帝贤Ｂ(200160)2007年年度报告（英文版）

承 德 帝 贤 针 纺 股 份 有 限 公 司 CHENGDE DIXIAN TEXTILE CO．，LTD. ANNUAL REPORT 2007 April 28, 2008 Chengde · PRC Section I. Important Notice and contents Important Notes: Except Chairman of the Board Wang Shuxian; Deputy General Manger Wang Huilai, Deputy General Manager Lan Wenzhi and Deputy General Manager Wang Zhengsong were arrested on suspicion of smuggling general cargo, the Board of Directors, Supervisory Committee of Chengde Dixian Textile Co., Ltd. (hereinafter referred to as the Company) and its directors, supervisors and senior executives confirm that there are no material omissions or errors which would render any statement misleading and individually and collectively accept responsibility for the correctness, accuracy and completeness of the contents of this report. The 21st Meeting of the 3rd Board of Director examined and approved 2007 Annual Report and its summary of the Company. Chairman of the Company Mr. Wang Shuxian was unable to attend due to be arrested on suspicion of smuggling general cargo, and other directors attended the meetings of board of directors. Shenzhen Dahua Tiancheng Certified Public Accountants audited the financial report of the Company and issued the disclaimer of opinions with emphasized issues for the Company. The Board of Director, Supervisory Committee of the Company made definitions on the relevant matters; the investors are suggested to pay attention to read. Mr. Song Yushan, Person temporarily in charge of the Board of the Company, Mr. Liu Fengguo, Chief Financial Officer, and Ms. Xu Fenglan, Person in Charge of Accounting Organ hereby confirm that the Financial Report of 2007 Annual Report is authentic and complete. Note: The report is prepared in bilingual versions using Chinese and English respectively, in the event of any discrepancy in understanding the two aforementioned versions, the Chinese version shall prevail. 1 Contents Section I. Important notice and contents---------------------------------------------------- Section II. Company Profile-------------------------------------------------------------------- Section III. Summary of Accounting Highlights and Business Highlights------------ Section IV. Changes in Share Capital and Particulars about Shareholders---------- Section V. Particulars about Directors, Supervisors, Senior Executives and Employees---- SectionVI. Administrative Structure -------------------------------------------------------- SectionVII. Particulars about Shareholders’ General Meeting------------------------- Section VIII. Report of the Board of Directors-------------------------------------------- Section IX. Report of the Supervisory Committee---------------------------------------- Section IX. Significant Events----------------------------------------------------------------- Section XI. Financial Report------------------------------------------------------------------- Section XII. Documents for Reference ------------------------------------------------------ 2 Section II. Company Profile 1. Legal Name of the Company In Chinese: 承德帝贤针纺股份有限公司 In English: CHENGDE DIXIAN TEXTILE CO., LTD. 2. Legal Representative: Wang Shuxian 3. Secretary of Board of Directors: Chen Zhiguo Contact Address: Xiabancheng Town, Chengde County, Hebei Province E-mail: gzc958@sohu.com Tel: (86) 314-3115049, 3115048 Fax: (86) 314-3182013 Authorized Representative in Charge of Securities Affairs: Han Zhigang Tel: (86) 314-3115049, 3115048 Fax: (86) 314-3182013 E-mail: hzg18632@126.com 4. Registered Address: Xiabancheng Town, Chengde County, Hebei Province Office Address: Xiabancheng Town, Chengde County, Hebei Provice Post Code: 067400 Company’s Internet Web Site: http://www.dxtex.com E-mail: dxgs-9@heinfo.net 5. Newspapers Chosen for Disclosing the Information of the Company: Securities Times (domestic) and Hong Kong Wen Wei Po (overseas) Internet Web Site for Publishing the Annual Report: http://www.cninfo.com.cn The Place Where the Annual Report is Prepared and Placed: Securities Department of the Company Contact Tel: (86) 314-3115049, 3115048 6. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: DIXIAN B Stock Code: 200160 7. Other Relevant Information of the Company Initial registered date: Nov. 3, 1999 Registered date after change: Mar. 31, 2004 Registered address: Industry and Commerce Administration Bureau of Hebei Province (316#, Tiyu South Street, Shijiazhuang, Hebei Province) Registered number for business license of the Company: 1300001001372 1/1 Registered number of taxation of the Company: 130821106576876 Organization Code Certificate: 106576876 3 The Certified Public Accountant engaged by the Company: Shenzhen Dahua Tiancheng Certified Public Accountants Office address: Room 1102-1103, 11th Floor, B Block, Union Square 5022, Binhe Road, Futian District, Shenzhen, P.R.China Section III. Summary of Accounting Highlights and Business Highlights I. Summary of accounting highlight as of the year 2007 Items Amounts(RMB) - Operating profit -574,549,404.78 - Total profit -574,718,466.36 Net profit attributable to shareholders of the listed - company -547,559,224.02 Net profit attributable to shareholders of the listed -220,392,774.32 company after deducting non-recurring gains and losses -11,260,519.82 Net cash flow arising from operating activities Notes: Items of deducting non-recurring gains and losses and the involved amounts are as following: Items Amounts(RMB) Operating income 44,207.34 Less: Withdrawal of the provision for special bad debt 171,440,482.65 Less: Withdrawal of the provision for the devaluation of 8,000,000.00 inventory Less: Loss-inventory differences and discarding loss 48,210,631.24 Less: Withdrawal of social insurance in year1997-2007 110,635,586.32 Less: Other expenditure 213,268.92 Total non-recurring gains and lossed deductting -338,455,761.79 4 II. Major accounting data and financial indexes over past three years ended the end of the report period(Unit: RMB) 1. Major accounting data Increase/de crease in this year 2006 2005 compared 2007 Items with last year (%) After Before After Before adjustment After adjustment adjustment adjustment adjustment 59,972,51 289,738,0 289,738,0 Operating income 233,828,225.80 233,828,225.80 -74.35% 8.33 20.15 20.15 -574,718, -391,148,911.0 22,216,03 22,216,03 Total profit -391,148,911.00 46.93% 466.36 0 8.51 8.51 Net profit attributable -547,559, -343,506,925.2 20,306,13 20,306,13 to shareholders of the -343,506,925.21 59.40% 224.02 1 5.88 5.88 listed company Net profit attributable to shareholders of the listed company after -220,392, -253,361,446.6 20,177,22 20,177,22 -279,449,158.95 -13.01% deducting 774.32 2 5.28 5.28 non-recurring gains and losses Net cash flow arising -11,260,5 28,712,09 28,712,09 from operating -17,643,154.42 -17,643,154.42 -36.18% 19.82 7.90 7.90 activities Increase/de crease at the end of this year At the end Items At the end of 2006 compared At the end of 2005 of 2007 with that at the end of last year (%) 2,182,122 2,580,107,980.4 2,580,107,980. 2,761,726 2,761,726 Total assets -15.43% ,998.28 5 39 ,330.29 ,330.29 Owners’ 431,356,8 1,319,847 1,319,847 equity(Shareholders’ 976,721,074.11 976,721,074.11 -55.84% 50.09 ,999.32 ,999.32 equity) 5 2. Major financial ratio Increase/decrea se in this year 2006 2005 compared with 2007 last year (%) Items Before After After Before After adjustm adjustme adjustment adjustment adjustment ent nt Basic earnings per share -0.78 -0.49 -0.49 59.18% 0.034 0.034 Diluted earnings per share -0.78 -0.49 -0.49 59.18% 0.034 0.034 Basic earnings per share after deducting non-recurring -0.31 -0.40 -0.40 -22.50% 0.034 0.034 gains and losses -35.17 -35.17 Fully diluted return on equity -126.94% -91.77% 1.54% 1.54% % % Weighted average return on -29.92 -29.92 -77.90% -47.98% 1.55% 1.55% equity % % Fully diluted return on equity -28.61 -25.94 after deducting non-recurring -51.09% -25.15% 1.53% 1.53% % % gains and losses Weighted average return on equity after deducting -22.07 -22.07 -31.35% -9.28% 1.54% 1.54% non-recurring gains and % % losses Net cash flow arising from -0.016 -0.025 -0.025 -36.00% 0.049 0.049 operating activities per share Increase/decrea se at the end of At the end this year At the end of 2006 At the end of 2005 of 2007 compared with that at the end of last year (%) Before After After Before After adjustme adjustme adjustment adjustment adjustment nt nt Net asset per share attributable to 0.61 1.38 1.38 -55.80% 2.24 2.24 shareholders of listed company III. The Company’s return on equity and earnings per share as of the year 2007 as calculated in accordant with Requirements on the Information Disclosure of Companies Publicly Issuing Shares No. 9----Calculation and Disclosure on Fully Diluted Method and Weighted Average Method, as follows: 6 1) Return on equity Amount in the repord Amount in the same period Profit in the report period period of last year Fully Weighted Fully Weighted diluted average diluted average Net profit attributable to common (126.94%) (35.17%) (77.90%) (29.92%) shareholders of the Company Net profit attributable to common shareholders of the Company after (51.09%) (25.94%) (31.35%) (22.07%) deducting the non-recurring losses and gains 2) Earnings per share Amount in the repord Amount in the same period period of last year Profit in the report period Basic Diluted Basic Diluted earnings per earnings per earnings per earnings per share share share share Net profit attributable to common (0.78) (0.49) (0.78) (0.49) shareholders of the Company Net profit attributable to common shareholders of the Company after (0.31) (0.31) (0.36) (0.36) deducting the non-recurring losses and gains Section IV. Changes in Share Capital and Particulars about Shareholders I. Changes in Share Capital (1) Statement of changes in share Unit: Share Increase/decrease of Before the change After the change this time (+, - ) Amount Proportio Amount Bonus shares Proportion (Share) n (Share) 7 I. Unlisted Shares 1. Sponsors’ shares 244,800,000 34.66% 244,800,000 34.66% Including: State-owned share Domestic legal person’s 23,147,309 3.28% 23,147,309 3.28% shares Foreign legal person’s shares Others 221,651,691 31.38% 221,651,691 31.38% 2. Raised legal person’s shares 3. Inner employees’ shares 4. Preference shares or others II. Listed Shares 1. RMB ordinary shares 2.Domestically listed 461,520,000 65.34% 461,520,000 65.34% foreign shares 3. Overseas listed foreign shares 4. Others III. Total shares 706,320,000 100% 706,320,000 100% (2) Particulars about issuance and listing of shares 1. Issuance and listing over the previous years ended the report period. The previous three year ended by the period-end, the Company did not issue shares and derived securities 2. During the report period, there were no changes in the number and structure of the Company’s shares due to bonus share, capital public reserve transferring into share capital, rationed share, additional issuance, share merger, convertible company’s bonds transferring shares, disinvestments, listing of inner employees’ shares or company’s employee’s shares, etc. 3.There were no inner employees’ shares in the Company. 8 II. About shareholders (1) Amount of shareholders and particulars about shares holding Total amount of shareholders 21,197 Particulars about shares held by the top ten shareholders Number of Numbers of Nature of Proportion of Total of shares share Full name of Shareholders non-circulatin shareholder shares held held pledged/froze g shares held n Wang Shuxian Natural person 29.49% 208,324,800 208,324,800 208,324,800 Circulating China Southern Securities Co., Ltd. 15.41% 108,840,000 Naught 0 B-share Domestic Chengde North Industrial legal person 2.62% 18,517,651 Naught 0 Corporation share Wang Zhengsong Natural person 1.89% 13,327,891 13,327,891 0 Circulating RIPPERTON ASSETS LIMITED 1.84% 8,501,266 Naught 0 B-share Circulating CSSC INTL LTD 1.70% 7,836,000 Naught 0 B-share Circulating Wang Wensheng 1.57% 7,258,007 Naught 0 B-share China Medium & Small Enterprise Circulating 1.53% 7,056,000, Naught 0 Development Funds Co., Ltd. B-share Circulating PERFECT SPACE INVESTMENTS 1.18% 5,454,587 Naught 0 B-share Circulating MAIN FORCES ASSETS LIMIFBO 0.69% 4,856,040 Naught 0 B-share Particulars about shares held by the top ten shareholders of circulation shares Number of circulation shares held at Shareholders’ name Type of shares the year-end Domestically listed China Southern Securities Co., Ltd. 108,840,000 foreign shares Domestically listed RIPPERTON ASSETS LIMITED 8,501,266 foreign shares Domestically listed CSSC INTL LTD 7,836,000 foreign shares Domestically listed Wang Wensheng 7,258,007 foreign shares China Medium & Small Enterprise Development Domestically listed 7,056,000 Funds Co., Ltd. foreign shares 9 Domestically listed PERFECT SPACE INVESTMENTS 5,451,587 foreign shares Domestically listed MAIN FORCES ASSETS LIMIFBO 4,856,040 foreign shares CHINA SOUTHERN CORPORATE FINANCE Domestically listed 4,548,000 LIMITED foreign shares cSS(HK)L A/C ULTRAMATIC HOLDINGS Domestically listed 4,428,396 LIMITED foreign shares Domestically listed CHINA SOUTHERN CAPITAL LIMITED 3,577,807 foreign shares Wang Shuxian and Wang Zhengsong are parent child relationship so as to exist related relationship; China Southern Securities (Hong Kong) Co., Ltd and CSSC INTL LTD belong to subsidiaries of CSSC Co., Ltd. so as to exist Explanation on associated related relationship. Among the top ten shareholders, the Company is relationship among the aforesaid unknown whether there exists associated relationship or belongs to the shareholders consistent actor regulated by the Management Measure of Information Disclosure on Change of Shareholding for Listed Company among the other shareholders. (2) Particulars about controlling shareholder of the Company: The controlling shareholder of the Company is Wang Shuxian (the first largest shareholder of the Company), who is also actual controller of the Company. His information is as follows: Mr. Wang Shuxian, aged 54 and Chinese nationality, who does not enjoy the residence power in the other country or area. He is one of the sponsors of the Company and holds 208,324,,800 shares of the Company at present. Mr. Wang Shuxian is founder of the Company. In 1986, Xiaban County Knitting Factory was founded in Xiabancheng town of Chengde, Hebei. Over ten years, the Company has developed into the largest base of manufacture and exporter of textile in North China from small to large company, developing the largest base of production and export in knitting products in North China. In 1994, he has established Hebei Dixian Textile Group Co., and it has been changed into joint-stock company on Nov. 3, 1999. Approved by CSRC, DIXIAN B successfully listed with Shenzhen Stock Exchange for trade on Sep. 29, 2000. On Dec.25, 2006, he was arrested on the suspicion of smuggling general cargo and there were no results already at present. At present, the 208,324,,800 shares of the Company held by Wang Shuxian respectively were judicially frozen and started auction by People’s Intermediate Court of Dalian and People’s Intermediate Court of Shenzhen; and two public auctions were taken with the results of failure. (3) In the report period, controlling shareholder and actual controller of the Company had no change (4) Property right and controlling relationship between the actual controller and the Company is as follow: WANG SHU XIAN 10 29.49% CHENGDE DIXIAN TEXTILE CO., LTD (5) Particulars about legal person shareholders as of holding 10% (including 10%) China South Securities Co., Ltd. was founded on Dec. 21, 1992 with registered capital of RMB 3.45 billion. Business scope of the Company includes: deputize and self-run security business; consignment of security and recommend and guarantee for listing; issuance and issuance agent for bond; guarantee agent, assignment and testimony of security; sales by proxy, mortgage and discount financing of security and investment consultation of security; finance consultant; investment related to security business; regroup, purchase and merger of enterprise and financing arrangement; deputize repay capital with interest and distribution of bonus with derived interest; capital management; promote business of fund; overseas business of security; act as sponsor of security investment fund and fund management company and other business authorized by CSRC. On Jan., 2, 2004, China South Securities Co., Ltd. was taken over control administratively. It was officially announced to be closed on April 29, 2004 and the clearing work is under the way nowadays. Section V. Particulars about the Directors, Supervisors and Senior Executives and Employees I. Particulars about directors, supervisors and senior executives (1)Basic information Holding share Holding share Reason Start dated of End date of Title Sex Age at the at the of Name office term office term year-begin year-end change Chairman of Wang Shuxian Male 54 Oct.30,2005 Oct. 30,2008 208,324,800 208,324,800 the Board Shi Bainian Director Male 36 Oct.30,2005 Oct. 30,2008 0 0 Song Yushan Director Male 67 Oct.30,2005 Oct. 30,2008 0 0 Liu Fumin Director Male 34 Oct.30,2007 Oct. 30,2010 0 0 Du Qingfeng Director Male 46 Oct.30,2005 Oct. 30,2008 0 0 Xu Guilian Director Female 48 Oct.30,2007 Oct. 30,2010 0 0 Independent Wang Enyuan Male 66 Oct.30,2005 Oct. 30,2008 0 0 Director Independent Li Wei Male 37 Oct.30,2005 Sep.6, 2007 0 0 Director Independent Wang Yaguang Male 55 Oct.30,2005 Sep.6, 2008 0 0 Director 11 Xu Xue Supervisor Male 59 Oct.30,2005 Oct. 30,2008 0 0 Li Xianfu Supervisor Male 62 Oct.30,2005 Oct. 30,2008 0 0 Sun Zhenyu Supervisor Male 45 Oct.30,2005 Oct. 30,2008 0 0 Yao Fenglan Supervisor Female 42 Oct.30,2005 Oct. 30,2008 0 0 Xu Huafeng Supervisor Male 34 Oct.30,2005 Oct. 30,2008 0 0 Deputy Wang Zhengsong General Male 31 Oct.30,2005 Oct. 30,2008 13,327,891 13,327,891 Manager Deputy Wang Huilai General Male 52 Oct.30,2005 Oct. 30,2008 0 0 Manager Deputy Song Shiqiang General Male 34 Oct.30,2005 Oct. 30,2008 0 0 Manager Deputy Huo Xuejun General Male 35 Oct.30,2005 Oct. 30,2008 0 0 Manager Deputy Lan Wenzhi General Female 48 Oct.30,2005 Oct. 30,2008 Manager Deputy Zhang Jing General Male 37 Oct.30,2005 Oct. 30,2008 0 0 - Manager Chief Liu Fengguo Financial Male 39 Oct.30,2005 Oct. 30,2008 Supervisor Secretary of Chen Zhiguo Board of Male 35 Oct.30,2005 Oct. 30,2008 0 0 Directors Particulars about directors, supervisors and senior executives holding the position in Shareholding Company: Drawing the payment Name of Shareholding Title in Shareholding from the Name Office term Company Company Shareholding Company (Yes / No) Chengde North Industrial Legal From 1999 Song Yushan No Corporation Representative until now 12 Chengde Dragon and Legal Representative From 2002 Song Yushan Phoenix Dressing Co., No until now Ltd. Chengde Xiaban Town Legal From 1999 Song Yushan No Hongxing Plastic Factory Representative until now (II). Particulars about main work experience of directors, supervisor and senior executives in previous five years 1. Particulars about present directors of the Company Mr. Wang Shuxian, graduated from middle school, and took the post of Chairman of the Company. Since 1986, he took the post of director of Xiaban Town Textile General Plant. In 1994, he assumed General Manager, Chairman of Dixian Group successively and was the founder of the Company. Since 1999, he took Chairman of the Company. Mr. Wang Shuxian possessed rich experience in the aspects of production, sale and enterprise management etc. of knitting and finished garments. At present he concurrently assumed the posts of Chairman of Xiaban Town Textile, Dixian Fashion, Industry Papermaking, Chengde Beirifang. On Dec.25, 2006, he was arrested on suspicion of smuggling general cargo. There is no result of the case at present. Mr. Shi Bainian, graduated from university (majored in economics management), was Director and General Manager of the Company. He successively took the post of director of tailoring branch of Dixian Group, director of dyeing manufacture and Deputy General Manager of the Company. Mr. Song Yushan, graduated from university, was Director of the Company (the temporary convener of Board of Directors). He successively took the post of secretary of office of Chengde County People’s Government, General Manager of Xiaban Town Industrial Company, Director of Economy United Commission of Xiaban Town, he took legal representative of Chengde North Industrial Corporation from 1999 till now, took legal representative of Chengde Longfeng Cosmetic Corp. from 2002 till now and took legal representative of Chengde Xiabancheng Red Star Plastic Manufactory from 1999 till now. Mr. Du Qingfeng, graduated from college (majored in finance), China economist, was the director of the Company. He was successively took the post of credit staff of industry and commerce section of Chengde County, and then sub-section chief, CFO of Dixian Co.. Liu Fumin, bachelor degree of economic management, CPA, Director of the Company, Deputy General Manager of the Company. He worked at financial section of Chengde North Mountain Forest Farm from March 2000 to August 2001, and he worked at Chengde Dixian Textile Co., Ltd. from August 2001 till now. He held the post of Deputy General Manager of the Company since Oct., 2005. Xu Guilian, graduated from high school, was the director of the Company. She successively took the post of Board Chairman of Chengde Meihua Textile Co. Ltd. and Suning Meihua Textile Co. Ltd. Mr. Li Wei, post graduate, was the independent director of the Company. He successively took the post of business manager of China National Chemicals Import & Export Corporation, 13 Project manager of investment banking department of China Eagle Securities Co., Ltd., and Deputy General Manager of Shijiazhuang branch office of Haitong Securities Co., Ltd. Now he was Deputy General Manager of Shenzhen Oriental Power Investment Co., Ltd. Mr. Wang Yaguang, graduated from college, certified public accountant, was Independent Director of the Company. He successively took the post of accountant, deputy director of Chengde County Costume Factory and Director of Chengde County Auditing Office. Now he was Chairman and director CPA of Chengde Hongyuan Certified Public Accountants Co., Ltd. Mr. Wang Enyuan, graduated from college, High China economist, was the independent director of the Company. He successively took the post of planning staff, credit staff, office director, and associate president of Chengde City People’s Bank, president and secretary of the party commission of Chengde ICBC. He retired in 1999. 2. Basic information of supervisors Mr. Xu Xue, Chairman of Supervisory Committee, he took the post of plant director of Dixian Company Zhuji Thread-making Plant from Jun. 1995 to Apr. 1997; plant director of Dixian Company Paper Cartons Plant from Apr. 1997 to Mar. 2001; committeeman of Paper mill arrangement committee from Mar. 2001 to Jul. 2003; he is deputy secretary of general Party branch of the Dixian Company from Jul. 2003 till now. Mr. Li Xianfu, graduated from high school, was supervisor of the company and sub-section chief of comprehensive management office. He ever took the post of Director of Chengde County 2nd Costume Factory and Sub-section chief of comprehensive management department of Dixian Group. Mr. Sun Zhenyu, graduated from university (majored in English), was the supervisor and manager of quality technology department. He ever taught in Shanggu Middle School of Chengde County. Later he successively took the post of associate director of Dyeing Factory of Dixian Group and General Dispatcher and manger of Knitting Department. Ms. Yao Fenglan, graduate from high school, was supervisor and associate director of General Manager Office. She ever worked in Chengde County Insurance Company. She was office secretary of Dixian Group and associate director of office. Mr. Xu Huafeng, graduated from college (majored in computer accounting), was the supervisor of the Company and sub-section chief of financial section of Heibei Xiaban Town Textile Wears Co., Ltd., the subsidiary of the Company. He ever worked as financial staff of that financial section. 3. Basic information of other senior executives Wang Zhengsong, graduated from college, Deputy General Manager of the Company (in charge of overseas business). He took the executive director of gold Axe Investment.; he has worked for the Company since Oct. 29, 2002. Song Shiqiang, deputy general manger of the Company. He took general manger of Weaving Mill, Yarn Spinning Mill and Spinning Mill of the Company, generally in charge of Yarn Spilling Company of the Company. Since Oct, 2005, he took the deputy general manger of the Company. Huo Xuejun, deputy General Manager of the Company, he graduated from high school and ever took the post of office director of GM Office of the Company. He ever engaged at 14 Chengde Credit Cooperatives and Dixian Group as cashier and accountant, and ever held the office director of Inspectorate Department of Dixian Group. He was in charge of deputy General Manager of the Company since Oct., 2005. Wang Huilai, graduated from college (majored in economics management), Deputy General Manager of the Company. He successively took the post of Secretary, Sectional Chief of Chengde Agricultural Means of Production and Deputy General Manager of the Company. On Jun.30, 2007, he was arrested on suspicion of smuggling general cargo. There is no result of the case at present. Lan Wenzhi, graduate from high school, was Deputy General Manager of the Company. She successively took financial work in People’s Government of Xiaban Town, and later took the post of Chief of Financial Section, Chief of Purchase Section, and Deputy General Manager of the Company. On Dec.25, 2006, she was arrested on suspicion of smuggling general cargo. There is no result of the case at present. Mr. Zhang Jing, graduated from university (majored in bank foreign exchange), China economist, Deputy General Manager of the Company. He ever worked in Xiaban Town branch of Bank of China. He worked for the Company from December 2000. He successively worked in overseas sale department, financial department and securities department of the Company. Liu Fengguo, graduated from collage (majored in accounting), Chief Financial Supervisor of the Company. He successively took the post in Financial Section, Audit Section and Supervise Section of the Company. Mr. Chen Zhiguo, junior college degree, was the secretary of the Board of the Company. He ever worked as the associate director, sub-section chief of general affairs, and manager of securities department of Spinning Mill of the Company. (III). All directors, supervisors and senior executives drew the annual remuneration from the Company as follows: 15 Drew from other Total annual remuneration Name Title shareholder company or （RMB’0000） other related organ or not Wang Chairman of the 6,000,000 No Shuxian Board Director, Shi Bainian 72,000 No General Manager Song Yushan Director 52,000 No Director, Liu Fumin Deputy General 52,000 No Manager Du Qingfeng Director 52,000 No Xu Guilian Director 52,000 No Wang Independent 30,000 No Enyuan director Independent Li Wei 30,000 No director Wang Independent 30,000 No Yaguang director Chairman of Xu Xue Supervisory 52,000 No Committee Li Xianfu Supervisor 34,000 No Sun Zhenyu Supervisor 34,000 No Yao Fenglan Supervisor 34,000 No Xu Huafeng Supervisor 34,000 No Wang Deputy General 52,000 No Zhengsong Manager Deputy General Huo Xuejun 52,000 No Manager Deputy General Lan Wenzhi 52,000 No Manager Song Deputy General 52,000 No Shiqiang Manager Deputy General Zhang Jing 52,000 No Manager Deputy General Wang Huilai 52,000 No Manager Chief Financial Liu Fengguo 52,000 No Supervisor Secretary of 16 Chen Zhiguo Board of 52,000 No Directors Total 6,947,000 - 17 The annual remunerations of directors, supervisors and senior executives of the Company were confirmed by its own title and position and implemented through examination and approval of annual shareholders’ general meeting. Reasonable fees occurred when independent directors attending the Board meeting of the Company and Shareholders’ General Meeting or implementing its official power according to relevant laws, regulations and Articles of Association, the Company apply for reimburse on fact. (IV) Leaving position and reason of directors, supervisors and senior executives in the report period 1. In the 10th Meeting of the Third Board of Directors on Jan.30, 2007, Board of Directors of the Company recommended Mr. Shi Bainian as the temporary principal of Board of Directorsc to act on the behalf of Chairman of the Board. 2. In the 10th Meeting of the Third Board of Directors on Jan.30, 2007, Board of Directors of the Company recommended Mr. Wang Huilai to act on the behalf of Secretary of Board of Directors. 3. In the 11th Meeting of the Third Board of Directors on Apr.5, 2007, Board of Directors of the Company discussed and approved that the General Manager Mr. Shi Bainian nominated Mr. Liu Fengguo as CFO of the Company. 4. In the 13th Meeting of the Third Board of Directors on May 29, 2007, Board of Directors of the Company approved to engage Mr. Zhang Jing as Deputy General Manger of the Company. 5. In the 13th Meeting of the Third Board of Directors on May 29, Board of Directors of the Company approved to resume Mr. Chen Zhiguo as Secretary of Board of Directors. 6. In the 14th Meeting of the Third Board of Directors on Jun.19, 2007, Board of Directors of the Company approved the proposal of Mr. Shi Bainian, and decided to recommend Mr. Song Yushan as the new temporary principal of Board of Directors to act on the behalf of Chairman of the Board. 7. In the 17th Meeting of the Third Board of Directors on Sep.26, 2007, Board of Directors of the Company approved to nominate Ms. Xu Guilian and Mr. Liu Fumin as Directors of the Company instead of Director Ms. Lan Wenzhi and Director Mr. Wang Huilai. II. Particulars about employees At the end of the report, there were 5,313 in-service employees, including 4,998 production and piecework personnel, 60 sales personnel, 150 technicians, who were all in their holidays now because of stopping production; 25 financial personnel and 77 administrative personnel; 100 security personnel; of which 547 persons got the junior college and technical secondary school’s degree or above, taking 10% of the total number of employees. Section VI. Administrative Structure I. Administration of the Company Strictly according to the requirements in Company Law of the P.R.C., Securities Law, Rules on Administration of Listed Companies, Guidance Opinion on Establishing Independent Director System in Listed Companies and other relevant laws and regulations, the Company 18 continuously improved the legal person administration structure of the Company, established modern enterprise system and standardized the operation of the Company. There is no significant difference between the actual administration of the Company and the normative documents on administration of listed companies released by China Securities Regulatory Commission. The major representation is as follows: 1. Shareholders and the Shareholders’ General Meeting: The Company set up Rules of Procedure of Shareholders’ General Meeting and was able to convene and hold the Shareholders’ General Meeting strictly according to the requirement of normative opinions of the Shareholders’ General Meeting and the procedure of the meeting was legal. The Company ensures that all shareholders share the actual information of the Company equally and guarantee the legal rights of medium and small shareholders. 2. Relation of the controlling shareholder and the listed company: In order to truly safeguard the whole interest of the Company, the Company has set up Behavior Criterion of Controlling Shareholder. The Company is completely independent from the controlling shareholder in terms of personnel, assets, finance, organization and business. The Board of Directors, the Supervisory Committee and internal organization can operate independently. 3. Directors and the Board of Directors: The Company elected directors strictly according to the procedure stated in the Articles of Association and engaged independent directors according to relevant requirements. All directors can take the responsibilities in a diligent attitude on behalf of the maximum interests of the Company and the shareholders. The Board of Directors established Rules of procedure of the Board of Directors, implemented patiently the regulations of the laws, regulations and the Articles of Association of the Company, treated all shareholders fairly and concentrated on the interest of relevant beneficial parties. 4. Supervisors and the Supervisory Committee: The Supervisory Committee established Rules of procedure of the Supervisory Committee. The supervisors can take their duties and supervise over the Company’s finance and the compliance with laws and regulations of the implementation of the, directors, managers and other senior executives’ duties in an attitude responsible for all shareholders and thus protect the legal right and interest of the Company and the shareholders. 5. Performance evaluation and encouragement and regulating mechanism: The Company improved actively a fair and transparent performance evaluation criteria and encouragement mechanism for directors, supervisors and senior executives. Engagement of senior executives is open, transparent and is in line with stipulations of laws and regulations. 6. For relevant beneficial parties: The Company is able to fully respect and safeguard the legal rights and interests of the bank, other creditors, employees, customers and other parties of related interests. The Company pays special attention to social welfare, environmental protection and commonweal cause in the area, while protecting the Company’s sustainable development and realizing the maximum of the shareholders’ interests. 