鲁泰Ａ(000726)鲁泰Ｂ2002年年度报告（英文版）

LU THAI TEXTILE CO., LTD. ANNUAL REPORT ==2002== Shandong · Zibo March 28, 2003 CONTENTS I. IMPORTANT NOTES-------------------------------------------------------------------------------------- II. COMPANY PROFILE------------------------------------------------------------------------------------- III. SUMMARY FINANCIAL HIGHLIGHT AND BUSINESS HIGHLIGHT------------------- IV. CHANGES IN SHARE CAPITAL AND PARTICULARS ABOUT SHAREHOLDERS--- V. PARTICULARS ABOUT DIRECTORS, SUPERVISORS, SENIOR EXECUTIVES AND EMPLOYEES--------------------------------------------------------------------------------------------------- VI. ADMINISTRATIVE STRUCTURE------------------------------------------------------------------- VII. BRIEF OF THE SHAREHOLDERS’ GENERAL MEETING--------------------------------- VIII. REPORT OF BOARD OF DIRECTORS---------------------------------------------------------- IX. REPORT OF SUPERVISORY COMMITTEE------------------------------------------------------ X. SIGNIFICANT EVENTS --------------------------------------------------------------------------------- XI. FINANCIAL REPORT----------------------------------------------------------------------------------- XII. DOCUMENTS AVAILABLE FOR REFERENCE------------------------------------------------ 2 I. IMPORTANT NOTES The Board of Directors of Luthai Textile Co., Ltd. (hereinafter referred to as the Company) and its directors hereby confirm that there are no any important omissions, fictitious statements or serious misleading information carried in this report, and shall take all responsibilities, individual and/or joint, for the reality, accuracy and completion of the whole contents. This annual report is written in both Chinese and English. Should there be any difference in interpretation of the two versions, the Chinese version shall prevail. In the 16th meeting of the 3rd Board of Directors of the Company, Director Mr. Chen Ruimou entrusted Chairman of the Board Liu Shizhen to vote on his behalf; Director Mr. Chen Youhan entrusted Director Mr. Xu Zhinan to vote on his behalf. Director Mr. Li Jinghe was absent from the Board meeting without entrusting proxy to attend. Shandong Zhengyuan Hexin Certified Public Accountants and PricewaterhouseCoopers (China) Certified Public Accountants respectively issued the domestic unqualified Auditors’ Report and international unqualified Auditors’ Report for the Company. Chairman of the Board of the Company Mr. Liu Shizhen, Chief Accountant Mr. Su Huasheng and Person in Charge of Financing Ms. Qu Qingfeng hereby confirm that the Financial Report of the Annual Report is true and complete. II. COMPANY PROFILE 1. Legal Name of the Company: In Chinese: 鲁泰纺织股份有限公司 In English: LU THAI TEXTILE CO., LTD. 2. Legal Representative: Liu Shizhen 3. Liaison Methods of Secretary of the Board of Directors and Authorized Representative in Charge of Securities Affairs: Secretary of the Board of Authorized representative in charge of Directors securities affairs Name Qin Guiling Zheng Weiyin Liaison No. 81, Songling East Road, No. 11, Mingbo Road, High-tech address Zichuan District, Zibo Industrial Development Zone, Zibo Telephone (86) 533-5285166 (86) 533-3586827 Fax (86) 533-5282188 (86) 533-5282188 E-mail qinguiling@lttc.com.cn wyzheng@lttc.com.cn 4. Registered Address: No. 11, Mingbo Road, High- tech Industrial Development Zone, Zibo, Shandong (the former Nanying North Road was changed into Mingbo Road) Office Address: No. 81, Songling East Road, Zichuan District, Zibo No. 11, Mingbo Road, High-tech Industrial Development Zone, Zibo Post Code: 255100 E-mail: lttc@public.zbptt.sd.cn Internet Web Site: www.lttc.com.cn 5. Newspapers for Disclosing the Information of the Company: Securities Times, Shanghai Securities News and Ta Kung Pao 3 The Place Where the Annual Report is Prepared and Placed: Securities Department of the Company Internet Web Site Designated by China Securities Regulatory Commission for Publishing the Annual Report: www.cninfo.com.cn 6. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: LUTHAI A, LUTHAI B Stock Code: 000726, 200726 7. Other Relevant Information of the Company Changed registration date: March 25, 2002 Changed registration place: Zibo Bureau of Administration for Industry and Commerce Registered number of enterprise legal person’s business license: QGLZZ Zi No.: 000066 Registered number of taxation: 370302613281175 Particulars about certified public accountants engaged by the Company: Domestic: Shandong Zhengyuan Hexin Certified Public Accountants Address: Liangyou Fulin Hotel, No. 5, Luoyuan Street, Jinan Overseas: PricewaterhouseCoopers (China) Certified Public Accountants Address: 18/F, North Building of Beijing Jiali Center, No. 1 of Guanghua Road, Chaoyang District, Beijing III. SUMMARY FINANCIAL HIGHLIGHT AND BUSINESS HIGHLIGHT 1. Accounting data as of the year 2002 Unit: In RMB’000 Total profit 152,986 Net profit 128,542 Net profit after deducting non-recurring gains and losses 129,482 Profit from main business lines 275,278 Profit from other business lines 6,557 Operating profit 155,053 Investment income -10 Financial expense -2,057 Subsidy income - Net cash flows arising from operating activities 269,188 Net increase/decrease in cash and cash equivalents -1,372 Note: The items of deducting non-recurring gains and losses comprises net income or expenditure from non-operating of RMB –1,147,000, profit from inventory of RMB 801,000, occupancy expenses of funds paid of RMB 4,840,000 and impact of income tax of RMB -110,000. Explanation for difference in net profit and net assets under IAS and CAS Unit: RMB’000 1.Profit before tax under IAS 152,987 Adjustment: Depreciation -3,000 Administration expenses 8 4 Profit before tax under CAS 149,995 Withdrawal of income tax -21,692 Minority interests -2,753 Net profit 125,550 2. Net assets under IAS 1,356,751 Effect of accumulated amount as of past year Capital public reserve 44,355 Retained profit -141,160 Net assets under CAS 1,259,946 Note: In the report period, the net profit of the Company was not been distributed according to IAS. 2. Major accounting data and financial indexes over the past three years Unit: RMB’000 Indexes/Items 2002 2001 2000 Income from main business lines 950,880 785,693 485,928 Net profit 128,542 120,518 87,447 Total assets 1,785,690 1,477,554 1,401,298 Shareholders’ equity (excluding minority interests) 1,356,751 1,314,320 1,271,161 Earnings per share (RMB/share) 0.37 0.45 0.42 Net assets per share (RMB/share) 3.85 4.85 6.10 Net assets per share after adjustment (RMB/share) 3.84 4.84 6.08 Net cash flows per share arising from operating 0.76 -0.13 0.39 activities (RMB) Return on equity (%) 9.47% 9.17% 6.88% 3. Supplementary financial indexes Earnings per share Return on equity (%) (RMB/share) Fully Weighted Fully Weighted diluted average diluted average Profit from main business lines 20.29 19.97 0.78 0.78 Operating profit 11.43 11.25 0.44 0.44 Net profit 9.47 9.32 0.37 0.37 Net profit after deducting non-recurring 9.53 9.38 0.37 0.37 gains and losses 4. Particulars about changes in shareholders’ equity during the report period Total Share Share Capital public Retained Item shareholders’ capital premium reserve profit equity Amount at the period-begin 270,790 824,564 89,355 129,611 1,314,320 Increase in this report 81,237 19,991 128,542 229,770 period Decrease in this report 81,237 106,102 187,339 period Amount at the period-end 352,027 743,327 109,346 152,051 1,356,751 5 The change of shareholders’ equity is due to realization of profit as of 2002, withdrawal of statutory surplus public reserve, and the Explanation for changes distribution of dividend in 2001 and capitalization of public reserve in the report period. IV. CHANGES IN SHARE CAPITAL AND PARTICULARS ABOUT THE SHAREHOLDERS 1. Statement of changes in shares of the Company Unit: shares Increase / decrease this time (+, -) Before the Shares capital After the Allotment Bonus Additional change transferred from Others Sub-total change of Shares shares issuance public reserve I. Unlisted shares 1. Promoters’ shares Including: State-owned shares Domestic legal 37,895,000 11,368,500 11,368,500 49,263,500 person’s share Foreign legal person’s 37,895,000 11,368,500 11,368,500 49,263,500 share Others 2. Raised legal person’s shares 3. Employees’ shares 26,000,000 7,800,000 7,800,000 33,800,000 4. Preference shares or others Total unlisted shares 101,790,000 30,537,000 30,537,000 132,327,000 II. Listed shares 1. RMB ordinary 65,000,000 19,500,000 19,500,000 84,500,000 shares 2. Domestically listed 104,000,000 31,200,000 31,200,000 135,200,000 foreign shares 3. Overseas listed foreign shares 4. Others Total listed shares 169,000,000 50,700,000 50,700,000 219,700,000 III. Total shares 270,790,000 81,237,000 81,237,000 352,027,000 2. Issuance and listing of the share (1) Issuance of shares over the past three years The Company issued 50 million ordinary RMB shares to increase its share capital in Dec. 2000 at the issuing price of RMB 17.80 per share. The said shares were listed at Shenzhen Stock Exchange for trade on Dec. 25, 2000. (2) Change in total share and structure of share in the report period In the report period, the Company implemented 2001 Profit Distribution Plan: transfer capital public reserve into share capital to all shareholders at the rate of 3 for 10. After transfer, the total share of the Company has increased by 30%, from 270.79 million shares to 352.027 million shares; however, the structure of share and 6 proportion of holding share remained unchanged. (3) Particulars about employees’ shares The Company issued 10 million employees’ shares in February 1993 at the issuing price of RMB 4 per share with the par value of RMB 2 per share. The Company split the shares with par value of RMB 2 per share into shares with par value of RMB 1 per share in April 1994. After the splitting, the number of employees’ shares changed to 20 million. The said employees’ shares were entrusted to Shandong Securities Registration Co., Ltd. in April 1997, and in December 2000, the said shares were entrusted to Shenzhen Securities Registration Co., Ltd.. These shares will be listed for trade in December 2003. 3. About shareholders at the end of the report period (1) At the end of the report period, the Company had totally 41784 shareholders, including 10101 shareholders of B-share. (2) Particulars about change in shares held by the top ten shareholders Increase / Holding Number Proportion Type of shares decrease in shares at the of share Nature of Name of Shareholder in total (Circulating/No the report year-end pledged shareholders shares (%) n-circulating) year (share) or frozen ZIBO LUCHENG TEXTILE CO., Promoter’s +11,368,500 49,263,500 14.00 Non-circulating Ｎｏ LTD. share Foreign TAILUN TEXTILE CO., LTD. +11,368,500 49,263,500 14.00 Non-circulating Ｎｏ shareholder SOUTH CAPITAL NOMINEES +627,900 4,160,000 1.18 Circulating Ｎｏ B-share LIMITED DAIWA SECS EMBC AC ITOCHU +664,650 3,900,000 1.11 Circulating Ｎｏ B-share HONG KONG LTD HUA AN CHUANGXIN +791,493 3,154,887 0.90 Circulating Ｎｏ A-share SECURITIES INVESTMENT FUND HANSHENG SECURITIES 3,139,132 0.89 Circulating Ｎｏ A-share INVESTMENT FUND CBNY S/A PNC/SKANDIA SELECT -173,819 2,737,472 0.78 Circulating Ｎｏ B-share FUND/CHINA EQUITY AC RIPPERTON ASSETS LIMITED +599,800 2,600,000 0.74 Circulating Ｎｏ B-share SSBT/THE CHINA FUND-UH1 +609,829 2,599,829 0.74 Circulating Ｎｏ B-share UHO1 PERFECT SPACE INVESTMENTS +597,000 2,587,000 0.73 Circulating Ｎｏ B-share Note: ① Among the top ten shareholders, the 1st shareholder and the 2nd shareholder are promoter shareholders of the Company, and the change of shares held by them was because the Company transferred capital public reserve into share capital. The changes of shares held by the 3rd shareholder to the 10th shareholder was due to purchase and selling of A-share and B-share. ② There existed no associated relationship among the top ten shareholders, and they didn’t belong to the consistent actionist. (3) Brief