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LOXLEY PUBLIC COMPANY LIMITED AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS MARCH 31, 1998 AND 1997 1. EFFECTIVE FROM COUNTRYS ECONOMIC CRISIS The accompanying interim financial statements for the three-month period then ended March 31, 1998, included the effects of the economic and financial crisis to the extent the Company, subsidia ries and associated companies are known and can be estimated. These crisis caused by the currency volatility in the Asia were affected from Pacific region, volatile stock market, interest rate and continue slowdown in economic of 1997 up to present time and will continue to be existed and, accordingly, there are uncertainties that may affect future operations of the Company, subsidiaries and associated companies. The ultimate outcome of this mattercannot presently be determined.The financial statements for the three-month period ended March 31, 1998 do not include any adjustment that might result from these uncertainties. Related effects will be reported in the financial statements as they become known and estimable. 2. PRINCIPLES OF CONSOLIDATION The consolidated financial statements included the accounts of Loxley Public Company Limited and the following subsidiaries owned directly and indirectly by Loxley Public Company Limited or the companies over which Loxley Public Company Limited has control. Percentage of Shareholding As at March 31 1998 1997 Direct Indirect Direct Indirect Subsidiary Companies Loxley Business Information Technology Company Limited 99 - 99 - Loxley Myanmar Company Limited (not yet started principal commercial operations) 99 - 99 - Loxley Wireless Company Limited (formerly Cellular Products & Services Company Limited) 99 - 99 - Jago Company Limited (not yet started principal commercial operations) 99 - 99 - Loxley Energy Company Limited (not yet started principal commercial operations) 99 - 45 - Loxley Utilities Services Company Limited 90 - 90 - - 2 - Percentage of Shareholding As at March 31 1998 1997 Direct Indirect Direct Indirect Loxley Comware Company Limited 70 - 70 - Loxley Pacific Company Limited 70 - 70 - Loxley Newteck Company Limited 67 - 67 - Societe Commercial Lao Company Limited 67 - 67 - Loxley Broadcast and Media Company Limited 60 - 60 - Loxley Infra Company Limited 60 - 60 - Loxley Pagephone Company Limited 55 - 55 - LoxData Company Limited 52 - 52 - Loxley Satellite Communications Company Limited (not yet started principal commercial operations) 51 - 51 - Professional Computer Company Limited - 99 - 99 Netone Network Solution Company Limited - 98 49 - Hutchison Telecommunications (Thailand) Company Limited - 55 55 - TNT Logistics (Thailand) Ltd. - - 51 - L Wave Company Limited - - 99 - Open Systems Integrator Company Limited - 83 67 - Loxley Information Company Limited - 65 65 - Loxley Information Services Company Limited - 65 65 - Companies Over Which Loxley Public Company Limited Has Control Loxley Trading Company Limited 50 - 50 - Loxley Property Development Company Limited 40 - 40 - Loxley Intergraph (Thailand) Company Limited - 50 - 50 Dynamic Integrator Corporation Company Limited - 50 - 50 - 3 - Percentage of Shareholding As at March 31 1998 1997 Direct Indirect Direct Indirect North - East Asia Telephone and Telecommunication Company Limited - 49 - 49 Loxley Video Post (Bangkok) Company Limited - 31 - 31 Significant intercompany transactions with the above subsidiaries have already been eliminated. In May 1994, the Company additionally invested in the share cap ital of Hutchison Telecommunications (Thailand) Limited (Hutchison) resulting in an increase in the percentage of shareholdings from 45% to 55% . At the date of the acquisition of the shares inHutchison, the Company had to pay for the additional share capital exceeding the net assets value of that subsidiary. As a result, the Company recorded the Excess of Investment Over Net Assets as part of "Other Assets" which is being amortized as expense over aperiod of approximately 12 years. As at March 31, 1997, the unamortized balance amounted to approximately Baht 25. 6 million. In August 1997, a subsidiary purchased all of the common shares of Hutchison from the Company and other shareholders. The subsidiary had to pay for the share capital exceeding the net assets value of Hutchison. As a result, the subsidiary recorded the Excess of Investment Over Net Assets as part of Other Assetswhich is being amortized as expense over a period of 8 years. Asat March 31, 1998, the unamortized balance amounted to approximitely Baht 80.5 million. The Company has included the financial statements of Loxley Trading Company Limited, in which the Company invested 50% of the shareholding in May 1994, for consolidation since it had control over the investee. At the date of the acquisition of the shares in Loxley Trading Company Limited, the Company had to pay for theshare capital exceeding the net assets value of that subsidiary.As a result, the Company recorded the Excess of Investment Over Net Assets as part of Other Assets which is being amortized as an expense over a period of 15 years. As at March 31, 1998, the unamortized balance amounted to approximately Baht 38.7 million. In respect of including the financial statements of Loxley Trading Company Limited for consolidation, the Company is required to recognize all of the capital deficiency of that subsidiary in the consolidated financial statements, which included the portion applicable to the minority interest totalling Baht 27 million. The Company recorded such amounts as a deferred charge and presented it as part of Other Assets which was amortized to expense over aperiod of 15 years. However, such balance was cleared up in 1995 by the allocation of the minoritys share in net income subsequently occurred of Loxley Trading Company Limited. - 4 - During the third quarter of 1996, the Company invested 90% in the share capital of Loxley Utilities Services Company Limited. In this connection, the Company had to pay for the share capital