News Detail: [TCJ] Opinions of the Business Regarding Tender Offer (Form250-2)Symbol: TCJ Headline: Opinions of the Business Regarding Tender Offer (Form250-2) Time: 09 Aug 2004 09:05:00 TCJ Asia Public Company Limited (Form 250-2) Opinions of the Business Regarding the Tender Offer August 9, 2004 To Securities holders: On July 21, 2004, TCJ Asia Plc. (hereinafter called "TCJ" or "the Company") received a copy of the statement of a tender offer for our securities from Mrs. Anongrat Chatjuthamard (hereinafter called "the Tender Offeror"), as follows: Amount of Securities Percentage of securities Offering Offering Type of price per value (baht) securities unit (baht) Share/unit Shares with To the total To the total voting issued shares with rights securities voting rights Ordinary 1,264,500 1,264,500 5.67 5.67 8.82 11,152,890.00 shares Preferred shares Warrants Convertible debentures Other securities (if any) Total 5.67 Total 11,152,890.00 1/ Net price to be received by the Offeree is Bt.8.7964 per share since the Offeree is subject to payment of a brokerage fee of 0.25% of the offering price and value-added tax of 7% of the brokerage fee. The tender offer period is during 9.00 -16.00 hrs. of each of the 25 business days from July 22, 2004 to August 27, 2004. After considering the tender offer with due regards for the benefits to the securities holders, we would like to express opinions for your consideration as follows: 1. The status of the Company in respect of past and future operating results together with assumptions Nature of business and past performance TCJ has engaged in the business of import, export, and sale of heavy construction equipments. More than 86.60 percent of the Company's revenue in 2003 comes from selling of reconditioned construction equipments. It imports the used equipments from Japan. The Company selects only the acceptable quality used equipments and reconditions them to increase their efficiency to the level near that of the new equipments. These equipments include tractors, wheel loaders, road rollers and truck cranes. The other 13.40 percent of the Company's revenue is from selling new equipments such as aerial lifts with brand name "AICHI" which are used for installation and maintenance of the public electricity system, telephone system, and other cables including maintenance at high altitude and also "UNIC" crane which is installed on trucks for loading and unloading materials for land transportation and construction projects. The Company has only one subsidiary, Big Crane and Equipment Rentals Company Limited, which it holds 99.99% of shares. This company engages in the rental business of heavy equipments like as crawler cranes, truck cranes, truck mounted cranes excavators and road rollers for transportation and construction businesses. TCJ's financial position and operational performance from 2001 to Q1 of 2004 (In millions of baht except per share amount which is in baht) Consolidated Financial Statement 2001 2002 2003 Q1 of 2004 Total assets 1,012.91 740.63 734.94 833.29 Total liabilities 907.74 982.78 375.28 457.80 Shareholders' equity 105.17 -242.15 359.66 375.50 Registered capital 635.00 635.00 223.00 223.00 Paid-up capital 250.00 250.00 223.00 223.00 Share premium 385.00 385.00 - - Retained -634.16 -981.48 129.66 145.50 earnings(Deficit) Sale 385.56 536.18 293.60 118.37 Total revenue 551.82 685.70 449.28 167.27 Cost of Sale 417.93 509.75 254.36 101.58 Total expenses 683.31 979.29 469.66 148.37 Earning (loss) before -171.49 -293.59 -20.38 18.90 interest expense Earning (loss) before -213.57 -347.32 -123.38 15.84 restructuring activities Net profit (loss) -213.57 -347.32 661.34 15.84 Sources: TCJ's financial statements. Investors may access TCJ's latest financial statements and consolidated financial statements at the websites of the Office of the Securities and Exchange Commission (www.sec.or.th) or the SET (www.set.or.th). Note : 1) The Company's registered capital at the end of 2001 and 2002 was 635 million baht comprising of 63.5 million shares at par value of 10 baht per share. At the end of 2003 and the end of first quarter 2004, the registered capital is 223 million baht comprising of 22.3 million shares at par value of 10 baht per share. 2) The Company's paid-up capital at the end of 2001 and 2002 was 250 million baht comprising of 25.0 million shares at par value of 10 baht per share. At the end of 2003 and the end of first quarter 2004, the paid-up capital is 223 million baht comprising of 22.3 million shares at par value of 10 baht per share. The Company had faced problems driven by the countrywide economic crisis since 1997 which caused the large infrastructure projects construction to significantly slow down. The sluggishness of major construction projects had also adversely affected the sales of heavy construction equipments. As a result, the Company signed an agreement with its creditors for its debt restructuring on June 30, 2001 but it eventually could not satisfy the scheduled repayment.Then, on February 27, 2003, the Company filed for reorganization at the Central Bankruptcy Court and received the Court approval for the reorganization plan on December 1, 2003. The Court-approved reorganization plan has the details as follows ; 1.The Company's registered capital must be decreased from 635 million baht to 25 million baht. Also the paid-up capital of 250 million baht must be decreased to 25 million baht within 3 months. 