UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K/A

 

Amendment No. 1

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended December 31, 2004

Commission File Number 1-4949

 

 

CUMMINS INC.

 

Indiana		35-0257090
(State of Incorporation)		(IRS Employer Identification No.)
500 Jackson Street Box 3005 Columbus, Indiana 47202-3005
(Address of principal executive offices)
Telephone (812) 377-5000
Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Name of each exchange on which registered
Common Stock, $2.50 par value		New York Stock Exchange Pacific Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act: None.

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).   Yes ý     No o

 

The aggregate market value of the voting stock held by non-affiliates was approximately $2.8 billion at June 27, 2004.

 

As of February 27, 2004, there were 46,324,016 shares of $2.50 par value per share common stock outstanding.

 

Documents Incorporated by Reference

 

Portions of the registrant’s definitive Proxy Statement filed with the Securities and Exchange Commission pursuant to Regulation 14A are incorporated by reference in Part III of this Form 10-K.

 

 

Explanatory Note

 

We are filing this amendment to include the financial statements of Dongfeng Cummins Engine Company Limited, a 50% owned unconsolidated subsidiary, which are required to be filed under Regulation S-X by March 31, 2005. The financial statements were excluded from the annual report to shareholders by Rule 14a-3(b).

 

PART IV

 

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

 

(a)               The following documents are filed as part of this report:

 

(1)                                  Financial Statements

 

•                  Management’s Report to Shareholders*

 

•                  Report of Independent Registered Public Accounting Firm*

 

•                  Consolidated Statements of Earnings*

 

•                  Consolidated Balance Sheets*

 

•                  Consolidated Statements of Cash Flows*

 

•                  Consolidated Statements of Shareholders’ Equity*

 

•                  Notes to Consolidated Financial Statements*

 

•                  Selected Quarterly Financial Data*

 

Financial Statement Schedules

 

•                  Financial Statements of Dongfeng Cummins Engine Company Limited (financial statements required by Regulation S-X to be filed by March 31, 2005, which are excluded from the annual report to shareholders by Rule 14a-3(b))

 

•                  Report of Independent Auditors

 

•                  Statements of Operations

 

•                  Balance Sheets

 

•                  Statements of Cash Flows

 

•                  Statements of Shareholders’ Equity

 

•                  Notes to the Financial Statements

 

* Previously filed

 

(b)              Reports on Form 8-K

 

On October 15, 2004, we filed a Current Report on Form 8-K under Item 5 announcing an amendment to Article VI of our By-Laws relating to indemnification of directors and officers and under Item 5, Item 8 and Item 9 containing press releases announcing the election of a Board of Director member and the declaration of a quarterly cash dividend payable to shareholders of record on November 16, 2004.

 

On October 21, 2004, we furnished a Current Report on Form 8-K under Item 2 and Item 9 containing our press release announcing financial results for the third quarter ended September 26, 2004.

 

2

 

On December 7, 2004, we filed a Current Report on Form 8-K under Item 1 and Item 9 containing a press release announcing completion of an unsecured $650 million, five-year revolving line of credit facility that replaced our secured $385 million three-year credit facility due to expire in November 2005.

 

(c)            Exhibit 23.1 Consent of Independent Auditor (filed herewith).

 

Exhibit 31(a). Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

Exhibit 31(b). Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

Exhibit 32. Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

(d)              The financial statements required by Regulation S-X which are excluded from the annual report to shareholders by Rule 14a-3(b), including (1) separate financial statements of subsidiaries not consolidated and fifty percent or less owned persons, (2) separate financial statements of affiliates whose securities are pledged as collateral, and (3) schedules, are filed under Item 15(a) of this Report which are incorporated herein by reference.

