深康佳Ａ(000016)深康佳2002年年度报告（英文版）

KONKA GROUP CO., LTD. 2002 ANNUAL REPORT April 17, 2003 -1- IMPORTANT NOTES Board of Directors and of KONKA GROUP CO., LTD. (hereinafter referred to as the Company) all Directors individually and collectively accept responsibility for the correctness, accuracy and completeness of the contents of this report and confirm that there are no material omissions nor errors which would render any statement misleading. Shenzhen Dahua Tiancheng Certified Public Accountants provided Auditors’ Report with interpretative explanation for the Company. The Board of Directors and the Supervisory Committee also had detailed comments on relevant issues. Welcome the investors to read carefully. Chairman of the Board of the Company Mr. Ren Kelei, Chief Financial Supervisor Mr. Yang Guobin and General Manger of Financial Department Ms. Yang Rong hereby confirm that the Financial Report of the Annual Report is true and complete. In the event of difference in interpretation between the two versions, the Chinese report shall prevail. Contents I. COMPANY PROFILE............................................................................................................ 2 II. FINANCIAL HIGHLIGHTS AND BUSINESS HIGHLIGHTS ...................................... 3 III. CHANGES IN SHARE CAPITAL AND PARTICULARS ABOUT SHAREHOLDERS ..................................................................................................................... 5 IV. ADMINISTRATIVE TEAM AND EMPLOYEES ............................................................ 7 V. DMINISTRATION STTUCUTRE........................................................................................ 9 VI. RIEFINGS ON THE SHAREHOLDERS’ GENERAL MEETING...............................11 VII. REPORT OF THE BOARD OF DIRECTORS ............................................................. 12 VIII. EPORT OF THE SUPERVISORY COMMITTEE ..................................................... 20 IX.SIGNIFICANT EVENTS ................................................................................................... 21 X.FINANCIAL REPORT ........................................................................................................ 24 XI.DOCUMENTS FOR REFERENCE .................................................................................. 24 -1- I. COMPANY PROFILE 1. Legal Name of the Company: In Chinese: 康佳集团股份有限公司 (Abbr.: 康佳集团) In English: KONKA GROUP CO., LTD. (Abbr.: KONKA) 2. Registered (Office) Address: Overseas Chinese Town, Nanshan District, Shenzhen Post Code: 518053 Internet Website: http://www.konka.com E-mail: szkonka@konka.com, szkonkas@sz.gd.cninfo.net 3. Legal Representative: Mr. Ren Kelei (Chairman of the Board) 4. Secretary of Board of Directors: Mr. Chen Xuri Authorized Representative in Charge of Securities Affairs: Mr. Chen Xuri and Mr. Yang Guobin Contact Address: Konka Group Co., Ltd., Overseas Chinese Town, Shenzhen Tel: (86) 755-26608866 Fax: (86) 755-26600082 E-mail: chenxuri@konka.com, yangguobin@konka.com 5. Newspaper Chosen for Disclosing the Information of the Company: China Securities, Securities Times and Ta Kung Pao, etc. Internet Website Designated by CSRC for Publishing the Annual Report: http://www.cninfo.com.cn The Place Where the Annual Report is Prepared and Placed: Secretariat of Board of Directors of the Company 6. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: Shen Konka - A, Shen Konka - B Stock Code: 000016, 200016 7. Date of the Initial Registration: Oct.1, 1980 Place of the Initial Registration: Shenzhen. 8. Registered Code of Enterprise Legal Person’s Business License: QGYSZ Zi No. 100476 9. Registered Code of Tax: 440301618815578 10. Certified Public Accountants Engaged by the Company Name: Shenzhen Dahua Tiancheng Certified Public Accountants Address: Room 1102-1103, on the 11th Floor, Tower B, Lianhe Plaza, No. 5022, Binhai Av., Futian District, Shenzhen -2- II. FINANCIAL HIGHLIGHTS AND BUSINESS HIGHLIGHTS 1. Major accounting data as of the year 2002 Unit: In RMB Items Amount Total profit 54,433,581.62 Net profit 35,590,430.74 Net profit after deducting non-recurring gains and losses 28,653,362.49 Profit from core business 1,217,861,067.60 Profit from other business 13,118,784.26 Operating profit 48,415,615.88 Investment income -50,270,690.54 Subsidy income 2,275,148.27 Net income / expenditure from non-operating 54,013,508.01 Net cash flows arising from operating activities 653,723,377.38 Net increase / decrease of cash and cash equivalents 50,042,065.38 2. Major financial index over the recent three years 2001 Index 2002 After Before 2000 adjustment adjustment Net profit (RMB’0000) 3,559.04 -69,476.43 -69,979.15 21,439.23 Net profit after deducting non-recurring 2,865.34 -71,486.72 -71,989.44 21,515.41 gains and losses (RMB’0000) Fully diluted earnings per share ((RMB) 0.059 -1.154 -1.163 0.357 Weighted average earnings per share 0.059 -1.154 -1.163 0.357 (RMB) Return on equity (%) 1.205 -23.97 -24.180 5.980 Net cash flows per share arising from 1.086 1.201 1.201 -0.022 operating activities (RMB) Dec. 31, 2001 Items Dec. 31, 2002 After Before 2000 adjustment adjustment Income from core business (RMB’0000) 804,165.28 674,812.20 674,812.20 895,378.10 Total assets (RMB’0000) 690,597.42 722,095.88 721,173.68 998,041.80 Equity-debt ratio (%) 54.53 56.19% 56.26% Shareholders’ equity (excluding minority 295,350.88 289,844.74 289,391.30 358,306.64 interests) (RMB’0000) Net assets per share (RMB) 4.906 4.815 4.807 5.957 Net assets per share after adjustment 4.787 4.570 4.586 5.645 (RMB) 3. Supplementary statement of profit in the report year -3- Return on equity Earnings per shares (%) (RMB) Profit as of the year 2002 Fully Weighted Fully Weighted diluted average diluted average Profit from core business 41.23 41.76 2.02 2.02 Operating profit 1.64 1.66 0.08 0.08 Net profit 1.21 1.22 0.06 0.06 Net profit after deducting non-recurring gains and losses 0.97 0.98 0.05 0.05 4. Items of non-recurring gains and losses and the relevant amount Unit: In RMB Items Jan. –Dec. in 2002 Income from non-operating 3,207,229.37 Expenditure of non-operating -18,790,821.53 Subsidy income 2,275,148.27 Amortization of consolidated price difference -316,980.98 Gains and losses of equity disposal of sector or investee company 20,562,493.12 Total 6,937,068.25 5. Changes in shareholders’ equity in the report year Unit: In RMB Amount at the Increase in this Decrease in this Amount at the Items year-begin year year year-end Share capital 601,986,352.00 601,986,352.00 Capital public reserve 1,833,270,840.28 18,138,999.96 1,851,409,840.24 Surplus public reserve 1,115,134,973.70 1,115,134,973.70 Statutory public welfare 240,860,222.78 240,860,222.78 fund Retained profit -654,789,127.96 35,590,430.74 -614,664,247.79 Total 2,893,912,961.21 2,953,508,827.21 Notes: 1. In accordance with the relevant regulation in Management Measure on Special Fund of National Bond for State Key Technical Innovation Projects and GJM [2001] No. 931 Document, the funds for the technical innovation project amounting to RMB 12,000,000.00 received by the Company were reckoned in capital public reserve; provision for equity investment of RMB 4,477,183.71, other capital public reserve of RMB 1,661,816.25. 2. In the report period, the Company founded that equity of Shenzhen Konka Electrical Co., Ltd. (“Konka Electrical”) was transferred in 2000, after transferring, the Company held 51% equity of Konka Electrical from 100% equity. But the Company consolidated its financial statement based on 100% equity in the year 2000 and 2001. The Company corrected the mistake. For details, please refer to “Note 2 (21) of Note to Financial Statement”. 3. The Company engaged K. C. Oh & Company Certified Public Accountants as overseas Auditor of the Company. Difference in net assets and net profit as reported -4- under CAS and IAS respectively; Unit: RMB Net assets Net profit As reported under IAS 2,944,954,827.21 43,122,380.17 1. Prophase adjustment of capital public 6,978,000.00 - reserve 2. Prophase adjustment of surplus public -17,909,000.00 - reserve 3. Government imbursement transferred into 22,482,500.00 - deferred income from capital public reserve 4. Partial government imbursement was listed into -2,997,500.00 -2,997,500.00 income 5. Consolidated adjustment of subsidiary company’s - -4,534,449.43 changing of equity As restated under Accounting System for 2,953,508,827.21 35,590,430.74 Enterprise III. CHANGES IN SHARE CAPITAL AND PARTICULARS ABOUT SHAREHOLDERS 1. Change in share capital Unit: share Increase/decrease in this time (+, - ) Before the After the Items change Allotment Bonus Capitalization of Additional change Others Subtotal of share shares public reserve issuance I. Unlisted Shares 1. Promoters’ shares 174,949,746 174,949,746 Including: State-owned share Domestic legal person’s shares 174,949,746 174,949,746 Foreign legal person’s shares Others 2. Raised legal person’s shares 3. Inner employees’ shares 42,092 42,092 (shares held by senior executives) 4. Preference shares or others Total Unlisted shares 174,991,838 174,991,838 II. Listed Shares 1. RMB ordinary shares 224,156,612 224,156,612 2.Domestically listed foreign 202,837,902 202,837,902 shares 3. Overseas listed foreign shares 4. Others Total Listed shares 426,994,514 426,994,514 III. Total shares 601,986,352 601,986,352 2. Issuance and listing of shares -5- In July 2000, the Company implemented 1999 Dividends Distribution Plan: the dividends were distributed at the rate of 1 bonus share for every 10 shares with RMB 4.00 dividend in cash (tax included, dividends of B-share were distributed in Hong Kong dollars). Thus, the total share capital was increased to 601,986,352 shares after bonus share. As approved by CSRC, 139,036,499 non-listed foreign shares were transferred into listed foreign share for circulation in 2001. The said shares were listed for trade in Shenzhen Stock Exchange dated June 21, 2001. There exists no unlisted inner employee’s share except for 42,096 shares held by senior executives. 3. About shareholders (1) Ended Dec. 31, 2002, the Company had totally 162,273 shareholders, including 146,370 ones of A-share and 15,903 ones of B-share. (2) Shareholding of main shareholders Increase / Number of Holding decrease in Proportion share Nature of Full name of Shareholders shares at the Type of shares the report (%) pledged/ shareholders year-end year (share) frozen State-owned Overseas Chinese Town Group Company 0 174,949,746 29.06 Non-circulating 174,949,741 shareholder Overseas Chinese Town (Hong Kong) Co., Overseas Ltd. -10,170,766 76,532,572 12.71 Circulating Unknown shareholder Hong Kong China Travel Service (Group) Overseas 0 45,416,337 7.54 Circulating Unknown Co., Ltd. shareholder Overseas NOMURA TB/NOMURA ITM 1,077,600 2,450,000 0.41 Circulating Unknown shareholder TOYO SECURITIES ASIA LIMITED A/C Overseas -8,206 2,360,701 0.39 Circulating Unknown CLIENT shareholder Domestic Longyuan Securities Investment Fund +1,880,228 1,880,228 0.31 Circulating Unknown shareholder Overseas Longxin International Co., Ltd. -1,219,095 1,409,260 0.23 Circulating Unknown shareholder Overseas Xin Ming +1,249,868 1,249,868 0.20 Circulating Unknown shareholder Domestic Kai Yuan Securities Investment Fund +1,172,828 1,172,828 0.19 Circulating Unknown shareholder Domestic China High-tech Investment Group Co. +59,000 1,059,017 0.17 Circulating Unknown shareholder Explanation on associated relationship among the top ten shareholders or consistent action: (1) Among the top ten shareholders, Overseas Chinese Town Group Company, the first largest shareholder, held non-circulating shares. There was no change in shares of the Company held by it in the report period. (2) Overseas Chinese Town (Hong Kong) Co., Ltd. is the wholly owned subsidiary of Overseas Chinese Town Group Company registered in Hong Kong, who held circulating shares; the shares held by it were changed due to trading in the secondly market in the report period. Except for this, there exists no associated relationship between Overseas Chinese Town Group Company and the other shareholders, and it does not belong to the consistent actionist regulated by the Management Measure of Information Disclosure on Change of Shareholding for Listed -6- Company with the other shareholders. For the other shareholders of circulating share, the Company is unknown whether there exists associated relationship, or whether the other shareholders belong to the consistent actionist regulated by the Management Measure of Information Disclosure on Change of Shareholding for Listed Company. (3) The other shareholders are social public shareholders, who hold circulating shares. The shares held by them were changed due to trading in the secondly market during the report period. (4) Particulars about legal person shareholder holding over 5% of total