HAAD THIP PUBLIC COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 1. SIGNIFICANT ACCOUNTING POLICIES Allowance for Doubtful Accounts The Company provides allowance for doubtful accounts equal to the estimated losses that may be incurred in the collection of receivables. The estimated losses are based on a review of the current status of the existing receivables. Inventories Inventories are valued at the lower of cost (first-in, first-out method) or net realizable value. Investments Investments in listed securities are valued at the lower of aggregate cost or market.Investments in other securities are valued at cost, net of allowance for decline in value of investments. Depreciation and Amortization The Company depreciates its property, plant and equipment acquired prior to 1990 and containers by the declining balance method over the period of five (5) to twenty (20) years and depreciates assets acquired since 1990 by the straight-line method over the estimated useful lives of the assets ranging from five (5) to twenty (20) years. The difference of depreciation between the straight-line method and declining balance method is not material. Promotion materials and deferred charges are amortized by the straight- line method over a period of five (5) years. Earnings per Share Earnings per share is determined by dividing the net income by the weighted average number of paid-up shares outstanding during the years. - 2 - 2. ACCOUNTS AND NOTES RECEIVABLE - Trade Long-outstanding balances of the accounts and notes receivable as at December 31, 1998 were as follows: Amount (In Million Baht) Over 3 months to 6 months 2.9 Over 6 months to 12 months 1.4 Over 12 months 2.4 Total 6.7 As at December 31, 1998, the Company provided allowance for doubtful accounts equal to the estimated losses that may be incurred in the collection of receivables (which are based on a review of the current status of the existing receivables) amounting to approximately Baht 1.1 million. 3. INVENTORIES In Baht 1998 1997 Finished goods 28,495,073 38,744,520 Less allowance for obsolescence ( 436,667) - Finished goods - net 28,058,406 38,744,520 Raw materials and packing materials 8,986,164 7,638,136 Spare parts and factory supplies 8,636,362 8,985,224 Promotion supplies 5,630,790 4,794,770 Net 51,311,722 60,162,650 4. INVESTMENT IN SHARES In Baht 1998 1997 Listed securities 40,000 40,000 Less allowance for decline in value ( 37,440) ( 37,440) Net 2,560 2,560 Other securities 4,640,000 4,990,000 Less allowance for decline in value ( 1,402,647) (1,142,137) Net 3,237,353 3,847,863 Investment - Net 3,239,913 3,850,423 - 3 - 5. PROPERTY, PLANT AND EQUIPMENT - At Cost In Baht 1998 1997 Land 207,892,453 204,027,453 Land improvements 2,082,495 1,891,530 Buildings 173,512,551 173,443,180 Leasehold improvements 503,182 503,182 Machinery and equipment 201,314,688 200,888,602 Furniture and office equipment 122,140,856 112,317,376 Vehicles 240,154,621 227,200,905 Containers - net 89,077,793 94,053,761 Construction in progress 26,655,465 17,917,301 Total 1,063,334,104 1,032,243,290 Less accumulated depreciation ( 418,669,484) ( 363,567,355) Property, Plant and Equipment-Net 644,664,620 668,675,935 Depreciation charges included in costs and expenses for the years amounted to approximately Baht 80.4 million and Baht 78.8 million in 1998 and 1997, respectively. A portion of the Company's land, buildings, machinery and equipment were mortgaged/pledged as collateral for overdraft line, letters of guarantee and long - term loan as discussed in Notes 6, 7 and 10. 6. BANK OVERDRAFT AND LOANS FROM FINANCIAL INSTITUTIONS In Baht 1998 1997 Bank overdraft 10,456,953 7,264,283 Short-term loans from banks 50,000,000 80,000,000 Total 60,456,953 87,264,283 As at December 31, 1998 and 1997, the Company had an overdraft line with a local bank amounted to Baht 30 million which bears interest at rates ranging from 12.75% to 16.25% per annum in 1998 and from 13.5% to 16.0% per annum in 1997. This is collateralized by the mortgage/ pledge of a portion of the Company's land, buildings, machinery and equipment as discussed in Note 5. - 4 - As at December 31, 1998 and 1997, the Company had short-term loans from two local branches of foreign banks totalling Baht 50 million and Baht 80 million, respectively, which bear interest at rates ranging from 8.25% to 9.70% per annum in 1998 and from 10.5% to 18.5% per annum in 1997. 7. LONG-TERM LOAN In Baht 1998 1997 Long-term loan 7,997,337 7,997,337 Less portion due within one year 799,728 - Long-term loan-net 7,197,609 7,997,337 In 1997, the Company entered into a long-term loan agreement with a local bank amounting to Baht 7,997,337 which bears interest at rates ranging from 4% to 6% per annum. This loan shall be repayable monthly commencing from July 1999, and is collateralized by a portion of the Company's land as discussed in Note 5. 