*ST帝贤B(200160)2008年年度报告（英文版）

，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 承 德 帝 贤 针 纺 股 份 有 限 公 司 CHENGDE DIXIAN TEXTILE CO．，LTD. ANNUAL REPORT 2008 April 28, 2009 Chengde · PRC 1 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 Contents Section I. Important Notice -----------------------------------------------------------------------3 Section II. Company Profile-----------------------------------------------------------------------4 Section III. Summary of Accounting Highlights and Business Highlights---------------5 Section IV. Changes in Share Capital and Particulars about Shareholders------------10 Section V. Particulars about Directors, Supervisors, Senior Executives and Employees---------------------------------------------------------------------------------------------14 SectionVI. Administrative Structure ---------------------------------------------------------------20 SectionVII. Particulars about Shareholders’ General Meeting----------------------------------24 Section VIII. Report of the Board of Directors------------------------------------------------25 Section IX. Report of the Supervisory Committee--------------------------------------------39 Section IX. Significant Events---------------------------------------------------------------------41 Section XI. Financial Report----------------------------------------------------------------------46 Section XII. Documents for Reference ----------------------------------------------------------46 2 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 Section I. Important Notice and contents Board of Directors, Supervisory Committee, all directors, supervisors and senior executives of Chengde Dixian Textile Co., Ltd. (hereinafter referred to as the Company) hereby confirm that there are no any fictitious statements, misleading statements, or important omissions carried in this report, and shall take all responsibilities, individual and/or joint, for the reality, accuracy and completion of the whole contents. The 6th Meeting of the 4th Board of Director examined and approved 2008 Annual Report and its summary of the Company. All the directors, supervisors and senior executives attended the board meeting. Beijing Yongtuo Certified Public Accountants Co., Ltd. audited the financial report of the Company and issued the qualified audit report with emphasized issues for the Company. The Board of Director, Supervisory Committee and independent directors of the Company made definitions on the relevant matters; the investors are suggested to pay attention to read. Mr. Chen Rong, Chairman of the Board of the Company, Mr. Ye Weijie, Chief Financial Officer, and Mr. Li Weigang Person in Charge of Accounting Organ hereby confirm that the Financial Report of 2008 Annual Report is authentic and complete. Note: The report is prepared in bilingual versions using Chinese and English respectively, in the event of any discrepancy in understanding the two aforementioned versions, the Chinese version shall prevail. 3 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 Section II. Company Profile 1. Legal Name of the Company In Chinese: 承德帝贤针纺股份有限公司 In English: CHENGDE DIXIAN TEXTILE CO., LTD. 2. Legal Representative: Chen Rong 3. Secretary of Board of Directors: Chen Zhiguo Contact Address: Xiabancheng Town, Chengde County, Hebei Province E-mail: gzc958@sohu.com Tel: (86) 314-3115049, 3115048 Fax: (86) 314-3111475 Authorized Representative in Charge of Securities Affairs: Han Zhigang Tel: (86) 314-3115049, 3115048 Fax: (86) 314-3111475 E-mail: hzg18632@126.com 4. Registered Address: Xiabancheng Town, Chengde County, Hebei Province Office Address: Xiabancheng Town, Chengde County, Hebei Provice Post Code: 067400 Company’s Internet Web Site: http://www.dxtex.com E-mail: dxgs-9@heinfo.net 5. Newspapers Chosen for Disclosing the Information of the Company: Securities Times (domestic) and Hong Kong Wen Wei Po (overseas) Internet Web Site for Publishing the Annual Report: http://www.cninfo.com.cn The Place Where the Annual Report is Prepared and Placed: Securities Department of the Company Contact Tel: (86) 314-3115049, 3115048 6. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form of the Stock: DIXIAN B Stock Code: 200160 7. Other Relevant Information of the Company Initial registered date: Nov. 3, 1999 Registered date after change: Mar. 31, 2004 Registered address: Industry and Commerce Administration Bureau of Hebei Province (316#, Tiyu South Street, Shijiazhuang, Hebei Province) Registered number for business license of the Company: 1300001001372 1/1 Registered number of taxation of the Company: 130821106576876 Organization Code Certificate: 106576876 The Certified Public Accountant engaged by the Company: Beijing Certified Public Accountants Co., Ltd. Office address: 11F-13F/Guo’an Building, No. Guandongdian North Street, Dongdaqiao Road, Chaoyang District, Beijing, P.R.C. 4 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 Section III. Summary of Accounting Highlights and Business Highlights I. Summary of accounting highlight as of the year 2008 Items Amounts(RMB) Operating profit -571,002,891.20 Total profit 372,761,404.05 Net profit attributable to the shareholders of the listed 176,403,180.59 company Net profit attributable to the shareholders of the listed -534,641,187.11 company after deducting non-recurring gains and losses Net cash flow arising from operating activities -4,769,709.48 Notes: Items of deducting non-recurring gains and losses and the involved amounts are as following: Items Amounts(RMB) Provision for accrual of bad debts -67,222,246.85 Provision for impairment of fixed assets -139,607,678.19 Provision for impairment of intangible assets -19,670,971.87 Provision for impairment of long-term investment -100,000,000.00 Provision for depreciation of inventory 6,597,120.98 Deferred income tax assets confirmed based on the accrual of the provisions for bad debts, fixed assets, construction in 72,051,552.85 progress and impairment Exemption of creditor’s rights 50,000,000.00 Fixed assets inventory overage 300,000.00 Losses confirmed while creditor’s rights were higher than the -161,815,672.07 book by the Court Penalty expenditure -2,118,395.79 Reorganization expense -6,348,350.50 Reorganization gains 1,056,972,999.81 Non-operating income 477,661.98 Less: Non-operating expenditure 52,298.68 Less: Influenced amount of minority shareholders’ interests -21,480,646.03 II. Major accounting data and financial indexes over past three years ended the end of the report period (Unit: RMB) 1. Major accounting data Increase/de 2008 2007 crease this 2006 year 5 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 compared with that last year (%) After Before adjustment After adjustment Before adjustment After adjustment adjustment Operating income 11,132,286.00 59,972,518.33 59,972,518.33 -81.44% 233,828,225.80 233,828,225.80 Total profit 372,761,404.05 -574,718,466.36 -1,971,295,949.65 118.91% -391,148,911.00 -391,148,911.00 Net profit attributable to shareholders of 176,403,180.59 -547,559,224.02 -1,392,672,660.84 112.67% -343,506,925.21 -343,506,925.21 the listed company Net profit attributable to shareholders of the listed -534,641,187.1 -220,392,774.32 -222,649,174.36 -140.13% -279,449,158.95 -279,449,158.95 company after 1 deducting non-recurring gains and losses Net cash flow arising from -4,769,709.48 -11,206,519.82 -11,260,519.82 -57.64% -17,643,154.42 -17,643,154.42 operating activities Increase/de crease at the end of this year At the end of At the end of 2007 compared At the end of 2006 2008 with that at the end of last year (%) After Before adjustment After adjustment Before adjustment After adjustment adjustment Total assets 598,681,950.83 2,182,122,998.28 1,134,689,885.81 -47.24% 2,580,107,980.45 2,580,107,980.45 Owners’ -237,353,406.1 equity(Sharehol 431,356,850.09 -413,756,586.73 42.63% 976,721,074.11 976,721,074.11 4 ders’ equity) Share capital 706,320,000.00 706,320,000.00 706,320,000.00 0.00% 706,320,000.00 706,320,000.00 2. Major financial ratio (Unit: RMB) Increase/de crease this year 2008 2007 compared 2006 with that last year (%) After Before Before adjustment After adjustment After adjustment adjustment adjustment Basic earnings per 0.25 -0.78 -1.97 112.69% -0.49 -0.49 share (RMB/share) 6 CHENGDE DIXIAN TEXTILE CO． ，LTD. ANNUAL REPORT 2008 Diluted earnings per 0.25 -0.78 -1.97 112.69% -0.49 0.49 share (RMB/share) Basic earnings per share after deducting -0.76 -0.31 -0.32 -137.50% -0.40 -0.40 non-recurring gains and losses (RMB/share) Fully diluted return -74.32% -126.94% 336.59% -410.91% -35.17% -35.17% on equity (%) Weighted average -74.32% -77.90% -496.70% 422.38% -29.92% -29.92% return on equity (%) Fully diluted return on equity after deducting 225.25% -51.09% 53.81% 171.44% -28.61% -28.61% non-recurring gains and losses (%) Weighted average return on equity after deducting 225.25% -31.35% -79.41% 304.66% -22.07% -22.07% non-recurring gains and losses (%) Net cash flow per share arising from -0.007 -0.016 -0.016 -56.25% -0.025 -0.025 operating activities (RMB/share) Increase/de crease at the end of this year At the end of 2008 At the end of 2007 compared At the end of 2006 with that at the end of last year (%) After Before Before adjustment After adjustment After adjustment adjustment adjustment Net asset per share attributable to shareholders of listed -0.34 0.61 -0.59 42.37% 1.38 1.38 company (RMB/share) III. The Company’s return on equity and earnings per share as of the year 2008 as calculated in accordance with Requirements on the Information Disclosure of Companies Publicly Issuing Shares No. 9----Calculation and Disclosure on Fully Diluted Method and Weighted Average Method, as follows: 1) Return on equity Return on equity Profit in the report period Fully diluted Weighted average Amount in Amount in last Amount in Amount 7 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 the report report period the report in last period period report period Net profit attributable to common shareholders of the Company -74.32% 336.59% -74.32% 336.59% Net profit attributable to common shareholders of the Company after deducting the non-recurring 225.25% 53.81% 225.25% 53.81% losses and gains 2) Earnings per share Earnings per share Basic earnings per share Diluted earnings per share Profit in the report period Amount in Amount in Amount in Amount in the last report the report last report report period period period period Net profit attributable to common shareholders of the Company 0.25 -1.97 0.25 -1.97 Net profit attributable to common shareholders of the Company after deducting the -0.76 -0.32 -0.76 -0.32 non-recurring losses and gains IV. Detailed statement on Provision for the Devaluation of Asset (Unit: RMB) Withdrawal Decrease in this period Book balance in Book balance in Items amount in this year-begin Transfer-in Transfer-out period-end period I. Total of provision for bad debts 273,807,759.77 71,048,783.70 0.00 0.00 344,856,543.47 II. Provision for falling price of 49,877,842.19 0.00 0.00 43,881,796.10 5,996,046.09 inventory III. Provision for devaluation of financial asset available for sales IV. Provision for devaluation of held-to-maturity investment V. Provision for devaluation of 55,980,000.00 100,000,000.00 0.00 0.00 155,980,000.00 long-term equity investment VI. Provision for devaluation of investing property VII. provision for devaluation of 915,745,585.19 139,607,678.19 0.00 0.00 1,055,353,263.38 fixed assets VIII. Provision for devaluation of engineering materials IX. Provision for devaluation of 490,841,949.37 0.00 0.00 0.00 490,841,949.37 construction in progress X. Provision for devaluation of productive biological asset Including: Provision for 8 CHENGDE DIXIAN TEXTILE CO． ，LTD. ANNUAL REPORT 2008 devaluation of mature productive biological asset XI. Provision for devaluation of oil asset XII. Provision for devaluation of 0.00 19,670,971.87 19,670,971.87 intangible asset XIII. Provision for devaluation of goodwill XIV. Other Total 1,786,253,136.52 330,327,433.76 43,881,796.10 2,072,698,774.18 Losses from Devaluation of Asset (Unit: RMB) Amount occurred in the report Amount occurred in last report Items period period I. Total of provision for bad debts 67,222,246.85 184,439,491.96 II. Provision for falling price of inventory -6,597,120.98 14,906,998.26 III. Provision for devaluation of financial asset available for sales IV. Provision for devaluation of held-to-maturity investment V. Provision for devaluation of long-term equity 100,000,000.00 investment VI. Provision for devaluation of investing property VII. provision for devaluation of fixed assets 139,607,678.19 915,745,585.19 VIII. Provision for devaluation of engineering materials IX. Provision for devaluation of construction in 480,831,898.10 progress X. Provision for devaluation of productive biological asset XI. Provision for devaluation of oil asset XII. Provision for devaluation of intangible asset 19,670,971.87 XIII. Provision for devaluation of goodwill XIV. Other Total 319,903,775.93 1,595,923,973.51 9 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 Section IV. Changes in Share Capital and Particulars about Shareholders I. Changes in Share Capital (1) Statement of changes in share Unit: Share Before the Change Increase/Decrease in the Change (+, -) After the Change Conversi Additi New Proporti Proporti Bonus on of onal Amount shares Others Amount on on shares public issuan issued reserve ce I. Unlisted shares 244,800,000 34.66% 244,800,000 34.66% 1. Sponsors’ 244,800,000 34.66% 244,800,000 34.66% shares Including: State-owned share Domestic legal 23,147,309 3.28% 23,147,309 3.28% person share Foreign legal person share Other 221,651,691 31.38% 221,651,691 31.38% 2. Raised legal person’s shares 3. Inner employees’ shares 4. Preference shares or others II. Listed shares 461,520,000 65.34% 461,520,000 65.34% 1. RMB ordinary shares 2. Domestically listed foreign 461,520,000 65.34% 461,520,000 65.34% shares 3. Overseas listed foreign capital share 4. Other III. Total shares 706,320,000 100% 706,320,000 100% (2) Particulars about issuance and listing of shares 1. Issuance and listing over the previous years ended the report period. The previous three year ended by the period-end, the Company did not issue shares and derived securities 2. During the report period, there were no changes in the number and structure of the Company’s shares and changes in structure of asset liabilities of the Company due to bonus share, capital public reserve transferring into share capital, rationed share, additional issuance, non-public offering, exercise of warrant, implementation of equity incentive plan, enterprise merger, convertible company’s bonds transferring shares, disinvestments, listing of inner employees’ shares or company’s employee’s shares, etc. 10 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 3. There were no inner employees’ shares in the Company. II. About shareholders (1) Amount of shareholders and particulars about shares holding Ended Dec. 31, 2008, the Company had totally 21,197 shareholders, including 5 of sponsors’ share and 21,192 of domestically listed foreign share. Total amount of shareholders 21,197 Particulars about shares held by the top ten shareholders Numbers of Number of Nature of Proportion of Total of shares Full name of Shareholders non-circulating share shareholder shares held held shares held pledged/frozen Chen Rong Natural person 29.49% 208,324,800 208,324,800 Naught China Southern Securities Co., Circulating 15.41% 108,840,000 Naught 0 Ltd. B-share Domestic Chengde North Industrial legal person 2.62% 18,517,651 18,517,651 0 Corporation share Wang Zhengsong Natural person 1.89% 13,327,891 13,327,891 0 SBCI FINANCE ASIN A/C Circulating 1.16% 8,169,363 Naught 0 SBC HONG KONG B-share Circulating Wang Wensheng 1.03% 7,258,007 Naught 0 B-share Circulating Xu Xinhuu 0.84% 5,911,105 Naught 0 B-share SUN HUNG KAI Circulating INVESTMENT SERVICES 0.51% 3,629,216 Naught 0 B-share LID-CUSTOMERS A/C Circulating Zhu Qing 0.45% 3,160,369 Naught 0 B-share Circulating Peng Wei 0.42% 2,978,525 Naught 0 B-share Particulars about shares held by the top ten shareholders of circulation shares Number of circulation shares held at Shareholders’ name Type of shares the year-end Domestically listed foreign China Southern Securities Co., Ltd. 108,840,000 shares SBCI FINANCE ASIN A/C SBC HONG Domestically listed foreign 8,169,363 KONG shares Domestically listed foreign Wang Wensheng 7,258,007 shares Domestically listed foreign Xu Xinhuu 5,911,105 shares SUN HUNG KAI INVESTMENT SERVICES Domestically listed foreign 3,629,216 LID-CUSTOMERS A/C shares Domestically listed foreign Zhu Qing 3,160,369 shares Domestically listed foreign Peng Wei 2,978,525 shares 11 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 Domestically listed foreign Wu Xiaomei 2,492,536 shares Domestically listed foreign Zhao Ziying 2,298,616 shares GUOTAI JUNAN Domestically listed foreign 2,092,957 SECURITIES(HONGKONG)LIMITED shares Among the top ten shareholders, the Company is unknown whether there exists Explanation on associated associated relationship or belongs to the consistent actor regulated by the relationship among the Management Measure of Information Disclosure on Change of Shareholding for aforesaid shareholders Listed Company among the other shareholders. (2) Particulars about controlling shareholder of the Company: The controlling shareholder of the Company is Chen Rong (the first largest shareholder of the Company), who is also actual controller of the Company. His information is as follows: Chen Rong: Male, aged 50 and Chinese nationality, who does not enjoy the residence power in the other country or area and got the Master Degree. He takes the posts of the member of the 9th and 10th Shanghai Committee’s Standing Committee of Political Consultative Conference; Vice-president of Shanghai Federation of Industry and Commerce; Vice-president of Shanghai Private Enterprises Association; and Vice-chairman of National Bowling Association. And he is also the Director of Guangzhou KingTeller Technology Co., Ltd., Chairman of Shanghai Zhonglu (Group) Co., Ltd. and Chairman of Zhonglu Co., Ltd. Chen Rong held the 208,324,800 sponsor’s shares of the Company accounted for 29.49% in total shares of the Company and became the first largest shareholder and actual controller of the Company. Now, he is the Chairman and concurrently General Manager of the Company. (3) In the report period, controlling shareholder and actual controller of the Company had changed. In August, 2008, Shenzhen Intermediate People’s Court verdicted that 112,324,800 sponsors’ shares of Chengde Dixian Textile Co., Ltd. held by Wang Shuxian were compensated to Chen Rong with the price of RMB 45,491,544. Dalian Intermediate People’s Court verdicted that 96,000,000 sponsors’ shares of Chengde Dixian Textile Co., Ltd. held by Wang Shuxian were compensated to Chen Rong with the price of RMB 38,880,000. After the effective of verdict, the shares held by Chen Rong accounted for 29.49% in total shares of the Company and became the first largest shareholder and actual controller of the Company. For the details, please refer to the Securities Times and Hong Kong Wen Wei Po respectively dated August 14, 2008 and August 20, 2008. (4) Property right and controlling relationship between the actual controller and the Company is as follow: Chen Rong 29.49% CHENGDE DIXIAN TEXTILE CO., LTD. (5) Particulars about legal person shareholders as of holding 10% (including 10%) In 2004, the Company additionally offered shares, China South Securities Co., Ltd. held 12 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 108,840,000 domestically listed foreign shares of the Company because it had the exclusive selling rights of the shares of the Company which accounted for 15.41% and became the first largest tradable shareholder of the Company. China South Securities Co., Ltd. was founded on Dec. 21, 1992 with registered capital of RMB 3.45 billion. Business scope of the Company includes: deputize and self-run security business; consignment of security and recommend and guarantee for listing; issuance and issuance agent for bond; guarantee agent, assignment and testimony of security; sales by proxy, mortgage and discount financing of security and investment consultation of security; finance consultant; investment related to security business; regroup, purchase and merger of enterprise and financing arrangement; deputize repay capital with interest and distribution of bonus with derived interest; capital management; promote business of fund; overseas business of security; act as sponsor of security investment fund and fund management company and other business authorized by CSRC. On Jan., 2, 2004, China South Securities Co., Ltd. was taken over control administratively. It was officially announced to be closed on April 29, 2004 and the clearing work is under the way nowadays. 13 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 Section V. Particulars about the Directors, Supervisors and Senior Executives and Employees I. Particulars about directors, supervisors and senior executives (1)Basic information Holding Holding share Reason Start dated of End date of Title Sex Age share at the at the of Name office term office term year-begin year-end change Obtained Chairman of by Chen Rong Male 51 2008-11-3 2011-11-3 0 208,324,800 the Board judicial judgment Chen Jie Director Male 56 2008-11-3 2011-11-3 0 0 Zhang Guichen Director Male 67 2008-11-3 2011-11-3 0 0 Independent Liu Wei Male 39 2008-11-3 2011-11-3 0 0 Director Independent Li Min Male 52 2008-11-3 2011-11-3 0 0 Director Yuan Runbing Supervisor Male 31 2008-11-3 2011-11-3 0 0 Fema Wu Yijing Supervisor 30 2008-11-3 2011-11-3 0 0 le Xu Xue Supervisor Male 60 2008-11-3 2011-11-3 0 0 Deputy Hu Wenxi General Male 54 2008-11-3 2011-11-3 0 0 Manager Deputy Shi Bainian General Male 36 2008-11-3 2011-11-3 0 0 Manager Ye Weijie CFO Male 42 2008-11-3 2011-11-3 0 0 Secretary of Chen Zhiguo Board of Male 36 2008-11-3 2011-11-3 0 0 Directors Particulars about directors, supervisors and senior executives holding the positions in Shareholding Company: There were no directors, supervisors and senior executives holding the positions in Shareholding Company. (II) Particulars about main work experience of directors, supervisor and senior executives in previous five years 1. Particulars about present directors of the Company Chen Rong: Male, aged 50, Master Degree. He takes the posts of the member of the 9th and 10th Shanghai Committee’s Standing Committee of Political Consultative Conference; Vice-president of Shanghai Federation of Industry and Commerce; Vice-president of Shanghai Private Enterprises Association; and Vice-president of National Bowling Association. And he is also the Director of Guangzhou KingTeller Technology Co., Ltd., 14 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 Chairman of Shanghai Zhonglu (Group) Co., Ltd. and Chairman of Zhonglu Co., Ltd. Mr. Chen Rong held the 208,324,800 sponsor’s shares of the Company accounted for 29.49% in total shares of the Company and becomes the first largest shareholder and actual controller of the Company. Now, he is the Chairman and concurrently General Manager of the Company. Chen Jie: Male: aged 55, graduated from senior high school. He has been engaged in equity investment for a long time, had profound acquaintances on capital market and other element market, experienced in investment and is the Vice-chairman of Shanghai Pingjie Investment Consultation Co., Ltd. Now, he is the Director of the Company. Zhang Guichen: aged 60, member of Communist Party of China, graduated from junior college. He has ever been the Clerk of Chengde Commerce Bureau; he ever worked in Family Planning Committee of Chengde and Planning Bureau with holding the posts of Clerk, Deputy Office Director, Office Director and Director General; Deputy Director of Chengde People's Congress. He was retired in Oct. 2008. Now, he is the Director of the Company. Li Min: Male, aged 51, member of Communist Party of China, Bachelor’s Degree, Senior Accountant, Certified Public Accountant. He ever was the Section Chief and Deputy President of Shanghai Toys Electroplate No.1 Factory; President and Deputy Secretary of Party Committee of Staff Accounting School of Shanghai No.2 Light Industry Bureau. Now, he is the Chairman, Director Accountant and Party Secretary of Shanghai Jinglong CPAs; Independent Director of 3rd, 4th and 5th Board of Zhonglu Co., Ltd.; Independent Director of Stellar Megaunion Corporation. Now, he is the Independent Director of the Company. Liu Wei: Male, aged 38, on-study Master of Laws, Lawyer, Executive Co-partner of Guohao Law Group Firms, Co-partner of Guohao Law Group (Shanghai) Firms. Now, he is the Member of 4th Committee for Mergers, Acquisitions and Restructurings of Listed Companies in CSRC; Vice-director of Finance and Securities Committee of Shanghai Lawyers Association; he ever was elected as the Top Ten Excellent Lawyer in Shanghai with specializing in business of the company, stock and finance lawyer. In year 1993, he obtained the Qualification of Practicing Law Affairs Engaged in Securities Business presented by CSRC, and he actively supplied laws services for the large and medium enterprise and famous private enterprise since he was engaged in the securities law affairs for 16 years. He ever offered law services for issuance and listed in stock exchange, refinancing and debts restructurings for almost 200 listed companies and supplied perennial laws consultant services for several ten large enterprises. Now, he is the Independent Director of the Company. 2. Basic information of supervisors Yuan Runbing: Male, aged 30. He ever worked in Unilever, Roland Berger Strategy Consultants, Deloitte Touche Tohmatsu Certified Public Accountants. He joined in PreIPO Capital Partners in 2008 and has taken the post of Vice-president of PreIPO Capital Partners. He participated in several project on management and consultation, deeply participated in several IPO audit project on listing in Stock Exchange and annual audit project; he specialized in private investment analysis and enterprise internal control analysis and enterprise strategy management. He obtained the Master Degree on Enterprise 15 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 Management Department of Fudan University, Bachelor Degree on Applied Physics Department of Lanzhou University. Now, he is the Supervisor of the Company. Wu Yijing: Female, aged 28, graduated from junior college, the Accountant of Shanghai Zhonglu (group) Co., Ltd. She ever worked in Shanghai Meizhao Culture Development Co., Ltd. Now, she is the Supervisor of the Company. Xu Xue: Male, aged 60. He took the post of Plant Director of Dixian Company Zhuji Thread-making Plant from Jun. 1995 to Apr. 1997; Plant Director of Dixian Company Paper Cartons Plant from Apr. 1997 to Mar. 2001; Deputy Secretary of General Party Branch of the Dixian Company from Jul. 2003 till now. He ever was the Chairman of the 3rd Supervisory Committee. And now he is the Supervisor of the Company. 3. Basic information of other senior executives Hu Wenxi: Male, aged 53, member of China Communist Party, graduated from junior college, Senior Economist. He ever Group Leader and Director of Workshop of Chengde Water Pump Plant and Hardware Maintenance Plant; Factory Director and Secretary of Chengde Magang General Plant, Water-heating Pieces Plant and Light Industry Machinery Plant; Deputy Director General of Chengde Economics and Trade Bureau; Chief Engineer of Chengde Industry Promotion Bureau; he withdrew to the second line of duty in April 2008 and exempted the administrative post. Now, he is the Deputy General Manager of the Company. Mr. Shi Bainian, graduated from university (majored in economics management), was Director and General Manager of the Company. He successively took the post of Director of Tailoring Branch of Dixian Group, Director of Dyeing Manufacture and Director and General Manager of the Company. Now, he is the Deputy General Manager of the Company. Ye Weijie: Male, age 45, Bachelor Degree, Accountant. He ever was the Accountant of Financial Department of Shanghai No.5 Printing and Dyeing Plant; Accountant of Financial Department of Shanghai Logitech Electronics Co., Ltd.; Financial Manager of Shanghai Bulanweike Bowling Center Co., Ltd.; Financial Manager of Shanghai Office of Australia TV Shopping Network Co., Ltd.; Deputy Manager of Financial Department, Majordomo of Financial Department of Marketing Center, and Director of Audit Office of Shanghai Forever Co., Ltd.; Majordomo of Financial Department of Shanghai Pujiang Cable Co., Ltd. Now, he is the CFO of the Company. Mr. Chen Zhiguo, junior college degree, was the 2nd and 3rd secretary of the Board of the Company. He ever worked as the Associate Director, Sub-Section Chief of General Affairs of Spinning Mill, and Manager of Securities Department of the Company. Now, he is the 4th secretary of the Board of the Company. (III) All present directors, supervisors and senior executives drew the annual remuneration from the Company in 2008 as follows: 16 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 Drew from other Total annual shareholder company or Title Name remuneration other related organ or not Chen Rong Chairman of the Board 0 No Chen Jie Director 0 No Zhang Guichen Director 0 No Liu Wei Independent Director 0 No Li Min Independent Director 0 No Yuan Runbing Supervisor 0 No Wu Yijing Supervisor 0 No Xu Xue Supervisor RMB 47,330 No Hu Wenxi Deputy General Manager RMB 6,000 No Shi Bainian Deputy General Manager RMB 66,000 No Ye Weijie CFO RMB 6,000 No Chen Zhiguo Secretary of Board of Directors RMB 49,330 No On Nov. 3, 2008, the Board of Directors, Supervisory Committee and Senior Executives of the Company held the election of new session. The former Chairman Wang Shuxian did not withdraw remuneration in year 2008, other former directors, supervisors and senior executives withdrew their remuneration based on the resolution of 2006 Annual Shareholders’ General Meeting and the time for withdrawing remuneration ended up to Dec. 15, 2008. Annual remuneration for the present directors, supervisors and senior executives were not confirmed due to the bankruptcy reorganization finally. Since Nov. 2008, the Deputy General Manager Hu Wenxi, Deputy General Manager Shi Bainian, CFO Ye Weijie, Secretary of the Board Chen Zhiguo and etc withdrew their remuneration based on RMB 3000/month; Employee Supervisor Xu Xue withdrew his remuneration based on RMB 2000/month; other directors and supervisors did not withdraw. In year 2008, the Company actually paid remunerations to all the directors, supervisors and senior executives (including the former and current relevant persons) totaled to RMB 990,000. The Board of the Directors of the Company would finally confirm the annual remuneration of current directors, supervisors and senior executives according to the bankruptcy reorganization of the Company and restoration of productions of the Company. (IV) Election or leaving position of directors, supervisors and senior executives; and engagement and dismissal of senior executives in the report period 1. The 21 st meeting of the 3rd board of directors held on April 7, 2008 examined and approved the nomination of Su Yongmin and Wang Jiguang as the Independent Directors of the Company by the board of directors; and changed the Independent Directors Mr. Li Wei and Wang Yaguang for expiration of 6 years office term. On August 24, 2008, the 1st Extraordinary Shareholders’ General Meeting of 2008 examined and approved the Proposal on Changing Independent Director. 2. The 26th meeting of the 3rd Board of the Company was held on Oct. 15, 2008 in which 17 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 examined the tenure of the 3rd Board was expired; with the nomination from largest shareholder Mr. Chen Rong, the Board nominated Chen Rong, Chen Jie and Zhang Guichen as the Directors of the 4th Board; Liu Wei and Li Min as the Independent Directors of the 4th Board; Yuan Runbing and Wu Yijing as the Supervisors of the 4th Board. On Nov. 3, 2008, the Company held the 2nd Extraordinary Shareholders’ General Meeting 2008 in which the proposal on changes for new session of the Board and Supervisory Committee. 3. On Nov. 3, 2008, the 1st meeting of the 4th Board elected Chen Rong as the Chairman of the Company voted by way of hands:; engaged Chen Rong as the General Manager of the Company; engaged Hu Wenxi and Shi Bainian as the Deptuty General Manager of the Company; engaged Ye Weijie as the CFO of the Company; engaged Chen Zhiguo as the Secretary of the Company; and engaged Han Zhigang as the Representative of the Securities Affairs of the Company. (V)Presence at the board meeting by directors Whether Attending attending the the meeting Due Presence in Entrusted meeting in Name of the in way of Absence Positions Presence person presence person in directors communicat (times) (times) (times) (times) successive ion two times or (times) not Director of the 3rd Wang Shuxian 6 0 0 0 6 Yes Board Director of the 3rd Xu Guilian 6 5 0 1 0 No Board Director of the 3rd Du Qingfeng 6 5 0 0 1 No Board Director of the 3rd Liu Fumin 6 5 0 0 1 No Board Director of the 3rd Shi Bainian 6 5 0 0 1 No Board Director of the 3rd Song Yushan 6 6 0 0 0 No Board Independent Li Wei director of the 3rd 1 0 1 0 0 No Board Independent Wang Yaguang director of the 3rd 1 0 0 1 0 No Board Independent Wang Enyuan director of the 3rd 6 6 0 0 0 No Board Independent Wang Jiguang director of the 3rd 5 5 0 0 0 No Board Independent Su Yongmin director of the 3rd 5 5 0 0 0 No Board Director of the 4th Chen Rong 4 1 3 0 0 No Board Director of the 4th Chen Jie 4 1 3 0 0 No Board Director of the 4th Zhang Guichen 4 1 3 0 0 No Board 18 CHENGDE DIXIAN TEXTILE CO． ，LTD. ANNUAL REPORT 2008 Director of the 4th Li Min 4 1 3 0 0 No Board th Director of the 4 Liu Wei 4 1 3 0 0 No Board Explanations on not attending the meeting of the Board in person in successive two times Wang Shuxian, Chairman of the 3rd Board of the Company, could not be able to attend the meetings, for being detained by Shijiazhuang Custom for being suspect in smuggle. Meetings of the Board held during 10 the year (times) Of which: site meetings (times) 6 Meetings held in way of 3 communication (times) Meetings held in way of both site 1 and communication (times) II. Particulars about employees At the end of report period, the Company entered into the procedure of bankruptcy reorganization, the administrator of the Company has released the labor contracts with original employees. The owed employee endowment insurance and compensation would be solved while the Company implemented the plan of bankruptcy reorganization. The Company had no expense for retirees at present. 19 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 Section VI. Administrative Structure I. Administration of the Company Strictly according to the requirements in Company Law of the P.R.C., Securities Law, Rules on Administration of Listed Companies, Guidance Opinion on Establishing Independent Director System in Listed Companies and other relevant laws and regulations, the Company continuously improved the legal person administration structure of the Company, established modern enterprise system and standardized the operation of the Company. There is no significant difference between the actual administration of the Company and the normative documents on administration of listed companies released by China Securities Regulatory Commission. The major representation is as follows: 1. Shareholders and the Shareholders’ General Meeting: The Company set up Rules of Procedure of Shareholders’ General Meeting and was able to convene and hold the Shareholders’ General Meeting strictly according to the requirement of normative opinions of the Shareholders’ General Meeting and the procedure of the meeting was legal. The Company ensures that all shareholders share the actual information of the Company equally and guarantee the legal rights of medium and small shareholders. 2. Relation of the controlling shareholder and the listed company: In order to truly safeguard the whole interest of the Company, the Company has set up Behavior Criterion of Controlling Shareholder. The Company is completely independent from the controlling shareholder in terms of personnel, assets, finance, organization and business. The Board of Directors, the Supervisory Committee and internal organization can operate independently. 3. Directors and the Board of Directors: The Company elected directors strictly according to the procedure stated in the Articles of Association and engaged independent directors according to relevant requirements. All directors can take the responsibilities in a diligent attitude on behalf of the maximum interests of the Company and the shareholders. The Board of Directors established Rules of procedure of the Board of Directors, implemented patiently the regulations of the laws, regulations and the Articles of Association of the Company, treated all shareholders fairly and concentrated on the interest of relevant beneficial parties. 4. Supervisors and the Supervisory Committee: The Supervisory Committee established Rules of procedure of the Supervisory Committee. The supervisors can take their duties and supervise over the Company’s finance and the compliance with laws and regulations of the implementation of the, directors, managers and other senior executives’ duties in an attitude responsible for all shareholders and thus protect the legal right and interest of the Company and the shareholders. 