深康佳Ａ(000016)深康佳Ｂ2003年年度报告（英文版）

KONKA GROUP CO., LTD. ANNUAL REPORT 2003 Chairman of the Board: Mr. Ren Kelei April 16, 2004 Important Notes Board of Directors of KONKA GROUP CO., LTD. (Hereinafter referred to as the Company) and all its Directors individually and collectively accept responsibility for the correctness, accuracy and completeness of the contents of this report and confirm that there are no material omissions nor errors which would render any statement misleading. Director Mr. Liang Rong entrusted Mr. Ren Kelei to attend the Board meeting and vote on his behalf. Shenzhen Dahua Tiancheng Certified Public Accountants issued a standard unqualified Auditors’ Report for the Company. Chairman of the Board of the Company Mr. Ren Kelei, Chief Financial Officer Mr. Yang Guobin and Person in Charge of Accounting Affairs Ms. Yang Rong hereby confirm that the Financial Report enclosed in the Annual Report is true and complete. This report is prepared in both Chinese and English. In the event of any interpretations between these two versions, the Chinese version shall prevail. I Contents I. COMPANY PROFILE................................................................................................................................1 II. FINANCIAL HIGHLIGHTS AND BUSINESS HIGHLIGHTS ..............................................................2 III. CHANGES IN SHARE CAPITAL AND PARTICULARS ABOUT SHAREHOLDERS.......................4 IV. ADMINISTRATIVE TEAM AND EMPLOYEES...................................................................................6 V. CORPORATE GOVERNANCE................................................................................................................8 (I) Corporate Governance of the Company ............................................................................................8 (II) Implementation of duties of independent directors..........................................................................8 (III) Separation from controlling shareholder in business, personnel, assets, organization and finance 9 (IV) Assessment and encouragement mechanism for senior executives ..............................................10 VI. REFINGS ON THE SHAREHOLDERS’ GENERAL MEETING........................................................10 VII. REPORT OF THE BOARD OF DIRECTORS ....................................................................................10 (I) Main operations in the report period ...............................................................................................10 (II) Operations and achievements of main holding companies and share-holding companies.............12 (III) Major suppliers and customers .....................................................................................................13 (IV) Investment of the Company..........................................................................................................13 (V) Financial position of the Company ................................................................................................13 (VI) Business plan in the new year ......................................................................................................13 (VII) Routine work of the Board of Directors......................................................................................14 (VIII) Preplan on distribution or capitalization in the year ..................................................................16 (IX) Preplan on distribution or capitalization for 2004 ........................................................................ 16 (X) Special explanation on the current capital of related parties and external guarantee.....................16 (XI) Other issues ..................................................................................................................................17 VIII. REPORT OF THE SUPERVISORY COMMITTEE ...........................................................................17 (I) Work of the Supervisory Committee ...............................................................................................17 (II) Independent opinion of the Supervisory Committee......................................................................18 IX. SIGNIFICANT EVENTS ......................................................................................................................18 (I) Significant lawsuits and arbitrations ...............................................................................................18 (II) Significant purchase, merge and absorption ..................................................................................19 (III) Material related transaction ..........................................................................................................19 (IV) Significant contracts and implementation ....................................................................................20 (V) Commitments.................................................................................................................................20 (VI) About Certified Public Accountants and remuneration ................................................................20 (VII) Other Significant Events .............................................................................................................20 X. FINANCIAL REPORT............................................................................................................................20 (I) Report of the auditors ......................................................................................................................20 (II) 2003 financial report was attached.................................................................................................22 XI. DOCUMENTS FOR REFERENCE ......................................................................................................22 I I. COMPANY PROFILE 1. Legal Name of the Company: In Chinese: 康佳集团股份有限公司 (Abbr.: 康佳集团) In English: KONKA GROUP CO., LTD. (Abbr.: KONKA GROUP) 2. Registered (Office) Address: Overseas Chinese Town, Nanshan District, Shenzhen Post Code: 518053 Internet Website: http://www.konka.com E-mail: szkonka@konka.com 3. Legal Representative: Mr. Ren Kelei (Chairman of the Board) 4. Secretary of Board of Directors: Mr. He Jianjun Authorized Representative in Charge of Securities Affairs: Mr. Xu Hongjun Contact Address: Secretariat of Konka Group Co., Ltd., Overseas Chinese Town, Shenzhen Tel: (86) 755-26608866 Fax: (86) 755-26600082 E-mail: szkonka@konka.com 5. Newspaper Chosen for Disclosing the Information of the Company: China Securities, Securities Times and Ta Kung Pao etc. Internet Website Designated by CSRC for Publishing the Annual Report: http://www.cninfo.com.cn The Place Where the Annual Report is Prepared and Placed: Secretariat of Board of Directors 6. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: Shen Konka - A, Shen Konka - B Stock Code: 000016, 200016 7. Initial Registration Date: Oct.1, 1980 Place: Shenzhen. 8. Registration Number of Enterprise Legal Person’s Business License: QGYSZ Zi No. 100476 9. Registration Number of Tax: 440301618815578 10. Certified Public Accountants Engaged by the Company Domestic: Shenzhen Dahua Tiancheng Certified Public Accountants Address: Room 1102-1103, on the 11th Floor, Tower B, Unite Plaza, No. 5022, Binhai Av., Futian District, Shenzhen International: K.C.OH & Company Certified Public Accountants Address: 8/F., New Henry House, No. 10 Ice House Street, Central, Hong Kong 1 II. FINANCIAL HIGHLIGHTS AND BUSINESS HIGHLIGHTS 1. Major accounting data as of the year 2003 Unit: In RMB Items Amount Total profit 127,379,887.60 Net profit 101,071,037.71 Net profit after deducting non-recurring gains and losses 98,067,812.82 Profit from main operations 1,881,895,908.49 Other operating profit 13,563,412.08 Operating profit 130,642,757.32 Investment income -6,193,636.29 Subsidy income 1,147,112.00 Net non-operating income/expenses 1,783,654.57 Net cash flow arising from operating activities 351,386,559.94 Net increase/decrease of cash and cash equivalents 286,994,305.04 2. Major financial index over the recent three years Increase/decrease Index 2003 2002 compared with last 2001 year (%) Income from main operations (RMB’0000) 1,280,646.61 804,165.28 59.25 674,812.20 Net profit (RMB’0000) 10,107.10 3,559.04 183.98 -69,476.43 Net profit after deducting non-recurring 9,806.78 2,865.34 242.26 -71,486.72 gains and losses (RMB’0000) Fully diluted earnings per share ((RMB) 0.168 0.059 184.75 -1.154 Weighted average earnings per share 0.168 184.75 0.059 -1.154 (RMB) Return on equity (%) 3.310 1.205 174.69 -23.97 Net cash flow per share arising from 0.584 1.086 -46.25 1.201 operating activities (RMB) Increase/decrease At the end of At the end of At the end of Items compared with last 2003 2002 2001 year (%) Total assets (RMB’0000) 963,737.57 700,597.42 37.56 722,095.88 Equity-debt ratio (%) 65.88 54.53 20.81 56.19 Shareholders’ equity (excluding minority 305,351.94 295,350.88 3.39 289,844.74 interests) (RMB’0000) Net assets per share (RMB) 5.072 4.906 3.39 4.815 Net assets per share after adjustment 4.895 4.787 2.26 4.570 (RMB) 2 3. Supplemental statement of profit in the report period Return on equity Earnings per share (%) (RMB) Profit as of the year 2003 Fully Weighted Fully Weighted diluted average diluted average Profit from main operations 61.63% 62.66% 3.1261 3.1261 Operating profit 4.28% 4.35% 0.2170 0.2170 Net profit 3.31% 3.37% 0.1679 0.1679 Net profit after deducting non-recurring 3.22% 3.27% 0.1629 0.1629 gains and losses 4. Items of deducting non-recurring gains and losses and the relevant amount Unit: In RMB Items Jan. –Dec. in 2003 Non-operating income 9,203,862.99 Non-operating expenditure -7,420,208.42 Various government subsidy income 1,147,112.00 Gains and losses from short-term investments (shares) 72,458.32 Total 3,003,224.89 5. Changes in shareholders’ equity in the report period Unit: In RMB Amount at the Increase in this Decrease in this Amount at the Items period-begin report period report period period-end Share capital 601,986,352.00 － － 601,986,352.00 Capital reserve 1,851,409,840.24 329,700.05 － 1,851,739,540.29 Surplus reserve 1,115,134,973.70 － － 1,115,134,973.70 Including: Statutory 240,860,222.78 － － 240,860,222.78 welfare fund Retained earnings -614,664,247.79 101,071,037.71 － -511,783,686.15 Balance of foreign currency translation -358,090.94 － 230,237.27 -127,853.67 Accumulative un-offset losses of subsidiaries － -3,429,897.23 － -3,429,897.23 Total shareholders’ equity 2,953,508,827.21 97,970,840.53 230,237.27 3,053,519,428.94 Notes: (1) Increase of capital reserve is mainly due to unpaid accounts payable of Mudanjiang Konka and Shannxi Konka, subsidiaries of the Company, and result in increase of capital reserve. Parent company’s capital reserve has increased by RMB 329,700.05 according to the proportion. (2) Increase in retained earnings is due to the profitability amounting to RMB 101,071,037.71 in the year. (3) Accumulative losses of subsidiaries not offset are because losses of subsidiaries not offset were reckoned into shareholders’ equity. 