瓦轴B(200706)瓦轴Ｂ2004年年度报告（英文版）

Wafangdian Bearing Company Limited 2004 Annual Report (based on IAS) (Report period：Jan. 1st ,2004－Dec. 31st, 2004) Chairman（Signature）： April 22, 2005 Important Notes The Board of Directors and directors of the Company hereby guarantee that there is no false record, false statement of misleading data, major omission in this report, and undertake the individual and associated responsibilities for the truth, accuracy and completeness of the contents in this report. Director Wang Zhongmin was absent from the meeting and authorized director Su Shaoli to attend the meeting, independent director Wu Chunyou 、Li Yanxi was absent from the meeting and together authorized independent director Zhang Li to attend the meeting. Chairman Mr. Wang Lushun, General manager Mr. Shao Yang and General Accountant Mr. Zhang Xinghai declare: guarantee the truth, completeness of the financial report in the annual report. The report is made in Chinese and English; The Chinese version is the standard if there is difference between Chinese version and English version. 1 Catalog Chapter One. Introduction to basic situation of the company 3 Chapter Two. Abstract of accounting data and business data 4 Chapter Three. Information on equity changes and shareholders 5 Chapter Four. Information on Directors, Supervisors, top management and employees 9 Chapter Five. Governing and managing structure of the Company 12 Chapter Six. Introduction to the shareholders’ meeting 13 Chapter Seven. Work report of the Board of Directors 14 Chapter Eight. Work report of the Supervisory Committee 26 Chapter Nine. Important events 27 Chapter Ten. Financial statements 31 Chapter Eleven. List of reference documents 66 2 2004 Annual Report of Wafangdian Bearing Company Limited (Based on IAS) Chapter One. Introduction to basic situation of the Company 1. Chinese name of the Company: 瓦房店轴承股份有限公司 Abbreviation of Chinese name: 瓦轴股份公司 English name of the Company: Wafangdian Bearing Company Limited Abbreviation of English name: WBC 2. Legal representative of the Company: Wang Lushun 3. Secretary of the Board of Directors of the Company: Zhang Xinghai Authorized Stock and Security Affairs Representative: Su Shaoli Correspondence address: No. 1 Beigongji Street, Wafangdian City, Liaoning Province, China. Consulting telephone: 0411-85509888 ext. 3373 Fax: 0411-85500794 E-mail: zwz214＠mail.dlptt.ln.cn 4. Registered address: No. 1 Beigongji Street, Wafangdian City, Liaoning Province, China Office address of the Company: No. 1 Beigongji Street, Wafangdian City, Liaoning Province, China Post code: 116300 International net address: http//www.zwz-bearing.com E-mail address: zwz214@mail.dlptt.ln.cn 5. The Company chose Securities Times, Hong Kong Commercial Newspaper, and Takung Pao for disclosure of information of the Company International net address for disclosure: http//www.cninfo.com.cn Preparation and liaison office of this report: Investment and Securities Department of the Company 6. Listing location of the Company’s stock:: Shenzhen Stock Exchange Abbreviated name of the stock: Wazhou B Stock code: 200706 7. Other relative information 1). The originally registered date of the company was March 20, 1997 The originally registered location of the company was: No. 1, Section 1, Beigongji Street, Wafangdian City, Liaoning Province, China 2). Business license registration No. of the entity: 大工商企法字 24239971-2 3).Tax registration No. of the company: 国税大字 2102812242399712 4). Certified public accountants appointed by the company: Shenzhen Pan-China Schinda Certified Public Accountants: Floor 16, Security Towel, No. 5020, Binhe Road, Shenzhen Hong Kong Ho and Ho & Certified Public Accountants: Room 303-4 of the third floor and the 25 floor of Lianfa Business Center, No. 2-12, east of Huanghou Street, Hongkong 3 Chapter Two. Abstract of accounting data and business data 1. Main economic indicators of WBC in the report year Unit: thousand Yuan Item Amount (RMB’ Yuan) Total assets 2,206,125 Shareholders’ equity (excluding minority interest) 1,069,199 Sales income 1,564,534 Profit after tax 36,902 Net profit 36,694 Gains per share 0.111 Net cash inflow from operating activities 101,364 Increase of cash and cash equivalents -54,091 Note: The impact of IAS and other adjustments on the PRC statutory financial statements is as follows: Note 2004 2003 RMB’000 RMB’000 Profit attributable to shareholders under the PRC Accounting Rules and Regulations 34,851 28,130 Adjustments: -Gain on debt restructuring （i） 1,215 969 -Waive of payable （ii） 408 2,369 -Unrealized profit from transactions with associates （iii） 220 2,314 -Government grant - 1,980 -Others - 15 1,843 7,647 Profit attributable to shareholders under IFRS 36,694 35,777 2. Main accounting data and financial indicators for the previous three years up to the report period: Unit: thousand Yuan Items Year 2004 Year 2003 Year 2002 Sales income 1,564,534 1,246,487 1,090,571 Net profit 36,694 35,777 17,141 Total assets 2,206,125 2,107,194 2,042,605 Shareholders’ equity (excluding minority interest) 1,069,199 1,042,405 1,016,528 Gain per share 0.11 元 0.11 Yuan 0.05 Yuan Weighted gain per share 0.11 元 0.11 Yuan 0.05 Yuan 4 Net assets per share 3.24 元 3.16 Yuan 3.08 Yuan Net cash inflow from operating activities per share 0.31 元 0.19 元 0.26 元 Return ratio of net assets % 3.43 3.43 1.69 Weighted return ratio of net assets % 3.48 3.48 1.73 3. Attachment table to the profit composition The attachment table to the 2002 annual profit distribution table has been prepared in accordance with the Notice No. 9 Regulations on Information Preparation and Disclosure of Listed Companies of the Securities Supervisory Committee of China: (the data are based on CAS) Net return on assets (%) Gain per share (Yuan/share) Profit in the Weighted Items report period Fully diluted Fully diluted Weighted average average (Yuan) 2004 2003 2004 2003 2004 2003 2004 2003 Main business profit 299,826,360.69 28.00 24.67 28.24 25.10 0.9086 0.7807 0.9086 0.7807 Operative 38,838,552.85 3.63 2.99 3.66 3.04 0.1177 0.0947 0.1177 0.0947 profit Net profit 34,850,990.54 3.25 2.69 3.28 2.74 0.1056 0.0852 0.1056 0.0852 Net profit after deductions of 45,851,134.38 4.28 4.32 3.09 0.1389 0.0962 0.1389 0.0962 abnormal profit 3.04 and loss 4. Information on the equity capital changes in the report period and the reasons (the data are based on CAS) Unit: RMB Yuan Surplus public Statutory public Items Equity shares Capital reserve Retained earnings Shareholders’ equity accumulated. fund welfare fund Period 1,044,399,717.3 beginning 330,000,000.00 526,478,325.56 28,257,425.27 14,128,712.64 145,535,253.87 4 figure Increases in the - 1,622,671.86 3,562,735.94 1,781,367.97 19,606,886.63 26,573,662.40 report period Decrease in the - - - - - - report period Period end 1,070,973,379.7 330,000,000.00 528,100,997.42 31,820,161.21 15,910,080.61 165,142,140.50 figure 4 Profit transferred Reasons for Gains from debt Occurring in the Occurring in the during the report changes restructuring etc. report period report period period 5 Chapter Three. Information on equity changes and shareholders 1. Equity changes in the report period (1). The change of the equity structure is as the following: Unit: Share Before the Increase/decrease in the report period (+,-) After the change change Allocation Bonus PAF transfer Increase Others Total One. Non-marketable shares 1、 Sponsor’s shares 200,000,000 200,000,000 Including: State-owned share 200,000,000 200,000,000 Shares held by domestic legal person Shares held by foreign legal person Others 2、Collected legal person shares 3、Internal employee shares 4、Preferred shares and others Total non-marketable shares 200,000,000 200,000,000 Two. Marketable shares 1、Home listed RMB ordinary shares 2、Home listed foreign capital shares 130,000,000 130,000,000 3、Abroad listed foreign capital shares 4. Others Total of marketable shares 130,000,000 130,000,000 Three. Total shares 330,000,000 330,000,000 (2). Share issue and listing situation: Type of share: Home listed foreign capital share (B-share) Share issue date: February 27,1997 Share issue price: The offered price for general investors is 2.66 HK dollars per share, and 3.575 HK dollars per share for strategic investor, AKTIEBOLAGET SKF. Amount of shares issued: 330,000,000 shares Listing date: The shares were listed on March 20.1997 in Shenzhen Stock Exchange. (3). There was no right issues, bonus issue, and increase issue etc. since shares of the company were listed. (4). No internal employees’ shares in the company. 2. Information on shareholders (1). Up to the report period, the number of the registered shareholders of the WBC was 12,300, including 1 state-owned shareholder and public shareholders of 12,299. 6 (2) Information on the first ten shareholders up to the end of the year: Unit: Share Increase/ Nature of share Number of Percentage of Order Name of shareholder decrease shares total equity (+/-) Wafangdian Bearing Group 0 State-owned legal person 200，000， 1 Corporation 60.60% 000 share 2 AKTIEBOLAGET SKF 65,000,000 19.70% 0 Foreign capital shares 3 WNG JUNGANG 543,600 0.16% 0 Foreign capital shares 4 LI JUNCHENG 303,900 0.09% -5,200 Foreign capital shares 5 ZHONG LIANDI 228,400 0.07% 0 Foreign capital shares 6 HE YANFEI 200,300 0.06% 0 Foreign capital shares 7 WANG WEIHONG 200,000 0.06% 0 Foreign capital shares 8 CHEN JINGKUN 194,000 0.06% 0 Foreign capital shares 9 CHEN CHANMING 182,520 0.06% 0 Foreign capital shares 10 WU,KIN YEUK 180,000 0.05% -12,900 Foreign capital shares HU JIANYUE Note: 1). There is no associated relationship between the first largest shareholder of the Company and the first ten circular share holding shareholders; The associated relationship between the first ten circular holding shareholders and the associated relationships between the first ten circular share holding shareholders and other shareholders are not clear. 2). In the report period, the frozen period of equity shares held by the strategic investment partner AKTIEBOLAGET SKF expired in 1999, the unfreeze procedure do not handle in the report period. 3. Introduction to the holding shareholder 1) Introduction to the first largest shareholder Name: Wafangdian Bearing Group Corporation Legal representative: Wang Lushun Date of establishment: 1995 Main business and product: Bearings, Machinery equipment, Automobile parts and relative products Registered capital: 360000000 Yuan RMB Wafangdian Bearing Group Corporation is a state-owned sole venture company, the actual controller is Supervising and Managing Committee of Dalian Government for Stated Owned Assets, the office Address is No.576, Zhongshan Road, Shahekou District Dalian City. And the director is Wang Chun. 2) Relationship of the property right and controlling between the Company and actual Controller: Supervising and Managing Committee of Dalian Government for State Owned Assets 7 100% shareholding Wafangdian Bearing Group Corporation 60.6% shareholding Wafangdian Bearing Company Limited 4. Introduction to shareholders with over (including) 10% of the total equity shares of the Company Name: AKTIEBOLAGET SKF (Swedish) Legal representative: Tom Gohnstone Date of establishment: 1907 Main business and products: Bearings, seals and relative products, and relative services Registered capital: 1,423,000,000 Swedish Koron Equity structure: totally 113837767 shares of the Company, including A type and B type shares, 18.7% of which go to A type, and 81.3% go to B type. 5. Up to the end of the year, the circumstance of holding shareholder of current shares. The number of circular Order Name of shareholder Sort shares at the end of year AKTIEBOLAGET SKF 65,000,000 1 B 2 WNG JUNGANG 543,600 B 3 LI JUNCHENG 303,900 B 4 ZHONG LIANDI 228,400 B HE YANFEI 200,300 5 B WANG WEIHONG 200,000 6 B CHEN JINGKUN 194,000 7 B CHEN CHANMING 182,520 8 B WU,KIN YEUK 9 HU JIANYUE 180,000 B 10 LIN YONGZHONG 176,000 B Note: There is no associated relation between the first largest shareholder and the first ten current holding shareholders, the associated relation between the first ten current holding shareholders and the associated relation between the first ten current holding shareholders and the other shareholders is not clear. 6. In the report period, the holding shareholder remained unchanged. 8 Chapter Four Information on Directors, Supervisors, top management and employees 1. Introduction to Directors and Supervisors and top management Name Position Sex Age Term Wang Lushun Chairman Male 54 2003.6-2006.6 Jiang Zhongyuan Vice-Chairman Male 52 2003.6-2006.6 Shao Yang Director, General Manager Male 38 2003.6-2006.6 Wang Zhongmin Director Male 41 2003.6-2006.6 Director Chief Accountant Secretary of Zhang Xinghai Male 36 2003.6-2006.6 BD Su Shaoli Director Male 53 2003.6-2006.6 Gunnar Gremlin Director Male 60 2003.6-2006.6 Patrick Tong Director Male 42 2003.6-2006.6 Gui Liyi Independent Director Male 61 2003.6-2006.6 Zhang Li Independent Director Female 44 2003.6-2006.6 Li Yanxi Independent Director Male 34 2003.6-2006.6 Wu Chunyou Independent Director Male 59 2003.6-2006.6 Zhang Jiayi President of Supervisory Committee Male 56 2003.6-2006.6 Cai Zhian Supervisor Male 56 2003.6-2006.6 Sun Najuan Supervisor Female 36 2003.6-2006.6 Wei Lifang Supervisor, Staff representative Female 49 2003.6-2006.6 Li Zhixin Supervisor, Staff representative Male 34 2003.6-2006.6 Gao Yongyang Vice-G.M. Male 51 2003.6-2006.6 Shan Shikai Vice-G.M. Male 47 2003.6-2006.6 Meng Wei Vice-GM Male 37 2003.6-2006.6 Remarks: (1). Positions held by the directors and supervisors in the shareholding units Name Position in the shareholders’ units Office term Wang Lushun Chairman of Board of Directors, General Manager of From December 1998 to now Wafangdian Bearing Group Corporation Jiang Vice-chairman of Board of Directors Wafangdian Bearing From May 2000 to now Zhongyuan Group Corporation Wang Director of WBGC From April 2000 to now Zhongmin Zhang Jiayi Chairman of Trade Union Wafangdian Bearing Group From October 1995 to now Corporation Cai Zhian Vice-G.M. of Wafangdian Bearing Group Corporation From May 1999 to now Sun Najuan Vice-chief accountant of Wafangdian Bearing Group From August 1998 to now Corporation Gunnar Gremlin General Manager , SKF (China) Investment Co,. Ltd. From August 2003 to now Patrick Tong Market Majordomo of AB SKF Industrial Division From April 2004 to now (2). No director, supervisor and top management owns stock of the Company. 