PADAENG INDUSTRY PUBLIC COMPANY LIMITED AND SUBSIDIARY COMPANIES NOTES TO THE INTERIM FINANCIAL STATEMENTS FOR THE QUARTERS AND SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998 1. ECONOMIC TURMOIL IN THE ASIA-PACIFIC REGION Many Asia-Pacific countries, including Thailand, are experiencing 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 Company's interim financial statements for the quarters and six-month periods ended June 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 Company's interim financial statements should be read in conjunction with the consolidated and the Company's 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 Company's equity in a subsidiary's losses (excluding the minority interest to the extent that they do not exceed the minority shareholders' equity), that exceeds the Company's investment in such subsidiary. .../2 - 2 - Under the Company's presentation of interim financial statements, the Company's 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 Company's 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 Company's interim financial statements do not present the same net income (loss) and shareholders' equity. Since January 1, 1999, the Company has not recognized the Company's equity in further losses incurred by Padaeng Poongsan Metals Co., Ltd. in the Company's interim financial statements. The Company has already recognized the Company's 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 six-month period ended June 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 six-month period ended June 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 amd Mining Limited, of which Puthep Co., Ltd. has a holding of 100% in these two companies. .../3 - 3 - 2.4 The Company's interim financial statements for the quarter and six-month period ended June 30, 1999, do not include the Company's 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. The Company has not changed accounting method for investment in such associated company as the related amount is not material. 2.5 The Company's interim financial statements for the quarter and six-month period ended June 30, 1999 do not include the Company's 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. 2.6 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: 3.1 A change in accounting policy for investments. For the quarter and six-month period ended June 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 - 3.2 A change in accounting estimates For the quarter and six-month period ended June 30, 1999, the Company changed its accounting estimate of the useful life of residue ponds from 20-25 years to 4-16 years because the ages of fully used ponds are less than those previously estimated. The effect of the change in estimate resulted in depreciation and residue ponds writting off for the quarter and six-month period ended June 30, 1999 increased by Baht 17,334,703. The net income and earnings per share for the consolidated and the Company's interim financial statements for the quarter and six-month period ended June 30, 1999 decreased by Baht 17,334,703 and Baht 0.11 per share, respectively. 4. DEPOSITS AT BANKS USED AS COLLATERAL As at June 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 June 30, 1998, deposits at banks of a subsidiary amounting to Baht 3,554,589 are used as collateral against sales of blank coins with a Government Agency. 5. INVESTMENT IN SECURITIES Company's 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 (26,404,791) - (26,404,791) - Total securities available for sale 99,332,309 - 99,332,309 - 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 June 30, 1998 has been reclassified to temporary investment as at June 30, 1999. As at June 30, 1999, unrealized loss on securities available for sale has been presented as a deduction from shareholders' equity. As at June 30, 1998, unrealized loss on non-current marketable securities has been presented as a deduction from shareholders' equity. /5 - 5 - 6. SUPPLEMENTAL DISCLOSURE FOR CASH FLOWS 6.1 Cash paid for the quarters ended June 30, 1999 and 1998: CONSOLIDATED THE COMPANY ONLY 1999 1998 1999 1998 Baht Baht Baht Baht Cash paid for tax 73,559 46,430 29,908 103,072 Cash paid for interest 84,470,632 124,568,527 79,500,745 115,113,539 Cash paid for the six-month periods ended June 30, 1999 and 1998 : CONSOLIDATED THE COMPANY ONLY 1999 1998 1999 1998 Baht Baht Baht Baht Cash paid for tax 101,051 205,207 41,940 139,499 Cash paid for interest 176,967,162 335,765,978 166,882,031 289,718,163 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 quarter and six-month period ended June 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 six-month period ended June 30, 1999, unrealized loss on securities available for sale has been presented as a deduction from shareholders' equity on the consolidated and the Company's interim financial statements decreased by Baht 66.64 million and Baht 59.10 million respectively. - For the quarter and six-month period ended June 30, 1998, unrealized loss on non- current marketable securities has been presented as a deduction from shareholders' equity on the consolidated and the Company's interim financial statements increased by Baht 61.61 million and Baht 6.29 million respectively. /6 - 6 - 7. ACCOUNTS RECEIVABLE CONSOLIDATED THE COMPANY ONLY 1999 1998 1999 1998 Baht Baht Baht Baht Trade debtors 224,450,553 349,804,131 213,283,791 338,958,792 Less Allowance for doubtful debt (28,457,180) (73,489,572) (23,735,085) (54,714,050) 195,993,373 276,314,559 189,548,706 284,244,742 As at June 30, 1999 and 1998, the accounts receivable which have difficulties in repayment and are overdue for more than three months are as follows: AS AT JUNE 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) - - AS AT JUNE 30, 1999 CONSOLIDATED THE COMPANY ONLY No. Baht No. Baht Trade accounts - other companies: 3 to 6 months 9 3,588,400 2 2,684,409 6 to 12 months 15 5,396,352 2 3,832,968 More than 12 months 17 23,616,584 1 18,386,159 32,601,336 24,903,536 Allowance for doubtful accounts 28,457,180 23,735,085 AS AT JUNE 30, 1998 CONSOLIDATED THE COMPANY ONLY No. Baht No. Baht Trade accounts - related companies: 3 to 6 months - - 2 15,357,980 6 to 12 months - - 2 30,029,842 More than 12 months - - 1 5,927,900 /7 - 7 - AS AT JUNE 30, 1998 CONSOLIDATED THE COMPANY ONLY No. Baht No. Baht Trade accounts - other companies: 3 to 6 months 9 32,417,205 2 31,472,998 6 to 12 months 12 44,058,868 1 25,355,584 More than 12 months 7 1,892,292 - - 78,368,365 56,828,582 Total accounts receivable which have difficulties in repayment 78,368,365 108,144,304 Allowance for doubtful accounts 73,489,572 54,714,050 /8 - 8 - 8. INVESTMENTS IN RELATED COMPANIES 8.1 Investments in subsidiaries and associated companies COMPANY'S 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 320,000,000 100 320,000,000 320,000,000 209,737,986 196,954,816 - - Puthep Co., Ltd. Explore and Produce gold Mineral. 234,814,100 100 252,490,972 252,490,972 162,598,954 241,673,616 - - 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 1,088 100,000 - - Sila Enterprise Co., Ltd. Produce rock 15,000,000 55 8,250,000 8,250,000 5,268,802 7,768,270 - - South East Asia Metals Co., Ltd. Distribute various basic metal and other by products 200,000,000 100 - - 153,460,030 153,408,414 - - Total investment in subsidiary companies 580,840,972 585,840,972 531,066,860 604,905,116 - - ASSOCIATED COMPANIES Padaeng Siam Industry Co., Ltd. Distribute acid and chemical products 2,500,000 50 1,250,000 1,250,000 1,491,468 1,471,558 - - Total investment in associated companies 1,250,000 1,250,000 1,491,468 1,471,558 - - Total investment in related companies Baht 582,090,972 587,090,972 532,558,328 606,376,674 - - /9 - 9 - 8.2 For the quarter and six-month period ended June 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 Company's interim financial statement and such investment is not material to the Company's 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 six-month period ended June 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 six-month period ended June 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). /10 (more)