7. Information disclosure and transparency: The Company authorized the secretary of the Board of Directors to be responsible for information disclosure, reception of the shareholders’ interviewing and consultation. The Company could disclose relevant information in a true, accurate, complete and timely manner strictly according to provisions of laws, regulations and the Articles of Association so as to ensure equal chances for all shareholders to obtain information. 19 II. Performance of Independent Directors Since taking the post in the Company, independent Directors Mr. Wang Enyuan Mr. Wang Yaguang and Mr. Li Wei seriously fulfilled their duties, participated in each meeting of Board of Directors and shareholders’ general meeting on time in the report period, and did not express different opinions on each proposal of the meeting of Board of Directors and other issues. They also actively inspected and researched the operations business developments and financial status, strictly supervised and guided the normal operation; actively took part in the decision-making of Board of Directors, expressed independent and object opinions on nominating directors and proposing to engage certified public accountants, and expressed scientific and reasonable opinions and suggestions with their specialized knowledge for several times on operation and development of the Company. They maintained interests of the Company and all shareholders and diligently perfect their responsibilities. In the report period, the Company totally held 9 Board of Directors and the attending of independent directors as follows: Times of Board Presence in Name of Entrusted meeting supposed to person Absence (Time) independent director presence (Time) attend (Time) Wang Enyuan 9 8 0 1 Wang Yaguang 9 8 1 0 Li Wei 9 4 0 5 III. Separation in businesses, personnel, assets, organization and finance of the Company and control shareholders 1. In respect of personnel: the labor, personnel and wage management of the Company is completely independent and the manager, deputy manager and other senior executives received salaries in the Company. 2. In respect of assets: The Company as an independent legal person has full property right of legal person and has independent production system, accessorial production system and auxiliary equipment. Industrial property right, trademark, non-patent technology and other intangible assets all belong to the listed company. The Company has independent purchase and sales system. 3. In respect of finance: The Company has independent financial department, whole, independent and normatively operated business accounting system and financial administration system and independent bank account. 4. In respect of organization independence: The Company’s organizations are wholly independent and the offices of the Company are wholly separated from the controlling shareholder. 5. In respect of business: The Company is independent from the controlling shareholder in terms of businesses and has independent and whole business and operating ability. 20 IV. Particulars about establishing and perfecting internal control system of the Company 1. Summary on internal control In the report period, according to relevant regulations of Notice on Issues Concerning Campaign to Strengthen Governance of Listed Companies promulgated by CSRS and Guidance To Listed Company Internal Control promulgated by Shenzhen Stock Exchange, combined self-inspection and reform of special activities of administration in listed companies the Company formulated System of Information Disclosure, Inside Report System of Significant Information and Management of Shares Held by Directors, Supervisors and Senior Executives and their Changes. 2. Self-evaluation of internal control systems by Board of Directors On Dec. 25, 2006, due to common commodity smuggling criminal of the Company, many key senior executors had detention by custom. All of its financial statements, documents and archives are still under detention of Shijiazhuang Customs Anti-smuggling Bureau without return. Operation and management of the Company was influenced a lot, so it also had a serious impact on internal control system of the Company. However, through continuous establishing, completing and perfecting as well as corresponding change and improvement for its special governance campaign, the internal control system improved to some extents. The existing management level will make all their effort to further improve internal control, strengthen comprehensive managing ability to the Company, perfect operation supervisory system and enhance ability of preventing and controlling internal risks. The Company will further strengthen internal auditing and its internal control functions to fully take its role. V. Evaluation and encouragement mechanism of performance of senior executives The Company established Detailed Rules of General Manager and other specific work regulations to normalize the work of the senior executives. Meanwhile, adopting the method of testing and evaluation, the Company confirmed the performance of senior executives according to respective indexes and implementation of work and added float reward on the basis of basic annual salary to mobilize the activeness of senior executives. The above persons were evaluated through testing by the Board of Directors and supervised by the Supervisory Committee. Section VII. Particulars about Shareholders’ General Meeting I. In the report period, the Company held one Annual Shareholders’ General Meeting and one Extraordinary Shareholders’ General Meeting 1. Particulars about Annual Shareholders’ General Meeting On June 8, 2007 the Company held 2006 Annual Shareholders’ General Meeting and the resolution notice has been published on Securities Times and Hong Kong Wen Wei Po and website http://www.cninfo.com.cn dated June 9, 2007. 2. Particulars about Extraordinary Shareholders’ General Meeting The Company held the 1st Extraordinary Shareholders’ General Meeting of 2007 on Oct.25, 2007, the resolution notice has been published on Securities Times and Hong Kong Wen Wei 21 Po and website http://www.cninfo.com.cn dated Oct.26, 2007. Section VIII. Report of the Board of Directors I. Discussion and analysis on the management level In the report period, the assets of the Company is still tense, due to that the main senior executives including Chairman of the Board Wang Shuxian have been arrested, which sets obstacle for the normal operation of the Company. 1. Because of the tense situation of assets in the first half year, most equipment for production has stopped working. As for the rest half year, the situation for production is getting deteriorated, and all the production has been stopped in the last ten-days of October of 2007. All producing workers recessed and remained few personnel for guarding. Once without external support, it is hard for the Company to recover its production. 2. The main senior executives of the Company have been arrested by Customs Anti-smuggling Bureau of Shijiazhuang, prosecuting to be suspects for crime of smuggling common goods. Until now, it yet hasn’t received an end. Before the lucidity of this case, there are many uncertainties for the destiny of the Company. 3. 208,324,800 shares of the Company, held by the holding shareholder of the Company Mr. Wang Shuxian, were respectively judicially frozen by Intermediate People’s Court of Dalian and Intermediate People’s Court of Shenzhen. Intermediate People’s Court of Shenzhen has already started the auction procedure, making it possible for change of the holding shareholder of the Company. 4. The bank loans of the Company all expired and it received prosecution from all the banks of creditor’s right. Court has respectively judged that the Company returns all the principal and interests. Except that Guangdong Development Bank of Dalian and Shenzhen Everbright Bank are executing the shares of Wang Shuxian through Intermediate People’s Court of Shenzhen, although other banks haven’t practically executed, all the assets and bank accounts of the Company have been closed down, so it is impossible for the Company to carry out normal operation. 5. After the material change happened to the Company, the government accredited the operation supervision team and the municipal government and county government have established risk disposal team and restructure team for the Company, with consideration of looking for strategic investors and cooperative partners for restructure. At present, no practical progress has been made, so it exists significant risks and opportunities for the Company. (I) Review on the operation of the Company in the report period 1. Overall operation of the Company in the report period During the report period, the Company has realized main operating income of RMB59,972,518.33, down 74.35% compared over the same period of last year; main operating profit of RMB-574,549,404.78, down 46.17%compared over the same period of last year; net profit of RMB -575,032,022.36 . Restricted in capitals and influenced by production-stopping and the custom case, performance of the Company has fell greatly 22 compared over the same period of last year. 2. Main business and operation status (1)Classified according to industry and product Classified according to industries Increase Increase /decreas Increase /decreas Gross e in /decreas e in profit income e in cost profit Classified according to Income from main Cost of main ratio of from of main from the industries or products operations (RMB) operations (RMB) main main operatio main operation operatio ns over operatio (%) ns over the last n over the last year (%) the last year (%) year (%) -125.07 Garments manufacturing 2,340.69 4,194.96 -79.22% -80.62% -35.88% % Cotton textile 2,046.87 2,667.51 -30.32% -79.44% -78.52% -5.60% Papermaking 1,103.59 1,665.56 -50.92% 1.90% -2.53% 6.86% Classified according to products -125.07 Sales of Knit wears 2,340.69 4,194.96 -79.22% -80.62% -35.88% % Sales of Spinning and 2,046.87 2,667.51 -30.32% -79.44% -78.52% -5.60% synthetic silks Sales of Paper 1,103.59 1,665.56 -50.92% 1.90% -2.53% 6.86% (2)Main business classified according to areas Income from main operations Increase/decrease in income from main Areas (RMB) operations over the last year (%) Domestic 3,197.71 -59.82% Overseas 2,293.44 -84.87% (3)Main suppliers and customers The total purchase amount from the top five suppliers amounted to RMB 18,663,613.18 and accounts for 64.9% of the Company’s total purchase amount of the year. The total sales amount to the top five customers amounted to RMB 19,150,606.44 and accounts for 34.88%% of the Company’s total sales amount. 3. Constitution of assets of the Company in the report period Item Dec.31,2007 Dec.31,2006 23 Proportion in Proportion in Amount Amount total assets total assets Total assets 2,182,122,998.28 100% 2,580,107,980.39 100% Account receivable 84,702,321.15 3.88% 354,505,960.69 13.74% Inventories 1,852,391.30 0.08% 113,836,832.59 4.41% Real estate investment 197,215,729.65 9.04% 197,215,729.65 7.64% Long-term equity 1,207,027,687.69 55.31% 1,349,095,511.77 52.29% investment Fixed assets 493,715,698.10 22.63% 493,715,698.10 19.14% Construction in progress 846,795,820.86 38.8% 837,298,671.01 32.45% Short-term loan 2,182,122,998.28 100% 2,580,107,980.39 100% Long-term loan 84,702,321.15 3.88% 354,505,960.69 13.74% Reason for changes: The reason for change in total assets: Mainly resulted from the case the Company revolved, the production operation was difficult which resulted in losses. The reason for increase in account receivable: Resulted from partial senior executives of the Company were a suspect for the event and couldn’t draw back the bad debt in time. The reason for decrease in inventory: Resulted from the sales in the report period. Financial data Increase/decrease Item 2007 2006 year-on-year Operating 3,685,785.86 3,686,024.10 -0．01% expenses Administrative 267,255,550.88 154,080,496.44 73.45% expense Financial 73,130,603.09 83,683,547.60 -12,61% expense The reason for changes: The reason for increase in administrative expenses: Resulted from the withdrawal of the social insurance for the staff of the Company during 1999 to 2007. The reason for increase in financial expenses: Mainly resulted from the decreases in production and operation. 4. Constitution of cash flow: Increase/decrease Item 2007 2006 proportion 24 1、Cash flow arising from operating activities Cash received from sales of goods and 63,347,110.26 117,337,733.97 -46.01% supplying labor force % 1,931,795.97 39,829,598.25 -95.15% Cash paid for the purchase of goods 19,224,469.95 102,894,369.04 -81.32% and accepting labor force Cash paid to/for employees 31,982,444.62 26,500,052.29 20.69% Tax expenses paid 1,098,746.76 1,396,286.24 -21.3% Other cash paid concerning the 24,233,764.72 32,219,779.07 -24.79% operating activities Net cash flow arising from operating -36.18% -11,260,519.82 -17,643,154.42 activities 2、Cash flow arising from investing activities Cash paid for purchase of fixed assets, intangible assets and other long-term 0 20,611,891.90 assets Net cash flow arising from investing 0 9,845,042.25 activities 3、Cash flow arising from financing activities Cash received from getting loans 9,697,000.00 132,000,000.00 -92.65% Cash paid for repaying the loans 52,480.89 122,270,000.00 -99.96% Cash paid for distribution of dividend -98.6% 72,038.73 5,181,982.34 or profit Net cash flow arising from financing 9,572,480.38 11,734,119.45 -18.42% activities The reason for changes: (1) The reason for changes in cash flow arising from operating activities: Resulted from the lack of current capital which influenced the production and operation, and made the sales revenue dropped sharply. (2) The reason for changes in net cash flow arising from investing activities: Resulted from the temporary stopping in the construction of fixed asset. (3) The reason for changes in cash flow arising from financing activities: Mainly resulted from the decreases in production and operation. 5. Discuss and analysis to the usage of the equipment, order-obtained, sales and stockpiling of products, changes of the technicians of the Company In 2007, the Company had no new loans added or implemented other financing. Influenced by the nervous fund, and not adequate running of equipment in the first half year, the orders 25 greatly reduced compared with previous years. The management personnel, the technicians, and workers significantly decreased compared with the last year. Until the last ten-days of October, the Company has stopped all production and the producing workers all recessed. 6.Business operation and achievement of the Company’s main holding subsidiaries and share-joining companies (1)Hebei Xiabancheng Knit Wears Co., Ltd. is the Company’s wholly owned subsidiary, which was a Sino-foreign joint venture set up by Knitting General Plant, the predecessor of the Company and foreign enterprises, registered on Jul.9, 1991 with a registered capital of USD 4 million. The operating scope is: production and sale of textile. Its main products are all kinds of knit wears. In 2005, the company transferred its production and sales into Company of Limited, then had no true operations. (2)Chengde Dixian Fashion Co., Ltd. is a Sino-foreign joint venture, which was jointly invested by Japanese Y’s Corporation and the Company. It registered on May 23, 2000 with registered capital of USD 24 million. The Company holds 75% equity of this company and Y’s Corporation holds 25% respectively. The operating scope is: production and sale of yarn and synthetic silks. With the approval of the board of directors of the Fashion Company, the Fashion Company transferred its production and sales into the Company, then had no true operations. (3)Chengde Xingye Papermaking Co., Ltd. was a papermaking company jointly established by Hong Kong Zhanxi International Co., Ltd. and the Company, with a registered capital of USD 100 million. The Company holds 75% equity of this company and Zhanxi Group holds 25% respectively. The operating scope is: production and sale of series of high-grade copperplate plate paper and craft board. Influenced by the shortage of fund, the production of Xingye Papermaking was completely ceased. Ended Dec.31, 2007, the total assets of the company were RMB 2,182,122,998.28, and net assets RMB655,275,269.13 . In 2007, it realized income from main operation amounting to RMB 59,972,518.33 and net profit RMB-575,032,022.36. (4)Chengde Banhe Chemical Simulation Textile Co., Ltd. was share-holding company of controlling subsidiary of the Company, which was a Sino-foreign operating enterprise registered and set up on Sep.29, 2002 with its registered capital of USD 60 million. Dixian Fashion Co., Ltd., Japan Shanxia Trade Co., Ltd. and Hebei Xiaban Town Knitting Company respectively hold 40% and 35% and 25% equity of this company. The operating scope was: production and sale of different types of chemical simulation cloth with high quality, knitting cloth and different types of coloration finished cloth; the main products were high quality chemical simulation cloth, knitting cloth and different types of coloration finished cloth. (5)Chengde Dahua Paper Co., Ltd (original Chengde Japan Papermaking Co., Ltd.) was a Sino-foreign joint venture invested and set up by the company and Japan Papermaking Co., Ltd. The total investment was amounting to YEN 11 billion and the registered capital was YEN 6.364 billion. The Company and Japan Papermaking respectively hold 45% and 55% equity of this company. The joint venture mainly produces and sells all types of high-quality paper. The production scale is producing 150 thousand tons of various papers per year. In 2005, the 45% equity of Chengde Japan Papermaking Co., Ltd held by the Company were transferred to controlling subsidiary of Chengde Xingye Papermaking Co., Ltd, 55% equity of Chengde Japan Papermaking Co., Ltd held by Japan Papermaking Co., Ltd were transferred to 26 Japan New Century Trading Co., Ltd. After transferring the equity, Chengde Japan Papermaking Co., Ltd changed its name to Chengde Dahua Paper Co., Ltd. The investment on Chengde Dahua Paper Co., Ltd was jointly finished by Chengde Xingye Papermaking Co., Ltd and Japan New Century Trading Co., Ltd. Ended Dec.31, 2007, the operation hasn’t been carried out. (6)Suning Banhe Chemical Simulation Textile Co., Ltd is a shareholding subsidiary of the Company, which is a joint venture and invested and set up by the Company and Japan Shanxia Trade Co., Ltd on Nov.7, 2004. Its registered capital was USD 29 million, the Company invests USD 5.8 million which accounts for 20% of the registered capital. Ended Dec.31, 2007, Suning Banhe hasn’t carried out operation officially. (II) Prospect for the future development of the Company 1. The development tendency in the industry of the Company and the market competition pattern the Company faced The Company is in the industries of textile and papermaking. The textile is the traditional pillar industry in our China for a long time, and the foreign and domestic competition are intense. With the development of economy, the industrial structure of the textile improves, management benefit raises and integrated industry processing system is formed, and there are rich raw material resources and sufficient labor forces. The textile and wears of the Company mainly exports to Japan. Due to the break in capital chain, the dress-making business of the Company has to stop. Once with capital to start, the Company has certain competitive power by its integrated industrial chain and low production cost. The industry of papermaking is the important industry which is closely linked with the development of national economy and social civilization. In the economical developed countries, the rising speed of the paper and cardboard consumption keeps with the GDP. Papermaking is on industry of technology, fund, and resource and energy intensity; its production scale is obvious, it is one industry of essential raw material with continuous and high effective production, and basic industry of raw material of successiveness and high efficient production. The present papermaking equipments of the Company are imported from Japan; the production craft, technical level of the essential equipment, the production scale remain in front of the domestic. At present, paper production of the Company has ceased due to shortage of fund. 2. The development strategy and development scale Due to the break in capital chain, the Company has already received sequente losses for 2 years. If this situation continues in 2008, the Company will have to suspend listing or terminate listing. So, the first task presents to the Company and the local government is to introduce into powerful strategic investors or restructure the cooperative partners, make the excellent assets work and finally to help the Company turn to make profit and walk out of the present difficulty. 3. Capital source required for realizing the development strategy After the material change happened to the Company, the government accredited the operation supervision team and the municipal government and county government have established risk 27 disposal team and restructure team for the Company, with consideration of looking for strategic investors and cooperative partners for restructure, in order to inject fund to the Company and then to start the excellent assets. 4. Risks, and relevant solutions and measures to be taken (1) Macro-policy risk China is in the process of transferring from the planned economy to market economy, and takes full-oriented reforms; new policy and measures are made, the changes of law regulation and policy environment bring uncertainty to the operations and investing operation of the Company. If the adjustment on the Refund Policy of exported commodity and the changes and adjustment on Preferential Tax Policy, they will bring uncertain factors to the operation of the Company. Considering the policy risk, the Company will further research and analyze the changes of national policy and law regulation, fully and objectively appraise the influences of development strategy and operations of the Company brought by the changes of national policy and law regulations. On the basis of operation abiding to the law, assurance of the development goal of the Company and manufacturing operation abiding to the national laws and regulations, to adjust timely the development strategy and operations of the Company, hold the development chances brought by the changes of the national policy and laws and regulations; at the same time, to avoid the disadvantageous influences brought by the changes of the national policy and laws and regulations. (2) Market or businesses risks and solutions ①Business market of textile risks and solutions At present, most of textiles of the Company exports to Japan, the market is relative centralized and single, and has strong depending on the Japan market with the risk of single market. Part of cotton yarn and synthetic products of the Company exports to South Korea, Japan, Hong Kong; and most of the products sell in domestics. Due to lots of companies in China, the market competition is keen; and with the big fluctuation in the price of market sales in recent two years, the Company will face with keener competition and suffer from the risks of decreasing of market price. Considering the risks of single sales market of the products of the Company, the Company will improve the product quality; at the same time, fully develop new products and strength of wears designing; promote knitting wears fitting to different consumption level and different consumption ranges, and speed up the construction of overseas sales networks. On the basis of strengthening and improving the market shares in Japan and South Korea, the Company positively develops the European and American market to make the regional distribution of the sales market reasonable. In addition, the Company will reasonable adjust the constitution of products according to the need of market and fashion trend; on the basis of assurance of the stable growth of knitting wears, increase the sales of cotton yarn and synthetic silk, and develop positively the domestic and overseas market. ②Business market of papermaking risks and solutions Due to the nervous conditions in capital of the Company and the involved in cases of the senior executives, in 2008, the Company could hardly start fund-concentrated paper-making 28 enterprise or seek for powerful partners of strategic investors to restart. (3) Financial risks and solutions ①Risks of operation fund and current, and solutions According to consolidate financial sheet 2007 of the Company, on Dec.31, 2007, the net operation capital of the Company amounted to RMB-1,688,039.44 with the liquidity ratio of and quick ratio of 11.6%; it remained certain risks of short-term debts. At the end of 2006, after the Company has occurred significant accident, the municipal and county governments established cadre group on risks treatment for the Company, considered bringing in strategic investors or combined partner restructurings, these will increase uncertainty in successive operations of the Company. ②Risks of hardly continuing financing, and solutions In recent years, the business of the Company develops quickly; the Company collected some fund by releasing and increasing the release of B shares, but most of funds are bank loans and self-collected ones. Due to the breaking of fund chain of the Company, larger amount debts exceeding the time limit, the Company was sued by many banks, which made difficulties for continuous financing, and it was one of bigger risk for the development of the Company. The municipal and county governments established cadre group on risks treatment for the Company to think out the method on actively solving the financing problem. (4) Technological risks and solutions Although the Company has the rich experience on the textiles, and mature technologies, faced with the domestic and overseas competitors, new technological risks are still to be remained. The Company will actively learn and master the advance technologies from domestic and international partners. (5) Environmental risks and solutions The process of textiles and papermaking will result in the pollution of yawp, sewage and dust. In recent years, the Company are evaluated the “Green Environmental Units” by the environmental departments. However, the government continuously improves the standard of environmental protection, it will possibly result in the continuous increasing on the environmental protection to make the production cost increase, and take influences on the profit-gaining ability of the Company. The Company will closely pay attention to the environmental standard regulated by the government. III. Investment of the Company 1. In the report period, there was no such situation that the application of raised proceeds in the report period or proceeds raised before the report period continuing to the report period. 2. In the report period, there is no investment with the non-raised proceeds of t he Company. IV. Explanation on the unstandardard Auditor’s Report issued by the CPAs by the Board of Directors of the Company Shenzhen Dahua Tiancheng Certified Public Accountants offered disclaimer of opinions with emphasized issues. Involved affairs were as follows: Matters caused to disclaimer of opinion 1. Due to the Company is being suspected of committing smuggling crime of common goods, several top managers are detained and partial financial information is seized by the Customs, 29 accounts and financial materials were not complete, the Company’s operation and management received a great influence, which resulted in an incomplete set of accounting records and accounting data. After occurring the case of suspicion of committing smuggling crime of common goods, and completely stopping production and operation on Oct., 2007, internal control system received a great influence, which caused that economic business and accountant record were not complete, we are not able to identify and evaluate the significant misreport risk of financial report, and could not make judgments on the integrity of the Company financial report. Owing to partial financial information is seized by the Customs, the Company is not able to provide complete accounting data, so that we are not able to make retroactive adjustments on long-term investment for Hebei Xiaban City Textile Co., Ltd. according to the CAS Explanation 1. Due to the Company cannot provide complete accounting data, we are not able to audit the respective opening balances on financial statements of the year end 2006, nor perform necessary audit procedures to obtain appropriate and sufficient audit evidences. We depends on the audited result of the year ended 2005 for the opening balance. The opening balances of the 2006 may affect the operation results, so we cannot ensure whether it is necessary to adjust operation results for the year 2006 and before 2006, related assets and retained earnings, and which may effect the financial statements of the year end 2007 and its comparable financial statement. (2) Refer to Note 7 (1), due to bank balance of the Company in the period end was RMB 5,534,066.66 and confirmed balance was RMB -177,247.52, the Company is not able to offer some bank statements, all bank reconciliation statements and explain the reason of why book value was negative; to RMB 5,711,314.18, the Company is not able to offer bank statements and bank information especially other places’ bank address and contact information, as a result, we are not able to send confirmation letter or perform necessary alternative audit procedures to obtain appropriate and sufficient audit evidences to confirm existence of bank balance and completeness of unrecorded liability. (3) Refer to Note 7 (3), (4) and (5), as at 31 December 2007, the Company owns trade receivable from Japan Y'S Corporation Co., Ltd., which amounts to RMB 126,510,349.26 with bad debt provision of RMB 121,966,068.08; Other receivables from Japan New Century Co. Ltd. and Nippon Paper Industries Co. Ltd. are amounted to RMB 103,676,465.83 with bad debt provision of RMB 92,857,547.78; Advance to Japan New Century Co., Ltd. is RMB 61,429,553.06. Due to the above debtors are all oversea companies and origin relative top managers are detained against alleged smuggle, the present top managers of the Company is not able to offer addresses and contact information, how these debtors happened is not clearly and whether these debtors are collectible is uncertainly. We are not able to send confirm requests or perform necessary alternative audit procedures to obtain appropriate and sufficient audit evidences which can provide reasonable base to express audit opinion regarding collectible and bad debts provision of these debts. Therefore, we are not able to judge the impact on the financial position and the operation performance. Refer to Note 7 (3), as at 31 December 2007, the Company owns trade receivable from Hebei 30 Chengde Import & Export Corporation amounted to RMB 8,208,150.31. We obtained confirmation letter from Hebei Chengde Import and Export Corporation, which indicted that the trade receivable is RMB 1,180,119.39.The Company is not able to provide any evidence to explain the difference of RMB 7,028,030.92. We are not able to judge the impact on the financial position and the operation performance. (4) Refer to Note 7 (6), as at 31 December 2007, book balance of inventories is RMB 51,730,223.49, book value is RMB 1,852,391.30. Provision was made for inventories amounted to RMB 14,906,998.26 in 2007. Part of inventories had been recognized as loss on income statement, which was amounted to RMB 48,210,631.24. With the influence of stopping production, and in the conditions of disordered inventory, various kinds, without details and reason analysis of the part transferred as losses and professional assessment result, we are not able to accept appropriate and sufficient audit evidence to confirm whether the assets are existed and disclosed correctly on financial statement, whether evidence of transferring as losses are sufficient, reasonable and correct, and is not able to assure loss on disposal of inventory and input tax turns involved in discard loss. (5) As at 31 December 2007, the net book value of fixed assets is RMB 1,207,687.69, balance of construction in progress (CIP) is RMB 493,715,698.10, which accounting for 77.94% of total assets. After the Company and its subsidiaries ceased their operation in succession in 2006 and 2007, machinery equipments are obsolete or damaged, CIP is suspended for a long time, and accounting data is not able to match with the physical assets, with the conditions of no specialized test and estimation of amounts and physical conditions of aforesaid assets, we are not able to obtain appropriate and sufficient audit evidence to judge the assets are existed and disclosed correctly on financial statement in accordance with regulations of the CAS. We are not able to obtain appropriate and sufficient audit evidence to judge whether the computation of the assets are fair. (6) Refer to Note 7(10), part of land use right has been repaid to Chengde Finance Bureau for loan RMB 6 million by judicial ruling. The land was used for Dixian Family Building and Dormitory Building. For the Company did not approve the judicial ruling result, the amounts is not consistent between land use right certificate and book value, the Company can not provide how many squares had been used for the