 

FINANCIAL STATEMENT SCHEDULES

 

Financial Statements of Dongfeng Cummins Engine Company Limited

 

(Financial statements required by Regulation S-X which are excluded from the annual report to shareholders by Rule 14a-3(b))

 

 

DONGFENG CUMMINS ENGINE COMPANY LIMITED

 

FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003

 

3

 

 

	19th Floor, Metropolitan Tower
	68 Zou Rong Lu, Yuzhong Qu
	Chongqing 400010
	People’s Republic of China
	Telephone +86 (23) 6374 0008
	Facsimile +86 (23) 6374 0990

 

Report of Independent Auditors

 

To the Board of Directors and Shareholders of Dongfeng Cummins Engine Company Limited

 

We have audited the accompanying balance sheets of Dongfeng Cummins Engine Company Limited (the “Company”) as of December 31, 2004 and 2003, and the related statements of operations, of cash flows and of shareholders’ equity for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Dongfeng Cummins Engine Company Limited at December 31, 2004 and 2003, and the results of its operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying statements of operations, of cash flows and of shareholders’ equity of Dongfeng Cummins Engine Company Limited for the year ended December 31, 2002 were not audited by us in accordance with auditing standards generally accepted in the United States of America , and, accordingly, we do not express an opinion on them.

 

 

PricewaterhouseCoopers Zhong Tian Certified Public Accountants Ltd. Co.

Chongqing Branch

 

Chongqing, People’s Republic of China

 

March 7, 2005

 

 

4

 

DONGFENG CUMMINS ENGINE COMPANY LIMITED

 

STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

 

IN RENMINBI

 

		2004		2003		Unaudited 2002
Net sales (includes sales to related parties of RMB4,025,032,342, RMB2,439,944,635 and RMB470,250,900, respectively)		4,779,263,602		2,616,270,513		841,939,907
Cost of sales (note 3)		(3,793,143,024	)	(2,065,177,230	)	(690,803,356	)
Gross profit		986,120,578		551,093,283		151,136,551
Selling expenses		(87,299,525	)	(48,861,867	)	(28,680,389	)
General and administrative expenses		(82,966,313	)	(63,586,931	)	(36,460,068	)
Interest income		3,140,044		1,109,217		899,826
Interest expense		—		(183,972	)	(908,462	)
Other (expenses) income, net		(4,186,118	)	1,215,470		(1,244,482	)
Income before income tax		814,808,666		440,785,200		84,742,976
Income tax (expense) benefit (note 10)		(69,161,083	)	6,138,983		—
Net income		745,647,583		446,924,183		84,742,976

 

The accompanying notes are an integral part of these financial statements.

 

5

 

DONGFENG CUMMINS ENGINE COMPANY LIMITED

 

BALANCE SHEETS

AS AT DECEMBER 31, 2004 AND 2003

 

IN RENMINBI

 

		2004		2003
ASSETS
Current assets:
Cash and cash equivalents		213,682,234		96,820,069
Trade receivable, net		52,863,007		45,346,917
Amounts due from related parties (note 3)		792,865,311		428,748,632
Notes receivable (note 4)		369,157,994		204,523,049
Inventories (note 5)		635,474,360		354,735,252
Prepayment		8,286,854		163,249
Deferred income tax (note 10)		16,605,385		4,974,530
Other current assets		1,940,759		5,230,713
Total current assets		2,090,875,904		1,140,542,411
Property, plant and equipment, net (note 6)		662,965,154		605,459,692
Intangible assets, net (note 7)		24,409,929		24,401,277
Deferred income tax (note 10)		23,673,826		28,751,437
Total assets		2,801,924,813		1,799,154,817

 

6

 

DONGFENG CUMMINS ENGINE COMPANY LIMITED

 

BALANCE SHEETS

AS AT DECEMBER 31, 2004 AND 2003

 

IN RENMINBI

 

		2004		2003
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable		699,414,414		353,311,716
Amounts due to related parties (note 3)		373,176,056		157,285,293
Accrued product coverage		74,734,593		20,812,031
Other accrued expenses		38,910,003		12,582,523
Reserve for staff retrenchment (note 11)		935,693		1,064,119
Other current liabilities (note 8)		64,506,794		35,019,328
Total current liabilities		1,251,677,553		580,075,010
Long-term liabilities:
Reserve for staff retrenchment (note 11)		3,575,227		4,714,325
Other long-term liabilities (note 9)		2,901,616		2,901,616
Total long-term liabilities		6,476,843		7,615,941
Total liabilities		1,258,154,396		587,690,951
Equity:
Paid in capital (note 13)		751,483,660		751,483,660
Capital surplus (note 14)		3,132,199		3,132,199
Surplus reserves (note 15)		26,345,295		8,756,315
Retained earnings		762,809,263		448,091,692
Total equity		1,543,770,417		1,211,463,866
Total liabilities and equity		2,801,924,813		1,799,154,817

 

The accompanying notes are an integral part of these financial statements.

