雷伊Ｂ(200168)2007年年度报告（英文版）

GUANGDONG RIEYS GROUP COMPANY LTD. Annual Report 2007 April 2008 Important Notice The Board of Directors, the Supervisory Committee as well as all directors, supervisors and senior executives of GUANGDONG RIEYS GROUPCOMPANY LTD. (hereinafter referred to as the Company) hereby confirms that there are no any important omissions, fictitious statements or serious misleading information carried in this report, and shall take the individual and/or joint responsibilities for the reality, accuracy and completeness of the whole contents. Director Mr. Chen Honghai failed to present the meeting with job reason, and he entrusted Vice Chairman of the Board, Mr. Ding Lihong to vote on his behalf. Shulun Pan Certified Public Accountants issued the qualified Auditors’ Report with emphasis on matter paragraph for the Company, the Board of Directors and the Supervisory Committee both have made the corresponding explanations in details for the relevant matters and submitted to investors to read carefully. Chairman of the Board Mr. Chen Hongcheng, Chief Financial Officer Ms. Chen Peixia and Financial General Manager Mr. Wang Jianbo hereby confirm that the Financial Report enclosed in the Annual Report is true and complete. Contents Section I. Company Profile…………………………………………………….……… Section II. Summary of Financial Highlights and Business Highlights……………….. Section III. Change in Share Capital and Particulars about Shareholders………...…… Section IV. Directors, Supervisors, Senior Executives and Employees……………….. Section V. Corporate Governance……………………………………………………… Section VI. Shareholders’ General Meeting…………………………………………… Section VII. Report of the Board of Directors…………………………………………. Section VIII. Report of the Supervisory Committee…………………………………... Section IX. Significant Events…………………………………………………………. Section X. Financial Report………………………………………………………….… Section XI. Documents Available for Reference……………………………………..... Section I. Company Profile I. Legal Name of the Company In Chinese: 广东雷伊（集团）股份有限公司 Abbr. in Chinese: 雷伊 In English: GUANGDONG RIEYS GROUP COMPANY LTD. Abbr. in English: Rieys II. Legal Representative: Mr. Chen Hongcheng III. Contact method of Secretary of BOD and Securities Affairs Representative: Secretary of BOD Securities Affairs Representative Name Mr. Xu Wei Mr. Chen Yaoji Address 12/F of Orient Building, Dongmen Middle Road, Luohu District, Shenzhen Telephone 0755—82250045 Fax 0755—82251182 E-mail xw@200168.com chenyaoji@200168.com IV. Registered Address: Meixin Industrial Park of Jun Bu Town, Puning, Guangdong Office Address: 12/F of Orient Building, Dongmen Middle Road, Luohu District, Shenzhen Post Code: 518001 Company’s Internet Website: http://www.rieys.com E-mail of the Company: rieys@live.cn V. Newspapers Chosen for Disclosing the Information of the Company: Securities Times and Hong Kong Ta Kung Pao Internet Website Designated by CSRC for Publishing the Annual Report: http://www.cninfo.com.cn The Place Where the Annual Report is Prepared and Placed: 12/F of Orient Building, Dongmen Middle Road, Luohu District, Shenzhen Ⅵ. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: RIEYS-B Stock Code: 200168 Ⅶ. Initial registered date: Nov. 17, 1997 Initial registered place: Industrial and Commercial Administration Bureau of Guangdong Province Registration code of enterprise business license: 4400001000088 Registration code of tax: 445281231131833 Certified Public Accountants engaged by the Company: Name: Shulun Pan Certified Public Accountants Co., Ltd. Address: 4/F, No. 61, Nanjing East Road, Shanghai Section II. Summary of Financial Highlights and Business Highlights I. Major financial date in 2007 (Unit: RMB Yuan) Item 2007 Operating profit -39,903,115.50 Total profit -40,005,028.23 Net profit attributable to shareholders of listed company -79,704,336.59 Net profit attributable to shareholders of listed company after -163,111,255.16 deducting non-recurring gains and losses Net cash flow arising from operation activities 66,663,627.17 There was no difference in net profit and net asset under the different accounting standards in the report period. Items and amount of non-recurring gains and losses: Item of non-recurring gains and losses Amount Gains and losses on disposal of non-current assets 78,640,988.87 Tax return and tax deduction exemption over examination right 230,510.02 or without formal document Gains and losses from fair valve when the consolidation cost was less than the recognized net assets enjoyed by the 5,022,579.15 consolidated units Gains and losses from liabilities reconstruction 23,739.92 Net income and expense from other non-operation -510,899.39 Total non-recurring gains and losses 83,406,918.57 II. Major accounting data and financial indexes over the past three years ended the report period: (I) Major accounting data (Unit: RMB Yuan) Increase/ 2007 2006 decrease than last 2005 year (%) Before adjustment After adjustment After adjustment Before adjustment After adjustment Operating income 407,819,022.64 483,558,136 486,827,752.70 -16.23 459,048,558 459,048,558 Total profit -40,005,028.23 39,498,753 43,190,521.15 -192.62 33,218,865 33,218,865 Net profit attributable to shareholders of -79,704,336.59 11,746,536 15,141,538.32 -626.40 12,618,709 12,618,709 listed company Net profit attributable to shareholders of listed company after -163,111,255.1 -25,052,214 -21,657,211.68 -653.15 7,378,650 7,378,650 deducting 6 non-recurring gains and losses Net cash flow from the 66,663,627.17 96,505,708 96,505,709.28 -30.92 2,661,258 2,661,258 operation activities Increase/ At the end of At the end of 2006 decrease than last At the end of 2005 2007 year Before Adjustment After Adjustment After Adjustment Before Adjustment After Adjustment Total assets 818,952,545.47 1,102,429,517 1,112,188,832.83 -26.37 1,244,935,379 1,244,935,379 Owners’ equity 458,459,845.90 523,025,117 639,492,559.97 -15.01 511,278,582 511,278,582 (shareholders’ equity) (II) Major financial index (Unit: RMB Yuan) Increase/ decrease 2007 2006 2005 than last year (%) Before adjustment After adjustment After adjustment Before adjustment After adjustment Basic earnings per share -0.25 0.04 0.05 -600 0.04 0.04 Diluted earnings per -0.25 0.04 0.05 -600 0.04 0.04 share Basic earnings per share after deducting -0.51 -0.08 -0.07 -628.57 0.02 0.02 non-recurring gains and losses Fully diluted return on -17.67% 2.25% 2.37% -20.52 2.47% 2.47% equity Weighted average return -16.00 2.27% 2.63% -18.63 2.46% 2.46% on equity Fully diluted return on equity after deducting -36.15% -4.79% -3.39% -32.07 1.44% 1.44% non-recurring gain and loss Weighted Average return on equity after deducting -33.00% -4.84% -3.76% -29.24 1.44% 1.44% non-recurring gain and losses Net cash flow per share 0.21 0.30 0.30 -30.00 0.01 0.01 from operation activities At the end of Increase/ decrease At the end of 2006 At the end of 2005 2007 than last year (%) Before Adjustment After Adjustment After Adjustment Before Adjustment After Adjustment Net assets per share attributable to 1.42 1.64 1.67 -14.97 1.60 1.60 shareholders of listed companies Section III. Change in Share Capital and Particulars about Shareholders I. Particulars about the changes in share capital 1. In the report period, the Company’s share capital remained unchanged. 2. Issuance and listing of shares 1) The Company has not issued any shares or the derived securities in recent three years. 2) In the report period, there was no change in total number and structure of the shares arising from bonus shares or share capital conversion. 3) There existed no inner employees’ shares in the Company. II. Particulars about shareholders 1. Particulars about shares held by the main shareholders of the Company (Unit: share) Total number of shareholders 21,074 Number of Character of Shareholdin Increase/decre Total number of Pledged or frozen Name of shareholders non-tradable shareholder g proportion ase in this year share held shares shares holding Guangzhou Shenghengchang Legal person 36.99% 0 117,855,000 117,855,000 Pledged Investment Co., Ltd. share Shenzhen Risheng Investment Legal person 10.68% 0 34,020,000 34,020,000 Pledged Co., Ltd. share Shantou Lianhua Industrial Legal person 3.81% 0 12,150,000 12,150,000 Pledged Co., Ltd. share Ou Wenqing B share 0.22% +690,370 690,370 0 Unknown Zhou Xiaoqun B share 0.20% 0 635,800 0 Unknown Xu Hui B share 0.18% +582,000 582,000 0 Unknown Lin Mingyu B share 0.17% +560,000 560,000 0 Unknown Gong Furong B share 0.16% +540,900 540,900 0 Unknown GUOTAI JUNAN SECURIES HONG KONG B share 0.15% +480,680 480,680 0 Unknown LIMITED Zhong Yaoxiang B share 0.14% +467,870 467,870 0 Unknown Shares hold by the top ten tradable shareholders Number of tradable Name of shareholders Type of shares shares holding Ou Wenqing 690,370 B share Zhou Xiaoqun 635,800 B share Xu Hui 582,000 B share Lin Mingyu 560,000 B share Gong Furong 540,900 B share GUOTAI JUNAN SECURIES HONG KONG LIMITED 480,680 B share Zhong Yaoxiang 467,870 B share Fang Shaoping 457,020 B share Cai Mingyuan 429,900 B share Mao Qun 406,243 B share There existed related relationship among Guangzhou Shenghengchang Investment Co., Ltd., Shenzhen Risheng Investment Co., Ltd. and Shantou Lianhua Industrial Co., Ltd., which belonged to Explanation on related relationship or action-in-concert among above action-in-concert promulgated by Measures for the Administration of mentioned shareholders Disclosure of Information on the Change of Shareholdings in Listed Companies. The Company was unknown whether there existed related relationship among other shareholders. Note: the site of Shenzhen Shenghengchang Industrial Co., Ltd moved to Guangzhou on Apr. 29, 2007 and changed the name to Guangzhou Shenghengchang Investment Co., Ltd. There was no change in actual controller of the Company. 2. About the controlling shareholder of the Company (1) The controlling shareholder of the Company is Guangzhou Shenghengchang Investment Co., Ltd.(Hereinafter refer to as Shenghengchang Investment), who held 117.855 million shares of the Company, taking up 36.99% of the total share capital. The registered capital of this company is RMB 98 million; hereinto Mr. Chen Hongcheng holds 70% equity of Shenghengchang Investment, while Mr. Chen Honghai holds 30% equity of Shenghengchang Investment. Its registered address was B 6, Kecheng Building, Science Town, High-tech Industry Development Zone, Guangzhou, legal representative was Mr. Chen Yuyi. The business scope of Shenghengchang Investment: industrial investment, wholesale, retail trade (exclusive of the state-controlled goods); hardware, electric, building materials, electronic products, sale of auto parts; import and export goods, technology import and export (except for projects prohibited by laws and administrative regulations; projects prohibited by laws and administrative regulations can be operated after obtain permission). (2) Mr. Cheng Hongcheng is the actual controller of Shenghengchang Investment. Mr. Chen Hongcheng was engaged in operation and management of the enterprise for over 20 years. He was once Chairman of the Board and concurrently President of Puning Hongxing Weaving and Clothing Co., Ltd., and executive director of Puning Haicheng Industrial Co., Ltd.. Mr. Chen Hongcheng is the standing commissar of Political Consultative Conference of Puning, the deputy of the National People’s Congress of Jieyang City and Guangdong Province. In 1998, Mr. Chen was awarded as the excellent village and township entrepreneur of Guangdong province, the advanced member of Guangdong Industry and Commerce Union, and the advanced member of Guangdong Chamber of Commerce. In 1999, Jieyang municipality People’s Government awarded him as the advanced individual of splendor undertaking; Vice Chairman of Costume Association of Guangdong Province; Vice Chairman of Costume Association of Shenzhen City. Chen Hongcheng Chen Honghai Holding 70% equity Holding 30% equity Guangzhou Shenghengchang Investment Co., Ltd. Holding 36.99% equity The Company 3. Particulars about other shareholders of legal person’s share holding over 10% of shares (including 10%): Shenzhen Risheng Investment Co., Ltd. was founded on Sep. 8, 2000, whose registered capital is RMB 25 million, among which Ms. Chen Xuewen holds 80.4% equity and Mr. Ding Lihong holds 19.6% equity. The legal representative is Ms. Chen Xuewen. The business scope of Shenzhen Risheng Investment Co., Ltd.: to invest and initiate industries (the detailed project till further declared); domestic commerce, material supply and marketing industry (excluding monopoly commodities); investment consultation and information consultation (excluding limited projects). Section IV. Directors, Supervisors, Senior Executives and Employees I. Directors, supervisors and senior executives 1. Basic information Number of share Number of Name Sex Age Title Office term holding at the share holding year-begin at the year-end Chen Chairman of the Board, Male 50 2006.5-2009.5 0 0 Hongcheng President Ding Vice Chairman of the Male 37 2006.5-2009.5 0 0 Lihong Board, Vice President Chen Male 54 Director 2006.5-2009.5 0 0 Honghai Zhang Male 49 Director 2006.5-2009.5 0 0 Yongli Fang Meidi Female 62 Independent Director 2006.5-2009.5 0 0 Cai Shaohe Male 47 Independent Director 2006.5-2009.5 0 0 Yang Xinfa Male 39 Independent Director 2006.5-2009.5 0 0 Yan Chairman of the Male 40 2006.5-2009.5 0 0 Mingfei Supervisory Committee Huang Female 41 Supervisor 2006.5-2009.5 0 0 Yanfang Pan Female 36 Supervisor 2006.5-2009.5 0 0 Xiaochun Li Male 38 Vice President 2006.5-2009.5 0 0 Guoqiang Lei Male 53 Vice President 2006.5-2009.5 0 0 Yongsheng Chen Peixia Female 36 CFO 2006.5-2009.5 0 0 Xu Wei Male 31 Secretary of the Board 2006.5-2009.5 0 0 The Company hadn’t implemented the equity incentive mechanism. 2. Main work experience of present directors, supervisors and senior executives Chairman of the Board and President: Mr. Chen Hongcheng, was born in 1958; bachelor degree, China nationality. He was once Chairman of the Board and concurrently President of Puning Hongxin Weaving and Clothing Co., Ltd., and executive director of Puning Haicheng Industrial Co., Ltd.. At present he is the standing commissar of political consultative conference of Puning, Guangdong, the deputy of the National People’s Congress of Jieyang City and Guangdong Province, Vice Chairman of Costume Association of Guangdong Province and Vice Chairman of Costume Association of Shenzhen City. Now he acts as Director of Guangzhou Shenghengchang Investment Co., Ltd. (the controlling shareholder) over the long term. Vice Chairman and Vice President: Mr. Ding Lihong was born in 1971 and graduated from junior college, and China nationality. He was once office director of Puning Hongxing Weaving & Clothing Co., Ltd., director of general manager office of Puning Jianyang Industrial Co., Ltd. and Secretary of the Board of Directors and vice President of Guangdong Rieys Group Company Ltd., Chairman of the Board of Shenzhen Shenghengchang Industrial Co., Ltd. (the controlling shareholder). Director: Mr. Chen Honghai was born in 1954 and graduated from university, and he has China nationality. He ever took the post of workshop director of Puning Songxing Garments Manufacturer and operation section chief, manager of Puning Hongxing Weaving & Clothing Co., Ltd. and supervisor of the Company. Now he acts as Director of Guangzhou Shenghengchang Investment Co., Ltd. (the controlling shareholder) over the long term. Director: Mr. Zhang Yongli, bachelor degree and economist, was born in 1959 and graduated from Naval Engineering Institute, and has China nationality. He took the post of assistant of the Navy Shanghai Base, the office director of Shenzhen Yanshan Industry Trading Co., Ltd, general manager of Haikou Lanyuan Corporation Company, vice general manager of Guangdong Baoli South Import and Export Company. Independent Director: Ms. Fang Meidi was born in 1946; she got a master degree and was awarded Certified Business Executive, and has Chinese nationality. She took the post of general manager of Shanghai Silk Import and Export Company and vice president of Shanghai Oriental International Group Co., Ltd.. Now she acts as president of Hong Kong Qili Co., Ltd. Independent Director: Mr. Cai Shaohe, was born in 1961. He got a master degree and was awarded Certified Public Account. He took the post of accounting superintendent and financial group leader of local state-run Chenghai Winery and vice superintendent and superintendent in Chenghai Auditing Firm. He is now in charge of chief accountant of Shantou City Fengye CPA Firm. Independent Director: Mr. Yang Xinfa was born in 1969; he is master degree and has Chinese nationality. Now he is the lawyer of Yixing Law Firm Shenzhen Branch. He ever worked in Hunan Dexin Law Firm, Guangdong Guoyang Law Firm, Guangdong Bohe Law Firm and Liu&Wang, Attorneys At Law; and ever took the post of secretary of Board of the Company. Chairman of the Supervisory Committee: Mr. Yan Mingfei was born in 1968, bachelor degree and engineer, and has China nationality. He took the post of assistant engineer of Shantou Teye Power Development Co., Ltd. and engineer of Shantou Special Economic Region Talents Exchange Center. Now he is in charge of general manager of Shantou Lianzhihua Information and Technology Co., Ltd.. Supervisor: Ms. Huang Yanfang was born in 1966, bachelor degree and party member of the CPC. She has engaged in enterprise financial work for many years. Now she serves in financial dep. of the Company. In the past, she held a post in Shantou Film Company as deputy section chief of financial section. Supervisor: Ms. Pan Xiaochun was born in 1971; she got master degree with enterprise operation & management experience for many year. From the year 2004, the very time she joined in the Company, she has engaged in operation & management of the Company. Before that, she served in Shenzhen Maoye (Group) Co., Ltd.. Vice President: Mr. Li Guoqiang, was born in 1970 and was awarded MBA degree, CCAP, Accountant; he is Chinese and engaged in social audit, capital assessment and corporation consultation, etc. for many years. He ever took the post in Shenzhen Zhongtian Audit and CPA Firm and Authur Anderson Huaqiang CPA Firm. He ever took the post of Chief Financial Officer of the Company. Vice President: Mr. Lei Yongsheng, was born in 1954, bachelor degree, economic engineer, and was engaged in business administration for several years. He ever worked in Hunan Academy of Ceramics, took the posts of chief clerk, section chief and division chief in Foreign Trade Department of Hunan Province, of General Manager of Commercial Dept. in Zhuhai Gree Group Corp., of General Manager and Secretary of CPC in Zhuhai Jiali Industrial Corp., and of General Manager of Shenzhen Shenghengchang Industrial Co., Ltd. Chief Financial Officer: Ms. Chen Peixia, was born in 1971, CPA. She was engaged in enterprise financing for several years. She ever worked in Shantou Youjian Certified Public Accountants and took the post of Manager of Auditing Dept. in the Company. Secretary of the Board: Mr. Xu Wei was born in1977, graduated from Zhongnan University of Economics and Law with bachelor degree of economics and law. He was ever in charge of securities affairs representative of Shenzhen International Enterprise Co., Ltd., securities affairs representative of the Company, director of office of the Board of Director and supervisor of the Company. 3. Particulars about the annual remuneration In accordance with the proposal on setting down remuneration of senior executives examined and passed at the 1st meeting of the 2nd Board of Director for the year 2002 and proposal on allowance standard of directors and independent director examined and passed at the annual Shareholders’ General Meeting 2001, directors and independent directors of the Company drew their annual allowance of RMB 30,000 respectively from the Company; supervisors of the Company received the annual allowance of RMB 10,000 respectively. The Company reimbursed the reasonable charges according to the actual situation which independent directors attended the meeting of the Board, shareholders’ general meeting or exercise their functions and powers in accordance with the relevant laws and regulations and Articles of Association. Name Title Total (Unit: RMB Yuan) Chen Hongcheng Chairman of the Board, President 186,000 Ding Lihong Vice Chairman of the Board. Vice President 118,500 Chen Honghai Director Allowance 30,000 Zhang Yongli Director 113,200 Cai Shaohe Independent Director Allowance 30,000 Fang Meidi Independent Director Allowance 30,000 Yang Xinfa Independent Director Allowance 30,000 Yan Mingfei Chairman of the Supervisory Committee Allowance 10,000 Huang Yanfang Supervisor 55,500 Pan Xiaochun Supervisor 55,500 Li Guoqiang Vice President 97,500 Lei Yongsheng Vice President 97,500 Chen Peixia CFO 97,500 Xu Wei Secretary of the Board 91,000 Total 1,042,200 Director Mr. Chen Honghai and Chairman of the Supervisory Committee Mr. Yan Mingfei received no payment from the Company. Of them, Director Chen Honghai drew the annual remuneration from Shenzhen Shenghengchang Industrial Co., Ltd. 3. Changes of directors, supervisors and senior executives of the Company in the report period. Due to the demand of business development, the Company decided to engage Mr. Yuan Siqun as Vice President of the Company and concurrently as Chairman of the Board, legal representative of Puning Rieys Paper Co., Ltd. through the resolution of the 2nd Meeting of the 4th Board of Directors 2007 of the Company. Because Puning Rieys Paper Co., Ltd. would become the related company of principal shareholders of the Company, the Company agreed the application for resigning the post of Vice President from Mr. Yuan Siqun. II. About employees As at Dec. 31, 2007, the Company and its subsidiaries controlled by the Company had about 2083 on-job staffs in total. Among them, 1312 production personnel, 405 salespersons, 86 technicians, 89 QC, 67 financial personnel and 124 administrative personnel; 4 persons with senior professional titles, and 46 persons with middle professional titles, and 87 persons with preliminary professional titles. The Company did not bear expenses of retirees at present. Section VI. Corporate Governance I. Corporate governance In accordance with Company Law, Securities Law and Code of Corporate Governance for Listed Companies and the relevant laws and regulations, the Company established and perfected its organization such as Shareholders’ General Meeting, Board of Directors and Supervisory Committee since the Company was founded and constituted and consummated the Articles of Association of the Company and the relevant other rules in line with the relevant laws and regulations. Directors, the Special Committee of the Board of Directors and the Supervisory Committee brought the certain function into full play in the operation and management of the Company. The actual situation of the corporate governance basically accorded with the requirements of such standardization documents as the Code of Corporate Governance for Listed Companies. But in the actual operation management, there existed some shortcomings in such aspects as unscientific and imprudence decision-making, undemanding capital management and incomplete internal control, the management efficiency remained to be improved. The Company would strengthen and organize senior executives to study the relevant laws and regulations and modern business management practice in the further in order to perfect the modern enterprise system of the Company. II. Duty performance of independent directors In the report period, three independent directors of the Company actively took part in operation of the Board, seriously and diligently performed their duties and carefully examined all proposals of the Board and expressed independent opinion in the report period, and played an important role in enhancing the independence of the Board, strengthening the function of strategic management of the Board, balancing of rights of the Board and concentrating on the legal rights and interests of the small and medium investors, and played an active promotion role in scientific decision-making of the Board and normative operation of the Company. During the report period, the Company’s independent directors did not propose any objection on all proposals of the Board and other proposals of the Company. Times of Times of Board Times of Boarding Name of Times of Board meeting Boarding meeting attended meeting attended shareholders should be attended meeting personally by proxy absent Cai Shaohe 7 5 2 0 Yang Xinfa 7 7 0 0 Fang Meidi 7 5 2 0 III. The Company was independent from controlling shareholders in business, personnel, assets, organization and finance: The Company was completely separated with the controlling shareholder, Guangzhou Shenghengchang Industrial Co., Ltd., and associated enterprises in business, personal, assets, organization and financing, which ensured the Company had independent and complete business and self-operation capability. IV. Particulars on establishing and perfecting the internal control of the Company In order to standardize the operating management of the Company, control risk and ensure the normal operation of the business activities, the Company set up such a series of internal control system as Rules of President’s Work, Internal Audit System, Management System of Information Disclosure and Management Method of Raised Proceeds which were complemented, amended and perfected continuously and executed strictly, according to Company Law, Securities Law and other related laws and rules and in line with the actual situation of the Company, its own characteristics and management demand. As a result, the production and operation of the Company were supervised, controlled and guided effectively. In the opinion of the Board of Directors: the existed internal control system met the requirement of the current management of the Company and the demand for development, guaranteed the operating activities to be carried out orderly, assured the overall implementation and full realization of the development strategy and operating target of the Company as it was relatively integrated, reasonable and effective. Also, it could favorably ensure the truth, legality and integrity of the accounting information of the Company, as well as the safety and integrity of all the property of the Company. The information was disclosed truly, accurately, timely and completely, which ensured to treat all the investors publicly, fairly and justly and safeguarded the interest of the Company and investors. V. Establishment and implementation of the assessment and incentive and restrain mechanism for the senior management staffs by the Company The Company set up preferable remuneration system and performance assessment system, which could help to assess the work ability, fulfillment and performance on the responsibility of the senior management staffs as the revenue of the senior management staffs was coupled with the work performance. The Company would take steps to perfect the assessment and incentive and restrain mechanism for the senior management staffs. Section VI Shareholders’ General Meeting I . On Mar. 26, 2007, the 1st Extraordinary Shareholders’ General Meeting in 2007 was held, of which the public notices of the resolution were published in Securities Times and Ta Kung Pao on Mar. 27, 2007 (public notice No.: 2007-004). II. On May 21, 2007, the Annual Shareholders’ General Meeting 2006 was held, of which the public notices of the resolution were published in Securities Times and Ta Kung Pao on May 22, 2007 (public notice No.: 2007-013). III. On Dec. 3, 2007, the 2nd Extraordinary Shareholders’ General Meeting was held, of which the public notices of the resolution were published in Securities Times and Ta Kung Pao on Dec. 4, 2007 (public notice No.: 2007-028). Section VII Report of the Board of Directors I. Operation of the Company in the report period (I) Review of operation status in the report period 1. Overall operation of the Company in the report period: In the report period, the Company realized the business income by RMB 407.82 million, total profit by RMB -40 million, net profit attributable to the owners of the parent company by RMB -79.7 million, respectively presenting a decrease of -16.23%, -192.61% and -626.42%. The reason for the large-scale decrease was mainly because: (1) Investment income arising form selling 34% equity of Polo & Racquet Club Operation Corporation in 2006 caused the profit in 2006 increased in a large scale; (2) Influence on the demanded fund for the business development by the bank pinch loan further decrease; (3) The high financial expenses for implementation of Puning Reiys Paper Co., Ltd. , which could be put into production but occupied a great deal of funds; (4) According to the audit result, the accountants firm suggested the Company should withdraw the loss provision and expenditure in accordance with conservatism principle and principle of rights and responsibility. 