东沣B退(200160)帝贤Ｂ2005年年度报告（英文版）

CHENGDE DIXIAN TEXTILE CO., LTD. ANNUAL REPORT 2005 April 28, 2006 Chengde · PRC Section I. Important Notice and contents The Board of Directors, Supervisory Committee of Chengde Dixian Textile Co., Ltd. (hereinafter referred to as the Company) and its directors, supervisors and senior executives individually and collectively accept responsibility for the correctness, accuracy and completeness of the contents of this report and confirm that there are no material omissions or errors which would render any statement misleading. The 2nd Meeting of the 3rd Board of Director examined and approved 2005 Annual Report and its summary of the Company and all directors attended the meeting of the Board. Shenzhen Pan-China Schinda Certified Public Accountant audited the domestic financial report of the Company and issued the unqualified Auditors’ Report with emphasized 1 issues for the Company. And Hong Kong Charles Chan, Ip & Fung CPA Ltd audited the international financial report and issued disclaimer of opinion report. The Board of Director, Supervisory Committee of the Company made definitions on the relevant matters, the investors are suggested to pay attention to read. Mr. Wang Shuxian, Chairman of the Board of the Company, Mr. Zhang Jing, Chief Financial Officer, and Ms. Xu Fenglan, Person in Charge of Accounting Organ hereby confirm that the Financial Report of Annual Report 2005 is authentic and complete. Note: The report is prepared in bilingual versions using Chinese and English respectively, in the event of any discrepancy in understanding the two aforementioned versions, the Chinese version shall prevail. Contents Section I. Important notice and contents---------------------------------------------------- Section II. Company Profile-------------------------------------------------------------------- Section III. Summary of Accounting Highlights and Business Highlights------------ Section IV. Changes in Share Capital and Particulars about Shareholders---------- Section V. Particulars about Directors, Supervisors, Senior Executives and Employees------------------------------------------------------------------------------------------ SectionVI. Administrative Structure -------------------------------------------------------- 2 SectionVII. Particulars about Shareholders’ General Meeting------------------------- Section VIII. Report of the Board of Directors-------------------------------------------- Section IX. Report of the Supervisory Committee---------------------------------------- Section IX. Significant Events----------------------------------------------------------------- Section XI. Financial Report------------------------------------------------------------------- Section XII. Documents for Reference ------------------------------------------------------ Section II. Company Profile 1. Legal Name of the Company In Chinese: 承德帝贤针纺股份有限公司 In English: CHENGDE DIXIAN TEXTILE CO., LTD. 2. Legal Representative: Wang Shuxian 3. Secretary of Board of Directors: Chen Zhiguo Authorized Representative in Charge of Securities Affairs: Li Yang Contact Address: Xiabancheng Town, Chengde County, Hebei Province Tel: (86) 314-3115049, 3115048 Fax: (86) 314-3182013 E-mail: dxgs-9@heinfo.net 3 4. Registered Address: Xiabancheng Town, Chengde County, Hebei Province Office Address: Xiabancheng Town, Chengde County, Hebei Provice Post Code: 067400 Company’s Internet Web Site: http://www.dxtex.com E-mail: dxgs-9@heinfo.net 5. Newspapers Chosen for Disclosing the Information of the Company: Securities Times (domestic) and Hong Kong Wen Wei Po (overseas) Internet Web Site for Publishing the Annual Report: http://www.cninfo.com.cn The Place Where the Annual Report is Prepared and Placed: Securities Department of the Company Contact Tel: (86) 314-3115049, 3115048 6. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: DIXIAN B Stock Code: 200160 7. Other Relevant Information of the Company Initial registered date: Nov. 3, 1999 Registered date after change: Mar. 31, 2004 Registered address: Industry and Commerce Administration Bureau of Hebei Province (316#, Tiyu South Street, Shijiazhuang, Hebei Province) Registered number for business license of the Company: 1300001001372 1/1 Registered number of taxation of the Company: 130821106576876 International Accountant: Hong Kong Charles Chan Ip & Fung CPA Ltd Office address: 37/F, Hennessy Center, No. 500, Hennessy Road, Causeway bay, Hong Kong Chinese Accountant: Shenzhen Pan-china Schinda Certified Public Accountant Ltd. Office address: 16/F, Securities Tower, No. 5020, Binhe Avenue, Shenzhen Custodian agent of the non-circulating shares of the Company: Shenzhen Branch of China Securities Registration and Clearing Co., Ltd. Name of lawyer firm engaged by the Company: Beijing Jin Cheng Tongda Lawyer Firm Office address: 11/F, Huaxia Bank, No. 22, Jian Guo Men Nei Ave., Beijing 4 Section III. Summary of Accounting Highlights and Business Highlights I. Summary of accounting highlight as of the year 2005 Unit: RMB Items Amounts Total profit 22,216,038.51 Net profit 20,306,135.88 Net profit after deducting non-recurring gains and losses 20,177,225.28 Profit form main operations 67,456,586.09 Other operating profit 463,662.05 Operating profit 22,087,127.91 Investment income 0 Subsidy income 241,290.41 Net non-operating income/expenses -112,379.81 Net cash flows arising from operating activities 28,712,097.90 Net increase/decrease in cash and cash equivalents -227,554,333.89 Notes: Items of deducting non-recurring gains and losses and the involved amounts are as following: Amount Items of non-recurring gains and losses (Unit: RMB) Income from compensation 38,290.68 Add: Other income 341,945.12 Less: Expenditure of penalty 59,832.80 Less: Expenditure of donation 5,050.00 Less: Other expenditure 186,442.40 Non-recurring losses and gains 128,910.60 II. Explanation on the difference in net profit as audited by domestic and international certified public accountants respectively As audited by Shenzhen Pan-china Schinda Certified Public Accountant Ltd. and CCIF Limited Certified Public Accountants according to Chinese Accounting Standards and International Accounting Standards respectively, the Company’s net profit as of year 2005 was RMB 20,306,135.88 and RMB 20,306,135.88. There is no difference in net profit. III. Major accounting data and financial indexes over past three years ended the end of the 5 report period Items Unit 2005 2004 2003 Income from main operations RMB 289,738,020 525,685,638 523,600,121 Net Profit RMB 20,306,136 105,127,475 143,046,587 Total assets RMB 2,761,726,330 2,992,390,845 2,310,992,832 Shareholders’ equity （ excluding RMB 1,319,347,999 1,298,142,307 696,775,076 minority interests） Earnings per share RMB/share 0.03 0.18 0.33 Earnings per share after deducting RMB/share 0.03 0.18 0.32 non-recurring gains and losses Net assets per share RMB/share 2.24 2.21 1.59 Net assets per share after RMB/share 2.24 2.20 1.58 adjustment Net cash flows per share arising RMB/share 0.05 0.13 0.28 from operating activities Return on equity % 1.54% 8.10 20.5 Weighted average earnings per RMB/share 0.03 0.21 0.36 share IV. In accordance with Editing and Reporting Rules No. 9 Regarding Information Disclosure for Companies Publicly Issuing Securities promulgated by China Securities Regulatory Commission, return on equity and earnings per share as calculated based on calculating method of fully diluted and weighted average: Return on equity Earnings per share (RMB) Profit in the report period Fully Weighted Fully Weighted diluted average diluted average Profit from main operations 5.11% 5.16% 0.11 0.11 Operating profit 1.67% 1.69% 0.04 0.04 Net profit 1.54% 1.55% 0.03 0.03 Net profit after deducting non-recurring 1.53% 1.54% 0.03 0.03 gains and losses V. Changes in shareholders’ equity in the report period (Unit: RMB） Statutory Capital public Surplus public Total shareholders’ Items Share capital public welfare Retained profit reserve reserve equity fund Amount at the 588,600,000 391,996,587.96 52,702,919.54 26,351,460.77 238,491,338.76 1,298,142,307.03 period-begin Increase in the 0 1,399,556.41 1,810,613.59 905,306.79 20,306,135.88 24,421,612.67 report period Decrease in the 0 0 0 0 2,715,920.38 2,715,920.38 report period Amount at the 588,600,000 393,396,144.37 54,513,533.13 27,256,767.56 256,081,554.26 1,319,847,999.32 6 period-end The equity investment balance from Withdrawal in Withdrawal in Realization of Realization of Reason of changes Inapplicable purchase of this period this period profit Profit Fashion Co., Ltd. Section IV. Changes in Share Capital and Particulars about Shareholders I. Changes in Share Capital (1) Statement of changes in share Unit: Share Before the change Increase/decrease of this time (+, - ) After the change Items New Capitalization Share Amount Proportion shares of public Others Subtotal Amount Proportion offering reserve issued I. Unlisted Shares 1. Sponsors’ shares 204,000,000 34.66% 204,000,000 34.66% Including: State-owned share Domestic legal person’s shares 19,289,424 3.28% 19,289,424 3.28% Foreign legal person’s shares Others 184,710,576 31.38% 184,710,576 31.38% 2. Raised legal person’s shares 3. Inner employees’ shares 4. Preference shares or others II. Listed Shares 1. RMB ordinary shares 2.Domestically listed foreign 384,600,000 65.34% 384,600,000 65.34% shares 3. Overseas listed foreign shares 4. Others III. Total shares 588,600,000 100% 588,600,000 100% (2) All issuance and listing of shares in previous three years at the end of report period 1. Approved by CSRC with ZJFXZ [2004] No.101 Document, the Company directionally issued 150,000,000 shares of domestically listed foreign shares (B shares) on July 19, 2004. Manner of issuance: allotted-sell to investors in overseas organization at certain price Price of issuance: HKD 3.32 per share Date Limit of share-holdings: having three-month term of banned sale Circulation date of listing: Oct. 22, 2004 7 Total amount of raising capital: HKD 498,000,000 2. In the report period, no changes occurred in total amount of shares of the Company. 3. There existed no inner employees’ shares in the Company. II. About shareholders (1) Amount of shareholders and particulars about shares holding Total amount of shareholders 15,147 Particulars about shares held by the top ten shareholders Proportion Numbers of Total of Increase/decre Number of share Full name of Shareholders Nature of shareholder of shares non-circulatin shares held ase in 2005 pledged/frozen held g shares held ① Wang Shuxian Natural person 29.49% 173,604,000 0 173,604,000 173,604,000 ②China Southern Securities Circulating B-share 15.41% 90,700,000 0 Naught Unknown Co., Ltd. ③China Southern Securities Circulating B-share 3.27% 19,235,055 -31,792,062 Naught Unknown (HK) Co., Ltd. ④Chengde North Industrial Domestic legal 2.62% 15,431,376 0 Naught Naught Corporation person share ⑤Wang Zhengsong Natural person 1.89% 11,106,576 0 11,106,576 Naught ⑥DEUTSCHE BANK AG Circulating B-share 1.204% 7,090,267 7,090,267 Naught Unknown LONDON ⑦RIPPERTON ASSETS Circulating B-share 1.203% 7,084,388 0 Naught Unknown LIMITED ⑧CSSC INTL LTD Circulating B-share 1.11% 6,530,000 0 Naught Unknown ⑨Wang Wensheng Circulating B-share 1.03% 6,048,339 0 Naught Unknown ⑩China Medium & Small Enterprise Development Funds Circulating B-share 1.00% 5,880,000 0 Naught Unknown Co., Ltd. Particulars about shares held by the top ten shareholders of circulation shares Number of circulation shares Shareholders’ name (full name) Type of shares held at the year-end ①China Southern Securities Co., Ltd. 90,700,000 Domestically listed foreign shares ②China Southern Securities (HK) Co., Ltd. 19,235,055 Domestically listed foreign shares ③DEUTSCHE BANK AG LONDON 7,090,267 Domestically listed foreign shares ④RIPPERTON ASSETS LIMITED 7,084,388 Domestically listed foreign shares ⑤CSSC INTL LTD 6,530,000 Domestically listed foreign shares ⑥Wang Wensheng 6,048,339 Domestically listed foreign shares ⑦China Medium & Small Enterprise Development Funds 5,880,000 Domestically listed foreign shares Co., Ltd. ⑧PERFECT SPACE INVESTMENTS 4,542,989 Domestically listed foreign shares ⑨MAIN FORCES ASSETS LIMITED 4,046,700 Domestically listed foreign shares ⑩CHINA SOUTHERN CORPORATE FINANCEL 3,790,000 Domestically listed foreign shares LIMITED 8 Wang Shuxian and Wang Zhengsong are parent child relationship so as to exist related relationship; China Southern Securities (Hong Kong) Co., Ltd and CSSC INTL LTD belong to subsidiaries of CSSC Co., Ltd. so as to exist related Explanation on associated relationship among the aforesaid relationship. Among the top ten shareholders, the Company is unknown whether shareholders there exists associated relationship or belongs to the consistent actor regulated by the Management Measure of Information Disclosure on Change of Shareholding for Listed Company among the other shareholders. (2) Particulars about controlling shareholder of the Company: The controlling shareholder of the Company is Wang Shuxian (the first largest shareholder of the Company), who is also actual controller of the Company. His information is as follows: Mr. Wang Shuxian, aged 52 and Chinese nationality, who does not enjoy the residence power in the other country or area. He is one of the sponsors of the Company and holds 173,604,000 shares of the Company at present. Mr. Wang Shuxian is founder of the Company. In 1986, Xiaban County Knitting Factory was founded in Xiabancheng town of Chengde, Hebei. Over ten years, the Company has developed into the largest base of manufacture and exporter of textile in North China from small to large, developing the largest base of production and export in knitting products in North China. In 1994, he has established Hebei Dixian Textile Group Co., and it has been changed into joint-stock company on Nov. 3, 1999. Approved by CSRC, DIXIAN B successfully listed with Shenzhen Stock Exchange for trade on Sep. 29, 2000. The Company has become the first B-share listed company controlled by person. Now, Mr. Wang Shuxian takes the post of Chairman of the Board of the Company all along. (3) In the report period, controlling shareholder and actual controller of the Company had no change (4) Property right and controlling relationship between the actual controller and the Company is as follow: WANG SHU XIAN 29.49% CHENGDE DIXIAN TEXTILE CO., LTD (5) Particulars about legal person shareholders as of holding 10% (including 10%) China South Securities Co., Ltd. was founded on Dec. 21, 1992 with registered capital of RMB 3.45 billion. Business scope of the Company includes: deputize and self-run security business; consignment of security and recommend and guarantee for listing; issuance and issuance agent for bond; guarantee agent, assignment and testimony of security; sales by proxy, mortgage and discount financing of security and investment consultation of security; finance consultant; investment related to security business; regroup, purchase and merger 9 of enterprise and financing arrangement; deputize repay capital with interest and distribution of bonus with derived interest; capital management; promote business of fund; overseas business of security; act as sponsor of security investment fund and fund management company and other business authorized by CSRC. On Jan., 2, 2004, China South Securities Co., Ltd. was taken over control administratively. It was officially announced to be closed on April 29, 2004 and the clearing work is under the way nowadays. Section V. Particulars about the Directors, Supervisors and Senior Executives and Employees I. Particulars about directors, supervisors and senior executives Basic information of directors, supervisor and senior executives Unit: share & RMB Holding share Holding share Shares Reason of Name Title Gender Age Office term at the at the changed change year-begin year-end (share) Chairman of the Oct.30,2005- Wang Shuxian Board Male 52 Oct. 30,2008 173,604,000 173,604,000 0 No change Director, Oct.30,2005- Shi Bainian General Manager Male 34 Oct. 30,2008 0 0 Oct.30,2005- Song Yushan Director Male 65 Oct. 30,2008 0 0 Director, Deputy Oct.30,2005- Wang Huilai General Manager Male 51 Oct. 30,2008 0 0 Oct.30,2005- Du Qingfeng Director Male 44 Oct. 30,2008 0 0 Director, Deputy Oct.30,2005- Lan Wenzhi General Manager Female 47 Oct. 30,2008 0 0 Independent Oct.30,2005- Wang Enyuan director Male 64 Oct. 30,2008 0 0 Independent Oct.30,2005- Li Wei director Male 35 Sep.6,2007 0 0 Independent Oct.30,2005- Wang Yaguang director Male 53 Sep.6,2007 0 0 Chairman of Oct.30,2005- Xu Xue Supervisory Male 57 Oct. 30,2008 0 0 committee Oct.30,2005- Li Xianfu Supervisor Male 60 Oct. 30,2008 0 0 Oct.30,2005- Sun Zhenyu Supervisor Male 43 Oct. 30,2008 0 0 Oct.30,2005- Yao Fenglan Supervisor Female 40 Oct. 30,2008 0 0 10 Oct.30,2005- Xu Huafeng Supervisor Male 33 Oct. 30,2008 0 0 Wang Deputy General Oct.30,2005- Zhengsong Manager Male 29 Oct. 30,2008 11,106,576 11,106,576 0 No change Deputy General Oct.30,2005- Huo Xuejun Male 33 Manager Oct. 30,2008 Deputy General Oct.30,2005- Liu Fumin Male 32 Manager Oct. 30,2008 Deputy General Oct.30,2005- Song Shiqiang Male 32 Manager Oct. 30,2008 Chief Financial Oct.30,2005- Zhang Jing Supervisor Male 35 Oct. 30,2008 0 0 Secretary of Oct.30,2005- Chen Zhiguo Board of Directors Male 33 Oct. 30,2008 0 0 Particulars about directors and supervisors holding the position in Shareholding Company √Applicable □Non-applicable Drawing the payment Name of Shareholding Title in Shareholding Name Office term from the Shareholding Company Company Company (Yes / No) Chengde North Industrial Song Yushan Legal Representative From 1999 until now No Corporation Chengde Dragon and Phoenix Song Yushan Legal Representative From 1999 until now No Dressing Co. Chengde Xiaban Town Song Yushan Legal Representative From 1999 until now No Hongxing Plastic Factory II. Particulars about main work experience of directors, supervisor and senior executives in previous five years 1. Particulars about present directors of the Company Mr. Wang Shuxian, graduated from middle school, and took the post of Chairman of the Company. Since 1986, he took the post of director of Xiaban Town Textile General Plant. In 1994, he assumed General Manager, Chairman of Dixian Group successively and was the founder of the Company. Since 1999, he took Chairman of the Company. Mr. Wang Shuxian possessed rich experience in the aspects of production, sale and enterprise management etc. of knitting and finished garments. At present he concurrently assumed the posts of Chairman of Xiaban Town Textile, Dixian Fashion, Industry Papermaking, Chengde Beirifang, Xinye Commerce and Trade and New Robot. Mr. Shi Bainian, graduated from university (majored in economics management), was Director and General Manager of the Company. He successively took the post of director of tailoring branch of Dixian Group, director of dyeing manufacture and Deputy General Manager of the Company. Mr. Song Yushan, graduated from university, was Director of the Company. He successively took the post of secretary of office of Chengde County People’s Government, 11 General Manager of Xiaban Town Industrial Company, Director of Economy United Commission of Xiaban Town, he took legal representative of Chengde North Industrial Corporation from 1999 till now, took legal representative of Chengde Longfeng Cosmetic Corp. from 2002 till now and took legal representative of Chengde Xiabancheng Red Star Plastic Manufactory from 1999 till now. Mr. Du Qingfeng, graduated from college (majored in finance), China economist, was the director of the Company. He was successively took the post of credit staff of industry and commerce section of Chengde County, and then sub-section chief, CFO of Dixian Co.. Mr. Wang Huilai, graduated from college (majored in economics management), was Director and Deputy General Manager of the Company. He was successively took the post of secretary and sub-section chief of Agricultural Recourses Company in Chengde District and Deputy General Manager of Dixian Group. Ms. Lan Wenzhi, graduated from high school, was Director and Deputy General Manager of the Company. She engaged in financial work of People’s Government of Xiaban Town. Later she successively took the post of sub-section chief of financial section and sub-section chief of supply section and Deputy General Manager of Dixian Group. 2. About Independent directors Mr. Li Wei, post graduate, was the independent director of the Company. He successively took the post of business manager of China National Chemicals Import & Export Corporation, Project manager of investment banking department of China Eagle Securities Co., Ltd., and Deputy General Manager of Shijiazhuang branch office of Haitong Securities Co., Ltd.. Now he was Deputy General Manager of Shenzhen Oriental Power Investment Co., Ltd.. Mr. Wang Yaguang, graduated from college, certified public accountant, was Independent Director of the Company. He successively took the post of accountant, deputy director of Chengde County Costume Factory and Director of Chengde County Auditing Office. Now he was Chairman and director CPA of Chengde Hongyuan Certified Public Accountants Co., Ltd.. Mr. Wang Enyuan, graduated from college, High China economist, was the independent director of the Company. He successively took the post of planning staff, credit staff, office director, and associate president of Chengde City People’s Bank, president and secretary of the party commission of Chengde ICBC. He retired in 1999. 3. Basic information of the present members of the Supervisory Committee of the Company Mr. Xu Xue, Chairman of Supervisory Committee, he took the post of plant director of Dixian Company Zhuji Thread-making Plant from Jun. 1995 to Apr. 1997; plant director of Dixian Company Paper Cartons Plant from Apr. 1997 to Mar. 2001; committeeman of Paper mill arrangement committee from Mar. 2001 to Jul. 2003; he is deputy secretary of general Party branch of the Dixian Company from Jul. 2003 till now. Mr. Li Xianfu, graduated from high school, was supervisor of the company and 12 sub-section chief of comprehensive management office. He ever took the post of Director of Chengde County 2nd Costume Factory and Sub-section chief of comprehensive management department of Dixian Group. Mr. Sun Zhenyu, graduated from university (majored in English), was the supervisor and manager of quality technology department. He ever taught in Shanggu Middle School of Chengde County. Later he successively took the post of associate director of Dyeing Factory of Dixian Group and General Dispatcher and manger of Knitting Department, manager of Quality Technology Department. Ms. Yao Fenglan, graduate from high school, was supervisor and associate director of General Manager Office. She ever worked in Chengde County Insurance Company. She was office secretary of Dixian Group and associate director of office. Mr. Xu Huafeng, graduated from college (majored in computer accounting), was the supervisor of the Company and sub-section chief of financial section of Heibei Xiaban Town Textile Wears Co., Ltd., the subsidiary of the Company. He ever worked as financial staff of that financial section. 