Financial Status and Operating Result

Auditors and Accounting Policies

Auditors

Mr.Sophon Permsirivallop

License no.3182

of Ernst & Young Office Limited

Mr. Sondej Praditsmanont

License no. 2349

of Ernst & Young Office Limited

Auditor’s Report

For the year 1998 the auditor has pointed out that its subsidiary have
not met certain financial ratios in its loan agreements. Except this
minor qualification, the auditor considers that the financial statements
fairly present the financial position of the company and its subsidiary.

For the year 1998 there is no qualification of any nature in the Audit
Report of the company.

For the year 1999 there is on qualification of any nature in the Audit
Report of the company.

Without qualifying the opinion on the financial statements for the years
2000 and 1999, the auditor draws attention regarding various matters as
follows :-

(a) As discussed in Note 26, the Company has invested in Thai Organic
    Chemicals Company

Limited. The book value of the investments as at 31 December 2000
include investment in ordinary shares (recorded under the equity method)
of Baht 159 million and investment in preference shares (recorded under
the cost method) of Baht 600 million (1999 : Baht 202 million and Baht
600 million, respectively). The ongoing economic and financial crisis in
Thailand and in the region is still adversely affecting business in
general and may have affected the operating results of Thai Organic
Chemicals Company Limited. In addition, as Thai Organic Chemicals
Company Limited has commenced its business activities in late 1998 and
is at the initial stage of its operation, the operating losses have been
incurred. The Company's management considered the impairment of the
value of these investments. To this end, net cash flows from the
investments were projected and these projections suggested that the net
future cash flows will exceed the book value of these investments.
Therefore, the Company believes that provision of impairment of value
for the investments is not required under current situation. However,
the value of the investments may depend on economic recovery in Thailand
and the region in the future.

(b) As discussed in Note 9, share of profit for the year ended 31
    December 2000 from P.T. Indo Liberty Textiles, an associated
    company, of Baht 49 million (1999 : Baht 54 million) is determined
    based on the financial statements which were reviewed but not
    audited by this company's auditors. The book value as at 31 December
    2000 and 1999 of this investment under equity method was Baht 300
    million and Baht 290 million, respectively.

(c) As discussed in Note 9, share of loss for the year ended 31 December
2000 from Thai Organic Chemicals Company Limited, another associated
company, of Baht 43 million (1999 : Baht 104 million) is determined
based on the financial statements which were audited by this company's
auditors. The book value as at 31 December 2000 and 1999 of this
investment under equity method was Baht 159 million and Baht 202
million, respectively

(c) As discussed in Note 13, as at the balance sheets date, machinery of
    the subsidiary were stated at fair value which was appraised by an
    independent appraiser in December 1997. Although the Thai Baht has
    strengthened since that year, the subsidiary's management believes
    that there is no significant change in fair value of the machinery,
    as subsequent to 1997, the subsidiary has continuously done the
    technological improvements to upgrade the machinery by increasing
    its production capacity and improving its production efficiency.
    Based on this belief, the subsidiary has not arranged to have those
    machinery revalued again by an independent appraiser. However, the
    subsidiary plans to have these machinery revalued in every 3 or 5
    years in order to conform with the accounting standard.

(e) As discussed in Note 17, as at 31 December 2000, the subsidiary had
the outstanding balance of long-term loans of approximately Baht 94
million (1999 : approximately Baht 246 million). Under the loan
agreements, the subsidiary has to maintain certain financial ratios.
However, due to the impact from currency devaluation, as at the balance
sheets date certain financial ratios of the subsidiary did not comply
with the covenants as stipulated in the agreements. The subsidiary,
presently, is negotiating with the related financial institutions for
the

relaxation of the covenants stipulated in the agreements.

(f) As discussed in Note 1, although Thailand's economic crisis, which
occurred in 1997, has eased to a certain extent in the current year,
financial restructuring within the business community is still prevalent
and subject to readjustment. As at the balance sheets date the
subsidiary had current liabilities in excess of current assets.
Nevertheless, the financial statements of the subsidiary have been
prepared on the going concern basis, assuming that the realisation of
assets and settlement of liabilities and obligations will occur in the
ordinary course of business of the subsidiary, without any expectation
of significant disruption to the ongoing activities.

