杭汽轮Ｂ(200771)2001年年度报告（英文版）

HANGZHOU STEAM TURBINE CO., LTD. ANNUAL REPORT 2001 Important Declaration The Board of Directors of the Company guarantees that there are no significant omissions, fictitious or misleading statements in the Report and we will accept individual and joint responsibilities for the truthfulness, accuracy and completeness of the Report. The 2001 Annual Report was examined by the 4th meeting of the 2nd term Board of Directors. All of the 8 directors presented the meeting adopted the report. Director Jin Fujuan absent on the meeting and entrusted director Fang Wen to vote on the report. This Report is written in English and Chinese. If the two versions vary in translation, the Chinese version shall prevail. Contents: I. Company Profile (2) II. Summary of Financial Statements and Financial Indicators (3) III. Changes in Share Capital and Shareholders (6) IV. Situation of the Directors, Supervisors, Management and Employees (8) V. Management Structure (12) VI. Profile of General Shareholders’ Meeting (16) VII. Report of the Board of Directors (21) VIII. Report of the Supervisory Committee (37) IX. Significant Events (42) X. Financial Report (48) XI. Document for Reference The Board of Directors (75) 1 Section 1. Company Profile 1. Legal Name of the Company Name in Chinese: 杭州汽轮机股份有限公司 B Share: Hangqilun B Code: 200771 Name in English: HANGZHOU STEAM TURBINE CO., LTD Abbreviation in English: HTC 2. Registered Office and Working Office Address: 357 Shiqiao Rd., Hangzhou City, Zhejiang, China Post Code: 310022 Web site: http://www.htc.net.cn 3. Legal Representative: Mr. Fang Wen 4. Secretary of the Board: He Jianhang China Tel: (0571)85780198 Fax:(0571)85780433 E-MAIL: he@htc.net.cn Liaison Address: Securities Office, Hangzhou Steam Turbine Co., Ltd., 357 Shiqiao Rd., Hangzhou City, Zhejiang Representative on Securities Affairs: Bo Ronghua Tel:(0571)85780422 Fax:(0571)85780433 E-mail: brh@htc.net.cn 5. Shares Listed on: Shenzhen Stock Exchange 6. Press for Information Disclosure: Securities Times, Hong Kong Commercial Daily Annual Report available on the Internet: http://www.cninfo.com.cn Abbreviation of the share: Stock Code: A B 7. The Place available of the Annual Report: Securities Office of the Company 8. Business range: designing and manufacturing turbine and supplementary instrument and parts of it selling our own products and providing relevant post-selling services. 9. Other relevant materials (i) Previous Date: April 23, 1998 Alternation: December 18,1998 Registered place: Industry Executive Administration in Zhejiang province Alternation: listed Chinese-abroad joint ventures holdings Co., Ltd. (Security Times and Hong Kong Commercial Daily of September 16, 1998) (ii) Registered Number of the Representative Business License: 002150 (iii) Registered Number for Taxation: 330165704202620 (iv) Name of Institution Entrusted for Non-circulating Stock(140,000,000 shares)of the Company: Central Securities Registering and Clearing Company, Shanghai Branch (v) Public Accountant Employed in 2001: Domestic Accountant Offices: Zhejiang Dongfang Certified Public Accountant Address: 563 Qingtai Street, Hangzhou 2 Tel: (0571)87807184 Fax:(0571)87819700 International Accountant Offices: Andersen (China) Co., Ltd. Address: Floor 21, Duke Building, Zhidi Square, 15 Queen Avenue (M), Zhonghuan, Hong Kong Tel:(00852)28520222 Fax:(00852)28150548 Section 2 Summary of Financial Statements and Financial Indicators 1. Financial Highlights for the Report Year Item Amount (RMB yuan) 1 Total profit 31,988,946.26 2 Profit from primary business 92,338,979.47 3 Profit from other business 1,043,806.70 4 Operating profit 32,614,254.69 5 Investment income 249,001.75 6 Subsidy income - 7 Net amount of non-operating -874,310.18 income/expenditure 8 Net profit 27,388,868.94 9 Net profit after deducting the non- 28,377,286.52 recurring gains and losses 10 Profit distributing after deducting 27,388,868.94 adjustment 11 Net cash flow from operating 51,144,604.60 activities 12 Net increase of cash and cash -34,439,543.49 equivalents 13 Net profit based on IAS 28,722,000.00 Notes: (1) In 2001 the Company’s non-recurring gains and losses after income deducting operating activities RMB62,437.77, expenditure deducting operating activities RMB936,747.95,flowing assets’ waste losses RMB114,107.40 and Net profit after deducting the non-recurring gains and losses is RMB28,377,286.52. (2) Profit from other business is from the Company’s selling part material. (3) Income of investment is RMB249,001.75, of which according to the equity method, Hangzhou Turbine Environmental Engineering Co., Ltd. in which the Company invested earned RMB156,078.69 in 2001. It undertook Hangzhou Keximeng Science&Technology Co., Ltd.’s losses of RMB808,562.84. (4) Based on IAS the Company’s net profit in 2001 is RMB28,722,000.00. The chief reason is effect of deferred taxation and deferred asset and the increase net profit is RMB1,333,131.06. 2 Appendix (In accordance with the 9th Regulation on Information Disclosure and Reporting of Company Openly Issuing Securities of Chinese Securities Regulatory Commission) 3 2001 2000 Profit in Rate of Return on Earnings Per Share Rate of Return on Net Earnings Per Share the Net Assets (%) ( yuan Per Share ) Assets (%) ( yuan Per Share ) reporting Fully Weighte Fully Weighted Fully Weighte Fully Weighte period Diluted d Diluted Diluted d Diluted d Profit 20.91 21.6 0.42 0.42 19.10 19.58 0.378 0.378 from primary business Operating 7.38 7.63 0.148 0.148 7.76 7.96 0.154 0.154 profit Net profit 6.2 6.41 0.124 0.124 6.71 6.88 0.133 0.133 Net profit 6.43 6.64 0.129 0.129 6.63 6.80 0.131 0.131 l ess non- recurring gains and losses 3 Financial Statements Summary and Financial Indicators of the last three years Unit: RMB (yuan) Name of the indictors December 31, December 31, 2000 December 31, 1999 2001 Before the supplemental After the supplemental Before the After the adjustment adjustment supplemental adjustment supplemental adjustment 1 Primary Business Income 289,160,331.88 249,196,348.70 249,196,348.70 291,557,910.19 291,557,910.19 2 Net profit 27,388,868.94 30,071,014.34 29,262,588.78 58,664,285.00 56,546,807.86 3 Total Assets 626,956,397.09 675,302,781.67 673,485,203.46 672,143,149.00 670,679,121.12 4 Shareholders' Equity 441,640,751.46 437,688,611.23 435,871,033.02 418,617,596.00 417,535,569.29 5 Earnings Per Share 0.124 0.14 0.133 0.27 0.267 6 Net Assets Per Share 2.01 1.99 1.98 1.90 1.90 7 Adjusted Net Assets Per Share 1.85 1.97 1.97 1.84 1.83 8 Net Cash Flow Per Share from 0.23 0.27 0.27 -0.005 -0.005 Operating Activities 9 Net Return on Assets ratio 6.2 6.87 6.71 14.01 13.55 10 Weighted Earnings Per Share 0.124 0.14 0.133 0.27 0.267 11 Earnings Per Share less non- 0.129 0.14 0.131 0.23 0.266 recurring gains and losses Note: The Company’s net profit in 2001 is RMB27,388,868.94, a decrease of RMB1,873,719.84 over last year(in 2001 paying back the year 2000’s local income tax RMB444,102.54). The two reasons of the drop of the net profit are: First of all, the Company made provisions for price falling of the inventories and the doubtful debts. In comparison with the same period of the previous year, the provisions for price falling of the inventories and the doubtful debts increased by RMB 300,000. Secondly, the sales prices of the products fell down. Since the industrial turbines made by the Company belong to the technical equipment based products and their market demand has very close relations with the macro-economic regulation and change of the investment environment. In addition, the production term of industrial turbines is quite long: most of the product supply contracts of a year are signed in the previous year. Affected by the macro policy adjustment and control in 2000, the market demand on our products decreased and the price fell down. As a result, the total profit dropped although sales income in 2001 increased. The Company has fully disclosed such information respectively in the 1999 and 2000 Annual Reports. (For the detail, please refer to 2000 Annual Report (Summary) and 1999 Annual Report (Summary) respectively published on Securities Times and Hong Kong Commercial Daily dated March 24, 2001 and April 17, 2000. 4 Other Business Indicators 4 Name of the indicators Unit 2001 2000 Increase or decrease comparing 2001 with 2000(%) 1 Gross industrial products(present 0,000 yuan 30468 21766.2 39.98 price) 2 Increase in industry(present price) 0,000 yuan 12074 11684.9 3.33 3 Export currency amount $ 0,000 53.3 124.9 -57.33 4 Selling income of products 0,000 yuan 28880.3 24919.6 15.89 Industrial driving turbine 0,000 yuan 21053.0 17363.5 21.25 Industrial turbogenerator 0,000 yuan 5000.6 4803.1 4.11 Others 0,000 yuan 2826.7 2753.0 2.68 5 Turnover rate of floating funds % 66.67 52.61 14.06 6 Balance rate % 29.74 35.03 -5.29 7 Selling product rate % 9.48 14.03 -4.55 8 Industrial funds tax rate % 14.86 10.00 4.86 9 Industrial increase rate % 43.38 53.68 -10.30 10 Industrial product selling rate % 96.78 110.9 -14.12 11 Industrial driving turbine’s market % 79.2 80 -0.80 occupied rate 12 Labor capacity of all industrial people Yuan per person 80450 69470 15.80 Note: (1) Related indicators Turnover rate of floating funds =Selling income/flowing assets average balance Balance rate=Total debts/total assets Selling product’s profit rate =Net profit after deducting subsidy/Selling income Industrial funds tax rate=Total tax profit/ flowing assets average + fixed assets net average Industrial increase rate =Increase in industry(present price)/ total in industry(present price) Industrial product selling rate = selling(present price)/ Total in industry(present price) Labor capacity of all industrial people = Industrial increase/year’s average population (2) Material on industrial turbine’s market occupied rate is in accordance with Chinese Electrical Equipment Industry Association, Turbine Branch. 5 Changes and Cause in Shareholder's Equity Unit: RMB yuan Item Capital Capital Surplus Public Welfare Undistributed Total Share Fund Profit Shareholders’ Equity At Beginning 220,000,000 148,923,543.57 24,389,497.86 12,194,748.93 42,557,991.59 435,871,033.02 of Year Increase 0 380,849.50 5,598,675.18 2,799,337.59 27,388,868.94 33,368,393.62 during Year Decrease 0 0 0 0 27,598,675.18 27,598,675.18 during Year At End of 220,000,000 149,304,393.07 29,988,173.04 14,994,086.52 42,348,185.35 441,640,751.46 Year Note: Cause of Changes (1)According to the Resolutions of the 4th Meeting of the 2nd Board of Directors of the Company, 10% of 2001’s annual profit is drawn as public welfare funds. (2)According to the profit distribution plan of 2001 of the 4th Meeting of the 2nd Board of Directors of the Company, 2001’s annual net profit is RMB27, 388,868.94, public welfare funds is RMB5, 598,675.18(10 SHARES FOR 1 YUAN), expenditure is RMB22, 000,000, profit left is RMB42, 348,185.35. (3) Details of increase of capital public reserves are in consolidated balanced sheet’s note 23. 5 6 Impact of IAS and other adjustment on earnings after tax and net asset Unit: RMB yuan Earnings after tax Net asset December 31, December 31, December 31, December 31, 2001 2000 2001 2000 In accordance with accounting statement listed on 27,388 29,263 441,640 435,871 domestic accounting standards Impact of adjustment: 844 2,698 (6,748) (7,592) Deferred tax Deferred asset write-off 109 (1,573) (109) Others 381 455 - Dividend declared at year-end - 22,000 11,000 As re-stated in accordance with IAS 28,722 30,843 456,892 439,170 Section 3. Changes in Share Capital and Shareholders 1 Statement of Changes of the Company’s shares Unit: share Increase or decrease of the change(+ -) At End of At Beginning Given Sending Public funds Other amount Year of Year shares shares transferred to shares (I)Non-issued shares 1 Sponsor’s shares State-owned shares 140,000,000 140,000,000 Inner legal person holding shares Outer legal person holding shares Others 2 Collecting legal person shares 3 interior staff shares 4 Preference shares or others Non-issued shares 140,000,000 140,000,000 (II)Issued shares 1 Renminbi common shares Listed domestically 2 Foreign capital 80,000,000 80,000,000 shares listed domestically 3 Foreign capital shares listed abroad 4 Others Total shares issued 80,000,000 80,000,000 (III)Total shares 220,000,000 220,000,000 2. Introduction to shares issued and listed (1). The Company singly sponsored by Hangzhou Turbine Power Group Co., Ltd. was a limited company, founded by collecting foreign shares (B-Share) listed domestically. Hangzhou Turbine Power Group Co., Ltd. invested net asset RMB199, 485,673 in the Company for the Company’s 140,000,000 state-owned shares (book value of RMB1 per share). By privately collecting the Company first issued 80,000,000 foreign shares (B-Share) listed domestically from March 31 to April 6, 1998. The price per share was HK$2.14 (HK$: RMB = 1: 1.0691, that’s RMB2.29 per share). The Company’s 80,000,000 foreign shares (B- 6 Share) listed domestically were allowed to be listed on Shenzhen Stock Exchange on April 28, 1998. (2) In the reporting period gross share capital of the Company was 220,000,000 shares, including 140,000,000 state-owned shares, 63.64% of gross share capital, and 80,000,000 foreign capital shares listed domestically (B-Share), 36.36% of gross share capital. (3) In the reporting period the Company did not exist that cause the change of the Company’s total shares and structure. (4) Up to the end of the reporting period the Company had not issued interior staff shares and company staff shares. 3.Introduction to Shareholders (i) There are 13142 shareholders in the Company in the reporting period, of which there are 1 state-owned shareholder and 13141 B shareholders. The number of shareholders is 835 people more than that of June 30, 2001. (ii) Top Ten Shareholders up to the Reporting Period Increase or decrease Percentage Mortgage or Name of shareholder Holding shares At compared with June (%) freeze Character of End of Year(share) 30, 2001(+-) shares 1 Hangzhou Turbine 140,000,000 No change 63.64 No State-owned Power Group Co., Ltd. existence shares 2 BIN LIANG 4,721,553 No change 2.15 No Foreign existence capitalshares 3 LO STEVEN CHIHWA 4,642,464 No change 2.11 No Foreign existence capitalshares 4 Song Youfu 1,890,000 No change 0.86 No Foreign existence capitalshares 5 LI BINLI 697,000 -268,107 0.32 No Foreign existence capitalshares 6 Liu Pei 522,000 -1,000 0.24 No Foreign existence capitalshares 7 EVER POINT 491,000 491,000 0.22 No Foreign INVESTMENTS existence capitalshares LIMITMD 8 Wu Haoyuan 460,235 460,235 0.21 No Foreign existence capitalshares 9 Zheng Lin 446,000 No change 0.20 No Foreign existence capitalshares 10 Yongsheng Industry Co., 397,566 397,566 0.18 No Foreign Ltd. existence capitalshares Note: (1) Of top ten shareholders Hangzhou Turbine Power Group Co., Ltd. holds shares on behalf of the State and the others belong to B-Share shareholders. 140,000,000 shares of the Company held by Hangzhou Turbine Power Group Co., Ltd. are not issued, transferred and mortgaged. (2)No associated relationship exists between the top ten shareholders above. (3) No shareholders hold 10% of the Company’s shares except for Hangzhou Turbine Power Group Co., Ltd. (4)Introduction to Hangzhou Turbine Power Group Co., Ltd. Hangzhou Turbine Power Group Co., Ltd. (the Group) was founded in June 1995, which is a state-owned and single proprietorship company authorized by the Government. The Group is considered to be one of 100 experimental units where modernized enterprise system was established and one of the centers of national-level business technology and one of 512 leading state-owned enterprises. The Group is one of five first leading businesses, one of 5 7 developing technology experimental units and one of 18 supporting superiority and leading state-owned enterprises in Hangzhou. Registered Office of the Group: 357 Shiqiao Rd., Hangzhou City; Legal Representative: Mr. Fang Wen; Owning-companies: 4 holding companies, 5 full-capital constituent companies and 7 participating stock companies; Major Business: textile machine, paper-making machine, pump, casting, changing speed gear, heat exchanging instrument, digital and display system and their manufacturing and processing. Original material, equipment and parts for groups’ purchasing and making, providing services of water, electricity and gas for their owning enterprises. (5)There is no change of the holding shareholders of the Company in the reporting period. (6)So far the Company has no strategic investor or common legal person share. Section 4 Directors, Supervisors, Senior Executives and Staff (I) Directors, Supervisors, Senior Executives and Staff No. Name Sex Age Title Office Term Office in the Office Term Shares at Group year beginning 1 Fang Wen male 61 Chairman of June, 2001 to Chairman of May, 2001 to none the Board June, 2004 the Board May, 2004 2 Jin Fujuan female 48 Vice- June, 2001 to Vice-Chairman May, 2001 to none Chairman of June, 2004 of the Board May, 2004 the Board 3 Wang Hongkang male 49 Vice- June, 2001 to Vice-Chairman May, 2001 to none Chairman of June, 2004 of the Board May, 2004 the Board and General Manager 4 Jiang Demu male 58 Director June, 2001 to director and May, 2001 to none June, 2004 chairman of the May, 2004 trade union 5 Li Lie male 53 director and June, 2001 to none - none deputy June, 2004 general manager 6 Bai Ronghua male 50 director and June, 2001 to none - none chief June, 2004 accountant 7 Yan Jianhua male 43 director and June, 2001 to Director May, 2001 to none general June, 2004 May, 2004 manager 8 Ye Zhong male 33 director and June, 2001 to Director May, 2001 to none chief engineer June, 2004 May, 2004 9 Yao Fusheng male 69 Independent June, 2001 to none - none director June, 2004 10 Zhu Shuilong male 49 Chairman of June, 2001 to director and May, 2001 to none the June, 2004 deputy general May, 2004 Supervisory manager Committee 8 11 Shao Linna female 47 Supervisor June, 2001 to director of the - none June, 2004 Financial Division 12 Zhang Yougen male 44 Supervisor June, 2001 to Director of the - none June, 2004 auditing and supervision office 13 He Fengdi female 51 Staff June, 2001 to vice-chairman - none supervisor June, 2004 of the Trade Union 14 Zhao Ying female 45 Staff Sep, 2001 to none - none supervisor June, 2004 15 Yu Changquan male 44 Deputy June, 2001 to none - none General June, 2004 Manager 16 Yan Jinghe male 47 Deputy June, 2001 to none - none General June, 2004 Manager 17 He Jianhang male 44 Secretary of June, 2001 to none - none the Board of June, 2004 Directors Notes: (1) None of the Company’s directors, supervisors, senior executives has ever held the Company’s shares. (2) All the directors and supervisors in current office have been elected at ‘2000 Shareholders’ General Meeting. About the resume and election of the directors, independent directors and supervisors, please refer to our Public Notice for Additional Agenda to 2000 Shareholders’ General Meeting respectively published on Securities Times and Hong Kong Commercial Daily dated June 12, 2001. and our Public Notice for the Resolutions of 2000 Shareholders’ General Meeting respectively published on Securities Times and Hong Kong Commercial Daily dated June 26, 2001. (3) Zhao Ying, the staff supervisor was added at the 3rd meeting of the 2nd Supervisory Committee, For her resume, please refer to our Public Notice for the Resolutions of the 3rd Meeting of the 2nd Supervisory Committee published on Securities Times dated September 20, 2001. (4) The Company’s senior executives in current office were engaged at the 1st meeting of the 2nd Board of Directors, For their resume, please refer to our Public Notice for the Resolutions of the 1st Meeting of the 2nd Board of Directors published on Securities Times dated June 26, 2001. (II) Annual Remuneration to Directors, Supervisors, Senior Executives 1. Decision-making procedures and basis for determination of the remuneration to directors, supervisors and senior executives The Company practices the “Annual Pay System” for the remuneration to the directors, supervisors and senior executives. The 9 said annual pay plan was implemented upon approval by the 1998 1st Extraordinary Shareholders’ Meeting. The Proposal concerning Amendment of the Plan for Practicing the Annual Pay System for Directors, Supervisors and Senior Executives was examined and adopted respectively at the 16th meeting of the 1st Board of Directors and the 7th meeting of the 1st Supervisory Committee dated June 10, 2001 and were submitted to 2000 Shareholders’ General Meeting. The Proposal was examined and approved at 2000 Shareholders’ General Meeting dated June 25, 2001. For the detail, please refer to the Public Notice for the Resolutions of the 16th Meeting of the 1st Board of Directors, “ the Public Notice for the Resolutions of the 7th Meeting of the 1st Supervisory Committee” and the “Public Notice for the Newly Added Agenda of 2000 Shareholders’ General Meeting” respectively published on Securities Times and Hong Kong Commercial Daily dated June 12, 2001; and the Public Notice for the Resolutions of 2000 Shareholders’ General Meeting respectively published on Securities Times and Hong Kong Commercial Daily dated June 26, 2001. Basis for determination of the annual pay to directors, supervisors and senior executives. The profit amounting to RMB 30 million realized by the company has been taken as the base for calculation, they would be rewarded with increase of the profit and punished with decrease of the profit, and 20% risk fund being deducted for time being, the pay would be cashed when they are qualified through examination upon the termination of their office. 