长虹美菱(000521)皖美菱Ｂ2005年年度报告（英文）

HEIFEI MEILING COMPANY LTD ANNUAL REPORT 2005 April 2006 Important Notice: Board of Directors and Supervisory Committee of Hefei Meiling Co., Ltd. (hereinafter referred to as the Company) and its directors, supervisors and senior executives individually and collectively accept responsibility for the correctness, accuracy and completeness of the contents of this report and confirm that there are no material omissions or errors that would render any statement misleading. Shenzhen Pengcheng Certified Public Accountants and Morison Heng Certified Public Accountants respectively issued standard unqualified Auditors’ Report for the Company. Mr. Zhao Yong, Executive of the Company, Vice-president Mr. Ye Honglin and Secretary of Financial Dept. Mr. Zhong Weiyi hereby confirm that the Financial Report of the Annual Report is true and complete. Contents Section I. Company Profile------------------------------------------------------------------------------ Section Ⅱ. Summary of Financial Highlight and Business Highlight-------------------------- Section Ⅲ. Changes in Capital Shares and Particulars about Shareholders----------------- Section Ⅳ. Particulars about Directors, Supervisors, Senior Executives and Employees- Section Ⅴ. Administrative Structure----------------------------------------------------------------- Section Ⅵ. Brief Introduction to the Shareholders’ General Meeting------------------------- Section Ⅶ. Report of the Board of Directors------------------------------- ------------------------ Section Ⅷ. Report of the Supervisory Committee------------------------------------------------- Section Ⅸ. Significant Events-------------------------------------------------------------------------- Section Ⅹ. Financial Report -------------------------------------------------------------------------- Section XI. Documents for Reference---------------------------------------------------------------- Section I. Company Profile 1. Legal Name of the Company In Chinese: 合肥美菱股份有限公司 In English: HEFEI MEILING CO., LTD. Abbr. in English: HFML 2. Legal Representative: Mr. Zhao Yong 3. Secretary of the Board of Directors and Securities Affairs Representative Secretary of the Board of Directors: Xue Hui Contact address: No. 48, Wuhu Road, Hefei Tel: (86) 551-2869394 Fax: (86) 551-2883122 E-mail: wyxuehui@163.com Securities Affairs Representative: Qi Dunwei E-mail: secretary@meiling.com 4. Registered Address: No. 48, Wuhu Road, Hefei Office Address: No. 48, Wuhu Road, Hefei Post Code: 230001 Company’s Internet Website: http://www.meiling.com E-mail of the Company: info@meiling.com 5. Newspapers Chosen for Disclosing the Information of the Company: Securities Times, China Securities and Wen Wei Po Internet Website Designated by CSRC for Publishing the Annual Report: http://www.cninfo.com.cn The Place Where the Annual Report is Prepared and Placed: Secretariat of the Board of Directors, on 2/F of the Company’s Office Bldg. 6. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: MEILINGDIANQI, MEILING-B Stock Code: 000521, 200521 7. Other relevant information Initial registration date: Dec. 31, 1992 Initial registration place: Hefei Municipal Administration Bureau of Industrial and Commerce Registration date after change: Jul.28, 2004 Registration address: Anhui Province Administration Bureau of Industrial and Commerce Registration number of business license of enterprise legal person: 001684 Registration number of tax: GSW Zi 34010414918555X Domestic Certified Public Accountants Engaged by the Company: Name: Shenzheng Pengcheng Certified Public Accountants Address: 5/F, Baofeng Mansion, No.2006 Dongmen South Road, Shenzhen International Certified Public Accountants Engaged by the Company: Name: Morison Heng Certified Public Accountants Address: 17th Floor, No.1, One Hysan Avenue, Causeway Bay, Hong Kong Section II. Summary of Financial Highlight and Business Highlight 1. Summary of accounting highlight as of the year 2005 Unit: RMB Items Amounts Total profit 7,101,086.78 Net profit 6,658,981.44 Net profit after deducting non-recurring gains and losses -12,604,041.38 Profit form main operations 344,249,045.67 Other operating profit 584,512.04 Operating profit 4,584,333.42 Investment income 1,321,095.64 Subsidy income 1,542,400.00 Net non-operating income/expenses -346,742.28 Net cash flows arising from operating activities 63,611,111.57 Net increase/decrease in cash and cash equivalents -8,327,473.47 Items of deducting non-recurring gains and losses and the involved amounts are as following: Unit: RMB No. Items Amounts 1 Income form sales of asset 77,300.00 2 Net income from penalty 69,294.36 3 Income from subsidy 1,542,400.00 Switching back provision for losses from the depreciation of 18,067,365.10 4 inventories of the report period 5 Subtotal 19,756,359.46 6 Net losses from disposal of fixed assets 451,815.06 7 Donation expenditure 40,553.62 8 Penalty expenditure 967.96 9 Subtotal 493,336.64 10 Amount of non-recurring gains and losses impact 19,263,022.82 2. The net profit as of year 2005 was RMB 6,659,000 as audited according to the Chinese Accounting Standards and that was RMB 4,011,000 as audited by Morison Heng Certified Public Accountants according to the International Financial Reporting Standards. The differences are stated as follows: Unit: RMB’000 Net profit as of Net assets as at Dec. 31, year 2005 2005 As report under PRC statutory financial statements 6,659 863,654 IFRS adjustments: Provision for warranty expenses -1,206 -13,282 Recalculation of financial assets in according with 1,588 -241,860 IAS 39 Depreciation of fixed assets -3,084 11,453 Other -80 -19,751 According to International Accounting Standards 3,877 600,214 3. Main accounting data and financial indexes Unit: RMB Items 2005 2004 2003 Income from main operations 2,022,018,592.24 1,438,633,867.16 1,383,809,999.35 Net profit 6,658,981.44 16,767,740.47 -194,656,073.42 Total assets 2,439,936,423.58 2,357,408,266.18 2,245,189,884.42 Shareholders’ equity 863,654,084.66 856,947,103.22 840,931,946.31 Earnings per share (weighted) 0.016 0.04 -0.47 Earnings per share (diluted) 0.016 0.04 -0.47 Earnings per share (deducting non-recurring gains and losses) -0.03 0.03 -0.44 Net assets per share 2.09 2.07 2.03 Net assets per share after adjustment 1.63 1.22 1.30 Net cash flow per share arising from operating activities 0.15 0.36 0.23 Return on equity (%) (diluted) 0.77 1.96 -23.15 Return on equity (%) (weighted) -1.46 1.98 -20.75 4. Supplemental statement of profit distribution Return on equity (%) Earnings per share (RMB) Profit as of report period Weighted Weighted Fully diluted Fully diluted average average Profit from main operations 39.86 40.42 0.83 0.83 Operating profit 0.53 0.53 0.01 0.01 Net profit 0.77 0.77 0.02 0.02 Net profit after deducting -1.46 -1.47 -0.03 -0.03 non-recurring gains and losses Explanation: (1) In accordance with Reporting Regulations on the Information Disclosure of Companies Publicly Issuing Stock (No. 9) promulgated by China Securities Regulatory Commission, at the end of year 2004 and 2005, the Company’s total ordinary share was 413,642,949 shares as calculated based on calculating method of weighted average. Calculation formula of major financial indexes: Earnings per share= net profit/Total ordinary share at the year-end Net assets per share= Shareholder’s equity at the year-end / Total ordinary share at the year-end Return on equity= Net profit/Shareholder’s equity at the year-end×100% Net assets after adjustment= (Shareholder’s equity at the year-end-accounts receivable more three years – expenses to be apportioned -long-term expenses to be apportioned)/Total ordinary share at the year-end Net cash flow per share arising from operating activities= Net cash flow arising from operating activities/ Total ordinary share at the year-end (2) Non-recurring gains and losses are calculated based on Q&A for Standard on the Information Disclosure of Companies Publicly Issuing Stock (No. 1) — non-recurring gains and losses. (3) Weighted average return on equity is calculated based on net profit after deducting non-recurring gains and losses as of report period. The calculating method of the said index referred to the regulations of Reporting Regulations on the Information Disclosure of Companies Publicly Issuing Stock (No. 9) 5. Particulars about changes in shareholders’ equity during the report period and reasons (Unit: share) Statutory Capital Surplus Item Share capital Public Retained profit Total reserve reserve welfare fund Amount at year-begin 413642949.00 571769478.72 219246331.19 65643217.32 -413354873.01 856947103.22 Increase in this period --- --- --- --- 6658981.44 6658981.44 Decrease in this period --- --- --- --- --- --- Amount at year-end 413642949.00 571769478.72 219246331.19 65643217.32 -406695891.57 863654084.66 Changes for Gains in the Gains in the reason --- --- --- --- report period report period Section III. Changes in Capital Shares and Particulars about Shareholders 1. Particulars about the changes in share (ended of Dec.31, 2005) Unit: share Before the change Increase/Decrease of this time (+, -) After the change Capitalization Type of share Rationed Bonus Additional Sub- Amount proportion of public Others Amount Proportion share shares issuance total reserve I. Unlisted 149,012,606 36.02% 149,012,606 36.02% shares 1. Sponsors’ 44,129,967 10.67% 44,129,967 10.67% shares Including: State-owned 40,543,692 9.80% 40,543,692 9.80% share Domestic legal 3,586,275 0.87% 3,586,275 0.87% person’s shares Foreign legal 0 0.00% 0 0.00% person’s shares 0 0.00% 0 0.00% Others 2. Raised legal 22,029,956 5.33% 22,029,956 5.33% person’s shares 3. Inner 0 0.00% 0 0.00% employees’ shares 4. Preference 82,852,683 20.03% 82,852,683 20.03% shares or others 264,630,343 63.98% 264,630,343 63.98% II. Listed shares 1. RMB ordinary 151,530,343 36.63% 151,530,343 36.63% share 2. Domestically 113,100,000 27.34% 113,100,000 27.34% listed foreign shares 3. Overseas 0 0.00% 0 0.00% listed foreign shares 0 0.00% 0 0.00% 4. Others 413,642,949 100.00% 413,642,949 100.00% III.Total shares 2. Issuance and Listing of shares In 1996, through approval by China Securities Regulatory Commission, the Company issued 100 million shares of domestically listed foreign capital shares (B-shares) at the price of RMB 3.30 per share on Aug. 14, 1996, which were listed with Shenzhen Stock Exchange for trading on Aug. 28, 1996. In June 1997, the Company implemented the dividend distribution plan by distributing bonus shares at the rate of 3.5 shares for every 10 shares. As a result, the share capital increased by 82.3549 million shares, up to 380,226,255 shares. From July 29 to August 11, 1997, the Company conducted allotment for A-shares (at the rate of 2.22 shares for every 10 shares) at the price of RMB 4.80 per share. Totally 33.4167 million shares were placed and were listed on Aug. 23, 1997. Up to then, the Company’s share capital increased to 413,642,949 shares. (II) About shareholders 1. Particular about amount of shareholders and shares held by the shareholders Unit: share Total amount of shareholders 84,388 Particulars about shares held by the top ten shareholders Numbers of Number of Nature of Proportion of Total of shares Full name of Shareholders non-circulating share pledged/ shareholder shares held held shares held frozen Guangdong Greencool Enterprise 20.00% 82,852,683 82,852,683 82,852,683 Other Development Co., Ltd. State-owned Hefei Meiling (Group) Holdings Co., Ltd. 9.80% 40,543,692 40,543,692 0 shareholder Foreign 0.99% 4,078,462 0 0 China Everbright Securities (HK) Co., Ltd. shareholder Fang Jingwen Foreign 0.57% 2,372,400 0 0 shareholder Foreign 0.51% 2,109,000 0 0 Yongsheng Industrial Co., Ltd. shareholder China Merchants Securities (Hong Kong) Co., Foreign 0.45% 1,869,850 0 0 Ltd. shareholder 0.41% 1,707,750 0 0 Hefei Refrigerator Fittings Factory Other 0.41% 1,707,750 0 0 Hefei Industrial Bank Other 0.37% 1,536,975 0 0 China Cinda Assets Management Company Other An’hui Guozhen Group Co., Ltd. 0.37% 1,536,975 0 0 Other Particulars about shares held by the top ten shareholders of circulation shares Number of circulation shares held at the Shareholders’ name (full name) Type of shares year-end China Everbright Securities (HK) Co., Ltd. 4,078,462 Domestically listed foreign share Fang Jingwen 2,372,400 Domestically listed foreign share Yongsheng Industrial Co., Ltd. 2,109,000 Domestically listed foreign share China Merchants Securities (Hong Kong) Co., 1,869,850 Domestically listed foreign share Ltd. Lin Xueling 1,444,500 RMB Common share Huang Guoqiang 1,367,000 Domestically listed foreign share Long qinfang 1,361,762 Domestically listed foreign share CAO SHENGCHON 1,360,600 Domestically listed foreign share LI XOXONG 1,350,000 Domestically listed foreign share Hefei Meicheng Vacuum Forming Co., Ltd. 1,305,300 RMB Common share Among the top ten shareholders, there existed no associated relationship or belong to the concerted actors as specified in the Measures for Controlling Information Disclosure of Alternation in the Shares Held by Shareholders Explanation on associated relationshipin Listed Companies; as the Company has no idea on whether there exists among the aforesaid shareholders any business relationship among other shareholders of circulating shares or they belong to the concerted actors as specified in the Measures for Controlling Information Disclosure of Alternation in the Shares Held by Shareholders in Listed Companies. Explanation: (1) Judicially frozen shares held by Guangdong Greencool Enterprise Development Co., Ltd. as follows: Due to dispute of advanced acceptance among Gu Chujun, Guangdong Greencool Enterprise Development Co., Ltd. and Greencool Cryogen (China) Co., Ltd, Foshan Shunde Branch of Bank of Communications applied for a pre-action custody of property to Intermediate People’s Court of Foshan Guangdong Province, and asked for freezing bank loans amounting to RMB 75 million of the said three parties and its property of relevant value, and supplied guarantee by Guangzhou Branch of Bank of Communications. According to (2005) FZFLBZI No.210 Civil Ruling Paper issued by Foshan Court and (2005) FZFBZI No.210 sealing list produced by Foshan Court, adjudged as follows: legally freezing bank loans of Gu Chujun, Guangdong Greencool Enterprise Development Co., Ltd. and Greencool Cryogen (China) Co., Ltd amounting to RMB 75 million or sealing up and detaining its equivalent value of property, as well as freezing sponsor’s state-owned shares amounting to 82,852,683 shares and bonus share & retained share of “Meiling Dianqi” (Sock Code: 000521) held by Guangdong Greencool Enterprise Development Co., Ltd according to the said ruling paper of Foshan Court dated July 15, 2005. The freezing period limited from July 15, 2005 to July 14, 2006. (2) There existed no pledged or frozen shares held by Hefei Meiling Group Holding Co., Ltd. 2. Brief introduction on controlling shareholder and actual controller Guangdong Greencool Enterprise Development Co., Ltd., the 1st largest shareholder of the Company, signed Share Transfer Agreement of Meiling Electric Appliance. Greencool plan to transfer its domestical legal share amounting to 82,852,683 shares (accounting for 20.03% of total shares issued by the Company) held from the Company to Sichuan Changhong Electric Appliance Co., Ltd. according to the said agreement. Sichuan Changhong Electric Appliance Co., Ltd. Legal representative: Mr. Zhao Yong Registered capital: 2,164,210,000 Registered address: No. 35, Mianxing (E) Road, Hi-tech Zone, Mianyang, Sichuan Business scope: production, sales and road transportation