2.The Company must convert the land rent liability to ordinary shares by issuing 19.80 million shares (par value of 10 baht per share) at the conversion price of 1 baht per share to the landlord creditor for compensation of the land rent within 3 months. 3.The Company must repay the secured creditors, unsecured creditors, and convertible debenture holders all together worth 271.54 million baht within 6 months. The total assets during 2001-2002 had decreased from 1,012.91 million baht in 2001 to 740.63 million baht in 2002 and 734.94 million baht in 2003 partly because of the decrease in inventory. At the end of 2001, the inventory was worth 300.68 million baht and dropped to 207.95 million baht at the end of 2002 and 137.42 million baht at the end of 2003. The decrease was caused by the revaluation of the inventory to reflect its fair market value. At the same time, the Company also sold down the obsolete inventory to boost its liquidity. Another cause for the decrease in total assets during 2001-2003 was the provision for loss on impairment of assets worth 155.35 million baht. However, the total assets at the end of the first quarter of 2004 had increased to 833.29 million baht from 734.94 million baht at the end of 2003 as a result of the increased liquidity after the Company's debt restructuring. While at the end of the first quarter of 2003, the consolidated total revenue and the Company's total revenue were 150.36 million baht and 70.56 million baht respectively, the consolidated total revenue and the Company's total revenue at the end of the first quarter of 2004 were 167.26 million baht and 123.04 million baht respectively. This revenue improvement had raised the account receivables from 33.57 million baht at the end of 2003 to 87.01 million baht at the end of the first quarter of 2004 and most of which were customers with good payment record (paying within the credit term of 3 months). Another source of increase in the total assets at the end of first quarter of 2004 was the increase in cash and bank deposit from 106.86 million baht at the end of 2003 to 157.02 million baht at the end of the first quarter of 2004 as a result of the borrowing from a foreign institution for repayment of debts under the reorganization plan and for working capital. On the liabilities side, after the implementation of the Bankruptcy Court-approved reorganization plan, the Company's liabilities had decreased significantly from the total liabilities of 907.74 million baht at the end of 2001 and 982.78 million baht at the end of 2002 to 375.28 million baht at the end of 2003. However, the total liabilities had increased to 457.80 million baht in the first quarter of 2004 as a result of a short-term borrowing of 336.16 million baht from a foreign financial institution. This borrowing was to repay the remaining 271.41 million baht of debt under the reorganization plan. The remaining proceeds after this repayment was for the Company's working capital. The shareholders' equity, before the restructuring, was 105.17 million baht at the end of 2001 and -242.15 million baht in 2002. Nevertheless, after the capital decrease and debt to equity conversion according to the reorganization plan, the shareholders' equity had increased to 359.66 million baht in 2003 and 375.50 million baht at the end of the first quarter of 2004. The Company's performance in 2002 showed that the total revenue increased by 173.88 million baht from 511.82 million baht in 2001 to 685.70 million baht as a result of the sale of the obsolete inventory. The sale had pushed the total revenue up significantly from 385.56 million baht in 2001 to 536.18 million baht in 2002. However, the inventory was sold at the price lower than its cost, so the total expenses had also grown drastically. The total expenses had grown from 683.31 million baht in 2001 to 979.29 million baht in 2002 causing the net loss to surge from 213.57 million baht at the end of 2001 to 347.32 million baht at the end of 2002. In 2003, the total revenue had dropped to 449.28 million baht from 685.70 million baht in 2002 partly because of the insufficiency of cash to acquire products for sale. The other reason was the sale of inventory in the previous year caused the total revenue to shift to an unusually high level. The total expenses in 2003 was 469.66 million baht, a dramatic drop from 979.29 million baht in 2002, resulting in a net loss before restructuring activities of 123.38 million baht, a drop from 347.32 million baht in 2002. In addition, adding the effect of restructuring activities brought the net profit in 2003 to 661.34 million baht compared to a net loss of 347.32 million baht in 2002. In the first quarter of 2004, the total