shares of the Company Item Type of holding Legal Dated of Registered capital Type of enterprise Main business lines Name share representative foundation (RMB’000) Overseas Chinese Town Domestic legal State-owned sole Industry, tourism, real estate, Ren Kelei May 1986 RMB 200,000 Group Company person’s share corporation finance and commerce Wholly-owned subsidiary of Overseas Chinese Town Foreign Investment and share holding Overseas Chinese Zheng fan Oct. 1997 RMB 455,000 (Hong Kong) Co., Ltd. circulation share by high-tech Town Group Company Tourism, industrial investment, capital Hong Kong China Travel Foreign State foreign construction, real estate, hotel Che Shujian Oct. 1985 HKD 700,000 Service (Group) Co., Ltd. circulation share corporation management, passenger-cargo transportation and import & export trade IV. ADMINISTRATIVE TEAM AND EMPLOYEES 1. Particulars about directors, supervisors and senior executives Holding shares (share) Name Title Gender Age Office term At the year- At the year- Note begin end Ren Kelei Chairman of the Board Male 52 Apr. 2001-Apr. 2004 0 0 Zhang Director Male 58 Apr. 2001-Apr. 2004 0 0 Zhengkui He Shilin Director Male 62 Apr. 2001-Apr. 2004 0 0 Liang Rong Director Male 38 Apr. 2001-Apr. 2004 13,550 13,550 President Apr. 2001-Apr. 2002 dimission Ni Zheng Director Male 35 May 2002-Apr. 2004 0 0 Wei Qing Director Male 50 Apr. 2001-Apr. 2004 0 0 Xiao Zhuoji Independent Director Male 69 May 2001-Apr. 2004 0 0 Ye Wu Independent Director Male 64 May 2001-Apr. 2004 0 0 Ma Liguang Independent Director Female 62 May 2001-Apr. 2004 0 0 Nie Guohua Chairman of Male 60 Apr. 2001-Apr. 2004 0 0 Supervisory Committee Wang Ruquan Supervisor Male 49 Apr. 2001-Apr. 2004 0 0 Wang Supervisor Male 53 Apr. 2001-Apr. 2004 0 0 Employee’s Xinzhong representative Hou Songrong President Male 34 Apr. 2002-Apr. 2004 0 0 Chen Xuri Vice-president, Male 44 Apr. 2001-Apr. 2004 0 0 secretary of the Board Yang Guobin Chief Financial Male 33 Mar. 2002- 0 0 Supervisor Mar. 2004 Wang Youlai Vice-president Male 42 Mar. 2002- 2,640 2,640 Mar. 2004 Huang Vice-president Male 42 Mar. 2002- 514 514 Zhongtian Mar. 2004 Huang Vice-president Male 40 Mar. 2002- 0 0 Weigang Mar. 2004 Chen Weirong Original Director Male 43 Apr. 2001-May 2002 25,289 25,289 dimission Lin Hanhui Original Vice- Male 39 Jan. 2000- 95 95 dimission president Mar. 2002 Note: The shares held by original director Mr. Chen Weirong and original vice- -7- president Mr. Lin Hanhui has been unfrozen for circulation after the report period according to the relevant regulation. Particulars about directors and supervisors holding the post in Shareholding Company Drawing the payment Name of Shareholding Title in Shareholding Name Office term from the Shareholding Company Company Company (Yes / No) Overseas Chinese Town Group CEO and concurrently Ren Kelei Dec. 1993 to now No Company President Secretary of the Party Zhang Overseas Chinese Town Group Committee and Aug. 1987 to now No Zhengkui Company concurrently managing vice-president Overseas Chinese Town Group He Shixiu Financial Advisor 2000 to now No Company Overseas Chinese Town Group Liang Rong Assistant President Apr. 2002 to now No Company Overseas Chinese Town (Hong Ni Zheng General Manager Dec. 1998 to now No Kong) Co., Ltd. Hong Kong China Travel General Manager of Wei Qing Service (Group) Co., Ltd. Investment Plan & 2000 to now No Management Dept. Overseas Chinese Town Group Nie Guohua Vice-president Feb. 1992 to now No Company Overseas Chinese Town Group Supervisor of Auditing Wang Ruquan Oct. 2000 to now No Company Dept. 2. Particulars about the annual recompense as of the year 2002 (1) The Company didn’t paid recompense or allowance to directors, independent director and supervisor. (2) The Board of Directors determined the recompense of senior executives, and referred to the following factors: engagement content and responsibility shouldered; actual profit status of the Company; recompense level in the same industry and same area. (3) The total annual remuneration of senior executives amounted to RMB 1,344,000. 5 enjoy the annual remuneration between RMB 200,000 and 300,000 respectively, and 1 enjoys the annual remuneration between RMB 300,000 and 350,000. Total annual remuneration of the top three senior executives drawing the highest payment was RMB 739,200. 3. Directors, supervisors and senior executives leaving the office in the report year (1) As decided by the 6th meeting of the 4th Board of Directors dated April 9, 2002, the Board of Director agreed that Mr. Xiang Weirong resigned from the post of director of the 4th Board of Directors due to work adjustment. The said proposal was examined and approved by 2001 Shareholders’ General Meeting held on May 13, 2002. (2) As decided by the 6th meeting of the 4th Board of Directors dated April 9, 2002, the Board of Directors no longer reengaged Lin Hanhui as vice-president of the Company and terminated labor contract with him. (3) As decided by the 7th meeting of the 4th Board of Directors dated April 26, 2002, Mr. Ni Zheng took the post of diector of the 4th Board of Directors. The proposal was -8- ex amined and approved by 2001 Shareholders’ General Meeting held on May 13, 2002. (4) President of the Company Mr. Liang Rong was relegated to Overseas Chinese Town Group Company due to work demand. As decided by the 7th meeting of the 4th Board of Directors dated April 26, 2002, Managing vice-president Mr. Hou Songrong replaced his as President. Mr. Liang Rong drew no pay from the Company since May 2002. 4. About Employees at the end of report period Anhu Shenzhen Branch Shann Chongqi Donggu Changs Chongqi Compa Mudanjia i headquart compani xi ng an hu ng Total ny ng Konka Konk ers es Konka Konka Konka Konka Qingjia. a Numbe 2421 6339 984 1074 1664 377 2293 375 237 1563 r 4 Structure of employees in Shenzhen headquarters Bachel Producti Financi Administrat or Classificati on Salespers Technici al Retir Doct Mast Bachel ive degree on personne on an personn ee or er or personnel or l el above Number 801 377 678 159 276 130 583 10 80 481 Proportion 33.1% 15.6% 28.0% 6.6% 11.4% 5.4% 24.1% 0.4% 3.3% 19.9% V. DMINISTRATION STTUCUTRE (I) Company administration In the report period, the Company continuously consummated legal person administration structure, consistently improved construction of modern enterprise system with details as follows: (1) According to Notification of Inspection on Establishing Modern Enterprise System in Listed Companies promulgated by China Securities Regulatory Committee and State Economic & Trade Commission, based on Company Law, Securities Law, Rules of Listed Companies’ Administration and other normative documents promulgated by CSRC, the Company and the control shareholders conducted patient self-inspection in the independence of the Company, construction of Three Committees, normative operation and behavior criterion of the control shareholders and etc. and submitted the report of self-inspection timely and factually. (2) In accordance with Company Law, Securities Law, Rules of Listed Companies’ Administration, Guide Opinion on Establishing Independent Directors System in Listed Companies and other laws and regulations, in the report period, the Company amended, constituted and approved a series of company administration system and documents such as Rules of Procedure of the Shareholders’ General Meeting, Rules of Procedure of the Board of Directors, Rules of Procedure of the Supervisory Committee, Independent Directors System, Detailed Rules of Work of President, System of Decision-making of Related Transaction, System of the Company’s Information Disclosure and so on and meanwhile amended Articles of Association of the Company, which was examined and approved by the Board of Directors, the Supervisory Committee and the Shareholders’ General Meeting and was -9- implemented. (3) Examined and approved by 2001 Annual Shareholders’ General Meeting held on May 13, 2002, Xiao Zhuoji, Ye Wu, Ma Liguang were elected as the independent directors of the Company. At present, one third of the members of the Board of Directors are independent directors in conformity with the requirement of the supervisory institution. The Board of Directors planed to establish upright organizations, namely Stratagem Committee, Financing Auditing Committee, Nomination Committee and Remuneration Committee for guiding and supervising the work of the operation and management. Relative detailed rules of work have been established and implemented. (4) To be in favor of the work, Chairman of the Board of the Company is still taken as pluralism by Mr. Ren Kelei, the legal representative of the control shareholder, OCT Group Company. Due to his social fame and important function on the development of the Company, before finding more fit person, the Company has not considered to change the situation temporarily. In addition, compared with the normative documents on listed companies’ administration promulgated by CSRC in respect of the actual situation of the Company’s administration, there almost existed no difference. (II) Implementation of duties of independent directors Strictly according to Rules of Listed Companies’ Administration, Guide Opinion on Establishing Independent Directors System in Listed Companies, Articles of Association of the Company, Independent Directors System, Detailed Implementation Rules of Special Committee of the Board of Directors, the independent directors implemented their duties, took part in the training of independent directors of listed companies organized by CSRC and got corresponding qualification certification. In the report period, the Company’s independent directors performed fully their specialty and did a large amount of work in respect of construction of normative operation of the Board of Directors and brewing of significant decision-making: (1) In the process of preparing construction of special committee of the Board of Directors and establishment and implementation of detailed implementation rules, the independent directors put forward to many constructive opinions and suggestions and took important posts in Auditing Committee, Nomination Committee and Remuneration Committee. (2) In the process of amendment of internal control system of the Company, the independent directors operated from a strategically advantageous position, actively gave counsels for the improvement and consummation of the legal person administration structure of the Company and urged the mature of every regulations and systems of the Company. (3) In the process of brewing of significant decision-makings of the Company, independent directors actively took part in relevant investigation and research, audit assessment and discussion, expressed pertinent and objective opinions and boosted the scientific decision-making and procedure of decision-making of the Board of Directors. (III) Separation from Control Shareholder in Business, personal, Assets, Organization and Finance - 10 - The Company was separated from the control shareholder in respect of business, personal, assets, organization and finance. (1) In respect of business: the Company has its independent business and industry structure system, made decisions independently, made its own management decisions, took full responsibility for its own profits and losses and undertook independently corresponding responsibility and risk. (2) In respect of personal: the Company established special institutions in charge of management of labor, person and wage, set up and consummated perfect management system of labor and personal. President, Vice President and other senior executives of the Company received remuneration in the Company and took no any post in the company of the control shareholder. (3) In respect of assets: the Company has independent operation system and corresponding auxiliary facility and established system of purchase, sale and service independently owned by the Company. The Company owned independently non- patent technology, trademark and other intangible assets. (4) In respect of organizations: the procedure of establishment and function of all organizations of the Company are independent. The Company is completely separated from the control shareholder in administrative management such as labor, personal and wage relationship and there existed no mixed operation and office. The Board of Directors, the Supervisory Committee and other institutions operated independently and there existed no affiliation between the Company and the functional departments of the control shareholder. (5) In respect of financing: The Company established independent accounting department, owned independent accounting settlement system, financing management system and bank account and was strictly separated from the control shareholder in operation. (IV) Assessment and Encouragement Mechanism for Senior Executives The Company formulated the Detailed Work Rules for President and various concrete work systems, restricted work and behavior of senior executives, and decided on senior executive’s remuneration through basic annual salary plus floating bonus based on the year-end assessment as well as accomplishment of targets so as to invigorate work enthusiasm. Performance of senior executives was assessed by the Board of Directors, and supervised by the Supervisory Committee. VI. RIEFINGS ON THE SHAREHOLDERS’ GENERAL MEETING In the report year, the Company held one shareholders’ general meeting. 