2.The main working experience and the instance of post holding & concurrent post holding of director, supervisor and top management in the other unit besides the shareholders’ unit. 9 One. Director Mr. Wang Lushun，high-grade engineer. has assumed the office of director, General manger, chairman of Wafangdian Bearing Company Limited since 1995, and currently holds the post of chairman and General Manager of Wafangdian Bearing Group Corporation, Chairman of Dalian SKF-Wazhou Company Limited, Chairman of Wafangdian Rongtai Engineering Plastic production Company Limited, Chairman of Wafangdian Hongda CVJ manufacturing Company Limited, Chairman of Dalian Koyo Wazhou Automobile Bearing Company Limited, Chairman of Wafangdian General Bearing Company Limited. Mr. Jiang Zhongyuan, has once assumed the office of the Section Chief of the Enterprise Section of Dalian Economy Committee since 1986, and currently holds the post of vice Chairman, vice General Manager, sectary of the party of Wafangdian Bearing Corporation, Chairman of Wafangdian Integrated Services Company Limited, chairman of Wafangdian Bearing Powering Company Limited., Chairman of Wafangdian Bearing Transportation Company Limited., Chairman of Wafangdian Grinding Wheel Manufacturing Company Limited . Mr. Wang Zhongmin, high-grade engineer, has assumed the office of the assistant of General Manager, Vice General Manager, General Manager of Wafangdian Bearing Company Limited since 1998, and currently holds the post of the director of Wafangdian Bearing Group Corporation, director of Wafangdian General Bearing Company Limited. Mr. Shao Yang, high-grade engineer, has assumed the office of the assist of General Manager, vice General Manager of Wafangdian Bearing Group Corporation, and currently holds the post of the director, General Manager of Wafangdian Bearing Company Limited, director of Dalian SKF-Wazhou Company Limited, Chairman of Wafangdian Bearing Precision Forging Company Limited. Mr. Zhang Xinghai, high-grade accountant, has assumed the office of the vice General Accountant and Secretary of board of directors of Wafangdian Bearing Company Limited since 1998, and currently holds the post of the director, General Accountant and Secretary of board of directors of Wafangdian Bearing Company Limited, director of Wafangdian General Bearing Company Limited. Mr. Su Shaoli, Economist, has assumed the office of Department Manager of Operating and Managing Department, Department Manager of Investment and Securities Department, director of Wafangdian Bearing Company Limited since 1997, currently holds the post of director of Wafangdian Bearing Company Limited, Department Manager of Operating and Managing Department & Investment and Securities Department, director of Dalian SKF-Wazhou Bearing Company Limited, director of Wafangdian General Bearing Company Limited, director of WBGC Liaoyang Bearing Manufacturing Company Limited. Mr. Gunnar Gremlin, has assumed the office of the Financial Director of SKF German Company, Vice General Manager of SKF Industrie SpA Company, President of Ovako Steel Plant, Executing President of AB SKF since 1984，currently holds the post of the General Manager of SKF China Investment Company Limited, Director of Dalian SKF-Wazhou Bearing Company Limited. Mr. Patrick Tong，has assumed the office of the Manager, General Manager of SKF China Company Limited since 1989, currently holds the post of the Market Majordomo of AB SKF Industrial Division，Director of Dalian SKF-Wazhou Bearing Company Limited. Mr. Gui Liyi, Professor，has been assuming the office of the Director and Professor of Law College at Northeast Finance and Economics University from 1981 to now, the concurrent post of lawyer in Liaoning Shuanghu Law Office from 1986 to now, and independent director of Dalian Tiantu Television Network Company Limited from 2000 to now. Ms. Zhangli, Professor of Accountant, has been assuming the office of teacher at Dalian Profession & Technology College from 1992 to now, and the concurrent post of associate professor in Dalian Training Leading Team for Enterprise Management from 1997 to now. Mr. Li Yanxi, Associate Professor of Accountant, CPA，has been assuming the office of teacher of Managing College at Dalian Science & Engineering University from 1992 to now, currently holds the post of superintendent of Financial Management Researching Institute of Management College at Dalian Science & Engineering University, has been holding the concurrent post of deputy director in Dalian Haihua Assets Evaluating Company Limited from 10 2001 to now, the post of director and secretary of Science & Technology Mansion of Dalian Science & Engineering University from 2003 to now. Mr. Wu Chunyou, Professor, has been assuming the office of teacher at Dalian Science & Engineering University from 1980 to now, currently holds the post of the prexy of Managing College at Dalian Science & Engineering University，has been holding the concurrent post of commissary of Teaching Guidance Committee of managing kind in National Educating Committee from 1999 to now, the concurrent post of CDR of Value Engineering Seminar for Chinese University & College from 1996 to now, the concurrent post of CDR of Consulting Seminar for Enterprise Managing of Dalian from 1999 to now, the concurrent post of independent director of Liaohe Jinma Oil Field Company Limited from 2002 to now. Two. Supervisor Mr. Zhang Jiayi, high-grade economist, has assumed the office of secretary of Discipline Examining Committee, president of Labor Union of Wafangdian Bearing Group Corporation since 1992, currently holds the post of deputy secretary of Party Committee, President of Labor Union of Wafangdian Bearing Group Corporation. Mr. Cai Zhian，politics engineer, has assumed the office of deputy department manager and department manager of Human Resources Department of Wafangdian Bearing Company Limited, department manager of Human Resources Department, deputy secretary of Party Committee, secretary of Discipline Examining Committee of Wafangdian Bearing Group Corporation since 1997, currently holds the post of vice General Manager , secretary of Discipline Examining Committee of Wafangdian Bearing Group Corporation. Ms. Sun Najuan, high-grade accountant, has assumed the office of the assistant of the General Manager and the manager of Financial Department in Sales Head Office of Wafangdian Bearing Company Limited, deputy general accountant and manager of Financial Checking Department of Wafangdian Bearing Group Corporation since 1997, and currently holds the post of the assistant of the General Manager, deputy General Accountant, manager of Financial Checking Department of Wafangdian Bearing Group Corporation. Ms. Wei Lifang, high-grade engineer, has assumed the office of technical director, secretary of Roller Factory of Wafangdian Bearing Company Limited since 1998, and currently holds the post of director and secretary of Roller Factory of Wafangdian Bearing Company Limited. Mr. Li Zhixin, accountant, has assumed the office of director of the Bad Assets Clearing Office of Wafangdian Bearing Group Corporation , the assistant of the manager of Financial Department of Wafangdian Bearing Company Limited since 1999, currently holds the post of the assistant of the manager of Investment & Securities Department of Wafangdian Bearing Company Limited. Three. Top management Mr. Gao Yongyang, Economist, has assumed the office of the General manager, secretary of Party Branch of Huamei Bearing Company Limited, the General manager, secretary of Party Branch of Hongda CVJ Manufacturing Company Limited since 1991, currently holds the post of the Vice General Manager of Wafangdian Bearing Company Limited, Chairman of Wafangdian Bearing Precision Ball Manufacturing Company Limited. Mr. Shan Shikai, Economist, has assumed the office of department manager of Human Resources Department, the assistant of the General Manager of Wafangdian Bearing Company Limited since 1995, currently holds the post of Vice General Manager of Wafangdian Bearing Company Limited. Mr. Meng Wei, engineer, has assumed the office of the assistant of the General Manager, Vice General Manager of Die Company of Wafangdian Bearing Group Corporation since 1996, the General Manager of Equipment Company of Wafangdian Bearing Group Corporation, currently holds the post of Vice General Manager of Wafangdian Bearing Company Limited. 3. Annual remuneration of the directors, supervisors and top management 1). The remuneration of directors (excluding independent directors), supervisors and top management paid by this company is the revenue got by them as the administrative management 11 of the company. The total annual salaries of the directors, supervisors and top management paid by this Company amounted to 263,880 Yuan. The total salaries of the first three directors who were highly paid reached 114,240 Yuan, the total salaries of the first three top management who were highly paid reached 126,720 Yuan. The annual allowance paid to independent directors is 36,000 RMB Yuan (including income tax payable). 2). Annual payment ranges and number of persons Four persons get annual remuneration with value of 30,000 Yuan; three persons get annual remuneration with value between 20,000 and 30,000 Yuan; one person get annual remuneration with value between 15,000 Yuan and 20,000 Yuan; 3). Information on people who were not paid by the Company (1). Wafangdian Bearing Group Corporation paid the following people for their salaries and subsidies: Wang Lushun, Jiang Zhongyuan, Cai Zhian, Zhang Jiayi, Sun Najuan, Wang Zhongmin (2). AKTIEBOLAGET SKF paid the following people for their salaries and subsidies: Gunnar Gremlin, Patrick Tong 4. Changes of directors, supervisors and top management There is no change about the directors, the supervisors and top management of the company in the report period. 5. Situation about staffs Up to the report period, the Company had a total employment of 8303 persons. 1). Classification according to specialty composing: Production Sales Financial Administrative Technicians others workers people people staffs Persons 6516 230 211 60 610 676 Percentage 78.5 2.8 2.5 0.7 7.4 8.1 2). According to the diploma of the staff on-the-job: 1419 were with junior college graduates. 2822 were with poly-technical school graduates, mid-level technical titles of position or higher or graduated from high middle school. 3). The number of retired works whose relative expenses must be paid by the Company was 1356. Chapter Five. Governing and managing structure of the Company 1. Practical situation of the governing and managing structure of the Company The Company followed the requirements in Company Law, Governing and Managing 12 Standard in listed companies and other law regulations, and the AOA, and regulated its operations and perfected its governing and managing structure. 1). The meetings and voting procedures of the shareholders, board of directors and supervisory committee and the formation of the resolutions were totally subject to these requirements. 2). The Company promulgated its internal management systems and regulations to form internal binding mechanism for budgeting, purchasing, material flow and sales. 3). The separation of business, personnel, assets, internal organization and finance of the Company from its controlling shareholder: (1). The Company was able to carry out independent operations, with its business being separated from its controlling shareholders; (2). The Company was independent in terms of its personnel, labor and salary management, with its own independent labor and personnel management systems. Except the Chairman of Board of Directors of the parent company Wafangdian Bearing Group Corporation who worked as the Chairman of the Company, the General Manager, Deputy-General Managers and the Finance Controller of the Company were also independent from the controlling shareholder. (3). The production system, auxiliary production system and supplementary facilities of the Company were independent from the controlling shareholder. (4). The finance of the Company was independent from the controlling shareholder. The Company carried out its own independent finance and accounting and paid taxes independently. (5). The Company has basically established its own independent organization from that of the controlling shareholder. 2.The fulfill-function situation of independent directors of the company The four independent directors of the company fulfill their authority that given by the law, the statute and Articles of Association carefully in the report period. They have participated in the board meeting held by the company and fulfill their function carefully, they raised independent suggestion to the associated business of the company, and raised some good suggestion from the view of law and specialty regarding the production and operation of the company, stick up for the interest of the company and all of the shareholders. One. The state of the independent directors attending the board session during the report period: Name of Times of promising Present by one’ Entrusting Absence independent Remarks this year self（time） Attending（time） （time） director Gui Liyi 4 4 0 0 Zhang Li 4 4 0 0 Li Yanxi 4 3 1 0 Wu Chunyou 4 2 2 0 Two. The state that the independent directors submit different opinions to the related items of the company during the report period The four independent directors didn’t raise different opinions to the related items of the 13 company in the report period. Chapter Six. Brief Introduction of the shareholders’ meeting One Shareholders’ meeting and two Extraordinary Shareholders’ Meeting were held in the report period. Details are as follows: 1. The circumstance of the first extraordinary shareholders’ meeting: The notice on holding the first extraordinary shareholders’ meeting of 2004 was published on Dec. 27th, 2003. The extraordinary shareholders’ meeting was held on Jan. 28th, 2004, at Meeting Room 309, WBGC headquarters. Three shareholders and authorized proxies presenting 26513,5200 shares presented the meeting, occupied 80.34% of the total shares. Eight directors and two supervisors also participate in the meeting. The associated shareholders, Wafangdian Bearing Group Corporation didn’t participated in the voting because that the proposals of the extraordinary shareholders’ meeting are all associated business. After sufficient discussion, the meeting made the following unanimous resolutions with signed votes: 1). Reviewed and approved the proposal on separating and transferring the Steel Ball Factory. 2). Reviewed and approved the proposal on WBGC charging using fee for ZWZ trademark from WBC 3). Reviewed and approved the contract of transferring the assets of Steel Ball Factory 4). Reviewed and approved the permission contract of using the trademark. The notice of the meeting was published on Jan.30th, 2004 in Security Times, Hong Kong Commercial Newspaper and the Takung Pao in Hong Kong. 2. The circumstance of the second extraordinary shareholders’ meeting: The notice on holding the second extraordinary shareholders’ meeting of 2004 was published on Feb. 27th, 2004. The extraordinary shareholders’ meeting was held on Mar. 31st, 2004, at P-T seat of the 29th floor of Dongyin Mansion, No 689, Beijing East Road, Shanghai. Three shareholders and authorized proxies presenting 26513,5200 shares presented the meeting, occupied 80.34% of the total shares. Three directors and one supervisor also participate in the meeting. The associated shareholders, Wafangdian Bearing Group Corporation didn’t participated in the voting because that the proposals of the extraordinary shareholders’ meeting are all associated business. After sufficient discussion, the meeting made the following unanimous resolutions with signed votes: 1). Reviewed and approved the proposal on the assets separating and transferring of Forging Factory. 2). Reviewed and approved the Assets Transferring Contract of Forging Factory. The notice of the meeting was published on Apr.1st, 2004 in Security Times, Hong Kong Commercial Newspaper and the Takung Pao in Hong Kong. 3. The circumstance of annual shareholders’ meeting: The notice on holding 2003 annual 14 shareholders’ meeting was published on May 20th, 2004. The annual shareholders’ meeting was held on Jun.23rd, 2004, at Meeting Room 309, WBGC headquarters. Three shareholders and authorized proxies presenting 26513,5200 shares presented the meeting, occupied 80.34% of the total shares. Eight directors and two supervisors also participate in the meeting. 