Cancellation of the protection measure on non-tariff - 14 - ① The restriction on import quantity is to be cancelled in the first year after China’s entry to WTO. The existing quota registration system for general steel import is to be changed to automatic registration system. ② Rights of exclusive selling of import steel will be cancelled within 5 years. At present, a company can deal in imported steel only after approval. All companies with import and export right can deal in imported steel in the future. (2) Reduction of import tariff. The existing average nominal tariff rate for steel import will be lowered from 10.58% at present to 8.07% within five years. The tariff rates related to the current products of the Company are as follows: 3-4.75mm hot rolled ordinary coiled plate: Preferential tariff rate in 2001: 6%; ordinary tariff rate: 14%; Tariff rate after China’s entry to WTO: 5%; Final tariff rate: 5 %. Hot rolled acid-washed ordinary coiled plate with thickness less than 3 mm: Preferential tariff rate in 2001: 6%; ordinary tariff rate: 14%; Tariff rate after China’s entry to WTO: 5%; Final tariff rate: 5 %. Hot rolled ordinary coiled plate with thickness less than 3 mm: Preferential tariff rate in 2001: 6%; ordinary tariff rate: 14%; Tariff rate after China’s entry to WTO: 3%; Final tariff rate: 3 %. Ordinary billet: Preferential tariff rate in 2001: 3%; ordinary tariff rate: 11%; Tariff rate after China’s entry to WTO: 2%; Final tariff rate: 2 %. Under the situation of world economic depression, the problem of excessive world production capacity of iron and steel will be more serious. The steel price in international market has lowered to the bottom in the past 20 years. Under such environment, it will present a great challenge to domestic iron and steel industry. Generally speaking, the main factor that affects Chinese iron and steel industry is the overall environment of international excessive production capacity instead of China’s entry to WTO. After keen competition in domestic and international market for years, the Company has basically had the competitiveness to respond to China’s entry to WTO. However, the fluctuation of iron and steel market will exert influence on the profits of the Company. 2. According to relevant regulations of the State Council, the implementation of the preferential income tax policy enjoyed by the Company (i.e., the Company paid the income tax at the rate of 33% and 18% of paid income tax was refunded. The actual income tax rate was 15%) stopped from January 1, 2002, which will greatly influence the net profit of the Company. (Ⅶ) Business development plan for 2002 1. To conduct elaborate and reasonable organization, operation and arrangement to ensure the fulfillment of the yearly output target. The steel plant will ensure the normal operation of continuous casting plant, aiming at the target of 3.9 million tons. It will actively adapt to and master automated steel - 15 - making technology of converter, increase the proportion of the products of high quality, quicken the renovation of continuous hot rolling plant and master new equipment as soon as possible. During production organization, it will be market-oriented and focus on increasing varieties and specifications and enhancing the output of products with high quality to make more profits. 2. To flexibly adjust marketing strategy and actively respond to the change of domestic and international markets after China’s entry to WTO As for sales work, the output/sales ratio, payment collection rate and contract realization rate should all reach 100%. The Company will export products of 0.3 million tons (including plate of 0.1 million tons and slab of 0.2 million tons) and produce products of 0.2 million tons to replace imported products. It will establish stable supply and marketing relationship through the innovation of marketing manners such as establishment of steel distribution center and direct sales as well as the adjustment of sales policies. It will actively realize the contracts with key users in respect of key types of steel, follow up production, delivery and after-sales services, win the trust of domestic and foreign users with reliable reputation and high-quality products and open up wider market space. 3. To further the implementation of low cost strategy, tap potential according to concrete target, strengthen management and all-roundly promote management innovation The Company will all-roundly promote management innovation, strictly and seriously implement various rules and regulations and realize scientific, standardized and system-based management. As for fund management, the Company will continue to strengthen budget management, separately manage income and expenditure, increase income and decrease expenditure and realize all receivable income. It will strictly implement financial disciplines, reduce financial expenses and management expenses. The total comparable product cost in 2002 is to lower by 5%. As for cost management, it will continue to implement low cost strategy, strengthen potential tapping according to concrete target and focus on the work relating to process cost, key economic and technical indexes and key consumption quota. As for quality management, the Company will continue to conduct work relating to standard conformity and certification and apply certification system to quality management. 4. To promote technical innovation, quicken technical renovation and new product development and enhance the proportion of products with high quality In 2002, the Company will make greater breakthrough in respect of new product development based on the achievement of the previous year. The sales volume of products with high quality is to reach 1.2 million tons, accounting for 36% of the total output. It will strengthen variety development and focus on developing weather-resistance steel plate for containers, deep casting steel for automobiles, welding bottle steel, weather-resistant steel plate for railway vehicles, pipeline steel and steel for high-rise building structure. It will actively implement famous brand strategy and form its own competitive key products by making use of its resource advantage and hardware - 16 - advantage that its renovated main equipment, processes and technologies have reached advanced domestic and international level. 5. The company will work hard in the coming year and carry out the addition placement of A shares successfully. (Ⅷ) Routine Work of the Board of Directors 1. In the report period, the Board of Directors held altogether 3 meetings which are summarized as follows: (1) The 3rd meeting of the 2nd Board of Directors was held on April 21, 2001 at No. 1 Meeting Room of Bengang Group, 8 supervisors were supposed to attend the meeting and all 8 of them were actually present. All the members of the Supervisory Committee attended the meeting as non-voting delegates, Mr. Zhang Yingfu, Chairman of the Board, presided the meeting, The meeting examined and adopted the following resolutions: a. Adopted 2000 Work Report of the Board of Directors; b. Adopted 2000 Annual Report and Summary c. Adopted 2000 Final Settlement Report; d. Adopted 2001 Production and Business Plan; e. Adopted 2000 Profit Distribution Preplan; f. Adopted Proposal for 2001 Profit Distribution Policy; g. Adopted the Proposal on the Company’s Additional Issue in Compliance with the Measures for Control over the New Issues of Listed Companies promulgated by China Securities Regulatory Commission; i. Adopted the Proposal for Additionally Issuing no more than 400 Million A shares; j. Adopted the Proposal for the Feasibility of the Planned Investment Projects Utilizing the Proceeds Raised through Additional Issue; k. Adopted the Statement of the Application of the Proceeds Raised through the Previous Share Offering. l. Adopted the Proposal on Related Transactions - the Acquisition of No. 2 Iron Works and the Cold Rolling Mill of Benxi Iron & Steel ( Group) Co., Ltd. with the Proceeds to be Raised through the Coming Additional Offering; m. Adopted the Proposal for Revising the Original “Comprehensive Service Agreement” upon Completion of the Additional Issue; - 17 - n. Adopted the Proposal for Reengaging Arthur Andersen & Co. and Andersen-Huaqiang Certified Public Accountants as the Company’s International and Domestic Auditors in 2001; o. Adopted the Proposal on New and Old Shareholders to Enjoy the Retained Profit Formed after the Additional Issue; p. Adopted the Proposal on Replacement of Part of the Directors; q. Adopted the Proposal on Engaging Mr. Li Mohua as the General Manager and Disengaging Mr. Wang Qingyang as Deputy General Manager; r. Adopted the Proposal for Holding 2000 Shareholders’ General Meeting. The public notice of the resolutions was published on China Securities Interactive, Securities Times and Hong Kong Commercial Daily respectively dated April 24, 2001. (2) The 4th meeting of the 2nd Board of Directors was held on May 25, 2001 at Bengang Hotel, 8 directors were supposed to attend the meeting and all 7 of them were actually present. All the members of the Supervisory Committee attended the meeting as non-voting delegates, Mr. Zhang Yingfu, Chairman of the Board, presided the meeting. The meeting unanimously elected Mr. Yu Tianzhen and Mr. Li Mohua vice Chairmen of the Board. The public notice of the resolutions was published on China Securities Interactive, Securities Times and Hong Kong Commercial Daily respectively dated May 26 , 2001. (3) The 5th meeting of the 2nd Board of Directors was held on August 14, 2001 at No. 1 Meeting Room of Bengang Group. 