2001 Annual Shareholders’ General Meeting was held in Huaxia Arts Center of Overseas Chinese Town at 9:30a.m. on May 13, 2002. 24 shareholders and proxies attended the meeting, representing 297,699,832 shares, taking 49.54% of the Company’s total 601,986,352 shares. The meeting examined and approved the following resolutions by voting: 1. 2001 Work Report of the Board of Directors; 2. 2001 Work Report of the Supervisory Committee; 3. 2001 Auditor’s Report of Accountants; 4. Proposal on Amendment of 2001 Profit Distribution Preplan; - 11 - 5. Proposal on 2002 Profit Distribution Policy; 6. Proposal on Changing Part Directors; 7. Proposal on Engaging Independent Directors; 8. Proposal on Implementing Rules of Procedure of the Shareholders’ General Meeting: 9. Proposal on Implementing Rules of Procedure of the Board of Directors; 10. Proposal on Implementing Rules of Procedure of the Supervisory Committee: 11. Proposal on Implementing Independent Directors System; 12. Proposal on Implementing Management Method of the Company’s Information Disclosure; 13. Proposal on Implementing System of Decision-making of Related Transaction; 14. Proposal on Amendment of Articles of Association; 15. Proposal on Engaging Counselor of the Company; 16. Proposal on Engaging Financing Auditing Institution and Auditing Expense; 17. Proposal on Ending 2001 Share Allotment Plan; 18. Proposal on Establishing Fund of the Board of Directors; 19. Proposal on Real Estate Project of Investing the 3rd Stage of Jinxiu Garden; 20. Proposal on Real Estate Project of Investing D and E Block of OCT PORTOFINO• SWAN CASTLE; 21. Proposal on Assignment of Share Equity of Shenzhen Huali Packing Co., Ltd. 22. Proposal on Assignment of Share Equity of Shanghai Huali Packing Co., Ltd. The public notice on the resolutions of the Shareholders’ General Meeting was published on China Securities, Securities Times and Ta Kung Pao dated May 14. VII. REPORT OF THE BOARD OF DIRECTORS (I) Main operation in the report period (1) Main operation in the report period The Company is engaged in the production and operation of color TVs, digital mobile phones and Internet products of LCD monitor etc. and its auxiliary products (such as high frequency connector, mould, plastic injection and packing etc.) and is concurrently engaged in the operation of refrigerators, air-conditioners, washing machines etc. The Company belongs to the industry of electron manufacture and communication manufacture. In 2002, under the background that the market competition was exceptionally intense, according to the whole deployment of strategic transformation, the Company put forward the operating concept of “ Only development can lead to survival, only system can lead to remoteness” with development and advance as the main rhythm, steadily pushed the three large business of color TVs, mobile phones and overseas business and emphasized on the development of products, marketing and cost control. All work made progress with breakthrough, thoroughly walked out the declining channels for two sequential years and entered into the period of ascending development. In the aspect of development of products, the Company brought forth S series and T series products of color TVs, including “Super TV” which became the apotheosis of - 12 - best sales of moderate machine type and brought forth the machine types of A series and AXT series with SCAR interface or RCA interface with pertinence. The Company also brought forth “ High Definition Series” products of HDTV-Ready, LC TVs, Plasma TVs, and TV Wall etc. in succession and gradually set up a high-grade image of Konka. Over ten kinds of new products of 7899, 7388, C688 and C699 were put forth in succession in the mobile phones, of which 7899, 7388, 5238 and KC88 and KC66 had very strong competitive power in the market and had good representation. The Company further strengthened the management of subsidiaries and the integration of marketing network. In terms of business of color TVs, based on quashing the regional marketing center, the Company withdrew and incorporating partial subsidiaries with bad achievements and no potential and further cut down the staffs and enhanced the efficiency. In terms of business of mobile phones, the Company cultivated the emphasis market, raised the proportion of input and output and thus drove the mounting up of the whole sales volume. The effect of expense control was obvious and the operating expense, management expense and financial expense decreased by 3.68%, 13.37% and 58.92% respectively compared with the corresponding period of the previous year. Simultaneously, the Company emphasized to reinforce the control of purchase cost, which made the purchase price of cover materials at the end of the report period averagely decrease by 7% than that of the beginning of the report period under the environment that the price of CPT recovered slightly and the materials with the largest margin of decline reached 65.7%. In 2002, the sales income realized in the whole year was RMB 8.0 billion, an increase of 19.16 % compared with the corresponding period of the previous year and the sales volume of color TVs was 5.5 million pieces including export of 738 thousand pieces. The sales volume of mobile phones was 1.6 million pieces. The net profit realized was RMB 35.6 million and earnings per share were RMB 0.0591. 2. Formation of income from core business and profit from core business in the report period: Income from Cost of core Gross Increase/decr Increase/de- Increase/decreas core business business profit ease of crease of cost e of gross profit (RMB’0000) (RMB’0000) ratio income from of core ratio compared (%) core business business with the Industry: product compared compared previous year with the with the (%) previous year previous year (%) (%) Household Domestic 589,310.54 496,898.22 15.68 3.08 -3.93 64.62 electrical sales appliance color TVs Export 45,259.53 44,799.89 1.02 -10.49 -16.44 color TVs Communication: 169,595.21 140,561.35 17.12 221.12 197.55 421.49 mobile phones Including: -- -- -- -- -- -- related transactions - 13 - Including particulars about growth of production and sales volume and market share: Output Sales volume Domestic market Core business item Output (piece) Increase (%) Sales volume (piece) Increase (%) share (%) Domestic sales color TVs 468.27 45.23 480.15 30.25 13.54 Export color TVs 62.73 157.68 73.76 16.84 Mobile phones 177.68 225.52 160.75 208.12 2.56 Total 708.68 76.57 714.66 47.67 Notes: the domestic market share of color TVs was gained from the calculation of average amount as per the retail amount supervised by Zhongyikang to 30 provinces and cities all over the country during Jan. to Dec.2002 and ranked steadily in the top three inside the country. The domestic market share of mobile phones was gained from the calculation as per the data of State Information Industrial Department. (II) Operation and achievement of main holding companies and share-holding companies (1) Shenzhen Konka Telecommunication Technology Co., Ltd., whose 100% equity is held directly and indirectly by the Company, is mainly engaged in the development, production and operation of digital mobile communication equipments and mobile phone products with a registered capital of RMB 120 million. Ended the end of the report period, the total assets of this company was RMB 638,705,150.30 and in 2002 the sales income realized was RMB 1,695,952,078.46 and net profit was RMB 44,236,161.58. (2) Dongguan Konka Electronic Co., Ltd., whose is wholly owned subsidiary of the Company, is engaged in the production and operation of color TVs and sound products etc. with a registered capital of RMB 200 million. Ended the end of report period, the total assets of this company was RMB 465,785,407.06 and in 2002 the realized sales income was RMB 154,160,256.02 and the net profit was RMB 1,475,988.00. (3) Mudanjiang Konka Industrial Co., Ltd., whose 60% equity is held by the Company, is mainly engaged in the production and operation of color TVs with a registered capital of RMB 60 million. Ended the end of report period, the total assets of this company was RMB 221,001,221.76 and the realized sales income in 2002 was RMB 183,223,860.90 and the net profit was RMB -759,945.79. (4) Shanxi Konka Electronic Co., Ltd., whose 60% equity is held directly and indirectly by the Company, is mainly engaged in the production and operation of color TVs with a registered capital of RMB 69.5 million. Ended the end of report period, the total assets of this company was RMB 123,229,405.21 and the sales income realized in 2002 was RMB 55,253,349.90 and the net profit was RMB 4,580,372.36. (5) Anhui Konka Electronic Co., Ltd., whose 65% equity is held by the Company, is mainly engaged in the production and operation of color TVs with a registered capital of RMB 140 million. Ended the end of report period, the total assets of this company was RMB 275,651,243.33 and the realized sales income in 2002 was RMB - 14 - 215,545,635.57 and the net profit was RMB . 10,758,025.84 (6) Chongqing Electronic Co., Ltd. whose 60% equity is held by the Company, is mainly engaged in the production and operation of color TVs with a registered capital of RMB 45 million. Ended the end of report period, the total assets of this company was RMB 89,957,378.93 and the realized sales income in 2002 was RMB 35,519,182.02 and the net profit was RMB -312,358.91. (III) Major suppliers and customers The total amount of purchase of the top five suppliers of the Company was RMB 2,387,648,250.84, taking 34.72% of the total annual amount of purchase and the total amount of sales of the top five customers was RMB 187,278,415.77, taking 2.33% of the total annual amount of sales of the Company. (IV) Difficulties and problems arising from the production and operation and solutions After experiencing the strategic transforming adjustment of production and operation, especially the deficiency of the year of 2001,the brand image of the Company was impacted to a certain extent, thus it led to loss of partial talents and deficiency of human resources. Simultaneously, the existing encouragement mechanism of the Company was backward relatively and the existing strength of research and development could not meet the need of future development. The technology research and development must be further reinforced. Aiming at the aforesaid problems, the Company had adopted measures with consideration of the actual situation and established policies to strengthen the competition capability of the enterprise continuously with details reflected in the business plan of the year of 2003. (V) Investment 1. There were no proceeds raised through share offering or its significant investment occurring in the report period. 