2. Annual Remuneration to Directors, Supervisors, Senior Executives in Current Office In RMB No Name Sex Age Title Total Annual Pay 1 Fang Wen male 61 Chairman of the Board 166,630.00 2 Jin Fujuan female 48 Vice-Chairman of the Board 124,972.50 3 Wang Hongkang Male 49 Vice-Chairman of the Board 124,972.50 4 Jiang Demu male 58 Director 104,143.75 5 Li Lie male 53 Director, Standing Deputy 124,972.50 General Manager 6 Bai Ronghua male 50 Director, and Chief 104,143.75 Accountant 7 Yan Jianhua male 43 Director and General Manager 124,972.50 8 Ye Zhong male 33 Director and Chief Engineer 104,143.75 9 Yao Fusheng male 69 Independent director 20,000.00 10 Zhu Shuilong male 49 Chairman of the Supervisory 124,972.50 Committee 11 zhao Ying female 45 Staff supervisor 12 Yu Changquan male 44 Deputy General Manager 104,143.75 13 Yan Jinghe male 47 Deputy General Manager 104,143.75 14 He Jianhang male 44 Secretary of the Board of 62,486.25 Directors 10 Notes: (1) The remuneration to the aforesaid persons covers basic salaries, various bonuses, welfare, subsidy, housing allowance and other allowances. (2) The remuneration to independent directors is paid in form of allowances. The matters in connection with the allowances to independent directors were examined and approved at 2000 Shareholders’ General Meeting. (3) The remuneration to aforesaid persons include taxes. (4) Five of the Company’s directors, supervisors, senior executives enjoy annual pay from RMB 170,000 to 120,000, six of them enjoy from RMB 110,000 to 60,000 and two of them enjoy from RMB30,000 to RMB 20,000. 3 About the supervisors who do not receive any pay or allowance from the company. No Name sex Age Position Pay from the Company? 1 Shao Linna female 47 Supervisor yes 2 Zhang male 44 Supervisor yes Yougen 3 He Fengdi female 51 Staff supervisor yes (III) Resignation of directors, supervisors and senior executives in the report year 1 Directors, supervisors and senior executives leaving the office and the reason in the report year (refer to the following table) No Name sex Age Original Position Reason 1 Wu male 59 Director and Chief term expiry Guanghua Engineer 2 Zhang male 61 Director term expiry Jinxiang 3 Hu Zaiti male 58 Staff supervisor term expiry 2. Engagement/disengagement of senior executives in the report year In the report year, both the Board of Directors and the Supervisory Committee were renewed. Therefore, the senior executives were all re-engaged by the new Board of Directors. Mr. Wang Wen, the Chairman of the Board no longer held the office of General Manager; Wu Guanghua no longer held the office of Chief Engineer; Yan 11 Jianhua was engaged as General Manager; Li Lie was engaged as Standing Deputy General Manager; Ye Zhong was engaged as Chief Engineer; Bo Ronghua was reengaged as Chief Accountant; Yu Changquan and Yan Jinghe were re-engaged as Deputy General Managers; He Jianhang was re-engaged as Secretary of the Board. (IV) Employees: Ended 2001, the Company had totally 1631 staff members, including 1094 production workers, 98 salespersons, 300 technical personnel, 16 financial personnel and 92 administrative personnel. Of them, 359 have college degree or higher, taking 22.01% of the total; 276 hold medium professional titles or higher, taking 16.92% of the total; 61 hold senior professional titles, taking 12.40% of the total professionals. At the initial stage of listing, the Company reached an agreement with the Group Company concerning the management of the retired staff. Therefore, the Company does not have retired staff for whom the Company has to take responsibility for costs. (For the management costs of the retired staff the Company had to pay to the Group Company in the report year, please refer to the “Material Related Transactions” as disclosed in the “Significant Events” of this report. Section 5 Administrative Structure (I) Company Administration 1. A Brief Introduction Pursuant to the PRC Company Law and the PRC Securities Law and other relevant laws and regulations, the Company established modern enterprise system, worked out the Articles of Association of the Company and the Rules of Procedures of the Shareholders’ General Meeting, the Board of Directors, the Supervisory Committee, the Office Meeting of the Company, Office Meeting of the General Manager, Office Meeting of the Chief Engineer. These rules and regulations have specified the power, duties and liabilities of various functional organs and persons of responsibility in the Company’s legal person administrative structure; and comply with such regulations as the Rules for Administration of Listed Companies promulgated by China Securities Regulatory Commission (CSRC). The following is a brief introduction to the Company’s administration in the report year. (1) Shareholders and Shareholders’ General Meeting: the Company worked out the Rules of Procedures for Shareholders’ General Meeting, has convened and held Shareholders’ General Meeting according to the Official Opinion on Standardizing Shareholders’ General Meeting of Listed Companies promulgated by CSRC, and 12 minority shareholders may fully express their opinions and exercise their powers at the Shareholders’ General Meeting. In the Company’s related transactions, there is nothing harmful to the minority shareholders’ interest involved. Information concerning the related transactions has been fully disclosed. The Company has not offered any guarantee to the major shareholders. (2) Relations between the Company and its Control Shareholder: the Company is absolutely independent in personnel, assets, finance, organization and business from its control shareholder, carries out its business autonomously, and independently takes responsibility and risks. (3) Directors and the Board: The Company has elected directors strictly according to the directorship election procedures as specified in the Articles of Association; engaged independent directors according to the concerned regulations. The Company has prepared the Rules of Procedures of the Board of Directors. All the directors have been working with due diligence for the maximum interest of the Company and the whole shareholders; the Board of Directors of the Company has duly exercised its powers and undertaken its duties and treated all shareholders in a fair way, and attach importance to the interest related parties and interest. (4) Supervisors and the Supervisory Committee: the Company has prepared the Rules of Procedures of the Supervisory Committee. All the supervisors have conducted supervision over the Company’s business operation, financial position and legality and compliance of directors, managers and other senior executives in performing the duties in the light of taking responsibility to the whole shareholders and staff, safeguarded the legal interests of the Company, the shareholders and the staff in a practical way. (5) Performance evaluation and encouragement and binding mechanism: the Company has established a fair and transparent performance evaluation and encouragement and binding mechanism for the directors, supervisors and management, and is in process of establishing the performance evaluation and encouragement and binding system for managers and the managerial personnel at the medium level. (6) To beneficiaries: the Company has fully respected and safeguarded the interest of the banks and other creditors. Since the listing, the Company has been always won the honorable title of an enterprise of “AAA” credit. The Company has tried its best to satisfy the customers’ requirements and is enjoying a good reputation in the domestic industrial driving equipment market. The Company attaches great importance in taking care of and safeguarding the staff’s interest, ensures the staff’s income to grow with the growth of the Company’s performance on the premise of maintaining the Company’s sustainable development and maximumizing the shareholders’ interest. 13 (7) Information Disclosure and Transparency: the Company authorizes the Secretary of the Board to disclose information and receive the shareholders’ visit and inquiry. The Company has truly, accurately, timely and completely disclosed all the information necessary to be disclosed according to the relevant law, rules and regulations and ensure all the shareholders to have the equal change to obtain the information, and conscientiously accept the supervision conducted by the supervisory authorities and the shareholders. 2. Summary of the existing problems in the Company administration and the measures for improvement against the specifications concerning administration of listed companies promulgated by CSRC. (1) The Company was established through system reform from a state-owned enterprise. Due to some historical reasons, there unavoidably exists some problems in its administrative structure. The Company shall further implement such authentic documents as the Rules for Administration of Listed Companies and the Guiding Opinions on Establishment of Independent Director System in Listed Companies promulgated by CSRC, and improve the Company administration in a progressive way. (2) The Company has not been up to the requirement specified in the authentic document of CSRC concerning administration of listed companies in terms of the number of independent directors. Although the Company has engaged one independent director, the number has not been up to the requirement as specified in the Guiding Opinions on Establishment of Independent Director System in Listed Companies promulgated by CSRC The Company shall add another independent director within the time limit specified by CSRC so that the number of independent directors shall be up to the concerned regulations, and create necessary conditions for the independent directors to play their role. (3) The Board of Directors has not yet established its specialized committee. The Company shall establish the special committee of independent directors based on the practical situation of the Company according to the Rules for Administration of Listed Companies promulgated by CSRC and further improve the decision making procedures of the Board and the Board’s encouragement and binding mechanism to the management. (II) Performance of Independent Director Nominated by at the 16th meeting of the 3rd Board of Directors, and through elected at 2000 shareholders’ general meeting, Mr. Yao Fusheng, an academician of the Chinese Academy of Engineering, was elected independent director of the Company. 14 Mr. Yao Fusheng proposed a lot of constructive opinions concerning operation and development of the Company at 2000 Shareholders’ General Meeting and the 1st Meeting of the 2nd Board of Directors,_ and played an important role in election for the Chairman and Vice-chairmen of the Board, and engagement of general manager, and other senior executives of the Company. In the report year, Mr. Yao Fusheng, the independent director was absent for business from the 2nd and 3rd meetings of the 2nd Board of Directors. In the report year, the number of independent directors has not been up to the requirements as specified in the relevant document of CSRC and the Board shall make improvement within the specified time limit. (III) Separation between the Company and its Control Shareholder in terms of Business, Personnel, Assets, Organization and Finance. (1) Independence in Business: the Company is independent from its parent company (Hangzhou Steam Turbine Group) in terms of design, manufacture and sales of industrial turbines; a number of the parent company’s subsidiaries are engaged in the business of selling industrial turbines, with the prices based on the Company’s ex- works price; the Group Company’s subsidiary foundry company supplies sprays to the Company, and its auxiliary machines company supplies complementary parts for the Company’s products. For the details about the business relations between the Company and the parent company in terms of sales of turbine, supply of sprays and auxiliary machines in the report year, please refer to the “Significant Events” and “Material Related Transactions” of this report. (2) Separation in terms of personnel: In the report year, the Chairman and Vice- chairmen of the Board of the Company were also the chairman and vice-chairmen of the board of the parent company (Hangzhou Steam Turbine Group) concurrently; the Company’s management took no office in the parent company other than director on concurrent basis. None of the Company’s financial personnel has taken any part-time job in the parent company or any other related companies. The Company is basically independent in terms of labor, personnel and salary management. (3) Assets: the Company is basically independent in assets, including production system, auxiliary production system, complementary facilities, industrial property right, non-patent technologies, etc. The Company has reached transaction agreements with its parent company concerning the trademark use right, the work traffic of the staff, etc. The Company has independent production, supply and sales system, and there exists no competition in the same sector with the parent company. 15 (4) Independence in organization: the Company is completely independent from its parent company in organizational structure and has independent management and operation system. All the managerial personnel at the medium level has been engaged by the Company’s management. (5) Finance: The Company has established independent financial department, accounting system and standardized and financial management system; opened independent A/C in bank and independently pays taxes according to the law. (IV). Establishment and Implementation of the Valuation and Encouragement Mechanism of Senior Executives and the Relevant Rewarding System The Company practices the “Performance Valuation” System of its directors, supervisors and senior executives on the basis of the “Proposal for Practicing Annual Salary System” as approved by the Shareholders’ General Meeting. The Board is responsible for the valuation over the General Manager and the Secretary of the Board; General Manager is responsible for valuation over other senior executives. The Annual Salary System is linked with the valuation results by means of the year end performance report which are recorded in the valuation file. The management has worked out the Post Performance Valuation System for Leaders at the Medium Level, which has precisely specified the conditions for taking posts, post responsibilities, items for valuation and post-based annual pay for various posts, and valuation is conducted on quarterly basis. The valuation results are linked to the annual pay; the unqualified persons through valuation shall be disengaged. The Company engages leaders at the medium level by open competition and achieved a good result. Section 6 Shareholders’ General Meeting (I) Notice for and Convening of Shareholders’ General Meeting In the report year, the Company held the Shareholders’ General Meeting once, namely 2000 Shareholders’ General Meeting. The 15th meeting of the 1st Board of Directors adopted a resolution that 2000 Shareholders’ General Meeting was to be held dated June 25, 2001. The meeting had five agendas: For the detail, please refer to our Public Notice for Holding 2000 Shareholders’ General Meeting respectively published on Securities Times and Hong Kong Commercial Daily dated May 24, 2001.) Afterwards, through resolutions of the the 16th meeting of the 1st Board of Directors, and the 7th meeting of the 1st Supervisory Committee, the following added five agendas would be submitted to ’00 Shareholders’ General Meeting for examination: 1. 16 the proposal of engaging Mr. Yao Fusheng, an academician of the Chinese Academy of Engineering, as independent director of the Company; 2. the proposal of nominating Fang Wen, Jin Fujuan, Wang Hongkang, Jiang Demu, Li Lie, Bo Ronghua, Yan Jianhua, Ye Zhong, and Yao Fusheng as the director candidates of the 2nd Board of Directors. 3. the proposal of nominating Zhu Shuilong, Zhang Yougen, Shao Linna and He Fengdi as supervisor candidates of the 2nd Supervisory Committee; 4. Proposal for amending the Articles of Association for the articles concerning the number of members of the Board of Directors and the Supervisory Committee and addition of independent directors; 5. Proposal for Amending the Plan for Practicing Annual Salary System for Directors, Supervisors and Senior Executives. For the detail, please refer to our Public Notice for Adding Proposals to 2000 Shareholders’ General Meeting respectively published on Securities Times and Hong Kong Commercial Daily dated June 12, 2001.) 2000 Shareholders’ General Meeting was duly held dated June 25, 2001 at No. 1 Meeting Room of Hangzhou Steam Turbine Group. There were two shareholders/authorized representatives present at the meeting, representing 157,541,142 shares covering 71.60% of the Company’s total share capital; including 17,541,142 shares represented by the shareholders/shareholders’ representatives of B- shares, taking 21.93% of the total listed B shares. 56 other delegates, including the Company’s directors, supervisors, director and supervisor candidates, senior executives and representatives of other concerned parties also attended the meeting as voting and non-voting delegates. The meeting complied with the PRC Company Law and the Articles of Association of the Company. First of all, the meeting agreed to list the Proposal for the Company to Apply for Subscribing CHINA PETROCHEMIC A as Strategic Investor as proposed by the Company’s biggest shareholder and approved by the Board of Directors in the meeting agenda. Afterwards, the Shareholders’ General Meeting examined and adopted the following proposals by written voting: 1. The meeting examined and adopted 2000 Work Report of the Board of Directors with 157,541,142 shares for, 0 share of waiver and o share against; with the shares of approval taking 100% of the total shares held by the shareholders present at the meeting. 