of video products, audiovisual products, air-conditioner products, companion products of buttery, network products, companion products of laser reading and writing, satellite TV & Broadcast ground receiving equipment, video movie, electric medicine products, electrical equipment, Security technology, organization products, digital camera, communication and computer products and chemical industry products; packaging goods and technical service; maintenance and sales of electric products and components; house leasing; transit trade, e-commerce, hi-tech risk investment and other state-permitted business. So the first largest shareholder of the Company is Sichuan Changhong Electric Group Co., Ltd. and the actual controller is State-owned Assets Supervision & Administration Commission of Mianyang Municipal. Equity structure chart of the Company is as follows: State-owned Assets Supervision & Administration Commission of Mianyang Municipal 100% Sichuan Changhong Electric Group Co., Ltd. 30.70% Sichuan Changhong Electric Appliance Co., Ltd. 20.03% Hefei Meiling Co., Ltd. Section IV. Particulars about Directors, Supervisors, Senior Executives and Employees 1. Shares held by directors, supervisors and senior executives, their office term and remuneration Total Drawing payments payments from Shares held Reason Shares held at drew from the shareholder Name Title Sex Age Office term at for period-begin Company in organ or other period-end change the report related organ or period not Chairman of Feb., 11, 2006- Zhao Yong Male 43 0 0 0.00 Yes the Board May 28, 2008 Wang Vice Chairman May 28, 2005- Male 55 13,477 13,477 46.05 No Jiazhang of the Board May 28, 2008 Feb., 10, 2006- Li Jin Director Male 39 0 0 0.00 Yes May 28, 2008 May 28, 2005- Jiang Jizhi Director Male 59 0 0 28.89 No May 28, 2008 Mar., 3, 2006- Wang Yong President Male 39 0 0 6.39 No May 28, 2008 Nov., 13, 2005- Ye Honglin Vice president Male 35 0 0 5.75 No May 28, 2006 Nov., 13, 2005- Li Daijiang Vice president Male 40 0 0 5.75 No May 28, 2008 May 28, 2005- He Jinqi Vice president Male 43 0 0 46.08 No May 28, 2008 May 28, 2005- Xuehui Vice president Male 43 0 0 46.11 No May 28, 2008 Independent May 28, 2005- Wei Wei Male 51 0 0 5.40 No director May 28, 2008 Zhuo Independent May 28, 2005- Male 68 0 0 5.40 No Wenyan director May 28, 2008 Wu Independent May 28, 2005- Male 49 0 0 5.40 No Hanhong director May 28, 2008 Chairman of Fei the Female Feb., 10, 2006- 48 0 0 0.00 Yes Minying Supervisory May 28, 2008 Committee Feb., 10, 2006- Yu Xiao Supervisor Male 38 0 0 0.00 Yes May 28, 2008 Yang Jun Supervisor Male 36 Feb., 10, 2006- 0 0 0.00 Yes May 28, 2008 Yong May 28, 2005- Supervisor Male 38 0 0 0 5.40 Yes Fengshan May 28, 2008 Main work experience of directors, supervisors and senior executives for the recent five years: (1) Zhao Yong, male, Han nationality, was born in Sichuan Santai dated June 1963, member of CPC, senior engineer with doctor degree, he is now in charge of Chairman of the Board and secretary of CPC Committee of Sichuan Changhong Electric Group Co., Ltd. and Sichuan Changhong Electric Appliance Co., Ltd., Chairman of the Board of Sichuan Changhong Network Science & Technology Co., Ltd, Sichuan Hongwei Technology Co., Ltd, Sichuan Changhong Zhaohua Information Industry Co., Ltd, Sichuan Changhong Information Technology Co., Ltd, Guangdong Chuanghong Electric Co., Ltd, Zhongshan Changhong Electric Appliance Co., Ltd, Changhong Battery Co., Ltd. he graduated from Department of Mechanical Engineering of Tsing Hua University with major of pressworking of mechanical engineering in 1993 and took part in work in March 1991, he had been in posts of head of technical skill center, assistant chief engineer, chief engineer, deputy general manager, vice Chairman of the Board, member of standing CPC committee, General Manager, vice secretary of CPC Committee of Sichuan Changhong Electric Appliance Co., Vice Chairman of the Board, member of standing CPC Committee, vice secretary of CPC Committee of Sichuan Changhong Electric Group Corp., deputy mayor and member of CPC Organizaiton of Mianyang City, now he is charge of Chairman of the Board of the Company. (2) Wang Jiazhang, male, Han nationality, took the turns of plant manager assistance and vice plant manger of Hefei Refrigerator Headquarter, vice chairman of the Board and chairman of Hefei Meiling Co., Ltd., now he is in charge of chairman of the Board and secretary of Hefei Meiling Group Holdings and vice chairman of the Company. (3) Li Jin, male, Han nationality, was born in Hunan An’hua dated April 1967, member of CPC, senior engineer with doctor degree, now he takes the post of director of Sichuan Changhong Electric Appliance Co., Ltd, General Manager of Changhong Air-conditioner Corp., director of Zhongshan Changhong Electric Appliance Co., Ltd, Chairman of the Board of Shanghai Changhong Air-conditioner Sales Co., Ltd.. He graduated from Tsinghua University specialized in Engineering Thermal Physics and then entered the Company, he has been in charge of head of air-conditioner Research center of Air-conditioner Division, deputy minister of Air-conditioner and concurrently chief engineer, etc., now he holds the position of director of the Company. (4) Jiang Jizhi, male, Han nationality, an accountant, took the turns of section chief and general accountant of accounting department of Hefei Meiling Co., Ltd., general manager of sales company and general manager of Hefei Meiling Washing Machine, and now is in charge of director and standing deputy general manager of Hefei Meiling Group and director of the Company. (5) Wang Yong, male, Han nationality, was born in Sichuan Ziyang dated July 1967, engineer with bachelor degree, he graduated from radiotechnology major of Shanghai Jiaotong University in July 1990 and then entered to work at Sichuan Changhong Electric Appliance Co., Ltd, he ever took the post of manager of Management Committee in Marketing Management, head of Management Agency, vice minister, deputy general manager of Changhong Electric Appliance (China) Marketing Corp. and concurrently General Manager of North China Operation & Administration Center, now he is the president of the Company. (6) Ye Honglin, male, Han nationality, was born in Sichuan Pujiang dated December 1971, an accountant with bachelor degree, he graduated from Finance major of Southwest University of Finance & Economics in 1995 and started to work at Sichuan Changhong Electric Appliance Co., Ltd, he ever held the position of General Manager of inner bank and deputy minister of finance department, and now he is vice president of the Company. (7) Li Daijing, male, Han nationality, was born in Sichuan Shifang dated Oct., 1966, member of CPC, a statistician with bachelor degree, he graduated from statistics major of Southwest University of Finance & Economics and then entered to work at Sichuan Changhong Electric Appliance Co., Ltd, he ever held the position of head of Price department, manager of Price department, vice minister of comprehensive management department and vice Minster of the Ministry of Materials,etc., now he is in charge of vice president of the Company. (8) He Jinqi, male, Han nationality, took the turns of charger of accounting office of one large-scale state-owned enterprise of Tianjin, manager of accounting office, financing office and finance department of Greencool Cryogen (China) Co. and vice president of Beijing Greencool Environment Engineering Co., and now is in charge of vice president of the Company. (9) Xue Hui, male, Han nationality, took the post of director and concurrently general manager of Hefei Huazhen Senior Composite Material Co., section chief of capital management office of WCP, standing deputy general manager of An’hui Chang’an Electronic Co. and concurrently general manager of sales company, and now is in charge of vice president and secretary of the Board of the Company. (10) Wei Wei, male, Han nationality, doctor degree, professor and instructor of doctor, is well posted up macro-economic field, took the post of president of Economic Institute of An’hui University, vice president of An’hui University and commissar of the Communist Party School, and now is in charge of president of An’hui province Society and Science Institute and independent dirctor of the Company. (11) Zhuo Wenyan, male, Han nationality, professor, China CPA, instructor of master degree student of An’hui Finance and Economics University, councilor of China accounting and standing councilor of An’hui CPA, and take the post of independent director of the Company. (12) Wu Hanhong, male, Han nationality, doctor degree, professor and instructor of doctorate, councilor of Chinese Foreign Economic Doctrine Seminar, chief secretary of Beijing Foreign Economic Doctrine Seminar, senior visiting scholar of Lou vain University of Belgium, and independent director of the Company. (13) Fei Minying, female, Han nationality, was born in An’hui Su County dated Nov., 1958, member of CPC, an engineer with bachelor degree; she graduated from department of economic management of Party School of CPC Sichuan Provincial Committee (undergraduate) in 1997, and graduated from law department of Southwest University of Science & Technology (undergraduate) in 2005, now she holds the post of deputy secretary of Committee for Disciplinary Inspection, minister of Ministry of Audit of Sichuan Changhong Electric Appliance Co., Ltd., full time secretary of CPC Branch of Changhong Machinery Plant, deputy head of sales department, head of Supervision Division, office director of auditing office and minister of auditing & law issue department, etc. of Sichuan Changhong Electric Appliance Co., Ltd, now she is Chairman of supervisory Committee of the Company. (14) Yu Xiao, male, Han nationality, was born in Yiwu Zhejiang dated Aug. 1968, member of CPC, senior accountant with bachelor degree, he graduated from accounting major of Sichuan University in July 1990, now he took the post of minister of financial department of Sichuan Changhong Electric Appliance Co., Ltd., he ever held the position of deputy director of finance & accounting department, deputy director of F& A of Sales department, deputy Minster of Sales Department, etc. of Sichuan Changhong Electric Appliance Co., Ltd., now he is supervisor of the Company. (15) Yang Jun, male, Han nationality, was born in Mianyang Sichuan dated Mar. 1970, member of CPC, he graduated from department of Economic Management of Sichuan University (junior college) in 2003, and Department of Business Administration of Sichuan Business Administration College (Master Degree) in 2005, now he holds the post minister of Assets Operation Department of Sichuan Changhong Electric Appliance Co., Ltd, he ever took the post of senior manager and vice minister of Assets Operation of Sichuan Changhong Electric Appliance Co., Ltd, now he is the supervisor of the Company. (16) Yong Fengshan, male, Han nationality, an accountant, took the turns of chief director of operation department and section chief of finance department of Hefei Cable Plant, vice general accountant and concurrently section chief of finance department of Hefei Meiling Co., Ltd., and now is in charge of director and deputy general manager of Hefei Meiling Group Holdings and supervisor of the Company. 2. Particulars about director and supervisor holding concurrent office in Shareholding Company Start date of End date of Drawing remuneration Name Unit Title office term office term and allowance or not Sichuan Changhong Electric Zhao Yong Chairman of the Board Aug., 12, 2004 Jun., 28, 2005 Yes Appliance Co., Ltd Wang Hefei Meiling (Group) Chairman of the Board 2002 ----- No Jiazhang Holdings Co., Ltd. Sichuan Changhong Electric Li Jin Director Jun., 28, 2002 Jun., 28, 2002 Yes Appliance Co., Ltd Hefei Meiling (Group) Director and deputy Jiang Jizhi 2002 ----- No Holdings Co., Ltd. GM Yong Hefei Meiling (Group) Director and deputy 2003 ----- Yes Fengshan Holdings Co., Ltd. GM 3. Foundation of annual remuneration Foundation of annual remuneration received by directors, supervisors and senior executives: the Company conducted the democratic evaluation and performance examination on the task of directors, supervisors and senior executives according to the resolution of the 11th meeting of the 4th Board of Directors and the relevant policies of labor authority and the checking system of linking their office position wages with performance; then the remuneration is decided and implemented on the basis of evaluation result which has been examined and approved by the Board of Directors or the Shareholders’ General Meeting. The Company respectively paid allowance of Independent Directors of RMB 54,000 to every independent director per year based on the decision of the 11th meeting of the 4th Board of Director. 4. Particular of the change of Director, Supervisor and Senior Executive (1) the Company held the 7th meeting of the 5th Board on Nov., 13, 2005, due to the demand of production operation of the Company, the meeting examined and approved Proposal on Engaging Senior Executives, and agreed to engage Mr. Wang Yong as standing vice president of the Company and to engage Mr. Li Daijing and Mr. Ye Honglin as vice president of the Company. (2) The Company held the 9th meeting of the 5th Board on Jan., 4, 2006, and examined and approved Proposal on Deposing Mr. Gu Chujun as Chairman of the Board. (3) The Company held the 1st Extraordinary Shareholders’ General Meeting of 2006 on Feb., 10, 2006; the meeting examined and approved Proposal on Deposing Mr. Gu Chujun, Mr. Cheng Xiangzhou, Mr. Linke and Mr. Huo Yongxin as Directors. (4) The Company held the 1st Extraordinary Shareholders’ General Meeting of 2006 on Feb., 10, 2006; the meeting examined and approved Proposal on Electing Mr. Zhao Yong and Mr. Li Jin as Directors of the 5th Board of Director. (5) The Company held the 1st Extraordinary Shareholders’ General Meeting of 2006 on Feb., 10, 2006; the meeting examined and approved Proposal on Deposing Mr. Li Weimin, Mr. Jing Xin and Chen Qilin as Supervisors. (6) The Company held the 1st Extraordinary Shareholders’ General Meeting of 2006 on Feb., 10, 2006; the meeting examined and approved Proposal on Electing Ms. Fei Minying, Mr. Yu Xiao and Yang Jun as Supervisors of the 5th Supervisory Committee. (7) The Company held the 10th Extraordinary meeting of the 5th Board of Director on Feb., the meeting elected Mr. Zhao Yong as Chairman of the Board of the Company and legal representative of the Company. (8) The Company held the 5th meeting of the 5th Supervisory Committee on Feb., 11, 2006; 5 supervisors were supposed to be present and actually all of them attended the meeting. The meeting elected Ms. Fei Minying as Chairman of the 5th Supervisory Committee. (9) The Company held the 11th Extraordinary meeting of the 5th Board on Mar., 3, 2006; the meeting examined and approved Proposal on Change in Partial Senior Executives of the Company, and decided to engage Mr. Wang Yong as President of the Company. 5. The number of employees, professional/occupational composition, education background and retirement The Company has 2,716 employees, including 243 professionals holding medium and senior professional titles, 1,537 production personnel, 663 salespersons, 196 administrative personnel. 