2. Significant projects invested with proceeds not raised through share offering In the report period, the Company invested and share-held the following two real estate projects: (1) Shenzhen OCT real estate project of “Building D and E of OCT PORTOFINO·SWAN CASTLE” and (2) Shenzhen OCT real estate project of “the 3rd stage of Jinxiu Garden”. For details, please refer to “Significant related transaction”. (VI) Financial status Unit: in RMB’0000 End of 2001 End of 2001 End of Increase/decre Item (after (after Main reason of change 2002 ase (%) adjustment) adjustment) Total assets 700,597.4 722,095.88 721,173.68 -2.98% 2 Net amounts 27,868.58 53,006.96 53,006.96 -47.42% The Company reduced the quantity receivable of account sale and recovered relatively much accounts and payments for good owed to the - 15 - Company by many customers was changed into notes settlement. Net inventory 257,879.5 282,593.19 282,593.19 -8.75% 6 Net long-term 27,336.66 20,461.62 20,461.62 33.60% Increase of real estate investment investment Net fixed assets 121,658.0 126,448.13 126,448.13 -3.79% 8 Long-term 2,020.00 8,921.70 8,921.70 -77.36% Recovery of bank loan liabilities Shareholders’ 295,350.8 289,844.74 289,391.30 1.90% equity 8 Item In 2002 In 2001 (before In 2001 (after Increase/decre Main reason of change adjustment) adjustment) ase (%) Profit from core 121,786 56,641.48 56,641.48 115.01% The increase of income by a big business margin .11 Net profit 3,559.0 -69,476.43 -69,979.15 - Increase of controlling expenses 4 Explanation: Commencing from Jan. 1, 2001, the Company started to implement eight items of Enterprise Accounting Standards and Enterprise Accounting Systems newly promulgated by Ministry of Finance and adjusted the amount at the beginning of the year according to the relevant regulations of linking up of enterprise accounting system of Ministry of Finance and the actual situation of the Company. (VII) No material effect of change of production and operation environment, macro- policies and regulations on the financial status and operating results (VIII) Explanation on the “Non-standardized opinion” of Certified Public Accountants by the Board of Directors Shenzhen Dahua Tiancheng Certified Public Accountants provided interpretative explanation for the three issues of the transfer of equity of affiliated companies of the Company in 2002, joint operation of real estate projects and appropriation of 100% impairment reserve of overseas subsidiary due to business suspension etc.. The Board of Directors agreed to the aforesaid explanation and considered this explanation really reflects the actual condition of the Company’s operation with the following explanation: 1) The price of equity transfer was confirmed according to the profitability situation of the two sold companies of past years and based on the reference of Auditors’ Report and assets assessment. The Board of Directors thought the transfer price was fair and its accounting disposal was in compliance with Enterprise Accounting Standards. However, since these transactions belonged to related transactions with comparatively large amount of earnings, in particular reminding the investors to pay attention. (2) The earnings of joint operation of real estate projects took a comparatively large proportion in the total amount of profits of the report year and the projects belonged to related transaction, thus the investors are reminded to pay attention. (3) The Board of Directors approved the overseas subsidiaries to stop business due to the intensified market competition and the resulting serious losses and did not consolidate their statements and appropriated 100% impairment loss. The Board of Directors thought that - 16 - the accounting disposal was steady, but the amount was comparatively large and thus reminded the investors to pay attention. (IX) Business plan of the new report year 1. Color TVs business: to enhance the sales volume of high-grade products and further reduce cost and expense The Company will emphasize on the high-grade products from the aspects of technology research and development, market input and sales and enhance the proportion of high-grade products through adjusting structure of products so as to increase the gross profit ratio and push the mounting up of sales. On the other hand, the Company shall thoroughly reduce the cost and expense from enhancing and improving the running mode of the enterprise and realize energy saving and consumption reducing through increasing the level of research and development, innovating the way of purchase and enhancing the manufacture and management level etc. and increase the competitive power. 2. Mobile phones business: To make sales mount up fast and establish and improve the industrial chain from research and development and manufacture to sales In terms of products, the Company will make independent research and development and products of CKD and OEM/ODM to complement each other in the business of mobile phones and control the terminal resources through channels innovation in the marketing, thus to establish the whole industrial chain of from research and development to manufacture and sales. Doing the mounting up of sales well and forming the integration of industrial resources, at the same time, the Company shall set about establishing the business of mobile value increase and dummy running so as to form a large communication industrial structure. 3. International business: to develop OEM business energetically and establish a large framework of international business In 2003, the Company shall aggressive market strategy in the OEM business of color TVs and shall reduce cost with generalization, serialization, standardization and purchase innovation. Simultaneously, the Company should “walk out” unhesitatingly and strengthen the strategic cooperation with craft brothers at home and abroad in order to realize the localization of international business in various areas through forms of establishing representative agency, incorporating sales companies and production bases with customers etc. and set up a large framework of international business. 4. To push the development of three large businesses with six large guarantees The Company shall guarantee the smooth development of three large businesses from starting with the following six aspects: (1) Increase of capability of research and development. To increase the capability of research and development from the aspects of development of research and development teams, management of research and development and mechanism of research and development etc.. (2) Innovation of marketing. To enhance the marketing capability through brand development, channel innovation and reinforcement of management of subsidiaries and after service. (3) To raise the brand image. The Company shall reinforce the input, standardize the running flow of brand management and establish brand management system with grade - 17 - division so as to strengthen the market promotion both gently and strictly and shape a new image of all new brands. (4) To reinforce the construction of human resources. To introduce into talents rapidly through varied kinds of forms, elect and appoint cadres boldly and establish scientific system of personnel examination and appointment. (5) To establish various encouragement system. The Company shall establish corresponding scientific and effective encouragement mechanism for different business unit and research and development system, sales system and management system. (6) To reinforce the operation forewarning system. To stick to the three “ one veto system” of quality risk, inventory risk and risk of accounts receivable. (X) Routine work of the Board of Directors 1. Meetings and resolutions of the Board of Directors in the report period In the report period, the 4th Board of Directors of the Company held four meetings: the 6th, the 7th, the 8th and the 9th Meeting of the 4th Board with details as follows: The 6th Meeting of the 4th Board of Directors was held in Shenzhen OCT Crown Plaza on April 9, 2002. Seven directors should be present and actually six directors attended the Meeting. All supervisors of the Company attended the Meeting as nonvoting delegates and all candidates of independent director audited the Meeting. The following resolutions were approved in the Meeting: (1) 2001 Annual Report and its Summary (2) Work Report of the Board of Directors (3) Proposal on Amendment of 2001 Profit Distribution Preplan and 2002 Profit Distribution Policy (4) Proposal on Engagement of New Term of Operating Management (5) Proposal on Change of Partial Directors (6) Proposal on Nomination of Independent Director (7) Rules of Procedure of Shareholders’ General Meeting (Draft) (8) Rules of Procedure of the Board of Directors (Draft) (9) Independent Director System (Draft) (10) Management Measure of Information Disclosure (Draft) (11) Decision-making System of Related Transaction (Draft) (12) Draft of Amendment of Articles of Association (13) Rules of Work of President (14) Proposal on Nomination and Engagement of Counselor of the Company (15) Proposal on Transferring Equity of Shenzhen Huali Packing Trade Co., Ltd. (16) Proposal on Transferring Equity of Shanghai Huali Packing Co., Ltd. (17) Proposal on Investing and Incorporating Real Estate Project of OCT “Building D and E of SWAN CASTLE” (18) Proposal on Adjusting Investment Proportion of Real Estate Project of the 3rd Stage of Jinxiu Garden (19) Strategic Planning of Five-year Development of Konka Group (20) Deciding to hold 2001 Shareholders’ General Meeting on May 13, 2002 - 18 - The 7th Meeting of the 4th Board of Directors was held in 605 Conference Room in the office building of Shenzhen OCT Group Company on the morning of April 26, 2002. Seven directors should be present and actually four directors attended the Meeting. One director entrusted other directors to attend the Meeting for him, one supervisor attended the Meeting as nonvoting delegates and two candidates of independent director audited the Meeting. The following resolutions were approved conformably in the Meeting: (1) Proposal on Supplementing Director (2) Proposal on Changing Engagement of President The 8th Meeting of the 4th Board of Directors was held in 605 Conference Room in the office building of Shenzhen OCT Group on the morning of Aug. 23, 2002. Nine directors should be present and actually eight directors attended the Meeting. One director voted by means of fax. The chairman of the Supervisory Committee and partial senior executives attended the Meeting as nonvoting delegates. The following resolutions were examined and approved in the Meeting: (1) 2002 Semi-annual Report and its Summary (2) 2002 Semi-annual Profit Distribution Proposal The 9th Meeting of the 4th Board of Directors was held on Oct. 25, 2002 by means of fax. Nine directors should be present and actually nine directors attended the Meeting. After examination, the 3rd Quarter Report of 2002 of Konka Group Co., Ltd. was approved conformably. The resolutions of the 6th, 7th, 8th, 9th Meeting of the 4th Board of Directors were published on China Securities, Securities Times and Ta Kung Pao, which are newspaper designated by CSRC for information disclosure on April 11, April 24, April 27 and Aug. 26, 2002 respectively and published on designated international internet: http://www.cninfo.com.cn. 2. Implementation of resolutions of Shareholders’ General Meeting by the Board of Directors The Board of Directors seriously carried out the resolutions of Shareholders’ General Meeting: has implemented a series of administrative system; has engaged counselor and certified public accountants; has completed two transactions of equity transfer and recovered capital of approximately RMB 140 million; has pushed two real estate projects as scheduled, which made the finish settlement of project of “ SWAN CASTLE” gain earnings; the project of “ the 3rd stage of Jinxiu Garden” also got on smoothly and is estimated to be completed with settlement in 2003, besides, recovery of investment gained earnings. (XI) Profit distribution preplan and preplan of converting capital public reserve into share capital of the report year - 19 - The 11th Meeting of the 4th Board of Directors held on April 9, 2003 discussed and decided neither to share profit nor convert capital public reserve into share capital in 2001. The aforesaid plan should be submitted to Shareholders’ General Meeting for approval. (XII) 2003 Preplan of distribution or capitalization The Company will neither share profit nor convert capital public reserve into share capital in 2003. This plan should be submitted to Shareholders’ General Meeting for approval. (XII) Other issues The Company designated China Securities, Securities Times and Hong Kong Ta Kung Pao as newspapers for information disclosure. VIII. EPORT OF THE SUPERVISORY COMMITTEE (I) Work of the Supervisory Committee In the report period, the 4th Supervisory Committee of the Company totally held 3 meetings, namely the 4th meeting, the 5th meeting and the 6th meeting of the 4th Supervisory Committee. The meetings and their resolutions are as follows: The 4th meeting of the 4th Supervisory Committee was held in Venezia Hotel of OCT, Shenzhen, China on Apr.9, 2002. All three supervisors that should be present attended the meeting, which made the following resolutions: (1) Examined and approved 2001 Annual Report and its Summary of the Company; (2) Examined and approved Work Report of the Supervisory Committee: (3) Examined and approved Rules of Procedure of the Supervisory Committee (Draft) The 5th meeting of the 4th Supervisory Committee was held in No.605 Meeting Room of the office building of OCT Group, Shenzhen, China in the morning of July 22, 2002. Three supervisors should be present, two of them attended the meeting and part senior executives participated in the meeting as non-voted delegates. The meeting debriefed the report of management team and relevant principal on the progress of work of inviting public bidding of purchase of raw material for color TV. The 6th meeting of the 4th Supervisory Committee was held in No.605 Meeting Room of the office building of OCT Group, Shenzhen, China in the morning of Aug.23, 2002. All three supervisors that should be present attended the meeting, which examined and approved the following resolutions: (1) Examined and approved 2002 Semi Annual Report and its Summary; (2) Examined and approved 2002 Semi Annual Profit Distribution Proposal. The resolutions of the 4th meeting and the 6th meeting of the 4th Supervisory Committee was published on China Securities, Securities Times and Ta Kung Pao respectively dated Apr.11, 2002 and Aug.26, 2002 and the internet, http://www.cninfo.com.cn designated by CSRC (II) Independent Opinion of the Supervisory Committee 1. Operation According to Law - 20 - In 2002, the Company operated in compliance with the relevant laws, legislations as stated in the PRC Company Law, Securities Law and Rules for Stock Listing as well as the Articles of Association. The directors and senior executives could implemented various resolutions of the Shareholders’ General Meeting and the Board of Directors, worked diligently and responsibly, ran the business and made decisions in a scientific and reasonable way, and further improved internal control system. The directors and senior executives neither violated national laws, legislations or the Articles of Association when performing their duties, nor damaged the Company’s interests when they performed their duties. 