2. The meeting examined and adopted 2000 Work Report of the Supervisory Committee with 157,541,142 shares for, 0 share of waiver and o share against; with the shares of approval taking 100% of the total shares held by the shareholders present at the meeting. 17 3. The meeting examined and adopted 2000 Financial Report with 157,541,142 shares for, 0 share of waiver and o share against; with the shares of approval taking 100% of the total shares held by the shareholders present at the meeting. 4. The meeting examined and adopted 2000 Profit Distribution Plan with 157,541,142 shares for, 0 share of waiver and o share against; with the shares of approval taking 100% of the total shares held by the shareholders present at the meeting. In accordance with the Articles of Association, the net profit available for distribution should be based on the principle of the lower of the audited results of the international and domestic financial statements. Audited by Zhejiang Orient Certified Public Accountants, in the year 2000, the Company realized net profit amounting to RMB30,071,014.34, 10% of the after-tax profit, totaling RMB 3,007,101.43, shall be set aside as statutory common reserve, 10% of the after-tax profit, totaling RMB 3,007,101.43, shall be set aside as statutory common reserve, with the year-beginning retained profit of RMB 31,841,901.53 being added, the total profit available for distribution to the shareholders was RMB 55,898,713.01. The Shareholders’ General Meeting approved to distribute dividends at the rate of cash RMB 0.50 for every 10 shares (including the tax) based on the total share capital of 220,000,000 shares at the end of the year. The dividends to the shareholders of B-shares shall be distributed in Hong Kong dollars after conversion with the average exchange rate between RMB and HKD as published by the People’s Bank of China on the first business day after 2000 Shareholders’ General Meeting adopted the profit distribution plan. The total amount for the profit distribution was RMB 11,000,000.00, with the remaining profit of RMB 44,898,713.01 to be carried forward for distribution in the next year. 5. The meeting examined and adopted the Proposal for with 157,541,142 shares for, 0 share of waiver and o share against; with the shares of approval taking 100% of the total shares held by the shareholders present at the meeting. 6. The meeting examined and adopted the Proposal of Engaging Mr. Yao Fusheng, an Academician of the Chinese Academy of Engineering, as Independent Director of the Company’s 2nd Board of Directors, with 157,541,142 shares for, 0 share of waiver and o share against; with the shares of approval taking 100% of the total shares held by the shareholders present at the meeting. 7. The meeting elected Fang Wen, Jin Fujuan (female), Wang Hongkang, Jiang Demu, Li Lie, Bo Ronghua, Yan Jianhua, Ye Zhong, and Yao Fusheng (independent director) the 9 directors of the 2nd Board of Directors. , with 157,541,142 shares for, 0 share of waiver and o share against; with the shares of approval taking 100% of the total shares held by the shareholders present at the meeting. 18 8. The meeting elected Zhu Shuilong, Shao Linna (female) and Zhang Yougen the three supervisors to form the 2nd Supervisory Committee together with He Fengdi (female) elected by the Company’s staff representative meeting, with 157,541,142 shares for, 0 share of waiver and o share against; with the shares of approval taking 100% of the total shares held by the shareholders present at the meeting. 9. The meeting examined and adopted the Proposal for Amendment of the Articles of Association, with 157,541,142 shares for, 0 share of waiver and o share against; with the shares of approval taking 100% of the total shares held by the shareholders present at the meeting. The meeting examined and approved the proposal of amending Article 43 of Chapter 5 and Article 67 of Chapter 7 of the Articles of Association. The meeting confirmed that the Board of Directors would consist of 9 directors and have an independent director, and the Supervisory Committee would consist of 5 supervisors. 10. The meeting examined and adopted Proposal for Amending the Plan for Practicing Annual Salary System for Directors, Supervisors and Senior Executives, with 157,541,142 shares for, 0 share of waiver and o share against; with the shares of approval taking 100% of the total shares held by the shareholders present at the meeting. 11. The meeting examined and adopted the Proposal for the Company to Apply for Subscribing CHINA PETROCHEMIC A as Strategic Investor, with 157,541,142 shares for, 0 share of waiver and o share against; with the shares of approval taking 100% of the total shares held by the shareholders present at the meeting, and authorize the Board of Directors for using the self-raised fund amounting to RMB 100 million for subscribing CHINA PETROCHEMIC A. Li Genmei, Huang Lianxi, two lawyers from Zhejiang Zhejing Law Firm attended the meeting as witness and produced legal opinions expressing that all the resolutions adopted at the meeting was legal and valid. (II) Resolutions Adopted or Rejected by the Shareholders’ General Meeting, the Newspapers where the Resolutions were Published and the Date of Publication In the report year, The Shareholders’ General Meeting had never rejected any proposal submitted by the Board of Directors and the Supervisory Committee. The Public Notice for the Resolutions of 2000 Shareholders’ General Meeting respectively published on Securities Times and Hong Kong Commercial Daily dated June 26, 2001. (III) Selection and Replacement of the Company’s Directors and Supervisors 19 In accordance with the Articles of Association, the office term of both directors and supervisors is three years. Directors and supervisors for the new Board of Directors and the Supervisory Committee shall be nominated respectively by the Board of Directors and the Supervisory Committee in current office and decided by the Shareholders’ General Meeting through election. The election for the new Board of Directors and the Supervisory Committee was conducted in June, 2001. The 1st Board of Directors consisted of 7 supervisors. The 2nd Board of Directors consists of 9 supervisors. There were two directors in the 1st Board of Directors who terminated the office due to the term expiry; the other five directors continued their office in the 2nd Board of Directors upon nomination by the 16th meeting of the 1st Board of Directors and election by 2000 Shareholders’ General Meeting. Three of the four new directors are directors of Hangzhou Steam Turbine Group as well; and one is an independent director; The 1st Supervisory Committee consisted of 3 supervisors, and the 2nd Supervisory Committee consists of 5 supervisors, there was a staff supervisor in the 1st Supervisory Committee, and two staff supervisors in the 2nd Supervisory Committee. The staff supervisor of the 1st Supervisory Committee terminated the office due to the term expiry. the other two supervisors continued their office in the 2nd Supervisory Committee upon nomination by the 7th meeting of the 1st Supervisory Committee and election by 2000 Shareholders’ General Meeting. One of the three new supervisors is the director of the Auditing and Supervision Office of Hangzhou Steam Turbine Group and another two are staff supervisors. For the details about the election for the Board of Directors and the Supervisory Committee, please refer to the Public Notice on Resolutions of the 16th Meeting of the 1st Board of Directors, the Public Notice on Resolutions of 7th Meeting of the 1st Supervisory Committee and the Public Notice for Holding 2000 Shareholders’ General Meeting respectively published on Securities Times and Hong Kong Commercial Daily dated June 12, 2001; and the Public Notice on the Resolutions of 2000 Shareholders’ General Meeting respectively published on Securities Times and Hong Kong Commercial Daily dated June 26, 2001. Section 7 Report of the Board of Directors (I) Business Highlights 1. Business Scope and Operation Status 20 The Company’s principal businesses are to design and manufacture of turbines, auxiliary equipment, and spares and parts, market the self-made products and offers the relevant after-sale services. The industrial turbines produced by the Company can be classified into industrial driving turbines and industrial power generation turbines subject to the objectives being driven. Industrial driving turbines are mainly used for driving rotating machines such as compressor, blower, pump, press, etc., therefore, they are widely applied in such industrial sectors as oil refining, chemical, fertilizer, metallurgy, electric power, light industry, environmental protection, etc. as the key power equipment in various heavy-duty industrial machines. Industrial power generation turbines are mainly used for driving generators and supplies thermal energy at the same time. therefore, they are widely applied in enterprises’ power stations for self-supply in different industrial sectors and regional joint heat-electricity production projects, as well as the power stations of fuel gas-steam turbine integrated circulation and urban garbage power station, etc. In the report year, the Company made a record in recovering the accounts receivable and production output since its listing; with RMB 360 million of payment for the goods recovered, a 19.15% growth over the previous year. The Company fulfilled a gross industrial output value amounting to RMB 300 million, a 39.98% growth over the previous year; produced 81 industrial turbines with 408,000 KW, with growth of 12.50% and 16.60% respectively over the previous year. All the staff had overcame the difficulties of short production cycle, numerous key machine sets and tough technologies, and finally over-fulfilled all the contracts. One thing that should be specially mentioned is that the Company’s “contract awareness”, “awareness of top quality products” and the good teamwork in the process of developing driving turbines for the “three machines of ethylene” of Shanghai Petrochemical Corporation and the ethylene project of the Yangtze Petrochemical Corporation have become good public praise among the customers and have laid a solid foundation for the Company in taking the market of ethylene. In the report year, the Company passed the certification for the new version of ISO9001 (the quality system Version 2000) so that the quality management has been further internationalized. A number of technologies, such as development of M Series products, optimized design of the turbines for water pump to 300,000 K W boiler, have been applied in practical production. Over ten computer applied systems, including BOM system, computer aided financial management, and management of materials, have been formally put into application through expertise after a certain period of trial run. The driving force of the “technology progress” is being enhanced day after day. In the report year, although the Company had made new progress in the production, marketing and product development, the economic efficiency still went downhill. The profit from the principal business was RMB 289.1603 million, a 21 16.04% growth over a 16.04% growth; the profit was RMB 31.9889 million, a 6.32% drop over the previous year. The reason is summarized as follows: First of all, the Company made provisions for price falling of the inventories and the doubtful debts. In comparison with the same period of the previous year, the provisions for price falling of the inventories and the doubtful debts increased by RMB 300,000. Secondly, the sales prices of the products fell down. Since the industrial turbines made by the Company belong to the technical equipment based products and their market demand has very close relations with the macro-economic regulation and change of the investment environment. In addition, the production term of industrial turbines is quite long: most of the product supply contracts of a year are signed in the previous year. Affected by the macro policy adjustment and control in 2000, the market demand on our products decreased and the price fell down. As a result, the total profit dropped although sales income in 2001 increased. The Company has fully disclosed such information respectively in the 1999 and 2000 Annual Reports. (For the detail, please refer to 2000 Annual Report (Summary) and 1999 Annual Report (Summary) respectively published on Securities Times and Hong Kong Commercial Daily dated March 24, 2001 and April 17, 2000. 2. Composition of the Income from the Principal Businesses (1) Composition of the income from the principal businesses according to the regions In RMB’000 Areas Income from Cost from Tax from main Profit from main Gross main business main business business lines business lines interest rate lines lines and surtax Northeas 86597 53490 157 32950 38.05% t North 48847 41230 113 7503 15.36% China East 115075 80070 179 34824 30.26% China Northwe 8957 3494 23 5440 60.74% st China Southwe 6520 4164 12 2343 35.94% st China Central 18408 10529 30 7849 42.64% China Export 4757 3328 1428 30.03% Total 289160 196306 515 92339 31.93% (2) Composition of the income from the principal businesses according to the categories: In RMB’000 Cateogries Income from Cost from Tax from main Profit from Gross main business main business lines main interest lines business and surtax business rate lines lines Industrial driving 210530 137358 375 72796 34.58% turbine Industrial 50005 46768 89 3148 6.30% electricity Generation 22 turbine Other 28644 12179 51 16394 57.27% Total 289160 196305 515 92338 31.93% The others in the product categories mainly refer to the business of import of the turbine spares and parts, domesticalizing the turbines used to be imported and upgrading the domestic turbines. 3. Operation and Performances of the Principal Controlling Companies and Shareholding Companies. (1) Established on January 22, 2001, Zhejiang Steam Turbine Completion Technology Development Co., Ltd. had registered capital of RMB 31.60 million and the Company holds 95% of its equity. IT is mainly engaged in marketing of the complementary automatic and instrument control devices for turbine and the turbine completion works. In the report year, the company undertook turbine completion project and the complementary automatic and instrument control devices with order volume of RMB 24.8563 million, realized sales income by RMB 3.4388 million, total profit: RMB 987,400, and net profit: RMB 63.63. (2) Hangzhou Steam Turbine Environment Engineering Co., Ltd., established in May, 2000, had registered capital of RMB 20 million and the Company holds 45% of its equity. The company is mainly engaged in general contract of environment and water treatment engineering projects and manufacture of environmental protection equipment. In the report year, realized sales income was RMB 4.1632 million, total profit: RMB 0.6541 million and net profit: RMB 0.3468 million. (3) Hangzhou Keximeng Technology Co., Ltd., was established in March, 2000, with registered capital of RMB 10 million and the Company holds 34.5% of its equity. The company is mainly engaged in “West Lake Wide-view Website”, E-business and public computer network terminal products. Affected by the downhill of IT industry in the report year, the company suffered from successive loss-making and the net profit: was RMB –2.3437 million. 3. Major Suppliers and Customers In the report year, the total purchase volume from the top five suppliers was RMB 40,875,851.11, taking 24.58% of the total in the year. The total sales volume to the top five customers was RMB 83,981,150.98, accounting for 29.08% of the Company’s total sales volume. 4. Problems and difficulties occurred in operation and their solutions 23 In the report year, the Company had two major problems and difficulties, one is the drop of the profit due to the intensified market competition and falling of the product price; the other is the enhanced difficult in production organization arising from the higher demand of the customers on delivery term and technical quality. To solve these two major difficulties, the Company’s new management has taken the following corresponding measures: (1) Use the new means of technical innovation to reduce the cost, shorten the delivery term based on the principle of pursuing efficiency through technical progress. In the report year, the Company positively applied the advanced design conception of “rationalization project” and “value project”, to bring down the product cost at the very beginning of design; the Company adopted the advanced manufacture technology of “CIMS project”, improved the production process, shortened the cycle of product development and manufacturer; the Company has also prepared the relevant encouragement policy, furthered improved the nationalization level of the imported complementary parts; reduced the costs and shortened the production cycle. At the same time, the Company completed the preparation of the proposals of “Technical Innovation Projects of National Key Technology and Equipment Nationalization” and “Important Technical Innovation Project with ‘Two Highs and One Superior’” in the report year, and obtained the approval of the said proposals by the State Commission of Economy and Trading. The Company plans to introduce the up-to-date foreign technology, and the processing and testing equipment, for the purpose of further improving technical innovation ability and product manufacture ability. (2) Improve the economic responsibility examination, reduce the expenses, control the costs and pursue efficiency through scientific management. In the report year, based on the market change, the Company revised the economic responsibility examination system, specified the term measuring standards and enhanced the responsibility examination system, decomposed and distributed various operation objectives to every department and every staff; in addition, the Company further tapped the potential, strictly brought the cost of raw materials and various expenses under control; buffered the efficiency downhill arising from the price falling of the products as far as possible. (3) Restructure the employment and distribution system, and mobilize staff’s enthusiasm, pursue the efficiency through encouragement mechanism. In the report year, the Company further deepened the reform of the employment system and distribution system, did a good in an organization restructuring based on the principle of “small quantity but high capability and high efficiency”, straightened out the distribution relations based on the principle of “taking priority with high efficiency with consideration of fairness at the same time”. The Company simplified the management structure through cancellation and combination of the structure and 24 improved the work efficiency; further mobilized the staff’s enthusiasm and creativity by means of connection of the work efficiency with the distribution so that the comprehensive competitiveness has been further enhanced. 