4. Basic information of other senior executives Wang Zhengsong, graduated from college, Deputy General Manager of the Company (in charge of overseas business). He took the executive director of gold Axe Investment.; he has worked for the Company since Oct. 29, 2002. Song Shiqiang, deputy general manger of the Company. He took general manger of Weaving Mill, Yarn Spinning Mill and Spinning Mill of the Company, generally in charge of Yarn Spilling Company of the Company. Since Oct, 2005, he took the deputy general manger of the Company. Huo Xuejun, deputy General Manager of the Company, he graduated from high school and ever took the post of office director of GM Office of the Company. He ever engaged at Chengde Credit Cooperatives and Dixian Group as cashier and accountant, and ever held the office director of Inspectorate Department of Dixian Group. He was in charge of deputy General Manager of the Company since Oct., 2005. Liu Fumin, bachelor degree of economic management, CPA, Deputy General Manager of the Company. He worked at financial section of Chengde North Mountain Forest Farm from March 2000 to August 2001, and he worked at Chengde Dixian Textile Co., Ltd. from August 2001 till now. He held the post of Deputy General Manager of the Company since Oct., 2005. Mr. Zhang Jing, graduated from university (majored in bank foreign exchange), China economist, CFO of the Company. He ever worked in Xiaban Town branch of Bank of China. He worked for the Company from December 2000. He successively worked in overseas sale department, financial department and securities department of the Company. Mr. Chen Zhiguo, junior college degree, was the secretary of the Board of the Company. He ever worked as the associate director, sub-section chief of general affairs, and manager of securities department of Spinning Mill of the Company. 13 III. All directors, supervisors and senior executives drew the annual remuneration from the Company as follows: Drew from other Total annual remuneration Name Title shareholder company or （RMB’0000） other related organ or not Wang Shuxian Chairman of the Board 1 No Director, 59,025 Shi Bainian General Manager No Song Yushan Director 43,200 No Director, Deputy General 43,200 Wang Huilai Manager No Du Qingfeng Director 43,200 No Director, Deputy General 43,200 Lan Wenzhi Manager No Wang Enyuan Independent director 22,000 No Li Wei Independent director 22,000 No Wang Yaguang Independent director 22,000 No Chairman of Supervisory 21,675 Xu Xue committee No Li Xianfu Supervisor 11,837 No Sun Zhenyu Supervisor 29,512 No Yao Fenglan Supervisor 21,675 No Xu Huafeng Supervisor 11,837 No Wang 43,200 Zhengsong Deputy General Manager No Huo Xuejun Deputy General Manager 43,200 No Liu Fumin Deputy General Manager 43,200 No Song Shiqiang Deputy General Manager 43,200 No Chief Financial Supervisor 43,200 Zhang Jing No Secretary of Board of 43,200 Chen Zhiguo Directors No Total 653,562 - The annual remunerations of directors, supervisors and senior executives of the Company were confirmed by its own title and position and implemented through examination and approval of annual shareholders’ general meeting. Reasonable fees occurred when independent directors attending the Board meeting of the Company and Shareholders’ General Meeting or implementing its official power according to relevant laws, regulations and Articles of Association, the Company apply for reimburse on fact. 14 IV. Leaving position and reason of directors, supervisors and senior executives in the report period In the report period, director, supervisors and senior executives carried out general election, the 1st meeting of the 3rd Board of Director newly engaged Mr. Liu Fumin, Mr. Song Shiqiang and Mr. Huo Xuejun as Deputy General Manager of the Company, other directors, supervisors and senior executives remains unchanged. (II) Particulars about employees At the end of 2005, there were 8547 in-service employees, including 8103 production and piecework personnel, 73 sales personnel, 231 technicians, 42 financial personnel and 98 administrative personnel; of which 830 persons got the junior college and technical secondary school’s degree or above, taking 9.7% of the total number of employees. The Company implemented the employees’ labor insurance and welfare system stipulated by the relevant laws and regulations of local areas and the nation. Section VI. Administrative Structure I. Administration of the Company Strictly according to the requirements in Company Law of the P.R.C., Securities Law, Rules on Administration of Listed Companies, Guidance Opinion on Establishing Independent Director System in Listed Companies and other relevant laws and regulations, the Company continuously improved the legal person administration structure of the Company, established modern enterprise system and standardized the operation of the Company. There is no significant difference between the actual administration of the Company and the normative documents on administration of listed companies released by China Securities Regulatory Commission. The major representation is as follows: 1. Shareholders and the Shareholders’ General Meeting: The Company set up Rules of Procedure of Shareholders’ General Meeting and was able to convene and hold the Shareholders’ General Meeting strictly according to the requirement of normative opinions of the Shareholders’ General Meeting and the procedure of the meeting was legal. The Company ensures that all shareholders share the actual information of the Company equally and guarantee the legal rights of medium and small shareholders. 2. Relation of the controlling shareholder and the listed company: In order to truly safeguard the whole interest of the Company, the Company has set up Behavior Criterion of Controlling Shareholder. The Company is completely independent from the controlling shareholder in terms of personnel, assets, finance, organization and business. The Board of Directors, the Supervisory Committee and internal organization can operate independently. 3. Directors and the Board of Directors: The Company elected directors strictly according to the procedure stated in the Articles of Association and engaged independent directors 15 according to relevant requirements. All directors can take the responsibilities in a diligent attitude on behalf of the maximum interests of the Company and the shareholders. The Board of Directors established Rules of procedure of the Board of Directors, implemented patiently the regulations of the laws, regulations and the Articles of Association of the Company, treated all shareholders fairly and concentrated on the interest of relevant beneficial parties. 4. Supervisors and the Supervisory Committee: The Supervisory Committee established Rules of procedure of the Supervisory Committee. The supervisors can take their duties and supervise over the Company’s finance and the compliance with laws and regulations of the implementation of the, directors, managers and other senior executives’ duties in an attitude responsible for all shareholders and thus protect the legal right and interest of the Company and the shareholders. 5. Performance evaluation and encouragement and regulating mechanism: The Company improved actively a fair and transparent performance evaluation criteria and encouragement mechanism for directors, supervisors and senior executives. Engagement of senior executives is open, transparent and is in line with stipulations of laws and regulations. 6. For relevant beneficial parties: The Company is able to fully respect and safeguard the legal rights and interests of the bank, other creditors, employees, customers and other parties of related interests. The Company pays special attention to social welfare, environmental protection and commonweal cause in the area, while protecting the Company’s sustainable development and realizing the maximum of the shareholders’ interests. 7. Information disclosure and transparency: The Company authorized the secretary of the Board of Directors to be responsible for information disclosure, reception of the shareholders’ interviewing and consultation. The Company could disclose relevant information in a true, accurate, complete and timely manner strictly according to provisions of laws, regulations and the Articles of Association so as to ensure equal chances for all shareholders to obtain information. II. Performance of Independent Directors In the report period, the Company totally held 5 Board of Directors and the attending of independent directors as follows: Times of Board Name of Presence Entrusted meeting Absence independent in person presence Remark supposed to (Time) director (Time) (Time) attend Wang Enyuan 5 5 0 0 Wang Yaguang 5 4 1 0 16 Li Wei 5 4 1 0 Independent directors of the Company presented no objection to various proposals of Board of Directors as well as other events. The independent directors fulfill their obligations with earnest, played a full role in the Board of Directors and expressed their opinions for some significant issues of the Company and performed an active function on the scientific decision-making and normative operation of the Company and preserved the interest of the Company and all shareholders in a diligent and responsible attitude. III. Separation in businesses, personnel, assets, organization and finance of the Company and control shareholders 1. In respect of personnel: the labor, personnel and wage management of the Company is completely independent and the manager, deputy manager and other senior executives received salaries in the Company. 2. In respect of assets: The Company as an independent legal person has full property right of legal person and has independent production system, accessorial production system and auxiliary equipment. Industrial property right, trademark, non-patent technology and other intangible assets all belong to the listed company. The Company has independent purchase and sales system. 3. In respect of finance: The Company has independent financial department, whole, independent and normatively operated business accounting system and financial administration system and independent bank account. 4. In respect of organization independence: The Company’s organizations are wholly independent and the offices of the Company are wholly separated from the controlling shareholder. 5. In respect of business: The Company is independent from the controlling shareholder in terms of businesses and has independent and whole business and operating ability. IV. Evaluation and encouragement mechanism of performance of senior executives The Company established Detailed Rules of General Manager and other specific work regulations to normalize the work of the senior executives. Meanwhile, adopting the method of testing and evaluation, the Company confirmed the performance of senior executives according to respective indexes and implementation of work and added float reward on the basis of basic annual salary to mobilize the activeness of senior executives. The above persons were evaluated through testing by the Board of Directors and supervised by the Supervisory Committee. Section VII. Particulars about Shareholders’ General Meeting I. In the report period, the Company held one Annual Shareholders’ General Meeting and one Extraordinary Shareholders’ General Meeting 1. Particulars about Annual Shareholders’ General Meeting On May 18, 2005 the Company held 2004 Annual Sharehoilders’ General Meeting and the resolution notice has been published on Securities Times and Hong Kong Ta Kung 17 Pao and website http://www.cninfo.com.cn dated May 19, 2005. 2. Particulars about Extraordinary Shareholders’ General Meeting The Company held the 1st Extraordinary Shareholders’ General Meeting of 2005 on Oct., 31, 2005, the resolution notice has been published on Securities Times and Hong Kong Ta Kung Pao and website http://www.cninfo.com.cn dated Nov., 1, 2005. Section VIII. Report of the Board of Directors I. Discussion and analysis to the whole operation in the report period In the report period, the normal operation of the Company was influenced by the stopping production due to the difficult of capital turnover and the breaking of fund chain. 1. After releasing the notice of suspension production on the breaking of the fund chain of the Company and its subsidiaries, part of banks responded violently, even appealed to laws. The raised fund of the Company mainly used for restoring production and technological transformation, which resulted in part of loans exceeding the time limit. With the gradual restoration of production of the Company, after part of bank deeply investigated and surveyed the Company, they provided continuous loans for the Company, such as Tianjin Pudong Development Bank, Dalian Pudong Development Bank and Chengde Bank of China, etc. Chairman of the Company, Mr. Wang Shuxian, held 173,604,000 shares of the Company, of which 8o million shares were judicially frozen by Intermediate People’s Court of Dalian, 93.604 million shares were judicially frozen by Intermediate People’S Court of Shenzhen. At present, the Company did not know any news about the progress of handling the shares of Chairman of the Company Mr. Wang Shuxian. The Company is taking positive measures to negotiate with the banks on solving the loans exceeded the time limit. 2. The fund of the Company became nervous and the production restored slowly because it did not carry out any exterior financing after the breaking of the fund chain. In addition, influenced by the geographical location of the Company, most of the synthetic silk and the cotton yarn sold to Yangtze River Delta and Pearl River Delta, and the transportation charges will be higher. In order to overcome these difficulties, the Company carried out large-scale technological transformations over the advanced yarn spinning equipment made in Japan: the yarn spinning equipments with original production capability of 30 completely were transformed into larger count single yarn and folded yarn with production capability of 80 of the ultra-fine additional value; the method reduced the outputs and values of the yarns of the Company, but it could decease the occupied amount of the current fund of the Company and overcome the difficulty of insufficient fund. At the same time, it reduced the freight volume of the products, decrease the proportion between the transportation charges and sales income and improve the competitive abilities of the products. In 2006, the transformed yarn spinning machines which were put into production will achieve above 800,000 spindles which accounts for 70% of the whole yarn spinning machine. At present, the Company has approximately 1.2 million spindles of yarn spinning machine, and the volume of the spinning machine remains second in China. 3. Chengde Xingye Papermaking Co.,Ltd ,the controlling subsidiary of the Company, 18 carried out the production by using the imported waste paper as the raw material at the beginning of establishment of it. The main products sold to Shandong and Yangtze River Delta by road transportation. Starting from the second half of 2004, the transportation charges increased largely and newly built lots of papermaking plants in the sales regions. Compared to the local papermaking plants, the papers of the Company needed to spend more transportation costs of transportation and transportation charges of transportation, and the transportation flowed obviously backwards and did not conform to the rule of industrial production. Under the situation of the increased transportation charges, the Company faced with keen competition and had no benefits to obtain. In light of that, the Papermaking Company started up the second scheme prepared in the building of the company; it namely was to manufacture papers of the wood-pulp with wooden around Chengde and Daxinganling Area. In order to achieve the goals, the Company invested no less than RMB 50 million on the technological transformation of papermaking, which was namely changing wastepaper pulp into wood-pulp, and the correspondent transformation on the sewage treatment. At present, Chengde Xingye Papermaking Co.,Ltd and its subsidiary has the whole waste papermaking with the production capability of 450,000 tons per year. Due to the lack of current fund, it can not conduct debugging of the products. Under these circumstances, the company cannot fully achieve the production goal by its own ability; it needs to get exterior supports. The Company now is negotiating cooperation with other papermaking enterprises. The project was the Forest-Paper Integration Project encouraged by the government; it will exert the advantages made paper by wood. In addition, the Company will sign a treaty with Daxing’ anling area on project of pulp-making with 300,000 tons to solve the problem on raw material supply for the paper plant of the Company. 4. The Company locates in northern side of Beijing, which is 220 kilometers form Beijing; but it is under the control the municipal government of Hebei, and is backward in the economical development. Except that the four state-owned banks, Rural Credit Cooperation and Urban Credit Cooperation, there was no other commercial banks. Chengde governs eight counties and three districts, but has not increased any loans supports for the manufacturing companies since 2005. The three original companies of Chengde: Chengde Iron and Steel Group Co., Ltd, Lolo Group, Chengde Dixian Textile Co.,Ltd, two of which were annexed, the last of which seek for annexation and merger with other partner including the state-owned companies to give good return to the shareholders to make the Company to shake off the nervous condition limited by the local financial environment. Chengde Dixian Textile Co.,Ltd and its subsidiaries have large assets with land area of 3000 acres and building area of about 700,000 square meters; the Company paid the maintenance charges, repair charges of lots of equipments and winter heating bills, additionally it needed to pay the expenses of amortization of the expenses and the interest of bank loans. Although the Company has large high quality assets and lots of yarn spinning machine and papermaking machine which could gain profits, it can not collect the enough current capital; thus it caused many advanced equipment cannot be 19 used ,make profits and give good return to the shareholders. At present, a lot of lands, plants and equipments were not mortgaged. Chairman of the Company Mr. Wang Shuxian expressed apologies and remorse for the present situation. Since 1986 of the establishment of the Company, the Company was always the superior customer for many banks to provide for loans; especially, the Company signed long-term friendship and cooperation agreement exclusively with Industrial and Commercial Bank of China without other banks. After the macroeconomic regulation, Industrial and Commercial Bank of China withdrew positively and other banks were permitted to enter, but the time was not enough. In order to express apologies and remorse, Chairman Mr. Wang Shuxian committed to draw remuneration only amounted to RMB 1 until the success of normal operation of the equipment and merger or reorganization of the Company. The management of the Company had confidence on successful reorganization, restoring the production and achieving the production. The Company strengthened the management, reduced the expenditures, revitalized the unused assets and made profits for the Company and gave good return for the shareholders. II. Review to the operation of the Company in the report period (I) Overall operations in the report period In 2005, influenced by the limit of fund and production suspension, the achievements of the Company reduced largely compared to the same period of last year. Without the new supports of loans, the Company adopted the following measures to help ourselves, such as sales of inventories, revitalization of asset, speeding up the sales and drawing back the fund capital; and the Company gradually restored the production. However, after the breaking of fund chain, and without other external financing including the bank loans, the fund of the Company was very intense; especially in the restoration of production of the Company, the necessary technological transformation was taken on the yarn spinning machine and paper-making machine, and the participated results were not good due to the limit of fund and low speed. The income from main operation amounted to RMB 289,738,020.15 with a decrease of 44.88% compared to last year , profit from main operation amounted to RMB 67,456,586.09 with a decrease of 60.77% with the same period of last year, the net profit amounted to RMB 20,306,135.88 with a decease of 80.68% compared to last year . 2. Main business and operation (1) Classified according to industries and products Classified according to industries Increase/decr Increase/de Gross Increase/decr ease in crease in Classified profit ease in cost income from profit from according to Income from main Cost of main operations ratio of of main main the main industries or operations (RMB) (RMB) main operations operations operation products operation over the last over the last over the (%) year (%) year (%) last year 20 (%) Garments 133,486,174.52 74,885,562.88 43.90 -36.62 -40.37 3.52 manufacturing Cotton textile 112,602,131.41 115,658,353.55 -2.71 -44.73 -24.36 -27.66 Papermaking 43,649,714.22 31,737,517.63 27.29 -60.79 -57.83 -5.10 Classified according to products Sales of Knit 133,486,174.52 74,885,562.88 43.90 -36.62 -37.56 3.52 wears Sales of Spinning 112,602,131.41 115,658,353.55 -2.71 -44.73 -24.35 -27.66 and synthetic silks Sales of Paper 43,649,714.22 31,737,517.63 27.29 -60.79 -57.83 -5.10 (2) Main operations in various areas Increase/decrease in income from Income from main operations Areas main operations over the last year (RMB) (%) Asia 159,024,941.90 -33.41 North China 49,677,599.89 -58.69 South China 58,427,872.82 -60.65 East China 17,582,051.39 181.14 Middle China 2，063，293.74 Northeast 2,962,260.41 -75.57 (3) Major suppliers and customers The total purchase amount from the top five suppliers amounted to RMB 80,641,016.77 accounting for 40.27% of the Company’s total purchase amount of the year. The total sales amount to the top five customers amounted to RMB 134,828,307.9accounts for 46.53% of the Company’s total sales amount. 