飞亚达Ｂ(200026)2008年年度报告（英文版）

深圳市飞亚达（集团）股份有限公司 SHENZHEN FIYTA HOLDINGS LTD. 2008 Annual Report May 26, 2009 Definition In this report, unless the context otherwise required, the following names in abbreviation shall refer to the following organizations: The Company or Fiyta: Shenzhen Fiyta Holdings Co., Ltd. CATIC Shenzhen Corporation: China National Aero-Technology Corporation Shenzhen Shenzhen CATIC Group: Shenzhen CATIC Group Co., Ltd. Harmony: Shenzhen Harmony World Watches Center Co., Ltd. Rainbow Supermarket: Shenzhen Rainbow Supermarket Co., Ltd. CATIC Property: Shenzhen CATIC Property Management Co., Ltd. CATIC Real Estate: Shenzhen CATIC Real Estate Development Co. Important I. The Board of Directors, the Supervisory Committee, directors, supervisors and senior executives of the Company hereby confirm that there are no important omissions, fictitious statements or serious misleading information carried in this report, and shall take all responsibilities, individually and/or jointly, for the authenticity, accuracy and completion of the whole contents. II. No director, director or any senior executive has expressed that he/she is not sure for the genuineness, accuracy or completeness of this annual report or has any different opinion on the same. III. RSM China CPAs issued a standard unqualified auditors’ report for the Company. IV. Mr. Wu Guangquan, the Chairman of the Board, Mr. Xu Dongsheng, the Managing Director, Mr. Li Dehua, Deputy General Manager and Chief Financial Officer and Mr. Hu Xinglong, Manager of the Financial Department, hereby ensure the accuracy and completeness of the financial report enclosed in this quarterly report. Contents Chapter 1 Company Profile Chapter 2 Financial and Business Highlights Chapter 3 Chang in Capital Stock and Shareholders Chapter 4 Directors, Supervisors, Senior Executives and Staff Chapter 5 Corporate Governance Structure Chapter 6 Shareholders’ General Meeting Chapter 7 Report of the Board of Directors Chapter 8 Report of the Supervisory Committee Chapter 9 Significant Events Section 10 Financial Report Chapter 11 Documents Available for Inspection Chapter 1 Company Information I. Legal Name in Chinese and English and Short Form: Company Name in Chinese: 深圳市飞亚达（集团）股份有限公司 Short Form in Chinese: 飞亚达公司 In English: SHENZHEN FIYTA HOLDINGS LTD Short Form in English: FIYTA II. Legal Representative: Mr. Wu Guangquan III. Secretary of the Board: Mr. Hao Huiwen Securities Affairs Representative: Miss Li Wenjing Liaison Address: 20th Floor, FIYTA Technology Building, Gaoxin S. Road One, Nanshan District, Shenzhen Tel : 0755－86013992 86013669 Fax: 0755 - 83348369 E-mail: investor@fiyta.com.cn IV. Registered Office Address: FIYTA Technology Building, Gaoxin S. Road One, Nanshan District, Shenzhen Office Address: 20th Floor, FIYTA Technology Building, Gaoxin S. Road One, Nanshan District, Shenzhen Post Code: 518057 Internet Website: http:// www.fiytagroup.com V. Newspapers Designated for Disclosing the Information: Securities Times, Hong Kong Commercial Daily Internet Website for publishing this annual report: http://www.cninfo.com.cn Place Where the Annual Report is Prepared and Placed: Secretariat of the Company VI. Stock Exchange Listed with: Shenzhen Stock Exchange Short Form & Code of the Stock: FIYTA A 0026 FIYTA B 200026 1 VII. Other Relevant Information 1． Date of first registration: March 30, 1990 Date of change in registration: January 30, 1997 Registration with: Shenzhen Municipal Administration for Industry and Commerce. 2． Business License No.: 440301103196089 3． Taxation Registration No.: 440301192189783 4． Company Organization Code: 19218978-3 5． Certified public accountant engaged Types Name Office Address 8 – 9th Floors, Block A, th Stock A International Enterprise and RSM China CPAs Building, No. 35 Jinrong Stock B Avenue, Xicheng District, Beijing 2 Chapter 2 Financial and Business Highlights I. Financial Highlights of the Year 2008 Items Amount In RMB Total profit 74,224,555.07 Net profit 64,522,473.14 Net profit after deduction of non- recurring 62,053,467.83 loss/gain* Operating profit 69,510,984.71 Investment income 102,851.35 Subsidy income 1,245,316.00 Net amount of non-operating income and 4,713,570.36 expenses Net cash flows arising from operating activities -77,725,105.19 Net increase/ decrease of cash and cash 24,190,273.99 equivalents * Deduction of non-recurring gain/loss items and amount involved Non-recurring gain and loss items Amount Gain/loss from disposal of non-current assets -17,788.13 Governmental subsidy charged to the current gain and loss which has close relation with the Company’s normal businesses excluding the governmental 1,245,316.00 subsidy in compliance with the national policy and allotted according to some standard or sustainedly enjoyable in fixed amount. Gains and losses from debts reorganization 2,000,000.00 The operating income and expenses other than the 1,486,042.49 aforesaid items Other gains/losses in compliance with the definition of -1,735,756.48 non-recurring gain/loss Amount affected by the income tax -508,808.57 Total 2,469,005.31 II. Financial Highlights Over the Past Three Years Ended the Report Period 1. Accounting Data Summary In RMB Year-on-year 2008 2007 increase/ 2006 decrease (%) Operation income 1,086,405,568.28 805,273,114.09 34.91% 491,825,821.81 Total profit 74,224,555.07 71,491,255.72 3.82% 34,846,010.21 Net profit attributable to the 64,522,473.14 60,876,912.74 5.99% 30,509,476.39 shareholders Net profit 62,053,467.83 58,923,180.78 5.31% 29,246,481.71 3 attributable to the shareholders less the nonrecurring gain or loss Net cash flows arising from -77,725,105.19 -57,409,010.78 -86,042,293.92 operating activities Year end-on-year End of 2008 End of 2007 end increase/ End of 2006 decrease (%) 1,045,497,639. Total assets 1,441,187,545.35 37.85% 775,314,838.38 53 Owners’/shareholde 670,923,545.85 642,124,427.84 4.48% 571,836,384.02 rs’ equity Capital Stock 249,317,999.00 249,317,999.00 249,317,999.00 2. Financial Data Summary In RMB Year-on-year 2008 2007 increase/ 2006 decrease (%) Basic earnings per share (RMB/share) 0.259 0.244 6.15% 0.122 Earnings per share 0.259 0.244 6.15% 0.122 (diluted) (RMB/share) Basic earnings per share after deduction of the 0.249 0.236 5.51% 0.117 non-recurring gain/loss (RMB/share) Assets-income ratio, fully 9.62% 9.48% 0.14% 5.34% diluted (%) Net assets-income ratio 9.85% 10.03% -0.18% 5.57% (%), weighted average Net assets-income ratio after taking off 9.25% 9.18% 0.07% 5.11% nonrecurring gains and loss (%), diluted Net assets-income ratio after taking off 9.48% 9.71% -0.23% 5.34% nonrecurring gains and loss (%), weighted Net cash flows per share arising from operating -0.31 -0.23 -0.35 activities, in RMB/share Year end-on-year end End of 2008 End of 2007 End of 2006 increase/ decrease (%) Net assets per share attributable to the 2.691 2.576 4.46% 2.294 Company’s shareholders (RMB/share) 4 III. Net assets-income ratio and earnings per share calculated in accordance with the Rules for Public Companies to Disclose Information and Prepare Statements (No. 9) promulgated by China Securities Regulatory Commission Earnings per share Profit of the Net assets-income ratio (%) (RMB/share) Items report period Weighted Weighted (RMB) Fully diluted Fully diluted average average Net profit attributable to the Company’s 64,522,473.14 9.62% 9.85% 0.259 0.259 shareholders of common shares Net profit attributable to the Company’s shareholders of 62,053,467.83 9.25% 9.48% 0.249 0.249 common shares less non-recurring gains and loss Chapter 3 Share Capital and Shareholders I. Change in Shares 1. Changes in the Company’s share capital ended December 31, 2008 are as follows: In shares Before the change Increase/ Decrease (+ / -) as of the year After the change Newly Shares issued Bonus convert Sub-t Proportio Q’ty Proportion Others Q’ty shares shares ed from otal n reserve I. Shares with 111,451,02 111,451,02 44.70% 44.70% sales restriction 5 5 1. Shares held by the state 2. State owned 111,415,50 111,415,50 44.69% 44.69% corporate shares 1 1 3. Other domestic shares including: 5 domestic non-state corporate shares Domestic natural person shares 4. Shares held by foreign investors including: foreign corporate shares Foreign natural person shares 5. Shares held by senior 35,524 0.01% 35,524 0.01% executives II. Shares 137,866,97 137,866,97 without sales 55.30% 55.30% 4 4 restriction 1. RMB ordinary 79,546,974 31.91% 79,546,974 31.91% shares 2. Foreign shares listed 58,320,000 23.39% 58,320,000 23.39% domestically 3. Foreign shares listed abroad 4. Others 249,317,99 249,317,99 III. Total Shares 100.00% 100.00% 9 9 Statement of Change in Shares with Sales Restriction Number of Number of Number of shares with Number of shares with shares with the sales shares with Causes of Names of sale Date of relieving the restriction restriction sales sales Shareholders restriction at sales restriction relieved in the increased in restriction at restriction year report year the report year end beginning year Equity November 9, 2010, Shenzhen 111,415,501 0 0 111,415,501 separation November 9, 2011, CATIC Group reform November 9, 2012 Shares with sales restriction Lu Bingqiang 35,524 0 0 35,524 held by － senior executives Total 111,451,025 0 0 － － 111,451,025 6 2. Issuing and Listing (1) Within three years prior to the end of the report period, the Company had not issued any shares or derivatives. (2) In the report period, the Company never conducted such activities as distributing bonus shares, converting public reserve into share capital, share allotment, new issuing, stock absorption and combination, converting convertible bonds into shares, capital reduction, issuing or listing employee shares or shares of the Company’s employees or any other activity which caused change in total shares and the structure. (3) At present, there are no employees’ shares in the Company. II. Shareholders 1. Ended December 31, 2008, there were totally 27,868 shareholders in the Company: including 17,979 shareholders of A shares (including one senior executive); 9,889 shareholders of B shares. 2. Shares held by the top ten shareholders Total Number of 27,868 Shareholders Shares held by the top ten shareholders Number of Proportion Total Nature of shares held Shares pledged Names of Shareholders of shares shares Shareholders with sales or frozen held held restriction Shenzhen CATIC Group State owned 44.69% 111415501 111,415,501 0 corporate Industrial and Commercial Domestic Bank of China – E Fund non-state 1.57% 3901957 0 0 Value Based Growth Mixed corporate Securities Investment Fund LEHMAN BROTHERS Domestic INTERNATIONAL non-state 1.01% 2511883 0 0 (EUROPE) corporate Construction Bank of China – Domestic Haifutong Style Superior Stock Type Securities Investment non-state 0.88% 2200932 0 0 Fund corporate Foreign UBS AG 0.85% 2108280 0 0 corporate Bank of China – Huabao Xingye Power Portofolio Domestic Stock Type Securities non-state 0.82% 2049594 0 0 Investment Fund corporate Agriculture Bank of China - Bank of Communications Domestic Schroder Growth Stock non-state 0.57% 1412384 0 0 Selected Stock Securities corporate Investment Fund GUOTAI JUNAN Foreign SECURITIES(HONGKONG 0.51% 1277102 0 0 corporate ) LIMITED HANG SENG CONSUMER Foreign SECTOR FLEXIPOWER 0.48% 1185100 0 0 corporate FUND 7 SBCI FINANCE ASIA LTD Foreign 0.37% 926580 0 0 A/C SBC HONG KONG corporate Shares held by the top ten shareholders without sales restriction Number of shares held Names of Shareholders Share Type without sales restriction Industrial and Commercial Bank of China – E Fund Value Based Growth Mixed 3901957 RMB ordinary shares (A shares) Securities Investment Fund LEHMAN BROTHERS INTERNATIONAL 2511883 RMB ordinary shares (A shares) (EUROPE) Construction Bank of China – Haifutong Style 2200932 RMB ordinary shares (A shares) Superior Stock Type Securities Investment Fund UBS AG 2108280 RMB ordinary shares (A shares) Bank of China – Huabao Xingye Power Portofolio Stock Type Securities 2049594 RMB ordinary shares (A shares) Investment Fund Agriculture Bank of China - Bank of Communications Schroder Growth 1412384 RMB ordinary shares (A shares) Stock Selected Stock Securities Investment Fund GUOTAI JUNAN Foreign shares listed 1277102 SECURITIES(HONGKONG) LIMITED domestically (B shares) HANG SENG CONSUMER SECTOR Foreign shares listed 1185100 FLEXIPOWER FUND domestically (B shares) SBCI FINANCE ASIA LTD A/C SBC HONG Foreign shares listed 926580 KONG domestically (B shares) Foreign shares listed Zhang Xiaozhai 884300 domestically (B shares) The Company has not found any connectivity relations among the Relationship/concerted aforesaid shareholders of negotiable shares and between the top ten action among the above shareholders of negotiable shares and the top ten shareholders. shareholders 3. About the Controlling Shareholder Shenzhen CATIC Group was founded in June, 1997, with total capital stock of RMB 678.90909 million, its legal representative is Wu Guangquan. Shenzhen CATIC Group is a diversified holding company, engaged in the business of LCD, PCB, medium and high grade watches, etc. through its subsidiaries. The Group was listed with Hong Kong Stock Exchange in September 1997 with the original total capital stock of 636,000,000 shares, including 400,000,000 non-listed domestic corporate shares and 236,000,000 foreign capital based shares listed outside Mainland China. . In December 2007, approved by China Securities Regulatory Commission (CSRC), Shenzhen CATIC Group additionally issued 47,199,999 foreign invested shares listed outside Mainland China in Hong Kong stock market (including 4,290,909 state-owned shares reduced by stock issuance). Upon the additional issuing, the applicant’s total capital stock increased to 678,909,090 shares, including 395,709,091 non-listed domestic corporate shares and 283,199,999 foreign invested shares listed outside Mainland China. 4. Eventual Controller China National Aero-Technology Import & Export Corporation Shenzhen, legal representative: Wu Guangquan; date of incorporation: December 1, 1982; registered capital: RMB 1000 million; principal business: import and export of commodities and technologies other than those exported exclusively by the central government or under the control by the central government, compensation trade as importer/exporter as well as agent; invest to set up economic entities; domestic commerce and supply and sale of goods and materials (excluding the commodities monopolized for operation, under control of and for exclusive sale by the central government); 8 sales of home-made automobiles (with cars exclusive); development of real estate. Controller of the eventual controller: CATIC International Holdings Limited was incorporated in 1983 with registered capital of RMB 5000 million, legal representative: Fu Shula, licenced businesses: supply of labor services to the engineering projects carried out abroad; sales of methylbenzene, acetone, methyl ethyl ketone, piperidine, ether, potassium permanganate, chloroform, sulfuric acid, hydrochloric acid, acetic anhydride, combustible liquid, combustible solid, articles inflammable naturally and with moisture, oxidizer and organic peroxide, toxic and corrosive goods; insurance for motor vehicles, assets of enterprises, household property and cargo freight. General business scope: import and export; warehousing; industrial, hotel, property and real estate development investment and management; development, sales and maintenance services of new energy equipment; exhibition; technology licencing and technical services in connection with the aforesaid services. The eventual controller of CATIC Shenzhen Corporation, the Company’s eventual controller is State-owned Assets Supervision and Administration Commission of the State Council. 5. Block Diagram of the Ownership and Control Relationship between the Company and eventual controller State-owned Assets Supervision and Administration Commission of the State Council 100% Aviation Industry Corporation of China 100% CATIC International Holdings Limited 100% CATIC Shenzhen Corporation 58.60% Shenzhen CATIC Group Co., Ltd. 44.69% SHENZHEN FIYTA HOLDINGS LTD. 9 Chapter 4 Directors, Supervisors, Senior Executives and Staff I. Directors, Supervisors and Senior Executives 1. Directors, Supervisors and Senior Executives Does Total he/she emolum receive ent any pay Number received or of Number from the allowan Starting Expiry date shares of Compan Gen Reason of ce from Name Post Age date of of office held at shares y in the der Change: the office term term year held at report shareh beginnin year end period olders g (RMB10 or any ,000), other before related the tax parties? Wu Chairman May 30, May 30, Guang of the male 46 0 0 - — Yes 2006 2009 quan Board Lai May 30, May 30, Weixua Director male 44 0 0 - — Yes 2006 2009 n Sui May 30, May 30, Director male 50 0 0 - — Yes Yong 2006 2009 Xu Managing May 30, May 30, Dongsh male 42 0 0 - 120 No Director 2006 2009 eng Wang May 30, May 30, Baoyin Director male 44 0 0 - — Yes 2006 2009 g Chen Dec. 16, May 30, Honglia Director male 40 0 0 - — Yes 2007 2009 ng Hua Independ May 30, May 30, Xiaonin ent male 45 0 0 - 9.00 Yes 2006 2009 g director Independ Guo May 30, May 30, ent male 43 0 0 - 9.00 No Wanda 2006 2009 director Independ Ji fem Sep 1, May 30, ent 67 0 0 - 9.00 No Qinzhi ale 2006 2009 director Chairman of Huang Superviso May 30, May 30, male 52 0 0 - — Yes Gaojian ry 2006 2009 Committe e Zhang Superviso male 55 May 30, May 30, 0 0 - 35.89 No 10 Songhu r 2006 2009 a Tang Superviso May 30, May 30, male 47 0 0 - 22.71 No Boxue r 2006 2009 Lu Deputy June 8, May 30, Bingqia General male 47 47,365 47,365 - 78.29 No 2006 2009 ng Manager Deputy General Li Manager, June 8, May 30, male 48 0 0 - 81.51 No Dehua Chief 2006 2009 Accounta nt Deputy June 8, May 30, Li Bei General male 53 0 0 - 82.69 No 2006 2009 Manager Deputy Fang fem June 8, May 30, General 49 0 0 - 90.35 No Juan ale 2006 2009 Manager Deputy General Manager Hao June 8, May 30, and male 40 0 0 - 76.27 No Huiwen 2006 2009 Secretary of the Board Total - - - - - - 614.71 - 2. Engagement of Directors and Supervisors in the Shareholders Titles engaged in the Name Shareholders Office term shareholders Wu Shenzhen CATIC Group Co., June 2006 - June Guangqua Chairman of the Board Ltd. 2009 n Lai Shenzhen CATIC Group Co., June 2006 - June Vice-Chairman Weixuan Ltd. 2009 Shenzhen CATIC Group Co., June 2006 - June Sui Yong Director Ltd. 2009 Xu Shenzhen CATIC Group Co., June 2006 - June Dongshen Director Ltd. 2009 g Wang Shenzhen CATIC Group Co., June 2006 - June Director Baoying Ltd. 2009 Huang Shenzhen CATIC Group Co., Chairman of Supervisory June 2006 - June Gaojian Ltd. Committee 2009 3. Curriculum Vitae of Directors, Supervisors and Senior Executives and the Offices Taken or Part Time Jobs Engaged by them in other Organizations except Shareholders (1) Directors Mr. Wu Guangquan, 45, senior accountant and MBA of Tongji University. Mr. Wu is the Chairman of the Board of the Company and the president of CATIC Shenzhen Corporation. He used to be vice chief accountant & financial manager of CATIC Shenzhen Corporation and chairman of the board of Jiangxi Jiangnan Trust & Investment Co., Ltd. Mr. Lai Weixuan, 44, senior accountant, EMBA of Beijing University. Mr. Lai is now Vice Chairman 11 of the Board of the Company, vice president and the Secretary of the CPC Committee of CATIC Shenzhen Corporation and the managing director of Shenzhen Rainbow Supermarket Co., Ltd. He used to be assistant to the general manager of CATIC Commercial & Trading Co. and deputy general manager of Shenzhen Rainbow Supermarket Co., Ltd. Mr. Sui Yong, 50, senior accountant. Mr. Sui graduated from Beihang University. He is a director of the Company and vice president and chief accountant of CATIC Shenzhen Corporation. He used to be deputy section-chief of Financial Section of Shenyang Liming Engine Company, deputy section-chief of Financial Section of CATIC, assistant general manager of CATIC Property Beihai CATIC Associated Development Co., manager and vice chief accountant of Financial Dept. of CATIC Shenzhen Corporation. Mr. Xu Dongsheng, 42, senior economist, graduated from MBA of Tongji University., on-campus doctor of Beijing University of Aeronautics & Astronautics. He is now the general manager of the Company, vice president of China Timepieces Association and president of Shenzhen Timepieces Association. He used to be the secretary of the Youth League Committee of CATIC Shenzhen Corporation, general manager of the life service company of CATIC Shenzhen Corporation, vice secretary of the discipline committee of CATIC Shenzhen Corporation and assistant president of CATIC Shenzhen Corporation. Mr. Wang Baoying, 44, senior engineer, undergraduate of Beijing University of Aeronautics & Astronautics, MBA of SCUPS. He is now a director of the Company, assistant to the president of CATIC Shenzhen Corporation and managing director of CATIC Shenzhen Resources Co., Ltd. He used to be a technician, deputy chief of the labor and capital devision, chief of comprehensive division and chief of the investment management division of Tianjin State-run No. 105 Factory, assistant to the general manager and deputy general manager of Shenzhen Rainbow Supermarket Co., Ltd. and deputy general manager of Shenzhen Nanguang (Group) Co., Ltd. and manager of the Strategic and Management Department of CATIC Shenzhen Corporation. Mr. Chen Hongliang, 40, first class senior economist, graduated from MBA of Tongji University, he is now vice president of CATIC Shenzhen Corporation.He used to be the secretary, deputy directory secreaty and directory secretary of the manager department of CATIC Shenzhen Corporation; the secretary and authorized representative of CATIC Shenzhen Holdings Ltd.; deputy manager and manager of the human resource department of CATIC Shenzhen Corporation; manager and assistant to the general manager of human resource of China National Aero-Technology Import & Export Corporation (CATIC). Mr. Hua Xiaoning, 45, Chinese certified public accountant, holding master’s degree of Hangzhou Dianzi University. He is now an independent director of the Company, president of Shenzhen Youlian Shijun Business Administration Consulting Co., Ltd.; he used to be independent director of Hangzhou Steam Turbine Co., Ltd. and Shenzhen Tianma Microelectronics Co., Ltd. He used to be an officer at Ernst & Young and Arthur Anderson. Mr. Guo Wanda, 43, research fellow, Dr. of economics of Nankai University. He is now an independent director of the Company and vice president of China Development Institute (Shenzhen, China). He used to be research fellow of Eonomics Research Institute of Nankai University, director of the Macro Economy Office of the Eonomy Prediction Department of Shenzhen Information Center, investment manager, secretary of the board of directors and assistant general manager of Shenzhen Guangshun Co., Ltd., and the chairman of the board and general manager of Guangshun Investment Hubei Shashi Company. Madam Ji Qinzhi, 67, senior engineer, bachelor of timepieces of Tianjin University. She is now independent director of the Company, vice president of the 6th Council of China Timepieces Association, Chairman of All-China Timepieces Standardization Technology Committee and Vice President of China Timepieces History Society. She used to be a technician of the Timepieces Science Research Institute of the Ministry of Light Industry, a technician, vice chief and chief of the Timepieces Division of the First Light Industry Bureau of the Ministry of Light Industry, the 12 president of the 4th Council of China Timepieces Association, the president and secretary general of the 5th Council of China Timepieces Association, representative of the 8th People’s Congress of Beijing. (2) Supervisors Mr. Huang Gaojian, 52, senior political work engineer, holding bachelor’s degree of Huazhong Normal University. He now is Chairman of the Supervisory Committee of the Company, vice president and chairman of the trade union of CATIC SHENZHEN HOLDINGS LTD. He used to be a teacher of Yanglin Middle School, Songzi, Hubei, vice president of the Higher Education Research Institute of Huazhong Normal University, director of the Party and Mass Work Department of CATIC Shenzhen Corporation and the editor in chief of CATIC Shenzhen, the Secretary of the CPC Committee and deputy general manager of Jiangxi Jiangnan Trust & Investment Co., Ltd. and assistant president of CATIC Shenzhen Holdings Ltd. Mr. Zhang Songhua, 55, senior engineer, undergraduate degree. Mr. Zhang is now a supervisory of the Company and deputy general manager of Shenzhen FIYTA Sophisticated Manufacture Co., Ltd. Mr. Zhang used to be technician of Inspection Section, director, deputy chief and chief of Technology Office of Hongtu Aircraft Factory of China Aviation Industry Corporation , department manager of Shenzhen Flydart Watch Industry Co., Ltd. and manager of Operation Dept. of Shenzhen Fei’ou Precision Timepiece Manufacture Co., Ltd., the general manager of Shenzhen Feitu New Technology Development Co. Mr. Tang Boxue, 47, holding bachelor’s degree and accountant. He is a supervisor and the person in charge of internal auditing of the Company. He used to be the project manager of the financial department and general manager of Shenzhen Pengmen Restaurant Co., Ltd. (3) Senior Executives Mr. Xu Dongsheng is now the general manager of the Company. Refer to the curriculum vitae of directors. Mr. Lu Bingqiang, 47, senior economist, graduated from Guangzhou Jinan University. Mr. Lu is deputy general manager of the Company. He used to be the president secretary of CATIC Shenzhen Corporation, assistant to the General Manager of the Company, director of the Company, and general manager and chairman of the board of Shenzhen Harmony World Watches Center. Mr. Li Dehua, 48, senior accountant, graduated from Beijing University of Aeronautics & Astronautics. He is deputy general manager & chief accountant of the Company. He used to be cost accountant of Shenyang Liming Engine Manufacture Co., Ltd., financial supervisor of Shenzhen Baohang Aluminum Co., Ltd., accounting supervisor of CATIC Shenzhen Corporation, manager of the financial department and chief financial officer of the Company. Mr. Li Bei, 53, senior engineer at research fellow level, graduated from Shenyang Liming Polytechnical College. He is deputy general manager of the Company. He used to be department manager of Shenzhen Feida Watch Co., Ltd. and Shenzhen Feibiao Watch Appearance Pieces Co., Ltd. Madam Fang Juan, 49, administrator, graduated from the English Department of Jiangxi Normal University. He is studying for EMBA at China Europe International Business School. She now is deputy general manager of the Company and managing director of Harmony World Watches Center. She used to be a translator of Jiangxi Ceramics Co., director of the scientific information office of Jingdezhen City, Jiangxi Province, manager of the human resource department and assistant to the general manager of the Company. Mr. Hao Huiwen, 40, senior economist, master’s degree of economics of Beijing Institute of Economics. He is studying for EMBA at China Europe International Business School. He is a deputy general manager, the secretary of the Board and the manager of the human resource 13 department of the Company. He used to be a teacher of market science department of Shanxi University of Finance and Economy, assistant manager of Personnel Dept. and secretary of the general manager of Shenzhen Hongchang Industrial Co., Ltd., director of Human Resource Dept. of CATIC Shenzhen Corporation, and manager and assistant of the general manager of the administrative management department of the Company. 4. Annual Emolument to Directors, Supervisors and Senior Executives (1) The annual emolument to senior executives of the Company was distributed by the Board of Directors according to the posts and the work performances; allowance to the independent directors was reviewed and approved by the Shareholders’ General Meeting. (2) In the report period, the total annual compensation to the above listed directors, supervisors and senior executives is RMB 6.1471 million. (3) The allowance provided to the 3 independent directors in current office is RMB 90,000 per person per year. There is no other emolument to them. (4) Mr. Wu Guangquan, Chairman of the Board, Mr. Sui Yong and Mr. Chen Hongliang, two directors and Mr. Huang Gaojian, Chairman of the Supervisory Committee all received their pays from the Company’s shareholder; Mr. Lai Weixuan, vice Chairman of the Board, received his pay from Shenzhen Rainbow Co., Ltd., Mr. Wang Baoying, a director, received his pay from CATIC Shenzhen Resource Co., Ltd. instead of the Company and received neither remuneration nor allowance from the Company. 5. Personnel change of directors, supervisors and senior executives in the report period II. Employees Ended the report period, there were altogether 2,241 employees in the Company. The composition of their education background, age structure and job structure are indicated as follows: 1. Age Structure Age Composition Below 30 30 - 40 over 40 Total Number of 1576 506 159 2,241 persons Proportion 70.3 22.6 7.1 100.00 2. Education Background Master’s Education University Junior college Below junior degree or Total background graduation graduation college higher Quantity 25 268 666 1,282 2,241 Proportion % 1.12 11.96 29.72 57.21 100.00 3. Job Structure Job Management Operation Finance Productinon Total composition Quantity 249 1,775 91 126 2,241 14 Proportion % 10.84 79.57 3.33 6.25 100.00 Chapter 5 Corporate Governance Structure I. About the Corporate Governance in the Report Period (I) Discrepancy between the Situation of the Company’s Corporate Governance and the Regulatory Documents and Description of the Situation In the year 2008, the Company continuously improved the Company’s corporate governance structure strictly according to the Company Law, the Securities Law and the regulations of China Securities Regulatory Commission concerning governance of listed companies, and tried to enhance construction of modern enterprise system, upgraded the level of regulatory operation of the Company. As a result, there was no discrepancy between the situation of the Company’s corporate governance and the regulatory documents of China Securities Regulatory Commission concerning governance of listed companies. (II) Campaign of Corporate Governance in 2007 The Company conducted a campaign of corporate governance from April to October 2007 according to the Circular of CSRC on Enhancing Campaign of Corporate Governance of Listed Companies (ZHENG JIAN GONG SI ZI [2007] No. 28). After site inspection, Shenzhen Securities Regulatory Bureau issued the Rectification and Improvement Report on the Campaign of Corporate Governance of Listed Companies, the Company positively implemented the measures for rectification and improvement. By the end of 2007, the issues proposed in the rectification and improvement report had been settled. (III) Campaign of Corporate Governance in 2008 As the campaign of the corporate governance of listed companies in 2008 was deepened, the Company conducted overall inspection over the key issues concerning occupancy of th Company’s funds by its principal shareholder and its subsidiaries, information disclosure management, submission of non-open information, etc, according to the Circular of China Securities Regulatory Commission ([2007] No. 27); meanwhile, the Company concluded summary of the rectification and improvement in the campaign of corporate governance in 2007 and issued the Report on Rectification and Improvement in the Campaign of Corporate Governance on July 15, 2008; Being directed against the issue of occupancy of the Company’s funds by the controlling shareholder and the related parties, the Company conducted the self-inspection activities, and issued the Self-inspection Report on Occupancy of the Company’s Funds by the Controlling Shareholder and the Related Parties, and at the same time worked out the Regulations on Prevention of the Principal Shareholders and its Related Parties from Occupancy of Funds; in consideration of the management of the information disclosure, the Company revised the Information Disclosure Management System and the Related Transactions Management System on November 27, 2008 which have further regulated the information disclosure and related transactions of the Company. Ended the report period, the issues involved in the Company’s rectification and improvement report on the campaign of corporate governance have been rectified and all the rectification and improvement measures have been implemented and the corporate governance level has been further upgraded. II. Incompliance Practice in the Corporate Governance in the Report Period Against the Circular on Reinforcing Supervision over the Action of Disclosing Non-open Information to Principal Shareholders and Eventual controller and the Supplementary Circular on Reinforcing Supervision over Non-Standard Actions, such as Provision of Non-open Information to Principal Shareholders, Eventual controllers in Listed Companies promulgated by Shenzhen Securities Regulatory Bureau, the Company was involved in such incompliance practice as 15 submission of such information as non-open information, regular submission of yearly plan budget, statements, etc. to its principal shareholder and eventual controller in the report period. The Company had already submitted the name list of the persons in the know to Shenzhen Securities Regulatory Bureau and the Stock Exchange before October 31, 2007, and meanwhile, issued a written letter of undertaking for submission of the incompliance information in corporate governance and the name list of the persons involved in submission of non-open information and obtained commitment from the principal shareholder and eventual controller for reinforcing control over the non-open information. In addition, the Company regularly submitted the Form of Report for Record on Listed Companies to Provide Non-open Information to Principal Shareholders and Eventual Controllers to Shenzhen Securities Regulatory Bureau before the 10th day of every month. In the report period, the Company had not been involved in such practice as accepting internal audit or specialized inspection of the operation and financial management from the parent company, accepting engagement and disengagement of the Company’s senior executives and middle level executives or audit over the detailed projects of the Company and its subsidiaries, review and approval of the Company’s asset acquisition or external investment projects, or such incompliance practice in administration as practicing ownership representative reporting system, etc. from the principal shareholder or eventual controller. III. Performances of Independent Directors In the report period, Mr. Hua Xiaoning, Mr. Guo Wanda and Madam Ji Qinzhi, the Company’s three independent directors, fully exercised the power as endowed with in the Articles of Association, played their strong points into full play, made independent, objective and fair judgment on exchange of senior executives and related transactions strictly according to relavent regulations, pushed ahead scientificity in decision making and decision making procedures of the Board of Directors and protected practically the interests of the Company and shareholders. 