苏常柴Ａ(000570)苏常柴Ｂ2002年年度报告（英文版）

CHANGCHAI COMPANY, LIMITED 2002 ANNUAL REPORT Important Notes: Board of Directors of the Changchai Company, Limited (hereinafter referred to as the Company) individually and collectively accept responsibility for the correctness, accuracy and completeness of the contents of this report and confirm that there are no material omissions nor errors which would render any statement misleading. Due to certain reasons, Director Mr. Zhu Xinmin was absent from the Board meeting. Jiangsu Gongzheng Certified Public Accountants and Haworth (Hong Kong) Certified Public Accountants issued Auditors’ Report with explanatory notes for the Company respectively, to which the Board of Directors and the Supervisory Committee of the Company made explanations in details, the investors are suggested to notice the content. Person in charge of the Company Mr. Zhang Junyuan, person in charge of the accounting Mr. Xue Guojun and person in charge of handling accounting affairs Mr. Tang Jianzhong hereby confirm that the Financial Report of the Annual Report is true and complete. 1 Content I. Company Profile-------------------------------------------------------------------------------------------------3 II. Abstract of Financial Highlights and Business Highlights-----------------------------------------------3 (I) Total profit and its composing as of the year 2002--------------------------------------------------------3 (II) Major accounting data and financial index over previous three years ended the report year-----------4 (III) The profit are calculated according to Regulations on the Information Disclosure of Companies Publicly Issuing Shares (No. 9) released by CSRC---------------------------------5 ( I V ) C h a n g e s i n s h a r e h o l d e r s ’ equity i n t h e r e p o r t y e a r - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 5 III. Changes in Share Capital and Particulars about Shareholders------------------------------5 ( I ) C h a n g e s i n s h a r e s c a p i t a l- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 5 ( I I ) A b o u t s h a r e h o ld e r s - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 6 IV. P a r t i c u l a r s a b o u t D i r e c t o r s , S u p e r v i s o rs a n d S e n i o r E x e c u t i v e s a n d E m p l o y e e s - - - - - - - - - 6 (I) Basic information----------------------------------------------------------------------------------7 (II) Particulars about the annual payment----------------------------------------------------------7 (III) Directors, supervisors and senior executives leaving the office and the reason in the report year----- ------------------------------------------------------------------------------------------7 (IV) About employees---------------------------------------------------------------------------------8 V. Administrative Structure---------------------------------------------------------------------------8 (I) Particulars about Company Administration----------------------------------------------------8 (II) Particulars about Performance of Duties by Independent Directors -----------------------8 (III) Separation in Business, Assets, Personnel, Organization and Finance between the Company and the controlling shareholder----------------------------------------------------------8 VI. Brief I n t r o d u c t i o n o f S h a r e h o l d e r s ’ G e n e r a l M e e t i n g - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 9 VII. Report of the Board of Directors---------------------------------------------------------------10 (I) Operation--------------------------------------------------------------------------------------------10 (II) Investment------------------------------------------------------------------------------------------11 (III) Financial status-----------------------------------------------------------------------------------13 (IV) Operation plan for the year 2002--------------------------------------------------------------13 (V) Routine work of the Board of Directors-------------------------------------------------------14 (VI) Profit distribution preplan and capital public reserve transferring into share capital for the Year 2002---------------------------------------------------------------------------------------15 (VII) Others matters-----------------------------------------------------------------------------------15 VIII. Report of the Supervisory Committee--------------------------------------------------------15 (I) Particulars about the meeting of the Supervisory Committee--------------------------------15 (II) Independent opinion------------------------------------------------------------------------------16 (III) The Supervisory Committee’ Opinion on the Board of Directors’ Explanation of Non-standardized Auditor’s Report- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1 7 XI. Significant Events---------------------------------------------------------------------------------17 X. Financial Report------------------------------------------------------------------------------------19 XI. Documents Available for Reference------------------------------------------------------------43 2 I. C O M P A N Y P R O F I L E 1. Legal Name of the Company In Chinese: 常柴股份有限公司 In English: CHANGCHAI COMPANY, LIMITED Abbr.: CHANGCHAI CO., LTD. 2. Legal Representative: Mr. Zhang Junyuan 3. Secretary of the Board of Directors: Mr. Zhang Jianhe Authorized representative in c harge of securities affairs: Mr. He Jianjiang Contact Address: No. 123, Huaide Middle Road, Changzhou, Jiangsu, China Tel: (86) 519-6600448, (86) 519-6603656-3155 Fax: (86) 519-6630954 E-mail: zjh000570@163.com, hjj000570@163.com 4. Registered Address and Office Address: No. 123, Huaide Middle Road, Changzhou, Jiangsu, China Post Code: 213002 Internet Website: http://www.changchai.com.cn E-mail: cctqm@public.cz.js.cn 5. Newspapers Chosen by the Company for Disclosing Information: Securities Times and Ta Kung Pao The Place Where the Annual Report is Prepared and Placed: Secretariat of the Board Internet Website Designated by CSRC for Publishing the Annual Report of the Company: http://www.cninfo.com.cn 6. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: Suchangchai A Stock Code: 000570 Suchangchai B 200570 7. Other Relevant Information of the Company (1) The initial registered date: May 5, 1994; The authority registered with: Administration Bureau for Industry and Commence of Changzhou Municipal (2) The changed registered date: July 3, 2002 The authority registered with: Administration Bureau for Industry and Commence of Jiangsu Provincial (3) Registered number of the legal person’s business license: 3200001103367 (1/2) (4) Registered number of tax: 320401137155863 (5) Name of the Certified Public Accountants engaged by the Company: Domestic: Jiangsu Gongzheng Certified Public Accountants Office address: 5/F, Block A of Hengli Building, No. 1, Hualong Lane, Changzhou, Jiangsu International: Haworth (Hong Kong) Certified Public Accountants Address: Room 2001, Central Plaza, 18 Harbour Road, Wan Chai, Hong Kong II. A B S T R A C T O F F I N A N C I A L H I G H L I G H T S A N D B U S I N E S S H I G H L I G H T S (I) Total profit and its composing as of the year 2002 (In RMB’000) Total profit -577,101.36 Net profit -477,475.86 Net profit after deducting non-recurring gains and losses (Note) -465,368.72 Profit from core business 174,940.01 Profit from other business 12,248.26 Operating profit -523,771.67 3 Investment income -5,870.59 Subsidy income 3,743.74 Net income / expenditure from non-operating -51,202.84 Net cash flows arising from operating activities 112,886.33 Net increase in cash and cash equivalent 61,429.75 Note: Items of deducting non-recurring gains and losses: (1) Losses of sales of assets RMB 5,027,337.00 (2) Losses of debts reorganization RMB 6,336,429.55 (3) Others (gains and losses of fixed assets disposal RMB 743,366.33 and income from intangible assets transferring) Difference of net profit as audited by Chinese Accounting Standard (CAS) and International Accounting Standard (IAS) Unit: In RMB’0000 CAS IAS Net profit -47,748 -51,534 Net profit As per Chinese Accounting Standards -47,748 Sales of net earnings of affiliated company 1,786 Explanation of the difference Writing off the unconfirmed loss of investment –3 , 3 5 1 Writing off the minority equity -2,181 Others -40 As per International Accounting Standards -51,534 (II) Major accounting data and financial index over previous three years ended the report year (In RMB’000) Items 2002 2001 2000 Income from core business 1,579,968.45 1,743,487 2,240,847 Net profit -477,475.86 -381,429 34,988 Total assets 2,184,414.07 2,926,504 3,530,311 Shareholders’ equity (excluding minority 738,664.38 1,239,421 1,627,951 interests) Earnings per share (diluted) (RMB) -1.28 -1.02 0.11 Earnings per share (weighted) (RMB) -1.28 -1.02 0.11 Earnings per share after deducting non-recurring -1.24 -1.02 0.07 gains and losses (RMB) (diluted) Net assets per share (RMB) 1.97 3.31 4.53 Net assets per share after adjustment (RMB) 1.82 3.19 4.41 Net cash flows per share arising from operating 0.30 0.44 -0.47 activities (RMB) Return on equity (%) (diluted) -64.64 -30.8 2.34 4 (III) The profit are calculated according to Regulations on the Information Disclosure of Companies Publicly Issuing Shares (No. 9) released by CSRC Supplementary statement of profit : Earnings per share Profit as of the report period Return on equity (%) (RMB) Fully Weighted Fully Weighted diluted average diluted average Profit from core business 23.68 17.48 0.47 0.47 Operating profit -70.91 -52.34 -1.40 -1.40 Net profit -64.64 -47.72 -1.28 -1.28 Net profit after deducting non-recurring gains and losses -63.00 -46.51 -1.24 -1.24 (ＩＶ) Changes in shareholders’ equity in the report year (Unit: in RMB’000) Total Share capital Capital public Surplus public Statutory public Retained Items s h a r e h o l d e r s’ (share) reserve reserve welfare fund profit equity Amount at 374,249,551 694,181.88 178,852.78 89,426.19 0 1,239,420.56 period-begin Increase in the 3,065.45 80.93 40.46 -477,475.86 –474,329.48 report period Decrease in the 692.34 230.77 8 0 .9 3 773.27 report period Amount at 374,249,551 697,247.33 178,241.40 8 9 ,2 3 5 . 8 9 -477,556.78 738,664.38 period -end Reason for the changes: (1) Decrease in capital public reserve was due to making up the deficits with it in 2002; (2) Increase in retained profit was due to due to making up the deficits in the year 2002; (3) Decrease in shareholders’ equity was due to the deficits as of the year 2002. III. CHANGES IN SHARE CAPITAL AND PARTICULARS ABOUT SHAREHOLDERS (I) Changes in share capital 1. Changes in shares Items Amount at Change in Amount at period-begin this time period-end I. Unlisted Shares 1 . P r o m o t e r s’ s h a r e s 153,160,000 0 153,160,000 Including: State-owned shares 153,160,000 0 153,160,000 D o m e s t i c l e g a l p e r s o n ’s s h a r e s F o r e i g n l e g a l p e r s o n ’s s h a r e s Others 2 . R a i s e d l e g a l p e r s o n’s shares 10,064,000 0 10,064,000 3 . I n n e r e m p l o y e e ’s shares 4. Preference shares and others Total unlisted shares 163,224,000 0 163,224,000 II. Listed Shares 1. RMB ordinary shares 111,025,551 0 111,025,551 2. Domestically listed foreign shares 100,000,000 0 100,000,000 3. Overseas listed foreign shares 4. Others Total listed shares 211,025,551 0 211,025,551 III. Total shares 374,249,551 0 374,249,551 2. Issuance and Listing of Shares (1) The Company implemented 1999 Share Allotment Plan from Mar. 1, 2000 to Mar. 22, 2000. Based on total share capital before allotment amounting to 352,000,000 shares, rights shares totaling 22,249,551 shares were allotted on the basis of 3 for 10 at the price of RMB 9 per share. Totally 22,249,551 rights shares were allotted in the share allotment activity including 2,260,000 shares subscribed by shareholders of state-owned shares with cash; 987,500 shares subscribed by legal person shareholders with cash; 102,054 shares subscribed by Shareholders of previous transferred allotted 5 shares and 18,899,997 shares subscribed by shareholders of public shares (including senior executives). The new additional shares amounting to 18,899,997 shares were listed on Apr. 5, 2000 for trade, while 18,136 shares subscribed by senior executives of the Company were frozen temporarily . (2) In the report year, there is no change in share capital of the Company. (3) There exist no inner employee’s shares in the Company. (II) About Shareholders 1. Ended Dec. 31, 2002, the Company had totally 87,460 shareholders, of them, 70,217 shareholders with totally 274,249,551 domestic shares and 17,243 shareholders with totally 100,000,000 foreign shares. 