12. Financial position and operating results

12.1 Financial Statements

(A) Summary of the Report of the Independent Auditor for 2002 to 2004.

The Company appointed Mr. Ruth Chaowanagawi, Certified Public Accountant
no. 3247 of Ernst & Young Office Limited, as auditor for the year ended
31 December 2002. The auditor expressed an unqualified opinion on the
consolidated financial statements for the years 2002 but drew attention
to the contingent liabilities.

For 2003 and 2004, the Company appointed Ms. Ratana Jala, Certified
Public Accountant no. 3734 of Ernst & Young Office Limited, as auditor.
The auditor expressed an unqualified opinion on the consolidated
financial statements for the years 2003 but drew attention to the
contingent liabilities. The auditor’s report for the year 2004 does not
contain any qualified opinions.

  (B) Summary of financial statements for the Company and its subsidiary
  companies for the years ended 31 December 2002, 2003 and 2004.

KGI SECURITIES (THAILAND) PUBLIC COMPANY LIMITED AND ITS SUBSIDIARY
COMPANIES

BALANCE SHEETS

AS AT 31 DECEMBER 2002, 2003 AND 2004

(Unit : Baht)

[]

KGI SECURITIES (THAILAND) PUBLIC COMPANY LIMITED AND ITS SUBSIDIARY
COMPANIES

BALANCE SHEETS (Continued)

AS AT 31 DECEMBER 2002, 2003 AND 2004

(Unit : Baht)

[]

KGI SECURITIES (THAILAND) PUBLIC COMPANY LIMITED AND ITS SUBSIDIARY
COMPANIES

EARNINGS STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2002, 2003 AND 2004

(Unit : Baht)

[]

KGI SECURITIES (THAILAND) PUBLIC COMPANY LIMITED AND ITS SUBSIDIARY
COMPANIES

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED 31 DECEMBER 2002,2003 AND 2004

(Unit : Baht)

[]

KGI SECURITIES (THAILAND) PUBLIC COMPANY LIMITED AND ITS SUBSIDIARY
COMPANIES

STATEMENTS OF CASH FLOWS (continued)

FOR THE YEARS ENDED 31 DECEMBER 2002,2003 AND 2004

(Unit : Baht)

[] 

(C) Ratios for years 2002, 2003 and 2004

  ------------------------------------ ------------ ----------- -----------
  Consolidated Basis                   2002         2003        2004

  Profitability Ratios                                          

  Gross profit margin (%)              94.88%       96.39%      93.92%

  Net profit margin (%)                34.54%       44.07%      23.13%

  Return on equity (%)                 8.36%        16.57%      7.77%

  Return on investment (%)             12.74%       20.86%      -0.45%

  Efficiency Ratios                                             

  Return on assets (%)                 6.54%        11.39%      4.60%

  Assets turnover (times)              0.19         0.26        0.20

  Financial Ratios                                              

  Liquid assets to total liabilities   1.48         0.65        0.94
  (times)                                                       

  Earning assets to total liabilities  4.07         1.19        2.46
  (times)                                                       

  Liquid assets to total assets (%)    25.54%       30.77%      30.99%

  Earning assets to total assets (%)   70.02%       56.51%      81.11%

  Debt to equity (times)               0.21         0.90        0.49

  Dividend payment (%)                 0%           19.23%      62.50%

  Other ratios                                                  

  Securities investment to total       54.00%       15.46%      34.08%
  assets (%)                                                    

  NCR to net liquid assets (SEC        497.53%      112.83%     223.93%
  requirement) (%)                                              

  Per Share Information                                         

  Par Value per share (Baht)           10.00        7.50        7.50

  Book Value per share (Baht)          4.11         2.12        2.17

  Basic Earning per share (Baht)       0.33         0.52        0.16

  Dividend per share (Baht)            0.00         0.10        0.10
  ------------------------------------ ------------ ----------- -----------

  12.2 Management discussion & analysis

  (Consolidated financial statements as of December 31, 2004)

Analysis of Performance

    For 2004, the Thai stock market was highly volatile, SET Index
    closed at 668 point on the last day of the year, a decrease of 13.5%
    compared to 2003. Average trading volume per day increased from
    Baht19,030million to Baht20,647million.

