PADAENG INDUSTRY PUBLIC COMPANY LIMITED AND SUBSIDIARY COMPANIES NOTES TO THE INTERIM FINANCIAL STATEMENTS FOR THE QUARTERS AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998 UNAUDITED 1. ECONOMIC TURMOIL IN THE ASIA-PACIFIC REGION Many Asia-Pacific countries, including Thailand, continue to experience severe economic difficulties relating to currency devaluations, volatile stock markets, and slowdown in growth. The country s unstable economy has to a certain extent affected, and may continue to affect the operations of the Company. On June 25, 1999, the Company entered into the Override Amendment Agreement with its lenders to amend the Tranche A principal repayment. Under the Override Amendment Agreement, the Company will have to sell the remainder of the increased capital of 75.1 million shares to repay the Tranche A principal by September 15, 2000 (see Note 11). 2. BASIS FOR PRESENTATION OF THE INTERIM FINANCIAL STATEMENTS 2.1 The accompanying consolidated and the Companys interim financial statements for the quarters and nine-month periods ended September 30, 1999 and 1998 are prepared by the management of the Company and are unaudited. However, in the opinion of the Company, all adjustments necessary for a fair presentation, have been reflected therein. The interim financial statements have been prepared in accordance with the Regulation of The Stock Exchange of Thailand (SET) dated May 18, 1999 regarding the preparation and submission of financial statements and reports for the financial position and result of operations of the listed companies (No.1) B.E.2542. International Accounting Standard (IAS) No. 34 Interim financial statements has not been adopted by the Company. Certain financial information which is normally included in financial statements prepared in accordance with generally accepted accounting principles, but which is not required for interim reporting purposes, has been omitted. In addition, the consolidated and the Companys interim financial statements should be read in conjunction with the consolidated and the Companys financial statements and notes thereto included in the audited financial statements for the year ended December 31, 1998. 2.2 In accordance with The Stock Exchange of Thailand (SET) guidelines, the consolidated interim financial statements recognized the full amount of the Companys equity in a subsidiarys losses (excluding the minority interest to the extent that they do not exceed the minority shareholders equity), that exceeds the Companys investment in such subsidiary. /2 - 2 - Under the Companys presentation of interim financial statements, the Companys equity in the undistributed losses of a subsidiary that incurs a capital deficiency, is generally recognized only to the extent of the amount of the investment in such subsidiary. In the case where the Company has receivables from and/or loans to and/or guarantee commitment for such subsidiary, such share in the loss that exceeds the Companys investment and loss that exceeds minority shareholders equity are shown as a reduction to the receivables from and/or loans to subsidiary. In the consolidated interim financial statements, the Company records 100% of its share of losses of subsidiaries plus the minority shareholders share of losses to the extent that they exceed the minority shareholders equity. Accordingly, the consolidated and the Companys interim financial statements do not present the same net income (loss) and shareholders equity. Since January 1, 1999, the Company has not recognized the Companys equity in further losses incurred by Padaeng Poongsan Metals Co., Ltd. in the Companys interim financial statements. The Company has already recognized the Companys equity in the entire amount of losses incurred by such company by reducing the investment in, providing the full amount of an allowance for doubtful debts for receivables and loans and recording liabilities from guarantee commitment for such subsidiary as at December 31, 1998. 