3. The Company engaged K. C. Oh & Company Certified Public Accountants as overseas 3 Auditor of the Company. Difference in net assets and net profit as reported under CAS and IFRS respectively; Unit: In RMB Net assets Net assets As per International Financial Reporting Standards 3,051,392,826.17 104,398,238.36 1. Prophase adjustment to capital reserve 6,978,000.00 - 2. Prophase adjustment to surplus reserve (17,909,000.00) - 3. Government’s subsidy’s transferring into capital 16,487,500.00 - reserve from deferred income 4. Partial government’s subsidy’s listing into income - (2,997,500.00) 5. Liabilities of affiliated companies unnecessary for - (329,700.65) payment’s listing into income 6. Adjustment to losses of subsidiaries not offset (3,429,897.23) - As per Accounting System for Business Enterprises 3,053,519,428.94 101,071,037.71 III. CHANGES IN SHARE CAPITAL AND PARTICULARS ABOUT SHAREHOLDERS 1. Change in share Unit: share Increase/decrease in this time (+, - ) Before the After the Items change Allotment Bonus Capitalization of Additional change Others Subtotal of share shares public reserve issuance I. Unlisted Shares 1. Sponsors’ shares 174,949,746 174,949,746 Including: State-owned share Domestic legal person’s shares 174,949,746 174,949,746 Foreign legal person’s shares Others 2. Raised legal person’s shares 3. Inner employees’ shares (shares 42,092 -25,384 16,708 held by senior executives) 4. Preference shares or others Total unlisted shares 174,991,838 174,966,454 II. Listed Shares 1. RMB ordinary shares 224,156,612 +25,384 224,181,996 2. Domestically listed foreign 202,837,902 202,837,902 shares 3. Overseas listed foreign shares 4. Others Total listed shares 426,994,514 427,019,898 III. Total shares 601,986,352 601,986,352 Note: Inner employees’ shares (shares held by senior executives) and RMB ordinary shares were changed because shares held by Mr. Chen Weirong, original director, and Mr. Lin Hanhui, original vice-president, were unfrozen for circulation after half year they left their posts. 2. Issuance and listing of shares 4 As approved by CSRC, 139,036,499 unlisted foreign shares of the Company were transferred into listed foreign share for circulation in 2001. The said shares were listed for trade in Shenzhen Stock Exchange dated June 21, 2001. There exists no unlisted inner employee’s share except for 16,708 shares held by senior executives. 3. About shareholders (1) Ended Dec. 31, 2003, the Company had totally 155,267 shareholders, including 139,411 ones of A-share and 15,985 ones of B-share. (2) Particulars about shares held by the top ten shareholder and the top ten shareholders of circulation share Increase / Number of decrease in Shares held at Proportion share Nature of Full name of Shareholders Type of shares the report the year-end (%) pledged/ shareholders year (share) frozen 1. OVERSEAS CHINESE TOWN State-owned GROUP COMPANY 0 174,949,746 29.06 Non-circulating 174,949,741 shareholder 2. OVERSEAS CHINESE TOWN Circulating B Foreign (HONG KONG) CO., LTD. -8,155,889 68,376,683 11.36 Unknown shares shareholder 3. HONG KONG CHINA TRAVEL Circulating B Foreign SERVICE (GROUP) CO., LTD. 0 45,416,337 7.54 shares Unknown shareholder 4. TOYO SECURITIES ASIA Circulating B Foreign LIMITED A/C CLIENT -165,575 2,195,126 0.36 shares Unknown shareholder Circulating B Foreign 5. NOMURA TB/NOMURA ITM -950,000 1,500,000 0.25 Unknown shares shareholder Circulating B Foreign 6. XIN MING +4,615 1,254,483 0.21 Unknown shares shareholder 7. CHINA HIGH-TECH Circulating A Domestic INVESTMENT GROUP CO. +187,601 1,246,618 0.21 shares Unknown shareholder 8. NATIONAL COMBINATION OF Circulating A Domestic 101 SOCIAL INSURANCE FUNDS +1,216867 1,216867 0.20 shares Unknown shareholder 9. SBCI FINANCE ASIA LED A/C Circulating B Foreign SBC HONG KONG +918,570 918,570 0.15 shares Unknown shareholder Circulating A Domestic 10. LIU FANG +754,764 754,764 0.12 Unknown shares shareholder 11. NEITENG SECURITIES CO., Circulating B Foreign LTD. +730,457 730,457 0.12 shares Unknown shareholder Explanation on associated relationship or consistent action among the top ten shareholders and the top ten shareholder of circulation share: (1) Among the top ten shareholders, Overseas Chinese Town Group Company, the first largest shareholder, held non-circulating shares. There was no change in shares of the Company held by it in the report period. (2) Overseas Chinese Town (Hong Kong) Co., Ltd. is the wholly-owned subsidiary of Overseas Chinese Town Group Company registered in Hong Kong; the shares held by it were changed due to trading in the second market in the report period. Except for this, there exists no associated relationship between Overseas Chinese Town Group Company and the other shareholders of circulation share, and they do not belong to the consistent actionist regulated 5 by the Management Measure of Information Disclosure on Change of Shareholding for Listed Companies. For the other shareholders of circulation share, the Company is unknown whether there exists associated relationship or consistent actionist regulated by the Management Measure of Information Disclosure on Change of Shareholding for Listed Companies or not. (3) The other shareholders are social shareholders, who hold circulation shares. The shares held by them were changed due to trading in the second market during the report period. (4) Particulars about legal person shareholder holding over 5% of total shares of the Company Registered Type of Type of Legal Dated of Name capital Core business scope holding share enterprise representative foundation (RMB’0000) State-owned Industry, tourism, real Overseas Chinese Town Domestic legal sole Ren Kelei May 1986 RMB 20,000 estate, finance and Group Company person’s share corporation commerce Wholly-owned subsidiary of Foreign Overseas Chinese Town Overseas Investment and share circulation Zheng fan Oct. 1997 RMB 45,500 (Hong Kong) Co., Ltd. Chinese Town holding by high-tech share Group Company Tourism, industrial investment, capital Hong Kong China Foreign State-owned construction, real estate, Travel Service (Group) circulation foreign Che Shujian Oct. 1985 HKD 70,000 hotel management, Co., Ltd. share corporation passenger-cargo transportation and import & export trade IV. ADMINISTRATIVE TEAM AND EMPLOYEES 1. Particulars about directors, supervisors and senior executives Shares held Shares held at Name Title Gender Age Office term at the Note the year-begin year-end Ren Kelei Chairman of the Board Male 53 Apr. 2001-Apr. 2004 0 0 Zhang Director Male 59 Apr. 2001-Apr. 2004 0 0 Zhengkui He Shilin Director Male 63 Apr. 2001-Apr. 2004 0 0 Liang Rong Director Male 39 Apr. 2001-Apr. 2004 17,850 17,850 Ni Zheng Director Male 36 May 2002-Apr. 2004 0 0 Wei Qing Director Male 51 Apr. 2001-Apr. 2004 0 0 Xiao Zhuji Independent Director Male 70 May 2001-Apr. 2004 0 0 Ye Wu Independent Director Male 65 May 2001-Apr. 2004 0 0 Ma Liguang Independent Director Female 63 May 2001-Apr. 2004 0 0 Nie Guohua Chairman of the Male 61 Apr. 2001-Apr. 2004 0 0 Supervisory Committee Wang Ruquan Supervisor Male 50 Apr. 2001-Apr. 2004 0 0 Wang Supervisor Male 54 Apr. 2001-Apr. 2004 0 0 Employee’s Xinzhong representative Hou Songrong President Male 35 Apr. 2002-Apr. 2004 0 0 Yang Guobin Chief Financial Officer Male 34 Mar. 2002-Mar. 2004 0 0 Wang Youlai Vice-president Male 43 Mar. 2002-Mar. 2004 2,640 2,640 Huang Vice-president Male 43 Mar. 2002-Mar. 2004 514 514 Zhongtian Chen Xuri Vice-president Mar. 2002-Apr. 2004 0 0 Male 45 Secretary of the Board Apr. 2001- Mar. 2004 Huang Vice-president Male 41 Mar. 2002-Apr. 2004 0 0 Weigang 6 Among which, particulars about directors and supervisors holding the post in Shareholding Company: Drawing the payment Name of Shareholding Title in Shareholding Name Office term from the Shareholding Company Company Company (Yes / No) Overseas Chinese Town Group CEO and concurrently Ren Kelei Dec. 1993 to now No Company President Secretary of the Party Zhang Overseas Chinese Town Group Committee and Aug. 1987 to now No Zhengkui Company concurrently managing vice-president Overseas Chinese Town Group He Shilin Financial Advisor 2000 to now No Company Overseas Chinese Town Group Apr. 2002 to May Liang Rong Assistant President No Company 2003 Overseas Chinese Town (Hong Ni Zheng General Manager Dec. 1998 to now No Kong) Co., Ltd. Hong Kong China Travel General Manager of Wei Qing Service (Group) Co., Ltd. Investment Plan & 2000 to now No Management Dept. Overseas Chinese Town Group Nie Guohua Vice-president Feb. 1992 to now No Company Overseas Chinese Town Group Supervisor of Auditing Wang Ruquan Oct. 2000 to now No Company Dept. 2. Particulars about the annual remuneration as of the year 2003 (1) The Company didn’t paid remuneration or allowance to directors, independent directors and supervisors. (2) The Board of Directors determined the remuneration of senior executives, and referred to the following factors: ① engagement content and responsibility shouldered; ② actual profit status of the Company; ③ remuneration level in the same industry and same area. (3) The total annual remuneration of senior executives amounted to RMB 1,455,900. Of which, 5 enjoy the annual remuneration between RMB 200,000 and 300,000 respectively, and 1 enjoys the annual remuneration between RMB 300,000 and 350,000. Total annual remuneration of the top three senior executives drawing the highest payment was RMB 739,200. 3. Particulars about engagement or leaving the post of directors, supervisors and senior executives in the report period: As decided by the 15th meeting of the 4th Board of Directors, Mr. Chen Xuri no longer took the post of secretary of the Board due to work demand since Mar. 2, 2004; Mr. He Jianjun took up the post of secretary of the Board of the Company. 4. About Employees as at end of report period Shenzhen Branch Mudanjiang Shannxi Anhui Chongqing Dongguan Konka Changshu Chongqing Company Total headquarters companies Konka Konka Konka Konka Konka mould Konka Qingjia. Number 3407 7736 848 1317 2127 408 2856 774 369 33 20175 7 Structure of employees in Shenzhen headquarters Bachelor Production Financial Administrativ Classification Salesperson Technician Retiree degree or Doctor Master Bachelor personnel personnel e personnel above Number 862 278 581 107 1375 204 963 8 145 810 Proportion 25.3 8.2 17.1 3.1 40.3 6.0 28.3 0.2 4.3 23.8 V. CORPORATE GOVERNANCE (I) Corporate Governance of the Company (1) In the report period, according to the requirements of CSRC and its dispatches and SSE, in the spirit of studying and carrying out the relevant documents, the Company maximized the interest of the shareholders as the springboard and footstone of the Company, consummated the administration of the Company in further step, standardized the operation of the Company, propelled the trust construction, and protected the interests of the Company and all shareholders in industrious and responsible manner. (2) In accordance with the requirements of Company Law, Securities Law, Rules of Listed Companies’ Administration, Guide Opinion on Establishing Independent Directors System in Listed Companies, other laws and regulations and Listing Rules of Shenzhen Stock Exchange, the Company constituted and implemented a series of company administration system and documents such as Procedure Rules of the Shareholders’ General Meeting, Procedure Rules of the Board of Directors, Procedure Rules of the Supervisory Committee, Independent Directors System, Detailed Work Rules of President, Decision-making of Related Transaction System, the Company’s Information Disclosure System etc. complied with the requirements of laws and regulations. (3) At present, one third of the members of the Board of Directors are independent directors in conformity with the requirement of the supervisory institution. The Board of Directors planed to establish upright organizations, namely Strategic Committee, Financing Auditing Committee, Nomination Committee and Remuneration Committee for guiding and supervising the work of the operation and management. Relative work detailed rules have been established and implemented. (II) Implementation of duties of independent directors Strictly according to Rules of Listed Companies’ Administration, Guide Opinion on Establishing Independent Directors System in Listed Companies, Articles of Association of the Company, Independent Directors System, Detailed Implementation Rules of Special Committee of the Board of Directors, the independent directors implemented their duties. In the report period, the Company’s independent directors performed fully their specialty and did a large amount of work in respect of construction of normative operation of the Board of Directors and brewing of significant decision-making: (1) In the process of preparing construction of special committee of the Board of Directors 8 and establishment and implementation of detailed implementation rules, the independent directors put forward to many constructive opinions and suggestions and took important posts in Auditing Committee, Nomination Committee and Remuneration Committee. (2) In the process of amendment of internal control system of the Company, grounded