2. Particulars about shares held by the top ten shareholders at the end of the report year Increase / Holding Number Proportion decrease in shares at the of share Nature of Name of Shareholder in total Type of shares the report year-end pledged shareholders shares (%) year (share) or frozen 1. CHANGZHOU STATE ASSETS State-owned 0 1 5 3 ,1 6 0 ,0 0 0 40.92 Non-circulating 0 ADMINISTRATIVE BUREAU shareholder 2. WUJIN DIESEL ENGINEER BLOCK Legal person 0 5 ,3 3 0 ,0 0 0 1.42 Non-circulating 0 FACTORY shareholder Foreign 3. WEN HAI GEN 1,649,253 3 ,6 4 2 ,7 1 9 0.97 Circulating Unknown shareholder 4. CBNY S/A PNC/SKANDIA SELECT Foreign -59,700 2,289,481 0.61 Circulating Unknown FUND/CHINA EQUITY AC shareholder 5. BENNIU AGRICULTURAL Legal person 0 1 ,7 6 0 ,0 0 0 0.47 Non-circulating 0 MACHINERY FACTORY shareholder Foreign 6. WEN CAN RONG 157,536 1,475,100 0.39 Circulating Unknown shareholder Foreign 7. WEN PEI RONG -555,423 1,000,000 0.27 Circulating Unknown shareholder Foreign 8. MERRL LYNCH INTERNATIONAL 1,000,000 0.27 Circulating Unknown shareholder Foreign 9. HE YONG HANG 918,300 0.25 Circulating Unknown shareholder Foreign 10. HOU DE YU 738,500 0.20 Circulating Unknown shareholder Notes: (1) Changzhou State Assets Administrative Bureau (“the Bureau”) is the largest shareholder of the Company, holding 153,160,000 shares on behalf of the state. In the report period, shares held by the Bureau were not pledged or frozen. The largest shareholder, Changzhou State Assets Administrative Bureau was incorporate into Municipal Financial Bureau due to reform of government organization, and the relevant procedure of change was still in process, the Company shall disclose the relevant matters timely. No. 2 and No. 5 shareholder were the domestic legal person shareholders; No. 3, 4, 6, 7,8, 9,10 were shareholders of foreign shares. (2) The Company is unknown whether there exists associated relationship among shareholders of foreign share or whether shareholders of foreign share belong to the consistent actionist regulated by the Management Measure of Information Disclosure on Change of Shareholding for Listed Company. 3. Changzhou State Assets Management Bureau is the controlling shareholder of the Company as non- juristic person organization. IV. P A R T I C U L A R S A B O U T D I R E C T O RS , S U P E R V I S O RS A N D S E N I O R E X E C U T I V ES A N D EMPLOYEES (I) Basic information 6 1. Directors, supervisors and senior executives Holding Holding Reason of Name Title Gender Age Office term shares at the shares at the change year-begin year-end Jun. 2001- Zhang Junyuan Chairman of the Board Male 48 0 0 Jun. 2003 Jun. 2000- Xue Guojun Director, General Manager Male 39 0 0 Jun. 2003 Jun. 2002- Zhu Zhihong Director Male 41 0 0 Jun. 2003 Director, Deputy General Jun. 2002- Zhu Xinmin Male 55 0 0 Manager Jun. 2003 Jun. 2000- Xu Zhenping Director Male 45 0 0 Jun. 2003 Jun. 2002- Q i a n Shufa Independent Director Male 48 0 0 Jun. 2003 Jun. 2002- Li Debiao Independent Director Male 41 0 0 Jun. 2003 Chairman of the Supervisory Jun. 2000- Lu Jin Male 52 18483 18483 Committee Jun. 2003 Jun. 2000- Ni Mingliang Supervisor Male 35 0 0 Jun. 2003 Jun. 2000- Yin Lihou Supervisor Male 38 0 0 Jun. 2003 Jun. 2000- Cao Huiming Supervisor Male 53 0 0 Jun. 2003 Jun. 2000- Li Zhengguo Supervisor Male 57 0 0 Jun. 2003 Jun. 2000- Shi Jianchun Deputy General Manager Male 40 0 0 Jun. 2003 Jun. 2000- He Jianguang Chief Engineer Male 38 0 0 Jun. 2003 Secretary of the Board of Dec. 2001- Zhang Jianhe Male 45 0 0 Directors Jun. 2003 2. Particulars about directors, supervisors or senior executives holding the position in Shareholding Company Directors, supervisors and senior executives of the Company didn’t hold the position in Shareholding Company. (II) Particulars about the annual payment 1. In 2002, the payment drew by directors, supervisors and senior executives from the Company are paid in monthly based on the wage management regulation of Changchai Co., Ltd.. Director Mr. Zhu Zhihong and Supervisor Mr. Cao Huiming received no pay from the Company. 2. The total annual payment of directors, supervisors and senior executives received from the Company was RMB 698, 600. The total annual payment of the top three directors drawing the highest payment was RMB 296,900. The total annual payment of the top three senior executives drawing the highest payment was RMB 175,200; the annual allowance of independent directors was RMB 20,000 respectively without the other treatment. 3. In 2002, of directors, supervisors and senior executives, 2 enjoy their annual payment over RMB 100,000 respectively; 5 enjoy their annual payment between RMB 80,000 to RMB 100,000 respectively, and 4 enjoy their annual payment under RMB 80,000 respectively . (III) Directors, supervisors and senior executives leaving the office and the reason in the report year In the report year, as approved by the 2001 Shareholders’ General Meeting, Mr. Zhu Zhihong, Mr. Zhu Xinmin were elected as Director of the Company respectively; Mr. Qian Shufa and Mr. Li Debiao were elected as Independent Director of the Company respectively. The original Director of the Company, namely Mr. Li Hanhua, Mr. Xuan Tingpu, Mr. Wang Jiaze and Mr. Sun Jian no longer held the post of Director of the Company due to work adjustment or age. 7 The aforesaid resolutions were published in Securities Times and Ta Kung Pao dated June 11, 2002. (IV) About employees By the end of 2002, the Company had totally 4066 registered employees, including 2505 production personnel; 229 salespersons; 303 technicians; 55 financial personnel, 87 administration personnel. Education Background: 6 postgraduate; 164 graduated from bachelor’s degree; 263 persons graduated from 3-years regular college; 147 persons graduated from polytechnic school; 1632 persons graduated from senior high school and 1854 persons graduated from junior high school or lower. The Company need not bear the costs of retirees. V. ADMINISTRATIVE STRUCTURE (I) Particulars about Company Administration In the report period, according to the criterion documents on listed companies’ administration promulgated by CSRC, the Company amended Articles of Association, established Rules of Procedure of the Shareholders’ General Meeting, Rules of Procedure of the Board of Directors, Rules of Procedure of the Supervisory Committee, Detailed Rules of General Manager, Method of Management of Information Disclosure, Method of Management of Raised Capital, System of Decision-making of Related Transaction, ensured the procedure and popedom of examination and approval on significant events, adjusted part directors, set up independent directors system, established the Audit Committee, the Remuneration and Evaluation Committee, cleaned up the historic problem left, perfected consistently legal person administrative structure and operated strictly according to the criterions and in accordance with the standardized documents as a whole. (II) Performance of Independent Directors In the report period, Mr. Qian Shufa and Mr. Li Debiao were elected as the independent directors of the Company in 2001 Annual Shareholders’ General Meeting. Mr. Qian Shufa participated patiently in the meetings of the Board of Directors, expressed his opinion, implemented patiently the duties of independent directors and took part in the training class of independent directors. Mr. Li Debiao hasn’t attended the Board of Directors for consistent three times due to other reason. According to relevant regulation, the Company plans to apply for 2002 Shareholders’ General Meeting to make an adjustment. (III) Separation from the control shareholders in personal, business, assets, organization and financing 1.In respect of personal: the Company established special human resource department, drew independent labor personal and remuneration system, evaluated, trained, encouraged and punished the employees through strict regulations and systems. Engagement and disengagement of the directors, supervisors and senior executives was in conformity with legal procedure. The directors, supervisors, senior executives and the staffs in all departments of the Company have taken no posts in the control shareholders’ companies. 2.In respect of business: the production and operation, research and development and administration management are independent completely with the control shareholders. There existed no competition in the same industry from the control shareholder in term of products. 3.In respect of assets: the Company has independent production, auxiliary production system, auxiliary facilities, land use right, industrial property right and non-patent technology, established independent system of purchase and sale service. The assets are independent and integral and the property right is clear. 4.In respect of organization: the establishment of the Company’s organizations is independent and integral and the office address and the sites of production and operation of the Company is separated from the control shareholder. There existed neither affiliation relationship between the function 8 departments of the Company and control shareholders nor mixed operation and offices. 5.In respect of business: the Company set up independent financing department, has independent accounting personals and bank account, paid taxes according to laws and has independent accounting statement system and perfect financing management system. V I . B R I E F IN T R O D U C T I O N O F S H A R E H O L D E R S ’ G E N E R A L M E E T I N G In the report year, the Company held one Shareholders’ General Meeting. 2001 Shareholder General Meeting was held at the meeting room of the labor union of the Company in the morning of June 10, 2002. The Company published the notice on holding 2001 Annual Shareholders’ General Meeting on Securities Times and Ta Kung Pao dated Apr.24, 2002 and May 15, 2002. Total 20 shareholders and shareholders’ proxies attended the meeting, representing 159,289,550 shares, taking 42.56% of the total shares of the Company, including 159,589,550 A shares, which takes 42.56% of the total shares of the Company and 0 B shares. The meeting examined and approved the following issues by vote; 1.2001 Work Report of the Board of Directors; 2.2001 Work Report of the Supervisory Committee; 3.2001 Annual Report and Summary; 4.Supplementary Public Notice of 2001 Annual Report; 5.Proposal on 2001 Profit Distribution, Proposal on Making up Losses and Proposal on 2002 Profit Predistribution; 6.Draft of Amendment of Articles of Association of the Company; 7.Dratf of Rules of Procedure of the Shareholders’ General Meeting of the Company; 8.Proposal on Authorizing Examination and Approval Right on Relevant Events in Stated Amount Scope; 9.Proposal on Adjusting Directors, Electing Independent Directors and Deciding Allowance of Independent Directors; Due to the adjustment of structure, change of work and age problem of the members of the Board of Directors, according to the requirement of relevant directors, Mr. Sun Jian, Mr. Xuan Tingpu, Mr. Wang Jiaze and Mr. Li Hanhua were agreed to resign their posts as directors. Mr. Zhu Zhihong and Mr. Zhu Xinmin were elected as the directors of the Company and Mr. Li Debiao and Mr. Qian Shufa were elected as the independent directors of the Company. 