3. Constitution of assets of the Company in the report period Dec. 31,2005 Dec. 31,2004 Item Proportion in Proportion in Amount Amount the total asset the total asset Total asset 2,761,726,330.29 100% 2,992,390,884.89 100% Account receivable 211,658,680.46 7.66% 254,354,050.82 8.5% Inventories 212,890,780.31 7.71% 215,910,696.86 7.22% Long-term 253,195,729.65 9.17% 56,579,349.46 1.89% investment of equity Fixed asset 953,473,276.47 34.52% 1,097,933,161.34 36.69% Project in progress 940,708,994.16 34.06% 925,901,558.45 30.94% Short-term loan 350,339,846.29 12.69% 276,530,000.00 9.24% Long-term loan 0 0 480,000,000.00 16.04% 21 Reasons for changes: The reason for the decreasing of total assets: It was mainly due to repay the bank loans. The reason for the decreasing of account receivable: It was due to decrease of sales amount and draw back the account receivable. The reason for the increasing of long-term investment of equity: Compared to the year-begin, the investment of equity of the Group in the year-end, approximate RMB 196.62 million increased, which was mainly because of the increased investment on Dahua Paper in the report period approximately amounted to RMB 149.48 million, new-increased long-term investment on Suning Banhe amounted to RMB 46.98 million and adjustment on losses and gains of long-term equity. The reason for the decreasing of fixed assets: It was mainly due to the external investment by fixed assets. The reason for the decreasing of project in progress: It wad due to increase the investment on paper project. The reason for the decreasing of the long-term loans: Compared to the year-begin, the long-term loans of the Group in the year-end, approximate RMB 480 million decreased, which was mainly because the long-term loans due within one year and then long-term balance of loan fully switch to the item of current liabilities. Financial highlights: Increase/decrease Item 2005 2004 over last year Operation expense 7,226,524.83 9,759,392.15 -25.95% Administrative 21,849,119.01 19,217,422.51 13.69% expense Financial expense 16,757,476.39 33,507,262.93 -49.99% Income tax 1,494,581.90 6,027,145.13 -75.20% Reasons for changes: The reason for the decreasing of operation expense: It was due to the decrease of operation expenses resulted by the decrease of sales income. The reason for the decreasing of administrative expense: It was due to withdrawal of provision for devaluation of inventory. The reason for the decreasing of financial expense: 49.99% decreased of the Group in 2005 compared to 2004, which was mainly because the new-increased bank loan decreased and the repaid note payable and discount of bank note this report period decreased, thus resulted in the payment for the interest of discount reduced. The reason for the decreasing of income tax: It was due to the decrease of total profit. 4. Constitution of the cash flow Increase/decrease Item 2005 2004 proportion 1、Cash flow arising from operating activities 22 Cash received from sales of goods and supplying 295,691,397.38 573,902,086.35 -48.48% for labor force Cash received from other operating activities 19,500,243.08 3,462,192.82 463.23% Cash paid for the purchase of goods and accepting 236,137,371.97 417,105,984.41 -43.39% labor force Cash paid to/for employees 27,259,189.09 63,135,763.58 -56.82% Taxes paid 172,956.53 28,402,345.32 -99.39% Other cash paid concerning the operating activities 22,910,024.97 17,300,510.09 32.42% Net cash flow arising from operating activities 28,712,097.90 77,842,558.55 -63.12% 2、Cash flow arising from investing activities Cash paid for purchase of fixed assets, intangible 89,678,046.37 328,316,084.71 -72.69% assets and other long-term assets Net cash flow arising from investing activities -89,678,046.37 -394,951,559.70 77.29% 3、Cash flow arising from financing activities Cash received from getting loans 170,036,358.67 517,438,123.40 -67.14% Cash paid for repaying the loans 356,359,878.85 571,301,647.40 -37.62% Cash paid for distribution of dividend or profit 7,264,865.24 34,129,717.75 -78.71% Net cash flow arising from financing activities -166,588,385.42 412,544,742.25 -140.38% Reasons for changes: (1) The reasons for changes on the cash flow arising from operating activities: It was due to lacks of current capital, thus influenced the operation and the decrease of sales income. (2) The reasons for changes on the cash flow arising from investing activities: It was due to the decrease on the investment of fixed assets. (3) The reasons for changes on the cash flow arising from financing activities: It was mainly due to that it did no conduct financing of equity and bank loan in the report period. 5. Discuss and analysis to the usage of the equipment, order-obtained, sales of products and stockpiling, changes of the technicians of the Company In 2005, the breaking of fund chain, the bank did not increase the loan, the Company had no other financing; the Company took necessary technological transformations on the yarn spinning and papermaking equipment. Influenced by the nervous fund, not good running of equipment, the orders reduced compared to previous years. However, the Company speed up the sales and withdrawal of the capital fund, there were no products kept in stock. The management personnel, the technicians, and workers kept stable. 6. Business operation and achievement of the Company’s main holding subsidiaries and share-holding companies (1) Hebei Xiabancheng Knit Wears Co., Ltd. is the Company’s wholly owned subsidiary, which was a Sino-foreign joint venture set up by Knitting General Plant, the predecessor of the Company and foreign enterprises, registered on Jul. 9, 1991 with a registered 23 capital of USD 4 million. The operating scope is: production and sale of textile. Its main products are all kinds of knit wears. In 2005, the company transferred its production and sales into Company of Limited, then had no true operations. (2) Chengde Dixian Fashion Co., Ltd. is a Sino-foreign joint venture, which was jointly invested by Japanese Y’s Corporation and the Company. It registered on May 23, 2000 with registered capital of USD 24 million. The Company holds 75% equity of this company and Y’s Corporation holds 25% respectively. The operating scope is: production and sale of yarn and synthetic silks. Japanese Y’s Corporation, the foreign shareholder of Chengde Dixian Fashion Co., Ltd, signed the Agreement of Transferring Sale and Purchase of Shares with Gold Axe on June 25, 2005. Japanese Y’s Corporation agreed to transfer its 25% equity to Gold Axe. The ways of transferring were: the account receivable by Gold Axe amounting to RMB 50,643,321 of Japanese Y’s Corporation to flush the account of equity transfer. The account receivable amounting to RMB 50,643,321 of Japanese Y’s Corporation was originally the account of wears of the Company; the Company signed the Agreement of Transferring Sale and Purchase of Shares with Gold Axe on June 25, 2005, the account receivable amounting to RMB 50,643,321 transferred to Gold Axe in book value. With the approval of the board of directors of the Fashion Company, the Fashion Company transferred its production and sales into the Company, then had no true operations. (3) Chengde Xingye Papermaking Co., Ltd. was a papermaking company jointly established by Hong Kong Zhanxi International Co., Ltd. and the Company, with a registered capital of USD 100 million. The Company holds 75% equity of this company and Zhanxi Group holds 25% respectively. The operating scope is: production and sale of series of high-grade copperplate plate paper and craft board. Influenced by the shortage of fund, the production of Xingye Papermaking was basically ceased. Ended Dec. 31, 2005, the total assets of the company were RMB 1,286,165,867.39, and net assets RMB 882,547,221.91. In 2005, it realized income from main operation amounting to RMB 65,936,030.08 and net profit RMB 8,152,731.92. (4) Chengde Banhe Chemical Simulation Textile Co., Ltd. was share-holding company of controlling subsidiary of the Company, which was a Sino-foreign operating enterprise registered and set up on Sep. 29, 2002 with its registered capital of USD 60 million. Dixian Fashion Co., Ltd., Japan Shanxia Trade Co., Ltd. and Hebei Xiaban Town Knitting Company respectively hold 40% and 35% and 25% equity of this company. The operating scope was: production and sale of different types of chemical simulation cloth with high quality, knitting cloth and different types of coloration finished cloth; the main products were high chemical simulation cloth, knitting cloth and different types of coloration finished cloth. Ended Dec. 31, 2005, the total assets of the company were RMB 495,515,418.46, and net assets RMB 387,070,189.44. In 2005, it realized income from core business amounting to RMB 21,412,237.90 and net profit amounting to RMB -4,704,867.78. (5) Chengde Dahua Paper Co., Ltd (original Chengde Japan Papermaking Co., Ltd.) was a 24 Sino-foreign joint venture invested and set up by the company and Japan Papermaking Co., Ltd. The total investment was amounting to YEN 11, 000 million and the registered capital was YEN 6364 million. The Company and Japan Papermaking respectively hold 45% and 55% equity of this company. The joint venture mainly produces and sells all types of high-quality paper. The production scale is producing 150 thousand tons of paper per year. In the report period, the 45% equity of Chengde Japan Papermaking Co., Ltd held by the Company transferred to controlling subsidiary of Chengde Xingye Papermaking Co., Ltd, 55% equity of Chengde Janpan Papermaking Co., Ltd held by Japan Papermaking Co., Ltd transferred to Japan New Century Trading Co., Ltd. After the transferring the equity, Chengde Japan Papermaking Co., Ltd changed it name to Chengde Dahua Paper Co., Ltd. The investment on Chengde Dahua Paper Co., Ltd was jointly finished by Chengde Xingye Papermaking Co., Ltd and Japan New Century Trading Co., Ltd. The project is still on the progress. (6) Suningbanhe Chemical Simulation Textile Co., Ltd was the shareholding subsidiary of the Company, which was a joint venture and invested and set up by the Company and Japan Shanxia Trade Co., Ltd on Nov. 7, 2004. It registered capital was USD 29 million, the Company invests USD 5.8 million accounting fro 20% of the registered capital. Among them, the Company invests RMB 7,251,417.00 in monetary fund, which is equal to USD 895,236.67; Japan New Century Co., Ltd paid on the behalf of the Company the overseas equipment disintegration, the installment expense, and freight and incidental expenses amounted to YEN 521,007,225.00 in equivalent to USD 4,904,763.33 for Suningbanhe. Japan Shanxia Trade Co., Ltd invests USD 23,200,000.00 in equipment accounting for 80% of the registered capital. Ended as Dec. 31, 2005, Suningbanhe did not officially carry out operations. (II) Prospect for the future development of the Company 1. The development tendency in the industry of the Company and the market competition pattern the Company faced The Company is in the industries of textile and papermaking. The textile is the traditional pillar industry in our China for a long time, and the foreign and domestic competition are intense. With the development of economy, the industrial structure of the textile improves, management benefit raises and integrated industry processing system is formed, and there are rich raw material resources and sufficient labor forces. The advantaged of textile competition of China still had certain development space. The equipments of yarn spinning of the Company are imported from Japan, now the Company has 1200000 spindles, advance equipment with comber set and automatic winding machine, and the production capability of 60-80 large count comber yarns. The textile and wears of the Company mainly exports to Japan. The Company has strong competitive power by its integrated industrial chain and low production cost. The knitting sportswear of the Company sold in Japan for over ten years and established stable commercial relationship with more than 40 companies; the products are mainly sold in large chain stores, ,and successfully set up good commercial prestige and important market status. 25 The industry of papermaking is the important industry which is closely linked with the development of national economy and social civilization. In the economical developed countries, the rising speed of the paper and cardboard consumption keeps with the GDP. It plays an important role in the modern economy and catches more sights; it is regarded as the industry of “Never depletion”; in modern world, the production and consumption level of paper and cardboard are one of important symbols for the measurement of national modernization and civilization. Papermaking is on industry of technology, fund, and resource and energy intensity; its production scale is obvious, it is one industry of essential raw material with continuous and high effective production. The present papermaking equipments of the Company are imported from Japan; the production craft, technical level of the essential equipment, the production scale remain in front of the domestic. At the same time, because this company begins to take shape in the production scale, and the textile and papermaking are essential industries, and could enjoy the cost superiority brought by the Scale-Economy. 2. The development strategy and development scale (1) To solidify the textile and wears industry with density of labor force, guarantee the stable relationship with the long-term partner in Japan, and guarantee the profit in the industry of the Company. (2) To develop actively the industry of yarn spinning and synthetic silk, the Company established yarn spinning capability with scales. At present, the Company has 1200000 spindles, of which 800000 spindles are put into normal production, and other new-imported are undertaking debugging of installment. The cotton yarn and synthetic silk keep stable development speed in recent 2 to years. By the advantages of expansion of low cost, the whole advance equipment of the yarn spinning plants purchased from Japan can produce products with high quality and low cost; and show its advantages and bring good profits for the Company. (3) To fully develop the modern large-scale papermaking industry with intensity of fund, technology and resources. The Company changed its types from the sportswear industry with labor force intensity to yarn spinning industry with labor force and fund intensity. At present, on the basis of consolidation of previous industries, try to transfer to modern larger-scale papermaking with intensity of fund, technology and resource. The Company imported advance Japanese papermaking equipment in relative low price, and had installed. At present, the establishment of the project of papermaking is not good, and with the limitation of fund; but the management group of the Company have confidence and ability to construct the papermaking project, and bring the Company great profit growth and development space. 3. The fund need and using plan for the future development strategy and sources of resources At present, the Company has 1200000 spindles of yarn spinning; after the fully putting into production, current fund amounting to RMB 0.3 billion are needed, RMB 0.06 billion are needed for the project in progress; the sources of fund are mainly from integration and reorganization of the Company or bank loan. The funds for the papermaking project 26 mainly rely on the introduction of strategic investors, which is the Forest-Paper Integration Project encouraged by the government. 4. Risks, solutions and measures to be taken (1) Macro-policy risk China is in the process of transferring from the planned economy to market economy, and takes full-oriented reforms; new policy and measures are made, the changes of law regulation and policy environment bring uncertainty to the operations and investing operation of the Company. If the adjustment on the Refund Policy of exported commodity and the changes and adjustment on Preferential Tax Policy, they will bring uncertain factors to the operation of the Company. Considering the policy risk, the Company will further research and analyze the changes of national policy and law regulation, fully and objectively appraise the influences of development strategy and operations of the Company brought by the changes of national policy and law regulations. On the basis of operation abiding to the law, assurance of the development goal of the Company and manufacturing operation abiding to the national laws and regulations, to adjust timely the development strategy and operations of the Company, hold the development chances brought by the changes of the national policy and laws and regulations; at the same time, to avoid the disadvantageous influences brought by the changes of the national policy and laws and regulations. (2) Market or businesses risks and solutions ①Business market of textile risks and solutions At present, most of textiles of the Company exports to Japan, the market is relative centralized and single, and has strong depending on the Japan market with the risk of single market. Part of cotton yarn and synthetic products of the Company exports to South Korea, Japan, Hong Kong; and most of the products sell in domestics. Due to lots of companies in China, the market competition is keen; and with the big fluctuation in the price of market sales in recent two years, the Company will face with keener competition and suffer from the risks of decreasing of market price. Considering the risks of single sales market of the products of the Company, the Company will improve the product quality; at the same time, fully develop new products and strength of wears designing; promote knitting wears fitting to different consumption level and different consumption ranges, and speed up the construction of overseas sales networks. On the basis of strengthening and improving the market shares in Japan and South Korea, the Company positively develops the European and American market to make the regional distribution of the sales market reasonable. In addition, the Company will reasonable adjust the constitution of products according to the need of market and fashion trend; on the basis of assurance of the stable growth of knitting wears, increase the sales of cotton yarn and synthetic silk, and develop positively the domestic and overseas market. ②Business market of papermaking risks and solutions The domestic and overseas papermaking market has bright future, but the Company made deep investigation and demonstration and made strict implementation plan while 27 choosing to enter the industry of papermaking. However, the government emphasizes to encourage developing the investment project of paper and paper good abiding to economical scale, many domestic and overseas papermaking companies with powers took the chance and expand the papermaking scale; thus, in the papermaking industry, there will be keen market competitions in the coming several years. Faced with the chance of development, if the Company can not timely adapt to the keen competitive market and form scale production in short term, it will result in bigger risks in the future development of the Company. Although there are many papermaking companies in China, most of them are ones with small-scale, bad technological equipment, inferior product quality and much pollution. Thus, the government made strictly limited policy on closing down the companies without larger-scale and adapting to the requirements of pollution prevention. On the circumstances of more attention on the pollution prevention by the government, the government support for large-scale papermaking companies is a long-term policy. Thus, the Company enters the papermaking domain with high starting point, low cost and larger scale; it could avoid effectively the risks brought by the fluctuation of market. (3) Financial risks and solutions ①Risks of operation fund and current, and solutions According to consolidate financial sheet 2005 of the Company, on Dec.31, 2005, the net operation capital of the Company amounted to RMB -563,220,000 with the liquidity ratio of 0.45 and quick ratio of 0.25; it remained certain risks of short-term debts. In order to change the operation fund and improve the ability of repayment, the Company will speed up the process of the project in progress to make it put into production and gain profits, enhance effectively the asset liquidity of the Company, adjust the constitution of debts, increase the proportion of long-term loans. The Company plans to bring in new projects with strategic investors, reduce the fund investment of the Company and reduce the risks. ②Risks of hardly continuing financing, and solutions In recent years, the business of the Company develops quickly; the Company collected some fund by releasing and increasing the release of B shares, but most of funds are bank loans and self-collected ones. Due to the adjustment of financing policy, breaking of fund chain of the Company, larger amount debts exceeding the time limit; all these made difficulties for continuous financing, and it was one of bigger risk for the development of the Company. The Company has good operation achievements and developing trend; although it suffered from the problem of fund, the Company has lots of superior assets, many machines which can get profits, hard-working operators and managers, and low ratio of debts. In the predictable future, the Company has the ability to guarantee the fund need for the operation of the Company. (4) Technological risks and solutions Although the Company has the rich experience on the textiles, and mature technologies, faced with the domestic and overseas competitors, new technological risks are still to be remained. In addition, the Company just entered the papermaking industry, and made 28 progress and improved in manufacturing technology, daily management and marketing. Considering the risks in technological progress of textile and papermaking industries, the Company will continue to improve the technologies, bring in advanced production equipment, remain the industrial status and competitive advantages in textiles, and strive for get the leadership and competitive advantages in textile industry. (5) Environmental risks and solutions The process of textiles and papermaking will result in the pollution of yawp, sewage and dust. In recent years, the Company are evaluated the “Green Environmental Units” by the environmental departments. However, the government continuously improves the standard of environmental protection, it will possibly result in the continuous increasing on the environmental protection to make the production cost increase, and take influences on the profit-gaining ability of the Company. The Company always paid to the environmental protection. Considering process of textiles and papermaking will result in the pollution of yawp, sewage and dust; the Company always positively takes measures to deal with. With the expansion of production scale, the Company will more pay attention to the environmental protection, increase the investment on environmental protection, and establish large waste treatment plants to make the various aspects of production in accordance with the environmental standard regulated by the government. II. Investment of the Company 1. In the report period, there was no such situation that the application of raised proceeds in the report period or proceeds raised before the report period continuing to the report period. 2. The Company invested RMB 46,980,000 on the establishment of the project of Suningbanhe in the report period. At present, it is still on the progress. 3. The Company invested RMB 206,210,000 on the establishment of the project of Dahua Paper in the report period. At present, it is still on the progress. III. Explanation on the Auditor’s Report issued by the domestic and international CPA by the Board of Directors of the Company In 2005, Shenzhen Pan-China Schinda Certified Public Accountant audited the domestic financial report of the Company and issued the unqualified Auditors’ Report with emphasized issues for the Company. And Hong Kong Charles Chan, Ip & Fung CPA Ltd audited the international financial report and issued disclaimer of opinion report. Definitions on the relevant matters by The Board of Director are as follows: 1. Certification of Land Using Right The Company purchase land about amounting to 600 acres, RMB 37 million were paid to the farmers for land transferring in 2005, and the Certification of Land Using Right was taken on the process. The matter is common in China and in accordance with relevant regulations. 