神城A退(000018)深中冠Ｂ2002年年度报告（英文版）

Stock Abbreviation: Victor Onward Stock code: 000018 200018 Announcement No.: 2003-012 深圳中冠纺织印染股份有限公司 Shenzhen Victor Onward Textile Industrial Co., Ltd. 2002 Annual Report 2003/04/04 Table of contents: Important Notes Section I. Basic Information Section II. Highlights of Accounting Data and Business Data Section III. Particulars about Changes of Share Capital and Shareholders Section IV. Directors, Supervisors, Senior Executives and Employees Section V Company Administration Structure Section VI. Brief Introduction of Shareholders' General Meeting Section VII Report of Board of Directors Section VIII Report of Supervisory Committee Section IX Important Events Section X Financial and Accounting Report Section XI. List of Documents Available for Inspection Important Notes The Board of Directors and the directors of the Company hereby warrant that there are no misstatement, misleading representation or important omissions in this report and shall assume joint and several liability for the authenticity, accuracy and completeness of the contents hereof. Director Mr. Hu Yongfeng did not attend this board meeting due to official business. Pricewaterhouse Coopers Zhongtian Certified Public Accountants issued standard unqualified auditors' report for the Company. Mr. Hu Yongfeng, the board chairman of the Company, Mr. Sun Zhiping, the general manger in charge of accounting, and Ms Wang Xihui, the person in charge of financial accounting organ, represent and warrant the financial report in this annual report is true and complete. Section 1 Brief Introduction of the Company I. Chinese Name of the Company: 深圳中冠纺织股份有限公司 English Name of the Company ： Shenzhen Victor Onward Textile Industrial Co., Ltd. II. Legal Representative: Hu Yongfeng III. Secretary to the Board of Directors : Chen Xing Contact address: Flat C, 10/F, Real Estate Building, Renmin Nan Road, Shenzhen Tel: (755)8232 0942, (852)2428 1823 Fax : (755) 8233 9100 (852) 2480 5666 E-mail：cx@chinaszvo.com IV. Registered address: Flat C, 10/F, Real Estate Building, Renmin Nan Road, Shenzhen City Business address: 18/F, China Resources Center, No.889, Changshawan Road, Kowloon, Hong Kong. Contact address: Flat C, 10/F, Real Estate Building, Renmin Nan Road, Shenzhen Zip Code: 518001 Website: http:/ www.chinaszvo.com E-mail：szvo@chinaszvo.com V. Press for information disclosure: Times Square and Hong Kong Commercial Daily Website for information disclosure: http://www.cninfo.com.cn The Place Where Company Documents are Prepared and Placed: Flat C, 10/F, Real Estate Building, Renmin Nan Road, Shenzhen City VI. Stock Exchange for Listing: Shenzhen Stock Exchange Stock abbreviation : Shen Victor Onward A Shares and B Shares Stock 1 Code : 000018 200018 VII. Other Relevant Information of the Company 1. The date and place when and where the Company made its first registration: The Company was first registered as Shenzhen Victor Onward Printing and Dyeing Co., Ltd. in Shenzhen in 1984. The Company changed its registration and was registered as Shenzhen Victor Onward Textile Industrial Co., Ltd. in Shenzhen in 1991. 2. Registration No. of Legal Entity Business License: 100625 3. Tax Registration No.: 440301618801483 4. Organization holding the unlisted shares in trust: Shenzhen Securities Registration Co. Ltd. 5. The name and business address of the Certified Public Accountants engaged by the Company Name: Pricewaterhouse Coopers Zhongtian Certified Public Accountants Address:37/F, Diwang Commercial Center, Xinxing Plaza, No. 5002, Shennan East Road, Shenzhen, China 6. The Law Firm Engaged by the Company: Guangdong Huashang Law Firm Section II. Highlights of Accounting Data and Business Data I. Main Profit Indicators of 2002 Unit: RMB'0000 Item Amount Total profit 193 Net profit 135 Net profit after deducting non-recurring gains and 137 losses Profit from key business 2021 Profit from other businesses 113 Operating profit 296 Investment income -101 Subsidy income 0 Net amount of non-operating income/expenditure -2 Net cash flows per share from operating activities 1599 Net increase of cash and cash equivalent 0.8 Note: Items of non-recurring gains and loss deducted and involved amount (RMB'0000) Items of non-operating income: Other income 13 Items of non-operating expenditure Expenditure from donation 14 Other expenditure 1 II. Highlights of accounting data and financial indicators in the latest three 2 years Unit: RMB'0000 Item 2002 2001 2000 Income from key 16174 14,880 16,376 business Net profit 135 84 506 Total assets 37645 38,886 43,773 Shareholders' 30826 30,692 30,717 equity Earnings per 0.008 0.005 元 0.03 share (RMB) Net assets per 1.825 1.815 元 1.816 share (RMB) Net assets per 1.814 1.80 元 1.80 share after adjustment (RMB) Net cash flow per 0.09 0.11 元 0.12 share from operating activities (RMB) Return on net 0.437% 0.274% 1.65% assets [Note 1: The net profit and net assets in the auditors' report issued pursuant to the Accounting System for Enterprise Adopting Share-holding System are RMB 1,347,864 and RMB 308,263,111 respectively. The net profit and net assets in the auditors' report issued pursuant to International Account Standard (IAS) are equivalent to RMB 1,898,106 and RMB 295,410,464. The reason for the difference between the net profits in domestic and international (audited) statements: Reconciliation statement of the difference of Net assets Net profit financial statements Balance in the statements prepared pursuant to 308,263,111 1,347,864 enterprise accounting system Adjustment made pursuant to international accounting standards: 1. Appraised appreciation of Hong Kong house (10,140,439) 485,202 property reversed pursuant to international accounting standards 2. Difference resulting from the disposal of (422,748) 65,040 long-term equity investment pursuant to international accounting standards 3. Others (2,289,660) - Balance after adjustment pursuant to international 295,410,264 1,898,106 3 accounting standards 2002 financial statements of the Company prepared pursuant to international accounting standards have been audited by Pricewaterhouse Coopers Zhongtian Certified Public Accountants Co., Ltd. [Note 2: The calculation formula for the main financial indicators is as follows: Earnings per share = Net profit / Total number of common shares at the end of the year Net asset per share = Shareholders' equity at the end of the year / Total number of common shares at the end of the year Net asset per share after adjustment = (Shareholders' equity at the end of the year - net amount of accounts receivable over 3 years - Deferred expenses- Net loss from (current / fixed) assets to be disposed -deferred assets) / Total number of common shares at the end of the year; Net cash flow per share from operating activities = Net cash flow from operating activities/total number of common shares at the end of the year; Return on net assets = Net profit / Shareholders' equity at end of year X 100% [Note 3: The above financial indicators and data are calculated based on 169,142,356 ordinary shares actually issued by the Company by the end of 2000, 2001 and 2002. III. Attached Schedule of Profit Statement: Earnings per share Return on net assets Profit in the (RMB) report period Fully Weighted Fully Weighted diluted average diluted average Profit from key 6.56% 6.57% 0.119 0.119 business Operating profit 0.96% 0.96% 0.017 0.017 Net profit 0.44% 0.44% 0.008 0.008 Net profit after deducting 0.44% 0.44% 0.008 0.008 non-recurring gains and losses IV. Particulars about Changes in Shareholders' Equity in the Report Period R MB Capital Surplus Statutory Currency Total Share Retained Item common common public welfare conversion shareholders' capital profit reserve reserve fund difference equity Balance at beginning of 169,142,356 29,722,897 52,891,633 3,620,299 3,847,900 51,310,462 306,915,248 the period Increase in this 202,180 67,394 1,145,684 1,347,864 period Decrease in 1 1 this period Balance at end 169,142,356 29,722,897 53,093,813 3,687,693 4,993,584 51,310,461 308,263,111 of the period Reason for change: 1) Surplus common reserve and statutory common reserve changed due to the appropriation of net profit at the proportion of 10% and 5% according to the provisions of the Articles of Association of the Company. 2) The retained profit changed because profit of RMB 1.15 million was transferred in after the allocation of the profit earned by the Company in 2002 for statutory common reserve fund and public welfare fund. 4 Section III. Particulars about Changes in Share Capital and Shareholders I. The changes in share capital Item Before this Increase or decrease this time (+/-) After this change change (Number at Bonus Capitalization Others Subtotal (Number at end of beginning of Share shares of common period) period) allotm reserve fund ent I. Non-negotiable shares 1. Promoter's shares 122,291,150 122,291,150 Of which: State-owned 55,031,022 55,031,022 shares Domestic corporate shares 24,458,231 24,458,231 Overseas corporate shares 42,801,897 42,801,897 Others 2. Raised corporate shares 3. Staff shares 0 0 4. Preferred shares or others Total non-negotiable shares 122,291,150 122,291,150 II. Negotiable shares 1. RMB common shares 20,231,200 20,231,200 2. Domestically listed 26,620,006 26,620,006 foreign-capital shares 2. Overseas listed foreign-capital shares 3. Others Total negotiable shares 46,851,206 46,851,206 III. Total shares 169,142,356 169,142,356 II. Introduction to shareholders 1. Total number of shareholders at the end of the period: At the end of 2002, the Company had 24,608 registered shareholders (legal person) in total including 16,903 shareholders (legal person) of A shares and 7,705 shareholders (legal persons) of B shares. 2. Particulars about the shareholding of the top ten shareholders at the end of report period Name of shareholders Number of shares Proportion ① Shenzhen Union Holdings Ltd. 47,359,859 28% ② Shenzhen Textile Holdings Ltd. 24,458,231 14.46% ③ Style-Success Ltd. 24,446,029 14.45% ④ Union Developing Group Co., Ltd. 7,671,163 4.54% ⑤ Rich Crown Investment (H.K.) Co., Ltd. 6,114,556 3.62% ⑥ Shing Ying Chieh 5,561,729 3.29% ⑦ Liu Liaoyuan 2,140,550 1.27% ⑧ Chen Song 333,100 0.20% ⑨ Huo Jinxia 278,500 0.16% ⑩ Wang Zhen 278,150 0.16% [Note 1: The controlling shareholder of the above-mentioned largest shareholder Shenzhen Union Holdings Ltd. and the fifth largest shareholder Hong Kong Rich 5 Crown Investment Co., Ltd. is Union Developing Group Ltd. [Note 2: Shenzhen Textile Holdings Co., Ltd., the second largest shareholder of the Company, pledged 12,229,115 shares accounting for 7.23% of 24,458,231 promoter's corporate shares to Shenzhen Shenfang Building Sub-branch of Merchant Bank to provide guarantee for the loan of RMB 20 million extended to it. The freezing period of the pledged shares started from December 20, 2002. III. Brief introduction to the legal person shareholders holding over 5% (inclusive) of the total shares 1. Shenzhen Union Holdings Ltd. Shares held: 47,359,859 shares, accounting for 28% of the total shares. Legal Representative: Ding Yue Date of establishment: June 17, 1994 Business scope: Production of and dealing in various fabrics, garments chemical fibers and textile equipment, domestic commerce, material supply and marketing (excluding monopolized commodities), management of self-owned properties, processing with imported materials and designs, internal introduction and foreign cooperation, assembling with imported spare parts and cooperation in compensation trade. Registered capital: RMB 359.555085 million Nature of enterprise: Share-holding system Registered address: Shenzhen 2. Shenzhen Textile Holdings Co., Ltd. No. of shares held: 24,458,229 shares, accounting for 14.46% of the total shares Legal Representative: Mr. Guang Tongke Date of establishment: August 1994 Business scope: Production and processing textiles, garments, decoration cloth, belts, trademark belt, bicycle, handicraft; purchase and sales of general goods, special-purpose textile equipment, accessories for textile equipment, meters, standard parts, leather products, textile raw materials, dyes, electronic products, grain, oil, foods; development and dealing of real estate, import and export business, holding exhibitions. Registered capital: RMB 163.416 million Nature of enterprise: Share-holding system Registered address: Shenzhen 3. Style-Success Ltd. Legal representative: Miss Amy Wang Business scope: investment Shares held: 24,458,029 shares, accounting for 14.46% of the total shares IV. Introduction to the controlling shareholder of the Company Shenzhen Union Holdings Ltd. holds 28% of the total share capital of the Company. Refer to the above III (1) for the information about the company. V. Introduction to other legal person shareholders holding over 10% of total shares Shenzhen Textile Holdings Co., Ltd. holds 14.46% of the total share capital of 6 the Company. Style - Success Ltd. holds 14.46% of the total share capital of the Company. Refer to the