8 directors were supposed to attend the meeting and all 8 of them were actually present. Mr. Zhang Yingfu presided the meeting. The meeting examined and adopted the following resolutions: ① Adopted 2001 Interim Report and the Summary; ② Adopted 2001 Interim Profit Distribution Plan; ③ Adopted the Proposal on the Management System concerning Provisions for Different Devaluations. The public notice of the resolutions was published on China Securities Interactive, Securities Times and Hong Kong Commercial Daily respectively dated August 16 2001. 2. Implementation of the Resolutions of the Shareholders’ General Meeting Based on the authorization by 2000 Shareholders’ General Meeting held on May 25, 2001 concerning the Company to additionally issue no more than 400 million A shares, the Company submitted the Application Report of Bengang Steel Plates Co., Ltd. for Additionally Issuing no more than 400 Million A Shares to China Securities Regulatory Commission. At present, the application is in process of review and examination. - 18 - (Ⅸ) Profit Distribution Preplan 1. 2001 Profit Distribution Preplan The Company’s net profit in the year 2001 was RMB 247,844,180 and the earnings per share was RMB 0.24. According to the Articles of Association, the Company is to allot the statutory surplus public reserve based on 10% of the net profit amounting to RMB 27,484,418 and the public welfare fund based on 5% of the net profit amounting to RMB 13,742,209, plus the retained profit in 2001 amounting to RMB 233,617,553, the total profit available for distribution to shareholders was RMB 907,577,293. Through discussion, the Board of Directors decided that based on the total share capital ended the year 2001 totaling 1,136,000 thousand shares, the Company distributed the cash dividends at the rate of RMB 1.76 for every 10 shares (including tax). The total amount for the cash profit distribution was RMB 199,993,600, the remaining undistributed profit was RMB 707,583,693. The aforesaid distribution was calculated based on RMB. The dividends for A shares were paid in RMB and that for B shares shall be paid in HK$ after conversion (with the exchange rate based on the rate on the date when the profit distribution proposal was adopted by the shareholders’ general meeting). 2. Estimated Policy on Profit Distribution in 2002 Since the Company has conducted cash dividend distribution for 2001, the Company has to carry out the projects of improving the major production equipment, including continuous rolling No. 3 heating furnace, the external refining of the steel-smelting furnace, etc. with a view to ensuring the Company’s sustainable operation and development in terms of fund. The Company shall neither conduct cash dividend distribution nor convert the capital public reserve into share capital for the year 2002. Ⅷ. Report of the Supervisory Committee (Ⅰ) Meetings In the report year, the Supervisory Committee had held 3 meetings with the details as follows: 1. The 3rd meeting of the 2nd Supervisory Committee was held on April 21, 2001 at No. 1 Meeting Room of Bengang Group. 5 supervisors were supposed to attend the meeting and 4 of them were actually present. The meeting examined and adopted the following resolutions:: (1) Adopted 2000 Work Report of the Supervisory Committee and approved to submit it to the Annual Shareholders’ General Meeting for examination; (2) Reviewed and passed 2000 Annual Report and the Summary; - 19 - (3) Reviewed and passed 2000 Financial Settlement Report; (4) Reviewed and passed 2001 Production and Operation Plan; (5) Reviewed and passed 2000 Profit Distribution Preplan; (6) Reviewed and passed the Proposal for 2001 Estimated Profit Distribution Policy; (7) Reviewed and passed the Proposal on the Company’s Additional Issue in Compliance with the Measures for Control over the New Issues of Listed Companies promulgated by China Securities Regulatory Commission; (8) Reviewed and passed the Proposal for Additionally Issuing no more than 400 Million A Shares; (9) Reviewed and passed the Proposal for the Feasibility of the Planned Investment Projects Utilizing the Proceeds Raised through Additional Issue; (10) Reviewed and passed the Statement of the Application of the Proceeds Raised in the Previous Share Offering; (11) Reviewed and passed the Proposal on Related Transactions - the Acquisition of No. 2 Iron Works and the Cold Rolling Mill of Benxi Iron & Steel ( Group) Co., Ltd. with the Proceeds to be Raised through the Coming Additional Offering; (12) Reviewed and passed the Proposal for Revising the Original “Comprehensive Service Agreement” upon Completion of the Additional Issue; (13) Reviewed and passed the Proposal for Election for New Supervisory Committee. The public notice of the resolutions was published on China Securities Interactive, Securities Times and Hong Kong Commercial Daily respectively dated , 2001. (2) The 4th meeting of the 2nd Supervisory Committee was held on May 25, 2001 at Bengang Hotel. 5 supervisors were supposed to attend the meeting and all 5 of them were actually present. The meeting unanimously elected Mr. Liu Junyou Chairman of the Supervisory Committee. The public notice of the resolutions was published on China Securities Interactive, Securities Times and Hong Kong Commercial Daily respectively dated , 2001. 3. The 5th meeting of the 2nd Supervisory Committee was held on August 14, 2001 at No. 1 Meeting Room of Bengang Group. 5 supervisors were supposed to attend the meeting and all 5 of them were actually present. The meeting was presided by Mr. Liu Junyou, Chairman of the Supervisory Committee. The meeting reviewed and adopted 2001 Interim Report and the Summary. (Ⅱ) Independent Opinion of the Supervisory Committee on the Relevant Issues in 2001 - 20 - 1. Operation According to the Law In 2001 the Company carried out its operation in a standardized way strictly according to the relevant laws, regulations and the Articles of Association. The conveying procedures, rules of procedures and decision making procedures of the Shareholders’ General Meeting and board meetings were legal and valid, in compliance with the PRC Company Law, the Rules of Listing, the Articles of Association, the Rules of Procedures for Shareholders’ General Meeting, the Rules of Procedures for the Board of Directors, etc. The Company’s internal control system is complete and healthy, the directors and managers have done their duties in a diligent way; the business decision making is scientific and rational. None of them has ever violated any laws, regulations, the Articles of Association or has been ever involved in any activities harmful to the Company’s interest. 2. Inspection of the financial position The Supervisory Committee conducted careful inspection over the Company’s financial system and financial position. In the opinion of the Supervisory Committee, the Company’s financial system is complete and healthy and the Company has good financial position; The 2001 Auditors’ Report produced by Arthur Andersen & Co. and Andersen-Huaqiang Certified Public Accountants has objectively and fairly reflected the Company’s financial position and operation results. 