pt indah kiat pulp & paper tbk and subsidiaries · pt indah kiat pulp & paper tbk and...

EDDY PIANTORegistered Public Accountants

PT INDAH KIAT PULP & PAPER TbkAND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001

AND

REPORT OF INDEPENDENT AUDITORS

UNITED STATES DOLLAR CURRENCY

PT INDAH KIAT PULP & PAPER Tbk AND SUBSIDIARIES TABLE OF CONTENTS Page

REPORT OF INDEPENDENT AUDITORS 1 FINANCIAL STATEMENTS

1. Consolidated Balance Sheets 2 2. Consolidated Statements of Income 3 3. Consolidated Statements of Changes in Stockholders’ Equity 4 4. Consolidated Statements of Cash Flows 5 5. Notes to Consolidated Financial Statements 6

Report of Independent Auditors Report No. 019/2003 The Board of Directors and the Stockholders PT Indah Kiat Pulp & Paper Tbk and Subsidiaries We have audited the consolidated balance sheets of PT Indah Kiat Pulp & Paper Tbk (the Company) and Subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the 2002 consolidated financial statements based on our audits and to report on the 2001 consolidated financial statements. We did not audit the financial statements of certain Subsidiaries which statements reflect 1% and 2% of total consolidated assets as of December 31, 2002 and 2001, respectively, and whose net sales represent 13% and 14% of the consolidated net sales for the years then ended. Certain of those statements were audited by other independent auditors whose unqualified reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for those Subsidiaries, is based solely on the reports of the other independent auditors. As discussed in Note 1, certain of those statements relate to Indah Kiat International Finance Company B.V. (IKBV) which were not audited. Except as discussed in paragraph three, we conducted our audits in accordance with auditing standards established by the Indonesian Institute of Accountants. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other independent auditors provide a reasonable basis for our opinion on the 2002 consolidated financial statements and our report on the 2001 consolidated financial statements.

1a

As of December 31, 2002 and 2001, we were unable to satisfy ourselves as to the recoverability of non-current trade receivables from related parties totaling US$ 300 million and US$ 310 million, respectively, since they depend on the satisfactory completion of the Asia Pulp & Paper Company Ltd’s (“APP”) (the ultimate shareholder of the Company) debt restructuring process. Furthermore, as discussed in Note 5c, we were unable to satisfy ourselves as to the recoverability of advances to a related party amounting to US$ 300 million in 2002 and 2001. In our opinion, based upon our audits and the reports of other auditors and except for the effect of any adjustments that might have been necessary had we been able to satisfy ourselves with respect to the recoverability of non-current trade receivables and advances to a related party as discussed in paragraph three, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company and Subsidiaries as of December 31, 2002, and the result of their operations, changes in stockholders’ equity and their cash flows for the year then ended in conformity with accounting principles generally accepted in Indonesia. Because of the significant uncertainties of the debt restructuring progress and other matters in 2001, we were unable to, and did not, express an opinion on the financial statements for the year ended December 31, 2001. As discussed in Notes 13, 17, 18, 31 and 35, from 2001 until the date of this report, the Company and certain Subsidiaries have defaulted on various principal and interest payments on loans and are in technical default on other loans. This has resulted from the severe economic conditions described in the following paragraph giving rise to the Company incurring net losses of US$ 266 million and US$ 182 million and having deficits of US$ 267 million and US$ 1 million for the years ended December 31, 2002 and 2001, respectively. On March 12, 2001, APP and its Subsidiaries (the “APP Group”), which include the Company, announced a standstill on payment of all obligations (principal and interest) due to their creditors, except for certain of their trade creditors. As a result, all long-term loans have been reclassified as current in the consolidated balance sheets and the Company and its Subsidiaries have reported current liabilities in excess of their current assets of US$ 2,813 million and US$ 2,672 million as of December 31, 2002 and 2001, respectively. Subsequent to the announced standstill, APP began negotiating terms for a consensual debt restructuring with its creditors. During 2002, progress has been made in reaching Preliminary Agreements (the “Preliminary Agreements”) with certain creditors. On December 18, 2002, APP, its principal Indonesian operating companies (“PIOCs”), which include the Company and certain of their respective creditors including the Indonesian Bank Restructuring Agency (IBRA)

1b

signed Preliminary Agreements with respect to the consensual restructuring of the PIOCs. Representatives of various export credit agencies and Japanese Trading Companies (“the negotiating creditors”) attended the signing and made public statements at subsequent press conference indicating various levels of support for the Preliminary Agreements. The Preliminary Agreements contemplate that the Definitive Restructuring Documentation (the “DRD”) containing detailed terms with respect to the debt restructuring and implementation provisions based on those set out in the Preliminary Agreements will be negotiated, finalized and signed by each of the PIOCs and its creditors on such date as may be agreed in accordance with the provisions thereof. Management's plans in regard to the restructuring are discussed in Note 35. There is, however, no guarantee or assurance that the DRD will be entered into by the Company and its creditors. The Preliminary Agreements provide for creditors’ withdrawal rights and termination in certain circumstances, with all its relevant consequences. The Company may, therefore, not be a going concern by December 31, 2003. As discussed in Note 33, the APP Group and the Company are currently defendants in certain litigation, the outcome of which may adversely impact the Company’s ability to effect the debt restructuring contemplated by the Preliminary Agreement. The accompanying consolidated financial statements have been prepared assuming that the Company and its Subsidiaries will continue as going concern entities. The matters discussed in this paragraph raise substantial doubt about the ability of the Company and its Subsidiaries to continue as going concern entities. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. These adjustments may include restating the Company’s financial statements from a going concern basis to a liquidation basis of accounting. The operations of the Company and its Subsidiaries have been affected significantly, and might continue to be affected for the foreseeable future, by severe and volatile business conditions. Note 35 to the consolidated financial statements includes a summary of the effects of such adverse economic conditions on the Company and its Subsidiaries as well as the measures the Company’s and its Subsidiaries’ managements have implemented and plan to implement in response to the conditions. As discussed therein, sales prices of pulp and paper products, which are affected by global prices, are highly volatile and had shown a significant decreasing trend since the first quarter of 2001 until the end of the second quarter of 2002. Since then prices have started to increase but there is no assurance this trend will continue.

1c

The Company’s and its Subsidiaries’ revenues and liquidity have been affected significantly by these economic conditions, the consequences of which are described in the preceding paragraph. The recovery of Indonesia’s economic stability depends largely on the effectiveness of the measures taken by the government, the decisions of international lending organizations and other factors, including regulatory and political developments, which are beyond the Company’s and its Subsidiaries’ control. It is not currently possible to determine the effectiveness of managements’ plans and the future effects of the continuing adverse economic conditions on the Company’s and its Subsidiaries’ liquidity and earnings, including the effects flowing through from their customers, suppliers, creditors and stockholders. EDDY PIANTO License No. 98.2.0136 Drs. Eddy Pianto Simon License No. 98.1.0166 March 26, 2003 NOTICE TO READERS The accompanying consolidated financial statements are intended to present the financial position, results of operations, changes in stockholders’ equity and cash flows in accordance with accounting principles and practices generally accepted in Indonesia and not those of any other jurisdictions. The standards, procedures and practices to audit such financial statements are those generally accepted and applied in Indonesia.

2

PT INDAH KIAT PULP & PAPER Tbk AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2002 AND 2001 (In United States Dollar, Unless Stated Otherwise) ASSETS Notes 2002 2001

CURRENT ASSETS Cash and cash equivalents 2c,2d,2q,3,5,13,29 Third parties US$ 26,860,705 US$ 19,711,120 Related parties 742,322 2,956,546 Trade receivables 2d,2e,2f,2q,4,5, 13,29,33 Third parties - net allowance for doubtful accounts of US$ 409,961,459 in 2002 and US$ 414,108,305 in 2001 91,364,771 29,093,911 Related parties 260,386,546 425,736,599 Accounts receivable - others - net of allowance for doubtful accounts of US$ 225,681 in 2002 and 2001 2q,6,10,29 15,901,876 15,304,871 Inventories 2d,2g,5,6,32 281,492,576 181,703,730 Advances to suppliers and others 2d,5,7 Third parties 22,723,370 23,302,158 Related parties 489,029 14,020,851 Prepaid taxes and expenses 2d,2h,5,8,29 18,922,374 17,094,026 Other current assets 2c,3 74,342,223 -

Total Current Assets 793,225,792 728,923,812

NON-CURRENT ASSETS Trade receivables 2d,2e,2f,2q,4,5,29 Third parties 45,071,198 50,388,009 Related parties 299,823,748 310,859,203 Due from related parties 2d,2q,5,29 7,799,642 7,810,542 Advances to related parties 2d,5 300,639,153 300,639,153 Investments in shares of stock 2d,2i,5,9 4,218,500 3,945,749 Property, plant and equipment - net 2d,2j,2k,2l,5, of accumulated depreciation 10,17,18,19 of US$ 1,255,152,446 in 2002 and US$ 1,060,752,760 in 2001 3,764,570,475 3,733,278,035

2a

PT INDAH KIAT PULP & PAPER Tbk AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2002 AND 2001 (In United States Dollar, Unless Stated Otherwise) Notes 2002 2001

Deferred tax assets - net 2o,2q,27,29 US$ 33,836,803 US$ 3,256,502 Other assets Advances for purchases of property and equipment 2d,5,11 Third parties 126,014,714 301,267,903 Related parties 115,285,948 115,285,948 Assets not used in operations 2k,12,17 38,186,580 38,186,580 Deferred loss on sale and leaseback - net 2d,2j,5,10,19 5,519,553 5,803,559 Refundable deposits 2d,2q,5,29 2,496,412 2,467,970 Others 2j 726,566 1,272,678

Total Non-Current Assets 4,744,189,292 4,874,461,831

TOTAL ASSETS US$ 5,537,415,084 US$ 5,603,385,643

The accompanying notes to Consolidated Financial Statements are an integral part of the consolidated financial statements.

2b

PT INDAH KIAT PULP & PAPER Tbk AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2002 AND 2001 (In United States Dollar, Unless Stated Otherwise) LIABILITIES AND STOCKHOLDERS’ EQUITY Notes 2002 2001

CURRENT LIABILITIES Short-term loans payable - net 2f,2q,4,13,29, 31,33 US$ 162,659,820 US$ 204,568,037 Trade payables 2d,2q,5,14,29 Third parties 92,124,436 104,972,629 Related parties 85,746,180 74,052,332 Accounts payable - others 2q,29 6,070,869 8,207,652 Accrued expenses 2d,2p,2q,5,15,29,34 724,055,825 480,297,477 Taxes payable 2q,16,29 417,501 659,499 Current maturities of long-term debts Notes and bonds payable - net 2l,2m,2q,10, 17,29,31,33 1,539,842,866 1,499,400,490 Bank and supplier loans payable - net 2l,2m,2q,10, 18,29,31,33 994,979,594 1,027,319,391 Obligations under capital lease 2d,2j,2q,5,10,19, 29,31 Third parties 675,031 1,258,137 Related parties 42,635 511,575

Total Current Liabilities 3,606,614,757 3,401,247,219

NON-CURRENT LIABILITIES Obligations under capital lease 2d,2j,2q,5,10,19, 29,31 Third parties 35,901 710,541 Related parties - 42,635 Due to related parties 2d,2q,5,29,32 3,330,144 7,643,350

Total Non-Current Liabilities 3,366,045 8,396,526

2c

PT INDAH KIAT PULP & PAPER Tbk AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2002 AND 2001 (In United States Dollar, Unless Stated Otherwise) Notes 2002 2001

STOCKHOLDERS’ EQUITY Common stock - Rp 1,000 par value per share Authorized common shares - 20,000,000,000 shares Issued and fully paid common shares - 5,470,982,941 shares in 2002 and in 2001 2d,2s,5,13,17, 18,20,31 US$ 2,189,015,592 US$ 2,189,015,592 Additional paid-in capital - net 2s,20 5,807,836 5,807,836 Deficits ( 267,389,146 ) ( 1,081,530 )

Total Stockholders’ Equity 1,927,434,282 2,193,741,898

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY US$ 5,537,415,084 US$ 5,603,385,643


3

PT INDAH KIAT PULP & PAPER Tbk AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 (In United States Dollar, Unless Stated Otherwise) Notes 2002 2001

NET SALES 2d,2n,2r,5,21,30,32 US$ 1,197,711,610 US$ 1,100,228,150 COST OF GOODS SOLD 2d,2j,2n,5,22,30 1,028,989,265 904,397,647

GROSS PROFIT 168,722,345 195,830,503

OPERATING EXPENSES 2d,2j,2n,5,23,34 Selling 61,313,340 85,783,060 General and administrative 47,142,387 37,922,903

Total Operating Expenses 108,455,727 123,705,963

INCOME FROM OPERATIONS 2r,30 60,266,618 72,124,540

OTHER CHARGES (INCOME) Interest expenses 2d,2j,2l,5,13, 17,18,19,24 259,877,874 294,272,161 Provision for doubtful accounts 2e,2f,4,31,33 ( 4,146,864 ) 1,014,659 Loss (gain) on foreign exchange - net 2l,2q,10,25 77,269,661 ( 35,998,377 ) Interest income 2c,3 ( 1,052,165 ) ( 1,062,263 ) Others - net 2d,2f,2g,2i,2j, 2m,5,6,9,10,17, 18,26 25,206,029 59,969,429

Other Charges - net 357,154,535 318,195,609

LOSS BEFORE DEFERRED TAX BENEFIT 296,887,917 246,071,069 ESTIMATED DEFERRED TAX BENEFIT 2o,27 ( 30,580,301 ) ( 63,680,015 )

NET LOSS US$ 266,307,616 US$ 182,391,054

BASIC LOSS PER SHARE 2t,20,28 US$ 0.049 US$ 0.033

DILUTED LOSS PER SHARE 2t,20,28 US$ 0.049 US$ 0.033


4

PT INDAH KIAT PULP & PAPER Tbk AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 (In United States Dollar, Unless Stated Otherwise) Additional Retained Total Issued and Fully Paid-in Earnings Stockholders’ Notes Paid Capital Capital - Net (Deficits) Equity

Balance, January 1, 2001 US$ 2,189,015,511 US$ 5,807,836 US$ 181,309,524 US$ 2,376,132,871 Exercise of warrants II 2s,20 81 - - 81 Net income for the year - - ( 182,391,054 ) ( 182,391,054 )

Balance, December 31, 2001 2,189,015,592 5,807,836 ( 1,081,530 ) 2,193,741,898 Net income for the year - - ( 266,307,616 ) ( 266,307,616 )

Balance, December 31, 2002 US$ 2,189,015,592 US$ 5,807,836 ( US$ 267,389,146 ) US$ 1,927,434,282


5

PT INDAH KIAT PULP & PAPER Tbk AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 (In United States Dollar, Unless Stated Otherwise) 2002 2001

CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers US$ 1,316,649,484 US$ 881,709,451 Payments to suppliers and employees ( 1,140,687,820 ) ( 720,559,816 )

Cash provided by operating activities 175,961,664 161,149,635 Receipts from: Interests 948,746 1,050,901 Payments for: Interests and other financial charges ( 18,851,588 ) ( 21,942,746 ) Taxes ( 6,824,248 ) ( 5,458,722 )

Net Cash Flows Provided by Operating Activities 151,234,574 134,799,068

CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales of property, plant and equipment 1,223,586 403,966 Decrease (increase) in other assets 422,355 ( 233,761 ) Decrease in due from related parties 10,900 2,977,760 Decrease (increase) in other current assets ( 74,342,223 ) 54,244,779 Additions in property, plant and equipment and construction in progress ( 14,931,740 ) ( 5,539,965 ) Increase in advances for purchases of property and equipment ( 10,469,687 ) ( 5,894,419 ) Increase in refundable deposits ( 28,442 ) ( 8,827 ) Increase in advances to related party - ( 39,318,431 ) Addition in deferred charges - land rights - ( 173,004 )

Net Cash Flows Provided by (Used in) Investing Activities ( 98,115,251 ) 6,458,098

CASH FLOWS FROM FINANCING ACTIVITIES Decrease in short-term loans payable - net ( 41,908,217 ) ( 153,516,525 ) Increase (decrease) in due to related parties ( 4,313,206 ) 32,952,743 Payments of obligations under capital lease ( 1,768,461 ) ( 1,312,312 ) Payments of long-term bank and supplier loans payable and notes and bonds payable ( 194,078 ) ( 1,050,600 ) Increase in obligations under capital lease - 139,364 Proceeds from exercise of warrants - 81

Net Cash Flows Used in Financing Activities ( 48,183,962 ) ( 122,787,249 )

5a

PT INDAH KIAT PULP & PAPER Tbk AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 (In United States Dollar, Unless Stated Otherwise) 2002 2001

NET INCREASE IN CASH AND CASH EQUIVALENTS US$ 4,935,361 US$ 18,469,917 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 22,667,666 4,197,749

CASH AND CASH EQUIVALENTS AT END OF YEAR US$ 27,603,027 US$ 22,667,666

ACTIVITIES NOT AFFECTING CASH FLOWS Reclassification of advances for purchases of property and equipment and construction-in-progress to property and equipment direct ownership US$ 31,491,511 US$ 4,483,000 The accompanying notes to Consolidated Financial Statements are an integral part of the consolidated financial statements.

PT INDAH KIAT PULP & PAPER Tbk AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In United States Dollar, Unless Stated Otherwise)

6

1. GENERAL

a. The Company’s Establishment PT Indah Kiat Pulp & Paper Tbk (the Company) was established in the Republic of Indonesia under

the framework of the Foreign Capital Investment Law No. 1 of 1967, based on the Notarial Deed No. 68 dated December 7, 1976 of Ridwan Suselo, S.H. Its Articles of Association was approved by the Ministry of Justice in its decision letter No. Y.A.5/50/2 dated February 9, 1978, and published in Supplement No. 172 of State Gazette No. 18 dated March 3, 1978. The provisions in the Company’s Articles of Association have been amended several times, wherein the last amendment was covered by Notarial Deed No. 141 dated June 30, 1998 of Linda Herawati, S.H. regarding the change in the Company’s name and Articles of Association to conform with the Capital Market Supervisory Board’s (Bapepam) decision letter No. Kep-13/PM/1997 dated April 30, 1997 regarding Articles of Association for Companies which Conduct Public Offering for Equity Securities and Public Companies, which has been approved by the Ministry of Justice in its letter No. C-2701 HT.01.04.Th.99 dated February 12, 1999 and published in Supplement No. 7966 of State Gazette No. 103 dated December 12, 2000 (see Note 20).

Based on the revised Article 3 of the Company's Articles of Association, the Company is engaged in

the manufacture of pulp and paper (including special port handling), trading, mining and forestry. The Company is currently engaged in the manufacture and sale of pulp, paper and packaging products for local and export markets and special port handling.

The Company is domiciled in Jakarta with its head office located at Jalan M.H. Thamrin, Jakarta and

its plants in Tangerang and Serang, West Java and Perawang, Riau. The Company started its commercial operations in 1978.

b. Public Offering of the Company’s Shares In 1990, the Company made a public offering of its 60,000,000 shares with a par value of

Rp 1,000 per share through the stock exchanges in Indonesia at the offering price of Rp 10,600 per share. During 1996 and 1997, the Company has offered several rights issue whereby the shares were also listed in the same stock exchanges. As of December 31, 2002 and 2001, the Company has listed 5,470,982,941 shares in the Jakarta and Surabaya Stock Exchanges.

The Company and several Subsidiaries have also listed their Guaranteed Secured Notes Due 2002

and 2006 totaling US$ 350 million and their Guaranteed Senior Notes Due 2007 of US$ 600 million in the Luxembourg Stock Exchange. The Company has also listed its Indah Kiat I 1999 Bonds of Rp 1 trillion in the Surabaya Stock Exchange (see Note 17).

c. Structure of the Company and its Subsidiaries The Company is indirectly controlled by Asia Pulp & Paper Company Ltd. (APP), Singapore. APP is

the main stockholder of PT Purinusa Ekapersada while the latter is the Company’s main stockholder with ownership interest of 52.46% as of December 31, 2002 (see Note 20). APP and its Subsidiaries are engaged in the manufacture and sale of pulp, paper and packaging products.


7

1. GENERAL (Continued) The consolidated financial statements include the accounts of the Company and its wholly-owned

operating Subsidiaries, consisting of:

Domicile, Year Percentage of Total Assets in Commercial Ownership Thousands US$

Scope of Date of Operations Subsidiaries Activities Establishment Started 2002 2001 2002 2001

Indah Kiat International Finance Company B.V. 1 The Netherlands, (IK Finance BV) Financing Company March 11, 1994 1994 100%* 100% * 615,858 560,231 Indah Kiat Finance Mauritius Limited 1 (IK Mauritius) Financing Company June 16, 1997 Mauritius, 1997 100 100 650,589 558,577 Indah Kiat Finance (III) Limited (formerly Earlshall Company Ltd.) 1 (IKF III) Financing Company June 24, 1998 Mauritius, 2000 100 100 549,871 499,346 Indah Kiat Finance (IV) Mauritius Limited (formerly Redhill Investments Ltd.) 2

(IKF IV) Financing Company June 22, 1998 Mauritius, 2000 100 100 147,204 130,614 Indah Kiat Finance (VIII) Mauritius Limited 2 (IKF VIII) Financing Company June 15, 2000 Mauritius, 2000 100 100 68,931 62,206 IK Trading Limited 1 September 29, Cayman Islands, (IK Trading) Distributor 1997 2000 100 100 55,392 55,392 Indah Kiat Trading (II) Cayman Islands, Limited 1 (IK Trading II) Distributor August 31, 1998 2000 100 100 4,520 4,520 Indah Kiat Trading British Virgin Import Export Distributor March 23, 2000 Islands 100 100 84,008 89,929 Indah Kiat Finance (II) Limited (IKF II) 3 Financing Company May 8, 1998 Mauritius, 1999 - 100 - 2 Indah Kiat Finance (V) Mauritius Limited 3 (IKF V) Financing Company March 28, 2000 Mauritius, 2000 - 100 - 2 Indah Kiat Finance (VI) Mauritius Limited 3 (IKF VI) Financing Company March 29, 2000 Mauritius, 2000 - 100 - 2

* Unaudited 1 Limited liability company 2 Public company with limited liability 3 Liquidation process

The scope of activities of the financing company Subsidiaries is primarily in the business of issuing

debt and obtaining loans to finance the Company’s operations while the distributor Subsidiaries are primarily engaged in the business of goods trading to assist the Company’s goods distribution.

