PADAENG INDUSTRY PUBLIC COMPANY LIMITED AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 1. CORPORATE INFORMATION Padaeng Industry Public Company Limited was established on April 10, 1981 and registered in the Stock Exchange of Thailand on July 21, 1987. The main objective is to engage in mining and refining of zinc. The main products of the Company are zinc ingot and zinc alloy. 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 calcine plant located in Rayong Province. During the year 2000, the Company employed 741 employees (1999 : 807 employees) and the total staff cost for the year 2000 are approximately Baht 261 million (1999: Baht 274 million). On January 19, 2000, the Company commenced a mutual separation plan for staff. At the date of this report 64 staff elected to participate in this program. The cost of this program included in the financial statements for the year ended December 31, 2000 is approximately Baht 33 million. 2. BASIS FOR PRESENTATION OF THE FINANCIAL STATEMENTS 2.1 The consolidated and the Companys financial statements for the years ended December 31, 2000 and 1999 are prepared 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). The Company maintains its statutory financial statements in the Thai language in conformity with accounting standards and practices generally accepted in Thailand. 2.2 In accordance with SET guidelines dated May 8, 1998 regarding Financial Statement Preparation with the General Accepted Accounting Principle and the Equity method of the investment in subsidiaries that have accumulated losses exceeding the share capital, the consolidated financial statements recognize 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 - However, the Companys financial statements have been prepared in accordance with the Accounting Standard No. 45 Accounting for Investments in Associates. The Companys share of losses in a subsidiary is generally recognized only to the extent of the amount of the investment in the subsidiary except where the Company has a commitment and/or guarantee for the subsidiary. In addition, the Companys equity in profit can resume to be recognized when the profit of such subsidiary exceeds the Companys share of unrecognized losses. Accordingly, the consolidated and the Companys financial statements do not present the same net income (loss) and shareholders equity. 2.3 The consolidated financial statements are the consolidation of the accounts of the Company and the following subsidiary companies after elimination of intercompany transactions. % of Incorporated Type of Business Shareholding in 2000 1999 Padaeng Properties Co., Ltd. 100.00 100.00 Thailand Providing services Puthep Co., Ltd. 100.00 100.00 Thailand Copper and base metal exploration Padaeng Poongsan Metals Co., Ltd. 61.98 61.98 Thailand Dormant Padaeng International Mining Co., Ltd. 100.00 100.00 Thailand Explore minerals in Vietnam Sila Enterprise Co., Ltd. 55.00 55.00 Thailand Trading in limestone aggregate For the investment of Sila Enterprise Co., Ltd. equity in undistributed net income (loss) in the consolidated and the Companys financial statements was computed from the unaudited financial statements which percentage of net income (loss) amounted to as follows; PERCENTAGE OF NET INCOME (LOSS) FOR THE YEAR ENDED DECEMBER 31, CONSOLIDATED THE COMPANY ONLY 2000 1999 2000 1999 Equity in undistributed net income (loss) Sila Enterprise Co., Ltd. 0.52 (0.11) 0.34 (0.09) The consolidated financial statements for the years ended December 31, 2000 and 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. /3 - 3 - 3. SIGNIFICANT ACCOUNTING POLICIES 3.1 Revenue recognition Sales are recognized when the title of goods is transferred to the buyer. Interest income is accrued on a time basis, by reference to the principal outstanding and the interest rate applicable unless collectability is in doubt. 3.2 Cash and cash equivalents 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. 3.3 Inventories Inventories are stated at the lower of cost or net realizable value. Cost is calculated on an average cost basis. Cost includes costs of purchase, direct conversion costs and a proportion of manufacturing overheads based on normal operating capacity. Net realisable value is the estimated selling price in the ordinary course of business less estimated conversion costs and the estimated costs necessarily incurred to make the sale. Materials and supplies are valued on the weighted average cost basis. An allowance has been provided for slow moving stocks of spares and consumables or where there has been an impairment of value. 