1998 FINANCIAL STATEMENT (2)

DUSIT THANI PUBLIC COMPANY LIMITED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED AND EQUITY METHOD FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 1. ECONOMIC TURMOIL IN THE ASIA-PACIFIC REGION Many Asia-Pacific countries, including Thailand, are experiencing severe economic difficulties relating to currency devaluations, volatile stock markets, and slowdown in growth. The countrys unstable economy has to a certain extent affected, and may continue to affect, the operations of the Company, recoverability of the Companys assets and the ability of the Company to maintain or payits debts as they mature. 2. BASIS FOR PREPARATION OF THE CONSOLIDATED AND EQUITY METHOD FINANCIAL STATEMENTS 2.1 The consolidated and equity method 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 consolidated and equity method financial statements for the year ended December 31, 1997 have been reclassified to conform to the classifications used in the financial statements for the year ended December 31, 1998. 2.2 The consolidated financial statements include the account balances of the Company and subsidiary companies as follows: % of shareholding 1998 1997 Dusit Resort Cha-am Company Limited 93.56 90.36 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 60.00 60.00 Philippine Hoteliers, Inc. 85.76 85.76 Dusit Thani Delaware, Inc. 100.00 100.00 In 1998, 719,604 additional shares of Dusit Resort Cha-am Company Limited were acquired at Baht 15 per share. As a result, the percentage of shareholding in this subsidiary increased from 90.36% to 93.56%. Also in the same year, the hotel business, assets and liabilities of this subsidiary were transferred to the Company as disclosed in Note 5.2.2 and has entered into a land and building lease agreement with this subsidiary as disclosed in Note 20. /2 - 2 - 2.3 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 shown as an item in the shareholders equity. 3. SIGNIFICANT ACCOUNTING POLICIES 3.1 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. 3.2 Allowance for doubtful accounts The determination of the allowance for doubtful accounts is based on the Companys and subsidiaries collection experience in the prior year together with a review of the financial position of the debtors. 3.3 Inventories Hotel business; inventories are valued at cost, on a moving weighted average basis. For 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 market value. Cost is determined on a specific identification basis. 3.4 Investments in securities 3.4.1 Investments in listed securities are stated at the lower of cost or market value. In the consolidated financial statements, the Company records all of its share of loss of subsidiaries plus the minority shareholders share of loss to the extent that they exceed the minority shareholders equity. In the equity method financial statements, the Company records share of loss of subsidiaries to the extent of the investment in and loans to subsidiaries and also their debts which are guaranteed by the Company. /3 - 3 - 3.4.2 Investments in subsidiary and associated companies are presented by the equity method. 3.4.3 Investments in other companies are stated at the lower of cost or net asset value. Investment in Dusit Thani College is stated at cost. 3.5 Property, premises and equipment Property, premises and equipment are stated at cost. Depreciation is computed by the straight-line method. Estimated useful lives of the assets are as follows: 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. 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. 3.6 Other assets Other assets are amortized as follows: Organization expenses of subsidiaries and hotel development expenses 3 - 5 years Goodwill on the acquisition of hotel business from subsidiary 10 years Condominium development expenses are amortized in proportion to revenue when recognized. /4 - 4 - 3.7 Translation of foreign currencies transactions 3.7.1 Assets and liabilities denominated in foreign currencies are translated into Baht at rates of exchange prevailing at the transaction dates. All balances of assets, 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 recogized in the statement of income. Loss on exchange in connection with assets and liabilities denominated in foreign currencies which has occurred from July 2, 1997 to December 31, 1997 is shown as an extraordinary item in the statement of income. 