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深康佳Ａ(000016)深康佳Ｂ2005年年度报告（英文版）

学生上传于 2006-04-27 06:03

Konka Group CO., Ltd Annual Report 2005 Chairman of the Board: Hou Songrong Apr. 25, 2006 1 Contents Section I. Important Notice Section II. Company Profile Section III. Accounting Data and Business Highlights Section IV. Changes in Share Capital and Particulars about Shareholders Section V. Particulars about Directors, Supervisors, Senior Executives and Employees Section VI. Administrative Structure Section VII. Particulars about Shareholders’General Meeting Section VIII. Report of the Board of Directors Section IX. Report of the Supervisory Committee Section X. Significant Events Section XI. Financial Report Section XII. Documents for Reference 2 Section I Important Notice The Board of Directors, the Supervisory Committee as well as the directors, supervisors and senior executives of Konka Group Co., Ltd (hereinafter referred to as “the Company”) hereby confirm that there are no false records, misleading statements or significant omissions in this report, and will shoulder any individual or joint responsibility concerning the authenticity, accuracy and completeness of the content. This Annual Report and its Summary have been examined and approved by the 14th meeting of the 5th Board of Directors of the Company. Independent Director Mr. Xiao Zhuoji was away on a business trip, but he had entrusted Independent Director Mr. Ye Wu to attend the meeting and exercise the voting rights on his behalf. After examining these files, the 7th meeting of the 5th Supervisory Committee of the Company believed that this Annual Report 2005 and its Summary could faithfully, accurately and completely reflect the financial status, the operation achievements, corporate governance and business development during the year 2005. No director, supervisor or senior executive declared that he/she could not guarantee the authenticity, accuracy and completeness of the content in this Annual Report. Shenzhen Dahua Tiancheng Certified Public Accountants has provided a standard unqualified Auditors’Report for the Company. Chairman of the Board Mr. Hou Songrong, C.F.O. Mr. Yang Guobin and the person in charge of accounting work Mr. Ruan Renzong hereby declare that they can guarantee the authenticity and completeness of the Financial Report in this Annual Report. 3 Section II Company Profile 1. Legal Name of the Company: In Chinese: ? ? ? ? ? ? ? ? ? ? Abbreviation: ? ? ? ? In English: KONKA GROUP CO., LTD. Abbreviation: KONKA GROUP 2. Registered (Office) Address: Overseas Chinese Town, Nanshan District, Shenzhen Postal Code: 518053 Internet Website of the Company: http://www.konka.com E-mail: szkonka@konka.com 3. Legal Representative of the Company: Chairman of the Board Mr. Hou Songrong 4. Secretary of the Board of Directors: Mr. Xiao Qing Securities Affairs Representative: Mr. Xu Wenxiao Contact Address: Secretariat of the Board, Konka Group Co., Ltd, Overseas Chinese Town, Nanshan District, Shenzhen, China Tel.: (86) 755-26608866 Fax: (86) 755-26600082 E-mail: szkonka@konka.com 5. Newspapers Chosen for Disclosing the Information of the Company: China Securities Journal, Securities Times and Hong Kong Ta Kung Pao, etc Internet Website Designated by CSRC: http://www.cninfo.com.cn Place Where the Annual Report Is Prepared and Placed: Secretariat of the Board of Directors 6. Stock Exchange Listed on: Shenzhen Stock Exchange Short Form of the Stock: G Konka - A, Shen Konka - B Stock Code: 000016, 200016 7. Initial Registration Date: Oct. 1, 1980 Place: Shenzhen 8. Registration Number of Corporate Legal Person’ s Business License: QGYSZ Zi No. 100476 9. Registration Number of Tax: 440301618815578 10. Certified Public Accountants Engaged by the Company: Domestic: Shenzhen Dahua Tiancheng Certified Public Accountants Address: Room 1102-1103, 11/F, Tower B, Union Plaza, No. 5022, Binhai Av., Futian District, Shenzhen International: K.C.OH & Company Certified Public Accountants Address: 8/F., New Henry House, No. 10, Ice House Street, Central, Hong Kong 4 Section III. Accounting Data and Business Highlights I. Major accounting data of the report period Unit: RMB Item Amount Total profit 40,001,831.16 Net profit 71,898,947.59 Net profit after deducting non-recurring gains and losses 64,186,579.21 Profit from main operations 1,883,466,317.97 Profit from other operations 26,498,445.26 Operating profit 32,649,410.68 Investment yield 7,236,702.20 Subsidy income 2,808,979.03 Net non-operating income or expense -2,693,260.75 Net cash flows arising from operating activities -101,374,782.62 Net increase or decrease of cash and cash equivalents -222,602,066.98 II. Main financial indicators of the recent three years Ｉｎｃｒｅａｓｅ／２００３ｄｅｃｒｅａｓｅｔｈｉｓＩｔｅｍ２００５２００４ｙｅａｒｃｏｍｐａｒｅｄＡｆｔｅｒｔｈｅＢｅｆｏｒｅｔｈｅｗｉｔｈｔｈｅｌａｓｔａｄｊｕｓｔｍｅｎｔａｄｊｕｓｔｍｅｎｔｙｅａｒ（％）Ｉｎｃｏｍｅｆｒｏｍｍａｉｎ１１，４５５，８９１．６１１３，３６２，５２１．９０－１４．２７１２，８０６，４６６．１１２，８０６，４６６．１ｏｐｅｒａｔｉｏｎｓ（ＲＭＢ’０００）Ｎｅｔｐｒｏｆｉｔ（ＲＭＢ’０００）７１，８９８．９５１４０，７２６．７０－４８．９１９９，１４５．５１０１，０７１．０Ｎｅｔｐｒｏｆｉｔａｆｔｅｒｄｅｄｕｃｔｉｎｇｎｏｎ－ｒｅｃｕｒｒｉｎｇ６４，１８６．５８１０１，９５３．６０－３７．０４９６，１４２．２９８，０６７．８ｇａｉｎｓａｎｄｌｏｓｓｅｓ（ＲＭＢ’０００）Ｅａｒｎｉｎｇｓｐｅｒｓｈａｒｅｆｕｌｌｙ０．１１９０．２３４－４８．９６０．１６５０．１６８ｄｉｌｕｔｅｄ（ＲＭＢ）Ｅａｒｎｉｎｇｓｐｅｒｓｈａｒｅ０．１１９０．２３４－４８．９６０．１６５０．１６８ｗｅｉｇｈｔｅｄａｖｅｒａｇｅ（ＲＭＢ）Ｒｅｔｕｒｎｏｎｅｑｕｉｔｙ（％）２．２４４．４１－２．１７３．２５３．３１Ｎｅｔｃａｓｈｆｌｏｗｓｐｅｒｓｈａｒｅａｒｉｓｉｎｇｆｒｏｍｏｐｅｒａｔｉｎｇ－０．１６８－０．６２１７２．８８０．５８４０．５８４ａｃｔｉｖｉｔｉｅｓ（ＲＭＢ）Ｉｎｃｒｅａｓｅ／Ａｔｔｈｅｅｎｄｏｆ２００３ｄｅｃｒｅａｓｅｔｈｉｓＡｔｔｈｅｅｎｄｏｆＡｔｔｈｅｅｎｄｏｆＩｔｅｍｙｅａｒｃｏｍｐａｒｅｄＡｆｔｅｒｔｈｅＢｅｆｏｒｅｔｈｅ２００５２００４ｗｉｔｈｔｈｅｌａｓｔａｄｊｕｓｔｍｅｎｔａｄｊｕｓｔｍｅｎｔｙｅａｒ（％）Ｔｏｔａｌａｓｓｅｔｓ（ＲＭＢ’０００）９，１２０，４５２．２７９，５９７，８４５．８０－４．９７９，６３４，５８８．１０９，６３７，３７５．７０Ａｓｓｅｔｓ－ｌｉａｂｉｌｉｔｙｒａｔｉｏ６１．９９６４．１３－３．３４６５．９０６５．８８（％）Ｓｈａｒｅｈｏｌｄｅｒｓ’ ｅｑｕｉｔｙ（ｅｘｃｌｕｄｉｎｇｍｉｎｏｒｉｔｙ３，２１１，２１２．３０３，１９３，９２８．１００．５４３，０５０，７３１．８０３，０５３，５１９．４０ｉｎｔｅｒｅｓｔｓ）（ＲＭＢ’０００）Ｎｅｔａｓｓｅｔｓｐｅｒｓｈａｒｅ５．０６８５．０７２（ＲＭＢ）５．３３４５．３０６０．５３Ｎｅｔａｓｓｅｔｓｐｅｒｓｈａｒｅ５．０８５５．１０８－０．４５４．８９０４．８９５ 5 ａｆｔｅｒａｄｊｕｓｔｍｅｎｔ III. Supporting Statement of the Income Statement in the report period Profit of the report period Return on equity (%) Earnings per share (RMB) Profit from main operations 58.653 59.317 3.129 3.129 Operating profit 1.017 1.028 0.054 0.054 Net profit 2.239 2.264 0.119 0.119 Net profit after deducting non-recurring gains and losses 1.999 2.021 0.107 0.107 IV. Non-recurring gains and losses deducted and amounts involved Unit: RMB Amount before deducting the Amount after deducting the Nature or content influence of income tax influence of income tax Government subsidy income 2,737,413.84 2,723,923.84 Write-back of the depreciation reserves for long-term equity investments 8,390,933.40 8,390,933.40 Non-operating income 3,969,193.55 3,851,336.60 Non-operating expense -6,662,454.30 -6,334,386.11 Amount influenced by minority interests -919,439.35 -919,439.35 Total 7,515,647.14 7,712,368.38 V. Change of shareholders’equity in the report period Unit: RMB ＡｍｏｕｎｔａｔｔｈｅＩｎｃｒｅａｓｅｄｕｒｉｎｇＤｅｃｒｅａｓｅｄｕｒｉｎｇＡｍｏｕｎｔａｔｔｈｅｅｎｄＩｔｅｍｂｅｇｉｎｎｉｎｇｏｆｔｈｅｔｈｉｓｐｅｒｉｏｄｔｈｉｓｐｅｒｉｏｄｏｆｔｈｅｐｅｒｉｏｄｐｅｒｉｏｄＳｈａｒｅｃａｐｉｔａｌ６０１，９８６，３５２．００－－６０１，９８６，３５２．００Ｃａｐｉｔａｌｒｅｓｅｒｖｅ１，８５７，５８１，４６５．１５１，２０７，２６０．９２－１，８５８，７８８，７２６．０７Ｓｕｒｐｌｕｓｒｅｓｅｒｖｅ１，１１５，１３４，９７３．７０２４８，７６８，８１４．２９６１６，６１７，０６７．７７７４７，２８６，７２０．２２Ｉｎｃｌｕｄｉｎｇ：ｓｔａｔｕｔｏｒｙｗｅｌｆａｒｅ２４０，８６０，２２２．７８－２４０，８６０，２２２．７８－ｆｕｎｄＲｅｔａｉｎｅｄｐｒｏｆｉｔ－３７５，７５６，８４４．９９４４７，６５５，７９２．５８９，８２７，３７８．９３６２，０７１，５６８．６６Ｄｉｆｆｅｒｅｎｃｅｏｆｆｏｒｅｉｇｎｃｕｒｒｅｎｃｙ－３７８，４６９．２９－１，２７０，８１３．６９－１，６４９，２８２．９８ｔｒａｎｓｌａｔｉｏｎＡｃｃｕｍｕｌａｔｅｄｌｏｓｓｅｓｏｆ－４，６３９，３４４．０４－５２，６３２，４３５．９０－－５７，２７１，７７９．９４ｓｕｂｓｉｄｉａｒｉｅｓｎｏｔｍａｄｅｕｐＴｏｔａｌｓｈａｒｅｈｏｌｄｅｒｓ’ ３，１９３，９２８，１３２．５３６４４，９９９，４３１．８９６２７，７１５，２６０．３９３，２１１，２１２，３０４．０３ｅｑｕｉｔｙ Explanations: 1. The capital public reserve had increased in the report period. Since Mudanjiang Konka, a unit calculated according to the equity method, had increased capital reserve for reasons such as being unable to repay the accounts payable, etc, and the Company had increased the capital reserve correspondingly according to its equity proportion. 2. The retained profit had increased, because according to the resolutions of the Shareholders’ 6 General Meeting 2004, the Company had used discretionary surplus reserve to make up all the losses of RMB 375,756,844.99 that had not been made up, and also the Company had made a profit of RMB 71,898,947.59 in the report period. 3. The discretionary surplus reserve had decreased because the Company had used discretionary surplus reserve to make up all the losses of RMB 375,756,844.99 that had not been made good as according to the resolutions of the Shareholders’General Meeting 2004. 4. The foreign currency translation difference had arisen out of different exchange rates at different periods. 5. The Company had engaged K.C.OH & Company Certified Public Accountants as the overseas Certified Public Accountants. Differences in net assets and net profit in the financial report compiled in accordance with international accounting standards are as follows: Unit: RMB Net assets Net profit According to International Accounting Standards 3,211,972,515.92 19,552,507.13 1. Prophase adjustment to capital reserve 6,978,000.00 0.00 2. Prophase adjustment to surplus reserve -17,909,000.00 0.00 3. Government subsidy transferred from deferred income into capital reserve 13,490,000.00 0.00 4. Part of government subsidy listed as income -2,997,500.00 -2,997,500.00 5. Liabilities of affiliated companies with no need to repay listed as income 0.00 -1,207,260.92 6. Assets depreciation of associated companies -321,711.89 -321,711.89 7. Adjustment to the losses of subsidiaries not made up 0.00 57,271,779.94 8. Cancellation of moving expense during the period of the occurrence 0.00 -2,317,654.09 9. Welfare and reward fund withdrawn for employees 0.00 1,918,787.42 According to the Business Accounting System 3,211,212,304.03 71,898,947.59 Section IV. Changes in Share Capital and Particulars about Shareholders I. Change in shares Change in shares ended Dec. 31, 2005 Unit: share Ｉｎｃｒｅａｓｅ／ｄｅｃｒｅａｓｅｄｕｒｉｎｇｔｈｉｓｃｈａｎｇｅ（＋／－）ＡｍｏｕｎｔａｔｔｈｅＳｈａｒｅｓＡｍｏｕｎｔａｔｔｈｅＮｅｗｌｙＩｔｅｍｂｅｇｉｎｎｉｎｇｏｆＲｉｇｈｔＢｏｎｕｓｔｒａｎｓｆｅｒｒｅｄｅｎｄｏｆｔｈｅｉｓｓｕｅｄＯｔｈｅｒｓＳｕｂｔｏｔａｌｔｈｅｐｅｒｉｏｄｓｈａｒｅｓｓｈａｒｅｓｆｒｏｍｃａｐｉｔａｌｐｅｒｉｏｄｓｈａｒｅｓｒｅｓｅｒｖｅＩ．Ｎｏｎ－ｃｉｒｃｕｌａｔｉｎｇｓｈａｒｅｓ１．Ｐｒｏｍｏｔｅｒｓ’ １７４，９４９，７４６－－－－－－１７４，９４９，７４６ｓｈａｒｅｓＩｎｃｌｕｄｉｎｇ：－－－－－－－－Ｓｔａｔｅｓｈａｒｅｓ１７４，９４９，７４６－－－－－８４，０００，０００－８４，０００，０００９０，９４９，７４６Ｄｏｍｅｓｔｉｃｌｅｇａｌ－－－－５５，０００，０００５５，０００，０００５５，０００，０００ｐｅｒｓｏｎｓｈａｒｅｓＦｏｒｅｉｇｎｌｅｇａｌ－－－－－２９，０００，０００２９，０００，０００２９，０００，０００ｐｅｒｓｏｎｓｈａｒｅｓＯｔｈｅｒｓ－－－－－－－－２．Ｒａｉｓｅｄｌｅｇａｌ－－－－－－－－ｐｅｒｓｏｎｓｈａｒｅｓ３．Ｉｎｔｅｒｎａｌ１６，７０８－－－－－１３，５５４－３，１５４ 7 ｅｍｐｌｏｙｅｅｓｈａｒｅｓ（ｓｅｎｉｏｒｅｘｅｃｕｔｉｖｅｓ）４．Ｐｒｅｆｅｒｅｎｃｅ－－－－－－－－ｓｈａｒｅｓｏｒｏｔｈｅｒｓＴｏｔａｌｎｏｎ－ｃｉｒｃｕｌａｔｉｎｇ１７４，９６６，４５４－－－－－１３，５５４－１７４，９５２，９００ｓｈａｒｅｓＩＩ．Ｃｉｒｃｕｌａｔｉｎｇｓｈａｒｅｓ１．ＲＭＢｏｒｄｉｎａｒｙ２２４，１８１，９９６－－－－１３，５５４－２２４，１９５，５５０ｓｈａｒｅｓ２．Ｄｏｍｅｓｔｉｃａｌｌｙｌｉｓｔｅｄｆｏｒｅｉｇｎ２０２，８３７，９０２－－－－－－２０２，８３７，９０２ｓｈａｒｅｓ３．Ｏｖｅｒｓｅａｓｌｉｓｔｅｄ－－－－－－－－ｆｏｒｅｉｇｎｓｈａｒｅｓ４．Ｏｔｈｅｒｓ－－－－－－－－Ｔｏｔａｌｃｉｒｃｕｌａｔｉｎｇ４２７，０１９，８９８－－－－１３，５５４－４２７，０３３，４５２ｓｈａｒｅｓＩＩＩ．Ｔｏｔａｌｓｈａｒｅｓ６０１，９８６，３５２－－－－－－６０１，９８６，３５２ Explanations: 1. The legal shares had changed due to the equity ownership transfer: ① On Apr. 30, 2005, Overseas Chinese Town Group Corporation transferred the Company’ s 29 million state-owned legal person shares (taking up 4.82 percent of the Company’ s total share capital) held by it to Thomson Investment Group Limited. After the recognition by the Shenzhen Branch of China Securities Depository and Clearing Corporation Limited, relevant ownership transfer procedures had been finished and those shares had been recognized as targeted legal person foreign legal person shares. ② On Jul. 27, 2005, Overseas Chinese Town Group Corporation transferred the Company’ s state-owned legal person shares totaling 55 million (taking up 9.14 percent of the Company’ s total share capital) to Anhui Tianda Enterprise (Group) Co., Ltd. After the recognition by the Shenzhen Branch of China Securities Depository and Clearing Corporation Limited, relevant ownership transfer procedures had been finished and those shares had been recognized as promoter domestic legal person shares. 2. Internal employee shares had changed, because after leaving their positions half a year in the report period, some of the senior executives of the Company applied for circulating of their shares. II. Issuance and listing of shares As approved by CSRC, 139,036,499 unlisted foreign shares of the Company were transferred into listed foreign share for circulation in 2001. The said shares were listed for trade in Shenzhen Stock Exchange dated June 21, 2001. There exists no unlisted inner employee’ s share except for 3,154 shares held by senior executives. III. Particulars about shareholders 1. Ended Dec. 31, 2005, the Company had totally 136,020 shareholders, including 121,568 ones of A-share and 14,452 ones of B-share. 2. Particulars about shares held by the top ten shareholders 8 Nature of Number of Increase / Type of shares shareholders Full name of Shares held at the Proportion shares decrease in the (circulating or (state-owned or Shareholders period-end (%) pledged/ report year non-circulating) foreign frozen shareholder) OVERSEAS CHINESE TOWN Non-circulating A State-owned -84,000,000 90,949,746 15.10% 0.00 GROUP share shareholder CORPORATION ANHUI TIANDA Non-circulating A Non-state-owned ENTERPRISE 55,000,000 55,000,000 9.14% 0.00 share shareholder (GROUP) CO., LTD THOMSON Non-circulating A 29,000,000 29,000,000 4.82% 0.00 Foreign shareholder INVESTMENTS share GROUP LIMITED -3,484,226 15,515,774 2.58% Circulating B share Unknown Foreign shareholder HONG KONG CHINA TRAVEL SERVICE 0 39,541,212 6.57% Circulating B share Unknown Foreign shareholder (GROUP) CO., LTD. BUILDUNITED 20,079,900 20,079,900 3.32% Circulating B share Unknown Foreign shareholder LIMITEDERCE ABLEWELL INVESTMENTS 14,100,000 14,100,000 2.34% Circulating B share Unknown Foreign shareholder LIMITED NOMURA SECURITIES 6,750,000 6,750,000 1.12% Circulating B share Unknown Foreign shareholder CO.,LTD MERRILL LYNCH PIERCE FENNER & 444,900 5,975,926 0.99% Circulating B share Unknown Foreign shareholder SMITH INC NO. 1 SHANGHAI SECURITIES CO., 3,904,880 3,904,880 0.65% Circulating B share Unknown Foreign shareholder LTD CHUANGLI DEVELOPMENT 2,568,800 2,568,800 0.43% Circulating B share Unknown Foreign shareholder HONG KONG CO., LTD 3. Particulars about shares held by the top ten shareholders of circulating shares Number of Nature of Increase / Type of shares Shares held at the Proportion shares shareholders Full name of Shareholders decrease in the (circulating or period-end (%) pledged/ (state-owned or report year non-circulating) frozen foreign shareholder) HONG KONG CHINA TRAVEL SERVICE 0 39,541,212 6.57% Circulating B share Unknown Foreign shareholder (GROUP) CO., LTD. BUILDUNITED 20,079,900 20,079,900 3.32% Circulating B share Unknown Foreign shareholder LIMITEDERCE THOMSON INVESTMENTS -3,484,226 15,515,774 2.58% Circulating B share Unknown Foreign shareholder GROUP LIMITED ABLEWELL INVESTMENTS 14,100,000 14,100,000 2.34% Circulating B share Unknown Foreign shareholder LIMITED NOMURA SECURITIES 6,750,000 6,750,000 1.12% Circulating B share Unknown Foreign shareholder CO.,LTD MERRILL LYNCH PIERCE 444,900 5,975,926 0.99% Circulating B share Unknown Foreign shareholder FENNER & SMITH INC 9 NO. 1 SHANGHAI 3,904,880 3,904,880 0.65% Circulating B share Unknown Foreign shareholder SECURITIES CO., LTD CHUANGLI DEVELOPMENT HONG 2,568,800 2,568,800 0.43% Circulating B share Unknown Foreign shareholder KONG CO., LTD CHINA HI-TECH INVESTMENT GROUP 0 2,550,914 0.42% Circulating A share Unknown Others CORPORATION TOYO SECURITLES ASIA -115,760 1,652,756 0.27% Circulating B share Unknown Foreign shareholder LIMITED-A/C CLIENT. 4. Explanation on associated relationship or consistent action among the top ten shareholders and the top ten shareholder of circulation share: (1) Among the top ten shareholders, the shares held by Overseas Chinese Town Group Corporation, the principal shareholder, are non-circulating shares. In the report period, the Company’ s shares held by it had changed, and the reasons are as follows: ① On Apr. 30, 2005, Overseas Chinese Town Group Corporation transferred the Company’ s 29 million state-owned legal person shares (taking up 4.82 percent of the Company’ s total share capital) held by it to Thomson Investment Group Limited. After the recognition by the Shenzhen Branch of China Securities Depository and Clearing Corporation Limited, relevant ownership transfer procedures had been finished. After this ownership transfer, Overseas Chinese Town Group Corporation still held the Company’ s state-owned legal person shares totaling 145,949,746, taking up 24.10 percent of the Company’ s total share capital. Therefore, Overseas Chinese Town Group Corporation remained as the principal shareholder of the Company. ② On Jul. 27, 2005, Overseas Chinese Town Group Corporation transferred the Company’ s state-owned legal person shares totaling 55 million (taking up 9.14 percent of the Company’ s total share capital) to Anhui Tianda Enterprise (Group) Co., Ltd. After the recognition by the Shenzhen Branch of China Securities Depository and Clearing Corporation Limited, relevant ownership transfer procedures had been finished. After this ownership transfer, Overseas Chinese Town Group Corporation still held the Company’ s state-owned legal person shares totaling 90,949,746, taking up 15.10 percent of the Company’ s total share capital. Therefore, Overseas Chinese Town Group Corporation remained as the principal shareholder of the Company. (2) Shares held by Anhui Tianda Enterprise (Group) Co., Ltd had changed due to the Company’ s shares transferred to it by Overseas Chinese Town Group Corporation. (3) Thomson Investments Group Limited held both the Company’ s non-circulating shares and circulating B shares. The non-circulating shares were transferred to it by Overseas Chinese Town Group Corporation, while the circulating B shares were bought at the second-grade market. (4) Except for Overseas Chinese Town Group Corporation, Thomson Investments Group Limited and Anhui Tianda Enterprise (Group) Co., Ltd, all the other shareholders were social public shareholders, and the shares held by them were circulating shares. The shares held by them had changed due to trade at the second-grade market. 