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深康佳Ａ(000016)深康佳Ｂ2004年年度报告（英文版）

RainbowDragon 上传于 2005-04-19 06:09

KONKA GROUP CO., LTD. ANNUAL REPORT 2004 Chairman of the Board: Ren Kelei April 15, 2005 I Contents Section I. Important Notice------------------------------------------------------------------------------- Section II. Company Profile------------------------------------------------------------------------------ Section III. Financial Highlights and Business Highlights------------------------------------------- Section IV. Changes in Share Capital and Particulars about Shareholders------------------------- Section V. Particulars about Directors, Supervisors, Senior Executives and Employees-------- Section VI. Administrative Structure-------------------------------------------------------------------- Section VII. Particulars about Shareholders’General Meeting-------------------------------------- Section VIII. Report of the Board of Directors-------------------------------------------------------- Section IX. Report of the Supervisory Committee---------------------------------------------------- Section X. Significant Events---------------------------------------------------------------------------- Section XI. Financial Report----------------------------------------------------------------------------- Section XII. Documents for Reference----------------------------------------------------------------- II Section I. Important Notice 1.The Board of Directors of KONKA GROUP CO., LTD. (Hereinafter referred to as the Company) and all its Directors individually and collectively accept responsibility for the authenticity, accuracy and completeness of the contents of this report and confirm that there are no material omissions or errors which would render any statement misleading. 2.The annual report and its summary was examined and approved by the whole directors in the 6 th meeting of the 5 th Board of Directors of the Company. 3.This annual report is prepared in both Chinese and English. Should there be any difference in understanding of the two versions, the Chinese version shall prevail. 4.Director Mr. Jian Di’an entrusted Mr. Ren Kelei to attend the Board meeting and vote on his behalf. 5.No director stated that they couldn’t ensure the correctness, accuracy and completeness of the contents of the Annual Report. 6.Shenzhen Dahua Tiancheng Certified Public Accountants issued a standard unqualified Auditors’Report for the Company. 7.Chairman of the Board of the Company Mr. Ren Kelei, Chief Financial Officer Mr. Yang Guobin and Person in Charge of Accounting Affairs Ms. Yang Rong hereby confirm that the Financial Report enclosed in the Annual Report is true and complete. III Section II Company Profile 1. Legal Name of the Company: In Chinese: 康佳集团股份有限公司 (Abbr.: 康佳集团) In English: KONKA GROUP CO., LTD. (Abbr.: KONKA GROUP) 2. Registered (Office) Address: Overseas Chinese Town, Nanshan District, Shenzhen Postal Code: 518053 Internet Website of the Company: http://www.konka.com E-mail: szkonka@konka.com 3. Legal Representative of the Company: Mr. Ren Kelei (Chairman of the Board) 4. Secretary of the Board of Directors: Mr. He Jianjun Securities Affairs Representative: Mr. Xu Wenxiao Contact Address: Secretariat of Konka Group Co., Ltd., Overseas Chinese Town, Shenzhen Tel: (86) 755-26608866 Fax: (86) 755-26600082 E-mail: szkonka@konka.com 5. Newspaper Chosen for Disclosing the Information of the Company: China Securities, Securities Times and Hong Kong Ta Kung Pao, etc. Internet Website Designated by CSRC for Publishing the Annual Report: http://www.cninfo.com.cn The Place Where the Annual Report is Prepared and Placed: Secretariat of the Board of Directors 6. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: Shen Konka - A, Shen Konka - B Stock Code: 000016, 200016 7. Initial Registration Date: Oct.1, 1980 Place: Shenzhen. 8. Registration Number of Enterprise Legal Person’ s Business License: QGYSZ Zi No. 1004769. Registration Number of Tax: 440301618815578 10. Certified Public Accountants Engaged by the Company Domestic: Shenzhen Dahua Tiancheng Certified Public Accountants Address: Room 1102-1103, on the 11 th Floor, Tower B, Unite Plaza, No. 5022, Binhai Av., Futian District, Shenzhen International: K.C.OH & Company Certified Public Accountants Address: 8/F., New Henry House, No. 10 Ice House Street, Central, Hong Kong Section III. Financial Highlights and Business Highlights I. Major accounting data as of year 2004 (Unit: RMB) Items Amount Total profit １７０，７３８，５６５．２２ Net profit １４０，７２６，６９９．４５ Net profit after deducting non-recurring gains and losses １０１，９５３，６２３．２０ Profit from main operations １，９６９，４０２，２０８．４２ Other operating profit ３０，３４９，９５１．９６ Operating profit １３３，６２７，１６３．２５ Investment income ３６，６８８，９９８．４９ Subsidy income ４６２，０５９．３５ Net non-operating income/expenses －３９，６５５．８７ Net cash flow arising from operating activities －３７３，６６９，７６６．４８ Net increase/decrease of cash and cash equivalents －４８０，１３１，４５５．２８ II. Major financial index over the recent three years 2003 Increase/decrease compared Items 2004 2002 with the last year (%) After adjustment Before adjustment Income from main operations (RMB’000) １３，３６２，５２１．９１２，８０６，４６６．１１２，８０６，４６６．１＋４．３４８，０４１，６５２．８ Net profit (RMB’000) １４０，７２６．７９９，１４５．５１０１，０７１．０＋４１．９４３５，５９０．４ Net profit after deducting non-recurring gains １０１，９５３．６９６，１４２．２９８，０６７．８＋６．０４２８，６５３．４ and losses (RMB’000) Fully diluted earnings per share (RMB) ０．２３４０．１６５０．１６８＋４１．８２０．０５９ Weighted average earnings per share (RMB) ０．２３４０．１６５０．１６８＋４１．８２０．０５９ Return on equity (%) ４．４１３．２５３．３１Ｉｎｃｒｅｓｅ１．１６ｐｅｒｃｅｎｔ１．２０５ Net cash flow per share arising from operating －０．６２１０．５８４０．５８４－２０６．３３１．０８６ activities (RMB) At the end of 2003 Increase/decrease compared At the end of Items At the end of 2004 with last year (%) 2002 After adjustment Before adjustment Total assets (RMB’000) ９，５９７，８４５．８９，６３４，５８８．１９，６３７，３７５．７－０．３８７，００５，９７４．２ Assets-liability ratio (%) ６４．１３６５．９０６５．８８Ｌｅｓｓ１．７７ｐｅｒｃｅｎｔ５４．５３ Shareholders’ equity (excluding minority ３，１９３，９２８．１３，０５０，７３１．８３，０５３，５１９．４＋４．６９２，９５３，５０８．８ interests) (RMB’000) Net assets per share (RMB) ５．３０６５．０６８５．０７２＋４．７０４．９０６ Net assets per share after adjustment (RMB) ５．１０８４．８９０４．８９５＋４．４６４．７８７ III. Supplemental statement of profit in the report period Return on equity(%) Earnings per share (RMB) Profit of the report period Fully diluted Weighted Fully diluted Weighted average average Profit from main operations ６１．６６６３．０５３．２７３．２７ Operating profit ４．１８４．２８０．２２０．２２ Net profit ４．４１４．５１０．２３０．２３ Net profit after deducting non-recurring gains and losses ３．１９３．２６０．１７０．１７ IV. Items of deducted non-recurring gains and losses and the relevant amount -5- (Unit: RMB) Nature or contents Amount before deducting the influence of Amount after deducting the influence of income tax income tax Investment earnings of projects such as ３６，１２８，８０８．９０３６，１２８，８０８．９０ “Swan Castle”and “Jinxiu Garden” Short-term investment earnings ５９５，４８３．６８５９５，４８３．６８ Earnings from transfer of long-term equity １０５，８３１．８６１０５，８３１．８６ investment Switch aback of bad debt reserve ２，２６９，１５３．６３２，２６９，１５３．６３ Income from government subsidy ２７４，３６６．００２４０，６４０．５７ Non-operating income ７，８８９，９３５．８５７，６３８，７４３．４１ Non-operating expenditure （７，９２９，５９１．７２）（７，７８１，４９２．２９） Influenced amount of losses or gains of （４２４，０９３．５１）（４２４，０９３．５１） minority shareholders Total ３８，９０９，８９４．６９３８，７７３，０７６．２５ V. Changes in shareholders’equity in the report period (Unit: RMB) Amount at the Decrease in this Amount at the end of Items beginning of the Increase in this period period this period period Share capital 601,986,352.00 －－６０１，９８６，３５２．００ Capital reserve 1,851,739,540.29 ５，８４１，９２４．８６－１，８５７，５８１，４６５．１５ Surplus reserve 1,115,134,973.70 －－１，１１５，１３４，９７３．７０ Including: Statutory welfare ２４０，８６０，２２２．７８－－２４０，８６０，２２２．７８ fund Retained profit -514,571,273.94 １４０，７２６，６９９．４５１，９１２，２７０．５－３７５，７５６，８４４．９９ Balance of foreign currency -127,853.67 －２５０，６１５．６２－３７８，４６９．２９ translation Accumulative un-offset losses -3,429,897.23 －１，２０９，４４６．８１－４，６３９，３４４．０４ of subsidiaries Total shareholders’equity 3,050,731,841.15 １４６，５８６，６２４．３１３，３７２，３３２．９３３，１９３，９２８，１３２．５３ Notes: 1. Capital reserve increased in the report period was due to the reason that the invested unit Mudanjiang Konka, which had been calculated according to equity method, had increased capital reserve because of unpaid funds, and the Company increased correspondingly according to equity proportion. 2. The increase of retained profit was due to the reason that a profit amounting to RMB 140,726,699.45 had been realized in this report year; the decrease of retained profit RMB 1,912,270.5was due to the reason that Shenzhen Konka Energy Technology Co., Ltd. had conducted a general checkup on its assets and cancelled assets after verification, resulting in the decrease of net assets at the beginning of the year, while the Company had correspondingly adjusted long-term investments according to equity method in the year. 3. The increase of accumulative un-offset losses of subsidiaries was due to the reason that the holding subsidiary Shenzhen Konka Electrical Appliances, which was brought into the consolidated scope, had losses in this year, although the long-term equity investments for it had been adjusted as zero according to equity method. 4. The foreign exchange translation balance was due to the different exchange rates in different periods. 5. The international Certified Public Accountants engaged by the Company was K. C. Oh & Company Certified Public Accountants. The different of net assets and net profits in the Financial Report prepared according to IFRS was as follows: (Unit: RMB) -6- Net assets Net assets According to International Financial Reporting Standards ３，１９３，６９０，８２２．４８１４２，５４８，６１１．９３ 1. Prophase adjustment to capital reserve ６，９７８，０００．００－ 2. Prophase adjustment to surplus reserve （１７，９０９，０００．００）－ 3. Government’s subsidy’s transferring into capital reserve from deferred １６，４８７，５００．００－ income 4. Partial government’s subsidy’s listing into income （２，９９７，５００．００）（２，９９７，５００．００） 5. Liabilities of affiliated companies unnecessary for payment’s listing into －（５，８４１，９２４．８６） income 6. Net assets decrease of associated company －２，７８７，５８７．７９ 7. Adjustment to un-offset losses of subsidiaries （４，６３９，３４４．０４）－ 8. Balance of moving fees in the period ２，３１７，６５４．０９２，３１７，６５４．０９ 9. Withdrawal of welfare and premium funds －１，９１２，２７０．５０ According to Accounting System for Business Enterprises ３，１９３，９２８，１３２．５３１４０，７２６，６９９．４５ Section IV. Changes in Share Capital and Particulars about Shareholders I. Change in shares (Unit: share) Increase/decrease in this time (+, - ) Before the Items Allotment Bonus Capitalization of Additional After the change change Others Subtotal of share shares public reserve issuance I. Unlisted Shares 1. Sponsors’shares 174,949,746 - - - - - - 174,949,746 Including: - - - - - - - - State-owned share - - - - - - - - Domestic legal person’s shares 174,949,746 - - - - - - 174,949,746 Foreign legal person’s shares - - - - - - - - Others - - - - - - - - 2. Raised legal person’s shares - - - - - - - - 3. Inner employees’shares (shares 16,708 - - - - - - 16,708 held by senior executives) 4. Preference shares or others - - - - - - - - Total unlisted shares 174,966,454 - - - - - - 174,966,454 II. Listed Shares - - - - - - - - 1. RMB ordinary shares 224,181,996 - - - - - - 224,181,996 2. Domestically listed foreign 202,837,902 - - - - - - 202,837,902 shares 3. Overseas listed foreign shares - - - - - - - - 4. Others - - - - - - - - Total listed shares 427,019,898 - - - - - - 427,019,898 III. Total shares 601,986,352 - - - - - - 601,986,352 II. Issuance and listing of shares As approved by CSRC, 139,036,499 unlisted foreign shares of the Company were transferred into listed foreign share for circulation in 2001. The said shares were listed for trade in Shenzhen Stock Exchange dated June 21, 2001. There exists no unlisted inner employee’ s share except for 16,708 shares held by senior executives. III. Particulars about shareholders (I) Ended Dec. 31, 2004, the Company had totally 142,611 shareholders, including 128,338 ones of A-share and 14,273 ones of B-share. -7- (II) Particulars about shares held by the top ten shareholder and the top ten shareholders of circulation share Increase / Number of decrease in the Shares held at the Proportion share Nature of Full name of Shareholders Type of shares report year year-end (%) pledged/ shareholders (share) frozen 1. OVERSEAS CHINESE TOWN GROUP A-share for State-owned 0 174,949,746 29.06 0 CORPORATION non-circulating shareholder 2. OVERSEAS CHINESE TOWN (HONG B share for Foreign -19,137,800 49,238,883 8.18 Unknown KONG) CO., LTD. circulating shareholder 3. HONG KONG CHINA TRAVEL B share for Foreign -5,875,125 39,541,212 6.57 Unknown SERVICE (GROUP) CO., LTD. circulating shareholder 4. THOMSON INVESTMENTS GROUP B share for Foreign +19,000,000 19,000,000 3.16 Unknown LIMITED circulating shareholder 5. MERRILL LYNCH PIERCE FENNER & B share for Foreign +5,531,026 5,531,026 0.92 Unknown SMITH INC circulating shareholder B share for Foreign 6. SKANDIA GLOBAL FUNDS PLC +4,268,802 4,268,802 0.71 Unknown circulating shareholder A share for Other 7. MINSHENG SECURITIES CO., LTD. +2,847,622 2,847,622 0.47 Unknown circulating shareholder 8. CHINA HIGH-TECH INVESTMENT A share for Other +1,304,295 2,550,914 0.42 Unknown GROUP CO. circulating shareholder B share for Foreign 9. YUAN LAN XIANG +2,053,322 2,053,322 0.34 Unknown circulating shareholder 10. DONGGUAN QIHANG INDUSTRIAL A share for Other +1,872,764 1,872,764 0.31 Unknown INVESTMENT CO., LTD. circulating shareholder 11. TOYO SECURITIES ASIA LIMITED B share for Foreign -426,610 1,768,516 0.29 Unknown A/C CLIENT circulating shareholder (III) Explanation on associated relationship or consistent action among the top ten shareholders and the top ten shareholder of circulation share: 1. Among the top ten shareholders, Overseas Chinese Town Group Corporation, the first largest shareholder, held non-circulating shares. There was no change in shares of the Company held by it in the report period. In the report period, Overseas Chinese Town Group Corporation (hereinafter referred to as “OCT Group Company”) signed two agreements of equity transfer: (1) On Aug. 28, 2004, OCT Group Company signed the Agreement of Equity Transfer with Anhui Tianda Enterprises (Group) Co., Ltd.. According to the said agreement, OCT Group Company planed to transfer its 550 million state-owned legal person’ s shares for non-circulating of the Company to Anhui Tianda Enterprises (Group) Co., Ltd.. The State-owned Assets Supervision and Administration Commission of the State Council wrote a reply (GZCQ [2004] No. 923) and approved this transfer. (2) On Nov. 23, 2004, OCT Group Company signed the Agreement of Sale and Purchase between Thomson Investments Group Limited and Overseas Chinese Town Group Corporation with Thomson Investment Group Limited (hereinafter referred to as Thomson). Both parties agreed that OCT Group Company would transfer 290 million state-owned legal person’ s shares of the Company to Thomson, the State-owned Assets Supervision and Administration Commission of the State Council and Ministry of Commerce of the PRC written replies on Jan. 19, 2005 and on Mar. 8, 2005 respectively (GZCQ [2005] No. 44, SZP [2005] No. 346) and approved this transfer. Since the above- mentioned two equity transfers had not undergone ownership transfer procedures, the shares of the Company held by OCT Group Company had not changed in the report period. -8- 2. Overseas Chinese Town (Hong Kong) Co., Ltd. is the wholly-owned subsidiary of Overseas Chinese Town Group Corporation registered in Hong Kong; the shares held by it were changed due to trading in the second market in the report period. Except for this, there exists no associated relationship between Overseas Chinese Town Group Corporation and the other shareholders of circulation share, and they do not belong to the consistent actionist regulated by the Management Measure of Information Disclosure on Change of Shareholding for Listed Companies. For the other shareholders of circulation share, the Company is unknown whether there exists associated relationship or consistent actionist regulated by the Management Measure of Information Disclosure on Change of Shareholding for Listed Companies or not. 3. The other shareholders are social shareholders, who hold circulation shares. The shares held by them were changed due to trading in the second market during the report period. (IV) Particulars about legal person shareholder holding over 5% of total shares of the Company Type of holding Legal Dated of Registered capital Name Type of enterprise Core business scope share representative foundation (RMB’000) Overseas Chinese Domestic legal State-owned sole Industry, tourism, real estate, Town Group Ren Kelei May 1986 RMB 200,000 person’s shares corporation finance and commerce Corporation Wholly-owned Overseas Chinese foreign subsidiary Foreign circulation Investment and share holding by Town (Hong Kong) of Overseas Zheng Fan Oct. 1997 HKD 455,000 shares high-tech Co., Ltd. Chinese Town Group Corporation Tourism, industrial investment, Hong Kong China capital construction, real estate, Foreign circulation State-owned foreign Travel Service (Group) Che Shujian Oct. 1985 HKD 700,000 hotel management, passenger-cargo shares corporation Co., Ltd. transportation and import & export trade IV. Holding shareholder and actual controller of the Company 1. Holding shareholder and actual controller In the report period, the holding shareholder and actual controller of the Company remained unchanged, both being Overseas Chinese Town Group Corporation. Shares of the Company held by it had not been pledged, entrusted or frozen. Overseas Chinese Town Group Corporatio n was a large-scale state-owned enterprise, which had been founded in 1985 by the approval of the State Council and belonged to one of the central enterprises of State-owned Assets Supervision and Administration Commission of the State Council. Its legal representative was Mr. Ren Kelei. Overseas Chinese Town Group Corporation had a registered capital of RMB 0.2 billion, and owned 14 secondary enterprises, among which the Company and Shenzhen Overseas Chinese Town Holding Company (hereinafter referred to as OCT Holding, stock code: 000069) were two companies listing in domestic. Right now, the total assets of Overseas Chinese Town Group Corporation had reached RMB 17.7 billion, with the annual sales income exceeding RMB 15 billion and the net assets close to RMB 4 billion. 