2. Investment on the equipment of Xingye Papermaking Xingye Papermaking was jointly established by the Company and Hong Kong Zhanxi 29 International Co., Ltd and obtained the enterprise legal business license on March 12, 2001. The foreign shareholder Hong Kong Zhanxi invested Xingye Papermaking with equipment and the values of equipment invested by Hong Kong Zhanxi was more than RMB 95,450,000 over the capital it should invested. In Sep. 2004, the Company signed the agreement with Hong Kong Zhanxi, on which the ownership of equipment with values of more than RMB 95,450,000 belonged to Hong Kong Zhanxi, and the Company temporarily regarded as the liabilities payable to Hong Kong Zhanxi; and the Company will list the aforesaid equipment into other long-term assets and equivalently list into other long-term liabilities. According to the agreement, the Company can use the equipment without and payment, at the same time, Hong Kong Zhanxi will agree to use the equipment for loan mortgage with the demand of the Company. Meanwhile, stipulated by the agreement the Company will further negotiate with Hong Kong Zhanxi on the disposal of assets. Ended as Dec. 31, 2005, the Company has been pledged on the equipment, and there were no any negotiate results on the equipment between the Company and Hong Kong Zhanxi. 3. Verifying the share capital of Dahua Paper Dahua Papar is Sino-foreign joint venture with the shareholding by Xingye Papermaking, Chengde Xingye Papermaking Co., Ltd negotiated with Japan New Century Trading Co., Ltd to distribute capitals with the current equipment, plants, land using rights of Xingye Papermaking Co., Ltd. According to national relevant stipulations and joint venture agreement of joint venture corporation, the investment on plants and equipment need the appraisal, verifying, issuance of verification report of the capital or equipment by CPA and Appraiser engaged by the new-established joint ventures. At present, the papermaking machine from the relevant party of Japan has not yet fully been in the place and thus did not has qualification on verifying capital; before it did not get confirmation on the distribution of capital the two parties concerned, the Chinese party will distribute capital in book value, and until the joint party issue the appraisal and verification report, the account will be adjusted according to accounting standard. 4. Increasingly issue B shares to verify capital With the approval of ZJFXZ [2004] No.101 promulgated by the CSRC, Chengde Dixian Textile Co., Ltd ( with the following as “the Company”) increased to distribute 0.15 billion domestically listed foreign shares of B-shares in July, 2004. During the period of increasing distribution, due to various reason, the organized investors just subscribe 1,300,000 shares, China Southern Securities Co., Ltd (with the following as “Nanfang Securities”) acted as the recommended institution and main contractor of the distribution, finally sales 148,700,000 shares of the Company, which were accounted for 99.13% of the total distribution, and of which 58,700,000 shares were subscribed in RMB. With the approval of State Administration of Foreign Exchange on subscription of B-share in RMB, the shares were not audited by the China Certified Public Accountant; the Company has not changed the procedure of industry and commerce until now. At present, the Company is taking active negotiation with the relevant departments. It made whole members of Board of the Company puzzled that the said issue settlement 2004 had obtained the 30 agreement from Hong Kong Charles Chan, Ip & Fung CPA Ltd. however, in 2005 the said CPAs denied the said issue settlement and presented as main item of limited scope, it is obvious ill will and deny itself. General shareholders are suggested to pay attention to the said issue. 5. Production suspension and technological reform on Xingye Papermaking In 2005, the Company took technological reform on part of equipments of Xingye Papermaking Co., Ltd, which mainly transformed making pulp with waste paper into making pulp with wood, and transformed the technologies of treatment of sewage. Due to the short of fund, part of production of Xingye Papermaking almost stopped in 2005. Installation and debugging on part of production line which is not put into production are undertaken smoothly due to short of fund, although the company did not stop the installation and debugging. The Company plan to conduct reorganization on project of papermaking and debts conformity. After reorganization, Xingye Papermaking will become the shareholding company of the Company, and effectively relieve the fund pressure of the Company, Papermaking Company can also bring in new strategic investors to solve its own fund, and restore the normal operations. 6. Sustainable operation of the Company In recent year, the Company expanded rapidly in operation scale, invested lots of fund on textiles and papermaking, due to the long term of project; it did not bring in ideal achievements at present. Since the banks adjusted the loan policy in the end of 2004 and did not increase loan and loan amount on the Company, which resulted in nervous condition in fund of the Company and large-scale production in the end 2004. At the beginning of 2005, due to releasing the notice on suspension production of breaking of chain fund of the Company, part of banks responded violently and even sued to court, part of banks requested to repay the loans in advance or did not allow repaying the old loans by borrowing new loans and continue to lend loans. The fund raised by the Company was mainly used for production restoration and technological transformation and resulted part of loan exceeding the time limit. With the gradual restoration of production, part of conduct deep investigation on the Company, and continued to lend loans to the Company. Tianjing Pudong Development Bank, Dalian Pudong Development Bank, Chengde Bank of China continued to lend loans to the Company. Under the circumstances of no increasing loan, the Company gradually restored the production by sales of inventory, revitalization of assets, speeding up sales and taking back monetary fund, and help by ourselves. Especially in the restoration of production, the Company took necessary technological transformation on the equipments of textile and papermaking. But due the breaking of fund chain and no other external financing including the bank loan, the nervous condition in fund of the Company still remained. Ended as Dec. 31, 2005, about RMB 828,340,000.00 of bank loan will come to time limit or already exceeded the time limit, including RMB 117,829,536.60 which exceeded the time limit, RMB 80,824,254.97 for the discount of commercial acceptance were sued in the court by Dalian Road Sub-branch of Guangdong Development Bank, Lianhua Road Sub-branch of Shenzhen Everbright Bank of China and Shijiazhuang Branch of Huaxia 31 Bank. The largest shareholders Mr. Wang Shuxian made commitments to repay the loans by his 173,604,000 shares (accounting for 29.49% of the total shares), which were judicially frozen. The equity of Chengde Dixian Fashion Co., Ltd, Chengde Xingye Papermaking Co., Ltd and Chengde Banhe Chemical Simulation Textile Co., Ltd held by the Company were sealed up by the court, and the period of sealing was from March 1, 2006 to Aug. 31, 2006. Ended as Dec. 31, 2005, the operating fund of the Company was RMB -563, 218, 636, 11. The Board of Directors of the Company thought, although the Company was in nervous condition of fund, the sustainable operation still had no problems and had development potentials and futures. At present, the fund of the Company was nervous, the operation still relatively stable. The asset liability ratio was low and had good cooperation basis with the banks, several banks restored the business relationship with the Company and continue to lend loan or allow repaying the old loans by borrowing new loans, all the banks hope the Company could get rid of the shortage of fund. In light of fund sue, at present, no bank implemented the sued results, the banks still seek for other settling ways with the Company. In order to solve the fund, the Company plan to integrate with the assets and liabilities, bring in strategic investment or seek for other ways to financing, and improve the financial status of the Company. The Company had lots of lands, plants and equipments which can gain profits, all are the basic factors of the sustainable operation of the Company. With the gradual operation of equipments of textile and papermaking, they will bring in huge economic effects of the Company, and the nervous condition will effectively be improved. The Company had almost 3000 acres lands and 700,000 square kilometers plant and lots advanced machines, have huge development potentials, and the difficulties were temporary. The Board of Directors of the Company thought, with the passing of time, the aforesaid matters will finally satisfactorily solved. With objective existing of the aforesaid 1st to 6th problems, domestic CPA Shenzhen Pan-China Schinda Certified Public Accountant and international CPA Hong Kong Charles Chan, Ip & Fung CPA Ltd have different opinions, they are as follows: Domestic CPA Shenzhen Pan-China Schinda Certified Public Accountant conducted deep investigation and acknowledge to the problems, and in accordance with the real condition of the Company, it emphasized that the aforesaid matters will influence the possibilities on sustainable operation of the Company. If there were no external financial support or timely and effectively reorganizations, the sustainable operation of the Company will remain uncertainties; and issued he unqualified Auditors’ Report with emphasized issues for the Company. International CPA Hong Kong Charles Chan, Ip & Fung CPA Ltd took the reasons of nervous arrangement in auditing date and shortage of personnel, and broke it word to delay issuing international auditor’s report for several times. The Company publicly published relevant explanations on newspapers dated April 18, April 22 of 2006, and arouse the dissatisfaction of Hong Kong Charles Chan, Ip & Fung CPA Ltd. The CPA just 32 appointed two personnel to arrive the Company, verified the account, gathered relevant material and data, and went back Hong Kong to draft report with the spending time in the Company of no more than 48 hours from the evening of March 36, 2006 to morning of March 29, 2006. Before Hong Kong Charles Chan, Ip & Fung CPA Ltd should issue the report, they did not negotiate and communicate with the Company, and asked the opinions of the Company. Hong Kong Charles Chan, Ip & Fung CPA Ltd did not fully get to know the conditions of the Company, in order to exempt the responsibility, issued the Financial Auditor’s Report not in the method of goodwill and responsibility, refused to express any opinions on the sustainable operation of the Company, and then issued disclaimer of opinion report. Meanwhile entirely groundless compiled in financial report as follows: “directors thought if the said subsidiary lastingly stop running, the said assets should be confirmed as provision for depreciation of assets.”(Refers to item 3 of 31st attachment in international financial report), Board of Directors make announcement hereby of never having such idea or showing meaning like this. They made decision without authorization to weave a rough and contradictory financial report which made Directors unsatisfied. We are not intended to preclude the possibility that be legally subject to relevant liability. In view of that Hong Kong Charles Chan, Ip & Fung CPA Ltd caused losses and damaged to the general investors and the Company, the Company will retain the legal means to protect the rights of the Company and legitimate equity of shareholders of the Company. IV. Routine work of the Board of Directors (I) In the report period, the meetings and resolutions of the Board of Directors: 1. The 18th Meeting of the 2nd Board of Directors of the Company was held on Feb. 17, 2005, and the relevant resolutions were published on Securities Times, and Hong Kong Ta Kung Pao dated Feb. 18, 2005. 2. The 19th Meeting of the 2nd Board of Directors of the Company was held on April 10, 2005, and the relevant resolutions were published on Securities Times, and Hong Kong Ta Kung Pao dated Apr. 13, 2005. 3. The 20th Meeting of the 2nd Board of Directors of the Company was held on Aug. 16, 2005, and the relevant resolutions were published on Securities Times, and Hong Kong Ta Kung Pao dated Aug. 18, 2005. 4. The 21st Meeting of the 2nd Board of Directors of the Company was held on Sep. 28, 2005, and the relevant resolutions were published on Securities Times, and Hong Kong Ta Kung Pao dated Sep 29, 2005. 5. The 1st Meeting of the 3rd Board of Directors of the Company was held on Oct. 31, 2005, and the relevant resolutions were published on Securities Times, and Hong Kong Ta Kung Pao dated Nov. 1, 2005. (II) Implementation of the Board of Directors about resolutions of Shareholders’ General Meeting: In the report period, according to requirements in Company Law of the P.R.C., Securities Laws of the P.R.C., Articles of Association of the Company and other laws and 33 regulations, the Board of Directors of the Company seriously implemented all resolutions passed by the Shareholders’ General Meeting, strictly in compliance with resolutions and authorizations of the Shareholders’ General Meeting. In 2004, after being audited by Shenzhen Pengcheng Certified Public Accountants and Hong Kong CCIF Certified Public Accountants Limited in line with Chinese Accounting System and International Accounting Standards respectively, the Company’s net profit after consolidation as of the year 2004 was RMB 105,127,475.36, and the net profit of parent company was RMB 107,327,475.36. In accordance with the relevant regulations of Company Law and Articles of Association of the Company, after appropriating 10% of net profit as statutory public reserve amounting to RMB 10,732,747.54 and appropriating 5% of net profit as statutory public welfare amounting to RMB 5,366,373.77, adding the remained profit from last year after distribution, the profit available for distribution to shareholders was RMB 238,491,338.76. Since the Company invested a large amount of capital in construction of projects of textile and papermaking and the bank adjusted the policies, which not only could not conduct auxiliary support on current capital demanded in the projects, but the original scale of credit line has decreased by a large margin, resulting in the tension of the Company’s capital. The Company has taken the profit to use in the transfer and development of the Company’s operations, and the Company would conduct profit distribution after the situation of the Company’s capital straightens up. Thus, the Company shall not distribute profit to shareholders nor convert capital public reserve into share capital in 2004 temporarily. This preplan should be submitted to Shareholders’ General Meeting for examination. V. Profit distribution preplan or preplan on converting capital public reserve into share capital of the year After being audited by Shenzhen Pan-China Schinda Certified Public Accountants and Hong Kong CCIF Certified Public Accountants Limited in line with Chinese Accounting System and International Accounting Standards respectively, the Company’s net profit after consolidation as of the year 2005 was RMB 20,306,135.88, and the net profit of parent company was RMB 18,106,135.88. In accordance with the relevant regulations of Company Law and Articles of Association of the Company, after appropriating 10% of net profit as statutory public reserve amounting to RMB 1,810,613.59 and appropriating 5% of net profit as statutory public welfare amounting to RMB 905,306.79, adding the remained profit from last year after distribution, the profit available for distribution to shareholders was RMB 256,081,554.26. The plan for distribution of 2005 profit of the Company: Taking the total shares 588,600,000 in the end of 2005 as the cardinal number, 2 bonus shares issued for each 10 shares. In 2005, the Company did not concert capital public reserve into shares. This preplan should be submitted to Shareholders’ General Meeting for examination. In 2005, breaking of the fund chain, and no support of new bank loans result in nervous condition of the Company. The Company has been used the profits on the turnover and development of business; thus it didn't conduct cash distribution. In order to concurrently 34 consider the development of the Company and the benefits of shareholders, the Company decided to adopt the distribution plan of 2 bonus shares issued for each 10 shares. VI. Special explanations and independent opinions of independent directors on the accumulated external guarantees and external guarantee in this period as well as implementation of regulations of the Company: According to the spirits of the Notification on Some Problems of Regulating Current Capital of Listed Companies and Related Parties and External Guarantee (ZJF [2003] No. 56) and Notification on Regulating the External Guarantee the Listed Companies (ZJF [2005] No. 120) issued by CSRC, we, as independent directors of the Company, carefully verifyed the external guarantees, and now our explanations and opinions on some problems were as follows: By the end of the report period, the Company had not provided guarantees for holding shareholders, actual holding shareholders or other related parties or individuals; holding shareholders or other related parties had not forced the Company to provide guarantee for others; the accumulated external guarantee amount of the Company was RMB 117.83 million, which were the wholly guarantee for the wholly-owned subsidiaries. In the report period, guarantee of loans amounting to RMB 200 million which the Company provided for Guangdong Rieys Group Company Ltd had released. In the report period, the Company indirectly got a credit of RMB 83 million from Shenzhen Lianhua Road Subbranch of China Everbright Bank through the way of providing guarantee to Shenzhen Lingfeng Textile Industrial Co., Ltd. The Company had used the aforesaid RMB 83 million, and had recorded it as debt in the account. The Company had not recorded it in the guarantee items, and this guarantee event had actually been a borrowing event, in compliance with the fact. The approval procedures of external guarantee of the Company were in accordance with relevant laws, regulations and stipulations in the Articles of Association of the Company. The Company made explicit stipulations in the Articles of Association of the Company concerning external guarantee approval procedure as well as the credit standard of guaranteed object, so as to secure the further standardization of the Company’s external guarantee system, effective control external guarantee risks of the Company and safeguarding the interests of vast investors. VII. Other events In the report period, the domestic newspaper Securities Times engaged by the Company for information disclosure had not been changed, and the overseas newspaper engaged by the Company will change from Hong Kong Ta Kung Pao to Hong Kong Wen Wei Po. Section IX. Report of the Supervisory Committee I. Meetings of the Supervisory Committee held in the report period and decisions made In the report period, Supervisory Committee of the Company held four meetings, with details as follows: 1. The 7th meeting of the 2nd Supervisory Committee was held in the meeting room on the 35 2nd floor of the Company on Apr. 10, 2005. The meeting examined and approved the following resolutions: (1) Examined and approved the Work Report of the Supervisory Committee 2004; (2) Examined and approved the Financial Audit Report 2004; (3) Examined and approved the Annual Report 2004 and Summary of the Annual Report. 2. The 8th meeting of the 2nd Supervisory Committee was held in the meeting room on the 2nd floor of the Company on the morning of Aug. 16, 2005. The meeting examined and approved the following resolution: Examined and approved the Semi-Annual Report 2005 and Summary 3. The 9th meeting of the 2nd Supervisory Committee was held in the meeting room on the 2nd floor of the Company on the morning of Sep. 28, 2005. 5 supervisors should attend the meeting and actually 5 supervisors attended the meeting. The meeting examined and approved the following resolutions: (1) Examined and approved the Proposal on the Election of Changes of Supervisory Committee; (2)The Supervisory Committee recommended Yao Fenglan, Xu Huafeng, Sun Zhenyu as the supervisor candidates of the shareholder representatives of the third supervisory committee, and submitted to the 1st Extraordinary Shareholder’s General Meeting 2005 for election; (3) According to the stipulations of the Articles of Association, with the election of Employee’s Representative Conference of the Company, Xu Xue and Li Xianfu were recommended as the representative supervisors of the 3rd Supervisory Committee. 4. The 1st meeting of the 3rd Supervisory Committee was held in the meeting room on the 2nd floor of the Company on the morning of Nov. 31, 2005. 5 supervisors should attend the meeting and actually 4 supervisors attended the meeting. The meeting examined and approved the following resolutions: Elected Mr. Xu Xue as the chairman of the 3rd Supervisory Committee of the Company II. Independent opinions of the Supervisory Committee 1. Operation of the Company according to law According to relevant State laws and regulations, the Supervisory Committee of the Company supervised the holding procedures and resolutions of the Shareholders’ General Meeting and the Board of Directors, implementation of the resolutions of the Shareholders’ General Meeting by the Board, implementation of duties of the senior executives and the management system of the Company, and believed that, in 2005, the Board of the Company could normatively operate strictly according to Company Law, Securities Law, Listing Rules, Articles of Association of the Company, as well as other relevant regulations and systems in a patient and responsible way and its operation decisions were scientific and reasonable. The Board had further perfected internal management system and internal control to set up a good internal mechanism. The directors and managers of the Company had no behaviors against laws, regulations or Articles of Association of the Company, nor behaviors that had done harm to the interest of the Company in implementing their duties. 36 2. Inspection of the financial status of the Company The Supervisory Committee of the Company patiently and meticulously inspected the financial system and financial status of the Company, and believed that the Financial Report 2005 of the Company could truly reflect the financial status and operation achievement of the Company. 