2. Main business of the Company and its operating status 1) Composing of income from main business and profit from main business: (1) Classified according to Income from main business Profit from main business industry (RMB) (RMB) Industry 303,513,308.67 57,665,761.53 Commerce 198,482,323.70 93,108,456.55 Offset of the business of the -94,625,409.73 511,651.84 Company Total 407,370,222.64 151,285,869.92 (2) Classified according to Income from main business Profit from main business region (RMB) (RMB) Sales of export clothing 254,080,972.54 37,789,009.41 Sales of clothing domestically 241,705,205.75 114,782,432.21 Clothing processing 6,209,454.08 -1,797,223.54 domestically Offset of the business of the -94,625,409.73 511,651.84 Company Total 407,370,222.64 151,285,869.92 2) Principal suppliers and customers: The total amount of purchase of the top five suppliers took up 48% of the total annual amount of purchase. The total amount of sales of the top five customers took up 35% of the total annual amount of sales. 3. Financial data and change composed by assets and the according reasons in the report period Unit: RMB Items of the Dec. 31, 2007 Dec. 31, 2006 Change balance sheet Amount Proportion Amount Proportion year-on-year in total in total assets (%) assets (%) Accounts 375,343,525.40 45.83 304,484,461.60 27.38 23.27% receivable Inventory 55,944,391.83 6.83 160,537,863.13 14.43 -65.15% Investment 0 0 0 0 0 properties Long-term 7,164,692.02 0.87 12,980,058.56 1.17 -44.81% equity investment Fixed assets 297,021,626.47 36.27 350,724,594.57 31.53 -15.31% Construction 2,060,754.99 0.25 121,743,316.17 10.95 -98.31% in progress Short-term 307,948,873.23 37.60 385,734,091.67 34.68 -20.17% borrowings Items of 2007 2006 income statement Operating 53,625,136.63 77,914,168.81 -31.17% expenses Administrative 62,159,315.92 49,582,105.99 25.37% expenses Financial 40,245,005.65 39,085,684.32 2.97% expenses Income tax 8,832,932.80 2,016,746.88 338.10% Analysis of the change reason: 1) Accounts receivable: Reason for decrease of the accounts receivable: on Dec. 31, 2007, Polo & Racquet Club Operation Corporation was no longer brought into the consolidated statement scope of the Company, the accounts receivable should be offset as the bad debt. Reason for decrease of accounts paid in advance: on Dec. 31, 2007, Polo & Racquet Club Operation Corporation was no longer brought into the consolidated statement scope of the Company. Reason for increase of other account receivable: the amount of transferring 36% equity of Polo & Racquet Club Operation Corporation; Polo & Racquet Club Operation Corporation was no longer brought into the consolidated statement scope of the Company 2) Inventory: Polo & Racquet Club Operation Corporation was no longer brought into the consolidated statement scope of the Company, inventory falling price provision was withdrawn. 3) Long-term equity investment: withdrawal impairment provision. 4) Fixed assets: withdrawal impairment provision, the construction in progress was transferred to the fixed assets, Polo & Racquet Club Operation Corporation exited the consolidated scope in 2007. 5) Construction in progress: the construction in progress was transferred to the fixed assets. 6) Short-term borrowings: part of borrowings was returned in 2007, Polo & Racquet Club Operation Corporation exited the consolidated scope in 2007. 4. Cash Flow Statement of the Company and main composing and change, and the analysis of the principal influence factors Unit: RMB 2007 2006 Increase/decrease year-on-year (%) Net cash flow arising 66,663,627.17 96,505,708 -30.92 from operating activities Net cash flow arising 11,156.19 97,230,763 -99.99 from investing activities Net cash flow arising -81,875,349.75 -176,662,132 +53.65 from financing activities Influence on cash by -3,392,221 - the change in exchange rate Analysis of change reason: 1) Decrease of the net cash flow arising from the operating activities was because of the decrease of cash inflows arising from operating activities. 2) Decrease of the net cash flow arising from the investing activities was because of the cash to pay for the acquisition and construction of fixes assets, intangible assets and other long-term assets as well as the other added cash related to the investing activities. 3) Change in net cash flow arising from financing activities was caused by returning the bank loan of the Company. 5. Operation and achievement of the major shareholding companies and joint stock companies: A. Operation and achievement of shareholding companies: 1) Shenzhen Chuanger Fashion Co., Ltd. registered capital of RMB 12 million, whose 86% equity was held by the Company, is mainly engaged in the production and sales of women’s brand “MISSK” of Hong Kong in mainland of China. Its international Internet website is http://www.misskfashion.com. In the report period, this company’s total assets was RMB 33.45 million, realizing net profit of RMB 2.74 million. 2) Shenzhen Heyiyi Fashion Co., Ltd. registered capital of RMB 10 million, whose 51% equity was held by the Company, is mainly engaged in the production and sales of women’s brand “AXARA” of France in China. Its international Internet website is http://axara-hyy.com.cn. In the report period, this company’s total assets were RMB 1.77 million, and net profit realized was RMB -8.51 million. 3) Puning Tianhe Textile Manufactory Co., Ltd. registered capital of HKD 64.8 million, whose 75% equity was held by the Company, is mainly engaged in the processing and export business of OEM garments. In the report period, this company’s total assets was RMB 332.90 million, realizing the net profit of RMB -0.76 million. 4) Dongguan Jinjing Textile Manufactory Co., Ltd. registered capital of USD 12.8 million, whose 75% equity was held by the Company, is mainly engaged in the production processing and sales of high-grade wool garments. In the report period, this company’s total assets were RMB 53.22 million, and net profit realized was RMB -27.92 million 5) Shenzhen Rieys Industrial Co., Ltd. registered capital of RMB 50million, whose 90% equity was held by the Company, is mainly engaged in the import and export business. In the report period, this company’s total assets were RMB 79.53 million, and net profit realized was RMB -6.84 million. (2) Operation and achievement of joint stock companies: Shanxi Chuanglian Information Network Technology Co., Ltd registered capital of RMB 45 million, of which 27.78% of equity was held by the Company, is mainly engaged in information consultation of operating network and development of network communication and consulting service of product information. The total assets were RMB 67.60 million and net profit was RMB -2.73 million according to the audit of Shanxi Tianxingjian Certified Public Accountants Co., Ltd.. (3) Particulars about selling subsidiaries in the report period: 1) Shanghai Tongrui Apparel Co., Ltd. registered capital of USD 1.2 million, whose 36% equity was held by the Company, is mainly engaged in the sales business of brand apparel such as SBPOLO. In the report period, this company’s total assets was RMB 39.61 million, realizing the net profit of RMB 0.53 million. 2) Dezhou Zhonghe Apparel Co., Ltd. registered capital of USD 600,000, whose 36% equity was held by the Company, is mainly engaged in the sales business of brand apparel. In the report period, this company’s total assets was RMB 94.69 million, realizing the net profit of RMB 4.63 million. 3) Puning Rieys Paper Co., Ltd. registered capital of USD 29 million, whose 100% equity was held by the Company, is mainly engaged in the production and sales of corrugated paper series products with high strength. In the report period, this company’s total assets were RMB 265.86 million, and net profit realized was RMB -102.76 million. Please refer to Section X Item II Acquisition and Sales of the Company in the Report Period with details about the particulars on selling the three companies mentioned above. (II) The prospect of the Company 1. The development trend of the Company and the competition through market faced by the Company Owing to such factors as the expansion of production capacity, great decline of export and the appreciation of cost and RMB, the textile and garment industry was facing the positive and passive transformation and up-grade of industry. The development pattern which focused on technology innovation, brand creation and channel construction would be the major pattern in the future instead of the increase pattern which focused on expansion of production capability and export product with the same quality, including the extension of upstream and downstream of industry chain, marketing from export to sell domestically, diversification in the industry, benefit obtaining from processing to brand and retail, enlargement of benefit space by strengthening research and development and bringing advanced equipment to develop new products. In addiction, the exploration of some new business patterns was attached great importance, which was expected to be a new course of the development pattern of the industry in the future, such as the pattern of selling garments directly on net. In line of the obvious up-grading trend in consumption currently in our country, the famous garment industry would develop with a quick pace in the macro-control environment, a rare historical opportunity that the famous garment industry faced to enlarge the market capacity. With years’ development, the domestic famous garment industry had festered a great deal of enterprises which owned famous brands, mature management and characteristic size. In addiction, the cost of figuring a brand and the commerce cost increased continuously. As a result, the new comers with small size could not enter the industry full of competition so easily. The competition in famous garment industries mainly meant the competition between the domestic enterprises with initial size and the international brands, concentration of industry being obvious. 2. Future development opportunity and challenge concerned by managements Challenge faced by the Company: such elements as quick appreciation of RMB, further decrease of the rate of tax rebate and increase of labor cost brought by the implementation of new labor law blocked the sales of garments overseas, making the market competition of the sales of garments domestically fiercer. The cost pressure continuously shortened the profit space of enterprises and increased the operating pressure of the garment industry. The industry concentration was as the relatively specific trend provided the up-grading competition of the famous garment industry. In the coming years, the development speed and size would be the crucial elements for the enterprises’ existence. Future development opportunity of the Company: the increase of the citizen’s revenue and the buildup brand consciousness provide a large space for the increase performance of the Company in the future. The new year is called A Year of Domestic Demand, because the up-grading consumption will boost the domestic demand market, and the simulating factors for the industry increase will be conversed from export to domestic consumption. The garment industry will keep in the state of increasing quickly as it has stepped into the core times of brand competition, the strong enterprises becoming more and more powerful. With years’ development and position of the Company in market and brand, the Company accumulated some experience in the aspects of brand construction and channel management, initially established the channel of main commercial circle covered domestically, which set up a preferable basis to obtain some advantage in the future competition for the Company. 3. Operating plan of the Company in 2008 1) Make brand business as the core, brand creation and channel construction as the crucial development strategy. As the funds situation permits, the Company will invest more into the women’s clothing brand and enlarge the brand business size according to the channel construction; on the other hand, the brand should be created and expanded by making use of self-financed funds. 2) On the basis of brand business as the core, the Company will exert its professional advantage with the direction of development of business diversification, try the business of measuring for suit, order of office wear in mass and direct sales. 3) Change and optimize the operating pattern of the processing of traditional clothing of the Company. The business of processing traditional clothing of the Company faces the disadvantaged elements as the quick appreciation of RMB, further decrease of the rate of tax rebate and increase of labor cost brought by the implementation of new labor law. So the Company should seek reform, to downsize the organization with high-value attached line, i.e., to strive for discovering potential in every tache internally, improve the management ability and the quality of products, enhance the core competition of the said business and take steps to increase the attached value of products; on the other hand, to make use of the Company’s order, the method of entrusting others to process can help to solve the disadvantaged factors the clothing processing business faces. II. Investment of the Company (I) The Company had no raised proceeds or its usage in the report period. (II) No external investment occurred in the report period. III. The explanation of the Board of Directors to the emphasized events by the accountant firm: Shulun Pan Certified Public Accountants Co., Ltd. issued the Auditors’ Report with qualified opinion and emphasized matter on the Financial Report of the Company in 2007. The events of qualified opinion: as that disclosed in Annotation to the Financial Report of the Company VII (VI), by Dec. 31, 2007, the procedure of change with the Industrial and Commercial Bureau for the transferring 36% equity of Polo & Racquet Club Operation Corporation was completed by the Company. However, by Apr. 28, 2008, the Company had not received the amount for equity transfer of RMB 171.5 billion, of which RMB 23.5 million from CEC MenswearLtd., RMB 148 billion from Sky Trend Investment (Group) Limited (the related enterprise of the actual controller Chen Hongcheng of the Company). The income from equity transfer recognized by the Company in 2007 was RMB 84.24 million. We had no enough and appropriate audit evidence to assure that the amount of the two equity transfers could be all recovered by the Board of Directors of the Company. Shulun Pan Certified Public Accountants Co., Ltd. believed that the sale of 31% equity held by Shanghai Tongrui Garment Co., Ltd. and Dezhou Sino-Union Garment Co., Ltd. respectively had been finished, and can’t judge the recovering situation of equity transfer accounts receivable, the Board of Directors suggested to adopt the above measure to ensure the recovering of equity transfer accounts strictly about the equity transfer accounts receivable.1. the proposal that the equity assignee didn’t paid the transfer account receivable was examined and approved by the 2nd meeting of the 4th Board of Directors for 2008 on Apr. 28, 2008, which regulated that the assignee must pay the equity transfer accounts to Shanghai Tongrui Garment Co., Ltd. and Dezhou Sino-Union Garment Co., Ltd. before Jun. 30, 2008, if not, the Company will go behind the related responsibility. 2. The actual controller Mr. Chen Hongcheng as the shareholder to transfer the aforesaid equity, also promise to pay the accounts in written. Emphasis on matter: “ We remind of financial statements’ user to pay attention to: the net loss attributable to the Company was RMB 79.7 million in 2007, dated the reporting date, the capital principal together with the corresponding interests of overdue borrowings was RMB 276 million totally. Although the improved measures disclosed in Note XI in financial statements, it still existed significant nondeterminacy in aspect of the continuous operation capability of the Company.” The Company’s measure to sell the 31% equity held Shanghai Tongrui Garment Co., Ltd. and Dezhou Sino-Union Garment Co., Ltd, respectively and 100% equity held by Puning Rieys Pater Co., Ltd, was in order to solve the continuous operation capability of the Company, to solve the financial problems existing for many years completely and realize the operation improvement on assets of the Company. In order to realize the wide range business strategy, the Company began to invest on paper project and established Puning Rieys Paper Co., Ltd.. However, the series of uncertain factors resulted in the paper project failed to product. Because the most funds of paper projects borrowed from the bank as short-term borrowings, the Company compensated the loans and interests using numerous accounts from the operating profit, which caused heave financial pressure on the Company, short of funds further leaded the lack of current capital, the income from main operation and operation performance declined increasingly. The poor operation performance resulting in that the banks decreased the loans scope to the Company. The decrease of bank loans and the huge amount of interest charges made the Company in embarrassment on funds and ultimately allowed the company into a vicious circle In order to relief the pressure from the fund shortage, the Company received the RMB 102 million from the sale of 34% equity of the Company held by Shanghai Tongrui Garment Co., Ltd.and Dezhou Sino-Union Garment Co., Ltd. all these didn’t settle the funds problems completely. The current fund shortage of the Company didn’t change ultimately. After sales of the aforesaid share assets, the Company was still a intact operation entity and there were no condition that was not able to operate continuously caused by breach of laws, regulations and standardization documents. (1) In aspect of the loan of bank: fun from share transfer was enough to resolve the loan of bank the Company faced at present. (2) In aspect of assets: After sales of 31% equity of Shanghai Doright Fashion Co., Ltd and Dezhou Sino-Union Garment Co., Ltd respectively, the Company didn’t hold equity of the two companies, and had no relationship in assets with the two companies. Meanwhile, the Company sole 100% equity of Puning Rieys Paper Co., Ltd and had no relationship with it after the sale. The Company was independent in assets from the two companies and there was no problems of ambiguous property right. (3) In aspect of operation: the sold equity was mainly engaged in paper making and brand operation of men clothes. The Company was still engaged in brand operation of women clothes and traditional fashion processing. The Company was still a intact operation entity, just the operation scale was shrinked. The brand operation of man clothes and women clothes was independent in operation managements, design and research & development, production, sales channel and customers from each other. Brand operation of men clothes had its own production and processing channel, and the products didn’t entrust the Company to produce and process. The production and processing operation of the Company was mainly in overseas order and didn’t depend on brand operation of men clothes. Besides, the income from brand operation of men clothes was not enough to offset the loss from paper making. (4) In aspect of purchase of raw materials: The orientation of marketing was large different in operation of fashion production and processing, products of brand operation of men clothes and brand operation of women clothes, which has the independent purchase system. Fashion processing and production was mainly in manufacturing of oversea order and emphases on quantity. (5) In aspect of intangible assets: The brand operation of men clothes was mainly in agent of foreign brand, that is, pay for brand use, there was no trademark property right and didn’t use any brand of the Company. Therefore, there were no disputes in brand and wouldn’t caused related transaction. The Board of Directors would focus on the aforesaid fund receival of share transfer, immediately adopt relevant measures to recover aiming at the breach of promises, and guarantee the interest of the Company as possible in the future. Meanwhile, the Board of Directors would promote the work in accordance with Work Plan 2008 stated in Outlook of the Company in (II), I, Section VII, shake off the current status and realize the ultimate purpose of operation improvement , and returned to all the investors better. IV. Routine work of the Board of Directors (I) Particulars about the Board meetings of the Company and the resolution content in the report period 1. On Mar. 9, 2007, the 1st meeting of the 4th Board of Directors in 2007 was held, of which the public notices of the resolutions were published in Securities Times and Hong Kong Ta Kung Pao on Mar. 10, 2007 (public notice No.: 2007-002). 2. On Apr. 26, 2007, the 2nd meeting of the 4th Board of Directors in 2007 was held, of which the public notices of the resolutions were published in Securities Times and Hong Kong Ta Kung Pao on Apr. 27, 2007 (public notice No.: 2007-006). 3. On Jun. 28, 2007, the 3rd meeting of the 4th Board of Directors in 2007 was held, of which the public notices of the resolutions were published in Securities Times and Hong Kong Ta Kung Pao on Jun. 30, 2007 (public notice No.: 2007-014). 4. On Jul. 13, 2007, the 4th meeting of the 4th Board of Directors in 2007 was held, of which the public notices of the resolutions were published in Securities Times and Hong Kong Ta Kung Pao on Jul. 14, 2007 (public notice No.: 2007-016). 5. On Aug. 23, 2007, the 5th meeting of the 4th Board of Directors in 2007 was held, of which the public notices of the resolutions were published in Securities Times and Hong Kong Ta Kung Pao on Aug. 24, 2007 (public notice No.: 2007-017). 6. On Oct. 29, 2007, the 6th meeting of the 4th Board of Directors in 2007 was held, of which the public notices of the resolutions were published in Securities Times and Hong Kong Ta Kung Pao on Oct. 30, 2007 (public notice No.: 2007-020). 7. On Nov. 14, 2007, the 7th meeting of the 4th Board of Directors in 2007 was held, of which the public notices of the resolutions were published in Securities Times and Hong Kong Ta Kung Pao on Nov. 16, 2007 (public notice No.: 2007-022). (II) The execution of the resolutions at Shareholders’ General Meeting by the Board of Directors in the report period: In the report period, the Board of Directors of the Company strictly fulfilled the rights and obligations authorized at Shareholders’ General Meeting, and executed all the resolutions at Shareholders’ General Meeting, ensuring the resolutions were thoroughly carried out carefully. (III) Performance of the Audit Committee 1. The auditing status of the Financial Statements of the Company by the Audit Committee The Audit Committee of the Board of Directors reviewed the Financial Statements compiled by the Company before the CPAs’ entry for the yearly audit of the Company, believing that, the statements was in line with the Accounting Standard for Business Enterprises published by the State, and truly reflected the financial status of the Company and the operating results and cash flow in 2007, so it was permitted that Shulun Pan Certified Public Accountants carried out the annual audit in 2007 on the basis of the said statements. After the accountant firm issued the preliminary audit opinion, the Audit Committee reviewed the related financial and believed that, the Financial Statements of the Company was complied with the basic situation of the Company after the adjustment of the Financial Statement of the Company according to the adjusting journal entry. The auditors’ report except the item with qualified and emphasized opinion issued by the accountants firm was in light with the actual situation of the Company. The Financial Statement was compiled based on Accounting Standard for Business Enterprises, reflecting the financial status of the Company on Dec. 31, 2007 and the operating results, cash flow and shareholders’ equity in 2007 in all the significant aspects. 2. Supervision of the annual audit work of the Company by the Audit Committee Before the entry of the CPAs, the Audit Committee, the Financial Department of the Company and the accountant firm consulted together to decide the time for the audit work of the Financial Report of the Company in 2007. After the entry of the CPAs, according to the audit time and progress confirmed by the consultation with accountant firm, the Audit Committee of the Board of Directors entrusted someone specially assigned to supervise by means of telephone and email, as well as auditors’ report being submitted in schedule. 3. Opinion on Annual Financial Statements and engagement of CPAs from the Audit Committee On Apr. 28, the 2nd meeting of the 4th Audit Committee of the Board of Directors was held, at which such proposals were examined and approved as Permission to Submit Annual Financial Report, Summary of Audit Work in Last Year and Engagement of Shulun Pan Certified Public Accountants. 4. Summary of the performance of the Remuneration and Appraisal Committee In the report period, according to the Proposal on Confirming Remuneration of the Senior Managements of the Company which was examined and approved at the 1st meeting of the 2nd Board of Directors of the Company in 2002, the Proposal on Allowance Standard of the Directors, Independent Directors and Supervisors which was examined and approved at the Shareholders’ General Meeting in 2001 and the performance assessment system of the Company, the Remuneration and Appraisal Committee of the Board of Directors believed that the remuneration of the directors, supervisors and the senior management staffs of the Company was confirmed and executed according to the above resolutions and system, of which the amount was in line with the operating status of the Company in 2007. V. Profit distribution preplan in 2007 According to the audit of Shulun Pan Certified Public Accountants Co., Ltd., the net profit of the Company was realized by RMB -79.70 million with the retained profit in last year of RMB 74.13 million, the profit available for distribution was RMB -5.57 million. The profit distribution preplan was no distribution or capitalization. Section IX Report of the Supervisory Committee I. Particulars about work of the Supervisory Committee in the report period Apart from attending the Board meetings of the Company, the Supervisory of Committee of the Company held 4 meetings totally: (I) On the afternoon of Apr. 26, 2007, the 1st meeting of the 4th Supervisory Committee of the Company was held at the meeting room of the Company on 12/F, Orient Building, Dongmen Middle Road, Luohu Area, Shenzhen. The following resolutions were examined and approved in this meeting: 1. Report on Work of the Supervisory Committee 2006; 2. Annual Report and Abstract 2006; 3. Opinion on Operation of the Company in 2006 from the Supervisory Committee. (II) On the afternoon of Aug. 23, 2007, the 2nd meeting of the 4th Supervisory Committee of the Company was held at the meeting room of the Company on 12/F, Orient Building, Dongmen Middle Road, Luohu Area, Shenzhen. The following resolutions were examined and approved in this meeting: 1. Permission for Text and Abstract of Interim Report 2007; 2. Proposal on Permitting Opinion of Reviewing Interim Report 2007. (III) On the morning of Oct. 29, 2007, the 3rd meeting of the 4th Supervisory Committee of the Company was held at the meeting room of the Company on 12/F, Orient Building, Dongmen Middle Road, Luohu Area, Shenzhen. The following resolutions were examined and approved in this meeting: 1. Permission for the Third Quarterly Report 2007; 2. Permission for Review Opinion of the Third Quarterly Report 2007; 3. Permission for Rectification Report on Strengthening Special Campaign of Corporate Governance. (IV) On the morning of Nov. 14, 2007, the 4th meeting of the 4th Supervisory Committee of the Company was held at the meeting room of the Company on 12/F, Orient Building, Dongmen Middle Road, Luohu Area, Shenzhen. The following resolution was examined and approved in this meeting: Permission for Opinion on Assets Sale (Related Transaction). II. Authorized by the Shareholders’ General Meeting, the Supervisory Committee and all supervisors performed the supervision duties according to the present laws and regulations of the State, the Article of Association and Rules of Procedure for the Supervisory Committee: (I) The Company’s operation according to laws In the report period, the Supervisory Committee conducted supervision and investigation about all the work of the Company, the members of the Supervisory Committee attended the Board meeting as non-voting delegate. The Company could strictly operate according to relevant policies, regulations of the State and the Articles of Association. Based on the principle of prudently operating and effectively preventing and minimizing risks, the Company had established a relatively perfect internal control system. While performing their duties in the Company, directors, general managers or other senior executives had no cases that were against laws, regulations, or Articles of Association, or did harm to the interests of the Company. (II) Finance of the Company The Supervisory Committee carefully fulfilled the duty of inspecting financial status of the Company and believed that the Audit Report in 2007 issued by the audit institution objectively and truly reflected the financial status and operating results of the Company. (III) The transaction prices of purchase and sale of the Company were reasonable and did not find the actions which were secret transaction or harm interests of shareholders or assets draining. (IV) In the report period, the related transaction did not harm the benefits of the shareholders and investors. (V) Permission of the special explanation to the Financial Report in 2007 which was issued non-standard auditors’ report by the accountants firm from the Board of Directors. Section X Significant Events I. The Company had no significant lawsuits or arbitrations in the report period. II. Significant purchases within the report year 1. Sold 5% equity of Shanghai Doright Fashion Co., Ltd and Dezhou Sino-Union Garment Co., Ltd respectively The Company signed Share Transfer Agreement with Hong Kong CEC Menswear Ltd on 28 Jun. 2007, which included sales 5% equity of “St. Paul” brand series companies with total price of RMB 23,500,000. The transfer was in the processing of transaction. Details of transaction event referred to public notice, which was published in o Securities Times and Hong Kong Ta Kung Pao dated 30 Jun. 2007 with Notice No. 2007-015 After share transfer, Hong Kong CEC Menswear Ltd was the first shareholder and controlled management of daily operation of Shanghai Doright Fashion Co., Ltd and Dezhou Sino-Union Garment Co., Ltd due to holding 39% equity of the aforesaid two companies respectively. Therefore, the Company has no right to decide the financial and operating policy of the aforesaid two companies, in accordance with requirements stipulated in Accounting Standards for Business Enterprises, balance sheet at the period-end of the two companies was not in range of consolidation, but profit statement and cash flow statement was within the range of consolidation. As for long-term equity investment of the two companies, the Company changed to equity method from cost method. The change procedure of industrial and commercial of the aforesaid share transfer had been completed. 