3.4 Investment in subsidiaries, associated and other companies Investment in subsidiaries, associated companies are accounted for by the equity method. Investment in other companies is stated at cost, net of valuation allowances for impairment, if any. 3.5 Goodwill The net excess of cost over (under) fair value of investments in subsidiary and associated companies is recognized as goodwill (net) and is amortized by the straight-line method over 10 years. /4 - 4 - 3.6 Depreciation and amortisation. Depreciation and amortisation are calculated on a straight-line basis, based on the estimated useful lives as follows: Years Land improvement 5-20 Factory building and office building 20-25 Residue ponds 4-11 Machinery 10-20 Heavy equipment 8 Equipment, furniture and fixtures and vehicles 5 Mining concession fees and expenses 5-16 Other structures 8-25 Finance lease assets are recorded as assets and amortized over than an estimated useful lives of 5 years. Change in estimated useful life of residue ponds. For the year ended December 31, 1999, the Company reduced the estimate of the useful life of the Tak residue ponds. The effect of this change in the estimated life of the residue ponds was an increase in the depreciation for the year ended December 31, 1999 by Baht 49.05 million. Residue ponds written off for the year ended December 31, 1999 were Baht 36.23 million. 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. 3.7 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 exploitation of each 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. /5 - 5 - 3.8 Foreign currency transactions Foreign currency transactions are translated into Baht at the exchange rates prevailing at transaction dates. Assets, liabilities and forward contracts 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. The Company uses forward contracts in asset and liability management activities to control exposure to fluctuations in foreign exchange rates. Fee from forward contracts is deferred and amortized over the life of the related contracts as expense in the statement of income. 3.9 Income tax Income tax expense, if any, is based on tax paid and accrued for the year. 3.10 Basic earnings per share Basic earnings 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. Environmental restoration costs Current expenditures relating to ongoing environmental restoration programs are charged against earnings as incurred. Where the costs relating to environmental liabilities that have arisen as a result of past events are expected to be material, a provision is made for these costs as soon as estimate of the liability is determined. The estimated restoration costs that will arise on the closure of the Tak residue ponds are accrued by a charge to earnings over the anticipated economic life of the pond. In accordance with IAS 37, and as a result of new information relating to the estimated cost of restoring the residue ponds an adjustment has been restated on the previous year financial statements for comparison (see Note 28). /6 - 6 - 4. CURRENT ASSETS - CASH 4.1 Deposit used as collateral CONSOLIDATED THE COMPANY ONLY December 31, December 31, 2000 1999 2000 1999 Baht Baht Baht Baht Deposit used as collateral 200,000 11,554,589 - - As at December 31, 2000, deposit at bank of a subsidiary was used as collateral against electricity usage. As at December 31, 1999, deposit at bank of a subsidiary was used as collateral against sales of blank coins with a Government Agency and used as collateral against other debt repayments. 4.2 Cash paid for the years ended December 31, 2000 and 1999 CONSOLIDATED THE COMPANY ONLY 2000 1999 2000 1999 Baht Baht Baht Baht Cash paid for tax 275,425 787,704 30,560 886,635 Cash paid for interest 238,397,543 343,225,984 234,296,982 326,032,313 4.3 Non cash items are as follows: - On January 25, 1999, the Company 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 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. 5. TRADE ACCOUNTS RECEIVABLE CONSOLIDATED THE COMPANY ONLY December 31, December 31, 2000 1999 2000 1999 Baht Baht Baht Baht Trade accounts receivable 351,449,292 267,135,305 341,616,908 258,466,548 Less: Allowance for doubtful accounts (5,957,196) (16,722,609) - (12,240,511) 345,492,096 250,412,696 341,616,908 246,226,037 /7 - 7 - As at December 31, 2000 and 1999, the following accounts receivable are past due more than three months and having difficulties in repayment: CONSOLIDATED THE COMPANY ONLY December 31, December 31, 2000 1999 2000 1999 No. Baht No. Baht No. Baht No. Baht Trade accounts receivable - related companies: 3 to 6 months - - - 6 to 12 months - - - More than 12 months - - 1 46,809,476 1 46,809,476 - - 46,809,476 46,809,476 Less Accumulated loss exceeding investment in a subsidiary - - (46,809,476) (46,809,476) - - - - Trade accounts receivable - other companies 3 to 6 months 8 1,438,876 14 4,624,837 1 725,625 2 2,785,407 6 to 12 months 8 1,921,683 7 2,991,431 - 1 2,379,549 More than 12 months 18 5,502,673 16 12,857,627 - 1 7,375,555 8,863,232 