杭汽轮Ｂ(200771)2002年年度报告（英文版）

HANGZHOU STEAM TURBINE CO., LTD. ANNUAL REPORT 2002 Published on April 17, 2003 HANGZHOU STEAM TURBINE CO., LTD. .................................................................................1 ANNUAL REPORT 2002.................................................................................................................1 Important Notification....................................................................................3 Chapter 1. Company Profile......................................................................................................3 Chapter II. Financial And Business Data Summary .................................................................5 1. Major business data (in RMB) ...................................................................................5 2. Subsidiary form of the profit statement: .......................................................................6 3. Major accounting data and financial indices of past 3 years till the end of the report term. ..................................................................................................................................6 4. Changes of shareholders’ equity and their causation ....................................................7 5. Other business data and indices in the report term........................................................8 Chapter III. Change of Share Capital and Shareholders ...........................................................9 (I) Change of share capital ................................................................................................9 (II) Particulars about share placing and listing..................................................................9 (III) About the shareholders ............................................................................................10 Chapter IV. Particulars about the Directors, Supervisors, Managements and Employees ......11 (I) Current directors, supervisors and senior managements ............................................11 (II) Annual payroll of current directors, supervisors and senior managements. .............12 (III) Leaving of directors, supervisors and senior managements ....................................12 (IV) Engaging or dismissing of managers, vice managers, financial principal, secretary of the Board.....................................................................................................................12 (V) About the employees ................................................................................................13 Chapter V. Management Structure ..........................................................................................13 (I) Situations of the management structure .....................................................................13 (II) Major shortages existing in the practice of management and their cures in regarding of the relative regulations issued by China Securities Supervisory Committee..............14 (III) Independent directors’ executing of duty ................................................................14 (IV) Particulars about the separation of business, personnel, assets, organization, and accounting with the controlling shareholder ...................................................................15 (V) Motivating and inspection systems for the senior managements..............................15 Chapter VI. Introducing the Shareholders’ General Meeting .................................................16 (I) Notification, calling and holding of shareholders’ general meeting ..........................16 (II) Proposals that been passed or denied by the shareholders’ general meeting, information disclosing medias and dates ........................................................................17 (III) Electing and changing of directors or supervisors...................................................18 Chapter VII. Report of the Board of Directors........................................................................18 (I) Business situation of the report term..........................................................................18 1 (II) Business highlights of the report term ......................................................................19 (III) Investments in the report term .................................................................................21 (IV) Analysis of the financial position and business performance for the report term. ..27 (V) Influences of the movement of business environment and macro policies on the business performance. .....................................................................................................28 (VI) The notes to the non-standard auditors’ report , the report with explanatory statements, reserved statements, refusing to express opinions, or negative statement issued by certified public accountants.............................................................................29 (VII) Routine works of the Board of Directors ...............................................................29 (VIII) Profit distribution preplan for year 2002 ..............................................................31 (IX) Other events ............................................................................................................32 Chapter VIII. Report of the Supervisory Committee ..............................................................32 (I) Business situation of the Supervisory Committee......................................................32 (II) Independent statement of the Supervisory Committee .............................................33 Chapter IX Important Events ...............................................................................................36 (I) Material Lawsuits and Arbitration in the Report Period ............................................36 (II) Summary of Acquisition and Sales of Assets, Absorption and Consolidation and the Progress ..............................................................................................................36 (III) Material Associated Transactions in the Report Period ................................37 (IV) Other Material Associated Transactions .........................................................38 (V) Important Contracts and Implementation .................................................................38 (VI) The commitments of the Company and its shareholders holding over 5% of the Company’s total shares in the report year or extending to the report year from previous year(s). ............................................................................................................................39 (VII) Engagement/Disengagement of Certified Public Accountants ..............................39 (VIII) About the administrative punishment, circulating notice of criticism from China Securities Regulatory Commission or public blame from the Stock Exchange against the Company and the rectification and reform based on the opinions for improvement from China Securities Regulatory Commission or its representative office after inspection over the Company ...........................................................................................................40 (IX) Significant events as specified in Article 62 of the PRC Securities Law or Article 17 of the Rules for Information Disclosure by the Public Companies (for Trial Implementation) ..............................................................................................................40 (X) Material Events after the Report Period ...................................................................41 Chapter X Financial Report ................................................................................................0 Chapter XI Documents Available for Inspection ...............................................................30 2 Important Notification The Board of Directors of the Company guarantees that there are no significant omissions, fictitious or misleading statements in the Report and we will accept individual and joint responsibilities for the truthfulness, accuracy and completeness of the Report. The 9th meeting of the 2nd term Board of Directors examined the Annual Report 2002. 10 directors who attended the meeting passed the report. Mr. Jiang Demu, the director, absent the meeting due to business duty. He doesn’t vote on the Annual Report 2002. This Report is written in English and Chinese. If there is any conflict exists between the two versions, the Chinese version shall prevail. The Board of Directors of Hangzhou Steam Turbine Co., Ltd. April 17, 2003 Chapter I. Company Profile (I) Legal Name of the Company Name in Chinese: 杭州汽轮机股份有限公司 Name in English: HANGZHOU STEAM TURBINE CO., LTD Stock Abbreviation: Hangqilun B Stock Code: 200771 Abbreviation in English: HTC (II) Registered Address: 357 Shiqiao Rd., Hangzhou City, Zhejiang, China Office Address: 357 Shiqiao Rd., Hangzhou City, Zhejiang, China Post Code: 310022 Web site: http://www.htc.net.cn E-mail: he@htc.net.cn (III) Legal Representative: Mr. Fang Wen (IV) The General Manager: Mr. Yan Jianhua (V) Secretary of the Board: Mr. He Jianhang Tel: (0571)85780198 Fax: (0571)85780433 E-mail: he@htc.net.cn Contact address: Securities Office, Hangzhou Steam Turbine Co., Ltd., 357 Shiqiao Rd., Hangzhou City, Zhejiang 3 Security Affair Representative: Mr. Bo Ronghua Tel:(0571)85780422 Fax:(0571)85780433 E-mail: brh@htc.net.cn (VI) Shares Listed in: Shenzhen Stock Exchange (VII) Medias Assigned by National Security Supervisory Committee for Information Disclosure: Press media: Securities Times, Hong Kong Commercial Daily Website: http://www.cninfo.com.cn (VIII) Report prepared and ready for inquire at: Securities Office, Hangzhou Steam Turbine Co., Ltd. (IX) The primary business range of the Company is: designing, manufacturing, selling and service providing of steam turbine and its supplementary equipments, elements and accessories. (X) Supplementary information: 1. Primary business registration of the company is on April 23, 1998 at Zhejiang Provincial Business Administration. With the authorization of the 1st Provisional Shareholders’ General Meeting 1998 held on September 15, 1998, the company changed its property of business into “Sino-foreign joint public company”. (For details about this event please refer to the announcement on Sept. 16th, 1998 issues of Security Times and Hong Kong Commercial Daily titled “The Public Notice of the 1st Provisional Shareholders’ General Meeting 1998” The date of business registration renewed was December 18th, 1998 and at Zhejiang Provincial Business Administration. 2. Business license No. Qi-gu-ze-zong-fu-zi 002150. 3. Tax registration No. 330165704202620 4. Consignee of the non-negotiable stocks: The 140,000,000 non-negotiable state-owned stocks of the company were consigned to: China Securities Registration and Clearing Co., Ltd. Shenzhen Branch. 5. Public accountants invited: Overseas public accountant: PriceWaterHouse Coopers CPA. Address: 12/F Shui On Plaza, 333 Huai Hai Zhong Road, Shanghai 200021, PRC Telephone: (021) 6386 3388 Fax: (021) 6386 3300 Domestic public accountant: Zhejiang Orient CPA. Address: No. 563 Qingtai Street, Hangzhou. Telephone: 0571 87807184 Fax: 0571 87819700 4 Chapter II. Financial And Business Data Summary 1. Major business data (in RMB) No. Subjects Amount 1 Total profit 43,307,797.36 2 Net profit 34,706,731.04 3 Net profit after deducting of irregular gain/loss 45,060,387.19 4 Major business profit 128,484,116.73 5 Other business profit 662,588.85 6 Operation profit 53,264,589.10 7 Investment gains -1,561,169.18 8 Allowance income 1,525,466.67 9 Net balance of non-business income/expense -9,921,089.23 10 Net cash flow from business operation 80,191,177.33 11 Net increase/decrease of cash and cash equivalents 2,763,520.70 12 Net profit on IAS 39,094,572.04 [Note 1] Subjects of net profit after deducting of irregular gain/loss and amount involved. (in RMB) Subjects Amount Non-business income 58,441.02 Non-business expenses 9,979,530.25 Over inventory of current assets 148,976.00 Short inventory of current assets 727,061.13 Less: income tax 145,518.21 Total 10,353,656.15 [Note 2] Non-business income was primarily come from selling of small amount materials. [Note 3] The investment gains was RMB-1,561,169.18. Among which, with equity-method, RMB117,588.78 of gains was from Hangzhou Steam Turbine Environment Engineering Co., Ltd. which invested by the company, in year 2002; RMB602,950.15 of loss was generated by Hangzhou Keximeng Technologies Co., Ltd.; Investment devalue reserves was drawn fully upon the loss amount to RMB1,585,548.99; Gains from stock investment amount to RMB509,741.18 was from Zhejiang Steam Turbine Technologies Development Co., Ltd.’s investment in A share market with their own fund. [Note 4] Influence of the IAS and of other adjustments on the profit after tax and net assets. (in RMB thousand) Profit after tax Net assets Dec. 31, Dec. 31, Dec. 31, 2002 Dec. 31, 2001 2002 2001 According to China Accounting 34,707 27,388 454,784 441,640 Standard Influence of adjustments: 7,824 256 10,240 2,416 Deferred taxations (assets) 5 Deferred taxations (liabilities) 587 588 (17,010) 9,164 Deducting of deferred assets 109 Share dividend announced after 22,000 22,000 the end of year Increasing of evaluation of 32,385 houses and equipments Discrepancy between the (2,906) (2,906) devalue reserves and increasing of evaluation of houses and equipments Discrepancy between the (1,248) (1,248) depreciation reserves and evaluation of houses and equipments Returning of income tax of 131 239 affiliated companies Others 142 Recalculated according to the 39,095 28,722 498,245 456,892 IAS 2. Subsidiary form of the profit statement: prepared in accordance with “Information Disclosing Regulations No. 9, for Public Companies” issued by China Securities Supervisory Committee. Profit for the Year 2002 Year 2001 report term Net income/asset ratio Gains per share Net income/asset ratio Gains per share (%) (RMB) (%) (RMB) Fully Weighted Fully Weighted Fully Weighted Fully Weighted diluted average diluted average diluted average diluted average Profit of major 28.25 27.99 0.584 0.584 20.91 20.54 0.42 0.42 business Operation profit 11.71 11.60 0.242 0.242 7.38 7.25 0.148 0.148 Net profit 7.63 7.56 0.158 0.158 6.2 6.09 0.124 0.124 Net profit after 9.91 9.82 0.205 0.205 6.40 6.29 0.128 0.128 deducting of irregular gains/losses 3. Major accounting data and financial indices of past 3 years till the end of the report term. (in RMB) 6 No. Indices December 31,2002 December 31,2001 December 31,2000 1 Major business income 326,027,763.80 289,160,331.88 249,196,348.70 2 Net profit 34,706,731.04 27,388,868.94 29,262,588.78 3 Total assets 685,480,273.39 626,956,397.09 673,485,203.46 4 Shareholders’ equity (minority 454,783,502.12 441,640,751.46 435,871,033.02 shareholders excluded) 5 Gains per share (RMB/share) 0.158 0.124 0.133 6 Net asset per share (RMB/share) 2.07 2.01 1.98 7 Adjusted net asset per share 1.92 1.82 1.91 (RMB/share) 8 Net cash flow generated by 0.36 0.23 0.27 business operation (RMB/share) 9 Net income/asset ratio (%) 7.63 6.20 6.71 10 Gains per share, weighted average 0.158 0.124 0.133 (RMB/share) 11 Gains per share, deducting 0.205 0.128 0.132 irregular gain/loss (RMB/share) [Note 1] Major business income increased by RMB36,867,400 that was 12.75% over that of the previous year. This was caused by the increasing of sales of the industrial steam turbine – the major product of the company. [Note 2] Net profit increased by RMB7,317,900, that was 26.72% over that of the previous year. This is caused by the Company enlarged the market share of service products and the cost deducting measures of the company. [Note 3] Total assets increased by RMB58,523,900 that was 9.34% over that of at the beginning of year. That was caused by the increasing of accessories purchased for new orders, which increased the account payable and advances. (For details about this please refer to “Financial Statements – Notes to the Financial Statements”, notes to the Consolidated Balance Sheet items no. 14, and 15.) [Note 4] Shareholders’ equity increased by RMB13,142,800 that was 2.98% over that of the previous year. This was caused by the increasing of net profit, surplus reserves, and capital reserves. 4. Changes of shareholders’ equity and their causation (in RMB) Subjects Capital share Capital reserves Surplus reserves Incl: Public Profit not Total of welfare distributed shareholders’ equity Initial 220,000,000 149,304,393.07 29,988,173.04 14,994,086.52 42,348,185.35 441,640,751.46 Increased this 0 436,019.62 7,161,164.20 3,580,582.10 27,545,566.84 35,142,750.66 term Decreased this 0 22,000,000.00 22,000,000.00 term At the end of 220,000,000 149,740,412.69 37,149,337.24 18,574,668.62 47,893,752.19 454,783,502.12 term Notes: Causations of the changes 1) The increasing of surplus reserves was caused by: according to the resolutions passed by the 9th meeting of the 2nd term board of directors, statutory public reserves and public welfares were drawn at rate of 10% from the net profit of year 2002. 2) The change of profit not distributed changed because: according to the profit distribution preplan of 2002 passed by the 9th meeting of the 2nd term board of directors, upon the net profit of year 2002 - RMB34,706,731.04, after drawing of surplus reserves RMB7,161,164.20, 7 RMB1.00 of cash dividend (tax included) will be delivered to each 10 shares. Totally RMB22,000,000 will be delivered. The balance of not-distributed profit will be amounted to RMB47,893,752.19. 3) For the causation of the increasing of capital reserves, please refer to “Financial Statements – Notes to the Financial Statements”, notes to the Consolidated Balance Sheet items No. 22. 5. Other business data and indices in the report term. No. Indices Unit Year 2002 Year Change of 2002 over 2001 2001 (%) 1 Overall industrial production value RMB10 34357 30468 12.76 (on current price) thousand 2 Industrial value increased (on RMB10 14320 12074 18.60 current price) thousand 3 Exported USD10 116.66 53.3 118.87 thousand 4 Sales income of products RMB10 32602.78 28916.03 12.75 thousand Incld: RMB10 19,839.27 21,053.00 -5.77 Industrial steam turbine for thousand driving Industrial steam turbine RMB10 8,506.67 5000.6 70.11 for electricity generators thousand Others RMB10 4,256.84 2,862.43, 48.71 thousand 5 Circulation ratio of current fund % 0.7075 0.6667 0.0408 6 Liabilities/asset ratio % 33.41 29.38 4.03 7 Profit ratio of product sales % 10.65 9.44 1.21 8 Tax ratio of industrial fund % 11.94 14.86 -2.92 9 Industrial value increasing ratio % 41.68 43.38 -1.7 10 Sales ratio of industrial products % 89.83 96.78 -6.95 11 Market share of industrial driving % 80 79.2 0.80 steam turbine 12 General industrial production ratio RMB/person 77364 80450 -3.8 Note: (1) Relative formulas - Circulation ratio of current fund = sales income / average balance of current assets - Liabilities/asset ratio = total of liabilities / total assets - Profit ratio of product sales = net profit after deducting of allowance / sales income - Tax ratio of industrial fund = total tax / average current assets + average net value of fixed assets - Industrial value increasing ratio = industrial value increasing on current price / total industrial output on current price - Sales ratio of industrial products = sales volume on current price / total industrial output on current price - General industrial production ratio = industrial value increasing / annual average number of employees (2) Data of market share of industrial driving steam turbine was sponsored by China Council of Electronic Industry Steam Turbine Sub-council. 