 

7

 

DONGFENG CUMMINS ENGINE COMPANY LIMITED

 

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 and 2002

 

IN RENMINBI

 

		2004		2003		Unaudited 2002
Cash flows from operating activities:
Net income		745,647,583		446,924,183		84,742,976
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		72,836,833		68,901,168		20,719,920
Provision for obsolete inventories and doubtful debts		30,552,290		4,372,829		(123,437	)
Loss on disposal of property, plant and equipment		808,032		2,338,388		255,977
Changes in assets and liabilities:
Inventories		(311,577,351	)	(231,985,821	)	(1,509,657	)
Receivables		(535,981,761	)	(593,459,496	)	5,066,304
Accounts payable		533,682,298		404,868,479		21,820,872
Others		97,083,089		27,543,149		(2,382,185	)
Net cash provided by operating activities		633,051,013		129,502,879		128,590,770
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment		2,077,908		1,060,805		—
Purchases of property, plant and equipment		(104,925,724	)	(59,418,105	)	(75,893,746	)
Net cash used in investing activities		(102,847,816	)	(58,357,300	)	(75,893,746	)
Cash flows from financing activities:
Proceeds from borrowings		—		—		10,000,000
Repayment of bank loans		—		(10,000,000	)	(28,968,100	)
Distribution of profits		(413,341,032	)	(48,451,605	)	—
Net cash used in financing activities		(413,341,032	)	(58,451,605	)	(18,968,100	)
Net change in cash and cash equivalents		116,862,165		12,693,974		33,728,924
Cash and cash equivalents at beginning of year		96,820,069		84,126,095		50,397,171
Cash and cash equivalents at end of year		213,682,234		96,820,069		84,126,095
Cash payment for interest during the year		—		183,972		908,462
Cash payment for income tax during the year		43,969,703		—		—

 

The accompanying notes are an integral part of these financial statements.

 

8

 

DONGFENG CUMMINS ENGINE COMPANY LIMITED

 

STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 and 2002

 

IN RENMINBI

 

		Paid-in Capital		Capital Surplus		Surplus Reserves		Retained Earnings		Total
		RMB		RMB		RMB		RMB		RMB
Balance at January 1, 2002 (unaudited)		414,198,250		3,040,934		—		(26,367,547	)	390,871,637
Net profit for the year		—		—		—		84,742,976		84,742,976
Balances at December 31, 2002 (unaudited)		414,198,250		3,040,934		—		58,375,429		475,614,613
Capital injection during the year		337,285,410		—		—		—		337,285,410
Non-cash assets donation received		—		91,265		—		—		91,265
Net profit for the year		—		—		—		446,924,183		446,924,183
Appropriation to surplus reserves		—		—		8,756,315		(8,756,315	)	—
Profit distribution to owners		—		—		—		(48,451,605	)	(48,451,605	)
Balance at December 31, 2003		751,483,660		3,132,199		8,756,315		448,091,692		1,211,463,866
Net profit for the year		—		—		—		745,647,583		745,647,583
Appropriation to surplus reserves (note 15)		—		—		17,588,980		(17,588,980	)	—
Profit distribution to owners (note 15)		—		—		—		(413,341,032	)	(413,341,032	)
Balance at December 31, 2004		751,483,660		3,132,199		26,345,295		762,809,263		1,543,770,417

 

The accompanying notes are an integral part of these financial statements.

 

9

 

DONGFENG CUMMINS ENGINE COMPANY LIMITED

 

NOTES TO THE FINANCIAL STATEMENTS

 

1.                                      Organization and principal activities

 

Dongfeng Cummins Engine Company Limited (the “Company”) is a sino-foreign equity joint venture amongst Cummins Engine Company, Inc. (“Cummins USA”), Cummins (China) Investment Co., Ltd. (“CCI”) and Dongfeng Automobile Co., Ltd. (“Dongfeng Auto”) established under the relevant laws and regulations of the People’s Republic of China (“PRC”).