10 (5) There was no related relationship between the principal shareholder Overseas Chinese Town Group Corporation and the other shareholders, and they had not joined in any concerted action. It is unknown whether the other shareholders had joined in any concerted action or had any related relationships among them or not. 5. Particulars about legal person shareholders holding over 5% of total shares of the Company Type of shares Type of Legal Date of Registered capital Name Main operations held enterprise representative foundation (RMB’0000) Overseas Chinese State-owned Industry, tourism, real Domestic legal Town Group wholly-funded Ren Kelei May 1986 RMB 200,000 estate, finance and person’s shares Corporation company commerce, etc Plastic products, plastic machinery, Anhui Tianda air-conditioner parts Domestic legal Enterprise (Group) Private enterprise Ye Shiqu August 2000 RMB 233,725,500 and components and person’s shares Co., Ltd fiber-optic communication equipment Foreign legal Thomson Investments person shares and Foreign enterprise Didier Trutt November 2004 USD 5.00 Investment Group Limited circulating B shares Tourism, industrial investment, infrastructure Hong Kong China State-owned construction, real Circulating B Travel Service (Group) foreign Che Shujian October 1985 HKD 700,000 estate, hotel shares Co., Ltd. corporation management, passenger-cargo transportation and import & export trade IV. Holding shareholder and actual controller of the Company 1. Holding shareholder and actual controller In the report period, the holding shareholder and actual controller of the Company remained unchanged, both being Overseas Chinese Town Group Corporation. Shares of the Company held by it had not been pledged, entrusted or frozen. Overseas Chinese Town Group Corporation was a large-scale state-owned enterprise, which had been founded in 1985 by the approval of the State Council and belonged to one of the central enterprises of State-owned Assets Supervision and Administration Commission of the State Council. Its legal representative was Mr. Ren Kelei. Overseas Chinese Town Group Corporation had a registered capital of RMB 0.2 billion, and owned 14 secondary enterprises, among which the Company and Shenzhen Overseas Chinese Town Holding Company (hereinafter referred to as OCT Holding, stock code: 000069) were two companies listing in domestic. 2. The property rights and control relationship between the actual controller and the Company State-owned Assets Supervision and Administration Commission of the State 11 100% Overseas Chinese Town Group Corporation 15.10% (A share) Konka Group Co., Ltd. 3. Particulars about legal person shareholders holding over 10 percent (including 10 percent) Except for Overseas Chinese Town Group Corporation, the Company had no other legal person shareholders holding over 10 percent shares (including 10 percent). Section V. Particulars about Directors, Supervisors, Senior Executives and Employees I. Particulars about supervisors, directors and senior executive 1. Basic information ＮａｍｅＴｉｔｌｅＳｅｘＡｇｅＯｆｆｉｃｅｔｅｒｍＮｏｔｅＣｈａｉｒｍａｎｏｆｔｈｅＢｏａｒｄＪｕｎ．２００４－Ｊｕｎ．２００７ＨｏｕＳｏｎｇｒｏｎｇＭａｌｅ３７ＰｒｅｓｉｄｅｎｔＡｐｒ．２００４－Ａｐｒ．２００７ＪｉａｎＤｉ’ａｎＤｉｒｅｃｔｏｒＭａｌｅ５６Ｊｕｎ．２００４－Ｊｕｎ．２００７ＹｅＳｈｉｑｕＤｉｒｅｃｔｏｒＭａｌｅ５５Ｓｅｐ．２００５－Ｊｕｎ．２００７ＨｕｏＪｕｎＤｉｒｅｃｔｏｒＦｅｍａｌｅ３９Ｓｅｐ．２００５－Ｊｕｎ．２００７ＮａＱｉｎｇｌｉｎＤｉｒｅｃｔｏｒＭａｌｅ３８Ｓｅｐ．２００５－Ｊｕｎ．２００７ＷｅｉＱｉｎｇＤｉｒｅｃｔｏｒＭａｌｅ５３Ｊｕｎ．２００４－Ｊｕｎ．２００７ＸｉａｏＺｈｕｏｊｉＩｎｄｅｐｅｎｄｅｎｔｄｉｒｅｃｔｏｒＭａｌｅ７２Ｊｕｎ．２００４－Ｊｕｎ．２００７ＹｅＷｕＩｎｄｅｐｅｎｄｅｎｔｄｉｒｅｃｔｏｒＭａｌｅ６７Ｊｕｎ．２００４－Ｊｕｎ．２００７ＭａＬｉｇｕａｎｇＩｎｄｅｐｅｎｄｅｎｔｄｉｒｅｃｔｏｒＦｅｍａｌｅ６５Ｊｕｎ．２００４－Ｊｕｎ．２００７ＣｈａｉｒｍａｎｏｆｔｈｅＤｏｎｇＹａｐｉｎｇＳｕｐｅｒｖｉｓｏｒｙＭａｌｅ５２Ｊｕｎ．２００４－Ｊｕｎ．２００７ＣｏｍｍｉｔｔｅｅＷａｎｇＸｉａｏｗｅｎＳｕｐｅｒｖｉｓｏｒＦｅｍａｌｅ３６Ｊｕｎ．２００４－Ｊｕｎ．２００７ＳｈａＧａｎｇＳｕｐｅｒｖｉｓｏｒＭａｌｅ４１Ｊｕｎ．２００４－Ｊｕｎ．２００７ＥｘｅｃｕｔｉｖｅＶｉｃｅＺｅｎｇＨｕｉＭａｌｅ４５Ｎｏｖ．２００４－Ａｐｒ．２００７ＰｒｅｓｉｄｅｎｔＹａｎｇＧｕｏｂｉｎＣ．Ｆ．Ｏ．Ｍａｌｅ３６Ａｐｒ．２００４－Ａｐｒ．２００７ＷａｎｇＹｏｕｌａｉＶｉｃｅＰｒｅｓｉｄｅｎｔＭａｌｅ４４Ａｐｒ．２００４－Ａｐｒ．２００７ＨｕａｎｇＶｉｃｅＰｒｅｓｉｄｅｎｔＭａｌｅ４４Ａｐｒ．２００４－Ａｐｒ．２００７ＺｈｏｎｇｔｉａｎＣｈｅｎＹｕｅｈｕａＶｉｃｅＰｒｅｓｉｄｅｎｔＭａｌｅ４２Ｎｏｖ．２００４－Ａｐｒ．２００７ＨｅＪｉａｎｊｕｎＶｉｃｅＰｒｅｓｉｄｅｎｔＭａｌｅ３６Ｎｏｖ．２００５－Ａｐｒ．２００７ＳｅｃｒｅｔａｒｙｏｆｔｈｅＸｉａｏＱｉｎｇＭａｌｅ３６Ｎｏｖ．２００５－Ｊｕｎ．２００７Ｂｏａｒｄ Particulars about directors and supervisors taking positions in shareholding units: Name of Shareholding Drawing the remunerations Name Title in Shareholding Company Office term Company and subsidies from the 12 Company or not (Yes / No) Overseas Chinese Town Jian Di’an Vice-president Dec. 2001 till now No Group Corporation Anhui Tianda Enterprise Ye Shiqu Chairman of the Board 1992 till now No (Group) Co., Ltd Hong Kong China Travel General Manager of Hotel Wei Qing 2000 till now No Service (Group) Co., Ltd. Management Company Vice Chairman of Party Dong Overseas Chinese Town Committee and concurrently Jul. 2000 till now No Yaping Group Corporation Vice-president Wang Overseas Chinese Town Assistant to the President, CFO Oct. 2000 till now No Xiaowen Group Corporation BUILD UNITED Na Qinglin Management cooperation partner May 2000 No LIMITED 2. Main work experiences of the current directors, supervisors and senior executives and other full-time or part-time positions taken by them in units other than the shareholding units (1) Directors Mr. Hou Songrong, Vice Chairman of the Board, President and Secretary of the Party Committee, was born in 1968; male; Han nationality; Master Degree, Economist. He successfully took the posts of Factory Director of Shenzhen Zhongqiao Industrial Co., Ltd., Business Manager of Investment and Development Dept. in Overseas Chinese Town Group Corporation, Deputy General Manager and General Manager of Shenzhen Overseas Chinese Town Xingqiao Industrial Company, and Vice-president, standing Vice-president and Vice Secretary of the Party Committee in Konka Group Co., Ltd. Mr. Jian Di’an, director, was born in 1949; male; the Uigur nationality; College degree, Senior Accountant. He successfully took the posts of Assistant General Manager of Shenzhen Overseas Chinese Town Economic Development General Company and General Manager of Windows of the World Co., Ltd. Now he acts as Vice-president of Overseas Chinese Town Group Corporation, Chairman of the Board and concurrently General Manager of Shenzhen Overseas Chinese Town Sanzhou Investment Co., Ltd. and Director of Overseas Chinese Town Real Estate Company. Ye Shiqu: director; male; Han nationality; born in January 1950; college education background; senior economist; founder of Anhui Tianda Group, Chairman of the Board of Anhui Tianda Group Company from 1992 till now; elected as nation model worker of agriculture and the national excellent township entrepreneur during the 3rd and 4th round before. Huo Jun: director; female; Han nationality; born in 1966; MBA of KELLOGG Management School of Northwest University in America; used to work at CLSA of France, BNP Paribas, Merrill Lynch, and international investment banks like Banque Nationale de Paris, etc, and engage in investment banking operation; now the Chief of Research at Da Cheng Fund Management Co., Ltd. Na Qinglin: director; male; Man nationality; born in 1967; MBA of Owen Management School of Vanderbilt University and University of Utah; work experiences: 1995-1997, engaged in investment banking work at Salomon Brothers 13 Inc.; 1997-2000, engaged in investment banking work at Salomon Smith Barney as Vice President of investment bank in Asia-Pacific and Australian regions; 2000 till now, a co-founder and management cooperation partner at Mingda Risk Investment Company. Mr. Wei Qing, Director, was born in 1952; the Han nationality; Master Degree. He successfully took the posts of Division Chief of Enterprise Management Division, Division Chief of Trade Coordination Division in Shenzhen Municipal People’ s Government Economic Development Bureau, Secretary-General of Shenzhen Enterprise Management Association and Chinese-Foreign Enterpriser Association, Deputy General Manager and General Manager of Enterprise Management Dept. in Hong Kong China Travel Service (Group) Co., Ltd. and General Manager of Investment and Planning Management Dept. in Hong Kong China Travel Service (Group) Co., Ltd.. Now he acts as General Manager of Hotel Management Co., Ltd. in Hong Kong China Travel Service (Group) Co., Ltd. (2) Independent directors Mr. Xiao Zhuoji, was born in 1933, who graduated from economics department of Renmin University of China with graduate student in 1959. He now acts as Member of the National Committee of CPPCC, Professor and Doctorial Tutor of Economic College of Beijing University, and enjoys the government allowance. He has published 12 main works such as “XIAO ZHU JI Selections”, “XIAO ZHU JI Anthology”, “Re-epistemic Socialism”, “Series of Chinese Macro Economy”and “Chinese Economic Hot Topic Perspective”, and mainly edited over 20 works such as “Book of Securities Practice”, “Guide to Practice of Securities Laws”, “Analysis and Forecast of Financing Market”and “Analysis and Forecast of Economic Situation”, and issued several hundred studies, and awarded several Economics Prize. Mr. Yewu, was born in 1938, who graduated from wireless department of Tsinghua University, Visiting Scholar of George Washington University. He now acts as Professor and Doctorial Tutor of Electron and Information College of South China University of Technology, and enjoys the government allowance, Standing Director of Guandong Province Electron Institute and Director of Guangdong Province Communication Institute. He has issued studies approaching one hundred, the topic of scientific research presided over and attended by him awarded several the Scientific Research Prize from China Consumer Electron Institute and Guangdong High Education Bureau. Ms. Ma Liguang, was born in 1940, who graduated from North Jiaotong University with the major of economic management. She successfully took the posts of Standing Vice Dean of China Travel College of and Deputy Director of Accounting Department of Management College of Jinan University, Professor of Accounting, Master’s Tutor. She obtained qualification of CPA (non-certified). She now acts as Vice Chairman of Guangdong Province Accounting Association. She has issued awardable financial and accounting studies over ten and several works. (3) Supervisors Mr. Dong Yaping, Chairman of the Supervisory Committee, was born in 1953; the Han nationality; Education of College, Senior Political Engineer. He successfully took 14 the posts of Division Chief of Foreign Affairs Supervision Department and Financial Supervision Department in Ministry of Supervision, Division Chief of Personnel Supervision Department in Office of Overseas Chinese Affairs of the State Council and Standing Director of Hua An Property Insurance Co., Ltd. He now acts as Vice-president of Overseas Chinese Town Group Corporation and Chairman of the Supervisory Committee of Overseas Chinese Town Holding Co., Ltd. Ms. Wang Xiaowen, Supervisor, was born in 1969; the Han nationality; Bachelor Degree. She successfully took the posts of Director and CFO of Shenzhen Overseas Chinese Town Industrial Development Co., Ltd. and Executive General-supervisor of Office of President in Overseas Chinese Town Group Corporation. Now she acts as CFO in Overseas Chinese Town Group Corporation and Chairman of the Board in Shenzhen Overseas Chinese Town Investment Co., Ltd. Mr. Sha Gang, Supervisor, was born in 1964; the Hui nationality; Bachelor Degree, Senior Engineer. He successfully took the posts of Deputy Director and Director of Computer Room of Channel 841 of Sinkiang Administration of Radio Film and Television, Deputy Division Chief and Division Chief of Technology Division of Sinkiang Administration of Radio Film and Television and Deputy General Manager of Shenzhen Overseas Chinese Town Xingqiao Industrial Company. Now he acts as Deputy General Manager of the Digital Network Department of the Company. (4) Other senior executives Mr. Zeng Hui, Standing Vice-president, was born in Nov. 1960; CPC member; the Han nationality; Master of Belgium University of Mons-Hainaut, Engineer. He successfully took the posts of Principal of Secretariat of Office of Dean in Changsha Railway University, Director of Overseas Chinese Town Xinqiao Industrial Development Co., Ltd., Deputy General-supervisor of HR Dept. of Overseas Chinese Town Group Corporation, General-supervisor of HR Dept. of Overseas Chinese Town Group Corporation, Chairman of the Board of Overseas Chinese Town Xinqiao Industrial Development Co., Ltd. Mr. Yang Guobin, Chief Financial Officer, was born in 1969; the Han nationality; Member of CPC; Bachelor Degree, CPA. He successfully took the posts of Deputy General Manager of Financial Dept. in Overseas Chinese Town Group Corporation. Mr. Wang Youlai, Vice-president, was born in 1961; the Han nationality; Member of CPC, Graduate Student, Engineer. He successfully took the posts of Business Manager of Quality Dept. of Konka Group Co., Ltd., Assistant General Manager of Konka Group Co., Ltd. Mr. Huang Zhongtian, Vice-president, was born in 1961; the Han nationality; Member of CPC, Education of College. He successfully took the posts of Head of production line of Konka Group Co., Ltd., Business director and Manager of Marketing Company of Konka Group Co., Ltd. and Assistant General Manager of Konka Group Co., Ltd. Mr. Chen Yuehua, Vice-president, was born in Sep. 1963; the Han nationality; Bachelor of Southeast University; Senior Engineer. He successfully took the posts of Designer and Business Manager of Technology Development Center of Konka Group Co., Ltd., General Manager of Development Center, General Manager of Office of 15 President, General Manager of Dongguan Konka Electronics Co., Ltd. and Deputy General Manager of Multimedia Enterprise Dept. and General Manager of Development Center of Konka Group Co., Ltd. Mr. He Jianjun, Vice President, was born in 1969; the Han nationality; Member of CPC; Bachelor degree; Bachelor of Science; Economist. He successfully took position as Deputy Director of Secretariat of the Board, Deputy General-supervisor and General-supervisor of Strategic Development Dept and Secretary of the Board. Xiao Qing: Secretary of the Board; male; Han nationality; born in 1969; Bachelor degree; Bachelor of Economics; economist; used to be General Manager at the Central Office of City Credit Cooperation in Ya’an district of Sichuan, and Senior Vice President of Top Group; joined Konka Group in 2004, successively as Business Assistant to the President at the President Office, Deputy Chief of the Strategic Development Department and Chief of Investment & Development Center. II. Remunerations during 2005 (1) The Company had not paid directors (excluding independent directors) or supervisors any remunerations or subsidies. The total remunerations paid to the top three directors that enjoyed the highest amounts totaled RMB 150,000, i.e. the total remunerations for the three independent directors. Subsidies for the independent directors of the Company were RMB 50,000 a year (not including tax). Other treatment for independent directors: trip expenses that occurred when they went to attend the Board meetings or Shareholders’General Meetings, and the expenses that occurred while they were performing their duties as stipulated in the Articles of Association, all these could be reported for deletion. (2) The Board of Directors determined the remuneration of independent directors and senior executives, and referred to the following aspects: ① scope of jobs and responsibility shouldered; ② actual profit status of the Company; ③ remuneration level in the same industry and same area. (3) Change of shares held by directors, supervisors and senior executives and their remunerations 16 ＮｕｍｂｅｒｏｆｓｈａｒｅｓＴｏｔａｌａｍｏｕｎｔｏｆｒｅｍｕｎｅｒａｔｉｏｎｓｄｒａｗｎＮｕｍｂｅｒｏｆｓｈａｒｅｓｈｅｌｄａｔｔｈｅＲｅａｓｏｎｓｆｏｒＮａｍｅｈｅｌｄａｔｔｈｅｅｎｄｏｆｆｒｏｍｔｈｅＣｏｍｐａｎｙｉｎｔｈｅｒｅｐｏｒｔｐｅｒｉｏｄｂｅｇｉｎｎｉｎｇｏｆｔｈｅｙｅａｒｔｈｅｃｈａｎｇｅｔｈｅｙｅａｒ（ＲＭＢ’００００）ＨｏｕＳｏｎｇｒｏｎｇ００－３３．６ＪｉａｎＤｉ’ａｎ００－０ＹｅＳｈｉｑｕ００－０ＨｕｏＪｕｎ００－０ＮａＱｉｎｇｌｉｎ００－０ＷｅｉＱｉｎｇ００－０ＸｉａｏＺｈｕｏｊｉ００－５．００ＹｅＷｕ００－５．００ＭａＬｉｇｕａｎｇ００－５．００ＤｏｎｇＹａｐｉｎｇ００－０ＷａｎｇＸｉａｏｗｅｎ００－０ＳｈａＧａｎｇ００－１６．９２ＺｅｎｇＨｕｉ００－２１．６０ＹａｎｇＧｕｏｂｉｎ００－２０．１６ＷａｎｇＹｏｕｌａｉ２，６４０２，６４０２０．１６Ｈｕａｎｇ５１４５１４－２０．１６ＺｈｏｎｇｔｉａｎＣｈｅｎＹｕｅｈｕａ００－２０．１６ＨｅＪｉａｎｊｕｎ００－２０．１６ＸｉａｏＱｉｎｇ００－２５．６８Ｔｏｔａｌ３１５４３１５４－２１３．６ Note: Since Worker Supervisor Mr. Sha Gang had concurrently taken the position of Assistant to the Chief of HR Center, he had received reward for the year 2005; being Chief of the Investment & Development Center during Jan. 1, 2005 and Nov. 11, 2005, Secretary of the Board Mr. Xiao Qing had received the reward for that period, but no reward had been paid to him for the period after he became Secretary of the Board. (4) Particulars about directors and supervisors not drawing remunerations from the Company Name of directors and supervisors received no Whether they drew the payment or allowance from payment from the Company the shareholding company or no (Yes / No) Jian Di’an, Ye Shiqu, Wei Qing, Na Qinglin, They drew payment or allowance from Dong Yaping, Wang Xiaowen shareholding company, where they took the position. III. The Company had elected and changed senior executives including directors, vice presidents and secretary of the Board, etc, with details as follows: As deliberated at the 10th meeting of the 5th Board of Directors of Konka Group Co., Ltd, it was approved that Mr. Ye Shiqu, Ms. Huo Jun and Mr. Na Qinglin would replace Mr. Ren Kelei, Mr. Wang Ruquan and Mr. Ni Zheng as directors of the Company. As deliberated at the 12th meeting of the 5th Board of Directors of Konka Group Co., Ltd, it had been decided that Mr. He Jianjun would be engaged as Vice President of Konka Group Co., Ltd and in the meantime he would leave the position of Secretary of the Board, while Mr. Xiao Qing would succeed him as Secretary of the Board. IV. Particulars about employees at the end of the report period 17 Anhui Shenzhen Branch Mudanjiang Shannxi Anhui Chongqing Dongguan Konka Boluo Changshu Chongqing Company Electronic Total headquarters companies Konka Konka Konka Konka Konka mould Konka Konka Qingjia. Appliance Number 2886 5591 756 1388 3235 434 3185 1190 418 212 436 393 20124 Structure of employees in Shenzhen headquarter Bachelor Production Financial Administrative Classification Salesperson Technician degree Doctor Master Bachelor personnel personnel personnel or above Number 956 141 595 163 1031 1156 13 216 927 Proportion 31.27% 4.61% 19.46% 5.33% 33.73% 37.81% 0.43% 7.06% 30.32% Section VI. Administrative Structure I. Corporate management The Company continually improved the administration Structure of corporation and standardize the Company’ s operation strictly in accordance with Company Law, Securities Law, the Code of Corporate Governance for Listed Companies in China and the relevant laws and regulations promulgated by CSRC and Shenzhen Stock Exchange, as well as the spirit of establishing modern enterprise system and safeguarding investors’rights and interests since its foundation. The Shareholders’ General Meeting of the Company had formulated the Articles of Association, Rules of Procedure of the Shareholders’General Meeting, Rules of Procedure of the Board of Directors and Rules of Procedure of the Supervisory Committee, and the management team of the Company had also formulated regulations and systems such as the President and Work Rules for President, and Internal Control System, etc. In accordance with the requirements in the normative documents on corporate management issued by the CSRC, the Company’ s corporate management structure is as follows: 1. Shareholders and Shareholders’General Meeting All the important events of the Company that need to be decided by the Shareholders’ General Meeting will be submitted to the Shareholders’General Meeting for deliberation, and information disclosure on these events must be faithful, accurate and complete and in time. The related transactions of the Company all follow the principles of being fair and square. Signing of agreements all abides by the principles of being equal, self-willing, equivalent and rewarding, and the content of the agreements will be clear and concrete. In the meantime, the Company will make full disclosure on the events that should be disclosed and the pricing principles according to relevant laws and regulations, so as to ensure all shareholders’rights to know. 2. Relationship between the holding shareholder and listed company The behavior of the Company’ s holding shareholder was normative. The holding shareholder exercised the right of investor according to the regulations of the Articles of Association of the Company, and did not intervene in the Company’ s decision-making and operating activities directly and indirectly, and did not harm the benefit of the Company and other shareholders. The Company was independent from the holding shareholder in personnel, assets, finance, organization and business; and the operating activities of the Company’ s Board of Directors and Supervisory Committee and internal organization were independent. 