The consolidated financial statements do not include the accounts of the following dormant

Subsidiaries:

Percentage of Ownership Scope of Date of Subsidiaries Activities Establishment Domicile 2002 2001

IK Trading (III) Limited 1 Dormant December 14, 1999 Cayman Islands 100.0* % 100.0* % IK Trading (IV) Limited 1 Dormant June 13, 2000 Cayman Islands 100.0* 100.0*

APPIK International Trading Limited (formerly Bucon Investments Limited)1 Dormant April 20, 1993 British Virgin Islands 100.0* 100.0* Kaisen Limited 1 Dormant November 9, 2000 Cayman Islands 100.0* 100.0*


8

1. GENERAL (Continued)

Percentage of Ownership Scope of Date of Subsidiaries Activities Establishment Domicile 2002 2001

PT Graha Kemasindo Indah 1 Dormant October 23, 1995 Jakarta 99.5* % 99.5* % Indah Kiat Finance (VII) Mauritius Limited 3 Dormant April 27, 2000 Mauritius - 100.0*

* Unaudited 1 Limited liability company 2 Public company with limited liability 3 Liquidation process

Since the date of their establishment up to now, the above Subsidiaries have been dormant and have

not undertaken any transactions. On December 21, 2002, the Company released a letter addressed to Bapepam stating that the

following Subsidiaries: Indah Kiat Finance (II) Limited (IKF II), Indah Kiat Finance (V) Mauritius Limited (IKF V), Indah Kiat Finance (VI) Mauritius Limited and Indah Kiat Finance (VII) Mauritius Limited (dormant) were in liquidation process.

d. Employees, Directors and Commissioners Based on the annual stockholders’ general meeting on September 26, 2002 covered by Notarial Deed

No. 50 of Linda Herawati, S.H., the members of the Company’s boards of commissioners and directors are as follows:

Commissioners Directors

1. Indra Widjaja - President Commissioner 1. Teguh Ganda Wijaya - President Director 2. Ir. Gandi Sulistiyanto Soeherman - Vice President Commissioner 2. Muktar Widjaja - Vice President Director 3. Show Chung Ho - Commissioner 3. Hendra Jaya Kosasih - Vice President Director 4. Kuo Cheng Shyong - Commissioner 4. Chen Wang Chi - Vice President Director 5. Raymond Liu, Phd. - Commissioner 5. Hsu Cha Ming - Vice President Director 6. Lo Shang Shung - Commissioner 6. Njauw Kwet Meen - Director 7. Hj. Ryani Soedirman - Commissioner 7. DR. Ong Piet Tjing - Director 8. Mas Achmad Daniri - Commissioner Independent 8. Suresh Kilam - Director 9. Prof. DR. Teddy Pawitra - Commissioner Independent 10. Ferdinand A. Sonneville - Commissioner Independent 11. Soetedjo - Commissioner Independent

Salaries and other compensation benefits of the Company’s and Subsidiaries’ directors and

commissioners amounted to approximately US$ 2,277,864 (Rp 21,295,226,632) and US$ 2,252,693 (Rp 23,126,323,784) in 2002 and 2001, respectively. During the past two years, there was a decrease of employees especially in its plant located in Perawang. Average number of permanent employees in 2002 and 2001 was 15,751 and 17,608.

2. SUMMARY OF ACCOUNTING POLICIES

a. Basis of Consolidated Financial Statements The consolidated financial statements have been prepared in accordance with the accounting

principles generally accepted in Indonesia.


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2. SUMMARY OF ACCOUNTING POLICIES (Continued) These consolidated financial statements also include the disclosure and accounts presentation

required under the Statements of Financial Accounting Standards (PSAK) issued by the Indonesian Institute of Accountants (IAI), which is effective on or after January 1999 and under the Bapepam’s decision letter issued on March 13, 2000, which is effective thereafter.

The consolidated financial statements have been prepared on an accrual basis, except for the

statements of cash flows and on a historical cost basis of accounting, except for certain assets as discussed in this note, which are valued at a basis other than cost.

Effective January 1, 1998, the Company and Subsidiaries adopted the US Dollar as their functional

currency, in accordance with the criteria stated in PSAK No. 52, “Reporting Currency”. PSAK No. 52 is effective for financial statements covering the reporting period on or after January 1, 2000. The Company believes that the change in its functional currency to the US. Dollar has enabled its financial results and relationships to be measured with more relevance and reliability.

The consolidated statements of cash flows present receipts and disbursements of cash and cash

equivalents classified into operating, investing and financing activities. The cash flows from operating activities are presented using the direct method, in accordance with Bapepam’s decision letter No. Kep-06/PM/2000 dated March 13, 2000 and Circulation Letter No. SE-02/PM/2002 dated December 27, 2002, on the Amendment of Rule No. VIII.G.7 regarding the Guidelines in the Presentation of Financial Statements.

b. Principles of Consolidation The consolidated financial statements include the accounts of the Company and Subsidiaries, which

are owned more than 50% directly or indirectly as mentioned in Note 1. All significant inter-company accounts and transactions have been eliminated. c. Cash Equivalents and Other Current Assets Time deposits with maturities of three (3) months or less at the time of placement and not pledged as

collateral for loans are classified as “Cash Equivalents”. Current accounts and time deposits placed in an escrow account in a bank in connection with the debt restructuring are recorded as “Other Current Assets”.

d. Transactions with Related Parties The Company and Subsidiaries have transactions with certain parties, which have related party

relationships as defined under PSAK No. 7, “Related Party Disclosures”. All significant transactions with related parties, whether or not consummated under the same terms

and conditions as those with non-related parties, are disclosed in the notes to the consolidated financial statements.

e. Allowance for Doubtful Accounts The Company and Subsidiaries provide allowance for doubtful accounts receivable based on a review

of the status of the individual accounts at the end of the year.


10

2. SUMMARY OF ACCOUNTING POLICIES (Continued) f. Receivables Discounting (Factoring) Export sales receivables discounted (factored) without recourse are recognized as sale of receivables

for accounting purposes. The difference between the book value of receivables transferred and proceeds received plus retention is recognized as “Other Charges - Financial Charges” in the consolidated statements of income. As the risk on collectibility has been transferred, allowance for doubtful receivables is not necessary. Export sales receivables discounted (factored) with recourse are recognized as related liabilities. The difference between the book value of receivables transferred and proceeds received plus retention is recognized as interest during the discounting (factoring) period. The unamortized portion is presented as contra account to the related liabilities. As the risk on collectibility has not been transferred, the receivables are presented at net realizable value with allowance for doubtful accounts.

g. Inventories Inventories are stated at the lower of cost or net realizable value. Cost is determined by the weighted-

average method. The net realizable value is determined based on the estimated selling price less the estimated cost of completion and the estimated costs necessary to effect the sale. Allowance for obsolete and slow-moving inventories is provided, if any, based on a review of the conditions of the inventories as appropriate.

h. Prepaid Expenses Prepaid expenses are charged to operations over the periods benefited. i. Investments in Shares of Stock Investments in shares of companies in which the Company has ownership interests of 20% to 50%

are accounted for under the equity method. Under this method, the cost of the investment is adjusted for the Company’s share in the net earnings or losses of the investee proportionate with its percentage of ownership.

Investments in which the Company has an ownership interest of less than 20% are carried at cost

(cost method). j. Property, Plant and Equipment

1. Direct Ownership Property, plant and equipment are stated at cost less accumulated depreciation, except for certain

assets used in operations and acquired up to September 12, 1986, which were revalued in accordance with Government Regulation No. 45 of 1986. These assets are stated at revalued amounts less accumulated depreciation. Prior to the change in the Company’s reporting currency to its functional currency, assets acquired up to December 31, 1992 (except non-building assets with estimated useful life of 4 years or less) were revalued in 1997. In relation to the adoption of PSAK No. 52 in 1998 and re-measurement of prior years’ financial statements, the revaluation increment has been recognized only for tax reporting purposes.


11

2. SUMMARY OF ACCOUNTING POLICIES (Continued) Depreciation on the following assets is computed on the straight-line method based on their

estimated useful lives as follows: Years

Land improvements 12 - 20 Buildings 11 - 20 Machinery 25 Transportation equipment, furniture, office fixtures and other equipment 2 - 5 In accordance with PSAK No. 47, “Accounting for Land”, land acquisitions are stated at

acquisition cost and not amortized. Expenses incurred in relation to the acquisition or renewal of land rights after January 1, 1999 are deferred and amortized over the period of land rights or the land estimated useful life, whichever is shorter. The balance is presented under “Other Assets - Others” in the consolidated balance sheets. Prior to January 1, 1999, land acquisition cost included expenses in relation to the acquisition or renewal of land rights and were not amortized.

The cost of maintenance and repairs is charged to expense as incurred while significant renewals

and betterments are capitalized. When assets are retired or otherwise disposed of, their carrying values and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in income or expense for the year.

2. Leases Lease transactions are accounted for under the capital lease method when all the required

capitalization criteria under PSAK No. 30, “Accounting for Lease Transactions” are met. Otherwise, leases are accounted for under the operating lease method. Assets and obligations under capital lease are recorded based on the present value of the lease payments at the beginning of the lease term plus residual value (option price) to be paid at the end of the lease period. Assets under capital lease are presented under the property, plant and equipment account. Depreciation is computed on the straight-line method over the estimated useful lives of the leased assets similar with the assets acquired under direct ownership.

Gain or loss arising from the sale and leaseback transactions is deferred and is amortized

proportionately with the amortization expense of the assets being leased under the straight-line method and is presented under “Deferred Loss on Sale and Leaseback Transactions” in the consolidated balance sheets.

3. Construction-in-progress The accumulated cost of assets under construction or installation is presented as construction-in-

progress under the property, plant and equipment account. When the facilities are substantially complete and are ready for their intended use, the accumulated cost is reclassified to the related items of property, plant and equipment.


12

2. SUMMARY OF ACCOUNTING POLICIES (Continued) k. Impairment of Asset Values Based on PSAK No. 48, “Impairment of Asset Values”, effective January 1, 2000, property, plant and

equipment and other non-current assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Whenever the carrying amount of an asset exceeds its recoverable amount, an impairment loss is recognized in the current year statement of income. The recoverable amount is the higher of the asset net selling price and value in use. The net selling price is the amount obtainable from the sale of an asset in an arm’s length transaction net of the related expenses. Value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. Recoverable amounts are estimated for individual assets or, if not possible, for the cash-generating unit (see Note 10).

l. Capitalization of Borrowing Costs In accordance with the revised PSAK No. 26 (1997 revision), “Borrowing Costs”, interest charges,

foreign exchange differences on borrowings and other costs incurred to finance the construction or installation of the property, plant and equipment are capitalized. Capitalization of these borrowing costs ceases when the construction or installation is substantially complete and the property, plant and equipment are ready for their intended use.

m. Issuance Cost Loans issuance costs are deducted directly from the loan proceeds in accordance with Bapepam’s

decision letter No. Kep-06/PM/2000 dated March 13, 2000. The difference between the net proceeds and the par value is recorded as a discount or premium and amortized over the periods of the loans.

n. Revenue and Expense Recognition Domestic sales are recognized when the title passes to the customer which is either upon delivery or,

in the case of finished products held at the request of the customers, upon invoicing. Export sales are recognized upon loading of the goods for shipment to customers (f.o.b. shipping point). Sales are presented net of value-added tax, sales returns and price discounts.

Expenses are recognized when incurred (accrual basis). o. Tax Expense (Benefit) The Company applied the deferred tax method to determine its tax expense (benefit) in accordance

with PSAK No. 46, “Accounting for Income Taxes”. Deferred taxes are recognized to reflect the tax effects on temporary differences between the financial and tax bases of assets and liabilities and accumulated tax loss. Valuation allowance is recorded to reduce deferred tax assets to that portion that is expected to more likely than not be realized.

The Subsidiaries have not yet applied the deferred tax method. The effects of applying the deferred

tax method by the Subsidiaries are deemed not material. The Company maintains accounting records in Indonesian Rupiah for corporate income tax purposes.


13

2. SUMMARY OF ACCOUNTING POLICIES (Continued) p. Employee Termination or Severance Payment Employee entitlements to service and compensation payments relating to an employee’s voluntary

resignation are recognized when they accrue to the employee. A provision is made for the estimated liability as a result of past services rendered by employees up to the balance sheet date and is calculated based on the Ministry of Manpower Regulation.

q. Foreign Currency Transactions and Balances Transactions involving currencies other than the US Dollar, including the transactions of the

Subsidiaries outside Indonesia which are integral parts of the Company, are recorded at the rates of exchange prevailing at the time the transactions are made. At the balance sheet date, monetary assets and liabilities denominated in currencies other than the US Dollar are restated to the US Dollar using the rates of exchange prevailing at such date. The exchange rates used for significant foreign currency transactions were US$ 1 = JP¥ 118.58, US$ 1 = Euro 0.93 dan US$ 1 = Rp 8,940 as of December 31, 2002 and US$ 1 = JP¥ 131.38, US$ 1 = Euro 1.1, US$ 1 = DEM 2.2 and US$ 1 = Rp 10,400 as of December 31, 2001. The resulting gains or losses are credited or charged to current operations except those capitalized in construction-in-progress.

r. Segment Information In 2000, the IAI revised PSAK No. 5, “Segment Reporting” and circulation Letter of the Bapepam

No. SE-02/PM/2002 dated December 27, 2002 regarding guidelines in the presentation and disclosures of financial statement for manufacturing industry were adopted by the company effective January 1, 2002. For management purposes, business segments are reported by the Company by geographical and industry segments. The geographical segment is presented based on the market of the Company’s products. The industry segment is presented based on the types of products. Financial information on geographical and industry segments are presented in Note 30.

s. Warrants Detachable warrants were issued together with the shares of stock and can be traded separately from

such shares of stock. In accordance with PSAK No. 41, “Accounting for Warrants”, the funds received from the exercise of warrants and the amount allocated as fair value of such warrants are recorded as Paid-in Capital and Additional Paid-in Capital (or as a deduction from additional paid-in capital if exercised below the share par value).

t. Earnings (Loss) Per Share The Company applied PSAK No. 56, “Earnings per Share”, where basic net income (loss) per share

was computed by dividing the residual net income (loss) for the year attributable to ordinary stockholders by the weighted-average number of ordinary shares outstanding during the year after giving effect to any rights issue and exercise of dilutive warrants. Diluted net income (loss) per share was computed after making the necessary adjustments to the weighted-average number of ordinary shares outstanding assuming the full exercise of warrants at the time of issuance (see Note 28).


14

2. SUMMARY OF ACCOUNTING POLICIES (Continued) u. Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted

accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

3. CASH AND CASH EQUIVALENTS AND OTHER CURRENT ASSETS Cash and cash equivalents and other current assets consist of: 2002 2001

Cash on hand (US$ 38,828 and Rp 6,289,068,074 in 2002 and US$ 40,885 and Rp 5,052,068,019 in 2001) US$ 742,322 US$ 526,641

Cash in banks Third parties PT Bank Mizuho Indonesia (US$ 2,408,605, JP¥ 14,832,543 Euro 1,698,006 and Rp 4,034,655,650 in 2002 and US$ 72,245, JP¥ 106,093,386 and Rp 3,626,590,649 in 2001) 4,749,989 1,761,182 PT Bank Internasional Indonesia Tbk (US$ 514,660, JP¥ 166,814 and Rp 28,302,337,822 in 2002) 3,683,049 - PT Bank Mandiri (Persero) (US$ 254,055 and Rp 8,392,641,510 in 2002 and US$ 229,507 and Rp 3,261,044,800 in 2001) 1,192,856 543,069 PT Bank Lippo Tbk (US$ 470,368 and Rp 5,376,771,396 in 2002 and US$ 216,390 and Rp 2,225,656,679 in 2001) 1,072,115 430,384 PT Bank Negara Indonesia Tbk (US$ 963,608 and Rp 741,211,327 in 2002 and 2,844,694 and Rp 2,298,810,709 in 2001) 1,046,543 3,065,725 Standard Chartered Bank, Jakarta (US$ 460,112 and Rp 52,155,476 in 2002 and US$ 370,436 and Rp 53,279,200 in 2001) 465,946 375,559 PT Bank CIC International Tbk 338,333 92,864 Bank of America, Jakarta (US$ 169,743 and Rp 711,527,093 in 2002 and US$ 1,067,367 and Rp 1,106,655,308 in 2001) 246,486 1,173,775


15

3. CASH AND CASH EQUIVALENTS AND OTHER CURRENT ASSETS (Continued) 2002 2001

PT Bank UFJ Indonesia (formerly PT Bank Sanwa Indonesia), Jakarta (US$ 218,596 and Rp 10,573,075 in 2002 and US$ 53,558 and Rp 10,482,036 in 2001) US$ 219,775 US$ 54,566 American Express Bank, N.A., Jakarta (US$ 191,192 and Rp 21,130,148 in 2002 and US$ 2,452,848 and Rp 21,030,148 in 2001) 193,556 2,454,870 The Hongkong and Shanghai Banking Corporation Limited, Jakarta (US$ 131,698 and Rp 128,509,059 in 2002 and US$ 131,645 and Rp 129,057,059 in 2001) 146,074 144,054 ANZ Panin Bank (US$ 6,290 and Rp 620,629,295 in 2002 and US$ 6,284 and Rp 2,845,801,980 in 2001) 75,718 279,908 Others (US$ 566,949, Rp 1,144,789,638 and Euro 77,171 in 2002 and US$ 366,184, Rp 2,318,087,761 and NLG 214,533 in 2001) 826,995 655,103

Total 14,257,435 11,031,059

Related parties PT Bank Internasional Indonesia Tbk (US$ 70,703, JP¥ 203,995 and Rp 20,778,093,035 in 2001) - 2,071,092 Others (US$ 316,996 and Rp 434,913,052 in 2001) - 358,813

Total - 2,429,905

Cash equivalents Third parties PT Bank Lippo Tbk (US$ 5,000,000 and Rp 25,000,000,000 in 2002) 7,796,588 - PT Bank Internasional Indonesia Tbk (Rp 28,000,000,000 in 2002) 3,131,991 - PT Bank Mizuho Indonesia (US$ 1,500,000 in 2002 and US$ 2,000,000 and Rp 3,000,000,000 in 2001) 1,500,000 2,288,449 PT Bank Negara Indonesia Tbk (US$ 121,000 and Rp 480,000,000 in 2002 and 2001) 174,691 167,154 The Hongkong and Shanghai Banking Corporation Limited, Jakarta - 6,224,458

12,603,270 8,680,061

Total Cash and cash equivalents US$ 27,603,027 US$ 22,667,666


16

3. CASH AND CASH EQUIVALENTS AND OTHER CURRENT ASSETS (Continued) 2002 2001

Other current assets Third parties Cash in banks - PT Bank Mandiri (Persero) US$ 58,722 US$ - Cash equivalents - PT Bank Mandiri (Persero) 74,283,501 -

Total other current assets US$ 74,342,223 US$ -

Based on the Preliminary Agreements signed on December 18, 2002 by APP, the Indonesian Bank

Restructuring Agency (IBRA), and the four (4) principal Indonesian operating companies (PIOCs) namely the Company, PT Pabrik Kertas Tjiwi Kimia Tbk, PT Pindo Deli Pulp And Paper Mills and PT Lontar Papyrus Pulp and Paper Industry, the PIOCs agreed to pay an aggregate sum of US$ 20 million per month into an escrow account during 2002. Each PIOC has agreed to pay an amount equivalent to its respective monthly mandatory debt services (MMDS) into an escrow account (see Notes 31 and 36).

On September 25, 2002, the Company entered into separate agreements with Bank Mandiri (the escrow

agent) relating to the escrow accounts to be deposited. As of December 31, 2002, the Company have balances of US$ 74,342,223 in its escrow account.

Annual interest rates from time deposits classified as cash equivalents are as follows: 2002 2001

Rupiah 11.0% - 12.8% 10.5% - 15.5% US Dollar 1.0 - 2.8 1.2 - 6.8

4. TRADE RECEIVABLES - CURRENT Accounts receivable - trade consists of: 2002 2001

Related parties Export (see Note 5 (1)) US$ 24,508,920 US$ 86,389,584 Local (see Note 5 (1)) 235,877,626 339,347,015

Accounts receivable - related parties 260,386,546 425,736,599

Third parties Export 499,700,819 441,755,696 Local 1,625,411 1,446,520

Total 501,326,230 443,202,216 Allowance for doubtful accounts ( 409,961,459 ) ( 414,108,305 )

Accounts receivable - third parties - net 91,364,771 29,093,911

Total Accounts Receivable - Current US$ 351,751,317 US$ 454,830,510


17

4. TRADE RECEIVABLES - CURRENT (Continued) Details of aging schedule of receivables third parties and related parties based on invoices issued,

excluding those reclassified to non-current assets and provision for doubtful account, are as follows: 2002 2001

Not yet due US$ 172,401,105 US$ 154,678,164 < 1 month 68,161,291 44,997,813 > 1 month - 2 month 62,141,782 43,298,981 > 2 month - 3 month 10,444,927 58,971,105 > 3 month - 4 month 8,303,479 66,526,441 > 4 month 30,298,733 86,358,006

Total US$ 351,751,317 US$ 454,830,510

Changes in the provision for doubtful accounts are as follows: 2002 2001

Beginning balance US$ 414,108,305 US$ 413,093,646 Changes for current period ( 4,146,846 ) 1,014,659

Ending balance US$ 409,961,459 US$ 414,108,305

In 2001, the Company had filed claims against third parties comprising five (5) export trade customers

due to the non-payment of the trade receivables (see Notes 33 A (5)). These outstanding export trade receivables totaling US$ 242,446,821 have been fully provided for as an allowance for doubtful accounts considering that the five export trade customers are no longer operating and therefore, the possibility of collecting their receivables is minimal. In April 2002, the court ruled partly in favor of the Company.