revenue was 167.27 million baht. As the cost of goods sold was 148.37 million baht, the earning before interest expenses was 18.90 million baht. This is compared to a loss before interest expenses during the previous years of 20.38 million baht, 293.59 million baht, and 171.49 million baht in 2003, 2002, and 2001 respectively. Future prospects In Thailand, there are a great number of distributors of both new and reconditioned heavy construction equipments. However, number of distributors with decent financial capability is limited causing the competition in this industry to be modest. The competition is more pivotal around the quality of products, the quality of pre-sale and after-sale services, the product image, the brand recognition, and the distributor image than the pricing.In the past few years, the Company has had trouble operating the business but has been able to retain significant market share in every product category. In 2003, the Company had the market share for the reconditioned equipments of 40 percent while its market share for new truck mounted crane and aerial lifts were about 50 percent and 10 percent respectively. At the same time, Big Crane Equipment Rentals Co., Ltd., the Company's subsidiary, had 35 percent of market share for rental crane. The Company has borrowed a short-term foreign currency loan in total of 336.16 million baht during January February 2004 to repay the remaining debt of 271.41 million baht according to the condition in the reorganization plan. After the Company fullfilled the requirements in the reorganization plan, the Company's financial condition had improved significantly. From the total debts of 982.78 million baht and the shareholders' equity of -242.15 million baht in 2002, the implementation of plan upto the first quarter of 2004 has reduced the debts to 457.80 million baht and turned the shareholders' equity to 375.50 million baht. The decreasing debts have caused the interest expense to be reduced from 53.72 million baht in 2002 to a projected 8.30 million baht.In addition,the positive shareholders' equity makes it possible for the Company to raise fund from financial institutions or from investors for future expansion. The Tender Offeror has a plan for a new business on which the plan administrator is now considering. The new business is related to construction materials which negotiation and due diligence are underway. The plan administrator is of the opinion that the new business has a bright future and will endorse the Company's profitability. . 2. Opinions on the accuracy of the Company's information stated in the tender offer The plan administrator, who has the power to manage the Company under the reorganization plan, views that all the information relevant to the Company shown in the tender offer statement (Form 247-4) is accurate. 3. Relationship or any agreements between the Company's director/s, either on his/their own behalf or in his/their capacity as the Company's director/s or as representative/s of the Tender Offeror, and the Tender Offeror, including the shareholding by the director/s in the Tender Offeror' juristic person and any contracts or agreements made or to be made between them (in such matters as administration, etc.) The Tender Offeror obtained the Company's shares from the debt to equity conversion according to the reorganization plan approved by the Bankruptcy Court on December 1, 2003. The plan demands that the Tender Offeror be compensated for its loan principle by 19.80 million ordinary shares, of which par value is 10 baht per share, at the conversion price of 1 baht per share. The conversion of debt to equity to repay the Tender Offeror's loan was completed on December 31, 2003 making the Tender Offeror hold a total of 20.36 million shares or 91.30 percent of the total paid-up capital, which accounts for 91.30 percent of the voting rights. Ten major shareholders of the Company as at April 27, 2004: Name No. of shares % to total issued shares of the Company 1. Mrs. Anongrat Chatjutamard 20,360,000 91.30 2. Miss Srivilai Chatjuthamard 423,500 1.90 3. Mr. Poonsak Kanavaree 294,460 1.32 4. Mr. Nakorn Harnkraivilai 249,270 1.12 5. Miss Varaporn Harnkraivilai 249,000 1.12 6. Mr. Ballang Chaijuthamard 140,000 0.63 7. Mrs. Ampai Harnkraivilai 124,000 0.56 8. Mrs. Bung-on Kelley 74,000 0.33 9. Gamma Capital Fund 72,720 0.33 10. Miss. Srivimol Chatjuthamard 70,000 0.31 Total 22,056,950 98.92 3.1 Relationship of the Company's directors with the Tender Offeror The Company's Board of Directors as at July 20, 2004 is as follows ; Name Position 1. Mr. Ballang Chatjuthamard President 2. Mr. Thanongsak Chatjuthamard Managing Director 3. Miss Srivilai Chatjuthamard Director 4. Miss Srivimol Chatjuthamard Director 5. Mr. Apinun Ratchatasombat Independent Director and Audit Committee Member The Company's filing for reorganization at the Central Bankruptcy Court on February 27, 2003 and the Court's order for reorganization and appointment of Miss Srivilai Chatjuthamard as the planner on March 24, 2003 have caused the Company's Board of Directors's