*ST舜喆B(200168)雷伊Ｂ2003年年度报告（英文版）

GUANGDONG RIEYS GROUP COMPANY LTD. 2003 ANNUAL REPORT February 2004 Contents Section Ⅰ. Important Notes--------------------------------------------------------------------- Section Ⅱ. Company Profile-------------------------------------------------------------------- Section Ⅲ. Summary of Financial Highlight and Business Highlight--------------------- Section Ⅳ. Changes in Capital Shares and Particulars about Shareholders-------------- Section Ⅴ . Particulars about Directors, Supervisors, Senior Executives and Employees------------------------------------------------------------------------------------------ Section Ⅵ. Administrative Structure----------------------------------------------------------- Section Ⅶ. Brief Introduction to the Shareholders’ General Meeting -------------------- Section Ⅷ. Report of the Board of Directors ----------------------------------- ------------- Section Ⅸ. Report of the Supervisory Committee------------------------------------------- Section Ⅹ. Significant Events------------------------------------------------------------------ Section Ⅺ. Financial Report-------------------------------------------------------------------- Section Ⅻ. Documents for Reference---------------------------------------------------------- GUANGDONG RIEYS GROUP COMPANY LTD. 2003 ANNUAL REPORT Section I. Important Notes Board of Directors of Guangdong Rieys Group Company Ltd. and its directors individually and collectively accept responsibility for the correctness, accuracy and completeness of the contents of this report and confirm that there are no material omissions nor errors which would render any statement misleading. Ms. Fang Meidi, Independent Director, was absent from the Board meeting due to health and entrusted Independent Director Mr. Cai Shaohe to execute the voting right on her behalf. Shenzhen Pengcheng Certified Public Accountants audited the financial report of the Company and issued standard unqualified Auditor’s Report for the Company. Chairman of the Board Mr. Chen Hongcheng and Chief Financial Supervisor Mr. Li Guoqiang hereby confirm that the Financial Report of the Annual Report is true and complete. Section II. Company Profile 1. Legal Name of the Company In Chinese: 广东雷伊（集团）股份有限公司 Abbr. In Chinese: 雷伊 In English: GUANGDONG RIEYS GROUP COMPANY LTD. Abbr. in English: Rieys 2. Legal Representative: Mr. Chen Hongcheng 3. Secretary of the Board of Directors: Mr. Zhou Haolin E-mail: zhl@200168.com Authorized Representative in Charge of the Securities Affairs: Mr. Xu Wei E-mail: xw@200168.com Contact Tel: (86) 755-82960823 Fax: (86) 755-82960383 Contact Address: Secretariat of the Board of Directors, 26th Floor of Jiangsu Bldg., Yitian Road, Futian District, Shenzhen 4. Registered Address: Meixin Industrial Park of Jun Bu Town, Puning, Guangdong Office Address: 26th Floor of Jiangsu Bldg., Yitian Road, Futian District, Shenzhen Post Code: 518000 Company’s Internet Website: http://www.rieys.com E-mail of the Company: rieys@200168.com 5. Newspapers Chosen for Disclosing the Information of the Company: Securities Times and Ta Kung Pao Internet Website Designated by CSRC for Publishing the Annual Report: http://www.cninfo.com.cn The Place Where the Annual Report is Prepared and Placed: Secretariat of the Board of Directors, 26th Floor of Jiangsu Bldg., Yitian Road, Futian District, Shenzhen 6. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: RIEYS-B Stock Code: 200168 7. Other relevant information Initial registered date: Nov. 17, 1997; Initial registered place: Industrial and Commercial Administration Bureau of Guangdong Province Registered number of business license of enterprise legal person: 4400001000088 Registered number of tax: 445281231131833 Domestic Certified Public Accountants Engaged by the Company: Name: Shenzhen Pengcheng Certified Public Accountants Address: 5th Floor of Baofeng Bulg., No. 2006, Dongmen Rd. S., Shenzhen International Certified Public Accountants Engaged by the Company: Name: Hong Kong Glass Radcliffe Chan Certified Public Accountants Address: 12th Floor, China Merchants Tower, Shun Tak Centre, 168-200 Connaught Road Central, Hong Kong Section III. Summary of Financial Highlight and Business Highlight 1. Major financial data as of the year 2003 (Unit: RMB) Items Year 2003 Total profit 75,249,621 Net profit 47,579,585 Net profit after deducting non-recurring gains and losses 32,796,908 Profit from main operations 157,715,935 Other operating profit 3,060,456 Operating profit 77,226,946 Investment income -4,667,913 Subsidy income 2,833,691 Net non-operating income/expenses -143,103 Net cash flows arising from operating activities 61,272,944 Net increase/decrease in cash and cash equivalents -90,773,086 Note: Items of deducting non-recurring gains and losses and the involved amounts: Income tax of RMB 7,660,851; subsidy income of RMB 2,449,470; interest income of RMB 4,419,292; net non-operating income/expenses of RMB –162,242; reversal of assets impairment reserve of RMB 415,306 (in items of deducting non-recurring gains and losses, subsidy income, interest income and net non-operating income/expenses differ from data of the same subjects listed in the above table, which is due to the difference of calculation method. The explanation on the difference between the auditing results under CAS and IAS: Profit after tax of the Company as of the year 2003 as audited by Shenzhen Pengcheng Certified Public Accountants under CAS and by Hong Kong Glass Radcliffe Chan Certified Public Accountants under IAS was RMB 47,579,585 and RMB 47,583,543 respectively. The adjustment for the differences is as follows: (Unit: RMB) Consolidation statement of 2003 Profit after tax audited by Shenzhen Pengcheng Certified Public 47,579,585 Accountants: Adjustment in accordance with IAS: Write off confirmation of trademark right 647,329 Write off amortization of related with trademark right Pre-operating expenses -2,368,297 Deferred tax 1,724,926 Profit after tax audited by Hong Kong Glass Radcliffe Chan Certified 47,583,543 Public Accountants: 2. Financial indexes over the recent three years at the end of report period (Unit: RMB) Indexes 2003 2002 2001 Income from main operations 488,288,750 476,822,720 401,930,781 Net profit 47,579,585 40,145,854 33,904,005 Total assets 1,117,318,635 958,492,660 732,757,864 Shareholder’s equity (excluding minority interests) 458,700,621 411,121,036 370,909,443 Earnings per share (RMB/share) 0.18 0.23 0.19 Weighted average earnings per share 0.18 0.23 0.19 Fully diluted earnings per share 0.18 0.23 0.19 Earnings per share after deducting non-recurring gains 0.12 0.18 0.17 and losses Net assets per share (RMB/share) 1.72 2.32 2.10 Net assets per share after adjustment (RMB/share) 1.72 2.32 2.09 Net cash flows per share arising from operating activities 0.23 0.56 -0.38 Return on equity (%) 10.37 9.76 9 3. Supplemental statement of income statement: Return on equity (%) Earnings per share (RMB/share) Profit in the report period Fully Weighted Fully Weighted diluted average diluted average Profit from main operations 34.38 36.26 0.59 0.59 Operating profit 16.84 17.76 0.29 0.29 Net profit 10.37 10.94 0.18 0.18 Net profit after deducting non-recurring 7.15 7.54 0.12 0.12 gains and losses 4. Particulars about changes in shareholders’ equity during the report period (Unit: RMB) Capital Surplus Statutory Total Retained Items Share capital public public Public shareholder’s profit reserve reserve welfare fund equity Amount at the year-begin 177,000,000 92,852,634 67,816,916 10,272,306 73,451,786 411,121,036 Increase in the report year 88,500,000 7,136,938 2,378,979 47,579,585 145,595,502 Decrease in the report year 17,700,000 77,936,938 95,636,938 Amount at the year-end 265,550,000 75,152,634 74,953,854 12,651,285 43,094,133 458,700,621 1. Reason on change of share capital: The Company implemented 2002 profit distribution plan at the rate of 4 bonus shares for every 10 shares and convert capital public reserve into share capital at the rate of 1 share for every 10 shares. 2. Reason on change of capital public reserve: to convert capital public reserve into share capital 3. Reason on change of surplus public reserve is due to withdrawal in the report period. 4. Reason on change of statutory public welfare fund is due to withdrawal in the report period. 5. Reason on change of retained profit is due to bonus share. 6. Reason on change of shareholders’ equity is due to profit in the report period. Section IV. Changes in Capital Shares and Particulars about Shareholders (I) Particulars about the changes in share capital 1. Statement of change in shares in the report period Statement of change in shares as of the year 2003 Unit: share Increase/decrease of this time (+, - ) Before the After the Items Capitalization change Share Additional change Bonus shares of public Others Subtotal Allotment issuance reserve I. Unlisted shares 1. Sponsors’ shares 91,125,000 +36,450,000 +9,112,500 +45,562,500 136,687,500 Including: State-owned share Domestic legal person’s shares 91,125,000 +36,450,000 +9,112,500 +45,562,500 136,687,500 Foreign legal person’s shares Others 2. Raised legal person’s shares 3. Inner employees’ shares 4. Preference shares or others Including: Transferred / allotted shares Total unlisted shares 91,125,000 +36,450,000 +9,112,500 +45,562,500 136,687,500 II. Listed shares 1. RMB ordinary shares 2.Domestically listed foreign 85,875,000 +34,350,000 +8,587,500 +42,937,500 128,812,500 shares 3. Overseas listed foreign shares 4. Others Total listed shares 85,875,000 +34,350,000 +8,587,500 +42,937,500 128,812,500 III. Total shares 177,000,000 +70,800,000 +17,700,000 +88,500,000 265,500,000 2. Issuance and listing of the share (1) Particulars about issuance of the share: The Company is a limited company, which was established by means of reorganization of joint stock system and initiating in 1997, and at the same year, the Company issued 80 million shares to the promoters with issuance price of RMB 1 per share. In April 1999, as approved by Shareholders’ General Meeting, the Company implemented the Dividend Plan at the rate of 3.5 bonus shares for every 10 shares based on the total shares registered at the end of 1998. The total bonus shares amounts to 28 million shares, thus, the total shares of the Company increase to 108 million shares. As approve by CSRC with document ZJFX Zi (2000) No. 133, the Company issued 60 million domestically listed foreign shares (B shares) from Oct. 17, to Oct. 18, 2000, and the issuance price is HKD 2.38 per share. The said 60 million domestically listed foreign shares (B shares) were listed with Shenzhen Stock Exchange for trading on Oct. 27, 2000. After initial issuance, the Company authorized the lead underwriter to exercise over-allotment option; and the lead underwriter issued additionally 9 million domestically listed foreign shares with allotment price of RMB 1 per share. The said 9 million shares were listed with Shenzhen Stock Exchange for trading on Nov. 27, 2000. (2) Particulars about bonus shares and transferring into share capital during the report period: During the report period, based on total share capital of 177,000,000 shares as at the end of the year 2002, the Company distributed the profit to the whole shareholders at the rate of 4 bonus shares for every 10 shares and convert the capital public reserve into share capital at the rate of 1 share for every 10 shares, and totaled to 88,500,000 shares. The Company’s total share capital was 265,500,000 shares after bonus shares and transferring into share capital. (3) There existed no inner employees’ shares in the Company. (II) About Shareholders 1. Ended Dec. 31, 2003, the Company has 16,424 shareholders in total. 2. Particulars about shares held by the top ten shareholders of the Company Unit: share Increase/decrease Holding shares Proportion in Type of Pledge or Shareholders’ name in the year at the year-end total shares (%) shares freezing Shenzhen Shenghengchang Industrial Legal person Yes +32,737,500 98,212,500 36.99% Co., Ltd. shares Shenzhen Risheng Investment Co., Legal person Yes +21,600,000 28,350,000 10.68% Ltd. shares CHEN MEI XIANG +7,341,275 24,216,275 9.12% B-share No Legal person Yes Shantou Lianhua Industrial Co., Ltd +3,375,000 10,125,000 3.81% shares SKANDIA GLOBAL FUNDS PLC +2,446,922 6,870,568 2.59% B-share Unknown WANG YING +476,499 639,498 0.24% B-share Unknown YAO JIN GEN +137,700 413,100 0.16% B-share Unknown BEST RELIANCE INVESTMENTS Unknown +107,550 362,150 0.14% B-share LTD TOYO SECURITIES ASIA Unknown +255,760 353,260 0.13% B-share LIMITED-A/C CLIENT CHENG AI XUE +109,250 309,750 0.11% B-share Unknown Notes: (1) During the report period, based on total share capital of 177,000,000 shares as at the end of the year 2002, the Company distributed the profit to the whole shareholders at the rate of 4 bonus shares for every 10 shares and convert the capital public reserve into share capital at the rate of 1 shares for every 10 shares, and totaled to 88,500,000 shares. (2) In Jan. 2003, Puning Huilong Textile Co., Ltd. transferred 12.15 million shares of the Company held by it to Shenzhen Zhongshengke Investment Co., Ltd.. For details, please refer to the Public Notice published in Securities Times and Ta Kung Pao dated Feb. 11, 2003. (3) In March 2003, Shenzhen Zhongshengke Investment Co., Ltd. changed its company’s name into Shenzhen Risheng Investment Co., Ltd.. For details, please refer to the Public Notice published in Securities Times and Ta Kung Pao dated April 1, 2003. (4) Approved by Industrial and Commercial Administration Bureau of Shantou dated April 7, 2003, Shantou Shengping District Lianhua Industrial Co., Ltd. changed its company’s name into Shantou Lianhua Industrial Co., Ltd. (5) CBNY S/A PNC/SKAND SELECT FUND/CHINA EQUITY changed its company’s name into SKANDIA GLOBAL FUNDS PLC. (6) Shenzhen Shenghengchang Industrial Co., Ltd., Shenzhen Risheng Investment Co., Ltd. and Shantou Lianhua Industrial Co., Ltd. jointly applied to Shenzhen Branch of China Construction Bank for a loan with the Company’s share held by them for the Company and provided pledge guaranty for this. For details, please refer to the Public Notice published in Securities Times and Ta Kung Pao dated Aug. 28, 2003 and Oct. 29, 2003. (7) There existed associated relationship among Shenzhen Shenghengchang Industrial Co., Ltd., Ms. Chen Meixiang, Shantou Lianhua Industrial Co., Ltd. and Shenzhen Risheng Investment Co., Ltd., and they belonged to the consistent actor regulated by the Management Measure of Information Disclosure on Change of Shareholding for Listed Company. 