834 of them hold college degrees or higher. The Company did not bear the expenses to retired staff and there are only 161 internally retired staff members. Professional composition is as follow: Professional Number Proportion Production personnel 1537 56.59% Salesperson 663 24.41% Administrative personnel 196 7.22% Technicians 122 3.20% Financial personnel 122 4.49% Section V. Administrative Structure I. Company Administration In the report period, strictly according to the requirements in Company Law of the P.R.C., Securities Law, Rules on Administration of Listed Companies, Articles of Association and other relevant laws and regulations, the Company endlessly perfected the legal administration structure of the Company and standardized the operation of the Company. The running of the Shareholders’ General Meeting, Board of Director and Supervisory Committee was normal, directors, supervisors and senior executives of the Company could abide by laws and regulations of Company Law of the PRC, Securities Law and Articles of Association and other rules of the Company, seriously implemented its duty and protected general interests of the Company. 1. In the report period, the Company applied itself to study Company Law of PRC and Securities Law, actively constructed standardized and efficient modern enterprise system. 2. In the report period, through establishing Work System of Independent Director, amending Articles of Association, Rules of Procedure for Board of Director, Rules of Procedure for Supervisory Committee and Rules of Procedure for Shareholders’ General Meeting to standardize operation and improve efficiency. 3. In the report period, the Company fulfilled a series of self-examination required by An’hui SRC. 4. In the report period, the administrative structures of the Company were perfect relatively and reached on the requirement of the relevant document of CSRC. II. Performances of Independent Directors According to the relevant provisions of the Guiding Opinions on the Establishment of Independent Director System in Listed Companies promulgated by China Securities Regulatory Commission, the Company has integrated independent director system in Articles of Association. At present, 3 independent directors of the Company was in compliance with the requirement of CSRC, since the tenancy, the 3 independent directors were able to attend to the Board of Directors and the Supervisory Committee in the report period, actively learned the particulars about the various operations of the Company, fulfill their obligations with earnest, and expressed their opinions for some significant issues of the Company and performed an active function on the scientific decision-making and normative operation of the Company and preserved the interest of the Company and all shareholders in a diligent and responsible attitude. 1. Particulars about independent director attending the Board of Directors: Name of This year should Presence in Entrusted Absence independent attending the board person presence Note (times) directors (times) (times) (times) Wei Wei 12 11 0 1 Went abroad Zhuo Wenyan 12 11 1 0 --- Wu Hanhong 12 11 1 0 --- 2. Particulars about independent director presenting different opinion on the relevant items of the Company: In the report period, the 3 independent directors had no different opinion on various proposals of the annual Board of Meeting and other events of the Company. III. Separation between the Company and its Controlling Shareholder in terms of Business, Personnel, Assets, Organization and Finance 1.The Board, the Supervisry Committee and the internal organizations of the Company operated independently and there existed no interfervence on the operating decision of the Company by the controlling shareholder; the staff of production and operation of the Company separated from the controlling shareholder; 2. The Company possessed its own independent labor, human resource, and salary management departments and worked out its own labor, personnel, and salary management systems, president and vice president, etc. other senior executives of the Company drew no remuneration in controlling shareholders’ unit. 3.There was clear equity realtionship between the Company and the controlling shareholder and the production system and equipment facilities were independent from the controlling shareholder; the Company possesseed independent 4. The Company has established independent financial departments and accounting system. The Company has opened independent bank account and paid taxes independently. There exists no joint office work with the controlling shareholder. 5. There existed no breach of regulation of the controlling shareholder by occupying capital and other assets. IV. Valuation and Encouragement Mechanism for Senior Executives The Company consistently perfected fair, transparent and normative valuation standards and encouragement binding mechanism on the directors, supervisors and senior executives; the duties of the executives were confirmed in the post obligation system of the Company. The Company conducted the distribution assessment system based on the work achievements on the senior executives. According to the post duty of individuals and evaluation of work achievements and the economic benefits of the Company, the company distributed salary to the senior executives. Section VI. Shareholders’ General Meeting I. The Annual Shareholders’ Meeting of the Company Annual Shareholders’ Meeting 2004 was held on May 28, 2005, and the relevant resolutions were published on China Securities, Securities Times and Hong Kong Ta Kung Pao dated May 31, 2005. II. Extraordinary Shareholders’ Meeting of the Company The 1st Extraordinary Shareholders’ Meeting 2006 was held on Feb. 10, 2006, and the relevant resolutions were published China Securities, Securities Times and Hong Kong Wen Wei Po dated Feb. 11, 2006. Section VI. Report of the Board of Directors I. Management Discussion & Analysis Year 2005 was the important development year of the Company. Over the past year, the external macro environment occurred a great change: more keen competition in the market of refrigeration industry, a new turn of mergering and reorganization continued, black and white household applicances blended obviously; the prices of raw materiala like crude oil, copper, iron ore remained in high level; the current fund loans was infulenced by the interruption of Kelon Matters; Changhong became the principal shareholder of Meiling due to the puchasing 20.03% equity of Greencool. Under the said situation such new macro enviroment, the Company carried through the instructions of the Board with a firm hand, and adjusted business strategy and operating mechanism timely, reinforced internal reformation and management, tightly seized the opportunity from the market adjustment and actively used the various policies so as to realize quickening of the development step under adjustment. 1. Rapid introduction of various kinds of new products During the whole year, the Company brought out twenty kinds of medium and advanced refrigerations in the domestic market, such as 2G of extreme-saving , energy-saving, electrical controlling, wind cooling, cooling-mixing, nanoecology, big-sized 460; in the foreign market, the Company completed the development of new products and improved 44 items, the types for export amouted to 120 and exported to 92 countries. 2. Breakthrough of 1,000,000 sets in domestic sales In order to adapt to the stratedy demands of the products of the Comapy, the Company adjusted the domestic market. Under the target of obtaining thegeneral sales, the Company adjusted the sales structure of products, mainly introduced the medium and advanced typs, added the supply amount in profit-gaining products; emphasized to enhance and perfect the plan “Project 300”, established the core network of 1st and 2nd market, promoted and consummate plan “Project 800”; established the star networks of 3rd and 4th market. the proportion in the sales of medium and advanced products in 2005 amounted to 40%. 3. Increasing in foreign market sales The Company mainly consolidated the Europe market, emphasized developing the America market in exporting markets, and obtained the purposes of perfecting the progit-gaining ability and highly increasing speed through adjusting the product structure. 4. The prodcution capability reached in exporting base. The new exporting base with more 600,000 sets was put into production and increase the production capbility. 5. Strengthening on the interior operation The Company intensified the mangement of operation plan and financail budget; extablished the planned running pattern of monthly operation; reasonably adjusted the production,sales and deposits; conducted the mangement system on preregisteration of expenses, controlled scientifically the expenses; reduced the cost of materials through price-increasing and bidding; strengthening the controll of subsidiary material consumption to reduce the consumption amount of subsidiary material of single set. The measures above made the operation of Company obtain rapid development and sold well, and the sales increase 40.55% over the same period, especially in the foreign market with the increasing ratio of 81.46% over the same period of last year . the net profits in the report period reduced over the same period of last year because of the rising in cost and reducing of gross ratio on raw materials such as steels and chemical industry. II. Scope of main business and operating status 1. Scope of main business The Company belongs to the industry of household appliance, mainly engaged in the research, manufacturing and sales of the refrigerators, and the scope of principal businesses includes the manufacturing, sales and service of various household refrigerators and auxiliary parts, and the sales and service of other household appliance products. 2. Operation based on Products in 2005 Unit: RMB Increase/decre Increase/decr Increase/decrease in ase in cost of Income from Gross ease in gross Cost of main income from main main Items main profit profit ratio operations operations over the operations operations ratio (%) over the last last year (%) over the last year (%) year (%) Refrige rators 2,021,833200. 1,672,327,695.94 17.29 40.56 45.45 -2.78 (freezer 63 ) Total 2,021,833200. 1,672,327,695.94 17.29 40.56 45.45 -2.78 63 3. Operation in 2005 classified according to areas Unit: RMB Areas Increase/decrease Increase/decrease over the same over the same Indexes Domestic period of last year Overseas period of last year （%） （%） Income from main 1,395,375,575.7 27.63 626,643,016.50 81.46 operations 4 Profit from main 343,262,412.59 19.28 6,568,967.24 606.24 operations 4. Operations and achievements of main holding and share-holding companies: Unit: RMB’0000 Proportio Type of Registered n held by Scale of Net Name of companies Main business economy capital the assets profit Company Production Hefei Meiling Sino-foreign and sales of USD 3.067 48.28% 9, 882 36.00 Packaging Co., Ltd. joint venture corrugated million paper Zhongke Meiling Low Domestic joint Refrigerators RMB 60 70.00% 7,608 147.00 Temperature venture and ice tanks million Technology Co., Ltd. with low temperature Anhui Anhong Plastic Sino-foreign ABS board USD 1 75.00% 2,053 -8.70 Co., Ltd. joint venture materials million 5. Main suppliers and customers Unit: RMB Total purchasing amount of the Proportion in total 391,362,531.56 20.41% top five supplier purchasing amount Total sales amount of the top Proportion in the total 114,721,300.55 7.97% five customers sales amount 6. Problems and difficulties from the operation and their solutions In 2006, household appliance enterprises face much more intense macro environment and market situation. Price of part of raw materials remains high and the negotiation ability of sub-supplier intensifies, the pressure of controlling cost increases; the share of foreign refrigerator in China domestic market of advanced refrigerator increase and competition intensifies; the market share of domestic second-level refrigerator exalts quickly; and the serious shortage of production capability could not meet the rapid increasing demand of market. Aiming at the said existing problems, the Company prepared to adopt the following countermeasures: (1) To adjust structure of products, return high-end of the market and enhance the brand value of “Meiling”; adjust the structure of export products and further improve the profit-gaining ability; emphasize the using of new technology, new material and new techniques, speed up the investment on development and research, grasp the key point of refrigerator freezing technology, adopt the designing cost system of products development, and reduce the cost from the original resources; conduct bidding and purchase with association of Changhong. (2) To utilize the advantages of Changhong Group Ltd to speed up the construction of Meiling Hi-tech Industrial Park to improve the developing potentialities. (3) To strengthen the cost quota management and expense management inside the Company, change the calculation unit into small with benefit as center, build up the operating idea that the function departments all are profit center so as to reach the purpose of revenue-enhancing and expenditure control. III. Investment in the report period 1. The use of the raised proceeds in the report period: In the report period, there was no share allotment or the use of the proceeds raised through shares allotment continuing to the report period. 2. Investment of the proceeds not raised through shares offering in the report period: Unit: RMB’0000 Amount at the Increased in this Transferring out in Amount at the Name of investee period-begin period this period period-end Investment of fixed assets 77,980 7,255 441 84,794 Construction in progress 2,047 1,265 1,707 1,604 IV. Analysis to financial position and operating results in the report period Unit: RMB 1. Operating results and cash flow Increase/decrease Indexes 2005 2004 (%) Income from main operations 2,022,018,592.24 1,438,633,867.16 40.55 Profit from main operations 344,249,045.67 286,774,086.51 20.04 Operating expense 191,276,409.37 164,594,968.14 16.21 Management expense 106,422,872,.27 70,707,284.80 50.51 Financial expense 42,549,942.65 37,603,651.95 13.15 Investment earnings 1,321,095.64 -652,168.43 302.57 Non-operating income/expense -346,742.28 93,424.84 ----- Net profit 6,658,981.44 16,767,740.47 -60.29 Net increase in cash and cash equivalents -8,327,473.47 60,430,991.78 -351.01 Reasons for changing: (1) Income from main operation increased by 40.55% compared with the last year, which was mainly because that the Company adjusted strategy and products structure according to the demand of market, mainly introduced the medium and advance products and made the sales volume of refrigerator in China domestic increase over the last year. (2) Profit from main operation increased by 20.04% compared with the last year, which was mainly because that sales volumes increased. (3) Operating expense increased by 16.21% compared with the last year, which was mainly because the increasing of operating volume of refrigerator in this year caused the rising in sales and transportation expenses. (4) Management expense increased by 50.51% compared with last year, which was mainly because of the increasing on amortization of intangible asset amounted to RMB7, 440,000 and withdrawal of the depreciation of inventory amounted to RMB 8,810,000 in the report period. (5) Investment earnings increased by 302.57% compared with last year, which was mainly because that the subsidiary of the Company, Hefei Meiling Packaging Co.,Ltd, truned the losses into gains in 2005 and calculated by equity method. (6) Net profit reduced by 60.29% compared with the last year, which was mainly because that the rising of price in chemical industry and steels resulted in the increasing of cost, operating expenses and management expenses of the Company. (7) Net increase in cash and cash equivalents reduced extremely compared with last year, which was mainly because the Company repaid the loan this year. 2. Analysis to financial position of the Company Increase/decrease Indexes 2005 2004 (%) Accounts receivable 95,783,745.92 96,424,740.03 -0.66 Other receivables 197,109,389.28 410,153,194.15 -51.94 Notes receivable 62,462,728.72 75,599,243.30 -17.38 Intangible assets 742,972,757.95 587,124,618.54 26.44 Total assets 2,439,936，423.58 2,357,408,266.18 3.50 Shareholders’ equity 863,654,084.66 856,947,103.22 0.78 Reasons for changing: (1) Other receivable reduced by 51.94% compared with last year, which was mainly because the Company liquidated the debts of Hefei Meiling Holding Co.,Ltd and Hefei Meiling Washing Machine Co.,Ltd. (2) Intangible assets increased by 26.44% compared with last year, which was mainly because that Hefei Meiling Holding Co.,Ltd repaid the debts and part of debts of Hefei Meiling Washing Machine Co.,Ltd by Land Use Right this year. V. Business development plan of the New Year In 2006, with the operating and guiding idea of “closing to the market, improving quality, promoting efficiency, enhancing the market share” as the core, the Company would further change and adjust mind, operating concept and management measures. All the operations of the Company will take market as the leading; organize the structural adjustment, personnel preparation, product development, manufacturing, quality management, cost control, all the activities will set market demand as target; expand the domestic market share; take the efficiency as the guide in international sales, optimize product , customer and resource structure. The Company actively guided the staff to fulfill obligations, improve professional level, management level and operating capabilities, creatively develop various works, and realizes operating objection “Striving for second level with keeping third in domestic market” proposed by the Board of Directors. 