power and authorities to end. On December 1, 2003, the Court appointed Miss Srivilai Chatjuthamard to be the plan administrator, the power and authorities of the planner was passed to the plan administrator upon the hearing of the Court's order. The Tender Offeror is not a director in the Company but has relationship with some of the directors as follows ; Name Position Relationship with the Tender Offeror 1.Mr. Ballang Chatjuthamard President of TCJ Spouse of the Tender Offeror 2.Mr. Thanongsak Chatjuthamard Managing Director of TCJ Son of the Tender Offeror 3.Miss Srivilai Chatjuthamard Director of TCJ and its Daughter of the Tender subsidiary Offeror 4.Miss Srivimol Chatjuthamard Director of TCJ and its Daughter of the Tender subsidiary Offeror 5.Miss Ananya Chatjuthamard Director of TCJ's Daughter of the Tender subsidiary Offeror 3.2. Joint or related business transaction(s) - None 3.3 Shareholding by the Company's directors in the Tender Offeror - None - 3.4 Existing or tentative mutual contract or agreement On May 1, 2002, the Company and the Tender Offeror entered into an agreement for the Company to rent an 8 rai 1 ngan 95 square wah land, where the Company office, factory, and showroom are located, from the Tender Offeror. The period of this agreement is until April 30, 2004. According to this agreement, the Company has to pay a rental fee of 21.6 million baht per year. However, the reorganization plan allows the Company to be waived from paying the rental fee from December 1,2003 until it completes all steps in the plan which it now does. Nevertheless, the Tender Offeror has agreed to waive the rent until December 31, 2004. 4. Opinions of the board of directors of the Company to the securities holders The Company's filing for reorganization at the Central Bankruptcy Court on February 27,2003 and the Court's order for reorganization and appointment of Miss Srivilai Chatjuthamard as the planner on March 24 2003 have caused the Company's Board of Directors's power and authorities to end. On December 1,2003 the Court appointed Miss Srivilai Chatjuthamard to be the plan administrator, the power and authorities of the planner was passed to the plan administrator upon the hearing of the Court's order. The plan administrator is to recommend the shareholders as follows ; 4.1 Reasons to accept/reject the tender offer The Tender Offeror states its offering price at 8.82 baht per share. The seller will be responsible for the brokerage fee of 0.25% of the offering price and the value-added tax of 7.0% of the brokerage fee. The plan administrator considers the Tender Offeror's offering price at 8.82 baht per share valuated by adjusted book value approach based on the Company's financial statement as at December 31,2003 to be appropriate share price at the time that the Tender Offeror must make a tender offer.However,by considering the share valuations in the report of the shareholders' advisor which are based on the Company's financial statement as at March 31,2004 whereby the Company's earning per share in the first quarter of 2004 is 0.71 baht per share and the plan administrator's opinion on book value of 9.53 baht per share at the end of first quarter of 2004 which is higher than the offering price, the plan administrator recommends the shareholders to reject the tender offer. However, in deciding whether to accept or reject the tender offer, the shareholders may take into account the opinions of the shareholders' advisor and the final decision depends on the discretion of the shareholders. 4.2 Opinions and reasons of each director and the number of shares held by each director (only in case that the opinion of the board of directors in 4.1 is not unanimous). - None- 4.3 Benefits or impacts from the plan and policies indicated in the tender offer and viability of such plans and policies. The Tender Offeror indicates in the tender offer that it intends to make changes to the Company's plan and policies shown in the reorganization plan approved by the Central Bankruptcy Court on March 4, 2004 regarding the permission for the plan administrator to divest the investment in the Company's subsidiaries and/or affiliated companies and/or other companies. The Tender Offeror plans to keep all the investments as the subsidiary which is Big Crane and Equipment Rentals Co.,Ltd. and other company which is Furukawa Unic (Thailand) Co., Ltd.have gradually improved in performance. Whilst, the affiliate, SPL Transport Co., Ltd., has registered for termination of its business with the Ministry of Commerce on January 14, 2004 and the registrar has completed all the relevant processes for termination on March 30, 2004. The intention for investment in a new business is to increase its profitability and enhance its financial capability. The plan administrator will be responsible for the processing of this new investment. At the moment, the plan administrator is in the process of negotiation and due diligence for evaluation of the investment in the new business to ensure maximum benefits to the Company. The new business will be related