8 Chapter III. Change of Share Capital and Shareholders (I) Change of share capital 1. Change of share capital (in shares) At Increase or decrease of the change(+ -) At End of Beginning of Share Bonus Capitalized Other Sub- Year Year allotted shares total (I) Non-current shares 1 Promoter’s shares State-owned shares 140,000,000 140,000,000 Domestic legal person shares Overseas legal person holding shares Others 2 Legal person shares invited 3 Employees’ shares 4 Preference shares or others Total of non-current shares 140,000,000 140,000,000 (II) Current shares 1 Renminbi common shares listed domestically 2 Foreign capital shares listed 80,000,000 80,000,000 domestically 3 Foreign capital shares listed abroad 4 Others Total of current shares 80,000,000 80,000,000 (III) Total shares 220,000,000 220,000,000 (II) Particulars about share placing and listing 1. The company didn’t place any stock or derivative securities during the past 3 years till the end of the report term. 2. Particulars about the primary placing of stocks of the company Hangzhou Steam Turbine Co., Ltd. (the Company) was promoted solely by Hangzhou Steam Turbine Power Group Co., Ltd. (the Group), and established by the mean of foreign shares (B shares) placing in the domestic market as a shareholding company. The Group invested in the Company with net asset of RMB199,485,673 and takes 140,000,000 state-owned shares of the Company at RMB1 each. The Company primarily issued 80,000,000 of foreign shares (B shares) in the domestic market at HKD2.14 per share by means of close placing between March 31 and April 6, 1998 (equal to RMB2.29 / share at RMB:HKD=1:1.0691). On April 28, 1998, 80,000,000 B shares were approved to be listed in Shenzhen Stock Exchange. 3. The total share capital of the company in the report term was 220,000,000 shares, including 140,000,000 of state-owned shares takes 63.64% of the total share capital, 80,000,000 of B shares takes 36.36% of the total share capital. 4. None of bonus share distributing, capitalizing, share allotting, new share placing, acquisition/merging, transferring of transferable company bonds, capital reducing, listing of employee shares, that cause the changing of capital share and/or share structure. 9 5. The company issued no internal employees’ shares or company employees’ shares till the end of the report term. (III) About the shareholders 1. At the end of report term, the company has totally 12557 shareholders. Among which, 1 for state-owned share holders, and 12556 for B share holders. The number of shareholders increased by 10 over the number at September 30, 2002. 2. Top ten shareholders at the end of report term. Shares Portio Mortgage Share Name of shareholders Shares held at increased n of or property the term end /decreased the freezing Rank (shares) from that of total Sept. 30, 2002 capital (+ -) share 1 Hangzhou Steam Turbine 140,000,000 No 63.64 No State-owne Power Group Co., Ltd. d 2 BIN LIANG 4,721,553 No 2.15 N/A Current B shares 3 LO STEVEN CHIHWA 4,642,464 No 2.11 N/A Current B shares 4 Song Youfu 1,890,000 No 0.86 N/A Current B shares 5 Huang Zhen 1,707,945 7,045 0.77 N/A Current B shares 6 EVER POINT 491,000 No 0.22 N/A Current B INVESTMENTS LIMITMD shares 7 Wu Haoyuan 471,700 No 0.21 N/A Current B shares 8 Zhen Lin 446,000 No 0.20 N/A Current B shares 9 Liu Pei 439,160 No 0.19 N/A Current B shares 10 He Yanfei 427,400 No 0.19 N/A Current B shares Note: (1) Of top ten shareholders Hangzhou Turbine Group Co., Ltd. holds shares on behalf of the State and the others belong to B-Share shareholders. (2) No shareholders hold 5% of the Company’s shares except for Hangzhou Turbine Power Group Co., Ltd. (4) Introduction to Hangzhou Turbine Power Group Co., Ltd. Hangzhou Turbine Power Group Co., Ltd. (the Group) was founded in June 1995, which is a state-owned and sole proprietorship company authorized by the Government. The Group is considered to be one of 520 leading state-owned enterprises. Registered Office of the Group: 357 Shiqiao Rd., Hangzhou City; Legal Representative: Mr. 10 Fang Wen; Owning-companies: 10 holding companies, 10 full-capital constituent companies and 5 partially hold companies; Major Business: textile machine, paper-making machine, pump, casting, changing speed gear, heat exchanging instrument, digital and display system and their manufacturing and processing. Original material, equipment and parts for groups’ purchasing and making, providing services of water, electricity and gas for their owning enterprises. (5) There is no change of the holding shareholders of the Company in the reporting period. (6) So far the Company has no strategic investor or common legal person share involved. Chapter IV. Particulars about the Directors, Supervisors, Managements and Employees (I) Current directors, supervisors and senior managements No. Name Sex Age Position in the Job Term Position in the Group Job Term Shareholding Company 1 Fang Wen M 62 Chairman of the 2001.6~2004.6 Chairman 2001.5~2004.5 No Board 2 Jin Fujuan F 49 Vice Chairman 2001.6~2004.6 Vice Chairman 2001.5~2004.5 No 3 Wang M 50 Vice Chairman 2001.6~2004.6 Vice Chairman, GM 2001.5~2004.5 No Hongkang 4 Jiang Demu M 59 Director 2001.6~2004.6 Director, Chairman of 2001.5~2004.5 No the Workers’ Union 5 Li Lie M 54 Director, 2001.6~2004.6 No - No Standing Vice GM 6 Bo Ronghua M 51 Director, Chief 2001.6~2004.6 No - No Accountant 7 Yan Jianhua M 44 Director, GM 2001.6~2004.6 Director 2001.5~2004.5 No 8 Ye Zhong M 34 Director, Chief 2001.6~2004.6 Director 2001.5~2004.5 No Engineer 9 Yao Fusheng M 70 Independent 2001.6~2004.6 No - No Director 10 Zhang M 64 Independent 2002.5~2004.6 No - No Mingguang Director 11 Zou Zhaoxue M 64 Independent 2002.5~2004.6 No - No Director 12 Chu Shuilong M 50 Chief Supervisor 2001.6~2004.6 Director, 2001.5~2004.5 No Vice GM 13 Shao Linna F 48 Supervisor 2001.6~2004.6 Chief of the - No Accounting Dept. 14 Zhang M 45 Supervisor 2001.6~2004.6 Chief of Auditing & - No Yougen Inspection Dept. 15 He Fengdi F 52 Staff Supervisor 2001.6~2004.6 Vice Chairman of the - No Workers’ Union 16 ZhaoYing F 46 Staff Supervisor 2001.9~2004.6 No - No 17 Yu M 45 Vice GM 2001.6~2004.6 No - No Changquan 18 Yan Jinghe M 48 Vice GM 2001.6~2004.6 No - No 19 He Jianhang M 45 Secretary of the 2001.6~2004.6 No - No Board Note: (1) None of the directors, supervisors or senior managements is holding the stocks of the 11 Company (2) During the report term, through the election of Shareholders’ General Meeting 2001, Mr. Zhang Mingguang and Mr. Zou Zhaoxue were elected the new independent directors of the Company. For details about their election and resume, please refer to “The resolutions of the 4th meeting of the 2nd term Board of Directors” published on the April 13, 2002 issue of Security Times, and “The resolutions of the Shareholders’ General Meeting 2001” published on the May 27, 2002 issues of Security Times and Hong Kong Commercial Daily. (3) No changes been made on the positions of other directors, supervisors or senior managements during the report term. (II) Annual payroll of current directors, supervisors and senior managements. 1. Basis of deciding of the payrolls of directors, supervisors and senior managements The Company adopts “Annual Salary Assessing System” for the directors, supervisors and senior managements. The plan was first raised by the Supervisory Committee, and implemented upon the approval of the first provisional shareholders’ general meeting of 1998. It was modified twice after that and put into operation upon the approval of the shareholders’ general meeting of 2000 and 2001. At the establishing of the “Salary Inspection Committee” of the Board, the principles of “keep the original foundation, properly adjust, optimizing the link with performance, enforce the motivation system” were founded for the year 2002. Inspections on the directors, supervisors and senior managements for their virtue, capability, hardworking and performance were undertaken. 2. Particulars about the annual payrolls of directors, supervisors and senior managements (1) Currently the overall payroll for directors, supervisors and senior managements are amounted to RMB2.12 million for the year 2002. Among which, 7 person ranged between RMB210 thousand to RMB180 thousand; 5 person ranged between RMB150 thousand to RMB90 thousand; 4 person ranged between RMB50 thousand to RMB20 thousand. (2) The highest 3 directors’ salary are amounted to RMB620 thousand, while the highest 3 senior managements’ salary are amounted to RMB610 thousand. (3) The above figures of salaries have been including basic payrolls, bonus, welfares, allowances, housing allowance, and other allowances. (4) The annual allowances for the independent directors are RMB20 thousand / person / year. (5) 3 of the supervisors Shao Linna, Zhang Yougen, He Fengdi, don’t accept salaries from the company. They take salaries from the Group, the controlling shareholder of the company. (III) Leaving of directors, supervisors and senior managements No directors, supervisors and senior managements left their position during the report term. (IV) Engaging or dismissing of managers, vice managers, financial principal, secretary of the Board No managers, vice managers, financial principal, secretary of the Board been newly engaged or dismissed during the report term. 12 (V) About the employees At the end of the year 2002, the employees of the Company were amounted to 2011. Among the employees, there are 1409 production workers, 108 sales people, 346 technicians, 25 accountants, and 92 administrative people. As for the education background, 507 are holding national diploma or above (take 25.21% of the total), 307 are holding intermediate technical certificates or above (take 15.27% of the total), 79 are holding higher technical certificates (take 11.19% of the professional employees) Overall employees at the end of year 2002 increased by 380 over year 2001. That was caused by the acquisition of the casting company, accessories company and part of the assets of energy supply department which were under the name of the Hangzhou Steam Turbine Group. At the beginning of share listing, the Company has engaged an agreement with the Group on the management of retirement. Therefore there are no retired employees that need to be undertaken by the company. (For details about the retirement administrative charge made to the Group during the report term, please refer to “Significant associated transactions” of “Significant Events” carried in this report.) Chapter V. Management Structure (I) Situations of the management structure 1. Construction of managing system During the report term, with the demand of “The Managing Principles of Public Companies” issued by China Securities Supervisory Committee, the Company completed the preparing of “Company Managing Compendium” and “Principles for Shareholders’ General Meeting”, and also the improving of “The Article of Association”, “Principles for Board Meeting”, “Principles for Supervisory Committee’s Meeting”, “Rules of General Manager”, and “The Administration of Information Disclosure” The above basic systems have been put into operation upon the approval of the 4th meeting of the 2nd term Board of Directors, the 4th meeting of the 2nd term Supervisory Committee, as well as the Shareholders’ General Meeting of 2001. Relative department of the Company put the above documents along with the previously produced documents, “Internal Management of Assets Devalue Reserves and Treatment of Loses”, “Management of Investments (Provisional)”, and “Management of Shareholding / Share Controlling Companies”, into “The Collection of Basic Management Systems of the Company”. The collection was distributed to the shareholders, directors, supervisors, management and functional departments for their references on their exercising of duties. 2. Operations under the instruction of superior inspection organizations During the report term, the Company was following with the overall arrangement of the Hangzhou Special Office of China Securities Supervisory Committee and participated in the undertaking of “The Statement of Trustiness of Directors & Board Secretary of the Listed Companies in Zhejiang”. All of the directors and the secretary of the Board signed the statement in undertaking the responsibilities of following the regulations and rules of the China Securities Supervisory Committee and Shenzhen Stock Exchange, keeping themselves with trustiness, and guarding the 13 benefits of mid-small shareholders. During the report term, the Company also was following with the overall arrangement of the National Economics & Trading Committee and China Securities Supervisory Committee and implemented “self-inspection on the establishing of modern enterprise managing system for public companies and their controlling shareholders”. For the problems discovered during the self-inspection, the Company undertook measurements to fix them. Under the instruction of China Securities Supervisory Committee, the Company undertook self-inspection on the “using of company capital by the controlling shareholder”. The result shown that except ordinary transactions occurred on trading of merchandises, the controlling shareholder used no big sum of fund of the Company. The Company also accepted the routine investigation of the Hangzhou Special Office of China Securities Supervisory Committee. No illegal behavior was found in the investigation. 3. Decision making system of the Board During the report period, in accordance with “The instructions on setting of independent directors in public companies”, the Company completed the procedures of setting independent directors. This made the number of independent directors takes around 30% of the board. The Board of Directors established 4 special committees, which are “Strategy & Development”, “Nominating”, “Auditing”, and “Salary Assessment”. The above measures are driving the decision-making system of the Board toward standardization, systematic, and scientific. (II) Major shortages existing in the practice of management and their cures in regarding of the relative regulations issued by China Securities Supervisory Committee For the Company was transformed from formal state-owned enterprise, shortages are hard to avoid in managing and operation system. The Company will further execute the regulations and standards of “The Managing Principles of Public Companies” issued by China Securities Supervisory Committee, and improve the management of the Company. (III) Independent directors’ executing of duty In the spirit of responsible for the shareholders of the Company, the independent directors executed their duties in defending of the mid-small shareholders’ benefit following with the laws and regulations stated by “The Company Law”, “The Security Law”, “Management Rules of Public Companies”, and “The Instructions on Setting Independent Directors in Public Companies”. They devote themselves in understanding of the company operation by taking part in the Board meeting and Shareholders’ General Meeting. They back the Board up in making fair and scientific decisions for the company. After the establishing of committees of “Strategy & Development”, “Nominating”, “Auditing”, and “Salary Assessment”, 3 of the independent directors were taken active roles in the works of the committees. They carefully studied the reports issued by the managements and relative departments such as “The Developing Plan for the 3 Years After the 10th 5-Year-Plan”, “Report on Implementing of Associated Transactions”, “Report of Changing of Accounting Evaluating”, “Statements on Profit Distribution Preplan 2002”, “Opinion on Implementing of Salary Inspection System of Year 2002”, and issued detailed opinions on the reports in representing of the committees. The independent director of the Salary Assessment Committee conducted the implementing of salary inspection works on directors, supervisors and senior management for the year 2002. Their spirit of hardworking, respecting of duty, faithfulness, and practice becomes the 14 model of other directors. (IV) Particulars about the separation of business, personnel, assets, organization, and accounting with the controlling shareholder 1. Separation of business: The designing, manufacturing and marketing of industrial steam turbines were independent from that of the parent company (the Group). Some of the subsidiaries of the Group are running marketing businesses of industrial steam turbines. The purchasing of products and accessories from the Company was on ordinary prices offered to other dealers. Before June 1st, 2002, the casting company of the Group was providing roughcasts to the Company, and the supplementary machinery company of the Group was providing supplementary equipments to the Company. For the details about the transactions of steam turbines, roughcasts and supplementary equipments during the report term please refer to the “Significant Associated Transactions” carried in the chapters of “Significant Events” and “Financial Statements”. 2. Separation of personnel: For the report term, the positions of Chairman and Vice Chairman of the Company were taken by the Chairman and Vice Chairman of the Group. None of the managements takes any job in the Group. The accounting staffs take no job in the Group or other associated companies. The Company was basically independent in personnel and salary management. 3. Integrity of assets: The properties of production systems, supplementary systems and equipments, industrial properties, and non-patent technologies are basically independent out of the Group. The using of trademark and staff transportation services are contracted to the Group with agreement of associated transactions. The Company has its own systems of production, supplying and sales with no competitive relationship with the Group. For the details about the transactions of trademark using and staff transportation services please refer to “Significant Associated Transactions” carried in the chapters of “Significant Events” and “Financial Statements” 4. Independency in organization: The Company is completely independent out of the Group in organization. It has its own managing and operation system. Mid-level managements were engaged by the managerial level and subject to the economical responsibility inspection. 5. Independency in accountancy: The Company was configured with its own accounting department and standardized accounting system. The Company opened its own bank account and undertook taxes according to the law. (V) Motivating and inspection systems for the senior managements The Company adopts “Annual Salary Assessing System” for the directors, supervisors and senior managements. The plan was first raised by the Supervisory Committee, and implemented upon the approval of the first provisional shareholders’ general meeting of 1998. It was modified twice after that and put into operation upon the approval of the shareholders’ general meeting of 2000 and 2001. The followings are the details. 1. Basis of assessment: realizes RMB30 million of total profit per year. 2. Award and penalty rules: the highest annual salary standard will change by RMB1000 upon each 1% of change of the basis. The other levels change correspondingly. 3. The assessment will base on the fiscal year stated by the Article of Association of the Company. 15 The salaries of the directors, supervisors and senior managements are subject to be drawn by 20% as risk guarantee fund and will be returned upon fulfilling of annual assessment. The Committee of Salary Assessment takes for the above system of assessment connected the profitability and the collective income of the management together, that was regarded as functioning motivation. On the other hand, for the lack of specific “assessment goal system” and “assessment evaluating system”, the connection between the personal income and the overall performance of individuals was not that close. For this reason, the committee suggests minor modifications on the original system and makes it closer between the annual income and performance of individuals. The Committee of Salary Assessment organized a “team of assessment” for the year 2002. The assessment was base on score levels of A-B-C-D-E. Individual whose score is under “D” and at the end of list is subject to penalty of 3% of his/her annual income. Individual whose score is below “E” is regarded as failed in performance, and is subject to penalty of 50% of annual income. For individual who violated the Company Law or other regulations, or violated the common ethic of honesties and respecting of duties, therefore punished by either of China Securities Supervisory Committee or Shenzhen Stock Exchange, will be subject to penalty of 50% of his/her annual income upon “one vote”. For the fairness of the assessment, the assessment forms will be sealed after collected, and forwarded to 2 of the independent directors of the Committee of Salary Assessment for their calculation of results. Through rigorous assessment, all of the managements achieved above “D” for year 2002. The assessment system was showing its effects in motivating and disciplining. Chapter VI. Introducing the Shareholders’ General Meeting (I) Notification, calling and holding of shareholders’ general meeting The Company held shareholders’ general meeting once during the report term – the shareholders’ general meeting for year 2001. On April 10, 2002, the resolutions on holding of the shareholders’ general meeting 2001 was passed by the 4th meeting of the 2nd term Board of Directors. “Notifications of holding shareholders’ general meeting 2001” were published on the April 13, 2002 issues of Security Times and Hong Kong Commercial Daily. At 9:00 AM, May 16, 2002, the shareholders’ general meeting 2001 was held in the meeting room No. 1 of the Group. Totally 6 shareholders or representatives attended the meeting, representing 140378801 shares takes 63.80% of the total voting shares. Among them, 5 are B shareholders or representatives, representing 378801 shares and takes 0.47% of current B shares. The meeting also invited relative inspection authorities, press medias, and delegations from both of the domestic and overseas auditors to attend. All of the directors, supervisors and senior managements attended the meeting. The nominees of new independent directors also presented the meeting as non-voting delegations. Mr. Fang Wen – the Chairman of the Board, hosted the meeting in examination of 12 proposals. 