3. About holding shareholder of the Company (1) The holding shareholder of the Company is Shenzhen Shenghengchang Industrial Co., Ltd. (“Shenghengchang Industrial’), who holds 98.2125 million shares of the Company, taking 36.99% of the total shares of the Company; its registered capital: RMB 98 million, registered place: 5th Floor, Hubei Baofeng Building, Bao’an South Road, Shenzhen; legal representative: Ding Lihong. Mr. Chen Hongcheng holds 70% share equity of Shenghengchang Industrial, while Mr. Chen Honghai holds 30% share equity of Shenghengchang Industrial. The business scope of Shenghengchang Industrial: sales of hardware, AC parts, building material, electronic products and car fittings. (2) Mr. Cheng Hongcheng is actual controller of Shenghengchang Industrial. Mr. Chen Hongcheng was engaged in operation and management of the enterprise over 20 years. He was ever in charge of Chairman of the Board and concurrently President of Puning Hongxin Weaving and Clothing Co., Ltd., and executive director of Puning Haicheng Industrial Co., Ltd.. Mr. Chen Hongcheng is the standing commissar of political consultative conference of Puning, Guangdong and the deputy to the National People’s Congress of Jieyang, Guangdong. In 1998, Mr. Chen was awarded as the excellent village and township entrepreneur of Guangdong province, the advanced member of Guangdong Industry and Commerce Union, and the advanced member of Guangdong Chamber of Commerce. In 1999, Jieyang municipality People’s Government awarded him as the advanced individual of splendor undertaking; Vice Chairman of Costume Association of Guangdong Province; Vice Chairman of Costume Association of Shenzhen City. Section V. Particulars about Directors, Supervisors, Senior Executives and Employees I. Directors, supervisors and senior executives of the Company 1. Basic information Number of Number of Name Gender Age Title Office term holding shares at holding shares the year-begin at the year-end Chairman of the Board and May. 2003– Chen Hongcheng Male 46 0 0 concurrently President May. 2006 Vice Chairman of the May. 2003– Zheng Yujian Male 39 0 0 Board May. 2006 May. 2003– Chen Honghai Male 50 Director 0 0 May. 2006 May. 2003– Ding Lihong Male 33 Director 0 0 May. 2006 May. 2003– Fang Meidi Female 57 Independent Director 0 0 May. 2006 May. 2003– Cai Shaohe Male 43 Independent Director 0 0 May. 2006 May. 2003– Yang Xinfa Male 35 Independent Director 0 0 May. 2006 Chairman of the May. 2003– Yan Mingfei Male 36 0 0 Supervisory Committee May. 2006 May. 2003– Liu Li Female 35 Supervisor 0 0 May. 2006 May. 2003– Xu Wei Male 26 Supervisor 0 0 May. 2006 May. 2003– Zhang Yongli Male 45 Vice President 0 0 May. 2006 Vice President, Secretary May. 2003– Zhou Haolin Male 34 0 0 of the Board May. 2006 May. 2003– Li Guoqiang Male 34 Chief Financial Supervisor 0 0 May. 2006 Note: Particulars about directors or supervisors holding the position in Shareholding Company Director Mr. Ding Lihong took the post of Chairman of the Board of Shenzhen Shenghengchang Industrial Co., Ltd. for a term of three years; Mr. Cheng Hongcheng took the post of Director of Shenzhen Shenghengchang Industrial Co., Ltd. for a term of three years; Mr. Cheng Honghai took the post of Director of Shenzhen Shenghengchang Industrial Co., Ltd. for a term of three years. 2. Particulars about the annual remuneration The Board of Directors determined the remuneration of directors, supervisors and senior executives based on the Articles of Association of the Company. The total amount of annual salary drew by directors, supervisors and senior executives in office at present from the Company was RMB 716,440. Of them, (1) one enjoyed the annual salary over RMB 100,000; (2) four enjoyed the annual salary between RMB 50,000 and RMB 100,000 respectively; (3) five enjoyed the annual salary under RMB 50,000. The total remuneration of the top three directors drawing the highest payment was RMB 90,000. The total remuneration of the top three senior executives drawing the highest payment was RMB 360,000. Independent Director of the Company drew their annual allowance of RMB 30,000 respectively from the Company. The Company reimbursed the reasonable charges according to the actual situation which independent directors attended the meeting of the Board, shareholders’ general meeting or exercise their functions and powers in accordance with the relevant laws and regulations and Articles of Association. Directors received no pay from the Company in 2003 are as follows: Mr. Zheng Yujian, Mr. Chen Honghai, Mr. Ding Lihong and Mr. Yan Mingfei received no pay from the Company. Of them, Director Chen Honghai draw the annual remuneration from Shenzhen Shenghengchang Industrial Co., Ltd. 3. Directors, supervisors and senior executives leaving the office in the report period (1) 2002 Annual Shareholders’ Meeting held on May 30, 2003 examined and approved: Mr. Chen Hongcheng, Mr. Zheng Yujian, Mr. Chen Honghai and Mr. Ding Lihong was respectively elected as the Director of the 3rd Board of Directors; Mrs. Fang Meidi, Mr. Cai Shaohe and Mr. Yang Xinfa was respectively elected as Independent Director of the 3rd Board of Directors; Mr. Yan Mingfei and Ms. Liu Li was respectively elected as the Supervisor of the 3rd Supervisory Committee and Labor Union Congress of the Company elected Mr. Xu Wei as the Supervisor of the 3rd Supervisory Committee. (2) As examined and approved by the 1st meeting of the 3rd Board of Directors in 2003 held on May 30, 2003, Mr. Chen Hongcheng was elected as Chairman of the 3rd Board of Directors and Mr. Zheng Yujian was elected as Vice Chairman of the 3rd Board of Directors; Mr. Zhang Yongli was engaged as Vice President of the Company, Mr. Zhou Haolin was engaged as Secretary of the Board and concurrently Vice President and Mr. Li Guoqiang was engaged as Chief Financial Supervisor. (3) As examined and approved by the 1st meeting of the 3rd Supervisory Committee in 2003 held on May 30, 2003, Mr. Yan Mingfei was elected as Chairman of the Supervisory Committee. The above matters have been published on Securities Times and Ta Kung Pao dated May 31, 2003. II. About employees Ended Dec. 31, 2003, the Company and its subsidiary company have totally 4500 employees in office with details as follows: 1. Composing of professional: 3200 production personnel, 660 salespersons, 250 technicians, 80 personnel of quality inspection, 80 financial personnel, and 220 administrative personnel. 2. Background of education: high-grand titles: 8 persons; secondary-grand titles: 75 persons; primary titles: 180 persons. 3. The Company has no retirees. Section VI. Administrative Structure I. Administration of the Company Strictly according to the PRC Company Law, Securities Law and requirements of relevant laws and regulations, the Company consistently consummated legal person administrative structure of the Company and standardized the Company’s operation. To further perfect the administrative structure of the Company, the Board consistently consummated Articles of Association of the Company, Rules for Procedure of the Shareholders’ Meeting, Rules for Procedure of the Board, Rules for Procedure of the Supervisory Committee, Work Rules for President, Information Disclosure System and so on, made Management Method of Investors Relationship and Auditing System. The actual administration of the Company is almost in accordance with the requirement of Rules for Administration of Listed Companies and so on. The Company will consistently consummate the administrative structure of the Company according to Rules for Administration of Listed Companies. II. Implementation of duties of independent directors According to the requirement of Guide Opinion of Establishing Independent Directors System in Listed Companies promulgated by CSRC, the Company elected three independent directors in 2002 Annual Shareholders’ General Meeting. Among of them, one is the expert engaging in fashions’ export for many years, one is financing and auditing expert and another is a lawyer. Independent directors of the Company has reached one third of directors of the Company. In the report period, the independent directors actively attended the Board of Directors and the Shareholders’ General Meeting, patiently executed duties of independent directors, expressed opinions on some significant events of the Company, played an important role in improving the independence of the Board, strengthening the function of strategic management of the Board, balancing of power of the Board and concentrating on the legal right and interest of the small and middle investors, played an active role in scientific decision and normative operation of the Company and further promoted the normative operation of the Company. III. The Company was separated with the controlling shareholder, Shenzhen Shenghengchang Industrial Co., Ltd. in business, personal, assets, financing and organization 1. In respect of business, the Company’s production and operation was completely independent the control shareholder. The activities of production and operation such as production, supply and sale were made decision by the Company. The Company need not depend on the control shareholder to conduct the activities of production and operation. The Company has independent systems of purchase, sale and production as well as independent and complete business and self-operation ability. There is no competition in the same industry between the controlling shareholder and the Company and the subsidiaries of the controlling shareholders have no same or similar business with the Company. 2. In respect of personal, Chairman of the Board of the Company is elected by the Board and is not the legal representative of the controlling shareholder. Chairman of the Board, President, Vice President, person in charge of financing, secretary of the Board of Directors and other senior executives did not take management posts and receive remuneration in the controlling shareholder. The Company established special human resources and administration department and independently managed the work of labor, personnel and salary. 3. In respect of assets, the Company had independent and complete system of production, management and sale and affiliates. The trademark and real estate were independently held by the Company and there existed no situation that the principal shareholder or related parties occupied the assets of the Company in any wrong way. 4. In respect of organization, the Company established perfect organization system and had independent financial center, human resources and administration department, capital operation department, auditing department and other administration and functional departments. The Shareholders’ Meeting, the Board of Directors, the Supervisory Committee independently operated and they were separated from the big shareholder. 5. In respect of financing, the Company established independent financial settlement system and financial management system according to Enterprise Accounting System and so on. The Company established independent financial department, independently opened account in bank and paid tax. The Company does not share one bank account with the controlling shareholder. Section VII. Brief Introduction to Shareholders’ General Meeting In the report period, the Company has held Shareholders’ General Meeting for 2002 and the Extraordinary Shareholders’ General Meeting for 2003. I. Shareholders’ General Meeting for 2002 On April 28th, 2003, the 2nd Meeting of the 2nd Board of Directors for 2003 of the Company considered and passed proposal on holding Shareholders’ General Meeting for 2002 and published Meeting Notice on Securities Times and Hong Kong Ta Kung Pao dated April 29th, 2002. The Shareholders’ General Meeting for 2002 was held in Conference Room of the Company in Meixin Industrial Park, Junbu Town, Puning at 10:00 A.M. on May 30, 2003. Totally 5 shareholders and shareholder’s proxies, who hold 108,116,000 shares totally, attended the Shareholders’ General Meeting, taking 61.08% of total share capital of the Company (including 91,125,000 domestic shares, taking 51.48% of total share capital of the Company; 16,991,000 foreign shares, taking 9.60% of total share capital), which was in compliance with the provisions in Company Law and Articles of Association. The Company’s directors, supervisors, senior executives and engaged lawyers have attended the Meeting as non-voting delegates and the following proposals have been considered and passed in the Meeting by means of signed voting: 1. Work Report of the Board of Directors for 2002 2. Work Report of the Supervisory Committee for 2002 3. Financial Report for 2002 4. Profit Distribution Project for 2002 5. Amending Articles of Association of the Company 6. Amending Rules of Procedure of Shareholders’ General Meeting 7. Amending Rules of Procedure of the Board of Directors 8. Engaging Shenzhen Pengcheng Certified Public Accountants as domestic auditor of the Company 9. Engaging Glass Radcliffe Chan as foreign auditor of the Company 10. Electing Mr. Chen Hongcheng as a director in the 3rd Board of Directors 11. Electing Mr. Chen Honghai as a director in the 3rd Board of Directors 12. Electing Mr. Ding Lihong as a director in the 3rd Board of Director 13. Electing Mr. Zheng Yujian as a director in the 3rd Board of Directors 14. Electing Ms. Fang Meidi as an independent director in the 3rd Board of Directors 15. Electing Mr. Cai Shaohe as an independent director in the 3rd Board of Directors 16. Electing Mr. Yang Xinfa as an independent director in the 3rd Board of Directors 17. Electing Mr. Yan Mingfei as a supervisor in the 3rd Supervisory Committee 18. Electing Ms. Liu Li as a supervisor in the 3rd Supervisory Committee 19. Establishing Puning Rieys Paper Co., Ltd., a Sino-foreign joint venture The resolutions of the Meeting were published on Securities Times and Hong Kong Ta Kung Pao dated May 31, 2003. II. Extraordinary Shareholders’ General Meeting for 2003 On Nov. 27, 2003, the 8th Meeting of the 3rd Board of Directors for 2003 of the Company considered and passed proposal on holding the Extraordinary Shareholders’ General Meeting for 2003. The Meeting Notice was published on Securities Times and Hong Kong Ta Kung Pao dated Nov. 29, 2003. The Extraordinary Shareholders’ General Meeting for 2003 was held in the Company’s Conference Room in Meixin Industrial Park, Junbu Town, Puning at 10:00 A.M. on Dec. 29th, 2003. The Meeting was presided over by Chairman of the Board Mr. Chen Hongcheng. Totally 4 shareholders and shareholder’s proxies attended the Shareholders’ General Meeting, holding 161,132,775 shares totally, taking 60.7% of total share capital of the Company (including 136,687,500 domestic shares, taking 51.4% of total share capital of the Company, and 24,445,275 foreign shares, taking 9.3% of total share capital), which was in compliance with the provisions in Company Law and Articles of Association. The Company’s directors, supervisors, senior executives and engaged lawyers have attended the Meeting as non-voting delegates and the following proposals have been considered and passed in the Meeting by signed voting: 1. Changing the Company’s name into “Guangdong Rieys Group Company Ltd.” 2. Amending Articles of Association 3. Establishing Puning Tianye Chemical Simulation Textile Co., Ltd. 4. Establishing Dongguan Jinjing Textile Co., Ltd. The resolutions of the Meeting were published on Securities Times and Hong Kong Ta Kung Pao dated Dec. 30th, 2003. III. Election and change of directors and supervisors in the report period The term of the 2nd Board of Directors and the 2nd Supervisory Committee expired in May 2003. In the Company’s Shareholders’ General Meeting for 2002, Mr. Chen Hongcheng, Mr. Chen Honghai, Mr. Ding Lihong and Mr. Zheng Yujian were elected as directors for the 3rd Board of Directors; Ms. Fang Meidi, Mr. Cai Shaohe and Mr. Yang Xinfa were elected as independent directors for the 3rd Board of Directors; Mr. Yan Mingfei and Ms. Liu Li were elected as supervisors for the 3rd Board of Directors. Section VIII. Report of the Board of Directors I. Discussion and analysis to the operation in the report period: In the report period, the Company has kept a good development trend and its achievement has increased by a