8. RETAINED EARNINGS APPROPRIATION At the ordinary meeting held on April 30, 1997, the shareholders approved to pay dividends out of earnings for the year 1996 at Baht 1 per share for 16,601,500 shares. The Company paid the dividends on May 15, 1997, and was approved the appropriation of legal reserve at 5% of 1996 net income amounting to Baht 849,668. In addition, as at December 31, 1997, the management proposed the appropriation of legal reserve at 5% of 1997 net income amounting to Baht 2,942,000, which was subsequently approved by the shareholders at the meeting on April 30, 1998. At the Board of Directors meeting held on December 12, 1997, the Board of Directors approved to pay interim dividends out of earnings during January 1, 1997 to June 30, 1997 at Baht 1 per share for 16,601,500 shares. The Company subsequently paid the dividends on January 9, 1998. At the Board of Directors meeting held on March 26, 1998, the Board of Directors approved to pay dividends out of earnings during July 1, 1997 to December 31, 1997 totalling approximately Baht 24.9 million ( Baht 1.50 per share for 16,601,500 shares ) and approved the appropriation of general reserve amounting to Baht 3,000,000. Payment of dividends (including the interim dividends at Baht 1 per share for 16,601,500 shares approved by the Board of Directors during 1997) and the appropriation of general reserve were approved by the shareholders at the ordinary meeting held on April 30, 1998. - 5 - At the Board of Directors meeting held on September 2, 1998, the Board of Directors approved to pay interim dividends out of earnings during January 1, 1998 to June 30, 1998 totalling approximately Baht 24.9 million (Baht 1.50 per share for 16,601,500 shares). In addition, management has proposed the appropriation of reserve fund at 5% of 1998 net income amounting to Baht 3,177,628. Under the provisions of the Limited Public Company Act B.E. 2535, the Company is required to appropriate at least 5% of its annual net income after deduction of the deficit brought forward (if any) as reserve fund until the reserve reaches 10% of authorized share capital. The reserve fund is not available for dividend distributions. 9. AGREEMENTS As at December 31, 1998, the Company had: a. Agreement with a contractor for the construction of the Company's warehouse with total contract value of Baht 6.2 million. The Company had recorded fee for said agreement totalling approximately Baht 2.5 million as part of property, plant and equipment in the Balance Sheet. b. Long-term land lease agreement for a period of 30 years which can be extended for another period of 30 years. The Company is committed to pay the rental at Baht 60,000 per annum. c. Long-term lease agreements with three lessors covering vehicles and a long-term lease agreement covering computers for a period of 36 months ending on various dates up to August 2001. The Company has to pay the rental totalling approximately Baht 7.8 million per annum. d. Lease agreements for posting advertising billboards, for which the Company is committed to pay the rental of approximately Baht 0.6 million per annum. 10. CONTINGENT LIABILITIES As at December 31, 1998, the Company : a. Was contingently liable for letters of guarantee issued by a local bank in favour of certain Government agencies and state enterprises totalling approximately Baht 29.0 million.These letters of guarantee are collateralized by the mortgage/pledge of a portion of the Company's land, buildings, machinery and equipment as discussed in Note 5. - 6 - b. Was being audited by the Revenue Department for 1996 books of accounts since the Company asked for a refund of the corporate income tax of such year. The ultimate outcome of the audit can not presently be determined. However, the management believes that the effects are not material to the Company. Accordingly, no provision has been set up in the accounts. 11. RECLASSIFICATION OF ACCOUNTS Certain accounts in the 1997 financial statements have been reclassified to conform with the 1998 financial statement presentation. 12. COMPUTER REMEDY PLAN FOR YEAR 2000 COMPLIANCE ("UNAUDITED") The Company has started to solve the Year 2000 computer system issue since May 1998. As at December 31, 1998, the Company has completed the remediation and was in the process of testing the computer system which can be implemented from the year 1999. The anticipated cost for said plans is not material. The Company's remedy project can be completed, but the Company still faces risks that other companies with whom the Company does business may be unsuccessful in their computer remedy projects within the time limit. However, the Company expects that the impact, if any, will not be significant to the Company's operations in the future. 13. BASIS OF FINANCIAL STATEMENT PRESENTATION The Company maintains its official accounting records in Thai Baht and prepares its statutory financial statements in the Thai language in conformity with financial accounting standards in Thailand. Certain accounting principles applied by the Company that conform with financial accounting standards and accounting principles in Thailand may not conform with generally accepted accounting principles in other countries. Accordingly, these financial statements are not designed for those who are not informed about Thailand accounting principles and practices. For the convenience of the reader, the accompanying financial statements have been translated into English from the statutory Thai language financial statements which are issued for domestic reporting purposes.