神城A退(000018)深中冠2003年年度报告（英文版）

Shenzhen Victor Onward Textile Industrial Co., Ltd. Annual Report for 2003 深圳中冠纺织印染股份有限公司 Shenzhen Victor Onward Textile Industrial Co., Ltd. Annual Report 2003 April 2004 1 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 Table of contents: Important Notes Section I. Basic Information Section II. Highlights of Accounting Data and Business Data Section III. Particulars about Changes of Share Capital and Shareholders Section IV. Directors, Supervisors, Senior Executives and Employees Section V Company Administration Structure Section VI. Brief Introduction of Shareholders' General Meeting Section VII Report of Board of Directors Section VIII Report of Supervisory Committee Section IX Important Events Section X Financial and Accounting Report Section XI. List of Documents Available for Inspection 1 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 Important Notes The Board of Directors and the directors of the Company hereby warrant that there are no misstatement, misleading representation or important omissions in this report and shall assume joint and several liability for the authenticity, accuracy and completeness of the contents hereof. Directors did not attend this board meeting on account of official duties. Pricewaterhouse Coopers Zhongtian Certified Public Accountants issued standard unqualified auditors' report for the Company. Mr. Hu Yongfeng, the board chairman of the Company, Mr. Sun Zhiping, the general manger in charge of accounting, and Ms Shun Yaqin, the person in charge of financial accounting organ, represent and warrant the financial report in this annual report is true and complete. Section I Basic Information about the Company I. Chinese Name of the Company:深圳中冠纺织印染股份有限公司 Name in English: Shenzhen Victor Onward Textile Industrial Co., Ltd. II. Legal Representative: Hu Yongfeng III. Secretary to the Board of Directors : Chen Xing Contact address: Flat C, 10/F, Real Estate Building, Renmin Nan Road, Shenzhen Tel：（755）82323864 Fax：（755）8233 9100 E- mail：cx@chinaszvo.com Securities affair representative: Jiang Xiujuan Contact address: Flat C, 10/F, Real Estate Building, Renmin Nan Road, Shenzhen Tel：（755）82325084 Fax：（755）82339100 E- mail：jxj@chinaszvo.com IV. Registered address: Flat C, 10/F, Real Estate Building, Renmin Nan Road, Shenzhen 2 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 City Business address: 26 Kuipeng Road, Kuiyong Town, Longgang District, Shenzhen, China Contact address: Flat C, 10/F, Real Estate Building, Renmin Nan Road, Shenzhen Zip Code: 518001 Website: http:/ www.chinaszvo.com E- mail：szvo@chinaszvo.com V. Press for information disclosure: Times Square and Hong Kong Commercial Daily Website for information disclosure: http://www.cninfo.com.cn The place where company documents are prepared and placed: Flat C, 10/F, Real Estate Building, Renmin Nan Road, Shenzhe n City VI. Stock Exchange for Listing: Shenzhen Stock Exchange Stock abbreviation : Shen Victor Onward A Shares and B Shares Stock Code : 000018 200018 VII. Other Relevant Information of the Company 1. The date and place when and where the Company made its first registration: The Company was first registered as Shenzhen Victor Onward Printing and Dyeing Co., Ltd. in Shenzhen in 1984. The Company changed its registration and was registered as Shenzhen Victor Onward Textile Industrial Co., Ltd. in Shenzhen in 1991. 2. Registration No. of Legal Entity Business License: 100625 3. Tax Registration No.: 440301618801483 4. Organization holding the unlisted shares in trust: Shenzhen Securities Registration Co. Ltd. 5. The name and business address of the Certified Public Accountants engaged by the Company Name: Pricewaterhouse Coopers Zhongtian Certified Public Accountants Address:37/F, Diwang Commercial Center, Xinxing Plaza, No. 5002, Shennan East Road, Shenzhen, China 6. The law firm engaged by the Company: Guangdong Shengdian Law Firm Section II Highlights of Accounting Data and Business Data I. Main Profit Indicators of 2003 Unit: RMB'0000 Item Amount Total profit 239 Net profit 157 Net profit after deducting non-recurring gains and 82 losses 3 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 Profit from key business 2940 Profit from other businesses 93 Operating profit 136 Investment income 71 Subsidy income 0 Net amount of non-operating income/expenditure 31 Net cash flows per share from operating activities -1487 Net increase of cash and cash equivalent -316 Note: Items of non-recurring gains and loss deducted and involved amount (RMB'0000) Income on disposal of fixed assets 47 Income of Short-term investment 56 Non-operating income 3 Non-operating expenses -18 The amount affected by the Income tax -13 non-recurring Gains and loss II. Highlights of accounting data and financial indicators in the latest three years Unit: RMB'0000 Item 2003 2002 2001 Income from key business 20826 16174 14880 Net profit 157 135 84 Total assets 39034 37645 38886 Shareholders' equity 31114 30826 30692 Earnings per share (RMB) 0.009 0.008 0.005 Net assets per share (RMB) 1.840 1.825 1.815 Net assets per share after adjustment 1.827 1.814 1.80 (RMB) Net cash flow per share from -0.088 0.095 0.11 operating activities (RMB) Return on net assets 0.51% 0.44% 0.27% Return on equity calculated on basis of net profit after deducting 0.26% 0.44% -1.71% non-operating gains and losses [Note 1: The net profit and net assets in the auditors' report issued pursuant to the Accounting System for Enterprise Adopting Share-holding System are RMB 1,566,030 and RMB 311,140,450 respectively. The net profit and net assets in the auditors' report issued pursuant to International Account Standard (IAS) are equivalent to RMB 2,117,153 and RMB 298,785,676. The reason for the difference between the net profits in domestic and international (audited) statements: Reconciliation statement of the difference of Net assets Net profit financial statements Balance in the statements prepared pursuant to 311,140,450 1,566,030 enterprise accounting system 4 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 Adjustment made pursuant to international accounting standards: 1. Appraised appreciation of Hong Kong house -9,696,179 485,980 property reversed pursuant to interna tional accounting standards 2. Difference resulting from the disposal of -359,226 65,143 long-term equity investment pursuant to international accounting standards 3. Others -2,299,369 - Balance after adjustment pursuant to international 298,785,676 2,117,153 accounting standards 2003 financial statements of the Company prepared pursuant to international accounting standards have been audited by Pricewaterhouse Coopers Zhongtian Certified Public Accountants Co., Ltd. IV. Particulars about Changes in Shareholders' Equity in the Report Period RM B Capital Surplus Statutory Currency Total Share Retained Item common common public welfare conversion shareholders' capital profit reserve reserve fund difference equity Balance at beginning of 169,142,356 29,722,897 53,093,813 3,687,693 4,993,584 51,310,461 308,263,111 the period Increase in this 234,905 78,302 1,331,125 1,311,309 2,877,339 period Decrease in this period Balance at end 169,142,356 29,722,897 53,328,718 3,765,995 6,324,709 52,621,770 311,140,450 of the period Reason for change: 1) Surplus common reserve and statutory common reserve changed due to the appropriation of net profit at the proportion of 10% and 5% according to the provisions of the Articles of Association of the Company. 2) The retained profit changed because profit of RMB 1.33 million was transferred in after the allocation of the profit earned by the Company in 2003 for surplus common reserve fund and public welfare fund. Section III. Particulars about Changes in Share Capital and Shareholders I. The changes in share capital Item Before this Increase or decrease this time (+/-) After this change change (Number at Bonus Capitalization Others Subtotal (Number at end of beginning of Share shares of common period) period) allotm reserve fund ent I. Non-negotiable shares 1. Promoter's shares 79,489,253 79,489,253 Of which: State-owned 47,359,859 47,359,859 shares 5 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 shares Domestic corporate shares 32,129,394 32,129,394 Overseas corporate shares 0 0 Others 2. Raised corporate shares 3. Staff shares 0 0 4. Preferred shares or others Total non-negotiable shares 79,489,253 79,489,253 II. Negotiable shares 1. RMB common shares 20,231,200 20,231,200 2. Domestically listed 69,421,903 69,421,903 foreign-capital shares 2. Overseas listed foreign-capital shares 3. Others Total negotiable shares 89,653,103 89,653,103 III. Total shares 169,142,356 169,142,356 II. Share issue and listing The total number of the shares of the Company remained unchanged in the three years as of the end of the report period. After the approval of CSRC, the non-listed foreign investment shares were listed on October 18, 2001 so that all "overseas corporate shares" in share structure were converted into "domestically listed foreign investment shares". III.Introduction to shareholders 1. Total number of shareholders at the end of the period: At the end of 2003, the Company had 22,414 registered shareholders (legal person) in total including 15,112 shareholders (legal person) of A shares and 7,302 shareholders (legal persons) of B shares. 2. Particulars about the shareholding of the top ten shareholders at the end of report period 1. Particulars about the shareholding of the top 10 shareholders at the end of the report period Name of shareholders Increas Quantity of Proport Quantity of Type of shares e or shares held ion (%) pledged or held decreas at the end of frozen shares e in the year year ① Shenzhen Union Holdings 0 47,359,859 28 Promoter's Ltd. state-owned shares ② Style-Success Ltd. 0 24,466,029 14.46 B shares 6 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 ③ Shenzhen Textile Holdings 0 24,458,231 14.46 12,229,115 Domestic Co., Ltd. corporate shares ④ Union Developing Group 0 7,671,163 4.54 Domestic Co., Ltd. corporate shares ⑤ Rich Crown Investment Co., 0 6,114,556 3.62 B shares Ltd. ⑥ Shing Ying Chieh 0 5,561,729 3.29 B shares ⑦ Liu Liaoyuan 25,200 2,165,750 1.28 B shares ⑧ Chen Song 65,300 398,400 0.24 B shares ⑨ Huo Jinxia 0 278,500 0.16 B股 ⑩ Wang Zhen 0 278,150 0.16 B shares [Note 1: The controlling shareholder of the above- mentioned largest shareholder Shenzhen Union Holdings Ltd. and the fifth largest shareholder Hong Kong Rich Crown Investment Co., Ltd. is Union Developing Group Ltd. [Note 2: Shenzhen Textile Holdings Co., Ltd., the second largest shareholder of the Company, pledged 12,229,115 shares accounting for 7.23% of 24,458,231 promoter's corporate shares to Shenzhen Shenfang Building Sub-branch of Merchant Bank to provide guarantee for the loan of RMB 20 million extended to it. The freezing period of the pledged shares started from December 20, 2002. IV. Introduction to the largest shareholder of the Company Shenzhen Union Holdings Ltd. Shares held: 47,359,859 shares, accounting for 28% of the total shares. Legal Representative: Ding Yue Date of establishment: June 17, 1994 Business scope: Production of and dealing in various fabrics, garments chemical fibers and textile equipment, domestic commerce, material supply and marketing (excluding monopolized commodities), management of self- owned properties, processing with imported materials and designs, internal introduction and foreign cooperation, assembling with imported spare parts and cooperation in compensation trade. Registered capital：RMB 449.555085 million Nature of enterprise: Share-holding system Registered address: Shenzhen V. Introduction to other legal person shareholders holding over 10% of total shares 1. Shenzhen Textile Holdings Co., Ltd. No. of shares held: 24,458,231 shares, accounting for 14.46% of the total shares Legal Representative: Mr. Guang Tongke Date of establishment: August 1994 Business scope: Production and processing textiles, garments, decoration cloth, belts, 7 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 trademark belt, bicycle, handicraft; purchase and sales of general goods, special-purpose textile equipment, accessories for textile equipment, meters, standard parts, leather products, textile raw materials, dyes, electronic products, grain, oil, foods; development and dealing of real estate, import and export business, holding exhibitions. Registered capital：163.4160 million Nature of enterprise: Share-holding system Registered address: Shenzhen 2. Style-Success Ltd. Legal representative: Miss Amy Wang Business scope: investment Shares held: 24,466,029 shares, accounting for 14.46% of the total shares VI. Introduction to the controlling shareholder of Shenzhen Union Holdings Ltd. Company name: Union Developing Group Co., Ltd. Legal representative：Dong Binggen Date of establishment: August 23, 1983 Company type: An enterprise directly under central government, one of 520 national key enterprises. Registered capital：RMB 90.61 million. Business scope: Import and export of commodities and technologies except the export commodities in which the state organizes unified and joint dealing and the imported commodities in which state-approved companies deal for itself and on commission basis, processing with materials and designs supplied by clients, assembling with imported spare parts and cooperation in compensation trade, processing imported materials, counter trade and entrepot trade (pursuant to (1999) WJMZSHZ No.193 Document), domestic sales of commodities for export, domestic sales of imported and exported commodities, textile technical consulting services, property management, lease service, contracting of overseas textile industry projects and domestic international bidding projects, import and export of the equipment and materials necessary for the said overseas projects, dispatch of labor service personnel for implementing the said overseas projects (pursuant to (98) WJMZSHZ No. 3109 Document), sales of automobiles (not including cars). VII. Basic information about the top ten shareholders holding negotiable shares of the 8 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 Company (As of December 31, 2003) Name of shareholder No. of shares Type of held shares held 1 Style-success Limited 24,466,029 B shares 2 Rich Crown Investment Co., 6,114,566 B shares Ltd. 3 Shing Ying Chieh 5,561,729 B shares 4 Liu Liaoyuan 2,165,750 B shares 5 Chen Song 398,400 B shares 6 Huo Jinxia 278,500 B shares 7 Wang Zhen 278,150 B shares 8 Di Suwen 246,672 B shares 9 Huang Weili 205,262 B shares 10 Zhong Yonglai 196,600 B shares Section IV Directors, Supervisors, Senior Executives and Employees I. Basic information about directors, supervisors and senior executives Term of Date of starting and Shares held at Shares held at Name Sex Age Title office ending beginning of year end of year Hu Yongfeng Male 42 Board chairman 3 years ２００３．