张裕Ａ(000869)张裕Ｂ2001年年度报告（英文版）

YANTAI CHANGYU PIONEER WINE COMPANY LIMITED (A joint stock limited company incorporated in the People’s Republic of China with limited liability) 2001 Annual Report Important: The Directors of the Company collectively and individually accept full responsibility for the truthfulness, accuracy and completeness of the information contained in this report and confirm that to the best of their knowledge and belief there are no other facts the omission of which would make any statement herein misleading. The reader is advised that this report has been prepared originally in Chinese. In the event of a conflict between this report and the original Chinese version or difference in interpretation between the versions of the report, the Chinese language report shall prevail. The financial data in the Chinese version is cited from Chinese auditor’s report, while the financial data in the English version is cited from the international auditor’s report. I. BRIEF INTRODUCTION TO THE COMPANY Yantai Changyu Pioneer Wine Company Limited (hereinafter referred to as the “Company”) is situated in Yantai, the region that produces the finest grapes and wine in the PRC. The predecessor of the Company is Yantai Changyu Pioneer Wine Company, the establishment of which dated back in 1892. With a history of 110 years, the Company is the first industrial winery in China. 1. Legal Name in Chinese: 烟台张裕葡萄酿酒股份有限公司 2. Legal Name in English: Yantai Changyu Pioneer Wine Company Limited Legal Representative: Sun Li-qiang 3. Secretary to the Board of Directors: Qu Wei-min Contact Address: 174, Shihuiyao Road, Yantai City, Shandong Province, the PRC Telephone: 0535-6247214, 6647864 Facsimile: 0535-6247214, 6244616 E-Mail: quwm@changyu.com.cn Authorized Representative of the Securities Affairs: Li Ting-guo Contact Address: 174, Shihuiyao Road, Yantai City, Shandong Province, the PRC Telephone: 0535-6647864 Facsimile: 0535-6244616 E-Mail: changyustock@yeah.net 4. Registered Address: 56, Dama Road, Yantai City, Shandong Province, the PRC Office Address: 174, Shihuiyao Road, Yantai City, Shandong Province, the PRC Postal Code: 264001 Web Site: http://www.changyu.com.cn E-Mail: stock@changyu.com.cn 5. The newspapers in which the Company’s information is disclosed: “China Securities Newspaper”, “Securities Times” in the PRC and “Hong Kong Commercial Daily” outside the PRC. Web Site for carrying the report: http://www.cninfo.com.cn 1 Annual Report kept at: Securities Department of the Company Telephone: 0535-6647864 6. Place of listing of the Shares: Shenzhen Stock Exchange Abbreviation of the Shares: Changyu A, Changyu B Code Number of the Shares: 000869, 200869 7. Other information of the Company: The date of the first registration: Sep. 18, 1997 The original place of registration: the Business Administration Bureau of Shandong Province The registration amendment date: Oct. 24, 2000 The registration amendment place: the Business Administration Bureau of Shandong Province The business license number: 3700001806012 The registration number of revenue: 37060216500338-1 The international accountant appointed by the Company: Arthur Andersen & Co. The office address of the international accountant appointed by the Company: 21/F, Edinburgh Tower, The Landmark, 15 Queen’s Road Central, Hong Kong. The Chinese accountant appointed by the Company: Arthur Andersen Hua Qiang Certified Public Accountants The office address of the Chinese accountant appointed by the Company: 1118, China World Tower 1, No 1 Jian Guo Men Wai Avenue, Beijing, 100004, China. II. SUMMARY OF ACCOUNTING AND FINANCIAL INFORMATION 1. Summary of Financial Information for the Year Ended 31st December, 2001 (the Reporting Period) Item: Amount RMB’000 Profit before taxation 229,629 Profit after taxation 163,849 Net profit after irregular profit and loss 154,570 Gross profit 451,397 Other income 56,167 Operation profit 221,445 Investment earnings -- Subsidy income -- Net of non-operating income and expenses -- Net cash flows from operating activities 52,614 Net increase in cash and cash equivalents -66,348 The amount after detected irregular profit and loss items and involved amounts was: Non-operating income 1,417,000 Non-operating expenses -6,100,000 Financial refund 51,780,000 Income tax 1,545,000 Total 48,642,000 2. Differences in Net Profit under the PRC Accounting Standards and International Accounting Standards The net profit of the Company in the reporting period was RMB 171,656,461 as audited by Arthur Andersen Hua Qiang Certified Public Accountants according to the PRC Financial Reporting Standards and RMB 163,848,643 after adjusted by Arthur Andersen & Co according to the International Financial Reporting Standards. Major differences in using the International Financial Standards and the PRC 2 Financial Reporting Standards were as follows: RMB’000 Net profit as stated under the PRC Accounting Standards 171,657 Impact to the net profit as stated under the International Financial Reporting Standards: Adjustment on administrative expenses using accrual basis --Deferred tax -7,808 Restated under the International Financial Reporting 163,849 Standards 3. Principal Accounting and Financial Information for the Preceding Three Years ended 31st December, 2001 Unit: RMB’000 Item 2001.1-12 2000.1-12 1999.1-12 Sales 824,849 819,029 583,175 Profit after taxation 163,849 121,748 89,435 Total assets 1,669,721 1,626,803 853,683 Total shareholders’ equity 1,433,437 1,321,588 620,580 Earnings per Share (RMB) Fully diluted 0.63 0.47 0.39 Weighted average 0.63 0.52 0.39 Net assets value per Share (RMB) 5.51 5.08 2.72 Return on shareholders’ equity (%) Fully diluted 11.43 9.21 14.41 Weighted average 11.67 18.40 20.11 Net assets value per Share after 5.51 5.07 2.72 adjustment Earnings per Share after irregular profit and loss 0.44 0.38 0.30 Net cash flows per Share from operating activities 0.20 0.93 0.33 Notes: The foregoing data and ratios are obtained based on the information contained in the consolidated financial statements. The data of 1999 and 2000 are restated according to new accounting standard in order to meet the way of this period. 4. Changes of Shareholders’ Equity in the Reporting Period Item Share Capital Capital Surplus Surplus Reserve Welfare Reserve Retained Earnings Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Amount at beginning of the reporting period 260,000 817,169 61,427 30,713 182,992 1,321,588 Increase during the reporting period -- -- 34,332 17,166 129,517 163,849 Decrease during the reporting period -- -- -- -- 52,000 52,000 Amount at the end of the reporting period 260,000 817,169 95,759 47,879 260,509 1,433,437 The reasons for variety Withdraw the profit Withdraw the profit Increase of profit after taxation after taxation after taxation III. CHANGES IN SHARE CAPITAL AND SUBSTANTIAL SHAREHOLDERS 1. Changes in Share Capital (1) During the reporting period, the Company did not distribute bonus share, allot new share, issue additional share, or transfer other capital to share capital, which would change the total share amount or the share capital structure. The share capital structure of the Company as at 31st December, 2001 was set out below: 3 Unit: Share with par value of RMB 1 each Amount before this Change Amount after this change change (Additional issue) Non-listed Shares Promoter’s Shares including: 140,000,000 140,000,000 --State Shares 140,000,000 140,000,000 --Shares held by domestic legal body --Shares held by foreign legal body --Others Shares offered to legal body Shares offered to employees Preferred Shares or others Including assigned and rationed Share Total non-listed Shares 140,000,000 140,000,000 Listed Shares A Shares listed in the PRC 32,000,000 32,000,000 B Shares listed in the PRC 88,000,000 88,000,000 B Shares listed overseas Others Total listed Shares 120,000,000 120,000,000 Total number of Shares issued 260,000,000 260,000,000 (2) Issuing and Listing of Shares On Oct. 23, 2000, for capital increase the Company issued 32 million A Shares with denomination of RMB1.00 per Share to public investors under the permission of the China Securities Regulatory Commission proved by document number ZJGSZ (2000) 148.The issuing price was RMB20.00 per Share. The Company’s A Share was listed on Shenzhen Stock Exchange on Oct. 26, 2000. 2. Substantial Shareholders The Company had 41,526 shareholders as at 31st December, 2001, including one state shareholder. The State Shares were held by Yantai Changyu Group Company Limited (hereinafter referred to as the “Group Company”) entrusted by Yantai City’s Administration Bureau of State-owned Assets. There were 27,936 shareholders with respect to A shares and 13,589 shareholders with respect to B Shares listed in the PRC. The respective shareholding of the top 10 shareholders of the Company were as follows: Number of Shares Percentage of total Name of Shareholders Type of Shares held Shares (%) Yantai Changyu Group Company Limited A 140,000,000 53.8 Jinding Stock Investments Fund A 1,783,735 0.69 First Asia Investments Ventures Ltd. B 1,772,911 0.68 CBNY S/A PNC/Skandia Select B 1,750,000 0.67 Fund/China Equity AC XIA YU B 1,698,457 0.65 BONY A/C CMG CH China Investments Limited B 1,690,700 0.65 CHEN ZU DE B 1,533,865 0.59 Crownble Enterprises Limited B 1,439,012 0.55 CHEN BAOHUI B 1,227,900 0.47 BTFE-China B-shares Investment B 967,200 0.37 Company Limited 4 3. In all the Company’s shareholders, except the 140 million state Shares held by the Group Company unlisted, all the other Shares held by the other shareholders are listed in public already. There are not any associated relationship between the top 10 shareholders. 4. The only legal person holding more than 5% (including 5%) of the Company’s Shares was the Group Company, the Parent Company, which held 140 million Shares, 53.8% of the Company’s Shares. The Group Company was established in 1994, as a sole state-owned limited company, its registered capital was 50 million Yuan. The legal representative of the Group Company is Mr.Sun Li-qiang, the business scope of the Group Company includes the management and administration to the authorized state assets, Chinese medicine, glass products, spirits producing, mineral water and managing, hotel management, canteens serving the Company’s employees, kindergartens, etc. During the reporting period, the number of the Company’s Shares held by the Group Company had not been changed and was not subject to any lien or frozen or under any legal disputes. 5. In the reporting period, the Parent Company of the Company kept unchanged, still was the Group Company, whose shareholder was Yantai City’s Administration Bureau of State-owned Assets. IV. DIRECTORS, SUPERVISORS, SENIOR MANAGEMENT AND STAFF 1. Directors, Supervisors and Senior Management (1) Basic information At the end of the reporting period the information of the directors, supervisors and senior management was as follows: NAME SEX AGE PROFESSIONAL TITLE POST POST IN THE PARENT COMPANY Mr. Sun Li-qiang M 54 senior economist Chairman to the Board of Directors Chairman to the Board of Directors Mr. Liang Xian-jiu M 47 economist Director Mr. Fu Ming-zhi M 49 senior economist Director Director & vice-general manager Mr. Leng Bin M 39 senior accountant Director Director & the chief accountant Mr. Qu Wei-min M 44 senior economist Director &Vice-General Manager and Secretary to the Board of Directors Mr. Wang Shi-liang M 54 politician Chairman to the Board of Supervisors Ms. Zhang Hong-xia F 45 senior accountant Supervisor Mr. Shi Shi-chun M 37 engineer Supervisor Mr. Zhou Hong-jiang M 37 senior engineer General Manager Mr. Yang Ming M 43 senior engineer Vice- General Manager Mr. Li Ji-ming M 35 senior engineer General Engineer Mr. Jiang Hua M 38 engineer Vice- General Manager Mr. Li Jian-jun M 43 senior engineer Assistant to General Manager Mr. Wang Gong-tang M 62 senior engineer Counselor Mr. Xu Zi-heng M 59 senior engineer Counselor Mr. Lin Wen-bing M 65 senior engineer Counselor All the above-introduced directors have three years duty term from 22nd August, 2000 to 21st August, 2003, and supervisors from 24th May, 2001 to 23rd May, 2004. All the directors, supervisors and senior management of the Company had not held any Shares of the Company. (2) Annual Rewards information The rewards of directors and supervisors were determined by Yantai City’s Administration Bureau of State-owned Assets according to merit system for operator of medium to large-scale enterprise owned by state. The total rewards of the senior management were decided by the Board of Directors according to the their operation performance. During the reporting period, the rewards totally paid by the Company to the directors, supervisors and senior management in 2001 were RMB 1.26 million. The 5 total rewards amount of the top three directors were RMB 0.33 million, the top three senior management were RMB 0.27 million. During the reporting period, the Company neither appointed any independent directors, nor paid any relevant allowance or supply any other remuneration. All the rewards to the directors, supervisors and senior management of the Company were paid by the Company. In 2001, 2 persons were each paid from RMB 100,000 to 120,000, 7 persons each were paid from RMB 70,000 to 90,000, 7 persons each were paid from RMB 50,000 to 70,000. (3). Change of directors, supervisors and senior management During the reporting period, there were no directors or supervisors resigned their posts because of expiration. Passed by the first meeting of the Second Board of Directors of the Company, it was agreed that Mr. Sun Mao-jian and Mr. Zhou Hong-jiang resigned their posts because of job changing. Passed by the fourth meeting of the Second Board of Directors, Mr. Li Ji-ming was appointed as general engineer and Mr. Jiang Hua was appointed as vice general manager. Passed by the seventh meeting of the Second Board of Directors, Mr. Liang Xian-jiu resigned his post of general manager because of job changing, and Mr. Zhou Hong-jiang was appointed as general manager of the Company. 2. Staff of the Company As to 31st December, 2001, the number of the staff of the Company was 1954, including 1219 productive workers, 362 sales persons, 156 technicians, 69 financial members, 148 administrative persons. Among the staff members, 241 persons were university graduates, 160 persons were college graduates, 226 persons were graduates of professional schools and 1,327 persons were graduates of lower than senior middle schools. All the retired staff’s expenses were paid by social security system, not by the Company. V. THE COMPANY RECTIFYING STRUCTURE 1. Current Rectifying Structure Situation of the Company Since listing Shares in 1997, the Company has, strictly following the requirements of the Corporate Law of the People’s Republic of China, the Securities Law of the People’s Republic of China, relevant stipulations of the China Securities Regulatory Commission (CSRC), the Listing Rules of Shenzhen Securities Exchange and the Corporate Articles of Association, being completing the Company legal person rectifying structure, and at present basically formed a legal person rectifying structure of standardizing operation, effective system and coordinating running. (1) Concerning Shareholders and Shareholders’ meeting: The Company would make sure that all Shareholders especially small and middle Shareholders enjoy equal position with big Shareholders to use their own right. The Company kept communications effectively by multiple ways, and carefully accepted the Shareholders’ visits and calls consulting to let Shareholders understand the production management and operation situations of the Company. The Company strictly followed the stipulations of the Standard Comments of the Listed Company Shareholders’ Meeting issued by the China Securities Regulatory Commission to preside and call the Shareholders’ meetings. (2) Concerning relationship with holding shareholders: The Company was independent in aspects of personnel, assets, finance and business. The holding shareholders used their rights as contributors by law through shareholders’ meetings and not interrupted the policy making decision and production management activities; the linking trading between holding shareholders had signed relevant agreement to contract each other with fair, just and reasonable pricing and carried out relevant legal procedures, and during the link trading voting process, the holding shareholders had avoided. 