5. For relevant beneficial parties: The Company is able to fully respect and safeguard the legal rights and interests of the bank, other creditors, employees, customers and other parties of related interests. The Company pays special attention to social welfare, environmental protection and commonweal cause in the area, while protecting the Company’s sustainable development and realizing the maximum of the shareholders’ interests. 6. Information disclosure and transparency: The Company authorized the secretary of the Board of Directors to be responsible for information disclosure, reception of the shareholders’ interviewing and consultation. The Company could disclose relevant information in a true, accurate, complete and timely manner strictly according to provisions of laws, regulations and the Articles of Association so as to ensure equal chances for all shareholders to obtain information. 20 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 In 2008, according to requirement of Notice on the Matter Concerning Carrying out a Special Campaign to Strengthen the Corporate Governance of Listed Company issued by CSRC and Notice on Supervising Relevant Work of Reform and Improvement of Special Governance Campaign issued by Hebei Securities Regulatory Bureau, combined with details of corporate governance, the Company actively started special governance campaign. On the basis of self-inspection, the Company established reform plan and made serious reform. The Company established and disclosed Reform Report of Special Governance campaign. According to relevant requirements of notice [2008] No. 27 issued by CSRC and Notice on Further Deeply Promoting Special Governance Campaign [2008] No.89 issued by Hebei Securities Regulatory Bureau, the Company established and disclosed Explanation on Reform of Special Governance Campaign. Details could be found on Securities Times and Hong Kong Wen Wei Po Dated July 25, 2008. II. Performance of Independent Directors Since taking the post in the Company, independent Directors Mr. Li Min and Mr. Liu Wei seriously fulfilled their duties, participated in each meeting of Board of Directors and shareholders’ general meeting on time in the report period, and did not express different opinions on each proposal of the meeting of Board of Directors and other issues. They also actively inspected and researched the operations business developments and financial status, strictly supervised and guided the normal operation; actively took part in the decision-making of Board of Directors, expressed independent and object opinions on nominating directors and proposing to engage certified public accountants, and expressed scientific and reasonable opinions and suggestions with their specialized knowledge for several times on operation and development of the Company. They maintained interests of the Company and all shareholders and diligently perfect their responsibilities. In 2008, independent directors did not proposed any disagreement on relevant issues. In the report period, the Company totally held 10 Board of Directors and the attending of independent directors as follows: Times of Board Entrusted Name of independent Presence in Absence meeting supposed presence director person (Time) (Time) to attend (Time) Wang Enyuan (dismissed) 6 6 0 0 Wang Yaguang (dismissed) 1 0 1 1 Li Wei (dismissed) 1 0 0 1 Su Yongmin (dismissed) 5 5 0 0 Wang Jiguang (dismissed) 5 5 0 0 Li Min 4 4 0 0 Liu Wei 4 4 0 0 III. Separation in businesses, personnel, assets, organization and finance of the Company and control shareholders 1. In respect of personnel: the labor, personnel and wage management of the Company is completely independent and the manager, deputy manager and other senior executives received salaries in the Company. 2. In respect of assets: The Company as an independent legal person has full property right 21 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 of legal person and has independent production system, accessorial production system and auxiliary equipment. Industrial property right, trademark, non-patent technology and other intangible assets all belong to the listed company. The Company has independent purchase and sales system. 3. In respect of finance: The Company has independent financial department, whole, independent and normatively operated business accounting system and financial administration system and independent bank account. 4. In respect of organization independence: The Company’s organizations are wholly independent and the offices of the Company are wholly separated from the controlling shareholder. 5. In respect of business: The Company is independent from the controlling shareholder in terms of businesses and has independent and whole business and operating ability. IV. Particulars about establishing and perfecting internal control system of the Company (Details could be found in Self-estimation Report of Internal Control in 2008 in Juchao Website.) 1. Summary on internal control The present internal control system of the company was basically completed, which could adapt demand of the Company’s management and development, and basically reached the whole goal of internal control. The present internal control could provide reasonable guarantee for compiling true and fair financial statement, and provide guarantee for healthy operation of each business, and implementation of relevant laws, regulations of the state and internal bylaws of unit. Each internal control of the Company was persistently, smoothly and strictly implemented in each tache of production and operation. The Company thought the internal control was effective. With changes of operation and external environment, there was some system and management defect hard to avoid during the development, and the effectiveness of the present internal control system may change. The Company would further perfected internal control system according to relevant requirement, in order to always adapt the demand of the Company’s development and the requirement of relevant laws and regulations of the state. 2. Independent directors’ opinions The Company established perfect internal control system, which accorded with the requirement of relevant laws and regulations of the state and bylaws of department; the internal control had legality, rationality and validity, and had complete risk estimation system. The legal person governance, production and operation, information disclosure and significant events strictly accorded with regulations of each internal control system, the potential internal and external risk in each tache was effectively controlled, and each expected goal was basically realized. Therefore, the internal control was effective. The self-estimation report of internal control truly and objectively reflected the actual conditions of present establishment, implementation and supervisal of internal control. The Company needed to strengthen checking and supervising effect and efficiency of internal control implementation, and should establish relevant work system and responsibility pursuing mechanism. 3. Supervisory committee’s opinions The self-estimation of internal control accorded with the requirement of Code of Corporate Governance for Listed Company issued by Shenzhen Stock Exchange and other relevant 22 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 document; it truly and completely reflected the status of establishment, perfection and implementation and main present problems; reform plan was practical, which accorded with demand of internal control; the overall estimation on internal control was objective and exact. V. Evaluation and encouragement mechanism of performance of senior executives Due to the largest shareholder of the Company changed, the board of directors, supervisory committee and senior executives all had a new election; the Company is in the phase of bankruptcy reorganization, so the new term of the board of directors did not establish evaluation and encouragement mechanism of senior executives. With implementing bankruptcy reorganization plan, the operation of the Company gradually stepped into the right path, and the board of directors would gradually establish and perfect evaluation and encouragement mechanism of senior executives according to actual conditions. 23 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 Section VII. Particulars about Shareholders’ General Meeting I. In the report period, the Company held one Annual Shareholders’ General Meeting and Two Extraordinary Shareholders’ General Meetings (I) Particulars about Annual Shareholders’ General Meeting On June 30, 2008 the Company held 2007 Annual Shareholders’ General Meeting and the resolution notice was published on Securities Times and Hong Kong Wen Wei Po and website http://www.cninfo.com.cn dated July 1, 2008. (II) Particulars about Extraordinary Shareholders’ General Meeting 1. The Company held the 1st Extraordinary Shareholders’ General Meeting of 2008 on April 24, 2008, the resolution notice has been published on Securities Times and Hong Kong Wen Wei Po and website http://www.cninfo.com.cn dated April 25, 2008. 2. The Company held the 2nd Extraordinary Shareholders’ General Meeting of 2008 on Nov. 3, 2008, the resolution notice has been published on Securities Times and Hong Kong Wen Wei Po and website http://www.cninfo.com.cn dated Nov. 4, 2008. 24 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 Section VIII. Report of the Board of Directors I. Discussion and analysis on the management level Influenced by various factors, the Company and subsidiaries stopped operation since October of 2007, and has not recovered operation in the report period. The Company has already received loss for successive two years. Once continuously loss in 2008, the Company would be possibly suspension or termination for listing. So, the primary task for the Company and the local government for 2008 were: introduction of powerful strategic investors or partners to reorganize assets and debts of the Company, thus in order to help the Company turn losses into gains and walk out mess. In the report period, large shareholders and actual controllers changed to the Company, and new session of management level was elected. The Company stepped into procedure for bankruptcy and reorganization. As the Company gradually finishes reorganization plan, the Company would be effectively relieved from debt burden and financial pressure. However, to fundamentally recover operation and profit-making ability, the Company still needs to reorganize assets, introduce industry investors, integrate industry resource and inject with assets or business which have good development and profit-making prospects. (I) Review on the operation of the Company in the report period 1. Overall operation of the Company in the report period During the report period, the Company has realized operating income of RMB 11,132,286.00, 81.44% down compared over the same period of last year; operating profit of RMB -571,002,891.20, 71.03% up compared over the same period of last year; net profit of RMB 176,403,180.59, a great profit growth compared to the loss of the same period of last year. Great drop in operating income and operating profit was mainly due to that the Company had not carried out any operation activity. Main business of the Company still received loss in 2008. Profit realized in 2008 was mainly because that the Company calculated income of RMB 1,056,972,999.81 received from bankruptcy and reorganization into gains and losses for 2008. 2. Main business and operation status (1)Classified according to industry and product Classified according to industries Increase/decre Increase/decre Increase/decrea Classified according Operating ase in ase in se in operating Operating to industries or Operating cost profit ratio operating operating cost profit ratio income products (%) income over over last year over last year last year (%) (%) (%) Sales of cotton yarn plain cloth and 337.80 761.40 -125.40% -83.49% -71.46% -95.06% spinning & synthetic silks Sales of paper 589.20 650.40 -10.39% -46.61% -60.95% -50.82% Classified according to products Sales of cotton yarn plain cloth and 337.80 761.40 -125.40% -83.49% -71.46% 95.06% spinning & synthetic silks Sales of paper 589.20 650.40 -10.39% -46.61% -60.95% -50.82% 25 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 (2)Main business classified according to areas Unit: RMB’0000 Increase/decrease in operating income over last Areas Operating income year (%) Domestic 927.10 -71.00% (3)Main customers: The total purchase amount from the top five suppliers amounted to RMB 0, accounting for 0% of the Company’s total purchase amount of the year. The total sales amount to the top five customers amounted to RMB 3.2 million, accounting for 28.8% of the Company’s total sales amount. 3. Analysis on constitution of assets of the Company in the report period Dec.31, 2008 Dec.31, 2007 Item Proportion Proportion in Amount Amount in total assets total assets Total assets 598,681,950.83 100% 1,134,689,885.81 100% Account 6,314,628.93 1.05% 18,238,933.65 1.6% receivable Inventories 377,830.47 0.06% 1,8523,91.30 0.16% Real estate - - - - investment Long-term equity 16.24% 17.4% 97,215,729.65 197,215,729.65 investment Fixed assets 124,093,126.16 20.73% 291,282,102.50 25.7% Construction in 2.15% 1.1% 12,883,800.00 12,883,800.00 progress Short-term loan 257,110,082.88 42.95% 846,795,820.86 74.6% Long-term loan - - - - Reason for material changes over the same period of last year: Reason for decrease in total assets: withdrawal of provision for asset devaluation; Reason for decrease in account receivable: withdrawal of bad debt loss; Reason for decrease in inventory: sales in this report period; Reasons for decrease in fixed assets: withdrawal of provision for asset devaluation; Reasons for decrease in short-term loans: short-term loans were correspondingly decreased according to confirmation of reorganization income. Note: in the report period, the Company adopted historical cost method to measure main assets, and no item was measure by fair value. Relevant analysis on financial data Increase/decrease Item 2008 2007 year-on-year Sales expense 3,990.00 3,685,785.86 -99.89% 26 CHENGDE DIXIAN TEXTILE CO． ，LTD. ANNUAL REPORT 2008 Administrative -86.41% 36,314,298.59 267,255,550.88 expense Financial 73,130,603.09 173.64% 200,115,413.80 expense Income tax 217,838,869.49 -348,830,814.82 106.23% Reason for material changes over the same period of last year: Reason for change in sales expense: long-term suspension of production and operation; Reason for change in administrative expense: all the factory was off for holiday, and no production and operation was made; Reason for change in financial expense: withdrawal of loan interest in later times; Reason for change in income tax: switch-back of deferred income tax confirmed in previous years. 4. Relevant analysis on constitution of cash flow Increase/decrease Item 2008 2007 proportion 1、Cash flow arising from operating activities Cash received from sales of goods and -77.4% 14,314,261.45 63,347,110.26 supplying labor force Other cash received from activities -19.96% 1,546,269.50 1,931,795.97 relevant to operation Cash paid for the purchase of goods -83.48% 3,175,107.86 19,224,469.95 and accepting labor force Cash paid to/for employees 5,146,595.66 31,982,444.62 -83.9% Tax expenses paid 398,245.78 1,098,746.76 -63.75% Other cash paid for activities relevant -50.85% 11,910,291.13 24,233,764.72 to operation Net cash flow arising from operating 57.64% -4,769,709.48 -11,260,519.82 activities 2、Cash flow arising from investing activities Cash paid for purchase of fixed assets, intangible assets and other long-term 3,400.00 - - assets Net cash flow arising from investing 296,600.00 - - activities 3、Cash flow arising from financing activities Cash received from getting loans - 9,697,000.00 -100% Cash paid for repaying the loans 1,395,649.94 52,480.89 2,559.35% Cash paid for distribution of dividend -100% - 72,038.73 or profit Net cash flow arising from financing -1,395,649.94 9,572,480.38 -114.08% activities Reasons for significant changes compared with the same period of last year: (1) Reasons for cash flow changes occurred in operation: the Company completely stopped production and operation in this period; (2) Reasons for net cash flow changes occurred in investment: the Company disposed assets in this period; 27 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 (3) Reasons for net cash flow changes occurred in capital financing: the Company paid debts in this period; (4) Reasons for significant difference between cash flow occurred in operation and net profit in the report period: in 2008, due to the Capital Chain was splitted, the Company declared bankruptcy and reforming, the factory entirely stopped production, without any capital support, the main business of the Company in 2008 still in loss. The Company made profit in this year mainly because that the income of bankruptcy and reforming was calculated into gains and losses in 2008, but it did not bring relevant cash flow to the Company. In 2008, due to break of capital chain, the Company declared bankruptcy and reorganization. Operation of factories all stopped, without any capital support. The main operation was still loss for 2008. The Company has gained payoff this year mainly due to that income from bankruptcy and reorganization was calculated into gains and losses of 2008, while bankruptcy and reorganization had not correspondingly bring cash flow into the Company. 5. Discussion and analysis on utilization of equipment, order-obtaining, sales and stockpiling of products, changes of main technicians of the Company Being seriously restricted by capital, the Company stopped operation since October of 2007; workers and technicians all recessed. In 2008, the Company still had not recovered for operation and received no order; the production equipments got seriously rusted. At the end of 2008, the Company walked into procedure of bankruptcy and reorganization. 6. Main holding subsidiaries and share-joining companies (1)Hebei Xiabancheng Knit Wears Co., Ltd. is the Company’s wholly owned subsidiary, which was a Sino-foreign joint venture set up by Knitting General Plant, the predecessor of the Company and foreign enterprises, registered on Jul.9, 1991 with a registered capital of USD 4 million. The operating scope is: production and sale of textile. Its main products are all kinds of knit wears. At the end of this year, the company walked into procedure of bankruptcy and reorganization. (2)Chengde Dixian Fashion Co., Ltd. is a Sino-foreign joint venture, which was jointly invested by Japanese Y’s Corporation and the Company. It registered on May 23, 2000 with registered capital of USD 24 million. The Company holds 75% equity of this company and Y’s Corporation holds 25% respectively. The operating scope is: production and sale of yarn and synthetic silks. The main products are yarn and synthetic silks. At the end of this year, the company walked into procedure of bankruptcy and reorganization. (3)Chengde Xingye Papermaking Co., Ltd. was a papermaking company jointly established by Hong Kong Zhanxi International Co., Ltd. and the Company, with a registered capital of USD 100 million. The Company holds 75% equity of this company and Zhanxi Group holds 25% respectively. The operating scope is: production and sale of series of high-grade copperplate plate paper and craft board. Influenced by the shortage of fund, the production of Xingye Papermaking was completely ceased. At the end of this year, Xingye Papermaking was applied for bankruptcy and settlement. Now, the company is still under settlement. (4)Chengde Banhe Chemical Simulation Textile Co., Ltd. was share-holding company of controlling subsidiary of the Company, which was a Sino-foreign operating enterprise 28 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 registered and set up on Sep.29, 2002 with its registered capital of USD 60 million. Dixian Fashion Co., Ltd., Japan Shanxia Trade Co., Ltd. and Hebei Xiaban Town Knitting Company respectively hold 40% and 35% and 25% equity of this company. The operating scope was: production and sale of different types of chemical simulation cloth with high quality, knitting cloth and different types of coloration finished cloth; the main products were high quality chemical simulation cloth, knitting cloth and different types of coloration finished cloth. At the end of this year, the company walked into procedure of bankruptcy and reorganization. (5)Chengde Dahua Paper Co., Ltd (original Chengde Japan Papermaking Co., Ltd.) was a Sino-foreign joint venture invested and set up by the company and Japan Papermaking Co., Ltd. The total investment was amounting to YEN 11 billion and the registered capital was YEN 6.364 billion. The Company and Japan Papermaking respectively hold 45% and 55% equity of this company. The joint venture mainly produces and sells all types of high-quality paper. The production scale is producing 150 thousand tons of various papers per year. In 2005, the 45% equity of Chengde Japan Papermaking Co., Ltd held by the Company were transferred to controlling subsidiary of Chengde Xingye Papermaking Co., Ltd, 55% equity of Chengde Japan Papermaking Co., Ltd held by Japan Papermaking Co., Ltd were transferred to Japan New Century Trading Co., Ltd. After transferring the equity, Chengde Japan Papermaking Co., Ltd changed its name to Chengde Dahua Paper Co., Ltd. The investment on Chengde Dahua Paper Co., Ltd was jointly finished by Chengde Xingye Papermaking Co., Ltd and Japan New Century Trading Co., Ltd. Equipment of the company has not been installed completely. (6)Suning Banhe Chemical Simulation Textile Co., Ltd is a shareholding subsidiary of the Company, which is a joint venture and invested and set up by the Company and Japan Shanxia Trade Co., Ltd on Nov.7, 2004. Its registered capital was USD 29 million, the Company invests USD 5.8 million which accounts for 20% of the registered capital. Suning Banhe hasn’t carried out operation officially and stopped operation in 2008. (II) Prospect for future development of the Company 1. The development tendency in the industry of the Company and the market competition pattern the Company faced The Company is in the industries of textile and papermaking. The textile is the traditional pillar industry in China for a long time, and the foreign and domestic competition are intense. With the development of economy, the industrial structure of the textile improves, management benefit raises and integrated industry processing system is formed, and there are rich raw material resources and sufficient labor forces. Our country still enjoys advantage in textile industry competition and still has development space. The Company is mainly engaged in production of knitting costume. Due to the break in capital chain, the dress-making business of the Company has to stop. Once with capital to start, the Company has certain competitive power by its integrated industrial chain and low production cost. The industry of papermaking is the important industry which is closely linked with the development of national economy and social civilization. In developed countries, the growth step of paper and cardboard consumption keeps the same with that of GDP. Papermaking is an industry with intensity in technology, fund, resource and energy; efficiency of production scale is obvious, it is one industry of essential raw material with continuous and high effective production. At present, paper production of the Company has also ceased due to shortage of fund. 29 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 2. Development strategy and programming At the end of the report period, the Company entered procedure for bankruptcy and reform. According to the reform plan, once the Company discharged debts, its debt burden and financial pressure would be effectively relieved. While, in order to resume sustainable operation and profit-making ability, and guarantee that creditors could get complete discharge according to regulations of the reform plan, the Company still has to make asset reorganization, introduce industry investors, integrate industry resource, and equip with assets or business which have considerable development and profit-making prospects. According to the actual condition of itself, and in consideration of wills of potential industry investors, the Company made the following operation programming for future development: (1)Business of textile and printing & dyeing Taking use of the original facilities for textile and printing & dyeing, and comparatively cheap labor force in local place, the Company introduces potential industry investors and inputs necessary capital, equipment, technique and advanced management experience, to build textile printing & dyeing industry park featuring with R&D, production, process and sales together with investors. Business of the industry park is mainly focused on development of top-grade textile and printing & dyeing products, and it is predicted that over 1000 occupation posts would be provided for local place. (2)Business of costume manufacture According to the strategic development programming of Chengde government aiming to build Strong County for Costume across the nation, and with support from the government, the Company cooperates with the potential industry investors who are going to provide necessary capital, technique, equipment and brand authorization. Through integrating the original customer network and sales channels of the Company, and engaging the original skilled employees of the Company, the Company would gradually resume and develop production and process business of costume. (3)Business of pulp and paper-making With the original condition and assistance from the government, the Company cooperates with the potential industry investors, and introduces in technique of making clean pulp, technique of sewage disposal and relevant special equipments which possess of independent intellectual property. Promotion and demonstration base for clean pulp technique and sewage disposal technique is planned to establish; meanwhile, with production base for pulp and newsprint paper. At the same time, the Company would make design development for matching equipments for the aforesaid techniques, and provides other paper-making enterprises with complete solution scheme for sustainable development between paper-making resources and environment. It aims to gradually become an integrated paper-making enterprise featuring with R&D of science and technology, production, operation and technique service. 3. Focus for 2009 works Acceleration of execution for the reform plan and manage to implement according to the reform plan. The Company will continue to consider of seeking for powerful strategy investors and partners to integrate assets, injecting the Company with capital, assets or business which have considerable development and profit-making prospects, so as to help the Company to resume production and profit-making ability of main business, and normal 30 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 operation of its various business as soon as possible. 4. Risks, and relevant solutions and measures to be taken (1) Macro-policy risk and countermeasures China now is just in procedure of rapid economic development. Unceasing release of new policy measures, and changes in laws and policy environment would bring certain uncertainties to the Company in implementing reform plan, operation, production and investment activities, also bring uncertainties to the development programming and strategy of the Company. Considering the policy risk, the Company will further research and analyze the changes of national policy and law regulation, fully and objectively appraise the influences of development strategy and operations of the Company brought by the changes of national policy and law regulations. On the basis of operation abiding to the law, assurance of the development goal of the Company and manufacturing operation abiding to the national laws and regulations, to adjust timely the development strategy and operations of the Company, hold the development chances brought by the changes of the national policy and laws and regulations; at the same time, to avoid the disadvantageous influences brought by the changes of the national policy and laws and regulations. (2) Market or business operation risks and countermeasures The Company has stopped operation for 2 years, so the original market has already been lost. At present, the Company has certain difficulty in resuming production and market, faced with griming test. With assistance from the government, the Company cooperates with potential industry investors who provide necessary capital, equipment, as well as technique. Through integrating original customer network and sales channels of the Company, and engaging the original skilled employees of the Company, the Company would gradually resume and develop the original industry. (3)Financial risk and countermeasure Affected by various factors, serious operation crisis and financial crisis had happened to the Company since 2005. It was prosecuted by various creditors, and all assets of the Company were sealed up or frozen, thus financial crisis was getting further serious, and the Company had lost ability to make profit. In November of 2008, the Company received bankruptcy and reform. And on Dec 30th of 2008, it was permitted by court with its reform plan. Once the Company discharges debts, its debt burden and financial pressure would be effectively relieved (4)Technique risk and countermeasure Due to operation of the Company had stopped for 2 years, facilities were seriously rotten, and technique workers were all off for holiday. When resuming production, it is not avoidable for the Company to lose skilled workers. Except the preference reengagement for the original skilled workers of it, the Company also would engage technique talented personnel from the same industry, domestic or overseas, with high remuneration; introduces and renews the original equipments; actively absorbs advanced technology of the same industry, domestic or overseas all available. III. Investment of the Company 1. In the report period, there was no such situation that application of raised proceeds in the report period or application of proceeds started in previous periods while continuing to last 31 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 in this report period. 2. In the report period, there was no investment with the non-raised proceeds of the Company. IV. 1. Explanation of the Board on the non-standard Auditor’s Report issued by the CPAs To the proceedings involved in qualified opinions with emphasis matters provided by accountants, the board of directors of the Company made the following explanations: The board of directors thought that, the proceedings involved in qualified opinions with emphasis matters provided by Beijing Yongtuo Certified Public Accountants existed, with complex reasons, including the following main reasons: 1. due to the Capital Chain was splitted, the Company completely stopped production and all workers took holidays; 2. due to the Company was a suspect to smuggle common cargos, many previous key managers were arrested, and operation management was significantly affected; 3. a majority of financial accounts, voucher and file data were detained by Shijiazhuang Customs Anti-smuggling Bureau without return till now, therefore, the Company could not provide complete and specified relevant information and data for accountants; 4. the Company was in the process of bankruptcy and reforming, and found the physical assets could not accorded with the financial data in the procedure of liquidation. The board of directors attached importance to the emphasized issues and qualified matters in the audit report, and thought that the Company could eliminate unfavorable effect of the above matters. With changes of large shareholders and production of new management level, the Company would gradually perfect internal control, strengthen internal management and improve the level of finance staff. With the finality of the custom case and accomplishment of bankruptcy and reforming, the Company would continue to make assets reorganization, resume and improve sustainable operation ability, the Company would gradually went into the right path, and the above matters involved would be resolved soon. 2. Explanation of independent directors on the non-standard Auditor’s Report issued by the CPAs In 2008, as for the financial statement of the Company, Beijing Yongtuo Certified Public Accountants Co., Ltd. audited the statement and issued qualified audit report with emphasized matters. Independent directors of the Company thought that Explanation of the Board on the Nonstandard Auditor’s Report Issued by the CPAs accorded with the actual condition and they agreed with this explanation. While meanwhile, they demanded the board of directors, administrative level and financial department of the Company to pay great attention to the problems involved in the emphasized issues and qualified opinion of the audit report, and to solve the problems as soon as possible, thus to protect practical interest of vast middles and minor shareholders. 