9 common proposals were passed with over half-votes. 1 proposal was subject to be passed with over 2/3 of the votes. 1 proposal was passed with over half-votes in condition of associated 16 controlling shareholders abandoned the voting. 1 proposal of electing of independent directors was passed with over half-votes of the overall shareholders attended the meeting. 1. The following common proposals were passed as resolutions by means of open ballot. (1) The Annual Report of the Board for Year 2001 140378801 shares pass, 0 shares abandon, 0 shares object. (2) The Annual Report of the Supervisory Committee for Year 2001 140378801 shares pass, 0 shares abandon, 0 shares object. (3) Financial Statements 2001 140378801 shares pass, 0 shares abandon, 0 shares object. (4) Profit Distribution Preplan 2001 140378801 shares pass, 0 shares abandon, 0 shares object. (5) The Proposal of Inviting Arthur Anderson CPA and Zhejiang Oriental CPA as the Overseas and Domestic Auditors Respectively. 140378801 shares pass, 0 shares abandon, 0 shares object. (6) The Proposal of Changing the Utilization of Fund Raised Previously 140378801 shares pass, 0 shares abandon, 0 shares object. (7) The Proposal on Producing of “Company Managing Compendium” 140378801 shares pass, 0 shares abandon, 0 shares object. (8) The Proposal on Producing of “Rules of the Shareholders’ General Meeting” 140378801 shares pass, 0 shares abandon, 0 shares object. (9) The Proposal on Modifying of the Annual Salary System of Directors, Supervisors and Senior Managements. 140378801 shares pass, 0 shares abandon, 0 shares object. 2. The results of voting on special proposals (1) The Proposal on Modifying of “The Article of Association” of the Company 140378801 shares pass, 0 shares abandon, 0 shares object. (2) The Proposal on Acquisition of the Casting Company, the Supplementary Machinery Company and Part of the Assets of the Energy Department. In condition of associated controlling shareholders abandoned the voting right, 378801 shares pass, 0 shares abandon, 0 shares object 3. The results of voting on electing of independent directors (1) Mr. Zhang Mingguang for the position of independent director of the 2nd term Board of Directors 140378801 shares pass, 0 shares abandon, 0 shares object. (2) Mr. Zou Zhaoxue for the position of independent director of the 2nd term Board of Directors 140378801 shares pass, 0 shares abandon, 0 shares object. 4. Legal opinions of the lawyer Li Genmei, and Huang Lianxi – the lawyers from Zhejiang Zhejing Lawyers’ Office, notarized the meeting on-site. The lawyers issued a letter of opinions on the holding of this meeting. The followings are their conclusions. The lawyers consider the calling and holding procedures of the shareholders’ general meeting 2001 of the Company, qualifications of the attendants, and the voting procedures are in accordance with relative laws, regulations and the Article of Association of the Company. The resolutions that passed by the meeting are legal and valid. (II) Proposals that been passed or denied by the shareholders’ general meeting, information disclosing medias and dates None of the proposals of the Board or the Supervisory Committee was denied by the shareholders’ general meeting. The resolutions of the shareholders’ general meeting 2001 were published by May 17, 2002 issues of Security Times and Hong Kong Commercial Daily. 17 (III) Electing and changing of directors or supervisors In the report term, in accordance with “The Instructions on Setting Independent Directors in Public Companies” issued by China Securities Supervisory Committee and promoted by the 4th meeting of the 2nd term Board of Directors, Mr. Zhang Mingguang and Mr. Zou Zhaoxue were elected the independent directors of the 2nd term Board of Directors by the shareholders’ general meeting of 2001. Their term of duty will from May 2002 till June 2004. Chapter VII. Report of the Board of Directors (I) Business situation of the report term In year 2002, the company realized RMB326,027,800 of sales volume, which increased by 12.75% over the previous year; RMB43,307,800 of profit, which increased by 35.38% over the previous year; new orders of steam turbines amounted to RMB484,775,000, increased by 77.05% over the corresponding period of previous year; USD1,166,600 of export, which increased by 118.87% over the previous year. The management of the company considers the significant growing in sales volume, profit, new orders, and export volume were in connecting with the following aspects. 1. Benefit from good macro economical environment. Since 2002, the macro economy of China was showing a trend of rapid growing. Overall investment on fixed assets increased by 16.1% over last year. Especially for the industries of power supplying, petrol-chemical, metallurgy, and civil energy, the investment was greatly enforced. These were bringing up the demand of industrial steam turbines and good business operation of the Company. 2. Benefit from practical operation of the management. With the core strategy of strengthening the overall competitive ability of the Company, various of measurement were adopted and working excellent. For instance, the simplifying of organizing structure increased the managing efficiency, and break out the bottleneck of productivities. The agreement of fully undertaking the sales expenses engaged with the sales department, and the agreement of salary contracting with Industrial Steam Turbine Institute effectively brings up the sales and developing of new products. Consolidated sales and purchasing strategies reduced the cost to a lowest level. 3. Benefit from the hard working and teamwork of the employees. The productivity of industrial steam turbine was in full speed for the year 2002. The employees of the Company was overcoming difficulties brought by heavy loading, high technical requirement and short delivery term. They accomplished the output of 96 units / 465,900kw / RMB266,611,000 of steam turbines. The output of number of units, kw, and value were increased by 18.52%, 14.16% and 1.29% respectively over the corresponding period of the previous year. The business and production goals of the year were successfully fulfilled. Though the Company achieved great operation result for the report term, the Board of Directors of the Company hope that the investors shall be aware of the following factors: Industrial steam turbine is as product of investment category. Its market requirement is sensitively linked with the national macro economical environment, especially the national investment strategy. Along with 18 the implementing of national strategies of “10th 5-year-plan”, “grand western development”, “west to east electricity transmission plan”, and “west to east gas transmission”, the requirement of steam turbine will be brought up for a period of time. The economical efficiency of the Company will be greatly influenced once the market environment changed. On the other hand, following with the increasing of raw materials prices and the giant investment on large technical reforming plan, it must influence the profitability of the company. Thus the Board of Directors hereby draws the investors’ great attention on investing of the Company’s stocks. (II) Business highlights of the report term 1. Major business range and their operation status The Company’s principal businesses are to design and manufacture of turbines, auxiliary equipment, and spares and parts, market the self-made products and offers the relevant after-sale services. The industrial turbines produced by the Company can be classified into industrial driving turbines and industrial power generation turbines subject to the objectives being driven. Industrial driving turbines are mainly used for driving rotating machines such as compressor, blower, pump, press, etc., therefore, they are widely applied in such industrial sectors as oil refining, chemical, fertilizer, metallurgy, electric power, light industry, environmental protection, etc. as the key power equipment in various heavy-duty industrial machines. Industrial power generation turbines are mainly used for driving generators and supplies thermal energy at the same time. therefore, they are widely applied in enterprises’ power stations for self-supply in different industrial sectors and regional joint heat-electricity production projects, as well as the power stations of fuel gas-steam turbine integrated circulation and urban garbage power station, etc. (1) The primary business income structure of the term classified in product and geographic categories are as followings: In product categories (in RMB 10 thousand) Categories Primary Primary Tax and Primary Gross profit ratio business business surcharges business % revenue cost profit Industrial driver steam turbine 19,839.27 10,531.62 39.79 9,267.86 46.92 Industrial generator steam turbine 8,557.95 7,586.70 17.16 954.09 11.35 Others 4,205.56 1,570.66 8.43 2,626.47 62.65 Total 32,602.78 19,688.98 65.38 12,848.42 39.41 Note: The “Others” is referring to vending of spare parts and accessories, localization of imported equipment or technical upgrading for clients. 19 In geographic regions (in RMB 10 thousand) Regions Primary Primary Tax and Primary Gross business business cost surcharges business profit profit revenue ratio North-east 4,128.21 1,823.77 6.64 2,297.80 55.66 North China 3,220.68 1,785.33 6.68 1,428.67 44.36 East China 18,187.13 11,035.98 37.92 7,113.23 39.11 North-west 1,710.17 848.28 3.28 858.61 50.21 South-west 1,406.96 1,090.71 3.72 312.53 22.21 Middle-south 3,285.64 2,633.60 7.14 644.90 19.63 Export 663.99 471.31 192.68 29.02 Total 32,602.78 19,688.98 65.38 12,848.42 39.41 (2) Market share of major products of the company in the report term. In accordance with the information provided by China Electronic Industry Association, the industrial driving steam turbine of the Company takes 80% of the share of domestic market, industrial electric generator steam turbine of the Company takes 15.70% of the domestic market. (3) There wasn’t significant change of the profitability and business structure occurred comparing with that of the previous report term. 2. Status and business performance of major subsidiaries and partially held subsidiaries (in RMB10 thousand) Name of the subsidiary Business property Total Net Registered Share Net assets assets capital taken profit Zhejiang Steam Turbine Developing of 4,114 3,339 3160 95% 116 Completion Technology auto-controlling Development Co., Ltd. technologies Hangzhou Steam Contracting of 3,666 2,233 2000 45% 26 Turbine Environment environment Engineering Co., Ltd. engineering Hangzhou Keximeng Network technologies 592 459 1000 34.5% -175 Technology Co., Ltd. and operation of website [Note 1] None of the gains from the investments on above 3 companies exceeded 10% of the net profit. [Note 2] In the report term, the above subsidiaries’ business results are as the followings: (1) Zhejiang Steam Turbine Completion Technology Development Co., Ltd. is primarily involved in the developing of auto-controlling parts of steam turbines and completion engineering. It realized sales income of RMB20,047,400 , total profit of RMB1,769,200 and net profit of RMB1,156,900 in the report term. (2) Hangzhou Steam Turbine Environment Engineering Co., Ltd. is primarily involved in the contracting of environment engineering and manufacturing of environmental protection equipments. It realized sales income of RMB14.69 million, total profit of RMB0.54 million and net profit of RMB0.26 million. (3) Hangzhou Keximeng Technology Co., Ltd. is primarily involved in the operation of “Grand View of West Lake” website, e-commerce, and public computer network terminals. Influenced by the stagnant of the overall IT industry, the company continues to loss money. It’s net profit for the report term was RMB-1.75 million. 20 [Note 3] In the report term, resolution used to be passed by the 5th meeting of the 2nd term Board of Directors to authorize the management in selling the equity of Hangzhou Keximeng Technology Co., Ltd. held by the company at proper price. (For details about the resolutions please refer to April 23, 2002 issues of Security Times and Hong Kong Commercial Daily). But no agreement has been engaged with relative parties, thus this transaction did not take place. [Note 4] For Hangzhou Keximeng Technology Co., Ltd. has no hope in backing to positive situation, in protecting of the investors’ benefit, the company has drawn RMB1.7173 million for long-term investment devalue reserves. (For details about this event please refer to the 3rd Quarterly Report of October 25, 2002 issues of Security Times and Hong Kong Commercial Daily) 3. Major vendors and buyers Total of purchasing from top 35.24 million Takes overall purchasing by 18.57% 5 vendors Total of sales to top 5 buyers 122.4957 million Takes overall sales by 37.57% 4. Problems encountered in the business operation and their countermeasures. The major problem shows in the conflict between hearty market demand and short of productivity. To meet with the problem, the following countermeasures were under implementing to increase the productivity. (1) Enforce the investment on technical reforming, speed up the implementing of the “localization of steam turbine for the large scale ethylene equipment project” which approved by National Committee of Economy and Trade, to upgrade the equipment level of standard. (2) Active in finding new cooperators to enlarge the out sourcing capability, especially on those bottleneck techniques. (3) Pay high attention on the “technique breakthrough team” and onsite technique team. Hardly promote the utilizing of new materials, new cutting tools, and new techniques. Use modern information technology to reform the old-fashion production in increasing their productivity. (4) According with the practice of production, fine adjust the organizing and structure of production. Plan and coordinate carefully to shorten the delivery term. (5) Enforce the managing and maintaining of equipments, upgrade the technical standard of the maintaining technicians, to make sure equipments are operated normally. (6) Key work point will operated by turns of 2 or 3 teams to increase the utilizing of key equipments’ workload. 5. Statement on the realization of profitability predicts for the report term. The 3rd Quarterly Report of the Company predicted the profitability of the whole year in this way: “For the amount of orders increased significantly compare with the previous year, the total profit of the year will be increased by about 40%”. With the auditing of Zhejiang Oriental CPA on the financial situation of 2002, the Company realized total profit of RMB43,307,800 which increased by 35.38% over the previous year. This is slightly lower than the predicted figure. The discrepancy is not exceeding 10% of the total profit. (III) Investments in the report term 1. Utilizing of fund raised during the report term or remained from the previous year. 21 1) The Company didn’t raise any fund during the report term. Previous raising of fund was in the period from March 31, 1998 to April 6, 1998. The Company primarily issued 80,000,000 of foreign shares (B shares) in the domestic market at HKD2.14 per share by means of close placing (equal to RMB2.29 / share at RMB:HKD=1:1.0691). Minus RMB14,700,500 of share placing expenses, the fund raised was amounted to RMB168,329,420. 2) Table of projects in which the fund were applied (in RMB10 thousand) Way of Investment projects Date of Total Actual Investment Actual Actual Proceeds as committed completion investment Projects: investment investment Raised amount date Issuing B repayment of the 1998-06-30 3,050.00 compliance with the 3,050.00 1998-06-30 shares loan for commitment “eighth-five” project Phase-I Issuing B Investing the 1999-12-31 1,500.00 compliance with the 1,430.72 1999-12-27 shares construction project commitment of “Technology Center” Issuing B Developing 1998-12-31 450.00 compliance with the 650.50 1998-10-15 shares thermo-power commitment combined production energy saving project Issuing B Developing 1999-12-31 2,900.00 Investing Hangzhou 900.00 2000-05-18 shares production water Steam Turbine treatment Environment Engineering equipment Co., Ltd. Issuing B 1999-12-31 Investing Hangzhou 345.00 2000-03-18 shares Keximeng Technology Co., Ltd. Issuing B 1999-12-31 Adding current fund 1,655.00 2000-06-30 shares Issuing B Developing 1999-12-31 3,000.00 Compliance with the 3,000.00 2001-01-21 shares complete set of commitment of setting up equipment and Zhejiang Steam Turbine engineering Completion Technology contract business Development Co., Ltd. Issuing B Acquisition of 1998-12-31 6,500.00 Acquisition of the casting 6,625.92 2002-12-31 shares partial assets of company, supplementary Hangzhou Boiler mechinary company and Factory partial assets of the energy division Total 17400.00 17,657.14 At the end of Dec., 31, 2002, the fund raised previously has been fully put into investment. 22 3) Particulars about the implementing of projects invested by the fund raised that has not been changed to other application. Investment on “repayment of the loan for ‘the eighth five-year-plan’ project Phase-I, the construction project of “Technology Center” and developing of thermo-power combined production energy saving project have been on schedule. The overall investment on “the eighth five-year-plan” was RMB46,973,100; on “Technology Center”, it was RMB25,000,000; on the thermo-power, its was RMB14,145,000. With the nature of “small quantity production” of industrial steam turbine, the investment on technical reforming is hard to measure. But investing on technical reforming will bring bigger capacity of single steam turbine, shorter deliver term, increase the ability in developing new products, therefore increase the overall competitive ability of the Company. Developing complete set of equipment and engineering contract business was scheduled to be completed at the end of 1999. But with the influence of the economic crisis of Asian countries, the market demand keep in downhill. This brought great venture for the investment. The Board of Directors once suspended the investment on this project. At the 2nd half of 2000, with the restoring of the market, resolutions was passed by the 13th meeting of the 1st term Board of Directors to establish Zhejiang Steam Turbine Completion Co., Ltd. This project was brought back to schedule. The registered capital of the new company is RMB31.6 million. The Company invested RMB30 million in this company takes 95% of the total capital shares. The new company was incorporated on Jan 21, 2001. It realized net profit of RMB0.64 million and RMB1.16 million respectively in 2001 and 2002. 