1). Reviewed and approved the 2003 Annual Report and Abstract of the Company; 2). Reviewed and approved the 2003 Annual Work Report of the Board of Directors of the Company; 3). Reviewed and approved the 2003 Annual Work Report of the Supervisory Committee of the Company; 4). Reviewed and approved the 2003 Annual Final Financial Report of the Company; 5). Reviewed and approved the 2003 Annual Profit Distribution Plan of the Company; 6). Reviewed and approved the proposal of production and operation plan (including financial budget) of 2004; 7). Reviewed and approved the proposal on engagement of certified public accountants for audit reports based on IAS and CAS and the proposal on remuneration. The notice of the meeting was published on Jun.24th, 2004 in Security Times, Hong Kong Commercial Newspaper and the Takung Pao in Hong Kong. Chapter Seven. Work report of the Board of Directors 1. Operation situation of the Company 1). Discussion and analysis on whole operation situation of the company in the report period (1). Information on operation of the company in the report period Based on IAS, the company realized net profit of 34,851thousand Yuan. Based on CAS, the company realized net profit of 36,694 thousand Yuan. (2). The effect on company caused by the adjust of account trace back. According to the regulation of No.5 Question and Answer of Information Disclosure Regulation for the Company which Issue the Securities Publicly----The Difference between the Financial Report based on CAS and IAS and it’s Disclosure issued by CSRC, the same management layer should not adopt different spare accountant policy to the same proceeding in the same account period except that it is limited by the special factor such as the different related accountant standard or special routine between different stock listing place. So, the board of directors of the company passed through the resolution to change the accountant disposing method of enterprise income taxes from taxes payable method into liabilities method of taxpaying affection accountant method. The company has adopted the method of carrying up and adjusting towards the changing of accountant policy, and adjusted the subsistence profit of period beginning and deferred taxes. The cumulated affection of the changing of accountant policy is 8,544,000.00 RMB Yuan, adjusted and added 8,544,000.00 RMB Yuan of subsistence profit of period beginning of 2003, including 7,262,400.00 RMB Yuan of undistributed profit of year beginning. 15 2). Operation (1). The scope of the main business of the company and it’s the actual situation The scope of the main business of the company includes the manufacture and sales of bearings, machinery equipment, automobile parts and components and other relative products, leasing of machinery equipment and houses, examination of bearings and relative machinery equipment and measuring apparatus. The company has the modern business mechanism characterized by the integrated production, supply and sales system. (2). Composing of main business income and main business profit 1). According to enterprises: (data from CAS) Order Enterprises Main business income Main business cost Main business gross (thousand Yuan) (thousand Yuan) profit(thousand Yuan) Domestic 1,154,662.4 859,759.2 294,903.2 1 Railway bearings 293,294.7 236,849.0 56,445.7 2 Automobile bearings 272,982.7 237,071.0 35,911.7 3 Metallurgical and mining bearings 348,880.6 238,954.4 109,926.1 4 Machine tool and electronic 81,129.8 51,658.5 29,471.4 equipment bearings 5 Current bearings 158,374.5 95,226.3 63,148.2 Exporting 266,472.1 274,901.6 -8,429.5 2). According to products Order Product Main business income Main business cost Main business gross (thousand Yuan) (thousand Yuan) profit (thousand Yuan) 1 Bearing 1,421,134.5 1,134,660.8 286,473.7 2 Accessories 143,399.8 124,193.7 192,06.1 Total 1,564,534.3 1,258,854.5 305,679.8 3). According to regions Main business details of the company and subsidiary companies are as the following: 2004 Main business income Main business cost Main business gross profit Amounts Proportion Amounts Proportion Amounts Proportion (%) (%) (%) Product Sales RMB RMB 1,421,134,476.90 90.83% RMB1,134,660,806.28 90.13% 286,473,670.62 93.72% —Exporting 266,472,117.85 17.03% 274,901,643.91 21.83% (8,429,526.06 ) (2.75% —Domestic sales 1,154,662,359.05 73.80% 859,759,162.37 68.30% 294,903,196.68 96.47% Including: Northern sales 433,487,324.73 27.71% 327,446,608.25 26.01% 106,040,716.48 34.69% Southern sales 244,094,099.10 15.60% 182,808,748.87 14.52% 61,285,350.23 20.05% Eastern China Sales 385,330,850.08 24.63% 285,327,821.56 22.67% 100,003,028.52 32.71% Western Sales 91,750,085.14 5.86% 64,175,983.69 5.10% 27,574,101.45 9.02% Industrial service sales 143,399,823.03 9.17% 124,193,712.78 9.87% 19,206,110.25 6.28% 16 RMB RMB 305,679,7 1,564,534,299.93 100.00% RMB1,258,854,519.06 100.00% 80.87 100.00% 2003 Main business income Main business cost Main business gross profit Amounts Proportion Amounts Proportion (%) Amounts Pro (%) port ion (%) Product sales RMB 835,709,490.92 84.91% 85.1 RMB 1,059,008,103.69 84.96% RMB 223,298,612.77 5% —Exporting 165,937,855.35 16.86% ) (3.4 156,789,003.19 12.58% (9,148,852.16 9% —Domestic sales 669,771,635.57 68.05% 88.6 902,219,100.50 72.38% 232,447,464.93 4% Including: 35.4 Northern sales 377,188,313.44 30.26% 284,181,639.65 28.87% 93,006,673.79 7% Southern sales 144,320,100.75 14.66% 19.9 196,510,534.72 15.77% 52,190,433.97 0% Eastern China Sales 197,827,633.04 20.11% 27.2 269,367,979.58 21.60% 71,540,346.54 8% Western Sales 43,442,262.13 4.41% 5.99 59,152,272.76 4.75% 15,710,010.63 % Industrial service sales 148,538,075.78 15.09% 14.8 187,479,291.25 15.04% 38,941,215.47 5% RMB 984,247,566.70 100.00% 100. RMB 1,246,487,394.94 100.00% RMB 262,239,828.24 00% (3). Main products and the occupation ratio in market 1). The market occupation ratio of main products of the company (bearings) Order Product Name Occupation ratio (%) 1 Railway bearings 38 2 Automobile bearings 32 3 Metallurgy mineral bearings 25 Machine tool bearings and electronic 28 4 equipment bearings 5 Standard bearings 15 2). In the report period, the main business or its structure, main business gains capability didn’t change much compared with the last period. 3). Operation and achievements of the main holding interest companies and participating interest company 1). General situation to holding interest companies of the company: Company Registration Establishment Registration Owning Main business Nature or type Legal name address date capitals interest of the economy representative 17 Dalian Produce Chinese-Ameri General Wafangdian bearings and can joint 1996.03.28 USD 4,510,000 75% Wang Lushun Bearing Beigongji Street relative venture No 1. Section 1. products company Produce and Liaoyang Baita sell bearings Liaoyang RMB Limited Dist. Weiguo Rd. 1996.11.22 100% and Feng Lijie bearing 19,350,000 company No 61. machinery manufacture 2). Operation situation and achievements of the holding interest and participating interest companies Unit: RMB Yuan Name of invested company Equity share Main Business Total Profit Net profit percentage income Liaoyang Bearing Co., Ltd. 100% 76,710,902.90 239,085.18 204,714.07 Wafangdian General Bearing Co., Ltd. 75% 33,321,068.99 833,817.89 833,817.89 Dalian SKF Wazhou Bearings Co., ltd. 49% 205,217,593.53 42,131,355.86 33,386,939.12 Shanghai Zhenxin Wazhou Mechanical 40% 7,146,623.46 19,573.16 16,049.97 & Electrical Product Sales Co., Ltd. Shanghai Aimuyi Mechanical & 4.76% 176,922,021.88 21,289,830.76 21,229,866.85 Electrical Equipment Chain Co., Ltd. 3). Holding interest & participating interest company, which the investment gains is equivalent to more than 10 % of the net profit: Unit: RMB’Yuan Name of participating interest company Dalian SKF Wazhou The net profit occupied The gain of investment in this term 16,359,600.17 46.94% list company Operation scope Produced and sell spherical roller bearings Participating company Net profit 33,386,939.12 4). Information on main suppliers and clients (1). Total purchasing amounts from the first five suppliers is 404,240 thousand Yuan, which is equivalent with 48.01% of the total purchasing amounts. (2). The total sales amounts to the first five customers are 209,160 thousand Yuan, which is equivalent with 13.37% of the total sales value of the company. 5). Problems and difficulties arising from operation and solving plan In 2004, in the face of the disadvantage factor of the price increasing of the steel and the production cost increasing, the company focus on the market actively, adjust product mixture and promote the change and update of the products actively, strengthen the sales and services network establishment of the market, improve market structure; adjust economy operation situation actively in order to make the financial situation of enterprise more healthy; adopt client credit-grade management, strengthen the A/R collection and control the increasing tendency of 18 A/R, and make the production and operation increased steadily. 2. Information on investment of the company in report period 1). Information on complete situation of the operation plan Up to the year 2002, the entire B-share fund has been used out on the promising investment items. So there are no B-share funds to use in 2004. 2). Investment situation of non B-share fund: In the year 2004, the company used 80,330 thousand Yuan self-raised capitals in technique improvement, including 36000 thousand Yuan goes to railway bearing improvement; 22,500 thousand Yuan goes to metallurgy mineral bearings, the B-share accumulated investment on the item of the automobile tapered bearings is 14630 thousand Yuan; The investment of non B-share fund project, improving project of low noise bearing is 7280 thousand Yuan. 3). Gain from investment: Railway bearings project: focus on improvement of railway high-speed freight wagon bearings, high speed passenger coach bearings, high-speed bearings in order to satisfy the matching requirement of high speed railway and development of building now; introduce key equipment to compose two producing lines, in order to make the products reach the requirement of high speed bearing. Improved the products quality and the producing abilities and reached the producing capacity of 20,000 sets of high-speed freight wagon bearing per month, it is more important that it ensured the occupation ratio of railway bearings in domestic market, the occupation ratio increased greatly from 20% to 36%, and increased the exporting shares. Automobile tapered bearings project: after improvement, added 2 double raceway automobile hub bearing production lines, the capability is 500000 sets, new added 2 atmosphere protection heat treatment production lines, improved the producing capability and products quality of single tapered roller bearing, the capability is 1200,0000 sets yearly. Metallurgical mineral bearings project: after improvement, the quality of products has heightened one grade, the technical equipment level has reached the designed requirements, and is in the most advanced level in domestic. And it has promoted the development of markets and further improved the market share. Low noise bearing project: This project was put into production and improved simultaneously, and effective production capability came into being after making use of the improved production equipment and inspecting machine, the sales income is 9000 RMB’0000 Yuan, realized the profit of 810 RMB’0000 Yuan, and reached the improving target. Through technology improving, the market competitive ability of the company has been further improved, the sales amount increased 38000 RMB’0000 Yuan compared with the same period of the last year, the exporting shares increased 11000 RMB’0000 Yuan. 3. Analysis on financial situation, results and change of operation Unit: thousand Yuan Items Year 2004 (Yuan) Year 2003 (Yuan) Increase/Decrease (%) Total assets 2,206,125 2,107,194 4.69 Non-current 283,146 258,633 9.48 liabilities Shareholders’ equity 1,069,199 1,042,405 2.57 19 Sales gross profit 299,826 257,646 16.37 Net profit 36,694 35,777 2.56 4. Effect on the company from change of external environment and mecro-policy, regulations of the enterprise 1.The Stratagem and decision made by the country to inspire and prosper the old industry basis of northeast china brings well developing opportunity for the company. 2.The high speed economic developing of China and the resuscitating of the world economy brings important market opportunity for the company. 3.The price increasing of the steel and other raw materials increased the production cost of the company and affected the payoff capability of the company. 5. Operation plan of the new year Key work in 2005: 1. Strengthen market sales network establishment, occupy the market rapidly, enlarge the customer scope, carry out Ten Value Increasing Services comprehensively, and increase the market occupation ratio of main products; 2. Promote producing potential, break through producing bottleneck, and improve the producing benefit of the enterprise. 3. Speed up new products developing, strength products mixture adjusting, speed up technique improvement and innovation and improve the competitive ability of the enterprise. 6. Daily work of the Board of Directors (One). The meetings and resolutions of the Board of Directors in the report period Four board meetings were held in the report period. The details are as follows: 1. The fifth meeting of third board session of the Company was held on Feb. 24, 2004 in Meeting Room 309 of WBGC headquarters. Due participating 12 directors and 9 actually attended the meeting. 3 other directors authorized their proxies to attend the meeting. 2 proxies of supervisory committee of the company attend the meeting. After discussions the following resolutions were made unanimously: (1). Reviewed and unanimously approved the 2003 final financial report; (2). Reviewed and unanimously approved the 2004 producing and operating plan; (3). Reviewed and unanimously approved the 2004 financial budget plan; (4). Reviewed and unanimously approved the 2003 A/R analysis and 2004 A/R plan; (5). Reviewed and unanimously approved the Employee Training Plan of the company; (6). Reviewed and unanimously approved the proposal on the separating and transferring of Forging Factory; (7). Reviewed and unanimously approved the Assets Transferring Contract of Forging Factory. Because of the regulation in item 9 of Art.172 of Articles of Association of the company, the above two proposals must be unanimously approved by all of the directors, so 3 associated directors and proxies didn’t avoid voting. All of the directors and proxies unanimously agreed to submit the above two proposals to the second extraordinary shareholders’ meeting to be reviewed. (8). Reviewed and unanimously approved the proposal on holding the second extraordinary shareholders’ meeting of 2004. The resolution of the meeting was published on Security Times, Hong Kong Commercial Newspaper and Takung Pao in Hong Kong on Feb.27th , 2004. 20 2. The sixth meeting of third board session of the Company was held at 9:00 a.m. on April 16,2004 in Meeting Room 309 of WBGC headquarters. Due participating 12 directors and 12 actually attended the meeting. 