5. Profit Estimation and Realization The Company has never made any profit estimation. Therefore, it is unnecessary to make any statement about the realization of the estimated profit. ( ) Investment 1 Application of the Proceeds Raised through Share Offering in RMB Way of Investment projects Date of Total Actual Investment Actual Actual Proceeds as committed completion investment Projects: investment investment Raised amount date Issuing B repayment of the 1998-06-30 4,697.31 compliance with the 3,050.00 1998-06-30 shares loan for “eighth- commitment five” project Phase-I Issuing B Investing the 1999-12-31 2,500.00 compliance with the 1,430.72 1999-12-27 shares construction project commitment of “Technology Center” Issuing B Developing thermo- 1998-12-31 1,414.50 compliance with the 650.50 1998-10-15 shares power combined commitment production energy saving project Issuing B Developing 1999-12-31 2,900.00 Investing Hangzhou Steam 900.00 2000-05-18 shares production water Turbine Environment treatment equipment Engineering Co., Ltd. Issuing B 1999-12-31 Investing Hangzhou 345.00 2000-03-18 shares Keximeng Technology Co., Ltd. Issuing B 1999-12-31 Adding current fund 1,655.00 2000-06-30 shares Issuing B Developing 1999-12-31 3,000.00 Compliance with the 3,000.00 2001-01-21 shares complete set of commitment of setting up equipment and Zhejiang Steam Turbine engineering contract Completion Technology business Development Co., Ltd. 2. About the Proceeds Raised through Share Offering not yet Applied In application of the proceeds raised through initial offering, the Company originally committed to use RMB 65 million (actually only about more than RMB 59 million) to acquire partial assets of Hangzhou Boiler Factory, however, the commitment has been proved impossible to be implemented due to various reasons. The Board presented a report about this event at 1998 first extraordinary shareholders’ meeting, and disclosed in succession in the past regular reports from 1998 to 2000. At present, the Company is looking for new investment projects. Once the conditions are ripe, change shall be made in compliance with the legal procedures. The Company has HK$ 55.6079 million after conversion of the proceeds raised through share offering not yet applied, which has been all deposited with the International Business Department of Hangzhou Industrial and Commercial Bank. 25 3. Reasons, Procedures of the Change of Projects and Disclosure of the Information Reasons, approval procedures of the change of the project “developing production water treatment equipment” as previously committed and disclosure of the information (1) Reason of Change: the investment in the previous “developing production water treatment equipment” was based on the precondition that the Company would research, develop, produce and market the water treatment (environmental protection) equipment by itself”. However, such investment would be not only involve big investment, but also it would be necessary to set up a new product development, production and sales system within the Company. Objectively, it involved the risk of impacting the existing (industrial turbine) product development, production and sales system. After the change, the investment project that Hangzhou Steam Turbine Power Group Co., Ltd. and Hainan Sugar Chemical Group Co., Ltd. and other investors would jointly invest to establish a professional environment engineering and equipment manufacture venture would not only be favorable for the Company to be involved in the environmental protection sector, but also favorable for the Company’s management to concentrate themselves on the principal business of industrial turbine. The investment in the previous “developing production water treatment equipment” covered the funds for the capital construction, equipment purchase and technology introduction, amounting to RMB 29 million. Now the investment has been changed into the project of initiating a company together with other investors and the Company needed to invest RMB 9 million only with investment amounting to RMB 20 million to be saved. From the viewpoint of cautious investment and preventing risks, the new investment has reflected the conception of actually safeguarding the investors’ interest in making investment decision. The fund amounting to RMB 3.45 million involved in initiating Hangzhou Keximeng Technology Co., Ltd. is from the balance after the change of the investment orientation from the project of “developing and manufacturing water treatment equipment”. This project enjoys support from the PRC Ministry of Science and Technology and Hangzhou Municipal Government, etc. and has been listed in “Information Projects in the Urban Circulation Sector of Hangzhou”. The Company just met the Asia Financial Crisis at the time of issuing B shares and the B-stock market was in great depression and there existed big gap between the actual issue price and the expected price. The Company had made commitment for application of the proceeds raised through share offering in its Public Issuing Memorandum in issuing the B shares. “The balance of the net proceeds (if any) shall be used as the operation fund”. The actual situation is: the amount of proceeds necessary to fulfill all the investment of the projects as 26 committed is RMB 174 million, the actual net proceeds raised was RMB 168 million, with shortage of about RMB 6 million. Therefore, the Board proposed to change the project of “developing and manufacturing water treatment equipment” with investment of RMB 29 million as committed into the investment in Hangzhou Keximeng Technology Co., Ltd. and Hangzhou Steam Turbine Environment Engineering Co., Ltd. with investment of RMB 16.55 million as the additional circulating fund of the Company. (2) Approval Procedures and Disclosure: the 9th meeting of the 1st Board of Directors examined and adopted the proposal of changing the application of the proceeds raised through share offering on January 25, 2000 into the investment of RMB 9 million to set up Hangzhou Steam Turbine Environment Engineering Co., Ltd. and RMB 3.45 million to participate in initiating Hangzhou Keximeng Technology Co., Ltd. The proposals were submitted to 2000 1st Extraordinary Shareholders’ Meeting for examination. On Feb. 28, 2000, the Company held 2000 1st Extraordinary Shareholders’ Meeting where the aforesaid two proposals were examined and adopted. For the detail, please refer to the Public Notice on Resolutions of the 9th Meeting of the 1st Board of Directors published on Securities Times dated January 27, 2000, and the Notice of Holding 2000 1st Extraordinary Shareholders’ Meeting and the Public Notice on Resolutions of 2000 1st Extraordinary Shareholders’ Meeting published on Securities Times dated February 29, 2000. After implementation of the relevant procedures of submission and preparation, the 11th meeting of the 1st Board of Directors examined and approved the proposal of changing the project of developing and manufacturing water treatment equipment with RMBG 29 million of the proceeds raised from the initial issuing as committed into the project of investing Hangzhou Steam Turbine Environment Engineering Co., Ltd. and Hangzhou Keximeng Technology Co., Ltd. with the balance amounting to RMB 16.55 million after the investment to be added to the circulating fund. This proposal would suggested to be submitted to 1999 Shareholders’ General Meeting for examination. The Proposal was examined and approved at 1999 Shareholders’ General Meeting dated May 31, 2000. For the detail, please refer to the Public Notice of the Resolutions of the 11th Meeting of the 1st Board of Directors and the Public Notice for Holding 1999 Shareholders’ General Meeting published on Securities Times and Hong Kong Commercial Daily dated April 17, 2000, and the Public Notice on the Resolutions of 1999 Shareholders’ General Meeting respectively published on Securities Times and Hong Kong Commercial Daily dated June 1, 2000. 4. Progress and Earnings of the Projects: (1) Projects with the Proceeds Raised through Initial Offering as Committed: “Repayment of the Loan for the ‘8th-Five’ Project Phase-I”, “Project of Constructing the Technology Center” and “Technical Innovation for Developing Thermal-Power 27 Joint Production Energy-saving Project” have been basically completed according to the progress as committed. The production feature of “individual machine with small batches” of industrial turbines has determined it difficult to measure the earnings of the investment for the technical innovation. However, the aforesaid technical innovation plays an important role in improving the capacity of individual machines in the Company’s production of industrial turbines, shortening the delivery term, enhancing the product development capacity, improving the comprehensive competitiveness of the Company. (2) According to the original plan, the project of “developing equipment completion and engineering contract” should be implemented at the end of 1999. However, impacted by the Asia Financial Crisis, the valid market demand was not sufficient. Therefore, a big investment risk was involved in this project. Therefore, the Board once postponed the investment. In the second half year of 2000, with the gradual recovery of the market demand, the 13th meeting of the 1st Board of Directors examined and decided to establish Zhejiang Steam Turbine Completion Technology Development Co., Ltd. to implement the project as committed. The Company was established on January 21, 2001. Ended the report year, the realized net profit reached RMB 636,300. (3) Hangzhou Steam Turbine Environment Engineering Co., Ltd. realized net profit amounting to RMB 346,800 after the realization of the net profit amounting to RMB 904,600 in 2000. (4) Affected by the successive depression of IT industry, Hangzhou Keximeng Technology Co., Ltd. was still not ideal in business performances. After the loss making amounting to RMB 1.31 million in 2000, the Company suffered loss again amounting to RMB 2.3437 million in 2001. 2. Investment with the Proceeds not Raised through Share Offering (1) In the report year, the Company applied RMB 15.76 million of self-raised fund for technical innovation and the blade production equipment has been renewed. The Company has invested no other project. (2) Zhejiang Steam Turbine Completion Technology Development Co., Ltd., one of the Company’s subsidiaries, used its self-raised fund to invest the primary market of A shares. In the report year, the company earned a profit amounting to RMB 901,485.00. At the end of the report year, the company bought shares of Jiangxi Copper Industry and Baoguang Holdings with lucky lots and has stated the shares in the sort-term investment with amount of RMB 22,390.00. Please refer to Note 2 to the Consolidated Balance Sheet” and Note 5 to the Consolidated Profit and Profit Distribution Statement of this report. 28 ( ) Financial Position 1. The financial data of the report year are summarized as follows In RMB ’000 Items Dec. 31, Dec. 31, increase/decrease Reason of Change: 2001 2000 (%) Total assets 626,950 673,480 -6.9 loan repayment accounts receivable 173,950 194,820 -10.71 the Company enhanced the recovery of payables inventories 112,390 98,670 13.90 products in inventory have not yet delivered Longt-term 11,990 12,400 -3.31 undertaking current deficits of the investee investment cost of the fixed 361,450 348,660 3.67 increase of equipment assets Long-term liabilities 10,300 8,500 21.18 development fee from the state transferred in Shareholders’ equity 441,640 435,870 1.32 Increase of the project in the report year Items Dec. 31, Dec. 31, increase/decrease Reason of Change: 2001 2000 (%) Income from main 289,160 249,200 16.04 Increase of sales volume business lines Profit from main business 92,340 83,240 10.93 increase of sales volume lines Net profit 27,390 29,260 -6.39 provisions for price falling of products and doubtful debts 2. In the report year, the change of the data of the same items in the same statements in the accounting statements exceeding 30% (including 30%) is explained as follows: In RMB ’000 Items Year end year increase/decrease Reason of Change: beginning (%) Short-term 22,390.00 0 100 refer to Note 2 to the Consolidated Balance investment Sheet Notes receivable 12,188,000.00 7,600,000.00 60.37 refer to Note 3 to the Consolidated Balance Sheet Account prepaid 4,826,677.94 19,614,193.31 -75.39 refer to Note 6 to the Consolidated Balance Sheet Short-term Loan: - 70,000,000.00 -100 loan repayment Accounts payable 33,667,218.45 23,741,399.30 41.81 increase of payables to the suppliers Dividends payable 22,000,000.00 11,000,000.00 100 Preplan of the Board Taxes payable 5,774,626.82 2,730,203.50 111.51 refer to Note 18 to the Consolidated Balance Sheet Other receivables 125,053.38 55,005.87 127.35 refer to Note 19 to the Consolidated Balance Sheet Other receivables 2,703,823.68 15,892,900.08 -82.99 refer to Note 20 to the Consolidated Balance Sheet (IV) The important influence of the material change of production and operation environment and macro-economic policies, laws and regulations exerted, being exerted and to be exerted on the financial status and operating result of the Company. As industrial steam turbine is a kind of important technical equipment, its market need is closely related to national macro-economical control and the change of investment environment. Since the second half of 2000, Chinese government has quickened its 29 pace of industrialization. The implementation of the 10th Five-year plan was officially initiated. The strategies including west development, transmission of gas and electricity of the west to the east, adjustment of industrial structure, renewal of products and active development of major equipment manufacturing have been implemented in succession, which is bound to further enlarge the market demand of industrial steam turbine and guarantee the sustained and healthy development of the Company. Meanwhile, with China’s entry to WTO, famous international transnational groups have quickened their pace of entering Chinese market. The price of foreign industrial steam turbine products has been constantly lowered. Domestic manufacturers broke the original market setup and entered the market of medium-sized and small steam turbine market with low price one after another. Undoubtedly, this will lead to the lowering of the selling price of industrial steam turbine products so that the profit rate of the leading products of the Company will lower. Therefore, the Board of Directors specially asked the investors to pay full attention to the factors of risk of investing in the Company. (V) The notes to the non-standard or qualified auditors’ report or the auditors’ report having explanatory statements or refusing to express opinions issued by certified public accountants As Arthur Andersen & Co. and Zhejiang Orient Certified Public Accountants issued standard unqualified auditors’ reports without explanatory statements, there is no matter that needs to be specially explained by the Board of Directors in this respect. (V) Business Development Plan for 2002 The Company will receive sufficient orders in 2002,which creates good conditions for promoting technical renovation, developing new products and new markets and furthering the reform of distribution system. For dealing with the challenges after China’s entry to WTO and enhancing its competing ability, the Company will adopt the following measures: 1. To carry out full production. According to scheduled production, the difficulties lie in short delivery term and large number of key products, which will bring great pressure on balanced production. The Company will focus on the appraisal of all links of production including technical preparation, production preparation and product manufacturing based on responsibility system to ensure timely delivery of high- quality products to users. 2. To continue to further the reform of distribution system. After practicing linking income with performance at marketing department, the Company will summarize 30 experience and popularize this new distribution mechanism to arouse the initiative of employees. It will actively explore the manners and methods of linking income with performance applicable to technical quality department and manufacturing department to form a setup of interest share based on reasonable work division and enhance its comprehensive competing ability. 3. To strengthen market development. The Company will make use of the favorable conditions created by China’s admission to WTO, strengthen the development of overseas market and strive to increase foreign exchange income over the previous year. The Company will continue to develop new products effectively, promote the development of new products with market demand and promote the development of markets with the development of new products. 4. To quicken technical renovation. The Company will focus on the construction of the national project of technical innovation of important technical equipment domestically made and national important high-tech renovation project and renew and renovate a batch of processing equipment to reserve more strength for its future development. 