above III (2) and (3) for the information about them. Section IV. Directors, Supervisors, Senior Executives and Employees I. Basic information about directors, supervisors and senior executives Shares held at Term of Date of starting and Shares held at Name Sex Age Title beginning of office ending end of year year Hu Yongfen Male 39 Board chairman 3 years 2002.6-2003.5 0 0 g Li Deputy chairman of Male 45 3 years 2000.5-2003.5 0 0 Zhihua the Board Song Deputy chairman of Male 50 3 years 2002.6-2003.5 0 0 Tao the Board Ding Male 44 Director 3 years 2000.5-2003.5 0 0 Yue Guan Male 56 Director 3 years 2000.5-2003.5 0 0 Tongke Fan Lian Female 55 Director 3 years 2000.5-2003.5 0 0 Sun Director/general Male 37 3 years 2000.5-2003.5 0 0 Zhiping manager Jiang Independent Male 41 1 year 2002.6-2003.5 0 0 Jianming director Mai Independent Jianguan Male 42 1 year 2002.6-2003.5 0 0 director g Convener of the Dong Male 52 Supervisory 3 years 2000.5-2003.5 0 0 Binggen Committee Gui Male 44 Supervisor 3 years 2000.5-2003.5 0 0 Liping Cai Male 53 Supervisor 1 year 2002.6-2003.5 0 0 Wanqing Chen Male 60 Deputy GM 3 years 2000.5-2003.5 0 0 Jingqiu Ye Jianzhon Male 47 Deputy GM 1 year 2002.6-2003.5 0 0 g Su Male 57 Deputy GM 3 years 2002.6-2003.5 0 0 Tingfang Wang Female 49 Financial controller 1 year 2002.6-2003.5 0 0 Xihui Chen Male 30 Board secretary 1 year 2002.6-2003.5 0 0 Xing II. Particulars about directors and supervisors holding positions at corporate shareholders Whether receiving Name Name of shareholder Position Term of office remuneration or subsidy Dong Shenzhen Union Holdings Convener of the 3 years No Binggen Ltd. supervisory committee 7 Secretary of Party Dong Union Developing Group committee, chairman of 3 years Yes Binggen Ltd. board of directors and GM Union Developing Group Ding Yue Vice president 3 years Yes Ltd. Shenzhen Union Holdings Ding Yue Board chairman 3 years No Ltd. Hu Union Developing Group Vice president 3 years Yes Yongfeng Ltd. Hu Shenzhen Union Holdings Vice president 3 years No Yongfeng Co., Ltd. Guan Shenzhen Textile Holdings Board chairman 3 years Yes Tongke Ltd. Shenzhen Union Holdings Fan Lian General manager 3 years Yes Ltd. Chief accountant and Union Developing Group Gui Liping manager of Finance 3 years Yes Ltd. Dept. III. Annual remuneration of directors, supervisors and senior executives Total amount of annual 93.50 remuneration The total amount of the remuneration of the top three directors receiving the 24.00 remuneration of the highest amount The total amount of the remuneration of the top three senior executives receiving 61.00 the remuneration of the highest amount Subsidy of independent RMB 30,000 / person /year directors The traveling expenses of independent directors for attending board meetings and shareholders' general meetings and the expenses from Other benefits of independent exercising powers and functions according to the Articles of Association directors of the Company shall be borne by the Company and included in the administration expenses of the Company. Name of directors and supervisors not receiving Dong Binggen, Li Zhihua, Hu Yongfeng, Guang Tongke, Fang Lian, Ding remuneration and subsidy Yue and Gui Liping. from the Company Range of remuneration Number of person RMB 0.2 million - 0.29 1 million RMB 0.1 million - 0.19 4 million RMB 50,000 - 100,000 6 IV. Change in directors, supervisors and senior executives in the report period 8 On May 25, 2002, the board of directors of the Company decided to remove Mr. Song Tao from the office of general manager and engage Mr. Sun Zhiping as the general manager of the Company, remove Mr. Ren Yuanwei from the office of board secretary, deputy general manager and financial controller, engage Mr. Chen Xing as the board secretary of the Company, engage Ms Wang Xihui as the financial controller of the Company and engage Mr. Ye Jianzhong and Mr. Su Tingfang as deputy general managers of the Company. On June 26, 2002, the shareholders' general meeting of the Company decided to approval the resignation of Mr. Dong Binggen from the office of director and board chairman, Mr. Ding Yue's resignation from the office of supervisor and convener of the supervisory committee and Mr. Su Tingfang's resignation from the office of supervisor, appoint Mr. Ding Yue as director of the Company, Mr. Jiang Jianming and Mr. Mai Jianguang as independent directors of the Comnpany and Mr. Dong Binggen as a supervisor of the Company. Through the election of congress of workers and staff of the Company, the shareholders' general meeting appointed Mr. Cai Wanqing as a supervisor of the Company. On June 26, 2002, the board of directors of the Company decided to appoint Mr. Hu Yongfeng as the board chairman of the Company and Mr. Song Tao as the vice board chairman of the Company. On June 26, 2002, the supervisory committee of the Company decided to appoint Mr. Dong Binggen as the convener of the supervisory committee of the Company. V. Staff: By the end of the report period, the Company had 400 staff members in total, including 20 managerial employees, 350 production employees, 20 sales employees (including those of Hong Kong Co.), 8 financial employees, 36 professional technicians and 30 professionals with senior and semi-senior professional titles. The Company has provided social insurance to its staff according to relevant regulations of the government. Section V Company Administration Structure I. Particulars about company administration The Company has constantly improved its corporate administration structure, established modern enterprise system and standardized its operation strictly according to the requirements of the Company Law, Securities Law and relevant laws and regulations of CSRC. The Company conducted serious self inspection and fill in self inspection report according to the Notice of Inspecting the Establishment of Modern Enterprise System by Listed Companies issued by CSRC and State Economic and Trading Commission. After self inspection, the board of directors of the Company thought the actual conditions of company administration basically complied with the 9 requirements of the document issued by CSRC in respect of the standardization of the administration of listed companies. 1. Shareholders and shareholders' general meeting: The Company convened and held shareholders' general meeting strictly according to the requirements of Opinions on Standardization of Shareholders' General Meeting of Listed Companies, formulated Rules of Procedure of Shareholders' General Meeting, ensured all shareholders, especially medium and small shareholders, enjoy equal position and can fully exercise their own rights. 2. Relationship between the controlling shareholder and the Company: The acts of the controlling shareholder of the Company were standardized. It did not exceed the authority of the shareholders' general meeting to directly or indirectly intervene with the decision making and operating activities of the Company. The Company is independent from its controlling shareholder in respect of personnel, assets, finance, organ and business. The board of directors, the supervisory committee and internal organ of the Company are able to operate independently. 3. Directors and the board of directors: The Company elected directors strictly according to the director selection and appointment procedure specified in the Articles of Association of the Company and will further perfect director selection and appointment procedure and actively promote system of cumulative voting. The member composition of the board of directors of the Company complied with the requirements of laws and regulations. The board of directors of the Company formulated Rules of Procedure of the Board of Directors. Directors of the Company were able to attend board meetings and shareholders' general meetings with responsible attitude, actively participate in relevant training, get familiar with relevant laws and regulations and understand the rights, obligations and responsibilities of director. The Company has established independent director system according to Guiding Opinions on the Establishment of Independent Director System at Listed Companies issued by CSRC. The number of independent director is 2. 4. Supervisors and the supervisory committee: The number and composition of the Supervisory Committee of the Company complied with the requirements of laws and regulations. The Supervisory Committee of the Company formulated the Rules of Procedure of the Supervisory Committee. The supervisors of the Company were able to perform their duties seriously, take the attitude of being responsible for all shareholders and supervise the legality and regulation conformity of the Company's finance and the duty performance of the directors, managers and other senior executives of the Company. 5. Performance appraisal and stimulation and restriction mechanism: The Company established the system of subsidy for independent directors and directors and remuneration for senior executives. The Company will further 10 improve and perfect overall remuneration system, establish fair and transparent performance appraisal standard and stimulation and restriction mechanism for directors, supervisors and executives. 6. Interested parties: The Company was able to fully respect and safeguard the legal rights and interests of the interested parties including banks, other creditors, employees and consumers and promote its sustained and healthy development together with interested parties. 7. Information disclosure and transparency: The Company designated the secretary to the board of directors to be responsible for information disclosure, reception of shareholder and consultation. In the report period, the Company was able to truly, accurately, completely and timely disclose relevant information according to the provisions of laws, regulations and the Articles of Association of the Company. In the report period, the board of directors of the Company formulated Regulations on Information Disclosure, made information disclosure more routinized and standardized and ensured the quality of the Company's information disclosure. The Company will continue to operate in a standardized way strictly according to the requirements of relevant laws and regulations including the Company Law, further perfect company administration structure and establish and improve various systems according to the gap with the requirements of Standards of Administration of Listed Companies, ensure the maximization of shareholders' interests and safeguard the lawful rights and interests of all shareholders. II. Particulars about duty performance of independent directors The Company has perfected independent director system in the Articles of Association of the Company according to Guiding Opinions on the Establishment of Independent Director System at Listed Companies issued by CSRC. The board of directors of the Company now has two independent directors. These two independent directors have consciously performed their duties according to the principles of good faith and diligence since they came into office. They were able to attend board meetings of the Company in person, give full play to their own work experience and expertise and express their opinions during examining proposals and seriously perform their duties. They have played important role in ensuring the reasonableness of the Company's decisions and protecting the interests of shareholders. III. The separation of the Company from its controlling shareholder in five respects The Company is independent from its controlling shareholder in respect of personnel, assets, finance, organization and business. The particulars are as follows: 1. Business: The Company has complete business and the ability of independent operation. It is completely independent from its controlling shareholder in respect of business. 2. Personnel: The Company is independent in respect of labor, personnel 11 and wage management. The general manager and other senior executives of the Company all received remuneration from the Company, who neither held position at nor received remuneration from the controlling shareholder. 3. Assets: The Company has complete assets. Its property rights are definite and not related to its controlling shareholder and other shareholders. 4. Organization: The Company established an organizational structure that is completely independent of its controlling shareholder. The board of directors, the supervisory committee and internal organs of the Company are able to operate independently. 