 

The Company, which was established on May 14, 1996, is engaged in the manufacture and sale of diesel engines, related parts and the provision of after-sale services.

 

On February 22, 2003, Dongfeng Auto, Cummins USA and CCI reached an agreement, namely “Agreement to increase the Company’s paid-in capital, change the Company’s shareholdings and to revise joint venture contract and Articles of Association”, to increase the Company’s paid-in capital. According to the approved revised joint venture contract and the Articles of Association, Dongfeng Auto contributed certain fixed assets and construction in progress of its Diesel Engine Branch while Cummins USA contributed cash and certain fixed assets and construction in progress of its subsidiary, Cummins (Xiangfan) Machining Co., Ltd. Subsequent to the capital increase, Cummins USA, CCI and Dongfeng Auto hold 40%, 10% and 50%, respectively, of the paid-in capital of the Company.

 

The joint venture has a term of 35 years from the date of establishment and may be extended subject to the unanimous approval of the Board of Directors and the approval of the relevant authorities.

 

2.                                      Summary of significant accounting policies

 

Basis of presentation

 

The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Certain amounts in 2003 have been reclassified to conform with the 2004 presentation.

 

Use of estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Comparative figures

 

The financial statements for the year ended December 31, 2002 are unaudited. Those unaudited financial statements include all adjustments of a normal recurring nature necessary to present fairly our financial position, results of operations and cash flows for the years presented.

 

 

10

 

Revenue recognition

 

The Company recognizes revenues on the sale of products, net of estimated costs of returns, allowances and sales incentives, when products are shipped to customers and title and risk of ownership transfers.

 

Foreign currency translation

 

The Company’s financial records are maintained in Renminbi (“RMB”), the functional currency. Transactions in foreign currencies are translated into Renminbi at the exchange rates prevailing at the transaction dates. Monetary assets and liabilities expressed in foreign currencies at the balance sheet date are translated into Renminbi at the exchange rates at the balance sheet date. Exchange differences arising in these cases are recorded in the Statement of Operations.

 

Income tax accounting

 

The Company accounts for enterprise and local income taxes using the tax payable method. Tax expense is recognized based on current period taxable income and tax rates.

 

The Company determines the deferred tax provision using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The Company also recognizes future tax benefits associated with tax loss and credit carry forwards as deferred tax assets. Deferred tax assets are reduced by a valuation allowance to the extent there is uncertainty as to their ultimate realization. The Company measures deferred tax assets and liabilities using enacted tax rates in effect for the year in which the temporary differences are expected to be settled or recovered.

 

Cash equivalents

 

All financial instruments purchased with original maturities of three months or less are considered to be cash equivalents.

 

Inventories

 

Inventories are stated at the lower of cost or market. Inventory cost calculated on the weighted average basis comprises materials, direct labor and the manufacturing overhead expenditures. Allowances are established to reduce cost of excess and obsolete inventories to their estimated net realizable value.

 

Property, plant and equipment

 

Property, plant and equipment are recorded at costs. Property, plant and equipment are depreciated at rates sufficient to write off their costs over their estimated useful lives on a straight-line basis, taking into account their residual value which is estimated at 10% of cost. The applicable useful lives of property, plant and equipment are as follows:

 

11

 

	Years
Buildings	20
Production machinery	10
Vehicles	5
Office equipment	5

 

Major additions and betterments are capitalized and depreciated over their estimated useful lives and repairs and maintenance expenses are charged to the Statement of Operations in the period incurred.

 

Upon retirement or other disposal of fixed assets, the cost and related amount of accumulated depreciation or amortization are eliminated from the asset and accumulated depreciation accounts, respectively. The difference, if any, between the net asset value and the proceeds is adjusted to earnings.

 

Construction in progress represents capital assets under construction or being installed and is stated at cost. Cost comprises original cost of plant and equipment, installation, construction and other direct costs which include interest costs on specific borrowings used to finance the capital assets, prior to the date of reaching the expected usable condition. Construction in progress is transferred to the property, plant and equipment account and depreciation commences when the asset has been substantially completed and reaches the expected usable condition.