1. To strengthen the constructions on resources and marketing team, intensify the plans on products and market, establish the enterprises running mechanism with guiding of market and leading of marketing, enhance the brand value, and increase the market shares. To exert the cooperative effects between Changhong and Meiling; realize the joint with management, technology, brand and industry through the unification and integration in purchasing, R&D, logistics, marketing and service, face the pressure and challenge of market in cost control, management level, reaction speed and market influence. To rely on the superiority in the third and fourth market of Changhong, the sales resources of Meiling expand quickly; utmostly exert the cooperative effects between the regions with absolute advantages of Changhong and areas with absolute disadvantages of Meiling, and with selling the refrigerators with the brand of “Changhong-Meiling”. To adapt the development of market to adjust the marketing organized structure, intensify the market force, establish the Marketing Department, adjust the sales institution outside, and promote the planning ability and speed up the construction of team. To increase the resources investment of sales, supporting market development in personnel preparation, sales policy and expenses budgets all around. To strengthen the construction of marketing team, establish marketing team with quick response, enthusiasm and combating spirit through the methods of professional knowledge training, vocation cultivation, optimization of team structure and achievement appraisal. To set the starting point of meeting the demands of customer, optimize the product planning and designing, and create sales methods. To adjust the product structure, promote the sales proportion of medium and advance products, improve the fame of Meiling, enhance the brand value of Meiling, enhance the enterprise competition and profit-gaining ability. 2. To persist in the conception of “ Quality is the life of enterprises”, increase the technological innovations, take unceasingly the various activities on quality management; improve the technological levels, products quality and whole quality of enterprises. To coordinate with the abilities on the leading information household technology and applied innovation of Changhong, and this can provide technological support for the reseach and manufacturing of intelligence and information of Meiling. To conduct deep research on the professional technologies of several domains, such as magnetic refrigeration, semiconductor refrigeration, absorption refrigeration, solar energy and wind refrigeration, etc.; and develop the excessive domains of refrigeration. To speed up the research and using on the technologies of energy-saving, electrical control, frequency conversion, antibacterial and more doors with more temperatures of refrigerator. To conduct the activities of technical fineness of products, pursue sense of accomplishment in technological performance, sculpture of appearance and technical ability of products. To apply the advance tools of quality management and statistical technology, improve the professional management of quality. To obtain the information in design, after service and logistic to strengthen radically the control and management of quality all round. 3. To respond quickly to the market, take the principal of “Speed first, efficiency above all”, improve the efficiency of whole operation, reduce the operation cost and consolidate the comprehensive competition ability of enterprise. To speed up the production and comprehensively improve the working efficiency through labor-hour checking, task analysis and technical optimization. To regulate the flow in production development and trial- production management, take plan of production of trial-manufacture seriously and shorten the period of product development and putting into production. To strengthen the production flexibility, enhance the adaptability to changing and flexibility of the demand of market, improve the reaction ability of production, speed up the production and deliver goods on time. To implement the project of information, establish the consummated platform of information management; realize the integration of logistics, fund flow and information. To simplify the business management flow; perfect and regulate the management systems of information transferring and report; shorten the reaction time; and improve the policy-making efficiency and the working efficiency. To take the demand of sales as the goal; coordinate the relationships between the sales, production, supply and research; perfect the management system of planning budget with the direction of market to make the operation plan close to the market and the whole operations of the Company work efficiently. To optimize the supplier structure; improve the supply chain; adopt the management of dynamic purchasing price in accordance with price fluctuation of the raw material market coordinated with bidding and purchasing with Changhong; reduce the cost of purchasing. To optimize the structural design, technological design, the using design of material of the products to reduce the design cost of products. 4. To adopt advance management method, increase the management innovation, improve the management of enterprise, and promote the professional ability and fighting of team work of employee. To adapt to the adjustment of sales structure and demand of market development; conduct decision-making of sales plans forward and risks are controlled by the headquarters; implement the running mechanism of simulated subsidiary with taking sales branch as the unit; improve the overall marketing ability and operation management with the measuring standard of putting into and output of production. To carry out the budget management method of export orders, take the regional market as the units, check the achievement of regional export, realize the development pattern of export with the target of profit gaining. To carry out the checking pattern of production line, groups; take the putting-in and output as the standard of checking the achievement of production; fully mobilize the enthusiasm on management and checking of whole employees. To encourage the departments to overcome difficulties, create conditions, increase and reduce expenses, realize the minimum of cost and expense. To implement the method of positive driven; carry out activities of small change, small reform, small invention and small creation; activate the enterprise innovation; and establish the vigorous running mechanism of enterprises. To unify the trainings of vacation and professions, strengthen the training of medium cadre, leader of group, reserved cadre; consummate and implement the plan of worker and technicians to optimize the employee; improve the professional ability and vocation abilities of the employees. VI. Routine work of the Board of Directors 1. Meetings and resolutions of the Board of Directors in the report period (1) The 21st meeting of the 4th Board of Directors of the Company was held on Apri. 18,2005, and the relevant resolutions were published on China Securities, Securities Times and Hong Kong Ta Kung Pao dated Apr. 19, 2005. (2) The 28th meeting of the 5th Board of Directors of the Company was held on May 28, 2005, and the relevant resolutions were published on China Securities, Securities Times and Hong Kong Ta Kung Pao dated May 31, 2005. (3) The 3rd meeting of the 5th Board of Directors of the Company was held on June 30, 2005, and the relevant resolutions were published on China Securities, Securities Times and Hong Kong Ta Kung Pao dated July 1, 2005. (4) The 4th meeting of the 5th Board of Directors of the Company was held on Aug.2, 2005, and the relevant resolutions were published on China Securities, Securities Times and Hong Kong Ta Kung Pao dated Aug. 3, 2005. (5) The 5th meeting of the 5th Board of Directors of the Company was held on Aug. 16, 2005, and the relevant resolutions were published on China Securities, Securities Times and Hong Kong Ta Kung Pao dated Aug. 17, 2005. (6) The 7th meeting of the 5th Board of Directors of the Company was held on Nov. 13, 2005, and the relevant resolutions were published on China Securities, Securities Times and Hong Kong Wen Wei Po dated Nov. 15, 2005. (7) The 9th meeting of the 5th Board of Directors of the Company was held on Jan. 4, 2006, and the relevant resolutions were published on China Securities, Securities Times and Hong Kong Wen Wei Po dated Jan. 7, 2006. (8) The 10th meeting of the 5th Board of Directors of the Company was held on Feb. 11, 2006, and the relevant resolutions were published on China Securities, Securities Times and Hong Kong Wen Wei Po dated Feb. 12, 2006. (9) The 10th meeting of the 5th Board of Directors of the Company was held on March 3, 2006, and the relevant resolutions were published on China Securities, Securities Times and Hong Kong Wen Wei Po dated March 5, 2006. 2. Implementation of the Board of Directors on resolutions of Shareholders’ General Meeting In the report period, the Company totally held one Annual Shareholders’ General Meeting and one Provisional Shareholders’ General Meeting. The Board of Directors seriously implemented their duties according to the Articles of Association of the Company and seriously implemented all resolutions of Shareholders’ General Meeting. VII. The profit distribution preplan and predicting profit distribution policy 2005 1. The profit distribution preplan Since there incurred a loss in the operation in 2001 and 2003, at present the accumulative retained profits were RMB –406,695,891.57. Thus, the Company decided neither to distribute profits nor convert reserve into share capital in 2005. The profit distribution plan would be carried out after losses offsetting. The said preplan should be submitted to Annual Shareholders’ General Meeting 2005 for consideration after being considered and approved by the Board of Directors. 2. Predicting profit distribution policy 2006 In 2006, the profit would be used for offset losses in priority and profit distribution would be conducted after offsetting losses. VIII. Other reporting issues In 2005, the newspapers designated by the Company for information disclosure were China Securities, Securities Times and Hong Kong Ta Kung Pao. In 2006, the newspapers designated by the Company for information disclosure are Securities Times, China Securities and Hong Kong Wen Wei Po. Section VIII. Report of the Supervisory Committee I. Meetings of the Supervisory Committee in the report period In the report period, besides attending the Shareholders’ General Meeting 2004 and each meeting in 2005 of the Board of Directors of the Company as non-voting delegates, and the main contents as follows: 1. On Apr. 18, 2005, the 16th meeting of the 4th Supervisory Committee was held in the meeting room on the 4th floor of the Company. 3 supervisors should have attended the meeting, and actually 3 supervisors had attended, which conformed to the regulations of the Company Law and Articles of Association of the Company. With voting by open ballots, the following were approved: Work Report 2004 of the Supervisory Committee, Annual Report 2004 and Summary of Annual Report 2004, Financial Budget Report 2004, Proposal on Election of Changing the Supervisory Committee, Proposal on Renewal of Engaging 2005 Certified Public Accountants and its Remunerations, the 1st Quarterly Report of 2005, Proposal on Revising the Articles of Association, and Proposal on Holding the 2004 Annual General Shareholders’ Meeting. 2. On May 28, 2005, the 1st meeting of the 5th Supervisory Committee was held in the meeting room on the 3rd floor of Meiling Hotel. 5 supervisors should have attended the meeting, and actually 5 supervisors had attended, which conformed to the regulations of the Company Law and Articles of Association of the Company. With voting by open ballots, the following were approved: Proposal on Electing Mr. Li Weimin Chairman of the 5th Supervisory Committee, Proposal on Loan of Mortgage from China Industrial and Commercial Bank, Proposal on Supplying Guarantee for the Current Funds Loan of Zhongke Meiling Low Temperature Technology Co., Ltd. 3. On Aug. 16, 2005, the 2nd meeting of the 5th Supervisory Committee was held in the meeting room on the 4th floor of the Company. 5 supervisors should have attended the meeting, actually 4 supervisors had attended, and Supervisor Mr. Chen Qilin did not attend the meeting due to be on business, which conformed to the regulations of the Company Law and Articles of Association of the Company. With voting by open ballots, the following were approved: 2005 Semi-Annual Report, Summary of Semi- Annual Report 2005, and Operation Plan for the Second Half of 2005. 4. On Feb. 11, 2006, the 5th meeting of the 5th Supervisory Committee was held in the A16 meeting room on the trade centre of Changhong. 