3. Change has taken place in the projects actually invested with the proceeds raised through share offering from that as committed, yet the procedures of such change complies with the law and regulations. Upon approval by China Securities Regulatory Commission, the Company held the 2nd meeting of the 2nd Board of Directors on August 20, 2000 and 2000 1st Extraordinary Shareholders’ General Meeting on September 21, 2000. The two meetings respectively adopted the Proposal for Change of the Application of the Proceeds Raised in the Previous Share Offering. 4. The Company had never been involved in such activities as assets purchase or sale, insider transactions, or done anything harmful to the shareholders’ equity or caused loss of the Company’s assets. 5. The related transactions were carried out in a fair and reasonable way without any harm to the Company’s interest. Ⅸ. Significant Events (Ⅰ) In the report year, the Company had been involved in lawsuit as the followings. According to the feedback information report on anti-dumping case presented by Jingtian Gongcheng Law Office, the Company's Chinese law adviser of anti-dumping case, Canadian Customs Duty Department conducted anti-dumping investigation on the hot rolled steel plates exported to Canada by thirteen countries, including China in January, 2001. Canadian International Trading Court made an award on August 17, 2001, determined the dumping rate of the Company's hot rolled plates was 7.1%. Canadian Customs Tax Department priced the hot rolled plates sold to Canada at - 21 - normal price of US$ 302.02/ton (ex-works price). The products priced by the exporter lower than this price would be levied with anti-dumping tax. Through investigation, the Company exported 65,031 tons of hot rolled coiled plates to Canada from January 1, to September 30, 2000 at the average price of US$ 261 with total value of US$ 16.96 million. After answering the anti-dumping suit proceeded by Canada, the Company no longer export its hot rolled plates to Canada. Since the Company principal market is domestic with total sales volume in 2000 being 3,123,239 tons and the domestic average price was RMB 2,110. The case did not produce any serious unfavorable affect upon the Company's production and operation in 2000. In the opinion of our lawyer, the quantity and amount of the products involved in the Canadian anti-damping case were very small in comparison with the Company's annual sales volume and income, or only 2.1% while the products exported during the investigation (January 1 to September 30, 2000) were not levied with anti-dumping tax, the said case did not produced serious affect upon the Company's production and operation. (Ⅱ) In the report period, the Company had conducted no such activities as assets acquisition, sales, absorption or consolidation. (Ⅲ) Significant Related Transactions The related transactions between the Company and Bengxi Steel Group are carried out according to the Comprehensive Service Agreement signed by both parties based on the principle of fairness, reasonability, equivalent price. Bengxi Steel Group offers products services to the Company, including raw materials, energy power, production and life services; the Company supplies hot rolled plate products to Bengang Group. 1. Purchase of Goods The Company purchased RMB 4,006,276,079 of goods from Bengang Group with the details listed as follows: Items Amount in RMB Proportion in the similar trading (%) Raw materials 2,572,767,151 79.48 energy power 379,732,453 100.00 auxiliary materials, spares and 938,849,601 96.83 parts Transportation 69,372,332 83.97 Repairing 110,866,265 93.59 Total 4,071,587,802 — 2. Sales of goods The Company purchased RMB 2,323,384,148 of goods from Bengang Groupxi , taking 44.3% of the sales income in the year. 3. Accounts prepaid Of the accounts prepaid in the report year, the amount RMB 546,015,904 is for purchase of raw materials, spares and parts and energy power from Bengang Group. 4. Advance Receipts - 22 - Of the advance receipts in the report year, the amount RMB 128,116,941 is from sales of goods to Bengang Group. (Ⅳ) Other Related Transactions (Ⅴ) Important Contracts and Implementation 1. In the report year, the Company did not keep as custodian, contract and lease any other company’s assets and vise versa. 2. In the report year, the Company did not offer external guarantees. 3. In the report period, the Company had never entrusted others to manage its cash assets. 4. Other Important Contracts - 23 - Ⅹ. Financial Report (Ⅰ) Auditors’ Report AA FA [2002] No. 0145 To all the shareholders of Bengang Steel Plates Co., Ltd. We have audited the accompanying balance sheet of Bengang Steel Plates Co., Ltd. (hereinafter referred to as the “Company”) as of Dec. 31, 2001, and statement of profit/profit distribution and cash flow statement then year ended. These accounting statements are the responsibility of the Company. Our responsibility is to express an opinion on these accounting statements based on our audits. We conducted our audits in according with the Independent Auditing Standards of Chinese Certified Public Accountants. During the auditing, we exercised the auditing procedures as we think necessary based on the practical situation of the Company including by sampling the accounting records. In our opinion, the aforesaid accounting statements comply with the relevant regulations as specified in the Enterprise Accounting Standards and the Enterprise Accounting System, fairly present, in all material aspects, the financial position of the Company as of Dec. 31, 2001 and the results of its operation and its cash flows then year ended and follow the doctrine of consistency in respect of accounting treatment method. Authur Andersen. Huaqiang Certified Chinese Certified Public Accountants Public Accountants Sun Yi Xiao Qinghua Beijing, China __(M)__(D), 2002 - 24 - (Ⅱ) Accounting Statements (attached hereafter) (Ⅲ) Notes to Accounting Statements (attached hereafter) Ⅺ. Documents Available for Inspection 1. 2001 accounting statements carried with personal signatures and seals of legal representative, person in charge of the financial affairs and person in charge of handling accounting 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 Public Notices of the Company disclosed in public on China Securities Interactive, Securities Times and Hong Kong Commercial Daily. Board of Directors of BENGANG STEEL PLATES CO., LTD. ____ , 2002 25 BENGANG STEEL PLATES CO., LTD. FINANCIAL STATEMENTS AS OF DECEMBER 31, 2001 TOGETHER WITH AUDITORS’ REPORT 26 The reader is advised that this report has been prepared originally in Chinese. In the event of a conflict between this report and the original Chinese version or difference in interpretation between the versions of the report, the Chinese language report shall prevail. 27 AUDITORS’ REPORT HK-FA-2002-0225 TO THE SHAREHOLDERS OF BENGANG STEEL PLATES CO., LTD. We have audited the accompanying balance sheet of Bengang Steel Plates Co., Ltd. (the “Company”) as of December 31, 2001, and the related statements of income, changes in equity and cash flows for the year then ended. These financial statements set out on pages 2 to 25 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 financial statements give a true and fair view of the financial position of the Company as of December 31, 2001, and of the results of its operations, changes in equity and cash flows for the year then ended in accordance with International Financial Reporting Standard, as published by the International Accounting Standards Board. Certified Public Accountants Hong Kong, April 22, 2002 28 29 BENGANG STEEL PLATES CO., LTD. NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2001 (Amounts expressed in Renminbi Yuan (“RMB”) unless otherwise stated) 1. ORGANIZATION AND OPERATIONS Bengang Steel Plates Co., Ltd. (the “Company”) was incorporated as a joint stock limited company in the People’s Republic of China (the “PRC”) on June 27, 1997 by Benxi Iron and Steel (Group) Limited (“Bengang Group Company”), through reorganization of assets and liabilities of its plants, namely, Steel Smelting Plant, Primary Rolling Plant and Continuous Hot Rolling Plant. The Company was incorporated through the issuance of 400,000,000 Domestically Listed Foreign Shares (“B Shares”) through a private placement and 616,000,000 unlisted State Shares to Bengang Group Company. In November 1997, the Company issued 120,000,000 Renminbi Denominated Domestic Shares (“A Shares”). The Company’s A Shares and B Shares have been listed on the Shenzhen Stock Exchange since 1997. The registered office of the Company is located at Benxi City, Liaoning Province, the PRC. The Company is principally engaged in steel smelting, metallurgy and processing and distribution business of related products. The directors considered that the ultimate parent company of the Company is Bengang Group Company. 