on rich work experience for years, the independent directors operated from a strategically advantageous position, actively gave counsels for the improvement and consummation of the legal person administration structure of the Company and urged the mature of every regulations and systems of the Company. (3) In the process of brewing of significant decision-makings of the Company, independent directors actively took part in relevant investigation and research, audit assessment and discussion, expressed pertinent and objective opinions and boosted the scientific decision-making and procedure of decision-making of the Board of Directors. (III) Separation from controlling shareholder in business, personnel, assets, organization and finance The Company was separated from the controlling shareholder in respects of business, personnel, assets, organization and finance. (1) In respect of business: the Company has its independent business and industry structure system, made decisions independently, made its own management decisions, took full responsibility for its own profits and losses and undertook independently corresponding responsibility and risk. (2) In respect of personnel: the Company established special institutions in charge of management of labor, person and wage, set up and consummated perfect management system of labor and personal. President, Vice President and other senior executives of the Company received remuneration in the Company and took no any post in the company of the control shareholder. (3) In respect of assets: the Company has independent operation system and corresponding auxiliary facility and established system of purchase, sale and service independently owned by the Company. The Company owned independently non-patent technology, trademark and other intangible assets. (4) In respect of organizations: the procedure of establishment and function of all organizations of the Company are independent. The Company is completely separated from the control shareholder in administrative management such as labor, personal and wage relationship and there existed no mixed operation and office. The Board of Directors, the Supervisory Committee and other institutions operated independently and there existed no affiliation between the Company and the functional departments of the control shareholder. (5) In respect of financing: The Company established independent accounting department, owned independent accounting settlement system, financing management system and bank account and was strictly separated from the control shareholder in operation. 9 (IV) Assessment and encouragement mechanism for senior executives According to the formulated Detailed Work Rules for President and various concrete work systems, The Company restricted work of senior executives, and decided on senior executives’ remuneration through basic annual salary plus floating bonus based on the year-end assessment as well as accomplishment of targets so as to invigorate work enthusiasm. Performance of senior executives was assessed by the Board of Directors, and supervised by the Supervisory Committee. VI. REFINGS ON THE SHAREHOLDERS’ GENERAL MEETING In the report year, the Company held one shareholders’ general meeting: Konka Group Co., Ltd. (hereinafter referred to as “the Company”) held Annual Shareholders’ General Meeting 2002 at the Conference Room, 5/F of OCT Group Building, Shenzhen, China at 9:30 A.M. on May 22, 2003. 32 shareholders and proxies attended the meeting, representing 297,852,803 shares, taking 49.48% of the Company’s total 601,986,352 shares (Including 175,052,299 A shares, taking 29.08% of the total shares, and 122,800,504 B shares, taking 20.48% of the total shares). The lawyer of Guangdong Wanshang Law Office Mr. Zhangzhi presented legal opinion for the Shareholders’ General Meeting. The meeting accorded with the relevant regulations in Company Law of the P.R.C. and the Articles of Association of the Company. The meeting was presided by Mr. Ren Kelei, Chairman of the Board. The Meeting examined and approved the following resolutions by voting: (I) Work Report 2002 of the Board of Directors; (II) Work Report 2002 of the Supervisory Committee; (III) Auditor’s Report of CPA 2002; (IV) Proposal on Profit Distribution Plan 2002; (V) Proposal on Profit Distribution Preplan 2003; (VI) Proposal on Engaging Counselor of the Company; (VII) Proposal on Engaging Financial Auditors and Their Auditing Expense; (VIII) Proposal on Buying Responsibility Insurance for Directors. The public notice on the resolutions of the Shareholders’ General Meeting was published in China Securities, Securities Times and Ta Kung Pao dated May 23 and designated International website: http://www.cninfo.com.cn. VII. REPORT OF THE BOARD OF DIRECTORS (I) Main operations in the report period (1) Main operations in the report period The Company is engaged in the production and operation of color TVs, digital mobile phones and Internet products of LCD monitor etc. and its auxiliary products (such as high frequency connector, mould, plastic injection and packing etc.) and is concurrently engaged in the operation of refrigerators, air-conditioners, washing machines etc. The Company belongs to the industry of electron manufacture and communication manufacture. 10 In 2003, the Company nailed down the strategic guiding idea of development and promotion in further step and increased input on R&P and marketing, promoting the core competitive edge of the Company and tamped the basis of sustainable development. The Company actively propelled the R&D of products, established and boosted the planning of all series of assembly lines, introduced R&D talents, set up special research institution, innovated the management mechanism of R&D, and established the prior position in the R&D of products. The Company successfully implemented “Digital High Definition Strategy” in the business of color TV, which increased the sale of high-tech color TV products and invigorated the sale of whole products. The Company successfully implemented “Color Screen Pioneer Strategy” in business of mobile phones exerting its up and coming advantages, which grasped the chance of introduction of color screen mobile phones in the market and realized the breakthrough in the sales. The Company executed new evaluation and encouragement mechanism, which encouraged properly, pressed properly, washed out the last one, boosted the work enthusiasm of the staff especially that of the key management team, and provided the continuous impetus for rapid development and management promotion. In 2003, the sales income realized in the whole year was RMB12.8 billion, an increase of 59.25% compared with the corresponding period of the previous year and the sales volume of domestic sales of color TVs was 6,828.6 thousand pieces and that of export of color TVs was 1,239.5 thousand pieces. The sales volume of mobile phones was 4,064.4 thousand pieces. The net profit realized was RMB101,071.0 thousand and earnings per share were RMB 0.1679. 2. Formation of income from main operations and profit from main operations in the report period: Income from main operations (RMB’0000) Cost of main operations (RMB’0000) Gross profit ratio (%) Industries Increase Increase Increase /products In 2003 In 2002 In 2003 In 2002 In 2003 In 2002 /decrease /decrease /decrease Domestic Color sales 773,392.09 559,374.42 38.26% 644,298.20 468,569.24 37.50% 16.69% 16.23% 2.82% TVs Export 70,160.21 45,259.53 55.02% 64,169.90 44,799.89 43.24% 8.54% 1.02% 740.72% Comm Mobile unicati 387,977.47 169,595.21 128.77% 338,325.56 140,561.35 140.70% 12.80% 17.12% -25.25% phones on Others 49,116.85 29,936.13 64.07% 45,511.14 28,328.98 60.65% 7.34% 5.37% 36.74% Total 1,280,646.61 804,165.28 59.25% 1,092,304.80 682,259.46 60.10% 14.71% 15.16% -2.99% 3.Analysis to the major financial index (1) The gross profit ratio of mobile phones decreased, which was mainly because that the Company reduced the sales price properly in order to expand scale and enhance market share under the intense market competition and the gross profit ratio of partial types of mobile phones was relatively low. 11 (2) The sales income increased greatly, which was because that on one hand, the Company reinforced the R&D input to products and enhanced the competitive capability of products in the market; on the other hand, the Company strengthened the marketing and reinforced the assessment and encouragement mechanism. In the aspect of color TVs, it was influenced by the recovery of the industry. (3) The assets-liability rate increased, which was mainly because that the Company’s sales scale was expanded and the turnover demand for inventories increased and at the same time notes receivable increased, resulting in the expansion of assets scale. (II) Operations and achievements of main holding companies and share-holding companies (1) Shenzhen Konka Telecommunication Technology Co., Ltd., whose 100% equity is held directly and indirectly by the Company, is mainly engaged in the development, production and operation of digital mobile communication equipments and mobile phone products with a registered capital of RMB 120 million. Ended the end of the report period, the total assets of this company was RMB 1,251,681,878.11 and in 2003 the sales income realized was RMB 3,879,774,653.89 and net profit was RMB45,672,347.04. (2) Dongguan Konka Electronic Co., Ltd., whose is wholly owned subsidiary of the Company, is engaged in the production and operation of color TVs and sound products etc. with a registered capital of RMB 200 million. Ended the end of report period, the total assets of this company was RMB 521,191,769.52 and in 2003 the realized sales income was RMB 262,121,571.65 and the net profit was RMB14,898,410.24. (3) Mudanjiang Konka Industrial Co., Ltd., whose 60% equity is held by the Company, is mainly engaged in the production and operation of color TVs with a registered capital of RMB 60 million. Ended the end of report period, the total assets of this company was RMB162,124,441.41and the realized sales income in 2003 was RMB129,853,730.95 and the net profit was RMB1,546,577.58. (4) Shaanxi Konka Electronic Co., Ltd., whose 60% equity is held directly and indirectly by the Company, is mainly engaged in the production and operation of color TVs with a registered capital of RMB 69.5 million. Ended the end of report period, the total assets of this company was RMB 139,790,047.02 and the sales income realized in 2003 was RMB 115,390,549.68 and the net profit was RMB8,306,683.69. (5) Anhui Konka Electronic Co., Ltd., whose 65% equity is held by the Company, is mainly engaged in the production and operation of color TVs with a registered capital of RMB 140 million. Ended the end of report period, the total assets of this company was RMB 324,464,863.89 and the realized sales income in 2003 was RMB 271,971,195.08 and the net profit was RMB22,653,533.48. (6) Chongqing Electronic Co., Ltd. whose 60% equity is held by the Company, is mainly 12 engaged in the production and operation of color TVs with a registered capital of RMB 45 million. Ended the end of report period, the total assets of this company was RMB 95,090,615.01 and the realized sales income in 2003 was RMB 47,809,282.20 and the net profit was RMB257,554.00. (III) Major suppliers and customers The total amount of purchase of the top five suppliers of the Company was RMB 3, 204,247,557.36, taking 29.56% of the total annual amount of purchase and the total amount of sales of the top five customers was RMB 7, 539,760,318,100, taking 5.89% of the total annual amount of sales of the Company. (IV) Investment of the Company 1. In the report period, the Company had no raised proceeds and material project invested with the said proceeds. 