2. Financial Inspection The Supervisory Committee made serious and careful inspection on the financial system and financial status, and believed that 2002 financial report factually reflected the Company’s financial status and management results and the auditors’ report issued by Shenzhen Dahua Tiancheng Certified Public Accountants as well as the assessment towards relevant issues were objective and fair. 3. Application of Raised Capital The actual investment project of the latest raised capital is in accordance with the promised investment project. 4. Purchases or Sales of Assets In the report year, the trade price of sale of share equity of the Company was reasonable, no internal transaction was found, the interest of the medium and small shareholder was treated equally and there found no assets ran off. 5. Correlative Transactions In order to help the Company to get through the hard period of changing type, in the support of the big control shareholder, namely OCT Group, the Company and OCT Real Estate Company cooperated and operated real estate item and obtained the steady investment return with effect rapidly taken. Meanwhile, the Company developed dedicatedly the main business, put capital and energy on the main products, reclaimed the monetary funds through related transaction of share equity’s assignment and supported strategic type change The aforesaid significant related transactions were fair and did not damage the interest of the listed company. There was no internal transaction. 6. Explanation on Auditors’ Report with interpretative explanation of the Supervisory Committee The Supervisory Committee thought that Shenzhen Dahua Tiancheng Certified Public Accountants provided domestic Auditors’ Report with interpretative explanation segment and its explanation and presentation was objective and fair. Simultaneously, the Supervisory Committee considered that the opinion on this problem of the Board of Directors was correct and agreed to its opinion on the Auditors’ Report. IX.SIGNIFICANT EVENTS 1. There was no material lawsuit or arbitration in the report year. 2. In the report year, the Company had no events of purchase and sale of assets. 3. Significant Correlative Transactions - 21 - The Company is the holding subsidiary of OCT Group Company. Hong Kong Konka Co., Ltd. (Hereinafter referred to as Hong Kong Konka is the full capital subsidiary of the Company set in Hong Kong. Hong Kong OCT Co., Ltd. (hereinafter referred to as Hong Kong OCT Co., Ltd.) is the full capital subsidiary of OCT Group Company set in Hong Kong. OCT Group Company holds 45% equity of OCT Real Estate Co., Ltd. hereinafter referred to as OCT Real Estate Co., Ltd. (1). The Company cooperated with OCT Real Estate Co., Ltd. to operate D and E building of OCT PORTOFINO• SWAN CASTLE Real Estate Project The project is located in the north west of Shenzhen OCT, occupies an area of 33500 ㎡, with construction area of 68500 ㎡(including underground garage of 8600 ㎡). The project is estimated to complete at the end of 2002. The project was planned and designed as tower, with total investment of RMB 0.3 billion. The Company invested 60% and OCT Real Estate Co., Ltd. invested 40%. The Company and OCT Real Estate Co., Ltd. were distributed profit (settled annually) and took relevant risks according to the above- mentioned investment proportion. The Company totally invested RMB0.165 billion. The acreage available for sale of the real estate items after development is 590,590,100 sq.m. and 41,443.36 sq.m. has been sold in 2002. The income from sale is RMB 372,470,394.00 and distributable profit is RMB 125,000,773.38 (calculated according to the cooperation agreement of the two parties). The profit for the Company in 2002 is RMB 75,000,464.03, which has been reckoned in the earnings from investment in 2002 and taken back on Dec.31, 2002 and took back RMB 65,000,000 investment. (2) The Company cooperated with OCT Real Estate Co., Ltd. to operate the 3rd phase of Jinxiu Garden real estate project. The Project is located in the east of Shenzhen OCT, occupies an area of 33700 ㎡ with total construction area of 115000 ㎡(including basement of 18000 ㎡). The project started from October 2001, with a construction term of about 2 years. The project is planned and designed as tower, with a total investment of RMB 0.5 billion, among which, investment of the Company reached RMB0.1 billion, taking 20% of the total investment and investment of OCT Real Estate Co., Ltd. of RMB 0.4 billion, taking 80% of the total investment. The Company and OCT Real Estate Co., Ltd. were distributed profit (settled annually) and took relevant risks according to the above-mentioned investment proportion. At present, the project is proceeding smoothly, has been constructed and realized 80% sales. It is estimated the project can be settled and achieve returns at the end of the year 2003. (3) The Company assigned its holding 70% equity of Shenzhen Huali Packing Trade Co., Ltd. to Hong Kong OCT With registered capital as HKD 40 million, Shenzhen Huali Packing Trade Co., Ltd. (hereinafter referred to as Shenzhen Huali Packing) was incorporated on Feb. 9, 1985 with the SFWF [1985] No.72 approval of Shenzhen Government. It was mainly engaged in the production and sales of corrugated paper cardboard for packing and corrugated paper packing cartons with a variety of standards and types, whose 70% equity is held by the Company, and 30% equity is held by Hong Kong OCT. According to the audit report of Shenzhen Dahua Tiancheng Certified Public Accountants, ended Dec. 31, 2001, Shenzhen Huali Packing has net assets of RMB 118.1780 million and realized a net profit of RMB 21.5138 million. According to the assets Evaluation report of Zhongqinxin Assets - 22 - Evaluation Co., Ltd. the Evaluation result with Dec. 31, 2001 as the standard date was as follows: the evaluated value of net assets amounted to RMB 162.2458 million, and the evaluated value of 70% equity held by the Company amounted to RMB 113.5721 million. The equity was assigned by the price RMB 118.7246 million, based on the premium price RMB 36 million as 70% of net assets audited. The premium price was calculated according to the forecasted profit contribution of Shenzhen Huali Packing in future 3 years since Jan. 1, 2002, RMB 5.1525 million higher than evaluated.. After the correlative transaction, Hong Kong OCT will hold 100% equity of Shenzhen Huali Packing, while the Company will not hold shares of Shenzhen Huali Packing any more. The book credit of long-term investment on the Company’s account against Shenzhen Huali Packing as of Dec.31, 2001 is RMB 101,443,937.61 (investment cost: 83,087,385.95, equity investment difference: 18,356,551.66). The earnings from it is RMB 17,280,662.39. (4) Hong Kong Konka assigned its holding 25% equity of Shanghai Huali Packing Co., Ltd. to Hong Kong OCT With register capital as HKD 55 million, Shanghai Huali Packing Co., Ltd. (hereinafter referred to as Shanghai Huali Packing, was incorporated on Oct. 27, 1997, with the HFG [1997] No. 40 approval of Shanghai Pudong New District Heqing Town People’s Government. Shanghai Meiling Plastic Products Factory held its 40% equity, Shenzhen Huali Packing held its 35% equity and Hong Kong Konka held its 25% equity. It was mainly engaged in the production and sales of corrugated paper cardboard for packing and corrugated paper packing cartons with a variety of standards and types. As audited by Shanghai Haijia Certified Public Accountants, ended Dec. 31, 2001, the company had net assets RMB 66.1845 million and realized a net profit of RMB 9.4931 million. According to the assets evaluation report of Zhongqinxin Assets Evaluation Co., Ltd. the Evaluation result with Dec. 31, 2001 as the standard date was as follows: the evaluated value of net assets amounted to RMB 82.2033 million, and the evaluated value of 25% equity held by Hong Kong Konka amounted to RMB 20.5508 million. The equity was assigned by the price RMB 18.20 million, based on the premium price RMB 36 million as 25% of net assets audited, RMB 2.3508 million lower than the evaluated result RMB 20.5508. After the assignment, Hong Kong Konka will not held shares of Shanghai Huali Packing any more. The book credit of long-term investment against Shanghai Huali Packing on Hong Kong Konka’s account as of Dec.31, 2001 was RMB 15,335,300.62. The earnings from it is RMB 2,864,699.38. 4. Impacts of correlative transactions on the Company and others Through cooperatively operation of real estate projects, took use of the margin fund in changing period to invest on real estates that can achieve profit stably and quickly to help the Company to get through the difficult time. Through correlative transaction equity assignment, the Company took back currency capital of about RMB 0.137 billion, which will provide capital support for the implementation of strategic change and benefit for the Company to concentrate capital and energy on main business lines and main products. South Securities Co., Ltd. issued Independent Financial Consultant Report on Correlative Transactions of Konka Group Co., Ltd. The Company signed with OCT Real Estate Co., Ltd. the relevant Agreement and - 23 - Complementary Agreement on Cooperative Operation of Real Estate Project. The Company signed with Hong Kong OCT, and Hong Kong Konka signed with Hong Kong OCT the relevant Agreement and Complementary Agreement on Equity Assignment. The relevant resolutions were approved by the Board of Directors and relevant Board Meetings and the above-mentioned correlative transactions were examined and approved in 2001 Shareholders’ General Meeting, and relevant correlative person gave up the voting right. In addition, there were related transactions between the Company and the subsidiaries of the Company’s control shareholder, OCT Group. The transactions including paying storage, estate expense, land use fee and purchasing goods are fair according to the market price and did not damage the interest of the Company and other shareholders of the Company. Please refer to (3) Current of related companies of Note 6 in the accounting statements of financial report. 5. Material Contracts and Implementation (1) In the report year, the Company had never kept as custodian, contracted or leased any other company’s assets and vice versa. (2) In the report year, the Company had never offered guarantee for external parties. (3) In the report year, the Company had never entrusted financing. 6. In the report year, the Company or the shareholders holding over 5% of total shares had never disclosed commitments in the designated newspapers or on the website. 7. About Certified Public Accountants and Remuneration As examined and approved by 2001 Annual Shareholders’ General Meeting, the Company engaged Shenzhen Dahua Tiancheng Certified Public Accountants in charge of the audit of the Company of 2002. The Company paid the financial audit expense of Certified Public Accountants as follows: RMB 350,000 for domestic audit (A share); RMB 450,000 for overseas audit (B share). 