20,473,895 725,625 12,540,511 Allowance for doubtful accounts 5,957,196 16,722,609 - 12,240,511 6. INVENTORIES CONSOLIDATED THE COMPANY ONLY December 31, December 31, 2000 1999 2000 1999 Baht Baht Baht Baht Raw materials - Zinc Ore + Concentrate 844,070,237 397,127,392 844,070,237 397,127,392 - Other 103,846,477 63,785,418 103,766,117 56,656,322 Stores of consumables and spares 136,554,012 140,218,432 136,554,012 140,218,432 Goods in transit 20,666,525 5,573,588 20,666,525 5,573,588 Less: allowance for obsolete and slow moving stock (32,766,876) (15,639,824) (32,766,876) (15,639,824) allowance for diminution of inventories (21,670,000) - (21,670,000) - 1,050,700,375 591,065,006 1,050,620,015 583,935,910 Work in process 72,032,460 65,928,749 72,032,460 65,928,749 Finished Goods Zinc Ingots 107,928,260 44,870,227 107,928,260 44,870,227 Zinc Alloy 30,932,192 8,320,042 30,932,192 8,320,042 Other 3,128,360 2,234,260 3,128,360 1,920,074 141,988,812 55,424,529 141,988,812 55,110,343 1,264,721,647 712,418,284 1,264,641,287 704,975,002 /8 - 8 - 7. OTHER RECEIVABLES CONSOLIDATED THE COMPANY ONLY December 31, December 31, 2000 1999 2000 1999 Baht Baht Baht Baht Interest receivable 270,431 112,757 35,873 40,330 Advances to employees 1,234,722 1,833,381 1,216,926 1,809,754 1,505,153 1,946,138 1,252,799 1,850,084 8. OTHER CURRENT ASSETS CONSOLIDATED THE COMPANY ONLY 2000 1999 2000 1999 Baht Baht Baht Baht Prepayment 1,722,228 1,994,106 1,722,228 1,994,106 Other 5,210,783 4,850,227 5,351,683 3,144,257 6,933,011 6,844,333 7,073,911 5,138,363 9. LONG -TERM DEPOSIT AT A FINANCIAL INSTITUTION CONSOLIDATED THE COMPANY ONLY December 31, December 31, 2000 1999 2000 1999 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 from December 2, 1997 to December 2, 2002, interest rate is fixed for 3 months. As at December 31, 2000 and 1999, interest rate was 3.455% p.a. and 4.125% p.a., respectively. /9 - 9 - 10. INVESTMENTS IN RELATED COMPANIES 10.1 Investments in subsidiaries COMPANYS NAME TYPE OF PAID-UP OWNERSHIP INVESTMENT INVESTMENT BUSINESS CAPITAL (%) CONSOLIDATED EQUITY METHOD DIVIDEND BAHT December 31, December 31, December 31, 2000 1999 2000 1999 2000 1999 Baht Baht Baht Baht Baht Baht Padaeng Poongsan Metals Co., Ltd. Dormant 250,000,000 61.98 - - - - - - Padaeng Properties Co., Ltd. Providing services 80,000,000 100 - - 34,667,247 50,110,948 - - Puthep Co., Ltd. Copper and other base exploration 234,814,100 100 - - 161,882,637 162,338,035 - - Padaeng Industry (Laos) Zinc exploration Co., Ltd. and mining 5,000,000 100 - - - - - - Padaeng International Mining Explores minerals Co., Ltd. in Vietnam 100,000 100 - - - - - - Sila Enterprise Co., Ltd. Trading 15,000,000 55 - - 5,789,627 5,387,030 - - South East Asia Metals Co., Ltd. Distributes various base metals and other by products 200,000,000 100 - - 155,012,413 154,199,784 - - Total investments in subsidiary companies - - 357,351,924 372,035,797 - - /10 - 10 - 10.2 As at December 31, 1999, the Companys investment in Puthep Company Limited amounting to Baht 162 million which is presented as part of the investment in subsidiary companies by the equity method as referred to in Note 10.1 does not include any adjustments which may arise due to uncertainty related to recoverability of deferred exploration and special prospect license fee of Baht 162 million. On August 21, 2000 Padaeng Industry Public Co., Ltd. and Puthep Co., Ltd. entered into a Participation Agreement with two foreign companies to undertake exploration and mining of Puthep Copper Project. In accordance with the Participation Agreement the foreign companies will provide funding for the feasibility study of the Puthep Copper Project over the next three years (2000-2003). In addition, the parties entering into the agreement are obliged to fulfill the conditions contained in the agreement. /11 - 11 - 11. OTHER SECURITIES COMPANYS NAME TYPE OF PAID-UP OWNERSHIP INVESTMENT INVESTMENT BUSINESS CAPITAL (%) CONSOLIDATED EQUITY METHOD DIVIDEND BAHT December 31, December 31, December 31, 2000 1999 2000 1999 2000 1999 Baht Baht Baht Baht Baht Baht Asean Potash Holding Co., Ltd. Explores potash mineral 913,770,000 1.10 10,010,000 10,010,000 10,010,000 10,010,000 - - Millennium Gold Corporation Co., Ltd. Dormant CAN $ 9,917,857 7.56 - 4,441,626 - 4,441,626 - - Total other securities 10,010,000 14,451,626 10,010,000 14,451,626 - - /12 - 12 - 12. PROPERTY, PLANT AND EQUIPMENT - NET Property, plant and equipment - net consist of the following: CONSOLIDATED Balance as at Additions Disposals Balance as at December 31, December 31, 1999 2000 Land 250,924,099 - - 250,924,099 Land improvement 165,957,248 1,584,679 - 167,541,927 Building 1,475,056,767 8,464,113 - 1,483,520,880 Machinery 3,563,353,257 7,991,101 - 3,571,344,358 Heavy equipment 122,958,941 - - 122,958,941 (more)