18 3. Directors and the Board of Directors The Board of Directors was responsible for the shareholders’general meeting. The Board exert its rights according to the Articles of Association of the Company and authorized by the shareholders’general meeting; the number, election and composing of the Board were in compliance with the requirement regulated in the Articles of Association of the Company; every director of the Company knew the rights, obligation and responsibility, and could study and know the relevant laws and regulations, and carefully and responsibly attended the Board meeting and shareholders’general meeting; the Board of Directors set down the Rule of Procedure of the Board of Directors according to Administration Rules of Listed Companies and performed seriously in line with it; the holding and discussion of the Board meeting had the completely record and files of resolutions and proposals for keeping; the resolutions of the Board meeting implemented the information disclosure timely. 4. Supervisors and the Supervisory Committee The number of supervisors in the Supervisory Committee and the member composition has been in accordance with the Company Law. Right now, the Supervisory Committee has 3 supervisors, of which 1 was elected by workers’ representatives. The Supervisory Committee of the Company has established the Rules of Procedure of the Supervisory Committee, and, according to the spirit of being responsible for all shareholders of the Company, it has conducted effective supervision over the finance of the Company as well as the Board of Directors and senior executives of the Company. 5. The achievements evaluation and encouragement mechanism The management team was responsibility for the Board of Directors. The engagement, and dismissal of the management team were open and transparent, which was compliance with the relevant laws and regulations and regulations of the Articles of Association; the remuneration of the management team was perform in public according to the regulations. The Company is actively starting to establish scientific, fair and transparent achievements evaluation and encouragement mechanism for directors, supervisors and senior executives based on original achievements evaluation and encouragement mechanism, which cause the Company’ s management system healthiness and efficiency. 6. Relations with the relevant beneficiaries The Company could give enough respect to the legal rights and interests of the banks and other creditors, employees, consumers, suppliers, and the communities, etc. In future, the Company will pay more attention to the welfare, environment protection, public welfare cause, etc of the communities and its social responsibilities while seek for sustainable development and maximization of shareholders’interests. 7. Information disclosure and transparency The Company has been paying enough attention to the outward information disclosure. Secretary of the Board is the person special for the information disclosure and handling visits of shareholders. The Company can actively support the work of the Secretary of the Board strictly according to the laws, regulations and Articles of 19 Association. As to the events needed to be disclosed as according to relevant laws, regulations and Articles of Association, the Company has made full disclosure according to the principle of being faithful, accurate, complete and punctual, so as to ensure that all shareholders have equal opportunity to get the information. II. Performance of the Independent Directors The Company established the System of Independent Director in accordance with the Guidelines Opinion on Establishing Independent Director in Listed Companies. The number of the Company’ s independent directors took the 1/3 of total amount of the Board of Directors. Independent directors exercised their rights according to the relevant regulations, and submitted proposal and issued Independent Opinion on the corresponding matters, which ensured scientific and fair decision-making. Independent directors brought the initiative of them into full play in respect of maintenance of the whole benefit and the legal rights of the middle and small shareholders. Name of Times of attending Entrusted Presence by Absence Independent the Board meeting presence Notes oneself (Times) (Times) Directors in this year (Times) Xiao Zhuoji 7 7 0 0 Ye Wu 7 7 0 0 Ma Liguang 7 7 0 0 In the report period, all independent directors of the Company could actively fulfill their duties and responsibilities endowed by laws, regulations and Articles of Association, attend all the Board meetings in person and express independent opinions on issues including engaging senior executives and related transactions, etc. In the report period, Independent directors worked in line with the actively and responsible attitude, and proposed the pertinent suggestion to the Company in respect of operating and management. In the report period, the Company’ s independent directors did not propose the objection on proposals of the Board meetings and proposals of other meetings. III. The Company’ s “Five Separations”from the holding shareholder Particulars about the Company’ s “Five Separations”from the holding shareholder in respect of business, personnel, assets, organization and finance: 1. In respect of personnel: The Company was independent in the management of labor, personnel and salaries. The holding the post of directors, supervisors and senior executives was implemented according to the relevant laws and regulations. 2. In respect of assets: The Company had independent operating and complete asset; and strictly divided ownership between the Company and the holding shareholder. There existed no situation that the holding shareholder occupied capital and assets of listed company. 3. In respect of organization: The Company established shareholders’general meeting, the Board of Directors, the Supervisory Committee and the Management Team completely according to the relevant of Company Law and Administration Rules of Listed Company. The Company has complete administration structure of corporation. The office organization and production location completely divided from the holding 20 shareholder. 4. In respect of finance: The Company has established independent financial department, and established independent accounting settlement system and financial management system. The Company has independent bank account. 5. In respect of business: The products operated by the Company have completed marketing network. There existed no competition in the same trade between the Company and the holding shareholder. The Company completely separated from the holding shareholder in personnel, assets, organization and finance and business and realized business independence, personnel independence, complete assets, organization perfect and finance independence. IV. The achievements evaluation and encouragement mechanism for Senior Executives In order to cause senior executives perform their responsibility in better and safeguard the long-term benefit of the Company and shareholders, the Company continually researched and reformed the standard and procedure of achievements evaluation and the relevant encouragement and binding mechanism. The Company established evaluation and encouragement mechanism; and bound the work of senior executives according to the Details Rule of President and President Work and every material work systems. At the same time, the Company determined the remuneration of senior executives through basic annual salary plus floating bonus based on the year-end assessment as well as accomplishment of targets so as to invigorate work enthusiasm of senior executives. Performance of senior executives was assessed by the Board of Directors, and supervised by the Supervisory Committee. Section VII. Particulars about Shareholders’General Meeting In the report period, the Company had held 2 Shareholders’General Meetings: I. Shareholders’General Meeting 2004 of Konka Group Co., Ltd was held at 9:30 a.m. on Jun. 30, 2005 at the meeting room on the 5th floor of office building of the Shenzhen Overseas Chinese Town Group Corporation, China. 10 shareholders (agencies) had attended the meeting, representing 231,251,414 shares, i.e. 38.41 percent of the Company’ s total share capital 601,986,352. The meeting had been in conformity with the Company Law and the Articles of Association of the Company. Chairman of the Board Mr. Ren Kelei presided at the meeting. Following resolutions had been examined and approved through ballots at the meeting: 1. Examined and approved the Work Report 2004 of the Board of Directors; 2. Examined and approved the Work Report 2004 of the Supervisory Committee; 3. Examined and approved the Auditors’Report 2004 of the CPAs 4. Examined and approved the Proposal on the Profit Distribution Plan for 2004; 5. Examined and approved the Proposal on Making up Losses; 6. Examined and approved the Proposal on Engaging Auditing Agencies and Auditing Expenses; 21 7. Examined and approved the Proposal on Purchasing Responsibility Insurance; 8. Examined and approved the Proposal on Revising the Articles of Association. II. Provision Shareholders’General Meeting 2005 of Konka Group Co., Ltd was held at 9:30 a.m. on Sep. 27, 2005 at the central meeting room of Shenzhen OCT Konka Group Co., Ltd, China. 9 shareholders (agencies) had attended the meeting, representing 225,245,320 shares, i.e. 37.42 percent of the Company’ s total share capital 601,986,352. The meeting had been in conformity with the Company Law and the Articles of Association of the Company. Chairman of the Board Mr. Hou Songrong presided at the meeting. Following resolutions had been examined and approved through ballots at the meeting: Mr. Ye Shiqu, Ms. Huo Jun and Mr. Na Qinglin had been elected as directors to the 5th Board of Directors of the Company to succeed Mr. Ren Kelei, Mr. Wang Ruquan and Mr. Ni Zheng. Mr. Ren Kelei, Mr. Wang Ruquan and Mr. Ni Zheng would not be the Company’ s directors any more. Public notices on the resolutions of the aforesaid Shareholders’General Meeting were published in China Securities Journal, Securities Times, Shanghai Securities News and Hong Kong Ta Kung Pao on Jul. 1, 2005 and Sep. 28, 2005, as well as on the designated internet website http://www.cninfo.com.cn. Chapter 8 Report of the Directors I. Main operation condition of the company within the report period A. Main operation conditions within the report period The company is mainly engaged in the production and sales of color TVs, digital mobile phones and accessories (such as high frequency heads, moulds, injection molds and packaging materials, etc.). Currently, it belongs to the electronics manufacturing and communication manufacturing industry. In 2005, the two main businesses of the company were both faced with severe operation environments. The domestic color TV market began to reshuffle and panel TV showed a strong market potential. The cell phone market, on one hand, fell into the vicious cycle of price war and on the other hand, was filled with smuggled goods and inferior brands. The market share of domestic brands decreased rapidly. The home appliance chain stores expanded fast and the channel structure had taken revolutionary changes. The end market competition became increasingly fierce and the profit room for the manufacturers was squeezed. Confronting the severe market challenges, under the leadership of the board of directors and by adhering to the shareholder interest maximization principle, the company had timely proposed and promoted the value management strategy, reduced enterprise accounting unit, promoted internal transaction system, implemented business restructuring and function integration, adopted expenditure-saving, efficiency-increasing and consumption-lowering measures, promoted administration streamlining and right decentralization and end-user service activities, effectively consolidated its management basis and enhanced its competitive edge. 22 1. Sales revenue: influenced by foreign brands and black-listed brands, the cell phone business of the company in 2005 declined to a great extent, which had imposed relatively great influence on the sales of the company. The total sales revenue of the company in 2005 was RMB11.456 billion Yuan, which was 14.27% lower than that of 2004. The overseas sales was RMB 1.479 billion Yuan, which was an 17.05% increase over that of 2004. The sales revenue of color TVs was RMB 7.867 billion Yuan, similar as that of 2004 and the sales revenue of cell phones was RMB 1.695 billion Yuan Yuan, 52.70% lower than that of 2004. 2. Profit condition: Influenced by the market environment, the cell phone business of the company suffered great loss, which also influenced the company’s profit condition. The net profit of the company in 2005 was RMB71.8989 million Yuan, which was a 48.9% decrease than that of 2004, of which the cell phone business loss was RMB 0.194billion Yuan. 3. Market performance: ① The color TV business mainly focused on the increase of the high-end product sales. According to the statistics of China Market Monitor Co., Ltd., the sales volume and market share of Konka color TV was ranked No. 1 in the industry ② The “Bojing”panel concept was specified and the image of Konka was raised ③ In respect of cell phone, the “Film and audio entertainment, Happy China” market strategy was successfully implemented and the pioneering image of Konka in the segmented market was set up ④ The overseas business had shown a strong momentum through the development of strategic customer and enhanced R & D and sales of high-end products ⑤ Emerging businesses: the refrigerator business increased greatly and the automobile electronics business had started and attained certain progresses in respect of market development. B. Main work conducted within the report period 1. Making plan for future strategic development and integrating core concepts of enterprise culture Confronting the competition situation of the slowing-down of the industry growth speed and the industry reform caused by technological advancement, the company started the making of the future three-year strategic development plan and stipulated the standard work flow and file templates. The strategic planning files for the whole group and each business unit had all been completed. The objective was clarified, the measures were feasible and the resource allocation was reasonable. Now the strategies are being implemented. In addition, the company had conducted systematic investigation and trimming on the current condition of its enterprise culture. On this basis, considering its strategic demand, the company also summed up and proposed the core concept of the enterprise culture “Create Excellent Konka, Fulfill Our Dreams”. 2. Reducing accounting unit and promoting internal transaction system among business units 23 In 2005, the company made new reforms on its operation of all kinds of businesses, reduced the accounting unit, established independent divisions according to business types and in the meanwhile set up the internal transaction system among all the divisions in the self-management and self-supporting approach so as to increase the decision efficiency and reaction speed of all kinds of businesses, which could facilitate the development of the businesses and establishment of the external operation platform and the faster attaining of centralized advantage in some steps of the supplier chain. Up to now, the internal transaction system among the business units has been set up and operated gradually. 3. Actively implementing administration streamlining and right decentralization and providing all-for-end-user service During the administration streamlining and right decentralization process, on one hand, the steps influencing the approval efficiency were reduced, the redundant approval was simplified and approval efficiency was enhanced through the in-depth trimming and study of the existing approval flow, on the other hand, on the premise of strict planning and budget control and based on the well controlled management risks and capital risks, power was decentralized, reaction speed of the end-user business units was increased and information publicity, post auditing and financial supervision were strengthened and “Decentralized power, enhanced responsibility, proper supervision and clear award and punishment”was implemented. In addition, considering their own functional characteristics, the functional units of all levels drew up and proposed a series of specific commitments and measures serving the end-users and customers and publicized them to the business units and sales departments in the quantitative or commitment manners so as to provide high efficiency support and excellent services for the end-user units. 4. Perfecting product R&D progress tracking system and promoting the advancement of R&D levels In 2005, the company’s product R&D progress tracking system was further perfected to ensure the product progress and achieve the improvement of R&D capabilities. According to the implementation condition, the target for the R&D of products in the three financial seasons in 2005 was basically completed. Certain projects were even completed excessively or ahead of schedule, which made important contribution to the sales tasks of the three key sales seasons and the whole year. In 2005, the quantity R&D programs of color TV was 418 and programs assessed was 345 while programs under way was 73. In respect of cell phone R&D, the R&D tasks for 59 domestic products and 9 export products had been completed. The 3G cell phone of Konka also achieved its calling function. 