introduction to the shareholder holding over 5% of the total shares and the controlling shareholder 7 ① Zibo Lucheng Textile Co., Ltd. (hereinafter referred to as “Lucheng Textile”) Legal representative: Liu Zibin Registered capital: RMB 8.67 million Business scope: Lucheng Textile was engaged in production and marketing of textile, knitwear, garments and other sewing products. Lucheng Textile was the largest shareholder of the Company as well as the actual controlling shareholder. Lucheng Textile was founded in Sep. 1998, based on Zibo the 7th Cotton Textile Plant, original promoter of the Company. It is a Limited Company that its shares held by natural persons. Of them, Mr. Liu Shizhen held 21% of the total shares, which is the largest shareholder of Lucheng Textile. (Liu Shizhen, Chinese nationality, who has not enjoy the residence power in the other country or area; he took the post of Chairman of the Board and concurrently General Manager of the Company for five years) At end of the year 2002, Lucheng Textile held 49.2635 million promoters’ shares of the Company, taking 14% of total shares of the Company, and the said shares have not been listed for trade, pledged or frozen. ② Tailun (Thailand) Textile Co., Ltd. (hereinafter referred to as “Tailun Textile”) Legal representative: Xu Zhinan Business scope: Yarn spinning Note: Tailun (Thailand) Textile Co., Ltd. is the coordinate largest shareholder of the Company. At end of the year 2002, the Tailun Textile held 49.2635 million foreign promoters’ shares, taking 14% of total shares. The said shares have not been listed for trade, pledged or frozen. V. PARTICULARS ABOUT DIRECTORS, SUPERVISORS, SENIOR EXECUTIVES AND EMPLOYEES 1. Basic information Holding Holding Name Title Gender Age Office term shares at the shares at the year-begin year-end Liu Shizhen Chairman of the Board, Male 63 May 7, 2001- 110,240 143,312 General Manager May 7, 2004 Chen youhan Vice Chairman of the Board M ale 70 May 7, 2001- 0 0 May 7, 2004 Xu Zhinan Director, Male 73 May 7, 2001- 0 0 Deputy General Manager May 7, 2004 Liu Zibin Director, Male 38 May 7, 2001- 0 0 Deputy General Manager May 7, 2004 Tengyuan Yingli Director Male 63 May 7, 2001- 0 0 May 7, 2004 Chen Ruimou Director Male 59 May 7, 2001- 0 0 May 7, 2004 Li Jinghe Director Male 78 May 7, 2001- 0 0 May 7, 2004 Su Huasheng Director, Chief Accountant Male 59 May 7, 2001- 25,480 33,124 May 7, 2004 Wang Fangshui Director, Chief Engineer Male 42 May 7, 2001- 13,000 16,900 May 7, 2004 Sun Zhigang Director Male 41 May 7, 2001- 15,340 19,942 May 7, 2004 8 Qin Guiling Director, Secretary of the Female 37 May 7, 2001- 15,600 20,280 Board of Directors May 7, 2004 Wu Yuhua Independent Director Male 59 Jun. 26, 2002- 0 0 May 7, 2004 Zhou Zhiji Independent Director Male 40 Jun. 26, 2002- 0 0 May 7, 2004 Li Tongmin Supervisor, Male 47 May 7, 2001- 17,160 22,308 Manager of Production Dept. May 7, 2004 Zhao Kegui Supervisor, Chief Economist Male 56 M ay 7, 2001- 26,000 33,800 May 7, 2004 Zhu Lingwen Supervisor, Male 49 May 7, 2001- 36,400 47,320 Manager of Layout Dept. May 7, 2004 Note: ① The change of shares held by directors, supervisors and senior executives was because the Company transferred capital public reserve into share capital during the report period. ② Director Mr. Liu Zibin took Chairman of the Board and concurrently General Manager of Zibo Lucheng Textile Co., Ltd., Director Mr. Xu Zhinan took the post of Chairman of the Board of Tailun (Thailand) Textile Co., Ltd., which are promoter shareholder of the Company. 2. Particulars about the annual payment ① For directors and supervisors and concurrently the post of senior executive, the Company determined their payment and bonus based on their office, contribution and Plan on Invigoration and Obligation for Senior Executive of the Company, and the said plan has been approved by 2001 shareholders’ general meeting of the Company, checked by the Compensation Committee of Board of Directors and approved by the Board of Directors for implementation. ② There were 2 directors and supervisors in office at present received no pay from the Company, namely, Chen Youhan and Li Jinghe, and they received no pay from the Shareholding Company. The Company respectively paid allowance of RMB 3000 to Independent Director Wu Qihua and Zhou Zhiji per month. ③ The total annual payment of directors, supervisors and senior executives received from the Company was RMB 6.29 million. The total payment of the top three directors drawing the highest payment was RMB 2.74 million, and the total payment of the top three senior executives drawing the highest payment was RMB 2.74 million. The limits of annual payment drew by directors, supervisors and senior executives: 1 person enjoys payment over RMB 1,000,000, 9 persons enjoy RMB 300,000 to 550,000, 2 persons enjoy under RMB 50,000. 3. Particulars about changes in directors, supervisors and senior executives In the report period, the Company additionally elected Mr. Wu Yuhua and Mr. Zhou Zhiji as independent director of the Company respectively in 2001 shareholders’ general meeting. Mr. Liu Zibin was engaged as deputy general manager of the Company in the 8th meeting of the 3rd Board of Directors held on Mar. 27, 2002. The other directors, supervisors and senior executives remained unchanged. 4. About employees: By the end of the report period, the Company had totally 6032 9 employees at their posts. Of them, 4856 production personnel, 298 sales personnel, 708 technicians, 39 financial personnel and 131 administration personnel. 1298 persons graduated from 3- years regular college. At present, the Company has 48 retirees, which joined the Social Insurance. VI. ADMINISTRATIVE STRUCTURE 1. Particulars about the Company’s administrative structure Strictly pursuant to Company Law, Securities Law and relevant laws and regulations stipulated by China Securities Regulatory Commission, the Company further improved its legal person administrative structure, standardized the Company’s operational mechanism, set up Rules of Procedure of the Shareholders’ General Meeting, Rules of Procedure of the Board of Directors, Rules of Procedure of the Supervisory Committee and other normative documents, made timely revision and improvement on the Articles of Association and further standardized the decision-making and operation of the Company. 2. Separation of business, personnel, assets, organization and finance from control shareholder (1) Separation of business: The Company was absolutely separated from control shareholder in business and had absolutely independent system of production, supplying and sales and independent operation capability of making decision by itself. (2) Separation of personnel: The Company was absolutely independent in terms of labor, personnel and payroll management, and held independent and complete capability of making decision by itself. Vice General Manager, Mr. Liu Zibin took the part-time job of Chairman of the Board and General Manager of Lucheng Company but there occurred no actions harmful of the interest of the Company and shareholders. (3) Separation of assets: The Company had integrated legal person property right and possessed independent production system, auxiliary production system and equipment; held independent ownership of intangible assets such as industrial property right, trademark, and non-patent technologies, etc. (4) Separation of organization: The Company was independent in organization and never shared office with control shareholder. (5) Separation of finance: The Company had an independent finance department, independent accounting assessment system and financial management system, and independent bank account. 3. Valuation and encouragement mechanism of senior executives and establishment and implementation of relevant encouragement system in the report period. 2001 Annual Shareholders’ General Meeting of the Company approved Plan of Encouragement and Binding of Senior Executives of the Company. The Stipend Committee of the Board of Directors valuated the implementation of the operation achievement in 2002 according to the aforesaid plan and submitted to the Board of Directors for approval and implementation. VII. BRIEFINGS ON THE SHAREHOLDERS’ GENERAL MEETING The Company held totally one Shareholders’ General Meeting in the report period, namely 2001 Annual Shareholders’ General Meeting. Shandong Deheng Lawyers’ 10 Firm issued legal position papers on the meeting. 1. Notification, calling and holding of the Shareholders’ General Meeting The notice of the Shareholders’ General Meeting was published on Shanghai Securities, Securities Times and Ta Kung Pao dated May 24, 2002. The Shareholders’ General Meeting was held at Multi- functional Hall on the 3/F of the Company’s Staffs’ Club at 9:00am on June 26, 2002. Totally 42 shareholders and shareholders’ proxies attended the meeting, representing 87952915 shares with vote right, taking 32.48% of the total share capital of 270790000 shares. Among of them, 37 domestic shareholders and 5 foreign shareholders were present at the meeting, taking 45939065 shares and 42013850 shares respectively in conformity with relevant regulation of Company Law and Article of Association. 2. Resolutions of the Shareholders’ General Meeting The resolutions examined by the Shareholders’ General Meeting were as follows: (1) 2001 Work Report of the Board of Directors; (2) Proposal on Rules of Procedure of the Shareholders’ General Meeting; (3) Proposal on Amendment of Articles of Association; (4) Proposal on Rules of Procedure of the Board of Directors; (5) Proposal on Adding Election of Mr. Wu Yuhua and Mr. Zhou Zhiji as Independent Directors of the 3rd Board of Directors; (6) Proposal on Reengaging Domestic and International Certified Public Accountants; (7) Proposal on Changing Investment Direction of Raised Capital; (8) Proposal on Enlarging Construction of COM Spinning With 20000 Ingots; (9) Proposal on Changing Investment Means of COM Spinning With 20000 Ingots (the proposal was not approved by the Shareholders’ General Meeting); (10) Proposal on 2001 Financial Settlement and 2002 Financial Budget of the Company; (11) Proposal on 2001 Profit Distribution; (12) 2001 Work Report of the Supervisory Committee; (13) Proposal on Establishment of Encouragement and Binding Mechanism of Senior Executives The resolutions were published on Shanghai Securities, Securities Times and Ta Kung Pao dated June 27, 2002. 