4) Particulars about the implementing of projects invested by the fund raised that has been changed to other application The committed project of “the water treatment equipment” was changed. It’s reasons, approval procedures, investments, implementing and profitability are as the followings: Causation of the change The formal “water treatment equipment” project was raised under the precondition of the Company has its own development, researching, production and marketing ability of environmental protection equipments. It not only involves in large investment, but also in developing of a new system of researching, production and marketing. This will practically impact on the current corresponding system of steam turbines of the Company. Currently, the project was change to form a specialized company of environmental protection equipments jointly with the Group, Hainan Sugar & Chemistry Industry Co., Ltd. This will not only benefit the Company’s entering of the environmental protection industry but also concentrate the spirit of the management on the major business of the Company. The original “water treatment equipment” project was including construction of houses, equipment purchasing and importing of techniques. It needs RMB29 million. Now it needs only RMB9 million in forming of the new company jointly with other parties. RMB20 million was saved. In the purpose of keeping away from the ventures of investing, the change of fund using was reflecting the principle of the Company in protecting the investors’ benefits. The investment of RMB3.45 million in Hangzhou Keximeng Technologies Co., Ltd. came from the proceeds saved from the changing of the investment in the “water treatment equipment” project. This project was supported by Ministry of Science & Tech and Hangzhou Municipal Government, and was regarded as one of the Information Engineering for City Communication of Hangzhou. The new company was registered with capital of RMB10 million and incorporated jointly with the Company, Baida Group, and Beijing Keximeng Industrial Center, Hangzhou Hangjiahu Technical Investment Co., Ltd. The Company invested RMB3.45 million in this new company and takes 34.5% of 23 the share equity. In the mean time of the Company issues its B shares, the Financial Crisis occurred in Asian countries. The B share market was in an extreme low valley. The issuing price of B shares is significantly lower than that of predicted. 24 At the issuing of B shares, the Prospectus of Share Placing has committed that the balance of the proceeds after the investment, if there is, will be used as operational fund. But the actual condition was, the overall investments were amounted to RMB174 million, but the proceeds raised were RMB168 million. There still was RMB6 million of shortage. Therefore the Board of Directors of the Company suggests that the balance of RMB16.55 million that saved from the “water treatment equipments” project can be put into operational fund. Approval procedures and information disclosure The 9th meeting of the 1st Board of Directors examined and adopted the proposal of changing the application of the proceeds raised through share offering on January 25, 2000 into the investment of RMB 9 million to set up Hangzhou Steam Turbine Environment Engineering Co., Ltd. and RMB 3.45 million to participate in initiating Hangzhou Keximeng Technology Co., Ltd. The proposals were submitted to 2000 1st Extraordinary Shareholders’ Meeting for examination. On Feb. 28, 2000, the Company held 2000 1st Extraordinary Shareholders’ Meeting where the aforesaid two proposals were examined and adopted. For the detail, please refer to the Public Notice on Resolutions of the 9th Meeting of the 1st Board of Directors published on Securities Times dated January 27, 2000, and the Notice of Holding 2000 1st Extraordinary Shareholders’ Meeting and the Public Notice on Resolutions of 2000 1st Extraordinary Shareholders’ Meeting published on Securities Times dated February 29, 2000. After implementation of the relevant procedures of submission and preparation, the 11th meeting of the 1st Board of Directors examined and approved the proposal of changing the project of developing and manufacturing water treatment equipment with RMBG 29 million of the proceeds raised from the initial issuing as committed into the project of investing Hangzhou Steam Turbine Environment Engineering Co., Ltd. and Hangzhou Keximeng Technology Co., Ltd. with the balance amounting to RMB 16.55 million after the investment to be added to the operational fund. This proposal would suggested to be submitted to 1999 Shareholders’ General Meeting for examination. The Proposal was examined and approved at 1999 Shareholders’ General Meeting dated May 31, 2000. For the detail, please refer to the Public Notice of the Resolutions of the 11th Meeting of the 1st Board of Directors and the Public Notice for Holding 1999 Shareholders’ General Meeting published on Securities Times and Hong Kong Commercial Daily dated April 17, 2000, and the Public Notice on the Resolutions of 1999 Shareholders’ General Meeting respectively published on Securities Times and Hong Kong Commercial Daily dated June 1, 2000. Progress and Earnings of the Project Hangzhou Steam Turbine Environmental Engineering Co., Ltd. was registered RMB20 million of capital. The Company invested RMB9 million in taking 45% of the capital share. The new company was incorporated on May 18, 2000 and realized net profit of RMB900 thousand, RMB3500 thousand and RMB2600 thousand respectively in year 2000, 2001 and 2002. Hangzhou Keximeng Technology Co., Ltd. was registered RMB10 million of capital. The Company invested RMB3.45 million in taking 34.5% of the capital share. The new company was incorporated on March 18, 2000. By the influent of continuous downhill of the whole IT industry, the net company lost RMB1.31 million, RMB2.34 million and RMB1.75 million respectively for the year 2000, 2001 and 2002. The committed project of “acquisition of partial assets of Hangzhou Boiler Factory” was changed. It’s reason, approval procedures, investments, implementing and profitability are as the followings: Causation of the change 25 The “acquisition of partial assets of Hangzhou Boiler Factory” was primarily approved by Hangzhou Municipal Government in 1997. Under the government policies of that year, the government raised and approved this project for steam turbines and boilers are associated in industrial application. Therefore the acquisition can bring together 2 of the leading competitor in each industry. But at the available of investment fund, the acquisition plan was suspended due to some reason of Hangzhou Boiler Factory. When informed this situation, the Board of Directors reported to the 1st shareholders’ general meeting of year 1998 right away on Sept.15 1998. Information about this event was disclosed constantly in the annual report of 1998, 1999, and 2000, and also the interim report of 1999, 2000 and 2001. The Board committed to find new project for investing. Once in right condition, legal procedures will be undertaken to change the application of proceeds of the share placing. Before that, this proceed was saving in Hangzhou Industry & Commerce Bank International Office. (For details please refer to routine reports published since the Company was listed in the stock market). On the shareholders’ general meeting of year 2000 held on June 25, 2001, some of the mid-small shareholders indicate that the volume of associated transactions were too large. They suggest the Company to use the fund for “acquisition of partial assets of Hangzhou Boiler Factory” amounted to RMB65 million (actually RMB59million) to acquire the casting company, supplementary machinery company and partial assets of energy division from the Group. The Board of Directors studied on this proposal carefully and took it for feasible in reducing the associated transactions, protecting the benefits of the mid-small shareholders, and resolved the problem remained from the application of fund. Approval procedures and information disclosure On April 10, 2002, “The proposal on changing of the application of fund raised previously” and “The proposal on acquisition of casting company, supplementary machinery company and partial assets of the energy division from Hangzhou Steam Turbine Group” was adopted by the 4th meeting of the 2nd term Board of Directors and the Supervisory Committee. Mr. Yao Fusheng, the independent director of the Company issued an “independent statement” on this acquisition and significant associated transaction in accordance with the relative regulations of China Security Supervisory Committee. The Company invited Zhejiang Oriental Asset Evaluation Co., Ltd. and Hangzhou Xincheng Real-estate Evaluation & Consulting Co., Ltd. to evaluate the assets and land using right to be acquired. Zhejiang Oriental CPA was invited to issue the auditor’s report. Xinye Securities Co., Ltd. and Zhejiang Zhejing Law Office were invited to issue “the report of independent financial counselor” and “statement of legality” respectively. (For details please refer to relative announcements published on April 13, 2002 issue of Security Times. The shareholder’s general meeting of 2001 held on May 16th, 2002 approved the acquisition project, which involved with changing of capital function and significant associated transaction. As the controlling shareholder of the Company, the Group was out of the voting procedure. The proposal was accepted by all of the B share holders presented the meeting. (For details of this event please refer to “The resolutions of the shareholders’ general meeting 2001” published on May 17, 2002 issues of Security Times and Hong Kong Commercial Daily.) Progress and Earnings of the Project At the end of Dec. 31, 2002, the associated transaction was amounted to RMB66,259,233.54 including RMB29,010,241.96 for fixed assets (RMB20,349,041.50 for 32,062.77 m2 of houses & buildings, RMB8,661,200.46 for equipments); RMB1,253,928.10 for materials inventory (RMB634,296.97 for materials from the casting company, RMB619,631.13 for materials from the supplementary machinery company); RMB17,637,608.48 for products in processing (RMB10,618,567.38 for the casting company and RMB7,019,041.1 for the supplementary machinery company); 26 RMB18,357,455.00 for the land using right of 34,313 m2 . The final amount of above transactions was higher than that of announced on April 13, 2002 by RMB3,529,200. This was caused by: (1) The transaction for fixed assets was actually decreased by RMB1,139,800 because the Company reduced some idle equipments when implementing the acquisition. (2) The transaction for current assets actually increased by RMB6,091,500 because the increasing of material inventory and products in processing during the period between the evaluating date (Sept. 30, 2001) and the date of actual acquisition (June 1, 2002). (3) The transaction for land using right decreased by RMB1,422,500 because the acreage of land was decreased by 2658.79 m2 when the “red line” was drawn by Hangzhou Bureau of Land Resources. The aforesaid amount was increased by RMB52,965 than that of announced in the 3rd Quarterly Report 2002. It was caused by the payment of RMB52,965 for land using right increased by 99 m2 in Dec. 2002. This was the supplementary acreage when Hangzhou Bureau of Land Resources drawn “red line”. The certificates of above-mentioned land and estates have completed with the transferring routines. The equipments and various of inventory materials have been transferred as well. Comparing with the previous year, after the completing of this acquisition, the payment made to the Group for associated transactions in 2002 decreased by RMB25.345 million. During the period of June-December 2002, the casting company and supplementary machinery company that acquired have made total profit of RMB2.0425 million. 2. Significant projects that invested with fund other than placing of stocks and their progress and profitability 1) In the report term, the Company invested RMB90 million in the "Industrial Steam Turbine for Large Scale Ethylene Equipment" project, which was regarded as the national key project, and takes 4.04% of the whole investment on this project. 2) Zhejiang Steam Turbine Completion Technology Development Co., Ltd., one of the Company’s subsidiaries, used its self-raised fund to invest the primary market of A shares. In the report year, the company earned a profit amounting to RMB 509,741.18. At the end of the report term, they bought 11,000 shares of Zhongxin Stock in the primary market. It was booked under the title of short-term investment and amounted RMB49,500.00 (please refer to “Note 2 of the Notes to the Consolidated Balance Sheet, and Note 5 of the Notes to the Consolidated Profit & Profit Allocation Statement). (IV) Analysis of the financial position and business performance for the report term. 1. Change of major financial data in the report term. (in RMB10 thousand) Items Dec. 31, Dec. 31, increase/ decrease Causation of Change: 2002 2001 (%) Total assets 68,548 62,695 9.34% Ref. Chapter I – 3 – Note 3 Shareholders’ equity 45,478 44,164 2.98% Ref. Chapter I – 3 – Note 4 27 Profit from major business 12,848 9,234 39.14% Ref. Chapter I – 3 – Note 2 Net profit 3,471 2,739 26.72% Ref. Chapter I – 3 – Note 2 Net increasing of cash and 276 -3,444 Net increase Enforcing on retreating of credits cash equivalents 3,720 2. Notes for the items changed more than 30% (including 30%) under the same indices in the financial statement of the report term. (In RMB 10 thousand) Items Year end Year beginning Increase/decrease Causation of (%) Change: Short-term 49,500.00 22,390.00 121.08 Ref. Chapter VII – investment (III) – 2 – 2) Notes receivable 3,100,000.00 12,188,000.00 -74.57 Cashing of notes receivable Other account 4,860,287.06 2,584,109.41 88.08 Increasing of bid receivable deposit balance at the end of term Engineering 2,347,570.40 1,070,782.77 119.24 Increasing of materials advances paid for equipment purchasing due to important tech-reform project Account payable 53,585,908.99 33,667,218.95 59.16 Increasing of inventory Account paid in 6,283,359.02 4,826,677.94 30.18 Increasing of advance advances paid for supplementary equipments Tax payable 8,672,271.42 5,774,626.82 50.18 Increasing of balances of VAT payable and Income Tax payable Other payable 7,459.790.85 2,703,823.68 175.90 Increasing of debt due to the Group at the end of term Long-term expenses 343,333.30 820,937.27 -58.18 Hand over of some to be amortized automobiles rented and amortizing of rent expenses (V) Influences of the movement of business environment and macro policies on the business performance. Meanwhile, with China’s entry to WTO, famous international transnational groups have quickened their pace of entering Chinese market. The price of foreign industrial steam turbine products has been constantly lowered. Domestic manufacturers broke the original market setup and entered the market of medium-sized and small steam turbine market with low price one after another. Undoubtedly, this will lead to the lowering of the selling price of industrial steam turbine products so that the profit rate of the leading products of the Company will lower. Therefore, the Board of Directors specially asked the investors to pay full attention to the factors of risk of investing in the Company. 28 (VI) The notes to the non-standard auditors’ report , the report with explanatory statements, reserved statements, refusing to express opinions, or negative statement issued by certified public accountants As PriceWaterHouse Coopers CPA. and Zhejiang Orient Certified Public Accountants issued standard auditors’ reports without explanatory statements and reserved statements, there is no matter that needs to be specially explained by the Board of Directors in this respect. (VII) Routine works of the Board of Directors 1. Board meetings and resolutions The Board of Directors held 5 formal meetings during the report term. The followings are the details. (1) The 4th meeting of the 2nd term Board of Directors: was held on April 10, 2002. 8 of the 9 directors attended the meeting. (Director Jin Fujuan absent for business reason and entrusted director Fang Wen to vote in behalf of her.) The meeting was hosted by Mr. Fang Wen, the Chairman of Board. The following 13 proposals was examined and adopted as resolutions. 1) The Annual Report 2001 and its summary version were passed and agreed to be published; 2) The annual profit distribution preplan for 2001. This proposal is subject to the approval of the Shareholders’ General Meeting 2001; 3) The proposal of changing the application of proceeds raised from previous share placing. This proposal is subject to the approval of the Shareholders’ General Meeting 2001; 4) The proposal of acquiring the casting company, the supplementary machinery company and partial assets of the energy division of the Group. This proposal is subject to the approval of the Shareholders’ General Meeting 2001; 5) The proposal of modifying the Article of Association. This proposal is subject to the approval of the Shareholders’ General Meeting 2001; 6) The proposal of Company Managing Compendium. This proposal is subject to the approval of the Shareholders’ General Meeting 2001; 7) The proposal of Rules of Shareholder’s General Meeting. This proposal is subject to the approval of the Shareholders’ General Meeting 2001; 8) The proposal of Rules of Board Meeting; 9) The proposal of Rules of Information Disclosure; 10) The proposal of Rules of General Manager; 11) The proposal of engaging Mr. Zhang Mingguang and Mr. Zou Zhaoxue as the independent directors of the Company. This proposal is subject to the approval of the Shareholders’ General Meeting 2001; 12) The proposal of modifying of the implementing plan of the annual salary system for directors, supervisors and senior management. This proposal is subject to the approval of the Shareholders’ General Meeting 2001; 13) The proposal of holding the Shareholders’ General Meeting 2001, and its agenda. The above resolutions were published in the Public Notice of Resolutions of the 4th Meeting of the 2nd Term Board of Directors carried in April 13, 2002 issues of Security Times and Hong Kong Commercial Daily. (2) The 5th meeting of the 2nd Board of Directors: was held on April 21, 2002. 8 of the 9 directors 29 attended the meeting. (Independent director Yao Fusheng entrusted Ms. Chen Qingyun brought his voting sheet to the meeting. Director Yao Fusheng voted agree on all of the agenda after carefully studied on the proposals.) The Chairman of Board Mr. Fang Wen hosted the meeting. 4 proposals was examined and passed as the followings: 1) The 1st Quarterly Report 2002 of the Company, and agree it to be published. 2) The proposal of selling of the shareholdings of Hangzhou Keximeng Technology Co., Ltd. The management of the Company was authorized to sell the shareholdings takes 34.5% of the total share capital of the company. 3) The proposal of entrusting the Group in managing of the medical fund account collectively for the employees of the Company. 4) The proposal of inviting of Arthur Anderson and Zhejiang Oriental CPA as the overseas and domestic auditors respectively for the year 2002. This is subject to the approval of the Shareholders’ General Meeting of 2001. In case of Arthur Anderson merged with other auditing bodies, the proposal will be valid upon the auditor after the coalition. The above resolutions are available in the “Announcement of Resolutions of the 5th meeting of the 2nd term Board of Directors” published in the April 23, 2002 issues of Security Times and Hong Kong Commercial Daily. (3) The 6th meeting of the 2nd term Board of Directors: was held on June 27, 2002. 10 of the 11 directors attended the meeting. Director Ye Zhong absent due to business. Director Yan Jianhua was entrusted by him in voting in the meeting. The meeting was hosted by Mr. Fang Wen, the Chairman of Board. The “Report of self-inspection on establishing of modern enterprise managing system” was examined and passed. It was also agreed to be submitted to China Security Supervisory Committee and National Economy & Trade Committee after proper modifying. (4) The 7th meeting of the 2nd term Board of Directors was held on August 14, 2002. 10 of the 11 supervisors attended the meeting. (Mr. Yao Fusheng, the independent director, absent the meeting due to reason of duties. Mr. Zhang Mingguang, another independent director, was entrusted to vote on the proposals in the meeting.) The meeting was hosted by Mr. Fang Wen, the Chairman of Board. The following 2 resolutions were examined and adopted in the meeting. 