5. Conducting expenditure-saving and efficiency-improving campaign in an all-round way and effectively controlling the operation cost The company had conducted expenditure-saving and efficiency-improving work in all units of the whole group, set targets for the quarterly and monthly expenditure-saving and efficiency-improving of all business units and functional departments and made relevant award and punishment plans. In the meanwhile, the company had formed the quality inspection team in order the prevent quality accidents due to 24 expenditure-saving and efficiency-improving. Judging from the phase result, the target for the general implementation effect was achieved. The cost control of the functional departments of the group was relatively rational, the cost control target of color TV raw materials, the processing cost control target of each manufacturing sub-companies and the cell phone raw materials and cost target were basically achieved. In 2005, the color TV material cost and cell phone material cost were lowered by 10% and 20% compared to figures of the previous year and the period expense of cell phone was lowered by RMB 100 million Yuan. 6. Starting the model project plan and improving the appearance of products The company has started the model project plan in the color TV and cell phone business fields. As the first batch products of the model project, the 29 series panel TV, A8 CRT TV and D163 Cell phone are now in the technological improvement phase, of which, D163 Cell phone was awarded China Industry Innovative Design Golden Medal. In addition, the company also strengthened its flow management and construction in 2005. It had also set up the management framework for enterprise operation, standardized obligations and responsibility designation of the procurement system, established the regional auditing bodies, implemented the QM (quality management) system and perfected the three-stage framework of human resources, conducted Party Member Progressiveness Education and themed enterprise culture activities, conducted consolidated and effective work in all aspects and attained good effects. (III) Income from the Principal Business and Profit Composition Ｉｎｃｏｍｅｆｒｏｍｐｒｉｎｃｉｐａｌｂｕｓｉｎｅｓｓ（ｉｎＲＭＢ’０００）Ｃｏｓｔｓｏｆｐｒｉｎｃｉｐａｌｂｕｓｉｎｅｓｓ（ｉｎＲＭＢ’０００）Ｇｒｏｓｓｐｒｏｆｉｔｒａｔｅ（％）Ｓｅｃｔｏｒ／ｐｒｏｄｕｃｔｓＩｎｃｒｅａｓｅ／Ｉｎｃｒｅａｓｅ／Ｉｎｃｒｅａｓｅ／２００５２００４２００５２００４２００５２００４Ｄｅｃｒｅａｓｅ（％）Ｄｅｃｒｅａｓｅ（％）ＤｅｃｒｅａｓｅＤｏｍｅｓｔｉｃｍａｒｋｅｔ７，８６６，５９７．５２８，１７１，４８４．６０－３．７３６，３４８，２３５．８６６，８４１，９０４．１０－７．２２１９．３０１６．２７３．０３ＣｏｌｏｒＴＶＦｏｒｅｉｇｎｍａｒｋｅｔ１，４７８，８６１．３４１，２６３，４４２．００１７．０５１，３４７，２９９．７４１，１５４，５７０．５０１６．６９８．９０８．６２０．２８Ｔｏｔａｌ９，３４５，４５８．８６９，４３４，９２６．６０－０．９５７，６９５，５３５．６０７，９９６，４７４．６０－３．７６１７．６５１５．２５２．４０ＣｏｍｍｕｎｉｃａｔｉＭｏｂｉｌｅｐｈｏｎｅ１，６９４，７１７．４１３，５８２，８６４．６０－５２．７０１，４９１，３７８．３１３，０７１，５２８．５０－５１．４５１２．００１４．２７－２．２７ｏｎＯｔｈｅｒｓ４１５，７１５．３３３４４，７３０．６０２０．５９３８４，１２６．１４３２３，６７２．００１８．６８７．６０６．１１１．４９１１，３９１，６７５．１Ｔｏｔａｌ１１，４５５，８９１．６１１３，３６２，５２１．９０－１４．２７９，５７１，０４０．０５－１５．９８１６．４５１４．７５１．７００ (IV) Analysis on the major financial indicators 1. The gross profit ratio of color TV had increased by a large margin, mainly because the average sales prices had been stable, and the Company had effectively cut raw materials, contributing to the decrease of product costs. The gross profit ratio of mobile phone had decreased a little, mainly because the market competition had been hot and the Company had launched marketing activities to expand scale and increase market shares. 2. The net profit had decreased by a large margin, mainly because the mobile phone operation of the Company had made great losses due to the overall sluggish status of the domestically-made cell phone industry, exerting a negative influence on the 25 Company’ s overall profit-making status. 3. Cash capital had decreased by a large margin, mainly because there had been lots of commodity funds paid and increase of investment in fixed assets, etc. 4. The investment yield had decreased by a large margin compared with the last period, mainly because of the great losses made by the subsidiary Shenzhen Konka Communication Technology Co., Ltd in the report period. 5. The financial expenses had increased a lot in the report period, mainly because of bank deposit decrease in the report period, thereby decrease of interest income. II. Operation and Performances of the Principal Subsidiaries and Holding Companies (1) Shenzhen Konka Communications Technology Co., Ltd. With its equity directly and indirectly held by the Company by 100% and registered capital of RMB 120 million, KONKA Communications is engaged in the business of developing, producing and selling digital mobile communication equipment and mobile phone products. At the end of the report period, the company’ s total assets were RMB 850,397,658.38, the sales income in 2005 was RMB 1,694,717,412.72 and net profit was RMB -193,760,965.26. (2) Dongguan KONKA Electronics Co., Ltd. With registered capital of RMB 200 million, Dongguan KONKA is one of the Company’ s solely owned subsidiaries, and is engaged in production and operation of color TV and acoustic products, etc. At the end of the report period, the company’ s total assets were RMB 407,906,838.62, the sales income in 2005 was RMB 179,533,128.10 and net profit was RMB -12,544,111.35. (3) Mudanjiang KONKA Industrial Co., Ltd. With its equity held by the Company by 60% and registered capital of RMB 60 million, Mudanjiang KONKA is engaged in production and operation of color TV. At the end of the report period, the company’ s total assets were RMB 121,730,561.36, the sales income in 2005 was RMB 70,008,082.64 and net profit was RMB -601,929.15. (4) Shaanxi KONKA Electronics Co., Ltd. With its equity held by the Company by 60% and registered capital of RMB 69.5 million, Shaanxi KONKA is engaged in production and operation of color TV. At the end of the report period, the company’ s total assets were RMB 137,677,929.47, the sales income in 2005 was RMB 150,889,114.27 and net profit was RMB 5,079,785.47. (5) Anhui KONKA Electronics Co., Ltd. With its equity held by the Company by 65% and registered capital of RMB 140 million, Anhui KONKA is engaged in production and operation of color TV. At the end of the report period, the company’ s total assets were RMB 393,184,055.44, the sales income in 2005 was RMB 440,750,587.44 and net profit was RMB 5,023,584.23. (6) Chongqing KONKA Electronics Co., Ltd. With its equity held by the Company by 60% and registered capital of RMB 45 million, Chongqing KONKA is engaged in production and operation of color TV. At 26 the end of the report period, the Company’ s total assets were RMB 88,499,464.53, the sales income in 2005 was RMB 51,258,064.46 and net profit was RMB 311,199.91. III. Major Suppliers and Customers The total purchase amount from the top five suppliers was RMB 3,091,489,925.28, accounting for 36.30% of the Company’ s total purchase amount. The total sales revenue from the top five distributors was RMB 740,030,076.30, accounting for 6.46% of the Company’ s total sales amount. IV. Operation Problems, Difficulties and Solutions 1. Flat-Panel TV pricing is still dropping Solution proposal: facing price-dropping situation, company get the core technology gradually through product technological innovation reinforcement. Company improved high-end products management system and layout, to make sure new product come to market speedy. Expanding flat-panel TV business scale through transverse and lengthways integrated supply chain, improve research and development ability and well-classify marketing management, implement diversification marketing tactic and promotion tactic. Reinforce of company distribution channel and customer service network, make cost and expense control, and establish a positive defense system in order to face price fight. 2. Mobile industry competition and performance down Solution proposal: (1) establish a comprehensive evaluation system, major evaluation index will be around “profit”. Make a complete set of evaluation system for branch profit, sales revenue, channel stack turn over, and main cell phone model, which made an ultimate innovation for branch management thinking, increase evaluation content to the profit result, make branch operator must take the management responsibility, and insure a balance operation way for branch development. (2) Carry out “Cut expenditure and staff, increase efficiency”policy. Make an expenditure quarto and controlling request to branch expenditure, cut down fixed expense, and put these measures into action step by step. To that branch with high expenditure and weak operation, will execute “shaping plan”, supervise branch cut expenditure and staff, raise efficiency by check and ratify expenditure quarto. V. Investments of the Company 1. In the report period, the Company raised no funds through share offering and had no material investments 2. Projects Invested with Funds not Raised through Share Offering The Company had no significant projects invested with non-raised proceeds in the report period. VI. Financial Position 27 Unit: RMB’000 Increase / At the end of Item At the end of 2004 decrease Major reasons for the change 2005 ( %) Total assets 9,120,452.30 9,597,845.80 -4.97 Decrease of current assets Net accounts 677,364.20 572,145.50 18.39 Change of part of the sales policies receivable Net inventories 3,385,558.30 3,580,777.40 -5.45 Control over inventories strengthened Net long-term Appreciation of investments with depreciation reserves 64,475.70 59,639.00 8.11 investment withdrawn before Net fixed assets 1,298,792.50 1,291,943.70 0.53 Investment increase infixed assets Long-term 20,179.10 10,499.10 92.20 Increase of special accounts payable liabilities Shareholders’ 3,211,212.30 3,193,928.10 0.54 Net profit made equity Increase / Item 2005 2004 decrease Major reasons for the change ( %) Profit from main Decrease of the sales income from the mobile phone 1,883,466.30 1,969,402.20 -4.36 operations operation, decrease of gross profit ratio Net profit 71,898.90 140,726.70 -48.91 Decrease of profitability of the mobile phone operation VII. Management plan in the new year 2006 operation environments analysis 2006, macro environment is favorable in domestic market, as well as oversea market, but there is still some uncertainty, especially under the pressure from resource price rising and exchange rate change. 1. TV market keeping stable rising trend, high-end TV will develop very quickly, Flat-Panel TV will following speedy develop tendency in 2005. At the same time, digital TV will has a big jump, along with China launch the digital TV standard and Cable Digital TV speedy development. But price will be drop quickly with high-end product selling scale enlarge, profit margin will be narrow down. And TV industry is still has some uncertainty for the Flat-Panel TV is not a mature industry, which will bring a bigger risky to company, so risky management should be concerned. 2. Mobile industry competition will still in incandescent status. Industry loss caused by price fight in these two years, will push major enterprises come into rational competition from unreasoning fight. While, 3G-operation standard and business-oriented phase is coming, which will create a new industry developing opportunity and a new market space to mobile producers. But 2006 market is still grimness, foreign brands are still aggressive, license plate sent out from government will still rise, parallel import and stick-brand product from “gray market”will still flooding in the market, which will bring bad impact to company development. (II) Management plan in 2006 1. Management policy in 2006 To execute management strategy in 2006, company will put three projects into priority: quality project, perfect project and innovation project. 28 Quality project: product quality is a systematic problem, which influence a whole produce chain from marketing, research, produce, sale and after service, involved every process, so company must take a systematic improvement. Perfect project: company will emphasize product out-looking design and application optimization while core technology improving. Innovation project: this project will focus on product innovation, marketing innovation and management system innovation. 2. Management target: (1) Flat-panel business: company will regard flat-panel business into strategically and enlarge resource input. Promote business develop according to domestic market and oversea market supported and coordinated each other, reach a good profit and turn over. (2) International business: under the good risky control situation, speed up business expansion, especially to strategitic clients and strategitic market expansion, finish international business overall arrangement in the coming three years. (3) Mobile business: company will increase mobile business research investment, committed to a mobile producer with a product competition as a main competition. (4) CRT TV business: further increase investment of high-end product produce layout, establish a business operation model to a world leading OEM TV producer. (5) Multi-media marketing business: catch digital TV and flat-panel TV market opportunity; raise sales structure and sales revenue quickly. And optimize brand resource, reinforce system management, improve operation efficiency, enhance terminal building, make multi-media marketing system become an excellent home appliances distribution platform. (6) White home appliances business: increase resource input, and finish production capacity layout. (7) Fitting business: improve product and service quality, develop new product, import new technology and explore new market. (8) New business: electronic business related from automobile, digital-network product, visualized message product, travel product, would enhance new product research based on 2005, keeping benefit as a management principle, standard management, improve system, expand distribution channel, push business development. 3. Key task in 2006 (1) Making technological strategy program and competition ability rising program Based on whole technological strategy, design a three-year technological strategy and competition ability rising program, make sure of which predictable technology and competition ability rising program need input resource in the coming three years. (2) Establish long-term incentive system Company will work out long-term incentive system for different levels this year, which will fully express company management idea that skeleton staff is company 29 business partner, while, it will also embody that long-term incentive principle, benefit-oriented and profit-oriented, risky-taking and vitrification principle. (3) Reinforce brand promotion and public affair promotion. (4) Reinforce talent training and development One is talent training, and the other is talent development. First, establish a channel, let a group of talent could growing quickly; and second is enhance daily evaluation and management to ranking, push staff improve themselves consciously; the third is all level ranking should recommend talent and training them with objectives; the last is execute rotational ranking system, improve management ranking ability quickly, strengthen service conscious and work coordination. (5) Perfect operation management system around Group plan and control to all departments First, perfect planning and authority management system with quarter or financial year unite. Group will confirm all departments operation plan, expenditure budget and major operation tactic every quarter or financial year, and give fully authority to department under planed budget and time. Second, establish information vitrification system for business control. Third, reinforce risky forecast system management. Storage management will be the first measure. Company will set several key turns over index for storage, and each index has upper limit and lower limit, if one of them out, warning message will be send out. And second is accounts receivable management. Establish a file to every dealer who got loan from company, and supervise to key index which will be involved risky, and each index has upper limit and lower limit, if one of them out, warning message will be send out. At the same time, for different warning take different controlling measure. The last point is all process quality control management, group will supervise major product quality index timely. The fourth, perfect business module information establishment, improve decision-making, analysis and control ability by using information system. VIII. Routine work of the Board of Directors 1. Meetings held in the report period and content of the resolutions In the report period, the Board of the Company held 7 meetings in total, i.e. the 6th , 7th , 8th , 9th , 10th , 11th and 12th meeting of the 5th Board of Directors. Details of the meetings and resolutions made are as follows: The 6th meeting of the 5th Board of Konka Group Co., Ltd was held on the morning of Apr. 15, 2005 (Friday) at Shenzhen Overseas Chinese Town Group Corporation. Notices on this meeting were sent to all shareholders through either e-mails, or written notices or faxes on Apr. 4, 2005. 9 directors should have attended the meeting, and actually 8 did. Director Jian Di’an was on a business trip, and he had entrusted Chairman of the Board Mr. Ren Kelei to attend the meeting and exercise voting on his behalf. All supervisors of the Supervisory Committee and some of the Company’ s senior executives also joined the meeting. Chairman of the Board Mr. Ren Kelei 30 presided at the meeting. The meeting had been in conformity with the Company Law of the People’ s Republic of China and the Articles of Association. After adequate deliberation, following resolutions had been examined and approved: (1) Examined and approved the Annual Report 2004 of the Company and the Summary; (2) Examined and approved the Profit Distribution Plan for 2004; (3) Examined and approved the Preplan of Making up Losses with Capital Reserve; (4) Examined and approved the Preplan of Profit Distribution for 2005; (5) Examined and approved the Proposal on Changing Securities Affairs Representative; The 7th meeting of the 5th Board of Konka Group Co., Ltd was held on Apr. 28, 2005. The 1st Quarterly Report 2005 had been examined and approved through voting by fax. The 8th meeting of the 5th Board of Konka Group Co., Ltd was held on the morning of May 27, 2005 (Friday) at Shenzhen Overseas Chinese Town Group Corporation. Notices on this meeting were sent to all shareholders through either e-mails, or written notices or faxes on May 17, 2005. 9 directors should attend the meeting, and actually all 9 did. All supervisors of the Supervisory Committee and some members of the Company’ s management team also joined the meeting. Chairman of the Board Mr. Ren Kelei presided at the meeting. The meeting had been in conformity with the Company Law of the People’ s Republic of China and the Articles of Association. After adequate deliberation, following resolutions had been examined and approved: (1) Examined and approved the Work Report 2004 of the Board of Directors; (2) Examined and approved the Proposal on Engaging Auditing Agencies and Auditing Expenses; (3) Examined and approved the Proposal on Purchasing Responsibility Insurance; (4) Examined and approved the Proposal on Revising the Articles of Association; (5) Examined and approved the Proposal on Convening the Shareholders’General Meeting 2004. The 10th meeting of the 5th Board of Konka Group Co., Ltd was held on the afternoon of Aug. 25, 2005 (Thursday) at Shenzhen Overseas Chinese Town Group Corporation. Notices on this meeting were sent to all shareholders through either e-mails, or written notices or faxes on Aug. 10, 2005. 