certain margin than that in 2002. In 2003, the Company realized income from main operations, profit from main operations and net profit amounting to RMB 480 million, RMB 158 million and RMB 47.58 million respectively, an increase of 2.5%, 42.3% and 18.5% respectively than those in the same period of last year. In the report period, the Company continued to develop production and sales of garments, main business of the Company largely. In the aspect of garments production, due to the sudden epidemic situation of SARS in the first half year of 2003, the Company’s orders placing was threw into confusion. Under this kind of situation, the Company kept contact with oversea customers through adopting advanced communications and actively turned the disadvantageous status that the production was slowing down caused by SARS. In the second half of the year, the Company reinforced cost control and production through various measures and finally realized garments export amounting to RMB 322,587,469 and gross operating profit amounting to RMB 77,679,221 in 2003. In the aspect of garments sales, the Company continued to commit itself to marketing of those internationally famous brands in the domestic market. The Company has become the general agent of “AXARA”, a French women’s brand, in China through investment increase in Shenzhen Heyiyi Fashion Co., Ltd.. At present, the Company’s subsidiaries have become general agent of such internationally famous brands as men’s brands, namely “SANTA BARBARA POLO & RACQUET CLUB”, “JEEP” and “SIDEOUT”, and women’s brands, namely “AXARA” and “MISSK”, in China. There are about 300 business network spots of the said brands in the whole state with coverage in all national medium and large cities, which has formed sales and distributing system with comparatively large scale. Depending on this sales system, the Company is communicating with other famous brands in the world on agent issues. While reinforcing the development of production and sales of garments, the Company also tried entering into other fields for development steps by steps. The Company thought the paper products at home have very great potential after many investigations and research. In the report period, The Company newly established Puning Rieys Paper Co., Ltd., which is specially engaged in the production of corrugated papers with high strength. At the present, the Company is actively implementing the construction of this project and is setting about establishing sales network of paper commodities. II. Operation (I) Scope of main operations and its operation 1. Scope of main operations: The Company is mainly engaged in the self-operation and agency of import and export business of all commodities and technology except for 16 kinds of export commodities operated jointly by the national organizations and 14 kinds of import commodities whose operations in the companies are checked and ratified by the country, operation of business of counter trade, carrying trade, processing with importing materials and “ processing raw materials on clients’ demands, assembling parts for the clients and processing according to the clients’ samples or engaging in compensation trade”, production, processing and sales of garments, knitting and textiles, sales of industrial production materials (excluding gold, silver, automobiles, dangerous goods and mobile communication terminal equipments), hardware, chemicals, general merchandise, household appliances, products of industrial arts (excluding gold and silver jewelry), grain and oil products, agricultural and byproducts (excluding grain and cotton) and planting and storage of crops. 2. Operation: (1) Classified according to Income from main operations Gross profit of operation industries (RMB) (RMB) Garments manufacturing 488,288,750 158,418,882 (2) Classified according to areas Income from main operations Gross profit of operation (RMB) Sales of export garments 322,587,469 77,679,221 Sales of domestic garments 165,701,281 80,739,661 (II) Operation and achievements of main holding companies and share-holding companies 1.Puning Tianhe Textile Manufactory is mainly engaged in the production of garments, knitting yarn-dyed fabric and rubber bands, 70% of which is exported and 30% of which is sold at home. The registered capital is HKD 50 million and legal representative is Mr. Chen Hongcheng. 2. Shenzhen Chuanger Fashion Co., Ltd. is mainly engaged in the purchase and sales of garments, sewing products, accouterments of garments and daily-used general merchandise (excluding products of special operation, special sales and special control) with registered capital of RMB 12 million and Mr. Zhou Haolin as the legal representative. This company is a main agent of the productive and sales business of “MISSK”, a Hong Kong brand, in mainland of China and its international internet website is www.misskfashion.com. 3. Shenzhen Rieys Industrial Co., Ltd. is mainly engaged in the development of industries (the detailed projects to be applied later), domestic commerce and supply and marketing industry of materials (excluding commodities of special operation, special control and special sales) and operation of import and export business with registered capital of RMB 50 million and Mr. Liu Li as the legal representative. 4. Shanghai Baowei Apparel Co., Ltd., which is a limited company registered in Shanghai Industrial and Commercial Administration Bureau on April 5, 1999, is mainly engaged in the sales of apparel garments, knitting products, daily general merchandise, leather products, cultural and educational products, shoes and caps, electric instruments, tableware, automobile and motor fittings and chemical materials (excluding dangerous products) and additionally establishment of one branch ( those operations involved in the license operation are transacted as per license) with registered capital of RMB 1 million and Mr. Chen Hongcheng as the legal representative. 5. Guangdong Liwei Fashion Manufacture Co., Ltd., which is a limited company registered in Guangdong Industrial and Commercial Administration Bureau on Mar. 25, 1999, is mainly engaged in the design, sales and agency of garments, shoes and caps and leather with registered capital of RMB 500,000 and Mr. Chen Hongcheng as the legal representative. 6. Guangdong Gangwei Apparel Co., Ltd., which is limited company registered in Guangdong Industrial and Commercial Administration Bureau on Mar. 25, 1999, is mainly engaged in the design and sales of garments, shoes and caps, leather and sales of knitting products and cultural and educational products with registered capital of RMB 5 million and Mr. Chen Hongcheng as the legal representative. 7. Beijing Baowei Apparel Co., Ltd., which is a limited company registered in Beijing Industrial and Commercial Administration Bureau on Nov.11, 1998, is mainly engaged in the sales of hardware, knitting products, cultural and educational products, garments and shoes and caps, leather, decoration materials, construction materials, electric instruments, kitchenware, household appliance, automobile fittings, motor fittings and chemical materials. (excluding those projects that has not gained the special license) with registered capital of RMB 500,000 and Mr. Chen Hongcheng as the legal representative. Shanghai Baowei Apparel Co., Ltd., Guangdong Liwei Fashion Manufacture Co., Ltd., Guangdong Gangwei Apparel Co., Ltd. and Beijing Baowei Apparel Co., Ltd. are mainly engaged in agency of productive and sales business of “SANTA BARBARA POLO & RACQUET CLUB”, an American brand and its international internet website is www.sbpolo.com.cn. “SANTA BARBARA POLO & RACQUET CLUB” enterprises refer to the said four enterprises. 8. Puning Rieys Paper Co., Ltd., which is a Sino-foreign joint venture established in Puning Administration for Industry and Commerce on May 8, 2003, is mainly engaged in production of corrugated paper series products with high strength. Its legal representative is Mr. Wang Zhengsong and its registered capital is USD 29 million. This company is still in organization period and majority of factory construction engineering and installation engineering of main equipments has been completed. 9. Shanghai Tongrui Apparel Co., Ltd. is a Sino-foreign joint venture registered in Shanghai Administration for Industry and Commerce with legal representative called Mr. Chen Hongchenga and registered capital amounting to USD 1.2 million. It is mainly engaged in the design and production of knitted, woven and leather garments and garments’ accessories and sales of self-produced products of the Company. This company is still in organization period and has still not accrued operating income. 10. Beijing Baodewei Apparel Co., Ltd. is a limited company registered in Beijing Administration for Industry and Commerce with registered capital amounting to RMB 500,000. It is mainly engaged in the sales of knitting and hardware products. This company is still in organization period and no operating income has been accrued. (III) Main suppliers and customers The total amount of purchase of the top five suppliers took 31% of the total annual amount of purchase. The total amount of sales of the top five customers took 51% of the total annual amount of sales. (IV) Problems and difficulties arising from the operation and their solutions 1. In the report period, the Company actively caught market opportunity and implemented a series of investment plans, which made the Company’s scale being expanded rapidly. Thus the Company has smoothly realized the change from sole garments production to both development of garments production and brand marketing. However, since the listing, the Company has no any new financing channels. While being in the expansion phase with relatively fast speed at present with large demand in capital, the Company just can conduct project investment through financing by using short-term bank loans. At present, the Company’s simple financing channel has brought difficulties for its further development and has become the bottleneck of the Company’s development. 2. With the rapid enlargement of the Company’s business scale, the Company has more and more subsidiaries and has changed gradually from simple enterprise in production processing type into a group in assets management type. The Company needs to further reinforce the management and emphasizes on controlling the work in the aspects of finance, auditing and personnel etc., in which exists such situation that the talents are deficient and the system is not perfect. Aiming at these situations, the Company’s financial, auditing and personnel departments commented and talked for several times and established corresponding systems to try their best to make progress in the Company’s management. III. Investment In the report period, the Company’s long-term equity investment decreased by RMB 4,712,767, which was mainly because in the report period, the Company amortized the equity investment balance of Shanxi Chuanglian Information Network Technology Co. Ltd. and four “SANTA BARBARA POLO & RACQUET CLUB” enterprises. (I) In the report period, the Company had no application of the proceeds newly raised. (II) Investment of the proceeds not raised by shares offering in the report period 1. The Company and Japan New Century Trade Co. Ltd. made a joint investment of USD 29,000,000 and established a Sino-foreign joint venture called Puning Rieys Paper Co., Ltd.. Hereinto, the Company invested USD 14,790,000, taking 51% of the total share capital of this company; Japan New Century Trade Co. Ltd. invested USD 14,210,000, taking 49% of the total share capital. This company has been established upon the approval of Puning Industrial and Commercial Administration Bureau. The Company has invested RMB122 million. This company is still in organization period, most of the factory construction and main equipments installation has been finished. 2. The Company and Guangkang (Hong Kong) Co., Ltd. made a joint investment of USD 12,800,000 and established Sino-foreign joint venture Dongguan Jinjing Textile Co., Ltd.. Hereinto, The Company invested USD 9,060,000, taking 75% of the total registered capital. Guangkang (Hong Kong) Co., Ltd. invested USD 3,200,000, taking 25% of the total registered capital. The Company has invested RMB 55,900,000. The corresponding procedure of capital examination has not been finished. 3. The Company made an agreement with the shareholders of Shenzhen Heyiyi Fashion Co., Ltd., The Company and Mr. Chen Yaoji, the shareholder of Shenzhen Heyiyi Fashion Co., Ltd. will increase the investment in Shenzhen Heyiyi Fashion Co., Ltd. with RMB 5,100,000 and 4,400,000 separately. After the investment increase, the registered capital of Shenzhen Heyiyi Fashion Co., Ltd. was RMB 10 million, the company took 51% equity of this company, Mr. Chen Yaoji took 47%, and another shareholder Mr. Li Min took 2%. The investment increase is still in implementation. 4. The Company and Australian SOMANCO PTY. LTD. jointly invested USD 1,200,000 to establish Sino-foreign venture Shanghai Tongrui Apparel Co., Ltd., among which the Company invested USD 840,000, taking 70% equity of the joint venture and SOMANCO PTY. LTD. invested USD 360,000, taking 30% equity of the joint venture. Shanghai Tongrui Apparel Co., Ltd. has been established upon the approval of Shanghai Industrial and Commercial Administration Bureau. 5. The Company and Japan YAMASHITA Commercial Co., Ltd. jointly invested USD 29,800,000 to establish Sino-foreign venture Puning Tianye Chemical Simulation Textile Co., Ltd., among which the Company invested USD 22,350,000, taking 75% equity of the joint venture and Japan YAMASHITA Commercial Co., Ltd. invested USD 7,450,000, taking 25% equity of the joint venture. The prophase work of the project is in implementation. 6. The Company and Mr. Zhang Yongli jointly invested RMB 500,000 to establish Beijing Baodewei Apparel Co., Ltd., among which the Company invested RMB 350,000, taking 70% equity of the joint venture and Mr. Zhang Yongli invested RMB 150,000, taking 30% equity of the joint venture. This company was in organization period, thus no operating income has been produced. IV. Financial status and operating results in the report period Items Amount at the end of Amount at the end of Increased and 2003 (RMB) 2002 (RMB) decrease rate (%) Total assets 1,117,318,635 958,492,660 16.57 Shareholders’ equity 458,700,621 411,121,037 11.58 Profit from main 157,715,935 111,664,548 41.24 operations Net profit 47,579,585 40,145,855 18.52 Net increase in cash -90,773,086 131,762,259 -168.89 and cash equivalents Main reasons of changes: Total assets: The annual profitability and liabilities increased. Shareholders’ equity: It is the profitability in the report period. Profit from main operations: The gross profit ratio increased. Net profit: The sales increased. Net increase in cash and cash equivalents: It accrued cash outflow due to investing activities. V. In the report period, the production and operation environment, macro-policies and regulations experienced changed; however, it had no material impact on the financial status and operating results of the Company. (I) According to the news in American government’s website, America government has cancelled the provision that China should submit export licenses while applying to American customs in terms of three kinds of textiles (knitting fibers, bra and gown) exported to America from Jan. 23, 2004. The Company’s export products to America are mainly finished garments and sweaters, which do not belong to the said three kinds of textile products stipulated, thus the change in import policies for these three kinds of textiles from American government has no direct and material influence on the Company. (II) Along with the increase in the development of national economy and people’s living level, people’s paper consumption and requirements on quality are increasingly enhancing. In 2002, the consumption of paper and cardboards in China reached 43,320,000; papermaking products imported from foreign countries are approximately 20 million tons, in which foreign currency used reached USD 7 billion. In 2003, the foreign currency used for importing papermaking products from foreign countries reached USD 11 billion and paper industry has become the third largest industry with using of foreign currency just inferior to petroleum and steel products. Viewing both from market content and from industrial development, papermaking industry has very good development prospect. VI. Routine work of the Board of Directors (I) In the report period, the Board meetings and resolutions was as follows: In the report period, the Board of Directors of the Company totally held 10 meetings. 