The Company has provided for Padaeng Poongsan Metals Co.,Ltds commitments in respect of loan guarantees (See Note 24). *6. During the year ended December 31, 1998 a subsidiary transferred plant and machinery to the Company in lieu of payment of outstanding debts. The book value of the plant and machinery transferred was Baht 11.8 million. As a result of this transfer, the subsidiary incurred a loss of Baht 6.27 million. 21. RISK MANAGEMENT POLICY FOR ASSETS AND LIABILITIES IN FOREIGN CURRENCIES The Companys risk management policy for assets and liabilities of the Company and subsidiary companies in foreign currencies is as follows: The Company has both local and foreign sales in USD currency, which result in revenues and accounts receivable in the same currency. In addition, the Company has accounts payable, loans and interest expense in USD currency. Thus, the Company believes it is able to manage currency exchange risk by matching cash receipt with the debts and interest in foreign currencies. According to conditions in the Share Subscription Agreement dated July 23, 1998, the Company will have to purchase forward exchange contracts for foreign currency loans (see Note 17). 22. JOINT CO-OPERATION AGREEMENT A subsidiary company which operates in real estate entered into a Joint Cooperation Agreement with the Industrial Estate Authority of Thailand on September 7, 1992, in which the subsidiary company agreed to develop its land for The Industrial Park of Padaeng Industry Group and to transfer the ownership of properties relating to infrastructure, roads and facilities, including equipment to the Industrial Estate Authority of Thailand without any compensations, whereby the subsidiary company is allowed to transfer its right to use the wharf frontage and any building on such land to other companies, in which the subsidiary company or Padaeng Industry Public Company Limited has at least a holding of 30% of share capital of such companies. In 1995, the subsidiary company sold certain plots of land in The Industrial Park of Padaeng Industry Group to two companies, under the term which is not in accordance with the above condition. The subsidiary company has loss from such sale of land in the amount of Baht 73.3 million. /26 - 26 - The subsidiary company sent a letter dated February 27, 1995 to the Industrial Estate Authority of Thailand requested an amendment to the above joint cooperation agreement. The Industrial Estate Authority of Thailand sent a letter dated October 6, 1995 to the subsidiary company, stating that the Board of Directors of the Industrial Estate Authority of Thailand passed a resolution that the request for an amendment to the agreement could be approved if it was in accordance with the law governing amendments of the State agreement, in this respect the Industrial Estate Authority of Thailand has to request for compensation of 30% of profit from such sale of land in The Industrial Park of Padaeng Industry Group by the subsidiary company to other juristic entity. As at 31 December 1998, the compensation of 30% of profit from sale of land has not yet been finalized. However, the subsidiary company has loss from such sale of land as described in the second paragraph, accordingly, it believes no amounts will be due. 23. OPERATIONS OF A SUBSIDIARY Following continued and substantial losses arising from the economic downturn in Southeast Asia, the Board of Padaeng Poongsan Metals Co., Ltd. resolved to cease operations in January 1998 and lay off staff. Operations were temporarily resumed in August 1998 in order to complete outstanding contractual obligations. As the major shareholder and sole signatory to the Guarantee Agreement of 1993 with the Government Savings Bank, the Company is obliged to meet outstanding commitments incurred by Padaeng Poongsan Metals Co., Ltd. As at December 31, 1999, Padaeng Industy Public Co, Ltd. has recognised in the profit and loss the following provision for current and future commitments for Padaeng Poongsan Co.,Ltd. for which Padaeng Industry Public CO., Ltd. is obliged to guarantee payment: CONSOLIDATED THE COMPANY 1998 1997 1998 1997 Baht Baht Baht Baht Provision for interest expenses; lease fees, insurances and other commitments prior to the disposal of the assets of Padaeng Poongsan Metals Co., Ltd. 37,969,000 - 46,239,000 - Loan guarantee repayments net of estimated recoveries on disposal of assets - - 237,679,526 - Other contractual obligations - - 8,222,000 - Total provision against Padaeng Poongsan Metals Co.,Ltds commitments 37,969,000 - 292,140,526 - /27 - 27 - 24. LOSS FROM DIMINUTION IN VALUE OF ASSETS OF A SUBSIDIARY As a result of the decision made by the Shareholders of Padaeng Poongsan Metals Co.,Ltd. on February 19, 1999 to cease operations, independent valuation consultants were engaged to determine the fair market value of assets of the subsidiary. The valuation included an appraisal of the buildings, other land improvements and machinery of the subsidiary at Lamchabang Industrial Estate. The valuation excluded furniture and fitting, office equipment, inventories of consumables and spares and other stocks of scrap and work in progress. In the opinion of the valuer, the most reasonable basis for determining the fair market value of the subsidiary was to assess the estimated gross amount that the property would realise if sold on a negotiated individual basis in an as-is, where is condition and location, either as a complete unit or on piece-meal basis. In January 1999, brokers were appointed to dispose of the assets of Padaeng Poongsan Metals Co.,Ltd. The following provisions for diminution of assets of Padaeng Poongsan Metals Co., Ltd were included in the consolidated Profit and Loss: 1998 1998 Provision Carrying Value Baht Baht Factory land, buildings plant and equipment 730,931,632 111,000,000 Other land and buildings 29,965,663 12,500,000 Office equipment and vehicles 4,179,345 - Inventories 52,395,602 31,366,050 817,472,242 154,866,050 25. PREPARATION FOR YEAR 2000 PROBLEMS. (Unaudited-not covered by the Independent Certified Public Accountants Report) The Company has undertaken a review to identify equipment and systems that could possibly be affected by Year 2000 problems and other associated programming issues. The review resulted in the compilation of an inventory of equipment and systems that would directly or indirectly impact on the business of Padaeng. /28 - 28 - Each item on the inventory was then examined to determine the consequences of failure and assigned a risk rating. The risk rating was determined by reference to supplier information and the assessment by the Companys employees. The risk rating was used to determine those items that posed the most significant threat to operations. A risk acceptance threshold was established in order to focus the Companys resources on remedial action. For those items that exceeded the acceptance risk threshold, a plan for replacement or modification was established. Additionally, contingency plans have been developed for all equipment identified as probably having a Year 2000 impact. The most significant risk identified is the production control computer software at both the Calcine Plant and the Zinc refinery. A number of steps have been implemented to correct these. During the Calcine Plant shutdown in April 1999 the supplier will install Year 2000 compliant software. This upgrade will take place at the Zinc refinery in June, 1999. The Companys financial systems have been reviewed and programming changes to make the systems year 2000 compliant have almost been completed. It is intended to have an independent audit of the reviews and remedial action undertaken by the Company. The cost of the Companys review including rectification is approximately 800,000 Baht. 26. Provident and Pension Funds The Company and a subsidiary have provident funds for those employees who have indicated their willingness to join. The contributions from employees are deducted from the monthly salaries, with the Company and the subsidiary matching the individuals contributions. The funds are managed by an authorized fund manager in accordance with the Provident Fund Act (B. E. 2530) 1987. In 1997, a subsidiary closed the provident and pension funds. In 1998, the Company temporarily ceased the provident fund. The Ministry of Finance confirmed this by a letter which dated on January 26, 1998. It is effective on January 1, 1998 to June 30, 1999 27. Legal Reserve Under the Public Companies Act, the Company is required to set aside as a legal reserve at least 5% of its net profit after accumulated deficit brought forward (if any) until the reserve is not less than 10% of the authorized capital. According to the Civil and Commercial Code, subsidiaries must appropriate to reserve fund at distribution of dividend at least one-twentieth of the Company such reserve fund is not available for distribution as dividend until the Company is finally wound up. /29