5 supervisors should have attended the meeting, and actually 5 supervisors had attended, which conformed to the regulations of the Company Law and Articles of Association of the Company. With voting by open ballots, the following were approved: Electing Ms. Fei Minying the Chairman of the 5th Supervisory Committee, Proposal on Sale Agency of Meiling’s Refrigerator by Changhong. II. Independent opinions of the Supervisory Committee on the relevant events of 2005 1. Operation according to the laws In the report period, the Board of Directors conducted operation in a standardized way and seriously implemented various resolutions and authorizations of the Shareholders’ General Meeting strictly according to the PRC Company Law, Securities Law, Code of Corporate Governance for Listed Company in China, Articles of Association of the Company, and other laws and regulations. The decision-making procedures were scientific and legal. The Supervisory Committee supervised over and checked the procedure of holding, resolutions of the Shareholders’ General Meeting and the Board of Directors, implementation of the resolutions of the Shareholders’ General Meeting by the Board of Directors, performance of duties of the directors, managers and other senior executives and implementation of the internal management system of the Company and there found no behaviors of breaking laws, regulations and Articles of Association of the Company. The decision-making and operation of related transactions of the significant investment of the Company was disposed in the classified authorization scope through legal decision-making procedure and had not done any harm to the interests of the Company or the shareholders of the Company, especially the minority shareholders. 2. Inspection of the financial status of the Company In the report period, the Supervisory Committee conducted earnest and careful inspection over the Company’s financial position. In the opinion of the Supervisory Committee, the Company had maintained good financial position, operated the funds with high efficiency, conducted standardized financial management and kept healthy internal system. Shenzhen Pengcheng Certified Public Accountants and Morison Heng Certified Public Accountants had respectively issued standard unqualified Auditors’ Report for the Company’s Financial Report of 2005, which had truly, accurately and completely reflected the Company’s financial position and operation result. 3. Purchases and sales of assets and related transactions As checked, the Supervisory Committee believed that the related transactions of the significant assets replacement between the Company and Hefei Meiling (Group) Holdings Co., Ltd. in the report period was conducted according to the principle of fairness and obtained the independent opinion issued by relevant agencies. The related transactions had no inside dealings and had not done harm to the interest of any part of the shareholders or caused any loss to the assets of the Company. Section IX. Significant Events I. The Company had not been involved in any material lawsuits or arbitrations in the report period. II. Purchase and sale of assets made by the Company in the report period In order to adapt to the competition in international market and domestic household appliance and demand of further expanding the production scale and capability, and with the requirements of Regulation on the Cash Flow between Listed Company and the Related Party and External Guarantee of Listed Company, Hefei Meiling (Group) Holding Co., Ltd planed to repay the debts amounted to RMB 101,105,300 of the Company by the Land Use Right in Hefei Economic Development Zone totaled 206,568.36 square meters, and the debts amounted to RMB 75,097,500 of the Company owed by Hefei Meiling Washing Machine Co., Ltd ; meanwhile, Hefei Meiling Washing Machine Co., Ltd, its Property and affiliated equipments repaid the debts amounted to RMB 40 million of the Company. The 20th meeting of the 4th Board of Director examined and approved the following proposals: Transferring Part of Land Use Right of Hefei Meiling (Group) Holding Co., Ltd to Liquidate the Debts of the Company, Transferring Part of Land Use Right of Hefei Meiling (Group) Holding Co., Ltd to Liquidate the Debts of the Company owed by Hefei Meiling Washing Machine Co., Ltd, and Transferring Part of Hefei Meiling Washing Machine Co., Ltd, its Property and Affiliated Equipments to Liquidate Part of Debts of the Company. The matters on repaying the debts by non-cash and assets constituted the related transaction; the relevant directors avoided the voting, the presenting directors who have voting rights examined and approved the aforesaid proposals, and independent directors explained their opinions. At the same time, the Company signed respectively Agreements with Hefei Meiling (Group) Holding Co., Ltd and Hefei Meiling Washing Machine Co., Ltd on Transferring Part of Land Use Right of Hefei Meiling (Group) Holding Co., Ltd to Liquidate the Debts of the Company, Transferring Part of Land Use Right of Hefei Meiling (Group) Holding Co., Ltd to Liquidate the Debts of the Company owed by Hefei Meiling Washing Machine Co., Ltd, and Transferring Part of Hefei Meiling Washing Machine Co., Ltd, its Property and Affiliated Equipments to Liquidate Part of Debts of the Company. The aforesaid proposals were approved in the Provisional General Meeting held on Feb. 10, 2006. III. Significant transactions of the Company in the report period 1. Purchasing of merchandise (1) Pricing principle The Company purchased material from the related enterprises in open bidding according to market price. (2) Lists on purchasing of merchandise from the related parties Unit: RMB’0000 Account for Amount of The related purchasing of Settlement The related party related transaction merchandise of the method transaction report period（%） Material and Hefei Meiling Packaging refrigerator 7,119.51 3.71 Note Co., Ltd. fittings Material and Anhui Anhong Plastic Co., refrigerator 5,285.04 2.76 Note Ltd. fittings Total 12,404.55 6.47 2. Sales of merchandise (1) Pricing principle The sales of the Company to Meiling Washing Machine Co., Ltd and Anhong Plastic Co., Ltd were conducted publicly according to the market price of the same merchandise. (2) Lists on sales of merchandise from the related parties Unit: RMB’0000 Amount of The related The same period Settlement Name of the Company related transaction of last year method transaction Anhui Anhong Plastic Co., Material of 0 1,776 Note Ltd. sales Total 0 1,776 The Company’s explanations on the necessity and continuity of the related transaction In the material purchasing of related transaction, to some extent the gap of raw material can be guaranteed, and it could make sure of the normal operation of Company and reducing the production cost. The purpose of the aforesaid transaction was to make sure of the normal operation of the Company and reducing the production cost. The related transaction belonged to normal durative long-term transaction; the price of transaction was based on market, the transaction amount was calculated on amount of factual happening; it did not do harm to the Company. 3. In the report period, the current debts and liabilities or guarantee between the Company and the related parties. Unit: RMB’0000 Funds the related party Funds the listed company providing for the listed Name of the related Relationship with providing for the related party company parties the listed company Amount of Amount of Balance Balance happening happening The second major Hefei Meiling (Group) shareholder of the 0 0 10,110.53 0 Holding Co., Ltd. Company The second major Hefei Meilingshareholder of the Washing MachineCompany and the 0 0 11,509.25 19,408.74 Co.,Ltd. controlling subsidiary Total 0 0 21,619.78 19,408.74 Explanations: i. In the report period, the happening amount of the listed company provided for the controlling shareholders and its subsidiary was amounting to RMB 0 with the blance of RMB 0. ii. The debts of the Company Hefei Meiling (Group) Holding Co., Ltd owed were amounting to RMB 0.101 billion, which mainly because of the transferring of items of the Company, such as the assets of Conditioner Plant, the equity of Washing Machine Company, and the bearing the relevant engrossed capital and apportioned advertisement expenses; and all were liquidated at present. iii. The Washing Machine Company was a joint-venture by the Company and LVOLAN. In order to support the development of the Company, Hefei Meiling (Group) Holding Co., Ltd purchasing 75% equity of Washing Machine Company owned by the Company, the maximum of Washing Machine Company owing to the Company amounted to RMB 0.309 billion, just RMB 194,087,400 at present, which was because the Company, on the behalf of Washing Machine Company, paid the expenses on projects, raw material, and the relevant engrossed capital and apportioned advertisement expenses bearing by Washing Machine Company . iv. Plan of liquidation on the debts amounted to RMB 194,087,400 of Washing Machine Company. At present, the municipal government agreed to change the land for industry which was located on No. 33, Wuhu Road of 72500 square meters and No.2, Wufu Road of 46900 square meters into land for commercial dwelling houses; and agreed to utilize the municipal income in the process of transferring the aforesaid land purpose to repay the debts of the Company Washing Machine Company owed, and predicted to liquidate the debts of Washing Machine Company before the end of 2006. (2) Guarantee between the Company and the related parties in the report period i. Ended Dec. 31, 2005, the amount of guarantee of the Company from the shareholder Hefei Meiling (Group) Holding Co., Ltd was amounting to RMB 285,012,000. ii. External guarantee, guarantee for subsidiaries and guarantee of breaking regulations of the Company Unit:’0000 Particulars about the external guarantee of the Company (barring the guarantee for controlling subsidiaries ) Name of the Date of happening Complete Guarantee for Amount of Guarantee Company (date of signing Guarantee type Implementatio related party (yes guarantee term guaranteed agreement) n or not or not) --- ---- ---- 0---- ---- ---- ---- Total amount of guarantee during the report 0.00 period Total balance of guarantee at the end of the 0.00 report period Guarantee of the Company for the controlling subsidiaries Total amount of guarantee for controlling 4,000.00 subsidiaries during the report period Total balance of guarantee for controlling 4,000.00 subsidiaries at the end of the report period Total amount of guarantee of the Company (including guarantee for controlling subsidiaries) Total amount of guarantees 4,000.00 Ratio of total guarantee to net assets of the Company Including: Amount of guarantee for shareholders, actual 0.00 controller and its related parties The debts guarantee amount provided for the guarantee of which the assets-liability ratio 0.00 exceeded 70% directly or indirectly Proportion of total amount of guarantee in net 0.00 assets of the Company exceeded 50% Total amount of the aforesaid three guarantees 0.00 The aforesaid company guaranteed was the controlling subsidiary of the Company, and the company was in normal operation and did not do harm to the financial status of the Company. IV. Fulfillment of the Company or shareholders holding above 5% shares on the publicly disclosed commitments (1) In 2005, Hefei Meiling (Group) Holding Co., Ltd planed to repay the debts amounted to RMB 101,105,300 of the Company by the Land Use Right in Hefei Economic Development Zone totaled 206,568.36 square meters; meanwhile, it repaid part of debts of the Company Hefei Meiling Washing Machine Co.,Ltd owed and the balance was amounting to RMB 194,087,400. According to the requirement of Regulation on the Cash Flow between Listed Company and the Related Party and External Guarantee of Listed Company, the shareholding company will continue to expand the liquidation of debts; at the same time, Hefei Meiling (Group) Holding Co., Ltd and Washing Machine Company commit to repay all the debts as soon as possible. It is estimated that all debts would be cleaned up before the end of 2006. (2) At present, the Company did not enter the procedure of Share Merger Reform, which was mainly because that the equity of the first major shareholder, Greencool Enterprises Development Co., Ltd, was judicially frozen and it was not convenient to operate. The Company is consulting positively with others to strive for relieving the freezing of equity early, so as to start the Share Merger Reform. V. Engagement, change of the engagement or disengagement of Certified Public Accountants Board of Directors of the Company engaged Shenzhen Pengcheng Certified Public Accountants to be in charge of the domestic auditing work in 2005 of the Company. The remuneration the Company paid Morison Heng Certified Public Accountants was HKD 460,000, and that for Shenzhen Pengcheng Certified Public Accountants was RMB 350,000. Morison Heng Certified Public Accountants and Shenzhen Pengcheng Certified Public Accountants had provided auditing services for the Company for 3 years and 2 years respectively. VI. Criticism received from CSRC and Shenzhen Stock Exchange in the report period In the report period, the Company, the Board of the Company and directors had not been inspected by CSRC, or received administrative penalty or circulating criticisms, nor had them ever been criticized publicly by Shenzhen Stock Exchange. Section X. Financial Report HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 Report and Financial Statements For the year ended December 31, 2005 MORISON HENG HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 CONTENTS PAGE(S) INTERNATIONAL AUDITORS’ REPORT 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 – 31 SUPPLEMENTARY INFORMATION 32 MORISON HENG Chartered Accountants 華 Certified Public Accountants 利 信 INTERNATIONAL AUDITORS’ REPORT TO THE SHAREHOLDERS OF HEFEI MEILING COMPANY LIMITED 會 計 師 事 務 所 合肥美菱股份有限公司 (Incorporated in the People’s Republic of China with limited liability) We have audited the accompanying consolidated balance sheet of Hefei Meiling Company Limited (the “Company”) and its subsidiaries (the “Group”) as at December 31, 2005 and the related consolidated statements of income, cash flows and changes in equity for the year then ended. These financial statements set out on pages 2 to 31 are the responsibility of the Company’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 management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In forming our opinion, we have considered the adequacy of the disclosures made in notes 18 & 19 to the financial statements in respect of the Company had executed agreements with Hefei Meiling Holding Company (“HMHC”) and Hefei Meiling Washing Machine Co., Ltd. (“Washing Machine Co.”) to transfer its trade receivables of RMB410,636,900, the amount due from HMHC and the amount due from Washing Machine Co. in exchange for land use rights as well as building and production facilities with valuation of RMB973,744,700 and RMB40,563,800 respectively. Title to the land use right has not been registered in the Company’s name as formal approval from the relevant PRC authority is required for transfer and registration. The financial statements do not include any adjustments that would result from a failure to obtain such approval. We consider that these matters have been adequately accounted for and disclosed in the financial statements. In our opinion, the accompanying consolidated financial statements give a true and fair view of the financial position of the Group as of December 31, 2005, and of the results of its operations and cash flows for the year then ended in accordance with International Financial Reporting Standards. Morison Heng Chartered Accountants Certified Public Accountants Hong Kong: -1- Independent member of MORISON INTERNATIONAL 華 利 信 國 際 獨 立 成 員 所 17/F., One Hysan Avenue, Causeway Bay, Hong Kong, Tel: (852) 28811 226 Fax: (852) 2577 2293 Email: mhmail@morisonhk.com Website: www.morisonhk.com 香港銅纙灣希慎道一號十七樓 電話: (852) 2881 1226 傳真: (852) 2577 2293 電郵: mhmail@morisonhk.com 網址 : www.morisonhk.com MORISON HENG HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2005 Notes 2005 2004 RMB’000 RMB’000 5 2,028,938 1,438,884 