exceeding the net assets value of that subsidiary. As a result, the Company recorded the Excess of Investment Over Net Assets as part of Other Assets which is being amortized as expense over a period of 15 years. As at March 31, 1998, the unamortized balance amounted to approximately Baht 52.6 million. The Company accounts for its investments in shares of associated companies for consolidated financial statements and investments in shares of subsidiaries and associated companies for the Companys financial statements by the equity method. In case of the subsidiary and/or associated company reports net loss, the Company will discontinue applying the equity method when the balance of investment in such subsidiary and/or associated company is reduced to zero and shall not recognize for additional losses because the Company did not have contingent liabilities or guarantees for subsidiaries and/or associated companies. The Company will resume applying the equity method only after the subsidiary and/or associated company subsequently reports net income, and its share of that net income exceeds the share of net losses not recognized during the period the equity method was suspended. 3. CHANGE IN THE METHOD OF ACCOUNTING 3.1 In December 1997, the Company started adopting the generally accepted practice of providing for deferred income tax resulting from timing differences in reporting revenues and expenses for financial reporting purposes compared to income tax reporting purposes, effective retroactively to January 1, 1997. Accordingly, the income tax applicable to revenues and expenses which are not currently allowable and deductible for income tax purposes is set up as Deferred Income Tax in the balance sheets. This will be allocated to future periods when such revenues and expenses provided for are actually incurred and considered allowable and deductible for income tax purposes. As a result of this deferment, net income for the three-month period ended March 31, 1997 increased by approximately Baht 96.1 million, representing income tax applicable to the timing differences for the three-month period ended March 31, 1997 (approximately Baht 18.5 million), and cumulativeincome tax applicable to timing differences of prior years up to December 31, 1996 (approximately Baht 77.6 million). The interim financial statements of subsidiaries included in this interim financial statements did not include any adjustment effect from the change in the method of accounting for income tax. The Management, however, believes that the effect on this matter was not material to the interim financial statements. - 5 - 3.2 In 1997, the Company appraised its land, previously recorded at cost amounting to approximately Baht 48.1 million, at appraised value totalling approximately Baht 253.6 million. The Company appraised the said land based on the information guidelines provided by an independent appraiser. The revaluation increment in land, totalling approximately Baht 205.5 million, was credited to Revaluation Increment in Land which was shown under Shareholders Equity in the balance sheets. 4. RELATED PARTY TRANSACTIONS A portion of sales of products and services, fees, other income, costs of sales and services and selling and administrative expenses are represented by transactions with their subsidiaries, associated and other related companies. These companies are related through common shareholdings and/or directorships. The accompanying financial statements reflect the effects of these transactio ns based on the basis determined by the companies concerned. Account balances with these related companies at March 31, 1998 and 1997 were shown separately in the balance sheets. As at March 31, 1998 and 1997, significant transactions which included in the accompanying financial statements consist of: In Thousand Baht Consolidated The Company 1998 1997 1998 1997 Sales of products and services 53,470 20,242 131,669 410,325 Fees and other income 28,264 21,075 33,027 43,075 Cost of sales and services 34,374 115,646 56,589 425,711 Selling and Administrative Expenses - - 2,266 6,094 - 9 - The Company accounted for the investments in Loxley Hitachi Cable Engineering Company Limited and investments in Thai Telephone and Telecommunication Public Company Limited by the equity method. Subsequently in 1997 and 1996, the Company sold a portion of investments which effected the percentage of shareholding in the said companies reduced to be less than 20% . As a result, the Company changed the accounting method for these investments to the cost method by using the outstanding balance of investments under the equity method as the cost of the investments. As at March 31, 1998, the aggregate market value of investments in listed securities was lower than the aggregate cost by approximately Baht 124.6 million. The valuation adjustment was recorded as Provision for unrealized loss on decline in value of long-term investments in listed securities as part of Shareholders Equity in Balance Sheets. 6. EURO CONVERTIBLE BONDS During the second quarter of 1995, the Company offered the Euro-Convertible Bonds in the foreign countries with a total face value of U.S. Dollars 100 million (divided into 100,000 bonds at U.S. Dollars 1,000 principal amount) (ECD 1), or equivalent to Baht 2,455 million contingent on the exchange rate fixed at the time of conversion or redemption. The bonds bear interest at the rate of 3.5% p.a. and will be due for redemption on April 20, 2005.However, the bondholders, pursuant to the stipulated conditions in the prospectus, may exercise their conversion rights at any time from July 20, 1995 up to March 20, 2005 at the conversion priceo Baht 500 per share, or put redemption option at prior maturity on April 20, 2000 at the price with premium totalling U.S.Dollars 1,310 per share. In addition, the Company, pursuant to the stipulated conditions in the prospectus, may mandatorily redeem all or some of the bonds at any time from May, 1998 to April 20, 2000 at the price with premium totalling U.S. Dollars 