to construction materials. The Tender Offeror has no plan to change the dividend policy and expect to pay dividend of 50 percent of the net profit around April every year unless the Company has to retain cash for investment and/or it does not generate profit for that particular year. 4.4 Additional opinions of the board of directors of the Company (only in case that the Tender Offer is prepared for securities delisting pursuant to the SET regulations). -None- 4.5 Other information The Company hereby certifies that the above statements are true and contain no information that might lead other parties to misunderstanding in material aspects and that no concealment has been made on any material information. TCJ Asia Plc. _____________________________ (Miss Srivilai Chatjuthamard) Plan Administrator 5. Opinion of the shareholders' advisor certified by the SEC Mrs. Anongrat Chatjuthamard has made a tender offer to purchase the ordinary shares of TCJ Asia Plc. as per a copy of the tender offer statement (Form 247-4) dated 21 July 2004. Sage Capital Limited, a financial advisor approved by the Office of the Securities and Exchange Commission ("the SEC"), has been appointed by the Company to provide opinions for small shareholders regarding the tender offer. We have studied the information in the tender offer (Form 247-4) of the Tender Offeror, the information from the Company, for example, the financial statements, annual report, interviews with the Company's executives and the concerned parties, the information disclosed to the public as a basis for our analysis and provision of opinions. Our opinions are given based on the assumption that the information in the tender offer and all the information and documents obtained from the Company and that from the interview with its executives and concerned parties are true. Any future changes in the said information or any future event may have material impacts on the Company's operations and the shareholders' decision-making on such tender offer. Our opinions can be illustrated below: 5.1. Appropriateness of the offering price As the Tender Offeror has made a tender offer to purchase the Company's ordinary shares at the price of 8.82 baht per share, we have carried out share valuation through various approaches to consider the appropriateness of the offering price as detailed below: 5.1.1 Book value approach This approach will reveal the book value of the Company at a certain period of time. The share price is determined based on the net book value of the assets shown in the Company's reviewed consolidated financial statements as at March 31,2004. Based on such financial statements, the Company's book value is calculated as follows: (Unit : million baht) Amount Issued and paid-up share capital 223.00 Retained earnings (Accumulated loss) 152.50 Book value of the shareholders' equity 375.50 Number of shares issued 22.30 Book value per share (baht/share) 16.84 Source: Consolidated financial statements as at 31 March, 2004 By this method, the book value of the Company is 16.84 baht per share. However, on May 10, 2004, the Company paid dividend at 5.75 baht per share to the shareholders causing the book value per share to be lowered to 11.09 baht per share. The offering price of 8.82 baht per share is, therefore, 2.27 baht per share lower or 25.74 baht per share lower than the book value. 5.1.2. Adjusted book value approach By this method, the share price is derived from the value of the Company's total assets as of March 31, 2004, deducted by total liabilities, and adjusted by commitments and contingent liabilities, as well as revaluation of some fixed asset items conducted by the independent appraiser. The amount so derived will then be divided by the total number of shares. The appraisal of the fixed assets was made on December 31, 2003. Nevertheless, the impairment had not been recorded in the first quarter of 2004 financial statement because the auditor had ruled that, according to the accounting standard, the impairment cannot be recorded as long as these fixed assets (which belong to a subsidiary's company) can generate revenue enough to cover their depreciation. Besides, the Company paid a dividend of 5.75 baht per share on May 10, 2004. Also the Company has produced net loss during the past several years and the last 5 years of the net loss carried forward can be used for tax saving on the future profit. The Company's share price calculated by this method is shown below: (Unit : million baht) Total assets 833.29 Less : Total liabilities 457.80 Book value of the shareholders' equity 375.49 Adjustments Downward adjustment from : Loss from revaluation of subsidiary's assets for rent 34.74 Dividend payment 128.23 Upward adjustment from : Present value of tax saving from loss carried forward 2.09 Book value of shareholders' equity after the adjustments 214.61 Number of issued and paid-up shares (million shares) 22.30 Share value by the adjusted book value (baht/share) 9.62 The above valuation shows that the Company's adjusted book value is 9.62 baht per share, which is 0.80 baht per share or 9.07 percent higher than the offering price. 