2. Sold 5% equity of Shanghai Doright Fashion Co., Ltd and Dezhou Sino-Union Garment Co., Ltd respectively, and 100% equity of Puning Rieys Paper Co., Ltd. Details of transaction event referred to Section X, III. III. The significant related transactions of the Company in the report period 1. Except sales of 31% equity of Shanghai Doright Fashion Co., Ltd and Dezhou Sino-Union Garment Co., Ltd respectively and 100% equity of Puning Rieys Paper Co., Ltd, the Company had no significant related transactions. Puning Rieys Paper Co., Ltd (Referred to Rieys Paper hereinafter) invested and established by the Company could not put into production till now due to uncertain factors and the Company bore jumbo fund for implementation the project, which caused capital shortage of the Company. In order to perfect financial status and solve the capital shortage, the Company sold 31% equity of Shanghai Doright Fashion Co., Ltd and Dezhou Sino-Union Garment Co., Ltd respectively (The two aforesaid companies referred to as “Shanghai Doright” and “”Dezhou Sino-Union”, which referred to as “St. Paul series companies” united) and 100% equity of Puning Rieys Paper Co., Ltd with total price of RMB 236 million to share holding company or actual controlling company by Mr. Chen Hongcheng, Chairman of the Board of the Company. The details were as follows: Sky Trend Investment (Group) Limited (referred to as “Sky Trend Investment” hereinafter) transferred 31% equity of St. Paul series companies held by the Company with RMB 148 million; Shenzhen Risheng Investment Co., Ltd (referred to as “Risheng Investment” hereinafter) transferred 67% equity of Rieys Paper held by the Company with RMB 53,630,000; Jiecheng Investment (Group) Co., Ltd (referred to as “Jiecheng Investment” hereinafter) transferred 33% equity of Rieys Paper held by Tianrui (HK) Trading Co., Ltd (referred to as “Tianri Hongkong” hereinafter). (1) Transaction of 100% equity of Rieys Paper: In accordance with Evaluation Report issued by Beijing Union & Glory Assets Evaluation Co., Ltd (referred to as “Union & Glory” hereinafter) with document No. ZSLM(BJ) APBZ (2007) No. 043 (the evaluation date was on 30 Sep. 2007), market value of 100% equity of Rieys Paper was RMB 88,343,400 on the date of evaluation. According to Audit Report issues by Shenzhen Pengcheng Certified Public Accountant Co., Ltd with document No. SPSSZ [2007] No. 1002, the audited book net value of Rieys Paper was RMB 88,087,000, and appreciation of 100% equity of Rieys Paper amounted to RMB 256,400, with appreciation rate of 0.29%. According to the result of evaluation, evaluation value of 67% equity of Rieys Paper held by Guangdong Rieys Group Company Ltd should be RMB 59,190,000, and 33% equity of Rieys Paper held by Tianri Hongkong should be RMB 29,153,400. Unanimously negotiated by both parties, trading price of 33% equity of Rieys Paper was RMB 34,370,000, and trading amount totaled RMB 88 million. (2) Transaction of respective 31% equity of Shanghai Doright and Dezhou Sino-Union According to Evaluation Report issued by Union & Glory with document No. ZSLM(BJ) APBZ (2007) No. 044 (the evaluation date was on 30 Sep. 2007), market value of 100% equity of St. Paul series companies was RMB 471 million, and evaluation value of 31% equity held by the Company was RMB 146,010,000 (471,000,000 X 31%=146,010,000); According to Audit Report issues by Shenzhen Pengcheng Certified Public Accountant Co., Ltd with document No. SPSSZ [2007] No. 1003, the audited book net value of St. Paul series companies was RMB 20,138,460,000, and the shareholders’ equity of 31% equity of St. Paul series companies held by the Company was RMB 62,987,200. Appreciation of 100% equity of St. Paul series companies amounted to RMB 83,022,800, with appreciation rate of 131.81%. According to the result of evaluation, evaluation value of respective 31% equity of Shanghai Doright and Dezhou Sino-Union held by Guangdong Rieys Group Company Ltd should be RMB 59,190,000, and 33% equity of Rieys Paper held by Tianri Hongkong should be RMB 146,010,000. Unanimously negotiated by both parties, trading price of 31% equity of Rieys Paper was RMB 34,370,000. In conclusion, evaluation value of transferred share totaled RMB 23,435,340,000. Based on the evaluation value and unanimously negotiated by both parties, price of share transfer of respective 31% equity of Shanghai Doright & Dezhou Sino-Union and 100% equity of Rieys Paper totaled RMB 236 million, appreciated RMB 84,925,800 compare with audited net book value. Deducting equity investment balance RMB 10,880,000 and assets impairment RMB 72,170,000, the income from this transaction totaled RMB 1,880,000. (3) The effect of the Company after transaction mainly represented in the following aspects: 1) Helping with perfecting financing environment and financial structure, strengthening profitability; Since 2004, the Company kept assets liabilities ratio being about 50%, therefore, the Company withdrew jumbo amount from operating income to repay the loan and interest. Meanwhile, the Company relieved pressure of repaying loan with the method of repaying old loan with new loan due to the short-loan of the bank and short repayment term. The Company repaid principal of the loan RMB 200 million and interest RMB 100 million since 2004 till now. In view of the sliding down of pressure from repayment and operating achievements, it was difficult for reasonable planning and utilization of the current capital. In order to relieve pressure of shortage of capital, the Company sold 34% equity of Shanghai Doright and Dezhou Sino-Union respectively to Hongkong CEC Limited and gain RMB 102 million in 2006. The Company sold 5% equity of Shanghai Doright and Rieys Paper respectively at the price of EMB 23,500,000 in Jul. 2007, which caused changes in range of consolidated statement. But in the effect of loan of bank and Rieys Paper, there were no great changes in the capital of the Company and the Company still faced jumbo pressure from repayment of the loan; Owing to sliding down of the operating achievements and the bank constricted loan scale of the Company since 2004, the Company faced jumbo pressure from repayment. After this transaction, the part funds would solved the liabilities and burdens which troubled the development of the Company. After settlement of loan of the bank and sales of Rieys Paper, interest expenditures of the Company reduced by a large margin. The Company invested more in design, production and sales of fashion and reasonably planned and used the capital, which benefited to strengthen profitability of the Company. 2) Benefit to resolve capital occupation of the listed company Before the sales, Rieys Paper accumulatively occupied principal and interests totaled RMB 117.94 million. In order to thoroughly resolve capital occupation of listed company, Rieys Paper signed repayment agreement with the Company and promised to repay 70% of principal and interest of occupied capital in cash by 30 Jun. 2008, and the remained 30% of the loan repaid in cash by 31 Aug. 2008. 3) Helping with resolving problems restrict development to the Company, benefit to highlight the main industry and being good for enhancing continuing operation and core competitive competence. In order to implementation diversified operation strategy, the Company self-financed to establish Rieys Paper with method of loan from bank since 2003, and prophase principal and interest paid for Rieys Paper totaled RMB 177,940,000 at present. But owing to various reasons, Rieys Paper hadn’t put into operation and benefit till now, and the Company paid jumbo interest. Therefore, the problem restricted development of the Company was improper investment, which caused heavy pressure of capital and further caused sliding down of the operation status and made the Company entered into vicious circle. From the experience of Rieys Paper, the Company woke up to largen, strengthen and do the main operation better. The Company peeled off Rieys Paper, retired paper making industry which was not familiar with, boned up to production and sales of fashion, and concentrated energy on main operation. Meanwhile, by the sale, the Company repaid the loan of bank and developed design, production and sales of fashion with part of balance, which was benefit to the continuing operation and core competitive competence and laid foundation for later development of the Company. 2. Related credits and liabilities current Unit: RMB’0000 Funds provided by the Company to Funds provide by related parties to Related parties related parties the Company Occurred amount Balance Occurred amount Balance Chen Hongcheng 0.00 0.00 47.00 78.00 Ding Lihong 0.00 0.00 80.00 214.00 Sky Trend Investment (Group) 14,800.00 14,800.00 0.00 0.00 Limited Total 14,800.00 14,800.00 127.00 292.00 Reason for new capital occupied in the year 2007: Sky Trend Investment (Group) Limited, the associated company of Mr. Chen Hongcheng (the actual controller), acquired 31% equity of Shanghai Doright Fashion Co., Ltd and 31% equity of Dezhou Sino-Union Garment Co., Ltd with RMB 148 million. The above-mentioned equity has been completed the registration procedure for administration for industry and commerce on 28 Dec. 2007. The Company failed to receive the aforesaid payment for equity transfer, therefore, non-operating capital occupied was formed. Settlement measure made by the Board Date Amount (RMB’0000) Reason Responsible person of Directors The Board of Director made a special resolution on the said capital occupied, To fail to pay which transferee should pay payment for payment for 28 Dec. 2007 14,800.00 Cheng Hongcheng equity transfer before 30 June 2008, in equity case of unpaid overdue, responsible transfer person shall be subject to the liabilities of leaders. Total 14,800.00 - - - IV. Significant guarantees made by the Company in the report period: 1. The Company had no external guarantee within the report period. 2. The guarantees provided by the Company to its subsidiaries within the report period 1) The Company provided a joint responsibility guarantees for a liquid fund applied by Shenzhen Rieys Industrial Co., Ltd (a subsidiary of the Company) amounting to RMB 20 Million in total from Hua Xia Bank Bao’an Sub-Branch and Agricultural Bank of China Nanshan Sub-Branch. 2) The Company provided a joint responsibility guarantee for a liquid fund applied by the Company’s subsidiary Puning Tianhe Textile Manufactory Co., Ltd. amounting to RMB 45 million from China Everbright Bank Guangzhou Branch and Punning Rural Credit Cooperative Liushaxi Branch. At present, the Company existed no external guarantee. The guarantee accumulatively provided by the Company to its shareholding subsidiaries amounted to RMB 65 million in total, taking up 14.41 % of net assets. V. Commitments made by the Company or shareholders holding more than 5% shares in the report period or lasting to the report period 1. No commitments made by the Company or shareholders holding more than 5% shares of the Company in the report period. 2. Commitments events made by the Company lasting to the report period referred to Note IX of Accounting Report. VI. In the report period, the Company dismissed Linghui Certified Public Accountants Co., Ltd. as oversea auditor. Approved by the 1st Extraordinary Shareholders Meeting 2008 on 17 Mar. 2008, the Company engaged Shunlun Pan Certified Public Accountants Co., Ltd as the auditor. The remuneration of the certified public accountants was RMB 330,000 in 2007, and the service term of audit of Shunlun Pan Certified Public Accountants Co., Ltd was one year. VII. In the report period, the Board of Directors, the Supervisory Committee, directors, supervisors of the Company had not been inspected, administratively punished or criticized with circulars by CSRC, nor had been condemned publicly by Shenzhen Stock Exchange. In accordance with provisions stipulated by Circular on the Matters Concerning Carrying out a Special Campaign to Strengthen the Corporate Governance of Listed Companies issued by CSRC with document No. ZJGSZ [2007] No. 2008 and Circular on Carrying out a Special Campaign to Strengthen the Corporate Governance of Listed Companies, China Securities Regulatory Commission Guandong Securities Regulatory Office examined corporate governance on the spot from 12 Sep. 2007 to 14 Sep. 2007. Aiming at problems in the examination, China Securities Regulatory Commission Guandong Securities Regulatory Office issued Circular Concerning Relevant Issues on Rectification within the time limit with document No. GDZJH [2007] No. 667 on 8 Oct. 2008 (referred to as “Circular” hereinafter), which required the Company to rectify within the time limit on the existed problem. Receipt of Circular, the Company paid high attention, organized all directors, supervisors and senior executives to study, analyzed problems adopted in rectification circular item by item, formulated relevant rectification measure, and supervised relevant person to carry out item by item. The Rectification Report was published in Securities Times and Hong Kong Da Kung Pao dated 30 Oct. 2007. VIII. Non-operation fund occupying of big shareholder & affiliated enterprise in the report period Details referred to Article III, Section VIII of the report. IX. The Company didn’t accept or invite special objects for interviews, communications and visits in the reporting period. Section XI. Financial Report I. Auditors’ Opinion (attachment) II. Accounting Statement and Notes (attachment) Section XII. Documents for Reference 1. Accounting statements with the signatures and seals of legal representative, financial principal and person in charge of accounting 2. Original of Auditor’s Report with seals of accounting agencies and certified public accountants and seals and signatures of certified public accountants 3. Originals of all the documents of the Company ever disclosed publicly on the information-disclosure media designated by CSRC, as well as original manuscripts of all notifications of the Company. The Report is prepared both in Chinese and English. Should there be any difference in interpretation between the two versions, the Chinese version is prevailing. Guangdong Rieys Group Company Ltd Board of Directors 29 Apr. 2007 AUDITORS’ REPORT XKSBZ（2008）No.11566 TO THE SHAREHOLDERS OF GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY: We have audited the accompanying financial statements of Guangdong Rieys (Group) Joint-stock Company(hereinafter referred to as ‘the Company’), which comprise the balance sheet and the consolidated balance sheet as of December 31, 2007, the income statement and the consolidated income statement, the cash flow statement and the consolidated cash flow statement, the statement of changes in owners’ (shareholders’) equity and the consolidated statement of changes in owners’ (shareholders’) equity, for the year then ended, and notes to the financial statements. Management’s responsibility for the financial statements Management is responsible for the preparation of these financial statements in accordance with Accounting Standards for Business Enterprises (Version 2006). This responsibility includes: ¾ Designing, implementing and maintaining internal control relevant to the preparation of financial statements that are free from material misstatement, whether due to fraud or error; ¾ Selecting and applying appropriate accounting policies; and ¾ Making accounting estimates that are reasonable in the circumstances. Auditor’s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Chinese Certified Public Accountants Auditing Standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider the internal control relevant to the preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Basis for qualified opinion As indicated in Note 7.6, the Company has completed the 36% equity transfer of St. Polo & Other Brands Co., Ltd. before 31 December 2007. However, the Company did not receive the equity transfer consideration of RMB 171.5 million, of which the amount due from CEC Menswear Ltd. was RMB23.5 million and the amount due from Sky Trend Hong Kong Investment Ltd. (a related party with the ultimate controller of the Company, Mr. 陈鸿成). We have not bee able to obtain sufficient and appropriate audit evidence to ascertain the validity of the directors’ assessment on the full recoverability of the above two equity transfer considerations. Opinion In our opinion, except for the possible effect of the above mentioned matter the financial statements of the Company have been prepared in accordance with Accounting Standards for Business Enterprises (Version 2006) and present fairly, in all material respect, the financial position of the Company as of December 31, 2007, the results of its operations and cash flows for the year then ended. Emphasis of matter We’d like to draw your attention that the Company incurred approximately a net loss of RMB79.7 million during year 2007. As of the date of this report, the Company has accumulative overdue bank loans of around RMB 276 million. The Company has disclosed its active steps that the Company is going to take to improve its performance. However, it was still of great uncertainty relating to the going concern basis. Our opinion is not qualified in this respect Shu Lun Pan Certified Public Accountants Co., Ltd. Certified Public Accountant of China Lin Zhen Gao Fei Shanghai, China Date: April 20, 2008 广东雷伊(集团)股份有限公司 2007 年年度报告摘要 Financial Statement 9.2.1 Balance Sheet Prepared by Guangdong Rieys Group Company Ltd. 31 Dec. 2007 Unit: RMB Yuan Amount at the period-end Amount at the period-begin Items Consolidation Parent Company Consolidation Parent Company Current assets Cash and cash equivalents 8,712,972.83 1,665,415.85 59,579,982.45 36,530,091.81 Settlement fund Outgoing call loan Trading financial assets 501,573.60 Notes receivable Accounts receivable 100,373,896.77 14,502,575.47 126,851,073.65 16,922,752.93 Prepayment 56,824,825.29 15,053,790.25 80,195,048.75 17,517,076.05 Insurance receivables Reinsurance Receivable Provision of reinsurance contract reserve receivable Interests receivable Other receivables 218,144,803.34 348,172,287.71 97,438,339.20 217,307,868.45 Financial assets purchased under agreement to resell Inventories 55,944,391.83 7,594,016.56 160,537,863.13 3,159,279.62 Non-current assets due within 1-year Other current assets Total current assets 440,000,890.06 386,988,085.84 525,103,880.78 291,437,068.86 Non-current assets： Loan and payment on other's behalf disbursed Available-for-sale financial assets Investment held to maturity Long-term receivables Long-term equity 7,164,692.02 319,071,500.68 12,980,058.56 350,161,340.06 investment Investment property Fixed assets 297,021,626.47 79,680,808.57 350,724,594.57 96,538,935.24 Construction in progress 2,060,754.99 1,040,571.59 121,743,316.17 5,220,571.59 Engineering materials Disposal of fixed assets Production biological assets Oil-gas assets Intangible assets 71,246,813.00 51,716,447.96 81,207,509.45 52,824,056.60 R&D expenses Goodwill 14,361,926.77 Long-term deferred expenses Deferred tax assets 1,457,768.93 6,067,546.53 Other non-current assets Total non-current assets 378,951,655.41 451,509,328.80 587,084,952.05 504,744,903.49 39 广东雷伊(集团)股份有限公司 2007 年年度报告摘要 Total assets 818,952,545.47 838,497,414.64 1,112,188,832.83 796,181,972.35 Current liabilities： Short-term loans 307,948,873.23 242,304,875.53 385,734,091.67 307,014,081.43 Loans from central bank Deposits received and hold for others Call loan received Held-for-trading financial liabilities Notes payable Accounts payable 16,985,531.68 2,383,189.65 35,877,543.08 755,581.38 Advance from customers 1,648,849.05 15,251,079.40 Financial assets sold under agreements to repurchase Fees and commissions payable Payroll payable 4,953,708.71 636,843.93 7,797,835.39 830,819.60 Taxes payable 5,190,095.83 802,361.27 4,011,264.56 -870,857.88 Interests payable 12,423,207.61 8,653,200.87 1,392,680.84 1,161,650.51 Other payables 11,342,433.46 131,880,144.35 22,631,777.92 130,159,353.13 Amount due to reinsurance Insurance contract provision Entrusted trading of securities Entrusted selling of securities Non-current liabilities due within 1-year Other current liabilities Total current liabilities： 360,492,699.57 386,660,615.60 472,696,272.86 439,050,628.17 Non-current liabilities： Long-term loans Bonds payable Long-term payables Specific payables Provision for liabilities Deferred taxes liabilities Other non-current liabilities Total non-current liabilities： Total liabilities 360,492,699.57 386,660,615.60 472,696,272.86 439,050,628.17 Shareholders' Equity： Share capital 318,600,000.00 318,600,000.00 318,600,000.00 318,600,000.00 Capital surplus 52,129,496.58 52,129,496.58 52,129,496.58 52,129,496.58 Less：Treasury Stock Surplus reserve 86,036,260.20 86,036,260.20 86,036,260.20 86,036,260.20 General risk provision Retained earnings -5,577,445.69 -4,928,957.74 74,126,890.90 -99,634,412.60 Foreign exchange difference Total shareholders' equity attributable to holding 451,188,311.09 451,836,799.04 530,892,647.68 357,131,344.18 company Minority interest 7,271,534.81 108,599,912.29 40 广东雷伊(集团)股份有限公司 2007 年年度报告摘要 Total shareholder's equity 458,459,845.90 451,836,799.04 639,492,559.97 357,131,344.18 Total liabilities & 818,952,545.47 838,497,414.64 1,112,188,832.83 796,181,972.35 shareholder's equity 9.2.2 Income Statement Prepared by Guangdong Rieys Group Company Ltd. Jan. - Dec. 2007 Unit: RMB Yuan This year Same period of last year Items Consolidation Parent Company Consolidation Parent Company I. Total revenue 407,819,022.64 29,633,336.46 486,827,752.70 43,316,335.27 Including: revenue 407,819,022.64 486,827,752.70 Interests income Insurance fee income Fee and commission income II. Total cost of sales 547,073,363.52 86,823,959.32 475,685,707.35 94,215,221.74 Including: Cost of sales 256,092,205.52 29,022,669.62 288,547,915.33 40,343,729.00 Interests expenses Service charge and commission income Insurance discharge payment Claim expenses-net Provision for insurance contract reserve-net Insurance policy dividend paid Reinsurance expense Business taxes 993,664.01 37,201.82 1,063,736.49 82,345.84 and surcharges Distribution 53,625,136.63 571,246.37 77,914,168.81 865,797.90 expenses Administrative 62,159,315.92 23,908,843.18 49,582,105.99 11,549,733.40 expenses Financial costs 40,245,005.65 19,599,481.83 39,085,684.32 28,146,467.29 Impairment 133,958,035.79 13,684,516.50 19,492,096.41 13,227,148.31 loss Plus: gain/loss on change in 207,513.60 fair value (“-”for loss) Gain/loss on 99,351,225.38 157,785,527.16 41,002,478.71 52,293,256.26 investment(“-”for loss) Including: income from investment on associates and jointly ventures Gain or loss on foreign exchange difference (“-”for loss) III. Operating profit(“-”for -39,903,115.50 100,594,904.30 52,352,037.66 1,394,369.79 41 广东雷伊(集团)股份有限公司 2007 年年度报告摘要 loss) Plus: non-operating income 6,169,367.37 99,043.07 7,014,747.47 408,136.00 Less: non-operating 6,271,280.10 5,988,492.51 16,176,263.98 8,724,611.53 expense Including: loss from disposal of non-current asset IV. Total profit(“-”for loss) -40,005,028.23 94,705,454.86 43,190,521.15 -6,922,105.74 Less: income tax expense 8,832,932.80 2,016,746.88 V. Net profit(“-”for loss) -48,837,961.03 94,705,454.86 41,173,774.27 -6,922,105.74 Including: Attributable to equity holders of the -79,704,336.59 15,141,538.32 parent company Minority interest 30,866,375.56 26,032,235.95 VI. Earnings per share (I) Basic earnings per -0.25 0.30 0.05 -0.02 share (II) Diluted earnings per -0.25 0.30 0.05 -0.02 share 9.2.3 Cash Flow Statement Prepared by Guangdong Rieys Group Company Ltd. Jan. - Dec. 2007 Unit: RMB Yuan This year Same period of last year Items Consolidation Parent Company Consolidation Parent Company 1. Cash flows from operating activities Cash received from sales 420,668,449.66 32,967,835.00 573,340,809.27 50,236,333.00 of goods or rending of services Net increase of deposits received and held for others Net increase of loans from central bank Net increase of inter-bank loans from other financial assets Cash received against original insurance contract Net Cash received from reinsurance Net increase of client deposit and investment Cash received from disposal of held-for-trading financial assets Cash received as Interests, fees and commissions received Net increase of inter-bank fund received Cash received under repurchasing, net Tax returned 13,148,092.88 1,000,000.00 19,829,402.00 Other cash received from 15,438,091.43 55,437,375.36 18,008,165.23 8,278,253.47 42 广东雷伊(集团)股份有限公司 2007 年年度报告摘要 operating activities Sub-total of cash inflow 449,254,633.97 89,405,210.36 611,178,376.50 58,514,586.47 from operating activities Cash paid for goods and 232,303,387.14 32,675,115.60 356,667,082.45 49,937,665.45 services Net increase of loans and advances Net increase of deposit in central bank, banks and other financial institutions Cash paid for original contract claim Cash paid for interests, fees and commission Cash paid for policy dividend Cash paid to and for 35,161,397.32 2,557,369.77 40,105,358.39 1,493,461.26 employees Cash paid for all types of 25,714,645.45 2,455,235.53 31,799,444.46 827,918.49 taxes Other cash paid relating to 89,411,576.89 28,360,727.05 86,100,781.92 35,600,912.90 operating activities Sub-total of cash 382,591,006.80 66,048,447.95 514,672,667.22 87,859,958.10 outflows Net cash outflow in 66,663,627.17 23,356,762.41 96,505,709.28 -29,345,371.63 operating activities 2. Cash Flows from Investing Activities Cash received from return 60,906,744.00 72,106,758.00 of investments Cash received from 12,960,000.00 12,960,000.00 41,093,256.05 41,093,242.00 investment income Net cash received from disposal of fixed assets, 174,300.00 123,000.00 15,500,000.00 intangible assets and other long-term assets Net cash received from disposal of subsidiaries and other operating units Other cash received 12,734,400.00 12,734,400.00 133,673,710.00 20,376,401.73 relating to investing activities Sub-total of cash inflows 25,868,700.00 25,817,400.00 251,173,710.05 133,576,401.73 of investing activities Cash paid for acquisition of fixed assets, intangible 11,694,484.71 63,742,947.67 4,458,049.10 assets and other long-term assets Cash paid for acquisition 1,400,000.00 1,400,000.00 90,200,000.00 11,700,000.00 of investments Net increase of pledge loans Net cash paid for acquisition of subsidiaries and other operating units Other cash paid relating to 12,763,059.10 investing activities 43 广东雷伊(集团)股份有限公司 2007 年年度报告摘要 Sub-total of cash outflows of investing 25,857,543.81 1,400,000.00 153,942,947.67 16,158,049.10 activities Net cash inflow from 11,156.19 24,417,400.00 97,230,762.38 117,418,352.63 investing activities 3. Cash Flows from Financing Activities: Cash received from investment Including: Cash received from minority shareholders of subsidiaries Cash received from 164,900,000.00 112,900,000.00 322,700,000.00 201,700,000.00 borrowings Cash received from bonds issuing Cash received relating to 36,486,443.23 35,666,443.23 financing activities Sub-total of cash inflows 201,386,443.23 148,566,443.23 322,700,000.00 201,700,000.00 of financing activities Cash paid for repayments 237,685,218.44 177,609,205.90 423,247,020.33 225,862,031.00 of borrowings Cash paid for dividends, 22,465,968.54 17,929,632.47 40,420,685.04 28,705,597.00 profit distribution or interest Including: dividends or profits paid to minority shareholders by subsidiaries Other cash paid relating to 23,110,606.00 35,694,427.17 35,694,427.00 financing activities Sub-total of cash outflows of financing 283,261,792.98 195,538,838.37 499,362,132.54 290,262,055.00 activities Net cash inflow from -81,875,349.75 -46,972,395.14 -176,662,132.54 -88,562,055.00 financing activities 4. Effect of foreign exchange -3,392,220.61 -112.47 rate changes 5. Net decrease in cash and -15,200,566.39 801,767.27 13,682,118.51 -489,186.47 cash equivalents Add : Cash and cash equivalents at the beginning of 23,885,555.84 835,665.20 10,203,437.33 1,324,851.67 the year 6. Cash and cash equivalents 8,684,989.45 1,637,432.47 23,885,555.84 835,665.20 at the end of the year 44 广东 9.2.4 Statement of Change in Equity Prepared by Guangdong Rieys Group Company Ltd. 31 Dec. 2007 Unit: RMB Y Year 2007 Shareholders' equity belonged to parent company Shareholders' equity be Less: Genera Retain Minori Less: Items Surplu Su Share Capital Treasu l Risk ed ty Total Share Capital Treasu s others capital reserve ry provisi earning interest capital reserve ry reserve res stock on s stock 318,60 108,59 639,49 318,60 I. Balance at 31 52,129, 86,036, 74,126, 52,129, 84 0,000.0 9,912.2 2,559.9 0,000.0 December, 2006 496.58 260.20 890.90 496.58 35 0 9 7 0 Plus: change in accounting policies Correction of errors in previous period 318,60 108,59 639,49 318,60 II. Balance at 1 January, 52,129, 86,036, 74,126, 52,129, 84 0,000.0 9,912.2 2,559.9 0,000.0 2007 496.58 260.20 890.90 496.58 35 0 9 7 0 III. Increase/ decrease -79,70 -101,3 -181,0 1,2 during the financial year 4,336.5 28,377. 