1. Independent Directors’ Attendance of Board Meetings and Special Committees Number of board meetings Nomination, Number of they Number of Number Emolument attendances Strategic Audit Name should personal of and by Committee Committee attend in attendances absences Assessment representative the Committee report year Hua 12 12 0 0 0 5 1 Xiaoning Guo 12 12 0 0 2 5 1 Wanda Ji Qinzhi 12 12 0 0 0 5 1 2. Independent Role of Independent Directors in the Annual Report According to the requirements specified in the Circular on Doing a Good Job for 2007 Annual Report and the Relevant Work promulgated by China Securities Regulatory Commission, the independent directors implemented the responsibilities and obligations of independent directors in a practical way during the audit and preparation of 2007 Annual Report. On January 17, 2008, the independent directors heard the report of the senior executives on the Company’s operation in 2007 and the budget and operation plan in 2008 and discussed the relevant issues. On January 18, 2008, independent directors came to the Company for site survey which involved the following work: the financial statements and various financial indexes in 2007, inspected the internal control environment and establishment and improvement of the internal control system in the Company, 16 and heard the annual work summary of the subsidiaries and various departments of the head office with the aid of Balance Scorecard. After the accountants engaged in the audit of the annual report issued a preliminary auditor’s opinion, the independent directors had an interview with the certified public accountants. At the meeting, they mainly discussed the audit work of the accounting statements in 2007 and the issues found in process of audit, conducted inquiry about the changes of the relevant financial indexes and the causes and reviewed the financial report for which the certified public accountants had issued preliminary auditor’s opinion. According to the Announcement of China Securities Regulatory Commission on doing a good job in preparation, audit and disclosure of 2008 Annual Report (Announcement of CSRC [2008] No. 48), the independent directors continued to implement their duties on due diligence basis. On January 15, 2009, the independent directors came to the Company for site survey, and at the same time heard the senior executives’ report on the Company’s operation in 2008 and the budget and operation plan in 2009, inspected the financial statements in 2008 and fulfillment of various financial indexes, checked the establishment and improvement of the Company’s internal control environment and internal control system. With aid of the balance scorecard, they heard the annual work summary of the subsidiaries and various departments of the head office and had discussion about the relevant issues. After the accountants engaged in the audit of the annual report issued a preliminary auditor’s opinion, the independent directors had an interview with the certified public accountants, collected detailed information about the audit work of the annual report and conducted inquiry about the changes of the relevant financial indexes and the causes and reviewed the financial report for which the certified public accountants had issued preliminary auditor’s opinion. At the same time, the independent directors checked the procedures of the meeting for reviewing annual report and various proposals necessary to be discussed at the meeting and approved the board meeting to be held in time. 3. Independent Directors’ Objectino against Some Issues of the Company In the report period, the Company’s independent directors proposed no objection against various proposals to the board meetings and other issues of the Company. IV. The Company has been practicing the “five separations” between the Company and its Control Shareholder in terms of business, personnel, assets, organization and finance The Company is highly independent in personnel, assets, finance, organization and business from its control shareholder. The Company has complete and independent business and the ability of autonomous operation. Business. The Company is mainly engaged in timepiece businesses and has independent production, auxiliary production system and complementary facilities, and possesses its own procurement and sales systems. There exists no competition in the same sector between the Company and its controlling shareholder. Personnel: The Company is completely independent organizations and sound systems in labor, personnel and salaries management. Except Mr. Wu Guangquan, Chairman of the Board, Mr. Lai Weixuan, vice Chairman of the Board, Mr. Sui Yong, Mr. Wang Baoying and Mr. Chen Hongliang, three directors, and Mr. Huang Gaojian, Chairman of the Supervisory Committee, who take offices in the controlling shareholder concurrently, no other senior executives hold any other offices in shareholders or financial staff take concurrent job in the related companies. Assets: The assets of the Company and its controlling shareholder are highly distinct. The Company enjoys the corporate ownership over its assets and the assets are completely independent from its controlling shareholder. In addition, the Company enjoys sole ownership of the Trademark FIYTA. Organization: The Company has established its own intra-company organizations independent from the controlling shareholder. The Board, the Supervisory Committee and the other internal departments and offices work independently. There exist neither subordinate relations between 17 the controlling shareholder/its functional departments nor doing joint office work. The controlling shareholder exercises its rights and assumes its corresponding obligations, and has never performed any direct or indirect interference with the Company’s operation activities. Finance: The Company has established independent financial department, accounting system and financial management system and independently opened bank accounts. The controlling shareholder has never interfered the Company in its financial and accounting activities. V. Self-assessment of the Company’s Internal Control In the report period, the Company continued improvement of the corporate governance structure and standardized the corporate governance activities in accordance with the Company Law, the Securities Law, the Norms for Governance of Listed Companies, the Directions on Internal Control of Listed Companies, etc., prepared the System for Prevention of Principal Shareholders and other Related Parties from Occupancy of Funds, revised the Articles of Association, the System for Designated Deposit and Management of the Proceeds Raised through Share Issuing, the System for Control of Information Disclosure, and the System for Control of Related Transactions, etc., improved the corporate governance and standardized operation level, ensured effective implementation of the internal control management of the Company. The Company conducted self-assessment of various aspects of the internal control and issued the Report on Self-assessment of the Internal Control. (For the detail, refer to the Report of Self-assessment on Internal Control issued by the Company). VI. Assessment of and Incentive Mechanism for Senior Executives The Company prepared and adjusted the salary system based on the Company’s operation result with reference to the average salary level of the sector with the principal direction of being “market based”, “fullness based” and “broadband based”. Since 2007, the Company has introduced the balance scorecard strategic management instrument, established strategy based achievement management system, decentralize the Company’s strategy down to various departments and posts level by level by means of the balance scorecard; in this way, the achievement indexes and action plan of senior executives are determined and the strategic review and work report and assessment are held each quarter; the total emolument and office renewal are determined based on the assessment result and business achievement. Annual wages system is practiced for directors, supervisors and the Secretary of the Board and the annual wages structure consists of annual salary, operating result based annual salary and welfare. The annual wages assessment for the general manager is based on the way of assessment worked out by the shareholder unit; the principal assessment basis is a series of index system worked out with the balance scorecard where the operating result index of the surplus yield is used as the principal index. The assessment of other senior executives is all based on the indexes in the balance scorecard as prepared at the year beginning and work report and assessment are conducted at the year end. The Company is exploring to establish a long efficiency incentive mechanism such as equity incentive system, so as to combine the shareholders’ interests, the Company’s interests and the operators’ personal interests together. 18 Chapter 6 Shareholders’ General Meeting I. 2008 1st Extraordinary Shareholders’ Meeting 2008 1st Extraordinary Shareholders’ Meeting was held on February 20, 2008 at the 20th floor meeting room of FIYTA Technology Building. There were 11 shareholders and shareholders’ representatives present at the meeting, representing 111,772,035 shares, taking 44.83% of the Company’s total vote-bearing shares. The shareholders present at the meeting reviewed and approved by voting the Proposal for Change of the Certified Public Accountants and the Proposal on Revision of the Articles of Association. The aforesaid resolutions of the Shareholders’ Meeting were published on Securities Times and Hong Kong Commercial Daily respectively dated February 21, 2008. II. Annual Shareholders’ General Meeting. 2007 Annual Shareholders’ General Meeting was held on May 15, 2008 at the 20th floor meeting room of FIYTA Technology Building. There were 19 shareholders and shareholders’ representatives present at the meeting, representing 127,631,081 shares, taking 51.19% of the Company’s total vote-bearing shares. The shareholders present at the meeting examined and adopted the following proposals through voting: (1) 2007 Work Report of the Board of Directors; (2) 2007 Work Report of the Supervisory Committee; (3) 2007 Final Settlement Report; (4) 2007 Annual Profit Distribution Proposal; (5) 2007 Annual Report and the Summary; (6) Proposal on Payment of Auditing Fee for the Year 2007 and Renewing Engagement of the Company’s Auditor for the Year 2008; (7) Implementation of Regular Related Transactions in 2007 and Prediction of Regular Related Transactions in 2008; (8) Proposal for Adjustment of Allowance to Independent Directors; (9) Proposal on Application for Total Bank Credit Line in 2008; (10) Proposal on Adding the Registered Capital of Harmony. The aforesaid resolutions of the Shareholders’ General Meeting were published on Securities Times and Hong Kong Commercial Daily respectively dated May 16, 2008. (III) 2008 2nd Extraordinary Shareholders’ Meeting 2008 2nd Extraordinary Shareholders’ Meeting was held on July 25, 2008 at the 20th floor meeting room of FIYTA Technology Building. There were 57 shareholders and shareholders’ representatives present at the meeting, representing 123,311,012 shares, taking 49.46% of the Company’s total vote-bearing shares. The shareholders present at the meeting examined and adopted the following proposals through voting: (1) Proposal on the Company’s Compliance with the Conditions for Non-Public Issuing; (2) Proposal on the Plan of Non-Public Issuing in the Year 2008; (3) Proposal on the Report of the Utilization of the Proceeds Previously Raised by Issuing; (4) Proposal on the Feasibility Study on the Projects to be Invested with the Proceeds Raised through Non-public Issuing in the Year 2008; (5) Proposal for Requesting Shareholders’ General Meeting to Authorize the Board of Directors to Handle Relevant Matters in Connection with the Non-Public Issuing. The aforesaid resolutions of the Sharehodlers’ Meeting were published on Securities Times and Hong Kong Commercial Daily respectively dated July 26, 2008. 19 Chapter 7 Report of the Board of Directors I. Operation Review (I) General In the report year, the financial crisis swept across the whole world and the famous brand watch industry was greatly affected in the traditional markets in Europe, the United States and Japan and dropped off seriously. The domestic watch market was affected as well despite of lugging behind and could not keep itself prosperous alone; especially after the 3rd quarter, the consumption market was descending significantly. In the report period, there were some famous world watch retailers and manufacturers in Hong Kong that went bankrupt due to such impact. At present, the market is in indefinite status in general. Generally speaking, the situation of the famous brand watch sector is that the domestic market is better than Hong Kong market and Hong Kong market is better than European and American market. In face of the influence from the financial crisis, the Company led various work with the brand strategy, paid close attention to the situation of the market and came up against the crisis calmly, conducted positive response; while quickly and steadily developing the network, made timely strategy adjustment, enhanced the risk control and reinforced the organization ability and construction of marketing system and a good result was achieved. The Company continued expanding the famous brand watch retail network steadily and quickly; with the help of the moment of successful trip of “Shenzhou No. 7” Space Watch, the Company tried every means to upgrade the identity of FIYTA Brand, positively developed the overseas market and achieved a great success in sales. By enhancing the internal management and adjustment of operation thought, application of the advanced management tool and conception of balance scorecard, Six Sigma project, etc., continuously improved the management abiity, operation efficiency and earning power. In the report period, the Company continued its steady development in various businesses despite the unfavorable conditions of the financial crisis, kept quicker growth in the income of the principal business and the year-on-year growth of the net profit reached 6%. Viewing from various business sectors, the Company enjoyed growth of different levels in Harmony world famous watches, FIYTA watches and property; the famous watch business kept a good development trnd in sales in the whole year with deepened implementation of the measures of various operation work and the income and profit grew quickly; FIYTA watches kept a favorable posture by means of brand advertisement and promotion activities and launching of new products in great demand on the basis of keeping steady growth of the previous three quarters and continuously made sales record in October and December; the income from the property kept steady relatively. Retail of Famous Brand Watches In the report period, the income from retail of famous brand watches was RMB 808.2425 million, with year-on-year growth of 37.32%, including net profit realized by Harmony amounting to RMB 42.5222 million, with a year-on-year growth of 32.59%. Development of Channels: In the report period, in addition to steady operation, the Company quickly developed the network and newly opened totally 12 chain shops; at the end of the report period, the number of retailers of Harmony world watches chain shops reached 79 (excluding 30 Henglianda shops). The newly opened shops are: Taiyuan Guomao Zhibo Franchised Shops, Taiyuan Guomao Rolex Franchised Shop, Fuzhou Dayang No. 3 Shop, Fuzhou Dayang Omega Flagship Shop, Shenzhen Wanxiang Omega Franchised Shop, Shenzhen Duty-free Mall, Shenzhen Shenglana Shop, Guiyang Xingli Shop, Shenyang 1928 Shop, Shenzhen Yitian Holiday Rolex Franchised Shop, Shenzhen Yitian Holiday Omega Franchised Shop, which have effectively improved the Company’s strategic competitiveness; meanwhile, the Company adjusted and closed Changshu Henglong Shop with poor operation environment and operation result, closed three shops due to demolishment. They are namely Shennan Rainbow Shop, Shenzhen World Watch Central Shop and Nanning Wangfujing Shop. Meanwhile, the Company further enhanced optimization and upgrading of existing shops with retail network, maintained and developed brand resources, realized high quality operation. In the report year, th Company 20 improved 20 shops. Enhancement of International Cooperation and Brand Promotion: The Company continued to enhance and deepen communications and cooperation with international watch groups and brands. In the report period, senior executives from numerouis international watch groups and brands came to visit Harmony; the Company held many brand promotion activities, deepened the relations with various cooperators. World top brand watches A.Lange & Sohne and Corum have been determined for entry into Harmony shops. Deepening Three-Level Marketing and Enhancing Terminal Opeation: The Company continued to positively promote and deepen “three-level marketing” theory, continuously itemize the work at the terminal, conducted sustainable “customer development month” activities, focused on development and fostering VIP customers, supported steady growth of sales; at the same time, conducted customer satisfaction investigation and mysterious customer investigation activity within the whole system and promoted upgrading of the terminal operation capacity; Popularizing Harmony Brand: The Company positively popularized Harmony Brand. Under the guidance of the principle of “Positive Launching, Dynamic Sales, Attention to Circulation, Implementing Follow-up”, the Company held a series sales competition activities including “Join the work with every effort. Display my own ability – sales competition” and “The Month of Shock Action of Sales” which powerfully promoted the sales; meanwhile, in coordination with those activities, the Company enhanced the promotion of HARMONY Brand. Strengthening the team construction and enhancing training: The Company continuously enhanced reserve of human resource, exerted great efforts in training of various professionals, including shop assistants, management, financial personnel, shop training teachers, etc. The average training time for each person in the year was 91.7 hours. After a series of training, the employees’ qualification was upgraded and the sales activity was better promoted. FIYTA Watches. In the report period, the Company further enhanced the improvement of efficiency with joint effort in the four departments of research and development, production, design and sales; with the help of the good opportunity of launching of SHENZHOU 7, enhanced marketing and promotion, improved the identity of FIYTA Brand and strengthened overseas development. In the report period, FIYTA watches realized a turnover of RMB 191.4408 million, 25.74% year-on-year growth. Domestic and Overseas Channel Development: In the report period, the Company newly opened 9 FIYTA Brand franchised shops, including 3 airport shops; there have been altogether 12 franchised shops now. Establishment of franchised shops has promoted upgrading of channel quality, which is favorable for more medium and high end customers to display good product and brand identity of FIYTA; meanwhile, the Company further developed overseas channels and FIYTA watches have entered the overseas markets, including Singapore, Malaysia, Canada, Vietnam, etc. and entered the local high grade consumption channel. At present, FIYTA watches are in good demand in the market. New Product Research and Development and Entry to the Market: The Company has speeded up product serialization and standardization, successfully launched TOURBILLON high end products, HENGYU Series, IMPRESSION.METROPOLITAN Series, “SHENZHOU 7” Space Watch Series, etc. and good sales result has been achieved. At the year beginning, an high-end product of FIYTA Watch – TOURBILLON wristwatch was launched and sold well in the market; in the report year, IMPRESSION.METROPOLITAN Series were launched and sold well continuously, becoming one of the serial products of FIYTA sold best; at the year end, with successful launching of SHENZHOU 7, SHENZHOU 7 Space Watch, with eight patents, solely self-developed spring drive, with solely independent intellectual property, was successfully launched to the market. The Company carried out a series of promotion activities, and achieved an outstanding reaction. The Company respectively put forth the only 699 SHENZHOU 7 Space Watch – Space Traveler watches globally at price of RMB 12,800 each; and the only 50 SHENZHOU Space Watch – 21 Treasure Version at retail price of RMB 52,800 each and achieved an excellent sales result and further upgraded the identity of FIYTA, one of the World Three Space Watch Brands. Awards in Research & Development and Design: In the report period, the extravehicular space flight wear watch of SHENZHOU No. 7 of China’s Manned Spaceship Project got successfully expertised. In respect of technology, structure and design, the Company has submitted application for 2 invention patents, 7 utility model patents and 1 outward appearance patent; two of the utility modent patents have been granted; two technologies of “extravehicular space wear watch testing technology” and “application of digitalization design and manufacture technology of sophisticated parts in watch industry” have been successfully expertised: the Company’s design team and the design work have been rewarded with three CIDF (China Product Innovation Design Award) grand prix: Gold Medal for FIYTA Reversal TOURBILLON Wristwatch, Recognition Award for Square TOURBILLON Wristwatch, Best Design Team Award for the Company’s Innovation Design Department; Shenzhen Technology Innovation Award for FIYTA FZK-601 watch control system and the application for the Science & Technology Award of Guangdong Province has been submitted. At present, FIYTA Chongqing Franchised Shop and Ningbo Franchised Shop have been put into operation. Sales Competition: The Company carried out promotion activities and sale competition with a number of themes, such as “One Hundred Shops in One Hundred Days”, which powerfully propelled the sales; in the report period, the Company fulfilled FIYTA Year End Feedback Visit of Customers’ Satisfaction. The survey result showed that FIYTA customers’ satisfaction has been continuously rising for three years. Brand Popularization: The Company once again sent a delegate for Basel Timepieces Show, Switzerland and set up an exhibition stand with big area and nice appearance in the national brand exhibition hall. During the exhibition, the delegate received many distributors and customers from Switzerland, France, Singapore, etc. and achieved a good success. The Company has established a systematic and continuous advertisement and public promotion strategy and completed construction of a new FIYTA Brand website in May 2008. In the report period, the Company also conducted a brand survey together with a famous survey agent to further identify the position of FIYTA Brand so as to have a better idea on further development of FIYTA Brand. Meanwhile, a FIYTA Brand research report provided by the consulting agent showed that: in the whole watch market, FIYTA brand watch takes the first place in eminence; in the core market, FIYTA brand is also in the top flight in terms of eminence. The Company conducted big promotion activities in Beijing, including “High Technology.Excellent Quality – FIYTA TOURBILLON Wristwatch Market Entry Press Release “, “SHENZHOU 7 Space Watch” Market Entry Press Release, etc. and achieved an enormous echo in the watch sector and mass media. Property Operation: In the report period, the Company enhanced customer relationship management for FIYTA Building, FIYTA Technology Building and Xi’an Prince Hotel Building so as to ensure retention of high quality customers and ensure high lease rate and actual reception of rental; in the report year, the Company realized a turnover in rental amounting to RMB 63.8065 million, a 12.68% year-on-year growth. In the report period, the Company further applied the advanced management instruments and popularized the balance scorecard project in various departments, posts and individuals and even in performance assessment and management; further propelled 6 Sigma Green Ribbon Project and Black Ribbon designated training and held basic training for standardized system popularization. The Company further enhanced human resource reserve, practiced college graduate probationer program and went to 25 key universities and colleges in 7 cities, such as Beijing to recruit, devoted great effort to reinforce staff training; the number of training hours per capita in the year reached 70.25. The Company positively upgraded the employee’s job-respect level and improved the employees’ satisfaction – the employees’ work respect survey report conducted by Hanweite Consulting Co. shows that at present FIYTA is in the stage of high efficiency/best employer. In the report period, the Company was honorably rewarded with “China Best Employer Enterprise Award” once again at the “Fifth Annual Ceremony of China Human 22 Resources Management” after 2006 and 2007. In the report period, the Company held the 1st Internationalization Strategy Seminar, positively explored the way of realization of the internationalization development; the Company formally started non-public issuing proposal on June 3, 2008 and devoted efforts in looking for new financing channel for the Company’s business development. Meanwhile, the Company continued to enhance the construction of relationship with the investors, received numerous investors’ visits, both personally and by call, attended 2007 Performance News Release of Shenzhen CATIC Group and the interactive meetings with investors organized by institutions for many times. (II) Principal Businesses and Operation The Company is mainly engaged in design, development, manufacture, sales and repairing of timepieces and components, including operation of FIYTA watch products and train shops for the world top brand watches. In addition, the Company has property lease income from FIYTA Building, FIYTA Technology Building and Xi’an ChengHeng Hotel Building. 1. The composition of the income and profit from the principal business is as follows: In RMB 10,000 Year-on-year Year-on-year Year-on-year Operating increase/dec Increase/dec Operating increase/decr Sectors Business costs profit rate rease of rease of income ease of profit (%) revenue rate business rate (%) (%) cost rate (%) Industry 19,144.08 6,635.05 65.34% 25.74% 12.08% 3.22% Trading 80,824.25 60,722.80 24.87% 37.32% 34.93% 1.33% Property 6,380.65 1,642.82 74.25% 12.68% 73.45% -9.02% operation Hotel 1,519.43 1,327.32 12.64% 2. Income and Profit from Watch and Property Taking over 10% of the Company’s Total Principal Business Income and Profit (1) Watches The sales income and sales cost of FIYTA watches and foreign famous watches are listed as follows: Table 1: To be presented based on the categories of the products In RMB 10,000 Year-on-ye Year-on-yea Operati ar r Year-on-year ng increase/de Operation Operation increase/dec increase/decrea Products profit crease of income costs rease of se of business rate operating business profit rate (%) (%) income rate cost rate (%) (%) Sales of FIYTA 19,144.08 6,635.05 65.34% 25.74% 12.08% 3.22% watches Sales of foreign 80,824.25 60,722.80 24.87% 37.32% 34.93% 1.33% famous watches Table 2: Listed according to regions In RMB 10,000 Year-on-year increase/decrease Regions Operation income of operating income rate (%) Northeast China 9,795.49 21.72% 23 North China 18,869.02 60.69% Northwest China 23,549.98 36.28% Southwest China 13,955.05 182.96% East China 12,427.37 21.13% South China 29,271.50 34.15% Total 107,868.40 45.60% (2) Property The Company’s revenue and profit from property operation mainly came from lease of FIYTA Building, FIYTA Technology Building and Xi’an ChengHeng Hotel Building. 3. Major Suppliers and Customers In RMB Total procurement from the Proportion in total 593,374,482.99 63.37% top five suppliers procurement Total sales to the top five Proportion in total 131,477,792.35 12.19% customers sales 4. In the report period, no material change took place in the Company’s principal business or its structure, and earning power of the principal business in comparison with the previous year. 5. Changes in the Asset Composition and Gains and Losses in the Report Period Opening Increase/De Ending balance Items balance crease Rate Reason of Change (RMB) (RMB) (%) Monetary 108,012,414.97 83,753,954.97 39.19% Business growth funds Growth of sales volume and For partial Accounts 100,540,669.65 37,220,749.57 170.12% network,the settlement receivable term has been shortened. The advance payment for purchase of Xi'an Chengheng International Hotel Advance to 76,850,318.78 -72.97% Building has been Suppliers 20,772,416.86 transferred into fixed assets as the building has been put into application. Opening new Inventories 677,127,363.08 517,698,982.35 30.80% Harmony shops Xi’an Haomen Food &Recreation City Co., Ltd. closed up in 2003 Long-term and its business equity 7,701,374.39 1,891,522.17 307.15% licence was revoked in investment 2008 and the company is no longer in the Company’s consolidation. Long-term Harmony Shop Front expenses to 35,880,151.86 18,485,098.29 94.10% Decoration and be Franchised Counters apportioned 24 Short-term Newly increased bank 575,000,000.00 310,000,000.00 85.48% Loan loan Shareholders’ 670,923,545.85 642,124,427.84 4.48% Increase of profit equity Amount in the Amount in Increase/De same period of Items report year crease Rate Reason of Change the previous (RMB) (%) year (RMB) Operating 69,510,984.71 71,435,914.89 -2.69% profit Sales growth and Overheads 98,956,724.46 82,229,298.81 20.34% network expansion Financial Increase of bank loan 45,534,434.85 18,162,268.05 150.71% expenses and interest rate Growth of sales Net profit 64,522,473.14 60,876,912.74 5.99% volume 6. Composition of Cash Flow Amount in the Amount in report same period of the Increase/Decrease Items year (RMB) previous year Rate (%) (RMB) Net cash flows arising -77,725,105.19 -57,409,010.78 - from operating activities Net cash flows arising from investment -172,576,619.74 -74,615,563.52 - activities Net cash flows arising from fund-raising 274,599,921.73 155,688,257.26 76.38% activities In 2008, the net increase of the Company’s cash and cash equivalents amounting to RMB 24.1903 million and net cash flow arising from operation activities amounting to RMB –77.7251 million were mainly due to increase of Harmony Chain Shops and big increase of the fund for purchase of inventories. 7. Operation and Performances of the Principal Subsidiaries and Joint Stock Companies In RMB 10,000 Legal Opera repres Registe Company Total ting Net Principal business entativ red Names assets incom profit e capital e Shenzhen Mainly engaged in world famous Xu 30000 76251 82233 4252 Harmony brand watch retails, including Dongs World purchase, sales and heng Watches maintenance service of Center Co., timepieces and parts Ltd. FIYTA Mainly engaged in production Xu 1000 5890 10745 1524 Sophisticated and sales of FIYTA watches, Dongs Manufacture including production and heng Co., Ltd. maintenance of clocks and watches, and spring drives, 25 spares and parts, sophisticated timepieces. Shenzhen Mainly engaged in the business Fang 280 280 3460 68 Harmony of high grade clocks and Juan World watches, glasses, ornaments, Watches gifts, general merchandise and Center Co., handicrafts (excluding gold and Ltd. silver jewelry FIYTA (Hong Mainly engaged in trading, and Xu 1000 1051 343 11 Kong) Limited in charge of development of Dongs (HK$) overseas market of FIYTA heng watches Xi’an Mainly engaged in domestic Xu 1000 1261 1519 8.7 Chengheng trading, sales, maintenance Dongs Industrial Co., service and after-sale services heng Ltd. of timepieces; hotel management and property management, etc. II. Development Prospect and Measures to be Taken In 2009, the follow-up impact from the financial crisis upon the entity economy shall continue; it may take 1 to 2 years or more for the market to be recovered; and the global luxury industry is still full of great uncertainness. However, the long term favorable trend of the Chinese luxuries industry still remains unchanged. While the per capita GDP has broken through USD3000, conversion of people’s consumption structure shall be favorable for sales of luxuries. Based on the judgment of the trend of China’s economy and the rising stage of China’s famous brand watch industry, we are neutrally or cautiously optimistic for the future of the market. In 2009, the Company shall focus on the following work: 1. Face up to the impact of the financial crisis and economic environment on the Company’s business and pay close attention to the situation and make adjustment of response. The Company shall be fully aware of the crisis, pay close attention to the market situation, positively deal with the market change in a cautious way; while enhancing sensitivity and quick response, excavate deeply the internal potential, put forth effort to making use of external resources and pay attention to the opportunities possibly occur externally at any time. In 2009, the Company shall “re-assess all the values” based on the principle of priority of cash flow, beneficial result and efficiency, upgrade the brand by means of systematic work, increase the revenue and save expenses, conduct operation with efficiency, improve competitiveness and earning power. 2. Adjust development strategy and operation tactic in a timely way, integrate and optimize the existing network and upgrade the operation level. The Company shall take the tactic of opening new shops in a steady and proper way; except the shops with strategic significance, the Company shall no longer open any shop in principle that cannot realize profit or bring about positive cash flow in the very year of opening; for the shops that are difficult in operation, cannot turn from deficits into profit, or have no strategic significance, the Company shall timely sort out and reduce loss from long term operation; the Company shall prepare and submit a chain shop adjustment proposal in a timely way according to the change of the market environment and development conditions of the Company. 3. Upgrade the added value of brand, enhance promotion of products, speed up circulation of fund and reduce financial risks. Harmony shall take positive response measures by controlling the shop opening speed in a proper way and enhancing communication and cooperation with the suppliers, ensure availability of commodities in good demand, speed up circulation of inventories, improve the fund utilization 26 efficiency; strive for more preferential supply prices and support from various aspects of work and unceasingly improve the operation cash flow. FIYTA Watch Industry shall continuously increase the proportion of the new products in great demand by enhancing product conceptualization design and serialization research and development, and at the same time upgrade terminal detail service and management by enhancing brand construction and popularization, unceasingly upgrade brand identity and increase sales unit price. Meanwhile, enhance market promotion work, sort out a small quantity of unsalable products, form product withdrawal mechanism, effectively reduce inventories and speed up circulation of inventories. In respect of property operation, the Company constantly improved the lease rate and actual rental collection rate by means of good communication with the management department and the customers, suspended expansion of the Company’s internal office area so as to ensure rental income. 4. To Propel outstanding operation, enhance control over the costs and expenditures and enhance the overall earning power. The head office saved administrative expenses and costs by enhancing budget control and review and approval of expenditures; Harmony and FIYTA Watch Sector shall constantly reduce the purchase costs through establishment of the strategic cooperation relation with the suppliers; and strive for better cooperation conditions by positive negotiation with the cooperators under the prerequisite of working together to overcome all difficulties and realize the objective of win-win. The Company shall enhance communication and cooperation with banks by taking the advantage of the favorable opportunity of monetary policy adjustment by the central government so as to reduce the interest payment. Meanwhile, strive for more fund support from the government and carry forward research and development of the key projects. III. Investments (I) In the report period, there were neither proceeds raised through share offering nor previous IPO proceeds deferred to the report period for use (II) Other material investments with the funds not raised through share offering. In the report period, the Company further increased the investment in Harmony Famous Brand Watches Chain Shops. Harmony Famous Brand Watches Center newly added 8 chain shops. At the end of the year, there were 79 chain shops in big and medium cities all over China. In 2008, the additional investment was RMB 176.20 million, the revenue from retail of Harmony hit RMB 808.24 million and the net profit reached RMB 42.52 million. IV. Accounting Policies, Change in Accounting Estimation and Correction of Material Accounting Errors In the report period, there was no change in the accounting policy and accounting estimation or correction of any previous accounting errors. V. Routine Work of the Board of Directors. 1. In the report period, the Company held 12 board meetings, which all complied with the PRC Company Law and the Articles of Association of the Company in terms of procedures and proposals. The board meetings are summarized as follows: (1) The 11th meeting of the Fifth Board of Directors was held on January 17, 2008. The meeting heard 2008 Annual Budget and 2008 Annual Operation Plan, Designated Work Report of HARMONY, Designated Report of the Company’s Third Brand. The said board meeting was a regular operation work report, no resolution was made and only served as a record. 