3. Explanation of the Board on correction of financial information of the 2007 Annual Report On Dec 25th of 2008, the Company held the 4th meeting of the 4th Board by means of communications, and the proposal on Withdrawal of Assets Devaluation Loss of Fixed Assets and Construction in Process, and Correction of Relevant Items in 2007 Financial Statement was examined and approved in this meeting; on Jan 8th of 2009, the aforesaid proposal was approved in the 1st Extraordinary Shareholders’ General Meeting for 2009. (1)Background of withdrawal of assets Devaluation loss and correction of financial statement On Jan 18th of 2005, the Company announced stop of production due to break of capital 32 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 chain. Though part production was then successively resumed with efforts, equipments has not all been normally used. Maintenance for equipments was also restricted due to shortage of capital. In December of 2006, many ex-senior-executives and key managers of the Company were detained by justice department, for being suspects of smuggling ordinary cargos and articles. Meanwhile all financial accounts, vouchers and files of the Company were detained by custom. Operation of the Company received s significant impact, nearly impossible to operate any more. Then with assistance from local government, the Company only kept a few equipments to hold production, most equipments were unused. Till October of 2007, the Company completely stopped operation and workers were all off. At the year end of 2007, Shenzhen Dahua Tiancheng Certified Public Accountants offered audit report with disclaimer of opinions and emphasized issues. Proceedings which made the certified public accountants not able to issue opinion totaled to 11, among which: The 1st proceeding that “Due to the Company is being suspected of committing smuggling crime of ordinary cargos and articles, several top managers are detained and partial financial information is seized by the Customs, the Company’s operation and management received a great influence, which also resulted in a significant influence on internal control, which caused that economic business and accountant record were not complete, we are not able to identify and evaluate the significant misreport risk of financial report, and could not make judgments on the integrity of the Company’s financial report.” The 5th proceeding that “net value of fixed assets of the Company as of Dec 31st of 2007 amounted to RMB 1,207,027,687.69, and RMB 493,715,698.10 for balance of construction in process, which accounted for 77.94% of total assets. After the Company and its subsidiaries successively stopped operation and construction in 2006 and 2007, equipments were unused, rotten and then damaged. Construction in process had been stopped for a long time. It was not able to take financial information corresponding to practical assets. without experts’ assistance in measuring quantity of the aforesaid assets, practical condition and appraisal, we are not able to obtain sufficient and adequate audit evidence to prove whether the assets really exist or adequately listed in financial statement according to regulations of Accounting Standard for Enterprise.” Because significant assets of the Company were involved in the aforesaid 5th proceeding, ex managers of the Company had tried various efforts, striving to eliminate the proceeding. However, due to not being able to obtain and check the financial documents and information detained by the Custom, they could not solve the problem. (2)Reason for withdrawal of assets Devaluation loss and correction of financial statement In august of 2006, Mr. Chen Rong got 208,324,800 unlisted tradable shares of the Company through justice auction, thus became the controlling shareholder of the Company; relevant Detailed Report on Equity Change was published on Sep 5th of 2008. On Nov 3rd of 2008, the Company held extraordinary shareholders’ meeting, elected new Board and new executives of the Company. The new executives adopted positive measures, engaged relevant professional personnel to make full check on various situation of the Company, and found that most equipments were rotten and damaged due to long-term unused. Meanwhile, in this check, with strong assistance from the government, they read and copied the financial document and information detained by the custom, and then made works which were expected to do in 2007 audit while actually not done due to restriction of objective condition. In order to accurately reflect the true financial situation of the Company as of period-end of last year (also refers to period-begin of this year), with responsibility for middle and minor shareholders, and practical principle, the new executives took reference to assets appraisal 33 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 result and decided to correct the financial data of fixed assets and construction in process listed in consolidated balance sheet as of Dec 31st of 2007. The detailed method was: the Company entrusted Guangzhou Zhongtianheng Assets Appraisal Co., Ltd. (hereinafter referred to as Zhongtianheng Appraisal Company) to appraise the market value of the aforesaid fixed assets and construction in process till Dec 31st of 2007 according to the financial document and information copied from the custom. (3)Influence on financial condition and operation achievement of the Company brought by the correction The original book value of fixed assets for 2007 amounted to RMB 1,660,869,237.35 and RMB 503,725,749.37 for construction in process. The Company entrusted assets appraisal institution to appraise the market value of the aforesaid fixed assets and construction in process till Dec 31st of 2007. Referring to the appraisal result, the Company made withdrawal of RMB 915,745,585.19 for devaluation reserve of fixed assets and RMB 480,831,898.10 for that of construction in process. Totally RMB 1,396,577,483.29 was withdrawn. Correspondingly, RMB 349,144,370.82 was adjusted to increase in deferred income tax assets, and decrease of RMB 349,144,370.82 in income tax expense. Due to the aforesaid adjustments, net profit for 2007 should be adjusted to decrease with RMB 1,047,433,112.47, among which decrease net profit of shareholders of parent company with RMB 845,113,436.82 and decrease of RMB 202,319,675.65 for minor shareholders’ gains and losses; equity of consolidated shareholders should be adjusted to decrease with RMB 1,047,433,112.47, among which decrease shareholders’ equity attributable to parent company with RMB 845,113,436.82 and decrease of RMB 202,319,675.65 for minor shareholders’ equity; With adjustment in the relevant items in the financial statement, the financial statement could objectively and really reflect assets and financial condition of the Company. After withdrawal for devaluation reserve of fixed assets, the Company was going to decrease annual depreciation cost amounting to RMB 50 million approximately; meanwhile, truthful reflect of assets’ value is useful to manage and examine the operation target of managers, and measures and effective management of assets activation. (4)The audited annual financial statement after correction, relevant financial statement annotations involved in correction proceedings, and name of CPAs which issued audit report Beijing Yongtuo CPAs Co., Ltd. made audit on the 2007 financial statement which received correction, and then issued audit report with disclaimer of opinion and emphasized proceedings. The corrected audit report could be available in Juchao Website http://www.cninfo.com.cn. (5)Opinion issued by the Board, the Supervisory Committee and independent directors on Withdrawal of Assets Devaluation Loss for Fixed Assets and Construction in Process, and Correction of Relevant Items in 2007 Financial Statement ○1 The board of directors holds that: withdrawal of assets devaluation loss for fixed assets and construction in process, and correction of relevant items in 2007 financial statement were done to accurately reflect the true financial status of the Company as of period-end of last year (also refers to period-begin of this year), and also for practical interests protection of vast middle and minor shareholders, with principle of making practice. The correction made by the Company according to relevant regulations of Accounting Standard was adequate. 34 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 ○ 2 The Supervisory Committee holds that: the corrected financial information accurately and fairly reflected financial condition of the Company, according with relevant regulations of Accounting Standard for Enterprise promulgated by the state. ○3 Independent directors hold that: to make correction for relevant items in financial statement is appropriate; the corrected items really reflected assets and finance status of the Company, according with relevant regulations of Accounting Standard for Enterprise promulgated by the state. They agreed with decisions made by the Board on Withdrawal of Assets Devaluation Loss for Fixed Assets and Construction in Process, and Correction of Relevant Items in 2007 Financial Statement. V. Routine work of the Board of Directors (I) In the report period, the meetings and resolutions of the Board of Directors: 1. The 21st Meeting of the 3rd Board of Directors of the Company was held on Apr 7th of 2008 in the 3rd floor conference room of the Company, and the relevant resolutions were published on Hong Kong Wen Wei Po, Securities Times and Juchao Website dated Apr 8th of 2008. 2. The 22nd Meeting of the 3rd Board of Directors of the Company was held on Apr 28th of 2008 in the 3rd floor conference room of the Company, and the relevant resolutions were published on Hong Kong Wen Wei Po, Securities Times and Juchao Website dated Apr 29th of 2008. 3. The 23rd Meeting of the 3rd Board of Directors of the Company was held on Jun 6th of 2008 in the 3rd floor conference room of the Company, and the relevant resolutions were published on Hong Kong Wen Wei Po, Securities Times and Juchao Website dated Jun 8th of 2008. 4. The 24th Meeting of the 3rd Board of Directors of the Company was held on Jul 24th of 2008 in the 3rd floor conference room of the Company, and the relevant resolutions were published on Hong Kong Wen Wei Po, Securities Times and Juchao Website dated Jul 25th of 2008. 5. The 25th Meeting of the 3rd Board of Directors of the Company was held on Aug 26th of 2008 in the 3rd floor conference room of the Company, and the relevant resolutions were published on Hong Kong Wen Wei Po, Securities Times and Juchao Website dated Aug 27th of 2008. 6. The 26th Meeting of the 3rd Board of Directors of the Company was held on Oct 15th of 2008 in the 3rd floor conference room of the Company, and the relevant resolutions were published on Hong Kong Wen Wei Po, Securities Times and Juchao Website dated Oct 16th of 2008. 7. The 1st Meeting of the 4th Board of Directors of the Company was held on Nov 3rd of 2008 in the 2nd floor conference room of the Company, and the relevant resolutions were published on Hong Kong Wen Wei Po, Securities Times and Juchao Website dated Nov 4th of 2008. 8. The 2nd Meeting of the 4th Board of Directors of the Company was held on Nov 15th of 2008 by communications, and the relevant resolutions were published on Hong Kong Wen Wei Po, Securities Times and Juchao Website dated Nov 16th of 2008. 9. The 3rd Meeting of the 4th Board of Directors of the Company was held on Dec 12th of 2008 by communications, and the relevant resolutions were published on Hong Kong Wen Wei Po, Securities Times and Juchao Website dated Dec 13th of 2008. 10. The 4th Meeting of the 4th Board of Directors of the Company was held on Dec 25th of 2008 by communications, and the relevant resolutions were published on Hong Kong Wen Wei Po, Securities Times and Juchao Website dated Dec 26th of 2008. 35 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 (II)Implementation of resolutions reached in Shareholders’ General Meeting by the Board In the report period, according to demands of Company Law, Securities Law, Articles of Association and other laws and regulations, the Board of the Company earnestly implemented various resolutions approved in Shareholders’ General Meeting, in strict accordance to resolutions and authorization of Shareholders’ General Meeting. (III) Implementation of audit committee of the board of directors Audit committee was constituted by 3 directors, including 2 independent directors. Audit committee strictly followed Implementation Regulations of Audit Committee. According to the regulations of Notice on Relevant Work of Annual Report 2008 of Listed Company issued by CSRC and Annual Report Work Regulations of Audit Committee, audit committee seriously and actively started relevant work of auditing annual report, exerted the function of supervising and auditing, and audit committee made summary of auditing work in 2008 as follows: 1. Confirming overall audit plan and check financial report Audit committee and financial department negotiated with Beijing Yongtuo Certified Public Accountants, and confirmed audit work arrangement of 2008. At the same time, audit committee checked financial statement of 2008 compiled by the Company and thought that: the Company could made financial calculation according to the regulations of New Accounting Standard, without any significant untruthfulness in report information; the financial statement of 2008 compiled by the Company basically reflected conditions of assets liability and operation achievement till Dec. 31, 2008, and agreed to start financial audit work in 2008 with the financial statement as basis. 2. Keeping normal communication with CPAs and paying attention to the progress of auditing During the auditing period, audit committee always kept communication with financial department and CPAs, and paid attention to the progress of auditing. The CPAs provided initial audit opinions, audit committee checked financial accounting statement, and formed written opinions that: the financial report of 2008 compiled by the Company basically reflected conditions of assets liability and operation achievement till Dec.31, 2008, and agreed to compile Financial Report of 2008 with the financial statement as basis and submit the board of directors to approve. At the same time, audit committee again put forward the requirement that the CPAs complete the final draft of audit report in the last ten days of April according to overall audit plan to ensure the Company to disclose Annual Report 2008 as schedule. 3. Audit committee held meeting to discuss relevant matters on annual report After completing annual auditing, audit committee held meeting to discuss the following resolutions: Financial Report of 2008, Self-estimation Report of Internal Control of the Company 2008, Proposal on suggesting Reengaging Certified Public Accountants to the Board of Directors and Summary Report on Annual Audit Work in 2008 of Certified Public Accountants. Till then, the audit work of 2008 was totally completed. Audit committee would submit the board of directors to approve the above proposals. 4. Summary Report on Annual Audit Work in 2008 of Certified Public Accountants Beijing Yongtuo Certified Public Accountants started the audit work the 3rd floor conference, 2009. During the audit work in one month, the audit group completed all audit procedure, obtained sufficient appropriate audit evidence, and submitted initial audit opinion to audit committee. In the process of auditing, Beijing Yongtuo Certified Public Accountants strictly followed the basic principle of profession morality, possessed high 36 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 professional level, adhere to independent, and kept profession caution; greatly completed the audit work of financial report of 2008, checked capital occupancy of holding shareholders and other related parties in 2008, and provided special explanation. Beijing Yongtuo Certified Public Accountants provided qualified audit report with emphasized issues for the 2008 annual financial report of the Company. 5. Proposal on suggesting Reengaging Certified Public Accountants to the Board of Directors Beijing Yongtuo Certified Public Accountants completed the audit work of annual report as schedule. In the audit work, Beijing Yongtuo Certified Public Accountants seriously implemented each duty, strictly followed the basic principle of profession morality, possessed high professional level, adhere to independent, kept profession caution, and greatly completed the audit work of financial report. Audit committee suggested reengaging Beijing Yongtuo Certified Public Accountants as audit institution of the Company for 2009. (IV) Performance of remuneration and examination committee Because the large shareholders changed and new term of the board of directors had not set remuneration and examination committee at present, the Company would set remuneration and examination committee, establish and perfect relevant system according to actual status. VI. Profit distribution preplan or preplan on converting capital public reserve into share capital in current year Audited by Beijing Yongtuo Certified Public Accountants Co., Ltd., the net profit realized by the Company in 2008 attributable to shareholders of listed company amounted to RMB 176,403,180.59. After offsetting losses in previous years, the profit of the Company available for distribution to investors amounted to RMB -1,416,436,100.68 till Dec 31st of 2008. The board of directors decided not to distribute profit in 2008, nor convert public reserve into share capital. The proposal still needs to be handed in to 2008 Shareholders’ General Meeting for discussion. Reason for why cash profit distribution preplan was not presented though profit was made in the report period, and usage of the undistributed profit: Influenced by various factors, the Company together with its subsidiaries all stopped production since October of 2007, and have not resumed production in the report period, besides, no production and operation business has been carried out. For that, the main business of the Company still received loss in 2008. The Company made profit in this year mainly because that the income of bankruptcy and reforming RMB 1,056,972,999.81 was calculated into gains and losses in 2008, but it did not bring relevant cash flow to the Company. Therefore, no cash distribution preplan was presented in this year. Independent directors thought: the situation that the board of directors decided not to distribute profit in 2008, nor convert public reserve into share capital was in accordance to actual condition of the Company, and also met relevant regulations of Company Law and Article of Association. 2. Bonus Division of the Company in recent three years Net profit attributable to Proportion taken in net profit Cash bonus (tax Year owners of parent company attributable to owners of included) in consolidated statement parent company in 37 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 consolidated statement 2007 0 -1,392,672,660.84 - 2006 0 -343,506,925.21 - 2005 0 20,306,135.88 - Note: In 2005, the Company ever implemented distribution scheme of sending 2 shares for every 10 shares held. VII. Special explanation and independent opinion issued by independent directors on capital occupancy and external guarantee of related parties of the Company Following the spirits of ZJF No.56 (2003) document on Standardizing Capital Current and External Guarantee between Listed Company and Related Party and ZJF No.120 (2005) document on Standardizing External Guarantee of Listed Company, as independent directors of the Company, we made careful inspection on the external guarantee executed according to the aforementioned regulation and presented the following explanation on relevant problems, with an attitude of earnest and responsibility: Till the end of the report period, the Company has never provided guarantee for shareholder, actual controller and its related party, any non legal person unit and individual; controlling shareholder and other related party neither forced the Company to provide guarantee for others; the Company didn’t provide guarantee violating any regulations. VII. Other proceedings The domestic media for information disclosure appointed by the Company is Securities Times; and Hong Kong Wen Wei Po for overseas. 38 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 Section IX. Report of the Supervisory Committee I. Meetings of the Supervisory Committee held in the report period and resolutions In the report period, the Company totally held 4 meetings of supervisory committee of the Company with details as follows: 1. The 7th meeting of the 3rd Supervisory Committee was held in the meeting room on the 2nd floor of the Company on Apr.28, 2008. The meeting examined and approved the following resolutions: (1) Work Report of the Supervisory Committee 2007; (2) Financial Audit Report 2007; (3) Annual Report 2007 and Summary of the Annual Report; (4) Explanation of the Board of Directors on Nonstandard Audit Report Provided by Accountants; (5) The 1st Quarterly Report 2008. The relevant resolutions were published on Hong Kong Wen Wei Po and Securities Times dated April 29, 2008. 2. The 8th meeting of the 3rd Supervisory Committee was held in the meeting room on the 2nd floor of the Company on the morning of Aug. 26, 2008. The meeting examined and approved the Semi-Annual Report 2008 and Summary. The relevant resolutions were published on Hong Kong Wen Wei Po and Securities Times dated Aug. 27, 2008. 3. The 9th meeting of the 3rd Supervisory Committee was held in the meeting room on the 2nd floor of the Company on the morning of Oct. 29, 2008. The meeting examined and approved the Third Quarterly Report 2008. The relevant resolutions were published on Hong Kong Wen Wei Po and Securities Times dated Oct. 30, 2008. 4. The 1st meeting of the 4th Supervisory Committee was held in the meeting room on the 2nd floor of the Company on the morning of Nov. 3, 2008. The meeting examined and approved Proposal on Electing Mr. Yuan Runbing as Chairman of the 4th Supervisory Committee. The relevant resolutions were published on Hong Kong Wen Wei Po and Securities Times dated Nov. 4, 2008. II. Independent opinions of the Supervisory Committee on relevant matters in 2008 1. Operation of the Company according to law According to relevant State laws and regulations, the Supervisory Committee of the Company supervised the holding procedures and resolutions of the Shareholders’ General Meeting and the Board of Directors, implementation of the resolutions of the Shareholders’ General Meeting by the Board, implementation of duties of the senior executives and the management system of the Company, and believed that, in 2008, the Board of the Company could normatively operate strictly according to Company Law, Securities Law, Listing Rules, Articles of Association of the Company, as well as other relevant regulations and systems in a patient and responsible way and its operation decisions were scientific and reasonable. The Board had further perfected internal management system and internal control to set up a good internal mechanism. The directors and managers of the Company had no behaviors against laws, regulations or Articles of Association of the Company, nor behaviors that had done harm to the interest of the Company in implementing their duties. 2. Inspection of the financial status of the Company The Supervisory Committee of the Company patiently and meticulously inspected the 39 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 financial system and financial status of the Company, and believed that the Financial Report 2008 of the Company could truly reflect the financial status and operation achievement of the Company. 3. Independent opinions of the supervisory committee on the actual investment of the latest raised fund. In the report period, the Company did not raise fund. With the approval of ZJFXZ〔2004〕 No.101 promulgated by CSRC, the Company has completed directional increasing 0.15 billion B shares in 2004. The total raised amount was HKD 0.498 billion. The raised fund have been used up according to the commitment of Prospectus, there were no changes on the projects of the raised fund. 4. Independent opinions of the supervisory committee on the purchase and sales of the assets In the report period, the Company had no purchase or sales of assets occurred. 5. Independent opinions of the supervisory committee on related transactions of the Company In the report period, the related transaction occurred according to the market transaction term and relevant regulations; there were no harm to the Company, equity of the shareholder, losses of assets of the Company, and no insider dealings. 6. Independent opinions of the supervisory committee on nonstandard Auditor’s Report issued by the Certified Public Accountants In 2008, Beijing Yongtuo Certified Public Accountants Co., Ltd. audited the financial report of the Company and issued qualified audit report with emphasized issues for the Company. Explanations of the Board of Director of the Company on particulars about the nonstandard Auditor’s Report issued by the Accountants were in accordance with the real status of the Company, and the Supervisory Committee agreed and did not have matters with special explanations. 40 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 Section X. Important Events I. In the report period, significant lawsuits of the Company 1. For the case on the Company’s loan from Shenzhen Ever Bright Bank Lianhua Road Sub-branch, according to Notice on Assistance in Execution [(2005) SZFMECZi No.177], Shenzhen Intermediate People’s Court of Guangdong Province decided that Shenzhen Lingfeng should pay back the loan of RMB 80, 824,254.97 as well as the interest at different times in ten days after the verdict works, and the Company has jointly paying responsibility. Because the Company is the actual asset user, the debt was identified according to above judgment. Chairman of the Board Wang Shuxian promised to pay back the debt with his entire asset as well as equities for the Company. Shenzhen Ever Bright Bank Lianhua Road Sub-branch applied for assets insurance, 112,320,000 shares held by Wang Shuxian have been frozen, and made three times public actions, with result of aborted action. In August of 2008, Shenzhen Intermediate People’s Court commuted the sealed 112,324,800 shares to Chen Rong with price of RMB 45,491,544. 2. On March 17, 2005, Guangdong Development Bank Co., Ltd Dalian Branch’s lawsuit about the Company’s loan contact, with (2005) MHCZiNo.43 and No.44 Civil Arbitrate Verdict, was decided by Liaoning Dalian Intermediate People’s Court that Hebei Xiabancheng Knitted Garment Co., Ltd. (having jointly responsibility to the two cases) should repay Guangdong Development Bank Co., Ltd Dalian Branch RMB 80,000,000 in total. Chairman of the Board of the Company Wang Shuxian promised to pay the debt with all his assets and equities for the Company. Guangdong Development Bank Co., Ltd Dalian Branch applied for assets insurance, and 96,000,000 shares held by Wang Shuxian have been frozen, and made three times public actions, with result of aborted action. In August of 2008, Dalian Intermediate People’s Court commuted 96,000,000 shares of Chengde Dixian Textile Co., Ltd. held by Wang Shuxian to Chen Rong with price of RMB 38,880,000. Till then, Chen Rong totally held 208,324,800 shares of the Company, which was 29.49% of the total shares, became the largest shareholder and actual controller of the Company. 3. On Dec. 25, 2006, many executors, including Chairman of the Board of the Company Wang Shuxian, were arrested on the suspicion of smuggling general cargo. In January of 2008, the Company was indicted by Shijiazhuang Intermediate People’s Court, and on Feb. 25, 2009, Shijiazhuang Intermediate People’s Court made judgment that, the Company was sentenced to pay fine RMB 68,734,451.21 due to crime of smuggling general cargo, and the smuggled cargo was confiscated and turned over to the state treasury. Within the legal term, Wang Shuxian made appeal. On Apr. 23, 2009, Hebei Higher People’s Court issued the Criminal Verdict (JXEZZi (2009) No.44) which sentenced that: reject the appeal and keep the original verdict. And this verdict was the terminal verdict. II. Bankruptcy and related reforming issues in the report period 1. Bankruptcy and related reforming issues of the Company: on Nov. 1, 2008, the creditor – Chengde Xingchen Construction Engineering Co., Ltd. submitted application of bankruptcy and related reforming to Chengde Intermediate People’s Court (hereinafter refer to as Chengde Intermediate Court). On Nov. 10, 2008, Chengde Intermediate Court made Civil Arbitrate Verdict (2008) CMPZ No. 9, which permitted the Company to reform and appointed settlement group as manager. During reforming period, on Dec. 13, 2008, the Company the Company submitted Reform Plan (Draft) of Chengde Dixian Textile Co., Ltd. (hereinafter refer to as Reform Plan (Draft)) to Chengde Intermediate Court. On Dec. 15, 2008, the 1st creditors meeting voted to Reform Plan (Draft) by the method of group vote, and the expiry date of submitting votes was Dec. 19, 2008. Till Dec. 19, 2008, employees’ 41 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 credit group and tax credit group had voted to approve Reform Plan (Draft); priority credit group and common credit group had voted not to approve Reform Plan (Draft). On Dec. 29, 2008, the Company submitted application for approving Reform Plan (Draft) to Chengde Intermediate Court. On Dec. 30, 2008, the Company received Civil Arbitrate Verdict (2008) CMPZ No. 9-2 from Chengde Intermediate Court, which said that: in the group voting of Reform Plan (Draft), employees’ credit group and tax credit group approved Reform Plan (Draft); the liquidation plan of priority credit group (credit that enjoy guarantee right of specific assets) accorded with the regulations of Item II (I) in Article 87 of Law of the People's Republic of China on Enterprise Bankruptcy; the liquidation proportion that common credit right received according to regulations of Reform Plan (Draft) was not less than the liquidation proportion received according to bankruptcy liquidation procedure; Reform Plan (Draft) equally treated members in the same group, and the regulated liquidation order did not disobey the regulations of Article 113 in Law of the People's Republic of China on Enterprise Bankruptcy; the operation plan also had feasibility. The Reform Plan (Draft) accorded with the approval qualification regulated by Law of the People's Republic of China on Enterprise Bankruptcy. Hereby, according to regulations of Item II and III in Article 87 of Law of the People's Republic of China on Enterprise Bankruptcy, Chengde Intermediate People’s Court judged as follows: (1) approved Reform Plan (Draft) of Chengde Dixian Textile Co., Ltd.; (2) terminated reform procedure of Chengde Dixian Textile Co., Ltd. The time limit of implementing reform plan was 24 months, and was calculated from the day when reform plan was permitted by Chengde Intermediate People’s Court. Since got approval for its reform plan, the Company actively made implementation, and cleared all debt till Apr 24th of 2009 according to the reform plan. On Apr 27th of 2009, the Company received Civil Verdict (CMPZ (2008) No.9-5) issued by Hebei Chengde Intermediate People's Court, which confirmed that the debt clearness part in the reform plan had already been executed completely, and the court judged that: 1. since Apr 24th of 2009, administrant of Chengde Dixian Textile Co., Ltd. terminated its obligation as supervisor; 2. since Apr 24th of 2009, creditors who have not declared creditors’ right over Chengde Dixian Textile Co., Ltd. during the reforming period could ask exertion right according to the clearness condition as being the same type of creditors’ right regulated by the reform plan. 2. Bankruptcy liquidation of Xiabancheng Company: on Dec.8, 2008, the Company received Civil Arbitrate Verdict (2008) CMPZ No. 12 made by Hebei Chengde Intermediate People’s Court that accepted application of Anxing Hongda Plastic Factory making bankruptcy liquidation of Hebei Xiabancheng Knitted Dress Co., Ltd. - wholly owned subsidiary of the Company. On Feb.18, 2008, the Company received Civil Arbitrate Verdict (2008) CMPZ No. 12-1 made by Hebei Chengde Intermediate People’s Court, which declared that Hebei Xiabancheng Knitted Dress Co., Ltd. was bankrupted. 3. Bankruptcy liquidation of Fashion Company: on Dec.8, 2008, the Company received Civil Arbitrate Verdict (2008) CMPZ No. 11 made by Hebei Chende Intermediate People’s Court that accepted application of Chengde Xinda Energy-saving Electronical Equipment Co., Ltd. making bankruptcy liquidation of Chengde Dixian Fashion Co., Ltd. whose 75% equity was held by the Company. On Feb.18, 2008, the Company received Civil Arbitrate Verdict (2008) CMPZ No. 11-1 made by Hebei Chengde Intermediate People’s Court, which declared that Chengde Banhe Chemical Fibber Simulation Textile Co., Ltd. was bankrupted. 42 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 4. Bankruptcy liquidation of Banhe Company: on Dec.8, 2008, the Company received Civil Arbitrate Verdict (2008) CMPZ No. 10 made by Hebei Chende Intermediate People’s Court that accepted application of Sun Weishan making bankruptcy liquidation of Chengde Banhe Chemical Fibber Simulation Textile Co., Ltd. – holding subsidiary of the Company. On Feb.18, 2008, the Company received Civil Arbitrate Verdict (2008) CMPZ No. 10-1 made by Hebei Chende Intermediate People’s Court, which declared that Chengde Banhe Chemical Fibber Simulation Textile Co., Ltd. – holding subsidiary of the Company was bankrupted. 5. Xingye Papermaking Co., Ltd. applied for bankruptcy: on Dec.8, 2008, the Company received Civil Arbitrate Verdict (2008) CMPZ No. 13 made by Hebei Chende Intermediate People’s Court that accepted application of Chengde Yonghe Concrete Co., Ltd. making bankruptcy liquidation of Xingye Papermaking Co., Ltd. whose 75% equity was held by the Company. At present, Xingye Papermaking Co., Ltd. was in process of liquidation. III.The Company had no equity of other listed companies, share participating commercial bank, Security Company, insurance company, trust companies, futures companies and other financial enterprises. IV. Purchases or sales of assets, takeovers or mergers In the report period, the Company had no important purchases or sales of assets, takeovers or mergers. V. Implementation details of equity incentive plan during the period In the report period, the Company had no implementation of equity incentive plan. VI. Significant related transactions In the report period, the Company had no significant related transactions. VII. Important contracts and their implementation 1. In the report period, the Company has not been involved in any material trusteeship, contracting and lease of assets of other companies or involved in any trusteeship, contracting and lease of its assets by other companies. 2. Important guarantee In the report period, the Company neither provide guarantee for subsidiaries, shareholders, actual controllers and other related parties, nor directly or indirectly provide guarantee for entity whose assets liability rate was over 70%. 3. In the report year, the Company had never entrusted other party to manage the Company’s cash assets and has no plan to entrust any party to manage the assets in the future either. 4. The Company has no other undisclosed important contract. VIII. The Company or the shareholders holding over 5% of total shares had no commitment issues that had important influence on the operating results and financial situation of the Company in the report period or carried down to the report period. IX. There was no illegal share buying and selling of directors, supervisors and senior executors of the Company 43 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 X. Particulars about engaging or dismissing certified public accountant employment In the report period, the Company changed financial information of 2007, and audited the financial information after correction. Due to the Company and the original audit institution – Dahua Tiancheng Certified Public Accountants did not reach an agreement on items of audit contract, in order to not affecting the audit work of the Company, after negotiation of the two parties, the Company decided to change engaging Beijing Onto Certified Public Accountants Co., Ltd. to audit the financial report of 2007 after correction. And engaged Beijing Onto Certified Public Accountants Co., Ltd. as audit institution of the Company for 2008, with the total audit expenses in 2008 of RMB 0.5 million. The audit institution provided audit service for the Company for the first year. XI. Related issues of received investigation, administrative punishment or criticism through public notice from China Securities Regulatory Commission or condemn by the stock exchange in public the Board of Directors, the Supervisory Committee, directors, supervisors and other senior executives of the Company in the report period. In the report period, due to smuggling cargo, some of the original directors and senior executives were indicted by Hebei Shijiazhuang Intermediate People’s Court and sentenced criminal responsibility. The present Board of Directors, the Supervisory Committee, directors, supervisors and other senior executives of the Company had never received investigation, administrative punishment or criticism through public notice from China Securities Regulatory Commission, nor had they been condemned by the stock exchange in public either. XII. In the report period, the received research and interview of the Company. In accordance with the principles of just, fair and publicity, to further regulate the behaviors of information disclosure for the listed companies and ensure justice for information disclosure, the Company received the research and media interviews in standardized way according to the regulations of Guideline on Fair Information Disclosure for Listed Companies promulgated by Shenzhen Stock Exchange. In the report period, the Company received visits and telephone communication from its investors for many times; the Company received them and replies strictly in accordance with relevant regulations; there occurred no such situations as selectively and privately reveal or leak non-public significant information to specific parties; and all these assure the fairness of information disclosure of the Company. Reception Way of Reception Discussion issue and offered Reception date place reception person information Security Present status, Feb. 5, 2008 department of Telephone Individual communication investors not offering any information the Company Security Whether the Company stopped Mar. 15, 2008 department of Telephone Individual production, not offering any communication investors the Company information Security Realizing disclosure of Annual Apr. 9, 2008 Telephone Individual department of communication investors Report 2007, not offering any 44 ，LTD. CHENGDE DIXIAN TEXTILE CO． ANNUAL REPORT 2008 the Company information Security Present status and reforming Face to face May 15, 2008 department of Individual conditions, not offering communication investors the Company information Security Present status and next May 20, 2008 department of Telephone Individual development, not offering communication investors the Company information Security Present status and development Aug. 15, 2008 department of Telephone Individual communication investors trend, not offering information the Company Security Changes of large shareholders, Aug. 28, 2008 department of Telephone Individual communication investors offering notice the Company Particulars about large Security shareholders appointing person to Sep. 16, 2008 department of Telephone Individual communication investors stay in the Company, not offering the Company information Security Development of the case, not Sep. 21, 2008 department of Telephone Individual communication investors offering information the Company Security Telephone Oct. 24, 2008 department of Individual Operation and significant events interview and investors the Company communication Security Election of the board of directors, Nov. 5, 2008 department of Telephone Individual communication investors not offering information the Company Security Relevant matters of bankruptcy Nov. 19, 2008 department of Telephone Individual and reforming, not offering communication investors the Company information Security Changes of financial Dec. 28, 2008 department of Telephone Individual information in 2007, not offering communication investors the Company information Security Development of bankruptcy and Dec. 31, 2008 department of Telephone Individual reforming, not offering communication investors the Company information 45 Section XI. Financial report AUDITOR’S REPORT [English Translation for Reference Only] (2009)GU SHEN ZI NO. All Shareholders of Chengde Dixian Textile Company Limited: We have audited the accompanying financial statements of Chengde Dixian Textile Company Limited (the Company), which comprise the consolidated balance sheet and balance sheet as at 31 December 2008, the consolidated income statement and income statement, the consolidated statement of changes in equity and statement of changes in equity, the consolidated cash flow statement and cash flow statement for the year then ended, and notes to the financial statements. 