32,714. 0 (“-”for loss) 9 48 07 -79,70 -48,83 30,866, (I) Net profit 4,336.5 7,961.0 375.56 9 3 (II) Gain and loss recognized directly in 广东 equity 1. Net changes in fair value of available-for-sale financial assets 2. Effects on changes in equity of invested companies under equity method 3. Deferred tax effect 4. Others -79,70 -48,83 30,866, Subtotal of (I)and (II) 4,336.5 7,961.0 375.56 9 3 -132,1 -132,1 (III) Contributions and 94,753. 94,753. decrease of capital 04 04 1. Contributions by shareholders 2. Equity settled share-based payment -132,1 -132,1 3. Others 94,753. 94,753. 04 04 1,2 (IV) Profit distribution 0 1. Surplus reserve 1,2 accrued 0 2. General risk 广东 provision accrued 3. Distribution to shareholders 4. Others (V) Transfer within shareholders' equity 1. Capital reserve transferred to capital (share capital) 2. Surplus reserve transferred to capital (share capital) 3. Surplus reserve offsetting losses 4. Others 318,60 458,45 318,60 IV. Balance at 31 52,129, 86,036, -5,577, 7,271,5 52,129, 86 0,000.0 9,845.9 0,000.0 December, 2007 496.58 260.20 445.69 34.81 496.58 26 0 0 0 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATEMENTS 1 Corporate information Guangdong Rieys (Group) Joint-stock Company（hereinafter referred to as ‘the Company’） is a listed company established by five enterprises including Puning Haicheng Industrial Co., Ltd , original sino-foreign cooperated enterprise of Hongxing Company and etc. under approval of Guangdong Economic System Reform Committee (1997) No. 113 on November 17, 1997 after joint stock system restructure based on Puning Hongxing Textile and Apparel Production Factory Co., Ltd., which is an original sino-foreign joint venture. The registered capital of the Company is 80,000,000 when established, which divided into 80,000,000 shares with denominational value of CNY 1.00. The Company issued 60,000,000 shares of foreign invested stock domestically listed (“Stock B”) for foreign investors on October 17, 2000, and issued 9,000,000 shares of Stock B with authority of excess sales of quota during the period from October 27 to November 22, 2000 in accordance with approval of ZJFXZ (2000) No. 133 issued by China Bond Supervision Management Committee on September 29, 2000. The registered capital of the Company increased to 177,000,000 after issuance of Stock B, which divided into 177,000,000 shares with denominational value of CNY 1.00. The registered capital of the Company increased to 318,600,000 after years of bonus distribution and transfer increase in paid-in capital, which divided into 318,600,000 shares with denominational value of CNY 1.00. The Company and its subsidiaries (hereinafter referred to as “the Group”)’s main scopes of business are manufacture, process and sales of various kinds of clothes including suit, fashion clothing, uniform, and knit goods, sales of industrial material for production, hardware, chemical product, daily necessities, furniture, arts and crafts and agricultural product and etc. (excluding commodities for exclusive sales, special control or monopolization) and various kinds of investment. 2 Principal accounting policies, estimates and errors of previous period 2.1 Statement of complying with Accounting Standards for Business Enterprises The financial statements prepared by the Company meet the requirements of the enterprise accounting standards, and exactly and completely reflect the financial status, operation result, change in owner’s equity and cash flow, etc of the Company. 48 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 2.2 Basis for the preparation In 2007, the net loss of the Company amounted to 79,700,000.00. The financial statements for the year 2007 of the Company are prepared on the basis of going concern. On the basis of going concern. The abilities of going concern, relized the value of assetsa and refund the debts in time are totally influenced by the status of the administration of the Company in future and the financial support from the banks which lent the borrowings or the creditors. To improve the liquidity of funds and the status of administration, the Company sold 36% shares of St. Polo & Other Brands Corporation by 171,500,000 in 2007. The Board of directors of the Company consider that in the foreseeable future, this receivable account will be received in time to rufund the debts before the maturity. Based on this estimate, the Board of dierectors of the Company are assured that on the basis of going concern the Company will maintain its operation, prepare the financial statements according to the actual transactions and events and make accounting comfirmation and measurement in accordance with ‘the Accounting Standard of P.R.C for Business Enterprise—Basic Standard’ and other accounting standards. The beginning balance of balance sheet and the income statement during the comparable period are prepared in accordance with ZJF [2006] No. 36 document and the stipulation of ZJKJZ [2007] No.10 document, and with the retroactive adjustment principle, the items, stipulated in the articles 5 to 19 of the No. 38 Enterprises Accounting Standard - First Implementation of Enterprise Accounting Standards and the "Accounting Standards for Business Enterprises Explanation Notice No. 1", have been adjusted. 2.3 Fiscal year The fiscal year of the Company is the solar calendar year, which is from January 1 to December 31. 2.4 Recording currency Recording currency is CNY. 49 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 2.5 Calculation natures and statement items with the changes of calculation natures in the report period In calculating the accounting factors, the Company adopts the historical cost method; in case the determined accounting factor amount can be obtained or reliably calculated, the replacement cost, net realizable value, current value or fair value of the individual accounting factor may be adopted. There is no change about calculation nature of statement items during current report period. 2.6 Confirmation standard for cash equivalent In preparing the cash flow statement, the cash equivalents of the Company include the investments with short period (it usually expires within three months from the purchase date), characteristics of high liquidity, easy conversion to certain amount of cash and little risk of value change. 2.7 Transactions of foreign currencies Foreign currency transactions are converted into CNY for recording purpose at the exchange rate on the first day of the period when the transaction occurs. Adjustments are made to foreign currency accounts in accordance with the exchange rate prevailing on the balance sheet date. Value of non currency item recorded at fair value by foreign currency is adjusted in accordance with the exchange rate prevailing on fair value confirm date. Conversion differences arising from those specific borrowings are to be capitalized as part of the cost of the construction in progress in the period before the fixed assets being acquired and constructed has not yet reached working condition for its intended use. Conversion differences arising from other accounts are charged to financial expenses. 2.8 Conversion of financial statements in foreign currency In balance sheet, assets and liabilities items are converted into CNY at the the exchange rate prevailing on the consolidated balance sheet date. Owner’s equity items (excluding Undistributed profit item) are converted into CNY at the exchange rate when the transaction occurs. In income statement, revenue and expenses items are recorded by the proper method and 50 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 the approximate rate when the transaction accurs. Translation difference occurred for above reason is disclosed in the consolidated balance sheet as a separate item. 2.9 Financial assets or financial liabilities a) Classification of financial assets or financial liabilities Based on the purpose of obtaining the financial assets and assuming the liabilities, financial assets or financial liabilities may be classified into: the financial assets or financial liabilities that are calculated in the fair values and whose changes are accrued to current profit and loss, including the trading financial assets or financial liabilities; the held-to-maturity investments; loans and receivables; available-for-sale financial assets; and other financial liabilities, etc. b) Confirmation and measurement of financial assets or financial liabilities (1) The financial assets or financial liabilities that are calculated in the fair values and whose changes are accrued to current profit and loss The fair values (excluding cash dividends that have been declared but have not been distributed and bond interests that have exceeded the expiry dates but have not been drawn) are deemed as the initial confirmation amount on acquisition. Relevant transaction expenses are charged to profit and loss of the period. The interests or cash dividends obtained during the holding period are recognized as investment income. Change of fair values is charged to profit and loss of the period at the year end. Difference between the fair value and initial book value is recognized as investment income upon disposal. Adjustment is made to gain or loss from changes in fair values. (2) Held-to-maturity investments The sum of fair values (excluding bond interests that have exceeded the expiry dates and have not been drawn) and relevant transaction expenses are deemed as the initial confirmation amount. During the holding period, interest income is recognized as investment income based on the amortized cost and actual interest rate (if the difference between the actual interest rate and the nominal interest rate is tiny, calculation is based on the nominal interest rate). The actual interest 51 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 rates are determined upon acquisition and remain unchanged during the expected holding period or a shorter period applicable. Difference between the amount received and book value of the investment is charged to profit and loss of the period upon disposal. (3) Receivables and loans For the receivables from sales of goods or rendering of services and other debt instruments of other corporations except for those quoted in active market held by the Company, including: accounts receivable, notes receivable, advances to suppliers, other receivables, etc, the prices specified in the contracts or agreements with the purchasers are deemed as the initial confirmation amount. For the receivables with financing characters, their present values are deemed as the initial confirmation amount. Difference between the amount received and book value of the receivables is charged to profit or loss of the period upon recovery or disposal. (4) Available-for-sale financial assets The sum of fair values (excluding cash dividends that have been declared but have not been distributed and bond interests that have exceeded the expiry dates but have not been drawn) and relevant transaction expenses is deemed as the initial confirmation amount. The interests and cash dividends generated during the holding period are accrued to investment income. At year end, available-for-sale financial assets are calculated in the fair values and the changes in fair values are accrued to the capital reserves (other capital reserves). Difference between the amount received and the book value of the financial assets is recognized as investment gain or loss upon disposal. At the same time, the accumulated changes in fair value previously recognized in the owners’ equity are transferred into investment gain or loss. (5) Other financial liabilities The sum of fair values and relevant transaction expenses is deemed as the initial confirmation amount. The subsequent calculation adopts the amortized cost method. c) Confirmation and measurement of transform of financial assets 52 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 The Company should terminate recognizing these financial assets when the transform occurs and almost all risk and return of the financial assets ownership have been transferred to the transferee; The Company should not terminate recognizing this financial assets if almost all risk and return of the financial assets ownership have been remained. Essence is more important than form when judging whether the transform meets the requirements of the financial assets termination recognition conditions mentioned above. The Company divides the transform of financial assets into entire transfer and partial transfer. If the transfer of an entire financial asset satisfies the conditions for stopping recognition, the difference between the amounts of the following two items shall be recorded in the profit and loss of the current period: (1) The book value of the transferred financial asset; (2) The sum of consideration received from the transfer, and the accumulative amount of the changes in the fair values originally recorded in the owners' equities (in the case that the financial asset involved in the transfer is an available-for-sale financial asset). For partial transfers of financial assets that meet the recognition conditions of termination in recognition, the book value of the whole financial assets are spitted into the terminated portion and the exterminated portion according to their respective relative fair values (under this situation, the retained service assets are deemed as a part of the exterminated financial assets), and the difference between the following two items shall be recorded in the profit and loss of the current period: (1) Book value of the terminated portion (2) The sum of the consideration of the terminated portion and the accumulated changes in fair value previously recognized in the owners’ equity related to the terminated portion (in the case that the assets transferred are available-for-sale financial assets) For transfers of financial assets that do not meet the conditions of termination in recognition, the financial assets remain recognition and the consideration received is recognized as financial liabilities. d) Confirmation of fair values of main financial assets and financial liabilities For the active financial assets or financial liabilities in the market, the Company will use the 53 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 quotations as their fair values. e) Impairment loss on financial assets (1) Impairment of available-for-sale financial assets: If at the year end the fair values of the available-for-sale financial assets decline significantly, or the trend of the decline is expected to be non-temporary after consideration of all relevant factors, the assets are deemed impaired and impairment loss is recognized together with the amount transferred from the accumulated decreases in fair values previously recognized in the owners’ equity. (2) Impairment of held-to-maturity financial assets: The treatment of impairment loss on held-to-maturity investments is in line with the impairment loss of the receivables. 2.10 Recognition standard and provision method of provision for bad and doubtful debts of accounts receivable If there is objective evidence at the year end to indicate that impairment exists in accounts receivable, their carrying amount should be decreasingly recorded as recoverable amount. The decreased amount should be recognized as impairment loss of assets and be recorded into profit and loss of the current period. Recoverable amount is recognized through discounting its future cash flow (excluding credit loss that has not occurred) at original actual rate with consideration of the value of related guarantee (deducting estimated disposal expenses and etc.). Original actual rate is actual rate calculated when recognizing the accounts receivable at first. Since there is tiny difference between estimated future cash flow and present value of short-term accounts receivable, the estimated future cash flow will not be discounted when recognizing related impairment loss. Conduct impairment testing separately on accounts receivable with relatively higher individual price at the end of the period. If there is objective evidence to indicate that impairment exists, recognize impairment loss and provide for bad and doubtful debts in accordance with the difference between its future cash flow and carrying amount. Individual material receivables are the top five largest receivables or sum of receivables which account for 10% of ending balance of accounts receivable. 54 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 For individual receivables not material, the Company categorizes them together with the receivables tested unimpaired into groups using aging of the accounts as a similar risk factor, and assigns a certain percentage of the end of the period balance of the receivable groups (individual impairment test may be carried out) to determine the impairment loss and provide for bad debts. Except the receivables provided impairment loss separately, the Company set the provision rate in accordance with the actual loss percentage of the same or similar credit risk group by aging divided in the previous years and the real circs as follows: Aging of accounts receivable Appropriation proportion Within 1 year 2% 1 to 2 years 10% 2 to 3 years 50% Over 3 years 80% 2.11 Inventory a) Inventory classification Raw materials, turn-over materials, finished goods, merchandise inventory, goods in process, issued commodity and materials for manufacturing consignment etc. b) Calculation of issued inventory (1) The inventory is calculated using weighted average method when issued. (2) Amortization of turn-over materials: For low cost and short lived articles, use step-amortization method； For package materials, use lump-sum amortization method. c) System of stock inventories Perpetual inventory system. d) Recording method of provision for inventory devaluation At the end of the year, after overall check of the inventory, draw or adjust provision for inventory devaluation according to the lower of the cost of inventory and net realizable values of inventory. 55 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 In normal operation process, net realizable values of commodities inventories for direct sales including finished goods, commodities and materials for sales are determined by the estimated selling prices minus the estimated selling expenses and relevant taxes and fees; In normal operation process, net realizable values of materials that need further processing are determined by the estimated selling prices of the finished goods minus estimated cost to completion, estimated selling expenses and relevant taxes. For the inventory held to implement sales contract or work contract, its net realizable value is calculated on the basis of contract price. For the balance of inventory beyond the amount of the sales contract, its net realizable value is calculated on the basis of general selling price. Provision for inventory devaluation is provided for based on individual inventory item at end of the period. For inventory that has large quantity and low unit price, the provision for inventory devaluation is provided for based on categories of the inventory. For inventory related to the products manufactured and sold in the same district, with same or similar use or purpose, and difficult to account for separately from other items, the provision for inventory devaluation is provided for on a combined basis. When the factors that influence the decreased bookkeeping of inventory value have disappeared, switch back from the provision for inventory devaluation amount that previously appropriated and the amount that switched back is charged to profit and loss of current period. 2.12 Fixed assets, depreciation and provision for impairment loss a) Recognition standard of fixed assets Fixed assets are tangible assets that are held for use in the production or supply of services, for rental to others, or for administrative purposes; they have useful lives over one fiscal year. And they shall be recognized only when both of the following conditions are satisfied: (1) It is probable that economic benefits associated with the assets will flow to the enterprise; and (2) The cost of the fixed assets can be measured reliably. b) Classification of fixed assets The Company’s fixed assets are classified as buildings and constructions, machinery equipment, transportation equipment, electronic equipment, etc. c) Initial measurement of fixed assets Fixed assets are recorded at the actual cost on acquisition. 56 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 The cost of fixed assets purchased includes purchase price, related tax, transportation expenses, loading and uploading expenses, installment expenses and specialist service expenses attributable to the assets that arise before the assets are completed and put into use. Where payment for the purchase price of a fixed asset is deferred beyond normal credit terms, such that the arrangement is in substance of a financing nature, the cost of the fixed asset shall be determined based on the present value of the purchase price, The difference between the purchase price and its present value shall be recognized in profit or loss over the period of credit. The cost of a self-constructed fixed asset comprises those expenditures necessarily incurred for bringing the asset to working condition for its intended use. For fixed assets formed through obtaining them by the debtor paying for debt in debt restructure, recognize its recording value as fair value of the fixed assets, and record the difference between the carrying amounts of debt restructure and the fixed assets used for paying debt into profit and loss of the current period. In the circumstance of the non monetary assets exchange has commercial nature and fair value of surrendered or received assets can be measured reliably, recording value of received assets should be recognized as fair value of surrendered assets unless there is clear evidence to indicate that fair value of received assets is more reliable; for non monetary assets exchange which doesn’t meet the requirement of premise mentioned above, cost of received assets should be recognized as carrying amount and related tax expenses payable of surrendered assets and should not be recognized as profit and loss. Recording value of fixed assets obtained by absorbing and consolidated by enterprise under the same control should be recognized as carrying amount of the consolidated party; recording value of fixed assets obtained by absorbing and consolidated by enterprise under different control should be recognized as fair value. Recording value of financing leasehold should be recognized as fair value of leasing assets and present value of lowest leasing payment when leasing occurs whichever is lower. d) Depreciation method Depreciation of fixed assets is provided for on a straight-line basis, the depreciation rate is recognized in accordance with category, estimated useful life and estimated residual rate of 57 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 fixed assets. Fixed assets renovations expenses that meet the criteria of capitalization are depreciated on an individual basis over the interval of two renovations or remaining useful life of the fixed assets, whichever is shorter. Estimated useful life and annual depreciation rate of fixed assets by categories are as follows: Estimated useful Estimated net residual Annual depreciation Category life (year) value rate (%) rate (%) Buildings and constructions 35 5% 2.71% Machinery equipment 10 5% 9.50% Transportation equipment 8 5% 11.88% Office equipment and others 5 5% 19.00% Fixed assets fitment 2-5 － 20%－50% Leasehold improvement 2-5 － 20%－50% 2.13 Calculation method of construction in progress a) Classification of construction in progress The Construction in progress will be calculated based on the classification of proposed projects. b) Transfer time of construction in progress to fixed assets For the construction in progress, all expenses occurring before they are ready for the use will be the book values as the fixed assets. In case the construction in progress has been ready for use but the final accounts for completion have not been handled, from the date when such projects has been ready for use, the Company will evaluate the values and determine the costs based on the project budgets, prices or actual costs of projects, etc and the depreciation amount will also be withdrawn; when the final accounts for completion are handled, the Company will adjust the originally evaluated values subject to the actual costs, but will not adjust the withdrawn depreciation amount 2.14 Intangible assets a) Calculation method of intangible assets When acquiring, the intangible assets are recorded according to actual cost. For those the price of intangible assets deferred paid exceed normal credit condition so substantively has financing character, the cost of intangible assets is confirmed on the basis of present value of purchasing price. The book values of intangible assets to be obtained by the absorption merger from the 58 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 enterprises which are under the same control will be determined based on the book values of merging party; the book values of intangible assets to be obtained by the absorption merger from the enterprises which are not under the same control will be determined based on their fair values. b) Usage life and amortization of intangible assets (1) Estimation of useful life for intangible assets with finite useful life: At the end of each year, the Company will recheck the usage life of intangible assets with the limited usage life and amortization method will be rechecked. According to the re-check, the useful life and amortization method of the intangible assets at the end of the year are not different from those estimated before. (2) Amortization of intangible assets: In case their usage life is limited, the intangible assets are amortized evenly over the period in which they produce economic profit for the Company; in case it is impossible to evaluate the usage life when the intangible assets bring the benefits to enterprises, it will be deemed that the usage life of such intangible assets is uncertain and amortization is not applicable. 2.15 Amortization method and period of long-term deferred expenses Long-term deferred expenses are amortized evenly over the beneficial period. a) Prepaid rental of leasehold improvement for operation is amortized evenly over the period stipulated in the leasing contract; b) Leasehold improvement for operation on leased property is amortized evenly over the remaining leasing period or the remaining useful life whichever is shorter. 