    The Company reported total income of Baht1,377million and net
    profits of Baht318million (equivalent to earnings per share of
    Baht0.16). Details of the Company’s performance are as follows:

    1. Revenue structure

  To diversify revenue structure, the Company tried to expand its income
  to various businesses such as financial advisory business,
  underwriting business, selling agent, securities borrowing and lending
  business, and derivatives business.

  In 2004, the Company reported total income of Baht1,377million and the
  Company’s revenue structure comprised 77% of brokerage fee, 18% of fee
  and service income, and 5% of other incomes (Gain or loss on trading
  in securities, interest and dividends and interest on margin loans and
  other income).

  -------------------------- --------------- -------- --------------- ----------
  ณ                          31 Dec 47                31 Dec 46       

  Income                     Baht            %        Baht            %

  Brokerage Fee              1,068,469,793   77%      1,181,073,360   57%

  Fee and service income     239,934,951     18%      226,093,413     11%

  Gain (Loss) on trading in  -66,163,453     -5%      513,576,681     25%
  securities                                                          

  Interest and Dividend      58,605,690      4%       92,058,739      4%

  Interest on Margin Loans   35,797,607      3%       12,096,510      1%

  Securities Income          1,336,644,588   97%      2,024,898,703   97%

  Other Income               40,104,924      3%       54,392,503      3%

  Total Income               1,376,749,512   100%     2,079,291,206   100%
  -------------------------- --------------- -------- --------------- ----------

2. Changes in income and expenses

2.1 Change in securities business income

  The Company’s securities business income decreased from
  Baht2,025million in 2003 to Baht1,337million in 2004, a decrease of
  34%, as follows:

Brokerage Fee

  The Company still ranked at No.4 in terms of market share at 4.52% in
  2004. In 2004 margin loans in credit balance accounts increased from
  Baht579million in 2003 to Baht1,431million in 2004 (equivalent to a
  147% increase). The Company opened a new branch, Pak Chong Branch,
  Nakorn Ratchasima Province, and as at 31 December 2004 had a total of
  17 branches (6 branches in Bangkok and 11 branches in provincial
  area). However, the high level of competition in the securities
  business resulted in decreased market share for many brokers. The
  Company also saw a decrease in market share from 5.23% in 2003 to
  4.52% in 2004, which resulted in a decrease in brokerage fees from
  Baht1,181million in 2003 to Baht1,068million in 2004 (equivalent to a
  9.57% decrease).

+-----------------------------+-----------+-------+---------+---------+
| Trading Volume              | 2003      | %     | 2004    | %       |
+-----------------------------+-----------+-------+---------+---------+
| SET (Baht million)*         | 19,030.24 |       | 20      |         |
|                             |           |       | ,647.39 |         |
+-----------------------------+-----------+-------+---------+---------+
| The Company (Baht million)* | 1,990.01  |       | 1       |         |
|                             |           |       | ,868.32 |         |
+-----------------------------+-----------+-------+---------+---------+
| The Company’s market share  | 5.23%     |       | 4.52%   |         |
| (%)                         |           |       |         |         |
+-----------------------------+-----------+-------+---------+---------+
| Breakdown by types of       |           |       |         |         |
| clients                     |           |       |         |         |
+-----------------------------+-----------+-------+---------+---------+
| - The Company’s portfolio   | 65.71     | 3.30  | 106.74  | 5.71    |
+-----------------------------+-----------+-------+---------+---------+
| - Fund                      | 48.15     | 2.42  | 79.82   | 4.27    |
+-----------------------------+-----------+-------+---------+---------+
| - Retail client             | 1,608.58  | 80.83 | 1       | 74.03   |
|                             |           |       | ,383.04 |         |
+-----------------------------+-----------+-------+---------+---------+
| - Foreign client            | 267.57    | 13.45 | 298.72  | 15.99   |
+-----------------------------+-----------+-------+---------+---------+
| Total                       | 1,990.01  | 1     | 1       | 100.00  |
|                             |           | 00.00 | ,868.32 |         |
+-----------------------------+-----------+-------+---------+---------+
| Breakdown by types of       |           |       |         |         |
| account                     |           |       |         |         |
+-----------------------------+-----------+-------+---------+---------+
| - Cash account              | 1,893.91  | 95.17 | 1       | 93.67   |
|                             |           |       | ,750.19 |         |
+-----------------------------+-----------+-------+---------+---------+
| - Credit balance account    | 96.10     | 4.83  | 118.13  | 6.33    |
+-----------------------------+-----------+-------+---------+---------+
| Total                       | 1,990.01  | 1     | 1       | 100.00  |
|                             |           | 00.00 | ,868.32 |         |
+-----------------------------+-----------+-------+---------+---------+