5. To complete the use of the proceeds raised in the previous periods. As proposed by the medium and small shareholders at 2000 shareholders’ general meeting, the Company plans to acquire part of the foundry, auxiliary machinery and energy assets of Hangzhou Steam Turbine & Power Group Co. Ltd. (HSTG). With the remaining funds of RMB 59 million raised in the previous periods to reduce the scale of related transaction between the Company and HSTG, lower the cost of production and management and straighten out the process of production and operation. The initial- stage preparation for this plan is being made. The Company will try to complete the acquisition in the first half-year. (VII) Routine Work of the Board of Directors 1. Board Meetings and Resolutions in the Report Period The Board of Directors of the Company held six meetings in the report period. The current Board of Directors and the former Board of Directors respectively held three meetings. The particulars are as follows: (1) The 14th meeting of the first Board of Directors was held at the meeting room on 3/F of the office building of the Company on March 21, 2001, which was presided over by the chairman of the Board of Directors Fang Wen. 7 directors were supposed to attend the meeting and all of them were actually present. Supervisors and senior executives of the Company attended the meeting as non-voting delegates. The meeting examined and adopted the following five resolutions through voting by means of disclosed ballot: (1) Examining and approving 2000 Annual Report and its 31 Summary and agreeing to the announcement of them, (2) Examining and approving the Work Report of the Board of Directors of the Company; (3) Examining and approving 2000 Financial Accounting Report of the Company; (4) Examining and Approving 2000 Profit Distribution Preplan and submitting it 2000 Shareholders’ General Meeting for examination; (5) Examining and approving the proposal that the annual income per capita of the employees of the Company shall not exceed RMB 20,000 in 2000. (The announcement of the above resolutions and 2000 Annual Report (Summary) of the Company were published on Securities Times and Hong Kong Commercial Daily on March 24, 2001.) (2) The 15th meeting of the first Board of Directors was held at the meeting room on 3/F of the office building of the Company on May 23, 2001, which was presided over by the chairman of the Board of Directors Fang Wen. 7 directors were supposed to attend the meeting and 6 of them were actually present. The vice chairman of the Board of Directors Jin Fujuan was absent on business. The vice chairman of the board of directors and general manager of Hang Steam Turbine Group Wang Hongkang, supervisors and senior executives of the Company attended the meeting as non-voting delegates. The meeting examined and adopted the following two resolutions through voting by means of disclosed ballot: (1) Examining and approving the proposal for continuing the appointment of Arthur Andersen & Co. and Zhejiang Orient Certified Public Accounts respectively as the international and domestic financial auditing organs of the Company in 2001 and submitting it to 2000 Shareholders’ General Meeting for examination; (2) Deciding to hold 2000 Shareholders’ General Meeting on June 25. (The announcement of the above resolutions and the Notice of Holding 2000 Shareholders’ General Meeting were published on Securities Times and Hong Kong Commercial Daily on May 24, 2001). (3) The 16th meeting of the first Board of Directors was held at the small meeting room the Company on June 10, 2001, which was presided over by the chairman of the Board of Directors Fang Wen. 7 directors were supposed to attend the meeting and all of them were actually present. The vice chairman of the board of directors and general manager of Hangzhou Steam Turbine Group Wang Hongkang, supervisors and senior executives of the Company attended the meeting as non-voting delegates. The meeting examined and adopted the following five resolutions through voting by means of disclosed ballot: (1) Examining and approving the proposal for appointing Academician Yao Fusheng of Chinese Academy of Engineering as the independent director of the second Board of Directors of the Company and submitting it to 2000 Shareholders’ General Meeting for examination and adoption; (2) Examining and approving the proposal for nominating Fang Wen, Jin Fujuan, Wang Hongkang, Jiang Demu, Lilie, Bai Ronghua, Yan Jianhua, Ye Zhong and Yao Fusheng as the candidates for the second Board of Directors of the Company and submitting it to 2000 Shareholders’ General Meeting for election; (3) Examining and approving the proposal for amending the articles of the Articles of Association of the Company in 32 connection with the restriction on the composition of the board of directors and supervisory committee and increasing relevant the article of appointing independent directors and submitting it to 2000 Shareholders’ General Meeting for examination; (4) Examining and approving the proposal for revising the implementation plan of the annual salary system for the directors, supervisors and senior executives of the Company and submitting it to 2000 Shareholders’ General Meeting for examination; (5) Examining the proposal for listing 6 proposals, i.e., “Subscribing for A Shares of China Petrochemical as Strategic Investor”, “Appointing Independent Director”, “Electing the Second Board of Directors”, “Electing the Second Supervisory Committee”, “Amending the Articles of Association of the Company, “Revising the implementation Plan of the Annual Salary System For the Directors, Supervisors and Senior Executives of the Company”, as new items on the agenda of 2000 Shareholders’ General Meeting. (The announcement of the above resolutions and the “Announcement of Increasing Items on the Agenda of 2000 Shareholders’ General Meeting” were published on Securities Times and Hong Kong Commercial Daily on June 21, 2001). (4) The 1st meeting of the second Board of Directors was held in the Company on June 25, 2001, which was presided over by the Convener of the Company Fang Wen. 9 directors were supposed to attend the meeting and all of them were actually present. Supervisors of the second Supervisory Committee and senior executives of the Company attended the meeting as non-voting delegates. The meeting examined and adopted the following six resolutions through voting by means of disclosed ballot: (1) Electing Fang Wen as the chairman of the second Board of Directors of the Company; (2) Electing Jin Fujuan and Wang Hongkang as the vice chairmen of the second Board of Directors of the Company; (3) Appointing Yan Jianhua as the general manager of the Company; (4) Appointing Li Lie as the executive deputy manager, Yu Changyuan and Yan Jing as deputy general managers of the Company, Ren Yezhong as the chief engineer of the Company and Bai Ronghua as the chief accountant according to the nomination of the general manager Yan Jianhua; (5) Appointing He Jianhang as the secretary to the Board of Directors; (6) Appointing Bai Ronghua as the representative in charge of securities affairs of the Company (The announcement of the above resolutions was published on Securities Times and Hong Kong Commercial Daily on June 26, 2001) (5) The 2nd meeting of the second Board of Directors was held at the meeting room on 3/F of the office building of the Company on August 8, 2001, which was presided over by the chairman of the Board of Directors Fang Wen. 9 directors were supposed to attend the meeting and 8 of them were actually present. Independent director Yao Fusheng was absent on business. All supervisors and senior executives of the Company attended the meeting as non-voting delegates. The meeting examined and adopted the following eight resolutions through voting by means of disclosed ballot: (1) Examining and approving 2001 Interim Report of the Company and agreeing to 33 the announcement of the same; (2) Examining and approving the proposal for neither distributing 2001 interim profit nor capitalizing common reserve fund; (3) Examining and approving the Company’s letter of reply to the letter of opinions issued by Hongzhou Special Commissioner’s Office of CSRC after roving and agreeing to presenting the same to Hongzhou Special Commissioner’s Office of CSRC after revision; (4) Examining and approving the proposal for withholding tax for the dividend distribution for the year 2000 and agreeing to dividend distribution as required by the relevant letter of reply of Shenzhen Stock Exchange; (5) Examining and approving the proposal that the annual income per capita of the employees whose wage was linked with their performance should not exceed RMB 25,000 in 2001; (6) Examining and approving the internal control system for providing reserve for asset depreciation; (7) Examining and approving the proposal that the Company should not provide economic liability guarantee in any forms to external organizations; (8) Examining and approving the amendment to the rules of procedure of the meetings of Board of Directors. (The announcement of the above resolutions and 2001 Interim Report of the Company were published on Securities Times and Hong Kong Commercial Daily on August 11, 2001.) (6) The 3rd meeting of the second Board of Directors was held at the meeting room on 3/F of the office building of the Company on September 19, 2001, which was presided over by the chairman of the Board of Directors Fang Wen. 9 directors were supposed to attend the meeting and 7 of them were actually present. Director Li Lie and Independent director Yao Fusheng were absent on business. Except that Shao Linna was absent on business, all other four supervisors and senior executives of the Company attended the meeting as non-voting delegates. The meeting listened to report of the chief engineer Bai Ronghau on Hangzhou State Taxation Bureau’s approval of giving local tax relief to the Company. The meeting examined and adopted the “Rectification Report of the Company on the Problems Found in Roving Inspection” through voting by means of disclosed ballot and agreed to reporting to competent department and making announcement. (The announcement of the above resolution and the “Rectification Report of the Company on the Problems Found in Roving Inspection” were published on Securities Times on September 20, 2001.) 2. Implementation by the Board of Directors of the Resolutions of the Shareholders’ General Meeting (1) The implementation by the Board of Directors of the matters entrusted by Shareholders’ General Meeting. 2000 Shareholders’ General Meeting examined and adopted the Proposal that the Company Applied to Subscribe for the A shares of China Petrochemical as Strategic Investor and authorized the Board of Directors of the Company to subscribe for the A shares of China Petrochemical with self-owned funds of no more than RMB 0.1 billion. Afterwards, the number of strategic investors of A Shares of China Petrochemical was limited. Meanwhile, the issuing price of the 34 A Shares of China Petrochemical was higher than the price predicted by the Company and there are certain risks. Therefore, the Company did not subscribe for the shares. (The Company disclosed this information in 2001 Interim Report. Refer to 2001 Interim Report of the Company published respectively on Securities Times and Hong Kong Commercial Daily on August 11, 2001. (2) The implementation of the profit distribution plan of the Company in the report period. The Company published the announcement of dividend distribution for the year 2000 on Securities Times and Hong Kong Commercial Daily respectively on August 15, 2000 and implemented the resolution of 2000 Shareholders’ General Meeting for profit distribution. As approved by 2000 Shareholders’ General Meeting of the Company, cash dividend of RMB 0.50 (including tax) each ten shares was paid with the total share capital at the end of 1999, i.e., 220,000,000 shares as the base. Cash dividend of RMB 11 million was paid in total. The remaining distributable profit of RMB 42.558 million was carried forward for distribution in the next year. The dividends for B shares were converted into HKD at the median of the exchange rates between RMB and HKD issued by China People’s Bank on the first working day (June 26, 2001) after the ending of 2000 Shareholders’ General Meeting of the Company (1HKD:1.0612RMB) before being paid to the shareholders of B shares. The last trading day for B shares was August 22, 2001. The ex-dividend date was August 23, 2001. The dividends payable to the shareholders of state-owned shares were directly paid by the Company. Shareholders of B Shares received dividends at the trusted securities companies or banks from August 28, 2001. (3) The implementation of the plans for rights issue and issuance of new shares. The Company did not formulate and implement the plan for rights issue or issuance of new shares in the report period. (VIII) The Profit Distribution Preplan In accordance with the provisions of the Articles of Association of the Company, the lower of the net profits in the financial statements prepared and audited respectively pursuant to Chinese accounting standards and international accounting standards. According to the 2000 financial statements audited by Zhejiang Orient Certified Public Accountants, the net profit of the Company in the report year was RMB 27,388,868.94. 10% of the net profit, totaling RMB 2,799,337.59 (RMB 2,738,886.89 allocated by the parent company) , shall be set aside as statutory common reserve fund and another 10% thereof totaling RMB 2,799,337.59 (RMB 2,738,886.89 allocated by 35 the parent company), as statutory common welfare fund. The retained profit carried over from the previous year is RMB 42,557,991.59. The total profit available for distribution is RMB 64,348,185.35. The Board of Directors proposed to pay cash dividend of RMB 1 per ten shares (including tax) with the total share capital at the end of the report year, i.e., 220,000,000 shares as the base. The dividends shall be converted into HK dollars at the median of the exchange rates between RMB and HKD issued by China People’s Bank on the first business day after the adoption of this distribution plan at 2001 Shareholders’ General Meeting before being paid to the shareholders of B shares. Cash of RMB 22,000,000 in total shall be distributed. The remaining retained profit of RMB 42,348,185.35 shall be carried forward for distribution in the next year. The Board of Directors proposed not to capitalize capital common reserve fund for the year 2001. The implementation of the above preplan is subject to the approval of 2001 Shareholders’ General Meeting. (IX) Profit distribution plan for the year 2002 The profit distribution plan for the year 2002 expected by the Board of Directors of the Company: After the end of 2002, the Company will distribute profits in accordance with the Articles of Association of the Company. The amount of profit distributed will be no less than 20% of the net profit earned in 2002. The remaining retained profit will be carried forward for distribution in the next year. The dividends will continue to be distributed in cash. It is expected that no capital common reserve fund will be capitalized in 2002. (X) Other matters In the report period, the newspapers selected by the Company for information disclosure were still Securities Times and Hong Kong Commercial Daily and remained unchanged. Section 8. Report of the Supervisory Committee (I) The work of the Supervisory Committee in the report period The Supervisory Committee held five meetings in the report period. The current Supervisory Committee held two meetings and the former Supervisory Committee held three meetings. The particulars are as follows: 36 (1) The 6th meeting of the first Supervisory Committee was held at the meeting room on the 3/F of the office building of the Company on March 21, 2001, which was presided over by the chairman of the Supervisory Committee Zhu Shuilong. 3 supervisors were supposed to attend the meeting and all of them were actually present. The meeting examined and adopted 2000 Work Report of the Supervisory Committee of the Company. (The announcement of the above resolution and 2000 Annual Report (Summary) of the Company were published on Securities Times and Hong Kong Commercial Daily on March 24, 2001.) (2) The 7th meeting of the first Supervisory Committee was held at the small meeting room of the Company on June 10, 2001, which was presided over by the chairman of the Supervisory Committee Zhu Shuilong. 3 supervisors were supposed to attend the meeting and all of them were actually present. The meeting examined and adopted the following three resolutions through voting by disclosed ballots: (1) Examining and approving the proposal that the Company planned to subscribe for the A shares of China Petrochemical as a strategic investor and submitting it to 2000 Shareholders’ General Meeting for examination and decision. The current Supervisory Committee asked the Board of Directors to fully consider risks when investing with self-owned funds and act within the limit of the resources of the Company. (2) Examining and approving the proposal for nominating Zhu Shuilong, Zhang Yougen and Shao Linna as the candidates for the second supervisory committee and submit it to 2000 Shareholders’ General Meeting for election; (3) Examining and approving the proposal for listing 6 proposals, i.e., “Subscribing for A Shares of China Petrochemical as Strategic Investor”, “Appointing Independent Director”, “Electing the Second Board of Directors”, “Electing the Second Supervisory Committee”, “Amending the Articles of Association of the Company, “Revising the implementation Plan of the Annual Salary System For the Directors, Supervisors and Senior Executives of the Company”, as new items on the agenda of 2000 Shareholders’ General Meeting. (The announcement of the above resolutions and the “Announcement of Increasing Items on the Agenda of 2000 Shareholders’ General Meeting” were published on Securities Times and Hong Kong Commercial Daily on June 21, 2001). (3) The 1st meeting of the second Supervisory Committee was held in the Company on June 25, 2001, which was presided over by the convener of the Company Zhu Shuilong. 4 supervisors were supposed to attend the meeting and all of them were actually present. The meeting examined and adopted the following resolution through voting by disclosed ballots: Electing Zhu Shuilong as the chairman of the second Supervisory Committee of the Company. (The announcement of the above resolution was published on Securities Times and Hong Kong Commercial Daily on June 21, 2001.) (4) The 2nd meeting of the second Supervisory Committee was held at the meeting 37 room on the 3/F of the office building of the Company on August 8, 2001, which was presided over by the chairman of the Supervisory Committee Zhu Shuilong. 4 supervisors were supposed to attend the meeting and all of them were actually present. The meeting examined and adopted the following five resolutions through voting by disclosed ballots: (1) Examining and approving 2001 Interim Report of the Company and agreeing to the announcement of the same; (2) Examining and approving the Company’s letter of reply to the letter of opinions issued by Hongzhou Special Commissioner’s Office of CSRC after roving and agreeing to presenting the same to Hongzhou Special Commissioner’s Office of CSRC after revision; (3) Examining and approving the internal control system for providing reserve for asset depreciation; (4) Examining and approving the amendment to the rules of procedure of the meetings of Supervisory Committee. (5) Examining and approving the independent opinion report of the Supervisory Committee on the standardized operation of the Company (The announcement of the above resolutions and 2001 Interim Report of the Company were published on Securities Times and Hong Kong Commercial Daily on August 11, 2001.) (5) The 3rd meeting of the second Supervisory Committee was held at the meeting room on the 3/F of the office building of the Company on August 8, 2001, which was presided over by the chairman of the Supervisory Committee Zhu Shuilong. 5 supervisors were supposed to attend the meeting and 4 of them were actually present Supervisor Shao Linna was absent on business). The meeting examined and adopted the following two resolutions through voting by disclosed ballots: (1) Examining and approving the proposal for appointing Zhao Ying as the supervisor (acted by employees’ representative) of the second Supervisory Committee of the Company according to the nomination by the 4th meeting of the second employees’ representative assembly of HSTG. His term of office lasts until June 2004; (2) Examining and approving the “Rectification Report of the Company on the Problems Found in Roving Inspection” through voting by means of disclosed ballot and agreeing to reporting to competent department and making announcement. (The announcement of above resolutions and the “Rectification Report of the Company on the Problems Found in Roving Inspection” were published on Securities Times on September 20, 2001.) (II) The independent opinions of the Supervisory Committee The Supervisory Committee supervised over the operation and business decisions of the Company in 2001. It expressed its independent opinions on the operation status of the Company as follows: 1. The Company’s operation according to law (1) In the report period, the members of the Supervisory Committee attended all 38 Shareholders’ General Meetings and meetings of the Board of Directors as non-voting delegates according to relevant provisions the Company Law and the Articles of Association of Company and supervised the holding procedure and items on agenda of shareholders’ general meetings and meetings of board of directors and the status of the implementation of resolutions. In the opinion of the Supervisory Committee, the Board of Directors was able to properly operate and manage the Company according to the requirements of the Company Law and the Articles of Association of Company, conscientiously accept the supervision of securities supervision department and carry out timely rectification and correction after finding problems so as to ensure the operation of the Company according to law. (2) The directors, general manager and senior executives of the Company neither violated laws, regulations or the Articles of Association of the Company nor harmed the interests of the Company nor infringed upon the rights and interests of shareholders. (3) Facing the unfavorable situation of sharp fall of product price, the Board of Directors and the management of the Company were able to lead employees to try their best to fight for markets and economic results so that the Company kept leading position in respect of technology and market share in the field of industrial steam turbine in China, which demonstrated the devotion of the decision making personnel and the management of the Company to work and their ability of calmly dealing with the change of market. (4) The Company was able to constantly improve its internal management system. The basis for formulating various systems is sufficient and relevant procedures were reasonable and legal and complied with relevant regulations. 