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Bata Pakistan Limited

Annual Report 1998

CONTENTS

Board of Directors

Notice of Meeting

Company's Financial Highlights

Distribution of Revenue - 1998

Operational Statistics

Chairman's Review

Directors' Report to the Members

Auditors' Report to the Members

Balance Sheet

Profit and Loss Account

Cash Flow Statement

Schedule of Net Changes in Operating Assets and Liabilities

Notes to the Accounts

Statement Under Section 237

Pattern of Shareholding

Consolidated Financial Information

Consolidated Balance Sheet

Consolidated Profit & Loss Account

ANNUAL REPORT I. T. I. (PVT) LTD.

Board of Directors

Directors' Report to the Members

Auditors' Report to the Members

Balance Sheet

Profit and Loss Account

Cash Flow Statement

Schedule of Net Changes in Operating Assets and Liabilities

Notes to the Accounts

BOARD OF DIRECTORS

1. MR. A. KELLY

Chairman

2. MR. G. STRICKER

Managing Director

3. MR. J.P. LEE

Director

4. MR. KHALID M. HASSAN

Director

5. SYED MOHAMMAD MOHSIN

Director

6. MALIK MANZOOR HAYAT NOON

Director

7. MR. S. SIBTEY ALI

Director

8. MR. RAZI-UR-RAHMAN KHAN

Director

Company Secretary

Auditors

Salahuddin Niazi

Gardezi & Company

Chartered Accountants

65, Shahrah-e-Quaid-e-Azam, Lahore.

Registered Office & Factory

Bankers

Batapur, G. T. Road

Habib Bank Limited

P.O. Batapur, Lahore

Citibank N. A.

ANZ Grindlays Bank

Emirates Bank International

The Bank of Punjab

National Bank of Pakistan

Bank Alfalah Limited

NOTICE OF MEETING

NOTICE IS HEREBY GIVEN that the 47thAnnual General Meeting of Bata Pakistan Limited

will be held at the Registered Office of the Company at Batapur, District Lahore on 25th

May, 1999 at 10.00 a.m. to transact the following business.

1. To confirm the minutes of 46th Annual General Meeting held on 05th May, 1998.

2. To receive, consider, and adopt the Directors' Report, Audited Accounts of the Company

and Auditors' Reports thereon, for the year ended 31st December, 1998.

3. To appoint Auditors and fix their remuneration for the year ending 31st December, 1999.

By Order of the Board

Batapur

Salahuddin Niazi

LAHORE: February 23,1999

Company Secretary

NOTES:

1. A member entitled to attend and vote at the meeting may appoint any person as his

proxy to attend the meeting and vote instead of him. The proxy shall have the right to

attend, speak and vote in place of the member appointing him at the meeting. A

proxy need not be a member of the Company. Proxy form must be deposited at the

Company's Registered Office not less than 48 hours before the time for holding the

meeting.

2. The shareholders are requested to promptly notify the Company of any change in

their addresses.

3. The Share Transfer Books of the Company will remain closed from 19th to 25th May,

1999 (both days inclusive).

COMPANY'S FINANCIAL HIGHLIGHTS

YEAR ENDED

(RUPEES IN THOUSAND)

% INCREASE/

DECEMBER 31,

1998

1997

(DECREASE)

NET SALES

1,658,759

1,849,328

(10)

RESULT

(LOSS)/PROFIT BEFORE TAX

(116,280)

12,970

(LOSS)/PROFIT AFTER TAX

(124,336)

686

NET RETURN ON TURNOVER %

(7.50)

0.04

CURRENT ASSETS

800,915

882,367

(9)

CURRENT LIABILITIES

551,482

678,492

(19)

CURRENT RATIO

ASSETS: LIABILITIES

1.5:1

1.3:1

DISTRIBUTABLE RESERVES

204,520

328,856

(38)

SHAREHOLDERS EQUITY

280,603

404,939

(31)

NUMBER OF SHARES

7,560

(LOSS)/EARNING PER SHARE

OF RS. 10 EACH

(15.38)

0.09

DISTRIBUTION OF REVENUE 1998

Rs. '000s

REVENUE PAID TO THE GOVERNMENT

318,103

16.02

COST OF SALES EXCLUDING WAGES

AND GOVERNMENT TAXES

1,056,661

53.22

SALARIES, WAGES, BENEFITS AND

WELFARE EXPENSES

358,187

18.04

OVERHEADS

376,920

18.98

TRANSFER FROM APPROPRIATION AC COUNT

(124,336)

(6.26)

GROSS SALES

1,985,535

100.00

CHAIRMAN'S REVIEW

On behalf of the Board of Directors, it gives me great pleasure to welcome you to the Company's 47th Annual

General Meeting and present the Company's Annual Report and financial statements for the year ended 31st

December, 1998.

1998 was one of the most difficult years for the Pakistan economy in recent years. The deteriorating economic

scenario, which started in early 1997, persisted into the year under review. The unprecedented turmoil and

uncertainty in the economy adversely affected the prospects in all sectors. A massive cash flow crunch

developed in public sector institutions. The shortfall in Government revenues persisted so that the

Government debt could not decline. Government spending on all but those items considered absolutely

necessary was curtailed. Inflation hit the poor and the middle classes hard.

