Reasons for over 20% change in financial performance

(Translation) No.H.T.051/2549 August 15, 2006 To: Managing Director of SET Re: Explanation of the 2nd Q. 2006 Operating result varied over 20% vs. last year The Company would like to clarify the 2nd quarter operating result ended June 30, 2006 representing a Net Loss of Baht 134.3 million against the same period of last year registering a Net Profit of Baht 43.6 million. When it is compared to the 1st quarter registering at Baht 162.3 million, its Net Loss decreased Baht 28 million. During the 12 months that ended September 2005 the company experienced significant demand for motorcycles. Approximately 50,000 motorcycles were sold over and above the levels anticipated during this period. The majority of these customers have had difficulties in meeting their payment commitments and the company has taken quick action to mitigate against this loss by repossession of the motorcycles relating to the non-performing loans. This has resulted in a sharp drop in sales and an increase in losses on repossession, materially impacting on the performance of the business. The company has now enhanced its risk management and control environment to ensure that this situation does not recur. In addition, new senior management has been appointed with appropriate experience to lead the company through this transition and to implement a successful growth strategy for the future. As a result the Company expected that Sales would decline as the result of actions taken to improve the quality of the Company's installment receivables which commenced during the 4th quarter of 2005. Such program has also continuously improved operating cash flows, which were positive Baht 185 million in the 2nd quarter this year. This compares to a cash utilization of Baht 620 million in the 2nd quarter of 2005, a giving rise to Baht 805 million better cash generation over the prior year. The 2nd quarter sales compared to the same period of prior year and the 1st quarter of this year can be analysed as follows: Product Gross Sales 1st Q.2006 2nd Q.2006 2nd Q.2005 New Motorcycle 235,845 65,083 542,834 2nd Hand Motorcycle 164,849 100,805 532,126 Home Appliance 447,410 445,715 499,552 Total Gross Sales 848,104 611,603 1,574,512 Revert - In 1st Q.2006 2nd Q.2006 2nd Q.2005 Motorcycle -614,475 -314,293 -276,982 Home Appliance -157,003 -85,687 -93,529 Total Revert-In ('000 Baht) -771,478 -399,980 -370,511 Net Product Sales 76,626 211,623 1,204,001 From the above table, the 2nd quarter gross sales of motorcycle greatly decreased due to the tightening credit assessment through centralized approval and the limit of buying new motorcycle in order to push the sales of 2nd motorcycle. The sales of Home Appliance were comparable to that of the first quarter of 2006, however sales were 11% down on the same period in the prior year. Consumer demand for home appliances has been impacted as a result of higher gasoline prices, increased interest rates and lower consumer confidence following the political turmoil at the beginning of 2006.. The 2nd quarter of this year had revert-in value of Baht 400 million against the 2nd quarter last year of Baht 370.5 million. However when we compare to the 1st quarter the revert-in decreased Baht 371.5 million. The decrease was due to lesser problem Hire Purchase Accounts. Subsequently the Loss on Repossession decreased from Baht 254.1 million in the 1st quarter to Baht 107.8 million or a reduction of Baht 146.3 million. Gross Margin decreased Baht 186.7 million. Gross Margin registered at Baht 490.9 million (905.2- 414.3) compared to the same period of previous year at Baht 677.6 (1,939.3- 1,261.7) showing a decrease of Baht 186.7 million. However the gross margin ratio this year registered at 54.2% against last year at 34.9%. The better ratio was mainly due to lower portion of motorcycle sales. During the 2nd quarter of this year only 27% of sales were motorcycles whilst last year this was 68%. Product gross margin of motorcycle is lower than home appliance. Selling & Administration Expense increased Baht 4.7 million. The decline in variable expenses due to lower sales was off-set by an increase in bad debt provisions resulting in total selling and administration expenses being approximately the same as the prior year. Interest expense increased Baht 15.8 million The increase was due mainly to higher interest rate. The average interest rate was 5.6% against the same period last averaging at 3.0%. The higher rate impact was Baht 18.7 million and lower borrowing of Baht -2.9 million. Our borrowings at end of June 2006 were Baht 2,794.4 million compared to at end of June 2005 Baht 3,320.4 million. Therefore the Interest Expense increased Baht 15.8 million (18.7 - 2.9). Installment and other receivables -net It decreased from Baht 4,706 million at end of 2005 to Baht 3,850.4 million at end of June 2006. The decrease is attributable to the management actions outlined above. Inventory- net The inventory increased from the end of last year Baht 217.9 million or an increase of Baht 64.8 mainly due to higher repossession of products . At the end of June 2006 the company has approximately 30,000 used motorcycles on hand. Significant emphasis is being placed on the sale of this inventory through the existing distribution network and new channels including bulk sales of the motorbikes. Likewise this inventory is expected to decline in the 3rd and 4th quarters of 2006. If further declines in the market value of used motorcycles materialize, this will impact negatively on the profitability of the company in subsequent months. Debt / Equity Ratio It was 1.77 at end of June 2006 compared to the first quarter at the rate of 1.72. The management of Singer recognizes that the company has one of the largest distribution networks serving the up-country market in Thailand. The strategy is now to use this infrastructure to: Re establish the company as the largest distributor of home appliances to the up country market Launch new products and services to the customer base Offer a sales and services infrastructure to other companies who wish to capitalize on the Singer distribution network. Kindly be informed Yours truly, Prateep Saenghiranwathana Controller & Finance Director