５－２００６．５ 0 0 Deputy chairman of Li Zhihua Male 47 3 years ２００３．５－２００６．５ 0 0 the Board Deputy chairman of Song Tao Male 51 3 years ２００３．５－２００６．５ 0 0 the Board Ding Yue Male 46 Director 3 years ２００３．５－２００６．５ 0 0 Guan Tongke M ale 57 Director 3 years ２００３．５－２００６．５ 0 0 Director/General Sun Zhiping Male 38 3 years ２００３．５－２００６．５ 0 0 manager Independent Mai Jianguang Male 43 3 years ２００３．５－２００６．５ 0 0 director Independent Li Weiping Male 50 3 years ２００３．５－２００６．５ 0 0 director Independent Shu Man Female 39 3 years ２００３．９－２００６．５ 0 0 director Convener of the Dong Binggen Male 54 Supervisory 3 years ２００３．５－２００６．５ 0 0 Committee Gui Liping Female 45 Supervisor 3 years ２００３．５－２００６．５ 0 0 Cai Wanqing Male 53 Supervisor 3 years ２００３．５－２００６．５ 0 0 Chen Jingqiu Male 61 Deputy GM 3 years ２００３．５－２００６．５ 0 0 Ye Jianzhong Male 49 Deputy GM 3 years ２００３．５－２００６．５ 0 0 Su Yanfang Male 60 Deputy GM 3 years ２００３．５－２００６．５ 0 0 Wang Xihui Female 50 Deputy GM 1 year ２００３．５－２００４．３ 0 0 Chen Xing Male 31 Board secretary 3 years ２００３．５－２００６．５ 0 0 II. Particulars about directors and supervisors holding positions at corporate shareholders Name of corporate Whether Name Position Term of office receiving shareholders remuneration 9 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 or subsidy Dong Shenzhen Union Holdings Convener of the 3 years No Binggen Ltd. supervisory committee Secretary of Party Dong Union Developing Group committee, chairman of 3 years Yes Binggen Co., Ltd. board of directors and GM Union Developing Group Ding Yue Vice president 3 years Yes Co., Ltd. Shenzhen Union Holdings Chairman of the board of Ding Yue 3 years No Ltd. directors Hu Union Developing Group Vice president 3 years Yes Yongfeng Co., Ltd. Hu Shenzhen Union Holdings Deputy chairman of the 3 years No Yongfeng Ltd. Board Guan Shenzhen Textile Holdings Chairman of the board of 3 years Yes Tongke Co., Ltd. directors Union Developing Group Deputy chief accountant Gui Liping and manager of Finance 3 years Yes Co., Ltd. Dept. III. Annual remuneration of directors, supervisors and senior executives Total amount of annual remuneration 93.50 The total amount of the remuneration of the top three directors receiving the remuneration of 24.00 the highest amount The total amount of the remuneration of the top three senior executives receiving the 61.00 remuneration of the highest amount Subsidy of independent directors RMB 30,000 / person /year The traveling expenses of independent directors for attending board meetings and shareholders' general meetings and the expenses from Other benefits of independent directors exercising powers and functions according to the Articles of Association of the Company shall be borne by the Company and included in the administration expenses of the Company. Dong Binggen, Li Zhihua, Hu Yongfeng, Name of directors and supervisors not receiving remuneration and subsidy from the Company Guang Tongke, Song Tao, Ding Yue and Gui Liping. Range of remuneration Number of person RMB 200,000 –RMB 300,000 1 RMB 100,000 - RMB 190,000 4 RMB 30,000 - RMB 100,000 6 IV. Change in directors, supervisors and senior executives in the report period In the report period，the board of directors and the supervisory committee of the Company were reelected due to the expiration of term of office the third board of directors and supervisory committee of the Company. Through vote by ballot at 2002 annual 10 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 shareholders' general meeting of the Company on May 16, 2003, Mr. Hu Yongfeng, Mr. Ding Yue, Mr. Li Zhihua, Mr. Guan Tongke, Mr. Song Tao and Mr. Sun Zhiping were elected as non- independent directors of the Company. Mr. Mai Jianguang, Mr. Jiang Jianming and Mr. Li Weiping were elected as independent directors of the Company. Mr. Dong Binggen, Ms Gui Liping and Mr. Cai Wanqing were elected as supervisors of the Company. The first meeting of the fourth board of directors of the Company held in the same day resolved to elect Mr. Hu Yongfeng as the chairman of the board of directors of the Company and Mr. Li Zhihua and Mr. Song Tao as vice chairmen of the board of directors, agree to the nomination of the chairman of the board of directors and appoint Mr. Sun Zhiping as the general manager of the Company, Ms Wang Xihui as the financial controller of the Company, Mr. Chen Xing as the board secretary of the Company, agree to the nomination of the general manager and appoint Mr. Chen Jingqiu, Mr. Ye Jianzhong and Mr. Su Tingfang as deput y general managers of the Company and Ms Wang Xihui as the deputy general manager of the Company and the manager of Finance Dept. On May 16, 2003, the first meeting of the fourth supervisory committee of the Company resolved to elect Mr. Dong Binggen as the convener of the fourth supervisory committee of the Company. On September 12, 2003, the first provisional shareholders' general meeting of the Company in 2003 resolved to agree to Jiang Jianming's resignation from the position of independent director and elect Ms Shu Man as an independent director of the fourth board of directors of the Company. V. Staff: By the end of the report period, the Company had 418 staff members in total, including 93 managerial employees, 298 production employees, 20 sales employees (including those of Hong Kong Co.), 7 financial employees, 191 professional technicians and 35 professionals with senior and semi- senior professional titles. The Company has provided social insurance to its staff according to relevant regulations of the government. Section V Company Administration Structure I. Particulars about corporate administration Strictly according to the requirements of laws and regulations including the Company Law, the Securities Law and relevant laws and regulations of CSRC, the Company has constantly perfected its legal person administration structure, established modern enterprise system, standardized its operation, formulated Rules of Procedure of Shareholders' General 11 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 Meeting, Rules of Procedure of the Board of Directors, Rules of Procedure of the Supervisory Committee and Independent Director's Work System and included them revised Articles of Association of the Company. In the report period，the 3rd meeting of the fourth board of directors of the Company, as required by ZJF (2003) No. 56 Document, adopted the Proposal for Amending the Articles of Association of the Company and added articles including the one concerning "external guarantee" and submitted the proposal to the next shareholders' general meeting for exa mination. These rules met requirements of the documents issued by CSRC in respect of the standardization of the administration of listed companies. Their main content is as follows: 1. Shareholders and shareholders' general meeting: The Company convened and held shareholders' general meeting strictly according to the requirements of Opinions on Standardization of Shareholders' General Meeting of Listed Companies, formulated Rules of Procedure of Shareholders' General Meeting, ensured all shareholders, especially medium and small shareholders, enjoy equal position and can fully exercise their own rights. 2. Relationship between the controlling shareholder and the Company: The acts of the controlling shareholder of the Company were standardized. It did not exceed the authority of the shareholders' general meeting to directly or indirectly intervene with the decision making and operating activities of the Company. The Company is independent from its controlling shareholder in respect of personnel, assets, finance, organ and business. The board of directors, the supervisory committee and internal organ of the Company are able to operate independently. 3. Directors and the board of directors: The Company elected directors strictly according to the director selection and appointment procedure specified in the Articles of Association of the Company and will further perfect director selection and appointment procedure and actively promote system of cumulative voting. The member composition of the board of directors of the Company complied with the requirements of laws and regulations. The board of directors of the Company formulated Rules of Procedure of the Board of Directors. Directors of the Company were able to attend board meetings and shareholders' general meetings with responsible attitude, actively participate in relevant training, get familiar with relevant laws and regulations and understand the rights, obligations and responsibilities of director. The Company has established independent director system according to Guiding Opinions on the Establishment of Independent Director System at Listed Companies issued by CSRC. The number of independent director is 3 person. 4. Supervisors and the supervisory committee: The number and composition of the Supervisory Committee of the Company complied with the requirements of laws and regulations. The Supervisory Committee of the Company formulated the Rules of Procedure of the Supervisory Committee. The supervisors of the Company were able to perform their duties seriously, take the attitude of being responsible for all shareholders and supervise the legality and regulation conformity of the Company's finance and the duty performance of the directors, managers and other senior executives of the Company. 5. Performance appraisal and stimulation and restriction mechanism: The Company 12 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 established the system of subsidy for independent directors and directors and remuneration for senior executives. The Company will further improve and perfect overall remuneration system, establish fair and transparent performance appraisal standard and stimulation and restriction mechanism for directors, supervisors and executives. 6. Interested parties: The Company was able to fully respect and safeguard the legal rights and interests of the interested parties including banks, other creditors, employees and consumers and promote its sustained and healthy development together with interested parties. 7.Information disclosure and transparency: The Company designated the secretary to the board of directors to be responsible for information disclosure, reception of shareholder and consultation. In the report period, the Company was able to truly, accurately, completely and timely disclose relevant information according to the provisions of laws, regulations and the Articles of Association of the Company. The Company will continue to operate in a standardized way strictly according to the requirements of relevant laws and regulations including the Company Law, further perfect company administration structure and establish and improve various regulations in light of the gap with the requirements of Standards of Administration of Listed Companies, ensure the maximization of shareholders' interests and safeguard the lawful rights and interests of all shareholders. II. Particulars about duty performance of independent directors The Company has perfected independent director system in the Articles of Association of the Company according to Guiding Opinions on the Establishment of Independent Director System at Listed Companies issued by CSRC. The board of directors of the Company now has Three independent directors. These Three independent directors have consciously performed their duties according to the principles of good faith and diligence since they came into office. They were able to attend board meetings of the Company in person, give full play to their own work experience and expertise and express their opinions during examining proposals and seriously perform their duties. They have played important role in ensuring the reasonableness of the Company's decisions and protecting the interests of shareholders. III. The separation of the Company from its controlling shareholder in five respects The Company is independent from its controlling shareholder in respect of personnel, assets, finance, organization and business. The particulars are as follows: 1. Business: The Company has complete business and the ability of independent operation. It is completely independent from its controlling shareholder in respect of business. 2. Personnel: The Company is independent in respect of labor, personnel and wage management. The general manager and other senior executives of the Company all received remuneration from the Company, who neither held position at nor received 13 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 remuneration from the controlling shareholder. 3. Assets: The Company has complete assets. Its property rights are definite and not related to its controlling shareholder and other shareholders. 4. Organization: The Company established an organizational structure that is completely independent of its controlling shareholder. The board of directors, the supervisory committee and internal organs of the Company are able to operate independently. 5. Finance: The Company has independent finance. It set up independent finance department and established independent financial accounting system. It has standardized and independent financial and accounting system and financial control system applicable to branches and subsidiaries. The Company independently pays taxes according to law. It opened accounts with banks independently. The Company and its controlling shareholder do not use the same bank account. IV. Appraisal and stimulation of the senior executives of the Company in the report period In the report period, the board of directors of the Company conducted annual appraisal of senior executives, gradually practiced public and competitive recruitment and enhanced the overall quality and management level of the management team. The board of directors of the Company is planning to establish remuneration and appraisal committees and will establish relevant incentive system as soon as possible and further improve performance appraisal standard and stimulation and restriction mechanism. Section VI. Brief Introduction of Shareholders' General Meeting In the report period, the Company held two shareholders' general meetings. The particulars are as follows: I. On April 8, 2003, the board of directors of the Company published the notice of holding 2002 annual shareholders' general meeting on Securities Times and Hong Kong Commercial Daily. 2002 annual shareholders' general meeting of the Company was held in the meeting room on the 16/F of Shenzhen Union Building in the morning of May 16, 2003 as scheduled. The meeting examined and adopted the following proposals by voting: 1. 