1. The 1st Meeting of the 2nd Board of Directors for 2003 of the Company was held in the Company’s Conference Room, 26/F, Jiangsu Building, Yitian Road, Futian, Shenzhen at 10:00 on Mar. 18th, 2003. The following resolutions have been considered and passed in the Meeting: Agreeing to provide guarantee for Shenzhen Rieys Industrial Co., Ltd. 2. The 2nd Meeting of the 2nd Board of Directors for 2003 of the Company was held in the Company’s Conference Room, 26/F, Jiangsu Building, Yitian Road, Futian, Shenzhen at 10:00 on April 28th, 2003. The following resolutions have been considered and passed in the Meeting: 1) Work Report of the Board of Directors for 2002 2) Financial Report for 2002 3) Profit Distribution Preplan for 2002 4) Annual Report for 2002 and its Summary 5) The 1st Quarterly Report for 2003 6) Amending Articles of Association 7) Amending Rules of Procedures of Shareholders’ General Meeting 8) Amending Rules of Procedures of the Board of Directors 9) Engaging Shenzhen Pengcheng Certified Public Accountants as domestic auditor of the Company 10) Engaging Glass Radcliffe Chan as foreign auditor of the Company 11) Agreeing Mr. Chen Hongcheng as a candidate of director for the 3rd Board of Directors 12) Agreeing Mr. Chen Honghai as a candidate of director for the 3rd Board of Directors 13) Agreeing Mr. Ding Lihong as a candidate of director for the 3rd Board of Directors 14) Agreeing Mr. Zheng Yujian as a candidate of director for the 3rd Board of Directors 15) Agreeing Ms. Fang Meidi as a candidate of independent director fort the 3rd Board of Directors 16) Agreeing Mr. Cai Shaohe as a candidate of independent director fort the 3rd Board of Directors 17) Agreeing Mr. Yang Xinfa as a candidate of independent director fort the 3rd Board of Directors 18) Agreeing Mr. Ding Lihong to resign from the post of Vice-president of the Company 19) Agreeing Proposal on Investment Increase in Shenzhen Rieys Industrial Co., Ltd. 20) Agreeing Proposal on Establishing Sino-foreign Joint-venture Puning Rieys Paper Co., Ltd. 21) Agreeing Proposal on Holding Shareholders’ General Meeting for 2002 3. The 1st Meeting of the 3rd Board of Directors for 2003 of the Company was held in the Company’s Conference Room, Meixin Industrial Park, Junbu Town, Puning on the afternoon of May 30th, 2003 and the following resolutions have been considered and passed in the Meeting: 1) Electing Mr. Chen Hongcheng as Chairman of the Board 2) Electing Mr. Zheng Yujian as Vice-chairman of the Board 3) Engaging Mr. Chen Hongcheng as President 4) Engaging Mr. Zhou Haolin as Secretary of the Board 5) Engaging Mr. Zhou Yongli as Vice-president of the Company 6) Engaging Mr. Zhou Haolin as Vice-president of the Company 7) Engaging Mr. Li Guoqiang as Chief Financial Officer of the Company 4. The 2nd Meeting of the 3rd Board of Directors for 2003 of the Company was held in the Company’s Conference Room, 26/F, Jiangsu Building, Yitian Road, Futian, Shenzhen at 10:00 on Aug. 21st, 2003. The following resolutions have been considered and passed in the Meeting: 1) Semi-annual Report for 2003 and its Summary 2) Interim Profit Distribution Preplan for 2003 3) Proposal on Investment Increase in Shenzhen Heyiyi Fashion Co., Ltd. 4) Proposal on Establishing Sino-foreign Joint Venture Dongguan Jinjing Knit Wears Co., Ltd. 5) Proposal on Reelecting Members in Special Committee of the Board of Directors 5. The 3rd Meeting of the 3rd Board of Directors for 2003 of the Company was held in the Company’s Conference Room, 26/F, Jiangsu Building, Yitian Road, Futian, Shenzhen at 10:00 on Sept. 19th, 2003. The following resolutions have been considered and passed in the Meeting: 1) Agreeing to provide guarantee for Hebei Xiabancheng Knit Wears Co., Ltd. 2) Agreeing to provide guarantee for Chengde Dixian Textile Co., Ltd. 6. The 4th Meeting of the 3rd Board of Directors for 2003 of the Company was held in the Company’s Conference Room, 26/F, Jiangsu Building, Yitian Road, Futian, Shenzhen at 10:00 on Oct. 8th, 2003. The following resolution has been considered and passed in the Meeting: Agreeing to provide guarantee for Zonglvquan Property Development (Shenzhen) Co., Ltd. 7. The 5th Meeting of the 3rd Board of Directors for 2003 of the Company was held in the Company’s Conference Room, 26/F, Jiangsu Building, Yitian Road, Futian, Shenzhen at 10:00 on Oct. 20th, 2003. The following resolution has been considered and passed in the Meeting: Agreeing the 3rd Quarterly Report for 2003 8. The 6th Meeting of the 3rd Board of Directors for 2003 of the Company was held in the Company’s Conference Room, 26/F, Jiangsu Building, Yitian Road, Futian, Shenzhen at 10:00 on, Oct. 30th 2003. The following resolution has been considered and passed in the Meeting: Agreeing the Proposal on Applying for Credit Line Amounting to RMB 147 million from China Construction Bank Shenzhen Branch 9. The 7th Meeting of the 3rd Board of Directors for 2003 of the Company was held in the Company’s Conference Room, 26/F, Jiangsu Building, Yitian Road, Futian, Shenzhen at 10:00 on Nov. 7th, 2003. The following resolution has been considered and passed in the Meeting: Agreeing the Proposal on Providing Guarantee for Puning Tianhe Textile Co., Ltd. 10. The 8th Meeting of the 3rd Board of Directors for 2003 of the Company was held in the Company’s Conference Room, 26/F, Jiangsu Building, Yitian Road, Futian, Shenzhen at 10:00 on Nov. 27th, 2003. The following resolutions have been considered and passed in the Meeting: 1) Agreeing Changing the Company’s name into Guangdong Rieys Group Company Ltd. 2) Agreeing to amend Articles of Association of the Company 3) Agreeing to establish Puning Tianye Chemical Simulation Textile Co., Ltd. 4) Agreeing to amend Resolution on Establishing Sino-foreign Joint Venture Dongguan Jinjing Knit Wears Co., Ltd. passed in the 2nd Meeting of the 3rd Board of Directors for 2003 5) Agreeing to establish Shanghai Tongrui Apparel Co., Ltd. 6) Agreeing to constitute System on Management of Investors’ Relationships 7) Agreeing to hold the Extraordinary Shareholders’ General Meeting for 2003 (II) The Board of Directors’ implementation to Shareholders’ General Meeting in the report period: The Company’s Shareholders’ General Meeting for 2002 held on May 30th, 2003 considered and passed profit distribution project for 2002: based on profit after tax amounting to RMB 40,145,854 in 2002 as audited by Shenzhen Pengcheng Certified Public Accountants, after being appropriated 10% of the said profit as statutory surplus public reserve amounting to RMB 4,014,585.4 and being appropriated 5% as welfare fund amounting to RMB 2,007,292.7 and adding retained earnings carried down from the end of 2001 amounting to RMB 49,327,510, the total profit available for distribution to shareholders was RMB 83,451,487. The profit distribution project for 2002 was: Allotting 2 bonus shares for every 10 shares by using the retained earnings of 2002, allotting 2 bonus shares for every 10 shares by using the retained earnings in previous years, converting capital public reserve into share capital amounting to 1 share for every 10 shares, all of which totally amounts to 5 shares converted and allotted for every 10 shares. At the same time discretionary surplus public reserve amounting to RMB 10 million were appropriated. After this project being implemented, the Company’s total share capital shall be expanded to 265.50 million. The Board of Directors of the Company published implementation notice on dividends distribution and capital public reserve’s converting into share capital for 2002 on Securities Times and Hong Kong Ta Kung Pao dated July 3rd, 2002 and confirmed that the final trading date, ex-right date and listing date of new circulated shares are July 10th, 11th and 16th, 2003 respectively. The profit distribution project for 2002 is now completed in implementation. VII. Profit distribution preplan and preplan on converting capital public reserve into share capital for the year Ended Dec. 31st, 2003, the profit after tax of the year audited and confirmed by Shenzhen Pengcheng Certified Public Accountants and Glass Radcliffe Chan according to Chinese Accounting Standards and International Accounting Standards respectively was RMB 47,579,585 and RMB 47,583,543 respectively. According to the principle of the lower amount in profit distribution, based on the profit after tax amounting to RMB 47,579,585 in 2003 audited by Shenzhen Pengcheng Certified Public Accountants, after being appropriated 10% of the said profit as statutory surplus public reserve amounting to RMB 4,757,959 and 5% as public welfare fund amounting to RMB 2,378,979 and adding retained earnings carried down from end of 2002 amounting to RMB 2,651,487, the total profit available for distributing to shareholders is RMB 43,094,133. The profit distribution preplan and project on converting capital public reserve into share capital in 2003 is: based on total number of shares amounting to 265,500,000 shares on Dec. 31st, 2003, the Company allots bonuses of 1 share for every 10 shares by using retained earnings and converts capital public reserve into share capital at 10:1, which totally amounts to allotting 1 bonus share and 1 share converted for every 10 shares. After this project, the Company’s total share capital shall be expanded into 318,600,000 shares. VIII. Other issues: 1. Special explanations of public accountants on capital occupation by the controlling shareholder and other related parties: According to Notification of Problems on Standardizing Capital Current of Listed Companies and Related Parties and Listed Companies’ Guarantee for External (ZJF [2003] NO. 56) of CSRC, the auditing organization of the Company issued Explanation on Special-item Auditing of Capital’s Occupancy of the Controlling Shareholder of Guangdong Rieys (Group) Co., Ltd. and Other Related Parties. Board of Directors of Guangdong Rieys (Group) Co., Ltd.: Shenzhen Pengcheng Certified Public Accountants (“we”) accepted the entrusting of the Board of Guangdong Rieys (Group) Co., Ltd. (“the Company”) and conducted the special-item check for capital’s occupancy of the controlling shareholder and other related parties of the Company ended as at Dec. 31, 2003. The duties of the management of the Company are supplying the true, legal and complete original written materials, manuscripts or oral attestation on capital’s occupancy of the controlling shareholder and other related parties and our duties are providing auditing explanation on capital’s occupancy of the controlling shareholder and other related parties of the Company according to our special-item check. We conducts our check according to Notification of Problems on Standardizing Capital Current of Listed Companies and Related Parties and Listed Companies’ Guarantee for External (ZJF [2003] NO. 56) of CSRC. In the process of check, according to Independent Auditing Rule of CPA of China, we made cautious investigation and implemented check procedure that we believed to be necessary. The special-item auditing explanation is only used to submit to the relevant supervision and management department by the Company and can not be used for any other aim. I. The controlling shareholders and other related parties 1. The controlling shareholders of the Company are as follows: Name of shareholders Kind of shares Percentage of shares held Shenzhen Shenghengchang Initiator Juridical person Industrial Co., Ltd. share 36.99% Shenzhen Risheng Investment Initiator Juridical person Co., Ltd. share 10.68% Chen Meixiang Foreign capital shares in circulation 9.53% Shantou Lianhua Industrial Foreign capital shares in Co., Ltd. circulation 3.12% Shenzhen Shenghengchang Industrial Co., Ltd. is the principal shareholder of the Company and holds 98,212,500 shares of the Company, taking by 36.99% of the total shares of the Company. There is associated relationship among of Shenzhen Shenghengchang Industrial Co., Ltd., Shenzhen Risheng Investment Co., Ltd., Shantou Lianhua Industrial Co., Ltd. and Mrs. Chen Meixiang and they belong to coincident action persons and are the controlling shareholders. 