3. Election and change of directors and supervisors of the Company 2001 Annual Shareholders’ General Meeting of the Company added election of Mr. Wu Yuhua and Mr. Zhou Zhiji as independent directors of the 3rd Board of Directors and there was no change on other directors. Supervisors of the Company remained unchanged in the report period. VIII. REPORT OF THE BOARD OF DIRECTORS 1. Analysis of financial report and operating results of the Board of Directors In the report period, the whole operation of the Company was as follows: The Company realized a sales income of RMB 950,880,400 in the whole year, a export income of USD 96,261,700 and a profit from principal business of RMB 275,278,000, which increased by 21.02%, 11.40% and 18.52% respectively compared with the previous year. In the report year, the project of COM spinning of 20,000 ingots, the 1st stage project of trimming of liquid ammonia and the production line of 1,500,000 pieces of shirts 11 were put into production respectively in the 2nd and the 3rd quarter of the year. The Company successfully completed the technical renovation of the weaving factory and the bleaching and dyeing factory, which established a foundation for further improving the additional value of yarn-dyed fabric products of the Company and enhancing the adaptive capability to the market. In the report period, the Company produced 60.49 million meters of yarn-dyed fabric, 4.28 million pieces of shirts, an increase of 26.3% and 26% respectively than that of the year of 2001, which ranked the highest record in the history. Facing the increase of output of products, the Company reinforced the expansion of domestic and oversea market, increased the work quality, optimized the before and after sales service and attached importance to developing new customers as well as keeping good relationship with old customers. In 2002, the export and domestic sales volume of the yarn-dyed fabric increased by 20.17% and 222% respectively compared with the year of 2001. The export and domestic sales volume of shirts increased by 16.11% and 200% respectively compared with the year of 2001. In the report year, the Company deepened the cost management and emphasized the cost management in the work of the year, thus the cost of each production procedure all decreased in a certain extent, which made the adverse influence of markup of cotton wool on the Company’s operation fall to the minimum. The factors of markup of cotton were to still exist in the next year, which imposed certain pressure on the production and operation of the Company. The Board of Directors of the Company would continue to reinforce the cost management and receive the new challenge in an active way. In the report year, the Company continuously increased the technology innovation and stressed the quality management much more: led by the science and technology committee of the Company, the Company developed 8 kinds of new products, of which the wash-and-wear outside material of liquid ammonia super united gained Excellent Product Award of Innovation in the 2002 National Annual Meeting of Product Development of Spinning, Yarn-dyed and Printing and Dyeing. The State Patent Bureau of Property Rights accepted the patent application of the Company. In the report period, the Company implemented the international standardization management of ISO9000 and ISO140000 effectively and successfully realized the transition of ISO9000 document from version of 1994 to 2000. At present, the Company is implementing the authentication of system of occupation health and safety management of OHSMS18000 in order to reply the non-trade barriers of international market. 2. Operation in the report period (1) Scope of principal business and the operation ① The operation scope of the Company: the Company is a textile enterprise of highly comprehensive production, which is mainly engaged in the spinning, bleaching and dyeing, weaving, rear trimming and garments manufacturing with the outside material of ya rn-dyed fabric used in shirts as the leading product. Over 86% of the Company’s products are exported and the Company enjoys a market coverage over thirty countries and areas of Japan, Korea, America, Britain and Italy etc., which is the largest production base of colored weaving in Asia. ② The operation of the Company classified according to product Unit: RMB’000 Product Revenue Operating cost Gross profit of operation 12 In 2002 In 2001 In 2002 In 2001 In 2002 In 2001 Spinning 14,890 35,443 9,810 35,722, 5,080 -279 Grey cloth 193 3,999 552 4,288 -358 -290 Yarn-dyed outside 772,651 623,454 559,837 444,687 212,814 178,768 material of shirt Shirt 149,304 114,022 98,422 65,425 50,881 48,597 Others 13,842 8,776 9,982 6,316 3,860 2,460 Total 950,880 785,694 678,603 556,438 272,277 229,256 ③ Market distribution of products of the Company Unit: RMB’000 Area In 2002 Proportion (%) In 2001 Proportion (%) Japan and Korea 237,419 24.97 147,501 18.77 Hong Kong 257,061 27.03 271,004 34.49 Southeast Asia 191,966 20.19 162,668 20.71 Europe and America 104,458 10.99 83,220 10.59 Others 5,180 0.54 8,674 1.10 Inland of China 154,796 16.28 112,627 14.34 Total 950,880 100.00 785,694 100.00 ④ In the report period, the principal business and the variety and structure of products of the Company experienced no significant change. (2) Operation and performance of holding companies and share-holding companies of the Company Unit: RMB’0000 Business Product or Total Net Proportion of Name of company Registered capital quality service assets profit shares held Beijing Luthai Shirt Production Shirt RMB 560 878.41 -0.92 60% Co., Ltd. enterprise Qingdao Bonded Area Trade Trade and RMB 160 87.38 -9.32 75% Luthai International consultation Trade Co., Ltd. Beijing Sichuang Production Garments and USD 200 2581.06 -7.46 65% Costume Co., Ltd. and sales raiment Dongying Luxin Textile Spinning Yarn RMB 10000 1269.45 795.10 65% Co., Ltd. Zibo Shidanlu Production Cosmetic RMB 200 237.50 2.70 10.5% Cosmetic Co., Ltd. (3) Major suppliers and customers In the report period, the total purchase amount of the top five suppliers of the Company was RMB 345.38 million, taking 45.15% of the total annual amount of purchase. In the report period, the total sales amount of the top five customers of the Company was RMB 326.3871 million, taking 34.32% of the total annual amount of sales. (4) Problems and difficulties occurred in the operation and the countermeasures In the report period, the production and operation status of the Company was good, but the situation of markets of raw material and finished goods was comparatively 13 austere. In the first half of the year, the price of cotton decreased, which made the price of the Company’s products fall compared with the previous year. Commencing from the 3rd quarter, the price of cotton increased while the increase of the price of products lagged, which made the rate of sales profit of the Company decrease compared with the previous year. However, the Company stressed the cost manageme nt in the work of the year from the beginning of the year, which resulted that the cost of each production procedure decreased in a certain extent, at the same time, the input of projects of COM spinning and liquid ammonia settlement to production made the additional value of the Company’s products increase. Thus, the Company still completed the annual budget in the austere situation of increase of price of cotton wool and decrease of price of products. (5) Completion of profit forecast The Company has neither forecast the profit as of the year in public nor disclosed the profit status as of the year in public. In the report year the Company completed a sales income of RMB 950,880,400, which was 95.09% of the plan as of the year. 3. Investment of the report year (1) Particulars about the Proceeds raised in the report year ① Particulars about investment projects, progress and income of raised proceeds Unit: RMB’0000 Total amount of raised proceeds 20117.72 used in the report period Total amount of raised proceeds 86770.00 Total amount of raised proceeds 76612.38 used accumulatively Planned Change of Practical Accrued Compliance with planned Committed project amount of project or amount of amount of progress and estimated input not input income earnings or not Technical renovation project of top 26731.00 No 27849.00 36913 Yes grade yarn-dyed outside material Technical renovation project of 10004.14 Yes 9527.55 - Yes rear trimming of top grade outside material Trimming project of liquid 5000.00 No 2675.30 - Yes ammonia COM spinning project of 20,000 13500.00 No 14263.40 - Yes ingots Dongying Tianxin joint venture 6500.00 No 6500.00 7896 Yes project Supplement of circulating funds 7000.00 No 7000.00 - Yes Technical renovation project of 3027.00 No 3170.59 - Yes spinning Renovation project of bleaching 3192.00 No 3305.40 - Yes and dyeing equipments Constituent company of Hong 636.00 No 636.66 - Yes Kong Expansion project of COM 12000.00 No 1684.19 - Yes spinning of 20,000 ingots Total 87,590.14 - 76,612.09 44,809.00 - 14 Explanation of not reaching Trimming project of liquid ammonia was divided into projects of two stages. The the planned progress and 1st stage project had been put into production in the 2nd quarter of 2002 and the earnings 2nd stage project is implementing now. The expansion project of 20,000 ingots of COM spinning is implementing now and estimated to be put into production in the 4th quarter of 2003. Reason of change and Reason of change of technic al renovation project of rear trimming of top grade explanation of change outside material: the price of equipments decreased than the predicted through procedure bidding purchase, saving funds of RMB 56,250,000. After examined and approved by 2001 Shareholders’ General Meeting, the planned investment of this project was changed from RMB 156,300,000 to RMB 100,041,400 and the saved funds amounting to RMB 56,250,000 was put into the expansion project of 20,000 ingots COM spinning. Explanation: Since the Company is a production enterprise of a coordinated process of spinning, weaving, dyeing and trimming, of which technical renovation project of rear trimming of top grade outside material, trimming project of liquid ammonia is the working procedure of rear trimming of yarn-dyed fabric and the project of 20,000 ingots COM spinning, technical renovation of spinning and renovation project of bleaching and dyeing equipments provide raw materials and work of prophase preparation for the production of yarn-dyed fabric. The semi- manufactured goods among each working procedure are not accounted independently and adopted measure of cost transfer. Thus, the aforesaid projects are implemented and put into production as planned in progress, but the income cannot be counted independently. The income of the above projects is reflected finally in the sales income of finished goods of yarn-dyed fabric. ② Change of investment projects It was originally planned that RMB 156.30 million was to be invested in the technical renovation project of rear trimming of top grade outside material. The price of equipments decreased than the predicted through renovation of arts and crafts and bidding purchase and funds of RMB 56,250,000 were saved. After examined and approved by 2001 Shareholders’ General Meeting, the planned investment of this project was changed from RMB 156,300,000 to RMB 100,041,400 and the saved funds amounting to RMB 56,250,000 was put into the expansion project of 20,000 ingots COM spinning. At present, the rear-trimming project of top grade outside material has all been put into production and the expansion project of 20,000 ingots of COM spinning is implementing now, which is estimated to be put into production in the 4th quarter of 2003. (2) Investment of proceeds not raised through share offering in the report period In the report period, the project of 1.5 million pieces of shirts invested by the Company with its self-owned funds amounting to RMB 23 million had been put into production in the 3rd quarter. The technical renovation project of the bleaching and dyeing factory invested with self-owned funds of RMB 9 million and the technical renovation project of weaving factory invested with RMB 5.1 million had been put into production in the first half of the year as scheduled. The technical renovation project of yarn-dyed fabric invested with self-owned funds of RMB 48 million and the production and technology project of twist thread invested with self-owned funds of RMB 49.49 million were also put into production in the 4th quarter of the year 15 successfully. 4. Analysis of financial status and operating results of the Company in the report period (1) Contrast analysis of the financial index in the report period Proportion of increase Name of index Dec. 31, 2002 Dec. 31, 2001 or decrease (%) Total assets 1,785,690 1,477,554 20.85% Shareholders’ equity 1,356,751 1,314,320 3.22% Profit from principal business 275,278 232,256 18.52% Net profit 128,542 120,518 6.66% Net increase of cash and cash equivalents -1,372 -444,378 99.69% (2) Reason of change of the financial index in the report period In the report period, the increase of total assets was mainly because that the Company realized a net profit of RMB 125.55 million and bank loan of RMB 105 million and the notes payable increased in the report year of 2002. The increase of shareholders’ equity was mainly due to the increased withdrawal of surplus public reserve in the report year. The main reason of increase of profit from principal business was that the output and sales volume of the Company’s products increased, thus the sales income of the products increased. The increase of net profit was mainly due to the increase of profit from principal business. The net increase of cash and cash equivalents was mainly due to the realization of net profit in the report period. 