5. Finance: The Company has independent finance. It set up independent finance department and established independent financial accounting system. It has standardized and independent financial and accounting system and financial control system applicable to branches and subsidiaries. The Company independently pays taxes according to law. It opened accounts with banks independently. The Company and its controlling shareholder do not use the same bank account. IV. Appraisal and stimulation of the senior executives of the Company in the report period In the report period, the board of directors of the Company conducted annual appraisal of senior executives, gradually practiced public and competitive recruitment and enhanced the overall quality and management level of the management team. The board of directors of the Company is planning to establish remuneration and appraisal committees and will establish relevant incentive system as soon as possible and further improve performance appraisal standard and stimulation and restriction mechanism. Section VI. Brief Introduction of Shareholders' General Meeting In the report period, the Company held one Shareholders' General Meeting. The particulars are as follows: The board of directors of the Company published the notice of holding 2002 annual shareholders' general meeting on Securities Times and Hong Kong Commercial Daily on May 22, 2002. On June 26, 2002, 2001 annual shareholders' general meeting of the Company was held as scheduled. 5 shareholders and shareholders' representatives attended the meeting, representing 110,069,838 shares which account for 65.08% of the total share capital of the Company. 3 shareholders represented 79,489,253 A shares and 2 shareholders represented 30,580,585 B shares. The meeting complied with relevant provisions of the Company Law and the Articles of Association of the Company. The resolutions adopted by this shareholders' general meeting were legal and valid. The Shareholders' General Meeting examined and adopted the following proposals by voting: 1. 2001 Work Report of the Board of Directors of the Company; 12 2. Examining 2001 Work Report of the Supervisory Committee of the Company; 3. Examining 2001 Annual Report of the Company and its Summary; 4. Examining 2001 Profit Distribution Preplan and Policy for 2002 Profit Distribution 5. Examining the Proposal for Continuing to Engaging Guangdong Huashang Law Office. 6. Examining the Proposal for Engaging Chinese and international Certified Public Accountants and Authorizing the Board of Directors to Decide Their Remuneration 7. Examining the Rules of Procedure of Shareholders' General Meeting of the Company; 8. Examining the Proposal for Amending Part of Articles of the Articles of Association of the Company; 9. Examining Independent Director's Work System of the Company; 10. Examining the Proposal for Annual Salary and Expenses of Independent Directors; 11. Examining the Proposal for Nominating Candidates for Independent Directors of the Company; 12. Examining the Proposal for Changing Part of Directors; 13. Examining the Proposal for Changing Part of Directors; Guangdong Huashang Law Office accepted the entrustment of the Company and designated Lawyer Xin Huanping to attend and witness 2001 shareholders' general meeting of the Company and issue legal opinions on relevant issues including the convening, holding procedure, the qualification of attendees and the voting procedure of this meeting. The announcement of the resolutions of this meeting was published on Securities Times and Hong Kong Commercial Daily on June 27, 2002. Section VII Report of Board of Directors I. Business highlights (I) Scope of key business and its operation status 1. The Company is mainly engaged in the production and processing (printing and dyeing) and sales of various high-grade fabrics of pure cotton, pure linen, polyester-mixed cotton, linen cotton and mixed fiber and finished garments. Influenced by international political and economic situation, the competition of textile printing and dyeing market was unprecedentedly fierce in 2002. The Company took a series of measures in respect of production and operation, actively developed markets and strengthened management, technical renovation and innovation so as to overcome difficulties, stand trials and create the highest output and sales volume in recent years. 2. The income from key business earned by the Company in the report 13 period mainly includes the income from printing and dyeing businessIn the report period, the total income from key business and the net profit of the Company was RMB 161.74 million and RMB 1.35 million respectively, an increase of 8.69% and 60.20% over the same period of the previous year respectively. (1) Income from and cost of key business in terms of line of business are as follows: Unit: RMB'0000 Line of business Operating income Operating cost Operating gross profit Fabrics bleaching, 16,095 14,121 1,974 printing and dyeing Fabrics trade 79 32 47 (2) Income from and cost of key business in terms of areas are as follows: Unit: RMB'0000 Area Operating income Operating cost Operating gross profit Mainland China 729 620 109 Hong Kong China 15,445 13,533 1,912 (3) Items whose income account for over 10% of the income from key business The Company is mainly engaged printing and dyeing business in the report period. Its products are mainly printing and dyeing products. 3， The key business of the Company did not experience great change in the report period， The Company is mainly engaged printing and dyeing business and its products are mainly printing and dyeing products， 4. Main suppliers and customers The Company's main products are printing and dyeing products, including various pure cotton, pure linen, polyester-mixed cotton, linen-mixed cotton and blended high-grade fabrics. The raw materials for the production (grey fibre, dyeing chemicals and fuel) are mainly imported. The products are mainly exported to Hong Kong, Japan, Europe and America. Victor Onward Printing and Dyeing (Hong Kong) Limited, a wholly-owned subsidiary of the Company, is mainly responsible for supply of raw materials and sales of products. The total amount of purchase from the top five suppliers accounted for 23% of the Company's total annual purchase amount. The total amount of sales to the top five customers accounted for 39% of the Company's total annual sales amount. 5. Operation plan for the year 2003 In 2003, domestic and international market competition is still expected to be fierce. We will still be confronted with great challenge. We will continuously enhance the awareness of the market and cost, greatly carry on the spirit of collaboration and work respect and view the whole situation with the aforesaid awareness and spirit. We will go on focusing on the production, operation and technical renovation throughout the year and spare no effort to 14 fulfill the following tasks: 1. Make great efforts to develop overseas market and try every means to enlarge the quantity of orders. On the basis of consolidating the existing market and operation channels, make full use of the advantages of the Company's business model of operation in Hong Kong and production in Shenzhen, further give play to the leading role of the Hong Kong Company in respect of operation, actively widen operation channels and market space, try every means to ensure the constant increase of orders, specially first-hand orders. Meanwhile, seriously study the market development strategy of the printing and dyeing industry, seek the competition strategy and operation approaches suiting its own development, occupy the dominant position in future competition and provide reliable market guarantee for the development of the Company. 2. Deepen internal reform, enhance internal management and ensure the constant enhancement of product quality. Further deepen internal reform, gradually establish a set of management system and operation mechanism matching modern enterprise system modern market competition. Further reform and adjust the organizational structure and management mechanism of the Company, actually realize reasonable power centralization, orderly power decentralization, proper authorization and power exercise, clear work division and clarification of rights and responsibilities, reduce internal friction, overcome laziness, bring the employees' initiatives into full play, organically combine discipline against others with self discipline, encourage all staff to go all out and concentrate on developing market, try very means to improve product quality and effectively carry out production and operation. Attach further importance to the management of every aspect and every link of production and operation. (1) Organize production strictly according to orders and customers' requirements, improve technical direction and site management and ensure the constant enhancement of product quality. (2) Continue to strengthen assets management and cost control, especially, strengthen finance department's monitoring of the process of production and operation. Establish and improve the systems of material purchase, requisition, cost accounting and other relevant management systems, strengthen the price management in process of material purchase and acceptance inspection and quality inspection of the goods and lower production cost. (3) Strengthen the collection of accounts receivable. The sales department and financial department should establish basic files of customers, especially conduct classified management of customers based on their credit status and cooperate with the customers of different types in different ways. Establish and improve the responsibility system of trade receivable recovery, link salespersons' work performance with the recovery of trade receivables, ensure the recovery of the payments for the sold products and lower operation risks. (4) Strengthen the invigoration of stock. Operation departments should formulate practical plans to gradually 15 make good use of grey fabrics with long account age. 3. Further carry out technical renovation and technological innovation and try to realize industrial upgrading. It has been an urgent task to quicken technical renovation and realize industrial upgrading. In 2004, we will quicken the renovation of equipment, facilities and technologies. On the basis of further improving the existing technical renovation projects, make great efforts to complete the technical renovation of dyeing and printing equipment and improve the production level of the key business. Actively carry out technological innovation according to market change, enhance the Company's ability of innovation and new product development and increase the added value and competitiveness of its products. Make use of the Company's existing resources, strengthen asset reorganization and capital operation and gradually realize conglomerate operation and production intensification. On the basis of improving the ERP system, meet ISO9002 and ISO4000 management standards as soon as possible, promote production and protect environment. To sum up, the Company will take various effective measures to ensure the constant improvement of its economic results and attain the objective of industrial upgrading. (II) The operation and operating result of main share-held subsidiaries of the Company and the companies in which the Company has invested 1. Victor Onward Printing and Dyeing (Hong Kong) Co., Ltd. Victor Onward Printing and Dyeing (Hong Kong) Limited is a wholly-owned subsidiary of the Company. It was registered by the Company developing foreign market in 1984 in Hong Kong with registered capital of HK$ 5 million. The Company holds 100% of its shares. It is mainly engaged in supplying raw materials to the Company and marketing the Company's products. At present, the company owns commercial office building, warehouses and a full-size vehicle transportation fleet. It has total assets of about HK$ 15 million. It is the Company's marketing center, financial center and investment center in Hong Kong and abroad. 