1,237 per share or U.S. Dollars 1,310 per share, depend upon the period of redemption. During the second quarter of 1996, the Company offered another Euro-Convertible Bond in the foreign countries with a total facevalue of U.S. Dollars 105 million (divided into 105,000 bonds at U.S. Dollars 1,000 principal amount) (ECD 2), or equivalentto Baht 2,646 million contingent on the exchange rate fixed at the time of conversion. The bonds bear interest at the rate of 2.5% p.a. and will be due for redemption on April 4, 2001. However, the bondholders, pursuant to the stipulated conditions in the prospectus, may exercise their conversion rights at any time from July 4, 1996 up to March 4, 2001 at the conversion price of Baht 450 per share. In addition, the Company, pursuant to the stipulated conditions in the prospectus, may mandatorily redeem all or some of the bonds at any time from April 1999 to April 3, 2001 at the price with premium totalling U.S. Dollars 1,210 per share in 2000 and U.S. Dollars 1,272 per share in 2001. - 10 - In respect of the issuance of the bonds referred to above, at the extraordinary shareholders meetings held on January 11, 1995 and March 18, 1996, the shareholders approved the increase in the Companys authorized share capital from Baht 400 million (dividedinto 40,000,000 shares at Baht 10 par value) to Baht 460 million (divided into 46,000,000 shares at the same par value) and finally to Baht 520 million (divided into 52,000,000 shares at the same par value). The increased share capital of 12,000,000 shares will be issued to the convertible bondholders who will later exercise their conversion rights. The Company registered the resolution of the increase share capital with the Ministry of Commerce onJanuary 27, 1995 and March 20, 1996, respectively. Since 1996, the market prices of the stock including the Companys shares, in the Stock Exchange of Thailand have declined continuously. Consequently, the bondholders may not exercise their conversion rights as much as that of the Companys estimate. Accordingly, the Company set up a policy to provide a provision for thepremium to be paid to the bondholders at the time redemption be made at the rate of 80% of total premium to be paid in case of all bondholders exercise the redemption right at prior maturity date, spread over the period of the right by applying the straight-line method.The Management believes that such provision is adequate since the present market price of the Companys shares represents the price during the period that the Securities Exchange of Thailand is unusually in declining circumstances and the redemption period will be in effect in next two (2) years for ECD 1 and next three (3) years for ECD 2, respectively. As at March 31, 1998, the provision amounted to approximately Baht 927.7 million. 7. EXCHANGE GAIN ARISING FROM CHANGE IN FOREIGN CURRENCY EXCHANGE SYSTEM As a result of the change in the foreign currency exchange system to the managed float system effective from July 2, 1997, the Company and subsidiaries derived a net gain on repayment and collection of its foreign currency liabilities and assets during the three-month period ended March 31, 1998, and on the translation of the net liabilities outstanding at March 31, 1998 (using the exchange rates prevailing on March 31, 1998) totalling approximately Baht 1,776.4 million for interim consolidated financial statements and Baht 1,788.9 million for the interim company financial statements. This gain was presented separately in the Statement ofIncome for the three-month period ended March 31, 1998. - 11 - 8. AGREEMENTS As at March 31, 1998 and 1997: a) A subsidiary has the joint venture agreement with a party comprising IBM Thailand Corporation Co., Ltd., Loxley International Co., Ltd. and IBM Worldtrade Corporation Co., Ltd., to supply the turnkey system for the Taxation Computerized Project to the Revenue Department. The total contract price is Baht 1,814 million in which the subsidiary is liable in respect of a 44.738% share of the prospective profit/loss incurred. b) A subsidiary has an agreement with the Telephone Organization of Thailand (TOT) for the latter to allow the subsidiary to provide paging services within an agreed period. By virtue of this agreement, the subsidiary is committed to transfer the ownership of communications network to TOT which subsequently grant right to use the network over the term of the license to the subsidiary. In this connection, the subsidiary has to pay compensations to TOT amounted to Baht 1 million per annum. Additionally, the subsidiary was required to provide a bank guarantee of Baht 141.1 million to TOT to guarantee its performance. A portion of banks guarantees was collateralized by the pledge of fixed deposit accountapproximately Baht 23.4 million. c) Two subsidiaries together with the Communication Authority of Thailand (CAT) have entered into an agreement to invest in the computer database services project. By virtue of this agreement, the subsidiaries are committed to supply, install, control and maintenance all tool and equipment as agreed in the agreement. In addition, the subsidiaries must transfer the ownership of such tools and equipment to CAT at the first day on which service be rendered. This agreement shall be in effect for a period of ten (10) years commencing from the first day on which service be rendered,without cancellation right except for those specified in the agreement. During the period of agreement, the subsidiaries have the right to charge service fee and other fees from the users as stipulated in the agreement. d) A subsidiary had entered into a joint venture agreement with a foreign government to set up a telecommunication system and provide related services in agreed area. Under the terms of the agreement, the subsidiary is committed to supply, install, control and maintenance all communication network. In addition, the subsidiary must transfer the ownership of such communication network to that foreign government at the expiry date of the agreement. (More)