2.16 Impairment on other main assets except for inventories, investment properties and financial assets a) Long-term equity investment In case the cost method is used to calculate the long-term equity investments which are not quoted in the active market or whose fair values cannot be reliably calculated, the depreciation loss will be determined based on the difference between the book values and current values determined by the discounting of future cash flow in line with the current market return rate of similar financial assets. For other long-term equity investments, in case the calculation results of receivable amounts 59 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 indicate that the receivable amount of this long-term equity investment is less than their book values, the difference will be confirmed as the asset depreciation losses. Once the depreciation loss of long-term equity investment is confirmed, they will not be reversed. b) Long-term non-financial assets For long-term non-financial assets such as fixed assets, construction in progress, intangibles, etc, the Company assesses whether signs of possible impairment exist at end of each year. Impairment tests are performed on goodwill arises from business combinations and intangibles with uncertain useful life regardless of whether signs of possible impairment exist. For assets with signs of impairment, recoverable amounts are estimated. Recoverable amounts are determined as the fair value of the assets after netting off costs of disposal, and the current value of projected future cash flows generated by the assets, whichever is higher. When the recoverable amount of an asset is lower than the book value of the asset, the book value of the asset is reduced to its recoverable amount. The amount reduced is recognized as impairment loss on assets in the current profit and loss statement, and provision for impairment loss on assets is recorded at the same time. Future depreciation or amortization of assets is adjusted after recognition of impairment loss so that the adjusted book value of the assets (less estimated residual value) is amortized systematically over their remaining useful life. Impairment loss on long-term non-financial assets such as fixed assets, construction in progress, intangibles, etc shall not be reversed once recognized. When there are signs of possible impairment on assets, the Company estimates the recoverable amount of the assets on an individual basis. If it is not possible to estimate the recoverable amount of the individual asset, the Company shall determine the recoverable amount of the asset group to which the asset belongs. 2.17 Long-term Equity Investment a) Initial Calculation (1) Long-term equity investment caused by the enterprise merger In case the long-term equity investment are made to obtain the equities of the enterprises under the same control and the Company pays the cash, transfers the non-cash assets or bears the liabilities as the consideration for the merger, the book value share on the merging date to obtain the owners’ equities of the merging party will be deemed as the initial investment cost of long-term equity investment. The difference between the initial investment cost of long-term equity investment and paid cash, transferred non-cash assets and book values of liabilities will 60 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 be supplemented by the capital reserve; in case the capital reserve is not enough, the remaining gains will be adjusted. In case the Company issues the equity securities as the merger consideration, the book value share on the merging date to obtain the owners’ equities of the merging party will be deemed as the initial investment cost of long-term equity investment. If the book value amount of the issued shares is deemed as the capital, the difference between the initial investment cost of long-term equity investment and the book value amount of the issued shares will be supplemented by the capital reserve; in case the capital reserve is not enough, the remaining gains will be adjusted. All direct expenses related to the enterprise merger, including the auditing expense, evaluation expense, legal service expense, etc will be accrued to the current profit and loss. In case the long-term equity investment are made to obtain the equities of the merging enterprises which are not under the same control, the consolidation cost determined according to ‘Accounting Standard for Business Enterprises No. 20 – Business Combinations’ on the purchase date will be deemed as the initial investment cost. (2) Other types of long-term equity investment In case the long-term equity investment is made by cash payment, the actual payment amount will be deemed as the initial investment cost. In case the long-term equity investment is made by issuing the equity securities, the fair values of issued equity securities will be deemed as the initial investment cost. For the long-term equity investment made by the investors, the values agreed in the investment contracts or agreements (deducting the cash dividends or profits that have been declared but have not been dismissed) will be deemed as the initial investment cost, except that the contracts or agreements provide that the values are not fair. In case the long-term equity investment is made by exchanging the non-currency assets, and this exchange has the commercial substance and the fair values of exchanged assets can be reliably calculated, the fair values of assets surrendered will be deemed as the initial investment cost, unless there is conclusive evidence that the fair values of assets received are more reliable; for exchange of non-currency assets that do not satisfy the above conditions, the sum of book value of assets surrendered and relevant taxes payable will be deemed as the initial investment cost. 61 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 In case the long-term equity investment is made by the mode of liability restructure, the fair values of the obtained equities will be deemed as the initial investment cost. b) Judgment criteria of joint control and significant influence in the invested companies If, in accordance with provisions in the contracts, the Company enjoys joint control over certain economic activities only when taking part in significant financial and operational decisions with investors in need of share of control who unanimously agree, the Company is deemed to enjoy joint control with other parties over the invested companies. If the Company is authorized to take part in decision making with regard to the financial and operational policies, but is unable to control or control jointly with other parties over the invested company, the Company is deemed to be able to exercise significant influence over the invested companies. c) Subsequent measurement and income recognition When the Company is able to exercise significant influence or joint control, the difference of cost of initial investment in excess of the proportion of the fair value of the net identifiable assets in the invested companies is not adjusted against the initial cost of long-term equity investment. The difference of cost of initial investment in short of the proportion of the fair value of the net identifiable assets in the invested companies is charged into the current profit and loss statement. . The Company’s long-term equity investments in subsidiaries are accounted for by the cost method and adjusted according to the equity method when preparing consolidated financial statements. For joint ventures, proportional consolidation method is not applicable. When the Company has neither joint control nor significant influence in the invested companies, there is no quotation available on the active market, and the fair value of the investment cannot be reliably measured, the long-term equity investment is accounted for under the cost method. When the Company has joint control or significant influence over the invested companies, the long-term equity investment is accounted for under the equity method. Investment income recognized under the cost method is limited to the proportion of the 62 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 accumulated profit of the invested companies after the investment. Any excess of profit or cash dividend received over the above amount is recognized as withdrawals of initial investments. Recognition of share of losses of the invested companies under the equity method is treated in the following steps: First, reduce the book value of the long-term equity investment. Second, when the book value is insufficient to cover the share of losses, investment losses are recognized up to a limit of book values of other long-term equity which form net investment in substance by reducing the book value of long term receivables, etc. Finally, after all the above treatments, if the Company is still responsible for any additional liabilities in accordance with the provisions stipulated in the investment contracts or agreements, estimated liabilities are recognized and charged into current investment loss according to the liabilities estimated. If the invested company achieve profit in subsequent periods, the treatment is in the reversed steps described above after deduction of any unrecognized investment losses, i.e., reduce book value of estimated liabilities recognized, restore book values of other long-term equity which form net investment in substance, and in long-term equity investment, and recognize investment income at the same time. Treatment of other equity changes except for net profit or loss in the invested companies: For other equity changes except for net profit or loss in the invested companies, if the proportion of investments remain unchanged, the Company calculates the proportion it shall enjoy or bear and adjust book value of long-term equity investment, and increase or decrease capital reserves – other capital reserves at the same time. 2.18 Capitalization of borrowing expenses a) Confirmation principle of capitalization of borrowing expenses In case the borrowing expenses occurring in the Company may directly be attributable to the construction and productions of assets complying with the capitalization conditions, they will be capitalized and accrued to the relevant capital costs; other borrowing expenses will be confirmed as the expenses based on the actual amount at the time of occurrence and accrued to the current profit and loss. The assets complying with the capitalization conditions mean the assets such as fixed assets, 63 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 investment real estates and inventory, etc that need a long time of construction and production activities before they are ready for use or for sales. The borrowing expenses begin to be capitalized under the following circumstances: (1) The asset payment have been made which include the payment such as the paid cashes, transferred non-currency assets or borne liabilities with the interests to construct or produce the assets complying with the capitalization conditions; (2) The borrowing expenses have occurred; (3) The necessary construction or production activities to make the assets ready for use or sales have been launched. In case during the construction or production period the assets complying with the capitalization conditions are abnormally suspended and the suspension period exceeds 3 months continuously, the capitalization of borrowing expenses will also be suspended. The capitalization of borrowing expenses for the assets that have been constructed or produced and are ready for use or sales will be stopped. When parts of the purchased assets or assets whose production satisfies the capitalization conditions are completed respectively and can be used individually, the capitalization of the borrowing expenses of these parts will be stopped. b) Capitalization period of borrowing expenses The capitalization period means the period from the moment that the borrowing expenses start to be capitalized to the moment that the capitalization is stopped, which does not include the period that the capitalization of borrowing expenses is suspended. c) Calculation method about capitalization amount of borrowing expenses The interest expenses for special loans (after the deduction of interest income generated by the unused loan capitals or the investment return obtained from the temporary investments) and auxiliary expenses will be capitalized before the assets complying with the capitalization conditions are ready for the expected use or sales. The interest amount of general loans to be capitalized will be determined by multiplying the weighted average amount of the asset payment by which the accumulated assets exceed the 64 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 special loans with the capitalization rate of general loans. The capitalization rate will be determined based on the weighted average interest rate of general loans. In case the loans have the discounts or premiums, the Company will adjust the interest amount in each period based on the amortized discount and premium amount in each accounting period in accordance with the actual interest rate method. 2.19 Recognition of Income a) Sale of goods Revenue from the sale of goods is recognized when the enterprise has transferred to the buyer the significant risks and rewards of ownership of the goods; the enterprise retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; it is probable that the economic benefits associated with the transaction will flow to the enterprise; and the relevant amount of revenue and costs can be measured reliably. b) Rendering of service In case on the preparation date of balance sheet the results about service transaction can be reliably evaluated, the labor income will be confirmed by the completion percentage method. The completed percentage of service transactions is determined by the measurement of finished work （or the proportion of services performed to date to the total services to be performed, or the proportion of costs incurred to date to the estimated total costs）. In case the service transaction results on the preparation date of balance sheet cannot be reliably evaluated, they will be determined in the following methods: (1) In case the service costs that have occurred can be compensated, the service income will be confirmed based on such service costs and the same amounts will be settled as the service costs. (2) In case the service costs that have occurred cannot be compensated, such service costs will be accrued to the current profit and loss and will not be confirmed as the service costs. c) Use right of transferred assets In case the economic benefits related to the transaction will probably flow into the enterprise 65 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 and the income amounts can be reliably calculated, the Company will determine the income amount about use right of transferred assets by the following means: (1) The interest income amount will be calculated and determined based on the use time of currency capital from the Company by others and actual interest rate. (2) The income amount of use expenses will be calculated and determined subject to the charging time and method agreed in the relevant contracts and agreements. (3) Rental income from lease of properties a. Lease contracts, agreements or other notice of settlement ratified by leaseholder b. Have executed liabilities as stipulated in the contract, issued rental invoices and the proceeds have been or will be received with certainty c. Cost can be reliably measured 2.20 Confirmation of deferred income tax assets Using the profit before income tax which is used to offset the variance of temporary difference as a limit to confirm the deferred tax assets that produced by the variance of temporary differences which can be offset. 2.21 Reason for changes in range of consolidation Guangdong Li Wei Clothing Co., Ltd, Shanghai Bolderway Fashin Co., Ltd., Beijing Bolderway Fashion Co., Ltd., Sichuan Bolderway Business Co., Ltd., Guangzhou Ruicheng Trading Co., Ltd., Guangzhou Ruitang Trading Co., Ltd. Shanghai Tongrui Fashion Co., Ltd., Shanghai Jiancheng Commerce and Trade Co., Ltd., Shanghai Bolderway Fashion Co., Ltd. and Dezhou Sino-Union Garment Co., Ltd. share the operation for such clothing brands of ‘SBPRC’, ‘JEEP’ and ‘SIDEOUT’ (hereinafter referred as Companies operating SBPRC and etc.) Comparing with last year, there are 10 companies excluded in the current consolidated financial statements. The reason is: The Company holds 70% share rights of the Companies operating SBPRC and etc. In 2006, the Company had transferred its 34% share rights of the Companies operating SBPRC and etc. to CEC Menswear Limited with CNY1.02 billion. CEC Menswear Limited had issued commitment letter to promise that after takeover 34% share rights of the Companies operating SBPRC and etc., they would not join in the acquired Companies’ daily management. But the commitment letter 66 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 stated that after the takeover of share rights, commitment restrictions would not applied if there exits change in either members of the Board of Directors or higher management level or alternative resolution of the Board of Directors. In June 2007, the Company had transfer its 5% share rights of the Companies operating SBPRC and etc. with half price about CNY 23.50 million to CEC Menswear Limited. From the date the agreement signed, the Company did not have the major control power over the Companies operating SBPRC and etc, the commitment letter signed by CEC Menswear Limited was invalid; in November 14, 2007, the company transferred the remain 31% share rights of the Companies operating SBPRC and etc. to Tianzhuo Hong Kong Holding Company (this company is the related company of the actual controller of the Company, Chen Hongcheng), As of December 31, 2007, the above companies had finished the procedures for changes in trade and industry for the two share rights changes. Therefore, the Companies operating SBPRC and etc. no longer included in the range of consolidated financial statements. Only the income statement and cash flow statement from the beginning of the year to its sold date included in the range of consolidation. 2.22 Accounting policies, accounting evaluation changes and correction of accounting errors and relative effects Since January 1, 2007, the Company has implemented the enterprise accounting standard systems and guidelines issued by the nation. In accordance with the principle stipulated in the articles 5 to 19 of No. 38 Enterprises Accounting Standard - First Implementation of Enterprise Accounting Standards and the "Accounting Standards for Business Enterprises Explanation Notice No. 1", the following items of the statements have been adjusted under principles of retrospective adjustments: In accordance with No. 18 Enterprises Accounting Standard – Income Tax, the confirmation of income tax is changed from the taxes payable method to debt method of balance sheet In case the book value of the Company’s assets and liabilities is different from the tax base; realize the deferred income tax assets or liabilities in accordance with the standard. Effect on beginning Among which: effect on balance of retained beginning undistributed Effect on current Event earnings of 2007 profit of 2007 year profit 1、Changes of fair value for trading financial assets 74,704.90 74,704.90 --- 67 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 2、Recognize of deferred tax assets 4,308,570.89 4,308,570.89 -1,931,876.47 3、Recovery of amortization of long-term equity investment 3,484,254.50 3,484,254.50 --- Total 7,867,530.29 7,867,530.29 -1,931,876.47 3. Taxation 3.1 Main type of tax and tax rate of the Company Type of tax Tax rate Taxable basis VAT 17% Revenue of product Business Tax 5％ Rental income Enterprise income tax 12%-33％ Taxable income Enterprise income tax 0.5% Sales In accordance with the ‘Temporary Rules of VAT for P.R.C’, the export sales is exempt for VAT and the input-VAT of goods is refunded with refund rate according to relevant rules before export. (a) Tax free or its decrease The controlling subsidiary of Puning Tianhe Garment Manufacturing Factory Co., Ltd. is productive foreign invested enterprise. In accordance with Note 75 Term 7 of ‘Implement Detailed Rules of Income Tax of the People’s Republic of China for Enterprises with Foreign Investment and Foreign Enterprises’, the enpterprise applied for the priviledge of the taxation favorable policy of 50% enterprise income tax for export in June 2007, and was subject to the tax rate of 12% of standard income tax temporarily because the export production value occupied 91% of production value for Year 2006. The controlling subsidiary of Dongguan Jinjing Textile Co., Ltd is productive foreign invested enterprise. In accordance with the Term 8 of ‘Income Tax Law of the People’s Republic of China for Enterprises with Foreign Investment and Foreign Enterprises’, the enterprise is exempt for the first two profit-making years and will be subject to taxation at a rate of 50% of the standard Enterprise Income Tax rate for the following three years. And the enterprise has not entered the profit-making years. The controlling subsidiary of Shenzhen Tianqi Garment Manufacturing Co., Ltd. is productive foreign invested enterprise. In accordance with the relevant rules of SF (1998) No. 232 of the ‘Circular of Several Problems of Enterprise Tax Policy in Shenzhen Economic District’, the productive enterprise is exempt for the first two profit-making years and will be subject to taxation at a rate of 50% of the standard Enterprise Income Tax rate for the following three years. 68 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 The enterprise has entered the third year of the the three 50% tax rate deduction years and is subject to the taxation at a rate of 7.5%. 4. Business combination and the consolidated financial statements The Company adopts the Accounting Policies for Business Enterprises No.33 – Consolidated Financial Statements issued in February 2006. All subsidiaries under the Company’s control are included in the scope of consolidation. The consolidated financial statements are prepared by the parent company based on the individual financial statements of the parent company as well as the subsidiaries included in the scope of consolidation, with reference made to other relevant information and after adjustment to the investments in subsidiaries under equity method. During consolidation, internal equity investments and subsidiaries’ owner’s equity, internal investment income and subsidiaries’ profit distribution, internal transactions, internal debts and credits are eliminated. Subsidiaries adopt the same accounting policy with the parent company. Figures in this section are in CNY ’0000 unless otherwise stated. 69 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 4.1 Subsidiaries acquired through business combination under the same control Place of Actual inves as at end of the Full name of the invested company registration Nature Registered capital Scope of business (10 thou Shenzhen Rieys Industrial Co., Ltd (“Reiys Industrial“) Shenzhen Trading 50,000,000 Investment and import & export trading Puning Tianhe Garment Manufacturing Factory Co., Ltd. Clothes, production and sales of knitting (“Puning Tianhe”) Puning Manufacture HKD 116,670,000 colorized cloth HKD 61,33 Production and sales of high-intense paper Puning Rievs Paper Industrial Co., Ltd. (“Rievs Paper“) Puning Manufacture USD 29,000,000 series USD 2,42 Production and sales of clothes, sewing Shenzhen Chuanger Garment Co., Ltd. （“Shenzhen Chuanger“） Shenzhen Manufacture 1,200 products and etc. Shenzhen Tianqi Garment Manufacturing Co., Ltd.（“Shenzhen Tianqi“） Shenzhen Manufacture 100 Clothes production Clothes, other domestic commercial and Shenzhen Heyiyi Fashion Co., Ltd. （“Shenzhen Heyiyi“） Shenzhen Trading 1,000 material supplying and marketing industry Dongguan Jinjing Textile Co., Ltd. （“Dongguan Jinjing “） Dongguan Manufacture USD 12,800,000 Production, sales and process of top material USD 9,61 Tian Rui (HK) Trading Company Limited（“Tian Rui (HK)“） Hongkong Trading USD 1 Trading U a) Judgment criteria of ‘consolidation of corporations under the same control’ Consolidation of the above enterprise and the Company under the same control means corporation taken into consolidatio Shenzhen Sheng Heng Chang Industrial Co. Ltd. before and after consolidation, and the control is not temporary. b) Actual controlling party of the ‘same controller’ To the subsidiaries acquired through business combination under the same control, the actual controller of the same control is GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 4.2 Subsidiaries obtained by consolidation which is not under the same control There is no subsidiary obtained by consolidation which is not under the same control by the end of year. a) Recognition of goodwill (negative goodwill) brought from the consolidation not under the same control The difference between the consolidation cost of the buyer and the fair value of recognized net assets obtained from the consolidation is recognized as goodwill, which is recognized in consolidated statements respectively. b) Subsidiaries purchased not under the same control in this year There is no subsidiary purchased not under the same control in this year. c) Subsidiaries sold not under the same control in this year There is no subsidiary sold not under the same control in this year. 4.3 Changes in the scope of consolidation during the year a) Ten companies were excluded from consolidation for the following reasons: The Company originally held 70% equity of St. Polo & Other Brands Corporation. The Company transferred 34% equity of St. Polo & Other Brands Corporation to CEC Menswear Limited with the price of CNY 1.02 hundred million in 2006. CEC Menswear Limited issued the confirmation letter in 2006 to confirm that ‘CEC would not participate in daily operation management of purchased enterprises after purchasing 34% equity ofSt. Polo & Other Brands Corporation.’, but it is indicated that ‘It is beyond the confirmed limitation that member of Board of Directors or top management has significant changes or the Board of Directors has other decisions after the equity purchase.’. Thus, St. Polo & Other Brands Corporation is under the consolidated scope as of December 31 2006. The Company transferred its 5% equity ofSt. Polo & Other Brands Corporation to CEC Menswear Limited with the price of CNY 23.5 million. The Company would not has the absolute control over these enterprises and the confirmed letter issued by CEC Menswear Limited is invalidated since the date of agreement subscription. Furthermore, the Company transferred the rest 31% equity of St. Polo & Other Brands Corporation to Tianzhuo Hongkong Investment Co. 71 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 Ltd. on November 14 2007, which is the related party of Chen Hongcheng - the actual controller of the Company. The business changing procedures of the above two equity changing has been finished as of December 31 2007. Thus, St. Polo & Other Brands Corporation is not under the consolidated scope as of December 31 2007, and the profit and income statement and cash flow statement from the beginning of year to the sale date is consolidated within the consolidation scope according to CK (2002) No. 18 issued by finance ministry. b) Enterprise excluded from consolidation scope for reporting period Original total Net profit from Name of subsidiaries excluded from holding Net assets on Net assets by sale date to the consolidation percentage sale date the end of year end of year St. Polo & Other Brands Corporation: Shanghai Tongrui Fashion Co., Ltd. 36% 7,724,489.86 7,033,530.63 -1,390,959.23 Dezhou Sino-Union Garment Co., Ltd. 36% 100,373,142.69 64,673,515.66 1,889,221.85 Guangdong Liwei Apparel Co. Ltd. 36% -788,720.02 -398,775.04 389,944.98 Guangzhou Ruitang Trading Co. Ltd. 36% 124,440.35 260,221.08 135,780.73 Guangzhou Ruicheng Trading Co. Ltd. 36% 6,742.35 ---- 2,641.59 Shanghai Boldway Fashion Co., Ltd. 36% 22,904,698.03 37,113,712.78 14,209,014.75 Shanghai Bolderway Fashion Co., Ltd. 36% 49,837,904.32 54,678,118.94 5,540,214.62 Shanghai Jiancheng Commerce and Trade Co., Ltd. 36% 24,307,778.52 56,311,594.45 32,003,815.93 Beijing Boldway Apparel Trading Co. Ltd. 36% -2,996,417.90 -2,853,706.58 142,711.32 Sichuan Baodewei Commerce and Trade Co., Ltd. 36% -345,931.01 -191,118.55 154,812.46 72 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 4.4 Minority shareholders’ equity and interest Increases/decreases Opening of minority share Other increases/ Ending Item balance holders’ equity decreases balance Remark Shenzhen Rieys Industrial Co., Ltd 5,026,815.37 -683,584.16 --- 4,343,231.21 Shenzhen Chuanger Garment Co., Ltd. 8,991,610.81 359,271.92 -6,422,579.13 2,928,303.60 Note 1 St. Polo & Other Brands Corporation 91,379,123.71 34,393,050.20 -125,772,173.91 --- Note 2 Shenzhen Heyiyi Fashion Co., Ltd. 3,202,362.40 -3,202,362.40 --- --- Total 108,599,912.29 30,866,375.56 -132,194,753.04 7,271,534.81 Notes 1: The Company purchased the equity of the minority shareholder – Bai Jidong of the subsidiary of Shenzhen Chuanger Garment Co., Ltd. with the price of CNY 1.4 million. The investment proportion is increased from the original controlling percentage of 51% to 86% and the current minority shareholders’ equity is decreased by CNY 6,422,579.16. Notes 2: St. Polo & Other Brands Corporation is not under the consolidated scope, and the minority shareholders’ equity is decreased by CNY 125,772,173.91 for this year. 73 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 5 Notes to the main items of financial statement (Amounts are expressed in CNY unless stated, and the ending balance is expressed unless stated as beginning balance.) 