5. The adverse factors of markup of price of raw materials faced by the Company in the new year If the price of raw material continues to rise, it will lead to the decrease of gross interest rate of the Company’s products. The main market of products of the Company is international market. The unstable situation of international politics will lead to the change of situation of international economy and international market. If the situation of politics and economy and exchange rate in the countries and areas of the export market incur significant change, it will impose certain operating risks on the Company’s products. Thus, in the new year, the Company shall further reinforce the market expansion, both the domestic and international market, especially quickening the development of domestic market so as to reduce the influence of change of international market on the Company as much as possible. To deepened the cost management, with increasing the output while economizing and increasing the income while limiting the expenditure, to enhance the technology progress and give prominence to quality management and to further increase the additional value of products so as to consume the influence of markup of raw material in a maximum way and implement the international standardization management of ISO9000, ISO14000 and OHSMS18000 effectively. The investment project of the new year is: to invest RMB 88.72 million to implement the technical project of top grade yarn-dyed fabric and the expansion project of one production line of liquid ammonia trimming. 6. Routine work of the Board of Directors (I) The meeting and resolution of the Board of Directors in the report period In the report period, the Company totally held 11 meetings of the Board of Directors 16 with details as follows: (1) On Jan. 25, 2002, the 5th Meeting of the 3rd Board of Directors was held in the Conference Room in the 2/F of the Company. 11 Directors should be present and actually 7 attended the Meeting. 3 Supervisors attended the Meeting as nonvoting delegates, which was in accordance with the relevant regulations of Company Law and Articles of Association. The resolution of Questionnaire of Normative Operation of Listed Company of the Popedom of Securities Regulatory Office of Jinan was approved in the Meeting. (2) On Jan. 28, 2002, the 6th Meeting of the 3rd Board of Directors was held in the Conference Room of the Company. 11 Directors should be present at the Meeting and actually 7 attended the Meeting, which is in compliance with the relevant regulations of Company Law and Articles of Association. The following resolutions were discussed and approved in the Meeting: Confirmation of the net loss of inventory loss of RMB 637.07 in the work of annual inventory taking and confirmation of loss from bad debts of RMB 4,516,677.49 in the year of 2001. The total loss of the aforesaid two items was RMB 4,517,314.56, which was disposed in the accounts in 2001. (3) On Feb. 2, 2002, the 7th Meeting of the 3rd Board of Directors was held in the Conference Room of the Company. 11 Directors should be present at the Meeting and actually 7 attended the Meeting, which was in compliance with the relevant regulations of Company Law and Articles of Association. The following resolutions were formed in the Meeting: Confirmation of loss of RMB 2,060,112.58 from disposal of equipments in a different price and RMB 591,510.23 of rejection of fixed assets. The total loss of the aforesaid two items was RMB 2,651,622.81, which was disposed as loss of fixed assets in 2001. (4) On March 27, 2002, the 8th Meeting of the 3rd Board of Directors was held in the Conference Room in 1/F of the Company. 11 Directors should be present in the Meeting and actually 8 attended the Meeting. Mr. Chen Ruimou entrusted Mr. Liu Shizhen to attend the Meeting vicariously. 2 members of the Supervisory Committee of the Company attended the Meeting as nonvoting delegates. The procedure of the Meeting was in compliance with the regulation of Company Law and Articles of Association. The following resolutions were mainly discussed and approved in the Meeting: a. 2001 Annual Report and its Summary b. Proposal on Revision of Articles of Association c. Proposal on Rules of Procedure of the Board of Directors d. Proposal on Rules of Procedure of Shareholders’ General Meeting e. Proposal on Information Disclosure System f. Proposal on Work Rules of General Manager g. Proposal on Addition of Two Independent Directors h. Proposal on Renewal of Shandong Zhengyuan Hexin Certified Public Accountants Limited and PriceWaterhouseCoopers China Co., Ltd. as the Financial Auditors of 2002 i. Proposal on Investment of RMB 120 Million to Expand 20,000 Ingots of COM Spinning j. Proposal on Change of the Input Orientation of the Raised Proceeds: the Company planned to invest RMB 156.30 million to carry through the technical renovation of the project of rear trimming with the actual input of RMB 54,041,400 at the end of 2001. According to the factual estimation of the General 17 Work Office of the Company, it still needed RMB 46 million to be put into this project before it could be completed fully and be put into production. Thus, the input funds of this project actually amounted to RMB 100,041,400 and the rest funds was RMB 56,258,600, which was suggested to be put into the expanded project of 20,000 ingots of COM spinning. k. Proposal on Expansion of Production Line of 1.5 Million Pieces of Shirts Invested With RMB 23 Million of Self-owned Funds l. Proposal on 2001 Profit Distribution Project m. Proposal on 2002 Profit Distribution Policy n. Proposal on Engagement of Mr. Liu Zibin as Deputy General Manager of the Company (5) On April 24, 2002, the 9th Meeting of the 3rd Board of Directors was held in the Conference Room of the Company. 11 Directors should be present in the Meeting and actually 7 attended the Meeting. 3 Supervisors attended the Meeting as nonvoting delegates, which was in compliance with the relevant regulations of Company Law and Articles of Association. The 1st Quarter Report of 2002 was discussed and approved in the Meeting. (6) On May 23, 2002, the 10th Meeting of 3rd Board of Directors was held in the Company. 11 Directors should be present at the Meeting and actually 9 attended the Meeting, of which 2 Directors voted to the resolutions of the Meeting through fax, 1 Director entrusted other Directors to vote instead and 3 Supervisors of the Company attended the Meeting as nonvoting delegates, which was in compliance with the relevant regulations of Company Law and Articles of Association. The following resolutions were formed in the Meeting: a. Proposal on Establishment of Encouragement and Binding Plan of Senior Executives of the Company b. Proposal on Holding 2001 Shareholders’ General Meeting (7) On June 26, 2002, the 11 th Meeting of the 3rd Board of Directors was held in the Reception Room in the 2/F of the Company. 13 Directors should be present and actually 10 attended the Meeting, whic h was in compliance with the requirement of Company Law and Articles of Association. The Self- inspection Report of Establishment of Modern Enterprise System of Listed Company was discussed and approved in the Meeting. (8) On June 27, 2002, the 12th Meeting of the 3rd Board of Directors was held in the Conference Room in the 2/F of the Company. 13 Directors should be present and actually 10 attended the Meeting, including one Independent Director, which was in compliance with the requirement of Company Law and Articles of Association. The resolution of the Meeting was legitimate and valid. The candidates of four special committees of Nomination of the Board of Directors, Strategic Decision- making, Auditing and Salary and Remuneration were confirmed in the Meeting. (9) On Aug. 15, 2002, the 13th Meeting of the 3rd Board of Directors was held in the 6th Reception Room of the Company. 13 Directors should be present and actually 11 Directors attended the Meeting, of which 3 Directors entrusted other Directors to attend the Meeting instead. 3 Supervisors attended the Meeting as nonvoting delegates. The Meeting was in compliance with the requirement of Company Law and Articles of Association. The following resolutions were mainly discussed and formed in the Meeting: a. 2002 Semi-annual Report and its Summary 18 b. 2002 Interim Distribution Plan: neither distributing profit nor converting public reserve into share capital c. Proposal on Implementation of Technical Renovation Project of Yarn-dyed Fabric with the Investment of RMB 48 Million of Self-owned Funds d. Proposal on Implementation of Production and Technology Renovation Project of Twist Thread with the Investment of RMB 49.49 Million of Self-owned Funds (10) On Oct. 22, 2002, the 14th Meeting of the 3rd Board of Directors was held in the 6th Reception Room of the Company. 13 Directors should be present and actually 11 Directors attended the Meeting. 3 Supervisors attended the Meeting as nonvoting delegates, which was in compliance with the requirement of Company Law and Articles of Association. The 3rd Quarter Report of 2002 was examined and approved in the Meeting. (11) On Dec. 20, 2002, the 15th Meeting of the 3rd Board of Directors was held in the Conference Room of the Company. 13 Directors should be present and actually 10 attended the Meeting, of which 3 Directors entrusted other Directors to vote instead. 3 Supervisors attended the Meeting as nonvoting delegates. The procedure of the Meeting was in compliance with the requirement of Company Law and Articles of Association. The following proposals were mainly discussed and approved in the Meeting: the Article 13 Chapter 2 of Articles of Association was revised to: “Upon approval by the registration department of the Company, the business scope of the Company is: productio n and sales of textile products and auxiliary series products of cotton polyester yarn, yarn-dyed fabric, shirt, raiment, health care underwear etc., sales of products of the Company in the market at home and abroad and after service, management of non-quota license, purchase and export of non-special-operating commodities, operation of grogshop, hotel and food service and concurrent operation of other business approved by State Administration Management Department.” The proposal should be submitted to 2002 Shareholders’ General Meeting for examination and approval. (II) Implementation of resolutions of Shareholders’ General Meeting by the Board of Directors In the report period, according to the requirement of Company Law and Articles of Association, the Board of Directors of the Company strictly implemented the rights and obligations endowed by Shareholders’ General Meeting, earnestly implemented every resolution examined and approved by Shareholders’ General Meeting so as to make the resolutions be carried out and implemented seriously. The Board of Directors implemented profit distribution plan as of 2001, earnestly carried out the project investment plan approved by Shareholders’ General Meeting, which made the progress of investment project be faster tha n the original plan basically, increased the speed of the development of the Company and gained good economic earnings. 7. 