- The Company and its subsidiary have entered into lease and related service agreements with other related companies covering their office spaces, cars and spaces for base stations for periods ranging from 4 months to 17 years with options to renew. The Company and its subsidiary are committed to pay for rental and related services in respect of the said agreements as follows: Million Baht Per Month Advanced Info Service Public Company Limited 17.54 Advanced Info Service Public Company Limited and subsidiary 19.93 NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Method of Revenue and Cost of Revenue Recognition - The Company and its subsidiary recognize income from mobile phone and pager services when said services are rendered to customers. All service costs incurred during the period are treated as period cost. - Revenue from equipment rental is recognized over the period of and at the rate prescribed in each agreement. - The subsidiary recognizes sale and cost of sale when merchandise is delivered to customer. Accounts and Notes Receivable The Company and its subsidiary provide allowance for doubtful accounts which is equivalent to the estimated collection losses. The estimated losses are based on collection experience and the management estimates. Inventories Inventories are valued at the lower of cost or net realizable value. Cost of inventories is determined on the moving average method. In considering the realizable value, due allowance is made for all obsolete and slow-moving items. Investments Method of recording of Investments in subsidiary in the Company's separate financial statements: Investments in the subsidiary company is recorded by using the equity method of accounting. The excess of the cost of investment in the subsidiary company over its book value at the date near the acquisition is included in investments, and is amortized by the straight-line method over a period of 15 years. The proportionate share in net income of the subsidiary company for the three-month and nine-month periods ended September 30, 1998 and 1997, after eliminating all significant gains or losses deriving from intercompany transactions incurred by the Company and its subsidiary, and less amortization of the excess of the cost of investment in the subsidiary company over its book value at the date near the acquisition, are shown as net result of investment in the subsidiary company in the statements of income. The recording of investment in the subsidiary company by using the equity method has been made for the purpose of reflecting the status of and return on investment in the said company. The Company, therefore, does not take into consideration the net result of investment in the subsidiary company for the three-month and nine- month periods ended September 30, 1998 and 1997 in the income tax computation for such periods. Method of recording of investments in share capital of companies, which are not subsidiaries, in the Company's separate financial statements: Investment in share capital of companies, which are not subsidiaries and do not represent marketable securities, are recorded by using the cost method and less adjustments relating to the decline in values of investments, determined from their financial status. Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed by the straight-line method based on the estimated useful lives of assets of 1 - 20 years. In considering the recoverability of equipment, due allowance is made to certain equipment items. Depreciation and amortization for the three-month and nine-month periods ended September 30, are summarized as follows: Million Baht Three Months Nine Months Ended September 30 Ended September 30 1998 1997 1998 1997 Recorded in the consolidated statements of income 122.86 73.11 352.23 181.96 Recorded in the Company's separate statements of income 106.88 64.51 304.09 155.90 The Company has entered into a number of financial lease agreements to obtain vehicles for its business operations. For the financial reporting purpose, vehicle under each financial lease and its related obligation are recorded at the discounted minimum lease amount, using the discount rate as prescribed in each lease agreement, or the fair market value at the date of each agreement, whichever is lower. Depreciation of vehicles under financial leases is computed by the straight-line method based on the estimated useful lives of vehicles of 5 years. Depreciation of vehicles under financial leases for the three-month and nine-month periods ended September 30, are as follows: Million Baht Three Months Nine Months Ended September 30 Ended September 30 1998 1997 1998 1997 Recorded in the consolidated statements of income 0.24 0.24 0.72 0.73 Recorded in the Company's separate statements of income 0.24 0.24 0.72 0.73 The aforesaid depreciation are included in the total depreciation and amortization for the three-month