5.1 Cash and cash equivalents Item As of December 31, 2007 As of December 31, 2006 Domestic CNY 8,693,795.27 57,495,884.64 Foreign currency abroad equivalent to CNY 19,177.56 2,084,097.81 Total 8,712,972.83 59,579,982.45 a) Domestic CNY Item As of December 31, 2007 As of December 31, 2006 Cash on hand 6,982,267.92 5,379,505.12 Cash in hand 1,683,543.97 16,421,952.91 Other cash and cash equivalent 27,983.38 35,694,426.61 Total 8,693,795.27 57,495,884.64 b) Domestic foreign currency As of December 31, 2007 As of December 31, 2006 Foreign Exchange Equivalent to Foreign Exchange Equivalent to Item currency rate CNY currency rate CNY Cash on hand – USD 1.00 7.3046 7.31 1.00 7.8087 7.80 Cash on hand –HKD 1,330.86 0.93638 1,246.19 31.44 1.00467 31.59 Cash in bank – USD 76.80 7.3046 560.99 265,560.92 7.8087 2,073,685.55 Cash in bank –HKD 18,542.76 0.93638 17,363.07 10,324.65 1.00467 10,372.87 Total equivalent to CNY 19,177.56 2,084,097.81 c) Other cash and cash equivalent Item As of December 31, 2007 As of December 31, 2006 Deposit 27,983.38 35,694,426.61 Ending balance of cash and cash equivalents decreased by 50,867,009.62 compared with beginning balance, decrease rate is 85.38%, and reason for this change is: St. Polo & Other 74 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 Brands Corporation quitted consolidation scope current year, and the influenced amount is 12,763,059.10. 5.2 Financial asset held for trading Fair value as of Fair value as of Item December 31, 2007 December 31, 2006 Financial asset specifically identified to be measured by fair value with its change recorded into profit and loss of current year --- 501,573.60 Ending balance of financial assets held for trading decreased by 501,573.60 compared with beginning balance, decrease rate is 100%, and reason for this change is: subsidiaries which hold financial assets held for trading quitted consolidation scope current year, and the influenced amount is 501,573.60. 5.3 Accounts receivable a) Accounts receivable constitution As of December 31, 2007 As of December 31, 2006 Carrying Provision Carrying Provision Item amount Percentage proportion Provision amount Percentage proportion Provision 1. Amount with significant individual amount and has been provided for bad and doubtful debts --- --- --- --- --- --- --- --- 2. Amount with insignificant individual amount and has been provided for bad and doubtful debts 172,728.17 0.16% 100% 172,728.17 --- --- --- --- 3. Other accounts classified as seeming credit risk in accordance with aging 110,791,975.69 99.84% --- 10,418,078.92 136,098,729.79 100% --- 9,247,656.14 Among which: within 1 year 93,844,021.58 84.57% 2% 1,897,884.08 122,279,936.00 89.85% 2% 2,611,869.44 1-2 years 5,778,932.37 5.21% 10% 577,893.24 4,013,395.00 2.95% 10% 484,941.24 2-3 years 3,309,719.31 2.98% 50% 1,654,859.66 5,317,470.00 3.90% 50% 2,560,612.99 Over 3 years 7,859,302.43 7.08% 80% 6,287,441.94 4,487,928.79 3.30% 80% 3,590,232.47 Total 110,964,703.86 100% 10,590,807.09 136,098,729.79 100% 9,247,656.14 75 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 b) Changes in provision for bad and doubtful debts of accounts receivable Year 2007 As of December 31,2006 9,247,656.14 Provided 7,395,108.94 Offset (Note) -6,051,957.99 As of December 31,2007 10,590,807.09 Note: Unrecoverable accounts receivable with long aging offset current year is 6,051,957.99 under approval of Resolution of Board of Directors. c) There is no accounts receivable due from shareholder who has more than 5% (including 5 %) voting shares of the Company as of December 31, 2007. d) Top 5 debtors of accounts receivable Name of debtor Amount Aging Percentage Hongkong Jinhua Trading 1-3 years 32.50% Company 36,064,764.90 HONOURLINK 23,353,507.90 Within 1 year 21.05% Victoria International (USA) Within 1 year 14.73% INC 16,346,852.07 KEENZONE LIMITED 8,682,362.38 Within 1 year 7.82% (Hongkong) Lidejia Company 5,013,351.14 Within 1 year 4.52% e) There is no amount due from related parties as of December 31, 2007. f) Ending balance of accounts receivable decreased by 25,134,025.93 compared with beginning balance, decrease rate is 18.47%, and reason for this change is: St. Polo & Other Brands Corporation quitted consolidation scope current year, and the influenced amount is 25,176,060.49, total bad and doubtful debts of accounts receivable offset current year is 6,051,957.99. 76 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 5.4 Advances to suppliers a) Aging analysis As of December 31, 2007 As of December 31, 2006 Aging Amount Percentage Amount Percentage Within 1 year 13,895,433.67 24.45% 39,473,719.00 49.00% 1-2 years 14,500,000.00 25.52% 37,901,253.73 47.00% 2-3 years 28,429,391.62 50.03% 2,048,639.00 3.00% Over 3years --- --- 771,437.02 1.00% Total 56,824,825.29 100% 80,195,048.75 b) Large amounts of advances to suppliers Item Amount Nature or description Puning Guangcheng Waste Paper Purchase Co., Ltd. 29,929,391.62 Advanced payment for waste paper Puning Liusha Rongcheng Construction Co., Ltd. 2,600,000.00 Advanced payment for project Chen Hanguang 1,598,906.85 Processing expenses Puning Huaqiao Construciotn Co., Ltd. 1,300,000.00 Advanced payment for project Hubei Galaxy Textile Co., Ltd. 1,250,000.00 Advanced payment for muslin c) There is no advance to suppliers due from shareholder who has more than 5% (including 5 %) voting shares of the Company. d) Ending balance of advances to suppliers decreased by 23,370,223.46 compared with beginning balance, decrease rate is 29.14%, and main reason for this change is: St. Polo & Other Brands Corporation quitted consolidation scope on December 31, 2007, and the influenced amount is 34,841,972.67. 77 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 5.5 Other receivables a) Other receivables constitution As of December 31, 2007 As of December 31, 2006 Carrying Provision Carrying Provision Item amount Percentage proportion Provision amount Percentage proportion Provision 1. Amount with significant individual amount and has been provided for bad and doubtful debts 171,500,000.00 71.73% --- --- --- --- --- --- 2. Amount with insignificant individual amount and has been provided for bad and doubtful debts 15,014,937.86 6.28% 100% 15,014,937.86 --- --- --- --- 3. Other accounts classified as seeming credit risk in accordance with aging 52,592,474.56 22.00% --- 5,947.671.22 --- --- --- --- Among which: within 1 year 32,319,965.11 13.52% 2% 512,749.19 68,912,660.00 61.70% 2% 2,407,651.84 1-2 years 13,269,384.33 5.55% 10% 1,326,938.43 22,620,636.87 20.25% 10% 1,912,011.35 2-3 years 4,981,721.68 2.08% 50% 2,490,860.84 15,646,655.00 14.01% 50% 7,782,403.85 Over 3 years 2,021,403.44 0.85% 80% 1,617,122.75 4,516,674.00 4.04% 80% 2,156,219.63 Total 239,107,412.42 20,962,609.08 111,696,625.87 14,258,286.67 b) Changes in provision for bad and doubtful debts of other receivables Year 2007 As of December 31,2006 14,258,286.67 Provided 24,466,402.69 Offset (Note 1) -14,589,878.00 Other transferred (Note 2) -3,172,202.28 As of December 31,2007 20,962,609.08 Note1: Unrecoverable other receivables with long aging offset current year is 14,589,878.00 under approval of Resolution of Board of Directors. 78 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 Note 2: Other transferred is arising from the fact that St. Polo & Other Brands Corporation quitted consolidation scope current year. c) Other receivable with significant individual amount and has been provided for bad and doubtful debt Provision Debtor Amount proportion Reason Shenzhen Meifennian Industrial 100.00% Unrecoverable Co.,Ltd. 790,000.00 Zhengzhiyun International Trading 100.00% Unrecoverable (Shanghai) Co., Ltd. 1,000,000.00 Shenzhen Jindadi Industrial Co., Ltd. 1,493,396.62 100.00% Unrecoverable d) There is no other receivable due from shareholder who has more than 5% (including 5 %) voting shares of the Company as of December 31, 2007. e) Top 5 debtors of accounts receivable Name of debtor Nature or description Amount Aging Percentage Tianzhuo Hongkong Investment Co. Payment for shares 148,000,000.00 61.90% Ltd. transfer Within 1 year CEC Menswear Ltd Current account 23,500,000.00 Within 1 year 9.83% 2.68% Puning Tianfu Industrial Co., Ltd. Current account 6,419,098.53 Within 1 year Current account of Lin Geng 2.51% fixed assets disposal 6,000,000.00 Within 1 year Advanced payment Huang Fencheng 2.28% for project 5,457,000.00 Within 1 year 79 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 f) As of December 31, 2007, amount due from related parties: Rank of debtor Nature or description Amount Aging Percentage Tianzhuo Hongkong Payment for shares transfer 148,000,000.00 61.90% Investment Co. Ltd. Within 1 year Dezhou Sino-Union 0.07% Garment Co., Ltd. Prepayment for goods 156,782.99 Within 1 year Guangzhou Ruitang 0.07% Trading Co. Ltd. Prepayment for goods 173,211.60 Within 1 year g) Ending balance of other receivables increased by 127,410,786.55 compared with beginning balance, decrease rate is 114.07%, and reason for this change is: In current year, payment for shares transfer of St. Polo & Other Brands Corporation increased by 171,500,000.00. St. Polo & Other Brands Corporation quitted consolidation scope on December 31, 2007, and the influenced amount is 39,811,874.70. 5.6 Inventories and provision for diminution in value of inventory a) Inventories As of December 31, 2007 As of December 31, 2006 Item Carrying amount Provision Carrying amount Provision Raw materials 20,598,036.86 703,754.19 26,466,809.00 355,969.23 Work in process 6,485,604.33 --- 3,813,661.00 --- Turnover material 1,616.56 --- 894,920.36 --- Merchandized goods 27,614,234.29 409,750.05 126,319,744.00 1,242,479.47 Commodities delivered 2,358,404.03 --- 4,237,753.58 --- Processing material on consignment --- --- 403,423.89 --- Total 57,057,896.07 1,113,504.24 162,136,311.83 1,598,448.70 Ending balance of inventories decreased by 105,078,415.76 compared with beginning balance, decrease rate is 64.81%, and reason for change is: St. Polo & Other Brands Corporation quitted consolidation scope on December 31, 2007, and the influenced amount is 104,238,487.81. 80 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 b) Provision for diminution in value of inventory Increases Decreases As of As of December 31, Other December 31, Category 2006 Provision Reversed transferred out 2007 Raw materials 355,969.23 703,754.19 355,969.23 --- 703,754.19 Merchandized goods 1,242,479.47 409,750.05 399,460.56 843,018.91 409,750.05 Total 1,598,448.70 1,113,504.24 755,429.79 843,018.91 1,113,504.24 Provision for diminution in value of inventory is provided in accordance with difference between cost and net realizable value is recognized as ending market price deducts related taxes, other transferred out is arising from the fact that St. Polo & Other Brands Corporation quitted consolidation scope current year, and the influenced amount is 843,018.91. 5.7 Long-term equity investment As of December 31, 2007 As of December 31, 2006 Provision for Provision for Carrying amount diminution in value Carrying amount diminution in value Investment valuation by cost method 20,971,018.82 13,806,326.80 20,971,018.82 7,990,960.26 81 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 a) Information of investee Holding Voting Total net assets as of Total turnover Net profit of Name of investee Registry Business nature proportion proportion December 31, 2007 of current year current year St. Polo & Other Brands Corporation: Manufacture and sales of costumes, knitting, Shanghai Tongrui Fashion Co., Ltd. Shanghai leather and etc. 36％ 36％ 7,033,530.63 22,172,193.91 529,939.52 Manufacture of Dezhou Sino-Union Garment Co., Ltd. Dezhou costumes and leather 36％ 36％ 64,673,515.66 39,008,268.27 4,820,879.34 Manufacture and sales Guangdong Liwei Apparel Co. Ltd. Guangzhou of brand costumes 36％ 36％ -398,775.04 137,488,580.56 -1,271,740.53 Sales of brand Guangzhou Ruitang Trading Co. Ltd. Shanghai costumes 36％ 36％ 260,221.08 3,341,675.20 109,057.13 Sales of knitting and Guangzhou Ruicheng Trading Co. Ltd. Beijing hardware 36％ 36％ --- --- --- Sales of brand Shanghai Boldway Fashion Co., Ltd. Guangzhou costumes 36％ 36％ 37,113,712.78 51,873,192.32 28,880,850.42 Sales of brand Shanghai Bolderway Fashion Co., Ltd. Guangzhou costumes 36％ 36％ 54,678,118.94 99,850,928.45 24,775,439.77 Shanghai Jiancheng Commerce and Trade Sales of brand Co., Ltd. Shanghai costumes 36％ 36％ 56,311,594.45 90,900,311.72 45,093,670.37 Sales of brand Beijing Boldway Apparel Trading Co. Ltd. Shanghai costumes 36％ 36％ -2,853,706.58 106,283,768.80 378,198.57 Sichuan Baodewei Commerce and Trade Sales of brand Co., Ltd. Chengdu costumes 36％ 36％ -191,118.55 1,923,926.13 61,499.47 b) Long-term equity investment by cost method As of December 31, 2007 As of December 31, 2006 Initial Investment Carrying Provision for Carrying Provision for Name of investee amount proportion amount diminution in value amount diminution in value Shanxi Chuanglian Information Network Technology Co., Ltd. 12,500,000 27.78% 20,971,018.82 13,806,326.80 20,971,018.82 7,990,960.26 Note: The Company has no significant influence onShanxi Chuanglian Information Network Technology Co., Ltd. for not have participated in the operation and management of Shanxi Chuanglian Information Network Technology Co., Ltd., therefore, the Company adopts cost method to value Shanxi Chuanglian Information Network Technology Co., Ltd.. Since the Company has not gained profit distribution from Shanxi Chuanglian Information Network Technology Co., Ltd. ever since investment began, the Company conducted impairment testing on equity investment, and provided corresponding provision for impairment on difference 82 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 between recoverable amount and its carrying amount of long-term investment. c) Long-term equity investment by equity method Name of investee St. Polo & Other Brands Corporation As of December 31, 2006 --- Quit consolidation, cost method valuation to equity method valuation 70,746,847.84 Good will transferred in 14,361,926.77 Changes of equity from the date of quit consolidation scope to year end 15,106,579.53 Cash dividends gained -12,960,000.00 Transfer out for disposal -87,255,354.14 As of December 31, 2007 --- d) Provision for diminution in value of long-term equity investment As of Decemb As of December Name of investee er 31, 2006 Increases Decreases 31, 2007 Reason for provision No dividends for past years, and holding equity is less Shanxi Chuanglian comparing to book cost Information Network of long-term Technology Co., Ltd. 7,990,960.26 5,815,366.54 --- 13,806,326.80 investment 83 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 5.8 Fixed assets and accumulated depreciation a) Fixed assets – original cost As of December As of December Category 31, 2006 Increases Decreases 31, 2007 Buildings and constructions 173,221,857.97 15,880,211.46 22,086,996.48 167,015,072.95 Machinery equipment 235,238,271.42 107,579,588.38 20,067,052.93 322,750,806.87 Transportation equipment 18,928,350.02 494,850.00 8,226,237.92 11,196,962.10 Office equipment and others 13,159,105.43 1,245,248.95 4,451,585.19 9,952,769.19 Decoration of fixed assets 5,177,260.22 --- 5,052,208.00 125,052.22 Leasehold improvement for operation 2,520,288.01 1,657,069.95 1,948,451.14 2,228,906.82 Total 448,245,133.07 126,856,968.74 61,832,531.66 513,269,570.15 Among which: 1. Original cost of fixed assets transferrd from CIP is 116,492,526.92. 2. Please refer to Notes 9.2 for details of fixed assets mortgaged or used for guarantee as of December 31, 2007. b) Accumulated depreciation As of December As of December Category 31, 2006 Increases Decreases 31, 2007 Buildings and constructions 16,524,766.08 7,540,458.28 2,160,464.74 21,904,759.62 Machinery equipment 61,114,852.32 26,266,797.57 6,154,240.89 81,227,409.00 Transportation equipment 9,742,661.76 1,619,336.11 3,252,826.45 8,109,171.42 Office equipment and others 7,899,357.34 1,178,996.90 1,881,149.38 7,197,204.86 Decoration of fixed assets 2,238,901.00 2,223,269.44 15,631.56 Leasehold improvement for operation 3,081,100.36 1,210,416.31 1,870,684.05 Total 97,520,538.50 39,686,689.22 16,882,367.21 120,324,860.51 84 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 c) Provision for impairment losses on fixed assets As of December As of December Category 31, 2006 Increases Decreases 31, 2007 Machinery equipment --- 95,923,083.17 --- 95,923,083.17 d) Carrying amount of fixed assets Category As of December 31, 2006 As of December 31, 2007 Buildings and constructions 158,909,462.89 145,110,313.33 Machinery equipment 175,947,208.10 145,600,314.70 Transportation equipment 9,193,481.73 3,087,790.68 Office equipment and others 4,861,924.09 2,755,564.33 Decoration of fixed assets 125,052.22 109,420.66 Leasehold improvement for operation 1,687,465.54 358,222.77 Total 350,724,594.57 297,021,626.47 e) Original cost of fixed assets temporarily redundant is 14,030,857.40, accumulated depreciation is 9,429,697.34, and net book value is 4,601,160.06. Since this part of assets still has some value for use and estimated recoverable is more than net book value, provision for impairment has not been provided. This part of fixed assets will be put into use before December 31, 2008. f) The Company evaluated recoverable amount of machinery equipment of fixed assets belong to Rievs Paper, subsidiary of the Company which is planned to be sold, the Company provided for impairment on this part of equipment amounted to 71,883,083.17 in accordance with result of Asset Evaluation Report ZSLM (Beijing) A PBZ (2007) No. 043 issued by Beijing Zhongsheng Lianmeng Assets Verification Co., Ltd. on November 13, 2007. g) In current year, the Company tested the recoverable amount of machinery equipment of fixed assets of subsidiary company Dongguan Jinjing and set these equipement as a assets group. According to the estimated cash inflow in future of this assets group of its operation and final disposal, the Company adopted approperate anuural discount rate to dicount its cash inflow, recognized its estimated current value of assets cash flow in future and compared this current 85 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 value with the book value of these equipment. After the test of these equipment, the Company provided impirement loss of 24,040,000.00. h) Ending balance of fixed assets increased by 65,024,437.08 compared with beginning balance, decrease rate is 14.51%, and reason for this change is: 1. Construction in progress completed in current year and transferred into fixed assets by 116,492,526.92; 2. St. Polo & Other Brands Corporation quitted consolidation scope current year, and the influenced amount is 44,290,335.76. 5.9 Construction in progress Decreases As of December Transferred to As of December Capital Name of project Budget 31, 2006 Increases fixed assets Other decreases 31, 2007 resource Percentage Equipment of Rievs Paper 211,650,000.00 102,069,411.91 2,458,138.54 103,871,890.45 --- 655,660.00 Self-owned 1.16% Plant of Rievs Paper 56,286,224.00 2,055,335.00 4,118,272.00 5,809,083.60 --- 364,523.40 Self-owned 7.32% Dezhou Industrial Park 100,000,000.00 3,169,989.30 332,681.97 2,631,552.87 871,118.40 --- Self-owned 0.33% Fenjin Project 11,343,600.00 9,228,008.37 3,958,504.60 --- 13,186,512.97 --- Self-owned 34.90% Expeniture of accessory of the Company --- 5,220,571.59 --- 4,180,000.00 --- 1,040,571.59 Self-owned --- Total 121,743,316.17 10,867,597.11 116,492,526.92 14,057,631.37 2,060,754.99 --- --- A. There is no capitalized borrowing recorded into project cost of the Company as of December 31, 2007. B. Other decreases are influenced amount for St. Polo & Other Brands Corporation quitted consolidation scope in current year. 86 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 5.10 Intangible assets A. Intangible assets- original cost As of December As of December Item 31, 2006 Increases Decreases 31, 2007 Land use right 85,283,368.00 --- 10,097,424.00 75,185,944.00 Brand use right 4,326,845.00 --- 3,110,000.00 1,216,845.00 Computer software 573,120.00 45,625.00 221,830.00 396,915.00 Total 90,183,333.00 45,625.00 13,429,254.00 76,799,704.00 B. Accumulated amortization As of December As of December Item 31, 2006 Amortized Decreases 31, 2007 Land use right 4,793,305.55 842,711.64 1,401,845.27 4,234,171.92 Brand use right 3,841,466.00 255,550.80 3,110,000.00 987,016.80 Computer software 341,052.00 212,480.28 221,830.00 331,702.28 Total 8,975,823.55 1,310,742.72 4,733,675.27 5,552,891.00 C. Carrying amount of intangible assets Item As of December 31, 2006 As of December 31, 2007 Land use right 80,490,062.45 70,951,772.08 Brand use right 485,379.00 229,828.20 Computer software 232,068.00 65,212.72 Total 81,207,509.45 71,246,813.00 Note: As of December 31, 2007, the Company was not obtained the relevant certificate of land use right, the book value of land use right was amounted to CNY 39,865,652.64. The Company had signed a “contract on land occupancy for construction project” with a local economic association located in Zhenchen Valley Junfu area Puning on December 3, 2003, occupied land of 298.56 mu. The Company has paid related land use compensation amounted to CNY 23,526,528 according to the contract in the year 2005, and applied for the certificate of land use right from the local government on April 7th 2008. The board of directors has consigned Guangdong Haima law office to issue the “Legal Opinion” on the 87 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 land matter. It is possible for the Company to obtain the certificate according to such “Legal Opinion” The Board of the directors of the Company holds the recoverable value of the land was higher than its book value as of December 31, 2007, the Company has not to accrue the impairment of assets on the balance sheet date. 5.11 Goodwill As of December As of December Name of investor Initial amount Resource 31, 2006 Movement 31, 2007 St. Polo & Other Brands Subsidiary obtained by merge of Corporation 14,361,926.77 enterprises under different control 14,361,926.77 -14,361,926.77 --- Note: Decrease in goodwill as of December 31, 2007 is arising from the fact that St. Polo & Other Brands Corporation quitted consolidation scope since July 2007 and changed to be valued by equity method, the Company transferred carrying amount of goodwill of 14,361,926.27 to long-term equity investment. 5.12 Deferred income tax assets and deferred income tax liabilities a) Recognized deferred income tax assets As of December As of December Form 31, 2006 Increases Decreases Other decreases 31, 2007 Deductable temporary difference 3,077,612.80 67,655.03 1,755,978.39 -68,479.49 1,457,768.93 Deductable loss 2,989,933.73 --- 243,553.11 2,746,380.62 --- Total 6,067,546.53 67,655.03 1,999,531.50 2,677,901.13 1,457,768.93 Note: Ending balance of deferred income tax assets decreased by 4,609,777.60 compared with beginning balance, decrease rate is 75.97%, and reason for change is: St. Polo & Other Brands Corporation quitted consolidation scope current year, and the influenced amount is recorded into other decreases of 2,677,901.13. 88 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 5.13 Short-term loan c) Short-term loan Category As of December 31, 2007 As of December 31, 2006 Pledged loan 121,830,000.00 149,830,000.00 Mortgaged loan 122,241,539.42 133,989,323.83 Secured loan 63,877,333.81 101,914,767.84 Total 307,948,873.23 385,734,091.67 Among which: 1. There is no foreign currency borrowing as of December 31, 2007. 2. Please refer to Notes 9.2 for more details of List of Mortgage and Pledge as of December 31, 2007. d) As of December 31, 2007, unpaid due borrowings amounted to 124,918,873.23. e) Ending balance of short-term loans decreased by 77,785,218.44 compared with beginning balance, decrease rate is 20.17%, and main reason for change is: St. Polo & Other Brands Corporation quitted consolidation scope current year, and the influenced amount is recorded into other decreases of 5,000,000.00. 5.14 Accounts payable As of December 31, 2007 As of December 31, 2006 16,985,531.68 35,877,543.08 a) There is no accounts payable due from shareholder who has more than 5% (including 5 %) voting shares of the Company as of December 31, 2007. b) There is no accounts payable due to related parties. c) Ending balance of accounts payable decreased by 18,892,011.40 compared with beginning balance, decrease rate is 52.66%, and main reason for change is: St. Polo & Other Brands Corporation quitted consolidation scope on December 31, 2007, and the influenced amount is 17,944,366.92. 89 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 5.15 Advances from customers As of December 31, 2007 As of December 31, 2006 1,648,849.05 15,251,079.40 a) There is no advances from customers due from shareholder who has more than 5% (including 5 %) voting shares of the Company as of December 31, 2007. b) There is no advance from customers due to related parties as of December 31, 2007. c) Ending balance of advances from customers decreased by 13,602,230.35 compared with beginning balance, decrease rate is 89.19%, and main reason for this change is: St. Polo & Other Brands Corporation quitted consolidation scope on December 31, 2007, and the influenced amount is 16,453,390.23. 5.16 Employee benefits payable A. Employee benefits payable As of As of December 31 Other December 31 Item 2006 Increases Paid transferred out 2007 A. Salaries and wages, bonus, allowance and subsidies 3,549,329.34 32,358,920.99 31,904,446.74 337,861.77 3,665,941.82 B. Employee welfare 3,667,884.81 2,812,036.72 2,162,103.85 3,030,050.79 1,287,766.89 C. Social insurance -329.52 1,167,242.83 1,117,860.20 49,053.11 --- D. Housing welfare fund 412,346.85 41,137.89 19,444.49 434,040.25 --- E. Union welfare fund and employee education fund 168,603.91 286,474.89 71,292.59 383,786.21 --- Total 7,797,835.39 36,665,813.32 35,275,147.87 4,234,792.13 4,953,708.71 B. Ending balance of employee benefits payable decrease by 2,844,126.68 compared with the beginning balance. The decrease rate is 36.47% and the main reason for this change is: St. Polo & Other Brands Corporation quitted consolidation scope on December 31, 2007, and the influenced amount is 4,234,792.13. 90 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 5.17 Taxes and surcharges payable Type of tax As of December 31, 2007 As of December 31, 2006 VAT -1,709,916.30 835,009.18 Business Tax 107,156.74 827,744.89 City Construction and Maintenance Tax 123,621.09 230,367.12 Enterprise Income Tax 5,693,730.86 1,530,240.34 Individual income tax 59,803.77 279,561.63 Education additional expenses 81,402.42 153,647.68 Others 834,297.25 154,693.72 Total 5,190,095.83 4,011,264.56 Ending balance of taxes and surcharges payable increased by 1,178,931.27 compared with opening balance. The increase rate is 44.02％. Main reason for this change is: the Company provided income tax much more than previous years. St. Polo & Other Brands Corporation quitted consolidation scope current year, and the influenced amount is 2,296,802.59. 5.18 Interests payable Item As of December 31, 2007 As of December 31, 2006 Bank loan interest 12,423,207.61 1,392,680.84 Ending balance of interest payable increased by 11,030,526.77 compared with opening balance. The increase rate is 792.04％. Main reason for change is: unpaid overdue loan interest as of December 31, 2007. 5.19 Other payables Item As of December 31, 2007 As of December 31, 2006 Other receivable 11,342,433.46 22,631,777.92 Among which: accrued expenses 2,649,936.65 2,489,522.96 A. There is no other payables due from shareholder who has more than 5% (including 5 %) voting shares of the Company as of December 31, 2007. 91 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 B. Amount due to related parties Name of client Amount Nature or description Ding Lihong 3,031,027.12 Personal borrowing Wang Shaoying 655,000.00 Personal borrowing Chen Hongcheng 789,910.69 Personal borrowing C. Ending balance of other payables decreased by 11,289,344.46 compared with beginning balance. The decrease rate is 49.88％. Main reason for this change is: St. Polo & Other Brands Corporation quitted consolidation scope on December 31, 2007, and the influenced amount is 6,677,426.32. 5.20 Share capital As of Increase(+)/Decrease(－) As of December Equity Share Share December 31, 31, 2006 Proportion restriction distribution issuance Others Subtotal 2007 Proportion 1. Non-negotiable stock State-owned shares --- --- --- --- --- --- --- --- --- Other domestic legal shares 164,025,000 51.48% --- --- --- --- --- 164,025,000 51.48% Total negotiable shares available for sale with limitation 164,025,000 51.48% --- --- --- --- --- 164,025,000 51.48% 2. Negotiable shares available for sale without limitation Stock A --- --- --- --- --- --- --- --- --- Stock B 154,575,000 48.52% --- --- --- --- --- 154,575,000 48.52% Total negotiable shares available for sale without limitation 154,575,000 48.52% --- --- --- --- --- 154,575,000 48.52% 3. Total shares 318,600,000 100% --- --- --- --- --- 318,600,000 100% Note: 92 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY NOTES TO THE FINANCIAL STATESMENTS FOR THE YEAR THEN ENDED 31 DECEMBER 2007 1. Shenzhen Sheng Heng Chang Industrial Co. Ltd. （hereinafter referred to as “Sheng Heng Chang”）, the largest shareholder of the Company, (holds 117,855,000 domestic legal shares which accounts for 36.99% of total share capital of the Company), pledged total domestic legal shares of the Company to Construction Bank of China Shengzhen Branch on April 28, 2005; 2. Shenzhen Rishen Investment Co., Ltd.（hereinafter referred to as “Rishen Company”）, the second largest shareholder of the Company, (holds 34,020,000 domestic legal shares which accounts for 10.67% of total share capital of the Company), pledged total domestic legal shares of the Company to Construction Bank of China Shengzhen Branch on April 28, 2005; 3. Shantou Lianhua Industrial Co., Ltd.