2002 profit distribution preplan of the Company Audited by Shandong Zhengyuan Hexin Certified Public Accountants Limited, the Company realized the total amount of profit of RMB 145,745,316.67 in 2002 and made adjustment of taxable income to the withdrawal of each impairment loss etc. according to the regulations of Tax Law. The taxable income after adjustment was RMB 146,980,170.45. According to the regulation of Income Tax Law of Foreign Investment Enterprise of PRC, since the export amount of products of the Company reached over 70% of value of output of all products in 2002, as per the rate of income 19 tax of 12%, the total amount of income tax payable was RMB 17,637,620.45 and the net profit was 128,107,696.22. According to the regulations of Company Law and Articles of Association, the Company withdrew 10% of the net profit as statutory public reserve, amounting to RMB 12,810,769.61 and withdrew 5% of the net profit as statutory welfare fund, amounting to RMB 6,405,384.81. Profit available for distribution was RMB108,891,541.80. Adding the undistributed profit at the end of the previous year amounting to RMB 11,162,523.50, the distributable profit in the report year was RMB 120,054,065.30. Distribution project as of the year is suggested as follows: (1) Based on the total amount of share capital of 352,027,000 shares at the end of 2002, the Company distributes cash dividend at the rate of cash RMB 3.00 (tax included) for every 10 shares, of which the dividend of B share is paid in HKD equivalent to the middle price of basic rate of exchange of People’s Bank of China on the next date of holding of Shareholders’ General Meeting (tax exclusive as per the regulation of GSF (1993) No. 45 document) (2) The dividend distributed practically when implementing the aforesaid distribution project is RMB 105,608,100.00 and the rest profit amounting to RMB 14,445,965.30 is carried down to the future years. (3) Based on the total amount of share capital of 352,027,000 shares at the end of 2002, the Company converts capital public reserve into share capital of 2 shares for every 10 shares to all shareholders. After the implementation of this conversion project, the total amount of share capital of the Company increases from 352,027,000 shares to 422,432,400 shares. The distribution preplan is implemented subject to the approval of Shareholders’ General Meeting. 8. Other events should be disclosed The Company had no other events should be disclosed. IX. REPORT OF THE SUPERVISORY COMMITTEE 1. Particulars about work of the Supervisory Committee in the report year In the report year, the Supervisory Committee totally held 4 meetings and attended 11 meetings of the Board of Directors as non-voting delegates. The meetings of the Supervisory Committee are as follows: (1) The 4th meeting of the 3rd Supervisory Committee was held at the meeting room in the 1/F of the Company on Jan.25, 2002. 3 supervisors were expected to attend the meeting and actually all of them were present. The meeting was held in conformity with the regulations of Company Law and the Company’s Articles of Association. The meeting examined and approved principally Investigation Table On Norma tive Operation of Listed Companies Supervised by Jinan Securities Management Office. (2) The 5th meeting of the 3rd Supervisory Committee was held at the meeting room in the 1/F of the Company on March 26, 2002. 3 supervisors were expected to attend the meeting and actually 2 of them were present. The meeting was held in conformity with the regulations of Company Law and the Company’s Articles of Association. The meeting examined and approved principally the following resolutions: 2001 Word Report of the Supervisory Committee; 2001 Annual Report and Summary; Rules of Procedure of the Shareholders’ General Meeting. (3) The 6th meeting of the 3rd Supervisory Committee was held at the meeting room in the 1/F of the Company on June 26, 2002. 3 supervisors were expected to attend the 20 meeting and actually all of them were present. The meeting was held in conformity with the regulations of Company Law and the Company’s Articles of Association. The meeting discussed and approved Self-examination on Establishing Modern Enterprise System of Listed Company. (4) The 7th meeting of the 3rd Supervisory Committee was held at the reception room in the 2/F of the Company on Aug.15, 2002. 3 supervisors were expected to attend the meeting and actually all of them were present. The meeting was held in conformity with the regulations of Company Law and the Company’s Articles of Association. The meeting approved 2002 Semi Annual Report and Summary of the Company. 2. Independent opinions expressed by the Supervisory Committee (1) Particulars about operation according to law In the report period, the Supervisory Committee of the Company examined wholly and patiently the procedure of decision- making of the Company, implementation of internal control system and duties of directors and managers and found no actions of breaking laws, regulations and Articles of Association or harmful of the interest of the Company. (2) Inspection of the Company’s financing The Supervisory Committee has checked the financial reports made by Shandong Zhengyuan Hexin Certified Public Accountants and PricewaterhouseCoopers China Certified Public Accountants and thought conformably the reports have truthfully and accurately reflected the Company’s financial status and business results. (3) The actual investment item of the last raised capital was in conformity with promised investment item. Bur for COM Spinning Item of 20,000 Ingots, 2001 Annual Shareholders’ General Meeting approved to change its investment means from establishing a joint enterprise named Zibo Luhua Textiles Co., Ltd. by and Zibo Thaimei Ties Co., Ltd. the Company which invests 90% to investing independently by the Company. The investment scale had no change. (4) Whether the related transactions are fair In opinion of the Supervisory Committee, the related transactions of the Company were based on the fairness, justness and publicity and there existed no transactions harmful of the interest of listed company. (5) Shandong Zhengyuan Hexin Certified Public Accountants and PricewaterhouseCoopers China Certified Public Accountants issued auditor’s reports with non-reservation opinion according to domestic and international accounting rules. X. SIGNIFICANT EVENTS 1. In 2002, there were no significant lawsuits and arbitrations. 2. In the report period, there were no purchase and sale of assets. 3. Significant related transactions in the report period In 2002, the related transactions of the Company was purchase of community and supply of service but the accumulative transaction amount in the report period didn’t reach RMB 30 million and didn’t exceed 5% of audited net assets in the latest year or 10% of net profit of the year 2002. There occurred no related transactions of assignment of assets and share equity. Please refer to the attachment of the 11 th section, namely financial report in the annual report for details. 4. Important contracts and their implementation (1) In the report year, the Company had kept as custodian, contracted or leased any 21 other company’s assets as follows: In the report period, the Company leased the land with 92.09 mu, house with 6484.71 square meters and one gas station of Zibo Lucheng Textiles Co., Ltd. and paid the rent of RMB 2,332,572,24 for the year 2002. (2) Significant guarantee: The Company hadn’t provided any guarantee to outside company in the report year. (3) Entrusting other managing cash assets in the report year and in the future: In the report year and before the report year, the Company had never entrusted any other party to manage the Company’s cash assets. There will not the item in future plan. (4) Other significant contracts: Ended Dec. 31, 2002, the significant contracts on purchase of equipment the Company signed but not implemented are as follows: Items Amount: RMB The 2nd phase 20,000 Ingots COM Spinning Product Line Technology 72,213,530.11 Alteration Project Finishing Product Line Technology Alteration Project 31,794,059.12 Colorful Weaving Product Line Technology Alteration Project 24,780,249.65 Twiddling String Product Line Project 19,817,097.80 60 Fabric Machine Project 17,500,113.25 5. Particulars about implementation of promises made by the Company or shareholders holding over 5% of total shares: In 2002, 2001 profit distribution proposal promised by the Company was implemented completely in July 2002. 2002 profit distribution policy committed was is that the Company distributes profit at least one time, actual distribution is not less than 50% of profit available for distribution, capital public reserve is transferred to share capital at least one time and its proportion doesn’t exceeding 10:3. The Board of Directors put forward to 2002 distribution preplan based on the commitment and submitted to 2002 Annual Shareholders’ General Meeting for approval and implementation. 6. Engagement of Certified Public Accountants by the Company The Company reengaged Shandong Zhengyuan Hexin Certified Public Accountants and PricewaterhouseCoopers China Certified Public Accountants as its financial auditor organizations of the Company. The audit expense paid in the report year was respectively RMB 400,000 and 750,000. The two auditor organizations have provided auditor service for the Company for 6 years. 7. In the report year, the Company, the Board of Directors or its directors had neither been checked, given administrative punishment or given circular notices of criticism by China Securities Regulatory Commission nor been condemned publicly by the Stock Exchange. 8. Function performed by independent directors 2001 Annual Shareholders’ General Meeting of the Company added election of 2 independent directors. The independent directors implemented perfectly their duties, attended the Board of Directors and the Shareholders’ General Meeting and made good suggestions for the Company’s decision- making during their office terms. The Company will add election of 3 independent directors before June 30, 2003 to make the independent directors reach one third of the total directors. 9. Other significant events There were no other significant events in the report period. XI. Financial Report 22 LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2002 DRAFT FOR CLIENT’S FINAL COMMENTS Report of the Auditors To the Shareholders of Luthai Textile Joint Stock Company Limited We have audited the accompanying consolidated balance sheet of Luthai Textile Joint Stock 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 pages 2 to 29 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 consolidated 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 consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion the consolidated financial statements present fairly in all material respects the financial position of the Group as of 31 December 2002 and the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards. PricewaterhouseCoopers 25 March 2003 23 LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2002 Year ended 31 December (all amounts in RMB thousands) Notes 2002 2001 Sales 1 950,880 785,694 Cost of sales (675,602) (553,438) Gross profit 275,278 232,256 Other operating income 6,557 6,197 Distribution costs (38,383) (32,856) Administrative expenses (88,399) (73,471) Operating profit 2 155,053 132,126 Finance (cost)/income – net 3 (2,057) 7,252 Share of results of non-consolidated subsidiary (10) (20) Profit from ordinary activities before tax 5 152,986 139,358 Income tax expense 5 (21,692) (19,002) Group profit after tax 131,294 120,356 Minority interest 21 (2,752) 162 Net profit 6 128,542 120,518 Earnings per share (basic and diluted) 6 RMB 0.37 RMB 0.34 The accounting policies on pages 8 to 13 and the notes on pages 14 to 29 form an integral part of these consolidated financial statements. LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED CONSOLIDATED BALANCE SHEET AS OF 31 DECEMBER 2002 31 December 31 December (all amounts in RMB thousands) Notes 2002 2002 2001 2001 ASSETS Non-current assets Property, plant and equipment 8 1,040,905 756,966 Land use rights 9 32,446 11,545 Intangible assets 10 11,074 13,443 Investments in non-consolidated subsidiaries 11 6,808 7,651 Available-for-sale investment 12 215 215 1,091,448 789,820 Current assets Inventories 13 283,764 261,141 Receivables and prepayments 14 