2. The credibility of the finance (1) The members of the Supervisory Committee listened to the report of relevant departments in respect of the financial status as well as the status of production and operation of the Company, checked relevant data and put forward some management improvement suggestions which were valued and adopted by relevant departments. (2) The Company was able to prepare financial statements strictly according to domestic and international accounting standards. The Internal Control System for the Asset Depreciation Reserve and Loss Disposal established by the Company specified the limit of authority and responsibilities of the shareholders’ general meeting, board of directors, the management and functional departments of the Company during the disposal of asset depreciation and losses. The standards and methods of reserve provision complied with the actual conditions of the Company and embodied consisting principle of prudent financial management of the Company. 39 3. The lawfulness of the utilization of raised funds (1) The Supervisory Committee participated in the process of decision making in respect of the investment project of establishing Zhejiang Steam Turbine Completion Technology Development Co., Ltd. implemented with raised funds in the report period and attended the board meetings and Shareholders’ General Meeting examining and approving the above investment project as non-voting delegates. In the opinion of the Supervisory Committee, the Company was able to timely performed the obligation of disclosing information truly and accurately while the decision making process complied with the provisions of the Company Law and the Articles of Association of the Company. The Supervisory Committee found no violation of regulations and contracts. The project of “developing the business of formation of complete set of equipment and turn-key contracting projects with RMB 30 million” was one of the investment projects promised at the time of issuing B shares in April 1998. Afterwards, due to the change of market situation, this project was delayed for certain reasons temporarily. With the market prospect turning for the better, this investment project has been put on the agenda again. The 13th meeting of the first Board of Directors of the Company passed the resolution for implementing this investment project promised in the Prospectus. This company was jointly established by the Company and Hangzhou Steam Turbine Environment Engineering Co., Ltd. with the registered capital of RMB 31.60 million. The Company contributed capital of RMB 30 million, which accounted for 95% of the total share capital. Hangzhou Steam Turbine Environmental Engineering Co., Ltd. contributed capital of RMB 1.6 million, which accounted for 5% of the total share capital. The business scope of this company: development, design and manufacturing of electromechanical automation control and apparatus/meter control device, turnkey contracting of thermoelectricity projects and steam turbine industrial drive projects and relevant services and sales of self-made products. The establishment of this company will effectively enhance the technical class of the industrial steam turbine products of the Company, expand the scope of electromechanical integration business and increase the added value of products, help the Company continue to keep its leading position in respect of product technology in China and promote the development of its main line of business and relevant business. (Refer to the announcement of the resolutions of the 13th meeting of the first Board of Directors of the Company published on the Securities Times on November 29, 2000.) In the opinion of the Supervisory Committee, the implementation of this project after suspension of two years reflected the prudent attitude of the Board of Directors in respect of the utilization of the raised funds and properly safeguarded the interests of shareholders and the long-term interests of the Company. 40 (2) The project of acquiring partial assets of Hangzhou Boiler Works with RMB 65 million (Note: The actual amount is RMB 59 million) set forth in the Prospectus was not implemented due to many reasons, which is reported by the Board of Directors to the Shareholders’ General Meeting of the Company. The board of directors is actively seeking appropriate new projects. Once a new project is deemed feasible after demonstration, the Company will change the use of the raised funds in accordance with legal procedure. (3) The whole of the remaining funds of HKD 55.6079 million are now deposited at International Business Department of Hangzhou Industrial & Commercial Bank. 4. The reasonableness and fairness of related transactions The Supervisory Committee consulted relevant information of the Company’s related transactions and confirmed that all related transactions were conducted openly and fairly in accordance with signed Contract on Related Transactions and no actions that harmed the interests of the Company were found. As the Company adopted the measure of promoting sales through price reduction, the prices of all outsourced parts and relevant parts and accessories purchased by the Company from HSTG were lowered correspondingly. In the opinion of the Supervisory Committee, the Board of Directors and the management of the Company were able to seriously perform obligations of good faith. All related transactions were carried out strictly according to relevant agreement and legal procedure and reasonably priced, which neither harmed the rights and interests of the shareholders nor caused the loss of the assets of the Company. 5. The opinions on the auditors’ report issued by certified public accountants. The Supervisory Committee held the opinion that the unqualified auditors’ report without explanatory statements issued by Arthur Andersen & Co. and Zhejiang Orient Certified Public Accountants in connection with the financial statements of he Company objectively reflected the financial status and operating results of the Company. The Supervisory Committee also held the following opinion: The Company obtained excellent operational results in spite of sharp fall of product price, which fully proved that the operation decisions made by the Board of Directors were correct and its management and measures taken were effective. Section 9. Important Events (I) Material lawsuits and arbitration 41 Kewana (Hangzhou) Generating Equipment Co., Ltd. (Kewana Hangzhou Co.) brought an action in Xiaoshan District People’s Court against the Company for the payment in arrears for goods totaling RMB 760839 (including interest) on June 18, 2001. This sum of money was supposed to be paid for the supporting generators in the steam turbine generating set provided by the Company to Chongqing Steel & Iron (Group) Co., Ltd. (Chongqing Steel). As Chongqing Steel failed to make payment to the Company, the Company did not make payment to Kewana Hangzhou Co. according to the contractual provisions. Later, the plaintiff and the defendant reached conciliation agreement through negotiation. The Company paid the principal of RMB 537,450 to the plaintiff. The court judged to close the case on October 7, 2001. The plaintiff and defendant should respectively bear half of the lawsuit fee. The Company bore RMB 6309. As the subject matter of the above lawsuit did not reach the limit for provisional announcement specified in the Listing Rules of Shenzhen Stock Exchange, the Company was exempted from immediate announcement and allowed to make statement here. Except the above lawsuit, the Company did not get involved in other material lawsuits and arbitration in the report period. (II) Brief introduction and progress of the events concerning acquisition or sale of the assets, assets absorption or merger in which the Company was involved in the report period. There were no such events as acquisition or sale of the assets, assets absorption or merger in which the Company was involved in the report period. (III) Material Related Transactions 1. Related transactions in connection with purchase/sale of goods and labor services Energies including water, electricity, air conditioning and steam, cast blanks and auxiliary units are provided by Hangzhou Steam Turbine & Power Group Co., Ltd. The price of energies including water, electricity, air conditioning and steam was fixed according the principle of “listed price of the state plus managing fee”. The price of cast blanks and auxiliary units was fixed according to market price. The mode of settlement: Price is to be determined according to actual transaction and payment is to be made quarterly. The amount of transaction of this item was RMB 60,344,402.74 in the report period. The living support, work-related transportation and post training of the staff and 42 workers, security service, computer services, trademark license, etc. of the Company are all provided by Hangzhou Steam Turbine & Power Group Co., Ltd. The price was fixed according to the principle of “fixing the price based on market price after negotiation between both parties” and relevant transaction agreement was signed. The Company paid the purchase price in lump sum each year in accordance with relevant agreement. The amount of transaction of this item was RMB 9,270,088.62 in the report period. The premium of the basic endowment insurance, supplementary endowment insurance, basic medical insurance, unemployment insurance and industrial injury insurance of the employees of the Company and the cost of subscribing for relevant newspapers and magazines were paid and collected by Hangzhou Steam Turbine & Power Group Co., Ltd. for the Company. The Company paid the said advanced expenses of RMB 24,765,413.34 to HSTG in the report period. The total amount of above three related transactions was RMB 94,379,904.70. Refer to note 9 of the financial statements of this report – “Relation between related parties and other related transactions” for details. 2. Related transaction concerning the transfer of assets or stock right The Company did get involved in any transfer of assets or stock right in the report period. 3. The relationship between the Company and the related party in respect of equity and creditors’ right and matters concerning guarantee (1) The Company did not conclude any equity transaction with related parties in the report period. (2) In the report period, HSTG owed payment of RMB 19,795,320.00 for goods to the Company, which accounted for 10.68% of the total accounts receivable at the end of the period. The Company owed RMB 801,823.21 to HSTG, which accounted for 29.66% of the total accounts payable at the end of the period. Refer to the “Balance of the accounts receivable from and payable to related parties” in the note 9 of the financial statements of this report – “Relation between related parties and other related transactions” for details. (3) In the report period, the Company provided guarantee for the undue loan with balance of RMB 12.60 million to its parent company HSTG before April 21, 2001. HSTG repaid the above loan on this day. (Refer to the Supplementary Announcement Concerning 2000 Annual Report of the Company published on Securities Times and Hong Kong Commercial Daily on March 31, 2001 and the 2001 Interim Report of the 43 Company published on Securities Times and Hong Kong Commercial Daily on August 11, 2001 for details) (IV) Other Material Related Transactions Except the above related transactions, the Company was not involved in other material related transactions in the report period. (V) Important Contracts and Their Implementation 1. Matters in respect of Trusting, Contracting for and Lease of assets between the Company and other companies In the report period, the Company did not trust or contract for or lease the assets of other companies nor did other companies trust, contract for or lease the assets of the Company. 2. Important guarantee Except that the Company provided guarantee for the undue loan with balance of RMB 12.60 million to its parent company HSTG before April 21, 2001, it did not provide guarantee to any other company. HSTG repaid the above loan on April 21, 2001. 3. Entrustment of cash asset management in or after the report period The Company neither entrusted others to manage its cash assets in the report period nor planned to entrust other others to manage its cash assets in the future. 4. Other important contracts In the report period, the Company was not a party to any other important contracts that exerted important influence on the change of its assets and should be performed. (VI) The Commitments of the Company or Shareholders Holding Over 5% of the Total Shares of the Company In the report period, HSTG disclosed the following commitment on Securities Times, Hong Kong Commercial Daily and designated website on March 31, 2001 through the Company and by means of issuing the Supplementary Announcement Concerning 2000 Annual Report of the Company: HSTG will fully repay two undue loans with total amount of RMB 12.60 million to banks before April 30, 2001 to relieve the Company from the guarantee liability assumed by the Company. As a result, HSTG fully repaid the above loans on April 21, 2001. 44 (VII) Appointment and Dismissal of Certified Public Accountants In the report period, the Company continued to engage Arthur Andersen & Co. as its international auditor of its financial statements and Zhejiang Orient Certified Public Accountants as domestic auditor of its financial statements. The remuneration paid by the Company to the above auditing organs in 2001 was respectively RMB 0.38 million and RMB 0.07 million. (VIII) Investigation, Administrative Punishment and Public Criticism by CSRC, Public Condemnation by Shenzhen Stock Exchange and the Rectification Pursuant to the Opinions Raised by CSRC and its Dispatched Organ after Inspection of the Company. In the report period, the Company was not investigated, administratively punished or publicly criticized by CSRC or publicly condemned by Shenzhen Stock Exchange. During the period from July 23, 2001 and July 28, 2001, Hangzhou Special Commissioners’ Office of CSRC conducted routine roving inspection of the Company and issued the Notice of Requiring Hangzhou Steam Turbine Co., Ltd. to Rectify the Problems Found in Roving Inspection Within Specified Time Limit (the Notice) with HZTPB (2001) No. 228 Document on September 3, 2001. The Notice required the Company to rectify the existing problems in respect of the standardized operation of shareholders’ general meeting, board of directors and supervisory committee, perfection of internal control system, utilization of raised funds, information disclosure, financial accounting, etc. within specified time limit. The third meeting of the second Board of Directors and the third meeting of the second Supervisory Committee specially examined the matters mentioned in the Notice for rectification and published the rectification report on Securities Times and the designated website on September 20, 2001. At present, except the matters for rectification subject to the examination and approval of 2001 Shareholders’ General Meeting, most of the other matters for rectification have been completed. One or two matters, such as the use of the funds raised in the previous periods, are under rectification. The Company is going through relevant procedure and rushing the handling of them. (IX) Important Events Set Out in Article 62 of the Securities Law and Article 17 of the (Proposed) Detailed Implementation Rules on the Information Disclosure by Companies Publicly Issuing Shares that Occurred in the Report Period Hangzhou State Tax Bureau Levy Sub-bureau issued the document of Approval of Exempting Hangzhou Steam Turbine Co., Ltd. from Local Income Tax (HGSZF (2001) No. 354 Document): According to the provisions of the Article 4 (1) of the Regulations of Zhejiang Province on Exempting Foreign-invested Enterprises and Foreign Enterprises from Local Income Tax, the bureau approved that the Company 45 was entitled to preferential tax treatment, with full exemption from income tax for the period from April 23, 1998 to December 31, 1998 and for the year ended December 31, 1999 and a 50% reduction for the next three years ended December 31, 2002 (2000-2002). The applicable local income tax rate for the above tax reduction years was lowered by 1.2% from 13.2% (pursuant to HGSW (1999) No.257) to 12%. (Refer to announcement of the resolutions of the third meeting of the second Board of Directors of the Company published on September 20, 2001). D (X) Important Events after the Report Period The Company initialed “Assets Acquisition Agreement” and “Land Leasing Contract”; it was planned to use the remaining proceeds raised through the previous share offering amounting to RMB 59 million to purchase partial assets of the foundry branch, auxiliary machine branch and the energy division of the Group Company on March 6, 2002. The price of the assets acquisition is based on the reference price in the appraisal results of the aforesaid assets by Zhejiang Orient Assets Appraisal Co., Ltd. The trading price of the equipment and factory buildings is based on the appraisal results produced by the appraisal organization with 10% discount of the appraised value. The purchase prices of the land use right and the current assets are subject to the actual prices as listed in the appraisal report produced by the appraisal organization and the payment is made on once-and-for-all basis. Party B is to pay RMB 62.73 million to Party A (including RMB 30.15 million for the fixed assets, RMB 12.8 million for the current assets, and RMB 19.78 million for the land use right). The land leasing price is based on the annual loan interest rate of bank loan plus the account payable for the total land price for 42983 square meters of the land actually leased. The Company should pay rent amounting to RMB 678,400 to the Group Company every year. The effectiveness of the above agreements is subject to the examination and approval of the matters concerning “Assets Acquisition and Material Related Transactions” and “Change in Application of the Proceeds Raised through Share Offering” by the shareholders’ general meeting of the Company. This proposal for asset acquisition, related transaction and change of the use of raised funds was raised by medium and small shareholders of the Company at 2000 Shareholders’ General Meeting of the Company held on June 25, 2001. The medium and small shareholders held the opinion that the acquisition of partial assets of the foundry branch, auxiliary machinery branch and the energy division of HSTG can reduce the volume of related transaction between the Company and HSTG, protect the interests of medium and small shareholders, straighten out the process of production, 46 shorten the delivery cycle and enhance the competitiveness of the Company in market while solving the issue concerning the use of the funds raised in the previous periods. Refer to the announcement of the resolutions of the fourth meeting of the second Board of Directors and Supervisory Committee of the Company and the Company’s Announcement Concerning Asset Acquisition, Material Related Transaction and Change of the Use of Raised Funds published on Securities Times and Hong Kong Commercial Daily on April 13, 2002 for details. Section 10. Financial Reports AUDITORS’ REPORT HK-FA-2002-0223 TO THE SHAREHOLDERS OF HANGZHOU STEAM TURBINE COMPANY LIMITED 47 We have audited the accompanying consolidated balance sheet of Hangzhou Steam Turbine Company Limited (the “Company”) and its subsidiary (the “Group”) as of 31 December 2001 and the related consolidated statements of income, changes in equity and cash flow for the year then ended. These financial statements set out on pages 2 to 25 are the responsibility of the Group’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion the consolidated financial statements give a true and fair view of the financial position of the Group as of 31 December 2001 and of the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards, as published by the International Accounting Standards Board. ARTHUR ANDERSEN & CO Certified Public Accountants Hong Kong, 10 April 2002. 