5.1.3. Price to book value approach (P/BV) By this method, the share price is calculated by multiplying the Company's book value as per the Company's reviewed financial statement at March 31, 2004 (adjusted with appropriate items as per adjusted book value approach) by the average P/BV ratio of the SET-listed companies in the machinery and equipments sector. The average P/BV ratios of this sector over the retroactive 3 months, 6 months, and 12 months from 20 July 2004 (one day before the Company received the offer from the Tender Offeror) are as follows: Period Average P/BV ratio of companies in Share price the machinery and equipments sector (baht/share) Average of retroactive 3 months 1.24 11.93 Average of retroactive 6 months 1.36 13.08 Average of retroactive 12 months 1.37 13.18 Source : Setsmart According to the consolidated financial statements as at March 31, 2004 and taking into account all the adjustment items , the Company's book value is 9.62 baht per share. Therefore, the share price derived by this method is between 11.93 baht and Bt. 13.18 baht per share, which is higher than the offering price by 3.11-4.36 baht per share, or between 35.26 percent and 49.43 percent. 5.1.4 Market value approach The share price by this method is calculated based on the weighted average closing prices of the Company's shares traded on the SET. However, the Company's share has not been permitted for trading on the SET since May 9, 2003, therefore, this share valuation approach is not applicable. 5.1.5 Price to earning ratio approach This valuation method is a multiplication of the four most recent quarters'earning per share by average P/E ratio of the SET-listed companies in the machinery and equipments sector. We have considered the P/E ratio over the retroactive 3 months, 6 months, and 12 months from 20 July 2004 (one day before the Company received the offer from the Tender Offeror). The results are shown below. Calculation period Average P/E ratio of machinery and Share price equipments sector (baht/share) Average of retroactive 3 months 6.34 N/A Average of retroactive 6 months 7.05 N/A Average of retroactive 12 months 7.16 N/A Source : Setsmart However, the Company's financial statements during the past four quarters, from the second quarter of 2003 to the first quarter of 2004, indicate that the Company generated an operating profit of 15.84 million baht in the first quarter of 2004 but a total operating loss of 87.88 million baht during the second to the fourth quarter of 2003. The performance for the past four quarters, therefore, has been a net loss in total of 72.04 million baht or 3.23 baht per share. Therefore, this valuation method is not applicable. 5.1.6 Discounted cash flow approach This method takes into account the profitability of the Company in the future by discounting the free cash flow by an appropriate discount rate, specifically the Cost of Equity. This evaluation is based on the financial projection from the reorganization plan for only TCJ, not including that of its subsidiary, Big Crane and Equipment Rentals Co., Ltd. because the plan allows the divestment of the Company's investment in all subsidiaries, affiliated companies, and other companies. The rationale for the divestment is that these companies have not contributed positive return to the Company. This financial projection is shown for the period until 2012, based on the assumption that the company is a going concern, and on the current economy and social conditions without any major changes to the Company. The advisor to the shareholders has reviewed the assumptions and the financial projection in the reorganization plan. It has adjusted some items in accordance with interviews with the Company's executives and concerned staff only for the purpose of deriving a fair value of the shares and comparing to the offering price. In case that the economic conditions, other external factors that affect the Company's operation, and the Company's situations materially affect the above-mentioned assumptions, the price from this valuation method may change and cannot be used for other purposes. Principle assumptions for the financial projection are as follows ; 1) Revenue : Revenue is composed of sale of products via auction and non-auction which is expected to grow in the same direction with the construction industry. Another revenue is from sale of obsolete inventory which is of little demand by the market, so the price is lower than its cost. According to the projection, the Company should complete the sale of this inventory by 2010. The last revenue is from services and maintenance of equipments which is expected to grow by 10 percent per year. 2) Cost : Cost is proportionate to each type of revenue. The cost of sale for new equipments via non-auction is 85.00 percent of the revenue during 2004-2007 and 83.00 percent of the revenue during 2008-2012. The cost of sale for new equipments via auction is 87.00 percent of the revenue during 2004-2007 and 85.00 percent during 2008-2012. The cost for the obsolete inventory is 162.53 percent of the revenue and cost for services and maintenance of equipments is 50 percent of the revenue. 