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GATRON (INDUSTRIES) LIMITED

ANNUAL REPORT 1997

CONTENTS

GATRON (INDUSTRIES) LIMITED

COMPANY INFORMATION

BOARD OF DIRECTORS

Peer Mohammad Diwan

Chief Executive

Haji Sharif Tayub

Haji Haroon Tayub

Abdul Razak Diwan

Zakaria Bilwani

Usman Habib

Iqbal Abdul Shakoor

Shabbir Diwan

Muhammad Murtaza

Z.I. Saifi - BEL Nominee

COMPANY SECRETARY

Mohammad Yasin Bilwani

BANKERS

Allied Bank of Pakistan Limited

American Express Bank Limited

Bank of America NT & SA

Citibank N.A.

Credit Agricole Indosuez

Deutsche Bank

Faysal Bank Limited

Habib Bank AG Zurich

Habib Bank Limited

Metropolitan Bank Limited

Muslim Commercial Bank Limited

National Bank of Pakistan

Societe Generale, The French and International Bank

Standard Chartered Bank

United Bank Limited

AUDITORS

Hyder Bhimji & Co.

Chartered Accountants

Karachi.

PLANT

Plot No. M-2, Sec. M, H.I.T.E.

Main R.C.D. Highway

Hub Chowki, Lasbela Distt.

Balochistan - Pakistan.

REGISTERED OFFICE

Room No. 7, 1st Floor

Saleem Plaza, M. A. Jinnah Road

Quetta - Pakistan.

LIAISON OFFICE

8th Floor, Textile Plaza

M. A. Jinnah / Dunoily Road

Karachi - 74000 - Pakistan.

FINANCIAL HIGHLIGHTS

(Rupees in Thousands)

1997

1996

YEAR AT A GLANCE

Turnover

2,750,615

2,997,636

Profit before tax

294,474

273,984

Profit after tax

194,247

206,326

Taxation

- current

52,512

15,000

- deferred

47,715

52,658

Gross assets employed (excluding capital work-in-progre

2,747,672

2,789,669

Issued share capital

348,768

Net shareholders equity

1,199,561

1,092,506

Earning per share before tax - Rupees

8.44

7.86

DIRECTORS' REPORT TO THE

SHAREHOLDERS

The directors of your company feel pleasure in

submitting their report on the performance of the

company for the year ended June 30, 1997.

YEAR UNDER REVIEW

By the Grace of Almighty Allah and due to strenuous

efforts of the management and staff, the company

continued to perform well. The main financial

parameters showed an improvement over the previous

year. The profit before tax for the year stood at

Rs. 294.474 million as compared to Rs. 273.984 million

of previous year.

As reported in previous report, the prices of main basic

raw material i.e. Pure Terephthalic Acid (PTA) and

Mono Ethylene Glycol (MEG) were being quoted at

USS: 610 and USS: 480 per ton respectively in last

calendar quarter of 1996. Subsequently the rates of

PTA varied within the range of USS: 600 to

US$: 640 upto the third calendar quarter of1997. The

rates of MEG were USS: 570 in second quarter of

1997 are now around USS: 700. The local filament

yarn market however did not witness a downward trend

in first few months of the financial year. In fact there

was a slight upsurge in the usually good seasonal

months of November to February. after which it

leveled out. A negative impact on profitability was

however felt due to the increase in Sales Tax rate.

Previously Sales Tax @ 15% was levieable at

intermediate stage but effective from July 1996 it was

increased to 18% and was made levieable on the

final product (from March, 1997 the rate of Sales Tax

was brought down to 12.5% on the final product).

Other major factors having negative effect on the

profitability were:

1) Massive devaluation of Pak Rupee against

US$ by 15.26% during the year, the major

portion in October 1996.

2) Increase in fuel rates by 30 to 40%.

However, since the filament yarn prices remained

firm, the overall profitability showed slight

improvement.

FUTURE - OUT LOOK

At present the rates of PTA in international markets

are being quoted at USS: 550 and MEG at USS 700.

It appears that these rates will remain within plus

minus 10% of this level, with more probability of

decrease.

There was 8.7% devaluation of Pak Rupee in October,

1 997. This devaluation and other inflationary pressure

would result in increased costs.

The key factor for profitability is whether the local

yarn market improves to allow absorption of the

increased costs. Of course the possible reduction in

raw material costs would definitely mitigate the

negative effects.

All other types of yarn manufactured in Pakistan are

subject to Sales Tax @ 12.5% only, whereas filament

yarn is subject to Sales Tax @ 12.5% as well as

Rs. 2.50 / Kg Excise Duty. This anomaly despite many

representations has not been removed by the

Government and it is high time that this excise duty

should be removed to make local industry competitive

against imports on which no excise duty is levied.

However, certain measures as enumerated hereunder

already taken by the Government should have a

positive impact on the profitability:

- Reduction of Sales Tax to 12.5%.

