12. Financial Condition and Operating Results

  The corporate accounting period begins on November 1 and ends on
  October 31 in the next year.

12.1) Review Report of Independent Auditor

1)  Auditor

  Year 2003 Miss Wanraya Puttasatiean Certified Public Accountant
  Registration No. 4387

  Sam Nak-Ngan A.M.C. Co., Ltd.

  Year 2004 Miss Susan Eiamvanicha Certified Public Accountant
  Registration No. 4306

  Sam Nak-Ngan A.M.C. Co., Ltd.

  Year 2005 Miss Praphasri Leelasupha Certified Public Accountant
  Registration No. 4664

  Sam Nak-Ngan A.M.C. Co., Ltd.

2)  Summary of the audit report over the past three years

  Year 2003: The Auditor reviewed corporate financial statements.
  Unqualified opinions and comments are as follows:

a.  The auditor did not observe the inventory counting as at October 31,
    2002 in amount of Baht 383.84 million, since at that time the
    current auditor had not yet been appointed as the corporate auditor,
    thereby could not apply other audit procedures to satisfy to audit
    volume and value of the inventory.

b.  According to Note 4 to the financial statements, the Company changed
    its accounting principle on calculating depreciation from declining
    balance to straight-line depreciation. Also, the Company’s capital
    in its associations is expressed in line with the equity method
    instead of standard costing. Detail is as follows:

i.  The Company revised its 2002 financial statements used for
    comparison; the straight-line depreciation was used instead. Hence,
    the 2002 financial information used for the comparison was expressed
    according to the new accounting principle. Retained results caused
    by such change in the new accounting principle that required
    revision with the retained earnings of 2002 amounted to Baht 9.49
    million.

ii. The Company revised its 2002 financial statements used for
    comparison; the equity method was used instead. Thus, the 2002
    financial information used for the comparison was expressed
    according to the new accounting principle. Retained results caused
    by such change in the new accounting principle that required
    revision with the retained earnings of 2002 amounted to Baht 52.61
    million.

  Year 2004 The Auditor reviewed corporate financial statements.
  Unqualified opinions and comments are as follows:

  The financial statements as of October 31, 2003 shown for comparison
  were audited by another auditor from the same firm. Qualified opinions
  on the income statements that relating to non-observation of the
  inventory counting in the end of the year 2002 amounting to Baht
  383.84 million was given, as at that time the current auditor had not
  yet been appointed as the corporate auditor.

  Year 2005 The Auditor reviewed corporate financial statements.
  Unqualified opinions and comments are as follows:

  The financial statements as of October 31, 2004 shown for comparison
  were audited by another auditor from the same firm. Qualified opinions
  relating to non-observation of the inventory counting as at the end of
  the year 2002.

12.2) Percentage of Shareholding in the Subsidiaries and Consolidated
Financial Statements Preparation Criteria

(Refer to the attached financial statements for detail.)

The 2003 financial statements as of October 31, 2003 included one
subsidiary (Thai Sugar Terminal Public Company Limited) while the 2004
financial statements as of October 31, 2004 and the 2005 financial
statements as of October 31, 2005 included nine subsidiaries as shown in
the following tables:

Table 12.1: Percentage of Shareholding in Subsidiaries

  ---------------------------------------- -------------- ---------- ----------
                                           Percentage of             
                                           Shareholding              

                                           2003           2004       2005

  Thai Sugar Terminal Public Company       23.68          23.82      23.82
  Limited                                                            

  Tamaka Sugar Industry Co.,Ltd.           -              88.82      88.82

  New Krung Thai Sugar Factory Co.,Ltd.    18.32          91.06      91.06

  New Kwang Soon Lee Sugar Factory         -              96.85      96.85
  Co.,Ltd.                                                           

  KSL Real Estate Co.,Ltd.                 23.63          80.31      80.31

  KSL Export Trading Co.,Ltd.              33.87          78.32      78.32

  KS LAXMI Co.,Ltd.                        -              51.00      51.00

  Khon Kaen Sugar Power Plant Co.,Ltd.     -              100.00     100.00

  Khon Kaen Alcohol Co.,Ltd.               -              100.00     100.00
  ---------------------------------------- -------------- ---------- ----------

NOTE:

(1) Although the Company only has 23.82 percent shareholding in Thai
Sugar Terminal Public Company Limited, the Company has controlling power
in that particular company. Thai Sugar Terminal Public Company Limited
is, therefore, considered a corporate subsidiary.