  Note : * Trading volume referred to volume in both SET and MAI

  Fee and service income

  The Company’s fee and service income increased from Baht226million in
  2003 to Baht240million in 2004 (equivalent to a 6.19% increase). The
  increase of fee and service income came from:

  a) Fee and service income of One Asset Management Limited (1A.M.), the
  Company’s subsidiary, which increased from Baht204million in 2003 to
  Baht218million in 2004.

  b) Financial advisory fees from investment banking: increased from
  Baht2.6million in 2003 to Baht8million in 2004 due to an increase in
  investment banking business, mainly from IPOs.

  -------------------------------- ------------- --------- ------------- ---------
                                   2004                    2003          

  Fee and Service Income           Baht          %         Baht          %

  Management fee, registrar and    217,780,255   90.78%    203,514,969   90.01%
  custodian fees                                                         

  Underwriting fee                 11,332,622    4.72%     13,100,454    5.79%

  Financial advisory fee           8,047,000     3.35%     2,610,360     1.16%

  Selling agent fee                1,471,308     0.61%     2,095,274     0.93%

  Securities borrowing and lending 366,018       0.15%     774,145       0.34%
  fee                                                                    

  Others                           937,748       0.39%     3,998,211     1.77%

  Total Fee and Service Income     239,934,951   100.00%   226,093,413   100.00%
  -------------------------------- ------------- --------- ------------- ---------

Gain (Loss) on trading in securities

The Company had a loss from trading securities totaling Baht(66)million
in 2004, which compared to a gain from trading securities totaling
Baht514million in 2003 mainly due to the decline in the SET.

The loss on trading securities of Baht(66)million comprised unrealised
loss on revaluation of investment in trading securities of
Baht(34)million, unrealised loss on revaluation of securities borrowed
under the securities borrowing and lending business of Baht(29)million
and realised loss on trading of securities of Baht(3)million.

  --------------------------------------------------------- --------------
  Gain (Loss) on trading in securities                      2004

  Unrealised gain (loss) on revaluation of investment in    (34,497,309)
  trading securities                                        

  Unrealised gain (loss) on revaluation of securities       (28,550,715)
  borrowed under SBL business                               

  Realised gain (loss) on trading of securities             (3,115,429)

  Total                                                     (66,163,453)
  --------------------------------------------------------- --------------

Interest and Dividend Income

The Company’s interest and dividend income decreased from Baht92million
in 2003 to Baht59million in 2004.

2.2 Change in Expenses

The Company’s total expenses decreased from Baht1,134million in 2003 to
Baht1,027million in 2004. However, total income in 2004 decreased too.
The result was that the ratio of total expenses to total income
increased from 55% in 2003 to 75% in 2004.

  []

Securities Business Expenses

The Company had securities business expenses of Baht78.6million,
comprising expenses on borrowing of Baht4.6million, fee and service
expense of Baht76.6million, and reversal of bad debt and doubtful
accounts of Baht(2.6)million. Details are as follows:

A) Expenses on borrowing

Expenses on borrowings of Baht4.6million refer to interest payment for
using credit line for daily liquidity management.

B) Fee and Service Expenses

Out of fee and service expenses totaling Baht76million, Baht43million
was from brokerage expenses which varied with the company’s brokerage
volume, Baht10million resulted from amortization of underwriting licence
fees, Baht13million was expenses for stock lending and borrowing
transactions and Baht10million came from other fees and expenses.

C) Reversal of bad debt and doubtful accounts

The Company reported reversal of bad debt and doubtful accounts of
Baht(2.6)million, which occurred as the Company received more in bad
debt repayments than was charged in new bad debts. In 2004, the Company
recorded doubtful accounts of Baht21.41million but the Company was
repaid Baht24.05million, thus the reversal of bad debts and doubtful
accounts was Baht(2.6)million.