10.Proposal on Establishing Two Special Committees of the Board of Directors; 11.Proposal on Reengaging Domestic and Overseas Audit Organizations in 2002 for the Company (note); Note: the proposal was not approved because of the ayes of 265,600 shares (including 0 B share), taking 0.167% of the shares represented by the present shareholders, the blackball of 5300 shares and the abstaining of 159,018,650 shares. Due to the serious influence of the event of America Enron on Andersen, Andersen’s institutions in other countries were merged into other companies in succession. The Shareholders’ General Meeting decided to postpone the proposal on engaging domestic and overseas audit organization in 2002 and authorized the Board of Directors to make further investigation and research, select the audit organization and submit it to the next Shareholders’ General Meeting for examination and approval. 12.Proposal on Transaction of Pledged Loan of Real Estate; 13.Proposal on Ending Huading Science & Technology Industrial Co., Ltd. and its Liquidation Report; 14.Proposal on Adjusting Investment Method of the Last Raised Capital and Using the Left Capital to 9 Supplement Current Capital; 15.Proposal on Related Transactions of the Company. The resolutions of the Shareholders’ General Meeting were published on Securities Times and Ta Kung Pao dated June 11, 2002. VII. Report of the Board of Directors (I) Operation of the Company 1. Scope of core business and its operation (1) The Company belongs to the industry of machinery manufacturing, which is mainly engaged in manufacturing and sales of agro-diesels, combine harvester and transport agro-vehicles. Under the situation of continuously intensified competition of industry, in order to turn the loss and walk out the jam, in the report period, the Company mainly emphasized the work of the following three aspects as well as continuing to improve the legal person’s administrative structure: firstly, the Company deepened the internal reform, changed the concept and transformed the mechanism through reducing organizations, cutting down staff and reforming the distribution system in order to enhance the economic running efficiency. A half of the management organizations and staff were reduced, over 800 employees were cut and the efficiency was increased obviously. Secondly, the Company strengthened the management of enterprise, reinforced various measures of cost reducing and profit increasing and improved the operating and financial status. In the report period, the Company reduced the period expense and inventory of finished goods as much as possible and made its best endeavors to recall the accounts receivable. Besides, the Company developed new products, organized codes of products, improved quoting system of products and credit files of customers and adjusted product structure and market layout to increase the profitability capability. In the report period, the Company sold 920,500 diesels, an increase of 1.22%, realized an income of core business of RMB 1,579,968,446.58, a decrease of 9.38% and realized a profit of core business of RMB 174,940,006.78, an increase of 6.64%. Thirdly, the Company cleaned the bequeathal problems of history, cut down foreign investment in a sequential way, strengthened the supervision and control of the companies that have been invested and probed into the approach of purchase, merger and reorganization actively. The Company seriously carried through the work of the aforesaid three aspects, which made the status of the Company be further improved and created condition for turning the complexion of loss. In the report period, the formation of income from core business of the Company classified according to product is as follows: Index Income from core business Profit from core business Product Amount (RMB) Percentage (%) Amount (RMB) Percentage (%) Diesels 1,537,897,328.32 97.34 178,585,475.05 102.08 Agro-vehicles 42,071,118.26 2.66 -3,645,468.27 -2.08 Total 1,579,968,446.58 100 174,940,006.78 100 In the report period, the formation of income from core business of the Company classified according to area is as follows: Area Income from core Increase/decrease of income from core business business (RMB) compared with the previous year (%) East China 882,495,194.58 1.45 Northeast 185,018,992.09 15.19 Southwest 106,090,022.36 0.35 Central China 105,187,982.78 -71.44 North China 87,240,725.56 -10.21 Northwest 79,384,157.88 -50.76 South China 27,654,551.29 -15.78 10 (2) Particulars about diesel products taking the largest proportion in the income from core business Sales income: RMB 1,537,897,328.32 cost of sales: RMB1,357,847,913.15 gross profit ratio: 11.71% 2. Operation of main subsidiaries and controlling subsidiaries of the Company (RMB ’0000) Name of company Main products Registered capital Total assets Net profit Changchai Yinchuan Diesels 3484.21 7135.06 -5182.41 Diesel Engine Co., Ltd. Changchai Wanxian Diesels 3500.00 7300.37 -3562.42 Diesel Engine Co., Ltd. Changchai Benniu Spare parts of 3378.64 11877.03 153.02 Diesel Engine Parts Co., diesels Ltd. Changzhou Vehicle Co., Four-wheel agro- 5000.00 6965.11 -3139.94 Ltd. vehicles Changchai Jintan Diesel Diesels 6329.23 13763.60 -2334.22 Engine Co., Ltd. 3. Major suppliers and customers In 2002, the purchase amount of the top five suppliers of the Company took 23.54% of the total annual amount of purchase and the sales amount of the top five customers took 28.02% of the total amount of sales of the Company. 4. Problems and difficulties arising from the operation and the solutions The problems and difficulties arising from the operation of the Company: on the one hand, since the competition of price was intense, the profitability space of the industry of small diesel was reduced increasingly. It was necessary to increase the profitability capability of the Company effectively. On the other hand, to the accounts receivable left behind by history and projects of foreign investment, it was necessary to adopt the effective measures to remove the operating risks arising from them possibly. The solutions of the Company: firstly, carried out the policy of benefit sales, integrated market resources and tried hard to realize the maximum of benefit. Through integration of resources of sales variety, the Company tried best to increase the sales volume of profitable variety, tried best to improved and reduced the cost of unprofitable variety and enhanced the technology content of products in order to increase the sales point and additional value. Besides, the Company tired hard to enhance the sales proportion of circulating market and made the market of circulating large, positively develop new market and expanded market share of multi-cylinder and realized profitability and further carried through cost decrease and expenditure saving and made the cost price of the Company have the capability to compete with private corporation. Secondly, continued to enhance the payoff of debts and did the work of sequential constriction of foreign investment well. The Company managed the resources of customers in a dynamic way, improved the credit files of customers and took measures in time to the customers who have problems possibly and combined prevention with control. What’s more, the Company strengthened the risk concept of business persons and ensured and restricted the rights and obligations of both parties through means of laws and examined binding the individual income with the interests of enterprise, controlled the transfer accounts strictly and tried hard to realize the cash sales and reinforced the management and supervision and control of foreign investment completely and ensured the safety of assets of the Company. (II) Investment in the report period 1. Application of proceeds raised through previous share offering After approved by ZJGSZ (2000) No. 7 document of CSRC, based on the total share capital of 352,000,000 at the end of the year of 1999, the Company allotted shares to all shareholders at the rate of 3 shares for every 10 shares. The total amount of shares allotted actually this time was 22,249,551 shares and the net amount of raised proceeds was RMB 194,713,059.00. The raised proceeds of this shares allotment was transferred into accounts on April 13, 2000. The public notice of change in shares was published and the change of commercial and industrial registration was completed. 11 Ended Dec. 31, 2002, the application of proceeds raised through shares allotment of the year of 1999 of the Company was as follows: (RMB’0000) Total amount of raised proceeds used in note 3 4694.36 Total amount of the report period 19471.31 raised proceeds Total amount of raised proceeds used 17770.36 accumulatively Compliance with Accrued Committed Planned amount Change of Actual amount of planned progress amount of projects of input projects or not input and estimated earning earning or not The project Back-carried remained all-feeding unchanged note 2 4990 0 No combine while way of 5910 (input of equity harvester input changed note 1 of RMB29.10 million and loan of RMB 30 The project Self-propelled million) remained all-feeding 4980 unchanged 0 No combine while way of harvester input changed 7530.36 (input of The project equity of RMB 24.90 Self-propelled remained million, loan of RMB semi-feeding 15000 unchanged 43.26 million and 0 No combine while way of input of circulating harvester input changed funds of RMB 7.1436 million) Total 24970 — 13440.36 — Total amount of capital of project 4330 of changed investment Corresponding Accrued Compliance with Planned amount Actual Project after project of amount planned progress of input of amount of the change committed of and estimated change project input originally earning earning or not Complementa ry circulating 4330 4330 funds Total — 4330 4330 — Note 1: Great changes had taken place in the market of harvest machinery in 2000 (for details, please refer to 2001 Annual Report of the Company). In order to reduce investment risks and to safeguard interests of shareholders, after examined by the 12th Meeting of the 3rd Board of Directors and approved by 2001 Shareholders’ General Meeting, the Company changed the way of input of the three investment projects committed in the shares allotment: investment of fixed assets was changed to equity investment, investment of auxiliary circulating funds was changed to provide loan for project companies and the investment amount was reduced accordingly. For details, please refer to Securities Times and Ta Kung Pao dated on Dec. 1, 2001 and June 11, 2002. Note 2: (1) After the change of way of input of the project, back-carried all-feeding combine harvesters and self-propelled all-feeding combine harvesters was produced by Changchai Combine Harvesters Co., Ltd. (hereinafter referred to as Changlian Company), whose investment progress was in compliance with the planned progress basically. Due to the influence of factors such as change of market, price war and product quality etc., Changlian Company incurred a large loss from the year of 2001 to 2002. After 12 examined and studied by the Extraordinary Meeting of the Board of Directors, the Company decided to transfer 60% of the equity of Changlian Company (for details, please refer to the item (II) of significant events). (2) There were thirty self-propelled semi-feeding combine harvesters produced in 2002 after its development project passing the authentication of putting into production based on the further improvement of quality, increase of reliability and reinforcement of management. Its project company Jiangnan Transport Machinery Co., Ltd. (for details, please refer to 2001 Annual Report of the Company) incurred a comparatively large loss in 2001 due to production of three-wheel transport agro- vehicles in the early stage and stopped production in 2002. The Company was probing into the way of liquidizing the stock assets of this company. Note 3: including, RMB 3,643,600 was additionally put into the project of self-propelled semi-feeding combine harvesters. After examined by the 15th Meeting of the 3rd Board of Directors and approved by 2001 Shareholders’ General Meeting, RMB 43.30 million from the balance of proceeds raised through previous share offering was used to supplement the circulating funds of the Company. Ended