ADVANCE PAINT & CHEMICAL (THAILAND) PUBLIC COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007

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1 ADVANCE PAINT & CHEMICAL (THAILAND) PUBLIC COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND GENERAL INFORMATION Advance Paint & Chemical (Thailand) Public Company Limited, the Company, is incorporated in Thailand and has its registered offices at 344 Moo 2, Klongjik, Bangpa-in District, Ayuthaya The Company was listed on the Stock Exchange of Thailand in The main business was Manufacturing and distributing paints, industrial paint and related products. 2. BASIS OF FINANCIAL STATEMENT PRESENTATION The financial statements are prepared in accordance with Thai Accounting Standards ( TAS ) including related interpretations and guidelines promulgated by the Federation of Accounting Professions ( FAP ) in conformity with generally accepted accounting principles in Thailand. They are prepared on a historical cost basis, except as disclosed in respective accounting policies. The accompanying financial statements have been prepared in the Thai language and expressed in Thai. Such financial statements have been prepared for domestic reporting purposes. For the convenience of the readers not conversant with the Thai language, an English version of the financial statements has been provided by translating from the Thai version of the financial statements. The preparation of financial statements in conformity with Thai accounting standard requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying amounts of assets and liabilities that are not readily apparent from other sources. Subsequent actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised, if the revision affects only that period, and in the period of the revision and future periods, if the revision affects both current and future periods. Adoption of new or revised Thai Accounting Standards (TAS) In 2008, the Federation of Accounting Professions has issued Notifications on new or revised Accounting Standards as follows:- a) Thai Accounting Standards that is effective for the current year. TAS 25 (revised 2007) Cash Flow Statements TAS 29 (revised 2007) Leases TAS 31 (revised 2007) Inventories TAS 33 (revised 2007) Borrowing costs 8

2 TAS 35 (revised 2007) TAS 39 (revised 2007) TAS 41 (revised 2007) TAS 43 (revised 2007) TAS 49 (revised 2007) TAS 51 Presentation of Financial Statements Accounting Policies, Changes in Accounting Estimates and Errors Interim Financial Reporting Business Combinations Construction Contracts Intangible Assets b) Thai Accounting Standards that will be applied to the financial statements for the accounting period commencing on or after January 1, TAS 36 (revised 2007) Impairment of Assets TAS 54 (Revised 2007) Non-Current Asset Held for Sale and Discontinued Operations The management has assessed that the adoption of these new and revised TAS does not have any material impact on the financial statements. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenues and expenses recognition Revenues and expenses are accounted for on an accrual basis. The Company recognizes sales and cost of sales upon the delivery of goods to customers. Allowance for doubtful accounts The Company provides an allowance for doubtful accounts equal to the estimated collection losses which are based on collection experience and review of the current status of the existing receivables. Inventories Inventories on hand are valued at the lower of cost or net realizable value. Raw materials are determined on the weighted average method. Work in progress is stated at standard cost approximating actual cost. Finished goods are stated at standard cost approximating actual cost. Provisions are made, where necessary, for obsolete, slow-moving, and defective inventories. Property, plant and equipment and depreciation Equipment is stated at cost net of accumulated depreciation and provision for impairment. Land, building and machinery are stated at the appraisal value appraised by an independent appraiser. The Company depreciates its buildings and equipments by the straight-line method over the estimated useful lives of the assets as follows: 9

3 No. of Years Buildings and improvement 30 Machinery and equipment 5-15 Furniture, fixtures and office equipment 5-10 Vehicles 5-10 The Company will consider the impairment of assets when there is indication that the recoverable amount is lower than the book value of the assets and recognize loss on the assets revaluation. Cash and cash equivalents Cash and cash equivalents presented in the statement of cash flows comprise cash on hand, cheques in transit and deposits at bank and fixed deposit with a maturity period not more than 3 months except for cash at banks held as collateral. Basic loss per share Basic loss per share is calculated by dividing net loss for the year by the number of common shares outstanding at the end of the year. In case of a capital increase, the numbers of common shares are weighted according to the time of subscriptions received. Diluted loss per share is calculated by dividing net loss for the year by the number of common shares and the number of equivalent common shares (Warrant) by weighted according to the period of time as if there were conversion of common shares at the issued date of issuance of equivalent common shares. 4. CASH AND CASH EQUIVALENT As at December 31, 2008 and 2007, cash and cash equivalent were comprised of: Cash 3,000 3,100 Deposits at financial institutions 25,325 74,179 Total 28,325 77, RESTRICTED CASH AT FINANCIAL INSTITUTIONS As at December 31, 2008 and 2007, restricted cash at financial institutions represented deposits in financial institutions amounting to 0.26 million and 0.20 million, respectively, which has been pledged as collateral for usage of electricity (Note 14). 10