Dixian Family Building and Dormitory Building, thus we are not able to judge the effect on the Company’s financial position and operation result. The Family Building and Dormitory Building are set up by the Company, but the buildings have not been recognized as assets in the Company’s account. The Company did not record the land use right, which is exchanged by the Family building, but they pledged the land use right to Chengde Finance Bureau for loan 18 million. We are not able to judge the effect on the Company’s financial position and operation result. We are also not able to assure cost of the four lands which were pledged to Chengde Finance Bureau for loan 18 million with the family building. (7) Refer to Note 7(7), balance of long term investment for Dahua Paper Industry Co., Ltd. is 31 197,215,729.65. Dahua Paper Industry Co., Ltd. ceased its operation from year 2006 to the report date due to lack of operation fund, and its account book have been detained by customs office. We are not able to judge the effect on the Company’s financial position and operation result. (8) Refer to Note 7(27), the Company accrued social insurance amounted to RMB 110,632,696.00 from 1999 to 2007 in year 2007. The Company cannot provide the social assurance from 1999 to 2007, we are not able to receive details and reliable evidence and period division of provision, and regarding documents from social society department thus we are not able to judge rationality and correctness of the accrual social society and the effect on the Company’s financial position and operation result. (9) Refer to Note (1), due the Company is unable to provide complete tax information and do not make related accounting calculation, we are not able to obtain appropriate and sufficient audit evidence to judge the effect on the Company’s financial position and the results of its operations. (10) Refer to Note 7 (12) and (20), the special account payable from Chengde Finance Bureau is RMB 33,625,717.66, and short-term loan from Chengde Finance Bureau is RMB 10,060,214.41. According to the confirmation letter from Chengde Finance Bureau, the Company owes RMB 76,013,020.00 from them. The Company cannot provide the evidence for the difference. We are not able to judge the effect on the Company’s finance position and operation result in year 2007 and previous year. (11) Refer to Note 7 (15), (17), accounts receivable from other company is amounted to RMB 9,280,976.93 and balance of other payable is RMB 22,059,945.15, which actually are the balance of the Company’s bank accounts in other companies. We are not able to know the reason for the difference between the receivable/payable balance and bank account, for the account books had been detained by customs office. Other accounts receivable- RMB 22,043,428.03 of Chengde Tongcheng Thread Industry Co.Ltd. and RMB 16,517.12 of Chengde Chengyi Paper Industry Co.Ltd. are current accounts of the Company used the bank account by aforesaid companies. For the above reason, we are not able to judge the effect on the Company’s finance position and operation result in year 2007 and previous year. (12) Refer to Note 7 (12), (17), as at 31 December 2007, the bank loan of the Company is RMB 917,559,861.42 (including bridging loan of RMB 80,824,300 from Shenzhen Lingfeng Textiles Co., Ltd.) is overdue and difficult to repay. Due to lack of relative documents regarding default interest payable of overdue loan also other audit procedures are not applicable to obtain sufficient and appropriate evidence, we are not able to judge the effect of the issue on the Company and in Year 2007 and previous financial position and operation results. (13) On Dec. 25th, 2006, ten managers of the Company (including chairman of the board Wang Shuxian) had criminal detention because of economic criminal involving smuggling. On 32 Jan, 31st, 2007, chairman of the board Wang Shuxian and seven managers were detente by Shijiazhuang Customs Anti-smuggling Bureau of PRC because of smuggling involved, According to No.35[2008] indictment issued by Shijiazhuang People’s Procuratorate, Chengde Dixian Textile Co., Ltd established seven false foreign asset investing operation enterprise to deceive information of tax-free equipments, used normal trading commodities to pretend foreign asset investment for equipment importing, which became normal commodity smuggling criminal. Because the case has not been judged, we can’t assess operation achievement and influence level of the case to the Company. Auditing opinions Based on the possible significant and widespread influence of the above matters, we are unable to make any suggestions on your company's financial statements. Emphasized events We remind people who use the financial statements to concern: 1. As described in Note 1: In July 2004, the Company increases of its capital by issuing 150,000,000 B shares in July 2004, in which 91,300,000 shares were issued for Hong Kong dollars and 58,700,000 shares were issued for RMB. The issuance of RMB shares has not been authorized by the China Administration of Foreign Exchange department, and has not verified by PRC certified public accountants and the procedures for the change of business registration were not carried out completely. According to the resolution of general meeting of shareholders on 8 June 2006, the Company distributed share bonus 117,720,000 shares to all shareholders at the rate of two shares given per ten shares. After share bonus distribution, the registered capital of the Company changed to RMB 706,320,000. The shares mentioned above are not verified by PRC certified public accountants and the procedures of changing business registration are not carried out completely. 2. Refer to Note 4, Century Win International Holding Ltd. incorporated in Hong Kong, invested the subsidiary of the Company, Xingye Papermaking Co., Ltd. in the form of machinery and equipment. The value of injected machineries and equipments is more than that required. The Company entered into agreement with Century Win International Holding Ltd. that the ownership of the equipments amounting to RMB 95,450,000 belongs to Century Win International Holding Ltd.; the Company doesn’t use the equipments remuneratively; the Company has right to use the equipments as a loan pledge. Moreover, the agreement states that the disposal of the equipments is decided upon the further negotiation between the Company and Century Win International Holding Ltd. Until 31 December 2007, the Company pledged the equipment for bank loan. Based on the information from Companies Registry, the Government of Hong Kong Special Administrative Region, Century Win International Holding Ltd. announced liquidation on 20 May 2005. 3. Refer to Note 4, registered capital of Dahua Paper Industry Co., Ltd. is JPY 6,364,000,000, in which the paid-in capital of USD 5,000,000 has been verified by PRC Certified Public Accountants. Xinye Papermaking Co., Ltd. invested RMB 206,215,729.65, including 33 investment valuing at RMB 187,653,000.00 in the form of equipment, land and plants which was not supported by the capital verification of PRC Certified Public Accountants and is waiting to be verified when foreign shareholders inject capital fully. 4. Refer to Note 7 (110), the Company purchased 619.81 Mus land at the consideration of RMB 38,791,627.50 as land lease premium. The Company has got the certificate for 324.781 Mus, but the amounts on land use right certificate is not matched with the payment. The land use right will be amortized till land use right registration is finished. 5. Refer to Note 7 (112), (17), until 31 December 2007, the bank borrowings of the Company amounting to RMB 836,735,606.45 are already overdue and difficult to repay, which includes overdue borrowing of RMB 829,337,055.71, and USD 1,012,861.86 (equivalent to RMB 7,398,550.74). Lingfeng Textiles (Shenzhen) Co., Ltd. has been prosecuted by bank due to the borrowing of RMB 80,824,254.97 arisen from discount of commercial acceptance bills, and the court judged the Company should repay the principal and interest. The majority shareholder of the Company, Mr. Shuxian Wang promised to repay the debts with the held 173, 604,000 shares of the Company (accounting to 29.49% of the total share capital of the Company), and these shares have been frozen by the Court. The equities of Chengde Ditian Fashion Co., Ltd., Xingye Papermaking Co., Ltd., and Chengde Banhe Fibre Textile Co., Ltd. held by the Company directly or indirectly were seized by the court. Until 31 December 2007, the unpaid taxes amounted to RMB 31,625,880.57. According to the information from Shenzhen Industrial and Commerce Price Information Center, Lingfeng Textiles (ShenZhen) Co., Ltd. did not make annual Inspection of Industry and Commerce in 2005, Shenzhen Industrial and Commerce Bureau withdrawn its business license on 30 November 2007. 6. Due to shortage of fund, bank loan disputation, the Company and senior executors were detained against alleged smuggle, business activities are suspended in October 2007. Main operation income of 2007 decreased greatly and since 2006 subsidiary of the Company Chengde Xingye Paper Industry Co. was suspended and stopped for construction. The delayed bank loan, unpaid taxes and influence of the smuggling case will all have impact on continuous operation of the Company. The financial position is worse from January to April in 2008, if there is no other financial support or restructuring immediately, the gonging concern basis is significantly uncertainly. 7. Refer to Note 2, six government officers accredited by the Chengde Government assisted the operation and management of the Company in June 2007. The management of the Company judge that the Company is able to continue operation. The financial statements of the Company are prepared on the going concern basis. If there is no financial support or restructuring, the above financial statement should be restated as liquidation price. The statement of the above paragraphs has no effect on the expressed audit opinion. For accountants with unexpressed opinion involved events presented by public certificate accountants with emphasized events, the board of the Company made following explanations: On Dec. 25, 2006, many key managed of the Company were caught, and its management and operation suffers. The smuggling case hasn’t ended and many banks made lawsuits, so there are many uncertainties. Most of its financial statements, documents and archives are still under 34 detention of Shijiazhuang Customs Anti-smuggling Bureau without return. The Company stopped operation comprehensively; employees were all on their holiday; and parts of the staff left their position. Therefore, the Company was unable to provide complete, detailed information and data to auditors and the board of the Company as well as its existing management level could not make complete and detailed explanations for corresponding conditions. V. Routine work of the Board of Directors (I) In the report period, the meetings and resolutions of the Board of Directors: 1. The 10th Meeting of the 3rd Board of Directors of the Company was held on Jan 29th of 2007 in the 3rd floor conference room of the Company, and the relevant resolutions were published on Hong Kong Wen Wei Po, Securities Times and Juchao Website dated Jan 30th of 2007. 2. The 11th Meeting of the 3rd Board of Directors of the Company was held on Apr 4th of 2007 in the 3rd floor conference room of the Company, and the relevant resolutions were published on Hong Kong Wen Wei Po, Securities Times and Juchao Website dated Apr 5th of 2007. 3. The 12th Meeting of the 3rd Board of Directors of the Company was held on Apr 29th of 2007 in the 3rd floor conference room of the Company, and the relevant resolutions were published on Hong Kong Wen Wei Po, Securities Times and Juchao Website dated Apr 30th of 2007. 4. The 13th Meeting of the 3rd Board of Directors of the Company was held on May 28th of 2007 in the 3rd floor conference room of the Company, and the relevant resolutions were published on Hong Kong Wen Wei Po, Securities Times and Juchao Website dated May 29th of 2007. 5. The 14th Meeting of the 3rd Board of Directors of the Company was held on Jun 20th of 2007 in the 3rd floor conference room of the Company, and the relevant resolutions were published on Hong Kong Wen Wei Po, Securities Times and Juchao Website dated Jun 21st of 2007. 6. The 15th Meeting of the 3rd Board of Directors of the Company was held on Jul 12th of 2007 in the 3rd floor conference room of the Company, and the relevant resolutions were published on Hong Kong Wen Wei Po, Securities Times and Juchao Website dated Jul 13th of 2007. 7. The 16th Meeting of the 3rd Board of Directors of the Company was held on Aug 20th of 2007 in the 3rd floor conference room of the Company, and the relevant resolutions were published on Hong Kong Wen Wei Po, Securities Times and Juchao Website dated Aug 21st of 2007. 8. The 17th Meeting of the 3rd Board of Directors of the Company was held on Sep 27th of 2007 in the 3rd floor conference room of the Company, and the relevant resolutions were published on Hong Kong Wen Wei Po, Securities Times and Juchao Website dated Sep 28th of 2007. 9. The 18th Meeting of the 3rd Board of Directors of the Company was held on Nov 2nd of 2007 in the 3rd floor conference room of the Company, and the relevant resolutions were published on Hong Kong Wen Wei Po, Securities Times and Juchao Website dated Nov 3rd of 2007. (II) Implementation of the Board of Directors about resolutions of Shareholders’ General Meeting: 35 In the report period, according to requirements of Company Law of the P.R.C., Securities Law of the P.R.C., Articles of Association of the Company and other laws and regulations, the Board of Directors of the Company seriously implemented all resolutions passed by the Shareholders’ General Meeting, strictly in compliance with resolutions and authorizations of the Shareholders’ General Meeting. (III) Duty performance of the Audit Committee of the Board In the report period, the Audit Committee of the Board issued opinion on the various period reports and proposal on renewal of the engagement of the CPAs Co., Ltd The Audit Committee of the Board has made a lot of work during the 2007 audit period of the Company. According to the requirement of the Notice on Doing Well the 2007 Annual Reports and Relevant Works of Listed Companies released by CSRC (ZJGSZ(2007)No.235), the Audit Committee made the following summary on the 2007 audit work: 1. Ensure the general audit plan and examine the financial statements of the Company After negotiation between the independent directors, the Audit Committee and Shenzhen Dahua Tiancheng Certified Public Accountants, the 2007 audit work plan of the Company was ensured. Meanwhile, the independent directors and the Audit Committee examined the financial statements of the Company, holding that: the Company can calculate according to the new accounting standard and no material distortion has been found in the documents of the annual report; the 2007 financial statements prepared by the Company basically reflected the balance sheet and operating achievement ended Dec 31st of 2007. It is agreed to take this financial statement as basis to carry out the 2007 financial audit work. 2. Keep the normal communication with the CPAs and pay attention to the progress of the audit During the audit, the Audit Committee always keeps in touch with the financial department and the CPAs, pays close attention to the progress of the audit and examines the financial statement. 3. Call in the Audit Committee to audit the Annual Report and relevant proposals Shenzhen Dahua Tiancheng Certified Public Accountants finished the audit work as scheduled and issued auditor’s report of disclairmer of opinions with emphasized issues. The Audit Committee held meeting to examine the 2007 Financial Statement, the 2007 Profit Distribution Preplan, the 2007 Annual Report, proposal on Reengaging Certified Public Accountant and Working Procedure for Auditing the Annual Financial Statement for the Audit Committee. (IV) Duty performance of the Remuneration and Examination Committee of the Board The Remuneration and Examination Committee made examination on the remuneration of the directors, supervisors and senior executives of the Company disclosed in the 2007 Annual Report and issued the following opinion: the present remuneration system of the Company is stipulated according to the regulated decision-making procedure, and the remuneration standard for the directors, supervisors and senior executives of the Company complies with regulation, and the remuneration amount of relevant personnel disclosed in the 2007 Annual Report is true and accurate. 36 VI. Profit distribution preplan or preplan on converting capital public reserve into share capital in current year In 2007, audited by Shenzhen Dahua Tiancheng Certified Public Accountants according to accounting standards, the net profit of the Company in 2007 after consolidation amounted to RMB-575,032,022.36, the net profit of parent company amounted to RMB-547,559,224.02, in accordance with relevant regulations of Company Law and Articles of Association of the Company, we don’t appropriate legal public reserve, plus the retained profit in the year-begin, the distributable profit for shareholders in current period amounted to RMB-747,725,844.45. In 2007, due to the capital chain splitted, the main senior executives were detained, the factory completely stopped working, and no any other fund support, the capital status of the Company is very intense. The Company didn’t distribute or convert in 2007. This preplan still need to be submitted to the 2007 annual shareholders’ general meeting to be examined and approved before implementation. VII. Other proceedings The domestic media for information disclosure appointed by the Company is Securities Times, and Hong Kong Wen Wei Po for overseas. Section IX. Report of the Supervisory Committee I. Meetings of the Supervisory Committee held in the report period and resolution In the report period, Supervisory Committee of the Company held 2 meetings, with details as follows: 1. The 5th meeting of the 3rd Supervisory Committee was held in the meeting room on the 2nd floor of the Company on Apr.27, 2007. The meeting examined and approved the following resolutions: (1) Examined and approved the Work Report of the Supervisory Committee 2006; (2) Examined and approved the Financial Audit Report 2006; (3) Examined and approved the Annual Report 2006 and Summary of the Annual Report; (4) Examined and approved the 1st Quarterly Report 2007; The relevant resolutions were published on Hong Kong Wen Wei Po and Securities Times dated April 28, 2007. 2. The 5th meeting of the 3rd Supervisory Committee was held in the meeting room on the 2nd floor of the Company on the morning of Aug.19, 2007. The meeting examined and approved the the Semi-Annual Report 2007 and Summary. The relevant resolutions were published on Hong Kong Wen Wei Po and Securities Times dated Aug.28, 2007. II. Independent opinions of the Supervisory Committee on relevant matters in 2007 1. Operation of the Company according to law According to relevant State laws and regulations, the Supervisory Committee of the Company supervised the holding procedures and resolutions of the Shareholders’ General Meeting and the Board of Directors, implementation of the resolutions of the Shareholders’ General Meeting by the Board, implementation of duties of the senior executives and the management 37 system of the Company, and believed that, in 2007, the Board of the Company could normatively operate strictly according to Company Law, Securities Law, Listing Rules, Articles of Association of the Company, as well as other relevant regulations and systems in a patient and responsible way and its operation decisions were scientific and reasonable. The Board had further perfected internal management system and internal control to set up a good internal mechanism. The directors and managers of the Company had no behaviors against laws, regulations or Articles of Association of the Company, nor behaviors that had done harm to the interest of the Company in implementing their duties. 2. Inspection of the financial status of the Company The Supervisory Committee of the Company patiently and meticulously inspected the financial system and financial status of the Company, and believed that the Financial Report 2007 of the Company could truly reflect the financial status and operation achievement of the Company. 3. Independent opinions of the supervisory committee on the actual investment of the latest raised fund. In the report period, the Company did not raise fund. With the approval of ZJFXZ〔2004〕 No.101 promulgated by CSRC, the Company has completed directional increasing 0.15 billion B shares in 2004. The total raised amount was HKD 0.498 billion. The raised fund have been used up according to the commitment of Prospectus, there were no changes on the projects of the raised fund. 4. Independent opinions of the supervisory committee on the purchase and sales of the assets In the report period, the Company had no purchase or sales of assets occurred. 5. Independent opinions of the supervisory committee on related transactions of the Company In the report period, the related transaction occurred according to the market transaction term and relevant regulations; there were no harm to the Company, equity of the shareholder, losses of assets of the Company, and no insider dealings. 6. Independent opinions of the supervisory committee on unstandard Auditor’s Report issued by the Certified Public Accountants In 2007, Shenzhen Dahua Tiancheng Certified Public Accountants audited the financial report of the Company and issued the Auditors’ Report of the disclaimer of opinions with emphasized issues for the Company. Explanations of the Board of Director of the Company on particulars about the unstandard Auditor’s Report issued by the Accountants were in accordance with the real status of the Company, and the Supervisory Committee agreed and did not have matters with special explanations. Section X. Important Events I. In the report period, significant lawsuits of the Company (1) The case on China Construction Bank Corporation Chengde Sub-branch bringing an accusation against the Company and its controlling subsidiary company Chengde Xingye Papermaking Co., Ltd. on contract dissension of loan guarantee was judged by Hebei Higher People’s Court on Dec.25, 2006 with (2006) JMECZi No.43 and No.44 Civil Ruling, and the 38 Group should repay the loan’s principal totalling RMB 16,980 ten thousand as well as its interest and default interest amounting to RMB 22,091,166.86 (ended Oct.20, 2006 ) within ten days after the verdict came into effect. At present, the Company still didn’t repay the aforesaid accounts and didn’t have any real implementation. (2) The case on Industrial and Commercial Bank of China Chengde Sub-branch bringing an accusation against the Company on loan contract was judged by Hebei Higher People’s Court on Dec.22, 2006 with (2006) JMECZi No.45 and No.46 Civil Ruling, and the Company should repay the loan’s principal totalling RMB 41,970 ten thousand, USD 1,012,861.86, as well as its interest and default interest amounting to RMB 55,380,904.63, USD 48,406.83 (ended Oct.20, 2006) to Industrial and Commercial Bank of China Chengde Sub-branch within ten days after the verdict came into effect. At present, the Company still didn’t repay the aforesaid accounts and didn’t have any real implementation. (3) In that the Company and its warrantor were suspected of being involved in material case, Bank of China Chengde Branch, according to the agreement of loan contract, declared that the loan contract which the Company signed with it expired instantly, and brought an accusation against the Company to Hebei Higher People’s Court on Dec.30, 2006; on Mar.1, 2007, Hebei Higher People’s Court decided with (2007) JMECZi No.8 Civil Verdict Documents that the Company should pay the loan’s principal of RMB 3,000 ten thousand and its interest. At present, the Company hasn’t repaid the aforesaid accounts yet. (4) On Nov. 11, 2005, Huaxi Bank Shijianzhuang Branch’s lawsuit about the Company’s loan, with JMEC No.34 Civil Arbitrate Verdict, was decided by Hebei Junior People’s Court that the Company to pay the loan and payment in total of RMB 37,829,536.60. At present, the Company hasn’t paid the above money and hasn’t taken any implementation. (5)Many executors, including Chairman of the Board of the Company Wang Shuxian, were arrested on the suspicion of smuggling general cargo and economic criminal. At present, this law case is in the process of hearing. (6) On March 17, 2005, Guangdong Development Bank Co., Ltd Dalian Branch’s lawsuit about the Company’s loan contact, with (2005) MHCZiNo.43 and No.44 Civil Arbitrate Verdict, was decided by Liaoning Dalian Intermediate People’s Court that Hebei Xiabancheng Knitted Garment Co., Ltd.( having jointly responsibility to the two cases) should repay Guangdong Development Bank Co., Ltd Dalian Branch RMB 80,000,000 in total. Chairman of the Board of the Company Wang Shuxian promised to pay the debt with all his assests and equities for the Company. Guangdong Development Bank Co., Ltd Dalian Branch applied for assets insurance, and 96,000,000 shares have been frozen. In the report period, auction process started. (7) For the case on the Company’s loan from Shenzhen Ever Bright Bank Lianhua Road Sub-branch, according to Notice on Assistance in Execution [(2005) SZFMECZi No.177], Shenzhen Intermediate People’s Court of Guangdong Province decided that Shenzhen Lingfeng should pay back the loan of RMB 80, 824,254.97 as well as the interest at different times in ten days after the verdict works, and the Company has jointly paying responsibility. Because the Company is the actual asset user, the debt was identified according to above judgment. Chairman of the Board Wang Shuxian promised to pay back the debt with his entire asset as well as equities for the Company. Shenzhen Ever Bright Bank Lianhua Road Sub-branch applied for assets insurance, and according to Civil Arbitrate Verdict of Shenzhen 39 Intermediate People’s Court (2005 SC No.61 Verdict), 112,320,000 shares have been frozen. In the report period, auction process started. (8) 208,324,800 shares of the Company, held by the holding shareholder of the Company Mr. Wang Shuxian, were respectively judicially frozen by Intermediate People’s Court of Dalian and Intermediate People’s Court of Shenzhen. Intermediate People’s Court of Dalian entrusted Intermediate People’s Court of Shenzhen to hold auction for all the consolidated frozen shares. Already totally two public auction have been made, with the results of failure. The last auction will be held on Apr 29th of 2008, making it possible for change of the holding shareholder of the Company. II. In the report year, the Company had no bankruptcy and related reforming issues. III.The Company had no equity of other listed companies, share participating commercial bank, Security Company, insurance company, trust companies, futures companies and other financial enterprises. IV. Purchases or sales of assets, takeovers or mergers In the report period, the Company had no important purchases or sales of assets, takeovers or mergers. V. Implementation details of equity incentive plan during the period In the report period, the Company had no implementation of equity incentive plan. VI. Significant related transactions In the report period, the Company had no important related transactions. VII. Important contracts and their implementation 1. In the report period, the Company has not been involved in any material trusteeship, contracting and lease of assets of other companies or involved in any trusteeship, contracting and lease of its assets by other companies. 2. Important guarantee The Company provided guarantees for loan of the Company’s wholly owned subsidiary Hebei Xiabancheng Company and Fashion Company from Guangdong Development Bank—Dalian Road Branch, respectively RMB 40,000,000 for each. The guarantees were still not released in the report period. Guangdong Development Bank—Dalian Road Branch has sued to the Liaoning Dalian Intermediate People’s Court and the Company and chairman of Board of Directors Wang Shuxian was decided to bear joint responsibility. The Company provided guarantee for loans of RMB 37,830,000 of the Company’s wholly owned subsidiary Xiabanchheng Company from Huaxia Bank – Hebei Shijiazhuang Branch and Ping Xi Road Sub-branch. The guarantee is still not released in the report period. Huaxia Bank –Shijiazhuang Branch has sued to Hebei High People’s Court and the Company was decided to bear joint responsibility. The Company got credit granting of RMB 8,300,000 from China Ever Bright Bank—Shenzhen Lianhua Road Branch with guarantee from Shenzhen Lingfeng Textile Industrial Co. Ltd. The Company has accounted the aforementioned RMB 8,300,000 as debts. The guarantee is actually a debt. Thus, the Company has not accounted it into Other Guarantees. China Ever Bright Bank—Shenzhen Lianhua Road Branch had sued to Guangdong Shenzhen Intermediate People’s Court. The Company and chairman of Board of Directors Wang Shuxian were decided to bear joint responsibility. 40 3. In the report year, the Company had never entrusted other party to manage the Company’s cash assets and has no plan to entrust any party to manage the assets in the future either. 4. The Company has no other undisclosed important contract. VIII. The Company or the shareholders holding over 5% of total shares had no commitment issues that had important influence on the operating results and financial situation of the Company in the report period or carried down to the report period. IX. Particulars about illegal share buying and selling of directors, supervisors and senior executors of the Company On Sep. 20,2007, without the Company and independent director Li Wei’ knowing, Li Wei’s friend use his security account bought 30200 shares “Dixian B” with Hongkong dollar 3.16 per share. All shares were sold with Hongkong dollar 3.10 per share on Sep. 21, 2007, without any profit. And the share buying and selling was against related regulations of Security Law. X. Particulars about certified public accountant employment In the report period, the Company continued employing Shenzhen Dahua Tiancheng Certified Public Accountants as its 2007 annual auditing organization. Total auditing expenses is RMB 0.5 million for 2007 auditing expense, and this auditing organization at the second year offered auditing service for the Company. XI. Related issues of received investigation, administrative punishment or criticism through public notice from China Securities Regulatory Commission or condemn by the stock exchange in public the Board of Directors, the Supervisory Committee, directors, supervisors and other senior executives of the Company in the report period,. Chairman of the Board of the Company Wang Shuxian, Deputy General Manager Wang Zhengsong, Wang Huilai and Lan Wenzhi were arrested by Shijiazhuang Suppressing Smuggling Bureau of Customs of PRC on the suspicion of smuggling general cargo. At present, this law case is in the process of hearing. Other Board of Directors, the Supervisory Committee, directors, supervisors and other senior executives of the Company had never received investigation, administrative punishment or criticism through public notice from China Securities Regulatory Commission, nor had they been condemned by the stock exchange in public either. XII. In the report period, the received research and interview of the Company. In accordance with the principles of just, fair and publicity, to further regulate the behaviors of information disclosure for the listed companies and ensure justice for information disclosure, the Company received the research and media interviews in standardized way according to the regulations of Guideline on Fair Information Disclosure for Listed Companies promulgated by Shenzhen Stock Exchange. In the report period, the Company received visits and telephone communication from its investors for many times; the Company received them and replies strictly in accordance with relevant regulations; there occurred no such situations as selectively and privately reveal or leak non-public significant information to specific parties; and all these assure the fairness of information disclosure of the Company. Reception Reception Way of Reception Discussion issue and offered date place reception person information 2007 Security Site research Media, Present status and development, offered 41 department of individual information was the 2006 annual report investors the Company Security Telephone Operation and significant events of the Individual 2007 department of interview and investors Company communication the Company XIII. Other significant events 1. Ended as Dec. 31, 2007, China Southern Securities Co., Ltd (with the following with short form of “Nanfang Securities”) held 108,840,000 shares of the Company with proportion of 15.41%; and its subordinate subsidiary China Southern Securities (Hong Kong) Co., Ltd held 19,235,055 shares of the Company with the proportion of 3.27%; CSSC INTL LTD held 6,530,000 with the proportion of 1.11%. Altogether 116,465,055 shares were held by Nanfang Securities with the proportion of 19.79%. Ended as 2007, the liquidation of Nanfang Securities was taken under the way. 2. The 208,324,800 shares of the Company held by Mr. Wang Shuxian, the controlling shareholders of the Company, were judicially frozen by Intermediate People’s Court of Dalian and Intermediate People’s Court of Shenzhen and were planned to be auctioned. The Controlling shareholder of the Company would possibly be changed. 