PADAENG INDUSTRY PUBLIC COMPANY LIMITED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED AND THE COMPANYS FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 1. ECONOMIC TURMOIL IN THE ASIA- PACIFIC REGION AND OPERATIONS OF THE COMPANY AND SUBSIDIARIES Thailand and many Asia-Pacific countries continue to experience economic difficulties since 1997. The accompanying financial statements reflect managements current assessment of the possible impact of the economic conditions on the financial position of the Company. On June 25, 1999, the Company entered into the Override Amendment Agreement requiring the Company to sell the remainder of the increased capital of 75.1 million shares to repay the Tranche A principal by September 15, 2000. There is uncertainty regarding the ability of the Company to continue as a going concern if the Company is unable to sell the remainder of the increase capital of 75.1 million shares on such date and the lenders are to demand immediate repayment. If the company is unable to continue as a going concern, it may be required to realized 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 (see Note 16.1). Padaeng Industry Public Company Limited was established on April 10, 1981 and registered in the Stock Exchange of Thailand on July 21, 1987. The Company has a head office on CTI Tower, 26th 27th Floor, 191/18-25 Rachadaphisek Road, Klongtoey District, Bangkok and has silicate mine and refining plant located in Tak Province and caleine plant located in Rayong Province. The main objective is to engage in mining and refining of zinc. The main products of the Company are zinc ingots and zinc alloy. During the year 1999, the Company has an average number of employees in each office as follows: Persons - Bangkok 104 - Tak 491 - Mae Sod 98 - Rayong 114 Total 807 And the total staff costs for the year 1999 are approximately Baht 274 million. 2. BASIS FOR PRESENTATION OF THE FINANCIAL STATEMENTS 2.1 The consolidated and the Companys financial statements for the years ended December 31, 1999 and 1998, are presented in accordance with the form of balance sheet and statement of income for public companies as required by the Ministerial Regulation No. 7 B.E. 2539 (1996) dated October 25, 1996, issued under the Public Companies Act, B.E. 2535 (1992) and effective as from accounting periods starting on January 1, 1997. /2 - 2 - The Company maintains its accounting records in Thai Baht and prepares its statutory financial statements in the Thai Language in conformity with accounting standards in Thailand. The accompanying financial statements are prepared in accordance with accounting principles and practices generally accepted in Thailand and are designed for those who have reasonable knowledge thereof. Such principles may not conform with generally accepted accounting principles in other countries. 2.2 Certain reclassifications have been made in the consolidated financial statements for the year ended December 31, 1998 to conform to the classifications used in the consolidated financial statements for the year ended December 31, 1999. Net income (loss) of a subsidiary which ceased its operations of Baht 10,027,862 as previously presented the part of revenues and expenses in the consolidated statement of income for the year 1998 as follows: Baht Sales 282,836,859 Gain on exchange rates 101,837,231 Other income 4,182,148 Cost of sales 193,045,769 Selling and administrative expenses 109,965,544 Interest expenses 75,817,063 2.3 The consolidated and the Companys financial statements are the consolidation of the accounts of the Company and the following subsidiary companies after eliminated intercompany transactions. % 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 financial statements for the year ended December 31, 1999 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 do not include Patong Exploration and Mining Limited because such subsidiary has registered to wind up operations on March 16, 1999. /3 - 3 - The consolidated financial statements for the year ended December 31, 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, Patong Exploration and Mining Limited of which Puthep Co., Ltd. has a holding of 100% in this company. Since January 1, 1999, the Company has not recognized its equity in further losses incurred by Padaeng Poongsan Metals Co., Ltd. in the Companys 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. 