Dec. 31, 2002, there was still RMB 17,009,500 from the proceeds raised through previous share offering not used up, which was deposited in the bank. 2. There was no project invested with proceeds not raised through share offering in the report period. (III) Financial Status 1. Financial indexes (RMB’000) Name of index Dec. 31, 2002 Dec. 31, 2001 Increase/decrease (%) Total assets 2,184,414.07 2,926,504.17 -25.36 S h a r e h o l d e r s ’ equity 738,664.38 1,239,420.56 -40.40 In 2002 In 2001 Increase/decrease (%) Profit from core 174,940.01 164,045.53 6.64 business Net profit -477,475.86 -381,428.65 25.18 Net increase in Cash 61,429.75 99,228.22 -38.09 and cash equivalents 2. Explanation of reason of change of financial status (1) The decrease of total assets and shareholders’ equity was due to the large loss incurring in the report year (2) The increase of net deficiency was mainly because that, a, enough reserve for bad debts was appropriated from the accounts receivable and other receivables according to the actual situation; b, the sales price still declined while the sales volume increased in a certain extent. (IV) Explanation of the Board of Directors on the issues involved in the Auditors’ Report with interpretative explanation provided by Certified Public Accountants In 2002, Jiangsu Gongzheng Certified Public Accountants provided the Auditors’ Report with interpretative explanation segment for the Company and the Board of Directors commented on this issue as follows: Anderson·Huaqiang Certified Public Accountants provided the domestic Auditors’ Report for the Company in 2001. Due to the serious influence of American Enron Event on Anderson, the organizations of Anderson in various countries merge with other organizations in succession. Thus, 2001 Shareholders’ General Meeting of the Company decided not to renew Anderson Certified Public Accountants as the domestic and oversea auditors of the Company in 2002. After investigation and research for several times, on Aug. 14, 2002, the Board of Directors held the 17th Meeting of the 3rd Board and examined and approved the engagement of Jiangsu Gongzheng Certified 13 Public Accountants and Hong Kong Haworth Certified Public Accountants as the domestic and oversea auditors of the Company in 2002, which was still necessary to be submitted to 2002 Shareholders’ General Meeting for examination and confirmation. Thus, Jiangsu Gongzheng Certified Public Accountants added the interpretative explanation in the 3rd segment of 2002 Auditors’ Report provided for the Company “ Besides, 2001 Accounting Statements of your company is audited by Anderson· Huaqiang Certified Public Accountants.” (V) Routine Work of the Board of Directors The meetings and resolutions of the Board of Directors in the report period: 1. The 14th Meeting of the 3 rd Board of Directors was held on Jan. 25, 2002 and the following resolutions were examined and approved in the Meeting: (1) Public Notice on 2001 Expected Loss (2) Proposal on Relevant Issues of Implementation of Administrative Rule for Listed Companies 2. The 15th Meeting of the 3 rd Board of Directors was held on April 10, 2002 and the following resolutions were examined and approved in the Meeting: (1) 2001 Annual Report and its Summary (2) 2001 Work Report of the Board of Directors (3) 2001 Profit Distribution Project, Project of Loss Offset and 2002 Profit Expected Distribution Project (4) Proposal on Using the Balance of Proceeds Raised Through Previous Shares Offering to Supplement Circulating Funds (5) Proposal on Authorization of Examination Rights of Relevant Issues in a Certain Scope of Amount (6) Proposal on Renewal of Domestic and Oversea Auditors of the Company of 2002 (7) Proposal on Transfer the Equity of Changchai Jintan Diesel Engine Co., Ltd. (8) Proposal on Disposal of Relevant Bequeathal Problems of Bankruptcy of Sanchai Factory (shareholder of subsidiary of the Company) (9) Proposal on Self-inspection Report and Correction Project of the Company 3. The 16th Meeting of the 3 rd Board of Directors was held on April 22, 2002 and the following resolutions were examined and approved in the Meeting: (1) Report of the 1st Quarter of 2002 (2) Proposal on Examination of Nine Normative Documents of Amendment Draft of Articles of Association of the Company (3) Proposal on Adjustment of Directors, Nomination of Candidates of Independent Directors and Decision of Allowance Project of Independent Directors (4) Proposal on Establishment of Two Special Committee of the Board of Directors (5) Proposal on Relevant Instance of Reporting of Loss of Achievement of the Year of 2001 (6) Proposal on Holding of 2002 Shareholders’ General Meeting 4. The Board of Directors held the Extraordinary Meeting on May 28, 2002 and examined and approved Proposal on Related Transaction of Changchai Group Co., Ltd.’s Commuting Arrearage Payable to the Company with the Evaluation of Changchai Building 5. The Board of Directors held the Extraordinary Meeting on June 20, 2002 and examined and approved Self-inspection Report of Establishment of Modern Enterprise System of Listed Companies 6. The Board of Directors held the Extraordinary Meeting on July 11, 2002 and examined and approved the following resolutions: (1) Operation of the First Half of the Year of 2002 and Planned Taking Measures of the Second Half of the Year (2) Assumption of Work of Two Special Committees of the Board of Directors 14 (3) Proposal on Transfer of the Equity of Jiangsu Changchai Combine Harvester Co., Ltd. (4) Proposal on Providing Guarantee for the Extension Period of Loan of RMB25 Million of Jiangnan Company 7. The 17th Meeting of the 3 rd Board of Directors was held on Aug. 14, 2002 and the following resolutions were examined and approved in the Meeting: (1) 2002 Annual Report and its Summary (2) Proposal on Engagement of Domestic and Oversea Auditor of the Company of 2002 (3) Proposal on Engagement of Securities Affairs Representative of the Company 8. The 18th Meeting of the 3 rd Board of Directors was held on Oct. 28, 2002 and the following resolutions were examined and approved in the Meeting: (1) Report of the 3rd Quarter of 2002 (2) Proposal on Engagement of Lawyer of the Company of 2002 9. The Board of Directors held the Extraordinary Meeting on Nov. 26, 2002 and examined and approved the Proposal on Transfer of 33% Equity of Nanjing Yilai Gene Medicine Co., Ltd. 10. The Board of Directors held the Extraordinary Meeting on Dec. 5, 2002 and examined and approved the Proposal on Transfer the Equity of Changchai Jintan Diesel Engine Co., Ltd. 11. The 19th Meeting of the 3rd Board of Directors was held on Dec. 24, 2002 and Examination Method of Operating Achievement of the Management of the year of 2003 was examined and approved in the Meeting. (VI) The profit distribution preplan or preplan of converting capital public reserve into share capital Audited by domestic and oversea auditors as per Chinese Accounting Standards and International Accounting Standards respectively, the net profit of the Company in 2002 was RMB-477,475,855.99 and RMB-515, 336, 000 respectively. The total profit available for distribution in the consolidated statement as of the year was RMB-477,475,855.99 and the profit available for distribution of the parent company was RMB-529,316,959.68. The Board of Directors decided neither to distribute profit nor convert capital public reserve into share capital in 2002. Since the Company incurred a comparatively large loss in the operation of the year of 2002, the Company planned to use capital pubic reserve amounting to RMB529,316,959.68 to offset the loss of 2002 according to the principle of taking the lower amount of profit available for distribution of the parent company and the Company. The aforesaid distribution preplan and project of loss offset still should be submitted to 2002 Shareholders’ General Meeting for examination. (VII) Other reporting issues The newspapers of information disclosure designated by the Company in 2002 were Securities Times and Ta Kung Pao. VIII. R E P O R T O F T H E S U P E R V I S O R Y C O M M I T T E E In the report year, according to relevant laws and regulations such as Company Law and Articles of Association etc., the Supervisory Committee seriously performed its duties, strictly supervised over the significant decisions made by the Board of Directors as well as the Company’s operation according to law, production and operation and financial management in an all-round way, boosted the Company’s standardized operation, and ensured veracity and legitimacy of its economic operation. (I) The Meeting of the Supervisory Committee The meetings of the Supervisory Committee of the Company and its resolutions in the report period: 1.The 7th meeting of the 3rd Supervisory Committee was held on Jan.25, 2002 that examined and approved the following resolutions: (1) Announcement on Estimated Losses of the Company in 2002; 15 (2) Proposal on Implementation of Relevant Items of Rules of Listed Companies’ Administration. 2. The 8th meeting of the 3rd Supervisory Committee was held on Apr. 10, 2002 that examined and approved the following resolutions: (1) 2001 Annual Report and Summary; (2) 2001 Work Report of the Supervisory Committee; (3) Proposal on Supplementing Current Capital in the Balance of the Last Raised Capital; (4) Proposal on Transferring Share Equity of Changjin Company; 3. The 9th meeting of the 3rd Supervisory Committee was held on Apr. 22, 2002 that examined and approved the following resolutions: (1) The 1st Quarter Report in 2002; (2) Rules of Procedure of the Supervisory Committee 4. The 10th meeting of the 3rd Supervisory Committee was held on May 24, 2002 that examined and approved Proposal on Related Transaction of Changchai Group Co., Ltd. ’s Offsetting the Debt Payable Owned to the Company as the Sale Amount of Changchai Building. 5. The 11th meeting of the 3rd Supervisory Committee was held on Aug.14, 2002, which examined and approved 2002 Semi Annual Report and its Summary. 6. The 12th meeting of the 3rd Supervisory Committee was held on Oct.28, 2002, which examined and approved the 3rd Quarter Report in 2002. 7. The Supervisory Committee held the extraordinary meeting on Nov.26, 2002 which examined and approved Proposal on Assignment 33% Share Equity of Nanjing Yilai Genetic Medical Co., Ltd. (II) Independent Opinions from the Supervisory Committee 1. Operation According to Law: In opinion of the Supervisory Committee, the Board of Directors and the managers of the Company worked in a patient and responsible way, normatively operated strictly according to Company Law, Securities Law and Articles of Association and basically established good internal control system and the procedures of decision-makings were legal. 2. Inspection of Financing: The Supervisory Committee seriously and meticulously inspected the Company’s financial systems and financial status, believed that the financial report of 2002 factually reflected the Company’s financial status and operation results, and the auditor’s opinion and assessment on relevant events issued by the domestic and overseas Certified Public Accountants were objective and fair. 3. Actual Investment Project of the Latest Raised Capital: The latest raised capital was 1999 share allotment, in which a total net amount of RMB 194,713,059.00 was raised. Due to the great change on the situation of the harvest machines market, so as to reduce the investment risk, the Board of Directors and the Supervisory Committee made the resolution on the adjustment of the investment method respectively in the 12th meeting of the 3rd Board of Directors and the 12th meeting of the 3rd Supervisory Committee, which was examined and approved by 2001 Annual Shareholders’ General Meeting. The Supervisory Committee believes that there occurred change on the raised capital and the investment method and amount of committed investment project. The procedure of change was legal. 