3.7.2 The Company and subsidiaries use forward contracts in asset and liability management activities to control exposure to fluctuations in foreign exchange rates. Fees on instruments used for asset and liability management are deferred and amortized over the life of the related contracts and shown as an expense in the statement of income. 3.8 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. 3.9 Income tax Income tax is based on taxable profit for the year of the Company and each subsidiary. 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. 3.10 Net income (loss) per share Net income (loss) 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 capital. /5 - 5 - 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. Actual results may differ from those estimates. 4. A CHANGE IN ACCOUNTING POLICY From January 1, 1998, pursuant to guidelines given by The Stock Exchange of Thailand, the Company has changed its method in the consolidated statements of accounting for the equity in net loss of subsidiaries which are in excess of Companys investments in such subsidiaries. The Company records all of its share of loss of subsidiary plus the minority shareholders share of loss to the extent that they exceed the minority shareholders equity. Previously, the Company recorded equity in net loss in subsidiary companies to the extent of the investment in such subsidiaries. The change in accounting has been presented on a retroactive basis and, accordingly, net loss for the year ended December 31, 1997 has been increased by Baht 163,057,595 from the amounts previously reported. In addition, deficit at January 1, 1998 has also been increased by the same amount to reflect the effects of this change. 5. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION 5.1 Cash paid for interest and income tax are as follows: CONSOLIDATED EQUITY METHOD 1998 1997 1998 1997 Baht Baht Baht Baht Interest 193,520,565 238,391,930 72,302,946 129,877,394 Income tax 44,430,877 39,369,808 - 17,678,226 5.2 For the year ended December 31, 1998 and 1997, non cash trans actions in the equity method financial statements are as follows: 5.2.1 The recording of unrealized loss in translation of the subsidiarys financial statements into Baht which was presented as a deduction in the shareholders equity. /6 - 6 - 5.2.2 During the year 1998, the hotel business of one subsidiary, namely 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, 1998 and 1997, short-term investments in the consolidated financial statements include fixed deposits of Baht 3,441,240 and Baht 2,795,999, which are used as collateral for bank guarantees and employees loans from bank. As at December 31, 1998 and 1997, short-term investments in the equity method financial statements include fixed deposit of Baht 2,544,440 and Baht 2,164,393, which are used as collateral for bank guarantees and employees loans from bank. 7. TRADE ACCOUNTS RECEIVABLE As at December 31, 1998, trade accounts receivable which are more than three months past due, are classified by aging as follows: CONSOLIDATED EQUITY METHOD Number of accounts receivable - past due 307 88 Amount past due 3 - 4 months 4,365,673 2,068,379 Over 4 months 23,555,217 12,971,844 Total Baht 27,920,890 15,040,223 Allowance for doubtful accounts Baht (25,418,591) (16,177,246) /7 - 7 - 8. INVENTORIES Inventories consist of the following: CONSOLIDATED EQUITY METHOD 1998 1997 1998 1997 Hotel business Food and beverage 28,767,704 35,159,237 13,497,438 10,230,438 Chinaware, glassware, silverware and linen 10,104,894 12,807,659 8,871,284 5,609,968 Mechanical supplies 3,759,970 3,896,663 3,110,827 2,889,346 Other supplies 18,585,188 21,688,282 10,087,355 7,155,999 Baht 61,217,756 73,551,841 35,566,904 25,885,751 Condominium business Land 1,539,063 1,715,293 - - Condominium units 50,343,190 55,863,269 - - Furniture and equipment 17,114,049 19,011,188 - - Baht 68,996,302 76,589,750 - - Commercial building business Land 5,440,000 5,440,000 - - Building 51,220,971 51,137,975 - - Equipment 2,196,040 2,196,040 - - Baht 58,857,011 58,774,015 - - Baht 189,071,069 208,915,606 35,566,904 25,885,751 As at December 31, 1998, condominium units are mortgaged as security for the long-term loans of the Company (see Note 13). As at December 31, 1998, commercial building are mortgaged as security for loan from financial institution of a subsidiary (see Note 12). As at December 31, 1997, condominium units and commercial building are mortgaged as security for the long-term loans of a subsidiary (see Note 13). 