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PHILIPS Electrical Industries of Pakistan Ltd

ANNUAL REPORT 1997

Contents

Key Data

Board of Directors

Chairman's Review

Auditors' Report to the members

Balance Sheet

Profit and Loss Account

Cash Flow Statement

Notes to the Accounts

Ten-Year Review

Pattern of Shareholding

Notice of Meeting

Key Data

1997

1996

Rupees in

million

Sales

3,218

3,365

Operating Profit

194

224

Profit before Taxation

103

Taxation

Profit after Taxation

Dividend - Cash %

Bonus Issue %

Paid-up Capital

119

Shareholders' Equity

306

420

Earning per share

3.9

6.4

Number of Employees

972

1,045

Board of Directors

Syed Naseem Ahmad

Rafiq M. Habib

Nizam A. Shah

Hakimullah Siddiqui

S.W. Plokker

Razi-ur-Rehman Khan

Javed Iqbal

Management Team

Syed Naseem Ahmad

Javed Iqbal

M. Kamil Shahbazkar

M. Farooq Farooqi

Jalees A. Siddiqi

Bankers

ABN Amro Bank

American Express Bank Ltd.

ANZ Grindlays Bank

Bank of America

Citibank N.A.

Emirates Bank International Ltd.

Habib Bank Ltd.

Hong Kong and Shanghai Banking Corp.

Muslim Commercial Bank

National Bank of Pakistan

Standard Chartered Bank

Auditors

A.F. Ferguson & Co.

Chartered Accountants

Chairman's Review

The year under review

Inspite of the

experienced unstable and

Government's efforts to

fluctuating business

implement some very

conditions mainly due to

fundamental economic

two factors. Firstly, the

reforms covering fiscal,

carry over impact of

financial, tariff and public

frequent and upward

sector fields in order to

revision of tariff

place the country on a

implemented through fiscal

more sustainable macro

and mini budgets and heavy

economic footing, the

devaluation of Pak Rupee

economy continues to

(average 17%) coupled with

remain sluggish owing to a

a double digit inflation

number of internal and

during the previous year,

external factors including

the effects of which could

provisions of WTO/IMF

not be passed on to the

agreements, and massive

consumers. Secondly,

currency devaluation in the

smuggling of electronic

Far Eastern countries. The

items which continued

prerequisites for

unabated under the guise

maintaining viable local

of "Afghan Transit Trade"

manufacturing operations

and "Baggage Trade". These

are operational efficiencies,

irregular imports adversely

reasonable protection in

affected the sales and

tariff structure and

profitability, specially of

effective control of the

televisions and products of

parallel trade. Keeping the

small domestic appliances,

above in view, the matter is

and continues to hamper

being pursued with the

the growth of the local

Government at all levels

legitimate industry

and we have received

competing in the market

positive response to our

"on level playing field"

problems.

basis.

Demerger of the MDA

Business

In regard to the above, we

wish to announce that the

order sanctioning the

Scheme of Arrangement

dated December 19, 1997,

duly approved by the

shareholders in the extra

ordinary meeting held on

March 6, 1998 for the

demerger of the MDA

Business from Philips

Electrical Industries

Pakistan Limited and

vesting it in a newly formed

company, Refrigerators

Manufacturing Company of

Pakistan Limited was

passed by the Honorable

High Court of Sind on

March 19, 1998. The same

court order was filed with

the Registrar of Joint Stock

Companies, Karachi on

March 24, 1998 in order to

put the Scheme of

Arrangement into legal

effect. Accordingly, the

share transfer between

Philips and the newly

formed company will take

effect as mentioned in the

Scheme of Arrangement.

As the effective date for

the transfer of the MDA

activity to the new

company as per approved

Scheme of Arrangement is

being implemented with

effect from the close of

business on June 30, 1997,

accordingly all figures set

out in this report and

audited accounts for the

MDA activity include the

first 6 months only i.e. the

period Jan-Jun 1997. After

that date (June 30, 1997)

MDA accounts have been

segregated from Philips

Electrical Industries of

Pakistan Limited.

Comparative figures and

ratios have been adjusted

as per audited accounts

wherever deemed

appropriate.

Sales and Profits

Inspite of the above-

mentioned adverse

conditions, the company

managed to achieve sales

to the tune of Rs.3,218

million against Rs.3,365

million of previous year

(4.4% lower over 1996).