1. MANAGEMENT’S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS The preparation of the financial statements in accordance with the China Accounting Standards for Business Enterprises (2006) is the responsibility of the Company’s management. The responsibility comprises (1) designing, implementing and maintaining the internal control system relevant to the preparation of the financial statements, to ensure that the financial statements are free of material misstatement due to fraud or error; (2) selecting and applying appropriate accounting policies; (3) making accounting estimates that are reasonable in the circumstances. 2. ADUTITOR’S RESPONSIBILITY Our responsibility is to express an opinion on these financial statements based on 46 our audit. We conducted our audit in accordance with the Standards on Auditing for Certified Public Accountants except the event which caused qualified opinion that stated in section 3 of the report. 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, the auditor considers internal control relevant to the entity’s preparation and fair presentation 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 entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by 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. 3. THE EVENT WHICH CAUSED QUALIFIED OPINION (1) The Company’s production and management held up in an all-round way, partial financial information is seized by the Customs and its internal control system received a great influence, which resulted in an incomplete set of accounting records. We are not able to obtain sufficient evidences to make assessment on whether the financial statements are free of material misstatement and its completeness. Owing to partial financial information is seized by the Customs, the Company is not able to provide complete accounting data, so that we are not able to make retroactive adjustments on long-term investment for Hebei Xiaban City Textile Co., Ltd. according to the China Accounting Standards for Business Enterprises 47 Explanation 1. Due to the Company cannot provide complete accounting data, we are not able to audit the respective opening balances on financial statements of the year ended 2007, nor perform necessary audit procedures to obtain appropriate and sufficient audit evidences. We depend on the audited result of the year ended 2006 for the opening balance. The opening balances of the 2007 may affect the operation results, so we cannot ensure whether it is necessary to adjust operation results for the year 2007 and before, related assets, liabilities and retained earnings, and which may effect the financial statements of the year end 2008 and its comparable financial statement. (2) Refer to Note 6 (1), due to partial bank accounts of the Company transferred into long-term freehold accounts, the Company is neither offer some bank statements and bank reconciliation statements nor completely offer bank information especially other places’ bank address and contact information, as a result, we are not able to send confirmation letter or perform necessary alternative audit procedures to obtain appropriate and sufficient audit evidences to confirm existence of bank balance and completeness of unrecorded liability. Refer to Note 6 (2), as at 31 December 2008, the Company owns trade receivable from Hebei Chengde Import & Export Corporation amounted to RMB 4,814,258.69. We obtained confirmation letter from Hebei Chengde Import and Export Corporation, which indicted that the trade receivable is RMB 14,203.39.Due to partial financial information is seized by the Customs, the Company is not able to provide any evidence to explain the difference of RMB 4,800,055.30. We are not able to judge the impact on the financial position and the operation performance. (3) Refer to Note 6 (6), as year 2008, Xinye Papermaking made provision of RMB100, 000,000.00 for the investment to Dahua Paper Industry in reason for Dahua Paper Industry Co., Ltd. project stopped to construct for several years and its financial volumes were detained. Owing to partial financial information is seized by the Customs, assets are froze, we are not able to perform audit procedures to make 48 judgments for the events and not able to judge the impact on the financial position and the operation performance. As refer to Note 6 (8), owing to CIP of the Company ceased and equipments remained unavailable for quite a long time, we are not able to judge the available level of the CIP and destroy level of the construction items, and thus, not able to judge the impact on the financial position and the operation performance. (4) Refer to Note 6 (7) and (9), as at 31 December 2008, the company used land, housing, buildings, machinery and equipment as collateral for bank loan respectively. Chengde Intermediate People’s Court of Hebei Province will auction the collateral to settle loans of the Company according to 《Restructuring Program (Draft)》. Owing to physical assets of the company are not able to correspond with the financial information, we are not able to judge the effect of the event on the Company’s finance position and operation result. As at 25 February 2009, according to (2008) SHI XING CHU ZI No. 48 verdict, Chengde Intermediate People’s Court of Hebei Province sentenced the defendant Chengde Dixian Textile Company Limited committed a crime of smuggling the ordinary goods, imposing a fine RMB 68,734,451.21 and besides, the smuggling of goods that involved in should be confiscated and turned over to the state treasury. Owing to physical assets of the company are not able to correspond with the financial information, we are not able to judge the effect of the event on the Company’s finance position and operation result. (5) Refer to Note 6 (9), part of land use right has been repaid to Chengde Finance Bureau for loan RMB 6,000,000.00 by judicial ruling. The Company has accounted the event in 2008. The land was used for Dixian Family Building and Dormitory Building. For the amounts is not consistent between land use right certificate and book value, and the Company can not provide how many squares had been used for the Dixian Family Building and Dormitory Building, thus we are not able to judge the effect on the Company’s financial position and operation result. 49 The Family Building and Dormitory Building are set up by the Company, but the buildings have not been recognized as assets in the Company’s account. The Company did not record the land (which is 58.07 MU) use right, which is exchanged by the Family building, but they pledged the land use right to Chengde Finance Bureau for loan 18 million. We are not able to judge the effect on the Company’s financial position and operation result. (6) Refer to Note 6 (15), the Company accrued social insurance amounted to RMB 110,632,696.00 from 1999 to 2007 in year 2007. The Company cannot provide the accrual basis, list for social insurance and regarding documents from social society department thus we are not able to judge rationality and correctness of the accrual social society and the effect on the Company’s financial position and operation result for the year 2007 and before 2007. As at 30 December 2008, Chengde Intermediate People’s Court approved the restructuring program of the Company according to the Civil Judge Letter of (2008) Cheng Min Po Zi.9-2. The Company calculated the variance of employee compensation between the book balance of the Company and the amount confirmed by 《Restructuring Program》into restructuring benefits at 31 December 2008. Owing to the Company cannot offer basis information for employee compensation before year 2008, we are not able to judge the reasonable and correctness of the restructuring benefits and the effect on the Company’s financial position and operation result for the year 2008 and before 2008. (7) Refer to Note 6 (16), according to the documents from Chengde County’s office of the state administration of taxation, Xiaban City Textile Owes total VAT of RMB17, 824,434.75, income tax that should be returned is RMB3, 347,757.71 as at 31 December 2008. Differences of the VAT and income tax between the taxation documents and the book balance are RMB 6,879,856.14 and RMB -5, 678,317.85 respectively. We obtained confirmation letter from the branch office of Chengde County’s 50 office of the state administration of taxation in the city, which indicted that, as at 31 December 2008, Xingye Papermaking owes total value added tax of RMB 11,302,432.14, thus with a difference of RMB 1,519,960.60 from the book balance. We obtained confirmation letter from Chengde County’s local taxation bureau, which indicted that Xingye Papermaking owes total Tenure tax of RMB 2,048,255.90、 housing property tax RMB 1,931,054.52、vehicle and ship use tax RMB 43,560.00、 stamp duty RMB 444,354.33 and individual income tax RMB 422,878.00 as at 31 December 2008. As a result, the difference of Tenure tax with book balance is RMB -819,296.36、housing property tax RMB 643,684.84、vehicle and ship use tax RMB 14,520.00、stamp duty RMB -245,134.92 and individual income tax RMB 422,154.00 respectively. We obtained confirmation letter from Chengde municipal office of the state administration of taxation in the high and new technology industrial development zone, which indicted that Banhe Fiber Textile owes total value added tax of RMB 2,829,109.93 as at 31 December 2008, thus with a difference of RMB 9,139,172.80 from book balance. We obtained confirmation letter from Chengde municipal local taxation bureau in the high and new technology industrial development zone, which indicted that Banhe Fiber Textile owes total tenure tax of RMB 2,280,530.24、housing property tax RMB 504,636.51 as at 31 December 2008. Respectively, the difference between the confirmation letter and book balance of tenure tax is RMB 2,280,530.24 and housing property tax RMB 473,886.51. Owing to the Company is not able to provide complete accounting data, so that we are not able to obtain sufficient and appropriate evidences to judge the effect on the Company’s financial position and operation result for the year 2008 and previous years. Net profit for the year of the Company remains surplus after making up losses of previous years, however, the Company does not make relevant tax payable accrued, so that we are not able to judge effect on the Company’s financial position and operation result. 51 (8) As to financial report date, relevant planning and implement of restructuring of the Company have material uncertainty, thus, the Company still has material uncertainty on going concern operation ability. 4. OPINION In our opinion, except for the possible effects caused by no making confirmation the last paragraph presented, the financial statements give a true and fair view of the financial position of the Company as of 31 December 2008, and of its operation results and its cash flows for the year then ended in accordance with the Accounting Standards for Business Enterprises and China Accounting System for Business Enterprises. 5. SIGNIFICANT ISSUE We remind that the users of the financial statements shall pay attention to the following events: (1) Refer to Note 1, the Company increases of its capital by issuing 150,000,000 B shares in July 2004, in which 91,300,000 shares were issued for Hong Kong dollars and 58,700,000 shares were issued for Renminbi Yuan (RMB). The issuance of Renminbi shares has not been authorized by the China Administration of Foreign Exchange department, and has not verified by PRC certified public accountants and the procedures for the change of business registration were not carried out completely. According to the resolution of general meeting of shareholders on 8 June 2006, the Company distributed share bonus 117,720,000 shares to all shareholders at the rate of two shares given per ten shares. After share bonus distribution, the registered capital of the Company changed to RMB 706,320,000. The shares mentioned above are not verified by PRC certified public accountants and the procedures of changing business registration are not carried out completely. (2) Chengde Intermediate People’s Court of Hebei Province approved the 《Restructuring Program (Draft)》of Chengde Dixian Textile Company Limited at 30 52 December 2008. The management of the Company judge that the Company is able to continue operation by Restructuring. The financial statements of the Company are prepared on the going concern basis. If the restructuring ineffectual, the above financial statement should be restated as liquidation price. At 8 February 2009, Chengde Intermediate People’s Court judged and declared the bankruptcy of Chengde Dixian Fashion Co., Ltd., Hebei Xiaban City Textile Co., Ltd. and Chengde Banhe Fiber Textile Co., Ltd. So that the financial statements of the above three companies are restated as liquidation price. At 8 December 2008, Chengde Intermediate People’s Court judged to accept and hear the application of the insolvency and liquidation of Xingye Papermaking Co., Ltd. which made by Chengde Yonghe Cement Co., Ltd. The management of the Company judge that Xingye Papermaking is able to continue operation by liability settlement. The financial statements of Xingye Papermaking are prepared on the going concern basis. The financial statements of Xingye Papermaking should be restated as liquidation price if the liability settlement ineffectual. (3) Refer to Note 3, Century Win International Holding Ltd. incorporated in Hong Kong, invested the subsidiary of the Company, Xingye Papermaking Co., Ltd. in the form of machinery and equipment. The value of injected machineries and equipments is more than that required. The Company entered into agreement with Century Win International Holding Ltd. that the ownership of the equipments amounting to RMB 95,450,000 belongs to Century Win International Holding Ltd.; the Company uses the equipments non-remuneratively; the Company has right to use the equipments as a loan pledge. Moreover, the agreement states that the disposal of the equipments is decided upon the further negotiation between the Company and Century Win International Holding Ltd. As at 31 December 2007, the Company pledged the equipment for bank loan. Based on the information from Companies Registry, the Government of Hong Kong Special Administrative Region, Century Win International Holding Ltd. 53 announced liquidation on 20 May 2005. (4) Refer to Note 3, registered capital of Dahua Paper Industry Co., Ltd. is JPY 6,364,000,000, in which the paid-in capital of USD 5,000,000 has been verified by PRC Certified Public Accountants. Xinye Papermaking Co., Ltd. invested RMB 206,215,729.65, including investment valuing at RMB 187,653,000.00 in the form of equipment, land and plants which was not supported by the capital verification of PRC Certified Public Accountants and is waiting to be verified when foreign shareholders inject capital fully. (5) Refer to Note 6(9), the Company purchased 619.81 mu lands at the consideration of RMB 38,791,627.50 as land lease premium. The Company has got the certificate for 324.781 mu, but the amounts on land use right certificate is not matched with the payment. The land use right will be amortized till land use right registration is finished. (6) According to the ruling of Chengde Intermediate People's Court (2008) Cheng Min Po Zi 10-1, (2008) Cheng Min Po Zi 11-1 and (2008) Cheng Min Po Zi 12-1 at 8 February 2008, Chengde Banhe Fiber Co., Ltd, Chengde Dixian Fashion Co., Ltd and Hebei Xiaban City Textile Co., Ltd were bankrupt respectively. Chengde Intermediate People's Court of Hebei Province confirmed the liability amounts of Xingye Papermaking according to (2008) Cheng Min Po Zi 13-1 judgment letter at 21 February 2009. Chengde Intermediate People's Court of Hebei Province approved the settlement application of Xingye Papermaking according to (2008) Cheng Min Po Zi 13-2 judgment letter at 31 March 2009. As to 28 April 2009, the Company has repaid liabilities to creditors according to 《Restructuring Program》. The whole liabilities that repaid by the Company including employee’s rights as creditors of RMB 17,897,697.28, tax payable amounting to RMB15,372,537.49, priority creditors’ rights of RMB 82,455,769.60 and common creditors’ rights of RMB 18,099,348.59. According to the ruling of Civil Judge Letter (2008) Cheng Min Po Zi 9-5 at 27 54 April 2009, Chengde Intermediate People’s Court of Hebei Province confirmed that liabilities repayment included in the restructuring planning has been finished. The statement of the above paragraphs has no effect on the expressed audit opinion. 55 (There are no texts on this page.) Beijing Yongtuo CPAs Certified Public Accountants of China: Beijing · China Certified Public Accountants of China: 28 April 2009 CHENGDE DIXIAN TEXTILE COMPANY LIMITED CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2008 (All amounts in RMB Yuan unless otherwise stated) ASSETS Notes 31 December 2008 31 December 2007 Current assets: Cash in banks and on hand 6(1) 447,257.73 6,316,017.15 Transaction finance asset - - Notes receivable - - Accounts receivable 6(2) 6,314,628.93 18,238,933.65 56 Advances to suppliers 6(3) 68,630,272.88 68,195,220.53 Interest receivable - - Dividend receivable - - Other receivables 6(4) 64,109,210.96 66,463,387.50 Inventories 6(5) 377,830.47 1,852,391.30 Non-current asset due within one year - - Other current assets - - Total current assets 139,879,200.97 161,065,950.13 Non-current assets: Finance asset available for sales - - Held-to-maturity securities - - Long-term account receivable - - Long-term equity investment 6(6) 97,215,729.65 197,215,729.65 Investment property - Fixed assets: 6(7) 124,093,126.16 291,282,102.50 Construction in progress 6(8) 12,883,800.00 12,883,800.00 Engineering material - - Disposal of fixed asset - - Consumable biological asset - - Oil and gas asset - - Intangible assets 6(9) 91,294,980.17 121,039,992.80 Expense on Research and Development - - Goodwill - - Long-term expenses to be apportioned 6(10) 2,009,612.55 2,057,939.91 Deferred income tax asset 6(11) 131,305,501.33 349,144,370.82 Other non-current asset - - Total non-current asset 458,802,749.86 973,623,935.68 TOTAL ASSETS 598,681,950.83 1,134,689,885.81 Legal Person in charge Person in charge representative: of accounting function: of accounting department: （The accompanying notes form an integral part of these financial statements） CHENGDE DIXIAN TEXTILE COMPANY LIMITED CONSOLIDATED BALANCE SHEET(CONTINUED) AS AT 31 DECEMBER 2008 (All amounts in RMB Yuan unless otherwise stated) 57 LIABILITIES AND SHAREHOLDERS' EQUITY Notes 31 December 2008 31 December 2007 Current liabilities: Short-term loans 6(12) 257,110,082.88 846,795,820.86 Transaction financial liabilities - - Notes payable - - Accounts payable 6(13) 40,929,519.04 36,829,684.49 Unearned revenue 6(14) 721,601.25 271,269.72 Employee compensation 6(15) 27,658,657.03 120,288,107.62 Taxes payable 6(16) 64,981,574.02 35,082,493.66 Interest payable 6(17) 270,261,883.18 168,590,957.64 Dividendes payable - - Other accounts payable 6(18) 57,034,528.39 180,457,239.67 Long-term liabilities due within 1 year - - Other current liabilities - - Total current liabilities 718,697,845.79 1,388,315,573.66 Noncurrent liabilities: Long-term payables - - Bonds payable - - Long-term account payable 6(19) 95,450,000.00 95,450,000.00 Special accounts payable 6(20) 19,651,018.03 33,625,717.66 Projected liabilities 2,118,395.79 9,456,437.83 Deferred income tax liabilities - - Other non-current liabilities - - Total non-current liabilities 117,219,413.82 138,532,155.49 Total liabilities 835,917,259.61 1,526,847,729.15 shareholders’equity: Paid-in capital (or share capital) 6(21) 706,320,000.00 706,320,000.00 Capital reserve 6(22) 395,971,144.37 395,971,144.37 Less: Inventory shares - - Surplus reserve 6(23) 76,791,550.17 76,791,550.17 Retained earnings 6(24) -1,416,436,100.68 -1,592,839,281.27 Balance difference of foreign currency translation - - Shareholders' equity attributed to the Company -237,353,406.14 -413,756,586.73 Minority shareholders ' equity 118,097.36 21,598,743.39 Total shareholers' equity -237,235,308.78 -392,157,843.34 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 598,681,950.83 1,134,689,885.81 Legal Person in charge Person in charge representative: of accounting function: of accounting department: （The accompanying notes form an integral part of these financial statements） CHENGDE DIXIAN TEXTILE COMPANY LIMITED 58 CONSOLIDATED INCOME STATEMENT AS AT 31 DECEMBER 2008 (All amounts in RMB Yuan unless otherwise stated) Items Notes 2008 2007 1. Operating income 6(25) 11,132,286.00 59,972,518.33 Less: Operating cost 6(25) 25,797,698.88 91,103,493.06 Tax and additional expense - - Selling and distribution expenses 3,990.00 3,685,785.86 General and administrative expenses 6(26) 36,314,298.59 267,255,550.88 Finance expense - net 6(27) 200,115,413.80 73,130,603.09 Impairement loss(gain) 6(28) 319,903,775.93 1,595,923,973.51 Add: Changing income of fair value - - Investment income - - Including: Investment income on affiliated company and joint venture - - 2. Operating profit -571,002,891.20 -1,971,126,888.07 Add: Non-operating income 6(29) 1,107,750,661.79 44,207.34 Less: Non-operating expenses 6(29) 163,986,366.54 213,268.92 Including: Disposal loss of non-current asset - - 3. Profit before tax 372,761,404.05 -1,971,295,949.65 Less: Income tax 217,838,869.49 -348,830,814.82 4. Net profit for the year 154,922,534.56 -1,622,465,134.83 Attributable to: Equity shareholders' of the Company 176,403,180.59 -1,392,672,660.84 Minority shareholders -21,480,646.03 -229,792,473.99 5.Earnings per share （1）Basic earnings per share 0.25 -1.97 （2）Diluted earnings per share 0.25 -1.97 Legal Person in charge Person in charge representative: of accounting function: of accounting department: （The accompanying notes form an integral part of these financial statements） 59 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Year of 2008 Item Shareholders' equity of parent company Paid-in capital Reserve capital Minus：treasury stock Surplus reserve Retained earning Ⅰ.Balance at the end of last year 706,320,000.00 395,971,144.37 - 76,791,550.17 -1,592,839,2 Add: Change of accounting policies - - - - Corrections of Prior Period Errors - - - - Ⅱ.Balance at the beginning of the year 706,320,000.00 395,971,144.37 - 76,791,550.17 -1,592,839,2 Ⅲ.Increase/ Decrease in this year (Decrease is listed with'"-") - - - - 176,403,1 1. Net profit for the year - - - - 176,403,1 2. Profits and losses directly calculating into owners' equity - - - - （1）Net changing amount of fair value of financial assets available for sale - - - - （2） Effect of changes of other owners' equity of invested units under equity method - - - - （3）Effect of income tax related to owners' equity - - - - （4）Other - - - - Subtotal of 1 and 2 - - - - 176,403,1 3.Owners' devoted and decreased capital - - - - (1) Owners' devoted capital - - - - (2)Amount calculated into owners' equity paid in shares - - - - (3)Others - - - - 4.Profit distribution - - - - (1)Withdrawal of surplus reserves - - - - (2)Distribution for owners (shareholders) - - - - (3)Others - - - - 5.Shareholders' equity transfer internal - - - - (1)Capital reserves conversed to capital (share capital) - - - - (2)Surplus reserves conversed to capital (share capital) - - - - (3)Remedying loss with surplus reserves - - - - (4). Others - - - - Ⅳ.Balance at the end of the year - - - - Ⅰ.Balance at the end of last year - - - - Add: Change of accounting policies - - - - Corrections of Prior Period Errors - - - - Ⅱ.Balance at the beginning of the year 706,320,000.00 395,971,144.37 - 76,791,550.17 -1,416,436,1 60 CHENGDE DIXIAN TEXTILE COMPANY LIMITED CONSOLIDATED STATEMENT OF CASH FLOWS AS AT 31 DECEMBER 2008 (All amounts in RMB Yuan unless otherwise stated) Items Notes 2008 2007 1. Cash flows from operating activities Cash received from sale of goods or rendering services 14,314,261.45 63,347,110.26 Write-back of tax received - - Cash received relating to other operating activities 6(30-1) 1,546,269.50 1,931,795.97 Sub-total of cash inflows 15,860,530.95 65,278,906.23 Cash paid for goods and services 3,175,107.86 19,224,469.95 Cash paid to and on behalf of employees 5,146,595.66 31,982,444.62 Payments of taxes and levies 398,245.78 1,098,746.76 Cash paid relating to other operating activities 6(30-2) 11,910,291.13 24,233,764.72 Sub-total of cash outflows 20,630,240.43 76,539,426.05 Net cash flows from operating activities -4,769,709.48 -11,260,519.82 2. Cash flows from investing activities Cash received from recovering investment - - Cash received from investment income - - Net cash received from disposal of fixed,intangible and other long-term assets 300,000.00 - Net cash received from disposal of subsidiaries and other units - - Cash received relating to other investing activities - - Sub-total of cash inflows 300,000.00 - Cash paid to acquire fixed,intangible and other long-term assets 3,400.00 - Cash paid for investment - - Net increase of mortgaged loans - - Cash received from subsidiaries and other business units - - Cash paid relating to other investing activities - - Sub-total of cash outflows 3,400.00 - Net cash flow from investing activities 296,600.00 - 3. Cash flows from financing activities Cash received from absorbing investment - - Including: Cash received from absorbing minority shareholders’investment by subsidiaries - - Cash received from borrowings - 9,697,000.00 Cash received from issuing bonds - - Cash received relating to other financing activities - - Sub-total of cash inflows - 9,697,000.00 Cash repayments of loan 1,395,649.94 52,480.89 Cash payments for distribution of dividends and interest expenses - 72,038.73 Including:Dividend and profit of minority shareholder paid by subsidiaries - - Cash paid relating to other financing activities - - Sub-total of cash outflows 1,395,649.94 124,519.62 Net cash flow from financing activities -1,395,649.94 9,572,480.38 4. Effect of foreign exchange rate changes on cash - - 5. Net increase in cash and cash equivalents -5,868,759.42 -1,688,039.44 Add: Balance of cash and cash equivalents at the beginning of year 6,316,017.15 8,004,056.59 6. Closing balance of cash and cash equivalents at the end of year 6(31) 447,257.73 6,316,017.15 61 Legal Person in charge Person in charge representative: of accounting function: of accounting department: （The accompanying notes form an integral part of these financial statements） CHENGDE DIXIAN TEXTILE COMPANY LIMITED BALANCE SHEET AS AT 31 DECEMBER 2008 (All amounts in RMB Yuan unless otherwise stated) ASSETS Notes 31 December 2008 31 December 2007 Current assets: Cash in banks and on hand 365,685.40 3,250,011.31 Transaction finance asset - - Notes receivable - - Accounts receivable 6(2) 12,231,947.36 20,481,720.44 Advances to suppliers 92,842,017.50 92,406,965.15 Interest receivable - - Dividend receivable - - Other receivables 6(4) 450,923,188.75 446,731,310.44 Inventories - 1,012,716.02 Non-current asset due within one year - - Other current assets - - Total current assets 556,362,839.01 563,882,723.36 Non-current assets: Finance asset available for sales - - Held-to-maturity securities - - Long-term account receivable - - Long-term equity investment 6(6) 1,211,812,433.52 1,211,812,433.52 Investment property - Fixed assets: 16,175,897.23 18,361,627.72 Construction in progress - - Engineering material - - Disposal of fixed asset - - Consumable biological asset - - Oil and gas asset - - Intangible assets 7,990,608.73 8,149,553.94 Expense on Research and Development - - Goodwill - - Long-term expenses to be apportioned 2,009,612.55 2,057,939.91 Deferred income tax asset 131,305,501.33 59,253,948.48 Other non-current asset - - 62 Total non-current asset 1,369,294,053.36 1,299,635,503.57 TOTAL ASSETS 1,925,656,892.37 1,863,518,226.93 Legal Person in charge of Person in charge representative: accounting function: of accounting department: （The accompanying notes form an integral part of these financial statements） CHENGDE DIXIAN TEXTILE COMPANY LIMITED BALANCE SHEET(CONTINUED) AS AT 31 DECEMBER 2008 (All amounts in RMB Yuan unless otherwise stated) LIABILITIES AND SHAREHOLDERS' EQUITY Notes 31 December 2008 31 December 2007 Current liabilities: Short-term loans 650,705.60 522,166,284.26 Transaction financial liabilities - - Notes payable - - Accounts payable 34,436,425.01 28,390,363.53 Unearned revenue 8,607.09 269,269.72 Employee compensation 17,897,697.28 110,579,116.67 Taxes payable 15,372,537.49 -11,820,091.60 Interest payable 165,267,072.66 140,631,230.47 Dividendes payable - - Other accounts payable 469,229,434.21 629,224,955.93 Long-term liabilities due within 1 year - - Other current liabilities - - Total current liabilities 702,862,479.34 1,419,441,128.98 Noncurrent liabilities: - - Long-term payables - - Bonds payable - - Long-term account payable - - Special accounts payable 151,018.03 14,125,717.66 Projected liabilities 2,118,395.79 9,456,437.83 Deferred income tax liabilities - - Other non-current liabilities - - Total non-current liabilities 2,269,413.82 23,582,155.49 Total liabilities 705,131,893.16 1,443,023,284.47 shareholders’equity: Paid-in capital (or share capital) 706,320,000.00 706,320,000.00 Capital reserve 394,571,587.96 394,571,587.96 Less: Inventory shares - - Surplus reserve 76,791,550.17 76,791,550.17 Retained earnings 42,841,861.08 -757,188,195.67 Balance difference of foreign currency translation - - 63 Shareholders' equity attributed to the Company 1,220,524,999.21 420,494,942.46 Total shareholers' equity 1,220,524,999.21 420,494,942.46 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 1,925,656,892.37 1,863,518,226.93 Legal Person in charge of Person in charge representative: accounting function: of accounting department: （The accompanying notes form an integral part of these financial statements） CHENGDE DIXIAN TEXTILE COMPANY LIMITED INCOME STATEMENT AS AT 31 DECEMBER 2008 (All amounts in RMB Yuan unless otherwise stated) Items Notes 2008 2007 1. Operating income 4,494,064.24 47,146,453.94 Less: Operating cost 18,735,669.63 72,115,464.03 Tax and additional expense - - Selling and distribution expenses 3,990.00 2,857,960.74 General and administrative expenses 17,816,881.06 212,883,980.69 Finance expense - net 120,711,178.05 63,334,910.63 Impairement loss(gain) 62,608,260.78 410,337,175.20 Add: Changing income of fair value - - Investment income - - Including: Investment income on affiliated company and joint venture - - 2. Operating profit -215,381,915.28 -714,383,037.35 Add: Non-operating income 1,107,296,785.72 42,538.24 Less: Non-operating expenses 163,936,366.54 205,234.00 Including: Disposal loss of non-current asset - - 3. Profit before tax 727,978,503.90 -714,545,733.11 Less: Income tax -72,051,552.85 -58,940,392.48 4. Net profit for the year 800,030,056.75 -655,605,340.63 5.Earnings per share （1）Basic earnings per share 1.13 -0.93 （2）Diluted earnings per share 1.13 -0.93 Legal Person in charge of Person in charge representative: accounting function: of accounting department: （The accompanying notes form an integral part of these financial statements） 64 STATEMENT OF CHANGES IN EQUITY Year of 2008 Item Paid-in capital Reserve capital Minus Ⅰ.Balance at the end of last year 706,320,000.00 394,571,587.96 - 76,791,550.17 -75 Add: Change of accounting policies - - - - Corrections of Prior Period Errors - - - - Ⅱ.Balance at the beginning of the year 706,320,000.00 394,571,587.96 - 76,791,550.17 Ⅲ .Increase/ Decrease in this year (Decrease is listed with'"-") - - - - 80 1. Net profit for the year - - - - 80 2. Profits and losses directly calculating into owners' equity - - - - （1）Net changing amount of fair value of financial assets available for sale - - - - （2） Effect of changes of other owners' equity of invested units under equity method - - - - （3）Effect of income tax related to owners' equity - - - - （4）Other - - - - Subtotal of 1 and 2 - - - - 3.Owners' devoted and decreased capital - - - - (1) Owners' devoted capital - - - - (2)Amount calculated into owners' equity paid in shares - - - - (3)Others - - - - 4.Profit distribution - - - - (1)Withdrawal of surplus reserves - - - - (2)Distribution for owners (shareholders) - - - - (3)Others - - - - 5.Shareholders' equity transfer internal - - - - (1)Capital reserves conversed to capital (share - - - - 65 capital) (2)Surplus reserves conversed to capital (share capital) - - - - (3)Remedying loss with surplus reserves - - - - (4). Others - - - - Ⅰ.Balance at the end of last year - - - - Add: Change of accounting policies - - - - Corrections of Prior Period Errors 706,320,000.00 394,571,587.96 - 76,791,550.17 4 66 CHENGDE DIXIAN TEXTILE COMPANY LIMITED CASH FLOW STATEMENT AS AT 31 DECEMBER 2008 (All amounts in RMB Yuan unless otherwise stated) Items Notes 2008 2007 1. Cash flows from operating activities Cash received from sale of goods or rendering services 6,019,507.00 42,727,517.47 Write-back of tax received - - Cash received relating to other operating activities 8,734,026.50 18,669,580.30 Sub-total of cash inflows 14,753,533.50 61,397,097.77 Cash paid for goods and services 3,175,107.86 17,747,614.81 Cash paid to and on behalf of employees 4,777,673.66 29,979,618.62 Payments of taxes and levies 19,971.81 1,004,298.54 Cash paid relating to other operating activities 8,566,056.14 21,849,925.33 Sub-total of cash outflows 16,538,809.47 70,581,457.30 Net cash flows from operating activities -1,785,275.97 -9,184,359.53 2. Cash flows from investing activities Cash received from recovering investment - - Cash received from investment income - - Net cash received from disposal of fixed,intangible and other long-term assets 300,000.00 - Net cash received from disposal of subsidiaries and other units - - Cash received relating to other investing activities - - Sub-total of cash inflows 300,000.00 - Cash paid to acquire fixed,intangible and other long-term assets 3,400.00 - Cash paid for investment - - Net increase of mortgaged loans - - Cash received from subsidiaries and other business units - - Cash paid relating to other investing activities - - Sub-total of cash outflows 3,400.00 - Net cash flow from investing activities 296,600.00 - 3. Cash flows from financing activities Cash received from absorbing investment - - Including: Cash received from absorbing minority shareholders’investment by subsidiaries - - Cash received from borrowings - 9,697,000.00 Cash received from issuing bonds - - Cash received relating to other financing activities - - Sub-total of cash inflows - 9,697,000.00 Cash repayments of loan 1,395,649.94 52,480.89 Cash payments for distribution of dividends and interest expenses - 72,038.73 67 Including:Dividend and profit of minority shareholder paid by subsidiaries - - Cash paid relating to other financing activities - - Sub-total of cash outflows 1,395,649.94 124,519.62 Net cash flow from financing activities -1,395,649.94 9,572,480.38 4. Effect of foreign exchange rate changes on cash - - 5. Net increase in cash and cash equivalents -2,884,325.91 388,120.85 Add: Balance of cash and cash equivalents at the beginning of year 3,250,011.31 2,861,890.46 6. Closing balance of cash and cash equivalents at the end of year 365,685.40 3,250,011.31 Legal Person in charge Person in charge representative: of accounting function: of accounting department: （The accompanying notes form an integral part of these financial statements） CHENGDE DIXIAN TEXTILE COMPANY LIMITED NOTES OF FINANCIAL STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2008 (All amounts in RMB Yuan unless otherwise stated) [English Translation for Reference Only] 1. BRIEF INTRODUCTION OF THE COMPANY Chengde Dixian Textile Company Limited (hereinafter referred to as “the Company”) is established in the People’s Republic of China as a jointly stock Company as approved by People’s Government of Hebei Province (JI GU BAN (1999) No. 36) dated on 3 November 1999. There are five promoters of the Company, which are Mr. Shuxian Wang, North Industry Co., Ltd., Longfeng Cosmetic Co., Ltd., Red Star Plastic Product Co., Ltd. and Mr. Zhengsong Wang respectively. The initial registered capital of the Company was RMB 100,000,000 representing 100,000,000 shares with a par value of RMB1 each and Mr. Shuxian Wang holds 85,100,000 shares. Upon the approval document No.[2000]121 issued by the China Securities Regulatory Commission on 29 August 2000, the Company issued 100,000,000 foreign capital shares (B share) with a par value of RMB1 each. In addition, the Company increased issuance of 15,000,000 foreign capital shares (B share) with a par value of RMB1 each between 29 September and 29 October 2000. The Company’s B shares listed in Shenzhen Stock Exchange. The registered capital of the Company after the issue of B shares was increased to RMB 215,000,000. 68 According to the resolution of general meeting of shareholders on 12 March 2002, the Company distributed share bonus 43,000,000 shares to all shareholders at the rate of two shares given per ten shares and used capital reserves to into capital as 107,500,000 shares to all shareholders at the rate of five shares given per ten shares. The registered capital of the Company was increased to RMB 365,500,000 after share bonus distribution and turning. According to the resolution of general meeting of shareholders on 22 July 2003, the Company distributed share bonus 73,100,000 shares to all shareholders at the rate of two shares given per ten shares. The registered capital of the Company was increased to RMB 438,600,000 after share bonus distribution. Upon the approval document No.