2.3 The consolidated interim financial statements are the consolidation of the accounts of the Company and subsidiaries as follows: % of Shareholding 1999 1998 Padaeng Properties Co., Ltd. 100.00 100.00 Puthep Co., Ltd. 100.00 100.00 Padaeng Poongsan Metals Co., Ltd. 61.98 61.98 Padaeng International Mining Co., Ltd. 100.00 100.00 Sila Enterprise Co., Ltd. 55.00 55.00 The consolidated interim financial statements for the quarter and nine-month period ended September 30, 1999 also include accounting for transactions of South East Asia Metal Co., Ltd. of which Padaeng Properties Co., Ltd. has a holding of 100% in this company and do not include accounting for transactions of Pakham Exploration and Mining Limited, in which all investment previously held by Puthep Co., Ltd. has been transferred to a joint venture company in accordance with an agreement dated November 20, 1998. In addition the interim financial statements do not include accounting transactions of Patong Exploration and Mining Limited because such subsidiary has registered to wind up operations on March 16, 1999. The consolidated interim financial statements for the quarter and nine-month period ended September 30, 1998 also include accounting transactions of South East Asia Metals Co., Ltd. of which Padaeng Properties Co., Ltd. has a holding of 100% in this company and also include accounting transactions of Patong Exploration and Mining Limited and Pakham Exploration and Mining Limited, of which Puthep Co., Ltd. has a holding of 100% in these two companies. /3 - 3 - 2.4 The Companys interim financial statements for the quarter and nine-month period ended September 30, 1999 do not include the Companys equity in undistributed gains (losses) of Pakham Exploration and Mining Limited, in which all investment previously held by Puthep Co., Ltd. has been transferred to a joint venture company in accordance with an agreement dated on November 20, 1998. 2.5 The Company has prospectively changed accounting method for investment in Patong Exploration and Mining Limited from equity method to the cost method since March 16, 1999 because such subsidiary registered to wind up operations on such date. 3. ACCOUNTING POLICY The same accounting policies are followed in these interim financial statements as compared with the most recent annual financial statements except as discussed below: A change in accounting policy for investments. For the quarter and nine-month period ended September 30, 1999 investments in securities are accounted for according to Accounting Standard No. 40 Accounting for investments in debt and equity securities which stipulates the classification, valuation and recognition of gain or loss on the change in carrying value of investment as follows: - Securities for trading and available for sale are stated at fair value. Gain or loss on the change in fair value is recognized in the statement of income for securities for trading and presented as an item in shareholders equity for securities available for sale. - Securities for general investment are stated at cost. In case an impairment in value of investment has occurred, the resultant loss for all classification of investment is recognized in the statement of income. In prior years, the investments in securities are accounted for in accordance with Accounting Standard No. 12 Accounting for marketable securities and No. 17 Accounting for investments. Such investments were stated at the lower of aggregate of cost or aggregate market value. The resultant loss was recognized in the statement of income for short-term investments. In case of long-term investments, the resultant loss was shown as a deduction from the shareholders equity in the balance sheet and as an expense in the statements of income where a permanent decline in market value was deemed to have occurred. /4 - 4 - 4. DEPOSITS AT BANKS USED AS COLLATERAL As at September 30, 1999, deposits at banks of a subsidiary amounting to Baht 11,554,589 are used as collateral against sales of blank coins with a Government Agency and used as collateral against other debt repayments. As at September 30, 1998, deposits at banks of a subsidiary amounting to Baht 11,554,589 are used as collateral against sales of blank coins with a Government Agency. 