Turnover Cost of sales (1,679,136) (1,148,782) 349,802 290,102 Gross profit Other operating income 6 5,183 11,085 Distribution costs (200,267) (152,833) Administrative expenses (100,846) (78,897) Other operating expenses (7,882) (1,719) Profit from operations 7 45,990 67,738 Finance costs 9 (41,857 ) (38,924 ) Share of results of associates 182 (214) 4,315 28,600 Profit before taxation Income tax 10 (18 ) - -2- MORISON HENG HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 4,297 28,600 Profit for the year Attributable to: 3,877 28,432 Equity holders of the parent 28 420 168 Minority interests 4,297 28,600 Earnings per share 11 0.0093 0.07 Basic -3- MORISON HENG HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 2005 Notes 2005 2004 RMB’000 RMB’000 ASSETS Non-currents assets Prepaid lease payments 12 644,781 473,452 Property, plant and equipment 13 500,664 479,586 Construction in progress 14 5,933 11,088 Intangible assets 15 113,945 117,480 Interests in associated companies 16 26,399 26,218 Available-for-sale investments 17 30,690 30,690 Amount due from a shareholder 18 - 70,374 Amount due from a related company 19 42,300 159,437 1,364,712 1,368,325 Current assets Inventories 20 363,696 237,529 Trade receivables 21 25,468 34,645 Bills receivable 62,464 75,599 Other receivables and prepayments 22 62,681 106,679 Tax recoverable 37,577 - Amounts due from related companies 23 25,073 445 Pledged or guaranteed deposits 24 72,225 89,476 Bank balances and cash 24 234,229 226,175 883,413 770,548 2,248,125 2,138,873 Total assets -4- MORISON HENG HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 CONSOLIDATED BALANCE SHEET – (continued) AT DECEMBER 31, 2005 Notes 2005 2004 RMB’000 RMB’000 Equity and liabilities Capital and reserves Registered capital 29 413,643 413,643 Reserves 30 856,707 856,658 Accumulated losses (670,136 ) (674,013 ) Equity attributable to equity holders of the 600,214 596,288 parent Minority interests 28 16,826 16,406 Total equity 617,040 612,694 Non-current liabilities Borrowings 27 13,300 23,300 Current liabilities Trade payables 417,433 369,307 Bills payable 285,700 272,106 Other payables and accruals 132,032 110,376 Receipts in advance 64,592 88,737 Amount due to a shareholder 28,392 - Amounts due to related companies 25 9,374 1,274 Amounts due to associated companies 25 10,576 18,813 Provision for warranty 26 13,282 12,076 Borrowings 27 656,404 630,190 1,617,785 1,502,879 Total liabilities 1,631,085 1,526,179 Total equity and liabilities 2,248,125 2,138,873 Approved by the Board of Directors on DIRECTOR DIRECTOR -5- MORISON HENG HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED DECEMBER 31, 2005 Attributable to equity holders of the parent Statutory Statutory Discretionary Share Capital common public common Accum capital reserve reserve funds welfare funds reserve funds lo RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RM Balance at December 31, 2003 413,643 572,521 65,426 65,643 153,820 (70 Share of capital reserve of an associate - (892) - - - Share of capital reserve of a subsidiary - 140 - - - Net profit for the year - - - - - 2 Share of results of subsidiaries - - - - - Balance at December 31, 2004 413,643 571,769 65,426 65,643 153,820 (67 Increase for the year - 49 - - - Net profit for the year - - - - - Share of results of subsidiaries - - - - - Balance at December 31, 2005 413,643 571,818 65,426 65,643 153,820 (67 -6- HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2005 2005 2004 RMB’000 RMB’000 Cash flows from operating activities Profit before taxation 4,315 28,600 Adjustments for: Amortisation of intangible assets 4,134 16,980 Amortisation of prepaid lease payments 10,513 3,334 Construction in progress written off - 1,523 Dividend income (768 ) (380) Depreciation 46,317 43,423 Loss on disposal of property, plant and equipment 5,233 17 Loss on disposal of available-for-sale investments - 30 Minority interest - (60) Interest paid 41,659 38,924 Interest income (2,219 ) (2,000) Impairment loss on amount due from a shareholder - 705 Impairment loss on receivables 1,432 690 Share of results of associated companies - 214 Write-back of provision for warranty expenses - (2,899) Write-back of provision for receivables - (4,623) Operating profit before working capital changes 110,616 124,478 Increase in inventories (126,167 ) (48,922) Decrease/(Increase) in trade receivables 7,745 (68,995) Decrease in bills receivable 13,135 62,462 Decrease/(Increase) in other receivables and prepayments 43,998 (47,815) (Increase)/Decrease in amounts due from related companies (24,628 ) 6,529 Increase in trade payables 48,126 73,122 Increase in bills payable 13,594 68,106 Increase in other payables and accruals 21,656 10,758 Decrease in receipts in advance (24,145 ) (15,583) Increase/(Decrease) in amounts due to related companies 8,100 (27,852) Increase in amount due to a shareholder 28,392 - (Decrease)/Increase in amounts due to associated companies (8,237 ) 18,813 Increase in provision for warranty 1,206 - Cash generated from operations 113,391 155,101 Interest paid (41,659 ) (38,924) Overseas income tax paid (37,595 ) - Net cash from operating activities 34,137 116,177 -7- HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 CONSOLIDATED CASH FLOW STATEMENT – (continued) FOR THE YEAR ENDED DECEMBER 31, 2005 2005 2004 RMB’000 RMB’000 Cash flows from investing activities Interest received 2,219 2,000 Dividend received 768 380 Payments for prepaid lease payments (181,842 ) - Proceeds on disposal of property, plant and equipment 10,053 1,329 Proceeds on disposal of available-for-sale investments - 70 Purchases of property, plant and equipment (65,961 ) (20,572) Purchases of intangible assets (599 ) - Purchase of available-for-sale investments - (100) Payments for construction in progress (11,565 ) (14,477) Acquisition of interests in associated companies (181 ) 1,572 Decrease in amount due from shareholder 70,374 14,142 Decrease in amount due from a related company 117,137 1,071 Net cash used in investing activities (59,597 ) (14,585) Cash flows from financing activities Decrease/(Increase) in deposits used as collaterals 17,251 (30,976) Proceeds from issue of capital reserve 49 140 Payment on capital reserve - (892) New borrowings raised 509,333 600,690 Repayments of borrowings (493,119 ) (641,169) Net cash from/(used in) financing activities 33,514 (72,207) Net increase in cash and cash equivalents 8,054 29,385 Cash and cash equivalents at the beginning of the year 226,175 196,790 Cash and cash equivalents at the end of the year 234,229 226,175 Analysis of cash and cash equivalents at the end of the year Bank balances and cash 234,229 226,175 -8- HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2005 GENERAL INFORMATION Hefei Meiling Company Limited (the “Company”) is a joint stock limited company incorporated in the People’s Republic of China (the “PRC”). The Company and its subsidiaries (the “Group”) are principally engaged in the manufacturing and sales of household refrigerators and household electronic appliances. The Company’s A shares and B shares are listed on the Shenzhen Stock Exchange. The Company’s Domestically Listed Foreign Shares (“B Shares”) are listed on the Shenzhen Stock Exchange. The address of its registered office is 48 Wuhu Road, Hefei. SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of those consolidated financial statements are set out below: Basis of preparation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) including International Accounting Standards and Interpretations issued by the International Accounting Standards Board. The basis of accounting differs from that used in the preparation of the statutory financial statements in the PRC (“the statutory financial statements”). The statutory financial statements of the Company and its subsidiaries comprising the Group have been prepared in accordance with the accounting principles and regulations as applicable in the PRC. Appropriate adjustments have been made to these financial statements to conform to IFRS but such adjustments are not incorporated in the Group’s statutory accounting records. The consolidated financial statements have been prepared under the historical cost convention as modified by the revaluation of available-for-sale investments. The preparation of financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge of current events and actions, actual results ultimately may differ from those estimates. -9- HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 SIGNIFICANT ACCOUNTING POLICIES – (continued) Changing in accounting policies At January 1, 2005, the Group adopted the revised IFRS below, which are relevant to its operations. IAS 1 Presentation of Financial Statements IAS 2 Inventories IAS 7 Cash Flow Statement IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors IAS 10 Events after the Balance Sheet Date IAS 16 Property, Plant and Equipment IAS 17 Leases IAS 21 The Effects of Changes in Foreign Exchange Rates IAS 24 Related Party Disclosures IAS 27 Consolidated and Separate Financial Statements IAS 28 Investments in Associates IAS 32 Financial Instruments: Disclosure and Presentation IAS 33 Earnings per share IAS 38 Intangible Assets IAS 39 Financial Instruments: Recognition and Measurement The effects of the adoption of the above Standards are summarised as follows: -. IAS 1 has affected the presentation of minority interests, share of results of associates and other disclosures. -. IAS 2, 7, 8,10,16,17,27,28,32,33 and 39 had no material effect on the Group’s policies. -. IAS 21 has no material effect on the Group’s policy. The functional currency of each of the consolidated entities has been re-evaluated based on the guidance to the revised standard. All the Group entities have the same functional currency as their measurement currency. -. IAS 24 has affected the identification of related parties and certain related party disclosures. -. IAS 38 has affected the amortization policy on trademark Basis of consolidation - 10 - HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries made up to December 31 each year. The results of the 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. All significant inter-company transactions and balances within the Group are eliminated on consolidation. Minority interests in the net assets of consolidated subsidiaries are presented separately from the Group’s equity therein. Minority interests in the net assets 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 in 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. - 11 - HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 2. SIGNIFICANT ACCOUNTING POLICIES – (continued) Subsidiaries A subsidiary is a company in which the Company, directly or indirectly, holds more than half of the issued share capital, or controls more than half of the voting power, or where the Company controls the composition of its board of directors or equivalent governing body. Investments in subsidiaries are stated at cost less any identified impairment loss. Result of the subsidiaries are accounted for by the Company on the basis of dividends received and receivable during the year. Investments in associates The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting, except when the investment is classified as held for sale, in which case it is accounted for IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, or when the investment is designated as at fair value through profit or loss upon initial recognition or is classified as held for trading, in which case it is accounted for under IAS 39 Financial Instruments: Recognition and Measurement. Under the equity method, investment in associates are carried in the consolidated balance sheet at cost as adjusted for post-acquisition changes in the Group’s share of the profit or loss and of changes in equity of the associate, less any identified impairment loss. When the Group’s share of losses of an associate equals or exceeds its interest in that associate (which includes any long-term interest that, in substance, form part of the Group’s net investment in the associate), the Group discontinues recognizing its share of further losses. An additional share of losses is provided for and a liability is recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of that associate. Where a group entity transacts with an associate of the Group, profits and losses are eliminated to the extent of the Group’s interest in the relevant associate. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts and sales related taxes. Sales of goods are recognised when goods are delivered and title has passed. Investment income is recognised when the right to receive dividends or other - 12 - HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 payments is established. Interest income is recognised on a time proportion basis, taking into account the principal amounts outstanding and the interest rates applicable. - 13 - HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 2. SIGNIFICANT ACCOUNTING POLICIES – (continued) Property, plant and equipment Buildings are depreciated over the unexpired periods of the leases or their expected useful lives to the Group, whichever is shorter, on a straight-line basis, while other property, plant and equipment are depreciated at rates sufficient to write off their cost less residual value, if any, and accumulated impairment losses over their estimate useful lives on a straight-line method at the following rates per annum: Buildings 30 – 40 years Plant and machinery 10 – 16 years Furniture, fixtures and office equipment 8 – 12 years Motor vehicles 8 – 15 years The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement. Construction in progress Construction in progress represents factory premises under construction, and production plants and machinery and other equipment under installation. Construction in progress is stated at cost which includes the cost of construction, purchase cost of plant and machinery as well as interest expenses arising from borrowings used to finance the construction during the construction period. Construction in progress for production plants and machinery is transferred to property, plant and equipment on the commissioning date. Plant and machinery are considered to be commissioned when they are capable of producing saleable quality output in commercial quantities on an ongoing basis. Prepaid lease payments Cost of acquiring rights to use certain land for the Group’s operations over a certain period is recorded as prepaid lease payments. Prepaid lease payments are stated at cost and amortized over the period of the lease on the straight-line basis to the income statement. - 14 - HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 2. SIGNIFICANT ACCOUNTING POLICIES – (continued) Intangible assets a. Computer software The cost of acquisition of new computer software is capitalized and treated as an intangible asset of there costs are not integral part of the related hardware. Computer software is amortised on the straight-line basis over their estimate useful lives, but not exceeding 10 years. b. Trademarks In prior years, trademarks were amortised on a straight-line basis over their estimated useful lives, but not exceeding 20 years. With effect from January 1, 2005 and in accordance with the provision of IAS 38: trademarks are assessed to have indefinite useful lives, as there is no foreseeable limit to the period over which the trademark are expected to generate net cash inflows for the Group and therefore are not amortised. Trademarks are tested for impairment for each reporting date and where an indicator of