48 HANGZHOU STEAM TURBINE COMPANY LIMITED AND SUBSIDIARY CONSOLIDATED BALANCE SHEET AS OF 31 DECEMBER 2001 (Expressed in thousands of Renminbi) Note 2001 2000 ASSETS Current assets Cash and cash equivalents 3 131,559 165,999 Trade receivables, net 4 163,595 178,566 Due from related parties 20 19,806 1,807 Inventories, net 5 112,387 98,671 Prepayments and other current assets 8,567 21,626 435,914 466,669 Non-current assets Investment in associates 7 12,080 13,843 Property, plant and equipment, net 8 139,111 133,502 Leasehold land 9 39,030 39,848 Other non-current assets 821 919 191,042 188,112 Total assets 626,956 654,781 EQUITY AND LIABILITIES Current liabilities Trade payables 33,023 23,314 Advances from customers 91,714 94,053 Due to related parties 20 18,151 5,455 Accruals and other payables 5,670 3,487 49 Provision for income tax 2,826 1,610 Short-term borrowings - 70,000 151,384 197,919 Non-current liabilities Deferred tax liabilities 10 6,748 7,592 Other non-current liabilities 11 10,300 8,500 17,048 16,092 Minority interests 1,632 1,600 Capital and reserves Share capital 12 220,000 220,000 Reserves 13 154,525 149,047 Retained earnings 82,367 70,123 456,892 439,170 626,956 654,781 Total equity and liabilities The accompanying notes are an integral part to these consolidated financial statements 50 HANGZHOU STEAM TURBINE COMPANY LIMITED AND SUBSIDIARY CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2001 (Expressed in thousands of Renminbi except earnings per share data) Note 2001 2000 Sales 14, 20 288,645 248,634 Cost of sales 20 (196,306) (165,393) Gross profit 92,339 83,241 Distribution costs 20 (6,933) (6,347) General and administrative expenses 20 (56,450) (49,530) Profit from operations 28,956 27,364 Financial income, net 15 3,936 5,711 Share of (loss) income from associates 7 (275) 193 Profit before tax 16 32,617 33,268 Income tax expense 17 (3,863) (2,425) Profit after tax 28,754 30,843 Minority interests (32) - Net profit for the year 28,722 30,843 Dividends 18 11,000 44,000 Earnings per share - Basic and diluted 19 RMB0.13 RMB0.14 The accompanying notes are an integral part to these consolidated financial statements 51 HANGZHOU STEAM TURBINE COMPANY LIMITED AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2001 (Expressed in thousands of Renminbi) Reserves Share Capital Statutory Retained Note Capital surplus reserves Sub-total earnings Total Balance as of January 1, 2000 As previously stated 220,000 124,073 18,960 143,033 45,294 408,327 Effect of the change in accounting policy - - - - 44,000 44,000 As restated 220,000 124,073 18,960 143,033 89,294 452,327 Net profit for the year - - - - 30,843 30,843 Appropriation from retained earnings 13 - - 6,014 6,014 (6,014) - Dividends 18 - - - - (44,000) (44,000) Balance as of 1 January 2001 220,000 124,073 24,974 149,047 70,123 439,170 Net profit for the year - - - - 28,722 28,722 Appropriation from retained earnings 13 - - 5,478 5,478 (5,478) - Dividends 18 - - - - (11,000) (11,000) Balance as of 31 December 2001 220,000 124,073 30,452 154,525 82,367 456,892 The accompanying notes are an integral part to these consolidated financial statements 52 HANGZHOU STEAM TURBINE COMPANY LIMITED AND SUBSIDIARY CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2001 (Expressed in thousands of Renminbi) Note 2001 2000 CASH FLOWS FROM OPERATING ACTIVITIES: Profit before tax 32,617 33,268 Adjustments for: Provision for doubtful accounts 700 3 Provision for obsolescence 3,070 - Depreciation of property, plant and equipment 10,454 11,209 Amortization of leasehold land 818 800 Amortization of other non-current assets 98 847 Loss (gain) on disposal of property, plant and equipment 87 (74) Interest expenses 1,979 3,769 Interest income (4,987) (8,360) Operating profit before changes in working capital 44,836 41,462 (Increase) decrease in inventories (16,786) 25,514 Decrease (increase) in trade receivables 14,270 (2,585) (Increase) decrease in amounts due from related parties (17,999) 12,587 Decrease (increase) in prepayments and other current assets 13,059 (10,243) Increase (decrease) in trade payables 9,709 (2,208) (Decrease) increase in advances from customers (2,339) 13,717 Increase (decrease) in amounts due to related parties 12,696 (3,950) Increase (decrease) in accruals and other payables 2,183 (12,276) Cash provided by operations 59,629 62,018 Interest paid (1,979) (3,769) Income taxes paid (3,492) (3,513) Net cash provided by operating activities 54,158 54,736 CASH FLOWS USED IN INVESTING ACTIVITIES: Investment in associates 1,763 (13,843) Purchase of property, plant and equipment (16,384) (8,082) Proceeds from sale of equipment 236 408 Interest received 4,987 8,360 Net cash used in investing activities (9,398) (13,157) 53 HANGZHOU STEAM TURBINE COMPANY LIMITED AND SUBSIDIARY CONSOLIDATED CASH FLOW STATEMENT (Cont'd) FOR THE YEAR ENDED 31 DECEMBER 2001 (Expressed in thousands of Renminbi) Note 2001 2000 CASH FLOWS USED IN FINANCING ACTIVITIES: Payment of in short-term borrowings (70,000) - Proceeds from other non-current liabilities 1,800 - Dividends paid (11,000) (44,000) Increase in minority interests - 1,600 Net cash used in financing activities (79,200) (42,400) Net decrease in cash and cash equivalents (34,440) (821) Cash and cash equivalents at beginning of year 165,999 166,820 Cash and cash equivalents at end of year 131,559 165,999 54 HANGZHOU STEAM TURBINE COMPANY LIMITED AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2001 (Amounts expressed in Renminbi (“RMB”) unless otherwise stated) 1. ORGANIZATION AND OPERATIONS Hangzhou Steam Turbine Company Limited (the “Company”) was incorporated as a joint stock limited company in accordance with the Company Law of the People’s Republic of China (the “PRC”) by way of the reorganisation of certain assets and liabilities in relation to the industrial steam turbine production business of Hangzhou Steam Turbine & Power Group Company Limited (“HSTG”), the promoter, and an offering of Domestically Listed Foreign Shares (“B Shares”) to foreign investors. Pursuant to a reorganisation based on audited financial statements prepared under generally accepted accounting principles in the PRC (“PRC GAAP”)and valuation by a PRC Valuer, Hangzhou Assets Revaluation Office, HSTG contributed net assets amounting to RMB199,485,673 in exchange for 140,000,000 state-owned shares of the Company with a par value of RMB1 each. The Company was incorporated on 23 April 1998 with share capital of RMB140,000,000, divided into 140,000,000 state-owned shares with a par value of RMB 1 each. The ultimate parent company of the Company is HSTG, a state-owned enterprise incorporated in the PRC. Pursuant to approval document No. [1998] 8 issued by the Securities Administration Committee of the State Council dated 1 March 1998, the Company issued 80,000,000 B Shares with a par value of RMB 1 each at a price of RMB2.26 (the "IPO"). Net proceeds from the IPO amounted to approximately RMB168,330,000. The B Shares were listed on the Shenzhen Stock Exchange on 28 April 1998. On 2 December 1998, pursuant to approval document No. [1998] 745 issued by the Ministry of Foreign Trade and Economic Co-operation of the PRC, the Company was transformed into a foreign invested joint stock limited company. The Company and its subsidiary (hereinafter collectively referred to as the “Group”) are principally engaged in the design, manufacture and sale of industrial steam turbines and other kinds of industrial equipment. The registered office of the Company is located at No.357 Shi Qiao Road, Hangzhou, Zhe Jiang Province, PRC. The number of employees of the Group as of 31 December 2001 was approximately 1,680 (2000: 1,700). 55 2. PRINCIPAL ACCOUNTING POLICIES The principal accounting policies adopted in preparing the consolidated financial statements of the Group are as follows: (a) Basis of preparation The accompanying consolidated financial statements of the Group are prepared in accordance with International Financial Reporting Standards (“IFRS”) as published by the International Accounting Standards Board. They are prepared under the historical cost convention, except that certain property, plant and equipment are carried at revalued amounts. (b) Principles of consolidation The consolidated financial statements include those of the Company and its subsidiary. All significant intercompany balances and transactions, including intercompany profits and unrealised profits and losses, are eliminated on consolidation. The equity and net income attributable to minority shareholders’ interests are shown separately in the consolidated balance sheet and income statement, respectively. Consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances. (c) Subsidiaries A subsidiary is a company which the Company controls. Control exists when the Company has the power to govern the financial and operating policies of the subsidiary so as to obtain benefits from its activities. (d) Associates An associate is a company, not being a subsidiary or a joint venture, in which the Company has significant influence. Significant influence exists when the Company has the power to participate in, but not control, the financial and operating decisions of the associate. Investments in associates are accounted for using the equity method. An assessment of investments in associates is performed when there is an indication that the asset has been impaired or the impairment losses recognised in prior years no longer exist. (e) Cash and cash equivalents Cash represents cash on hand and deposits with banks which are repayable on demand. Cash equivalents represent short-term, highly liquid investments which are readily convertible into known amounts of cash with original maturities of three months or less and that are subject to an insignificant risk of change in value. 56 (f) Receivables Receivables are stated at face value, after provision for doubtful accounts. 57 2. PRINCIPAL ACCOUNTING POLICIES (Cont’d) (g) 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. (h) Property, plant and equipment and depreciation Property, plant and equipment are stated at 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 year in which they are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of the asset beyond its originally assessed standard of performance, the expenditures are capitalised as an additional cost of the asset. Valuation by independent valuers is performed once every 3 to 5 years. Any increase in valuation is credited to the revaluation reserve in shareholders’ equity; any decrease is first offset against any increase on earlier valuation recorded in revaluation reserve in respect of the same asset and is thereafter charged to the consolidated income statement. Increase in 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. Depreciation is calculated using the straight-line method to write off the cost or 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: Buildings 40 years Machinery and equipment 14-18 years Motor vehicles and office equipment 5-10 years 58 2. PRINCIPAL ACCOUNTING POLICIES (Cont’d) (h) Property, plant and equipment and depreciation (Cont’d) The useful lives of assets and depreciation method are reviewed periodically to ensure that the method and period of depreciation are consistent with the expected pattern of economic benefits from items of property, plant and equipment. When assets are sold or retired, their cost or revalued amounts and accumulated depreciation and accumulated impairment loss are eliminated from the accounting records and any gain or loss resulting from their disposal is included in the consolidated income statement. (i) Construction-in-progress Construction-in-progress represents plant and properties under construction and is stated at cost. This includes the costs of construction, buildings, machinery 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 ready for use. (j) Leasehold land Leases of land are classified as operating leases. The pre-paid lease payments are amortized over the lease period (fifty years) on a straight-line basis. (k) Borrowings Borrowings are initially recognized at cost, being the fair value of the consideration received and including transaction costs. After initial recognition, all interest-bearing borrowings are stated at amortised cost using the effective yield method. (l) 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. 59 2. PRINCIPAL ACCOUNTING POLICIES (Cont’d) (m) Revenue recognition Provided it is probable that the economic benefits associated with a transaction will flow to the Group and the revenue and costs, if applicable, can be measured reliably, revenue is recognized on the following bases: (i) Sale of goods Revenue is recognized when the significant risks and rewards of ownership of 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. (n) Taxation The Group companies provide for taxation on the basis of their respective profit for financial reporting purposes, adjusted for income and expense items which are not assessable or deductible for income tax purposes. Other taxes are provided in accordance with the prevailing PRC tax regulations. 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 assets are recognized for all deductible temporary difference to the extent that it is probable that taxable profits will be available against which the deductible temporary difference can be utilized. (o) Foreign currency transaction The Group companies maintain their books and records in RMB, the measurement currency. Transactions in other currencies are translated into the reporting currency at exchange rates prevailing at the time of the transactions. Monetary assets and liabilities denominated in other currencies at the balance sheet date are re-translated at the exchange rates prevailing at that date. Exchange differences arising on the settlement of monetary items or reporting monetary items at rates different from those at which they were initially recorded during the periods are recognized in the consolidated income statement in the year in which they arise. 60 2. PRINCIPAL ACCOUNTING POLICIES (Cont’d) (p) Borrowing costs Borrowing costs include interest charges and other costs incurred in connection with the borrowing of funds, including amortization of discounts or premiums relating to borrowings, amortization of ancillary costs incurred in connection with arranging borrowings and exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. Borrowing costs are expensed as incurred, except when they are directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use in which case they are capitalised 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. (q) Pension scheme Pursuant to the PRC laws and regulations, contributions to the basic old age insurance for the Group’s local staff are to be made monthly to a government agency based on 28% of the total salary, of which 23% is borne by the Group 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 Group accounts for these defined contributions on an accrual basis. (r) Financial instruments Financial assets and financial liabilities carried on the balance sheet include cash and cash equivalents, trade and other receivables and payables, balances with related companies, investments and borrowings. The accounting policies on recognition and measurement of these items are disclosed in the respective accounting policies found in Note 2. Financial instruments are classified as liabilities or equity in accordance with the substance of the contractual arrangement. 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 Group companies have a legally enforceable right to offset and intend to settle either on a net basis or to realize the asset and settle the liability simultaneously. 61 2. PRINCIPAL ACCOUNTING POLICIES (Cont’d) (s) Impairment of assets (i) Financial instruments Financial instruments are reviewed for impairment at each balance sheet date. For financial assets carried at amortized cost, whenever it is probable that the Group will not collect all amounts due according to the contractual terms of loans or receivables, an impairment or bad debt loss is recognized in the consolidated income statement. Reversal of impairment losses previously recognized is recorded when the decrease in impairment loss can be objectively related to an event occurring after the write- down. Such reversal is recorded in income. However, the increased carrying amount is only recognized to the extent it does not exceed what amortized cost would have been had the impairment not been recognized. (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 consolidated 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 it is not possible, for the cash-generating unit. 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 consolidated income statement or as a revaluation increase. However, the increased carrying amount of an asset due to a reversal of an impairment loss is recognised to the extent it does not exceed the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognised for that asset in prior years. (t) 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. 62 2. PRINCIPAL ACCOUNTING POLICIES (Cont’d) (u) Subsequent events Post-year-end events that provide additional information about the Group’s position at the balance sheet date or those that indicate the going concern assumption is not appropriate are reflected in the financial statements. Post-year-end events that are not adjusting events are disclosed in the notes of the financial statements when material. 3. CASH AND CASH EQUIVALENTS 2001 2000 RMB’000 RMB’000 Cash on hand 4 4 Bank current deposits 45,742 63,502 Bank time deposits 85,813 102,493 131,559 165,999 4. TRADE RECEIVABLES, NET 2001 2000 RMB’000 RMB’000 Accounts receivable 164,870 183,729 Notes receivable 12,188 7,600 Less: provision for doubtful accounts (13,463) (12,763) 163,595 178,566 5. INVENTORIES, NET 2001 2000 RMB’000 RMB’000 Raw materials, at cost 47,020 46,437 Work-in-progress, at cost 30,897 21,084 Finished goods, at cost 41,143 34,753 119,060 102,274 Less: provision for obsolescence (6,673) (3,603) 112,387 98,671 6. INVESTMENT IN SUBSIDIARY As of 31 December 2001, the Company had the following subsidiary: 63 Percentage of equity interest held Place of Name incorporation Direct Indirect Registered capital Principal activities Zhe Jiang Steam Turbine Kit Hangzhou, 95% - 31,600,000 Design, manufacture and System Technology the PRC sale of industrial Development Co., Ltd. equipment and kit systems. The subsidiary was founded in 2000. 