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(UNAUDITED BUT REVIEWED) INTER FAR EAST ENGINEERING PUBLIC COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS 1. GENERAL INFORMATION Since the Company has had liquidity problems, suffered losses from its operations for over 3 consecutive years, and has a significant capital deficit, the Stock Exchange of Thailand ("SET") announced the security of the Company’s classification as a security which may be delisted from the SET, and ordered the Company to submit a rehabilitation plan in accordance with the SET rehabilitation criteria, to enable it to avoid delisting. 2. FUNDAMENTAL ACCOUNTING ASSUMPTION The Company has a significant capital deficit due to the operating losses it had suffered, and liquidity problems had resulted in the Company’s being unable to fulfill the conditions of various loan agreements and to repay indebtedness. At the request of a lender, on 14 May 2001, the Central Bankruptcy Court ordered the Company to undergo rehabilitation. The rehabilitation planner prepared a business rehabilitation plan and proposed it to a meeting of creditors, with a resolution accepting the plan passed by a majority vote on 28 February 2002. Subsequently, on 3 May 2002, the Central Bankruptcy Court ruled in favor of this rehabilitation plan. As discussed in Note 3 to the financial statements, the Company has implemented most of the conditions of the rehabilitation plan, such as increasing of share capital, reducing of share capital, conversion of debt to equity and repayment of principal and interest in accordance with the plan. However, in late 2003, the Company was unable to comply with certain conditions of the rehabilitation plan. The Company obtained a loan from a new lender and therefore repaid principal of Baht 377 million in March 2004, together with related interest, leaving principal of approximately Baht 20 million which the Company is to settle by the transfer of collateral in accordance with the plan. The Company will petition the Central Bankruptcy Court to cancel the Company’s rehabilitation after completing repayment of the indebtedness. The Company is confidence that it will be successful in implementing all of the above. These financial statements have therefore been prepared on the goingconcern basis, assuming that the realization of assets and settlement of liabilities and obligations will occur in the ordinary course of business of the Company. -1- (UNAUDITED BUT REVIEWED) 3. REHABILITATION PLAN AND DEBT RESTRUCTURING On 3 May 2002, the Central Bankruptcy Court ruled in favor of the Company’s rehabilitation plan, which is administrated by Inter Far East Planner Company Limited. The types of indebtedness can be summarised as follows :- 1. 2. 3. 4. 5. 6. 7. 8. 9. Group of creditors Secured creditors with debts amounting to not less than 15% of the total. Loans secured by land and construction of other parties. Loan and financial instrument creditors - financial institutions. Loan and financial instrument creditors - related companies. Hire purchase payables and trade accounts payable. Creditors rendering service to the Company with which the service contract was cancelled before the date on which the court issued the order approving the business rehabilitation. Creditors which issued a letter of guarantee to the Company for the hire/sale of photocopies or for utilities charges. Creditors which are beneficiaries of the Company’s guarantees. Uncollaterised portion of debt obligations to loan and financial instrument creditors. (Unit : Million Baht) Indebtedness per repayment claims Principal Interest Total 250 100 139 46 389 146 547 234 781 36 6 4 - 40 6 1 - 1 1 - 1 3 - 3 301 1,245 152 575 453 1,820 Since group 5 and group 7 creditors are necessary for the continuity of the business of the Company, they will not be affected by this rehabilitation plan. -2- (UNAUDITED BUT REVIEWED) The conditions of debt repayment under the rehabilitation plan are as follows :1. Reduction of existing debt obligations 1.1 All creditors will waive part of the indebtedness, comprising the interest, fees and expenses payable in relation to the Company’s outstanding debts, when the Company is in full compliance with the stipulations of the rehabilitation plan. 1.2 The group 4 creditors will waive 22% of the debt principal. 2. The rescheduling of debt repayment and change of interest rate The indebtedness will be apportioned and the periods for repayment will be extended to 1 year to 10 years from the debt restructuring date (2 June 2002). Interest is to be charged at rates of 0.01 percent per annum and the average MLR per annum. 