2 proxies of supervisory committee of the company attend the meeting. After discussion the following resolutions were made unanimously: (1). Reviewed and unanimously approved 2003 Final Financial Report of WBC (audited); (2). Reviewed and unanimously approved 2003 Work Report of Board of Directors of WBC; (3). Reviewed and unanimously approved 2003 Annual Report and Abstract (based on CAS and IAS); (4). Reviewed and unanimously approved 2003 Annual Profit Distribution Plan of WBC. In 2003, 10% of the net profit (281.3 RMB’0000 Yuan) after taxes shall go to the statutory surplus public accumulated fund, and 5% (140.7 RMB’0000 Yuan) shall go to the statutory public welfare fund; based on the total number of equity shares of 330,000,000 at the end of the period, 0.30RMB Yuan (including tax) shall be paid to every 10 shares. The remaining profit shall be carried over to the coming year (5). Reviewed and unanimously approved 2004 First Quarter Report . (6) Reviewed and unanimously approved the proposal of the changing of accountant policy, accountant estimation and the correction to the accountant difference. 1). The change of check method when distribute the cash dividend between the approval date of Balance sheet and financial report According to “the issuing of the Post-Balance event in the Accounting Standards for Enterprises” as stated in the Publication of (2003) 12 Document in Finance Department, the resolution of the scheme of cash dividend distribution, which passed by the meeting of the Board of Directors or other similar institution during the period from post-balance date to the date of the publication of financial report, has to be disclosed separately in the shareholder’s funds in the balance sheet. To the term of comparison account report concerns cash dividend distribution should trace back to history. So WBC provide cash dividend of 2002 in 2003 trace back to adjust the undistributed profit of 2003 amount to RMB 9,900,000.00 Yuan. To 2002 provide cash dividend of 2001 trace back to adjust the undistributed profit of 2002 amount to RMB 9,900,000.00 Yuan. 2). Correct the mistake of account A. The subsidiary company of WBC---WBGC Liaoyang Bearing Co., Ltd. (hereinafter refer to as “Liaozhou”) adopts record on hand yearly, the amount of work are much more when finance accounting, and the account receivable concerns more than 700 customers. In 2003, Liaozhou company clear all customers, and analysis the year of account one by one, and find there are mistake in the year of account of account receivable of former year, so add the preparation of bad account of former year, decrease the consolidated undistributed profit of 2002 amount to RMB 3,670,060.23 Yuan. Decrease the consolidated net profit of 2002 amount to RMB 1,267,966.36 Yuan. Decrease the Surplus reserve of 2002 amount to RMB 206,374.32 Yuan. B. Liaozhou company put the account receivable should write-off but without write-off amount to RMB 3,889,623.31 Yuan count to contact account of Liaoyang new textile bearing factory in mistake, Liaoyang new textile bearing factory confirm the account payable in former audit year. In 2003, Liaozhou Company clear the contact account, decrease the consolidated undistributed profit of the beginning year of 2002 amount to RMB 3,306,179.83 Yuan. 21 C. Because the contract of debt restructure of WBC Co., Ltd. delivery lagging, leading to add the loss of debt restructure amount to RMB 2,054,298.03 Yuan, decrease the consolidated undistributed profit of the beginning of 2002 amount to RMB 585,732.54 Yuan. Decrease the consolidated net profit of 2002 amount to RMB 1,365,200.92 Yuan. Decrease the surplus reserve of 2002 amount to RMB 204,780.14 Yuan. Correct the above account policy and account mistake, totally increase undistributed profit at the beginning of 2002 year amount to RMB 2,338,027.40 Yuan, decrease the net profit of 2002 amount to RMB 2,633,167.28 Yuan, decrease the surplus reserve of 2002 amount to RMB 411,154.46 Yuan, total increase undistributed profit at the beginning of 2003 amount to RMB 116,014.58 Yuan. The board of directors thinks that the adjustment of account trace back that caused by the correction of accountant policy and accountant difference is reasonable, and according to the Enterprise Account Rule and Enterprise Account System and it’s supplement regulation that published by the country. (7) Reviewed and unanimously approved the proposal on engagement of certified public accountants for audit reports based on IAS and CAS and the proposal on remuneration The Company intends to continue to engage Shenzhen Pan-China Schinda Certified Public Accountants as the domestic Certified Public Accountants, with the expenses for audit of 29 RMB’0000 Yuan. And the Company intends to continue engage Ho and Ho & Company Certified Public Accountants as the foreign Certified Public Accountants with the expenses for audit of 46 RMB’0000 Yuan. (8). Reviewed and unanimously approved the proposal on holding 2003 Annual Shareholders’ meeting. Including, the first , second , third, fourth, and seventh items of the above resolution need to be submitted to 2003 Annual Shareholders’ meeting to be reviewed and approved. The resolution of the meeting was published on Security Times, Hong Kong Commercial Newspaper and Takung Pao in Hong Kong on Apr. 21st , 2004 3.The Seventh meeting of third board session of the Company was held at 9:00 a.m. on August 19th, 2004 in Meeting Room 309 of WBGC headquarters. Due participating 12 directors and 9 actually attended the meeting. 2 proxies of supervisory committee of the company attend the meeting. After discussion the following resolutions were made unanimously: (1). Reviewed of and approved the 2004 Mid-year Report based on CAS and IAS of the Company (unaudited); (2). Reviewed of and approved the 2004 Mid-year Financial Report of the Company (unaudited); (3). Reviewed of and approved the 2004 Mid-year Profit Distribution Plan； In the middle of 2004, the company shall not make the allocation of dividend and bonus shares, and no accumulated public fund shall be transferred into equity； The notice of the meeting was published in Security Times, Hong Kong Commercial Newspaper and English Takung Pao on August 24, 2004. 4. The eighth meeting of third board session of the Company was held at 10:00 a.m. on October 22nd, 2004 in Meeting Room 309 of WBGC headquarters. Due participating 12 directors and 8 actually attended the meeting. 4 persons authorized proxies to attend the meeting, 2 proxies 22 of supervisory committee of the company attend the meeting. After discussion the following resolutions were made unanimously: (1). Reviewed of and unanimously approved the Third Quarter Report of 2004 (based on CAS and IAS) of the Company. The notice of the meeting was published in Security Times, Hong Kong Commercial Newspaper and English Takung Pao on October 26, 2004. (Two). Execution situation of shareholders’ meeting resolution 1. In the report period, the board of directors fulfilled its function in accordance with authorization by the shareholders’ meeting and the function scope regulated in AOA, and supervised the operation activities effectively based on production and operation plan and operating targets, which is ensured at the year beginning. And finished the 2004-profit distribution work of the company and other works, which were ensured at the shareholders’ meeting. 2. The profit distribution plan and profit distribution plan for 2005 The proposed profit distribution plan is as the following: In 2004, 10% of the net profit after taxes shall go to the statutory surplus public accumulated fund, and 5% shall go to the statutory public welfare fund; based on the total number of equity shares of 330,000,000 at the end of the period, 0.30RMB Yuan (including tax) shall be paid to every 10 shares. The remaining profit shall be carried over to the coming year. The proposed profit distribution plan for 2005 is as the following: 30% to 60% of the net profit to be realized in 2004 shall be paid for dividend in 2005. The payment shall be made mainly in cash. The ratio of cash payment in the dividend distribution shall not be less than 50%. The concrete distribution plan shall be made in accordance with actual situation. 3. Execution situation on bonus issue, increase issue in the report period No bonus issue and increase issue in the report period. 4. In 2004, Shenzhen Pan-China Schinda Certified Public Accountants issued a standard and unreserved audit report for the company. We, as the board of the directors, consider that this report actually, correctly and justly reflect the financial situation and operative result of the company. And the company didn’t violate accounting standard, system and relative regulations relating to information disclosure. 5. The special explanation of the holding shareholders of the Company and other associated parties occupy capital and assurance circumstance was issued by Shenzhen Pan-China Schinda Certified Public Accountant. . SchindaYEZHONGBAOZHI (2005)No.21 Shenzhen Pan-China Schinda Certified Public Accountant The advice letter about the circumstance of associated party of WBC occupy the capital of listed company CHIAN DALIAN WAFANGDIAN 23 Board of directors of WBC: According to the regulation of the letter No(2003)56 issued by CSRC and National Resources Supervising and Managing Committee of State Department, we issued the special audit advice about associated party of Wafangdian Bearing Co., Ltd. (hereinafter refer to as WBC) occupy the capital of listed company according to the audit circumstance of 2004 Consolidated accountant statement of WBC. Up to December 31st, 2004, the circumstance of associated party of WBC occupy the capital of listed company is as follows: 24 Subject of Relationship of associated consolidated Dealing amount of Dealing amount of credit Balance of Dec.31st, Provision on bad debts Reas Name of associated party Balance of Jan.1st, 2004 party accounting debtor side 2004 reserving amount occu statement Wafangdian Bearing Controlling shareholder A/R RM 206,381.99 RM 204,456.42 RM 410,838.41 RM --- RMB --- Paym of WBC Group Co.,Ltd.(WBGC) B B B B for g Sale-sites of WBGC. Subsidiary company of 141,983,430.40 183,351,942.55 183,134,887.83 142,200,485.12 1,422,004.85 Paym WBGC A/R for g Mid-Eastern ZMC Subsidiary company of A/R 6,880,404.74 908,349.85 605,016.61 7,183,737.98* 1,129,182.78 Paym WBGC Company for g Wazhou special steel Subsidiary company of 317,438.42 29,364,043.67 19,628,540.01 10,052,942.08* 113,226.96 Paym WBGC A/R for g Tongda Bearing company managed by A/R 92,270.62 --- 92,270.62 --- --- Paym WBGC for g SKF Wazhou Co. 848,528.72 --- 848,528.72 --- --- Paym Associated company of A/R for g WBC Wafangdian Bearing Precision Participated company of A/R --- 7,374.52 --- 7,374.52 73.75 Paym Steel Manufacturing (Steel Ball for g WBGC company) SKF Wazhou Co. Associated company of A/R 32,335.18 --- 32,335.18 --- --- Inste WBC adva mon Liaoyang New Textile Company managed by Other A/R 6,932,040.59 1,414,010.98 3,475,347.00 4,870,704.57 1,623,022.51 Inste Bearing Factory subsidiary company of adva WBC mon Other A/R RM RM RM RM B 157,292,830.66 B 215,250,177.99 B 208,227,764.38 B 164,315,244.27 RMB 4,287,510.85 25 * The amount of accountant life over one year is 11,778,761.90 RMB Yuan. ** The sum of money that WBC sold bearing and bearing parts to sale-sites of WBGC and Wafangdian Bearing Mid-eastern ZWZ Company of China amounted to 184,260,292.40 RMB Yuan this year. And WBC took back the payment for goods amounted to 183,739,904.44 RMB Yuan by cash from sale-sites of WBGC and Wafangdian Bearing Mid-eastern ZWZ company of China this year. *** The sum of money that WBC sold the scrap and provided the related labor to Wafangdian Bearing Special Steel amounted to 29,364,043.67 RMB Yuan this year. And WBC took back the fund amounted to 19,628,540.01 RMB Yuan, including 4,402,000.00 RMB Yuan by cash and 15,226,540.01RMB Yuan by material pledging payment. **** Liaoyang Bearing Manufacturing Company Limited of WBGC (hereinafter refer to as Liaoyang Bearing) which is the subsidiary of WBC pay the sum of money such as salary, water and electricity expenses etc. instead of the company managed by it ---- Liaoyang New Textile Bearing Factory (hereinafter refer to as New Textile) amounted to 1,414,010.98 RMB Yuan this year. And took back the fund paid instead of the others of this year and before amounted to 3,475,347.00 RMB Yuan, including 1,146,415.85 RMB Yuan by cash, 2,328,931.15 RMB Yuan by liabilities reorganization. Liaoyang Bearing should have took back the dealing amount of 4,870,704.57 RMBYuan from New Textile up to Dec.31st, 2004，the provision special bad debts reserving of Liaoyang Bearing according to individual cognizance method amounted to 1,623,022.51RMB Yuan. We will further annotate if you have questions to the special audit advice letter. Best regards! Shenzhen Pan-China Schinda Certified Public Accountant April 22, 2005 China Shenzhen 6. The independent directors of the company agree on the special explanation on associated party occupy the capital of listed company instance which issued by Shenzhen Pan-China Schinda Certified Public Accountant. About the case that the Company provided the loan guarantee of 448 RMB’0000 Yuan to the associated shareholder----WBGC, WBGC provided the fixed deposit receipt of 448 RMB’0000 as the pledge of the loan guarantee provided by the Company to WBGC on Mar.26th, 2003, because the fixed deposit receipt expired on Nov.5, 2004, WBGC new provided a fixed deposit receipt of 500 RMB’0000 as the pledge of the loan guarantee provided by the Company to WBGC, in this way, the independent director thinks that we can 26 keep away the possible contingent risk because of the loan guarantee. Chapter Eight. Work report of the Supervisory Committee In 2004, the Supervisory Committee fulfilled its duties and obligations according to Company Law and the AOA of the Company and participated in all the activities of the Company and expressed its opinions. 1. Meetings in the report period Two meetings were held in the report period: 1). The fourth supervisor’s meeting of third session of the Company was held on Feb.25th, 2004 in Meeting Room 309 of WBGC headquarters. Due participating 5 supervisors and actually 4 supervisors attended. Chief Accountant of the company attended the meeting. The opening of the meeting was in accordance with the law and AOA of the company. The president of the Supervisor Committee ,Mr. Zhang Jiayi presided over the meeting . The present supervisors reviewed and agreed the following report: Reviewed and agreed the proposal on separating and transferring the assets of Forging Factory. Reviewed and agreed the Assets Transferring Contract of Forging Factory. 