2. Material projects invested with the proceeds not raised through shares offering In the report period, the Company withdrew the investment of two projects of real estate, namely (1) Real estate project of “Building D and E of PORTOFINO · SWAN CASTLE” in OCT and (2) Real estate project of “The 3rd stage of Splendid Garden” in OCT, which totally amounted to RMB200 million. (V) Financial position of the Company Unit: RMB’0000 Items At the end of 2003 At the end of 2002 Increase/decrease (%) Main reasons for changes Increase in notes receivable and Total assets 963,737.57 700,597.42 37.56 inventories Accounts receivable-net Adjusting partial policies of book amount 33,454.71 27,868.58 20.04 refund Increase in stock demand due to Inventories-net book amount 317,008.11 257,879.56 22.93 expansion in scale Long-term investments-net Withdrawal of investments in real book amount 6,954.78 27,336.66 -74.56 estate projects Fixed assets-net book amount 125,420.77 121,658.08 3.09 Long-term liabilities 645.91 2,020.00 -68.02 Returning financial funds Shareholders’ equity 305,351.94 295,350.88 3.39 Items In 2003 In 2002 Increase/decrease (%) Main reasons for changes Profit from main operations 188,189.50 121,786.11 54.52 Great increase in income Net profit 10,107.10 3,559.04 183.98 Expansion in scale (VI) Business plan in the new year In 2004, the Company shall surround two principal axes, namely “Completely enhancing internally basic capability and completely enhancing externally competitive advantage”, in the operation and plan to accomplish three tasks: (1) The business of color TVs must reach the best level of management and operation in the same industry at home with competitive advantages being established in the new-typed display field; (2) The business of mobile phones must climb up so as to ensure the better living and development; (3) International 13 layout must be accomplished preliminarily in the international business. Based on this, the Company should well do the work in the following five aspects: Firstly, fully push the strategic planning with emphasis on planning of industrial strategy and technical strategy, especially on planning of technical innovation. Secondly, make efforts to push research and development. Reinforce technical reserve and establish technical innovation and pre-research system; completely push R&D system for integrated products and make flow of R&D business smooth; further introduce into superior R&D talents so as to support the future development. Thirdly, innovate marketing and several marketing campaigns must be conducted in color TVs and mobile phone businesses; push separate marketing management of products; continue to push flat channels and strengthen terminal construction in the business of mobile phones. Fourthly, develop management enhancement in a well-knit way; establish departments for flow enhancement and at the same time set up mechanism of registration, check and acceptance and encouragement to the management enhancement projects, such as management project of supply chain, development project of integrated products, marketing project of integrated products, strategic purchase and enhancement project of surveyor’s pole management etc.. Fifthly, actively reform and push encouragement mechanism. Based on the existing encouragement project, probe into establishing long-term encouragement mechanism; at the same time, optimize and improve annual assessment mechanism and firmly push foot elimination system. (VII) Routine work of the Board of Directors 1. Meetings and resolutions of the Board of Directors in the report period In the report period, the 4th Board of Directors of the Company held the 5th Meeting: the 10th, 11th, 12th, 13th and 14th Meeting of the 4th Board, with details as follows: The 10th Meeting of the 4th Board of Directors was held in Conference Room No. 605, Office Building, OCT, Shenzhen on the morning of Jan. 23, 2003. The Meeting was presided over by Mr. Ren Kelei, Chairman of the Board. 9 Directors should be present and actually 8 of them attended the Meeting. 1 Director authorized Chairman of the Board to vote on his (her) behalf. Supervisor Wang Ruquan, President Hou Songrong and Chief Financial Officer Yang Guobin attended the Meeting as non-voting delegates. The Meeting listened to and agreed the report of President Hou Songrong on Work Summary 2002 and Business Plan 2003 and Business Plan Indexes 2003. The 11th Meeting of the 4th Board was held in Conference Room No. 605, Office Building, OCT, Shenzhen, China on the afternoon of Apr. 17, 2003. All directors of the Company attended the Meeting, which was presided over by Mr. Ren Kelei, Chairman of the Board, in 14 compliance with relevant provisions in Company Law of the P.R.C. and the Articles of Association of the Company. All supervisors and main members in the Management of the Company have attended the Meeting as non-voting delegates. The following resolutions have been passed unanimously after full discussion at the Meeting: (1) Annual Report 2002 and its Summary (2) Work Report of the Board (3) Profit Distribution Plan 2002 and Profit Distribution Preplan 2003 (4) Proposal on Engaging Counselor of the Company (5) Proposal on Engaging Financial Auditors and Their Auditing Expenses (6) Circular on Holding Annual Shareholders’ General Meeting 2002 The 12th Meeting of the 4th Board of Directors of the Company was held on Apr. 21, 2003 by means of fax voting, where the 1st Quarterly Report for 2003 was considered and passed. The 13th Meeting of the 4th Board of Directors of the Company was held in Conference Room No. 605, Office Building, OCT Group, Shenzhen, China on the morning of Aug. 20, 2003. 9 directors should be present and actually 7 of them attended the Meeting. Director Mr. Wei Qing authorized Director Mr. Ren Kelei to attend the Meeting and vote on his behalf and Director Mr. Liang Rong did not attend the Meeting due to business reason. The Meeting was presided over by Mr. Ren Kelei, Chairman of the Board, and Chairman of the Supervisory Committee and 1 supervisor and partial senior executives have attended the Meeting as non-voting delegates, in compliance with relevant provisions in Company Law of the P.R.C. and the Articles of Association of the Company. The following resolutions have been considered and passed at the Meeting: (1) Semi-annual Report 2003 and its Summary (2) Semi-annual Profit Distribution Proposal 2003 The 14th Meeting of the 4th Board of Directors of the Company was held on Oct. 27, 2003 by means of fax voting, where the 3rd Quarterly Report for 2003 of the Company was considered and passed. The resolutions of the 11th, 12th, 13th and 14th Meeting of the 4th Board of Directors were published respectively on the newspapers of information disclosure designated by CSRC, namely China Securities, Securities Times, Shanghai Securities News and Hong Kong Ta Kung Pao, dated Apr. 21, Apr. 22, Aug. 22 and Oct. 28, 2003 respectively and in the designated international website http://www.cninfo.com.cn. 2. Implementation of the Board on resolutions of the Shareholders’ General Meeting The Board seriously implemented the resolutions of Shareholders’ General Meeting: engaging 15 counselor and certified public accounts and buying responsibility insurance for senior executives. (VIII) Preplan on distribution or capitalization in the year After research at the 16th Meeting held on Apr. 16, 2004, the 4th Board of Directors decided neither to distribute dividends nor convert reserve into share capital in 2003. The said plan should be submitted to Shareholder’ General Meeting for approval. (IX) Preplan on distribution or capitalization for 2004 In 2004, the Company would not distribute dividends or convert reserve into share capital. This plan should be submitted to the Shareholders’ General Meeting for approval. (X) Special explanation on the current capital of related parties and external guarantee Explanation on executing Notification on standardizing the current capital between the listed company and related parties and several problems on external guarantee of listed company (CSRC2003 No.56 Document): 1. Current capital between related parties (1) Ended Dec. 31, 2003, the subsidiary of the controlling shareholder of the Company-Shenzhen OCT Real Estate Co., Ltd. occupied capital amounting to RMB303, 400, the deposit for dormitory paid by the Company to Shenzhen OCT Real Estate Co., Ltd.. (2) Ended Dec. 31, 2003, the subsidiary of the controlling shareholder of the Company-Shenzhen OCT Property Co., Ltd. occupied capital amounting to RMB76, 900, the deposit for property management paid by the Company to Shenzhen OCT Property Co., Ltd..(3) Ended Dec. 31, 2003, the related company-Shenzhen Konka Energy Technology Co., Ltd. of which 30% shares were held by the Company, occupied capital amounting to RMB 1,330,000, the loan borrowed by Shenzhen Konka Energy Technology Co., Ltd. from the Company. The loan of the same period of the previous year was RMB1, 530,000. This year, RMB200, 000 was paid in monetary fund. The above capital belonged to non-operating occupation, which reflected in the item of accounts receivable. (4) Indonesia Konka Trade Co., Ltd. of which 100% shares were held by the Company, occupied capital amounting to RMB25, 391,600, the payment for commodities sold by the Company to Indonesia Konka Trade Co., Ltd.. The above capital belonged to operating occupation, which reflected in the item of accounts receivable. Because Indonesia Konka Trade Co., Ltd. shut down due to losses, the financial statements of Konka Trade Co., Ltd. were not consolidated this year and in 2002, the Company withdrew 100% provision for bad debts for the amount of the accounts receivable. 2. Ended Dec. 31, 2003, there existed no external guarantee of the Company. The independent directors believed, the current capital between the related parties and the Company was common with small amounts and accounted reasonably and steadily; the external of the Company was controlled well and operated normatively. 16 (XI) Other issues (1) Public notice on anti-dumping: American Department of Commerce made preliminary ruling on the anti-dumping case of color TVs on Nov. 25, 2003 that partial manufacturers of televisions in China dump their products to the American market, of which the Company was judged preliminarily as 27.94% anti-dumping tax rate, which impacted a certain influence on the Company’s export of color TVs in the future. (2) Public notice on price falling of products: In order to enhance the productive and sales scale of High Definition Televisions of Konka in a rapid way and occupy the much broader market through technical advantage, the Company adjusted the sales price of High Definition Televisions in partial types on Apr. 21, 2003. In order to enhance the productive and sales scale of color screen mobile phones of Konka in a rapid way and improve the Company’s competitive capability gradually, the Company adjusted the sales price of partial color screen mobile phones on Apr. 22, 2003. (3) The Company designated China Securities, Securities Times and Hong Kong Ta Kung Pao as the newspapers for information disclosure. VIII. REPORT OF THE SUPERVISORY COMMITTEE (I) Work of the Supervisory Committee In the report period, the 4th Supervisory Committee of the Company totally held 2 meetings, namely the 7th meeting and the 8th meeting of the 4th Supervisory Committee. The meetings and the contents of their resolutions are as follows: The 7th meeting of the 4th Supervisory Committee of the Company was held in the Office Building of OCT, Shenzhen, China in the afternoon of Apr. 17, 2003. Three supervisors should attend the meeting and actually all of them were present in accordance with relevant regulations of Company Law of PRC and Articles of Association of the Company. The meeting was presided by Chairman of the Supervisory Committee, Mr. Nie Guohua. The meeting unanimously approved the following resolutions through sufficient discussion. (1) 2002 Annual Report and its Summary of the Company; (2) Work Report of the Supervisory Committee in 2002. The 8th meeting of the 4th Supervisory Committee of the Company was held in the meeting room on 6F of Office Building of OCT Group, Shenzhen, China in the morning of Aug. 20, 2003. Three supervisors should attend the meeting and actually all of them were present. The meeting was presided by Chairman of the Supervisory Committee, Mr. Nie Guohua in accordance with relevant regulations of Company Law of PRC and Articles of Association of the Company. The meeting examined and approved Semiannual Report for 2003 and its Summary of the Company. The resolutions of the 7th meeting and the 8th meeting of the 4th Supervisory Committee were 17 published on China Securities, Securities Times, Shanghai Securities News and Ta Kung Pao, the newspapers for information disclosure designated by CSRC respectively dated Apr. 21, 2003 and Aug.22, 2003 and the designated internet: http://www.cninfo.com.cn. (II) Independent opinion of the Supervisory Committee 1. Operation according to laws In 2003, the Company operated in compliance with the relevant laws, legislations as stated in Company Law, Securities Law and Rules for Stock Listing as well as the Articles of Association. The directors and senior executives could implement various resolutions of the Shareholders’ General Meeting and the Board of Directors, worked diligently and responsibly and further improved internal control system. The directors and senior executives neither violated national laws, legislations or the Articles of Association when performing their duties, nor damaged the Company’s interests in the intended way. 2. Financial inspection The Supervisory Committee made serious and careful inspection on the financial system and financial status, and believed that 2003 financial report factually reflected the Company’s financial status and operation results and the standard unqualified auditors’ report issued by Shenzhen Dahua Tiancheng Certified Public Accountants was objective and fair. 3. Application of raised capital The Company has no raised capital in the latest three years. The actual invested project of the latest raised capital is in accordance with the promised invested project. 