2002 work report of the board of directors of the Company; 2. 2002 work report of the supervisory committee of the Company; 3. 2002 annual report of the Company and its Summary; 4. 2002 profit distribution preplan and 2003 profit distribution policy of the Company; 5. Establishment of Shenzhen Victor Onward New Technology Co., Ltd. in the form of joint venture; 6. The proposal for expanding the business scope of the Company; 14 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 7. Reelection of the board of directors and the supervisory committee; Mr. Hu Yongfeng, Mr. Ding Yue, Mr. Li Zhihua, Mr. Guan Tongke, Mr. Song Tao and Mr. Sun Zhiping were elected as non- independent directors of the Company. Mr. Mai Jianguang, Mr. Jiang Jianming and Mr. Li Weiping were elected as independent directors of the Company. Mr. Dong Binggen, Ms Gui Liping and Mr. Cai Wanqing were elected as supervisors of the Company. II. On August 13, 2003, the board of directors of the Company published the notice of holding the first provisional shareholders' general meeting of Shenzhen Victor Onward Textile Industrial Co., Ltd. in 2003 on Securities Times and Hong Kong Commercial Daily. In the morning of September 12, 2003, the first provisional shareholders' general meeting of the Company in 2003 was held as scheduled. 5 shareholders or shareholders' representatives attended the meeting, representing 110069838 shares which account for 65.07% of the total share capital of the Company. Among them， 3 represented shareholders of domestic investment shares， representing 79489253 shares. 2 represented shareholders of foreign investment shares， representing 30580585 shares. The meeting examined and voted through the proposal for replacing independent directors of the fourth board of directors of the Company. It agreed to Jiang Jianming's resignation from the position of independent director and elected Ms Shu Man as an independent director of the fourth board of directors of the Company. This provisional shareholders' general meeting engaged Huashang Law Office with the qualification of being engaged in securities and futures business as witness. Lawyer Lai Weiwen attended this meeting. In the opinion of the lawyer of this law office，the convening and holding procedure of the first provisional shareholders' general meeting of the Company in 2003, the qualification of the persons attending this meeting and the voting procedure were legal and complied with relevant provisions of laws, regulations and the Articles of Association of the Company and the resolutions adopted at the meeting were legal and valid. The announcement of the resolutions of this meeting was published on Securities Times and Hong Kong Commercial Daily on September 13, 2003. Section VII Report of Board of Directors 15 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 I. Operating status of the Company 2003 is unfavourable to textile industry. In the first half year, it met the attack of SARS. In the second half year, the price of cotton soared. Facing unfavourable market environment，all employees of the Company made concerted effort, worked steadily and fulfilled the production and operation task for the year. Its income from main operation and net profit were RMB 208.255 million and RMB 1.566 million, an increase of 28.76% and 16.19% respectively over the previous year. In 2003, the Company's management level, product structure and marketing mode changed much. The change was mainly embodied in the following aspects: With the establishment of ISO9001 quality management system and ISO14001 environment management system and the mature and steady operation of ERP system, the Company's management was improved to a new level and its production efficiency was greatly enhanced while its production cost was further lowered; As for product structure, the Company successfully completed the development of high-class blended fabrics including silk yarn cotton, linen, mondale, man- made cotton, linen and elastic fabrics, formed batch production scale, quickened the development of printed products and promoted the joint growth of dyed and printed products. By the end of 2003, the output of printed products with relatively high profit rate increased sharply. The monthly production capacity exceeded 1 million yards. In 2003, the Company produced products of 33 million yards, including dyed products of 21 million yards, printed products of 8.3 million and bleached products of 3.8 million. The proportion of these three kinds of products was 63%, 25% and 12% respectively. The output of printed products in 2003 increased by 30.5% over 2002. The proportion of printed products was enhanced by 25% over 2002. Meanwhile，the Company also innovated marketing means. It gave full play to the marketing advantage of Victor Onward (Hong Kong), fully tapped the marketing potential of Shenzhen Trading Dept., increased operation approaches and developed ocean trade and subcontract business. Preliminary effect has been obtained. Overseas orders increased sharply. (I) Scope of key business and its operation status 1. The Company is mainly engaged in the production and processing (printing and dyeing) and sales of various high- grade fabrics of pure cotton, pure linen, polyester- mixed 16 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 cotton, linen cotton and mixed fiber and finished garments. 2. The income from main operation earned by the Company in the report period mainly includes the income from printing and dyeing business. In the report period, the total income from main operation and the net profit of the Company was RMB 208.255 million and RMB 1.566 million respectively, an increase of 28.76%% and 16.19% over the same period of the previous year respectively. (1) Income from and cost of key business in terms of line of business are as follows: Unit: RMB million Line of business Operating income Operating cost Operating gross profit Fabrics bleaching, 203.17 176.94 26.23 printing and dyeing Fabrics trade 509 1.92 3.17 (2) Income from and cost of main operation in terms of areas are as follows: Unit: RMB million Area Operating income Operating cost Operating gross profit Mainland China 9.63 8.55 1.08 Hong Kong, China 198.62 170.31 28.32 (3) The line of business or product whose income or profit accounts for over 10% of total income from main operation or profit from main operation in the report period Unit: RMB Line of business Product sales Product sales cost Gross profit rate income Fabrics bleaching, 203,165,541 176,939,092 12.91% printing and dyeing (4) The profit structure and key business structure in the report period did not change much compared with the previous report period. (II) The operating status of main controlled subsidiaries and joint ventures 1. Victor Onward Printing and Dyeing (Hong Kong) Co., Ltd. Victor Onward Printing and Dyeing (Hong Kong) Limited is a wholly-owned subsidiary of the Company. It was registered by the Company for developing foreign market in Hong Kong in 1984 with registered capital of HKD 5 million. The Company holds 100% of its shares. It is mainly engaged in supplying raw materials to the Company and marketing the Company's products. At present, the company owns commercial office building, warehouses and a full-size vehicle transportation fleet. It has total assets of about HKD 96 million. It is the Company's marketing center, financial center and investment 17 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 center in Hong Kong and abroad. It earned net profit of HKD 1.88 million in 2003. 2. Shenzhen Nanhua Printing and Dye ing Co., Ltd. Shenzhen Nanhua Printing and Dyeing Co., Ltd. was established on July 21, 1988 with registered capital of HKD 85.49 million. The Company holds 49.56% of its shares. It is mainly engaged in printing and dyeing of various garment fabrics. It has assets of about RMB 160.74 and earned net profit of RMB 1.69 million in 2003. 3. The investment income obtained by the Company from Nanhua Printing and Dyeing and Huaguanli respectively accounted for over 10% its net profit. The accumulative investment equity decreased by HKD 0.55 million and HKD 0.23 million. (III) Major Suppliers and Customers The Company's main products are printing and dyeing products, including various pure cotton, pure linen, polyester- mixed cotton, linen- mixed cotton and blended high- grade fabrics. The raw materials for the production (grey fibre, dyeing chemicals and fuel) are mainly imported. The products are mainly exported to Hong Kong, Japan, Europe and America. Victor Onward Printing and Dyeing (Hong Kong) Limited, a wholly-owned subsidiary of the Company, is mainly responsible for supply of raw materials and sales of products. The total amount of purchase from the top five suppliers accounted for 20% of the Company's total annual purchase amount. The total amount of sales to the top five customers accounted for 44% of the Company's total annual sales amount. (IV) Problems and difficulties occurred in operation and solutions Due to historic reasons，the Company still has the problems including poor quality of assets operation and low efficiency of use of internal assets. To the Company, one of the most imperative tasks is to actively optimize resource allocation, activate ineffective assets, invigorate stock assets and improve performance. On the one hand, the Company increased its business resources through concentrating on marketing intensification and product development. On the other, it reduced bad assets precipitated in operation flow, gradually invigorated inventories and accounts receivable，sped up circulation and enhanced its efficiency. II. Investment of the Company in the report period (I) Utilization of raised funds in the report period 18 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 The Company did not utilize raised funds in the report period. (II) Investment project utilizing non-raised funds in the report period. Nil. III. Financial position and operating status of the Company Unit: RMB Item 2003 2002 Change Total assets 390,342,262 376,445,241 13,897,021 Shareholders' equity 311,140,450 308,263,111 2,877,339 Profit from main operation 29,398,793 20,210,797 9,187,996 Net profit 1,566,030 1,347,864 218,166 Net increase of cash and cash (3,159,645) 8,480 -3,151,165 equivalents Main reasons for change ： Total assets increased mainly due to the increase of short-term loans in the report year; Shareholders' equity increased mainly due to the earning of profit in the report year; The profit from main operation increased by big margin due to the great growth of output and sales volume and effective cost control; Net profit increased mainly due to the great growth of output and sales volume and effective cost control; Net increase of cash and cash equivalents decreased due to the increase of the cash paid for purchasing commodities and accepting labor services. IV. Influence of the changes in production and operation environment and macro policies on the Company The lowering of export rebate rate in 2004 will reduce the income of the Company from export rebates by big margin and greatly increase export cost. Meanwhile，the rise of cotton price will also bring certain difficulty to the Company's production and operation. V. Business development plan for 2004 The overall operation strategy of the Company is to stabilize production capacity, expand marketing, strengthen printing, consolidate dyeing，establish relatively stable gray cloth supply base and subcontract processing base and further enlarge its main operation. Meanwhile, it will moderately participate in the project investment in other fields and enhance the earnings of net assets by making use of its good financing channels. 19 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 According to local industrial and economic policies and direction, the space for developing conventional printing and dyeing industry in Shenzhen has been increasingly small. How to adapt to macro-policies, find measures for realizing sustainable development and adjust development direction is an important problem to be considered by the Company. The main countermeasures the Company will take include: 1. To fully tap operation potential，enlarge order source and increase order volume. Maintain the current order volume of Hong Kong， actively develop ocean trade and subcontract business, increase the proportion of ocean order and enhance added value. 2. To develop digital printing and enhance the proportion of printed products. Actively enlarge the publicity of digital printing, provide personalized services， advocate the concept of environmental protection，change traditional operation mode, enhance the quality of printed products, strengthen technology development and strive to make the proportion of printed products exceed 30%. 3. To develop inland production bases, increase partners and enlarge business scale. Actively increase partners, develop domestic trade, greatly enlarge its operation scale and obtain more scale benefits on existing basis. 4. To establish advanced test center and adopt international standards. In 2004, the Company plans to invest RMB 1.5 million in establishing a large test center in its factory in Shenzhen and its test standards will comply with the regulations of U.S.A. AATCC, European Union and Japan on the test of textile products for the purpose of satisfying the test demands of products for ocean trade and opening a green channel for its products to enter international market. 5. Reform remuneration distribution system and establish effective incentive system. The existing remuneration distribution method is a nonstandard distribution system formed in over 20 years, which is unreasonable in many aspects. The lack of relevant incentive system has resulted in the failure to bring into full play employees' initiative and restricted the innovation development of the Company. Establishing a plan of remuneration distribution that is linked with output and quality and can bring into full play all employees' production initiative is a focal point of personnel administration in the next stage. VI. Routine Work of the Board of Directors (I) Board meetings and resolutions in the report period 20 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 1. The 11th meeting of the third board of directors of the Company The 11th meeting of the third board of directors of the Company was held in the meeting room on the 16/F of Shenzhen Union Building in the morning of April 4, 2003. The attendees seriously studied the report of Shenzhen Securities Regulatory Office titled Perfecting Company Administration Structure and Further Enhancing the Level of the Standardized Operation of Listed Companies. The meeting examined and voted through the following resolutions: (1) 2002 Work Report of the Company; (2) 2002 Auditor's Report of the Company for A shares and B shares (3) Profit Distribution Preplan for 2002 and Profit Distribution Policy for 2003 of the Company (4) 2002 Annual Report and 2002 Annual Report (Summary) of the Company (5) Approving technical renovation project of the Company in 2003; (6) Establishing Shenzhen Victor Onward Technical Co., Ltd. in the form of joint venture; (7) Expanding the business scope of the Company; (8) Appointing the deputy general manager and manager of Finance Dept. of the Company; (9) Reelecting the board of directors and management; (10) Adopting the proposal for holding 2002 annual shareholders' general meeting; The announcement of the resolutions of this meeting was published on Securities Times and Hong Kong Commercial Daily on April 8, 2003. 