2). The fifth supervisor’s meeting of third session of the Company was held on Arp.16, 2004 in Meeting Room 307 of WBGC headquarters. Due participating 5 supervisors and actually 5 supervisors attended. Chief Accountant of the company attended the meeting. The president of the Supervisor Committee ,Mr. Zhang Jiayi presided over the meeting . The meeting adopted the working report on operating condition and financial condition of the company from Chief Accountant. The present supervisors reviewed and agreed the following report: (1). Reviewed and agreed the 2003 Annual Report and its abstract of WBC; (2). Reviewed and agreed the 2003 final financial report of the company; (3). Reviewed and agreed the 2003 profit distribution plan of the company; (4). Discussion and approved the 2003 Annual Supervisory committee work report of WBC; (5). Reviewed and agreed 2004 First Quarter report; (6). Reviewed and agreed the proposal on the changing of accountant policy, accountant estimation and the correction to the accountant difference; (7). Reviewed and agreed the proposal on the engagement of certified public accountants for audit reports based on IAS and CAS and the proposal on remuneration; 2. Statutory operation of the Company In accordance with the power regulated in the Company Law of PRC and AOA, Supervisory Committee of the company participated in the operation of the company actively. And supervise the statutory operation of the company, examine the financial health of the company. 1. Statutory operation of the company. In the report period, the decision-making procedure is regulative, and strictly executes relative laws, ordinances of the state and has established perfect internal controlling system. The supervisors of the company supervised the fulfillment of function of the directors and managers, and didn’t find out any activity violating the laws, legal regulations, AOA or hurting the interest of the Company. 2. Examining the finance health of the Company. In 2003, Shenzhen Pan-China Schinda Certified Public 27 Accountants issued a standard and unreserved audit report for the company. We, as the supervisors of supervisors committee, consider that this report actually, correctly and justly reflect the financial situation and operative result of the company. And the company didn’t violate accounting standard, system and relative regulations relating to information disclosure. 3. In the report period, the company transfer the assets of Steel Ball factory and Forging factory, the supervisory committee thinks, the steel ball produced by Steel Ball factory and the forging piece produced by the Forging factory doesn’t belong to the strategic products of the Company, it is benefit to refine the principal part of the Company and develop the preponderant production after separating and transfer of the two factories. We can see that the Steel Ball factory and the Forging factory was in long-term bad state by simulating prediction calculation. The Company will achieve more profit after separation and transfer of the two factories. Because the dated and aging equipment of the Steel Ball factory and Forging factory, WBC will save a great deal of investments after separation and transfer of the factory and it is benefit to concentrate on developing the dominating products of the Company. To separate the Steel Ball factory and the Forging factory is in accordance with the policies of developing the elder northeast industrial base and adjusting the structure of industry and production and changing the policy of assistant industry of enterprise. The transfer price is reasonable, there is no transaction inside, and it doesn’t impair shareholders’ benefit or cause the capital of the company run off. 4. The associated transaction of the company is performed with the fair and reasonable price, and didn’t hurt the interest of listed companies. Chapter Ninth. Important events 1. In the report year the Company had no major lawsuits and arbitration. 2. In the report period, the circumstance of purchasing and sales of important and major assets and acquisition and merger in the Company. In the report period, the company separates and transfers the assets of the Steel Ball factory and Forging factory, the transfer doesn’t influent the continuity of business and stability of management. The details see the notice in Security Times, Hong Kong Commercial Newspaper and English Takung Pao on Jan.30th, Apr. 1st, Apr.30th and Jun.30th, 2004. 3. Important associated transactions The principles of fairness, rightness and openness were respected in the associated events and associated transactions of the Company. The Company also followed the principle of sufficient disclosure of the information on relative associated transactions. Price of association transactions is in accordance with market price. The principal related party transactions with Wafangdian Bearing Group and other related parties, which were carried out in the ordinary course of business, are as follows: 2004 2003 RMB’000 RMB’000 Wafangdian Bearing Group - purchase of raw materials and bearing parts 12,475 4,670 - sale of accounts receivable at book value - 7,807 - sale of raw materials and bearing parts 57,890 658 - payment for land use rights 2,620 3,164 28 - payment of research and development costs 5,400 5,400 - payment for guarding and fire protection service 3,374 3,700 - payment of charge for providing bank guarantee (note 30a) 11,000 10,300 - payment for advertisement service 821 900 - payment for leasing of office buildings and equipment 213 679 -payment of trade mark use fee（note30b） 21,825 - Subsidiaries of Wafangdian Bearing group - purchase of raw materials and bearing parts 406,177 85,519 - sale of raw materials and bearing parts 479,742 152,634 -payment for service 2,531 3,359 Dalian SKF Bearing Company Limited, an associate - purchase of raw materials and bearing parts 202,368 160,502 - sale of raw materials and bearing parts 105,810 108,727 a) The charge was calculated at an annual rate of 2% of certain bank loans guaranteed by Wafangdian Bearing Group. b) Pursuant to the agreement signed between the Company and Wafangdian Bearing Group on 1 January 2002, the Company can use Wafangdian Bearing Group’s trademark free of any charge for the period expired on 31 December 2003. With effect from 1 January 2004,, the Company will pay Wafangdian Bearing Group trademark using fee equivalent to 2% of sales amount for products carrying Wafangdian Bearing Group’s trademark. (Note 28). c) On 18 December 2003, the Company entered into agreement with Wafangdian Bearing group to dispose the assets of Steel Ball Factory to Wafangdian Bearing Group at a consideration of RMB24,397,000 which was based on the valuation at 31 January 2004. The consideration is to be paid off in such a way that the Wafangdian Bearing Group will take up the amount owed by the Company to creditors in relation to the Steel Ball Factory. If the Company could not obtain consent from these creditors for such arrangement by 30 June 2004, the consideration will be paid by cash. Up to 31 December 2004, the Company had not obtained the written consent from these creditors and Wafangdian Bearing Group had not paid the consideration. In additions, according to the Agreement, the Company had to pay off 297 employee of the Steel Ball Factory after the assets had been transferred. The severance payment was approximately of RMB6,606,000. During the year, the Company had made the payment at one time. d) On February 25, 2004, the Company entered into agreement with Wafangdian Bearing Group to dispose the assets of Forging and PressingFactory to Wafangdian Bearing Group at a consideration of RMB32,983,000 which was based on the valuation at 30 March 2004. The consideration is to be paid off in such a way that the Wafangdian Bearing Group will take up the amount owed by the Company to creditors in relation to the Forging and Pressingfactory. If the Company could not obtain consent from these creditors for such arrangement by 31 August 29 2004, the consideration will be paid by cash. Up to 31 December 2004, the Company had not obtained the written consent from these creditors and Wafangdian Bearing Group had paid RMB5,339,000 to the Company. In additions, according to the agreement, the Company had to pay off 758 employee of the Forging and PressingFactory after the assets had been transferred. The severance payment was approximately of RMB18,852,400. Up to 31 December 2004, the formalities of the assets transfer had not been completed; the employees were not laid off. The Company will make the payment once the formalities are completed. e) The amounts set out in the table above in respect of the years ended 31 December 2004 and 2003 represent the relevant costs to the Group as determined by the corresponding contracts with the related parties. The directors of the Company are of the opinion that the above transactions with related parties were conducted in the ordinary course of business and on normal commercial terms or in accordance with the agreements governing such transactions, and the independent non-executive directors have confirmed this. 4. Information on entrusting, contracting and leasing of assets from other companies by the Company or the Company’s assets entrusted, contracted or leased by other companies: The Company rented the land use rights of its controlling shareholder Wafangdian Bearing Group Corporation, the Company’s subsidiary Company Wafangdian Current Bearing Company Limited rented the workshops of the Company. The Company rented the workshops of Wafangdian Bearing Precision Steel Manufacturing Company Limited. In the report period, the Company transferred the Steel Ball factory and Forging factory, so, the Company signed the supplementary contract of the Contract of the Leasing of Land Using Right, the Company intended to deduct the land that occupied by the Steel Ball factory and Forging factory from the stated owned land area that the Company rented from WBGC and adjust the land renting amount correspondingly. In the report period, the Company uses ZWZ trademark of WBGC with compensation. The Company signed the Trademark Using Permission Contract with WBGC on Dec.18th, 2003, an agreement have been reached that the Company is granted the right to use the Trademark of WBGC to its home-make products, at the cost of 2% of the net sales amount from Jan.1st, 2004 to 31st December, 2006. 5. Other important contracts. On Feb.25th, 2004, the Company signed “contract of transferring assets” with WBGC. An agreement has been reached that WBC transferred the Forging factory to WBGC with the assets evaluating value of RMB 32,983,000 Yuan on Mar.31st, 2004, the original 758 staffs of Forging factory will be arranged and dismissed by the Company after transferring, and the Company need to pay 18,850,000 RMB Yuan for the compensation of 30 the dismissing. 6. Up to the report period, the guarantee with value of 448 RMB’0000 Yuan provided to WBGC is still not eliminated, WBGC and WBC have reached agreement that WBGC provided a deposit receipt of 448 RMB’0000 Yuan as pledge of guarantee risk. The deposit receipt expired on Nov.5th, 2004, WBGC new provided a deposit receipt ( time limited is from Nov.5th, 2004 to Nov. 5th. 2005) of 500 RMB’0000 Yuan as pledge of guarantee risk, After the guarantee is eliminated, WBC hands back the pledge to WBGC, so WBC can void risk caused by guarantee. 7. In the report period, the Company did not entrust any other institutions to manage its cash and assets. 8. The company and the shareholders with more than 5% (include 5%) shares of the company haven’t disclosed any promising items on the appointed newspaper and websites. 9. The circumstance of change or discontinue the service contracts with the certified public accountants in the report period the Company. According to the decision of 2003 Annual shareholders’ meeting, the company continues engaging Shenzhen Pan-China Schinda Certified Public Accountants, the remuneration paid by the Company was 290 thousand-Yuan. The certified public accountant has audited for the company continuously for 8 years; The company continues engaging Hong Kong Ho and Ho & Company as the Certified Public Accountants, the remuneration is 46 RMB’0000 Yuan. The certified public accountant has audited for the company continuously for 2 years; In the report period, the subsidiary of the Company, Wafangdian General Bearing Company continues engaging Shenzhen Pan-China Schinda Certified Public Accountants, the remuneration paid by the Company was 20 thousand-Yuan. The certified public accountant has audited for the company continuously for 2 years; In the report period, the subsidiary of the Company, Liaoyang Bearing Manufacturing Company limited of WBGC continues engaging Shenzhen Pan-China Schinda Certified Public Accountants, the remuneration paid by the Company was 30 thousand-Yuan. The certified public accountant has audited for the company continuously for 7 years; 10. In the report period, no check, administration penalty or notifying criticism from CSRC was made on the company, board of directors of the company and the directors, neither did the publicly condemn from the Shenzhen Stock Exchange. Dalian Securities Supervising Bureau of CSRC sent DS letter [2004] No 84 “ Supervising and Managing Attention Letter” on Jun.24th, 2004, aim at the matter of WBGC making use of the sale-sites to sell the products and the funds occupied by the sale-sites of WBGC which was raised in “ Supervising and Managing Attention Letter”, The Company decided to deduct the using of the sale-sites of WBGC step by step and decrease the assets of the company which occupied by the sale-sites of 31 WBGC after discussing; About the matter of the procedure of the register of industrial and commercial changing of Liaoyang Bearing Company which was raised in “ Supervising and Managing Attention Letter”, the company decided to adjust the board of directors of Liaoyang Bearing Company at a proper time after discussing, and solve the matter of the register of industrial and commercial changing along with the changing of legal representative after the policy of “ liabilities reorganization, pack and repay the loan” of Liaoyang Bearing Company is put into effect by Liaoyang City. Chapter Ten. Financial Statements INTERNATIONAL AUDITORS’ REPORT TO THE SHAREHOLDERS OF WAFANGDIAN BEARING COMPANY LIMITED (incorporated in the People’s Republic of China with limited liability) We have audited the accompanying consolidated balance sheet of Wafangdian Bearing Company Ltd. (the “Company”) and its subsidiaries (together with the Company referred to as the “Group”) as of 31 December 2004 and the related consolidated statements of income, cash flows and statement of changes in equity for the year then ended. These consolidated financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing as promulgated by the International Federation of Accountants. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as of 31 December 2004, and the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards promulgated by the International Accounting Standards Board Ho and Ho & Company Certified Public Accountants 22 April 2005, Hong Kong 32 Consolidated income statement for the year ended 31st December 2004 (Expressed in Renminbi Thousand Yuan) Note 2004 2003 RMB’000 RMB’000 Turnover 3 1,564,534 1,246,487 Cost of sales (1,264,708) (988,841) Gross profit 299,826 257,646 Other operating income 4 16,583 20,314 Distribution expenses (118,060) (76,137) Administrative expenses (122,989) (127,704) Profit from operations 5 75,360 74,119 Finance costs, net 6 (44,256) (43,644) Share of profit of associates 20,872 18,676 Profit before tax 51,976 49,151 Profits tax 7 (15,074) (13,737) Profit after tax 36,902 35,414 Minority interests (208) 363 Profit attributable to shareholders 36,694 35,777 Dividends 8 9,900 9,900 Earning per share – Basis 9 RMB0.11 RMB0.11 The accompanying notes form an integral part of these consolidated financial statements. 