Apc Group's Pre-Audit Disclosure

March 7, 2000 PSE CIRCULAR FOR BROKERS NO. 569-00 APC GROUP'S PRE-AUDIT DISCLOSURE When the new Board of Directors assumed office in June, 1999, it immediately reviewed APC's past transactions to ensure that the financial reports reflect the true nature and valuations of all financial accounts. The review revealed that certain assets were either incorrectly classified, needed to be written off as expenses or losses or needed revaluation. Thus, the Board made the painful decision of cleaning up APC's books. Reclassification of Advances to Investments in PhilCom The major transaction recognized in 1999 was APC's majority ownership in PhilCom which increased to 73.84% from its original recorded ownership of 40%. The 33.84% increase in APC's ownership interest in PhilCom equivalent to 204.4 million shares was previously booked as advances to nominee companies at a total amount of P1.6 billion. They are now reclassified as APC's direct investment in PhilCom. Losses on PILTEL and PICOP The effects of the investment decisions of the previous management in the financial affairs of APC and PhilCom took a heavy toll on APC's 1999 financial performance. Investment-related losses amounting to more than P1 billion were brought about by the following transactions: 1. Losses resulting from APC s Investment in PILTEL APC made advances to a BVI company, Robin Venture Limited, for the purchase of PILTEL shares. The bulk of these shares were sold in early 1999 at a loss of P528.4 million. Interest receivable from Robin Venture amounting to P196.1 million had to be written off. APC had to write down the remaining investments in PILTEL from P148.1 million to P16.4 million or by P131.7 million. Losses from all the above transactions add up to P856.2 million 2. Purchase of PICOP shares Another investment by previous management was the purchase of PICOP shares at P4.84 per share for a total cost of P186.1 million. These were revalued at the current market price of P.39 per share resulting in another write-down of P 171.1 million. PhilCom's Losses Also in relation to the PILTEL transactions of previous management PhilCom incurred an interest expense of P294.6 when the arbiter of the case between PhilCom and PILTEL decided to charge interest on the balance of PhilCom's subscription to PILTEL shares. This interest was deducted from the P516 million downpayment made by PhilCom. Receivables amounting to P144 million arising from overbooking of 1997 revenues from a foreign administration were written off in 1999. PhilCom's 1999 operations, including the effects of the above write-offs, closed with a loss of P468 million. Petroleum Training and Other Operating Subsidiaries APC's traditional product lines and services such as petroleum trading operations, money transfer and manpower services continued to generate positive results. Total revenues in 1999 amounted to P1.13 billion. a robust growth of almost 100% from P0.59 billion in 1998. The combined contribution of these operations totaled P69.5 million, up by 200% from P23.1 million in 1998. Effects of the Clean-Up Under existing accounting standards, ownership of more than 50% in a subsidiary requires a line-by-line consolidation of financial statements. In accordance with this principle, when APC's recorded, ownership in PhilCom increased to 73.84%, its consolidated revenues jumped to P2.87 billion from P.91 billion in 1998 or by 215%. PhilCom contributed P1.5 billion in revenues. The one-time clean-up of APC's books and the loss incurred by PhilCom resulted in a consolidated loss of P1,396.7 million in 1999 compared to a mere P9.1 million in 1998. As a consequence of this loss and the accumulated losses of PhilCom in previous years, consolidated stockholders' equity decreased to P2.73 billion from P4.84 billion in 1998. This clean-up, however, allows APC to start with a clean slate. free from the burdens of past decisions. Its new leadership has set the stage for a good and transparent corporate governance and a professional management a public company deserves. prcd APC GROUP INC. and Subsidiaries Comparative Income Statement For the Years Ended December 31, 1999 and 1998 (Amounts in Thousands) Unaudited Audited 1999 1998 REVENUES Transmission 1,501,000 - Petroleum Sales 809,141 279,751 Service Fees 274,631 242,687 Dividend Income 123,254 123,591 Interest Income 60,629 201,267 Money Transfer Services 48,483 36,332 Equity in Net Earnings of Investees - 15,276 Other Income 54,005 9,627 2,871,143 908,532 COSTS AND EXPENSES Cost of Transmission 1,133,000 - Bad Debts 969,560 - Cost of Petroleum Sales 742,417 254,236 Interest Expense 672,479 426,541 Decline in Market Value and Loss on Investments 325,498 - Cost of Services 252,132 214,504 Foreign Exchange Loss 148,253 9,385 General and Administrative 70,269 71,928 Equity in Net Losses of Investees 61,326 - 4,374,933 976,594 Pre-tax Income (Loss) (1,503,791) (68,062) Income Tax (15,289) 58,933 Minority Interest 122,405 - Net Income (Loss) (1,396,675) (9,128) ======== ======= APC GROUP INC. and Subsidiaries Balance Sheet (Amounts in Thousands) Unaudited Audited 12/31/99 12/31/98 ASSETS Cash and Cash Equivalents 217,516 41,549 Marketable Equity Securities 190,475 3,200 Receivables 2,306,587 420,254 Inventories 63,031 7,604 Prepaid and Other Current Assets 323,348 10,464 Investments and Advances 1,401,705 8,415,348 Property and Equipment 5,232,833 126,914 Other Assets 3.604.714 223.683 13,340,210 9,249,016 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Notes Payable 1,721,798 457,475 Accounts Payable and Accrued Expenses 2,621,335 701,351 Subscriptions Payable 75,162 108,804 Income Tax Payable 16,982 16,182 Long-term Debt 2,205,000 - Advances from a Stockholder and Affiliates 3,821,275 3,119,334 Minority Interest 149,914 5,000 Stockholders' Equity 2,728,745 4,840,869 13,340,210 9,249,016 ======== ========