DUSIT THANI PUBLIC COMPANY LIMITED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED AND THE COMPANYS FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 1. ASIA-PACIFIC ECONOMIC TURMOIL Thailand and many Asia-Pacific countries continue to experience economic difficulties since 1997. The accompanying consolidated and the Companys financial statements reflect managements current assessment of the possible impact of the economic conditions on the financial position of the Company and its subsidiaries. 2. COMPANY OPERATIONS Dusit Thani Public Co., Ltd. is a company registered in Thailand with its head office located at 946 Dusit Thani Office Building 7th floor, Rama IV Road, Silom, Bangrak, Bangkok. The Companys main business is hotel and hotel management. As at December 31, 1999, the number of employees and personnel expenses of the Company and subsidiaries are as follows: CONSOLIDATED THE COMPANY ONLY Number of employees persons 3,494 1,910 Personnel expenses Baht 543,236,927 283,456,588 3. BASIS FOR PREPARATION OF THE CONSOLIDATED AND THE COMPANYS FINANCIAL STATEMENTS 3.1 The accompanying consolidated and the Companys financial statements 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 for accounting periods starting on January 1, 1997. The Company 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 comform with generally accepted accounting principles in other countries. In the financial statements for the year ended December 31, 1998, investments in and loan to related parties, other current liabilities, cost of sales and selling and administrative expenses have been reclassified to conform to the classifications used in the financial statements for the year ended December 31, 1999. .../2 - 2 - 3.2 The consolidated financial statements include account balances of the subsidiaries as follows: % of shareholding 1999 1998 Dusit Hotels and Resorts Company Limited (formerly Dusit Resort Cha-am Company Limited) 97.32 93.56 Royal Princess Public Company Limited 79.65 79.65 Korat Thani Corporation Limited by Royal Princess Public Company Limited 68.00 68.00 Supsinthanee Company Limited by Royal Princess Public Company Limited 77.46** 60.00 Philippine Hoteliers, Inc. 85.76 85.76 Dusit Thani Delaware, Inc. 100.00 100.00* Dusit Thani International Company Limited 99.99 99.99 * Not subject to an audit ** Including preferred shares which have the same rights as the ordinary shares to receive dividends and vote in shareholders meetings. For the year ended December 31, 1999, the consolidated financial statements include the account balances of an additional subsidiary, Dusit Thani International Company Limited. Accordingly, the consolidated financial statements for the year ended December 31, 1998, have been adjusted retroactively to include the account balances of such subsidiary. All material inter-company transactions and balances have been eliminated. The financial statements of Korat Thani Corporation Limited have been audited by another auditor of the same firm whose report thereon disclaimed an opinion due to the uncertainty of the companys ability to continue as a going concern. As at December 31, 1999, this company had total assets of Baht 218,084,141, liabilities of Baht 527,579,030, capital deficiency of Baht 309,494,889, and net loss of Baht 89,962,276. In December 1999, the lender began legal proceedings against this company for repayment of debts. These matters raise substantial doubt about its ability to continue as a going concern. The financial statements of Supsinthanee Company Limited have also been audited by another auditor of the same firm whose report thereon expressed an unqualified opinion with an explanatory paragraph regarding the ability of the company to continue as a going concern. Management already has plans to resolve this problem. During the year 1999, this subsidiary had increased its share capital by issuing preferred shares and is currently in the process of negotiating with the creditor for debt restructuring. As at December 31, 1999, this company had total assets of Baht 280,417,880, liabilities of Baht 312,326,658, capital deficiency of Baht 31,908,778, and net loss of Baht 43,707,434. In addition, the subsidiary will revise its marketing plans in order to try to increase operation cash flows. However, the matters noted above raise substantial doubt about the companys ability to continue as a going concern. .../3 - 3 - If the two subsidiaries are unable to continue as a going concern, they may be required to realize their assets and extinguish their liabilities other than in the normal course of business and at amounts different from those stated in the financial statements. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or to the amounts and classification of liabilities that might be necessary should these two subsidiaries not continue as a going concern. 