27 (2) The 12th meeting of the Fifth Board of Directors was held on February 4, 2008. The following proposals were reviewed and adopted at the meeting: The Proposal on Renewal of Engagement of the Certified Public Accountants, Proposal on Amendment of the Articles of Association, Proposal on Holding 2008 1st Extraordinary Shareholders’ Meeting. The relevant announcement was published on Securities Times and Hong Kong Commercial Daily on February 5, 2008. (3) The 13th meeting of the Fifth Board of Directors was held on April 9, 2008. The following proposals were reviewed and adopted at the meeting: 2007 Work Report of the Board of Directors, 2007 Financial Settlement Report, 2007 Profit Distribution Proposal, 2007 Annual Report and the Summary, Proposal on Payment of Auditing Fee for the Year 2007 and Renewing Engagement of the Company’s Auditor for the Year 2008, Proposal on Regular Related Transactions in 2007 and Prediction of Regular Related Transactions in 2008, Proposal for Adjustment of Allowance to Independent Directors, Proposal on Application for Total Bank Credit Line in 2008, Proposal on Cancellation after Verification of Partial Inventories, Proposal on Confirmation of the Deferred Income Tax Asset and Liability in the Year 2007, Annual Report Work System for Independent Directors, 2007 Work Report of Independent Directors, Rules for the Work of the Audit Committee, Report of Duty Implementation of the Audit Committee & Summary of the Audit Work of the Certified Public Accountants in the Year 2007, Self-assessment Report of the Internal Control, Report of the Enterprise’s Social Responsibility, Proposal on Adding the Registered Capital of Harmony, Proposal on Application for Prolonging the Operation Term of the World Watch Center and Equity Assignment. The relevant announcement was published on Securities Times and Hong Kong Commercial Daily on April 11, 2008. (4) The 14th meeting of the Fifth Board of Directors was held on April 17, 2008. The meeting reviewed and approved 2008 1st Quarterly Report. The relevant announcement was published on Securities Times and Hong Kong Commercial Daily on April 18, 2008. (5) The 15th meeting of the Fifth Board of Directors was held on June 2, 2008. The meeting reviewed and approved Proposal on the Company’s Compliance with the Conditions for Non-Public Issuing, Proposal on the Plan of Non-Public Issuing in the Year 2008, Proposal on the Draft Plan of Non-Public Issuing, Proposal on the Report of the Utilization of the Proceeds Raised by Previous Issuing, Proposal on the Feasibility Study on the Projects to be Invested with the Proceeds Raised through Non-public Issuing in the Year 2008, Proposal for Requesting Shareholders’ General Meeting to Authorize the Board of Directors to Handle Relevant Matters in Connection with the Non-Public Issuing, Proposal on Amendment of the Management System for Proceeds Raised through Issuing, Proposal on Application of the Board of Directors for Holding an Extraordinary Shareholders’ Meeting. The relevant announcement was published on Securities Times and Hong Kong Commercial Daily on June 3, 2008. (6) An extraordinary meeting of the Fifth Board of Directors was held on June 11, 2008. The meeting reviewed and approved the Comprehensive Credit Line Contract with Shenzhen Pingan Bank Co., Ltd. with total quota of RMB 60 million. The relevant announcement was published on Securities Times and Hong Kong Commercial Daily on June 13, 2008. (7) The 16th meeting of the Fifth Board of Directors was held on July 15, 2008. The meeting reviewed and approved the Report of Rectification and Improvement of the Corporate Governance Campaign. The relevant announcement was published on Securities Times and Hong Kong Commercial Daily on July 17, 2008. (8) The 17th meeting of the Fifth Board of Directors was held on July 21, 2008. The meeting reviewed and approved 2008 Semi-annual Report. The relevant announcement was published on Securities Times and Hong Kong Commercial Daily on July 22, 2008. (9) The 18th meeting of the Fifth Board of Directors was held on July 28, 2008. The following proposals were reviewed and adopted at the meeting: Self-inspection Report on the Issue of 28 Occupancy of the Company’s Funds by the Controlling Shareholder and the Related Parties, and the System for Prevention of the Principal Shareholders and its Related Parties from Occupancy of the Company’s Shares. The relevant announcement was published on Securities Times and Hong Kong Commercial Daily on July 30, 2008. (10) An extraordinary meeting of the Fifth Board of Directors was held on September 25, 2008. The meeting reviewed and approved the application to Shanghai Pudong Development Bank Shenzhen Branch Phoenix Building Sub-branch for a short term loan of RMB 20 million. The relevant announcement was published on Securities Times and Hong Kong Commercial Daily on September 27, 2008. (11) The 19th meeting of the Fifth Board of Directors was held on October 23, 2008. The meeting reviewed and approved 2008 3rd Quarterly Report. The relevant announcement was published on Securities Times and Hong Kong Commercial Daily on October 27, 2008. (12) An extraordinary meeting of the Fifth Board of Directors was held on November 27, 2008. The following proposals were reviewed and adopted at the meeting: Information Disclosure Management System, Related Transaction System. The relevant announcement was published on Securities Times and Hong Kong Commercial Daily on November 29, 2008. 2. Implementation of the Resolutions of the Shareholders’ General Meeting by the Board of Directors In the report year, the Board carried out the work strictly according to the Articles of Association and the resolutions of Shareholders’ General Meeting and seriously implemented all the resolutions of 2008 Annual Shareholders’ General Meeting. (1) 2008 1st Extraordinary Shareholders’ Meeting held on February 20, 2008 reviewed and approved the Proposal on Amendment of the Articles of Association. The Company completed the amendment of the Articles of Association according to the resolution of the Shareholders’ Meeting and changed the corresponding registration data with the administration for industry and commerce. (2) According to 2007 Annual Shareholders’ General Meeting, the Company issued the Announcement on Implementation of Dividend Distribution for the Year 2007 on June 21, 2008. With the total capital stock of 249,317,999 shares as the base, the Company distributed cash dividend at the rate of RMB 1.00 for every 10 shares to the whole shareholders(with tax inclusive; the actual dividend rate for distribution after tax to the individual shareholders and investment fund is RMB 0.9 for every 10 shares but with no tax reduction to the shareholders of B shares). The total amount of cash dividend actually paid was RMB 24,931,799.90. Cash dividend for B shares was paid in Hong Kong Dollars after conversion from Renminbi into Hong Kong Dollars based on the average rate as published by Bank of China on the last business day after the resolution of the Shareholders’ General Meeting (May 16, 2008). The cash dividend for both A and B shares were completed in distribution respectively on June 26, 2008 and June 30, 2008. (3) 2008 2nd Extraordinary Shareholders’ General Meeting held on July 25, 2008 reviewed and approved the Proposal on the Plan for Non-Public Issuing in 2008; the application documentation has been submitted to China Securities Regulatory Commission for review and at present the authority is in process of review. 3. Summary Report on Performances of the Audit Committee of the Board of Directors In accordance with China Securities Regulatory Commission, Contents and Formats for Information Disclosure by Companies that Offer Securities to the Public Guideline (No. 2): Contents and Format of Annual Reports (Revision 2007), the Announcement of China Securities Regulatory Commission ([2008] No. 48) and Shenzhen Stock Exchange: Circular on Doing a Good Job in 2008 Annual Report and the Relevant Work in Listed Companies and the Company’s Rules for the Work of the Audit Committee, the Audit Committee of the Company conducted 29 overall review of the Company’s audit work in 2008. The following is the summary of the performances of the Audit Committee and the work of RSM China CPAs (hereinafter referred to as CPAs). (1) Collecting the Basic Information of the Company in the Report Period and Checked and Reviewing the Financial Statements Prepared by the Company On January 15, 2009, the Audit Committee heard the General Manager’s overall report on the production and operation and progress of significant events during the report period and reviewed 2008 Financial and Accounting Statements prepared by the Company. In its opinion, the data in the financial and accounting statements prepared by the Company basically reflected the financial position and operation results of the Company as ended at December 31, 2008 and approved to carry out the audit work in 2008 with the financial statements as the base and issued auditing opinions in writing. (2) Decision on Overall Audit Plan Before the certified public accountants started auditing, the audit committee, after consultation with the certified public accountants, decided the time schedule of the audit work in 2008. (3) Supervision of the Audit Work On January 16, 2009, the certified public accountants formally started the audit work. During the auditing, the Audit Committee issued three Letters of Urging Audit respectively on February 18, February 25 and March 13, 2009, demanding the certified public accountants to complete the audit work according to the time schedule of audit for three times in succession and ensure timely disclosure of the Company’s annual report and relevant documents. (4) Preliminary Auditor’s Opinion after Reviewing the Financial and Accounting Statements On March 15, 2009, the certified public accountants issued a preliminary auditor’s opinions on the financial and accounting statements and the Audit Committee once again reviewed the Company’s financial and accounting statements as preliminarily audited by the certified public accountants. In the opinion of the Audit Committee, these financial statements truly, accurately and completely reflected the financial position and operation result of the Company ended December 31, 2008 and approved 2008 Annual Report and Summary prepared on the basis of these statements. Meanwhile, the Audit Committee demanded the certified public accountants to complete the audit work according to the plan as soon as possible so as to ensure the Company to disclose 2008 Annual Report as scheduled. (5) Summary Work after the Formal Report On March 23, 2009, the certified public accountants completed the auditing procedures as scheduled and issued a standard unqualified auditor’s report and other relevant documents to the Audit Committee. The Audit Committee held 2009 1st Meeting of the Audit Committee on the very day and concluded a resolution and submitted it to the Board of Directors for review and at the same submitted the Summary Report on the Performances of the Audit Committee and the Audit Work of the Certified Public Accountants in 2008. In the opinion of the Audit Committee, RSM China CPAs, the domestic and international auditor engaged by the Company honestly performed the duties in process of offering audit performances according to the professional principle of independence, objectiveness and fairness and did a good job in auditing 2008 Annual Report. (6) Resolution on Renewal of Engagement of the Certified Public Accountants As RSM China CPAs offered its service according to the audit standards, strictly implemented the relevant audit rules and quality control regulations, it is quite qualified for the business, conscientiously did its duties and successfully completed various audit work and resolved to renew the engagement of the accounting firm as the Company’s international auditor for the year 2009 to the Board of Directors. 4. Summary Report on Performances of the Committees of Nomination, Remuneration and 30 Assessment of the Board of Directors In the report period, the Committees of Nomination, Remuneration and Assessment of the Board of Directors performed its functions strictly according to the law and regulations, the Articles of Association, the Rules for Implementation of the Committees of Nomination, Remuneration and Assessment of the Board of Directors and conducted verification of the emoluments to directors, supervisors and senior executives in the year 2008. The verification comments are as follows: The decision-making procedures of emolument to directors, supervisors and senior executives complied with the regulations; the payment criteria of the emolument to directors, supervisors and senior executives complied with the emolument system; the emolument to directors, supervisors and senior executives as disclosed in 2008 Annual Report is true and accurate. VI. Technology Innovation in the Report Period The principle of constructing the Company’s core competitiveness with technology innovation and the enterprise culture have enhanced the two major pillars of the brand. For a long time the Company has been continuously developing and consolidating the Company’s leading position in brand and technology of the Chinese timepiece industry and improving the international competitiveness of the brand and the whole industry through technology innovation. In the report period, the Company successfully conquered a number of tough difficulties in technology of “Shenzhen 7 Space Watch: the high magnetic-proof of the space watch has surpassed the same kind of products made in Switzerland and reached international leading level; and also successfully solved the tough difficult in technology of mechanical spring drive at high and low temperature environment. By using a number of pressure-proof and elastic suspension structure in the spring drive, the shockproof requirement was successfully satisfied and this technology was further applied in the watches wore by the Chinese motorcycle team at Dakar Rally. The problems of the weight and shockproof structure of watch were successfully solved. After three years’ research and tackling of tough technical problems, the Company achieved an innovative breakthrough in the special functions of mechanical timing spring drive, technical indexes, structure and efficiency as well as innovation achievements in many aspects, including research and development, and standardized synchronous mechanism; on October 19, the extravehicular space flight wear watch of SHENZHOU No. 7 of China’s Manned Spaceship Project was successfully expertised. In respect of technology, structure and design, the Company has submitted application for 2 invention patents, 7 utility model patents and 1 outward appearance patent; two of the utility modent patents have been granted; On November 30, two technologies of “extravehicular space wear watch testing technology” and “application of digitalization design and manufacture technology of sophisticated parts in watch industry” were successfully expertised. Meanwhile, in research and development of new product technology, the Company successfully explored the machining process of hollowing case fixing structure and hollowing case multi-layer interlacing structure of “Impression.Metropolis” series. In the past five years, the Company has finished preparation and revision of and officially issued 4 national standards and 17 industrial standards. In 2009, the Company worked out project proposal, prepared and revised two national standards and two industrial standards; participated in the work of 4 working teams of ISO/TC114 international standards. VII. Profit Distribution Proposal According to the relevant provisions of the Company Law and the Articles of Association, the Company takes the net profit in 2008 amounting to RMB 64,522,473.14 attributable to the parent company as audited and confirmed by RSM China CPAs as the base, plus the retained earnings at the beginning of the previous year amounting to RMB 86,222,040.84 and after provision of the statutory public reserve amounting to RMB 5,787,316.33, the profit available for distribution to the shareholders is RMB 144,957,197.65. The Board of Directors decided after discussion that the Company intended to distribute cash dividend at the rate of RMB 1.0 (with tax inclusive) for every 10 shares to the whole shareholders for the year 2008. Calculated based on the total capital stock of 249,317,999 shares as at December 31, 2008, the Company has to pay cash dividend amounting to RMB 24,931,799.90. 31 The independent directors of the Company approved the above proposal of the Board of Directors. In their opinion, the proposal complies with the Company’s actual development conditions; the proposal needs to be approved by 2008 Annual Shareholders’ General Meeting. Cash dividends distributed in the past three years: in RMB Years of Amount of cash Net profit in the years Rate of cash dividend to dividend dividend of dividend distribution the net profit distribution 2005 0.00 16,338,540.19 0.00% 2006 0.00 30,509,476.39 0.00% 2007 24,931,799.90 60,876,912.74 40.95% VIII. In the report year, the newspapers chosen by the Company for disclosing its information remain unchanged, namely Securities Times and Hong Kong Commercial Daily. 32 Chapter 8 Report of the Supervisory Committee I. Work Summary 1. In the report period, the Supervisory Committee conducted effective supervision over the performances of directors, managers and other senior executives according to the power as specified in the Company Law and the Articles of Association and exercised the supervisory functions in terms of the Company’s operation according to the law, financial conditions, application of the proceeds raised through issuing, related transactions, etc. through regular or irregular inspection and analysis, and played an important role in promoting the Company to conduct operation in a regulatory way and safeguarding the shareholders’ rights and interests. 2. In the report year, the Supervisory Committee had held five meetings: (1) The 10th meeting of the 5th Board of Directors was held on April 9, 2008. The following proposals were reviewed and adopted at the meeting: 2007 Work Report of the Supervisory Committee, 2007 Annual Report, Proposal on Implementation of Regular Related Transactions in 2007 and Prediction of Regular Related Transactions in 2008; Proposal on Cancellation after Verification of Partial Inventories, Proposal on Adding the Registered Capital of Harmony, Report on Self-assessment of Internal Control. (2) The 11th meeting of the 5th Supervisory Committee was held on April 17, 2008. The meeting reviewed and approved 2008 1st Quarterly Report. (3) The 12th meeting of the 5th Supervisory Committee was held on July 21, 2008. The meeting reviewed and approved 2008 Semi-annual Report. (4) The 13th meeting of the 5th Supervisory Committee was held on July 28, 2008. The meeting reviewed and approved Self-inspection Report on the Issue of Occupancy of the Company’s Funds by the Controlling Shareholder and the Related Parties. (5) The 14th meeting of the 5th Supervisory Committee was held on October 23, 2008. The meeting reviewed and approved 2008 3rd Quarterly Report.. 3. Supervisors of the Supervisory Committee attended all the Board meetings held in 2008 as non-voting delegates, heard the relevant proposals and reports and learned the operation and significant decision-making process of the Company. 4. Supervisors of the Supervisory Committee also attended 2007 Annual Shareholders’ General Meeting, addressed 2007 Work Report of the Supervisory Committee and expressed independent opinions on the Company’s production, operation, financial status and implementation of the duties of members of the Board and senior executives. II. Independent Opinion of the Supervisory Committee In 2008, the Supervisory Committee exercised fully the powers authorized according to the relevant laws and regulations of the state and the Articles of Association, conducted sustainable and effective supervisions over such issues as Company’s operation according to the law and the work of the senior executives. Our independent opinions are summarized as follows: 1. In the report period, the Company established sound internal control system and Company’s decision-making procedures complied with the laws and regulations; Holding of the shareholders’ general meeting and board meetings and decision making procedures were legal and effective; the Board of Directors carried out their work conscientiously and with responsibility, the Company’s decision making was scientific and reasonable, the 33 internal control system was sound and was implemented practically. Directors, managers and other senior executives had done due diligence in their work, seriously implemented the resolutions of the Shareholders’ General Meeting and the Board Meetings, and had never been found involved in any action against the law, regulations and the Articles of Association or harmful to the Company’s interest in implementing their duties. The Company’s internal control and self-assessment complied with the Basic Regulations on the Internal Control of Enterprises jointly promulgated by the State Ministry of Finance and China Securities Regulatory Commission, the Announcement of China Securities Regulatory Commission [2008] No. 48 and Guide of Internal Control of Listed Companies of Shenzhen Stock Exchange and the relevant documents; the self-assessment truly and entirely reflected the present situation of construction of the Company’s internal control system and implementation. 2. RSM China CPAs produced a standard and unqualified auditor’s report for the Company after auditing, which truly and objectively reflected the Company’s financial position and operation result of the year 2008. 3. In the report period, the Company had no investment project with proceeds raised through issuing. 4. The Company’s acquisition of assets was based on the market price and was carried out according to the principle of openness, fairness and justness, had never been found involved in insider transaction without any harm to the minority shareholders’ equity or caused loss of the Company’s assets. 5. The related transactions incurred in the Company were carried out fairly and based on reasonable price; independent directors all expressed independent opinions; the related directors took the measure of avoiding voting for such transaction without any harm to the minority shareholders’ equity or caused loss of the Company’s assets. 34 Chapter 9 Significant Events I. The Company was not involved in any material lawsuit or arbitration in the report year. II. Asset Acquisition, Sales, Merger and Consolidation In the report period, there was no asset sales, merger or consolidation event in the Company. Asset acquisition is as follows: As Kunming Lishan Department Store Co., Ltd., the Company’s associate of Harmony Kunming Lishan Shop, conducted equity assignment of its shareholder, in order to upgrade Harmony’s operation capacity and brand identity in Kunming and strengthen Harmony’s competition superiority already existing in Kunming market and realize the company’s long term development in Kunming, on December 26, 2007, Harmony, one of the Company’s subsidiaries and Kunming Golden Eagle Industrial Co., Ltd. (Golden Eagle) entered into the Equity Assignment Agreement, according to which Harmony would acquire 100% equity in Lishan Department Store Co., Ltd. (a company with limited liability incorporated by Yunnan Golden Eagle Industrial Co., Ltd. on June 24, 2005 in Kunming, Yunnan Province with business term of 10 years and registered capital of RMB 5,000,000.00 and principal activities of domestic trading and supply and sales of goods and materials) at the price of RMB 1.20 million while all the credit and liabilities of the former Lishan Department Store Co., Ltd. were taken by the original shareholder. On March 26, 2008, Lishan Department Store Co. Ltd. handled the necessary procedures for change of registration with the authority of industry and commerce. Up to now, the equity assignment has been completed. III. Transactions with Related Parties 1. Related Parties (1) Shenzhen CATIC Property Management Co., Ltd. is one of the indirectly controlled subsidiaries of the Company’s eventual controller, with the legal representative: Shi Zhenglin, the registered capital: RMB 20 million and principal business: real estate lease, repairing and property management; after-sale service of real estate, management of municipal works, landscape engineering, environmental sanitation, management and services of life facilities; installation, repairing and maintenance of air conditioner, water and power supply, mechanical and electrical equipment; housing refurbishment and repairing. The Company entrusted the company to supply property management services for FIYTA Building and FIYTA Technology Building based on the market price; lease its shop sites for business operation and lease office sites to the company and the payment settlement is done by means of bank account transfer. (2) Shenzhen Rainbow Supermarket Co., Ltd. is a controlled subsidiary of the Company’s eventual controller. Its legal representative is Wu Guangquan; its registered capital is RMB 350 million; its principal business is: wholesale and retail of commodities and relevant supplementary services, parking services to motor vehicles with its parking area, and is engaged in business activities by means of franchising. The Company rents the franchised counter of the supermarket for selling watch products and payment settlement is made by means of bank account transfer. (3) Shenzhen CATIC Real Estate Development Co., Ltd. is a subsidiary under control of the Company’s eventual controller, its legal representative is Shi Zhenglin, registered capital is RMB 150 million; it is mainly engaged in development and operation of real estate; property management, professional sales of equipment and The Company lease office sites to the company and payment settlement is made by means of bank account transfer. (4) Shenzhen Makway Cable TV Devices Co., Ltd. is a controlled subsidiary of the Company’s controlling shareholder. Its legal representative is Cheng Baozhong and the registered capital is RMB 20 million. It is mainly engaged in reception, modulation, amplification, distribution and testing components, devices and equipment for cable TV system, and installation and testing. The Company lease office sites to the company and payment settlement is made by means of 35 bank account transfer. (5) Jiangnan Securities Co., Ltd. is a controlled subsidiary of the Company’s eventual controller. Its legal representative is Yao Jiangtao and the registered capital is RMB 541.42 million. It is mainly engaged in trading of securities as agent; payment of principal and interest of securities by commission; custody and identification of securities; registration and opening account on behalf; trading of securities; underwrite of securities; securities investment consultation; other businesses as approved by China Securities Regulatory Commission. The Company lease office sites to the company and payment settlement is made by means of bank account transfer. (6) Shenzhen CATIC Hotel Management Co., Ltd. is an indirectly controlled subsidiaries of the Company’s eventual controller, the legal representative is Shi Zhenglin and the registered capital is RMB 200 million. It is mainly engaged in management consulting; invest and set up entities; property management; development of hotel management software. The Company entrusted it to manage Xi’an Chengheng International Hotel and the management fee is settled by means of bank account transfer. 2. Regular Daily Transactions in Connection with Entrusted Sales and Acceptance of labor service (1) In the report period, the payment for property management was RMB 1.8026 million, the property lease expenses were RMB 0. 4341million and collection of the rental amounting to RMB 2.3602 million. CATIC Property offers property management services to the Company’s FIYTA Building and FIYTA Technology Building. Company rented property from CATIC Property for one of its world watch shop and leased office site to CATIC Property. The transactions between the two parties were based on the market price which is determined according to the principles of fairness and the contracts, improving the professional service level and doing no harm to either party’s interests. (2) The Company sells watches through Rainbow Supermarket and paid sales costs for the franchised counters of the supermarket amounting to RMB 6.9276 million, taking 8.33% of the corresponding expenses in the report period. Rainbow Supermarket has established over 30 shopping malls in such big cities in Shenzhen, Xiamen, Nanchang, etc. Thanks to its high grade market positioning, good operation and reputation and rapid expansion in the economically advanced regions of the Pearl River Delta and Yangtze River Delta, Rainbow Supermarket has become excellent channel in sales of the Company’s watches; and at the same time, can offer conditions to the Company for establishing franchised counters, which is favorable for upgrading the Company’s income from the watch business and does no harm to the Company’s interests. (3) In the report period, the Company collected RMB 1.7347 million of rental income from CATIC Property. Both Parties’ transactions were based on the contract concluded according to the principle of market price, which did no harm to the Company’s interests. (4) In the report period, the Company totally paid custody costs amounting to RMB 0.5036 million to Shenzhen CATIC Hotel Management Co., Ltd. Both Parties’ transactions were based on the contract concluded according to the principle of market price, which did no harm to the Company’s interests. 3. Transaction Purpose and the Impact upon the Company (1) CATIC Property offered management services for both of the Company’s FIYTA Building and FIYTA Technology Building which is favorable for improving professional service, improving the management level, ensuring and increasing the Company’s income from property lease. Shenzhen World Watches Center Co., Ltd., one of the Company’s subsidiaries, rented the face shop from CATIC Property which was also favorable for geographic location. Meanwhile, the Company offered property lease service according to the marketing principle to CATIC Real Estate, Makway, CATIC Property and Jiangnan Securities. It is predicted that such related transaction shall continue in 2009. 36 (2) The Company sells watches through the franchised counters in Rainbow Supermarket. Rainbow Supermarket has established several over 30 supermarkets in such big cities as Shenzhen, Xiamen, Nanchang, etc. In 2009, it is predicted that more such supermarkets shall be set up throughout the country. The Company’s franchised counters shall follow at the same time and the transaction amount is predicted to increase somewhat. As Rainbow Supermarket enjoys high market position and good reputation and can provide the Company with superior specialized counters, it has become an excellent channel for the Company to sell watches, which can promote the Company’s income from watches to rise without doing any harm to the Company’s interests. (3) After acquisition of Xi’an ChengHeng Hotel Building, the Company entrusted Chengheng International Hotel to CATIC Hotel Management Co., Ltd. for management, for the purpose of introducing professional operation, upgrading hotel service level and improving operation result. (4) The aforesaid related transactions are favorable for the Company to carry out principal business and all belong to normal business scope of the Company. The related transactions have been carried out with the prices determined with reference to the market prices of the same services which are fair reasonable and do no harm to the Company’s interests. (5) The aforesaid related transactions have not affected the Company’s independence and the Company’s business shall not become dependent on the related parties or be controlled by the same. 4. For other material related transactions, refer to the notes to the financial report. The related liabilities between the Company and Rainbow Supermarket, CATIC Property, and CATIC Real Estate, the Company’s related parties were the liabilities to and from resulted from normal sales of goods, expenses for property management or property lease. 5. Actual Implementation of Related Transactions. (For the detail, refer to the Announcement of Shenzhen FIYTA Holdings Ltd. on Implementation of Regular Related Transactions in 2008 and the Predicted Regular Related Transactions in 2009.) IV. Important Contracts and Implementation 1. In the report year, the Company had never kept as custodian, contracted or leased any other company’s assets and vice versa. 2. In the report period, the Company offered no material guarantee to any other company. 3．In the report year, the Company had never entrusted any other company for assets management. 4. Other Important Contracts and Implementation The Company executed the Agreement on Assignment of the Ownership of Xi’an Prince International Hotel Building Project with Xi’an Maike Metal International Group Co., Ltd. (MAIKE) on October 19, 2007. This acquisition proposal was reviewed and approved by 2007 1st Extraordinary Shareholders’ Meeting held on November 7, 2007. By then, the agreement came into force. According to the agreement, both parties conducted check and transfer of the operation power and operational asset of the hotel, and the supporting equipment and facilities in connection with the building and meanwhile, conducted check-up of the credit and liabilities before the date of handing over at the same time. In the report period, the ownership transfer procedures for Xi’an Prince International Hotel Building were completed and all the payments involved were made. V. Non-public Issuing The Company started non-public issuing on June 3, 2008 and planned to issue 30 million to 50 37 million shares to no more than 10 institutional investors. The proceeds to be raised would be mainly applied in the project of developing new shops of Harmony World Watch Retail Chain Shops and upgrading the existing shops. The proposal was reviewed and approved at the 15th meeting of the Fifth Board of Directors held on June 2, 2008 and 2008 2nd Extraordinary Shareholders’ Meeting held on July 25, 2008. The Company submitted the application documentation to China Securities Regulatory Commission on August 1, 2008. At present, the authority is still in process of review and verification. The expiry date of the proposal is July 25, 2009. VI. Implementation of the Commitments by the Company or the Shareholders Holding over 5% of the Company’s Shares The Company started to implement the equity separation reform plan on November 7, 2007. In the Company’s equity separation reform plan, the commitments made by CATIC Shenzhen Corporation, the shareholder holding over 5% of the Company’s shares, and the implementation are summarized as follows: (1) Shenzhen CATIC Group committed that upon completion of the equity separation reform of FIYTA, the non-negotiable shares held by Shenzhen CATIC Group would not be listed with Shenzhen Stock Exchange for trading within 36 months after the day when such shares got approved for listing. (2) Within 24 months after the 3-year sales restriction term expires, in case Shenzhen CATIC Group would sell the non-negotiable FIYTA shares it was holding through listing with Shenzhen Stock Exchange, the sales price must not be lower than RMB 25.00 per share. Implementation of the commitment: The commitment is in process of implementation. Commencing from the date when the equity separation reform was finished to the end of the report period, Shenzhen CATIC Group has not reduced or assigned any shares with sales restriction held by Shenzhen CATIC Group. VII. Engagement of Certified Public Accountants and the Pay In the report period, the Company engaged RSM China CPAs as both the domestic and international auditors. Emolument in 2008 Successive service Types Description (RMB ‘000) years A- and B-Share RSM China CPAs 60 2 s VII. Equity in other listed companies held by the Company Proportio Gain and Change in Short Initial Book value Stock n in the loss in owner’s equity Accounti form of investment at the end of Source Code investee’s the report in the report ng item stock amount the period equity period period Available Wanneng 3,000,000.0 4,543,000.0 -for-sale Corporat 000543 0.14% 0.00 -10241500.00 Power 0 0 financial e shares assets 3,000,000.0 4,543,000.0 Total - 0.00 -10241500.00 - - 0 0 IX .Investigation Reception and Interviews 38 In the report period, the Company implemented the Guidelines of Listed Companies for Fair Information Disclosure and positively enhanced the construction of the relationship with investors. In survey reception and interviews, the Company and its officers in charge of information disclosure strictly observed the principle of fair information disclosure without any discrimination policy and had never been engaged in any activity of revealing, disclosing or letting out in advance any private information to any designated addressees in a secret way. Reception of visitors is summarized as follows: Matters discussed Receptio Way of Reception Time Visitors received and n place reception information provided the Site Huaxia Fund Management Co., January 18, 2008 Company research Ltd., Runhui Investment the Site Youbang Huatai Fund January 22, 2008 Company research Management Co., Ltd. Shanghai Shenyin Wanguo Securities Research & Consulting the Site Co., Ltd., Guotai Junan (Hong February 20, 2008 Company research Kong), CITIC-Prudential Fund, Development Everbright Securities Co., Ltd., trend of the Martin Currie Fund. domestic luxury Site Goldman Sachs, Jiafu Assets goods sector, February 26, 2008 Company Research Management Co., Ltd. some Guangfa Securities Co., Ltd., measures Huabao Xingye Fund concerning the Management Co., Ltd., Fuguo Company’s Fund Management Co., Ltd. strategic the Site February 27, 2008 Guolianan Fund Management development, Company research Co., Ltd., Western Securities Co., brand Ltd., Shanghai Zhixin Investment construction, Management Co., Ltd. terminal management in Orient Securities Co., Ltd., Pingan the past three Site years. March 12, 2008 Company Assets Management Co., Ltd. Research Provision of the Boshi Fund Management Co., Company’s Site Ltd., First State Cinda Fund, public March 24, 2008 Company brochures Research Hengping Trust Co., Ltd., Baoying Fund Management Co., Ltd. Shanghai Huace Investment Co., Ltd., Guosen Securities, China Site Merchants Fund Management March 26, 2008 Company Research Co., Ltd., Yinhua Fund Management Co., Ltd., Pingan Securities Co., Ltd. Site Franklin Templeton Sealabd Fund Development May 8, 2008 Company Research Management Co., Ltd. trend of the domestic luxury Site May 14, 2008 Company Zhonghai Fund Management Co., goods sector, Research Ltd. some Site Guoyuan Securities Co., Ltd. and measures May 29, 2008 Company Research China Galaxy Securities Co., Ltd. concerning the Site Midea Investment Management Company’s June 13, 2008 Company Research Co., Ltd. strategic the Site Morgan Stanley, CICC Hong development, July 8, 2008 brand Company research Kong Securities Limited 39 E-Fund Management Co., Ltd., construction, Bank of Communications terminal Schroder Fund Management Co., management in the Site July 25, 2008 Ltd., No. 1 Pioneering Securities the past three Company research Co., Ltd., Huabao Xingye Fund years. Management Co., Ltd., Orient Provision of the Securities Co., Ltd. Company’s Zhonghai Fund Management Co., 2007 Annual the Site Report and August 5, 2008 Ltd. and China Jianyin Investment Company research public Securities Co., Ltd. the Site brochures August 12, 2008 GF Fund Management Co., Ltd. Company research Guangzhou Securities Co., Ltd. the Site August 14, 2008 and Huaxia Fund Management Company research Co., Ltd. September 17, Site Company Value Partners 2008 Research December 24, the Site GTJA Allianz Funds 2008 Company research XI. Penalties to and the Remedies from the Company, the Board of Directors and Directors In the report year, there existed no such event resulted in inspection, administrative penalties or circulating notice of criticism from China Securities Regulatory