Based on the review of the status of the individual receivable accounts at the end of the year, the

Company’s and Subsidiaries’ managements believe that the allowances for doubtful accounts as of December 31, 2002 and 2001 are adequate to cover possible losses from the non-payment of the accounts.

5. BALANCES AND SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES In the normal course of operations, the Company and Subsidiaries enter into business and financial

transactions with related parties. The financial transactions with related parties include capital lease obligations. The related parties are under common control by the same stockholders and/or have the same boards of directors and/or commissioners of the Company and Subsidiaries.


18

5. BALANCES AND SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES (Continued) Significant balances with related parties are as follows:

1. Current trade receivables - related parties 2002 2001

Export APP (Hongkong) Limited, Hongkong US$ 5,490,953 US$ 34,160,953 Asia Pulp & Paper Trading (USA) Inc., United States of America 5,106,589 8,562,317 Vestwin Trading Pte. Ltd., Singapore 4,393,592 - Jin Xin Paper Industry Co. Ltd., 3,248,596 - People’s Republic of China APP China Trading Limited, Hongkong 1,685,245 22,638,268 Ningbo Asia Paper Tube and Carton Box Co. Ltd., People’s Republic of China 1,106,687 - Gold East Paper (Jiangsu) Co. Ltd., People’s Republic of China 653,443 - Asia Pulp & Paper (France) EURL, France 632,477 938,375 Asia Pulp & Paper (Australia) Pty. Ltd., Australia 472,093 7,741,027 Asia Pulp & Paper (Malaysia) Sdn. Bhd., Malaysia 407,012 - APP International Trading Marketing Pte. Ltd., Scandinavia 158,315 145,765 APP Trading Company Limited, Singapore - 10,609,357 Asia Pulp & Paper (Spain) S.A., Spain - 754,452 Campania Trading Limited, United Arab Emirates - 257,304 Others (each below US$ 150,000) 1,153,918 581,766

Total US$ 24,508,920 US$ 86,389,584

% to the consolidated total assets 0.44% 1.54%

Local PT Cakrawala Mega Indah US$ 169,820,015 US$ 261,457,969 PT Sinar Duniamakmur 54,463,934 69,336,512 PT The Univenus Company 5,564,456 3,092,773 PT Pindo Deli Pulp And Paper Mills 2,727,647 2,005,610 PT Pabrik Kertas Tjiwi Kimia Tbk 1,546,402 1,198,722 PT Lontar Papyrus Pulp and Paper Industry 915,639 1,008,922 PT Konverta Mitra Abadi 548,716 468,621 PT Ekamas Fortuna 173,802 696,838 Others (each below US$ 100,000) 117,015 81,048

Total US$ 235,877,626 US$ 339,347,015



19

5. BALANCES AND SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES (Continued)

2. Non-current trade receivables - related parties 2002 2001

Export APP International Trading (VI) Limited, Cayman Islands US$ 107,249,499 US$ 107,167,358 APP International Trading Limited, Cayman Islands 62,962,168 58,785,269 APP International Trading (V) Limited, Cayman Islands 22,938,500 28,204,257 APP International Trading (VIII) Limited, British Virgin Islands 21,307,469 21,711,568 APP International Trading (II) Limited, British Virgin Islands 19,667,092 21,304,962 APP Paper Trading (S) Pte. Limited, Singapore 16,847,842 17,853,747 Asia Pulp & Paper Trading (USA) Inc., United States of America 10,638,043 9,395,749 APP China Trading Limited, Hongkong 10,249,806 11,875,877 APP (Hongkong) Limited, Hongkong 9,737,195 10,237,195 APP International Trading (III) Limited, Cayman Islands 6,103,672 6,103,672 Asia Pulp & Paper (Malaysia) Sdn. Bhd., Malaysia 5,821,123 3,489,316 APP International Trading (IV) Limited, Cayman Islands 1,649,025 1,649,025 Asia Pulp and Paper (Spain) S.A., Spain 932,565 1,254,217 Asia Pulp & Paper (UK) Limited, United Kingdom 915,682 974,014 Paper Box Industries (S) Pte. Limited, Singapore 884,998 884,998 Asia Pulp & Paper (Japan) Co. Ltd., Japan 649,501 3,295,954 APP Import & Export Pte. Ltd., Singapore 419,146 1,923,071 Asia Pulp & Paper (Belgium) S.A./N.V., Belgium 286,110 286,110 Gold East Paper (Jiangsu) Co. Ltd., People’s Republic of China 225,572 225,572 Campania Trading Limited, United Arab Emirates 239,289 165,493 Asia Pulp & Paper (Australia) Pty. Ltd., Australia - 3,735,495 Others (each below US$ 150,000) 99,451 336,284

Total US$ 299,823,748 US$ 310,859,203



20


3. Due from related parties 2002 2001

PT Lontar Papyrus Pulp and Paper Industry US$ 2,509,423 US$ 2,250,091 Bina Sinar Amity Transportation Service (Singapore) Pte. Ltd., Singapore 1,787,993 2,187,068 Zhenjiang Dadong Pulp & Paper Co. Ltd., People’s Republic of China 1,559,250 1,559,250 Ningbo Zhonghua Paper Co. Limited, People’s Republic of China 1,049,081 1,049,081 PT Satria Perkasa Agung 274,154 230,424 Asia Pulp & Paper (Japan) Co. Ltd., Japan 172,730 148,480 PT Sinar Duniamakmur 121,017 82,095 PT Purinusa Ekapersada 115,631 116,261 Others 210,363 187,792

Total US$ 7,799,642 US$ 7,810,542


No allowance for doubtful accounts is provided as of December 31, 2002 and 2001 since the

Company’s management believes that all the receivables are collectible. The collectibility of non-current trade receivable balances will depend on the satisfactory completion of the APP debt restructuring process.

4. Trade accounts payable - related parties

2002 2001

PT Dian Swastatika Sentosa US$ 33,964,897 US$ 196,543 PT Arara Abadi 30,741,761 61,075,431 PT Ekamas Fortuna 12,850,609 3,627,968 Vestwin Trading Pte. Ltd., Singapore 2,958,725 889,206 PT Pindo Deli Pulp And Paper Mills 1,010,403 1,936,204 PT Purinusa Ekapersada 887,694 643,527 Ningbo Asia Paper Converting 778,286 - PT Intercipta Kimia Pratama 589,437 637,584 PT Asia Trade Logistics 419,138 47,728 PT Kemas Citra Perkasa 418,019 359,336 Asia Pulp & Paper (Canada) Ltd., Canada 198,767 1,098,500 PT Cakrawala Mega Indah 194,309 1,282,554 PT Pabrik Kertas Tjiwi Kimia Tbk 192,618 245,279 PT Lontar Papyrus Pulp and Paper Industry 190,315 144,491 APP Import & Export Pte. Ltd., Singapore - 1,045,568 Campania Trading Limited, United Arab Emirates - 283,503 Others 351,202 538,910

Total (see Note 14) US$ 85,746,180 US$ 74,052,332

% to the consolidated total liabilities 2.38% 2.17%


21


5. Due to related parties 2002 2001

PT Mapala Rabda US$ 1,241,556 US$ 1,243,932 PT Sinar Mas Specialty Minerals 788,721 919,365 PT Murini Timber 685,152 281,898 PT Dian Swastatika Sentosa (see Note 32 (7)) 2,361 680,543 PT Pindo Deli Pulp And Paper Mills 1,237 363,113 Asia Pulp & Paper Company Ltd., Singapore - 3,638,932 Others 611,117 515,567

Total US$ 3,330,144 US$ 7,643,350

% to the consolidated total liabilities 0.09% 0.22%

Significant transactions with related parties are as follows: a. On January 2, 1998, based on the renewed appointment agreements of PT Cakrawala Mega Indah

(CMI) and PT Sinar Duniamakmur (SDM), CMI and SDM agreed to market and sell the Company’s products within Indonesia. The existing agreements with the distributors have an indefinite validity period, unless one of the parties terminates the respective agreement upon giving a written notice to the other party not later than one (1) month prior to the proposed termination date.

In 2002 and 2001, the Company also sold its pulp, paper and packaging products domestically to

PT Cakrawala Mega Indah dan PT Sinar Duniamakmur. Total local sales to the related parties amounted to US$ 526,802,078 or 99.9% of total local sales in 2002 and US$ 468,812,235 or 99.1% of total domestic sales in 2001 (see Note 21). Receivables arising from these sales transactions are recorded under “Trade Receivables - Related Parties” in the consolidated balance sheets.

b. In 2002 and 2001, the Company and its trading subsidiary sold their export pulp, paper and

packaging products overseas through IK Import & Export Ltd., APP International Trading Limited, APP International Trading (VI) Limited, APP International Trading (V) Limited, APP Paper Trading (S) Pte. Ltd. and Ningbo Zhonghua Paper Co. Ltd. Total export sales to the related parties amounted to US$ 95,677,506 or 14.3% of total export sales in 2002 and US$ 185,812,583 or 29.6% of total export sales in 2001 (see Note 21). Receivables arising from these transactions are recorded under “Trade Receivables - Related Parties - Current and Non-Current Assets” in the consolidated balance sheets. For the other trade receivable balances from related parties as of December 31, 2002 and 2001, see Note 4.

c. The Company purchased a significant portion of its wood requirements for pulp production from

PT Arara Abadi (Arara), a related party, amounting to approximately US$ 273 million or 37% of the Company’s total raw materials and materials purchases in 2002 and US$ 154 million or 30% of the Company’s total raw materials and materials purchases in 2001 (see Note 22).

On January 10, 2001, the Company entered into an Amended and Restated Pulpwood Purchase

Agreement with Arara which is valid for thirty (30) years. The Company agreed to exclusively purchase the pulpwood from Arara and Arara agreed to supply the pulpwood to the Company at a certain agreed price. Under this agreement, the Company has agreed from time to time at the request of Arara, to


22

5. BALANCES AND SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES (Continued) provide financing to Arara without any charges for purposes of financing the cost associated with

maintaining and developing the concession and the plantation, including without limitation, costs incurred in connection with the growing, harvesting and delivery of pulpwood. Both parties also agreed that the financing provided by the Company shall not be set off against the Company’s payment obligation from the purchase of pulpwood from Arara.

In 2002 and 2001, the advances provided to Arara included non-interest bearing funds and the balance

of US$ 300 million is presented as “Non-Current - Advances to Related Party” in the consolidated balance sheets.

d. In July 1996, the Company entered into an exclusive contract with PT Sinar Mas Specialty

Minerals (SMSM), an associated company, valid for ten (10) years and automatically renewed for a successive twelve (12) month period unless terminated by either party, under which SMSM agreed to supply the Company with its requirements for Precipitated Calcium Carbonate Megafil and Albagloss (PCC). The Company purchased megafil and albaglos from SMSM in 2002 and 2001 amounting to approximately US$ 5 million and US$ 5 million or 0.7% and 0.9% of total purchases, respectively.

The Company also agreed to supply carbon dioxide gas to SMSM at no charge and other resources

and services (land, utilities and services, landfill, electrical services, electrical usage and product storage) at their actual cost. Based on SMSM’s board of directors’ resolution dated December 1, 1999, SMSM agreed to pay a management fee to the Company. Total management fee amounted to US$ 309 thousand in 2002 and US$ 300 thousand in 2001. The related receivables are recorded under “Due from Related Parties” in the consolidated balance sheets.

e. The Company has also purchases of raw materials from Linden Trading Company Inc., United States

of America, Vestwin Trading Pte. Ltd., Singapore, PT Ekamas Fortuna and PT Intercipta Kimia Pratama totaling US$ 72.2 million or 9.8% from the total purchases in 2002 and US$ 34.4 million or 6.3% from the total purchases in 2001. The related payables are recorded under “Trade Payables - Related Parties” in the consolidated balance sheets. In 2002 and 2001, the Company provided advances to Linden Trading Company Inc. and Vestwin Trading Pte. Ltd. which balances are presented as “Advances to Suppliers and Others - Related Parties” in the consolidated balance sheets (see Note 7).

f. The Company’s property, plant and equipment were insured with several insurance companies

outside Indonesia, which was coordinated through PT Asuransi Sinar Mas, a related party, in 2001, with coverage of up to approximately US$ 4.73 billion and Rp 13 billion as of December 31, 2002 and US$ 4.6 billion and Rp 7.1 billion as of December 31, 2001 (see Note 10).

g. In 2002 and 2001, the Company used the transportation services of PT Bina Sinar Utama, a

related party. Total related transportation expense charged in 2002 and 2001 amounted to approximately US$ 1.91 million and US$ 1.89 million or 4.5% and 3%, respectively, of the total transportation expense. The related payables are presented as “Due to Related Parties” account in the consolidated balance sheets. The Company also provided a non-interest bearing fund to Bina Sinar Amity Transportation Service (Singapore) Pte. Ltd. which balance is presented as “Due from Related Parties” and advance to PT Bina Sinar Utama which balance is presented as “Advances to Suppliers and Others - Related Parties” in the consolidated balance sheets (see Note 7).


23

5. BALANCES AND SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES (Continued) h. In 2002 and 2001, the Company had a membership certificate amounting to US$ 1.7 million with

PT Kerawang Bukit Golf, a related party. i. The Company entered into a sale-and-leaseback transaction with PT Summit Sinar Mas Finance, a

related party (see Note 19). j. Effective January 2, 1998, the Company and PT Dian Swastatika Sentosa (DSS), a related party,

entered into an asset purchase agreement and an energy services agreement whereby the Company agreed to sell its power plant assets in Tangerang and Serang to DSS and purchase energy services from DSS for a period of twenty five (25) years. The actual energy purchase cost paid by the Company to DSS amounted to US$ 39.6 million and US$ 38.2 million in 2002 and 2001, respectively. The Company also entered into a master operating lease agreement and an employee transition agreement which provide for the lease to DSS of the land where the power plant assets are located, and the transfer to DSS of the Company’s employees involved in the operation of the power plant assets, respectively (see Note 32 (7)). The related payables are recorded as “Trade Payables - Related Parties” in the consolidated balance sheets.

k. APP provided certain management and marketing services to the Company. The management fee in

connection with these services amounted to US$ 18 million and Sin$ 78 million in 2002 and 2001, respectively, which is reported under “Operating Expenses” in the consolidated statements of income (see Note 23). The related payables are recorded as “Due to Related Parties” in the consolidated balance sheets.

l. The Company entered into rental agreements with PT Royal Oriental Ltd., a related party, for office

space with a total area of 5,905 square meters covering the period from August 1, 2000 to July 31, 2003. The Company also entered into a new rental agreement with the same party for other office space with a total area of 228 square meters covering the period from October 31, 2001 to October 31, 2002 and renewed up to October 31, 2003.

m. The Company has also entered into several agreements with certain related parties in which the

Company has committed to supply and sell the Company’s products to those related parties (see Notes 32 (10, 11, 12, 13)). The Company has also entered into supply contracts with several related parties in relation to the purchase of equipment and spare parts (see Note 11).

In addition to those disclosed above, due from related parties arose mainly from lending and borrowing

of raw materials which will be settled in the form of raw materials, harvesting fee, rental of equipment and reimbursement of expenses.

6. INVENTORIES Inventories consist of: 2002 2001

Finished goods - paper US$ 48,142,669 US$ 30,252,785 - packaging paper 18,378,588 13,307,305 - pulp 9,260,159 4,095,345


24

6. INVENTORIES (Continued) 2002 2001

Work-in-process - paper US$ 1,826,108 US$ 6,468,569 - packaging paper 4,442,930 4,208,432 - pulp 3,673,190 2,960,380 Raw materials 114,617,330 57,127,477 Indirect materials and spare parts 81,151,602 63,283,437

Total US$ 281,492,576 US$ 181,703,730

Indirect materials consist mainly of electrical and mechanical supplies, tools and instruments, chemicals

and plant supplies. The Company insured its marine cargo and stock/inventory in storage under a Stock Throughput

Insurance Policy with a limit of liabilities at US$ 20 million at any one shipment for marine and US$ 75 million for stock in storage under a condition that the respective risk location is bounded on each side by open land space, street, open waterway, each of which shall not be less than 50 feet wide. In 2002, the insurance was coordinated by Asuransi Rama Satria Wibawa at US$ 20 million at any one shipment for marine insurance and at US$ 200 million at any one location for storage risk. In 2001, the insurance was coordinated by PT Asuransi Allianze Utama Indonesia.

7. ADVANCES TO SUPPLIERS AND OTHERS Current advances to suppliers and others consist of the following: 2002 2001

Third parties Advances to suppliers US$ 16,191,853 US$ 20,726,989 Advances against expenses 2,606,319 656,029 Others 3,925,198 1,919,140

Total US$ 22,723,370 US$ 23,302,158

Related parties Linden Trading Company Inc., United States of America (see Note 5e) US$ 382,960 US$ 9,880,750 Vestwin Trading Pte. Ltd., Singapore (see Note 5e) 106,069 3,434,110 PT Bina Sinar Utama (see Note 5g) - 702,083 PT Bina Sinar Amity (see Note 5g) - 3,908

Total US$ 489,029 US$ 14,020,851


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8. PREPAID TAXES AND EXPENSES Prepaid taxes and expenses consist of the following: 2002 2001

Value-added tax (Rp 69,999,878,878 in 2002 and Rp 19,128,751,935 in 2001) US$ 7,827,985 US$ 1,839,303 Income taxes Article 22 (Rp 4,969,757,716 in 2002 and Rp 3,517,425,820 in 2001) 565,630 338,214 Article 23 (Rp 2,523,732,459 in 2002 and Rp 2,291,133,339 in 2001) 282,297 220,302 Fiscal (exit taxes) (Rp 3,380,500,000 in 2002 and Rp 2,088,000,000 in 2001) 378,113 200,769

Total prepaid taxes 9,054,025 2,598,588

Insurance (see Note 5f) 5,166,710 2,648,243 Rent (see Note 5l) 1,079,960 958,980 Others 3,621,679 10,888,215

Total prepaid expenses 9,868,349 14,495,438

Total Prepaid Taxes and Expenses US$ 18,922,374 US$ 17,094,026

9. INVESTMENTS IN SHARES OF STOCK The details of this account are as follows: Carrying Value Number of Percentage of Investees Shares Held Ownership 2002 2001

PT Sinar Mas Specialty Minerals 2,500 50% US$ 3,992,880 US$ 3,720,129 PT Paramitra Abadimas Cemerlang 760 19 225,620 225,620

Total US$ 4,218,500 US$ 3,945,749

Starting in July 1997, PT Sinar Mas Specialty Minerals (SMSM) commenced its operations and engaged in

chemical manufacturing. In 2002 and 2001, the carrying values of investment in SMSM included the Company’s equity in the net income of the associated company of US$ 272,751 and US$ 286,411, respectively, which are recorded under “Other Charges (Income) - Others” in the consolidated statements of income.

On May 9 1996, the Company made an investment in PT Paramitra Abadimas Cemerlang totaling

760 shares valued at Rp 760,000,000. PT Paramitra Abadimas is an inactive company which is engaged in general trading especially for chemical products, including import and export.


26

10. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of: 2002 Beginning Balance Additions Deductions Ending Balance Carrying Value Direct Ownership Land rights US$ 33,404,946 US$ - US$ 710,275 US$ 32,694,671 Land improvements 157,500,172 - - 157,500,172 Buildings 352,075,941 5,273,510 50,707 357,298,744 Machinery 4,116,154,683 242,366,497 1,540,857 4,356,980,323 Transportation equipment 23,361,083 690,551 506,009 23,545,625 Furniture, office fixtures and other equipment 29,287,479 1,128,347 142,641 30,273,185 Total 4,711,784,304 249,458,905 2,950,489 4,958,292,720

Assets under Capital Lease (see Note 19) Machinery 38,841,283 - - 38,841,283 Transportation equipment 218,073 - - 218,073 Total 39,059,356 - - 39,059,356

Assets under Construction Construction-in-progress 43,187,135 10,675,221 31,491,511 22,370,845 Total Carrying Value 4,794,030,795 260,134,126 34,442,000 5,019,722,921

Accumulated Depreciation Direct Ownership Land improvements 42,875,249 7,777,504 50,652,753 Buildings 98,418,363 17,656,908 15,001 116,060,270 Machinery 865,565,907 164,562,470 546,618 1,029,581,759 Transportation equipment 21,870,553 798,887 514,451 22,154,989 Furniture, office fixtures and other equipment 24,525,342 3,203,854 121,140 27,608,056 Total 1,053,255,414 193,999,623 1,197,210 1,246,057,827 Assets under Capital Lease Machinery 7,445,250 1,553,650 - 8,998,900 Transportation equipment 52,096 43,623 - 95,719 Total 7,497,346 1,597,273 - 9,094,619 Total Accumulated Depreciation 1,060,752,760 195,596,896 1,197,210 1,255,152,446 Net Book Value US$ 3,733,278,035 US$ 3,764,570,475

2001 Beginning Balance Additions Deductions Ending Balance Carrying Value Direct Ownership Land rights US$ 33,404,946 US$ - US$ - US$ 33,404,946 Land improvements 156,901,701 749,608 151,137 157,500,172 Buildings 351,373,772 702,813 644 352,075,941 Machinery 4,114,387,945 3,997,303 2,230,565 4,116,154,683 Transportation equipment 24,303,607 142,998 1,085,522 23,361,083 Furniture, office fixtures and other equipment 27,364,035 1,937,598 14,154 29,287,479 Total 4,707,736,006 7,530,320 3,482,022 4,711,784,304


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10. PROPERTY, PLANT AND EQUIPMENT (Continued) 2001 Beginning Balance Additions Deductions Ending Balance Assets under Capital Lease (see Note 19) Machinery US$ 38,841,283 US$ - US$ - US$ 38,841,283 Transportation equipment 218,073 - - 218,073 Total 39,059,356 - - 39,059,356 Assets under Construction Construction-in-progress 43,900,660 3,769,475 4,483,000 43,187,135 Total Carrying Value 4,790,696,022 11,299,795 7,965,022 4,794,030,795 Accumulated Depreciation Direct Ownership Land improvements 35,127,265 7,751,763 3,779 42,875,249 Buildings 80,788,343 17,638,167 8,147 98,418,363 Machinery 702,739,853 163,459,723 633,669 865,565,907 Transportation equipment 21,335,149 1,620,081 1,084,677 21,870,553 Furniture, office fixtures and other equipment 21,284,444 3,252,774 11,876 24,525,342 Total 861,275,054 193,722,508 1,742,148 1,053,255,414 Assets under Capital Lease Machinery 5,891,599 1,553,651 - 7,445,250 Transportation equipment 9,445 42,651 - 52,096 Total 5,901,044 1,596,302 - 7,497,346 Total Accumulated Depreciation 867,176,098 195,318,810 1,742,148 1,060,752,760 Net Book Value US$ 3,923,519,924 US$ 3,733,278,035

Additions to property, plant and equipment include reclassifications from construction-in-progress to

property, plant and equipment amounting to US$ 31,491,511 and US$ 4,483,000 in 2002 and 2001, respectively, and reclassifications from advances for purchases of property and equipment amounting to US$ 213,710,875 in 2002 and US$ 1,276,830 in 2001.