2. The property rights and control relationship between the actual controller and the Company -9- State-owned Assets Supervision and Administration Commission of the State Council 100% Overseas Chinese Town Group Company 100％ 29.06% (A-share) OVERSEAS CHINESE TOWN (HONG KONG) CO., LTD. 8.18% (B-share) Konka Group Co., Ltd. Particulars about legal person shareholder holding over 10% (including 10%) of total shares of the Company Except for Overseas Chinese Town Group Corporation, the holding shareholder of the Company, there existed no other shareholders of legal person’ s share holding over 10% total shares of the Company (including 10%). Section V. Particulars about Directors, Supervisors, Senior Executives and Employees I. Basic information 1. Basic information Shares held at Shares held at Name Title Sex Age Office term the year-begin the year-end Note (share) (share) Jun. 2004- Ren Kelei Chairman of the Board Male 54 0 0 Jun. 2007 Jun. 2004- Jian Di’an Vice Chairman of the Board Male 55 0 0 Jun. 2007 Jun. 2004- Vice Chairman of the Board Hou Jun. 2007 Male 36 0 0 Songrong Apr. 2004- President Apr. 2006 Wang Jun. 2004- Director Male 50 0 0 Ruquan Jun. 2007 Jun. 2004- Ni Zheng Director Male 36 0 0 Jun. 2007 Jun. 2004- Wei Qing Director Male 52 0 0 Jun. 2007 Jun. 2004- Xiao Zhuoji Independent Director Male 71 0 0 Jun. 2007 Jun. 2004- Ye Wu Independent Director Male 66 0 0 Jun. 2007 Jun. 2004- Ma Liguang Independent Director Female 64 0 0 Jun. 2007 Chairman of the Supervisory Jun. 2004- Dong Yaping Male 51 0 0 Committee Jun. 2007 Wang Jun. 2004- Supervisor Female 35 0 0 Xiaowen Jun. 2007 - 10 - Jun. 2004- Employee Sha Gang Supervisor Male 40 0 0 Jun. 2007 representative Nov. 2004- Zeng Hui Standing Vice-president Male 44 0 0 Apr. 2006 Apr. 2004- Yang Guobin Chief Financial Officer Male 35 0 0 Apr. 2006 Apr. 2004- Wang Youlai Vice-president Male 43 2,640 2,640 Apr. 2006 Huang Apr. 2004- Vice-president Male 43 514 514 Zhongtian Apr. 2006 Nov. 2004- Chen Yuehua Vice-president Male 41 0 0 Apr. 2006 Mar. 2004- He Jianjun Secretary of the Board Male 35 0 0 Jun. 2007 Zhang Apr. 2001- Director Male 60 0 0 Left his post Zhengkui Jun. 2004 Apr. 2001- He Shilin Director Male 64 0 0 Left his post Jun. 2004 Apr. 2001- Liang Rong Director Male 39 17,850 17,850 Left his post Jun. 2004 Chairman of the Supervisory Apr. 2001- Nie Guohua Male 62 0 0 Left his post Committee Jun. 2004 Wang Apr. 2001- Supervisor Male 56 99 99 Left his post Xinzhong Jun. 2004 Mar. 2002- Vice-president Apr. 2004 Chen Xuri Male 46 0 0 Left his post Apr. 2001- Secretary of the Board Mar. 2004 Huang Mar. 2002- Vice-president Male 41 0 0 Left his post Weigang Apr. 2004 Among which, particulars about directors and supervisors holding the post in Shareholding Company: Name of Shareholding Drawing the payment from the Name Title in Shareholding Company Office term Company Shareholding Company (Yes / No) Overseas Chinese Town Ren Kelei CFO and concurrently President Dec. 1993 to now No Group Corporation Overseas Chinese Town Jian Di’an Vice-president Dec. 2001 to now No Group Corporation Wang Overseas Chinese Town Chief Supervisor of Auditing Oct. 2000 to now No Ruquan Group Corporation Dept. Overseas Chinese Town Ni Zheng General Manager Dec. 1998 to now No (Hong Kong) Co., Ltd. Hong Kong China Travel General Manager of Hotel Wei Qing 2000 to now No Service (Group) Co., Ltd. Management Company Vice Chairman of Party Dong Overseas Chinese Town Committee and concurrently Jul. 2000 to now No Yaping Group Corporation Vice-president Wang Overseas Chinese Town CFO Oct. 2000 to now No Xiaowen Group Corporation 2. Particulars about main working experience of directors, supervisors and senior executives (1) Director Mr. Ren Kelei, Chairman of the Board, was born in 1950; the Han nationality; Bachelor's Degree, Economist and Senior Political Engineer. He successfully took the posts of Deputy - 11 - General Manager of China National Packaging Corporation, Secretary- general of and concurrently Director, General Office of Shenzhen Municipal Committee of CPC and General Manager of Overseas Chinese Town Group Corporation. Now he acts as President and Vice Chairman of the Party Committee of Overseas Chinese Town Group Corporation. Mr. Jian Di’an, Vice Chairman of the Board, was born in 1949; the Uigur nationality; College degree, Senior Accountant. He successfully took the posts of Assistant General Manager of Shenzhen Overseas Chinese Town Economic Development General Company and General Manager of Windows of the World Co., Ltd.. Now he acts as Vice-president of Overseas Chinese Town Group Corporation, Chairman of the Board and concurrently General Manage r of Shenzhen Overseas Chinese Town Sanzhou Investment Co., Ltd. and Director of Overseas Chinese Town Real Estate Company. Mr. Hou Songrong, Vice Chairman of the Board, President and Secretary of the Party Committee, was born in 1968; the Han nationality; Master Degree, Economist. He Successfully took the posts of Factory Director of Shenzhen Zhongqiao Industrial Co., Ltd., Business Manager of Investment and Development Dept. in Overseas Chinese Town Group Corporation, Deputy General Manager and General Manager of Shenzhen Overseas Chinese Town Xingqiao Industrial Company, and Vice-president, standing Vice-president and Vice Secretary of the Party Committee in Konka Group Co., Ltd.. Mr. Wang Ruquan, Director, was born in 1954; the Han nationality; College degree, Accountant. He successfully took the posts of Division Chief of Office of Overseas Chinese Affairs of the State Council, Assistant General Manager and Chief Financial Officer of Overseas Chinese Town Group Corporation, and Supervisor of the Supervisory Committee in Konka Group Co., Ltd.. Now he acts as Chief Director of the Auditing Dept. in Overseas Chinese Town Group Corporation. Mr. Ni Zheng, Director, was born in 1968; the Han nationality. He obtained Bachelor's Degree of the Applied Physics and Master Degree of Materials Science from Chongqing University and Doctor Degree from Shanghai Jiao Tong University. He successfully took the posts of Business Manager of Business Negotiation Dept. and General Manager of Investment and Development Dept. in Overseas Chinese Town Group Corporation. Now he acts as Director and General Manager of Overseas Chinese Town (Hong Kong) Co., Ltd.. Mr. Wei Qing, Director, was born in 1952; the Han nationality; Master Degree. He successfully took the posts of Division Chief of Enterprise Management Division, Division Chief of Trade Coordination Division in Shenzhen Municipal People ’ s Government Economic Development Bureau, Secretary-General of Shenzhen Enterprise Management Association and Chinese-Foreign Enterpriser Association, Deputy General Manager and General Manager of Enterprise Management Dept. in Hong Kong China Travel Service (Group) Co., Ltd. and General Manager of Investment and Planning Management Dept. in Hong Kong China Travel Service (Group) Co., Ltd.. Now he acts as General Manager of Hotel Management Co., Ltd. in - 12 - Hong Kong China Travel Service (Group) Co., Ltd.. (2) Independent Director Mr. Xiao Zhuoji, was born in 1933, who graduated from economics department of Renmin University of China with graduate student in 1959. He now acts as Member of the National Committee of CPPCC, Professor and Doctorial Tutor of Economic College of Beijing University, and enjoys the government allowance. He has published 12 main works such as “XIAO ZHUO JI Selections ”, “XIAO ZHUO JI Anthology”, “Re-epistemic Socialism”, “Series of Chinese Macro Economy”and “Chinese Economic Hot Topic Perspective”, and mainly edited over 20 works such as “Book of Securities Practice”, “Guide to Practice of Securities Laws”, “Analysis and Forecast of Financing Market”and “Analysis and Forecast of Economic Situation”, and issued several hundred studies, and awarded several Economics Prize. Mr. Ye Wu, was born in 1938, who graduated from wireless department of Tsinghua University, Visiting Scholar of George Washington University. He now acts as Professor and Doctorial Tutor of Electron and Information College of South China University of Technology, and enjoys the government allowance, Standing Director of Guandong Province Electron Institute and Director of Guangdong Province Communication Institute. He has issued studies approaching one hundred, the topic of scientific research presided over and attended by him awarded several the Scientific Research Prize from China Consumer Electron Institute and Guangdong High Education Bureau. Ms. Ma Liguang, was born in 1940, who graduated from North Jiaotong University with the major of economic management. She successfully took the posts of Standing Vice Dean of China Travel College of and Deputy Director of Accounting Department of Management College of Jinan University, Professor of Accounting, Master’ s Tutor. She obtained qualification of CPA (non-certified). She now acts as Vice Chairman of Guangdong Province Accounting Association. She has issued awardable financial and accounting studies over ten and several works. (3) Supervisor Mr. Dong Yaping, Chairman of the Supervisory Committee, was born in 1953; the Han nationality; Education of College, Senior Political Engineer. He successfully took the posts of Division Chief of Foreign Affairs Supervision Department and Financial Supervision Department in Ministry of Supervision, Division Chief of Personnel Supervision Department in Office of Overseas Chinese Affairs of the State Council and Standing Director of Hua An Property Insurance Co., Ltd.. He now acts as Vice-president of Overseas Chinese Town Group Corporation and Chairman of the Supervisory Committee of Overseas Chinese Town Holding Co., Ltd.. Ms. Wang Xiaowen, Supervisor, was born in 1969; the Han nationality; Bachelor Degree. She successfully took the posts of Director and CFO of Shenzhen Overseas Chinese Town - 13 - Industrial Development Co., Ltd. and Executive General-supervisor of Office of President in Overseas Chinese Town Group Corporation. Now she acts as CFO in Overseas Chinese Town Group Corporation and Chairman of the Board in Shenzhen Overseas Chinese Town Investment Co., Ltd.. Mr. Sha Gang, Supervisor, was born in 1964; the Hui nationality; Bachelor Degree, Senior Engineer. He successfully took the posts of Deputy Director and Director of Computer Room of Channel 841 of Sinkiang Administration of Radio Film and Television, Deputy Division Chief and Division Chief of Technology Division of Sinkiang Administration of Radio Film and Television and Deputy General Manager of Shenzhen Overseas Chinese Town Xingqiao Industrial Company. Now he acts as Business Manager of HR Dept. of Konka Group Co., Ltd.. (4) Other Senior Executives Mr. Zeng Hui, Standing Vice-president, was born in Nov. 1960; the Han nationality; Master of Belgium University of Mons-Hainaut, Engineer. He successfully took the posts of Principal of Secretariat of Office of Dean in Changsha Railway University, Director of Overseas Chinese Town Xinqiao Industrial Development Co., Ltd., Deputy General-supervisor of HR Dept. of Overseas Chinese Town Group Corporation, General-supervisor of HR Dept. of Overseas Chinese Town Group Corporation, Chairman of the Board of Overseas Chinese Town Xinqiao Industrial Development Co., Ltd.. Mr. Yang Guobin, Chief Financial Officer, was born in 1969; the Han nationality; Member of CPC; Bachelor Degree, CPA. He successfully took the posts of Deputy General Manager of Financial Dept. in Overseas Chinese Town Group Corporation. Mr. Wang Youlai, Vice-president, was born in 1961; the Han nationality; Member of CPC, Graduate Student, Engineer. He successfully took the posts of Business Manager of Quality Dept. of Konka Group Co., Ltd., Assistant General Manager of Konka Group Co., Ltd. and Deputy General Manager of Konka Group Co., Ltd.. Mr. Huang Zhongtian, Vice-president, was born in 1961; the Han nationality; Member of CPC, Education of College. He successfully took the posts of Head of production line of Konka Group Co., Ltd., Business director and Manager of Marketing Company of Konka Group Co., Ltd. and Assistant General Manager of Konka Group Co., Ltd.. Mr. Chen Yuehua, Vice-president, was born in Sep. 1963; the Han nationality; Bachelor of Southeast University; Senior Engineer. He successfully took the posts of Designer and Business Manager of Technology Development Center of Konka Group Co., Ltd., General Manager of Development Center, General Manager of Office of President, General Manager of Dongguan Konka Electronics Co., Ltd. and Deputy General Manager of Multimedia Enterprise Dept. and General Manager of Development Center of Konka Group Co., Ltd.. Mr. He Jianjun, Secretary of the Board, was born in 1969; the Han nationality; Member of CPC; Bachelor degree; Bachelor of Science; Economist. He successfully took Deputy Director of - 14 - Secretariat of the Board, Deputy General-supervisor and General-supervisor of Strategic Development Dept.. 2. Particulars about the annual remuneration as of the year 2004 (1) The Company didn’t pay remuneration or allowance to directors (excluding Independent Director) and supervisors. (2) The Board of Directors determined the remuneration of independent directors and senior executives, and referred to the following aspects: ① scope of jobs and responsibility shouldered; ② actual profit status of the Company; ③ remuneration level in the same industry and same area. (3) The total annual remuneration of senior executives amounted to RMB 1,177,200. Of which, 4 enjoy the annual remuneration between RMB 200,000 and 300,000 respectively, and 1 enjoys the annual remuneration between RMB 300,000 and 350,000. Total annual remuneration of the top three senior executives drawing the highest payment was RMB 739,200. The allowance of independent directors was RMB 50,000 per year respectively (tax excluded); the other treatment of independent directors: The Company reimbursed the reasonable charges according to the actual situation which independent directors attended the meeting of the Board, shareholders’general meeting or exercise their functions and powers in accordance with the relevant laws and regulations and Articles of Association. (4) Particulars about directors and supervisors received no payment from the Company Name of directors and supervisors received no Whether they drew the payment or allowance from payment from the Company the shareholding company or no (Yes / No) Ren Kelei, Jian Di’an, Wang Ruquan, Ni They drew payment or allowance from Zheng, Wei Qing, Dong Yaping and Wang shareholding company, where they took the Xiaowen position. 3. In the report period, the Company reelected the Board of Directors and the Supervisory Committee and changed senior executives such as Vice-president, Secretary of the Board, the detail situation are as follows: On Mar. 2, 2004, as examined by the 15th meeting of the 4th Board of Directors, the Board of Directors decided dismissed Mr. Chen Xuri from the post of Secretary of the Board and engaged Mr. He Jianjun as Secretary of the Board. On Apr. 16, 2004, as examined by the 16th meeting of the 4th Board of Directors, the Board of Directors engaged the new management team: Mr. Hong Songrong continually took the post of President, Mr. Yang Guobin continually took the CFO and Mr. Wang Youlai and Mr. Huang Zhongtian took the post of Vice-president respectively with the office term from Apr. 2004 to Apr. 2006; and decided to no longer engage Mr. Chen Xuri and Mr. Huang Weigang as Vice-president of the Company. - 15 - On Jun. 28, 2004, the 2003 Shareholders’ General Meeting examined and approved the Proposal on Electing New Board of Directors, and elected Mr. Ren Kelei, Mr. Jian Di’an, Mr. Hou Songrong, Mr. Wang Ruquan, Mr. Ni Zheng, Mr. Wei Qing, Mr. Xiao Zhuji, Mr. Ye Wu and Ms. Ma Liguang as Director of the 5th Board of Directors, of them, Mr. Xiao Zhuji, Mr. Ye Wu and Ms. Ma Liguang are Independent Director of the 5th Board of Directors. Mr. Zhang Zhengkui, Mr. He Shilin and Mr. Liang Rong no longer took the post of Director of the Company. On Jun. 28, 2004, the 2003 Shareholders’ General Meeting examined and approved the Proposal on Electing New Supervisory Committee, and elected Mr. Dong Yaping, Ms. Wang Xiaowen as Supervisor of the 5th Supervisory Committee, at the same time, the Company’s Labor Union Committee elected Mr. Sha Gang as Employee Supervisor of the 5th Supervisory Committee. Mr. Nie Guohua, Mr. Wang Ruquan and Mr. Wang Xinzhong no longer took the post of Supervisor of the Company. On Jun. 28, 2004, as fully discussed, the 1st meeting of the 5th Board of Directors unanimous ly elected Mr. Ren Kelei as Chairman of the 5th Board of Directors, Mr. Jian Di’an and Mr. Hou Songrong as Vice Chairman of the 5th Board of Directors. On Jun. 28, 2004, the 1st meeting of the 5th Supervisory Committee unanimously elected Mr. Dong Yaping as Chairman of the 5th Supervisory Committee. On Nov. 17, 2004, as decided by the 5th meeting of the 5th Board of Directors, the Board engaged Mr. Zeng Hui and Mr. Chen Yuehua as Standing Vice-president and Vice-president of the Company respectively. 