[2004]101 issued by the China Securities Regulatory Commission in July 2004, the Company increases of its capital by issuing 150,000,000 B shares, in which 91,300,000 shares were issued for Hong Kong dollars and 58,700,000 shares were issued for Renminbi Yuan (RMB). The issuance of Renminbi shares has not been authorized by the China Administration of Foreign Exchange department, and has not verified by PRC certified public accountants and the procedures for the change of business registration were not carried out completely. Upon the approval of the Ministry of Commerce on 11 March 2004, the Company changed to foreign investment joint stock Company and obtained the business license form Hebei Province Administration for Industry and Commerce on 31 March 2004. According to the resolution of general meeting of shareholders on 8 June 2006, the Company distributed share bonus 117,720,000 shares to all shareholders at the rate of two shares given per ten shares. The registered capital of the Company was increased to RMB 706,320,000 after share bonus distribution. The issuance of mentioned above shares has not been verified by PRC certified public accountants and the procedures for the change of business registration were not carried out completely. The Company and its subsidiaries (hereafter referred to as the “Company”) are principally engaged in the production and sale of clothes, synthetic fibers and a variety of paper products. Intermediate People's Court of Shenzhen determined that promoter share of 112,324,800 shares held by Shuxian Wang should be compensate for Chen Rong in the price of RMB 45,491,544 in 2008. And at the same year, Intermediate People's Court of Dalian determined that promoter share of 96,000,000 shares held by Shuxian Wang should be compensate for Rong Chen in the price of RMB 38,880,000. 2. BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS 69 The financial statements prepared by the Company are in accordance with the requirements of China Accounting Standards for Business Enterprises (2006) issued by the Ministry of Finance of the People’s Republic of China (hereinafter referred to as “the Ministry of Finance”). According to China Accounting Standards for Business Enterprise, estimation and assumptions are the requirement when preparing financial statements, which will affect the disclosure of assets, liabilities and the contingent liabilities as of balance sheet date and the profits/losses accounts for the year then ended. Chengde Intermediate People’s Court of Hebei Province made ruling on the approval of 《Restructuring Program (Draft)》of Chengde Dixan Textile Company Limited on 31 December 2008. The management of the Company judge that the Company is able to continue operation by Restructuring. The financial statements of the Company are prepared on the going concern basis. If the restructuring ineffectual, the above financial statement should be restated as liquidation price. On 8 February 2009, Chengde Intermediate People’s Court judged and declared the bankruptcy of Chengde Dixian Fashion Co., Ltd., Hebei Xiaban City Textile Co., Ltd. and Chengde Banhe Fiber Textile Co., Ltd. So that the financial statements of the above three Companies are restated as liquidation price. On 8 December 2008, Chengde Intermediate People’s Court judged to accept and hear the application of the insolvency and liquidation of Xingye Papermaking Co., Ltd. which made by Chengde Yonghe Cement Co., Ltd. The management of the Company judge that Xingye Papermaking is able to continue operation by Restructuring. The financial statements of Xingye Papermaking are prepared on the going concern basis. If the restructuring ineffectual, the financial statements of Xingye Papermaking should be restated as liquidation price. 3. CONSOLIDATION FINANCIAL STATEMENTS (1) Holding subsidiaries： Name of Place of Business Registered Investment Shares Shares Voting holding registration nature capital amount hold hold right Hebei Xiaban Production City Textile Chengde and sale of USD4,000,000 USD4,000,000 75% 25% 100% Co., Ltd. clothes Chengde Production Dixian and sale of Fashion Co., Chengde clothes and USD24,000,000 USD24,000,000 75% 25% 100% Ltd. synthetic (Dixian fibers 70 Xingye Production Papermaking and sale of Chengde USD100,000,000 USD75,000,000 75% - 75% Co., Ltd. various (Xingye kind of Papermaking) Chengde paper Production Banhe Fiber and sale of Textile Co., Chengde clothes and USD60,000,000 USD39,000,000 - 65% 65% Ltd. synthetic (Banhe Fiber fibers Huaxin Waste Collection Paper and sales of Chengde RMB1,000,000 RMB900,000 - 100% 100% Collection Co., waster Ltd. paper Gold Axe British Investment Investment Virgin holding USD1 USD50,000 100% - 100% Group Limited Islands and liaison With the board of director’s approval of Xiaban City Textile, the operation and sales businesses of Xiaban City Textile for the year of 2005 were completely transferred to the Company. No business operations were transacted of Xiaban City Textile during the year. The 25% shareholding belongs to the Gold Axe Investment Group Limited, which is a subsidiary of the Company. According to the Share Transfer Agreement signed on 25 June 2005 between Gold Axe Investment and the Japan Yufa Company, the Japan Yufa Company agreed to transfer the 25% shareholding to Gold Axe in return for the set off against the account receivables of RMB 50,643,321 from Japan Yufa Company. The amount of RMB 50,643,321 was the account payables should be paid for the Company for goods payment. An agreement was signed between the Company and Gold Axe on 25 June 2005 for the above mentioned account receivables at the carrying amount of RMB 50,643,321 transfer to Gold Axe. The board of directors of Dixian Fashion approved the above share transfer. However, the Government Authority did not approve the share transfer and the business registration was not completed by the Company. With the board of director’s approval of Dixian Fashion, the operation and sales businesses of Dixian Fashion for the year of 2005 were completely transferred to the Company. No business operations were transacted of Dixian Fashion during the year. Century Win International Holding Ltd. (Century Win International), a Company incorporated 71 in Hong Kong, entered into an equity joint venture agreement with the Company to set up Xingye Papermaking in 2001 and obtained the business license on 12 March 2001. According to the equity joint venture agreement, the Company and Century Win International had paid in capital of approximately RMB 622,500,000 and RMB 207,500,000 respectively, and the registered capital would be contributed in full by both sides within three years from the business license date of Xingye Papermaking (the ‘Investment Period’). Up to the 31 December 2007, the Company and Century Win International had fully paid the capital of RMB 622,500,000 and RMB 207,500,000 respectively. Some of the production lines were in operation since 2002. During the year ended 31 December 2003, Century Win International contributed approximately RMB128,650,000 of equipments in excess of its required capital contribution to Xingye Papermaking. According to an agreement signed between the Company and Century Win International in September 2004, the equipments value of RMB 95,450,000 was owed to Century Win International and the Company recorded it as liability payables. Century Win International agreed not to request the Company to repay the money unless consent was mutually agreed. Based on the agreement, the Company could use the machinery nonremuneratively and could use it as loan security. The remaining sum of RMB 33,200,000 was recognized as a debt by the Company. An agreement was signed on 12 February 2004 among the Company, Lingfeng Textiles (ShenZhen) Co., Ltd. and Ceutury Win International whereby the sum of RMB 33,200,000 was set off with a debt owing form Lingfeng Textiles (ShenZhen) Co., Ltd.. The business operation of Xingye Papermaking was suspended from the year of 2006 due to serious liquidity problem. If without financial support from outside and efficient and timely reconstruction, there exists material uncertainty on going concern basis. Banhe Fiber Textile is a subsidiary of the Company incorporated as Sino-foreign enterprise in 29 September 2002 and the registered capital was USD 15,000,000. Dixian Fashion and Yamashita Shoji Co., Ltd. invested 35% and 65% shareholding respectively. Upon approval coded Ji Wai Jin Mao Zi Zi [2003]No.37 issued by the Hebei Province Ministry of Commerce on 24 March 2003, the Banhe Fiber Textile increase the registered capital of from USD 15,000,000 to USD 60,000,000 on 7 July 2003. Xiaban City Textile then joined as a new shareholder. The distribution of shareholding then became Dixian Fashion, Yamashita Shoji Co., Ltd. and Xiaban City Textile holding 20%, 55% and 25% respectively. Upon the approval coded Ji Wai Jin Mao Zi [2004]No.22 issued by the Hebei Province Ministry of Commerce on 31 March 2004,Yamashita Shoji Co., Ltd. was transferred 20% shareholding to Dixian Fashion. After the change, the distribution of shareholding became as Dixian Fashion, Yamashita Shoji Co., Ltd. and Xiaban City Textile holding 40%, 35% and 25% respectively. 72 Up to 31 December 2007, the paid up share capital of Banhe Fiber Textile was RMB 394,820,975.29. Dixian Fashion and Xiaban City Textile paid RMB 199,200,000 and RMB 114,890,975.29 respectively. However, the share capital verification procedure was not completed. Huaxin Waste Paper is a subsidiary of the Company invested by Xingye Papermaking and XinYe Commerce & Trade Co., Ltd., and obtained the business license on 17 January 2003. Xingye Papermaking holds 90% equity of Huaxin Waste Paper. No business operations were transacted of Huaxin Waste Paper during the year of 2006. According to the information from Industrial and Commerce Bureau, the minority shareholder is changed from XinYe Commerce & Trade Co., Ltd. to Dixian Fashion. It is presented as minority shareholder equity on the financial statement for the Company cannot get documents of minority shareholders alternation due to the account book has been detained and staffs demission. (2) Associated Company Name of Place of legal Registered Investment Shares Business associated registatio representative capital amount hold nature Company n Chengde Production Shuxian Beirifang Co., Chengde USD1,000,000 USD500,000 -and sale of Wang Ltd. stretch yarn Production and Dahua Paper Shuxian sale of various Chengde JPY6,364,000,000JPY2,864,000,000 45% Industry Co., Ltd. Wang kind of paper products Production and Suning Banhe Zhengsong sale of Fibre Textile Co., Suning USD 29,000,000 USD5,800,000 20% Wang chemical fiber Ltd. fabrics Construction of Dixian Light Rail Chengde Huilai Wang USD 8,000,000 USD6,000,000 - light rail and Co., Ltd. transportation Chengde Beirifang Co., Ltd. is a joint venture Company invested by Japan Beirifang Co., Ltd., Y’S Corporation Co., Ltd. and the Company and obtained the business license on 12 March 2002. The Company holds 50% equity of Chengde Beirifang Co., Ltd. but no capital contributed actually as to 31 December 2005. No business operations were transacted of Chengde Beirifang Co., Ltd. during the year of 2005. On 27 March 2008, its license has been withdrawn by Chengde Industrial and Commercial Bureau. 73 Dahua Paper Industry Co., Ltd. was found as a joint venture Company invested by Nippon Paper Industries Co. and the Company on 19 April 2004. The registered capital was USD5,000,000, of which the Company invested USD2,250,000 accounting for 45％ equity. Upon approval coded Ji Shang Wai Zi Zi [2004]No.41 issued by the Hebei Province Ministry of Commerce, Dahua Paper Industry Co., Ltd. has increased the total investment from USD5,000,000 to JPY11,000,000,000 and the registered capital increased to JPY6,364,000,000. The investment of the Company has increased to JPY2,864,000,000, accounting for 45％ equity. On 24 June 2005, Nippon Paper Industries Co. and Japan New Century Co. have agreed the share-transfer contract, which indicated that Nippon Paper Industries Co. transferred 55％ equity of Dahua Paper Industry Co., Ltd. to Japan New Century Co.. The above alteration has approved by the Hebei Province Ministry of Commerce. Dahua Paper Industry Co., Ltd. obtained new business license due to rename. On 29 June 2005, the Company agreed the share-transfer contract and transferred 45% equity of Dahua Paper Industry Co., Ltd. to Xinye Papermaking Co., Ltd. As to 31 December 2007, Dahua Paper Industry Co., Ltd. has obtained investment of RMB 266,280,320.00. However, the above capital is unverified and the procedure on changes of shareholder is unfinished. Suning Banhe Fibre Textile Co., Ltd. was invested by Yamashita Shoji Co., Ltd. and the Company on 7 November 2004. The registered capital was USD29,000,000, of which the Company invested USD5,800,000 accounting for 20％ equity. Suning Banhe Fibre Textile Co., Ltd. leased equipments form Chengde Banhe Fibre Textile Co., Ltd. to operate from the year of 2006. Dixian Light Rail Co., Ltd. was invested by Japan New Century Co. and the Company on 8 April 2003. The registered capital was USD8,000,000 and total investment was USD17,800,000. The Company invested paid-in capital as USD600,000, accounting for 75％ of total equity. As to 31 December 2007, the Company has not contributed any actual capital to Dixian Light Rail Co., Ltd. and Dixian Light Rail Co., Ltd. has not come into operation. Its business license has been withdrawn by Chengde Industrial and Commerce Bureau on 27 March 2008. (3) Minority shareholder’s equities： Subsidiary name Minority shareholder’s equity Huaxin Waste Paper Collection Co., Ltd. - Xingye Papermaking Co., Ltd. 118,097.36 74 Banhe Fibre Textile Co., Ltd. - Total 118,097.36 4. MAJOR ACCOUNTING POLICIES, ACCOUNTING ESTIMATES AND CONSOLIDATED FINANCIAL STATEMENTS (1) Accounting policies The accounting policies adopted by the Company are in accordance with the China Accounting Standards for Business Enterprises (2006) issued by the Ministry of Finance. (2) Accounting period The accounting year of the Company is from January 1 to December 31. (3) Recording currency Except for Gold Axe Investment Group Limited, the recording currency of the Company is the RMB (Yuan), the statutory currency of the People’s Republic of China. The recording currency of the Gold Axe Investment Group Limited is US dollars. (4) Basis of accounting and measurement The Company follows the accrual basis of accounting. Assets are initially recorded at actual costs. If at any time the provision for impairment made, the Company and subsidiaries are in accordance with the CAS (2006). (5) Cash and cash equivalents The cash equivalents refers to short-term (matured within three months from the purchased date) and highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. (6) Translation for foreign currency transactions and financial statement The foreign currency transaction should be converted into market exchange rates on the day in which the transaction took place when initially recorded. Foreign currency items should be converted into RMB at market exchange rates on balance sheet date. The differences raised from the translation between market exchange rates on balance sheet date and the initial confirmation value or the previous balance sheet date should be calculated into the current profits and losses. The foreign non-currency items which recorded in historical cost adopted the market exchange rates on the day in which the transaction took place. For balance sheet, all items related to assets and liabilities should be converted into RMB at the market exchange rates on balance sheet date. All owner's equity except for undistributed profits 75 should be converted into RMB at market exchange rates on the day in which the transactions took place. For the income statement, items related to revenues and expenses should converted into RMB at market exchange rates on the day in which the transactions took place. The translation difference should be presented in the owner’s equity in the balance sheet. For the Companies that operate in the foreign badness inflation economy situation, all items of balance sheet should be restated as normal price index, all items of income statement should be restated as movements of normal price first and then translated into RMB at the market exchange rates on the date that most close to the balance sheet date. Restate of the financial statements should cease when the foreign operation out of inflation situation, and the statements should be converted as the price on the date of which the restate stopped. For the cash flow statement, foreign currency cash flow items and cash flow items of foreign subsidiaries should converted into RMB at market exchange rates on the day in which they took place. (7) Financial assets and liabilities a. Classification of financial assets and liabilities Financial assets comprise transaction financial assets, financial assets measured with fair value and their changes calculated into the current profits and losses, held-to-maturity investment, loans and receivables, available-for-sale financial assets etc. Financial liabilities comprise transaction financial liabilities, financial liabilities measured with fair value and their changes calculated into the current profits and losses. b. The principle and the methods of measurement for financial tools ①Confirmation a financial asset or financial liability when the Company involved in a contract. When the rights of the contract for charging cash flow of a financial asset terminate or nearly all risks and remunerations thereon ownership are transferred, the Company terminates confirming the financial asset. Confirmation of all or partial of the financial liability should be terminated when all or partial current obligations of the financial liability terminated. ②After initial confirmation, financial assets and financial liabilities are measured with fair value. For financial assets or financial liabilities measured with fair value and their changes calculated into the current profits and losses, the relevant transaction expenses are directly calculated into the current profits and losses; for other kinds of financial assets and financial liabilities, the relevant transaction expenses are calculated into initial confirmation amount. 76 ③After initial confirmation, financial assets of the Company are measured with fair value subsequently and does not deduct the transaction expenses possibly occurring when such financial assets will be disposed in the future. However, the following items excluded: Held-to-maturity investment and receivable accounts are measured with amortized costs according to actual interest rate method; The equity tool investment that has no quotation in active market and which fair value cannot be reliably measured are measured according to costs after initial confirmation; When financial assets are not able to be measured with fair value due to the held intention or ability of the Company changed or the fair value cannot be measured reliably, the Company converts the fair value to cost measurement. The cost should be the fair value of the financial assets on the day which they are re-classified. ④The Company adopts amortized costs for subsequent measurement of liabilities according to actual interest rate method except the following: After initial confirmation, the financial liabilities measured with fair value and their changes calculated into the current profits and losses are measured with fair value, and do not deduct the transaction expenses possibly occurring when such financial liabilities will be disposed in the future; When financial liabilities are not able to be measured with fair value due to the held intention or ability of the Company changed or the fair value cannot be measured reliably, the Company converts the fair value to cost measurement. The cost should be the fair value of the financial liabilities on the day which they are re-classified; Derivative financial liabilities related with the equity tool investment that has no quotation in active market and which fair value cannot be reliably measured are measured according to costs after initial confirmation; Financial guarantee contract of financial liabilities which do not belong to kinds of the financial liabilities that measured with fair value and their changes calculated into current profits and losses, or loan undertaking not measured with fair value and their changes calculated into current profits and losses and moreover loaned with a rate that lower than the market rate, should be subsequent measured with the larger amount of the following two: a)Amount according to the rule of contingent events; b)Balance amount that arises from the initial confirmation amounts deducting the accumulated amortized amounts that in accordance with rules of confirmation for revenues。 77 ⑤Except that related with hedging, profit or loss occurring from fair value change of financial assets or liabilities should be treated as flowing ruled: Gain or loss arising from fair value change for the financial assets or liabilities which measured with fair value and changes of fair value calculated into current profits and losses should be calculated into current profits and losses; Gain or loss resulting from fair value change of available for sale financial assets should be calculated into capital reserve after deducting total differences from impairment loss and foreign currency financial assets exchange. The amount should be transferred out to current profits and losses when the financial assets terminated to confirm.. ⑥Except that related with hedging, gain or loss arising when the financial assets or liabilities which measured with amortization cost terminated to confirm or impairment or amortization should calculated into current profits and losses. ⑦Amortization from fair value exchange of hedging tools and items hedged, which at the same accounting period, should be calculated into current profits and losses. c. Confirmation of fair value The Company uses the quotation in active market to confirm the fair values of financial assets or financial liabilities in active market. The quotation of the financial assets held by the Company or the financial liabilities that the Company intends to undertake is the current offer; the quotation of the financial assets that the Company intends to purchase or the financial liabilities that the Company has undertaken is the current price. If any financial tool has no active market, its fair value is confirmed with value estimation technology. The value estimation methods include reference to the closing cost of market transaction made recently by parties who are willing to transact, or reference to current market quotation of other financial tools that are essentially same. The Company takes the value estimation value of regular evaluation and tests its validity. d. Provisions for devalue of financial assets At end of the period, the Company checks book value of financial assets excluding financial assets which measured with fair value and changes of which calculated into current profits and losses. Impairment provision should be made if impersonality evidence obtained to verify the impairment of the assets. Single significant amount assets should be test impairment singly. And single amount assets that do not significant should be test in the financial assets group which have the similar credit risk characterizers. 78 Main methods to calculate impairment provision for financial assets are as flowing: ①Financial assts that can be measured with fair value reliably should be made impairment provision in light of amounts from book value minus fair value and calculated into current profits and losses. For financial assets that can not be measured with fair value reliably, provision should be made in the light of amounts from book value minus current value of projected future cash flow( excluding credit loss has not happened yet) and calculated into current profits and losses. For impairment of available for sale financial assets, accumulated losses that calculated into owners’ equity due to decrease of fair value when happening, should be transferred out to current profits and losses. ②For held-to-maturity investment, impairment provision should be calculated in the amount from book value minus current value of projected future cash flow( excluding credit loss has not happened yet) and entered into current profits and losses. (8) Conversion of Financial assets: Recognition of financial assets conversion: Recognition of the financial assets should be terminated when the Company converts out nearly all related risks and rewards in light with the flowing situations: ①Selling the financial assets without recourse; ②For financial assets that partially conversed, book value of the unitary financial assets should be allocated between the terminated recognition parts and the rest in light with fair value of their own respectively. Differences between book value of the termination recognition parts and relevant receivables together with accumulated amounts from fair value change should be calculated into current profits and losses. (9) Provisions for bad accounts： The bad debt is recognized when the bad debt is determined as such when the debtor is bankrupt or dead, and the proceeds from the bankrupt’s estates or the decreased property are unable to cover the debt; or the debtor fails to repay the overdue debt for more than three years with plain evidences to indicate his inability to do so. The Company adopts allowance method to calculate possible bad debts. A general provision for the remaining receivables (both accounts receivable and other receivables) is made based on the ageing of receivables, at the following percentages: Aging of receivables Percentage of provision for bad accounts 79 Within 1 year 1%-5% Between 1 and 2 year 20% Between 2 and 3 year 50% Over 3 year 100% Based on an assessment of the recoverability of accounts receivable, specific provisions are applied to accounts receivable where events or changes in circumstances indicate that the balances may not be collectible. The specific provisions should be recorded in impairment loss for assets in current period.（10）Inventories a) Inventories mainly include raw material, auxiliary materials, repair parts, low cost consumables, packing material, goods in stock, goods in process, finished goods. b) Inventories are accounted for initial cost when purchased and entered into storage, and using weighted average accounting method when issued. At the end of the year, inventories are presented at the lower side between cost and net realizable value (NRV). c) Perpetual inventory system is applied to inventories. d) Low cost consumables are recorded using immediately write-off method when issued. e) On the basis of stocktaking at the end of each year, for any inventory is physical damage, part or entire obsolescence or its sales price fall below its cost, which results the cost of the inventory is lower than its net realizable value (the “NRV”), a provision for impairment of inventory should be made. f) The provision for impairment equals to the difference between cost and NRV for individual item. NRV is the estimated selling price in the ordinary course of business, less the estimated costs to completion and the estimated costs necessary to conclude the sale. （11）Long-term equity investment Long- term equity investments of the Company are referred to the equity tools of which the Company do have control on or control with other joint entities and have significant influence or do 80 not do control and joint control or have significant influence and have not offer in active market , fair value cannot be reliably measured. The initial cost of the long-term equity investment formed in the merger of an enterprise shall be ascertained in accordance with the following provisions: a) For the merger of enterprises under the same control, regarding the share of the book value of the owner's equity of the merged enterprise as the initial cost of the long-term equity investment. The difference between the initial cost of the long-term equity investment and the payment in cash, non-cash assets transferred as well as the book value of the debts borne by the merging party shall offset against the capital reserve. If the capital reserve is insufficient to dilute, the retained earnings shall be adjusted. b) For the merger of enterprises under the same control, if the consideration of the merging enterprise is that it makes payment in cash, transfers non-cash assets or bear its debts, it shall, on the date of merger, regard the share of the book value of the owner's equity of the merged enterprise as the initial cost of the long-term equity investment. The difference between the initial cost of the long-term equity investment and the payment in cash, non-cash assets transferred as well as the book value of the debts borne by the merging party shall offset against the capital reserve. If the capital reserve is insufficient to dilute, the retained earnings shall be adjusted. If the consideration of the merging enterprise is that it issues equity securities, it shall, on the date of merger, regard the share of the book value of the owner's equity of the merged enterprise as the initial cost of the long-term equity investment. The total face value of the stocks issued shall be regarded as the capital stock, while the difference between the initial cost of the long-term equity investment and total face value of the shares issued shall offset against the capital reserve. If the capital reserve is insufficient to dilute, the retained earnings shall be adjusted. Besides the long-term equity investments formed by the merger of enterprises, the initial cost of a long-term equity investment obtained by other means shall be ascertained in accordance with the provisions as follows: 81 ①The initial cost of a long-term equity investment obtained by making payment in cash shall be the purchase cost which is actually paid. The initial cost consists of the expenses directly relevant to the obtainment of the long-term equity investment, taxes and other necessary expenses; ②The initial cost of a long-term equity investment obtained on the basis of issuing equity securities shall be the fair value of the equity securities issued; ③The initial cost of a long-term equity investment of an investor shall be the value stipulated in the investment contract or agreement except the unfair value stipulated in the contract or agreement; ④The initial cost of a long-term investment obtained by the exchange of non-monetary assets shall be ascertained in accordance with the Accounting Standards for Enterprises No. 7 – Exchange of Non-monetary Assets; ⑤The initial cost of a long-term equity investment obtained by recombination of liabilities shall be ascertained in accordance with Accounting Standards for Enterprises No. 12 – Debt Restructuring. A long-term equity investment of the Company that does not do joint control or does not have significant influences on the invested entity, and has no offer in the active market and its fair value cannot be reliably measured. The Company shall accounted by the cost method, and shall make an adjustment by the equity method when it works out consolidated financial statements. The price of a long-term equity investment measured by the cost method shall be included at its initial investment cost. If there are additional investments or disinvestments, the cost of the long-term equity investment shall be adjusted. The dividends or profits declared to distribute by the invested entity shall be recognized as the current investment income. A long-term equity investment of the Company that does joint control or significant influences over the invested entity shall be measured by the equity method. If the initial cost of a long-term equity investment that measured by equity method is more 82 than the Company’s attributable share of the fair value of the invested entity's identifiable net assets for the investment, the initial cost of the long-term equity investment may not be adjusted. If the initial cost of a long-term equity investment is less than the investing enterprise' attributable share of the fair value of the invested entity's identifiable net assets for the investment, the difference shall be included in the current profits and losses and the cost of the long-term equity investment shall be adjusted simultaneously. After the Company obtains a long-term equity investment, it shall, in accordance with the attributable share of the net profits or losses of the invested entity, recognize the investment profits or losses and adjust the book value of the long-term equity investment. The investing enterprise shall, in the light of the profits or cash dividends declared to distribute by the invested entity, calculate the proportion it shall obtain, and shall reduce the book value of the long-term equity investment correspondingly. The impairment of a long-term equity investment which is measured by cost method for which there is no offer in the active market and of which the fair value cannot be reliably measured, its impairment shall be disposed in accordance the difference between the book value and the current value of the expected future cash flow which similar to financial assets rates of market return. The impairment of any other long-term equity investment measured with cost method should be calculated into current profits and losses. Once impairment of long-term equity investment invalidated, it cannot be transferred back. (12) Fixed assets and accumulated depreciation: Fixed assets include buildings and plant, machinery and equipment, motor vehicles and other equipments used in production or rendering of services, which par value is over RMB1,000.00 and with useful life for more than one year. For those non-manufacturing or non-operating equipments which par value is over RMB2, 000.00 and with useful life for more than two years is also defined as fixed assets. Fixed assets purchased or constructed by the Company are recorded at actual cost as carrying amount. For the fixed assets obtained from the Company restructuring, the carrying 83 amounts should be recognized based on an assessment of national assets management departments. Fixed assets are depreciated using the straight-line method to write off the cost of the assets to their estimated residual values over their estimated useful lives. The estimated residual value of fixed assets is recognized base on different categories of fixed assets, distributed basically from 5% to 10% of its original costs. The annual depreciation rate of fixed assets and estimated useful lives are as follows: Estimated Annual Category residual Estimated useful lives depreciation rate value Buildings and plant-cost 5% 25 years 3.80% Papermaking equipment 10% 20 years 4.50% Other machinery equipment 5% 7—15 years 6.33%-13.57% Motor vehicles 5% 5—10 years 9.5%—19% Office equipments 5% 5—10 years 9.5%—19% Fixed assets are presented at the lower side between carrying amount and net realizable value (NRV).If at any time the recoverable amount has declined below the carrying amount due to continuous decline of market price, negative change in technology, physical damage and obsolescence, then impairment has occurred. The provision for impairment of individual fixed assets equals to the differences between the recoverable amount and the carrying amount of that fixed assets. Impairment losses can not be reversed in subsequent periods. (13)Construction in progress Construction in progress is recorded as actual cost. Borrowing costs on specific borrowings for financing the construction are capitalized as part of the cost of the fixed assets until the assets are ready for their intended use. Construction in progress is transferred to fixed assets and depreciation commences when the asset are ready for their intended use. At each period end, for those construction in process is suspended (whatever due to the negative change in technology or worse economic performance) and there is estimation that the construction will not be re-activated in the next three years, a provision for impairment should be made for individual construction project. The provision for impairment equals to the differences between the recoverable amount and the carrying amount. Impairment losses can not be reversed in subsequent periods. (14) Intangible assets Intangible assets represent land use right, which is recorded at acquired cost and amortized using the straight-line basis over the estimated useful lives. At the end of the year, the intangible 84 assets should be computed based on the lower side between carrying amount and recoverable amount. If the carrying amount is higher than the net realizable value, a provision for impairment of intangible assets is to be computed. Impairment losses can not be reversed in subsequent periods. (15) Long-term prepaid expenses Long-term prepaid expenses include the improvement of business lease fixed assets and other long-term prepayments that should be amortized for more than 1 year and are presented at cost net of accumulated amortization. Expenses occurred during the opening period, which should be recorded as expenses at the month when it begins business operating. (16)Impairment of assets: The term "impairment of assets" refers to that the recoverable amount of assets is lower than its carrying value. An enterprise shall, on the day of balance sheet, make a judgment on whether there is any sign of possible assets impairment. No matter whether there is any sign of possible assets