Significant additions to property, plant and equipment in 2002 are in a multifuel boiler and a turbine

generator and in 2001 include the new pulp mill modification projects in Perawang Pulp Mills No. 1, 2 and 9.

The decrease in property, plant and equipment represents sale and disposal as detailed below: 2002 2001

Net Book Value US$ 1,753,279 US$ 1,739,874 Sold 1,223,586 403,966

Loss on sale and disposal of property, plant and equipment - net US$ 529,693 US$ 1,335,908


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10. PROPERTY, PLANT AND EQUIPMENT (Continued) Depreciation charged to factory overhead and operating expenses is as follows: 2002 2001

Property, plant and equipment US$ 193,999,623 US$ 193,722,508 Assets under capital lease 1,597,273 1,596,302

Total US$ 195,596,896 US$ 195,318,810

Details of construction-in-progress as of December 31, 2002 are as follows: Percentage of Accumulated Estimated Description Completion Cost Year of Completion

Building and land improvement 65 % US$ 9,505,413 2003 80 1,707,564 2003 Machinery 65 9,224,512 2003 - 2004 80 1,933,356 2003

Total US$ 22,370,845

As of December 31, 2002, the construction of the Perawang Power Plant including civil, mechanical and

electrical sections was still in progress. As of December 31, 2002 and 2001, a large portion of property, plant and equipment were pledged as

collateral for the Company's long-term notes payable, long-term bank and supplier loans payable and obligations under capital lease (see Notes 17, 18, and 19).

Buildings, machinery, transportation equipment, furniture and office fixtures and other equipment were

covered by all risk insurance of approximately US$ 4.73 billion and Rp 13 billion as of December 31, 2002 and US$ 4.6 billion and Rp 7.1 billion as of December 31, 2001, which management believes are adequate to cover possible losses from such risks (see Note 5f).

In June 2002, the Company commissioned an appraisal on all its property, plant and equipment by an

independent appraiser (see Note 2k), who concluded that the market value for each cash-generating unit is greater than the net book value of the property, plant and equipment. The total market value of the assets was appraised at US$ 3,784,795,326.

11. ADVANCES FOR PURCHASES OF PROPERTY AND EQUIPMENT This account consists of the following: 2002 2001

Third parties US$ 126,014,714 US$ 301,267,903 Related party APP International Equipment Company Ltd., Mauritius 115,285,948 115,285,948

Total US$ 241,300,662 US$ 416,553,851


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11. ADVANCES FOR PURCHASES OF PROPERTY AND EQUIPMENT (Continued) This accounts represents advance payments for purchases of spare parts and machinery on the pulp mill

and paper machine expansion at Perawang and packaging paper mill expansion at Serang. On September 11, 2000, the Company together with PT Pabrik Kertas Tjiwi Kimia Tbk, PT Pindo Deli

Pulp And Paper Mills and PT Lontar Papyrus Pulp and Paper Industry, related parties, (collectively referred to as Buyers) entered into a supply contract with Asia Pulp & Paper Company Ltd. (APP), APP International Equipment Company Ltd. (APPIE), related parties, ORIX Trade International Corporation (OTIC), ORIX Corporation (ORIX) and Nissho Iwai Corporation (NIC) whereby the Buyers agreed to purchase from OTIC certain equipment and/or spare parts (Equipment) with the total aggregate value not to exceed JP¥ 15 billion. ORIX agreed to provide or arrange back-up funding to OTIC to enable OTIC to fulfill its obligation while APP agreed to guarantee the Buyers’ obligation. Pursuant to the supply contract in September to October 2000, APPIE entered into several sales agreements with NIC whereby NIC agreed to purchase equipment and spare parts from APPIE totaling JP¥ 13,235,957,780 with payment to be made by OTIC. OTIC also entered into a sale agreement with NIC whereby OTIC agreed to purchase certain equipment. The Company utilized the facility, made an advance to APPIE and incurred liabilities to OTIC (see Note 13). The supply contract includes negative covenants on the part of the Buyers relating to, among others, entering into merger, consolidation, sale, lease, assignment or disposal of all or substantially the Buyers’ assets without the prior consent of OTIC.

12. ASSETS NOT USED IN OPERATIONS This account represents machineries of PPM 4 and PPM 5 located overseas which are not used in

operation and were purchased from Beloit Asia Pacific (L) Ltd. (see Note 33 A (3)). Based on the appraisal report dated January 14, 2003 of PT Saptasentra Jasa Pradana, the market value of

certain Beloit Machineries PPM 4 and 5 located in the United States of America and Germany as of December 17, 2002 amounted to US$ 38,181,260 which was determined based on the depreciated replacement cost method which considered the physical damage, functional and economic obsolescence of the assets. The management believes that the impairment loss of US$ 5,320 on the assets is not material and therefore, no adjustment is made.

13. SHORT-TERM LOANS PAYABLE - NET On March 12, 2001, Asia Pulp & Paper Company Limited (main stockholder of parent company) and

Subsidiaries (APP Group), including the Company, announced a standstill on their payment obligations (principal and interest payments) to creditors, including the short-term loans described below.

The following short-term loans payable represent mostly working capital loans which include revolving loan

facilities, bill discounting facilities (see Note 4), import usance and sight letters of credit facilities, trust receipts and export facilities, foreign exchange facilities, product purchase and prepayment arrangement and overdraft facilities.


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13. SHORT-TERM LOANS PAYABLE - NET (Continued) 2002 2001

ORIX Trade International Corporation, Japan (JP¥ 13,235,957,780 in 2002 and 2001) (see Note 11) US$ 111,579,124 US$ 100,745,990 PT Bank Mizuho Indonesia, Jakarta (formerly PT Fuji Bank International Indonesia) (US$ 13,297,847, Euro 2,544,658, JP¥ 23,903,400, Sin$ 648,624 and GBP 41,550 in 2002 and US$ 49,513,059, Euro 711,986, JP¥ 14,380,640, SGD 262,558 and DEM 142,702 in 2001) (see Note 32 (3)) 16,607,097 50,462,150 ABN AMRO Bank N.V., Jakarta (see Note 32 (15)) 13,429,652 17,801,735 Credit Suisse First Boston, Singapore 5,000,000 5,000,000 PT Inti Fikasa Securindo (formerly PT Bank CIC Internasional Tbk), Jakarta (see Note 32 (4)) 4,824,178 4,821,229 Citibank N.A., Jakarta (US$ 2,377,404 and Rp 8,602,317,633 in 2002 and US$ 2,377,404 and Rp 8,602,317,633 in 2001) 3,339,634 3,204,550 PT Bank Permata, Jakarta (formerly PT Bank Universal Tbk) (Rp 25,000,000,000) (see Note 20) 2,796,497 2,403,846 PT Bank Central Asia Tbk, Jakarta (Rp 21,570,831,725 in 2002 and in 2001) (see Note 32 (6)) 2,412,850 2,074,118 Malayan Banking Berhad, Malaysia 2,400,000 2,400,000 PT Bank UFJ Indonesia, Jakarta (formerly PT Bank Sanwa Indonesia) (see Note 32 (5)) 270,788 1,444,113 PT Bank Mandiri (Persero), Jakarta (see Note 20) - 5,656,520 American Express Bank Ltd., Jakarta and Singapore - 3,232,136 PT Bank Sumitomo Mitsui Indonesia, Jakarta - 1,612,431 PT Bank Pan Indonesia Tbk, Jakarta ( Rp 15,866,866,000 in 2001) (see Note 20) - 1,525,660 Standard Chartered Bank, Jakarta (US$ 1,128,093, Euro 309,875, JP¥ 2,210,150 and DEM 57,591 in 2001) - 1,446,547 PT Indosuez Indonesia Bank, Jakarta - 737,012

Total Short-term Loans Payable US$ 162,659,820 US$ 204,568,037

These short-term loans payable bear annual interest rates as follows:

2002 2001

US Dollar 3.9% - 9.9% 4.2% - 14.0% Rupiah 19.0 - 20.0 18.0 - 23.0 Other foreign currencies 2.4 - 6.9 11.5 - 11.6


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13. SHORT-TERM LOANS PAYABLE - NET (Continued) The loan agreements include negative covenants and restrictions relating to, among others, the

maintaining of certain financial ratios and surplus cash balances by the Company and APP, direct or indirect majority ownership by APP in the outstanding common stock of and management control in the Company and continuing guarantee from the Company for facilities extended to Vestwin Paper Trading Pte. Ltd. and Linden Trading Company Inc. (related party trading companies), changes in capital structure, ceasing in carrying on the business, lease or sale of significant part of the Company’s and Subsidiaries’ assets and investments, entering into merger, acquisition, consolidation, reorganization, dissolution or undertaking a material change in the nature of the business, failure to pay any indebtedness (cross-default) in excess of certain material amount, providing of loan or guarantee, profit distribution and payments to stockholders and entering into non-arms’ length transactions.

Some of these loans also include balances covered by receivables on sold goods, pledge of Massingham

International Limited’s shares held in Golden Agri Resources Limited and Flambo International Limited’s shares held in Asia Food & Properties Limited (related party companies) at an amount not less than US$ 60 million, corporate guarantee from APP in 2002 and 2001 for facilities totaling US$ 70 million (see Notes 3 and 4).

14. TRADE PAYABLES This account represents amounts due to suppliers for purchases of raw materials, spare parts and factory

supplies as follows: 2002 2001

Third parties US$ 92,124,436 US$ 104,972,629 Related parties (see Note 5 (4)) 85,746,180 74,052,332

Total US$ 177,870,616 US$ 179,024,961

Details of aging schedule of account payable based on invoice date are as follows: 2002 2001

Not yet due US$ 13,325,510 US$ 3,117,338 < 1 month 19,574,621 1,702,455 > 1 month - 2 month 9,330,803 1,782,003 > 2 month - 3 month 5,404,397 1,819,229 > 3 month - 4 month 4,438,466 44,787,720 > 4 month 125,796,819 125,816,216

Total US$ 177,870,616 US$ 179,024,961


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14. TRADE PAYABLES (Continued) Details of trade payables based on difference currencies are as follows: 2002 2001

US Dollar (US$ 139,275,538 in 2002 and US$ 22,884,340 in 2001) US$ 139,275,538 US$ 22,884,340 Rupiah (Rp 299,613,120,965 in 2002 and Rp 300,758,583,677 in 2001) 33,513,772 28,919,095 European Euro (Euro 2,002,759 in 2002 and Euro 2,053,769 in 2001) 2,162,980 1,814,508 Singapore Dollar (Sin$ 3,438,826 in 2002 and Sin$ 5,557,760 in 2001) 1,987,761 3,003,798 Swiss Franc (CHF 613,724 in 2002 and CHF 613,722 in 2001) 442,468 366,358 Japanese Yen (JP¥ 31,400,093 in 2002 and JP¥ 16,015,655,456 in 2001) 264,801 121,903,777 Canadian Dollar (CAD 313,626 in 2002 198,767 - German Deutschemark (DEM 24,728 in 2002 and DEM 23,500 in 2001) 12,592 10,617 Great Brittain Pound (GBP 6,396 in 2002 and GBP 83,495 in 2001) 10,255 121,073 Swedish Krona (SEK 14,700 in 2002 and SEK 14,700 in 2001) 1,682 1,395 Total US$ 177,870,616 US$ 179,024,961

15. ACCRUED EXPENSES This account consists mainly of interest expense on short-term loans payable, long-term notes and bonds

payable and long-term bank and supplier loans payable in 2002 and 2001. 16. TAXES PAYABLE This account consists of the following taxes payable: 2002 2001

Income taxes Subsidiary - IK Finance BV ((Euro 123,871) in 2002 and (NLG 272,975) in 2001) (see Note 1c) ( US$ 115,262 ) ( US$ 115,262 ) Article 21 (Rp 3,529,418,523 in 2002 and Rp 5,292,350,976 in 2001) 394,844 508,880


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16. TAXES PAYABLE (Continued) 2002 2001

Article 22 (Rp 96,043,344 in 2002 and Rp 86,623,921 in 2001) US$ 10,751 US$ 8,328 Articles 23 and 26 (Rp 1,136,575,895 in 2002 and Rp 2,679,129,552 in 2001) 127,168 257,553

Total US$ 417,501 US$ 659,499

17. LONG-TERM NOTES AND BONDS PAYABLE - NET On March 12, 2001, Asia Pulp & Paper Company Limited (main stockholder of parent company) and

Subsidiaries (APP Group), including the Company, announced a standstill on their obligations (principal and interest payments) to creditors, including the long-term notes and bonds payable described below. Therefore, since December, 2001, all long-term loans were reclassified to current maturities in the consolidated balance sheet.

2002 2001

Guaranteed Senior Notes Due 2007 US$ 600,000,000 US$ 600,000,000 Guaranteed Secured Notes Due 2002 and 2006 350,000,000 350,000,000 Guaranteed Notes Due 2005 165,000,000 165,000,000 Guaranteed Notes Due 2005 165,000,000 165,000,000 Guaranteed Senior Notes Due 2002 110,000,000 110,000,000 Indah Kiat I 1999 Bonds due 2004 and 2006 (Rp 1,000,000,000,000) 111,852,977 96,150,000 Guaranteed Notes Due 2005 100,000,000 100,000,000

Total 1,601,852,977 1,586,150,000 Less: unamortized discount (see Note 2m) ( 62,010,111 ) ( 86,749,510 )

Net US$ 1,539,842,866 US$ 1,499,400,490

Under an indenture dated July 3, 1997 among IK Mauritius (see Note 1c), a Subsidiary, the Company and

First Trust of New York, N.A., (succeeded by US Bank Corporate Trust Services) as trustee, IK Mauritius issued US$ 600 million Guaranteed Senior Notes Due 2007 which were originally due on July 1, 2007 unless redeemed prior to its maturity date. These notes may be redeemed at the issuer’s option in whole or in part at any time on or after July 1, 2002 at 105% of the principal amount plus accrued interest, declining ratably to 102.5% on or after July 1, 2003 and to 100% on or after July 1, 2004. These notes which are listed in the Luxembourg Stock Exchange are fully, unconditionally and irrevocably guaranteed by the Company and bear annual interest of 10% payable semi-annually in arrears on January 1 and July 1 of each year. The net proceeds from the issuance of the Guaranteed Senior Notes were used to refinance certain short-term and long-term loans payable. On July 1, 1999, the Company and IK Mauritius amended the agreement whereby they agreed to change the currency of the loan from US Dollar to Japanese Yen and change the interest rate from 10% to 5.5% adjusting with the change in the loan currency. Notes amounting to US$ 598.45 million were registered with the US Securities and Exchange Commission (SEC).


34

17. LONG-TERM NOTES AND BONDS PAYABLE - NET (Continued) Under separate indentures dated June 29, 1994 among IK Finance BV (see Note 1c), a Subsidiary, the

Company and Bank America National Trust Company (succeeded by First Trust of New York, N.A. and succeeded further by US Bank Corporate Trust Services), as trustee, IK Finance BV issued Guaranteed Secured Notes of US$ 200,000,000 and US$ 150,000,000 which were originally due on June 15, 2002 and 2006, respectively. The notes which are listed in the Luxembourg Stock Exchange and registered with the US SEC bear annual interest of 11.875% and 12.5%, respectively (see Note 33 A (7)).

The interest is payable semi-annually on June 15 and December 15 of each year. These notes are secured

by the Company's real property and all movable assets (other than finished goods inventory, goods-in-process and raw materials) comprising pulp mills No. 1 and No. 2 and paper mill in a Perawang, and any insurance proceeds relating thereto. The net proceeds from the issuance of Guaranteed Secured Notes were used by the Company to refinance certain syndicated long-term bank loans payable, revolving credit and standby letters of credit facilities and syndicated term loan facility.

Based on the agreement on the notes payable issued dated July 21, 2000 among IKF III (see Note 1c), a

Subsidiary, the Company and APP as the guarantors, The Chase Manhattan Bank, London as principal paying and fiscal agent, Chase Manhattan Bank Luxembourg S.A. as registrar and Credit Suisse First Boston International (CSFBi), London, as calculation agent, IKF III issued Guaranteed Notes amounting to US$ 165,000,000 due on July 24, 2005 unless redeemed or purchased and cancelled prior to its maturity date. At any time, the notes can be redeemed in whole, but not in part, at nominal value plus the accrued interest if IKF III determines there are changes in the governing tax rules. These notes bear an annual interest rate of 11.75% payable semi-annually in arrears on January 24 and July 24 of each year. The net proceeds received from these notes were loaned to the Company and used to refinance the Company’s maturing loans.

Based on the agreement on the notes payable issued dated August 24, 2000 among IKF III (see Note 1c),

a Subsidiary, the Company and APP as the guarantors, The Chase Manhattan Bank, London as principal paying and fiscal agent, Chase Manhattan Bank Luxembourg S.A. as registrar and CSFBi, London, as calculation agent, IKF III issued Guaranteed Notes amounting to US$ 165,000,000 which will be due on August 25, 2005 unless redeemed or purchased and cancelled prior to its maturity date. At any time, the notes can be redeemed in whole, but not in part, at nominal value plus the accrued interest if IKF III determines there are changes in the governing tax rules. These notes bear an annual interest rate of 11.75% payable semi-annually in arrears on August 25 and February 25 of each year. The net proceeds received from these notes were loaned to the Company and used to refinance the Company’s maturing loans.

Based on the agreement on the notes payable issued dated March 31, 2000 (which had been amended on

April 11, 2000) among IKF IV (see Note 1c), a Subsidiary, the Company and APP as the guarantors and The Bank of New York as trustee, IKF IV issued Guaranteed Senior Notes amounting to US$ 110,000,000 payable in eight (8) equal quarterly installments starting on March 31, 2001 (which has been amended to become April 11, 2001) up to December 31, 2002, except if redeemed or purchased and cancelled prior to its maturity date. At any time, the notes can be paid in whole or in part at 100% of the nominal value plus the accrued interest. These notes payable bear annual interest of 15%, payable semi-annually every March 31 (which had been amended to become April 11) and September 30. The net proceeds received from these notes were loaned to the Company and used to refinance the Company’s maturing loans (see Note 33 (A) 3).


35

17. LONG-TERM NOTES AND BONDS PAYABLE - NET (Continued) On October 20, 1999, the Company issued Indah Kiat I 1999 Bonds in the aggregate principal of

Rp 1 trillion which were listed in the Surabaya Stock Exchange. The bonds comprise three (3) series of A series which bear annual interests of 17% and 17.8% due within 5 and 7 years, respectively, B series which bear annual interest at a floating rate of six (6) month JIBOR + 2% and six (6) month JIBOR + 2.5% due within 5 and 7 years, respectively, and C series which bear annual interest at a floating rate of the average of six (6) month Rupiah time deposits from four banks, namely, PT Bank Mandiri (Persero), PT Bank Negara Indonesia (Persero) Tbk, PT Bank Danamon Indonesia Tbk and PT Bank Central Asia Tbk plus fixed premium of 2.5% and 3% due within 5 and 7 years, respectively. The net proceeds from the issuance of these bonds were used to repay part of the unsecured Japanese Yen Bonds - First Series amounting to JP¥ 37 billion which became due in March 2000 (see Notes 31 and 36d).

Based on the agreement on the notes payable issued dated March 6, 2000 among IKF III (see Note 1c), a

Subsidiary, the Company and APP as the guarantors and The Chase Manhattan Bank, London, as principal paying and fiscal agent and The Chase Manhattan Bank Luxembourg S.A., as registrar, IKF III issued Guaranteed Notes amounting to US$ 100,000,000 originally due on March 8, 2005 unless redeemed or purchased and cancelled prior to its maturity date. At any time, the notes can be paid in whole, but not in part, at nominal value plus the accrued interest if IKF III determines there are changes in the governing tax rules. These notes payable bear an annual interest rate of 11.75% payable semi-annually in arrears every March 8 and September 8 each year. The net proceeds from the issuance of these notes were loaned to the Company and used as working capital and to refinance the maturing loans.

The long-term notes and bonds payable agreements include certain covenants relating to, among others,

the repurchase of the notes and bonds upon change in the controlling stockholders, redemption of the notes and bonds in case of changes in tax laws, maintaining of certain financial ratios, limitation on incurrence of debt, restricted payments, distributions from subsidiaries, asset sales and sales-and-leaseback transactions, pledge of property, not allowing any lien on present and future properties, securing guarantees, making advances and obtaining new loans or investments without the consent of the trustee.

18. LONG-TERM BANK AND SUPPLIER LOANS PAYABLE - NET On March 12, 2001, Asia Pulp & Paper Company Limited (main stockholder of parent company) and

Subsidiaries (APP Group), including the Company, announced a debt standstill on all their obligations (principal and interest payments) to creditors, including long-term bank and supplier loans. Therefore, since December 31, 2001, all long-term loans were reclassified to current maturities in the consolidated balance sheet.

