PADAENG INDUSTRY PUBLIC COMPANY LIMITED AND SUBSIDIARIES Notes to the Consolidated and Equity Method Financial Statements For the Years Ended December 31, 1998 and 1997 1. ECONOMIC TURMOIL IN THE ASIA- PACIFIC REGION AND GOING CONCERN OF THE COMPANY Many Asia-Pacific countries, including Thailand, are experiencing severe economic difficulties relating to currency devaluation, volatile stock markets, and slowdown in growth. The countrys unstable economy has significantly affected, and may continue to affect the operations of the Company and subsidiaries. The consolidated financial statements for the year ended 31 December 1998 include provisions against the loan and other commitments of Padaeng Poongsan Metals Co. Ltd and the write down of assets to net realisable value (see Notes 24 and 25). These provisions are the result of the Board of Padaeng Poongsan Metal Co., Ltds decision to cease operations. At December 31, 1997, there was uncertainty regarding the ability of the Company to continue as a going concern because of negative cashflows if it was unable to obtain an extension of short term debt repayments and changes in certain conditions of the loans from its lenders and the lenders were to demand immediate repayment. On October 7, 1998 the Company entered into the Override and Supplementary Agreement dated October 7, 1998 with its lenders and other parties. The agreements provided for amendments of the repayment terms. The Company was able to obtain an extension of the short-term debt repayment from its creditors. The funds for the repayment of the loan principals in accordance with the agreement were to be from operating income and from the sales of the increased capital to Western Metals Limited and Western Metals International Pty Ltd. However, on February 24, 1999, Western Metals Limited rescinded its subscription agreement under which it was to have acquired a further 75.1 million shares for Baht 1,051 million. Western Metals Limited cited delays in the granting of mining lease applications covering extensions to the known orebody at the Mae Sod mine as affecting its investment in the Company. The Companys application for a mining license is progressing with respect to the adjacent deposit in accordance with Government regulations . This delay in obtaining the mine license for the adjacent deposit will not affect current operations. The Mae Sod mines current reserves are approximately 800,000 tonnes and these reserves together with current stockpiles will provide ore for approximately 4-5 years according to the Company production plan for usage of raw materials. The proceeds that were due from Western Metals Limited for the subscription due on February 28, 1999 were to be used in part to made the Tranche A repayment on February 28 (see Note 16). However, this payment will not be made on that date which will cause the Company to be in noncompliance with the Override and Supplementary Agreement. Therefore, long term debt at December 31, 1998 has been reclassified as current. /2 - 2 - The Company intends to negotiate with its creditors to re- schedule the Tranche A principal payments while continuing to maintain interest payments. The Company intends to meet all commitments for the Tranche B repayment within the time schedule negotiated with its creditors (see Note 16). As a result of the termination of the subscription agreement by Western Metals Limited, the uncertainty relating to the Companys ability to continue as a going concern mentioned in the Note 1 to the 1997 annual accounts has not been resolved. If the Company is unable to continue as a going concern, it may be required to realise its assets and extinguish its liabilities other than in the normal course of business and at amounts different from those stated in the financial statements. The 1997 consolidated financial statements did not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the subsidiary not continue as a going concern. As discussed in Note 24 to the financial statements, on February 19, 1999 the shareholders of the subsidiary approved the closure of the business and the subsidiary has made valuation provisions for certain assets in 1998. The amount of the subsidiarys assets at December 31, 1998 included in the 1998 consolidated financial statements is of Baht 203.1 million or 4.07% of the total consolidated assets. However, the amounts realizable from the disposition of the assets and settlement of liabilities may differ from amounts shown in the accompanying financial statements. 