6 (3) Concerning Directors and the Board of Directors: The Company engaged the Directors strictly according to the Directors’ engaging procedures stipulated in the Corporate Articles of Association; members and personnel of the Company Board of Directors accorded with the requirements of laws, regulations and Articles of Association; the Directors of the Company could attend the Board meetings and shareholding meetings with attitude of responsibility, diligence and honest, were familiar with relevant laws and regulation, and understand the rights, obligations and duties as directors; the Board of Directors set up “Discussing Regulation of the Board of Directors”, “the Information Disclosing Managing Rules of the Company” and other management regulations. “The Articles of Association of the Company” had been amended according to “the Criterion for the Shareholders’ Meeting of Listed Company” and “the Guide Lines for Establishing Independent Director System in Listed Company” promulgated by China Securities Regulatory Commission. In 2002, the Company would amend “the Articles of Associations of the Company” further, and institute and perfect the relevant rectifying regulations such as the “Discussing Regulations of the Board of Directors”, according to the requirements of “Rectifying Rules of Listed Company”. (4) Concerning Supervisors and the Board of Supervisors: The composition of the Board of Supervisors of this Company was in accordance with the laws, regulations and Articles of Association; the supervisors, with a responsible attitude to the shareholders, can seriously implement their responsibilities, and supervise the Company’s finance and the legitimate of the directors, managers and other senior personnel implementing their responsibilities. (5) Concerning performance evaluation, encouraging and restraining system: The Company had set up a just and transparent performance evaluation standard and encouraging and restraining system for the directors, supervisors and managers; the hiring of managers was open, transparent and in accordance with relevant laws and regulations. (6) Concerning party with relevant interests: The Company could fully respect and protect the legal rights of creditors, employees, customers, consumers, communities and other parties with relevant interests in order to keep the stable and healthy development of the Company. (7) Concerning information disclosure and transparency: The Company had made up a standard information disclosure system. It could truly, correctly, completely and timely disclose relevant information strictly according to the laws, regulations and Articles of Association. There was not any false record, misleading statement or important omission and it could ensure the same opportunities of all shareholders to get information equally. In the 2001 information disclosure examination to listed companies by Shenzhen Securities Exchange, the Company was evaluated as “Excellent Information Disclosure Company”. 2. About Hiring Independent Directors According to the requirements of Guidance to Set Up Independent Directors System in Listed Company issued by China Securities Regulatory Commission, the Company was actively selecting the independent directors, and would complete the hiring by June 30, 2002. 3. Personnel, Assets, Finance, Institution and Business Associated with Holding Shareholders (1) Personnel: The general manager, deputy general manager and other senior management did not assume any administrative position in the holding shareholders’ units and all took payment in the Company; the Company owned independent labor, personnel and salary management system. (2) Assets: There was a definite separation between the Company and the holding shareholders in industrial property rights and non-patent technology. As an independent legal person, the Company had complete legal person property rights, and operated its business independently according to the law; the Company did not provide any guarantee for any shareholder, personal debts, other legal person or natural person with its assets. (3) Finance: The Company had independent finance department, complete, independent and standard financial checking system and had opened an independent bank account. It independently paid taxes according to the law 7 and paid employees’ insurance funds independently. (4) Independent institution: The Company had set up a complete organizational system. The Board of Directors and Board of Supervisors and other inside institutions operated independently and there was no subordinate relationship with the functional departments of holding shareholders. But in administrative institutions, a few departments overlap with the holding shareholders, which had been pointed out by CSRC in Zhengzhou Commission in its routine check on the Company, the Company had made up respective actions and would resolve this problem by the end of May 2002. (5) Business: The Company’s business was independent to the holding shareholders. The raw materials purchasing of the Company, production and sales systems were completely independent. No existence of entrusting holding shareholders to purchase or sell on its behalf, or the same industry competition with holding shareholders. 4. Performance Evaluation and Encourage to Senior Management The Company’s senior management assumed the responsibility of realizing the production and operation goal issued by the Board of Directors and directly took the examination and penalty by the Board of Directors. At the end of the year, the Board of Directors would, according to the realized profits, operation, management and other comprehensive index to evaluate the performance of senior personnel and took these as grounds of awards or penalties. VI. BRIEF INTRODUCTION TO THE BOARD OF DIRECTORS The Company convened the shareholders’ meeting twice during the reporting period. 1. The Company’s Shareholders’ Meeting (the 2000 Annual Meeting) was convened at the conference room on the forth floor of the Golden Gulf Hotel at 9:00 AM on 24th May, 2001. The public notices regarding the meeting was published on 30th March, 2001 in “China Securities Newspaper”, “Securities Times ” and “Hong Kong Commercial Daily”. Four shareholders or proxies, including one state shareholder, two domestic common shareholders or proxies, and one shareholder with respect to foreign shares listed at domestic, presented at the meeting, representing 141,785,111 Shares or 54.53% of the total Shares issued, and it was in conformity with the stipulates in “the Law of Limited Company in the PRC” and “the Articles of Association of the Company”. Mr. Li Zhi-qiang, a security qualified lawyer from Jin Mao Law Office in Shanghai, also presented the meeting and gave his legal position paper. At the meeting, the relevant issues were discussed and the following resolutions were made by public ballot: (1) Passed “the 2000 Work Report of the Board of Directors” (2) Passed “the 2000 Work Report of the Board of Supervisors” (3) Passed “the 2000 Annual Report” (4) Passed “ the 2000 Financial Statement and the 2001 Financial Budget Report” (5) Passed “the Profit Distribution Plan of 2000” (6) Passed “the Proposal of the Investment Project of Excess Proceeds Collected” (7) Passed “the Proposal of Changing Several Directors”. It was agreed that Mr. Tian Fu-yong resign his post of director of the second Board of Directors because of age, and Mr. Fu Ming-zhi become the new director of the second Board of Directors. (8) Passed “the Proposal of the Board of Supervisors’ Reelection”. Mr. Wang Shi-Liang, Ms. Zhang Hong-xia and Mr. Shi Shi-chun were elected to be the supervisors of the second Board of Supervisors. (9) Passed “the Proposal of Continuing to Appoint Certified Public Accountants” The resolution announcement of this Shareholders’ Meeting was published on 25 th May, 2001 in “China Securities Newspaper”, “Securities Times” and “Hong Kong Commercial Daily”. 8 2. The Company convened the 2001 first Extraordinary Shareholders’ Meeting at the conference room on the second floor of the Company’s office building at 8:30 AM on 22nd October 2001. The public notices regarding the extraordinary meeting was published on 15th, September, 2001 in “China Securities Newspaper”, “Securities Times” and “Hong Kong Commercial Daily”. Three shareholders or proxies including one state shareholder and two shareholders with respect to overseas Share listed at domestic and domestic common shareholders or proxies attended the meeting, represented 142,016,407 Shares or 54.6% of the total Shares issued, which was in fully conformity with the stipulates and regulations in “the Law of Limited Company in the PRC” and “the Articles of Association of the Company”. Mr. Li Zhi-qiang, a security qualified lawyer from Jin Mao Law Office in Shanghai, also presented the meeting and gave his legal position paper. During the meeting, the relevant issues were discussed one by one and the following resolutions were discussed and passed by public ballot: (1) “The Proposal of Amending the Articles of Association of the Company” by a special resolution. (2) “The Proposal of Signing the Agreement of Purchasing Bottle from Yantai Changyu Glass Product Co., LTD.” The resolution announcement of this Extraordinary Shareholders’ Meeting was published on 23rd October, 2001 in “China Securities Newspaper”, “Securities Times” and “Hong Kong Commercial Daily”. VII. BOARD OF DIRECTORS’ REPORT 1. Business Condition (1) Principal Business The Company is a light industrial manufacturer of which the principal business is the distilling, producing and distributing of wine, brandy, tonic wine, sparkling wine and cider using grapes and apples as materials, and its major products include dry red wine, dry white wine, XO brandy, VSOP brandy, VO Brandy, VS brandy, Tzepao Sanpien Jiu, Special Quality Sanpien Jiu, Vermouth and sparkling wine. At present, the Company’s colligated output of wine is 55,000 tons. The Company’s sales network covers 29 provinces and municipalities all over the country, and it has nearly one thousand salesmen. For the sales revenue, comprehensive wine sales volume and profit, the statistics from the information office of the General Association of China Light Industry shows that the Company took the first place respectively in the wine field in 2001. Sales and Profits of Principal Business Assorted by Products Type During the reporting period, the sales and profits of the four types of products of the Company were as follows: Product Principal Sales Proportion in Profits Proportion in (RMB) Principal Sales (RMB) Profits (%) (%) Wine 531,202,048 64.4 307,418,641 68.1 Brandy 194,699,124 23.6 104,216,810 23.1 Tonic Wine 78,649,357 9.5 33,552,192 7.4 Sparkling Wine 20,299,824 2.5 6,209,247 1.4 Total 824,849,353 100 451,396,890 100 Sales and Profits of Principal Business Assorted by Territory Distribution For sales revenue, the top five provinces were Guangdong, Shandong, Fujian, Jiangsu and Zhenjiang in turn. During the reporting period, the total sales revenue in the top five provinces was RMB 537.13 million, 60.6% of the sales of the Company’s principal business, total profits from principal business was RMB 325.45 million, 63.5% of the profits of the Company’s principal business. And the sales revenue and profits in the other areas took 39.4% and 36.5% of the Company’s principal business respectively. Operation Situations of Key Products Taking over 10% of the Company’s Sales The wine, brandy and tonic wine’s sales took 10% of the sales of the Company’s principal business, and their sales, sale cost and gross profit ratio were set below: 9 Product Sales (RMB) Sale Cost (RMB) Gross Profit Ratio (%) Wine 531,202,048 223,783,407 57.9 Brandy 194,699,124 90,482,314 53.5 During the reporting period, the Company’s principal business and its structure did not change a lot, compared with that of the last reporting period. (2) The Major Holding and Sharing Company Company Name Sharing Business Scope Major Products or Registered Assets Net Profit Ratio Services Capital (RMB’0000) (RMB’0000) (USD’0000) Yantai Changyu-Castle 70% To research, Dry red wine, dry 500 3,800 Not put into Wine Castle Co., LTD. produce and sell white wine and production yet wine and sparking wine of sparkling wine Changyu-Castle Yantai Kylin Packaging 50% To produce and Cork, aluminum cap, 100 1,047 0 Co., LTD. sell packaging PVC capsule and so material on. (3) Major Suppliers and Clients During the reporting period, the Company purchased 22% of its total purchase from the top 5 suppliers of the Company, and sold 13% of its total products to the top 5 clients of the Company. (4) Problems, Difficulties and Measures Taken in Operation After fast increasing from 1997 to 1999, the wine market of China went to a phase of structural adjustment since 2000, the products structure changed greatly. During the reporting period, there was an obvious character: the sales of low quality wine dropped deeply, and the market competition became more furious, while the market for high quality wine, brandy and tonic wine went up steadily, especially the slap-up wine with high quality and reasonable price had an excellent market prospect. Regarding the distribution of domestic wine market, the west wine market was on the developing stage, its sales increased slowly, while the sales went up steadily in developed coastal area. For this situation, the Company adopted the following measures and brought good results: First, centered by market, to perfect sale network and optimize the market layout. During the reporting period, the Company conformed the selling resource all over the country, and primarily established a “three-level” marketing network, i.e. the distribution head office, branch office and agency. The Company solidified the matured market, such as Shandong, Guangdong, Fujian and so on, deeply developed the county market in developed coastal area, and concentrated resources to develop image-market such as Beijing, Shanghai and so on. All these measures made the Company’s marketing network more perfect and accordant. Second, to expedite product structure adjustment. The Company gave priority to high-level products and strengthened new product’s development and market promotion. During the reporting period, the Company recommended Changyu-Castle castle wine, special quality Cabernet dry red wine, special 100-year dry red wine and some other varieties of high level wines. The Company also brought into the market dry red wine to improve the quality of traditional wine, some diverse products to adapt different consumers, over 10 kinds of gift wine packages to meet the feast demand, and low alcohol wine cooler containing fruit juice to meet the taste of female and old persons. All the new products’ development met the demand of the market and perfected the Company’s product structure. As a result, although the sales of low-level products dropped, the sales of high-grade wine and brandy increased a lot, which increased the gross profit ratio of the product during the reporting period 2.8% higher than that of the preceding year. Third, to strengthen the market management, normalize the market order. During the reporting period, the Company paid more attention to the management and control in the process of market developing, the examination and approving of the marketing expenses, and the auditing and supervising of advertising expenses and promoting articles, so the effect and benefit were improved. At the same time, the Company made the sale merit system more perfectly, emphasized the profit as well as market developing, intensified final market’s 10 management and development, took forceful measures to stop product from going into different agent territory to protect the benefit of the distributor and the Company. The above-mentioned measures ensured the superiority of the Company’s products to the other competitors, and guaranteed the steady benefit increasing of the Company. 