2002 2001

Syndicated loans arranged by: - BA Asia Limited, Hongkong (US$ 231,500,000, JP¥ 2,111,000,000 and Rp 98,735,000,000 in 2002 and 2001) US$ 260,347,338 US$ 257,061,058 - IKB Deutsche Industriebank Aktiengesellschaft, Dusseldorf (Euro 95,198,425 in 2002 and DEM 186,194,074 in 2001) 99,772,818 84,108,387


36

18. LONG-TERM BANK AND SUPPLIER LOANS PAYABLE - NET (Continued) 2002 2001

- Barclays Bank Plc., London and Credit Lyonnais France Bankfilial, Stockholm US$ 59,070,120 US$ 59,070,120 - Sampo Bank Plc., Helsinki 41,214,375 41,214,375 - Creditanstalt Bankverein, Vienna 10,540,000 10,540,000 - Export Development Corporation, Canada 6,000,000 6,000,000 Indonesian Bank Restructuring Agency (IBRA) (US$ 103,920,172 and Rp 994,658,671,738 in 2002 and US$ 179,866,380 and Rp 994,658,671,738 in 2001) 215,182,587 275,506,638 Kvaerner Pulping OY, Finland and Sampo Bank Plc., Helsinki 53,800,000 53,800,000 Bank of America N.T. & S.A. and ABN AMRO Bank, N.V. 51,526,152 51,720,230 Mitsubishi Corporation, Tokyo, Japan (JP¥ 5,421,899,095) 45,726,324 41,268,048 IKB Deutsche Industriebank Aktiengesellschaft, Dusseldorf (Euro 11,715,507 and US$ 29,340,270 in 2002 and DEM 22,913,464 and US$ 29,340,270 in 2001) 41,618,724 39,690,518 Export Development Corporation, Canada 22,586,042 22,586,042 Bank One, N.A., Chicago, United States of America 19,924,220 19,924,220 Bayerische Hypo-und Vereinsbank Aktiengesellschaft, Munich, Germany (Euro 9,305,822 and US$ 5,458,149 in 2002 and DEM 18,200,606 and US$ 5,458,149 in 2001) 15,211,258 13,679,990 IKB Deutsche Industriebank Aktiengesellschaft, Dusseldorf and BHF Bank Aktiengesellschaft, Frankfurt, Germany 11,591,572 11,591,572 Bank of America N.T. & S.A., United States of America and United Kingdom 6,448,577 6,448,577 Bank of America, S.A. Madrid 6,394,507 6,394,507 IKB Deutsche Industriebank Aktiengesellschaft, Dusseldorf and Kreditanstalt fur Wiederaufbau, Frankfurt am Main 5,825,634 5,825,634 Export-Import Bank of the United States, United States of America 5,805,156 5,805,156 Deutsche Bank AG, Succursale de Paris 3,600,448 3,600,448 Sampo Bank Plc., Helsinki 3,521,015 3,521,015 Credit Lyonnais Bank, Copenhagen 3,311,019 3,311,019 Credit Lyonnais France Bankfilial, Stockholm and Den Danske Aktieselskab, Copenhagen 2,968,200 2,968,200 Bank of America, United States of America 1,967,795 1,967,795 The Trade Bank, Minnesota, United States of America 612,538 612,538 ABN AMRO Bank (Deutscheland) AG, Hamburg (Euro 394,226 in 2002 and DEM 771,040 in 2001) 413,175 348,304

Total 994,979,594 1,028,564,391 Less unamortized discount (see Note 2m) - ( 1,245,000 )

Net US$ 994,979,594 US$ 1,027,319,391


37

18. LONG-TERM BANK AND SUPPLIER LOANS PAYABLE - NET (Continued) On September 30, 2000, the Company and BII entered into a credit agreement with cash loan facilities of

US$ 24,555,774 and other credit facilities of US$ 155,310,606 and Rp 994,658,671,738. These facilities have been extended several times and the last amendment extended the stated maturity date to September 30, 2003. The facilities bear annual interest of 6.7% - 10.0% for the US Dollar facilities and 16% for the Rupiah facility. These credit facilities arose in 2000 from the repurchase of uncollected export trade receivables from export trade customers which were previously sold to BII (see Notes 4 and 31). On November 5, 2001, the loan from PT Bank International Indonesia Tbk (BII) was transferred to the Indonesian Bank Restructuring Agency (IBRA) in accordance with a sales purchase agreement and assignment of rights to the receivables entered into by IBRA and BII dated on the same date (see Note 32 (14). On June 28, 2002, Sinar Mas Group (SMG) paid an amount of 20% of its total obligations to IBRA which includes US$ 90 million in cash coming from the company broken down as follows: US$ 75,946,208 as principal, US$ 13,554,246.74 as interest, US$ 325,158 as penalty and US$ 174,387.91 as guarantee premium.

On March 30, 2000, the Company and its Subsidiary, IK Finance BV (see Note 1c), obtained an unsecured

term loan facility of US$ 264,500,000 arranged by BA Asia Limited (as Coordinating Arranger) and The Fuji Bank Limited, Singapore Branch as an agent. This facility consists of Tranches A and B US Dollar facility of US$ 231,500,000, Rupiah facility of US$ 13,000,000 (Rp 98,735,000,000) and Japanese Yen facility of US$ 20,000,000 (JP¥ 2,111,000,000). Tranche A which was drawn down by the Company consists of commitments in US Dollar and Rupiah of US$ 99.5 million and US$ 13 million, respectively. Tranche B which was drawn down by IK Finance BV and loaned to the Company consists of commitments in US Dollar and Japanese Yen of US$ 132 million and US$ 20 million, respectively. These facilities had stated maturity dates of April 10, 2001 and 2002. Tranche A facility is guaranteed by Asia Pulp & Paper Co., Ltd. (APP) and Tranche B facility is unconditionally and irrevocably guaranteed by the Company and APP.

In 1994, the Company entered into an agreement (as amended) with IKB Deutsche Industriebank

Aktiengesellschaft, Dusseldorf, Germany (IKB), whereby IKB, as the agent, agreed to arrange a long-term facility to finance up to 85% of the capital expenditures on the machinery construction at the Serang board mill. The initial finance amounted to German Deutschemark (DEM) 348,853,600, which was changed to DEM 320,447,131 and subsequently to DEM 310,319,894. This facility is payable in 20 semi-annual installments starting on December 30, 1996 up to June 30, 2006. These loans are covered by the Guarantee of Finance Credit with Hermes Kreditversicherungs-AG, Germany and with Oesterreichische Kontrollbank AG, Austria for export credit insurance.

In connection with the packaging paper machine construction at Perawang Mill, the Company obtained

syndicated loans with several banks and financial institutions arranged by Barclays Bank Plc., London, and Credit Lyonnais France Bankfilial, Stockholm, with maximum amounts of US$ 76,075,000, US$ 18,398,681 and US$ 10,540,000, respectively or totaling US$ 105,013,681. The loans are payable in 16 semi-annual installments starting on June 30, 1997 and guaranteed by the same creditor banks and financial institutions and EKN, the Swedish Export Credits Guarantee Board. The stated maturity dates under the loans are January 18, 2005, December 30, 2004 and March 1, 2005, respectively.

In 1996, the Company entered into an export credit facility agreement with Sampo Bank Plc., Helsinki,

Barclays Bank Plc. and Credit Lyonnais France Bankfilial as the arranger of syndicated banks to make available to the Company a long-term loan facility of US$ 73,270,000 to finance the purchase of recovery boiler machinery at Perawang Mill. The loans are payable in 16 semi-annual installments starting on July 3, 1997 up to January 3, 2005, and are guaranteed by The Finnish Guarantee Board and a group of bank guarantors and financial institutions.


38

18. LONG-TERM BANK AND SUPPLIER LOANS PAYABLE - NET (Continued) In 1996, the Company entered into an export credit facility agreement with Creditanstalt Bankverein,

Vienna, Austria, as an agent, whereby the lenders agreed to make available a loan facility of up to US$ 21,080,000 to the Company. The loans are payable in 16 semi-annual installments starting on January 27, 1997 up to July 27, 2004 and guaranteed by the Oesterreichische Kontrollbank AG, Austria.

In 1996, Export Development Corporation, Canada (EDC) as a lender (with BZW, Investment Banking

Division of Barclays Bank Plc., as the arranger), agreed to make available to the Company the investment credit facility to finance the purchase of recausticizing system machinery with the maximum amount of US$ 12,000,000. This facility is payable in 16 installments starting on March 15, 1997 up to September 15, 2004 and is guaranteed by Barclays Bank Plc. up to 30% of the total facility.

On August 10, 2000, IKF VIII (see Note 1c), a Subsidiary, issued six (6) promissory notes to Kvaerner

Pulping OY, Finland of US$ 8,966,666 each totaling US$ 53,800,000 which are guaranteed by the Company and APP with stated maturities of several dates starting on September 30, 2001 up to March 31, 2004 unless redeemed, repaid, purchased or cancelled prior to maturity date. The loan was extended to the Company to finance the purchase of multi-fuel boiler. In September 2000, Kvaerner Pulping OY endorsed three (3) promissory notes to Sampo Bank Plc., Helsinki totaling US$ 26,900,000.

In 1997, the Company entered into an agreement with Bank of America N.T. & S.A. (BOA), United States

of America and ABN AMRO Bank N.V. (ABN), United States of America, whereby BOA, as the agent, agreed to arrange an export financing credit with a maximum amount of US$ 67,559,544. The loan is payable in 20 semi-annual installments starting on April 15, 1999 up to October 15, 2008, and guaranteed by Export-Import Bank of the United States and APP. In 1998, the Company also obtained credit facilities from BOA, London branch and ABN, Stockholm branch to finance 85% of the purchase price of machinery for the production of fine paper with maximum amounts of US$ 5,131,487, whereby BOA acts as the agent. The loan is payable in 20 semi-annual installments starting on November 30, 1998 and guaranteed by EKN, the Swedish Export Credits Guarantee Board for export credit insurance. The Company also obtained credit facilities from ABN AMRO (Deutschland) AG, Dusseldorf branch and BOA, Frankfurt am Main branch to finance the purchase of machinery for the production of fine paper with a maximum amount of US$ 6,970,000. The loan is payable in 20 semi-annual installments starting on September 30, 1998 up to March 30, 2008 and guaranteed by Hermes Kreditversicherungs - AG, Germany in the form of export credit insurance.

The Company entered into a machine purchase agreement with Mitsubishi Corporation, Tokyo,

Japan (MC), whereby the Company agreed to pay a portion of the purchase price through a loan amounting to JP¥ 4,576,788,300 payable in 16 semi-annual installments of JP¥ 286,049,268 over eight years, with the first installment due six (6) months from the bill of lading date of the last major shipment. In connection with the purchase agreement, MC obtained a loan from The Export-Import Bank of Japan and a syndication of several banks with a total amount of up to JP¥ 4,029,000,000. The total value of machinery fully received amounted to JP¥ 5,474,905,630. This facility is secured by the machinery obtained through this facility. In 1998, the Company obtained a credit facility from MC to finance the purchase of paper machine and electrical distribution system and drives amounting to JP¥ 2,215,196,552. The Company agreed to pay a portion of the equipment purchase price through a loan amounting to JP¥ 1,882,917,069 which is payable in 16 semi-annual equal installments, with the first installment due not later than May 15, 1998. This loan is guaranteed by APP. In 2000, the Company also entered into a purchase agreement with MC to purchase main components of CFB multifuel boiler amounting to JP¥ 2,528,780,320 payable in 2 installments on May 21, 2001 and May 15, 2002.


39

18. LONG-TERM BANK AND SUPPLIER LOANS PAYABLE - NET (Continued) In 1997, the Company entered into an agreement with IKB to finance 85% of the capital expenditures on

the machinery construction at the Serang Paper Mill with a maximum amount of DEM 5,010,106. This facility is payable in 14 semi-annual equal consecutive installments starting on September 28, 1998 and will be due on March 29, 2005. This facility is covered by the Guarantee of Finance Credit with Hermes Kreditversicherungs - AG, Germany. The Company also entered into several agreements with IKB to finance 85% of the capital expenditures on the machinery construction with maximum amounts of Euro 2,237,895, DEM 3,187,500, DEM 20,785,050, DEM 3,652,450, US$ 27,837,500 and DEM 2,320,500. These facilities are payable in a range of 10 to 20 semi-annual installments starting on several dates ranging from February 15, 1999 up to October 23, 2000 and will be due on several dates between August 15, 2003 up to March 31, 2010. These loans are covered by the Guarantee of Finance Credit with Hermes Kreditversicherungs-AG, Germany and APP. In 2000, IKB agreed to convert the outstanding loans of DEM 2,320,500 to become US$ 1,118,469 and Euro 2,237,895 to become US$ 2,097,803.

In 1997, the Company obtained credit facilities from EDC with an aggregate maximum amount of

US$ 25,000,000. The loan is payable in 6 to 20 semi-annual installments starting on several dates ranging from July 15, 1997 up to April 15, 2000 and have stated maturity dates ranging from January 18, 2001 up to October 15, 2009. In 1999, the Company obtained a credit facility from EDC with an aggregate maximum amount of US$ 25,000,000. The loan is payable in 10 to 20 semi-annual installments starting on several dates ranging from July 15, 2000 up to January 15, 2001 and will be due on several dates ranging from January 15, 2005 up to July 15, 2010 . The Company’s payment obligations are guaranteed by APP.

In 1998, the Company entered into an agreement to purchase a fine paper machine PPM No. 3 with Beloit

Corporation, Wisconsin, United States of America, whereby the Company agreed to pay a portion of the purchase price through a loan amounting to US$ 26,701,678 payable in 8 semi-annual installments, with the first installment amounting to US$ 1,444,604, the second at US$ 1,348,010 and the final six equal installments at US$ 3,984,844 each. The facility has a stated maturity date of March 30, 2003 and is guaranteed by APP. Beloit Corporation subsequently transferred the loan to Bank One, N.A., Chicago, United States of America (see Note 33 A (6)).

The Company obtained a long-term loan facility with Bayerische Hypo-Und Vereinsbank

Aktiengesellschaft, Munich, Germany, of DEM 5,465,918, DEM 6,246,480 and DEM 24,565,000 to finance the purchase of offset printing machines, synchro sheeter and vacuum evaporator, vacuum filters and bar screens. These facilities are payable in 10 to 14 semi-annual installments and have stated maturity dates ranging from February 3, 2002 up to August 30, 2006. The DEM 6,246,480 and DEM 24,565,000 facilities are guaranteed by Hermes Kreditversicherungs-AG, Germany and the DEM 5,485,977 facility by APP.

In 1996, the Company entered into another agreement with IKB, whereby IKB and BHF Bank

Aktiengesellschaft, Frankfurt, Germany (BHF) as creditors, granted the credit facilities through IKB, as an agent, to finance up to 85% of the Company’s capital expenditures on the export credit contract value which includes deliveries of stock preparation machinery and other services with the maximum amount of US$ 27,047,000. This facility is payable in 14 semi-annual installments starting on February 28, 1997 up to August 29, 2003 and covered by the Guarantee of Finance Credit with Hermes Kreditversicherungs - AG, Germany.

In 1997, the Company obtained a credit facility from BOA, United States of America, with a maximum

amount of US$ 4,590,729. This loan is payable in 10 semi-annual installments starting on July 15, 1997 up to January 15, 2002 and guaranteed by Export-Import Bank of the United States. The Company also obtained a credit facility from BOA, London, with a maximum amount of US$ 2,606,875 to finance the supply and


40

18. LONG-TERM BANK AND SUPPLIER LOANS PAYABLE - NET (Continued) installation of the Serang Mill equipment. The loan is payable in 12 semi-annual installments starting on

February 28, 1997 and guaranteed by The Finnish Guarantee Board. In 1998, the Company also obtained a credit facility from BOA, London, with Bank of America International Limited, as agent, to finance 85% of the delivery and installation of machinery for the purification of pulp with the maximum amount of US$ 10,506,000. This loan is payable in 10 consecutive semi-annual installments starting on November 30, 1998 and guaranteed by EKN, the Swedish Export Credits Guarantee Board and APP.

The Company entered into investment credit facilities agreement with Bank of America, S.A., Madrid (as

the agent and arranger) and Barclays Bank Plc. To obtain credit facilities up to a maximum amount of US$ 5,617,190, payable in 13 semi-annual installments starting from April 16, 1996 up to April 16, 2002. The Company also obtained credit facilities from Bank of America, S.A. Madrid, with a maximum amount of US$ 14,275,047 which are payable in 14 semi-annual installments starting from October 15, 1996 up to April 15, 2003.

In 1998, the Company entered into an export credit facility agreement with IKB Deutsche Industriebank

Aktiengesellschaft, Dusseldorf, Germany (IKB) and Kreditanstalt fur Wiederaufbau, Frankfurt am Main to finance up to 85% of the purchase of two (2) cut-size sheeters with a maximum amount of DEM 9,979,000 which was amended to DEM 12,826,500. This loan is payable in 12 semi-annual installments starting on January 18, 2000 up to January 18, 2005 and is guaranteed by APP and Hermes Kreditversicherungs-AG, Hamburg, Germany.

The Company entered into on investment credit facility agreement with Export-Import Bank of the United

States, and (EXIM) to obtain a credit facility up to a maximum amount of US$ 11,286,191 which was amended to US$ 10,554,831, is payable in 20 semi-annual installments starting from December 15, 1996 up to June 15, 2006.

In 1998, the Company obtained credit facilities from Deutsche Bank, AG, Succursale de Paris to finance

85% of the supply of pallet and roll wrapping machinery with maximum amounts of FRF 14,516,500 and FRF 20,923,550 (equivalent to US$ 2,395,989 and US$ 3,433,926, respectively). These facilities are payable in 12 equal consecutive semi-annual installments starting on September 15, 1998 and October 30, 1998 and are guaranteed by APP.

In 1999, the Company obtained credit facilities amounting to US$ 2,637,239 from Sampo Bank Plc.,

Helsinki to finance the purchase of chipper modification for pulp No. 8 and 9. These loans are payable in 10 semi-annual installments starting on September 29, 1999 up to March 31, 2005 and guaranteed by APP and Oesterreichische Kontrollbank AG. In 2000, the Company entered into another agreement with the same bank with a credit facility of US$ 1,147,500 to finance the purchase of DCS upgrade for Perawang Mill. These loans are payable in 6 semi-annual installments starting from April 2, 2001 up to October 1, 2003 and guaranteed by APP.

The Company entered into a credit facility agreement with Credit Lyonnais Bank, Copenhagen, Denmark

to obtain a credit facility up to a maximum amount of US$ 6,948,375, and is payable in 16 semi-annual installments starting from March 31, 1997 up to September 30, 2004. This facility is guaranteed by Eksportkreditfonden EKF, Copenhagen.


41

18. LONG-TERM BANK AND SUPPLIER LOANS PAYABLE - NET (Continued) In 1997, the Company obtained a term loan facility from Credit Lyonnais France Bankfilial, Stockholm

(as the agent and arranger) and Den Danske Bank Aktieselskab, Copenhagen, with a maximum amount of US$ 7,420,500, which represents 85% of the contract value of the rescreening plant equipment. The loan is payable in 10 semi-annual installments starting from May 29, 1998 up to November 29, 2002 and guaranteed by the creditor banks, EKN, The Swedish Export Credits Guarantee Board and APP.

In 1996, the Company obtained a credit facility from Bank of America, United States of America to

finance the purchase of incinerator plant with the facility amount of US$ 6,592,098. This facility is payable in 10 semi-annual installments starting from September 15, 1997 up to 2002 and is guaranteed by Export-Import Bank of the United States.

The Company obtained a credit facility from The Trade Bank, Minnesota, United States of America, with

maximum amounts of US$ 3,369,111 and US$ 4,931,772 to finance the purchase of synchronous rotary knife sheeters and flexoprinters slotters, stackers and prefeeders. This facility is payable in 10 semi-annual installments and have stated maturity dates between January 15, 2001 up to June 15, 2001.The facility is guaranteed by Export-Import Bank of the United States, United States of America.

The credit facility from ABN AMRO Bank (Deutscheland) AG, Hamburg, Germany was obtained to

finance 80% of the purchase value of a cardboard machine up to DEM 7,710,400. This facility was payable in 10 semi-annual installments starting on December 30, 1996 up to March 3, 2001.

These loan facilities bear annual interest rates as follows: 2002 2001

Indonesian Rupiah 17.6% - 21.4% 15.8% - 20.5% Japanese Yen 3.8 - 6.0 3.8 - 11.6 US Dollar 2.2 - 12.5 4.3 - 11.7 European Euro 4.0 - 5.3 - German Deutschemark - 4.3 - 6.2 The agreements include certain negative covenants and restrictions relating to, among others, the

maintaining of certain financial ratios, non-payment of matured debt by the Company, APP or any of its Subsidiaries (cross-default), entering into merger or consolidation, providing prior written notification and obtaining prior consent of creditors on additional borrowings, pledge of assets in these facilities which can not be pledged to other facilities, termination of guarantee of guarantor, providing guarantee except for Subsidiary’s obligation, material modification of contract, transfer or disposal of the Company’s assets and majority ownership or direct or indirect control by APP, or the Widjaja family or changes in APP’s directors or commissioners, incurring adverse changes in the Company’s business and financial condition.

Beginning on January 1, 2002, the outstanding loan balance in DEM had been changed to Euro with

exchange rate of Euro 1 = DEM 1.95.