2. BASIS OF PRESENTATION AND PRINCIPAL ACCOUNTING POLICIES The principal accounting policies adopted in preparing the financial statements of the Company are as follows: (a) Basis of presentation The accompanying financial statements of the Company are prepared in accordance with International Financial Reporting Standards (“IFRS”), as published by the International Accounting Standards Board (“IASB”), effective as of December 31, 2001. They are prepared under the historical cost convention, except that certain property, plant and equipment are carried at revalued amounts (Note 4). (b) Cash and cash equivalents Cash represents cash in hand and deposits with banks which are repayable on demand. Cash equivalents represent short-term, highly liquid investments that are readily convertible into known amounts of cash with original maturities of three months or less 30 and that are subject to an insignificant risk of change in value. 31 2. BASIS OF PRESENTATION AND PRINCIPAL ACCOUNTING POLICIES (Cont’d) (c) Receivables Receivable are stated at fair value of the consideration given and are carried at amortised cost, after provision for impairment. (d) Inventories Inventories are stated at the lower of cost and net realizable value. Cost, calculated on the weighted average basis, comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. When inventories are sold, the carrying amount of those inventories is recognized as an expense in the period in which the related revenue is recognized. The amount of any write-down of inventories to net realizable value and all losses of inventories are recognized as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realizable value, is recognized as a reduction in the amount of inventories recognized as an expense in the period in which the reversal occurs. (e) Property, plant and equipment and depreciation Property, plant and equipment are stated at cost or revalued amount less accumulated depreciation and accumulated impairment loss. The initial cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditures incurred after the property, plant and equipment have been put into operation, such as repairs and maintenance and overhaul costs, are recognized as expense in the period in which they are incurred. In situations where it is probable that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of the asset beyond its originally assessed standard of performance, the expenditures are capitalized as an additional cost of the asset. Depreciation is calculated using the straight-line method to write off the cost or the revalued amount, after taking into account the estimated residual value, of each asset over its expected useful life. The expected useful lives are as follows: Plant and buildings 10-35 years Machinery and equipment 5-15 years Motor vehicles and office equipment 5-8 years The useful lives of assets and depreciation method are reviewed periodically. 32 When assets are sold or retired, their costs or revalued amounts and accumulated depreciation are eliminated from the accounts and any gain or loss resulting from their disposal is included in the income statement. 33 2. BASIS OF PRESENTATION AND PRINCIPAL ACCOUNTING POLICIES (Cont’d) (e) Property, plant and equipment and depreciation (Cont’d) Certain categories of property, plant and equipment are stated at revalued amount less accumulated depreciation and accumulated impairment loss. Any increase in the valuation is credited to the revaluation reserve in shareholders’ equity; any decrease is first offset against an increase on earlier valuation in respect of the same property and is thereafter charged to the income statement. Increase on revaluation directly related to a previous decrease in carrying amount for the same investment that was recognized as an expense is credited to income to the extent that it offsets the previously recorded decrease. Upon the disposal of revalued property, the realized portion of the revaluation reserve is transferred from the valuation reserve to retained earnings. Construction-in-progress represents plant and properties under construction and machinery pending installation and is stated at cost. This includes cost of construction, plant and equipment and other direct costs plus borrowing costs which include interest charges and exchange differences arising from foreign currency borrowings used to finance these projects during the construction period, to the extent these are regarded as an adjustment to interest costs. Construction-in-progress is not depreciated until such time as the assets are completed and put into operational use. (f) Operating leases Leases are classified as operating leases whenever substantially all the risks and rewards incidental to ownership of the leased assets remain with the leasor. Lease payments under operating leases are recognized as an expense in the income statement as incurred. (g) Provisions A provision is recognized when, and only when an enterprise has a present obligation (legal or constructive) as a result of a past event and it is probable (i.e. more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. Where the effect of the time value of money is material, the amount of a provision is the present value of the expenditures expected to be required to settle the obligation. 34 2. BASIS OF PRESENTATION AND PRINCIPAL ACCOUNTING POLICIES (Cont’d) (h) Revenue recognition Provided it is probable that the economic benefits associated with a transaction will flow to the Company and the revenue and costs, if applicable, can be measured reliably, revenue is recognized on the following bases: (i) Sale of goods Revenue is recognized when the significant risks and rewards of ownership of goods have been transferred to the buyer. (ii) Interest income Interest income from bank deposits is recognized on a time proportion basis that takes into account the effective yield on the assets. (i) Taxation The Company provides for taxation on the basis of its profit for financial reporting purposes, adjusted for income and expense items which are not assessable or deductible for income tax purposes. Deferred taxation is provided under the balance sheet liability method in respect of significant temporary differences between the tax base of an asset or liability and its carrying amount in the balance sheet. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. Deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax asset are recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which the deductible temporary difference can be utilized. At each balance sheet date, the Company re-assesses unrecognized deferred tax assets and the carrying amount of deferred tax assets. The Company recognizes a previously unrecognized deferred tax asset to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. The Company conversely reduces the carrying amount of a deferred tax asset to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilised. 