2.4 The consolidated financial statements for the years ended December 31, 1999 and 1998 also include the financial statements of a subsidiary company whose financial statements were examined by another auditor. The following table indicates the percentages of its assets and revenues compared to consolidated assets and revenues; % of CONSOLIDATED THE COMPANY ONLY Shareholding 1999 1998 1999 1998 1999 1998 Sila Enterprise Co., Ltd - Assets 55 55 0.001 0.003 0.001 0.003 - Revenues 0.004 0.002 0.004 0.002 2.5 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 Companys financial statements presentation, 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 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 financial statements do not present the same net income (loss) and shareholders equity. 3. SIGNIFICANT ACCOUNTING POLICIES 3.1 Revenue recognition Sales are recognized when the title of goods is transferred to the customers. /4 - 4 - Interest income is accrued on a time basis, by reference to the principal outstanding and the interest rate applicable. Revenues from service are recognized when the services are provided. 3.2 Inventories Inventories are stated at the lower of cost or net realizable value. Cost is calculated on an average cost basis. 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, associated and other companies Investments in subsidiaries and associated companies are accounted for by the equity method. In 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. Unrealized gain or loss on the change in fair value is recognized as non-interest income/expenses for securities for trading and presented as a component of shareholders equity for securities available for sale until realized. - Non-marketable equity securities are classified as general investment and carried at cost, net of valuation allowances for impairment, if any. In 1998, the investments in securities are accounted for in accordance with Accounting Standards 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 statement of income where a permanent decline in market value was deemed to have occurred. Investments in other companies were stated at cost. Investments in listed securities were stated at the lower of cost or market value. Market value of listed investments was 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. /5 - 5 - 3.5 Depreciation and amortisation. Depreciation and amortisation are calculated on a straight-line basis, based on the estimated useful lives as follows: 1999 1998 Land improvement 5-20 years 5-20 years Factory building and office building 20-25 years 20-25 years Residue ponds 4-11 years 4-11 years Machinery 10-20 years 10-20 years Heavy equipment 8 years 8 years Equipment, furniture and fixtures and vehicles 5 years 5 years Mining concession fees and expenses 5-16 years 5-16 years Other structures 8-25 years 8-25 years Finance lease assets are recorded as assets and amortized over an estimated useful lives of 5 years. A change in accounting estimates For the year ended December 31, 1999, the Company changed its accounting estimate of the useful life of residue ponds from 20-25 years to 4-11 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 writing off for the year ended December 31, 1999 increased by Baht 49.05 million and Baht 36.23 million respectively. The net income and earnings per share for the consolidated and the Companys financial statements for the year ended December 31, 1999 decreased by Baht 85.28 million and Baht 0.57 per share, respectively. 