1) Examined and adopted the 2002 Semiannual Report and its abstracted version. And agree to publish them by public medias. 2) Examined and adopted the proposal of, neither profit distribution nor capitalization of reserves will be implemented for the semiannual term of 2002. The meeting also decided that, except for otherwise decided by the Shareholders’ General Meeting, the Company will no longer discuss on the profit distribution matter for neither semiannual nor quarterly terms. The above resolutions were published in the Public Notice of Resolutions of the 7th Meeting of the 2nd Term Board of Directors carried in Aug. 17, 2002 issues of Security Times and Hong Kong Commercial Daily. (5) The 8th meeting of the 2nd Term Board of Directors: was held on Oct. 24, 2002, 11 directors should present the meeting but 10 directors presented. Director Li Lie absent the meeting for business reason and entrusted Director Bo Ronghua to exercise his right of voting. The meeting was presided by Mr. Fang Wen, the Chairman of the Board. The following resolutions was examined and passed: 1) Examined and passed the 3rd Quarterly Report of Year 2002. The report was approved to be published. 2) Examined and passed the detailed implementing plans of Special Committee of the Board of Directors. 3) Elected the members of each Special Committee of the Board of Directors as followings: a)Strategy Committee: consists Fang Wen, Yao Fusheng, Wang Hongkang, Yan Jianhua, and Li Lie. Fang Wen is the Chief of committee, Yao Fusheng is the Vice Chief. 30 b)Nominating Committee: consists Zhang Mingguang, Fangwen, Yao Fusheng, Wang Hongkang, and Jin Fujuan. Zhang Mingguang is the Chief of committee. Fang Wen is the Vice Chief. c) Auditing Committee: consists Zhou Zhaoxue, Zhu Shuilong, Jin Fujuan, Jiang Demu and Ye Zhong. Zhou Zhaoxue is the Chief of committee, Zhu Shuilong is the Vice Chief. d) Salary and Performance Assessment Committee: consists Zhang Mingguang, Jin Fujuan, Zhou Zhaoxue, Wang Hongkang, and Bo Ronghua. Zhang Mingguang is the chief of committee, Jin Fujuan is the Vice Chief. The above resolutions were published in the Public Notice of Resolutions of the 8th Meeting of the 2nd Term Board of Directors carried in Oct 26, 2002 issues of Security Times and Hong Kong Commercial Daily. 2. Implementing of the resolutions of the shareholder’s general meeting (1) Implementing of the authorizations of the shareholders’ general meeting: The Shareholders’ General Meeting of 2001 adopted “The proposal of acquiring of the casting company, supplementary machinery company and partial assets of the energy division of the Group”. The Board of Directors decided the basic date of the acquisition on June 1, 2002. For the implementing details please refer to Chapter VII Report of the Board of Directors (III) “The committed project of “acquisition of partial assets of Hangzhou Boiler Factory” was changed. It’s reason, approval procedures, investments, implementing and profitability” (2) Implementing of profit distribution and dividend delivery The company issued “Public Notice of profit distribution and dividend delivery for year 2001” on the June 3rd, 2002 issues of Security Times and Hong Kong Commercial Daily in implementing of the resolutions about profit distribution adopted by the Shareholders’ General Meeting 2001. Approved by the Shareholders’ General Meeting of 2001, basing upon the total capital shares of 220 million shares. RMB1.00 (tax included) would be delivered to each 10 shares. Totally RMB22 million was delivered as cash dividend. The remaining of RMB42.3481 million would be transferred to the next fiscal year. For the B share holders, the dividend will be transferred to HKD on the middle exchange rate announced by People’s Bank of China at the 1st business day (May 17, 2001) after the proposal was adopted by the Shareholders’ General Meeting 2001 (HKD:RMB=1.0613:1). The final transaction date of B shares would be June 10th, 2002. The ex-dividend date would be June 11th, 2002. For holder of state-owned shares, dividend will be delivered directly by the Company. For holders of B shares, they can obtain the dividend from the consignees of dealers or banks since June 14, 2002. (3) Implementing of share allotting and issuing of new shares: for the report term, the Company raised no proposal on share allotting or issuing of new shares. (VIII) Profit distribution preplan for year 2002 In accordance with the terms of the Article of Association of the Company, the lower one of net profit produced by the domestic and overseas auditors will be the basis of profit allocation. The auditing result stated by the Financial Statement 2002 produced by Zhejiang Oriental CPA is the lower one. With which, the net profit of the year is RMB34,706,731.04, after drawing of statutory public reserves at 10% amounted to RMB3,580,582.10 (RMB3,470,673.10 was drawn for the parent company), and drawing of statutory public welfare at 10% amounted to RMB3,580,582.10 (RMB3,470,673.10 was drawn for the parent company), plus the un-delivered profit at the end of pervious year amounted to RMB42,348,185.35, the profit distributable is RMB69,893,752.19. The Board of Directors suggests that, basing on the total capital share of 220,000,000 shares at the end of 2002, cash dividend of RMB1 for each 10 shares will be distributed (tax included). For the B share holders, the dividend will be transferred to HKD on the middle exchange rate announced by 31 People’s Bank of China at the 1st business day after the proposal was adopted by the Shareholders’ General Meeting. Totally RMB22,000,000.00 will be delivered this time. The balance of RMB47,893,752.19 of profit not distributed will be transmitted to the next year. No capitalizing of public reserves will be implemented for the year 2002. The implementing of above preplan is upon the approval of the Shareholders’ General Meeting 2002. (IX) Other events Security Times and Hong Kong Commercial Daily continues to be assigned by the Company as information disclosure press media and stay unchanged. Chapter VIII. Report of the Supervisory Committee (I) Business situation of the Supervisory Committee The Supervisory Committee held 4 formal meetings during the report term. The followings are the details. (1) The 4th meeting of the 2nd term Supervisory Committee: was held on April 10, 2002. All of the supervisors attended the meeting. The meeting was hosted by Mr. Chu Shuilong, the Chairman of Committee. The following 12 proposals was examined and adopted as resolutions. 1. The Annual Report 2001 and its summary version were passed and agreed to be published; 2. The Annual Report of the Supervisory Committee of Year 2001, and the independent statement of the committee on the legality of operation of the Company for year 2001; 3. The proposal of changing the application of proceeds raised from previous share placing. This proposal is subject to the approval of the Shareholders’ General Meeting 2001; 4. The proposal of acquiring the casting company, the supplementary machinery company and partial assets of the energy division of the Group. This proposal is subject to the approval of the Shareholders’ General Meeting 2001; 5. The independent statement on the acquiring of the casting company, the supplementary machinery company and partial assets of the energy division of the Group. 6. The proposal of modifying the Article of Association. This proposal is subject to the approval of the Shareholders’ General Meeting 2001; 7. The proposal of Company Managing Compendium. This proposal is subject to the approval of the Shareholders’ General Meeting 2001; 8. The proposal of Rules of Shareholder’s General Meeting. This proposal is subject to the approval of the Shareholders’ General Meeting 2001; 9. The proposal of Rules of Meetings of the Supervisory Committee and put effective right away; 10. The proposal of Rules of Information Disclosure; 11. The proposal of modifying of the implementing plan of the annual salary system for directors, supervisors and senior management. This proposal is subject to the approval of the Shareholders’ General Meeting 2001; 12. The proposal of holding the Shareholders’ General Meeting 2001, and its agenda. The above resolutions were published in the Public Notice of Resolutions of the 4th Meeting of the 2nd Term Supervisory Committee carried in April 13, 2002 issues of Security Times and Hong Kong Commercial Daily. (2) The 5th meeting of the 2nd Supervisory Committee: was held on April 21, 2002. 4 of the 5 32 supervisors attended the meeting. (Supervisor Zhang Yougen absent) The Chairman - Mr. Chu Shuilong hosted the meeting. 2 proposals was examined and passed as the followings: 1. The 1st Quarterly Report 2002 of the Company, and agree it to be published. 2. The proposal of selling of the shareholdings of Hangzhou Keximeng Technology Co., Ltd. The management of the Company was authorized to sell the shareholdings takes 34.5% of the total share capital of the company. The Supervisory Committee took for the negative position of Hangzhou Keximeng was due to both objective and subjective causations. Managements of the Company shall learn from the experience in this operation. The committee suggests the entrusted directors to propose in the shareholders’ meeting of Hangzhou Keximeng a 3rd party auditing on the operation team. The above resolutions are available in the “Announcement of Resolutions of the 5th meeting of the 2nd term Supervisory Committee” published in the April 23, 2002 issues of Security Times and Hong Kong Commercial Daily. (3) The 6th meeting of the 2nd term Supervisory Committee: was held on August 14, 2002. All of the 5 directors attended the meeting. The Chairman - Mr. Chu Shuilong hosted the meeting. The 2002 Semiannual Report and its abstracted version was examined and passed. And agree to publish them by public medias. The above resolutions were published in the Public Notice of Resolutions of the 6th Meeting of the 2nd Term Supervisory Committee carried in Aug. 17, 2002 issues of Security Times and Hong Kong Commercial Daily. (4) The 7th meeting of the 2nd Term Supervisory Committee: was held on Oct. 24, 2002, 4 of the 5 supervisors attended the meeting. Supervisory Zhao Ying absent the meeting for heath problem and entrusted Supervisor He Fengdi to exercise her right of voting. Mr. Chu Shuilong hosted the meeting. The following resolutions was examined and passed: 1. Examined and passed the 3rd Quarterly Report of Year 2002. The report was approved to be published. 2. Examined and passed the detailed implementing plans of Special Committee of the Board of Directors. The Supervisory Committee appreciates the operation results of the first 3 quarters of the year and supports the drawing of “long-term investment devalue reserves” for Hangzhou Keximeng Technology Co., Ltd. The above resolutions were published in the Public Notice of Resolutions of the 7th Meeting of the 2nd Term Supervisory Committee carried in Oct 26, 2002 issues of Security Times and Hong Kong Commercial Daily. (II) Independent statement of the Supervisory Committee The Supervisory Committee supervised the operation and decision making of the Company during the year 2002. The followings are the independent statement of the committee. 1. Operation of the Company in respecting of relative law. (1) The Committee supervised the shareholders’ general meeting and Board meetings during the report term on the calling procedures, agendas and implementing of resolutions. The Committee regards the Board of Directors and the management of the Company were operating in respect to the terms of the Article of Association, the Company Law, and the Managing Standard of Public Companies. The making and implementing of the significant decisions were scientific and legal. Therefore ensures the legality of operation of the Company. (2) The Committee found no illegal behavior violating the Article of Association, or harming the benefits of the Company and the shareholders took place with the directors, the general manager and other senior managements in executing of their duties. 33 (3) The Company has established a consummate inner controlling managing system. The issuing of “Collection of Basic Regulations of the Legal Person Managing System” provides a rule to the decision-making, implementing, supervising and managing activities. (4) The Committee regards the Board of Directors and the management of the Company was facing the severe competition of the market and leading the employees going all out to pursue highest economical efficiency. The Company kept at the leading role of the domestic industrial steam turbine industry both in the aspects of technical and marketplace. This was showing the capability of the decision-making level and managerial level of the Company in cope with the ever-changing market. 2. Inspection on the financial situation of the Company. (1) The Committee listened to the report of the relative department of the Company in respect of the financial and production situation. Suggestions were raised on the managing of Company. These suggestions were recognized and adopted by the relative departments. (2) PriceWaterHouse Coopers and Zhejiang Oriental CPA issued Financial Statements of Year 2002 without explanatory statement or reserved opinions respectively. The Committee regards the auditing reports are frankly reflecting the financial situation and operation results. (3) In the Financial Report 2002, adjustments were undertaken on the bad debt reserves standard and assets devalue reserves were drawn upon 2 items of assets. 1) Adjustments on the bad debt reserves: The original policy of bad debt reserves was as: in accordance with the age of the accounts receivable balance at the end of term (including account receivable and other account receivable), 5% is drawn for below 1 year and between 1-3 years, 15% is drawn for beyond 3 years. The adjusted new policy is as: 5% for below 1 year and between 1-3 years, 30% beyond 3 years. On the new policy, it will influence the net profit of the Company for year 2002 by RMB6,908,900 2) In accordance with the regulations of the International Accounting Standard term 16, (evaluation shall be undertaken for each 3-5 years on the fixed assets – workshops, houses and equipments). Through the evaluation of Zhejiang Oriental Real-estate Evaluating Co., Ltd., RMB9,284,600 of assets devaluating reserves was drawn upon those assets’ booking value is lower than that of the market price. 3) For Hangzhou Keximeng Technology Co., Ltd. is hopeless in turning into positive situation, in protecting of the investors’ benefit, the Company has drawn long-term investment devalue reserves on this investment in the Financial Statement of 3rd Quarterly Report 2002. This influenced the net profit of this term by RMB1,585,500. The above adjustment on policy of bad debt reserves and drawing of assets devalue reserves were totally influencing the net profit of the term by RMB17.79 million. The Committee considers: Although the above drawing of asset devalue reserves influenced the business results of 2002 in a negative way, it will benefit the consolidating of company assets and increase the ability of risk defending from the long-term viewing. Thus the Committee supports this decision. 3. Legality of the utilizing of fund raised from share placing During the report term, the Company changed the applying of fund amounted to RMB65 million (RMB59 million in fact) raised for acquisition of Hangzhou Boiler Factory into acquisition of the casting company, supplementary machinery company and partial assets of the energy division of the Group. The committee participated in the whole decision-making, examination and implementing procedures of this event, which was regarded as change of application of fund raised from share placing, assets acquisition and significant associated transaction. Though the amount of the transaction involved was not more than 50% of the net asset of the Company, the Company implemented strictly under the terms of “The notifications in respect to significant acquisition and exchanging of assets of the public companies” issued by China Security Supervisory Committee as well as “Share Listing Rules” issued by Shenzhen Stock Exchange. The Committee recognizes the changing of fund applying was reasonable, valid and reflecting the 34 principles of “Justice, Fairness, and Publicity”. This changing of fund applying, asset acquisition and significant associated transaction was implemented upon the approval of the Shareholders’ General Meeting 2001. 4. Rationality and Rule-compliance of the Assets Acquisition Activities In the report period, the Company acquired partial assets of the Foundry Branch, Auxiliary engine Branch and the Energy Division, the subsidiaries of the Group. The aforesaid acquisition was proposed by the minority shareholders at 2000 Shareholders’ General Meeting. In their opinion, the amount involved in the Associated transactions had been always high, which affected the Company in healthy development and they suggested to acquire partial assets of the Foundry Branch, Auxiliary engine Branch and the Energy Division, the subsidiaries of the Group with the proceeds raised through share offering amounting to RMB 59 million which had been committed for acquiring Hangzhou Boiler Works previously. In the opinion of the Supervisory Committee: (1) The amount of Associated transactions in terms of commodity purchase and supply, offering labor services, etc. between the Company and the Group was about RMB 60 million per year in average, of which the amount involved in such Associated transactions as purchase and sale of castings, auxiliary engines, energy, supplying labor services, etc. was about RMB 50 million, taking 83% of the Associated transactions. After the successful acquisition, the amount of the Associated transactions would be cut down, which was favorable for protection of the minority shareholders’ interests. (2) Product delivery cycle has become one of the essential factors to improve the competitiveness of the Company. After the successful acquisition, the Company’s production process may be rationalized, the management costs may be cut down, the product delivery cycle may be shortened and the Company’s market competitiveness may be improved. (3) Members of the Supervisory Committee reviewed all the documents and information in connection with the said acquisition, including the assets appraisal report, land appraisal report, financial auditing report, written legal opinions, report of independent financial consultant produced by the respective professional agents as well as the Feasibility Study Report prepared by the relevant department of the Company. They also attended the board meeting held for the said transaction as non-voting delegates, attended the shareholders’ meeting for approving the transaction. In our opinion, the procedures of reviewing and decision making for the said transaction complied with the relevant provisions specified by China Securities Regulatory Commission and Shenzhen Stock Exchange and were legal and valid. (4) The price of the said assets acquisition is based on the assets appraisal result; the two parties to the transaction conducted consultation based on the principle of mutual equality, the seller made some concession in the transaction which was filed to the authority of state assets administration. There existed no insider transaction or any conduct and condition harmful to minorities’ interests and no loss of the Company’s assets was found. 5. Rationality and Fairness of the Associated Transaction The Supervisory Committee reviewed the documentation concerning the Associated transactions of the Company and proved that all the Associated transactions were carried out in accordance with the duly signed Contract on Associated Transactions in a fair, open and righteous way. As the Company adopted the measures of price reduction and promotion and cut down the prices of all the complementary parts and components supplied externally. The prices of the components and complementary parts purchased from the Group were also brought down correspondingly. In the opinion of the Supervisory Committee: the Board of the Directors and the management seriously implemented their obligations in a credible way, all the Associated transactions were carried out strictly in accordance with the relevant agreements/ contracts, with the reasonable prices and through law-compliance procedures, causing no harm to the shareholders’ rights and interests or loss of the Company’s assets. 