2. Other related parties Except for the controlling subsidiaries in the consolidated accounting statement, the related parties that have related current with the Company are as follows: Name of related parties Relationship with the Company HK Xinli Trade Co., Ltd. Shareholder of the controlling subsidiary, Puning Tianhe Manufacture Clothing Co., Ltd. II. Capital’s occupancy of the controlling shareholder and other related parties (excluding the controlling subsidiaries in the consolidated accounting statement) Items Current Current Character of Dec. 31, 2002 Dec. 31, 2003 increase decrease payment HK Xinli Trade Co., 39,774,716 40,215,425 55,408,291 24,581,850 Ltd. Sale arrearage Shenzhen Risheng Current 1,840,000 - 1,840,000 - Investment Co., Ltd. arrearage Total 41,614,716 40,215,425 57,248,291 24,581,850 III. Based on the materials that the Company provided and our check, ended as at Dec. 31, 2003, the Company and its controlling subsidiaries have no the following situations: 1. Onerously or voluntarily lend the Company’s capital to the controlling shareholder and other related parties for use; 2. Provide entrust loan to related parties through bank and non-bank finance organizations; 3. Entrust the controlling shareholders and other related parties to invest; 4. Issue trade acceptance draft without real trade background for the controlling shareholder and other related parties; 5. Repay debts in place of the controlling shareholders and other related parties. Shenzhen Pengcheng Certified Public Accountants CPA of China CPA of China Shenzhen China Feb. 27, 2004 Hou Lixun Chen Airong 2. Special explanations and independent opinions of independent directors on capital come-and-go between the Company and related parties and exterior guarantee: After being examined, the Company accumulatively provided exterior guarantees amounting to RMB 78 million in 2003, taking 18% of net assets. The Company has all gained counter guarantees from guaranteed parties in exterior guarantees. The Company accumulatively provided guarantee amounting to RMB 105 million for controlling subsidiaries, taking 24% of net assets. There was no guarantee in expiration. Special Auditing Explanations on Capital Occupation Between Controlling Shareholders and Other Related Parties of Guangdong Rieys Group Company Ltd. produced by the Company’s auditor has truly reflected the Company’s situation. Section IX. Report of the Supervisory Committee I. Work of the Supervisory Committee in the report period Except that the supervisors attended the Board meeting as non-voting delegates, the Supervisory Committee totally held three meetings: 1. The first meeting of the 2nd supervisor committee was held on 28th, April 2003 in the 26 F, Tower A, Jiangsu Building, Yitian Road, Futian district, ShenZhen city. The following items were deliberated and made: 1) Approve the supervisory committee working report of 2002 2) Approve the annual report and its summary for 2002 year 3) Approve the first quarter report for 2003 year 4) Approve the nomination of Mr.Yan Mingfei to be the candidate of supervisory committee member 5) Approve the nomination of Mrs. Liu Li to be the candidate of supervisory committee member 6) Approve the independent report from supervisory committee regarding to the operation of the company 2. The first meeting for third term supervisory meeting for 2003 was held on 30th, May 2003 in the meeting hall, Meixin Industrial Park, Junbu town, Puning city. The following items were deliberated and made: Mr. Yan Mingfei was selected to be the chairman of Supervisory Committee 3. The second meeting of third supervisory committee for 2003 was held on 21st, Aug. 2003 in meeting hall, 26 F, Jiangsu Building, Yitian Road, Futian district, ShenZhen city. The following items were deliberated and made: 1) Approve semi-annual report for 2003 and its summary 2) Approve the interim profit arrangement proposal for 2003 II. Independent comments for the company operation from the supervisory committee (I) Company’s operation Within the reporting period, the supervisory committee legally committed its responsibilities of supervising and monitoring. The company operated strictly being under the relevant national regulations and Article of Association. The working procedures and decision-making process of annual general shareholders’ meeting and the board committee were legal. Based on the principle of conservatism for the minimum risks and established a completed inner controlling system. No illegal behavior, abusing, action against company law and company constitution from the directors and senior managers were found. (II) Financial situation Supervisory committee checked the financial management system and the financial situation of the Company with cautions and carefulness. The financial department of the Company commits the completeness of inner management system subject to the relevant national accounting regulation and accounting standard. After the auditing of financial situation and related reporting, no behaviors against Company Law and Articles of Association were found. The annual report for 2003 honestly reflects the financial situation and the performance of the Company. Shenzhen Pengcheng Certified Public Accountant and Glass Radcliffe Chan audited all the financial reporting with impartial, regulated and non-reserved reporting. (III) In the report period, the Company did not use the raised proceeds. (IV) The purchasing and selling of assets within the reporting period In the report period, the Company’s transaction price of acquisition was reasonable. There was no insider transaction, not harming equity of partial shareholders or making the Company’s assets lost. In the report period, the Company did not sell material assets. (V) Related transactions In the report period, the Company’s transaction with those related parties who have no control relationships with the Company did not damage the interests of the Company and shareholders. Section X. Important Events I. Material lawsuits and arbitrations The Company had no material lawsuits and arbitrations in the report period. II. Acquisitions within the reporting year In the report period, the Company planned to conduct investment increase to Shenzhen Heyiyi Fashion Co., Ltd.. (For more details, please refer to Item 3, (II), III, Section VIII.) III. Related transactions (For more details, please refer to the related relationships and transaction in financial report.) IV. Guarantee for Outsider Company within this reporting period 1. Exterior guarantees in the report period 1) The company offers a irrevocable guarantee of a one year loan from Citic Industrial Bank, Guangzhou Branch of RMB 30 million to Hebei Xiabancheng Knit Wear Co. Ltd, subsidiary of Chengde Dixian Textile Co., Ltd. For more details, please see the notice published on Securities Times and Ta Kung Pao of 20th, September 2003. 2) The Company offers the irrevocable guarantee of a one year loan of 30 millions RMB from Shanghai Pudong Development Bank, Guangzhou Branch to Chengde Dixian Textile Co., Ltd, who offers a equivalent irrevocable guarantee of a one year loan of RMB 30 million from Shanghai Pudong Development Bank, Guangzhou Branch to the Company. For more details, please see the notice on securities Times and Ta Kung Pao of 20th, Sept. 2003. 3) The Company offers a guarantee of a seven month loan of maximum RMB18 million from Industrial Bank, Shenzhen Technology Branch to Zonglvquan Property Development (Shenzhen) Co., Ltd.. Zhonglvquan Property Development (Shenzhen) Co., Ltd. offers his full ownership property of big villa located in Yinghu Zhonglvquan villa (second term, with area of 829.19 square meters), the houses numbered 2F, 3F squared 706.12 as counter-guaranty. For details, please see the notice published on Securities Times and Ta Kung Pao of 11th, Oct. 2003. 2. The guarantee offered by the Company to its subsidiaries within the reporting period 1) The Company offers the guaranteeing contract for a one year 45 million loan with joint responsibility from Shanghai Pudong Development Bank, ShenZhen branch to Shenzhen Rieys Industrial Co., Ltd. For more details, please see the notice published on Securities Time and Ta Kung Pao of 20th, March 2003. 2) The Company offers the guaranteeing contract for a one year 60 million loan with joint responsibility from China Everbright Bank, Guangzhou Branch to its subsidiary Puning Tianhe Textile Co., Ltd.. For more details, please see the notice published on Securities Time and Ta Kung Pao of 8th, November 2003. The accumulating guarantee of the Company for outsiders is RMB 78 million, representing 17% of the net assets of the Company. The accumulating guarantee of the Company for its controlling subsidiaries is RMB 82.50 million (calculated according to the Company’s holding equity of these companies), taking 18% of its net assets. No guarantee expires until. V. The Company or the shareholder with more than 5% holding out of all shares have no guaranteeing items within reporting period or until VI. The Company reengages Shenzhen Pengcheng Accountant Agent as domestic accountant and Glass Radcliffe Chan as foreign accountant with reporting period. The payment for 2003 for accountancy is RMB 520,000. Remuneration paid to certified public accountants: (Unit: RMB’0000) Shenzhen Pengcheng Certified Glass Radcliffe Chan Public Accountants Total remuneration for 2003 26 26 Term for auditing service 1 year 1 year VII. In the report period, the Board of Directors, the Supervisory Committee, directors, supervisors and other senior executives of the Company have not been checked, administratively punished and criticized with circulars by CSRC or have also not been condemned in public by Shenzhen Stock Exchange. VIII. With the approval of the Extraordinary Shareholders’ General Meeting for 2003 and Guangdong Administration for Industry and Commerce, the Company’s name was changed to Guangdong Rieys Group Company Ltd. For more details, please see the notice published on Securities Time and Hong Kong Ta Kung Pao dated February 14, 2003. Section XI. Financial Report 1. Auditor’s Report (Appendix) 2. Financial Statements (Appendix) 3. Notes to Financial Statements (Appendix) Section XII. Documents Available for Reference 1. Financial statements with the signatures and seals of legal representative, financial principal and person in charge of accounting. 2. Script of Auditor’s Report with signatures and seals of certified public accountants and public accountants. 3. Originals of all documents and original manuscripts of public notices of the Company ever disclosed in such newspapers as Securities Times and Hong Kong Ta Kung Pao designated by CSRC. The Report is prepared both in Chinese and English. In the event of any interpretations between these two versions, the Chinese version shall prevail. Board of Directors of Guangdong Rieys Group Company Ltd. Feb. 27, 2004 AUDITORS’ REPORT TO THE SHAREHOLDERS OF GUANGDONG RIEYS (GROUP) COMPANY LIMITED: (Formerly known as “GUANGDONG RIEYS COMPANY LIMITED”) (Incorporated in the People’s Republic of China with limited liability) We have audited the accompanying consolidated balance sheets of Guangdong Rieys (Group) Company Limited (the “Company”) and its subsidiaries (the “Group”) as of December 31, 2003, and the related statements of consolidated income, consolidated cash flows and consolidated changes in equity for the years then ended. These financial statements set out on pages 2 to 30 are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as of December 31, 2003 and of the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards. BAKER TILLY HONG KONG LIMITED Certified Public Accountants Hong Kong February 27, 2004 GUANGDONG RIEYS (GROUP) COMPANY LIMITED (FORMERLY KNOWN AS ”GUANGDONG RIEYS COMPANY LIMITED”) CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2003 (Expressed in thousands of Renminbi except for earnings per share) Note 2003 2002 Sales 488,289 476,823 Cost of sales (330,573) (365,158) Gross profit 157,716 111,665 Other operating income, net 4 5,796 784 Distribution costs (35,114) (22,796) General and administrative expenses (39,696) (29,177) Profit from operations 88,702 60,476 Finance costs, net 5 (15,232) (10,448) Share of gain/(loss) of an associate 16 58 (375) Gain on disposals of an associate 16 - 760 Profit before tax 6 73,528 50,413 Income tax (expenses)/refund 7 (450) 310 Profit after tax 73,078 50,723 Minority interests (25,495) (8,811) Net profit for the year 47,583 41,912 Dividends 8 70,800 26,550 As restated Earnings per share - Basic and diluted 9 RMB0.18 RMB0.16 The accompanying notes are an integral part of these financial statements. - 25 - GUANGDONG RIEYS (GROUP) COMPANY LIMITED (FORMERLY KNOWN AS ”GUANGDONG RIEYS COMPANY LIMITED”) CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2003 (Expressed in thousands of Renminbi) Note 2003 2002 ASSETS Current assets Cash and cash equivalents 24(c) 121,556 237,330 Marketable securities 10 648 1,053 Trade and other receivables, net 11 222,607 184,002 Inventories, net 12 74,648 89,241 Prepayments 1,790 1,183 Advances to suppliers 85,287 132,484 Taxes recoverable 13(a) 57,523 49,490 564,059 694,783 Non-current assets Prepayments for property, plant and equipment 35,237 - Prepayments for long-term investments 14 60,900 - Investments in an associate 16 12,845 12,787 Property, plant and equipment, net 17 407,322 211,023 Land use rights, net 18 12,960 13,263 Deferred tax assets 13(b) 3,562 1,837 Goodwill 19 40,255 45,026 Computer software and other deferred assets 20 1,983 1,526 575,064 285,462 Total assets 1,139,123 980,245 LIABILITIES AND EQUITY Current liabilities Trade payables 131,305 130,656 Accruals and other payables 25,825 25,803 Short-term bank loans 21 383,300 321,800 Long-term bank loans due within one year - 60,000 Taxes payable 13(c) 2,331 1,529 542,761 539,788 Minority interests 24(b) 136,468 28,146 Equity Share capital 22 265,500 177,000 Reserves 23 150,108 150,671 Retained earnings 44,286 84,640 459,894 412,311 Total liabilities and equity 1,139,123 980,245 The accompanying notes are an integral part of these financial statements. - 26 - GUANGDONG RIEYS (GROUP) COMPANY LIMITED (FORMERLY KNOWN AS ”GUANGDONG RIEYS COMPANY LIMITED”) CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED DECEMBER 31, 2003 (Expressed in thousands of Renminbi) Reserves Statutory Share Share revenue Discretionary Retained Note capital premium reserves reserve earnings Total Balances at January 1, 2002 177,000 92,787 24,795 15,000 87,300 396,882 Net profit for the year - - - - 41,912 41,912 Dividends 8 - - - - (26,550) (26,550) Surplus of capital contribution made by a minority shareholder of a subsidiary - 67 - - - 67 Appropriation from retained earnings - statutory revenue reserves 23 - - 6,022 - (6,022) - - discretionary reserve 23 - - - 12,000 (12,000) - Balances at December 31, 2002 177,000 92,854 30,817 27,000 84,640 412,311 Net profit for the year - - - - 47,583 47,583 Dividends 8, 22 70,800 - - - (70,800) - Issue of shares 22 17,700 (17,700) - - - - Appropriation from retained earnings - statutory revenue reserves 23 - - 7,137 - (7,137) - - discretionary reserve 23 - - - 10,000 (10,000) - Balances at December 31, 2003 265,500 75,154 37,954 37,000 44,286 459,894 The accompanying notes are an integral part of these financial statements. - 27 - GUANGDONG RIEYS (GROUP) COMPANY LIMITED (FORMERLY KNOWN AS ”GUANGDONG RIEYS COMPANY LIMITED”) CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2003 (Expressed in thousands of Renminbi) Note 2003 2002 CASH FLOWS GENERATED FROM(USED IN) OPERATING ACTIVITIES: Cash flows generated from operations 24(a) 139,090 77,655 Interest paid (18,828) (19,277) Taxes paid (9,406) (30,983) Net cash flows generated from operating activities 110,856 27,395 CASH FLOWS USED IN INVESTING ACTIVITIES: Purchases of property, plant and equipment (155,423) (11,052) Increase in land use rights - (2,757) Decrease (Increase) in marketable securities 430 (1,182) Increase in investment in an associate - (9,000) Increase in investment in subsidiary - (309) Increase in prepayments for property, plant and equipment (35,237) - Increase in prepayments for long-term investment (60,900) - Net proceeds from disposals of an associate - 5,000 Interest received 4,598 9,570 Net proceeds from disposals of fixed assets 15,055 - Increase (Decrease) in other deferred assets (1,072) 106 Net cash flows used in investing activities (235,549) (9,624) CASH FLOWS GENERATED FROM FINANCING ACTIVITIES: 24(b) Increase in short-term bank loans 61,500 123,100 Decrease in long-term bank loan (60,000) - Contribution from minority shareholders 4,419 17,442 Dividends paid - (26,550) Net cash flows generated from financing activities 5,919 113,992 Net (decrease) increase in cash and cash equivalents (115,774) 131,763 Cash and cash equivalents, beginning of year 237,330 105,567 Cash and cash equivalents, end of year 24(c) 121,556 237,330 The accompanying notes are an integral part of these financial statements. - 28 - GUANGDONG RIEYS (GROUP) COMPANY LIMITED (FORMERLY KNOWN AS ”GUANGDONG RIEYS COMPANY LIMITED”) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2003 (Expressed in Renminbi (“RMB”) unless otherwise stated) 1. ORGANIZATION AND OPERATIONS Guangdong Rieys (Group) Company Limited (the “Company”) is formerly known as Guangdong Rieys Company Limited, which was incorporated as a joint stock limited company in the People’s Republic of China (the “PRC”) on November 17, 1997. The change of the Company’s name has been approved by the Guangdong Industrial and Commercial Administrative Bureau on February 11, 2004. Pursuant to the approval document No. [2000] 133 issued by the China Securities Regulatory Commission on September 29, 2000, the Company issued 69,000,000 domestically listed foreign shares (“B shares”) with a par value of RMB1 each and these shares were listed on the Shenzhen Stock Exchange on October 17, 2000. The Company and its subsidiaries (hereinafter referred to as the “Group”) are principally engaged in the production and sale of clothes. 