9 directors should have attended the meeting, and actually all 9 did. All supervisors of the Supervisory Committee and some of the Company’ s senior executives also joined the meeting. Chairman of the Board Mr. Ren Kelei presided at the meeting. The meeting had been in conformity with the Company Law of the People’ s Republic of China and the Articles of Association. After adequate deliberation, following resolutions had been examined and approved: (1) Examined and approved the Semi-Annual Report 2005 and the Summary of the Company; (2) Examined and approved the Proposal on Changing the Chairman of the Board of 31 Directors; (3) Examined and approved the Proposal on Changing Part of the Directors; (4) Examined and approved the Proposal on Purchasing and Transforming the Refrigerator Production Line of Ankang Electric Appliances Company; (5) Examined and approved the Proposal on Convening the Provision Shareholders’ General Meeting 2005. The 11th meeting of the 5th Board of Konka Group Co., Ltd was held on Oct. 24, 2005. The 3rd Quarterly Report 2005 had been examined and approved through voting by fax. The 12th meeting of the 5th Board of Konka Group Co., Ltd was held on the morning of Nov. 9, 2005 (Wednesday) at Shenzhen OCT Konka Group Co., Ltd. Notices on this meeting were sent to all shareholders through either e-mails, or written notices or faxes on Oct. 26, 2005. 9 directors should have attended the meeting, and actually all 9 did. Chairman of the Board Mr. Hou Songrong presided at the meeting. The meeting had been in conformity with the Company Law of the People’ s Republic of China and the Articles of Association. After adequate deliberation, the Board decided to remove Mr. He Jianjun from the position of Secretary of the Board and engage him as Vice President of Konka Group Co., Ltd, while Mr. Xiao Qing was engaged to succeed Mr. He Jianjun as Secretary of the Board of Konka Group Co., Ltd. Resolutions of the aforesaid 7 Board meetings were published in China Securities Journal, Securities Times, Shanghai Securities News and Hong Kong Ta Kung Pao as well as the internet website designated www.cninfo.com.cn and the website of the Company www.konka.com on Apr. 16, 2005, Apr. 29, 2005, May 28, 2005, Aug. 26, 2005, Oct. 25, 2005 and Nov. 10, 2005 respectively. 2. Implementation of the resolutions of the Shareholders’General Meeting by the Board The Board of Directors had dutifully implemented the resolutions of the Shareholders’ General Meeting: carried out the work of making up losses with capital reserve, changing part of the directors, and revising the Articles of Association. IX. Profit distribution or capitalization of capital reserve plan for the report period In 2005, the retained profit of the Company at the end of the period totaled 62,071.57 RMB’000Calculated according to the total share capital of 601,986,352 shares at the end of the period, the retained profit per share was RMB0.1031. According to the Company Law and the Articles of Association, the 14th meeting of the 5th Board of Directors of the Company had decided after careful deliberation that the profit distribution plan for 2005 would be not to distribute any dividend nor capitalize any public reserve. Since the Company will still face fierce market competition in 2006, it needs to reserve some capital against business risks. Hence no cash profit distribution preplan 32 has been proposed. This plan still needs the approval of the Shareholders’General Meeting. In the opinion of the Company's independent directors, the profit distribution preplan of the Company complied with relevant provisions of the Company Law and the Articles of Association of the Company and did not harm the interests of middle and small shareholders. X. Special explanations on the capital current with related parties and external guarantees 1. Explanation on the implementation of the Notice on Problems of Standardizing the Capital Current between Listed Companies and Related Parties and the External Guarantees of Listed Companies (CSRC [2004] No. 56 Document): Full text of the special explanation given by the CPAs on the capital occupations by the controlling shareholder and other related parties is as follows: Special Explanation on the Capital Occupations by the Controlling Shareholder and Other Related Parties of Konka Group Co., Ltd SH (2006) ZSZ No. 111 CSRC Shenzhen Securities Regulatory Bureau and Shenzhen Stock Exchange, We, as the CPAs auditing the Accounting Statements 2005 of Konka Group Co., Ltd (hereinafter referred to as Konka Group), hereby present this Special Explanation on the relevant issues concerning the capital occupations by the controlling shareholder and other related parties of Konka Group in accordance with the Notice on Problems of Standardizing the Capital Current between Listed Companies and Related Parties and the External Guarantees of Listed Companies (CSRC [2004] No. 56 Document) issued by the CSRC. The Attachment I of this Special Explanation has been prepared according to the requirement of the Work Memorandum on Information Disclosure – 2006 No. 2: Requirements on the Disclosure and Report of the Capital Occupations by the Controlling Shareholders and Other Related Parties as well as the Clearing Plan. We have noticed that the overall capital occupations of the Listed Company by the related parties of Konka Group Co., Ltd are as follows: 1. By Dec. 31, 2005, the balance of the capital of the Listed Company occupied by related parties totaled RMB 31,849,300. 2. Irregular capital occupations of the Listed Company are as follows: (1) The balance of the irregular capital occupations by related parities totaled RMB 0, and the balance of capital occupations remained unchanged compared with that the beginning of the period. (2) Neither the principal shareholder (or the actual controller) nor any of the enterprises controlled by it had occupied the capital of the Listed Company irregularly. This Special Explanation has been provided by us on the requirements of the CSRC and its Branch institution as well as the Shenzhen Stock Exchange, and it cannot be applied for other uses. Should any consequences be generated due to inappropriate 33 application, it will have nothing to do with the CPAs and the accounting agency that have conducted this business. Shenzhen Dahua Tiancheng Certified Public Accountants China Shenzhen Chinese CPA: Wu Jianhui Chinese CPA: Chen Baohua Apr. 25, 2006 34 2. Statement on the capital occupations by the controlling shareholder and other related parties in 2005 Relationship between the Accounting item Balance of capital Balance of capital Accumulated amount Accumulated amount Reasons for the Nature of Type of the occupier Name of the occupier occupier and the Listed calculated by the occupied at the occupied at the end of occupied in 2005 repaid in 2005 occupation occupation Company Listed Company beginning of 2005 2005 Controlling shareholder, actural controller and their affiliated enterprises Subtotal - - - 250.15 976.46 913.84 312.77 - - Subsidiary of the Other accounts Rent for dorm and Operating Shenzhen OCT Real Estate Co., Ltd 104.61 25.78 8.44 controlling shareholder receivable 121.95 deposit occupation The big shareholder Shenzhen OCT Property Management Co., Subsidiary of the Other accounts Deposit for property Operating and its controlled Ltd controlling shareholder receivable 7.69 0.60 0.60 7.69 management charges occupation legal person Advance payment of Other accounts Operating Shenzhen Special Economic Zone Water Subsidiary of the water and power receivable occupation and Power Company controlling shareholder 137.85 950.08 904.80 183.13 charges Related persons and their affiliated enterprises Subsidiaries and affiliated - - - - - - - - - companies of the - - - - - - - - - Listed Company 35 II. The special explanation and independent opinions of independent directors on the guarantees provided by the Company and its implementation of the Circular Concerning Some Issues on Regulating the Funds between Listed Companies and Associated Parties and Listed Companies’ Provision of Guaranty to Other Parties issued by CSRC (ZJH 2004 No. 56 Document of CSRC). According to the requirements of the Circular Concerning Some Issues on Regulating the Funds between Listed Companies and Associated Parties and Listed Companies’Provision of Guaranty to Other Parties issued by CSRC (ZJF (2004) No. 56 Document), we examined and verified the guarantees provided by Konka Group Co., Ltd. ("the Company") and carefully read 2005 auditor's report and the Special Statement on Fund Occupation by the Controlling Shareholder and Related Parties of Konka Group Co., Ltd. issued by Shenzhen Dahua Tiancheng Certified Public Accountants. Independent directors unanimously held the following opinion: In the report period, the fund transfer between the Company and its related parties was normal and in small amount. The accounting treatment was reasonable and conservative. As of December 31, 2005, the Company did not provide any guarantee to others, operated in a standardized way and did not violated the requirements of ZJF (2004) No. 56 Document. Independent directors: Xiao Zhuoji, Ma Liguang and Ye Wu XII. Other matters 1. Public Notice on Transfer of State-owned Legal Person’ s Share Obtaining Replay of SASAC: Refer to the public notice published by the Company in China Securities Journal, Shanghai Securities News, Securities Times and Ta Kung Pao on Feb. 1, 2005 for details (announcement number: 2005-01). 2. Public Notice on Transfer of State-owned Legal Person’ s Share Obtaining Replay of Ministry of Commerce: Refer to the public notice published by the Company in China Securities Journal, Shanghai Securities News, Securities Times and Ta Kung Pao on Mar. 21, 2005 for details (announcement number: 2005-02). 3. Public Notice on the Change in Shareholding of Shareholders: Refer to the public notice published by the Company in China Securities Journal, Shanghai Securities News, Securities Times and Ta Kung Pao on Mar. 31, 2005 for details (announcement number: 2005-03). 4. Public Notice on Forecasting of Routine Related Transaction: Refer to the public notice published by the Company in China Securities Journal, Shanghai Securities News, Securities Times and Ta Kung Pao on Apr. 18, 2005 for details (announcement number: 2005-06). 5. Public Notice on Progress of Equity Transfer (Block Trade of Hong Kong OCT): Refer to the public notice published by the Company in China Securities Journal, Shanghai Securities News, Securities Times and Ta Kung Pao on Apr. 29, 2005 for details (announcement number: 2005-03). 6. Public Notice on Progress of Equity Transfer: Refer to the public notice published by the Company in China Securities Journal, Shanghai Securities News, Securities Times and Ta Kung Pao on Jul. 28, 2005 for details (announcement number: 2005-12). 7. Public Notice on Related Transaction: Refer to the public notice published by the Company in China Securities Journal, Shanghai Securities News, Securities Times and Ta Kung Pao on Aug. 26, 2005 for details (announcement number: 2005-15). 8. The Company chose China Securities Journal and Ta Kung Pao as the newspapers for information disclosure. Section IX. Report of the Supervisory Committee I. Work of the Supervisory Committee In the report period, the 5th Supervisory Committee of the Company held 4 meetings in total, i.e., the 3rd, 4th , 5th and 6th meeting of the 5th supervisory committee The particulars of the meetings and resolutions are as follows: The 4th meeting of the 5th Supervisory Committee of the Company was held in Shenzhen OCT Group Corporation on the morning April 15, 2005 (Friday). 3 supervisors were expected to attend the meeting and all of them were actually present, the meeting was presided over by Chairman of the Supervisory Committee Mr. Dong Yaping, which was in compliance with relevant provisions of the Company Law of the Articles of Association of the Company. Upon full discussion, the meeting examined and unanimously approved the Annual Report 2004 and its Summary. The 6th meeting of the 5th Supervisory Committee of the Company was held in Shenzhen OCT Group Corporation on the morning May 27, 2005 (Friday). The notification of this meeting was sent to all supervisors by means of e-mail, written form and fax on May 17, 2005. 3 supervisors were expected to attend the meeting and all of them were actually present, the meeting was presided over by Chairman of the Supervisory Committee Mr. Dong Yaping, which was in compliance with relevant provisions of the Company Law of the Articles of Association of the Company. Upon full discussion, the meeting examined and unanimously approved Work Report 2004 of the Supervisory Committee. The resolutions of the above 2 meetings of the supervisory committee were published in the newspapers designated by CSRC, i.e., China Securities Journal, Securities Times, Shanghai Securities News and Ta Kung Pao, designated website www.cninfo.com.cn respectively on - 37 - April 16, 2005 and May 28, 2005. II. Independent Opinions of the Supervisory Committee 1. The operation of the Company according to law In 2005, the operation of the Company complied with relevant laws and regulations including the Company Law, the Securities Law and Listing Rules and provisions of the Articles of Association of the Company. The Company's directors and senior executives implemented resolutions of shareholders' general meetings and board meetings, worked diligently and constantly improved internal control system. The Company's directors and senior executives neither violated laws national laws and regulations and the Articles of Association of the Company nor harmed the interests of the Company when they performed their duties. 2. Inspection of the financial status of the Company The supervisory committee seriously and carefully inspected the Company 's financial system and financial position and held the opinion that the financial report of the Company for 2004 truly reflected its financial position and operating results and the standard unqualified auditing opinions issued by Shenzhen Dahua Tiancheng Certified Public Accountants were objective and fair. 3. Utilization of raised proceeds of the Company The Company did not raise proceeds in the recent three years. The investment projects utilizing the proceeds previously raised are completely the same with those promised in the prospectus. 4. Acquisition and disposal of assets by the Company In the report period, the transaction price of equity sale of the Company was reasonable and no insider trading was found. The interests of middle and small shareholders were fairly considered and no loss of the Company's assets was found. 5. Related transactions (1) The Company was involved in related transactions with the subsidiaries of the controlling shareholder of the Company, including the paying of property management fee water and electricity expenses, land use fee and purchase of goods, which were all fair transactions and carried out at normal market price. The related transactions did not harm the interests of the Company and its other shareholders. (2) In the report period, the Company transferred its equity of Mudanjiang Huali Packing Co., Ltd. to Shenzhen Huali Packing Trade Co., Ltd., which belongs to related transaction; there existed related transaction of assets transfer with Anhui Tianda. Making procedure of contract - 38 - of the above related transaction was in compliance with Stock Listing Rules of Shenzhen Stock Exchange and procedure regulated in the domestic laws and rules, the price was fair and reasonable, which did not harm the interests of medium- and small shareholders, and was fair and reasonable for the Company and all shareholders. (3) In the report period, the Company was not involved in joint external investment with related parties. Section X. Important Events I. Material lawsuits and arbitration In the report year, the Company had no significant lawsuits or arbitrations. II. Significant acquisitions, takeovers and mergers The Company was not involved in any significant acquisition, takeover or merger in the report year. III. Significant related transactions 1. In 2005, the Company was involved in the related transactions with the subsidiaries of the controlling shareholder of the Company (OCT Group Corporation), including the paying of payment property management fee, water and electricity expenses, land use fee and purchas e of goods, which were all fair transactions and carried out at normal market price. The related transactions did not harm the interests of the Company and its other shareholders. Refer to “(3) Transactions with related companies”and “(4) Current accounts with related companies”of Note 6 to the financial statements in the financial report for details. 2. Related transactions concerning routine operation Proportion Further classification taking up the Type of related according to product Related parties Total amount amount of the transaction or labor service same kind of transactions Shanghai Huali Packing Co., Ltd. 56,144,264.90 0.56% Purchase of Raw materials of Shenzhen Huali Packing Trade 27,614,666.59 95,650,255.70 0.27% raw materials packing Co., Ltd. Mudanjiang Huali Packing Co., Ltd. 11,891,324.21 0.12% The Company has published the Forecasting Public Notice on Routine Related Transaction (public notice No. 2005-06) in Securities Times, Shanghai Securities News, China Securities Journal and Ta Kung Pao and Internet website designated by CSRC http://www.cninfo.com.cn on Apr. 19, 2005. In the report period, the pricing base, transaction price, transaction amount and settlement methods of raw material purchased by the Company from Shanghai Huali Packing Co., Ltd. was basically in compliance with the forecasting; the Company additionally exploited other suppliers of color TV raw materials in order to distribute purchase risk, at the same time, purchase price of color TV raw materials reduced, - 39 - which resulted in transaction amount of raw materials of packing purchased actually by the Company from Shenzhen Huali Packing Trade Co., Ltd. occurred a quite difference with the forecasting; Mudanjiang Huali Pacing Co., Ltd. is a supplier that the Company exploited in August 2005, thus the Company did not make the forecasting. IV. Significant contracts and their performance (1) In the report period, the Company did not hold in trust, contract for or lease the assets of other companies nor did other companies hold in trust, contract for or lease the assets of the Company. (2) In the report period, the Company did not provide guarantees to others. (3) In the report period, the Company did not entrust others with money management. V. Commitments The Company or any shareholder holding over 5% of the total shares of the Company did not disclose any commitment on the designated newspapers and websites in the report year. VI. Certified public accountants' firm and remuneration As examined and adopted at the annual shareholders' general meeting 2004, the Company engaged Shenzhen Dahua Tiancheng Certified Public Accountants to be responsible for 2005 audit of the Company. So far, this firm has provided audit services to the Company for five consecutive years. In 2005, the Company paid financial audit fee of RMB 0.35 million for A shares to Shenzhen Dahua Tiancheng Certified Public Accountants , as well as RMB 0.45 million for B shares to K. C. OH & Company Certified Public Accountants. VII. About share merger reform of the Company In accordant with the spirit of Several Opinions on Promoting Reform and Opening-up and Steady Development of Capital Market promulgated by the State Council and the Administrative Method of Share Merger Reform for Listed Companies, in order to perfect corporate governance, protect the legal rights and interests of investors and form effective incentive mechanism, the Company’ s nontradable shareholders proposed share merger reform plan on Jan. 23, 2006. Through reiterative communication with tradable shareholders, the Company finally determined share merger reform plan at the rater of 2.5 shares for every 10 shares, the said plan was approved at the shareholders’general meeting related with share merger reform held from Mar. 2, 2006 to Mar. 6, 2006. The Company’ s share merger reform has been implemented on Mar. 30, 2006. At present, the Company has completed task of share merger reform. The key points of share merger reform are as follows: 1. The shareholders of tradable A shares could obtain the consideration at rate of 2.5 shares for every 10 tradable A shares. 