DUSIT THANI PUBLIC COMPANY LIMITED AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 1. ASIA-PACIFIC ECONOMIC TURMOIL Thailand and many Asia-Pacific countries continue to experience economic difficulties since 1997. The accompanying consolidated and the Company's financial statements reflect management's 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 Company Limited 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 Company's main business is hotel and hotel management. The number of employees and personnel expenses of the Company and subsidiaries are as follows: CONSOLIDATED THE COMPANY ONLY 2000 1999 2000 1999 Number of employees persons 3,275 3,494 1,715 1,910 Personnel expenses Baht 533,508,345 543,236,927 261,492,814 283,456,588 3. BASIS FOR PREPARATION OF THE CONSOLIDATED AND THE COMPANY'S FINANCIAL STATEMENTS 3.1 The accompanying consolidated and the Company's 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 and practices generally accepted in Thailand. In the financial statements for the year ended December 31, 1999, other current assets, other payables, accounts payable-construction, accrued expenses, other current liabilities, selling and administrative expenses and interest expenses have been reclassified to conform to the classifications used in the financial statements for the year ended December 31, 2000. .../2 - 2 - 3.2 The consolidated financial statements include account balances of the subsidiaries as follows: % of shareholding 2000 1999 Dusit Hotels and Resorts Company Limited (formerly Dusit Resort Cha-am Company Limited) 97.44 97.32 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 99.99* 77.46* Philippine Hoteliers, Inc. 85.76 85.76 Dusit Thani Delaware, Inc. - 100.00 Dusit Thani International Company Limited 99.99 99.99 Devarana Spa Company Limited 99.99** - * Including preferred shares which have the same rights as the ordinary shares to receive dividends and vote in shareholders' meetings. ** The financial statements of Devarana Spa Company Limited have been audited by another auditor whose report thereon expressed an unqualified opinion. As at December 31, 2000, Dusit Hotels and Resorts Company Limited (formerly Dusit Resort Cha-am Company Limited) held 106,300 ordinary shares of the Company. The acquisition cost was Baht 2,643,111 which was presented as investments available for sale in the consolidated balance sheet. Such investment was not deducted from shareholders' equity as the amount was immaterial. On January 10, 2000, Royal Princess Public Company Limited had acquired 480,000 ordinary shares of Supsinthanee Company Limited from the existing shareholders at Baht 0.01 per share. As a result the percentage of shareholding of Royal Princess Public Company Limited in Supsinthanee Company Limited increased from 77.46% to 99.99%. 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. This disclaimer of opinion issued by the other auditor was due to the uncertainty of Korat Thani Corporation Limited to continue as a going concern as a result of the significant of liabilities and legal proceedings has been undertaken against it by one of its lenders since December 1999. Currently, the case is under the consideration of the Court. As at December 31, 2000, the Company had an indirect equity interest of 54.16% in Korat Thani Corporation Limited and this company had total assets of Baht 203,038,183 and total revenues of Baht 61,566,353, or 4.95% and 2.43% of the related consolidated totals. /3 - 3 - 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 has implemented plans to resolve this issue. During the year 1999, this subsidiary had increased its share capital by issuing preferred shares and in year 2000, entered into debt restructuring agreement with the creditor. In addition, the subsidiary will revise its marketing plans in order to increase operating cash flows. On April 26, 2000, the shareholders' meeting of Supsinthanee Company Limited passed a special resolution to decrease the capital of the company from Baht 213,000,000 to Baht 53,250,000 by a reduction of the par value from Baht 100 per share to Baht 25 per share. However, the number of outstanding shares remains the same which are 930,000 preferred shares and 1,200,000 ordinary shares, totalling 2,130,000 shares. The resolution was registered with the Registrar of Partnerships and Companies on September 21, 2000. The aforementioned decrease in capital does not affect financial position and operation of Royal Princess Public Company Limited since the company has recognized net loss of this subsidiary until its investment in ordinary shares and preferred shares has been reduced to zero. As at December 31, 2000, the Company had an indirect equity interest of 79.64% in Supsinthanee Company Limited. As at December 31, 2000, this company had total assets of Baht 258,632,726 and total revenues of Baht 60,265,602 (including gain on debts restructuring of Baht 37,950,139), or 6.31% and 2.38% of the related consolidated totals. Subsequently, on December 13, 2000, the Board of Directors' meeting of Royal Princess Public Company Limited passed a resolution to sell investment in Supsinthanee Company Limited consisting of 930,000 preferred shares and 1,199,997 ordinary shares to Dusit Thani International Company Limited which is a subsidiary of the Company in amount of Baht 0.01 per share. As of December 20, 2000, Royal Princess Public Company Limited has sold 500,000 preferred shares and the remaining will be sold within the year 2001. Since the investment in Supsinthanee Company Limited has a book value of zero, the sale of such investment resulted in a gain of Baht 5,000. Should 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. /4 - 4 - 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. 4.2 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 stated at the lower of cost or net realizable value. Cost is determined on a moving weighted average basis. For Supsinthanee Company Limited and Philippine Hoteliers, Inc., inventories are stated at cost or net realizable value. Cost is determined 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 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 shareholder's equity. Securities for general investment are stated at cost. /5 - 5 - 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. An accounting for the equity in net loss of subsidiaries in excess of the Company's 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 retained earnings brought forward in 1999 (See Note 17). 