4. About Employees as at end of report period Konka Anhui Boluo Shenzhen Branch Mudanjiang Shannxi Anhui Chongqing Donggua Changshu Chongqing Company mould Electronic Konka Total headquarters companies Konka Konka Konka Konka n Konka Konka Qingjia. Appliance Number 3409 6999 827 1170 2939 403 2766 1164 147 210 444 292 20770 Structure of employees in Shenzhen headquarters Bachelor Production Financial Administrative Classification Salesperson Technician degree Doctor Master Bachelor personnel personnel personnel or above Number 1186 222 875 95 1031 1395 14 245 1136 Proportion 34.79% 6.51% 25.67% 2.79% 30.24% 40.92% 0.41% 7.18% 33.32% Section VI. Administration Structure (I) Administration of the Company The Company continually perfected the administration Structure of corporation, established the modern enterprise system, standardized the Company’ s operation and strengthened information - 16 - disclosure work in accordance with Company Law, Securities Law, the Articles of Association of the Company and the relevant laws and regulations promulgated by CSRC and Shenzhen Stock Exchange seriously since the Company was listed. In the report period, the Company enacted the rules such as the Management System of Investor Relationship and Internal Control System, and renewedly revised the Articles of Association of the Company and further perfected the Company’s administration structure. At present, the Company’s administration structure is as follows: 1. Shareholders and Shareholders’General Meeting According to the regulations of the Articles of Association of the Company, the shareholders’ general meeting is the highest power institution. The Company’ s important events that should be submitted to the shareholders’general meeting were submitted to shareholders’general meeting for examination and approval. The convening and holding of the shareholders’general meeting was performed according to the procedure regulated and public notices were published on the appointed newspapers timely, truly and completely, which cause the Company’s shareholder fully enjoy the right sharing and knowing information and participation, and ensured the shareholders as the Company’ s owners to enjoy legal and equality right regulated in laws, executive regulations and the articles of association of the Company. 2. Relationship between the holding shareholder and listed company The behavior of the Company’s holding shareholder was normative. The holding shareholder exercised the right of investor according to the regulations of the Articles of Association of the Company, and did not intervene in the Company’ s decision-making and operating activities directly and indirectly, and did not harm the benefit of the Company and other shareholders. The Company was independent from the holding shareholder in personnel, assets, finance, organization and business; and the operating activities of the Company’s Board of Directors and Supervisory Committee and internal organization were independent. 3. Directors and the Board of Directors The Board of Directors was responsible for the shareholders’general meeting. The Board exert its rights according to the Articles of Association of the Company and authorized by the shareholders’general meeting; the number, election and composing of the Board were in compliance with the requirement regulated in the Articles of Association of the Company; every director of the Company knew the rights, obligation and responsibility, and could study and know the relevant laws and regulations, and carefully and responsib ly attended the Board meeting and shareholders’ general meeting; the Board of Directors set down the Rule of Procedure of the Board of Directors according to Administration Rules of Listed Companies and performed seriously in line with it; the holding and discussion of the Board meeting had the completely record and files of resolutions and proposals for keeping; the resolutions of the Board meeting implemented the information disclosure timely. 4. Supervisors and the Supervisory Committee - 17 - The number and composing of the Supervisory Committee was compliance with the requirements of the laws and rules, and the supervisors had the relevant financing, accounting and auditing knowledge. The Supervisory Committee performed its responsibility according to the requirements of the relevant laws, regulations and rules such as Company Law, the Articles of Association of the Company and Rules of Procedure of the Supervisory Committee; the Supervisory Committee conducted supervision for the Company’ s financing and the validity of responsibility implemented by directors and senior executives in line with responsible spirit. 5. The achievements evaluation and encouragement mechanism The management team was responsibility for the Board of Directors. The engagement, and dismission of the management team were open and transparent, which was compliance with the relevant laws and regulations and regulations of the Articles of Association; the remuneration of the management team was perform in public according to the regulations. The Company is actively starting to establish scientific, fair and transparent achievements evaluation and encouragement mechanism for directors, supervisors and senior executives based on original achievements evaluation and encouragement mechanism, which cause the Company’ s management system healthiness and efficiency. 6. Relations with the Relevant Beneficiaries: The Company could fully respect the legal rights and interests of the banks, other creditors, employees and investors and other parties of related interests, and jointly promoted sustainable and healthy development with these parties. The Company encouraged employees to raise the more and better rationalization proposes through directly communication with the Board of Directors, the Supervisory Committee and the management team. 7. Information Disclosure and transparent The Company seriously performed its responsibility according to the requirements of the Rules for Listing Shares in the Shenzhen Stock Exchange, and set down Management System of Information Disclosure and the Management System of Investor Relationship, which ensured the Company to disclose the relevant information truly, accurately, completely and timely from the system; the Company’ s information were disclosed in the appointed media in order to ensure all shareholders have equal opportunity to obtain the information and the principle of “fair, impartial and open ”. The Company’s work of information disclosure obtained affirmation from the Supervision Department and investors. The Company was chosen as “excellent company”in the information disclosure. II. Performance of the Independent Directors The Company established the System of Independent Director in accordance with the Guidelines Opinion on Establishing Independent Director in Listed Companies. The number of the Company’s independent directors took the 1/3 of total amount of the Board of Directors. Independent directors exercised their rights according to the relevant regulations, and - 18 - submitted proposal and issued Independent Opinion on the corresponding matters, which ensured scientific and fair decision- making. Independent directors brought the initiative of them into full play in respect of maintenance of the whole benefit and the legal rights of the middle and small shareholders. Name of Times of attending the Presence by Entrusted Absence Independent Board meeting in this oneself presence Notes Directors (Times) year (Times) (Times) Entrusted Mr. Ye Wu to attend the meeting and Xiao Zhuoji 9 7 2 0 vote instead of him at the 18th meeting of 4th Board and 1st meeting of the 5th Board Ye Wu 9 9 0 0 Ma Liguang 9 9 0 0 In the report period, the Company’s independent directors seriously performed their responsibility and personally attended the most of Board meetings, and expressed independent opinions on such matter as engagement of senior executives. Independent directors worked in line with the actively and responsible attitude, and proposed the pertinent suggestion to the Company in respect of operating and management. In the report period, the Company’s independent directors did not propose the objection on proposals of the Board meetings and proposals of other meetings. III. The Company’ s “Five Separations”from the holding shareholder Particulars about the Company’ s “Five Separations”from the holding shareholder in respect of business, personnel, assets, organization and finance: 1. In respect of personnel: The Company was independent in the management of labor, personnel and salaries. The holding the post of directors, supervisors and senior executives was implemented according to the relevant laws and regulations. 2. In respect of assets: The Company had independent operating and complete asset; and strictly divided ownership between the Company and the holding shareholder. There existed no situation that the holding shareholder occupied capital and assets of listed company. 3. In respect of organization: The Company established shareholders’general meeting, the Board of Directors, the Supervisory Committee and the Management Team completely according to the relevant of Company Law and Administration Rules of Listed Company. The Company has complete administration structure of corporation. The office organization and production location completely divided from the holding shareholder. 4. In respect of finance: The Company has established independent financial department, and established independent accounting settlement system and financial management system. The Company has independent bank account. 5. In respect of business: The products operated by the Company have completed marketing - 19 - network. There existed no competition in the same trade between the Company and the holding shareholder. The Company completely separated from the holding shareholder in personnel, assets, organization and finance and business and realized business independence, personnel independence, complete assets, organization perfect and finance independence. IV. The achievements evaluation and encouragement mechanism for Senior Executives In order to cause senior executives perform their responsibility in better and safeguard the long-term benefit of the Company and shareholders, the Company continually researched and reformed the standard and procedure of achievements evaluation and the relevant encouragement and binding mechanism. The Company established evaluation and encouragement mechanism; and bound the work of senior executives according to the Details Rule of President and President Work and every material work systems. At the same time, the Company determined the remuneration of senior executives through basic annual salary plus floating bonus based on the year-end assessment as well as accomplishment of targets so as to invigorate work enthusiasm of senior executives. Performance of senior executives was assessed by the Board of Directors, and supervised by the Supervisory Committee. Section VI. Refings on the Shareholders’General Meeting In the report year, the Company held one shareholders’general meeting: Konka Group Co., Ltd. (hereinafter referred to as “the Company”) held the 2003 Annual Shareholders’ General Meeting at the Conference Room on 5/F of Office Building of Overseas Chinese Town Group Corporation, Shenzhen, China at 9:30 A.M. on June 28, 2004. Nine shareholders and proxies attended the meeting, representing 283,589,932 shares, taking 47.11 % of the Company’ s total 601,986,352 shares (Including 174,949,746 A shares, taking 29.06% of the total shares, and 108,640,186 B shares, taking 18.05% of the total shares), which was in compliance with the Company Law of PRC and Articles of Association of the Company. The meeting was presided by Mr. Ren Kelei, Chairman of the Board. The Meeting examined and approved the following resolutions by voting: (I) Work Report 2003 of the Board of Directors; (II) Work Report 2003 of the Supervisory Committee; (III) Auditor’ s Report of CPA 2003; (IV) Proposal on 2003 Profit Distribution Plan; (V) Proposal on 2004 Profit Distribution Preplan; (VI) Proposal on Reelecting Board of Directors; (VII) Proposal on Reelecting Supervisory Committee; (VIII) Proposal on Engaging Financial Auditors and Their Auditing Expense; (IX) Proposal on Allowance of Independent Director; (X) Proposal on Buying Responsibility Insurance; - 20 - (XI) Proposal on Amending the Articles of Association of the Company. The public notice on the resolutions of the said shareholders’general meeting was published in China Securities, Securities Times, Shanghai Securities News and Ta Kung Pao dated Jun. 29, 2004 and designated International website: http://www.cninfo.com.cn. Section VIII. Report of the Board of Directors I. Business Highlights (I) Summary The Company is mainly engaged in production and sales of color TV sets, digital mobile phone and the complementary products (such as high frequency head, mold, plastic injection, packing) in the sector of electronic and communication manufacture. In 2004, the Company experienced a stern operation environment in its two principal businesses. In respect of the color TV market, with development of high-side TV and tablet TV, international brands resurged and new competitors came in great numbers. In respect of the overseas market, due to the overall loss of the Chinese manufacturers in the anti-dumping suit submitted by the United States, the export growth slowed down. In respect of the mobile phone market, international brands were fighting in terms of price, quantity of products as well as in manpower. In such circumstances, under the leadership of the Board of Directors, the Company, by taking the maximization of shareholders’ interest as the principle and inspired by the philosophy of “surpassing ego, being progressive and having high and distant vision” and “building KONKA into an enterprise at international level”, reinforced the principal businesses, attached great importance on broadening sources of income and reducing expenditures, focused on the management standardization and propelled the key projects. The whole teamwork, based on the spirit of surpassing ego, being progressive and having high and distant vision, got all out in the work, created new successes, and achieved big growths in various businesses. 1. In 2004, the Company maintained the trend of sustainable growth in color TV business in addition to the high growth of the business in 2003; realized a turnover in the domestic sales amounting to RMB ８．１７１ billion, a ５．５６％ growth over the previous year. Statistics from ZHONGYIKANG and SINO shows that KONKA color TV has firmly taking the first in the domestic market, continuing to hold the champion in the year. 2. In the report period, the Company insisted on its major operation principle of expanding the sales size and improving the fundament management work in its overseas business, seized the market opportunity and positively developed new market. As a result, the turnover grew by ８０％over the same period of the previous year; the Company’s rank in export rapidly rose to the 5th from the 30th. Since October, 2004, the Company has ranked the 4th. The products with Company’ s own brand made a breakthrough in retail in supermarkets in the United States. In addition, the Company’ s export size has transferred from the original low-price and big size model to a model of high added value brand and high-side product model. - 21 - 3. Not like other domestic mobile phone brands which have experienced output reduction and substantially gliding of sales, KONKA mobile phone is one of the few brands which can continue to keep the growth trend. The market share of KONKA mobile phones is rising steadily. (II) Work Summary I. In the report period, the Company completed the assessment of over 460 color TV projects, where the common CRT products experienced renovation and updating from the low and medium side line to the high-side line; the Company achieved an important breakthrough in high-side digital line-by- line color kinescope products. In respect of tablet TV products, the Company has completed the development of LCD TV and plasma TV with the specifications from 15”to 42”. In respect of projection TV products, the Company successfully development micro-display back projection product; in addition, it also developed serialized 4:3 and 16:9 color kinescope back projection. In respect of products for foreign markets, the Company completed the development of line-by- line TV for the American market, 100 Hz TV for European market and 17” – 27” TV products for the American and European markets; in respect of digital AV products, the Company completed the development of NDS STB for Chongqing and the relevant products for Futjisu platform. In 2004, the Company’s mobile phone R & D capacity was greatly improved. Of the models of mobile phone products launched to the market in batches, the self R & D proportion rate reached 70%. The Company mastered the application of mobile phone with multi- media functions, completed the R & D of key technology of 1 million Pixel mobile phone and started R & D of over 2 million pixel mobile phone. The Company has also mastered the relevant technologies of 3D music and MP3 mobile phone; and the technologies of more than 10 substitution core components other than radio frequency core chips in GSM/ GPRS proposal. Meanwhile, the Company has completed 3 G protocols, structural research and technology follow-up, fully mastered the 3G bottom protocol and laid technical foundation for application and service development. II. Implementing the market promotion strategy of “digital radio and high resolution” and “image strategy”on overall basis; establishing KONKA as leading position in the industry In 2004, the Company developed its color TV business towards the orientation in depth of digital TV and digital amusement and devoted itself to building KONKA into a “high resolution leader and digital pilot”of digital TV. Under the guidance of such strategy, the Company not only launched radio high resolution TV and tablet DOUBLE-HERO – 55” liquid crystal TV and 63”plasma TV, established a new “surveyor’s pole”of “high resolution”TV and tablet TV and substantially added high resolution product line on overall basis; and laid a solid foundation for KONKA color TV to rank the first sales volume in China continuously for twenty months and further propel “tablet TV strategy”. In 2004, the Company implemented the “image strategy”for mobile phone on overall basis, took the high-side image as breakthrough. Under the guidance of such divergence strategy, the Company took lead to launch several models of mobile phones with camera functions among the domestic brands, finished very quickly the product layout of mobile phones with camera functions; consolidated KONKA’ s leading position in the field of mobile phone with camera functions by enhancing promotion and expansion