2. Investment of the Company (1)The Uses of the Proceeds Collected in the Reporting Period In the reporting period, the Company made a public offer of 32 million A Shares for capital increase in October of 2000, and got net proceeds of RMB 613.46 million. The Company had invested in those projects as disclosed in the Prospectus. To the end of the reporting period, RMB363.67 million had been invested, including RMB 228.67 million had been invested in the reporting period, which was RMB 93.67 million more than that of the last year, 69.4% increased. And the un-invested fund of RMB 249.79 million had been deposited in bank. The progress situations of investment projects are set out below: Unit: RMB 0000 Projects as disclosed in the Prospectus and actual Committed investment Amount invested Situation investment amount 1. Additional 30,000 tons medium to high grade wine 27,050 6,753 project, including: A. Additional 30,000 Mus of vineyard 3,650 1,950 In progress B. Additional 10,000 tons raw material wine 2,950 453 In progress fermentation capacity C. Technology innovation of oak barrel and wine 8,300 1,220 In progress cellar D. Low alcohol wine project with an annual 3,850 1,571 In progress output of 20,000 tons E. Medium to high grade wine project built in the 8,300 1,559 The first stage west of China with an annual output of 10,000 tons finished 2. Marketing system’s re-building and enlarging, 9,125 6,796 including: A. Construction of distribution company 4,525 2,782 In progress B. Computerizing information system’s 4,600 4,014 In progress establishing 3. Enterprise technology center with nation-level 1,000 1,015 Finished 4. Wine castle 3,770 3,296 Products appeared in market 5. Distribution subsidiaries in county of coastal area 4,000 2,100 In progress 6. Environment protection of ferment center 450 456 Finished 7. Participating Jiadeyu Information Co. 200 200 Finished 8. Supplementing operation fund 15,751 15,751 Finished Total 61,346 36,367 The uses of proceeds and the operational situations of the above-mentioned invested projects are stated below: Additional 30,000 tons medium to high grade wine project A. Additional 30,000 Mus of vineyard: The Company had invested RMB 19.5 million during the reporting period, and founded 16,400 Mus high quality grape vineyard for high-level dry red wine, dry white wine and brandy in Laiyang city, Zhaoyuan city, Fushan district and Muping district of Yantai. And it was expected to harvest in 2003. These new vineyard would guarantee the grape supply for the Company’s increasing high quality wine output. At present, the vineyard of the Company has been up to 66,400 Mus. B. Additional 10,000 tons of raw material wine fermentation capacity: As disclosed, the total investment amount of this project was RMB 29.50 million, among which RMB 4.53 million had been invested in the reporting period. The Company had finished civil engineering, machine prearranging and foreign machine biding, and prepaid part of engineering amount. This project was expected to be put into production in the harvest season of September of 2002, after that the output of high-level wine of the Company would be greatly increased. 11 C. Technology innovation of oak barrel and wine cellar: RMB 83 million was designed to invest in this project, and the Company had invested RMB 12.2 million accumulatively, including the amount for purchasing 540 oaks barrels, and RMB 9.27 million for reinforcing the cellar. During the reporting period, the 540 oak barrels had been put into using, which increased the oak barrels’ volume 120,000 liters and could greatly improve the output and quality of the Company’s high-grade wine and brandy. After this project finished, the Company would get new 150,000 liters wine storage volume. D. Low alcohol wine project with an annual output of 20,000 tons: As disclosed, the investment for this project was RMB 38.5 million. And RMB 15.71 million had been invested, the major building and the machines for pressing, fermenting, filtering and clarifying had been finished and put into producing. In order to make this project into producing earlier, the Company used the bottling line of sparkling wine to produce wine cooler which had appeared in the market at the end of November of 2001. During the reporting period, the Company had sold 192 tons low alcohol wine, getting sales RMB 1.8 million and profit RMB0.58 mullion. E. Medium to high grade wine project with annual output of 10,000 tons built in the west of China: The Company will establish a winery with an annual output of 5,000 tons at the first stage in Jingyang county, Xianyang city, Shanxi province. The actual investment proceeded behind the plan schedule, because the land purchase effected this project’s starting. In the reporting period, the Company had invested RMB 15.59 million, and finished the complete civil engineering, part of machines’ purchasing, making, installing and testing. This project was planned to be put into producing in March of 2002. Marketing system’s re-building and enlarging project: A. Construction of distribution company. This project was plan to invested RMB 45.25 million, and RMB 27.82 million had been invested accumulatively in the reporting period. The branch companies exclusively distributing the product of the Company had been established in 22 municipalities directly under the Central Government or provincial capitals such as Beijing, Shanghai, Chongqing, Shenyang, Haerbin, and so on. During the reporting period, the sales reached RMB 323.6 million, RMB 23.67 million more than that of the last year, 7.9% increased. This project was undertook to finish at the end of 2001, but because in the reporting period the Company recomposed the marketing system, the project was delayed. And this project would be finished in September of 2002. B. Computerizing information system’s establishing. The investment for this project was RMB 46 million, including investment for fixed assets RMB 29.5 million. During the reporting period, the Company had invested RMB 40.14 million accumulatively, and finished the building of main engineer of information marketing center of the head office, internal decoration, layout of network and the bidding for soft ware development. Now the Company is purchasing net machines and developing soft ware. This project was expected to be put into using in August of 2002. The proceeding schedule was roughly as same as the plan. Enterprise technology center with nation-level project: The total investment amount of this project was RMB 10 million, while RMB 10.15 million had been invested accumulatively, including RMB 6.55 million invested in the reporting period. The Company purchased gas chromatograph-mass spectrograph system, wine auto-analyzer, microbial vaccine identifier, microbial counter and other analyzing equipment, and introduced mini filter, membranes presser for test. And the Company reformed the old research facilities completely, and invited two French specialists to enrich the research team. This project had been finished at the end of 2001, and greatly improved the level of researching and developing new products and techniques of the Company. During the reporting period, the researching of wine without alcohol had reached creationary results as a new invention in the domestic same field. The wine cooler was honored excellent awards of China Food Industry Association. The Science and Technique Center of the Company and Union University of the South of Changjiang River succeeded applying an item of Key Technique of National “the Tenth Five-year Plan”, to be first to undertake the grape further processing and relevant key technique research task of the National Science and Technique Department. Wine Castle: The total investment amount for this project was RMB 37.7 million, and the Company had 12 invested RMB 32.96 million during the reporting period, including RMB 5.45 million for land expenses, RMB 15.98 million for civil engineering, and RMB 11.53 million for purchasing machines from home and abroad. At present, the main building of the wine castle had been finished, the machines are being installed and tested, and trial producing had been done. One of the wine castle’s products, Changyu-Castel high quality dry red wine had been sold in the market and always out of stock, which would become a new profits resource of the Company. Distribution subsidiaries in counties of coastal area. The total investment amount for this project was RMB 40 million, and RMB 21 million hand been invested in the reporting period. The Company had established some monopolistic subsidiaries in 27 cities including Zhongshan, Huizhou and Dongguan in Guangdong province, Quanzhou and Zhangzhou in Fujian province, Jiaxing, Huzhou, Jinhua, Taizhou and Shaoxing in Zhejiang province, Xuzhou, Changzhou, Nantong, Huaiyin, Zhenjiang, Yangzhou, Taizhou, Lianyungang and Suzhou in Jiangsu province, and Yantai, Weihai, Taian, Linyi, Zibo, Dezhou, Weifang and Jining in Shandong province. During the reporting period, the sales reached RMB 242.84 million, RMB 15.8 million more than that of the last year, increased 6.9%. This project should be finished in 2001, but because the Company reformed the marketing system in the reporting period, this project was delayed, and it was expected to be finished in September of 2002. The fermentation center’s environment protection. The actual investment amount for this project was RMB 4.56 million. During the reporting period, the Company had finished the bidding, engineering preparation and engineer building, and this project had been finished completely, now is being tested generally. After all the work finished, the sewage treating capacity can satisfy the demand of the second enlargement project of the fermentation center which would increase more 10,000 tons fermentation capacity, and it can completely reach the sewage-treating standard. To participate the establishment of “Shenzhen Jia De Yu Information Business Co., Ltd.”. The Company undertook to invest RMB 2 million for this project, and already invested all the amount in 2000. The business scope of this company mainly covers information consultation, information technology, venture investment, assets management and commodity (wine and drinks mainly) business & distribution. At present, this company had established successfully a web site named “wine field”(web site is 9xo9.com.), on which business system of wine or drinks and relative products was established. And now it had already begun to invite members to do relevant business. Some of distributors of the Company had tried to buy or wholly sell the Company’s products through the “wine field”. Complementing operation capital: RMB 157.51 million of floating capitals had been put into operation. The increase of floating capital decreased the Company’s financial expenses and equity-debt ratio. (2) Investment Situations of Non-collected Capital in the Reporting Period Discussed and passed in the third meeting of the Second Board of Directors, the Company decided to establish a Sino-French joint venture, Langfang Castel-Changyu Wine Co., LTD. in Langfang, Hebei province, together with Vin Alcools et Spiritueux de France (hereafter to be refered as “VASF”), one sole subsidiary of Castel Group. The registered capital of VASF was USD 3 million. The Company paid USD 1.47 million by cash to receive part assets of Red Castle Winery LTD, which was exclusively owned by VASF before, and invest to the joint venture by these assets, taking 49% of the total share of the joint venture. VASF invested the rest assets of Red Castle Winery LTD to take 51% of the total share of the joint venture. To the end of the reporting period, all the investment of the two parties had been in position, it had been finished to check and evaluate the capital of Red Castle Winery LTD, reform the joint venture, transfer capital and re-register business license. The joint venture had finished the producing preparation, and was expected to do trial producing and sell the products at the beginning of March in 2002. 3. Financial Situation of the Company The total assets by the end of the reporting period was RMB 1,669.72 million with growth of 2.63% over that of the beginning of the fiscal year, which was mainly caused by the increase of shareholder’s equity. The shareholders’ equity was RMB 1,433.4 million, 8.5% growth over that of the beginning of the fiscal year, which was mainly caused by the Company’s operation profit. The profit from principal business was RMB 451.4 13 million, 1.1% growth over that of the preceding year, which was mainly caused by the increase of the income of the principal business. The net profit was RMB 163.8 million, 34.6% growth over that of the preceding year, which was mainly caused by the increase of financial returns of income tax, the percentage growth for mid-high grade products and the gross interests rate. By the end of the reporting period, the net of cash flows from operating activities was RMB 52.6 million, the net of cash flows per Share from operating activities was RMB 0.20, with 0.73 Yuan RMB less than that of the beginning of the fiscal year, which was caused mainly by the enlargement of raw material grape purchase and increase of paying all kinds of expenses and taxes. The equity-debt ratio was 14.15%, about 4.6% lower than that of the beginning of the fiscal year. The current ratio was 5.83 and the quick ratio was 4.44 (At the beginning of the fiscal year, the current ratio and the quick ratio was 4.43 and 3.54 respectively). During the reporting period, the operation expenses and general and administrative expenses of the Company were basically as same as that of the preceding year, which was mainly caused by strengthening the control on the two kinds of expenses. The financial expenses of the Company was less RMB 5.8 million than that of the preceding year, which was mainly caused by the increase of interest income of the proceeds collected but not invested. 4. The Influence of Great Change of Operation Environment and Macro-policy The influence of canceling the “levy first and return later” income tax policy and China entering WTO were detailed at “8.Other Material Events” of “IX Material Events” in this report. 