4 6. TRADE ACCOUNTS RECEIVABLE - NET As at December 31, 2008 and 2007, the Company had trade accounts receivable by age as follows: Current 1,133,970 2,047,540 Overdue not over 3 months 175, ,343 Overdue over 6 months 151, ,803 Total 1,460,492 3,082,686 Post-dated cheques receivable 323, ,948 Less Provision for doubtful accounts (151,489) (121,402) Net 1,632,089 3,804, INVENTORIES - NET As at December 31, 2008 and 2007, inventories consisted of: Finished goods 4,049,534 5,192,823 Work in process - 214,881 Raw materials 1,251,385 2,017,959 Packing materials 386, ,950 Total 5,686,948 7,909,613 Less: Provision for obsolete stock (3,759,703) (3,759,703) Net 1,927,245 4,149,910 11

5 8. PROPERTY, PLANT AND EQUIPTMENT - NET Property plant and equipment as at December 31, 2008 consisted of: January 1, 2008 Movement during the year Increase/ Depreciation Decrease/ Transfer out December 31, 2008 Cost Land and improvements 30,000, ,000,000 Building 71,433, ,433,740 Electronic systems in progress 12,082, ,082,068 Building improvements 4,535, ,535,018 Machinery and equipment - Cost 67,694, ,694,252 - Revaluation surplus 2,020,645-2,020,645 - Total 69,714,897-2,020,645 67,694,252 Furniture and fixtures 14,774, ,774,397 Vehicles 2,021, ,021,685 Total 204,561,805-2,020, ,541,160 Accumulated Depreciation Building 32,545,963 2,385,261-34,931,224 Building improvements 3,546,240 91,653-3,637,893 Machinery and equipment - Cost 39,010,540 4,538,065-43,548,605 Machinery and equipment - Revaluation 282, ,517 - Furniture and fixtures 13,937, ,727-14,163,723 Vehicles 2,011, ,011,576 Accumulated Depreciation - Cost 91,051,885 7,241,136-98,293,021 Accumulated Depreciation - Revaluation 282, ,517 - Total 91,334,402 7,241, ,517 98,293,021 12

6 January 1, 2008 Movement during the year Increase/ Depreciation Decrease/ Transfer out December 31, 2008 Provision for loss from assets valuation Land 140,000 3,732,500-3,872,500 Building 12,341, , ,008 12,197,593 Electronic systems in progress 12,082, ,082,068 Building improvements 18, ,715 26, ,821 Machinery and equipment 7,081,370 16,501,947 3,088,942 20,494,375 Furniture and fixtures 381,102-59, ,865 Total 32,044,250 21,184,274 3,969,302 49,259,222 Net book value 81,183,153 54,988,917 Depreciation for the year ended December 31, 2008 and 2007, are 3.28 million and 4.73 million, respectively, and are included in the statement of income. As at December 31, 2008 and 2007, the cost of the equipment amounting to million and million, respectively, are fully depreciated and are still in use. In the second quarter of 2008, the Company s land together with buildings, and machineries were revalued equivalent to the average appraisal value appraised by independent appraisers (Valuation & Consultants Co.,Ltd. and Preferred Appraisal Co.,Ltd.). The Company, therefore, has recorded loss on impairment of fixed assets of million which is included in the statement of income. Amortization of revaluation surplus for the years ended December 31, 2008 and 2007, are deducted from the Revaluation Surplus of Assets under Shareholders Equity as follows: Revaluation Surplus of Assets Balance at beginning of year 1,738,127 1,882,796 Less Amortization 70, ,669 Less Reversal for machinery and equipment - Revaluation 1,667,594 - Balance at end of year - 1,738,127 Land and building were used as collateral for bank overdrafts and short-term loans from a financial institution (Note 9). 13