35 6. Auditors’ report issued by the certified public accountants PriceWaterHouse Coopers CPA. and Zhejiang Orient Certified Public Accountants issued standard auditors’ reports without explanatory or and reserved statements, there is no matter that needs to be specially explained by the Supervisory Committee in this respect. Chapter IX Important Events (I) Material Lawsuits and Arbitration in the Report Period In order to enhance the work of recovering the accounts receivable, the Company took civil actions against some tough debtors through court. On October 15, 2002, the Company submitted a suit to Hangzhou Yuhang District People’s Court against Hangzhou Sanshi Cement Co., Ltd. for the arrears amounting to RMB 1.5 million to the Company. The court announced the verdict of the first instance on November 13, judging the respondent to repay partial arrears amounting to RMB 270,000 plus the interest amounting RMB 45,135 to the Company within 10 days after the judgment comes into force. The balance amounting to RMB 1.23 million owed to the Company should be payable according to the payment term agreed on by both parties. Of the court charge for the said case amounting to RMB 17,930 and charge for application for protecting the property amounting to RMB 2,020, the Company borne RMB 14,363. Although the Company won the suit, yet no repayment had been received from the respondent ended December 31, 2002. As the amount of the subject arrears involved in the aforesaid lawsuit was below the minimum for “Provisional Announcement” as specified in the Rules for Listing Stocks with Shenzhen Stock Exchange, the Company did not have to make immediate announcement about this event and has made up this notice hereby. In the report period, the Company had no other lawsuit or arbitration. (II) Summary of Acquisition and Sales of Assets, Absorption and Consolidation and the Progress In the report period, the Company acquired partial assets of the Foundry Branch, Auxiliary engine Branch and the Energy Division, the subsidiaries of the Group. The assets involved in the acquisition were the physical assets and land use right of the aforesaid organizations with close relation of the production and manufacture of industrial steam turbines, including inventories, houses and buildings, machines and equipment, construction-in-progress, land use right. The creditor’s right and debts of the aforesaid organizations are not listed in the range of the aforesaid acquisition. According to the Assets Appraisal Report issued by Zhejiang Orient Assets Appraisal Co., Ltd. (ZOAA (2001) No. 149), the fair value of the assets after appraisal on the base date September 30, 2001 was RMB 66,076,428.69. The names, categories and values of the acquired assets are listed as follows: In RMB Assets net book value net book value after appraised increase/decrease crease/ decrease adjustment value rate % current assets 13,397,704.81 13,397,704.81 12,796,413.44 -601,291.37 -4.49% Fixed assets: 18,903,322.89 18,903,322.89 33,501,391.25 14,598,068.36 77.22% Land use right 19,778,624.00 19,778,624.00 36 net assets 32,301,027.70 32,301,027.70 66,076,428.69 33,775,400,99 104.56% In comparison with the book value after adjustment amounting to RMB 32,301,027.70, the added value as appraised was RMB 33,775,400.99, and the accession rate is 104.56%. The main reasons are: (1) Land use right: There was no book value originally. As the land used by the Group is the state land allocated by the authority, the added value as directly appraised is now RMB 19,778,624.0. (2) Due to the change of the replacement value of the buildings, machines and equipment, the resulted added value was RMB 14,598,068.36. According to the 4th meeting of the second Board: the appraisal result is the reflection of the fair value of the assets as of the base date. The pricing principle of the said assets acquisition was: with the appraisal result of the aforesaid assets made by Zhejiang Orient Assets Appraisal Co., Ltd. as the reference price, the acquisition price of the fixed assets was subject to 90% of the appraised value; the acquisition prices of the land use right and the current assets were subject to the actual prices as listed in the appraisal report and was paid up once and for all. The actual payment been made was as: At the end of Dec. 31, 2002, the associated transaction was amounted to RMB66,259,233.54 including RMB29,010,241.96 for fixed assets (RMB20,349,041.50 for 32,062.77 m2 of houses & buildings, RMB8,661,200.46 for equipments); RMB1,253,928.10 for materials inventory (RMB634,296.97 for materials from the casting company, RMB619,631.13 for materials from the supplementary machinery company); RMB17,637,608.48 for products in processing (RMB10,618,567.38 for the casting company and RMB7,019,041.1 for the supplementary machinery company); RMB18,357,455.00 for the land using right of 34,313 m2 . For the detail, please refer to the Company’s Public Notice on Assets Acquisition and Material Associated Transactions published on Securities Times dated April 13, 2002 and the Company’s Public Notice on Implementation Result of the Material Associated Transactions published on Securities Times dated January 13, 2003. After the implementation of the assets acquisition, the Associated transaction volume between the Company and its controlling shareholder, Gangzhou Steam Turbine Group was cut down greatly and the Company’s operation process was rationalized, the product manufacture cycle was shortened and the Company’s market competitiveness was enhanced. (III) Material Associated Transactions in the Report Period 1. Associated transactions in connection with purchase and sale of goods and supply of labor (1) A number of subsidiaries of the Group are engaged in the business of sales of industrial steam turbines and sell the steam turbines and spares and parts purchased from the Company at ex-works price; in the report period, the amount involved in this Associated transaction was RMB 34,401,557.81. (2) Before May 31, 2002, the Company’s water, electricity, pneumatic air, steam, etc. and semi-finished castings and auxiliary engines were all supplied by the Group. The prices of water, electricity, pneumatic air, steam, etc. were based on the principle of “the state specified quotation plus the administrative expenses” while the prices of the semi-finished castings and auxiliary engines were determined according to the market prices. The way of settlement was “calculated based on the actual amount incurred and payment was made on monthly basis”. After June 1, 2002, as the Company had acquired the Foundry Branch, Auxiliary engine Branch and the Energy 37 Division, the subsidiaries of the Group, the semi-finished castings, auxiliary engines, pneumatic air and steam became self-supplied while the water and electricity were still supplied by the Group. In the report period, the amount of the Associated transactions was RMB 35,413,173.09, decreased by RMB 24.9312 million over the previous period. (3) The Group also offers the Company such services as livelihood supplies, commutations, on-service training, public security service, trademark license, etc. and the service charges are based on the “mutual consultation with reference to the market prices” and both parties have entered in to agreement and the service charges are paid once and for all every year according to the agreement. In the report period, the amount of the aforesaid transaction was RMB 9,656,027.69. (4) The Company’s basic endowment insurance, additional endowment insurance, basic medical insurance, unemployment insurance, and industrial injury insurance for the employees as well as the fees for subscribing magazines and newspapers are paid and collected on behalf by the Group. In the report year, the Company paid RMB 25,562,466.71 to the Group for the aforesaid expenses advanced by the Group. The total amount of the aforesaid four transactions was RMB 105,033,225.30. For the detail, please refer to Note 9 to the accounting statement enclosed in this report titled “Relationship and other transactions with the Associated parties. As the Company and the Group are inside the same “enclosure”, the aforesaid Associated transactions are necessary in a certain degree and shall continue in order to cut down costs and realizing the share of resources. 2. Associated transactions concerning assets and equity transfer: In the report period, the Company was never involved in any equity transfer with the Associated parties. For the assets based Associated transaction, refer to the above (II) of this chapter. 3. Credit, Liabilities and Guarantees with the Associated Parties: (1) Of the credits and debts incurred in purchase and sales of the Company’s steam turbine products between the Company, the Group and its subsidiaries in the report period, the Group owed the Company RMB 14,594,943.00 for goods, taking 7.47% of the Company’s total accounts receivable at the end of the period; the Company owed the Group RMB 4,766,595.93, taking 63.9% of the Company’s total other payables at the end of the period. For the detail, please refer to Note 8 to the accounting statements “Relationship and Transactions with the Associated Parties and Note 4 “Balance of the Accounts Receivable from the Associated Parties”. (2) There existed no guarantees between the Company and the Associated parties in the report period. (IV) Other Material Associated Transactions Except the aforesaid Associated transactions, the Company was not involved in any other material Associated transactions in the report period. (V) Important Contracts and Implementation 1. Keep as custodian, contract and lease other company’s assets and vise versa: The Company did not keep as custodian, contract for or lease the assets of other companies nor did other companies keep as custodian, contract or lease the assets of the Company in the report period. 38 2. Material Guarantees: In the report year, the Company had offered neither assets nor credit guarantees. 3. Entrusting other party to manage cash assets in the report period or continued after the report period. In the report year, the Company had never entrusted any other party to manage the Company’s cash assets and had no plan of entrusting any party to manage the assets in the future either. 4. Other Important Contracts: In the report period, the Company had no other important contract to implement which may cause significant influence upon the change of the assets. (VI) The commitments of the Company and its shareholders holding over 5% of the Company’s total shares in the report year or extending to the report year from previous year(s). The Company and its controlling shareholder, Hangzhou Steam Turbine Group Co., Ltd. made no commitment in the report period and had no commitment extending to the report year from previous year(s), either. (VII) Engagement/Disengagement of Certified Public Accountants In the report period, the Company engaged PriceWaterHouse Coopers CPA as the international auditor of the Company’s financial statements and Zhejiang Orient Certified Public Accountants as the domestic auditor. Note to the engagement of PriceWaterHouse Coopers CPA as the Company’s international auditor: 2001 Shareholders’ General Meeting adopted the Proposal on Engaging PriceWaterHouse Coopers CPA as the international auditor of the Company’s financial statements and Zhejiang Orient Certified Public Accountants as the Company’s International and Domestic Financial Auditors. About the engagement of Arthur Andersen & Co., the proposal submitted by the Board to the shareholders’ general meeting stated that: “Should Arthur Andersen & Co. be combined with other certified public accountants, the Board would resolve to engage the combined certified public accounts as the financial auditor”> (For the detail, please refer to “Public Notice on the Resolution of the 5th Meeting of the Second Board” published on Securities Times and Hong Kong Commercial Daily dated April 23, 2002.) Later on with the businesses of Arthur Andersen & Co. in China were officially merged into Pricewaterhouse Coopers Zhongtian Certified Public Accountants in July, 2002, the Company thus engaged Pricewaterhouse Coopers Zhongtian Certified Public Accountants as the Company’s international auditor for auditing the Company’s international financial statements in 2002. The remuneration paid to the aforesaid two CPAs in the report period was stated as follows: CPA 2002 Remarks Pricewaterhouse Coopers RMB 350,000 The Company did not bear Zhongtian Certified Public business travel expenses Accountants Zhejiang Orient Certified Public RMB 120,000 The Company did not bear Accountants business travel expenses Total RMB 470,000 Zhejiang Orient Certified Public Accountants had been offering the auditing service to the Company as the domestic auditor for four years in succession since 1999 and ended 2002. 39 Pricewaterhouse Coopers Zhongtian Certified Public Accountants offered the auditing service to the Company as the international auditor commencing from 2002. (VIII) About the administrative punishment, circulating notice of criticism from China Securities Regulatory Commission or public blame from the Stock Exchange against the Company and the rectification and reform based on the opinions for improvement from China Securities Regulatory Commission or its representative office after inspection over the Company In the report year, the Company, the Board of Directors or its directors had never underwent administrative punishment or had been criticized through public notice by China Securities Regulatory Commission; and had never been condemned by the stock exchange in public either. From July 23 to 28, 2001, China Securities Regulatory Commission Hangzhou Securities Regulatory Office conducted routine inspection and issued a Notice on Demanding Hangzhou Steam Turbine Co., Ltd. to Make Correction of the Problems Found in the Routine Inspection (HSRO [2001] No. 228) (hereinafter referred to as the Notice) on September 3, 2001. The Notice urged the Company make correction of the existing problems within the deadline in “Standardizing the Operation of the Shareholders’ General Meeting, the Board of Directors and the Supervisory Committee”, “Improving the Internal Control System”, “Application of the Proceeds Raised through Share Offering”, “Information Disclosure”, “Financial Accounting”, etc.The rectification and reform report adopted at the 3rd meeting of the Second Board of Directors and the 3rd meeting of the Third Supervisory Committee was published on Securities Times on September 20, 2001 and the designated Internet website. On October 30, 2002, Hangzhou Securities Regulatory Office conducted return inspection over the rectification and reform result. The resulted showed that all the items listed in the Rectification and Reform Report were rectified and up to the requirements. (IX) Significant events as specified in Article 62 of the PRC Securities Law or Article 17 of the Rules for Information Disclosure by the Public Companies (for Trial Implementation) On July 24, 2002, the Company published the Public Notice on Material Technical Innovation and Investment” on Securities Times, which was summarized as follows: In accordance with the Official Letter of the Investment and Planning Department of the State Economic and Trade Commission ([2002] No. 180) and the Official Reply of Zhejiang Provincial Economic and Trade Commission (ZETC Investment [2002] No. 764), the Company’s feasibility study report on technical innovation project –domestic made industrial steam turbines to complete large ethylene equipment “Three Ethylene Machines” was approved and put into formal implementation. (1) This project aims at improving the Company’s design and manufacture level and development capacity, trying to form an annual production capacity of industrial steam turbines to complete three large ethylene equipment (700,000 to 900,000 tons/year) “Three Ethylene Machines”. (2) Project description: to add 24 units/sets of key production and processing equipment, including 8 units/sets of up-to-date numerical control machining equipment to be imported and 16 units/sets 40 of China made numerical control and digital display machining equipment. For this project, the existing production building and facilities are to be used and the existing blade plant is to be partially improved for the purpose of improving the work conditions of the blade precision machining equipment. The additional water, power, pneumatic air and steam shall be supplied by the Company itself by balancing the supply. (3) Total investment and fund sources: total investment: RMB 125.22 million, including investment on fixed assets: RMB 90 million (including US$ 7.32 million of foreign exchange) and initial current fund: RMB 35.22 million. Fund sources: loan from Industrial and Commercial Bank of China amounting to RMB 30 million and the balance to be raised by the Company itself. (4) Construction period: from 2002 to 2003. (5) The environment protection, fire-fighting and labor safety of the project must strictly comply with the relevant regulations of the state. (6) The project is listed on No. 20 in “Catalog of Key Industrial, Product and Technology Projects Encouraged by the State (Revised in 2000): Domestic Investment Projects: Machine-building: Key Manufacture Technology Development and Equipment Manufacture of Large Chemical Fertilizer and Ethylene Installation. (7) Risks existing in project investment and influence upon the Company: this project is a technical innovation project with biggest investment since the Company was listed. Upon completion, the project shall play a positive role in upgrading the Company’s technical innovation capacity, expanding the production capacity and enhancing the core competitiveness. Meanwhile, the Board should also remind the investors that there may exist some risk in process of project implementation. For instance, the fund raising cost may increase in process of capital raising, which may influence the economic results of the current period. In addition, the Board of Directors should specially emphasize that the Company’s leading product – industrial steam turbine, is a product of investment and the market demand is closely Associated with the macro economic environment and investment policy of the state. For this reason, the Board of Directors would hereby specially remind the investors to pay close attention to the policy risks possibly involved in the investment of this technical innovation project. Ended December 31, 2001, the Company had invested RMB 3.64 million in this project, taking 4.04% of the total investment in this project. (X) Material Events after the Report Period Ended the date of publishing this report, there were no material events necessary to be disclosed. 