5. INVESTMENT IN SECURITIES Companys names Type of Paid-up ownership Investment Investment business capital (%) cost method equity method 1999 1998 1999 1998 Baht Baht Baht Baht Securities available for sale National Fertilizer Canal produce Public Co., Ltd. and distribute fertilizer 4,744,561,390 2.65 125,737,100 - 125,737,100 - Less Unrealized loss on securities available for sale (70,412,776) - (70,412,776) - Total securities available for Sale 55,324,324 - 55,324,324 - On May 25, 1999, the Board of directors meeting of the Company approved the proposed sale of the above securities. Such securities, previously presented as long-term investment as at September 30, 1998 has been reclassified to temporary investment as at September 30, 1999. As at September 30, 1999, unrealized loss on securities available for sale has been presented as a deduction from shareholders equity. As at September 30, 1998, unrealized loss on non-current marketable securities has been presented as a deduction from shareholders equity. 6. SUPPLEMENTAL DISCLOSURE FOR CASH FLOWS 6.1 Cash paid for the quarters ended September 30, 1999 and 1998: CONSOLIDATED THE COMPANY ONLY 1999 1998 1999 1998 Baht Baht Baht Baht Cash paid for tax 17,724 470,910 650 257,661 Cash paid for interest 85,117,912 130,351,336 85,741,558 120,399,120 /5 - 5 - Cash paid for the nine-month periods ended September 30, 1999 and 1998 : CONSOLIDATED THE COMPANY ONLY 1999 1998 1999 1998 Baht Baht Baht Baht Cash paid for tax 118,775 346,939 42,590 257,661 Cash paid for interest 262,085,074 466,117,314 252,623,589 410,117,283 6.2 Cash and cash equivalents consist of cash in hand and at banks and deposits at financial institutions which are promissory notes with original maturities of 3 months or less. 6.3 Non-cash items are as follows: - For the nine-month period ended September 30, 1999, an account receivable of Baht 21.39 million has been settled by inventories of Baht 19.79 million and value added tax of Baht 1.60 million. - On January 25, 1999, the Company has entered into hire-purchase agreement with a company resulting in assets increase by Baht 7.15 million and liabilities increase by the same amount. - For the quarter and nine-month period ended September 30, 1999, unrealized loss on securities available for sale has been presented as a deduction from shareholders equity on the consolidated and the Companys interim financial statements increased by Baht 44.01 million and decreased by Baht 15.09 million respectively. - For the quarter and nine-month period ended September 30, 1998, unrealized loss on non-current marketable securities has been presented as a deduction from shareholders equity on the consolidated and the Companys interim financial statements decreased by Baht 1.26 million and increased by Baht 5.03 million respectively. 7. ACCOUNTS RECEIVABLE CONSOLIDATED THE COMPANY ONLY 1999 1998 1999 1998 Baht Baht Baht Baht Trade debtors 267,079,639 235,098,662 257,457,829 256,828,231 Less Allowance for doubtful debt (28,610,774) (59,717,675) (24,008,675) (101,523,526) 238,468,865 175,380,987 233,449,154 155,304,705 As at September 30, 1999 and 1998, the accounts receivable which have difficulties in repayment and are overdue for more than three months are as follows: /6 - 6 - AS AT SEPTEMBER 30, 1999 CONSOLIDATED THE COMPANY ONLY No. Baht No. Baht Trade accounts - related companies: 3 to 6 months - - - - 6 to 12 months - - - - More than 12 months - - 1 46,809,476 46,809,476 Less Allowance for doubtful debt (loss that exceeds investment in a subsidiary) - 46,809,476 - - Trade accounts - other companies: 3 to 6 months 6 1,858,675 2 1,573,590 6 to 12 months 8 5,350,280 1 4,559,662 More than 12 months 15 24,989,570 1 19,175,423 32,198,525 25,308,675 Allowance for doubtful accounts 28,610,774 24,008,675 AS AT SEPTEMBER 30, 1998 CONSOLIDATED THE COMPANY ONLY No. Baht No. Baht Trade accounts - related companies: 3 to 6 months - - 1 3,818,344 6 to 12 months - - 2 26,411,756 More than 12 months - - 1 24,485,525 - 54,715,625 Trade accounts - other companies: 3 to 6 months 6 23,739,432 2 14,546,235 6 to 12 months 14 45,230,394 1 40,325,653 More than 12 months 7 1,242,621 - - 70,212,447 54,871,888 Total accounts receivable which have difficulties in repayment 70,212,447 109,587,513 Allowance for doubtful accounts 59,717,675 101,523,526 /7 - 7 - 8. INVESTMENTS IN RELATED COMPANIES 8.1 Investments in subsidiaries and associated companies COMPANYS NAMES TYPE OF PAID-UP OWNERSHIP INVESTMENT INVESTMENT BUSINESS CAPITAL (%) COST METHOD EQUITY METHOD DIVIDENDED Baht 1999 1998 1999 1998 1999 1998 Baht Baht Baht Baht Baht Baht SUBSIDIARY COMPANIES Padaeng Poongsan Metals Co., Ltd. Manufactures and 250,000,000 61.98 - - - - - - Distribute Non- Ferrous Industrial and blank coins Padaeng Properties Co., Ltd. Real Estate 320,000,000 100 320,000,000 320,000,000 211,324,889 202,353,745 - - Puthep Co., Ltd. Explore and 234,814,100 100 252,490,972 252,490,972 162,482,775 161,664,061 - - produce gold mineral. Padaeng Industry (Laos) Co., Ltd. Explore various 5,000,000 100 - 5,000,000 - 5,000,000 - - prime mineral Padaeng International Mining Co., Ltd. Explore minerals 100,000 100 100,000 100,000 8,978 100,000 - - in Vietnam Sila Enterprise Co., Ltd. Produce rock 15,000,000 55 8,250,000 8,250,000 5,359,222 6,805,209 - - South East Asia Metals Co., Ltd. Distribute various 200,000,000 100 - - 153,874,613 150,423,907 - - basic metal and other by products Total investment in subsidiary companies 580,840,972 585,840,972 533,050,477 526,346,922 - - ASSOCIATED COMPANIES Padaeng Siam Industry Co., Ltd. Distribute acid and 2,500,000 50 - 1,250,000 - 1,481,902 - - chemical products Total investment in associated companies - 1,250,000 - 1,481,902 - - Total investments in related companies Baht 580,840,972 587,090,972 533,050,477 527,828,824 - - /8 - 8 - 8.2 For the quarter and nine-month period ended September 30, 1998, the investment in Padaeng Industry (Laos) Co., Ltd. referred to in Note 8.1 to the equity method interim financial statements are shown at cost, as there is no available information of that company to be included in the Companys interim financial statements and such investment is not material to the Companys consolidated interim financial statements. For the year ended December 31, 1998, the Company has written off the investment in Padaeng Industry (Laos) Co., Ltd. because management believed that there was a decline, other than temporary, in the value of such investment. 8.3 For the quarter and nine-month period ended September 30, 1999, the Company has an investment in Puthep Company Limited amounting to Baht 162 million which is presented as part of investments in subsidiary companies by the equity method as referred to in Note 8.1. The interim financial statements for the quarter and nine-month period ended September 30, 1999 do not include any adjustments which may arise, due to the uncertainty related to the exploration results and continued funding of a joint venture project (see Note 10). 8.4 The Companys interim financial statements for the quarter and nine-month period ended September 30, 1999, do not include the Companys equity in the undistributed gains (losses) of Padaeng Siam Industry Co., Ltd. because such associated company has registered to wind up operations on January 8, 1999 and liquidated on July 1, 1999. /9 - 9 - 9. OTHER SECURITIES COMPANYS NAMES TYPE OF PAID-UP OWNERSHIP INVESTMENT INVESTMENT BUSINESS CAPITAL (%) COST METHOD EQUITY METHOD DIVIDEND Baht 1999 1998 1999 1998 1999 1998 Baht Baht Baht Baht Baht Baht Asia Investment (1995) Co., Ltd. Explore and Produce Zinc US$ 200,000 20.00 - 1,018,200 - 1,018,200 - - Asean Potash Holding Co., Ltd. Produce and distribute Potash mineral 395,967,000 2.52 10,010,000 10,010,000 10,010,000 10,010,000 - - Millennium Gold Corporation Explore and Co., Ltd. Gold mineral Canal CAN$ 9,917,857 7.56 4,441,626 4,441,626 4,441,626 4,441,626 - - National Fertilizer Public Co., Ltd. Produce and distribute fertilizer 4,744,561,390 2.65 - 125,737,100 - 125,737,100 - - Less Unrealized loss on non-current marketable security - (88,015,970) - (88,015,970) - - - 37,721,130 - 37,721,130 - - Total other securities 14,451,626 53,190,956 14,451,626 53,190,956 - - /10 - 10 - 10. OTHER ASSETS Other assets as at September 30, consist of the following: CONSOLIDATED THE COMPANY ONLY 1999 1998 1999 1998 Baht Baht Baht Baht Start-up cost (net) 10,280,336 17,895,915 10,280,336 17,895,915 Excess of development stage expenses over revenues (net) 8,156,820 29,144,759 8,156,820 18,262,173 Assets and data from other companies (net) 102,850 514,251 102,850 514,251 Deposits and installment payments for condominium units 74,932,723 74,932,723 - - Less Allowance for doubtful accounts (74,932,723) (74,932,723) - - 18,540,006 47,554,925 18,540,006 36,672,339 Deposits 6,871,628 7,257,840 3,989,292 3,782,974 Financial advisory fees 2,029,382 11,214,981 2,029,382 11,214,981 Special prospect license fee 16,986,510 23,600,151 - - Exploration expenditures 145,538,980 193,618,705 - - Others 57,253,622 52,513,963 56,294,441 52,155,065 228,680,122 288,205,640 62,313,115 67,153,020 247,220,128 335,760,565 80,853,121 103,825,359 Deposits and installment payments for condominium units of Baht 74.93 million as at September 30, 1999 and 1998, as shown above, is of a subsidiary company. Construction of such condominium units was suspended due to the countrys unstable economy and decline in the real estate property market, a full allowance for doubtful account has been provided against such amount. On July 23, 1999, Padaeng Industry Public Co., Ltd. entered into a Memorandum of Understanding with a foreign company who indicated its wish to enter into a joint-venture to undertake exploration and mining of Puthep Copper Project and to acquire equity in the project which will be established through shares acquisition in Puthep Co., Ltd., a wholly owned subsidiary of Padaeng Industry Public Co., Ltd. The consolidated interim financial statements for the period ended September 30, 1999 include deferred exploration expenditures and special prospect license fee, amounting to Baht 162 million. The recoverable value is still uncertain because the exploration results and continued funding of a joint venture project are not known at this time. On February 17, 1998, the Company entered into a Memorandum of Understanding with a local company who had concession rights for certain property. The Company has to pay compensation as described in such Memorandum of Understanding to the local company for concession withdrawal in target area. On June 3, 1999, the Company entered into an Amendment to Memorandum of Understanding with such company to terminate the old compensation payment terms and to pay compensation of Baht 40.9 million which is repayable in three installments. /11 - 11 - As at September 30, 1999 the Company paid compensation of Baht 40.9 million as described in the Amendment to Memorandum of Understanding and such company already withdrew from the concession. The Company has uncertainty related to recoverability of the compensation of Baht 40.9 million because the Company is currently submitting its concession application in the target area to the Department of Mineral Resources for approval and the outcome of which is not known at this time. 11. LONG-TERM LOANS Long-term loans as at September 30, consist of the following: CONSOLIDATED THE COMPANY ONLY 1999 1998 1999 1998 Baht Baht Baht Baht Long-term loans - The Company 2,668,911,399 3,337,900,772 2,668,911,399 3,337,900,772 - A subsidiary 193,750,000 271,250,000 - - 2,862,661,399 3,609,150,772 2,668,911,399 3,337,900,772 Less Current portion of long-term loans (1,861,992,455) (2,049,398,242) (1,668,242,455) (1,778,148,242) 1,000,668,944 1,559,752,530 1,000,668,944 1,559,752,530 On February 24, 1999 Western Metals Limited rescinded its subscription in accordance with the Override and Supplementary Agreement which it was to have acquired another 75.1 million shares for Baht 1,051 million, it caused the Company to be unable to comply with (more)