8. Other Significant Events In the report period, the Company, the directors and senior executives of the Company have not been punished by securities supervision and administration authorities. X.FINANCIAL REPORT (I) The Whole Text of the Auditors’ Report (Please refer to the attachment) (II) Financial Statements (Please refer to the attachment) (III) Attachment of Accounting Statement (Please refer to the attachment) XI.DOCUMENTS FOR REFERENCE (I) Accounting statements carried with the signatures and seals of legal representative, finance controller and person in charge of accounting. (2) Originals of domestic and overseas auditor’s report carried with the seal of Certified Public Accountants, the signature and seal of certified public accountants. (3) Originals of all documents and manuscripts of public notices disclosed on the newspapers designated by CSRC in the report period. (4) Other relevant materials. Board of Directors of Konka Group Co., Ltd. Apr. 17, 2003 - 24 - Konka Group Co., Ltd. (Incorporated in the People’s Republic of China) Report of the auditors and financial statements for the year ended December 31, 2002 Report of the auditors to the members of Konka Group Co., Ltd. (Incorporated in the People’s Republic of China) We have audited the financial statements on pages 2 to 26. The preparation of these financial statement 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 the management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. In our opinion the financial statements present fairly, in all material respects, the financial position of the Company and its subsidiaries as at December 31, 2002 and the results of their operations and cash flows for the year then ended, in accordance with International Accounting Standards. K. C. Oh & Company Certified Public Accountants Hong Kong : April 17, 2003 - 25 - Konka Group Co., Ltd. Consolidated income statement for the year ended December 31, 2002 Note 2002 2001 RMB’000 RMB’000 Turnover 5 8,041,653 6,748,122 Cost of sales ( 6,822,595 ) ( 6,180,730 ) Gross profit 1,219,058 567,392 Other revenue 6 166,746 45,718 Distribution costs ( 899,831 ) ( 934,246 ) Administrative expenses ( 392,789 ) ( 286,440 ) Other operating expenses ( 1,197 ) ( 977 ) Operating profit/(loss) 91,987 ( 608,553 ) Finance costs ( 34,620 ) ( 84,285 ) Share of loss from associates ( 428 ) ( 448 ) Profit/(loss) before taxation 7 56,939 ( 693,286 ) Taxation 8 ( 8,189 ) ( 7,206 ) Profit/(loss) before minority interests 48,750 ( 700,492 ) Minority interests ( 5,627 ) ( 6,526 ) Profit/(loss) attributable to shareholders 43,123 ( 707,018 ) Accumulated profit/(loss) at beginning of year ( 653,292 ) 47,371 Accumulated loss before appropriations ( 610,169 ) ( 659,647 ) Appropriations : Transfers from statutory surplus reserves - 3,178 Transfers from statutory public welfare fund - 3,177 - 6,355 Accumulated loss at end of year ( 610,169 ) ( 653,292 ) Earnings/(loss) per share – basic RMB0.07 ( RMB1.17 ) The calculation of the basic earnings/loss per share is based on the current year’s profit of RMB43,123,000 (2001 - loss of RMB707,018,000) attributable to the shareholders and on the weighted average number of 601,986,352 shares in issue during the year. - 26 - Konka Group Co., Ltd. Consolidated balance sheet as at December 31, 2002 Note 2002 2001 RMB’000 RMB’000 Non-current assets Property, plant and equipment 9 1,383,137 1,575,761 Goodwill 10 1,585 17,435 Intangible assets 11 8,674 7,157 Interests in associates 12 53,993 41,332 Other investments 13 211,790 112,290 1,659,179 1,753,975 Current assets Tax recoverable - 1,688 Inventories 14 2,578,796 2,825,932 Properties held for sale 15 4,172 3,944 Account receivables 16 277,156 528,540 Prepayments, deposits and other receivables 17 233,277 304,686 Note receivables 1,205,139 769,525 Cash and bank balances 1,044,899 994,857 5,343,439 5,429,172 Current liabilities Tax payable ( 3,508 ) - Account payables ( 872,733 ) ( 818,972 ) Other payables and accrued expenses ( 826,732 ) ( 702,687 ) Note payables ( 1,903,760 ) ( 1,579,358 ) Short-term bank loans 18 ( 164,000 ) ( 816,000 ) ( 3,770,733 ) ( 3,917,017 ) Net current assets 1,572,706 1,512,155 Total assets less current liabilities 3,231,885 3,266,130 (to be cont’d) - 27 - Konka Group Co., Ltd. Consolidated balance sheet as at December 31, 2002 (cont’d) Note 2002 2001 RMB’000 RMB’000 Total assets less current liabilities 3,231,885 3,266,130 Non-current liabilities Long-term bank loans 19 - ( 55,127 ) Deferred income ( 19,485 ) ( 10,483 ) Other long-term liabilities ( 24,283 ) ( 34,090 ) ( 43,768 ) ( 99,700 ) Minority interests ( 243,162 ) ( 260,490 ) Net assets employed 2,944,955 2,905,940 Financed by : Share capital 20 601,986 601,986 Reserves 21 2,342,969 2,303,954 Shareholders’ equity 2,944,955 2,905,940 The financial statements on pages 2 to 26 were approved and authorized for issued by the board of directors on April 5, 2003 and are signed on its behalf by : Director Director - 28 - Konka Group Co., Ltd. Consolidated statement of changes in equity for the year ended December 31, 2002 Share Capital Surplus Accumu capital reserves reserves profit/ RMB’000 RMB’000 RMB’000 RMB As at January 1, 2001 601,986 1,811,143 1,139,399 4 Loss for the year of 2001 - - - ( 70 Dividend paid - - - Over-appropriation in previous years - - ( 6,355 ) Goodwill recognition - 3,170 - Exchange difference arising from translation of foreign operations - - - As at December 31, 2001 601,986 1,814,313 1,133,044 ( 65 As at January 1, 2002 601,986 1,814,313 1,133,044 ( 65 Profit for the year of 2002 - - - 4 Dividend paid - - - Difference arising from investment in subsidiaries - 4,477 - Adjustment on revaluation of property, plant and equipment - 1,662 - Exchange difference arising from translation of foreign operations - - - As at December 31, 2002 601,986 1,820,452 1,133,044 ( 61 - 29 - Konka Group Co., Ltd. Consolidated cash flow statement for the year ended December 31, 2002 2002 2001 RMB’000 RMB’000 Cash flow from operating activities Operating profit/(loss) before taxation 56,939 ( 693,286 ) Adjustment items : Interest income ( 6,371 ) ( 26,912 ) Income from government grant ( 5,273 ) ( 2,278 ) Interest expenses 22,165 84,285 Depreciation 173,163 133,604 Provision for impairment loss of property, plant and equipment 529 8,018 Loss on disposal of property, plant and equipment 5,302 3,649 Amortization of goodwill 317 2,489 Profit/(loss) on disposal of subsidiaries ( 20,360 ) 535 Provision for diminution in value of unconsolidated subsidiaries 136,567 - Amortization of intangible assets 2,672 3,058 Provision for diminution in value of associates 5,594 - Share of results in associates 428 448 Profit on disposal of other investments ( 202 ) ( 3,681 ) Provision for diminution in value of inventories 18,821 61,204 Provision for doubtful debts on account receivables 46,041 21,132 Provision/(reversal) for doubtful debts on other receivables ( 1,739 ) 4,940 Net operating cash inflow/(outflow) before movements in working capital 434,593 ( 402,795 ) Exchange reserve movement 1,332 ( 1,342 ) Decrease in inventories 193,227 2,039,251 (Increase)/decrease in properties held for sale ( 228 ) 285 Decrease in account receivables 151,455 404,349 (Increase)/decrease in prepayments, deposits and other receivables 56,769 ( 18,063 ) Increase in note receivables ( 441,605 ) ( 27,081 ) Increase/(decrease) in account payables 73,389 ( 317,844 ) Increase in other payables and accrued expenses 156,782 227,475 Increase/(decrease) in note payables 356,612 ( 1,169,901 ) Cash generated from operations 982,326 734,334 Interest paid ( 22,165 ) ( 84,285 ) Corporate and profits tax paid ( 2,993 ) ( 43,591 ) Net cash inflow from operating activities 957,168 606,458 (to be cont’d) - 30 - Konka Group Co., Ltd. Consolidated cash flow statement for the year ended December 31, 2002 (cont’d) 2002 2001 RMB’000 RMB’000 Net cash inflow from operating activities 957,168 606,458 Investing activities Interest received 6,371 26,912 Purchases of property, plant and equipment ( 174,484 ) ( 381,289 ) Proceeds from disposal of property, plant and equipment 121,882 226,739 Purchases of intangible assets ( 4,189 ) ( 1,015 ) Net cash inflow/(outflow) on disposal of subsidiaries 114,456 ( 7,483 ) Provision for diminution in value of unconsolidated subsidiaries ( 136,567 ) - Additional investment in associates ( 14,889 ) ( 23,773 ) Receipts/(repayments) from/(to) associates ( 26,890 ) 6,347 Acquisition of other investments ( 265,000 ) ( 101,604 ) Proceeds from disposal/return of other investments 167,202 19,025 Net cash outflow from investing activities ( 212,108 ) ( 236,141 ) Financing activities Dividend paid ( 11,579 ) ( 81,119 ) Decrease in minority interests ( 4,780 ) ( 565 ) Bank loans repaid ( 683,127 ) ( 754,474 ) Government grant received 14,275 12,761 Other long-term liabilities raised/(repaid) ( 9,807 ) 21,872 Net cash outflow from financing activities ( 695,018 ) ( 801,525 ) Increase/(decrease) in cash and cash equivalents 50,042 ( 431,208 ) Cash and cash equivalents at beginning of year 994,857 1,426,065 Cash and cash equivalents at end of year 1,044,899 994,857 Analysis of cash and cash equivalents : Cash and bank balances 1,044,899 994,857 - 31 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2002 1. General information Konka Group Co., Ltd. (“the Company”), formerly known as Shenzhen Konka Electronic Group Co., Ltd., obtained approval from Shenzhen Municipal People’s Government to reorganize into a limited stock company in August 1991. On the approval of the People’s Bank of China, Shenzhen Branch, the Company issued “A” shares and “B” shares, which have then been listed on the Shenzhen Exchange. On August 29, 1995, the Company changed its name to Konka Group Co., Ltd. The principal activities of the Company and its subsidiaries (“the Group”) include the manufacture and sale of color television, stereo recorders, hi-fi component systems, facsimile machines and telecommunication products, property development and investment. 2. Basis of preparation of the financial statements The consolidated financial statements have been prepared in accordance with the International Accounting Standards (“IAS”) issued by the International Federation of Accountants. These accounting standards differ from those used in the preparation of the PRC statutory financial statements, which are prepared in accordance with the PRC Accounting Standards. To conform to IAS, adjustments have been made to the PRC statutory financial statements. Details of the impact of such adjustments on the net asset value as at December 31, 2002 and on the operating results for the year then ended are included in note 26 to the financial statements. In additional, Apart from certain fixed asset items that are recorded at valuation basis and short-term investments that are recorded at the lower of cost and market value/net realizable value, the financial statements have been prepared under the historical cost convention. 3. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Group made up to December 31 each year. Except for those subsidiaries not consolidated for the reasons stated below, all significant inter-company transactions and balances within the Group have been eliminated on consolidation. (a) Subsidiaries A subsidiary is a company in which the Company holds, directly or indirectly, more than 50% of the equity interest as a long-term investment and/or has the power to cast the majority of votes at meetings of the board of directors/management committee. As at December 31, 2002, the Company held the following subsidiaries : - 32 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2002 (cont’d) 3. Basis of consolidation (cont’d) (a) Subsidiaries (cont’d) Place of Percentage of Name of the incorporation/ Registration interest held Principal company registration capital Direct Indirect activities RMB’000 % % Dongguan Konka PRC RMB200,000 100 - Production of Electronic Co., Ltd. TV sets, hi-fi, etc Konka Pacific Pty. Australia AUD1,000 100 - Sale of Ltd. * electronic products Konka (U.S.A.) Ltd. * U.S.A. USD3,000 100 - Research and development Hong Kong Konka Hong Kong HKD500 100 - Trading of Limited electronic products Anhui Konka PRC RMB128,500 65 - Manufacture Electronic and sale of Co., Ltd. TV sets Mudanjiang Konka PRC RMB68,000 60 - Manufacture Industrial and sale of Co., Ltd. TV sets Chongqing Konka PRC RMB45,000 60 - Manufacture Electronic Co., Ltd. and sale of TV sets Shenzhen Konka PRC RMB8,300 51 - Manufacture Electrical Co., Ltd. and sale of electronic products Shenzhen Konka PRC RMB120,000 75 25 Manufacture Telecommunications and sale of Technology Co., Ltd. mobile phones Shenzhen Shushida PRC RMB42,000 75 25 Manufacture Electronic Co., Ltd. and sale of electronic products Shenzhen Konka PRC RMB30,000 75 25 Manufacture Communication and sale of Network Co., Ltd. digital network products Chongqing Qingjia PRC RMB15,000 50 10 Manufacture Electronic Co., Ltd. and sale of electronic parts Shenzhen Konka PRC RMB14,500 49 51 Production of Precision Mould mould Co., Ltd. - 33 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2002 (cont’d) 3. Basis of consolidation (cont’d) (a) Subsidiaries (cont’d) Place of Percentage of Name of the incorporation/ Registration interest held Principal company registration capital Direct Indirect activities RMB’000 % % Shenzhen Konka PRC RMB9,500 49 51 Production of Injected Plastic plastic Manufactory Co., Ltd. products Shanxi Konka PRC RMB69,500 45 15 Manufacture Electronic and sale of Co., Ltd. TV sets Dongguan Konka PRC RMB10,000 - 100 Production of Packaging Co., Ltd. plastic products Hong Din International Hong Kong HKD500 - 100 International Trade Limited trade Hong Din Investment Hong Kong HKD500 - 100 Investment Development holding Limited Indonesia Konka Indonesia USD500 - 100 Trading Trading Limited * Konka Electronics India USD1,160 - 70 Production of (India) Co., Ltd. * color TV sets Changshu Konka PRC RMB24,650 - 60 Manufacture Electronic Co., Ltd. and sale of electronics products Boluo Konka Printed PRC RMB40,000 - 51 Manufacture Co., Ltd. and sale of electronic products Shenzhen New PRC RMB15,000 - 49 Production of Teamwork Precision mould Mould Co., Ltd. ** * The results and the financial position of these companies are not required to be consolidated because they had ceased the business. The balances due from these companies to the Company of RMB136,567,000 and RMB25,392,000 were charged as provision for diminution in value of unconsolidated subsidiaries and provision for doubtful debts for the year respectively. ** The Company has effective control over this company. - 34 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2002 (cont’d) 3. Basis of consolidation (cont’d) (b) Associates An associate is a company in which the Company holds, directly or indirectly, not less than 20% and not more than 50% equity interest as a long-term investment and is able to exercise significant influence on this company. The investments in associates are accounted for by the Group using the equity method of accounting. The associates held by the Company as at December 31, 2002 are shown in note 12 to the financial statements. 