5. Business Plan of 2002 In the new year, the Board of Directors will continue to concentrate on developing the Company’s central business, meanwhile it will care about the investment projects outside the main business that will bring stable return to the Company’s long-term development. The present goal of the Company is still to continuously improve the shareholders’ value through increasing the profit of each share and capital return rate. If there is no unexpected situation happens, the Board of Directors anticipates that, with the increase of China economy and average personal income level, the future wine market of China will keep in stable development. But on the other side, with the decreased customs tariffs level of imported wine, the barrier of foreign wine entering China market is reduced, leading to the fiercer competition in domestic wine market. In order to fit in this situation and to ensure the sales income and total profits to stably increase on the basis of 2001, the Company will take the following actions: (1) Continuously stick to the operation principal of taking market as center and further develop the market. Further complete Three-Level sales net management system, accelerate the terminal net developing and monitoring, and actively explore the contact and cooperation with chain stores and other new sales forms to make the sales net more perfect; keep proper scale of advertising and market investment, improve the brand influence and expand the middle and high level product sales; focus on developing Beijing, Shanghai and Shenzhen markets where there are large wine market volumes while low occupied rate by the Company, so as to culture new sales increasing points; make full use of the new changes of market situation after China’s entry to WTO and actively expand the product exports; enlarge the market investment, try to set up a complete computer information system and modern materials flow system, ensure the straightway of currency flow, materials flow and information flow, and improve the capacity of driving market to continuously enhance the comprehensive occupied rate of the Company’s products and market competency and to ensure the stable increment of sales income and profits. (2) Enlarge the scientific research investment and continue to optimize product structure. In the year, the Company will accelerate the implementation of three-year science and technology development plan, increase the training and introduction of technological talents, introduce the advanced technological equipment and improve crafts technology research level and basic technology research ability; accelerate the serialization process of Changyu-Castel Wine, Cabernet Dry Red Wine and other deluxe products, and develop new products aiming at different consumption level; comprehensively change the packing design, and improve the attraction 14 and competency of products. (3) Deepen labor, personnel and distribution system reforms and encourage the working activeness and creativity of the personnel. The Company will reform the present distribution, awards and penalties systems, make them suitable to the differences among the high-level personnel, middle-level personnel, technological employees, salespersons and other ordinary employees, and intensify the encouraging and restraining system. Through deepening labor and personnel system reform, set up a flexible hiring and distribution system to fully play the activeness and creativity of the personnel. (4) Accelerate funds collection projects construction and improve the Company’s stamina. In the new year, the Company will pay attention to the construction of A Share investment project, speed the implementation, and ensure to put in production as soon as possible to add new power to the Company’s stable development. (5) Strengthen inside management and pay great attention to develop potentials and increase efficiency. The Company will strengthen the management centering on finance, complete comprehensive budget management system to funds and expenses, further reduce two fund occupations and improve funds using efficiency; regulate original materials base construction, transfer from extensive style to quality and efficiency style, strengthen grape planting and original materials purchasing management, vie for quality, and ensure stable improvement of product quality in all sections from original materials to crafts process; strictly manage bidding and bidding invitation, comprehensively implement purchasing by comparison, reduce purchasing cost of raw materials and constantly improve efficiency. 6. Matters on the Work of Board of Directors [1] The Situations and Contents of the Meetings of Board of Directors in the Reporting Period The Company had convened meeting of the Board of Directors eight times during the reporting period. (1) The first meeting of the second Board of Directors was held on 22nd February, 2001, “Proposal of Electing the Chairman and Vice-chairman to the Board of Directors”, “Proposal of Changing Several Directors” and “ Proposal of Mr. Sun Mao-jian and Zhou Hong-jiang Applying to Leave Their Posts of Vice-general Manager” were discussed and passed at the meeting. The resolution announcement of this meeting was published on February 23, 2001 in “China Securities Newspaper”, “Securities Times” and “Hong Kong Commercial Daily”. (2) The second meeting of the second Board of Directors was held on March 27, 2001. At the meeting the following resolutions were discussed and passed: A. “The 2000 Work Report of the Board of Directors” B. “The 2000 Work Report of the General Manager” C. “The 2000 Annual Report and its Summary” D. “The 2000 Financial Statement and the 2001 Financial Budget Report” E. “The Profit Distribution Plan of 2000” F. “The Predicted Profit Distribution Plan of 2001” G. “The Proposal of Investment Project for Exceed Proceeds Collected” H. “The Proposal of Continuous Engagement of the Certified Public Accountant” I. “The Proposal of Relevant Matters on Convening the 2000 Shareholders’ Meeting” The resolution announcement of this meeting was published on March 30, 2001 in “China Securities Newspaper”, “Securities Times” and “Hong Kong Commercial Daily”. (3) The third meeting of the second Board of Directors was held on 8th August 2001. The following resolutions were discussed and passed: A. “The Proposal of 2001 Interim Report and its Summary ” B. “The Proposal of 2001 Interim Profit Distribution Plan” C. “The Report of Using Situation of the Capital Collected Last Time” D. “The Proposal of Strategic Cooperating with Castle Group from France and Established an Joint Venture” 15 The resolution announcement of this meeting was published on August 9, 2001 in “China Securities Newspaper”, “Securities Times” and “Hong Kong Commercial Daily”. (4) The forth meeting of the second Board of Directors was held on September 14, 2001. The following resolutions were discussed and passed unanimously at the meeting: A. “The Proposal of Amending the Articles of Association of the Company” B. “The Proposal of the Discussion Rules of the Board of Directors” C. “The Proposal of Singing the Agreement of Purchasing Wine Bottle from Yantai Changyu Glass Co., LTD.” D. “The Proposal of Appointing Mr. Li Ji-ming and Mr. Jiang Hua as Senior Management of the Company” The resolution announcement of this meeting was published on September 15, 2001 in “China Securities Newspaper”, “Securities Times” and “Hong Kong Commercial Daily”. (5) The fifth meeting of the second Board of Directors was held on October 27,2001. “The Proposal of the Third Quarter Report of 2001” was discussed and passed at the meeting. The resolution announcement of this meeting was published on October 30, 2001 in “China Securities Newspaper”, “Securities Times” and “Hong Kong Commercial Daily”. (6) The first temporary meeting of the second Board of Directors was held on November 16, 2001. “The Proposal of Initiating to Establish Tiantong Funds Management Co., LTD.” was discussed and passed. (7) The sixth meeting of the second Board of Directors was held on October 27,2001. “The Proposal of the Third Quarter Report of 2001” was discussed and passed at the meeting. The resolution announcement of this meeting was published on December 28, 2001 in “China Securities Newspaper”, “Securities Times” and “Hong Kong Commercial Daily”. (8) The seventh meeting of the second Board of Directors was held on December 28, 2001. The following resolutions were discussed and passed unanimously at the meeting: A. It was agreed that Mr. Liang Xian-jiu left his job of the director of the second Board of Directors and the general manager because of job change. B. Nominated by the Holding Company, the second Board of Directors agreed to recommend Mr. Zhou Hong-jiang as the director candidate for the second Board of Directors of the Company. C. “The Proposal of Appointing Mr. Zhou Hong-jiang as the General Manager of the Company” D. “The Proposal of Deposing the Organization of Board of Directors” The resolution announcement of this meeting was published on December 29, 2001 in “China Securities Newspaper”, “Securities Times” and “Hong Kong Commercial Daily”. [2] The Situation of the Board of Directors’ Execution to the Resolutions of the Shareholders’ Meeting At the 2000 Shareholders’ Meeting held on May 4, 2001, the 2000 profit distribution Plan was discussed and passed. Based on the total capital stock, 260 million Shares at the end of 2000, cash dividends of RMB2.50 were declared to every 10 Shares. The Announcement for this share dividend declaring was published on June 15, 2001 in “China Securities Newspaper”, “Securities Times” and “Hong Kong Commercial Daily”. Share right registering date for A Share and the last exchange date for B Share was 22nd June 2001. The interest’s payment date was 25th June 2001. 7. Company’s Profit Distribution Plan of 2001 The net profit of 2001 was RMB 163,848,643 based on the audit performed by Arthur Andersen & Co. according to the International Financial Reporting Standards, and RMB 171,656,461 based on the audit performed by Arthur Andersen Hua Qiang Certified Public Accountants according to the PRC Financial Reporting Standards. According to “Detailed Implementations Rules Concerning Domestic-listed Foreign Investment Shares of Joint Stock Limited Companies” and “the Articles of the Association of the Company”, appropriation of dividend is based on the lower of the Company’s retained earnings as reported in the financial statement audited 16 by certified public accountants and drawn up according to the PRC Financial Reporting Standards and that prepared under the International Financial Reporting Standards. On the basis of the net profit of RMB 171,656,461 in 2001, after allocating 10% of such amount, i.e. RMB 17,165,646 to the statutory public reserve, and 10% of such amount, i.e. RMB 17,165,646 to the statutory public welfare fund, and plus RMB 104,192,512 of the profit undistributed at the beginning of the reporting period, the amount available for distribution in 2001 was RMB 241,517,681. Discussed and passed at the ninth meeting of the second Board of Directors, the 2001 profit distribution plan was as follows: RMB 65 million was proposed to be appropriated by cash dividend to shareholders of all 260 million Shares on 31st December, 2001 in the ratio of RMB 2.50 for every 10 Shares (For A Share, income tax included). The remaining of RMB 176,517,681 will be carried forward to the next year. The cash dividend distributed to the foreign shareholders will be paid in HK Dollars converted from RMB by the middle ratio announced by the People’s Bank of China on the first working day after the resolution date of the General Shareholders’ Meeting. The Company wouldn’t transfer capital reserve to share capital in 2001. The above profit distribution plan is subject to be considered and approved by the 2001 Shareholders’ Meeting. 8. The Expected Profit Distribution Policy of 2002 Discussed at the ninth meeting of the second Board of Directors, the Profit Distribution Policy of 2002 was expected as follows: A. The Company will distribute profit once at the end of the fiscal year of 2002. B. About 30% of the net profit of 2001 will be distributed in 2002. C. About 20% of the undistributed net profit of 2000 will be distributed in 2001. D. The dividend will be distributed by cash in principle, and the percentage of cash dividend in all dividends distributed will not be less than 90%. The detailed distribution plan of the above-mentioned distribution policy will be decided according to the actual operation situations of 2002 by the Board and Directors and subject to be considered and approved by the Shareholders’ Meeting. 9. Other Disclosed Information The newspapers for the Company to disclose information kept unchanged and still were “China Securities Newspaper”, “Securities Times” in home and “Hong Kong Commercial Daily” at abroad. VIII. BOARD OF SUPERVISORS’ REPORT 1. Meeting of the Board of Supervisors The Company had convened the meeting of the Board of Supervisors four times during the reporting period: The 2001 first meeting of the Board of Supervisors was held on March 27, 2001. At the meeting, the 2000 Annual Report, the 2000 Financial Statement Report, the 2001 Financial Budget Report, the 2000 Profit Distribution Plan, the Working Report of the Board of Supervisors of 2000 and the Proposal of the Board of Supervisors’ Reelecting were discussed and passed. The first meeting of the second Board of Supervisors was held on May 24, 2001, and the Proposal of Reelecting the Chairman to the Board of Supervisors was discussed and passed at the meeting. The second meeting of the second Board of Supervisors was held on August 8, 2001, and the Proposal of the 2001 Interim Report and its Summary and the Independent Opinion about the Operation Situation of the First Half Year of 2001 were discussed and passed at the meeting. The third meeting of the second Board of Directors was held on October 27, 2001, the Third Quarter Report of 2001 was discussed and passed at the meeting. 17 2. Report of Board of Supervisors During the reported period, the members of the Board of Supervisors seriously implement their responsibilities, actively do their work, attend all shareholder’s meetings, and make a serial of supervising and checking activities to the Company’s regulatory operation, finance, related trade and collected funds using. The Board of Supervisors, through serious discussion, has formed the following independent comments: (1) About the legal operation of the Company: During the reporting period, the directors and high-level managerial personnel are honest and integrative, abide by the laws and regulations, seriously implement the resolutions of shareholders’ meetings and Board of Directors, stick to Corporate Law and Articles of Association while implementing their jobs, abide by state laws, regulations and the Company’s system, and protect the interests of the Company and all shareholders without violating laws, regulations or Articles of Association or damaging the Company’s interests. (2) Checking the Company’s finance: During the reporting period, all expenses of the Company are basically reasonable, and related withdrawing and deposit are in accordance with laws, regulations and Articles of Association. The financial structure is good and the assets quality is excellent. Anderson Company and Anderson Huaqiang Certified Public Accountants have evaluated the Company’s financial reports in 2001 respectively according to the international audit standards and China audit system, and have presented evaluation report without reservation. The Board of Supervisors thinks that the report truly, objectively and correctly reflected the Company’s financial situation and business achievements. (3) About the collected funding using: In October 2000, the Company increased its capital and issued 32 million ordinary A Shares. The actual invested projects of collected funds are in accordance with those committed in the Share Invitation Statement. No change happens in the invested projects, but the investment schedules of individual projects are different from the committed investment schedules. (4) Equity of the relevant trade: During the reporting period, the relevant trade in the Company proceeds strictly according to the relevant state regulations. The procedures are complete and the trades are just, which protects the interests of the Company and the shareholders. (5) During the reporting period, CSRC in Zhengzhou Commission made a routine check to the Company. According to the examination results, CSRC Jinan Securities Supervision Office issued the Reform Notice in Limited Time on November 28, 2001 to the Company. Aiming at the problems presented in the Notice, the Company made up responding reform actions and began the reform. The Board of Supervisors has seriously rechecked the reform and thinks the reform actions are effective. The reform results have basically reached the requirements of relevant laws and regulations. The Board of Supervisors thinks that, during the reporting period, the Board of Directors and managers group solidify and coordinate, advance and develop, deal with concrete things related to work efficiently, and do an efficient job for the further development of the Company and protecting the shareholders’ interests. The Board of Supervisors suggests that in the new year, the Company should strengthen the research on the new changes and tendencies in the domestic wine market since China’s entry to WTO and make up responding policies; meanwhile pay great attention to the projects under construction and form a firm basis for the Company’s stable and healthy development. IX. MATERIAL EVENTS 1 During the reporting period, there were no material litigation and arbitration 2. During the reporting period, the Company did not purchase, sell or annex any assets. 