7 9. BANK OVERDRAFT AND SHORT-TERM LOAN FROM FINANCIAL INSTITUTIONS As at December 31, 2008 and 2007, these consisted of: Bank overdraft 10,033,385 9,888,197 Short-term loan 40,000,000 40,000,000 Total 50,033,385 49,888,197 The Company has a bank overdraft and a short-term loan credit line with a bank. The line of 10 million bears interest at the rate of MOR. The credit line of 40 million bears interest at the rate of MLR. The credit lines are collaterized by the mortgage of the Company s land, building and machinery (Note 8). 10. WARRANT In the third quarter of 2008, old shareholders exercised its warrants of 239,500 shares at 1 per share and in the year 2007, no shareholder exercised its warrants. As at December 31, 2008 and 2007, the Company had outstanding non-exercised warrants of 195,966,879 and 196,206,379 units, respectively, In respect of the Security Exchange of Thailand s regulation, the Company s securities had been suspended for trading on November 14, 2005 having the market price of that date of 0.60 per share for common shares, 0.30 per unit for APC-W-1 and 0.32 per unit for APC-W OPERATING AS A GOING CONCERN The Company continues to operate at an increase loss and has current liabilities substantially in excess of current assets and the Company has a capital deficiency as of December 31, 2008 in the amount 9.57 million. The Company s ability to continue operations as a going concern is dependent on its abilities to generate sufficient profit and cash flows to serve its debts. 12. RECONCILIATION OF DILUTED LOSS PER SHARE As at December 31, 2008 and 2007, the diluted loss per share is the amount equal to the basic loss per share because the exercise price ( 1 per share) is higher than the common share's fair value. 14

8 13. EXPENSES The Company s significant expenses for the year 2008 and 2007 were as follows:- Employee expenses 4,217,873 6,099,671 Electricity 723, ,297 Depreciation 3,283,508 4,729,818 Consulting fee 1,162, , COMMITMENTS As of December 31, 2008, the Company has the following commitments: 14.1 The Company has a commitment under a consulting agreement for a period of six months starting September 1, This agreement can be terminated or renewed. The Company is committed to pay a monthly fee of 30,000. On March 1, 2007, the Company has an agreement to decrease the consulting fee to 10,000. Presently, the Company still has the commitment on this agreement The Company has a commitment with local banks for the letters of guarantee issued by banks totaling approximately 0.26 million. These are secured by the Company s deposit at a financial institution The Company hires a consultant to obtain suggestion on the fair value of the fixed assets to be sold to director which will be proposed to the shareholders meeting for approval. The Company has to pay service fee and other expenses in the total amount of 1,400,000 (Excluded VAT). As at October 30, 2008, consultant had issued letter to terminate the service to the Company and the consultant charged service fee of only 500,000 from 1,400, TRANSACTIONS WITH RELATED COMPANY The Company rents a space of the plant to the related company owned by the Company s directors. The monthly rental is 30,000 and service fee for the year ended December 31, 2008 and 2007 amounting to 1,529,812 and 1,541,912, respectively. As of December 31, 2008 and 2007, the Company had loans from a director amounting to 12,088,199 and 3,050,000 respectively, and liability under discounted trade receivable with the director as of December 31, 2007 amounting to 5,413,243. The interest expenses for the year ended December 31, 2008 and 2007 amounting to 582,708 and 381,495 respectively. (Interest rate at 7.25 to 8.25% per annum and 7.62 to 8.00% per annum in 2008 and 2007, respectively). 15

9 16. FINANCIAL INFORMATION BY SEGMENT The Company s operations involve a single industry segment in paint manufacturing and are carried on in a single geographic area in Thailand. As a result, all of the revenues, operating profit (loss) and assets reflected in these financial statements pertain to the aforementioned industry segment and geographic area. 17. CONTRACT WITH SCG NETWORK MANAGEMENT CO., LTD (FORMERLY CSM CO., LTD). On November 7, 2002, the Company entered into a purchase and sales contract with SCG Network Management Co., Ltd. (Formerly CSM Co., Ltd.) (buyer) to sell its inventory with the condition that the buyer will be able to exchange the inventory in case of damage or if it is in a bad condition. The contract is for a period of 1 year and can be automatically renewed unless the buyer gives an advance written notice of cancellation of at least 30 days. 18. DISCLOSURE OF FINANCIAL INSTRUMENTS Credit Risk Credit risk refers to the risk that counterparty will default on its contractual obligations resulting in a financial loss to the Company. The Company believes it will not suffer significantly from debt collection because the customers can repay debt. Fair Value of Financial Instruments The following methods and assumptions are used by the Company in estimating the fair value of the financial instruments as disclosed herein: Cash and cash equivalents, trade accounts and notes receivable; the carrying values approximate their fair values. Bank overdrafts and loans from banks carrying variable rates of interest and trade accounts payable; the carrying amounts of these financial instruments approximate their fair values. Interest rate risk The Company may have interest rate risk arising from the fluctuation of market interest rates in the future, which will affect the performance and cash flows of the Company. This is caused by the deposits in a financial institution and borrowing from a financial institution. 19. RECLASSIFICATION The financial statements for the year ended December 31, 2007 have been reclassified to conform to the presentation in the financial statements for the year ended December 31, APPROVAL OF FINANCIAL STATEMENTS These financial statements were approved by the authorized directors of the Company on February 24,

The office of the Company and the factory are at 42/62, Moo 14, Bangkaew, Bangplee, Samutprakarn.

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