2. PRINCIPAL ACCOUNTING POLICIES The principal accounting policies adopted in preparing the consolidated financial statements of the Group are as follows: Basis of presentation The accompanying consolidated financial statements of the Group are prepared in accordance with International Financial Reporting Standards (“IFRS”) as published by the International Accounting Standards Board. These are prepared under the historical cost convention. Principles of consolidation The consolidated financial statements include the Company and its subsidiaries and also incorporate the Group’s interest in an associate on the basis as set out in Note 2(h) below. The purchase method of accounting is used for acquired businesses. Results of subsidiaries and associates acquired or disposed of during the year are included in the consolidated financial statements from the date of acquisition or to the date of disposal. The equity and net income attributable to minority shareholders’ interests are shown separately in the balance sheet and statement of income, respectively. All significant inter-company balances and transactions, including inter-company profit and unrealized profit and losses, are eliminated on consolidation. Consolidated financial statements are prepared using consistent accounting policies for like transactions and other events in similar circumstances. Cash and cash equivalents Cash represents cash on hand and deposits with banks which are repayable on demand. Cash equivalents represent short-term, highly liquid investments which are readily convertible into known amounts of cash and which were within three month or less of maturity when acquired and are subject to an insignificant risk of change in value. - 29 - 2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) Marketable securities Marketable securities are intended to be held for an identified long term purposes on a continuing basis and are stated at cost less any provision for diminution in value. The carrying amounts of individual investments are reviewed at each balance sheet date to assess whether the fair values have declined below the carrying amounts. The amount of the reduction is recognized as an expense in the income statements. Accounts receivable and other receivables Provision is made against accounts receivable and other receivables to the extent they are considered to be doubtful. Accounts receivable and other receivables in the balance sheet are stated net of such provision. Inventories Inventories are stated at the lower of cost and net realizable value. Cost, calculated on the weighted average basis, comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present locations and conditions. Net realizable value is determined based on the anticipated sales proceeds less estimated costs of completion and selling expenses. When inventories are sold, the carrying amount of those inventories is recognized as an expense in the period in which the related revenue is recognized. The amount of any write-down and any losses of inventories to net realizable value is recognized as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realizable value, is recognized as a reduction in the amount of inventories recognized as an expense in the period in which the reversal occurs. Subsidiaries A subsidiary is a company in which the Company controls, directly or indirectly, controls more than half of the voting power or otherwise has power to govern the financial and operating policies, are consolidated. Associates An associate is a company, not being a subsidiary or a joint venture, in which the Company has significant influence. Significant influence exists when the Company has the power to participate in, but not control, the financial and operating decisions of the associate. Investments in associates are accounted for using the equity method. An assessment of investments in associates is performed when there is an indication that the asset has been impaired or the impairment losses recognized in prior years no longer exist. - 30 - 2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) Property, plant and equipment and depreciation Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment loss. The initial cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditure incurred after the property, plant and equipment have been ready for its intended use, such as repairs and maintenance and overhaul costs, are recognized as expense in the period in which they are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of the asset beyond its originally assessed standard of performance, the expenditures are capitalized as an additional cost of the asset. Depreciation is calculated using the straight-line method to write off the cost, after taking into account the estimated residual value (5% of the initial cost), of each asset over its expected useful life. The expected useful lives are as follows: Buildings 35 years Machinery and equipment 10 years Motor vehicles and office equipment 5-8 years Leasehold improvements Over the lease terms The useful life and depreciation method are reviewed periodically to ensure that the method and period of depreciation are consistent with the expected pattern of economic benefits from items of property, plant and equipment. When assets are sold or retired, their cost and accumulated depreciation and accumulated impairment loss are eliminated from the accounts and any gains or losses resulting from their disposal is included in the consolidated income statement. Construction-in-progress represents plant and properties under construction and is stated at cost. This includes cost of construction, plant and equipment and other direct costs plus borrowing costs which include interest charges and exchange differences arising from foreign currency borrowings used to finance these projects during the construction period, to the extent that they are regarded as adjustment to interest costs. Construction-in-progress is not depreciated until such time as the relevant assets are completed and ready for use. Land use rights Land use rights are stated at cost less accumulated amortization and accumulated impairment loss. Amortization is calculated using the straight-line method to write off the cost over the terms of the leases. Goodwill The excess of the cost of an acquisition over the Company’s interest in the fair value of the net identifiable assets and liabilities acquired as at the date of the exchange transaction is recorded as goodwill and recognized as an asset in the balance sheet. With respect to investments in associates, goodwill is included in the carrying amount of the investment. The identifiable assets and liabilities recognized upon acquisition are measured at their fair values as at that date. Any minority interest is stated at the minority’s proportion of the fair values. - 31 - 2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) (k) Goodwill (Contimued) Goodwill is carried at cost less accumulated amortization and accumulated impairment loss. Goodwill is amortized on a straight-line basis over a period not more than 10 years. Amortization of goodwill is included in operating expenses. The unamortized balances are reviewed at each balance sheet date to assess the probability of continuing future benefits. If there is an indication that goodwill may be impaired, the recoverable amount is determined for the cash-generating unit to which the goodwill belongs. If the carrying amount is more than the recoverable amount, an impairment loss is recognized. Operating leases Leases of assets under which substantially all the risks and rewards of ownership are effectively retained by the lessor are classified as operating leases. Leases payments under operating leases are recognized as an expense on a straight-line basis over the lease term. Aggregate benefit of incentives provided by the lessor is recognized as a reduction of rental expense over the lease term on a straight-line basis. Provisions A provision is recognized when, and only when an enterprise has a present obligation (legal or constructive) as a result of a past event and it is probable (i.e. more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. Where the effect of the time value of money is material, the amount of a provision is the present value of the expenditures expected to be required to settle the obligation. Minority interests Minority interests include their proportion of the fair values of identifiable assets and liabilities recognized upon acquisition of a subsidiary. Revenue recognition Provided it is probable that the economic benefits associated with a transaction will flow to the Group and the revenue and costs, if applicable, can be measured reliably, revenue is recognized on the following bases: (i) Sale of goods Revenue is recognized when the significant risks and rewards of ownership of the goods have been transferred to the buyer. (ii) Interest income Interest income from bank deposits is recognized on a time proportion basis that takes into account the effective yield on the assets. - 32 - 2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) Taxation The income tax charge is based on profit for the year and considers deferred taxation. Deferred taxes are calculated using the liability method. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets and liabilities are measured using the tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled based on tax rates enacted or substantially enacted at the balance sheet date. The measurement of deferred tax liabilities and deferred tax assets reflects the tax consequences that would follow from the manner in which the Group expects, at the balance sheet date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are recognized regardless of when the timing difference is likely to reverse. Deferred tax assets and liabilities are not discounted and are classified as non-current assets (liabilities) in the balance sheet. Deferred tax assets are recognized when it is probable that sufficient taxable profits will be available against which the deferred tax assets can be utilized. At each balance sheet date, the Group re-assesses unrecognized deferred tax assets and the carrying amount of deferred tax assets. The Group recognizes a previously unrecognized deferred tax assets to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. The Group conversely reduces the carrying amount of a deferred tax asset to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilized. Current tax and deferred tax are charged or credited directly to equity if the tax relates to items that are credited or charged, in the same or a different period, directly to equity. A deferred tax liability is recognized for all taxable temporary differences, unless the deferred tax liability arises from goodwill for which amortization is not deductible for tax purposes. Other taxation is provided on the basis of the relevant PRC tax regulations. (q) Subsidy income Subsidy income from government is recognized only when there is reasonable assurance that the company has complied with the conditions attaching to them and the subsidy income have been received. (r) Foreign currency translation Each entity within the Group maintains its books and records in RMB, which is not freely convertible. The measurement currency of each entity within the Group is considered to be RMB. Transactions in other currencies are translated into RMB at exchange rates prevailing at the time of transactions. Monetary assets and liabilities denominated in other currencies at the balance sheet date are re-translated at exchange rates prevailing at that date. Non-monetary assets and liabilities in other currencies are translated at historical rates. Exchange differences arising on the settlement of monetary items at rates different from those at which they were initially recorded during the periods are recognized in the statement of income in the period in which they arise. - 33 - 2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) (s) Borrowing costs Borrowing costs include interest charges and other costs incurred in connection with the borrowing of funds, including amortization of discounts or premiums relating to borrowings, amortization of ancillary costs incurred in connection with arranging borrowings and exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. Borrowing costs are expensed as incurred, except when they are directly attributable to the acquisition, construction or production of a qualifying asset that necessarily takes a substantial period of time to get ready for its intended use in which case they are capitalized as part of the cost of that asset. Capitalization of borrowing costs commences when expenditures for the asset and borrowing costs are being incurred and the activities to prepare the asset for its intended use are in progress. Borrowing costs are capitalized at the weighted average cost of the related borrowings until the asset is substantially ready for its intended use. If the resulting carrying amount of the asset exceeds its recoverable amount, an impairment loss is recorded. (t) Pension scheme In accordance with the PRC laws and regulations, the Group’s contributions to local municipal government retirement scheme in the PRC are expensed as incurred while the local municipal government in the PRC undertakes to assume the retirement benefit obligations of all existing and future retirees of the qualified staff in the PRC. The pension scheme meets the criteria of a defined contribution in accordance with IAS 19, “Employee Benefits”. The government agency is responsible for the pension liabilities relating to such staff upon their retirement. The Group accounts for these contributions on an accrual basis. (u) Financial instruments Financial assets and financial liabilities carried on the balance sheet include cash and cash equivalents, trade and other receivables, long-term investments, investment in an associate, payables, balances with related party and borrowings. The accounting policies on recognition and measurement of these items are disclosed in the respective accounting policies mentioned in Note 2. Financial instruments are classified as liabilities or equity in accordance with the substance of the contractual arrangement on initial recognition. Interest, dividends, gains, and losses relating to a financial instrument classified as a liability are reported as expense or income. Distributions to holders of financial instruments classified as equity are charged directly to equity. When the rights and obligations regarding the manner of settlement of financial instruments depend on the occurrence or non-occurrence of uncertain future events or on the outcome of uncertain circumstances that are beyond the control of both the issuer and the holder, the financial instruments is classified as a liability unless the possibility of the issuer being required to settle in