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SERVICE FABRICS LIMITED

Annual Report 1997

COMPANY INFORMATION

CHIEF EXECUTIVE

Mr. Farooq Hameed

DIRECTORS

Mr. Ijaz Hameed

Mr. Aamer Hameed

Mr. Muhammad Salim

Mr. Sajid Salim Minhas

Mrs. Nasreen Aftab Ahmed Khan

Mrs. Uzma Hameed

Mr. A.D. Azhar Khawaja (N.I.T Nominee)

SECRETARY

Mr. Ralph Nazirullah

BANKERS

Habib Bank Limited

Habib Bank A.G.Zurich

Bank of America

AUDITORS

Taseer Hadi Khalid & Company

Chartered Accountants

LEGAL ADVISORS

Cornelius, Lane & Mufti

Advocates & Solicitors

REGISTERED OFFICE

38 Empress Road, Lahore.

Telephones: 6304561-3, 6367863-5

Telegram: PRIMEPAK

Telex: 44577 PRIME PK

Telefax: (92-42) 6367861

E-mail: primsoft@lhr.comsats.net.pk

MILLS

Manga - Raiwind Road,

Manga Mandi, Lahore.

Telephones: (04951) 383707-8

Telefax: (92-4951) 383710

NOTICE OF MEETING

Notice is hereby given that the 10th Annual General Meeting of the members of the company will be held on

Monday March 30, 1998, at 1100 hours at the Registered Office of the Company at 38 Empress Road, Lahore to

transact the following business:

1.To confirm the minutes of the 9th Annual General Meeting.

2. To receive and adopt the audited accounts together with the Directors' and Auditors' reports for

the year ended September 30, 1997.

3. To elect seven Directors in accordance with the provisions of section 178 of the Companies

Ordinance, 1984. Following are the retiring directors;

1. Mr. Farooq Hameed

5. Mr. Sajid Salim Minhas

2. Mr. ljaz Hameed

6. Mrs. Nasreen Aftab Ahmed Khan

3. Mr. Aamer Hameed

7. Mrs. Uzma Hameed

4. Mr. Muhammad Salim

4 To appoint auditors and to fix their remuneration.

5 Any other business with the permission of the Chair

NOTES:

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

to attend and vote. Votes may be given either personally or by proxy or by attorney, and in case of a

corporation by a representative duly authorised.

2. The instrument of proxy duly executed in accordance with the Articles of Association of the

Company should be deposited at the registered office of the Company at least 48 hours before the

time of the meeting.

3. Transfers received in order up to the close of business on 21st March. 1998 will be considered in

time to effect the voting rights.

4. The share transfer books of the Company will remain closed from 22nd March to 30th March.1998

(both days inclusive).

5. The shareholders desirous of contesting the election are advised to send their nomination and

consent to act as director to reach the Company fourteen days earlier than the date of holding of

election.

CHIEF EXECUTIVE'S REVIEW

I welcome Company s shareholders to the tenth Annual General Meeting and submit annual report along with

financial statements for the year ended September 30, 1997

The current financial position of the Company and the operational results are not satisfactory. The Company

incurred heavy losses of around Rs. 377 million uptil September 30. 1997 This has seriously impacted the

liquidity of the Company and it is quite apparent that sufficient cash is not being generated from operations to

meet debt service and debt repayment obligations as they currently stand

Although one of the major factors of current financial crises is cotton crop failure for the fourth consecutive year

the following significant reasons can also be attributed for the situation:

Exorbitant increase in input costs i.e mark up, electricity and especially high yarn cost put the weaving

industry in Pakistan into a very difficult situation These ever-increasing costs were never absorbed in the

cloth selling rates in the international market. Our competitors. on the other hand, are selling their products

at much lower prices taking hold of many of our markets

The weaving industry in Pakistan was hit at conception with one of the most severe global textile

recessions in recent history

The new textile fabric producers do not have easy access to textile quotas The cost for obtaining a market

share in a quota country is prohibitive.