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 on leased land Per lease agreement Premises 20 33 years Interior and renovation of buildings on lease land 5 10 years Interior and renovation of buildings 5 10 years Furniture and equipment on lease land 5 15 years Furniture and equipment 5 15 years Vehicles 5 10 years Leasehold Per lease agreement 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. /6 - 6 - 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. 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 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, respectively. The exchange differences on the translation is in the shareholders' equity. 4.8 Recognition of revenues Sales of condominium units and commercial buildings are recognized as revenue upon the transfer of title to the property. Management income is recognized on accrual basis. /7 - 7 - 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. 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. SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION 5.1 Cash and cash equivalents CONSOLIDATED THE COMPANY ONLY 2000 1999 2000 1999 Cash in hand and at banks 240,155,073 196,217,827 84,007,035 73,586,002 Short-term investments 603,264,389 458,067,317 489,110,054 420,191,686 Less - Deposits with maturity of more than 3 months and cash at banks used as collateral (1,964,389) (3,557,317) (710,054) (2,691,686) - Short-term investments with maturity of more than 3 months (478,800,000) (277,800,000) (377,900,000) (245,500,000) Baht 362,655,073 372,927,827 194,507,035 245,586,002 /8 - 8 - 5.2 Cash paid for interest and income tax are as follows: CONSOLIDATED THE COMPANY ONLY 2000 1999 2000 1999 Baht Baht Baht Baht Interest 11,000,869 27,500,704 61,594 8,870,273 Income tax 141,475,418 19,029,334 95,216,569 - 5.3 Non cash transactions in the financial statements are as follows : 5.3.1 For the years ended December 31, 2000 and 1999, the recording of exchange differences on the translation of the subsidiary's financial statements into Baht which was presented as an addition (deduction) in the shareholders' equity amount of Baht (35,681,862) and Baht 688,052, respectively. 5.3.2 For the years ended December 31, 2000 and 1999, the recording of investments available for sale at fair value and recognizing unrealized gain (loss) on such investments in the consolidated and the Company's financial statements amount of Baht (14,547,277) and Baht 9,196,852, respectively, which were included in shareholders' equity. 5.3.3 In the Company's financial statements for the year ended December 31, 1999, the recognition of undistributed net loss of subsidiary in excess of the Company's investments and minority interest in the amounts of Baht 140,323,239, as the Company will continue to provide financial support to the subsidiary. 5.3.4 In the consolidated financial statements for the year ended December 31, 2000, the transferring of accrued interest payable of Baht 76,132,556, other payable of Baht 6,107,674 and loan from financial institution of Baht 240,712,500, totalling Baht 322,952,730 of Supsinthanee Company Limited to current portion of long-term liabilities of Baht 160,235,396 and long-term liabilities of Baht 162,717,334 in accordance with the conditions specified in debt restructuring agreement dated March 28, 2000. 5.3.5 In the consolidated financial statements for the year ended December 31, 2000, the reduction of accrued interest has been granted by creditor to one subsidiary in the amount of Baht 37,950,139, was presented as gain on debts restructuring (see Note 18). /9 - 9 - 5.3.6 In the Company's financial statements for the year ended December 31, 2000, the Company has transferred the hotel management service business to one subsidiary on January 1, 2000. According to the contract, the Company has transferred related assets totalling Baht 3,860,585 and liabilities of Baht 1,671,065 and the difference between assets and liabilities is recorded as cash received from sale of assets relating to the hotel management service business in the amount of Baht 2,189,520. 6. SHORT-TERM INVESTMENTS As at December 31, 2000 and 1999, short-term investments in the consolidated financial statements include fixed deposits of Baht 1,964,389 and Baht 3,557,317, respectively, which are used as collateral for bank guarantees and employees' loans from bank. As at December 31, 2000 and 1999, short-term investments in the Company's financial statements include fixed deposit of Baht 710,054 and Baht 2,691,686, 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 2000 1999 2000 1999 Number of accounts receivable - past due 1,010 1,032 528 606 CONSOLIDATED THE COMPANY ONLY 2000 1999 2000 1999 Amount past due Less than 3 months 147,995,063 142,907,550 92,850,143 91,212,930 3-4 months 2,633,911 2,637,450 1,762,346 1,027,952 Over 4 months 16,412,136 17,170,137 7,430,727 9,457,861 Total Baht 167,041,110 162,715,137 102,043,216 101,698,743 Allowance for doubtful accounts Baht (15,415,755) (20,610,401) (11,403,352) (12,202,268) /10 - 10 - 8. INVENTORIES Inventories consist of the following: CONSOLIDATED THE COMPANY ONLY 2000 1999 2000 1999 Hotel business Food and beverage 25,533,590 33,908,119 13,339,987 16,922,939 Chinaware, glassware, silverware and linen 7,759,747 9,054,823 6,638,742 8,205,647 Mechanical supplies 2,829,783 3,172,352 2,368,218 2,914,318 Other supplies 19,350,950 19,755,103 10,056,033 10,591,729 55,474,070 65,890,397 32,402,980 38,634,633 Condominium business Land 946,337 1,398,545 - - Condominium units 35,213,451 51,911,774 - - Furniture and equipment 10,605,362 15,583,732 - - 46,765,150 68,894,051 - - Less Allowance for diminution in value of condominium units (7,435,150) (5,980,301) - - 39,330,000 62,913,750 - - 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 (15,454,811) (4,617,010) - - 43,402,200 54,240,001 - - Baht 138,206,270 183,044,148 32,402,980 38,634,633 As at December 31, 2000 and 1999, interest of Baht 4,107,841 and Baht 6,062,535, respectively, on a loan to finance construction was included in condominium units. As at December 31, 2000 and 1999, commercial building is mortgaged as security for a loan from a financial institution of a subsidiary (see Note 12). /11 - 11 - 9. INVESTMENTS AND LOANS Investments and loans consist of the following : 9.1 Related parties (more)