of sales channels and established the product image of KONKA mobile phone with camera function as the leader in the technology. III. The Company successfully carried out the battle based public relations and promotion - 22 - activities in defense against the anti-dumping suit brought about by the United Sates. Such activities not only helped the Company in winning a favorable public opinion environment, but, what is more important, turned the crisis into opportunity. This event has better upgraded KONKA’ s position in the national industry, the sector and the society. From this, the Company achieved a good result in promotion in advancing towards a colorful image in the internationalization. IV. In respect of sales, the Company pushed on the VIP310 project of color TV in a steady way, and exercised the “Three Thousands Project”–“a thousand shops in a thousand counties, ten thousand counters in a thousand districts and KA1000 policy franchise shops, enhanced the terminal construction, effectively increased the coverage and optimization and consolidation channels, reinforced the confidence of distributors and agents in operation of KONKA brand. Meanwhile, through standardization of terminal image standard, the Company enhanced the business guidance on the terminal display and training coaching, reinforced the ability of selling terminal. V. Enhancement of the standardized administration over its subsidiaries On the basis of enhancing the subsidiaries’system and process construction, the Company devoted major efforts to carry out the contract standardization and formatting and promote the standardized management of the subsidiaries. Meanwhile, the Company established a template of retail analysis, channel and inventory analysis and expense analysis, further improved the calculation method of retails and channel inventories, promoted the optimization of and control over the sales channel. VI. Preliminary Formation of Internationalized Overseas Development Layout The Company has started advancing towards the powerful force in operation of the brand internationalization. The Company’ s overseas manufacture base has formed a complete delivery and supply chain in North America and Europe. Meanwhile, the Company has laid a foundation in the layout of the production base in Thailand and Indonesia as well as expansion of the market in Southeast market. Such high speed integration and manufacture capacity speeded up the process of globalization of lost cost manufacture; and meanwhile, provided powerful guarantee to evade such trading barrier as anti-dumping, etc. and accumulated the experience in operation of the overseas production base for KONKA as well and laid a good foundation for realization of the internationalization strategy development layout. With further smoothing of the international supply chain, the Company has accumulated more superiority in R &, production, sales and services of high-side color TV. As a result, the Company has become the unique enterprise enjoying exemption from inspection in export in the color TV industry. VII. Through optimization of product linear process flow and standard, implementation of product quality planning, improvement of the maintenance and management of the production network, organization and implementation of the plan of upgrading the straight- through rate of the production line, the production capacity of the line has been greatly improved. Meanwhile, through gradual promotion of the transfer from “extensive management” to “intensive management” in the process of production and manufacture, the production capacity of multiple models, multiple batches and big lot has been effectively enhanced. VIII. Quality and After-sale Services At the end of 2004, KONKA was granted three important awards – “Award of Brand Satisfactory to the Users”, “Award of Product Satisfactory to the Users”and “Award of Mobile phone with Camera Function Most Welcome by the Users”by Electronic Information Industry Development Research Institute of the Ministry of Information Industry, becoming one of the enterprises with most awards. KONKA is the first in the sector that offers transparent repairing services to the consumers. In addition, KONKA mobile phone has introduced QC service quality management system and has ensured high efficiency and top quality of services in terms of real- time of services, sound management process and - 23 - supervision system. In addition to the warranty based services, KONKA has made innovation in added value services and has started on overall basis the “experience based marketing”and “KONKA Paradise”network service platform. IX. Effectively Promoting the Work of Cost Reduction Although the purchase environment in 2004 was extremely bad, the Company still conducted effective control and lowered the purchase costs by working out well prepared and effective purchase plan and improving the close cooperation with both upstream and downstream enterprises. In respect of financial management, while satisfying the fund demand in business development, the financial costs in the report year dropped by 71% over the same period of the previous year. (III) Income from the Principal Business and Profit Composition Income from principal business (in Costs of principal business (in RMB1,000) Gross profit rate (%) RMB1,000) Sector/ products Increase/De Increase/De Increase/ 2004 2003 2004 2003 2004 2003 crease (%) crease (%) Decrease Domestic ８，１７１，４８４．６７，７３３，９２０．９＋５．５６６，８４１，９０４．１６，４４２，９８２．０＋６．１９１６．２７１６．６９－０．４２ market Color TV Foreign market １，２６３，４４２．０７０１，６０２．１＋８０．０８１，１５４，５７０．５６４１，６９９．０＋７９．９２８．６２８．５４＋０．０８ Total ９，４３４，９２６．６８，４３５，５２３．０＋１１．８５７，９９６，４７４．６７，０８４，６８１．０＋１２．８７１５．２５１６．０１－０．７７ Communi Mobile phone ３，５８２，８６４．６３，８７９，７７４．７－７．６５３，０７１，５２８．５３，３８３，２５５．６－９．２１１４．２７１２．８０＋１．４７ cation Others ３４４，７３０．６４９１，１６８．５－２９．８３２３，６７２．０４５５，１１１．４－２８．９６．１１７．３４－１．２３ Total １３，３６２，５２１．９１２，８０６，４６６．１＋４．３４１１，３９１，６７５．１１０，９２３，０４８．０＋４．２９１４．７５１４．７１＋０．０４ (IV) Analysis of the major financial data 1. Slight drop of gross profit rate of color TV was due to fierce competition of the market and promotion activities for business expansion and improving market share; slight rise of gross profit of mobile phones was due to drop of product costs resulted from effective drop of raw material costs while keeping the average prices basically stable. 2. Big growth in net profit is due to that the Company received income from the real estate projects in the report period; meanwhile, the gross profit rate increased somewhat at the same time the sales income grew steadily. 3. Big decrease in the monetary fund over the beginning of the report period was mainly due to big payments for raw materials, etc. in the report period. 4. Big growth in short-term loan over the beginning of the report period was mainly due to increase of bank loans resulted from big expansion of production and operation scale. 5. Big growth in profit from other businesses over the previous period was mainly due to big growth of profit from transfer of materials and income from sales of recoverable wastes. II. Operation and Performances of the Principal Subsidiaries and Holding Companies (1) Shenzhen Konka Communications Technology Co., Ltd. With its equity directly and indirectly held by the Company by 100% and registered capital of RMB 120 million, KONKA Communications is engaged in the business of developing, producing and selling digital mobile communication equipment and mobile phone products. At the end of the report period, the company’ s total assets was RMB 1,035,139,935.36, the sales income in 2004 was RMB 3,582,864,604.68 and net profit was RMB 11,735,062.53. (2) Dongguan KONKA Electronics Co., Ltd. (Dongguan KONKA) With registered capital of RMB 200 million, Dongguan KONKA is one of the Company’s solely owned subsidiary, and is engaged in production and operation of color TV and acoustic products, etc. At the end of the report period, the company’ s total assets was RMB 343,906,626.28, the sales income in 2004 was RMB 324,153,392.47 and net profit was RMB - 24 - 4,611,042.10. (3) Mudanjiang KONKA Industrial Co., Ltd. (Mudanjiang KONKA) With its equity held by the Company by 60% and registered capital of RMB 60 million, Mudanjiang KONKA is engaged in production and operation of color TV. At the end of the report period, the company’ s total assets was RMB 124,185,852.82, the sales income in 2004 was RMB 76,254,913.38 and net profit was RMB -5,575,931.22. (4) Shaanxi KONKA Electronics Co., Ltd. (Shaanxi KONKA). With its equity held by the Company by 60% and registered capital of RMB 69.5 million, Shaanxi KONKA is engaged in production and operation of color TV. At the end of the report period, the company’ s total assets was RMB 135,450,184.01, the sales income in 2004 was RMB 146,162,852.82 and net profit was RMB 6,846,293.80. (5) Anhui KONKA Electronics Co., Ltd. (Anhui KONKA) With its equity held by the Company by 65% and registered capital of RMB 140 million, Anhui KONKA is engaged in production and operation of color TV. At the end of the report period, the company’ s total assets was RMB 378,650,985.85, the sales income in 2004 was RMB 385,094,683.23 and net profit was RMB 22,430,649.03. (6) Chongqing KONKA Electronics Co., Ltd. (Chongqing KONKA). With its equity held by the Company by 60% and registered capital of RMB 45 million, Chongqing KONKA is engaged in production and operation of color TV. At the end of the report period, the Company’ s total assets was RMB 66,979,226.73, the sales income in 2004 was RMB 50,630,335.12 and net profit was RMB 116,488.37. III. Major Suppliers and Customers The total purchase amount to the top five suppliers was RMB 3,091,489,925.28, accounting for 36.30% of the Company’ s total purchase amount. The total sales amount to the top five distributors was RMB 924,326,824.1, accounting for 6.92% of the Company’ s total sales amount. IV. Problems and difficulties occurred in operation and their solutions 1. Anti-dumping measures adopted by some European and American countries against China’s color TV enterprises Solutions: First, carry out the battle based public relations and promotion activities in defense against the anti-dumping suit from the United States. Second, carry out internationalized overseas development layout. The effect of the Company’ s countermeasures was significant. In the report period, the Company achieved big growth in the overseas business. 2. Intensified Competition in the Mobile Phone Competition Solutions: First, increase investment in R & D, enhance autonomous R & D, speed up R & D and continuously launch new products. Secondly, implement “image strategy”, consolidate the leading position of KONKA mobile phone with camera functions, establish the product identity of KONKA mobile phone with camera function as the technology leader. Thirdly, enhance the standardized management over the subsidiaries. Fourthly, enhance the requirements on quality and after-sale service. As a result from these measures, KONKA mobile phones have maintained sustainable growth despite the big gliding in sales of other mobile phone manufacturers. V. Investment 1. In the report period, the Company raised no funds through share offering and had no material investments 2. Projects Invested with Funds not Raised through Share Offering In the report period, the Company achieved income amounting to RMB 36,128,808.90 from investment in the two real estate projects –Buildings D and E of PORTFINO. Swan Castle and Splendid Garden Phase III. So far, the Company has recovered all the investment in the - 25 - aforesaid two cooperative projects and both of the above two cooperative projects have been completed. For the detail, refer to “Note 11 to the Accounting Statements”and “Notes to other Important Events”of the financial report. VI. Financial Position In RMB ‘000 End of 2003 Increase/Decr Description End of 2004 2. Reasons of Change after adjustment before adjustment ease (%) Total assets ９，５９７，８４５．８９，６３４，５８８．１９，６３７，３７５．７－０．３８ Net amount ５７２，１４５．５３３４，５４７．１３３４，５４７．１＋７１．０２ Partial change of sales policy receivable Inventory demand increased due to expansion Inventories, net ３，５８０，７７７．４３，１７０，０８１．１３，１７０，０８１．１＋１２．９６ of the scale Due to sales of the equity in Shenzhen Long-term ５９，６３９．０６６，７６０．３６９，５４７．８－１０．６７ Shangyongtong Investment Development Co., investment, net Ltd., one of the Company’s associates Fixed assets, net １，２９１，９４３．７１，２５４，２０７．７１，２５４，２０７．７＋３．００ Long-term １０，４９９．１６，４５９．１６，４５９．１＋６２．５５ Increase of special accounts payable liabilities Shareholders’ Net profit realized amounting to RMB ３，１９３，９２８．１３，０５０，７３１．８３，０５３，５１９．４＋４．６９ equity １４０．７２６ million 2003 Increase/Decre Description 2004 Reasons of Changes after adjustment before adjustment ase (%) Profit from Slight growth in income as well as slight growth principal １，９６９，４０２．２１，８８１，８９５．９１，８８１，８９５．０＋４．６５ in gross profit rate businesses Net profit １４０，７２６．７９９，１４５．５１０１，０７１．０＋４１．９４ Income received from real estate project VII. Operation Plan in the New Year (I) Analysis of Operation Environment in 2005 1. Great change may take place in the consumption structure of color TV. Tablet TV and high-side products shall take the leading position in the market. Meanwhile, the new trade protectionism trend shall further hinder the implementation of China’s color TV export and business internationalization strategy. 2. The National Development and Reform Commission promulgated Several Provisions on Verification of Mobile Communication System and Terminal Investment Projects (NDRC HI-TECH [2005] No. 256, which shows that the admission of the domestic mobile projects has been transferred from the review and approval system to the verification system. This may produce some influence upon the competition pattern of the domestic mobile phone market. Meanwhile, with the further lowering of the prices of foreign mobile phone brands and further enhancement of promotion of terminal sales links, the mobile phone business shall be confronted with intensified competition of the market. (II) Operation Plan in 2005 1. Principal Operation Strategy in 2005 In 2005, the Company’ s operation strategy shall turn to the orientation from “giving first place to price based operation and the second place to value based operation”to “giving first place to - 26 - the value based operation and the second place to price based operation. The Company shall carry out the work of purchase, manufacture, R & D, quality control, marketing, etc. by taking the enterprise’s profit and value addition of brand as the guide, difference based competition as the base and value addition of the value as the objective. The Company shall try every means to create value for the shareholders, produce benefit for staff to share and lay future-oriented development foundation for the Company. 2. Operation Objectives: (1) Color TV: While keeping a certain growth in sales income from the domestic color TV market, the Company shall try to maximize the profit, substantially increase the sales proportion and average sales price of its high-side products. (2) Mobile Phone: The Company shall maintain the existing leading position in the fierce competition. (3) International Business: In overall sales volume, the Company shall try to achieve a growth with quantity expanded and high quality; meanwhile, the Company shall realize a substantial breakthrough in sales of high-side products. (4) Diversifications: The Company has realized a big growth in refrigerator business, and is going to start automotive electronic businesses on overall basis and form sales with big scale. 3. Arrangement of Key Work in 2005 First: carry out various work of purchase, manufacture, R & D, quality control, marketing, etc. based on the value operation strategy. (1) Greatly improve and optimize IPD operation system and business flow and establish the product management system applicable to the value based operation. (2) Substantially upgrade the product definition and the ability of product line planning, and work out the product strategy in realizing the value based operation. (3) Greatly improve the industrial modeling design and application function design ability and level and ensure realization of the value based operation by development of the first class products. (4) Greatly improve the interface quality of KONKA in value based operation and communication with consumers and optimize the brand resources. (5) Greatly enhance the quality control in development, process design, material inspection and production process. (6) Realize the structural upgrading, optimize the staff structure and improve staff’s qualification while the total HR quantity is under control. (7) Establish and optimize dynamic and timely supplier assessment system and link the quota distribution with the assessment results. (8) Further carry forward the bidding work in product purchase and standardization and generalization work of components & parts. (9) Study expense items item by item, propose the objectives and methods of dropping expense - 27 - and affix responsibilities to individuals. Secondly, further improve the internal management level. (1) Make full authorization while doing a good job in control, distinguish perfectly the rights and responsibilities, make correct authorization, strict supervision and investigation of and deal with the violations of the regulations. (2) On the basis of combing and integration, define the cultural concept of KONKA, propose a value system, carry out some directive corporate cultural activities under the guidance of such value based system and do a good job in internal and external transmission of the corporate culture ideas. Thirdly, further promote the strategic layout of internationalization. Speed up the establishment of internationalized purchase, production and sales platform, and improve planning and construction of overseas offices. Fourthly, while doing a good job in analysis of the sector the Company is engaged in and its position in the market, work out an explicit diversification and accessory business development plan and operation mechanism, positively look for strategic partners. Make good use of the superiority of KONKA brand and share the relevant resources, realize the objectives of big growth in diversification and accessory business. Fifthly, improve the relationship in management with investors and establish a good identity in the capital market. The Company shall, in accordance with the Guide of Shenzhen Stock Exchange on Management of the Relationship between the Listed Companies and the Investors, further standardize the information disclosure work; Make full use of the modern IT means and timely, accurately and completely disclose the Company’ s information; positively enhance and improve the relations and communications between the Company and its shareholders, investors as well as potential investors; gradually improve the management of relations with the investors and establish a good identity of the Company in the capital market. Sixthly, establish and effective long-term encouragement mechanism through reform of the research mechanism. The Company shall discuss the issue of mechanism reform in a positive way, establish a long term effective encouragement mechanism so as to ensure sustainable and stable development of the Company. VIII. Routine Work of the Board of Directors 1. Board meetings and resolutions in the report period In the report period, the board of directors of the Company held 9 meetings, i.e., the 15th, 16th, 17th and 18th meeting of the fourth board of directors and the 1st, 2nd, 3rd, 4th and 5th meeting of the fifth board of directors. The particulars of the meetings and resolutions are as follows: The 15th meeting of the fourth board of directors of the Company was held in meeting room - 28 - 605 of Shenzhen OCT Group, China on March 2, 2004. 