2. The 12th meeting of the third board of directors of the Company The 12th meeting of the third board of directors of the Company was held April 24, 2003 in the manner of voting by correspondence. The meeting examine and unanimously adopted the report of the Company for the first quarter of 2003. The announcement of the resolution of this meeting was published on Securities Times and Hong Kong Commercial Daily on April 26, 2003. 3. The 1st meeting of the fourth board of directors of the Company 21 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 The 1st meeting of the fourth board of directors of the Company was held in the meeting room on the 16/F of Shenzhen Union Building in the morning of May 16, 2003. The meeting unanimously adopted the following resolutions after voting: (1) Electing Mr. Hu Yongfeng as the board chairman of the Company; (2) Electing Mr. Li Zhihua and Mr. Song Tao as vice board chairman of the Company; (3) Approving the appointment of Mr. Sun Zhiping as the general manager of the Company, Wang Xihui as the financial controller of the Company and Chen Xing as the board secretary of the Company according to the nomination by the board chairman; (4) Approving appointment of Mr. Chen Jingqiu, Mr. Ye Jianzhong and Mr. Su Tingfang as deputy general managers of the Company and Ms Wang Xihui as the deputy general manager and manager of Finance Dept. of the Company according to the nomination of the general manager. The announcement of the resolution of this meeting was published on Securities Times and Hong Kong Commercial Daily on May 17, 2003. 3. The 2nd meeting of the fourth board of directors of the Company The 2nd meeting of the fourth board of directors of the Company was held in the meeting room on the 16/F of Shenzhen Union Building in the morning of August 12, 2003. The meeting examined and voted through the following resolutions: (1) 2003 Semiannual Report and Summary of 2003 Semiannual Report of the Company; (2) The semiannual profit distribution plan for 2003: The Company is neither to distribute profit for the first half of 2003 nor capitalize common reserve fund; (3) Adopting the Proposal for Nominating Candidates for Independent Directors of the Company. The announcement of the resolution of this meeting was published on Securities Times and Hong Kong Commercial Daily on August 13, 2003. 4. The 3rd meeting of the fourth board of directors of the Company The 3rd meeting of the fourth board of directors of the Company was held in the meeting room on the 16/F of Shenzhen Union Building in the morning of October 27, 2003. The meeting examined and voted through the following proposals: (1) The Report of the Company for the Third Quarter of 2003; (2) The proposal for revising the Articles of Association of the Company. 22 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 The announcement of the resolution of this meeting was published on Securities Times and Hong Kong Commercial Daily on October 28, 2003. (II) Implementation by the board of directors of the resolutions of the shareholders' general meeting The board of directors of the Company strictly implemented the resolutions of shareholders' general meetings and the matters authorized by shareholders' general meetings according to the provisions of the Company Law and the Articles of Association of the Company. 1. 2002 annual shareholders' general meeting of the Company examined and adopted the proposal for the profit distribution of the Company for 2002: The Company is neither to distribute dividends for 2002 nor capitalize common reserve fund. 2. According to the resolutions of 2002 annual shareholders' general meeting of the Company, the Company has settled the formalities for the change of industrial and commercial registration in respect of the enlargement of its business scope and correspondingly amended the Articles of Association of the Company. 3. According to the proposal for reelecting the board of directors and the supervisory committee of the Company adopted at 2002 annual shareholders' general meeting of the Company, Mr. Hu Yongfeng, Mr. Ding Yue, Mr. Li Zhihua, Mr. Guan Tongke, Mr. Song Tao and Mr. Sun Zhiping have acted as the members of the fourth board of directors of the Company. Mr. Mai Jianguang, Mr. Jiang Jianming and Mr. Li Weiping have acted as independent directors of the fourth board of directors of the Company. Mr. Dong Binggen, Ms Gui Liping and Mr. Cai Wanqing have acted as the members of the fourth supervisory committee of the Company. 4. According to the resolution of the first provisional shareho lders' general meeting of the Company in 2003, Mr. Jiang Jianming has resigned from the position of independent director of the fourth board of directors of the Company and Ms Shu Man has acted as an independent director of the fourth board of directors of the Company. VII. Profit distribution preplan for 2003 As audited by Pricewaterhouse Coopers Zhongtian Certified Public Accountants, the 23 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 total profit and after-tax net profit of the Company for the year 2003 were RMB 2,390,403 and RMB 1,566,030 respectively. 10% of the after-tax profit, i.e., RMB 156,603, and 5% thereof, i.e., RMB 78,302, are to be set aside as statutory surplus reserve and statutory public welfare fund respectively. The year-end distributable profit is RMB 1,331,125. With the year-beginning undistributed profit of RMB 4,993,584 being added, the total distributable profit is RMB 6,324,709. As the Company will demand large amount of funds for investment and equipment renovation in the future, it decided neither to distribute the profit for 2003 nor capitalize common reserve fund. VIII. The special statement of Pricewaterhouse Coopers Zhongtian Certified Public Accountants on the fund occupation by the controlling shareholder and other related parties of the Company Special Audit Statement on Fund Occupation by the Controlling Shareholder and Other Related Parties of Shenzhen Victor Onward Textile Industrial Co., Ltd. To the Board of Directors of Shenzhen Victor Onward Textile Industrial Co., Ltd.: We accepted entrustment and audited the balance sheet of Shenzhen Victor Onward Textile Industrial Co., Ltd. ("the Company") and the consolidated balance sheet of the Company and its subsidiaries ("the Group") as at December 31, 2003 and the profit statement of the Company and the consolidated profit statement of the Group, the profit distribution statement of the Company and the consolidated profit distribution statement, the cash flow statement of the Company and the consolidated cash flow statement of the Group for the year then ended pursuant to the independent audit standards of Chinese C.P.A. and issued Pricewaterhouse Coopers Zhongtian (2004) No. 1508 unqualified auditor's report on April 16, 2004. As required by the Circular of Issuing Special Audit Opinions on the Fund Transfer between Listed Companies and Related Parties and External Guarantee (SSBH (2003) No. 13 Document) and its supplementary notes issued by Listed Companies Supervision Dept. of CSRC and the Circular of Issuing Special Audit Opinions on the Occupation of Funds of Listed Companies by Related Parties and Provision of Guarantee by Listed Companies Against Regulations (SZBFZ (2003) No. 26) issued by Shenzhen Securities Regulatory 24 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 Office under CSRC, the Company prepared the statement of the fund occupation by its controlling shareholder and related parties and special guarantee as of December 31, 2003 ("the Statement") attached hereto. It is the responsibility of the Company to prepare the Statement according to facts and ensure its truthfulness, lawfulness and completeness. We checked the information in the Statement against the accounting information rechecked by us when auditing the financial report of the Company for 2003 and relevant content of audited financial report and found no discrepancy in all material aspects. This letter shall only be used by the Company for reporting to Shenzhen Securities Regulatory Office under CSRC, which shall not be used for any other purpose. Appendix 1 Statement of Fund Occupation by the Controlling Shareholder and Related Parties of Shenzhen Victor Onward Textile Industrial Co., Ltd. Appendix 2 Statement of Special Guarantee Provided by Shenzhen Victor Onward Textile Industrial Co., Ltd. Pricewaterhouse Coopers Zhongtian Certified Public Accountants Co., Ltd. C.P.A. :xulizhou April 16, 2004 C.P.A. :kongyu 25 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 Statement of Fund Occupation by the Controlling Shareholder and Related Parties of Shenzhen Victor Onward Textile Industrial Co., Ltd. For the Year Ended December 31, 2003 Unit: HKD million Closing time Closing time Relationship Compa point of point of Amount of fund Amount of fund Accumulative Manner Reason Fund between fund Corresponding Accumulative Compa ny ending beginning occupation at occupation at credit amount of for occupation occupation items in financial debit amount of ny code abbrevi balance of balance of the end of the beginning of fund occupati occupati party party and the statements fund occupation ation fund fund period of period occupation on on Company occupation occupation A B C D E1 E2 F1 G1 F2 G2 F3 G3 F4 G4 F5 G5 H I Shenzh Shenzhen en Affiliated Accounts Nanhua Printing December December 31, Accounts Purchas Producti 000018 Victor company of the receivabl 0 0 0.3086 0 0 0 0.3086 0 and Dyeing Co., 31, 2003 2002 payable e on Onwar Company e Ltd. d Subsidiary of Accounts Nanhua Xingye the affiliated Purchas Producti Ditto Ditto receivabl 0 0 0.2042 0 0 0 0.2042 0 Co., Ltd. company of the e on e Company Purchas Shenzhen Affiliated Accounts Other e and Producti Huaguanli company of the Ditto Ditto receivabl receivabl 2.3657 4.187 .80080 0 1.5649 4.187 0 0 advance on Trade Co., Ltd. Company e es money Shenzhen Affiliated Other Difficult Accounts Borrowi Lianchang company of the Ditto Ditto receivabl 0.5596 0 1.0260 0 0 0 0.4664 0 y of fund payable ng Printing and Company es turnover 26 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 Dyeing Co., Ltd. Union Developing The controlling Other Borrowi Advance Group Co., Ltd. shareholder of Ditto Ditto receivabl 0.1060 0 0 0 0.1060 0 0 0 ng money ("Union the Company es Developing") Shenzhen Wholly-owned Union Other Difficult subsidiary of Borrowi Developing Ditto Ditto receivabl 0.7084 0 0.7084 0 0 0 0 0 y of fund Union ng Investment Co., es turnover Developing Ltd. Shenzhen Wholly-owned Other Difficult Union subsidiary of Borrowi Ditto Ditto receivabl 0 0 0.5970 0 0 0 0.5970 0 y of fund Commerce and Union ng es turnover Trade Co., Ltd. Developing Total 2.4582 5.4685 2.8442 0.8008 1.1902 5.2364 1.5762 0.5687 Persons in charge of the Company: Hu YongFeng Controller of accounts: Sun ZhiPing Person in charge of accounting organ: Sun Yaqin 27 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 Whether Relationship Amount of Company guarantee Company Name of the object of between the object guarantee Starting day of Ending day of Mode of abbreviatio liability code guarantee of guarantee and (RMB guarantee guarantee guarantee n exists at the Company million) present Shenzhen 000018 Victor Shenzhen Nanhua Printing Affiliated company Credit Onward and Dyeing Co., Ltd. of the Company 8 October 22, 2003 October 22, 2006 Yes guarantee This statement was approved by the board of directors on April 16, 2004. Persons in charge of the Company:Hu Yongfeng Controller of accounts: Sun Zhiping Person in charge of accounting organ: Sun Yaqin 28 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 Opinions of Independent Directors on the Accumulative and Current-period External Guarantee Provided by the Company: According to the gist of ZJF (2003) No. 56 Document - Circular on Certain Issues Relating to Standardization of Fund Transfer Between Listed Companies and Their Related Parties and Guarantees Provided by Listed Companies ("the Circular") issued by CSRC, we, as the Company's independent directors，seriously examined the status of the external guarantee provided by the Company with practical attitude and hereby give our opinions on relevant issues: According to the result of our prudent investigation，the Company did not provide guarantee to its controlling shareholder and other related parties, any unincorporate entity or individual against regulations nor did the controlling shareholder and other related parties force the Company to provide guarantee to others as of the end of the report period. As required by the Circular，the 3rd meeting of the fourth board of directors of the Company examined and adopted the proposal for amending the Articles of Association of the Company and provided for the examination and approval procedure of external guarantee and the credit standards of the objects of guarantee. This proposal has been examined and adopted by the first provisional shareholders' general meeting of the Company in 2004. The fund occupation by the controlling shareholder and other related parties in 2003 was fund transfe r formed during normal operation. Section VIII Report of Supervisory Committee In 2003, the supervisory committee of the Company did its duties and actively carry out its work with the attitude of being responsible to all shareholders according to the provisions of the Company Law, relevant laws and regulations and the Articles of Association of the Company. I. Work of the Supervisory Committee In the report period, the supervisory committee of the Company legally exercised its function of supervision according to the Company Law, the Articles of Association of the Company and other laws and regulations. The supervisors attended the first provisional shareholders' general meeting in 2003, 2002 annual shareholders' general meeting and all board meetings of the Company held in the report period as nonvoting delegates and the supervisory committee held 4 29 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 meetings: 1. The 11th meeting of the third supervisory committee of the Company was held in the meeting room on the 16/F of Shenzhen Union Building in the morning of April 4, 2003. The meeting examined and voted through the following resolutions: (1) 2002 Work Report of the Company; (2) 2002 Auditor's Report of the Company for A shares and B shares (3) Profit Distribution Preplan for 2002 and Profit Distribution Policy for 2003 of the Company (4) 2002 Annual Report and 2002 Annual Report (Summary) of the Company (including the Report of the Supervisory Committee); (5) Adopting the proposal for the reelection of the supervisory committee. The announcement of the resolutions of this meeting was published on Securities Times and Hong Kong Commercial Daily on April 8, 2003. 