3. Senior managers of the Company, including Chairman of the Board Wang Shuxian, were taken into criminal custody. Now the case is under examination. Uncertain factors existed in the production and operation of the Company before the lucidity of the law case. 4. After significant accidents happened in the Company, municipal and county-level government founded a risk disposal group in allusion to the Company, considering finding strategic investors and cooperative partners to reconstruct it. At present the case hasn’t got any real development, and risks as well as opportunities existed simultaneously in the Company. 5. The bank loans of the Company are all overdue and prosecuted by many banks. Court has judged the Company respectively to pay back all the money and interest. The assets and bank accounts have all been sealed up. 6. Due to intense fund of the Company, lots of production equipments were stopped. At the second six months of the year, the production situation further worsened. At the later Oct. of 2007, the Company all stopped, and staffs were all on holiday, except for a few guarding. If not for external support, the Company is hard to restart. 7. The Company had successive two years loss. If the Company’s financial status continues worse after taking risk market-away warning, it will suspend listing or end listing. Section XI. Financial report 42 CHENGDE DIXIAN TEXTILE COMPANY LIMITED FINANCIAL STATEMENTS AND AUDITOR’S REPORT FOR THE YEAR ENDED DECEMBER 31 2007 [English Translation for Reference Only. Should there be any inconsistency between the Chinese and English version, then the Chinese version should prevail.] Content Page Auditor’s Report 1-6 Audited Financial Statements 1. Consolidated Balance Sheet 7-8 2. Consolidated Income Statement 9 3. Consolidated Statement of Changes in 10 - 11 Equity 4. Consolidated Statement of Cash Flows 12 5. Balance Sheet 13 - 14 6. Income Statement 15 7. Statement of Changes in Equity 16 - 17 8. Statement Of Cash Flows 18 9. Notes to the Financial Statements 19 -75 43 Auditor’s report [English Translation for Reference Only] SH (2008) A. NO. 042E All Shareholders of Chengde Dixian Textile Company Limited, We have audited the accompanying financial statements of Chengde Dixian Textile Company Limited (the Company), which comprise the consolidated balance sheet and balance sheet as at 31 December 2007, the consolidated income statement and income statement, the consolidated statement of changes in equity and statement of changes in equity, the consolidated cash flow statement and cash flow statement for the year then ended, and notes to the financial statements. 1. MANAGEMENT’S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS The preparation of the financial statements in accordance with the China Accounting Standards for Business Enterprises (2006), which issued by the Ministry of Finance of the People’s Republic of China, is the responsibility of the Company’s management. The responsibility comprises (1) designing, implementing and maintaining the internal control system relevant to the preparation of the financial statements, to ensure that the financial statements are free of material misstatement due to fraud or error; (2) selecting and applying appropriate accounting policies; (3) making accounting estimates that are reasonable in the circumstances. 2．MATTERS CAUSE TO DISCLAIMER OF OPINION (1) Due to the Company is being suspected of committing smuggling crime of common goods, several top managers are detained and partial financial information is seized by the Customs, the Company’s operation and management are not in proper order and its internal control system received a great influence, which resulted in an incomplete set of accounting records. We are not able to obtain sufficient evidences to make assessment on whether the financial statements are free of material misstatement and its completeness. Owing to partial financial information is seized by the Customs, the Company is not able to provide complete accounting data, so that we are not able to make retroactive adjustments on long-term investment for Hebei Xiaban City Textile Co., Ltd. according to the CAS Explanation 1. Due to the Company cannot provide complete accounting data, we are not able to audit the respective 44 opening balances on financial statements of the year end 2006, nor perform necessary audit procedures to obtain appropriate and sufficient audit evidences. We depends on the audited result of the year ended 2005 for the opening balance. The opening balances of the 2006 may affect the operation results, so we cannot ensure whether it is necessary to adjust operation results for the year 2006 and before 2006, related assets and retained earnings, and which may effect the financial statements of the year end 2007 and its comparable financial statement. (2) Refer to Note 7 (1), the Company is not able to offer some bank statements, all bank reconciliation statements and bank information especially other places’ bank address and contact information, as a result, we are not able to send confirmation letter or perform necessary alternative audit procedures to obtain appropriate and sufficient audit evidences to confirm existence of bank balance and completeness of unrecorded liability. (3) Refer to Note 7 (3), (4) and (5), as at 31 December 2007, the Company owns trade receivable from Japan Y'S Corporation Co., Ltd., which amounts to RMB 126,510,349.26 with bad debt provision of RMB 121,966,068.08. Other receivables from Japan New Century Co. Ltd. and Nippon Paper Industries Co. Ltd. are amounted to RMB 102,676,465.83 with bad debt provision of RMB 91,857,547.78. Advance to Japan New Century Co., Ltd. is RMB 61,429,553.06. Due to the above debtors are all oversea companies and relative top managers are detained against alleged smuggle, the present top managers of the Company is not able to offer addresses and contact information, how these debtors happened is not clearly and whether these debtors are collectible is uncertainly. We are not able to send confirm requests or perform necessary alternative audit procedures to obtain appropriate and sufficient audit evidences which can provide reasonable base to express audit opinion regarding collectible and bad debts provision of these debts. Therefore, we are not able to judge the impact on the financial position and the operation performance. Refer to Note 7 (3), as at 31 December 2007, the Company owns trade receivable from Hebei Chengde Import & Export Corporation amounted to RMB 8,208,150.31. We obtained confirmation letter from Hebei Chengde Import and Export Corporation, which indicted that the trade receivable is RMB 1,180,119.39. The Company is not able to provide any evidence to explain the difference of RMB 7,028,030.92. We are not able to judge the impact on the financial position and the operation performance. (4) Refer to Note 7 (6), as at 31 December 2007, book balance of inventories is RMB 51,730,223.49, book value is RMB 1,852,391.30. Provision was made for inventories amounted to RMB 14,906,998.26 in 2007. Part of inventories had been recognized as loss on income statement, which was amounted to RMB 48,210,631.24. We are not able to accept appropriate and sufficient audit evidence to confirm whether the assets are existed and disclosed correctly on financial statement, for the Company can not provide the list of inventory provision and details of inventories recognized as loss. 45 (5) As at 31 December 2007, the net book value of fixed assets is RMB 1,207,687.69, balance of construction in progress (CIP) is RMB 493,715,698.10, which accounting for 77.94% of total assets. It is difficult to match the physical assets with assets list in accounting book the reasons are including (1) machinery equipments are damaged; (2)CIP is suspended or obsolete for a long time; (3)its subsidiaries ceased their operation in succession in 2006 and 2007. We are not able to obtain appropriate and sufficient audit evidence to judge the assets are existed and disclosed correctly on financial statement if there is no professional assessment result. (6) Refer to Note 7(10), part of land use right has been repaid to Chengde Finance Bureau for loan RMB 6 million by judicial ruling. The land was used for Dixian Family Building and Dormitory Building. For the Company did not approve the judicial ruling result, the amounts is not consistent between land use right certificate and book value, the Company can not provide how many squares had been used for the Dixian Family Building and Dormitory Building, thus we are not able to judge the effect on the Company’s financial position and operation result. The Family Building and Dormitory Building are set up by the Company, but the buildings have not been recognized as assets in the Company’s account. The Company did not record the land use right, which is exchanged by the Family building, but they pledged the land use right to Chengde Finance Bureau for loan 18 million. We are not able to judge the effect on the Company’s financial position and operation result. (7) Refer to Note 7(7), balance of long term investment for Dahua Paper Industry Co., Ltd. is 197,215,729.65. Dahua Paper Industry Co., Ltd. ceased its operation from year 2006 to the report date due to lack of operation fund, and its account book have been detained by customs office. We are not able to judge the effect on the Company’s financial position and operation result. (8) Refer to Note 7(27), the Company accrued social insurance amounted to RMB 110,632,696.00 from 1999 to 2007 in year 2007. The Company cannot provide the accrual basis, list for social insurance and regarding documents from social society department thus we are not able to judge rationality and correctness of the accrual social society and the effect on the Company’s financial position and operatiion result. (9) Due the Company is unable to provide tax information and complete related accounting, we are not able to obtain appropriate and sufficient audit evidence to judge the effect on the Company’s financial position and the results of its operations. 46 (10) Refer to Note 7 (15) and (17), the balance for subsidy advance from Chengde Finance Bureau is RMB 33,625,717.66, and short-term loan from Chengde Finance Bureau is RMB 10,060,214.41. According to the confirmation letter from Chengde Finance Bureau, the Company owes RMB 76,013,020.00 from them. The Company cannot provide the evidence for the difference. We are not able to judge the effect on the Company’s finance position and operation result in year 2007 and previous year. (11) Refer to Note 7 (5), (17), accounts receivable from other company is amounted to RMB 9,280,976.93 and balance of other payable is RMB 22,059,945.15, these amounts actually reflects the balance of the Company’s bank accounts in other companies. We are not able to know the reason for the difference between the receivable/payable balance and bank account, for the account books had been detained by customs office. For the above reason, we are not able to judge the effect on the Company’s finance position and operation result in year 2007 and previous year. (12) Refer to Note 7 (12), (17), as at 31 December 2007, the bank loan of the Company is RMB 917,559,861.42 (including bridging loan of RMB 80,824,300 from Lingfeng Textiles (Shenzhen) Co., Ltd.) is overdue and difficult to repay. Due to lack of relative documents regarding default interest payable of overdue loan also other audit procedures are not applicable to obtain sufficient and appropriate evidence, we are not able to judge the effect of the issue on the Company and in Year 2007 and previous financial position and operation results. (13) On 25 December 2006, ten management members of the Company, including the chairman of the board, Mr. Shuxian Wang, were detained against alleged smuggle. On 31 January 2007, the chairman of the board Shuxian Wang and other six management members were alleged against goods smuggle and arrested by Shijiazhuang Customs. According to the indictment issued by Shijiazhuang People’s Procuratorate, Chengde Dixian Textile Company Limited set up 7 inveracious foreign investment companies to cheat documents of equipments exemption tax, and imported common goods as foreign investment equipment. For the events is not verdicted, we are not able to judge the effect on financial position, operation results and going concern. 3. AUDITOR’S OPINION Because the impact on the above matters is material, we are unable to express an opinion as to whether the financial statements present fairly, in all material respects, the financial position of the Company as of December 31 2007 and the results of its operations and its cash flows for the year then ended. 4. SIGNIFICANT ISSUE We remind that the users of the financial statements shall pay attention to the following events: 47 (1) Refer to Note 1, the Company increases of its capital by issuing 150,000,000 B shares in July 2004, in which 91,300,000 shares were issued for Hong Kong dollars and 58,700,000 shares were issued for Renminbi Yuan (RMB). The issuance of Renminbi shares has not been authorized by the China Administration of Foreign Exchange department, and has not verified by PRC certified public accountants and the procedures for the change of business registration were not carried out completely. According to the resolution of general meeting of shareholders on 8 June 2006, the Company distributed share bonus 117,720,000 shares to all shareholders at the rate of two shares given per ten shares. After share bonus distribution, the registered capital of the Company changed to RMB 706,320,000. The shares mentioned above are not verified by PRC certified public accountants and the procedures of changing business registration are not carried out completely. (2) Refer to Note 3, Century Win International Holding Ltd. incorporated in Hong Kong, invested the subsidiary of the Company, Xingye Papermaking Co., Ltd. in the form of machinery and equipment. The value of injected machineries and equipments is more than that required. The Company entered into agreement with Century Win International Holding Ltd. that the ownership of the equipments amounting to RMB 95,450,000 belongs to Century Win International Holding Ltd.; the Company uses the equipments nonremuneratively; the Company has right to use the equipments as a loan pledge. Moreover, the agreement states that the disposal of the equipments is decided upon the further negotiation between the Company and Century Win International Holding Ltd. As at 31 December 2007, the Company pledged the equipment for bank loan. Based on the information from Companies Registry, the Government of Hong Kong Special Administrative Region, Century Win International Holding Ltd. announced liquidation on 20 May 2005. (3) Refer to Note 3, registered capital of Dahua Paper Industry Co., Ltd. is JPY 6,364,000,000, in which the paid-in capital of USD 5,000,000 has been verified by PRC Certified Public Accountants. Xinye Papermaking Co., Ltd. invested RMB 206,215,729.65, including investment valuing at RMB 187,653,000.00 in the form of equipment, land and plants which was not supported by the capital verification of PRC Certified Public Accountants and is waiting to be verified when foreign shareholders inject capital fully. (4) Refer to Note 7 (10), the Company purchased 619.81 Mus land at the consideration of RMB 38,791,627.50 as land lease premium. The Company has got the certificate for 324.781 Mus, but the amounts on land use right certificate is not matched with the payment. The land use right will be amortized till land use right registration is finished. 48 (5) Refer to Note 7 (12), (17), as at 31 December 2007, the bank borrowings of the Company amounting to RMB 836,735,606.45 are already overdue and difficult to repay, which include overdue borrowing of RMB 829,337,055.71, and USD 1,012,861.86 (equivalent to RMB 7,398,550.74). Lingfeng Textiles (Shenzhen) Co., Ltd. has been prosecuted by bank due to the borrowing of RMB 80,824,254.97 arisen from discount of commercial acceptance bills, and the court judged the Company should repay the principal and interest. The majority shareholder of the Company, Mr. Shuxian Wang promised to repay the debts with the held 173, 604,000 shares of the Company (accounting to 29.49% of the total share capital of the Company), and these shares have been frozen by the Court. The equities of Chengde Ditian Fashion Co., Ltd., Xingye Papermaking Co., Ltd., and Chengde Banhe Fibre Textile Co., Ltd. held by the Company directly or indirectly were seized by the court. According to the information from Shenzhen Industrial and Commerce Price Information Center, Lingfeng Textiles (ShenZhen) Co., Ltd. did not make annual Inspection of Industry and Commerce in 2005, Shenzhen Industrial and Commerce Bureau withdrawn its business license on 30 November 2007. (6) Due to shortage of fund, bank loan disputation, the Company and management members were detained against alleged smuggle, business activities are suspended in October 2007. The financial position is worse from January to April in 2008, if there is no other financial support or restructuring immediately, the gonging concern basis is significantly uncertainly. (7) Refer to Note 2, six government officers accredited by the Chengde Government assisted the operation and management of the Company in June 2007. The management of the Company judge that the Company is able to continue operation. The financial statements of the Company are prepared on the going concern basis. If there is no financial support or restructuring, the above financial statement should be restated as liquidation price. The statement of the above paragraphs has no effect on the expressed audit opinion. BDO.Shenzhen Dahua Tiancheng CPAs Certified Public Accountants of China Shenzhen, China Certified Public Accountants of China 28 April 2008 49 CHENGDE DIXIAN TEXTILE COMPANY LIMITED CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2007 (All amounts in RMB Yuan unless otherwise stated) ASSETS Notes 31 December 2007 31 December 2006 Current assets: Cash in banks and on hand 1 6,316,017.15 8,004,056.59 Notes receivable 2 - 100,000.00 Accounts receivable 3 18,238,933.65 152,329,032.12 Advances to suppliers 4 68,195,220.53 66,630,052.40 Other receivables 5 66,463,387.50 135,546,876.11 Inventories 6 1,852,391.30 113,836,832.59 Total current assets 161,065,950.13 476,446,849.81 Noncurrent assets: Long-term equity investment 7 197,215,729.65 197,215,729.65 Fixed assets 8 1,207,027,687.69 1,286,296,569.15 Construction in progress 9 493,715,698.10 493,715,698.10 Intangible assets 10 121,039,992.80 123,856,250.22 Long-term prepaid expenses 11 2,057,939.91 2,263,327.46 Deferred taxes asset - 313,556.00 Other noncurrent assets: - - Total noncurrent assets 2,021,057,048.15 2,103,661,130.58 TOTAL ASSETS 2,182,122,998.28 2,580,107,980.39 Legal Person in charge of Person in charge of representative: accounting function: accounting department: （The accompanying notes form an integral part of these financial statements） 50 CHENGDE DIXIAN TEXTILE COMPANY LIMITED CONSOLIDATED BALANCE SHEET（CONTINUED） AS AT 31 DECEMBER 2007 (All amounts in RMB Yuan unless otherwise stated) LIABILITIES AND SHAREHOLDERS' EQUITY Notes 31 December 2007 31 December 2006 Current liabilities: Short-term loans 12 846,795,820.86 837,298,671.01 Accounts payable 13 36,829,684.49 39,882,373.75 Advances from customers 14 271,269.72 752,195.44 Employee compensation 15 120,288,107.62 15,420,224.77 Taxes payable 16 35,082,493.66 28,800,282.98 Interest payable 18 168,590,957.64 100,731,032.86 Other payables 17 180,457,239.67 188,111,971.52 Total current liabilities 1,388,315,573.66 1,210,996,752.33 Noncurrent liabilities: Long-term payables 19 95,450,000.00 95,450,000.00 Subsidy advanced 20 33,625,717.66 38,625,717.66 Contingent liability 9,456,437.83 4,728,218.91 Deferred taxes liability 21 - 2,195,000.00 Total noncurrent liabilities 138,532,155.49 140,998,936.57 Total liabilities : 1,526,847,729.15 1,351,995,688.90 Shareholders' equity: Paid-in capital 22 706,320,000.00 706,320,000.00 Capital reserve 23 395,971,144.37 393,776,144.37 Surplus reserve 24 76,791,550.17 76,791,550.17 Retained earnings 25 (747,725,844.45) (200,166,620.43) Shareholders' equity attributed to the Company 431,356,850.09 976,721,074.11 Minority shareholders ' equity 223,918,419.04 251,391,217.38 Total shareholers' equity 655,275,269.13 1,228,112,291.49 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 2,182,122,998.28 2,580,107,980.39 Legal Person in charge of Person in charge of representative: accounting function: accounting department: （The accompanying notes form an integral part of these financial statements） 51 CHENGDE DIXIAN TEXTILE COMPANY LIMITED CONSOLIDATED INCOME STATEMENT AS AT 31 DECEMBER 2007 (All amounts in RMB Yuan unless otherwise stated) Items Notes 2007 2006 1. Operating income 26 59,972,518.33 233,828,225.80 Less: Operating cost 26 91,103,493.06 209,194,327.42 Selling and distribution expenses 3,685,785.86 3,686,024.10 General and administrative expenses 27 267,255,550.88 154,080,496.44 Finance expense - net 28 73,130,603.09 83,683,547.60 Impairement loss(gain) 29 199,346,490.22 176,265,026.25 2. Operating profit (574,549,404.78) (393,081,196.01) Add: Non-operating income 30 44,207.34 2,021,982.72 Less: Non-operating expenses 30 213,268.92 89,697.71 3. Profit before tax (574,718,466.36) (391,148,911.00) Less: Income tax 313,556.00 - 4. Net profit for the year (575,032,022.36) (391,148,911.00) Attributable to: Equity shareholders' of the Company (547,559,224.02) (343,506,925.21) Minority shareholders (27,472,798.34) (47,641,985.79) 5.Earnings per share （1）Basic earnings per share (0.78) (0.49) （2）Diluted earnings per share (0.78) (0.49) Legal Person in charge of Person in charge of representative: accounting function: accounting department: （The accompanying notes form an integral part of these financial statements） 52 CHENGDE DIXIAN TEXTILE COMPANY LIMITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY AS AT 31 DECEMBER 2007 (All amounts in RMB Yuan unless otherwise stated) Year of 2007 Items Shareholders' equity of parent company M Paid-in capital Capital reserve Surplus reserve Retained earnings Other Balance at the end of last year 706,320,000.00 393,776,144.37 81,770,300.69 (205,145,370.95) - Add: Change of accounting principle - - (4,978,750.52) 4,978,750.52 - Balance at the beginning of the year 706,320,000.00 393,776,144.37 76,791,550.17 (200,166,620.43) - Increase and decrease amount of this year - 2,195,000.00 - (547,559,224.02) - 1. Net profit for the year - - - (547,559,224.02) - 2. Gain (loss) attributable to shareholders - 2,195,000.00 - - Subtotal - 2,195,000.00 - (547,559,224.02) - Shareholders' equity transfer internal - - - - - Balance at the end of the year 706,320,000.00 395,971,144.37 76,791,550.17 (747,725,844.45) - Legal Person in charge of Person in charge of representative: accounting function: accounting department: （The accompanying notes form an integral part of these financial statements） 53 CHENGDE DIXIAN TEXTILE COMPANY LIMITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY AS AT 31 DECEMBER 2007 (All amounts in RMB Yuan unless otherwise stated) Year of 2006 Items Shareholders' equity of parent company Minori Paid-in capital Capital reserve Surplus reserve Retained earnings Other Balance at the end of last year 588,600,000.00 393,396,144.37 81,770,300.69 256,081,554.26 - Add: Change of accounting principle - - (4,978,750.52) 4,978,750.52 - Balance at the beginning of the year 588,600,000.00 393,396,144.37 76,791,550.17 261,060,304.78 - Increase and decrease amount of this year 117,720,000.00 380,000.00 - (461,226,925.21) - 1. Net profit for the year - - - (343,506,925.21) - 2. Gain (loss) attributable to shareholders - 380,000.00 - - - Subtotal - 380,000.00 - (343,506,925.21) - Shareholders' equity transfer internal 117,720,000.00 - - (117,720,000.00) - Balance at the end of the year 706,320,000.00 393,776,144.37 76,791,550.17 (200,166,620.43) - Legal Person in charge of Person in charge o representative: accounting function: accounting depa （The accompanying notes form an integral part of these financial statements） 54 CHENGDE DIXIAN TEXTILE COMPANY LIMITED CONSOLIDATED STATEMENT OF CASH FLOWS AS AT 31 DECEMBER 2007 (All amounts in RMB Yuan unless otherwise stated) ITEM Notes 2007 2006 1. Cash flows from operating activities Cash received from sale of goods or rendering services 63,347,110.26 117,337,733.97 Cash received relating to other operating activities 31 1,931,795.97 39,829,598.25 Sub-total of cash inflows 65,278,906.23 157,167,332.22 Cash paid for goods and services 19,224,469.95 102,894,369.04 Cash paid to and on behalf of employees 31,982,444.62 26,500,052.29 Payments of taxes and levies 1,098,746.76 13,196,286.24 Cash paid relating to other operating activities 31 24,233,764.72 32,219,779.07 Sub-total of cash outflows 76,539,426.05 174,810,486.64 Net cash flows from operating activities (11,260,519.82) (17,643,154.42) 2. Cash flows from investing activities Net cash received from disposal of fixed,intangible and other long-term assets - 5,433,574.16 Cash received relating to other investing activities - 25,023,359.99 Sub-total of cash inflows - 30,456,934.15 Cash paid to acquire fixed,intangible and other long-term assets - 20,611,891.90 Sub-total of cash outflows - 20,611,891.90 Net cash flows from operating activities - 9,845,042.25 3. Cash flows from financing activities Cash received from borrowings 9,697,000.00 132,000,000.00 Cash received relating to other financing activities - 7,255,134.22 Sub-total of cash inflows 9,697,000.00 139,255,134.22 Cash repayments of loan 52,480.89 122,270,000.00 Cash payments for distribution of dividends and interest expenses 72,038.73 5,181,982.34 Cash paid relating to other financing activities - 69,032.46 Sub-total of cash outflows 124,519.62 127,521,014.80 Net cash flow from financing activities 9,572,480.38 11,734,119.42 4. Effect of foreign exchange rate changes on cash 5. Net increase in cash and cash equivalents (1,688,039.44) 3,936,007.25 Add: Balance of cash and cash equivalents at the beginning of year 8,004,056.59 4,068,049.34 6. Closing balance of cash and cash equivalents at the end of year 32 6,316,017.15 8,004,056.59 Legal Person in charge of Person in charge of representative: accounting function: accounting department: 55 CHENGDE DIXIAN TEXTILE COMPANY LIMITED BALANCE SHEET AS AT 31 DECEMBER 2007 (All amounts in RMB Yuan unless otherwise stated) ASSETS Notes 31 December 2007 31 December 2006 Current assets: Cash in banks and on hand 3,250,011.31 2,861,890.46 Accounts receivable 3 20,481,720.44 163,683,168.83 Advances to suppliers 92,406,965.15 86,429,553.06 Other receivables 5 446,731,310.44 514,476,042.14 Inventories 1,012,716.02 80,238,794.34 Total current assets 563,882,723.36 847,689,448.83 Noncurrent assets: Long-term equity investment 7 1,211,812,433.52 1,211,812,433.52 Fixed assets 112,341,554.19 139,498,272.31 Construction in progress 143,035,867.46 143,035,867.46 Intangible assets 8,149,553.94 8,601,143.46 Long-term prepaid expenses 2,057,939.91 2,263,327.46 Deferred taxes asset - 313,556.00 Total noncurrent assets 1,477,397,349.02 1,505,524,600.21 TOTAL ASSETS 2,041,280,072.38 2,353,214,049.04 Legal Person in charge of Person in charge of representative: accounting function: accounting department: （The accompanying notes form an integral part of these financial statements） 56 CHENGDE DIXIAN TEXTILE COMPANY LIMITED BALANCE SHEET（CONTINUED） AS AT 31 DECEMBER 2007 (All amounts in RMB Yuan unless otherwise stated) IABILITIES AND SHAREHOLDERS' EQUITY Notes 31 December 2007 31 December 2006 Current liabilities: Short-term loans 522,166,284.26 517,669,134.41 Accounts payable 28,390,363.53 31,246,571.12 Advance from customers 269,269.72 645,144.72 Employee compensation 110,579,116.67 14,844,433.97 Taxes payable (11,820,091.60) (16,120,382.01) Interest payable 140,631,230.47 82,313,375.69 Other payables 629,224,955.93 627,661,551.48 Total current liabilities: 1,419,441,128.98 1,258,259,829.38 Noncurrent liabilities: Long-term payables 14,125,717.66 14,125,717.66 Subsidy advanced 9,456,437.83 4,728,218.91 Contingent liability - 2,195,000.00 Total noncurrent liabilities 23,582,155.49 21,048,936.57 Total liabilities : 1,443,023,284.47 1,279,308,765.95 Shareholders' equity: Paid-in capital 706,320,000.00 706,320,000.00 Capital reserve 394,571,587.96 392,376,587.96 Surplus reserve 76,791,550.17 76,791,550.17 Retained earnings (579,426,350.22) (101,582,855.04) Shareholders' equity attributed to the Company 598,256,787.91 1,073,905,283.09 Total shareholers' equity 598,256,787.91 1,073,905,283.09 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 2,041,280,072.38 2,353,214,049.04 Legal Person in charge of Person in charge of representative: accounting function: accounting department: （The accompanying notes form an integral part of these financial statements） 57 CHENGDE DIXIAN TEXTILE COMPANY LIMITED INCOME STATEMENT AS AT 31 DECEMBER 2007 (All amounts in RMB Yuan unless otherwise stated) Items Notes 2007 2006 1. Operating income 47,146,453.94 235,578,624.62 Less: Operating cost 72,115,464.03 196,918,961.43 Selling and distribution expenses 2,857,960.74 2,180,440.97 General and administrative expenses 212,883,980.69 67,278,228.84 Finance expense - net 63,334,910.63 70,389,721.08 Impairement loss(gain) 173,321,381.27 107,598,856.89 Investment income (loss) - (4,860,347.26) 2. Operating profit (477,367,243.42) (213,647,931.85) Add: Non-operating income 42,538.24 2,004,857.57 Less: Non-operating expenses 205,234.00 88,415.41 3. Profit before tax (477,529,939.18) (211,731,489.69) Less: Income tax 313,556.00 - 4. Net profit for the year (477,843,495.18) (211,731,489.69) 5. Earnings per share （一）Basic earnings per share (0.68) (0.30) （二）Diluted earnings per share (0.68) (0.30) Legal Person in charge of Person in charge of representative: accounting function: accounting department: （The accompanying notes form an integral part of these financial statements） 58 CHENGDE DIXIAN TEXTILE COMPANY LIMITED STATEMENT OF CHANGES IN EQUITY AS AT 31 DECEMBER 2007 (All amounts in RMB Yuan unless otherwise stated) Year of 2007 Items Shareholders' equity of parent company Paid-in capital Capital reserve Surplus reserve Retained ea Balance at the end of last year 706,320,000.00 393,776,144.37 81,770,300.69 (205,145 Add: Change of accounting principle - (1,399,556.41) (4,978,750.52) 103,562 Balance at the beginning of the year 706,320,000.00 392,376,587.96 76,791,550.17 (101,582 Increase and decrease amount of this year - 2,195,000.00 - (477,843 1. Net profit for the year - - - (477,843 2. Gain (loss) attributable to shareholders - 2,195,000.00 - Subtotal - 2,195,000.00 - (477,843 Shareholders' equity transfer internal - - - Balance at the end of the year 706,320,000.00 394,571,587.96 76,791,550.17 (579,426 Legal Person in charge of Person in charge of representative: accounting function: accounting department: （The accompanying notes form an integral part of these financial statements） 59 CHENGDE DIXIAN TEXTILE COMPANY LIMITED STATEMENT OF CHANGES IN EQUITY AS AT 31 DECEMBER 2007 (All amounts in RMB Yuan unless otherwise stated) Year of 2006 Items Shareholders' equity of parent company Paid-in capital Capital reserve Surplus reserve Retained earnings Other Balance at the end of last year 588,600,000.00 393,396,144.37 81,770,300.69 256,081,554.26 - Add: Change of accounting principle - (1,399,556.41) (4,978,750.52) (28,212,919.61) - Balance at the beginning of the year 588,600,000.00 391,996,587.96 76,791,550.17 227,868,634.65 - Increase and decrease amount of this year 117,720,000.00 380,000.00 - (329,451,489.69) - 1. Net profit for the year - - - (211,731,489.69) - 2. Gain (loss) attributable to shareholders - 380,000.00 - - - Subtotal - 380,000.00 - (211,731,489.69) - Shareholders' equity transfer internal 117,720,000.00 - - (117,720,000.00) - Balance at the end of the year 706,320,000.00 392,376,587.96 76,791,550.17 (101,582,855.04) - Legal Person in charge of Person in cha representative: accounting function: accounting depa （The accompanying notes form an integral part of these financial statements） 60 CHENGDE DIXIAN TEXTILE COMPANY LIMITED CASH FLOW STATEMENT AS AT 31 DECEMBER 2007 (All amounts in RMB Yuan unless otherwise stated) Items Notes 2007 2006 1. Cash flows from operating activities Cash received from sale of goods or rendering services 42,727,517.47 88,493,403.82 Cash received relating to other operating activities 18,669,580.30 23,247,309.60 Sub-total of cash inflows 61,397,097.77 111,740,713.42 Cash paid for goods and services 17,747,614.81 97,907,320.87 Cash paid to and on behalf of employees 29,979,618.62 22,487,923.29 Payments of taxes and levies 1,004,298.54 7,400,000.00 Cash paid relating to other operating activities 21,849,925.33 6,459,979.37 Sub-total of cash outflows 70,581,457.30 134,255,223.53 Net cash flows from operating activities (9,184,359.53) (22,514,510.11) 2. Cash flows from investing activities Net cash received from disposal of fixed,intangible and other long-term assets - 5,433,574.16 Cash received relating to other investing activities - 25,023,359.99 Sub-total of cash inflows - 30,456,934.15 Cash paid to acquire fixed,intangible and other long-term assets - 20,581,423.88 Cash received from subsidiaries and other business units - - Cash paid relating to other investing activities - - Sub-total of cash outflows - 20,581,423.88 Net cash flow from investing activities - 9,875,510.27 3. Cash flows from financing activities Cash received from borrowings 9,697,000.00 132,000,000.00 Cash received relating to other financing activities - 7,255,134.22 Sub-total of cash inflows 9,697,000.00 139,255,134.22 Cash repayments of loan 52,480.89 122,270,000.00 Cash payments for distribution of dividends and interest expenses 72,038.73 5,181,982.34 Cash paid relating to other financing activities - 69,032.43 Sub-total of cash outflows 124,519.62 127,521,014.77 Net cash flow from financing activities 9,572,480.38 11,734,119.45 4. Effect of foreign exchange rate changes on cash - - 5. Net increase in cash and cash equivalents 388,120.85 (904,880.39) Add: Balance of cash and cash equivalents at the beginning of year 2,861,890.46 3,766,770.85 6. Closing balance of cash and cash equivalents at the end of year 3,250,011.31 2,861,890.46 Legal Person in charge of Person in charge of representative: accounting function: accounting department: （ T he accompanying notes form an integral part of these financial statements） 61 CHENGDE DIXIAN TEXTILE COMPANY LIMITED NOTES OF FINANCIAL STATEMENT FOR THE YEAR ENDED DECEMBER 31 2007 (All amounts in RMB Yuan unless otherwise stated) [English Translation for Reference Only] 1. Basic situation of the Company Chengde Dixian Textile Company Limited (hereinafter referred to as “the Company”) is established in the People’s Republic of China as a jointly stock company as approved by People’s Government of Hebei Province (JI GU BAN (1993) No. 36) dated on 3 November 1999. There are five promoters of the Company, which are Mr. Shuxian Wang, North Industry Co., Ltd., Longfeng Cosmetic Co., Ltd., Red Star Plastic Product Co., Ltd. and Mr. Zhengsong Wang respectively. The initial registered capital of the Company was RMB 100,000,000 representing 100,000,000 shares with a par value of RMB1 each and Mr. Shuxian Wang holds 85,100,000 shares. Upon the approval document No.