3.6 Exploration expenditure Exploration is accumulated separately for each area of interest. Accumulated costs are carried forward where one of the following conditions are met; - Costs are expected to be recouped through successful development and exploitation of the area of interest or by sale of the area of interest; or - Exploration activities in the area of interest have not yet reached a stage that permits a reasonable assessment of the existence or otherwise of economically recoverable reserves and exploration activities are ongoing on the area of interest. Expenditure which no longer satisfies the above policy is written off or a provision raised against such expenditure where directors are of the opinion that the carried forward net cost may not be recoverable under the above policy. /6 - 6 - 3.7 Foreign currency transactions Foreign currency transactions are translated into Baht at the exchange rates prevailing at transaction dates. Assets and liabilities denominated in foreign currencies at the balance sheet date are converted into Baht at the reference exchange rates established by the Bank of Thailand at that date. Gains or losses on conversion to Baht are recognized in the statement of income. 3.8 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. 3.9 Income tax Income tax expense, if any, is based on tax paid and accrued for the period. 3.10 Earnings (loss) per share Earnings (loss) per share are computed on the basis of the number of outstanding ordinary shares at the balance sheet date. In the case of a capital increase, the number of ordinary shares is weighted according to time of subscription received for the increased issued and paid up capital. 3.11 Use of accounting estimates Preparation of financial statements in conformity with generally accepted accounting principles requires management 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. 4. CURRENT ASSETS CASH CONSOLIDATED THE COMPANY ONLY 1999 1998 1999 1998 Baht Baht Baht Baht Cash on hand and at bank 398,269,162 65,515,412 335,184,787 52,039,169 Short-term deposits at financial institutions - 99,856,250 - 51,856,250 398,269,162 165,371,662 335,184,787 103,895,419 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. /7 - 7 - 4.1 Deposits used as collateral CONSOLIDATED THE COMPANY ONLY 1999 1998 1999 1998 Baht Baht Baht Baht Deposits used as collateral 11,554,589 11,554,589 - - As at December 31, 1999, deposits at banks of a subsidiary are used as collateral against sales of blank coins with a Government Agency and used as collateral against other debt repayments. As at December 31, 1998, deposits at banks of a subsidiary were used as collateral against sales of blank coins with a Government Agency. 4.2 Supplemental disclosure CONSOLIDATED THE COMPANY ONLY 1999 1998 1999 1998 Baht Baht Baht Baht Cash paid during the year for tax 787,804 3,556,765 886,635 2,336,597 Cash paid during the year for interest 343,225,984 548,937,468 326,032,313 489,106,267 4.3 Non cash items are as follows: - For the year ended December 31, 1998, the unrealized loss on marketable equity securities non current which was shown as a deduction from shareholders equity as per consolidated and the Companys financial statements increased from the prior year amounting to Baht 2,514,742. - In 1998, the Company entered into an Override Agreement dated October 7, 1998. A portion of short-term loans will have amended repayment schedules. But certain events occurred which caused the Company to be in non compliance with the Override Agreement (see Note 16.1). Long-term loan per the agreement has been reclassified as current liability. - In 1998, a subsidiary has repaid debt by transferring fixed assets as per the consolidated and the Companys financial statements amounting to Baht 15,257,929 and Baht 11,811,027 respectively. - For the year ended December 31, 1999, an account receivable of Baht 27.85 million has been settled by inventories of Baht 25.79 million and value added tax of Baht 2.06 million. - On January 25, 1999, the Company has entered into a hire-purchase agreement with a company resulting in assets increase by Baht 7.15 million and liabilities increase by the same amount. /8 - 8 - 5. TRADE ACCOUNTS - RECEIVABLES CONSOLIDATED THE COMPANY ONLY 1999 1998 1999 1998 Baht Baht Baht Baht Trade debtors 267,135,305 241,813,125 258,466,548 203,039,625 Less: Allowance for doubtful Debt (16,722,609) (45,890,816) (12,240,511) (40,761,047) 250,412,696 195,922,309 246,226,037 162,278,578 As at December 31, 1999 and 1998, the following account