Under the above circumstances, the Company's existence is dependent on the continued support of banks The

current financial crises have a valid background and events and facts cannot be denied. Therefore, the existing

terms of debt obligations need revision, as the Company does not appear to be suitably placed to meet future

repayment commitments. It is imperative that the banks consider a financial restructuring plan on practical and

workable financial framework.

The Company has already submitted a proposal to Habib Bank Limited for financial restructuring. It is expected

that the bank would review the proposal and more meaningful longer-term arrangements will be made for the

revival of the Company.

Inspite of recessionary conditions, the Company earned FPCCI award of SPECIAL MERIT TROPHY 1996-97

for cotton fabrics export. This achievement was made possible due to our strenuous marketing efforts and strict

control over quality of cloth being produced at our mills. During the year under review our exports were Rs 672

million - nearly 92 per cent of the total sales of Rs.729 million as 'against Rs 547 million exports and Rs 608

million total sales in the previous year.

Present Governments' Trade Policy 1997-98 attempted to address country's worsening trade deficit,

emphasizing the need to diversify exports. The State Bank of Pakistan has also announced favourable export

financing arrangements. In addition, most of the banks have cut down mark up rates. Such measures if

continued will gradually take the textile industry out of crises situation. Improved results are expected during the

current year subject to stability in yarn rates and better selling prices of fabric in the international market.

I would like to appreciate Company's employees for their hard work and devotion during this period of turmoil

for the textile industry and expect their continued hard work during the current year with more zeal for the

achievement of better and improved results.

DIRECTORS' REPORT TO THE MEMBERS

The directors present herewith their 10th Annual Report together with the Audited Accounts for

the year ended September 30. 1997.

ACCOUNTS

(Rupees)

Loss for the year

96,264,996

Add Taxation

6,783,455

Loss after taxation

103,048,451

Add: Accumulated loss brought forward

from last year

273,581,566

Loss carried forward

376,630,017

AUDITORS

Company's auditors, Messrs Taseer Hadi Khalid & Co retire and being eligible, offer themselves

for re-appointment.

AUDITORS' REPORT TO THE MEMBERS

We have audited the annexed balance sheet of SERVICE FABRICS LIMITED as at September 30,

1997 and the related profit and 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 view of the adverse financial position of Service Industries Textiles Limited, an associated

company, the recoverability of the amounts due from the company, appears to be dependent

on its ability to continue operations and support of the financial institutions (see Note 18, 19.2

and 19.3).

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

Companies Ordinance, 1984;

c) 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.

d) in our opinion and to the best of our information and according to the explanations given to us,

the balance sheet, profit and loss account and the cash flow, together with the notes forming

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

required and except for the effect of the matter referred to in paragraph (a) above, respectively

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

the loss and the cash flow for the year then ended; and

e) without qualifying our opinion:

we draw your attention to Note 2 to the financial statements. The present financial position

and operating results of the company indicate that the company may not be able to

continue as a going concern, unless the financial support is forthcoming from the banks

and the restructuring package is approved. However, in the said note the company has

explained the basis for preparing the financial statements on a going concern basis and the

steps being taken by it to circumvent this situation.

we draw your attention to Notes 6.3 and 9.2 in which the uncertainties about the positions

of the demand finance and deferred mark-up have been disclosed.

f) in our opinion, no zakat was deductible at source under the Zakat and Ushr Ordinance, 1980.

BALANCE SHEET AS AT SEPTEMBER 30, 1997

SHARE CAPITAL AND RESERVES

1997

1996

Note

(Rupees)

Share Capital

Authorised capital:

16,000,000 ordinary shares of Rs.10/- each

160,000,000

==========

Issued, subscribed and paid up capital:

157,548,000

Accumulated loss

(376,630,017)

(273,581,566)

(219,082,017)

(116,033,566)

SURPLUS ON REVALUATION OF FIXED ASSETS

303,203,101

LONG TERM LIABILITIES

Long term loans - Secured

263,203,101

311,439,244

Liabilities against assets subject

to finance lease

732,688

Sponsors bridge loan - Unsecured

7,359,982

-----------

270,785,010

319,531,914

DEFERRED LIABILITIES

38,746,708

39,026,757

CURRENT LIABILITIES

Short term borrowings- Secured

272,134,289

261,583,905

Current maturity of long term loans

and assets subject to finance lease

87,409,359

19,657,715

Creditors, accrued and other liabilities

55,459,643

41,853,143

Provision for taxation

18,368,516

11,585,061

-----------

433,372,415

334,679,824

CONTINGENCIES AND COMMITMENTS

-----------

827,025,217

880,408,030

===========

These accounts should be read in conjunction with the attached notes.