- Enforcement of numerous relief packages.

- Freezing of gas/fuel rates.

The Government is emphasizing on all sectors of

the industry to be aggressive and competitive on the

export front.

There is a high inbuilt strength for the filament yarn

producers to be competitive in export provided

following things are equalized on the level of

competing countries like Korea and Taiwan:

- Energy cost (Fuel and Electricity cost).

- Financing Cost.

- Duty on import of Machinery.

- Duty on Spare Parts.

The present Export Rebate/Duty Drawback only

covers the import duties paid on basic raw material

i.e. PTA and MEG, while above disparities in cost

are incurred in converting this PTA and MEG into

Polyester Chips and then converting these Polyester

Chips into Polyester Yarn (and then into Texturised

and Processed Yarn)on capital intensive plants and

machineries. And of course beyond these disparities,

the Pakistani Polyester Filament Yarn producers

cannot exactly match the economies of scale of the

producers in Korea, Taiwan and other Far Eastern

countries. Furthermore, PTA and MEG available in

Korea and Taiwan have also been historically at lower

prices than Pakistan. While many of the polyester

producers in these countries have their own PTA

production plants.

The exporting industry in Pakistan to be on equal

footing should therefore be given:

I. Low rate of financing for working capital to the

tune of export at the rates prevalent in Japan,

Korea and Taiwan.

II. Furnace Oil/Diesel Oil, Lube Oil be supplied

without import duty and other taxes.

III. Reduction in import duty on plant and machinery

and spares.

IV. Low rate of financing on the long term loans for

the plant and machinery and spares, (that is on

rates prevalent in Japan, Korea and Taiwan).

While the facility No.1 stated above is already

available, the rates however need to be brought down.

The other three factors noted above may be difficult

to apportion between local and exported goods.

Therefore, their effects should be given as additional

rebate or duty drawback. Even beyond these facilities

there is a further scope for compensatory rebate to

match the raw material prices, economies of scale

of Taiwan and Korea and their dumping prices.

Moreover, in the current proposed No Duty Drawback

Scheme, the local filament yarn producers are not

allowed to offer their product (at export prices) to the

Pakistani weavers availing the No Duty No Drawback

Scheme such that foreign suppliers are given

monopoly in the No Duty Drawback Scheme.

Since Polyester Filament Yarn is abundantly

available in Pakistan and to allow this industry to

expand, Polyester Filament Yarn should be excluded

from No Duty No Drawback. If at all it is not

excluded than the exporter of finished goods

(fabrics) should be obliged to open letter of credit in

foreign exchange in favour of Pakistani manufacturers

for these input goods (Filament Yarn) and local

suppliers / manufacturers of input goods should be

entitled to get regular drawback as well as additional

drawback/rebate (as mentioned above) as if he was

exporting.

RESULTS, DIVIDEND AND FINANCE

The financial results of your company in the year under

review were an improvement over last year.

The appropriation of profits is proposed as under:

(Rupees in Thousands

Profit before taxation

294,474

Taxation

100,227

----------

Profit after taxation

194,247

Unappropriated profit

brought forward

94,970

----------

Profit available for appropriation

289,217

Appropriation:

Proposed cash dividend @25%

87,192

Transfer to general reserve

200,000

287,192

----------

Unappropriated profit

2,025

carried forward

==========

The Board has also resolved to issue 10% Right

Shares at a premium of Rs. 10/- per share in proportion

of one share for every ten shares.

FUTURE PROJECTS

As reported earlier, the Bottle Grade PET Resin

project is progressing as scheduled. After arrival of

major portion of equipment, erection commenced in

mid September, 1997 and the project is expected to

be commissioned in end January, 1998. Efforts are

under way for marketing of this product, however, as

true for all new products, the first few months would

see inventory build up.

Consequently, a major portion of the textile grade

chips of the company would be procured from outside

for which a long term contract for quantity supply has

been signed similar to long term supply contracts of

PTA and MEG.

The company is also implementing a 5000 tons/year

filament yarn production unit at an estimated cost of

Rs. 307 million, which is expected to go on stream

by 3rd quarter 1998. This expansion would also utilize

surpluses in present utilities and yarn processing

section.

CONTRIBUTION TO NATIONAL EXCHEQUER

During the year, the Company's contribution to the

national exchequer amounted to Rs. 664.322 million

in respect of payment towards sales tax, excise

duties, import duties and other statutory levies. This

does not include the income tax paid by the employees

of the Company in their individual capacities.

re-appointment.

SUBSIDIARY COMPANY

The Audited Accounts of the wholly owned subsidiary,

Gatro Power (Pvt.) Limited for the year ended June

30, 1997 are attached.

BOARD CHANGES

There were no changes on the Board of Directors

during the year.

AUDITORS

The external Auditors, Messrs. Hyder Bhimji &

Company, retire and offer themselves for

PATTERN OF SHAREHOLDING

A statement showing the pattern of shareholdings in

the Company as at June 30, 1997 appears on page

No. 37.