（hereinafter referred to as “Lianhua Company”） the fourth largest shareholder of the Company, (holds 12,150,000 domestic legal shares which accounts for 3.81% of total share capital of the Company), pledged total domestic legal shares of the Company to Construction Bank of China Shengzhen Branch on April 28, 2005. 4. The above pledge is the secure for applying current funds loan with upper limit of CNY 110,000,000 and CNY 40,000,000 to Construction Bank of China Shengzhen Branch. The pledge period is from April 28, 2005 to the maturity of loan contract. The above pledge has been registered in China Security Registration and Settlement Co., Ltd. Shengzhen Branch. 93 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY FOR THE YEAR ENDED DECEMBER 31, 2007 NOTES TO THE FINANCIAL STATEMENTS 5.21 Capital reserves Adjusted Unadjusted Amount of openning Ending Item openning balance adjustments balance Increases Decreases balance Share capital premium 48,536,895.00 --- 48,536,895.00 --- --- 48,536,895.00 Other capital reserves 3,592,601.58 --- 3,592,601.58 --- --- 3,592,601.58 Total 52,129,496.58 --- 52,129,496.58 --- --- 52,129,496.58 5.22 Surplus reserves Adjusted Unadjusted Amount of openning Ending Item openning balance adjustments balance Increases Decreases balance Statutory Surplus Reserves 49,036,260.20 --- 49,036,260.20 --- --- 49,036,260.20 Statutory public welfare fund --- --- --- --- --- --- Voluntary surplus reserves 37,000,000.00 --- 37,000,000.00 --- --- 37,000,000.00 Reserve fund --- --- --- --- --- --- Enterprise expansion fund --- --- --- --- --- --- Other surplus reserves --- --- --- --- --- --- Total 86,036,260.20 --- 86,036,260.20 --- --- 86,036,260.20 Note: Since the Company did not draw subsidiaries’ surplus reserves during the consolidation in previous years, so there is no adjustments to opening balance of surplus reserves in accordance with ‘Accounting Regulations to PRC Enterprise – No.33 detail regulation: Consolidated Financial Statement’. 1 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY FOR THE YEAR ENDED DECEMBER 31, 2007 NOTES TO THE FINANCIAL STATEMENTS 5.23 Undistributed profit Item Amount Unadjusted undistributed profit at the beginning of period 66,259,360.60 Adjustment of undistributed profit at the beginning of period 7,867,530.30 （increases+, decreases-） Adjusted undistributed profit at the beginning of period 74,126,890.90 Plus: Losses covered by reserve surplus --- Plus: Net profit of current year -79,704,336.59 Minus: Extract for statutory surplus reserves --- Minus: Other deductions --- Undistributed profit at the ending of period -5,577,445.69 Among the adjustment of CNY 7,867,530.30 to opening balance of undistributed profit: (1) In accordance with ‘Accounting Regulations to PRC enterprises’ and ‘Explanation No. 1 to Accounting Regulations to PRC enterprises’, retrospective adjustments is made to adjust deferred tax assets, which affects the opening balance of undistributed profit for CNY 4,308,570.89. (2) In accordance with ‘Accounting Regulations to PRC enterprises’ and ‘Explanation No. 1 to Accounting Regulations to PRC enterprises’, retrospective adjustment is made to adjust the difference between book value and fair value of financial assets held for trading, which affects the opening balance of undistributed profit for CNY 74,704.90. (3) The injection difference in long-term equity investment has been adjusted to increase the opening balance of undistributed profit by CNY 3,484,254.50. 2 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY FOR THE YEAR ENDED DECEMBER 31, 2007 NOTES TO THE FINANCIAL STATEMENTS 5.24 Operating revenue and operating cost Current year Previous year Item Principle Principle activities Other activities Total activities Other activities Total 391,891,794.46 448,800.00 392,340,594.46 483,558,137.70 3,269,615.00 486,827,752.70 Operating revenue 240,605,924.54 7,852.80 240,613,777.34 286,574,332.33 1,973,583.00 288,547,915.33 Operating cost 151,285,869.92 440,947.20 151,726,817.12 196,983,805.37 1,296,032.00 198,279,837.37 Gross operating profit A. Sales and costs of sales listed in accordance with operation categories Revenue from principle activities Costs of principle activities Item Current year Previous year Current year Previous year (1) Industry 303,513,308.67 444,022,248.01 245,187,769.59 338,552,872.54 (2) Commerce 198,482,323.70 126,792,601.48 105,646,550.68 34,885,671.69 Subtotal 501,995,632.37 570,814,849.49 350,834,320.27 373,438,544.23 Deduction from intra-group business -94,625,409.73 -87,256,711.79 -110,228,395.73 -86,864,211.90 Total 407,370,222.64 483,558,137.70 240,605,924.54 286,574,332.33 B. Sales and costs of sales listed in accordance with region Revenue from principle activities Costs of principle activities Item Current year Previous year Current year Previous year Export sales of clothes 254,080,972.54 192,351,095.17 216,291,963.13 165,681,878.60 Domestic sales of clothes 241,705,205.75 371,402,392.77 126,535,679.52 200,284,041.88 Processing of clothes 6,209,454.08 7,061,361.55 8,006,677.62 7,472,623.75 Subtotal 501,995,632.37 570,814,849.49 350,834,320.27 373,438,544.23 Deduction from intra-group business -94,625,409.73 -87,256,711.79 -110,228,395.73 -86,864,211.90 Total 407,370,222.64 483,558,137.70 240,605,924.54 286,574,332.33 C. Operating revenue of current year decreased by 79,008,730.06 compared with previous year. The decrease rate is 16.23%. Main reason for such change is: St. Polo & Other Brands Corporation quitted consolidation scope on December 31, 2007. 3 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY FOR THE YEAR ENDED DECEMBER 31, 2007 NOTES TO THE FINANCIAL STATEMENTS 5.25 Taxes and surcharges on operations Item Current year Previous year Business tax 76,895.84 89,225.63 City maintenance & construction tax 406,285.34 437,355.26 Consumption tax --- 32,384.17 Education surcharge 510,482.83 453,525.61 Others --- 51,245.82 Total 993,664.01 1,063,736.49 Taxes and surcharges on operations of current year increased by 70,072.48 compared with previous year. The increase rate is 6.59%. Main reason for such change is: St. Polo & Other Brands Corporation quitted consolidation scope on December 31, 2007. 5.26 Financial expenses Item Current year Previous year Interest expenses 33,496,495.31 35,620,685.37 Interest income -466,259.98 -701,809.00 Exchange gain and loss 6,619,333.97 3,392,221.39 Others 595,436.35 774,586.56 Total 40,245,005.65 39,085,684.32 Financial expenses of current year increased by 1,159,321.33 compared with previous year. The increase rate is 2.97%. Main reason for such change is: Exchange loss increase due to the revaluation of CNY. 5.27 Impairment loss on assets Item Current year Previous year 1. Loss on bad debts 31,861,511.63 11,245,064.19 2. Loss on inventory devaluation 358,074.45 256,071.96 3. Impairment loss on long-term equity investment 5,815,366.54 7,990,960.26 4. Impairment loss on fixed assets 95,923,083.17 --- Total 133,958,035.79 19,492,096.41 4 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY FOR THE YEAR ENDED DECEMBER 31, 2007 NOTES TO THE FINANCIAL STATEMENTS 5.28 Investment income Item Current year Previous year 1. Investment income from financial assets --- --- 2. Investment income from equity investments (1) Recognized with cost method --- --- (2) Recognized with equity method 15,106,579.53 --- (3) Disposal of investment income 84,244,645.85 41,093,242.27 Others --- -90,763.56 Total 99,351,225.38 41,002,478.71 5.29 Non-operating revenue Item Current year Previous year 1. Gain on disposal of non-current assets 3,814.01 1,641,043.60 Among which: gain on disposal of fixed assets 3,814.01 1,641,043.60 2. Gain on debt restructure 31,032.58 624,925.18 3. Tax returns (Note 1) 955,680.00 4,306,062.19 4. Income of fine and penalty 55,143.00 1.03 5. Income of purchase equity by discount (Note 2) 5,022,579.15 6. Others 101,118.63 442,715.47 Total 6,169,367.37 7,014,747.47 Note 1: No large amount of tax return in current year. Non-operating revenue of current year decreased by 5,867,959.25 compared with previous year. The decrease rate is 83.65%. Main reason for such change is: Large amount of government subsidy confirmed in current year. Note 2: Profit of the minority of shareholders occurred for the Company purchased the subsidiary companies in current year. 5 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY FOR THE YEAR ENDED DECEMBER 31, 2007 NOTES TO THE FINANCIAL STATEMENTS 5.30 Non-operating expenses Item Current year Previous year 1. Loss on disposal of non-current assets 5,607,299.90 8,783,528.98 Among which: loss on disposal of fixed assets 5,607,299.90 8,783,528.98 2. Loss on debt restructure --- 5,875,660.33 3. Donation --- 794,587.86 4. Fine and penalty for delay payment 441,008.61 15,588.50 5. Provisions --- --- 6. Others 222,971.59 706,898.31 Total 6,271,280.10 16,176,263.98 Non-operating expenses of current year decreased by 9,904,983.88 compared with previous year. The decrease rate is 24.58%. Main reason for this change is: Decrease in disposal of fixed assets for current year, and no debt restructure for current year. 5.31 Income tax expenses Item Current year Previous year Income tax for current year 6,901,056.33 1,886,552.41 Deferred tax expenses 1,931,876.47 130,194.47 Total 8,832,932.80 2,016,746.88 5.32 Notes to cash flow statement A. Cash and cash equivalence Item As of December 31, 2007 As of December 31, 2006 Cash on hands 6,983,521.41 5,379,544.51 Cash in bank 1,701,468.03 18,506,011.33 Other monetary funds 8,684,989.44 23,885,555.84 6 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY FOR THE YEAR ENDED DECEMBER 31, 2007 NOTES TO THE FINANCIAL STATEMENTS B. Other cash receipts relating to investing activities Among which: Item Current year Receipts from other companies 14,916,688.45 Interest income 466,259.98 Non operation income 55,143.00 Total 15,438,091.43 C. Other cash payments relating to operating activities Among which: Item Current year Payment for selling and distribution expense 51,267,608.78 Payment for general and administrative expenses 17,045,018.95 Payment for bank charges 1,259,040.63 Decreases in other payables 18,394,387.05 Others 1,445,521.48 Total 89,411,576.89 D. Other cash receipts relating to investing activitieses Item Current year Received payment for investment in previous period 12,734,400.00 E. Other cash payments relating to investing activities Item Current year Net cash payments from disposals of subsidiaries 12,763,059.10 F. Other cash receipts relating to financing activities Item Current year Collection from previous year’s security deposit in bank 35,666,443.23 Inter-company loan 820,000.00 Total 36,486,443.23 7 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY FOR THE YEAR ENDED DECEMBER 31, 2007 NOTES TO THE FINANCIAL STATEMENTS G. Other cash payments relating to financing activities Item Current year Payment for current year’s security deposit to bank 23,192,631.00 H. Supplementary information for cash flow statement Item Current year Net Losses -79,704,336.59 Plus: Minority shareholders' equity 30,866,375.56 Provision for assets impairment 133,958,035.79 Depreciation of fixed assets, depletion of oil and natural gas assets and depreciation of bearer biological assets 37,025,662.88 Amortization of intangible assets 1,310,742.72 Amortization of long-term deferred expenses --- Loss from disposals of fixed assets, intangible assets and other long-term assets (deduct: increase) 5,602,359.29 Loss on scraps of fixed assets (deduct: increase) --- Loss from changes in fair values (deduct: increase) --- Financial expenses (deduct: increase) 33,496,495.31 Investment loss (deduct: increase) -104,373,804.53 Decreases in deferred income tax assets (deduct: increase) 1,931,876.47 Increases in deferred income tax liabilities (deduct: decrease) --- Decreases in inventories (deduct: increase) 839,927.95 Decreases in operating receivables (deduct: increase) 3,899,267.61 Increases in operating payables (deduct: decrease) 1,811,024.71 Others --- Net cash flows from operating activities 66,663,627.17 I. Disposals of subsidiaries The Company used to hold 70 percent of shares of companies which operate as agent of St. Polo Brand (St. Polo Companies). In 2006, the Company sold 34 percent to CEC Menswear Limited at a price of CNY 102,000,000. In June, 2007, the Company sold 5 percent to CEC Menswear Limited at a price of 23,500,000, thus, the Company lost its absolute control of St. Polo Companies since the date of contract being signed (the signing date). On November 14, 2007, the Company sold the remaining 31 percent of shares to Tianzhuo Hongkong Investment Co. Ltd. (a related company to natural person, Chen 8 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY FOR THE YEAR ENDED DECEMBER 31, 2007 NOTES TO THE FINANCIAL STATEMENTS Hongcheng who actually control the Company). The registration process of the above transaction has completed as of December 31, 2007, so St. Polo Companies are not in the range of consolidation. The income and cash flows from beginning of the year to the signing date is still in the range of consolidation in accordance with article CK(2002) No. 18 issued by Ministry of Finance. The St Polo Companies’ consolidated financial position and result of operation from January 1, 2007 to the signing date is listed as follows: Item Signing date Assets: Cash and cash equivalence 12,763,059.10 Financial assets held for trading 501,573.60 Accounts receivable 25,176,060.49 Provision for bad and doubtful debts -308,355.30 Net value of accounts receivables 24,867,705.19 Advances to suppliers 34,841,972.67 Other receivables 39,811,874.70 Provision for bad and doubtful debts -2,863,846.97 Net value of other receivables 36,948,027.73 Inventories 104,238,487.81 Provision for diminution in value of inventory -843,018.91 Net value of inventory 103,395,468.90 Original cost of fixed assets 39,217,269.76 Accumulated depreication -8,893,258.25 Net value of fixed assets 30,324,011.51 Construction in process 12,408,707.37 Intangible assets 8,507,978.73 Deferred tax assets 2,677,901.13 Total assets 267,236,405.93 Liabilities Short-term loan 5,000,000.00 Notes payable 18,110,606.00 Accounts payable 17,944,366.92 Advance from customers 16,453,390.23 Employee benefits payable 4,234,792.13 9 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY FOR THE YEAR ENDED DECEMBER 31, 2007 NOTES TO THE FINANCIAL STATEMENTS Taxes and surcharges payable 2,296,802.59 Other payables 6,677,426.32 Total liabilties 70,717,384.19 From January 1, 2007 Result of operation to the signing date Sales from operation 168,932,435.93 Costs from operation -70,698,669.37 Sales tax -802,857.69 Selling and distribution expenses -32,730,483.92 General and administrative expenses -7,273,796.88 Financial expenses -296,066.45 Impairment loss on assets -1,137,393.74 Non-operating income 1,008,523.00 Non-operating expenses -1,134.71 57,000,556.17 Income tax -3,261,415.23 Net profit 53,739,140.94 Information of St. Polo Companies’ cash flow: Item Current year Net cash payments from disposals of subsidiaries 12,763,059.10 10 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY FOR THE YEAR ENDED DECEMBER 31, 2007 NOTES TO THE FINANCIAL STATEMENTS 6. Notes to the main items of financial statements of parent company (Monetary unit is CNY and the amount is the ending balance unless otherwise stated.) 6.1 Accounts receivable a) Accounts receivable constitution As of December 31, 2007 As of January 1, 2007 Provision Provision Item Book balance Percentage proportion Provision Book balance Percentage proportion Provision 1. Significant individual amount and the provision has been recognized individually --- --- --- --- --- --- --- --- 2. Not significant individual amount and the provision has been recognized individually --- --- --- --- --- --- --- --- 3. Other amounts with the symbol of credit risk identified by aging 18,077,400.15 --- --- 3,574,824.68 19,400,732.71 --- --- 2,477,979.78 Among which: Within 1 year 13,351,660.28 73.86% 2% 13,010,319.71 67.06% 2% 84,791.17 1-2 years 138,341.60 0.77% 10% 13,834.16 1,743,369.00 8.99% 10% 15,795.39 2-3 years 363,093.64 2.01% 50％ 181,546.82 2,146,952.00 11.07% 50％ 377,320.12 Over 3 years 4,224,304.63 23.37% 80% 3,379,443.70 2,500,092.00 12.89% 80% 2,000,073.10 Total 18,077,400.15 3,574,824.68 19,400,732.71 2,477,979.78 b) There is no accounts receivable due from shareholder who has more than 5% (including 5 %) voting shares of the Company as of 31 December 2007. c) Top five account receivables at the year end Rank of debtor Amount Aging Percentage Puning Tianhe Apparel Factory Co., Ltd. 10,483,433.85 With in 1 year 58.20% Hongkong Jinhua Trading Company 4,224,304.63 Over 3 years 23.45% Shenzhen Heyiyi Fashion Co., Ltd. 2,852,716.44 1-2 years 15.84% Guangzhou Chen Shunqin 335,904.80 2-3 years 1.86% Guangzhou industrial and commercial bureau 117,462.99 Within 1 year 0.65% 11 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY FOR THE YEAR ENDED DECEMBER 31, 2007 NOTES TO THE FINANCIAL STATEMENTS e) Accounts receivable with related parties accounts for 73.86% of total amount of this item. f) Accounts receivable as of December 31, 2007 increased by 1,323,332.02 compared with January 1, 2007. The increase rate is 6.82％. The reason leads to the change is: Bad debt written off from accounts receivable is 2,912,103.77. 6.2 Other receivables a) Other receivables constitution As of December 31, 2007 As of January 1, 2007 Provision Provision Item Book balance Percentage proportion Provision Book balance Percentage proportion Provision 1. Significant individual amount and the provision has been recognized individually 171,500,000.00 48.59% --- --- --- --- --- --- 2. Not significant individual amount and the provision has been recognized individually 3,031,608.20 0.86% 100％ 3,031,608.20 --- --- --- --- 3. Other amounts with the symbol of credit risk identified by aging 178,424,275.14 50.55% --- 1,751,987.43 220,331,209.39 100％ --- 3,023,340.94 Among which: Within 1 year 173,856,490.69 49.26% 2% 152,585.92 135,917,347.26 61.69% 2% 511,448.94 1-2 years 2,737,103.39 0.78% 10% 273,710.34 82,515,233.13 37.45% 10% 1,562,578.00 2-3 years 462,845.60 0.13% 50％ 231,422.80 1,898,629.00 0.86% 50％ 949,314.00 Over 3 years 1,367,835.46 0.39% 80% 1,094,268.37 --- --- 80% --- Total 352,955,883.34 100% 4,783,595.63 220,331,209.39 3,023,340.94 b) There is no other receivable due from shareholder who has more than 5% (including 5 %) voting shares of the Company as of 31 December 2007. c) Top 5 of ending balance of other receivables Rank of debtor Amount Aging Percentage Tianzhuo Hongkong Investment Co. Ltd. 148,000,000.00 Within 1 year 41.93% Puning Rievs Paper Industrial Co., Ltd. 85,988,126.29 Within 1 year 24.36% 12 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY FOR THE YEAR ENDED DECEMBER 31, 2007 NOTES TO THE FINANCIAL STATEMENTS Tian Rui (HK) Trading Company Limited 78,960,786.91 Within 1 year 22.37% CEC Menswear Ltd. 23,500,000.00 Within 1 year 6.66% Lin Geng 6,000,000.00 Within 1 year 1.70% f) As of December 31, 2007 other receivables due from related parties accounted for 88.66%of total amount of this item. Percentage of total amount of other Rank of debtor Nature or content Amount Aging receivables Receivable for Tianzhuo Hongkong Investment Co. Ltd. share transfer 148,000,000.00 Within 1 year 41.93% Receivable for Puning Rievs Paper Industrial Co., Ltd. share transfer 85,988,126.29 Within 1 year 24.36% Current account 78,960,786.91 Within 1 year 22.37% Tian Rui (HK) Trading Company Limited g) Accounts receivable as of December 31, 2007 increased by 132,624,673.95 compared with January 1, 2007. The increase rate is 60.19％.The reason leads to the change is: receivable for transfer of 36% shares of St. Polo & Other Brands Corporation, which amounted to 171,500,000, had not been received。 6.3 Long-term equity investment As of December 31, 2007 As of January 1, 2007 Provision for Provision for dimi Amount Amount diminution in value nution in value Investment with cost method 332,877,827.48 13,806,326.800 358,152,300.32 7,990,960.26 13 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY FOR THE YEAR ENDED DECEMBER 31, 2007 NOTES TO THE FINANCIAL STATEMENTS a) Information of invested unit (Affiliated venture) Voting right Share holding proportion of the Total ending Business percentage of Company among balance of net Total sales of Net profit of Name of invested unit Registry nature the Company invested units assets current year current year St. Polo & Other Brands Corporation： Production and sales of garment, sweater, 7,033,530.63 22,172,193.91 529,939.52 Shanghai Tongrui Fashion Co., Ltd. Shanghai leather etc. 36％ 36％ Production and sales of garment, 64,673,515.66 39,008,268.27 4,820,879.34 Dezhou Sino-Union Garment Co., Ltd. Dezhou leather 36％ 36％ Production and sales of brand -398,775.04 137,488,580.56 -1,271,740.53 Guangdong Liwei Apparel Co. Ltd. Guangzhou apparel 36％ 36％ Production and sales of brand 260,221.08 3,341,675.20 109,057.13 Guangzhou Ruitang Trading Co. Ltd. Shanghai apparel 36％ 36％ Sales of sweater, Guangzhou Ruicheng Trading Co. Ltd. Beijing hardware 36％ 36％ --- --- --- Production and sales of brand 37,113,712.78 51,873,192.32 28,880,850.42 Shanghai Boldway Fashion Co., Ltd. Guangzhou apparel 36％ 36％ Production and sales of brand 54,678,118.94 99,850,928.45 24,775,439.77 Shanghai Bolderway Fashion Co., Ltd. Guangzhou apparel 36％ 36％ Shanghai Jiancheng Commerce and Production and sales of 56,311,594.45 90,900,311.72 45,093,670.37 brand Trade Co., Ltd. Shanghai apparel 36％ 36％ Beijing Boldway Apparel Trading Co. Production and sales of -2,853,706.58 106,283,768.80 378,198.57 brand Ltd. Shanghai apparel 36％ 36％ Sichuan Baodewei Commerce and Production and sales of -191,118.55 1,923,926.13 61,499.47 brand Trade Co., Ltd. Chendu apparel 36％ 36％ 14 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY FOR THE YEAR ENDED DECEMBER 31, 2007 NOTES TO THE FINANCIAL STATEMENTS b) Long-term equity investment with cost method Name of invested unit Increases and Transfer to As of Provision for As of January decreases of equity method December 31, diminution in 1, 2007 Initial amount current year 2007 value １．Subsidiary Puning Tianhe Garment Manufacturing Factory Co., Ltd. 51,712,500.42 51,712,500.42 --- --- 51,712,500.42 --- Puning Rievs Paper Industrial Co., Ltd (Note) 122,353,300.00 122,353,300.00 --- --- 122,353,300.00 --- Shenzhen Rieys Industrial Co., Ltd 45,000,000.00 45,000,000.00 --- --- 45,000,000.00 --- Shenzhen Chuanger Garment Co., Ltd. 7,520,000.00 6,120,000.00 1,400,000.00 --- 7,520,000.00 --- Shenzhen Heyiyi Fashion Co., Ltd. 5,100,000.00 5,100,000.00 --- --- 5,100,000.00 --- Dongguan Jinjing Textile Co., Ltd. 80,221,000.00 80,221,000.00 --- --- 80,221,000.00 --- Tian Rui (HK) Trading Company Limited 8.26 8.26 --- --- 8.26 --- St. Polo & Other Brands Corporation 23,190,218.34 26,674,472.84 --- -26,674,472.84 --- --- Total 335,097,027.02 337,181,281.52 1,400,000.00 -26,674,472.84 311,906,808.68 --- 2．Others Shanxi Chuanglian Information Network Technology Co., Ltd. 12,500,000.00 20,971,018.80 --- --- 20,971,018.80 13,806,326.80 Total 347,597,027.02 358,152,300.32 1,400,000.00 -26,674,472.84 332,877,827.48 13,806,326.80 （“Rievs Paper”） Note: The Company intended to sale its subsidiary Puning Rievs Paper Industrial Co., Ltd. , which had an accumulated occupancy of fund amounted to 177,940,000.00. As of December 31, 2007, Municipal Sewage Outlet Project, which located outside the factory, had not been completed for technology reason that lead to the routine production of Rievs Paper can not begin. Because the influence comes from the process of some other projects outside the factory, the date when this project will begin its routine production is uncertain. However the funds which the Company prepaid for Rievs Paper were borrowed from banks and the Company assumed relative large amount of interest expenses every year and that exerted great fund pressure on the Company and finally caused fund shortage in the Company. 15 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY FOR THE YEAR ENDED DECEMBER 31, 2007 NOTES TO THE FINANCIAL STATEMENTS c) Long-term equity investment with equity method: Particulars see Note 5.7 (c). d) Provision for diminution in value of long-term equity investment: Particulars see Note 5.7 (d). e) As of December 31, 2007, long-term equity investment decreased by 25,274,472.84 as compared with January 1, 2007. The decrease rate is 7.06%. The reason leads to the change is: 1） 36% shares of St. Polo & Other Brands Corporation held by the Company were transferred and that decreased long-tern investment amounted to 26,674,472.84. 2） In current year, the Company purchased 35% shares of Shenzhen Chuanger and the balance of long-term investment increased by 1,400,000.00. 6.4 Operating revenue and operating cost Current year Previous year Item Main operation Other operation Subtotal Main operation Other operation Subtotal Operating revenue 29,604,536.46 28,800.00 29,633,336.46 42,853,685.78 462,649.49 43,316,335.27 Operating cost 29,021,056.82 1,612.80 29,022,669.62 40,234,461.80 109,267.20 40,343,729.00 Operating gross profit 583,479.64 27,187.20 610,666.84 2,619,223.98 353,382.29 2,972,606.27 a) Sales and costs of sales in accordance with operation categories Sales of main operation Costs of main operation Item Current year Previous year Current year Previous year Industry 29,604,536.46 42,853,685.78 29,021,056.82 40,234,461.80 b) The sales in current year are totally sales to holding subsidiary company Puning Tianhe Garment Manufacturing Factory Co., Ltd.； c) Operating revenue of current year increased by 13,682,998.81 as compared with previous year. The decrease rate is 31.59%，The reason leads to the change is: The decrease of turnover. 16 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY FOR THE YEAR ENDED DECEMBER 31, 2007 NOTES TO THE FINANCIAL STATEMENTS 6.5 Investment income Item Current year Previous year 1. Financial instrument investment income --- --- 2.Investment held to maturity --- --- 3. Equity investment income a. Cost method valuation recognition 39,088,211.04 11,200,000.00 b. Equity method valuation recognition 34,452,670.27 --- c. Income of investment diposal 84,244,645.85 41,093,242.27 4. Others --- 13.99 Total 157,785,527.16 52,293,256.26 Investment income of current year increased by 105,492,270.90 as compared with previous year. The decrease rate is 201.73%. The reason is: 36% shares of St. Polo & Other Brands Corporation held by the Company were sold in current year. 7. Related parties and related parties transaction 7.1 Related parties with controlling relationship (a) Related parties with controlling relationship Related parties controlling the Company Relationship with Business Legal Name of enterprise Registry Main business the Company nature Representative Sales of hardware, Shenzhen Sheng electric, construction Heng Chang Guang zhou, materials, electronic Controlling Industrial Co. Ltd. Guang dong products, etc. shareholder Trade Chen Yuyi Related parties controlled by the Company There is no other related party with controlling relationship, apart from subsidiaries stated in note 4. (b) Registered capital and its changes of related parties with controlling relationship (Monetary unit: CNY 0’000) Name of enterprise Opening balance Increases Decreases Ending balance Shenzhen Rieys Industrial Co., Ltd 5,000 --- --- 5,000 Puning Tianhe Garment Manufacturing HKD 11,667 --- --- HKD 11,667 Factory Co., Ltd. 17 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY FOR THE YEAR ENDED DECEMBER 31, 2007 NOTES TO THE FINANCIAL STATEMENTS Puning Rievs Paper Industrial Co., Ltd. USD 2,900 --- --- USD 2,900 Shenzhen Chuanger Garment Co., Ltd. 1,200 --- --- 1,200 Shenzhen Tianqi Garment 100 --- --- 100 Manufacturing Co., Ltd. Shenzhen Heyiyi Fashion Co., Ltd. 1,000 --- --- 1,000 Dongguan Jinjing Textile Co., Ltd. USD 1,280 --- --- USD 1,280 Tian Rui (HK) Trading Company USD 10 --- --- USD 10 Limited (c) Shares and its changes of related parties with controlling relationship (Monetary unit: CNY 0’000) Opening balance Increases Decreases Ending balance Name of enterprise Amount % Amount % Amount % Amount Shenzhen Rieys Industrial Co., Ltd 4,500 90% --- --- --- --- 4,500 90% Puning Tianhe Garment --- --- --- --- Manufacturing Factory Co., Ltd. 12,797 100% 12,797 100% Puning Rievs Paper Industrial Co., --- --- --- --- Ltd. 20,076 100% 20,076 100% Shenzhen Chuanger Garment Co., 420 --- --- --- Ltd. 612 51% 1,032 86% Shenzhen Tianqi Garment --- --- --- --- Manufacturing Co., Ltd. 100 100% 100 100% Shenzhen Heyiyi Fashion Co., Ltd. 51 51% --- --- --- --- 51 51% Dongguan Jinjing Textile Co., Ltd. 8,015 100% --- --- --- --- 8,015 100% Tian Rui (HK) Trading Company --- --- --- --- Limited --- 100% --- 100% (d) Related parties without controlling relationship Name of enterprise Relationship with the Company Chen Xuewen, Ma Chanying Direct relatives of board chairman Shenzhen Rishen Investment Co., Ltd. Shareholder with 10.68% of shareholdings Chen Meixiang Shareholder with 6.85% of shareholdings Shantou Lianhua Industrial Co., Ltd. Shareholder with 3.81% of shareholdings Ding Lihong Director of the company Chen Hongcheng Board chairman of the company 18 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY FOR THE YEAR ENDED DECEMBER 31, 2007 NOTES TO THE FINANCIAL STATEMENTS Legal representative of the company’s holding Chen Yuyi company Shanghai New World International Trading Limited Controlled by related nature person Shanghai Hong Yi Property Limited Controlled by related nature person Shanghai Jian Ya Corperate Development Co., Ltd. Controlled by related nature person Shanghai Rui Ya Business Consultancy Co., Ltd. Controlled by related nature person Shanghai Rui Ya Clothes Co., Ltd. Controlled by related nature person Shanghai Tongrui Fashion Co., Ltd. Joint company Dezhou Sino-Union Garment Co., Ltd. Joint company Guangdong Liwei Apparel Co. Ltd. Joint company Shanghai Boldway Fashion Co., Ltd. Joint company Beijing Boldway Apparel Trading Co. Ltd. Joint company Guangzhou Ruicheng Trading Co. Ltd. Joint company Guangzhou Ruitang Trading Co. Ltd. Joint company Shanghai Jiancheng Commerce and Trade Co., Ltd. Joint company Shanghai Bolderway Fashion Co., Ltd. Joint company Sichuan Baodewei Commerce and Trade Co., Ltd. Joint company 7.2 Related parties transactions (a) Transactions between subsidiaries controlled and consolidated and such subsidiaries with their parent companies have been eliminated (b) Pricing policy of related party transaction is the adoption of market price. The significant transactions between the company and related parties mentioned above are as follows: (c) Purchases from related parties Scale of transactions Current year Previous year Amount (CNY Amount (CNY Name of enterprise 0’000) 0’000) Shanghai Jian Ya Corperate Development Co., Ltd. --- 1,126 19 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY FOR THE YEAR ENDED DECEMBER 31, 2007 NOTES TO THE FINANCIAL STATEMENTS (d) Sales to related parties Scale of transactions Current year Previous year Amount (CNY Amount (CNY Name of enterprise 0’000) 0’000) Guangdong Liwei Apparel Co. Ltd. 2 --- Dezhou Sino-Union Garment Co., Ltd. 2 --- Shanghai Jiancheng Commerce and Trade Co., Ltd. 166 --- Shanghai Hong Yi Property Limited --- 43 Shanghai Rui Ya Business Consultancy Co., Ltd. --- 36 Shanghai Jian Ya Corperate Development Co., Ltd. --- 535 Shanghai New World International Trading Limited --- 41 Shanghai Rui Ya Clothes Co., Ltd. --- 7 (e) Balance of current account of related parties Percentage in total receivables Amount at end of year (CNY 0’000) (payables) (%) Item Related party End of this year End of last year End of this year End of last year Other receivables: Chen Yuyi 95 65 1.19% 0.59% Dezhou Sino-Union Garment Co., Ltd. 15 --- 0.20% --- Shanghai New World International Trading Limited --- 82 0.74% Guangzhou Ruitang Trading Co. Ltd. 17 --- 0.22% --- Total 127 147 1.61% 1.33% Other payables Chen Hongcheng 78 31 6.43% 1.32% Ding Lihong 309 161 25.17% 6.78% Wang Shaoying 65 25 5.33% 1.05% Total 452 217 36.93% 9.15% (f) Other related parties transactions 1) The guarantee provided for related parties: see note 8.3 for details. 