3.3 The consolidated financial statements for the year ended December 31, 1998 include the financial statements of Dusit Thani Delaware, Inc. which have not been audited. Total assets and revenues of this subsidiary constituted 2.57% and 2.78%, respectively, of the related consolidated totals. In addition, the consolidated and the Companys financial statements for the year ended December 31, 1998 included equity in undistributed net income (loss) of the following subsidiary and associated companies which have not been audited and can be stated as a percentage of net income or loss as follows: % of Consolidated The Company Only Shareholder % of % of net income net income Subsidiary Dusit Thani Delaware, Inc. 100.00 - 48.67 - 48.67 Associated Companies Dusit Sindhorn Limited 49.99 (43.48) (43.48) DPMN Industries Company Limited (directly and indirectly) 44.91 (1.78) (2.95) Worldclass Rent a Car Company Limited 20.00 0.22 0.22 (45.04) (46.21) Total (45.04) 2.46 For the financial statements which have not been audited, subsequently, the company received the audited financial statements and found that they have no material impact on its financial position. 4. SIGNIFICANT ACCOUNTING POLICIES 4.1 Cash and cash equivalents Cash and cash equivalents consist of cash in hand and at banks and short-term investments which represent deposits with financial institutions with original maturities of 3 months or less. In the statement of cash flows, cash and short-term investments used as collateral are not included in cash and cash equivalents but are presented as part of the other current assets. .../4 - 4 - 4.2 Allowance for doubtful accounts The determination of the allowance for doubtful accounts is based on the collection experience of the company and subsidiaries in the prior year together with a review of the financial position of the debtors. 4.3 Inventories Hotel business; inventories are valued at cost, on a moving weighted average basis. For Dusit Hotels and Resorts Company Limited (formerly Dusit Resort Cha-am Company Limited), Supsinthanee Company Limited and Philippine Hoteliers, Inc., inventories are valued at cost, on a first-in, first-out basis. Condominium and commercial building business; inventories consisting of land, buildings, furniture and equipment, are stated at the lower of cost or net realizable value. Cost is determined on a specific identification basis. 4.4 Investments Investments in securities As at December 31, 1999, investment in securities are accounted for according to Thai 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: Available for sale securities are carried at fair value. Gains or losses on the change in fair value are presented as an item in shareholders equity. Securities for general investment are stated at cost. Investments in subsidiary and associated companies are presented by the equity method. Investment in Dusit Thani College is 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 marketable securities are accounted for in accordance with Thai Accounting Standard No.12 Accounting for marketable securities and No.17 Accounting for investments. Such investments are stated at the lower of aggregate cost or aggregate market value. The resultant loss is recognized in the statement of income for short-term investment. In case of long-term investments, the resultant loss is 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 is deemed to have occurred. .../5 - 5 - An accounting for the equity in net loss of subsidiaries in excess of the Companys investments in those subsidiaries Since January 1, 1999, the Company has recorded all of its share of loss of subsidiary plus the minority shareholders share of loss to the extent that they do not exceed the subsidiaries debt guaranteed by the Company. Previously, the Company recorded equity in net loss of subsidiaries to the extent of the investment and the subsidiaries debt which is guaranteed by the Company according to the percentage of shareholding. The change has been presented on a retroactive basis. As a result, basic earnings per share for 1998 decreased by Baht 0.90 from the previously reported amount. 4.5 Property, premises and equipment Property is stated at cost. Premises and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed by the straight-line method. Estimated useful lives of the assets are as follows: Premises and premises on leased land 20 - 33 years Interior renovation and redecoration 5 - 10 years Furniture and equipment 5 - 15 years Vehicles 5 - 10 years Leasehold 15 - 30 years Depreciation of chinaware, glassware, silverware and linen is determined on the basis of physical inventory and revaluation at the end of the year. In case an impairment of assets has occurred, the resultant loss is recognized in the statement of income. Premises and equipment of Philippine Hoteliers, Inc. which have been acquired before October 23, 1980 were stated at the appraised value as at November 