PERSONNEL

The management and union relationship remained

cordial and constructive. The targets met by the

company during the year under review could not have

been achieved without the high standards of

professionalism, competence and responsibility

displayed by both the management and workers.

ACKNOWLEDGMENTS

Your Directors would like to take this opportunity to

thank all the banks, financial institutions and the

Government agencies in general for the co-operation

extended by them during the course of business

activities.

NOTICE OF ANNUAL GENERAL MEETING

Notice is hereby given that the Seventeenth Annual General Meeting of Gatron (Industries) Limited will be

held on Monday, December 22, 1997 at 12:00 noon at Serena Hotel, Quetta to transact the following business:

ORDINARY BUSINESS

1. To confirm the minutes of the Sixteenth Annual General Meeting held on December 14, 1996.

2. To receive, consider and adopt the audited accounts of the Company for the year ended June 30, 1997

together with the Auditors' report thereon and Directors' report for the year then ended.

3. To approve, as recommended by the Directors for payment of cash dividend at Rs. 2.50 per share (25%)

for the year ended June 30, 1997.

4. To appoint Auditors for the next financial year and to fix their remuneration.

5. To transact any other business with the permission of the Chair.

Notes:

1. The Share Transfer Books of the Company will remain closed from December 14, 1997 to

December 22, 1997 (both days inclusive). The shareholders are advised to notify to the company of any

change in their addresses.

2. A member entitled to attend and vote at the meeting may appoint another member as his/her proxy to

attend, speak and vote on his/her behalf. Proxies in order to be effective must be received at the office

of the Company not less than 48 hours before the time of holding of the meeting. Proxy form is enclosed.

ANNOUNCEMENT OF RIGHT ISSUE

Members are hereby notified that the Board of Directors in its meeting held on November 18, 1997

has decided to issue "Right Shares" in the ratio of one additional Ordinary Share for every ten

Ordinary Shares i.e., (10%) of the face value of Rs. 10/- each at a premium of Rs. 10/- per share.

The Share Transfer Books of the Company will be closed from December 14, 1997 to

December 22, 1997 (both days inclusive) to determine the Right entitlements.

Transfers received at the 8th Floor, Textile Plaza, M. A. Jinnah Road, Karachi, at the close of

business on December 13, 1997 will be treated in time for the purpose of entitlement of rights to the

transferees.

AUDITORS' REPORT TO THE MEMBERS

We have audited the annexed Balance Sheet of GATRON (INDUSTRIES) LIMITED as at June 30, 1997 and

the related Profit & Loss Account and Cash Flow Statement, together with the notes forming part thereof, for

the year then ended and we state that we have obtained all the information and explanations which to the best

of our knowledge and belief were necessary for the purposes of our audit and, after due verification thereof,

we report that:

(a) in our opinion, proper books of account have been kept by the Company as required by the

Companies Ordinance, 1984;

(b) in our opinion:

i) the Balance Sheet and Profit and Loss Account together with the notes thereon have been drawn

up in conformity with the Companies Ordinance, 1984 and are in agreement with the books of

account and are further in accordance with accounting policies consistently applied;

ii) the expenditure incurred during the year was for the purpose of the Company's business; and

iii) the business conducted, investments made and the expenditure incurred during the year were in

accordance with the objects of the Company;

Balance Sheet, Profit and Loss Account and Cash Flow Statement, together with the notes forming part

thereof, give the information required by the Companies Ordinance, 1984 in the manner so required and

respectively give a true and fair view of the state of the Company's affairs as at June 30, 1997 and of the

profit and the changes in cash position for the year then ended; and

(d) in our opinion, Zakat deductible at source under the Zakat & Ushr Ordinance, 1980 was deducted

by the Company and deposited in the Central Zakat Fund established Under Section 7 of that

Ordinance.

BALANCE SHEET AS AT JUNE 30, 1997

(Rupees In Thousands)

Note

1997

1996

SHARE CAPITAL AND RESERVES

Authorized capital

44,000,000 Ordinary Shares of Rs. 10/- each

440,000

==========

Issued, subscribed and paid up capital

348,768

Capital reserve

348,768

General reserve

500,000

300,000

Unappropriated profit

2,025

94,970

----------

1,199,561

1,092,506

REDEEMABLE CAPITAL

40,204

56,285

LONG TERM LOANS

282,972

412,162

LIABILITIES AGAINST ASSETS

SUBJECT TO FINANCE LEASE

26,756

104,098

DEFERRED LIABILITIES

234,743

184,083

CURRENT LIABILITIES AND PROVISIONS

Current maturity of redeemable capital

16,081

Current maturity of long term loans

164,337

170,320

Current maturity of liabilities against

assets subject to finance lease

77,342

97,776

Short term financing under mark-up arrang

288,670

145,485

Creditors, accrued and other liabilities

354,963

364,586