3) Selling and General Administration Expenses (SG&A) : SG&A is composed of fixed costs and variable costs. The fixed costs are out-of-pocket expenses, miscellaneous expenses, insurance expenses. The variable costs related to production are salary, overtime wages, fringe benefits to the employees, maintenance and repair expenses which are expected to grow by 3 percent per year. The variable costs related to the selling are commission fee for which new equipment is 1 percent of the sale price while obsolete inventory is 1.5 percent of the sale price . 4) Turnover Rate of the Current Assets and Current Liabilities : The average turnover rate for account receivables is 30 days while that of the inventory is 60 days and that of the trade payables is 60 days. 5) Discount Rate : The discount rate is a return to the share holders (Cost of Equity : Ke) which is derived from Capital Asset Pricing Model : CAPM as shown below ; Ke = Rf + ? (Rm-Rf) while ; - Risk free rate (Rf) is the return from investment in government bond with the longest maturity, 18 years. As at March 31, 2004, this figure was 5.06 percent per annum. - Beta (?) is the co-relation of weekly return of the stocks in the machinery and equipments sector and the weekly return of the SET index. Now that the Company's shares have been suspended from trading for more than 1 year, we have to find the beta of the companies which have similar business. The only companies in the machinery and equipments sector are Patkol Plc. and Thai Lift Industry Plc. Beta from Bloomberg is collected 1 year retroactively from July 16, 2004. Then this historical beta is used for calculation of an unleveraged beta of each company and find the average, then adjust it with the Company's debt- equity ratio. Beta from this calculation turns out to be 0.38. - Market return (Rm) is an average return of the SET index during 1989-2003 comprising of return from gain of the SET index and from dividend. The 15-year average market return is 18.91 percent per year. The above calculation generates a Cost of Equity of 9.70. However, the Company contains higher risk than other companies in the same sector. Although the Company has met all requirements in the reorganization plan but the long-term business plan is still unclear both for the existing business and the new business. In addition, it is still uncertain whether the Company can eliminate the ground for delisting as it has not generated 3 consecutive quarters of operating profit or one full year of operating profit. Therefore, the advisor believes it is appropriate to adjust the Cost of Equity to justify the Company's risk. The appropriate range of Cost of Equity should be between 13.00 and 16.00. The share prices from the discounted cash flow approach which also includes the cash in the Company as at the end of the first quarter of 2004, amounted to 145.73 million baht, are as follows ; Ke Share Price (%) (baht/share) 13.00 10.90 14.00 10.35 15.00 9.89 16.00 9.49 The share prices from this valuation method are 9.49 10.90 baht per share which are higher than the offering price of 8.82 baht per share by 0.67 2.08 baht per share or 7.60 23.58 percent. Nonetheless, the financial projection is taken from the reorganization plan. It is subject to several factors which may affect the Company's future cash flow but cannot be accurately quantified such as ; - The short-term loan from a foreign institution which is due within 1 year for repayment of loan and for working capital. The interest rate for the loan is based on LIBOR rate. The loan is revolving yearly but there is always an uncertainty in revolving it. Further, LIBOR is a floating interest rate and sensitive to the capital market situation and world condition. - The Tender Offeror plans to change the policy related to the investment in subsidiaries, affiliated companies, and other companies from allowing the plan administrator to divest these investments to keeping these investments because these companies have improved in performance. However, the long-term business plan is still uncertain resulting in impossibility in evaluating the value of these investments. - The new business to enhance the Company's profitability and financial status is still in the process of negotiation and due diligence. Therefore, there is still an uncertainty in the amount of investment, source of fund, investment conditions, and long-term business plan. It is impossible to perform a financial projection for this new business. Table of the Company's share prices by the above methods in comparison with the offering price: (Unit : baht/share) Share valuation method Valuation Offering Above (Below) offering price Price Price Baht % 1. Book value 11.09 8.82 2.27 5.74 2. Adjusted book value 9.62 8.82 0.80 9.07 3. Price to book value 11.93-13.18 8.82 3.11-4.36 35.26-49.43 4. Market value N/A 8.82 N/A N/A 5. Price to earning ratio N/A 8.82 N/A N/A 6. Discounted cash