3. The conversion of debt to equity Principal of approximately Baht 355 million was to be converted to 35,488,904 ordinary shares at par value of Baht 10 each, within 60 days from the debt restructuring date. The creditors are to transfer part of the shares back to the Company’s management without compensation after the Company has fulfilled the conditions stipulated in the rehabilitation plan. Under the rehabilitation plan, the planner has 5 years to implement the plan from the date on which the court approved it. -3- Under the rehabilitation plan, the indebtedness has been apportioned and the periods for repayment have been extended as per the following conditions :Outstanding balance As at 30 June 2004 As at 31 December 2003 Accrued Accrued Principal interest Total Principal interest Total 1. Tranche A - - - - - - 350 377,504 97,624 475,128 20,000 20,000 1 20,001 2. Tranche B 350 - 3. Tranche D 20,000 Total Less : Current portion of long-term liabilities Long-term liabilities net of current portion 20,350 - 20,350 397,504 97,625 495,129 (20,350) - (20,350) (397,504) (97,625) (495,129) - - - - - - - -4- (Unit : Thousand Baht) Repayment condition - Repayment within 1 year from the debt restructuring date, using cash flows from the operations and/or sales of other investments. - Interest charged at a rate of 0.01 percent per annum, payable on a monthly basis. - Repayment of principal of approximately Baht 486 million in quarterly installments within 10 years from the debt restructuring date. Interest charged at the average MLR, payable on a monthly basis. Debts can be sold to the Company at a discount but total must not exceed Baht 50 million, within 1 year from the debt restructuring date. - Repayment of Baht 0.6 million in principal within 5 years from the debt restructuring date in monthly installments, with no interest. - Repayment of principal within 2 years from the debt restructuring date (extendable by 1 year) with collateral being sold or transferred to make debt repayment (Note 4). - Interest charged at a rate of 0.01 percent per annum, payable on a monthly basis. (UNAUDITED BUT REVIEWED) Approximately Baht 355 million of Tranche C debt was converted to share capital of approximately Baht 354 million on 21 November 2002. As at 31 December 2002, the remaining indebtedness of approximately Baht 0.9 million was presented as debt awaiting conversion to equity in shareholders’ equity. In May 2003, a creditor forgave indebtedness of Baht 2.1 million (consisting of Tranche B debt of Baht 1.2 million and debt awaiting conversion to equity of Baht 0.9 million as discussed in the preceding paragraph) to the Company. In addition, in June 2003, a creditor sold Tranche B debt totaling Baht 0.5 million to the Company with a discount of approximately Baht 0.4 million and the Company’s future interest obligations also reduced by Baht 0.3 million. The Company recorded the totaled Baht 2.8 million of such reduction in indebtedness as a gain from debt restructuring, presenting it as an extraordinary item in the earnings statement for the period ended 30 June 2003. In late 2003, the Company was unable to comply with certain conditions of the rehabilitation plan. As at 31 December 2003, the Company therefore classified “Long-term liabilities”, which represents the outstanding balance of the indebtedness after restructuring, as a current liability in the balance sheet. In March 2004, the Company repaid Baht 377.1 million principal of Tranche B debt outstanding, together with related interest, prior to the scheduled date per the rehabilitation plan (the rehabilitation plan permits this). The remaining principal consists of Baht 20.0 million of Tranche D debt, which the rehabilitation plan stipulates is to be settled through the sale or transfer of collateral (Note 4). On 9 July 2004, the lender approved to receive the transfer of the collateral to settle debt. The repayment of Baht 377 million principal of Tranche B debt in March 2004 reduced the Company’s future interest obligations by Baht 93 million and the Company recorded the Baht 93 million reduction in indebtedness as a gain from debt restructuring, presenting it as an extraordinary item in the earnings statement for the period ended 30 June 2004. -5- (UNAUDITED BUT REVIEWED) The business rehabilitation plan stipulates that the creditors will waive part of the indebtedness (comprising interest, fees and expenses payable in relation to the Company’s outstanding debts) after the Company repays the principal of Tranche A and Tranche D and providing it does not default on payment of Tranche B loans for the period as from the debt restructuring date to the date on which the Company repays the principal of Tranche A and Tranche D in full. The Company recorded the amount to be waived as “Accrued interest awaiting debt forgiveness” in the balance sheets. Since in late 2003, the Company was unable to comply with certain conditions of the rehabilitation plan, for prudent reasons, the Company classified the indebtedness as a current liability as at the balance sheet date. However, the Company believes the debt will be released in 2004, after the repayment of the debt under the rehabilitation plan. In addition, the Company has to reserve cash for debt repayment in accordance with the conditions stipulated in the rehabilitation plan. However, since 31 December 2003, the Company has ceased to reserve cash for the repayment in accordance with the conditions stipulated in the rehabilitation plan because the Company was requesting the approval from the leaders to repay all debt. Under the business rehabilitation plan, the Company has to pay the planner a quarterly