3. Related Party Transaction On September 13, 2001, the Company signed an agreement of purchasing wine bottle from Yantai Changyu Glass Product Co., LTD., one of the Group Company’s subsidiaries whose Shares were held by the Group Company wholly. The Company should purchase bottles for brandy, dry red wine, natural red wine, 18 Cabernet dry red wine and sparkling wine from this company. The Company disclosed the details about this related party transaction on September 15, 2001 in “China Securities Newspaper”, “Securities Times” and “Hong Kong Commercial Daily”. And on October 22, 2001, the agreement of purchasing wine bottle from Yantai Changyu Glass Product Co., LTD was discussed and passed at the first extraordinary shareholders’ meeting and then became effective. During the reporting period, the total trade amount for this related party transaction was RMB 47,987,166. Except the above-mentioned related party transaction, there were no any other related party transactions during the reporting period. But for the related party transactions happened in the previous reporting year and continued to the reporting period, please refer to the “24. Related Parties and its Transaction” of the notes of Financial Statement. 4. Material Contract and its Executing During the reporting period, there were no mortgage or warranty, entrusting or entrusted, contracting or contracted, leasing or leased events for the Company. And there were no events of entrusting other person to manage the cash assets, no matter it occurred in or continued to the reporting period. 5. Events the Company Undertook The Company undertook in the 2000 Annual Report that the share dividend distributed in 2001 would not be less than that of 2000. The Profit Distributing Plan of 2001 discussed and passed by the ninth meeting of the second Board of Directors was accordance with this undertaking, and it would be submitted to the 2001 Shareholders’ Meeting to discuss and pass for effecting. The shareholders who held the Shares of the Company more than 5% did not undertake anything in the appointed newspaper or net station. 6. Appointment of Certified Public Accountants The Company convened 1999 Shareholders’ Meeting on 15th June 2000, and it was determined to engage continually in 2000 Arthur Andersen & Co as the Company’s international auditor, and Arthur Andersen Hua Qiang Certified Public Accountant as the domestic certified public auditor. The period of appointment was 1 year. The auditing fee was HKD 0.8 million totally, travel expense and working expense included. 7. Examination and Administrative Punishment by CSRC, Criticism Notification, Public Censure by Stock Exchange (1) From October 18 to 24 of 2001, CSRC in Zhengzhou Commission made a routine check to the Company. According to the examination results, CSRC Jinan Securities Supervision Office issued the Reform Notice in Limited Time on November 28, 2001 to the Company. Aiming at the problems presented in the Notice, the Company made up responding reform actions and began the reform. By the end of the reporting period, except several departments superposed with the holding company, which will be settled by the end of May of 2002 because of the limitation of office condition, all the other reforms actions had been finished. At the special meeting held by the Board of Directors on November 26, 2001, the Company examined the reform results, and considered that the reform results had reached the requirements of relevant laws generally. “The reform report regarding the problems found by CSRC’s check” was published on November 28, 2001 on “China Securities Newspaper”, “Securities Times” and “Hong Kong Commercial Daily”. (2) During the reporting period, none of the Company, the Board of Directors or the directors of the Company was punished administratively, criticized or censured publicly by the supervising departments. 8. Other Material Events (1) Amending the Articles of Association of the Company: On October 22, 2001, the Company convened the first extraordinary shareholders’ meeting of 2001 to amend part of Articles of Association of the Company, the relevant information was published on September 15, 2001 in “China Securities Newspaper”, “Securities Times” and “Hong Kong Commercial Daily”. (2) Changing the General Manager: Discussed and passed in the seventh meeting of the second Board of Directors, it was agreed that Mr. Liang Xian-jiu resigned his post of general manager because of job change, and 19 Mr. Zhou Hong-jiang was appointed as the general manager. The relevant information was published on November 29, 2001, in “China Securities Newspaper”, “Securities Times” and “Hong Kong Commercial Daily”. (3) The influence of the China entering WTO: After China entered into WTO, the Company will be influenced on two aspects. First is the reduce of import tariff. According to the law document “ the reducing table for the farm produce of the PRC”, the import tariff of wine and brandy would be cut down to 44.6% and 46.7% respectively from the date of January 1, 2002, and to 14% and 10% respectively in 2004, which was propitious to foreign wine and brandy to come into the market of China. And second, foreign winery and agent would have the right of import, export and distribution, and could establish distribution channel directly in China. So, for long term, the Company would be faced more furious competition after China entered into WTO. But in the interim period, the Company would perfect the marketing net work, enforce research capacity, improve product structure, enlarge market occupation, reduce operation cost to improve the competition power and lessen the pressure on the Company’s benefiting capacity. (4) Income tax policy change: According to the documents of “the Notice of correcting the levy first and return later income tax policy constituted by local government”, from January 1, 2002 the Company would not enjoy continuously the income tax policy of levy first and return later that the Company would pay enterprise income tax at the rate of 33% of the enterprise income before taxation and the local financial department would return 18% of the enterprise income before taxation to the Company, i.e. the actual income tax of the Company should be 15%, so the actual income tax of the Company would be changed to 33%, and which would have some effects on the business performance in 2002. IX. OTHER RELATED INFORMATION OF THE COMPANY 1. The Company completed the first registration in Shandong Province Administration for Industry and Commerce on 18th September, 1997, and the registration changing on 24th October, 2000. 2. Enterprise legal person business license number: 3700001806012 3. Taxation registration number: 37060216500338-1 4. Depository of non-marketable Shares: Shenzhen Securities Register Co., Ltd. 5. In the reporting period, the Company engaged Guo Tai Jun An Security Company as the main consignee to issue A Shares for capital increase for the Company. 6. International Certified Public Accountants of the Company: Arthur Andersen & Co, 21/F Edinburgh Tower, The Landmark, 15 Queen’s Road Central, Hong Kong PRC Certified Public Accountants of the Company: Arthur Andersen ‚Hua Qiang Certified Public Accountants, 1118, China World Tower 1, Jian Guo Men Wai Avenue, Beijing, PRC. X. FINANCIAL REPORT 20 AUDITORS’ REPORT TO THE SHAREHOLDERS OF YANTAI CHANGYU PIONEER WINE COMPANY LIMITED: We have audited the accompanying consolidated balance sheet of Yantai Changyu Pioneer Wine Company Limited (the “Company”) and its subsidiaries (the “Group”) as of December 31, 2001 and the related consolidated statements of income, changes in equity and cash flows for the year then ended. These financial statements set out on page 22to page 55 are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements give a true and fair view of the financial position of the Group as of December 31, 2001 and of the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards, as published by the International Accounting Standards Board. Certified Public Accountants Hong Kong, the People’s Republic of China March 27, 2002 21 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2001 (Amounts expressed in thousands of Renminbi (“RMB”)) Note 2001 2000 RMB’000 RMB’000 ASSETS Non-current assets Leasehold land, net 3 6,449 6,579 Property, plant and equipment, net 4 377,046 337,258 Investment in associate 6 703 703 Other long-term investment 7 2,000 - Deferred tax assets 8 6,333 16,045 392,531 360,585 Current assets Inventories 9 304,048 254,729 Trade receivables, net 10 155,873 141,944 Prepayments and other receivables 12 57,143 43,143 Due from related party 24 72 - Cash and cash equivalents 11 760,054 826,402 1,277,190 1,266,218 Total assets 1,669,721 1,626,803 EQUITY AND LIABILITIES Capital and reserves Share capital 13 260,000 260,000 Reserves 1,173,437 1,061,588 1,433,437 1,321,588 Minority interests 1,655 1,655 Non-current liabilities Deferred tax liabilities 8 15,531 17,435 Current liabilities Trade payables 38,962 49,177 Other payables and accrued liabilities 15 100,613 87,769 Salaries payable 49,163 40,793 Due to related party 24 - 3,986 Taxes payable 30,360 104,400 219,098 286,125 Total equity and liabilities 1,669,721 1,626,803 The accompanying notes are an integral part of these consolidated financial statements. 22 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 2001 (Amounts expressed in thousands of Renminbi (“RMB”), except for earnings per share data) Note 2001 2000 RMB’000 RMB’000 Revenue 824,849 819,029 Cost of sales 24 (373,452) (372,485) Gross profit 451,397 446,544 Other operating income 17 56,167 12,278 Distribution and selling expenses 24 (210,179) (208,016) General and administrative expenses 24 (69,840) (69,233) Other operating expenses (6,100) (1,248) Profit from operations 221,445 180,325 Financial income, net 18 8,184 2,387 Profit before tax 19 229,629 182,712 Income tax expense 20(a) (65,780) (60,964) Net profit 163,849 121,748 Earnings per share 22 - Basic and diluted RMB 0.63 RMB 0.52 The accompanying notes are an integral part of these consolidated financial statements. 23 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED DECEMBER 31, 2001 (Amounts expressed in thousands of Renminbi (“RMB”)) Reserves Statutory Statutory Share Capital surplus public Retained Note capital reserve reserve fund welfare fund profits Total Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Balances at January 1, 2000 228,000 235,709 19,157 19,157 118,557 392,580 620,580 Dividends paid - - - - (34,200) (34,200) (34,200) Net profit for the year - - - - 121,748 121,748 121,748 Issuance of domestic investment ordina shares (“A Shares”) 13 32,000 - - - - - 32,000 Premium from issuance of A Shares (n of underwriting commission and listin expenses of approximately RM 26,540,000) - 581,460 - - - 581,460 581,460 Appropriation from retained profits 14 - - 11,557 11,556 (23,113) - - Balances at December 31, 2000 260,000 817,169 30,714 30,713 182,992 1,061,588 1,321,588 Dividends paid 21 - - - - (52,000) (52,000) (52,000) Net profit for the year - - - - 163,849 163,849 163,849 Appropriation from retained profits 14 - - 17,166 17,166 (34,332) - - Balances at December 31, 2001 260,000 817,169 47,880 47,879 260,509 1,173,437 1,433,437 The accompanying notes are an integral part of these consolidated financial statements. 24 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2001 (Amounts expressed in thousands of Renminbi (“RMB”)) Note 2001 2000 RMB’000 RMB’000 CASH FLOWS FROM OPERATING ACTIVITIES Profit before tax 229,629 182,712 Adjustments for: Loss on disposal of property, plant and equipment 4,763 770 Provision for doubtful debts 8,874 12,970 Depreciation and amortization 27,606 24,478 Interest expense - 1,796 Interest income (8,422) (4,352) Operating profit before changes in working capital 262,450 218,374 Increase in inventories (49,319) (14,153) Increase in trade receivables (22,803) (78,861) (Increase) Decrease in prepayments and other receivables (12,643) 33,093 (Increase) Decrease in due from related party (72) 60,736 Decrease in trade payables (10,215) (1,994) Increase in salaries payable 8,370 1,213 (Decrease) Increase in due to related party (3,986) 3,986 Increase in other payables and accrued liabilities 12,844 28,826 (Decrease) Increase in taxes other than income tax payable (37,724) 44,802 Cash generated from operations 146,902 296,022 Interest paid - (1,796) Income tax paid (94,288) (52,474) Net cash flows from operating 52,614 241,752 activities 25 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 2001 (Amounts expressed in thousands of Renminbi (“RMB”)) Note 2001 2000 RMB’000 RMB’000 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, plant and equipment (73,847) (89,160) Cash acquired from acquisition of production unit to settle receivables 23 - 5,638 Purchase of investments (2,000) - Proceeds from disposals of property, plant and equipment 1,820 - Interest received 7,065 4,352 Net cash used in investing activities (66,962) (79,170) CASH FLOWS FROM FINANCING ACTIVITIES Repayment of short-term bank borrowings - (20,000) Repayment of long-term bank borrowings - (10,000) Net proceeds from issuance of share capital - 613,460 Increase in minority interests - 1,655 Dividends paid (52,000) (34,200) Net cash flows (used in) generated from financing activities (52,000) 550,915 Net (decrease) increase in cash and cash equivalents (66,348) 713,497 Cash and cash equivalents at beginning of year 826,402 112,905 Cash and cash equivalents at end of year 760,054 826,402 The accompanying notes are an integral part of these consolidated financial statements. 26 YANTAI CHANGYU PIONEER WINE COMPANY LIMITED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 (Amounts expressed in Renminbi (“RMB”) unless otherwise stated) 1. ORGANIZATION AND OPERATIONS Yantai Changyu Pioneer Wine 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”) on September 18, 1997. As part of the reorganization (the “Reorganization”), the Company issued 88,000,000 domestically listed foreign shares (“B Shares”) to overseas investors. The Reorganization involved a reorganization carried out by Yantai Changyu Group Company Limited (“Changyu Group Company”), the promoter and the parent company of the Company, which injected certain assets and liabilities in relation to the brandy, wine, sparkling wine and cider and tonic wine production and sales businesses to the Company. The Company’s B Shares were listed on the Shenzhen Stock Exchange on September 23, 1997. In October 2000, the Company issued 32,000,000 domestic investment ordinary shares (“A Shares”) to PRC investors. The Company’s A Shares were listed on Shenzhen Stock Exchange on October 26, 2000. The Company and its subsidiaries (the “Group”) are principally engaged in the production and sales of wine, brandy, sparkling wine and cider and tonic wine. The average number of employees in the Group was approximately 2,150 in 2001 and 2,100 in 2000. The registered office address of the Company is located at 56 Dama Road, Yantai City, Shandong Province, the PRC. The directors of the Company considered Changyu Group Company, a company incorporated in the PRC and owned by the government of the PRC, to be the ultimate parent company. 2. BASIS OF PRESENTATION AND PRINCIPAL ACCOUNTING POLICIES The consolidated financial statements for the year ended December 31, 2001 were prepared in accordance with International Financial Reporting Standards (“IFRS”), as published by the International Accounting Standards Board, as if those standards had been applied consistently throughout the years. They are prepared under the historical cost convention, except that certain property, plant and equipment are carried at revalued amounts. This basis of accounting differs from that used in the statutory accounts of the Group companies which are prepared in accordance with the accounting principles and the relevant financial regulations applicable to enterprises in the PRC (“PRC GAAP”). 