3. Independent opinions of the supervisory committee on the actual investment of the latest raised fund. In the report period, the Company did not raise fund. With the approval of ZJFXZ〔2004〕 No. 101 promulgated by CSRC, the Company has completed directional increasing 0.15 billion B shares in 2004. The total raised amount was HKD 0.498 billion. The raised fund have been used up according to the commitment of Prospectus, there were no changes on the projects of the raised fund. 4. Independent opinions of the supervisory committee on the purchase and sales of the assets In the report period, the Company had no purchase or sales of assets occurred. 5. Independent opinions of the supervisory committee on related transactions of the Company In the report period, the related transaction occurred according to the purchase term and relevant regulations; there were no harm to the Company, equity of the shareholder, losses of assets of the Company, and insider dealings. 6. Independent opinions of the supervisory committee on Auditor’s Report issued by the Certified Public Accountants In 2005, Shenzhen Pan-China Schinda Certified Public Accountant audited the domestic financial report of the Company and issued the unqualified Auditors’ Report with emphasized issues for the Company. And Hong Kong Charles Chan, Ip & Fung CPA Ltd audited the international financial report and issued disclaimer of opinion report. The Board of Director of the Company regarded that it is in accordance with the real status of the Company, and the Supervisory Committee did not have matters with special explanations. Section X. Important Events I. In the report period, significant lawsuits of the Company At the beginning of 2005, notice on the production suspension because of the breaking of fund chain, Dalian Road Branch of Guangdong Development Bank, Lianhua Road Branch of Shenzhen Everbright Bank of China, Shijiazhuang Branch of Huaxia Bank carried out the lawsuits requesting the Company and its subsidiaries to repay its loans: 1. The loan disputes between Dalian Road Branch of Guangdong Development Bank and the Company: On March 17, 2005, Dalian Intermediate People’s Court of Liaoning justified that the Company repaid the principal amounting to RMB 800 million and interest. Dalian Road Branch of Guangdong Development Bank applied to the court to judicially freeze the sponsor shares amounting to 80,000,000(accounting for 13.59% of the total shares of the Company) held by Chairman of the Company Mr. Wang Shuxian, at 37 present, they has not been defrosted, and also had not learned any dealing with shares held by Chairman of the Company Mr. Wang Shuxian. 2. The loan disputes between Lianhua Road Branch of Shenzhen Everbright Bank of China and the Company: On Oct.17, 2005, Shenzhen Intermediate People’s Court justified that the Company repaid the principal amounting to RMB 80.83 million and interest. Lianhua Road Branch of Shenzhen Everbright Bank of China applied to the court to judicially freeze the sponsor shares amounting to 93,604,000(accounting for 15.9% of the total shares of the Company) held by Chairman of the Company Mr. Wang Shuxian, at present, they has not been defrosted, and also had not learned any dealing with shares held by Chairman of the Company Mr. Wang Shuxian. On Feb. 24, 2006, Notice on Assisting in Enforcement issued by Shenzhen Intermediate People’s Court [(2005)SZFMECZNo. 177] about the debts disputing among Shenzhen Lianhua Roan Subbranch of China Everbright Bank, Shenzhen Lingfeng, and other total five defendants by Chengde Commercial and Industrial Administration Bureau, with the details as follows: a. Sealing up the 75% equity of Fashion Company held by the Company; b, Sealing uo the 54% equity of Xingye Papermaking held by the Company; c, Sealing up 20% equity of Banhe Chemical Simulation Textile held by Fashion Company with the sealing value of RMB 850,000,000 as the maximum. The period of sealing up is from March 1, 2006 to August 31, 2006. 3. The loan disputes between Shijiazhuang Branch of Huaxia Bank and the Company: On Nov. 22, 2005, Hebei High People's Court justified that the Company repaid the principal amounting to RMB 20 million and interest, and repaid the principal amounting to RMB 17.83 million and interest of acceptance advance fund. At present, the funds the said lawsuits concerned have not been repaid, and the three lawsuits did not have essential progress; the bank is seeking for other solutions with the Company. II In the report period, the Company had no important purchases or sales of assets, takeovers or mergers. III Related transactions 1. Related sales and purchases 38 Selling products and supplying Purchasing products and accepting labor services to related party labor services from related party Related party Proportion in the Proportion in the Transaction Transaction amount of the same amount of the same amount amount kind of transactions kind of transactions Shenzhen Lingfeng Textile Industrial Co., 855.56 19.60% 0.00 0.00% Ltd. Japan New Century 4,027.37 30.17% 1,340.33 97.57% Trading Co., Ltd Japan Kitanihon Spinning Co 3.12 0.03% 0.00 0.00% ., Ltd. Suningbanhe Chemical Simulation Textile Co., 22.03 0.20% 0.00 0.00% Ltd Total 4,908.08 1,340.33 Note: In the report period, the transaction amount of funds that listed company had sold the products or provided for labor forces for controlling shareholders and its subsidiaries was RMB 0.00. The Company and the relate parties have long-term trading partnership, and have good basis of cooperation. The prices of the transactions between related companies and the Company were all set according to regular market transaction articles and articles of relevant agreement. 2. Current liabilities and credits Supply funds to related parties Related parties supplied funds to the Company Related parties Occurred amount Balance Occurred amount Balance Shenzhen Lingfeng Textile 703.66 1,039.18 -217.57 8,082.43 Industrial Co., Ltd. Japan 0.32 39.82 0.00 0.00 Kitanihon Spinning Co., Ltd. Chengde Dahua Paper Co., Ltd 3,273.33 4,347.76 0.00 0.00 Suningbanhe Chemical 0.00 2,622.44 0.00 0.00 Simulation Textile Co., Ltd Chengde Chengyi Paper Co., 63.72 63.72 0.00 0.00 Ltd. Chengde Chengshi Thread 401.42 401.42 0.00 0.00 Co., Ltd. Shenzhen Lingfeng Textile 57.43 677.43 0.00 0.00 Industrial Co., Ltd. Japan New Century Trading 3,079.20 3,079.20 0.00 0.00 Co., Ltd Japan New Century Trading 542.95 2,285.20 0.00 0.00 Co., Ltd Wang Shuxian 0.00 0.00 -236.43 4,42.20 Hong Kong Zhanxi 0.00 0.00 0.00 9,545.00 International Co., Ltd. Total 8,122.03 14,556.17 -454.00 18,069.63 39 Including: In the report period, the capital amount the listed company provided to controlling shareholder and its subsidiaries was RMB 0.00 and the balance was RMB 0.00. The Company has long-term trade partnership with the related parties, and has good basis of cooperation. The transaction price of the Company and the related companies was based on the normal purchase terms and relevant regulations. IV. Important contracts and implementation In the report period, the implementation of each business contract of the Company was normal, and no significant contract dispute ever happened. 1. In the report period, the Company had not entrusted, contracted or leased other companies’ assets, nor had other companies entrusted, contracted or leased assets of the Company. 2. In the report period, RMB 20 million the Company provided loan guarantee for Guangdong Rieys Co., Ltd. by way of counter guarantee were canceled. The Company respectively provided guarantee for RMB 40 million from Dalian Branch of Guangdong Development Bank for Hebei Xiabancheng Knit Wears Co., Ltd, the Company’s wholly-owned subsidiary, and Chengde Dixian Fashion Co., Ltd. In the report period, the guarantee was not canceled. Guangdong Development Bank sued to Dalian Intermediate People’s Court of Liaoning, which justified that the Company and Chairman of the Company Mr. Wang Shuxian shouldered the joint responsibilities. The Company provided guarantee amounting to RMB 37.83 million for its wholly-owned subsidiary Hebei Xiabancheng Knit Wears Co., Ltd from Shijiazhuang Branch and Pingxi Road sub-branch of Huaxia Bank. In the report period, the guarantee was not canceled. Shijiazhuang Branch of Huaxia Bank sued to Hebei High People’s Court, which justified that the Company shouldered the joint responsibility. The Company indirectly got a credit of RMB 83 million from Shenzhen Lianhua Road Subbranch of China Everbright Bank through the way of providing guarantee for Shenzhen Lingfeng Textile Industrial Co., Ltd. The Company had used the aforesaid RMB 83 million, and had recorded it as debt in the account. This guarantee was actually a loan, so the Company did not list it in the guarantee items. Shenzhen Lianhua Road Subbranch of China Everbright Bank sued to Shenzhen Intermediate People’s Court, which justified that the Company and Chairman of the Company Mr. Wang Shuxian shouldered the joint responsibilities. 3. In the report period, the Company had never entrusted any other party to manage the Company’s cash assets and has no plan of entrusting any party to manage the assets in the future, either. V. In the report period or the time extending into the report period, the commitments held by the Company or shareholders holding more than 5% shares that would bear significant influence on the operation achievement or the financial status of the Company. 40 VI. Due to the arrangement of work, the original CPA Shenzhen Pengcheng Certified Public Accountant Co., Ltd did not make agreement with the Company. In 2005, the Company did not engage Shenzhen Pengcheng Certified Public Accountant Co., Ltd for auditing, but engaged Shenzhen Pan-China Schinda Certified Public Accountants, and CCRF Certified Public Accountants Limited as the Company’s auditing units did not change. The auditing fee for 2005 amounted to RMB 950,000. Shenzhen Pan-China Schinda Certified Public Accountants had provided the Company auditing services for 1 year and CCRF Certified Public Accountants Limited had provided the Company auditing services for two years. The Certified Public Accountants signing the domestic auditor’s report of the Company were He Xiaoming and Zhu Weifeng. VII. In the report year, the Company, the Board of Directors or its directors, the Supervisory Committee or its supervisors or other senior executives had never been inspected, or received administrative penalty or circulating criticism from China Securities Regulatory Commission, nor had them ever been condemned publicly by the stock exchange, either. VIII. In the report period, the 45% equity of Chengde Japan Papermaking Co., Ltd held by the Company transferred to controlling subsidiary of Chengde Xingye Papermaking Co., Ltd, 55% equity of Chengde Janpan Papermaking Co., Ltd held by Japan Papermaking Co., Ltd transferred to Japan New Century Trading Co., Ltd. After the transferring the equity, Chengde Japan Papermaking Co., Ltd changed it name to Chengde Dahua Paper Co., Ltd. The investment on Chengde Dahua Paper Co., Ltd was jointly finished by Chengde Xingye Papermaking Co., Ltd and Japan New Century Trading Co., Ltd. IX. In the report period, Xiabancheng Knit Wears Co.,Ltd, the wholly-owned subsidiary of the Company, transferred its production and sales into Company of Limited, then had no true operations. X. In the report period, Japanese Y’s Corporation(with the followings of short form of “Japanese Y’s), the foreign shareholder of Chengde Dixian Fashion Co., Ltd, signed the Agreement of Transferring Sale and Purchase of Shares with Gold Axe on June 25, 2005. Japanese Y’s Corporation agreed to transfer its 25% equity to Gold Axe. The ways of transferring were: the account receivable by Gold Axe amounting to RMB 50,643,321 of Japanese Y’s Corporation to flush the account of equity transfer. The account receivable amounting to RMB 50,643,321 of Japanese Y’s Corporation was originally the account of wears of the Company; the Company signed the Agreement of Transferring Sale and Purchase of Shares with Gold Axe on June 25, 2005, the account receivable amounting to RMB 50,643,321 transferred to Gold Axe in book value. Fashion Company is the wholly-owned subsidiary of the Company; in the report period, the Fashion Company transferred its production and sales into the Company, then had no true operations. 41 XI. In the latter half of 2004, the Company completed issues of directional increasing 0.15 billion domestically listed foreign shares (B share), of which 91,300,000 were subscribed in HKD, 58,700,000 were subscribed in RMB. The Capital Assessment Institution regarded that the subscription of B shares should get approval from State Administration of Foreign Exchange, and the shares did not get examination from the Certified Public Accountant. The Company has not change the procedure of industry and commerce until now. XII. Significant events 1. Because of the adjustment of bank policy, in the end of 2004, part of banks did not increase loans and amount of credit line; the Company and subsidiaries faced with the crisis of capital turnover to result in large production suspension in the end of 2004. The Company released the announcement on production suspension on Jan. 18, 2005, and release announcement and plan of restoring production on Jan. 25, 2005. Because the problem of short of fund did not get basic solutions, the bank did not increase the loans for the Company; part of banks had sued the Company. The nervous status of fund resulted in the part of production suspension of the Company and subsidiaries in 2005. Under those circumstances, the Company tried to reduce the operation cost and take technological transformation of manufacturing equipments, produced large count combed yarn with much higher values, transformed the production line of papermaking, and the product of woodpulp paper were in the trial stage of production. At present, the production of the Company restored slowly. Ended as Dec. 31, 2005, the operation fund of the Company amounted to RMB -563,220,000. The management group of the Company thought the invest project was put into operation gradually with the restoration of production, and the fund pressure of the Company could alleviate along with the increasing of income from operations. 2. Ended as Dec. 31, 2005, China Southern Securities Co., Ltd (with the following with short form of “Nanfang Securities”) held 90,700,000 shares of the Company with proportion of 15.41%; and its subordinate subsidiary China Southern Securities (Hong Kong) Co., Ltd held 19,235,055 shares of the Company with the proportion of 3.27%; CSSC INTL LTD held 6,530,000 with the proportion of 1.11%. Altogether 116,465,055 shares were held by Nanfang Securities with the proportion of 19.79%. Ended as 2005, the liquidation of Nanfang Securities was taken under the way. 3. After releasing the notice of suspension production on the breaking of the fund chain of the Company and its subsidiaries, part of banks responded violently, even appealed to laws. Part of banks requested to repay the loans in advance or did not allow the Company repays the loans by borrowing new loans or continuously lends loans. The raised fund of the Company mainly used for restoring production and technological transformation, which resulted in part of loans exceeding the time limit. With the gradual restoration of production of the Company, after part of bank deeply investigated and surveyed the Company, they provided continuous loans for the Company, such as Tianjin Pudong Development Bank, Dalian Pudong Development Bank and Chengde Bank of China, etc. 42 Chairman of the Company, Mr. Wang Shuxian, held 173,604,000 shares of the Company, of which 80 million shares were judicially frozen by Intermediate People’s Court of Dalian, 93.604 million shares were judicially frozen by Intermediate People’S Court of Shenzhen. At present, the Company did not know any news about the progress of handling the shares of Chairman of the Company Mr. Wang Shuxian. The Company is taking positive measures to negotiate with the banks on solving the loans exceeding the time limit. 4. In order to integrate the industry structure of the Company, fulfill the competitive advantages, perfect the management and improve the efficiency of operation management, accelerate the long healthy development of the Company, the Company will plan to integrate the industries of the Company, with the details are as follows: (1)Complete thoughts of integration of industry In accordance with the real status and competitive advantages of the Company, the Company will properly separate and integrate the main industries of textile and papermaking; the Company will strengthen the concentration in main operation of textile industry, slow down the holding proportion and investment scale on papermaking; on the basis, it estimates that the Company will withdraw about RMB 0.45 billion through revitalization of relevant assets and reorganization of debts and liabilities. (2) Adjustment on textile After the implementation of whole plan, the controlling and shareholding companies which take textile as main business by the Company will wholly integrated into direct or indirect controlling wholly-owned subsidiary of the Company, all the wholly-owned subsidiary of the Company will take operation of textiles as main business. The Company (including the wholly-owned subsidiary, hereinafter with the same) plans to purchase or replace 35% equity of Chengde Banhe Chemical Simulation Textile Co., Ltd with registered capital amounting to USD 60,000,000 and 80% equity of Suning Banhe Chemical Simulation Textile Co., Ltd with registered capital amounting to USD 29,000,000 held by Japan Shanxia Trade Co., Ltd. After the accomplishment of share transferring, Chengde Banhe Chemical Simulation Textile Co., Ltd and Suning Banhe Chemical Simulation Textile Co., Ltd will wholly-owned subsidiary of the Company. (3) Adjustment on papermaking After the implementation of whole plan, the Company will slow down holding proportion and investment scale in papermaking and sell the controlling equity of Chengde Xingye Papermaking Co., Ltd. The Company plan to sell or replace part of equity of Chengde Xingye Papermaking Co., Ltd to Japan Shanxia Trade Co., Ltd, Wang Shuxian and Hong Kong Zhanxi International Group Co., Ltd respectively with the proportion of 33%, 15.5% and 1.5%. through the equity transferring, the holding proportion of Chengde Xingye Papermaking Co., Ltd held by the Company will reduce from 75% to 25%, and it will change from controlling subsidiary of the Company to Shareholding company of the Company. (4) The purchase, sales, replacement of asset and related transaction concerned in the process of integrating whole plan and implementation of relevant agreement will be 43 implemented according to the relevant procedure of Laws and Regulation of PRC and CSRC. Section XI. Financial report AUDITORS’ REPORT TO THE SHAREHOLDERS OF CHENGDE DIXIAN TEXTILE CO., LTD. (INCORPORATED IN THE PEOPLE’S REPUBLIC OF CHINA WITH LIMITED LIABILITY) We have audited the accompanying consolidated balance sheet of Chengde Dixian Textile Co., Ltd. (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”) as of 31 December 2005 and the related consolidated income statement, consolidated statement of changes in equity and consolidated cash flow statement for the year then ended. These financial statements set out on pages 5 to 43 are the responsibility of the Company’s management. 44 Except as discussed in the following paragraphs, 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 examination, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for our opinion. LIMITATION OF SCOPE 1. Limitation of Scope – Ownership of land lease premium As explained in note 12 to the financial statements, the land use right registration document was not yet obtained for the land lease premium amounting to RMB36,967,000. We have not obtained sufficient appropriate audit evidence to satisfy ourselves on the ownership of the aforementioned land lease premium. 2. Limitation of Scope – Validity of capital injection in the form of machinery and equipment As fully explained in note 14(a) to the financial statements, the minority shareholder of a subsidiary injected capital in the subsidiary in the form of machinery and equipment amounting to RMB95,450,000 in value more than that required. The Group regarded the over-injected machinery and equipment as non-current assets and included the same amount as other non-current liabilities to the minority shareholder. We were not able to obtain adequate explanations or assurance regarding the circumstances surrounding the excessive amount of capital injection, or otherwise to satisfy ourselves as to the propriety and appropriateness of accounting entry, and hence the fairness of balances of the aforementioned amount as included in the non-current assets and non-current liabilities in notes 14 and 24 respectively. 45 AUDITORS’ REPORT TO THE SHAREHOLDERS OF CHENGDE DIXIAN TEXTILE CO., LTD. (INCORPORATED IN THE PEOPLE’S REPUBLIC OF CHINA WITH LIMITED LIABILITY) (Continued) LIMITATION OF SCOPE (Continued) 3. Limitation of Scope – Valuation of interest in an associate As further described in note 13(a) to the financial statements, an associate of the Company, 承德大華紙業有限公司 has not yet commenced business up to the date of this report. The capital invested amounting to RMB206,216,000, mainly in the form of property, plant and equipment injected by the Group, represents interest in the associate. However, as included in the investment in the associate, a capital injection amounting to approximately RMB187,563,000 was not supported with capital verification report being issued by the qualified PRC certified public accountants, and we were unable to carry out alternative procedures to verify the validity of the capital injection and satisfy ourselves on the valuation of the interest in that associate. 4. Limitation of Scope - Issuance of B shares As further explained in note 19(a), 150,000,000 B shares of nominal value RMB1 at a consideration of HK$3.32 each were issued during the year ended 31 December 2004. Out of which, 91,300,000 shares were issued for Hong Kong dollars and 58,700,000 shares were issued for Renminbi Yuan (“Renminbi shares”). The organization for capital verification considered that the issuance of Renminbi shares had to be authorized by the government department which controls the foreign exchange, thus the issue of Renminbi shares were not verified by PRC certified public accountants and the procedures for the change of business registration was not carried out completely. As detailed in the note 17 of the financial statements of the Company for the year ended 31 December 2004, approved by the board of directors on 11 April 2005, the circumstance of this incident had been disclosed. We had noted that, during the year ended 31 December 2005, the board of directors did not take any possible steps to rectify this situation. Thus, we had not been provided with sufficient audit evidence as to the impact and consequence of this incident. 