flow 9.49-10.90 8.82 0.67-2.08 7.60-23.58 From the above table, it is evident that 4 share valuation methods are applicable namely the book value, the adjusted book value, the price to book value and the discounted cash flow. These 4 methods produce the share prices ranging between 9.49 baht and 13.18 baht per share. However, we are of the opinion that the book value approach is not appropriate as the book value as at March 31, 2004 does not reflected the loss from the assets revaluation, the dividend payment in the second quarter of 2004, and the potential tax saving from the loss carried forward. The share price from this method, therefore, does not reflect the current fair value. The price per book value approach is also not an accurate reflection of the fair value because the companies in the machinery and equipments sector are used as reference because of its similarity of business to the Company's. However, the products of these companies are not the same as the Company's and the operational conditions are different. This valuation method can reflect the fair share price only to a certain level. The discounted cash flow approach is highly sensitive to the changes in assumptions and the prevailing economic conditions. Should there be material changes to these factors, there will also be changes to the share price. Finally, the effects from the short-term foreign loan, changes in the policy related to divestment of investment in the subsidiaries, affiliated companies, and other companies, and the investment in the new business make it difficult to derive an accurate fair share price. We believe that the adjusted book value which yields the share price of 9.62.baht per share is appropriate and reflects the fair share price which is higher than the offering price. We are, therefore, of the opinion that the offering price of 8.82 baht per share is not appropriate.5.2 Reasons for acceptance and/or rejection of the tender offer 5.2.1 Reasons to reject the tender offer Inappropriate offering price : we are of the opinion that our fair share price based on the adjusted book value is higher than the offering price of 8.82 baht per share by 0.80 baht per share or 9.07 percent. Therefore, we view that the offering price is inappropriate. 5.2.2 Other factors for consideration The shareholders who reject this tender offer may be affected as follows: 1) The Company's shares liquidity: Although the Company has successfully implemented the reorganization plan approved by the Central Bankruptcy Court on December 1, 2003, it is still in the process of preparing to file for a revocation of reorganization at the Central Bankruptcy Court. It will also have to eliminate the ground for delisting for which it needs to generate 3 consecutive quarters of operating profit or one full year of operating profit. The small shareholders who have not tendered their securities this time may not find trading liquidity and may fail to sell securities at the time required. Ultimately, should the Company be not able to eliminate the ground for delisting by the end of first quarter of 2006, it may be delisted form the SET which, as a result, will certainly cause the trading illiquidity. 2) Management risk arising from the Tender Offeror: As at December 31, 2003, the Tender Offeror has acquired 91.30 percent of the Company's ordinary shares via a debt to equity conversion. The shareholders who control more than 75 percent of a company can absolutely control the voting in the shareholders meeting for all matters including the material resolutions which, either the law or the Company's article of association, requires at least three fourth of the votes from the shareholders in the meeting. The small shareholders, therefore, don't have enough votes for balancing the power of the major shareholders. 3) Risk from the new business : Although the Company has been considering an investment in a new business and performing a relevant due diligence but any details of which, for instance, the total investment amount, the source of fund, the investment conditions, and the length of preparation period have not been made clear. Therefore, the costs and benefits from this investment cannot be estimated. 5.3 Benefits or impacts from the plans and policies indicated in the tender offer and viability of such plans and policies This tender offer is made in compliance with the SEC Notification no. KorJor 53/2545 regarding rules, conditions and procedures of security holding for business takeover. As stated by the Tender Offeror in the tender offer, it has acquired the Company's ordinary shares from the debt to equity conversion according the reorganization plan approved by the Central Bankruptcy Court on December 1,2003. It has no plan to delist the Company's shares from the SET. We hereby certify that we have given opinions on the tender offer prudently in line with professional practices and with due regards to the interest of the shareholders. Sage Capital Ltd. (______________________) (_____________________) Mr. Thanathip Vidhayasirinun Mrs. Saranya Krasaesian