33 Consolidated balance sheet as at 31st December 2004 (Expressed in Renminbi Thousand Yuan) Note 2004 2003 RMB’000 RMB’000 Assets Non-current assets Property, plant and equipment 11 348,236 365,640 Construction in progress 12 77,680 45,773 Investments in associates 13 83,951 81,575 Non-trading securities 14 2,000 2,000 Deferred tax assets 15 7,224 8,544 Total non-current assets 519,091 503,532 Current assets Inventories 16 696,257 633,787 Trade receivables 17 763,451 755,868 Bills receivables 57,047 36,869 Pre-paid expenses and other current assets 18 47,310 58,997 Prepaid income tax 3,163 2,064 Restricted bank deposits 19 82,032 30,212 Cash and bank balances 20 37,774 85,865 Total current assets 1,687,034 1,603,662 Total assets 2,206,125 2,107,194 The accompanying notes form an integral part of these consolidated financial statements. The consolidated financial statements have been approved for issue by the board of directors on 22 April 2005. 34 Consolidated balance sheet as at 31st December 2004(Continued) (Expressed in Renminbi Thousand Yuan) Note 2004 2003 RMB’000 RMB’000 Equity and liabilities Shareholders’ equity Share capital 21 330,000 330,000 Reserves 22 739,199 712,405 1,069,199 1,042,405 Minority interests 23 3,425 3,217 Non-current liabilities Long-term bank loans 24 282,840 258,300 Other liabilities 306 333 Total non-current liabilities 283,146 258,633 Current liabilities Trade payables 25 312,248 259,381 Bills payable 82,032 36,450 Accrued expenditure and other payables 26 105,225 131,718 Short-term bank loans 24 350,850 375,390 Total current liabilities 850,355 802,939 Total liabilities 1,133,501 1,061,572 Total equity and liabilities 2,206,125 2,107,194 The financial statements on pages 2 to 34 were approved and authorized for issue by the Board of Directors on 22 April 2005 and are signed on its behalf by: Director Director 35 Consolidated statement of changes in equity for the year ended 31st December 2004 (Expressed in Renminbi Thousand Yuan) Statutory Statutory Share Capital surplus public Retained capital reserves reserve fund welfare fund profits Total equity RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Balance at 1 January 2003 -As previously reported 330,000 521,161 24,635 12,317 128,415 1,016,528 -Adjustment of previous - - 854 427 (1,281) - years -As restated 330,000 521,161 25,489 12,744 127,134 1,016,528 Payment of 2002 - - - - (9,900) (9,900) dividends Net profit attributable to - - - - 35,777 35,777 shareholders Appropriations - - 2,768 1,384 (4,152) - Balance at 31 December 2003 and 1 January 2004 330,000 521,161 28,257 14,128 148,859 1,042,405 Payment of 2003 - - - - (9,900) (9,900) dividends Net profit attributable to - - - - 36,694 36,694 shareholders Appropriations - - 3,563 1,781 (5,344) - Balance at 31 December 2004 330,000 521,161 31,820 15,909 170,309 1,069,199 36 Consolidated cash flow statement for the year ended 31st December 2004 (Expressed in Renminbi Thousand Yuan) 2004 2003 RMB’000 RMB’000 Profit before tax 51,976 49,151 Adjustments for： Share of profit of associates (20,872) (18,676) Interest income (2,269) (1,892) Interest expenses 33,822 34,669 Depreciation of property, plant and equipment 50,320 57,499 Provision for doubtful debts 3,817 12,470 Loss on debt restructuring 14,446 5,802 Gain on debt restructuring (1,215) (3,338) Provision for slow moving inventories 1,731 8,168 Gain on disposal of property, plant and equipment (4,957) (347) Operating cash flows before movements in working 126,799 143,506 capital Increase in inventories (64,201) (77,536) Increase in trade receivables (20,141) (18,331) Increase in trade payables 102,067 58,211 Cash generated by operations 144,524 105,850 Income tax paid (9,338) (8,165) Interest paid (33,822) (35,634) Net cash from operating activities 101,364 62,051 37 Consolidated cash flow statement for the year ended 31st December 2004(Continued) (Expressed in Renminbi Thousand Yuan) 2004 2003 RMB’000 RMB’000 Net cash from operating activities 101,364 62,051 Investing activities Interest received 2,269 1,892 Net proceeds from disposal of property, plant and 4,957 216 equipment Purchases of property, plant and equipment and (94,961) (27,568) construction in progress Increase in restricted deposits and deposits with (57,820) (13,001) maturities more than three months Net cash used in investing activities (145,555) (38,461) Financing activities Dividends paid to shareholders (9,900) (9,900) Repayment of other liabilities - (2,070) New bank loans raised 434,680 663,940 Repayment of bank loans (434,680) (663,940) Net cash used in financing activities (9,900) (11,970) Net (decrease) increase in cash and cash equivalents (54,091) 11,620 Cash and cash equivalents at beginning of year 85,865 74,245 Cash and cash equivalents at end of year (note 20) 31,774 85,865 38 Notes to the financial statements for the year ended 31 December 2004 General information Wafangdian Bearing Company Limited (the “Company”) was established as a joint stock limited company in the People’s Republic of China (the “PRC”) on 20 March 1997. Its domestically listed foreign ordinary public shares (B shares) have been listed on the Shenzhen Stock Exchange since 25 March 1997. The Company considers that Wafangdian Bearing Group Company Limited (“Wafangdian Bearing Group”) is its parent and ultimate parent company. The Company together with its subsidiaries is collectively referred to as the “Group”. The Group is principally engaged in the manufacturing and sale of bearing products, engineering equipment, automobile spare parts and relating products. As of 31 December 2004, the Company has direct interests in the following subsidiaries, all of which are incorporated in the PRC. Particulars of which are set out below: Attributable Name of company equity interest Principal activities Liaoyang Bearing Manufacture Manufacture and trading of bearing Co. Limited 100% products Wafangdian General Bearing Manufacture and trading of bearing Co. Limited 75% products Principal accounting policies a) Statement of compliance The consolidated financial statements of the Group have been prepared in accordance with the International Financial Reporting Standards (“IFRS”) promulgated by the International Accounting Standards Board (“IASB”). IFRS includes International Accounting Standards (“IAS”) and related interpretations. The Group maintains its accounting records and prepares its statutory financial statements in accordance with the accounting principles in the PRC, PRC Accounting Standards and the Accounting System (“Statutory Financial Statements”). The accounting policies and basis adopted to the preparation of the Statutory Financial Statements differ in certain respects from IFRS. The differences arising from the restatement of the results of operations and the net assets for compliance with IFRS are adjusted in financial statements but will not be taken up in the accounting records of the Group. 39 2. Principal accounting policies (continued) b) Basis of preparation Except for certain financial instruments which are stated at their fair value, the financial statements have been prepared on the historical cost basis. The accounting policies adopted was consistent with the previous years. The principal accounting policies adopted in this report are set out below: c) Basis of consolidation The consolidation financial statements include the financial statements of the Company and its subsidiaries. Subsidiaries are those enterprises controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. The results of subsidiaries are included in the consolidated financial statements from the date that control effectively commences until the date that control effectively ceases, and the share attributable to minority interests is deducted from or added to the profit from ordinary activities after taxation. All significant inter-company balances, transactions, and any unrealized gains arising from intercompany transactions are eliminated on consolidation. d) Investments in associates An associate is a company, not being a subsidiary, in which the Group exercises significant influence over its management. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control over those policies. Investments in associates are accounted for using the equity method in the Group’s financial statements, from the date that significant influence commences to the date that significant influence ceases. When the Group’s share of losses exceeds the carrying amount of the associates, the carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has obligations in respect of the associates. Unrealized gains and losses arising from transactions with associates are eliminated to the extent of the Group’s interest in associates, except where unrealized losses provide evidence of an impairment of the asset transferred, in which case they are recognized immediately in the income statement. 40 2. Principal accounting policies (continued) e) Foreign currency transactions Transactions in foreign currencies are translated to RMB at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet dates are re-translated to RMB at the foreign exchange rate ruling at that date. Non-monetary assets and liabilities denominated in foreign currencies, that are stated at historical cost are translated to RMB at the foreign exchange rate ruling at the date of the transaction. Difference of exchange is recognized in the income statement. f) Property, plant and equipment i) Owned assets Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. The cost for self-constructed assets includes the cost of materials, direct labour and an appropriate proportion of production overheads and borrowing costs. Where an item of property, plant and equipment comprises major components having difference useful lives, they are accounted for as separate items of property, plant and equipment. ii) Subsequent expenditure Expenditure incurred to replace a component of an item of property, plant and equipment, including inspection and overhead expenditure, is capitalized. Other subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the item of property, plan and equipment. All other expenditure is recognized in the income statement as an expense as incurred. iii) Depreciation Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of items of property, plant and equipment, and major components that are accounted for separately. The estimated useful lives are as follows: Depreciation rates per Years annum Buildings 15 - 35 2.77%-6.47% Plant and equipment 7 5.39%-13.86% Furniture and fixtures 4 - 11 8.82%-24.25% Motor vehicles 6 16.17% 41 2. Principal accounting policies (continued) f) Property, plant and equipment vi) Disposals Gains or losses arising from the retirement or disposal of property, plant and equipment are determined as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in the income statement on the date of retirement or disposal. g) Construction in progress Construction in progress represents properties under construction and is stated in the balance sheet at cost less impairment losses. Cost comprises direct cost of construction as well as interest charges and foreign exchange differences on related borrowing funds to the extent that they are regarded as an adjustment to interest charges during the period of construction. Construction in progress is transferred to property, plant and equipment when the asset is substantially ready for its intended use. No depreciation is provided in respect of construction in progress. h) Investment Dated debt securities that the Group has the ability and intention to hold to maturity are classified as “held-to-maturity securities”. Held-to-maturity securities are stated in the balance sheet at amortised cost less provision for impairment losses. For the periods presented, none of the Group’s debt securities were classified as held-to maturity securities. Securities that are acquired principally for the purpose of generating a profit from short term fluctuations in price or dealer’s margin are classified as “trading securities”. Trading securities are stated in the balance sheet at fair value with the changes in the fair value included in the income statement. Securities other than those classified as held-to-maturity and trading are classified as “non-trading securities”. Non-trading securities are stated in the balance sheet at cost less impairment losses. Gains or losses on disposal of investment are determined on the specific identification basis and are accounted for in the income statement on the trade date. 42 2. Principal accounting policies (continued) i) Impairment The carrying amounts of long-lived assets are reviewed periodically in order to assess whether the recoverable amounts have declined below the carrying amounts. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount is reduced to the recoverable amount. The recoverable amount is the greater of the net selling price and the value in use. In determining the value in use, expected future cash flows generated by the asset are discounted to their present value. The Group assesses at each balance sheet date whether there is any indication that an impairment loss recognized for an asset in prior years may no longer exist. An impairment loss is reversed if there has been a favorable change in the estimates used to determine the recoverable amount. A subsequent increase in the recoverable amount of an asset, when the circumstances and events that led to the write-down or write-off cease to exist, is recognized as income unless the asset is carried at revalued amount. j) Inventories Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated cost of completion and selling expenses. The cost of inventories is calculated based on the weighted average costing method and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of overheads based on normal operating capacity. k) Trade and other receivables Trade and other receivables are stated at cost less allowance for doubtful accounts. An allowance for doubtful accounts is provided based upon the evaluation of the recoverability of these accounts at the balance sheet date. l) Cash and cash equivalents Cash equivalents represent short-term, highly liquid investments that are readily convertible to a known amount of cash and subject to an insignificant risk of changes in value. 43 2. Principal accounting policies (continued) m) Interest-bearing loans Interest-bearing loans are recognized initially at cost, less attributable transaction costs. Subsequent to initial recognition, interest-bearing loans are stated at amortised cost with any difference between cost and redemption value being recognized in the income statement over the period of the loans on an effective interest basis. n) Trade and other payables Trade and other payables are stated at their cost. o) Provisions A provision is recognized in the balance sheet when the Group has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risk specific to the liability. p) Dividends Dividends on ordinary shares are recognized as a liability in the period in which they are declared. q) Revenue Revenue from the sale of goods is recognized in the income statement when the significant risks and rewards of ownership have been transferred to the buyer. r) Expenses i) Operating lease payments Payments made under operating lease are recognized in the income statement on straight-line basis over the terms of the respective leases. Lease incentive received is recognized in the income statement as an integral part of the total lease expense. Contingent rental are charged to the income statement in the accounting period in which they are incurred. 