2. The 1st meeting of the fourth supervisory committee of the Company was held in the meeting room on the 16/F of Shenzhen Union Building in the morning of May 16, 2003. The meeting elected Mr. Dong Bingen as the convener of the fourth supervisory committee of the Company. The announcement of the resolution of this meeting was published on Securities Times and Hong Kong Commercial Daily on May 17, 2003. 3. The 2nd meeting of the fourth supervisory committee of the Company was held in the meeting room on the 16/F of Shenzhen Union Building in the morning of August 12, 2003. The meeting examined and voted through the following resolutions : (1) 2003 Semiannual Report and Summary of 2003 Semiannual Report of the Company; (2) The semiannual profit distribution plan for 2003: The Company is neither to distribute profit for the first half of 2003 nor capitalize common reserve fund. The announcement of the resolution of this meeting was published on Securities Times and Hong Kong Commercial Daily on August 13, 2003. 4. The 3rd meeting of the fourth supervisory committee of the Company was held in the meeting room on the 16/F of Shenzhen Union Building in the morning of October 27, 2003. The meeting examined and unanimously voted through the Report of the Company for the Third Quarter of 2003. 30 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 The announcement of the resolution of this meeting was published on Securities Times and Hong Kong Commercial Daily on October 28, 2003. II. In the report period，the supervisory committee seriously performed its duties and expressed independent opinions in respect of the following matters: 1. The operation of the Company according to law. In the report period, the Company operated strictly according to Company Law, Securities law and the Articles of Association of the Company and other relevant laws and regulations. The Company's procedure of decision was legal and its internal control system was sound. The directors and managers of the Company all did their duties during their work and none of their acts were found to violate the laws, regulations and the Articles of Association or harm the Company's interests. 2. Inspection of the financial status of the Company. The Supervisory Committee carefully checked and examined the financial data of the Company including the financial report of the Company for 2003 audited by Pricewaterhouse Coopers Zhongtian Certified Public Accountants and held the opinion that its financial status was good and its financial structure was reasonable in 2003. The unqualified auditors' report for 2003 issued by Pricewaterhouse Coopers Zhongtian Certified Public 2.Accountants for the Company was true and truly reflected the financial position and operating results of the Company. 3 The Company did not raise funds in the report period. The funds last raised after listing were invested in such projects as promised in Prospectus. 4. Neither insider trading nor act that caused harm to the rights and interests of part of shareholders or the loss of the Company's assets was found in respect of the transaction price of the assets purchased or sold by the Company. 5.The related transactions between the Company and associated enterprises (companies) were conducted in a fair manner and at market prices. 6. The certified public accountants issued unqualified Auditor's Report for the year 2003 without explanatory notes. Section IX Important Events I. The Company did not get involved in any material lawsuit or arbitration in the report period. 31 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 II. The Company neither acquired nor disposed of material assets nor was involved in any takeover and merger in the report period. III. Material related transactions 1) Sale of goods: Unit: HKD Name of related party 2003 2002 Huaguanli 4,190,559 34,879 2) Consigned processing of goods: Name of related party 2003 2002 Nanhua Printing and Dyeing 244,868 - Lianchang Printing and 323,666 - Dyeing Total 568,534 - IV. Material contracts and their performance 1. The Company did not hold in trust or contract for or lease the assets of other companies nor did other companies hold in trust or contract for the assets of the Company in the report period. 2. External guarantee in the report period: Unit: HKD December 31, 2003 December 31, 2002 The guarantee provided for the bank loan extended to Nanhua Printing and 7,506,803 8,000,000 Dyeing 3. The Company did not entrust others to manage its cash assets in the report period. 4. Other material contracts. Short-term loan: Unit: HKD December 31, 2003 December 31, 2002 Loan secured * 18,767,008 18,846,589 Credit loan 32,842,263 21,596,306 Total 51,609,271 40,442,895 * Shenzhen Union Developing Group Co., Ltd. provided guarantee for all loans. 32 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 The annual interest rate of the above short-term loan ranged between 3.2% to 5.3% in the report year (2002: 3.6% - 5.6%). V. The performance of the commitments of the Company or shareholders holding over 5% equity of the Company in the report period (I) Capital commitments: The following are the capital expenditure commitments that were authorized on the date of balance sheet but need not be recognized in financial statements: 1) On February 8, 2001, Hong Kong Victor Onward and Union Holdings sign the Letter of Investment Intent for Establishment of Ningbo Union New Material Technology Co., Ltd. ("Ningbo Union") in the Form of Joint Venture. According to this letter of intent, the registered capital of Ningbo Union is RMB 700 million. The amount of capital contribution of Hong Kong Victor Onward is RMB 175 million, accounting for 25% of the registered capital. The amount of capital contribution of Union Holdings is RMB 525 million, accounting for 75% of the registered capital. The proposal concerning this investment project has been examined and adopted at 2000 shareholders' general meeting of the Company held on June 30, 2001. As of the date of this report, both parties to the joint venture had not signed official joint venture contract in respect of the above investment intention. 2) On December 28, 2003, Hong Kong Victor Onward, the wholly-owned subsidiary of the Company, Shanghai Huashun Investment Management Co., Ltd., China Textile Holdings (Hong Kong) Ltd. and Chuangjie Development Co., Ltd. signed the Letter of Intent for Capital Contribution and planned to jointly invest USD 29.90 in establishing a joint venture company in Hangzhou City, Zhejiang Province, China. Hong Kong Victor Onward will own 25% equity of the joint venture company. This intent was approved by the board of directors of the Company on March 9, 2004 and is to be submitted to provisional shareholders' general meeting for voting. 3) On November 3, 2003, Hong Kong Victor Onward and the Bankruptcy Liquidation Group of Changzhou Dieqiu Textile Printing and Dyeing Group Company ("Liquidation Group") signed agreement. The Liquidation Group transferred 1.6% 33 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 equity of Nanhua Printing and Dyeing held by Changzhou Dieqiu Textile Printing and Dyeing Group Company to Hong Kong Victor Onward at the price of RMB 0.268 million. This transfer was approved by Shenzhen Foreign Trade and Economic Cooperation Bureau on January 8, 2004. As of the date of this report, Nanhua Printing and Dyeing had completed the change of industrial and commercial registration. (II） Commitments concerning operating lease According to the signed irrevocable contract for operating lease, the lowest rent to be paid in the future is as follows: Unit: HKD December 31, 2003 December 31, 2002 Within 1 year - 22,400 The said reduction of the commitment of operating lease is due to the expiration of the tenancy contract for the warehouse in Hong Kong in 2003 and no renewal. VI. Appointment and removal of certified public accountants The Company continued to engage Pricewaterhouse Coopers Zhongtian Certified Public Accountants for its audit work in the report period. In the report period, the Company paid remuneration of HKD 0.41 million to the certified public accountants. This accounting firm has provided audit services to the Company for 2 years. VII. The Company and its directors, supervisors and senior executives were not investigated by CSRC, administratively punished or publicly criticized by CSRC or publicly condemned by stock exchange. VIII. The Company did not change its name or stock abbreviation in the report period. IX. Other Important Events Nil. 34 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 Section X Financial and Accounting Report PricewaterhouseCoopers Zhong Tian CPAs Limited Company 12th Floor, Shui On Plaza 333 Huai Hai Zhong Lu Shanghai 200021 People's Republic of China Telephone +86 (21) 6386 3388 Facsimile +86 (21) 6386 3300 REPORT OF THE AUDITORS TO THE SHAREHOLDERS OF SHENZHEN VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED (Incorporated as a joint stock limited company in the People’ s Republic of China) We have audited the accompanying consolidated balance sheet of Shenzhen Victor Onward Textile Industrial Company Limited (the “Company”) and its subsidiaries (the “Group”) as of 31 December 2003 and the related consolidated statements of income, cash flows and changes in shareholders’equity for the year then ended. These consolidated financial statements set out on pages 2 to 29 are the responsibility of the Company’ s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the accompanying consolidated financial statements give a true and fair view of the financial position of the Group as of 31 December 2003 and of the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards. PricewaterhouseCoopers Zhong Tian CPAs Limited Company 16 April 2004 35 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 SHENZHEN VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2003 Notes 2003 2002 HKD’000 HKD’000 Sales 4 195,931 152,411 Cost of sales (168,272) (133,366) Gross profit 27,659 19,045 Other operating income 2,480 2,681 Distribution costs (7,213) (6,033) Administrative expenses (18,133) (9,741) Other operating expenses (1,243) (1,249) Profit from operations 3,550 4,703 Finance costs – net 7 (1,811) (1,457) Share of results of associates before tax (721) 160 Other income/(expenses), net 1,929 (923) Profit before tax 5 2,947 2,483 Income tax expense 8 (989) (826) Group profit before minority interest 1,958 1,657 Minority interest 24 34 131 Net profit 1,992 1,788 Earnings per share (expressed in Hong Kong dollar per share) – basic and diluted 9 0.01 0.01 The accompanying notes form an integral part of this consolidated financial statement. 36 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 SHENZHEN VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED CONSOLIDATED BALANCE SHEET AS OF 31 DECEMBER 2003 Notes 2003 2002 HKD’000 HKD’000 ASSETS Non-current assets Property, plant and equipment 11 103,285 110,488 Investment properties 12 26,422 27,636 Investments in associates 13 28,166 29,104 Available-for-sale investments 14 29,449 29,859 Intangible assets 410 - 187,732 197,087 Current assets Inventories 15 67,933 58,589 Receivables and prepayments 16 82,978 60,951 Due from related parties 27 6,563 1,904 Trading investments 17 51 2,382 Cash and cash equivalents 18 32,969 36,086 190,494 159,912 Total assets 378,226 356,999 Shareholders’equity Share capital 21 207,871 207,871 Reserves 22 51,120 50,899 Retained earnings 21,374 19,603 280,365 278,373 Minority interest 23 335 369 LIABILITIES Non-current liabilities Due to original shareholders 1 14,754 14,754 14,754 14,754 Current liabilities Trade and other payables 19 29,298 21,291 Current tax liabilities 1,865 1,769 Short -term borrowings 20 51,609 40,443 82,772 63,503 Total liabilities 97,526 78,257 Total equity and liabilities 378,226 356,999 The accompanying notes form an integral part of this consolidated financial statement. 37 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 SHENZHEN VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’EQUITY FOR THE YEAR ENDED 31 DECEMBER 2003 Reserves Share Other Retained Share capital premium reserves earnings Total HKD’ 000 HKD’ 000 HKD’ 000 HKD’ 000 HKD’ 000 (Note 22) Balances at 1 January 2002 207,871 11,826 38,883 18,005 276,585 Net profit for the year - - - 1,788 1,788 Transfer to statutory reserves - - 190 (190) - Balances at 31 December 2002 207,871 11,826 39,073 19,603 278,373 Balances at 1 January 2003 207,871 11,826 39,073 19,603 278,373 Net profit for the year - - - 1,992 1,992 Transfer to statutory reserves - - 221 (221) - Balances at 31 December 2003 207,871 11,826 39,294 21,374 280,365 The accompanying notes form an integral part of this consolidated financial statement. 38 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 SHENZHEN VICTOR ONWARD TEXTILE INDUSTRIAL COMPANY LIMITED CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2003 Notes 2003 2002 HKD’000 HKD’000 Cash flows from operating activities Cash (used in)/generated from operations 26 (13,396) 15,437 Interest paid (2,102) (1,896) Tax paid (713) (355) Net cash (used in)/generated from operating activities (16,211) 13,186 Cash flows from investing activities Purchase of property, plant and equipment (3,998) (5,351) Purchase of intangible assets (410) - Proceeds from disposal of property, plant and equipment 1,647 - Proceeds from disposal of trading investments 2,858 - Interest received 276 685 Dividend received 1,555 - Net cash generated from /(used in) investing activities 1,928 (4,666) Cash flows from financing activities Proceeds from borrowings 107,910 47,982 Repayments of borrowings (96,744) (53,994) Increase of pledged bank deposits - (3,000) Injection from a minority shareholder - 500 Net cash generated from/(used in) financing activities 11,166 (8,512) Net (decrease)/increase in cash and cash equivalents (3,117) 8 Cash and cash equivalents at beginning of year 30,086 30,078 Cash and cash equivalents at end of year 18 26,969 30,086 The accompanying notes form an integral part of this consolidated financial statement. 