239,572 214,315 Trading investments 15 - 40,000 Cash and cash equivalents 16 170,906 172,278 694,242 687,734 Total assets 1,785,690 1,477,554 The accounting policies on pages 8 to 13 and the notes on pages 14 to 29 form an integral part of these consolidated financial statements. LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED CONSOLIDATED BALANCE SHEET (CONTINUED) AS OF 31 DECEMBER 2002 31 December 31 December (all amounts in RMB thousands) Notes 2002 2002 2001 2001 SHAREHOLDERS’ EQUITY Capital and reserves Ordinary shares 20 352,027 270,790 Share premium 20 765,795 847,032 Reserves 22 86,878 66,887 Retained earnings 152,051 129,611 1,356,751 1,314,320 Minority interest 21 44,621 39,897 LIABILITIES Non-current liabilities Borrowings 18 15,000 - Current liabilities Trade and other payables 17 237,953 119,909 Current tax liabilities 6 3,428 Borrowings 18 131,359 - 369,318 123,337 Total liabilities 384,318 123,337 Total shareholders’ equity and liabilities 1,785,690 1,477,554 The accounting policies on pages 8 to 13 and the notes on pages 14 to 29 form an integral part of these consolidated financial statements. LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEAR ENDED 31 DECEMBER 2002 Share Share Retained (all amounts in RMB thousands) Notes Reserves Total capital premium earnings Balance at 1 January 2001 208,300 909,522 46,189 107,150 1,271,161 Net profit 6 - - - 120,518 120,518 Reserves 22 - - 20,698 (20,698) - Dividend relating to 2000 - - - (77,359) (77,359) Capitalisation of share premium 20 62,490 (62,490) - - - Balance at 31 December 2001 270,790 847,032 66,887 129,611 1,314,320 Balance at 1 January 2002 270,790 847,032 66,887 129,611 1,314,320 Net profit 6 - - - 128,542 128,542 Reserves 22 - - 19,991 (19,991) - Dividend relating to 2001 - - - (86,111) (86,111) Capitalisation of share premium 20 81,237 (81,237) - - - Balance at 31 December 2002 352,027 765,795 86,878 152,051 1,356,751 The accounting policies on pages 8 to 13 and the notes on pages 14 to 29 form an integral part of these consolidated financial statements. LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2002 Year ended 31 December (all amounts in RMB thousands) Notes 2002 2001 Cash flow from operating activities Net profit 128,542 120,518 Adjustment for: Minority interest 21 2,752 (162) Tax 5 21,692 19,002 Depreciation 8 66,479 45,238 Amortisation of land use rights 9 3,263 1,956 Amortisation of intangible assets 10 2,493 2,711 Impairment charge of property, plant and equipment 8 - 1,258 Loss on disposal of property, plant and equipment 2 231 5,276 Gain on disposal of non-consolidated subsidiary 2 (14) - Provision for inventories 2 6,828 6,889 Share of results in non-consolidated subsidiary 11 10 20 (Reversal of)/provision for doubtful debts 2 (218) 4,721 Interest expenses 3 6,653 221 Interest income 3 (2,959) (5,825) Dividend income - (3) 235,752 201,820 Changes in working capital Inventories (29,451) (117,935) Receivables and prepayments (42,897) (82,674) Trading investments 40,000 (40,000) Trade and other payables 97,551 27,590 Cash generated from/(used in) operations 300,955 (11,199) Interest paid (6,653) (221) Tax paid (25,114) (23,377) Net cash generated from/(used in) operating activities 269,188 (34,797) The accounting policies on pages 8 to 13 and the notes on pages 14 to 29 form an integral part of these consolidated financial statements. 28 LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED CONSOLIDATED CASH FLOW STATEMENT (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2002 Year ended 31 December (all amounts in RMB thousands) Notes 2002 2001 Cash flow from investing activities Investment in non-consolidated subsidiary 11 (6,367) (7,200) Purchase of property, plant and equipment (313,388) (294,094) Purchase of land use rights 9 (24,164) (4,909) Purchase of intangible assets 10 (124) (5,261) Proceeds from sale of property, plant & equipment 525 306 Proceeds from disposal of non-consolidated subsidiary 7,214 - Dividend received - 3 Interest received 2,959 5,825 Net cash used in investing activities (333,345) (305,330) Cash flow from financing activities Proceeds from borrowings 153,867 - Repayments of borrowings (7,508) (24,012) Dividend paid to group shareholders (86,126) (80,239) Proceeds from minority shareholders 21 2,552 - Net cash generated from/(used in) financing activities 62,785 (104,251) Decrease in cash and cash equivalents (1,372) (444,378) Movement in cash and cash equivalents At beginning of year 172,278 616,656 Decrease in cash and cash equivalents (1,372) (444,378) At end of year 16 170,906 172,278 Non-cash transactions The principal non-cash transactions are the capitalisation of share premium (Note 20). The accounting policies on pages 8 to 13 and the notes on pages 14 to 29 form an integral part of these consolidated financial statements. 29 LUTHAI TEXTILE JOINT STOCK COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2002 ACCOUNTING POLICIES Background information Luthai Textile Joint Stock Company Limited (the “Company”) is a joint stock limited company established in Shandong Province of the People’s Republic of China (“PRC”). The principal activities of the Company and its subsidiaries (the “Group”) are the manufacture and sale of various textiles and garment products, including yarn, dyed yarn, fabric and shirts. The Group operates in the PRC. The address of the Company’s registered office is as follows: South Side, Nan Ying North Road Zibo High and New Technology Development Zone Zibo City, Shandong Province The People’s Public of China The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below: A. Basis of preparation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards, including International Accounting Standards and Interpretations issued by the International Accounting Standards Board. The consolidated financial statements have been prepared under the historical cost convention. B. Consolidation Subsidiary undertakings, which are those companies in which the Group, directly or indirectly has an interest of more than one half of the voting rights or otherwise has power to exercise control over the operations, are consolidated. 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. All inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are also eliminated unless cost cannot be recovered. Where necessary, the accounting policies of subsidiaries are changed to ensure consistency with the policies adopted by the Group. A listing of the Group’s principal subsidiaries is set out in Note 24. 30 C. Foreign currencies The Group maintains its books and accounting records in Renminbi. Foreign currency transactions in the Group companies are accounted for at the exchange rates prevailing at the date of the transactions. Foreign currency monetary assets and liabilities are translated at the applicable exchange rates prevailing at the balance sheet date. 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. D. Property, plant and equipment Property, plant and equipment are stated at cost less depreciation and impairment losses. Property, plant and equipment contributed by a minority shareholder are initially recorded at their approved appraised value upon contribution to a subsidiary. Depreciation is calculated on the straight- line method to write off the cost of the each asset to its residual value, estimated at 10 per cent of cost, over its estimated useful life as follows: Buildings 20 years Plants and machinery 13 years Electronic equipment and motor vehicles 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. 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. All other borrowing costs are expensed. E. Land use rights Land use rights are stated at cost less accumulated amortisation and impairment losses. Cost represents consideration paid for the rights to use the land on which the Group’s factories and buildings are situated. Amortisation of land use rights is calculated on a straight-line basis over the period of the land use rights varying from 10 to 13 years. The land use rights will be renewed upon expiration of their present use period. 31 F. Intangible assets Expenditure on acquired intangible assets is capitalised and amortised using the straight-line method over their estimated beneficial period as follows: Electricity use rights 10 years Water use rights 10 years Computer software 5 years G. Investments The Group classified its 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 purchases 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. Investments with fixed maturity that the management has the intent and ability to hold to maturity are classified as held-to-maturity and are included in non-current assets; during the year 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; these 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. All 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, whilst 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 are included in the income statement in the period in which they arise. Unrealised gain and losses arising from changes in the fair value of securities classified as available-for-sale are recognised in equity. The fair value of investments is 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. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments are included in the income statement as gains and losses from investment securities. 32 H. Leases 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. I. Inventories Inventories are stated at the lower of cost or net realisable value. Cost is determined by 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, but excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and estimated selling expenses. J. 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 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. K. Notes receivable Notes receivable are carried at face value of the notes which approximate fair value. L. Cash and cash equivalents Cash and cash equivalents are carried in the balance sheet at cost. For the purpose of the cash flow statement, cash and cash equivalents comprise cash in hand and deposits held at call with banks. M. Share capital Ordinary shares with discretionary dividends are classified as equity. External costs directly attributable to the issuance of new shares are shown as a deduction in equity from the proceeds. Dividends on ordinary shares are recognised in equity in the period in which they are declared. 33 N. Borrowings Borrowings are recognised initially at the proceeds received, net of transaction costs incurred. In subsequent periods, borrowings are 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. Deferred income tax Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. The principal temporary differences arise from depreciation on property, plant and equipment, provisions for receivables, inventories and property, plant and equipment. Tax rates enacted by the balance sheet date are used to determine 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. P. Defined contributions to pension scheme The Group participates in a government pension scheme. The annual contribution amount is provided based on the amount determined by the local government agency. Under this scheme, retirement benefits of existing and retired employees are assured by the National United Retirement Fund and the Group has no further obligations beyond the annual contributions. It is the directors’ intention to continue making such payments in the future. Q. Revenue recognition Sales are recognised upon delivery of products and customer acceptance when significant risks and rewards of ownership of the goods are transferred to the customer. Sales are shown net of value added tax and discounts, and after eliminating sales within the Group. Other revenues earned by the Group are recognised on the following bases: Interest income – on an accrual basis, unless collectibility is in doubt. Dividend income – when the payment is received. 