and nine-month periods ended September 30, 1998 and 1997 as discussed previously. Goodwill Goodwill in the consolidated financial statements represents the excess of the cost of investment in shares of a subsidiary company over its book value at the date near the acquisition. Goodwill is amortized by the straight-line method over a period of 15 years. Amortization of goodwill for the three-month periods ended September 30, 1998 and 1997 are equally recorded at Baht 9.15 million while amortization of goodwill for the nine-month periods ended September 30, 1998 and 1997 are equally recorded at Baht 27.45 million. Costs of Mobile Phone and Pager Networks Under Concession Agreements Costs of mobile phone and pager networks under concession agreements represent costs of certain equipment and other assets which have been transferred and/or have to be transferred to the Telephone Organization of Thailand. Costs of certain equipment and other assets which have been transferred and/or ready to be transferred to the Telephone Organization of Thailand are amortized over the remaining period of each concession agreement until September 30, 2015 for the Company, and until June 11, 2005 for the subsidiary. Amortization of costs of mobile phone and pager networks under concession agreements for the three-month and nine-month periods ended September 30, are summarized as follows: Million Baht Three Months Nine Months Ended September 30 Ended September 30 1998 1997 1998 1997 Recorded in the consolidated statements of income 422.73 261.02 1,160.04 728.76 Recorded in the Company's separate statements of income 393.07 232.79 1,072.07 649.74 Deferred Charges Deferred charges represent expenditure relating to the increase of share capital, commitment fees of long-term loans, costs of long-term leases for spaces for base stations, expenditure relating to the increase of power of electricity at base station, cost of additional supplementary equipment for the operation of pager network other than those specified in the concession agreement and have been transferred to the Telephone Organization of Thailand, cost of computer software, and expenditure relating to the improvement project of mobile phone service network. The following amortization methods are used: - Expenditure relating to the increase of share capital is amortized over a period of five years. - Commitment fees of long-term loans are amortized over the period of each loan agreement. - Costs of long-term leases for spaces for base stations are amortized over the period of each lease agreement. - Expenditure relating to the increase of power of electricity at base stations are amortized over the remaining period of concession agreement. - Costs of additional supplementary equipment for the pager network other than those specified in the concession agreement and have been transferred to the Telephone Organization of Thailand are amortized over periods of five years. - Cost of computer software are amortized over a period of ten years. - Expenditure relating to the improvement project of mobile phone service network is amortized over the remaining period of concession agreement. Amortization of deferred charges for the three-month and nine-month periods ended September 30, are summarized as follows: Million Baht Three Months Nine Months Ended September 30 Ended September 30 1998 1997 1998 1997 Recorded in the consolidated statements of income 13.43 7.12 56.12 22.25 Recorded in the Company's separate statements of income 13.42 7.12 56.08 22.25 Foreign Currency Transactions Foreign currency transactions are recorded in Baht at the rates of exchange ruling on the transaction dates. Outstanding assets and liabilities in foreign currencies at the balance sheet date are translated into Baht at the exchange rates ruling on that date. Translation gain or loss is included as revenue or expense in the statements of income. The Company's forward exchange contracts are intended to hedge the risks of changes in foreign currency exchange rates. Forward exchange contract receivables and payables are recorded in Baht at the spot rate on the date of contract inception, and the balances on the balance sheet date are translated into Baht at the prevailing spot rate. Premiums or discounts under forward exchange contracts for hedging losses on assets and liabilities in foreign currencies are amortized to the profit and loss accounts over the period of the forward exchange contract. Earnings Per Share Earnings per share is computed by using the following methods: - Earnings per share in the consolidated financial statements for the three-month and nine-month periods ended September 30, 1998 and 1997 are computed by dividing consolidated net income for each period, after considering minority interests in subsidiary, by the number of common shares outstanding at the end of each period. - Earnings per share in the Company's