FIXED CAPITAL EXPENDITURE

OPERATING FIXED ASSETS - At cost

less accumulated depreciation

584,262,770

635,480,663

PRELIMINARY EXPENSES

320,385

480,577

DEFERRED COST

7,599,627

26,580,121

CURRENT ASSETS

Stores and spares

10,333,568

9,096,297

Stock in trade

43,816,130

31,935,556

Trade debts

50,096,471

33,454,789

Advances, deposits, prepayments

and other receivables

23,231,174

141,872,837

Cash and bank balances

7,365,092

1,507,190

----------

234,842,435

217,866,669

----------

827,025,217

880,408,030

===========

PROFIT AND LOSS ACCOUNT

FOR THE YEAR ENDED SEPTEMBER 30, 1997

1997

1996

Note

(Rupees)

Sales

728,594,334

608,118,741

Cost of sales

(693,363,409)

(582,617,846)

GROSS PROFIT

35,230,925

25,500,895

OPERATING EXPENSES

Administrative

(13,706,358)

(11,750,548)

Selling

(30,796,529)

(27,794,459)

----------

(44,502,887)

(39,545,007)

OPERATING LOSS

(9,271,962)

(14,044,112)

Financial expenses

(83,438,904)

(81,781,372)

----------

(92,710,866)

(95,825,484)

Other charges

(7,849,448)

(15,517,881)

Other income

4,295,318

3,768,841

LOSS BEFORE TAXATION

(96,264,996)

(107,574,524)

TAXATION:

- Current year

(5,411,282)

(3,040,594)

- Prior year

(1,372,173)

(6,783,455)

(3,040,594)

----------

LOSS AFTER TAXATION

(103,048,451)

(110,615,118)

Accumulated loss brought forward

(273,581,566)

(162,966,448)

----------

ACCUMULATED LOSS CARRIED FORWARD

(376,630,017)

(273,581,566)

==========

These accounts should be read in conjunction with the attached notes.

CASH FLOW STATEMENT

FOR THE YEAR ENDED SEPTEMBER 30, 1997

1997

1996

CASH FLOWS FROM OPERATING ACTIVITIES

Note

(Rupees)

LOSS BEFORE TAX

(96,264,996)

(107,574,524)

ADJUSTMENT OF ITEMS NOT INVOLVING

MOVEMENT OF CASH:

Gain on d

(95,318)

Gratuity provision

580,535

897,020

Depreciation

63,476,742

136,882,366

Amortization of deferred cost and preliminary expenses

9,943,448

11,704,539

Financial expenses

83,438,904

81,781,372

157,344,311

131,265,297

----------

CASH GENERATED FROM OPERATIONS

61,079,315

23,690,773

(Increase) in trade debts

(3,547,199)

(5,618,045)

Decrease/(Increase) in balance due from associated

compaines

5,224,980

(124,889,867)

(Increase)/Decrease in stock, stores and spares

(13,117,845)

11,532,535

Increase/(Decrease) in creditors, accrued and other

liabilities

(1,684,458)

12,601,904

Financial expenses paid

(41,671,760)

(40,498,902)

Gratuity paid

(860,584)

(594,236)

(55,656,866)

(47,466,611)

----------

NET CASH GENERATED FROM OPERATING ACTIVITIES

5,422,449

(23,775,838)

CASH FLOWS FROM INVESTING ACTIVITIES

Additions to fixed assets

(12,750,440)

(10,762,404)

Sale proceeds of fixed assets

586,909

Deferred cost - Quota sold/(purchased)

9,197,238

(9,736,560)