+------------------------------------------------+---------------------+
|                                                |   2004              |
+------------------------------------------------+---------------------+
| Balance - beginning of the year                | 215,074,098         |
+------------------------------------------------+---------------------+
| Add : Doubtful accounts                        | 21,411,778          |
+------------------------------------------------+---------------------+
| Bad debt recovery                              | -                   |
+------------------------------------------------+---------------------+
| Less : Reversal of doubtful accounts           | (24,050,169)        |
+------------------------------------------------+---------------------+
|  Bad debt written-off                          |   (1,667,769)       |
+------------------------------------------------+---------------------+
| Balance - end of the year                      |   210,767,938       |
+------------------------------------------------+---------------------+

D) Operating Expenses

The Company’s operating expenses decreased from Baht1,084million in 2003
to Baht949million in 2004, a decline of 12.5%. The decrease came mainly
from reduced personnel expenses. Personnel expenses fell from
Baht794million in 2003 to Baht643million in 2004, largely due to a
decrease in marketing commission payments which varied with the
company’s brokerage volume.

3 Performance

The Company reported net profit of Baht318million and earnings per share
of Baht0.16, a gross profit margin of 93.92%, net profit margin of
23.13%, and return on equity of 7.77%.

  --------------------------------------------------- -------------------
  Profitability Ratios                                2004

  Gross profit margin (%)                             93.92%

  Net profit margin (%)                               23.13%

  Return on equity (%)                                7.77%
  --------------------------------------------------- -------------------

Analysis of Financial Status

As of 31 December 2004, the Company had total assets of Baht6,357million
and total shareholders’ equity of Baht4,261million. The Company’s
financial status was strong with a high level of liquidity. Net capital
adequacy ratio (NCR) was 223.9% at the year end, which is higher than
that required by the SEC (at least 7%). On 3 February 2005, TRIS Rating
affirmed the company rating of KGI Securities (Thailand) PLC (KGI) at
“BBB”. The rating reflects the firm’s solid capital base and adequate
liquidity. Analysis of financial status is as follows:

3.1 Assets

The company’s total assets were Baht6,357million at the end of 2004.

  -------------------------------------------- ------------- -------------
  Financial Ratios                             2003          2004

  Earning assets to total liabilities (times)  1.19          2.46

  Earning assets to total assets (%)           56.51%        81.11%

  Securities investment to total assets (%)    15.46%        34.08%
  -------------------------------------------- ------------- -------------

3.1.1 Investment in securities

Net investment increased from Baht1,158million in 2003 to
Baht2,166million in 2004, Net investments comprised:

a) Total short term investments increased from Baht1,125million in 2003
to Baht1,328million in 2004. Total short term investments comprised 58%
equity securities, 38% debt securities, and 2% of other securities, as
follows:

  ---------------------------------- ------------------ ------------------
  Investment in trading securities   Million Baht       %

  Equity securities                  776                58%

  Debt securities                    504                38%

  Total Investment in trading        1,279              96%
  securities                                            

  Add : Allowance for revaluation    29                 2%

  Total Investment in trading        1,308              98%
  securities-net                                        

  Other investment                                      

  Other securities                   24                 2%

  Less : Allowance for impairment    (5)                (0.4)%

  Other investment –net              19                 1%

  Total short term investment - net  1,328              100%
  ---------------------------------- ------------------ ------------------

b) Long term investments increased from Baht33million in 2003 to
Baht839million in 2004. The increase in long term investment was due to
an investment in KGI (Thailand) Holdings Limited (KTHL), a foreign
subsidiary, which the company intends to hold for more than 1 year. KTHL
had invested its capital in offshore funds, which mainly invest in
equity securities of foreign companies.

  That investment carries foreign exchange risk; however, KTHL has
  entered into a forward exchange contract to hedge the investment in
  securities of USD 17 million with a strike price of Baht 40.60 per 1
  US dollar, totaling of Baht 690million.