35 2. BASIS OF PRESENTATION AND PRINCIPAL ACCOUNTING POLICIES (Cont’d) (j) Foreign currency translation The Company maintains its books and records in RMB. Transactions in other currencies are translated into the measurement currency at exchange rates, quoted by the People’s Bank of China (“PBOC”) prevailing at the time of the transactions. Monetary assets and liabilities denominated in other currencies at the balance sheet date are re-translated at PBOC rates prevailing at that date. Exchange differences, other than those capitalized as a component of borrowing costs, arising on the settlement of monetary items at rates different from those at which they were initially recorded during the period are recognized in the income statement in the period in which they arise. (k) Borrowings Borrowings are initially recognized at the proceeds received, net of transaction costs. All interest-bearing borrowings are subsequently carried at amortized costs using the effective interest rate method. Borrowing costs include interest charges and other costs incurred in connection with the borrowing of funds, including amortization of discounts or premiums relating to borrowings, amortization of ancillary costs incurred in connection with arranging borrowings and exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. Borrowing costs are expensed as incurred, except when they are directly attributable to the acquisition or construction of property, plant and equipment that necessarily takes a substantial period of time to get ready for its intended use in which case they are capitalized as part of the cost of that asset. Capitalization of borrowing costs commences when expenditures for the asset and borrowing costs are being incurred and the activities to prepare the asset for its intended use are in progress. Borrowing costs are capitalized at the weighted average cost of the related borrowings until the asset is ready for its intended use. If the resulting carrying amount of the asset exceeds its recoverable amount, an impairment loss is recorded. (l) Pension scheme Pursuant to the PRC laws and regulations, contributions to the basic old age insurance for the Company’s local staff are to be made monthly to a government agency based on 29% of the total salary of the employees, of which 24% is borne by the Company and the remainder is borne by the staff. The government agency is responsible for the pension liabilities relating to such staff on their retirement. The Company accounts for these contributions on an accrual basis. 36 2. BASIS OF PRESENTATION AND PRINCIPAL ACCOUNTING POLICIES (Cont’d) (m) Financial instruments Financial assets and financial liabilities carried on the balance sheet include cash and cash equivalents, trade and other receivables and payables, and borrowings. The accounting policies on recognition and measurement of these items are disclosed in the respective accounting policies. Financial instruments are classified as liabilities or equity in accordance with the substance of the contractual arrangement on initial recognition. Interest, dividends, gains and losses relating to a financial instrument classified as a liability, are reported as expense or income. Distributions to holders of financial instruments classified as equity are charged directly to equity. Financial instruments are offset when the Company has a legally enforceable right to offset and intends to settle either on a net basis or to realize the asset and settle the liability simultaneously. (n) Impairment of assets (i) Financial instruments Financial instruments are reviewed for impairment at each balance sheet date. For financial assets carried at amortised cost, whenever it is probable that the Company will not collect all amounts due according to the contractual terms of loans, receivables, an impairment or bad debt loss is recognized in the income statement. Reversal of impairment losses previously recognized is recorded when the decrease in impairment loss can be objectively related to an event occurring after the write-down. Such reversal is recorded in income. However, the increased carrying amount is only recognized to the extent it does not exceed what amortised cost would have been had the impairment not been recognized. (ii) Other assets Other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Whenever the carrying amount of an asset exceeds its recoverable amount, an impairment loss is recognized in the income statement or treated as a revaluation decrease for property, plant and equipment that are carried at revalued amount to the extent that the impairment loss does not exceed the amount held in the revaluation reserve for the same asset. The recoverable amount is the higher of an asset’s net selling price and value in use. The net selling price is the amount obtainable from the sale of an asset in an arm’s length transaction less the costs of disposal while value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. Recoverable amounts are estimated for individual assets or, if its is not possible, for the cash-generating unit. 37 Reversal of impairment losses recognized in prior years is recorded when there is an indication that the impairment losses recognized for the asset no longer exist or have decreased. The reversal is recorded in the income statement or as a revaluation increase. However, the increased carrying amount of an assets due to a reversal of an impairment loss is recognized to the extent it does not exceed the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognized for that asset in prior years. 38 2. BASIS OF PRESENTATION AND PRINCIPAL ACCOUNTING POLICIES (Cont’d) (o) Contingencies Contingent liabilities are not recognized in the financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. A contingent asset is not recognized in the financial statements but disclosed when an inflow of economic benefits is probable. (p) Subsequent events Post-year-end events that provide additional information about a company’s position at the balance sheet date (adjusting events) are reflected in the financial statements. Post-year-end events that are not adjusting events are disclosed in the notes when material. (q) Accounting development Following the introduction of IFRS 39 “Financial instruments: Recognition and Measurement” and the amendments to IFRS 12 “Income Taxes” and IFRS 19 “Employee Benefits” which are effective for financial statements covering periods beginning on or after January 1, 2001, the Company has implemented these standards and amendments, the adoption of which did not have a material impact on the reported financial position or results of the Company. 39 3. RELATED PARTY TRANSACTIONS Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party, or exercise significant influence over the other party in marking financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. (a) The Company had the following significant transactions with its related parties: 2001 2000 RMB’000 RMB’000 Sales of goods to Bengang Group Company 1,639,645 2,111,065 Sales of goods to fellow subsidiaries 710,605 911,134 - Bengang International Trading Co., Ltd. 710,605 822,401 - Dalian Baluole Steel Pickle Co., Ltd. - 88,733 Purchase of raw material from related parties 3,236,853 4,351,719 - Bengang Group Company 2,572,767 3,629,875 - Bengang Iron Industry Co., Ltd. 664,086 721,844 Purchases of energy and electric power from Bengang Group Company 379,732 549,531 Purchases of accessories and spare parts from related parties 969,613 761,605 - Bengang Group Company 938,850 693,110 - Bengang Machinery Co., Ltd. 30,763 68,495 Maintenance charges paid to Bengang Group Company 110,866 18,676 Freight paid to related parties 82,616 95,454 - Bengang Group Company 69,372 87,731 - Bengang Vehicle Transportation co., Ltd. 13,244 7,723 Rentals paid to Bengang Group Company 2,673 2,673 Trademark royalty paid to Bengang Group Company 25 25 On April 14, 1997, the Company entered into a Comprehensive Services Agreement governing, inter alia, the purchases of raw materials, energy and electric power, ancillary materials and spare parts from Bengang Group Company, effective from the date of the incorporation of the Company with a term of five years. According to an approval document “Liao Tu Pi Zi (1997) No.6” issued by the Land Bureau of Liaoning Province on March 5, 1997 regarding the valuation of land and the related arrangements, and the land use right lease contract entered into between the Company and Bengang Group Company on April 7, 1997, the Company is authorised to lease the land on which its plants and buildings are located from Bengang Group Company at an agreed fee. The term of the lease contract is 50 years. The initial rent payable by the Company to Bengang Group Company was approximately RMB2,700,000 per annum. The rent will be adjusted after the first five years of the lease and subsequently at an interval of three years. 40 As of December 31, 2001, the Company had loans amounting to RMB626,444,000 (2000: RMB422,510,000) guaranteed by Bengang Group Company (see Note 12). 