[2000]121 issued by the China Securities Regulatory Commission on 29 August 2000, the Company issued 100,000,000 foreign capital shares (B share) with a par value of RMB1 each. In addition, the Company increased issuance of 15,000,000 foreign capital shares (B share) with a par value of RMB1 each between 29 September and 29 October 2000. The Company’s B shares listed in Shenzhen Stock Exchange. The registered capital of the Company after the issue of B shares was increased to RMB 215,000,000. According to the resolution of general meeting of shareholders on 12 March 2002, the Company distributed share bonus 43,000,000 shares to all shareholders at the rate of two shares given per ten shares and used capital reserves to into capital as 107,500,000 shares to all shareholders at the rate of five shares given per ten shares. The registered capital of the Company was increased to RMB 365,500,000 after share bonus distribution and turning. According to the resolution of general meeting of shareholders on 22 July 2003, the Company distributed share bonus 73,100,000 shares to all shareholders at the rate of two shares given per ten shares. The registered capital of the Company was increased to RMB 438,600,000 after share bonus distribution. Upon the approval document No.[2004]101 issued by the China Securities Regulatory Commission in July 2004, the Company increases of its capital by issuing 150,000,000 B shares, in which 91,300,000 shares were issued for Hong Kong dollars and 58,700,000 shares were issued for Renminbi Yuan (RMB). The issuance of Renminbi shares has not been authorized by the China Administration of Foreign Exchange department, and has not verified by PRC certified public accountants and the procedures for the change of business registration were not carried out completely. 62 Upon the approval of the Ministry of Commerce on 31 March 2004, the Company changed to foreign investment joint stock company and obtained the business license form Hebei Province Administration for Industry and Commerce on 31 March 2004. According to the resolution of general meeting of shareholders on 8 June 2006, the Company distributed share bonus 117,720,000 shares to all shareholders at the rate of two shares given per ten shares. The registered capital of the Company was increased to RMB 706,320,000 after share bonus distribution. The issuance of mentioned above shares has not been verified by PRC certified public accountants and the procedures for the change of business registration were not carried out completely. The company and its subsidiaries (hereafter referred to as the “Company”) are principally engaged in the production and sale of clothes, synthetic fibers and a variety of paper products. 2. BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS The financial statements prepared by the Company are in accordance with the requirements of China Accounting Standards for Business Enterprises (2006) issued by the Ministry of Finance of the People’s Republic of China (hereinafter referred to as “the Ministry of Finance”). According to China Accounting Standards for Business Enterprise, estimation and assumptions are the requirement when preparing financial statements, which will affect the disclosure of assets, liabilities and the contingent liabilities as of balance sheet date and the profits/losses accounts for the year then ended. In accordance with the requirements of “Questions and Answers on the Preparation of Information Disclosures of Companies Issuing Public Shares No.7 - the Preparation and Disclosure of Comparative Figures in the Transitional Period of the Adoption of CAS (2006)” (Q&A No. 7) issued by the CSRC on February 15 of 2007, the Company is assumed to have fully adopted CAS (2006) as of 1 January 2006, and on the basis of the assumption prepared the reconciliation statement of profit for this year. The Company prepared the reconciliation statement of profit for 2006 in accordance with the requirement of CAS Bulletin 1 and meanwhile made a retroactive adjustment in prior years. The retroactive adjustments include: minority shareholders’ equity accepted by previous standards are reclassified to shareholders’ equity under CAS (2006); long-term investment for subsidiaries, the parent company should be retroactive the cost to the purchase price in parent company’s financial statement. Due to shortage of fund, bank loan disputation and management members were detained against alleged smuggle, business activities are suspended in October 2007. The financial position is worse from January to April in 2008, if there is no other financial support or restructuring immediately, the gonging concern basis is significantly uncertainly. The six government officers accredited by the Chengde Government assisted the operation and management of the Company in June 2007. The management of the Company judge that the Company is able to continue operation. The financial statements of the Company are prepared on the going concern basis. If there is no financial support or restructuring, the above financial statement should be restated as liquidation price. 63 3. CONSOLIDATION FINANCIAL STATEMENTS (1) Holding subsidiaries Place of Registered Investment Shares hold Shares hold Voting Name of holding subsidiaries Business nature registration capital amount directly indirectly right Hebei Xiaban City Textile Co., Ltd. Chengde Production and sale of clothes USD4,000,000 USD4,000,000 75% 25% 100% ( Xiaban City Textile) Chengde Dixian Fashion Production and sale of clothes Co., Ltd. Chengde USD24,000,000 USD24,000,000 75% 25% 100% and synthetic fibers (Dixian Fashion) Xingye Papermaking Co., Production and sale of various Ltd. Chengde USD100,000,000 USD75,000,000 75% --- 75% kind of paper products (Xingye Papermaking) Chengde Banhe Fiber Textile Production and sale of clothes Co., Ltd. Chengde USD60,000,000 USD39,000,000 --- 65% 65% and synthetic fibers (Banhe Fiber Textile) Huaxin Waste Paper Collection and sales of waster Collection Co., Ltd. Chengde RMB1,000,000 RMB900,000 --- 100% 100% paper (Huaxin Waste Paper) Gold Axe Investment Group British Investment holding and liaison of Limited Virgin USD1 USD50,000 100% --- 100% export business (Gold Axe Investment) Islands a) With the board of director’s approval of Xiaban City Textile, the operation and sales businesses of Xiaban City Textile for the year of 2005 were completely transferred to the Company. No business operations were transacted of Xiaban City Textile during the year. The 25% shareholding belongs to the Gold Axe Investment Group Limited, which is a subsidiary of the Company. b) According to the Share Transfer Agreement signed on 25 June 2005 between Gold Axe Investment and the Japan Yufa Company, the Japan Yufa Company agreed to transfer the 25% shareholding to Gold Axe in return for the set off against the account receivables of RMB 50,643,321 from Japan Yufa Company. The amount of RMB 50,643,321 was the account payables should be paid for the Company for goods payment. An agreement was signed between the Company and Gold Axe on 25 June 2005 for the above mentioned account receivables at the carrying amount of RMB 50,643,321 transfer to Gold Axe. The board of directors of Dixian Fashion approved the above share transfer. However, the Government Authority did not approve the share transfer and the business registration was not completed by the Company. With the board of director’s approval of Dixian Fashion, the operation and sales businesses of Dixian Fashion for the year of 2005 were completely transferred to the Company. No business operations were transacted of Dixian Fashion during the year. c) Century Win International Holding Ltd. (Century Win International), a company incorporated in Hong Kong, entered into an equity joint venture agreement with the Company to set up Xingye Papermaking in 2001 and obtained the business license on 12 March 2001. According to the equity 64 joint venture agreement, the Company and Century Win International had paid in capital of approximately RMB 622,500,000 and RMB 207,500,000 respectively, and the registered capital would be contributed in full by both sides within three years from the business license date of Xingye Papermaking (the ‘Investment Period’). Up to the 31 December 2007, the Company and Century Win International had fully paid the capital of RMB 622,500,000 and RMB 207,500,000 respectively. Some of the production lines were in operation since 2002. During the year ended 31 December 2003, Century Win International contributed approximately RMB128,650,000 of equipments in excess of its required capital contribution to Xingye Papermaking. According to an agreement signed between the Company and Century Win International in September 2004, the equipments value of RMB 95,450,000 was owed to Century Win International and the Company recorded it as liability payables. Century Win International agreed not to request the Company to repay the money unless consent was mutually agreed. Based on the agreement, the Company could use the machinery nonremuneratively and could use it as loan security. The remaining sum of RMB 33,200,000 was recognized as a debt by the Company. An agreement was signed on 12 February 2004 among the Company, Lingfeng Textiles (ShenZhen) Co., Ltd. and Ceutury Win International whereby the sum of RMB 33,200,000 was set off with a debt owing form Lingfeng Textiles (ShenZhen) Co., Ltd.. The business operation of Xingye Papermaking was suspended from the year of 2006 due to serious liquidity problem. If without financial support from outside and efficient and timely reconstruction, there exists material uncertainty on going concern basis. d) Banhe Fiber Textile is a subsidiary of the Company incorporated as Sino-foreign enterprise in 29 September 2002 and the registered capital was USD 15,000,000. Dixian Fashion and Yamashita Shoji Co., Ltd. invested 35% and 65% shareholding respectively. Upon approval coded Ji Wai Jin Mao Zi Zi [2003]No.37 issued by the Hebei Province Ministry of Commerce on 24 March 2003, the Banhe Fiber Textile increase the registered capital of from USD 15,000,000 to USD 60,000,000 on 7 July 2003. Xiaban City Textile then joined as a new shareholder. The distribution of shareholding then became Dixian Fashion, Yamashita Shoji Co., Ltd. and Xiaban City Textile holding 20%, 55% and 25% respectively. Upon the approval coded Ji Wai Jin Mao Zi Zi [2004]No.22 issued by the Hebei Province Ministry of Commerce on 31 March 2004,Yamashita Shoji Co., Ltd. was transferred 20% shareholding to Dixian Fashion. After the change, the distribution of shareholding became as Dixian Fashion, Yamashita Shoji Co., Ltd. and Xiaban City Textile holding 40%, 35% and 25% respectively. Up to 31 December 2007, the paid up share capital of Banhe Fiber Textile was RMB 394,820,975.29. Dixian Fashion and Xiaban City Textile paid RMB 199,200,000 and RMB 114,890,975.29 respectively. However, the share capital verification procedure was not completed. e) Huaxin Waste Paper is a subsidiary of the Company invested by Xingye Papermaking and XinYe Commerce & Trade Co., Ltd., and obtained the business license on 17 January 2003. Xingye Papermaking holds 90% equity of Huaxin Waste Paper. No business operations were transacted of Huaxin Waste Paper during the year of 2006. 65 According to the information from Industrial and Commerce Bureau, the minority shareholder is changed from XinYe Commerce & Trade Co., Ltd. to Dixian Fashion. It is presented as minority shareholder equity on the financial statement for the Company cannot get documents of minority shareholders alternation due to the account book has been detained and staffs demission. (2) Associated company Place of legal Registered Shares Name of associated company Investment amount Business nature registration representative capital hold Production and sale of Chengde Beirifang Co., Ltd. *6 Chengde Shuxian Wang USD1,000,000 USD500,000 --- stretch yarn Production and sale of Dahua Paper Industry Co., Ltd. *7 Chengde Shuxian Wang JPY6,364,000,000 JPY2,864,000,000 45% various kind of paper products Production and sale of Suning Banhe Fibre Textile Co., Ltd. *8 Suning Zhengsong Wang USD 29,000,000 USD5,800,000 20% chemical fiber fabrics Construction of light Dixian Light Rail Co., Ltd. *9 Chengde Huilai Wang USD 8,000,000 USD6,000,000 --- rail and transportation a) Chengde Beirifang Co., Ltd. is a joint venture company invested by Japan Beirifang Co., Ltd., Y’S Corporation Co., Ltd. and the Company and obtained the business license on 12 March 2002. The Company holds 50% equity of Chengde Beirifang Co., Ltd. but no capital contributed actually as to 31 December 2005. No business operations were transacted of Chengde Beirifang Co., Ltd. during the year of 2005. On 27 March 2008, its license has been withdrawn by Chengde Industrial and Commercial Bureau. b) Dahua Paper Industry Co., Ltd. was found as a joint venture company invested by Nippon Paper Industries Co. and the Company on 19 April 2004. The registered capital was USD5,000,000, of which the Company invested USD2,250,000 accounting for 45％ equity. Upon approval coded Ji Shang Wai Zi Zi [2004]No.41 issued by the Hebei Province Ministry of Commerce, Dahua Paper Industry Co., Ltd. has increased the total investment from USD5,000,000 to JPY11,000,000,000 and the registered capital increased to JPY6,364,000,000. The investment of the Company has increased to JPY2,864,000,000, accounting for 45％ equity. On 24 June 2005, Nippon Paper Industries Co. and Japan New Century Co. have agreed the share-transfer contract, which indicated that Nippon Paper Industries Co. transferred 55％ equity of Dahua Paper Industry Co., Ltd. to Japan New Century Co.. The above alteration has approved by the Hebei Province Ministry of Commerce. Dahua Paper Industry Co., Ltd. obtained new business license due to rename. On 29 June 2005, the Company agreed the share-transfer contract and transferred 45% equity of Dahua Paper Industry Co., Ltd. to Xinye Papermaking Co., Ltd. As to 31 December 2007, Dahua Paper Industry Co., Ltd. has obtained investment of RMB 266,280,320.00. However, the above capital is unverified and the procedure on changes of shareholder is unfinished. 66 c) Suning Banhe Fibre Textile Co., Ltd. was invested by Yamashita Shoji Co., Ltd. and the Company on 7 November 2004. The registered capital was USD29,000,000, of which the Company invested USD5,800,000 accounting for 20％ equity. Suning Banhe Fibre Textile Co., Ltd. leased equipments form Chengde Banhe Fibre Textile Co., Ltd. to operate from the year of 2006. d) Dixian Light Rail Co., Ltd. was invested by Japan New Century Co. and the Company on 8 April 2003. The registered capital was USD8,000,000 and total investment was USD17,800,000. The Company invested paid-in capital as USD600,000, accounting for 75％ of equity. As to 31 December 2007, the Company has not contributed any actual capital to Dixian Light Rail Co., Ltd. and Dixian Light Rail Co., Ltd. has not come into operation. Its business license has been withdrawn by Chengde Industrial and Commerce Bureau on 27 March 2008. (3) Minority shareholder’s equities Shareholder’s Minority shareholder’s Minority shareholder’s equity in parent Subsidiary name equity less minority equity company less interest minority interest Huaxin Waste Paper Collection Co., Ltd. 118,097.36 --- --- Xingye Papermaking Co., Ltd. 159,217,882.77 (17,819,402.56) --- Banhe Fibre Textile Co., Ltd. 64,582,438.91 (9,653,395.78) --- Total 223,918,419.04 (37,126,194.12) --- 4. MAJOR ACCOUNTING POLICIES, ACCOUNTING ESTIMATES AND CONSOLIDATED FINANCIAL STATEMENTS (1) Accounting policies The accounting policies adopted by the Company are in accordance with the China Accounting Standards for Business Enterprises (2006) issued by the Ministry of Finance. (2) Accounting period The accounting year of the Company is from January 1 to December 31. (3) Recording currency Except for Gold Axe Investment Group Limited, the recording currency of the Company is the RMB (Yuan), the statutory currency of the People’s Republic of China. The recording currency of the Gold Axe Investment Group Limited is US dollars. (4) Basis of accounting and measurement The Company follows the accrual basis of accounting. Assets are initially recorded at actual costs. If at any time the provision for 67 impairment made, the Company and subsidiaries are in accordance with the CAS (2006). (5) Cash and cash equivalents The cash equivalents refers to short-term (matured within three months from the purchased date) and highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. All transactions denominated in non-recording currency are translated into RMB at the medial exchange rates stipulated by the People’s Bank of China (the “market exchange rates”) on the day in which the transactions took place. At the month end, the Company adjusted monetary assets denominated in non-recording currency converted into RMB at the market foreign exchange rates. The translation differences raised from above transactions should be recorded into the long-term prepaid expenses for current period. The net exchange losses arising form loans used for purchase fixed assets should be capitalized in accordance with capitalization principle of loan costs. The net exchange losses arising form other exchange rate should be recorded into the profits and losses accounts for current period. (6) Translation for foreign currency transactions and financial statement For the subsidiary used foreign currency as the recording currency, all assets, liabilities and profit and loss should be converted into RMB at market exchange rates on consolidation balance sheet date; all owner's equity except for undistributed profits should be converted into RMB at market exchange rates on the day in which the transactions took place. For cash flow statement, all items related to increase or decrease in revenues, expenses, long-term liabilities, long-term investments, fixed assets, long-term prepaid expenses and intangible assets should be converted into RMB at market exchange rates on consolidation balance sheet date; all items related to increase or decrease in capital should be converted into RMB at market exchange rates on the day in which the transactions took place. The translation differences raised from above transactions should be presented in undistributed profits in the balance sheet in accordance with ‘Temporary provisions on consolidation financial statements’ issued by the Ministry of Finance. (7) Financial assets and liabilities The Company classifies financial assets and financial liabilities into different categories according to the purpose of obtaining assets or undertaking liabilities while initial confirmation: financial assets and financial liabilities measured with fair value and their changes calculated into the current profits and losses, loans and receivables, held-to-maturity investment, available-for-sale financial assets and other financial liabilities. After initial confirmation, financial assets and financial liabilities are measured with fair value. For financial assets or financial liabilities measured with fair value and their changes calculated into the current profits and losses, the relevant transaction expenses are directly calculated into the current profits and losses; for other kinds of financial assets and financial liabilities, the relevant transaction expenses are calculated into initial confirmation amount. After initial confirmation, the subsequent 68 measurements of financial assets and financial liabilities are following: − Financial assets and financial liabilities measured with fair value and their changes calculated into the current profits and losses (including financial assets or financial liabilities held for trading) The financial assets and financial liabilities and derivative tools held by the Company for sales or buy back in recent period belong to this kind, except derivative tools appointed and being effective arbitrage tool, derivative tools belonging to financial guarantee contract. After initial confirmation, the financial assets and financial liabilities measured with fair value and their changes calculated into the current profits and losses are measured with fair value, and the incomes or losses formed due to change of fair value are calculated into the current profits and losses. − Receivable accounts Receivable account refers to non-derivative financial assets without quotation in active market and recovered amount fixed or confirmable. After initial confirmation, receivable accounts are measured according to amortized costs according to actual interest rate method. − Available-for-sale financial assets The Company classifies the non-derivative financial assets appointed as available for sale while initial confirmation and financial assets not classified as other categories into available-for-sale financial assets. The equity tool investment that has no quotation in active market and which fair value cannot be reliably measured are measured according to costs after initial confirmation. Except the above equity tool investment which fair value cannot be reliably measured, other available-for-sale financial assets are measured with fair value after initial confirmation. For the incomes or losses formed due to change of fair value, the exchange balance formed by devaluation losses and monetary financial assets in foreign currencies are calculated into the current profits and losses, other incomes or losses are directly calculated into shareholders’ equity, and transferred out when the available-for-sale financial assets are terminated confirmation and calculated into the current profits and losses. Confirmation of fair value The Company uses the quotation in active market to confirm the fair values of financial assets or financial liabilities in active market, and does not deduct the transaction expenses possibly occurring when such financial assets or financial liabilities will be disposed in the future. The quotation of the financial assets held by the Company or the financial liabilities that the Company intends to undertake 69 is the current offer; the quotation of the financial assets that the Company intends to purchase or the financial liabilities that the Company has undertaken is the current price. If any financial tool has no active market, its fair value is confirmed with value estimation technology. The value estimation methods include reference to the closing cost of market transaction made recently by parties who are willing to transact, or reference to current market quotation of other financial tools that are essentially same. The Company takes the value estimation value of regular evaluation and tests its validity. (8) Termination confirmation of financial assets When the rights of the contract for charging cash flow of a financial asset terminate or nearly all risks and remunerations thereon ownership are transferred, the Company terminates confirming the financial asset. If the whole transfer of financial assets meets termination confirmation conditions, the Company calculates the difference of the following two amounts into the current profits and losses: − Book value of financial assets transferred − The sum of the consideration received from transfer, and the accumulative change amount of fair value previously directly calculated into shareholders’ equity. If the current obligations of financial liabilities have been wholly or partially released, the Company terminates confirming the financial liabilities or any part thereof. (9) Provisions for bad accounts The bad debt is recognized when the bad debt is determined as such when the debtor is bankrupt or dead, and the proceeds from the bankrupt’s estates or the decreased property are unable to cover the debt; or the debtor fails to repay the overdue debt for more than three years with plain evidences to indicate his inability to do so. The Company adopts allowance method to calculate possible bad debts. A general provision for the remaining receivables (both accounts receivable and other receivables) is made based on the ageing of receivables, at the following percentages: Ageing of receivables Percentage of provision for bad debts Within 1 year 1%-5% Between 1 and 2 years 20% Between 2 and 3 years 50% Over 3 years 100% Based on an assessment of the recoverability of accounts receivable, specific provisions are applied to 70 accounts receivable where events or changes in circumstances indicate that the balances may not be collectible. The specific provisions should be recorded in impairment loss for assets in current period. (10) Inventories a) Inventories mainly include raw material, auxiliary materials, repair parts, low cost consumables, packing material, goods in stock, goods in process, finished goods. b) Inventories are accounted for initial cost when purchased and entered into storage, and using weighted average accounting method when issued. At the end of the year, inventories are presented at the lower side between cost and net realizable value (NRV). c) Perpetual inventory system is applied to inventories. d) Low cost consumables are recorded using immediately write-off method when issued. e) On the basis of stocktaking at the end of each year, for any inventory is physical damage, part or entire obsolescence or its sales price fall below its cost, which results the cost of the inventory is lower than its net realizable value (the “NRV”), a provision for impairment of inventory should be made. The provision for impairment equals to the difference between cost and NRV for individual item. NRV is the estimated selling price in the ordinary course of business, less the estimated costs to completion and the estimated costs necessary to conclude the sale. (11) Long-term investment a) Investments in subsidiaries In the individual financial statements of the Company, long-term equity investment in subsidiaries is calculated with cost method, and the cost minus evaluation provision is calculated into the balance sheet at the end of the period. While initial confirmation, the investment costs of long-term equity investment in subsidiaries are measured according to the following principles: − For long-term equity investment in subsidiaries arising from merger of enterprises under the same control, the Company takes the share of carrying amount of owners’ equity of the mergered party acquired on the merger date as the initial investment costs of long-term equity investment. For the difference between the initial investment costs of long-term equity investment and the carrying amount of the paid consideration, premium price of capital stock (or premium price of capital) in capital reserves is modified; if the premium price of capital stock (or premium price of capital) in capital reserves is insufficient to write off, the earning retained is modified. − For long-term equity investment not under the same control, the Company takes the merger costs confirmed on purchase date as the initial investment costs of long-term equity investment. − For long-term equity investment in subsidiaries arising from non-corporate merger, while initial confirmation, for long-term equity investment acquired from cash payment, the Company takes the 71 actually paid purchase price as the initial investment costs. For long-term equity investment obtained from issuing equity securities, the Company takes the fair value of stock equity as initial investment costs. For long-term equity investment invested by investors, the Company takes the value regulated in investments contract or agreements as initial investment costs. b) Investment on joint enterprises and jointly-run enterprises Investment on joint enterprises and jointly-run enterprises Joint enterprise refers to the enterprise to which the Company and other investors perform joint control according to arrangement of agreements. Joint control refers to mutual control to economic activities according to contracts, and only exists when investors that need to share control power to important financial and operation decision relating to economic activities agree unanimously. Jointly-run enterprise refers to the enterprise to which the Company can perform material influence. Material influence refers to, with power of participating in decision to finance and operation policy of the invested entity, but cannot control or jointly control establishment of these policies with other parties. Long-term equity investment to joint enterprises and jointly-run enterprises is calculated with equity method, except the investment is in accordance with the conditions of holding for sale (namely, the Company has made decision for disposal of this investment, has signed irrevocable transfer agreement with the assignee, and this transfer will be completed within one year). The Company measures the held-for-sale investment to joint enterprises and jointly-run enterprises according to carrying amount and estimated realizable net value which is smaller, and the difference that the carrying amount is higher than the estimated realizable net value is confirmed as devaluation losses of assets. When the investment to joint enterprises and jointly-run enterprises is initially confirmed, for long-term equity investment obtained with cash payment, the Company takes the actually paid purchase price as the initial investment costs. For long-term equity investment obtained from issuing equity securities, the Company takes the fair value of stock equity as initial investment costs. For long-term equity investment invested by investors, the Company takes the value regulated in investments contract or agreements as initial investment costs. The detailed accounting treatments of the Company while calculating with equity method include: − In case the initial investment costs of long-term equity investment is larger than the share of fair value of recognizable net assets of the invested entity as enjoyable while investment, the former is used as costs of long-term equity investment; In case the initial investment costs of long-term equity investment is less than the share of fair value of recognizable net assets of the invested entity as enjoyable while investment, the latter is used as costs of long-term equity investment, and the difference between the costs long-term equity investment and initial investment costs is calculated into the current profits and losses. − After obtaining the investment to joint enterprises and jointly-run enterprises, the Company deducts the amount of debit balance of investment on stock equity confirmed according to the previous accounting criteria and systems, amortized on linear amortization method according to the previous ten years of amortization period from the investment to joint enterprises and jointly-run enterprises as held by the Company before firstly executing China Accounting Standards for Business Enterprises (2006), 72 from the enjoyable or sharable share of net profits and losses realized by the invested entity, and then confirms investment profits and losses and modifies the carrying amount of long-term equity investment; the carrying amount of long-term equity investment is correspondingly reduced according to the distributable part calculated according to profits or cash dividend declared for distribution by the invested entity. While calculating the enjoyable or sharable share of net profits and losses realized by the invested entity, the Company is based on the fair value of recognizable assets of the invested entity when the investment is acquired, if the accounting policies or accounting period of the invested entity are different with the Company, necessary modification has been made to the financial statements of the invested entity according to the accounting policies or accounting period of the Company while calculation with equity method. The part of the internal transaction