9. INVESTMENTS IN AND LOANS TO SUBSIDIARY, ASSOCIATED AND OTHER COMPANIES As at December 31, 1998 and 1997, investments in subsidiary, associated and other companies consist of listed securities and other securities. Cost and market value (being the closing prices at The Stock Exchange of Thailand at the close of the last business day of each period) of the securities are as follows: CONSOLIDATED EQUITY METHOD 1998 1997 1998 1997 Listed securities 5,314,150 5,314,150 5,314,150 5,314,150 (Market value : Baht 7,297,281 in 1998 and Baht 6,353,828 in 1997) Other securities 280,649,783 1,139,395,836 1,253,508,803 2,159,942,241 Less Allowance for diminution in value of securities (39,000,000) - (17,000,000) - 241,649,783 1,139,395,836 1,236,508,803 2,159,942,241 Total Investments Baht 246,963,933 1,144,709,986 1,241,822,953 2,165,256,391 /8 - 8 - 10. PROPERTY, PREMISES AND EQUIPMENT Property, premises and equipment consist of the following: CONSOLIDATED EQUITY METHOD 1998 1997 1998 1997 Land 286,779,327 287,134,223 29,885,675 29,761,040 Premises 1,301,589,496 1,300,455,286 52,811,391 52,881,226 Premises on leased land 1,015,774,378 1,204,665,870 188,056,184 188,056,184 Leasehold improvement 1,384,976 1,384,976 - - Premises under construction 29,082,410 25,786,428 29,082,410 14,024,259 Interior renovation and redecoration (net) 34,149,205 52,272,588 18,282,995 34,275,398 Furniture and equipment 1,606,946,757 1,761,974,299 889,976,382 849,568,915 Vehicles 36,370,623 43,390,859 16,054,321 12,473,551 Chinaware, glassware, silverware and linen 72,149,484 75,150,376 38,217,467 31,103,000 Leasehold (net) 170,700,495 186,973,278 317,571,907 174,967,382 4,554,927,151 4,939,188,183 1,579,938,732 1,387,110,955 Less Accumulated depreciation (1,999,641,026) (1,998,881,093) (892,581,982) (831,424,773) 2,555,286,125 2,940,307,090 687,356,750 555,686,182 Appraisal increase: Premises and premises equipment 121,304,966 152,120,575 - - Furniture and equipment 4,764,359 5,974,670 - - Less Accumulated depreciation (60,535,343) (72,951,881) - - 65,533,982 85,143,364 - - Baht 2,620,820,107 3,025,450,454 687,356,750 555,686,182 Depreciation and amortization for the year Baht 349,773,319 456,628,361 136,830,258 121,501,625 As at December 31, 1998 and 1997, land and premises having a book value of Baht 908,726,165 and Baht 727,137,627, are mortgaged as security for loan from financial institutions and long-term loans (see Notes 12 and 13). As at December 31, 1998, leasehold of the Company having a book value of Baht 158,000,000 and land and premises of subsidiaries having a book value of Baht 238,429,187 are mortgaged as security for the long-term loans of the Company(see Note 13). /9 - 9 - 11. OTHER ASSETS Other assets consist of the following: CONSOLIDATED EQUITY METHOD 1998 1997 1998 1997 Deferred expenses - 291,251 - - Development expenses 85,709,454 130,389,224 - - Goodwill on the acquisition of hotel business from subsidiary - - 399,750,000 - Others 7,910,813 15,009,770 - - Baht 93,620,267 145,690,245 399,750,000 - 12. BANK OVERDRAFTS AND LOANS FROM FINANCIAL INSTITUTIONS Bank overdrafts and loans from financial institutions consist of the following: CONSOLIDATED EQUITY METHOD 1998 1997 1998 1997 Bank overdrafts 32,974,476 37,561,182 11,814,654 17,725,804 Loans from financial institutions 355,222,500 475,560,000 - - Baht 388,196,976 513,121,182 11,814,654 17,725,804 As at December 31, 1998 and 1997, the Company and subsidiary companies have credit lines for bank overdrafts totalling Baht 123,000,000 and Baht 138,000,000, which are guaranteed by the chairperson and managing director of the Company. As at December 31, 1998 and 1997, the Company has credit lines for bank overdrafts totalling Baht 64,000,000 and Baht 76,000,000, which are guaranteed by the chairperson and managing director of the Company. As at December 31, 1998 and 1997, loans from financial institutions are secured by the mortgage of loan, premises and commercial building of two subsidiary companies and also guaranteed by Royal Princess Public Company Limited (see Notes 8 and 10). As at December 31, 1997, loans in foreign currency of subsidiaryconsist of the following: Interest rate US$ Exchange Baht % p.a. rate Loans from financial institutions SIBOR+2.50 9,000,000 47.556 428,004,000 LIBOR+2.50 1,000,000 47.556 47,556,000 10,000,000 475,560,000 (More)