42

19. OBLIGATIONS UNDER CAPITAL LEASE In 1995, the Company entered into a syndicated sale-and-leaseback transaction with PT Central Sari

Finance Corporation (CSFC) as an agent, relating to the sale and leaseback of machinery. The syndicated lease agreement provides the Company with an option to purchase the leased assets at the end of the lease term which expired on December 19, 2000. The interest is payable under the same terms as the principal. The Company has not paid the last installment and agreed with CSFC on October 4, 2000 to reschedule the payment of the principal amount of US$ 1,101,324.44 as follows:

PT Central Sari Finance Corporation US$ 153,673.19 PT Jaya Fuji Leasing Pratama 153,673.18 PT ABN AMRO Finance Indonesia 153,673.18 PT Koexim BDN Finance 153,673.18 PT Orix Indonesia Finance 128,060.98 PT Maharaja Arthastar Indonesia Finance 102,448.78 PT Dipo Star Finance 102,448.78 PT Exim SB Leasing 102,448.78 PT Panca Overseas Finance 51,224.39

Total US$ 1,101,324.44

The restructured amount comprises maturing principal and interests of US$ 1,101,324 which was payable

in twelve (12) monthly installments of US$ 91,777 each, from May 18, 2001 up to April 19, 2002. The interest was payable under the same terms as the principal.

As of December 31, 2002 and 2001, the balance of obligation under capital lease amounted to nil and

US$ 458,885.16, respectively. The machinery is recorded under “Machinery Under Capital Lease” (see Note 10).

In 1996, the Company entered into a sale-and-leaseback transaction with PT Summit Sinar Mas Finance

(SSMF), a related party, relating to the sale and leaseback of automation system equipment with an option to purchase the leased assets at the end of the lease term which expired on July 18, 2001. The principal totaling US$ 6,870,072 is payable in 20 quarterly installments of US$ 343,504 each from October 1996 up to July 2001. The interest is payable under the same terms as the principal. In July 1997, the Company partially terminated the lease relating to the power plant asset and fully paid the remaining lease obligation balance of US$ 1,213,920, therefore acquiring such asset with a cost of US$ 1,686,000. Accordingly, the remaining principal of US$ 4,014,504 is payable in 15 quarterly installments of US$ 267,634 each from January 1998 up to July 2001.

In April 2001, the Company and SSMF agreed to reschedule the maturing liabilities. The Company agreed

and acknowledged that the amount of the outstanding principal of the lease obligation to be rescheduled as of January 17, 2001 was US$ 852,630.47 payable in two tranches, with Tranche A for the principal amount and Tranche B representing interest as follows:

Tranche A - Principal amount US$ 802,900.80 Tranche B - Overdue and accrued interest 49,729.67

Total US$ 852,630.47


43

19. OBLIGATIONS UNDER CAPITAL LEASE (Continued) The lease payment was rescheduled for twenty four (24) months starting January 17, 2001 with a

four (4) month grace period. Annual interest rate is 3% above SIBOR. Monthly payment of US$ 42,632 started on June 17, 2001 and continues every month thereafter until January 17, 2003.

As of December 31, 2002 and 2001, the outstanding obligation under capital lease amounted to

US$ 42,632 and US$ 554,210, respectively, and the equipment is recorded under “Machinery Under Capital Lease” (see Note 10).

The Company also entered into a sale-and-leaseback transaction with PT GE Finance Indonesia, relating

to the sale and leaseback of the automatic warehouse and computerized system with an option to purchase the assets at the end of the lease term which expired on November 18, 2001. The principal totaling US$ 8,262,000 is secured by the leased assets and payable in 20 quarterly installments of US$ 413,100 each from February 18, 1997 up to November 18, 2001. The interest is payable under the same terms as the principal.

In May 3, 2001, the Company and PT GE Finance Indonesia agreed to reschedule the maturing liabilities

amounting to US$ 1,715,710. The rescheduled lease had a grace period on the principal amount of three (3) months from February 18, 2001 up to May 18, 2001 with thirty (30) monthly rental payment of US$ 57,190 starting June 18, 2001 up to November 18, 2003. The interest is based on progressive rates ranging from an annual rate of 2.5% above the average rate of three (3) month SIBOR to 4.5%. The rescheduled payments above include the accrued interest for unpaid rental on February 18, 2001 and May 18, 2001 amounting to US$ 67,462.

As of December 31, 2002 and 2001, the outstanding obligation amounted to US$ 629,094 and

US$ 1,372,568, respectively, and the assets are recorded under “Machinery Under Capital Lease” (see Note 10).

In 2000, the Company entered into two (2) lease agreements with PT ORIX Indonesia Finance which

cover the sale and leaseback and lease of transportation equipment with an option to purchase the assets at the end of the lease term which will expire on October 13, 2004 and September 5, 2004, respectively. The principal amounts totaling Rp 232,900,000 and US$ 160,573 are secured by the leased assets and payable in 16 quarterly installments of Rp 14,556,250 and US$ 10,036 each from January 13, 2001 up to October 13, 2004 and from December 5, 2000 up to September 5, 2004, respectively. The interest is payable under the same terms as in the principal. Another sale-and-leaseback agreement was entered into in August 2000 relating to the sale and leaseback of pulp machinery with principal of US$ 419,029 payable in 16 quarterly installments of US$ 26,189. This agreement was cancelled on September 4, 2001. As of December 31, 2001, the outstanding obligation amounted to Rp 174,675,000 and US$ 120,430, which was converted into US Dollar in January 2002. The total outstanding amount as of December 31, 2002 was US$ 81,838 and the assets are recorded under “Transportation Equipment Under Capital Lease” (see Note 10).

The lease obligations bear annual interest rates ranging from 4.8% to 6.7% and 7.32% to 8.55% in 2002

and 2001, respectively, for the US Dollar lease obligations 24.4% and 16.73% in 2002 and 2001, respectively for Rupiah lease obligations. These capital lease agreements contain restrictions and negative covenants limiting the Company actions, including, among others, the conduct of sale, transfer and pledge of the leased assets and maintaining of certain financial ratios.


44

19. OBLIGATIONS UNDER CAPITAL LEASE (Continued) The obligations under capital lease will mature as follows: Year Amount

2003 US$ 751,817 2004 36,115

Total 787,932 Less outstanding interest 34,365

Obligations under capital lease 753,567 Less current maturities 717,666

Long-term portion - net US$ 35,901

Current maturities of obligations under capital lease - Third parties US$ 675,031

- Related party US$ 42,635

20. CAPITAL STOCK AND ADDITIONAL PAID-IN CAPITAL - NET The Company's stockholders and their respective stockholdings, based on the Securities Administration

Agency (BAE) records, are as follows: December 31, 2002

Percentage Number of Shares Stockholders of Ownership Issued and Fully Paid Amount

PT Purinusa Ekapersada (Purinusa) 52.46018 % 2,870,087,547 US$ 1,168,597,663 CHP International (BVI) Corporation, British Virgin Islands 5.87811 321,590,469 139,078,751 Asia Pulp & Paper Co. Ltd. 4.20400 230,000,000 88,933,967 YFY Global Investment (BVI) Corporation 2.56221 140,178,037 54,202,561 YFY HK Company Limited 0.05325 2,913,027 1,126,378 Ong Piet Tjing - Director 0.00068 37,398 16,174 Public and others (each below 5%) 34.84157 1,906,176,463 737,060,098

Total (Rp 5,470,982,941,000) 100.0000 % 5,470,982,941 US$ 2,189,015,592

December 31, 2001


PT Purinusa Ekapersada (Purinusa) 52.46018 % 2,870,087,547 US$ 1,168,597,663 CHP International (BVI) Corporation, British Virgin Islands 5.87811 321,590,469 139,078,751 Asia Pulp & Paper Co. Ltd. 4.20400 230,000,000 88,933,967


45

20. CAPITAL STOCK AND ADDITIONAL PAID-IN CAPITAL - NET (Continued) December 31, 2001


YFY Global Investment (BVI) Corporation 2.56221 % 140,178,037 US$ 54,202,561 YFY HK Company Limited 0.05325 2,913,027 1,126,378 Ong Piet Tjing - Director 0.00068 37,398 16,174 Samuel Bonsajang - Commissioner 0.00005 2,925 1,265 Su Meng Huei - Commissioner 0.00001 556 224 Public and others (each below 5%) 34.84151 1,906,172,982 737,058,609

Total (Rp 5,470,982,941,000) 100.0000 % 5,470,982,941 US$ 2,189,015,592

As of December 31, 2002, the Company has listed all its issued shares totaling 5,470,982,941 shares in the

Jakarta and Surabaya Stock Exchanges. On October 17, 2000, the Company announced to the shareholders, the conversion of the shares in certificate form to electronic form (scriptless) starting from November 15, 2000 up to December 12, 2000. The scriptless trading started on December 13, 2000.

As of December 31, 2002, the Company’s shares held by Purinusa were pledged as collateral for loans

obtained by the Company from PT Pan Indonesia Tbk, PT Bank Permata (formerly PT Bank Universal Tbk) and PT Bank Mandiri (Persero) (see Note 13). In 2002 and 2001, 1,452,891,053 shares of the Company held by Purinusa were pledged as collateral to the Indonesian Bank Restructuring Agency (IBRA).

The increase in the issued and fully paid capital to US$ 2,189,015,592 as of December 31, 2002 and 2001

arose from:

a. In 1999, the exercise of warrants I to common shares totaling 13,964,206 shares or US$ 1,955,638 and the exercise of warrants II to common shares totaling 143,762,851 shares or US$ 20,133,483.

b. In 2000, the exercise of warrants I to common shares totaling 1,140,189 shares or US$ 138,014 and

the exercise of warrants II to common shares totaling 339,488 shares or US$ 41,094. In November 2000, BAE reported the revision on the warrants I exercised in May 1999 of 476,000 shares, which actually represents the exercise of warrants II.

c. In 2001, the exercise of warrants II to common shares totaling 964 shares or US$ 81 (Rp 964,000).

As of December 31, 2002, the outstanding warrants I and II, which had been exercised

totaled 300,798,816 and 167,531,025 warrants, respectively, and not yet exercised totaled 6,792,613 and 276,833,058 warrants, respectively. On April 13, 2001 and July 11, 2002, the Company’s warrants I and warrants II, respectively, could no longer be exercised since the exercise period had lapsed. Warrants I and warrants II not exercised which had expired totaled 6,791,721 and 276.832,986 warrants, respectively.


46

21. NET SALES Net sales are classified as follows: 2002 2001

Local Related parties PT Cakrawala Mega Indah US$ 343,734,636 US$ 357,798,939 PT Sinar Duniamakmur 177,331,856 109,150,354 PT Pabrik Kertas Tjiwi Kimia Tbk 5,591,069 215,883 PT Lontar Papyrus Pulp and Paper Industry 74,698 645,943 PT Pindo Deli Pulp And Paper Mills 21,097 705,461 PT Ekamas Fortuna 2,695 161,200 Others (each below US$ 150,000) 46,027 134,455

Total 526,802,078 468,812,235

Third parties (each below 10% from total sales) 573,222 4,102,239

Export Related parties APP China Trading Limited, Hongkong 30,852,404 29,569,691 Asia Pulp & Paper Trading (USA) Inc., United States of America 15,455,130 30,034,956 Vestwin Trading Pte. Ltd, Singapore 9,633,519 - Jin Xin Paper Industry Pte. Ltd. People’s Republic of China 7,897,756 643,246 Asia Pulp & Paper (Canada) Limited, Canada 7,775,348 4,104,111 Asia Pulp & Paper (Australia) Pty. Ltd., Australia 6,635,091 14,684,731 APP Paper Co. Ltd., Republic of China 5,873,275 9,255,986 Asia Pulp & Paper (Malaysia) Sdn. Bhd., Malaysia 4,388,784 11,313,338 Ningbo Asia Paper Tube and Carton Box Co., Ltd., People’s Republic of China 3,479,664 812,752 Jin Xin (Qing Yuan) Paper Industry Co., People’s Republic of China 1,403,838 - Nippecraft Limited, Singapore 1,053,883 686,401 Gold East Paper (Jiangsu) Co. Ltd., People’s Republic of China 653,443 - APP (Hongkong) Limited, Hongkong 300,000 41,211,867 APP International Trading (VI) Limited, Cayman Islands - 11,097,536 APP Trading Company Limited, Singapore - 10,861,489 APP International Trading (V) Limited, Cayman Islands - 7,417,493 APP International Trading (VIII) Limited, British Virgin Islands - 5,389,644 Asia Pulp & Paper (Spain) S.A., Spain 2,076,193 Sinar Mas Pulp & Paper (India) Limited, India - 1,950,000 APP International (III) Limited, Cayman Islands - 1,026,666


47

21. NET SALES (Continued) 2002 2001

Asia Pulp & Paper (France) EURL, France US$ - US$ 965,456 Campania Trading Limited, United Arab Emirates - 892,209 Paper Box Industries Pte., Limited, Singapore - 660,329 APP International Trading (II) Limited, British Virgin Islands - 304,468 Asia Pulp & Paper (UK) Limited, England - 255,003 APP International Marketing A/S, Scandinavia - 159,259 Others (each below US$ 150,000) 275,371 439,759

Total 95,677,506 185,812,583

Third parties (each below 10% from total sales) 575,534,886 442,389,485

Total Sales 1,198,587,692 1,101,116,542 Sales returns and price discount ( 876,082 ) ( 888,392 )

Net Sales (see Note 30) US$ 1,197,711,610 US$ 1,100,228,150

The details of sales based on type of product are as follows: Amount Percentage to Net Sales

Type of Product 2002 2001 2002 2001

Pulp US$ 395,824,447 US$ 396,704,159 33.05 % 36.06 % Paper 400,592,593 388,761,186 33.45 35.33 Packaging and other 401,294,570 314,762,805 33.50 28.61

Net Sales US$ 1,197,711,610 US$ 1,100,228,150 100.00 % 100.00 %

22. COST OF GOODS SOLD The details of cost of goods sold are as follows: 2002 2001

Raw materials used US$ 608,846,764 US$ 443,469,465 Direct labor and factory overhead (see Note 34) 444,573,328 430,439,170

Total production cost 1,053,420,092 873,908,635 Work-in-process (pulp, paper and packaging products) - at beginning of year 13,637,381 11,585,948 - at end of year ( 9,942,227 ) ( 13,637,381 )

Cost of goods manufactured 1,057,115,246 871,857,202 Finished goods (pulp, paper and packaging products) - at beginning of year 47,655,435 80,195,880 - at end of year ( 75,781,416 ) ( 47,655,435 )

Cost of goods sold (see Note 30) US$ 1,028,989,265 US$ 904,397,647


48

22. COST OF GOODS SOLD (Continued) The details of suppliers accounting for more than 10% of total purchases: Amount Percentage to Total Purchases

Supplier 2002 2001 2002 2001

PT Arara Abadi (see Note 5c) US$ 272,846,580 US$ 153,609,738 36.95 % 30.33 % Others (each below 10% to total purchases) 465,499,135 352,818,808 63.05 69.67

Total purchase - net US$ 738,345,715 US$ 506,428,546 100.00 % 100.00 %

23. OPERATING EXPENSES The details of operating expenses are as follows: 2002 2001

Selling Expenses Freight US$ 41,230,084 US$ 44,595,648 Management fees (see Note 5k) 8,491,836 34,937,857 Export expenses 7,858,775 2,796,127 Salaries 1,079,348 1,009,861 Office expenses 948,028 730,650 Traveling 179,384 105,699 Repairs and maintenance 141,698 85,718 Storage 103,306 96,928 Insurance and transportation 67,768 805,076 Depreciation 40,754 170,072 Representation 21,597 15,092 Others 1,150,762 434,332

Total US$ 61,313,340 US$ 85,783,060

General and Administrative Expenses Office expenses US$ 14,997,450 US$ 9,895,579 Salaries (see Note 34) 10,585,923 9,182,236 Management fees (see Note 5k) 9,678,947 8,916,670 Depreciation 5,816,158 4,347,434 Traveling and transportation 2,375,791 5,196,817 Repairs and maintenance 352,692 301,707 Representation 49,317 22,282 Others 3,286,109 60,178

Total US$ 47,142,387 US$ 37,922,903

Total Operating Expenses US$ 108,455,727 US$ 123,705,963


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24. INTEREST EXPENSE Interest expense was incurred from the following: 2002 2001

Long-term bank and supplier loans payable, notes and bonds payable US$ 258,223,423 US$ 278,442,975 Short-term loans payable 1,574,800 15,576,025 Obligations under capital lease 79,651 253,161

Total US$ 259,877,874 US$ 294,272,161

25. LOSS (GAIN) ON FOREIGN EXCHANGE - NET Loss on foreign exchange - net amounting to US$ 77,269,661 in 2002 and gain on foreign exchange - net

amounting to US$ 35,998,377 in 2001, were mainly incurred from restatements of monetary assets and liabilities of the Company in currencies other than the US Dollar and transactions from the Company’s operations in currencies other than the US Dollar.

26. OTHER CHARGES (INCOME) - NET This account consists mainly of share in net earnings of an associated company and amortization of

discount on long-term notes and bonds payable and long-term bank and supplier loans payable, loss on the decline of inventory value and loss on sale and disposal of property, plant and equipment - net in 2002 and 2001.

27. TAXES EXPENSE (BENEFIT) The following calculation presents the reconciliation between income (loss) before tax expense (benefit) and

estimated fiscal loss for the years ended December 31, 2002 and 2001 which were based on the Rupiah consolidated income statement.

2002 2001

Income (loss) before tax expense (benefit) per consolidated statement of income Rp 1,410,298,633,280 (Rp 3,199,601,391,158 ) Net income of the Subsidiaries before tax expense (benefit) ( 152,065,675,366 ) ( 1,556,566,478,796 ) Eliminating transactions relating to Subsidiaries 304,131,350,732 3,113,132,957,591

Company’s commercial income (loss) before tax expense (benefit) 1,562,364,308,646 ( 1,643,034,912,363 ) Temporary differences ( 71,566,523,485 ) 1,830,343,718,951 Permanent differences ( 9,640,098,978 ) ( 10,968,037,134 )

Estimated profit on income tax basis 1,481,157,686,183 176,340,769,454


50

27. TAXES EXPENSE (BENEFIT) (Continued) 2002 2001

Estimated accumulated fiscal loss - beginning of year ( Rp 4,471,085,074,009 ) ( Rp 3,576,670,485,067 ) Adjustments on fiscal loss in accordance with the tax assessment letter for the year 2000 - ( 1,070,755,358,396 )

Estimated accumulated fiscal loss - end of year ( Rp 2,989,927,387,826 ) (Rp 4,471,085,074,009 )

Temporary differences consist mainly of depreciation, provision for doubtful accounts, amortization of

deferred charges, transactions under capital lease, allowance for interest expense under debt restructuring, employee benefits. Permanent differences consist mainly of interest income already subjected to final tax.

The Company reported its year 2001 income tax return to the Tax Office on September 2, 2002 based on

audited amounts. There was no tax expense for the current year in 2002 and 2001 since the Company still incurred tax losses.

The income of IK Mauritius, IKF III, IKF IV, IKF VIII, IK Trading, IK Trading II and Indah Kiat Trading Import Export are subject to income tax at 0%. IK Trading I and II reported no income in 2002 and 2001.

Tax expense (benefit) and estimated tax payable of the Company are as follows: 2002 2001

Tax benefit - deferred Temporary differences at maximum tax rate (30%) Valuation allowance ( US$ 75,925,327 ) ( US$ 59,550,788 ) Revaluation of property, plant and equipment net of depreciation 11,663,442 ( 2,045,713 ) Depreciation of property, plant and equipment 35,359,518 10,035,148 Amortization of deferred charges 226,508 950,370 Transactions under capital lease 906,852 301,323 Allowance for doubtful accounts 47,284,852 76,695,199 Allowance for interest expense under debt restructuring ( 77,719,255 ) ( 73,015,541 ) Accumulated tax loss 28,640,474 ( 17,144,412 ) Employees’ benefits ( 920,966 ) 44,876 Loss on the decline of inventory value ( 96,399 ) 49,523

Tax benefit - deferred ( US$ 30,580,301 ) ( US$ 63,680,015 )


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27. TAXES EXPENSE (BENEFIT) (Continued) The following are the tax effects on significant temporary differences between accounting reporting and

tax reporting purposes: 2002 2001

Deferred tax assets Allowance for interest expense under debt restructuring US$ 150,734,797 US$ 73,015,541 Accumulated tax loss 100,333,134 128,973,608 Revaluation of property, plant and equipment - net 44,329,431 55,992,873 Employees’ benefits 3,481,810 2,560,844 Allowance for doubtful accounts 15,565 47,300,417 Inventories 686,677 590,279

Total 299,581,414 308,433,562 Valuation allowance ( 100,348,699 ) ( 176,274,025 )

Net 199,232,715 132,159,537

Deferred tax liabilities Property, plant and equipment 147,272,588 111,913,070 Deferred charges 15,263,717 15,037,210 Transactions under capital lease 2,859,607 1,952,755

Total 165,395,912 128,903,035

Deferred tax assets - net (see Note 29) US$ 33,836,803 US$ 3,256,502

Tax losses recorded as deferred tax assets represent amounts which can be compensated against taxable

income within a period of five (5) years since the date they were incurred. Based on the review of the adequacy of the valuation allowances at the end of the year, the management

believes that the valuation allowances as of December 31, 2002 and 2001 are adequate to cover benefits that will not be realized and will recognize benefit only if there is an indication that a benefit can be realized.

28. LOSS PER SHARE The following presents the reconciliation of the numerator and denominator used in the computation of

basic and diluted loss per share: 2002

Weighted Average Number of Ordinary Loss Per Net Loss Shares Outstanding Share Amount

Basic ( US$ 266,307,616 ) 5,470,982,941 ( US$ 0.049 ) Diluted ( US$ 0.049 )


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28. LOSS PER SHARE (Continued) 2001

Weighted Average Number of Ordinary Loss Per Net Loss Shares Outstanding Share Amount

Basic ( US$ 182,391,054 ) 5,470,982,700 ( US$ 0.033 ) Diluted ( US$ 0.033 )

In 2002 and 2001, diluted net loss per share is anti-dilutive. The diluted net loss per share, after the

assumed exercise of 43,283,596 warrants issued, respectively, has decreased as compared to the basic net loss per share resulting in anti-dilution. Diluted net loss per share is thus the same with basic net loss per share.