5. Limitation of Scope – Carrying value of a subsidiary which operations had been suspended As detailed in note 31(3) to the financial statements, owing to the insufficient financial resources of the Group, the operations of a subsidiary, Xingye Papermaking Co. Ltd. was suspended during the year. Included in the consolidated balance sheet are components of assets and liabilities of the subsidiary, with net assets value of RMB882,665,000 contributed to the Group as at 31 December 2005. We are unable to obtain sufficient reliable financial 46 information about the future operational capability to contribute future income to the Group. Any adjustment in this respect would have a consequential impact on the net results of the Group for the year ended 31 December 2005 and its financial position as at 31 December 2005. The net assets value and the carrying value of property, plant and equipment of the subsidiary at the balance sheet date amounted to RMB882,665,000 and RMB849,100,000 respectively. AUDITORS’ REPORT TO THE SHAREHOLDERS OF CHENGDE DIXIAN TEXTILE CO., LTD. (INCORPORATED IN THE PEOPLE’S REPUBLIC OF CHINA WITH LIMITED LIABILITY) (Continued) LIMITATION OF SCOPE (Continued) We were unable to carry out alternative audit procedures to satisfy ourselves as to the matters set out in paragraphs 1 to 5 above. Any adjustment that might have been found to be necessary in respect of the matters set out above would have a consequential effect on the financial position of the Group as at 31 December 2005, the net profit and cash flows of the Group for the year then ended and the related disclosures in the financial statements. FUNDAMENTAL UNCERTAINITIES In forming our opinion, we have considered the adequacy of the disclosure made in note 1(b) to the financial statements concerning the overdue bank borrowings and other payable as at 31 December 2005. Pursuant to which, these overdue bank borrowings and other payables amounting to RMB117,830,000 and RMB80,824,000 respectively were part and partial of other payables and accrued charges together with short-term borrowings amounting to RMB133,515,000 and RMB828,340,000 respectively due to various creditors including bank creditors. A court judgment had been made in favor of the creditors and banks. As a result, 173,604,000 shares of the Company owned by a major shareholder were frozen by the PRC judiciary. According to the court judgment after the balance sheet date, the shares of the subsidiaries of Dixian Fashion Company Limited, Xingye Papermaking Company Limited, and Chengde Banhe Fibre Textile Company Limited were sealed up for the period from 1 March 2006 to 31 August 2006. It is uncertain at this stage whether and how the Group can be able to repay the overdue bank borrowings and other payables. Attention should be drawn that the Group’s ability to continue as a going concern is dependent upon the attainment of profitable and positive cash flow operations, the restructuring/refinancing of its debts and the continuing financial support of its bankers. The financial statements which 47 show net current liabilities of RMB561,819,000 as at 31 December 2005 have been prepared on a going concern basis, the validity of which depends upon continuing financial support being available. The financial statements do not include any adjustments that would result from a failure to obtain such financial support. We consider that appropriate disclosures have been made but the inherent uncertainties surrounding the circumstances under which the Group might successfully continue to adopt the going concern basis are so material or pervasive that we have disclaimed our opinion. AUDITORS’ REPORT TO THE SHAREHOLDERS OF CHENGDE DIXIAN TEXTILE CO., LTD. (INCORPORATED IN THE PEOPLE’S REPUBLIC OF CHINA WITH LIMITED LIABILITY) (Continued) DISCLAIMER OF OPINION Because of the significance of the possible effects of the limitation in evidence available to us as set out in paragraphs 1 to 5 of the preceding paragraphs, and the fundamental uncertainty relating to the appropriateness of the going concern basis as set out above, we were unable to form an opinion as to whether the financial statements give a true and fair view of the state of the affairs of the Group as of 31 December 2005 and of the profit and cash flows of the Group for the year then ended in accordance with International Financial Reporting Standards, as published by International Accounting Standards Board. C1238-2005_Cons 48 CHENGDE DIXIAN TEXTILE CO., LTD. CONSOLIDATED INCOME STATEMENT FOR THE ENDED 31 DECEMBER 2005 Note 2005 2004 RMB’000 RMB’000 TURNOVER 4(c) 289,738 525,686 COST OF SALES (222,281) (353,744) GROSS PROFIT 67,457 171,942 OTHER OPERATING INCOME 844 5,067 DISTRIBUTION COST (7,227) (9,759) 22 ADMINISTRATIVE EXPENSES (21,850) (19,217) OTHER OPERATING EXPENSES (251) (413) PROFIT FROM OPERATIONS 5 38,973 147,620 FINANCE COSTS, NET 7 (16,757) (33,508) SHARE OF RESULTS OF AN ASSOCIATE BEFORE TAX - (1,283) PROFIT BEFORE TAXATION 22,216 112,829 INCOME TAX EXPENSE 8 (1,495) (6,027) NET PROFIT FOR THE YEAR 20,721 106,802 ATTRIBUTABLE TO: - Equity holders of the Company 20,306 105,127 - Minority interest 21 415 1,675 20,721 106,802 EARNINGS PER SHARE - Basic 10 RMB0.03 RMB0.22 - Diluted 10 N/A N/A 49 The notes on pages 9 to 43 form an integral part of these financial statements. 50 CHENGDE DIXIAN TEXTILE CO., LTD. CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2005 Note 2005 2004 RMB’000 RMB’000 ASSETS Non-current assets Property, plant and equipment 11 1,797,858 1,911,180 Land lease premium 12 111,349 77,332 Prepayments for property, plant and equipment 33,367 45,993 Interests in associates 13 253,196 56,579 Deferred tax assets 23 314 314 Other non-current assets 14 97,761 97,817 2,293,845 2,189,215 Current assets Land lease premium 12 1,400 1,074 Inventories 15 212,891 215,911 Trade receivables 16 81,969 162,615 Other receivables and prepayments 17 167,553 191,953 Cash and bank balances 18 4,068 231,623 467,881 803,176 Current liabilities Trade payables 25 32,935 282,375 Other payables and accrued charges 26 133,515 137,430 Current income tax liabilities 34,910 21,703 Borrowings 22(b) 828,340 294,530 (1,029,700) (736,038) Net current (liabilities)/assets (561,819) 67,138 Total assets less current liabilities 1,732,026 2,256,353 Non-current liabilities Borrowings 22(a) - 480,000 Deferred tax liabilities 23 2,195 2,195 Other non-current liabilities 24 110,950 125,355 51 (113,145) (607,550) NET ASSETS 1,618,881 1,648,803 EQUITY AND LIABILITIES Capital and reserves 23 Share capital 19 588,600 588,600 24 Reserves 20 731,248 709,542 1,319,848 1,298,142 MINORITY INTEREST 21 299,033 350,661 1,618,881 1,648,803 Approved and authorised for issue by the board of directors on 25 April 2006. Director Director The notes on pages 9 to 43 form an integral part of these financial statements. 52 CHENGDE DIXIAN TEXTILE CO., LTD. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2005 Share Share Capital Revaluation Statutory Retained Minority capital premium reserve reserve reserves earnings interest Total (Note 19) (Note 20) (Note 20) (Note 20) (Note 20) (Note 21) RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Balance at 1/1/2005 588,600 367,178 - 24,819 79,054 238,491 350,661 1,648,803 Net profit for the year - - - - - 20,306 - 20,306 Appropriation from net profit (Note 20) - - - - 2,716 (2,716) - - Share of net profit of subsidiaries - - - - - - 415 415 Adjustment to consolidation - - - - - - (52,043) (52,043) Increase in capital reserve - - 1,400 - - - - 1,400 Balance at 31/12/2005 588,600 367,178 1,400 24,819 81,770 256,081 299,033 1,618,881 Balance at 1/1/2004 438,600 17,756 - 24,819 62,955 149,463 277,340 970,933 Net profit for the year - - - - - 105,127 - 105,127 Appropriation from net profit (Note 20) - - - - 16,099 (16,099) - - Share issue 150,000 - - - - - - 150,000 Share premium less issuance costs - 349,422 - - - - - 349,422 Capital injection in subsidiaries - - - - - - 80,730 80,730 Share of net profit of subsidiaries - - - - - - 1,675 1,675 Adjustment to consolidation - - - - - - (9,084) (9,084) 53 Balance at 31/12/2004 588,600 367,178 - 24,819 79,054 238,491 350,661 1,648,803 The notes on pages 9 to 43 form an integral part of these financial statements. CHENGDE DIXIAN TEXTILE CO., LTD. CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2005 Note 2005 2004 RMB’000 RMB’000 CASH FLOWS (USED IN)/FROM OPERATING ACTIVITIES Cash (used in)/generated from operations 27 (67,545) 25,737 Taxes paid - (1,979) NET CASH (USED IN)/GENERATED FROM OPERATING ACTIVITIES (67,545) 23,758 CASH FLOWS FROM INVESTING ACTIVITIES (38,047) (27,434) Purchases of property, plant and equipment (113,048) (314,703) Interest received 2,577 3,462 NET CASH USED IN INVESTING ACTIVITIES (148,518) (338,675) 54 CASH FLOWS FROM FINANCING ACTIVITIES 25 Borrowings raised 53,810 517,302 26 Repayment of borrowings - (570,050) 27 Issue of share capital - 497,538 28 Interest paid (18,165) (34,130) 29 Interests in associates (47,137) - 30 31 NET CASH (USED IN)/ FROM FINANCIING ACTIVITIES (11,492) 410,660 (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (227,555) 95,743 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 231,623 135,880 CASH AND CASH EQUIVALENTS AT END OF YEAR 18 4,068 231,623 The notes on pages 9 to 43 form an integral part of these financial statements. CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2005 1. (a) GENERAL Chengde Dixian Textile Co., Ltd. (the “Company”) was incorporated as a joint stock limited company in the People’s Republic of China (the “PRC”) on 3 November 1999 pursuant to a reorganisation in preparation for the listing of its shares. The initial registered capital of the company was RMB100,000,000 representing 100,000,000 A shares with a par value of RMB1 each. Pursuant to the approval document No. [2000]121 issued by the China 55 Securities Regulatory Commission (the “CSRS”) dated 29 August 2000, the company issued a total of 115,000,000 domestically listed foreign shares (“B shares”) (inclusive of the exercise of the Over-allotment Option of 15,000,000 B shares) with a par value of RMB1 each. The registered capital of the company after the issue of B shares was increased to RMB215,000,000. The company’s A and B shares were listed on the Shenzhen Stock Exchange on 29 September 2000. The company and its subsidiaries (hereafter collectively referred to as the “Group”) are principally engaged in the production and sale of clothes, synthetic fibers and a variety of paper products. The company is granted the rights to import and export, which has been principally utilised in the import of raw materials and export of products for its subsidiaries. The address of the registered office of the company is Xiaban Town, Chengde County, Hebei Province, the PRC. The total number of employees of the group as of 31 December 2005 was approximately 8,000 (2004: approximately 9,600). 1. (b) GOING CONCERN BASIS As there was a change in the policies of banking industry, some banks did not increase the credit facilities to the Group since the end of 2004. As a consequence, the Group faced liquidity problems and downsized production very significantly. On 18 January, 2005, it was publicly announced that the company ceased its production. On 25 January, 2005, it was publicly announced that the company resumed its production. In fact, some banks raised legal proceedings against the Group. The shortage of funds forced the Group to cease production. Under this circumstance, the Group attempted to reduce the operating expenses and make technology improvement in production line, in order to produce high quality textile products and tried to use wood pulp as raw materials in its paper mill 56 production. The Group gradually restored the production scale. Up to 31 December 2005, the Group’s net current liabilities were RMB563,219,000. The management of the Group considered that since investment project gradually operates, with the sales increase which leads to favorable cash inflows, the Group’s pressure on liquidity will be reduced. Thus, the management of the Group considered that the financial statements for the year ended 31 December 2005 prepared in accordance with going concern basis is reasonable. CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2005 2. IMPACT OF RECENTLY ISSUED INTERNATIONAL FINANCIAL REPORTING STANDARDS The following revised, amended and new standards which are generally effective for accounting periods beginning on or after 1 January 2006 may result in changes in the future as to how the Group’s financial performance and financial position are prepared and presented: - IAS 1 Presentation of Financial Statements (revised 2005); - IAS 39 Financial instruments: Recognition and measurement (revised 2005) The Group has not early adopted these revised, amended and new standards for the year ended 31 December 2005. The Group has commenced its assessment of the impact of these standards but it is not yet in a position to state whether these standards would have a material impact on its results of operations and financial position. Adoptions of IFRSs In 2005, the Group adopted the new/revised IFRSs below, which are relevant to its operations. In 2004, comparative figures have been restated as required in accordance with the relevant requirements. - IAS 1 Presentation of Financial Statements (revised 2003); - IAS 2 Inventories (revised 2003); - IAS 8 Accounting policies, changes in accounting estimates and errors (revised 2003); - IAS 10 Events after the balance sheet date (revised 2003); - IAS 16 Property, plant and equipment (revised 2003); - IAS 17 Leases (revised 2003); - IAS 21 The effects of changes in foreign exchange rates (revised 2003); - IAS 24 Related party disclosures (revised 2003); 57 - IAS 27 Consolidated and separated financial statements (revised 2003); - IAS 28 Investments in associates (revised 2003); - IAS 32 Financial instruments: Disclosure and presentation (revised 2003); - IAS 33 Earnings per share (revised 2003); - IAS 36 Impairment of assets (revised 2004); - IAS 38 Intangible assets (revised 2004); - IAS 39 Financial instruments: Recognition and measurement (revised 2004); - IAS 40 Investment property (revised 2003); - IFRS 2 Share-based payment; and - IFRS 3 Business combination The adoption of the above list of IFRSs did not result in substantial changes to the Group’s business. 58 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2005 3. PRINCIPAL ACCOUNTING POLICIES a) BASIS OF PREPARATION The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) including International Accounting Standards and Interpretations issued by the International Accounting Standards Board. This basis of accounting differs from that used in the preparation of the company’s statutory financial statements (“PRC statutory financial statements”). The PRC statutory financial statements of the company and its subsidiaries comprising the group have been prepared in accordance with the relevant accounting principles and regulations applicable to them, as appropriate in the PRC. Appropriate adjustments have been made to the PRC statutory accounting records of the group. The consolidated financial statements have been prepared under the historical cost convention, except as disclosed in the accounting policies below. b) CONSOLIDATED ACCOUNTING The consolidated financial statements include the financial statements of the Company and its subsidiaries for the year ended 31 December 2005. The financial statements of the subsidiaries are prepared using consistent accounting policies. All significant intercompany balances and transactions, including intercompany profits and unrealised profits and losses, are eliminated on combination. Consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances. i) SUBSIDIARIES Subsidiaries, which are those entities in which the Group has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies, are consolidated. Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated. Details of the group’s subsidiaries are set out in Note 30. ii) ASSOCIATES Investments in associates are accounted for by the equity method of accounting. Associates are entities over which the group generally has between 20% and 50% of the voting rights, or over which the group has significant influence, but which 59 it does not control. Unrealised gains on transactions between the group and its associates are eliminated to the extent of the group’s interest in the associates. Details of the group’s associate are set out in Note 12. CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2005 3. PRINCIPAL ACCOUNTING POLICIES (Continued) b) CONSOLIDATED ACCOUNTING (Continued) iii) JOINT VENTURES The group’s interest in jointly controlled entities are accounted for by proportionate consolidation. The group combines its share of the joint ventures’ individual income and expenses, assets and liabilities and cash flows on a line by-line basis with similar items in the group’s financial statements. The group recognises the portion of gains or losses on the sale of assets by the group to the joint venture that it is attributable to the other ventures. The group does not recognise its share of profits or losses from the joint venture that result from the purchase of assets by the group from the joint venture until it resells the assets to an independent party. However, if a loss on the transaction provides evidence of a reduction in the net realisable value or current assets or an impairment loss, the loss is recognised immediately. c) FOREIGN CURRENCIES i) FUNCTIONAL AND PRESENTATION CURRENCY Items included in the financial statements of each entity in the Group are measured using the currency that best reflects the economic substance of the underlying events and circumstances relevant to that entity (“the functional currency”). The consolidated financial statements are presented in RMB, which is the Company’s functional and presentation currency. ii) TRANSACTIONS AND BALANCES Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. iii) GROUP COMPANIES 60 The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: (i) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2005 3. PRINCIPAL ACCOUNTING POLICIES (Continued) c) FOREIGN CURRENCIES (Continued) iii) GROUP COMPANIES (Continued) (i) income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and (ii) all resulting exchange differences are recognized as a separate component of equity. d) FINANCIAL INSTRUMENTS Financial assets and financial liabilities carried on the balance sheet include cash and bank balances, receivables, prepayments, payables and borrowings. The accounting policies on recognition and measurement of cash and bank balances, trade receivables and borrowings are disclosed in the respective accounting policies found in Note 3. All other financial assets without a quoted market price in an active market are measured at cost subject to impairment review. Financial instruments are classified as liabilities or equity in accordance with the substance of the contractual arrangement on initial recognition. Interest, dividends, gains, and losses relating to a financial instrument classified as a liability are reported as expense or income. Distributions to holders of financial instruments classified as equity are charged directly to equity. Financial instruments are offset when the group companies have a legally enforceable right to offset and intend to settle either on a net basis or to realise the asset and settle the liability simultaneously. e) PROPERTY, PLANT AND EQUIPMENT 61 Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Expenditures incurred after the property, plant and equipment have been put into operation, such as repairs and maintenance and overhaul costs, are recognised as expense in the period in which they are incurred. In situations where it is probable that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of the asset beyond its originally assessed standard of performance, the expenditures are capitalised as an additional cost of the asset. Other properties are interests in land and buildings other than investment properties and are stated at valuation. Independent valuations are performed every year. In the intervening years, the directors review the carrying amount of the other properties and adjustment is made where there has been a material change. Increases in valuation are credited to the other properties revaluation reserve. Decreases in valuation are first set off against increases on earlier valuations in respect of the same property and are thereafter debited to operating profit. CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2005 3. PRINCIPAL ACCOUNTING POLICIES (Continued) e) PROPERTY, PLANT AND EQUIPMENT (Continued) Major costs incurred in restoring property, plant and equipment to their normal working condition are charged to the income statement. Improvements are capitalised and depreciated over their expected useful lives to the company. The gain or loss on disposal of property, plant and equipment other than investment properties is the difference between the net sales proceeds and the carrying amount of the relevant asset, and is recognised in the income statement. Any revaluation reserve balance remaining attributable to the relevant asset is transferred to retained earnings and is shown as a movement in reserves. f) OPERATING LEASES Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operating leases. Rentals receivables/payables under such operating leases are accounted for in the income statement on a straight-line basis over the periods of the respective lease. Contingent rentals payables are written off as an expense of the accounting period in which they are incurred. g) AMORTISATION AND DEPRECIATION Depreciation is not provided for freehold land. Property, plant and equipment are depreciated at rates sufficient to write off their cost less accumulated impairment loss 62 over their estimated useful lives on a straight-line basis, after taking into account its estimated residue value. The estimated useful lives are as follows: Land lease premium 50 years Buildings 25 years Machinery and equipment - Paper making 20 years - Others 7 – 14 years Others 7 – 14 years Motor vehicles and office equipment 5 – 10 years 63 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2005 3. PRINCIPAL ACCOUNTING POLICIES (Continued) h) IMPAIRMENT OF ASSETS Internal and external sources of information are reviewed at each balance sheet date to identify indications that the following assets may be impaired or an impairment loss previously recognised no longer exists or may have decreased: - property, plant and equipment; - interests in subsidiaries, associate company and joint venture; and - land lease premium. If any such indication exists, the asset’s recoverable amount is estimated. For intangible assets that are not yet available for use, or are amoritsed over more than 20 years from the date when the asset is available for use or goodwill that is amortised over 20 years from initial recognition, the recoverable amount is estimated at each balance sheet date. An impairment loss is recognised whenever the carrying amount of an asset exceeds its recoverable amount. i) Calculation of recoverable amount The recoverable amount of an asset is the greater of its net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit). ii) Reversals of impairment losses In respect of assets other than goodwill, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss in respect of goodwill is reversed only if the loss was caused by a specific external event of an exceptional nature that is not expected to recur, and the increase in recoverable amount relates clearly to the reversal of the effect of that specific event. A reversal of impairment losses is limited to the asset’s carrying amount that 64 would have been determined had no impairment loss been recognised in prior years. Reversals of impairment losses are credited to the income statement in the year in which the reversals are recognised. CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2005 3. PRINCIPAL ACCOUNTING POLICIES (Continued) i) INVENTORIES Inventories are stated at the lower of cost and net realisable value, after provision for obsolete items. Cost, calculated on the weighted average basis, comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Net realisable value is the estimated selling price in the ordinary course of business less estimated cost of completion and the estimated costs necessary to make the sale. When inventories are sold, the carrying amount of those inventories is recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all losses of inventories are recognised as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realisable value, is recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs. j) TRADE RECEIVABLES Trade receivables are carried at original invoice amount less provision made for impairment of these receivables. A provision for impairment of trade receivables is established when there is an objective evidence that the group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the carrying amount and the recoverable amount, being the present value of expected cash flows, discounted at the market rate of interest for similar borrowers. k) CASH AND CASH EQUIVALENTS Cash represents cash on hand and deposits with banks which are repayable on demand. Cash equivalents represent short-term, highly liquid investments which are readily convertible into known amounts of cash with original maturities of three months or less of maturity when acquired. Cash equivalents include investments and advances denominated in foreign currencies provided that they fulfil the above criteria. For the purposes of the cash flow statement, cash equivalents would also include cash, bank balances maturing within three months or less, bank overdrafts and 65 advances from banks repayable within three months or less from the date of the advance. 