cash or another financial asset is remote at the time of issuance, in which case the instrument is classified as equity. - 34 - 2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) (v) Impairment of assets (i) Financial instruments Financial instruments are reviewed for impairment at each balance sheet date. For financial assets carried at amortized cost, whenever it is probable that the company will not collect all amounts due according to the contractual terms of loans, receivables or held-to-maturity investments, an impairment or bad debt loss is recognized in the consolidated income statement. Reversal of impairment losses previously recognized is recorded when the decrease in impairment loss can be objectively related to an event occurring after the writedown. Such reversal is recorded in income. However, the increased carrying amount is only recognized to the extent it does not exceed what amortized cost would have been had the impairment not been recognized. For available-for-sale financial assets, an impairment is recognized in the statement of income when there is objective evidence that the asset is impaired. The recoverable amount of a debt instrument remeasured to fair value is the present value of expected future cash flows discounted at the current market interest rates for a similar financial assets. A reversal of an impairment loss is recorded when the decrease in the impairment loss can be objectively related to an event occurring after the write down. Such reversal is recorded in income. (ii) Other assets Other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Whenever the carrying amount of an asset exceeds its recoverable amount, an impairment loss is recognized in income or treated as a revaluation decrease for an asset that is carried at revalued amount to the extent that the impairment loss does not exceed the amount held in the revaluation surplus for that same asset. The recoverable amount is the higher of an asset’s net selling price and value in use. The net selling price is the amount obtainable from the sale of an asset in an arm’s length transaction less the costs of disposal while value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. Recoverable amounts are estimated for individual assets or, if it is not possible, for the cash-generating unit to which the asset belongs. Reversal of impairment losses recognized in prior years is recorded when there is an indication that the impairment losses recognized for the asset no longer exist or has decreased. The reversal is recorded in income or as a revaluation increase. However, the increased carrying amount of an asset due to a reversal of an impairment loss is recognized to the extent it does not exceed the carrying amount that would have been determined (net of amortization and depreciation) had no impairment loss been recognized for that asset in prior years. (w) Segment reporting The Group is organized on a worldwide basis into one major operating business. The divisions are the basis upon which the Group reports its primary segment information. Financial information on business and geographical segments is presented in Note 28. 2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) (x) Contingencies Contingent liabilities are not recognized in the financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. A contingent asset is not recognized in the financial statements but disclosed when an inflow of - 35 - economic benefits is probable. (y) Subsequent events Post-year-end events that provide additional information about a company’s position at the balance sheet date or those that indicate the going concern assumption is not appropriate are reflected in the financial statements. Post-year-end events that are not adjusting events are disclosed in the notes when material. 3. CHANGES IN GROUP’S ORGANIZATION During the year ended December 31, 2003, the Company acquired the following subsidiaries, all of which were incorporated in the PRC: Original Dates of attributable Name acquisition equity interests Principal activities Puning Rieys Paper Mill Co., Ltd. May 8, 2003 51% Business has not yet been commenced Shanghai Tongrui Fashion Co., Ltd. August 6, 2003 70% Business has not yet been commenced Bejing Bao Dewei Fashion Co., Ltd. November 28, 2003 70% Business has not yet been commenced As of December 31, 2003, investment in subsidiaries and associate are detailed on Note 15 and Note 16. 4. OTHER OPERATING INCOME, NET 2003 2002 RMB’000 RMB’000 Financial subsidy income 2,834 2,197 Rental income less outgoings 2,044 - Consultancy fee 1,000 - Others 78 - Less: Donation and others (160) (1,413) 5,796 784 Financial subsidy income was mainly granted by and received from the Puning Finance Bureau in 2003 for the purpose of supporting the local enterprises. 5. FINANCE COSTS, NET 2003 2002 RMB’000 RMB’000 Interest income from bank deposits and outstandings due from the third parties (7,971) (9,570) Interest expenses on bank loans 22,428 19,277 Others 775 741 15,232 10,448 Interest is charged on the outstandings due from the third parties at a rate of 6% per annum. 6. PROFIT BEFORE TAX Profit before tax was determined after charging (crediting) the following: 2003 2002 RMB’000 RMB’000 Staff costs - salaries and wages 31,849 342,789 - provision for staff and workers’ bonus and welfare fund 3,693 4,381 - contribution to defined contribution pension schemes 1,030 838 Depreciation of property, plant and equipment 20,001 15,647 Amortization of land use rights 303 281 Amortization of goodwill 4,771 2,687 Amortization of computer software and other deferred assets 615 299 Share of (gain)/loss of an associate (58) 375 Gain on disposals of an associate - (760) Cost of sales 330,573 365,158 Rentals of office buildings under operating leases 3,298 1,787 Provision for obsolete stocks 724 895 Provision for doubtful debts 4,504 1,018 Exchange losses, net 515 571 7.TAXATION Details of income tax expense charged (refunded) during the year are as follows: 2003 2002 RMB’000 RMB’000 Current income tax expense 2,175 322 Deferred tax arising from temporary differences (1,725) (632) 450 (310) 8. DIVIDENDS 2003 2002 RMB’000 RMB’000 Dividends declared during the year 70,800 26,550 Dividends declared after year end (See Note 30) 26,550 70,800 In accordance with the relevant regulations in the PRC and the Articles of Association of the Company, the Company declares dividends based on the lower of retained earnings as reported in the statutory accounts and the financial statements prepared in accordance with IFRS. As the statutory accounts have been prepared in accordance with the generally accepted accounting principles (the “PRC GAAP”), the retained earnings as reported in the statutory accounts will be different from the amount reported in the accompanying consolidated financial statements. As of December 31, 2003, the retained earnings before final dividends reported in the statutory accounts were approximately RMB43,094,000 (2002: approximately RMB83,452,000). 9. EARNINGS PER SHARE The calculation of basic earnings per share was based on the consolidated net profit attributable to shareholders for the year ended December 31, 2003 of approximately RMB47,583,000 (2002: approximately RMB41,912,000), divided by the weighted average number of shares in issue during the year of 265,500,000 shares (2002: 265,500,000* shares). Diluted earnings per share do not differ from basic earnings per share as there were no dilutive potential ordinary shares as of year end. * The numbers of ordinary shares in issue and deemed to be issued in 2002 have been restated for the effect of a bonus issue as detailed in note 22 to the accounts. 10. MARKETABLE SECURITIES 2003 2002 RMB’000 RMB’000 Listed securities, at market value at year end 348 779 Listed funds, at market value at year end 300 274 648 1,053 11. TRADE AND OTHER RECEIVABLES, NET 2003 2002 RMB’000 RMB’000 Trade receivables 111,095 71,527 Other receivables 95,106 77,928 Amounts due from related parties (Note 25(c)) 24,582 38,219 Less : Provision for doubtful debts (8,176) (3,672) 222,607 184,002 - 38 - 12. INVENTORIES, NET 2003 2002 RMB’000 RMB’000 Raw materials 9,959 17,974 Work-in-progress 3,888 8,214 Finished goods 63,419 63,791 Sub-contracting materials - 1,156 77,266 91,135 Less: Provision for obsolete stocks - Raw materials (115) (115) - Finished goods (2,503) (1,779) (2,618) (1,894) 74,648 89,241 13. TAXATION Puning Tianhe Garment Manufacturing Factory Co., Ltd., one of the subsidiary, is a Sino-foreign company. In accordance with rule 8 of the “Policy on Profits Tax on Foreign Investment and Enterprises in the PRC”, any profit tax liabilities arising from the taxable profit of this company for the first and second profit making years will be waived. Any profits tax liabilities arising from the third to fifth years thereafter will be subject to a discount of 50%. Accordingly, this company does not has any provision for taxation for the year ended December 31, 2003. In accordance with the “Provisional Regulation on Profits Tax in the PRC “ and according to the agreed taxable rate stipulated by the Tax Bureau in Jinshan, Shanghai, the profits tax of Shanghai Boldway Fashion Co., Ltd., one of the subsidiary, is assessed based on 0.5% of the monthly sales revenue. Other than these two companies, Shenzhen Rieys Industrial Co., Ltd. and the remaining companies within the Group are subject to income tax at the rates of 15% and 33% respectively. The Group is subject to Value Added Tax (VAT). The applicable tax rate for domestic sales is 17% while that for export sales is 0%. Input VAT from purchases of raw materials and other production imports can be netted off against output VAT from sales. Input VAT on purchases of raw materials used to produce goods for export sales is refundable. VAT payable or receivable is the net difference between periodic output and input VAT. (a) Taxes recoverable 2003 2002 RMB’000 RMB’000 Prepaid enterprise income tax 2,005 1,977 VAT recoverable, net 55,518 47,513 57,523 49,490 - 39 - 13. TAXATION (CONTINUED) (b) Deferred tax assets 2003 2002 RMB’000 RMB’000 Deferred tax relating to provision for doubtful debts 2,698 1,212 Deferred tax relating to provision for obsolete stocks 864 625 3,562 1,837 (c) Taxes payable 2003 2002 RMB’000 RMB’000 Enterprise income tax 357 - City construction tax 777 759 Others 1,197 770 2,331 1,529 14. PREPAYMENTS FOR LONG TERM INVESTMENTS Prepayments for long term investments represent the amounts prepaid to acquire the equity interests in certain companies incorporated in the PRC. As of December 31, 2003, the transfers of equity interest were still in progress. 15. INVESTMENTS IN SUBSIDIARIES As of December 31, 2003, the Company directly owned equity interests in the following subsidiaries, all of which were incorporated in the PRC: Attributable Date of equity Name incorporation Registered capital interests Principal activities RMB’000 HKD’000 USD’000 * Shenzhen Rieys Industrial December 7, 50,000 90% Investment and liaison Co., Ltd. 2000 of export business Puning Tianhe Garment December 28, 50,000 75% Manufacturing of Manufacturing Factory 2001 garment Co., Ltd. Shenzhen Chuanger Garment February 8, 2001 12,000 51% Manufacturing of Co., Ltd garment Guangdong Leader Way Co., March 25, 1999 500 70% Manufacturing and Ltd. trading of garment Guangdong Gang Wei March 25, 1999 5,000 70% Trading of garment Fashion Co., Ltd. Beijing Boldway Fashion November 11, 500 70% Trading of garment Co., Ltd. 1998 Shanghai Boldway Fashion April 5, 1999 1,000 70% Trading of garment Co., Ltd. Puning Rieys Paper Mill Co., May 8, 2003 29,000 51% Business has not yet Ltd. been commenced Shanghai Tongrui Fashion August 6, 2003 1,200 70% Business has not yet Co., Ltd. been commenced Beijing Bao Dewei Fashion November 28, 500 70% Business has not yet Co., Ltd. 2003 been commenced * During the year, registered capital of Shenzhen Rieys Industrial Co., Ltd. has been increased from Rmb20,000,000 to Rmb50,000,000. - 40 - 16. INVESTMENTS IN AN ASSOCIATE As of December 31, 2003, the Company directly owned equity interests in the following associate which was incorporated in the PRC: Date of Register Attributa incorporati ed ble equity Name on capital interest Principal activities RMB’0 00 Shanxi Chuanglian May 7, 45,000 27.7% Development, Information Network 1999 manufacturing and Technology Co., Ltd. sales of communication products and provision of technical services As of December 31, 2003, investment in the associate comprised: 2003 2002 RMB’000 RMB’000 Unlisted shares, at cost 13,162 13,162 Less : Share of post-acquisition loss (317) (375) 12,845 12,787 The directors of the Company are of the opinion that the underlying value of the associate was not less than its carrying value as of December 31, 2003. During the year, gain on disposals of an associate is as below: 2003 2002 RMB’000 RMB’000 Sales proceeds - 10,000 Unlisted shares, at cost - 6,600 Goodwill arising from acquisition - 3,120 Less : Accumulated amortization - (78) Less : Share of loss of post-acquisition loss - (402) - 9,240 Gains on disposals of an associate - 760 - 41 - 17. PROPERTY, PLANT AND EQUIPMENT, NET Machinery Motor vehicles and and office Leasehold Construction Buildings equipment equipment improvements In progress Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Cost As at 31 January 2003 77,548 136,126 17,852 3,447 16,455 251,428 Additions 13,191 169 4,685 1,357 214,430 233,832 Reclassifications (3,067) (1,022) 1,022 3,067 - - Transfer to other receivables - (1,780) - - - (1,780) Disposals - (413) (2,050) - (15,055) (17,518) As at 31 December 2003 87,672 133,080 21,509 7,871 215,830 465,962 Accumulated depreciation As at 31 January 2003 5,062 28,951 5,576 816 - 40,405 Reclassifications (9) (505) 514 - - - Charged for the year 2,039 14,147 2,133 1,682 - 20,001 Transfer to other receivables - (946) - - - (946) Disposals - (414) (406) - - (820) As at 31 December 2003 7,092 41,233 7,817 2,498 - 58,640 Net book value As at 31 December 2003 80,580 91,847 13,692 5,373 215,830 407,322 As at 31 December 2002 72,486 107,175 12,276 2,631 16,455 211,023 As of December 31, 2003 and 2002, there are no borrowing costs capitalized in the property, plant and equipment. As of December 31, 2003, buildings of the Company with a net book value of approximately RMB44,590,000 (2002: RMB31,000,000) have been pledged as collaterals for the Group’s short-term bank loans (see Note 21). During the year, machinery and equipment with costs amounting to RMB1,780,000 were transferred to other receivable accounts as the amount paid is higher than the amounts reported in the construction in progress verification report. The directors are of the opinion that the underlying values of property, plant and equipment as of December 31, 2003 are not less than their carrying values. - 42 - 18. LAND USE RIGHTS, NET 2003 2002 RMB’000 RMB’000 Cost Beginning of year 14,126 11,385 Additions - 2,741 End of year 14,126 14,126 Accumulated amortization Beginning of year 863 582 Charged for the year 303 281 End of year 1,166 863 Net book value End of year 12,960 13,263 Beginning of year 13,263 10,803 Land use rights comprise land use fees paid to the land administration authorities for the rights to use the lands where the Group companies’ factory buildings in Punning are located. As of December 31, 2003, land use rights with a net book value of approximately RMB2,685,000 (2002: RMB2,740,000) have been pledged as collaterals for the Group’s short-term bank loans (see Note 21). 