9 directors were supposed to attend the meeting and 8 of them were actually present. Director Mr. Liang Rong was absent for certain reason. The meeting complied with relevant provisions of the Company Law of the People's Republic of China and the Articles of Association of the Company. The meeting was presided over by the chairman of the board of directors Ren Kelei. All supervisors and part of members of the management of the Company attended the meeting as nonvoting delegates. Upon full discussion, the meeting unanimously adopted the following proposals and resolutions: 1. President Hou Songrong's report titled 2003 Work Summarization and 2004 Work Strategy. 2. The Proposal Concerning Planned Operation Target for 2004. 3. The Proposal for Changing Part of Directors. 4. The Proposal for Changing the Secretary to the Board of Directors The 16th meeting of the fourth board of directors of the Company was held in meeting room 605 of Shenzhen OCT Group, China on April 16, 2004. 9 directors were supposed to attend the meeting and 8 of them were actually present. Director Mr. Liang Rong authorized Mr. Ren Kelei to attend the meeting and vote on his behalf. The meeting complied with relevant provisions of the Company Law of the People's Republic of China and the Articles of Association of the Company. The meeting was presided over by the chairman of the board of directors Ren Kelei. All supervisors and part of members of the management of the Company attended the meeting as nonvoting delegates. Upon full discussion, the meeting unanimously adopted the following proposals and resolutions: 1. 2003 Annual Report of the Company and its summary. 2. 2003 work report of the board of directors of the Company. 3. The profit distribution plan for 2003 and profit distribution preplan for 2004. 4. The Proposal Concerning the Purchase of Liability Insurance by Directors and Senior Executives. 5. Proposal for Appointing New Management. 6. The Proposal for Engaging New Securities Affair Representative. 7. Investor Management System of Konka Group Co., Ltd. 8. The meeting studied the Circular of Studying and Implementing the Opinions of the State Council on Promoting the Reform, Opening and Steady Development of Capital Market issued by Shenzhen Stock Exchange and the Opinions on Promoting the Reform, Opening and Steady Development of Capital Market issued by the State Council. The 17th meeting of the fourth board of directors of the Company was held on April 26, 2004. The meeting examined and adopted the report of the Company for the first quarter of 2004 through voting by fax. The 18th meeting of the fourth board of directors of the Company was held in meeting room - 29 - 605 of Shenzhen OCT Group Company from 9:00 a.m. to 12:00 a.m. on May 27, 2004 (Thursday). 9 directors were supposed to attend the meeting and 6 of them were actually present. Director Mr. Zhang Zhengkui and director Mr. Liang Rong authorized Mr. Ren Kelei to attend the meeting and vote on their behalf. Independent director Mr. Xiao Zhuoji authorized independent director Mr. Ye Wu to attend the meeting and vote on his behalf. The meeting complied with relevant provisions of the Company Law of the People's Republic of China and the Articles of Association of the Company. The meeting was presided over by the chairman of the board of directors Ren Kelei. Part of the members of the management of the Company attended the meeting as nonvoting delegates. Upon full discussion, the meeting unanimously adopted the following proposals and resolutions: 1. The Proposal for Reelecting the Board of Directors. 2. The Proposal Concerning the Subsidy of Independent Directors. 3. The Proposal Concerning Engagement of Financial Auditing Body and Audit Fee. 4. The Proposal for Amending the Articles of Association of the Company. 5. The Proposal for Holding Shareholders' General Meeting. The 1st meeting of the fifth board of director of the Company was held in meeting room 605 of Shenzhen OCT Group Company at 11:00 a.m. on June 28, 2004 (Monday). 9 supervisors were supposed to attend the meeting and 8 of them were actually present. Independent director Mr. Xiao Zhuoji authorized independent director Mr. Ye Wu to attend the meeting and vote on his behalf. The meeting complied with relevant provisions of the Company Law and the Articles of Association of the Company. Upon full discussion, the meeting unanimously elected Mr. Ren Kelei as the chairman of the fifth board of directors and Mr. Jian Dian and Mr. Hou Songrong as vice chairmen of the board of directors. Independent directors Mr. Ye Wu and Mdm Ma Liguang agreed to the above resolutions. The 2nd meeting of the fifth board of director of the Company was held in meeting room 605 of Shenzhen OCT Group Company in the morning of August 9, 2004 (Monday). 9 supervisors were supposed to attend the meeting and all of them were actually present. All members of the supervisory committee and key members of the management attended the meeting as nonvoting delegates. The meeting was presided over by the chairman of the board of directors Ren Kelei. The meeting complied with relevant provisions of the Company Law of the People's Republic of China and the Articles of Association of the Company. Upon full discussion, the meeting examined and adopted the following proposals and resolutions: 1. 2004 Semiannual Report of the Company and its summary. 2. Profit distribution proposal for the first half of 2004: The Company is neither to distribute profit nor to capitalize capital surplus for the first half of 2004. The 3rd meeting of the fifth board of director of the Company was held in meeting room 605 of Shenzhen OCT Group Company in the morning of October 14, 2004 (Thursday). 9 supervisors were supposed to attend the meeting and all of them were actually present. All members of the supervisory committee and key members of the management attended the meeting as nonvoting delegates. The meeting was presided over by the chairman of the board of directors Ren Kelei. The meeting complied with relevant provisions of the Company Law of the People's Republic of China and the Articles of Association of the Company. Upon full discussion, the - 30 - meeting examined and adopted the Report on the Rectification within Specified Time Limit Required by China Securities Regulatory Commission Shenzhen Securities Administration. The 4th meeting of the fifth board of directors of the Company was held on October 25, 2004. The meeting examined and adopted the report of the Company for the third quarter of 2004 through voting by fax. The 5th meeting of the fifth board of director of the Company was held in meeting room 605 of Shenzhen OCT Group Company in the morning of November 17, 2004 (Wednesday). 9 directors were supposed to attend the meeting and all of them were actually present. All members of the supervisory committee attended the meeting as nonvoting delegates. The meeting was presided over by the chairman of the board of directors Mr. Ren Kelei. The meeting complied with relevant provisions of the Company Law of the People's Republic of China and the Articles of Association of the Company. Upon full discussion, the meeting examined and adopted the proposal for supplementing senior executives. Upon the president's nomination, the board of directors decided to appoint Mr. Zeng Hui as executive vice president and Mr. Chen Yuehua as vice president of the Company. Independent directors Mr. Xiao Zhuoji, Mr. Ye Wu and Ms Ma Liguang held the opinion that the appointment and nomination of the above senior executives and the procedures of examination and voting complied with the provisions of the Company Law of the People's Republic of China and the Articles of Association of Konka Group Co., Ltd. The above senior executives have the professional quality, expertise, relevant work experience and post qualification necessary for duty performance. The resolutions of the above 9 board meetings were published on the newspapers designated by CSRC, i.e., China Securities Daily, Securities Times, Shanghai Securities Daily and Ta Kung Pao, designated website www.cninfo.com.cn and the website of the Company www.konka.com respectively on March 4, 2004, April 20, 2004, April 27, 2004, May 28, 2004, June 29, 2004, August 10, 2004, October 15, 2004, October 25, 2004 and November 18, 2004. 2. Implementation by the board of directors of the resolutions of the shareholders' general meeting The board of directors seriously implemented the resolutions of the shareholders' general meeting, reelected members of the board of directors and the supervisory committee and amended the Articles of Association of the Company. IX. Preplan for profit distribution or capital surplus capitalization for the report year 1. Preplan for profit distribution or capital surplus capitalization for the report year Upon review, the 6th meeting of the fifth board of directors decided neither to distribute profit nor capitalize capital surplus for 2004. The net profit of the Company for 2004 was RMB １４０．７３ million. With the undistributed profit of - RMB 514.57 million for the previous year added, the year-end undistributed profit was -RMB ３７５．７６ million (i.e., uncovered loss of RMB ３７５．７６ million). Calculated based on the total share capital at the end of the period, i.e., 601,986,352 shares, the loss per share to be made up in the future was RMB ０．６２４. According to relevant provisions of the Company Law and the Articles of Association of the - 31 - Company, the Company decided determined the profit distribution plan of neither distributing profit nor capitalizing capital surplus upon the serious discussion at a meeting of the board of directors of the Company. The reason for the Company's failure to make cash profit distribution preplan: The profit of RMB １４０．７３ million made in the report period is to be used to make up the loss for the previous year and the undistributed profit after making up loss is to be negative. This plan is subject to the approval of the shareholders' general meeting. In the opinion of the Company's independent directors, the profit distribution preplan of the Company complied with relevant provisions of the Company Law and the Articles of Association of the Company and did not harm the interests of middle and small shareholders. 2. Preplan for making up losses The cumulative uncovered losses of the Company at the end of 2004 were RMB ３７５．７６ million. Upon the serious discussion at the 6th meeting of the fifth board of directors on April 15, 2005, the Company planned to make up all uncovered losses of RMB ３７５．７６ million with discretionary surplus reserve fund. This plan is subject to the approval of the shareholders' general meeting. X. Preplan for profit distribution or capital surplus capitalization for 2005 The Company is neither to distribute profit nor capitalize capital surplus for 2005. This plan is subject to the approval of the shareholders' general meeting. XI. Special statement on the fund Transfer with related parties and the guarantees provided by the Company I. Statement on the implementation of the Circular on Certain Issues Relating to Standardization of Fund Transfer Between Listed Companies and Their Related Parties and Guarantees Provided by Listed Companies (2003 No.56 Document of CSRC): The full text of the special statement of certified public accountants on the fund occupation by the controlling shareholder and other related parties of the Company is as follows: Special Statement on the Fund Occupation by the Controlling Shareholder and Other Related Parties of Konka Group Co., Ltd. SH(2005) ZSZ No. 089 CSRC Shenzhen Securities Administration: We, as the certified public accountants auditing the financial statements of Konka Group Co., Ltd. (hereinafter referred to as "the Company") for 2004, issue this special statement on the fund occupation by the controlling shareholder and related parties of the Company in accordance with the Circular on Certain Issues Relating to Standardization of Fund Transfer Between Listed Companies and Their Related Parties and Guarantees Provided by Listed Companies issued by CSRC (ZJF (2003) No. 56 Document). I. As we noticed, the overall condition of the occupation of the funds of the Company by its related parties is as follows: 1. The balance of the funds of the Company occupied by its related parties as of December 31, 2004 was RMB 29.0231 million. 2. The occupation of the funds of the Company by its related parties in violation of regulations: (1) As of December 31, 2004, the balance of the funds occupied by related parties in violation of regulations was RMB 0, which remained unchanged as compared with the beginning of period. (2) The occupation of the funds of the Company by its controlling shareholder (or actual - 32 - controller) and controlled enterprises in violation of regulations: At both the beginning and end of the period, the balance of the funds occupied in violation of regulations was RMB 0. In the report period, the amount of the funds occupied in violation of regulations and the cash used to repay occupied funds was both RMB 0. This opinion is issued by us as required by CSRC and its local offices and shall not be used for other purpose. We and the C.P.A. who performed this service shall not bear any liability for the consequences caused by its improper use. Shenzhen Dahua Tiancheng Certified Public Accountants Chinese C.P.A. Wu Jianhui Shenzhen China Chinese C.P.A. Chen Baohua April 15, 2005 Supporting statement: Statement of Occupation of Funds of the Company by Its Related Parties Unit: RMB'000 Shenzhen OCT Shenzhen Konka Shenzhen OCT Shenzhen OCT Water Name of related Property Indonesia Konka Trade A Energy Technology Real Estate Co., and Power Supply Co., Total party Management Co., Co., Ltd. Co., Ltd. Ltd. Ltd. Ltd. Subsidiary, affiliated Relationship Subsidiary and Subsidiary and Subsidiary and enterprise and between related affiliated enterprise affiliated enterprise affiliated enterprise of B associated company of Controlled subsidiary parties and the of the controlling of the controlling the controlling the controlling Company shareholder shareholder shareholder shareholder Items in financial C Accounts receivable Other receivables Other receivables Other receivables Accounts receivable statements Beginning 27060.2 D 1330.00 300.34 70.69 (30.93) 25390.16 balance 6 Transaction amount on debit E 0.00 870.91 9.00 5490.35 0.00 6380.16 side Transaction amount on credit F 200.00 130.64 9.00 4070.57 0.00 4420.11 side 29020.3 Ending balance G 1130.00 1040.61 70.69 1370.85 25390.16 1 Provision for bad 26150.2 H 560.50 130.09 30.69 20.76 25390.16 debt 0 Manner and Water and electricity Dormitory rent and reason of I Current accounts Security deposit expenses paid in Payment for goods security deposit occupation advance Settlement of Manner of Settlement of Settlement of water and J Monetary capital property — repayment dormitory rent electricity expenses management fee Whether it is the regulation-violati ng fund occupation K No No No No No prohibited by No. 56 Document Remarks L - 33 - II. The special statement and independent opinions of independent directors on the guarantees provided by the Company and its implementation of the Circular on Certain Issues Relating to Standardization of Fund Transfer Between Listed Companies and Their Related Parties and Guarantees Provided by Listed Companies issued by CSRC (2003 No. 56 Document of CSRC). According to the requirements of the Circular on Certain Issues Relating to Standardization of Fund Transfer Between Listed Companies and Their Related Parties and Guarantees Provided by Listed Companies issued by CSRC (ZJF (2003) No. 56 Document), we examined and verified the guarantees provided by Konka Group Co., Ltd. ("the Company") and carefully read 2004 auditor's report and the Special Statement on Fund Occupation by the Controlling Shareholder and Related Parties of Konka Group Co., Ltd. issued by Shenzhen Dahua Tiancheng Certified Public Accountants. Independent directors unanimously held the following opinion: In the report period, the fund transfer between the Company and its related parties was normal and in small amount. The accounting treatment was reasonable and conservative. As of December 31, 2004, the Company did not provide any guarantee to others, operated in a standardized way and did not violated the requirements of ZJF (2003) No. 56 Document. Independent directors: Xiao Zhuoji, Ma Liguang and Ye Wu XII. Other matters 1. Announcement of releva nt information about OCT Group Company, the controlling shareholder of the Company: Refer to the announcement published by the Company on China Securities Daily, Shanghai Securities Daily, Securities Times and Ta Kung Pao on March 20, 2004 for details (announcement number: 2004-002). 