39 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 1 General Shenzhen Victor Onward Textile Industrial Company Limited (the “Company”) was established as a joint stock limited company in the People’s Republic of China (the “PRC”) in 1991 subsequent to a reorganization to rationalize the Company’ s structure in preparation for the listing of its shares. Its domestically listed Rmb ordinary shares (“A Shares”) and domestically listed foreign investment shares (“B Shares”) have been listed on the Shenzhen Stock Exchange since 1992. The predecessor of the Company was Victor Onward Printing & Dyeing Company Limited (“VOPDCL”), which was a Sino-foreign equity joint venture enterprise registered in the PRC. VOPDCL was established on 26 March 1984. On 19 November 1991, the Shenzhen Municipal Government approved the reorganization of VOPDCL into a joint stock limited company and the change of its name to the Company’ s present name. The Company together with its subsidiaries are hereinafter collectively referred to as the “Group”. Upon the reorganization of the Company, the People’ s Bank of China specifically approved that any future revaluation surplus arising from subsequent revaluation of the properties of Victor Onward Printing & Dyeing (Hong Kong) Company Limited (“VO(HK)”), a wholly-owned subsidiary of the Company, would be attributable to the original shareholders of the Company. Such properties were revalued as of 31 January 1992, resulted in a revaluation surplus of approximately HKD14,754,000 and was recorded as amount due to original shareholders. The shareholders in concern have agreed not to call for immediate repayment of the surplus, which would be offset against payment for any future subscription of shares by them. The Group is principally engaged in the bleaching, dyeing, printing and finishing of woven fabrics. The address of the Company’ s registered office is as follows: Flat C, 10/F, Real Estate Building Renmin Road, S. Shenzhen, China 2 Accounting policies The principal accounting policies adopted in the preparation of these consolidated financial statements of the Group are set out below. -40- 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 2 Accounting policies (Cont’d) (a) Basis of preparation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), which include International Accounting Standards and Interpretations issued by the International Accounting Standards Board. The consolidated financial statements have been prepared under the historical cost convention as modified by the revaluation of available-for-sale investment securities and financial assets and liabilities held-for-trading. This basis of accounting differs from that used in the statutory financial statements of the Group which were prepared in accordance with generally accepted accounting principles and relevant financial regulations applicable to enterprises in the PRC (“PRC GAAP”). Appropriate adjustments have been made to these consolidated financial statements to conform to IFRS, but such adjustments are not incorporated in the Group’ s statutory financial statements. The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’ s best knowledge of current event and actions, actual results ultimately may differ from those estimates. (b) Group accounting (1) Subsidiaries Subsidiaries, which are those entities in which the Group has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies are consolidated. The existence and effect of potential voting rights that are presently exercisable or presently convertible are considered when assessing whether the Group controls another entity. Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given up, shares issued or liabilities undertaken at the date of acquisition plus costs directly attributable to the acquisition. The excess of the cost of acquisition over the fair value of the net assets of the subsidiary acquired is recorded as goodwill. See note 2 (h) for the accounting policy on goodwill. Intercompany transactions, balances and unrealized gains on transactions between group companies are eliminated; unrealized losses are also eliminated unless cost cannot be recovered. Where necessary, accounting policies of subsidiaries have been changed to ensure consistency with the policies adopted by the Group. -41- 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 2 Accounting policies (Cont’d) (b) Group accounting (Cont’d) (2) Associates Investments in associates are accounted for by the equity method of accounting. Under this method the Company ’ s share of the post-acquisition profits or losses of associates is recognized in the income statement and its share of post-acquisition movements in reserves is recognized in reserves. The cumulative post-acquisition movements are adjusted against the cost of the investment. Associates are entities over which the Group generally has between 20% and 50% of the voting rights, or ove r which the Group has significant influence, but which it does not control. Unrealized gains on transactions ’ between the Group and its associates are eliminated to the extent of the Group s interest in the associates; unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. The ’ s investment in associates includes goodwill (net of accumulated Group amortization) on acquisition. When the Group ’ s share of losses in an associate equals or exceeds its interest in the associate, the Group does not recognize further losses, unless the Group has incurred obligations or made payments on behalf of the associates. (c) Foreign currency translation (1) Measurement currency Items included in the financial statements of each entity in the Group are measured using the currency that best reflects the economic substance of the underlying events and circumstances relevant to that entity (“the measurement currency”). The consolidated financial statements are presented in Hong Kong dollars (“HKD”), which is the measurement currency of the Company. (2) Transactions and balances Foreign currency transactions are translated into the measurement currency using the exchange rates prevailing on the first day of the month in which the transactions took place . Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies, are recognized in the income statement. Translation differences on debt securities and other monetary financial assets measured at fair value are included in foreign exchange gains and losses. Translation differences on non-monetary items are reported as part of the fair value gain or loss. -42- 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 2 Accounting policies (Cont’d) (d) Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation and accumulated impairment loss. Depreciation is calculated on the straight -line method to write off the cost of each asset to their residual values (which are estimated at 10% of cost) over their estimated useful lives as follows: Buildings in Hong Kong 20-50 years Buildings in the PRC 20-30 years Plant and machinery 5-14 years Motor vehicles 4-5 years Furniture, fixtures and office equipment 5 years Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Gains and losses on disposals are determined by comparing proceeds with carrying amount and are included in operating profit. When revalued assets are sold, the amounts included in fair value and other reserves are transferred to retained earnings. Interest costs on borrowings to finance the construction of property, plant and equipment are capitalized during the period of time that is required to complete and prepare the asset for its intended use. Other borrowing costs are expensed. Repairs and maintenance are charged to the income statement during the financial period in which they are incurred. The cost of major renovations is included in the carrying amount of the asset when it is probable that future economic benefits in excess of the originally assessed standard of performance of the existing asset will flow to the Group. Major renovations are depreciated over the remaining useful life of the related asset. Construction- in-progress represents equipment under installation or testing. Construction in progress is stated at cost which includes all expenditure and other direct costs, prepayments and deposits attributable to the installation and interest charges arising from borrowings used to finance the installation during the installation period. Depreciation is not provided on construction- in-progress until the related asset is completed for intended use and transferred to property, plant and equipment. -43- 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 2 Accounting policies (Cont’d) (e) Investment property Investment property, principally comprising office buildings, is held for long-term rental yields and is not occupied by the Group. Investment property is recorded at cost less accumulated depreciation less impairment loss. Depreciation is calculated on the straight -line method to write off the cost of investment property to their residual values over their estimated useful life. Where the carrying amount of investment property is greater than its fair value, it is written down to its recoverable amount. The fair value of investment property is determined by the discounted cash flow method based on the reasonable anticipative investment return rate. (f) Impairment of long lived assets Property, plant and equipment and other non-current assets, including prepaid lease, goodwill and intangible assets are reviewed for impairment losses whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the carrying amount of the asset exceeds its recoverable amount which is the higher of an asset’s net selling price and value in use. For the purposes of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash flows. (g) Investments The Group classified its investments in debt and equity securities into the following categories: trading, held-to-maturity and available-for-sale. The classification is dependent on the purpose for which the investments were acquired. Management determines the classification of its investments at the time of the purchase and re-evaluates such designation on a regular basis. Investments that are acquired principally for the purpose of generating a profit from short-term fluctuations in price are classified as trading investments and included in current assets; for the purpose of these financial statements short term is defined as 3 months. Investments with a fixed maturity that management has the intent and ability to hold to maturity are classified as held-to-maturity and are included in non-current assets, except for maturities within 12 months from the balance sheet date which are classified as current assets; during the period the Group did not hold any investments in this category. Investments intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, are classified as available-for-sale; and are included in non-current assets unless management has the express intention of holding the investment for less than 12 months from the balance sheet date or unless they will need to be sold to raise operating capital, in which case they are included in current assets. Purchases and sales of investments are recognized on the trade date, which is the date that the Group commits to purchase or sell the asset. Cost of purchase includes transaction costs. Trading and available-for-sale investments are subsequently carried at fair value. Held-to-maturity investments are carried at amortized cost using the effective yield method. Realized and unrealized gains and losses arising from changes in the fair value of trading investments and of available-for-sale investment are included in the income statement in the period in which they arise. -44- 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 2 Accounting policies (Cont’d) (g) Investments (Cont’d) The fair value of investments are based on quoted bid prices or amounts derived from cash flow models. Fair values for unlisted equity securities are estimated using applicable price/earnings or price/cash flow ratios refined to reflect the specific circumstances of the issuer. Equity securities for which fair values cannot be measured reliably are recognized at cost less impairment. (h) Goodwill The excess of the cost of an acquisition over the Company’ s interest in the fair value of the net identifiable assets and liabilities acquired as of the date of the exchange transaction is recorded as goodwill and recognized as an asset in the balance sheet. With respect to investments in associates, goodwill is included in the carrying amount of the investment. The identifiable assets and liabilities recognized upon acquisition are measured at their fair values as at that date. Any minority interest is stated at the minority’ s proportion of the fair values. When, subsequent to acquisition, additional evidence becomes available to assist with the estimation of the amounts assigned to identifiable assets and liabilities, those amounts and the amount assigned to goodwill (or negative goodwill) are adjusted to the extent that such adjustments are made by the end of the first annual accounting period commencing after acquisition and do not increase the carrying amount of goodwill above its recoverable amount. Otherwise, such adjustments to the identifiable assets and liabilities are recognized as income or expense. Goodwill is carried at cost less accumulated amortization and accumulated impairment losses. Amortization of goodwill is on a straight-line basis over its amortization period and is included in operating profit. The amortization period is determined at the time of the acquisition based upon the particular circumstances and ranges from 5 to 8 years. The unamortized balances are reviewed at each balance sheet date to assess the probability of continuing future benefits. If there is an indication that goodwill may be impaired, the recoverable amount is determined for the cash-generating unit to which the goodwill belongs. If the carrying amount is more than the recoverable amount, an impairment loss is recognized. (i) Negative goodwill Negative goodwill is recognized in the income statement as follows: (1) to the extent that negative goodwill relates to expected future losses and expenses that are identified in the Company’s plan for the acquisition and can be measured reliably but which cannot be accrued for at the date of acquisition, that portion of negative goodwill is recognized as income when the future losses and expenses are recognized. (2) the amount of negative goodwill not exceeding the fair values of acquired identifiable non-monetary assets is recognized as income on a systematic basis over the remaining weighted average useful life of the identifiable acquired depreciable/amortizable assets. 