Commission or public blame from the Stock Exchange against the Company, the Board of Directors or any directors or independent directors. Implementation of the Social Responsibilities of the Company in the Report Period The Company paid close attention to the demands, rights and interests of the employees, customers, cooperation partners, shareholders, environment, society, other parties, scrupulously abided by credibility and commitment, insisted on harmony and coexistence of different parties, implemented the law and principles, enhanced the communication and coordination with relevant interested parties, positively assumed the social responsibility of enterprise, and devoted efforts for sustainable development of the society and environment. (For the detail, refer to the Report on Social Responsibility of the Company issued by the Company.) XII. Index of Provisional Announcement Information Disclosed in the Report Period Presses Announc Announcement where the Websites for information ement Description Date information is disclosure No. disclosed Securities Times and 2008-00 January 23, 2008 Announcement on Hong Kong http://www.cninfo.com.cn 1 Change of the Certified Commercial Public Accountants Daily Securities Announcement on Times and 2008-00 February 5, 2008 Resolutions of the 12th Hong Kong http://www.cninfo.com.cn 2 Meeting of the Fifth Commercial Board of Directors Daily Securities Times and 2008-00 February 5, 2008 Notice for 2008 1st Hong Kong http://www.cninfo.com.cn 3 Extraordinary Commercial Shareholders’ Meeting Daily 40 Securities Times and 2008-00 February 21, Resolutions of 2008 1st Hong Kong http://www.cninfo.com.cn 4 2008 Extraordinary Commercial Shareholders’ Meeting Daily Securities Announcement on Times and 2008-00 February 21, Obtaining Loan from Hong Kong http://www.cninfo.com.cn 5 2008 China Development Commercial Bank Daily Securities Times and 2008-00 February 29, Announcement on Hong Kong http://www.cninfo.com.cn 6 2008 Obtaining Loan from Commercial Huaxia Bank Daily Securities Times and 2008-00 April 11, 2008 Resolutions of the 13th Hong Kong http://www.cninfo.com.cn 7 Meeting of the Fifth Commercial Board of Directors Daily Securities Resolutions of the 10th Times and 2008-00 April 11, 2008 Meeting of the Fifth Hong Kong http://www.cninfo.com.cn 8 Supervisory Commercial Committee Daily Securities Times and 2008-00 April 11, 2008 Hong Kong http://www.cninfo.com.cn 9 2007 Annual Report Commercial Summary Daily Announcement on Implementation of Securities Regular Related Times and 2008-01 April 11, 2008 Transactions in 2007 Hong Kong http://www.cninfo.com.cn 0 and Prediction of Commercial Regular Related Daily Transactions in 2008; Securities Times and 2008-01 April 18, 2008 Hong Kong http://www.cninfo.com.cn 1 2008 1st Quarterly Commercial Report, the Text Daily Announcement on Securities Increase of the Times and 2008-01 Registered Capital of April 23, 2008 Hong Kong http://www.cninfo.com.cn 2 HARMONY and the Commercial Related Transaction Daily Securities Times and 2008-01 April 23, 2008 Notice for 2007 Annual Hong Kong http://www.cninfo.com.cn 3 Shareholders’ General Commercial Meeting Daily Securities Times and 2008-01 May 16, 2008 Resolutions of 2007 Hong Kong http://www.cninfo.com.cn 4 Annual Shareholders’ Commercial General Meeting Daily 41 Securities Announcement on Times and 2008-01 Obtaining Loan from May 16, 2008 Hong Kong http://www.cninfo.com.cn 5 Guangdong Commercial Development Bank Daily Securities Announcement on Times and 2008-01 June 3, 2008 Resolutions of the 15th Hong Kong http://www.cninfo.com.cn 6 Meeting of the Fifth Commercial Board of Directors Daily Securities Announcement on Times and 2008-01 June 13, 2008 Obtaining Loan from Hong Kong http://www.cninfo.com.cn 7 Shenzhen Pingan Commercial Bank Daily Announcement on Securities Fulfillment of the Times and 2008-01 June 19, 2008 Procedures for Hong Kong http://www.cninfo.com.cn 8 Transfer of Assets as Commercial Acquired Daily Securities Times and 2008-01 Suggestive June 19, 2008 Hong Kong http://www.cninfo.com.cn 9 Announcement Commercial Daily Securities Announcement on Times and 2008-02 June 21, 2008 Implementation of Hong Kong http://www.cninfo.com.cn 0 Dividend Distribution Commercial for 2007 Daily Suggestive Securities Announcement on Times and 2008-02 July 10, 2008 Holding 2008 2nd Hong Kong http://www.cninfo.com.cn 1 Extraordinary Commercial Shareholders’ Meeting Daily Securities Announcement on Times and 2008-02 July 17, 2008 Resolutions of the 16th Hong Kong http://www.cninfo.com.cn 2 Meeting of the Fifth Commercial Board of Directors Daily Securities Times and 2008-02 July 17, 2008 Correction Report on Hong Kong http://www.cninfo.com.cn 3 the Campaign of Commercial Corporate Governance Daily Suggestive Securities Announcement on Times and 2008-02 July 19, 2008 Holding 2008 2nd Hong Kong http://www.cninfo.com.cn 4 Extraordinary Commercial Shareholders’ Meeting Daily Securities Times and 2008-02 July 22, 2008 Hong Kong http://www.cninfo.com.cn 5 2008 Semi-Annual Commercial Report Summary Daily Securities Announcement on Times and 2008-02 July 26, 2008 Resolutions of 2008 Hong Kong http://www.cninfo.com.cn 6 2nd Extraordinary Commercial Shareholders’ Meeting Daily 42 Securities Announcement on Times and 2008-02 July 30, 2008 Resolutions of the 10th Hong Kong http://www.cninfo.com.cn 7 Meeting of the Fifth Commercial Board of Directors Daily Self-inspection Report on the Issue of Securities Occupancy of the Times and 2008-02 July 30, 2008 Company’s Funds by Hong Kong http://www.cninfo.com.cn 8 the Controlling Commercial Shareholder and the Daily Related Parties. Securities Announcement on Times and 2008-02 July 30, 2008 Resolutions of the 13th Hong Kong http://www.cninfo.com.cn 9 Meeting of the Fifth Commercial Board of Directors Daily Announcement on Securities Fulfillment of the Times and 2008-03 Increase of the August 5, 2008 Hong Kong http://www.cninfo.com.cn 0 Registered Capital to Commercial the Controlled Daily Subsidiary Securities Announcement on Times and 2008-03 September 27, Obtaining Loan from Hong Kong http://www.cninfo.com.cn 1 2008 Shanghai Pudong Commercial Development Bank Daily Securities Times and 2008-03 October 27, 2008 Hong Kong http://www.cninfo.com.cn 2 2008 3rd Quarterly Commercial Report Daily Announcement on Securities Resolutions of the Times and 2008-03 November 29, Extraordinary Meeting Hong Kong http://www.cninfo.com.cn 3 2008 of the Fifth Board of Commercial Directors Daily 43 Chapter 10 Financial Report (Refer to Pages 46 to 166) 44 Chapter 11 Documents Available for Inspection I. Financial Statements signed by and under the seal of the legal representative, chief accountant and accounting supervisors; II. Original copy of the Auditors’ Report under the seal of the accounting firm and signed by and under the seal of certified public accountants. III. All the manuscripts of the Company’s documents and announcements disclosed in the newspapers (Securities Times and Hong Kong Commercial Daily) designated by China Securities Regulatory Commission. Shenzhen Fiyta Holdings Co., Ltd. Board of Directors March 26, 2009 45 中瑞岳华会计师事务所有限公司 Zhongrui Yuehua Certified Public Accountants Co., 电话(Tel)：+86(010)88091188 Ltd. 地址：北京市西城区金融大街 35 号国际 Add:8-9 /F Block A Corporation Bldg.No.35 企业大厦 A 座 8-9 层 Finance Street Xicheng District 传真(Fax)：+86(010)88091199 Beijing PRC 邮政编码：100032 Post Code:100032 Report of the Auditors ZhongRui YueHua Shen Zi (2009) No. 02612 To the Shareholders of Shenzhen Fiyta Holdings Limited: We have audited the accompanying financial statements of Shenzhen Fiyta Holdings Limited (the “Company”), which comprise the company and consolidated balance sheets as at 31 December 2008, and the company and consolidated income statements, the company and consolidated statements of changes in shareholders' equity and the company and consolidated cash flow statements for the year then ended, and the notes to the financial statements. Directors’s Responsibility for the Financial Statements Management is responsible for the preparation of these financial statements in accordance with the Accounting Standards for Business Enterprises and the “Accounting System for Business Enterprises”. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with China Auditing Standards. Those standards require that we comply with ethical requirement and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. 46 An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in 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 of the financial statement 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 appropriate 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. Opinion In our opinion, the financial statements of Shenzhen Fiyta Holdings Limited have been prepared in accordance with Accounting Standards for Business Enterprises, and present fairly, in all material respects, the Company's and consolidated financial position as of 31 December 2008, and the Company's and consolidated results of operations and cash flows for the year then ended. Zhongrui Yuehua Chinese Public Accountant: Wang Yuqiao Certified Public Accountants Co., Ltd. Chinese Public Accountant: Liu Guibin Beijing PRC March 26 2009 47 Consolidated balance sheets at 31 December 2008 Unit:RMB 31 December 31 December ASSETS Note 2008 2007 Current Assets Currency funds 7.1 108,233,795.73 84,043,521.74 Held-for-trading financial assets - - Notes receivable - - Account receivable 7.2 100,540,669.65 37,220,749.57 Prepayment 7.3 20,772,416.86 76,850,318.78 Interest receivable - - Other accounts receivable 7.4 19,547,646.16 19,616,552.22 Inventories 7.5 677,127,363.08 517,698,982.35 Non-current assets due within one - - year Other current assets 7.6 2,623,608.52 - Total current assets 928,845,500.00 735,430,124.66 Non-current Assets Available-for-sale financial assets 7.7 4,543,000.00 16,995,000.00 Held-to-maturity investments - - Long-term receivables - - Long-term equity investments 7.8 7,701,374.39 1,891,522.17 Investment real estate 7.9 177,773,318.21 182,709,230.02 Fixed assets 7.10 262,829,687.92 67,771,100.72 Construction in process 7.11 - 407,761.50 Construction materials - - Disposal of non-current assets - - Bearer biological assets - - Oil and gas assets - - Intangible assets 7.12 12,896,865.80 12,612,319.22 R&D expense - - Goodwill 7.13 - - Long-term prepayments 7.14 35,880,151.86 18,485,098.29 Deferred tax assets 7.15 10,717,647.17 9,195,482.95 Other non-current assets - - Total non-current assets 512,342,045.35 310,067,514.87 TOTAL ASSETS 1,441,187,545.35 1,045,497,639.53 Legal Representative:Wu Guangquan Chief financial officer：Li Dehua Financial manager：Hu Xinglong 48 Consolidated balance sheets at 31 December 2008 Unit:RMB LIABILITIES AND OWNERS' 31 December 31 December Note EQUITY 2008 2007 Current liabilities Short-term borrowings 7.17 575,000,000.00 310,000,000.00 Held-for-trading financial liabilities - - Notes payable - - Accounts payable 7.18 58,809,238.66 56,312,772.48 Advances from customers 7.19 2,092,162.76 3,604,104.94 Employee benefits payable 7.20 11,845,608.17 7,187,227.42 Tax payable 7.21 -10,317,406.43 -19,033,713.74 Interest payable 7.22 987,587.50 - Dividends payable 7.23 395,426.76 - Other payables 7.24 36,863,962.80 26,206,668.52 Non-current liabilities due within one - - year Other current liabilities 7.25 1,546,453.73 - Total current liabilities 677,223,033.95 384,277,059.62 Non-current Liabilites Long-term borrowings 7.26 70,000,000.00 - Bonds payable - - Long-term payables 7.27 10,050,000.00 5,050,000.00 Special payables - - Provisions - - Deferred tax liabilities 7.28 371,774.70 2,577,823.14 Other non-current liabilities 7.29 4,050,000.00 3,000,000.00 Total non-current liabilities 84,471,774.70 10,627,823.14 Total liabilities 761,694,808.65 394,904,882.76 Owners' equity Share capital 7.30 249,317,999.00 249,317,999.00 Capital reserve 7.31 193,081,632.65 203,323,132.65 Less：Treasury shares - - Surplus reserve 7.32 109,362,340.60 103,575,024.27 Unappropriated profit 7.33 120,025,397.75 86,222,040.84 Differences arising from foreign -863,824.15 -313,768.92 currency exchange Total owner's equity belonging to 670,923,545.85 642,124,427.84 parent company Minority interests 8,569,190.85 8,468,328.93 Total owners' equity 679,492,736.70 650,592,756.77 TOTAL LIABILITIES AND 1,441,187,545.35 1,045,497,639.53 OWNERS' EQUITY Legal Representative:Wu Guangquan Chief financial officer：Li Dehua Financial manager：Hu Xinglong 49 Consolidated income statements for the year ended 31 December 2008 Unit:RMB Items Note 2008 2007 Operating revenues 7.34 1,086,405,568.28 805,273,114.09 Including: Main business income 1,086,405,568.28 805,273,114.09 Operating costs 1,016,997,434.92 735,709,428.16 Including :Main business cost 7.34 698,506,248.16 521,497,507.40 Business tax and levies 7.35 7,157,846.06 4,544,164.15 Selling and distribution 7.36 163,184,243.63 105,946,362.26 expenses Administrative expenses 7.37 98,956,724.46 82,229,298.81 Financial expenses 7.38 45,534,434.85 18,162,268.05 Impairment loss of assets 7.39 3,657,937.76 3,329,827.49 Add: Gains from changes in fair values - - Investment income 7.40 102,851.35 1,872,228.96 Including: Income from 9,351.35 306,522.17 investment in associates and joint ventures Operating Profit / ( loss ) 69,510,984.71 71,435,914.89 Add: Non-operational income 7.41 5,019,833.99 1,981,659.39 Less: Non-operational expenses 7.42 306,263.63 1,926,318.56 Including: losses from 58,183.06 66,617.27 disposal of non-current assets Total profit / ( loss ) 74,224,555.07 71,491,255.72 Less:Income tax expenses 7.43 9,205,793.25 9,747,120.33 Net profit / ( loss) 65,018,761.82 61,744,135.39 Including: Net profit of the party being absorbed before the combination date in a - - business combination involving entities under common control Net profit attributable to 64,522,473.14 60,876,912.74 [owners/shareholders] of the parent company Profit or loss attributable to minority 496,288.68 867,222.65 interests Earnings per share Basic EPS 0.259 0.244 Diluted EPS 0.259 0.244 Legal Representative:Wu Guangquan Chief financial officer：Li Dehua Financial manager：Hu Xinglong 50 Consolidated cash flow statements for the year ended 31 December 2008 Unit:RMB Note 2008 2007 Cash flows from operating activities: Cash received from the sale of goods or 1,214,962,317.46 914,447,918.98 rendering of services Refunds of taxes - - Other cash receipts relating to operating 7.45 5,256,331.95 5,593,283.14 activities Sub-total of cash inflows 1,220,218,649.41 920,041,202.12 Cash paid for goods and services 1,018,528,515.53 760,812,184.43 Cash paid to and on behalf of employees 117,635,606.50 83,922,858.83 Payments of all types of taxes 51,157,288.24 39,916,161.68 Other cash payments related operating 7.46 110,622,344.33 92,799,007.96 activities Sub-total of cash out flows 1,297,943,754.60 977,450,212.90 Net cash flows from operating activities -77,725,105.19 -57,409,010.78 Cash flows from investing activities： Cash received from return of investments - 3,712,991.75 Cash received from return on investment 93,500.00 - Net cash received from the sale of non-current assets，intangible assets and other long- term 414,700.00 1,657,430.00 assets Net cash received from disposal of - - subsidiaries and other business units Other cash receipts from related investing 359,963.26 - activities Sub-total of cash inflows 868,163.26 5,370,421.75 Cash paid to acquire non-current assets, 173,444,783.00 79,985,985.27 intangible assets and other long-term assets Cash paid to acquire investments - - Net cash recerived from the subsidiaries and - - other business units Payment to other cash-related investment - - activities Sub-total of cash outflows 173,444,783.00 79,985,985.27 Net cash flows from investing activities -172,576,619.74 -74,615,563.52 Cash flows from financing activities： Cash received from being invested - - Including: cash received from minority - - investment in subsidiary Cash received from borrowings 1,165,000,000.00 310,000,000.00 Other cash receipts relating to financing 7.47 29,119,083.43 - activities Sub-total of cash inflows 1,194,119,083.43 310,000,000.00 Cash paid to the amounts borrowed 855,000,000.00 140,000,000.00 Cash paid for distribution of dividends, profits 63,169,161.70 13,557,982.50 51 and interests Including: cash paid to the subsidiary in - terms of dividends, profit Cash paid to other financing activities 1,350,000.00 753,760.24 Sub-total of cash outflows 919,519,161.70 154,311,742.74 Net cash flows from financing activities 274,599,921.73 155,688,257.26 Cash increased or decreased from the -107,922.81 - changes of exchange rate Net increase in cash and cash equivalents 24,190,273.99 23,663,682.96 Add: cash and cash equivalents at beginning 84,043,521.74 60,379,838.78 of period Cash and cash equivalents balance at the 108,233,795.73 84,043,521.74 end of the year Legal Representative:Wu Guangquan Chief financial officer：Li Dehua Financial manager：Hu Xinglong 52 Consolidated statements of changes in shareholders' equity for the year ended 31 2008 Equity attributable to shareholders of the parent company Less: Share Capital Earned Unappropriat- Treasury O capital reserve surplus ed profit shares I. Balance at 31 249,317,999.00 203,323,132.65 - 103,575,024.27 86,222,040.84 -31 December 2007 1.Add：Changes in - - - - - accounting policies 2.Correction of prior - - - - - periods errors II.Balance at 1 January 249,317,999.00 203,323,132.65 - 103,575,024.27 86,222,040.84 -31 2008 III.Changes for the - -10,241,500.00 - 5,787,316.33 33,803,356.91 -55 year (I) Net profit - - - - 64,522,473.14 (II) Gains and losses directly recognised in - -10,241,500.00 - - - -55 shareholders' equity Net fair value changes of available-for-sale - -12,452,000.00 - - - financial assets Implications of changes in other shareholders’s - - - - equity of investees using equity method Tax effects of items directly recognised in - 2,210,500.00 - - - shareholders' equity Others - - - - - -55 Subtotal of (I) and (II) - -10,241,500.00 - - 64,522,473.14 -55 53 (III) Owner’s contributions and - - - - - reduction in capital 1. Capital contribution - - - - - from owners 2. Share-based payment recognised in - - - - - shareholders' equity 3. Others - - - - - (IV) Profit distribution - - - 5,787,316.33 -30,719,116.23 1. Transfer to surplus - - - 5,787,316.33 -5,787,316.33 reserve 2. Distribution to - - - - -24,931,799.90 shareholders 3. Others - - - - - (V) Transfer within - - - - - shareholders' equity 1. Capitalisation of - - - - - capital reserve 2. Capitalisation of - - - - - surplus reserve 3. Loss made up by - - - - - surplus reserve 4. Others - - - - - IV. Balance at 31 249,317,999.00 193,081,632.65 - 109,362,340.60 120,025,397.75 -86 December 2008 Legal Representative:Wu Guangquan Chief financial officer：Li Dehua Financial manager：Hu Xinglong 54 Consolidated statements of changes in shareholders' equity for the year ended 31 December 2008 2007 Equity attributable to shareholders of the parent company Less: Share Capital Earned Unappropriat- Treasury Oth capital reserve surplus ed profit shares I. Balance at 31 249,317,999.00 191,847,232.65 - 101,480,997.62 19,988,231.72 December 2007 1.Add：Changes in - 1,751,000.00 - -1,791,540.65 9,242,463.68 accounting policies 2.Correction of prior - - - - - periods errors II.Balance at 1 January 249,317,999.00 193,598,232.65 - 99,689,456.97 29,230,695.40 2008 III.Changes for the - 9,724,900.00 - 3,885,567.30 56,991,345.44 -313, year (I) Net profit - - - - 60,876,912.74 (II) Gains and losses directly recognised in - 9,724,900.00 - - - -313, shareholders' equity Net fair value changes of available-for-sale - 11,935,000.00 - - - financial assets Implications of changes in other shareholders’s - - - - - equity of investees using equity method Tax effects of items directly recognised in - -2,210,100.00 - - - shareholders' equity Others - - - - - -313, Subtotal of (I) and (II) - 9,724,900.00 - - 60,876,912.74 -313, 55 (III) Owner’s contributions and - - - - - reduction in capital 1. Capital contribution - - - - - from owners 2. Share-based payment recognised in - - - - - shareholders' equity 3. Others - - - - - (IV) Profit distribution - - - 3,885,567.30 -3,885,567.30 1. Transfer to surplus - - - 3,885,567.30 -3,885,567.30 reserve 2. Distribution to - - - - - shareholders 3. Others - - - - - (V) Transfer within - - - - - shareholders' equity 1. Capitalisation of - - - - - capital reserve 2. Capitalisation of - - - - - surplus reserve 3. Loss made up by - - - - - surplus reserve 4. Others - - - - - IV. Balance at 31 249,317,999.00 203,323,132.65 - 103,575,024.27 86,222,040.84 -313, December 2008 Legal Representative:Wu Guangquan Chief financial officer：Li Dehua Financial manager：Hu Xinglong 56 The Company balance sheets at 31 December 2008 Unit:RMB 31 December 31 December ASSETS Note 2008 2007 Current Assets Currency funds 54,938,436.99 46,746,295.03 Held-for-trading financial assets - - Notes receivable - - Account receivable 8.1 30,970,485.15 18,909,117.02 Account prepaid - 60,000,000.00 Interest receivable - - Dividend receivable 45,838,566.24 - Other accounts receivable 8.2 328,199,004.65 341,831,097.65 Inventories 70,057,384.10 55,452,601.07 Non-current assets due within one - - year Other current assets - - Total current assets 530,003,877.13 522,939,110.77 Non-current Assets Available-for-sale financial assets 4,543,000.00 16,995,000.00 Held-to-maturity investments - - Long-term receivables - - Long-term equity investments 8.3 336,404,374.39 160,195,023.04 Investment real estate 177,773,318.21 182,709,230.02 Non-current assets 249,121,975.84 55,761,814.44 Construction in progress - 407,761.50 Construction materials - - Disposal of non-current assets - - Bearer biological assets] - - Oil and gas assets - - Intangible assets 12,783,665.80 12,499,119.22 Development expenditure - - Goodwill - - Long-term prepayments 10,834,367.04 6,266,056.23 Deferred tax assets 3,940,470.02 2,706,874.49 Other non-current assets - - Total non-current assets 795,401,171.30 437,540,878.94 TOTAL ASSETS 1,325,405,048.43 960,479,989.71 Legal Representative:Wu Guangquan Chief financial officer：Li Dehua Financial manager：Hu Xinglong 57 The Company balance sheets at 31 December 2008 Unit:RMB 31 December 31 December LIABILITIES AND OWNERS' EQUITY Note 2008 2007 Current liabilities Short-term borrowings 575,000,000.00 310,000,000.00 Held-for-trading financial liabilities - - Notes payable - - Accounts payable 7,827,286.28 10,646,888.38 Advances from customers 318,790.01 717,260.00 Employee benefits payable 3,946,072.82 1,254,911.62 Tax payable 7,421,939.59 5,630,570.37 Interest payable 987,587.50 - Dividends payable - - Other payables 31,429,069.07 26,103,420.28 Non-current liabilities due within one year - - Other payables 800,000.00 - Total current liabilities 627,730,745.27 354,353,050.65 Non-current Liabilites Long-term borrowings 70,000,000.00 - Bonds payable - - Long-term payables 50,000.00 50,000.00 Special payables - - Provisions - - Deferred tax liabilities 371,774.70 2,574,273.99 Other non-current liabilities 4,050,000.00 3,000,000.00 Total non-current liabilities 74,471,774.70 5,624,273.99 Total liabilities 702,202,519.97 359,977,324.64 Owners' equity Share capital 249,317,999.00 249,317,999.00 Capital reserve 193,081,632.65 203,323,132.65 Less：Treasury shares - - Surplus reserve 109,362,340.60 103,575,024.27 Unappropriated profit 71,440,556.21 44,286,509.15 Total owners' equity 623,202,528.46 600,502,665.07 TOTAL LIABILITIES AND OWNERS' 1,325,405,048.43 960,479,989.71 EQUITY Legal Representative:Wu Guangquan Chief financial officer：Li Dehua Financial manager：Hu Xinglong 58 The Company income statements for the year ended 31 December 2008 Unit:RMB ITEMS Note 2008 2007 Operating revenues 8.4 262,408,806.23 224,124,868.31 Less：Operating costs 8.4 111,616,068.75 99,846,405.26 Business tax and levies 4,323,178.19 3,706,931.32 Selling and 73,833,670.67 53,418,647.14 distribution expenses Administrative 44,082,027.28 41,954,561.50 expenses Financial expenses 18,612,771.81 977,966.94 Impairment loss of 1,857,687.49 329,493.02 assets Add: Gains from changes in fair - - values Investment income 8.5 46,629,791.32 19,725,851.04 Including: Income from investment in associates and joint 9,351.35 306,522.17 ventures Operating Profit / ( loss ) 54,713,193.36 43,616,714.17 Add: Non-operational income 2,093,368.05 1,076,501.32 Less: Non-operational expenses 158,992.94 1,842,353.30 Including: losses 8,027.07 61,109.27 from disposal of non-current assets Total profit / ( loss ) 56,647,568.47 42,850,862.19 Less:Income tax expenses -1,225,594.82 3,995,189.16 Net profit / ( loss) 57,873,163.29 38,855,673.03 Earnings per share Basic EPS Diluted EPS Legal Representative:Wu Guangquan Chief financial officer：Li Dehua Financial manager：Hu Xinglong 59 The Company cash flow statements for the year ended 31 December 2008 Unit:RMB Note 2008 2007 Cash flows from operating activities: Cash received from the sale of goods or rendering 267,899,546.79 226,926,957.50 of services Refunds of taxes - - Other cash receipts relating to operating activities 51,073,084.66 4,723,283.14 Sub-total of cash inflows 318,972,631.45 231,650,240.64 Cash paid for goods and services 111,118,178.71 79,121,867.85 Cash paid to and on behalf of employees 51,128,356.34 35,353,792.02 Payments of all types of taxes 19,143,558.14 23,229,151.04 Other cash payments related operating activities 52,852,038.92 171,395,827.76 Sub-total of cash out flows 234,242,132.11 309,100,638.67 Net cash flows from operating activities 84,730,499.34 -77,450,398.03 Cash flows from investing activities： Cash received from return of investments - 3,712,991.75 Cash received from return on investment 7,438,952.07 - Net cash received from the sale of non-current assets，intangible assets and other long- term 381,760.00 1,657,430.00 assets Net of cash received from disposal of - - subsidiaries and other business units Other cash receipts from related investing - - activities Sub-total of cash inflows 7,820,712.07 5,370,421.75 Cash paid to acquire non-current assets, intangible 148,969,766.25 65,779,565.65 assets and other long-term assets Cash paid to acquire investments 176,200,000.00 19,744,000.00 Net cash recerived from the subsidiaries and other - - business units Payment to other cash-related investment - 13,462.70 activities Sub-total of cash outflows 325,169,766.25 85,537,028.35 Net cash flows from investing activities -317,349,054.18 -80,166,606.60 Cash flows from financing activities： Cash received from being invested - - Cash received from borrowings 1,160,000,000.00 310,000,000.00 Cash paid to other financing activities - - Sub-total of cash inflows 1,160,000,000.00 310,000,000.00 Cash paid to the amounts borrowed 855,000,000.00 140,000,000.00 Cash paid for distribution of dividends, profit and 62,708,661.70 13,557,982.50 interests Cash paid to other financing activities 1,350,000.00 600,000.00 Sub-total of cash outflows 919,058,661.70 154,157,982.50 Net cash flows from financing activities 240,941,338.30 155,842,017.50 Cash increased or decreased from the changes -130,641.50 - 60 of exchange rate Net increase in cash and cash equivalents 8,192,141.96 -1,774,987.13 Add: cash and cash equivalents at beginning of 46,746,295.03 48,521,282.16 period Cash and cash equivalents balance at the end 54,938,436.99 46,746,295.03 of the year Legal Representative:Wu Guangquan Chief financial officer：Li Dehua Financial manager：Hu Xinglong 61 The Company statements of changes in shareholders' equity for the year ended 31 D 2008 Less: Share Capital Earned Un Treasury capital reserve surplus shares I. Balance at 31 December 2007 249,317,999.00 203,323,132.65 - 103,575,024.27 1.Add：Changes in accounting - - - - policies 2.Correction of prior periods errors - - - - II.Balance at 1 January 2008 249,317,999.00 203,323,132.65 - 103,575,024.27 III.Changes for the year - -10,241,500.00 - 5,787,316.33 (I) Net profit - - - - (II) Gains and losses directly - -10,241,500.00 - - recognised in shareholders' equity Net fair value changes of - -12,452,000.00 - - available-for-sale financial assets Implications of changes in other shareholders’ equity of investees - - - using equity method Tax effects of items directly - 2,210,500.00 - - recognised in shareholders' equity Others - - - - Subtotal of (I) and (II) - -10,241,500.00 - - (III) Owner’s contributions and - - - - reduction in capital 1. Capital contribution from owners - - - - 2. Share-based payment recognised - - - - in shareholders' equity 3. Others - - - - (IV) Profit distribution - - - 5,787,316.33 1. Transfer to surplus reserve - - - 5,787,316.33 2. Distribution to - - - - 62 [owners/shareholders] 3. Others - - - - (V) Transfer within shareholders' - - - - equity 1. Capitalisation of capital reserve - - - - 2. Capitalisation of surplus reserve - - - - 3. Loss made up by surplus reserve - - - - 4. Others - - - - IV. Balance at 31 December 2008 249,317,999.00 193,081,632.65 - 109,362,340.60 Legal Representative:Wu Guangquan Chief financial officer：Li Dehua Financial manager：Hu Xinglong 63 The Company statements of changes in shareholders' equity for the year ended 31 D 2007 Less: Share Capital Earned Un Treasury capital reserve surplus shares I. Balance at 31 December 2007 249,317,999.00 191,847,232.65 - 101,480,997.62 1.Add：Changes in accounting - 1,751,000.00 - -1,791,540.65 policies 2.Correction of prior periods errors - - - - II.Balance at 1 January 2008 249,317,999.00 193,598,232.65 - 99,689,456.97 III.Changes for the year - 9,724,900.00 - 3,885,567.30 (I) Net profit - - - - (II) Gains and losses directly - 9,724,900.00 - - recognised in shareholders' equity Net fair value changes of - 11,935,000.00 - - available-for-sale financial assets Implications of changes in other shareholders’ equity of investees - - - - using equity method Tax effects of items directly - -2,210,100.00 - - recognised in shareholders' equity Others - - - - Subtotal of (I) and (II) - 9,724,900.00 - - (III) Owner’s contributions and - - - - reduction in capital 1. Capital contribution from owners - - - - 2. Share-based payment recognised - - - - in shareholders' equity 3. Others - - - - (IV) Profit distribution - - - 3,885,567.30 1. Transfer to surplus reserve - - - 3,885,567.30 2. Distribution to - - - - 64 [owners/shareholders] 3. Others - - - - (V) Transfer within shareholders' - - - - equity 1. Capitalisation of capital reserve - - - - 2. Capitalisation of surplus reserve - - - - 3. Loss made up by surplus reserve - - - - 4. Others - - - - IV. Balance at 31 December 2008 249,317,999.00 203,323,132.65 - 103,575,024.27 Legal Representative:Wu Guangquan Chief financial officer：Li Dehua Financial manager：Hu Xinglong 65 SHENZHEN FIYTA HOLDINGS LIMITED Notes to the Financial Statements The Year 2008 (Except in particular, the units of amount is RMB Yuan) The basic information of the Company Shenzhen Fiyta Holdings Limited (hereinafter referred to as "the Company" or the "Company" ) was approved by the General Office of Shenzhen Municipal People's Government Office in Shenzhen Goverment Fu[1992]No.1259 file,with China National Aero-Technology Import and Export Shenzhen Trade&Industry Center (later renamed the "China National Aero-Technology Shenzhen Co., Ltd.") as a sponsor, restructured, established and renamed from "Shenzhen Fiyta Time Industrial Company" to Shenzhen Fiyta Holdings Limited. On March 10, 1993, the company was approved of public offering of RMB ordinary shares(A shares) and RMB special shares(B shares) in the territory by the Bank of China branch in Shenzhen Special Economic Zone with [Shenzhen People's Bank(1993)No.070 file]. According to the Shenzhen Securities Management Office Fu[1993]No.20 file and Shenzhen Stock Exchange (1993）No.16 file, the company's A shares and B shares were at the Shenzhen Stock Exchange since June 3, 1993. January 30, 1997, the company was renamed of Shenzhen Fiyta Holdings Limited by the approval of Shenzhen Municipal Administration for Industry and Commerce. July 4,1997, according to the share transfer agreement signed by China National Aero-Technology Shenzhen Co., Ltd. (hereinafter referred to as "CATIC Shenzhen Company") and Shenzhen China Aviation Industry Company Limited (later renamed the "Shenzhen China Aviation Group Company Limited", hereinafter referred to as "China National Aviation 66 Group"), "CATIC Shenzhen Company transferred 7,236 shares of corporate shares (representing the company's total share capital of 52.24%) held to China National Aviation Group. Since then, the company's controlling shareholder changed into China National Aviation Group from CATIC Shenzhen Company. October 26,2007, The companies splited share structure reform. Under the premise of maintaining the company's total shares of 249,317,999 shares unchanged, the Company's non-tradable shareholders paid 3.1 shares per 10 Outstanding shares to all the outstanding shareholders registered on option registration date designated by share reform program. At this point, after the share reform, the shares percentage held by CNAC Group fell into 44.69% from 52.24%. February 29,2008, in order to increase operating range, via Shenzhen Municipal Administration for Industry and Commerce approved, the Company's corporate business license changed to No. 440301103196089 from Shenzhen Company Zi No.4403011001583. The Company and its subsidiaries' operate scope is primarily the production and operation of a variety of pointer and its quartz watch movements, components, various timing devices, processing and wholesale gold jewelry K List (production sites to be declared separately); domestic commercial, material supply and marketing industry (excluding franchise, specifically control, merchandise sales); property management and property leasing; import and export business of self-design, construction; import and export business (according to Shenzhen Trading Management Register Zi No.2007-072 file to implement).The legal representative of the Company is WuGuangyu. The residence of the Company is Fiyta Technology Building in Gao Xin Nan Yi Dao of Nanshan District Shenzhen. The Company establishes a general meeting of shareholders, boards of directors, board of supervisors, the audit committee, strategy committee and the nomination, remuneration, 67 evaluation commission and other institutions of governance. Under the company, there are manager, the ministry of human resources, finance department, audit department, the department of the relations between the party, the securities department, the property department, sales division, R&D, innovative design and other functional departments. The financial statements is approved to report on March 24, 2009 by the Company's Board of Directors. Statement of Compliance with Corporate Accounting Standards The Company financial statements are prepared in line with "Accounting Standard for Business Enterprises - Basic Guidelines" and other requirements of the accounting standards issued by the People's Republic of China Ministry of Finance. It truly and completely reflectes the company's financial position and consolidated financial position on December 31,2008, operating and combined operating of the year 2008, 2008 annual cash flow and cash flow of the merger, and other relevant information. Foundation of the financial statements The company's financial statement is based on the assumptions of continuing operations, confirmed and measured according to the actual occurrence of the transactions and matter, in accordance with the "Accounting Standard for Business Enterprises - Basic Guidelines" promulgated by People's Republic of China the Ministry of Finance and other provisions of the Accounting Standards. On this basis, the financial statements are prepared. Company's main accounting policies, accounting estimates and errors in the early 1.Accounting period 68 Accounting for the calendar year January 1 until December 31. 2.Bookkeeping Standard Money The company serves RMB as the accounting standard money. 3.Bookkeeping Basics and Accounting Measurement Property The company accounting is on an accrual basis for bookkeeping, generally uses the historical cost as a measurement property. When the determined accounting elements are in line with the requirements of Accounting Standard for Business Enterprises and able to obtain a reliable measurement, it could use the replacement cost, net realizable value, Present value, and fair value to measure. 4.Criteria for determining cash equivalents Cash equivalents of the Company means the company's investment, with short duration (usually from the date of purchase, within three months of maturity), strong liquidity, being easily convertible to known amounts of cash, and small risks of the value changes. 5.Foreign Currency Business Accounting Methods The Company's foreign currency transactions happening at the initial confirmation , are convertible into the amount of bookkeeping standard money by the spot rate of trading day(often referred to the same day the U.S. rate released by People's Bank of China , the same below). On the balance sheet day, for monetary items in foreign currency, we use the spot rate of the balance sheet day. The resulting exchange differences, except in accordance with the requirement of "Accounting Standard for Business Enterprises No. 17 - Borrowing Costs", capitalize the exchange differences resulted from the related foreign currency borrowings ,which are for purchase of production or production in line with the the condition 69 of capital assets, are all included in current period profit and loss. Foreign currency non-monetary items in the historical cost measurement, still use the the spot rate of trading day, and won't change the amount of bookkeeping standard money. Meanwhile, foreign currency non-monetary items by fair value measurement, use the spot rate of fair value determined day to convert. And the resulting exchange differences are included in current period profit and loss or capital surplus. 