4. Purchase and sales of assets. (1) On Aug.30, 2002, the Company signed Equity Assignment Agreement with Jiangsu Word Machinery & Electrical Group Co., Ltd. (hereinafter referred to as Word Company) and agreed to transfer 60% equity of Changchai Combined Reap Machine Co., Ltd. (hereinafter referred to as Changlian Company) to Word Company. According to Assessment Report of the Whole Assets of Changlian Company with SGKPB ZI [2002] No.1032 issued by Jiangsu Gongzheng Certified Public Accountants Co., Ltd., the finally ensured price of equity assignment is RMB 10,000,000. (2) On Nov.27, 2002, the Company signed Equity Assignment Agreement with Starsteruck Investments Limited and agreed to transfer 33% equity of Nanjing Yilai Genetic Medical Co., Ltd. to Starsteruck 16 Investments Limited and the assignment price is HKD 14,340,000. The Supervisory Committee believed that the transactions of assets were conducted based on the negotiated price, and the procedures of transfer were legitimate, avoiding the further loss of the shareholders’ interests and rights. 5.The related transaction of Changchai Group Co., Ltd. ’s Offsetting the Debt Payable Owned to the Company as the Sale Amount of Changchai Building was fair and reasonable and not harmful for the interests and rights of the shareholders and the Company. The detail was published on Securities Times and Ta Kung Pao dated May 29, 2002. (III) The Supervisory Committee’ Opinion on the Board of Directors’ Explanation of Non-standardized Auditor’s Report Explanation of the Company on the non-standardized auditor’s report reflected truly the actual situation of disengaging Andersen Certified Public Accountants and engaging Jiangsu Gongzheng Certified Public Accountants and Hong Kong Howah Certified Public Accountants. I X. S I G N I F I C A N T E V E N T S (I) Ended as of the report period, the accumulative amount of the lawsuits and arbitrations interfered by the Company is RMB 100,265,800. The detail was published on Securities Times and Ta Kung Pao dated Jan. 28, 2003. (III) Purchase and sales of assets (1) On Aug.30, 2002, the Company signed Equity Assignment Agreement with Jiangsu Word Machinery & Electrical Group Co., (hereinafter referred to as Word Company) and agreed to transfer 60% equity of Changchai Combined Reap Machine Co., Ltd. (hereinafter referred to as Changlian Company) to Word Company. According to Assessment Report of the Whole Assets of Changlian Company with SGKPB ZI [2002] No.1032 issued by Jiangsu Gongzheng Certified Public Accountants Co., Ltd., after several negotiations between the two parties, the finally ensured price of equity assignment is RMB 10,000,000. The detailed payment method is as follows: pay RMB 2,000,000 in cash within 10 days after signing the agreement and pay RMB 1,000,000 in cash every year from 2003 to 2005. Concerning the balance of RMB 5,000,000 and the debt payable to the Company of RMB 30,000,000, write off it from the amount payable of goods purchase of the Company every year from 2003 to 2006. (2) On Nov.27, 2002, the Company signed Equity Assignment Agreement with Starsteruck Investments Limited and agreed to transfer 33% equity of Nanjing Yilai Genetic Medical Co., Ltd. to Starsteruck Investments Limited and the assignment price is HKD 14,340,000. (III) In the report year, the Company had never kept as custodian, contracted or leased any other company’s assets and vice versa. (IV) Significant related transaction events (1) Changchai Group Import & Export Company is the subsidiary of Changchai Group Co., Ltd. which is the related company of the Company. In the report period, the total amount of diesel engine product sold to Changchai Group Import & Export Company was RMB59,799,333.00. The price of the related transaction that was normal goods sale was fair market price. Ended as of the report period, Changchai Group Import & Export Company has account payable of RMB 87,676,426.43 owned to the Company, most of which was historic problems left and the Company is actively dunning. (2) Changzhou Gear Wheel Factory is the subsidiary of Changchai Group Co., Ltd., which is the related company of the Company. In the report period, the total amount of Gear Wheel the Company purchased from Changzhou Gear Wheel Factory was RMB 42,967,989.00. The price of the related transaction was fair market price. The related transaction is paid in cash and is normal material purchase. (V) In the report year, the Company provided RMB 70 million’s guarantee for Changzhou Gear Wheel Factory, among which there was still RMB 50 million unfinished, provided RMB 88 million’s guarantee for Changzhou Tractor Plant, among which there was still RMB 80 million unfinished. In the report year, the accumulate total amount of the guarantee the Company provided for others is 17 RMB 224,760,000, exceeding 10% of total amount of the latest audited net assets. The Company published Public Notice on Guarantees the Company Provided for Others on Securities Times and Ta Kung Pao. The item is subject to the approval of the Shareholders’ General Meeting. (VI) In the report period, the Company has not entrusted financing. (VII) In the report period, according to Report of Assets Assessment of Assets Assignment with SZZPB ZI (2002 NO.31) issued by Jiangsu Zhongtian Assets Assessment Firm, Changchai Group Co., Ltd. (shortened form: Changchai Group) signed Agreement of Assignment of Changchai Building with the Company on Mar.29, 2002. Changchai Group decided to transfer Changchai Building to the Comapany as the assessment price of RMB 100,036,000 of Changchai Building so as to offset the equal amount owned to the Company. The detail was published on Securities Times and Ta Kung Pao dated May 29, 2002. (VIII) The 17th meeting of the 3rd Board of Directors examined and approved to engage Jiangsu Gongzheng Certified Public Accountants Co., Ltd and Hong Kong Howah Certified Public Accountants as the domestic and overseas audit organizations of the Company in 2002. The public notice was published on Securities Times and Ta Kung Pao dated Aug.16, 2002. The audit expense the Company paid to Jiangsu Gongzheng Certified Public Accountants Co., Ltd and Hong Kong Howah Certified Public Accountants for the year 2002 is RMB 800,000. The two audit organizations audited the annual financial report of the Company for the first time. (IX) Other significant events Jiangnan Transport Machinery Co., Ltd. is a project company invested in the raised capital from the share allotment of the Company in 1999. The Company invested RMB 24,900,000 in share equity, RMB 10,000,000 in intangible assets, taking 34.9% of the registered capital. In the report period, as a result of the drastic competition in the market of three-wheel vehicle and the lack of current capital, Jiangnan Transport Machinery Co., Ltd. is in the status of stopping production and is exploring the channels of liquidizing the existed assets from many aspects. 18 X. F I N A N C I A L R E P O R T REPORT OF THE AUDITORS TO THE SHAREHOLDERS OF CHANGCHAI CO MPANY LIMITED (incorporated in the People’s Republic of China with limited liability) We have audited the financial statements on pages 2 to 30 which have been prepared in accordance with International Accounting Standards, except that the scope of our work was limited as explained below. R e s p e c t i v e r esponsibilities o f D i r e c t o r s a n d A u d i t o r s The Company’s directors are responsible for the preparation of financial statements which give a true and fair view. In preparing financial statements which give a true and fair view, it is fundamental that appropriate accounting policies are selected and applied consistently. It is our responsibility to form an independent opinion, based on our audit, on those statements and to report our opinion to you. B a s i s o f o pinion We conducted our audit in accordance with International Standards on Auditing. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the financial statements and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed. We planned our audit in accordance with International Standards on Auditing so as to obtain all the information and explanations which was considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement whether caused by fraud or other irregularity or error. However, the evidence available to us was limited because we were not appointed auditors of the Company until November 2002 and in consequence it was not possible for us to perform the auditing procedures necessary to obtain sufficient appropriate audit evidence as regards to the opening balances of the Group as at 1 January 2002. Any adjustment to the opening balances might have a consequential effect on the loss for the year ended 31 December 2002. Q u a l i f i e d op i n i o n arising from disagreement over accounting treatment and limitation in audit scope As set out in more details in note 2 to the consolidated financial statements, two of the Group’s subsidiaries (the “Unconsolidated Subsidiaries”) ceased operations during the year and no reliable financial information of the Unconsolidated Subsidiaries is available. As of 31 December 2002, the Group accounted for its interest in the Unconsolidated Subsidiaries using the cost method of accounting. Provision for impairment loss has been made at 31 December 2002 to write down the Group’s interests in the Unconsolidated Subsidiaries to their expected net realisable value of RMB Nil. In our opinion, the financial statements of the Unconsolidated Subsidiaries should have been consolidated into the Group’s consolidated financial statements in accordance with International Accounting Standard IAS 27 “Consolidated financial statements and accounting for investments in subsidiaries”. However, there were no practical audit procedures that we could perform to verify (i) the amounts which should have been consolidated; and (ii) the carrying value (before provision for impairment loss) of the Group’s investment in the Unconsolidated Subsidiaries. Except for any adjustments that might have been found to be necessary had the above disagreement over accounting treatment not existed and had we been able to obtain sufficient evidence concerning the opening balance as at 1 January 2002, in our opinion the financial statements give a true 19 and fair view of the state of affairs of the Group as at 31 December 2002 and of its loss and cash flows for the year then ended. HORWATH HONG KONG CPA LIMITED 2001 Central Plaza Certified Public Accountants 18 Harbour Road Wanchai 8 April 2003 Hong Kong Chan Kam Wing, Clement Practising Certificate number P02038 20 CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2002 (Amounts expressed in thousands of RMB, except earnings per share) Note 2002 2001 RMB’000 RMB’000 Turnover 4 1,655,562 1,743,487 Cost of sales (1,472,787) (1,579,442) Gross profit 182,775 164,045 Other operating income 28,257 19,567 Unrecognised investment losses - 7,864 Selling expenses (114,642) (190,343) General and administrative expenses (571,273) (347,335) Other operating expenses (15,147) (53,754) Loss from operations (490,030) (399,956) Finance costs, net 6 (35,085) (30,057) Share of losses from associates (3,018) (40,052) Other investment (loss)/income (2,853) 2,485 (Loss)/gain on disposal of leasehold land, property, plant and equipment (743) 442 Impairment loss on property, plant and equipment (34,760) - Gain on disposal of a subsidiary 23,472 - Other (expenses)/ income, net (3,642) 74 Loss from ordinary activities 5 (546,659) (467,064) Income tax expense 7 (27) (2,195) Net loss after taxation (546,686) (469,259) Minority interests 31,350 48,475 Net loss after taxation and minority interests (515,336) (420,784) Loss per share – Basic 8 (1.38) (1.12) The notes on pages 7 to 30 form part of these financial statements. 