2. Announcement of the unfreezing of pledged equity: Refer to the announcement published by the Company on China Securities Daily, Shanghai Securities Daily, Securities Times and Ta Kung Pao on July 1, 2004 for details (announcement number: 2004-012). 3. Announcements of the change in the shareholding of the controlling shareholder: Refer to the announcements published by the Company on Securities Times and Ta Kung Pao respectively on August 31, 2004 and October 30, 2004 for details (announcement number: 2004-015 and 2004-018). 4. Announcements of the change in shareholding of shareholders: Refer to the announcements published by the Company on Securities Times and Ta Kung Pao respectively on December 23, 2004, February 1, 2005 and March 22, 2005 (Announcement number: 2004-020, 2005-01 and 2005-02). 5. Announcement of the change in the shareholding of shareholders: Refer to the announcement published by the Company on Securities Times and Ta Kung Pao on April 1, 2005 for details (announcement number: 2005-03). - 34 - 6. Announcement of obtaining investment income from real estate projects: Refer to the announcement published by the Company on China Securities Daily, Shanghai Securities Daily, Securities Times and Ta Kung Pao on December 23, 2004 for details (announcement number: 2004-021) and the part of "notes to other important events" in the "Note 11 to Financial Statements" in the financial report. 7. The Company selected China Securities Daily, Securities Times and Ta Kung Pao as the newspapers for information disclosure. IX. Report of the Supervisory Committee I. Work of the Supervisory Committee In the report period, the fourth and fifth supervisory committee of the Company held 4 meetings in total, i.e., the 9th and 10th me eting of the fourth supervisory committee and the first and second meeting of the fifth supervisory committee. The particulars of the meetings and resolutions are as follows: The 9th meeting of the fourth supervisory committee of the Company was held in meeting room 605 of Shenzhen OCT Group, China on April 16, 2004. 3 supervisors were supposed to attend the meeting and all of them were actually present. The meeting complied with relevant provisions of the Company Law of the People's Republic of China and the Articles of Association of the Company. Upon full discussion, the meeting unanimously adopted the following proposals and resolutions: 1. 2003 Annual Report of the Company and its summary. 2. 2003 work report of the supervisory committee of the Company. The 10th meeting of the fourth supervisory committee of the Company was held in 6/F meeting room of Shenzhen OCT Group Company on May 27, 2004 (Thursday). 3 supervisors were supposed to attend the meeting and all of them were actually present. The me eting complied with relevant provisions of the Company Law of the People's Republic of China and the Articles of Association of the Company. Upon full discussion, the meeting unanimously adopted the proposal for reelecting the supervisory committee. The term of office of the fourth supervisory committee expired. The supervisory committee nominated Mr. Dong Yaping and Ms Wang Xiaowen to serve as supervisors of the fifth supervisory committee. The above resolution is to be submitted to 2003 annual shareholders' general meeting for examination. Meanwhile, the labor union of the Company recommended Mr. Sha Gang to serve as a supervisor who is an employee representative. The 1st meeting of the fifth supervisory committee of the Company was held in 6/F meeting room of Shenzhen OCT Group Company on June 28, 2004 (Monday). 3 supervisors were supposed to attend the meeting and all of them were actually present. The meeting complied - 35 - with relevant provisions of the Company Law of the People's Republic of China and the Articles of Association of the Company. Upon full discussion, the meeting unanimously elected Mr. Dong Yaping to serve as the chairman of the fifth supervisory committee. The 2nd meeting of the fifth supervisory committee of the Company was held in meeting room 607 of Shenzhen OCT Group Company in the morning of October 14, 2004 (Thursday). 3 supervisors were supposed to attend the meeting and all of them were actually present. The meeting was presided over by the chairman of the supervisory committee Mr. Dong Yaping. The meeting complied with relevant provisions of the Company Law of the People's Republic of China and the Articles of Association of the Company. Upon full discussion, the meeting examined and adopted the Report on the Rectification within Specified Time Limit Required by China Securities Regulatory Commission Shenzhen Securities Administration. The resolutions of the above 4 meetings of the supervisory committee were published on the newspapers designated by CSRC, i.e., China Securities Daily, Securities Times, Shanghai Securities Daily and Ta Kung Pao, designated website www.cninfo.com.cn and the website of the Company www.konka.com respectively on April 20, 2004, May 28, 2004, June 29, 2004 and October 15, 2004. II. Independent Opinions of the Supervisory Committee 1. The operation of the Company according to law In 2004, the operation of the Company complied with relevant laws and regulations including the Company Law, the Securities Law and Listing Rules and provisions of the Articles of Association of the Company. The Company's directors and senior executives implemented resolutions of shareholders' general meetings and board meetings, worked diligently and constantly improved internal control system. The Company's directors and senior executives neither violated laws national laws and regulations and the Articles of Association of the Company nor harmed the interests of the Company when they performed their duties. 2. Inspection of the financial affairs of the Company The supervisory committee seriously and carefully inspected the Company 's financial system and financial position and held the opinion that the financial report of the Company for 2004 truly reflected its financial position and operating results and the standard unqualified auditing opinions issued by Shenzhen Dahua Tiancheng Certified Public Accountants were objective and fair. 3. Utilization of raised proceeds of the Company The Company did not raise proceeds in the recent three years. The investment projects utilizing the proceeds previously raised are completely the same with those promised in the prospectus. 4. Acquisition and disposal of assets by the Company In the report period, the transaction price of equity sale of the Company was reasonable and no insider trading was found. The interests of middle and small shareholders were fairly - 36 - considered and no loss of the Company's assets was found. 5. Related transactions (1) The Company obtained investment income of RMB 36,128,808.90 from the real estate projects jointly developed and operated by the Company and OCT Real Estate Company, i.e., Block D and E of PORTFINO Swan Castle and Phase-III Splendid Garden in the report period. It did not harm the interests of the Company and no insider trading was found. (2) The Company was involved in related transactions with the subsidiaries of the controlling shareholder of the Company, including the payment of warehouse rent, property management fee and purchase of goods, which were all arm's length transactions and carried out at normal market price. The related transactions did not harm the interests of the Company and its other shareholders. (3) In the report period, the Company was not involved in related transactions arising from the assignment of assets and equity. (4) In the report period, the Company was not involved in joint external investment with related parties. Section X. Important Events I. Material lawsuits and arbitration On May 2, 2003, Five Rivers Electronic Innovations LLC, IBEW and IUE-CWA brought antidumping action against Chinese enterprises in colour TV industry. On November 25, 2003, U.S. Department of Commerce announced the result of preliminary ruling and imposed antidumping tax rate of 27.94% against the Company, which will affect the export of color TVs of the Company to certain extent in the future. The Company published relevant announcement on China Securities Daily, Securities Times, Shanghai Securities Daily and Ta Kung Pao on November 26, 2003. On April 13, 2004, U.S. Department of Commerce announced the result of final ruling for the case of antidumping against Chinese color TV. The recognized dumping margin of the Company was 11.36 %. On May 14, 2004, U.S. Department of Commerce announced revised dumping margin of Chinese color TV. According to the revised result, the recognized dumping margin of the Company was 9.69%. This final conclusion of United States International Trade Commission will not waver the Company's confidence in and resolution of quickening internationalization and deve loping American market. The Company will not give up American market. II. Significant acquisitions, takeovers and mergers The Company was not involved in any significant acquisition, takeover or merger in the report year. III. Significant related transactions Refer to the part of "notes to other important events" in Note 11 to financial statements in the - 37 - financial report for the details about the projects jointly developed and operated by the Company and Shenzhen OCT Real Estate Co., Ltd., i.e., Block D and E of PORTFINO Swan Castle and Phase-III Splendid Garden. In addition, the Company was involved in the related transactions with the subsidiaries of the controlling shareholder of the Company (OCT Group Company), including the sale of equity of associated companies, payment of payment property management fee, water and electricity expenses, land use fee and purchase of goods, which were all arm's length transactions and carried out at normal market price. The related transactions did not harm the interests of the Company and its other shareholders. Refer to (3) "Transactions with related companies" and (4) "Current accounts with related companies" of Note 6 to the financial statements in the financial report for details. IV. Significant contracts and their performance (1) In the report period, the Company did not hold in trust, contract for or lease the assets of other companies nor did other companies hold in trust, contract for or lease the assets of the Company. (2) In the report period, the Company did not provide guarantees to others. (3) In the report period, the Company did not entrust others with money management. V. Commitments The Company or any shareholder holding over 5% of the total shares of the Company did not disclose any commitment on the designated newspapers and websites in the report year. VI. Certified public accountants' firm and remuneration As examined and adopted at 2003 annual shareholders' general meeting, the Company engaged Shenzhen Dahua Tiancheng Certified Public Accountants to be responsible for 2004 audit of the Company. So far, this firm has provided audit services to the Company for four consecutive years. In 2004, the Company paid financial audit fee of RMB 0.35 million for A shares and RMB 0.45 million for B shares to the certified public accountants' firm. VII. Other Important Events 1. China Securities Regulatory Commission Shenzhen Securities Administration inspected the Company from August 2, 2004 to August 10, 2004 and issued the Notice of Requiring Konka Group Co., Ltd. to Make Rectification within Specified Time Limit (SZJFZ (2004) No. 245 Document) ("Rectification Notice") to the Company on September 16. The Rectification Notice indicated the existing problems of the Company in respect of corporate administration, information disclosure, accounting and financial accounting. The Company paid close attention to this, formulated practicable rectification measures in the light of the problems and rectification requirements indicated in the Rectification Notice and held a board meeting on October 14, 2004. The meeting examined and adopted the Report of Konka Group Co., Ltd. on Rectification Required by China Securities Regulatory Commission Shenzhen Securities Administration ("Rectification Report"). The Company has timely submitted the Rectification Report to Shenzhen Securities Administration and Shenzhen Stock Exchange and conducted effective communication with them. The Company publicly disclosed the Rectification Report on Securities Times, Ta Kung Pao and www.cninfo.com.cn on October 16, 2004 (announcement number: 2004-016). The Company formulated detailed rectification plan according to the Rectification Report, clarified the responsibilities and relevant responsible - 38 - persons for each stage and really implemented the gist of the Rectification Notice and rectification measures. So far, the rectification work has been basically completed and the problems indicated in the Rectification Notice have been basically solved. 2. In the report period, the Company and its directors and senior executives were not punished by securities regulatory authority. Section XI. DOCUMENTS FOR REFERENCE (I) Accounting statements carried with the signatures and seals of legal representative, CFO and person in charge of accounting. (2) Originals of domestic and overseas auditor’s report carried with the seal of Certified Public Accountants, the signature and seal of certified public accountants. (3) Originals of all documents and manuscripts of public notices disclosed on the newspapers designated by CSRC in the report period. (4) Other relevant materials. Board of Directors of Konka Group Co., Ltd. Apr. 15, 2005 - 39 - Konka Group Co., Ltd. (Incorporated in the People’s Republic of China) Contents Pages Report of the auditors 1 Consolidated income statement 2 Consolidated balance sheet 3-4 Consolidated statement of changes in equity 5 Consolidated cash flow statement 6-7 Notes to the financial statements 8 - 28 - 40 - Report of the auditors to the members of Wu Jianhui ,Chen Baohua Konka Group Co., Ltd. (Incorporated in the People’ s Republic of China) We have audited the accompanying balance sheet of Konka Group Co., Ltd. as of December 31, 2004 and the related statements of income, cash flows and changes in equity for the year then ended. These financial statements are the responsibility of the Group’ s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements present fairly, in all material respects, the financial position of the Group as of December 31, 2004 and the results of its operations and its cash flows for the year then ended, in accordance with International Financial Reporting Standards. K. C. Oh & Company Certified Public Accountants Hong Kong : April 15, 2005 -1- Konka Group Co., Ltd. Consolidated income statement for the year ended December 31, 2004 2004 2003 ote RMB’000 RMB’000 Turnover 5 13,362,522 12,806,466 Cost of sales ( 11,393,120 ) ( 10,924,570 ) Gross profit 1,969,402 1,881,896 Other revenue 6 75,252 13,979 Distribution costs ( 1,471,606 ) ( 1,442,897 ) Administrative expenses ( 391,716 ) ( 297,938 ) Operating profit 181,332 155,040 Finance costs ( 7,033 ) ( 23,981 ) Share of loss from associates ( 1,738 ) ( 351 ) Profit before taxation 7 172,561 130,708 Taxation 8 ( 11,593 ) ( 15,935 ) Profit before minority interests 160,968 114,773 Minority interests ( 18,419 ) ( 10,374 ) Profit attributable to shareholders 142,549 104,399 Accumulated loss as at beginning of year ( 503,961 ) ( 610,169 ) Accumulated loss before appropriation/reversal ( 361,412 ) ( 505,770 ) Appropriations/reversal Dividend payment waived - 1,809 Accumulated loss as at end of year ( 361,412 ) ( 503,961 ) Earnings per share –basic RMB0.237 RMB0.173 The calculation of the basic earnings per share is based on the current year’s profit of RMB142,549,000 (2003 - RMB104,399,000) attributable to the shareholders and on the existing number of 601,986,352 shares in issue during the year. -2- Konka Group Co., Ltd. Consolidated balance sheet as at December 31, 2004 2004 2003 ote RMB’000 RMB’000 Non-current assets Property, plant and equipment 9 1,387,288 1,400,005 Goodwill 10 989 1,311 Intangible assets 11 11,014 7,200 Interests in associates 12 35,159 39,216 Other investments 13 10,290 11,790 1,444,740 1,459,522 Current assets Inventories 14 3,580,777 3,170,081 Properties held for sale 15 4,172 4,172 Account receivables 16 571,016 333,217 Prepayments, deposits and other receivables 17 199,251 156,410 Note receivables 18 2,933,652 3,166,448 Short-term investments - 1,243 Cash and bank balances 851,762 1,331,894 8,140,630 8,163,465 Current liabilities Tax payable ( 2,145 ) ( 9,719 ) Account payables ( 1,271,053 ) ( 1,232,711 ) Other payables and accrued expenses ( 821,192 ) ( 1,256,385 ) Note payables ( 3,977,323 ) ( 3,783,822 ) Short-term bank loans 19 ( 48,149 ) ( 28,045 ) ( 6,119,862 ) ( 6,310,682 ) Net current assets 2,020,768 1,852,783 Total assets less current liabilities 3,465,508 3,312,305 (to be cont’d) -3- Konka Group Co., Ltd. Consolidated balance sheet as at December 31, 2004 (cont’d) 2004 2003 ote RMB’000 RMB’000 Total assets less current liabilities 3,465,508 3,312,305 Non-current liabilities Deferred income ( 13,490 ) ( 16,487 ) Finance lease obligations - ( 1,875 ) Other long-term liabilities ( 10,499 ) ( 4,584 ) ( 23,989 ) ( 22,946 ) Minority interests ( 247,827 ) ( 237,966 ) Net assets employed 3,193,692 3,051,393 Financed by : Share capital 20 601,986 601,986 Reserves 2,591,706 2,449,407 Shareholders’equity 3,193,692 3,051,393 The financial statements on pages 2 to 28 were approved and authorized for issued by the board of directors on April 15, 2005 and are signed on its behalf by : Ni Zheng Wang Ru quan Director Director -4- Konka Group Co., Ltd. Consolidated statement of changes in equity for the year ended December 31, 2004 Reserves Share capital Capital Surplus Accumulated Dividend Exchange Total and total Share capital reserves reserves profit/(loss) reserve reserve reserves reserves RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 As at January 1, 2003 601,986 1,820,452 1,133,044 ( 610,169 ) - ( 