occurring between the Company and joint enterprises and jointly-run enterprises, belonging to the Company calculated according to share holding proportion, is set off while calculation with equity method. The unrealized losses occurring in internal transactions are fully confirmed if any evidence shows the losses are devaluation losses of relevant assets. The net losses occurred by the Company to joint enterprises and jointly-run enterprises are limited to when the carrying amount of long-term equity investment and the long-term equity of other net investments essentially to joint enterprises and jointly-run enterprises are reduced to zero, except the Company bears the obligation of additional losses. If joint enterprises and jointly-run enterprises realize net profits subsequently, the Company recovers confirming income share amount after the income share amount offsets the loss share amount not confirmed. c) Other long-term equity investments Other long-term equity investments refer to long-term equity investments without control, joint control or material influence to the invested entity and without quotation in the active market and which fair value cannot be reliably measured. The Company confirms the initial investment costs of this kind of investment according to the above principles for confirmation and measurement of initial costs of investments to joint enterprises and jointly-run enterprises, and performs subsequent measurement with cost method. d) Provision for long-term investment At each period end, for long-term investment that the market value of investee is continually decreased or the operation condition is worse, which value is considered to be less than the recoverable amount, a provision for impairment should be made. The provision for impairment equals to the difference between the investment’s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition. Impairment losses can not be reversed in subsequent periods. (12) Fixed assets and accumulated depreciation 73 Fixed assets include buildings and plant, machinery and equipment, motor vehicles and other equipments used in production or rendering of services, which par value is over RMB1,000.00 and with useful life for more than one year. For those non-manufacturing or non-operating equipments which par value is over RMB2, 000.00 and with useful life for more than two years is also defined as fixed assets. Fixed assets purchased or constructed by the Company are recorded at actual cost as carrying amount. For the fixed assets obtained from the Company restructuring, the carrying amounts should be recognized based on an assessment of national assets management departments. Fixed assets are depreciated using the straight-line method to write off the cost of the assets to their estimated residual values over their estimated useful lives. The estimated residual value of fixed assets is recognized base on different categories of fixed assets, distributed basically from 5% to 10% of its original costs. The annual depreciation rate of fixed assets and estimated useful lives are as follows: Category Estimated residual value Estimated useful lives Annual depreciation rate Buildings and plant-cost 5％ 25 years 3.80％ Papermaking equipment 10％ 20 years 4.50％ Other machinery equipment 5％ 7—15 years 6.33％-13.57％ Motor vehicles 5％ 5—10 years 9.50％—19.00％ Office equipments 5％ 5—10 years 9.50％—19.00％ Fixed assets are presented at the lower side between carrying amount and net realizable value (NRV).If at any time the recoverable amount has declined below the carrying amount due to continuous decline of market price, negative change in technology, physical damage and obsolescence, then impairment has occurred. The provision for impairment of individual fixed assets equals to the differences between the recoverable amount and the carrying amount of that fixed assets. Impairment losses can not be reversed in subsequent periods. (13) Construction in progress Construction in progress is recorded as actual cost. Borrowing costs on specific borrowings for financing the construction are capitalized as part of the cost of the fixed assets until the assets are ready for their intended use. Construction in progress is transferred to fixed assets and depreciation commences when the asset are ready for their intended use. At each period end, for those construction in process is suspended (whatever due to the negative change in technology or worse economic performance) and there is estimation that the construction will not be re-activated in the next three years, a provision for impairment should be made for individual construction project. The provision for impairment equals to the differences between the recoverable amount and the carrying amount. Impairment losses can not be reversed in subsequent periods. (14) Intangible assets Intangible assets represent land use right, which is recorded at acquired cost and amortized using the straight-line basis over the estimated useful lives. At the end of the year, the intangible assets should be 74 computed based on the lower side between carrying amount and recoverable amount. If the carrying amount is higher than the net realizable value, a provision for impairment of intangible assets is to be computed. Impairment losses can not be reversed in subsequent periods. (15) Long-term prepaid expenses Long-term prepaid expenses include the improvement of business lease fixed assets and other long-term prepayments that should be amortized for more than 1 year and are presented at cost net of accumulated amortization. Expenses occurred during the opening period, which should be recorded as expenses at the month when it begins business operating. (16) Assets impairment The Company confirms whether the following assets have the evidence of devaluation on the balance sheet date according to internal and external information, including fixed assets, construction in progress, intangible assets and long-term equity investment to subsidiaries, joint enterprises or jointly-run enterprises The Company makes devaluation test to the assets with devaluation evidence, and estimates the recoverable amount of assets. Furthermore, whether the intangible assets with uncertain goodwill and service life have devaluation evidence or not, the Company estimates their recoverable amount to the intangible assets with uncertain service life every year, and estimates recoverable amount to goodwill at the end of each year. Goodwill test is made in combination of relevant asset group or asset group combination. Asset group is the minimum asset combination can be identified by the Company, and the cash flow generated by it is basically independent with other assets or asset group. Asset group consists of the assets creating cash inflow. The Company mainly considers whether the asset group can independently generate cash inflow while identifying asset group, and also considers the management manner to production and operation activities, decision manner to use or disposal of assets. The recoverable amount refers to whichever is the higher in the net amount of the fair value of assets (or asset group, asset group combination, the same as below), and the current value of estimated future cash flow of assets. The net amount remained from fair value of assets minus disposal expenses is confirmed according to the price of sales agreement in fair transaction minus the amount directly listed into disposal expenses of the assets. The current value of estimated future cash flow of assets is confirmed according to the estimated future cash flow generated in the course of continual use and final disposal of assets, the amount obtained after discounting with proper before-tax discounting rate selected upon general consideration of the estimated future cash flow, service life, discounting rate and other factors of assets. The estimated result of recoverable amount shows if the recoverable amount of assets is lower than their book value, the book value of assets will be reduced and calculated with the recoverable amount, and the reduced amount is confirmed as devaluation losses of assets and calculated into the current 75 profits and losses, and corresponding devaluation provisions of assets are calculated and drawn. The devaluation losses relating to asset group or asset group combination are firstly written off and amortized until the book value of goodwill of the asset group or asset group combination, and then the book values of other assets are written off and reduced according to the proportion of book values of other assets other than goodwill in asset group or asset group combination, but the book values of assets after write-off shall not be less than whichever is the highest in the following three items: net amount remained from the fair value of the assets minus disposal expenses (if confirmable), current value of estimated future cash flow of the assets (if confirmable) and zero. Devaluation losses of assets once confirmed will not be returned in the subsequent accounting periods. (17) Borrowing expenses The borrowing expenses, which are incurred by the Company and can be directly listed into purchase, construction or production of the assets in accordance with capitalized conditions, are capitalized and calculated into the costs of relevant assets. Except the above borrowing expenses, other borrowing expenses are confirmed as financial expenses at the current period of their occurrence. In the period of capitalization, the Company confirms the amount of interest capitalization in each accounting period according to the following method (including amortization of discounting price or premium price): − For special loans borrowed for purchase, construction or production of the assets in accordance with capitalized conditions, the Company confirms them with the amount of the interest expenses of special loans calculated according to actual interest rate of the current period, minus the interest incomes from the not used loan capital that is deposited into bank, or minus the investment earnings acquired from temporary investment. − For the common borrowing occupied for purchasing, constructing or producing the assets in accordance with capitalized conditions, the Company calculates and confirms the interest amount of common borrowings that shall be capitalized, according to the weighted average of capital expenditures of the part that the accumulative asset expenditures exceed the special borrowings, multiplied capitalization rate of the occupied common borrowings. Capitalization rate is confirmed according to the weighted average actual interest rate of common borrowings. When the Company is confirming the actual interest rate of borrowings, the Company discounts the future cash flow of borrowings in the anticipated existence term or any applicable shorter term, as the interest rate used for the current carrying amount of the borrowing. Capitalization term refers to the term from capitalization of borrowing expenses to closing of capitalization, exclusive of the term that the borrowing expenses suspend capitalization. When capital expenditures and borrowing expenses have occurred, and the purchase, construction or production activities necessary for making assets reach the scheduled usable or available-for-sale status have commenced, capitalization of the borrowing expenses starts. When assets purchased, constructed or produced in accordance with capitalized conditions reach the scheduled usable or available-for-sale status, capitalization of borrowing expenses stops. If the assets in accordance with capitalized conditions generate non-normal interruption in the course of purchase, construction or production, and 76 the interruption time exceeds three months, the Company temporarily stops capitalization of borrowing expenses. (18) Employee compensation The employees’ salaries and wages are various remunerations paid by the Company for employees’ services and other relevant expenditures. Except dismissal welfare, the Company confirms the payable employees’ salaries and wages as liability in the period that the employees provide their services, and correspondingly increase asset costs or current expenses. According to relevant regulations of China, the employees of the Company have participated in social basic endowment insurance implemented by the local labor and social security department. The Company pays endowment insurance to the local social basic endowment insurance institution according to payment amount and ratio of social basic endowment insurance locally regulated. The social basic endowment insurance above paid is calculated into the current profits and losses according to accrual basis. When employees have retired, local labor and social security department is liable to pay social basic retirement pension to the retired employees. The Company has no other payment obligations. Besides retirement welfare, the Company pays house accumulation fund and basic hospitalization insurance, unemployment insurance, employment injury insurance and birth insurance for in-service employees according to relevant laws, regulations and policies. The Company pays house accumulation fund and the above social insurances according to certain proportion of employee’s salary on monthly basis, and calculates into capital costs or the current profits and losses according to accrual basis. (19) Revenue recognition Revenue from the sale of goods is recognized when the significant risks and rewards of ownership of the goods are transferred to the buyer; the transfer of control and ownership of the goods sold which normally takes place upon delivery of goods; and the amount of revenue and cost relating to the goods can be measured reliably. Revenue from providing service is recognized when the income, relating cost and extent of performance can be reliably measured and a presumption of cash inflow exists and cost relating to the service can be measured reliably. Revenue from transferring using right of assets is recognized when the relevant economic benefits are likely to flow into the Company and the amount of revenues can be measured in reliable way. (20) Deferred tax Deferred income tax assets and deferred income tax liabilities are confirmed respectively according to the deductible temporary difference and taxable temporary difference. Temporary difference refers to the difference between the book value of assets or liabilities and their taxation basis, including the deductible 77 losses and taxation setoff that can be carried forward in the subsequent years. The confirmation of deferred income tax assets is limited to the amount of taxable incomes that is likely obtained for deducting the deductible temporary difference. If it is not a transaction of corporate merger, accounting profits or taxable amount of incomes is not affected when the transaction occurs (or can deduct the losses), the temporary difference generating in this transaction will not generate deferred income taxes. The temporary difference caused by the initial confirmation of goodwill will not generate relevant deferred income taxes. On the balance sheet date, the Company measures the book value of the deferred income tax assets and liabilities according to the anticipated realization or settlement manner of deferred income tax assets and liabilities, the provisions of taxation laws issued, and the tax rate applicable to the anticipated period of recovering the assets or discharging the liabilities. (21) Income tax The Company calculates the income tax using balance sheet liability method. The current income taxes are the anticipated payable income taxes calculated according to the tax rates as regulated in taxation laws on the amount of taxable incomes, plus any modification of income taxes payable in the previous years. (22) Corporate merger a) Corporate merger under the same control If enterprises that participate in merger are under the final control by the same party or unchanged several parties before and after merger and such control is not temporary, it is the corporate merger under the same control. The assets and liabilities obtained by the mergering party under merger are measured according to the book value on the mergered party on the merger date. The difference between the book value of the net assets obtained and the book value of consolidated consideration paid (or the total face value of the issued shares) is modified in the premium price of stock equity (or premium price of capital) in the capital reserves; if the premium price of stock equity (or premium price of capital) in the capital reserves is not sufficient for write-off, the earning retained is modified. The merger date is the date when the mergering party actually acquires the control rights to the mergered party. b) Corporate merger not under the same control If the parties that participate in merger are not under the final control by the same party or the same several parties, it is the corporate merger not under the same control. The merger costs paid by the Company are the sum of the assets paid for the control rights to the mergered party, liabilities occur or are undertaken, the fair value of the issued equity securities on the purchase date and direct expenses occurring in corporate merger. The difference between the fair value and book value of the paid assets is calculated into the current profits and losses. The purchase date is the date when the Company actually obtains the control rights to the purchased party. The Company distributes the merger costs on the purchase date to confirm the fair value of recognizable 78 assets, liabilities and contingent liabilities of the purchased party. When the merger costs are larger than the fair value of recognizable net assets of the purchased party obtained from merger, the difference is confirmed as goodwill. When the merger costs are less than the fair value of recognizable net assets of the purchased party obtained from merger, the difference is calculated into the current profits and losses. (23) Basis of financial statements consolidation a) The scope of consolidation The consolidated scope of the consolidated financial statements includes the Company and the subsidiaries under control of the Company. Control refers to which is entitled to decide the financial and management policies of a company and by which interest can be obtained from the operation activities of the company. The operation results and financial status of the subsidiaries under control are contained in the consolidated financial statements from control starting date to control closing date. b) Accounting method of consolidated financial statements For any subsidiary acquired by the Company through corporate merger under the same control, when the consolidated financial statements for the current period are being prepared, it is deemed that the mergered subsidiaries are entered into the merger scope of the Company when the final control party of the Company starts to perform control to it, and the number at the beginning of the period in the consolidated financial statements and previous comparison statement are made corresponding modification. While the Company is preparing the consolidated financial statements, the assets and liabilities of the mergered subsidiary and their book values are combined into the consolidated balance sheet of the Company and the operation results of the mergered subsidiary are combined into the consolidated profit statement of the Company since the final control party of the Company starts to perform control. For any subsidiary acquired by the Company through corporate merger not under the same control, when the consolidated financial statements for the current period are being prepared, the financial statements of the subsidiary are modified on the basis of recognizable assets, fair values of liabilities as confirmed on the purchase date, and the assets, liabilities and operation results of the purchased subsidiary are combined into the financial statements of the Company as of the purchase date. c) The accounting policy of each holding subsidiary is in accordance with the Company. 5. TAXATION The types of taxes applicable to the Company include value added tax (VAT), business tax, tax for maintaining and building cities, education supplementary tax and enterprise income tax. 79 Items of taxation Tax base Tax rate Value added tax taxable amount of income minus deducted input tax 17% or 13% Enterprise income tax taxable amount of income 0% to 33% a) Value added tax The Company’s sales of products are subject to value added tax, in which the applicable tax rate for domestic sales is 13% or 17%. The Company has been approved to use the “exempt, credit, refund” method on goods exported providing a tax refund at the rate of 13%. b) Enterprise income tax According to enterprise income tax of China law system, the applicable enterprise income tax rate of the Company is 30%. Upon the approval of the Ministry of Commerce on 31 March 2004, the Company changed to foreign investment joint stock company and obtained the business license form Hebei Province Administration for Industry and Commerce on 31 March 2004. According to foreign investment enterprise income tax of China law system, the Company is exempted from enterprise income tax in the first and second years from the year beginning to make profit and is allowed a fifty percent reduction in the third to fifth years (so-called “2-year exemption, 3-year 50% rate reduction” tax holiday). Due to negative profit in the year of 2007, the enterprise income tax in current year is zero. The operation and sales businesses of Red Star Plastic Product Co., Ltd. for the year of 2007 were completely transferred to the Company and exempted from enterprise income tax in current year. Chengde Ditian Fashion Co., Ltd. is an joint venture manufacturing company, according to the relevant tax regulations, the Company was entitled to two years’ exemption from income taxes followed by three years of a 50% tax reduction, commencing from the first cumulative profit-making year net of losses carried forward. The first profit-making year of the company is 2001. Its operation was transferred to the Company this year, so it is not necessary to pay income tax. Xingye Papermaking Co., Ltd. is a joint venture manufacturing company, which was set up in 2001, according to the relevant tax regulations, the Company was entitled to two years’ exemption from income taxes followed by three years of a 50% tax reduction, commencing from the first cumulative profit-making year net of losses carried forward. The first profit-making year of the company is 2003. The profit is negative in this year, so tax payable is zero. Chengde Banhe Fibre Textile Co., Ltd. is a joint venture manufacturing company, which was set up in 2002, according to the relevant tax regulations, the Company was entitled to two years’ exemption from income taxes followed by three years of a 50% tax reduction, commencing from the first cumulative profit-making year net of losses carried forward. The first profit-making year of the company is 2003. The profit is negative in this year, so tax payable is zero. Chengde Huaxin Waste Paper Collection Co., Ltd. (“Huaxin Waste Paper Collection Co., Ltd.”) is a 80 non-manufacturing enterprise, which was set up in 2003, the applicable tax rate is 33%. 6. CHANGES IN ACCOUNTING PRINCIPLES The Company adopted China Accounting Standards for Business Enterprises (CAS) (2006) as of January 1, 2007. At the date of first-time adoption, the Company made retrospective adjustments to other items in accordance with the requirements of “CAS 38 –First-time Adoption of CAS” (CAS 38). Effects for shareholder’s equity please refer to Note 17. Changes are shown as below: (a) According to CAS 2- Long-term investment, in the Company’s separate financial statements, investments in subsidiaries were accounted for using the equity method before January 1 2007. Such investments are now accounted for using the cost method. (b) According to CAS 16-Government subsidy, the Company reclassified government subsidy to non-operating income. (c) According to CAS 8- Assets impairment, impairment for receivables, inventories, long-term 带格式的: 正文, 定义网格后不调 整右缩进, 无项目符号或编号, 不 investment and fixed assets is recorded as asset impairment loss, not administrative. The accrued 调整西文与中文之间的空格, 不 调整中文和数字之间的空格 long-term investment present is recorded as asset impairment loss, not investment gain. 带格式的: 字体: (国际) 宋体 (d) According to CAS 9- Staff cost, the Company reclassified accrued payroll and accrued expenses as staff cost payable. (e) According to CAS 33- Consolidation financial statement, the Company should use equity method to calculate long-term investment to consolidated subsidiaries before consolidation. Effect on accounting principles and estimations In accordance with the requirements of Q&A No. 7 issued by the CSRC, the Company is assumed to have fully adopted CAS (2006) as of 1 January 2006, and on the basis of the assumption prepared the reconciliation statement of profit for this year. The Company prepared the reconciliation statement of profit for 2006 in accordance with the requirement of CAS Bulletin 1 and meanwhile made a retroactive adjustment in prior years. The comparable information please refers to Note 16 and 18. 7. NOTES TO SIGNIFICANT MATTERS OF FINANCIAL STATEMENTS (unless otherwise stated, following data is provided after consolidated) Note 1. Cash and cash equivalents Category Currency Closing balance Opening balance Cash RMB 403,621.33 642,526.47 Bank RMB 5,318,826.66 6,743,564.47 81 Other cash and cash equivalents RMB 593,569.16 617,965.65 Total 6,316,017.15 8,004,056.59 * The closing balance of some cashes in bank are negative and the amount of RMB 5,711,314.18 is a lack of bank statements, therefore the authentic existence of cashes in bank is uncertainty. Some accounts are frozen by Court due to overdue loans. Note 2. Notes receivable Category Closing balance Opening balance Bank acceptance --- 100,000.00 Note 3. Accounts receivable After consolidated, the accounts receivable are listed below: a) Closing balance of accounts receivable analyzed based on risk combination are presented as below: Closing balance Opening balance Item Amount Rate in total Bed debt provision Amount Rate in total Bed debt provision 1. Individual accounts with 132,285,798.27 92.30% 118,820,617.01 140,016,540.96 86.03% 4,002,954.21 large amount 2. Individual accounts without large amount but with major risk after 5,474,153.30 3.82% 5,182,739.92 7,997,305.64 4.91% 2,039,556.91 integrated into credit risk combination 3. Others with small amount 5,563,265.27 3.88% 1,080,926.26 14,743,201.50 9.06% 4,385,504.86 Total 143,323,216.84 100% 125,084,283.19 162,757,048.10 100% 10,428,015.98 Total for top 5 companies 114,358,490.27 79.79% 103,608,335.99 109,959,765.04 67.56% 2,364,766.21 * The category of individual accounts with large amount is defined the single amount of receivable over RMB 1,000,000. After assessing of the recoverability of accounts receivable, details of single accounts receivable with large amounts and bad debt provision are listed as follows: Name of company Closing balance Bad debt provision Aging Y'S Corporation Co., Ltd. 79,114,550.26 79,114,550.26 1 to 2 years Yecun Trading 1,167,696.69 1,167,696.69 1 to 2 years Antianxiushan 3,724,953.90 3,724,953.90 1 to 2 years Korea Gaozhisha 11,391,123.66 11,391,123.66 1 to 2 years Japan Tianbiao 5,757,806.51 5,757,806.51 1 to 2 years Fumian Company 1,652,254.33 1,652,254.33 1 to 2 years Lanyan Group 8,000,000.00 5,950,154.54 2 to 3 years Chengde Import And Export Company 8,208,150.31 82,081.50 Within 1 year Japan New Century Co. 7,044,666.04 7,044,666.04 1 to 2 years 82 Shaoxing Office 2,225,275.09 22,252.75 Within 1 year Langfang Office 1,504,236.40 1,504,236.40 2 to 3 years Jingjin Office 1,072,304.76 1,072,304.76 1 to 2 years Total 130,863,017.95 118,484,081.34 The recoverability of such accounts receivable is uncertainty, because (1) except for Lanyan Group, Chengde Import And Export Company and three Offices, the above companies are oversea; (2) the business activities of the Company are suspended; (3) several top managers are detained against alleged smuggle; and (4) staffs demission. The Company made specific provisions of RMB 112,429,592.55 for the rest companies except for Lanyan Group, Chengde Import And Export Company and Shaoxing Office. ** The category of single accounts without large amount but with major risk after integrated into credit risk combination is defined base on the characteristics of the Company, the aging of debts over three years are with high risk to recoverable. According to that, the accounts with single amount lower than RMB 1,000,000 and aging over three years are classified into the category. In the category of single accounts without large amount but with major risk, the uncertain recoverability of receivables are listed as follows: Name of company Closing balance Bad debt provision Aging Longbing 416,950.18 416,950.18 1 to 2 years Beizi 297,926.90 297,926.90 1 to 2 years Jieweiying 696,995.62 696,995.62 1 to 2 years CAL 934,026.16 934,026.16 1 to 2 years Changzhou Office 364,266.73 72,853.35 1 to 2 years Langfang Office 563,536.32 563,536.32 2 to 3 years Jimo Office 272,592.40 272,592.40 2 to 3 years Beijing Office 49,006.59 49,006.59 1 to 2 years Tianjin Office 32,018.00 32,018.00 1 to 2 years Shenyang Office 228,162.72 228,162.72 1 to 2 years Total 3,855,481.62 3,564,068.24 The recoverability of such accounts receivable is uncertainty, because (1) the business activities are suspended; (2) several top managers are detained against alleged smuggle; and (3) staffs demission. The Company made specific provisions of RMB 3,491,214.89 for other companies except for Changzhou Office. 