20, 1980 of the independent appraisers. Those acquired subsequently were stated at cost. Depreciation of appraisal increase is charged to operations. Depreciation of the assets of Philippine Hoteliers, Inc. is computed by the straight-line method on the estimated useful lives of the assets ranging from 5 to 50 years. The costs of originally acquired chinaware, glassware, silverware, linen and uniform are capitalized and amortized over a period of 10 years. Subsequent purchases are charged to operations. /6 - 6 - 4.6 Other assets Other assets are amortized as follows: Goodwill on the acquisition of hotel business from subsidiary 10 years Impairment of other assets is assessed annually and any resultant loss is recognized in the statement of income. 4.7 Translation of foreign currency transactions 4.7.1 Assets and liabilities denominated in foreign currencies are translated into Baht at the rates of exchange prevailing at the transaction dates. All balances of assets, and liabilities in foreign currencies and forward exchange contracts at the end of the year are converted at the reference exchange rates established by the Bank of Thailand at the end of the year. All foreign exchange gains or losses on exchange are recognized in the statement of income. 4.7.2 Balance sheet and statement of income of foreign subsidiaries are translated into Baht at the exchange rates prevailing at the balance sheet date and the average exchange rates. The exchange differences on the translation is in the shareholders equity. 4.7.3 The Company uses forward contracts in asset and liability management activities to control exposure to fluctuations in foreign exchange rates. Premium or discount on forward contracts are deferred and amortized over the lives of the related contracts and shown as an income or an expense in the statement of income. 4.8 Recognition of revenues from sales of condominium units and commercial building Sales of condominium units and commercial building are recognized as revenue upon the transfer of title to the property. 4.9 Income tax Income tax expense is based on the tax paid and accrued for the period. For Philippine Hoteliers, Inc., deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial reporting bases of assets and liabilities and their related tax bases. Deferred tax assets and liabilities are measured using the tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. .../7 - 7 - 4.10 Basic earnings per share Basic earnings per share is computed on the basis of number of outstanding ordinary shares at the balance sheet date. In case of a capital increase, the number of shares are weighted according to time of registration of issued and paid-up share capital. 4.11 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. Actual results may differ from those estimates. 5. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION 5.1 Cash and cash equivalents CONSOLIDATED THE COMPANY ONLY 1999 1998 1999 1998 Cash in hand and at banks 196,217,827 348,640,498 73,586,002 96,356,576 Short-term investments 458,067,317 385,795,097 420,191,686 346,948,390 Less Deposits with maturity of more than 3 months and cash at banks used as collateral (3,557,317) (3,441,238) (2,691,686) (2,544,440) Baht 650,727,827 730,994,357 491,086,002 440,760,526 5.2 Cash paid for interest and income tax are as follows: CONSOLIDATED THE COMPANY ONLY 1999 1998 1999 1998 Baht Baht Baht Baht Interest 27,500,704 193,520,565 8,870,273 72,302,946 Income tax 18,574,337 44,430,877 - - 5.3 For the years ended December 31, 1999 and 1998, non cash transactions in the financial statements are as follows : 5.3.1 The recording of unrealized loss on translation of the subsidiarys financial statements into Baht which was presented as a deduction in the shareholders equity in the consolidated and the Companys financial statements. .../8 - 8 - 5.3.2 The recording of investments available for sale at fair value and recognizing unrealized gains on such investments in the consolidated and the Companys financial statements which were included in shareholders equity. 5.3.3 In the Companys financial statements for the year ended December 31, 1999 and 1998, the recognition of undistributed net loss of subsidiary in excess of the Companys investments and minority interest in the amounts of Baht 140,323,239 and Baht 168,453,667, respectively, as the Company will continue to provide financial support to the subsidiary. 5.3.4 During the year 1998, the hotel business of one subsidiary, Dusit Hotels and Resorts Company Limited (formerly Dusit Resort Cha-am Company Limited )has been transferred to the Company. According to the agreement, total assets in the amount of Baht 60,332,673, leasehold of Baht 160,000,000, goodwill of Baht 410,000,000 and liabilities totalling Baht 484,084,387 were transferred to the Company. The difference between assets and liabilities was recorded as repayment of loan to subsidiary in the amount of Baht 100,600,000 and payable to such subsidiary in the amount of Baht 45,648,286. 