4. Purchases or sales of assets In the report year, the trade price of sale of equity of the Company was reasonable, no internal transaction was found, the interest of the minority shareholder was treated equally and there found no assets ran off. 5. Correlative transactions The Company cooperated and operated real estate item with OCT Real Estate Company and took back investment totaling RMB 200 million in the report period. It did not damage the interest of the listed company and there was not inside transaction. There were related transactions between the Company and the subsidiaries of the controlling shareholder, including payment of storage, properties management expense, water and electric expense, purchase of goods and so on. They belonged to fair transactions, were disposed as normal market price and did not damage the interest of the Company and other shareholders of the Company. IX. SIGNIFICANT EVENTS (I) Significant lawsuits and arbitrations On May 2, 2003, American Five Rivers Electronic Innovations Company, IBEW and IUE-CWA appealed to anti-dumping against the enterprises in the color-TV industry of China. 18 On Nov. 25, American Department of Commerce promulgated the result of the first judgement and the Company was primarily judged the anti-dumping rate of 27.94% and it has influence on the export of color-TV of the Company in some degree in the future. The Company published notice on China Securities, Securities Times, Shanghai Securities News and Ta Kung Pao dated Nov. 26, 2003. On Apr. 13, 2004, American Department of Commerce promulgated the final arbitration results on anti-dumping case of color TVs from China and the dumping margin of the Company was confirmed as 11.36%. The Company would actively conduct industrial non-damage deraignment and strive for fair and just results in the follow-up public hearings of American International Trade Committee and the final arbitration made on May 27, 2004. If American International Trade Committee still makes the qualitative judgment according to the judgment of American Department of Commerce, the Company would appeal to American Court of International Trade. (II) Significant purchase, merge and absorption The Company has no significant purchase, merge and absorption this year. (III) Material related transaction 1. The Company cooperated with Shenzhen OCT Real Estate Co., Ltd. (the controlling shareholder of the Company, OCT Group Company holds 45% equity of OCT Real Estate Co., Ltd.) to develop and operate the project of “Block D and Block E of OCT PORTOFINO• SWAN CASTLE”. According to the cooperation agreement, the Company has 60% proceeds right of this item. In 2002, the Company had totally put into capital of RMB 165 million for this item and the Company was distributed profit amounting to RMB 75,000,464.03 in 2002 and took back the investment amounting to RMB 65 million. The sale of this item this year is good and The Company withdrew all the rest investment amount of RMB100 million. In the report period, the lead group of the said project and directors in the both parties had no resolution on dividends distribution, thus the investment earnings was not confirmed yet. 2. The Company cooperated with Shenzhen OCT Real Estate Co., Ltd. to develop and operate the project of “the 3rd Period of Splendid Garden”. According to the cooperation agreement, the Company has 20% proceeds right of this item. The Company has totally put into capital of RMB 0.2 billion for this item. The item has been completed and started to sell but not settled yet. The Company took back the investment amounting to RMB 0.1 billion in 2002 and took back the rest investment amount of RMB 100 million in the year. The Board in the both parties of the said project had no resolution on dividends distribution, thus the investment earnings would be confirmed until cash distributed. In addition, in 2003, there were related transactions between the Company and the subsidiaries of the controlling shareholder (OCT Group Company), including payment of storage, properties management expense, water and electric expense, purchase of goods and so on. They belonged to fair transactions, were disposed as normal market price and did not damage the interest of the Company and other shareholders of the Company. Please refer to 19 the section of “(3) Current of associated companies” of “Note VI of Accounting Statements” of Financial Report for its detail. (IV) Significant contracts and implementation (1) In the report period, there was no significant custody, contract and lease of assets between the Company and other companies. (2) In the report period, the Company has no guarantee for external parties. (3) In the report period, the Company has not entrusted financing. (V) Commitments In the report year, the Company or the shareholders holding over 5% of total shares had never disclosed commitments in the designated newspapers or on the website. (VI) About Certified Public Accountants and remuneration As examined and approved by Annual Shareholders’ General Meeting 2002, the Company engaged Shenzhen Dahua Tiancheng Certified Public Accountants in charge of the audit of the Company of 2003. The Company paid the financial audit expense of Certified Public Accountants as follows: RMB 350,000 for domestic audit (A share); RMB 450,000 for overseas audit (B share). (VII) Other Significant Events 1. In the report period, the Company newly established two subsidiaries: (1) Dongguan Konka Molding and Plastic Co., Ltd. and (2) Anhui Konka Electric Appliances Co., Ltd. (Having actual controlling right), placed into the consolidated scope of financial statements: Names of Time of Registered Legal Registered Equity Investment Main companies establishment address representative capital held amount operations Dongguan Mould and Konka Molding Dongguan, RMB 10 RMB 10 July 2003 Wang Youlai 100% plastic and Plastic Co., Guangdong million million products Ltd. Salse of Anhui Konka electric Electric Chuzhou, RMB 10 RMB 3.50 April 2003 Wang Youlai 26.75% appliances Appliances Co., Anhui million million such as Ltd. refrigerators 2. In the report period, the Company and its directors and senior executives have not been punished by securities regulatory department. X. FINANCIAL REPORT (I) Report of the auditors We have audited the accompanying balance sheet of Konka Group Co., Ltd. as of December 31, 2003 and the related statements of income, cash flows and changes in equity for the year then ended. These financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about 20 whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the 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 financial statements present fairly, in all material respects, the financial position of the Group as of December 31, 2003 and the results of its operations and its cash flows for the year then ended, in accordance with International Financial Reporting Standards. K. C. Oh & Company Certified Public Accountants Hong Kong : April 16, 2004 21 (II) 2003 financial report was attached. XI. DOCUMENTS FOR REFERENCE (1) Accounting statements carried with the signatures and seals of legal representative, CFO and person in charge of accounting. (2) Originals of domestic and overseas auditor’s report carried with the seal of Certified Public Accountants, the signature and seal of certified public accountants. (3) Originals of all documents and manuscripts of public notices disclosed on the newspapers designated by CSRC in the report period. (4) Other relevant materials. Board of Directors of KONKA GROUP CO., LTD. Apr. 16, 2004 22 KONKA GROUP CO., LTD. For the period ended December 31, 2003 Financial Report (for B shares) Contents Pages Consolidated income statement 2 Consolidated balance sheet 3-4 Consolidated statement of changes in equity 5 Consolidated cash flow statement 6-7 Notes to the financial statements 8 - 29 Legal Representative: Ren Kelei Financial Controller: Yang Guobin Accountants in Charge: Yang Rong 1 Konka Group Co., Ltd. Consolidated income statement for the year ended December 31, 2003 2003 2002 Note RMB’000 RMB’000 Turnover 5 12,806,466 8,041,653 Cost of sales ( 10,924,570 ) ( 6,822,595 ) Gross profit 1,881,896 1,219,058 Other revenue 6 13,979 166,746 Distribution costs ( 1,442,897 ) ( 899,831 ) Administrative expenses ( 297,938 ) ( 392,789 ) Other operating expenses - ( 1,197 ) Operating profit 155,040 91,987 Finance costs ( 23,981 ) ( 34,620 ) Share of loss from associates ( 351 ) ( 428 ) Profit before taxation 7 130,708 56,939 Taxation 8 ( 15,935 ) ( 8,189 ) Profit before minority interests 114,773 48,750 Minority interests ( 10,374 ) ( 5,627 ) Profit attributable to shareholders 104,399 43,123 Accumulated loss as at beginning of year ( 610,169 ) ( 653,292 ) Accumulated loss before appropriation/reversal ( 505,770 ) ( 610,169 ) Appropriations/reversal Dividend payment waived 1,809 - Accumulated loss as at end of year ( 503,961 ) ( 610,169 ) Earnings per share - basic RMB0.173 RMB0.072 The calculation of the basic earnings per share is based on the current year’s profit of RMB104,399,000 (2002 - RMB43,123,000) attributable to the shareholders and on the existing number of 601,986,352 shares in issue during the year. 2 Konka Group Co., Ltd. Consolidated balance sheet as at December 31, 2003 2003 2002 Note RMB’000 RMB’000 Non-current assets Property, plant and equipment 9 1,400,005 1,383,137 Goodwill 10 1,311 1,585 Intangible assets 11 7,200 8,674 Interests in associates 12 39,216 53,993 Other investments 13 11,790 211,790 1,459,522 1,659,179 Current assets Inventories 14 3,170,081 2,578,796 Properties held for sale 15 4,172 4,172 Account receivables 16 333,217 277,156 Prepayments, deposits and other receivables 17 156,410 233,277 Note receivables 3,166,448 1,205,139 Short-term investments 18 1,243 - Cash and bank balances 1,331,894 1,044,899 8,163,465 5,343,439 Current liabilities Tax payable ( 9,719 ) ( 3,508 ) Account payables ( 1,232,711 ) ( 872,733 ) Other payables and accrued expenses ( 1,256,385 ) ( 826,732 ) Note payables ( 3,783,822 ) ( 1,903,760 ) Short-term bank loans 19 ( 28,045 ) ( 164,000 ) ( 6,310,682 ) ( 3,770,733 ) Net current assets 1,852,783 1,572,706 Total assets less current liabilities 3,312,305 3,231,885 (cont’d) 3 Konka Group Co., Ltd. Consolidated balance sheet as at December 31, 2003 (cont’d) 2003 2002 Note RMB’000 RMB’000 Total assets less current liabilities 3,312,305 3,231,885 Non-current liabilities Deferred income ( 16,487 ) ( 19,485 ) Finance lease