3.1.2 Net securities business receivable and accrued interest
receivables

Net securities business receivables and accrued interest receivables
decreased from Baht3,074million in 2003 to Baht2,869million in 2004. The
main securities business receivables were credit balance accounts of
Baht1,431million, customer’s accounts of Baht716million, Receivable
under securities borrowing and lending business of Baht734million, and
other receivables of Baht196million against which the Company had set
allowances for doubtful accounts of Baht211million. Accrued interest
receivables amounted to Baht3million.

+---------------------------------------+--------------+--------------+
|                                       | 2004         | 2003         |
+---------------------------------------+--------------+--------------+
| Customer’s accounts                   |              |   2          |
|                                       |  715,970,062 | ,488,173,547 |
+---------------------------------------+--------------+--------------+
| Credit balance                        |   1          |              |
|                                       | ,430,845,260 |  578,514,279 |
+---------------------------------------+--------------+--------------+
| Receivables under securities          |              |              |
| borrowing and lending business :-     |              |              |
+---------------------------------------+--------------+--------------+
| - Guarantee deposit receivables       |              |   -          |
|                                       |  711,448,375 |              |
+---------------------------------------+--------------+--------------+
| - Securities borrowing and lending    |   22,920,000 |   -          |
| receivables                           |              |              |
+---------------------------------------+--------------+--------------+
| Other receivables :-                  |              |              |
+---------------------------------------+--------------+--------------+
| - Installment receivables             |              |              |
|                                       |  195,380,834 |  211,364,081 |
+---------------------------------------+--------------+--------------+
| - Overdue customers’ accounts         |   422,762    |   354,493    |
+---------------------------------------+--------------+--------------+
| Total securities business receivables |   3          |   3          |
|                                       | ,076,987,293 | ,278,406,400 |
+---------------------------------------+--------------+--------------+
| Add : Accrued interest receivables    |   3,161,690  |   10,434,565 |
+---------------------------------------+--------------+--------------+
| Less : Allowance for doubtful         |   (          |   (          |
| accounts                              | 210,767,938) | 215,074,098) |
+---------------------------------------+--------------+--------------+
| Securities business receivables and   |              |              |
+---------------------------------------+--------------+--------------+
| accrued interest receivables - net    |   2          |   3          |
|                                       | ,869,381,045 | ,073,766,867 |
+---------------------------------------+--------------+--------------+

The Company has classified its securities business receivables in
accordance with the relevant guidelines issued by the SEC governing
accounting for the doubtful debts of securities companies. As of 31
December 2004, Baht15million were classified as substandard debt and
Baht183million were classified as doubtful debt. The company has set
aside full provisions for the doubtful debts. For prudent reasons, the
Company has set up a general provision primarily for losses associated
with securities business receivables. The outstanding balance of such
general provision as of 31 December 2004 was Baht 28 million.

+-----------------+--------------+---------------+--------------------+
| As of 31        | Debt balance | Allowance for | Allowance for      |
| December 2004   |              | doubtful      | doubtful accounts  |
|                 |              |               | in excess of the   |
|                 |              | accounts set  |                    |
|                 |              | up            |                    |
+-----------------+--------------+---------------+--------------------+
|                 |              | by the        | SEC’s requirement  |
|                 |              | Company       |                    |
+-----------------+--------------+---------------+--------------------+
| Doubtful debt   | 183          | 183           | -                  |
+-----------------+--------------+---------------+--------------------+
| Substandard     | 15           | -             | -                  |
| debt            |              |               |                    |
+-----------------+--------------+---------------+--------------------+
| Total           | 198          | 183           | -                  |
+-----------------+--------------+---------------+--------------------+
| General reserve |              | 28            | 28                 |
+-----------------+--------------+---------------+--------------------+
| Total           |              | 211           | 28                 |
+-----------------+--------------+---------------+--------------------+

3.2 Liquidity

The Company had high liquidity. As of 31 December 2004, the value of the
Company’s liquid assets was Baht1,970million (equivalent to 30.99% of
total assets). These liquid assets consisted of Baht775million in cash
and cash equivalents, Baht443million of government securities and
Baht752million of listed securities. In addition, the Company’s NCR was
as high at 223.93% (the SEC requires that the NCR must not be lower than
7%).