4. Significant accounting policies (a) Property, plant and equipment Property, plant and equipment other than construction-in-progress is stated at cost less depreciation and amortization. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its present working condition and location for its intended use. Expenditure incurred after the assets have been put into operation, such as repairs and maintenance and overhaul costs, is normally charged to the income statement in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the assets, the expenditure is capitalized as an additional cost of the assets. Depreciation of property, plant and equipment is provided using the straight-line method over the estimated useful lives, taking into account the estimated residual value of 10% of the cost or revalued amount, as follows : Land use rights Over the lease terms Buildings 2.25% Leasehold improvements 20% Machinery and equipment 9% Electronic equipment 18% Motor vehicles 18% The valuation of the property, plant and equipment includes the costs of buildings, machinery and furniture, and also the interest expenses and exchange differences arising from bank loans that finance the construction. The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sale proceeds and the carrying amount of the asset and is recognized in the income statement. Where the recoverable amount of an asset has declined below its carrying amount, the carrying amount is reduced to reflect the decline in value, which is the difference between the recoverable amount and the carrying amount. - 35 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2002 (cont’d) 4. Significant accounting policies (cont’d) (b) Construction-in-progress Construction-in-progress is stated at cost, which includes all construction costs and other direct costs (including borrowing costs capitalized), attributable to such projects. The latter include factories, office buildings and facilities. Construction-in-progress is not depreciated until completion. Costs on completed construction works are transferred to the relevant category of property, plant and equipment when completed. (c) Goodwill Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary, associate or jointly controlled entity at the date of acquisition. Goodwill is recognized as an asset and amortized on a straight- line basis over the estimated useful lives, which are on average 10 years. On disposal of a subsidiary, associate or jointly controlled entity, the attributable amount of unamortized goodwill is included in the determination of the profit or loss on disposal. (d) Intangible assets The cost of technical know-how is amortized on a straight-line basis over its profit-generating period. Trademarks are measured initially at cost and amortized on a straight-line basis over their estimated useful lives, which are on average 5 years. (e) Investments Long-term investments are stated at cost less impairment loss that is other than temporary whilst short-term investments are stated at the lower of cost and market value or net realizable value. (f) Inventories Inventories are valued at the lower of cost and net realizable value. Cost comprises direct materials, direct labor cost and an appropriate portion of overheads. Cost is calculated using the weighted average method. Net realizable value is calculated as the estimated selling price less all further costs of production and the related costs of marketing, selling and distribution. - 36 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2002 (cont’d) 4. Significant accounting policies (cont’d) (g) Properties held for sale Properties held for sale are stated at the lower of cost and net realizable value. Cost is determined by an apportionment of the total land and building costs attributable to unsold properties. Net realizable value is estimated by the directors based on prevailing market prices, on an individual property basis. (h) Deferred taxation Tax liabilities arising from timing differences, which are probable to be crystallized in the foreseeable future, are recognized as deferred tax liabilities. (i) Deferred income Long-term government grants towards research and technical know-how development are recognized as income on a straight-line basis over the period of the grant. (j) Cash equivalents Cash equivalents are short-term, highly liquid investments that are readily available to known amounts of cash and which are subject to an insignificant risk of changes in value. (k) Revenue recognition Revenue is recognized when it is probable that the economic benefits associated with the transactions will flow to the Group and the stage of completion of the transactions can be measured reliably : i) Revenue from sales of goods is recognized when the risks and rewards of ownership of the goods are substantially transferred to customers. ii) For properties held for sale, revenue is recognized on the execution of an unconditional binding sales agreement. iii) Interest income is accrued on a time basis, by reference to the principal outstanding and at the interest rate applicable. iv) Dividend income from investments is recognized when the shareholders’ rights to receive payments have been established. - 37 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2002 (cont’d) 4. Significant accounting policies (cont’d) (l) Foreign currency conversion The financial statements are expressed in Renminbi. Transactions in foreign currencies are translated at the rates prevailing at the dates of the transactions. Monetary assets and liabilities in foreign currencies are translated at the rates prevailing at the balance sheet date. Exchange differences arising from translation of foreign currency borrowings for the purpose of financing the construction of office buildings, plant and machinery and other major assets, for periods prior to their being in a condition to enter into service, are included in the cost of the assets concerned. Other exchange differences are dealt with in the consolidated income statement. On consolidation, the financial statements of overseas subsidiaries denominated in foreign currencies are translated to Renminbi at the rates of exchange prevailing at the balance sheet date. The resulting translation differences are included in the exchange reserve. (m) Impairment loss At each balance sheet date, the Group reviews the carrying amounts of its assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. Any impairment loss arising is recognized as an expense immediately. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years. A reversal of an impairment loss is recognized as income immediately. (n) Provisions Provisions are recognized when the Group has a present legal or constructive obligation subsequent to a past event, which will result in a probable outflow of economic benefits that can be reasonably estimated. - 38 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2002 (cont’d) 5. Turnover 2002 2001 RMB’000 RMB’000 The People’s Republic of China 7,630,353 6,535,098 Hong Kong 411,300 5,773 Others - 207,251 Total 8,041,653 6,748,122 6. Other revenue 2002 2001 RMB’000 RMB’000 Net investment profit (1) 20,150 174 Income from government grant (2) 5,273 2,278 Income from raw material less cost 6,589 8,758 Income from trademark and mould less cost 881 38 Transfer from VAT of local-product-local-sale 69,597 24,305 Profit from joint venture on property development site at Swan Castle (3) 75,000 - Other non-operating net incomes/(expenses) ( 10,744 ) 10,165 166,746 45,718 (1) During the year, the Group disposed of several subsidiaries with net investment profit. It mainly came from disposal of : (i) Shenzhen Huali Packaging Co., Ltd. at profit of RMB17,281,000 and (ii) Shanghai Huali Packaging Co., Ltd. at profit of RMB2,865,000. (2) The Group received government grant RMB12,000,000 (2001 - RMB11,980,000) for research and technical know-how development that would be recognized as income on a straight-line basis over the period of the grant. During the year, an amount of RMB2,998,000 was recognised. Other short-term subsidies with a total sum of RMB2,275,000 were also recognized as income. (3) The Group and Shenzhen OCT Property Development Limited had a joint venture project on a property development site, namely “Swan Castle”. Pursuant to the terms of the co-operative agreement, the Group held 60% interest in this project and had contributed a sum of RMB165,000,000 during the year. The proceed from disposal of the properties was RMB372,470,000 and the profit was RMB125,001,000. The Group had recognized its share of attributable profit as other income. - 39 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2002 (cont’d) 7. Profit/loss before taxation 2002 2001 RMB’000 RMB’000 Profit/loss before taxation has been arrived at : After charging : Auditors’ remuneration 800 800 Directors’ emoluments 320 320 Depreciation 173,163 133,604 Provision for impairment loss of property, plant and equipment 529 8,018 Loss on disposal of property, plant and equipment 5,302 3,649 Amortization of goodwill 317 2,489 Loss on disposal of subsidiaries - 535 Provision for diminution in value of unconsolidated subsidiaries (3a) 136,567 - Amortization of intangible assets 2,672 3,058 Provision for diminution in value of associates 5,594 - Provision for diminution in value of inventories 18,821 61,204 Provision for doubtful debts 44,302 26,072 Interest expenses 22,165 84,285 Research and development expenditure - 2,844 Rentals of land and buildings 22,463 52,929 Staff costs 375,792 298,279 And after crediting : Interest income 6,371 26,912 Profit on disposal of subsidiaries 20,360 - Income from government grant 5,273 2,278 Profit on disposal of other investments 202 3,681 8. Taxation 2002 2001 RMB’000 RMB’000 PRC corporate tax 7,454 6,090 Hong Kong profits tax 735 1,116 8,189 7,206 PRC corporate tax is determined by reference to the profit reported in the audited financial statements under PRC Accounting Standards, and after adjustments for income and expense items that are not assessable or deductible for income tax purposes. It is provided at the rates of 15% (2001 - 15%) on the estimated assessable income for companies established in Shenzhen and 33% (2001 - 33%) for other PRC companies. Hong Kong profits tax is calculated at 16% (2001 - 16%) of the estimated assessable profits for the year. - 40 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2002 Property, plant and equipment Land Leasehold Machinery Electronic use rights Buildings improvements & equipment equipment RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Cost/valuation As at January 1, 2002 26,829 637,963 14,708 885,598 306,922 Additions 8,800 173,111 6,685 24,440 82,997 Disposals ( 4,303 ) ( 600 ) - ( 54,229 ) ( 86,147 ) ( Eliminated on disposal of subsidiaries - ( 22,382 ) - ( 122,032 ) ( 6,297 ) ( As at December 31, 2002 31,326 788,092 21,393 733,777 297,475 7 Accumulated depreciation As at January 1, 2002 ( 1,511 ) ( 105,579 ) ( 13,326 ) ( 328,120 ) ( 179,316 ) ( Additions ( 499 ) ( 16,805 ) ( 4,481 ) ( 77,822 ) ( 