obligations ( 1,875 ) - Other long-term liabilities ( 4,584 ) ( 24,283 ) ( 22,946 ) ( 43,768 ) Minority interests ( 237,966 ) ( 243,162 ) Net assets employed 3,051,393 2,944,955 Financed by : Share capital 20 601,986 601,986 Reserves 2,449,407 2,342,969 Shareholders’ equity 3,051,393 2,944,955 The financial statements on pages 2 to 29 were approved and authorized for issued by the board of directors on April 10, 2004 and are signed on its behalf by : Ren Kelei He Shilin Director Director 4 Konka Group Co., Ltd. Consolidated statement of changes in equity for the year ended December 31, 2 Reserves Capital Surplus Accumulated Dividend Share capital reserves reserves profit/(loss) reserve RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 As at January 1, 2002 601,986 1,814,313 1,133,044 ( 653,292 ) 11,579 ( Profit for the year of 2002 - - - 43,123 - Dividend paid - - - - ( 11,579 ) Difference arising from investment in subsidiaries - 4,477 - - - Adjustment on revaluation of property, plant and equipment - 1,662 - - - Exchange difference from translation of foreign operations - - - - - As at December 31, 2002 601,986 1,820,452 1,133,044 ( 610,169 ) - ( As at January 1, 2003 601,986 1,820,452 1,133,044 ( 610,169 ) - ( Profit for the year of 2003 - - - 104,399 - Dividend payment waived - - - 1,809 - Exchange difference from translation of foreign operations - - - - - As at December 31, 2003 601,986 1,820,452 1,133,044 ( 503,961 ) - ( According to the corporation law and relevant regulations of a joint stock limited company, the Company’s specified profit should be classified as cap revaluation of property, plant and equipment and other investments, etc. Capital reserves are normally used for issue of new shares, or for write-off revalued. Surplus reserves comprise statutory reserve, statutory public welfare fund and discretionary welfare fund. The Company is required to transfer an amount of not less than 10% of the profit after making up the accumulated loss to statutory reserve until it is up can be used to cover current year loss or for issue of new shares. The amount of statutory reserve to be utilized for issue of new shares should not exceed below 25% of the registered share capital after the issue of new shares. The Company is also required to transfer 5% of the profit after making up the acc public welfare fund shall only be applied for the collective welfare of the Company’s employees. Discretionary welfare fund is applied in accordance general meeting and can be used to make up the accumulated loss or for issue of new shares. 5 Konka Group Co., Ltd. Consolidated cash flow statement for the year ended December 31, 2003 2003 2002 RMB’000 RMB’000 Cash flow from operating activities Operating profit before taxation 130,708 56,939 Adjustment items : Interest income ( 10,922 ) ( 6,371 ) Dividend income ( 72 ) - Income from government grant ( 7,215 ) ( 5,273 ) Interest expenses 5,776 22,165 Depreciation 126,744 173,163 Impairment loss provision on property, plant and equipment - 529 Loss on disposal of property, plant and equipment 2,836 5,302 Amortization of goodwill 321 317 Amortization of intangible assets 2,514 2,672 Profit on disposal of subsidiaries - ( 20,360 ) Impairment loss provision on unconsolidated subsidiaries - 136,567 Impairment loss provision on associates 5,594 5,594 Share of results from associates 351 428 Profit on disposal of other investments - ( 202 ) Provision for inventory obsolescence 22,636 18,821 Provision/(reversal) for doubtful debts on account receivables ( 8,971 ) 46,041 Reversal for doubtful debts on other receivables ( 343 ) ( 1,739 ) Net operating cash inflow before movements in working capital 269,957 434,593 Exchange reserve movement 230 1,332 (Increase)/decrease in inventories ( 613,921 ) 193,227 Increase in properties held for sale - ( 228 ) (Increase)/decrease in account receivables ( 47,090 ) 151,455 Decrease in prepayments, deposits and other receivables 77,210 56,769 Increase in note receivables ( 1,961,309 ) ( 441,605 ) Increase in account payables 359,978 73,389 Increase in other payables and accrued expenses 431,462 156,782 Increase in note payables 1,880,062 356,612 Cash generated from operations 396,579 982,326 Interest paid ( 5,776 ) ( 22,165 ) Corporate and profits tax paid ( 9,724 ) ( 2,993 ) Net cash inflow from operating activities 381,079 957,168 (to be cont’d) 6 Konka Group Co., Ltd. Consolidated cash flow statement for the year ended December 31, 2003 (cont’d) 2003 2002 Note RMB’000 RMB’000 Net cash inflow from operating activities 381,079 957,168 Investing activities Interest received 10,922 6,371 Dividend received 72 - Purchases of property, plant and equipment ( 167,193 ) ( 174,484 ) Proceeds from disposal of property, plant and equipment 23,245 121,882 Purchases of intangible assets ( 1,040 ) ( 4,189 ) Net cash inflow from disposal of subsidiaries - 114,456 Impairment loss provision on unconsolidated subsidiaries - ( 136,567 ) Additional investment in associates ( 2,400 ) ( 14,889 ) Receipts from/(repayments to) associates 11,232 ( 26,890 ) Acquisition of other investments - ( 265,000 ) Proceeds from disposal/return of other investments 200,000 167,202 Increase in short-term investments ( 1,243 ) - Net cash inflow/(outflow) from investing activities 73,595 ( 212,108 ) Financing activities Dividend paid - ( 11,579 ) Government grant received 6 4,217 14,275 Finance lease obligations repaid 22 ( 625 ) - Other long-term liabilities repaid 22 ( 19,699 ) ( 9,807 ) Bank loans repaid 22 ( 135,955 ) ( 683,127 ) Decrease in minority interests 22 ( 15,617 ) ( 4,780 ) Net cash outflow from financing activities ( 167,679 ) ( 695,018 ) Increase in cash and cash equivalents 286,995 50,042 Cash and cash equivalents as at beginning of year 1,044,899 994,857 Cash and cash equivalents as at end of year 1,331,894 1,044,899 Analysis of cash and cash equivalents Cash and bank balances 1,331,894 1,044,899 -7- Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 1. General information Konka Group Co., Ltd. (“the Company”), formerly known as Shenzhen Konka Electronic Group Co., Ltd., obtained approval from Shenzhen Municipal People’s Government to reorganize into a limited stock company in August 1991. On the approval of the People’s Bank of China, Shenzhen Branch, the Company issued “A” shares and “B” shares, which have then been listed on the Shenzhen Stock Exchange. On August 29, 1995, the Company changed its name to Konka Group Co., Ltd. The principal activities of the Company and its subsidiaries (“the Group”) include the manufacture and sale of colour television, mobile phones, stereo recorders, hi-fi component systems, facsimile machines and telecommunication products, property development and investment holding. 2. Basis of preparation of the financial statements The consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (“IFRS”) issued by the International Federation of Accountants. These accounting standards differ from those used in the preparation of the PRC statutory financial statements, which are prepared in accordance with the PRC Accounting Standards. To conform to IFRS, adjustments have been made to the PRC statutory financial statements. Details of the impact of such adjustments on the net asset value as at December 31, 2003 and on the operating results for the year then ended are included in note 26 to the financial statements. In addition, apart from certain property, plant and equipment that are recorded at valuation basis and short-term investments that are recorded at the lower of cost and market value/net realizable value, the financial statements have been prepared under the historical cost convention. 3. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Group made up to December 31 each year. Except for those subsidiaries not consolidated for the reasons stated below, all significant inter-company transactions and balances within the Group have been eliminated on consolidation. (a) Subsidiaries A subsidiary is a company in which the Company holds, directly or indirectly, more than 50% of the equity interest as a long-term investment and/or has the power to cast the majority of votes at meetings of the board of directors/management committee. -8- Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 3. Basis of consolidation (cont’d) (a) Subsidiaries (cont’d) As at December 31, 2003, the Company held the following subsidiaries : Place of Percentage of Name of the incorporation/ Registration interest held Principal company registration capital Direct Indirect activities RMB’000 % % Dongguan Konka PRC RMB200,000 100 - Production of Electronic Co., Ltd. TV sets, hi-fi, etc Konka Pacific Pty. Australia AUD1,000 100 - Sale of Ltd. * electronic products Konka (U.S.A.) Ltd. * U.S.A. USD3,000 100 - Research and development Hong Kong Konka Hong Kong HKD500 100 - Trading of Limited electronic products Anhui Konka PRC RMB140,000 65 - Manufacture Electronic and sale of Co., Ltd. TV sets Mudanjiang Konka PRC RMB60,000 60 - Manufacture Industrial and sale of Co., Ltd. TV sets Chongqing Konka PRC RMB45,000 60 - Manufacture Electronic Co., Ltd. and sale of TV sets Shenzhen Konka PRC RMB15,000 60 - Production of Visual Information mould and System Engineering sub- Co., Ltd. contracting Shenzhen Konka PRC RMB8,300 51 - Manufacture Electrical Co., Ltd. and sale of electronic products Shenzhen Konka PRC RMB120,000 75 25 Manufacture Telecommunications and sale of Technology Co., Ltd. mobile phones Shenzhen Shushida PRC RMB42,000 75 25 Manufacture Electronic Co., Ltd. and sale of electronic products Shenzhen Konka PRC RMB30,000 75 25 Manufacture Communication and sale of Network Co., Ltd. digital network products Chongqing Qingjia PRC RMB15,000 50 10 Manufacture Electronic Co., Ltd. and sale of electronic -9- parts Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 3. Basis of consolidation (cont’d) (a) Subsidiaries (cont’d) Place of Percentage of Name of the incorporation/ Registration interest held Principal company registration capital Direct Indirect activities RMB’000 % % Shenzhen Konka PRC RMB14,500 49 51 Production of Precision Mould mould Co., Ltd. Shenzhen Konka PRC RMB9,500 49 51 Production of Injected Plastic plastic Manufactory Co., Ltd. products Shanxi Konka PRC RMB69,500 45 15 Manufacture Electronic and sale of Co., Ltd. TV sets Dongguan Konka PRC RMB10,000 - 100 Production of Packaging Co., Ltd. plastic products Hong Din International Hong Kong HKD500 - 100 International Trade Limited trade Hong Din Investment Hong Kong HKD500 - 100 Investment Development holding Limited Indonesia Konka Indonesia USD500 - 100 Trading Trading Limited * Konka Electronics India USD1,160 - 70 Production of (India) Co., Ltd. * colour TV sets Changshu Konka PRC RMB24,650 - 60 Manufacture Electronic Co., Ltd. and sale of electronics products Boluo Konka Printed PRC RMB40,000 - 51 Manufacture Co., Ltd. and sale of electronic products Anhui Konka PRC RMB10,000 - 35% Manufacture Electrical and sale of Co., Ltd. ** electrical appliances * The results and the financial position of these companies are not required to be consolidated because they have ceased the business. ** The Company has effective control over this company. - 10 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 3. Basis of consolidation (cont’d) (b) Associates An associate is a company in which the Company holds, directly or indirectly, not less than 20% and not more than 50% equity interest as a long-term investment and is able to exercise significant influence on this company. Investments in associates are accounted for by equity method. Interests in associates are represented by the Group’s share of their net assets, reduced by the impairment loss provision as considered necessary by the directors. The associates held by the Company as at December 31, 2003 are shown in note 12 to the financial statements. 4. Significant accounting policies (a) Property, plant and equipment Property, plant and equipment other than construction-in-progress is stated at cost less depreciation and amortization. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its present working condition and location for its intended use. Expenditure incurred after the assets have been put into operation, such as repairs and maintenance and overhaul costs, are charged to the consolidated income statement in the period in which they are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of the assets, the expenditures are capitalized as an additional cost of the assets. Depreciation of property, plant and equipment is provided using the straight-line method over the estimated useful lives, taking into account the estimated residual value of 10% of the cost or revalued amount, as follows : Land use rights Over the lease terms Buildings 2.25% Leasehold improvements 20% Machinery and equipment 9% Electronic equipment 18% Motor vehicles 18% The valuation of the property, plant and equipment includes the costs of buildings, machinery and furniture, and also the interest expenses and exchange differences arising from bank loans that finance the construction. - 11 - When assets are sold or retired, their cost and accumulated depreciation are eliminated from the accounts and any profit or loss resulting from their disposal is included in the consolidated income statement. - 12 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 4. Significant accounting policies (cont’d) (a) Property, plant and equipment (cont’d) Where the recoverable amount of an asset has declined below its carrying amount, the carrying amount is reduced to reflect the decline in value, which is the difference between the recoverable amount and the carrying amount. (b) Construction-in-progress Construction-in-progress is stated at cost, which includes all construction costs and other direct costs (including borrowing costs capitalized), attributable to such projects. The latter include factories, office buildings and facilities. Construction-in-progress is not depreciated until completion. Costs on completed construction works are transferred to the relevant category of property, plant and equipment when completed. (c) Goodwill Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary, associate or jointly controlled entity at the date of acquisition. Goodwill is recognized as an asset and is amortized on a straight-line basis over its estimated useful life, which is on average 10 years. On disposal of a subsidiary, associate or jointly controlled entity, the attributable amount of unamortized goodwill is included in the determination of the profit or loss on disposal. (d) Intangible assets The cost of trademarks is amortized on a straight-line basis over its profit-generating period. Technical know-how is measured initially at cost and is amortized on a straight-line basis over its estimated useful life, which is on average 5 years. (e) Investments Long-term investments are stated at cost less impairment loss that is other than temporary whilst short-term investments are stated at the lower of cost and market value or net realizable value. - 13 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 4. Significant accounting policies (cont’d) (f) Inventories Inventories are valued at the lower of cost and net realizable value. Cost comprises direct materials, direct labor cost and an appropriate portion of overheads. Cost is calculated using the weighted average method. Net realizable value is calculated as the estimated selling price less all further costs of production and the related costs of marketing, selling and distribution. (g) Properties held for sale Properties held for sale are stated at the lower of cost and net realizable value. Cost is determined by an apportionment of the total land and building costs attributable to unsold properties. Net realizable value is estimated by the directors based on prevailing market prices, on an individual property basis. (h) Deferred income Long-term government grants towards research and technical know-how development are recognized as income on a straight-line basis over the period of the grant. (i) Cash equivalents Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. (j) Revenue recognition Revenue is recognized when it is probable that the economic benefits associated with the transactions will flow to the Group and the stage of completion of the transactions can be measured reliably : i) Revenue from sales of goods is recognized when the risks and rewards of ownership of the goods are substantially transferred to customers. ii) For properties held for sale, revenue is recognized on the execution of an unconditional binding sales agreement. iii) Interest income is accrued on a time proportion basis by reference to the principal outstanding and at the interest rate applicable. - 14 - iv) Dividend income from investments is recognized when the shareholders’ right to receive payments has been established. - 15 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 4. Significant accounting policies (cont’d) (k) Finance leases Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the Group. Assets leased under finance leases are capitalized at their fair value at the date of acquisition. The corresponding leasing commitments are shown as obligations to the Group. The finance costs, which represent the difference between the total leasing commitments and the fair value of the assets acquired, are charged to the consolidated income statement on an actual basis over the period of the respective leases. (l) Foreign currency conversion The financial statements are expressed in Renminbi. Transactions in foreign currencies are translated at the rates prevailing at the dates of the transactions. Monetary assets and liabilities in foreign currencies are translated at the rates prevailing at the balance sheet date. Exchange differences arising from translation of foreign currency borrowings for the purpose of financing the construction of office buildings, plant and machinery and other major assets, for periods prior to their being in a condition to enter into service, are included in the cost of the assets concerned. Other exchange differences are dealt with in the consolidated income statement. On consolidation, the financial statements of overseas subsidiaries denominated in foreign currencies are translated into Renminbi at the rates of exchange prevailing as at the balance sheet date. The resulting translation differences are included in the exchange reserve. (m) Impairment loss As at each balance sheet date, the Group reviews the carrying amounts of its assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. Any impairment loss arising is recognized as an expense immediately. - 16 - A reversal of impairment loss is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognized in prior years. Reversals of impairment loss are credited to the income statement in the year in which the reversals are recognized. - 17 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 4. Significant accounting policies (cont’d) (n) Provisions Provisions are recognized when the Group has a present legal or constructive obligation subsequent to a past event, which will result in a probable outflow of economic benefits that can be reasonably estimated. (o) Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years, and it further excludes income statement items that are never taxable or deductible. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized. Such assets and liabilities are not recognized if the temporary difference arises from goodwill (or negative goodwill) or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognized for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed as at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realized. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. - 18 - Tax asset can be offset against tax liability only if the Group has a legally enforceable right to make or receive a single net payment and the Group intends to make or receive such a net payment or to recover the asset and settle the liability simultaneously. - 19 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 5. Business and geographical segments 2003 Colour TV Mobile phone Others Elimination Consolidated Colour TV Mobile phon RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’00 Income statement External sales 8,649,116 3,855,715 301,635 - 12,806,466 6,046,339 1,695,952 Inter-segment sales 2,210,249 24,060 189,533 ( 2,423,842 ) - 1,780,935 - 10,859,365 3,879,775 491,168 ( 2,423,842 ) 12,806,466 7,827,274 1,695,952 Operating profit/(loss) 208,803 53,077 ( 8,984 ) ( 97,856 ) 155,040 136,651 55,230 Finance costs ( 23,981 ) Share of loss from associates ( 351 ) ( 351 ) ( 428 ) Taxation ( 15,935 ) Minority interests ( 10,374 ) Profit for the year 104,399 Balance sheet Assets Segment assets 8,375,210 820,167 371,188 - 9,566,565 5,749,848 638,705 Interests in associates 39,216 - - - 39,216 53,993 - Unallocated assets 17,206 9,622,987 Liabilities Segment liabilities 5,431,026 680,873 187,220 - 6,299,119 3,012,957 545,083 Unallocated liabilities 34,509 6,333,628 - 20 - - 21 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 5. Business and geographical segments (cont’d) The Group’s operations are located in the PRC and Hong Kong. The following table provides an analysis of the Group’s turnover by geographical market, irrespective of the origin of the goods : 2003 2002 RMB’000 RMB’000 PRC 12,104,864 7,630,353 Hong Kong 701,602 411,300 12,806,466 8,041,653 The following is an analysis of the carrying amount of segment assets and capital additions, analyzed by geographical area in which the assets are located : Carrying amount of segment assets Capital additions 2003 2002 2003 2002 RMB’000 RMB’000 RMB’000 RMB’000 PRC 9,406,768 6,455,371 170,648 342,367 Hong Kong 216,219 547,247 85 6,917 9,622,987 7,002,618 170,733 349,284 6. Other revenue 2003 2002 RMB’000 RMB’000 Net investment profit - 20,150 Dividend income 72 - Income from government grant (*) 7,215 5,273 Income from raw material less cost 1,518 6,589 Income from trademark and mould less cost - 881 Transfer from VAT of local-product-local-sale - 69,597 Profit from joint venture on property development site at Swan Castle - 75,000 Other non-operating net incomes/(expenses) 5,174 ( 10,744 ) 13,979 166,746 (*) The Group received government grant for research and technical know-how development that would be recognized as income on a straight-line basis over the period of the grant. During the year, an amount of RMB2,998,000 was recognized. Other short-term subsidies with a total sum of RMB4,217,000 were also recognized as income for the year. - 22 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 7. Profit before taxation 2003 2002 RMB’000 RMB’000 Profit before taxation has been arrived at : After charging : Auditors’ remuneration 800 800 Directors’ emoluments - 320 Depreciation - owned assets 126,669 173,163 - assets under finance leases 75 - Impairment loss provision on property, plant and equipment - 529 Loss on disposal of property, plant and equipment 2,836 5,302 Amortization of goodwill 321 317 Amortization of intangible assets 2,514 2,672 Impairment loss provision on unconsolidated subsidiaries - 136,567 Impairment loss provision on associates 5,594 5,594 Provision for inventory obsolescence 22,636 18,821 Provision for doubtful debts - 44,302 Interest expenses 5,776 22,165 Research and development expenditures 43,921 - Rentals of land and buildings 31,810 22,463 Staff costs 256,325 375,792 And after crediting : Interest income 10,922 6,371 Reversal for doubtful debts 9,314 - Profit on disposal of subsidiaries - 20,360 Profit on disposal of other investments - 202 - 23 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 8. Taxation 2003 2002 RMB’000 RMB’000 PRC corporate tax 14,162 7,454 Hong Kong profits tax 1,773 735 15,935 8,189 PRC corporate tax is determined by reference to the profit reported in the audited financial statements under PRC Accounting Standards, and after adjustments for income and expense items that are not assessable or deductible for income tax purposes. It is provided at the rates of 15% (2002 - 15%) on the estimated assessable income for companies established in Shenzhen and 33% (2002 - 33%) for other PRC companies. Hong Kong profits tax is calculated at 17.5% (2002 - 16%) of the