2. 35% of consideration need performed by Anhui Tianda Enterprise (Group) Co., Ltd. and Thomson Investment Group Limited, shareholders holding nontradable shares, was paid in - 40 - advanced by OCT Group Corporation (the first largest shareholder of the Company) instead of them. Anhui Tianda Enterprise (Group) Co.,Ltd. and Thomson Investment Group Limited promised that they must refund all shares to OCT Group Corporation that OCT Group Corporation paid in advance instead of them before listing for trade of Konka Stock A held by them. 3. All shareholders of nontradable shares promised that no trading and transfer of nontradable shares held by them may be taken with 24 months as of the date when the shares obtained circulation right in A market; after expiration of the aforesaid undertaking, the every shareholder of nontradable shares could sale original nontradable shares through listing and trading on Stock Exchanges, but proportion of number of shares could be sold in total shares of the Company shall not exceed 5 percent within 12 months, as well as exceed 10 percent within 24 months. VIII. Other Important Events In the report period, the Company and its directors and senior executives were not punished by securities regulatory authority. Section XI. Financial Report I. Auditors’Report Auditors’Report SH (2006) GSZ No. 035 Shareholders of Konka Group Co., Ltd: We have audited the Consolidated Balance Sheet ended Dec. 31, 2005, the Consolidated Income and Profit Distribution Statement 2005 and the Consolidated Cash Flow Statement 2005 of Konka Group Co., Ltd (hereinafter referred to as the Company). While it is the responsibility of the management team of the Company to compile these accounting statements, our responsibility is to express opinions on these accounting statements based upon our auditing work. We have arranged and carried out our auditing work in accordance with the independent auditing rules for Chinese CPAs, so as to make sure with reason whether or not there exist no significant report errors. Our auditing work includes checking based upon sampling the evidences that support the amounts in the accounting statements and disclosure, commenting on the accounting policies adopted by the management team during the compilation of these accounting statements and the important accounting estimations made by them, and commenting on the overall reflection of these accounting statements. We believe that our auditing work has provided fairly reasonable base for us to express opinions. We believe that the aforesaid accounting statements have been in conformity with the - 41 - Business Accounting Standards and Business Accounting System issued by the State, and that they fairly and squarely reflected the Company’ s financial situation ended Dec. 31, 2005 and the business achievements and cash flows of the Company in 2005 in all crucial aspects. Shenzhen Dahua Tiancheng Certified Public Accountants China Shenzhen Chinese CPA:Wu Jianhui Chinese CPA:Chen Baohua Apr. 25, 2006 II. Financial Report (attached at the back) Section XI. DOCUMENTS FOR REFERENCE (I) Accounting statements carried with the signatures and seals of legal representative, CFO and person in charge of accounting. (2) Originals of domestic and overseas auditor’ s report carried with the seal of Certified Public Accountants, the signature and seal of certified public accountants. (3) Originals of all documents and manuscripts of public notices disclosed on the newspapers designated by CSRC in the report period. (4) Other relevant materials. Board of Directors of Konka Group Co., Ltd. Apr. 26, 2006 - 42 - Konka Group Co., Ltd. (Incorporated in the People’s Republic of China) Report of the auditors and financial statements for the year ended December 31, 2005 - 43 - Konka Group Co., Ltd. (Incorporated in the People’s Republic of China) Contents Pages Report of the auditors 1 Consolidated income statement 2 Consolidated balance sheet 3-4 Consolidated statement of changes in equity 5 Consolidated cash flow statement 6-7 Notes to the financial statements 8 - 33 Report of the auditors to the members of Konka Group Co., Ltd. (Incorporated in the People’ s Republic of China) We have audited the accompanying balance sheet of Konka Group Co., Ltd. as of December 31, 2005 and the related statements of income, cash flows and changes in equity for the year then ended. These financial statements are the responsibility of the Group’ s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements present fairly, in all material respects, the financial position of the Group as of December 31, 2005 and the results of its operations and its cash flows for the year then ended, in accordance with International Financial Reporting Standards. K. C. Oh & Company Certified Public Accountants Hong Kong : April 22, 2006 -1- Konka Group Co., Ltd. Consolidated income statement for the year ended December 31, 2005 2005 2004 Note RMB’000 RMB’000 Turnover 5 11,455,892 13,362,522 Cost of sales ( 9,572,425 ) ( 11,393,120 ) Gross profit 1,883,467 1,969,402 Other revenue 6 39,210 75,252 Distribution costs ( 1,419,200 ) ( 1,471,606 ) Administrative expenses ( 445,364 ) ( 391,716 ) Operating profit 58,113 181,332 Finance costs ( 12,353 ) ( 7,033 ) Share of loss from associates ( 833 ) ( 1,738 ) Profit before taxation 7 44,927 172,561 Income tax 8 ( 11,514 ) ( 11,593 ) Profit for the year 33,413 160,968 Attributable to : Equity holders of the parent 19,552 142,549 Share of results of minority interests 13,861 18,419 33,413 160,968 Profit per share to equity holders of the parent - basic RMB0.032 RMB0.237 The calculation of the basic earnings per share is based on the current year’ s profit of RMB19,552,000 (2004 - RMB142,549,000) attributable to the equity holders of the parent and on the existing number of 601,986,352 shares in issue during the year. -2- Konka Group Co., Ltd. Consolidated balance sheet as at December 31, 2005 2005 2004 Note RMB’000 RMB’000 Assets Non-current assets Property, plant and equipment 9 1,332,475 1,358,969 Land use rights – non-current portion 10 27,059 27,689 Goodwill 11 989 989 Intangible assets 12 19,928 11,014 Interests in associates 13 44,284 35,159 Other investments 14 10,290 10,290 1,435,025 1,444,110 Current assets Land use rights – current portion 10 630 630 Inventories 15 3,385,558 3,580,777 Properties held for sale 16 4,172 4,172 Account receivables 17 676,234 571,016 Prepayments, deposits and other receivables 18 231,918 199,251 Note receivables 19 2,759,689 2,933,652 Cash and bank balances 629,160 851,762 7,687,361 8,141,260 Total assets 9,122,386 9,585,370 (to be cont’ d) -3- Konka Group Co., Ltd. Consolidated balance sheet as at December 31, 2005 (cont’ d) 2005 2004 Note RMB’000 RMB’000 Equity and liabilities Capital and reserves Share capital 20 601,986 601,986 Reserves 2,609,987 2,591,706 Equity attributable to equity holders of the parent 3,211,973 3,193,692 Minority interests 261,722 247,827 Total equity 3,473,695 3,441,519 Non-current liabilities Deferred income 10,493 13,490 Other long-term liabilities 20,179 10,499 30,672 23,989 Current liabilities Tax payable 4,536 2,145 Account payables 1,430,260 1,271,053 Other payables and accrued expenses 813,038 821,192 Note payables 3,342,185 3,977,323 Short-term bank loans 21 28,000 48,149 5,618,019 6,119,862 Total liabilities 5,648,691 6,143,851 Total equity and liabilities 9,122,386 9,585,370 The financial statements on pages 2 to 33 were approved and authorized for issued by the board of directors on April 22, 2006 and are signed on its behalf by : Director Director -4- Konka Group Co., Ltd. Consolidated statement of changes in equity for the year ended December 31, 2005 Reserves Attributable to Accumulated equity holders Share Capital Surplus profit/(loss) Dividend Exchange Total of the parent Minority Total capital reserves reserves RMB’000 reserve reserve reserves RMB’000 interests RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 As at January 1, 2004 601,986 1,820,452 1,133,044 ( 503,961 ) - ( 128 ) 2,449,407 3,051,393 237,966 3,289,359 Profit for the year of 2004 - - - 142,549 - - 142,549 142,549 18,419 160,968 Increase in minority interests - - - - - - - - 5,002 5,002 Dividend paid to minority interests - - - - - - - - ( 13,560 ) ( 13,560 ) Exchange difference from translation of foreign operations - - - - - ( 250 ) ( 250 ) ( 250 ) - ( 250 ) As at December 31, 2004 601,986 1,820,452 1,133,044 ( 361,412 ) - ( 378 ) 2,591,706 3,193,692 247,827 3,441,519 Profit for the year of 2005 - - - 19,552 - - 19,552 19,552 13,861 33,413 Funds from discretionary surplus reserve to make good the accumulated loss - - ( 375,757 ) 375,757 - - - - - - Appropriation to statutory surplus reserve - - 7,909 ( 7,909 ) - - - - - - Increase in minority interests - - - - - - - - 34 34 Exchange difference from translation of foreign operations - - - - - ( 1,2 ) ( 1,271 ) ( 1,271 ) - ( 1,271 ) 71 As at December 31, 2005 601,986 1,820,452 765,196 25,988 - ( 1,6 ) 2,609,987 3,211,973 261,722 3,473,695 49 According to the corporation law and relevant regulations of a joint stock limited company, the Company’ s specified profit should be classified as capital reserves, which include share premium, surplus on revaluation of property, plant and equipment and other investments, etc. Capital reserves are normally used for issue of new shares, or for write-off or permanent provision when foreign investments are revalued. Surplus reserves comprise statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve. The Company is required to transfer an amount of not less than 10% of the profit after making up the accumulated loss to statutory reserve until it is up to 50% of the registered share capital. Statutory reserve can be used to cover current year loss or for issue of new shares. The amount of statutory reserve to be utilized for issue of new shares should not exceed an amount such that the balance of the reserve will fall below 25% of the registered share capital after the issue of new shares. The Company is also required to transfer 5% of the profit after making up the accumulated loss to statutory public welfare fund. Statutory public welfare fund shall only be applied for the collective welfare of the Company’ s employees. Discretionary surplus reserve is applied in accordance with the shareholders’resolutions passed in the annual general meeting and can be used to make up the accumulated loss or for issue of new shares. -5- Konka Group Co., Ltd. Consolidated cash flow statement for the year ended December 31, 2005 2005 2004 RMB’000 RMB’000 Cash flow from operating activities Operating profit before taxation 44,927 172,561 Adjustment items : Interest income ( 7,488 ) ( 11,993 ) Dividend income - ( 595 ) Income from government grant ( 2,997 ) ( 2,997 ) Short-term bank loan waived - ( 4,500 ) Other payables waived ( 1,207 ) ( 473 ) Interest expenses 4,456 7,227 Depreciation of property, plant and equipment 139,540 146,808 Loss on disposal of property, plant and equipment 1,815 1,978 Reversal for impairment loss on property, plant and equipment ( 260 ) - Amortization of land use rights 630 630 Amortization of goodwill - 322 Amortization of intangible assets 5,550 3,295 Profit on partial disposal of a subsidiary - ( 112 ) Share of results from associates 833 1,738 Profit on disposal of an associate - ( 357 ) Reversal for impairment loss on associates ( 8,391 ) - Loss on disposal of other investments - 364 Provision for inventory obsolescence 50,053 35,502 Inventories written off 27,040 - Provision for doubtful debts on account receivables 18,271 18,165 Provision/(reversal) for doubtful debts on other receivables 2,148 ( 2,135 ) Net operating cash inflow before movements ,in working capital 274,920 365,428 Exchange reserve movement ( 1,271 ) ( 250 ) (Increase)/decrease in inventories 118,126 ( 446,198 ) Increase in account receivables ( 123,489 ) ( 255,964 ) Increase in prepayments, deposits and other receivables ( 34,815 ) ( 33,824 ) Decrease in note receivables 173,963 232,796 Increase in account payables 159,207 38,342 Decrease in other payables and accrued expenses ( 7,012 ) ( 434,720 ) Increase/(decrease) in note payables ( 635,138 ) 193,501 Cash paid for operations ( 75,509 ) ( 340,889 ) Interest paid ( 4,391 ) ( 7,227 ) Corporate and profits tax paid ( 9,123 ) ( 19,167 ) Net cash outflow from operating activities ( 89,023 ) ( 367,283 ) (to be cont’ d) -6- Konka Group Co., Ltd. Consolidated cash flow statement for the year ended December 31, 2005 (cont’ d) 2005 2004 Note RMB’000 RMB’000 Net cash outflow from operating activities ( 89,023 ) ( 367,283 ) Investing activities Interest received 7,488 11,993 Dividend received - 595 Purchases of property, plant and equipment ( 120,738 ) ( 158,948 ) Proceeds from disposal of property, plant and equipment 6,137 22,249 Purchases of intangible assets ( 14,464 ) ( 7,285 ) Decrease of investment in associates 2,400 - Repayments to associates ( 3,967 ) ( 4,030 ) Proceeds from disposal/return of other investments - 1,136 Decrease in short-term investments - 1,243 Net cash outflow from investing activities ( 123,144 ) ( 133,047 ) Financing activities Finance lease obligations repaid - ( 1,875 ) Bank loans raised/(repaid) 22 ( 20,149 ) 24,604 Other long-term liabilities raised 22 9,680 5,915 Increase/(decrease) in minority interests 22 34 ( 8,446 ) Net cash inflow/(outflow) from financing activities ( 10,435 ) 20,198 Decrease in cash and cash equivalents ( 222,602 ) ( 480,132 ) Cash and cash equivalents as at beginning of year 851,762 1,331,894 Cash and cash equivalents as at end of year 629,160 851,762 Analysis of cash and cash equivalents Cash and bank balances 629,160 851,762 -7- Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2005 1. General information Konka Group Co., Ltd. (“the Company”), formerly known as Shenzhen Konka Electronic Group Co., Ltd., obtained approval from Shenzhen Municipal People’s Government to reorganize into a limited stock company in August 1991. On the approval of the People’ s Bank of China, Shenzhen Branch, the Company issued “A” shares and “B” shares, which have then been listed on the Shenzhen Stock Exchange. On August 29, 1995, the Company changed its name to Konka Group Co., Ltd. The principal activities of the Company and its subsidiaries (“the Group”) include the manufacture and sale of colour television, mobile phones, stereo recorders, hi-fi component systems, facsimile machines and telecommunication products, property development and investment holding. 2. Basis of preparation of the financial statements In the current year, the Group has adopted all of the new and revised Standards and Interpretations issued by the International Accounting Standards Board (the “IASB”) and the International Financial Reporting Interpretations Committee (the “IFRIC”) of the IASB that are relevant to its operations and effective for accounting periods beginning on January 1, 2005. The adoption of these new and revised Standards and Interpretations has resulted in changes to the Group’ s accounting policies in the following areas : • Goodwill (International Financial Reporting Standard 3); • Excess of acquirer’ s interest in the net fair value of acquiree’ s identifiable assets, liabilities and contingent liabilities over cost of acquisition (previously known as negative goodwill) (International Financial Reporting Standard 3); and • Initial direct costs incurred in relation to operating lease receivables (International Accounting Standard 17 (Revised)). (a) The impact on goodwill International Financial Reporting Standard 3 (IFRS 3) has been adopted for business combinations for which the agreement date is on or after March 31, 2004. The option of limited retrospective application of the Standard has not been taken up, thus avoiding the need to restate past business combinations. The Group had no acquisition during the 2004 and 2005 accounting periods. Therefore, the new Standard had no material impact on the Group’ s financial positions and operating results for the current and prior periods. After initial recognition, IFRS 3 requires goodwill acquired in a business combination to be carried at cost less any accumulated impairment losses. Under International Accounting Standard 36 - Impairment of Assets (IAS 36) (as revised in 2004), impairment reviews are required annually, or more frequently if there are indications that goodwill might be impaired. IFRS 3 prohibits the amortization of goodwill. Previously, under IAS 22, the Group carried goodwill in its balance sheet at cost less accumulated amortization and accumulated impairment losses. Amortization was charged over the estimated useful life of the goodwill, subject to the rebuttable presumption that the maximum useful life of goodwill was 20 years. -8- Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2005 (cont’ d) 2. Basis of preparation of the financial statements (cont’d) (a) The impact on goodwill (cont’ d) In accordance with the transitional rules of IFRS 3, the Group has applied the revised accounting policy for goodwill prospectively from the beginning of its first annual period beginning on or after March 31, 2004, i.e. January 1, 2005, to goodwill acquired in business combinations for which the agreement date was before March 31, 2004. Therefore, from January 1, 2005, the Group has discontinued amortizing such goodwill and has tested the goodwill for impairment in accordance with IAS 36. Because the revised accounting policy has been applied prospectively, the change has had no impact on amounts reported for 2004 or prior periods. The Group had no amortization charge for the year. The charge in 2004 was RMB322,000. (b) The impact on the excess of acquirer’ s interest in the net fair value of acquiree’ s identifiable assets, liabilities and contingent liabilities over cost (previously known as negative goodwill) IFRS 3 requires that, after reassessment, any excess of the acquirer’ s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of the business combination should be recognized immediately in profit or loss. IFRS 3 prohibits the recognition of negative goodwill in the balance sheet. Previously, under IAS 22 (superceded by IFRS 3), the Group released negative goodwill to income over a number of accounting periods, based on an analysis of the circumstances from which the balance resulted. Negative goodwill was reported as a deduction from assets in the balance sheet. In accordance with the transitional rules of IFRS 3, the Group has applied the revised accounting policy prospectively from January 1, 2005. Therefore, the change has had no impact on amounts reported for 2004 or prior periods. (c) The impact on initial direct costs incurred in relation to operating lease receivables IAS 17 (as revised in 2003) requires initial direct costs incurred by a lessor in negotiating and arranging an operating lease to be added to the carrying amount of the leased asset and recognized as an expense over the lease term on the same basis as the lease income. However, the Group had no material initial direct costs incurred when negotiating and arranging the operating leases. The consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (“IFRS”). These accounting standards differ from those used in the preparation of the PRC statutory financial statements, which are prepared in accordance with the PRC Accounting Standards. To conform to IFRS adjustments have been made to the PRC statutory financial statements. Details of the impact of such adjustments on the net asset value as at December 31, 2005 and on the operating results for the year then ended are included in note 27 to the financial statements. In addition, the financial statements have been prepared under the historical cost convention except for certain fixed asset items that are recorded at valuation less accumulated depreciation and accumulated impairment losses. Konka Group Co., Ltd. -9- Notes to the financial statements for the year ended December 31, 2005 (cont’ d) 3. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and the entities (including special purpose entities) controlled by the Company (its subsidiaries). Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group. The consolidated financial statements incorporate the financial statements of the Company and of its subsidiaries (the “Group”) made up to December 31 each year. All intra-group transactions, balances, income and expenses are eliminated on consolidation. Minority interests in the net assets of consolidated subsidiaries are identified separately from the Group’ s equity therein. Minority interests consist of the amount of those interests at the date of the original business combination and the minority’ s share of changes in equity since the date of the combination. Losses applicable to the minority ni excess of the minority’ s interest in the subsidiary’s equity are allocated against the interests of the Group except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses. (a) Subsidiaries A subsidiary is a company in which the Company holds, directly or indirectly, more than 50% of the equity interest as a long-term investment and/or has the power to cast the majority of votes at meetings of the board of directors/management committee. As at December 31, 2005, the Company held the following subsidiaries : Place of Percentage of Name of the incorporation/ Registration interest held Principal company registration capital Direct Indirect activities ’000 % % Dongguan Konka PRC RMB200,000 100 - Production of Electronic Co., Ltd. TV sets, hi-fi, etc. Konka Pacific Pty. Australia AUD1,000 100 - Sale of Ltd. * electronic products Konka (U.S.A.) Ltd. * U.S.A. USD3,000 100 - Research and development Hong Kong Konka Hong Kong HKD500 100 - Trading of Limited electronic products Anhui Konka PRC RMB140,000 65 - Manufacture Electronic and sale of Co., Ltd. TV sets - 10 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2005 (cont’ d) 3. Basis of consolidation (cont’d) (a) Subsidiaries (cont’ d) Place of Percentage of Name of the incorporation/ Registration interest held Principal company registration capital Direct Indirect activities ’000 % % Mudanjiang Konka PRC RMB60,000 60 - Manufacture Industrial and sale of Co., Ltd. TV sets Chongqing Konka PRC RMB45,000 60 - Manufacture Electronic Co., Ltd. and sale of TV sets Shenzhen Konka PRC RMB15,000 60 - Production of Visual Information mould and System Engineering sub- Co., Ltd. contracting Shenzhen Konka PRC RMB8,300 51 - Manufacture Electrical Co., Ltd. and sale of electronic products Shenzhen Konka PRC RMB120,000 75 25 Manufacture Telecommunications and sale of Technology Co., Ltd. mobile phones Shenzhen Shushida PRC RMB42,000 75 25 Manufacture Electronic Co., Ltd. and sale of electronic products Shenzhen Konka PRC RMB30,000 75 25 Manufacture Communication and sale of Network Co., Ltd. digital network products Shenzhen Konka PRC RMB14,500 49 51 Production of Precision Mould mould Co., Ltd. Shenzhen Konka PRC RMB9,500 49 51 Production of Injected Plastic plastic Manufactory Co., Ltd. products Shanxi Konka PRC RMB69,500 45 15 Manufacture Electronic and sale of Co., Ltd. TV sets Chongqing Qingjia PRC RMB15,000 30 10 Manufacture Electronic and sale of Co., Ltd. ** electronic parts Dongguan Konka PRC RMB10,000 - 100 Production of Packaging Co., Ltd. plastic products Hong Din International Hong Kong HKD500 - 100 International Trade Limited trade Hong Din Investment Hong Kong HKD500 - 100 Investment Development holding Limited Indonesia Konka Indonesia USD500 - 100 Trading Trading Limited * - 11 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2005 (cont’ d) 3. Basis of consolidation (cont’d) (a) Subsidiaries (cont’ d) Place of Percentage of Name of the incorporation/ Registration interest held Principal company registration capital Direct Indirect activities ’000 % % Konka Electronics India USD1,160 - 70 Production of (India) Co., Ltd. * colour TV sets Changshu Konka PRC RMB24,650 - 60 Manufacture Electronic Co., Ltd. and sale of electronic products Chongqing Konka PRC RMB30,000 - 57 Manufacture Automobile Co., Ltd. and sale of automobile and parts Boluo Konka Printed PRC RMB40,000 - 51 Manufacture Co., Ltd. and sale of electronic products Anhui Konka PRC RMB10,000 - 35 Manufacture Electrical and sale of Co., Ltd. ** electrical appliances * The results and the financial position of these companies are not required to be consolidated because they have ceased the business. ** The Company has effective control over this company. (b) Associates An associate is a company in which the Company holds, directly or indirectly, not less than 20% and not more than 50% equity interest as a long-term investment and is able to exercise significant influence on this company. Investments in associates are accounted for by equity method. Interests in associates are represented by the Group’ s share of their net assets, reduced by the impairment loss provision as considered necessary by the directors. As at December 31, 2005, the Group held the associates as follows : Percentage of Place of interest held Name of the company registration Direct IndirectPrincipal activities % % Huadoushi Longfeng Properties Macau 50 - Investment holding and Development Co., Ltd. * property investment Shenzhen OCT International PRC 25 - TV program production & Media Co., Ltd. distribution - 12 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2005 (cont’ d) 3. Basis of consolidation (cont’d) (b) Associates (cont’ d) Percentage of Place of interest held Name of the company registration Direct IndirectPrincipal activities % % Shenzhen Dekon Electronics PRC - 30 Manufacture & sale of Co., Ltd. electronic products Shenzhen Konka Energy PRC - 30 Manufacture & sale of Technology Co., Ltd. electronic parts Chongqing Jingkang Plastics PRC - 25 Production of moulds Material Co., Ltd. * This company was jointly invested by the Group and other four companies for developing a property development project, namely “Huadoushi Furong Village”. The project had not yet been commenced because the other four companies requested to withdraw their investment from this project and the local government had exchanged the land of this company’s project. Since there was no progress on this project, the Group had provided impairment loss on the investment cost of this company. 4. Significant accounting policies (a) Property, plant and equipment and depreciation Property, plant and equipment are stated at cost or valuation less accumulated depreciation. Their depreciation is provided using the straight-line method over the estimated useful lives, taking into account the estimated residual value of 10% of the cost or revalued amount, as follows : Buildings 2.25% Leasehold improvements 20% Machinery and equipment 9% Electronic equipment 18% Motor vehicles 18% Construction-in-progress represents the factory and office buildings under construction and is stated at cost. This includes costs of construction, machinery and furniture as well as interest charges and exchange differences arising from borrowings that are used to finance the construction during the construction period. No depreciation is provided on construction-in-progress prior to its completion. However, for construction-in-progress that are pending for further process and are functionally or technologically obsolete, their carrying amounts are reduced to their recoverable amounts by reference to the impairment loss. (b) Land use rights The cost of land use rights is amortized on a straight-line basis over the lease term. - 13 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2005 (cont’ d) 4. Significant accounting policies (cont’d) (c) Goodwill Goodwill arising on the acquisition of a subsidiary or an associate represents the excess of the cost of acquisition over the Group’ s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary or associate recognized at the date of acquisition. Goodwill is initially recognized as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill is allocated to each of the Group’ s cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognized for goodwill is not reversed in a subsequent period. On disposal of a subsidiary or an associate, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. (d) Intangible assets The cost of trademarks is amortized on a straight-line basis over its profit-generating period. Technical know-how is measured initially at cost and is amortized on a straight-line basis over its estimated useful life, which is on average 5 years. (e) Investments Investments are recognized and derecognized on a trade date basis where the purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at fair value, plus directly attributable transaction costs. - 14 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2005 (cont’ d) 4. Significant accounting policies (cont’d) (e) Investments (cont’ d) At subsequent reporting dates, debt securities that the Group has the expressed intention and ability to hold to maturity (held-to-maturity debt securities) are measured at amortized cost using the effective interest rate method, less any impairment loss recognized to reflect irrecoverable amounts. An impairment loss is recognized in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the investment’ s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition. Impairment losses are reversed in subsequent periods when an increase in the investment’ s recoverable amount can be related objectively to an event occurring after the impairment was recognized, subject to the restriction that the carrying amount of the investment at the date the impairment is reversed shall not exceed what the amortized cost would have been had the impairment not been recognized. Investments other than held-to-maturity debt securities are classified as either investments held for trading or as available-for-sale, and are measured at subsequent reporting dates at fair value. Where securities are held for trading purposes, gains and losses arising from changes in fair value are included in profit or loss for the period. For available-for-sale investments, gains and losses arising from changes in fair value are recognized directly in equity, until the security is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognized in equity is included in the profit or loss for the period. Impairment losses recognized in profit or loss for equity investments classified as available-for-sale are not subsequently reversed through profit or loss. Impairment losses recognized in profit or loss for debt instruments classified as available-for-sale are subsequently reversed if an increase in the fair value of the instrument can be objectively related to an event occurring after the recognition of the impairment loss. Other unlisted long-term investments with no reference to fair value are stated at cost less provision for diminution in value that is other than temporary. (f) Inventories Inventories are valued at the lower of cost (using weight-average method) and net realizable value. Cost comprises direct materials, direct labor cost and an appropriate portion of overheads. Net realizable value is calculated as the estimated selling price less all further costs of production and the related costs of marketing, selling and distribution. (g) Properties held for sale Properties held for sale are stated at the lower of cost and net realizable value. Cost is determined by an apportionment of the total land and building costs attributable to unsold properties. Net realizable value is estimated by the directors based on prevailing market prices, on an individual property basis. - 15 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2005 (cont’ d) 4. Significant accounting policies (cont’d) (h) Account receivables Account receivables are measured at initial recognition at fair value, and are subsequently measured at amortized cost using the effective interest rate method. Appropriate allowances for estimated irrecoverable amounts are recognized in profit or loss when there is objective evidence that the asset is impaired. The allowance recognized is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition. (i) Account payables Accounts payable are initially measured at fair value, and are subsequently measured at amortized cost, using the effective interest rate method. (j) Cash equivalents Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. (k) Bank borrowings Interest-bearing bank loans and overdrafts are initially measured at fair value, and are subsequently measured at amortized cost, using the effective interest rate method. Any difference between the proceeds (net of transaction costs) and the settlement or redemption of borrowings is recognized over the term of the borrowings in accordance with the Group’ s accounting policy for borrowing costs. (l) Research and development expenditures Expenditure on research activities is recognized as an expense in the period in which it is incurred. An internally-generated intangible asset arising from the Group’ s technical know-how development is recognized only if all of the following conditions are met : - an asset is created that can be identified; - it is probable that the asset created will generate future economic benefits; and - the development cost of the asset can be measured reliably. Internally-generated intangible assets are amortized on a straight-line basis over their estimated useful lives. Where no internally-generated intangible asset can be recognized, development expenditure is charged to profit or loss in the period in which it is incurred. - 16 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2005 (cont’ d) 4. Significant accounting policies (cont’d) (m) Deferred income Long-term government grants towards research and technical know-how development are recognized as income on a straight-line basis over the period of the grant. (n) Revenue recognition Revenue is recognized when it is probable that the economic benefits associated with the transactions will flow to the Group and the stage of completion of the transactions can be measured reliably : i) Revenue from sales of goods is recognized when the risks and rewards of ownership of the goods are substantially transferred to customers. ii) For properties held for sale, revenue is recognized on the execution of an unconditional binding sales agreement. iii) Interest income is accrued on a time proportion basis by reference to the principal outstanding and at the interest rate applicable. iv) Dividend income from investments is recognized when the shareholders’right to receive payments has been established. (o) Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization. All other borrowing costs are recognized in profit or loss in the period in which they are incurred. (p) Retirement benefit costs Payments to defined contribution retirement benefit plans are charged as an expense as they fall due. Payments made to state-managed retirement benefit schemes are dealt with as payments to defined contribution plans where the Group’ s obligations under the plans are equivalent to those arising in a defined contribution retirement benefit plan. - 17 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2005 (cont’ d) 4. Significant accounting policies (cont’d) (q) Foreign currency conversion The financial statements are expressed in Renminbi. Transactions in foreign currencies are translated at the rates prevailing at the dates of the transactions. Monetary assets and liabilities in foreign currencies are translated at the rates prevailing at the balance sheet date. Exchange differences that are attributable to the translation of foreign currency borrowings for the purpose of financing the construction of factory and office buildings, plant and machinery and other major fixed assets for periods prior to their being in a condition to enter into services are included in the cost of the fixed assets concerned. Other exchange differences are dealt with in the consolidated income statement. On consolidation, the financial statements of overseas subsidiaries denominated in foreign currencies are translated into Renminbi at the rates of exchange prevailing as at the balance sheet date. The resulting translation differences are included in the exchange reserve. (r) Leasing Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. i) The Group as lessor Amounts due from lessees under finance leases are recorded as receivables at the amount of the Group’ s net investment in the leases. Finance lease income is allocated to accounting periods so as to reflect a constant periodic rate of return on the Group’ s net investment outstanding in respect of the leases. Rental income from operating leases is recognized on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized on a straight-line basis over the lease term. - 18 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2005 (cont’ d) 4. Significant accounting policies (cont’d) (r) Leasing (cont’ d) ii) The Group as lessee Assets held under finance leases are recognized as assets of the Group at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged to profit or loss, unless they are directly attributable to qualifying assets, in which case they are capitalized in accordance with the Group’ s general policy on borrowing costs. Rentals payable under operating leases are charged to profit or loss on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the lease term. (s) Impairment loss At each balance sheet date, the Group reviews the carrying amounts of its assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. Any impairment loss arising is recognized as an expense immediately. A reversal of impairment loss is limited to the asset’ s carrying amount that would have been determined had no impairment loss been recognized in prior years. Reversals of impairment loss are credited to the income statement in the year in which the reversals are recognized. (t) Provisions Provisions are recognized when the Group has a present obligation as a result of a past event, and it is probable that the Group will be required to settle that obligation. Provisions are measured at the directors’best estimate of the expenditure required to settle the obligation at the balance sheet date, and are discounted to present value where the effect is material. - 19 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2005 (cont’ d) 4. Significant accounting policies (cont’d) (u) Income tax Income tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years, and it further excludes income statement items that are never taxable or deductible. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized. Such assets and liabilities are not recognized if the temporary difference arises from goodwill (or negative goodwill) or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognized for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed as at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realized. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Tax asset can be offset against tax liability only if the Group has a legally enforceable right to make or receive a single net payment and the Group intends to make or receive such a net payment or to recover the asset and settle the liability simultaneously. - 20 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2005 5. Business and geographical segments 2005 Mobile Colour TV phone Others Elimination Consolidated Colour TV Mobile phone Others Elimination Consolidated RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Income statement External sales 9,566,275 1,693,656 195,961 - 11,455,892 9,526,590 3,573,713 262,219 - 13,362,522 Inter-segment sales 3,748,258 1,062 219,754 ( 3,969,074 ) - 3,985,231 9,152 82,512 ( 4,076,895 ) - 13,314,533 1,694,718 415,715 ( 3,969,074 ) 11,455,892 13,511,821 3,582,865 344,731 ( 4,076,895 ) 13,362,522 Operating profit/(loss) 264,154 ( 193,178 ) ( 27,422 ) 14,559 58,113 240,289 14,661 ( 17,479 ) ( 56,139 ) 181,332 Finance costs ( 12,353 ) ( 7,033 ) Share of loss from associates ( 833 ) - - - ( 833 ) ( 1,738 ) - - - ( 1,738 ) Income tax ( 11,514 ) ( 11,593 ) Minority interests ( 13,861 ) ( 18,419 ) Profit to equity holders of the parent 19,552 142,549 Balance sheet Assets Segment assets 8,038,250 624,487 400,903 - 9,063,640 8,253,222 1,035,140 245,887 - 9,534,249 Interests in associates 44,284 - - - 44,284 35,159 - - - 35,159 Unallocated assets 14,462 15,962 9,122,386 9,585,370 Liabilities Segment liabilities 4,791,401 640,679 168,432 - 5,600,512 5,116,502 883,707 84,993 - 6,085,202 Unallocated liabilities 48,179 58,649 5,648,691 6,143,851 - 21 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2005 (cont’ d) 5. Business and geographical segments (cont’d) The Group’ s operations are located in and outside the PRC. The following table provides an analysis of the Group’ s turnover by geographical market, irrespective of the origin of the goods : 2005 2004 RMB’000 RMB’000 Inside PRC 9,977,030 12,097,893 Outside PRC 1,478,862 1,264,629 11,455,892 13,362,522 The following is an analysis of the carrying amount of segment assets and capital additions, analyzed by geographical area in which the assets are located : Carrying amount of segment assets Capital additions 2005 2004 2005 2004 RMB’000 RMB’000 RMB’000 RMB’000 Inside PRC 8,711,578 9,293,739 135,086 166,102 Outside PRC 410,808 291,631 116 131 9,122,386 9,585,370 135,202 166,233 6. Other revenue 2005 2004 RMB’000 RMB’000 Dividend income - 595 Income from government grant (*) 2,997 2,997 Profit on partial disposal of a subsidiary - 112 Profit on disposal of an associate - 357 Impairment loss on associates reversed 8,391 - Loss on disposal of other investments - ( 364 ) Income from raw material less cost 3,853 10,445 Income form scrap products less cost 10,714 8,123 Liabilities waived 1,207 4,973 Transfer from VAT of local-product-local-sale - 188 Profit from joint venture on property development ‘ site at Fairview Park and Swan Castle - 36,129 Profit from disposal of properties to staff - 3,928 Other non-operating net incomes 12,048 7,769 39,210 75,252 (*) The Group received government grant for research and technical know-how development that would be recognized as income on a straight-line basis over the period of the grant. - 22 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2005 (cont’ d) 7. Profit before taxation 2005 2004 RMB’000 RMB’000 Profit before taxation has been arrived at : After charging : Auditors’remuneration 800 800 Directors’emoluments - - Depreciation of property, plant and equipment 139,540 146,808 Amortization of land use rights 630 630 Loss on disposal of property, plant and equipment 1,815 1,978 Amortization of goodwill - 322 Amortization of intangible assets 5,550 3,295 Loss on disposal of other investments - 364 Provision for inventory obsolescence 50,053 35,502 Inventories written off 27,040 - Provision for doubtful debts on account receivables 18,271 18,165 Provision for doubtful debts on other receivables 2,148 - Interest expenses 4,456 7,227 Research and development expenditures 98,632 69,257 Rentals of land and buildings 16,838 32,949 Staff costs 257,038 275,908 And after crediting : Interest income 7,488 11,993 Dividend income - 595 Reversal for impairment loss on property, plant and equipment 260 - Profit on partial disposal of a subsidiary - 112 Profit on disposal of an associate - 357 Reversal for doubtful debts on other receivables - 2,135 Short-term bank loan waived - 4,500 Other payables waived 1,207 473 - 23 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2005 (cont’ d) 8. Income tax 2005 2004 RMB’000 RMB’000 PRC corporate tax 8,167 9,098 Hong Kong profits tax 3,347 2,495 11,514 11,593 PRC corporate tax is determined by reference to the profit reported in the audited financial statements under PRC Accounting Standards, and after adjustments for income and expense items that are not assessable or deductible for income tax purposes. It is provided at the rates of 15% (2004 - 15%) on the estimated assessable income for companies established in Shenzhen and 33% (2004 - 33%) for other PRC companies. Hong Kong profits tax is calculated at 17.5% (2004 - 17.5%) of the estimated assessable profits for the year. The reconciliation between tax expense and accounting profit at applicable tax rates is as follows : 2005 2004 RMB’000 RMB’000 Profit before taxation 44,927 172,561 Tax at the applicable income tax rate of 15% (2004 - 15%) 6,739 25,884 Tax effect of : - disallowable expenses 266 328 - non-taxable revenue ( 401 ) ( 2,095 ) - different tax rates in different regions ( 2,654 ) ( 2,911 ) - recognized tax losses ( 9,967 ) ( 9,613 ) - tax losses unrecognized 17,531 - Actual tax expense at 25.63% (2004 - 6.72%) 11,514 11,593 No deferred tax asset is recognized as it is uncertain whether taxable profit will be available against which deductible temporary differences can be utilized in the near future. As at December 31, 2005, the net unprovided deferred tax asset was RMB105,954,000 (2004 - RMB70,434,000). - 24 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2005 9. Property, plant and equipment Leasehold Machinery Electronic Motor Construction- Buildings improvements & equipment equipment vehicles in-progress Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Cost/valuation As at January 1, 2004 815,920 22,230 617,387 531,032 67,013 113,883 2,167,465 Additions 2,920 658 39,457 73,187 13,132 29,594 158,948 Disposals ( 13,037 ) ( 17,100 ) ( 18,393 ) ( 27,531 ) ( 14,134 ) ( 1,719 ) ( 91,914 ) Reclassifications 58,852 - - 18,373 - ( 77,225 ) - As at December 31, 2004 864,655 5,788 638,451 595,061 66,011 64,533 2,234,499 Additions 12,073 749 48,369 46,840 4,518 8,189 120,738 Disposals ( 516 ) - ( 14,055 ) ( 16,951 ) ( 11,100 ) ( 1,123 ) ( 43,745 ) Reclassifications 19,213 - 20,151 - - ( 39,364 ) - As at December 31, 2005 895,425 6,537 692,916 624,950 59,429 32,235 2,311,492 Accumulated depreciation As at January 1, 2004 ( 128,969 ) ( 19,265 ) ( 291,396 ) ( 309,114 ) ( 47,665 ) - ( 796,409 ) Additions ( 21,510 ) ( 1,131 ) ( 50,124 ) ( 64,229 ) ( 9,814 ) - ( 146,808 ) Disposals 5,271 17,100 13,932 17,857 13,527 - 67,687 As at December 31, 2004 ( 145,208 ) ( 3,296 ) ( 327,588 ) ( 355,486 ) ( 43,952 ) - ( 875,530 ) Additions ( 22,256 ) ( 1,794 ) ( 49,665 ) ( 60,738 ) ( 5,087 ) - ( 139,540 ) Disposals 103 - 11,892 13,598 10,200 - 35,793 Reversal for impairment loss - - 254 - 6 - 260 As at December 31, 2005 ( 167,361 ) ( 5,090 ) ( 365,107 ) ( 402,626 ) ( 38,833 ) - ( 979,017 ) Net book value As at December 31, 2005 728,064 1,447 327,809 222,324 20,596 32,235 1,332,475 As at December 31, 2004 719,447 2,492 310,863 239,575 22,059 64,533 1,358,969 The Group ’s certain property, plant and equipment with a net book value of RMB58,190,000 have been pledged to secure general banking facilities granted to the Group. In preparation for the reorganization of the Company into a Sino-foreign joint stock limited company, the Company’ s property, plant and equipment as at July 31, 1991 were revalued on an open market value basis by Zhonghua (Shenzhen) Certified Public Accountants, a registered valuer in Shenzhen. The surplus of RMB29,203,000 arising from the revaluation was capitalized as share capital. - 25 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2005 (cont’ d) 10. Land use rights 2005 2004 RMB’000 RMB’000 Cost As at beginning of the year 31,326 31,326 Reclassifications 8,094 - As at end of the year 39,420 31,326 Accumulated amortization As at beginning of the year ( 3,007 ) ( 2,377 ) Charged for the year ( 630 ) ( 630 ) Reclassifications ( 8,094 ) - As at end of the year ( 11,731 ) ( 3,007 ) Net book value 27,689 28,319 Classified as current portion ( 630 ) ( 630 ) Classified as non-current portion 27,059 27,689 The Group’ s certain land use rights with a net book value of RMB4,314,000 have been pledged to secure general banking facilities granted to the Group. 11. Goodwill 2005 2004 RMB’000 RMB’000 Cost As at beginning of the year and as at end of the year 3,217 3,217 Accumulated amortization As at beginning of the year ( 2,228 ) ( 1,906 ) Charged for the year - ( 322 ) As at end of the year ( 2,228 ) ( 2,228 ) Net book value 989 989 - 26 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2005 (cont’ d) 12. Intangible assets Technical Trademarks know-how Total RMB’000 RMB’000 RMB’000 Cost As at January 1, 2004 1,534 16,872 18,406 Additions 28 7,257 7,285 Transfer to prepayments - ( 269 ) ( 269 ) As at December 31, 2004 1,562 23,860 25,422 Additions 47 14,417 14,464 As at December 31, 2005 1,609 38,277 39,886 Accumulated amortization As at January 1, 2004 ( 638 ) ( 10,568 ) ( 11,206 ) Charged for the year 2004 ( 214 ) ( 3,081 ) ( 3,295 ) Transfer to prepayments - 93 93 As at December 31, 2004 ( 852 ) ( 13,556 ) ( 14,408 ) Charged for the year 2005 ( 165 ) ( 5,385 ) ( 5,550 ) As at December 31, 2005 ( 1,017 ) ( 18,941 ) ( 19,958 ) Net book value As at December 31, 2005 592 19,336 19,928 As at December 31, 2004 710 10,304 11,014 13. Interests in associates 2005 2004 RMB’000 RMB’000 Share of net assets 52,142 55,375 Impairment loss provision ( 2,797 ) ( 11,188 ) Amounts due from associates 1,130 1,130 Amounts due to associates ( 6,191 ) ( 10,158 ) 44,284 35,159 - 27 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2005 (cont’ d) 14. Other investments 2005 2004 RMB’000 RMB’000 Unconsolidated subsidiaries, balances due 136,567 136,567 Impairment loss provision ( 136,567 ) ( 136,567 ) - - Unlisted shares, at cost 1,885 1,885 Impairment loss provision ( 1,400 ) ( 1,400 ) 485 485 Listed share, at cost * 9,805 9,805 10,290 10,290 * The market value of these listed shares is not generally available. 15. Inventories 2005 2004 RMB’000 RMB’000 Raw materials 1,416,730 1,551,927 Work-in-progress 198,685 113,212 Finished goods 1,996,287 2,091,729 3,611,702 3,756,868 Provision for inventory obsolescence ( 226,144 ) ( 176,091 ) 3,385,558 3,580,777 16. Properties held for sale 2005 2004 RMB’000 RMB’000 King Yuan Building – cost b/f and cost c/f 4,172 4,172 - 28 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2005 (cont’ d) 17. Account receivables 2005 2004 RMB’000 RMB’000 Amount receivables 814,306 690,817 Provision for doubtful debts ( 138,072 ) ( 119,801 ) 676,234 571,016 As at December 31, 2005, the aging of amount receivables is analyzed as follows : 2005 2004 RMB’000 RMB’000 Within one year 605,465 493,906 Over one year but within two years 20,970 13,328 Over two years but within three years 7,552 18,752 Over three years 180,319 164,831 814,306 690,817 18. Prepayments, deposits and other receivables 2005 2004 RMB’000 RMB’000 Advance payments 53,457 49,570 Prepayments 76,721 38,451 Other receivables 108,314 115,656 238,492 203,677 Provision for doubtful debts ( 6,574 ) ( 4,426 ) 231,918 199,251 19. Note receivables 2005 2004 RMB’000 RMB’000 Bills receivable 135,862 127,634 Promissory notes issued by banks 2,594,001 2,806,018 Promissory notes issued by debtors 29,826 - 2,759,689 2,933,652 - 29 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2005 (cont’ d) 20. Share capital 2005 2004 RMB’000 RMB’000 Registered, issued and paid-up “A” shares of RMB1 each 399,148 399,148 “B” shares of RMB1 each 202,838 202,838 601,986 601,986 “A” shares, listed and tradable 224,199 224,199 “B” shares, listed and tradable 202,837 202,837 427,036 427,036 Listed but temporarily not tradable 174,950 174,950 601,986 601,986 The “A” and “B” shares carry equal rights with respect to the distribution of the Company’ s assets and profits, and rank pari passu in all other respects. The “A” shares are held by PRC investors with settlement in Renminbi, whereas “B” shares are held by both PRC investors and foreign investors, and are settled in Hong Kong dollars. 21. Short-term bank loans 2005 2004 Note RMB’000 RMB’000 Bank loans, secured 9, 10 28,000 48,149 22. Analysis of financing Other long-term Minority Bank loans liabilities interests RMB’000 RMB’000 RMB’000 As at beginning of the year 48,149 10,499 247,827 Net cash inflow/(outflow) from financing ( 20,149 ) 9,680 - Increase in minority interests - - 12,900 Dividend paid to minority shareholders - - ( 12,866 ) Share of results of minority interests - - 13,861 As at end of the year 28,000 20,179 261,722 - 30 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2005 (cont’ d) 23. Commitments As at December 31, 2005, the Group did not have any material commitments under non-cancellable operating leases and capital expenditures. 24. Contingent liabilities At December 31, 2005, the Group did not have any significant contingent liabilities. 25. Post balance sheet event The Company’ s Extraordinary General Meetings were held from March 2 to March 6, 2006 pursuant to which resolutions for the proposed share reform were passed. The proposal stipulated that as at the effective date of the share reform, each shareholder of listed and tradable “A”share with name registered in the register of shareholders could be entitled 2.5 shares for every 10 shares on hand. As a result, the shareholders of listed but temporarily not tradable shares would compensate to such “A”share shareholders in the total entitlement of 56,049,676 shares. 26. Related party transactions During the year ended December 31, 2005, the Group had certain material transactions with related parties with details as follows : 2005 2004 RMB’000 RMB’000 Overseas Chinese Town Holdings Operating lease paid 335 357 Co. Shenzhen Dekon Electronics Co., Purchase of merchandises 52,017 58,841 Ltd. Shanghai Huali Packaging Co., Purchase of merchandises 56,144 57,226 Ltd. ' Shenzhen Huali Packaging Co., Purchase of merchandises 27,615 49,071 Ltd. ' Proceeds from disposal of - 1,136 'other investments - 31 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2005 (cont’ d) 27. Impact on results attributable to shareholders and net asset value as reported by the PRC Certified Public Accountants Profit Attributable Net to shareholders asset value RMB’000 RMB’000 As reported by PRC Certified Public Accountants 71,899 3,211,212 Adjustments to conform to IFRS : Prior year adjustment on capital reserves - ( 6,978 ) Prior year adjustment on surplus reserves - 17,909 Accumulated losses of subsidiaries ( 57,272 ) - Government grant transfer from capital reserves as 'deferred income - ( 10,492 ) Removal expenditures written-back 2,318 - Government grant recognized as income 2,997 - Transfer of welfare funds recognized as expense ( 1,919 ) - Goodwill written-back 322 322 Other payables waived by subsidiaries’creditors 1,207 - As restated in conformity with IFRS 19,552 3,211,973 28. Financial instruments Financial assets of the Group include cash and bank balances, note receivables, account receivables, prepayments, deposits and other receivables. Financial liabilities include bank loans, note payables, account payables, other payables, accrued expenses, deferred income and other long-term liabilities. (a) Credit risk Cash and bank balances : Substantial amounts of the Group’ s cash balances are deposited with Bank of China, China Merchants Bank, Shenzhen Development Bank, Industrial and Commercial Bank of China, Construction Bank of China and Agricultural Bank of China. Account receivables : The Group does not have a significant exposure to any individual customer or counterpart. The major concentrations of credit risk arise from exposures to a substantial number of account receivables that are mainly located in the PRC. - 32 - Konka Group Co., Ltd. Notes to the financial statements for the year ended December 31, 2005 (cont’ d) 28. Financial instruments (cont’d) (b) Fair value The fair value of financial assets and financial liabilities is not materially different from their carrying amount. The carrying value of short-term bank loans and other long-term liabilities is estimated to approximate its fair value based on the borrowing terms and rates of similar loans. Fair value estimates are made at a specific point in time and based on relevant market information and information about the financial instruments. These estimates are subjective in nature and involve uncertainties on matters of significant judgement, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. 29. Language The translated English version of financial statements is for reference only. Should any disagreement arise, the Chinese version shall prevail. - 33 -

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