358 ) 2,342,969 2,944,955 Profit for the year of 2003 - - - 104,399 - - 104,399 104,399 Dividend payment waived - - - 1,809 - - 1,809 1,809 Exchange difference from translation of foreign operations - - - - - 230 230 230 As at December 31, 2003 601,986 1,820,452 1,133,044 ( 503,961 ) - ( 128 ) 2,449,407 3,051,393 As at January 1, 2004 601,986 1,820,452 1,133,044 ( 503,961 ) - ( 128 ) 2,449,407 3,051,393 Profit for the year of 2004 - - - 142,549 - - 142,549 142,549 Exchange difference from translation of foreign operations - - - - - ( 250 ) ( 250 ) ( 250 ) As at December 31, 2004 601,986 1,820,452 1,133,044 ( 361,412 ) - ( 378 ) 2,591,706 3,193,692 According to the corporation law and relevant regulations of a joint stock limited company, the Company’s specified profit should be classified as capital reserves, which include share premium, surplus on revaluation of property, plant and equipment and other investments, etc. Capital reserves are normally used for issue of new shares, or for write-off or permanent provision when foreign investments are revalued. Surplus reserves comprise statutory reserve, statutory public welfare fund and discretionary welfare fund. The Company is required to transfer an amount of not less than 10% of the profit after making up the accumulated loss to statutory reserve until it is up to 50% of the registered share capital. Statutory reserve can be used to cover current year loss or for issue of new shares. The amount of statutory reserve to be utilized for issue of new shares should not exceed an amount such that the balance of the reserve will fall below 25% of the registered share capital after the issue of new shares. The Company is also required to transfer 5% of the profit after making up the accumulated loss to statutory public welfare fund. Statutory public welfare fund shall only be applied for the collective welfare of the Company’ s employees. Discretionary welfare fund is applied in accordance with the shareholders’resolutions passed in the annual general meeting and can be used to make up the accumulated loss or for issue of new shares. -5- Konka Group Co., Ltd. Consolidated cash flow statement for the year ended December 31, 2004 2004 2003 RMB’000 RMB’000 Cash flow from operating activities Operating profit before taxation 172,561 130,708 Adjustment items : Interest income ( 11,993 ) ( 10,922 ) Dividend income ( 595 ) ( 72 ) Income from government grant ( 2,997 ) ( 7,215 ) Short-term bank loan waived ( 4,500 ) - Other payables waived ( 473 ) - Interest expenses 7,227 5,776 Depreciation 147,438 126,744 Loss on disposal of property, plant and equipment 1,978 2,836 Amortization of goodwill 322 321 Amortization of intangible assets 3,295 2,514 Profit on partial disposal of a subsidiary ( 112 ) - Impairment loss provision on associates - 5,594 Share of results from associates 1,738 351 Profit on disposal of an associate ( 357 ) - Loss on disposal of other investments 364 - Provision for inventory obsolescence 35,502 22,636 Provision/(reversal) for doubtful debts on ,account receivables 18,165 ( 8,971 ) Reversal for doubtful debts on other receivables ( 2,135 ) ( 343 ) Net operating cash inflow before movements ,in working capital 365,428 269,957 Exchange reserve movement ( 250 ) 230 Increase in inventories ( 446,198 ) ( 613,921 ) Increase in account receivables ( 255,964 ) ( 47,090 ) (Increase)/decrease in prepayments, deposits and other receivables ( 33,824 ) 77,210 (Increase)/decrease in note receivables 232,796 ( 1,961,309 ) Increase in account payables 38,342 359,978 Increase/(decrease) in other payables and accrued expenses ( 434,720 ) 431,462 Increase in note payables 193,501 1,880,062 Cash generated from/(paid for) operations ( 340,889 ) 396,579 Interest paid ( 7,227 ) ( 5,776 ) Corporate and profits tax paid ( 19,167 ) ( 9,724 ) Net cash inflow/(outflow) from operating activities ( 367,283 ) 381,079 (to be cont’d) -6- Konka Group Co., Ltd. Consolidated cash flow statement for the year ended December 31, 2004 (cont’d) 2004 2003 Note RMB’000 RMB’000 Net cash inflow/(outflow) from operating activities ( 367,283 ) 381,079 Investing activities Interest received 11,993 10,922 Dividend received 595 72 Purchases of property, plant and equipment ( 158,948 ) ( 167,193 ) Proceeds from disposal of property, plant and equipment 22,249 23,245 Purchases of intangible assets ( 7,285 ) ( 1,040 ) Additional investment in associates - ( 2,400 ) Receipts from/(repayments to) associates ( 4,030 ) 11,232 Proceeds from disposal/return of other investments 1,136 200,000 (Increase)/decrease in short-term investments 1,243 ( 1,243 ) Net cash inflow/(outflow) from investing activities ( 133,047 ) 73,595 Financing activities Government grant received - 4,217 Finance lease obligations repaid 21 ( 1,875 ) ( 625 ) Other long-term liabilities raised/(repaid) 21 5,915 ( 19,699 ) Bank loans raised/(repaid) 21 24,604 ( 135,955 ) Decrease in minority interests 21 ( 8,446 ) ( 15,617 ) Net cash inflow/(outflow) from financing activities 20,198 ( 167,679 ) Increase/(decrease) in cash and cash equivalents ( 480,132 ) 286,995 Cash and cash equivalents as at beginning of year 1,331,894 1,044,899 Cash and cash equivalents as at end of year 851,762 1,331,894 Analysis of cash and cash equivalents Cash and bank balances 851,762 1,331,894 -7- Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2004 1. General information Konka Group Co., Ltd. (“the Company”), formerly known as Shenzhen Konka Electronic Group Co., Ltd., obtained approval from Shenzhen Municipal People’s Government to reorganize into a limited stock company in August 1991. On the approval of the People’ s Bank of China, Shenzhen Branch, the Company issued “A” shares and “B”shares, which have then been listed on the Shenzhen Stock Exchange. On August 29, 1995, the Company changed its name to Konka Group Co., Ltd. The principal activities of the Company and its subsidiaries (“the Group”) include the manufacture and sale of colour television, mobile phones, stereo recorders, hi- fi component systems, facsimile machines and telecommunication products, property development and investment holding. 2. Basis of preparation of the financial statements The consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (“IFRS”) issued by the International Federation of Accountants. These financial statements differ from those used in the preparation of the PRC statutory financial statements, which are prepared in accordance with the PRC Accounting Standards. To conform to IFRS, adjustments have been made to the PRC statutory financial statements. Details of the impact of such adjustments on the net asset value as at December 31, 2004 and on the operating results for the year then ended are included in note 25 to the financial statements. In addition, apart from certain property, plant and equipment that are recorded at valuation basis and short-term investments that are recorded at the lower of cost and market va lue/net realizable value, the financial statements have been prepared under the historical cost convention. 3. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Group made up to December 31 each year. Except for those subsidiaries not consolidated for the reasons stated below, all significant inter-company transactions and balances within the Group have been eliminated on consolidation. (a) Subsidiaries A subsidiary is a company in which the Company holds, directly or indirectly, more than 50% of the equity interest as a long-term investment and/or has the power to cast the majority of votes at meetings of the board of directors/management committee. -8- Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2004 (cont’d) 3. Basis of consolidation (cont’d) (a) Subsidiaries (cont’d) As at December 31, 2004, the Company held the following subsidiaries : Place of Percentage of Name of the incorporation/ Registration interest held Principal company registration capital Direct Indirect activities ’000 % % Dongguan Konka PRC RMB200,000 100 - Production of Electronic Co., Ltd. TV sets, hi-fi, etc Konka Pacific Pty. Australia AUD1,000 100 - Sale of Ltd. * electronic products Konka (U.S.A.) Ltd. * U.S.A. USD3,000 100 - Research and development Hong Kong Konka Hong Kong HKD500 100 - Trading of Limited electronic products Anhui Konka PRC RMB140,000 65 - Manufacture Electronic and sale of Co., Ltd. TV sets Mudanjiang Konka PRC RMB60,000 60 - Manufacture Industrial and sale of Co., Ltd. TV sets Chongqing Konka PRC RMB45,000 60 - Manufacture Electronic Co., Ltd. and sale of TV sets Shenzhen Konka PRC RMB15,000 60 - Production of Visual Information mould and System Engineering sub- Co., Ltd. contracting Shenzhen Konka PRC RMB8,300 51 - Manufacture Electrical Co., Ltd. and sale of electronic products Shenzhen Konka PRC RMB120,000 75 25 Manufacture Telecommunications and sale of Technology Co., Ltd. mobile phones Shenzhen Shushida PRC RMB42,000 75 25 Manufacture Electronic Co., Ltd. and sale of electronic products Shenzhen Konka PRC RMB30,000 75 25 Manufacture Communication and sale of Network Co., Ltd. digital network products Shenzhen Konka PRC RMB14,500 49 51 Production of Precision Mould mould Co., Ltd. -9- Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2004 (cont’d) 3. Basis of consolidation (cont’d) (a) Subsidiaries (cont’d) Place of Percentage of Name of the incorporation/ Registration interest held Principal company registration capital Direct Indirect activities ’000 % % Shenzhen Konka PRC RMB9,500 49 51 Production of Injected Plastic plastic Manufactory Co., Ltd. products Shanxi Konka PRC RMB69,500 45 15 Manufacture Electronic and sale of Co., Ltd. TV sets Chongqing Qingjia PRC RMB15,000 30 10 Manufacture Electronic and sale of Co., Ltd. ** electronic parts Dongguan Konka PRC RMB10,000 - 100 Production of Packaging Co., Ltd. plastic products Hong Din InternationalHong Kong HKD500 - 100 International Trade Limited trade Hong Din Investment Hong Kong HKD500 - 100 Inve stment Development holding Limited Indonesia Konka Indonesia USD500 - 100 Trading Trading Limited * Konka Electronics India USD1,160 - 70 Production of (India) Co., Ltd. * colour TV sets Changshu Konka PRC RMB24,650 - 60 Manufacture Electronic Co., Ltd. and sale of electronics products Boluo Konka Printed PRC RMB40,000 - 51 Manufacture Co., Ltd. and sale of electronic products Anhui Konka PRC RMB10,000 - 35 Manufacture Electrical and sale of Co., Ltd. ** electrical appliances * The results and the financial position of these companies are not required to be consolidated because they have ceased the business. ** The Company has effective control over this company. - 10 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2004 (cont’d) 3. Basis of consolidation (cont’d) (b) Associates An associate is a company in which the Company holds, directly or indirectly, not less than 20% and not more than 50% equity interest as a long-term investment and is able to exercise significant influence on this company. Investments in associates are accounted for by equity method. Interests in associates are represented by the Group’s share of their net assets, reduced by the impairment loss provision as considered necessary by the directors. The associates held by the Company as at December 31, 2004 are shown in note 12 to the financial statements. 4. Significant accounting policies (a) Property, plant and equipment Property, plant and equipment other than construction-in-progress is stated at cost less depreciation and amortization. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its present working condition and location for its intended use. Expenditure incurred after the assets have been put into operation, such as repairs and maintenance and overhaul costs, are charged to the consolidated income statement in the period in which they are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of the assets, the expenditures are capitalized as an additional cost of the assets. DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT IS PROVIDED USING THE STRAIGHT-LINE METHOD OVER THE ESTIMATED USEFUL LIVES, TAKING INTO ACCOUNT THE ESTIMATED RESIDUAL VALUE OF 10% OF THE COST OR REVALUED AMOUNT, AS FOLLOWS : LAND USE RIGHTS OVER THE LEASE TERMS BUILDINGS 2.25% LEASEHOLD IMPROVEMENTS 20% MACHINERY AND EQUIPMENT 9% ELECTRONIC EQUIPMENT 18% MOTOR VEHICLES 18% THE VALUATION OF THE PROPERTY, PLANT AND EQUIPMENT INCLUDES THE COSTS OF BUILDINGS, MACHINERY AND FURNITURE, AND ALSO THE INTEREST EXPENSES AND EXCHANGE DIFFERENCES ARISING FROM BANK LOANS THAT FINANCE THE CONSTRUCTION. WHEN ASSETS ARE SOLD OR RETIRED, THEIR COST AND ACCUMULATED DEPRECIATION ARE ELIMINATED FROM THE ACCOUNTS AND ANY PROFIT OR LOSS RESULTING FROM THEIR DISPOSAL IS INCLUDED IN THE CONSOLIDATED INCOME STATEMENT. - 11 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2004 (cont’d) 4. Significant accounting policies (cont’d) (a) Property, plant and equipment (cont’d) WHERE THE RECOVERABLE AMOUNT OF AN ASSET HAS DECLINED BELOW ITS CARRYING AMOUNT, THE CARRYING AMOUNT IS REDUCED TO REFLECT THE DECLINE IN VALUE, WHICH IS THE DIFFERENCE BETWEEN THE RECOVERABLE AMOUNT AND THE CARRYING AMOUNT. (b) Construction-in-progress Construction-in-progress is stated at cost, which includes all construction costs and other direct costs (including borrowing costs capitalized), attributable to such projects. The latter include factories, office buildings and facilities. Construction-in-progress is not depreciated until completion. Costs on completed construction works are transferred to the relevant category of property, plant and equipment when completed. (c) Goodwill Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group’ s interest in the fair value of the identifiable assets and liabilities of a subsidiary, associate or jointly controlled entity at the date of acquisitio n. Goodwill is recognized as an asset and is amortized on a straight-line basis over its estimated useful life, which is on average 10 years. On disposal of a subsidiary, associate or jointly controlled entity, the attributable amount of unamortized goodwill is included in the determination of the profit or loss on disposal. (d) Intangible assets The cost of trademarks is amortized on a straight- line basis over its profit-generating period. Technical know- how is measured initially at cost and is amortized on a straight-line basis over its estimated useful life, which is on average 5 years. (e) Investments Long-term investments are stated at cost less impairment loss that is other than temporary whilst short-term investments are stated at the lower of cost and market value or net realizable value. - 12 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2004 (cont’d) 4. Significant accounting policies (cont’d) (f) Inventories Inventories are valued at the lower of cost and net realizable value. Cost comprises direct materials, direct labor cost and an appropriate portion of overheads. Cost is calculated using the weighted average method. Net realizable value is calculated as the estimated selling price less all further costs of production and the related costs of marketing, selling and distribution. (g) Properties held for sale Properties held for sale are stated at the lower of cost and net realizable value. Cost is determined by an apportionment of the total land and building costs attributable to unsold properties. Net realizable value is estimated by the directors based on prevailing market prices, on an individual property basis. (h) Deferred income Long-term government grants towards research and technical know- how development are recognized as income on a straight- line basis over the period of the grant. (i) Cash equivalents Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. (j) Revenue recognition Revenue is recognized when it is probable that the economic benefits associated with the transactions will flow to the Group and the stage of completion of the transactions can be measured reliably : i) Revenue from sales of goods is recognized when the risks and rewards of ownership of the goods are substantially transferred to customers. ii) For properties held for sale, revenue is recognized on the execution of an unconditional binding sales agreement. iii) Interest income is accrued on a time proportion basis by reference to the principal outstanding and at the interest rate applicable. iv) Dividend income from investments is recognized when the shareholders’ right to receive payments has been established. - 13 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2004 (cont’d) 4. Significant accounting policies (cont’d) (k) Finance leases Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the Group. Assets leased under finance leases are capitalized at their fair value at the date of acquisition. The corresponding leasing commitments are shown as obligations to the Group. The finance costs, which represent the difference between the total leasing commitments and the fair value of the assets acquired, are charged to the consolidated income statement on an actual basis over the period of the respective leases. (l) Foreign currency conversion The financial statements are expressed in Renminbi. Transactions in foreign currencies are translated at the rates prevailing at the dates of the transactions. Monetary assets and liabilities in foreign currencies are translated at the rates prevailing at the balance sheet date. Exchange differences arising from translation of foreign currency borrowings for the purpose of financing the construction of office buildings, plant and machinery and other major assets, for periods prior to their being in a condition to enter into service, are included in the cost of the assets concerned. Other exchange differences are dealt with in the consolidated income statement. On consolidation, the financial statements of overseas subsidiaries denominated in foreign currencies are translated into Renminbi at the rates of exchange prevailing as at the balance sheet date. The resulting translation differences are included in the exchange reserve. (m) Impairment loss As at each balance sheet date, the Group reviews the carrying amounts of its assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. Any impairment loss arising is recognized as an expense immediately. A reversal of impairment loss is limited to the asset’ s carrying amount that would have been determined had no impairment loss been recognized in prior years. Reversals of impairment loss are credited to the income statement in the year in which the reversals are recognized. - 14 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2004 (cont’d) 4. Significant accounting policies (cont’d) (n) Provisions Provisions are recognized when the Group has a present legal or constructive obligation subsequent to a past event, which will result in a probable outflow of economic benefits that can be reasonably estimated. (o) Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years, and it further excludes income statement items that are never taxable or deductible. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized. Such assets and liabilities are not recognized if the temporary difference arises from goodwill (or negative goodwill) or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognized for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed as at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realized. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Tax asset can be offset against tax liability only if the Group has a legally enforceable right to make or receive a single net payment and the Group intends to make or receive such a net payment or to recover the asset and settle the liability simultaneously. - 15 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2004 (cont’d) 5. Business and geographical segments 2004 2003 Colour TV Mobile phone Others Elimination Consolidated Colour TV Mobile phone Others Elimination Consolidated RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Income statement External sales 9,526,590 3,573,713 262,219 - 13,362,522 8,649,116 3,855,715 301,635 - 12,806,466 Inter-segment sales 3,985,231 9,152 82,512 ( 4,076,895 ) - 2,210,249 24,060 189,533 ( 2,423,842 ) - 13,511,821 3,582,865 344,731 ( 4,076,895 ) 13,362,522 10,859,365 3,879,775 491,168 ( 2,423,842 ) 12,806,466 Operating profit/(loss) 240,289 14,661 ( 17,479 ) ( 56,139 ) 181,332 208,803 53,077 ( 8,984 ) ( 97,856 ) 155,040 Finance costs ( 7,033 ) ( 23,981 ) Share of loss from associates ( 1,738 ) ( 1,738 ) ( 351 ) ( 351 ) Taxation ( 11,593 ) ( 15,935 ) Minority interests ( 18,419 ) ( 10,374 ) Profit for the year 142,549 104,399 Balance sheet Assets Segment assets 8,253,222 1,035,140 245,887 - 9,534,249 8,375,210 820,167 371,188 - 9,566,565 Interests in associates 35,159 - - - 35,159 39,216 - - - 39,216 Unallocated assets 15,962 17,206 9,585,370 9,622,987 Liabilities Segment liabilities 5,116,502 883,707 84,993 - 6,085,202 5,431,026 680,873 187,220 - 6,299,119 Unallocated liabilities 58,649 34,509 6,143,851 6,333,628 - 16 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2004 (cont’d) 5. Business and geographical segments (cont’d) The Group’ s operations are located in the PRC and Hong Kong. The following table provides an analysis of the Group’s turnover by geographical market, irrespective of the origin of the goods : 2004 2003 RMB’000 RMB’000 PRC 12,097,893 12,104,864 Hong Kong 1,264,629 701,602 13,362,522 12,806,466 The following is an analysis of the carrying amount of segment assets and capital addit ions, analyzed by geographical area in which the assets are located : Carrying amount of segment assets Capital additions 2004 2003 2004 2003 RMB’000 RMB’000 RMB’000 RMB’000 PRC 9,293,739 9,406,768 166,102 170,648 Hong Kong 291,631 216,219 131 85 9,585,370 9,622,987 166,233 170,733 6. Other revenue 2004 2003 RMB’000 RMB’000 Dividend income 595 72 Income from government grant (*) 2,997 7,215 Profit on partial disposal of a subsidiary 112 - Profit on disposal of an associate 357 - Loss on disposal of other investments ( 364 ) - Income from raw material less cost 10,445 1,518 Liabilities waived 4,973 - Transfer from VAT of local-product-local-sale 188 - Profit from joint venture on property ‘development site at Fairview Park and Swan Castle 36,129 - Profit from disposal of properties to staff 3,928 - Other non-operating net incomes 15,892 5,174 75,252 13,979 (*) The Group received government grant for research and technical know-how development that would be recognized as income on a straight-line basis over the period of the grant. - 17 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2004 (cont’d) 7. Profit before taxation 2004 2003 RMB’000 RMB’000 Profit before taxation has been arrived at : After charging : Auditors’remuneration 800 800 Directors’emoluments - - Depreciation - owned assets 147,438 126,669 - assets under finance leases - 75 Loss on disposal of property, plant and equipment 1,978 2,836 Amortization of goodwill 322 321 Amortization of intangible assets 3,295 2,514 Impairment loss provision on associates - 5,594 Loss on disposal of other investments 364 - Provision for inventory obsolescence 35,502 22,636 Provision for doubtful debts 18,165 - Interest expenses 7,227 5,776 Research and development expenditures 69,257 43,921 Rentals of land and buildings 32,949 31,810 Staff costs 275,908 256,325 And after crediting : Interest income 11,993 10,922 Dividend income 595 - Profit on partial disposal of a subsidiary 112 - Profit on disposal of an associate 357 - Reversal for doubtful debts on account receivables - 8,971 Reversal for doubtful debts on other receivables 2,135 343 Short-term bank loan waived 4,500 - Other payables waived 473 - - 18 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2004 (cont’d) 8. Taxation 2004 2003 RMB’000 RMB’000 PRC corporate tax 9,098 14,162 Hong Kong profits tax 2,495 1,773 11,593 15,935 PRC corporate tax is determined by reference to the profit reported in the audited financial statements under PRC Accounting Standards, and after adjustments for income and expense items that are not assessable or deductible for income tax purposes. It is provided at the rates of 15% (2003 - 15%) on the estimated assessable income for companies established in Shenzhen and 33% (2003 - 33%) for other PRC companies. Hong Kong profits tax is calculated at 17.5% (2003 - 17.5%) of the estimated assessable profits for the year. The reconciliation between tax expense and accounting profit at applicable tax rates is as follows : 2004 2003 RMB’000 RMB’000 Profit before taxation 172,561 130,708 Tax at the applicable income tax rate of 15% (2003 - 15%) 25,884 19,606 Tax effect of : - disallowable expenses 328 5,567 - non-taxable revenue ( 2,095 ) ( 3,152 ) - different tax rates in different regions ( 2,911 ) ( 3,447 ) - recognized tax losses ( 9,613 ) ( 2,639 ) Actual tax expense at 6.72% (2003 - 12.19%) 11,593 15,935 No deferred tax asset is recognized as it is uncertain whether taxable profit will be available against which deductible temporary differences can be utilized in the near future. As at December 31, 2004, the net unprovided deferred tax asset was RMB70,434,000 (2003 -RMB82,723,000). - 19 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2004 (cont’d) 9. Property, plant and equipment Land Leasehold Machinery Electronic Motor Construction- use rights Buildings improvements & equipment equipment vehicles in-progress Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Cost/valuation As at January 1, 2004 31,326 815,920 22,230 617,387 531,032 67,013 113,883 2,198,791 Additions - 2,920 658 39,457 73,187 13,132 29,594 158,948 Disposals - ( 13,037 ) ( 17,100 ) ( 18,393 ) ( 27,531 ) ( 14,134 ) ( 1,719 ) ( 91,914 ) Re-classifications - 58,852 - - 18,373 - ( 77,225 ) - As at December 31, 2004 31,326 864,655 5,788 638,451 595,061 66,011 64,533 2,265,825 Accumulated depreciation As at January 1, 2004 ( 2,377 ) ( 128,969 ) ( 19,265 ) ( 291,396 ) ( 309,114 ) ( 47,665 ) - ( 798,786 ) Additions ( 630 ) ( 21,510 ) ( 1,131 ) ( 50,124 ) ( 64,229 ) ( 9,814 ) - ( 147,438 ) Disposals - 5,271 17,100 13,932 17,857 13,527 - 67,687 As at December 31, 2004 ( 3,007 ) ( 145,208 ) ( 3,296 ) ( 327,588 ) ( 355,486 ) ( 43,952 ) - ( 878,537 ) Net book value As at December 31, 2004 28,319 719,447 2,492 310,863 239,575 22,059 64,533 1,387,288 As at December 31, 2003 28,949 686,951 2,965 325,991 221,918 19,348 113,883 1,400,005 The Group’s certain property, plant and equipment with a cost of RMB66,274,000 have been pledged to secure general banking facilities granted to the Group. In preparation for the reorganization of the Company into a Sino- foreign joint stock limited company, the Company’ s property, plant and equipment as at July 31, 1991 were revalued on an open market value basis by Zhonghua (Shenzhen) Certified Public Accountants, a registered valuer in Shenzhen. The surplus of RMB29,203,000 arising from the revaluation was capitalized as share capital. - 20 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2004 (cont’d) 10. Goodwill RMB’000 RMB’000 Cost As at January 1, 2004 and as at December 31, 2004 3,217 Amortization As at January 1, 2004 ( 1,906 ) Charged for the year ( 322 ) As at December 31, 2004 ( 2,228 ) Net book value As at December 31, 2004 989 As at December 31, 2003 1,311 11. Intangible assets Technical Trademarks know-how Total RMB’000 RMB’000 RMB’000 Cost As at January 1, 2004 1,534 16,872 18,406 Additions 28 7,257 7,285 Transfer to prepayments - ( 269 ) ( 269 ) As at December 31, 2004 1,562 23,860 25,422 Amortization As at January 1, 2004 ( 638 ) ( 10,568 ) ( 11,206 ) Charged for the year ( 214 ) ( 3,081 ) ( 3,295 ) Transfer to prepayments - 93 93 As at December 31, 2004 ( 852 ) ( 13,556 ) ( 14,408 ) Net book value As at December 31, 2004 710 10,304 11,014 As at December 31, 2003 896 6,304 7,200 - 21 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2004 (cont’d) 12. Interests in associates 2004 2003 RMB’000 RMB’000 Share of net assets 55,375 63,462 Impairment loss provision ( 11,188 ) ( 11,188 ) Amounts due from associates 1,130 1,330 Amounts due to associates ( 10,158 ) ( 14,388 ) 35,159 39,216 As at December 31, 2004, the Group held the associates as follows : Effective Place of equity held Company name registration by the Company Principal activities Directly Indirectly Huadoushi Longfeng Properties Macau 50% - Investment holding and Development Co., Ltd. * property investment Shenzhen Jiaxuntong Technology PRC 40% - Mobile phone development Co., Ltd. Shenzhen OCT International PRC 25% - TV program production & Media Co., Ltd. distribution Shenzhen Dekon Electronics Co., Ltd. PRC - 30% Manufacture & sale of electronic products Shenzhen Konka Energy Technology Co., Ltd. PRC - 30% Manufacture & sale of electronic parts Chongqing Jingkang Plastics Material PRC - 25% Production of moulds Co., Ltd. * This company was jointly invested by the Group and other four companies for developing a property development project, namely “Huadoushi Furong Village”. The project had not yet been commenced because the other four companies requested to withdraw their investment from this project and the local government had exchanged the land of this company ’s project. Since there was no progress on this project, the Group had provided impairment loss on the investment cost of this company in an amount of RMB11,188,000. - 22 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2004 (cont’d) 13. Other investments 2004 2003 RMB’000 RMB’000 Unconsolidated subsidiaries, balances due 136,567 136,567 Impairment loss provision ( 136,567 ) ( 136,567 ) - - Unlisted shares, at cost 1,885 3,385 Impairment loss provision ( 1,400 ) ( 1,400 ) 485 1,985 Listed share, at cost * 9,805 9,805 10,290 11,790 * The market value of these listed shares is not generally available. 14. Inventories 2004 2003 RMB’000 RMB’000 Raw materials 1,551,927 1,422,663 Work-in-progress 113,212 18,983 Finished goods 2,091,729 1,869,024 Provision for inventory obsolescence ( 176,091 ) ( 140,589 ) 3,580,777 3,170,081 15. Properties held for sale 2004 2003 RMB’000 RMB’000 King Yuan Building –cost b/f and cost c/f 4,172 4,172 - 23 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2004 (cont’d) 16. Account receivables 2004 2003 RMB’000 RMB’000 Amount receivables 690,817 434,853 Provision for doubtful debts ( 119,801 ) ( 101,636 ) 571,016 333,217 As at December 31, 2004, the aging of amount receivables is analyzed as follows : 2004 2003 RMB’000 RMB’000 Within one year 493,906 219,398 Over one year but within two years 13,328 23,441 Over two years but within three years 18,752 60,474 Over three years 164,831 131,540 690,817 434,853 17. Prepayments, deposits and other receivables 2004 2003 RMB’000 RMB’000 Advance payments 49,570 46,540 Prepayments 38,451 32,407 Other receivables 115,656 84,024 203,677 162,971 Provision for doubtful debts ( 4,426 ) ( 6,561 ) 199,251 156,410 18. Note receivables 2004 2003 RMB’000 RMB’000 Bills receivable 127,634 192,503 Promissory notes issued by banks 2,806,018 2,973,945 2,933,652 3,166,448 The Group’s certain promissory notes issued by banks with a net book value of RMB23,762,000 have been pledged to secure the bank loans. - 24 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2004 (cont’d) 19. Short-term bank loans 2004 2003 RMB’000 RMB’000 Bank loans, unsecured * - 4,500 Bank loans, secured 48,149 23,545 48,149 28,045 * The Government of Mudanjiang waived the working capital funds due by the Group. 20. Share capital 2004 2003 RMB’000 RMB’000 Registered, issued and paid-up “A” shares of RMB1 each 399,148 399,148 “B” shares of RMB1 each 202,838 202,838 601,986 601,986 “A”shares, listed and tradable 224,199 224,199 “B”shares, listed and tradable 202,837 202,837 427,036 427,036 Listed but temporarily not tradable 174,950 174,950 601,986 601,986 The “A” and “B” shares carry equal rights with respect to the distribution of the Company’ s assets and profits, and rank pari passu in all other respects. The “A”shares are held by PRC investors with settlement in Renminbi, whereas “B”shares are held by both PRC investors and foreign investors, and are settled in Hong Kong dollars. - 25 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2004 (cont’d) 21. Analysis of financing Finance Other lease long-term Minority obligations liabilities Bank loans interests RMB’000 RMB’000 RMB’000 RMB’000 Balance as at January 1, 1,875 4,584 28,045 237,966 2004 Short-term bank loan - - ( 4,500 ) - waived Net cash inflow/(outflow) from ( 1,875 ) 5,915 24,604 - financing Increase in minority interests by partial disposal of a - - - 5,114 subsidiary Dividend paid to minority shareholders - - - ( 13,560 ) Profit on partial disposal of a - - - ( 112 ) subsidiary Share of results of minority interests - - - 18,419 Balance as at December 31, 2004 - 10,499 48,149 247,827 22. Commitments As at December 31, 2004, the Group did not have any material commitments under non-cancellable operating leases and capital expenditures as at December 31, 2004. 23. Contingent liabilities At December 31, 2004, the Group did not have any significant contingent liabilities. - 26 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2004 (cont’d) 24. Related party transactions The Group had certain material transactions with related parties with details as follows : 2004 2003 RMB’000 RMB’000 Overseas Chinese Town Operating lease paid 357 357 Holdings Co. Utilities and building 'management fee paid - 14 Shenzhen Dekon Electronics Co., Purchase of Ltd. 'merchandises 58,841 56,706 Shanghai Huali Packaging Co., Ltd. Purchase of 'merchandises 57,226 51,904 Shenzhen Huali Packaging Co., Ltd. Purchase of 'merchandises 49,071 30,680 Proceeds from disposal of 'other investments 1,136 - 25. Impact on results attributable to shareholders and net asset value as reported by the PRC Certified Public Accountants Profit attributable Net to shareholders asset value RMB’000 RMB’000 As reported by PRC Certified Public Accountants 140,727 3,193,929 Adjustments to conform to IFRS : Prior year adjustment on capital reserves - ( 6,978 ) Prior year adjustment on surplus reserves - 17,909 Accumulated losses of subsidiaries shared by minority 'interests - 4,640 Government grant transfer from capital reserves as 'deferred income - ( 16,487 ) Removal expenditures written-off ( 2,318 ) ( 2,318 ) Government grant recognized as income 2,997 2,997 Transfer of welfare funds recognized as expense ( 1,912 ) - Impairment loss on an associate ( 2,787 ) - Bank loan and other payables waived by subsidiaries’ 'creditors 5,842 - As restated in conformity with IFRS 142,549 3,193,692 - 27 - KONKA GROUP CO., LTD. Notes to the financial statements for the year ended December 31, 2004 (cont’d) 26. FINANCIAL INSTRUMENTS FINANCIAL ASSETS OF THE GROUP INCLUDE CASH AND BANK BALANCES, NOTE RECEIVABLES, ACCOUNT RECEIVABLES, PREPAY MENTS, DEPOSITS AND OTHER RECEIVABLES. FINANCIAL LIABILITIES INCLUDE BANK LOANS, NOTE PAYABLES, ACCOUNT PAYABLES, OTHER PAYABLES, ACCRUED EXPENSES, DEFERRED INCOME AND OTHER LONG-TERM LIABILITIES. (A) CREDIT RISK CASH AND BANK BALANCES : SUBSTANTIAL AMOUNTS OF THE GROUP’ S CASH BALANCES ARE DEPOSITED WITH BANK OF CHINA, CHINA MERCHANTS BANK, SHENZHEN DEVELOPMENT BANK, INDUSTRIAL AND COMMERCIAL BANK OF CHINA, CONSTRUCTION BANK OF CHINA AND AGRICULTURAL BANK OF CHINA. ACCOUNT RECEIVABLES : THE GROUP DOES NOT HAVE A SIGNIFICANT EXPOSURE TO ANY INDIVIDUAL CUSTOMER OR COUNTERPART. THE MAJOR CONCENTRATIONS OF CREDIT RISK ARISE FROM EXPOSURES TO A SUBSTANTIAL NUMBER OF ACCOUNT RECEIVABLES THAT ARE MAINLY LOCATED IN THE PRC. (B) FAIR VALUE THE FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES IS NOT MATERIALLY DIFFERENT FROM THEIR CARRYING AMOUNT. THE CARRYING VALUE OF SHORT-TERM BANK LOANS AND OTHER LONG-TERM LIABILITIE S IS ESTIMATED TO APPROXIMATE ITS FAIR VALUE BASED ON THE BORROWING TERMS AND RATES OF SIMILAR LOANS. FAIR VALUE ESTIMATES ARE MADE AT A SPECIFIC POINT IN TIME AND BASED ON RELEVANT MARKET INFORMATION AND INFORMATION ABOUT THE FINANCIAL INSTRUMENT S. THESE ESTIMATES ARE SUBJECTIVE IN NAT URE AND INVOLVE UNCERTAINTIES ON MATTERS OF SIGNIFICANT JUDGEMENT, AND THEREFORE CANNOT BE DETERMINED WITH PRECISION. CHANGES IN ASSUMPTIONS COULD SIGNIFICANTLY AFFECT THE ESTIMATES. 27. Language THE TRANSLATED ENGLISH VERSION OF FINANC IAL STATEMENTS IS FOR REFERENCE ONLY. SHOULD ANY DISAGREEMENT ARISE, THE CHINESE VERSION SHALL PREVAIL. - 28 -

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