impairment, the business reputation formed by the merger of enterprises and intangible assets with uncertain service lives shall be subject to impairment test every year. The impairment basis and methods of long term equity investment, fixed assets, construction in progress and intangible assets etc. are listed as flowing: a. There may be an impairment of assets when one of the following signs occurs: ①The current market price of assets falls, and its decrease is obviously higher than the expected drop over time or due to the normal use; ② The economic, technological or legal environment in which the enterprise operates, or the market where the assets is situated will have any significant change in the current period or in the near future, which will cause adverse impact on the enterprise; ③ The market interest rate or any other market investment return rate has risen in the current period, and thus the discount rate of the enterprise for calculating the expected future cash flow of the assets will be affected, which will result in great decline of the recoverable amount of the assets; ④ Any evidence shows that the assets have become obsolete or have been damaged substantially; ⑤The assets have been or will be left unused, or terminated for use, or disposed ahead of schedule; ⑥Any evidence in the internal report of the enterprise shows that the economic performance of the assets have been or will be lower than the expected performance, for example, the net cash 85 flow created by assets or the operating profit (or loss) realized is lower (higher) than the excepted amount, etc.; and ⑦ Other evidence indicates that the impairment of assets has probably occurred. b. Where any evidence shows that there is possible assets impairment, the recoverable amount of the assets shall be estimated. The recoverable amount shall be determined in light of the higher one of the net amount of the fair value of the assets minus the disposal expenses and the current value of the expected future cash flow of the assets. When either of the net amount of the fair value of an asset minus the disposal expenses or the current value of the expected future cash flow of the asset exceeds the carrying value of the asset, it shows that no asset impairment has occurred, and it does not need to estimate another amount of the asset. The net amount of the fair value of an asset minus the disposal expenses shall be determined in light of the amount of the basis of the price as stipulated in the sales agreement in the fair transaction minus the disposal expenses directly attributable to the asset. Where there is no sales agreement but there is an active market of assets, the net amount of the fair value of an asset minus the disposal expenses shall be determined in light of the amount of the market price of the asset minus the disposal expenses. Generally the market price of the asset shall be determined according to the price bidden by the buyer of the asset. Where there is no sales agreement and no active market of assets, the net amount of estimated fair value of an asset minus the disposal expenses shall be estimated in light of the best information available. The said net amount may be estimated by reference to the latest transaction prices or results of similar assets among the counterparts. Where the net amount of the fair value of an asset minus the disposal expenses cannot be estimated reliably according to the provisions as described above, the enterprise shall regard the current value of the expected future cash flow of the asset as the recoverable amount of the asset. The current value of the expected future cash flow of an asset shall be determined by the discounted cash with an appropriate discount rate, on the basis of the expected future cash flow generated during the continuous use or final disposal of an asset. To predict the current value of the future cash flow, the enterprise shall take into comprehensive consideration the expected future cash flow, service life, discount rate, and other factors. c. Where the measurement result of the recoverable amount indicates that an asset's recoverable amount is lower than its carrying value, the carrying value of the asset shall be recorded down to the recoverable amount, and the reduced amount shall be recognized as the loss of asset impairment and be recorded as the profit or loss for the current period. Simultaneously, a provision for the asset impairment shall be made accordingly. After the loss of asset impairment has 86 been recognized, the depreciation or amortization expenses of the impaired asset shall be adjusted accordingly in the future periods so as to amortize the post-adjustment carrying value of the asset systematically (deducting the expected net salvage value). Once any loss of asset impairment is recognized, it shall not be switched back in the future accounting periods. d. Where there is any evidence indicating a possible impairment of assets, the enterprise shall, on the basis of single item assets, estimate the recoverable amount. Where it is difficult to do so, it shall determine the recoverable amount of the group assets on the basis of the asset group to which the asset belongs. The recognition of an asset group shall base on whether the main cash inflow generated by the asset group is independent of those generated by other assets or other group assets. Simultaneously, when recognizing an asset group, the enterprise shall take into consideration how its managers manage the production and business activities (for example, according to the production lines, business varieties or according to the regions or areas), and the ways of decision-making for the continuous use or disposal of the assets, etc. (17) Borrowing expenses The borrowing expenses, which are incurred by the Company and can be directly listed into purchase, construction or production of the assets in accordance with capitalized conditions, are capitalized and calculated into the costs of relevant assets. Except the above borrowing expenses, other borrowing expenses are confirmed as financial expenses at the current period of their occurrence. In the period of capitalization, the Company confirms the amount of interest capitalization in each accounting period according to the following method (including amortization of discounting price or premium price): − For special loans borrowed for purchase, construction or production of the assets in accordance with capitalized conditions, the Company confirms them with the amount of the interest expenses of special loans calculated according to actual interest rate of the current period, minus the interest incomes from the not used loan capital that is deposited into bank, or minus the investment earnings acquired from temporary investment. − For the common borrowing occupied for purchasing, constructing or producing the assets in accordance with capitalized conditions, the Company calculates and confirms the interest amount of common borrowings that shall be capitalized, according to the weighted average of capital expenditures of the part that the accumulative asset expenditures exceed the special borrowings, multiplied capitalization rate of the occupied common borrowings. Capitalization rate is confirmed according to the weighted average actual interest rate of common borrowings. When the Company is confirming the actual interest rate of borrowings, the Company 87 discounts the future cash flow of borrowings in the anticipated existence term or any applicable shorter term, as the interest rate used for the current carrying amount of the borrowing. Capitalization term refers to the term from capitalization of borrowing expenses to closing of capitalization, exclusive of the term that the borrowing expenses suspend capitalization. When capital expenditures and borrowing expenses have occurred, and the purchase, construction or production activities necessary for making assets reach the scheduled usable or available-for-sale status have commenced, capitalization of the borrowing expenses starts. When assets purchased, constructed or produced in accordance with capitalized conditions reach the scheduled usable or available-for-sale status, capitalization of borrowing expenses stops. If the assets in accordance with capitalized conditions generate non-normal interruption in the course of purchase, construction or production, and the interruption time exceeds three months, the Company temporarily stops capitalization of borrowing expenses. (18) Employee compensation The employees’ salaries and wages are various remunerations paid by the Company for employees’ services and other relevant expenditures. Except dismissal welfare, the Company confirms the payable employees’ salaries and wages as liability in the period that the employees provide their services, and correspondingly increase asset costs or current expenses. According to relevant regulations of China, the employees of the Company have participated in social basic endowment insurance implemented by the local labor and social security department. The Company pays endowment insurance to the local social basic endowment insurance institution according to payment amount and ratio of social basic endowment insurance locally regulated. The social basic endowment insurance above paid is calculated into the current profits and losses according to accrual basis. When employees have retired, local labor and social security department is liable to pay social basic retirement pension to the retired employees. The Company has no other payment obligations. Besides retirement welfare, the Company pays house accumulation fund and basic hospitalization insurance, unemployment insurance, employment injury insurance and birth insurance for in-service employees according to relevant laws, regulations and policies. The Company pays house accumulation fund and the above social insurances according to certain proportion of employee’s salary on monthly basis, and calculates into capital costs or the current profits and losses according to accrual basis. (19) Revenue recognition : Revenue from the sale of goods is recognized when the significant risks and rewards of 88 ownership of the goods are transferred to the buyer; the transfer of control and ownership of the goods sold which normally takes place upon delivery of goods; and the amount of revenue and cost relating to the goods can be measured reliably. Revenue from providing service is recognized when the income, relating cost and extent of performance can be reliably measured and a presumption of cash inflow exists and cost relating to the service can be measured reliably. Revenue from transferring using right of assets is recognized when the relevant economic benefits are likely to flow into the Company and the amount of revenues can be measured in reliable way. (20) Deferred tax: Deferred income tax assets and deferred income tax liabilities are confirmed respectively according to the deductible temporary difference and taxable temporary difference. Temporary difference refers to the difference between the book value of assets or liabilities and their taxation basis, including the deductible losses and taxation setoff that can be carried forward in the subsequent years. The confirmation of deferred income tax assets is limited to the amount of taxable incomes that is likely obtained for deducting the deductible temporary difference. If it is not a transaction of corporate merger, accounting profits or taxable amount of incomes is not affected when the transaction occurs (or can deduct the losses), the temporary difference generating in this transaction will not generate deferred income taxes. The temporary difference caused by the initial confirmation of goodwill will not generate relevant deferred income taxes. On the balance sheet date, the Company measures the book value of the deferred income tax assets and liabilities according to the anticipated realization or settlement manner of deferred income tax assets and liabilities, the provisions of taxation laws issued, and the tax rate applicable to the anticipated period of recovering the assets or discharging the liabilities. (21) Income tax The Company calculates the income tax using balance sheet liability method. The current income taxes are the anticipated payable income taxes calculated according to the tax rates as regulated in taxation laws on the amount of taxable incomes, plus any modification of income taxes payable in the previous years. (22) Corporate merger a) Corporate merger under the same control If enterprises that participate in merger are under the final control by the same party or 89 unchanged several parties before and after merger and such control is not temporary, it is the corporate merger under the same control. The assets and liabilities obtained by the merging party under merger are measured according to the book value on the merged party on the merger date. The difference between the book value of the net assets obtained and the book value of consolidated consideration paid (or the total face value of the issued shares) is modified in the premium price of stock equity (or premium price of capital) in the capital reserves; if the premium price of stock equity (or premium price of capital) in the capital reserves is not sufficient for write-off, the earning retained is modified. The merger date is the date when the merging party actually acquires the control rights to the merged party. b) Corporate merger not under the same control If the parties that participate in merger are not under the final control by the same party or the same several parties, it is the corporate merger not under the same control. The merger costs paid by the Company are the sum of the assets paid for the control rights to the merged party, liabilities occur or are undertaken, the fair value of the issued equity securities on the purchase date and direct expenses occurring in corporate merger. The difference between the fair value and book value of the paid assets is calculated into the current profits and losses. The purchase date is the date when the Company actually obtains the control rights to the purchased party. The Company distributes the merger costs on the purchase date to confirm the fair value of recognizable assets, liabilities and contingent liabilities of the purchased party. When the merger costs are larger than the fair value of recognizable net assets of the purchased party obtained from merger, the difference is confirmed as goodwill. When the merger costs are less than the fair value of recognizable net assets of the purchased party obtained from merger, the difference is calculated into the current profits and losses. (23) Basis of financial statements consolidation a) The scope of consolidation The consolidated scope of the consolidated financial statements includes the Company and the subsidiaries under control of the Company. Control refers to which is entitled to decide the financial and management policies of a Company and by which interest can be obtained from the operation activities of the Company. The operation results and financial status of the subsidiaries under control are contained in the consolidated financial statements from control starting date to control closing date. b) Accounting method of consolidated financial statements For any subsidiary acquired by the Company through corporate merger under the same control, 90 when the consolidated financial statements for the current period are being prepared, it is deemed that the merged subsidiaries are entered into the merger scope of the Company when the final control party of the Company starts to perform control to it, and the number at the beginning of the period in the consolidated financial statements and previous comparison statement are made corresponding modification. While the Company is preparing the consolidated financial statements, the assets and liabilities of the merged subsidiary and their book values are combined into the consolidated balance sheet of the Company and the operation results of the merged subsidiary are combined into the consolidated profit statement of the Company since the final control party of the Company starts to perform control. For any subsidiary acquired by the Company through corporate merger not under the same control, when the consolidated financial statements for the current period are being prepared, the financial statements of the subsidiary are modified on the basis of recognizable assets, fair values of liabilities as confirmed on the purchase date, and the assets, liabilities and operation results of the purchased subsidiary are combined into the financial statements of the Company as of the purchase date. c) The accounting policy of each holding subsidiary is in accordance with the Company. 5. TAXATION The types of taxes applicable to the Company include value added tax (VAT), business tax, tax for maintaining and building cities, education supplementary tax and enterprise income tax. Items of taxation Tax base Tax rate Taxable amount of income minus deducted input Value added tax 17% or 13% tax Enterprise income tax Taxable amount of income 0% to 25% 6. NOTES TO SIGNIFICANT MATTERS OF FINANCIAL STATEMENTS (unless otherwise stated, following data is provided after consolidated) Note1.Cash and cash equivalents Category Currency Closing balance Opening balance Cash RMB 12,639.38 403,621.33 Cash at bank RMB 434,618.35 5,318,826.66 Other cash and cash RMB - 593,569.16 equivalents Total 447,257.73 6,316,017.15 For the reason that partial bank accounts transfer to long-term property accounts， The closing balance of some cashes at bank are negative and the amount of RMB 358,347.19 is a lack of bank 91 statements, therefore the authentic existence of cashes in bank is uncertainty. Those related bank accounts are majorly outside of Chengde city. The Company is unable to confirm the actual balances of cash at bank. Note 2. Accounts receivable After consolidated, the accounts receivable are listed below: a)Closing balance of accounts receivable analyzed based on risk combination are presented as below: Closing balance Opening balance Item Rate Bad debit Rate Bad debit Amount Amount in total provision in total provision 1. Individual accounts with 131,055,106.54 92.05% 126,545,785.40 132,285,798.27 92.30% 118,820,617.01 large amount 2. Individual accounts without large amount but 5,550,166.48 3.90% 5,550,166.48 5,474,153.30 3.82% 5,182,739.92 with major risk after integrated into credit risk combination 3. Others with 5,767,250.56 4.05% 3,961,942.77 5,563,265.27 3.88% 1,080,926.26 small amount Total 142,372,523.58 100% 136,057,894.65 143,323,216.84 100% 125,084,283.19 Total for top 5 111,308,146.47 78.18% 111,308,146.47 114,358,490.27 79.79% 103,608,335.99 Companies The category of individual accounts with large amount is defined the single amount of receivable over RMB 1,000,000. After assessing of the recoverability of accounts receivable, details of single accounts receivable with large amounts and bad debt provision are listed as follows: Closing Bad debt Name of Company Aging balance provision Y'S Corporation Co., Ltd. 79,114,550.26 79,114,550.26 2 to 3 years Yecun Trading 1,167,696.69 1,167,696.69 2 to 3 years Antianxiushan 3,724,953.90 3,724,953.90 2 to 3 years Korea Gaozhisha 11,391,123.66 11,391,123.66 2 to 3 years Japan Tianbiao 5,757,806.51 5,757,806.51 2 to 3 years Fumian Company 1,652,254.33 1,652,254.33 2 to 3 years Lanyan Group 8,000,000.00 8,000,000.00 Over 3 years Chengde Import And Export 4,814,258.69 962,851.74 1 to 2 years Company Japan New Century Co. 7,044,666.04 7,044,666.04 2 to 3 years Shaoxing Office 2,715,275.09 543,055.02 1 to 2 years Langfang Office 1,504,236.40 1,504,236.40 Over 3 years Jingjin Office (from 1 Feburary) 1,020,959.19 1,020,959.19 2 to 3 years 92 Total 127,907,780.76 121,884,153.74 The recoverability of such accounts receivable is uncertainty, because (1) except for Lanyan Group, Chengde Import And Export Company and three Offices, the above Companies are oversea; (2) the business activities of the Company are suspended; (3) several top managers are detained against alleged smuggle; and (4) staffs demission. The Company made specific provisions of RMB 112,378,246.98for the rest Companies except for Lanyan Group, Chengde Import And Export Company and Shaoxing Office. We obtained confirmation letter from Hebei Chengde Import and Export Corporation, which indicted that the trade receivable is RMB 14,203.39.Due to partial financial information is seized by the Customs, the Company is not able to provide any evidence to explain the difference of RMB 4,800,055.30 between the book balance and balance of the confirmation letter. We are not able to make adjustment. The category of single accounts without large amount but with major risk after integrated into credit risk combination is defined base on the characteristics of the Company, the aging of debts over three years are with high risk to recoverable. According to that, the accounts with single amount lower than RMB 1,000,000 and aging over three years are classified into the category. In the category of single accounts without large amount but with major risk, the uncertain recoverability of receivables are listed as follows: Name of Company Closing balance Bad debt provision Aging Longbing 416,950.18 416,950.18 2 to 3 years Beizi 297,926.90 297,926.90 2 to 3 years Jieweiying 696,995.62 696,995.62 2 to 3 years CAL 934,026.16 934,026.16 2 to 3 years Changzhou Office 364,267.61 182,133.81 2 to 3 years Langfang Office(from 1 563,536.32 563,536.32 Over 3 years Feburary) Jimo Office(from 1 Feburary) 272,592.40 272,592.40 Over 3 years Beijing Office(from 1 Feburary) 49,006.59 49,006.59 2 to 3 years Tianjin Office(from 1 Feburary) 32,018.00 32,018.00 2 to 3 years Shenyang Office(from 1 228,162.72 228,162.72 2 to 3 years Feburary) Total 3,855,482.50 3,673,348.70 The recoverability of such accounts receivable is uncertainty, because (1) the business activities are suspended; (2) several top managers are detained against alleged smuggle; and (3) staffs demission. The Company made specific provisions of RMB 3,491,214.89 for other Companies except for Changzhou Office. There is no such amount belongs to shareholders who hold 5% or more than 5% voting rights. 93 b) Closing balance of accounts receivable analyzed based on aging are listed as below: Closing balance Opening balance Aging Rate Bad debt Rate Bad debt Amount Amount in total provision in total provision Withi 11,525,073.7 n1 - - - 8.04% 677,984.63 5 year 1 to 2 118,620,175. 82.76 113,444,665. 4,576,303.95 3.21% 2,431,813.73 years 64 % 53 2 to 3 120,625,300. 84.73 116,455,592. 11,789,637.2 8.23% 9,573,302.79 years 71 % 00 1 Over 17,170,918.9 12.06 17,170,488.9 3 1,388,330.24 0.97% 1,388,330.24 2 % 2 years 142,372,523. 136,057,894. 143,323,216. 125,084,283. Total 100% 100% 58 65 84 19 Before consolidated, the accounts receivable are listed below: a)Closing balance of accounts receivable analyzed based on risk combination are presented as below: Closing balance Opening balance Item Rate Rate Bad debit Bad debit Amount in Amount in provision provision total total 1. Individual accounts 134,571,285.86 97.40% 122,910,623.44 135,389,241.54 97.42% 115,907,540.18 with large amount 2. Individual accounts without large amount but with major 1,055,500.36 0.76% 1,055,500.36 2,710,165.59 1.95% 2,418,752.21 risk after integrated into credit risk combination 3. Others with small 2,535,920.15 1.84% 1,964,635.21 881,253.98 0.63% 172,648.28 amount Total 138,162,706.37 100% 125,930,759.01 138,980,661.11 100% 118,498,940.67 Total for top 111,308,146.47 80.56% 111,308,146.47 114,358,490.27 82.28% 103,608,335.99 5 Companies The category of individual accounts with large amount is defined the single amount of receivable over RMB 1,000,000. After assessing of the recoverability of accounts receivable, details of single accounts receivable with large amounts and bad debt provision are listed as follows: Name of Company Closing balance Bad debt provision Aging 94 Y'S Corporation Co., Ltd. 79,114,550.26 79,114,550.26 2 to 3 years Yecun Trading 1,167,696.69 1,167,696.69 2 to 3 years Antianxiushan 3,724,953.90 3,724,953.90 2 to 3 years Korea Gaozhisha 11,391,123.66 11,391,123.66 2 to 3 years Japan Tianbiao 5,757,806.51 5,757,806.51 2 to 3 years Fumian Company 1,652,254.33 1,652,254.33 2 to 3 years Lanyan Group 8,000,000.00 8,000,000.00 Over 3 years Chengde Import And Export 8,208,150.31 962,851.74 1 to 2 years Company Japan New Century Co. 7,044,666.04 7,044,666.04 2 to 3 years Shaoxing Office 2,225,275.09 543,055.02 1 to 2 years Total 128,286,476.79 119,358,958.15 The recoverability of such accounts receivable is uncertainty, because (1) except for Lanyan Group, Chengde Import And Export Company and Shaoxing Office, the above Companies are oversea; (2) the business activities are suspended; (3) several top managers are detained against alleged smuggle; and (4) staffs demission. The Company made specific provisions of RMB 109,853,051.39 for the rest Companies except for Lanyan Group, Chengde Import And Export Company and Shaoxing Office. We obtained confirmation letter from Hebei Chengde Import and Export Corporation, which indicted that the trade receivable is RMB 14,203.39.Due to partial financial information is seized by the Customs, the Company is not able to provide any evidence to explain the difference of RMB 4,800,055.30 between the book balance and balance of the confirmation letter. We are not able to make adjustment. The category of single accounts without large amount but with major risk after integrated into credit risk combination is defined base on the characteristics of the Company, the aging of debts over three years and debts of those Companies wich were cancelled of business licences are with high risk to recoverable. According to that, the accounts with single amount lower than RMB 1,000,000 and aging over three years are classified into the category. In the category of single accounts without large amount but with major risk, the uncertain recoverability of receivables are listed as follows: Name of Company Closing balance Bad debt provision Aging Longbing 416,950.18 416,950.18 2 to 3 years Beizi 297,926.90 297,926.90 2 to 3 years Jieweiying 696,995.62 696,995.62 2 to 3 years CAL 934,026.16 934,026.16 2 to 3 years Changzhou Office 364,266.73 182,133.81 2 to 3 years Total 2,710,165.59 2,528,032.67 The recoverability of such accounts receivable is uncertainty, because (1) the business activities are suspended; (2) several top managers are detained against alleged smuggle; and (3) 95 staffs demission. The Company made specific provisions of RMB 2,345,898.86 for Companies except for Changzhou Office. There is no such amount belongs to shareholders who hold 5% or more than 5% voting rights. b)Closing balance of accounts receivable analyzed based on aging are listed as below: Closing balance Opening balance Aging Rate in Bad debit Rate in Bad debit Amount Amount total provision total provision Withi n1 - - - 12,168,506.75 8.76% 675,899.95 year 1 to 2 117,756,654.0 84.73 110,858,362.9 11,356,021.34 8.22% 2,367,204.27 years 0 % 2 2 to 3 117,751,184.6 85.23 114,508,054.3 9,055,500.36 6.51% 6,964,677.80 years 7 % 8 Over 3 9,055,500.36 6.55% 9,055,500.36 - - - years 138,162,706.3 125,930,759.0 138,980,661.1 118,498,940.6 Total 100% 100% 7 1 1 7 Note 3. Advances to suppliers Closing balance Opening balance Aging Amount Rate in total Amount Rate in total Within 1 year - - 5,977,412.09 8.77% 1 to 2 years 1,030,133.15 1.50% 788,255.38 1.16% 2 to 3 years 3,716,189.37 5.42% 56,453,443.24 82.77% Over 3 years 63,883,950.36 93.08% 4,976,109.82 7.30% Total 68,630,272.88 100% 68,195,220.53 100% The amounts of advances to suppliers, that the Company is not able to confirm the contents of account, the reason of payment and recoverability, are listed as below: Name of Company Amount Aging Japan New Century Co.,Ltd 56,453,443.24 Over 3 years Chengde Xinyuan Trading Co.,Ltd. 3,900,000.00 Over 3 years Shanghai Yikamu Trading Co.,Ltd. 1,076,109.82 Over 3 years Total 61,429,553.06 Note 4. Other receivables After consolidated, the other receivables are listed below： a)Closing balance of other receivables analyzed based on risk combination are presented as 96 below: Closing balance Opening balance Item Rate Bad debit Rate in Bad debit Amount Amount in total provision total provision 1. Individual accounts with 264,785,242.70 97.02% 206,254,716.37 205,052,357.22 95.29% 144,651,762.59 large amount 2. Individual accounts without large amount but with 978,940.30 0.36% 978,940.30 3,073,824.17 1.43% 3,073,824.17 major risk after integrated into credit risk combination 3. Others with 7,143,676.78 2.62% 1,564,992.15 7,060,682.69 3.28% 997,889.82 small amount Total 272,907,859.78 100% 208,798,648.82 215,186,864.08 100% 148,723,476.58 Total for top 5 136,200,994.68 49.91% 92,048,566.53 182,785,490.96 84.94% 140,911,300.04 Companies The category of individual accounts with large amount is defined the single amount of receivable over RMB 1,000,000. After assessing of the recoverability of other receivable, details of single receivable with large amounts and bad debt provision are listed as follows: Closing Bad debt Name of Company Aging balance provision Japan New Century Co. 30,792,000.00 30,792,000.00 Over 3 years Nippon Paper Industries Co. 58,360,818.27 58,360,818.27 2 to 3 years Chengde Finance Bureau 9,184,470.01 4,592,235.01 2 to 3 years Suning Finance payment 2,000,000.00 1,000,000.00 2 to 3 years center Chengde Court 1,339,177.55 669,588.78 2 to 3 years Suning Finance Bureau 1,000,000.00 500,000.00 2 to 3 years Total 102,676,465.83 95,914,642.06 The Company is not able to confirm the contents of account, reasons of payment and recoverability. Due to the recoverability of such accounts receivable is uncertainty, the Company made specific provisions of RMB 89,152,818.27 for Japan New Century Co.and Nippon Paper Industries Co.. The category of single accounts without large amount but with major risk after integrated into credit risk combination is defined base on the characteristics of the Company, the aging of debts over three years and debts of those Companies wich were cancelled of business licenses are with 97 high risk to recoverable. According to that, the accounts with single amount lower than RMB 1,000,000 and aging over three years are classified into the category. There is no such amount belongs to shareholders who hold 5% or more than 5% voting rights. In the closing balance of other receivables, the receivable belonged to Xiaban Finance Bureau is RMB 40,169,264.50, which the amount of RMB 38,791,627.50 is paid for 619.81 mu land transfer rent. Of the 619.81 mu land there 324.781 mu have got land use certificate. Due to the book balance of land use certificate can not be matched with the payment, the land use right will be amortized till land use right registration is finished. b)Closing balance of other receivables analyzed based on aging are listed as below: Closing balance Opening balance Aging Rate in Bad debit Rate in Bad debit Amount Amount total provision total provision with 1 5,757,232.17 2.11% 3,048,120.63 15,021,448.14 6.98% 152,805.46 year 1 to 2 69,221,055.59 25.36% 15,681,068.53 123,226,186.82 57.27% 71,910,134.04 years 2 to 3 74,735,051.30 27.39% 66,874,938.94 43,704,119.08 20.31% 43,425,427.04 years over 3 123,194,520.72 45.14% 123,194,520.72 33,235,110.04 15.44% 33,235,110.04 years Total 272,907,859.78 100% 208,798,648.82 215,186,864.08 100% 148,723,476.58 Before consolidated, other receivables of the Company are listed below: a)Closing balance of other receivables analyzed based on risk combination are listed as below: Closing balance Opening balance Item Rate Rate Bad debit Bad debit Amount in Amount in provision provision total total 1. Individual accounts with 604,182,639.89 98.84% 158,066,671.52 540,846,997.82 98.34% 100,018,303.64 large amount 2. Individual accounts without large amount but with major 978,940.30 0.16% 978,940.30 2,323,824.17 0.42% 2,323,824.17 risk after integrated into credit risk combination 3. Others with 6,118,110.30 1.00% 1,310,889.92 6,832,961.54 1.24% 930,345.28 small amount Total 611,279,690.49 100% 160,356,501.74 550,003,783.53 100% 103,272,473.09 Total for top 5 136,200,994.68 23.50% 92,048,566.53 147,787,529.71 26.87% 99,116,374.94 Companies The category of individual accounts with large amount is defined the single amount of 98 receivable over RMB 1,000,000. After assessing of the recoverability of other receivable, details of single receivable with large amounts and bad debt provision are listed as follows: Name of Company Closing balance Bad debt provision Aging Japan New Century Co. 30,792,000.00 30,792,000.00 Over 3 years Nippon Paper Industries Co. 58,360,818.27 58,360,818.27 2 to 3 years Chengde Finance Bureau 9,184,470.01 4,592,235.01 2 to 3 years Suning Finance payment center 2,000,000.00 1,000,000.00 2 to 3 years Chengde Court 1,339,177.55 669,588.78 2 to 3 years Suning Finance Bureau 1,000,000.00 500,000.00 2 to 3 years Total 102,676,465.83 95,914,642.06 The Company is not able to confirm the contents of account, reasons of payment and recoverability. Due to the recoverability of such accounts receivable is uncertainty, the Company made specific provisions of RMB 89,152,818.27 for Japan New Century Co. and Nippon Paper Industries Co.. The category of single accounts without large amount but with major risk after integrated into credit risk combination is defined base on the characteristics of the Company, the aging of debts over three years and debts of those Companies which were cancelled of business licenses are with high risk to recoverable. According to that, the accounts with single amount lower than RMB 1,000,000 and aging over three years are classified into the category. There is no such amount belongs to shareholders who hold 5% or more than 5% voting rights. In the closing balance of other receivables, the receivable belonged to Xiaban City Finance Bureau is RMB 40,169,264.50, which the amount of RMB 38,791,627.50 is paid for 619.81 mu land transfer rent. Of the 619.81 mu land there 324.781 mu have got land warrant. Due to the book balance of land warrant can not be matched with the payment, the amount will transfer into intangible assets when all land warrant obtained and then amortized. b)Closing balance of other receivables analyzed based on aging are listed as below: Closing balance Opening balance Aging Rate in Bad debit Rate in Bad debit Amount Amount total provision total provision with 1 2,806,526.84 0.48% 51,210.13 99,316,733.54 18.06% 151,532.94 year 1 to 2 97,273,662.14 16.78% 13,830,658.96 367,256,234.88 66.77% 70,609,638.08 years 2 to 3 350,355,528.57 60.45% 66,092,560.53 51,195,705.07 9.31% 276,192.03 years over 3 129,188,544.54 22.29% 80,382,072.12 32,235,110.04 5.86% 32,235,110.04 years Total 579,624,262.09 100% 160,356,501.74 550,003,783.53 100% 103,272,473.09 Note 5. Inventories and provision 99 a)Balance of inventories are listed as below： Closing balance Opening balance Item Carry Carry Book value Book value amount amount Goods in 3,754,396.56 20,012.85 17,757,070.29 363,903.22 stock Raw 1,844,501.69 3,286.52 3,683,282.64 183,282.64 material Goods in 774,978.31 354,531.10 27,639,048.77 604,373.65 process Commission processing - - 2,113,751.76 163,751.76 material Turnover - - 442,486.29 442,486.29 materials Self-made goods in - - 94,593.74 94,593.74 process Total 6,373,876.56 377,830.47 51,730,233.49 1,852,391.30 The decrease amount between opening balance and closing balance is RMB 45,356,356.93 occupied 87.68%.The main reason caused the difference is that all of the inventories are sold in a disguised form.. b)The related provision for inventories is analyzed as follows: Current disposal Transferred Opening Current Transferred Item back due to Closing balance addition out due to Total goods balance other reason value rises Goods in 17,393,167.07 - - 13,658,783.36 13,658,783.36 3,734,383.71 stock Raw 3,500,000.00 - - 1,658,784.83 1,658,784.83 1,841,215.17 material Goods in 27,034,675.12 - - 26,614,227.91 26,614,227.91 420,447.21 process Commission processing 1,950,000.00 - - 1,950,000.00 1,950,000.00 - material Total 49,877,842.19 - - 43,881,796.10 43,881,796.10 5,996,046.09 The current transferred out amount occurred due to relative goods had been sold out. The Company transferred out such inventory provision into assets impairment losses——inventory losses and transferred back the provision accrued before. Note6. Long-term equity investment After consolidated, the accounts receivable are listed below: （1）Details of long-term equity investment are presented as below: 100 Closing balance Opening balance Item Impairment Impairment Book balance Book value Book balance Book value provision provision Investment in associated - - - - - - Companies Investment in affiliated 253,195,729.65 155,980,000.00 97,215,729.65 253,195,729.65 55,980,000.00 197,215,729.65 Companies Other equity - - - - - - investment Total 253,195,729.65 155,980,000.00 97,215,729.65 253,195,729.65 55,980,000.00 197,215,729.65 Investment in affiliated Company listed as follows: Rate in Addition registere Accumu or d capital lated Company Initial Investment decrease Cash Closing of increase invested investment cost superaddition of current dividends balance invested or period Compan decrease equities y Dahua Paper 45% 206,215,729.65 - - - - 206,215,729.65 Industry Co., Ltd. Suning Banhe Fibre 20% 46,980,000.00 - - - - 46,980,000.00 Textile Co., Ltd. Dixian Light Rail 75% - - - - - - Co., Ltd. Chengde