2. BASIS FOR PRESENTATION OF THE FINANCIAL STATEMENTS 2.1 Certain reclassifications have been made in the consolidated and equity method financial statements for the year ended December 31, 1997 to conform to the classifications used in the consolidated and equity method financial statements for the year ended December 31, 1998. The consolidated and equity method financial statements are the consolidation of the accounts of the Company and subsidiary companies after eliminated transactions of the following: % of Shareholding 1998 1997 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 /3 - 3 - The consolidated financial statements for the year ended December 31, 1997 include accounting transactions of South East Asia Metals Co., Ltd. of which Padaeng Properties Co., Ltd. has a 100% holding, 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. The 1998 consolidated financial statements include accounting transactions of those subsidiary companies except for Pakham Exploration and Mining Limited because Puthep Co., Ltd transferred all its shares in Pakham Exploration and Mining Limited to a joint venture company in accordance with an agreement. The 1997 consolidated financial statements comparative figures have not been adjusted to compare with the 1998 consolidated financial statements because the total assets of Pakham Exploration and Mining Limited not did significantly affect the consolidated financial statements. Total assets of Pakham Exploration and Mining Limited at December 31, 1997 is of Baht 38.2 million or 0.8 % of total consolidated assets at the same date. 2.2 The consolidated financial statements for the year ended December 31, 1998 and 1997 include the financial statements of a subsidiary company whose financial statements were examined by another auditor. The following table indicates the percentages of assets and revenues compared to total assets and consolidated revenues; % of CONSOLIDATED THE COMPANY shareholding 1998 1997 1998 1997 1998 1997 Sila Enterprise Co., Ltd - Assets 55 55 0.003 .004 0.003 .005 - Revenues 0.002 .002 0.002 .003 2.3 In accordance with SET guidelines, the consolidated 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. Under the equity method presentation of 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, loans to and/or guarantee commitment for such subsidiary, and there is doubt that the Company will be able to collect and/or the Company would be making payments under such guarantee commitment, 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 addition, a full provision has been made for the amount of receivables from and loans to the subsidiary where there is doubt about recoverability less the amount of such loss as at December 31, 1998. Such presentation is deemed to be prudent. /4 - 4 - 3. SIGNIFICANT ACCOUNTING POLICIES 3.1 Inventories Inventories are stated at the lower of cost or realisable value. Inventories held by a subsidiary that operates in the real estate business are stated at cost. Cost is calculated on an average cost basis. 3.2 Materials and supplies Materials and supplies are valued on the weighted average cost basis. An allowance has been provided for obsolete stocks of spares and consumables. 3.3 Investments in subsidiaries and associated companies Investments in associated and subsidiaries companies are accounted for by the equity method. Investments in other companies are stated at cost. Investments in listed securities are stated at the lower of cost or market value. Market value of listed investments is determined by the closing price on the Stock Exchange of Thailand. 3.4 Goodwill The net excess of cost over (under) book value of investments in subsidiary and associated companies is recognized as goodwill and is amortized by the straight-line method over 10 years. For the year ended December 31, 1997 the Company has written off goodwill of certain subsidiary company of approximately Baht 63 million, which was previously amortized over 10 years as expense in 1997 because such subsidiary company ceased its manufacturing. 3.5 Depreciation and amortisation. Depreciation and amortisation are calculated on a straight-line basis, based on the estimated useful lives as follows: Land improvement 5 20 years Factory building and office building 20 25 years Machinery 10 20 years Heavy equipment 8 years Equipment, furniture and fixtures and vehicles 5 years Mining concession fees and expenses 5 16 years Other structures 8 25 years /5 - 5 - 3.6 Exploration expenditure Exploration expenditure and special prospect licenses are deferred and amortised on the commencement of operations. Where a project is unlikely to lead to successful exploitation, expenditure is expensed in the period that it is incurred. 3.7 Development costs Incomes and expenses incurred during the development are deferred and amortised when normal operations commence. 