34 R. Financial instruments (1) Financial risk factors The Group’s activities expose to it to a variety of financial risks, including the effects of changes in Government Bonds Exchange quoted prices, foreign currency exchange rates and interest rates. (i) Foreign exchange risk The Group’s sales, notes receivable and trade receivables are exposed to foreign exchange risk arising from various currency exposures primarily with respect to US Dollars and the Group’s purchases and trade payables are exposed to foreign exchange risk primarily with respect to Euro and Japanese Yen. The Group has not used any forward contracts or currency borrowings to hedge its insignificant exposure to foreign currency risk. (ii) Interest rate risk The Group’s income and operating cash flows are substantially independent of changes in market interest rates. The Group has no significant interest-bearing assets. As at 31 December 2002, all of the Group’s borrowings were at fixed interest rates as stipulated by the People’s Bank of China of PRC. (iii) Credit risk The carrying amounts of cash and cash equivalents, receivables and prepayments, and trading investments represent the Group’s maximum exposure to credit risk in relation to financial assets. The Group has no significant concentrations of credit risk. The Group has policies in place to ensure that sales of products are made to customers with an appropriate credit history. Cash and trading investments transactions are limited to reputable financial institutions. (2) Fair value estimation Fair value of publicly traded trading securities is based on quoted market prices at the balance sheet date. In assessing the fair value of non-traded financial instruments, the Group uses a variety of methods, such as quoted market prices or estimated discounted value of future cash flows, and makes assumptions that are based on market conditions existing at each balance sheet date. The face values less any estimated credit adjustments for financial assets and liabilities with a maturity of less than one year are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate available to the Group for similar financial instruments. 35 S. Comparatives Comparative figures have been adjusted to conform with changes in presentation in the current year. 1. Sales Sales represent invoiced sales of textile products to third parties and related companies (Note 23), net of value added tax and discounts, and comprise the following: 2002 2001 Sales outside the mainland PRC - Asia Hong Kong SAR 251,448 271,004 Japan 151,859 147,501 Rest of Asia 258,337 162,668 661,644 581,173 - Europe 83,288 56,169 - South America 19,464 27,051 - Others 5,004 8,674 Sales within the mainland PRC 181,480 112,627 950,880 785,694 2. Operating profit The following items have been included in arriving at operating profit: 2002 2001 Depreciation on property, plant and equipment (Note 8) 66,479 45,238 Impairment of property, plant and equipment (included in “Administrative expenses”) (Note 8) - 1,258 Loss on disposal of property, plant and equipment 231 5,276 Amortisation of land use rights (Note 9) 3,263 1,956 Amortisation of intangible assets (included in “Administrative expenses”) (Note 10) 2,493 2,711 Operating lease rentals payable – property 5,213 4,345 Operating lease rentals payable – machinery 1,338 - Gain on disposal of non-consolidated subsidiary (Note 11) (14) - Profit on sale of trading investments (473) (1,628) (included in “Other operating income”) Staff costs (Note 4) 123,682 69,182 Cost of inventory included in cost of sales 524,053 418,271 (Reversal of)/provision for doubtful debts (218) 4,721 Provision for inventories 6,828 6,889 36 3. Finance (cost)/income – net 2002 2001 Interest income 2,959 5,825 Net foreign exchange transaction gains 1,637 1,648 Interest expenses (6,653) (221) (2,057) 7,252 4. Staff costs 2002 2001 Wages and salaries 101,365 56,092 Defined contribution plan 9,959 5,593 Housing fund 2,463 2,887 Welfare 9,895 4,610 123,682 69,182 Average number of persons employed by the Group during the year: Full time 6,032 3,264 Part time 795 2,312 6,827 5,576 5. Income tax expense 2002 2001 Current tax 21,692 19,002 As at 31 December 2002, the Group has no significant deferred tax assets and liabilities. In accordance with the relevant statutory tax rules in the coastal open zone where the Company is located, the Company is subject to a statutory tax rate of 24 per cent. Beginning from 1995, the Company has been granted a concessionary tax rate of 12 per cent subject to its output value of export products exceeding 70 per cent of output value of the products of the enterprise. The Local Ministry of Foreign Trade and Economic Cooperation has verified that output value of export products for the year ended 31 December 2002 had exceeded 70 per cent of output value of products of the enterprise. Accordingly, the income tax has been provided at 12 per cent. The reconciliation of profit before tax and income tax expense is as follows: 2002 2001 Profit before tax of the Group 152,986 139,358 Tax calculated at a tax rate of 12% (2001: 12%) 18,358 16,723 Effect of different tax rates of subsidiaries 2,581 1,145 Income not subject to tax (114) - Effect of expenses not deductible for tax purposes 867 1,134 Income tax expense 21,692 19,002 37 6. Earnings per share Basic and diluted earnings per share have been calculated by dividing the net profit attributable to shareholders by the weighted average number of ordinary shares in issue during the year. As there are no potentially dilutive securities, there is no difference between basic and diluted earnings per share. 2002 2001 Net profit attributable to shareholders 128,542 120,518 Weighted average number of ordinary shares in issue (thousands) 352,027 352,027 Earnings per share (RMB per share) 0.37 0.34 7. Dividends per share At the Annual General Meeting to be held in May 2003, a dividend in respect of 2002 of RMB 0.3 per share is to be proposed. Total dividends amounted to RMB 105,608,000. These financial statements do not reflect this dividend payable, which will be accounted for in shareholders’ equity as an appropriation of retained earnings in the year ending 31 December 2003. The dividends declared in respect of 2001 and 2000 were, respectively, RMB 86,111,220 and RMB 77,359,000. 38 8. Property, plant and equipment Electronic Plants & equipment & Construction Buildings machinery motor vehicles in progress Total Year ended 31 December 2001 Opening net book amount 69,779 247,378 6,350 157,478 480,985 Additions 12,323 58,409 4,278 256,019 331,029 Transfer of construction in progress 81,642 254,290 6,405 (342,337) - Disposals - (8,183) (369) - (8,522) Impairment charge (Note 2) - (1,258) - - (1,258) Depreciation charge (Note 2) (5,590) (37,401) (2,247) - (45,238) Closing net book amount 158,154 513,235 14,417 71,160 756,966 At 31 December 2001 Cost 179,908 686,666 19,314 71,160 957,048 Accumulated depreciation and impairment provision (21,754) (173,431) (4,897) - (200,082) Net book amount 158,154 513,235 14,417 71,160 756,966 Electronic Plants & equipment & Construction Buildings machinery motor vehicles in progress Total Year ended 31 December 2002 Opening net book amount 158,154 513,235 14,417 71,160 756,966 Additions 5,135 7,816 6,166 332,057 351,174 Transfer of construction in progress 103,606 207,858 2,976 (314,440) - Disposals - (664) (92) - (756) Depreciation charge (Note 2) (8,536) (53,230) (4,713) - (66,479) Closing net book amount 258,359 675,015 18,754 88,777 1,040,905 At 31 December 2002 Cost 288,693 904,135 27,498 88,777 1,309,103 Accumulated depreciation and impairment provision (30,334) (229,120) (8,744) - (268,198) Net book amount 258,359 675,015 18,754 88,777 1,040,905 39 8. Property, plant and equipment (continued) As at 31 December 2002, certain buildings with remaining depreciation period of 6 to 18 years are situated on land where the land use rights will expire within the next 2 to 11 years. The directors believe that all the land use rights held by the Company would be renewed under a reasonable price upon the expiration of their present use period, and would cover the remaining depreciation period of the buildings situated on them. 9. Land use rights 2002 2001 Opening net book amount 11,545 8,592 Additions 24,164 4,909 Amortisation charge (Note 2) (3,263) (1,956) Closing net book amount 32,446 11,545 At year end Cost 46,010 21,846 Accumulated amortisation (13,564) (10,301) Net book amount 32,446 11,545 Included in the above land use rights is a cost of RMB 22,864,000 of land use rights that has been paid, but the procedures relating to the issuance of the certificate of such land use rights are being processed. 10. Intangible assets Electricity Water use Total Use rights rights Year ended 31 December 2001 Opening net book amount 5,006 5,887 10,893 Additions 1,004 4,257 5,261 Amortisation charge (Note 2) (1,700) (1,011) (2,711) Closing net book amount 4,310 9,133 13,443 At 31 December 2001 Cost 8,080 11,042 19,122 Accumulated amortisation (3,770) (1,909) (5,679) Net book amount 4,310 9,133 13,443 40 10. Intangible assets (continued) Electricity Water use Computer Total use rights rights software Year ended 31 December 2002 Opening net book amount 4,310 9,133 - 13,443 Additions - - 124 124 Amortisation charge (Note 2) (808) (1,684) (1) (2,493) Closing net book amount 3,502 7,449 123 11,074 At 31 December 2002 Cost 8,080 11,045 124 19,249 Accumulated amortisation (4,578) (3,596) (1) (8,175) Net book amount 3,502 7,449 123 11,074 11. Investments in non-consolidated subsidiaries 2002 2001 At beginning of year 7,651 471 Share of results before tax (10) (20) Addition (Note 24(b)) 6,367 7,200 Disposal (7,200) - At end of year 6,808 7,651 Investments in non-consolidated subsidiaries comprise the Company’s unquoted equity investments in Qingdao Luthai International Trading Co., Ltd. (“Qingdao Lutai”), Lutai (Hong Kong) Textile Co., Ltd. (“Lutai HK”) and Zibo Luhua Textile Co., Ltd. (“Zibo Luhua”) (Note 24). As the financial statements of Qingdao Luthai were not material to the Group, it had been accounted for by the equity method of accounting in the consolidated financial statements of the Group. Lutai HK was incorporated in 2002 and was still in pre-operating stage as at 31 December 2002. Accordingly, it has been accounted for by the cost method of accounting in the consolidated financial statements of the Group. Zibo Luhua had remained dormant since its establishment in 2001 and had been accounted for by the cost method of accounting in the consolidated financial statements of the Group until it was dissolved in 2002. A gain amounting to RMB 14,000 (Note 2) was realised from the disposal of Zibo Luhua. 41 12. Available-for-sale investment 2002 2001 At beginning of year 215 215 At end of year 215 215 Available- for-sale investment represents the Company’s 10.5% unquoted equity investment in Zibo Stanluian Cosmetics Co., Ltd. that was incorporated in PRC. The investment is carried at cost, as its fair value cannot be reliably determined without incurring excessive costs. The directors are of the opinion that the investment is classified as non-current assets as it is not expected to be realised within twelve months of the balance sheet date. 13. Inventories 2002 2001 Raw materials (at cost) 129,254 101,408 Raw materials (at net realisable value) - 20,883 Work in progress (at cost) 92,278 73,276 Finished goods (at cost) 54,371 63,409 Finished goods (at net realisable value) 7,861 2,165 283,764 261,141 14. Receivables and prepayments 2002 2001 Trade receivables 21,046 14,876 Provision for doubtful debts (1,122) (880) 19,924 13,996 Other receivables 5,037 12,212 Provision for doubtful debts (475) (935) 4,562 11,277 Notes receivable (a) 76,263 63,832 VAT tax refund receivable (b) 80,410 58,737 Prepayments 52,562 57,254 Amount due from Tianxin (Note 23) 1,782 2,731 Employee housing loans 4,069 6,488 239,572 214,315 (a) Notes receivables represent irrevocable letters of credit denominated in foreign currencies, and bills of exchange denominated in Renminbi received from customers, with maturity dates within one year and six months of balance sheet date, respectively. (b) At 31 December 2002, certain bank borrowings are secured on VAT tax refund receivable (2001: nil) (Note 18). 