83 *** There is no such amount belongs to shareholders who hold 5% or more than 5% voting rights. b) Closing balance of accounts receivable analyzed based on aging are listed as below: Closing balance Opening balance Bed debt Bed debt Aging Amount Rate in total Amount Rate in total provision provision Within 1 year 11,525,073.75 8.04% 677,984.63 138,259,351.41 84.95% 1,364,681.75 1 to 2 years 118,620,175.64 82.76% 113,444,665.53 19,190,278.98 11.79% 5,814,274.55 2 to 3 years 11,789,637.21 8.23% 9,573,302.79 3,597,082.74 2.21% 1,538,724.71 Over 3 years 1,388,330.24 0.97% 1,388,330.24 1,710,334.97 1.05% 1,710,334.97 Total 143,323,216.84 100% 125,084,283.19 162,757,048.10 100% 10,428,015.98 Before consolidated, the accounts receivable of the Company are listed below: a) Closing balance of accounts receivable analyzed based on risk combination are presented as below: Closing balance Opening balance Bed debt Item Amount Rate in total Bed debt provision Amount Rate in total provision 1. Individual accounts with 135,389,241.54 97.42% 115,907,540.18 157,211,785.73 92.69% 3,559,297.51 large amount 2. Individual accounts without large amount but with major risk after 2,710,165.59 1.95% 2,418,752.21 5,738,160.23 3.38% 1,106,720.94 integrated into credit risk combination 3. Others with small amount 881,253.98 0.63% 172,648.28 6,667,543.77 3.93% 1,268,302.45 Total 138,980,661.11 100% 118,498,940.67 169,617,489.73 100% 5,934,320.90 Total for top 5 companies 114,358,490.27 82.28% 103,608,335.99 104,819,854.64 61.80% 2,313,367.10 * The category of individual accounts with large amount is defined the single amount of receivable over RMB 1,000,000. After assessing of the recoverability of accounts receivable, details of single accounts receivable with large amounts and bad debt provision are listed as follows: Name of company Closing balance Bad debt provision Aging Y'S Corporation Co., Ltd. 79,114,550.26 79,114,550.26 1 to 2 years Yecun Trading 1,167,696.69 1,167,696.69 1 to 2 years Antianxiushan 3,724,953.90 3,724,953.90 1 to 2 years Korea Gaozhisha 11,391,123.66 11,391,123.66 1 to 2 years Japan Tianbiao 5,757,806.51 5,757,806.51 1 to 2 years Fumian Company 1,652,254.33 1,652,254.33 1 to 2 years 84 Lanyan Group 8,000,000.00 5,950,154.54 2 to 3 years Chengde Import And Export Company 8,208,150.31 82,081.50 Within 1 year Japan New Century Co. 7,044,666.04 7,044,666.04 1 to 2 years Shaoxing Office 2,225,275.09 22,252.75 Within 1 year Total 128,286,476.79 115,907,540.18 The recoverability of such accounts receivable is uncertainty, because (1) except for Lanyan Group, Chengde Import And Export Company and Shaoxing Office, the above companies are oversea; (2) the business activities are suspended; (3) several top managers are detained against alleged smuggle; and (4) staffs demission. The Company made specific provisions of RMB 109,853,051.39 for the rest companies except for Lanyan Group, Chengde Import And Export Company and Shaoxing Office. ** The category of single accounts without large amount but with major risk after integrated into credit risk combination is defined base on the characteristics of the Company, the aging of debts over three years are with high risk to recoverable. According to that, the accounts with single amount lower than RMB 1,000,000 and aging over three years are classified into the category. In the category of single accounts without large amount but with major risk, the uncertain recoverability of receivables are listed as follows: Name of company Closing balance Bad debt provision Aging Longbing 416,950.18 416,950.18 1 to 2 years Beizi 297,926.90 297,926.90 1 to 2 years Jieweiying 696,995.62 696,995.62 1 to 2 years CAL 934,026.16 934,026.16 1 to 2 years Changzhou Office 364,266.73 72,853.35 1 to 2 years Total 2,710,165.59 2,418,752.21 The recoverability of such accounts receivable is uncertainty, because (1) the business activities are suspended; (2) several top managers are detained against alleged smuggle; and (3) staffs demission. The Company made specific provisions of RMB 2,345,898.86 for companies except for Changzhou Office. *** There is no such amount belongs to shareholders who hold 5% or more than 5% voting rights. b) Closing balance of accounts receivable analyzed based on aging are listed as below: Closing balance Opening balance Bed debt Bed debt Aging Amount Rate in total Amount Rate in total provision provision Within 1 year 12,168,506.75 8.76% 675,899.95 149,409,589.81 88.09% 508,259.41 85 1 to 2 years 117,756,654.00 84.73% 110,858,362.92 16,369,159.88 9.65% 3,377,758.63 2 to 3 years 9,055,500.36 6.51% 6,964,677.80 3,061,241.04 1.80% 1,270,803.86 Over 3 years --- --- --- 777,499.00 0.46% 777,499.00 Total 138,980,661.11 100% 118,498,940.67 169,617,489.73 100% 5,934,320.90 Note 4. Advances to suppliers Closing balance Opening balance Aging Amount Rate in total Amount Rate in total Within 1 year 5,977,412.09 8.77% 64,988,690.16 97.54% 1 to 2 years 788,255.38 1.16% 565,252.42 0.85% 2 to 3 years 56,453,443.24 82.77% 1,076,109.82 1.61% Over 3 years 4,976,109.82 7.30% --- --- Total 68,195,220.53 100% 66,630,052.40 100.00% * The amounts of advances to suppliers, that the Company is not able to confirm the consents of account, reasons of payment and recoverability, are listed as below: NAME OF COMPANY AMOUNT AGING JAPAN NEW CENTURY CO. 56,453,443.24 2 TO 3 YEARS CHENGDE XINGYUAN TRADING CO., 3,900,000.00 3 TO 4 YEARS LTD. SHANGHAI YIKAMU TRADING CO., 1,076,109.82 3 TO 4 YEARS LTD. TOTAL 61,429,553.06 Note 5. Other receivables After consolidated, the accounts receivable are listed below: a) Closing balance of other receivables analyzed based on risk combination are presented as below: Closing balance Opening balance Item Amount Rate in total Bed debt provision Amount Rate in total Bed debt provision 1. Individual accounts with 205,052,357.22 95.29% 144,651,762.59 210,914,286.02 99.68% 77,287,299.12 large amount 2. Individual accounts without large amount but with major risk after 3,073,824.17 1.43% 3,073,824.17 949,562.08 0.09% 949,562.08 integrated into credit risk combination 3. Others with small amount 7,060,682.69 3.28% 997,889.82 2,430,359.62 0.23% 510,470.41 86 Total 215,186,864.08 100% 148,723,476.58 214,294,207.72 100% 78,747,331.61 Total for top 5 companies 182,785,490.96 84.94% 140,911,300.04 137,832,347.24 64.32% 31,355,970.26 * The category of individual accounts with large amount is defined the single amount of receivable over RMB 1,000,000. After assessing of the recoverability of accounts receivable, details of single receivable with large amounts and bad debt provision are listed as follows: Name of company Closing balance Bad debt provision Aging Japan New Century Co. 30,792,000.00 30,792,000.00 Over 3 years Nippon Paper Industries Co. 58,360,818.27 58,360,818.27 1 to 2 years Dahua Paper Industry Co., Ltd. 44,182,431.26 43,552,063.64 2 to 3 years Chengde Overhead Convey Co., Ltd. 1,000,000.00 1,000,000.00 Over 3 years Chengde Finance Bureau 9,184,470.01 1,836,894.00 1 to 2 years Suning Finance payment center 2,000,000.00 400,000.00 1 to 2 years Chengde Court 1,339,177.55 267,835.51 1 to 2 years Suning Finance Bureau 1,000,000.00 200,000.00 1 to 2 years Total 147,858,897.09 136,409,611.42 Except for Dahua Paper Industry Co., Ltd., the Company is not able to confirm the consents of account, reasons of payment and recoverability. Due to the recoverability of such accounts receivable is uncertainty, the Company made specific provisions of RMB 133,704,881.91 for Japan New Century Co., Nippon Paper Industries Co., Dahua Paper Industry Co., Ltd., Chengde Overhead Convey Co., Ltd. ** The category of single accounts without large amount but with major risk after integrated into credit risk combination is defined base on the characteristics of the Company, the aging of debts over three years are with high risk to recoverable. According to that, the accounts with single amount lower than RMB 1,000,000 and aging over three years are classified into the category. For companies being revoked business license, the Company made provisions in full for bad debts listed below: Rate in bad debt Name of company Closing balance Bad debt provision Aging provision Dixian Light Rail Co., Ltd. 880,714.13 100% 880,714.13 1 to 2 years Tahe Paper & Pulp Co., Ltd. 750,000.00 100% 750,000.00 1 to 2 years Total 1,630,714.13 1,630,714.13 *** There is no such amount belongs to shareholders who hold 5% or more than 5% voting rights. **** In the closing balance of other receivables, the receivable belonged to other companies is RMB 9,280,976.93, which is suspense account of the Company. However, as to 31 December 2007, the 87 closing balance of bank account is RMB 5,912.35 and the Company is not able to explain the reasons of difference due to several top managers of Company are detained and partial financial information is seized by the Customs. ***** In the closing balance of other receivables, the receivable belonged to Xiaban City Finance Bureau is RMB 40,169,264.50, which the amount of RMB 38,791,627.50 is paid for 619.81 Mou land transfer rent. The amount will transfer into intangible assets when land warrant obtained. b) Closing balance of other receivables analyzed based on aging are listed as below: Closing balance Opening balance Bed debt Bed debt Aging Amount Rate in total Amount Rate in total provision provision Within 1 year 15,021,448.14 6.98% 152,805.46 136,811,329.06 63.84% 1,996,082.04 1 to 2 years 123,226,186.82 57.27% 71,910,134.04 44,008,739.05 20.54% 43,643,398.72 2 to 3 years 43,704,119.08 20.31% 43,425,427.04 32,405,291.66 15.12% 32,039,002.90 Over 3 years 33,235,110.04 15.44% 33,235,110.04 1,068,847.95 0.50% 1,068,847.95 Total 215,186,864.08 100% 148,723,476.58 214,294,207.72 100% 78,747,331.61 Before consolidated, the accounts receivable of the Company are listed below: a) Closing balance of other receivables analyzed based on risk combination are presented as below: Closing balance Opening balance Item Amount Rate in total Bed debt provision Amount Rate in total Bed debt provision 1. Individual accounts with 540,846,997.82 98.34% 100,018,303.64 545,547,172.73 99.47% 32,564,394.39 large amount 2. Individual accounts without large amount but with major risk after 2,323,824.17 0.42% 2,323,824.17 949,562.08 0.17% 949,562.08 integrated into credit risk combination 3. Others with small amount 6,832,961.54 1.24% 930,345.28 2,001,696.17 0.36% 508,432.37 Total 550,003,783.53 100% 103,272,473.09 548,498,430.98 100% 34,022,388.84 Total for top 5 companies 147,787,529.71 26.87% 99,116,374.94 132,128,233.06 24.09% 31,298,929.12 * The category of individual accounts with large amount is defined the single amount of receivable over RMB 1,000,000. After assessing of the recoverability of accounts receivable, details of single receivable with large amounts and bad debt provision are listed as follows: Name of company Closing balance Bad debt provision Aging 88 Japan New Century Co. 30,792,000.00 30,792,000.00 Over 2 years Nippon Paper Industries Co. 58,360,818.27 58,360,818.27 1 to 2 years Chengde Finance Bureau 9,184,470.01 1,836,894.00 1 to 2 years Suning Finance payment center 2,000,000.00 400,000.00 1 to 2 years Chengde Court 1,339,177.55 267,835.51 1 to 2 years Hebei Province Suning Finance Bureau 1,000,000.00 200,000.00 1 to 2 years Total 102,676,465.83 91,857,547.78 The Company is not able to confirm the consents of account, reasons of payment and recoverability. Due to the recoverability of such accounts receivable is uncertainty, the Company made specific provisions of RMB 89,152,818.27 for Japan New Century Co. and Nippon Paper Industries Co. ** The category of single accounts without large amount but with major risk after integrated into credit risk combination is defined base on the characteristics of the Company, the aging of debts over three years are with high risk to recoverable. According to that, the accounts with single amount lower than RMB 1,000,000 and aging over three years are classified into the category. For companies being revoked business license, the Company made bad debt provisions in full listed below: Rate in bad debt Name of company Closing balance Bad debt provision Aging provision Dixian Light Rail Co., Ltd. 880,714.13 100% 880,714.13 1 to 2 years *** There is no such amount belongs to shareholders who hold 5% or more than 5% voting rights. **** In the closing balance of other receivables, the receivable belonged to Xiaban City Finance Bureau is RMB 40,169,264.50, which the amount of RMB 38,791,627.50 is paid for 619.81 mous land transfer rent. The amount will transfer into intangible assets when land warrant obtained. **** In the closing balance of other receivables, the receivable belonged to other companies is RMB 9,280,976.93, which is suspense account of the Company. However, as to 31 December 2007, the closing balance of bank account is RMB 5,912.35 and the Company is not able to explain the reasons of difference due to several top managers of Company are detained and partial financial information is seized by the Customs. b) Closing balance of other receivables analyzed based on aging are listed as below: Closing balance Opening balance Bed debt Bed debt Aging Amount Rate in total Amount Rate in total provision provision 89 Within 1 year 99,316,733.54 18.06% 151,532.94 464,936,611.22 84.77% 1,825,666.16 1 to 2 years 367,256,234.88 66.77% 70,609,638.08 51,087,680.15 9.31% 88,871.83 2 to 3 years 51,195,705.07 9.31% 276,192.03 32,405,291.66 5.91% 32,039,002.90 Over 3 years 32,235,110.04 5.86% 32,235,110.04 68,847.95 0.01% 68,847.95 Total 550,003,783.53 100% 103,272,473.09 548,498,430.98 100% 34,022,388.84 Note 6. Inventories and provision Closing balance Opening balance Item Book value Carrying amount Book value Carrying amount Goods in stock 17,757,070.29 363,903.22 68,973,086.18 64,379,919.11 Raw material 3,683,282.64 183,282.64 1,906,711.24 1,906,711.24 Goods in process 27,639,048.77 604,373.65 64,336,262.43 45,311,247.01 Commission processing material 2,113,751.76 163,751.76 13,054,536.64 1,701,875.20 Turnover materials 442,486.29 442,486.29 537,080.03 537,080.03 Self-made goods in process 94,593.74 94,593.74 --- --- Total 51,730,233.49 1,852,391.30 148,807,676.52 113,836,832.59 * The decrease amount between opening balance and closing balance is RMB 97,077,443.03 occupied 65.24%. There are two main reasons caused that difference. The first one is the production of the Company was suspended on October 2006 due to shortage of capital. Secondly, inventory shortages of RMB 48,210,631.24 was defined as loss and transferred into administrative expenses. The related provision for inventories is analyzed as follows: Current disposal Opening Current Transferred Transferred out Closing Item Balance addition back due to due to other Total Balance goods value rise reason Goods in 4,593,167.07 12,800,000.00 --- --- --- 17,393,167.07 stock Raw material --- 3,500,000.00 --- --- --- 3,500,000.00 Goods in 19,025,015.42 11,750,000.00 --- 3,740,340.30 3,740,340.30 27,034,675.12 process Commission processing 11,352,661.44 1,950,000.00 --- 11,352,661.44 11,352,661.44 1,950,000.00 material Total 34,970,843.93 30,000,000.00 --- 15,093,001.74 15,093,001.74 49,877,842.19 90 * The transferred amount occurred due to relative goods in process and commission processing materials are damnous. The Company transferred out such amount into administrative expenses and transferred back the provision accrued before. ** The Company made related provision for inventories, due to production suspended, inventories seriously damaged and alleged smuggle, some inventories are poor efficiency when the Company managed to go into production again. Note7. Long-term equity investment After consolidated, the accounts receivable are listed below: a) Details of long-term equity investment are presented as below: Item Closing balance Opening balance Devaluing Book Balance Book value Book Balance Devaluing provision Book value provision Investment in associated --- --- --- --- --- --- companies Investment in affiliated 253,195,729.65 55,980,000.00 197,215,729.65 253,195,729.65 55,980,000.00 197,215,729.65 company Other equity investment --- --- --- --- --- --- Total 253,195,729.65 55,980,000.00 197,215,729.65 253,195,729.65 55,980,000.00 197,215,729.65 Investment in affiliated company listed as follows: Addition or Rate in Accumulated Initial Investment decrease of Unit invested registered capital Cash dividends increase or Closing balance investment cost superaddition current period of invested unit decrease equities Dahua Paper Industry Co., Ltd. 45% 206,215,729.65 --- --- --- --- 206,215,729.65 Banhe Fibre Textile Co., Ltd. 20% 46,980,000.00 --- --- --- --- 46,980,000.00 Dixian Light Rail Co., Ltd. 75% --- --- --- --- --- --- Chengde Beirifang Co., Ltd. 50% --- --- --- --- --- --- Total 253,195,729.65 --- --- --- --- 253,195,729.65 Owing to the importation equipments of Banhe Fibre Textile Co., Ltd. were sealed up by CIQ for more than one year and piled up on the open air, the Company made the provision for long-term equity investment of RMB 46,980,000.00 in 2006 because the equipments were scraped. 91 Dahua Paper Industry Co., Ltd had made the provision for long-term equity investment of RMB 9,000,000.00 in 2006. The Company could not forecast the affect grade in reason for Dahua Paper Industry Co., Ltd. project stopped to construct and the financial volumes were detained. Details of the company amount for the long-term equity investment as follows: (1) Details as follows: Item Closing balance Opening balance Devaluing Book Balance Book value Book Balance Devaluing provision Book value provision Long-term equity investment Thereinto:Investment in subsidiary in the cost 1,211,812,433.52 --- 1,211,812,433.52 1,211,812,433.52 --- 1,211,812,433.52 method Investment in affiliated 46,980,000.00 46,980,000.00 --- 46,980,000.00 46,980,000.00 --- company Other equity investment --- --- --- --- --- --- Total 1,258,792,433.52 46,980,000.00 1,211,812,433.52 1,258,792,433.52 46,980,000.00 1,211,812,433.52 a) Investment in affiliated company as follows: Rate in Addition or Accumulated registered Initial Investment decrease of Unit invested Cash dividends increase or Closing balance capital of investment cost superaddition current period decrease invested unit equities Suning Banhe Fibre Textile 20% 46,980,000.00 --- --- --- --- 46,980,000.00 Co., Ltd. * Due to the importation equipments of Banhe Fibre Textile Co., Ltd. were sealed up by CIQ more than one year and piled up on the open air, the Company made the provision for long-term equity investment of RMB 46,980,000.00 in 2006 because the equipments were scraped. b) Investment in subsidiaries as follows: Rate in registered Initial investment Unit invested Opening balance Increase Decrease Closing balance capital of cost invested unit Hebei Xiaban City Textile Co., Ltd. 75% 24,900,000.00 431,604,203.41 --- --- 431,604,203.41 Chengde Ditian Fashion Co., Ltd, 75% 132,706,091.93 149,408,230.11 --- --- 149,408,230.11 92 Xingye Papermaking Co., Ltd. 75% 622,500,000.00 622,500,000.00 --- --- 622,500,000.00 Gold Axe(abroad company） 100% 8,300,000.00 8,300,000.00 --- --- 8,300,000.00 Total 788,406,091.93 1,211,812,433.52 --- --- 1,211,812,433.52 * Due to the finance datas for 2007 were detained by CIQ, the Company did not adjust ascend to the investment for Hebei Xiaban City Textile Co., Ltd. Note 8. Fixed assets and accumulated depreciation Cost of fixed asset Opening balance Increase Decrease Closing balance Buildings and plants 256,653,223.06 --- --- 256,653,223.06 Machinery equipment 1,391,525,761.16 351,500.00 --- 1,391,877,261.16 Motor vehicle 11,010,889.94 --- --- 11,010,889.94 Other equipment 1,317,472.98 10,390.21 --- 1,327,863.19 Total 1,660,507,347.41 361,890.21 --- 1,660,869,237.35 Accumulated Opening balance Increase Decrease Closing balance depreciation Buildings and plants 55,395,709.55 10,090,078.19 --- 65,485,787.74 Machinery equipment 311,421,735.25 68,591,615.73 --- 380,013,350.98 Motor vehicle 6,755,640.16 789,493.92 --- 7,545,134.08 Other equipment 637,693.03 159,583.83 --- 797,276.87 Total 374,210,777.99 79,630,771.67 --- 453,841,549.66 Return back Implement provision Opening balance Increase Transferred back Transferred out Closing balance due to assets due to other value rise reason Buildings and plants --- --- --- --- --- Machinery equipment --- --- --- --- --- Motor vehicle --- --- --- --- --- Other equipment --- --- --- --- --- Total --- --- --- --- --- Net value 1,286,296,569.15 1,207,027,687.69 * The import paper making equipment in machinery equipment, which costs RMB 444,720,000, is the investment cost of the Company and Century Win International Holding Ltd. to Xingye Papermaking Co. Ltd. At present the account amount is contract price because of did not transact value appraisal procedure, the Company will adjust the account amount on critical value finally. As at 31 December 2003, the equipment value for Century Win International Holding Ltd. actual 93 invested is about RMB 128,650,000.00 higher than ought to investing capital. The Company signed with Century Win International Holding Ltd. in September 2007, the agreement stated the amount of RMB 95,450,000.00 of equipment ownership in possession of Century Win International Holding Ltd. and the Company regarded these as the liability to Century Win International Holding Ltd. Based on the agreement, the Company could use the equipment for free and pledge the equipment for loan. ** As at 31 December 2007, the Company pledged land, buildings and machinery equipment for bank loan. The Company can not confirm the book value of pledged assets because the company’s practical assets could not correspond with the finance information and the pawn evaluated on practical assets. ***Affected by the shortage of capital and be a suspect of smuggle, the company stopped all the production and the equipments leave unused to made most equipments were cankered to losing the using value. The company could not confirm the using extent of fixed assets and could not estimate the impairment reasonable. Note 9. Construction in progress Transfer to Capital Name of project Budget amount Opening balance Increase Decrease Closing balance fixed asset source Banhe Fibre Textile 40,000,000 83,643,453.05 --- --- --- 83,643,453.05 Papermaking project 1,000,000,000 335,720,225.63 --- --- --- 335,720,225.63 Thermal power stations 20,000,000 7,329,176.55 --- --- --- 7,329,176.55 Chemical fiber plant 180,000,000 66,167,154.98 --- --- --- 66,167,154.98 Others --- 10,865,739.16 --- --- --- 10,865,739.16 Total 503,725,749.37 --- --- --- 503,725,749.37 Impairment for CIP 180,000,000 10,010,051.27 --- --- --- 10,010,051.27 Net value 180,000,000 493,715,698.10 --- --- --- 493,715,698.10 *Affected by the shortage of capital and be a suspect of smuggle, the Company stopped all the construction in progress and the equipments made in process has left unused, so that most part equipments were cankered to losing the using value. The Company is unable to explain the using extent and murder extent of construction in progress. Note 10. Intangible assets Item Opening balance Increase Decrease Closing balance 1. original value 132,831,008.13 --- --- 132,831,008.13 Financial software --- --- --- --- Patent technology --- --- --- --- 94 Land use rights 132,831,008.13 --- --- 132,831,008.13 2. Accumulated amortization 8,974,757.91 2,816,257.42 --- 11,791,015.33 Financial software --- --- --- --- Patent technology --- --- --- --- Land use rights 8,974,757.91 2,816,257.42 --- 11,791,015.33 3. net book value 123,856,250.22 --- --- 121,039,992.80 Financial software --- --- --- --- Patent technology --- --- --- --- Land use rights 123,856,250.22 --- --- 121,039,992.80 * The Company determined that there is no fixed assets impairment loss existence, therefore there is no provision recorded at the year end. **As at 31 December 2007, the part of the land use right was pledged for loan. The Company is unable to explain the book value of pledged assets because the Company’s practical assets could not correspond with the finance datas and the pawn evaluated on practical assets. ***Based on judging of Chengde County Hebei Province demos court (2007) Cheng Zhi Cai Zi No. 236-1 civil judge letter, the Company’s land use right of 32.144 mous was counteracted to the loan from Chengde County Finance Bureau. However, the Company did not approbate with it. Note 11. Long-term prepaid expenses Opening Accumulated Closing Residual Item Original cost Addition Amortization balance amortization balance years Workshop 2,640,000.00 2,263,327.46 --- 205,387.55 582,060.09 2,057,939.91 41 rental expense Total 2,640,000.00 2,263,327.46 --- 205,387.55 582,060.09 2,057,939.91 41 Note 12. Short-term loans Type of loan Closing balance Opening balance Credit loan 10,060,214.41 -- Mortgage loan 686,928,087.34 599,669,134.41 Guaranteed loan --- 117,829,536.60 Guaranteed and mortgage loan 149,807,519.11 119,800,000.00 Total 846,795,820.86 837,298,671.01 *Credit loan is the Company borrowed from Chengde county Finance Bureau, of which RMB 5,000,000.00 for national debt transfer to loan capital. **The mortgage loans and the guaranteed and mortgage loans referred above had all exceeded the time limit overdue and were prosecuted by many banks. Details see Note 20 for lawsuit items. Note 13. Accounts payable 95 Closing balance Opening balance Aging Amount Rate in total Amount Rate in total Within 1 year 8,307,381.59 22.56% 17,375,220.04 43.57% 1 to 2 years 19,887,013.45 54.00% 14,073,693.33 35.29% 2 to 3 years 2,687,049.08 7.30% 6,222,363.00 15.60% Over 3 years 5,948,240.37 16.14% 2,211,097.38 5.54% Total 36,829,684.49 100% 39,882,373.75 100% * The closing balance is no such amount belongs to shareholders who hold 5% or more than 5% voting rights. Note 14. Advances from customers Closing balance Opening balance Aging Amount Rate in total Amount Rate in total Within 1 year 125.00 0.05% 483,779.29 64.32% 1 to 2 years 2,728.57 1.01% 207,418.88 27.57% 2 to 3 years 268,416.15 98.95% 60,997.27 8.11% Over 3 years --- --- --- --- Total 271,269.72 100% 752,195.44 100% * The closing balance is no such amount belongs to shareholders who hold 5% or more than 5% voting rights. Note 15. Employee compensation Current period Current period Item Opening balance Closing balance accrual payment 1. Wages, bonuses, allowances and 10,757,025.77 21,316,156.81 27,080,969.96 4,992,212.62 subsidies 2. Welfare expenses --- --- --- --- 3. Social insurances 4,663,199.00 110,632,696.00 --- 115,295,895.00 4. Housing accumulation fund --- --- --- --- 5. Labor union expenditures and --- --- --- --- employee education expenses 6. Non-monetary welfare --- --- --- --- 7.Compensations for the --- --- --- --- cancellation of the labor relationship 8. Other --- --- --- --- Total 15,420,224.77 131,948,852.81 27,080,969.96 120,288,107.62 * Social insurance was increased RMB 110,632,696.00 refers to the accrued unpaid social insurance of the Company from the year of 1999 to 2007, whereas the amount had not been confirmed by insurance department. Note 16. Taxes payable 96 Taxes Closing balance Opening balance Value added tax 19,651,582.90 19,635,199.96 Business tax 112,436.75 112,436.75 Enterprise income tax 8,436,307.27 8,436,307.27 Housing property tax 1,862,342.26 178,126.00 Individual income tax 464,483.05 --- Education supplementary tax 456,862.04 438,213.00 Tenure tax 4,046,740.24 --- Other 51,739.15 --- Total 35,082,493.66 28,800,282.98 * Due to the shortage of capital, the unpaid tax has overdue. Based on the instance report made by foreign business affairs and agreed by vice governor of Hebei Province on 13 March 2007, the overdue tax payables are treated as charge account, and Government of Chengde City assists the Company to make plans of amortization of payment. The current tax payables in the year of 2007 are in according with the instance report. Note 17. Other payables Closing balance Opening balance Aging Amount Rate in total Amount Rate in total Within 1 year 34,286,649.22 19.00% 105,879,066.94 56.29% 1 to 2 years 145,699,350.07 80.74% 344,373.17 0.18% 2 to 3 years 80,671.88 0.04% 81,847,126.06 43.51% Over 3 years 390,568.50 0.22% 41,405.35 0.02% Total 180,457,239.67 100% 188,111,971.52 100% * There is no such amount belongs to shareholders who hold 5% or more than 5% voting rights. ** The amount of RMB 22,059,945.15 is the current account in other companies’ bank accounts borrowed by the Company to use. Due to account books are impound, the Company is unable to explain the difference between closing balance and bank statement. *** The amount of RMB 80,824,254.97 in other payables belongs to Shenzhen Lingfeng Co. According to the decision of Shenzhen Intermediate People’s Court of Guangdong (reference No.: (2005) Shen Zhong Fa Min Er Chu Zi 177), the court decided that Shenzhen Lingfeng Co., should pay the outstanding balance. On 24 October 2003, the related party of the Company, Shenzhen Lingfeng, entered into “Comprehensive Credit Agreement” with Everbright Bank of China, Lianhua Road Branch of Shenzhen (Everbright Bank Shenzhen Branch) (reference No.S0520031015). The agreement provided that Everbright Bank Shenzhen Branch authorized Shenzhen Lingfeng the maximum credit, that is, RMB 100 millions. The detailed credit limit is note discount of RMB 100 millions, and the valid credit period is from 24 October 2003 to 24 October 2004. The Company and the legal representative of the Company Shuxian Wang signed “Maximum Credit Limit Guarantee Contract” and “Personal Guarantee Contract” respectively, in order to provide joint liability to all creditor’s right under the 97 Comprehensive Credit Agreement. Thereafter, Everbright Bank Shenzhen Branch signed “Commercial Acceptance Bills Discount Agreement” with Shenzhen Lingfeng and the Company respectively, which says based on the application of Lingfeng, Everbright Bank Shenzhen Branch agreed to provide discount limit amounting to 100 millions for the commercial acceptance bills. With the application of Shenzhen Lingfeng and approval of Everbright Bank Shenzhen Branch, the credit limits is applicable to the company, and the valid period of the discount limit is the same with that of Comprehensive Credit Agreement. Based on the agreements, from 23 July 2004 to 27 July 2004, Shenzhen Lingfeng drew nine commercial acceptance bills to the Company, totally amounting to RMB 83,000,000. The company applied discount to Everbright Bank Shenzhen Branch with these bills, and the bank paid RMB 83,000,000 to the Company as agreed upon. Due to the shortage of fund, Shenzhen Lingfeng and the Company were unable to repay and fulfill the joint guarantee liability when the bills were due. Therefore, Everbright Bank Shenzhen Branch took action to the court, and the court decided that Shenzhen Lingfeng should pay principal and interest, RMB 80,824,254.97 in total, to the bank in the ten days the sentence effective. The Company undertook joint liability and was the real user of the fund, so it is liable to the debt. The chairman of board Shuxian Wang promised to repay the debt with all his property and equity. The bank applied to the court to judicially freeze the sponsor shares amounting to 93,604,000 shares, which has not been defrosted at present. Note 18. Interest payable Item Closing balance Opening balance Interest payable 168,590,957.64 100,731,032.86 * As to 31 December 2007, all bank loans of the Company are overdue. Due to some default interest certification are uncollected, the closing balance of interest payable is not in according with the actual amount. Note 19. Long-term payables Item Closing balance Opening balance Equipment payment premium- 95,450,000.00 95,450,000.00 Century Win International Holding Ltd. Total 95,450,000.00 95,450,000.00 * Due to the equipment value for Century Win International Holding Ltd. actual invested is higher than ought to investing capital, the Company should pay RMB 95,450,000.00 back to Century Win International Holding Ltd. Note 20. Subsidy advanced Item Closing balance Opening balance subsidy of environmental protection 10,500,000.00 15,500,000.00 special financial allocation on Papermaking project 23,125,717.66 23,125,717.66 98 Total 33,625,717.66 38,625,717.66 * The amount of RMB 10,500,000.00 is the volunteer allowance from Chengde Financial Bureau. Note 21. Deferred tax liability Item Closing balance Opening balance Differed taxes accrued by estimated increase in value --- 2,195,000.00 Total --- 2,195,000.00 Note 22. Paid-in capital Item Opening balance Increase Decrease Closing balance Capital stock structure (1) Shares not traded --- --- a) Founders’ shares 244,800,000.00 --- --- 244,800,000.00 In which: --- --- --- State held shares --- --- --- --- Domestic legal person held shares 23,147,309.00 --- --- 23,147,309.00 b) Legal person share recruitment --- --- --- --- c)Natural person held shares 221,652,691.00 --- --- 221,652,691.00 Total of shares not traded 244,800,000.00 --- --- 244,800,000.00 (2) Shares traded --- --- a) RMB common shares --- --- --- --- b) Foreign currency shares domestic listed 461,520,000.00 --- --- 461,520,000.00 c) Foreign currency shares overseas listed --- --- --- --- d) Others --- --- --- --- Total of shares traded 461,520,000.00 --- --- 461,520,000.00 (3) Total of shares 706,320,000.00 --- --- 706,320,000.00 * The registered capital of the Company before capital increase is RMB 438,600,000.00, which has been verified by PriceWaterhouseCoopers Certified Public Accountants and reported in the Capital Verification Report coded Pu Hua Yong Dao Yan Zi [2003]149. ** Upon the approval document No.[2004]101 issued by the China Securities Regulatory Commission in July 2004, the Company increases of its capital by issuing 150,000,000 B shares, in which 91,300,000 shares were issued for Hong Kong dollars and 58,700,000 shares were issued for Renminbi Yuan (RMB). The issuance of Renminbi shares has not been authorized by the China Administration of 99 Foreign Exchange department, and has not verified by PRC certified public accountants and the procedures for the change of business registration were not carried out completely. *** According to the resolution of general meeting of shareholders on 8 June 2006, the Company distributed share bonus 117,720,000 shares to all shareholders at the rate of two shares given per ten shares. The registered capital of the Company was increased to RMB 706,320,000 after share bonus distribution. The issuance of mentioned above shares has not been verified by PRC certified public accountants and the procedures for the change of business registration were not carried out completely. *** Refer to Note 20 for details of the frozen equity of shares. Note 23. Capital reserve Item Opening balance Increase Decrease Closing balance Share premium 391,996,587.96 --- --- 391,996,587.96 Equity rights 1,399,556.41 --- --- 1,399,556.41 investment provision Other capital surplus 380,000.00 2,195,000.00 --- 2,575,000.00 Total 393,776,144.37 2,195,000.00 --- 395,971,144.37 * Increase of capital surplus in current period is due to deferred tax liability transferred back. Note 24. Surplus reserve Item Opening balance Increase Decrease Closing balance Mandatory surplus 76,791,550.17 --- --- 76,791,550.17 reserve fund Random surplus --- --- --- --- reserve fund Total 76,791,550.17 --- --- 76,791,550.17 Note 25. Retained Earnings Item Closing balance Opening balance Retained Earnings at beginning of the year (200,166,620.43) 261,060,304.78 Add: Total net profit attributable to parent company (547,559,224.02) (343,506,925.21) Less: Mandatory surplus reserve fund accrued --- --- Ordinary shares dividends converted to shares --- 117,720,000.00 Closing balance at the year end (747,725,844.45) (200,166,620.43) Note 26. Operating income and operating cost 100 (1) Details of operating income and cost are listed as follows: Current period Last period Item Revenue Cost Revenue Cost 1．Main business income 54,911,535.83 85,280,393.45 231,195,124.26 206,685,599.71 2．Other business income 5,060,982.50 5,823,099.61 2,633,101.54 2,508,727.71 Total 59,972,518.33 91,103,493.06 233,828,225.80 209,194,327.42 (2) Breakdown of main business: Current period Last period Breakdown of main Revenue Cost Revenue Cost business 1．Main business Sale of knitted apparel 23,406,935.60 41,949,643.89 120,800,886.07 65,419,597.78 Sale of cotton yarn and 20,468,699.24 26,675,131.18 99,563,982.12 124,177,530.79 synthesis silk Sale of paper 11,035,900.99 16,655,618.38 10,830,256.07 17,088,471.14 Subtotal 54,911,535.83 85,280,393.45 231,195,124.26 206,685,599.71 2．