21 CONSOLIDATED BALANCE SHEET AS AT DECEMBER 31, 2002 (Amounts expressed in thousands of RMB) Note 2002 2001 RMB’000 RMB’000 Assets and liabilities Non-current assets Land use rights 9 78,874 84,393 Property, plant and equipment 9 574,157 614,154 Construction in progress 10 90,693 113,029 Investments in associates 11 66,695 77,669 Other long-term investments 12 101,887 101,392 Prepayment for investment - 57,000 912,306 1,047,637 Current assets Inventories 14 287,733 452,247 Value-added tax recoverable 31,922 42,082 Due from CGC 15 35,820 137,323 Due from associates and related parties 16 140,311 201,063 Trade and other receivables 436,373 727,494 Prepayments 12,047 15,492 Short-term investment 13 130 - Pledged bank deposits 10,793 13,949 Cash and cash equivalents 360,561 309,924 1,315,690 1,899,574 Total assets 2,227,996 2,947,211 Capital and reserves Share capital 18 374,250 374,250 Reserves 19 349,834 873,034 Unrecognised investment losses - (7,864) 724,084 1,239,420 Minority interests 14,663 46,013 Non-current liabilities Borrowings – long term portion 17 60,000 293,500 Current liabilities Borrowings 17 591,370 445,990 Other payables, advances from customers and accruals 242,932 208,485 Tax payable 5,018 4,631 Dividends payable 3,040 4,810 Due to associates and related parties 16 26,151 27,186 Notes and trade payables 560,738 677,176 1,429,249 1,368,278 Total equity and liabilities 2,227,996 2,947,211 These financial statements were approved and authorised for issue by the board of directors on 8 April 2003 … … … … … … … … … … … … … … … … .. … … … … … … … … … … … … … … … … .. Zhang Jun Yuan Xue Guo Jun ChairmanDirector & General Manager The notes on pages 7 to 30 form part of these financial statements. 22 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEAR ENDED DECEMBER 31, 2002 (Amounts expressed in thousands of RMB) Reserves Statutory Statutory Discretionary Retained surplus public surplus earnings/ Unrecognised Share Capital reserve welfare reserve(accumulated Total investment Total capital reserve fund fund fund losses) reserves losses equity RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Balance at 31 December 2000 374,250 857,417 89,427 89,427 58,162 198,623 1,293,056 - 1,667,306 Net loss for the year - - - - - (420,784) (420,784) (7,864) (428,648) Other - 762 - - - - 762 - 762 Balance at 31 December 2001 374,250 858,179 89,427 89,427 58,162 (222,161) 873,034 (7,864) 1,239,420 Net loss for the year - - - - - (515,336) (515,336) - (515,336) Profit appropriations - statutory surplus reserve fund - - 41 - - (41) - - - - statutory public welfare fund - - - 41 - (41) - - - Transfer from reserve - (163,997) (1) (1) (58,162) 222,161 - - - Realisation of unrecognised investment loss - - - - - (7,864) (7,864) 7,864 - Balance at 31 December 2002 374,250 694,182 89,467 89,467 - (523,282) 349,834 - 724,084 The notes on pages 7 to 30 form part of these financial statements. 23 CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2002 (Amounts expressed in thousands of RMB) Note 2002 2001 RMB’000 RMB’000 Cash inflow from operating activities Cash generated from operations 20(a) 142,924 175,210 Interest paid (44,414) (45,057) Income tax paid (1,776) (3,838) Net cash generated from operating activities 96,734 126,315 Cash flows from investing activities Disposal of Jiangsu Changchai United Harvest Machinery Co., Ltd., net of cash disposed 20(b)(i) (41,568) - Disposal of Changchai Dongli Machinery Co., Ltd. (“CCDL”), net of cash disposed - (6,149) Disposal of Huading Technology Xinye Investment Co.,Ltd. (“Huading”), net of cash acquired - 6 Acquisition of leasehold land - (9,780) Acquisition of property, plant and equipment (5,925) (29,985) Expenditures for construction in progress (26,449) - Acquisition of other long term investments (767) - Increase in investments in associates (12,273) (24,240) Decrease in other long-term investments - 4,051 Decrease in pledged bank deposits 3,156 14,345 Proceeds from disposal of investments in associates 15,202 - Proceeds from disposal of property, plant, equipment and leasehold land 14,366 37,467 Proceeds from disposal of other long term investments 111 - Interest received 3,440 5,840 Dividends received - 4,717 Cash outflow of subsidiaries not consolidated (240) - Net cash used in investing activities (50,947) (3,728) Cash flows from financing activities Net decrease in short-term bank loans - (96,760) Decrease in loan from CGC - (3,600) Proceeds from long-term bank loans 512,510 233,480 Repayment of long-term bank loans (505,890) (156,480) Dividends paid (1,770) - Net cash generated from/(used in) financing activities 4,850 (23,360) Net increase in cash and cash equivalents 50,637 99,227 Cash and cash equivalents, beginning of year 309,924 210,697 Cash and cash equivalents, end of year $ 360,561 $ 309,924 The notes on pages 7 to 30 form part of these financial statements. 24 NOTES TO THE FINANCIAL STATEMENTS (Expressed in Renminbi thousands) 1. Organisation and principal activities Changchai Co., Ltd. (the “Company”) was established as a joint stock limited company in the People’s Republic of China (the “PRC”) in 1994. The address of the Company’s registered office is No.123 Huai De Zhong Rd., Changzhou, Jiangsu Province. The Company’s domestic investment ordinary shares (“A shares”) and domestically listed foreign investment ordinary shares (“B shares”) have been listed on the Shenzhen Stock Exchange since 1994 and 1996 respectively. The Company is principally engaged in the manufacture and sale of small and medium diesel engines under the “Changchai” brand name for use in agricultural machinery such as tricycles, tractors and water pumps, and agricultural product processing machinery such as rice mills, oil presses and pulverizing machinery. The principal activities of its subsidiaries are shown in Note 25. The Company together with its subsidiaries listed in Note 25 are hereinafter collectively referred to as the “Group”. 2. Summary of significant accounting policies The financial statements of the Group have been prepared in accordance with International Accounting Standards (“IAS”). The Group also prepares financial statements which comply with accounting regulations in the People’s Republic of China. A reconciliation of the Group’s results and shareholders’ equity under IAS and PRC accounting regulations is presented in Note 27. The principal accounting policies adopted are as follows: (a) Basis of preparation The consolidated financial statements have been prepared based on the books and records maintained by the Company and its subsidiaries. Chengdu Changwan Diesel Engines Co., Ltd. (“CCDE”) and Chongqing Wanchou Changwan Diesel Engines Spare Parts Co., Ltd. (“CWCD”) ceased operations during the year, and key management and accounting staff have left the companies. As a result, certain account balances and transactions of CCDE and CWCD as reflected in its financial statements for the year ended 31 December 2002 cannot be satisfactorily substantiated or otherwise supported. The financial statements of CCDE and CWCD have not been consolidated into the Group’s consolidated financial statements. The Group’s 25 interests in the subsidiaries were accounted for using cost method of accounting as at 31 December 2002. (b) Consolidation The consolidated financial statements of the Group incorporate the financial statements of the Company and all operating subsidiaries that are controlled by the Company. Where an entity either began or ceased to be controlled by the Company during the year, the results are included only from the date control commenced or up to the date control ceased. All material intra-group transactions and balances are eliminated on consolidation. (c) Subsidiary A subsidiary is a company, in which the Company has the power to govern the financial and operating policies of the subsidiary so as to obtain benefits from its activities. Details of the Company’s subsidiaries as of 31 December 2002 are set out in Note 25 to the financial statements. (d) Associated company An associate is a company, other than a subsidiary, in which the Company has a long term equity interest and over which the Company is in a position to exercise significant influence in management, including participation in financial and operating policy decisions. Associated companies are accounted for using the equity method of accounting. As at the balance sheet date, the Group’s interest in the associate is carried at the amount that reflects its share of the net assets of the associate. (e) Joint Venture A jointly controlled entity is a contractual arrangement whereby the Group and other parties undertake an economic activity which is subject to joint control and none of the participating parties has unilateral control over the economic activity. The consolidated income statement and balance sheet include the Group’s share of the results of jointly controlled entities for the year, and their assets and liabilities, are accounted for using the proportionate consolidation method. (f) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net assets of the acquired subsidiary or associate at the date of acquisition. Goodwill on acquisition is reported in the balance sheet 26 as an intangible asset and amortised using the straight-line method over a period of 5 years. The carrying amount of goodwill is reviewed annually and written down for permanent impairment where it is considered necessary. The gain or loss on disposal of an entity includes the unamortised balance of goodwill relating to that entity. (g) Other investments Investments held on long term basis, other than investment in subsidiaries and associated companies are stated at cost, less any provision for impairment loss deemed necessary by the directors. Listed shares held for short term dealing purpose are stated at market value at balance sheet date. Unrealised gains and losses are included in net profit or loss for the year. (h) Land use rights Land use rights are stated at cost less accumulated amortisation and any impairment losses. Amortisation is provided using the straight line basis over their estimated useful lives. (i) Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses. The 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. Expenditure incurred after the property, plant and equipment have been put into operation, such as repairs and maintenance and overhaul costs, is normally charged to the consolidated income statement in the year in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the property, plant and equipment, the expenditure is capitalised as additional cost of the property, plant and equipment. Depreciation is provided using the straight line method to write off the cost of property, plant and equipment, over their estimated useful lives from the date on which they become fully operational and after taking into account their estimated residual values. The estimated useful lives of property, plant and equipment are as follows: Buildings 20-30 years Plant and machinery 6-15 years Motor vehicles 5-10 years Furniture, fixtures and equipment 5-10 years 27 When assets are sold or retired, their cost and accumulated depreciation are eliminated from the accounts and any gain or loss resulting from their disposal is included in the consolidated income statement. (j) Construction in progress Construction in progress comprises factory and office buildings, plant and machinery under construction or installation, including the related furniture, fixtures and office equipment, and is stated at cost less any impairment losses. Construction in progress is transferred to property, plant and equipment when it is ready for its intended use. No provision for depreciation is made on construction in progress. (k) Impairment of assets Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Whenever the carrying amount of an asset exceeds its recoverable amount, an impairment loss is recognised in the consolidated income statement for items of assets carried at cost. The recoverable amount is the higher of an asset’s net selling price and value in use. The net selling price is the amount obtainable from the sale of an asset in arm’s length transaction while value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. Recoverable amounts are estimated for individual assets or, if it is not possible, for the cash-generating unit. (l) Inventories Inventories comprise raw materials, work-in-progress and finished goods. Inventories are stated at the lower of cost and net realisable value. Cost includes direct materials, direct labour costs and overheads that have been incurred in bringing the inventories and work in progress to their present location and condition and is calculated using the weighted average method. Net realisable value is estimated by the management and is determined by reference to the selling price less all costs to completion and costs to be incurred in selling and distribution. Spare parts and consumables are stated at cost less any provision for obsolescence. (m) Receivables Trade receivables are carried at anticipated realisable value. An estimate is made for doubtful receivables based on a review of all outstanding amounts at the year-end. Bad debts are written off during the year in which they are identified. 