41 3. RELATED PARTY TRANSACTIONS (Cont’d) According to a guarantee letter issued by Bengang Group Company in 1999, Bengang Group Company would, starting from 1999, bear the income tax arising from revaluation surplus of fixed assets during the Company’s restructuring for its listing. (b) As of December 31, 2001, amounts due from/to related parties were as follows: 2001 2000 RMB’000 RMB’000 Due from Bengang Group Company 364,664 396,012 Deposit with Bengang Group Company 80,100 520,000 Due from fellow subsidiaries 23,572 48,384 - Bengang Group Second Steel Co., Ltd. 2,144 - - Bengang International Trading Co., Ltd. 21,428 42,474 - Others - 5,910 Due to fellow subsidiaries (62,320) - - Tianjin Benchui Trading Co., Ltd. (23,529) - - Herbin Bengang Group Company (18,519) - - Dalian Boluole Steel Pipe Co., Ltd. (13,207) - - Shenyang International Trading Co., Ltd. (3,498) - - Others (3,567) - 406,016 964,396 Deposit with Bengang Group Company was related to the acquisition of property, plant and equipment from Bengang Group Company. The balances with Bengang Group Company and its affiliates were unsecured, non-interest bearing and repayable on demand. (c) On April 21, 2001, the Company concluded an Asset Acquisition Agreement with Bengang Group Company, pursuant to which, the Company has undertaken to acquire the assets and related business of two production plants from Bengang Group Company. Both the Company and Bengang Group Company agreed that the proposed acquisition of the production plants was subject to the successful issuance of not more than 400,000,000 shares of new A Shares by the Company (see Note 10). According to the agreement, the purchase considerations are determined based on the results of an appraisal of the assts and liabilities of the production plants as of December 31, 2000 as conducted by a qualified PRC appraiser. According to the asset appraisal report Liao Hua Ping Bao Zi (2001) No. 001 issued by Liaoning Huachengxin Assets Appraisal Office on May 16, 2001, the net asset value of the two production plants as of December 31, 2000 was approximately RMB402,171,000 and RMB838,633,000 respectively. The proposed acquisition of the production plants and issuance of new A Shares by the Company were approved at the Company’s annual general meeting for fiscal year 2000 42 held on May 25, 2001. Pursuant to the asset appraisal report, the appraisal results described above were valid until December 31, 2001. Should the proposed acquisition occur subsequent to December 31, 2001, a re-appraisal was deemed necessary. As of approval of the financial statements, the re-appraisal results of the two production plants of Bengang Group Company were still unknown. 43 4. PROPERTY, PLANT AND EQUIPMENT, NET 2001 2000 Motor Plant vehicles and and Machinery office Construction- buildings and equipment equipment in-progress Total Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Valuation Beginning of year 889,630 2,795,725 23,057 534,808 4,243,220 3,943,717 Additions 367 13,281 2,107 1,019,501 1,035,256 312,373 Transfer to fixed assets 88,220 363,137 2,446 (453,803) - - Increase resulting from revaluation 34,613 287,151 - - 321,764 - Disposals (9,509) (20,170) (623) (9,077) (39,379) (12,870) End of year 1,003,321 3,439,124 26,987 1,091,429 5,560,861 4,243,220 Accumulated depreciation and impairment losses Beginning of year 257,768 1,116,671 18,248 - 1,392,687 1,147,718 Depreciation 32,086 263,217 1,032 - 296,335 246,967 Impairment losses - - - - - 7,500 Disposals (2,887) (15,564) (135) - (18,586) ( 9,498) End of year 286,967 1,364,324 19,145 - 1,670,436 1,392,687 Net book value End of year 716,354 2,074,800 7,842 1,091,429 3,890,425 2,850,533 Beginning of year 631,862 1,679,054 4,809 534,808 2,850,533 2,795,999 As of December 31, 2001, had the assets been carried at cost less accumulated depreciation and impairment losses, the amounts of property, plant and equipment that would have been included in the financial statements are as follows: 2001 2000 Motor Plant vehicles and and Machinery office Construction- buildings and equipment equipment in-progress Total Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Cost 876,161 3,123,756 20,562 - 4,020,479 3,607,902 Accumulated depreciation and impairment losses 234,744 1,568,145 17,147 - 1,820,036 1,560,355 641,417 1,555,611 3,415 - 2,200,443 2,047,547 (a) Certain of the Company’s property, plant and equipment as of December 44 31, 2001 was stated at market value based on an appraisal performed by Liaoning Assets Appraisal Office, independent professional valuer, on March 16, 1997. As a result of the appraisal, an increase in value of the Company’s fixed assets amounting to RMB268,178,000 as of December 31, 1996 was credited to the revaluation reserve. The directors of the Company are of the opinion that the carrying amount of the property, plant and equipment as of December 31, 2001 approximated their fair value. 45 4. PROPERTY, PLANT AND EQUIPMENT, NET (Cont’d) (b) An independent valuation was preformed by the Liaoning Zhenghe Assets Appraisal Co., Ltd., a PRC certified asset appraiser, on the properties, plant and equipment of the Company. Pursuant to a valuation report Liao Zheng Zi Ping Bao Zi (2002) No. 28 issued by the independent valuer on April 15, 2002, the fair value of the Company’s properties, plant and equipment was determined based on their replacement costs as at December 31, 2001. A revaluation surplus of approximately RMB321,764,000 was reflected in the accompanying financial statements as revaluation reserve. (c) Construction-in-progress 2001 2000 RMB’000 RMB’000 Cost of construction, plant and equipment and other direct costs 1,077,740 521,063 Cumulative interest capitalized 14,805 13,745 Exchange gain capitalized (1,116) - 1,091,429 534,808 Average capitalization rate of interest 5.67% 6.05% 5. DEFERRED TAX ASSETS Components of deferred tax assets are as follows: 2001 2000 RMB’000 RMB’000 Provision for doubtful accounts 11,035 7,922 Provision for obsolete inventories 5,533 2,179 Provision for impairment of property, plant and equipment 2,475 2,475 Write-off of staff relocation costs - 6,063 19,043 18,639 6. INVENTORIES, NET 2001 2000 RMB’000 RMB’000 Raw materials 1,889 1,142 Work-in-progress 641,786 127,784 Finished goods 24,702 222,902 Spare parts 172,817 113,080 841,194 464,908 Less: Provision for obsolete inventories (16,767) (6,604) 46 824,427 458,304 As of December 31, 2001, spare parts stated at net realizable value amounted to approximately RMB34,291,000 (2000: RMB6,868,000). 47 7. TRADE AND BILLS RECEIVABLE, NET 2001 2000 RMB’000 RMB’000 Accounts receivable 33,669 42,251 Bills receivable 187,140 132,390 220,809 174,641 Less: Provision for doubtful receivables (32,329) (24,251) 188,480 150,390 8. PREPAID TAXES Prepaid taxes mainly represented net input value-added tax (“VAT”) paid on purchases of raw materials, spare parts, fuel and other supplies, which is deductible against output VAT arising from sale of products in the future. 9. OTHER CURRENT ASSETS 2001 2000 RMB’000 RMB’000 Other receivable, net 8,229 21,760 Deferred expenses 2,791 2,770 11,020 24,530 10. SHARE CAPITAL As of December 31, 2001, the outstanding share capital represented unlisted shares held by Bengang Group Company (“State Shares”), A Shares and B Shares. The B Shares ranked pari passu in all respects with the A Shares except that A Shares can only be owned and traded by investors in the Mainland China; while B Shares can be owned and traded in foreign currency by both domestic and foreign investors. The details of share capital were as follows: 2001 2000 2001 2000 Number of shares(‘000) RMB’000 RMB’000 Authorized: Unlisted State Shares of RMB1 each 616,000 616,000 616,000 616,000 A Shares of RMB1 each 400,000 400,000 400,000 400,000 B Shares of RMB1 each 120,000 120,000 120,000 120,000 1,136,000 1,136,000 2001 2000 2001 2000 Number of shares(‘000) RMB’000 RMB’000 Issued and fully paid: 48 Unlisted State Shares 616,000 616,000 616,000 616,000 A Shares 400,000 400,000 400,000 400,000 B Shares 120,000 120,000 120,000 120,000 1,136,000 1,136,000 49 10. SHARE CAPITAL (Cont’d) By a resolution passed at the Company’s annual general meeting held on May 25, 2001, the Company was authorized to issue not more than 400,000,000 shares of new A Shares to the public and strategic investors. The proceeds from the new issuance are expected to be used primarily for acquisition of two production plants from Bengang Group Company (see Note 3) and technical innovation of the Continuous Hot Rolling Project of the Company. 