66 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2005 3. PRINCIPAL ACCOUNTING POLICIES (Continued) l) TRADE AND OTHER PAYABLES Liabilities for trade and other payables are carried at cost which is the fair value of the consideration to be paid in the future for goods and services received, whether or not billed to the Group. m) PROVISIONS Provisions are recognised for liabilities of uncertain timing or amount when the company or group has a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditures expected to settle the obligation. Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote. n) BORROWINGS Borrowings are recognized initially at fair value, net of transaction costs incurred. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or financial liability, including fees and commissions paid to agents, advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Borrowings are subsequently stated at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption value is recognized in the income statement over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. 67 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2005 3. PRINCIPAL ACCOUNTING POLICIES (Continued) o) REVENUE RECOGNITION i) Revenue comprises the invoiced value for the sale of goods and services net of value-added tax, rebates and discounts, and after eliminating sales within the group. ii) Revenue from the sale of goods is recognised when significant risks and rewards of ownership of the goods are transferred to the buyer. iii) Revenue from rendering of services is based on the stage of completion determined by reference to services performed to date as a percentage of total services to be performed. iv) Interest income is recognised on a time proportion basis, taking account of the principal outstanding and the effective rate over the period to maturity, when it is determined that such income will accrue to the group. v) Dividends are recognised when the right to receive payment is established. p) BORROWING COSTS Borrowing costs include interest charges and other costs incurred in connection with the borrowing of funds. Borrowing costs are expensed as incurred, except when they are directly attributable to the acquisition, construction or production of assets that necessarily takes a substantial period of time to get ready for their intended use in which case they are capitalised as part of the cost of that asset. Capitalisation of borrowing costs commences when expenditures for the asset and borrowing costs are being incurred and the activities to prepare the asset for its intended use are in progress. Borrowing costs are capitalised at the weighted average cost of the related borrowings until the asset is ready for its intended use. If the resulting carrying amount of the asset exceeds its recoverable amount, an impairment loss is recorded. All other borrowing costs are charged to the income statement in the year in which they are incurred. 68 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2005 3. PRINCIPAL ACCOUNTING POLICIES (Continued) q) EMPLOYEE BENEFITS Salaries, annual bonuses, paid annual leave, leave passage and the cost to the Group of non-monetary benefits are accrued in the year in which the associated services are rendered by employees. Provision is made in respect of paid leave entitlement accumulated during the year, which can be carried forward into future periods for compensated absence or payment in lieu if the employee leaves employment. The employees of the group originated from urban areas have participated in the defined contribution retirement scheme organised and managed by the local government. The remaining employees, however, join the scheme based on individual preference. Apart from the above social security arrangement for employees, there is no other significant commitment in relation to employee welfare. The group’s contributions to the retirement scheme are calculated based on the relevant regulations of the local government authorities and are charged to the income statement as incurred. r) INCOME TAX i) Income tax for the period comprises current tax and movements in deferred tax assets and liabilities. Current tax and movements in deferred tax assets and liabilities are recognised in the income statement except to the extent that they relate to items recognised directly in reserves, in which case they are recognised in reserves. ii) Current tax is the expected tax payable on the taxable income for the period, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous periods. iii) The Group provide for income tax on the basis of their profit for financial reporting purposes, adjusted for income and expense items which are not assessable or deductible for income tax purposes. iv) Deferred tax assets and liabilities arise from deductible and taxable temporary differences between the carrying amounts of assets and liabilities for financial reporting purpose and the tax bases respectively. Deferred tax assets also arise from unused tax losses and unused tax credits. 69 Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2005 3. PRINCIPAL ACCOUNTING POLICIES (Continued) r) INCOME TAX iv) (Continued) Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax assets and liabilities are not discounted. The carrying amount of deferred tax assets/liabilities is reviewed at each balance sheet date and is reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow the related tax benefit to be utilised. v) Current tax balances and deferred tax balances, and movements therein, are presented separately from each other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets against deferred tax liabilities if, and only if, the Group and the Company has the legally enforceable right to set off current tax assets against current tax liabilities. The principle of offsetting usually applies to income tax levied by the same tax authority on same taxable entity. s) RELATED PARTIES For the purposes of these financial statements, parties are considered to be related to the Group if the Group has the ability, directly or indirectly, to control the party or exercise significant influence over the party in making financial and operating decisions, or vice versa, or where the Group and the party are subject to common control or common significant influence. Related parties may be individuals (being members of key management personnel, significant shareholders and/or their close family members) or other entities and include entities which are under the significant influence of related parties of the Group where those parties are individuals, and post-employment benefit plans which are for the benefit or employees of the Group or of any entity that is related party of the Group. t) SUBSEQUENT EVENTS 70 Post-year-end events that provide additional information about the Group’s position at the balance sheet date (adjusting events) are reflected in the financial statements. Post-year-end events that are not adjusting events are disclosed in the notes when material. u) SEGMENT REPORTING The segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risk and rewards that are different from those of other segments. CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2005 4. SEGMENT INFORMATION a) Primary reporting format – business segments Unallocated Textile Paper items Group RMB’000 RMB’000 RMB’000 RMB’000 Year ended 31 December 2005 Sales 279,248 10,490 - 289,738 Other operating income 324 520 - 844 Segment result 29,291 9,682 - 38,973 Unallocated costs - Profit from operations 38,973 Finance costs – net (16,757) Share of results of an associate before tax - - - - Profit before tax 22,216 Income tax expense (1,495) Profit before minority interest 20,721 Minority interest (415) Net profit attributable to equity holders of the company 20,306 71 Segment assets 1,451,422 1,057,108 - 2,508,530 Associate 46,980 206,216 - 253,196 Unallocated assets - - - - Total assets 2,761,726 Segment liabilities 1,042,118 100,727 - 1,142,845 Unallocated liabilities - - - - Total liabilities 1,142,845 Other segment items Capital expenditure 86,507 64,588 - 151,095 Depreciation 35,266 26,331 - 61,597 Amortisation 802 598 - 1,400 Impairment provision – (reversal)/charge - - - - CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2005 4. SEGMENT INFORMATION (Continued) a) Primary reporting format – business segments (Continued) Unallocated Textile Paper items Group RMB’000 RMB’000 RMB’000 RMB’000 Year ended 31 December 2004 Sales 479,459 46,227 - 525,686 Other operating income 3,392 1,675 - 5,067 Segment result 109,883 37,737 - 147,620 Unallocated costs - - - - Profit from operations 147,620 Finance costs – net (33,508) Share of results of an associate before tax (1,283) - (1,283) 72 Profit before tax 112,829 Income tax expense (6,027) Profit before minority interest 106,802 Minority interest (1,675) Net profits attributable to equity holders of the Company 105,127 Segment assets 1,760,880 1,174,932 - 2,935,812 Associate 56,579 - - 56,579 Unallocated assets - - - - Total assets 2,992,391 Segment liabilities 1,044,050 299,538 - 1,343,588 Unallocated liabilities - - - - Total liabilities 1,343,588 Other segment items Capital expenditure 269,972 174,284 - 444,256 Depreciation 54,662 35,288 - 89,950 Amortisation 653 421 - 1,074 Impairment provision – (reversal)/charge 3,087 1,993 - 5,080 There are no significant sales or other transactions between the business segments. Unallocated items mainly represent corporate expenses, assets and liabilities. Segment assets consist primarily of property, plant and equipment, land lease premium, operating receivables and operating cash, and mainly exclude investments. Segment liabilities comprise operating liabilities and exclude items such as corporate taxation and borrowings. Capital expenditure comprise additions to property, plant and equipment (Note 11). CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2005 4. SEGMENT INFORMATION (Continued) b) Secondary reporting format – geographical segments As the group operates within the PRC, which is considered as one geographical segment, no segment information is presented. 73 c) Analysis of sales and other operating income For the year ended 31 December 2005 2004 RMB’000 RMB’000 Sales of goods - Textile 233,268 414,352 - Paper 43,650 111,334 - Raw materials 12,820 - 289,738 525,686 Other operating income - Rental income - 1,676 - Provision of electricity and steam - 139 - Others 844 3,252 844 5,067 290,582 530,753 5. PROFIT FROM OPERATIONS The following items have been included in arriving at profit from operations: For the year ended 31 December 2005 2004 RMB’000 RMB’000 Depreciation of property, plant and equipment 61,597 89,950 Amortisation of land use rights 1,400 1,074 Amortisation of other assets 55 55 Cost of inventories 222,281 353,744 Operating lease rentals in respect of property 1,000 1,000 (Written back)/provision for bad and doubtful debts (344) 927 (Reversal)/provision for inventory losses (3,515) 4,153 Loss on disposal of property, plant and equipment 129,586 - Repair and maintenance 597 170 Staff costs (Note 6) 27,912 52,460 CHENGDE DIXIAN TEXTILE CO., LTD. 74 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2005 6. STAFF COSTS For the year ended 31 December 2005 2004 RMB’000 RMB’000 Wages and salaries 27,259 44,946 Contributions to retirement benefits scheme 653 7,479 Other social security costs - 35 27,912 52,460 7. FINANCE COSTS, NET For the year ended 31 December 2005 2004 RMB’000 RMB’000 Interest income 2,577 3,462 Interest expenses - Interest on bank borrowings (45,651) (62,000) Less: amounts capitalised in construction-in-progress 27,486 27,870 (18,165) (34,130) Net foreign exchange transaction losses (89) (244) Bank charges (1,080) (2,596) Net financial expense (16,757) (33,508) 8. INCOME TAX EXPENSE For the year ended 31 December 2005 2004 RMB’000 RMB’000 75 Current income tax 1,495 6,466 Deferred tax relating to the origination and reversal of temporary differences (Note 23) - (439) Share of tax of associates (Note 13) - - Tax charge 1,495 6,027 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2005 8. INCOME TAX EXPENSE (Continued) The company and its major operating subsidiaries are subject to income tax at the rate of 33%, of which the enterprise income tax (“EIT”) rate is 30% and the local income tax (“LIT”) rate is 3%. In accordance with the “Income Tax Laws of the PRC for Enterprises with Foreign Investment” (FIE EIT Laws”), Hebei Xiaban City Textile Co., Ltd. (“Xiaban City Textile”) will be entitled to a 50% reduction of EIT and full exemption of LIT in the year in which its export sales exceed 70% of the total sales in that year. For the year ended 31 December 2004, export sales of Xiaban City Textile exceeded 70% of the total sales and EIT was provided at the rate of 15%, but it suffered a loss in 2005. Dixian Fashion Co. Ltd. (“Dixian Fashion”) and Xingye Papermaking Co. Ltd. (“Xingye Papermaking”) are both foreign investment enterprises. In accordance with FIE EIT Laws, foreign investment enterprises are entitled to full exemption of EIT for two years starting from its first profit-making year, after offsetting available tax losses carried forward from prior years, and 50% reduction for the three years thereafter. 2005 is the fourth profit-making year of Dixian Fashion, after offsetting available tax losses carried forward from prior years, but it suffered a loss in 2005. Xingye Papermaking commenced its operation in 2002 and 2005 is its fourth profit-making year. Consequently, the applicable tax rate is 15% (2004: nil). This is the second profit-making year of the company after becoming an enterprise with foreign investment and hence the profit is tax free. The reconciliation of the tax charge that would arise using the statutory tax rate to the effective tax charge is as follows: For the year ended 31 December 2005 2004 RMB’000 RMB’000 Profit before tax 22,216 112,829 76 Tax calculated at the statutory tax rate of 33% (2004: 33%) 7,331 37,234 Effect of tax holidays (8,640) (28,604) Differential tax rate on a subsidiary due to export sales exceeding 70% of the total sales - (4,297) Tax effect of tax losses not recognised 2,804 1,694 Tax charge 1,495 6,027 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2005 9. DIVIDENDS In accordance with relevant regulations of the PRC and the Articles of Association of Company, distributable profits of the company shall be the lower of retained earnings as reported in the statutory financial statements prepared in accordance with PRC accounting standards and the relevant accounting regulations (“PRC GAAP”) and the financial statements prepared in accordance with IFRS. The directors do not recommend any final dividend for the year ended 31 December 2005. 10. EARNINGS PER SHARE The calculation of basic earnings per share is based on the consolidated net profit for the year ended 31 December 2005 of approximately RMB20,306,000 (2004: approximately RMB105,127,000), divided by the weighted average number of shares in issue during the year ended 31 December 2005 of 588,600,000 shares (2004: 488,600,000 shares). No diluted earnings per share was presented as there were no dilutive potential ordinary shares as of the respective year end. 11. PROPERTY, PLANT AND EQUIPMENT Motor Machinery vehicles and and office Construction- Buildings equipment equipment in-progress Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 77 Cost or valuation At 1/1/2005 240,502 982,122 12,166 925,902 2,160,692 Additions - 19,031 333 93,684 113,048 Transfer - 69,655 - (69,655) - Disposals (5,795) (162,545) (77) (9,222) (177,639) At 31/12/2005 234,707 908,263 12,422 940,709 2,096,101 Accumulated depreciation At 1/1/2005 28,486 215,460 5,566 - 249,512 Charge 9,338 51,325 934 - 61,597 Written back (402) (12,464) - - (12,866) At 31/12/2005 37,422 254,321 6,500 - 298,243 Net book value At 31/12/2005 197,285 653,942 5,922 940,709 1,797,858 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2005 11. PROPERTY, PLANT AND EQUIPMENT (Continued) Motor Machinery vehicles and and office Construction- Buildings equipment equipment in-progress Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Cost or valuation At 1/1/2004 155,682 636,633 10,679 792,280 1,595,274 Adjustment to - - - 312,071 312,071 consolidation Additions/ transfer 85,701 453,925 1,487 (153,449) 387,664 Disposals (881) (108,436) - (25,000) (134,317) 78 At 31/12/2004 240,502 982,122 12,166 925,902 2,160,692 Accumulated depreciation At 1/1/2004 20,172 141,788 4,623 - 166,583 Charge 8,348 80,659 943 - 89,950 Written back (34) (6,987) - - (7,021) At 31/12/2004 28,486 215,460 5,566 - 249,512 Net book value At 31/12/2004 212,016 766,662 6,600 925,902 1,911,180 a) The group’s property, plant and equipment were last revalued on 31 July 1999 by independent professional valuers on a replacement cost basis. The revaluation surplus net of applicable income taxes amounting to approximately RMB24,819,000 were credited to revaluation reserve. The group’s property, plant and equipment acquired subsequent to the last revaluation have not been revalued and are stated at cost less accumulated depreciation. The directors are of the opinion that the carrying amounts of property, plant and equipment do not differ materially from their fair values at the balance sheet date. b) At 31 December 2005, property, plant and equipment at cost or, as the case may be, revalued amount of approximately RMB1,775,524,028 (2004: approximately RMB1,496,579,086) were pledged for the group’s borrowings. The directors are of the opinion that the recoverable amount of property, plant and equipment was not less than their carrying amount at 31 December 2005. CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2005 12. LAND LEASE PREMIUM RMB’000 Cost or valuation At 1/1/2005 84,118 Additions 38,047 Disposals (2,400) 79 At 31/12/2005 119,765 Accumulated amortization At 1/1/2005 5,712 Charge 1,400 Written back (96) At 31/12/2005 7,016 Net book value at 31/12/2005 112,749 Current portion of non-current assets (1,400) Non-current portion 111,349 Cost or valuation At 1/1/2004 56,684 Additions 27,434 At 31/12/2004 84,118 Accumulated amortisation At 1/1/2004 4,638 Charge 1,074 At 31/12/2004 5,712 Net book value at 31/12/2004 78,406 Current portion of non-current assets (1,074) Non current portion 77,332 With reference to payment for land lease premium in an amount of RMB36,967,000 made at the balance sheet date, the relevant land use right registration document had not been obtained by the Group. The directors are of opinion that procedures relating to the land use right registration were in progress. CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2005 80 13. INTERESTS IN ASSOCIATES For the year ended 31 December 2005 2004 RMB’000 RMB’000 At beginning of year 56,579 225,015 Adjustment to consolidation - (223,768) Additions for the year 196,617 56,615 Share of results before tax - (1,283) Share of tax (Note 8) - - At end of year 253,196 56,579 Details of the associates are as follows: Percentage Place of Principles of equity Registered Name incorporation activity interest held capital 承德大華紙業 Hebei, PRC PRC Production 45% JPY6,364 million 有限公司(“大華紙業”) and sales of (Formerly known as various kinds of “Nippon Paper Industries paper products Chengde Co., Ltd. (Not yet commenced (“Nippon”)”) business) Suning Ban He Hebei, PRC Construction of 20% US$29 million Chemical Fibre light railway and Emulative Textile transportation Company Limited (Not yet commenced (“Suning Ban He”) business) Nippon is unlisted and incorporated in April 2004, of which 45% equity interest was held by the company. During the year ended 31 December 2004, the registered capital was raised from US$5 million to JPY6,364 million. Suning Ban He was incorporated in November 2004 and not yet commenced business as at 31 December 2005. 81 Note (a): During the year, the assets of certain subsidiaries had been transferred to an associate, representing capital injection made by the Group for the acquisition of equity interest in the associate in an amount of RMB206,216,000. However, the relevant capital verification report in relation to the amount injected of RMB187,653,000 to be issued by the PRC certified public accountants was still not available. CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2005 14. OTHER NON-CURRENT ASSETS For the year ended 31 December 2005 2004 RMB’000 RMB’000 Machinery over-injected by a minority 95,450 95,450 shareholder (note a) Rental prepayment 2,311 2,367 97,761 97,817 Note (a): The amount, RMB95,450,000, represented an over-injected investment amount made by a minority shareholder. According to the available documents and information, the Group should not have the ownership in respect of that over-injected amount which was in form of machinery. However, the Group considered that an accounting entry is recorded to reflect the existence for that over-injected machinery value and accordingly, resulting in a creation of non-current liability as presented in note24. 