2. Shenzhen Nanhua Printing and Dyeing Co., Ltd. Shenzhen Nanhua Printing and Dyeing Co., Ltd. was established on July 21, 1988 with registered capital of HK$ 85.49 million. The Company holds 49.56% of its equities. It is mainly engaged in printing and dyeing of various garment fabrics. II. Investment of the Company in the report period (I) Utilization of raised funds in the report period The Company did not utilize raised funds in the report period. (II) Other investments In the report period，Victor Onward printing and dyeing (Hong Kong) Co., Ltd., a subsidiary of the Company, and Hong Kong A' TEX Co., Ltd. jointly invested in the project of digital polychromatic printing. The total 16 investment of the project is HKD 2 million. Victor Onward printing and dyeing (Hong Kong) Co., Ltd. contributed capital of HKD 1.5 million, holding 75% equity. Hong Kong A'TEX Co., Ltd. contributed capital of HKD 0.5 million, holding 25% equity. III. Financial position of the Company RMB Item December 31, 2002 December 31, 2001 Proportion of increase/Decrease (+/-) Total assets 376,445,241 388,860,327 -3.19% Shareholders' equity 308,263,111 306,915,248 0.44% Item 2002 2001 Proportion of increase/Decrease (+/-) Profit from key business 20,210,797 15,374,486 31.46% Net profit 1,347,864 841,358 60.20% Net increase of cash and cash 8,480 -33,117,291 100.03% equivalent Main reasons for change： Total assets decreased due to the decrease of liabilities in this year; Shareholders' equity increased due to the earning of profit in this year; Profit from key business increased by big margin due to the great growth of output and sales volume; Net profit increased due to the great growth of output and sales volume and effective cost control; Net increase of cash and cash equivalents increased due to the great growth of output and sales volume, quickened recovery of funds and decrease of repaid liabilities. IV. Influence of the changes in production and operation environment and macro policies on the Company The changes in production and operation environment, macro policies, laws and regulations did not have material influence on the Company. V. Routine Work of the Board of Directors (I) Board meetings and resolutions in the report period 1. The 3rd meeting of the third board of directors of the Company was held at the meeting room on 16/F of Shenzhen Union Building in the afternoon of March 20, 2002. The meeting examined and adopted as follows resolutions through voting: (1) 2001 Work Report of the Company (2) The Auditor's Report issued by Andersen Huaqiang Certified Public Accountants for A shares and B shares of the Company (3) 2001 Profit Distribution Preplan and 2002 Profit Distribution Policy of the Company (4) 2001 Annual Report and 2001 Annual Report (Summary) of the Company. The meeting decided to publish them on Securities Times and 17 Hong Kong Commercial Daily on March 23, 2001. (5) The Resolution for Cooperative Development of Digital Polychromatic Printing Project by Victor Onward (Hong Kong) Printing and Dyeing Co., Ltd. and Hong Kong A TEX Co., Ltd. (6) The Resolution for Implementing ISO9000 Quality Assurance System and ISO14000 Environmental Management System (7) The Resolution for 2002 Technical Renovation Project (8) The Resolution for Amending Part of Articles of the Articles of Association of the Company (Refer to the appendix) (9) Rules of Procedure of Shareholders' General Meeting of the Company (10) Rules of Procedure of the Board of Directors of the Company (11) Regulations on Information Disclosure of Listed Companies (12) The time, venue and items on agenda of 2001 annual shareholders' general meeting will be separately announced. The announcement of the resolutions of this meeting was published on Securities Times and Hong Kong Commercial Daily on March 23, 2002. 2. The 7th meeting of the third board of directors of the Company was held at the meeting room on 16/F of Shenzhen Union Building in the morning of April 17, 2002. The meeting examined and voted through the quarterly report of the Company for the first quarter of 2002. The announcement of the resolution of this meeting was published on Securities Times and Hong Kong Commercial Daily on April 20, 2002. 3. The 8th meeting of the third board of directors of the Company was held at the meeting room on 16/F of Shenzhen Union Building in the morning of May 22, 2002. The meeting examined and adopted the following resolutions through voting: (1) Change of the board chairman of the Company (2) Revision of the Resolution for Amending Part of Articles of the Articles of Association of the Company made by the 6th meeting of the third board of directors (3） Independent Director's Work System of the Company; (4) Nomination of candidates for independent directors of the Company; (5) Annual salary and expenses of independent directors; (6) Adjustment of the management of the Company; (7) Reappointment of the board secretary and financial controller of the Company; (8) Renewed engagement of Guangdong Huashang Law Office; (9) Engaging Chinese and international Certified Public Accountants and deciding their remuneration; (10) Change of part of directors; (11) Holding 2001 annual shareholders' general meeting. The announcement of the resolutions of this meeting was published on Securities Times and Hong Kong Commercial Daily on May 25, 2002. 18 4. The 9th meeting of the third board of directors of the Company was held at the meeting room on 16/F of Shenzhen Union Building in the morning of June 22, 2002. The meeting examined and voted through Self Inspection Report on Establishment Of Modern Enterprise System; 5. The 10th meeting of the third board of directors of the Company was held at the meeting room on 16/F of Shenzhen Union Building in the morning of August 7, 2002. The meeting examined and adopted the following resolutions through voting: (1) 2002 Semiannual Report and Summary of 2002 Semiannual Report of the Company; (2) 2002 semi-annual profit distribution plan: The Company is neither to distribute profit for the first half year nor capitalize common reserve fund. The announcement of the resolutions of this meeting was published on Securities Times and Hong Kong Commercial Daily on August 10, 2002. 6. The 11th meeting of the third board of directors of the Company was held at the meeting room on 16/F of Shenzhen Union Building in the morning of October 23, 2002. The meeting examined and voted through the Quarterly Report of the Company for the third quarter of 2002. The announcement of the resolution of this meeting was published on Securities Times and Hong Kong Commercial Daily on October 26, 2002. (II) Implementation by the board of directors of the resolutions of the shareholders' general meeting The board of directors of the Company strictly implemented the resolutions of shareholders' general meeting and accepted the supervision of the supervisory committee of the Company in the report year. 2001 annual shareholders' general meeting of the Company examined and adopted the proposal for 2001 profit distribution of the Company: The Company is neither to distribute dividends for the year 2001 nor capitalize common reserve fund. VI. 2002 profit distribution preplan As audited by Pricewaterhouse Coopers Zhongtian Certified Public Accountants, the total profit and after-tax net profit of the Company for the year 2002 were RMB 1,925,541 and RMB 1,347,864 respectively. 10% of the after-tax profit, i.e., RMB 1,36,784, and 5% thereof, i.e., RMB 67,394, are to be set aside as statutory surplus common reserve fund and statutory public welfare fund respectively. The year-end distributable profit is RMB 1,145,684. With the retained profit of RMB 3,847,900 for the year 2001 being added, the total distributable profit is RMB 4,993,584. As the Company will demand large amount of funds for investment and equipment renovation in the future, it decided neither to distribute the profit for the year 2002 nor capitalize common reserve fund. Section VIII Report of Supervisory Committee In 2002, the supervisory committee of the Company did its duties and 19 actively carry out its work with the attitude of being responsible to all shareholders according to the provisions of the Company Law, relevant laws and regulations and the Articles of Association of the Company. I. Work of the Supervisory Committee In the report period, the supervisory committee of the Company legally exercised its function of supervision according to the Company Law, the Articles of Association of the Company and other laws and regulations. The supervisors attended the first provisional shareholders' general meeting in 2002, 2001 annual shareholders' general meeting and all board meetings of the Company held in the report period as nonvoting delegates and the supervisory committee held six meetings: 1. The 6th meeting of the third supervisory committee of the Company was held at the meeting room on 16/F of Shenzhen Union Building in the morning of March 20, 2002. The meeting examined and adopted the following resolutions through voting: (1) 2001 Work Report and Annual Report (Summary) of the Company (2) The Auditor's Report issued by Andersen Huaqiang Certified Public Accountants for A shares and B shares of the Company (3) 2001 Profit Distribution Preplan and 2002 Profit Distribution Policy of the Company (4) 2001 Annual Report of the Company (5) The Resolution for Cooperative Development of Digital Polychromatic Printing Project by Victor Onward (Hong Kong) Printing and Dyeing Co., Ltd. and Hong Kong A TEX Co., Ltd. (6) The Resolution for Implementing ISO9000 Quality Assurance System and ISO14000 Environmental Management System (7) The Resolution for 2002 Technical Renovation Project (8) The Resolution for Amending Part of Articles of the Articles of Association of the Company (9) Rules of Procedure of Shareholders' General Meeting of the Company (10) Rules of Procedure of the Supervisory Committee of the Company (11) Regulations on Information Disclosure of Listed Companies The announcement of the resolutions of this meeting was published on Securities Times and Hong Kong Commercial Daily on March 23, 2002. 2. The 7th meeting of the third supervisory committee of the Company was held at the meeting room on 16/F of Shenzhen Union Building in the morning of April 17, 2002. The meeting examined and voted through the quarterly report of the Company for the first quarter of 2002. The announcement of the resolution of this meeting was published on Securities Times and Hong Kong Commercial Daily on April 20, 2002. 3. The 8th meeting of the third supervisory committee of the Company was held at the meeting room on 16/F of Shenzhen Union Building in the 20 morning of May 22, 2002. The meeting examined and voted through the proposal for the change of part of supervisors. The announcement of the resolution of this meeting was published on Securities Times and Hong Kong Commercial Daily on May 25, 2002. 4. The 9th meeting of the third supervisory committee of the Company was held at the meeting room on 16/F of Shenzhen Union Building in the morning of June 26, 2002. The meeting unanimously elected Mr. Dong Binggen as the convenor of the supervisory committee of the Company through voting. The announcement of the resolution of this meeting was published on Securities Times and Hong Kong Commercial Daily on June 27, 2002. 5. The 10th meeting of the third supervisory committee of the Company was held at the meeting room on 16/F of Shenzhen Union Building in the morning of August 7, 2002. The meeting examined and adopted the following resolutions through voting: (1) 2002 Semiannual Report and Summary of 2002 Semiannual Report of the Company (2) 2002 semi-annual profit distribution plan of the Company The announcement of the resolutions of this meeting was published on Securities Times and Hong Kong Commercial Daily on August 10, 2002. 6. The 11th meeting of the third supervisory committee of the Company was held at the meeting room on 16/F of Shenzhen Union Building in the morning of October 23, 2002. The meeting examined and voted through the Quarterly Report of the Company for the third quarter of 2002. The announcement of the resolution of this meeting was published on Securities Times and Hong Kong Commercial Daily on October 26, 2002. II. In the report period，the supervisory committee seriously performed its duties and expressed independent opinions in respect of the following matters: 1. The operation of the Company according to law In the report period, the Company operated strictly according to Company Law, Securities law and the Articles of Association of the Company and other relevant laws and regulations. The Company's procedure of decision was legal and its internal control system was sound. The directors and managers of the Company all did their duties during their work and none of their "acts were found to violate the laws, regulations and the Articles of Association or harm the Company's interests. 2. The financial status of the Company. The Supervisory Committee carefully checked and examined the financial data of the Company including 2002 financial report audited by Pricewaterhouse Coopers Zhongtian Certified Public Accountants and held the opinion that its financial status was good and its financial structure was reasonable in 2002. 2002 unqualified auditors' report issued by Pricewaterhouse Coopers Zhongtian Certified Public Accountants for the Company was true and truly reflected the financial status and operating results of the Company. 21 3. The Company did not raise funds in the report period. The funds last raised after listing were invested in such projects as promised in Prospectus. 4. Neither insider trading nor act that caused harm to the rights and interests of part of shareholders or the loss of the Company's assets was found in respect of the transaction price of the assets purchased or sold by the Company. 5. The related transactions between the Company and associated enterprises (companies) were conducted in a fair manner and at market prices. 6. The certified public accountants issued unqualified Auditor's Report for the year 2002. Section IX Important Events I. The Company was not involved in any material lawsuits and arbitration in the report period. II. The Company was not involved in any material acquisition and disposal of assets, takeover and merger and material related transaction in the report period. III. Changes in the controlling shareholder, board of directors, general manager and board secretary of the Company in the report period. 