42 15. Trading investments 2002 2001 Investment in government bonds - 40,000 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 Government Bonds Exchange quoted bid prices. Trading investments are classified as current assets because they are expected to be realised within twelve months of the balance sheet date. In the cash flow statement, trading investments are presented within the section on operating activities as part of changes in working capital. In the income statement, changes in fair values of trading investments are recorded in other operating income. 16. Cash and cash equivalents 2002 2001 Cash at bank and in hand 74,834 54,413 Short term bank deposits 96,072 117,865 170,906 172,278 The interest rates on short term bank deposits range from 0.125% to 3.5% per annum (2001: 0.75% to 5.10%). 17. Trade and other payables 2002 2001 Notes payable (a) 140,815 500 Trade payables 38,870 47,984 Advances from customers 8,796 5,043 Payroll and welfare payables 23,393 7,138 Dividend payables 1,099 534 Taxes other than income taxes payable 3,584 38,087 Accrued expenses 8,703 4,814 Amount due to shareholder – Lucheng (Note 23) 562 1,291 Other payables 12,131 14,518 97,138 119,409 237,953 119,909 (a) Notes payable represent commercial bills denominated in Renminbi payable to suppliers, with maturity dates within six months of balance sheet date. 43 18. Borrowings 2002 2001 Current Bank borrowings – secured (a) 60,000 - Bank borrowings – unsecured 30,000 Inter-company commercial bills discounted to banks 41,359 - 131,359 - Non-current Bank borrowings – unsecured 15,000 - Total borrowings 146,359 - (a) These current bank borrowings amounting to RMB 60,000,000 are secured over VAT tax refund receivable (Note 14(b)). The interest rates of the borrowings were fixed and the effective interest rates at the balance sheet date were as follows: 2002 2001 Bank borrowings 4.80% - Inter-company commercial bills discounted to banks 2.88% - The carrying amounts of borrowings approximate their fair values. Maturity of non-current borrowing: 2002 2001 Between 1 and 2 years 15,000 - 44 19. Commitments (a) Capital commitments Capital expenditure contracted for at the balance sheet date but not recognised in the financial statements is as follows: 2002 2001 Property, plant and equipment 166,105 106,864 (b) Operating lease commitments – where the Group is a lessee The future aggregate minimum lease payments under non-cancellable operating leases are as follows: 2002 2001 Not later than 1 year 4,970 3,740 Later than 1 year and not later than 5 years 11,838 11,675 Later than 5 years 14,555 17,862 31,363 33,277 45 20. Ordinary shares and share premium 2002 2001 Number of shares (in thousands) 352,027 270,790 Registered, issued and fully paid ordinary shares of RMB 1.00 each (a) Non-tradable - Domestic legal person shares 49,264 37,895 - Foreign legal person shares 49,263 37,895 - Employee shares 33,800 26,000 (b) Tradable - A shares 84,500 65,000 - B shares 135,200 104,000 352,027 270,790 Share premium 765,795 847,032 Total 1,117,822 1,117,822 All shares rank pari passu in all respects. Pursuant to the resolutions of the Annua l General Meeting of the Company on 26 June 2002, the Board of Directors of the Company capitalised RMB 81,237,000 Share Premium as at 31 December 2001 on a 3- for-10 basis (2001: RMB 62,490,000). After the capitalisation, the total Share Capital of the Company increased from 270.79 million shares to 352.03 million shares. 21. Minority interest 2002 2001 At beginning of year 39,897 5,059 Addition in investment in subsidiaries 2,552 35,000 Share of net profit/(losses) of subsidiaries 2,752 (162) Dividend paid (580) - At end of year 44,621 39,897 46 22. Reserves Statutory Public Discretionary common welfare fund common Total reserve reserve Balance at 1 January 2001 31,006 15,183 - 46,189 Appropriation during the year 11,571 5,785 3,342 20,698 Balance at 31 December 2001 42,577 20,968 3,342 66,887 Balance at 1 January 2002 42,577 20,968 3,342 66,887 Appropriation during the year 13,327 6,664 - 19,991 Balance at 31 December 2002 55,904 27,632 3,342 86,878 The PRC laws and regulations require PRC enterprises to provide for statutory common reserve fund and statutory public welfare fund which are appropriated from net profit as reported in the statutory financial statements prepared under the PRC accounting regulations prior to any dividend appropriation. All statutory common reserve fund and statutory public welfare fund are created for specific purposes. The Company is required to allocate at least 10 per cent of its net profit to the statutory common reserve fund until this fund reaches 50 per cent of the registered capital. The statutory common reserve fund can only be used, upon approval by the relevant authorities, to offset accumulated losses or to increase capital. However, the remaining unconverted statutory common reserve fund should be maintained at a minimum of 25 per cent of registered capital. An appropriation of 10 per cent of net profit has been allocated to the statutory common reserve fund for the year ended 31 December 2002 (2001: 10 per cent). An appropriation of 5 per cent of net profit has been made to the statutory public welfare fund for the year ended 31 December 2002 (2001: 5 per cent ). This fund should be used for the collective welfare of the employees. According to the PRC lis ting rules and relevant regulations, distributions of profit should be made based on the lower of the retained earnings as stated in the statutory financial statements and the retained earnings as stated in the financial statements prepared in accordance with IFRS. On this basis, the retained earnings of the Company as of 31 December 2002 were RMB 120,054,000 (2001: RMB 97,274,000). In accordance with the Company’s Articles of Association, an appropriation to a discretionary common reserve fund can be made after the statutory appropriations, subject to shareholders’ approval at the Annual General Meeting. At the Annual General Meeting to be held in May 2003, no discretionary common reserve fund is to be proposed (2001: nil). 47 23. Related party transactions The Company is controlled by Zibo Lucheng Textile Co., Ltd. (“Lucheng”) (Note 17) that incorporated in PRC, which owns 14% of the Company’s shares. The largest shareholder of Lucheng is Mr. Liu Shizhen, the Chairman of the Board of Directors and the General Manager of the Company. In addition to the related party information shown elsewhere in the financial statements, the following significant transactions between the Group and related parties took place during the financial year at terms agreed between the parties as set out below: Related party Relationship Dongying City Tianxin Woven Co., Ltd. (“Tianxin”) (Note Minority shareholder of Dongying Luxin 14) Woven Co., Ltd. (“Dongying Luxin”), a subsidiary of the Company (Note 24) (a) Transactions between the Company and Lucheng (i) Sales of goods 2002 2001 Slow-moving and scraped fabric and fragmentary cloths 143 211 Shirts processing income and other sales - 650 143 861 The directors believe that the above transactions were carried out on commercial terms and conditions and at market prices. (ii) Purchases of goods 2002 2001 Fabric and fragmentary cloths 707 953 Other garment products 975 405 1,682 1,358 The directors believe that the above transactions were carried out on commercial terms and conditions and at market prices. (iii) Salaries of temporary staff Salaries paid to Lucheng for the temporary staff provided on commercial terms and conditions and at market prices, approximated RMB 6,721,000 (2001: RMB 20,339,000). 48 23. Related party transactions (continued) (a) Transactions between the Company and Lucheng (continued) (iv) Lease agreement On 1 January 2002, the Company renewed a lease agreement with Lucheng for a piece of land and certain buildings on this land. Lucheng has guaranteed a lease term of 15 years, which is renewable annually, with monthly lease payments of RMB 121,854 and RMB 43,541 for the land and certain buildings respectively. The areas of the land and building leased are 61,424.03 m2 and 6,484.07 m2 respectively. The Company has constructed its Luthai Industrial Park on this land in the year 2001. On 12 August 2001, the Company signed a lease agreement with Lucheng for a gasoline station. The lease term is 5 years with monthly lease payment of Rmb 28,986 for the land and gasoline storage facilities constructed on it. The directors believe that these leases were carried out on commercial terms and conditions and at market prices. Lease payments in year 2002 amounted to RMB 2,333,000 (2001: RMB 1,982,000). (b) Transactions between Dongying Luxin and Tianxin (i) Sales of goods 2002 2001 Cotton yarns related products 323 16,393 The directors believe that the above transactions were carried out on commercial terms and conditions and at market prices. (ii) Purchases of goods and services Basis 2002 2001 Cotton yarns related raw materials Market price - 6,982 Cotton yarns related semi-finished goods Market price 491 2,093 Tools and auxiliary materials Cost 693 4,770 Utilities Cost plus 10% 6,845 5,002 8,029 18,847 (iii) Acquisition of property, plant and equipment 2002 2001 Acquisition of property, plant and equipment - 28,404 49 23. Related party transactions (continued) (b) Transactions between Dongying Luxin and Tianxin (continued) (iv) Purchase of general services On 24 February 2001, Dongying Luxin signed an agreement with Tianxin related to the rental of buildings and daily services from Tianxin. The directors believe that this agreement was carried out on commercial terms and conditions and on market prices. Relevant payments in year 2002 approximated Rmb 1,887,000 (2001: RMB 1,572,000). (c) Directors’ and supervisory committee members’ remuneration In 2002, the total remuneration of the directors and the supervisory committee members amounted to RMB 4,272,000 (2001: RMB 2,623,000). 50 24. Principal subsidiary undertakings Particulars of the Company’s subsidiaries are as follows: % Interest held and Name Country of proportion of voting Principal activities incorporation rights 2002 2001 Consolidated subsidiaries Dongying Luxin (Note 23) PRC 65% 65% Manufacture and sales of cotton yarns related products Beijing Innovative Garment Co., Ltd. PRC 65% 60% Manufacture and sales of (“Beijing Innovative”) (a) shirts Beijing Luthai Shirt Co., Ltd. PRC 60% 60% Manufacture and sales of (“Beijing Luthai”) textiles and garment products Non-consolidated subsidiaries Qingdao Luthai (Note 11) PRC 75% 75% General trading Zibo Luhua (Note 11) PRC - 90% M anufacture and sales of textiles and garment products Lutai HK (b) Hong Kong SAR 100% - Trading, import and export of textile products (a) On 20 November 2002, the Company acquired additional 5% interest in Beijing Innovative at cash consideration of Rmb 5,794,000. (b) On 20 February 2002, the Company incorporated a wholly owned subsidiary, Lutai HK. The registered and paid-up capital of Lutai HK is HK$ 6,000,000 (RMB 6,367,000) (Note 11). 25. Approval of financial statements The financial statements were authorised for issue by the Board of Directors on 25 March 2003. 51 XII. DOCUMENTS AVAILABLE FOR REFERENCE 1. Accounting statements carried with personal signatures and seals of legal representative, chief accountants and person in charge of handling accounting organization. 2. Original of Auditors’ Report carried with the seal of Certified Public Accountants as well as personal signatures of certified public accountants. 3. Originals of all documents and manuscripts of Public Notices of the Company disclosed publicly on Securities Times, Shanghai Securities News and Ta Kung Pao. Board of Directors of Luthai Textile Co., Ltd. March 28, 2003 52