60,053 ) ( Disposals - 600 - 26,415 31,489 Eliminated on disposal of subsidiaries - 11,104 - 66,964 3,711 Provision for impairment loss - - - ( 293 ) ( 236 ) - As at December 31, 2002 ( 2,010 ) ( 110,680 ) ( 17,807 ) ( 312,856 ) ( 204,405 ) ( 4 Net book value As at December 31, 2002 29,316 677,412 3,586 420,921 93,070 As at December 31, 2001 25,318 532,384 1,382 557,478 127,606 Certain property, plant and equipment of subsidiaries with a net book value of RMB129,912,000 have been pledg granted to the Group. In preparation for the reorganization of the Company into a Sino-foreign joint stock limited company, the Company July 31, 1991 were revalued on an open market value basis by Zhonghua (Shenzhen) Certified Public Accountants surplus of RMB29,203,000 arising from the revaluation was capitalized as share capital. - 41 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2002 (cont’d) 9. Goodwill RMB’000 RMB’000 Cost As at January 1, 2002 24,781 Eliminated on disposal of subsidiaries ( 21,611 ) As at December 31, 2002 3,170 Amortization As at January 1, 2002 ( 7,346 ) Charged for the year ( 317 ) Eliminated on disposal of subsidiaries 6,078 As at December 31, 2002 ( 1,585 ) Net book value As at December 31, 2002 1,585 As at December 31, 2001 17,435 10. Intangible assets Technical Trademarks know-how Total RMB’000 RMB’000 RMB’000 Cost As at January 1, 2002 1,424 11,753 13,177 Additions 44 4,145 4,189 As at December 31, 2002 1,468 15,898 17,366 Amortization As at January 1, 2002 ( 235 ) ( 5,785 ) ( 6,020 ) Charged for the year ( 194 ) ( 2,478 ) ( 2,672 ) As at December 31, 2002 ( 429 ) ( 8,263 ) ( 8,692 ) Net book value As at December 31, 2002 1,039 7,635 8,674 As at December 31, 2001 1,189 5,968 7,157 - 42 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2002 (cont’d) 11. Interests in associates 2002 2001 RMB’000 RMB’000 Share of net assets 61,413 70,048 Provision for impairment ( 5,594 ) - Amounts due from associates 1,530 1,561 Amounts due to associates ( 3,356 ) ( 30,277 ) 53,993 41,332 As at December 31, 2002, the Group held the associates as follows : Effective Place of equity held Company name registration by the Company Principal activities Directly Indirectly Huadoushi Longfeng Properties Macau 50% - Investment holding and Development Co., Ltd. * property investment Shenzhen OCT International PRC 25% - Media advertising Media Co., Ltd. Shenzhen Shangyongtong Investment PRC 20% - Investment in industrial & Development Co., Ltd. field, etc. Shenzhen Dekon Electronics Co., Ltd. PRC - 30% Manufacture & sale of electronic products Shenzhen Konka Energy Technology Co., Ltd. PRC - 30% Manufacture & sale of electronic parts Chongqing Jingkang Plastics Material PRC - 25% Production of moulds Co., Ltd. * This company was jointly invested by the Group and other four companies for developing a property development project, namely “Huadoushi Furong Village”. The project had not yet been commenced because the other four companies requested to withdraw their investment from this project and the local government exchanged the land already owned by this company. The Group made a provision for impairment loss that was equivalent to 20% of the investment cost in this company. - 43 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2002 (cont’d) 12. Other investments 2002 2001 RMB’000 RMB’000 Unconsolidated subsidiaries, balances due 136,567 - Provision for impairment loss ( 136,567 ) - - - Unlisted shares, at cost 3,385 1,885 Provision for impairment loss ( 1,400 ) ( 1,400 ) 1,985 485 Listed share, at cost* 9,805 9,805 Joint venture project 200,000 100,000 Government debentures - 2,000 211,790 112,290 * These listed shares are issued exclusively to legal entities and can only be transferred between legal entities. The market value of such shares is not generally available. 13. Inventories 2002 2001 RMB’000 RMB’000 Raw materials 1,124,186 777,129 Work-in-progress 24,540 66,520 Finished goods 1,548,023 2,081,415 Provision for diminution in value ( 117,953 ) ( 99,132 ) 2,578,796 2,825,932 14. Properties held for sale 2002 2001 RMB’000 RMB’000 Cost b/f 3,944 4,229 Additions/(disposals) 228 ( 285 ) Cost c/f 4,172 3,944 - 44 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2002 (cont’d) 15. Account receivables 2002 2001 RMB’000 RMB’000 Amount receivables 387,763 593,106 Provision for doubtful debts ( 110,607 ) ( 64,566 ) 277,156 528,540 As at December 31, 2002, the aging of amount receivables is analyzed as follows : 2002 2001 RMB’000 RMB’000 Within one year 111,626 382,174 In the second year 91,007 113,914 In the third year 64,742 46,442 Over three years 120,388 50,576 387,763 593,106 16. Prepayments, deposits and other receivables 2002 2001 RMB’000 RMB’000 Advance payments 76,338 130,391 Prepayments 25,000 71,179 Other receivables 138,843 110,826 Others - 933 Provision for doubtful debts 240,181 313,329 ( 6,904 ) ( 8,643 ) 233,277 304,686 17. Short-term bank loans 2002 2001 RMB’000 RMB’000 Bank loans, unsecured 105,000 685,000 Bank loans, secured 27,000 84,000 Short-term portion of long-term bank loans (note 19) 32,000 47,000 164,000 816,000 - 45 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2002 (cont’d) 18. Long-term bank loans 2002 2001 RMB’000 RMB’000 Bank loans, secured - 5,127 Bank loans, unsecured but guaranteed 32,000 97,000 32,000 102,127 Aging of bank loans : Within one year 32,000 47,000 In the second year - 55,127 32,000 102,127 Amount due for settlement within one year (note 18) ( 32,000 ) ( 47,000 ) Amount due for settlement over one year - 55,127 19. Share capital 2002 2001 RMB’000 RMB’000 Registered, issued and paid-up “A” shares of RMB1 each 399,148 399,148 “B” shares of RMB1 each 202,838 202,838 601,986 601,986 “A” shares, listed and tradable 224,198 224,198 “B” shares, listed and tradable 202,838 202,838 427,036 427,036 Listed but temporarily not tradable 174,950 174,950 601,986 601,986 The “A” and “B” shares carry equal rights with respect to the distribution of the Company’s assets and profits, and rank pari passu in all other respects. The “A” shares are held by PRC investors with settlement in Renminbi, whereas “B” shares are held by both PRC investors and foreign investors, and are settled in Hong Kong dollars. . - 46 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2002 21. Reserves According to the corporation law and relevant regulations of a joint stock limited company, the Company as capital reserves, which include share premium, surplus on revaluation of fixed assets and other investm used for issue of new shares, or for write-off or permanent provision when foreign investments are revalu statutory reserve and statutory public welfare fund. The Company is required to transfer an amount of making up the accumulated loss to statutory reserve until it is up to 50% of the registered share capital. current year loss or for issue of new shares. The amount of statutory reserve to be utilized for issue of ne such that the balance of the reserve will fall below 25% of the registered share capital after the issue required to transfer 5% of the profit after making up the accumulated loss to statutory public welfare fu only be applied for the collective welfare of the Company’s employees. The movements of reserves and retained earnings during the year are as follows : Statutory Capital surplus Accumulated reserves reserves profit/(loss) RMB’000 RMB’000 RMB’000 As at January 1, 2002 1,814,313 1,133,044 ( 653,292 ) Profit for the year - - 43,123 Dividend paid (1) - - - Difference arising from investment in subsidiaries (2) 4,477 - - Adjustment on revaluation of property, plant and equipment (3) 1,662 - - Exchange difference arising from translation of foreign operations - - - As at December 31, 2002 1,820,452 1,133,044 ( 610,169 ) (1)In accordance with IAS 10 (Revised) “Events After the Balance Sheet Date”, dividends proposed or d before the issue of the financial statements are not treated as a liability at the balance sheet date, b During the year, the Group had paid the dividend of RMB11,579,000. As no final dividend was prop was payable as at December 31, 2002. (2)During the year, the Group had carried out revaluation of assets and liabilities for certain subsidiaries. waiver of account payables totalling RMB4,477,000. This difference was credited to capital reserves. (3)This was a restatement of revaluation previously set off against property, plant and equipment. - 47 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2002 (cont’d) 22. Disposal of subsidiaries 2002 2001 RMB’000 RMB’000 Property, plant and equipment 72,371 3,061 Other investments 21,596 - Intangible assets - 38 Inventories 35,088 13,229 Account receivables 53,888 6,026 Prepayments, deposits and other receivables 16,379 738 Note receivables 5,991 200 Cash and bank balances 25,598 10,774 Account payables ( 19,628 ) ( 11,645 ) Other payables and accrued expenses ( 32,737 ) ( 3,231 ) Note payable ( 32,210 ) - Short-term bank loans ( 24,000 ) ( 13,000 ) 122,336 6,190 Attributable goodwill 15,533 669 Minority interests ( 18,175 ) ( 3,033 ) Profit/(loss) on disposal of subsidiaries 20,360 ( 535 ) Satisfied by cash 140,054 3,291 23. Commitments As at December 31, 2002, the Group did not have any material commitments under non-cancellable operating leases and capital expenditures as at December 31, 2002. 24. Contingent liabilities At December 31, 2002, the Group did not have any significant contingent liabilities. - 48 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2002 (cont’d) 25. Related party transactions The Group had certain material transactions with related parties with details as follows : 2002 2001 RMB’000 RMB’000 Overseas Chinese Town Guarantee fee paid 6,976 6,976 Holdings Co. Operating lease paid 357 503 Utilities and building management fee paid 6,180 11,938 Warehouse charge paid 1,380 10,277 Guarantee by this company 100,000 - Shenzhen OCT Machinery Purchase of Industry Co., Ltd. merchandises 53 61 Overseas Chinese Town (HK) Purchase of Co., Ltd. merchandises 30,937 91,803 Proceeds of disposal of subsidiaries 136,925 - Shenzhen Dekon Electronics Co., Purchase of Ltd. merchandises 31,622 - Shanghai Huali Packaging Co., Ltd. Purchase of merchandises 38,208 - Shenzhen Huali Packaging Co., Ltd. Purchase of merchandises 26,087 - 26. Impact on results attributable to shareholders and net asset value as reported by the PRC Certified Public Accountants Profit attributable Net to shareholders asset value RMB’000 RMB’000 As reported by PRC Certified Public Accountants 35,590 2,953,509 Adjustments to conform to IAS : Prior year adjustment on capital reserves - ( 6,978 ) Prior year adjustment on statutory surplus reserves - 17,909 Government grant transfer from capital reserves as deferred income - ( 22,483 ) Government grant recognized as income 2,998 2,998 Change in percentage ownership for subsidiaries 4,535 - As restated in conformity with IAS 43,123 2,944,955 - 49 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2002 (cont’d) 27. Financial instruments Financial assets of the Group include cash and bank balances, note receivables, account receivables, prepayments, deposits and other receivables. Financial liabilities include bank loans, note payables, account payables, other payables and accrued expenses. (a) Credit risk Cash and bank balances : Substantial amounts of the Group’s cash balances are deposited with the Bank of China, China Merchants Bank, Shenzhen Development Bank, Industrial and Commercial Bank of China, Construction Bank of China and Agricultural Bank of China. Account receivables : The Group does not have a significant exposure to any individual customer or counterpart. The major concentrations of credit risk arise from exposures to a substantial number of account receivables that are mainly located in the PRC. (b) Fair value The fair value of financial assets and financial liabilities is not materially different from their carrying amount. The carrying value of short-term bank loans is estimated to approximate its fair value based on the borrowing terms and rates of similar loans. The fair value of long-term bank loans is estimated, by applying discounted cash flow method using carrying market interest rates for similar financial instruments, to approximate its carrying value. Fair value estimates are made at a specific point in time and based on relevant market information and information about the financial instruments. These estimates are subjective in nature and involve uncertainties on matters of significant judgement, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. 28. Language The translated English version of financial statements is for reference only. Should any disagreement arise, the Chinese version shall prevail. 29. Comparative figures CERTAIN COMPARATIVE FIGURES HAVE BEEN RECLASSIFIED SO AS TO CONFORM TO THE CURRENT YEAR’S PRESENTATION. - 50 -