44 2. Principal accounting policies (continued) r) Expenses ii) Net financing costs Net financing costs comprise interest payable on loans, calculated using the effective interest rate method, interest receivable on funds invested and foreign exchange gains and losses. Interest income is recognized in the income statement as it accrues, taking into account the effective yield on the assets. Interest expenses are recognized in the income statement using the effective interest rate method. iii) Borrowing costs Borrowing costs are expensed in the income statement in the period in which they are incurred, except to the extent that they are capitalized as being directly attributable to the acquisition, construction or production of an asset which necessarily takes a substantial period of time to get ready for its intended use or sale. The capitalization of borrowing costs as part of the cost of a qualifying asset commences when expenditures for the asset are being incurred, borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress. Capitalization of borrowing costs is ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. s) Retirement benefits The Group participates in retirement schemes operated by local authorities and the annual cost of providing retirement benefits is charged to the income statement according to the contribution determined by the relevant schemes. t) Income tax Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognized in the income statement except to the extent that it relates to items recognized directly to equity, in which case it is recognized in equity. Current tax is the expected tax payable on the taxable income for the year using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment of tax payable in respect of previous years. 45 2. Principal accounting policies (continued) t) Income tax (continued) Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Initial recognition of assets or liabilities that affect neither accounting nor taxable profit is regarded as temporary difference which is not provided for. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date. A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the asst can be utilized. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realized. u) Segment reporting A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segment. 3. Turnover Turnover represents the revenue from the sales of bearing products to outside customers. 4. Other operating income 2004 2003 RMB’000 RMB’000 Sales of raw materials 12,256 14,055 Gain on debt restructuring 1,215 3,338 Waive of payables 408 - Sundry income 2,704 2,921 16,583 20,314 46 5. Profit from operations Profit from operations is arrived at after charging/(crediting): 2004 2003 RMB’000 RMB’000 Staff costs (note5a) - Wages and salaries 115,141 118,711 - Staff welfare 15,934 17,068 - Contribution to retirement scheme 21,291 22,749 152,366 158,528 Depreciation of property, plant and equipment 50,320 57,499 Maintenance expenses 31,474 24,999 Land use fee paid to Wafangdian Bearing Group 2,620 3,164 Research and development costs paid to Wafangdian Bearing Group 5,400 5,400 Trade mark use fee paid to Wafangdian Bearing group 21,825 - Provision for slow moving inventories 1,731 8,168 Provision for doubtful debts 3,817 12,470 Loss on debt restructuring 14,446 5,802 Gain on disposal of property, plant and equipment (4,957) (347) 5a) Staff costs included directors’ remuneration of RMB252,000 (2003: RMB102,000). 6. Finance costs, net 2004 2003 RMB’000 RMB’000 Interest expenses 35,890 35,634 Less: Amount capitalised in construction in progress (2,068) (965) 33,822 34,669 Interest income (2,269) (1,892) Finance charge paid to Wafangdisn Bearing group for providing bank guarantee 11,300 10,300 Foreign exchange loss, net 580 16 Other finance charges 823 551 44,256 43,644 Capitalisation rate adopted for construction in progress 5.66% 5.98% 47 7. Income tax expenses Income tax expenses in the income statement represent:- 2004 2003 RMB’000 RMB’000 Current taxation PRC income tax - the group 9,468 11,858 - associates 4,286 1,879 13,754 13,737 Deferred taxation 1,320 - 15,074 13,737 A reconciliation of the expected tax with the actual tax expense is as follows:- 2004 2003 RMB’000 RMB’000 Profit before taxation 51,976 49,151 Expected income tax expense at a statutory tax rates 16,220 12,998 Non-taxable income (9,016) (8,977) Non-deductible expenses 2,060 5,113 Utilities of tax losses previously not recognized (462) - Share of taxation of associates 4,286 1,879 Deferred tax assets not recognized 1,986 2,724 15,074 13,737 Notes: The provision for PRC income tax for the Group is determined at the statutory rates of 24% or 33% applicable to the Company and the Subsidiaries in accordance with the relevant income tax rules and regulations of the PRC. The statutory rate of the associate, Dalian SKF Bearing Company Limited, is 24%. However, it is enjoying the tax privilege of 50% reduction according to the relevant tax rules and regulations of the PRC. Therefore its applicable effective tax rate is 12%. 48 9. Dividends 2004 2003 RMB’000 RMB’000 Dividend proposed after the balance sheet date of RMB0.03 per share (2003: RMB0.03 per share) 9,900 9,900 Pursuant to a resolution passed at the Directors’ meeting on 22 April 2005, a final dividend of RMB 0.03 (2003: RMB 0.03) per share totaling RMB 9,900,000 (2003: RMB 9,900,000) was proposed for shareholders’ approval at the Annual General Meeting. Final dividend proposed after the balance sheet date has not been recognized as a liability at the balance sheet date. Dividend attributable to the previous financial year, approved and paid during the year represent: 2004 2003 RMB’000 RMB’000 Final dividends in respect of the previous financial year, approved and paid during the year, of RMB 0.03 per share (2003: RMB 0.03 per share) 9,900 9,900 9. Earnings per share The earnings per share for the year ended 31 December is calculated based on the net profit attributable to shareholders of RMB 36,694,000 (2003: RMB 35,777,000) and the weighted average number of ordinary shares outstanding during the year of 330,000,000 shares (2002: 330,000,000 shares). The amount of diluted earning per share is not presented as there were no dilutive potential ordinary shares in expositing during the years presented. 10. Employee benefit plan As stipulated by the regulation of the PRC, the Group participates in various defined contribution retirement plans organized by municipal and provincial government for its staff. The Group is required to make contributions to the retirement plan at rates 19% of the salaries, bonus and certain allowances of its staff. A member of the plan is entitled to a pension equal to a fixed proportion of the salary prevailing at his or her retirement date. The Group has no other material obligations for the payment of pension benefits associated with these plans beyond the annual contribution described above. The Group’s contribution for the year was RMB21,291,000（2003：RMB22,749,000）. The Company’s contribution to the defined contribution plans administered by the PRC government is recognized as an expense in the income statement as incurred. 49 Property, plant and equipment Plant and Furniture Motor Buildings equipment and fixtures vehicles Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Cost 1 January 2004 256,139 449,352 281,086 17,864 1,004,441 Re-classification - 75,762 (75,402) (360) - Additions - 5,013 32 1,518 6,563 Transfer from construction in progress 13,216 21,852 18,162 3,288 56,491 Disposals (34,345) (90,925) (66,954) (1,857) (194,081) 31 December 2004 235,010 461,027 156,924 20,453 873,414 Accumulated depreciation 1 January 2004 130,967 271,070 224,404 12,360 638,801 Re-classification - 64,719 (64,711) (8) - Charge for the year 7,738 29,127 11,976 1,479 50,320 Written back on disposals (22,624) (82,242) (57,524) (1,553) (163,943) 31 December 2004 116,081 282,674 114,145 12,278 525,178 Net book value 31 December 2004 118,929 178,353 42,779 8,175 348,236 31 December 2003 125,172 178,282 56,682 5,504 365,640 All of the buildings owned by the Group are located in the PRC under medium lease (lease periods of 10 years or more but less than 50 years). Included in Buildings are net book value of RMB2,097,000. The application for property use permit of which are in progress. 50 12. Construction in progress 2004 2003 RMB’000 RMB’000 Cost At beginning of year 47,176 46,659 Additions 88,398 41,151 Transfer to property, plant and equipment (56,491) (40,634) At end of year 79,083 47,176 Accumulated provision for impairment losses At beginning and end of year 1,403 1,403 Net book value 77,680 45,773 As at 31 December 2004, construction in progress included capitalized interest of RMB626,000. Investments in associates 2004 2003 RMB’000 RMB’000 At beginning of year 81,575 79,475 Share of profit 20,872 18,676 Share of tax (4,286) (1,879) Share of profit after tax 16,586 16,797 Dividends received (14,210) (14,697) At end of year 83,951 81,575 The Group’s investments in associates are accounted for under equity method and individually or in the aggregate not material to the Group’s financial condition or results of operations for all periods presented. The Company has direct interests in the following associates, all of which are incorporated in the PRC. 51 13. Investments in associates (continued) Particulars of which are set out below: Attributable Name of equity Principal Company interest Activities Manufacture and trading of Dalian SKF Bearing Company Limited 49% SRB bearing products Shanghai Zhenxin Wazhou Mechanical & Electrical Product Sales Company Sale of bearing products Limited 40% and accessories 14. Investments in non-trading securities 2004 2003 RMB’000 RMB’000 Unlisted investments, at cost 2,000 2,000 Unlisted investment represents 4.76% equity interest in 上海爱姆意机电设备连锁有限公司 held by the Group. 15. Deferred tax assets Deferred tax assets mainly consist of temporary difference of depreciation charge of fixed assets. The movements are as follows: 2004 2003 RMB’000 RMB’000 At beginning of year 8,544 8,544 Transfer to income statement (1,320) - At end of year 7,224 8,544 As at 31 December 2004, deductible temporary differences of RMB52,974,000 were not recognized as deferred tax asset. 52 16. Inventories 2004 2003 RMB’000 RMB’000 Raw materials 100,129 107,572 Work-in-progress 149,828 95,508 Finished goods 473,823 456,499 723,780 659,579 Less: Provision for slow-moving inventories (27,523) (25,792) 696,257 633,787 At 31 December 2004, the carrying amount of the Group’s inventories carried at net realisable value amounted to RMB419,741,000 (2003：RMB393,846,000）. 17. Trade receivable 2004 2003 RMB’000 RMB’000 Wafangdian bearing Group and fellow subsidiaries 159,445 149,479 Associates - 849 Third parties 675,498 672,732 834,943 823,060 Less: Provision for doubtful debts (71,492) (67,192) 763,451 755,868 53 18. Pre-paid expenditure and other current assets 2004 2003 RMB’000 RMB’000 Wafangdian Bearing Group and fellow subsidiaries 4,871 6,934 Associates - 30 Third parties 47,203 56,947 Pre-paid expenses 1,335 1,668 53,409 65,579 Less: Provision for doubtful debts (6,099) (6,582) 47,310 58,997 19. Restricted bank deposits Restricted bank deposits represent deposits with banks pledged for banking facilities granted to the Group.. 20. Cash and bank balances For the purpose of cash flow statement, the analysis of balance of cash and cash equivalents is set out below: 2004 2003 RMB’000 RMB’000 Cash and bank balances 119,806 116,077 Less: Restricted bank deposits(note 10) (82,032) (36,450) 37,774 85,865 Less: Deposits with maturities more than three months (6,000) - 31,774 85,865 54 21. Share capital 2004 2003 RMB’000 RMB’000 Registered, issued and fully paid: 200,000,000domesticstate-owned legal person shares of RMB1.00 each 200,000 200,000 130,000,000domestic public-owned B shares of RMB1.00 each 130,000 130,000 330,000 330,000 The legal entities and B shares rank have the equal rights in all significant respects. 22. Reserves Note 2004 2003 RMB’000 RMB’000 Capital reserve (a) 521,161 521,161 Statutory surplus reserve (b) 31,820 28,257 Public welfare fund reserve (c) 15,909 14,128 Retained profits available for distribution (d) 170,309 148,859 739,199 712,405 a) Capital reserve In accordance with the articles of association, capital reserve of the Company may be utilized to offset prior years’ losses or for the issuance of bonus shares. The capital reserve of the Company mainly represents share premium, that is, net assets acquired from Wafangdian Bearing Group in excess of par value of state shares issued and proceeds from the issuance of B shares in excess of their par value. Section 178 and 179 of the PRC Company Law govern the application of the share premium account. 55 22. Reserves (continued) b) Statutory surplus reserve According to the Company’s Articles of Association, the Company and its subsidiaries are required to transfer 10% of its net profit, as determined in accordance with the PRC Accounts Rules and Regulations, to statutory surplus reserve until the reserve balance reaches 50% of the registered capital. The transfer to this reserve must be made before distribution of a dividend to shareholders. Statutory surplus reserve can be used to offset previous years’ losses, if any, and may be converted into shares capital by the issue of new shares to shareholders in proportion to their existing shareholdings or by increasing the par value of the shares currently held by them, provided that the balance after such issue is not less than 25% of the registered capital. During the year ended 31 December 2004, the Company transferred RMB 3,563,000 (2003: RMB 2,768,000), being 10% of the current year’s net profit determined in accordance with the PRC Accounting Rules and Regulations to this reserve. c) Public welfare fund reserve According to the Company’s Articles of Association, the Company and its subsidiaries is required to transfer 5% of its net profit, as determined in accordance with the PRC Accounting Rules and Regulations, to the statutory public welfare fund. This fund can only be utilized on capital items for the collective benefits of the Company’s employees such as the construction of dormitories, canteen and other staff welfare facilities. This fund is non-distributable other than on liquidation. The transfer to this fund must be made before distribution of a dividend to shareholders. During the year ended 31 December 2004, the Company transferred RMB 1,781,000 (2003:RMB 1,384,000), being 5% of the current year’s net profit determined in accordance with the PRC Accounting Rules and Regulations to this reserve. d) Retained profits available for distribution According to the Company’s Articles of Association, the amount of retained profits available for distribution to shareholders of the Company is the lower of the amount determined in accordance with the PRC Accounting Rules and Regulations and the amount determined in accordance with IFRS. At 31 December 2004, the amount of retained profits available for distribution was RMB 165,142,000 (2003: RMB 145,535,000), being the amount determined in accordance with the PRC Accounting Rules and Regulations. Final dividend of RMB 9,900,000 (2003: RMB 9,900,000) proposed after the balance sheet date has not been recognized as a liability at the balance sheet date. 56 23. Minority interests 2004 2003 RMB’000 RMB’000 At beginning of year 3,217 3,580 Share of profit(loss) of subsidiaries 208 (363) At end of year 3,425 3,217 24. Bank Loan 2004 2003 RMB’000 RMB’000 Long-term loan 282,840 258,300 Short-term loan 350,850 375,390 633,690 633,690 a) Long-term bank loan represent: 2004 2003 Interest rate Interest rate per annum Amount per annum Amount RMB’000 RMB’000 Loan with interest - Guaranty 5.18%-5.85% 281,340 5.49%-6.03% 256,800 - No mortagage and no guaranteed 1,500 - 1,500 282,840 258,300 Wafangdian Bearing Group assures the guaranteed loans. The maturities of the long-term bank loan are as follows: 2004 2003 RMB’000 RMB’000 In two to five years 282,840 258,300 57 24. Bank Loans (continued) b) Short-term bank loans represent: 2004 2003 Interest rate Interest rate per annum Amount per annum Amount RMB’000 RMB’000 Loan with interest - Secured 5.31-6.90% 23,220 5.31-6.90% 23,220 - Guaranteed 5.31-7.03% 327,630 5.31-7.03% 352,170 350,850 375,390 The secured short-term bank loans are secured by certain property, plant and equipment with net book value of RMB 50,063,000 (2003:RMB 50,063,000). Included in above guaranteed short-term loans RMB 316,800,000 (2003: RMB 341,340,000) is guaranteed by Wafangdian Bearing Group. As at 31 December 2004, the loan of RMB26,670,000 had been overdue. The extension of the terms was in progress. 