 

No interest cost was capitalized in 2004 (2003 and 2002: nil).

 

Impairment of long-lived assets

 

The Company evaluates the long-lived assets for impairment when events or changes in circumstances indicate, in management’s judgment, that the carrying value of such assets may not be recoverable. The determination of whether an impairment has occurred is based on management’s estimate of undiscounted future cash flows attributable to the assets as compared to the carrying value of the assets. If an impairment has occurred, the amount of the impairment recognized is determined by estimating the fair value for the assets and recording a provision for loss if the carrying value is greater than fair value.

 

Intangible assets

 

Intangible assets with finite useful lives are subject to amortization. Intangible assets are presented at cost and are amortized on the straight-line basis over their estimated useful lives. The applicable useful lives are as follows:

 

	Years
Land occupancy rights	35
Proprietary technology	7
Software	5

 

12

 

Operating leases

 

Payments made under operating leases are expensed on a straight-line basis over the period of the leases.

 

Product coverage

 

The Company charges the estimated costs of product coverage programs, other than product recalls, to earnings at the time products are shipped to customers. The Company uses historical experience of product coverage programs to estimate the remaining liability for various product coverage programs. As a result of the uncertainty surrounding the nature of product recall programs, the liability for such programs is recorded when the recall action is announced.

 

Below is the summary of the activity in the product coverage liability account for the years ended December 31, 2004, 2003 and 2002:

 

		2004		2003		Unaudited 2002
		RMB		RMB		RMB
Beginning balance		20,812,031		1,332,790		3,836,916
Provision for warranties issued		104,788,040		38,443,586		4,965,717
Payments		(50,865,478	)	(18,964,345	)	(7,469,843	)
Ending balance		74,734,593		20,812,031		1,332,790

 

Allowance for doubtful accounts

 

The Company provides an allowance for doubtful accounts based on collection experience and an analysis of accounts receivable in light of the current economic environment. In addition, when necessary, the Company provides for the full amount of specific accounts deemed to be uncollectable. The activity in the allowance for doubtful accounts for the years ended December 31, 2004, 2003 and 2002 was as follows:

 

		2004		2003		Unaudited 2002
		RMB		RMB		RMB
Beginning balance		569,283		77,166		200,603
Provision		73,447		943,302		—
Write-offs		—		(451,185	)	(123,437	)
Recovery		(359,400	)	—		—
Ending balance		283,330		569,283		77,166

 

13

 

Research and development expenses

 

Research and development expenses are charged to operations as incurred. For the year ended December 31, 2004, the Company incurred research and development costs amounting to RMB7,770,672 (2003: RMB4,274,654; 2002: RMB1,424,403).

 

Shipping and handling

 

Shipping and handling costs are included in selling expenses. For the year ended December 31, 2004, the Company incurred shipping and handling costs amounting to RMB13,873,150 (2003: RMB7,537,492; 2002: RMB1,713,214).

 

3.                                      Related party transactions

 

The Company purchases products and components from related parties, and sells products and components to related parties. Related party transfer prices may differ from normal selling prices. In accordance with the provision of various agreements, certain products transferred are priced at cost, some are priced on a cost-plus basis, and others are priced at market value.

 

The following table lists the major related parties and their relationship with the Company:

 

Name of related parties		Relationship with the Company
Cummins USA		Owner
CCI		Owner
Dongfeng Auto		Owner
Dongfeng Motor Co., Ltd. (“Dongfeng Motor”)		Parent company of Dongfeng Auto
Darlington Engine Co., Ltd. (“Darlington UK”)		Subsidiary of Cummins USA
Cummins Engine (Shanghai) Trade & Service Co., Ltd. (“Cummins Shanghai”)		Subsidiary of CCI
Cummins (Xiangfan) Machining Co., Ltd. (“CXMC”)		Subsidiary of Cummins USA
Marketing Department of Dongfeng Motor Inc. Commercial Vehicle Branch (“Marketing Department of DFCV”)		Subsidiary of Dongfeng Motor

 

14

 

The following table summarizes related party sales for the years ended December 31, 2004, 2003 and 2002:

 

		December 31, 2004		December 31, 2003		Unaudited December 31, 2002
		RMB		RMB		RMB RMB
Dongfeng Motor and its subsidiaries		3,945,142,313		2,326,766,421		452,509,000
CCI		10,221,875		98,482,778		8,739,200
Cummins Shanghai		36,060,515		11,278,938		699,800
Cummins USA		26,110,359		—		—
Others		7,497,280		3,416,498		8,302,900
		4,025,032,342		2,439,944,635		470,250,900

 

The following table summarizes related party purchases for the years ended December 31, 2004 and 2003:

 

		December 31, 2004		December 31, 2003		Unaudited December 31, 2002
		RMB		RMB		RMB
Darlington UK		726,209,345		494,166,790		399,173,900
Dongfeng Motor and its subsidiaries		703,559,116		399,358,149		60,471,557
Others		—		5,525,818		1,023,300
		1,429,768,461		899,050,757		460,668,757

 

15

 

The following table summarizes other related party transactions for the years ended December 31, 2004, 2003 and 2002:

 

		December 31, 2004		December 31, 2003		Unaudited December 31, 2002
		RMB		RMB		RMB
Rental income
- CXMC		—		237,000		948,000
Royalty fee
- Cummins USA		42,323,581		18,429,866		3,405,992
After-sale service network fee
- CCI		—		10,000,000		10,000,000
- Dongfeng Auto		—		10,000,000		10,000,000
		—		20,000,000		20,000,000
Sales commission fee
- CCI		2,656,028		2,199,674		7,642,000
Management fee
- CCI		9,933,775		8,071,192		5,972,500
Warranty service charge
- Marketing Department of DFCV		66,689,182		117,560,056		—

 

The following tables summarizes significant related party balances:

 

		December 31, 2004		December 31, 2003
		RMB		RMB
Amounts due from related parties
- Dongfeng Motor and its subsidiaries		760,103,109		417,006,994
- Cummins USA		30,549,407		214,110
- CCI		1,261,560		8,996,928
- Others		951,235		2,530,600
		792,865,311		428,748,632

 

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		December 31, 2004		December 31, 2003
		RMB		RMB
Amounts due to related parties
- Dongfeng Motor and its subsidiaries		163,881,211		70,183,562
- Darlington UK		165,942,288		63,613,351
- Cummins USA		36,620,259		17,471,292
- CCI		6,732,298		5,298,400
- Others		—		718,688
		373,176,056		157,285,293

 

4.                                      Notes receivable

 

All notes receivables are issued by banks and due within 1-6 months.

 

5.                                      Inventories

 

Inventories are comprised of the following:

 

		December 31, 2004		December 31, 2003
		RMB		RMB
Raw materials		514,479,380		278,214,786
Work in process		52,512,518		21,537,448
Finished goods		103,231,417		58,893,730
		670,223,315		358,645,964
Less: provision for loss on realization of inventories		(34,748,955	)	(3,910,712	)
		635,474,360		354,735,252

 

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6.                                      Property, plant and equipment

 

Property, plant and equipment is comprised of the following:

 

		December 31, 2004		December 31, 2003
		RMB		RMB
Buildings		170,274,553		164,653,661
Production machinery		834,153,046		761,977,037
Vehicles		6,337,526		4,687,596
Office equipment		18,780,452		17,517,734
Construction in progress		69,586,910		43,253,330
		1,099,132,487		992,089,358
Less: accumulated depreciation		(436,167,333	)	(386,629,666	)
		662,965,154		605,459,692

 

Depreciation expense for the year ended December 31, 2004 was RMB65,787,651 (2003: RMB61,927,941; 2002: RMB13,812,382).