receivables of the Company are past due more than three months and some debtors are having difficulties in repayment: CONSOLIDATED THE COMPANY ONLY 1999 1998 1999 1998 No. Baht No. Baht No. Baht No. Baht Trade accounts receivable - related companies: 3 to 6 months - - - - - - - - 6 to 12 months - - - - - 1 11,214,828 More than 12 months - - - - 1 46,809,476 1 35,594,648 - - 46,809,476 46,809,476 Less Accumulated loss exceeding investment in a subsidiary - - (46,809,476) (46,809,476) - - - - CONSOLIDATED THE COMPANY ONLY 1999 1998 1999 1998 No. Baht No. Baht No. Baht No. Baht Trade accounts receivable - other companies: 3 to 6 months 14 4,624,837 8 1,579,153 2 2,785,408 1 789,264 6 to 12 months 7 2,991,431 9 40,658,269 1 2,379,549 2 40,221,783 More than 12 months 16 12,857,627 13 5,615,679 1 7,375,555 - 20,473,895 47,853,101 12,540,512 41,011,047 Allowance for doubtful trade accounts receivable 16,722,609 45,890,816 12,240,511 40,761,047 /9 - 9 - 6. INVENTORIES CONSOLIDATED THE COMPANY ONLY 1999 1998 1999 1998 Baht Baht Baht Baht Raw materials - Zinc Ore + Concentrate 397,127,392 349,702,904 397,127,392 356,279,943 - Others 63,785,418 68,037,700 56,656,322 51,968,655 Stores of consumables and spares 140,218,432 172,988,499 140,218,432 146,955,969 Land - 1,603,132 - - Cost of land improvement - 642,610 - - Goods in transit 5,573,588 3,697,819 5,573,588 3,697,819 Less: provision for obsolete inventories (15,639,824) (9,676,774) (15,639,824) (9,676,774) provision for diminution of inventories - (52,395,602) - - 591,065,006 534,600,288 583,935,910 549,225,612 Work in process 65,928,749 87,733,989 65,928,749 75,258,181 Finished Goods Zinc Ingots 44,870,227 63,920,650 44,870,227 63,920,650 Zinc Alloy 8,320,042 6,189,778 8,320,042 6,189,778 Others 2,234,260 39,347,880 1,920,074 3,036,729 55,424,529 109,458,308 55,110,343 73,147,157 712,418,284 731,792,585 704,975,002 697,630,950 7. OTHER RECEIVABLES CONSOLIDATED THE COMPANY ONLY 1999 1998 1999 1998 Baht Baht Baht Baht Advances - 7,025,851 - 7,025,851 Interest receivable 112,757 1,708,866 40,330 982,362 Advances to employee 1,833,381 1,892,722 1,809,754 1,758,091 Other receivables - 4,982,076 - 4,982,076 1,946,138 15,609,515 1,850,084 14,748,380 8. OTHER CURRENT ASSETS CONSOLIDATED THE COMPANY ONLY 1999 1998 1999 1998 Baht Baht Baht Baht Prepayment 1,994,106 196,484 1,994,106 - Other 4,850,227 7,264,804 3,144,257 4,826,918 6,844,333 7,461,288 5,138,363 4,826,918 9. LONG -TERM DEPOSIT CONSOLIDATED THE COMPANY ONLY 1999 1998 1999 1998 Baht Baht Baht Baht Long-term deposit at a financial institution 30,054,136 30,054,136 - - 30,054,136 30,054,136 - - Long-term deposit at a financial institution is a negotiable certificate of deposit of a subsidiary with a maturity of 5 years, interest rate is fixed for 3 months. As at December 31, 1999 interest rate was 4.125% p.a. (In 1998, interest rate was 6.95% p.a). /10 - 10 - 10. INVESTMENTS IN RELATED 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 BAHT 1999 1998 1999 1998 1999 1998 Baht Baht Baht Baht Baht Baht SUBSIDIARY COMPANIES Padaeng Poongsan Metals Co., Ltd. Manufactures and distribute Non- Ferrous Industrial and blank coins 250,000,000 61.98 - - - - - - Padaeng Properties Co., Ltd. Real Estate 320,000,000 100 - 320,000,000 - 204,932,446 - - 80,000,000 100 80,000,000 - 50,110,948 - - - Puthep Co., Ltd. Explore and produce gold mineral. 234,814,100 100 252,490,972 252,490,972 162,338,035 161,601,113 - - Padaeng Industry (Laos) Co., Ltd. Explore Various prime mineral 5,000,000 100 - - - - - - Padaeng International Mining Co., Ltd. Explore minerals in Vietnam 100,000 100 100,000 100,000 - 100,000 - - Sila Enterprise Co., Ltd. Produce rock 15,000,000 55 8,250,000 8,250,000 5,387,030 6,239,063 - - South East Asia Metals Co., Ltd. Distribute various basic metal and other by products 200,000,000 100 - - 154,199,784 151,704,942 - - Total investment in subsidiary companies 340,840,972 580,840,972 372,035,797 524,577,564 - - ASSOCIATED COMPANIES Padaeng Siam Industry Co., Ltd. Distribute acid and chemical products 2,500,000 50 - 1,250,000 - 1,491,468 - - Total investment in associated companies - 1,250,000 - 1,491,468 - - (more)