As discussed in Note 4, The Accounting Standard No. 32 "Property, Plant and Equipment" was amended in 2000. In effect, the amendment requires that, with respect to the assets that are presented in the financial statements on a revaluation basis, depreciation charges as included in the earnings statements be determined on the appraised value of those assets rather than on their historical cost, as was the case prior to the amendment, and that the amortization of the corresponding revaluation surplus be credited directly to the retained earnings statements. The subsidiary has accounted for this accounting change retroactively in the 1999 financial statements. In addition, in 1999, the subsidiary provided for deferred tax liabilities on the revaluation surplus in accordance with the Accounting Standard No. 32 "Property, Plant and Equipment" whereby it required the deferred tax liabilities to be set up in accordance with the International Accounting Standard no. 12. The standard was however amended in 2000, effectively requiring the tax effect on the revaluation surplus to be recognised in the financial statements only when an accounting standard relating to income tax has been pronounced by the Institute of Certified Accountings and Auditors of Thailand. Since no such accounting standard has been pronounced, in 2000 the subsidiary has reversed the remaining balance of deferred tax liabilities amounting to Baht 65.6 million to the revaluation surplus in the shareholders' equity section. Therefore, under equity accounting method based on the Company's interest in equity of the subsidiary, the Company has reflected such transactions into its investments accordingly and restated the 1999 financial statements as presented herein for comparative purposes. The adjustment has the effect of decreasing the net earnings for the year 2000 by Baht 7.5 million (Baht 0.25 per share) and increasing the net earnings for the year 1999 by Baht 18.8 million (Baht 0.63 per share).

In addition, on 20 January 2000, the Institute of Certified Accountants
and Auditors of Thailand issued the Accounting Standards Interpretation
Statement No. 4, prohibiting pre-operating expenses from being
recognised as assets, effective for the financial statements for the
year ended on or after 31 December 1999. As a result, in 1999, the
subsidiary and an associated company had written off the balances of
their pre-operating expenses against the beginning balances of deficit.
Therefore, under equity accounting method based on the Company's
interest in equity of those companies, the Company had reflected such
transactions into its investments accordingly against the beginning
balance of retained earnings of 1999. The cumulative effect of the
accounting change of the subsidiary and an associated company up to the
beginning of 1999 had been presented under the heading of "Cumulative
effect of the change in accounting policy for pre-operating expenses of
the subsidiary/an associated company " in the respective retained
earnings statements.

Summary of Significant Accounting Policies

Sales

Sales is recognised on the basis of delivery excluding value added tax.

Export incentives

Export incentive granted by the Ministry of Finance in the form of tax
coupons are recognised as income when export shipment is made.

Inventories

Finished goods are valued at the lower of cost (average method) or net
realisable value. Cost is defined as all the costs of production
including attributable factory overheads.

Raw materials, spare parts and supplies are valued on an average method.

Property, plant and machinery

In December 1997 and September 1998, the subsidiary changed the method
in valuation of buildings (exclusive of residential building) machinery
and land, respectively from historical cost method to revaluation
method.

The revaluation was made by an independent appraisal company on 31
December 1997 at "Fair market value". The independent appraisal company
determined the fair market value of those assets by using the exchange
rates prevailing as of 31 December 1997.

The subsidiary plans to have these assets revalued in every 3 or 5 years
in order to conform with the accounting standard.

The subsidiary has credited the surplus resulting from the revaluation
to "Revaluation Surplus" in the balance sheets of the subsidiary.

Part of the surplus attributable to the Company's investment have been
shown under the caption of "Share of revaluation surplus of subsidiary"
in the balance sheets.

Other fixed assets are stated at cost less accumulated depreciation.

Depreciation and amortisation

Depreciation of buildings, plant and equipment is calculated on the
straight-line method over periods ranging from 5 to 25 years and is
included in determining earnings.

Revaluation surpluses for buildings, plant and machinery of the
subsidiary are amortized on the straight-line method over the useful
lives of the related assets and are charged directly to retained
earnings (deficit) of the subsidiary.

No depreciation is charged for land, and the subsidiary's revaluation
surpluses on land.

Technical know-how fees of the subsidiary are amortised over a period of
10 years.

Lease right is amortised over the period of the lease (20 years).

Investments in subsidiary and associated companies

Investments in subsidiary (only in the financial statements of the
Company) and in associated companies are stated under equity accounting
method. Under this method, for each accounting period, the investments
are adjusted to incorporate the Company's proportionate share of the
operating results in the subsidiary and associated companies.

Loss from subsidiary in excess of cost of investments in subsidiary is
presented as liabilities under the caption of "Provision for loss of
investment in subsidiary".

Investments in related companies and investment in preference shares

Long-term investments in related companies and investment in preference
shares are non-marketable equity securities and are stated at cost.

The Company recognises loss on impairment of these investments when the
fair value of the investments is lower than their cost, and the loss is
included in determining earnings if any.