15. INVENTORIES For the year ended 31 December 2005 2004 RMB’000 RMB’000 Raw materials, at cost 39,743 32,194 Work-in-progress, at cost 95,641 71,810 Finished goods, at cost 88,018 117,776 82 223,402 221,780 Less: Full provision for obsolete finished goods, net of reversal (10,511) (5,869) 212,891 215,911 During the year ended 31 December 2005, the group reversed inventory provision of approximately RMBNil (2004: RMBNil) upon the sales of related finished goods. 16. TRADE RECEIVABLES For the year ended 31 December 2005 2004 RMB’000 RMB’000 Trade receivables 84,068 165,058 Less: Provision for bad and doubtful debts (2,099) (2,443) 81,969 162,615 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2005 17. OTHER RECEIVABLES AND PREPAYMENTS For the year ended 31 December 2005 2004 RMB’000 RMB’000 Other receivables 129,689 91,738 Prepayments to suppliers 37,864 100,215 167,553 191,953 18. CASH AND BANK BALANCES At December 2005, all time deposits, of which the maturity were within six months, were pledged for the discount of the group’s trade acceptance to banks. 83 19. SHARE CAPITAL At 31 December 2005, share capital included promoters’ shares and B shares, all of which rank pari passu in all respects with each other. Details of share capital are as follows: For the year ended 31 December 2005 2004 2005 2004 Number of shares (in thousands) RMB’000 RMB’000 Registered, issued and fully paid: Unlisted - Promoters’ shares of RMB1 each 204,000 204,000 204,000 204,000 Listed - B shares of RMB1 each 384,600 384,600 384,600 384,600 588,600 588,600 588,600 588,600 Movements in share capital during the year are as follows: For the year ended 31 December 2005 2004 2005 2004 Number of shares (in thousands) RMB’000 RMB’000 Balance, beginning of year 588,600 438,600 588,600 438,600 Issue of B shares - 150,000 - 150,000 Balance, end of year 588,600 588,600 588,600 588,600 Note (a): During the year ended 31 December 2004, the company issued 150,000,000 B shares of nominal value RMB 1 at HK$ 3.32 each, of which 91,300,000 shares were issued for Hong Kong dollars and 58,700,000 shares were issued for Renminbi Yuan (“Renminbi shares”). The organisation for capital vertification considered that the issue of Renminbi shares had to be authorised by the government department which controls the foreign exchange, thus the issue of Renminbi shares were not vertified by PRC certified public accountants and the procedure for the change of business registration was not carried out. CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2005 20. RESERVES 84 a) Share premium and revaluation reserve Share premium represents the premium on the issuance of B shares. Revaluation reserve represents the revaluation surplus arising from the valuation of property, plant and equipment (see Note 11 (a)). Pursuant to the relevant PRC regulations, share premium and revaluation reserve can only be used to increase share capital. b) Statutory reserves According to the Company Law of the PRC and Articles of Association of the Company, the Company is required to provide the following statutory reserves which are appropriated from the net profit as reported in the statutory financial statements prepared in accordance with PRC GAAP: i) Statutory surplus reserve fund The group is required each year to transfer 10% of the profit after tax as reported under the PRC statutory financial statements to the statutory surplus reserve fund until the balance reaches 50% of the registered share capital. This reserve can be used to make up any losses incurred or to increase share capital. Except for the reduction of losses incurred, any other usage should not result in this reserve balance falling below 25% of the registered capital. ii) Statutory public welfare fund The group is required each year to transfer 5%-10% of the profit after taxation as reported under the PRC statutory financial statements to the statutory public welfare fund. This reserve is restricted to capital expenditure for employees’ collective welfare facilities that are owned by the group. The statutory public welfare fund is not available for distribution to shareholders (except on liquidation). For the year ended 31 December 2005, the directors of the company proposed that 10% and 5% (2004: 10% and 5%) of the net profit as reported in the statutory accounts be appropriated to statutory reserve fund and statutory public welfare fund respectively, totalling approximately RMB2,187,000 (2004: approximately RMB16,099,000). The resolution is subject to approval by shareholders in the annual general meeting. 85 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2005 21. MINORITY INTEREST For the year ended 31 December 2005 2004 RMB’000 RMB’000 At beginning of year 350,661 277,340 Capital injection in subsidiaries - 80,730 Share of net profit of subsidiaries 415 1,675 Adjustment to consolidation (52,043) (9,084) At end of year 299,033 350,661 22. BORROWINGS a) Non-current borrowings For the year ended 31 December 2005 2004 RMB’000 RMB’000 Secured bank borrowings - 480,000 Borrowings of RMBnil (2004: RMB360,000,000) are secured by property, plant and equipment and land lease premium of the group, borrowings of RMBnil (2004: RMB120,000,000) are cross-guaranteed by certain companies in the group. These borrowings bear interest ranging from 5.49% to 6.039% per annum in 2004. The maturity of long-term borrowings is as follows: For the year ended 31 December 2005 2004 86 RMB’000 RMB’000 Within one year - 120,000 Over one year but within two years - 360,000 Over two years but within three years - - - 480,000 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2005 22. BORROWINGS (Continued) b) Current borrowings For the year ended 31 December 2005 2004 RMB’000 RMB’000 Bank borrowings - secured bank borrowings 828,340 294,530 - unsecured bank borrowings - - 828,340 294,530 Borrowings of RMB710,510,000 (2004: RMB141,320,000) are secured by property, plant and equipment and land lease premium of the group, borrowings of RMB117,830,000 (2004: RMB153,210,000) are cross-guaranteed by certain companies in the group. These borrowings bear interest ranging from 5.22% to 6.86% (2004: 5.22% to 7.24%) per annum. 23. DEFERRED TAX ASSETS AND LIABILITIES Deferred income taxes are calculated in full on temporary differences under the liability method using the enacted tax rates applicable to respective companies in the group. The movements in deferred tax assets and liabilities are as follows: For the year ended 31 December 2005 Credit to 87 income 1/1/2005 statement 31/12/2005 RMB’000 RMB’000 RMB’000 Deferred tax assets Deductible temporary difference on 188 - 188 provision for inventory obsolescence Deductible temporary difference on provision for doubtful debts 126 - 126 314 - 314 Deferred tax liabilities Assessable temporary differences on revaluation reserve of property, plant and equipments (2,195) - (2,195) (1,881) - (1,881) CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2005 23. DEFERRED TAX ASSETS AND LIABILITIES (Continued) For the year ended 31 December 2004 Credit to income 1/1/2004 statement 31/12/2004 RMB’000 RMB’000 RMB’000 Deferred tax assets Deductible temporary difference on 188 - 188 provision for inventory obsolescence Deductible temporary difference on 126 - 126 provision for doubtful debts 314 - 314 88 Deferred tax liabilities Assessable temporary differences on revaluation reserve of property, plant and equipments (2,634) 439 (2,195) (2,320) 439 (1,881) 24. OTHER NON-CURRENT LIABILITIES Other non-current liabilities mainly represented the fund over-injected for share capital by a minority shareholder (note 14(a)) and the outstanding consideration payable for the acquisition of land lease premium to other parties. The balances were unsecured, interest-free and repayable within two years. 25. TRADE PAYABLES For the year ended 31 December 2005 2004 RMB’000 RMB’000 Trade payables 32,935 33,375 Notes payable - 249,000 32,935 282,375 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2005 26. OTHER PAYABLES AND ACCRUED CHARGES For the year ended 31 December 2005 2004 RMB’000 RMB’000 Advances from customers 1,263 4,915 Salary and welfare payables 6,137 12,414 Accrued charges 38,145 6,167 89 Other payables 87,970 113,934 133,515 137,430 27. NOTES TO CONSOLIDATED CASH FLOW STATEMENT (a) Cash (used in)/generated from operations For the year ended 31 December 2005 2004 RMB’000 RMB’000 Net profit for the year 20,721 106,802 Adjustments for: Depreciation 61,597 89,950 Loss on disposal of property, plant and equipment 17,597 - Amortisation of land lease premium (Note 12) 1,400 1,074 Impairment loss for assets - 5,735 (Written back)/provision for bad and doubtful debts (344) 927 Provision for inventory obsolescence 4,642 4,153 Interest expenses 18,165 34,130 Interest income (2,577) (3,462) Share of results of associates before tax - 1,283 Changes in working capital: Decrease in prepayments for property, plant and equipment 12,626 90,336 Decrease/(increase) in other non-current assets 56 (95,341) Increase in inventories (1,622) (93,703) Decrease/(increase) in trade receivables 30,347 (53,900) (Increase)decease in prepayments and other receivables 24,400 (100,841) Decrease in trade payables (249,440) (21,856) Decrease in accruals and other payables (3,915) (38,000) Increase in current income tax liabilities 13,207 - (Decrease)/increase in other non-current liabilities (14,405) 98,450 Cash (used in)/generated from operations (67,545) 25,737 (b) Major non-cash transactions During the year, the Group injected property, plant and equipment amounting to RMB149,497,000 to an associate. 90 Besides, the Group set off the trade receivables of RMB50,643,000 due from the minority shareholder of a subsidiary with the purchase consideration of the minority shares of the subsidiary. CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2005 28. FINANCIAL INSTRUMENTS a) Fair values The carrying amounts of the group’s cash and bank balances, trade and other receivables, prepayments, payables and short-term borrowings approximate their fair values because of the short maturity of these instruments. The fair value of long-term borrowings is based on the current rates available for debt with the same maturity and credit-rating risk profile. At 31 December 2005, the difference between the fair values and carrying amounts of the group’s long-term borrowings was minimal since the difference between the current rates and the historical rates of such long-term borrowings was not significant. b) Credit risk The carrying amounts of cash and bank balances, trade and other receivables and prepayments represented the group’s maximum exposure to credit risk in relation to financial assets. Cash is placed with reputable banks and the weighted average effective interest rate on deposits was 1.88% per annum. Majority of the group’s trade receivables relate to sales of goods. The group performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral on trade receivables. Group procedures are in force to ensure that sales are made to customers with an appropriate credit history and do not exceed an acceptable credit exposure limit. The group maintains a provision for doubtful debts and actual losses have been within management’s expectation. No other financial assets carry a significant exposure to credit risk. c) Interest rate risk The directors believe that group’s exposure to interest rate risk of financial assets and 91 liabilities as at 31 December 2005 was minimal since their deviation from their respective fair values was not significant. d) Liquidity risk The group policy is to maintain sufficient cash and cash equivalents or have available funding through an adequate amount of committed credit facilities to meet its current use in operations. CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2005 28. FINANCIAL INSTRUMENTS (Continued) e) Foreign exchange risk The foreign exchange risks of the group occur due to the fact that the group has business activities denominated in foreign currencies. The group did not enter into any foreign exchange forward contracts to hedge against foreign currency fluctuation. However, the directors believe that the group’s exposure to foreign exchange risk was minimal since most of the group’s foreign currency transactions are denominated in USD and, over the past five years, there has been no significant fluctuation in the exchange rates between RMB and USD. 29. COMMITMENTS a) Capital commitments At 31 December 2005, capital commitments contracted for but not required to be recognised in the financial statements are as follows: For the year ended 31 December 2005 2004 RMB’000 RMB’000 Investment in an associate - 142,425 Investment in subsidiaries 56,860 8,439 Investment in a joint venture 4,035 - 92 60,895 150,864 b) Operating lease commitments At 31 December 2005, the future aggregate minimum lease payments for plant by the group under non-cancellable operating leases for each of the following period are as follows: For the year ended 31 December 2005 2004 RMB’000 RMB’000 Within one year 1,000 1,000 Later than one year and not later than five years 4,000 4,000 Later than five years 19,000 20,000 24,000 25,000 CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2005 30. RELATED PARTY TRANSACTIONS AND RELATIONSHIPS Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party, or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Century Win International Holding Ltd. (Century Win Co.”), a company incorporated in Hong Kong, entered into an equity joint venture agreement with the company to set up Xingye Papermaking in 2001. The directors are of the opinion that CenturyWin Co. is a related party of the company. 承德大華紙業有限公司 (“大華紙業”) is an associate of the group, over which the group has significant influence. As a result, the directors are of the opinion that 大華紙業 is a related party of the company. Suning Banhe Chemical Fibre Emulative Textile Co., Ltd. (“Suning Banhe”) is an associate of the group, over which the group has significant influence. As a result, the directors are of the opinion that Suning Banhe is a related party of the company. 93 Chengde Dixian Kitanihon Knitwears and Textile Co., Ltd. (“Kitanihon”) is a jointly controlled entity of the group. As a result, the directors are of the opinion that Kitanihon is a related party of the company. New Century Trade Co. Ltd. (“New Century”) is the shareholder of an associate of the Group. As a result, the directors are of the opinion that New Century is a related party of the Company. 承德誠意紙業有限公司 (“誠意紙業”) and 承德誠實綫業有限公司(“誠實綫業”) have common chief executives of the two companies and of the group. As a result, the directors are of the opinion that 誠意紙業 and 誠實綫業 are the related parties of the company. a) The group had the following significant transactions with related parties: For the year ended 31 December 2005 2004 RMB’000 RMB’000 Purchase machinery and equipment from New Century Trade Co. Ltd. 13,403 - Sales of goods to Kitanihon 31 1,997 Sales of goods to Y’S Corporation - 52,579 Sales of goods to 深圳市菱豐紡織實業有限公司 8,556 34,092 Sales of goods to New Century Trade Co. Ltd. 40,274 - Sales of goods to Suning Ban He 220 - The above transactions were carried out on normal commercial terms and conditions and at market prices. CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2005 30. RELATED PARTY TRANSACTIONS AND RELATIONSHIPS (Continued) b) The group had the following significant balances with related parties: At 31 December 2005, the future aggregate minimum lease payments for plant by the group under non-cancellable operating leases for each of the following period are as follows: 94 For the year ended 31 December 2005 2004 RMB’000 RMB’000 Trade receivables - Y’S Corporation - 51,073 - 深圳市菱豐紡織實業有限公司 10,392 3,355 Other receivables and prepayments - Kitanihon 398 395 - 大華紙業 43,478 10,744 - 日本制紙株式會社 - 30,792 - Suning Ban He 26,224 - - 誠意紙業 637 - - 誠實綫業 4,014 - - 深圳市菱豐紡織實業有限公司 6,774 6,200 - New Century Trade Co. ,Ltd 53,756 - Other payables and accrued charges - Century Win Co.* 95,450 95,450 - 深圳市菱豐紡織實業有限公司 80,824 83,000 - Wang Shuxian 4,422 6,786 * The amount payable to Century Win Co. represented the value of machinery contributed by Century Win Co. in excess of its required capital contribution to Xingye Papermaking. c) Directors’ remuneration The total remuneration payable to key management personnel for the year ended 31 December 2005 was approximately RMB654,000 (2004: RMB514,000). CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2005 31. SUBSIDIARIES At 31 December 2005, the company had the following subsidiaries: Percentage 95 Place of Registered Principal of equity Name incorporation capital activities interest held Direct Indirect Xiaban City Textile Hebei, PRC USD4,000,000 Production and 75% 25% Co., Ltd. (“Xiaban sale of clothes City Textile”) Dixian Fashion Hebei, PRC USD24,000,000 Production and 75% 25% Co. Ltd. (“Dixian sale of clothes and Fashion”) synthetic fibers Xingye Papermaking Hebei, PRC USD100,000,000 Production and 75% - Co. Ltd. (“Xingye sale of various Papermaking”) kinds of paper products Chengde Banhe Fibre Hebei, PRC USD60,000,000 Production and - 65% Textile Co., Ltd. sale of clothes and (“Banhe”) synthetic fibers Gold Axe Investment British Virgin USD1 Investment holding 100% - Group Limited Islands and liaison of (“Gold Axe”) export business Huaxin Waste Paper Hebei, PRC RMB1,000,000 Collection and sales - 90% Collection Co., of paper Ltd. (“Huaxin”) 1. With the board of director’s approval of Xiaban City Textile, the operation and sales businesses of Xiaban City Textile for the year were completely transferred to the company. No business operations were transacted of Xiaban City Textile during the year. The 25% shareholding belongs to the Gold Axe. 2. According to the Share Transfer Agreement signed on 25 June 2005 between Gold Axe and the foreign party of Dixian Fashion, Y’s Corporation, agreed to transfer the 25% shareholding to Gold Axe in return for the set off against the account receivables of RMB 50,643,321 from 日本裕发. The amount of RMB 50,643,321 was the account payables due to Dixian Faxhion. An agreement was signed between Chengde Dixian Textile and Gold Axe on 25 June 2005 for the transfer of account receivables at the book value of RMB 50,643,321 to Gold Axe. The board of directors of Dixian Fashion approved the above share transfer. However, the Government Authority did not approve the share transfer and the business registration was not completed by the company. With the board of director’s approval of Dixian Fashion, the operation and sales businesses of Dixian Fashion for the year were completely transferred to the company. No business operations were transacted of Dixian Fashion during the year. CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2005 31. SUBSIDIARIES (Continued) 96 3. Century Win International Holding Ltd. (Century Win Co.”), a company incorporated in Hong Kong, entered into an equity joint venture agreement with the company to set up Xingye Papermaking in 2001 and get the business license on 12 March 2001. According to the equity joint venture agreement, the company and Century Win Co. had paid in capital of approximately RMB 622,500,000 and RMB 207,500,000 respectively, and the registered capital would be contributed in full by the company within three years from the business license date of Xingye Papermaking (the “ Investment Period”). Up to the 31 December 2005, the company and Century Win Co. had fully paid the capital of RMB 622,500,000 and RMB 207,500,000 respectively. The share capital verification procedure was however, not completed. Part of the production line was in operation since 2002. During the year ended 31 December 2003, Century Win Co. contributed approximately RMB128,650,000 of machinery in excess of its required capital contribution to Xingye Papermaking. According to an agreement signed between the company and Century Win Co. in September 2004, approximately RMB 95,450,000 was owed to Century Win Co. and the company recorded it as other payables. Century Win Co. agreed not to request the company to repay the money due unless consent was mutually agreed. Based on the agreement, the company could use the machinery and could use it as loan security. The remaining sum of RMB33,200,000 was recognized as a debt by the company. An agreement was signed on 12 February 2004 among the company, 深圳菱豐 and Ceutury Win Co. whereby the sum of RMB 33,200,000 was set off with a debt owing form 深圳菱丰. The business operation of Xingye Papermaking was suspended during the year due to serious liquidity problem. The directors consider that should the subsidiary cease operations permanently, impairment loss has to be provided for the assets. The net assets value and the carrying value of property, plant and equipment of the subsidiary at the balance sheet date amounted to RMB882,665,000 and RMB849,100,000 respectively. 4. Banhe, a subsidiary of the company, was incorporated as Sino-foreign enterprise in 29 September 2002 and the registered capital was USD 15,000,000. Dixian Fashion and 日本 山下商事株式会社（“日本山下商事”）share 35% and 65% respectively. An approval coded 冀外经贸资字[2003]No.37 was issued by 河北省商务厅 on 24 March 2003 for the increase of registered capital of Banhe from USD 15,000,000 to USD 60,000,000 on 7 July 2003. A new shareholder - Xiaban City Textile then joined. Shareholding then became Dixian Fashion, 日本山下商事 and Xiaban City Textile holding 20%, 55% and 25% respectively. An approval coded 冀外经贸资字[2004]No.22 was issued by 河 北省商务厅 on 31 March 2004. 20% shareholding of 日本山下商事 was transferred to Dixian Fashion. After the change, the shareholding then was Dixian Fashion, 日本山 下商事 and Xiaban City Textile holding 40%, 35% and 25% respectively. Up to 31 December 2005, the paid up share capital of Banhe was RMB 394,820,975.29. Dixian Fashion and Xiaban City Textile paid RMB 199,200,000 and RMB114,890,975.29 respectively. However, the share capital verification procedure was not completed. CHENGDE DIXIAN TEXTILE CO., LTD. NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2005 97 32. CONTINGENT LIABILITIES At 31 December 2005, there was no contingent liabilities of the group. 33. POST BALANCE SHEET EVENTS Pursuant to the resolution of the board of directors’ meeting dated 16 April 2006. The directors of the company propose to distribute 2 bonus shares for 10 shares as at 31 December 2005. The proposal will be tabled in the shareholders’ general meeting for approval. 34. COMPARATIVE FIGURES Certain comparative figures have been reclassified to conform with the current year’s presentation. 35. APPROVAL OF FINANCIAL STATEMENTS The consolidated financial statements were approved by the board of directors on 25 April 2006. 98 Section XII. Documents for Reference 1. Accounting statements carrying with personal signatures and seals of legal representative, person in charge of the financial affairs and person in charge of accounting institution 2. Original of Auditors’ Report carrying with the seal of Certified Public Accountants as well as personal signatures and seals of certified public accountants. 3. Originals of all documents and manuscripts of Public Notices of the Company publicly disclosed on Securities Times and Hong Kong Wen Wei Po. The Company will provide timely the above documents for reference provided that China Securities Regulatory Commission or Stock Exchange demands or shareholders requires according to the regulations and Articles of Association. Board of Directors Chengde Dixian Textile Co., Ltd. Apr. 18, 2006 99