contract decreases the BTSC's bargaining power and may have an adverse affect on BTSC's business and profitability. BTSC is dependent on Siemens with respect to several aspects of its operations. Siemens is also the main maintenance contractor under a maintenance agreement for a period of 10 years, expiring in December 2014. Its maintenance fees for the years ended March 31, 2007, 2008 and 2009 and nine-month periods ended 31 December 2009 were approximately Baht 328.2 million, Baht 344.2 million Baht 349.7 million, and Baht 262.2 million, respectively. The interests of Siemens as provider of its services may conflict with the BTSC's interests. BTSC currently has limited alternative sources of supply for these services and equipment and, as a result, may have limited negotiating power with Siemens regarding the terms for providing these services or any adjustments for a replacement system. In the event that Siemens is unable to provide satisfactory service in accordance with the terms of its agreement, or in case of termination of the agreement, or if Siemens seeks to amend the terms of its agreement in a manner that is not favorable to BTSC, BTSC's business, financial performance, results of operations and prospects may be adversely affected. 1.11 BTSC is exposed to fluctuations in operating costs, including maintenance costs and the cost of electricity used to power the BTS SkyTrain System's operations. BTSC's operating costs may increase due to factors beyond the control of BTSC, including compliance with its obligations to maintain, renew and replace the operating assets and infrastructure of the BTS SkyTrain System to the standards prescribed by the BMA from time to time; compliance with safety and operating performance standards from the BTS SkyTrain System, which may be enhanced by the BMA being required to operate at a level of service 24 despite reduced demand (such as operating trains for a certain minimum number of hours and with prescribed frequency); BTSC's need to procure additional operating assets and possibly to incur additional capital expenditure and operating costs due to extensions of the BTS SkyTrain System (or operating any extension of the skytrain system undertaken by the BMA); any increase in mandatory employee benefits; any increase in the amounts we may have to pay to Siemens under the Maintenance Agreement; any potential downturn in the business of VGI and/or its subsidiaries; or any change in government fiscal or other policies that affect transportation operations or demand. BTSC has no right to, and there can be no assurance that we can, obtain reimbursement of these expenses from the Government or the BMA or that BTSC could charge higher levels of fares to offset any such increased costs. BTSC's future expenses could therefore increase at a higher rate than its future fare increases. Such events would lead to a decline in BTSC's profitability, BTSC's business, financial performance, results of operations and prospects may be adversely affected. 1.12 BTSC does not own the Civil Works of the BTS SkyTrain System or the land on which the BTS SkyTrain System's stations and railways are located. Pursuant to the Concession Agreement, the Civil Works for the BTS SkyTrain System were constructed on public lands provided to BTSC by the BMA. BMA provides BTSC with the exclusive right to use the land during the term of the Concession Agreement, but continues to retain its rights in the land as the Civil Works have been completely constructed and title thereto has been legally transferred to BMA. In addition, BTSC is required to transfer ownership of the Electrical and Mechanical Works to BMA upon the expiration of the term of the Concession Agreement. All rights in relation to software, copyright or patent rights BTSC has will also be transferred at that time. If these limits on BTSC's ownership and rights over property are maintained or worsen against BTSC, BTSC use of the property for the BTS SkyTrain System and other businesses BTSC may enter into in the future may be severely limited, which could have a material adverse effect on BTSC's business, financial condition, results of operations and prospects. If BTSC is in default or bankrupt, creditors of BTSC are not entitled to enforce any repayment from the Civil Works and other assets transferred to BMA. However, the creditors of BTSC can enforce repayment only from electric trains, other movable assets and other investments of BTSC pursuant to which secured creditors (if any) are entitled to receive repayment from the enforcement of such assets before other unsecured creditors, which are also subject to the contractual rights of enforcement of BMA. 2. Risk from Hotel Business Operations Formerly, the Company's core businesses were businesses related only with property development. However, the Company presently places more emphasis on the hotel business especially 3-6 star hotels in Bangkok as well as up-country. Hence, there may be risks from operating this new business since that was not the Company's core business in the past. The Company has formed a joint venture company, Absolute Hotel Services Co., Ltd., with partners that have extensive experience in the hotel business. The objective for setting up the joint venture is to develop a hotel network under the brand U Hotels & Resorts to manage 3-4 star hotels of the Company. For 5-6 star hotels, the Company forms alliances with international hotel chains since these international hotel chains are well established and have their own clientele. Moreover, the Company was a shareholder of the Regent Hotel on Rajadamri Road and The Empress Hotel in Chiang Mai as well as operating hotels such as the Empress Bangkok, now known as the Eastin Makkasan Bangkok. Presently, the Company also operates the Eastin Lakeside Hotel and therefore has the capability to operate hotel businesses. 