1. The Company's controlling shareholder did not change in the report period. 2. On June 26, 2002, shareholders' general meeting of the Company decided to approve the resignation of Mr. Dong Binggen from the office of director and board chairman and appoint Mr. Ding Yue as director of the Company and Mr. Jiang Jianming and Mr. Mai Jianguang as independent directors of the Company. 3. On June 26, 2002, the board of directors of the Company decided to appoint Mr. Hu Yongfeng as the board chairman of the Company and Mr. Song Tao as the vice board chairman of the Company. 4. On May 25, 2002, the board of directors of the Company decided to remove Mr. Song Tao from the office of general manager and engage Mr. Sun Zhiping as the general manager of the Company, remove Mr. Ren Yuanwei from the office of board secretary and engage Mr. Chen Xing as the board secretary of the Company. IV. Important related transactions (1) Sales of goods Name of related party 2002 2001 Huaguanli 37,014 130,354 Nanhua Printing and Dyeing - 973,862 37,014 1,104,216 (2) Income from fund possession cost 22 Name of related party 2002 2001 Lianchang Printing and - 1,132,129 Dyeing (3) Purchase of equity capital of Nanhua Printing and Dyeing Name of related party 2002 2001 Union Developing * - 14,359,409 * The Company acquired 36.54% equity of Nanhua Printing and Dyeing from Union Developing Group Co., Ltd. at the price of RMB 14, 359,409. V. The Company did not hold in trust or contract for or lease the assets of other companies nor did other companies hold in trust, contract for or lease the assets of the Company in the report period. VI. Appointment and removal of certified public accountants As Andersen Co. has officially signed the agreement for the consolidation of the business in mainland China and Hong Kong with Pricewaterhouse, its business in mainland China will be carried out by Pricewaterhouse Coopers Zhongtian Certified Public Accountants. Therefore, the Company and Pricewaterhouse Coopers Zhongtian Certified Public Accountants signed engagement agreement. In the report period, the Company paid remuneration of HKD 0.4 million to the certified public accountants. VII. The performance of the commitments of the Company or shareholders holding over 5% equity of the Company in the report period. Commitments of the Company in respect of operating lease According to the signed irrevocable contract for operating lease, the lowest rent to be paid in the future is as follows: December 31, 2002 December 31, 2001 Within 1 year 23,771 279,902 1-2 years - 279,902 2-3 years - 102,961 23,771 662,765 The said reduction of the commitment of operating lease is due to the Company's early termination of the tenancy contract for the warehouse in Hong Kong in 2002. 23 VIII. Other material contracts and external guarantee of the Company in the report period. 1. Important loan contract: 1 2 Short-term loan December 31, 2002 December 31, 2001 Loan secured * 20,000,000 20,000,000 Credit loan 22,918,000 21,224,000 42,918,000 41,224,000 * Union Developing provided guarantee for all loans. The annual interest rate of the above short-term loan ranges between 3.2% to 5.6% in the report year (2001: 3.6% - 5.6%). １、 External guarantee: Amount: HKD December 31, 2002 December 31, 2001 Guarantee for the bank loan 8,000,000 14,000,000 to Nanhua Printing and Dyeing IX. The Company and its directors, supervisors and senior executives were not investigated by CSRC, administratively punished or publicly criticized by CSRC or publicly condemned by stock exchange. X. The Company did not change its name or the abbreviation of the stock name in the report period. XI. Other important events Nil. Section X Financial and Accounting Report I. Auditor's Report II. Financial statements III. Notes to the financial statements Section XI. List of Documents Available for Inspection 1. The original of the annual report bearing the signature of the legal representative of the Company; 2. The financial report bearing the signature of the person in charge and financial controller of the Company. 3. The original of the auditors' report bearing the seal of Pricewaterhouse Coopers Zhongtian Certified Public Accountants and the seal and signature of 24 C.P.A. 4. The original of all the Company's documents and the original manuscripts of announcements publicly disclosed on the newspapers designated by China Securities Regulatory Commission in the report period. 5. The Articles of Association of the Company. Board of Directors of Shenzhen Victor Onward Textile Industrial Co., Ltd. April 4, 2003 25 VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2002 TOGETHER WITH AUDITORS’ REPORT 26 VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED Contents Page Auditors’ report 1 Consolidated income statement 2 Consolidated balance sheet 3 Consolidated statement of changes in shareholders’ equity 4 Consolidated cash flow statement 5 Notes to the consolidated financial statements 6 to 28 Supplementary information 29 27 Mailing address: 37th Floor, Shun Hing Square Di Wang Commercial Centre 5002 Shennan Dong Lu Shenzhen 518008 People's Republic of China Telephone +86 (755) 8246 1717 Facsimile +86 (755) 8246 1730 AUDITORS’ REPORT TO THE SHAREHOLDERS OF VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED (Incorporated as a joint stock limited company in the People’s Republic of China) We have audited the accompanying consolidated balance sheet of Victor Onward Textile Industrial Company Limited (the “Company”) and its subsidiaries (the “Group”) as of 31 December 2002 and the related consolidated income and cash flow statements for the year then ended. These consolidated financial statements set out on page 2 to 28 are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as of 31 December 2002 and of the consolidated results of its operations and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards. PricewaterhouseCoopers 4 April 2003 28 VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2002 Notes 2002 2001 HKD’000 HKD’000 Sales 4 152,411 139,978 Cost of sales (133,366) (125,514) Gross profit 19,045 14,464 Other operating income 2,681 2,445 Distribution costs (6,033) (6,462) Administrative expenses (9,741) (6,414) Other operating expenses (1,249) (1,273) Profit from operations 5 4,703 2,760 Finance costs – net 7 (1,457) (965) Share of results of associates before tax 160 70 Other income/(expenses), net (923) 328 Profit before tax 2,483 2,193 Income tax expense 8 (826) (394) Group profit before minority interest 1,657 1,799 Minority interest 24 131 - Net profit 1,788 1,799 Earnings per share (expressed in Hong Kong dollar per share) – basic and diluted 9 0.01 0.01 The accompanying notes form an integral part of this consolidated financial statement. -2- VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED CONSOLIDATED BALANCE SHEET AS OF 31 DECEMBER 2002 Notes 2002 2001 HKD’000 HKD’000 ASSETS Non-current assets Property, plant and equipment 11 110,488 112,904 Investment properties 12 27,636 28,850 Investments in associates 13 29,104 29,130 Available-for-sale investments 14 29,859 30,009 197,087 200,893 Current assets Inventories 15 58,589 62,060 Receivables and prepayments 16 60,951 60,354 Due from related parties 27 1,904 3,597 Trading investments 17 2,382 3,118 Cash and cash equivalents 18 36,086 33,078 159,912 162,207 Total assets 356,999 363,100 Shareholders’ equity Share capital 21 207,871 207,871 Reserves 25 50,899 50,709 Retained earnings 19,603 18,005 278,373 276,585 Minority interest 24 369 - LIABILITIES Non-current liabilities Long-term borrowings 20 - 6,553 Due to original shareholders 1 14,754 14,754 14,754 21,307 Current liabilities Trade and other payables 19 21,291 24,008 Current tax liabilities 1,769 1,300 Short-term borrowings 20 40,443 39,900 63,503 65,208 Total liabilities 78,257 86,515 Total equity and liabilities 356,999 363,100 The accompanying notes form an integral part of this consolidated financial statement. -3- VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEAR ENDED 31 DECEMBER 2002 Reserves Share Other Retained Share capital premium reserves earnings Total HKD’000 HKD’000 HKD’000 HKD’000 HKD’000 (Note 25) Balances at 1 January 2001 207,871 11,826 38,764 16,325 274,786 Net profit for the year - - - 1,799 1,799 Transfer to statutory reserves - - 119 (119) - Balances at 31 December 2001 207,871 11,826 38,883 18,005 276,585 Balances at 1 January 2002 207,871 11,826 38,883 18,005 276,585 Net profit for the year - - - 1,788 1,788 Transfer to statutory reserves - - 190 (190) - Balances at 31 December 2002 207,871 11,826 39,073 19,603 278,373 The accompanying notes form an integral part of this consolidated financial statement. -4- VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2002 Notes 2002 2001 HKD’000 HKD’000 Cash flows from operating activities Cash generated from operations 26 15,437 5,382 Interest paid (1,896) (3,220) Tax paid (355) (383) Net cash from operating activities 13,186 1,779 Cash flows from investing activities Purchase of property, plant and equipment (5,351) (9,026) Acquisition of investments - (16,835) Proceeds from disposal of investments - 25,993 Interest received 685 1,409 Net cash (used in)/from investing activities (4,666) 1,541 Cash flows from financing activities Proceeds from borrowings 47,982 38,847 Repayments of borrowings (53,994) (73,375) (Decrease)/increase of pledge bank deposits (3,000) 19,392 Injection from a minority shareholder 500 - Net cash used in financing activities (8,512) (15,136) Net increase/(decrease) in cash and cash equivalents 8 (11,816) Cash and cash equivalents at beginning of year 30,078 41,894 Cash and cash equivalents at end of year 18 30,086 30,078 The accompanying notes form an integral part of this consolidated financial statement. -5- VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2002 1 General Victor Onward Textile Industrial Company Limited (the “Company”) was established as a joint stock limited company in the People’s Republic of China (the “PRC”) in 1991 subsequent to a reorganization to rationalize the Company’s structure in preparation for the listing of its shares. Its domestically listed Rmb ordinary shares (“A Shares”) and domestically listed foreign investment shares (“B Shares”) have been listed on the Shenzhen Stock Exchange since 1992. The predecessor of the Company was Victor Onward Printing & Dyeing Company Limited (“VOPDCL”), which was a Sino-foreign equity joint venture enterprise registered in the PRC. VOPDCL was established on 26 March 1984. On 19 November 1991, the Shenzhen Municipal Government approved the reorganization of VOPDCL into a joint stock limited company and the change of its name to the Company’s present name. The Company together with its subsidiaries are hereinafter collectively referred to as the “Group”. Upon the reorganization of the Company, the People’s Bank of China specifically approved that any future revaluation surplus arising from subsequent revaluation of the properties of Victor Onward Printing & Dyeing (Hong Kong) Company Limited (“VO(HK)”), a wholly-owned subsidiary of the Company, would be attributable to the original shareholders of the Company. Such properties were revalued as of 31 January 1992, resulted in a revaluation surplus of approximately HKD14,754,000 and was recorded as amount due to original shareholders. The shareholders in concern have agreed not to call for immediate repayment of the surplus, which would be offset against payment for any future subscription of shares by them. The Group is principally engaged in the bleaching, dyeing, printing and finishing of woven fabrics. The address of the Company’s registered office is as follows: Flat C, 10/F, Real Estate Building Renmin Road, S. Shenzhen, China 2 Accounting policies The principal accounting policies adopted in the preparation of these consolidated financial statements -6- VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2002 of the Group are set out below: (a) Basis of preparation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), which includes International Accounting Standards and Interpretations issued by the International Accounting Standards Board. The consolidated financial statements have been prepared under the historical cost convention as modified by the revaluation of available-for-sale investment securities and financial assets and liabilities held-for-trading. This basis of accounting differs from that used in the management accounts of the Company and its main subsidiaries which were prepared in accordance with generally accepted accounting principles and relevant financial regulations applicable to enterprises in the PRC (“PRC GAAP”). Appropriate adjustments have been made to these consolidated financial statements to conform with IFRS, but such adjustments are not incorporated in the Group’s statutory financial statements. -7- VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2002 2 Accounting policies (Cont’d) (a) Basis of preparation (cont’d) The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge of current event and actions, actual results ultimately may differ from those estimates. (b) Group accounting (1) Subsidiaries Subsidiaries, which are those entities in which the Group has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies are consolidated. The existence and effect of potential voting rights that are presently exercisable or presently convertible are considered when assessing whether the Group controls another entity. Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given up, shares issued or liabilities undertaken at the date of acquisition plus costs directly attributable to the acquisition. The excess of the cost of acquisition over the fair value of the net assets of the subsidiary acquired is recorded as goodwill. See note 2 (h) for the accounting policy on goodwill. Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are also eliminated unless cost cannot be recovered. Where necessary, accounting policies of subsidiaries have been changed to ensure consistency with the policies adopted by the Group. (2) Associates Investments in associates are accounted for by the equity method of accounting. Under this method the Company’s share of the post-acquisition profits or losses of associates is recognised in the income statement and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the cost of the investment. Associates are entities over which the Group generally has between 20% and 50% of the voting rights, or over which the Group has significant influence, but which it does not control. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. The Group’s investment in associates includes -8- VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2002 goodwill (net of accumulated amortisation) on acquisition. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, the Group does not to recognise further losses, unless the Group has incurred obligations or made payments on behalf of the associates. -9- VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2002 2 Accounting policies (Cont’d) (c) Foreign currency translation (1) Measurement currency Items included in the financial statements of each entity in the Group are measured using the currency that best reflects the economic substance of the underlying events and circumstances relevant to that entity (“the measurement currency”). The consolidated financial statements are presented in Hong Kong dollars, which is the measurement currency of the Company. (2) Transactions and balances Foreign currency transactions are translated into the measurement currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies, are recognised in the income statement. Translation differences on debt securities and other monetary financial assets measured at fair value are included in foreign exchange gains and losses. Translation differences on non-monetary items are reported as part of the fair value gain or loss. (d) Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation and accumulated impairment loss. Depreciation is calculated on the straight-line method to write off the cost of each asset to their residual values (which are estimated at 10% of cost) over their estimated useful lives as follows: Buildings in Hong Kong 20-50 years Buildings in the PRC 20-30 years Plant and machinery 5-14 years Motor vehicles 4-5 years Furniture, fixtures and office equipment 5 years Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Gains and losses on disposals are determined by comparing proceeds with carrying amount and are included in operating profit. When revalued assets are sold, the amounts included in fair value and other reserves are transferred to retained earnings. - 10 - VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2002 2 Accounting policies (Cont’d) (d) Property, plant and equipment (cont’d) Interest costs on borrowings to finance the construction of property, plant and equipment are capitalised during the period of time that is required to complete and prepare the asset for its intended use. Other borrowing costs are expensed. Repairs and maintenance are charged to the income statement during the financial period in which they are incurred. The cost of major renovations is included in the carrying amount of the asset when it is probable that future economic benefits in excess of the originally assessed standard of performance of the existing asset will flow to the Group. Major renovations are depreciated over the remaining useful life of the related asset. Construction-in-progress represents equipment under installation or testing. Construction in progress is stated at cost which includes all expenditure and other direct costs, prepayments and deposits attributable to the installation and interest charges arising from borrowings used to finance the installation during the installation period. Depreciation is not provided on construction-in-progress until the related asset is completed for intended use and transferred to property, plant and equipment. (e) Investment property Investment property, principally comprising office buildings, is held for long-term rental yields and is not occupied by the Group. Investment property is recorded at cost less accumulated depreciation less impairment loss. Depreciation is calculated on the straight-line method to write off the cost of investment property to their residual values over their estimated useful life. Where the carrying amount of investment property is greater than its fair value, it is written down to its recoverable amount. The fair value of investment property is determined by the discounted cash flow method based on the reasonable anticipative investment return rate. (f) Impairment of long lived assets Property, plant and equipment and other non-current assets, including prepaid lease, goodwill and intangible assets are reviewed for impairment losses whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount of the asset exceeds its recoverable amount which is the higher of an asset’s net selling price and value in use. For the purposes of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash flows. - 11 - VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2002 2 Accounting policies (Cont’d) (g) Investments The Group classified its investments in debt and equity securities into the following categories: trading, held-to-maturity and available-for-sale. The classification is dependent on the purpose for which the investments were acquired. Management determines the classification of its investments at the time of the purchase and re-evaluates such designation on a regular basis. Investments that are acquired principally for the purpose of generating a profit from short-term fluctuations in price are classified as trading investments and included in current assets; for the purpose of these financial statements short term is defined as 3 months. Investments with a fixed maturity that management has the intent and ability to hold to maturity are classified as held-to-maturity and are included in non-current assets, except for maturities within 12 months from the balance sheet date which are classified as current assets; during the period the Group did not hold any investments in this category. Investments intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, are classified as available-for-sale; and are included in non-current assets unless management has the express intention of holding the investment for less than 12 months from the balance sheet date or unless they will need to be sold to raise operating capital, in which case they are included in current assets. Purchases and sales of investments are recognised on the trade date, which is the date that the Group commits to purchase or sell the asset. Cost of purchase includes transaction costs. Trading and available-for-sale investments are subsequently carried at fair value. Held-to-maturity investments are carried at amortised cost using the effective yield method. Realised and unrealised gains and losses arising from changes in the fair value of trading investments and of available-for-sale investment are included in the income statement in the period in which they arise. The fair value of investments are based on quoted bid prices or amounts derived from cash flow models. Fair values for unlisted equity securities are estimated using applicable price/earnings or price/cash flow ratios refined to reflect the specific circumstances of the issuer. Equity securities for which fair values cannot be measured reliably are recognised at cost less impairment. (h) Goodwill The excess of the cost of an acquisition over the Company’s interest in the fair value of the net identifiable assets and liabilities acquired as of the date of the exchange transaction is recorded as goodwill and recognized as an asset in the balance sheet. With respect to investments in associates, goodwill is included in the carrying amount of the investment. The identifiable assets and liabilities recognized upon acquisition are measured at their fair values as at that date. Any minority interest is stated at the minority’s proportion of the fair values. When, subsequent to acquisition, additional evidence becomes available to assist with the estimation of the amounts assigned to identifiable assets and liabilities, those amounts and the amount assigned to goodwill (or negative goodwill) are adjusted to the extent that such adjustments are made by the end of the first annual accounting period commencing after acquisition and do not increase the carrying amount of goodwill above its recoverable amount. Otherwise, such adjustments to the identifiable assets and liabilities are recognized as income or expense. - 12 - VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2002 2 Accounting policies (Cont’d) (h) Goodwill (cont’d) Goodwill is carried at cost less accumulated amortization and accumulated impairment losses. Amortization of goodwill is on a straight-line basis over its amortization period and is included in operating profit. The amortization period is determined at the time of the acquisition based upon the particular circumstances and ranges from 5 to 8 years. The unamortized balances are reviewed at each balance sheet date to assess the probability of continuing future benefits. If there is an indication that goodwill may be impaired, the recoverable amount is determined for the cash-generating unit to which the goodwill belongs. If the carrying amount is more than the recoverable amount, an impairment loss is recognized. (i) Negative goodwill Negative goodwill is recognized in the income statement as follows: (1) to the extent that negative goodwill relates to expected future losses and expenses that are identified in the Company’s plan for the acquisition and can be measured reliably but which cannot be accrued for at the date of acquisition, that portion of negative goodwill is recognized as income when the future losses and expenses are recognized. (2) the amount of negative goodwill not exceeding the fair values of acquired identifiable non-monetary assets is recognized as income on a systematic basis over the remaining weighted average useful life of the identifiable acquired depreciable/amortizable assets. (3) the amount of negative goodwill in excess of the fair values of acquired identifiable non-monetary assets is recognized as income immediately. The negative goodwill is amortised on a straight-line basis over the weighted average useful life of the identifiable depreciable assets acquired. Negative goodwill is presented in the same balance sheet classification as goodwill. With respect to associates, negative goodwill is included in the carrying value of the investment. (j) Operating leases (1) A Group company is the lessee Leases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. - 13 - VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2002 2 Accounting policies (Cont’d) (j) Operating leases (cont’d) (2) A Group company is the lessor Assets leased out under operating leases are included in property, plant and equipment in the balance sheet. They are depreciated over their expected useful lives on a basis consistent with similar owned property, plant and equipment. Rental income (net of any incentives given to lessees) is recognised on a straight-line basis over the lease term. (k) Inventories Inventories are stated at the lower of cost or net realisable value. Cost is determined using the weighted average method. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity) but excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses. (l) Trade receivables Trade receivables are carried at original invoice amount less provision made for impairment of these receivables. A provision for impairment of trade receivables is established when there is an objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the carrying amount and the recoverable amount, being the present value of expected cash flows, discounted at the market rate of interest for similar borrowers. (m) Cash and cash equivalents Cash and cash equivalents are carried in the balance sheet at cost. For the purposes of the cash flow statement, cash and cash equivalents comprise cash on hand, deposits held at call with banks. (n) Borrowings Borrowings are recognised initially at the proceeds received, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost using the effective yield method; any difference between proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings. (o) Retirement scheme The Group participates in a defined contribution retirement scheme (the “Scheme”) operated by the local government. Contributions to the Scheme are charged to the staff costs in the period to which the contributions are related. - 14 - VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2002 2 Accounting policies (Cont’d) (p) Taxation Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Currently enacted tax rates are used in the determination of deferred income tax. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. (q) Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Where the Group expects a provision to be reimbursed, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. (r) Revenue recognition Revenue from sales of goods is recognised when significant risks and rewards of ownership of the goods are transferred to the buyers, which generally coincides with the time when delivery is made. Sales are shown net of sales taxes and discounts, and after eliminating sales within the Group. Interest income is recognised on a time proportion basis, taking account of the principal outstanding and the effective rate over the period to maturity, when it is determined that such income will accrue to the Group. (s) Dividends Dividends are recorded in the Group’s consolidated financial statements in the period in which they are approved by the Group’s shareholders. (t) Segment reporting Business segments provide products or services that are subject to risks and returns that are different from those of other business segments. Geographical segments provide products or services within a particular economic environment that is subject to risks and returns that are different from those of components operating in other economic environments. (u) Comparatives Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current year. - 15 - VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2002 2 Accounting policies (Cont’d) (v) Financial instruments Financial instruments carried on the balance sheet include cash and cash equivalents, interest in associates, available-for-sale investments, receivables, payables and borrowings. Interest in associates, available-for-sale investments and account receivables are stated at their carrying amounts determined in accordance with notes 2(b), 2(g) and 2(l) respectively. Other financial assets and financial liabilities without a quoted market price in an active market are measured at cost subject to impairment review. 3 Financial risk management (a) Foreign exchange risk Most of the transactions of the Group were made in HKD and RMB. In the opinion of the directors, the Group does not have significant foreign exchange risk exposure. (b) Interest rate risk The interest rates of borrowings of the Group are disclosed in Note 20. As of 31 December 2002, change in interest rates would not have material impact on the Group’s operating results and operating cash flows. (c) Credit risk The carrying amount of cash and cash equivalents, trade receivables, other receivables and due from related companies represented the Group’s maximum exposure to credit risk in relation to financial assets. Cash is placed with reputable banks and the weighted average effective interest rate on deposits was 1.0625% per annum. Majority of the Group’s trade receivables relates to sales of goods to third party customers. The Group performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral on trade receivables. The Group maintains a provision for doubtful debts and actual loses have been within the management’s expectation. No other financial assets carry a significant exposure to credit risk. (d) Fair values The carrying amounts of the Company ’s cash and cash equivalents, trade and other receivables and payables, due from related parties, borrowings and due to related parties approximate to their fair values because of the short maturity of these instruments. - 16 - VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2002 4 Sales and segment information No segment information is presented as the Group operates substantially in bleaching and dyeing in the PRC, which accounted for more than 90% (2001: more than 90%) of the consolidated revenue and results of the group. No geographical segment information is presented as the Group conducted its sales substantially in Hong Kong, which accounted for more than 90% (2001: more than 90%) of the consolidated revenue and results of the group. During the year, there were approximately HKD27,768,000 (2001: HKD8,565,000) of sales income and HKD373,000 (2001: nil) of commission expenses made to a certain customer, the director of which had been the Company’s former financial manager. In October 2002, that financial manager had resigned from the Company. 5 Profit from operations The following items have been included in arriving at profit from operations: 2002 2001 HKD’000 HKD’000 Depreciation on property, plant and equipment (Note 11, 12) - owned assets 9,959 8,696 - owned assets leased out under operating leases 1,214 1,214 Loss on disposal of property, plant and equipment - 36 Trading investments (Note 17) – fair value losses 736 135 Amortization of goodwill, net (Note 13) (36) 346 Inventory – costs of inventories recognised as expense (included in ‘Cost of Sales’) 105,359 99,156 – Provision for inventory (Note 15) 398 - Trade receivables – provision for bad and doubtful debts 2,477 1,944 Staff costs (Note 6) 12,074 12,481 6 Staff costs 2002 2001 HKD’000 HKD’000 Wages and salaries 11,151 11,616 Pension costs – defined contribution plans 923 865 - 17 - VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2002 12,074 12,481 The average number of employees in 2002 was 394 (2001: 390). - 18 - VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2002 7 Finance costs – net 2002 2001 HKD’000 HKD’000 Interest expense on bank borrowings 1,896 3,868 Interest income (685) (3,210) Net foreign exchange transaction losses 95 70 Others 151 237 1,457 965 8 Taxation 2002 2001 HKD’000 HKD’000 PRC income tax (note (a)) - Company 354 389 - Share of tax of associates 150 5 Hong Kong profits tax (note (b)) 322 - 826 394 (a) The Company was regarded as an export-oriented foreign investment enterprise in the Shenzhen Special Economic Zone, the PRC. The applicable income tax rate of the Company was 10%. (b) Hong Kong taxation represented the amount provided at the rate of 16% (2001: 16%) on the estimated assessable profits for the year. (c) The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the basis tax rate of the home country of the Company as follows: 2002 2001 HKD’000 HKD’000 Profit before tax 2,483 2,193 Income tax provision calculated at the effective tax rate of 10% (2001: 10%) 248 219 Effect of different tax rate in other country 121 - Effect of tax preferential period (50) (2) Income not subject to tax (217) (94) Expenses not deductible for tax purposes 824 271 Effect of offsetting accumulated deficits in a subsidiary (100) - Tax charge 826 394 (d) Deferred taxation has not been provided as there are no significant temporary differences. - 19 - VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2002 9 Earnings per share Basic earnings per share is calculated by dividing the net profit attributable to shareholders by the weighted average number of ordinary shares in issue during the year. 2002 2001 Net profit attributable to shareholders (HKD) 1,788,000 1,799,000 Weighted average number of ordinary shares in issue 169,142,356 169,142,356 Basic earnings per share (HKD per share) 0.01 0.01 The Company has no dilutive potential ordinary shares and as a result, basic and diluted earnings per share are the same. 10 Dividends In accordance with relevant regulations of the PRC and the Articles of Association of the Company, the Company declares dividends based on the lower of retained earnings as reported in the statutory financial statements and the financial statements prepared in accordance with IFRS. As the statutory financial statements have been prepared in accordance with PRC accounting standards and relevant accounting regulation, the retained earnings as reported in the statutory financial statements will be different from the amount reported in the accompanying consolidated financial statements. As of 31 December 2002, the retained earnings before final dividends reported in the statutory financial statements were HKD4,710,936 (2001: HKD3,631,325). - 20 - VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2002 11 Property, plant and equipment 2002 2001 Furniture, fixtures and Buildings in Buildings in Motor office Construction Hong Kong the PRC Machinery vehicles equipment in progress Total Total HKD’000 HKD’000 HKD’000 HKD’000 HKD’000 HKD’000 HKD’000 HKD’000 Cost Beginning of year 14,518 60,831 118,577 5,771 4,348 5,109 209,154 200,422 Additions - 3,145 1,327 763 735 1,573 7,543 8,823 Disposals - - - - - - - (91) Transfers - 341 5,438 - 86 (5,865) - - 216,69 209,15 End of year 14,518 64,317 125,342 6,534 5,169 817 7 4 Accumulated depreciation Beginning of year 3,434 21,199 63,858 5,377 2,382 - 96,250 87,577 Charge for the year 483 2,056 6,956 204 260 - 9,959 8,696 Disposals - - - - - - - (23) 106,20 End of year 3,917 23,255 70,814 5,581 2,642 - 9 96,250 Net book value End of year 10,601 41,062 54,528 953 2,527 817 110,488 112,904 Beginning of year 11,084 39,632 54,719 394 1,966 5,109 112,904 112,845 As at 31 December 2002, there were buildings in the PRC, with a cost of HKD58,723,000 and net book value of 23,945,000, for which the relevant property certificates had not been obtained from the government authorities, as the buildings are located in the land granted by the government. Properties of VO (HK), including buildings and investment properties (See Note 12), with a net book value of approximately HKD23,665,000 are mortgaged as collateral for the Group’s banking facilities. - 21 - VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2002 12 Investment properties 2002 2001 HKD’000 HKD’000 Cost Beginning and end of year 38,364 38,364 Accumulated depreciation Beginning of year 9,514 8,300 Charge for the year 1,214 1,214 End of year 10,728 9,514 Net book value End of year 27,636 28,850 Beginning of year 28,850 30,064 Independent valuer has not been employed to determine the fair value of the investment properties. Their fair values as at 31 December 2002, which was determined by management of the Company by using discounted cash flow method, approximate their net book value. 