  -------------------------------------------- ------------- -------------
                                               2003          2004

  Liquid assets to total liabilities (times)   0.65          0.94

  Liquid assets to total assets (%)            30.77%        30.99%

  NCR (%)                                      112.83        223.93
  -------------------------------------------- ------------- -------------

For 2004, the Company reported cash flows of Baht775million, a decrease
of Baht1,057million from the year before, details of cash flows as
follows:

  --------------------------------------------------------- -------------
  Cash flows for the 2004                                   (million
                                                            baht)

  Net cash from operating activities                        (503.33)

  Cash flows from investing activities                      (856.07)

  Cash flows from financing activities                      301.87

  Net decrease in cash and cash equivalents                 (1,057.53)

  Cash and cash equivalent as at 1 January 2004             1,832.21

  Cash and cash equivalent as at 31 December 2004           774.68
  --------------------------------------------------------- -------------

3.3 Appropriateness of capital structure

As of 31 December 2004, the company had a good debt to equity ratio,
which decreased from 0.90 times in 2003 to 0.49 times in 2004. The
reason was increase in shareholders’ equities and decrease in
liabilities. Changes in liabilities and equities are as follows:

Shareholders’ equity

As of 31 December 2004, shareholders’ equity was Baht4,254million an 8%
increase compared with 2003. This included:

a)  Paid-up capital increased from Baht13,940million in 2003 to
    Baht14,938million in 2004 and discount on common stock increased
    from Baht(11,205)million in 2003 to Baht(11,964)million in 2004.
    During the year, the Company registered increases in its share
    capital totaling Baht 998 million (133,094,571 shares at par value
    of Baht 7.50 each). The discount on common stock increased by Baht
    759 million as a result of such share issuance.

b)  Unappropriated retained earnings increased from Baht870million in
    2003 to Baht973million in 2004 and legal reserve increased from
    Baht46.8million in 2003 to Baht62.80million in 2004.

  ----------------------------------------------- -----------------------
                                                  Unappropriated Retained
                                                  Earnings

  Balance ending - 31 December 2003               869,530,021

  Dividend paid /1                                -199,038,084

  Net earnings                                    318,497,489

  Transfer to statutory reserve /2                -16,000,000

  Balance ending - 31 December 2004               972,989,426
  ----------------------------------------------- -----------------------

  Note /1 On 29 April 2004, the Annual General Meeting of the Company’s
  shareholders passed a resolution for the Company to declare a dividend
  of Baht 0.10 per share, totaling Baht 199 million for distribution to
  shareholders in respect of the earnings for the year 2003. Such
  dividend was paid on 28 May 2004.

  /2 According to the Public Limited Companies Act B.E. 2535, the
  Company is required to set aside to a statutory reserve at least 5
  percent of its net profit for the year after deducting accumulated
  deficit brought forward (if any) until the reserve reaches 10 percent
  of the registered share capital. The statutory reserve can not be used
  for dividend payment. As at 31 December 2004, the Company set aside
  Baht 16,000,000 to the statutory reserve from its net earnings for the
  year 2004.

Liabilities

Liabilities decreased from Baht3,542million in 2003 to Baht2,096million
in 2004. The main portion of liabilities i.e. Baht1,472million correlate
with the trading volumes. Baht79million resulted from trading
transactions with securities company and Baht1,393million came from
securities business payable.

3.  Audit Fee

1) Audit fees

The Company and subsidiaries paid audit fees and disbursements as
follows:

- To the Company’s auditor for the accounting period of 2004, a total of
Baht 1,272,057.

- To the auditor’s firm, any persons or companies related to the auditor
and to the auditor’s firm for the accounting period of 2004, a total of
HK Dollar 121,500.

2) Non-audit fees

The Company and its subsidiaries paid for other services, which included
the auditing of financial reports prepared for the Company’s parent
company in a foreign country and tax services. The payments consisted of
payments;

- To the Company’s auditor for the accounting period of year 2004, a
total of Baht 170,000 and no further expense for services not yet
completed which will become payable in the near future.

- To the auditor’s firm, any persons, or any companies related to the
auditor or the auditor’s firm for the accounting period of year 2004, a
total of HK Dollar 7,000 and no further expense for services not yet
completed which will become payable in the near future.