(2) On January 29, 2004 the Company had a change of its shareholding
structure to clarify its investment structure by acquiring shareholding
in three sugar manufacturers as follows:

1.  Tamaka Sugar Industry Co., Ltd. 88.82 percent shareholding

2.  New Krung Thai Sugar Factory Co., Ltd. 91.06 percent shareholding

3.  New Kwang Soon Lee Sugar Factory Co., Ltd. 96.85 percent
    shareholding

After the structural change, those companies became the Company’s
subsidiaries. Also, the change of the KSL Group’s structure made other
companies in the group become the Company’s subsidiaries. Consequently,
the 2003 consolidated financial statements could not be compared to the
2004 and 2005 operating results and financial position.

12.3) Income Statements

In 2005 the Company and its subsidiaries generated revenue from their
operations amounted to Baht 5,532 million, 9 percent increase from the
previous year. Operating costs amounted to Baht 4,167 million,
7 percent decrease from the previous year. Selling and administrative
expenses amounted to Baht 550 million, 14 percent decrease from the
previous year. Corporate income tax amounted to Baht 194 million,
16 percent increase from the previous year. Consequently, the Company’s
net profit in 2005 amounting to Baht 495 million decreased by 17 percent
from that in 2004 which amounted to Baht 593 million.

Table 12.2 : Consolidated Profit and Loss in year 2003, 2004, 2005

[]

In terms of the revenue structure, in 2005 the Company’s revenue from
selling sugar and molasses amounted to Baht 5,057 million, representing
91 percent of the total revenue. Other revenues included revenue from
services, rental income, non-firm electricity sale, sale of fuel oil to
sugarcane farmers (The fuel oil was bought, and then sold to the
farmers.), cane harvesting service, sale of fertilizer to sugarcane
farmers (The fertilizer was bought, and then sold to the farmers),
interest received, and other income.

Table 12.3 : Consolidated Revenue Structure in 2005 and 2004

[]

The Company’s main revenue in 2005 was from sale of sugar and molasses.
Compared to the revenue in 2004, a 10 percent decrease in revenue from
sale of sugar amounted to Baht 504 million. Revenue from sale of
molasses, however, increased at an amount of Baht 139 million or by 69
percent. Reasons for the increase and decrease are shown in Table 12.4
indicating sales and sale volunes, and Table 12.5 indicating amount of
cane and sugar produced in 2005 and 2004.

Table 12.4 : Sales and Sale Volumes from sugar and molasses

[]

Table 12.5 : Amount of Cane Crushed, Sugar and Molasses Produced

[]

The 10 percent decrease in revenue from sale of sugar was the result of
a 25 percent reduction of sale volumes in the previous year, from
582,294 tons to 436,455 tons. Dry weather resulted in a decreased number
of canes being crushed, from 5.052 million tons in 2004 to 4.067 million
tons in 2005. The amount of sugar manufactured, thus, was decreased by
22 percent, from 548,005 tons in 2004 to 425,612 tons in 2005. Such
decrease resulted in higher prices of sugar products. In 2005 the
average sugar price was Baht 10,807 per ton, a 21 percent increase from
that in 2004 which was Baht 8,966 per ton. The 25 decrease in sale
volumes and the 21 percent increase in prices resulted in a 10 percent
decrease in revenue of the corporate sugar segment. Similarly, revenue
of sales of molasses decreased from 251,618 tons in 2004 to 175,907 tons
in 2005. Prices of molasses soared from Baht 798 per ton to Baht 1,933
per ton, a 142 percent increase, due to the demand for molasses in
ethanol production.

To facilitate analysis and calculation of the corporate income ratio
(revenues from sale of sugar and molasses, and services) the income
statements were presented in a new format shown in Table 12.6 indicating
quarterly income statements, yearly income statements, and gross margin.
In the first quarter of 2005, gross margin equaled 51 percent compared
to that in the first quarter of 2004 which equaled 18 percent. The
margin was the effect of previous years’ inventory. Generally, the
Company’s production cost partially varied in line with the world sugar
prices at the beginning of each year (priced at a profit sharing ratio
of 70:30). From the end of 2004 to the beginning of 2005, the world
sugar prices rose. The Company’s inventory, which its production cost
was in line with the 2004 world sugar prices, was considered low cost.
Once such inventory was sold at the beginning of 2005, the Company gross
margin rose dramatically. However, considering gross margin in the
second and fourth quarter, the gross margin in 2005 was lower than that
in 2004 by approximately 6-7 percent. For instance, the gross margin in
the second quarter of 2005 equaled 21 percent, which was lower than that
in 2004 equaling 6 percent (28 – 6). That reflects the corporate
operating results. A decreased amount of sugar being crushed resulted in
increased fixed cost and decreased gross margin.