13 Investments in associates 2002 2001 HKD’000 HKD’000 Fair value at acquisition 30,280 30,280 Share of post-acquisition profits before tax 250 90 Share of tax of associates (155) (5) Goodwill, net 5,024 6,029 Negative goodwill, net (6,295) (7,264) 29,104 29,130 - 22 - VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2002 13 Investments in associates (Cont’d) Movements in goodwill and negative goodwill were as follows: Negative Goodwill goodwill HKD’000 HKD’000 Cost Beginning and end of year 6,029 (7,610) Accumulated amortization Beginning of year - 346 Charge for the year (1,005) 969 End of year (1,005) 1,315 Net book value End of year 5,024 (6,295) Beginning of year 6,029 (7,264) The goodwill arose from the excess of acquisition cost over the Group’s equity interest in the fair value of net identifiable assets and liabilities of an associate at the date of acquisition, which is 31 December 2001. In 2002, the management re-assessed the fair value of the associate as of 1 January 2002. Based on the assessment, the share of fair value of the associate as of 1 January 2002 was restated from HKD3,141,740 to HKD1,371,500 with the goodwill restated from HKD4,259,160 to HKD 6,029,400. The negative goodwill arose from the excess of the Group’s equity interest in the fair value of the net identifiable assets of another associate over the acquisition cost at the date of acquisition. The negative goodwill was originally amortized over 11 years starting from 30 June 2001. On 1 January 2002, the management changed the remaining amortization period for the net negative goodwill as of 1 January 2002 from 10.5 years to 7.5 years, based on their reassessment on the useful life of net identifiable assets and liabilities of the associate. The principal associates, all of which are unlisted, are: Country of Percentage of incorporation interest held Shenzhen Huaguanli Trading Co., Ltd. (“Huaguanli”) Shenzhen 25% Shenzhen Nanhua Printing & Dyeing Co., Ltd. (“Nanhua”) * Shenzhen 49.56% Shenzhen Lianchang Printing & Dyeing Co., Ltd. (“Lianchang”) ** Shenzhen 37.5% * The Group had entered into share transfer agreements with Changzhou Dieqiu Textile Industrial Group Limited and Union Development Group Co., Ltd. to purchase 13.02% and 36.54% of the shares of Nanhua on 6 June 1998 and 20 June 2001 respectively. The Company had already fully paid the consideration of the share being transferred and filed an application for the approval on the share transfer to the relevant government authorities. Up to 4 April 2003, the approval procedures were still in progress. The management considered that the investments in Nanhua should be accounted for by the equity method of accounting as the Group has significant influence on Nanhua. Under this method, the Group’s share of the post-acquisition profits or losses shall be 49.56% according to the relevant stipulation of the share transfer agreements. - 23 - VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2002 13 Investment in associate (Cont’d) ** On 5 January 1999, the Group had entered into a share transfer agreement with Heater Industrial Limited, a Hong Kong based company, to purchase 37.5% of the total equity interest of Lianchang. All the consideration for the purchase had been fully paid to Heater Industrial Limited up to 31 December 2001. Up to 4 April 2003, the filing procedures for the relevant government authorities’ approval were still in progress. The management considered that the investments in Lianchang should be accounted for using the equity method of accounting starting from 1 January 2002 as the Group started to exercise its significant influence on Lianchang from then. Under this method, the Group’s share of the post-acquisition profits or losses shall be 37.5% according to the relevant stipulation of the share transfer agreement. 14 Available-for-sale investments 2002 2001 HKD’000 HKD’000 Listed, at cost 4,250 4,250 Less: impairment provisions for listed investment (3,513) (3,363) Listed, at fair value 737 887 Unlisted, at cost 29,122 29,122 29,859 30,009 Available-for-sale investments comprise a 0.5% shareholding in an unlisted company and a 1.7% shareholding in a company listed on the Hong Kong Stock Exchange (the “HKSE”). Listed investments are fair valued by reference to the HKSE quoted bid prices at the close of business on 31 December. Unlisted investment is stated at cost less accumulated impairment loss as its fair value cannot be measured reliably. 15 Inventories 2002 2001 HKD’000 HKD’000 Raw materials 45,346 51,011 Work in progress 6,243 5,128 Finished goods 7,898 6,421 Less: Provision for obsolescence (898) (500) 58,589 62,060 - 24 - VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2002 16 Receivables and prepayments 2002 2001 HKD’000 HKD’000 Trade receivables 54,101 55,719 Value added tax, refundable 10,061 4,980 Prepayments 629 353 Other receivables 3,754 6,160 Less: Provision for bad and doubtful debts (7,594) (6,858) 60,951 60,354 17 Trading investments 2002 2001 HKD’000 HKD’000 Hong Kong listed equity securities, cost 5,294 5,294 Less: impairment provisions for trading investments (2,912) (2,176) 2,382 3,118 The trading investments are traded in active markets and are valued at market value at the close of business on 31 December by reference to quoted bid prices. 18 Cash and cash equivalents 2002 2001 HKD’000 HKD’000 Cash at bank and in hand 7,642 14,948 Short term bank deposits 28,444 18,130 36,086 33,078 The weighted average effective interest rate on short term bank deposits was 1.0625% (2001: 1.5%) and these deposits have an average maturity of 30 days. For the purposes of the cash flow statement, the cash and cash equivalents comprise the following: 2002 2001 HKD’000 HKD’000 Cash and cash equivalents 36,086 33,078 Less: pledged bank deposits (6,000) (3,000) 30,086 30,078 The pledged bank deposits represented deposits pledged with a bank to obtain certain banking facilities. - 25 - VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2002 19 Trade and other payables 2002 2001 HKD’000 HKD’000 Trade payables 16,682 18,565 Other payables 2,793 3,053 Accrued expenses 1,816 2,390 21,291 24,008 20 Borrowings 2002 2001 HKD’000 HKD’000 Borrowings from banks Current - Guaranteed borrowings (note (a), 18,846 18,846 (c)) - Secured borrowings (note (b)) - 1,054 - Unsecured borrowings (note (c)) 21,597 20,000 40,443 39,900 Non-current - Secured borrowings (note (b)) - 6,553 Total borrowings 40,443 46,453 (a) The borrowings were guaranteed by Union Development Group Co., Ltd., a related party. (b) The borrowings were paid off in the current year prior to their maturity, which is 18 December 2007. (c) The interest rates for these borrowings ranged from 3.2% to 5.6% during the year (2001: 3.6% to 5.6%). 21 Share capital As of 31 December, the authorized, issued and fully paid share capital of the Company comprised: 2002 2001 Number of Number of shares Amount shares Amount ’000 HKD’000 ’000 HKD’000 “A Shares”, par value of RMB1 each 99,720 122,554 99,720 122,554 “B Shares”, par value of RMB1 each 69,422 85,317 69,422 85,317 - 26 - VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2002 169,142 207,871 169,142 207,871 22 Contingencies At 31 December 2002, the Group had contingent liabilities in respect of guarantees for Nanhua’s bank facilities amounting to HKD8,000,000 (2001 : HKD14,000,000). 23 Commitments Capital commitments Capital expenditure authorized for at the balance sheet date but not recognised in the financial statements is as follows: On 8 February 2001, VO (HK), the fully held subsidiary of the Company has entered into a letter of intent with Shenzhen Union China Holdings Ltd. to set up a foreign-invested join venture in Ningbo, the PRC. According to the letter of intent, the share capital of the joint venture is RMB 700 million, of which VO (HK) has a share of 25%, amounting to RMB 175 million. Up to 4 April 2003, there is no formal contract signed between the parties in respect of the above investment. Operating lease commitments At 31 December 2002, the future aggregate minimum lease payments under non cancellable operating leases in respect of warehouses are as follows: 2002 2001 HK$’000 HK$’000 Not later than 1 year 22 264 Later than 1 year and not later than 5 years - 361 22 625 24 Minority interests 2002 2001 HK$’000 HK$’000 At beginning of year - - Capital contribution 500 - Share of net loss of the subsidiary (131) - At end of year 369 - - 27 - VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2002 25 Reserves (a) Share premium Share premium represents the premium on the issuance of A Shares and B Shares. (b) Other reserves (i) Pursuant to the relevant PRC regulations and the articles of association of the Company, profit after the taxation shall be appropriated in the following sequence: (1) make up accumulated losses, if any; (2) transfer 10% of the profit after tax to the statutory surplus reserve. When the balance of the statutory surplus reserve reaches 50% of the share capital, such transfer need not be made; (3) transfer 5% to 10% of the profit after tax to the statutory public welfare fund; (4) transfer to the discretionary surplus reserve with an amount approved by the shareholders at general meetings; (5) distribute dividends to shareholders. The amounts transferred to the reserve funds shall be based on the profit after tax of the Company’s statutory financial statements. (ii) 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 the reserves due to losses incurred, any other usage should not result in the reserves falling below 25% of the registered capital. (iii) Statutory public welfare fund According to relevant PRC regulations, the use of statutory public welfare fund is restricted to capital expenditures for collective employee welfare facilities. The statutory public welfare fund is not available for distribution to shareholders except in liquidation. According to a document issued by the Ministry of Finance, when the statutory public welfare fund is utilised, an amount equal to the lower of cost of the assets and the balance of the statutory public welfare fund is transferred from the statutory public welfare fund to the discretionary surplus reserve. On disposal of the relevant assets, the original transfers from the statutory public welfare fund are reversed. For the year ended 31 December 2002, the directors proposed appropriations of 10% and 5% (2001: 10% and 5%) of statutory net profit, determined under PRC accounting standards, totalling HKD 190,520 (2000: HKD 118,730), to the statutory surplus reserve fund and statutory public welfare fund. (c) Profit available for distribution to shareholders Pursuant to the relevant PRC regulations, profit available for distribution to shareholders shall be the lower of the retained earnings determined according to PRC accounting standards and regulations as appeared in the statutory financial statements and the retained earnings adjusted according to IFRS. - 28 - VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2002 26 Cash generated from operations 2002 2001 HK$’000 HK$’000 Net profit 1,788 1,799 Adjustments for: Minority interest (131) - Tax 826 394 Depreciation 11,173 9,910 Amortisation 36 (346) Impairment charge 3,761 2,540 Loss on sale of property, plan and equipment - 36 Gain from disposal of associates - (1,061) Write back of provision for long service payments - (800) Share of results of associates before tax (160) (70) Interest expense 1,896 3,868 Interest income (685) (3,210) Changes in working capital: Inventories 3,073 (2,697) Trade and other receivables (3,523) 2,520 Due from related parties (48) 4,677 Trade and other payables (2,717) (11,181) Current tax liabilities 148 (997) Cash generated from operations 15,437 5,382 27 Related party transactions The Company’s major shareholder is Union Development Group of China Ltd. (“Union Development”), who directly holds 4.54% of the Company’s issued shared and indirectly holds another 27.99% through its subsidiary, namely Shenzhen Union China Holdings Ltd.. In addition to the guarantee to/from related parties disclosed in Note 20 (a) and Note 22, the Group entered into the following significant related party transactions in the normal course of its business and on an arm’s-length basis: 2002 2001 HK$’000 HK$’000 Sales of goods: Huaguanli 35 123 Nanhua - 918 35 1,041 - 29 - VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2002 27 Related party transactions (Cont’d) 2002 2001 HK$’000 HK$’000 Interest Income received from: Lianchang - 1,067 Acquisition of equity interest in an associate: Union Development* - 13,531 * In 2001, the Group acquired additional 36.54% equity interests in Nanhua for approximately HKD13.5 million from Union Development. Year end balances with related parties: 2002 2001 HK$’000 HK$’000 Trade receivables from related parties 513 447 Other receivable from related parties 3,132 3,150 3,645 3,597 Less: Provision for bad and doubtful debts (1,741) - 1,904 3,597 The above balances were non-interest bearing, unsecured and repayable on demand. - 30 - VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2002 28 Principal subsidiaries As of 31 December 2002, the Company directly/indirectly held the following subsidiaries: Place of Percentage of equity Name incorporation Principal activities interest held 2002 2001 Consolidated subsidiaries VO (HK) Hong Kong Procurement of materials, marketing of printed and 100% 100% dyed woven fabrics and investment holdings Victor Onward Digital Printing Hong Kong Manufacturing of printed and dyed woven fabrics 75% - Co., Ltd. (“VO Digital”)* Unconsolidated subsidiaries Rich Sino Enterprises Limited Hong Kong Dormant 100% 100% (“Rich Sino”) ** * VO Digital was newly set up in 2002, with the paid in capital of HKD 2,000,000. ** Pursuant to a resolution of the Board of Director’s Meeting of Rich Sino dated 21 January 1999, the directors decided to cease the operation of Rich Sino. The Company had fully provided for the investment in Rich Sino. 29 Comparative figures Certain comparative figures have been reclassified to conform to the current year’s presentation. 30 Approval of financial statements The consolidated financial statements had been approved for issue by the Board of Directors on 4 April 2003. - 31 - VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2002 The impact of IFRS and other adjustments on the PRC statutory financial statements are as follows: Net profit for the year Net assets as of ended 31 December 31 December 2002 2001 2002 2001 HKD’000 HKD’000 HKD’000 HKD’000 As reported in the PRC statutory 1,270 791 290,485 289,215 financial statements Impact of IFRS adjustments: Reversal of revaluation of leasehold properties in Hong Kong 457 457 (9,556) (10,013) Difference in treatment of negative 61 (459) (398) (459) goodwill Others - 1,010 (2,158) (2,158) As restated under IFRS 1,788 1,799 278,373 276,585 10621/JWE - 32 -