2 Accounting policies (Cont’d) -45- 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 (i) Negative goodwill (Cont’ d) (3) the amount of negative goodwill in excess of the fair values of acquired identifiable non-monetary assets is recognized as income immediately. Negative goodwill not exceeding the fair value of acquired identifiable non-monetary assets is amortized on a straight-line basis over the weighted average useful life of the identifiable depreciable assets acquired. Negative goodwill is presented in the same balance sheet classification as goodwill. With respect to associates, negative goodwill is included in the carrying value of the investment. (j) Operating leases (1) A Group company is the lessee Leases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. (2) A Group company is the lessor Assets leased out under operating leases are included in property, plant and equipment in the balance sheet. They are depreciated over their expected useful lives on a basis consistent with similar owned property, plant and equipment. Rental income (net of any incentives given to lessees) is recognized on a straight -line basis over the lease term. (k) Inventories Inventories are stated at the lower of cost or net realizable value. Cost is determined using the weighted average method. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity) but excludes borrowing costs. Net realizable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses. (l) Trade receivables Trade receivables are carried at original invoice amount less provision made for impairment of these receivables. A provision for impairment of trade receivables is established when there is an objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the carrying amount and the recoverable amount, being the present value of expected cash flows, discounted at the market rate of interest for similar borrowers. -46- 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 2 Accounting policies (Cont’d) (m) Cash and cash equivalents Cash and cash equivalents are carried in the balance sheet at cost. For the purposes of the cash flow statement, cash and cash equivalents comprise cash on hand, deposits held at call with banks. (n) Borrowings Borrowings are recognized initially at the proceeds received, net of transaction costs incurred. Borrowings are subsequently stated at amortized cost using the effective yield method; any difference between proceeds (net of transaction costs) and the redemption value is recognized in the income statement over the period of the borrowings. (o) Retirement scheme The Group participates in a defined contribution retirement scheme (the “Scheme”) operated by the local government. Contributions to the Scheme are charged to the staff costs in the period to which the contributions are related. (p) Taxation Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Currently enacted tax rates are used in the determination of deferred income tax. Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. (q) Provisions Provisions are recognized when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Where the Group expects a provision to be reimbursed, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. (r) Revenue recognition Revenue from sales of goods is recognized when significant risks and rewards of ownership of the goods are transferred to the buyers, which generally coincides with the time when delivery is made. Sales are shown net of sales taxes and discounts, and after eliminating sales within the Group. Interest income is recognized on a time proportion basis, taking account of the principal outstanding and the effective rate over the period to maturity, when it is determined that such income will accrue to the Group. -47- 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 2 Accounting policies (Cont’d) (s) Dividends ’ s consolidated financial statements in the period Dividends are recorded in the Group ’ s shareholders. in which they are approved by the Group (t) Segment reporting Business segments provide products or services that are subject to risks and returns that are different from those of other business segments. Geographical segments provide products or services within a particular economic environment that is subject to risks and returns that are different from those of components operating in other economic environments. (u) Comparatives Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current year. (v) Financial instruments Financial instruments carried on the balance sheet include cash and cash equivalents, interest in associates, available-for-sale investments, receivables, payables and borrowings. Interest in associates, available-for-sale investments and account receivables are stated at their carrying amounts determined in accordance with notes 2(b)(2), 2(g) and 2(l) respectively. Other financial assets and financial liabilities without a quoted market price in an active market are measured at cost subject to impairment review. 3 Financial risk management (a) Foreign exchange risk Most of the transactions of the Group were made in HKD and Renminbi (“RMB”). In the opinion of the directors, the Group does not have significant foreign exchange risk exposure. (b) Interest rate risk The interest rates of borrowings of the Group are disclosed in Note 20. As of 31 December 2003, change in interest rates would not have material impact on the Group’s operating results and operating cash flows. -48- 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 3 Financial risk management (Cont’d) (c) Credit risk The carrying amount of cash and cash equivalents, trade receivables, other receivables and due from related companies represented the Group’ s maximum exposure to credit risk in relation to financial assets. Cash is placed with reputable banks and the weighted average effective interest rate on deposits was 0.6146% per annum. Majority of the Group’s trade receivables relates to sales of goods to third party customers. The Group performs ongoing credit evaluations of its customers’financial condition and generally does not require collateral on trade receivables. The Group maintains a provision for doubtful debts and actual loses have been within the management’ s expectation. No other financial assets carry a significant exposure to credit risk. (d) Fair values The carrying amounts of the Company ’ s cash and cash equivalents, trade and other receivables and payables, due from related parties, borrowings and due to related parties approximate to their fair values because of the short maturity of these instruments. 4 Sales and segment information Ｎｏ ｓｅｇｍｅｎｔ ｉｎｆｏｒｍａｔｉｏｎ ｉｓ ｐｒｅｓｅｎｔｅｄ ａｓ ｔｈｅ Ｇｒｏｕｐ ｏｐｅｒａｔｅｓ ｓｕｂｓｔａｎｔｉａｌｌｙ ｉｎ ｂｌｅａｃｈｉｎｇ ａｎｄ ｄｙｅｉｎｇ ｉｎ ｔｈｅ ＰＲＣ， ｗｈｉｃｈ ａｃｃｏｕｎｔｅｄ ｆｏｒ ｍｏｒｅ ｔｈａｎ ９０％ （２００２： ｍｏｒｅ ｔｈａｎ ９０％） ｏｆ ｔｈｅ ｃｏｎｓｏｌｉｄａｔｅｄ ｒｅｖｅｎｕｅ ａｎｄ ｒｅｓｕｌｔｓ ｏｆ ｔｈｅ Ｇｒｏｕｐ． No geographical segment information is presented as the Group conducted its sales substantially in Hong Kong, which accounted for more than 90% (2002: more than 90%) of the consolidated revenue and results of the Group. -49- 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 5 Profit before tax The following items have been included in arriving at profit from operations: 2003 2002 HKD’000 HKD’000 Depreciation on property, plant and equipment (Note 11, 12) - owned assets 10,316 9,959 - owned assets leased out under operating leases 1,214 1,214 Profit on disposal of property, plant and equipment (442) - Trading investments (Note 17) - fair value losses - 736 - profit on sale (526) - Amortization of goodwill, net (Note 13) 37 36 Inventory – costs of inventories recognized as expense (included in ‘Cost of Sales’) 131,700 105,359 – Provision for inventory (Note 15) 709 398 Trade receivables – provision for bad and doubtful debts 9,780 2,477 Staff costs (Note 6) 14,375 12,074 6 Staff costs 2003 2002 HKD’000 HKD’000 Wages and salaries 13,294 11,151 Pension costs – defined contribution plans 1,081 923 14,375 12,074 The average number of employees in 2003 was 425 (2002: 394). 7 Finance costs – net 2003 2002 HKD’000 HKD’000 Interest expense on bank borrowings 2,102 1,896 Interest income (276) (685) Net foreign exchange transaction losses (220) 95 Others 205 151 1,811 1,457 -50- 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 8 Taxation 2003 2002 HKD’000 HKD’000 PRC income tax (note (a)) - Company 169 354 - Share of tax of associates 180 150 Hong Kong profits tax (note (b)) 640 322 989 826 (a) The Company was regarded as an export-oriented foreign investment enterprise in the Shenzhen Special Economic Zone, the PRC. The applicable income tax rate of the Company was 10%. (b) Hong Kong taxation represented the amount provided at the rate of 17.5% (2002: 16%) on the estimated assessable profits for the year. (c) The tax on the Group’ s profit before tax differs from the theoretical amount that would arise using the basis tax rate of the home country of the Company as follows: 2003 2002 HKD’000 HKD’000 Profit before tax 2,947 2,483 Income tax provision calculated at the effective tax rate of 10% (2002: 10%) 295 248 Effect of different tax rate in other country 240 121 Effect of tax preferential period (60) (50) Income not subject to tax (262) (217) Expenses not deductible for tax purposes 776 824 Effect of offsetting accumulated deficits in a subsidiary - (100) Tax charge 989 826 (d) Deferred tax assets have not been accounted for as it is uncertain that temporary differences will be reversed significantly in the near future. -51- 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 9 Earnings per share Basic earnings per share is calculated by dividing the net profit attributable to shareholders by the weighted average number of ordinary shares in issue during the year. 2003 2002 Net profit attributable to shareholders (HKD) 1,992,000 1,788,000 Number of ordinary shares in issue 169,142,356 169,142,356 Basic earnings per share (HKD per share) 0.01 0.01 The Company has no dilutive potential ordinary shares and as a result, basic and diluted earnings per share are the same. 10 Dividends In accordance with relevant regulations of the PRC and the Articles of Association of the Company, the Company declares dividends based on the lower of retained earnings as reported in the statutory financial statements and the financial statements prepared in accordance with IFRS. As the statutory financial statements have been prepared in accordance with PRC accounting standards and relevant accounting regulation, the retained earnings as reported in the statutory financial statements will be different from the amount reported in the consolidated financial statements prepared in accordance with IFRS. As of 31 December 2003, the retained earnings before final dividends reported in the statutory financial statements were HKD5,963,288 (2002: HKD4,710,936). -52- 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 11 Property, plant and equipment 2003 2002 Furniture, fixtures and Buildings in Buildings in Motor office Construction Hong Kong the PRC Machinery vehicles equipment in progress Total Total HKD’ 0 HKD’ 0 HKD’ 0 HKD’ HKD’ 0 HKD’ 00 HKD’ HKD’ 00 00 00 000 00 0 000 000 Cost 216,69 Beginning of year 14,518 64,317 125,342 6,534 5,169 817 7 209,154 Additions - 321 2,391 831 420 778 4,741 7,543 Disposals - (1,184) (308) (828) - - (2,320) - Transfers - - 562 - 286 (1,271) (423) - 218,69 216,69 End of year 14,518 63,454 127,987 6,537 5,875 324 5 7 Accumulated depreciation 106,20 Beginning of year 3,917 23,255 70,814 5,581 2,642 - 9 96,250 Charge for the year 484 2,144 7,042 361 285 - 10,316 9,959 Disposals - (33) (277) (805) - - (1,115) - 115,41 106,20 End of year 4,401 25,366 77,579 5,137 2,927 - 0 9 Net book value End of year 10,117 38,088 50,408 1,400 2,948 324 103,285 110,488 Beginning of year 10,601 41,062 54,528 953 2,527 817 110,488 112,904 As at 31 December 2003, there were buildings in the PRC, with a cost of approximately HKD55,116,000 and net book value of approximately HKD29,854,000, for which the relevant property certificates had not been obtained from the government authorities, as the buildings are located in the land granted by the government. Up to the report date, the Company is applying for purchase the related land use right. Certain buildings and investment properties of VO(HK) (See Note 12), with a net book value of approximately HKD22,505,000 are mortgaged as collateral for the Group’ s banking facilities. -53- 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 12 Investment properti e s 2003 2002 HKD’000 HKD’000 Cost Beginning and end of year 38,364 38,364 Accumulated depreciation Beginning of year 10,728 9,514 Charge for the year 1,214 1,214 End of year 11,942 10,728 Net book value End of year 26,422 27,636 Beginning of year 27,636 28,850 Independent valuer has not been employed to determine the fair value of the investment properties. Their fair values as at 31 December 2003, which was determined by management of the Company by using discounted cash flow method, approximate their net book value. 