25. Payables Accounts of Trade 2004 2003 RMB’000 RMB’000 Wafangdian Bearing Group and fellow subsidiaries 46,097 50,204 Associates 61,441 23,573 Third parties 204,710 185,604 312,248 259,381 58 26. Accrued expenses and other payables 2004 2003 RMB’000 RMB’000 Wafangdian Bearing Group and fellow subsidiaries 52,620 24,328 Third parties 48,176 104,916 Accrued expenses 4,429 2,474 105,225 131,718 The amounts due from Wafangdian Bearing Group and fellow subsidiaries are repayable in accordance with normal commercial terms. 27. Financial Risk and Management a) Financial risks and risks management The main risks arising from the Company’s financial instruments are business risk, interest rate risk, foreign currency risk and credit risk. The Company does not have any written risk management policies and guidelines. However, the board of directors meets periodically to analyze and formulate measures to manage the Company’s exposure to these risks. Generally, the Company introduces conservative strategies on its risk management. As the Company’s exposure to these risks is kept to a minimum, the Company has not used any derivatives and other instruments for hedging purposes. The Company does not hold or issue derivative financial instruments for trading purposes. The board of directors reviews and agrees policies for managing each of these risks and they are summarized below: i) Business risk The Company conducts its operations in the PRC and accordingly is subject to special considerations and significant risks. These include risks associated with, inter alias, the political, economic and legal environment, influence of national authorities over price regulations and competitions in the industry. ii) Interest rate risk The interest rates and terms of repayment of the bank loans of the Company are disclosed in note 24. The Company has no significant concentration of interest rate risk. 59 28. FINANCIAL INSTRUMENTS (continued) a) Financial risks and risks management (continued) iii) Foreign currency risk The Company’s businesses are principally located in the PRC and all transactions are conducted in RMB, except for the purchases of some machinery and equipment. As at 31 December 2004, all of the Company’s assets and liabilities were denominated in RMB except that small amount of cash and cash equivalents were denominated in foreign currency. Fluctuation of exchange rates of RMB against foreign currencies will not significantly affect the Company’s results of operation. iv) Credit risk The Company’s cash and cash equivalents are mainly deposits with state-owned banks in the PRC. The carrying amount of the trade receivables and cash included in the financial statements represent the Company’s maximum exposure to credit risk in relation to its financial assets. The Group has no other financial assets carrying significant exposure to credit risk. The Company has no significant concentrations of credit risk. b) Fair value of financial instruments Financial instruments of the Company mainly consist of cash and bank balances, trade receivables; other current assets trade payable, other payables and long-term interest bearing loans. The carrying amount of the Company’s financial instruments approximated their value as at 31 December 2004 because of the short term maturities of these instruments except for long-term interest bearing loans. It was not practicable to estimate the fair value of the long term loans of RMB258,300,000 as the instruments are not marketable. The carrying amount of the Company’s long term interest bearing loans approximated its fair value based on borrowing rates currently for loans with similar terms maturities. Fair value estimates are made at a specific point in time and based on relevant market information about the financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. 60 28. Commitments a) Operating lease commitments Non-cancelable operating lease rental are payable as follows: 2004 2003 RMB’000 RMB’000 Less than one year 2,620 3,164 In two to five years 1,638 4,878 4,258 8,042 The leases run for an initial period of one to five years, with an option to renew the lease when all terms are renegotiated. b) Other commitments The Company entered into an agreement with Wafangdian Bearing Group on 8th December 2003. Pursuant to the agreement, the Company will pay Wafangdian Bearing Group trademark using fee equivalent to 2% of the sales amount of products carrying the trademarks owned by Wafangdian Bearing Group with effect from 1 January 2004. The terms of the agreement is for 3 years.. 29. Contingent liabilities At 31 December, 2004 and 2003, guarantees given to banks in respect of banking facilities granted to the parties below were as follows: 2004 2003 RMB’000 RMB’000 Wafangdian Bearing Group(note 29a) 4,480 4,480 Third parties 3,150 3,150 7,630 7,630 29a) The Company obtained a fixed bank deposits of RMB5,000,000 from Wafangdian Bearing group as security for the guarantee. The Company monitors the conditions that are subject to the guarantees to identify whether it is probable that a loss has occurred, and recognized any such losses under guarantees when those losses are estimable. At 31 December 2004 and 2003, it is not probable that the Company will be required to make payments under the guarantees. Thus no liability has been accrued for a loss related to the Company’s obligation under the guarantees arrangement. 30. Associated parties transactions Companies are considered relating if one company has ability, directly or indirectly, to control the other company or exercise significant influence over the other company in making financial and 61 operating decisions. Companies are also considered relating if they ate subject to common control or common significant influence. The associated parties should be separate human being or the enterprise entities. The parent of the Company, Wafangdian Bearing Group, is a state-owned enterprise established in PRC holding 60.6% of the Company’s shares. Wafangdian Bearing Group itself is a national company owned by the PRC government. There are also many other enterprises directly or indirectly owned or controlled by the PRC government (“state-owned enterprises”). Under IFRS, state-owned enterprises, other than Wafangdian Bearing Group and fellow subsidiaries, are not considered related parties. Related parties refer to enterprises that Wafangdian Bearing Group would has significant effect. The main transaction carried out by our group and Wafangdian Bearing Group or with other associated parties , are as follows: 2004 2003 RMB’000 RMB’000 Wafangdian Bearing Group - Purchase of raw materials and bearing parts 12,475 4,670 - Transfer the receivable accounts at book value or cash - 7,807 - Sale of raw materials and bearing parts 57,890 658 - Payment for land use rights 2,620 3,164 - Payment of research and development costs 5,400 5,400 - Payment for guarding and fire protection service 3,374 3,700 - Payment of charge for providing bank guarantee (note 30a) 11,000 10,300 - Payment for advertisement service 821 900 -Payment for leasing of office buildings and equipment 213 679 -Trade mark use fee（note30b） 21,825 - Subsidiaries of Wafangdian Bearing group - Purchase of raw materials and bearing parts 406,177 85,519 - Sale of raw materials and bearing parts 479,742 152,634 -Payment for service 2,531 3,359 Dalian SKF Bearing Company Limited, an associate - Purchase of raw materials and bearing parts 202,368 160,502 - Sale of raw materials and bearing parts 105,810 108,727 62 30. Associated parties transactions (continued) 30a) The charge was calculated at an annual rate of 2% of certain bank loans guaranteed by Wafangdian Bearing Group. 30b) Pursuant to the agreement signed between the Company and Wafangdian Bearing Group on 1 January 2002, the Company can use Wafangdian Bearing Group’s trademark free of any charge for the period expired on 31 December 2003. With effect from 1 January 2004,, the Company will pay Wafangdian Bearing Group trademark using fee equivalent to 2% of sales amount for products carrying Wafangdian Bearing Group’s trademark. (Note 28). 30c) On 18 December 2003, the Company entered into agreement with Wafangdian Bearing group to dispose the assets of Steel Ball Factory to Wafangdian Bearing Group at a consideration of RMB24,397,000 which was based on the valuation on 31 January 2004. The consideration is to be paid off in such a way that the Wafangdian Bearing Group will take up the amount owed by the Company to creditors in relation to the Steel Ball Factory. If the Company could not obtain consent from these creditors for such arrangement by 30 June 2004, the consideration will be paid by cash. Up to 31 December 2004, the Company had not obtained the written consent from these creditors and Wafangdian Bearing Group had not paid the consideration. In additions, according to the Agreement, the Company had to arrange or send away 297 employee of the Steel Ball Factory after the assets had been transferred. The allocation payment was approximately of RMB6,606,000 at one time. During the year, the Company had made the payment at one time. 30d) On 25 February 2004, the Company entered into agreement with Wafangdian Bearing Group to dispose the assets of Forging and Pressing Factory to Wafangdian Bearing Group at a consideration of RMB32,983,000 which was based on the valuation at 30 March 2004. The consideration is to be paid off in such a way that the Wafangdian Bearing Group will take up the amount owed by the Company to creditors in relation the Pressing Factory. If the Company could not obtain consent from these creditors for such arrangement by 31 August 2004, the consideration will be paid by cash. Up to 31 December 2004, the Company had not obtained the written consent from these creditors and Wafangdian Bearing Group had paid RMB5,339,000 to the Company. In additions, according to the agreement, the Company had to pay off 758 employee of the Pressing Factory after the assets had been transferred. The severance payment was approximately of RMB18,852,400. Up to 31 December 2004, the formalities of the assets transfer had not been completed; the employees were not laid off. The Company will make the payment once the formalities are completed. 30e) The amounts set out in the table above in respect of the years ended 31 December 2004 and 2003 represent the relevant costs to the Group as determined by the corresponding contracts with the related parties. The directors of the Company had the opinion that the above transactions with related parties were conducted in the ordinary course of business and on normal commercial terms or in accordance with the agreements governing such transactions, and the independent non-executive 63 directors have confirmed this. 31. Segment information During the year, approximately 90% (2003：approximately 90%) of the Group’s turnover and profit from operations were attributable to the manufacture and sales of bearing products in the PRC. Accordingly, no analysis by business and geographical segment is presented. 32 Differences between financial statements prepared under the PRC Accounting Rules and Regulations and IFRS Other than the differences in the classifications of certain financial captions and the accounting for the items described below, there are no material differences between the Group’s financial statements prepared under the PRC Accounting Rules and Regulations and IFRS. The major differences are: i) Gain from debt restructuring Under the PRC Accounting Rules and Regulations, gain from debt restructuring should be credited to capital reserve. Under IFRS, gain from debt restructuring should be recognized as income in the income statement. ii) Waive of payable Under the PRC Accounting Rules and Regulations, amount waived by creditors should be credited to capital reserve. Under IFRS, gain from debt restructuring should be recognized as income in the income statement. iii) Unrealized profit from transactions with associates Under the PRC Accounting Rules and Regulations where associates are accounted for using the equity method in consolidated financial statements, unrealized profits resulting from transactions between the investor and its associates are not eliminated. Under IFRS, such unrealized profits should be eliminated to the extent of the investor’s interests in the associates. 64 32 Differences between financial statements prepared under the PRC Accounting Rules and Regulations and IFRS (continued) Effects of major differences between the PRC Accounting Rules and Regulations and IFRS on profit attributable to shareholders are analyzed as follows: Note 2004 2003 RMB’000 RMB’000 Profit attributable to shareholders under the PRC Accounting Rules and Regulations 34,851 28,130 Adjustments: -Gain on debt restructuring （i） 1,215 969 -Waive of payable （ii） 408 2,369 -Unrealized profit from transactions with associates （iii） 220 2,314 -Government grant - 1,980 -Others - 15 1,843 7,647 Profit attributable to shareholders under IFRS 36,694 35,777 Effects of major differences between the PRC Accounting Rules and Regulations and IFRS on shareholders’ equity are analyzed as follows: Note 2004 2003 RMB’000 RMB’000 Shareholders’ equity under the PRC Accounting Rules and Regulations 1,070,974 1,044,400 Adjustments: -Unrealized profit from transactions with associates （iii） (1,775) (1,995) Shareholders’ equity under IFRS 1,069,199 1,042,405 65 Chapter Eleven. List of reference documents 1. Accounting statements with the signatures and seals of the legal representative, financial controller and the director of the accounting department of the company; 2. The original 2004 annual audit report and the financial statement with the seal of the Certified Public Accountants and the personal signature and seal of the certified public accountant. 3. Original documents and notices of the company disclosed in newspapers designated by the Security Supervisory Committee of China in the report period. Above documents are kept in the Investment and Securities Department of the company. 66