fee of Baht 750,000 for plan administration and special remuneration not exceeding Baht 3 million per year until the rehabilitation of the Company is successfully completed in accordance with the plan and/or relevant laws. 4. RELATED PARTY TRANSACTIONS During the period, the Company had significant business transactions with its related companies (related by way of common shareholders and/or common directors) and the planner. Such transactions, which have been concluded on the terms and basis determined by the Company and those companies and were in the ordinary course of business, are summarised below :2004 Transactions with related parties : Average lending (weighted average balance outstanding at month end) Sales Transactions with the planner : Plan administration fee 2003 10 2 207 - 1 1 (Unit : Million Baht) Pricing policy Interest rate with reference to the interest rate of commercial banks. Cost plus margin Bath 0.75 million and special remuneration not exceeding Baht 3 million. (UNAUDITED BUT REVIEWED) The outstanding balances of the above transactions have been separately shown in the balance sheets. Details are as follows :(Unit : Baht) -6- 30 June 2004 31 December 2003 (Audited) Loans to related party Ekpakorn Co., Ltd. Less : Allowance for doubtful accounts Net 10,104 (10,104) 10,104 (10,104) - - The loans to the related parties are repayable on demand and are not collateralised. The Company had ceased accruing interest income on the above loans since the Company expected the interest receivable thereon would not be recoverable. (Unit :Thousand Baht) 30 June 2004 31 December 2003 (Audited) Rental deposit-related party Ekpakorn Co., Ltd. 20,271 20,271 Total 20,271 20,271 On 15 December 1991, the Company entered into an agreement to lease an office building from the above related company. On 20 November 1998, the lessor agreed to allow the land and construction thereon for rent to be mortgaged to secure the Company’s Baht 20.0 million loan from a commercial bank. The Company agreed that any loss incurred by the lessor as a result of such action would be offset by the balance of the rental deposit, which is not required to be returned to the Company. In 2000, the Company terminated the lease agreement. On the date of termination, the balance of the rental deposit was Baht 20.27 million. The Company defaulted on repayment of the above loan to the bank under its rehabilitation plan, which requires neither the Company to sell the above collateral to repay Tranche D debt of not more than Baht 20.0 million or for the lender to receive the collateral in repayment at a transfer price of Baht 20.0 million. On 9 July 2004, the lender approved to receive the transfer of the collateral to settle debt. -7- (UNAUDITED BUT REVIEWED) (Unit : Thousand Baht) 30 June 2004 31 December 2003 (Audited) Amount due to relate party Inter Far East Planner Co., Ltd. Total 1,605 1,605 5. ACCOUNTS RECEIVABLE - TRADE 4,012 4,012 (Unit : Thounsand Baht) 30 June 2004 31 December 2003 (Audited) 88,209 87,639 (4,095) (10,401) 84,114 77,238 19,919 14,586 (8,235) (6,106) 11,684 8,480 95,798 85,718 (4,561) (3,382) 91,237 82,336 Accounts receivable-trade Less : Provision for doubtful debts Accounts receivable-installment Less : Deferred profit Net trade accounts receivable Less : Long-term portion Net trade accounts receivable-current portion The aging of the outstanding balances as at the balance sheet dates are as follows :(Unit : Thousand Baht) 30 June 2004 31 December 2003 (Audited) Trade accounts receivable-other parties Net yet due and less than 90 days past due 91 - 360 days past due Over 360 days past due Total Less : Allowance for doubtful accounts Trade accounts receivable - net 92,120 2,988 4,785 99,893 (4,095) 95,798 -8- 82,407 3,211 10,501 96,119 (10,401) 85,718 (UNAUDITED BUT REVIEWED) During the period ended 30 June 2004, the Company had written-off bad debts of approximately Baht 3 million (2003 : Baht 140 million). The Company has determined the net recoverable amount of the outstanding balances and, as a result, allowance of approximately Baht 4 million (31 December 2003 : Baht 10 million) has been recorded. The Company believes that such allowance is adequate in the current circumstances. 6. DEPOSITS WITH FINANCIAL INSTITUTIONS PLEDGED FOR GUARANTEE COMMITMENTS This account comprises fixed deposits which are pledged to secure the sale of goods to customers and government agencies. 