27 The principal accounting policies adopted in preparing the accompanying financial statements of the Group are as follows: (a) Principles of consolidation The consolidated financial statements include the Company and its subsidiaries and also incorporate the Group’s interest in associates on the basis as set out in Note 2(e) below. The purchase method of accounting is used for acquired businesses. Results of subsidiaries and associates acquired or disposed of during the year are included in the consolidated financial statements from the date of acquisition or to the date of disposal. The equity and net income attributable to minority shareholders’ interests are shown separately in the balance sheet and statement of income respectively. All significant intercompany balances and transactions, including intercompany profits and unrealized profits and losses, are eliminated on consolidation. Consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances. (b) Leasehold land Leases of land acquired are classified as operating leases. The prepaid lease payments are amortized over the lease period (fifty years) on a straight-line basis. (c) Property, plant and equipment Property, plant and equipment are stated at revalued amounts or at cost (for those acquired subsequent to last revaluation) less accumulated depreciation and accumulated impairment loss. The cost is considered to be not materially different from revalued amounts. When assets are sold or retired, their cost or revalued amounts and accumulated depreciation are eliminated from the accounts and any gain or loss resulting from their disposals is included in the statement of income. Certain property, plant and equipment are stated at revalued amounts less accumulated depreciation and accumulated impairment loss. Independent valuations are performed periodically with the last valuation performed by Shandong Yantai Certified Public Accountants on December 31, 1996. In the intervening years, the directors review the carrying value of the property, plant and equipment and adjustment is made where in the directors’ opinion that there has been a material change in value. Any increase in valuation is credited to the revaluation reserve in shareholders’ equity; any decrease is first offset against an increase on earlier valuation in respect of the same asset and is thereafter charged to the statement of income. Increase on revaluation directly related to previous decrease in carrying amount for the same asset that was recognized as an expense is credited to income to the extent that it offsets the previously recorded decrease. 28 The initial cost of property, plant and equipment 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 ready for its intended use, such as repairs and maintenance and overhaul cost, are normally charged to income in the period when the costs 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 an item of property, plant and equipment beyond its originally assessed standard of performance, the expenditures are capitalized as an additional cost of property, plant and equipment. Depreciation is computed on a straight-line basis to write off the cost or revalued amounts, after taking into account the estimated residual value of each asset, over its expected useful life. The expected useful lives are as follows: Buildings 30-40 years Machinery and equipment 10-20 years Motor vehicles 6-12 years The useful life and depreciation method are reviewed periodically to ensure that the method and period of depreciation are consistent with the expected pattern of economic benefits from items of property, plant and equipment. Construction-in-progress represents plant and properties under construction and machinery under testing and installation and is stated at cost. This includes cost of construction, plant and equipment and other direct costs. Construction-in-progress is not depreciated until such time as the relevant assets are completed and put into operational use. (d) Subsidiaries A subsidiary is a company over which the company exercises control. Control exists when the company has the power to govern its financial and operating policies of the subsidiary so as to obtain benefits from its activities. (e) Associates An associate is a company, not being a subsidiary or a joint venture, in which the company has significant influence. Significant influence exists when the company has the power to participate in, but not control, the financial and operating decisions of the associate. Investments in associates are accounted for using the equity method. An assessment of investments in associates is performed when there is an indication that the asset has been impaired or the impairment losses recognized in prior years no longer exist. 29 (f) Long-term investments Long-term investments of the Group consist of investments in equity instruments without an active market. They are classified as available-for-sale financial assets and stated at cost less any impairment in value. An assessment of long-term investments is performed when there is an indication that the asset has been impaired or the impairment losses recognized in the prior year no longer exist. Income from investments is accounted for to the extent of dividends (interests) received and receivable. Upon disposal of a long-term investment, the difference between net disposal proceeds and the carrying amount is charged or credited to the statement of income. (g) Research and development costs Expenditure for research is recognized as an expense when incurred. Expenditure on development is charged against income in the period incurred except for project development costs which comply strictly with all of the following criteria: • the product or process is clearly defined and costs are separately identified and measured reliably; • the technical feasibility of the product is demonstrated; • the product or process will be sold or used in-house; • the assets will generate future economic benefits (e.g. a potential market exists for the product or its usefulness in case of internal use is demonstrated); and • adequate technical, financial and other resources required for completion of the project are available. Capitalized development costs are amortized on a straight-line basis over their expected useful lives. The period of amortization does not normally exceed five years. The recoverable amount of development costs is estimated whenever there is an indication that the asset has been impaired or that the impairment losses recognized in previous years no longer exist. During the year ended December 31, 2001, no development costs were capitalized as they did not meet the criteria for capitalization. (h) Inventories Inventories, including work-in-process, are valued at the lower of cost and net realizable value, after provision for obsolete items. Net realizable value is the selling price in the ordinary course of business, less the costs of completion, marketing and distribution. Cost is determined primarily on the basis of weighted average cost. For processed inventories, cost includes the applicable allocation of fixed and variable overhead costs based on a normal operating capacity. Unrealizable inventory has been fully written off. 30 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. (i) Receivables Receivables are initially recorded at the fair value of the consideration given and are subsequently carried at amortized cost, after provision for impairment. (j) Cash and cash equivalents Cash represents cash on hand and cash with banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less and that are subject to an insignificant risk of change in value. (k) Operating lease Leases of assets under which substantially all the risks and rewards of ownership are effectively retained by the lessor are classified as operating leases. Leases payments under operating leases are recognized as an expense on a straight-line basis over the lease term. Aggregate benefit of incentives provided by the lessor is recognized as a reduction of rental expense over the lease term on a straight-line basis. (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. When discounting is used, the increase in provision reflecting the passage of time is recognized as interest expense. (m) Liabilities and equity Financial instruments are classified as liabilities or equity in accordance with the substance of the contractual arrangement on initial recognition. 31 Interest, dividends, gains and losses relating to a financial instrument classified as a liability, are reported as expense or income. Distributions to holders of financial instruments classified as equity are charged directly to equity. When the rights and obligations regarding the manner of settlement of financial instruments depend on the occurrence or non-occurrence of uncertain future events or on the outcome of uncertain circumstances that are beyond the control of both the issuer and the holder, the financial instruments is classified as a liability unless the possibility of the issuer being required to settle in cash or another financial asset is remote at the time of issuance, in which case the instrument is classified as equity. (n) Minority interests Minority interests include their proportion of the fair values of identifiable assets and liabilities recognized upon acquisition of a subsidiary. (o) Revenue recognition Revenue comprises the net invoiced value (excluding value-added tax (“VAT”) and sales taxes (Note 20)) of goods sold after allowances for returns and discounts. 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) Sales of goods Revenue from sales of goods is recognized when delivery has taken place and transfer of risks and rewards has been completed. (ii) Interest income Interest income from bank deposits is recognized on a time proportion basis that reflects the effective yield on the assets. (p) Taxation The Group companies provide for taxation on the basis of its income for financial reporting purposes, adjusted for income and expense items which are not assessable or deductible for income tax purposes. 32 Deferred taxes are calculated using the balance sheet liability method. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets and liabilities are measured using the tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled based on tax rates enacted or substantially enacted at the balance sheet date. Deferred tax assets are recognized when it is probable that sufficient taxable profits will be available against which the deferred tax assets can be utilized. Deferred tax assets and liabilities are recognized regardless of when the timing difference is likely to reverse. Deferred tax assets and liabilities are not discounted and are classified as non-current assets or liabilities in the balance sheet. (q) Financial refund Financial refund from government is recognized only when there is reasonable assurance that the Company has complied with the conditions attaching to them and the refund will be received. (r) Foreign currency translations Each entity within the Group maintains its books and records in RMB, which is not freely convertible. The measurement currency of each entity within the Group is considered to be RMB. Transactions in other currencies are translated into RMB at exchange rates prevailing at the time of transactions. Monetary assets and liabilities denominated in other currencies at the balance sheet date are re-translated at exchange rates prevailing at that date. Non-monetary assets and liabilities in other currencies are translated at historical rates. Exchange differences arising on the settlement of monetary items at rates different from those at which they were initially recorded during the periods are recognized in the statement of income in the period in which they arise. (s) 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. 33 Borrowing costs generally are expensed as incurred. Borrowing costs are capitalized if they are directly attributable to the acquisition, construction or production of a qualifying asset. Capitalization of borrowing costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Borrowing costs are capitalized until the assets are substantially ready for their intended use. If the resulting carrying amount of the asset exceeds its recoverable amount, an impairment loss is recorded. Borrowings are initially recognized at the proceeds received, net of transaction costs. They are subsequently carried at amortized costs using the effective interest rate method, the difference between net proceeds and redemption value being recognized in the net profit or loss for the year over the life of the borrowings. (t) 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 25% of the standard salary set by the provincial government, of which 20% is borne by the Group and the remainder is borne by the staff. The pension scheme meets the criteria of a defined contribution in accordance with IAS 19, “Employee Benefits”. The government agency is responsible for the pension liabilities relating to such staff upon their retirement. The Group accounts for these contributions on an accrual basis. (u) Financial instruments Financial assets and financial liabilities carried on the balance sheet include cash and cash equivalents, trade and other receivables and payables, and borrowings. The Group recognizes a financial asset or financial liability on the balance sheet when, and only when, it becomes a party to the contractual provisions of the instruments. Financial assets other than loans and receivables originated by the enterprise are classified into three categories: (i) held to maturity; (ii) available-for-sale; and (iii) held for trading. Financial instruments are initially measured at cost, which is the fair value of the consideration given or received for them, including transaction costs. Available-for-sale and trading investments are subsequently carried at fair value without any deduction for transaction costs. 34 Gains or losses on measurement to fair value of available-for-sale and trading investments are recognised immediately in the statement of income in the period in which the change in fair value occurs. All other financial instruments are carried at cost or amortized cost using the effective interest rate method. The Company does not enter into any contracts involving derivative financial instruments. Financial instruments are offset when the Company has 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. (v) Impairment of assets (i) Financial instruments Financial instruments are reviewed for impairment at each balance sheet date. For financial assets carried at amortized cost, whenever it is probable that the company will not collect all amounts due according to the contractual terms of loans, receivables or held-to-maturity investments, an impairment or bad debt loss is recognized in the statement of income. Reversal of impairment losses previously recognized is recorded when the decrease in impairment loss can be objectively related to an event occurring after the writedown. Such reversal is recorded in income. However, the increased carrying amount is only recognized to the extent it does not exceed what amortized cost would have been had the impairment not been recognized. For available-for-sale financial assets, an impairment loss is recognized in the statement of income when there is objective evidence that the asset is impaired. The recoverable amount of a debt instrument remeasured to fair value is the present value of expected future cash flows discounted at the current market interest rates for a similar financial asset. A reversal of an impairment loss is recorded when the decrease in the impairment loss can be objectively related to an event occurring after the write down. Such reversal is recorded in income. 