Beirifang 50% - - - - - - Co., Ltd. Total 253,195,729.65 - - - - 253,195,729.65 Owing to the importation equipments of Banhe Fibre Textile Co., Ltd. were sealed up by CIQ for more than two years and piled up on the open air, the Company made the provision for long-term equity investment of RMB 46,980,000.00 in 2006 because the equipments were scraped. Xingye Papermaking had made the provision for long-term equity investment to Dahua Paper Industry of RMB 9,000,000.00 in 2006. As year 2008, Xinye Papermaking made the provision for the investment of 100,000,000.00 in reason for Dahua Paper Industry Co., Ltd. project stopped to construct for several years and its financial volumes were detained. Before consolidated, details of the Company amount for the long-term equity investment as follows: 101 （1）Details as follows: Closing balance Opening balance Item Impairment Impairment Book balance Book value Book balance Book value provision provision Investment in associated 1,211,812,433.52 - 1,211,812,433.52 1,211,812,433.52 - 1,211,812,433.52 Companies Investment in affiliated 46,980,000.00 46,980,000.00 - 46,980,000.00 46,980,000.00 - Companies Other equity - - - - - - investment Total 1,258,792,433.52 46,980,000.00 1,211,812,433.52 1,258,792,433.52 46,980,000.00 1,211,812,433.52 a. Investment in affiliated Company as follows: Rate in Addition or registered Initial decrease of Accumulate Company Investment Cash Closing capital of investment current d increase invested super-addition dividends balance invested cost period or decrease Company equities Suning Banhe 20% 46,980,000.00 - - - - 46,980,000.00 Fiber Textile b. Investment in subsidiaries as follows: Rate in Company registered Initial investment Opening balance Increase Decrease Closing balance invested capital of cost invested Hebei Xiaban 75% 24,900,000.00 431,604,203.41 - - 431,604,203.41 City Textile Chengde Ditian 75% 149,216,007.00 149,408,230.11 - - 149,408,230.11 Fashion Xingye 75% 622,500,000.00 622,500,000.00 - - 622,500,000.00 Papermaking Gold 100% 8,300,000.00 8,300,000.00 - - 8,300,000.00 Axe(abroad Company） Total 804,916,007.00 1,211,812,433.52 - - 1,211,812,433.52 Due to the finance data were detained by CIQ, the Company did not adjust ascend to the investment for Hebei Xiaban City Textile Co., Ltd. Note 7. Fixed assets and accumulated depreciation Cost of fixed Opening balance Increase Decrease Closing balance asset Buildings and plants 256,653,223.06 - - 256,653,223.06 Machinery 1,391,877,261.16 300,000.00 300,000.00 1,391,877,261.16 102 equipment Motor vehicle 11,010,889.94 - - 11,010,889.94 Other equipment 1,327,863.19 3,700.00 - 1,331,563.19 Total 1,660,869,237.35 303,700.00 300,000.00 1,660,872,937.35 Accumulated Opening balance Increase Decrease Closing balance depreciation Buildings and plants 65,485,787.74 8,506,335.25 - 73,992,122.99 Machinery equipment 380,013,350.98 19,008,247.21 335,979.17 398,685,619.02 Motor vehicle 7,545,134.08 387,501.19 - 7,932,635.27 Other equipment 797,276.86 18,893.67 - 816,170.53 Total 453,841,549.66 27,920,977.32 335,979.17 481,426,547.81 Return back Impairment Transferred Transferred Increase Decrease back due to out due to Closing balance provision assets other value rise reason Buildings 70,564,240.79 42,907,460.49 - - 113,471,701.28 and plants Machinery 843,018,944.34 96,700,217.70 - - 939,719,162.04 equipment Motor 2,162,400.06 - - - 2,162,400.06 vehicle Other - - - - - equipment Total 915,745,585.19 139,607,678.19 - - 1,055,353,263.38 Net value 291,282,102.50 124,093,126.16 The import paper making equipment in machinery equipment, which costs RMB 444,720,000, is the investment cost of the Company and Century Win International Holding Ltd. to Xingye Papermaking Co. Ltd. At present the account amount is contract price because of did not transact value appraisal procedure, the Company will adjust the account amount on critical value finally. As at 31 December 2003, the equipment value for Century Win International Holding Ltd. Actual invested is about RMB 128,650,000.00 higher than ought to investing capital. The Company signed with Century Win International Holding Ltd. in September 2004, the agreement stated the amount of RMB 95,450,000.00 of equipment ownership in possession of Century Win International Holding Ltd. and the Company regarded these as the liability to Century Win International Holding Ltd. Based on the agreement, the Company could use the equipment for free and pledge the equipment for loan. At 8 February 2009, Chengde Intermediate People’s Court judged and declared the bankruptcy 103 of Chengde Dixian Fashion Co., Ltd., Hebei Xiaban City Textile Co., Ltd. and Chengde Banhe Fiber Textile Co., Ltd. So that the financial statements of the above three Companies are restated as liquidation price by the Company. Based on the evaluation results for liquidation prices of the three Companies’ fixed assets that made by Guangzhou Zhongtianheng Evaluation Company Limited on the time of 8 December 2008, the Company made implement provision of RMB137,688,727.55 . As at 31 December 2008, Chengde Intermediate People’s Court in Hebei Province ruled on approval of the 《Restructuring Program (Draft)》of Chengde Dixian Textile Company Limited. The Company is able to make disposition of the pledged assets according to the 《Restructuring Program (Draft)》. And fixed assets of the Company are restated as liquidation price. Based on the evaluation results for liquidation prices of the Company’s fixed assets that made by Guangzhou Zhongtianheng Evaluation Company Limited on the time of 10 November 2008, the Company made implement provision of RMB1,918,950.64 . As at 31 December 2008, the Company used land, housing, buildings, machinery and equipment as collateral for bank loan respectively. Chengde Intermediate People’s Court in Hebei Province will auction the collateral to settle bank loan of the Company according to 《Restructuring Program (Draft)》. The Company is unable to explain the book value of the collateral for public sale because the Company’s practical assets could not correspond with the finance data. As at 25 February 2009, according to SHI XING CHU ZI (2008) No. 48 verdict, Chengde Intermediate People’s Court in Hebei Province sentenced the defendant Chengde Dixian Textile Company Limited committed a crime of smuggling the most ordinary goods, imposing a fine RMB 68,734,451.21 and besides, the smuggling of goods that involved in should be confiscated and turned over to the state treasury. The Company is unable to explain the book value of the smuggling goods because the Company’s practical assets could not correspond with the finance data. . Note 8. Construction in progress Transferr Name of Budget Opening Incre ed to Decr Closing Capital project amount balance ase fixed ease balance source assets Banhe Fibre 40,000,000 83,643,453.05 - - - 83,643,453.05 Textile Papermaking 1,000,000,0 335,720,225.63 - - - 335,720,225.63 project 00 Thermal power 20,000,000 7,329,176.55 - - - 7,329,176.55 stations Chemical 180,000,00 66,167,154.98 - - - 66,167,154.98 fiber plant 0 104 Others - 10,865,739.16 - - - 10,865,739.16 Total 503,725,749.37 - - - 503,725,749.37 Impairment 490,841,949.37 - - - 490,841,949.37 for CIP Net value 12,883,800.00 - - - 12,883,800.00 Affected by the shortage of capital and be a suspect of smuggle, the Company stopped all the construction in progress and the equipments made in process has left unused, so that most part equipments were cankered to losing the using value. The Company is unable to explain the using extent and murder extent of construction in progress. Note 9. Intangible assets Item Opening balance Increase Decrease Closing balance 1.original value 132,831,008.13 - 7,250,000.00 125,581,008.13 Financial - - - - software Patent technology - - - - Land use rights 132,831,008.13 - 7,250,000.00 125,581,008.13 2.Accumulated 11,791,015.33 4,074,040.76 1,250,000.00 14,615,056.09 amortization Financial - - - - software Patent technology - - - - Land use rights 11,791,015.33 4,074,040.76 1,250,000.00 14,615,056.09 3.Total of - 19,670,971.87 - 19,670,971.87 impairment Financial - - - software Patent technology - - - - Land use rights - 19,670,971.87 - 19,670,971.87 4.Net book value 121,039,992.80 91,294,980.17 As at 31 December 2007, the part of the land use right was pledged for loan. According to the 《Restructuring Program (Draft)》, the Company is going to make public sale for the pledged assets to return bank loan. The Company is unable to explain the book value of pledged assets because the Company’s practical assets could not correspond with the finance data and the pawn evaluated on practical assets. At 8 February 2009, Chengde Intermediate People’s Court judged and declared the bankruptcy of Chengde Dixian Fashion Co., Ltd., Hebei Xiaban City Textile Co., Ltd. and Chengde Banhe Fiber Textile Co., Ltd. So that the financial statements of the above three Companies are restated as liquidation price by the Company. Based on the evaluation results for liquidation prices of the three Companies’ intangible assets that made by Guangzhou Zhongtianheng Evaluation Company Limited on the time of 8 December 2008, the Company made implement provision of RMB19,670,971.87 . 105 Based on judging of Chengde County Hebei Province demos court (2007) Cheng Zhi Cai Zi No. 236-1 civil judge letter, the Company’s land use right of 21,609.70 mu was counteracted to the loan of RMB 6,000,000 from Chengde County Finance Bureau. The Company decreased original cost of intangible asset of RMB 7,250,000.00, and decreased accumulated amortization of RMB 1,250,000.00 simultaneity in 2008. Note 10. Long-term prepaid expenses Opening Accumulated Closing Residual Item Original cost Increase Amortization balance amortization balance years Workshop 2,640,000.00 2,057,939.91 - 48,327.36 630,387.45 2,009,612.55 40 rental expense Total 2,640,000.00 2,057,939.91 - 48,327.36 630,387.45 2,009,612.55 Note 11. Deferred income tax asset Items that result in temporary differences Closing balance Opening balance Impairment provision for fixed assets 23,974,719.28 228,936,396.29 Impairment provision for construction in 35,758,966.87 120,207,974.53 progress Bad debit provision for account receivables 40,089,125.44 - Bad debit provision for other receivables 31,482,689.75 - Total 131,305,501.34 349,144,370.82 At 8 February 2009, Chengde Intermediate People’s Court declared the bankruptcy of Chengde Dixian Fashion Co., Ltd., Hebei Xiaban City Textile Co., Ltd. and Chengde Banhe Fiber Textile Co., Ltd. The Company transferred back the deferred income tax assets of RMB 106,240,773.36 which confirmed during previous years. At 8 December 2008, Chengde Intermediate People’s Court accepted the application of insolvency liquidation of Chengde Xingye Papermaking Co.,Ltd. The Company transferred back the deferred income tax assets of RMB 183,649,648.98 for reasons of 1)bankruptcy application was undertook by court; 2) production suspend for a long time due to shortage of capital; 3)uncertainty of going concern basis; and 4) earnings for tax could not occur in short order.. The Company confirmed deferred income tax assets of RMB 71,571,815.19 of the current period due to make bad debit provision for account receivables and other receivables. Note 12. Short-term loans Type of loan Closing balance Opening balance Credit loan 5,650,705.60 10,060,214.41 Mortgage loan 120,920,000.00 686,928,087.34 106 Guaranteed loan - - Guaranteed and mortgage loan 130,539,377.28 149,807,519.11 Total 257,110,082.88 846,795,820.86 At 30 December 2008, Chengde Intermediate People’s Court of Hebei Province confirmed the liability amounts of the Company according to the Civil Judge Letter of (2008)Cheng Min Po Zi 9-1. The Company calculated the amount of variance which aroused from the amount that the Court confirmed deducting book balance of the Company for short-term loans into non-operation expenses and increased short-term loan of RMB118,776.65. At 30 December 2008, Chengde Intermediate People’s Court of Hebei Province approved the restructuring program of the Company according to the Civil Judge Letter of (2008)Cheng Min Po Zi.9-2 . The Company confirmed restructuring benefits at 31 December 2008 and decreased the amounts of relevant short-term loan of RMB537,067,236.22. Note 13. Accounts payable Closing balance Opening balance Aging Amount Rate in total Amount Rate in total Within 1 year 800,000.00 1.95% 8,307,381.59 22.56% 1 to 2 years 2,155,651.17 5.27% 19,887,013.45 54.00% 2 to 3 years 2,273,085.99 5.55% 2,687,049.08 7.30% Over 3 years 35,700,781.88 87.23% 5,948,240.37 16.14% Total 40,929,519.04 100% 36,829,684.49 100% At 30 December 2008, Chengde Intermediate People’s Court of Hebei Province confirmed the liability amounts of the Company according to the Civil Judge Letter of (2008)Cheng Min Po Zi 9-1. The Company calculated the amount of variance which aroused from the amount that the Court confirmed deducting book balance of the Company for accounts payable into non-operation expenses and increased amount of accounts payable of RMB 79,384,448.76. Owing to partial creditors’ rights of subsidiaries were applied in the Company and confirmed by the Court, the Company increased accounts payable that paid for the subsidiaries amounted to RMB 31,655,428.40. At 30 December 2008, Chengde Intermediate People’s Court approved the restructuring program of the Company according to the Civil Judge Letter of (2008)Cheng Min Po Zi.9-2 . The Company confirmed restructuring benefits at 31 December 2008 and decreased the amounts of relevant account payable of RMB103,641,969.82. The closing balance is no such amount belongs to shareholders who hold 5% or more than 5% voting rights. 107 Note 14. Advances from customers Closing balance Opening balance Aging Amount Rate in total Amount Rate in total Within 1 year - - 125.00 - 1 to 2 years 202,781.96 28.10% 2,728.57 1.00% 2 to 3 years 151,532.95 21.00% 268,416.15 98.95% Over 3 years 367,286.34 50.90% - - Total 721,601.25 100% 271,269.72 100% Chengde Intermediate People’s Court approved the restructuring program of the Company according to the Civil Judge Letter of (2008)Cheng Min Po Zi.9-2 at 30 December 2008. The Company confirmed restructuring benefits at 31 December 2008 and decreased the amounts of relevant advances from customers of RMB270,662.63. The closing balance is no such amount belongs to shareholders who hold 5% or more than 5% voting rights Note 15. Employee compensation Current Opening Current period Closing Item period balance accrual balance payment 1.Wages,bonuses,allowances 4,992,212.62 -4,734,394.67 203,449.00 54,368.95 and subsidies 2.Welfare expenses - - - - 3.Social insurances 115,295,895.00 -94,467,766.92 - 20,828,128.08 4.Housing accumulation - - - - fund 5.Labor union expenditures and employee education - - - - expenses 6.Non-monetary welfare - - - - 7.Compensations for the cancellation of the labor - 6,776,160.00 - 6,776,160.00 relationship 8.Other - - - - Total 120,288,107.62 -92,426,001.59 203,449.00 27,658,657.03 Social insurance was increased RMB 110,632,696.00 refers to the accrued unpaid social insurance of the Company from the year of 1999 to 2007, whereas the amount had not been confirmed by insurance department. Chengde Intermediate People’s Court approved the restructuring program of the Company according to the Civil Judge Letter of (2008)Cheng Min Po Zi.9-2 at 30 December 2008. according to the 《restructuring program》, the Company should pay employee of RMB 17,897,697.28 （including Social insurance payable of RMB 11,121,537.28 and economical compensation of RMB 6,776,160.00）. The Company confirmed restructuring benefits at 31 December 2008 and 108 decreased relevant employee’s rights of RMB 94,826,785.73. Note 16. Taxes payable Taxes Closing balance Opening balance Value added tax 43,075,086.52 19,651,582.90 Business tax 125,249.50 112,436.75 Enterprise income tax 8,593,107.08 8,436,307.27 Housing property tax 2,959,338.13 1,862,342.26 Individual income tax 692,285.76 464,483.05 Education supplementary tax - 456,862.04 Tenure tax 6,253,566.94 4,046,740.24 Others 3,282,940.09 51,739.15 Total 64,981,574.02 35,082,493.66 Chengde Intermediate People’s Court approved the restructuring program of the Company according to the Civil Judge Letter of (2008)Cheng Min Po Zi.9-2 at 30 December 2008. The Company calculated the amount of variance which aroused from the amount that the Court confirmed deducting book balance of the Company for tax payable into non-operation expenses and increased amount of tax payable of RMB 26,504,788.08. According to the documents from Chengde County’s office of the state administration of taxation, Xiaban City Textile Owes total VAT of RMB17,824,434.75, income tax that should be returned is RMB3,347,757.71 as at 31 December 2008. Differences of the VAT and income tax between the taxation documents and the book balance (of which the VAT RMB 10,944,578.61 and income tax RMB2,330,560.14) are RMB 6,879,856.14 and RMB-5,678,317.85 respectively. The Company is unable to explain the differences and make adjustment for tax payable because the financial data of Xiaban City Textile were detained by customs office. As at 31 December 2008, book balance of total value added tax that Xingye Papermaking owing is RMB 9,782,471.54. We obtained confirmation letter from the branch office of Chengde County’s office of the state administration of taxation in the city, which indicted that Xingye Papermaking owes total value added tax of RMB 11,302,432.14, thus with a difference of RMB 1,519,960.60. As at 31 December 2008, book balance of land use tax of Xingye Papermaking is RMB 2,867,552.26、housing property tax RMB 1,287,369.68、vehicle and ship use tax RMB 29,040.00、stamp duty RMB 444,354.25 and individual income tax RMB 724.00. We obtained confirmation letter from Chengde County’s local taxation bureau, which indicted that Xingye Papermaking owes total Tenure tax of RMB 2,048,255.90 、 housing property tax RMB 1,931,054.52、vehicle and ship use tax RMB 43,560.00、stamp duty RMB 199,219.33and individual 109 income tax RMB 422,878.00. As a result, the difference of Tenure tax is RMB -819,296.36、housing property tax RMB 643,684.84、vehicle and ship use tax RMB 14,520.00、stamp duty RMB -245,134.92 and individual income tax RMB 422,154.00 respectively. The Company is unable to explain the differences and make adjustment for tax payable because the financial data of Xingye Papermaking were detained by customs office. As at 31 December 2008, book balance of total value added tax that Banhe Fiber Textile owing is RMB -6,310,062.87. We obtained confirmation letter from Chengde municipal office of the state administration of taxation in the high and new technology industrial development zone, which indicted that Banhe Fiber Textile owes total value added tax of RMB 2,829,109.93, thus with a difference of RMB 9,139,172.80. As at 31 December 2008, book balance of tenure tax of Banhe Fiber Textile is RMB 0.00、housing property tax RMB 30,750.00. We obtained confirmation letter from Chengde municipal local taxation bureau in the high and new technology industrial development zone, which indicted that Banhe Fiber Textile owes total tenure tax of RMB 2,280,530.24、housing property tax RMB 504,636.51. Respectively, the difference of tenure tax is RMB 2,280,530.24 and housing property tax RMB 473,886.51. The Company is unable to explain the differences and make adjustment for tax payable because the financial data of Banhe Fiber Textile were detained by customs office Note 17. Interest payable Closing balance Opening balance Interest payable 270,261,883.18 168,590,957.64 Chengde Intermediate People’s Court of Hebei Province confirmed the liability amounts of the Company according to the Civil Judge Letter of (2008)Cheng Min Po Zi 9-1 at 30 December 2008. The Company calculated the amount of variance which aroused from the amount that the Court confirmed deducting book balance of the Company for interest payable into non-operation expenses and increased interest payable of RMB 15,125,388.94. Chengde Intermediate People’s Court approved the restructuring program of the Company according to the Civil Judge Letter of (2008)Cheng Min Po Zi.9-2 at 30 December 2008. The Company confirmed restructuring benefits at 31 December 2008 and decreased the amounts of relevant short term loan of RMB 95,059,550.33. Note 18. Other payables Closing balance Opening balance Aging Amount Rate in total Amount Rate in total Within 1 year 8,383,047.08 14.70% 34,286,649.22 19.00% 110 1 to 2 years 21,274,179.05 37.30% 145,699,350.07 80.74% 2 to 3 years 22,284,526.94 39.07% 80,671.88 0.04% Over 3 years 5,092,775.32 8.93% 390,568.50 0.22% Total 57,034,528.39 100% 180,457,239.67 100% Chengde Intermediate People’s Court of Hebei Province confirmed the liability amounts of the Company according to the Civil Judge Letter of (2008)Cheng Min Po Zi 9-1 at 30 December 2008. The Company calculated the amount of variance which aroused from the amount that the Court confirmed deducting book balance of the Company for other payable into non-operation expenses and increased other payable of RMB 55,926,435.23. Chengde Intermediate People’s Court of Hebei Province approved the restructuring program of the Company according to the Civil Judge Letter of (2008)Cheng Min Po Zi.9-2 at 30 December 2008. The Company confirmed restructuring benefits at 31 December 2008 and decreased the amounts of relevant other payable of RMB220,597,810.72. There is no such amount belongs to shareholders who hold 5% or more than 5% voting rights. Note 19. Long-term payables Item Closing balance Opening balance Equipment payment premium- Century Win International Holding Ltd. 95,450,000.00 95,450,000.00 Total 95,450,000.00 95,450,000.00 Due to the equipment value for Century Win International Holding Ltd. actual invested is higher than ought to investing capital, the Company should pay RMB 95,450,000.00 back to Century Win International Holding Ltd. Note 20. Special accounts payable Item Closing balance Opening balance subsidy of environmental protection 10,500,000.00 10,500,000.00 special financial allocation 9,151,018.03 23,125,717.66 Total 19,651,018.03 33,625,717.66 The amount of RMB 10,500,000.00 is the volunteer allowance from Chengde Financial Bureau. Chengde Intermediate People’s Court of Hebei Province approved the restructuring program of the Company according to the Civil Judge Letter of (2008)Cheng Min Po Zi.9-2 at 30 December 2008. The Company confirmed restructuring benefits at 31 December 2008 and decreased the amounts of relevant special accounts payable 4,748,982.87. Note 21.Paid-in capital 111 Opening Closing Item Increase Decrease balance balance Capital stock structure (1) Shares not traded a) Founders’ shares 244,800,000.00 - - 244,800,000.00 In which: State held shares - - - - Domestic legal person held 23,147,309.00 - - 23,147,309.00 shares b) Legal person share - - - - recruitment c) staff held shares - - - - Natural person held shares 221,652,691.00 - - 221,652,691.00 Total of shares not traded 244,800,000.00 - - 244,800,000.00 (2) Shares traded a) RMB common shares - - - - b) Foreign currency shares 461,520,000.00 - - 461,520,000.00 domestic listed c) Foreign currency shares - - - - overseas listed d) Others - - - - Total of shares traded 461,520,000.00 - - 461,520,000.00 (3) Total of shares 706,320,000.00 - - 706,320,000.00 1)The registered capital of the Company before capital increase is RMB 438,600,000.00, which has been verified by Price Waterhouse Coopers Certified Public Accountants and reported in the Capital Verification Report coded Pu Hua Yong Dao Yan Zi [2003]149. 2)Upon the approval document No.[2004]101 issued by the China Securities Regulatory Commission in July 2004, the Company increases of its capital by issuing 150,000,000 B shares, in which 91,300,000 shares were issued for Hong Kong dollars and 58,700,000 shares were issued for Renminbi Yuan (RMB). The issuance of Renminbi shares has not been authorized by the China Administration of Foreign Exchange department, and has not verified by PRC certified public accountants and the procedures for the change of business registration were not carried out completely. 3)According to the resolution of general meeting of shareholders on 8 June 2006, the Company distributed share bonus 117,720,000 shares to all shareholders at the rate of two shares given per ten shares. The registered capital of the Company was increased to RMB 706,320,000 after share bonus distribution. The issuance of mentioned above shares has not been verified by PRC certified public accountants and the procedures for the change of business registration were not carried out completely. Note 22. Capital reserve Item Opening balance Increase Decrease Closing balance Share premium 391,996,587.96 - - 391,996,587.96 112 Equity rights 1,399,556.41 - - 1,399,556.41 investment provision Other capital surplus 2,575,000.00 - - 2,575,000.00 Total 395,971,144.37 - - 395,971,144.37 Note 23. Surplus reserve Item Opening balance Increase Decrease Closing balance Mandatory surplus reserve fund 76,791,550.17 - - 76,791,550.17 Random surplus reserve fund - - - - Total 76,791,550.17 - - 76,791,550.17 Note 24. Retained Earnings Item Closing balance Opening balance Retained Earnings at beginning of the year -1,592,839,281.27 -200,166,620.43 Add: Total net profit attributable to parent Company 176,403,180.59 -1,392,672,660.84 Less: Mandatory surplus reserve fund accrued - - Ordinary shares dividends converted to shares - - Closing balance at the year end -1,416,436,100.68 -1,592,839,281.27 Note 25. Operating income and operating cost (1)Details of operating income and cost are listed as follows: Current period Last period Item Revenue Cost Revenue Cost 1.Main business 9,270,741.81 14,118,130.87 54,911,535.83 85,280,393.45 income 2.Other business 1,861,544.19 11,679,568.01 5,060,982.50 5,823,099.61 income Total 11,132,286.00 25,797,698.88 59,972,518.33 91,103,493.06 (2)Sorts of main business: Sorts of main Current period Last period business Revenue Cost Revenue Cost 1.Main business Sale of knitted - - 23,406,935.60 41,949,643.89 apparel Sale of cotton yarn 3,378,380.27 7,614,060.18 20,468,699.24 26,675,131.18 and synthesis silk Sale of paper 5,892,361.54 6,504,070.69 11,035,900.99 16,655,618.38 Subtotal 9,270,741.81 14,118,130.87 54,911,535.83 85,280,393.45 2．Other business 113 Property rental 236,591.88 57,358.75 - - Management fees - - - - Income of sale 717,671.21 2,177,241.96 4,816,289.29 5,238,827.28 material Others 907,281.10 9,444,967.30 244,693.21 584,272.33 Subtotal 1,861,544.19 11,679,568.01 5,060,982.50 5,823,099.61 Total 11,132,286.00 25,797,698.88 59,972,518.33 91,103,493.06 (3) Regional indicators of main business: Current period Last period Item Revenue Cost Revenue Cost Domestic sales 9,270,741.81 14,118,130.87 31,977,126.47 33,884,023.71 Overseas sales - - 22,934,409.36 51,396,369.74 Total 9,270,741.81 14,118,130.87 54,911,535.83 85,280,393.45 Note 26. General and administrative expenses Item Current period Last period Staff salaries 5,369,848.39 17,283,768.71 Material consumption 320,253.04 1,961,437.59 Depreciation expense and production 29,784,991.99 72,628,785.98 suspend loss Electricity charge 450,000.34 911,032.86 Social insurance 9,801.65 110,632,696.00 Service fee for agent 797,071.06 3,509,760.00 Legal fare 403,997.00 898,868.13 Business entertainment 1,548,272.30 1,033,820.90 Tax 1,889,116.59 5,095,265.81 Inventories loss -17,502,909.78 48,210,631.24 Amortization of intangible assets 1,689,139.70 1,601,836.61 Technical transformation - - Others 5,206,365.81 3,487,647.05 Liquidation expense 6,348,350.50 - Total 36,314,298.59 267,255,550.88 Note 27. Financial cost Item Current period Last period Interest expense 200,056,439.44 72,998,673.63 Less: Interest income 4,213.71 1,538.15 Exchange loss - 59,502.91 Less: exchange gain - - 114 Other 63,188.07 73,964.70 Total 200,115,413.80 73,130,603.09 Chengde Intermediate People’s Court of Hebei Province confirmed the liability amounts of the Company according to the Civil Judge Letter of (2008)Cheng Min Po Zi 9-1 at 30 December 2008. The Company calculated the amount of variance which aroused from the amount that the Court confirmed deducting book balance of the Company for short-term loan and interest payable into financial cost of RMB 151,244,165.59. Note 28. Impairment loss / gain Item Current period Last period Bad debit loss 67,222,246.85 184,439,491.96 Inventory impairment loss -6,597,120.98 14,906,998.26 Fixed asset impairment loss 139,607,678.19 915,745,585.19 Construction in progress impairment loss - 480,831,898.10 Long-term investment impairment loss 100,000,000.00 - Intangible asset impairment loss 19,670,971.87 - Total 319,903,775.93 1,595,923,973.51 At 8 February 2009, Chengde Intermediate People’s Court judged and declared the bankruptcy of Chengde Dixian Fashion Co., Ltd., Hebei Xiaban City Textile Co., Ltd. and Chengde Banhe Fiber Textile Co., Ltd. So that fixed assets of the above three Companies are restated as liquidation price by the Company. Based on the evaluation results for liquidation prices of the three Companies’ fixed assets that made by Guangzhou Zhongtianheng Evaluation Company Limited on the time of 8 December 2008, the Company made implement provision of RMB137,688,727.55. As at 31 December 2008, Chengde Intermediate People’s Court in Hebei Province ruled on approval of the 《Restructuring Program (Draft)》of Chengde Dixian Textile Company Limited. The Company is able to make disposition of the pledged assets according to the 《Restructuring Program (Draft)》. And fixed assets of the Company are restated as liquidation price. Based on the evaluation results for liquidation prices of the Company’s fixed assets that made by Guangzhou Zhongtianheng Evaluation Company Limited on the time of 10 November 2008, the Company made implement provision of RMB1,918,950.64 . At 8 February 2009, Chengde Intermediate People’s Court judged and declared the bankruptcy of Chengde Dixian Fashion Co., Ltd., Hebei Xiaban City Textile Co., Ltd. and Chengde Banhe Fiber Textile Co., Ltd. So that intangible assets of the above three Companies are restated as liquidation price by the Company. Based on the evaluation results for liquidation prices of the three 115 Companies’ intangible assets that made by Guangzhou Zhongtianheng Evaluation Company Limited on the time of 8 December 2008, the Company made implement provision of RMB19,670,971.87. Xingye Papermaking had made the provision for long-term equity investment to Dahua Paper Industry of RMB 9,000,000.00 in 2006. As year 2008, Xinye Papermaking made the provision for the investment of 100,000,000.00 in reason for Dahua Paper Industry Co., Ltd. project stopped to construct for several years and its financial volumes were detained. Note 29. Non-operating income and expenses （1）Non-operating income: Item Current period Last period Net income from fines - 6,794.00 Compensation - 19.10 Benefits from exempt 50,000,000.00 - liabilities Restructuring benefits 1,056,972,999.81 - Others 477,661.98 37,394.24 Fixed asset inventory surplus 300,000.00 - Total 1,107,750,661.79 44,207.34 According to Cheng Xian Zheng Fu Zi [2008] No. 20 at 27 November 2008, the Company confirmed benefits of RMB 50,000,000.00 from exempted liabilities by Chengde Xian Finance Bureau. As at 30 December 2008, Chengde Intermediate People’s Court in Hebei Province ruled on approval of the 《Restructuring Program (Draft)》of the Company. The Company confirmed restructuring benefits amounting to RMB 1,056,972,999.81 at 31 December 2008. (2) Non-operating expense Item Current period Last period Fixed asset inventory loss - - Expenses for fines 51,820.50 205,234.00 Penalty expenses 2,118,395.79 - Employee reward expenses - 4,508.92 Collecting overdue tax fine - 3,526.00 Others 161,816,150.25 - Total 163,986,366,54 213,268.92 116 Chengde Intermediate People’s Court of Hebei Province confirmed the liability amounts of the Company according to the Civil Judge Letter of (2008)Cheng Min Po Zi 9-1 at 30 December 2008. The Company calculated the amount of variance which aroused from the amount that the Court confirmed deducting book balance of the Company for liabilities into non-operating expense and increased relevant liabilities amounting to RMB 161,816,150.25. As at 25 February 2009, according to Shi Xing Chu Zi (2008) No. 48 criminal verdict letter, Chengde Intermediate People’s Court in Hebei Province sentenced the Company committed a crime of smuggling the ordinary goods, imposing a fine RMB 68,734,451.21 and besides, the smuggling of goods that involved in should be confiscated and turned over to the state treasury. The Company calculated the penalty which amounting to RMB 2,118,395.79 into losses according to discharge proportion of common creditors’ rights ruled by the《Restructuring Program (Draft)》. Note 30. Other cash concerning operating activities (1) Other cash received from operating activities Item Current period Last period Current accounts 1,158,783.23 1,686,480.44 Financial allocation 376,460.00 - Interest income 8,744.27 1,353.49 Repayment for personal loans 2,282.00 243,962.04 Total 1,546,269.50 1,931,795.97 (2) Other cash paid from operating activities Item Current period Last period Current accounts 195,742.33 8,311,507.97 Repairing fees 88,729.00 106,048.09 Material consumption 62,620.50 1,961,437.59 Electricity charge 485,180.31 3,511,622.33 Water fee 10,000.60 275,630.00 Travel expenses 207,512.62 465,256.51 Rental charge 40,000.00 1,606,130.00 Personal loans 2,155,616.90 10,028.00 Bank charges 67,571.03 73,894.70 Office expenses 6,783,110.28 508,548.24 Transport charges 25,735.89 2,300,307.96 Business entertainment 78,467.20 1,593,593.33 Service fee for agent 1,710,004.47 3,509,760.00 117 Total 11,910,291.13 24,233,764.72 Note 31. Cash and cash equivalent Item Current period Last period 1. Cash 447,257.73 6,316,017.15 Include: cash on hand 12,639.38 403,621.33 Bank deposit available for use in payment any time 434,618.35 5,318,826.66 Other monetary fund available for use in payment any time - 593,569.16 2. Cash equivalent - - Include: Bond investment matured in three months - - 3.Closing balance of cash and cash equivalent 447,257.73 6,316,017.15 7. Supplemental Information for Cash Flow Statement Supplemental information Current period Last period 1. Adjustments to reconcile net income to net cash provided by operating activities: Net profit 154,922,534.56 -1,622,465,134.83 Impairment provision for assets 259,278,650.06 1,595,923,973.51 Depreciation of fixed assets, consumption & depreciation of fuel and gas, depreciation of 27,920,977.32 71,937,098.72 production materials Amortization for intangible assets 4,074,040.76 2,816,257.42 Amortization for long-term prepayment 48,327.36 205,387.55 Loss on disposal of fixed assets, intangible - - assets and others long-term assets Loss upon rejection of fixed assets - - Loss on variance of fair value - - Finance cost 200,115,413.80 72,488,089.96 Loss on investment - - Decrease of deferred tax assets 217,838,869.49 -348,830,814.82 Liability increase of deferred tax - - Decrease of inventories 45,356,356.93 97,077,443.03 Decrease of operating receivable account 287,651,188.68 19,625,432.94 items Increase of operating payable account items -118,872,545.20 99,961,746.70 Others -1,083,103,523.24 - 118 Total -4,769,709.48 -11,260,519.82 2. Significant investing and financing activities for non cash items: Liabilities capitalized - - Convertible bonds payable mature in one year - - Financing leased fixed assets - - 3. Net increase (decrease) for cash and cash equivalents: Ending balance for cash 447,257.73 6,316,017.15 Decrease: beginning balance for cash 6,316,017.15 8,004,056.59 Increase: ending balance for cash equivalents - - Decrease: beginning balance for cash - - equivalents Net increase (decrease) in cash and cash -5,868,759.42 -1,688,039.44 equivalents 8. Non-operating Losses and Profits Description Current period Last period 1. Losses/gains on disposal of non-current assets (1) net loss/profit on disposal of fixed-assets - - (2)net loss/profit on disposal of intangible assets - - (3)net loss/profit on disposal of long-term investment - - Net loss/profit on disposal of non-current assets - - 2. Government subsidy recognized in current income - - 3. Specific provisions for bad debts accrued -67,222,246.85 -171,309,768.52 4.Fixed assets loss provisions -139,607,678.19 -915,745,585.19 5.Construction in progress loss provisions - -480,831,898.10 6.Intangible assets loss provisions -19,670,971.87 7.Long-term investment loss provisions -100,000,000.00 - 8.Inventory devaluing loss 6,597,120.98 - 9.Social insurance between the year of 1997 to 2007 - -110,635,586.32 10.Inventory shortages and loss upon rejection of inventories - -48,210,631.24 11.Deferred tax assets accrued from the bad debit provisions, fixed assets impairment provisions and construction in progress impairment provisions 72,051,552.85 349,144,370.82 12.Exemption of creditors' rights 50,000,000.00 - 13.Fixed assets inventory surplus 300,000.00 - 14.Lossed from the differences between the confirmation by court and the book balance -161,815,672.07 - 15.Expenses for fines -2,118,395.79 - 16.Restructuring expenses -6,348,350.50 - 17.Restructuring benefits 1,056,972,999.81 - 119 18. Net losses/profit from other non-operating items (1)non-operating income 477,661.98 44,207.34 (2)decrease: non-operating expense 52,298.68 213,268.92 Net of non-operating income and expenses 425,363.30 -169,061.58 Total of non-operating losses/profit before deduction of income tax 689,563,721.67 -1,377,758,160.13 Decrease: amount of income tax - - Total of non-operating losses/profit after deduction of income tax 689,563,721.67 -1,377,758,160.13 Decrease: amount of minority interest -21,480,646.03 207,734,673.65 Total of non-operating loss/profit after deduction of minority interest 711,044,367.70 -1,170,023,486.48 9. Related Parties Relationship and Transactions (1) Relationship of related parties a) Controlled shareholder The Controlled shareholder of the Company is Mr. Rong Chen, who holds 29.49% shares of the Company. b)Changes for registered capital of controlled shareholder Name Opening balance Increase Decrease Closing balance of related Rate in Rate in Rate in Rate in Amount Amount Amount Amount parties total total total total Shuxia 208,324,800.0 29.49 208,324,800.0 29.49 - - - - n Wang 0 % 0 % Rong 208,324,800.0 29.49 208,324,800.0 29.49 - - - - Chen 0 % 0 % *According to the decision of Shenzhen Intermediate People’s Court of Guangdong Province (2006) Shen Zhong Fa Zhi Zi 398-4 and (2006) Shen Zhong Fa Zhi Zi 398-5, Everbright Bank Shenzhen Branch transferred the creditors’ rights amounting to RMB 80,824,254,97 ( which including loan principal and relevant interest, overdue interest, lawsuit expense and protection expense) to China Xinda Capital Management Company Shenzhen Office. Then, Xinda Capital Management Company Shenzhen Office conveyed partial of the above creditors’ rights which amounting to RMB 45,491,544 to Rong Chen. The sponsor shares amounting to 112,324,800 shares held by Shuxian Wang was repaid to Rong Chen in the price of RMB 45,491,544.00 according to the ruling of Shenzhen Intermediate People’s Court. Rong Chen should held 15.90% of the total shares of the Company after the ruling effective. **According to the decision of Dalian Intermediate People’s Court of Liaoning Province (2008) Da Zhi Shen Zi 227 and (2005) Da Zhi Shen Zi 43, Guangdong Development Bank Dalian Branch transferred partial principal of the creditors’ rights which amounting to RMB38,880,000 to Rong 120 Chen. Afterward, the sponsor shares amounting to 96,000,000 shares held by Shuxian Wang was repaid to Rong Chen in the price of RMB 38,880,000 according to the decision of Dalian Intermediate People’s Court. Thus, together with 112,324,800 shares of the above, shares that Rong Chen holds amount to112,324,800 shares, which occupies 29.49% of total shares of the Company. ***According to the transfer registration letter of 12 September 2008 from China Securities Depository and Clearing Corporation Limited, transfer procedures to Rong Chen for the 112,324,800 shares judged by Shenzhen Intermediate People’s Court and 96,000,000 shares judged by Dalian Intermediate People’s Court has been finished. After completion of the share transfer, Rong Chen hold 208,324,800 shares of the Company, of which rate in total 29.49%. Thus, Rong Chen become the first shareholder and actual controller of the Company. c) Other related parties: Name of related parties Relationship with the Company Shareholder of holding subsidiary’s associated Japan New Century Co. Company Century Win International Holding Ltd. Shareholder of subsidiary Chengde Beirifang Co., Ltd. Associated Company with 50% of equity Dahua Paper Industry Co., Ltd. 45% of equity participation Suning Banhe Fibre Textile Co., Ltd. 20% of equity participation (2)Transactions of related parties a) Sale of goods Current Name of Company Item Last period period LingFeng Textiles Xingye Papermaking Co. - - (ShenZhen) Co., Ltd. Ltd (Sale of paper) The Company (Sale of Japan New Century Co. - 2,723,838.40 clothes) Total - 2,723,838.40 b) Equipments leased The subsidiary of the Company, Chengde Banhe Fibre Textile Co., Ltd. leased 215 sets of equipments to Suning Banhe Fibre Textile Co., Ltd. without lease contracts in the year of 2006. However, due to smuggle, the production of Suning Banhe Fibre Textile Co., Ltd. was not start up and the equipments rent expenses are unpaid. (3) Amounts receivable from and payable to related parties Closing Opening Item Company name Content balance balance Account Japan New Century Co. Goods payment 7,044,666.04 7,044,666.04 receivables 121 LingFeng Textiles Goods payment 381,767.91 381,767.91 (ShenZhen) Co., Ltd. Advances Equipmen to Japan New Century Co. 56,453,443.24 56,453,443.24 payment suppliers Other Japan New Century Co. Agency fund 30,792,000.00 30,792,000.00 receivables Suning Banhe Fibre Pay for another 4,685,985.28 4,685,985.28 Textile Co., Ltd. Dahua Paper Industry Pay for another 44,182,431.26 44,182,431.26 Co., Ltd. Other LingFeng Textiles Loans 80,824,254.97 80,824,254.97 payables (ShenZhen) Co., Ltd. Dahua Paper Industry Current account 58,360,818.27 58,360,818.27 Co., Ltd. Century Win Equipment Long-term International Holding payment 95,450,000.00 95,450,000.00 payables Ltd. premium 10. Return on net assets Return on net assets Profit in report period Fully diluted Weighted average Current Last Current Last period period period period Net profit for shareholders of common shares -74.32% 336.59% -74.32% 336.59% Net profit for shareholders of common shares 225.25% 53.81% 225.25% 53.81% after diction of non-operating losses/profit 11. Earnings per share Earnings per share Profit in report period Diluted earnings per Basic earnings per share share Current Current Last Last period period period period Net profit for shareholders of common 0.25 -1.97 0.25 -1.97 shares Net profit for shareholders of common -0.76 -0.32 -0.76 -0.32 shares after diction of non-operating Item 2008 2007 Calculation for basic and diluted earning per share (1) Numerator: Net profit after income tax 176,403,180.59 -1,392,672,660.84 Adjustment: preferred stock dividends and other - - instruments 122 Profit/loss for parent Company’s common stock 176,403,180.59 -1,392,672,660.84 shareholders in basic earnings per share calculation Adjustment: Dividends and interests related with diluted potential - - common stock The change of profit or expense generated from the - - transfer of diluted potential common stock Profit/loss for common stock shareholders of parent 176,403,180.59 -1,392,672,660.84 Company in diluted earnings per share calculation (2) Denominator: Weighted average for offering common stock in 706,320,000.00 706,320,000.00 current year in basic earnings Add: weighted average when all diluted potential - - common stocks transfer to Weighted average for currently offering common 706,320,000.00 706,320,000.00 stock in diluted earnings per share calculation. (3) Earnings per share: Basic earnings per share: Net profit for Company’s common stock 0.25 -1.97 shareholders Net profit for Company’s common stock -0.76 -0.32 shareholders after deduction of non-operating items Diluted earnings per share: Net profit for Company’s common stock 0.25 -1.97 shareholders Net profit for Company’s common stock -0.76 -0.32 shareholders after deduction of non-operating items 12. Commitment (1) Capital commitments As to 31 December 2008, Capital expenditures contracted for but not recognized in the financial statements are as follows: Item Closing Opening balance balance Invested in joint stock Company－Dahua Paper Industry Co., - - Ltd. Invested in holding Company－Banhe Fibre Textile Co., Ltd. 8,439,024.71 8,439,024.71 Invested in associated Company－Beirifang Co., Ltd. 4,035,100.00 4,035,100.00 Invested in holding Company－Dixian Light Rail Co., Ltd. 48,421,200.00 48,421,200.00 Total 60,895,324.71 60,895,324.71 Dahua Paper Industry Co., Ltd. was found as a joint venture Company invested by Nippon Paper Industries Co. and the Company. The registered capital was USD 5,000,000 when found. 123 Upon approval coded Ji Shang Wai Zi [2004]No.41 issued by the Hebei Province Ministry of Commerce, Dahua Paper Industry Co., Ltd. has increased the total investment from USD5,000,000 to JPY6,364,000,000 and the registered capital increased to JPY6,364,000,000. The investment of the Company has increased to JPY2,864,000,000, accounting for 45％ equity. On 24 June 2005, Nippon Paper Industries Co. and Japan New Century Co. have agreed the share-transfer contract, which indicated that Nippon Paper Industries Co. transferred 55％ equity of Dahua Paper Industry Co., Ltd. to Japan New Century Co. The above alteration has approved by the Hebei Province Ministry of Commerce. Dahua Paper Industry Co., Ltd. obtained new business license due to rename. On 29 June 2005, the Company agreed the share-transfer contract and transferred 45% equity of Dahua Paper Industry Co., Ltd. to Xinye Papermaking Co., Ltd. As to 31 December 2006, Xingye Papermaking Co. Ltd. has contributed capital to Dahua Paper Industry Co., Ltd. with RMB 206,215,729.65. Banhe Fiber Textile is invested by Dixian Fashion and Yamashita Shoji Co., Ltd. invested 35% and 65% shareholding respectively and the registered capital was USD 15,000,000. Upon approval coded Ji Wai Jin Mao Zi Zi [2003]No.37 issued by the Hebei Province Ministry of Commerce on 24 March 2003, the Banhe Fiber Textile increase the registered capital of from USD 15,000,000 to USD 60,000,000 on 7 July 2003. Xiaban City Textile then joined as a new shareholder. The distribution of shareholding then became Dixian Fashion, Yamashita Shoji Co., Ltd. and Xiaban City Textile holding 20%, 55% and 25% respectively. Up to 31 December 2006, Dixian Fashion and Xiaban City Textile paid RMB 199,200,000 and RMB 114,890,975.29 respectively, therefore the rest capital of RMB 8,439,024.71 should be invested. The Company has not contributed any actual capital to Dixian Light Rail Co., Ltd. and Beifang Textile Co., Ltd, however, both Companies has been revoked business licenses on 27 March 2008. 13. Non-adjustment matters in matters after the Balance Sheet Date (1) On Ten O’clock AM of 4 April 4 2009, Hebei Jiasheng Auction Company Limited who was consigned by bankruptcy administrator of Chende Dixian Fashion Co.,Ltd held auction to the bankruptcy assets(including land and workshop) of Chengde Dixian Fashion Co.,Ltd for the fifth time. Rongyida Real Estate Development Company of Chengde County acquired the auction assets at the price of RMB 26,676,019.00. On Ten O’clock AM of 6 April 2009, Hebei Jiadeli Auction Company Limited who was consigned by bankruptcy administrator of Hebei Xiaban City Textile Co.,Ltd held auction to the bankruptcy assets(including land use right and housing building) of Hebei Xiaban City Textile 124 Co.,Ltd for the fifth time. Rongyida Real Estate Development Company of Chengde County acquired the auction assets at the price of RMB 8,760,300.00. On Ten O’clock AM of 8 April 4 2009, Hebei Shengxing Auction Company Limited held auction to partial assets of the Company for the fifth time. Rongyida Real Estate Development Company of Chengde County acquired the auction assets at the price of RMB18,436,600.00. The Company is unable to confirm book value of the auction estates due to partial financial data detained by CIQ. On Ten O’clock AM of 8 April 2009, Hebei Shengxing Auction Company Limited held auction to creditors’ rights assets (including book value of account receivable of RMB 10,959,998.56, advance to suppliers of RMB 86,429,553.06) of the Company for the fifth time. Rongyida Real Estate Development Company of Chengde County acquired the auction assets at the price of RMB 1,197,300.00 in the room 1711 of Chengde Rehe building. (2) refer to the flowing 15, according to the ruling of Chengde Intermediate People's Court (2008) Cheng Min Po Zi 10-1, (2008) Cheng Min Po Zi 11-1 and (2008) Cheng Min Po Zi 12-1 at 8 February 2009, Chengde Banhe Fiber Co., Ltd, Chengde Dixian Fashion Co., Ltd and Hebei Xiaban City Textile Co., Ltd were bankrupt respectively. Chengde Intermediate People's Court of Hebei Province confirmed the liability amounts of Xingye Papermaking according to (2008) Cheng Min Po Zi 13-1 judgment letter at 21 February 2009. Chengde Intermediate People's Court of Hebei Province approved the settlement application of Xingye Papermaking according to (2008) Cheng Min Po Zi 13-2 judgment letter at 31 March 2009. (3) As to 28 April 2009, the Company has repaid liabilities to creditors according to 《Restructuring Program》. The whole liabilities that repaid by the Company including employee’s rights as creditors of RMB 17,897,697.28, taxes amounting to RMB15,372,537.49, priority creditors’ rights of RMB 82,455,769.60 and common creditors’ rights of RMB 18,099,348.59. According to the ruling of Civil Judge Letter (2008) Cheng Min Po Zi 9-5 at 27 April 2009, Chengde Intermediate People’s Court of Hebei Province confirmed that liabilities repayment included in the restructuring planning has been finished. 14. Mortgage assets As to 31 December 2008, the mortgage assets of the Company are listed below: Mortgage assets Code Xiaban City Textile Co. - Fixed assets- land use right Chengxianguoyong[2005]75&76 Xiaban City Textile Co. - Fixed assets- land use right Chengxianguoyong[2000]174 125 Xingye Papermaking Co.- Fixed assets- land use right Chengxianguoyong[2001]131 Xingye Papermaking Co.-Fixed assets- land use right Chengxianguoyong[2001]133 Xingye Papermaking Co.- Fixed assets- land use right Chengxianguoyong[2001]132 Xingye Papermaking Co.- Fixed assets- land use right Chengxianguoyong[2000]152 Xingye Papermaking Co.- Fixed assets- land use right Chengxianguoyong[2000]169 Banhe Fibre Textile Co.- Fixed assets- land use right Chenshikaiguoyong[2005]063 Xiaban City Textile Co. - Fixed assets- buildings and Chenxianfangzi No.000109 plants Xiaban City Textile Co. - Fixed assets- buildings and Chenxianfangzi No. 000196 plants Xiaban City Textile Co. - Fixed assets- buildings and Chenxianfangzi No. 000108 plants Xiaban City Textile Co. -Fixed assets-machinery 3 Qinggang combine machines equipments Xiaban City Textile Co. -Fixed assets-machinery 7 cotton hullers equipments Xiaban City Textile Co. -Fixed assets-machinery 15 roving frames equipments Xingye Papermaking Co. - Fixed assets- buildings and Chenxianfangzi No. 000197 plants Xingye Papermaking Co.- Fixed assets- buildings and Chenxianfangzi No. 000198 plants Xingye Papermaking Co. - Fixed assets- buildings and Chenxianfangzi No. 000150 plants Xingye Papermaking Co. - Fixed assets- buildings and Chenxianfangzi No. 000195 plants Xingye Papermaking Co. - Fixed assets-machinery No.2 production line equipments The Company and Ditian Fashion Co.- Fixed 14 automatic winders assets-machinery equipments The Company and Ditian Fashion Co.- Fixed assets-machinery equipments The Company and Ditian Fashion Co.- Fixed 144 carding machines assets-machinery equipments The Company and Ditian Fashion Co.- Fixed 118 wool spinning machines assets-machinery equipments The Company and Ditian Fashion Co.- Fixed 759 spinning frames assets-machinery equipments The Company and Ditian Fashion Co.- Fixed assets-machinery equipments The Company and Ditian Fashion Co.- Fixed 367 spinning frames assets-machinery equipments The Company and Ditian Fashion Co.- Fixed 567 spinning frames assets-machinery equipments The Company and Ditian Fashion Co.- Fixed 328ripple/knitting machines assets-machinery equipments The Company and Ditian Fashion Co.- Fixed 91 spinning frames assets-machinery equipments The Company and Ditian Fashion Co.- Fixed 266 spinning frames assets-machinery equipments The Company and Ditian Fashion Co.- Fixed 1253 spinning frames assets-machinery equipments The Company and Ditian Fashion Co.- Fixed assets-machinery equipments Xingye Papermaking Co. - Fixed assets- machinery No.1 production line equipments 126 Xingye Papermaking Co. - Fixed assets-machinery No.3/4/5/6/8/12 production line equipments Xingye Papermaking Co. - Construction in progress- No.7/9/10/11 production line machinery equipments Chengde Intermediate People's Court of Hebei province could make public sale for pledged assets to repay bank loans of the Company according to the 《Restructuring Programme（Draft）》. Refer to Note 14, Rongyida Real Estate Development Company of Chengde County acquired the flowing assets of the above pledges through auction on 4 April and 8 April of 2009: 1) Xiaban City Textile Co. - Fixed assets- land use right with code No. Chengxianguoyong[2000]174; 2) Xingye Papermaking Co.- Fixed assets- land use right with code No. Chengxianguoyong[2001]132; 3) Xiaban City Textile Co. - Fixed assets- buildings and plants with code No. Chenxianfangzi No. 000196; and 4) Xingye Papermaking Co.- Fixed assets- buildings and plants with code No. Chenxianfangzi No. 000198. The Company is unable to confirm book value of the pledged assets because the physical assets can not be matched with the financial data. 15. Litigation and other significant events （1）On 24 October 2003, the related party of the Company, Shenzhen Lingfeng, entered into “Comprehensive Credit Agreement” with Everbright Bank of China, Lianhua Road Branch of Shenzhen (Everbright Bank Shenzhen Branch) (reference No.S0520031015). The agreement provided that Everbright Bank Shenzhen Branch authorized Shenzhen Lingfeng the maximum credit, that is, RMB 100 millions. The detailed credit limit is note discount of RMB 100 millions, and the valid credit period is from 24 October 2003 to 24 October 2004. The Company and the legal representative of the Company Shuxian Wang signed “Maximum Credit Limit Guarantee Contract” and “Personal Guarantee Contract” respectively, in order to provide joint liability to all creditor’s right under the Comprehensive Credit Agreement. Thereafter, Everbright Bank Shenzhen Branch signed “Commercial Acceptance Bills Discount Agreement” with Shenzhen Lingfeng and the Company respectively, which says based on the application of Lingfeng, Everbright Bank Shenzhen Branch agreed to provide discount limit amounting to 100 millions for the commercial acceptance bills. With the application of Shenzhen Lingfeng and approval of Everbright Bank Shenzhen Branch, the credit limits is applicable to the Company, and the valid period of the discount limit is the same with that of Comprehensive Credit Agreement. Based on the agreements, from 23 July 2004 to 27 July 2004, ShenzhenLingfeng drew nine commercial acceptance bills to the Company, totally amounting to RMB 83,000,000. The Company applied discount to Everbright Bank Shenzhen Branch with these bills, and the bank paid RMB 83,000,000 to the Company as agreed upon. Due to the shortage of fund, Shenzhen Lingfeng and the Company were unable to repay and fulfill the joint guarantee liability when the bills were due. Therefore, Everbright Bank Shenzhen 127 Branch took action to the court, and the court decided that Shenzhen Lingfeng should pay principal and interest, RMB 80,824,254.97 in total, to the bank in the ten days the sentence effective. The Company undertook joint liability and was the real user of the fund, so it is liable to the debt. The former chairman of board Shuxian Wang promised to repay the debt with all his property and equity. Everbright Bank Shenzhen Branch of Lianhua Road applied to the court to protect the complete property. According to 《Civil Judge Letter of Shenzhen Intermediate People’s Court of Guangdong Province 》(reference 2005 SHEN ZHONG FA LI CAI ZI No.61), the sponsor shares amounting to 112,324,800shares has been froze. Thereafter, Shenzhen Intermediate People’s Court consigned auction Companies to hold public sale for three times but failed for sale finally. After public sale failed, the bank transferred the creditors’ rights( which including loan principal and relevant interest, overdue interest, lawsuit expense and protection expense) to China Xinda Capital Management Company Shenzhen Office. Then, Xinda Capital Management Company Shenzhen Office conveyed partial of the above creditors’ rights which amounting to RMB 45,491,544.00 to Rong Chen. The sponsor shares amounting to 112,324,800 shares held by Shuxian Wang was repaid to Rong Chen in the price of RMB 45,491,544.00 according to the decision of Shenzhen Intermediate People’s Court. China Xinda Capital Management Company Shenzhen Office declared creditors’ rights to the administrant of the Company after the Company performing restructuring procedures in November 2008. At 30 December 2008, Chengde Intermediate People’s Court of Hebei Province confirmed common creditors’ rights of RMB 57,523,610.69 for China Xinda Capital Management Company Shenzhen Office according to the Civil Judge Letter of (2008) Cheng Min Po Zi 9-1. As to 28 April 2009, the Company has repaid the above amounts of RMB 1,150,472.21 in consistent with repayment rate (2%) ruled by《Restructuring Program 》. （2）On 24 January 2005, Guangdong Development Bank Dalian Branch proceeded against Xiaban City Textile Co., Ltd, the Company and the former board chairman of the Company Shuxian Wang. According to the judgment of Liaoning Intermediate People’s Court ((2005) Da Min He Chu Zi 34, Xiaban City Textile Co., Ltd should repay the principal RMB 40,000,000 and interests in the ten days the sentence effective, interests calculated up to the day the principal and interests repaid completely. The Company and Shuxian Wang assume responsibility for joint liability of discharge. The former chairman of board Shuxian Wang promised to repay the debt with all his property and equity. Guangdong Development Bank Dalian Branch applied to the court to freeze the sponsor shares amounting to 96,000,000shares held by Shuxian Wang. Dalian Intermediate People’s Court 128 consigned Shenzhen Intermediate People’s Court together held auction for three time but ended with failure. Thereafter, the bank transferred partial principal of the creditors’ rights which amounting to RMB38,880,000 to Rong Chen. Afterward, the sponsor shares amounting to 96,000,000 shares held by Shuxian Wang was repaid to Rong Chen in the price of RMB 38,880,000 according to the decision of Dalian Intermediate People’s Court. Guangdong Development Bank Dalian Branch declared creditors’ rights to the administrant of the Company after the Company performing restructuring procedures in November 2008. At 30 December 2008, Chengde Intermediate People’s Court of Hebei Province confirmed common creditors’ rights of RMB 67,012,556.89 for Guangdong Development Bank Dalian Branch according to the Civil Judge Letter of (2008) Cheng Min Po Zi 9-1. As to 28 April 2009, the Company has repaid the above amounts of RMB 1,340,251.14 in consistent with repayment rate (2%) ruled by《Restructuring Program 》. （3）On 27 September 2005, Huaxia Bank, Shijiazhuang Branch sued Xiaban City Textile Co., Ltd. and the Company. According to the judgment of Hebei Advanced People’s Court ((2005) Ji Min Er Chu Zi 34, Xiaban City Textile Co., Ltd. should repay the loans of RMB 20,000,000 and the advance of bill principal of RMB 17,829,536.60 in the ten days the sentence effective. The Company assumes responsibility for joint liability of discharge. Thereafter, the bank transferred the creditors’ rights to China Great Wall Asset Management Corporation Shijiazhuang Office. China Great Wall Asset Management Corporation Shijiazhuang Office declared creditors’ rights amounting to RMB 55,604,399.05, of which principal RMB 37,829,536.60, interests RMB 17,774,862.45, after the Company starting restructuring process since November 2008. According to the ruling of Chengde Intermediate People’s Court of Heben Province (2008)Cheng Min Po Zi 9-1 on 30 December 2008, common creditors’ rights of RMB 55,604,399.05 held by China Great Wall Asset Management Corporation Shijiazhuang Office was validated. As to 28 April 2009, the Company has repaid the above amounts of RMB 1,112,087.98 in consistent with repayment rate (2%) ruled by《Restructuring Program 》 （4）Due to overdue loans, China Construction Bank Chengde Branch proceeded against Xingye Papermaking Co., Ltd. and the Company. Pursuant to the court’s judgment on 6 December 2006, the Company must repay the principal RMB 50,000,000 and interests(calculated to 20 October 2006) in the ten days the sentence effective, the Xingye Papermaking Co., Ltd. assumes responsibility for joint liability of RMB 40,000,000. according to the ruling, China Construction Bank Chengde Branch has priority of compensation for 1) the land use right of 129 Chengxiantaxiang(2005)4, 2) housing building of Chengxiantazi No. 000994, 3) 50,000 ton production line of Xinye Papermaking Co.,Ltd, 4) combine filature machines production line and two boilers of Chengxian Di Dong Zi No.342 of the Company, 5) two land use rights of Chen Xian Ta Xiang (2004) 13 of the Company. Due to overdue loans, China Construction Bank Chengde Branch proceeded against Xingye Papermaking Co., Ltd. and the Company on 10 November 2006. Pursuant to the court’s judgment on 25 December 2006, Xingye Papermaking Co., Ltd. must repay the principal RMB 1,198,000,000 and relative interests at a rate of 6.6375‰ in the ten days the sentence effective, the Company assumes responsibility for joint liability. China Construction Bank Chengde Branch has priority of compensation for the pledged assets of (2005) Chengxian Di Dong Zi No.341. Before the Company starting restructuring program, China Construction Bank Chengde Branch transferred the above two creditors’ rights to China Credit Trust Co., Ltd. After the Company starting restructuring program in November 2008, China Credit Trust Co., Ltd. declared creditors’ rights to the Company amounting to RMB 227,747,555.99 which including principal RMB 169,800,000.00, interest RMB 56,967,585.99 and others of RMB 979,970.00. According to the ruling of Chengde Intermediate People’s Court of Heben Province (2008)Cheng Min Po Zi 9-1 on 30 December 2008, prior claim of RMB66,447,271.04 and common creditors’ rights of RMB 161,300,284.95 held by China Credit Trust Co., Ltd. was validated. According to the 《Agreement》that signed by the administrant of the Company, China Construction Bank Shijia Zhuang Jinquan Branch and the administrant of Chengde Xingye Papermaking Co., Ltd. in April 2009, the Company and Xingye Papermaking should repay Jinquan Branch of RMB 11,150,000. As to 28 April 2009, the Company has repaid the above amounts of RMB 11,150,000 in consistent with the 《Agreement》. （5）Due to overdue loans, Industrial and Commercial Bank of China Chengde Branch proceeded against the Company .According to the decision of Hebei Advanced People’s Court on 22 December 2006, the Company should pay the Industrial and Commercial Bank of China Chengde Branch principal RMB 3,907,000,000 and default interest (as at 20 October 2006) in the ten days the sentence was effective. If the Company non-fulfilled the obligation, the pledged of the Company included in 1)Cheng Xian Ta Xiang (2004) 14, 2)Cheng Xian Zheng Fang Cheng Xian Ta Zi No. 000985, 3)Cheng Xian Ta Xiang (2002) 006, 4)Cheng Xian Zheng Fang Cheng Xian Ta Zi No. 000748, 5) Chen Xian Di Dong Zi (2002) 281/282, 6) Chen Xian Di Dong Zi (2003) 206/308, 7) Chen Xian Di Dong Zi (2004) 317/319/327/329, 8) Chen Xian Di Dong Zi (2005) 338. After the Company starting restructuring program in November 2008, Industrial and 130 Commercial Bank of China Chengde Branch declared creditors’ rights to the Company amounting to RMB 610,863,067.76 which including principal RMB 390,700,000.00, interest RMB 217,541,956.49, legal cost RMB 2,225,710.00 and balance of guarantee loan of RMB395,401.27. According to the ruling of Chengde Intermediate People’s Court of Heben Province (2008)Cheng Min Po Zi 9-1 on 30 December 2008, prior claim of RMB610,467,666.49 and common creditors’ rights of RMB 395,401.27 held by Industrial and Commercial Bank of China Chengde Branch was validated. According to《Restructuring Program》, the Company auctioned all the assets (except confiscated equipments) which were pledged to Industrial and Commercial Bank Chengde Branch. The above pledged assets transferred into cash of RMB 29,945,204.00 lastly. The Company repaid Industrial and Commercial Bank Chengde Branch with RMB 29,945,204.00 of auction cash and transferred the remain liabilities of RMB 580,522,462.49 into common creditors’ rights at 22 April 2009. The Company has repaid the liabilities in accordance with the repayment rate 2% of common creditors’ rights with RMB 11,610,449.25 that raised by the Company. （6）According to the decision of Hebei Advanced People’s Court on 22 December 2006, the Company should pay the Industrial and Commercial Bank of China Chengde Branch principal RMB 290,000,000 and default interest (as at 20 December 2006), USD 1,012,861.86 and default interest (as at 20 October 2006) in the ten days the sentence was effective. If the Company is not able to assume responsibility for joint liability, relative mortgaged properties should be disposed. After the Company starting restructuring program in November 2008, Industrial and Commercial Bank of China Chengde Branch declared creditors’ rights to the Company amounting to RMB 42,665,371.42 and USD 1,225,877.29 which including principal RMB 29,000,000.00, principal USD 1,012,861.86, interest RMB 217,541,956.49, interest USD213,015.43 and legal cost RMB 212,165.00 . According to the ruling of Chengde Intermediate People’s Court of Heben Province (2008)Cheng Min Po Zi 9-1 on 30 December 2008, prior claim of RMB51,038,113.31 held by Industrial and Commercial Bank of China Chengde Branch was validated. According to 《Restructuring Program》, the Company auctioned all the assets (except confiscated equipments) which were pledged to Industrial and Commercial Bank Chengde Branch. The above pledged assets transferred into cash of RMB 3,977,533.00 lastly. The Company repaid Industrial and Commercial Bank Chengde Branch with RMB 3,977,533.00 of auction cash and transferred the remain liabilities of RMB 47,060,580.31 into common creditors’ rights at 22 April 2009. The Company has repaid the liabilities in accordance with the repayment rate 2% of common creditors’ rights with RMB 941,211.61 that raised by the Company. 131 （7）Due to the Company and its guarantee being suspected in a material case involved, according to the borrowing agreement, Bank of China Chengde Branch announced that the agreed loan with the Company was on due immediately, and took legal action on 30 December 2006. On 1 March 2007, Hebei Advanced People’s Court decided that the Company should pay the principal RMB 30,000,000 and default interest (from 30 December 2006 till completion payoff date) After the Company starting restructuring program in November 2008, Industrial and Commercial Bank of China Chengde Branch declared creditors’ rights to the Company amounting to RMB 36,058,404.15 which including principal RMB30,000,000.00, interest RMB 5,740,874.15 and legal cost RMB 317,530.00. According to the ruling of Chengde Intermediate People’s Court of Heben Province (2008)Cheng Min Po Zi 9-1 on 30 December 2008, common creditors’ rights of RMB36,058,404.15 held by Industrial and Commercial Bank of China Chengde Branch was validated. As to 31 December 2008, the above payment has not been repaid in the discharge rate of the 《Restructuring Program (Draft)》 by the Company. （8）As at 31 December 2008, Southern Securities Co., Ltd. (Southern Securities) held 108,810,000 shares of the Company, which occupies 15.41% of the total shares. Its subsidiary Southern Security (Hong Kong) Co., Ltd. held 799,830 shares, accounting to 0.11%. Totally, Southern Securities held 109,639,832 shares of the Company, and the holding percentage is 15.52%. At the end of 2008, the liquidation of Southern Security was in process. （9）Tahe Xin’an Paper & Pulp Co., Ltd. is a subsidiary invested by the Company, but the Company did not contribute capital actually. Due to the paid in capital was not been completed in a time-limit by the Company and other shareholders, Tahe Xin’an Paper & Pulp Co., Ltd. is cancelled without registered. （10）On 8 December 2008, according to the ruling of Chengde Intermediate People's Court (2008) Cheng Min Po Zi 10, (2008) Cheng Min Po Zi 11, (2008) Cheng Min Po Zi 12, (2008) ,Cheng Min Po Zi 13: 1)the application of liquidation for Chengde Banhe Fiber Co., Ltd by Weishan Sun was accepted; 2) the application of liquidation for Chengde Dixian Fashion Co., Ltd by Chengde Xinda Energy Saving Wiring Factory was accepted; 3) the application of liquidation for Hebei Xiaban City Textile Co., Ltd by Anxin Hongda Plastic Factory was accepted; 4) the application of liquidation for Chengde Xingye Papermaking Co., Ltd by Chengde Yonghe Cement Co., Ltd. was accepted. On 8 December 2008, according to the ruling of Chengde Intermediate People's Court (2008) Cheng Min Po Zi 10-1, (2008) Cheng Min Po Zi 11-1 and (2008) Cheng Min Po Zi 12-1, (2008), 132 Chengde Banhe Fiber Co., Ltd , Chengde Dixian Fashion Co., Ltd and Hebei Xiaban City Textile Co., Ltd were bankrupt respectively. Chengde Intermediate People's Court of Hebei Province confirmed the liability amounts of Xingye Papermaking according to (2008) Cheng Min Po Zi 13-1 judgment letter at 21 February 2009. Chengde Intermediate People's Court of Hebei Province approved the settlement application of Xingye Papermaking according to (2008) Cheng Min Po Zi 13-2 judgment letter at 31 March 2009. （11）Shijiazhuang People's Procuratorate of Hebei Province sued to the Shijiangzhuang Immediate People’s Court for the flowing reaons: Chengde Dixian Textile Company Limited set up 7 falsehood foreign investment Companies of “Chengde Banhe Fiber”, “Dixian Light rail”, “Xingye Papermaking”, “Dixian Fashion”, “Suning Meihua”, “Suning Puhua” and “Suning Leiyi” and escaped tax of RMB 68,734,451.21 by pretending common import goods to foreign investment import equipments. The above action offended criminal law of China and should be penalty for smuggling common goods. On 25 February 2009, Shijiangzhuang Immediate People’s Court sentenced Chengde Dixian Textile Company Limited criminal of smuggling common goods and fined RMB 68,734,451.21. All relevant goods should be turned in to treasury. Shuxian Wang appealed to the Advance People’s Court of Hebei Province during the legal period. The Court rejected the appeal and sustain the original judgment according to verdict letter of (2009) Ji Xing Er Zhong Zi No. 44. The ruling was the final order. （12）Due to the Company non-fulfillment of the obligation judged by court and worsen operation position, Chengde Xingcheng Building Project Co., Ltd applied restructuring for the Company in November 2008. On 10 November 2008, Chengde Intermediate People's Court of Hebei province accepted the application. On 30 December 2008, Chengde Intermediate People's Court of Hebei province validated the flowing creditors’ rights: 1) 6 prior claims amounting to RMB 844,157,605.65; 2) tax of RMB 15,372,537.49 for 3 taxation office; 3) 131 common creditors’ rights amounting to RMB 552,326,118.84. At the same day, Chengde Intermediate People's Court of Hebei province approved to finish the restructuring program of the Company. According to the《Restructuring Program (Draft), assuming that capital of the Company could be transferred into cash in the price of evaluation value, discharge rate of common creditors’ rights is 1.082% after repaying prior claims of RMB 20,310,000.08, restructuring costs of RMB 8,000,000 and employee creditors’ rights of RMB 17,890,000.76, tax of RMB 15,370,000.25. In addition, the 133 debtors should raise funds to repay each common creditor’s rights in the discharge rate 2% of total creditors’ rights that finally confirmed. According to (2008) Cheng Min Po Zi 9-1, (2008) Cheng Min Po Zi 9-2 and 《Restructuring Program (Draft), the Company confirmed the restructuring benefits on 31 December 2008. The Company increased short-term loan of RMB 118,776.65,interest payable of RMB 151,125,388.94, accounts payable of RMB 79,384,448.76,Other payable of RMB 55,926,435.23 and tax payable of RMB 26,504,788.08 according to the difference between the Court’s ruling and the book balance of the Company. After the above liabilities increased and consideration for the evaluation value RMB 167,043,749.50 of mortgaged assets and discharge rate of common creditors’ rights as of 1.082% as well as discharge rate of repayment of 2%, the Company confirmed restructuring benefit of RMB 1,056,972,999.81. Therefore, the Company decreased short-term loan of RMB 537,067,236.22, interest payable of RMB 95,059,550.33, account payable of RMB 102,335,735.43, other payable of RMB 220,597,810.72, advance from customers of RMB 270,662.63, employee’s rights of RMB 94,826,785.73, special accounts payable of RMB 4,748,982.87 and accrued liabilities of RMB 2,066,235.88. According to the ruling of Civil Judge Letter (2008) Cheng Min Po Zi 9-5 at 27 April 2009, Chengde Intermediate People’s Court of Hebei Province confirmed that liabilities repayment included in the restructuring planning has been finished. 16. The Approval of Financial Statements The Company’s financial statement was approved by the board of directors’ meeting on 28 April 2009. Section XII. Documents for Reference 1. Accounting statements carrying with confirmation and seals of Legal Representative of the Company, Person in Charge of the Financial Affairs and Person in Charge of Accounting Institution 2. Original of Auditors’ Report carrying with the seal of Certified Public Accountants as well as personal signatures and seals of certified public accountants. 3. Originals of all documents and manuscripts of Public Notices of the Company publicly disclosed on Securities Times and Hong Kong Wen Wei Po. The Company will provide timely the above documents for reference provided that China Securities Regulatory Commission or Stock Exchange demands or shareholders requires according to the regulations and Articles of Association. The Board of Directors of Chengde Dixian Textile Co., Ltd. April 30, 2009 134 135