EXPLANATION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS 1. OVERVIEW As of the end of the year 2002, the company and its subsidiaries has the total of 10,662,500 mobile phone subscribers, comprising of 2,526,300 GSM Advance and GSM 1800 subscribers and 8,136,200 One-2-Call subscribers,which represents an increase of 5,459,200 subscribers or 104.9%. The main factors were the significant growth in the mobile phone market, the changes of this industry such as the lower handset price, unlocking IMEI (International Mobile Equipment Identity), and the popular in Pre-paid system usage which is given a lower cost and convenience to purchase. During the year,the entrance of a new operator in the industry caused of the intense competition. As a result,the company's market share decreased from 65% as of the end of 2001,to 61% as of the end of 2002. The company's financial performance, however,significantly increased from last year. In 2002, the company and its subsidiaries gained the total revenue of Baht 81,366 million and the net profit of Baht 11,430 million, an increase from the revenue of Baht 60,670 million and the net profit of Baht 3,851 million in 2001. 2. ANALYSIS OF OPERATION RESULTS CONSOLIDATED FINANCIAL STATEMENT FOR THE YEAR ENDED OF DECEMBER 2002, COMPARING TO THE YEAR ENDED OF DECEMBER 2001. The primary source of revenue of the company and its subsidiaries comprises of revenue from services and equipment rental and revenue from sales, deriving mainly from the company's mobile phone business, data communication service business, and call center business. Revenue from Services and Equipment Rental In 2002, the company and its subsidiaries gained Baht 60,926 million of revenue from services and equipment rental, increased by Baht 19,185 million or 46% when compared with last year. The result is from notably enlarging the customer bases, especially the Pre-paid system service. ARPU of GSM advance and One-2-Call stood at Baht 1,170 and Baht 335, respectively. This figure represents a decline from last year, resulting from tariff promotion during the year 2002, as well as the company's larger and wider subscriber base. Revenue from Sales Revenue from sales was Baht 19,325 million in 2002, an increase of Baht 1,876 million or 10.8% when compared with last year. The increase was primarily due to the dramatic growth of total mobile phone market in 2002, reflecting to increase in company sales volume, despite of facing to the lower handset selling price after unlocking IMEI. Cost of Services and Equipment Rental Cost of services and equipment rental was Baht 29,766 million, up Baht 8,130 million, or 37.6% from the year of 2001. These are 2 main components; (1) the increase of annual revenue sharing payment to TOT as a percentage of the continuously increased income from mobile phone services, and (2) the amortization costs of mobile phone networks. In addition, the company had changed the amortization period of NMT analog system from not over June 2003, to September 2002. The result of the amortization period change is an increase in the amortization expense in 2002 by Baht 322 million. Costs of Sales Costs of sales rose by Baht 1,536 million or 11.3% from last year, to be Baht 15,075 million in 2002 due to the continual increase of mobile phone subscribers, and the lower handset selling price. As a result, the gross profit margin from sales stood at 22% in 2002, slightly decreased from previous year. Selling and Administrative Expenses Selling and administrative expenses of the company and its subsidiaries rose from Baht 9,483 million in 2001 to Baht 13,802 million, or up 45.5% due to the following main factors. * Increase in staff expense of Baht 307 million. * Increase in marketing expense by Baht 921 million, mainly from Baht 660 million of the expense in NMT analog migration campaign to digital GSM advance system. * Increase in allowance for doubtful accounts and bad debts of the company and its subsidiaries by Baht 2,104 million. * Increase in amortization of goodwill of Baht 578 million. * Increase in billing and collection expenses of Baht 217 million. Interest Expenses Interest expenses rose from Baht 1,573 million in 2001 to Baht 3,069 million in 2002 due to debenture issued and loan increased in order to finance the network expansion. Income Tax Income tax rose Baht 1,578 million to Baht 7,816 million in 2002, or up 25.3% from last year due to significant increase in total revenues of the company and its subsidiaries, as the company gained tax benefit of Baht 434 million from selling the investment in Advanced Paging Co., Ltd. to third party. Net Profit Net profit of the company and its subsidiaries was Baht 11,430 million, an increase of Baht 7,579 million,or 196.8% when compared with last year due to the reasons as mentioned above. In 2001, the company also recorded the allowance for impairment loss of NMT analog network and paging network cost in the amount of Baht 4,265 million. 