28 (n) Short term investments Short term investments are stated at market value at balance sheet date. Unrealised gains and losses are included in net profit or loss for the year. (o) Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise cash in hand, deposits held at call with banks, and investments in money market instruments, net of bank overdrafts. In the consolidated balance sheet, bank overdrafts are included in borrowings in current liabilities. (p) Pension obligations As a statutory requirement, the Company and its subsidiaries have to contribute 21% of total salaries as retirement benefits for employees to a government agency. All contributions are dealt with in the income statement. (q) Foreign currencies The Group’s maintains its books and records in RMB. Foreign currency transactions during the year are translated into RMB at the rates of exchange prevailing at the transaction dates as quoted by the People’s Bank of China (“PBOC”). Monetary assets and liabilities denominated in foreign currencies are translated into RMB at the rates prevailing at the balance sheet date as quoted by the PBOC. Exchange differences arising are included in consolidated income statement. (r) Related party Parties are considered to be related if one party has the ability, directly or indirectly, to control the other or exercise significant influence over the other party in making financial and operating decision. Parties are also considered to be related if they are subject to common control or common significant influence. Related parties include the holding company, fellow subsidiaries, associates and joint ventures of the Company, or any persons or its close family members who are in a position to exercise significant influence over that related party. (s) Financial assets and liabilities Investments, trade receivables and marketable securities are stated at carrying amounts determined in accordance with notes 2(g), (m) and (n) respectively. Other financial assets and financial liabilities are stated at cost. (t) Revenue recognition 29 i) Sales are recognised upon delivery of products and customer acceptance. ii) Service income is recognised upon deliver of services. iii) Interest income is recognised on a time proportional basis, taking into account the principal amounts outstanding and the interest rates applicable. (u) Deferred taxation Deferred taxation is provided using the liability method. Under the liability method, deferred taxation is recognised for all significant timing differences arising from the inclusion of items of income and expenditure in tax computations in periods different from those in which they are included in the financial statements. A deferred tax asset is not recognised until its realisation is assured beyond reasonable doubt. (v) Borrowing costs Borrowing costs that are directly attributable to the acquisition, construction or production of assets that necessarily take a substantial period of time to be ready for their intended use or sale are capitalised as part of the assets. All other borrowing costs are recognised as an expense in the period in which they are incurred. 3. Segment information (a) Primary reporting format - business segments The Group is principally engaged in the production and sale of small and medium diesel engines and related products and operates in the PRC. (b) Secondary reporting format - geographical segments In 2002, over 90% of sales of the Group is generated from sales in the PRC. 4. Turnover Turnover represents the gross value of goods and services invoiced to customers, net of value-added tax, additional tax and allowances for discounts and returns. 5. Loss from ordinary activities 2002 2001 RMB’000 RMB’000 Loss from ordinary activities is stated after charging: Depreciation of property, plant and equipment and amortisation 56,143 68,319 30 Amortisation of land use rights 1,998 2,394 Provision for doubtful debts 411,942 139,754 Provision for inventory obsolescence 13,240 26,724 Provision for impairment of property, plant and equipment 34,375 25,537 Loss on disposals of property, plant, equipment and leasehold land 10,212 - Research and development expenses 1,621 1,521 Staff costs 132,877 140,202 and crediting: Gain on disposals of property, plant, equipment and leasehold land - 442 6. Finance costs 2002 2001 RMB’000 RMB’000 Interest expenses on bank loans 44,414 45,057 Cash discounts on receivables - 35,346 Interest income from bank deposits (3,440) (5,840) Cash discounts on payables - third parties (7,178) (10,296) - a related party - (34,210) Others 1,286 - 35,082 30,057 Net exchange loss 3 - 35,085 30,057 7. Taxation (a) Taxation in the consolidated income statement represents: 2002 2001 RMB’000 RMB’000 Current year taxation 27 1,746 Tax expenses adjustment in relation to prior year profits - 449 27 2,195 The Company is subject to an EIT rate of 33% on taxable income determined according to the PRC tax laws. As certified by jiangsu Science and Technology Commission, the Company has been granted a New and High Technology Enterprise. 31 With the approval from local tax authorities, some of the Company’s subsidiaries enjoy preferential EIT rates ranging from 0% to 15% on their taxable income. According to Circular Guofa [2000] No.2 issued on 11 January 2000, effective from 1 January 2001, the above tax benefits and financial refund would require approval from the State Council. There was no assurance that the above preferential tax treatment would be still available to the Company and its subsidiaries in the future. (b) Deferred taxation No provision for deferred taxation has been made in the financial statements as the directors are of opinion that the recognition of deferred tax assets arising on the temporary differences are uncertain. 8. Loss per share Loss per share is calculated based on the loss attributable to shareholders for the year of approximately RMB515,336,000 (2001 : RMB420,784,000) by the number of shares in issue during the year of 374,250,000 shares (2001 : 374,250,000 shares). 9. Leasehold land, property, plant and equipment Furniture, fixtures Land use Plant and Motor and rights Buildings machinery vehicles equipment Total R M B’ 0 0 0 R M B’ 0 0 0 R M B’ 0 0 0 R M B’ 000 R M B’ 0 0 0 R M B’ 0 0 0 Cost: At 1 January 2002 96,500 432,452 459,844 40,321 36,245 1,065,362 Additions 2,124 88,175 1,989 840 12,060 105,188 Transfer from construction in progress - 5,524 16,839 621 3,655 26,639 Disposals (4,234) (8,804) (28,676) (3,191) (696) ( 4 5 , 60 1 ) Other disposals (3,045) ( 1 9 , 5 3 3) ( 4 8 , 3 8 8) (7,347) (3,144) ( 8 1 , 4 5 7) At 31 December 2002 91,345 497,814 401,608 31,244 48,120 1,070,131 Accumulated depreciation: At 1 January 2002 12,107 82,117 220,350 25,309 17,395 357,278 Charge for the year 1,998 19,085 30,031 3,138 3,889 58,141 Written back on - Disposals (466) (2,910) (14,947) (2,501) (641) (21,465) - Other disposals (1,168) (2,375) ( 1 2 , 2 2 1) (4,051) ( 9 5 1) ( 2 0 , 7 6 6) At 31 December 2002 12,471 95,917 223,213 21,895 19,692 373,188 32 Impairment loss: At 1 January 2002 - - 9,537 - - 9,537 Additions - 29,270 5,105 - - 34, 3 7 5 At 31 December 2002 - 29,270 14,642 - - 43,912 Net book value: At 31 December 2002 78,874 3 7 2, 6 2 7 163,75 3 9,3 4 9 28, 4 28 65 3, 0 3 1 At 31 December 2001 84,393 350,335 229,957 15,012 18,850 698,547 As of December 31, 2002, the Group’s property, plant and equipment with an aggregate net book value of approximately RMB60,806,000 (2001: approximately RMB50,000,000) had been pledged as collateral for certain short-term bank loans (see Note 17). Other disposals represent assets of unconsolidated subsidiaries and assets of a subsidiary disposed of. 10. Construction in progress 2002 2001 RMB’000 RMB’000 Cost: At beginning of the year 129,029 129,862 Additions 26,449 39,886 Disposal of subsidiaries (4,373) (1,042) Other disposals (17,773) - Transfer to property, plant and equipment (26,639) (39,677) At end of the year 106,693 129,029 Provision for impairment loss: At beginning of the year 16,000 - Additions - 16,000 At end of the year 16,000 16,000 Net book value 90,693 113,029 11. Investments in associates 2002 2001 RMB’000 RMB’000 Share of net assets of associates 11,053 34,629 Loan to associates 55,642 43,040 66,695 77,669 33 11. Investments in associates (continued) The Group’s major associates were incorporated and are operating in the PRC, as follows: Percentage holding 2002 2001 Name of associates % % Nature of business Direct holding: Changzhou Fuji Changchai Robin 33 33 Manufacture and sale of gasoline Gasoline Engine Co., Ltd. engines and relevant components Beijing Tsinghua Xing Ye 25 25 Project investment, business Investment Management Co., administration consultng and Ltd. investment consulting Shenzhen Gamma Web System 34 34 Provision of internet service, Co., Ltd. (“Shenzhen Gamma”) development and sale of computer software and hardware Manufacture and sale of vehicles and Changchai Group Jiangnan 34.9 34.9 agricultural machinery Vehicle Co., Ltd. (“Jiangnan Vehicle”) Research of diagnostic technology, manufacture and Nanjing Yilai Genertic Medical 33 33 sale of genetic medicla Co., Ltd. (“Nanjing Yilai” ) equipment Indirect holding:- Manufacture and sale of vehicles and Changchai Group Jiangnan agricultural machinery Vehicle Co., Ltd. (“Jiangnan 5 5 Vehicle”) The names of the above associates were directly translated from Chinese and may not represent their legal names. 12. Other investments 2002 2001 RMB’000 RMB’000 Unlisted investments, at cost 102,687 101,392 Less : Provision (800) - 101,887 101,392 34 13. Short term investments 2002 2001 RMB’000 RMB’000 Unlisted investment, at cost 140,130 140,000 Less : Provision (140,000) (140,000) 130 - 14. Inventories 2002 2001 RMB’000 RMB’000 Raw materials 187,064 218,345 Work in progress 52,592 102,599 Finished goods 98,497 168,483 338,153 489,427 Less : Provision for inventory obsolescence (50,420) (37,180) 287,733 452,247 15. Due from CGC As of 31 December 2002, 40.92% (2001: 40.92%) of the Company’s share capital (the “State-owned shares”) was registered in the name of Changzhou State Assets Bureau (“CSAB”). Pursuant to documents issued by Changzhou Municipal Government and CSAB, Changchai Group Company Limited (“CGC”) is entitled to dividends derived from the Stated-owned shares. The Company’s management is of the view that CGC is able to exercise control over the Company. Breakdown of due from CGC is as follows: Note 2002 2001 RMB’000 RMB’000 Construction of Changchai Mansion (a) - 36,974 Receivables from CGC (b) 35,840 41,167 Consideration receivable from assets exchange scheme (c) - 79,142 Payables to CGC (20) (19,960) 35,820 137,323 (a) In August 1996, CSAB appointed the Company to construct Changchai Mansion, an office building, on behalf of CGC. The receivable balance was unsecured, interest free and had no fixed repayment terms. (b) RMB5,390,000 (2001: RMB5,870,000) bears interest at a rate of 6.72% (2001:6.72%) per annum. The remaining balance is unsecured, interest free and had no fixed repayments terms. 35 (c) Amounts receivable from CGC represented cash consideration receivable from CGC in connection with an asset exchange scheme with CGC effective 16 July 1999. They were unsecured and interest free. 16. Amounts due from/(to) associates and related companies The balances are unsecured, interest-free and have no fixed terms of repayment. 