Operating profit was

Rs. 194 million as compared

to Rs.224 million of last

year, and profit before tax

was Rs.69 million as

compared to Rs. 103 million

of 1996. The drop in the

profit is mainly attributed

owing to negative results in

the Consumer Electronics

sector and the marginal

profits in the MDA sector

during the first six months

in the year under review.

Lighting

During the year of review,

this major sector of the

company continued its

excellent performance

being the market leader

and continued the policy

of providing excellent

products to consumers at

competitive prices. In this

sector, improvement of

customer service level and

offerings of total lighting

emphasis and special

projects were given due

attention.

In this

division, sales

increased from

Rs. 1,594 million

to Rs. 1,869

million, which

represents an

increase of 17% over

1996. The operating profit

registered a significant

increase over previous year

and jumped from Rs. 151

million to Rs. 190 million

which shows 26% increase.

This improved result was

possible through alternate

sourcing of goods, effective

marketing

strategies,

better sales

mix, operating

efficiencies in

the factory and

the overall cost

savings.

Consumer Electronics

Sales in this division

registered a dip of 5.6%

over 1996 which is mainly

on account of colour

televisions, although other

products of this division

such as Portable Audio

Systems, VCR etc. proved

to be good fillers. The PC

Monitors which were

introduced in the market in

1996, continued to enjoy

the confidence of the

consumers due to its

quality and price and sales

shot up approx. by 50% in

terms of volume.

Operating result was a loss

of Rs. 8 million against

operating profit of Rs.36

million of last year. This

was mainly due to the

television market, which,

especially during the first

six months of the year,

remained stagnant and as

mentioned earlier, the

imports through irregular

channels adversely affected

the local industry. Price

increases in colour

televisions to offset the

imposition of high sales tax

and custom

duty severely

eroded the

profits. The

March 1997

package of the

government

provided some relief

to the industry, and a part

of the relief was passed on

to the consumers. The

impact of these measures

was not felt completely

during the year under

review as finished goods

selling at higher prices

remained in the pipeline

and inventories of raw

materials and components

cleared under higher duty

had to be consumed.

It is our apprehension that

unless and until

irregular trade is

controlled by the

government, the

very survival of

our television

industry will become

doubtful.

Major Domestic

Appliances

Figures for this activity are

for the period of first six

months only i.e. Jan-Jun

1997 whereas 1996 is for

the whole year for the

reasons stated earlier in

this report. For the

purpose of comparison, if

compared with the figures

of Jan-Jun 1996, sales

registered a decline of 28%,

whereas operating profit

was Rs.2 million against

Rs.62 million in the same

period.

The major reasons for the

shortfall in the sales and

profits were depressed

market conditions and

demand for white goods in

the first half of the year. As

total market was

depressed, lucrative

matching incentives with

the trade were offered to

keep the sales going and

keep the

losses due

to inventory

pile up at

the minimal.

Although the

March 1997

package

offered some

relief, but the benefits

could not be reaped as

the peak-selling season of

refrigerators was over by

the middle of the year.

Other Activities

This sector covers the

activities of Small Domestic

Appliances & Personal

Care (DAP) products,

Professional Systems,

Medical Systems and After

Sales Service.

The activities of Domestic

Appliances & Personal

Care are currently facing

difficult situation in the

market place due to

imports through smuggling

and irregular channels.

Despite this difficult

situation, the activity has

shown overall

improvements in sales and

profitability through

stringent,

dedicated

and

innovative

efforts in

Marketing

and Sales.

As stated earlier, unless

smuggling/parallel trade is

effectively controlled by

the Govt., DAP activity will

remain threatened.

The Professional Systems

deals in trading of high-

tech products and

equipment. This

activity is

primarily

project based

and requires

advanced

professional

know-how and is

dependent on availability of

development

funds/budgets. As a policy,

the company focuses on

major projects. It is a

pleasure to inform you that

the company was awarded

a substantial order for the

installation of weighbridges

on the Lahore-Islamabad

Motorway including lighting

of 3 interchanges for which

work is at hand.

Restructuring of the

Medical Division was

completed during the year

under review, and the

activity has now been

harried over to a locally

appointed agent, who is

now responsible for all

medical activities of Philips

International in Pakistan.

As part of the company

policy to ensure excellent

"after sales service" to the

customers, the company is

maintaining an efficient set

up for all products and

equipment sold and

supplied by the company.

This service

setup which

provides

competitive

edge over the

competitors,

has already

been established

in all major cities

and further expansion is

at hand.

The Company and the

Shareholders

It is a pleasure to

announce that the

company has been awarded

the best presented Annual

Accounts for the year 1996

in the Non Financial sector