7. OTHER INVESTMENTS The others investments consist of the following investments in ordinary shares and available-for-sale securities :Investments in ordinary shares :Company’s name Investments in other companies/related companies 1. Far East Internet Company Limited 2. IFEC Service Company Limited 3. Suncolor Company Limited 4. Suncolor O.A. Company Limited 5. Ekpakorn Company Limited 6. Thai Samsung Electronics Company Limited 7. Paitoon Hotel and Resort Company Limited 8. Unilis Company Limited 9. Supathani Company Limited 10. UB-Haworth (Thailand) Company Limited 11. Noble Place Company Limited 12. Treasure Hill Company Limited 13. Thai Sanwa Food Industrial Company Limited 14. Khoo Khaeng Company Limited 15. Digit Thai Network Company Limited 16. Technology Applications (Thailand) Company Limited Total Less : Allowance for impairment loss Net -9- Equity interest (percent) 30 June 31 December 2004 2003 (Audited) 65.75 9.00 3.13 15.83 19.17 0.13 0.01 5.00 18.00 1.56 0.12 1.00 0.34 0.26 3.80 - 65.75 9.00 3.13 15.83 19.17 0.13 0.01 5.00 18.00 1.56 0.12 1.00 0.34 0.26 3.80 - (Unit : Thousand Baht) Amount 30 June 31 December 2004 2003 (Audited) 9,863 283 14,219 9,500 7,667 2,500 94 1,500 9,500 32,584 1,500 2,000 548 2,209 380 38 94,385 (90,953) 3,432 9,863 283 14,219 9,500 7,667 2,500 94 1,500 9,500 32,584 1,500 2,000 548 2,209 380 38 94,385 (90,953) 3,432 (UNAUDITED BUT REVIEWED) Investments in available-for-sale securities :30 June 2004 Investment in available-for-sale securities-at cost Unrealised gains from change in fair value of investments Investment in available-for-sale securities at fair value Other investments awaiting sale - net 6,460 1,923 8,382 11,815 (Unit : Baht) 31 December 2003 (Audited) 7,021 2,066 9,087 12,519 Although, the Company’s equity interest in Far East Internet Company Limited is 65.75 percent, because the Company does not have control or significant influence over this company, the investment has been classified as other investment. 8. PROPERTY, PLANT AND EQUIPMENT/NON-OPERATING ASSETS All of the land and buildings, and non-operating assets of the Company has been mortgaged with a bank to secure credit facilities operate to the company by that bank. 9. LONG-TERM LOAN In November 2003, the Company obtained a loan of Baht 450 million from a local bank. This loan is repayable in monthly installments at Baht 4.17 million each commencing November 2003, and carries interest at MLR (Minimum Loan Rate) per annum. The loan agreement contains normal covenants pertaining to matters such as the maintenance of a certain debt-to-equity ratio. In addition, the agreement obligates the Company to pledge approximately 20.4 million of its ordinary shares held by a director as collateral for the loan, and the director is still in the process of pledging the full number of shares stipulated by the lender. The long-term loan is secured by the mortgage of all the Company’s land and buildings, and non-operating assets. 10. CORPORATE INCOME TAX No corporate income tax is payable on earnings for the period since the tax losses brought forward from previous year exceed the net earnings for the period. - 10 - (UNAUDITED BUT REVIEWED) 11. FINANCIAL INFORMATION BY SEGMENT The operations of the Company involve the single industry segment of trading and hire of office equipment, specifically photocopiers, automatic copiers and Private Automatic Branch Exchange (PABX) products, including maintenance services, and are carried on only in Thailand. As a result, all the revenues, operating results and assets as reflected in these financial statements pertain to the aforementioned industry segment and geographic area. 12. BANK GUARANTEES As at 30 June 2004, there were outstanding bank guarantees of approximately Baht 8.9 million (31 December 2003 : Baht 10.5 million) which have been issued by banks on behalf of the Company in respect of certain performance bonds as required in the normal course of business of the Company. 13. COMMITMENTS a) As at the balance sheet dates, the Company has the following outstanding rental commitments. Payable within 1 year Between 2 and 3 years Over 3 years 30 June 2004 6.5 10.4 8.9 (Unit : Million Baht) 31 December 2003 2.6 3.9 - b) Various banks and financial institutions have sued the Company for Baht 555 million for its default on repayment of debts. The courts have temporarily suspended the case because the Company has been ordered to rehabilitate its business. c) The Company has entered into a contract to reserve a two-rai plot of land for purchase at President Country Club Project 3 for Baht 4.8 million. The Company is also entitled to reserve a Baht 0.6 million golf club membership and to purchase of ordinary shares of Holiday Country Club Co., Ltd. and Holiday Land Co., Ltd. in amounts of Baht 30,000 and Baht 20,000, respectively. As at the balance sheet dates, the sum of Baht 3 million has been paid, and the remaining will be paid on the date the land title deed is transferred. A full allowance for diminution in the value of such partial payment has been set up because the project has been suspended. - 11 - (UNAUDITED BUT REVIEWED) 14. FOREIGN CURRENCY RISK The Company entered into forward exchange contracts to purchase foreign currency with maturities less than one year to hedge foreign currency risk from the payment of trade accounts payable. The contracts outstanding on 30 June 2004 totaled Yen 21.5 million (31 December 2003 : None) at the rates of Baht 0.36827 to 0.36862 per Yen 1. As at 30 June 2004, foreign currency-dominated liabilities of the Company due within one year which were unhedged amounted to USD 0.3 million (31 December 2003 : USD 0.3 million and JPY 113 million). 15. APPROVAL OF FINANCIAL STATEMENTS These financial statements have been approved by the director of Inter Far East Planner Company Limited (the Company’s plan administrator). - 12 -