Table 12.6 Consolidate income statement in new format for calculating
financial ratio

[]

Table 12.7 : Selling, General and Administrative Expenses

[]

The corporate selling and administrative expenses consists of three main
parts:

(1) Selling expenses include transportation and exportation expense.
Compared to 2004, in 2005 the transportation expense decreased by 20
percent due to decreased amounts of sugar and molasses manufactured. The
cost per unit of sugar and molasses, however, increased from Baht 234
per ton to 225 Baht per ton. This nine percent increase was caused by
increased petrol prices.

(2) Funding: VAT-inclusive controlled prices of sugar products were
replaced by VAT-exclusive controlled prices. The Cabinet mandated that
difference from the change in sugar prices funded the Cane and Sugar
Fund. Part of corporate expenses depended on domestic sales of sugar
which increased in the previous year due to a domestic sugar sale quota
was extended (from 0.192 million tons of Quota Kor in 2004 to 0.200
million tons in 2005).

(3) Administrative expenses decreased approximately by 18 percent. This
was because in 2004, an extraordinary item appeared in the form of the
impairment equaling Baht 46 million. (The decreased asset value amounted
to Baht 23.8 million. The decreased value caused by asset removal
amounted to Baht 22.2 million)

Increased interest rates compared to those in the previous year
increased the Company’s interest expense. Due to the fact that in the
previous year the subsidiaries’ taxes were on credit, in 2005,
consequently, tax expenses appeared higher.

12.4) Balance Sheet

Table 12.8 : Balance Sheet of the Company in 2003*-2005

[]

In 2005, the Company and its subsidiaries had assets amounted to Baht
8,620 million. Current assets amounted to Baht 2,130 million.
Non-current assets amounted to Baht 6,490 million, which included
property, plant and equipment. The net book value equaled Baht 5,804
million. The total liabilities equaled Baht 1,380 million. Shareholder’s
equity amounted to Baht 7,240 million. D/E ratio equaled 0.19.

As of 2005, the Company and its subsidiaries had the total inventory
amounted to Baht 857 million. Sugar totaled 79,774 tons (at the cost of
Baht 772 million). Molasses totaled 28,304 tons (at the cost of Baht 85
million). Compared to the inventory in 2004, the Company and its
subsidiaries had the total inventory amounted to Baht 653 million. Sugar
totaled 86,758 tons (at the cost of Baht 644 million). Molasses totaled
14,925 tons (at the cost of Baht 9 million).

12.5) Cash Flow

Table 12.9 : Cash Flow of the Company in 2003* - 2005

[]

In 2005, the Company’s cash flow that was generated from its operations
before the changes in assets and liabilities amounted to Baht 711
million. The changes in assets and liabilities amounted to Baht 328
million. Inventory cost of goods increased (Baht 204 million). Inventory
cost of materials increased (Baht 33 million). Creditors increased (Baht
74 million). The Company had cash from operating totaled Baht 443
million.

Cash was paid for corporate investment totaled Baht 1,019 million.
Important transactions included increased purchase of post-date cheques
(Baht 152 million), the subsidiaries’ immovable property purchase (Baht
81 million), lands, buildings and equipment purchase (Baht 770 million),
and investment in unutilized lands (Baht 47 million).

In terms of cash generating activities, in 2005 the Company received net
cash amounted to Baht 393 million, in which part of the cash was from
capital gains (Baht 1,164 million) deducted by dividend payment (Baht
635 million), loan payment and overdrafts (Baht 142 million).

At the end of 2005, the year-end cash totaled Baht 264 million. The
Company’s total cash reduced by Baht 183 million compared to the
previous year’s year-end cash amounting to Baht 451 million.

12.6) Audit Fees

Khon Kaen Sugar Industry Public Co., Ltd. was responsible for audit fees
in 2005 totaled Baht 870,000 million (excluding its subsidiaries), in
which Baht 465,000 was interim audit fees and Baht 405,000 was
three-month period financial reports audit fees.