separate financial statements for the three-month and nine-month periods ended September 30, 1998 and 1997 are computed by dividing net income for each period by the number of common shares outstanding at the end of each period. NOTE 5 - SEGMENT INFORMATION The business operations of the Company and its subsidiary, as reflected in the consolidated financial statements, are classified into four major segments; the operations of a 900-MHz CELLULAR TELEPHONE SYSTEM network; the operations of a DIGITAL DISPLAY PAGING SYSTEM network; pagers rental; and the trading of pagers. Financial information by business segment for the three-month and nine- month periods ended September 30, are shown as follows: Million Baht Three Months Nine Months Ended September 30 Ended September 30 1998 1997 1998 1997 Revenues from Services and Rental Mobile phone service 3,248.31 3,521.11 10,457.31 9,771.79 Pager service 340.70 375.45 1,050.60 1,113.20 Pager rental 2.30 - 7.41 - Adjustments of intercompany transactions (0.66) (0.74) (1.99) (2.06) Total 3,590.65 3,895.82 11,513.33 10,882.93 Revenues from Sales Sales of pagers 48.90 100.90 165.06 183.92 Total Revenues from Services, Rental and Sales Mobile phone service 3,248.31 3,521.11 10,457.31 9,771.79 Pager service 340.70 375.45 1,050.60 1,113.20 Pager rental 2.30 - 7.41 - Sales of pagers 48.90 100.90 165.06 183.92 Adjustments of intercompany transactions (0.66) (0.74) (1.99) (2.06) Total 3,639.55 3,996.72 11,678.39 11,066.85 Million Baht Three Months Nine Months Ended September 30 Ended September 30 1998 1997 1998 1997 Operating Profit (Loss) Mobile phone service 458.73 1,385.55 2,547.96 4,034.22 Pager service 121.75 109.64 358.28 256.84 Pager rental (5.87) - (16.57) - Sales of pagers (19.76) (5.33) (53.85) (11.59) Adjustments of intercompany transactions - - - - Total Operating Profit 554.85 1,489.86 2,835.82 4,279.47 Gain (loss) on exchange 579.99 (101.56) 1,313.64 (93.68) Other income 129.53 119.96 426.46 236.81 Interest expense (311.60) (199.28) (911.42) (334.86) Directors' remuneration (1.32) (1.69) (3.92) (3.92) Other expenses (9.99) (12.40) (41.09) (40.59) Net income before income tax and adjustment of net effect derived from the change in exchange rate system 941.46 1,294.89 3,619.49 4,043.23 Income tax (367.27) (406.57) (1,264.59)(1,284.59) Net income before adjustment of net effect derived from the change in exchange rate system 574.19 888.32 2,354.90 2,758.64 Adjustment of net effect derived from the change in exchange rate system - (344.18) - (344.18) Net income before considering minority interests in subsidiary 574.19 544.14 2,354.90 2,414.46 Less Share of net income of subsidiary to minority interests 32.75 17.54 80.26 51.51 Net income 541.44 526.60 2,274.64 2,362.95 Classifications of assets by business segment as at September 30, Million Baht 1998 1997 Property and Equipment - net Segment-Mobile phone service 1,798.65 1,093.55 Segment-Pager service 69.77 85.96 Segment-Pagers rental 28.97 - Segment-Sales of pagers 20.05 22.94 Adjustments of intercompany transactions (0.05) (0.05) 1,917.39 1,202.40 Other Assets Costs of mobile phone and pager networks under concession agreements - net Mobile phone service 28,526.50 18,975.69 Pager service 796.15 882.49 Other assets 9,413.22 9,910.51 Adjustments of intercompany transactions (452.16) (415.48) Total Assets 40,201.10 30,555.61 Operating profit (loss) by each segment represents revenue by each segment less the related cost of revenue and selling and administrative expenses. There is no intertransaction among those segments. Property and equipment by segment are those assets used in the operations of each segment. Other assets comprise: cash in hand and at banks, short-term investments, accounts and notes receivable, short- term loan and advances to related parties, inventories, other current assets, investments, costs of mobile phone and pager networks, deferred charges, goodwill and others. NOTE 6 - SHORT-TERM INVESTMENTS Short-term investments at September 30, represent time deposits with banks and other financial institutions and investments in bills of exchange of which their withdrawal periods are within 1 year, comprise: Million Baht Consolidated Company's Separate Balance Sheets Balance Sheets 1998 1997 1998 1997 Time deposits with local and foreign banks 3,305.99 380.00 3,240.99 300.00 Time deposits with other financial institutions 440.00 - 350.00 - Investments in bills of exchange 149.32 2,907.82 149.32 2,768.65 Total 3,895.31 3,287.82 3,740.31 3,068.65 Investments in bills of exchange as at September 30, 1998 and 1997 are shown net of discount, determined from the remaining periods of those bills of exchange as follows: Discount Rates (%) Million Baht 1998 1997 1998 1997 Recorded in the consolidated financial statements 6.15 11.50-13.50 0.68 32.18 Recorded in the Company's separate financial statements 6.15 12.85-13.50 0.68 31.35