 

7.                                      Intangible assets

 

The gross and net amount of intangible assets were:

 

		December 31, 2004		December 31, 2003
		RMB		RMB
Land occupancy rights - gross		9,774,040		8,504,040
Less: accumulated amortization		(1,375,325	)	(1,093,391	)
Net		8,398,715		7,410,649
Proprietary technology - gross		41,488,327		41,488,327
Less: accumulated amortization		(32,990,749	)	(26,992,428	)
Net		8,497,578		14,495,899
Software - gross		9,738,672		3,950,838
Less: accumulated amortization		(2,225,036	)	(1,456,109	)
Net		7,513,636		2,494,729
Total		24,409,929		24,401,277

 

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For the year ended December 31, 2004, amortization expense for intangibles amounted to RMB7,049,182 (2003: RMB6,973,227; 2002: RMB6,907,538). The estimated amortization expense for the five succeeding years, assuming no further acquisitions or disposals, is approximately RMB8,164,648 in 2005, RMB4,808,418 in 2006, RMB1,542,525 in 2007, RMB1,447,576 in 2008, and RMB1,410,576 in 2009.

 

8.                                      Other current liablities

 

Other current liabilities are comprised of the following:

 

		December 31, 2004		December 31, 2003
		RMB		RMB
Welfare payable		5,346,173		1,167,509
Value added tax & other taxes payable		28,768,404		7,087,900
Advance from customers		19,561,421		12,094,959
Other payable		10,830,796		14,668,960
		64,506,794		35,019,328

 

9.                                      Other long-term liabilities

 

Pursuant to the land use right transfer agreement dated 24 December 1996 (the “Contract Date”) reached by the Company and the Land Bureau of Xiangfan, Hubei Province, the Company is entitled to the use of a parcel of land of 65,800 square meters in Xiangfan Automobile Industry Development Zone for a period of thirty-five years starting from the Contract Date.  As consideration, a land use fee amounting to RMB8,504,040 is to be paid in three installments of which the first 30% installment is to be paid within ten days after the Contract Date.  The second 30% installment and the third 40% installment are to be paid before 30 December 2001 and 2011, respectively. In 2002, the Company has paid RMB500,000 of the third installment.  The unpaid third installment is recorded as other long-term liabilities.

 

10.                              Taxation

 

(a)                                 Income taxes

 

The Company is subject to the PRC income tax laws applicable to Foreign Investment Enterprises.  Accordingly, the applicable enterprise income tax rate of the Company is 30% and the local tax rate is 3%, resulting in an aggregate tax rate of 33%.  As approved by the tax authority, the Company is exempted from local income tax.  In accordance with the PRC Law of Enterprise Income Tax for Enterprises with Foreign Investment and Foreign Enterprises, the Company is entitled to two years’ exemption from enterprise income taxes followed by three years of a 50% enterprise income tax reduction commencing from the first cumulative profit-making year net of losses carried forward from the previous 5 years. Further, in accordance with relevant tax regulatory, newly capital injection of Foreign Investment Enterprises under certain conditions is entitled to separate preferential income tax policy.

 

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As mentioned in Note 1, the Company has increased its capital amounted in 2003. The newly injected capital represented 50% of the total paid-in capital of the Company. Pursuant to Xiang Guo Shui Zi Fa [2004] No.14 issued by the local tax authority, profit generated from the newly injected capital is entitled to two years’ exemption from enterprise income taxes followed by three years of a 50% enterprise income tax reduction commencing from the first cumulative profit-making year. Further, according to the relevant approval, the taxable profit of the Company is subject to different tax rates according to the apportioned profit as estimated based on the ratio of the newly injected capital and the total paid-in capital of the Company.

 

The first profit-making year of the Company (prior to the newly injected capital) was 2002. Accordingly, for the year ended December 31, 2004, 50% of the Company’s profit will be subject to enterprise income tax rate of 15% while the remaining 50% of the Company’s profit will be exempted for enterprise income tax.

 

Income tax expense (benefit) comprised:

 

		December 31, 2004		December 31, 2003
		RMB		RMB
Income tax - current year		75,714,327		—
Deferred taxation relating to the origination and reversal of temporary differences		(6,553,244	)	(6,138,983	)
		69,161,083		(6,138,983	)

 

(b)                                  Value added tax

 

The Company’s sales of self-manufactured products are subject to Value Added Tax (VAT). The applicable tax rate for domestic sales is 17%.

 

Input VAT on purchases of raw materials, fuel, utilities, merchandise and transportation can be deducted from output VAT. VAT payable is the net difference between output and deductible input VAT.

 

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