25 3. Risk from Property Development Business in terms of Rising Prices of Construction Materials Cost of construction materials is an imperative component of construction cost in developing property projects. Price of construction materials tend to fluctuate in line with rising oil prices and growth of the property sector. Construction cost of the Company's projects has risen in the recent past as a result of this fluctuation and consequently impacted the Company's profitability. However, the Company efficiently manages construction cost by including cost of construction material and labour of the project in its contracts. By using this policy, construction contractors become responsible for fluctuation in the cost of construction materials. As for construction materials that are the Company's responsibility, the company has a qualified Project Development Department with experience and good relationships with suppliers. The Company has strong bargaining power and is able to control the cost of construction material at the appropriate level. The Company always plans the construction in detail and assesses the amount of construction materials required for each material for its projects prior to placing orders. 4. Risk from managing Baan Aur-Arthorn Project The Company has signed a contract with National Housing Authority to construct Baan Aur-Arthorn project on April 25, 2006. However, due to political uncertainty which may affect public policy concerning the continuity of this project, the Company will have to wait for clarification on the matter. This uncertainty directly affects the number of units that the Company shall be approved to construct and hence future revenue. At present, the number of units that the Company has been approved to construct has been reduced from 9,584 units to 8,048 units from the total of 20,000 units since the National Housing Authority has terminated the project at Bang Bor (1,536 units). The Company has made provision for impairment of the development cost of the Saraburi project and the Chonburi project in the amount of Baht 19.8 million and Baht 11.2 million as stated in financial statements as at March 31, 2008 and 2009 respectively. However, the Company still receives revenue by installments from the completed houses that have been handed over to the National Housing Authority. The Company has completed the construction and handovered 4,216 units to the National Housing Authority. Presently, 2,108 units are under construction and the remaining 1,724 units are awaiting the order from the National Housing Authority to start the construction. 5. Risk from Interest Rate Volatility After the completion of its business rehabilitation plan, the Company still has a certain amount of debt outstanding. However, these debts are non-interest bearing debts and thus the Company is not affected by the risk from interest rate volatility. As regards new financing from financial institutions for the Company's projects after the termination of the business rehabilitation, the Company has negotiated with several financial institutions and entered into loan agreements with one financial institution that offered the best terms and conditions. As for future projects, the Company has a policy to find its funds from the best sources depending on the economic and financial situation at the time. Material Cases or Claims under the Process 1. The following pending and active legal disputes involving the Company are disputes that did not arise out of the Company's ordinary course of business and may have a significant impact on the Company's business operations as of 31 December 2009 as follows: 1.1 The Company and two subsidiaries, as mortgagors of the assets placed as security for the Company's bonds, were sued by a local bank for payment of the secured bonds, together with interest charges and other related expenses, totaling approximately Baht 4,250.8 million. The 26 court of First Instance ordered the two subsidiaries to make payment of such amount. The two subsidiaries appealed the decision and the Appeals Court found in accordance with the court of First Instance. However, the bank has submitted settlement claims under the Company's rehabilitation plan and the Company held an open auction of such assets in order to make payment to the bank, as discussed in Note 9 to the financial statements for the period of nine months ended December 31, 2009. Therefore, the subsidiaries have not set aside provision for the contingent liability in their accounts. 1.2 The Company, together with its directors, has been sued by a local financial institution for repayment of a short-term loan and interest charges amounting to Baht 150.5 million. 1.3 The Company has been sued by a local financial institution, as guarantor for trust receipts issued by a company, amounting to Baht 90.3 million. 1.4 A subsidiary has been sued, together with the Company's and its subsidiary's directors, by a creditor claiming land costs of approximately Baht 436.8 million because of the breach of a condition of a contract to purchase and to sell the land. The Court of First Instance ordered a subsidiary to make payment amounting to Baht 38 million and interest. Currently, the case is in the process of being appealed by the subsidiary and the subsidiary believes that it will suffer no significant loss as a result of this litigation. 