6.Financial Assets, Financial Liabilities (1) Financial assets and financial liabilities classifications In light of its own operational characteristics and risk management requirements, the Company divides the financial assets obtained or the financial liabilities beared into several following categories at the initial recognition: ① the financial assets or liabilities which are measured by fair value and whose changes are included in the current period profit and loss; ②hold-to-maturity investment；③loans and and receivables；④available-for-sale financial assets；⑤other financial liabilities。 (2) Financial assets and financial liabilities' confirm basis and measurement methods When the company becomes a party to the financial instrument contract, that is confirmation of a financial assets or financial liabilities. Initially confirm the financial assets or financial liabilities according to the fair value measurement. The company's Initial recognition of financial assets or financial liabilities, is in accordance with the fair value measurement. With regard to the financial assets or liabilities which are measured by fair value and whose changes are included in the current period profit and loss, relevant transaction costs are 70 directly included in the current period profit and loss. For other types of financial assets or financial liabilities, related transaction costs are included in the amount of initial confirmation. The follow-up measurement methods of Financial assets and financial liabilities include: ①The financial assets or liabilities, which are measured by fair value and whose changes are included in surplus, will be follow-up measured according to fair value. All the realized&unrealized profit and loss will be included in surplus. ②Hold-to-maturity investment and receivables, use the effective interest rate method by the post-amortization cost measurement. Its termination confirmation, the gains and losses resulted from the occurrence of impairment or amortization generated, are all included surplus. ③Available-for-sale financial assets are follow-up measured according to the fair value. With the Exception of exchange gains or losses formed by Impairment losses and foreign currency monetary financial assets,the gains or losses generated from the changes of fair value are directly included in the owners equity and will be transferred at the termination of the financial assets confirmation, included in surplus. ④Equity instrument investment, which are with no quotation in an active market and whose fair value can not be a reliable measurement, as well as the Derivative Financial Assets,which are linked with the equity instrument and must be settled through delivery equity instrument, are in accordance with the cost measurement. ⑤Other financial liabilities are follow-up measured by post-amortization cost , however, except in the following situations: A. The Derivative Financial liabilities linked with the equity instrument that is with no quotation in an active market and whose fair value can not be a reliable measurement, 71 as well as must be settled through delivery equity instrument, are in accordance with the cost measurement. B. The financial guarantee contract, which not belonging to designated financial liabilities with fair value measurement and changes included in current profit and loss, either or the loan commitments, which are not designated measured by fair value even its changes included in current and loans below-market rates, will be follow-up measured according to the higher of the following two amounts after the initial recognition. a .The amount determined by "Accounting Standard for Business Enterprises No. 13 - or there is the matter" b .The balance remained in the initial confirmation amount which deduct the amount of accumulated amortizationin determined in accordance with "Accounting Standard for Business Enterprises No. 14 - Income" principle. (3) Financial assets and financial liabilities' the fair value determation methods Financial assets or financial liabilities with existence of an active market usually determine the fair value at the quotation of the active market. Financial assets or financial liabilities with no existence of an active market, use valuation techniques to determine their fair value. (4) The transfer of financial assets' confirmation and measurement The company confirmes the termination of financial assets which have transferred almost all the risks and rewards of the ownership of financial assets to the turn side; continues to confirm the transferred financial assets which retains all the risks and rewards of the ownership of 72 financial assets even serves the consideration as a financial liability. If neither did the company transfer nor retained all the related risks and rewards of the financial assets ownership, separately deal with it as the following conditions: ①To the giving up control of the financial assets, terminate the confirmation . ②To the not giving up the control of the financial assets, in accordance of the extent of continuing involvement of the transferred financial assets, confirm the related financial assets and accordingly confirm the liabilities. The overall transfer of financial assets satisfying the conditions of termination of confirmation, differences between the following two amounts will be included in current period profit and loss:① book value of the transferred financial assets；②The sum of consideration received by the transfer, and the original accumulated amount of the fair value changes directly included in the ownership equity. Part of the transfer of financial assets satisfying the conditions of termination of confirmation, the overall book value of the financial assets will be transferred.Between the two parts of termination of confirmation and no termination, share in accordance with their relative fair value, and include the amount of the difference between the following two terms into the current profit and loss:①book value of the part termination of confirmation;② the sum of the consideration of the part termination of confirmation, and the amount of the corresponding part termination of confirmation to the accumulated amount of the original fair value changes directly included in the ownership equity. (5) Testing methods of financial assets impairement and methods of provision for impairment preparation ①The scope of the financial assets provision impairment and the objective evidence of impairment On the balance sheet day, the company carries out inspection of the book value of financial 73 assets other than these which are measured by fair value and it changes included in the current period profit and loss. There is objective evidence shows that the occurrence of impairment of financial assets, provision for impairment prepared. The objective evidence showing the occurrence of the financial assets impairment, refers to the matter that actually occurred after the initial confirmation of the financial assets ,affects the expectation of the future cash flows of the financial assets, and the effect can be reliably measured by the business. ②Testing methods of financial assets impairement and methods of provision for impairment preparation A. The financial assets measured by post-amortization cost If there is objective evidence showing that the impairment of financial assets happen, then write down the book value of the financial assets to its expected future cash flow (excluding future credit losses which have not yet happened)present value, the written-down amount included in current period profit and loss. Expect the present value of future cash flow, discount and determine in accordance with the original effective interest rate of the financial assets, and consider the value of the security related. Separately carry out the test for impairment of the financial assets with the individual amount of RMB500,000.00yuan above (including 500,000.00yuan). if there is objective evidence showing that it has happened impairment, confirm the impairment loss and include it in current period profit and loss. To the financial assets with not a significant individual amount, include testing impairment in a portfolio of financial assets having the similar credit risk characteristics, or separately carry out the test for impairment. The financial assets where impairment did not happen in the separate testing(including financial assets with individual major and non-significant amount ), include testing impairment in a portfolio of financial assets having the similar credit risk 74 characteristics. To the financial assets singly confirmed impairment loss, exclude testing impairment in a portfolio of financial assets having the similar credit risk characteristics. After confirm the impairment loss of the financial assets measured by post-amortization cost, if there is objective evidence that the value of the financial assets has been restored, and objectively related to the matter happening after the confirmation of the loss, the original confirmation of the impairment loss will be recognized in back,and included in the current period profits and losses. However, the book value turning back does not exceed the post-amortization cost on the turning-bake day of the financial assets under the situation of assumption of no provision for impairment preparation. Receivables impairment testing and provision methods, see "Notes iv, receivables." B. Financial assets measured by cost If there is evidence that the impairment of financial assets happen, confirm the amount of the difference between the book value of the financial assets and present value,which are determined and discounted on future cash flow in accordance with the prevailing market rate of return, as the impairment losses and include in current period profits and losses. Once the happening impairment losses are confirmed, no longer turn back. According to "Accounting Standard for Business Enterprises No. 2 - long-term equity investment" providing that the long-term equity investment which are accounted by cost method, with no consideration in an active market, and fair value can not be reliably measured, its impairment is also done with the principles above. C. Available-for-sale financial assets 75 If there is objective evidence that the impairment of the financial assets happen, the accumulated losses due to the decline in fair value that is originally directly included in the capital surplus, are to be transferred and included in surplus. The transferred accumulated loss is the balance of initial acquisition costs of the Available-for-sale financial assets deducting the money to recover the principal and the amortized amount, as well as the current fair value and the impairment losses originally included in surplus. 7. Account receivable (1) Confirmed standard of bad debt reserves When the book value of account receivable is checked at the date of balance sheet, the Company should do withdrawal depreciation reserves, if the depreciation of account receivable has been indicated by the following objective evidences: ①Debtor appears significant financial difficulty; ②Debtor violate of the terms of the contract ( e.g. default or delinquency in interest or principal payments); ③Debtor may go bankrupt or financial restructuring; ④Other objective evidences that indicate the depreciation of account receivable. (2) Withdrawal method of bad debt reserves At the date of balance sheet, the Company should do independent depreciation testing for the account receivable that has a big single amount (that is, the account receivable with a single amount over 800,000.00 Yuan and other account with a single amount over 500,000.00 Yuan) and that has a risk in accordance with the characteristics of credit risk though not has a big single amount (that is, the account receivable with more than 4 years account receivable aging). When objective evidences indicate the depreciation of account receivable, the Company should confirm the impairment losses and do withdrawal bad debt reserves in accordance with the difference between cash flow current value in the future and book value. When the impairment losses are confirmed, if the difference between short-term cash flow current value in the future and book value is very small, the Company doesn’t discount the cash flow current value in the future. The other account receivable except the above two kinds of situations and the ones with impairment losses after independent depreciation testing should 76 be classified as several groups, and confirm the impairment losses according to the rate of group balance, then do withdrawal bad debt reserves. The withdrawal ratio of bad debt reserves is: Accounts receivable ageing The withdrawal ratio (%) Below 1 year( Including 1 year, following same ) 5 1-2 years 10 2-3 year 30 More than 3 years 50 The Company’s withdrawal bad debt reserves isn’t including staff reserve fund and account receivable of the merged subsidiaries. 8. Inventory (1) Inventory Categories The Company’s inventory is divided into raw materials, wrappage, low-value consumption goods, semi-finished goods, finished goods. (2) Valuation methods of inventory’s acquirement and delivery According to the actual cost, the inventory’s acquirement is valued. The cost of inventory includes procurement cost, processing cost and other cost. The valuation methods of inventory’s acquirement and delivery are weighted average and specific identification. (3) Amortization methods of low-value consumption goods and wrappage The amortization method of low-value consumption goods and wrappage is one-off amortization method. (4) The inventory system is perpetual inventory system. (5) Confirmed standard and withdrawal method of inventory falling price reserves The Company’s inventory is calculated according to the lower one between the cost and the invariable present net worth at the date of balance sheet. The invariable present net worth is the amount that the estimated price of inventory cuts 77 estimated cost, estimated selling expenses and taxes and dues before the project finished. And, ①In the regular process of production and management, the invariable present net worth of the inventory for sale such as finished productions and materials for sale is the amount that its estimated price of inventory cuts estimated selling expenses and taxes and dues. ②The invariable present net worth of finished goods is the amount that its estimated price of inventory cuts estimated selling expenses and taxes and dues. Among this, the invariable present net worth of the Company’s FIYTA watches is confirmed according to the annual sales status in that year. The ratio of invariable present net worth to annual sales status is: Ratio of invariable present net Annual sales status worth (%) Long-term backlog with no value 0 Long-term backlog with quality problems 10 Long-term backlog with no market 20 New designs with no market 45 New designs to be eliminated 70 The falling price reserves of the Company’s sales brand watches are provisioned in accordance with single inventory project. At the date of balance sheet, if the cost of inventory is higher than its invariable present net worth, do inventory falling price reserves and include into the current profit and loss account. If the factors that affect the value depreciation of the inventory have vanished, the depreciation amount should be recovered and back from the former amount of inventory falling price reserves, and included into the current profit and loss account. 9. Long-term investment on stocks (1) Initial measurement of long-term investment on stocks The Company obtains the long-term investment on stocks through the business combinations under the same control, and takes the initial investment cost in accordance with share of the owners’ equity’s book value of the other side’s; and the Company obtains the long-term investment on stocks through the business combinations under the different control, 78 and takes the initial investment cost of long-term investment on stocks in accordance with the determinate combinational cost. If the Company obtains the long-term investment on stocks by other ways, differentiate ways to obtain and confirm the initial investment cost in accordance with the cash actually paid, the fair value of private offerings of equity, the discussed value of investment contracts or agreement. The initial investment cost includes expenses, taxes, and other necessary expenditures in relevance to obtaining the long-term investment. The Company obtains the long-term investment on stocks through the business combinations under the same control, and takes the initial investment cost of long-term investment on stocks in accordance with share of the owners’ equity’s book value of the other side’s at the merger date. The difference between the initial investment cost of long-term investment on stocks and the paid book value of the combination consideration (or the total value of issued shares) is used to adjust capital reserve, if capital reserve’s not enough to balance, then it’s to adjust retained earnings. All kinds of direct costs that the mergee paid for are included into the current profit and loss account. The bonds that issued for the business combinations or the fees and commission for assuming responsibility for other debt should be included into the initial measurement amount of the bonds and the other debts. The fees and commission for issuing private offerings of equity in the business combinations offset the premium income of private offerings of equity, if the premium income is not enough to balance, it’s to balance retained earnings. The Company obtains the long-term investment on stocks through the business combinations under the different control, and takes the initial investment cost of long-term investment on stocks in accordance with the determinate combinational cost at the purchase date. The combinational cost is the assets that the Company paid for the control of the other company, the debt that the Company assumed responsibility for, the fair value of private offerings of equity that the Company issued, and all kinds of direct costs in relevance to the business combination that the Company paid for at the purchase date. For the business combinations that implemented by several steps of exchange and deal, the combinational cost 79 is the sum of every transaction cost. The items may impact the combinational cost in the future should be appointed in the contract of combination, if the item is likely to impact in the future and the amount can be reliably calculated at the purchase date, it should be included into the combinational cost. The bonds that issued for the business combinations or the fees and commission for assuming responsibility for other debt should be included into the initial measurement amount of the bonds and the other debts. The fees and commission for issuing private offerings of equity in the business combinations offset the premium income of private offerings of equity, if the premium income is not enough to balance, it’s to balance retained earnings. (2) Follow-up measurement of long-term investment on stocks and confirmed method of investment income ①The Company uses cost method to account the long-term investment on stocks that the invested company can control, not jointly control or have significant impact, and without quotation and its fair value can’t be reliably measured in active market. The long-term investment on stocks that accounted by cost method can be priced in accordance with the initial investment cost. Additional capital or withdrawals adjust the cost of long-term investment on stocks. The cash stock dividends or profit that the invested company declares to distribute are confirmed to be the current investment income. The investment income that the Company confirmed is only the quota of the accumulated net income after the invested company accept the investment, and the part that the profit or cash stock dividends exceed the amount above is taken as the withdrawal of initial investment cost. ②The Company uses equity method to account the long-term investment on stocks that the invested company can jointly control or have significant impact. If the initial investment cost of the long-term investment on stocks is more than the quota of the invested company’s identifiable net assets fair value when investing, the initial investment cost of the long-term investment on stocks need to be adjusted; if the initial investment cost of the long-term investment on stocks is less than the quota of the invested company’s identifiable net assets fair value when investing, the difference is included into the current profit and loss account, 80 and the cost of the long-term investment on stocks need to be adjusted. When accounting by equity method, after obtaining the long-term investment on stocks, the Company confirms the profit and loss of investments and adjusts the book value of the long-term investment on stocks in accordance with the quote of net profit and loss that the Company should hold or share which the invested company implement. When confirming the quote of the invested company’s net profit and loss that the Company should hold, on the base of the fair value of the invested company’s identifiable assets when investing, in accordance with the accounting policy and the accounting period of the Company, the Company offset the part of the insider profit and loss that belongs to the investor when trading with joint venture and operative business (if the insider profit and loss is assets depreciation, it should fully confirmed), and confirm after the adjustment of the invested company’s net profit. Regarding the long-term investment on stocks of joint venture and operative business that the Company holds before the first implementation date, if there is debit balance of equity investment relevant to this investment, the Company should deduct the debit balance of equity investment in accordance with straight-line amortization in original residual maturity, and confirm the profit and loss of investment. Calculate the part that the Company deserved in accordance with the cash stock dividends or profit that the invested company declares to distribute, and reduce the book value of the long-term investment on stocks correspondingly. The net profit and loss of the invested company that the Company confirmed take the book value of the long-term investment on stocks and other material constitution of long-term interests of the investing in the invested company write-down to zero as a limit, except the additional losses that the Company should take the responsibility. Regarding other changes of owners’ equity except for the net profit and loss of the invested company, the Company adjust the book value of the long-term investment on stocks and include into owners’ equity, and turn into the current profit and loss account by the relevant rate when deal with this investment. (3)The confirmed basis of jointly control and significant impact ①The confirmed basis of jointly control mainly includes: Any party can’t separately control the operative business’s activity of production and management; the decision about the 81 basic management of operative business needs to get the agreement of all parties. ②The confirmed basis of significant impact mainly includes: When the Company holds more than 20% (including 20%) and less than 50% voting shares directly or indirectly by its subsidiaries, the Company is confirmed to have significant impact on the invested company, except there is clear evidence to indicate the Company can’t participate the decision of production and management in this condition; when the Company holds less than 20% (excluding 20%) voting shares, the Company isn’t considered to have significant impact on the invested company. 10. Investment real estates The investment real estates of the Company includes the tenure of the rent land, the tenure of the land that the Company holds and prepares to transfer after value-added, and the rent buildings. The Company use cost mode to do the follow-up measurement of the investment real estates. The depreciation policy and method of amortization of the investment real estates that use cost mode to do the follow-up measurement, agree with that of the same or the same kind of fixed assets and intangible assets. The basis and method of depreciation reserves is on notes 4: Assets Depreciation. 11. Fixed assets (1) The confirmed requirement of fixed assets The fixed assets of the Company is the tangible assets that the Company holds for producing goods, providing service, renting or management and the service life is more than one financial year. The fixed assets that satisfy all the conditions below can be confirmed: ①the economic interests in relevance to this fixed asset are likely to flow into the Company; ②the cost of this fixed asset can be reliably calculated. (2) Fixed assets categories and method of depreciation The depreciation of fixed assets is provisioned by average service life method. The 82 service life, the estimated rate of salvage value and the annual depreciation of all kinds of fixed assets are: The estimated rate of Annual Assets categories Service life salvage value (%) depreciation (%) 20-35years 5 2.7-4.8 Building/structure 10 years 5-10 9-9.5 Machinery equipment 5 years 5 19 Transport 5 years 5 19 Electronic equipment 5 years 5 19 Other equipment The fixed assets that have been done withdrawal depreciation reserves are provisioned in accordance with the remaining service life and the amount that the original price minus the estimated salvage value, the depreciation reserves and the depreciation that have been provisioned. The fixed assets that have reached the estimated service life state but haven’t finally account for completed project are confirmed the cost in accordance with the estimated value and done withdrawal depreciation; after the final account for completed project, the fixed assets can be adjusted original estimated value in accordance with the actual cost, but the amount of depreciation that have been provisioned don’t need to adjust. The Company should review the fixed assets’ service life, estimated salvage value and method of depreciation in the end of every year, and do some adjustment if necessary. 12、Construction-in-process The company’s construction-in-process include all following constructions in process: construction engineering, erection works, technical innovation project, general overhaul project 13. Intangible assets （1）Initial estimates of intangible assets Intangible assets are initially estimated according to their respective costs. （2）Follow-through estimates of intangible assets 83 ①Estimates of intangible assets’ economic service time The company is in possession or in control of the intangible assets prescribed by contractual rights or other lawful rights, to ensure that their economic service time is within the effective term of the contractual rights or other lawful rights. When contractual rights or other lawful rights are lengthened by reasons such as contract renewal after expiring, and evidence states that no large payments should be made by the company, renewed terms should be counted within the economic service time. When contract or law does not prescribe an economic service time, the economic service time of intangible assets should be prescribed according to previous experiences or consults from hired experts. When the above solutions could not conclude a rational term in which intangible assets could bring economic benefits to the company, the company would categorize such intangible assets as intangible-assets-with-undeterminable-economic service time. ②Check of economic service time of intangible assets The company would at least in the end of every calendar year check the economic service time and amortization approaches of intangible assets. Changes should be made when necessary. ③Amortization of in tangible assets The company applies straight-line amortization by stages to intangible assets with certain economic service time, starting from the month it is obtained, within its economic service time. When economic service time of the intangible assets could not be amortized, the company would apply devaluation calculation in the end of each calendar year. 14、Researching and Developing Cost Costs of the Company’s internal developing projects should be distinguished into researching cost and developing cost. Researching cost is the cost of the Company’s innovative and premeditated investigation in order to obtain and understand new scientific or technological knowledge. Researching cost of the Company’s internal researching and developing projects should be reckoned in the current term’s profit and loss when it happened. 84 Developing cost is the expense caused by implementing research result or other knowledge in a certain plan or design, to produce new or improved material, equipment, and products and so on before commercial production or application. Only when following requirements are all satisfied could developing cost be capitalized: 1. Accomplish this intangible asset to allow its implementation or ensure the technical feasibility; 2. The intention to accomplish this intangible asset and implement or sell it; 3. Means that the intangible assets could create economic benefits, including evidence proving products produced by implementing the intangible assets have markets or the intangible assets itself has markets; in cases that the intangible assets would be used internally, evidence proving its effectiveness; 4. Sufficient support in technology, financing or any other resources to accomplish the development of this intangible asset, and the ability to implement or sell this intangible asset; 5. Cost of this asset’s developing stage could be reliably calculated. Developing costs that could not satisfy the above requirements should be reckoned into the current term profit and loss when it happened. 15、Long term Prepaid Expenses Long term prepaid expenses refer to the cost that has already taken place but should be shouldered in the current and future terms, with amortization time longer than one year (one year excluded). Long term prepaid expenses are reckoned into the account with its actual expense, and amortized straight-line in the project’s benefiting time. 16、Devaluation of Assets （1）Applicable Range Assets devaluation covered in this annotation mainly include: long-term equity investments(Long-term equity investments that don’t enjoy collective control or significant influence of the invested unit, don’t have quoted price in active markets and whose fair value could not be reliably calculated are excluded), investment real estate (Investing real estate that are not calculated by fair value are excluded.), fixed assets, constructions-in-process, 85 intangible assets(including capitalized developing expenses), assets groups and combination of assets groups, goodwill, etc. （2）Determination of possible assets devaluation On balance sheet date, the company would determine if there exist signs of assets devaluation. Goodwill formed by company merger, and intangible assets with undeterminable economic service time should be subjected to devaluation testing annually regardless of any signs of devaluation. When following signs exist, assets might have suffered devaluation: ① Market value of assets plunge in the given term, its drop rate evidently higher than time worn or expected decline due to normal operation. ②Economic, technological or legal environment where the company operates in, or market of the assets have or would be subjected to grave change in the short term, thus casting negative influence over the company. ③market rates or other market investment return rates have risen in the current term, thus influencing the calculation of the company’s discount rate of assets’ estimated future cash flow, and significantly lower assets’ retractable sum ④Evidences show assets are out of time or its entities are demolished. ⑤Assets have been or would be idle, eased application, or planned to be disposed in advance. ⑥Company’s internal reports provide evidence showing that the assets’ economic benefits are or would be lower than expected, such as net cash flow or realized sales profit(or deficit) created by the assets are far lower(or higher) than expected. ⑦Other signs indicating the assets have depreciated. （3）Calculation of retractable sum of assets When signs of assets devaluation exist, amount of retractable sum should be estimated. Retractable sum should be the higher of net value achieved by fair value minus disposing fee, and the present value of assets’ expected future cash flow. （4）Confirmation of assets devaluation loss When results of assets’ retractable sum calculation state that assets’ retractable sum is 86 lower than their book value, assets’ book value should be subtracted to their retractable sum, and the subtracted sum should be considered assets devaluation loss and taken into profit and loss of this current term, meanwhile preparation of relative assets devaluation should be made. When assets devaluation loss is confirmed, devaluated assets’ depreciation or amortization fee should be adjusted relatively in the future, so that in the rest of assets’ economic service time, the adjusted assets’ book value (minus estimated remnant value) would be systematically amortized. Once assets devaluation loss has been confirmed, it could never be returned in any future accounting terms. （5）Identification of assets group and handling of devaluation When signs that an asset might possibly be subjected to devaluation exist, the Company estimates its retractable sum on the basis of this one asset. When the Company could not estimate a certain asset’s retractable sum, the asset’s retractable sum should be determined on the basis of the assets group it belongs to. The confirmation of assets groups should be judged on whether the main cash flow created by the assets group is independent from that created by other assets or assets group. When assets group’s or combination of assets group’s retractable sum is lower than its book value(If total assets and goodwill are amortized to a certain assets group or combination of assets group, this assets group’s or combination of assets group’s book value should include the amortization of relative total assets and goodwill.), relative devaluation loss should be confirmed. Devaluation loss sum should first subtract the book value of goodwill amortized to the assets group or combination of assets group, and then commensurably subtract other assets’ book value according to the proportion of other assets aside from goodwill in the assets group or combination of assets group. （6）Devaluation of Goodwill Goodwill created by merger of the company should be subjected to devaluation testing at least at the end of each year. As for book value of goodwill created by mergers, it should be amortized to relative assets groups with rational approaches starting from the purchasing date. When it is difficult to amortize to relative assets groups, the book value should be amortized to 87 relative combination of assets groups. Relative assets groups or combination of assets groups are assets or combination of assets groups which could benefit from company merger, and are not larger than confirmed reporting segments of the Company. When testing relative assets groups or combination of assets groups containing goodwill for devaluation, if assets groups or combination of assets groups connected to goodwill show signs of devaluation, assets groups or combination of assets groups which do not contain goodwill should first be subjected to devaluation testing, calculate retractable sum, compare to relative book value and confirm its devaluation loss. Then assets groups or combination of assets groups containing goodwill should be subjected to devaluation testing, compare the book value(including book value of goodwill amortized to it) and retractable sum of these assets groups or combination of assets groups. When relative assets groups’ or combination of assets groups’ retractable sum is lower than their book value, devaluation loss of goodwill should be calculated, and measures prescribed by this annotation should be carried out. 17、Anticipated debts （1）confirmation principles of anticipated debts When operations connected to foreign endorsements, pending action or arbitration, product quality warranty, job cutting plans, onerous contract, reforming obligation, fixed assets’ retirement obligation or any other possible events could satisfy all following requirements, liability should be confirmed: 1. This obligation is the Company’s current obligation, 2. Implementation of this obligation would very likely drive economic benefits out of the Company, 3. Cost of the obligation could reliably be calculated. （2）Calculation of anticipated debts Anticipated debts should be calculated initially with the best estimate of the cost needed to implement the current obligation, meanwhile factors connecting to possible events, such as risks, uncertainties and currency’s time value should be taken into consideration. Book value of anticipated debts should be checked on every assets’ balance date. When 88 sufficient evidence suggests that the book value could not reflect the current best estimate, the book value should be adjusted according to the current best estimate. 