7. INVESTMENT IN ASSOCIATES As of 31 December 2001, the Company had the following associates: Percentage of equity interest held Place of Name incorporation Direct Indirect Registered capital Principal activities Hangzhou Cocim Hangzhou, 34.5% - 10,000,000 Provision of services Technology Co., Ltd. the PRC relating to computers and peripheral equipment, computer information network engineering and E-commerce Hangzhou Steam Turbine Hangzhou, 45% - 20,000,000 Design, manufacture, Environmental the PRC installation and sale of Engineering Co., Ltd. environmental protection equipment and engineering Both of the associates were founded in 2000. As of 31 December 2001, investment in associates comprised: 2001 2000 RMB’000 RMB’000 Investments at cost 12,450 12,450 Share of (loss) income from associates (321) 193 Share of tax of associates (138) (239) Due from associates 89 1,439 12,080 13,843 The amounts due from associates are unsecured, interest free and have no fixed terms of repayment. In the opinion of the directors, the underlying values of the investment in associates were not less than the Company’s carrying value of the associates as of 31 December 2001. 64 8. PROPERTY, PLANT AND EQUIPMENT, NET Movements in property, plant and equipment were as follows: 2001 2000 Motor Machinery vehicles and and office Construction- Buildings equipment equipment in-progress Total Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Valuation Balance, beginning of year 102,915 212,675 33,068 10,037 358,695 354,154 Additions - 1,190 886 14,308 16,384 8,082 Transfers 1,692 10,659 505 (12,856) - - Disposals - (1,410) (734) - (2,144) (3,541) Balance, end of year 104,607 223,114 33,725 11,489 372,935 358,695 Representing: At cost 6,152 13,787 5,858 11,489 37,286 23,046 At valuation 98,455 209,327 27,867 - 335,649 335,649 104,607 223,114 33,725 11,489 372,935 358,695 Accumulated depreciation and impairment loss Balance, beginning of year 45,720 156,398 23,075 - 225,193 217,191 Charge for the year 2,528 6,488 1,438 - 10,454 11,209 Disposals - (1,298) (525) - (1,823) (3,207) Balance, end of year 48,248 161,588 23,988 - 233,824 225,193 Net book value Balance, end of year 56,359 61,526 9,737 11,489 139,111 133,502 Balance, beginning of year 57,195 56,277 9,993 10,037 133,502 136,963 The Company’s property, plant and equipment injected by HSTG as its capital contribution were revalued by Hangzhou Assets Revaluation Office, independent professional valuers, on 30 April 1997 on a replacement cost basis, because market values were not available. The revaluation surplus amounting to approximately RMB38,080,000 was recorded in revaluation surplus and subsequently transferred to capital surplus as part of the injection from HSTG. In accordance with the accounting policy as disclosed in Notes 2(h), the Group will perform an independent valuation of the property, plant and equipment in 2002. The cost of the property, plant and equipment, acquired since the addressed revaluation in 1997, approximates their fair value. Had the property, plant and equipment been carried at cost less accumulated depreciation, the carrying amounts of each class of asset as of year end would have been as follows: 2001 2000 Motor Machinery vehicles and and office Construction- Buildings equipment equipment in-progress Total Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 65 Cost 48,986 128,852 33,725 11,489 223,052 208,812 Accumulated depreciation (9,870) (74,200) (23,988) - (108,058) (103,235) 39,116 54,652 9,737 11,489 114,994 105,577 The directors are of the opinion that the recoverable amount of property, plant and equipment was not less than their carrying amount as of 31 December 2001. 9. LEASEHOLD LAND 2001 2000 RMB’000 RMB’000 Cost 40,918 40,918 Less: accumulated amortization (1,888) (1,070) Net book value 39,030 39,848 The lease of land is valid for a period of 50 years from the date of certificate obtained by the Company (August 1999). 10. DEFERRED TAX ASSETS/LIABILITIES 2001 2000 RMB’000 RMB’000 Deferred tax assets: Deferred tax relating to provision for doubtful accounts 1,615 1,685 Deferred tax relating to provision for obsolescence 801 475 2,416 2,160 Deferred tax liabilities: Deferred tax relating to revaluation surplus of property, plant and equipment (9,164) (9,752) (6,748) (7,592) 11. OTHER NON-CURRENT LIABILITIES As of 31 December 2001, the Group had long-term borrowings granted by a governmental authority amounting to approximately RMB10,300,000 (2000: approximately RMB8,500,000). Such long-term borrowings were unsecured, interest free and had no fixed terms of repayment. 66 12. SHARE CAPITAL As of 31 December 2001, share capital included state-owned shares and B Shares, all of which ranked pari passu in all respects with each other. The details of share capital were as follows: 2001 2000 2001 2000 Number of shares RMB’000 RMB’000 (in thousands) Registered, issued and fully paid: Unlisted - state-owned shares of RMB1 each 140,000 140,000 140,000 140,000 Listed - B shares of RMB1 each 80,000 80,000 80,000 80,000 220,000 220,000 220,000 220,000 13. RESERVES In accordance with the Company Law of the PRC and Articles of Association of the Company, the Company is required to provide certain statutory reserves which are appropriated from the net profit as reported in the statutory financial statements prepared in accordance with PRC GAAP. The Company is required to set aside 10% of its net profit for the statutory reserve fund (except where the fund has reached 50% of the Company’s registered capital) and 5%-10% for the statutory common welfare fund. The Company may make appropriations from its net profit to the discretionary revenue reserve fund upon approval by shareholders. These reserves cannot be used for purposes other than those for which they are created and are not distributable as cash dividends without the prior approval of shareholders under certain conditions. The directors have resolved that the statutory common welfare fund is to be utilised to build or acquire capital items, such as dormitories and other facilities for the Group’s employees, and cannot be used to pay for staff welfare expenses. Title to these capital items will remain with the Group. For the year ended 31 December 2001, the directors of the Company proposed that 10% and 10% (2000: 10% and 10%) of the net profit as reported in the statutory accounts be appropriated to each of the statutory reserve fund and the statutory common welfare fund, totalling RMB5,478,000 (2000: RMB6,014,000). The resolution is subject to approval by shareholders in the annual general meeting. 67 14. SALES Type of product 2001 2000 RMB’000 RMB’000 Industrial drive steam turbine 210,887 173,073 Industrial power generating steam turbine 50,006 48,031 Others 27,752 27,530 288,645 248,634 15. FINANCIAL INCOME, NET 2001 2000 RMB’000 RMB’000 Interest expense on bank borrowings (1,979) (3,769) Interest income on bank deposits 4,987 8,360 Gain on disposals of short-term investments 901 - Others 27 1,120 3,936 5,711 16. PROFIT BEFORE TAX Profit before tax was determined after charging (crediting) the following: 2001 2000 RMB’000 RMB’000 Staff costs - salaries and wages 35,519 31,051 - provision for staff and workers’ bonus and welfare fund 4,907 4,263 - contribution to defined contribution pension schemes 1,776 1,553 Depreciation of property, plant and equipment 10,454 11,209 Amortization of leasehold land 818 800 Amortization of other non-current assets 98 - Loss (income) on disposal of property, plant and equipment 87 (74) Cost of inventories 112,938 100,590 Provision for doubtful accounts 700 3 Provision for obsolescence 3,070 - Exchange losses, net 27 647 68 17. TAXATION (1) Income Tax Details of income tax charged during the year are as follows: 2001 2000 RMB’000 RMB’000 Current income tax 5,013 4,884 Local income tax refund for 2000 (444) - Deferred tax relating to the origination and reversal of temporary differences (844) (2,698) Share of tax of associates (see Note 7) 138 239 3,863 2,425 The Company was transformed into a foreign invested joint stock limited company as approved by the Ministry of Foreign Trade and Economic Co-operation of the PRC (See Note 1). According to relevant PRC tax laws and regulations, foreign invested enterprises are subject to full exemption from income tax for two years and a 50% reduction in the next three years starting from the first profit making year after offsetting available tax losses carried forward from prior years. In addition, foreign invested enterprises which are located in the Coastal Open Economic Zone are subject to a preferential enterprise income tax rate of 24% and a local income tax at the rate of 2.4% on their profits. Hangzhou belongs to the Coastal Open Economic Zone. Pursuant to the approval document Hang Guo Shui Wai [1999] No. 257 issued by the Hangzhou State Tax Bureau, the Company is entitled to preferential tax treatment, with full exemption from income tax for the period from 23 April 1998 to 31 December 1998 and for the year ended 31 December 1999; and a 50% reduction for the next three years ending 31 December 2002, when the applicable income tax rate for the above tax reduction years is 13.2%. According to the relevant income tax law applicable to foreign invested enterprises in Zhe Jiang Province, foreign invested enterprises are subject to exemption from local income tax if certified as an Advanced Technology Enterprise by the governmental authority in Zhe Jiang Province. The Company has been certified as an Advanced Technology Enterprise by the Ministry of Foreign Trade and Economic Co-operation of Zhe Jiang Province. Accordingly, pursuant to the approval document Hang Guo Shui Zheng Fen [2001] No. 354 issued by the Hangzhou State Tax Bureau, the Company is entitled to local income tax exemption for the years from 2000 to 2002. Therefore, for the year ended 31 December 2001, the applicable income tax rate was 12%. The local income tax refund for the year ended 31 December 2000 was received in 2001 and has been offset against the income tax expense of 2001. 69 17. TAXATION (Cont’d) (1) Income Tax (Cont’d) The reconciliation of the statutory tax rate to the effective tax rate is as follows: 2001 2000 RMB’000 RMB’000 Accounting profit 32,617 100% 33,268 100% Tax at the statutory tax rate of 26.4% 8,611 26.4% 8,783 26.4% Tax effect of expenses that are not deductible in determining taxable profit 2,235 6.9% 343 1.0% Effect of tax holidays (6,983) (21.5%) (6,701) (20.1%) Income tax expense 3,863 11.8% 2,425 7.3% (2) Turnover Tax Pursuant to the “Provisional Regulations on VAT of the PRC”, the Company is subject to VAT at the rate of 17% and City and County Maintenance and Construction Tax (“CMCT”) and Education Surcharge calculated at 7% and 4% respectively of the VAT payable. An input credit is available whereby VAT previously paid on purchase of semi-finished products or raw materials etc. can be used to offset the VAT on sales to determine the net VAT payable. 18. DIVIDENDS 2001 2000 RMB’000 RMB’000 Dividends declared before year end 11,000 44,000 Dividends declared after year end (See Note 25) 22,000 11,000 In accordance with relevant regulations of the PRC and the Articles of Association of the Company, the Company declares dividends based on the lower of retained earnings as reported in the statutory accounts and the financial statements prepared in accordance with IFRS. As the statutory accounts have been prepared in accordance with PRC GAAP, the retained earnings as reported in the statutory accounts will be different from the amount reported in the accompanying consolidated financial statements. As of 31 December 2001, the retained earnings before final dividends reported in the statutory accounts were approximately RMB63,884,000 (2000: approximately RMB55,899,000). 70 19. EARNINGS PER SHARE The calculation of basic earnings per share is based on the consolidated net profit for the year ended 31 December 2001 of approximately RMB28,722,000 (2000: approximately RMB30,843,000), divided by the weighted average number of shares in issue during the year of 220,000,000 shares (2000: 220,000,000 shares). Diluted earnings per share do not differ from basic earnings per share as there were no dilutive potential ordinary shares as of year end. 20. RELATED PARTY TRANSACTIONS Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party, or exercise significant influence over the party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. A. Related party agreements effective from the date of incorporation of the Company For the year ended 31 December 2001, the Company had the following related party transactions, pursuant to several agreements signed with the parent company-HSTG on 8 October 1997 and effective from the date of its incorporation. Details are as follows: (a) Service agreements Pursuant to several service agreements, HSTG provides the Company with facilities and services such as social services, property management, staff training, transportation and computer service. Unless terminated earlier, the agreements will be effective until 31 December 2007. For the year ended 31 December 2001, the Company incurred service fees of approximately RMB8,570,000 in accordance with the service agreements (2000: approximately RMB8,203,000). (b) Supply agreements Pursuant to several supply agreements, HSTG supplies the Company with certain raw materials (mainly iron and steel), spare parts, energy and communication facilities. Unless terminated earlier, the agreements will be effective until 31 December 2007. For the year ended 31 December 2001, the Company purchased raw materials, spare parts, energy and communication facilities amounting to approximately RMB60,344,000 from HSTG (2000: approximately RMB54,932,000). (c) Trademark agreement Pursuant to the trademark agreement, HSTG has licensed the Company to use its registered trademark for an annual fee of RMB700,000. For the year ended 31 December 2001, the Company paid the trademark fee of RMB700,000 to HSTG (2000: RMB700,000). 71 20. RELATED PARTY TRANSACTIONS (Cont’d) B. Other related party transactions 2001 2000 RMB’000 RMB’000 Sales of goods to HSTG 26,284 17,940 Sales of goods to subsidiaries of HSTG 28,988 20,938 Purchases of goods from subsidiaries of HSTG 5,407 7,064 C. As of 31 December 2001, the Group had the following material balances with related parties: 2001 2000 RMB’000 RMB’000 Due from related parties: - HSTG 8,605 - - subsidiaries of HSTG 11,201 1,807 19,806 1,807 Due to related parties: - HSTG 11,327 4,814 - subsidiaries of HSTG 6,824 641 18,151 5,455 All the balances with related parties were unsecured, interest free and had no fixed terms of repayment. D. Emoluments of the Board of Directors (a) Directors’ total remuneration approximated 874,000 and 633,000 in 2001 and 2000. (b) No loans have been granted to Directors. 21. CONTINGENT LIABILITIES As of 31 December 2001, the Group had no significant contingent liabilities (2000: the Company provided guarantees to HSTG to obtain bank loan facilities of RMB45,600,000). 72 22. FINANCIAL INSTRUMENTS (a) Fair values The carrying amounts of cash and cash equivalents, trade and other receivables and payables, balances with related companies and borrowings approximate their fair values because of the short maturity of these instruments. (b) Credit risk The carrying amounts of cash and cash equivalents, trade and other receivables, and amounts due from related companies represent the Group’s maximum exposure to credit risk in relation to financial assets. Cash is placed with reputable banks and the weighted average effective interest rate on deposits was approximately 5% per annum. The majority of the Group’s trade receivables relate to sales of goods to third party customers. The Group performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral on trade receivables. The Group maintains a provision for doubtful debts and actual losses have been within management’s expectations. As of 31 December 2001, no single customer accounted for greater than 10% of total revenues for the year or trade receivables. No other financial assets carry a significant exposure to credit risk. (c) Interest rate risk The directors believe that Group’s the exposure to interest rate risk of financial assets and liabilities as of 31 December 2001 was minimal since their deviation from their respective fair values was not significant. (d) Liquidity risk The Group policy is to maintain sufficient cash and cash equivalents or have available funding through an adequate amount of committed credit facilities to meet its current use in operations. (e) Foreign exchange risk The Group has no significant exchange risk due to limited foreign currency transactions. 23. SEGMENT INFORMATION No segment information is presented as the Group operates in one industry and one segment. 73 24. COMMITMENTS As of 31 December 2001, the Group had capital commitments for purchase of equipment amounting to approximately RMB1,640,000 (2000: approximately RMB2,430,000). 25. SUBSEQUENT EVENTS Pursuant to the resolution of the board of directors’ meeting dated [ ] 2002, the Company declared final dividends to all shareholders of RMB0.1 per share (2000: RMB0.05 per share). The total amount of cash dividends proposed was therefore RMB 22,000,000 (2000: RMB11,000,000). The resolution is subject to approval by shareholders in the annual general meeting. 26. IMPACT OF IFRS ADJUSTMENTS ON NET PROFIT /NET ASSETS The Group’s consolidated financial statements were prepared in conformity with IFRS as if these standards had been applied consistently throughout the years. This basis of accounting differs from that used in the statutory financial statements of the Group prepared in accordance with PRC GAAP. The principal adjustments made to conform to IFRS are as follows: Net profit for the year ended Net assets as of 31 December 31 December 2001 2000 2001 2000 RMB’000 RMB’000 RMB’000 RMB’000 As reported in the statutory accounts 27,388 29,263 441,640 435,871 Impact of adjustments: - Deferred tax 844 2,698 (6,748) (7,592) - Reversal of deferred assets 109 (1,573) - (109) - Dividends declared after year end - - 22,000 11,000 - Others 381 455 - - As restated in the IFRS financial statements 28,722 30,843 456,892 439,170 27. APPROVAL OF FINANCIAL STATEMENTS The consolidated financial statements were approved by the board of directors on 10 April 2002. 74 Section 11. Documents Available for Inspection 1. Financial statements bearing the seal and signature of legal representative, chief accountant and financial controller. 2. The original of the auditors’ report bearing the seal of the certified public accountants and the seal and signature of C.P.A. 3. The original of all Company’s documents and the original manuscripts of announcements publicly disclosed on the press designated by China Securities Regulatory Commission in the report period. The above documents are placed at the Securities Office of the Company. When China Securities Regulatory Commission and Stock Exchange require the Company to provide such documents or when shareholders ask to consult them according to laws and regulations or the Articles of Association of the Company, the Company will timely provide such documents. The Board of Directors of Hangzhou Steam Turbine Co., Ltd. April 13, 2002 75