11. RESERVES (a) Statutory reserves According to the articles of association of the Company, when distributing the net profit of each year, the Company shall set aside 10% of its net profit after tax (based on the Company’s local statutory accounts) for the statutory surplus reserve fund (except where the reserve balance has reached 50% of the Company’s paid-up share capital), and 5% to 10% for the statutory public welfare fund at a percentage determined by the Board of Directors. These reserves cannot be used for purposes other than those for which they are created and are not distributable as cash dividends. The directors have resolved that the statutory public welfare fund is to be utilized to build or acquire capital items, such as dormitories and other facilities for the Company’s employees, and cannot be used to pay for staff welfare expenses. Title to these capital items will remain with the Company. For the year ended December 31, 2001, the directors proposed appropriations of 15% (2000: 15%) of net profit after tax, determined under the PRC accounting standards, totaling approximately RMB41,226,000 (2000 : approximately RMB52,471,000), to the statutory surplus reserve fund and statutory public welfare fund. 2001 2000 Percentage Amount Percentage Amount Statutory reserves RMB’000 RMB’000 Statutory surplus reserve fund 10% 27,484 10% 34,981 Statutory public welfare fund 5% 13,742 5% 17,490 15% 41,226 15% 52,471 (b) Dividends According to the articles of association of the Company, the reserve available for distribution is the lower of the amount determined under the PRC accounting standards and the amount determined under IFRS. As of December 31, 2001, the retained earnings before final dividends reported in the statutory financial statements were approximately RMB940,010,000 (2000: approximately RMB706,619,000). 50 51 12. BORROWINGS (a) Short-term borrowings As of December 31, 2001, the Company had short-term bank borrowings granted by various banks amounting to approximately RMB117,000,000, none of which (2000: RMB122,510,000) was guaranteed by Bengang Group Company. These loans bear interest at a rate of 5.85% per annum (2000: 4.875% to 5.363% per annum). (b) Long-term borrowing 2001 2000 Secured RMB’000 RMB’000 Fixed rate at 6.21% per annum maturing in 2003-2006 170,000 - Fixed rate at 5.94% per annum maturing in 2002 40,000 - Floating rate at EURIBOR-0.275% per annum maturing in 2002-2004 105,328 - Fixed rate at 6.21% per annum maturing in 2002 - 50,000 Fixed rate at 6.03% per annum maturing in 2002-2004 310,000 210,000 Fixed rate at 5.94% per annum maturing in 2001-2002 - 40,000 Subtotal 625,328 300,000 Unsecured Fixed rate at 5.94% per annum maturing in 2002-2004 386,510 - Fixed rate at 6.21% per annum maturing in 2002 94,560 - Fixed rate at 6.03% per annum maturing in 2000-2001 - 54,560 Fixed rate at 5.94% per annum maturing in 2002-2003 - 164,000 Subtotal 481,070 218,560 1,106,398 518,560 Amounts due within one year included under current liabilities (240,355) (54,560) 866,043 464,000 As of December 31, 2001, all secured long-term bank loans are guaranteed by Bengang Group Company (see Note 3). 2001 2000 RMB’000 RMB’000 Long-term borrowings repayable in: 2001 - 54,560 2002 240,355 207,000 2003 233,217 167,000 2004 482,826 90,000 52 2005 75,000 - 2006 75,000 - 1,106,398 518,560 53 13. FINANCE COSTS, NET 2001 2000 RMB’000 RMB’000 Interest expenses on - Bank loans 61,171 29,607 - Others 147 540 Less : amount capitalized in construction-in-progress (14,805) (13,745) 46,513 16,402 Interest income from bank deposits (5,933) (9,150) Exchange (gain) loss, net (6) 9 40,574 7,261 14. PROFIT BEFORE TAX Profit before tax was determined after crediting and charging the following: 2001 2000 RMB’000 RMB’000 Crediting: Interest income 5,933 9,150 Exchange gain, net 6 (9) Charging: Staff costs - salaries and wages 82,091 89,790 - provision for staff and workers’ bonus and welfare 11,002 12,571 - contribution to pension scheme 19,189 21,575 Depreciation 296,335 246,967 Cost of inventories recognized as expenses 3,794,805 4,765,675 Provision for obsolete inventories 10,163 4,321 Provision for doubtful receivables 9,502 22,148 54 15. INCOME TAX EXPENSE In accordance with the approval document Liao Zheng (1997) No. 58 issued by Liaoning provincial government on March 28, 1997, the Company is subject to enterprise income tax at the tax rate of 15% on the profit, commencing from the date of the listing of the Company’s shares. Pursuant to approval documents Liao Di Shui Suo (1997) No. 250 issued by Liaoning Financial Bureau and Ben Cai Gong Zi (1997) No. 163 issued by Benxi Financial Bureau, starting from January 1, 1997, all listed companies subject to enterprise income tax at the tax rate of 15% will be levied income tax at a rate of 33% with a financial refund of 18% by the local finance bureau. The refund is subject to approval by the relevant regulatory authorities. This policy remained valid in 2000. Pursuant to the provision in a document Cai Shui (2000) No. 99 issued by the Ministry of Finance of the PRC in 2000, the Company will not be entitled to the financial refund commencing from January 1, 2002. During the year ended December 31, 2001, the Company received financial refund of approximately RMB81,648,000 from the local finance bureau (2000: approximately RMB81,115,000), which had been offset against income tax in the financial statements. Details of taxation charged during the year are as follows: 2001 2000 RMB’000 RMB’000 (Note 26) Current income tax 114,315 148,993 Financial refund (81,648) (81,115) Deferred tax income relating to origination of temporary differences (405) (12,572) 32,262 55,306 The reconciliation of the statutory tax rate to the effective tax rate is as follows: 2001 2000 RMB’000 % RMB’000 % (Note 26) Accounting profit 298,393 100.0% 425,198 100.0% Tax at the statutory tax rate of 33% 98,470 33.0% 140,315 33.0% Tax effect of reversal of impairment losses of machinery and equipment to revaluation reserve under IFRS - - (2,475) (0.6%) Tax effect of expenses that are not deductible in determining taxable profit: - Provision for doubtful accounts 3,136 1.1% 7,309 1.7% - Provision for obsolete inventories 3,354 1.1% 1,426 0.3% - Others 8,950 3.0% (10,154) (2.3%) Financial refund that is not taxable (81,648) (27.3%) (81,115) (19.1%) 55 Tax expenses 32,262 10.9% 55,306 13.0% The statutory income tax rate applicable to the Company is 33% (2000: 33%). 56 16. EARNINGS PER SHARE Earnings per share was calculated based on the net profit for the year ended December 31, 2001 of approximately RMB265,905,000 (2000: RMB369,892,000) divided by the number of shares outstanding during 2001 of 1,136,000,000 shares (2000: 1,136,000,000 shares). No diluted earnings per share were presented as there were no dilutive potential ordinary shares as of year end. 17. CASH GENERATED FROM OPERATIONS (a) Reconciliation from profit before tax to cash generated from operations: 2001 2000 RMB’000 RMB’000 (Note 26) Cash Flows From Operating Activities Profit before tax 298,393 425,198 Adjustments for: Provision for doubtful accounts 9,502 22,148 Provision for obsolete inventories 10,163 4,321 Depreciation 296,335 246,967 Losses on disposal of fixed assets 41 3,372 Unrealized foreign exchange gain (6) 9 Interest expenses 46,366 15,862 Interest income (5,933) (9,150) Operating profit before changes of working capital 654,861 708,727 (Increase) Decrease in trade and bills receivable (46,168) 76,343 Decrease (Increase) in due from related companies 56,160 (63,973) (Increase) Decrease in inventories (376,286) 108,964 Decrease in other current assets 13,510 17,541 Decrease in deposits from customers (271,478) (183,860) Increase in trade and other payables 208,448 39,741 Cash generated from operations 239,047 703,483 (b) Analysis of the balances of cash and cash equivalents 2001 2000 RMB’000 RMB’000 Cash and bank deposits 83,284 262,329 57 18. BANKING FACILITIES As of December 31, 2001, the Company had unutilized banking facilities of approximately RMB37,035,000 (2000: Nil), the use of which was restricted to the Continuous Hot Rolling Project of the Company. 19. CONTINGENT LIABILITIES As of December 31, 2001, the Company had no significant contingent liabilities (2000: Nil). 