17. Borrowings 2002 2001 RMB’000 RMB’000 The bank loans are repayable as follows: Within one year 591,370 445,990 In the second year 60,000 248,500 In the third to fifth years inclusive - 45,000 651,370 739,490 Less : amount due within one year shown under current liabilities (591,370) (445,990) Amount due for settlement after one year 60,000 293,500 Secured 54,885 55,940 Unsecured 596,485 683,550 651,370 739,490 At 31 December 2002, the Group has pledged certain of its property, plant and equipment with a carrying amount of approximately RMB60,806,000 (2001: approximately RMB50,000,000) to secure bank loans granted to the Group. Interest rates for bank loans are charged in the range of 5.04% - 7.722% per annum (2001: 4.77% - 7.792% per annum). 18. Share capital 2002 2001 RMB’000 RMB’000 Registered, issued and fully paid shares of RMB 1 each Stated-owned shares 153,160 153,160 Legal person shares 10,064 10,064 A shares – PRC investors 111,026 111,026 274,250 274,250 36 B shares 100,000 100,000 374,250 374,250 The B Shares rank pari passu in all respects with the A Shares except that the A Shares can not be purchased or traded by foreign investors. 19. Reserves (a) Pursuant to the relevant PRC regulations and the Articles of Association of the Company, profit after taxation shall be appropriated in the following sequence: (i) make up accumulated losses. (ii) transfer 10% of the profit after tax to the statutory surplus reserve. When the balance of the statutory surplus reserve reaches 50% of the paid up share capital, such transfer needs not be made. (iii) transfer 5% to 10% of the profit after tax to the statutory public welfare fund. (iv) transfer such amount to the discretionary surplus reserve as approved by the shareholders in general meetings. (v) distribute dividends to shareholders. The amounts of transfer to the statutory surplus reserve and statutory public welfare fund shall be based on profit after tax in the statutory accounts prepared in accordance with PRC accounting standards and regulations. 19. Reserves (continued) (b) Statutory surplus reserve and discretionary surplus reserve According to the relevant PRC regulations, statutory surplus reserve and discretionary surplus reserve can be used to make up losses or to increase share capital. Except for the reduction of losses incurred, other usage should not result in the statutory surplus reserve falling below 25% of the registered capital. (c) Statutory public welfare fund According to the relevant PRC regulations, statutory public welfare fund is restricted to capital expenditure for employees’ collective welfare facilities. Staff welfare facilities are owned by the Group. The statutory public welfare fund is not normally available for distribution to shareholders except in liquidation. 37 (d) Profit distribution Pursuant to the relevant PRC regulations and the Articles of Association of the Company, profit distributable to shareholders shall be the lower of the amount determined in accordance with the PRC accounting standards as stated in the statutory financial statements and that adjusted in accordance with IAS. In the PRC statutory financial statements as at 31 December 2002, accumulated losses carried forward amounted to RMB477,557,000 (2001 : RMB Nil). 20. Reconciliation of operating profit to cash inflow generated from operations (a) Reconciliation of profit before tax to net cash inflow from operating activities 2002 2001 RMB’000 RMB’000 Operating loss before taxation (546,659) (467,064) Share of results of associates 3,018 40,052 Dividend income - (4,717) Interest income (3,440) (5,840) Interest expenses 44,414 45,057 Depreciation and amortisation 58,141 70,713 Gain on disposal of subsidiary (23,472) - Loss on disposal of associates 5,027 - Loss/(gain) on disposal of property, plant and equipment 10,212 (442) Provision for bad and doubtful debts 411,942 139,754 Provision for inventories 13,240 26,724 Loss of subsidiaries not consolidated 121 - Provision for impairment loss on property, plant and equipment and construction in progress 34,375 25,537 Construction in progress written off 2,766 Unrecognised investment losses - (7,864) Decrease in inventories 57,449 220,236 Decrease in due from CGC 21,427 57,646 Net (increase)/decrease in trade and other receivables, amounts due from related parties, VAT recoverable and prepayments (37,909) 150,055 Net increase/(decrease) in amounts due to related parties, notes and trade payables, tax payable, advances from customers, other payables and accruals 92,272 (114,637) Cash inflow generated from operations 142,924 175,210 38 20. Reconciliation of operating profit to cash inflow generated from operations (continued) (b) Non-cash items on financing and investing activities: (i) Disposal of subsidiary During the year, the Group disposed of its subsidiary Jiangsu Changchai United Harvest Machinery Co., Ltd. for a consideration of RMB10,000,000. The net assets of the subsidiary at the date of disposal were as follows: RMB’000 Property, plant and equipment 60,124 Construction in progress 4,373 Inventories 74,353 Trade and other receivables 63,924 Prepayments 3,547 Cash and cash equivalents 45,223 Tax recoverable 3,508 Borrowings (114,700) Notes and trade payables (123,384) Other payables, advances from customers and accruals (30,440) (13,472) Gain on disposal 23,472 Total consideration 10,000 Satisfied by: Cash 3,655 Deferred consideration 6,345 10,000 Net cash outflow arising on disposal: Cash consideration 3,655 Bank balances and cash disposed of (45,223) (41,568) (ii) During the year, the Group acquired property, plant and equipment of RMB100,036,000 from CGC to settle the receivables from CGC at the same amount. 39 21. Related party transactions (a) During the year, the Group entered into the following transactions with related parties which are not members of the Group: 2002 2001 RMB’000 RMB’000 Sale of goods to - associates - 10,217 - related companies controlled by CGC 90,441 121,453 Purchase of goods from related companies controlled by CGC 43,102 103,187 The above transactions were carried out at market price or, where no market price was available, at cost plus a percentage of profit mark-up. (b) On 28 March 2002, the Company signed an agreement with CGC to acquire the Changchai Mansion from CGC for a consideration of RMB100,036,000 to settle the receivables due from CGC. 22. Capital commitments As at 31 December 2002, the Group had commitments to purchase property, plant and equipment as follows: 2002 2001 RMB’000 RMB’000 Contracted but not provided for 8,342 8,800 23. Contingent liabilities As at 31 December 2002, the Group had outstanding guarantees in favour of banks for bank loans made to the following parties: 2002 2001 RMB’000 RMB’000 Related companies 181,560 182,360 Third parties 43,200 37,050 224,760 219,410 40 24. Pension schemes The Group participates in a defined contribution retirement scheme (the “Scheme”) arranged by the Shanghai Municipal Government. The Group is obligated to make an annual contribution based on 21% (2001: 21%) of the aggregate payroll. Total contributions made by the Group under the Scheme during the year amounted to RMB17,062,000 (2001 : RMB19,762,000). 25. Principal subsidiaries At 31 December 2002, the Company held shares in the following subsidiaries, all of which are unlisted and incorporated in the PRC:- Percentage holding 2002 2001 Name of subsidiaries % % Nature of business Changchai Wanxian Diesel Engines 60 60 Manufacture and sale of diesel Co., Ltd. engines Changchai Yinchuan Diesel Engines 60 60 Manufacture and sale of diesel Co., Ltd. engines Changzhou Changchai Benniu Diesel 75 75 Manufacture and sale of spare Engines Spare Parts Co., Ltd. parts for diesel engines 25. Principal subsidiaries (continued) Percentage holding 2002 2001 Name of subsidiaries % % Nature of business Jiangsu Changchai United Harvest - 60 Manufacture and sale of harvest Machinery Co., Ltd. machinery and spare parts Changchai Jin Tan Diesel Engines 71.28 71.28 Manufacture and sale of diesel Co., Ltd engines Changzhou Vehicle Co., Ltd. 50 50 Manufacture and sale of agricultural vehicles and spare parts Chengdu Changwan Diesel Engines 51 51 Sale of diesel engines Co., Ltd. * Chongqing Wanchou Changwan 96.67 96.67 Sales of diesel engines spare parts Diesel Engines Spare Parts Co., Ltd. * * The financial statements of these subsidiaries were excluded from the consolidated financial statements on the grounds that they ceased operations during the year and were immaterial to the Group. The investments in these subsidiaries under cost accounting are included in other investments. The names of the above companies were directly translated from Chinese and may not represent their legal names. 41 26. Financial assets and liabilities (a) Interest rate risk The interest rates of unsecured bank loans are shown in Note 17 to the financial statements. Other financial assets and liabilities do not have material interest rate risk. (b) Credit risk Trade receivables of the Group are spread among a number of customers in the PRC. Other than that, financial assets of the Group do not represent a concentration of risk. The carrying amount of financial assets best represents their maximum credit risk exposure at the balance sheet date. (c) Fair value The fair value of cash and bank balances, trade receivables, other receivables, amounts due from/to associated/related companies, trade payables and other payables are not materially different from their carrying amounts. Fair value of financial assets or financial liabilities have been determined by generally acceptable accounting principles and are subject to assumptions. Changes in valuation methods and assumptions may significantly affect the estimates. 27. Impact of IAS adjustments on loss after taxation and minority interests and shareholders’ equity The statutory accounts of the Group are prepared in accordance with PRC accounting regulations applicable to joint stock limited companies. These accounting principles differ in certain significant respects from IAS. The effects of these differences on the loss after taxation and minority interests for the year ended 31 December 2002 and shareholders’ funds at that date are summarised as follows: Loss after taxation and minority Shareholders’ interest funds RMB’000 RMB’000 As determined pursuant to PRC accounting regulations (477,477) 738,664 Net gain on disposal of subsidiary 20,236 10,000 Consolidation of unrecognised losses of subsidiaries (33,517) - Written off of property, plant and equipment (2,637) (2,637) 42 Written back of excess loss on minority interest (21,811) (21,811) Others (130) (132) As determined pursuant to IAS (515,336) 724,084 28. Comparative figures Construction in progress is separated from property, plant and equipment in the 2002 financial statements. Accordingly, comparative figures have been reclassified to conform to the current year’s presentation. 29. Language The English text of the financial statements is a translated version for the convenience of English readers and for reference only. The Chinese text of the financial statements will prevail over the English text. XI. CONTENTS OF DOCUMENTS FOR REFERENCE Documents including: 1.The original of 2002 Annual Report with the signature of Chairman of the Board. 2.The accounting statements with the signatures and seals of the person in charge of the Company, the person in charge of accounting affairs and the accounting organization.. 3.The original of Auditor’s Report with the seal of Certified Public Accountants, the signature and seal of certified public accountants. 4.The original of all documents and the manuscripts of public notices disclosed publicly on Securities Times and Ta Kung Pao designated by CSRC in the report period. 5.Articles of Association The aforesaid documents for reference are completely placed in the Secretariat of the Board The Annual Report is prepared respectively in Chinese and English. Should there be any difference in interpretation between the two versions, the Chinese version shall prevail. Board of Directors of Changchai Co., Ltd. Apr. 10, 2003 43