3.8 Foreign currency transactions Foreign currency transactions are translated into Baht at the exchange rates prevailing at transaction date. Assets and liabilities denominated in foreign currencies are converted into Baht at the rates of exchange prevailing at that date. Gains or losses on conversion to Baht are recognised in the profit and loss. Losses on exchange in connection with assets and liabilities denominated in foreign currencies outstanding at July 2, 1997 to December 31, 1997 inclusive of the portion settled before the year-end and the remaining portion at such date is presented as a loss from the application of the managed float exchange system and shown as an extraordinary item in the profit and loss account. 3.9 Interest and financial charges. Interest expenses and financial charges in connection with loans for projects incurred in the development and pre-production stage have been capitalised. These costs are amortised on a straight-line basis. Interest cost on the borrowings used for the purchase of land for re-sale has been included in the cost of that land for sale. 3.10 Use of accounting estimates The accounts are prepared in conformity with generally accepted accounting principles. Management is required to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities and disclosure of contingent assets and liabilities. The actual results may differ from those estimates. 3.11 Earnings per share Earnings per share is computed on the basis of the number of outstanding ordinary shares at the balance sheet date. In the case of the capital increase, the number of ordinary shares is weighted according to time of subscription received for the increased issued and paid up capital. /6 - 6 - 4. CURRENT ASSETS CASH CONSOLIDATED THE COMPANY 1998 1997 1998 1997 Baht Baht Baht Baht Cash at bank and on hand 65,515,412 234,319,651 52,039,169 226,065,933 Deposits 99,856,250 60,000,000 51,856,250 60,000,000 165,371,662 294,319,651 103,895,419 286,065,933 Cash and cash equivalents consist of cash on hand and at banks and deposits at financial institutions which are promissory notes with original maturities of 3 months or less. 4.1 Deposits used as collateral 11,554,589 3,554,589 - - Deposits at the bank of a subsidiary are used as collateral against an agreement to purchase and sell coin with a Government Agency. In 1997, deposits at financial institutions of the Company and a subsidiary are used as collateral against trust receipt facility with a bank for import of minerals by the Company. 4.2 Supplemental Disclosure Cash paid during the year for tax: 3,556,765 6,325,210 2,336,597 217,475 Cash paid during the year for interest : 548,937,468 498,351,973 497,588,081 346,429,816 4.3 Non cash items are as follows: - At December 1997, the provision for decline in market value of non current investing securities is shown as a deduction from shareholders equity as per consolidated and equity method financial statements. For the year ended December 31, 1998 the provision was increased by Baht 2,514,742. - ortion of short-term loans will have amended repayment schedules. But certain event occurred which caused the Company to be in non compliance with the Override Agreement (see Note 1). Long term loan per the agreement has been reclassified as current. In the consolidated and equity method financial statements, short- term loans amounting to Baht 1,078,000,000 have been reclassified as long- term loans. - repaid debt by transferring fixed assets as per consolidated and equity method financial statements amounting to Baht 15,257,929 and Baht 11,811,027 respectively. /7 - 7 - 5. CURRENT ASSETS - RECEIVABLES Trade debtors 241,813,125 362,593,307 203,039,625 326,943,677 Less: provision for doubtful debt 45,890,816 52,801,221 40,761,047 - 195,922,309 309,792,086 162,278,578 326,943,677 As at December 31, 1998 the following account receivables of the Company are past due more than three months and the debtors are having difficulties in repayment: Trade accounts and notes receivable - related companies: CONSOLIDATED THE COMPANY 1998 1997 1998 1997 No Baht Baht No Baht Baht 3 to 6 months - - - - - - 6 to 12 months - - - 1 11,214,828 - More than 12 months - - - 1 35,594,648 - - - 46,809,476 - Less Accumulated loss exceeding investment in a subsidiary - - (46,809,476) - - - - - Trade accounts and notes receivable - other companies: CONSOLIDATED THE COMPANY 1998 1997 1998 1997 No Baht Baht No Baht Baht 3 to 6 months 8 1,579,153 - 1 789,264 - 6 to 12 months 9 40,658,269 - 2 40,221,783 - More than 12 months 13 5,615,679 - - - - 47,853,101 - 41,011,047 - Allowance for doubtful trade accounts and notes receivable 45,890,816 - 40,761,047 - For the financial statements as at December 31, 1997, the Company could not conveniently obtain the information for comparison. /8 - 8 - 6. INVENTORIES CONSOLIDATED THE COMPANY 1998 1997 1998 1997 Baht Baht Baht Baht Raw materials - Zinc Ore + Concentrate 349,702,904 