13 Investments in associates 2003 2002 HKD’000 HKD’000 Fair value at acquisition 29,180 29,180 Share of post-acquisition profits before tax 629 1,350 Share of tax of associates (335) (155) Goodwill, net 4,019 5,024 Negative goodwill, net (5,327) (6,295) 28,166 29,104 -54- 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 13 Investments in associates (Cont’d) Movements in goodwill and negative goodwill were as follows: Negative Goodwill goodwill HKD’000 HKD’000 Cost Beginning and end of year 6,029 (7,610) Accumulated amortization Beginning of year (1,005) 1,315 Charge for the year (1,005) 968 End of year (2,010) 2,283 Net book value End of year 4,019 (5,327) Beginning of year 5,024 (6,295) The goodwill arose from the excess of acquisition cost over the Group’ s equity interest in the fair value of net identifiable assets and liabilities of an associate at the date of acquisition, which is 31 December 2001. The goodwill was amortized over 6 years starting from 1 January 2002. The negative goodwill arose from the excess of the Group’ s equity interest in the fair value of the net identifiable assets of another associate over the acquisition cost at the date of acquisition. The negative goodwill was amortized over 8 years starting from 30 June 2001. The principal associates, all of which are unlisted, are: Country of Percentage of incorporation interest held Shenzhen Huaguanli Trading Co., Ltd. (“Huaguanli”) Shenzhen 25% Shenzhen Nanhua Printing & Dyeing Co., Ltd. (“Nanhua”) * Shenzhen 49.56% Shenzhen Lianchang Printing & Dyeing Co., Ltd. (“Lianchang”) ** Shenzhen 37.5% * The Group had entered into share transfer agreements with Changzhou Dieqiu Textile Industrial Group Limited and Union Development Group Co., Ltd. to purchase 13.02% and 36.54% of the shares of Nanhua on 6 June 1998 and 20 June 2001 respectively. The Company had already paid the full consideration of the share being transferred and filed an application for the approval on the share transfer to the relevant government authorities. The formal approval from government authorities were obtained after the balance sheet date. The management considered that the investments in Nanhua should be accounted for by the equity method of accounting as the Group has significant influence on Nanhua. Under this method, the Group’ s share of the post-acquisition profits or losses shall be 49.56% according to the relevant stipulation of the share transfer agreements. -55- 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 13 Investment in associate (Cont’d) ** On 5 January 1999, the Group had entered into a share transfer agreement with Heater Industrial Limited, a Hong Kong based company, to purchase 37.5% of the total equity interest of Lianchang. The consideration for the purchase had been fully paid to Heater Industrial Limited up to 31 December 2001. Up to the report date, the filing procedures for the relevant government authorities’approval were still in progress. The management considered that the investments in Lianchang should be accounted for using the equity method of accounting starting from 1 January 2002 as the Group started to exercise its significant influence on Lianchang since then. Under this method, the Group’ s share of the post-acquisition profits or losses shall be 37.5% according to the relevant stipulation of the share transfer agreement. 14 Available-for-sale investments 2003 2002 HKD’000 HKD’000 Listed, at cost 4,250 4,250 Less: impairment provisions for listed investment (3,923) (3,513) Listed, at fair value 327 737 Unlisted, at cost 29,122 29,122 29,449 29,859 Available-for-sale investments comprise a 0.5% shareholding in an unlisted company and a 1.7% shareholding in a company listed on the Stock Exchange of Hong Kong Limited (the “HKSE”). Listed investments are fair valued by reference to the HKSE quoted bid prices at the close of business on 31 December. Unlisted investment is stated at cost less accumulated impairment loss as its fair value cannot be measured reliably. 15 Inventories 2003 2002 HKD’000 HKD’000 Raw materials 50,924 45,346 Work in progress 5,716 6,243 Finished goods 12,900 7,898 69,540 59,487 Less: Provision for obsolescence (1,607) (898) 67,933 58,589 -56- 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 16 Receivables and prepayments 2003 2002 HKD’000 HKD’000 Trade receivables 70,714 54,101 Value added tax, refundable 19,228 10,061 Prepayments 1,800 629 Other receivables 3,776 3,754 95,518 68,545 Less: Provision for bad and doubtful debts (12,540) (7,594) 82,978 60,951 17 Trading investments 2003 2002 HKD’000 HKD’000 Hong Kong listed equity securities, cost 51 5,294 Less: fair value impairment for trading investments - (2,912) 51 2,382 The trading investments are traded in active markets and are valued at market value at the close of business on 31 December by reference to quoted bid prices. 18 Cash and cash equivalents 2003 2002 HKD’000 HKD’000 Cash at bank and in hand 18,304 7,642 Short term bank deposits 14,665 28,444 32,969 36,086 The weighted average effective interest rate on short term bank deposits was 0.6146% (2002: 1.0625%) and these deposits have an average maturity of 30 days. For the purposes of the cash flow statement, the cash and cash equivalents comprise the following: 2003 2002 HKD’000 HKD’000 Cash and bank balance 32,969 36,086 Less: pledged bank deposits (6,000) (6,000) 26,969 30,086 The pledged bank deposits represented deposits pledged with a bank to obtain certain banking facilities. -57- 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 19 Trade and other payables 2003 2002 HKD’000 HKD’000 Trade payables 25,401 16,682 Other payables 1,935 2,793 Accrued expenses 1,962 1,816 29,298 21,291 20 Short-term borrowings 2003 2002 HKD’000 HKD’000 Borrowings from banks - Guaranteed borrowings (note (a), (b)) 18,846 18,846 - Unsecured borrowings (note (b)) 32,763 21,597 51,609 40,443 (a) The borrowings were guaranteed by Union Development Group Co., Ltd., a related party of the Group. (b) The effective interest rates for these borrowings were ranging from 3.2% to 5.3%. (2002: 3.6% to 5.6%). 21 Share capital As of 31 December, the authorized, issued and fully paid share capital of the Company comprised: 2003 2002 Number of Number of shares Amount shares Amount ’000 HKD’000 ’000 HKD’000 “A Shares”, par value of RMB1 each 99,720 122,554 99,720 122,554 “B Shares”, par value of RMB1 each 69,422 85,317 69,422 85,317 169,142 207,871 169,142 207,871 Pursuant to the articles of association of the Company, A Shares and B Shares are registered ordinary shares and carry equal rights. 22 Reserves (a) Share premium Share premium represents the premium on the issuance of A Shares and B Shares. -58- 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 22 Reserves (Cont’d) (b) Other reserves (i) Pursuant to the relevant PRC regulations and the Articles of Association of the Company, profit after the taxation shall be appropriated in the following sequence: (1) make up accumulated losses, if any; (2) transfer 10% of the profit after tax to the statutory surplus reserve. When the balance of the statutory surplus reserve reaches 50% of the share capital, such transfer need not be made; (3) transfer 5% to 10% of the profit after tax to the statutory public welfare fund; (4) transfer to the discretionary surplus reserve with an amount approved by the shareholders at general meetings; (5) distribute dividends to shareholders. The amounts transferred to the reserve funds shall be based on the profit after tax of the Company’ s statutory financial statements. (ii) Statutory surplus reserve and discretionary surplus reserve According to the relevant PRC regulations, statutory surplus reserve and discretionary surplus reserve can be used to make up losses or to increase share capital. Except for the reduction of the reserves due to losses incurred, any other usage should not result in the reserves falling below 25% of the registered capital. (iii) Statutory public welfare fund According to relevant PRC regulations, the use of statutory public welfare fund is restricted to capital expenditures for collective employee welfare facilities. The statutory public welfare fund is not available for distribution to shareholders except in liquidation. According to a document issued by the Ministry of Finance, when the statutory public welfare fund is utilised, an amount equal to the lower of cost of the assets and the balance of the statutory public welfare fund is transferred from the statutory public welfare fund to the discretionary surplus reserve. On disposal of the relevant assets, the original transfers from the statutory public welfare fund are reversed. For the year ended 31 December 2003, the directors proposed appropriations of 10% and 5% (2002: 10% and 5% ) of the net profit of the Company’ s statutory financial statements, totalling HKD221,004 (2000: HKD190,520), to the statutory surplus reserve fund and statutory public welfare fund respectively. (c) Profit available for distribution to shareholders Pursuant to the relevant PRC regulatio ns, profit available for distribution to shareholders shall be the lower of the retained earnings determined according to PRC -59- 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 accounting standards and regulations as appeared in the statutory financial statements and the retained earnings adjusted according to IFRS. According to the statutory financial statements as of 31 December 2003, HKD5,963,288 is available for distribution to shareholders (2002: HKD4,710,936). -60- 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 23 Minority interests 2003 2002 HKD’000 HKD’000 At beginning of year 369 - Capital contribution - 500 Share of net loss of the subsidiary (34) (131) At end of year 335 369 24 Contingencies At 31 December 2003, the Group had contingent liabilities in respect of guarantees for Nanhua’s bank facilities amounting to HKD7,506,803 (2002 : HKD8,000,000). 25 Commitments (a) Capital commitments Capital expenditures authorized for at the balance sheet date but not recognized in the financial statements are as follows: 1) On 8 February 2001, VO(HK), the subsidiary of the Company, has entered into a letter of intent with Shenzhen Union China Holdings Ltd. to set up a foreign-invested join venture in Ningbo, the PRC. According to the letter of intent, the share capital of the joint venture is RMB700 million, of which VO(HK) owns 25%, amounting to RMB175 million. Up to the report date, there is no formal contract signed between the parties in respect of the above investment. 2) On 28 December 2003, VO(HK) had entered into a letter of intent with Shenzhen Union Development Company Limited, a subsidiary of the Union Development, China Texitle Holding Hong Kong Group Limited, Shanghai Huashun Investment Management Company and Creative Economy Development Limited to jointly invest an amount of USD29.9 million to set up a joint venture company in Zhejiang Province. 25% of the equity interest of the joint venture company will be held by VO(HK). The letter of intent has been approved by the Board of Directors of the Company and the Shareholders Meeting on 9 March 2004 and 16 April 2004 respectively. 3) On 3 November 2003, VO(HK) has entered into a share transfer agreement with Liquidation Committee of Changzhou Die Qiu Textile Group Company to purchase 1.6% equity interest of Nanhua at a consideration of RMB268,000. The share transfer has been approved by Shenzhen Municipal Foreign Trade and Economics Co-operation Bureau on 8 January 2004. -61- 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 25 Commitments (Cont’d) (b) Operating lease commitments At 31 December 2003, the future aggregate minimum lease payments under non cancellable operating leases in respect of warehouses are as follows: 2003 2002 HKD’000 HKD’000 Not later than 1 year - 22 26 Cash (used in)/generated from operations 2003 2002 HKD’000 HKD’000 Net profit 1,992 1,788 Adjustments for: Minority interest (34) (131) Income tax 989 826 Depreciation 11,530 11,173 Amortization of goodwill 37 36 Impairment charge 10,898 3,761 Profit on sale of property, plan and equipment (442) - Gain from disposal of trade investments (526) - Dividend received (1,555) - Share of results of associates before tax 721 (160) Interest expenses 2,102 1,896 Interest income (276) (685) Changes in working capital: Inventories (10,053) 3,073 Trade and other receivables (41,068) (3,523) Due from related parties 4,282 (48) Trade and other payables 8,007 (2,717) Current tax liabilities - 148 Cash (used in)/generated from operations (13,396) 15,437 -62- 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 27 Related party transactions The Company’ s major shareholder is Union Development Group of China Ltd. (“Union Development”), who directly holds 4.54% of the Company’ s issued shared and indirectly holds another 27.99% through its subsidiary, namely Shenzhen Union China Holdings Ltd. In addition to the guarantee to/from related parties disclosed in Note 20 (a) and Note 24, the Group entered into the following significant related party transactions in the normal course of its business and on an arm’ s-length basis: 2003 2002 HKD’000 HKD’000 Sales of goods: Huaguanli 4,191 35 Processing consigned to: Nanhua 245 - Lianchang 324 - 569 - Year end balances with related parties: 2003 2002 HKD’000 HKD’000 Trade receivables from related parties 4,187 513 Other receivables from related parties 3,740 3,132 7,927 3,645 Less: Provision for bad and doubtful debts (1,364) (1,741) 6,563 1,904 The above balances were non-interest bearing, unsecured and repayable on demand. -63- 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 28 Principal subsidiaries As of 31 December 2003, the Company directly/indirectly held the following subsidiaries: Place of Percentage of equity Name incorporation Principal activities interest held 2003 2002 Consolidated subsidiaries VO(HK) Hong Kong Procurement of materials, marketing of printed and 100% 100% dyed woven fabrics and investment holdings Victor Onward Digital Printing Hong Kong Manufacturing of printed and dyed woven fabrics 75% 75% Co., Ltd. (“VO Digital”)* Unconsolidated subsidiaries Rich Sino Enterprises Limited Hong Kong Dormant 100% 100% (“Rich Sino”) ** * VO Digital was newly set up in 2002, with the paid in capital of HKD 2,000,000. ** ’ s Meeting of Rich Sino dated Pursuant to a resolution of the Board of Director 21 January 1999, the directors decided to cease the operation of Rich Sino. The Company had fully provided for the investment in Rich Sino. 29 Comparative figures Certain comparative figures have been reclassified to conform to the current year’ s presentation. 30 Approval of financial statements The consolidated financial statements had been approved for issue by the Board of Directors on 16 April 2004. 11377/JWE The impact of IFRS and other adjustments on the PRC statutory financial statements are as -64- 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 follows: Net profit for the year Net assets as of ended 31 December 31 December 2003 2002 2003 2002 HKD’000 HKD’ 000 HKD’ 000 HKD’ 000 As reported in the PRC statutory financial 1,474 1,270 291,959 290,485 statements Impact of IFRS adjustments: Reversal of revaluation of leasehold properties in Hong Kong 457 457 (9,099) (9,556) Difference in treatment of negative 61 61 (337) (398) goodwill Others - - (2,158) (2,158) As restated under IFRS 1,992 1,788 280,365 278,373 -65- 深圳中冠纺织印染股份有限公司 二 00 三年年度报告 Section XI. List of Documents Available for Inspection 1. The original of the annual report bearing the signature of the legal representative of the Company; 2. The financial report bearing the signature of the person in charge and financial controller of the Company. 3. The original of the auditors' report bearing the seal of Pricewaterhouse Coopers Zhongtian Certified Public Accountants and the seal and signature of C.P.A. 4. The original of all the Company's documents and the original manuscripts of announcements publicly disclosed on the newspapers designated by China Securities Regulatory Commission in the report period. V. The articles of association of the Company. The Board of Directors of Shenzhen Victor Onward Te xtile Industrial Co., Ltd. April 2004 -66-