29. ASSETS AND LIABILITIES IN FOREIGN CURRENCIES The following balances of assets and liabilities are denominated in foreign currencies as of

December 31, 2002: ASSETS Cash and cash equivalent Indonesian Rupiah (Rp 109,977,914,268) US$ 12,301,780 European Euro (Euro 1,796,493) 1,925,439 Japanese Yen (JP¥ 14,832,543) 125,085

14,352,304

Trade receivables and accounts receivable - others Indonesian Rupiah (Rp 965,650,154,543) 108,014,579 Japanese Yen (JP¥ 1,340,247,017) 11,302,471 European Euro (Euro 993,179) 1,072,633 Great Brittain Pound (GBP 5,822) 9,315 Australian Dollar (AUD 11,339) 6,406

120,405,404

Due from related parties Indonesian Rupiah (Rp 24,480,276,258) 2,738,350 European Euro (Euro 51,771) 55,913 New Zealand Dollar (NZD 17,635) 9,282 Australian Dollar (AUD 13,898) 7,852 Singapore Dollar (Sin$ 1,337) 773

2,812,170

Prepaid taxes Indonesian Rupiah (Rp 80,873,869,053) 9,054,025


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29. ASSETS AND LIABILITIES IN FOREIGN CURRENCIES (Continued) Deferred tax assets Indonesian Rupiah (Rp 302,501,019,091) US$ 33,836,803 Refundable deposits Indonesian Rupiah (Rp 530,506,063) 59,341

Total Assets (Rp 1,484,013,739,275, JP¥ 1,355,079,560, Euro 2,841,443, AUD 25,237, NZD 17,635, Sin$ 1,337 and GBP 5,822) US$ 180,520,047

LIABILITIES Short-term loans payable Japanese Yen (JP¥ 13,250,338,420) US$ 111,741,764 Indonesian Rupiah (Rp 55,173,149,358) 6,171,493 European Euro (Euro 733,173) 791,827 Singapore Dollar (Sin$ 262,558) 151,768 Great Britain Pound (GBP 12,885) 20,616

118,877,468

Trade payables and accounts payable - others Indonesian Rupiah (Rp 330,017,363,923) 36,915,058 Singapore Dollar (Sin$ 3,877,531) 2,241,347 European Euro (Euro 2,018,962) 2,180,479 Japanese Yen (JP¥ 249,777,651) 2,106,406 Swiss Franc (CHF 615,030) 442,468 Canadian Dollar (CAD 312,064) 198,767 Great Britain Pound (GBP 6,409) 10,255 Swedish Krona (SEK 13,579,095) 1,682

44,096,462

Due to related parties Indonesian Rupiah (Rp 25,344,661,755) 2,837,297 Accrued expenses European Euro (Euro 514,893,143) 556,084,594 Japanese Yen (JP¥ 9,677,712,212) 81,613,360 Indonesian Rupiah (Rp 597,156,013,784) 66,795,975 Singapore Dollar (Sin$ 491,317) 283,998 Canadian Dollar (CAD 434,284) 274,863 Swiss Franc (CHF 362,662) 260,908 Great Brittain Pound (GBP 407,468) 254,668 Denmark Krone (DKK 979,858) 138,203 Swedish Krona (SEK 1,004,450) 114,926 Australian Dollar (AUD 48,968) 27,666 Norwegian Krone (NOK 321) 46 Others (FIM 935) 165

705,849,372


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29. ASSETS AND LIABILITIES IN FOREIGN CURRENCIES (Continued) Taxes payable Indonesian Rupiah (Rp 4,762,037,762) US$ 532,764 European Euro (Euro 123,871) ( 115,262 )

417,502

Notes and bonds payable Indonesian Rupiah (Rp 1,000,000,000,000) 111,852,977 Bank and supplier loans payable and obligation under capital lease European Euro (Euro 116,613,980) 125,943,098 Indonesian Rupiah (Rp 1,093,393,671,738) 122,303,543 Japanese Yen (JP¥ 7,751,477,987) 65,369,185

313,615,826

Total liabilities (Rp 3,105,846,898,320, JP¥ 30,929,306,270, Sin$ 4,631,406, Euro 634,135,386, CAD 746,348 CHF 977,692, SEK 14,583,545, GBP 426,763, AUD 48,968, NOK 321, DKK 979,878 and FIM 935) US$ 1,297,546,904

Net liabilities US$ 1,117,026,857

30. SEGMENT INFORMATION The Company operates in two (2) business segments: paper and pulp products and packaging products.

The paper and pulp products segment product lines consist primarily of paper and other related paper products and pulp, which are primarily used within the Asia Pulp & Paper Company Ltd. or APP Group.

The packaging products segment product lines consist primarily of linerboard, corrugating medium,

corrugated shipping containers and boxboard. The packaging product segments included the sale of chemical by-products, which are not significant. Transfers between business segments are accounted for at cost.

The information concerning the Company’s business segments are as follows (in thousands of

US Dollar): 2002 2001

Information based on geographical area Net Sales

Export US$ 670,360 US$ 627,424 Local 527,352 472,804

Consolidated net sales US$ 1,197,712 US$ 1,100,228


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30. SEGMENT INFORMATION (Continued) 2002 2001

Information based on kinds of product Net Sales Paper and pulp US$ 796,417 US$ 785,465 Packaging products and others 401,295 314,763

Consolidated net sales US$ 1,197,712 US$ 1,100,228

Cost of good sold Paper and pulp US$ 684,059 US$ 585,760 Packaging products and others 344,930 318,638

Consolidated cost of good sold US$ 1,028,989 US$ 904,398

Income (loss) from operations Paper and pulp US$ 42,158 US$ 116,276 Packaging products and others 18,109 ( 44,151 )

Consolidated income from operations US$ 60,267 US$ 72,125

Total assets

Paper and pulp 76% 74% Packaging products 23 23 Others 1 3

Total 100% 100%

31. DEBT RESTRUCTURING A Summary of significant events related to the debt restructuring of APP Group, including the Company,

since 2001 is as follows: a. On March 12, 2001, APP and its Subsidiaries, including the Company, declared a standstill with

respect to the debt obligations of the APP Group (including APP, which is the Singapore incorporated holding company for the group). This standstill declaration essentially amounted to the publication by APP of the inability of APP Group members, including the Company, to timely service their respective debt obligations.

b. On April 9, 2001, a meeting was held between APP and its advisors and financial creditors at which

the formation of various creditor committees for the purpose of facilitating consensual debt restructuring discussions, was put forward and thereafter implemented. There are four (4) committees, a public bondholder committee, a bank committee, a Japanese trading company committee and an export credit agency committee. APP has been in discussions with these committees since that date. The objective is to negotiate and agree on a debt restructuring plan for presentation to all financial creditors of the APP Group. Up to the date of this report, the committees have been focusing on the four Indonesian subsidiaries of APP.


56

31. DEBT RESTRUCTURING (Continued) c. In the context of the activities of the committees focused on the Indonesian operations of APP,

regular meetings and discussions have taken place between APP Group and that these committee. Discussions have focused on the following: • The development of key restructuring terms based on agreed cash flows; and • Initiatives aimed at the enhancement of transparency and efficiency;

d. On September 28, 2002, APP and the principal Indonesian operating companies within the APP

Group (the PIOCs), namely the Company, PT Pabrik Kertas Tjiwi Kimia Tbk, PT Lontar Papyrus Pulp and Paper Industry and PT Pindo Deli Pulp And Paper Mills agreed on preliminary terms in Bali (the Bali Accord) with certain material creditors with respect to the principal terms of a financial restructuring. These companies also agreed on preliminary terms with respect to a company restructuring.

e. In early December 2002, The Indonesian Bank Restructuring Agency (IBRA) circulated to the

creditor committees, preliminary agreements (the Preliminary Agreements) in respect of debt restructuring and composition relating to PIOCs. These Preliminary Agreements reflect the Bali Accord and subsequent restructuring discussions with creditors.

The Preliminary Agreements were signed in Jakarta on December 18, 2002, between the PIOCs and

certain of their respective creditors, including IBRA. Representatives of various export credit agencies and Japanese Trading Companies attended the signing and made public statements at the subsequent press conference indicating various levels of support for the Preliminary Agreements.

The Preliminary Agreements contemplate that definitive restructuring documentation containing

detailed terms with respect to the debt restructuring and implementation provisions based on those set out in the Preliminary Agreements will be negotiated, finalized and signed by each of the PIOCs and its creditors on such date as may be agreed in accordance with the provisions thereof.

The consensual restructuring exercise relating to the Company and its Subsidiaries is complex and

continues to involve an analysis of a myriad of complex transactions that span many jurisdictions and laws and will likely take a lengthy period of time to complete. The Company has initiated a debt verification process, and invited proofs of debt to be submitted. Verification of the underlying transactions giving rise to the proofs could require the Company or its Subsidiaries to recognize additional liabilities or penalties, not determinable with any accuracy or not known at the time this set of financial statements was finalized.

32. SIGNIFICANT COMMITMENTS AND AGREEMENTS As of December 31, 2002 and 2001, the Company has the following significant commitments and

agreements:

1. The Company’s operations are subject to extensive government environmental regulations. Such regulations are continuously being reviewed and amended. The Company may be required to incur significant expenditures in order to comply with changing environmental regulations. The management believes that the Company’s operations are in compliance, in all material respects, with existing environmental regulations.


57

32. SIGNIFICANT COMMITMENTS AND AGREEMENTS (Continued) 2. The debt restructuring as discussed in note 31 is complex, as it will involve analysis of a myriad of

transactions that span many jurisdictions and laws and therefore may take and extended period to complete. Up to implementation of the plan for restructuring of the debts of APP Group, the Company may have to recognize additional liabilities and penalties, which are not conclusively ascertained and cannot be reliably estimated at the date of completion of these accounts.

3. On August 9, 2001, the Company entered into a Trade Facility Maintenance Agreement with

PT Bank Fuji International Indonesia, now known as PT Bank Mizuho Indonesia (the Bank) under which the Bank agreed to provide the Company with a trade finance facility in the form of an Acceptance Guarantee Facility and in order to support the Company's operation, the Bank has agreed to maintain the total exposure of export and import facilities provided by the Bank to the Company.

The term of facilities to provide the Company with a bills discounted facility (without Letters of

Credit base) have been amended several times, the latest of which was on September 30, 2002 where pursuant to Amendment and Restatement Agreement No. 431/AMD/MZH/0902 to the Agreement to the General Business Conditions the Bank agreed to provide the Company with a bills discounted facility (without Letters of Credit base). The Bank has agreed to provide, during the facility period, a Bills Discounted Facility (without Letters of Credit base) in the principal amount of US$ 50 million or equivalent to other currencies. Pursuant to the terms and conditions of the agreement, the outstanding amount of the facility is integrated with the outstanding amounts of the other bills discounted facilities (without Letters of Credit base) provided by the Bank to PT Pabrik Kertas Tjiwi Kimia Tbk (Tjiwi Kimia), PT Pindo Deli Pulp And Paper (Pindo Deli) and PT Lontar Papyrus Pulp and Paper Industry (Lontar Papyrus) (other borrowers). This integrated outstanding amount is also integrated with the outstanding amounts of acceptance guarantee facilities in the form of Import Letters of Credit (sight and usance), Local Letters of Credit, Trust Receipts and Shipping Guarantee Facility granted by the Bank to the Company and to the other borrowers. The maturity date of the facility is on September 30, 2003.

The terms of facilities to provide the Company with an Acceptance Guarantee Facility in the form of

Import Letters of Credit (sight and usance), Local Letters of Credit, Trust Receipts and Shipping Guarantee Facility have been amended several times, the latest of which was on September 30, 2002 where pursuant to Amendment and Restatement Agreement No.427/AMD/MZH/0902 to the Agreement to the General Conditions for the Opening of Letters of Credit, the Bank has agreed to provide, during the facility period, an Acceptance Guarantee Facility in the form of Import Letters of Credit (sight and usance), Local Letters of Credit, Trust Receipts and Shipping Guarantee Facility in the principal amount of US$ 110 million or equivalent to the other currencies. Pursuant to the terms and conditions of the agreement, the outstanding amount of the facility is integrated with the outstanding amount of the other acceptance guarantee facility provided by the Bank to Tjiwi Kimia, Pindo Deli and Lontar Papyrus (other borrowers). This integrated outstanding amount is also integrated with the outstanding amount of bills discounted facilities (without Letters of Credit base) granted by the Bank to the Company and to the other borrowers. The maturity date of the facility is on September 30, 2003 (see Note 13).

4. Based on Notice Assignment Letter No. 434.3/D/CIC/X/2002 dated October 31, 2002, PT Bank

CIC International Tbk (CIC) assigned and transferred all of its rights, title and interest under or in connection with Letter of Credit facility including any security rights, provided to the company, to PT Inti Fikasa Securindo.


58

32. SIGNIFICANT COMMITMENTS AND AGREEMENTS (Continued) In 2001, CIC agreed to provide the Company letters of credit facility with a total facility not

exceeding US$ 5,800,578. The facility expired within one year after the date of the agreement and is covered with fiduciary transfer on the imported goods.

In 2001, CIC agreed to extend the maturity period of the Bill discounting facility up to July 6, 2002

(see Note 13). 5. On March 15, 2001, the Company entered into an agreement with PT Bank UFJ Indonesia (UFJ)

(formerly PT Bank Sanwa Indonesia) whereby UFJ agreed to provide import letters of credit facilities of US$ 1,800,000 and export bills bought under letters of credit facilities of US$ 2,000,000. The facilities expired on March 15, 2002. On September 17, 2001, UFJ extended the import letters of credit facility amount to become US$ 1,925,000. On March 15, 2002, UFJ and the Company agreed to amend some provisions of the contract and extending the maturity of the existing facilities to on September 15, 2002 (see Note 13).

6. On November 8, 2001, PT Bank Central Asia Tbk (BCA), Jakarta agreed to extend the import usance

letters of credit facilities up to October 18, 2002 with the maximum facility amount of Rp 22 billion and on certain conditions, among others, placement of fund covering 105% of the letters of credit amount opened in the form of time deposits placed in BCA (see Note 13) credit facilities on the same amount (see Note 13).

7. In connection with the sale of the power plant assets described in Note 5j, the Company entered into

an energy services agreement with DSS for a period of 25 years under which DSS will produce electricity and steam for the Company for a fixed processing service fee of at least US$ 37.6 million per year for the first ten years. The relating variable fee is charged to the Company on actual basis.

8. On April 9, 1999, the Company entered into a management and operation agreement on a multi-

purpose terminal at Merak with PT Pelabuhan Indonesia II (Persero) whereby both parties agreed to engage in profit sharing from the ships and goods serviced in the terminal. This agreement is effective from April 9, 1999 and will expire within 30 years since the date of the management and operation of the multi-purpose terminal which is not later than April 15, 1999.

9. On March 1, 1999, the Company entered into an agreement on the cooperation for the management

of the terminal to be used for its own purpose within the Company’s working area at Perawang Mill with PT Pelabuhan Indonesia I (Persero) whereby both parties agreed to engage in profit sharing on several services provided in the terminal. This agreement is effective from March 1, 1999 up to February 28, 2004.

10. The Company has an agreement with APP International Trading (V) Limited (APPIT (V)), Cayman

Islands and APP whereby the Company agreed to supply and sell pulp, paper and packaging products to APPIT (V) on the condition that APP guarantees the payment obligations of APPIT (V). APPIT (V) has agreed to on-sell such products to certain designated customers under the sale confirmation contracts, APP as the Servicer also agreed to act as APPIT (V)’s agent and administer the agreement on behalf of APPIT (V) under the Servicing Agreement. APPIT (V) agreed to pay the purchase price for the products which comprise the 80% advance and final installment payable no later than 10 business days after the invoice date and following the receipt of sale proceeds by APPIT (V), respectively. The parties’ obligations in this agreement shall continue until terminated by mutual written consent of APPIT (V) and the Company (see Note 5m).


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32. SIGNIFICANT COMMITMENTS AND AGREEMENTS (Continued) 11. The Company entered into an agreement with APP International Trading (VI) Limited (APPIT VI),

Cayman Islands, whereby the Company agreed to sell export pulp, paper and packaging products. The Company’s obligation to continue to sell export goods under this agreement is only to the extent that payments are made on an ongoing basis with the agreed customary terms. The Company has agreed to sell to certain designated customers located in certain countries through APPIT VI. The parties’ obligation in this agreement shall continue until terminated by the Company upon prior written notice to APPIT VI (see Note 5m).

12. IK Trading II (see Note 1c) has an agreement with APP International Trading (III) Limited

(APPIT III), British Virgin Islands and APP whereby IK Trading II agreed to supply and sell to APPIT III which agreed to purchase paper and packaging products from IK Trading II and make the prepayment of JP¥ 10 billion. The agreement shall continue until terminated by mutual written consent of APPIT III and IK Trading II. As a condition to the effectiveness of the aforementioned agreement, IK Trading II entered into an agreement with the Company and APP whereby the Company agreed to supply and sell to IK Trading II which agreed to purchase paper and packaging products from the Company and make the prepayment of JP¥ 10 billion to the Company. The agreement shall continue for 6½ years up to 2005 and may be extended by mutual consent of the parties. APP agreed to guarantee the payment by APPIT III and IK Trading II. The prepayment can be set off against unpaid sale of goods (see Note 5m).

The Company did not receive and record the above prepayment accounts. 13. On November 15, 2000, the Company as the exporter, entered into an agreement with Kinno

Limited Cayman Islands (Kinno), a related party buyer whereby Kinno arranged financing with a group of banks and financial institutions to make the prepayment to the Company of JP¥ 5.350 billion for the purchase of paper products. The Company agreed to produce and deliver paper products of approximately 200,000 metric tons so that Kinno satisfies its commitment under a sale and purchase agreement with Itochu Corporation. If this is not met, the Company may be required to repay some or all of the prepayment amounts with accrued interests. The above prepayment was paid directly to the account of Kinno (see Note 5m).

14. On June 28, 2002, the Company and IBRA prepared and signed Notarial Deed Addendum to the

Pledge of Shares Agreement No. 100 notarized by Linda Herawati, S.H. representing addendum to the Notarial Deed of the Pledge of Shares Agreement No. 9 dated April 7, 2001 by the same notary public (see Note 18).

15. On September 12, 2002, the Company and ABN AMRO Bank N.V. (ABN), Jakarta branch entered

into Amendment Agreement No. 026/2002 of a facility agreement originally entered into on November 9, 1999 and secured by a corporate guarantee from APP, under which ABN had made available to the Company an uncommitted facility up to an aggregate principal amount of US$ 30 million plus Foreign Exchange Facility up to an aggregate amount of US$ 40 million. The amount owed by the Company under the amended facility agreement was overdue for payment and ABN had declared the Company to be in default for all amounts including principal, interest and costs and had called on the guarantee. ABN had converted a part of the outstanding amounts into Uncommitted Trade Finance facilities to the Company, up to the aggregate amount of US$ 12,021,022.


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32. SIGNIFICANT COMMITMENTS AND AGREEMENTS (Continued) The Company shall use this facility for the purpose of financing working capital requirements only. If the Company defaults in its payments, it has agreed to pay a default interest on the unpaid amount over the period commencing from the date when the said amount was due to the date of actual repayment, to the extent permitted by law, at the rate of 5% per annum for US Dollar facility over and above the interest rates which the parties have agreed to. The remaining portion of the Outstanding Amounts, which have not been converted into the Uncommitted Trade Finance facility under this Amendment Agreement, shall remain outstanding and continue to accrue interest in accordance with the terms of the agreement. Despite the signing date, this agreement took effect on January 7, 2002 (see Note 13).

33. SIGNIFICANT LITIGATIONS AND CLAIMS The following are the significant litigations and claims involving the Company and APP in 2002 and

2001:

A. Direct connection with the Company

1. In 1996, the Company, PT Onward Paper Utama, a related party, and other companies were named as defendants in case No. 9/PDT/G/1996/PN/SRG in the Serang District Court in relation to the pollution of the river in Serang. The litigant, PT Samudra Farmindo Luas (SFL), filed for morale and material loss against the Company amounting to Rp 36 billion. Based on the Serang District Court decision No. 9/PDT/G/1996/V/SRG dated January 20, 1997, the Company was released from any liability in the examination stage, but the litigant appealed to the higher court. On October 9, 2000, the Bandung High Court in its decision No. 309/PDT/2000/PT.BDG supported the decision of the Serang District Court. Based on the Company lawyer’s letter dated November 29, 2001, the Bandung High Court’s decision was not relayed to SFL since the Serang District Court had not received the Central Jakarta District Court’s information. Hence, by law, SFL has not received the Bandung High Court’s decision. There are no developments on this case.

2. On June 11, 1999, Andersen 2000 Inc. (Andersen 2000), United States of America, commenced

arbitration proceedings against the Company under the Rules of the International Chamber of Commerce (ICC) in respect of to the purchase contract, service contract and the related contracts on incinerator machinery (Incinerators) in the Serang Mills. On January 3, 2000, the Company issued a counterclaim in the arbitration proceedings against Andersen 2000.

On July 10, 2000, both parties signed a Settlement Agreement whereby both agreed on, among

other things, the modification to the Incinerators to be performed by Andersen 2000 to increase their capacity to attain a certain targeted routine processing capacity and installment payments totaling US$ 1,800,000 to be made by the Company on certain terms in relation to the above. Twenty percent (20%) of the amount due was to be paid in 2000 and the remainder should be paid in 10 equal semi-installments starting from April 2001. To guarantee the above settlement obligation, both APP and Crown Andersen Inc. (Crown), parent company of Andersen 2000 furnished guarantees of US$ 1,440,000 and US$ 1,036,000, respectively. Upon the due execution and delivery of the Crown guarantee, the Company would release the letter of credit to Andersen 2000 and the latter would take all necessary steps to terminate the civil action pending before the US District Court and related US proceedings.


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33. SIGNIFICANT LITIGATIONS AND CLAIMS (Continued) During 2000 and 2001, the Company had paid 20% of the amount due and the first installment.