3. ANALYSIS OF FINANCIAL POSITION 3.1ANALYSIS OF ASSETS Cash on Hand and Cash Equivalents and Short-Term Investments At the end of 2002, the company and its subsidiaries' cash on hand and cash equivalents was Baht 4,068 million and short-term investments was Baht 62 million. While compared with the end of 2001, the amount of cash on hand and cash equivalents was Baht 15,284 million and short-term investments was Baht 88 million. The decrease was primarily from the company and its subsidiaries investment in continual network expansion with higher than cash flow received from operating and financing sources. Trade Accounts Receivable Net At the end of 2002, net trade accounts receivable decreased from Baht 7,674 million as of the end of 2001, to Baht 7,239 million. The decrease was primarily due to that the company has strengthened the collection performance. Inspection of fraud has become more stringent. In addition, the application of an intelligent database system enables the company to segment the customer and thus better receivable management. Moreover, the higher proportion of prepaid revenue results in the decline of average debt collection period from 40 days to 33 days. Net Inventories Net inventories decreased from Baht 2,238 million at the end of the year 2001, down to Baht 1,961 million at the end of the year 2002. The main reason was the lower cost of inventories due to the drastic expansion of total mobile handset market, manufacturer achieved economy of scale. Property and Equipment Net Net property and equipment totaled Baht 9,748 million, as of the end of 2002, increasing from Baht 6,233 million at the end of 2001. The significant increase was due to valued added service equipment expansion. The Cost of Mobile Phone and Pager Networks and the Cost of Tools and Equipment for the Operation of Data Net Under the Joint Venture Agreement Net The net cost of mobile phone and pager networks and the cost of tools and equipment for the operation of Data Net rose from Baht 56,334 million at the end of 2001, to Baht 79,795 million at the end of 2002. This is due to the company's network expansion of the digital GSM system in Bangkok and the provincial area. 3.2 ANALYSIS OF LIABILITIES Trade Accounts Payable Trade accounts payable balanced of Baht 7,649 million, and Baht 10,701 million at the end of 2002 and 2001, respectively, or average payable period of 108 days and 117 days, respectively. The shorter average payable period, caused by the advance payments to the suppliers for cash discount in return, has resulted in the decrease in trade A/P though the network expansion continued. Long-term Debentures and Long-term Loans In 2002, the company and its subsidiaries issued additional long-term debentures and drew down new long-term loans at the amount of Baht 14,986 million, and Baht 3,358 million, respectively, totaling Baht 18,344 million. The company repay long-term debentures and long-term loans amounting Baht 6,357 million and Baht 1,437 million, respectively, totaling Baht 7,794 million. As of the end of 2002, the company and its subsidiaries had the long-term debentures and loans at the amount of Baht 51,734 million, compared with the amount of Baht 41,184 million of last year.The portion of long-term debentures and loans, maturing within 1 year, amounted to Baht 8,501 million. While the portion of long-term debentures and loans, maturing longer than 1 year, amounted to Baht 43,233 million. Other Current Liabilities Other current liabilities balanced of Baht 6,124 million, as of the end of 2001, increased to Baht 7,969 million at the end of 2002. The major items were Baht 3,666 million income tax payable and Baht 2,304 million unearned income from prepaid revenue. 3.3 ANALYSIS OF SHAREHOLDERS' EQUITY As of the end of 2002, the company had Baht 51,241 million equities, increased from Baht 41,021 million at the end of 2001. Its paid-up capital was Baht 2,935 million with Baht 20,004 million premium and Baht 28,101 million retained earning. During December, 2002, the company repurchased 2.16 million shares at the average price of Baht 32.67 per share. As at November 14, 2002, the company passed the resolution of the board of directors to approve to repurchase stocks, not exceeding 90 million shares, or 3.07% of total issued and fully paid-up share capital. 3.4 ANALYSIS OF LIQUIDITY As part of the network coverage expansion as well as adding capacity,the company continued to invest high-quality service to its customers. In 2002, the company and its subsidiaries had net cash payments to investing activities of Baht 36,746 million. As a result of strong growth in revenue from services and equipment rental and revenue from sales, the company's net cash flow from operation was Baht 22,038 million. In addition, the company received Baht 14,943 million from long-term debentures, Baht 2,940 million from long-term loans, and Baht 20 million of short-term loans from commercial bank.The company cash outflow stemmed from Baht 13,231 million of loans and debentures repayment, Baht 1,151 million of dividend payment, and Baht 71 million of stock repurchase. Thus, the company had the net cash receipts from financing activities of Baht 3,477 million. As a result, cash and cash equivalent of the company and its subsidiaries totally decreased by Baht 11,231 million in 2002. 1