20 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY FOR THE YEAR ENDED DECEMBER 31, 2007 NOTES TO THE FINANCIAL STATEMENTS 2) As of December 31, 2007, the book value of long-term equity investments amounts to 87,255,354.15, and accounts for 36% of the shareholdings. To improve the company’s liquidity and operating results, on June 28, 2007, the company signed agreement with CEC Menswear Ltd. to transfer 5% of its equity interest of the companies trading brands of Santa Polo, etc. at the price of 23.5 millions. According to the equity transfer agreement, the transfer payment should be made to the account appointed by transferor on a lump-sum basis within 5 working days after the day when the equity transfer had been approved by the local govenment at registered place. As of December 31, 2007, the equity transfer procedures of the companies trading brand of Santa Polo, etc. had been completed at industry and commerce office, but the transfer payment had not been received, up to April 20, 2008. On November 14, 2007, the company transfered the remaining 31% of its equity holdings of the companies trading brands of Santa Polo, etc. to Tianzhuo Hongkong Investment Co. Ltd. (which is the related party of the actual controller Chen Hongcheng) at the price of 148 millions. According to the equity transfer agreement, the equity transferee should make 50% of the equity transfer payment to the account appointed by transferor within 5 working days after the day when the agreement become effective, and the rest of the transfer payment should be made to the account appointed by transferee on a lump-sum basis within 5 working days after the register day when the equity transfer procedures of the companies trading brands of Santa Polo, etc. had been completed. As at December 31, 2007, the equity transfer procedures of the companies trading brands of Santa Polo, etc. had been completed, but the transfer payment was not received as at April 20, 2008. On November 14, 2007, the company transfered 67% of its shareholdings of Puning Rievs Paper Industrial Co., Ltd. to its related party, Shenzhen Rishen Investment Co., Ltd., at the price of 53.63 millions. It also transfered 33% interest of Rievs Paper held by its wolly-owned subisidairy, Tian Rui (HK) Trading Company Limited, to Jiecheng Investment (Group) Co., Ltd.at the price of 34.37 millions. The total price of the equity transfer amounts to 88 millions. The transferee of both equity sales is the related party of the actual controller Chen Hongcheng. With respect to the equity transfer mentioned above, Puning Rievs Paper Industrial Co., Ltd. had not completed the transfer procedures at industry and commerce office,, and the transfer payment was not received as at April 20, 2008. 8 Contingencies 8.1 Contingent liabilities arising from pending law suits or arbitration cases. In April, 2007, Agricultural Bank of China Shenzhn Branch Nanshan Subsidiary appealed the Company for not refund the matured loans, of which the corpus and interest expenses were totally amounted to 8,280,000.00. According to the (2007) SNFMECZ No.341 Judgment on Civil Suit of Guangdong 21 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY FOR THE YEAR ENDED DECEMBER 31, 2007 NOTES TO THE FINANCIAL STATEMENTS Province Shenzhen Nanshan District People’s Court, the Company was sentenced to lose this lawsuit. As of April 28, 2008, the Company has not paid the corpus and interest expenses in accordance with the above Judgment. 8.2 As at December 31, 2007, the company has no contingent liabilities arising from providing debt guarantee for its related parties or other units. 8.3 The contingent liabilities of the Company from providing debt guarantee for related parties and other units are as follows: Loan Amount Name of Guarantee Bank issuing loan （RMB） Due Date Guarantor Puning Tianhe Garment Puning Association of Country Credit 10,000,000.00 2008-1-10 Shenzhen Sheng Heng Chang Manufacturing Factory Co., Ltd. Union Liusha West Union Industrial Co. Ltd. Puning Tianhe Garment Puning Association of Country Credit 5,000,000.00 2008-5-20 Guangdong Rieys (Group) Company Manufacturing Factory Co., Ltd. Union Liusha West Union Limited Puning Tianhe Garment China Everbright Bank Guangzhou 29,966,663.89 2007-10-25 Guangdong Rieys (Group) Company Manufacturing Factory Co., Ltd. Branch Limited 、 Puning Rievs Paper Industrial Co., Ltd.、Shenzhen Rishen Investment Co., Ltd. 、 Shantou Lianhua Industrial Co., Ltd. 、 Dongguan Jinjing Textile Co., Ltd. 、 Shenzhen Sheng Heng Chang Industrial Co. Ltd. 、Shenzhen Rieys Industrial Co., Ltd 、Chen Xuewen、 Chen Hongcheng、 Ding Lihong Guangdong Rieys (Group) Puning Association of Country Credit 25,700,000.00 2008-11-20 Guangzhou Shenghenchang Company Limited Union Liusha West Union Investment Co., Ltd. Guangdong Rieys (Group) Puning Association of Country Credit 2,500,000.00 2008-9-20 Guangzhou Shenghenchang Company Limited Union Liusha West Union Investment Co., Ltd. Guangdong Rieys (Group) Puning Association of Country Credit 6,000,000.00 2008-12-10 Guangdong Rieys (Group) Company Company Limited Union Liusha West Union Limited Guangdong Rieys (Group) Puning Association of Country Credit 5,000,000.00 2008-1-2 Guangdong Rieys (Group) Company Company Limited Union Liusha West Union Limited Guangdong Rieys (Group) Citic Bank Guangzhou Branch 14,830,000.00 2007-11-25 Guangdong Rieys (Group) Company Company Limited Limited 、 Ma Chanying 、 Ding Lihong、Chen Xuewen Guangdong Rieys (Group) Shanghai Pudong Development Bank 18,588,126.86 2006-3-26 Shenzhen Rishen Investment Co., Company Limited Guangzhou Dongshan Branch Ltd.、Shenzhen Sheng Heng Chang Industrial Co. Ltd. 、 Guangdong Rieys (Group) Company Limited、 Chen Hongcheng、Chen Meixiang、 Zheng Yujian Guangdong Rieys (Group) China Everbright Bank Guangzhou 47,856,748.67 2007-10-25 Guangdong Rieys (Group) Company 22 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY FOR THE YEAR ENDED DECEMBER 31, 2007 NOTES TO THE FINANCIAL STATEMENTS Company Limited Branch Limited 、 Puning Rievs Paper Industrial Co., Ltd.、Shenzhen Rishen Investment Co., Ltd. 、 Shantou Lianhua Industrial Co., Ltd. 、 Dongguan Jinjing Textile Co., Ltd. 、 Shenzhen Sheng Heng Chang Industrial Co. Ltd. 、Shenzhen Rieys Industrial Co., Ltd 、Chen Xuewen、 Chen Hongcheng、 Ding Lihong Guangdong Rieys (Group) Construction Bank of China 121,830,000.00 2008-1-21 Guangdong Rieys (Group) Company Company Limited Shengzhen Branch Heping Road Limited、Shenzhen Rieys Industrial Subsidiary Co., Ltd 、 Shenzhen Rishen Investment Co., Ltd. 、 Shantou Lianhua Industrial Co., Ltd. 、 Dongguan Jinjing Textile Co., Ltd. 、 Shenzhen Sheng Heng Chang Industrial Co. Ltd. 、Puning Tianhe Garment Manufacturing Factory Co., Ltd.、Shenzhen Chuanger Garment Co., Ltd. 、 Chen Meixiang 、 Chen Hongcheng Shenzhen Rieys Industrial Co., Ltd Huaxia Bank Anbao subsidiary 7,000,000.00 2008.03 Puning Tianhe Garment Manufacturing Factory Co., Ltd. Guangdong Rieys (Group) Company Limited 、 Chen Xuewen 、 Chen Hongcheng、 Ding Lihong Shenzhen Rieys Industrial Co., Ltd Agricultural Bank of China Shenzhn 13,677,333.81 2006.07 Shenzhen Sheng Heng Chang Branch Nanshan Subsidiary Industrial Co. Ltd. 、Ding Lihong、 Chen Hongcheng Total 307,948,873.23 9 Commitments 9.1 The Company did not have public economic guarantee up to December 31, 2007. 9.2 Other significant financial commitments: The assets mortgage up to December 31, 2007: (a) The parent company, Guangdong Rieys (Group) Joint-stock Company mortgaged constructions with net book value of CNY 8,925,570.00 to obtain Jieyang Puning Union West Liusha Branch with CNY 6 million borrowing. The maturity date is December 10, 2008. (b) The parent company, Guangdong Rieys (Group) Joint-stock Company mortgaged constructions with net book value of CNY 7,258,230.00 to obtain Jieyang Puning Union West Liusha Branch with CNY 5 million 23 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY FOR THE YEAR ENDED DECEMBER 31, 2007 NOTES TO THE FINANCIAL STATEMENTS borrowing. The maturity date was January 2, 2008. (c) The parent company, Guangdong Rieys (Group) Joint-stock Company mortgaged constructions with net book value of CNY 23,115,868.30 to obtain CITIC Band Guangzhou Branch with CNY 14.83 million borrowing. The maturity date was November 25, 2007. (d) The parent company, Guangdong Rieys (Group) Joint-stock Company mortgaged machine equipments with net book value of CNY 11,394,817.27 to obtain SPD Bank Guangzhou Dongshan Branch CNY 18,588,126.86 borrowing. The maturity date is March 26, 2006. (Some of mortgaged assets have been scrapped.) (e) The parent company, Guangdong Rieys (Group) Joint-stock Company mortgaged machine equipments with net book value of CNY 5,114,278.37 to guarantee its subsidiary Puning Tianhe Garment Manufacturing Factory Co., Ltd.and obtaining China Everbright Bank Guangzhou Branch with CNY 29,966,663.89 borrowing. The maturity date was October 25, 2007. (Some of mortgaged assets have been scrapped.) (f) The subsidiary, Puning Rievs Paper Industrial Co., Ltd., mortgaged machine equipments with net book value CNY 171,853,165.44 to guarantee the parent company, Guangdong Rieys (Group) Joint-stock Company and obtaining China Everbright Bank Guangzhou Branch with CNY 47,856748.67. The maturity date was October 25, 2007. Pledging of assets for the Company up to December 31, 2007: 1. The parent company, Guangdong Rieys (Group) Joint-stock Company, pledge by using 36% share rights of Shanghai Tongrui and the same portion of Dezhou Sino-Union and interests in law (include but not limited dividends and other benefits of pledge of shares) to obtain ICBC Shenzhen Branch He Ping Road sub branch with CNY 121.83 million borrowing. The maturity date was January 21, 2008. 10 Post-balance sheet events 10.1 The Company had additional overdue loan with interest at CNY 1.36 billion. The accumulated unpaid overdue loan with interest is CNY 2.76 billion up to the date of financial report issued. It occupied 61.20% of the Company’s net assets at year ended. The Company had not signed any extension agreement or memorandum of understanding with related banks up to the date of financial report issued. 11 Other significant events The Company had legally hold 36% share rights of the Company operating SBPRC and etc..up to December 31, 2006. In June 28, 2007, the Company had signed agreement with CEC Menswear Ltd. to transfer 5% share rights of the Company operating SBRRC and etc. with half price of CNY 23.50 million. In November 14, 2007, the Company had signed agreement to transfer remain 31% share rights of the Company operating 24 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY FOR THE YEAR ENDED DECEMBER 31, 2007 NOTES TO THE FINANCIAL STATEMENTS SBPRC and etc. to Tianzhuo Hongkong Investment Co. Ltd. (This company is the related company of the Company’s actual controller Chen Hongcheng); the Company As of December 31, 2007, the above companies had finished the procedures for changes in trade and industry for the two share rights changes. The transferring income recognized by the Company in 2007 is CNY 84,244,645.86. But the Company has not received the money for the above two share rights transferring up to April 28, 2008. In November 14, 2007, the Company had transferred 67% share rights of Puning Rievs Paper Industrial Co., Ltd.with half price of CNY 53.63 million to its related party, Shenzhen Rishen Investment Co., Ltd.; transferred 33% share rights of Rievs Paper hold by wholly owned subsidiary, Tian Rui (HK) Trading Company Limited, to Jiecheng Investment (Group) Co., Ltd.. The total amout of the share rights transferring is CNY 88.00 million; The tranferees of the above two transferring are the related companies of the Company’s actual controller Cheng Hongchen; the Company had not finished the procedures for changes in trade and industry for Puning Rievs Paper Industrial Co., Ltd.. The Company had not recognized the loss of related share rights transferring. The money of share rights transferring had not received until April 28, 2008. Due to the reason that Rishen Investment, Tianzhuo Hongkong and Jiecheng Investment are the related companies of the Company’s actual controller Cheng Hongchen, the actions for assets sold was related party transations. The above transactions for share rights transferring had been passed with beyond 2/3 of voting rights of the non-related shareholders attened in the general meeting. The pricing of above share transfer is according to the assets evaluation report ZSLM(Beijing) APBZ (2007) No. 043 and No. 044 issued by Zhongsheng Lianmeng. The above shares’ evaluation price accounts to CNY 23,435,340,000,000 (among which, the value of 100% shares of Rievs Paper accounts to CNY 88,343,400, and the value of 31% shares of ‘St Polo’ Brand and other brand, which is simulatively merged as one company when evaluation, accounts to CNY 146,010,000. ) Rishen Investment, Tianzhuo Hongkong paid all price of share transfer in cash. In accordance with the agreement signed between the Company and Tian Rui (HK), Tian Rui (HK) use its creditor’s rights of 33% shares of Rievs Paper receivable from Jiecheng Investment to reverse its payment for share transfer. Thus, all the price of share transfer, which accounts to CNY 236,000,000, is received by the Company. The Company planned to decrease the debt burden and improve the financial situlation and assets quality through the fund received from the sales refunded bank loan. The Company will not have the equity of St. Polo & Other Brands Corporation after the sales. 25 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY FOR THE YEAR ENDED DECEMBER 31, 2007 NOTES TO THE FINANCIAL STATEMENTS The above equity transferring transaction has resulted that the fund of the Company has occupied by the related parties of the actual controller - Chen Hongcheng considered that the bank loan is still under coordination. The actual controller of Mr. Chen Hongcheng offered the guarantee of unconditional irrepealable fidisirial duty until the above equity transferring amount received. 12. Non-recurring profit and loss of current year (Profit: +, loss: -) Item Amount 1. Profit and loss of non-current assets disposal -5,601,085.26 2. Tax return or deduction approved by exceeding authority or without official permission 230,510.02 3. Profit or cost occurred by difference which the cost of enterprise combination is lower than proportion of the fair value of the net identifiable assets in the invested enterprise 5,022,579.15 4. Profit and loss arising from estimated liabilities without relationship with main business of the Company -5,950,955.56 5. Net amount of other non-operating income and expenses besides items above -468,119.90 Total -6,767,071.55 Profit factors of the minority of shareholders have been deducted from the data listed above. 13. Return on net asset and earnings per share Return on equity Earnings per share Fully diluted Diluted return on Weighted Basic earnings earnings per Profit of the reporting period equity average per share share Net profit attributable to ordinary shareholders of the Company -18% -16% -0.25 -0.25 Net profit attributable to ordinary shareholders of the Company after deducting non-recurring gain or loss -36% -33% -0.51 -0.51 26 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY FOR THE YEAR ENDED DECEMBER 31, 2007 NOTES TO THE FINANCIAL STATEMENTS 13.1 Calculation process The above data is calculated using the following formulae: Fully diluted return on equity Fully diluted return on equity = P/E Where: P is net profit attributable to ordinary shareholders of the Company or net profit attributable to ordinary shareholders of the Company after deducting non-recurring gain or loss; E is the year end equity attributable to ordinary shareholders of the Company. Net profit attributable to ordinary shareholders of the Company does not include the amount of gain or loss of minority shareholders. For net profit attributable to ordinary shareholders of the Company after deducting non-recurring gain or loss, non-recurring gain or loss of parent company (after taking into consideration the income tax effects) and the proportion of non-recurring gain or loss (after taking into consideration the income tax effects) of all subsidiaries owned by ordinary shareholders of parent company are deducted on the basis of consolidated net profit after deducting gain or loss of minority shareholders. The year end equity attributable to ordinary shareholders of the Company does not include equity of minority shareholders. Weighted average return on equity Weighted average return on equity = P/(E0+NP/2+Ei*Mi/M0–Ej*Mj/M0+-Ek*Mk/M0) Where: P is net profit attributable to ordinary shareholders of the Company or net profit attributable to ordinary shareholders of the Company after deducting non-recurring gain or loss; E0 is the year beginning equity attributable to ordinary shareholders of the Company; Ei is increased equity attributable to ordinary shareholders of the Company which arises from new issuance of shares or conversion of debt instruments to stocks in the reporting period; Ej is reduced equity attributable to ordinary shareholders of the Company due to stock repurchase or cash dividend in the reporting period; M0 is the number of months of the 27 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY FOR THE YEAR ENDED DECEMBER 31, 2007 NOTES TO THE FINANCIAL STATEMENTS reporting period; Mi is the number of months from the next month that equity is increased to the year end of the reporting period; Mj is the number of months from the next month that equity is decreased to the year end of the reporting period; Ek is the change of equity resulting from other transactions or events; Mk is the number of months from the next month that other change of equity occurs to the year end of the reporting period. Basic earnings per share Basic earnings per share = P/S S = S0+S1+Si*Mi/M0-Sj*Mj/M0-Sk Where: P is net profit attributable to ordinary shareholders of the Company or net profit attributable to ordinary shareholders of the Company after deducting non-recurring gain or loss; S is weighted average number of ordinary shares outstanding; S0 is the total number of shares at the beginning of the year; S1 is the number of increased shares as a result of capitalization of reserves or scrip dividend during the reporting period; Si is the number of increased shares as a result of new issuance of shares or conversion of debt instruments to stocks during the reporting period; Sj is the number of reduced shares as a result of stock repurchase; Sk is the number of consolidated shares in the reporting period; M0 is the number of months of the reporting period; Mi is the number of months from the next month that the number of shares is increased to the year end of the reporting period; Mj is the number of months from the next month that the number of shares is decreased to the year end of the reporting period. (There exist potential diluted ordinary stocks in the Company should be adjusted to net profit and ordinary stocks’ weighted mean issued abroad of reporting period of ordinary stock shareholders, and calculate diluted earnings per share in accordance with regulations above.) 28 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY FOR THE YEAR ENDED DECEMBER 31, 2007 NOTES TO THE FINANCIAL STATEMENTS Diluted earnings per share Diluted earnings per share = [P+ (any recognized interest related to dilutive potential ordinary shares-conversion expenses)*(1-income tax rate)]/ (S0+S1+Si*Mi/M0-Sj*Mj/M0-Sk +weighted average number of increased ordinary shares arising from warrants, stock options and convertible debts) Where: P is net profit attributable to ordinary shareholders of the Company or net profit attributable to ordinary shareholders of the Company after deducting non-recurring gain or loss. In calculating the diluted earnings per share, the Company has taken into consideration the effects of all dilutive potential ordinary shares, until the diluted earnings per share reach the lowest amount. 13.2 Potential ordinary stock without diluteness current year but with high possibility to have diluteness in future 13.3 Significant changes in quantity of ordinary stock or potential ordinary stock issued abroad by the Company during period from balance sheet day to approved financial report issuance day. 14. Supplementary information provided by managerial level 14.1 Adjustment for consolidated net profit difference of Year 2006 The Company prepared adjusted Income Statements of same period of previous year and Balance Sheet as of January 1, 2007 in accordance with relevant stipulations of ‘Question and answer No.7 on stipulation of information disclosure over public issue securities-Prepare and disclosure on contrastive financial accounting information between the old and new accounting policy ’ (hereafter refers to ‘Question and answer on No.7 stipulation’), retroactive adjustment of Income Statements of same period of previous year is listed as follows: 29 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY FOR THE YEAR ENDED DECEMBER 31, 2007 NOTES TO THE FINANCIAL STATEMENTS Item Amount Net profit of Year 2006 (original accounting standard) 11,746,535.83 Total influenced amount of retroactive adjusted items Among which: 1. Deferred income tax expenses -163,956.91 2. Adjustment to the difference between book value and fair value of trading financial assets 74,704.90 3. Recovery of original equity investment difference of subsidiary 3,484,254.50 Net profit for owners of parent company of Year 2006 (new accounting standard) 15,141,538.32 Plus: Minority interest 26,032,235.95 Net profit of Year 2006 (new accounting standard) 41,173,774.27 Reference information of assumed full-scope implementation of new accounting standard Total influenced amount of other items --- Net profit of full-scope analog of new accounting standard of Year 2006 41,173,774.27 14.2 Adjustment for beginning balance of consolidated equity difference of Year 2007 The Company adjusted beginning balance of owners’ equity and modified certain items in accordance with ‘Accounting Standard for Business Enterprise No. 38—Initial Implementation of Accounting Standard for Business Enterprise’ and ‘Explanation for Accounting Standard for Business Enterprise No. 1’ (CK (2007) No. 14), the adjusting process, modified items, influenced amount and reason are listed as follows: 30 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY FOR THE YEAR ENDED DECEMBER 31, 2007 NOTES TO THE FINANCIAL STATEMENTS Item Year 2007 Year 2006 Difference Reason Equity as of December 31, 2006 (original accounting standard) 523,025,117.39 523,025,117.39 --- 1 Long-term equity investment difference 3,484,254.50 --- 3,484,254.50 Note Among which: long-term equity investment difference arising from consolidating enterprises under same control --- --- --- Other credit difference of long-term equity investment adopting equity method --- --- --- 2 Investment real estate assumed to be measured adopting fair value mode --- --- --- 3 Under-provided depreciation of previous year arising from estimated assets redundancy expenses --- --- --- 4 Dismiss compensation complied with estimated liabilities recognition terms --- --- --- 5 Share payment --- --- --- 6 Restructure obligation complied with estimated liabilities recognition terms --- --- --- 7 Enterprise consolidation --- --- --- Among which: Carrying amount of consolidated goodwill of enterprises under same control --- --- --- Provision for impairment of goodwill in accordance with new accounting standard --- --- --- 8 Financial assets measured by fair value with its changes recorded into profit and loss of current period and financial assets available for sale 74,704.90 74,704.90 --- 9 Financial liabilities measured by fair value with its changes recorded into profit and loss of current period --- --- --- 10 Increased equity arising from financial instruments split --- --- --- 11 Derivative financial instruments --- --- --- 12 Income tax 4,308,570.89 4,308,570.89 --- 13 Minority interest 108,599,912.29 108,599,912.29 --- 14 Specific retroactive adjustment for Share B, Share H and etc. of listed companies --- 15 Others --- Equity as of January 1, 2007 (new accounting standard) 639,492,559.97 636,008,305.47 3,484,254.50 Explanations of adjustment to the difference in opening balance of owners’ equity Note Main difference occurred for the Company calculated and adjusted the amount according to the new accounting standards during the process of preparing the contrastive disclosure for adjustment for equity difference between original and new accounting standards for the year 2006. The Company calculated and adjusted the amount again according to the ‘Experts’ Opinion on Issues in Implement of Accounting Standards for Business Enterprises’ when preparing the financial statements for the year 2007. 31 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY FOR THE YEAR ENDED DECEMBER 31, 2007 NOTES TO THE FINANCIAL STATEMENTS 5.5 Provision for impairment of assets in Year 2007 Decre Item As of January 1, 2008 Provision Transferred in Writes of 1. Provision for doubtful and bad debts 23,505,942.81 31,861,511.63 --- 20,641,835 2. Provision for diminution in value of inventory 1,598,448.70 1,113,504.24 755,429.79 3. Provision for impairment of available-for-sale financial assets --- --- --- 4. Provision for impairment of held-to-maturity investments --- --- --- 5. Provision for impairment of long-term equity investment 7,990,960.26 5,815,366.54 --- 6. Provision for impairment of investment real estate --- --- --- 7 Provision for impairment of fixed assets --- 95,923,083.17 --- 8. Provision for impairment of project materials --- --- --- 9. Provision for impairment of construction in progress --- --- --- 10. Provision for impairment of bearer biological assets --- --- --- Among which: Provision for impairment of mature bearer biological assets --- --- --- 11. Provision for impairment of oil and natural gas assets --- --- --- 12. Provision for impairment of intangible assets --- --- --- 13. Provision for impairment of goodwill --- --- --- 14. Others --- --- --- Total 33,095,351.77 134,713,465.58 755,429.79 20,641,835 32 GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY FOR THE YEAR ENDED DECEMBER 31, 2007 NOTES TO THE FINANCIAL STATEMENTS 11. Approval issuance of Financial Statements This Financial Statements of the Company and consolidation have been approved to issue by the Board of Directors of the Company on April 24, 2008. GUANGDONG RIEYS (GROUP) JOINT-STOCK COMPANY （Company seal） April 20, 2008 33