20. FINANCIAL INSTRUMENTS (a) Fair values The carrying amount of the Company’s cash and cash equivalents, short-term bank deposits over three months, trade and other receivables, trade and other payables and short-term bank loans approximate their fair values because of the short maturity of these instruments. As of December 31, 2001, the estimated fair values of long-term loans including current portions were approximately RMB1,106,398,000 (2000: RMB518,560,000) based on current market interest rates for comparable instruments. As of the same date, the book value of these liabilities was approximately RMB1,106,398,000 (2000: RMB518,560,000). (b) Foreign exchange risk The foreign exchange risks of the Company occur because the Company has business activities denominated in foreign currencies. As of December 31, 2001, the Company did not enter into any foreign exchange forward contracts to hedge against foreign exchange fluctuations. However, the directors believe that the Company’s exposure to foreign exchange risk is minimal since most of the Company’s foreign currency transactions are denominated in United States dollars (“USD”) and, over the past five years, there has been no significant fluctuation in the exchange rates between RMB and USD. (c) Credit risk The carrying amounts of cash and cash equivalents, trade and other receivables, and due from related parties and other current assets except for prepayments and deferred tax assets, represent the Company’s maximum exposure to credit risk in relation to financial assets. Cash is placed with banks and the weighted average effective interest rate on deposits was 3.43% per annum (2000: 4.72% per annum). The majority of the Company’s trade receivables and balances due from related parties relate to sales of products to related parties and third party customers. The Company performs ongoing credit 58 evaluations of its customers’ financial condition and generally does not require collateral on trade receivables. The Company maintains a provision for doubtful debts and actual losses have been within management’s expectation. No other financial assets carry a significant exposure to credit risk. 59 20. FINANCIAL INSTRUMENTS (Cont’d) (d) Interest rate risk The interest rates of long-term and short-term bank loans of the Company are disclosed in Note 11. Directors of the Company believe that the exposure to interest rate risk of financial assets and liabilities as of December 31, 2001 was minimum since their deviation from their respective fair value was not significant. (e) Liquidity risk The Company’s policy is to maintain sufficient cash and cash equivalents or have available funding through an adequate amount of committed credit facilities to meet its current use in operations. 21. SEGMENT INFORMATION No segment information is presented as the Company operates in one industry and one geographical segment. 22. COMMITMENTS (a) Capital commitments As of December 31, 2001, the Company had the following capital commitments: 2001 2000 RMB’000 RMB’000 Authorized and contracted Acquisition of property, plant and equipment 1,626,171 1,646,976 Authorized but not contracted Acquisition of property, plant and equipment 13,193 159,710 1,639,364 1,806,686 (b) Subject to the successful issuance of not more than 400,000,000 shares of new A Shares, the Company had a commitment to acquire the assets and related business of two production plants from Bengang Group Company (see Note 3). (c) Operating lease commitments As of 31 December 2001, the Company had an operating lease contract for the land where its plants and buildings are located. The term of the lease contract is 50 years. The initial rent payable by the Company is approximately RMB2,700,000 per annum. The rent will be adjusted after the first five years of the lease, namely 2002, and subsequently at an interval of three years (see Note 3). 60 23. IMPACTS OF IFRS ADJUSTMENTS ON NET PROFIT AND SHAREHOLDERS’ EQUITY Net profit for the year ended Shareholders’ equity as of December 31, December 31, 2001 2000 2001 2000 RMB’000 RMB’000 RMB’000 RMB’000 As reported in the statutory accounts 274,844 349,900 3,485,946 3,411,096 Reversal of impairment losses of machinery and equipment to revaluation reserve - 7,500 - - Write-off of staff relocation costs (9,117) (80) - 9,117 Dividends proposed after balance sheet date not recognized as a liability - - 199,994 - Recognition of revaluation surplus - - 321,764 - Deferred taxation 404 12,572 19,043 18,639 As restated for IFRS 266,131 369,892 4,026,747 3,438,852 24. SUBSEQUENT EVENTS Pursuant to a board resolution on April 22, 2002, the directors recommended the payment of a final dividend of RMB0.18 (2000: Nil) per share, totaling RMB199,993,600 for 2001. Dividends are not recognized as a liability as at the balance sheet date. 25. APPROVAL OF FINANCIAL STATEMENTS The financial statements were approved by the Board of Directors on April 22, 2002. 26. COMPARATIVE FIGURES Financial refund in 2000 has been reclassified to offset against income tax to conform to the current year’s presentation. 1855_422/WYE 61 BALANCE SHEET AS OF DECEMBER 31, 2001 (Expressed in thousands of Renminbi Yuan) Note 2001 2000 ASSETS Non-current assets: Property, plant and equipment, net 4 3,890,425 2,850,533 Deposit with parent company 3 80,100 520,000 Deferred tax assets 5 19,043 18,639 3,989,568 3,389,172 Current assets: Inventories, net 6 824,427 458,304 Trade and bills receivable, net 7 188,480 150,390 Due from related parties 3 388,236 444,396 Prepaid taxes 8 89,133 7,443 Other current assets 9 11,020 24,530 Cash and cash equivalents 17 83,284 262,329 1,584,580 1,347,392 Total assets 5,574,148 4,736,564 EQUITY AND LIABILITIES Capital and reserves: Share capital 10 1,136,000 1,136,000 Reserves 11 2,890,747 2,302,852 4,026,747 3,438,852 Non-current liabilities: Long-term borrowings 12 866,043 464,000 Current liabilities: Trade and other payables 108,591 142,285 Due to related parties 62,320 - Taxes payable - 9,787 Deposits from customers 153,092 424,570 Short-term borrowings 12 117,000 202,510 Current portion of long-term borrowings 12 240,355 54,560 681,358 833,712 Total equity and liabilities 5,574,148 4,736,564 62 BENGANG STEEL PLATES CO., LTD. INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2001 (Expressed in thousands of Renminbi Yuan, except earnings per share data) Note 2001 2000 (Note 26) Revenue 3 5,242,814 6,993,594 Cost of sales 3 (4,795,957) (6,426,017) Gross profit 446,857 567,577 Selling and distribution costs 3 (29,903) (57,106) General and administrative expenses 3 (77,987) (78,012) Profit from operations 338,967 432,459 Finance costs, net 13 (40,574) (7,261) Profit before tax 14 298,393 425,198 Income tax expense, net 15 (32,262) (55,306) Net profit 266,131 369,892 Dividends 11 - 204,480 Earnings per share 16 - Basic RMB0.23 RMB0.33 - Diluted N/A N/A 63 BENGANG STEEL PLATES CO., LTD. STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED DECEMBER 31, 2001 (Expressed in thousands of Renminbi Yuan) Reserves Share Revaluation Statutory Deferred tax Retained Note Share capital premium reserve reserves reserve earnings Total Balances as of January 1, 2000 1,136,000 1,072,187 331,483 151,732 (2,004) 591,542 3,280,940 Reclassification - - (2,004) - 2,004 - - As restated 1,136,000 1,072,187 329,479 151,732 - 591,542 3,280,940 Impairment losses of production plant - - (7,500) - - - (7,500) Disposal of revalued fixed assets - - (2,136) - - 2,136 - Net profit for the year - - - - - 369,892 369,892 Appropriation from retained earnings 11 - - - 52,471 - (52,471) - Dividends 11 - - - - - (204,480) (204,480) Balances as of January 1, 2001 1,136,000 1,072,187 319,843 204,203 - 706,619 3,438,852 Disposal of revalued fixed assets 4 - - (8,712) - - 8,712 - Net profit for the year - - - - - 266,131 266,131 Revaluation surplus 4 - - 321,764 - - - 321,764 Appropriation from retained earnings 11 - - - 41,226 - (41,226) - Balances as of December 31, 2001 1,136,000 1,072,187 632,895 245,429 - 940,236 4,026,747 64 BENGANG STEEL PLATES CO., LTD. CASH FLOW STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2001 (Expressed in thousands of Renminbi Yuan) Note 2001 2000 (Note 26) CASH FLOWS FROM OPERATING ACTIVITIES Cash generated from operations 17 239,047 703,483 Interest paid (81,234) (28,618) Income taxes paid (67,562) (67,878) Net cash from operating activities 90,251 606,987 CASH FLOWS FROM INVESTING ACTIVITIES Disposal of long-term investments - 198,000 Purchases of property, plant and equipment (777,557) (819,626) Interest received 5,933 9,150 Net cash used in investing activities (771,624) (612,476) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from short-term borrowings 100,285 55,510 Proceeds from long-term borrowings 402,043 291,490 Dividends paid - (204,480) Net cash from financing activities 502,328 142,520 Net (decrease) increase in cash and cash equivalents (179,045) 137,031 Cash and cash equivalents, beginning of year 262,329 125,298 Cash and cash equivalents, end of year 17 83,284 262,329 65