35 (ii) Other assets Other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Whenever the carrying amount of an asset exceeds its recoverable amount, an impairment loss is recognized in income or treated as a revaluation decrease for an asset that is carried at revalued amount to the extent that the impairment loss does not exceed the amount held in the revaluation surplus for that same asset. The recoverable amount is the higher of an asset’s net selling price and value in use. The net selling price is the amount obtainable from the sale of an asset in an arm’s length transaction less the costs of disposal while value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. Recoverable amounts are estimated for individual assets or, if it is not possible, for the cash-generating unit to which the asset belongs. Reversal of impairment losses recognized in prior years is recorded when there is an indication that the impairment losses recognized for the asset no longer exist or have decreased. The reversal is recorded in income or as a revaluation increase. However, the increased carrying amount of an asset due to a reversal of an impairment loss is recognized to the extent it does not exceed the carrying amount that would have been determined (net of amortization and depreciation) had no impairment loss been recognized for that asset in prior years. (w) 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. (x) Subsequent events Post-year-end events that provide additional information about a company’s position at the balance sheet date (adjusting events), are reflected in the financial statements. Post-year-end events that are not adjusting events are disclosed in the notes when material. 36 3. LEASEHOLD LAND, NET 2001 2000 RMB’000 RMB’000 Cost Beginning of year 6,849 - Transfer from Changyu Group Company - 6,849 End of year 6,849 6,849 Accumulated amortization Beginning of year 270 - Transfer from Changyu Group Company - 140 Additions 130 130 End of year 400 270 Net book value End of year 6,449 6,579 Beginning of year 6,579 - During the year ended December 31, 2000, the leasehold land transferred from Changyu Group Company were related to the assets of Yantai Fushan Wine Factory (“Fushan Factory”) transferred by Changyu Group Company (Note 24(g)). 37 4. PROPERTY, PLANT AND EQUIPMENT, NET Movements in property, plant and equipment were as follows: 2001 2000 Machinery and Construction Buildings equipment Motor vehicles -in-progress Total Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Cost/Valuation Beginning of year 143,483 277,550 19,467 61,344 501,844 400,864 Additions 320 1,385 1,050 71,092 73,847 89,160 Transfers 18,127 8,274 2,612 (29,013) - - Transfer from Changyu Group Company - - - - - 15,483 Disposals (8,159) (4,976) (5,414) - (18,549) (3,663) End of year 153,771 282,233 17,715 103,423 557,142 501,844 Accumulated depreciation Beginning of year 38,897 116,863 8,826 - 164,586 135,769 Transfer from Changyu Group Company - - - - - 7,362 Charges 4,469 21,581 1,426 - 27,476 24,348 Disposals (5,218) (3,709) (3,039) - (11,966) (2,893) End of year 38,148 134,735 7,213 - 180,096 164,586 Net book value End of year 115,623 147,498 10,502 103,423 377,046 337,258 Beginning of year 104,586 160,687 10,641 61,344 337,258 265,095 The buildings, machinery and equipment and motor vehicles of the Group as of December 31, 1996 were revalued by Shandong Yantai Certified Public Accountants, independent professional valuers. The independent professional valuers determined the fair value of the buildings, machinery and equipment and motor vehicles based on the replacement cost and open market value methods. According to the approval document Guo Zi Qi Fa [1997] No. 103 issued by the PRC State Administration of State-owned Assets, the revaluation surplus on the buildings, machinery and equipment and motor vehicles of approximately RMB 48,887,000 was credited to capital reserve. Group management estimates that there have been no significant changes in economic circumstances since the last valuation that would affect the fair value of the buildings, machinery and equipment and motor vehicles carried at revalued amounts at the balance sheet date. 38 If property, plant and equipment were carried at cost less accumulated depreciation, the amounts of each category of property, plant and equipment would be as follows: 2001 2000 Machinery and Construction Buildings equipment Motor vehicles -in-progress Total Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Cost 119,292 211,845 14,382 103,423 448,942 393,644 Accumulated depreciation (14,937) (73,273) (3,721) - (91,931) (86,521) 104,355 138,572 10,661 103,423 357,011 307,123 During the year ended December 31, 2000, the property, plant and equipment transferred from Changyu Group Company were related to the assets of Fushan Factory transferred by Changyu Group Company (Note 24(g)). As of December 31, 2001, the amount of construction-in-progress did not include any borrowing costs capitalized. The underlying values of property, plant and equipment as of December 31, 2001 were not less than their carrying values. 5. INVESTMENT IN SUBSIDIARIES As of December 31, 2001, the Group had the following subsidiaries which were all incorporated in the PRC: Percentage of Percentage of Date of equity interest equity interest Paid-in Principal Name of company establishment held directly held indirectly capital activities Yantai Changyu Pioneer Food Co., Ltd. December 1, 1992 100% - RMB 30,000 Sale of fruits Yantai Changyu Pioneer Wine Machine December 1, 1992 100% - RMB 300,000 Machinery Packaging Co., Ltd. sub-contracting and repairing Yantai Changyu Pioneer Vehicular Transport Co., December 1, 1992 100% - RMB 300,000 Transportation Ltd. (“Vehicular Transport”) service Dalian Changyu Sales and Distribution Co., Ltd. January 23, 1998 70% 30% RMB 500,000 Sales of wine (d) Xi’an Changyu Sales and Distribution Co., Ltd. (d) March 27, 1998 70% 30% RMB 500,000 Sales of wine Hangzhou Changyu Sales and Distribution Co., April 7, 1998 70% 30% RMB 500,000 Sales of wine Ltd. (d) Changchun Changyu Sales and Distribution Co., January 20, 1998 70% 30% RMB 500,000 Sales of wine Ltd. (d) Zhengzhou Changyu Sales and Distribution Co., January 16, 1998 70% 30% RMB 500,000 Sales of wine Ltd. (d) Nanjing Changyu Sales and Distribution Co., Ltd. February 10, 1998 70% 30% RMB 500,000 Sales of wine (d) 39 Percentage of Percentage of Date of equity interest equity interest Paid-in Principal Name of company establishment held directly held indirectly capital activities Changsha Changyu Sales and Distribution Co., January 22, 1998 70% 30% RMB 500,000 Sales of wine Ltd. (d) Wuhan Changyu Sales and Distribution Co., Ltd. January 12, 1998 70% 30% RMB 500,000 Sales of wine (d) Nanchang Changyu Sales and Distribution Co., March 24, 1998 70% 30% RMB 500,000 Sales of wine Ltd. (d) Taiyuan Changyu Sales and Distribution Co., Ltd. January 20, 1998 70% 30% RMB 500,000 Sales of wine (d) Shijiazhuang Changyu Sales and Distribution April 2, 1998 70% 30% RMB 500,000 Sales of wine Co., Ltd. (d) Beijing Changyu Sales and Distribution Co., Ltd. July 14, 1998 70% 30% RMB 500,000 Sales of wine (d) Guangzhou Changyu Sales and Distribution Co., May 15, 1998 70% 30% RMB 500,000 Sales of wine Ltd. (d) Zhanjiang Changyu Sales and Distribution Co., October 20, 1998 70% 30% RMB 500,000 Sales of wine Ltd. (d) Yantai Kylin Packaging Co., Ltd. (“Kylin September 29, 1999 50% - USD Production o Packaging”) (a) 1,000,000 packaging materials Yantai Changyu-Castel Wine Chateau Co., Ltd. September 3, 2001 70% - USD Production and 5,000,000 sales of wine Changyu (Jingyang) Pioneer Wine Co., Ltd. December 5, 2001 90% 10% RMB Production and (“Jingyang Wine”) (c) 1,000,000 sales of wine Yantai Changyu Pioneer Wine Sales Co., Ltd. December 24, 2001 90% 10% RMB Sales of wine (“Changyu Wine Sales”) (b) 8,000,000 (a) The Company has more than one half of voting power in the board of directors of Kylin Packaging and has control over the subsidiary. The subsidiary’s financial statements have been included in the consolidated financial statements. (b) Changyu Wine Sales was originally set up by the Company and Changyu Group Company as a limited liability company. In December 2001, pursuant to an agreement between Changyu Group Company and Vehicular Transport, a subsidiary of the Company, Changyu Group Company transferred its 10% of equity interest in Changyu Wine Sales to Vehicular Transport at a consideration of RMB 800,000. As of December 31, 2001, the relevant legal approvals were still under procedure. (c) Jingyang Wine was originally set up by the Company and Changyu Group Company as a limited liability company. In December 2001, pursuant to an agreement between Changyu Group Company and Changyu Wine Sales, Changyu Group Company transferred its 10% of equity interest in Jingyang Wine to Changyu Wine Sales at a consideration of RMB 100,000. As of December 31, 2001, the relevant legal approvals were still under procedure. 40 (d) These subsidiaries (collectively referred to the “Sales Distributions”) were originally set up by the Company as wholly owned subsidiaries of the Company. In December 2001, pursuant to an agreement between the Company and Changyu Wine Sales, the Company transferred its 30% of equity interests in the Sales Distributions to Changyu Wine Sales at a consideration of RMB 1 in total. As of December 31, 2001, the relevant legal approval were under procedure. 6. INVESTMENT IN ASSOCIATE As of December 31, 2001, the Company had the following associate which was incorporated in the PRC: Percentage of equity Date of interest held Registered Principal Name of company establishment directly capital activities Yantai Sino-French Pegase Brandy Co., February 25 40% French Franc Manufacture Ltd. 1992 1,604,060 and sale of brandy The underlying value of the associate was not less than its carrying value as of December 31, 2001. 7. OTHER LONG-TERM INVESTMENT 2001 2000 RMB’000 RMB’000 Available-for-sale investment - non-current - Unlisted shares 2,000 - Non-current available-for-sale investment comprises a 5% shareholding in Shenzhen Jiadeyu Information Business Co., Ltd. It is not practicable to determine the fair value of the non-current available-for-sale investment since the investment does not have quoted market price in an active market and other methods reasonably estimating fair value for the investment are clearly inappropriate or unworkable. The underlying value of the non-current available-for-sale investment was not less than the Company’s carrying value of the long-term investment as of December 31, 2001. 41 8. DEFERRED TAX ASSETS / LIABILITIES Components of deferred tax assets / liabilities were as follows: 2001 2000 RMB’000 RMB’000 Deferred tax assets: - Provision for doubtful debts 6,333 16,045 Deferred tax liabilities: - Revaluation surplus of property, plant and equipment 8,648 10,552 - General and administrative expenses recorded using the accrual basis 6,883 6,883 15,531 17,435 Deferred taxes arise on the above in the following circumstances: - Provision for doubtful accounts is not tax deductible until approved by the local tax bureau; - Property, plant and equipment stated at fair value have different tax bases and carrying amounts because revaluation is done for accounting purpose only; and - Certain accrued expenses are not tax deductible until payments are made. 9. INVENTORIES 2001 2000 RMB’000 RMB’000 Raw materials, at cost 42,000 24,417 Work-in-process, at cost 124,611 115,214 Finished goods, at cost 137,437 115,098 304,048 254,729 Less: Provision for obsolescence - - 304,048 254,729 For the year ended December 31, 2001, the cost of inventories recognized as an expense in the consolidated statement of income was approximately RMB 315,556,000 (2000: RMB 322,663,000). 42 10. TRADE RECEIVABLES, NET 2001 2000 RMB’000 RMB’000 Accounts receivable 198,299 190,564 Notes receivable 15,068 - 213,367 190,564 Less: Provision for doubtful debts (57,494) (48,620) 155,873 141,944 11. CASH AND CASH EQUIVALENTS 2001 2000 RMB’000 RMB’000 Cash 44 898 Current bank deposits 527,260 712,504 Fixed bank deposits 232,750 113,000 760,054 826,402 12. PREPAYMENTS AND OTHER RECEIVABLES 2001 2000 RMB’000 RMB’000 Prepayments to suppliers 7,943 - Advances to employees 13,082 5,413 VAT refund receivable on export sales 3,281 2,859 Interest receivable from bank deposits 1,357 - Deposits to suppliers for packaging materials 1,902 11,683 Others 29,578 23,188 57,143 43,143 43 13. SHARE CAPITAL As of December 31, 2001, the outstanding share capital comprised State-owned Shares, A Shares and B Shares. The B Shares ranked pari passu in all respects with the A Shares except that A Shares can only be owned and traded by investors in the PRC mainland; while B Shares can be owned and traded in foreign currency by both foreign and qualified domestic investors. 2001 2000 2001 2000 Number of shares RMB’000 RMB’000 (in thousands) Issued and fully paid: Listed - A Shares of RMB 1 each 32,000 32,000 32,000 32,000 - B Shares of RMB 1 each 88,000 88,000 88,000 88,000 120,000 120,000 120,000 120,000 Unlisted - State-owned Shares of RMB 1 each 140,000 140,000 140,000 140,000 260,000 260,000 260,000 260,000 Movements in share capital during the year were as follows: 2001 2000 2001 2000 Number of shares RMB’000 RMB’000 (in thousands) Balances, beginning of year 260,000 228,000 260,000 228,000 A Shares issued during the year - 32,000 - 32,000 Balances, end of year 260,000 260,000 260,000 260,000 In October 2000, the Company issued 32,000,000 A shares to domestic investors at RMB 20 per share. The net proceeds from the issuance amounted to approximately RMB 613,460,000, after the deduction of underwriting commission and listing expenses of approximately RMB 26,540,000. 44 14. RESERVES (a) Capital reserve In accordance with the Company’s articles of association, the Company shall record the followings as capital reserve: (i) share premium; (ii) donations; (iii) appreciation arising from revaluation of assets; and (iv) other items in accordance with the articles of association and relevant regulations in the PRC. Capital reserve may be utilized to offset prior years’ losses or for the issuance of bonus shares. (b) Statutory reserves In accordance with the Company Law of the PRC and the Company’s articles of association, the Company is required to appropriate 10% of the net profit reported in the statutory accounts (after offsetting prior years’ losses) to the statutory surplus reserve fund (“SRF”) until the balance of SRF reaches 50% of the Company’s share capital, and thereafter any further appropriation is optional. The SRF can be utilized to offset prior years’ losses or for the issuance of bonus shares. However, such SRF shall be maintained at a minimum of 25% of share capital after such issuance. In accordance with the Company Law of the PRC and the Company’s articles of association, the Company also shall appropriate 5% to 10% of the net profit reported in the statutory accounts (after offsetting prior years’ losses) to the statutory public welfare fund (“PWF”). PWF shall be utilized for collective staff benefits such as building of staff quarters or housing. No distribution of the fund shall be made other than on liquidation of the Company. For the year ended December 31, 2001, the directors of the Company proposed that 10% (2000: 10%) of the net profit as reported in the statutory accounts be appropriated to each of SRF and PWF respectively, totalling approximately RMB 34,331,000 (2000: RMB 25,496,000). The resolution is subject to approval by shareholders in the annual general meeting. 15. OTHER PAYABLES AND ACCRUED LIABILITIES 2001 2000 RMB’000 RMB’000 Welfare payable 13,449 9,785 Advances from customers 25,828 29,367 Payables for advertising expenses 23,820 9,449 Others 37,516 39,168 100,613 87,769 45 16. 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 25% of the standard salary set by the provincial government, of which 20% 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 contributions on an accrual basis. 