41 Chapter X Financial Report AUDITORS’ REPORT 普华永道中天会计师事务所有限公司 12th Floor, Shui On Plaza 333 Huai Hai Zhong Lu Shanghai 200021 To the shareholders of People's Republic of China Hangzhou Steam Turbine Company Limited Telephone +86 (21) 6386 3388 Facsimile +86 (21) 6386 3300 (incorporated in the People’s Republic of China with limited liability) We have audited the accompanying balance sheet of Hangzhou Steam Turbine Company Limited (the “Company”) and its subsidiaries (the “Group”) as of 31 December 2002 and the related income and cash flow statements for the year then ended. These financial statements set out on pages 2 to 25 are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements present fairly, in all material respects, the financial position of the Group as of 31 December 2002 and of the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards. PricewaterhouseCoopers Zhong Tian CPAs Co., Ltd. 14 April 2003 HANGZHOU STEAM TURBINE COMPANY LIMITED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in Renminbi thousands except earnings per share data) Notes 2002 2001 Sales 325,374 288,645 Cost of sales (197,982) (196,306)   Gross profit 127,392 92,339 Other operating (loss)/profit (10,128) 1,212 Distribution expenses (8,243) (6,933) Administrative expenses (69,059) (56,450)   Operating profit 4 39,962 30,168 Finance income, net 6 1,264 2,724 Share of result of associates (1,815) (275)   Group profit before tax 39,411 32,617 Income tax 7 (258) (3,863)   Group profit after tax 39,153 28,754 Minority interest 18 (58) (32)   Net profit 39,095 28,722 Earnings per share 9 - Basic RMB 0.18 RMB 0.13 - Diluted Not applicable Not applicable The accompanying notes form an integral part of these consolidated financial statements. HANGZHOU STEAM TURBINE COMPANY LIMITED CONSOLIDATED BALANCE SHEET AS OF 31 DECEMBER 2002 (All amounts in Renminbi thousands) Notes 2002 2001 ASSETS Non-current assets Property, plant and equipment 10 173,542 127,622 Construction in progress 11 10,163 11,489 Leasehold land 12 56,477 39,030 Investments in associates 13 10,051 11,991 Other non-current assets 342 821   250,575 190,953   Current assets Inventories 14 138,046 112,387 Receivables and prepayments 15 181,671 183,452 Cash and cash equivalents 134,323 131,559   454,040 427,398   Total assets 704,615 618,351 EQUITY AND LIABILITIES Capital and reserves Share capital 16 220,000 220,000 Reserves 17 186,731 155,775 Retained earnings 91,514 81,117   498,245 456,892   Minority interests 18 1,690 1,632   LIABILITIES Non-current liabilities Deferred tax liabilities 19 6,770 6,748 Other non-current liabilities 20 11,930 10,300   18,700 17,048   Current liabilities Trade and other payables 21 177,308 137,004 Current tax liabilities 8,672 5,775   185,980 142,779   Total liabilities 204,680 159,827   Total equity and liabilities 704,615 618,351 These consolidated financial statements have been approved for issue by the Board of Directors of Hangzhou Steam Turbine Company Limited on 14 April 2003. The accompanying notes form an integral part of these consolidated financial statements. HANGZHOU STEAM TURBINE COMPANY LIMITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in Renminbi thousands) Share Share Revaluation Other Statutory To capital premium surplus surplus reserves rese (Note 16) (Note 17) Balance at 1 January 2001 220,000 96,762 27,311 - 24,974 149 Net profit for 2001 - - - - - Appropriation to reserves - - - - 5,478 5, Debts restructure gains - - - 1,250 - 1, Dividends - - - - -       Balance at 31 December 2001 220,000 96,762 27,311 1,250 30,452 15 Net profit for 2002 - - - - - Appropriation to reserves - - - - 6,698 Debts restructure gains - - - 306 - Dividends - - - - - Revaluation for property, plant and equipment - gross - - 32,385 - - 3 Revaluation for property, plant and equipment – tax (Note 19) - - (8,433) - - (       Balance at 31 December 2002 220,000 96,762 51,263 1,556 37,150 18 The accompanying notes are an integral part to these consolidated financial statements. HANGZHOU STEAM TURBINE COMPANY LIMITED CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2002 (All amounts in Renminbi thousands) Note 2002 2001 CASH FLOWS FROM OPERATING ACTIVITIES Cash generated from operations 22 86,237 60,374 Interest paid - (1,979) Income tax paid (7,090) (3,797) Income tax refund received - 444   Net cash generated from operating activities 79,147 55,042   CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment (39,765) (16,384) Purchase of leasehold land (18,357) - Purchase of short-term investments (611) (993) Disposal of short-term investments 1,093 1,872 Proceeds from sale of property, plant and equipment 185 236 Disposal of other non-current assets 65 - Interest received 1,377 4,987   Net cash used in investing activities (56,013) (10,282)   CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid (22,000) (11,000) Proceeds from other non-current liabilities 1,630 1,800 Repayments of borrowings - (70,000)   Net cash used in financing activities (20,370) (79,200)   Net increase (decrease) in cash and cash equivalents 2,764 (34,440) Cash and cash equivalents at beginning of year 131,559 165,999   Cash and cash equivalents at end of year 134,323 131,559 The accompanying notes form an integral part of these consolidated financial statements. HANGZHOU STEAM TRUBINE COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2002 (In the notes all amounts are shown in Renminbi thousands unless otherwise stated) 1 GENERAL INFORMATION Hangzhou Steam Turbine Company Limited (the “Company”) was incorporated as a joint stock limited company in accordance with the Company Law of the People’s Republic of China (the “PRC”) by way of the reorganisation of certain assets and liabilities in relation to the industrial steam turbine production business of Hangzhou Steam Turbine & Power Group Company Limited (“HSTG”), the promoter, and an offering of Domestically Listed Foreign Currency Ordinary Shares (“B Shares”) to foreign investors. Pursuant to a reorganisation based on audited financial statements prepared under generally accepted accounting principles in the PRC (“PRC GAAP”) and valuation by a PRC Valuer, Hangzhou Assets Revaluation Office, HSTG contributed net assets amounting to RMB199,485,673 in exchange for 140,000,000 state-owned shares of the Company with a par value of RMB1 each. The Company was incorporated on 23 April 1998 with share capital of RMB140,000,000, divided into 140,000,000 state-owned shares with a par value of RMB 1 each. The ultimate parent company of the Company is HSTG, a state-owned enterprise incorporated in the PRC. Pursuant to approval document [1998] No. 8 issued by the Securities Administration Committee of the State Council dated 1 March 1998, the Company issued 80,000,000 B Shares with a par value of RMB 1 each at a price of RMB2.26 (the "IPO"). Net proceeds from the IPO amounted to approximately RMB168,330,000. The B Shares were listed on the Shenzhen Stock Exchange on 28 April 1998. On 2 December 1998, pursuant to approval document [1998] No. 745 issued by the Ministry of Foreign Trade and Economic Co-operation of the PRC, the Company was transformed into a foreign invested joint stock limited company. The Company and its subsidiary (hereinafter collectively referred to as the “Group”) are principally engaged in the design, manufacture and sale of industrial steam turbines and other kinds of industrial equipment. The registered office of the Company is located at No.357 Shi Qiao Road, Hangzhou, Zhe Jiang Province, PRC. 2 ACCOUNTING POLICIES (a) Basis of preparation These consolidated financial statements have been prepared based on the management accounts of the Company and its subsidiary. Those management accounts are prepared in accordance with the PRC Accounting Standards for Business Enterprises and the Accounting System for Business Enterprises (“Statutory Accounts”), which differ in certain respects from International Financial Reporting Standards (“IFRS”). These consolidated financial statements have incorporated adjustments made to the Statutory Accounts in order to conform with IFRS including International Accounting Standards and Interpretations issued by the International Accounting Standards Board. These consolidated financial statements are prepared under the historical cost convention, except that certain property, plant and equipment are carried at revalued amounts. The Group adopted IAS 39 Financial Instruments: Recognition and Measurement in 2001. The financial effects of adopting these standards were reported in the previous year’s consolidated financial statements. 2 ACCOUNTING POLICIES (continued) (b) Group accounting (1) Subsidiaries Subsidiaries are those companies in which the Group has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies. Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date on which control ceases. All material inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are also eliminated unless cost can not be recovered. Where necessary, accounting policies for subsidiaries have been changed to ensure consistency with the policies adopted by the Group. (2) Associates Investments in associates are accounted for by the equity method of accounting. Under this method the Group’s share of the post-acquisition profits or losses of associates is recognized in the consolidated income statement and its share of post-acquisition movements in reserves is recognized in reserves. The cumulative post-acquisition movements are adjusted against the cost of the investment. Associates are entities over which the Group generally has between 20% and 50% of the voting rights, or over which the Group has significant influence, but which it does not control. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, the Group does not recognise further losses, unless the Group has incurred obligations or made payments on behalf of the associates. (c) Foreign currency translation The Group companies maintain their books and records in Renminbi, the measurement currency. Transactions in foreign currencies are translated into Renminbi at the exchange rates prevailing at the dates of the transactions. Foreign exchange gains or losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated income statement. (d) Property, plant and equipment and depreciation Property, plant and equipment are stated at cost or valuation less accumulated depreciation and accumulated impairment loss. The initial cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditures incurred after the property, plant and equipment have been put into operation, such as repairs and maintenance and overhaul costs, are recognized as expense in the year in which they are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of the asset beyond its originally assessed standard of performance, the expenditures are capitalised as an additional cost of the asset. 2 ACCOUNTING POLICIES (continued) (d) Property, plant and equipment and depreciation (continued) Valuation by independent valuers is performed periodically. Any increase in valuation is credited to the revaluation surplus in shareholders’ equity; any decrease is firstly offset against any increase on earlier valuation recorded in revaluation surplus in respect of the same asset and is thereafter charged to the consolidated income statement. Increase in revaluation directly related to a previous revaluation decrease of the same asset that was recognized as an expense is credited to income to the extent that it offsets the previously recorded decrease. Depreciation is calculated using the straight-line method to write off the cost or revalued amount, after taking into account the estimated residual value, of each asset over its expected useful life. The expected useful lives are as follows: Buildings 40 years Machinery and equipment 14-18 years Motor vehicles and office equipment 5-10 years The useful lives of assets and depreciation method are reviewed periodically to ensure that the method and period of depreciation are consistent with the expected pattern of economic benefits from items of property, plant and equipment. When assets are sold or retired, their cost or revalued amounts and accumulated depreciation and accumulated impairment losses are eliminated from the accounts and any gain or loss resulting from their disposal is included in the consolidated income statement. The relevant portion of the revaluation surplus realised in respect of previous valuation is realised from revaluation surplus directly to retained earnings. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. (e) Construction in progress Construction in progress represents plant and properties under construction and equipment under installation and is stated at cost. Cost includes construction, installation, testing and other direct costs, financing costs and exchange differences that are attributable to the assets. Construction in progress is not depreciated until such time as the asset has been substantially completed and reaches the expected usable condition. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. (f) Leasehold land Leases of land acquired are classified as operating leases. The pre-paid lease payments are amortized over the lease period (fifty years) on a straight-line basis. 2 ACCOUNTING POLICIES (continued) (g) Inventories Inventories are stated at the lower of cost and net realisable value. Cost is calculated on a weighted average basis. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads. Net realisable value is the estimate of the selling price in the ordinary course of business, less the costs to completion and selling expenses. (h) Trade receivables Trade receivables are carried at original invoice amount less provision made for impairment of these receivables. A provision for doubtful debts is established when there is an objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the carrying amount and the recoverable amount, being the present value of expected cash flows, discounted at the market rate of interest for similar borrowers. (i) Cash and cash equivalents Cash and cash equivalents are carried in the consolidated balance sheet at cost. For the purposes of the cash flow statement, cash and cash equivalents comprise cash on hand, deposits held at call with banks, other short-term highly liquid investments with original maturity of three months or less and bank overdraft. (j) Deferred income tax Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Currently enacted tax rates are used to determine deferred income tax. Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. (k) Pension scheme Pursuant to the PRC laws and regulations, contributions to the basic old age insurance for the Group’s local staff are to be made monthly to a government agency based on 34% of the total salary, subject to a certain ceiling, of which 27% is borne by the Group and the remainder is borne by the staff. The government agency is responsible for the pension liabilities relating to such staff on their retirement. The Group accounts for these defined contributions on an accrual basis. (l) Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Where the Group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the receipt of the reimbursement is virtually certain. 2 ACCOUNTING POLICIES (continued) (m) Financial instruments Financial assets and financial liabilities carried on the balance sheet include cash and cash equivalents, trade and other receivables and payables, balances with related companies, investments and other non-current liabilities. The accounting policies on recognition and measurement of these items are disclosed in the respective accounting policies found in Note 2. Financial instruments are classified as liabilities or equity in accordance with the substance of the contractual arrangement. Interest, dividends, gains, and losses relating to a financial instrument classified as a liability, are reported as expense or income. Distributions to holders of financial instruments classified as equity are charged directly to equity. Financial instruments are offset when the Group companies have a legally enforceable right to offset and intend to settle either on a net basis or to realize the asset and settle the liability simultaneously. (n) Revenue recognition Revenue comprises the invoiced value for the sale of goods net of value-added tax, rebates and discounts, and after eliminating sales within the Group. Revenue from the sale of goods is recognised when significant risks and rewards of ownership of the goods are transferred to the buyer. Interest income is recognised on a time proportion basis, taking account of the principal outstanding and the effective rate over the period to maturity, when it is determined that such income will accrue to the Group. (o) Dividends Dividends are recorded in the Group’s consolidated financial statements in the period in which they are approved by the Group’s shareholders. (p) Impairment of long-lived assets Property, plant and equipment and investments in associates are reviewed for impairment losses whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount of the asset exceeds its recoverable amount which is the higher of an asset’s net selling price and value in use. For the purposes of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash flows. (q) Segment reporting Business segments provide products or services that are subject to risks and returns that are different from those of other business segments. Geographical segments provide products of services within a particular economic environment that is subject to risks and returns that are different from those of components operating in other economic environments. (r) Comparatives Where necessary, the comparative figures have been reclassified to conform with changes in presentation in the current year. 3 FINANCIAL RISK MANAGEMENT (1) Financial risk factors The Group’s activities expose it to a variety of financial risks, including credit risk, liquidity risk, interest rate risk and foreign exchange risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. Financial risk management is carried out by the Finance Department under policies approved by the Board of Directors. (i) Credit risks Cash is placed with reputable banks. The majority of the Group’s trade receivables relate to sales of goods to third party customers. The Group performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral on trade receivables. The Group maintains a provision for doubtful debts and actual losses have been within management’s expectations. As of 31 December 2002, no single customer accounted for greater than 10% of total revenues for the year or trade receivables. (ii) Liquidity risks The Group’s policy is to maintain sufficient cash and cash equivalents or have available funding through an adequate amount of committed credit facilities to meet its current requirements in operations. (iii) Interest rate risk The Group’s income and operating cash flows are substantially independent of changes in market interest rates. The Group has no significant interest-bearing assets or liabilities. (iv) Foreign exchange risk The Group has no significant foreign exchange risk due to limited foreign currency transactions. (2) Fair value estimation The carrying amounts of cash and cash equivalents, trade and other receivables, trade and payables and balances with related companies approximate their fair values because of the short maturity of these instruments. 4 OPERATING PROFIT The following items have been included in arriving at operating profit: 2002 2001 Depreciation on property, plant and equipment (Note 10) 13,751 10,454 Losses on sale of property, plant and equipment 311 85 Costs of inventories recognised as expense 168,786 151,495 Staff costs (Note 5) 67,143 55,738 Included in “Administrative expenses” - Increase in provision for doubtful debts (Note 15) 8,078 700 - (Decrease) / increase in provision for inventory obsolescence (Note 14) (1,300) 3,070 - Amortisation of leasehold land (Note 12) 910 818 - Amortisation of other non-current assets 92 98 Included in “Other operating loss” - Decrease in valuation on property, plant and equipment (Note 10) 12,191 - 5 STAFF COSTS 2002 2001 Salaries and wages 44,942 35,594 Contribution to defined contribution pension schemes 10,790 8,376 Others 11,411 11,768   67,143 55,738 Average number of full time employees during the year 1,849 1,680 6 FINANCE INCOME, NET 2002 2001 Interest expense - bank borrowings - (1,979) Interest income 1,377 4,987 Net foreign exchange transaction losses (46) (27) Others (67) (257)   Finance income, net 1,264 2,724 7 TAX (a) Income tax 2002 2001 Current tax 8,544 5,013 Local income tax refund for 2000 - (444) Share of associates (Note 13) 125 138 Deferred tax (Note 19) (8,411) (844)   258 3,863 The Company was transformed into a foreign invested joint stock limited company as approved by the Ministry of Foreign Trade and Economic Co-operation of the PRC (See Note 1). According to relevant PRC tax laws and regulations, foreign invested enterprises are subject to full exemption from income tax for two years and a 50% reduction in the next three years starting from the first profit making year after offsetting available tax losses carried forward from prior years. In addition, foreign invested enterprises which are located in the Coastal Open Economic Zone are subject to a preferential enterprise income tax rate of 24% and a local income tax at the rate of 2.4% on their profits. Hangzhou belongs to the Coastal Open Economic Zone. Pursuant to the approval document Hang Guo Shui Wai [1999] No. 257 issued by the Hangzhou State Tax Bureau, the Company is entitled to preferential tax treatment, with full exemption from income tax for the period from 23 April 1998 to 31 December 1998 and for the year ended 31 December 1999; and a 50% reduction for the next three years ended 31 December 2002, when the applicable income tax rate for the above tax reduction years is 13.2%. According to the relevant income tax law applicable to foreign invested enterprises in Zhe Jiang Province, foreign invested enterprises are subject to exemption from local income tax if certified as an Advanced Technology Enterprise by the governmental authority in Zhe Jiang Province. The Company has been certified as an Advanced Technology Enterprise by the Ministry of Foreign Trade and Economic Co-operation of Zhe Jiang Province. Accordingly, pursuant to the approval document Hang Guo Shui Zheng Fen [2001] No. 354 issued by the Hangzhou State Tax Bureau, the Company is entitled to local income tax exemption for the years from 2000 to 2002. Therefore, for the year ended 31 December 2002, the applicable income tax rate was 12% (2001: 12%). The Company’s subsidiary and associates are subject to income tax at rates of 33%. 