impairment exists. c. Research and development Research expenditure is recognised as an expense as incurred. Costs incurred on development projects (relating to the design and testing of new or improved products) are recognised as intangible assets when it is probable that the project will be a success considering its commercial and technological feasibility, and only if the cost can be measured reliably. Other development expenditures are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Development costs that have been capitalised are amortised from the commencement of the commercial production of the product on a straight-line basis over the period of its expected benefit, not exceeding five years. Available-for-sale-investments Investments intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, are classified as available-for-sale investments; and are included in non-current assets unless management has the express intention of holding the investment for less than 12 months from the balance sheet date or unless they will need to be sold to raise operating capital, in which case they are included in current assets. Purchases and sales of investments are recognised on the trade date, which is the date - 15 - HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 that the Group commits to purchase or sell the asset. Cost of purchase includes transaction costs. Available-for-sale investments are subsequently carried at fair value. Fair values for unlisted equity securities are estimated using applicable price/earnings or price/cash flow ratios refined to reflect the specific circumstances of the issuer. Equity securities for which fair values cannot be measured reliably are recognised at cost less impairment. Unrealised gains and losses arising from changes in the fair value of securities classified as available-for-sale are recognised in equity. When securities classified as available-for-sale investments are sold or impaired, the accumulated fair value adjustments are included in the consolidated income statement as gains and losses from investment securities. - 16 - HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 2. SIGNIFICANT ACCOUNTING POLICIES – (continued) Inventories Inventories are stated at the lower of cost and net realisable value. Cost which comprises direct materials and, where applicable, direct labor costs and those overheads that have been incurred in bringing the inventories and work in progress to their present locations and condition, is calculated using the first-in, first-out method. Net realisable value is based on estimated selling prices less estimated selling expenses. Trade receivables Trade receivables are carried at original invoice amount less provision made for impairment of these receivables. A provision for impairment of trade receivables is established when there is an objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the carrying amount and the recoverable amount, being the present value of expected cash flows, discounted at the market rate of interest for similar borrowers. Impairment of assets At each balance sheet date, the Group reviews the carrying amounts of its tangible assets to determine whether there is any indication that those assets have suffered an impairment loss. 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. Impairment loss is recognised as an expense immediately. Where an impairment loss is subsequently reversed, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, such that the increased carrying amount does not exceed the carrying amount that would have determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately. Warranty The Group recognises the estimated liability to repair or replace products still under warranty at the balance sheet date. This provision is calculated based on certain percentage of the completed contract cost which is determined by reference to past history of the level of repairs and replacements. - 17 - HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 Taxation PRC income taxes are provided for based on the estimated assessable profits and the applicable tax rates for the Company and other companies comprising the Group. Deferred taxation is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the accounts. Taxation rates enacted or substantively enacted by the balance sheet date are used to determine deferred taxation. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred taxation is provided on temporary differences arising on investments in subsidiaries and associated companies, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. - 18 - HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 2. SIGNIFICANT ACCOUNTING POLICIES – (continued) Provisions Provisions are recognised 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. Leased assets Leases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. Rentals applicable to such operating leases are charged to the income statement on the straight-line basis over the lease terms. Foreign currencies (a) Functional and presentation currency Items included in the accounts of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated financial statement are presented in Renminbi (“RMB”), which is the functional currency of all the entities comprising the Group and the presentation currency of the Company. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rated of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. Related parties Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. - 19 - HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 Employee benefits The Group participates in employee social security plans, including pension, medical, housing and other welfare benefits, organized by the government authorities in accordance with relevant regulations. Except for the above social security benefits, the Group has no additional commitment to other employee welfare benefits. According to the relevant regulations, premium and welfare benefit contributions are remitted to the social welfare authorities and are calculated based on percentages of the total salary of employees, subject to a certain ceiling. Contributions to the plans are charged to the income statement as incurred. - 20 - HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 2. SIGNIFICANT ACCOUNTING POLICIES – (continued) Borrowing costs All borrowing costs are recognised as expenses in the year in which they are incurred. Cash and cash equivalents Cash and cash equivalents are carried in the balance sheet at cost. For the purpose of the cash flow statement, cash and cash equivalents comprise cash on hand, deposits held at call with banks, cash investments with a maturity of three months or less from the date of investment and bank overdraft. FINANCIAL RISK MANAGEMENTS (a) Financial risk factors The Group’s activities expose it to a variety of financial risks: cash flow interest-rate risk, credit risk, foreign exchange risk and liquidity risk. (i) Cash flow and fair value interest rate risk As the Group has no significant interest-bearing assets, the Group’s income and operating cash flows are substantially independent of changes in market interest rates. The Group’s interest rate risk arises from long-term borrowings. The interest rates and repayment terms of borrowings are disclosed in note 27. Borrowings issued at variable rates expose the Group to Cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. The Group has not hedged its cash flow and fair value interest rate risk. (ii) Credit risk The Group has no significant concentrations of credit risk. Trade receivables of the Group are spread among a number of customers in the PRC and cash is deposited with registered banks in the PRC. The carrying amounts of the trade receivables after deducting the provision for bad and doubtful debts represent the Group’s maximum exposure to credit risk. (iii) Foreign exchange risk The Group’s entities operate in the PRC with most of the transactions denominated in Renminbi. The Group is exposed to foreign exchange risk arising from the exposure of Renminbi against USD. The Group has not hedged its foreign exchange rate risk. In addition, the conversion of Renminbi into foreign currencies is subject to the rules and regulations of the foreign exchange control promulgated by the PRC - 21 - HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 government. (iv) Liquidity risk The Group ensures that it maintains sufficient cash and credit lines to meet its liquidity requirements. (b) Fair value estimation The carrying amounts of the following financial assets and financial liabilities approximate their fair values: cash, receivables, payables and borrowings. Information on the fair value of borrowings and interest rate exposure is included in note 27. CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. (a) Estimated impairment of property, plant and equipment and available-for-sale investments Property, plant and equipment and available-for-sales investments are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The recoverable amounts of property, plant and equipment and available-for-sale investments have been determined based on value-in-use calculations. These calculation and valuations require the use of judgment and estimates. (b) Current taxation and deferred taxation The Group is subject to taxation in the PRC. Significant judgment is required in determining the amount of the provision for taxation and the timing of payment of the related taxations. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such difference will impact the income tax and deferred tax provisions in the periods in which such determination are made. SEGMENT INFORMATION - 22 - HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 (a) No business segment information of the Group is presented as the Group’s sales, expenses, assets and liabilities are primarily attributable to manufacturing and sales of household refrigerators and electronic appliances. 2005 2004 RMB’000 RMB’000 Sales of goods 2,028,938 1,438,884 5. SEGMENT INFORMATION – (continued) (b) Geographical Segments The following table presents revenue regarding geographical segments for the year ended December 31, 2005: 2005 2004 RMB’000 RMB’000 The PRC 1,402,295 1,075,321 Europe 403,027 201,110 Asia Pacific region 67,920 50,950 Others 155,696 111,503 2,028,938 1,438,884 The principal assets employed by the Group are located in the PRC, accordingly, no segmental analysis of assets and expenditure is prepared for the year. OTHER OPERATING INCOME 2005 2004 RMB’000 RMB’000 - 23 - HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 Bank interest income 2,219 2,000 Investment income 768 380 Sale of scrap materials 654 1,031 Tax refund on export sales and new products 1,542 2,862 Gain on disposal of property, plant and equipment - 189 Write-back of provision for receivables - 4,623 5,183 11,085 - 24 - HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 PROFIT FROM OPERATIONS Profit from operations is arrived at: 2005 2004 RMB’000 RMB’000 After charging: Amortisation of prepaid lease payments 10,513 3,334 Amortisation of intangible assets 4,134 16,980 Construction in progress written off - 1,523 Depreciation of property, plant and equipment 46,317 43,423 Exchange loss 2,826 108 Loss on disposal of property, plant and equipment 5,233 17 Loss on disposal of available-for-sale investments - 30 Impairment loss on receivables 1,432 690 Impairment loss on amount due from a shareholder - 705 Provision for inventories 8,807 - Provision for warranty expenses 13,000 7,200 Research and development expenditure 2,295 3,124 Rent paid under operating leases – office rental 4,944 6,707 Staff costs 108,372 88,246 Warranty expenses 11,794 10,099 STAFF COSTS 2005 2004 RMB’000 RMB’000 Wages and salaries 80,977 71,867 Staff welfare 16,010 13,798 Retirement benefits 11,385 2,581 108,372 88,246 FINANCE COSTS 2005 2004 RMB’000 RMB’000 Interest on bank borrowings 41,659 38,924 - 25 - HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 Interest element of finance leases 198 - 41,857 38,924 INCOME TAX 2005 2 0 0 4 RMB’000 RMB’000 Current tax 18 - PRC income tax comprises income tax of the Company and its subsidiaries, Zhongke Meiling Cryogenics Company Limited and Anhui Anhong Plastics Co., Ltd., and is calculated at rates applicable to the relevant companies ranging from 24% to 33%. The charge for the year can be reconciled to the profit per the income statement as follows: 2005 2004 RMB’000 RMB’000 Profit before tax 4,315 28,600 Tax calculated at the effective rate of 33% 1,424 9,438 Tax effect of expenses not deductible for taxation purposes 11,092 - Tax effect of income not taxable for taxation purposes (4,176 ) (685 ) Tax effect of tax losses not recognised 23 - Utilisation of tax losses not previously recognised (8,363 ) (8,753 ) Others 18 - Taxation charge 18 - No deferred tax asset has been recognized in the financial statements as it is uncertain such an asset will crystallize in the foreseeable future (2004: Nil). Details of the unprovided deferred tax asset at December 31, 2005 are as follows: 2005 2004 RMB’000 RMB’000 - 26 - HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 Provision for receivables and inventories 66,999 14,506 Tax losses 130,418 33,536 197,417 48,042 EARNINGS PER SHARE The calculation of loss per share is based on the consolidated profit after tax and minority interests for the year of RMB3,877,000 (2004: profit of RMB28,432,000) and 413,643,000 shares (2004: 413,643,000 shares) in issue. The diluted earnings per share is equivalent to the basis earnings per share as there were no potential ordinary shares outstanding during the years ended December 31, 2005 and 2004. - 27 - HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 PREPAID LEASE PAYMENTS RMB’000 COST At January 1, 2004 134,161 Additions 352,570 At December 31, 2004 486,731 Additions 181,842 At December 31, 2005 668,573 ACCUMULATED AMORTIZATION At January 1, 2004 9,945 Charge for the year 3,334 At December 31, 2004 13,279 Charge for the year 10,513 At December 31, 2005 23,792 NET BOOK VALUE At December 31, 2005 644,781 At December 31, 2004 473,452 At December 31, 2005, the net book value of land use rights of the Group amounted to RMB585,707,000 (2004: RMB59,877,000) were pledged as security for bank borrowings. Title to the land use right for settlement of outstanding balance with HMHC has not been registered in the Company’s name. - 28 - HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 PROPERTY, PLANT AND EQUIPMENT Furniture, fixtures Plant and and office Motor Buildings machinery equipment vehicles Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 COST At January 1, 2004 237,701 503,456 31,524 17,735 790,416 Additions 888 17,044 128 2,512 20,572 Transfer from construction in - 9,551 - - 9,551 progress Disposals - (524) (189 ) (1,668 ) (2,381) At December 31, 2004 238,589 529,527 31,463 18,579 818,158 Additions 40,225 20,726 2,196 2,814 65,961 Transfer from construction in progress - 16,720 - - 16,720 Disposals - (21,379) (145 ) (737 ) (22,261) At December 31, 2005 278,814 545,594 33,514 20,656 878,578 ACCUMULATED DEPRECIATION At January 1, 2004 42,743 219,654 21,265 12,522 296,184 Charge for the year 6,557 34,474 1,311 1,081 43,423 Eliminated on disposals - (73) - (962 ) (1,035) At December 31, 2004 49,300 254,055 22,576 12,641 338,572 Charge for the year 6,636 37,465 1,718 498 46,317 Eliminated on disposals - (6,412) (63 ) (500 ) (6,975) At December 31, 2005 55,936 285,108 24,231 12,639 377,914 NET BOOK VALUES At December 31, 2005 222,878 260,486 9,283 8,017 500,664 At December 31, 2004 189,289 275,472 