19. GOODWILL 2003 2002 RMB’000 RMB’000 Shanxi Chuanglian Information Network Technology Co., Ltd. 11,838 11,838 Guangdong Leader Way Co., Ltd. 4,426 4,426 Guangdong Gang Wei Fashion Co., Ltd. 2,995 2,995 Shanghai Boldway Fashion Co., Ltd. 25,940 25,940 Beijing Boldway Fashion Co., Ltd. 2,514 2,514 47,713 47,713 Less: Accumulated amortization (7,458) (2,687) 40,255 45,026 20. COMPUTER SOFTWARE AND OTHER DEFERRED ASSETS 2003 2002 RMB’000 RMB’000 Cost 11,315 10,243 Less: Accumulated amortization (9,332) (8,717) 1,983 1,526 - 43 - 21. SHORT-TERM BANK LOANS During the year, interest as charged at rates ranging from 4.2038% to 6.6375% (2002: from 4.779% to 8.775%) per annum. 2003 2002 RMB’000 RMB’000 Amounts secured by buildings and land use rights (Note 17 and 18) 71,300 46,600 Amounts guaranteed by a third party 60,000 60,000 Amounts guaranteed by shareholders, Shenzhen Sheng Heng Chang Industrial Co., Ltd. (“Sheng Heng Chang”), Shenzhen Risheng Investment Co., Ltd. (“Risheng Investment”), Shantou Lianhua Industrial Co., Ltd. (“Shantou Lianhua”), and Chen Meixiang (Note 25(b)) 226,000 215,200 Amounts guaranteed by the Company to subsidiaries of the Group 26,000 - 383,300 321,800 22. SHARE CAPITAL As of December 31, 2002, the share capital included promoters’ shares and B shares, which ranked pari passu. The details of share capital were as follows: 2003 2002 2003 2002 Number of shares RMB’000 RMB’000 (in thousands) Registered, issued and fully paid: Unlisted Promoters’ shares of RMB1 each 91,125 91,125 91,125 91,125 Issue of 36,450,000 shares of RMB 1 each 36,450 36,450 as dividends - - Issue of 9,112,500 shares of RMB 1 each 9,113 - 9,113 - from share premium account Listed B shares of RMB1 each 85,875 85,875 85,875 85,875 Issue of 34,350,000 shares of RMB 1 each 34,350 34,350 as dividends - - Issue of 8,587,500 shares of RMB 1 each 8,587 - 8,587 - from share premium account 265,500 177,000 265,500 177,000 Pursuant to a resolution passed at the annual general meeting on April 27, 2003, dividends were paid to all shareholders by issuing 4 shares of every 10 shares and by converting share premium to share capital by issuing 1 share for every 10 shares. . - 44 - 23. RESERVES According to the Company Laws of the PRC and Articles of Association of the Company, the Company is required to provide certain statutory reserves which are appropriated from the net profit as reported in the statutory accounts prepared in accordance with the PRC GAAP. Accordingly, the Company shall set aside 10% of its net profit for statutory revenue reserve fund (except where the fund has reached 50% of the Company’s registered capital) and 5% for the statutory common welfare fund. The Company may make appropriations from its net profit to the discretionary revenue reserve fund upon approval by shareholders. These reserves cannot be used for purposes other than those of which they are created and are not distributed as cash dividends without the prior approval by shareholders under certain conditions. The directors have resolved that the statutory common welfare fund is to be utilized to build or acquire capital items, such as dormitories and other facilities for the Group’s employees, and cannot be used to pay for staff welfare expenses. Title to these capital items will remain with the Group. For the year ended December 31, 2003, the directors proposed that 10% and 5% (2002: 10% and 5%) of the net profit as reported in the statutory accounts be appropriated to statutory revenue reserve fund and statutory common welfare fund, totaling approximately RMB7,137,000 (2002: approximately RMB6,022,000). The resolution is subject to approval by shareholders in the annual general meeting. Pursuant to the resolution of the Board of directors’ meeting dates April 27, 2003, the Company has made appropriation of RMB10,000,000 (2002: RMB12,000,000) from its net profit to the discretionary reserve. - 45 - 24. NOTES TO THE CASH FLOW STATEMENT Reconciliation from profit before tax to cash flow generated from (used in) operations: 2003 2002 RMB’000 RMB’000 CASH FLOWS GENERATED FROM (USED IN) OPERATING ACTIVITIES: Profit before tax 73,528 50,413 Adjustments for: Provision for doubtful debts 4,504 1,018 Provision for obsolete stocks 724 895 (Write back of) provision for marketable securities (25) 129 Depreciation of property, plant and equipment 20,001 15,647 Amortization of land use rights 303 281 Amortization of goodwill 4,771 2,687 Amortization of computer software and other deferred assets 615 299 Share of (gain) loss of an associate (58) 375 Gain on disposals of an associate - (760) Interest expenses 18,828 19,277 Interest income (4,598) (9,570) Operating profit before working capital changes 118,593 80,691 Decrease (Increase) in inventories 13,869 (49,293) Increase in trade and other receivables (7,276) (51,993) Decrease in prepayments 11,590 4,869 Increase in trade payables 649 84,657 Increase in accruals and other payables 1,665 8,724 Cash flows generated from operations 139,090 77,655 Analysis of the changes in financing during the year Short-term Long-term Minority bank loans bank loans interests Rmb’000 RMB’000 RMB’000 Balance as at January 2002 198,700 60,000 1,893 New loans raised 123,100 - - Share of profit by minority interests - - 8,811 Contribution from minority interests - - 17,442 Balance as at January 2003 321,800 60,000 28,146 New loans raised 383,300 - - Repayments of loans (321,800) (60,000) - Fixed assets contributed by minority interest - - 78,408 Share of profit by minority interests - - 25,495 Other assets contribution by minority - - 4,419 interests 383,300 - 136,468 - 46 - 24. NOTES TO THE CASH FLOW STATEMENT (CONTINUED) Analysis of the balances of cash and cash equivalents 2003 2002 RMB’000 RMB’000 Cash on hand 1,178 8,034 Bank current deposits 20,378 104,296 Bank time deposits 100,000 125,000 121,556 237,330 25. RELATED PARTY TRANSACTIONS Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party, or exercise significant influence over the party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. (a) Relationship Name Relationship Hong Kong Hing Lee Trading Company (“Hing Lee”) The shareholder holding 25% equity interest of a subsidiary Sheng Heng Chang One of the shareholders holding 37% equity interest of the Company Risheng Investment (formerly known as “Shenzhen Zhong One of the shareholders holding 10.68% equity interest of the Sheng Ke Investment Co., Ltd”) Company Shantou Lianhua One of the shareholders holding 3.81% equity interest of the Company Chen Meixiang One of the shareholders holding 9.12% equity interest of the Company - 47 - 25. RELATED PARTY TRANSACTIONS (CONTINUED) (b) Transactions 2003 2002 RMB’000 RMB’000 Sales of goods to Hing Lee 40,215 46,425 Purchases of goods from Hing Lee (10,487) (3,250) The above sales and purchase transactions were made at prices comparable to those offered to other third parties. 2003 2002 RMB’000 RMB’000 Guarantee of short term bank loans provided by Sheng Heng Chang, Risheng Investment, Shantou Lianhua and Chen Meixiang 226,000 215,200 Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party, or exercise significant influence over the party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. (c) Balances with related parties 2003 2002 RMB’000 RMB’000 Amounts due from Hing Lee (repayment in accordance with the sales contracts) 24,582 36,379 Amounts due to Hing Lee (repayment in accordance with the purchase agreement) 6,302 3,250 Amounts due from Shenzhen Zhong Sheng Ke Investment Co., Ltd. (no fixed term of repayments) - 1,840 The above balances are all unsecured and interest free. 26. CONTINGENT LIABILITIES As of December 31, 2003, the Company provided a guarantee to two independent third parties for a short-term bank loan amounting to RMB78,000,000 (2002: RMB60,000,000). 27. FINANCIAL INSTRUMENTS (a) Financial risk management The Group’s activities expose it to a variety of financial risks, including credit risk, interest rate risk, liquidity risk and foreign exchange risk. Financial risk management is carried out by the Finance Department under policies approved by the Board of Directors. (i) Credit risk The carrying amounts of cash and cash equivalents, trade and other receivables represent the Group’s maximum exposure to credit risk in relation to financial assets. Cash is placed with reputable banks. The majority of the Group’s trade receivables related to sales of goods from third party customers. The Group performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral on trade receivables. The Group maintains a provision for doubtful debts and actual losses have been within management’s expectations. For the year ended December 31, 2003, approximately 51% of the Group’s turnover was made to top five customers (2002: approximately 62%). As of December 31, 2003, no single customer accounted for greater than 13% (2002: approximately 21%) of total trade receivables. No other financial assets carry a significant exposure to credit risk. (ii) Interest rate risk The directors believe that the Group’s exposure to interest rate risk of financial assets and liabilities as of December 31, 2003 was minimal since their deviation from their respective fair values was not significant. (iii) Liquidity risk The Group policy is to maintain sufficient cash and cash equivalents or have available funding through an adequate amount of committed credit facilities to meet its current use in operations. (iv) Foreign exchange risk The foreign exchange risks of the Group occur due to the fact that the Group has business activities denominated in foreign currencies. The Group did not enter into any foreign exchange forward contracts to hedge against foreign currency fluctuations. However, the directors believe that the Group’s exposure to foreign exchange risk was minimal since most of the Group’s foreign currency transactions are denominated in HKD and USD and, over the past five years, there has been no significant fluctuation in the exchange rates between RMB and USD and HKD. - 49 - 27. FINANCIAL INSTRUMENTS (CONTINUED) (b) Fair value estimation In assessing the fair value of other financial instruments, the Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date as follows: (i) Cash and cash equivalents and short-term bank loans The carrying amount of cash and cash equivalents and short-term bank loans approximates their fair value due to the short-term maturity of these financial instruments. (ii) Receivables and payables The carrying amount of receivables and payables, which are all subject to normal trade credit terms, approximates their fair values. (iii) Balances with related parties No disclosure of fair values is made for balances with related parties as it is not practicable to determine their fair values with sufficient reliability since these balances are non-interest bearing and have no fixed repayment terms. (iv) Long-term investment and investment in an associate The fair value of long-term investment and investment in an associate cannot be reliably estimated and disclosed because these investments do not have quoted market price in an active market and other methods for estimating fair value for these investments are clearly inappropriate or unworkable. (v) Long-term bank loans The fair value of long-term bank loans is based on the current rates available for debt with the same maturity and credit-rating risk profile. As of December 31, 2003, the difference between the fair values and carrying amounts of the Group’s long-term bank loans was minimal since the difference between the current rates and the historical rates of such long-term bank loans was not significant. - 50 - 28. SEGMENT INFORMATION (a) Business segment The Group conducts its business within one business segment - the business of production and sales of clothes. (b) Geographical segments The Group’s activities are mainly conducted in Mainland China and Hong Kong and Overseas outside China. The geographical segments are primary reporting segments of the Group. An analysis by geographical segments is as follows: Mainland China Hong Kong and Unallocated Total Overseas 2003 2002 2003 2002 2003 2002 2003 2002 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Revenue from external 165,702 64,864 322,587 411,959 - - 488,289 476,823 customers Segment results 80,037 38,246 77,679 73,419 - - 157,716 111,665 Other operating income 5,796 784 - - - - 5,796 784 Unallocated expenses - - - - (74,810) (51,973) (74,810) (51,973) Profit from operations 85,833 39,030 77,679 73,419 (74,810) (51,973) 88,702 60,476 Finance costs, net - - - - (15,232) (10,448) (15,232) (10,448) Share of gain / (loss) of an associate 58 (375) - - - - 58 (375) Gain on disposals of associate - 760 - - - - - 760 Income tax (expenses) / refund - - - - (450) 310 (450) 310 Minority interests - - - - (25,495) (8,811) (25,495) (8,811) Net profit / (loss) for the year 85,891 39,415 77,679 73,419 (115,987) (70,922) 47,583 41,912 Segment assets 1,126,278 955,916 - - - - 1,126,278 955,916 Investment in an associate 12,845 24,329 - - - - 12,845 24,329 Total assets 1,139,123 980,245 - - - - 1,139,123 980,245 Total liabilities 542,761 539,788 - - - - 542,761 539,788 Substantially all the capital expenditures of the Group are in Mainland China. - 51 - 29. COMMITMENTS (a) Capital commitments 2003 2002 RMB’000 RMB’000 Contracted but not provided in respect of: - Property, plant and equipment 11,943 - Authorized but not contracted in respect of: - Capital contribution to the investee companies not yet contributed 18,646 - 30,589 - (b) Operating lease commitments Total future minimum lease payments under non-cancelable operating leases are as follows: 2003 2002 RMB’000 RMB’000 Office buildings and shops - within one year 3,585 1,346 - within two to five years 3,779 2,280 - over five years - - 7,364 3,626 30. SUBSEQUENT EVENTS Pursuant to a resolution passed at the Board of Directors’ meeting dated February 27, 2004, the Company declared final dividends to all shareholders by issuing 1 share (2002: 4 shares) for every 10 shares (2002: 10 shares), based on the total number of shares of 265,500,000 shares as of December 31, 2003. In addition, the Company proposed to convert RMB26,550,000 (2002: RMB17,700,000) from share premium to share capital by issuing 1 share (2002: 1 share) for every 10 shares (2002: 10 shares). The resolutions are subject to the approval by the shareholders in the annual general meeting. - 52 - 31. IMPACT OF IFRS ADJUSTMENTS ON NET PROFIT/NET ASSETS The Group’s consolidated financial statements were prepared in conformity with IFRS as if those standards had been applied consistently throughout the years. This basis of accounting differs from that used in the statutory accounts of the Group prepared in accordance with PRC GAAP. The principal adjustments made to conform to IFRS are as follows: Net profit for the year ended Net assets as of December 31, December 31, 2003 2002 2003 2002 RMB’000 RMB’000 RMB’000 RMB’000 As reported in the statutory accounts 47,579 40,146 595,169 411,122 Impact of adjustments: - Reversal of recognition and amortization of trademark 648 1,135 - (648) - Deferred tax 1,725 631 3,562 1,837 - Pre -operating expenses (2,369) - (2,369) - As restated in the Group’s IFRS financial statements 47,583 41,912 596,362 412,311 32. APPROVAL OF FINANCIAL STATEMENTS The financial statements were approved by the board of directors on February 27, 2004. - 0 -