18、Turnover （1）Confirmation of commodity sales turnover Only when all following requirements are satisfied could confirmation be made: 1.the Company has transferred commodity possession’s all major risk and profit to the buyer, 2. The Company do not retain the continual managing rights normally connected to ownership, or cast any effective control of the sold commodity, 3. The income could be reliably calculated, 4. Relative economic benefits would very likely go to the Company, 5. Relative, expected or likely costs could be reliably calculated. （2）Confirmation of offering labor income When results of labor dealing provided by the Company on balance date could be reliably estimated, labor income should be offered on the basis of the percentage of work that has been accomplished. Work’s rate of progress to offer labor dealing is calculated by the company on the accomplished work. When results of labor dealing provide by the Company on balance date could not be reliably estimated, situations should be handled with following approaches: 1. When occurred labor cost is expected to be compensated, labor income should be confirmed and offered by the amount of labor cost that has taken place, and labor cost should be transacted in the same amount; 2. When occurred labor cost is not expected to be compensated, the labor cost should be reckoned in the current term’s profit and loss, and should not be confirmed and offered. （3）Confirmation of remise right of assets revenue ①Principle in confirmation of remise right of assets revenue Remise right of assets revenue include interest income, utility income and etc. Only when following requirements are all satisfied could confirmation be made: A. Economic benefit connected to the dealings would go to the Company; B. Income sum could reliably be 89 calculated. ②Detailed confirming approaches A. Interest income, should be calculated on the time that other people use the Company’s currency capital and the actual interest rate B. Utility income, should be calculated according to the charging time and measure prescribed by relative contracts or agreements. 19. Lease (1) Classification of Leases Our company divides leases on their commencement dates into two categories: financial leasing and operating leasing. (2) Classification of Financial Leasing and Operating Leasing. Financial leasing is identified as having one or more of the characteristics below: ① the ownership of the leased assets is transferred to the lessee at the end of the lease. ② the lessee can choose to buy the leased assets. This bargain purchase option enables the lessee to buy the leased assets at far less prices than the fair market values of leased assets when the option becomes exercisable. Thus, on the lease beginning date, it can be reasonably determined that the option will be exercised. ③the lease terms equal or exceed 75 percent of the assets’ estimated useful life even if the ownership of the leased assets are not transferred. ④ in the case of the lessee, the present value of the minimum lease payments on the lease beginning date amounts to at least substantially all of the fair value of the leased asset; in the case of the lessor, the present value of the minimum lease receipts on the leasing beginning date amounts to substantially all of the fair value of the leased asset on the lease beginning date. ⑤ the leased assets are of a specialized nature such that only our company (or the lessee) can use them without major modifications being made. Leases other than financial leases are operating leases. (3) Accounting of Financial Leases ① Accounting and Reporting by Lessees in Financial Leasing 90 At the inception of the lease, the lower one of the fair value of the leased property and minimum lease payments will be the entry value of the leased assets; minimum lease payments will be the entry value for long-term account payables; the margin between them will be classified as unrecognized financial charges. The initial direct costs such as commissions, attorney's fees and traveling expenses, stamp duties directly attributable to the leased item incurred during the process of lease negotiating and signing the leasing agreement shall be recorded in the asset value of the current period. In calculating the present value of minimum, the lessor’s interest rate implicit in the lease will be adopted as the discount rate. The lessee shall adopt the effective interest rate method to calculate and recognize the financing charge in the current period. In calculating the depreciation of a leased asset, the lessee should adopt a depreciation policy consistent with that for depreciable assets which are owned by the lessee. If it is reasonable to be certain that the lessee will obtain the ownership of the leased asset at the end of the lease term, the leased asset shall be fully depreciated over its useful life. It it is not reasonable to be sure that the lessee will obtain the ownership of the leased asset at the end of the lease term, the leased asset shall be fully depreciated over the shorter of the lease term or it useful life. Contingent rents, when actually incurred, shall be included in current profit and loss. ② Accounting and Reporting by Lessor in Financial Leasing On the beginning date of the lease term, the lessor shall recognize the sum of the minimum lease receipts on the lease beginning date and the initial direct costs as the entry value in an account of the financial lease values receivable, and record the unguaranteed residual value at the same time. The balance between the sums of the minimum lease receipts, the initial direct costs and the unguaranteed residual value, and the sum of their present values shall be recognized as unrealized financing income. The unrealized financing income at the current period shall be calculated by adopting the effective interest rate method. Contingent rents shall be recorded into the profits and losses of the period in which they 91 actually arise. (4) Accounting of Operating Leases The rents from operating leases shall be determined on a straight line basis and shall be recorded in the lessee and the lessor’s profits and losses of the current period. Initial direct costs incurred by the lessee and the lessor shall be included in the lessee and the lessor’s profits and losses of the current period. Contingent rents shall be recorded into the profits and losses of the period in which they actually arise. 20. Government Grants (1) The Recognition of Government Grants Government grants can be recognized when the following conditions are met simultaneously: ① the enterprise can meet the conditions for government grants. ② the enterprise can obtain government grants. (2) Measurement of Government Subsidies ① If the government subsidy is monetary asset, it shall be measured based on the amount received or receivable. If the government subsidy is non-monetary asset, it shall be measured at its fair value. If its fair value cannot be obtained in a reliable way, it shall be measured at its nominal amount (1 yuan). ② Government subsidies pertinent to assets shall be recognized as deferred income, equally distributed within the useful lives of relevant assets, and included in the current profits and losses. But government subsidies measured at their nominal amounts shall be directly included in the current profits and losses. Government subsidies pertinent to incomes shall be treated respectively in accordance with the circumstances as follows: subsidies used for compensating the related future expenses or losses of the enterprise shall be recognized as deferred income and shall be included in the current profits and losses during the period of the recognition of relevant expenses; subsidies used for compensating related expenses or losses already incurred to the enterprise shall be directly included in the current profits and losses. ③ If it is necessary to refund any government subsidy which has been recognized, it shall be 92 treated respectively in accordance with the circumstances as follows: if deferred income is concerned , the book balance of the deferred income shall be offset against, but the excessive part shall be included in the current profits and losses; if no deferred income is concerned, it shall be directly included in the current profits and losses. 21. Income Taxes (1) Measurement of Income Taxes Income tax of the company is measured based on the balance sheet approach. (2) Temporary Difference Temporary difference shall refer to the difference between the carrying amount of an asset or liability and its tax base. As for an item that has not been recognized as an asset of liability, if its tax base can be determined in light of the tax law, the difference between the tax base and its carrying amount shall also be classified as a temporary difference. Temporary differences are classified into taxable temporary differences and deductible temporary differences. (3) Recognition of Deferred Income Tax As for any deductible loss or tax deduction that can be carried forward to the next year, the corresponding deferred income tax assets shall be determined to the extent that the amount of future taxable income to be offset by the deductible loss or tax deduction to be likely obtained. This approach does not apply to deductible temporary differences originated from the following transactions: ① The transaction is not business combination. And at the time of transaction, the accounting profits will not be affected nor will the taxable amount be affected. ② Deferred income tax assets shall be recognized when the taxable temporary differences are related to the investments of subsidiary companies, associated companies and joint enterprises, provided that the following conditions be met simultaneously: the temporary differences are likely to be reversed in foreseeable future; and the taxable income used to make up for deductable temporary differences is very likely to be obtained. 93 (4) Recognition of Deferred Income Tax Liabilities Except for the ones arising from the following transactions, deferred income tax liabilities arising from all taxable temporary differences shall be recognized: ① The initial recognition of business reputation or the initial recognition of assets or liabilities arising from transactions that simultaneously satisfy the following conditions: the transaction is not business combination; and at the time of transaction, the accounting profits will not be affected, nor will the taxable amount be affected. ② Taxable temporary differences related to the investments of subsidiary companies, associated enterprises and joint enterprises: the time of reverse of temporary differences can be controlled and the temporary differences are unlikely to be reversed in the expected future. (5) Deferred Income Tax Assets Impairment The carrying amount of deferred income tax assets shall be reexamined on the balance sheet day. If it is unlikely to obtain sufficient taxable income taxes to offset the benefit of the deferred income tax assets, the carrying amount of the deferred income tax assets shall be written down. The write-down amount of deferred income tax assets and the reexamined amount shall be listed in the owners’ equities. Otherwise, deferred income tax assets shall be recorded as a part of current income tax expense. When it is probable to obtain sufficient taxable income taxes, such write-down amount shall be subsequently reversed. 22. Segment Reporting Our company adopts segment reporting as the chief reporting method. 23. Business Combinations and Consolidated Financial Statements For accounting policies related to business combinations and consolidated financial statements, see footnote 6. Taxes 94 1. Value-added Tax VAT payables of our company and its subsidiary companies as normal taxpayers shall be the balance of output tax for the period after deducting the input tax for the period. The output tax rate of value-added tax is 17 percent. 2. Business Tax The business tax payables of our company and its subsidiaries shall be 5 percent of the revenues derived from renting houses, providing labor services, abalienating the right to use assets. 3. Excise Tax The excise tax rate of expensive watches, manufactured or imported by our company and its subsidiaries, is set at 20 percent. 4. Urban Maintenance and Construction Tax & Educational Surtax The parent company in Shenzhen and its Shenzhen subsidiaries pay 1 percent of their turnover tax amounts as urban maintenance and construction tax, 3 percent of their turnover tax amounts as educational surtax, in accordance with [1988]232 Tax Regulations on Business Enterprises in Shenzhen. Branches and subsidiaries not located in Shenzhen are subject to tax policies of their respective places of incorporation. 5. Income Tax Corporate Corporate The company and its subsidiaries income tax rate income tax rate last year this year Company Names 15% 18%② Shenzhen Harmony World Watch Center Co.,Ltd 15% 18%② （Harmony） 95 Shenzhen Fiyta Precision Timing Manufacture Co., 7.5% 18%② Ltd（Fiyta Manufacturer） Shenzhen World Famous Watch Centre Co., Ltd. 15% 18%② (World Famous Watch Centre) Xi,an Haomen Food & Recreation City Co., Ltd. 33% 25%③ (Haomen) Fiyta (Hong Kong) Limited (Fiyta Hongkong) 17.5% 16.5%① Xi’an Chengheng Industrial Co.,Ltd(Xi’an 33% 25%③ Chengheng) Shenzhen Feijing Precision Optical Device 15% 18%② Manufacture Co., Ltd (Feijing) Beijing Henglianda Watch Center Co.,Ltd 33% 25%③ (Henglianda) Kunming Lishan General Merchandise Co.,Ltd 33% 25%③ (Lishan) Harbin World Famous Watch Centre Co.,Ltd 33% 25%③ （Harbin subsidiary) Notes ①: Fiyta (Hong Kong) Limited was registered in Hong Kong. The profit tax rate is 16.5% this year. ② According to Transitional Incentives on Enterprise Income taxes issued by State Council on December 26, 2007: enterprises that were entitled to a preferential enterprise income tax rate of 15 percent shall, on the beginning of 2008, be subject to enterprise income tax rate set at 18 percent. ③ In accordance with The Law of the People’s Republic of China on Enterprise Income Tax (for trial implementation) issued by State Administration of Taxation. The law, which came into effect on January 1, 2008, set the income tax rate of residential enterprises at 25 percent. ④ According to Pretax deduction of Enterprise R&D Expenditure (for trial implementation) issued by State Administration of Taxation on December 10, 2008 : Companies whose R&D expenditures that have not yet been confirmed as intangible assets, therefore not listed in current profits and losses, may be entitled to weighted tax deduction. 150 percent of the R&D expenditures will be deducted as a result. ⑤ According to Interim Provisions on Consolidated Income Taxes on Cross-regional Enterprises issued by State Administration of Taxation on March 10, 2008, the company 96 and its subsidiary Hengjili will collectively compute the taxable income and tax payables this year; the taxes not paid off in 2007 and before when the two companies were separate taxpayers will be recognized and paid off within the remaining statutory period. 6. House Property Tax According to article 5 of Policies Related to House Property Tax & Vehicle and Vessel Usage Tax issued by Administrator of Local Taxation of Shenzhen Municipality: production and operation units that rent out house properties pay house property taxes based on 70 percent of the original value of the house properties. And the house property rate is set at 1.2 percent. The company’s house properties in Shenzhen are subject to this tax rate. House properties located in other cities are subject to the tax laws of their respective places. Corporate merger and fiscal statement 1.Corporate merger （1） the merger of enterprises under the same control ① the principle of the merger of enterprises under the same control our company's rationale of the merger of enterprises under the same control includes:a) any party to the merger is controlled by the group before or after the merger; b)before the merger, parties involved were controlled by the group for a year above (including one year), the combied company after the merger will still be controlled by the group for a year above (including one year). Any enterprise fit the principles above will be defined as the merger of enterprises under the same untroll by the group. ② The date of the merger The date of the merger refers to the date when our company actually get the corporate right of controll of the merged enterprise, meaning the day of transference of the net asset or the producting and managing right of controll to our company. Any circumstance fits the following principles will be considered the transerence of the right of control: A. the deal of the merger of the enterprises is acknowledged by the board of directors; B, the merger is 97 confirmed by the relevent department of the government, C,enterprises involved have handled the procedures of the transference of the asset; D. our company has paid most of the merger price (over 50% of the total number ), and has the ability of paying the rest; D. our company has already controlled the finance and management of the merged enterprise, and share both the profit and the risk. ③ confirmation of the cost of the merger the assetsand debts during the merger aquired by our company are calculated by the book value of the merged enterprise on the date of the merger. The shortfall of aquired book value of net asset and paid book value (or the total value of the share), will be balanced by capital reserve; if the capital reserve was not enough, it will be balanced by the retained earnings. ④ the processing method of the merger’s charge Our company records into the current income for enterprises involved of any direct charge, including the audit fee of the merger, assessment fee, legal services and so on. For the bond or other commission charge of the debt, they will be recorded as the primary quota of the issuance of the bonds and other debt.. The fees or commissions of issuance of bonds during the merger will be paid by the gains of the bonds. If the gains were not enough, the fees will be paid by the retained earnings. （2） For the merger under the different controll ① The basic information of the enterprises involving the merger The basic information and the cost of the merger of the enterprises involved are specified in NOTE SIX. ② The principle of the merger under the different control Any party of the merger is not controlled by the same party or many parties before or after the merger. During the merger under the different control, on the acquisition date, the party who gained the right of control after the merger is the buyer (our company), and other parties involved are sellers. ③ The acquisition date 98 The acquisition date refers to the date when our company actually get the corporate right of controll of the merged enterprise, meaning the day of transference of the net asset or the producting and managing right of controll to our company. The confirmation of the acquisition date is the same as the confirmation of the date of the merger. ④ confirmation of the cost of the merger The cost of the merger is the fees paid for aquiring the right of control of asset, the debts and the fair value of the equity securities. If the merger is realized step by step, the cost the merger refers to the total cost of every deal of the merger. The contract of the merger should consider the elements affecting the cost in the future. If these elements can be meassured on the acquisition date, the cost should also be considered as the cost of the merger. The asset,debt and contingent liability of the seller will be considered as fair value during the merger under different control. If the cost of the merger is larger than the countable net assets of the seller, it is a goodwill. If the cost of merger is smaller than the countable fair value of the net assets of the seller, first, the fair value of the countable assets, debts and contingent liability of the seller should be reassessed. After the reassessment, the situation above still exists, the difference will be considered as the current profits and losses. ⑤ the processing method of the merger’s charge Our company records into the current income for enterprises involved of any direct charge, including the audit fee of the merger, assessment fee, legal services and so on. For the bond or other commission charge of the debt, they will be recorded as the primary quota of the issuance of the bonds and other debt.. The fees or commissions of issuance of bonds during the merger will be paid by the gains of the bonds. If the gains were not enough, the fees will be paid by the retained earnings. ⑥ the value of the goodwill and its confirmation Goodwill is the situation when the cost of the merger is larger than the difference of the seller’s fair value of its countable net assets. The details of the goodwill is in the NOTE SEVEN. 99 ⑦ The book value of the cost of the merger, fair value and its confirmation For the convenience of the assessment, the book value of the date of the merger is the book value of the end of the current month of the merger. The method of confirming the book value of the date of the merger is as follows: A. monetary capital is recorded as the balance of the book value of the date of the merger B. Account receivable, the short term account receivable is considered as the fair value; the long term account receivable has to calculate the interest rate. The confirming of the account receivable should consider the possibility of doubtful debts and the relevent fees. C. The stock, the manufactured goods and products should be assessed by the difference of the estimated price and estimated sales fees, relevent taxes and the profits of selling similar manufactured goods and products; products in processing should be assessed by the difference of the estimated price and the cost of finish manufacturing the products, the estimated sales fees, relevent taxes and the profits of selling similar manufactured goods and products; raw materials are considered as replacement cost. D. constructions, equipment, other long term assets which can be sold in the market is assessed as the market price of the date of the merger of its fair value; for which can’t be sold, they will be assessed according to the similar assets. If the similar assets also can’t be sold in the market, they will be assessed by the evaluation technology. E. The fair value caused by the merger or the debts, will be measured with proper interest rate to determine the current value of future cash flow. ⑧ The Identifiable Intangible Assets, debts of the seller, the previous Accounting Period’s date of balance sheet and the book value and fair value of the date of the merger. The Identifiable Intangible Assets, debts of the seller, the previous Accounting Period’s date of balance sheet and the book value and fair value of the date of the merger is in NOTE SIX 2 (1) ⑨ the fisical information of the merged enterprise The merged enterprise’s details of the income, net profits and cash flow in the fiscal report are in NOTE SIX 2 (1) 100 （3）merger annexation When this company is involved in the merger annexation, the confirmating methods of the acquired assets and debts are as follows: ① the merger annexation under the same control, this company accounts the acquired assets, relevent assets of the debts, debts as its original carrying value on the date of the merger. If the merged enterprise has a different accountant policy, this company will balance it by its own principles. And according to its own principles, this company confirm the acquired assets and the debts. ② the merger annexation under the different control, this company will evalue every fair value of fit assets and debts as its own assets and debts. 2. Financial report of the merger （1）The range of the merger ①set the principles The range of the merger of the financial report is based on control. Control refers to the ability to decide the financial and excutive policy of the invested unit, and gain profit during the management of the invested unit. This company’s investment to the invested unit occupied above 50% (not include 50%) of the decision making right, or even not occupy 50% but have the actual right of control. These units are in the range of the merger. ② The management of subsidiary company in 2008 and the confirmation of the range of the merger Nature Registerd Actual Organization locati of assets The range of the Company name Control code or on Busines (houndred business lers registerd code s thousand) 1 subsidiary company construct from the merger under different control 101 Li Shan Domestic trade、 This Kun comme Department Store 500(RMB) Material supply compan 77552086-1 ming rce (note ①) and marketing y 2 subsidiary company acquired by other means Sales and Harmony (Note maintainace of This Shen comme 30,000(RM the timekeeper compan 27931393-5 ②) zhen rce B) and its y accessories Manufacture and maintainance of manuaf This Manuafacturing Shen 1,000(RMB the accurate acturin compan 71521080-2 Company zhen ) timekeeper and g y its the asscessories Top grade watch and clock、 glasses、 WATCH CENTRE This Shen comme accessories、 280(RMB) compan 19223622-8 ( note ③) zhen rce presents、 y handicraft (not including jewelry ) caterin Haomen Company g ， catering ， This 61010040006 Xi’an entert 1,600(HKD) entertainment and compan (note ④) 54 ainmen boutique y t The sales and This Hong Kong, Fiyta Hong comme trade of 1,000(HKD) compan - Electronics Co Kong rce wristwatch and y its accessories Domestic trades （except National franchise professionals merchandise）， the sales and comme maintainance of rce， timekeepers,hotel caterin management， This Cheng Heng 1,000(RMB property company Xi’an g ， ) compan 66865862-X entert mangement， y ainmen realestate t developer， realestate agent， tenancy of departments， accommodation， catering business, tea house， produciton and 102 sales of cakes Producing, manuaf processing and This Fei Jing Company Shen 44030110178 acturin 700(RMB) mangaing compan (note ⑤) zhen 57 g delicate optical y instrument comme the sales and This Harbi maintainance of Harbin Company rce， 50(RMB) compan 12759210-3 n, timekeepers and y its accessories comme the sales and This Beiji maintainance of Heng LianDa rce， 1000(RMB) compan 77546687-7 ng timekeepers and y its accessories （continue） The actual investment Net investment to Voting shares the subsidiary right Merger Company name （hundred proporti company (hundred proportio or not thousand on (%) thousand yuan）) n(%) yuan） subsidiary company construct from the merger under different control Li Shan Department Store (note 120(RBM) 120(RBM) 100.00 100.00 Yes ①) subsidiary company acquired by other means Harmony (Note ②) 29,850(RMB) 29,850 (RMB) 99.50 99.50 Yes Manuafacturing Company 1,000(RMB) 1,000(RMB) 99.995 99.995 Yes WATCH CENTRE ( note ③) 140(RMB) 140(RMB) 50.00 50.00 Yes Haomen Company (note ④) 1,104(RMB) 1,104(RMB) 62.00 62.00 No Hong Kong, Fiyta Electronics 1,000(HKD) 1,000(HKD) 100.00 100.00 Yes Co. Cheng Heng company 1,000(RMB) 1,000(RMB) 100.00 100.00 Yes Fei Jing Company (note ⑤) 700(RMB) 700(RMB) 99.879 99.879 No Harbin Company 50(RMB) 50(RMB) 100.00 100.00 Yes Heng LianDa 500(RMB) 500(RMB) 50.00 50.00 Yes Note ①: Li Shan Department Store was registered by Yun Nan Jing Ying Ltd ( short for Jing Ying Ltd) on June 24, 2005 in Kunming. Its business term is 10 years and its registed assets 103 are 5 million yuan. Its range of business is domestic trade and material supply and marketing. On December 26, 2007, one of the company’s subsidiary company, Harmony signed “ share transference deal” with Jin Ying Ltd. Jin Ying Ltd used the holdings of 100% share of Li Shan Department Store as cash 1.2 million RMB to Harmony. Both party acknowledged that the date of accomplishing share transference is the day when the relevent business registration procedures are done. On March 26, 2008, Li Shan Department Store finished the relevent business registration procedures. But due to the convenience of assessment, Harmony decided to make March 31, 2008 as the legal date of the share’s Validity. Note ②: this company invested Harmony 176.2 million RMB this fiscal year. After the investment, the shareholding of this company increased to 99.5%. Note ③: Watch Center used to be the joint venture company of this company. According to the deal signed by this company and Watch Center’s another shareholder-ShenZhen Shen Hang Electornic Engineering (short for “Shen Hang Electronic”), Shen Hang Electronic has fixed income every yaer from 2003. Shen Hang Electronic will not participate in the managing of Watch Center. This company has the right of control over the Watch Center’s finance and management. So Shen Hang Electronic is in the range of merger of this company. Note ④: Haomen Company has stopped its business last fiscal year. Its license was revoked by Administration For industry&Commerce Of Xi’an on May 20, 2008. So it is not in the range of the merger. Note ⑤: Fei Jing Company has stopped its business last fiscal year. Its license was revoked by Administration For industry&Commerce Of Shenzhen on November 30, 2007. So it is not in the range of the merger since 2007. ③ The Change of The Range of the Merger 1) The reason of the change As is said in note six 2 (1), the subsidiary company Harmony of this company will be mergered by Li Shan Department Store under the different control; Haomen Company revoked in 2008 will not be in the range of the merger. 2) the finance information of the new subsidiary company during the report period 104 ① Book value and fair value of subsidiary company on the date of merger through merger under the same control A、the book value and fair value of the mergered Li Shan Department Store Book Value Fair Value Items 2008-3-31 2008-3-31 Identifiable Intangible Assets: currency capital 359,963.26 359,963.26 other account receivable 871,959.26 871,959.26 Inventory 22,448.30 39,602.00 Fixed assets 336,825.34 258,990.00 Long-term deferred expense 3,005,920.68 3,205,811.91 Total assets 4,597,116.84 4,736,326.43 Identifiable debts: Accounts payable 455,226.53 455,226.53 Advance receivable 641.10 641.10 Payable Tax -17,985.23 -17,985.23 Other payable 4,834,200.51 4,834,200.51 Total debts 5,272,082.91 5,272,082.91 Total net assets -674,966.07 -535,756.48 B、Book Value of Li Shan Department Store on the previous date of balance sheet Items Book Value 2007-12-31 Currency capital 141,661.28 Other accounts receivable 871,391.99 Inventory 22,448.30 Fixed assets 359,628.46 Long-term deferred expense 3,335,431.68 Total 4,730,561.71 Accounts payable 97,312.73 Payable Tax 275,011.87 Other payable 3,597,069.47 Total debts 3,969,394.07 105 Items Book Value 2007-12-31 Total net assets 761,167.64 ② Financial information of subisidairy company through the merger under the different control A．Finance Status 2008-12-31 Subsidiary Total of Shareholders’ Total assets Total debts Equity Li Shan 4,307,831.95 5,857,755.23 -1,549,923.28 Department Store B. Management results of enterprises and capital flow May 31-December 31, 2008 Net Cash Net Cash Subsidiary Net Cash Flow from Flow from Income Cost Net profit flow from the the financing management investment Li Shan Department 6,706,372.82 7,720,539.62 -1,014,166.80 778,622.14 -31,280.00 - Store 3) subsidiary company not in the range of the merger during the report period a.finance status December 31, 2008 Subsidiary Total of Owner’s Total assets Total debts Equities Haomen 10,553,909.00 - 10,553,909.00 Company b. Management results of enterprises and capital flow January 1- December 31, 2008 Net Cash Subsidiary Net Cash Flow from Net Cash flow Income Cost Net profit Flow from the the from financing investment managemen Haomen - - - - - - Company （2）The Compilation of Consolidated Financial Statement ①Basic method of compiling consolidated financial statement Based on the financial statements of the parent company and subsidiary companies within the consolidated scope and other related materials, consolidated financial statement adjusts 106 long-term equity investment of subsidiary companies according to equity method. It is compiled after countervailing parent company’s equity capital investment, the part of subsidiary company owners’ equity which belongs to the parent company as well as major transactions among companies and internal business. Minority stock holders’ interest is listed as “minority stock holders’ interest” under the category of ownership interest in consolidated balance sheet. And minority interest is listed as “minority interest” under the category of net margin in consolidated profit statement. ②Processing Method of Added or Disposed Subsidiary during Report Period During the report period, parent company should adjust the initial value when compiling its consolidated balance sheet if the subsidiary companies are increased through consolidation of companies under the same administration. Parent company doesn’t have to change its initial value under the opposite situation. During report period, parent company should bring the income, expenditure and margin of subsidiary companies which are merged by companies under the same administration into its consolidated profit statement from the beginning of its merger to the end of report period. For subsidiary companies which are consolidated by companies under different administration, parent company should draw their income, expenditure and margin into consolidated profit statement from its purchase date to the end of report period. Parent company should dispose these subsidiary companies during report period and take their income, expenditure and margin from the beginning of its merger to the disposing date into consolidated profit statement. During report period, parent company should draw the cash flow of subsidiary companies which are merged by companies under the same administration into its consolidated cash flow statement from the beginning of its merger to the end of report period. For subsidiary companies which are consolidated by companies under different administration, parent company should draw their cash flow into its consolidated cash flow statement from its purchase date to the end of report period. Parent company should dispose these subsidiary companies during report period and take their cash flow from the beginning of its merger to its 107 disposing date into consolidated profit statement. ③Methods of disposing different accounting policies and accounting period between parent company and subsidiary companies If the accounting policy and accounting period taken by subsidiary companies are different from parent company, subsidiary companies’ financial statement should make necessary adjustments according to parent company’s accounting policy and period when our company is compiling consolidated financial statement. Our company can also require subsidiary companies to compile another financial statement in accordance with its accounting policy and period. ④Translation of foreign currency statement Based on the following rules, our company translates foreign currency statements into statements of RMB. When converting items of asset and debt in balance sheet, spot foreign exchange rate on the compiling date of the balance sheet should be followed. Other items except “undistributed profit” in the category of ownership interest should be converted according to the converting day’s spot foreign exchange Items of revenue and expenditure in the income statement should be converted according to the spot foreign exchange rate when transactions were finished. Converted differences in Foreign Currency Statements that are caused by above methods should be listed separately under the category of ownership interest in the balance sheet. Cash flow statement which is showed by foreign currency should be converted following the spot foreign exchange rate of the day when the cash flow happened. As an adjustable category, Foreign exchange effect on cash and cash equivalent should be listed separately in cash flow statement. (3)Minority stockholder’s equity Subsidiaries 31 December 2008 31 December 2007 Hendry Co. 7,169,190.85 7,068,328.93 Luxurious Watch Center 1,400,000.00 1,400,000.00 108 Total 8,569,190.85 8,468,328.93 ⅠNotes to the main items of financial statements Except items with special explanation, for the following items (including notes of major items in parent company’s financial statement), the beginning of the year means Jan. 1st, 2008 and the end of the year means Dec. 31st, 2008. Last year means the whole year of 2007 while this year demonstrates the whole year of 2008. 1. Monetary Fund 31 December 2008 31 December 2007 Item Currency Exchange Original Exchange Original amoun RMB RMB rate amount rate Cash in hand RMB 248,851.22 1.00 248,851.22 458,341.41 1.00 458,341.41 HKD 0.51 0.88 0.44 15,729.60 0.90 14,183.66 USD 2,061.72 6.83 14,091.03 2,049.72 7.30 14,972.38 EUR 2,703.00 9.66 26,108.28 975.00 10.67 10,400.23 GBP 110.00 9.88 1,086.78 110.00 14.58 1,603.88 CHF 3,150.00 6.38 20,102.36 80.00 6.54 523.54 SGD 5,000.00 4.76 23,808.00 5,000.00 5.03 25,157.00 Subtotal 334,048.11 525,182.10 Cash at bank RMB 104,413,688.13 1.00 104,413,688.13 74,706,978.00 1.00 74,706,978.00 HKD 1,501,447.07 0.88 1,324,126.17 6,360,189.43 0.90 5,956,295.37 USD 283,930.67 6.83 1,940,552.56 351,216.87 7.30 2,565,499.50 Subtotal 107,678,366.86 83,228,772.87 Other monetar RMB 221,380.76 1.00 221,380.76 289,566.77 1.00 289,566.77 y assets Total 108,233,795.73 84,043,521.74 Notes (1) Other monetary assets comes from refundable deposits. (2) The amount of monetary fund at the end of the year increases 28.78% than the amount at beginning of the year because this year’s sales volume of our company has increased. 