estimated assessable profits for the year. The reconciliation between tax expense and accounting profit at applicable tax rates is as follows : 2003 2002 RMB’000 RMB’000 Profit before taxation 130,708 56,939 Tax at the applicable income tax rate of 15% (2002 - 15%) 19,606 8,541 Tax effect of : - disallowable expenses 5,567 5,538 - non-taxable revenue ( 3,152 ) ( 836 ) - different tax rates in different regions ( 3,447 ) ( 2,285 ) - recognized tax losses ( 2,639 ) ( 2,769 ) Actual tax expense 15,935 8,189 No deferred tax asset is recognized as it is uncertain whether taxable profit will be available against which deductible temporary differences can be utilized in the near future. As at December 31, 2003, the net unprovided deferred tax asset was RMB82,723,000 (2002 - RMB101,644,000). - 24 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 9. Property, plant and equipment Land Leasehold Machinery Electronic use rights Buildings improvements & equipment equipment RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Cost/valuation As at January 1, 2003 31,326 788,092 21,393 733,777 297,475 Additions - 4,516 837 19,962 104,542 Disposals - ( 13,882 ) - ( 2,189 ) ( 5,148 ) Re-classifications - 37,194 - ( 134,163 ) 134,163 As at December 31, 2003 31,326 815,920 22,230 617,387 531,032 Accumulated depreciation As at January 1, 2003 ( 2,010 ) ( 110,680 ) ( 17,807 ) ( 312,856 ) ( 204,405 ) Additions ( 367 ) ( 22,995 ) ( 1,458 ) ( 52,816 ) ( 38,074 ) Disposals - 4,706 - 5,379 2,262 Re-classifications - - - 68,897 ( 68,897 ) As at December 31, 2003 ( 2,377 ) ( 128,969 ) ( 19,265 ) ( 291,396 ) ( 309,114 ) Net book value As at December 31, 2003 28,949 686,951 2,965 325,991 221,918 As at December 31, 2002 29,316 677,412 3,586 420,921 93,070 As at December 31, 2003, the net book value of electronic equipment includes an amount of RMB2,425,000 in respect of ass The Group’s certain property, plant and equipment with a net book value of RMB197,357,000 have been pledged to secure g In preparation for the reorganization of the Company into a Sino-foreign joint stock limited company, the Company’s proper revalued on an open market value basis by Zhonghua (Shenzhen) Certified Public Accountants, a registered valuer in Shenzh the revaluation was capitalized as share capital. - 25 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 10. Goodwill RMB’000 RMB’000 Cost As at January 1, 2003 3,170 Additions 47 As at December 31, 2003 3,217 Amortization As at January 1, 2003 ( 1,585 ) Charged for the year ( 321 ) As at December 31, 2003 ( 1,906 ) Net book value As at December 31, 2003 1,311 As at December 31, 2002 1,585 11. Intangible assets Technical Trademarks know-how Total RMB’000 RMB’000 RMB’000 Cost As at January 1, 2003 1,468 15,898 17,366 Additions 66 974 1,040 As at December 31, 2003 1,534 16,872 18,406 Amortization As at January 1, 2003 ( 429 ) ( 8,263 ) ( 8,692 ) Charged for the year ( 209 ) ( 2,305 ) ( 2,514 ) As at December 31, 2003 ( 638 ) ( 10,568 ) ( 11,206 ) Net book value As at December 31, 2003 896 6,304 7,200 As at December 31, 2002 1,039 7,635 8,674 - 26 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 12. Interests in associates 2003 2002 RMB’000 RMB’000 Share of net assets 63,462 61,413 Impairment loss provision ( 11,188 ) ( 5,594 ) Amounts due from associates 1,330 1,530 Amounts due to associates ( 14,388 ) ( 3,356 ) 39,216 53,993 As at December 31, 2003, the Group held the associates as follows : Effective Place of equity held Company name registration by the Company Principal activities Directly Indirectly Huadoushi Longfeng Properties Macau 50% - Investment holding and Development Co., Ltd. * property investment Shenzhen Jiaxuntong Technology PRC 40% - Mobile phone development Co., Ltd. Shenzhen OCT International PRC 25% - TV program production & Media Co., Ltd. distribution Shenzhen Shangyongtong Investment PRC 20% - Investment in industrial & Development Co., Ltd. field, etc. Shenzhen Dekon Electronics Co., Ltd. PRC - 30% Manufacture & sale of electronic products Shenzhen Konka Energy Technology Co., Ltd. PRC - 30% Manufacture & sale of electronic parts Chongqing Jingkang Plastics Material PRC - 25% Production of moulds Co., Ltd. * This company was jointly invested by the Group and other four companies for developing a property development project, namely “Huadoushi Furong Village”. The project had not yet been commenced because the other four companies requested to withdraw their investment from this project and the local government had exchanged the land of this company’s project. During the year, the Group made a further 20% provision for impairment loss on the investment cost of this company in an amount of RMB5,594,000. - 27 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 13. Other investments 2003 2002 RMB’000 RMB’000 Unconsolidated subsidiaries, balances due 136,567 136,567 Impairment loss provision ( 136,567 ) ( 136,567 ) - - Unlisted shares, at cost 3,385 3,385 Impairment loss provision ( 1,400 ) ( 1,400 ) 1,985 1,985 Listed share, at cost * 9,805 9,805 Joint venture project - 200,000 11,790 211,790 * The market value of these listed shares is not generally available. 14. Inventories 2003 2002 RMB’000 RMB’000 Raw materials 1,422,663 1,124,186 Work-in-progress 18,983 24,540 Finished goods 1,869,024 1,548,023 Provision for inventory obsolescence ( 140,589 ) ( 117,953 ) 3,170,081 2,578,796 15. Properties held for sale 2003 2002 RMB’000 RMB’000 Cost b/f 4,172 3,944 Additions - 228 Cost c/f 4,172 4,172 - 28 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 16. Account receivables 2003 2002 RMB’000 RMB’000 Amount receivables 434,853 387,763 Provision for doubtful debts ( 101,636 ) ( 110,607 ) 333,217 277,156 As at December 31, 2003, the aging of amount receivables is analyzed as follows : 2003 2002 RMB’000 RMB’000 Within one year 219,398 111,626 Over one year but within two years 23,441 91,007 Over two years but within three years 60,474 64,742 Over three years 131,540 120,388 434,853 387,763 17. Prepayments, deposits and other receivables 2003 2002 RMB’000 RMB’000 Advance payments 46,540 76,338 Prepayments 32,407 25,000 Other receivables 84,024 138,843 162,971 240,181 Provision for doubtful debts ( 6,561 ) ( 6,904 ) 156,410 233,277 18. Short-term investments Short-term investments are stated at the lower of cost and market value as at balance sheet date by reference to the relevant stock exchange market. - 29 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 19. Short-term bank loans 2003 2002 RMB’000 RMB’000 Bank loans, unsecured 4,500 105,000 Bank loans, secured 23,545 27,000 Short-term portion of long-term bank loans - 32,000 28,045 164,000 20. Share capital 2003 2002 RMB’000 RMB’000 Registered, issued and paid-up “A” shares of RMB1 each 399,148 399,148 “B” shares of RMB1 each 202,838 202,838 601,986 601,986 “A” shares, listed and tradable 224,199 224,199 “B” shares, listed and tradable 202,837 202,837 427,036 427,036 Listed but temporarily not tradable 174,950 174,950 601,986 601,986 The “A” and “B” shares carry equal rights with respect to the distribution of the Company’s assets and profits, and rank pari passu in all other respects. The “A” shares are held by PRC investors with settlement in Renminbi, whereas “B” shares are held by both PRC investors and foreign investors, and are settled in Hong Kong dollars. . - 30 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 22. Disposal of subsidiaries 2003 2002 RMB’000 RMB’000 Property, plant and equipment - 72,371 Other investments - 21,596 Inventories - 35,088 Account receivables - 53,888 Prepayments, deposits and other receivables - 16,379 Note receivables - 5,991 Cash and bank balances - 25,598 Account payables - ( 19,628 ) Other payables and accrued expenses - ( 32,737 ) Note payables - ( 32,210 ) Short-term bank loans - ( 24,000 ) - 122,336 Attributable goodwill - 15,533 Minority interests - ( 18,175 ) Profit on disposal of subsidiaries - 20,360 Satisfied by cash - 140,054 23. Analysis of financing Finance Other lease long-term Minority obligations liabilities Bank loans interests RMB’000 RMB’000 RMB’000 RMB’000 Balance as at January 1, 2003 - 24,283 164,000 243,162 Inception of finance leases 2,500 - - - Net cash outflows from financing ( 625 ) ( 19,699 ) ( 135,955 ) - Decrease in minority interests - - - ( 1,650 ) Dividend paid to minority shareholders - - - ( 13,967 ) Goodwill from increase in equity interests of a subsidiary - - - 47 Share of results of minority interests - - - 10,374 Balance as at December 31, 2003 1,875 4,584 28,045 237,966 - 31 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 24. Commitments As at December 31, 2003, the Group did not have any material commitments under non-cancellable operating leases and capital expenditures as at December 31, 2003. 24. Contingent liabilities At December 31, 2003, the Group did not have any significant contingent liabilities. 25. Related party transactions The Group had certain material transactions with related parties with details as follows : 2003 2002 RMB’000 RMB’000 Overseas Chinese Town Guarantee fee paid - 6,976 Holdings Co. Operating lease paid 357 357 Utilities and building management fee paid 14 6,180 Warehouse charge paid - 1,380 Guarantee by this company - 100,000 Shenzhen OCT Machinery Purchase of Industry Co., Ltd. merchandises - 53 Overseas Chinese Town (HK) Purchase of Co., Ltd. merchandises - 30,937 Proceeds of disposal of subsidiaries - 136,925 Shenzhen Dekon Electronics Co., Purchase of Ltd. merchandises 56,706 31,622 Shanghai Huali Packaging Co., Ltd. Purchase of merchandises 51,904 38,208 Shenzhen Huali Packaging Co., Ltd. Purchase of merchandises 30,680 26,087 - 32 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 26. Impact on results attributable to shareholders and net asset value as reported by the PRC Certified Public Accountants Profit attributable Net to shareholders asset value RMB’000 RMB’000 As reported by PRC Certified Public Accountants 101,071 3,053,519 Adjustments to conform to IFRS : Prior year adjustment on capital reserves - ( 6,978 ) Prior year adjustment on surplus reserves - 17,909 Accumulated losses of subsidiaries shared by minority interests - 3,430 Government grant transfer from capital reserves as deferred income - ( 19,485 ) Government grant recognized as income 2,998 2,998 Account payables waived by subsidiaries’ creditors 330 - As restated in conformity with IFRS 104,399 3,051,393 27. Financial instruments Financial assets of the Group include cash and bank balances, short-term investments, note receivables, account receivables, prepayments, deposits and other receivables. Financial liabilities include bank loans, note payables, account payables, other payables, accrued expenses, deferred income and other long-term liabilities. (a) Credit risk Cash and bank balances : Substantial amounts of the Group’s cash balances are deposited with the Bank of China, China Merchants Bank, Shenzhen Development Bank, Industrial and Commercial Bank of China, Construction Bank of China and Agricultural Bank of China. Account receivables : The Group does not have a significant exposure to any individual customer or counterpart. The major concentrations of credit risk arise from exposures to a substantial number of account receivables that are mainly located in the PRC. - 33 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2003 (cont’d) 27. Financial instruments (cont’d) (b) Fair value The fair value of financial assets and financial liabilities is not materially different from their carrying amount. The carrying value of short-term bank loans and other long-term liabilities is estimated to approximate its fair value based on the borrowing terms and rates of similar loans. Fair value estimates are made at a specific point in time and based on relevant market information and information about the financial instruments. These estimates are subjective in nature and involve uncertainties on matters of significant judgement, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. 28. Language The translated English version of financial statements is for reference only. Should any disagreement arise, the Chinese version shall prevail. - 34 -