17. OTHER OPERATING INCOME 2001 2000 RMB’000 RMB’000 Financial refund (Note 20(a)) 51,780 10,233 Others 4,387 2,045 56,167 12,278 18. FINANCIAL INCOME, NET 2001 2000 RMB’000 RMB’000 Interest income from bank deposits 8,422 4,352 Interest expense on bank loans repayable within five years - (1,796) Others (238) (169) 8,184 2,387 46 19. PROFIT BEFORE TAX Profit before tax was determined after crediting and charging the following: 2001 2000 RMB’000 RMB’000 Crediting: Interest income from bank deposits 8,422 4,352 Charging: Staff costs - Wages and salaries and bonus 95,737 73,331 - Provision for staff welfare 7,253 8,718 - Contributions to defined contribution pension scheme 11,330 5,086 Depreciation of property, plant and equipment 27,476 24,478 Amortization of leasehold land 130 130 Cost of inventories 315,556 322,663 Advertising expenses 69,726 97,607 Sales commission 9,365 - Transportation expenses 38,679 31,840 Trademarks licence (Note 24(b) ) 17,720 17,472 Travelling expenses 13,733 15,269 Research and development costs included in general and administrative expenses 2,807 5,227 Operating lease rentals - Lease of machinery, facilities and trademark (Note 24(e)) 3,400 3,400 - Lease of land use rights (Note 24(d)) 550 550 Provision for doubtful debts 8,874 12,970 20. TAXATION (a) Enterprise income tax (“EIT”) Details of taxation charged during the year were as follows: 2001 2000 RMB’000 RMB’000 Current income tax expense 57,972 67,149 Deferred tax expenses (income) relating to the origination and reversal of temporary differences 7,808 (6,185) 65,780 60,964 47 The reconciliation of the applicable tax rate to the effective tax rate is as follows: 2001 2000 RMB’000 % RMB’000 % Accounting profit before tax 229,629 100% 182,712 100% Tax at the statutory tax rate of 33% 75,778 33% 60,295 33% Tax effect of expenses that are not deductible in determining taxable profit: - Provision for doubtful debts 2,928 1% 4,280 2% - Non-deductible advertising expenses 3,999 2% 3,688 2% - Sales commission 3,090 1% - - - Others 1,904 1% 2,263 1% Tax effect of income that are not subject to income tax: - Deductible provision for doubtful debts of prior years (12,640) (5%) - - - Financial refund (17,087) (7%) (3,377) (2%) Effect of deferred taxes relating to the origination and reversal of temporary differences 7,808 3% (6,185) (3%) Income tax expense 65,780 29% 60,964 33% The Group is subject to EIT which is levied at a rate of 33% of taxable income based on the PRC statutory accounts. Pursuant to the relevant documents issued by the Shandong Provincial Municipal Government, the Company is entitled to a financial refund of 18% on its taxable income, commencing from the date of the listing of the Group’s B Shares. Pursuant to the relevant documents issued by the Ministry of Finance in October 2000, commencing from January 1, 2002, the policies on financial refund in respect of EIT paid implemented by the local governments in the PRC should be terminated. Therefore, the directors of the Company expect that the Company would not receive any financial refund starting from January 1, 2002. (b) VAT The Group is subject to VAT, which is a tax charged on top of the selling price at a general rate of 17%. An input credit is available whereby VAT previously paid on purchases of semi-finished products, raw materials, etc., can be used to offset the VAT on sales to determine the net VAT payable. 48 (c) Sales taxes The Group is subject to consumption tax (“CT”) on its products. CT is levied on the gross turnover of products at rates ranging from 10% to 15%. In addition to the above, the Group is subject to the following types of sales taxes: - city development tax, a tax levied at 7% of CT and net VAT payable. - education supplementary tax, a tax levied at 3% of CT and net VAT payable. 21. DIVIDENDS 2001 2000 RMB’000 RMB’000 Dividends proposed after year end (Note 30) 65,000 52,000 In accordance with the relevant regulations of the PRC and the articles of association of the Company, the Company declares dividends based on the lower of retained profits as reported in the PRC statutory accounts and the financial statements prepared in accordance with IFRS. As the statutory accounts have been prepared in accordance with PRC GAAP, the retained profits as reported in the statutory accounts will be different from the amount reported in the accompanying consolidated financial statements. As of December 31, 2001, the retained profits before final dividends reported in the statutory accounts were approximately RMB 241,518,000 (2000: RMB 156,193,000). 22. EARNINGS PER SHARE The calculation of basic earnings per share is based on the net profit for the year attributable to shareholders of approximately RMB 163,849,000 (2000: RMB 121,748,000), divided by the weighted average number of ordinary shares outstanding during the year of 260,000,000 shares (2000: 233,333,333 shares). Diluted earnings per share equal basic earnings per share as there are no potentially dilutive shares outstanding. 23. NOTES TO THE CONSOLIDATED STATEMENT OF CASH FLOWS During the year ended December 31, 2000, Changyu Group Company injected one of its production units to the Company to to settle its liabilities with the Company (Note 24(g)). 49 24. RELATED PARTY TRANSACTIONS For the year ended December 31, 2001, the Company had the following significant related party transactions: (a) Services agreement Pursuant to a service agreement dated May 18, 1997, starting from September 18, 1997 (date of the incorporation), Changyu Group Company has provided facilities and services such as kindergarten and canteen to the Company. An annual service fee of RMB 500,000 is payable by the Company to Changyu Group Company from the date of incorporation, until the end of the fourth accounting year (i.e. 2000). As from the fifth accounting year, the service fee may be adjusted every three years by not more than 10% of the previous annual service fee. The agreement is effective until December 31, 2007. For the year ended December 31, 2001, the Company paid service fee of RMB 500,000 (2000: RMB 500,000) to Changyu Group Company. (b) Trademarks licence Pursuant to a trademarks licence dated May 18, 1997, starting from September 18, 1997, the Company may use certain trademarks of Changyu Group Company which have been registered with the PRC Trademark Office. An annual fee at 2% of the Company’s annual sales is payable to Changyu Group Company. The licence is effective until the expiry of the registration of the trademarks. For the year ended December 31, 2001, the Company paid trademarks fee of approximately RMB 17,720,000 (2000: RMB 17,472,000) to Changyu Group Company. (c) Patents implementation licence Pursuant to a patents implementation licence dated May 18, 1997, starting from September 18, 1997, the Company may use the patents of Changyu Group Company. The annual patents usage fee payable by the Company to Changyu Group Company is RMB 50,000. The contract is effective until December 20, 2005. For the year ended December 31, 2001, the annual patents usage fee payable to Changyu Group Company amounted to RMB 50,000 (2000: RMB 50,000). (d) Agreement for the lease of land use rights Pursuant to an agreement dated May 18, 1997, the Company agreed to lease from Changyu Group Company certain pieces of land for the period from September 18, 1997 to April 21, 2047. The annual rental payable by the Company to Changyu Group Company is approximately RMB 550,000. For the year ended December 31, 2001, the annual rental of land use rights payable to Changyu Group Company amounted to approximately RMB 550,000 (2000: RMB 550,000). 50 (e) Operating lease agreement Pursuant to a lease agreement dated April 28, 1999, starting from May 28, 1999, Changyu Group Company agreed to lease the machinery, facilities and trademark of “Zhongya” of Yantai Chinese Traditional Medicine Factory, a wholly owned subsidiary of Changyu Group Company, to the Company. An annual leasing fee of RMB 3,400,000 is payable by the Company to Changyu Group Company. The agreement is effective until May 28, 2004. Pursuant to the supplementary agreement between the Company and Changyu Group Company, such arrangement was effective from January 1, 1999. For the year ended December 31, 2001, the Company paid leasing fee of RMB 3,400,000 (2000: RMB 3,400,000) to Changyu Group Company. (f) Agreement for purchase of wine bottles Pursuant to an agreement dated September 13, 2001, the Company agreed to purchase wine bottles from Changyu Group Company starting from October 22, 2001. For the year ended December 31, 2001, the Company purchased wine bottles of approximately RMB 47,987,000 from Changyu Group Company. (g) Production unit transferred from Changyu Group Company Pursuant to the resolution approved in the shareholders’ meeting dated June 15, 2000, Changyu Group Company transferred one of its production units, Fushan Factory, into the Company to settle its liabilities due to the Company at a transfer price equal to the net assets of Fushan Factory. As of June 15, 2000, the carrying amounts of assets and liabilities of Fushan Factory were as follow: Assets: Amounts RMB’000 Cash and cash equivalents 5,638 Non-cash assets: Leasehold land, net 6,709 Property, plant and equipment, net 8,121 Inventories 7,884 Prepayments and other receivables 344 Total assets 28,696 Liabilities: Trade payables 4,784 Other payables and accrued liabilities 6,070 Total liabilities 10,854 Net assets 17,842 Net cash inflows from the transfer 5,638 51 (h) Balances with related party The balances with related party were unsecured, non-interest bearing and have no fixed repayment terms. 25. FINANCIAL INSTRUMENTS (a) Financial risk management The Group’s activities expose it to a variety of financial risks, including credit risk, interest rate risk, liquidity risk and foreign exchange risk. Financial risk management is carried out by the Finance Department under policies approved by the Board of Directors. (i) Credit risk The Group has no significant concentration of credit risk with any single counterparty or group of counterparties having similar characteristics. The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the balance sheet. (ii) Interest rate risk The directors believe that the Group’s exposure to interest rate risk of financial assets and liabilities as of December 31, 2001 was minimal since their deviation from their respective fair values was not significant. (iii) Liquidity risk The Group policy is to maintain sufficient cash and cash equivalents or have available funding through an adequate amount of committed credit facilities to meet its commitments over the next year in accordance with its strategic plan. (iv) Foreign exchange risk The Group has no significant foreign exchange risk due to limited foreign currency transactions. (b) Fair value estimation In assessing the fair value of other financial instruments, the Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date as follows: 52 (i) Cash and cash equivalents The carrying amount of cash and cash equivalents approximates their fair value due to the short-term maturity of these financial instruments. (ii) Receivables and payables The carrying amount of receivables and payables, which are all subject to normal trade credit terms, approximates their fair value. (iii) Balances with related party No disclosure of fair values is made for balances with related party as it is not practicable to determine their fair values with sufficient reliability since these balances are non-interest bearing and have no fixed repayment terms. (iv) Long-term investment and investment in associate The fair value of long-term investment and investment in associate cannot be reliably estimated and disclosed because these investments do not have quoted market price in an active market and other methods for estimating fair value for these investments are clearly inappropriate or unworkable. 26. SEGMENT INFORMATION The Group conducts its business within one business segment - the business of production and sales of wine products in the PRC. No segment statement of income has been prepared by the Group for the year ended December 31, 2001. The Group also mainly operates within one geographical segment because its revenue is primarily generated in the PRC and its assets are located in the PRC. Accordingly, no geographical segment data is presented. 27. CONTINGENT LIABILITIES As of December 31, 2001, the Group had no material contingent liabilities. 28. COMMITMENTS (a) Capital commitments As of December 31, 2001, the Group had the following capital commitments: (i) investment in a subsidiary amounted to approximately RMB 1,450,000; and 53 (ii) acquisition of property, plant and equipment amounted to approximately RMB 11,400,000. (b) Operating lease Total future minimum lease payments under non-cancelable operating leases are as follows: 2001 2000 RMB’000 RMB’000 Lease of land use rights - not later than one year 550 550 - later than one year and not later than 2,200 2,200 five years - later than five years 22,183 22,733 24,933 25,483 Lease of machinery, facilities and trademark - not later than one year 3,400 3,400 - later than one year and not later than five years 4,816 8,216 8,216 11,616 29. CHANGES IN ACCOUNTING POLICIES From January 1, 2001, the Group is subject to the newly effective IAS 39 “Financial Instruments - Recognition and Measurement”, IAS 40 “Investment Property” and IAS 12 “Income Taxes” (revised 2000). There is no significant financial impact on the opening balances of the consolidated financial statements resulting from the initial adoption of these standards. 30. SUBSEQUENT EVENTS (a) On February 25, 2002, the Company contributed RMB 12,640,000 to set up Langfang Development Zone Castel-Changyu Wine Co., Ltd., together with a foreign investor. The Company owned 49% equity interest in Langfang Development Zone Castel-Changyu Wine Co., Ltd.. Langfang Development Zone Castel-Changyu Wine Co., Ltd. was established on March 1, 2002, upon the issuance of its business licence. (b) On March 12, 2002, the Company contributed approximately RMB 11,078,000 to Yantai Changyu-Castel Wine Chateau Co., Ltd.. Thereafter, the Company has fully contributed its investment to Yantai Changyu-Castel Wine Chateau Co., Ltd. 54 (c) Pursuant to the resolution of the board of directors’ meeting dated March 27, 2002, the Company declared final dividends to all shareholders in the ratio of RMB 2.5 (2000: RMB 2) for every 10 shares, based on the total number of shares of 260,000,000 (2000: 260,000,000) as of December 31, 2001. The total amount of cash dividends proposed was RMB 65,000,000 (2000: RMB 52,000,000). The resolution is subject to approval by shareholders in the annual general meeting. 31. IMPACTS OF IFRS ADJUSTMENTS ON NET PROFIT AND NET ASSETS Net profit for the year Net assets ended December 31, as of December 31, 2001 2000 2001 2000 RMB’000 RMB’000 RMB’000 RMB’000 As reported in the Group’s statutory accounts 171,657 8 127,480 1,421,778 1,250,121 Impact of adjustments, net - difference in accounting policy with respect to dividends declared after balance sheet date - - - 52,000 - adjustment on administrative expenses using accrual basis - - 20,857 20,857 - timing difference in recognition of financial refund - (11,917) - - - provision for deferred taxes (7,808) 6,185 (9,198) (1,390) As restated in accordance with IFRS 163,849 121,748 1,433,437 1,321,588 32. APPROVAL OF FINANCIAL STATEMENTS The financial statements were authorized for issue by board of directors on March 27, 2002. XI . DOCUMENTS AVAILABLE FOR INSPECTION 1. Original copy of the Annual Report signed by the Chairman of the Board of Directors; 2. Financial Statements signed by and under the seal of the legal representative, chief accountant and accounting supervisors; 3. Original copy of the Auditors’ Report under the seal of the accounting firm, and signed by and under the seal of the certified accountants; 4. The “Prospectus” and “Public Listing Notice” related to the issue of domestically listed foreign Shares (B Shares) by the Company; The “Prospectus” and “Notice of Share’s Changing and A Share’s Public Listing” related to issuing A Share for capital increase. 5. All the originals of the Company’s documents and public notice disclosed in the newspapers designated by the Securities Supervision Committee of China in the reporting period. 55 Yantai Changyu Pioneer Wine Company Limited Board of Directors Dated 30th March, 2002 56