Certain modifications to the Incinerators were done. On March 9 and 10, 2001, a test was conducted on the performance of the Incinerators and the results of the test were reviewed on March 14, 2001 which showed that the Incinerators failed to reach the targeted routine processing capacity. The Company and Andersen 2000 then entered into discussions and negotiations over additional equipment and/or modifications that may be required to enable the Incinerators to meet the targeted routine processing capacity. No agreement had been reached between the parties. The Company then exercised its right to withhold payment.

The Company gave notice of dispute on October 16, 2001 and filed an arbitration claim against

Andersen 2000 on November 17, 2001 at the Singapore International Arbitration Centre (SIAC) seeking, among other things:

• A declaration that upon true construction of the Settlement Agreement, the parties were

required to procure such equipment and modifications as would enable the Incinerators to be able to routinely process the targeted capacity.

• An order that the Incinerators be properly and validly tested according to the standards and requirements of the Settlement Agreement, the Purchase, Services and Related contracts defined under the recitals to the Settlement Agreement (the Other Agreements) as soon as practicable with a view to producing a comprehensive joint test report.

• An order that Andersen 2000 perform all duties required of them as turn-key contractors under the Settlement Agreement and Other Agreements.

• An order that in the event the tests disclosed that there was no reasonable probability of rectifying the Incinerators such that they would meet the target routine processing capacity, then: a. All of the Settlement Agreement (including the guarantee by APP) and Other

Agreements should be declared void and/or otherwise discharged. b. All payments made to Andersen 2000 under all of the Settlement Agreement and Other

Agreements, should be refunded in full to the Company, with interest at 12% per annum.

c. The Company should be entitled to recover from Andersen 2000 all damages, costs and expenses required for it to procure substitute incinerators and a replacement supplier to provide supervisory works and services in connection with any replacement incinerators.

d. The Company should be entitled to all relief available to them by law arising from any frustration of the Settlement Agreement and Other Agreements.

• Pending testing, production of the joint report and implementation of remedial measures in

respect of the Incinerators, a declaration or order that the Company need not pay to Andersen 2000 any part of the second to tenth installments under the Settlement Agreement.

The Company further claimed:

• Damages and losses arising from Andersen 2000’s failure to take all necessary steps to

complete testing of the Incinerators, produce the joint test report and agree on remedial measures to be taken to rectify the Incinerators.


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33. SIGNIFICANT LITIGATIONS AND CLAIMS (Continued)

• Costs and expenses of and occasioned by these proceedings including (but not limited) to legal costs, expert’s fees, costs and expenses of the arbitral tribunal, among others.

The Company commenced SIAC Arbitration No. 85 of 2001 on November 17, 2001. Andersen

commenced arbitration proceedings against the Company in Arbitration Nos. 84 and 87 of 2001 on November 8, 2001 and November 17, 2001, respectively. SIAC Arbitration No. 84 of 2001 was withdrawn in response to the Company’s application to strike it out. Andersen has since discontinued SIAC Arbitration No. 87 of 2001.

The Company’s claim in SIAC Arbitration No. 85 of 2001 had progressed towards a hearing.

The Company filed its statement of case on March 20, 2002 and Andersen 2000 filed its statement of defense and counterclaim on May 17, 2002. The Company filed its reply and defense to counterclaim on June 21, 2002. In 2002, both parties had filed and exchanged their respective lists of documents. On November 20, 2002, Andersen applied to the arbitrator to decide on the merits of the case based on documents alone. Parties have exchanged affidavits for non-expert witnesses on January 31, 2003. Andersen was due to file its submission for this application on February 21, 2003. The Company’s reply is due on March 14, 2003. The Arbitrator dismissed Andersen’s application to decide the arbitration without a full trial. The Arbitrator has directed the trial to be heard in July 2003.

3. On December 18, 1996, Asia Pulp & Paper Company Ltd. (APP) and Beloit Asia Pacific (L) Ltd.

(BAPL) executed two contracts for the sale and purchase of two papers making machines known as PPM 4 and PPM 5 (hereinafter referred to as the PPM 4 and PPM 5 Contracts). On the same day, APP and Beloit Asia Pacific Pte., Ltd. (BAP) executed two contracts for the supply and purchase of installation supervision, start-up work and training services for the paper machines purchased under the PPM 4 and PPM 5 Contracts (hereinafter referred to as the PPM 4 and PPM 5 Services Contracts).

On May 12, 1997, pursuant to two written agreements, the Company purportedly took over

APP’s rights and obligations in the PPM 4 and PPM 5 Contracts. Pursuant to the terms of the PPM 4 and PPM 5 Contracts, Harnischfeger Industries Inc.

(Harnischfeger), the parent company of Beloit Corporation (BC) and BAPL arranged for four letters of credit to be issued to the Company and APP (the APP Parties). On or about October 31, 1997, APP issued document described as a US$ 59 million promissory note (the Note) pursuant to a request from BC. In this regard, BC had asked APP to assist with its working capital requirements in relation to the PPM 4 and PPM 5 Contracts.

Following the execution of the abovementioned agreements, disputes arose between the parties.

As a result, arbitration proceedings were commenced in the Singapore International Arbitration Centre (the SIAC) in relation to the PPM 4 and PPM 5 Contracts. In addition, proceedings were commenced in the state of Wisconsin in the United States (the Wisconsin proceedings) to prevent the Company and APP from drawing under the letters of credit. Finally, Singapore proceedings were commenced in the High Court of Singapore to prevent BC and First National Bank (FNB) from calling on payment on the Note.


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33. SIGNIFICANT LITIGATIONS AND CLAIMS (Continued) On March 3, 2000, the Company and APP entered into a Deed of Settlement (the Deed) with

BAPL, Harnischfeger, BC, BAP and PT Beloit Indonesia. By this Deed, and subject to, inter alia, the following terms set forth below, all parties agreed to

discontinue proceedings in relation to certain contracts and agreements entered into between APP and BAPL, BAP and Harnischfeger. These proceedings include three arbitrations commenced in the SIAC and the Wisconsin proceedings.

In addition, APP also withdrew an interim injunction in the Singapore proceedings wherein the

APP Parties sought to prevent BC and FNB, and their agents, servants, or otherwise howsoever from calling for payment on the Note, pending the final resolution of one of the arbitration proceedings abovementioned.

The deed also provided that:

• The settlement sum of US$ 135 million shall be paid by APP to BC in two (2) tranches comprising: - US$ 25 million on the completion date; and - US$ 110 million by way of issuance of a promissory note payable by the Company and

guaranteed by APP. One of the conditions of this promissory note shall be that the representations, warranties and covenants in this promissory note shall not be less protective than that issued on July 3, 1997 among the Company Finance Mauritius Limited and First Trust of New York (see Note 17).

• APP and the Company shall waive all their rights and claims to recover sums previously paid under the PPM 4 and PPM 5 contracts and agree not to seek recovery or reimbursement of such sums;

• the Note and respective letters of credit shall be cancelled and returned to the issuer; • APP and the Company shall take possession and acquire control of all the machine parts

pursuant to the PPM 4 and PPM 5 Contracts. To this extent, BC, BAP, and BAPL shall, and Harnischfeger shall assist to provide APP and/or the Company with such further information and documents on the machine parts as APP and/or the Company may reasonably require.

On March 22, 2000, the Deed was approved by the Bankruptcy Court for the District of Delaware, pursuant to the Bankruptcy Rule 9019, upon the condition that the Deed will be amended to clarify the avoidance of any doubt that Harnischfeger’s indemnity in the Deed for any claim against the APP Parties does not include claims against APP Parties in respect of the latter’s obligation to pay or repay any promissory notes issued to BC or other financing or loans relating to PPM 3 and PPM 11 contracts. The Deed was amended accordingly. Based on correspondences with the solicitors of the Beloit Entities and Harnischfeger, US$ 17 million was received by APP on November 20, 2000 and payment of US$ 794,130 was requested to be paid to BC in accordance with the terms of Settlement Deed by December 6, 2000. Pursuant to the Deed, the Company issued, and APP guaranteed, a promissory note with a face value of US$ 110 million to BC. Upon non-satisfaction of the note, BC has commenced an action in New York State Courts for judgment on the US$ 110 million promissory note. The New York State Court has awarded Judgment to BC, and the appeal against the Judgment was denied on or about October 25, 2002. The appeal was dismissed and the judgment of the lower court was affirmed.


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33. SIGNIFICANT LITIGATIONS AND CLAIMS (Continued) Pursuant to the Judgment awarded by the New York State Court, David J. Boland (Boland), the Administrator of the Beloit Corporation (in Liquidation) has commenced enforcement proceedings in various jurisdictions including Texas and Wisconsin, United States of America, England, Scotland, Finland and, possibly, Germany and Austria. The enforcement proceedings in England and Scotland include an injunction restraining the machine parts from being removed from these jurisdictions. In England and Wisconsin, third parties such as Transpac, Sandusky and Dawson with whom the machine parts are stored have commenced proceedings for storage charges and the disposal of the machine parts. In certain instances, Judgment has been entered on the claim for storage charges (see Note 12).

4. On May 23, 2001, Boland also filed a Writ of Summons in the High Court of Singapore against the Company, Indah Kiat Finance (IV) Mauritius Ltd. And APP based on the Judgment issued by the New York State Court. The Writ has not been served on the Company nor Indah Kiat Finance (IV) Mauritius Ltd. This action has been held in abeyance until the resolution of the appeal filed jointly by Deutsche Bank AG and BNP Paribas against the dismissal of the Joint Petition for a Judicial Management Order against APP. The appeal came on for hearing before the Singapore Court of Appeal, and Judgment has been reserved.

5. Based on the legal counsel’s letters dated July 9, 2001 as amended on November 14, 2001, the

Company through its legal counsels, filed claims at the Central Jakarta District Court against its trade customers namely, City Success Ltd., Lucky Clover Limited, Red Chips International Limited, Shinning Armour International Limited and Yale Han Trading Ltd. all with last known registered addresses in British Virgin Islands, regarding the non-payment of the Company’s trade receivables from these companies arising from the export sales of paper products whereby the claims amounted to US$ 94,200,204, US$ 115,841,384, US$ 114,231,575, US$ 83,234,882 and US$ 61,926,298, respectively, or totaling US$ 469,434,343 (which includes receivable balance of US$ 242,446,821 plus interest and damages) plus 6% interest per annum from the filing date of the claim until the customer’s payment date.

In April 2002, the Court issued its decision partly in favor of the Company, which were, City

Success Ltd. (US$ 1,493,596), Lucky Clover Limited (US$ 65,514,674), Red Chips International Limited (US$ 64,537,272), Shinning Armour International Limited (US$ 50,094,121) and Yale Han Trading Ltd. (US$ 20,807,158). In addition the court also ruled against the Defendants to pay an annual interest of 6% since the filing date of the claim until the actual payment date. Since there was no effort to appeal by the Defendants within the prescribed period, the court ruling became legal and enforceable (see Note 4).

6. In August 2002, Bank One N.A. filed a complaint in the United States District Court for the

Northern District of Illinois against the Company, PT Pabrik Kertas Tjiwi Kimia (Tjiwi Kimia) and APP. The claim against the Company and Tjiwi Kimia is for their failure to pay two (2) promissory notes issued by the Company and Tjiwi Kimia which, as of April 25, 1998, had a face value of US$ 21,810,000 and US$ 16,213,000 respectively. As of July 31, 2002, the outstanding balances on the notes were US$ 14,790,000 and US$ 9,761,000. APP was named as co - defendant because it was the guarantor for both promissory notes. The promissory notes were originally issued to Beloit Corporation as part-payment for machinery, and they were subsequently assigned to the First National Bank of Chicago, the predecessor of Bank One. The Company and Tjiwi Kimia have yet to receive the complaints. APP has applied for a stay of the proceedings and the matter will be heard before the Judge on May 22, 2003 (see Note 18).


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33. SIGNIFICANT LITIGATIONS AND CLAIMS (Continued) 7. On September 12, 2002, Oaktree Capital Management Group LLC (Oaktree), Gramercy

Advisors LLC and General Electric Capital Corporation (GE) (collectively the Plaintiffs) filed a complaint in the New York State Court against APP International Finance (APP Finance) and Indah Kiat International Finance Company BV (Indah Kiat Finance) for failing to make periodic interest payments in their capacities as issuers under various notes issued pursuant to their respective indentures (the Notes) and PT Lontar Papyrus Pulp and Paper Industry (Lontar), the Company and APP (collectively the Guarantors) in their capacities as guarantors. The Plaintiffs are seeking to recover principal, in excess of US$ 250 million plus interest. The notes include: a. 11¾% Guaranteed Secured Notes due 2005 issued by APP Finance and guaranteed by

Lontar and APP (Lontar Notes); b. 11⅞% Guaranteed Secured Notes due 2002 issued by Indah Kiat Finance and guaranteed by

the Company (Indah Kiat 02 Notes); and c. 12½% Guaranteed Secured Notes due 2006 issued by Indah Kiat Finance and guaranteed by

the Company (Indah Kiat 06 Notes).

Bank America National Trust Company (the Trustee) is the trustee for all the Notes. The Plaintiffs have requested the Trustee to prosecute the action on the Plaintiff’s behalf. As the Trustee did not commence the action within 30 days of the request, the Plaintiffs, who claim to act on behalf of persons who collectively hold more than 25% of the outstanding principal amount for each series Notes, commenced the action against the Defendants. APP and its subsidiaries have filed a motion to dismiss the complaint on the basis, inter alia, that two (2) of plaintiffs, not being actual holders of the Notes, are not the proper plaintiffs. The court has accepted APP’s arguments and has dismissed the complaint with leave for the Plaintiffs to file an amended complaint. The plaintiffs filed their amended complaint on March 11, 2003 (see Note 17).

8. In May and July 2001, entities within the Franklin Templeton Group filed two (2) complaints

with the New York State Courts against APP and certain of its shareholders and officers including the company in respect of their purchase of: a. APP Finance II Mauritius Ltd., 12% Cumulative Guaranteed Preferences Shares maturing

February 15, 2004; b. Pindo Deli Finance Mauritius Limited 10¼% Guaranteed Senior Notes Due

October 1, 2002; c. Pindo Deli Fiance Mauritius Limited 11¾% Guaranteed Senior Debentures due

October 1, 2007; and d. Tjiwi Kimia Finance Mauritius Limited 10% Guaranteed Senior Notes due August 1, 2004.

The plaintiffs have alleged that the defendants made fraudulent misrepresentations and failed to

disclose in APP’s public filings, prospectuses, financial statements and press releases, among others, the two (2) swap contracts totaling approximately US$ 220 million and other issues. Among the APP-related defendants, APP, Tjiwi Kimia, Tjiwi Kimia Finance Mauritius Limited, Pindo Deli Finance Mauritius Limited, APP Finance II Mauritius Limited and Pindo Deli have been served with the complaint. APP has filed a motion to dismiss the complaint, and the plaintiffs have filed an opposition to APP’s motion to dismiss.


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33. SIGNIFICANT LITIGATIONS AND CLAIMS (Continued)

B. Indirect connection with the Company

1. Starting in August 2001, several class suits were filed by and on behalf of purchasers of securities of APP in the US District Court, Southern District of New York against APP and certain of its directors and officers. The plaintiffs have alleged that the defendants violated certain sections of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder by making material misrepresentations and failing to disclose in APP’s 1997 up to 2000 financial statements and press releases, among others, the two swap contracts totaling approximately US$ 220 million. On April 4, 2001, APP announced that these swap contracts on APP’s consolidated financial statements have not been determined pending completion of the investigations. The plaintiffs asserted that APP’s financial statements did not accurately reflect its financial condition and APP’s estimates, projections and opinions as to its expected revenues, earnings and income. In April 2001, APP announced that it had appointed independent accountants to review the abovementioned swap contracts and in September 2001, APP appointed a US law firm to represent APP in legal proceedings filed in the US APP announced in its press release that it would vigorously defend the US class actions. In light of the above class action, APP believes that it is appropriate for the review of the swap transactions to be conducted under the auspices of US legal counsel. The independent accountants appointed to conduct the aforementioned review, therefore, resigned.

On or about June 5, 2002, the class action suits were consolidated and one single consolidated

complaint was served on APP. APP has filed a motion to dismiss the consolidated complaint. Formal oral argument on the motions to dismiss is scheduled for May 5, 2003.

2. On June 23, 2002, Deutsche Bank AG and BNP Paribas filed a petition in the High Court of

Singapore to place APP under judicial management under the applicable provisions of the Singapore Companies Act (Chapter 50). The Petition first came on for hearing before the High Court of Singapore on July 11, 2002, and was dismissed on August 22, 2002. Dissatisfied with the decision, Deutsche Bank AG and BNP Paribas filed an appeal against the dismissal. On March 19, 2003, the appeal came on for hearing before the Singapore Court of Appeal. After hearing submissions from both parties, the Singapore Court of Appeal reserved its judgment.

34. EMPLOYEE BENEFITS On June 20, 2000, the Ministry of Manpower issued the Decree No. Kep-150/Men/2000, amending the

Decree of the Ministry of Manpower No. Per-03/Men/1996, regarding the Settlement of Work Dismissal and Determination of Separation, Appreciation and Compensation Payments by Companies. The Decree requires companies to pay their employees termination, appreciation and compensation benefits in case of employment dismissal based on the employees’ number of years of service, provided the conditions set forth in the Decree are met. Based on the Company’s computation, the amount of such employees’ benefits charged to operations in 2002 amounted to US$ 3,041,740 and is presented as part of Cost of Goods Sold and Operating Expenses - General and Administrative Expense in the consolidated statements of income (see Notes 22 and 23). On December 31, 2002 the estimated accrual balance amounted to US$ 12,250,197 and the management believes that such amount is adequate to meet the requirements of this Decree as of December 31, 2002.


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35. ECONOMIC CONDITIONS Currently, the Indonesia’s economic conditions continue to be affected by uncertainties in the domestic

social and political conditions. Although at the macro level, there are positive improvements to some major economic indicators, such as decreased inflation and interest rates, increase in economic activity and improvement in liquidity. However, the Rupiah currency is still volatile against foreign currencies due to the domestic social and political conditions.

Prices of pulp, paper and packaging products, which are based on or affected by global prices, are highly

cyclical and fluctuating and had shown a significant decreased trend since the first quarter of 2001 until the end of the second quarter of 2002. Since then prices have started to increase but there is no assurance this trend will continue. In addition, the volatility in exchange and interest rates has affected the Company’s cost of funds, and its capacity to service its debts, given that balances of the Company’s borrowings are denominated mainly in US Dollar and currencies other than the US Dollar.

The directors of the APP Group, in order to anticipate the uncertain economic condition and mainly to maintain its going concern have prepared a restructuring plan proposal in order to regulate the activities including the improvement in their operational performance namely, preparation of a continuing operational plan, assessment to conduct divestment of non-core assets, exertion of efforts to achieve an ideal debt level and negotiation with creditors to reach an agreement acceptable to all creditors.

The Company’s and its Subsidiaries’ operations have been affected significantly and will continue to be affected for the foreseeable future, by the adverse economic conditions. It is uncertain how future economic and non-economic developments in Indonesia will affect the Company’s and its Subsidiaries’ revenue and liquidity. These consolidated financial statements do not include any adjustments related to the uncertainty of the economic conditions. The recovery of Indonesia’s economic stability depends largely on the effectiveness of the measures taken by the government, the decisions of international lending organizations and other factors, including regulatory and political developments, which are beyond the Company’s and its Subsidiaries’ control. It is not currently possible to determine the effectiveness of management’s plans and the future effects of the continuing adverse economic conditions on the Company’s and its Subsidiaries’ liquidity and earnings, including the effects flowing through from their customers, suppliers, creditors and stockholders.

36. SIGNIFICANT SUBSEQUENT EVENTS The following are the significant events subsequent to the December 31, 2002 balance sheet date (see also

Notes 3, 13, 17, 18, 31 and 33 B (2)):

a. Debt Restructuring The focus of the debt restructuring discussions to date has been the Indonesian and Chinese operating companies within the APP group. The progress with respect to the debt restructuring relating to APP has been difficult to achieve. Substantive and intensive discussions in this respect have commenced in January 2003 and are still ongoing as of the date of our report. Several committees have been created among the creditors under a Combined Steering Committee. Regular meetings and discussions have been taking place between the APP group and the committees on the Indonesian operations of APP.


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36. SIGNIFICANT SUBSEQUENT EVENTS (Continued) The Company is undergoing monitoring controls from IBRA. Resident financial controllers from IBRA are holding offices within the Company’s premises to monitor monthly reports and other controlling activities. The PIOCs, including the Company, have deposited a total of US$ 203 million as of February 2003 into individual escrow accounts. These amounts will be used in payment of interests from the restructured debts.

b. Proof of Debt Process

The Preliminary Agreements relating to the debt restructuring process contemplates that a Proof of Debt Process be undertaken by the Company subject to coordination with and review by an Independent Accountant. The Company has appointed PT Ernst & Young Advisory Services (the Independent Accountant). The Company has placed notices in local and foreign newspaper requesting creditors to submit a Proof of Debt Form to the Company, copied to the Independent Accountant.

c. Judicial Management On March 19, 2003, the Supreme Court of Singapore reserved judgment on the petition filed by Deutsche Bank AG and BNP Paribas to place APP under judicial management under the applicable provisions of the Singapore Companies Act (Chapter 50).

d. Bondholders’ General Meeting

The PIOCs held bondholders’ general meetings on March 6-7, 2003 to decide among themselves whether to join the IBRA-led debt restructuring. There were no agreements decided since there was inadequate quorum established for each of the PIOCs. The bondholders have collectively held meetings with IBRA to discuss further the necessary steps to settle their bond concerns (see Note 17).

e. Claims for tax refund

After December 31, 2002, the Company received a Tax Overpayment Assessment Letter No. 00018/407/02/092/02 dated March 04, 2003 for value added tax for period July year 2002 amounting to Rp 28,367,560,672.

37. RECLASSIFICATION OF ACCOUNTS In 2001, amounts due from and due to related parties arising from non-trade activities were previously

presented as current assets. In accordance with Bapepam Regulation No. KEP-06/PM/2000, the amounts due from and due to related parties arising from non-trade activities are currently presented as non-current assets.

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