7 TAX (continued) (a) Income tax (continued) The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the tax rate of the Company as follows: 2002 2001 Profit before tax 39,411 32,617   Tax calculated at the standard tax rate of 26.4% (2001: 26.4%) 10,405 8,611 Income and expense items which are not taxable or deductible for tax purposes 1,482 2,446 Effect of tax holidays (6,443) (6,983) Effect of difference in income tax rate applied to timing difference (5,586) - Local income tax refund for 2000 - (444) Effect of different tax rates for consolidated subsidiary 400 233   Tax charge 258 3,863 (b) Turnover tax Pursuant to the “Provisional Regulations on VAT of the PRC”, the Company is subject to VAT at the rate of 17% and City and County Maintenance and Construction Tax (“CMCT”) and Education Surcharge calculated at 7% and 4% respectively of the VAT payable. An input credit is available whereby VAT previously paid on purchase of semi-finished products or raw materials etc. can be used to offset the VAT on sales to determine the net VAT payable. 8 DIVIDEND The Board of Directors of the Company recommended a dividend in respect of 2002 of RMB 0.1 per share amounting to a total dividend of RMB 22,000,000. The proposal on dividend is subject to approval by the shareholders in the Company’s Annual General Meeting to be held in year 2003. These consolidated financial statements do not reflect this dividend payable and the dividend will not be accounted for in shareholders’ equity as an appropriation of retained earnings in the year ending 31 December 2002. The dividends declared in respect of 2001 and 2000 were, respectively, RMB22,000,000 and RMB11,000,000. In accordance with relevant regulations of the PRC and the Articles of Association of the Company, the Company declares dividends based on the lower of retained earnings as reported in the Statutory Accounts and the consolidated financial statements prepared in accordance with IFRS. As of 31 December 2002, the retained earnings before final dividends reported in the Statutory Accounts were approximately RMB69,894,000 (2001: approximately RMB64,348,000). 9 EARNINGS PER SHARE The calculation of basic earnings per share is based on the consolidated net profit for the year ended 31 December 2002 of approximately RMB39,095,000 (2001: approximately RMB28,722,000), divided by the weighted average number of shares in issue during the year of 220,000,000 shares (2001: 220,000,000 shares). Diluted earnings per share do not differ from basic earnings per share as there were no dilutive potential ordinary shares as of year end. 10 PROPERTY, PLANT AND EQUIPMENT Motor Machinery vehicles and and office Buildings equipment equipment Total RMB’000 RMB’000 RMB’000 RMB’000 Valuation At 1 January 2001 102,915 212,675 33,068 348,658 Additions - 1,190 886 2,076 Transfers (Note 11) 1,692 10,659 505 12,856 Disposals - (1,410) (734) (2,144) At 31 December 2001 104,607 223,114 33,725 361,446 Additions 20,348 8,491 2,416 31,255 Transfers (Note 11) - 7,854 887 8,741 Disposals - (2,820) (1,608) (4,428) Valuation increase/(decrease) 10,517 11,522 (1,868) 20,171 At 31 December 2002 135,472 248,161 33,552 417,185 Representing: At cost 348 6,616 800 7,764 At valuation 135,124 241,545 32,752 409,421 At 31 December 2002 135,472 248,161 33,552 417,185 Accumulated depreciation and impairment losses At 1 January 2001 45,720 156,398 23,075 225,193 Depreciation charged for the year 2,528 6,488 1,438 10,454 Disposals - (1,298) (525) (1,823) At 31 December 2001 48,248 161,588 23,988 233,824 Depreciation charged for the year 2,961 9,074 1,716 13,751 Disposals - (2,573) (1,359) (3,932) At 31 December 2002 51,209 168,089 24,345 243,643 Net book value At 31 December 2002 84,263 80,072 9,207 173,542 At 31 December 2001 56,359 61,526 9,737 127,622 10 PROPERTY, PLANT AND EQUIPMENT (continued) The Company’s property, plant and equipment injected by HSTG as its capital contribution were revalued by Hangzhou Assets Revaluation Office, independent professional valuers, on 30 April 1997 on a replacement cost basis, because market values were not available. The revaluation surplus amounting to approximately RMB38,080,000 was recorded in revaluation surplus. In accordance with the accounting policy as disclosed in Note 2(d), an independent valuation on the property, plant and equipment was performed by Zhejiang Oriental Assets Valuation Co., Ltd. on 30 September 2002 on a replacement cost basis. The net revaluation surplus was approximately RMB20,171,000, among which, amount of approximately RMB 32,362,000 was credited to revaluation surplus and approximately RMB12,191,000 was charged to Other operating loss in consolidated income statement. The cost of the property, plant and equipment, acquired since the above mentioned revaluation on 30 September 2002, approximates their fair value. Had the property, plant and equipment been carried at cost less accumulated depreciation, the carrying amounts of each class of asset as of year end would have been as follows: 2002 2001 Motor vehicles Machinery and office Buildings and equipment equipment Total Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Cost 69,335 142,377 35,420 247,132 223,052 Accumulated depreciation (9,846) (79,328) (24,392) (113,566) (108,058) 59,489 63,049 11,028 133,566 114,994 The Company purchased property, plant and equipment amounting to approximately RMB 29,010,000 from HSTG in 2002. Please refer to Note 26(2) for details. The directors are of the opinion that the recoverable amount of property, plant and equipment was not less than their carrying amount as of 31 December 2002. 11 CONSTRUCTION IN PROGRESS 2002 2001 At beginning of year 11,489 10,037 Additions during the year 7,392 14,308 Valuation increase 23 - Transfer to fixed assets (Note 10) (8,741) (12,856)   At end of year 10,163 11,489 12 LEASEHOLD LAND 2002 2001 Cost At beginning of year 40,918 40,918 Addition (Note 26(2)) 18,357 -   At end of year 59,275 40,918   Accumulated amortization At beginning of year (1,888) (1,070) Charge for the year (910) (818)   At end of year (2,798) (1,888)   Net book value at end of year At beginning of year 56,477 39,030 At end of year 39,030 39,848 The Company acquired land use right of approximately RMB18,357,000 from HSTG in 2002. Please refer to Note 26(2) for details. 13 INVESTMENTS IN ASSOCIATES 2002 2001 At beginning of year 11,991 12,404 Share of results before tax (229) (275) Share of tax (Note 7) (125) (138)   Share of results after tax 11,637 11,991 Impairment (1,586) -   At end of year 10,051 11,991 14 INVENTORIES 2002 2001 Raw materials (at cost) 36,995 46,586 Work in progress (at cost) 65,823 32,996 Finished goods (at cost) 40,601 39,478   143,419 119,060 Less: provision for obsolescence (5,373) (6,673)   Net book value 138,046 112,387 15 RECEIVABLES AND PREPAYMENTS 2002 2001 Trade and notes receivables 176,505 177,058 Prepayments and other receivables 13,986 8,567 Receivables from HSTG (Note 26(4)) 5,519 - Receivables from associates (Note 26(4))33 89 Receivables from other related parties (Note 26(4)) 7,169 11,201 Less: provision for doubtful debts (21,541) (13,463)   181,671 183,452 16 SHARE CAPITAL 2002 2001 Number of shares Number of shares ‘000 Amount ‘000 Amount     Authorised, issued and fully paid Unlisted shares of Rmb 1 each: State-owned shares 140,000 140,000 140,000 140,000     Listed shares of Rmb 1 each: Domestically listed foreign currency ordinary shares (B Shares) 80,000 80,000 80,000 80,000     220,000 220,000 220,000 220,000 State-owned shares and B Shares ranked pari passu in all respects with each other. 17 RESERVES - STATUTORY RESERVES Statutory reserve includes statutory reserve fund and statutory welfare fund. According to the Articles of Association of the Company, 10% of its profit for the year computed in accordance with the PRC accounting regulations (after offsetting any prior years' losses) should be appropriated to the statutory reserve fund. When the balance of such fund reaches 50 % of the Company's registered share capital, any further appropriation is optional. The statutory reserve fund can be utilised to offset prior years' losses or for issue of bonus shares. However, the fund shall be maintained at a minimum of 25% of the registered share capital after any such issue. According to the Articles of Association of the Company, 5% to 10% of its profit for the year computed in accordance with the PRC accounting regulations should be appropriated to the statutory welfare fund. The fund shall be utilised for the collective benefits of the workforce, including the provision of staff quarters or housing. No other distribution shall be made from the fund other than upon liquidation of the Company. For the year ended 31 December 2002, the directors of the Company proposed that 10% and 10% (2001: 10% and 10%) of the net profit as reported in the Statutory Accounts be appropriated to each of the statutory reserve fund and the statutory welfare fund, totalling approximately RMB6,698,000 (2001: approximately RMB5,478,000). The resolution is subject to approval by the shareholders in the Annual General Meeting to be held in year 2003. 18 MINORITY INTEREST 2002 2001 At beginning of year 1,632 1,600 Share of net profit of a subsidiary 58 32   At end of year 1,690 1,632 19 DEFERRED TAX LIABILITIES 2002 2001 At beginning of year 6,748 7,592 Charged to consolidated income statement (Note 7) (8,411) (844) Charged to equity – for revaluation on property, plant and equipment 8,433 -   At end of year 6,770 6,748 Charged to consolidated At beginning income Charged to of year statement equity At end of year Deferred tax assets Provision for doubtful debts 1,615 4,068 - 5,683 Provision for obsolescence 801 618 - 1,419 Revaluation loss of property, plant and equipment - 3,138 - 3,138 2,416 7,824 - 10,240 Deferred tax liabilities Revaluation surplus of property, plant and equipment (9,164) 587 (8,433) (17,010) Net (6,748) 8,411 (8,433) (6,770) 20 OTHER NON-CURRENT LIABILITIES As of 31 December 2002, the Group had long-term borrowings granted by a governmental authority amounting to approximately RMB11,930,000 (2001: approximately RMB10,300,000). Such long-term borrowings were unsecured, interest free and had no fixed terms of repayment. 21 TRADE AND OTHER PAYABLES 2002 2001 Accounts payable and other payable 52,282 33,023 Amounts due to HSTG (Note 26(4)) - 2,722 Amounts due to other related parties (Note 26(4)) 6,824 6,823 Advance from customers and other payable 118,20294,436   177,308 137,004 22 CASH GENERATED FROM OPERATIONS 2002 2001 Net profit 39,095 28,722 Adjustments for: Minority interest (Note 18) 58 32 Income tax (Note 7) 258 3,863 Depreciation of property, plant and equipment (Note 10) 13,751 10,454 Amortisation of leasehold land (Note 12) 910 818 Amortisation of other non-current assets 92 98 Interest expense (Note 6) - 1,979 Interest income (Note 6) (1,377) (4,987) Increase in provision for doubtful debts (Note 15) 8,078 700 (Decrease)/increase in provision for inventory obsolescence (Note 14) (1,300) 3,070 Share of results of associates (Note 13) 229 275 Impairment of investments in associates (Note 13) 1,586 - Short-term investment gains (509) (901) Fixed assets revaluation decrease loss (Note 10) 12,191 - Loss on sale of property, plant and equipment (Note 4) 311 85 Loss on disposal of other non-current assets 321 -   Operating income before working capital changes 73,694 44,208 Increase in inventories (24,359) (16,786) (Increase)/decrease in receivables and prepayments (4,993) 19,308 Increase in payables and accruals 41,895 13,644   Cash generated from operations 86,237 60,374 23 CONTINGENCIES As of 31 December 2002, the Group had no contingent liabilities (2001: Nil). 24 CAPITAL COMMITMENTS As of 31 December 2002, the Group had capital commitments for purchase of equipment amounting to approximately RMB14,024,000 (2001: approximately RMB1,640,000). 25 SEGMENT INFORMATION No segment information is presented as the Group operates in one business segment of industrial steam turbines industry and in one geographical segment in the PRC. 26 RELATED PARTY TRANSACTIONS Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party, or exercise significant influence over the party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. (1) Related party agreements effective from the date of incorporation of the Company For the year ended 31 December 2002, the Company had the following related party transactions, pursuant to several agreements signed with the parent company-HSTG on 8 October 1997 and effective from the date of its incorporation. Details are as follows: (a) Service agreements Pursuant to several service agreements, HSTG provides the Company with facilities and services such as social services, property management, staff training, transportation and computer service. Unless terminated earlier, the agreements will be effective until 31 December 2007. For the year ended 31 December 2002, the Company incurred service fees of approximately RMB8,956,000 in accordance with the service agreements (2001: approximately RMB8,570,000). (b) Supply agreements Pursuant to several supply agreements, HSTG supplies the Company with certain raw materials (mainly iron and steel), spare parts, energy and communication facilities. Unless terminated earlier, the agreements will be effective until 31 December 2007. For the year ended 31 December 2002, the Company purchased raw materials, spare parts, energy, transportation and communication facilities amounting to approximately RMB35,413,000 from HSTG (2001: approximately RMB60,344,000). (c) Trademark agreement Pursuant to the trademark agreement, HSTG has licensed the Company to use its registered trademark for an annual fee of RMB700,000. For the year ended 31 December 2002, the Company paid the trademark fee of RMB700,000 to HSTG (2001: RMB700,000). (2) Purchase of assets Pursuant to an asset transfer agreement dated 6 March 2002 entered into between the Company and HSTG, the Company agreed to acquire certain assets from HSTG, including inventories, property, plant and equipment and land use right. The purchase price of the property, plant and equipment and the land use right was based on a valuation of the assets performed by Zhejiang Oriental Assets Valuation Co., Ltd. and Hangzhou XinCheng Real Estate Valuation & Consulting Co., Ltd., respectively. The total purchase cost of the assets is approximately RMB66,259,000, including: inventory of approximately RMB18,892,000, property, plant and equipment of approximately RMB29,010,000 and land use right of approximately RMB18,357,000. 26 RELATED PARTY TRANSACTIONS (CONTINUED) (3) Other related party transactions 2002 2001 Sales of goods to HSTG 34,402 26,284 Sales of goods to subsidiaries of HSTG 22,202 28,988 Sales of goods to associates 3,205 - Purchases of goods from subsidiaries of HSTG 5,470 5,407 Turn in social benefits as pension, medical benefit, etc. and magazine fee via HSTG 18,846 15,574 The above related party transactions were carried out based on commercial terms and conditions and market prices. (4) As of 31 December, the Group had the following material balances with related parties: 2002 2001 Due from related parties: - HSTG 5,519 - - Subsidiaries of HSTG 7,169 11,201 - Associates 33 89   12,721 11,290 Due to related parties: - HSTG - 2,722 - Subsidiaries of HSTG 6,824 6,823   6,824 9,545 All the balances with related parties were unsecured, interest free and had no fixed terms of repayment. (5) Emoluments of the Board of Directors (a) Directors’ total remuneration approximated RMB1,456,000 (2001: approximately RMB999,000). (b) No loans have been granted to Directors. 27 SUBSIDIARIES AND ASSOCIATES As of 31 December 2002, the Company had the following subsidiary: Percentage of equity interest held Place of Registered Name incorporation Direct Indirect capital Principal activities Zhe Jiang Steam Hangzhou, 95% - 31,600,000 Design, manufacture Turbine Kit System the PRC and sale of industrial Technology equipment and kit Development Co., Ltd. systems. There was no change in the percentage of equity interest held in the subsidiary in 2002 or 2001. As of 31 December 2002, the Company had the following associates: Percentage of equity interest held Place of Registered Name incorporation Direct Indirect capital Principal activities Hangzhou Cocim Hangzhou, 34.5% - 10,000,000 Provision of services relating Technology Co., Ltd. the PRC to computers and peripheral equipment, computer information network engineering and E-commerce Hangzhou Steam Turbine Hangzhou, 45% - 20,000,000 Design, manufacture, Environmental the PRC installation and sale of Engineering Co., environmental protection Ltd. equipment and engineering There were no changes in the percentages of equity interest held in the associates in 2002 or 2001. 28 SUBSEQUENT EVENTS Pursuant to the resolution of the board of directors’ meeting dated 14 April 2003, the Company declared final dividends to all shareholders in respect of 2002 of RMB0.1 per share (2001: RMB0.1 per share). The total amount of cash dividends proposed was therefore RMB 22,000,000 (2001: RMB22,000,000). The resolution is subject to approval by shareholders in the Annual General Meeting. 29 IMPACT OF IAS ADJUSTMENTS ON NET INCOME FOR THE YEARS AND NET ASSETS The Group’s consolidated financial statements were prepared in conformity with IFRS as if these standards had been applied consistently throughout the years. This basis of accounting differs from that used in the Statutory Accounts of the Group. The principal adjustments made to conform to IFRS are as follows: Net profit for the year ended Net assets as of 31 December 31 December 2002 2001 2002 2001 As reported in the Statutory Accounts 34,707 27,388 454,784 441,640 Impact of adjustments: - Deferred tax assets 7,824 256 10,240 2,416 - Deferred tax liabilities 587 588 (17,010) (9,164) - Reversal of deferred assets - 109 - - - Dividends declared after year end - - 22,000 22,000 - Valuation surplus of property, plant and equipment - - 32,385 - - Difference between revaluation loss and impairment of property, plant and equipment (2,906) - (2,906) - - Variance of depreciation due to revaluation of property, plant and equipment (1,248) - (1,248) - - EIT refund of associate 131 239 - - - Others - 142 - - As restated in the IFRS consolidated financial statements 39,095 28,722 498,245 456,892 Chapter XI Documents Available for Inspection 1. Financial Statements signed by and under the seal of the legal representative, chief accountant and director of the financial division; 2. Original copy of the Auditors’ Report under the seal of the accounting firm and signed by and under the seal of certified accountants. 3. Originals of all documents and manuscripts of Public Notices of the Company disclosed in public in the newspapers as designated by China Securities Regulatory Commission. The Company hereby confirms that all the aforesaid documents shall be timely available upon the requirements by China Securities Regulatory Commission, the Stock Exchange and by the shareholders according to the relevant law, regulations and the Articles of Association. The Chairman of Board: Fang Wen Hangzhou Steam Turbine Co., Ltd. April 17, 2003