(2,966,293)

(20,498,964)

----------

NET CASH USED IN INVESTING ACTIVITIES

2,456,156

(44,274,802)

CASH FLOWS FROM FINANCING ACTIVITIES:

Repayment of lease

(3,149,246)

(1,373,623)

Repayment of long term loan

(4,000,000)

(6,000,000)

NET CASH USED IN FINANCING ACTIVITIES

(7,149,246)

(7,373,623)

----------

Net (decrease) in cash and cash equivalents

(4,693,090)

'(51,648,425)

Cash and cash equivalents at the beginning of year

(260,076,715)

'(208,428,290)

----------

CASH AND CASH EQUIVALENTS AT END OF THE YEAR

(264,769,805

(260,076,715)

=========

NOTES TO THE ACCOUNTS

FOR THE YEAR ENDED SEPTEMBER 30, 1997

1. NATURE AND STATUS OF THE COMPANY

Service Fabrics Limited was incorporated in Pakistan on December 01,1987 as a Public Limited Company

under the Companies Ordinance, 1984. The shares of the Company are quoted on the Karachi and Lahore

Stock Exchanges. Principal business of the company is manufacturing and sale of fabrics.

2. GOING CONCERN ASSUMPTION

These financial statements are prepared under the going concern assumption. This is subject to

the continued support of the financial institutions and favourable economic conditions for the

textile sector in the near future. Restructuring of loan is under consideration by the bank.

3. SIGNIFICANT ACCOUNTING POLICIES

3.1 Accounting convention

These accounts have been prepared under the historical cost convention as modified by the

revaluation of certain fixed assets.

3.2 Fixed capital expenditure

Fixed assets are stated at cost less accumulated depreciation except freehold land,

which is stated at revalued cost and plant and machinery which is stated at revalued

cost less subsequent accumulated depreciation.

Depreciation is charged to income applying reducing balance method. No depreciation

is charged on assets disposed off during the year. Full year's depreciation is charged on

additions during the first half of the year. The annual rates of depreciation are as follows:

Depreciation rates

%age

Factory building - on freehold land

Plant and machinery

Furniture, fitting and equipment

Electric fittings, equipment and other appliances

Vehicles

Tubewell

Maintenance and normal repairs are charged to income as and when incurred, while major

renewals and improvements are capitalized. Gain or loss on disposal of operating fixed assets

is included in income currently.

3.3 Stores, spares and stocks

The basis of valuation of stores, spares and stocks are as follows:

Stores and spares

These are valued at average cost.

Raw material and work

These are valued at the lower of average cost

in process

and net realizable value determined generally on

FIFO basis.

Finished goods

These are valued at the lower of average cost

and net realizable value. Cost in relation to

finished goods includes prime cost and

appropriate proportion of production overheads.

Net realizable value signifies the estimated

selling price in the ordinary course of business

less costs necessary to effect the sale.

3.4 Preliminary expenses

These represent the Company formation and other related expenses. These are being written

off over a period of five years after commencement of commercial operations.

3.5 Staff retirement benefits

The company operates an unfunded gratuity scheme covering all employees, payable on

termination or retirement of employees. The provision is made annually on the basis of length of

service and existing pay of the employees to cover the obligation under the scheme.

3.6 Deferred costs

Deferred costs represent export quota purchased by the company, which is stated at cost. This

is written off over a period of 5 years commencing from the year in which it is purchased as the

benefit is expected to be derived over this period.

3.7 Foreign currencies

Transactions in foreign currencies are translated into Pak rupees at the rate prevailing on the

date of transaction while assets and liabilities are translated into Pak rupees at the exchange

rate ruling at the year end.

Exchange differences on loans utilized for the acquisition of plant and machinery are capitalized

up to the date of commissioning of the assets.

All other exchange differences are included in profit currently.

3.8 Capitalization of borrowing costs

Borrowing costs relating to loans used for capital expenditure prior to commencement of

commercial production along with any rescheduling effect are capitalized.

3.9 Assets subject to finance leases

Assets subject to finance leases are stated at the lower of present value of minimum lease