508,879,396 356,279,943 508,879,396 - Others 68,037,700 92,790,094 51,968,655 36,634,381 Stores of consumables and spares 172,988,499 174,806,540 146,955,969 147,619,312 Land 1,603,132 1,603,132 - - Cost of land improvement 642,610 642,610 - - Goods in transit 3,697,819 12,758,519 3,697,819 5,803,930 Less: provision for obsolete stock (9,676,774) (9,904,270) (9,676,774) (9,904,270) provision for diminution of stocks (52,395,602) - - - 534,600,288 781,576,021 549,225,612 689,032,749 Work in progress 87,733,989 98,227,265 75,258,181 64,619,364 Finished Goods Zinc Ingots 63,920,650 363,131,181 63,920,650 363,131,181 Zinc Alloy 6,189,778 12,806,489 6,189,778 12,806,489 By products 39,347,880 139,558,335 3,036,729 7,830,394 109,458,308 515,496,005 73,147,157 383,768,064 731,792,585 1,395,299,291 697,630,950 1,137,420,177 7. OTHER RECEIVABLES Advances 7,025,851 - 7,025,851 - Interest Receivable 1,708,866 7,975,370 982,362 621,575 Advances to employee 1,892,722 4,373,051 1,758,091 4,199,821 Other receivables 4,982,076 41,294,403 4,982,076 41,294,403 15,609,515 53,642,824 14,748,380 46,115,799 8. OTHER - CURRENT ASSET CONSOLIDATED THE COMPANY 1998 1997 1998 1997 Baht Baht Baht Baht Prepayment 196,484 894,092 - - Other 7,264,804 8,674,486 4,826,918 3,402,415 7,461,288 9,568,578 4,826,918 3,402,415 /9 - 9 - 9. LONG TERM DEPOSIT CONSOLIDATED THE COMPANY 1998 1997 1998 1997 Baht Baht Baht Baht 30,054,136 30,054,136 - - 30,054,136 30,054,136 - - As at December 31, 1998, long term deposits at a financial institution of a subsidiary amounted to Baht 30.05 million. This was a promissory note from a financial institution whose operations were suspended by order of the Ministry of Finance on August 5, 1997. On December 2, 1997, the subsidiary changed these promissory notes to a negotiable certificate of deposit with Krung Thai Bank Public Company Limited with a maturity of 5 years. Interest rates are fixed for 3 months. At December 31, 1998 the interest rate was 6.95% per annum. /10 - 10 - 10. INVESTMENTS IN SUBSIDIARIES AND ASSOCIATED COMPANIES 10.1 Investments in subsidiaries and associated companies COMPANYS NAMES TYPE OF PAID-UP OWNERSHIP INVESTMENT INVESTMENT BUSINESS CAPITAL (%) COST METHOD EQUITY METHOD DIVIDENDED 1998 1997 1998 1997 1998 1997 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 320,000,000 100 320,000,000 320,000,000 204,932,446 217,736,054 - - Puthep Co., Ltd. Explore and Produce gold Mineral. 234,814,100 100 252,490,972 252,490,972 161,601,113 241,762,670 - - Padaeng Industry (Laos) Co., Ltd. Explore Various prime mineral 5,000,000 100 - 5,000,000 - 5,000,000 - - Padaeng International Mining Co., Ltd. Explore minerals in Vietnam 100,000 100 100,000 100,000 100,000 100,000 - - Sila Enterprise Co., Ltd. Produce rock 15,000,000 55 8,250,000 8,250,000 6,239,063 8,473,053 - - South East Asia Metals Co., Ltd. Distribute various basic metal and 200,000,000 100 - - 151,704,942 109,315,855 - - others by products Total investment in subsidiary companies 580,840,972 585,840,972 524,577,564 582,387,632 - - ASSOCIATED COMPANIES Padaeng Siam Industry Co., Ltd. Distribute acid and chemical products 2,500,000 50.00 1,250,000 1,250,000 1,491,468 1,450,867 - - Total investment in associated companies 1,250,000 1,250,000 1,491,468 1,450,867 - - Total investment in related companies 582,090,972 587,090,972 526,069,032 583,838,499 - - /11 - 11 - 10.2 The investment in Padaeng Industry (Laos) Co., Ltd referred to in Note 10.1 to the equity method financial statements are shown at cost, as there is no available information from that company to be consolidated and accounted for by the equity method and the investment is not material to the Companys consolidated financial statements. For the year ended December 31, 1998, the Company has written off investment in Padaeng Industry (Laos) Co., Ltd. because the management believe that there is a decline, other than temporary, in the value of such investment. 10.3 For the year ended December 31, 1998 and 1997, the equity in undistributed net profits (losses) of associated company Padaeng Siam Industry Co.,Ltd. included in the consolidated financial statements by the equity method are computed from the financial statements for the years ended that have not been audited. On December 22, 1997, a subsidiary company sold all its investments in IPD Land Co., Ltd. 10.4 For the year ended December 31, 1998 and 1997, the Company has investments in Puthep Company Limited amounting to Baht 162 million and Baht 242 million respectively which is presented as part of investments in subsidiary companies by the equity method as referred to in Note 10.1. The 1998 and 1997 financial statements does not include any adjustments which may arise has the outcome of the exploration of subsidiary been known. (more)