Other business Property rental --- --- --- --- Management fees --- --- --- --- Income of sale material 4,816,289.29 5,238,827.28 2,633,101.54 2,020,733.87 Others 244,693.21 584,272.33 --- 487,993.84 Subtotal 5,060,982.50 5,823,099.61 2,633,101.54 2,508,727.71 Total 59,972,518.33 91,103,493.06 233,828,225.80 209,194,327.42 * Decrease of operating income in current period is accrued because the Company has stopped production due to a lack of capital, smuggling case and staff demission due to stopped production. (3) Regional indicators of main business: Current period Last period Region Revenue Cost Revenue Cost Domestic sales 31,977,126.47 33,884,023.71 79,580,198.44 94,389,925.91 101 Overseas sales 22,934,409.36 51,396,369.74 151,614,925.82 112,295,673.80 Total 54,911,535.83 85,280,393.45 231,195,124.26 206,685,599.71 (4) Details on the rate of the total revenue from the first five clients in the gross revenue are listed as follows: Current period Last period Total of first five clients in terms of sales revenue 19,150,606.44 130,568,445.94 Rate in the total sales revenue 34.88% 56.48% Note 27. General and administrative expenses Item Current period Last period Staff salaries 17,283,768.71 11,294,642.51 Material consumption 1,961,437.59 2,191,196.27 Depreciation expense 72,628,785.98 56,792,555.79 Electricity charge 911,032.86 3,930,540.94 Social insurance 110,632,696.00 --- Service fee for agent 3,509,760.00 1,360,922.40 Legal cost 898,868.13 4,210,548.78 Business entertainment 1,033,820.90 5,845,490.57 Tax 5,095,265.81 --- Inventories loss 48,210,631.24 4,449,409.45 Amortization of intangible assets 1,601,836.61 1,695,047.09 Technical transformation --- 54,220,956.10 Others 3,487,647.05 8,089,186.54 Total 267,255,550.88 154,080,496.44 ﹡Social insurance refers to unpaid social insurance of the Company from the year of 1999 to 2007. ** With the influences of smuggling case and production stopped, part of inventories had been recognized as loss on income statement, the loss amount is uncertainty, and the relative turnover tax has not been transferred back. Note 28. Finance cost Item Current period Last period Interest expense 72,998,673.63 82,836,887.06 Less: interest income 1,538.15 3,290.77 Exchange loss 59,502.91 346,428.18 Less: Exchange gain --- --- Others 73,964.70 503,523.13 102 Total 73,130,603.09 83,683,547.60 Note 29. Impairment loss / gain Item Current period Last period 1. Bad debt loss 184,439,491.96 85,815,597.78 2. Inventory impairment loss 14,906,998.26 24,459,377.20 3. construction in progress impairment loss --- 10,010,051.27 4.Long-term equity investments impairment loss --- 55,980,000.00 Total 199,346,490.22 176,265,026.25 * Increase of impairment loss in current period is accrued because the major debtors of the Company are overseas companies, the Company almost stopped production due to smuggling case and staff demission. Specific provisions are applied after assessing of the recoverability of receivables. Note 30. Non-operating income and expenses 1. Non-operating income Item Current period Last period Net income from fines 6,794.00 16,295.70 Subsidies --- 2,000,000.00 Compensation 19.10 829.45 Others 37,394.24 4,857.57 Total 44,207.34 2,021,982.72 * The subsidies in 2006 are the discount interest and loan interest endowed by the local Finance Bureau for the technical alteration of the paper equipment. 2. Non-operating expenses Item Current period Last period Total of losses on disposing fixed assets --- --- Expenses for fines 205,234.00 66,118.00 Donation expenses --- 22,300.00 103 Employee reward expenses 4,508.92 --- Collecting overdue tax fine 3,526.00 --- Others --- 1,279.71 Total 213,268.92 89,697.71 Note 31. Other cash concerning operating activities a) Other cash received from operating activities Item Current period Last period Current accounts 1,686,480.44 28,610,929.01 Financial allocation --- 11,000,000.00 Interest income 1,353.49 --- Repayment for personal loans 243,962.04 218,669.24 Total 1,931,795.97 39,829,598.25 b) Other cash paid from operating activities Item Current period Last period Current accounts 8,311,507.97 21,877,644.51 Repairing fees 106,048.09 --- Material consumption 1,961,437.59 --- Electricity charge 3,511,622.33 --- Water fee 275,630.00 --- Travel expenses 465,256.51 441,567.25 Rental charge 1,606,130.00 --- Personal loans 10,028.00 741,540.00 Bank charges 73,894.70 --- 104 Legal cost --- 174,272.78 Office expenses 508,548.24 331,283.21 Transport charges 2,300,307.96 1,419,734.22 Business entertainment 1,593,593.33 775,958.73 Service fee for agent 3,509,760.00 1,260,922.40 Others --- 5,196,855.97 Total 24,233,764.72 32,219,779.07 Note 32. Cash and cash equivalent Item Current period Last period 1. Cash 6,316,017.15 8,004,056.59 Include: cash on hand 403,621.33 642,526.47 Bank deposit available for use in payment any time 5,318,826.66 6,743,564.47 Other monetary fund available for use in payment any time 593,569.16 617,965.65 2. Cash equivalent --- --- Include: Bond investment matured in three months --- --- 3. Closing balance of cash and cash equivalent 6,316,017.15 8,004,056.59 8. Supplemental Information for Cash Flow Statement Supplemental information Current period Last period 1. Adjustments to reconcile net income to net cash provided by operating activities: Net profit (575,032,022.36) (391,148,911.00) Impairment provision for assets 199,346,490.22 179,854,847.55 Depreciation of fixed assets, consumption & depreciation of fuel and gas, 71,937,098.72 54,590,766.83 depreciation of production materials Amortization for intangible assets 2,816,257.42 1,695,047.09 Amortization for long-term prepayment 205,387.55 48,327.56 Loss on disposal of fixed assets, intangible assets and others long-term assets --- (7,538,801.28) Loss upon rejection of fixed assets --- --- Loss on variance of fair value --- --- Finance cost 72,488,089.96 83,550,478.25 Loss on investment --- 45,309,786.06 Decrease of deferred tax assets 313,556.00 --- Liability increase of deferred tax --- --- Decrease of inventories 97,077,443.03 96,615,094.63 Decrease of operating receivable account items 19,625,432.94 (123,714,981.26) Increase of operating payable account items 99,961,746.70 43,095,191.15 105 Others --- --- Total (11,260,519.82) (17,643,154.42) 2. Significant investing and financing activities for non cash items: Liabilities capitalized --- --- Convertible bonds payable mature in one year --- --- Financing leased fixed assets --- --- 3. Net increase (decrease) for cash and cash equivalents: Ending balance for cash 6,316,017.15 8,004,056.59 Decrease: beginning balance for cash 8,004,056.59 4,068,049.34 Increase: ending balance for cash equivalents --- --- Decrease: beginning balance for cash equivalents --- --- Net increase (decrease) in cash and cash equivalents (1,688,039.44) 3,936,007.25 a) Non-operating Losses and Profits Description Current period Last period 1. Losses/gains on disposal of non-current assets (1) net loss/profit on disposal of fixed-assets --- --- (2)net loss/profit on disposal of intangible assets --- --- (3)net loss/profit on disposal of long-term investment --- --- Net loss/profit on disposal of non-current assets --- --- 2. Government subsidy recognized in current income --- 2,000,000.00 3. Specific provisions for bad debts accrued (171,309,768.52) (30,792,000.00) 4. Construction in progress loss provisions --- (10,010,051.27) 5. Long-term investment loss provisions --- --- 6. Inventory devaluing loss (8,000,000.00) (26,437,336.56) 7. Social insurance between the year of 1997 to 2007 (110,635,586.32) --- 8. Inventory shortages and loss upon rejection of inventories (48,210,631.24) --- 9. Net losses/profit from other non-operating items --- --- (1) non-operating income 44,207.34 21,982.72 (2) decrease: non-operating expense 213,268.92 89,697.71 Net of non-operating income and expenses (169,061.58) (67,714.99) Total of non-operating losses/profit before deduction of income tax (330,325,047.66) (94,849,766.26) Decrease: amount of income tax --- --- Total of non-operating losses/profit after deduction of income tax (330,325,047.66) (94,849,766.26) Decrease: amount of minority interest (3,158,597.96) (4,748,680.34) Total of non-operating loss/profit after deduction of minority interest (327,166,449.70) (90,101,085.92) 106 10. Related Parties Relationship and Transactions (1) Relationship of related parties a) Controlled shareholder The Controlled shareholder of the Company is the founder Mr. Shuxian Wang, who holds 29.49% of un-trade natural person held shares. Mr. Shuxian Wang has Chinese nationality and is current director of the Company. b) Registered capital of controlled shareholder Name of related Opening balance Increase Closing balance parties Amount Rate in total Amount Rate in total Amount Rate in total Shuxian Wang 208,324,800.00 29.49% --- --- 208,324,800.00 29.49% c) Other related parties Name of related parties Relationship with the Company Shareholder of holding subsidiary’s associated Japan New Century Co. company Century Win International Holding Ltd. Shareholder of subsidiary Chengde Beirifang Co., Ltd. Associated company with 50% of equity Dahua Paper Industry Co., Ltd. 45% of equity participation Suning Banhe Fibre Textile Co., Ltd. 20% of equity participation Chengde Chengyi Paper Industry Co., Ltd. Controlled by top management of the Company Chengde Chengshi Yarn Industry Co., Ltd. Controlled by top management of the Company LingFeng Textiles (ShenZhen) Co., Ltd. Controlled by shareholder’s consort of the Company Guilian Xu Shareholder’s consort of the Company (2)Transactions of related parties a) Sale of goods Name of company Project Current period Last period 107 Xingye Papermaking Co. Ltd. LingFeng Textiles (ShenZhen) Co., Ltd. --- (8,555,555.56) (Sale of paper) Japan New Century Co. The Company (Sale of clothes) 2,723,838.40 36,565,809.73 Total 2,723,838.40 28,010,254.17 b) Equipments leased The subsidiary of the Company, Chengde Banhe Fibre Textile Co., Ltd. leased 215 sets of equipments to Suning Banhe Fibre Textile Co., Ltd. without lease contracts in the year of 2006. However, due to smuggle, the production of Suning Banhe Fibre Textile Co., Ltd. was not start up and the equipments rent expenses are unpaid. (3) Amounts receivable from and payable to related parties Item Company Name Content Closing Balance Opening balance Goods Account payables Japan New Century Co. 7,044,666.04 7,518,426.04 payment Goods LingFeng Textiles (ShenZhen) Co., Ltd. 381,767.91 381,767.91 payment Equipment Advances to suppliers Japan New Century Co. 56,453,443.24 56,453,443.24 payment Other receivables Japan New Century Co. Agency fund 30,792,000.00 30,792,000.00 Chengda Paper Industry Co. Agency fund 9,280,976.93 5,356,324.34 Pay for Suning Banhe Fibre Textile Co., Ltd. 4,685,985.28 4,685,985.28 another Pay for Dahua Paper Industry Co., Ltd. 44,182,431.26 44,176,643.26 another Guilian Xu Loans 2,000,000.00 --- Other payables LingFeng Textiles (ShenZhen) Co., Ltd. Loans 80,824,254.97 80,824,254.97 Current Dahua Paper Industry Co., Ltd. 58,360,818.27 58,360,818.27 account Current Tongcheng Yarn Industry Co., Ltd. 22,043,428.03 16,587,709.68 account Shuxian Wang Loan 2,314,262.54 2,541,262.54 Current Chengde Chengyi Paper Industry Co., Ltd. 16,517.12 16,517.12 account Equipment Long-term payables Century Win International Holding Ltd. payment 95,450,000.00 95,450,000.00 premium 11. Return on net assets 108 Profit in report period Return on net assets Fully diluted Weighted average Amount in Amount in Amount in Amount in current year prior year current year prior year Net profit for shareholders of common (126.94%) (35.17%) (77.90%) (29.92%) shares Net profit for shareholders of common shares after deduction of non-operating (51.09%) (25.94%) (31.35%) (22.07%) losses/profit 12. Earnings per share Earnings per share Profit in report period Basic earnings per share Diluted earnings per share Amount in Amount in Amount in Amount in current year prior year current year prior year Net profit for shareholders of common (0.78) (0.49) (0.78) (0.49) shares Net profit for shareholders of common shares after deduction of non-operating (0.31) (0.36) (0.31) (0.36) losses/profit Item 2007 2006 Calculation for basic and diluted earning per share (1) Numerator: Net profit after income tax (547,559,224.02) (343,506,925.21) Adjustment: preferred stock dividends and other instruments --- --- Profit/loss for parent company’s common stock shareholders in basic earnings (547,559,224.02) (343,506,925.21) per share calculation Adjustment: --- --- The change of profit or expense generated from the transfer of diluted potential --- --- common stock Profit/loss for common stock shareholders of parent company in diluted (547,559,224.02) (343,506,925.21) earnings per share calculation (2) Denominator: Weighted average for offering common stock in current year in basic earnings 706,320,000.00 706,320,000.00 per share calculation 109 Add: weighted average when all diluted potential common stocks transfer to --- --- common stock Weighted average for currently offering common stock in diluted earnings per 706,320,000.00 706,320,000.00 share calculation. (3) Earnings per share: Basic earnings per share: Net profit for Company’s common stock shareholders (0.78) (0.49) Net profit for Company’s common stock shareholders after deduction of (0.31) (0.36) non-operating items Diluted earnings per share: Net profit for Company’s common stock shareholders (0.78) (0.49) Net profit for Company’s common stock shareholders after deduction of (0.31) (0.36) non-operating items 13. Contingent events (1) The Company has been accused of tax fraud by People's Procuratorate of Hebei Province Shijiazhuang City. The condescendence with coding of Shi Jian Gong Xing Su [2005]35 stated that for the purpose of taking advantage of tax deductible on foreign investment, the Company set up seven false foreign investment companies (namely Ditian Fashion Co., Ltd., Dixian Light Rail Co., Ltd., Xingye Papermaking Co., Ltd., Chengde Banhe Fibre Textile Co., Ltd., Suning Meihua Jiafang Co., Ltd., Puning Leiyi Paper Industry Co., Ltd., Suning Puhua Jiafang Co., Ltd.) to obtain permit for importing equipments exempt from taxation and make profits. The fraud tax payable is RMB 68,734,451.21. The conduct is defined as committing smuggling crime of common goods. If the Company is convict of guilty, the Company will be sentenced to pay a fine with a sum of one to five times of fraud tax payable. (2) As to 31 December 2007, the contingent events of Company and subsidiaries concerning overdue loans from bank and penalize interests, please refers to Note 20 and 7(18). 14. Commitment (1) Capital commitments As to 31 December 2007, Capital expenditures contracted for but not recognized in the financial statements are as follows: Item Closing balance Opening balance Invested in joint stock company－Dahua Paper Industry Co., Ltd. --- --- Invested in holding company－Banhe Fibre Textile Co., Ltd. 8,439,024.71 8,439,024.71 Invested in associated company－Beirifang Co., Ltd. 4,035,100.00 4,035,100.00 110 Invested in holding company－Dixian Light Rail Co., Ltd. 48,421,200.00 48,421,200.00 Total 60,895,324.71 60,895,324.71 * Dahua Paper Industry Co., Ltd. was found as a joint venture company invested by Nippon Paper Industries Co. and the Company. The registered capital was USD 5,000,000 when found. Upon approval coded Ji Shang Wai Zi Zi [2004]No.41 issued by the Hebei Province Ministry of Commerce, Dahua Paper Industry Co., Ltd. has increased the total investment from USD5,000,000 to JPY6,364,000,000 and the registered capital increased to JPY6,364,000,000. The investment of the Company has increased to JPY2,864,000,000, accounting for 45％ equity. On 24 June 2005, Nippon Paper Industries Co. and Japan New Century Co. have agreed the share-transfer contract, which indicated that Nippon Paper Industries Co. transferred 55％ equity of Dahua Paper Industry Co., Ltd. to Japan New Century Co. The above alteration has approved by the Hebei Province Ministry of Commerce. Dahua Paper Industry Co., Ltd. obtained new business license due to rename. On 29 June 2005, the Company agreed the share-transfer contract and transferred 45% equity of Dahua Paper Industry Co., Ltd. to Xinye Papermaking Co., Ltd. As to 31 December 2006, Xingye Papermaking Co. Ltd. has contributed capital to Dahua Paper Industry Co., Ltd. with RMB 206,215,729.65. ** Banhe Fiber Textile is invested by Dixian Fashion and Yamashita Shoji Co., Ltd. invested 35% and 65% shareholding respectively and the registered capital was USD 15,000,000. Upon approval coded Ji Wai Jin Mao Zi Zi [2003]No.37 issued by the Hebei Province Ministry of Commerce on 24 March 2003, the Banhe Fiber Textile increase the registered capital of from USD 15,000,000 to USD 60,000,000 on 7 July 2003. Xiaban City Textile then joined as a new shareholder. The distribution of shareholding then became Dixian Fashion, Yamashita Shoji Co., Ltd. and Xiaban City Textile holding 20%, 55% and 25% respectively. Upon the approval coded Ji Wai Jin Mao Zi Zi [2004]No.22 issued by the Hebei Province Ministry of Commerce on 31 March 2003, Yamashita Shoji Co., Ltd. was transferred 20% shareholding to Dixian Fashion. After the change, the distribution of shareholding became as Dixian Fashion, Yamashita Shoji Co., Ltd. and Xiaban City Textile holding 40%, 35% and 25% respectively. Up to 31 December 2006, Dixian Fashion and Xiaban City Textile paid RMB 199,200,000 and RMB 114,890,975.29 respectively, therefore the rest capital of RMB 8,439,024.71 should be invested. As to 31 December 2007, the Company has not contributed any actual capital to Dixian Light Rail Co., Ltd. and Dixian Light Rail Co., Ltd. has not come into operation. Its business license has been withdrawn by Chengde Industrial and Commerce Bureau on 27 March 2008. *** The Company has not contributed any actual capital to Dixian Light Rail Co., Ltd. and Banhe Fibre Textile Co., Ltd, however, the both companies has been revoked business licenses on 27 March 2008. 15. Non-adjustment matters in matters after the Balance Sheet Date As to audit report date, the Company has no significant non-adjustment matters in the Balance Sheet. 111 16. Adjustment table for difference in net profit Item Amount of last year Net profit under former accounting principle (343,506,925.21) Add: total of retrospective items (47,641,985.79) Therein: Profit and loss minority interest (47,641,985.79) Differed taxes --- Net profit under new accounting principle (391,148,911.00) Reference under the assumption of implementing new accounting principle Total from other items’ effect --- Therein: development expense --- Pro forma net profit (391,148,911.00) Net profit under new accounting principle: Adjustment Item Before adjustment After adjustment amount 1. Revenue from operations 233,828,225.80 --- 233,828,225.80 Less: Operating cost 209,194,327.42 --- 209,194,327.42 Taxes and levies on operations --- --- --- Selling expenses 3,686,024.10 --- 3,686,024.10 Administrative expense 264,355,471.42 (110,274,974.98) 154,080,496.44 Finance expense 83,683,547.60 --- 83,683,547.60 Impairment loss on assets --- 176,265,026.25 176,265,026.25 Add: Investment gain (55,980,000.00) 55,980,000.00 --- Subsidy income 2,000,000.00 (2,000,000.00) --- 2. Operating profit (381,071,144.74) (12,010,051.27) (393,081,196.01) Add: Non-operating income 21,982.72 2,000,000.00 2,021,982.72 Less: Non-operating expenses 10,099,748.98 (10,010,051.27) 89,697.71 3. Total profit (391,148,911.00) --- (391,148,911.00) Less: Income tax --- --- --- 4. Net profit (391,148,911.00) --- (391,148,911.00) 17. Shareholders’ equity difference adjustment table under former and new accounting principle Disclosed amount in Originally disclosed Items Name of items Difference Notes 2007 amount in 2006 112 Owner’s equity as at Dec. 31 2006 (under former 976,721,074.11 976,721,074.11 --- accounting principle) 1 Variance in long-term investment --- --- --- Therein: variance in long-term investment generated from --- --- --- common controlled companies Credit variance generated by using equity method to --- --- --- record long-term investment The investing real estate prepare to record with fair value 2 --- --- --- module The currently recognized depreciation for prior years due 3 --- --- --- to the accrual of assets discard expense Resign compensation which is compliance to the 4 --- --- --- anticipated liability recognition condition Disclosed amount in Originally disclosed Items Name of items Difference Notes 2007 amount in 2006 5 Stock paid --- --- Restructuring liability for anticipated liability compliance 6 --- --- with recognition condition 7 Enterprise combination --- --- Therein: carrying amount of goodwill generated from --- --- acquisition under common controlled company Provision for goodwill impairment according to new --- --- accounting principle Financial assets recognized by fair value and expensed in 8 current period for variance and financial assets readily for --- --- sales Financial liability recognized by fair value and expensed 9 --- --- in current period for variance 10 Increased income from financial instrument split --- --- 11 Derivative financial instrument --- --- 12 Income tax --- --- 13 Minority shareholders equity 251,391,217.38 251,391,217.38 14 Special retrospective adjustment for B share and H share --- --- 15 Others --- --- Owner’s equity as at Jan. 1 2007 (under new accounting 1,228,112,291.49 1,228,112,291.49 principle) 113 18. Beginning balance of owner’s equity adjustment procedure and amendment table under new accounting principle Item Paid-in capital Capital reserve Surplus reserve Undistributed profit Minority shareholders 1, ending balance for prior year 706,320,000.00 393,776,144.37 81,770,300.69 (205,145,370.95) 251,391 Add: correction for prior year’s accounting error --- --- --- --- Change of prior year’s accounting principle 2, beginning balance for current year before adjustment procedure: 706,320,000.00 393,776,144.37 81,770,300.69 (205,145,370.95) 251,391 A, write off of variance in long-term investment under common controlled company --- --- --- --- B, write off of credit balance for long-term investment under equity method --- --- --- --- C, adjust the difference between carrying amount and fair value for investing real --- --- --- --- estate D, adjust expense for previously unrecognized fixed asset discard cost and recognize --- --- --- --- depreciation expense E, adjust payroll payable from resign compensation --- --- --- --- F, adjust the fair value of recognized liability for stock payment in first vesting date --- --- --- --- or later G, adjust restructuring liability which is compliance with the recognition condition --- --- --- --- for anticipated debt. H, retrospective adjust the temporary difference between carrying amount for assets --- --- --- --- and liabilities and income tax based amount I, write off originally recognized remaining value for goodwill under common --- --- --- --- controlled company J, goodwill impairment test generated from non-common controlled company --- --- --- --- K, adjust the difference between carrying amount and fair value for trading financing --- --- --- --- assets L, adjust the difference between carrying amount and fair value for financing debts --- --- --- --- O. long-term equity investment from parent companies to subsidiary companies --- --- (4,978,750.52) 4,978,750.52 3, the beginning balance after the adjustment 706,320,000.00 393,776,144.37 76,791,550.17 (200,166,620.43) 251,391 114 承德帝贤针纺股份有限公司 2007 年年度报告 19. Mortgage assets As to 31 December 2007, the mortgage assets of the Company are listed below: Mortgage assets Code Amount Xiaban City Textile Co. - Fixed assets- land use right Chengxianguoyong[2005]75&76 63,640,000.00 Xiaban City Textile Co. - Fixed assets- land use right Chengxianguoyong[2000]174 28,683,600.00 Xingye Papermaking Co.- Fixed assets- land use right Chengxianguoyong[2001]131 5,821,395.00 Xingye Papermaking Co.-Fixed assets- land use right Chengxianguoyong[2001]133 10,302,190.00 Xingye Papermaking Co.- Fixed assets- land use right Chengxianguoyong[2001]132 37,951,947.94 Xingye Papermaking Co.- Fixed assets- land use right Chengxianguoyong[2000]152 3,294,635.84 Xingye Papermaking Co.- Fixed assets- land use right Chengxianguoyong[2000]169 9,142,600.00 Banhe Fibre Textile Co.- Fixed assets- land use right Chenshikaiguoyong[2005]063 29,610,600.00 Xiaban City Textile Co. - Fixed assets- buildings and plants Chenxianfangzi No.000109 3,078,655.00 Xiaban City Textile Co. - Fixed assets- buildings and plants Chenxianfangzi No. 000196 15,456,412.62 Xiaban City Textile Co. - Fixed assets- buildings and plants Chenxianfangzi No. 000108 1,981,928.00 Xiaban City Textile Co. -Fixed assets-machinery equipments 3 Qinggang combine machines 27,888,000.00 Xiaban City Textile Co. -Fixed assets-machinery equipments 7 cotton hullers 22,659,000.00 Xiaban City Textile Co. -Fixed assets-machinery equipments 15 roving frames 4,357,600.00 Xingye Papermaking Co. - Fixed assets- buildings and plants Chenxianfangzi No. 000197 1,997,715.20 Xingye Papermaking Co.- Fixed assets- buildings and plants Chenxianfangzi No. 000198 66,512,900.00 Xingye Papermaking Co. - Fixed assets- buildings and plants Chenxianfangzi No. 000150 4,687,053.00 Xingye Papermaking Co. - Fixed assets- buildings and plants Chenxianfangzi No. 000195 2,377,100.00 Xingye Papermaking Co. - Fixed assets-machinery equipments No.2 production line 53,783,795.30 The Company and Ditian Fashion Co.- Fixed assets-machinery 14 automatic winders 14,970,000.00 equipments The Company and Ditian Fashion Co.- Fixed assets-machinery 1 board paper production machine 22,300,000.00 equipments The Company and Ditian Fashion Co.- Fixed assets-machinery 144 carding machines 20,000,000.00 equipments The Company and Ditian Fashion Co.- Fixed assets-machinery 118 wool spinning machines 58,896,200.00 equipments 759 spinning frames 142,119,400.00 4 twisting machines of elastic yarn The above mortgage assets pledged to banks to obtain loans of RMB 719,469,134.41 in total. 20. Litigation and other significant events (1) Guangdong Development Bank Dalian Branch proceeded against Xiaban City Textile Co., Ltd.、the Company and Mr. Shuxian Wang for loans on 24 January 2005. Pursuant to the court’s judgment, Xiaban City Textile Co., Ltd. must repay the principal RMB 40,000,000 and interests in the ten days the sentence effective, the Company and Mr. Shuxian Wang assume responsibility for joint liability of discharge. As to 31 December 2007, the above payment has not been repaid by Xiaban City Textile Co., Ltd. and the Company. Mr. Shuxian Wang promised to repay the debts with personal property and his 80,000,000 shares have been frozen 115 承德帝贤针纺股份有限公司 2007 年年度报告 by the court. (2) According to the decision of Shenzhen Intermediate People’s Court of Guangdong (reference No.: (2005) Shen Zhong Fa Min Er Chu Zi 177), the court decided that Shenzhen Lingfeng Co., should pay the outstanding balance. On 24 October 2003, the related party of the Company, Shenzhen Lingfeng, entered into “Comprehensive Credit Agreement” with Everbright Bank of China, Lianhua Road Branch of Shenzhen (Everbright Bank Shenzhen Branch) (reference No.S0520031015). The agreement provided that Everbright Bank Shenzhen Branch authorized Shenzhen Lingfeng the maximum credit, that is, RMB 100 millions. The detailed credit limit is note discount of RMB 100 millions, and the valid credit period is from 24 October 2003 to 24 October 2004. The Company and the legal representative of the Company Shuxian Wang signed “Maximum Credit Limit Guarantee Contract” and “Personal Guarantee Contract” respectively, in order to provide joint liability to all creditor’s right under the Comprehensive Credit Agreement. Thereafter, Everbright Bank Shenzhen Branch signed “Commercial Acceptance Bills Discount Agreement” with Shenzhen Lingfeng and the Company respectively, which says based on the application of Lingfeng, Everbright Bank Shenzhen Branch agreed to provide discount limit amounting to 100 millions for the commercial acceptance bills. With the application of Shenzhen Lingfeng and approval of Everbright Bank Shenzhen Branch, the credit limits is applicable to the company, and the valid period of the discount limit is the same with that of Comprehensive Credit Agreement. Based on the agreements, from 23 July 2004 to 27 July 2004, ShenzhenLingfeng drew nine commercial acceptance bills to the Company, totally amounting to RMB 83,000,000. The company applied discount to Everbright Bank Shenzhen Branch with these bills, and the bank paid RMB 83,000,000 to the Company as agreed upon. Due to the shortage of fund, Shenzhen Lingfeng and the Company were unable to repay and fulfill the joint guarantee liability when the bills were due. Therefore, Everbright Bank Shenzhen Branch took action to the court, and the court decided that Shenzhen Lingfeng should pay principal and interest, RMB 80,824,254.97 in total, to the bank in the ten days the sentence effective. The Company undertook joint liability and was the real user of the fund, so it is liable to the debt. The chairman of board Shuxian Wang promised to repay the debt with all his property and equity. The bank applied to the court to judicially freeze the sponsor shares amounting to 93,604,000 shares, which has not been defrosted at present. (3) On 27 September 2005, Huaxia Bank, Shijiazhuang Branch sued Xiaban City Textile Co., Ltd. and the Company. According to the judgment of Hebei Advanced People’s Court ((2005) Ji Min Er Chu Zi 34, Xiaban City Textile Co., Ltd. should repay the loans of RMB 20,000,000 and the advance of bill principal of RMB 17,829,536.60. The Company assumes responsibility for joint liability of discharge. As to 31 December 2007, the above payment has not been repaid by Xiaban City Textile Co., Ltd. and the Company. (4) China Construction Bank Chengde Branch proceeded against Xingye Papermaking Co., Ltd. and the Company. Pursuant to the court’s judgment on 6 December 2006, the Company must repay the principal RMB 50,000,000 and interests in the ten days the sentence effective, the Xingye Papermaking Co., Ltd. assumes responsibility for joint liability of RMB 40,000,000. As to 31 December 2007, the above payment has not been repaid by Xingye Papermaking Co., Ltd. and the Company. Due to overdue loans, China Construction Bank Chengde Branch proceeded against Xingye Papermaking Co., Ltd. and the Company on 10 November 2006. Pursuant to the court’s judgment on 25 December 2006, Xingye Papermaking Co., Ltd. must repay the principal RMB 1,198,000,000 and relative interests at a rate of 6.6375‰ in the ten days the sentence effective, the Company assumes responsibility for joint liability. As to 31 December 2007, the above payment has not been repaid by Xingye Papermaking Co., Ltd. and the Company. (5) According to the decision of Hebei Advanced People’s Court on 22 December 2006, the Company should pay the Industrial and Commercial Bank of China Chengde Branch principal RMB 3,907,000,000 and default interest (as at 20 December 2006) in the ten days the sentence was effective. If the Company is not able to assume responsibility for joint liability, relative mortgaged properties should be disposed. As to 31 December 2007, the above payment has not been repaid. According to the decision of Hebei Advanced People’s Court on 22 December 2006, the Company should pay the Industrial and Commercial Bank of China Chengde Branch principal RMB 290,000,000 and default interest (as at 20 December 2006), USD 1,012,861.86 and default interest (as at 20 December 2006) in the ten days the sentence was effective. If the Company is not able to assume responsibility for joint liability, relative mortgaged properties should be disposed. As to 31 December 2007, the above payment has not been repaid. 116 承德帝贤针纺股份有限公司 2007 年年度报告 (6) Due to the Company and its guarantee being suspected in a material case involved, according to the borrowing agreement, Bank of China Chengde Branch announced that the agreed loan with the Company was on due immediately, and took legal action on 30 December 2006. On 1 March 2007, Hebei Advanced People’s Court decided that the Company should pay the principal RMB 30,000,000 and interest. As to 31 December 2007, the above payment has not been repaid. (7) As at 31 December 2007, Southern Securities Co., Ltd. (Southern Securities) held 90,700,000 shares of the Company, which occupies 15.41% of the total shares. Its subsidiary Southern Security (Hong Kong) Co., Ltd. held 19,235,055 shares, accounting to 3.27%. CSSL Southern Securities International Co., Ltd. held 6,530,000 shares, occupying 1.11%. Totally, Southern Securities held 116,465,055 shares of the Company, and the holding percentage is 19.79%. At the end of 2007, the liquidation of Southern Security was in process. (8) Guangzhou Shenzhen Xinrunlian Auction Co., Ltd, Shenzhen Yaao Auction Co., Ltd., Guangzhou Huifeng Auction Co., Ltd., Shenzhen Pengrun Auction Co., Ltd. announced that with a commission by Shenzhen intermediate people's court, they planned to put up 208,324,800 natural person held shares owned by Mr. Shuxian Wang (112,324,800 shares are frozen by Shenzhen intermediate people's court and 96,000,000 shares are frozen by Dalian intermediate people's court) for auction at B Block, 12th Floor Yongtong Building, Renminbei Road, Luohu District Shenzhen on 29 April 2008. (9) Between January and April, the Company stops production successively. Due to a lack of substantial plan on debts and assets restructuring, a worse financial position of the Company occurred than for the previous year. (10) Tahe Xin’an Paper & Pulp Co., Ltd. is a subsidiary invested by the Company, but the Company did not contribute capital actually. Due to the paid in capital was not been completed in a time-limit by the Company and other shareholders, Tahe Xin’an Paper & Pulp Co., Ltd. is cancelled without registered. 21. The Approval of Financial Statements The Company’s financial statement was approved by the board of directors’ meeting on 28 April 2008. 117 承德帝贤针纺股份有限公司 2007 年年度报告 Section XII. Documents for Reference 1. Accounting statements carrying with confirmation and seals of principle of the Company, person in charge of the financial affairs and person in charge of accounting institution 2. Original of Auditors’ Report carrying with the seal of Certified Public Accountants as well as personal signatures and seals of certified public accountants. 3. Originals of all documents and manuscripts of Public Notices of the Company publicly disclosed on Securities Times and Hong Kong Wen Wei Po. The Company will provide timely the above documents for reference provided that China Securities Regulatory Commission or Stock Exchange demands or shareholders requires according to the regulations and Articles of Association. Board of Directors Chengde Dixian Textile Co., Ltd. April 28, 2008 118