109 2. Accounts receivable (1) Disclosure of accounts receivable by client categories is as follows: 31 December 2008 Category Provision for Book Balance Percentage Book Value bad debts RMB (%) RMB RMB Individually significant 61,219,428.26 42.54 12,906,198.95 48,313,229.31 accounts Individually insignificant accounts but with significant risks after 29,837,240.27 20.73 29,081,558.48 755,681.79 being grouped with similar credit risk characteristics Other insignificant accounts 52,864,526.42 36.73 1,392,767.87 51,471,758.55 Total 143,921,194.95 100.00 43,380,525.30 100,540,669.65 (continue) 31 December 2007 Category Book Provision for Percentage Book Value Balance bad debts (%) RMB RMB RMB Individually significant 37,723,081.96 47.23 12,570,728.49 25,152,353.47 accounts Individually insignificant accounts but with significant risks after 32,371,033.23 40.53 28,849,395.83 3,521,637.40 being grouped with similar credit risk characteristics Other insignificant accounts 9,771,048.29 12.24 1,224,289.59 8,546,758.70 Total 79,865,163.48 100.00 42,644,413.91 37,220,749.57 (2) The ageing of accounts receivable and related provisions for bad debts is analyzed below: 110 31 December 2008 (con Aging Amount Percentage Provision of bad debts RMB (%) RMB tinu Within 1 year 100,286,297.68 69.68 1,394,093.22 e) 1－2 years 956,934.60 0.66 69,660.46 2－3 years 1,427,770.09 0.99 713,885.05 More than 3 years 41,250,192.58 28.67 41,202,886.57 Total 143,921,194.95 100.00 43,380,525.30 31 December 2007 Aging Amount Provision of bad debts Percentage (%) RMB RMB Within 1 year 34,927,233.02 43.73 1,179,641.31 1－2 years 1,905,804.87 2.39 190,580.48 2－3 years 263,577.07 0.33 182,188.81 More than 3 years 42,768,548.52 53.55 41,092,003.31 Total 79,865,163.48 100.00 42,644,413.91 (3) The list of first fifth larger debtors Amount Debtors % of total Ageing RMB Within 1 Shenzhen Wan Xiang City 4,302,638.62 2.99 year Xian Jin Ying International Within 1 2,209,427.89 1.54 Shopping Center Co., Ltd. year Beijing Rural-Urban Trading More than 3 2,033,710.15 1.41 Center Co., Ltd. years Euro Plaza Developing Co. of Hei Within 1 1,913,673.04 1.33 Longjiang Provience year Qingdao Hendry Co. of watch, More than 3 1,298,215.01 0.90 glasses and jewelry years Total 11,757,664.71 8.17 (4)Receivables statistics at the end of the year includes 264,776.50 RMB yuan from the receivable related party which takes account of 0.18% in total amount of receivables. Introduction of this transaction can be found in note Ⅸ,3.6. 111 (5)Balance of receivables at the end of the year is increased by 64,056,031.47 RMB yuan because this year’s increased sales amount. 3. Prepayment (1) Specifications of prepayment 31 December 2008 31 December 2007 Aging Amount Percentage Amount Percentage RMB (%) RMB (%) Within 1 year 20,592,356.86 99.13 76,106,071.08 99.03 1- 2 years 180,060.00 0.87 744,247.70 0.97 Total 20,772,416.86 100.00 76,850,318.78 100.00 Notes ① Prepayment with aging of more than 1 year is mainly Hendry Company’s unliquidated consulting fee for counter designing in a shopping mall. ②Balance of prepayment at the end of the year decreased by 72.97%, mainly because the prepayment of house purchasing money of Xian Cheng Heng Hotel goes into service as permanent asset. (2) Specification of prepayment of large amount Amount Debtors Contents RMB Prepayment for MONTRES CHOURIEF S.A. 4,097,342.40 buying watch Prepayment of Guangzhou Yitian Designing Co. 3,986,516.86 decorating and designing fee Prepayment of Shanghai Ye Kai Decoration Projects Co., Ltd. 792,271.00 decorating and designing fee Prepayment of Bo Gao Exhibition Furniture Manufacturer of 500,000.00 decorating and Shenzhen city, Nanshan District designing fee Prepayment of Shenzhen Wei Shida Decorating and 420,214.48 decorating and Designing Projects Co., Ltd. designing fee Prepayment of Guangzhou Weilin Decorating Projects Co., 400,000.00 decorating and Ltd. designing fee (3) Prepayment statistics at the end of the year does not include prepaid money of stockholders who have voting right and take no less than 5% shares of our company. 112 4. Other receivables (1) Disclosure of accounts receivable by client categories is as follows: 31 December 2008 Category Provision for Book Balance Percentage Book Value bad debts RMB (%) RMB RMB Individually significant 19,834,738.09 64.18 9,601,280.98 10,233,457.11 accounts Individually insignificant accounts but with significant risks after 1,370,256.63 4.43 1,370,256.63 - being grouped with similar credit risk characteristics Other insignificant accounts 9,701,785.25 31.39 387,596.20 9,314,189.05 Total 30,906,779.97 100.00 11,359,133.81 19,547,646.16 31 December 2007 Category Provision for Book Balance Percentage Book Value bad debts RMB (%) RMB RMB Individually significant 22,311,912.51 71.93 9,687,677.45 12,624,235.06 accounts Individually insignificant accounts but with significant risks after 2,984,446.82 9.62 960,774.65 2,023,672.17 being grouped with similar credit risk characteristics Other insignificant accounts 5,720,900.71 18.45 752,255.72 4,968,644.99 Total 31,017,260.04 100.00 11,400,707.82 19,616,552.22 (2) The ageing of other receivables and related provisions for bad debts is analyzed below: 31 December 2008 Aging Provision of bad Amount Percentage debts RMB (%) RMB Within 1 year 12,472,959.75 40.36 357,762.64 1－2 years 5,583,084.54 18.06 451,121.16 113 31 December 2008 Aging Provision of bad Amount Percentage debts RMB (%) RMB 2－3 years 123,156.83 0.40 15,238.75 More than 3 years 12,727,578.85 41.18 10,535,011.26 Total 30,906,779.97 100.00 11,359,133.81 31 December 2007 Aging Provision of bad Amount Percentage debts RMB (%) RMB Within 1 year 11,871,719.86 38.27 363,146.55 1－2 years 1,158,096.62 3.73 115,809.66 2－3 years 514,283.33 1.66 354,285.00 More than 3 years 17,473,160.23 56.34 10,567,466.61 Total 31,017,260.04 100.00 11,400,707.82 (3) The list of first fifth larger debtors Percentage Amount among Debtors Ageing RMB receivables (%) More Fei Jing Co.,Ltd 6,307,234.57 20.41 than 3 years 1-2 Willy Housing Company of Taoyuan town 1,675,410.67 5.42 years More Shenzhen Xin Longtai Industrial Co., Ltd. 1,573,875.89 5.09 than 3 years Shanghai Dai De Liangxing Real Estate Consulting Co., Ltd. (Dai De Liang Xing 1,200,000.00 3.88 1-2years Co.) (Note) Shenzhen Yi Tian Holiday World Real Within 1 1,090,523.00 3.53 Estate Developing Co., Ltd. year Total 11,847,044.13 38.33 Note: This amount of money is Hendry Company’s rental deposit of 1,200,000.00 RMB Yuan which is received by Dai De Liang Xing Company. On Dec, 1st, 2006, through the introduction of Dai De Liang Xing Company, Hendry Company signed cooperative contract 114 with American World Mater Co.(WM Co. in abbreviation as follows). In the contract it is written that WM Co. will provide the 512-516 property in Huai Hai Road of Shanghai which was rented by it to Hendry Company as Hendry’s selling center of luxurious watch. Hendry Company saved rental deposit of 1,200,000.00 RMB yuan into Dai De Liang Xing Company’s account. Later, because WM Co. broke the contract, Hendry Company raised suing application that Dai De Liang Xing Company should return its rental deposit. On Mar, 15th, 2008, the People’s Court of Nanshan District of Shenzhen, Guangdong Province released civil judgment of No. 633 which refused Hendry Company’s appeal. On Apr, 9th, 2008, Hendry Company asked Shenzhen Intermediate People’s Court for second instance. Until Dec, 31st, 2008, this case is still under judging process. (4) Specifications of other receivables with large amount Percentage Amount among Debtors Contents RMB receivables (%) Payment for Internal Fei Jing Co. 6,307,234.57 20.41 business Payment for Willy Housing Company of Taoyuan town 1,675,410.67 5.42 purchasing houses Shenzhen Xin Longtai Industrial Co., Ltd. 1,573,875.89 5.09 Rent money Shanghai Dai De Liangxing Real Estate Consulting Co., Ltd. (Dai De Liangxing Co.) 1,200,000.00 3.88 Deposit (note) Shenzhen Yi Tian Holiday World Real Rental deposit for the 1,090,523.00 3.53 Estate Developing Co., Ltd. shopping center Deposit and caution Beijing Hua Fu Jin Bao Real Estate 1,058,400.00 3.42 money for the Developing Co., Ltd. shopping center Deposit and caution Hua Run Letting Deposit 822,320.00 2.66 money for the shopping center Payment for Internal Zhuang Tu Goods Trading Center 641,807.20 2.08 business Payment for Internal Xian Aviating Engine Company 602,551.69 1.95 business Deposit and caution Shen Yang Kun Tai Real Estate Developing 500,000.00 1.62 money for the Co., Ltd. shopping center Total 15,472,123.02 50.06 115 (5) Other receivables statistics at the end of the year includes 6,307,234.57 RMB yuan from the related parties which takes account of 20.53% in total amount of other receivables. Introduction of this transaction can be found in Note Ⅸ-3.6. 5. Inventories （1）Details of inventories 31 December 2008 Capitalized Items Provision for Amount borrowing Book value obsolete stocks RMB costs RMB RMB RMB Raw materials 56,426,175.61 - 15,501,511.16 40,924,664.45 Work-in-process 4,426,826.37 - - 4,426,826.37 Finished goods 644,932,994.15 - 13,157,121.89 631,775,872.26 Total 705,785,996.13 - 28,658,633.05 677,127,363.08 31 December 2007 Capitalized Items Provision for Amount borrowing Book value obsolete stocks RMB costs RMB RMB RMB Raw materials 43,928,706.37 - 15,501,511.16 28,427,195.21 Work-in-process 4,224,959.75 - - 4,224,959.75 Finished goods 499,574,874.01 - 14,528,046.62 485,046,827.39 Total 547,728,540.13 - 30,029,557.78 517,698,982.35 Note: ①. Inventories in this year are 28.86 percent more than that on the beginning of this year. The main reasons are: A、Hengjili corporation established 12 new stores and stored goods for the festivals. B、Production department augmented inventory reserves. ②.The noted watches in storage which were reserved for more than three years are totally 18,024,528.05 Yuan, 2.55 percent of inventory residual for the year ended. (The noted 116 watches in storage which were reserved for more than three years are totally 20,537,912.09 Yuan in 2007, 3.75 percent of inventory residual at the end of 2007.) （2）Provision for obsolete stocks Drawing 31 December Decrease 31 December goods in Items 2007 2008 advance Return Reselling Total RMB RMB RMB RMB RMB RMB Raw 15,501,511.16 - - - - 15,501,511.16 materials Finished 14,528,046.62 1,227,643.90 - 2,598,568.63 2,598,568.63 13,157,121.89 goods Total 30,029,557.78 1,227,643.90 - 2,598,568.63 2,598,568.63 28,658,633.05 Note: ①. The reselling number of inventory falling price reserves this year is the self-produced Fiyta which is sold this year as inventory falling price reserves last year. ②.As the price of noted watches is increasing and its value of collection, our corporation didn’t draw falling price reserves for the ones which have older storage age except some brand. 6. Other current assets （1）Other current assets 31 December 31 December Items Content 2008 2007 RMB RMB Rent Shop rent 2,113,573.79 - Others 510,034.73 - Total 2,623,608.52 - 7. Available-for-sale financial assets 31 December 2008 31 December 2007 Items RMB RMB Available-for-sale financial assets 4,543,000.00 16,995,000.00 Total 4,543,000.00 16,995,000.00 Note: The Available-for-sale financial assets for the year ended are 73.27 percent less than 117 that for the year started as the result of depression of saleable financial assets. 8. Long-term equity investments （1）Details of Long-term equity investments 31 December 31 December Items 2007 Increase Decrease 2008 RMB RMB RMB RMB Investment for subsidiary 6,300,000.00 11,040,000.00 - 17,340,000.00 Investment for union company 1,806,522.17 9,351.35 - 1,815,873.52 Other investment on stocks 385,000.00 - - 385,000.00 Minus: long-term investment 6,600,000.00 5,239,499.13 - 11,839,499.13 falling price reserves Total 1,891,522.17 5,809,852.22 - 7,701,374.39 （2）Details of investment for subsidiary Initial 31 31 December investment December Increase Decrease Investee 2008 amount 2007 RMB RMB RMB RMB RMB Jing Fei 6,300,000.00 6,300,000.00 - - 6,300,000.00 Corporation Hao Men 11,040,000.00 - 11,040,000.00 - 11,040,000.00 Corporation Total 17,340,000.00 6,300,000.00 11,040,000.00 - 17,340,000.00 As Note 6.2(1), the subsidiary was exempted the qualification of operating by the business administration. （3）Details of investment for union company Proportion Registered Nature of Time of Registered Stock Investee for voting place business investment capital proportion right Northwest industry Education, university Shenzhen training, 20 years 3,000,00.00 50% 50% Shenzhen researching institution （continued） 118 Net capital for Operating Net profit Investee the year ended income RMB RMB RMB Northwest industry university Shenzhen institution 3,750,524.37 333,500.00 18,702.70 （4）Long-term equity investments calculated by equity measured Added Equity Initial For the year investment(minus Equity For the year appreciation Investee investment started transferred Dividend ended of invested RMB RMB equity) RMB RMB RMB RMB Northwest industry university 1,500,000.00 1,806,522.17 - 9,351.35 - 1,815,873.52 Shenzhen institution （5）Other long-term equity investments Initial 31 31 investment December Increase Decrease December Investee amount 2007 RMB RMB 2008 RMB RMB RMB Xi’an Tang Cheng 85,000.00 85,000.00 - - 85,000.00 Corporation Shenzhen Zhong Hang Broadcast 300,000.00 300,000.00 - - 300,000.00 Corporation Total 385,000.00 385,000.00 - - 385,000.00 （6）Provision for impairment loss of long-term equity investments Decrease 31 December 31 December Increase RMB Investee 2007 2008 RMB Come RMB Resell Total RMB back Fei Jing Corporation 6,300,000.00 - - - - 6,300,000.00 Hao Meng - 5,239,499.13* - - 5,239,499.13 Corporation Shenzhen Zhong Hang Broadcast 300,000.00 - - - - 300,000.00 Corporation Total 6,600,000.00 5,239,499.13 - - - 11,839,499.13 Note: For the subsidiary company isn’t brought into this year’s accounts, it must be 119 merged in last year’s account to offset falling price reserves. 9. Investment real estate （1）Details of investment real estate 31 December 31 December Increase Decrease Items 2007 2008 RMB RMB RMB RMB Investment real estate using the cost 182,709,230.02 1,259,760.40* 6,195,672.21 177,773,318.21 method Less: Impairment of - - - - investment real estate Total 182,709,230.02 1,259,760.40 6,195,672.21 177,773,318.21 Note: Our company transfers self-used part to rent part （2）Investment real estate using the cost method 31 December 31 December Increase Decrease Items 2007 2008 RMB RMB RMB RMB Cost price Real estate 230,515,071.84 1,259,760.40 - 231,774,832.24* 230,515,071.84 1,259,760.40 - 231,774,832.24 Total Accumulated depreciation Real estate 47,805,841.82 6,195,672.21 - 54,001,514.03 47,805,841.82 6,195,672.21 - 54,001,514.03 Total Less: Impairment of investment real - - - - estate NAV 182,709,230.02 - - 177,773,318.21 Note: Our company used estate at the price of 186,458,140.72 Yuan as collateral. By the end of 2008, there wasn’t the situation that the book value is more than receivable capital in our company’s account. 10. Fixed Assets 120 （1）Fixed Assets Details 31 December 31 December Increase Decrease Items 2007 2008 RMB RMB RMB RMB Original price Buildings 64,964,661.14 186,361,909.92 1,758,679.88 249,567,891.18 Machinery 9,090,555.83 278,185.50 0.00 9,368,741.33 equipment Transportation 9,072,000.72 1,169,248.00 1,050,869.40 9,190,379.32 facilities Electronic 12,182,193.86 2,326,004.55 192,744.50 14,315,453.91 facilities Other 9,938,215.30 22,874,311.85 627,739.77 32,184,787.38 facilities Total 105,247,626.85 213,009,659.82 3,630,033.55 314,627,253.12 Accumulated depreciation Buildings 10,604,276.33 6,908,753.18 84,873.76 17,428,155.75 Machinery 6,340,938.94 507,785.36 - 6,848,724.30 equipment Transportation 5,830,334.22 1,276,028.96 998,325.92 6,108,037.26 facilities Electronic 6,394,724.28 2,306,581.77 180,761.91 8,520,544.14 facilities Other 5,706,252.36 5,127,024.47 541,173.08 10,292,103.75 facilities 34,876,526.13 16,126,173.74 1,805,134.67 49,197,565.20 Total Depreciation reserves Buildings 2,600,000.00 - - 2,600,000.00 2,600,000.00 - - 2,600,000.00 Total Book value Buildings 51,760,384.81 - - 229,539,735.43 Machinery 2,749,616.89 - - 2,520,017.03 equipment Transportation 3,241,666.50 - - 3,082,342.06 facilities Electronic 5,787,469.58 - - 5,794,909.77 facilities Other 4,231,962.94 - - 21,892,683.63 facilities Total 67,771,100.72 196,883,486.08 1,824,898.88 262,829,687.92 121 NOTE：Compared to the beginning of year，the original value of fixed assets at end of period increases 198.94%，the main reason is the capital used to purchase Xi'an ChengHeng International Hotel Building’s property （2）Fixed Assets--- not warranted yet Book original Accumulated Depreciation Original value Items value depreciation reserves RMB RMB RMB RMB Szechwan Chengtu 11,634,400.00 2,275,551.60 2,600,000.00 6,758,848.40 HuaShun Building Total 11,634,400.00 2,275,551.60 2,600,000.00 6,758,848.40 （3）Fixed assets used for mortgage Book original Accumulated Depreciation Original value Items value depreciation reserves RMB RMB RMB RMB FIYTA Science and Technology 24,252,833.08 2,633,164.76 - 21,619,668.32 Building Total 24,252,833.08 2,633,164.76 - 21,619,668.32 NOTE： details about fixed assets used for mortgage in annotations11、2。 （4）Fixed assets depreciation reserves 31 31 Decrease December Increase December Items 2007 RMB Reversal Amortization Total 2008 RMB RMB RMB RMB RMB Buildingst 2,600,000.00 - - - - 2,600,00.00 Total 2,600,000.00 - - - - 2,600,000.00 11. Construction-in-process Fixed assets 31 31 changeover December Increase Other decrease December Capital Items in for 2007 RMB RMB 2008 source current RMB RMB year RMB Project of Hose Own Renovation for 151,261.50 263,213.20 - 414,474.70 - funds FIYTA 122 Building Project of Signboard on Own the top of 256,500.00 13,500.00 - 270,000.00 - funds FIYTA Building Total 407,761.50 276,713.20 - 684,474.70(NOTE) - NOTE ： The decrease of construction in progress current year, means transferring construction-in-progress into a " Long-term prepayments " accounts. 12. Intangible assets Changeove 31 Original r for Amortization Accumulative 31 December December Increase Items Cost current for current year amortization 2008 2007 RMB RMB year RMB RMB RMB RMB RMB 15,487,349.6 11,358,458. 11,014,384.0 Tenure - - 344,074.32 4,472,965.52 0 40 8 Software 1,140,660.8 1,494,950.00 337,100.00 - 88,486.76 105,675.94 1,389,274.06 system 2 Trademark 3,863,200.00 113,200.00 755,007.66(NOTE) - 375,000.00 3,369,992.34 493,207.66 20,845,499.6 12,612,319. 12,896,865.8 Total 1,092,107.66 - 807,561.08 7,948,633.80 0 22 0 NOTE： （1）Long-term prepayments should be re-classified and transferred into trademarks of the accounts （2）The case that intangible assets more than recoverable amount doesn’t happen by the end of December 31th ，2008 13. Goodwill 31 December 2008 31 December 2007 RMB RMB Items Depreciation Book Book Depreciation Book Book balance reserves value balance reserves value Lishan Department 1,735,756.48 1,735,756.48 - - - - Store Total 1,735,756.48 1,735,756.48 - - - - NOTE：As annotations 6、2、（1）shows， Company HengJiLi purchased the 100% 123 shares of Lishan Department Store on the price of 1,200,000.00 yuan. The fair value of Cognizable Net Assets of LiShan is -535,756.48 yuan, HengJiLi shows the balance (1,735,756.4 yuan) as Goodwill in the consolidated financial statement. At end of year ,HengJiLi makes impairment testing for the Goodwill，and include the goodwill impairment loss （recoverable amount is less than its book value） into gains and losses of 2008 14. Long-term prepayments Amortization 31 December Increase Change over for 31 December for current Items 2007 RMB current year 2008 year RMB RMB RMB RMB Cost for making 4,381,130.47 9,738,759.94 - 5,565,617.14 8,554,273.27 shoppe Trademark-using 755,007.66 - 755,007.66(NOTE) - - expenses Others 13,348,960.16 21,375,659.63 - 7,398,741.20 27,325,878.59 Total 18,485,098.29 31,114,419.57 755,007.66 12,964,358.34 35,880,151.86 NOTE： (1)As annotations 7、12 shows，the account is re-classified and transferred into "intangible assets". (2)Compared to the beginning of year，Long-term prepayments at end of year increases 94.10%，mainly due to the cost used to open new stores and decorate existing stores . 15. Deferred tax assets （1）Details of Deferred tax assets 31 December 2007 31 December 2008 Items RMB RMB From the differences between book 9,553,777.94 9,181,405.66 value of assets and tax basis From the differences between book - 14,077.29 value of debt and tax basis 124 Pre-tax reparative lossses 1,163,869.23 - Total 10,717,647.17 9,195,482.95 （2）Details of temporary differences 31 December 2007 31 December 2008 Items RMB RMB Account receivable 3,001,794.91 2,387,543.09 Other notes receivable 1,065,798.80 312,606.85 Inventory falling price reserves 14,977,784.05 16,122,322.99 Elimination of Unrealized Profits Resulting from Intragroup 27,952,102.67 33,131,216.07(NOTE（1）) Transactions other account payable - 42,658.45 Deductible loss 5,548,178.90(NOTE（2）) - Total 52,545,659.33 51,996,347.45 NOTE: (1) HengJiLi sent the stock to the branch companies for sell in 2007, and 13,160,204.91 yuan is the unrealized internal sales profits of it.Due to the change of ways to levy income tax in current year , HengJiLi changed the internal sales profits to Deductible Temporary differences and its tax. (2) As annotations 7、12 shows， due to the change of ways to levy income tax in current year ,it’s the cumulative Pre-tax reparative losses of HengJiLi and its branches by the end of December 31th,2008. 16.Assets Depreciation reserves Table Draw Decrease 31 December reserves this amount of Unpaid debt 31 December Items 2007 year or other debt return amount 2008 RMB add-ons this year RMB RMB RMB RMB 1. Bad debt reserves 54,045,121.73 694,537.38 - - 54,739,659.11 Including: Account 42,644,413.91 736,111.39 - - 43,380,525.30 receivable 125 Draw Decrease 31 December reserves this amount of Unpaid debt 31 December Items 2007 year or other debt return amount 2008 RMB add-ons this year RMB RMB RMB RMB Other notes 11,400,707.82 -41,574.01 - - 11,359,133.81 receivable 2. Inventory falling 30,029,557.78 1,227,643.90 - 2,598,568.63 28,658,633.05 price reserves Including：Finished 14,528,046.62 1,227,643.90 - 2,598,568.63 13,157,121.89 goods Raw materials 15,501,511.16 - - - 15,501,511.16 3. Long-term investment on stocks 6,600,000.00 5,239,499.13 - - 11,839,499.13 depreciation reserves (note) 4. Total fixed assets 2,600,000.00 - - - 2,600,000.00 depreciation reserves Including: 2,600,000.00 - - - 2,600,000.00 Building\structure 5. Goodwill - 1,735,756.48 - - 1,735,756.48 depreciation reserves Total 93,274,679.51 8,897,436.89 - 2,598,568.63 99,573,547.77 Note：Long-term stock rights investment depreciation reserves increase this year due to Haomen Company no longer being counted in consolidation range. 17. Short-term borrowings 31 December 2008 31 December 2007 RMB RMB Guarantee loan 575,000,000.00 310,000,000.00 Total 575,000,000.00 310,000,000.00 Short-term borrowings increases by 85.48% at the end of this year, basing on the level at the beginning of this year, as Hengjili Company increased loan for expanding luxurious watch selling scale. 18. Accounts payable （1）Accounts payable list Ageing 31 December 2008 31 December 2007 126 Amount Percentage Amount Percentage RMB (%) RMB (%) Within 1 year 57,418,655.43 97.64 50,782,287.41 90.18 1-2 years 785,074.79 1.33 3,421,400.07 6.08 2-3 years 36,571.50 0.06 1,084,553.24 1.93 More than 3 568,936.94 0.97 1,024,531.76 1.81 years Total 58,809,238.66 100.00 56,312,772.48 100.00 （2）Accounts payable with unpaid big loan 1 year exceed time limit Amount Reason of Return Creditors RMB unpaid guarantee Daliang Weiye Watch company LTD. of 519,571.54 Unpaid No Shunde District, Foshan City In quality Project fee of High Tech industry garden 515,162.52 No guarantee time Total 1,034,734.06 (3)At the end of this year, there is no debt payable for the shareholders with 5% or more than 5% shares of our company. 19．Advances from customers （1）Advances from customers list 31 December 2008 31 December 2007 Ageing Amount Percentage Amount Percentage RMB (%) RMB (%) Within 1 year 2,058,162.76 98.00 3,604,104.94 100.00 1-2 years 34,000.00 2.00 - - Total 2,092,162.76 100.00 3,604,104.94 100.00 （2）Advances from customers with the ageing more than 1 year Amount Reason for not carrying forward RMB Chengdu Xingda railway 34,000.00 Earthquake project unfinished construction company Total 34,000.00 （3）At the end of this year, there is no advances from customers from the shareholders with 5% or more than 5% shares of the Company. 127 20．Employee benefits payable 31 December 31 December Increase Decrease Item 2007 2008 RMB RMB RMB RMB 108,022,798. 101,914,175. Wages, bonus and allowance 3,808,930.23 9,917,553.37 22 08 Employee welfare - 3,362,329.20 3,362,329.20 - Social insurance - 8,346,242.41 8,346,242.41 - Housing accumulation fund - 1,194,897.79 1,193,909.29 988.50 Labor union outlay and 50,592.45 3,083,477.64 2,937,750.08 196,320.01 employee education fee 841,550.00(n Compensation for dismissal - 11,550.00 830,000.00 ote) Supplemental pension 3,327,704.74 900,746.29 3,327,704.74 900,746.29 insurance Labor insurance - 381,220.80 381,220.80 - 126,133,262. 121,474,881. Total 7,187,227.42 11,845,608.17 35 60 Note：submitted by the luxurious watch subsidiary of the Company based on the length of service, according to the Labor Law. 21．Tax payable 31 December 2008 31 December 2007 Items RMB RMB Value-added tax -12,729,991.64 -24,424,911.26 Sales tax 858,407.15 539,235.81 City maintenance and 123,138.94 95,693.81 construction tax Corporation income tax 717,109.28 3,521,602.17 Individual income tax 273,376.66 948,743.44 House property tax 155,120.26 - Land usage tax -155.83 - Tuition add-ons 97,995.95 87,013.47 Stamp tax 144,279.38 187,096.09 128 31 December 2008 31 December 2007 Items RMB RMB Bank enhancing fee 43,313.42 11,812.73 Total -10,317,406.43 -19,033,713.74 22．Interest payable 31 December 2008 31 December 2007 Items RMB RMB Bank 987,587.50 - Total 987,587.50 - 23．Dividends payable 31 31 December Reason for not December Investors 2008 paying 2007 dividends RMB RMB China aviation tech Shenzhen Draw reserves 395,426.76 - company unpaid Total 395,426.76 - 24. Other payables （1）Other payables list by ageing 31 December 2008 31 December 2007 Ageing Amount Percentage Amount Percentage RMB (%) RMB (%) Within 1 27,264,009.92 73.96 17,639,299.48 67.31 year 1-2 years 3,053,418.36 8.28 1,602,604.19 6.12 2-3 years 907,094.30 2.46 1,817,533.03 6.94 More than 3 5,639,440.22 15.30 5,147,231.82 19.63 years Total 36,863,962.80 100.00 26,206,668.52 100.00 129 （2）Other payables top 5 loaners list 31 December 2008 Contents RMB Haomen company 8,309,101.20 Asset disposition Low interest housing money of Taoyuan Building 4,146,963.66 village reconstruction fee Shenzhen Tencent computer system 2,600,000.00 Rent deposit company LTD. Rent deposit 617,064.77 decoration Shenzhen Kejin biology identification 338,718.40 Rent deposit company LTD. （3）Other payables more than 1 year with significant amount 31 December Guaranted 2008 Reason for unpaid or not RMB Not bring to Haomen company 8,309,101.20 No account Building reconstruction Low interest housing money of Taoyuan village 4,146,963.66 No still applying Shenzhen Tencent computer system company 2,600,000.00 In tenancy No LTD. Rent deposit of Fiyta sale subsidiary 617,064.77 In tenancy No Shenzhen Kejin biology identification company 338,718.40 In tenancy No LTD. Shenzhen Youlifeng Kala OK company LTD. 331,080.00 In tenancy No Shenzhen bakery king company LTD. 322,000.00 In tenancy No Shenzhen Weisheng electron company LTD. 300,137.88 In tenancy No Shenzhen Good Family sports goods company 279,578.00 In tenancy No LTD. Shenzhen Yongantang pharmacy company LTD. 273,600.00 In tenancy No Shenzhen Youchuang Science and Tech company 263,756.40 In tenancy No LTD. Shenzhen Oracle research and development 238,140.00 In tenancy No center Shenzhen Huapu electron tech company LTD. 226,026.00 In tenancy No China Merchants Bank Shenzhen Sci&Tech Park 191,520.00 In tenancy No subsidiary COLANI Company 150,000.00 In tenancy No Restaurant card deposit 135,900.00 Unpaid No Wenqingbo 105,960.00 In tenancy No 130 31 December Guaranted 2008 Reason for unpaid or not RMB Shenzhen Century triumph Sci&Tech company 105,856.14 In tenancy No LTD. Beijing Oracle software system company LTD. 102,060.00 In tenancy No Total 19,037,462.45 （4）Other payables includes 711,031,50 paying to other related parties, which takes up 1.93% of other account payable at the end of this year. Details please refer to Note 9 and (3) 6. 25. Other current liabilities （1）Details of other current liabilities 31 December 2008 31 December 2007 Items Contents RMB RMB Drawing expense in advance 1,546,453.73 - Total 1,546,453.73 - （2）Details of drawing expense in advance 31 December 31 December Reason for Items 2008 2007 reserve RMB RMB No pay for Entitled expense for the drawing expense 800,000.00 - China astronautics fund in advance No pay for Drawing emporium expense drawing expense 746,453.73 - in advance in advance Total 1,546,453.73 - 26. Long-term borrowings The company which supplied Reason for 31 December 31,December Currency loans loans 2008 2007 Shenzhen subsidiary of RMB Pledge loans 70,000,000.00 - National Development Bank Total 70,000,000.00 - Note：The China astronautics conglomerate supplied the guarantee for the long-term loans for the year ended. 131 27. Long-term payables 31 December 2008 31 December 2007 Category RMB RMB Beijing Hendry watch corporation 10,000,000.00* 5,000,000.00 Funds for researching and standardizing 50,000.00 50,000.00 Fiyta Total 10,050,000.00 5,050,000.00 Note: It is the loan which Heng Lian Da Company borrowed from its present company, Beijing Hendry Watch Corporation. 28. Deferred tax liabilities （1）Details of deferred tax liabilities 31 December 2008 31 December 2007 Items RMB RMB Deferred tax liabilities arising from the difference between the tax base of an 371,774.70 2,577,823.14 asset and its carrying value Total 371,774.70 2,577,823.14 Note: Deferral taxes for the year ended are 85.58 percent less than that for the year started, as the result of depreciation of the saleable financial assets. （2）Details of temporary differences 31 December 2008 31 December 2007 Items RMB RMB Other notes receivable - 19,717.50 Saleable financial assets 1,543,000.00 13,995,000.00 Long-term investment on stocks 315,873.52 306,522.17 Total 1,858,873.52 14,321,239.67 29. Other non-current liabilities 31 December 31 December Items Contents 2008 2007 RMB RMB Deferral Funds for constructing 3,000,000.00 3,000,000.00 income technology centre 132 31 December 31 December Items Contents 2008 2007 RMB RMB Deferral High delicate multifunction 1,050,000.00* - income watch core Total 4,050,000.00 3,000,000.00 Note: It is the funds for high delicate multifunction watch core from the Guangdong finance and education document [2008]2. 30. Share capital Unit: one stock 31 December 31 December 2008 Changes(+、-) 2007 Issue Reserve Prop Items d transfer Proport Amounts ortio Bonu Amounts stock ed to Others ion RMB n s RMB s stocks (%) (%) 1.Limited stocks (1) Stocks of legal 111,415,5 44.6 111,415,50 - - - - 44.68 person 01 8 1 (2)Other domestic 35,524 0.01 - - - - 35,524 0.01 stocks Stocks of domestic 35,524 0.01 - - - - 35,524 0.01 natural person 111,451,0 44.7 111,451,02 Total limited stocks - - - - 44.70 25 0 5 2. Unlimited stocks 79,546,97 31.9 (1)Common stocks - - - - 79,546,974 31.91 4 1 (2)Foreign stocks 58,320,00 23.3 - - - - 58,320,000 23.39 issued in China 0 9 (3)Total unlimited 137,866,9 55.3 137,866,97 - - - - 55.30 stocks 74 0 4 249,317,9 100. 249,317,99 3.Sum of stocks - - - - 100.00 99 00 9 Note: This paper is assured by Shekou Zhong Hua Accounting agency with the No. of 16(1998). 31. Capital reserve 31 December 31 December 2007 Increase Decrease 2008 Items RMB RMB RMB RMB 133 Capital 177,354,784.00 - - 177,354,784.00 premium Other capital 25,968,348.65 - 10,241,500.00* 15,726,848.65 reserve Total 203,323,132.65 - 10,241,500.00 193,081,632.65 Note: The decreasing this year is caused by the depreciation of saleable financial assets. 32. Surplus reserves 31 December 31 December 2007 Increase Decrease 2008 Items RMB RMB RMB RMB Legal surplus 41,590,130.27 5,787,316.33* - 47,377,446.60 Free surplus 61,984,894.00 - - 61,984,894.00 reserves Total 103,575,024.27 5,787,316.33 - 109,362,340.60 33. Unappropriated profit 31 December 2008 31 December 2007 RMB RMB Unappropriated profits at end of 86,222,040.84 19,988,231.72 last year Add:Changes in accounting - 9,242,463.68 policies Unappropriated profits at beginning 86,222,040.84 29,230,695.40 of year Add: Net profit of the year 65,018,761.82 61,744,135.39 Less: Appropriation to statutory 5,787,316.33 3,885,567.30 surplus reserve Appropriation to shareholders 24,931,799.90* - Gains or losses of minority 496,288.68 867,222.65 shareholders Unappropriated profits at end of 120,025,397.75 86,222,040.84 year Note: As the ratification from the shareholder meeting, the profit in 2007 is distributed as dividend in the way that one Yuan per ten stocks based on 249,317,999 shares issued. The total dividend is 24,931,799.90 Yuan 34. Operating revenues and costs 134 （1）Operating revenues 2008 2007 Items RMB RMB Main operating revenues 1,078,684,047.50 797,457,309.59 Other operating revenues 7,721,520.78 7,815,804.50 Total of operating revenues 1,086,405,568.28 805,273,114.09 Main operating costs 691,334,006.92 518,711,629.08 Other operating costs 7,172,241.24 2,785,878.32 Total of Operating costs 698,506,248.16 521,497,507.40 （2）Main operating revenues, costs and profit for different production categories 2008 Categories Main operating Main operating Main operating revenues costs profit RMB RMB RMB Famous watches 848,037,856.94*① 648,841,091.34 199,196,765.60 Self-produced Fiyta 304,761,629.24*② 171,247,661.62 133,513,967.62 Estate rent 64,895,461.08*③ 16,428,232.59 48,467,228.49 Hotel income 15,194,296.75*③ 1,327,319.42 13,866,977.33 Total 1,232,889,244.01 837,844,304.97 395,044,939.04 Less：Internal offset 154,205,196.51 146,510,298.05 7,694,898.46 from the Company Total 1,078,684,047.50 691,334,006.92*④ 387,350,040.58 （continued） 2007 Categories Main operating Main operating Main operating revenues costs profit RMB RMB RMB Famous watches 609,233,893.49 473,661,386.02 135,572,507.47 Self-produced Fiyta 251,720,561.87 145,145,961.44 106,574,600.43 Estate rent 56,746,075.18 9,471,311.81 47,274,763.37 Total 917,700,530.54 628,278,659.27 289,421,871.27 135 2007 Categories Main operating Main operating Main operating revenues costs profit RMB RMB RMB Less：Internal offset 120,243,220.95 109,567,030.19 10,676,190.76 from the Company Total 797,457,309.59 518,711,629.08 278,745,680.51 Note: ① The revenue of famous watch this year increased by 39.20 percent of last year, as the result that the Hendry company strengthened sales and enhanced the number of new shops. Note: ②The revenue of self-produced Fiyta this year increased by 21.07 of than last year, as the result that our company launched Fiyta’s city and shenzhou No.7 watch and the augmentation of new shops’ income. Note: ③The increasing of estate rent and hotel income is caused by the well operating of the subsidiary company, Xi’an Cheng Heng Company. Note: ④Operating costs increased by 33.94 percent of last year, caused by income increasing. （3）Main operating revenues, costs and profit for different districts 2008 Main operating Main operating Main Name of districts revenues costs operating RMB RMB profit RMB Northeast 97,954,915.00 66,567,997.14 31,386,917.86 North China 188,690,154.86 128,229,662.50 60,460,492.36 Northwest 235,499,818.07 160,040,475.94 75,459,342.13 Southwest 139,550,495.63 94,835,435.21 44,715,060.42 East China 124,273,658.58 84,453,634.10 39,820,024.48 South China 446,920,201.87 303,717,100.08 143,203,101.79 Total 1,232,889,244.01 837,844,304.97 395,044,939.04 minus：offset from districts 154,205,196.51 146,510,298.05 7,694,898.46 Total 1,078,684,047.50 691,334,006.92 387,350,040.58 136 （continued） 2007 Main operating Main operating Main Name of districts revenues costs operating RMB RMB profit RMB Northeast 80,478,905.79 55,097,689.66 25,381,216.13 North China 117,425,305.58 80,392,035.42 37,033,270.16 Northwest 172,811,418.52 118,310,628.27 54,500,790.25 Southwest 24,742,728.06 16,939,434.48 7,803,293.58 East China 102,594,161.13 70,238,296.55 32,355,864.58 South China 419,648,011.46 287,300,574.89 132,347,436.57 Total 917,700,530.54 628,278,659.27 289,421,871.27 minus：offset from districts 120,243,220.95 109,567,030.19 10,676,190.76 Total 797,457,309.59 518,711,629.08 278,745,680.51 (4)The sales of client ranking from 1 to 5 in this year are 131,477,792.35 Yuan, 12.19 percent of the total sales of our company. 35. Business taxes and levies 2008 2007 Items RMB RMB Business tax 4,467,321.12 3,095,556.42 ConTotalption tax 966,887.18 42,769.23 Tax for maintaining and 532,942.61 539,491.11 building cities Associate education fees 883,881.22 742,537.49 Others 306,813.93 123,809.90 Total 7,157,846.06 4,544,164.15 Note: the amount of business tax and associate charge this year is 57.72% more than that in last year. The main reason is that Xi’an ChengHeng Company begins to deal in and produce the Company’s upscale watches. 137 36. Selling and distribution expenses Sale expenses amount this year is RMB 163,184,243.63 yuan, which is RMB 57,237,881.37yuan more than that in last year RMB 105,946,362.26yuan, the main cause includes two aspects, A、the cost of decorating original and new stores amortization has increased; B、Staff Salaries increase in accordance to the increase of sales income and the expense of Advertising fees and market generalizing fees. 37. Administrative expenses The amount of adminisstrative expenses this year is RMB 98,956,724.46 yuan, which is RMB 16,727,425.65 yuan more than that in the last year RMB 82,299,298.81 yuan. It is mainly because that the opening of Xi’an ChengHeng Company augments the expense and that the research and development expense increases than that in last year. 38. Financial expenses 2008 2007 Items RMB RMB Interest expenses 39,133,320.13 14,876,389.09 Less：Interest income 1,073,968.66 1,176,602.13 Add：Exchange losses 27,449.07 619,528.33 Less: Exchange gians 5,670.14 254,636.45 Financial commission charge 5,949,335.03 3,497,589.21 Borrowings guarantee fee 1,350,000.00 600,000.00 Other outlay 153,969.42 - Total 45,534,434.85 18,162,268.05 Note: the amount of finance charge this year increases by 150.71% to last year, which is mainly because of the increase of correspondent interest outlay. 