8,887 5,938 479,586 At December 31, 2005, the net book value of buildings of the Group amounted to RMB26,960,000 (2004: RMB85,873,000) were pledged as security for bank borrowings. At December 31, 2005, the net book value of buildings of the Group amounted to RMB10,000,000 (2004: Nil) in respect of assets held under finance lease. - 29 - HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 CONSTRUCTION IN PROGRESS 2005 2004 RMB’000 RMB’000 At January 1 11,088 7,685 Additions 11,565 14,477 Transfer to property, plant and equipment (16,720 ) (9,551 ) Write-off - (1,523 ) At December 31 5,933 11,088 Construction in progress represents production equipment and machinery under installation and is stated at cost. No interest expenses were capitalized in the current year (2004: Nil). INTANGIBLE ASSETS Computer Technical software Trademark know-how Total RMB’000 RMB’000 RMB’000 RMB’000 COST At January 1, 2004 and at December 31, 2004 8,821 130,078 18,000 156,899 Additions 599 - - 599 At December 31, 2005 9,420 130,078 18,000 157,498 ACCUMULATED AMORTISATION At January 1, 2004 2,462 17,427 2,550 22,439 Charge for the year 1,764 12,966 2,250 16,980 At December 31, 2004 4,226 30,393 4,800 39,419 Charge for the year 1,884 - 2,250 4,134 At December 31, 2005 6,110 30,393 7,050 43,553 NET BOOK VALUE At December 31, 2005 3,310 99,685 10,950 113,945 At December 31, 2004 4,595 99,685 13,200 117,480 - 30 - HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 INTERESTS IN ASSOCIATED COMPANIES 2005 2004 RMB’000 RMB’000 Unlisted shares, at cost 25,749 25,749 Share of post-acquisition profits 2,310 2,129 28,059 27,878 Less: Impairment loss (1,660 ) (1,660 ) 26,399 26,218 Details of the associated companies as at December 31, 2005 are as follows: Registered Equity Name of associated company capital Principal activities interest held 2005 2004 Hefei Meiling Packing USD3,067,000 Manufacturing and sale of 48.28% 48.28% Product Co., Ltd packing materials Hefei Meiling - Sigema USD1,000,000 Manufacturing and sale of air 20% 20% Appliances Co., Ltd conditioners 合肥技術產權交易所 RMB3,500,000 Clearing house 28.57% 28.57% AVAILABLE-FOR-SALE INVESTMENTS 2005 2004 RMB’000 RMB’000 Listed investments 6,150 6,150 Unlisted investments 24,540 24,540 30,690 30,690 - 31 - HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 AMOUNT DUE FROM A SHAREHOLDER 2005 2004 RMB’000 RMB’000 Amount due from a shareholder - 89,799 Less: Impairment loss - (19,425 ) - 70,374 (a) The balance was due from Hefei Meiling Holding Company (“HMHC”). The year end balance mainly represents recharge of advertising and other selling expenses to HMHC, interest charge on the outstanding balance and receivables arising from disposal of equity interests in certain companies to HMHC. According to an agreement dated March 20, 2001, no interest would be charged to HMHC on the outstanding balance commencing January 1, 2001. (b) In the current year, the Company entered into agreements with HMHC, and Hefei Meiling Washing Machine Co., Ltd (“Washing Machine Co.”) to settle the amount due from HMHC and partially settle the amount due from Washing Machine Co. in exchange for the land use rights with valuation of RMB176,202,800, building and production facilities with valuation RMB40,563,800. The land use rights are owned by HMHC and located in Economic and Technological Development Zone of Hefei and the buildings and production facilities of Washing Machine Co. The transaction of exchange of assets has been approved by the shareholders and China Securities Regulatory Commission. The title to the land use right has not been registered in the Company’s name as the Company has just filed the documents to the relevant PRC authority to grant formal approval for transfer and registration. The Directors are of the opinions that formal approval will be granted and the formality be completed in the near future and will have no material impact on the financial position and operations of the Group. - 32 - HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 AMOUNT DUE FROM A RELATED COMPANY 2005 2004 RMB’000 RMB’000 Amount due from a related company 194,079 311,216 Less: Impairment loss (151,779 ) (151,779 ) 42,300 159,437 (a) The balance was due from Hefei Meiling Washing Machine Co., Ltd (“Washing Machine Co.”), a subsidiary of HMHC. The year end balance mainly represents advances to Washing Machine Co. for the purchases of property, plant and machinery, financing its operations and interest charge on the outstanding balance. According to an agreement dated March 20, 2001, no interest would be charged to Washing Machine Co. on the outstanding balance commencing January 1, 2001. (b) Pursuant to agreements [DATE] entered into between the Company, HMHC and Washing Machine Co., the outstanding balance will be settled by the transfer of building and production facilities with carrying value of RMB40,563,800 and land use rights owned by HMHC. Title to the land use right has not been transferred to the Company’s name. (c) The amount due from Washing Machine Co. is guaranteed by HMHC. INVENTORIES 2005 2004 RMB’000 RMB’000 Raw materials 88,656 80,075 Work in progress 19,120 13,018 Finished goods 255,920 144,436 363,696 237,529 Included above are raw materials of RMB5,098,112 (2004: RMB3,054,000) and finished goods RMB25,726,320 (2004: RMB4,168,000) carried at net realisable value. TRADE RECEIVABLES 2005 2004 RMB’000 RMB’000 Trade receivables 97,276 105,723 Less: Provision for bad and doubtful debts (71,808 ) (71,078 ) Trade receivables, net 25,468 34,645 - 33 - HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 OTHER RECEIVABLES AND PREPAYMENTS 2005 2004 RMB’000 RMB’000 Other receivables 17,803 17,507 Less: Provision for bad and doubtful debts (9,622 ) (6,137 ) Other receivables, net 8,181 11,370 Prepayments 54,500 95,309 62,681 106,679 AMOUNTS DUE FROM RELATED COMPANIES The amounts due are unsecured, interest-free and with no fixed terms of repayment. CASH AND CASH EQUIVALENTS 2005 2004 RMB’000 RMB’000 Cash and cash equivalents: Bank balance and cash 234,229 226,175 Pledged or guaranteed deposits Bank guarantee saving deposits 72,225 89,476 Total bank balances and cash 306,454 315,651 Bank guarantee saving deposits have been pledged to banks to guarantee bills payable and the average effective interest rate on short-term bank deposits was 0.99% (2004: 0.99%) per annum. AMOUNTS DUE TO RELATED COMPANIES/ASSOCIATED COMPANIES The amounts due are unsecured, interest-free and with no fixed terms of repayment. - 34 - HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 PROVISION FOR WARRANTY 2005 2004 RMB’000 RMB’000 Opening net book value 12,076 14,975 Provision for the year 13,000 7,200 Utilisation (11,794 ) (10,099 ) Closing net book value 13,282 12,076 The Group provides a three-year warranty in respect of the compressors of refrigerators and undertakes to repair or replace items that fail to perform satisfactorily. The provision is estimated by reference to the expected warranty claims calculated at certain percentage based on past experience of the level of repairs and returns. BORROWINGS 2005 2004 RMB’000 RMB’000 Current - secured bank borrowings 656,404 605,690 - unsecured bank borrowings - 24,500 656,404 630,190 Non-current - secured bank borrowings 10,000 20,000 - unsecured government loan 3,300 3,300 13,300 23,300 Total borrowings 669,704 653,490 (a) Certain bank borrowings of the Group are guaranteed by the following shareholder: 2005 2004 RMB’000 RMB’000 HMHC 284,404 582,390 - 35 - HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 Certain bank borrowings of the Group are guaranteed by the land use right owned by the shareholder. (b) The Group’s major bankers had confirmed that it would provide banking facilities totaling RMB1,050,000,000 to the Group for a period to December 31, 2005. As at December 31, 2005 banking facilities of RMB250,000,000 has not been utilised. - 36 - HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 27. BORROWINGS – (continued) (c) The interest rate exposure of the borrowings of the Group is as follows: 2005 2004 RMB’000 RMB’000 Total borrowings - at fixed rates 666,404 650,190 - interest free 3,300 3,300 669,704 653,490 2005 2004 Weighted average effective interest rate: - bank borrowings 4.39% 5.57% (d) The carrying amount and estimated fair value of the Group’s non-current borrowings at December 31, 2005 are set out as follows: 2005 2004 RMB’000 RMB’000 Carrying amount 13,300 23,300 Estimated fair value 13,684 23,115 The fair value of non-current borrowings is estimated by applying a discounted cash flow approach using current market interest rates for similar indebtedness. Fair value estimates are made at specific point in time and are based on relevant market information. These estimates are subjective in nature and involved uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in valuation methods and assumptions could significantly affect the estimates. MINORITY INTERESTS 2005 2004 RMB’000 RMB’000 At beginning of year 16,406 16,298 - 37 - HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 Share of capital reserve - (60 ) Share of results of subsidiaries 420 168 At end of year 16,826 16,406 - 38 - HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 REGISTERED CAPITAL Registered, issued and fully paid ordinary shares of RMB1 each: 2005 2004 RMB’000 RMB’000 A shares (unlisted) 149,056 149,056 A shares (listed) 151,487 151,487 B shares (listed) 113,100 113,100 413,643 413,643 Pursuant to Company’s Articles of Association, A and B shares are all registered ordinary share. Except for the currency in which dividends are payable, these shares carry equal rights. RESERVES In accordance with the relevant PRC regulations applicable to joint stock limited companies and the Company’s Articles of Association, the Group is required to allocate its profit after tax to the following reserves: Statutory common reserve funds The Group is required each year to transfer 10% of the profit after tax as reported under the PRC statutory financial statements to the statutory common reserve funds until the balance reaches 50% of the registered share capital. This reserve can be used to make up any loss incurred or to increase share capital. Except for the reduction of losses incurred, any other application should not result in this reserve balance falling below 25% of the registered capital. Statutory public welfare funds The Group is required each year to transfer 5% to 10% of the profit after tax as reported under the PRC statutory financial statements to the statutory public welfare funds. This reserve is restricted to capital expenditure for employees’ collective welfare facilities that are owned by the Group. The statutory public welfare funds are not available for distribution to shareholders (except on liquidation). Once capital expenditure for staff welfare facilities has been made an equivalent amount must be transferred from the statutory public welfare funds to the discretionary common reserve funds. - 39 - HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 Discretionary common reserve funds The discretionary common reserve funds can be set up by means of appropriation from retained earnings or transferred from the statutory public welfare funds. The reserve can be used to reduce losses, to increase share capital or for payment of dividends. Any transfer to the reserve requires the approval of shareholders in general meeting. No profit appropriation will be made for the year 2005 as the net profit for the year has been utilised to make up accumulated losses. - 40 - HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 DISTRIBUTABLE PROFITS Pursuant to the relevant PRC regulations and the Company’s Articles of Association, profit distributable to shareholders shall be the lower of the distributable profits as determined in accordance with PRC accounting standards and the distributable profits as adjusted in accordance with IFRS. CAPITAL COMMITMENTS 2005 2004 RMB’000 RMB’000 Authorised but not contracted for 470 - Contracted but not provided for - capital contribution to construction in progress 2,446 - - acquisition of property, plant and equipment - 18,635 2,916 18,635 RELATED PARTY TRANSACTIONS During the year, the Group had the following material transactions with the following related parties in normal course of its business: 2005 2004 RMB’000 RMB’000 HMHC – the shareholder of the Company - Disposal of accounts receivable for a consideration of land use rights 703,875 352,570 Other subsidiaries of HMHC - Purchase of goods - 43,500 PLEDGE OF ASSETS At December 31, 2005, the land use rights with net book value of RMB644,780,983 (2004: RMB59,877,000), the buildings with net book value of RMB26,960,000 (2004: RMB85,873,000) and the plant and machinery with net book value of RMB172,870,000 (2004: Nil) were pledged to banks for banking facilities granted to the Group. - 41 - HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 POST BALANCE SHEET EVENTS (i) Subsequent to the balance sheet date, the Board has resolved to set up a subsidiary with Sichuan Changhong Electronic Holdings Co., Ltd. to engage in property development. The registered capital of the proposed subsidiary is RMB20 million and the Group will contribute in cash amounting to RMB18 million. (ii) Subsequent to the balance sheet date, the Board has resolved to set up a company with Sichuan Changhong Electric Co., Ltd. to engage in manufacturing and trading of electronic appliances and equipment. The registered capital of the proposed company is RMB20 million and the Group will contribute in cash amounting to RMB2 million. (iii) Subsequent to the balance sheet date, the Board has resolved that Changhong Group will become an agent of the Group in distributing household refrigerators and electronic appliances. SUBSIDIARIES As at December 31, 2005, the Company directly held equity interests in the following PRC established subsidiaries: Attributable Registered equity Name of subsidiary capital Principal activities interest held 2005 2004 Anhui Anhong Plastics Co., USD1,000,000 In the process of liquidation 75% 75% Ltd Zhongke Meiling RMB60,000,000 Development, manufacturing 70% 70% Cryogenics Company and sale of cryogenic Limited refrigerators - 42 - HEFEI MEILING COMPANY LIMITED 合肥美菱股份有限公司 SUPPLEMENTARY INFORMATION FOR THE YEAR ENDED DECEMBER 31, 2005 The impact of IFRS adjustments on the PRC statutory financial statements is as follows: Net loss for Net assets The year ended as at December 31, 2005December 31, 2005 RMB’ 000 RMB’000 As report under PRC statutory financial statements 6,659 863,654 IFRS adjustments: Adjustments for warranty provision (1,206 ) (13,282 ) Remeasurement of financial assets in according with IAS 39 1,588 (241,860 ) Depreciation of property, plant and equipment (3,084 ) 11,453 Others (80 ) (19,751 ) As restated after IFRS adjustments 3,877 600,214 §Section XI Documents for Reference 1. Original of Annual Report with the signature of CEO. 2. Financial statements with the signature and seal of the legal representative, CEO and chief financial officer (CFO). 3. Original of the Auditor’s Report with the seal of Shenzhen Pengcheng Certified Public Accountants Ltd., and the signature and seal of the certified public accountants. 4. Original of the Auditor’s Report with the seal of Morison Heng Chartered Accountants Certified Public Accountants, and the signature and seal of the certified public accountants. 5. Original of the documents and public notices disclosed on the newspapers designated by China Securities Regulatory Commission in the report year. Board of Directors of Hefei Meiling Co., Ltd. April 12, 2006 - 43 -