Foreign currency transaction

Foreign currency transactions incurred during the year are translated
into Baht at the rates ruling on the transaction dates. Assets and
liabilities denominated in foreign currency outstanding on the balance
sheet date are translated into Baht at the rates ruling on the balance
sheet date, with the exception of those covered by forward exchange
contracts, which are translated at the contracted rates.

Exchange gain and loss are included in determining earnings.

Derivatives

The Company purchase forward exchange contracts to reduce their exposure
from exchange rate fluctuation risk. Discounts or premiums (the
difference between the spot exchange rate and the forward exchange rate
at inception of the contracts) are deferred and amortized to earnings
over the contract lives using the straight-line method.

Earnings per share

Earnings per share as presented in the earnings statements is the basic
earnings per share which is determined by dividing net earnings for the
year by the number of ordinary shares outstanding at the balance sheet
date.

Financial Status and Operating Result

Balance Sheet, Income Statement, Cashflow Statement during the past 3
years with common size

  - Please see Annexure 5 -

Financial Ratios

  - Please see Annexure 6 -

Financial Highlights of Subsidiary and Associated Companies

  - Please see Annexure 7 -

Debentures

  - None –

Management Discussion & Analysis

Sales

The Sales revenue in 2000 increased by 10% to Baht 2,655 million from
Baht 2,407 million in 1999. The sales volume sold was marginally higher
by 1%. The export sales value increased by 13% whereas local sales value
increased by 6% The average selling price of Carbon Black increased by
9% during the year mainly due to cost driven selling price increase in
both export and domestic market and weakening of Thai Baht. The ratio of
export to local sales for the year 2000 in value term was balanced at
63:37 as against 62:38 in 1999

Production

The company’s plant continued to operate at full capacity. The
production of various grades of Carbon Black during the year increased
marginally.

Cost and Expenses

The ratio of cost of sales to sales was increased by 10.8% mainly due to
substantial increase in prices of Carbon Black Feed Stock oil and fuel
oil which are the major raw material and account for 92% of the cost of
sales. The selling and administrative expenses are lower in 2000 mainly
due to reduction in freight expenses. The ratio of total expenses
(before exchange loss and share of gain/loss from subsidiary and
associated company) to sales increased by 5% only inspite of steep
increase in raw material prices and this reflects the company’s
continuous endeavour to keep cost under control and increase
productivity. Interest expenses reduced by 54% due to repayment of long
term loans and availing of working capital loans at very low interest
rates.

Financial Position

The total shareholders equity increased during the year by Baht 200.647
million to Baht 2,938.355 million Baht. The book value of share at Baht
97.95 per share against a par value of Baht 10 per share reflects strong
financial position of the company.

The company has recorded net profit (before tax) of Baht 459 million in
2000 against net profit of Baht 483 million in 1999 where as net profit
(after tax) was 345 million in 2000 against 442 million in 1999. The
operating profit (before exchange loss, depreciation, tax and equity
gain from subsidiary and associated company) has been reduced by 16%
mainly due to steep increase in raw material prices and lower interest
income.

The equity income from subsidiary company is Baht 50 million in 2000
against 16 million in 1999 due to improved performance, reduction in
exchange loss and interest expenses.

The equity income from associated companies in 2000 is Baht 6 million
against equity loss of Baht 50 million in 1999. This was due to higher
earnings realized by associated companies during the year.

Analysis of Financial Ratios

Liquidity

The company is having comfortable liquidity position and cash flows to
meet its obligations. The company’s current assets increased from 1,022
million to 1,298 million due to temporary increase in inventory of raw
material. The current liabilities increased form 427 million to 738
million due to increase in working capital loans.

Equity

The company is having very low debt to equity ratio. The ratio further
improved from 0.36 to 0.31 in 2000 due to repayment of loans and
increase in shareholders equity.

Profitability

The gross profit margin of the company is reduced to 28% in 2000 as
compared to 39% in 1999 mainly due to steep increase in prices of Carbon
Black Feed Stock oil which is the major raw material. The net profit
margin (before tax) on total revenue after excluding equity income/loss
and exchange gain/loss has also been reduced to 14.71% in 2000 against
21.0% in 1999. The return on shareholders equity based on total net
income (net of taxes) and the shareholders equity at the beginning of
the year works out to 12.62% as against 18.91% in 1999.

Efficiency

The fixed assets turnover ratio improved to 3.07 in 2000 against 2.44 in
1999. Total assets turnover ratio also improved to 0.69:1 in 2000
against 0.65:1 in 1999.