39. Impairment loss of assets 138 2008 2007 Items RMB RMB Doubtful debts loss 694,537.38 945,664.55 Inventory impairment loss 1,227,643.90 2,384,162.94 Goodwill depreciation loss 1,735,756.48 - Total 3,657,937.76 3,329,827.49 40. Investment income 2008 2007 Investee RMB RMB Northwest Institute of Technology research academy 9,351.35 306,522.17 in Shenzhen Anhui Province Energy Group 93,500.00 - Gain on dealing finance assets - 1,565,706.79 transfer Total 102,851.35 1,872,228.96 Note: There is no significant limitation in investment income remit back of the Company at the end of this year. 41. Non-operating income （1）Details of Non-operating income 2008 2007 Items RMB RMB Gain on disposal of 40,394.93 31,739.40 Non-current Among it: Gain on disposal of 40,394.93 31,739.40 fixed assets Disposal of Amounts due 888,343.39 - payable which cannot be payed Amercement income - 7,500.00 Government grants 1,245,316.00 1,105,800.00 Indemnity income 477,321.60 673,078.28 Gain on arrangement 2,000,000.00(note) - 139 2008 2007 Items RMB RMB Others 368,458.07 163,541.71 Total 5,019,833.99 1,981,659.39 Note: details of gain on debt arrangement is in notes twelve .2 （2）Government grants 2008 2007 RMB RMB Including: Items Including: amount amount of Amount of money counted Amount money into current loss counted into current loss Research and develop expense 550,000.00 550,000.00(note①) 500,000.00 500,000.00 Technical development plan - - 250,000.00 250,000.00 funds Labor department training fee - - 20,000.00 20,000.00 Prior new production financial 445,316.00 445,316.00(note②) 135,800.00 135,800.00 grants of Shenzhen Government loyalty of - - 200,000.00 200,000.00 Nanshan District Shenzhen private and middle and small enterprises 250,000.00 250,000.00(note③) - - development special subside Total 1,245,316.00 1,245,316.00 1,105,800.00 1,105,800.00 Note：①RMB 300,000.00yuan of it is received as the research and develop funds according to the document《Shenzhen Technology and Information Department[2008] No. 79》 issued by Technology Department of Shenzhen ;RMB 250,000.00yuan of it is received as Research and develop funds according to the document 《 Shenzhen Technology and Information Department[2008] No. 338》 issued by Technology Department of Shenzhen. ②it is received as the prior new production financial grants according to the document Shenzhen trade industry and technology [2007] No.81 issued by The Technology Department of Shenzhen. ③、it is received as Shenzhen private and middle and small enterprises development 140 special subside during December 2008. 42. Non-operating expenses 2008 2007 Items RMB RMB Loss on disposal of 58,183.06 66,617.27 Non-currents assets Amercement outlay 5,591.26 16,298.75 Donation outlay 51,881.62 1,700,000.00 Extraordinary loss 5,000.00 - Other 185,607.69 143,402.54 Total 306,263.63 1,926,318.56 43. Income tax （1）Constitution of Income tax expenses 2008 2007 Items RMB RMB Current tax expenses 10,723,505.91(note) 11,411,901.32 Deferred tax expenses -1,517,712.66 -1,664,780.99 Total of Income tax charge 9,205,793.25 9,747,120.33 Note: in according to notes five, 5, ④, the Company and manufacturing company deducts current tax payable income RMB 4,152,274.87yuan, which has not been applied for registration to local tax department only when the financial statements gets approval. （2）Relationship between Income tax expenses and accounting profit 2008 2007 Items RMB RMB Accounting profit/loss 127,363,393.50 99,901,068.56 Add:Effect of income adjustment for -73,732,094.47 -23,821,726.43 tax purposes Income tax expenses 53,631,299.03 76,079,342.13 Current tax expenses 10,723,505.91 11,411,901.32 141 Deferred tax expenses -1,517,712.66 -1,664,780.99 Including: Changes of deferred tax liabilities (excluding the amount -1,522,164.22 -1,721,251.47 directly transferred into owner's equity) Including: Changes of deferred tax iabilities (excluding the amount directly 4,451.56 56,470.48 transferred into owner's equity) Total of Income tax charge 9,205,793.25 9,747,120.33 44. Earnings per share 2008 2007 Items RMB RMB Basic earnings per share 0.259 0.244 Diluted earnings per share 0.259 0.244 45. Other cash receipts relating to operating activities Some great value items in “receive other cash related to dealing” of the Company is listed bellow: 2008 2007 Items RMB RMB Guarantee deposits 1,573,907.20 2,576,194.40 Interest income 1,073,968.66 1,176,602.13 Government grants 2,295,316.00 1,105,800.00 Total 4,943,191.86 4,858,596.53 46. Other cash payments related operating activities 2008 2007 Items RMB RMB Rent 27,826,528.64 12,570,491.48 Advertising fees 11,212,959.84 11,540,929.96 Consignment commission charge 7,589,739.44 6,719,178.86 Office allowance 5,077,560.83 6,022,674.26 142 2008 2007 Items RMB RMB Research and development 8,774,385.49 5,937,496.83 expense Travelling expense 5,398,043.54 5,254,546.27 Market generalizing expense 9,939,916.95 5,230,175.17 Counters decoration expense 5,069,769.85 4,661,057.71 Wrappage expense 4,039,171.20 3,595,875.83 Bank commission charge 5,787,356.99 3,521,311.85 Transportation expense 2,330,613.43 3,456,733.75 Water and electricity 3,160,435.75 3,135,286.88 Consult fees 264,800.00 2,343,026.89 Exhibition fees 781,548.00 2,178,790.00 Business entertainment 2,829,882.26 1,985,750.21 Conference 1,634,798.49 1,963,159.10 Donation outlay 63,064.14 1,700,000.00 Bond expense 505,202.56 1,602,457.32 Insurance premium 2,331,504.27 1,564,870.04 Post fees 1,105,062.66 1,090,708.15 Total 105,722,344.33 86,074,520.56 47. Other cash receipts relating to financing activitie 2008 2007 Items RMB RMB Received bill discount capital 29,119,083.43 - Total 29,119,083.43 - 48. Supplementary information to the cash flow statemen （1）Reconciliation of net profit to cash flow from operating activities 2008 2007 Items RMB RMB 1．Reconciliation of net profit to cash flow from operating activities： 143 2008 2007 Items RMB RMB Net profit 65,018,761.82 61,744,135.39 Add: Provision for asset impairment 3,657,937.76 3,329,827.49 Depreciation of fixed assets 22,321,845.95 13,126,039.19 Amortisation of intangible assets 807,561.08 361,263.50 Amortisation of long-term prepaid 12,964,358.34 14,057,695.53 expenses Losses on disposal of fixed assets, intangible assets and 17,788.13 34,877.87 other long-term assets (less gains) Financial expenses 40,483,320.13 15,476,389.09 Losses arising from investments (less -102,851.35 -1,872,228.96 gains) Decrease in deferred tax assets (less -1,522,164.22 -1,721,251.47 increase)） Increase in deferred tax liabilities (less 4,451.56 2,266,570.48 decrease) Decrease in inventories -158,057,456.00 -146,303,163.95 Decrease in operating receivables (less -70,491,258.00 -38,641,710.99 increase) Increase in operating payables (less 7,172,599.61 20,732,546.05 decrease) Net cash flow from operating activities -77,725,105.19 -57,409,010.78 2．Significant investing and financing - - activities that do not involve： 3 ． Net changes in cash and cash - - equivalents： Closing balance of cash 108,233,795.73 84,043,521.74 Less: Opening balance of cash 84,043,521.74 60,379,838.78 Add: Closing balance of cash equivalents - - Less: Opening balance of cash - - equivalents Net increase in cash and cash equivalents 24,190,273.99 23,663,682.96 （2）Information of current acquirement or disposition of sunsidiary company and other Business unit 2008 2007 Items RMB RMB Information of acquired sunsidiary company and other Business unit: 144 1．Price of acquired sunsidiary company and other 1,200,000.00 - Business unit 2．Cash and cash equivalent from acquired sunsidiary - - company and other Business unit Less： Cash and cash equivalent from acquired 359,963.26 - sunsidiary company 3． Net cash paid by acquired sunsidiary company and -359,963.26 - other Business unit 4． Net cash of acquired sunsidiary company -535,756.48 - Of total ： Current assets 1,271,524.52 - Non- current assets 3,464,801.91 - Current liabilities 5,272,082.91 - Non- current liabilities - - （3）Information of cash and cash equivalent 2008 2007 Items RMB RMB Ⅰ Cash 108,233,795.73 84,043,521.74 334,048.11 525,182.10 Cash on hand 107,678,366.86 83,228,772.87 Bank demand deposits Other monetary funds that can be readily 221,380.76 289,566.77 withdrawn on demand Ⅱ Cash equivalents - - Including：Investments in debt securities due - - within three months Ⅲ Cash and cash equivalent balances 108,233,795.73 84,043,521.74 Including：Restricted cash and cash equivalents of the Parent Company - - and subsidiaries within the Group Ⅰ Notes to the main items of parent company financial statements 1. Receivable account （1）Account receivabled listed according to category At end of year items Percentage Balances Bad debt provision Book value (%) Account receivable with significant amount 12,469,694.66 17.01 12,004,098.95 465,595.71 Account receivable with insignificant 29,837,240.27 40.70 29,081,558.48 755,681.79 amount but higher credit risk after the 145 At end of year items Percentage Balances Bad debt provision Book value (%) combination Other insignificant account receivable 31,008,572.62 42.29 1,259,364.97 29,749,207.65 total 73,315,507.55 100.00 42,345,022.40 30,970,485.15 (Receivable account continued) At opening of year item Percenta Bad debt Balances Book value ge (%) provision Account receivable with significant amount 25,561,326.65 41.98 11,269,494.28 14,291,832.37 Account receivable with insignificant amount but higher credit risk after the 32,344,670.91 53.12 28,823,033.51 3,521,637.40 combination Other insignificant account receivable 2,987,010.41 4.90 1,891,363.16 1,095,647.25 total 60,893,007.97 100.00 41,983,890.95 18,909,117.02 （2）Receivable account listed according to aging At end of year At opening of year Ageing Percentage Bad debt Percentage Bad debt Balances Balances (%) provision (%) provision Within 1 28,724,937.41 39.18 1,358,590.32 17,615,283.71 28.93 495,480.67 year 1 -2 2,757,708.13 3.76 69,660.46 1,905,804.87 3.13 290,580.48 years 2-3 1,427,770.09 1.95 713,885.05 254,917.53 0.42 123,529.27 years More than 3 40,405,091.92 55.11 40,202,886.57 41,117,001.86 67.52 41,074,300.53 years total 73,315,507.55 100.00 42,345,022.40 60,893,007.97 100.00 41,983,890.95 （3） item note of receivable account top 5 period-end debt Percentage in Ages of Debtor Amount receivable debts account (%) Beijing Urban and Rural Trade Center More than 2,033,710.15 2.77 Incorporated Company 3 years Qingdao Hendry Watch and clock More than 1,298,215.01 1.77 Lens and Jewel Company 3 years 146 Yingkou Department Store Watch and More than clock and Sewing Machine Wholesale 982,604.03 1.34 3 years Center Jiilin Watch and clock Photographic More than 890,387.77 1.21 Equipment Wholesale Company 3 years Chow Tai Fok Jewlery （Shenzhen） Within 1 850,000.00 1.16 Company Limited year Total 6,054,916.96 8.25 （4）The year-end balance of receivable account dose not include shareholder’s receivable fund, who hold 5% or more of the company’s share and have voting right. （5）The RMB 12,422,499.58 Yuan increased in receivable account at the current year end balance comparing to the last year beginning balance is due to the increased Fiyta’s sale. 2、Other receivable account （1）Other receivable account list according to category At end of year Item Percentag Bad debt Balance Book value e (%) provision Other account receivable with significant 334,724,349.8 98.73 9,214,749.60 325,509,600.29 amount 9 Other account receivable with insignificant amount but higher credit risk after the 1,370,256.63 0.40 1,370,256.63 - combination Other insignificant account receivable 2,945,920.41 0.87 256,516.05 2,689,404.36 328,199,004.6 total 339,040,526.9 100.00 10,841,522.28 5 3 （continued） At opening of year item Percentage Book balance Bad debt provison Book value (%) Other account receivable with significant 344,813,738.92 97.85 9,316,405.09 335,497,333.83 amount Other account receivable with insignificant amount but higher credit risk 2,726,603.42 0.77 908,120.45 1,818,482.97 after the combination Other insignificant account receivable 4,863,365.45 1.38 348,084.60 4,515,280.85 total 352,403,707.79 100.00 10,572,610.14 341,831,097.65 147 （2）other receivable account list according to aging At end of year At opening of year aging Percentage Bad debt Percentage Bad debt Amount Amount (%) provison (%) provison Within 1 324,343,716.81 95.67 112,586.27 168,118,326.95 47.71 89,343.00 year 1 -2 1,898,854.44 0.56 178,686.00 170,953,249.98 48.51 86,870.48 years 2-3 105,806.83 0.03 15,238.75 93,403.33 0.03 12,606.45 years More than 3 12,692,148.85 3.74 10,535,011.26 13,238,727.53 3.75 10,383,790.21 years total 339,040,526.93 100.00 10,841,522.28 352,403,707.79 100.00 10,572,610.14 （3）item note of other receivable account top 5 period-end debt Percentage in Debtors Amount other receivable Ages of debts account (%) Harmony Company 319,187,334.80 94.14 Within 1 year More than 3 Feijing Company 6,307,233.57 1.86 years Shenzhen Xinlongtai Industrial More than 3 1,573,876.89 0.46 Company Limited years Taoyuan County low profit More than 3 1,675,410.67 0.49 housing years Zhuangtu Commodity Exchange More than 3 641,807.20 0.19 Center years Total 329,385,663.13 97.15 （4）Other receivable account list with significant amount Percentage in Nature of Debtors Amount other receivable fund（or account (%) content） Inside Harmony Company 319,187,334.80 94.14 Accounting Inside Feijing Company 6,307,233.57 1.86 Accounting Shenzhen Xinlongtai Industrial 1,573,876.89 0.46 House rent Company Limited Taoyuan County low profit Buying-house 1,675,410.67 0.49 housing account Taoyuan County low profit 641,807.20 0.19 Accounting housing Xi’an Aviation Engine Company 602,551.69 0.18 Accounting 148 Percentage in Nature of Debtors Amount other receivable fund（or account (%) content） Total 329,988,214.82 97.33 3、Long-term equity investment （1）Details of long-term equity investment Balances at Decrease Balances at end of Increase during Items beginning of year during the year the year year Investments in subsidiaries 169,843,000.00 176,200,000.00 - 346,043,000.00 Investments in associates 1,806,522.17 9,351.35 - 1,815,873.52 Other equity investments 385,000.00 - - 385,000.00 Minus: Depreciation reserve for 11,839,499.13 - - 11,839,499.13 long-term investment on stocks Total 160,195,023.04 176,209,351.35 - 336,404,374.39 （2）Investments in subsidiaries Original Balances at Decreased Increased Balances at end Investee Investment beginning of during the during the year of year Amount year year Shenzhen Harmony World Watch Centre Co., 298,500,000.00 122,300,000.00 176,200,000.00 - 298,500,000.00 Ltd. Harbin Fiyta (Hong 125,000.00 125,000.00 - - 125,000.00 Kong) Co., Ltd Shenzhen World Famous 1,400,000.00 1,400,000.00 - - 1,400,000.00 Watch Centre Co., Ltd. Shenzhen Fiyta Precision Timing Manufacture Co., 9,000,000.00 9,000,000.00 - - 9,000,000.00 Ltd Shenzhen Feijing Precision Optical Device 6,300,000.00 6,300,000.00 - - 6,300,000.00 Manufacture Co., Ltd Xian Haomen Food & 11,040,000.00 11,040,000.00 - - 11,040,000.00 Recreation City Co., Ltd. Fiyta (Hong Kong) 9,678,000.00 9,678,000.00 - - 9,678,000.00 Limited Xian Chengheng Co., Ltd. 10,000,000.00 10,000,000.00 - - 10,000,000.00 149 Original Balances at Decreased Increased Balances at end Investee Investment beginning of during the during the year of year Amount year year Total 346,043,000.00 169,843,000.00 176,200,000.00 - 346,043,000.00 （3）Details of investments in associates Balances at Increased Decreased Balances at Registered Business Investee beginning of during the during the end of year Address Nature year year year Education, Shenzhen Research Institution training, of Northwestern Polytechnical 1,806,522.17 1,815,873.52 Shenzhen 9,351.35 - scientific University research Total 1,806,522.17 - 1,815,873.52 9,351.35 （3）Details of Investments In Associates-continued Investee Current year revenue Current year profits Shenzhen Research Institution of Northwestern Polytechnical 333,500.00 18,702.70 University （4）Long-term investment on stocks by equity method Current year Balances at additional Obtaine Original Balances at beginning investment Equity Change of d cash Investee Investment end of year of year (minus equity investee dividen Amount assignment of ds current year) Shenzhen Research Institution of 1,806,522.1 1,815,873.5 1,500,000.00 - 9,351.35 - Northwestern 7 2 Polytechnical University （5）Other long-term equity investments Balances at Original Increased Decreased Balances at beginning of Investee Investment during the during the end of year year Amount year year Xian Tangcheng Co., Ltd 85,000.00 85,000.00 - - 85,000.00 Shenzhen China Aviation 300,000.00 300,000.00 - - 300,000.00 Communication Co., Ltd Total 385,000.00 385,000.00 - - 385,000.00 150 （6）Impairment loss for long-term equity investment Counting Decreased during the year Balances at and Balances at end Investee beginning of Drawing Reversing Reselling of year year of the total Amoun Amount year Shenzhen Feijing Precision Optical Device 6,300,000.00 - - - - 6,300,000.00 Manufacture Co., Ltd Xian Haomen Food & Recreation City 5,239,499.13 - - - - 5,239,499.13 Co., Ltd. Shenzhen China Aviation 300,000.00 - - - - 300,000.00 Communication Co., Ltd Total 11,839,499.13 - - - - 11,839,499.13 4、Revenue and cost （1）Revenue for prime business and others Item Amount for current year Amount for previous year Prime business revenue 253,562,789.72 220,296,771.06 other business revenue 8,846,016.51 3,828,097.25 Total revenue 262,408,806.23 224,124,868.31 Prime business cost 104,465,146.05 97,060,526.94 Prime business cost 7,150,922.70 2,785,878.32 Total cost 111,616,068.75 99,846,405.26 （2）Prime business revenue, cost and profits for different productions (or business) Current year Amount Productions (or business) Prime business Prime business Prime business cost revenue profits Sales from self manufactured Fiyta 298,379,317.60 197,742,846.86 100,636,470.74 watches Lease out 64,889,405.52 16,428,232.59 48,461,172.93 151 Subtotal 363,268,723.12 214,171,079.45 149,097,643.67 Less: Setoff in the 109,705,933.40 109,705,933.40 - company Total 253,562,789.72 104,465,146.05 149,097,643.67 Prime business revenue, cost and profits for different productions (or business (continued) Previous year amount Productions (or business) Prime business Prime business Prime business cost revenue profits Sales from self manufactured Fiyta 256,929,917.83 180,968,437.08 75,961,480.75 watches lease out 56,746,075.18 9,471,311.81 47,274,763.37 Subtotal 313,675,993.01 190,439,748.89 123,236,244.12 Less:off-set inter- 93,379,221.95 93,379,221.95 - company Total 220,296,771.06 97,060,526.94 123,236,244.12 (3）Prime business revenue, cost and profits for different regions Current year Amount Region Prime business Prime business Prime business profits revenue cost Northeast 21,021,145.98 8,627,781.95 12,393,364.03 Northern China 32,326,190.61 13,267,750.68 19,058,439.93 Northwest 16,431,414.17 6,744,002.38 9,687,411.79 Southwest 13,987,019.56 5,740,741.02 8,246,278.54 East China 28,711,541.73 11,784,177.79 16,927,363.94 Southern China 250,791,411.07 168,006,625.63 82,784,785.44 Total 363,268,723.12 214,171,079.45 149,097,643.67 Less: offset among 109,705,933.40 109,705,933.40 - regions Total 253,562,789.72 104,465,146.05 149,097,643.67 Prime business revenue, cost and profits for different regions（continue） 152 Previous year Amount Region Prime business Prime business Prime business revenue cost profits Northeast 19,538,905.79 11,862,509.07 7,676,396.72 Northern China 28,295,305.58 17,178,716.29 11,116,589.29 Northwest 13,971,418.52 8,482,362.35 5,489,056.17 Southwest 11,632,728.06 7,062,490.79 4,570,237.27 East China 25,234,161.13 15,320,226.65 9,913,934.48 Southern China 215,003,473.93 130,533,443.74 84,470,030.19 Total 313,675,993.01 190,439,748.89 123,236,244.12 Less:off-set among 93,379,221.95 93,379,221.95 - regions Total 220,296,771.06 97,060,526.94 123,236,244.12 （4）Current year’s sales income of the top five customers amounted to 34,656,673.03 RMB, accounting for 13.67% of the entire sales revenue. 5、Investment income Current year’s Investee Previous year’s amount amount Income from transferring transaction - 1,565,706.79 monetary assets Equity method adjustments of 9,351.35 306,522.17 affiliated companies Bonus from avaliable-for-sale 93,500.00 - financial assets Subsidiary stock dividends 46,526,939.97* 17,853,622.08 Total 46,629,791.32 19,725,851.04 Note ① Among those, RMB 32,241,314.52 Yuan is the distributed dividend from Shenzhen Harmony World Watch Centre Co., Ltd.; RMB 13,597,251.72 Yuan is the distributed dividend from Shenzhen Fiyta Precision Timing Manufacture Co., Ltd; RMB 688,373.73 Yuan is the distributed dividend from Shenzhen World Famous Watch Centre Co., Ltd. ② There is no significant constraint to remitted investment income at the end of the year. 153 6、Statement of Provision for Impairment of Assets Counting and Drawing Decrease during the Balances at Amount of year Balances at end beginning of Current Year Item of year year Reversi or Other ng Reselling Increase Amoun Amount t 52,556,501.0 1. Bad debt provision 630,043.59 - - 53,186,544.68 9 41,983,890.9 Accounts receivable 361,131.45 - - 42,345,022.40 5 10,572,610.1 Other receivables 268,912.14 - - 10,841,522.28 4 2.Inventory 2,598,568.6 13348374.31 1,227,643.90 - 11,977,449.58 revaluation reserve 3 13,348,374.3 2,598,568.6 Commodity stocks 1,227,643.90 - 11,977,449.58 1 3 3.Depreciation 11,839,499.1 reserve for long-term - - - 11,839,499.13 3 investment on stocks 4.Total Fixed assets depreciation 2,600,000.00 - - - 2,600,000.00 provision Buildings 2,600,000.00 - - - 2,600,000.00 80,344,374.5 2,598,568.6 Total 1,857,687.49 - 79,603,493.39 3 3 7、Supplementary Schedule for Cash Flow Statement （1）Information on reconciliation net profit to cash flow from operations. Item Current Year Previous Year 1、Convert net profit to cash flow from operating activities： Net profits 57,873,163.29 38,855,673.03 Plus：Provision for asset losses 1,857,687.49 329,493.02 Depreciation for fixed assets 19,035,401.57 9,090,668.97 Amortization of intangible assets 807,561.08 344,074.32 Amortization of long-term deferred expenses 5,966,437.33 6,178,058.37 Loss of disposing fixed assets， intangible assets -30,370.60 61,109.27 and other long-term assets Scrap loss of fixed assets（income marked as - -31,739.40 “-”） 154 Item Current Year Previous Year Financial expenses（income marked as “-”） 19,049,836.43 883,290.78 Investment losses（income marked as “-”） -46,629,791.32 -19,725,851.04 Decrease of deferred income tax assets（increase -1,233,595.53 2,233,001.33 marked as “-”） Increase of deferred income tax liabilities 8,000.71 2,265,273.99 （decrease marked as “-”） Decrease of inventory（increase marked as “-”） -13,233,858.30 13,529,215.56 Decrease of operation receivables（increase 34,669,920.07 -129,104,961.02 marked as “-”） Increase of operation payables（decrease marked 6,590,107.12 -2,357,705.21 as “-”） Others - - Net cash from operating activities 84,730,499.34 -77,450,398.03 2、Important Investing and financing activities not involved in cash 3、Net increase of cash and cash equivalents Closing balance of cash. 54,938,436.99 46,746,295.03 Less： beginning balance of cash 46,746,295.03 48,521,282.16 Plus： closing balance of cash equivalent - - Less： beginning balance of cash equivalent - - Net increase of cash and cash equivalents 8,192,141.96 -1,774,987.13 （2）Cash and Cash Equivalents Item Current Year Previous Year 1.Cash 54,938,436.99 46,746,295.03 Cash on hand 87,498.90 253,932.58 Callable deposit 54,735,099.33 46,470,023.68 Other callable cash 115,838.76 22,338.77 2.Cash equivalents - - Investment in bond maturity within three - - months 3.Cash and Cash equivalents at end of year 54,938,436.99 46,746,295.03 155 Item Current Year Previous Year Restricted cash and cash equivalents used in parent company or Group - - subsidiaries Ⅸ Related Parties' Relationship and transactions (ⅰ) Relationship of Related Parties 1、Recognition of related parties The company’s standards for related parties are followings: If a party has the power to, directly or indirectly, control, jointly control or exercise significant influence over another party, or if two or more parties are subject to control, joint control or significant influence from a same party, the related party relationships are constituted. 2、The company’ parent company Shareholding Name of CNAC’s Nature of Registered ratio CNAC to parent Organization code Domicile Voting-right business capital the company company ratio (%) (%) Investment in industry, domestic business, CNAC 440301102781041 Shenzhen 678,909,090.00 44.69 44.69 material supply and marketing industry Note: The CATIC Shenzhen owns 58.60% equity stake of the CNAC. Since the CATIC Shenzhen is a wholly owned subsidiary of AVIC International Holding Corporation (“AVIC International”), the company is ultimately controlled by AVIC International. 3、The company’s subsidiaries For related information about the company’s subsidiaries see attached table Ⅵ、2、(1). 156 4、Related parties without controlling relationship Relationship with the Organization code or Name of company company Registration number Shenzhen CATIC Property Management Co., subject to common Ltd (CPM) control 19219400-5 Shenzhen CATIC Building Equipment Co., subject to common Ltd (CBE) control 440301102746791 Shenzhen Rainbow Department Store Co., subject to common Ltd ) (Rainbow) control 100377 affiliated company of Shenzhen Shenhang Electronic Co. Ltd the company’s subsidiary 4403011152608 affiliated company of Beijing Hengdeli Company the company’s subsidiary 10125553-9 Shenzhen CATIC Real Estate Co., Ltd subject to common (CAREC) control 440301103148532 Shenzhen MAIWEI Cable TV Equipment subject to common Co., Ltd (MAIWEI) control 440301501124988 subject to common South China Securities Co., Ltd (scstock) control 3600001132533 subject to common Atravis Hospitality Management Co., Ltd control 76197033-5 Shenzhen CATIC Nanguang Plc (CATIC subject to common Nan-Guang) control 4403011032584 ⅱ Pricing Policy Related-party transaction of the company is priced according to the mutual agreement. ⅲ Related party transaction 1、Labor services received Current year Prior year Portion Portion accounted for accounted for Name of related parties in the in the Amount company’ total Amount company’ total transaction transaction sum sum of the of the same same kind（%） kind（%） A、Project Shenzhen CATIC Building - - 274,236.47 100.00 Equipment Co., Ltd 157 Current year Prior year Portion Portion accounted for accounted for Name of related parties in the in the Amount company’ total Amount company’ total transaction transaction sum sum of the of the same same kind（%） kind（%） B、Property Management Shenzhen CATIC Property 1,802,635.18 100.00 1,687,965.34 100.00 Management Co., Ltd C、Lease Shenzhen CATIC Property 434,140.00 1.56 804,960.00 6.40 Management Co., Ltd D、Payment of shop counters’ selling expenses Rainbow Department Store 6,927,557.95 8.33 4,174,066.31 6.10 E、Payment of contracting fee Shenzhen Shenhang 300,000.00 100.00 700,000.00 100.00 Electronic Co. Ltd G、Payment of warranty costs CNAC 1,350,000.00 100.00 600,000.00 100.00 H、Collecting training expense CATIC - - 252,400.00 100.00 I、Payment of hospitality management fee Atravis Hospitality 503,605.77 100.00 - - Management Co., Ltd Total 11,317,938.90 8,493,628.12 2、Sale of goods Current year Prior year Portion accounted Portion accounted Name of the for in the for in the related party Amount company’ total Amount company’ total transaction sum of transaction sum of the same kind（%） the same kind （%） AVIC 1,441,102.14 0.48 244,860.68 0.10 International Total 1,441,102.14 0.48 244,860.68 0.10 158 3、Lease supply Current year Prior year Portion Portion accounted for accounted for in the Name of the related in the company’ parties company’ Amount total Amount total transaction transaction sum of the sum of the same kind same kind（%） （%） Shenzhen CATIC 1,734,662.00 2.67 1,357,100.00 2.39 Real Estate Co., Ltd Shenzhen MAIWEI Cable TV 301,476.00 0.46 305,117.80 0.54 Equipment Co., Ltd Shenzhen CATIC Property 2,360,160.00 3.64 590,040.00 1.04 Management Co., Ltd South China 779,580.00 1.20 227,377.50 0.40 Securities Co., Ltd Total 5,175,878.00 7.97 2,479,635.30 4.37 4、Other material transactions (1) Security for loan Current year Prior year Portion Portion accounted for Name of accounted for in in the related party the company’ Amount company’ total Amount total transaction transaction sum of the sum of the same kind（%） same kind（%） CNAC 675,000,000.00 100.00 310,000,000.00 100.00 Total 675,000,000.00 100.00 310,000,000.00 100.00 (2) Payment of loan interest Current year Prior year Name of related Portion accounted Portion accounted party for in the for in the company’ Amount Amount total transaction sum company’ total transaction sum of of the same kind（%） 159 the same kind（%） Beijing Hengdeli 462,500.00 1.18 300,000.00 1.87 Company Total 462,500.00 1.18 300,000.00 1.87 (3) Loan Lending Current year Prior year Portion Portion accounted for Name of related accounted for in in the party the company’ Amount Amount company’ total total transaction transaction sum of the sum of the same kind（%） same kind（%） Beijing Hengdeli Company 5,000,000.00 0.77 5,000,000.00 1.59 Total 5,000,000.00 0.77 5,000,000.00 1.59 5、Emolument of the key management personnel Name of the key Income in 2008(RMB management Position 10,000) personnel Xu Dongsheng director、general manager 120.00 Hua Xiaoning independent director 9.00 Guo Wanda independent director 9.00 Ji Qinzhi independent director 9.00 Zhang Songhua supervisor 35.89 Tang Boxue supervisor 22.71 Lu Bingqiang deputy general manager 78.29 deputy general manager、chief Li Dehua 81.51 accountant Li Bei deputy general manager 82.69 Fang Juan deputy general manager 90.35 deputy general manager、secretary Hao Huiwen 76.27 of the board of directors Total 614.71 6、Balance of trade receivables and trade payables of related parties Name of related parties End of the year Beginning of the year Trade receivables Shenzhen Rainbow Department Store - 17,457.40 160 Name of related parties End of the year Beginning of the year AVIC International 264,776.50 426,026.00 Total 264,776.50 443,483.40 Trade receivables--bad debt provision Shenzhen Rainbow Department Store - 872.87 Other trade receivables CATIC Property Management Co., - 31,200.00 Ltd Shenzhen Feijing Precision Optical 6,307,234.57 6,307,234.57 Instrument Manufacture Co., Ltd Total 6,307,234.57 6,338,434.57 Other trade receivables--bad debt provision Shenzhen Feijing Precision Optical 6,160,145.06 6,160,145.06 Instrument Manufacture Co., Ltd Total 6,160,145.06 6,160,145.06 Other trade payables CATIC Building Equipment Co., Ltd 8,227.10 8,227.10 CATIC Nanguang Plc 3,354.90 3,354.90 CATIC Property Management Co., 37,213.05 53,575.39 Ltd CATIC Real Estate Co., Ltd 85,800.00 85,800.00 CATIC Shenzhen - 52,400.00 South China Securities Co., Ltd 150,000.00 - Atravis Hospitality Management Co., 376,190.45 - Ltd MAIWEI Cable TV Equipment Co., 50,246.00 - Ltd Total 711,031.50 203,357.39 Long-term trade payable Beijing Hengdeli Company 10,000,000.00 5,000,000.00 Ⅹ Operating commitment 161 The company's future minimum lease payments under a non-cancellable operating lease which fall due are as follows: Remaining lease term Minimum lease payments Within one year（one year included） 28,186,535.00 Above one year within two years(two years 22,181,615.00 included) Above two year within three years (three years 19,240,092.00 included) Above three years 57,062,200.00 Total 126,670,442.00 Note: The non-cancellable operating lease commitment is mainly the rent the company should pay the market and speciality stores. Ⅺ Events after the balance sheet date 1.On January 14, 2009, Harmony World Watch Center Co., Ltd filed a lawsuit to Changshu People's Court against Changshu Taigu Department Store Corporation to attain defaulting loans and penal sum since the latter is in a default on a loan of RMB 445,492.10. By the date when the financial report is approved to release, the case is still in cognizance. 2.On July 15, 2008, the company mortgaged the buildings described in Annotation Ⅶ、16 and Ⅶ、17 to Bank of China Shenzhen Branch for loan quota. Since the company didn’t use it, Bank of China Shenzhen Branch approved to terminate the contract on August 6, 2008. On January 15, that mortgage was cancelled by Shenzhen Real Estate Property Right Registration Center. 3.On March 24, 2009, the company board passed a resolution on 2008 fiscal year profit distribution pre-arranged planning, that is, to give cash bonus RMB 1(tax included) per 10 shares to all the shareholders based on the company’s 249,317,999 shares on December 31, 2008. The profit distribution plan has not yet been approved by the company’s general meeting of shareholders. 162 Ⅻ Explanations to other important item 1.On March 25, 2008, the company reached an Equity Transfer Agreement of Shenzhen Harmony World Watch Center Co., Ltd Contract Operation and the Expiry of the Contract with shareholder Shenzhen Shenhang Electronic Co. Ltd. It reads: (1) The World Watch Center pays after-tax profit RMB 300,000.00 to Shenhang Electronic by March 31, 2008; (2) The World Watch Center will deal with the main physical assets, debtor and creditor and take risks after the contract operation expiry date; (3) After the contract operation expiry date of the World Watch Center, the company, coordinating with Shenhang Electronics, will apply to extend the World Watch Center’s operation expiry date, and plan to sell Shenhang Electronic the 50% equity stake of the World Watch Center for RMB 1,400,000.00. On April 9, 2008, the company’s fifth board of directors passed the resolution Bill on the Application for Extending the World Watch Center’s Operation Expiry Date and the Transfer of Stock Ownership. On January 25, 2009, the company has went through the formalities of extending operation expiry date and transferring assets after the contract expiry date in the administrative department for industry and commerce. The transfer of stock ownership has not yet been accomplished by the date when the financial report is approved to release. 2. Debt restructuring According to the debt relief agreement reached by Lishan Department Store and Jinying Industrial Company on May 1, 2008, Jinying Industrial Company discharged Lishan Department Store of debts RMB 2,000,000.00. Therefore Lishan Department Store obtained debt restructuring profit RMB 2,000,000.00. Supplementary Information 163 Ⅰ Extraordinary Profit and Loss According to Explanatory Announcement No.1 on Information Disclosure for Companies Offering Their Securities to the Public - Extraordinary Profit and Loss (2008)" released by China Securities Regulatory Commission, the company’s extraordinary profit and loss in 2008 is as follows: Items 2008 2007 Profit and loss from disposal of non-current assets, including -17,788.13 -34,877.87 the offset part of the impaired assets; Unauthorized examination and approval, or lack of official approval documents, or occasional tax revenue return and - - abatement; Governmental subsidies counted into the current profit and loss, except for the one closely related with the normal operation of the company and gained constantly at a fixed 1,245,316.00 1,105,800.00 amount or quantity according to certain standard based on state policies; Capital occupation fees charged to the non-financial - - enterprises and counted into the current profit and loss; Gains when the investment cost of acquiring a subsidy, an allied enterprise and a joint venture is less than the fair - - value of the identifiable net assets of the invested entity; Profit and loss from non-monetary assets exchange ; - - Profit and loss from entrusting others for investment or asset - - management; Retained asset impairment provisions resulting from - - force majeure such as natural disasters; Profit and loss from debt restruction 2,000,000.00 - Enterprises ’ reorganization fees, such as staffing expenses - - and integration fees; Profit and loss that exceeds the fair value in - - transaction with unfair price; Current net profit and loss of the subsidies established by merger of enterprises under unified control from the beginning - - of the period to the merger day; Profit and loss on contingency that has no relation with - - the normal operation of the company; Profit or loss from change in fair value by holding tradable financial assets and liabilities, and investment income from disposal of tradable financial assets and - 1,565,706.79 liabilities as well as salable financial assets, excluding the effective hedging businesses related with the normal operations of the company; Switch -back of impairment provisions of accounts receivable - - that have undergone impairment test alone; 164 Items 2008 2007 Profit and loss from outward entrusted loaning; - - Profit and loss from the change of investment property’ - - s fair value by follow-up measurement in fair value mode; Impact on the current profit and loss by one-off adjustment to the current profit and loss according to the requirements of the - - tax as well as accounting laws and rules; Custody fees of entrusted operation; - - Other non-operating income and expenses besides the above 1,486,042.49 -1,015,581.30 items; Other items that conform to the definition of extraordinary -1,735,756.48 306,522.17 profit and loss. Total 2,977,813.88 1,927,569.79 Minus:：amount affected by income tax 508,808.57 -26,732.44 Net amount of extraordinary profit and loss 2,469,005.31 1,954,302.23 Net amount of extraordinary profit and loss assigned to - 570.27 minority shareholder Net amount of extraordinary profit and loss assigned to the 2,469,005.31 1,953,731.96 company’s Common stockholders Net profit assigned to the company’s common stockholders 62,053,467.83 58,923,180.78 except for the extraordinary profit and loss Extraordinary profit and loss’s impact on net profit (%) 3.83 3.21 Ⅱ Related financial index According to No.9 Rules on the Compilation of Information Disclosure of Public Companies----Calculation and Disclosure of Earning Rate of Net Assets and Earnings Per Share released by China Securities Regulatory Commission, the company’s earning rate of net assets and earnings per share in 2008 are as follows: Earning rate of net assets Earnings per share (Yuan/share) Profit of the report Report Time duration overall weighted basic earnings diluted earnings dilution average per share per share Net profit assigned to 2008 9.62 9.85 0.259 0.259 the company’s common 2007 9.48 10.03 0.244 0.244 shareholders Net profit assigned to 2008 9.25 9.48 0.249 0.249 the company’s common stockholders except 2007 9.18 9.71 0.236 0.236 for the extraordinary 165 profit and loss 166