1.5 A subsidiary has been sued by an individual for payment for loss of property from residing in the hotel of the subsidiary, amounting to approximately Baht six million. Currently, the lawsuit is being considered by the Court of First Instance. However, the subsidiary believes that it will incur no loss beyond the amount it has set aside. The litigation discussed in item 1.1 - 1.3 represents cases in which creditors submitted claims under the rehabilitation plan, and on November 14, 2006, the Central Bankruptcy Court ordered the termination of the Company's rehabilitation. However, liabilities in respect of this litigation are pending final court judgment or comptroller's orders. In addition, the Company held an open auction of some assets for debt settlement. The Company believes that it will incur no loss beyond the amount it has set side. 2. The following pending and active legal disputes involving BTSC are disputes that did not arise out of BTSC's ordinary course of business and may have a significant impact on BTSC's business operations as of 31 December 2009 as follows: 2.1 In a Civil Court case, Puel Pipeline Transportation Company Limited, Dhipaya Insurance Public Company Limited and Samaggi Insurance Public Company Limited, as the 1st, 2nd and 3rd Plaintiffs, respectively, have claimed damages of Baht 108,602,702 against BTSC, as the 2nd Defendant, and Italian-Thai Development Public Company Limited and Thai Maruken Company Limited, as the 1st and 3rd Defendants, respectively, on the grounds of insurance, subrogation, tort and damages. In connection with this case, all of the plaintiffs submitted applications for debt repayment to the Bankruptcy Court as group 10 creditors (on an unsecured basis as having a legal dispute arising from tort obligations). The Bankruptcy Court dismissed applications for debt repayment made by group 10 creditors. An appeal from such order to the Bankruptcy Court is currently in process. 2.2 In the Central Administrative Court, Mr. Suparatham Mongkolsawas, et al claimed against BMA as the first (1st) defendant, the Governor of the BMA, as the second (2nd) defendant, Director of Public Works Department, as the third (3rd) defendant, and BTSC as the fourth (4th) defendant on the ground of faults under the Bangkok Metropolitan Administration Act and the Rehabilitation for Disabled Person Act, B.E. 2534 (1991), and other ministerial regulations relating to the provision of elevator and other facilities for the disable persons. On 22 September 2009, the court dismissed the case. Later, the plaintiffs appealed to the Supreme Administrative Court against such ruling but BTSC has filed an objection. Such appeal is currently in process. 2.3 In the Central Bankruptcy Court (in an affiliated business rehabilitation case), BMA submitted an application for repayment pursuant to BTSC's business rehabilitation, and the official 27 receiver issued an order allowing BMA to receive repayment in respect of (i) consideration for use of the government real property in an amount of Baht 8,330,667, and (ii) a guarantee fee in an amount of Baht 12,296,700 on the condition that BMA shall be entitled to receive payment only when BMA has paid to Krung Thai Bank Public Company Limited the same amount (but not exceeding the guarantee limit). The Court dismissed the BMA application for repayment in respect of (i) the land and property taxes in an amount of Baht 72,352,502.02 and (ii) building rental in the amount of Baht 201,440,705.60. Later, BMA appealed to the Bankruptcy Court against such order of the official receiver. Such appeal is currently in process. The hearing procedure is scheduled on 24 May 2010. According to Section 90/75 of the Bankruptcy Act B.E. 2483 (as amended), upon the Bankruptcy Court's order to terminate the business rehabilitation,BTSC is released from any debts incurred prior to the date on which the Bankruptcy Court issued the order to rehabilitate BTSC's business (7 July 2006), except for debts for which creditors have applied for repayment under the business reorganization. No. of Employees As of March 31, 2009, the Company had 147 employees. Investment in Subsidiaries, Associates Companies, and Related Companies Investment in Subsidiaries, Associates Companies, and Related Companies as of December 2009 are shown in the table below BTS Group Holdings Public Company Limited (Unit: Million Baht) Type of % of Investment Company Name Business Paid Up Capital Shareholding Cost Siam Paging and Land owner 5.00 100.00 5.00 Communication Co., Ltd. Sampaopetch Co., Ltd. Land owner 1.00 100.00 1.00 Saraburi Property Co., Ltd. Land owner 100.00 30.00 7.50 Dnal Co., Ltd. Office Building 50.00 100.00 680.61 for rent Muangthong Assets Co., Hotels 433.50 100.00 437.19 Ltd. Yong Su Co., Ltd. Service 234.00 100.00 236.57 Apartment Thana City Golf & Country Management 10.00 100.00 10.0 Club Co., Ltd. and Operation Kamala Beach Resort & Hotel and 859.00 100.00 1,288.60 Hotel Management Co., Ltd. Property Development Tanayong Property Building 1.00 100.00 1.00 Management Co., Ltd. Management Absolute Hotel Services Co., Hotel 8.00 50.00 4.00 Ltd. Management Tanayong Food and Restaurant 1.00 100.00 1.00 Beverage Co., Ltd. Hip Hing Construction Construction 25.00 51.00 12.75 (Thailand) Co., Ltd. Tanayong International Ltd. Securities 1,000 USD 100.00 0.03 Investment In addition, on 4 May 2010, the Company has acquired 15,022,335,992 BTSC ordinary shares or equivalent to 94.6% of total issued shares of BTSC. 28 BTSC (Units: Million Baht) Type of % of Investment Company Name Paid Up Capital Business Shareholding Cost Nuvo Line Agency Company Real estate 2,001.00 80.00 1,600.80 Limited development BTS Assets Company Real estate 800.00 100.00 1,200.00 Limited development Bangkok Smartcard System E-Money 200.00 100.00 200.00 Company Limited BTS Land Company Limited Real estate 10.00 100.00 10.00 development VGI Global Media Company Advertising 10.00 100.00 2,500.00 Limited Change in Capital in the Last 3 Years Unit: Million Baht Capital Increase After the Increase Date (Decrease) (Decrease) Note 18 May 2007 480.00 5,813.33 To use the proceed from the offering to the specific investors for the investment with the group of investors including Winnington Capital and its affiliated companies which are located in Hong Kong in order to setting up a join venture company to engage in the real estate development, including hotel business, construction of villa for sale and land, in Phuket Province 28 July 2009 1,034.80 6,848.13 To issue 1,034.80 million newly issued ordinary shares to Winnington Capital Limited as a part of the purchase price to Winnington Capital Limited for the shares in Kamala Beach Resort & Hotel Management Company Limited. As a result, the Company would hold 100% of paid up shares in Kamala Beach Resort & Hotel Management 18 November 766.26 7,614.39 To issue 856.02 million newly issued 2009 ordinary shares to accommodate the (more)