6. SHORT-TERM INVESTMENTS As at December 31, 1999 and 1998, short-term investments in the consolidated financial statements include fixed deposits of Baht 3,557,317 and Baht 3,441,238, respectively, which are used as collateral for bank guarantees and employees loans from bank. As at December 31, 1999 and 1998, short-term investments in the Companys financial statements include fixed deposit of Baht 2,691,686 and Baht 2,544,440, respectively, which are used as collateral for bank guarantees and employees loans from bank. 7. TRADE ACCOUNTS RECEIVABLE Trade accounts receivable are classified by aging as follows: CONSOLIDATED THE COMPANY ONLY 1999 1998 1999 1998 Number of accounts receivable - past due 1,032 1,042 606 616 Amount past due Less than 3 months 142,907,550 154,109,549 91,212,930 105,255,661 3-4 months 2,637,450 4,041,784 1,027,952 2,068,379 Over 4 months 17,170,137 20,192,427 9,457,861 12,971,844 Total Baht 162,715,137 178,343,760 101,698,743 120,295,884 Allowance for doubtful accounts Baht (20,610,401) (25,418,591) (12,202,268) (16,177,246) .../9 - 9 - 8. INVENTORIES Inventories consist of the following: Amount past due Less than 3 months 142,907,550 154,109,549 91,212,930 105,255,661 3-4 months 2,637,450 4,041,784 1,027,952 2,068,379 Over 4 months 17,170,137 20,192,427 9,457,861 12,971,844 Total Baht 162,715,137 178,343,760 101,698,743 120,295,884 Allowance for doubtful accounts Baht (20,610,401) (25,418,591) (12,202,268) (16,177,246) CONSOLIDATED THE COMPANY ONLY 1999 1998 1999 1998 Hotel business Food and beverage 33,908,119 28,767,704 16,922,939 13,497,438 Chinaware, glassware, silverware and linen 9,054,823 10,104,894 8,205,647 8,871,284 Mechanical supplies 3,172,352 3,759,970 2,914,318 3,110,827 Other supplies 19,755,103 18,585,188 10,591,729 10,087,355 65,890,397 61,217,756 38,634,633 35,566,904 Condominium business Land 1,398,545 1,539,063 - - Condominium units 51,911,774 57,013,125 - - Furniture and equipment 15,583,732 17,114,049 - - 68,894,051 75,666,237 - - Less Allowance for diminution in value of condominium units (5,980,301) - - - 62,913,750 75,666,237 - - Commercial building business Land 5,440,000 5,440,000 - - Buildings 51,220,971 51,220,971 - - Equipment 2,196,040 2,196,040 - - 58,857,011 58,857,011 - - Less Allowance for diminution in value of commercial buildings (4,617,010) - - - 54,240,001 58,857,011 - - Baht 183,044,148 195,741,004 38,634,633 35,566,904 As at December 31,1999 and 1998, interest of Baht 6,062,535 and Baht 6,669,935, respectively, on a loan to finance construction was included in condominium units. As at December 31, 1999 and 1998, commercial building is mortgaged as security for a loan from a financial institution of a subsidiary (see Note 12). As at December 31, 1998, condominium units are mortgaged as security for long-term liabilities of the Company (see Note 14). .../10 - 10 - 9. INVESTMENTS AND LOANS Investments and loans consist of the following : 9.1 Related parties CONSOLIDATED THE COMPANY ONLY 1999 1998 1999 1998 Related parties Investments in subsidiary and associated companies (Note 20) 218,966,659 218,847,847 936,012,257 1,161,924,168 Total Baht 218,966,659 218,847,847 936,012,257 1,161,924,168 9.2 As at December 31, 1999, other investments consist of the following : CONSOLIDATED THE COMPANY ONLY Available for sale Equity securities 52,940,707 7,865,607 General investments Equity securities 60,470,450 21,000,000 Less Allowance for diminution in value of securities (51,920,850) (21,000,000) 8,549,600 - Total Baht 61,490,307 7,865,607 The aforementioned investments are classified according to the Accounting Standard No. 40 Accounting for Investment in Debt Security and Equity Security. .../11 - 11 - 10. PROPERTY, PREMISES AND EQUIPMENT - NET Property, premises and equipment consist of the following: Consolidated Balance as at Additions Disposals Amortization Transfers Exchange Balance as at December 31, gain (loss) December 31, 1998 on translation 1999 Land 253,668,244 - - - - - 253,668,244 Land improvement 33,111,084 - - - (137,353) (8,746) 32,964,985 Buildings 1,302,107,479 456,224 843,253 (68,003,662) - 1,233,716,788 Buildings on lease land 1,017,159,355 7,623,086 - - - (3,879,171) 1,020,903,270 Buildings-appraisal increase 121,304,965 - - - - (568,506) 120,736,459 Sub-total 2,440,571,799 8,079,310 843,253 - (68,003,662) (4,447,677) 2,375,356,517 Furniture and equipment 1,606,914,617 27,977,338 19,962,844 - 18,836,944 (773,831) 1,632,992,224 Furniture and equipment-appraisal increase 4,764,360 - - - - (22,329) 4,742,031 Sub-total 1,611,678,977 27,977,338 19,962,844 18,836,944 (796,160) 1,637,734,255 Interior and renovation 34,919,912 37,982,126 1,201,118 24,912,094 112,352,422 - 159,141,248 Work in process 30,627,121 37,002,539 524,842 - (33,697,115) - 33,407,703 (more)