In the year under review, various political issues kept cropping up and took on the proportions of a crisis.

This resulted in lower investor confidence and industrial growth almost came to a standstill. Pakistan

stock exchanges saw a massive fall in share values, which remained under pressure due to the reduced

level of economic activity, evidenced by no new scrip being offered to the public during 1998.

In May 1998, Pakistan carried out nuclear tests in reaction to the earlier tests carried out by India. These

tests resulted in various economic sanctions being placed on both countries by the international

community and a freeze on new loans by the lending agencies. Domestically, foreign currency accounts were

frozen and by the end of the fiscal year the Pakistani Rupee had lost 13% of its value compared with a year ago.

The performance of the Company over the year mirrored the general economic slowdown. The year

under review was full of stresses and strains emanating from factors such as wage revisions, domestic

competition and fuel price increases. These adverse factors exerted considerable pressure on the Company's

cost structure on one hand and hampered attainment of higher sales on the other.

The sales during the year under review registered a decline of 10.3% mainly because of reduced export and

wholesale business. The resulting reduction in volume led us for the first time in the history of the Company

to suffer a net loss of Rs.124.3 million.

An increase of 3.4% in operating expenses linked to the decline in sales value resulted in those expenses

representing 25.6% of sales compared with 22.2% in 1997. At the same time, financial charges increased

to 3.2% of sales from 2.1% in the previous year. The Company's debt was restructured during the year in

anticipation of increased scarcity of short-term funds. Rs.150 million was renegotiated as long term finance,

which is not payable until November 2001.

These factors adversely affected the Company's operating costs, while a stagnant market and fierce

competition within the industry did not allow adequate price increases. In addition to the adverse pressure on

margins, the operating environment remained disturbed by numerous strikes and an unsettled law

and order situation. All these factors contributed to the unsatisfactory operating performance of the

Company.

During most of the year, the Company operated with considerable cash constraints due to low sales, an

increase in the upfront margin on opening of letters of credit, prior year tax payments to the Government,

disbursement of voluntary early retirement payments and overdue amounts receivable from distributors and

dealers.

The cost of sales escalated due to the increase in the prices of imported raw materials. The cost of local

inputs also increased, especially in the case of utility services.

The Company made a provision for Rs.75 million for diminution of its long-term investment in its wholly

owned subsidiary - International Tanners & Industries (Pvt) Limited.

During 1998 your Company contributed Rs. 327.3 million to the National Exchequer in the form of

corporate tax, customs duties and other forms of Government taxation. The Company's shares of a

nominal value of Rs.10 per share were quoted at Rs.39 on the last trading day in 1998 on the Karachi Stock

Exchange.

As the prospect of a recession and currency crisis is real and at this time it is difficult to determine the

impact of such a possible crisis, the Directors have decided not to recommend the payment of a dividend

this year. However, we are confident of achieving a turnaround in the Company's performance and our

current business strategy is already producing encouraging results in the early part of 1999.

We are aware that the challenges of the severe competition call for greater imagination and vision. To

promote growth in this highly competitive environment, increasing attention is being focused on

improving our shoeline, service to the customer and standard of quality and at the same time on becoming

more cost efficient.

While 1998 was a very difficult year, I am happy to report considerable improvement in the past few

months with the introduction of many innovative products and a growing number of retail stores of

international standard.

New projects in various footwear categories will further strengthen the Company's reputation and image as a

dynamic trend-setting leader in the market.

After the success of the Bata Bazaar stores at Township, Batapur and Bahawalpur, the Company

opened two other mega stores at Faisalabad and Anarkali, Lahore. A total of Rs.6 million was spent on

their renovation. I am pleased to report that the concept of sophisticated presentation of mass

merchandise in the mega stores, with an exciting and comfortable shopping environment and a self-service

selling system, has proved successful. Customer response to these stores was initially positive and is

increasingly enthusiastic. We are constantly in search of larger stores in good locations in growing markets.

The increasing number of Bata Bazaar stores is making a significant contribution to the enhancement of the

Company's image as the most dynamic and forward-looking footwear marketer in Pakistan.

In Pakistan, we are the only shoe company which has a specialized chain of retail stores exclusively dealing

in children's footwear and accessories under the internationally known brand "Bubblegummers". It

distinguishes us from all other shoe businesses in the country. 14 Stores are being operated under the

Bubblegummers' brand and special corners are being created in Bata Bazaar stores for the display of

footwear under the 'Bubblegummers' brand.

A number of existing stores were totally remodeled to bring them in line with the latest techniques in sell

service and product display. The on-going programme of store renovation saw several Dealers' stores being

modernized in line with the latest sales and display techniques.

At the wholesale level, new Depots were opened at Karachi and Sialkot. To enhance the sales of the

Lahore Depot, a sales office was acquired in the heart of the Shahalam Wholesale Shoe Market and this office

is progressing satisfactorily.

China, Vietnam and Indonesia continue to be our major competitors in export markets. Efforts were made to

develop a shoeline in harmony with the latest trends in different markets. Owing to the general recession

in many export markets, margins were lower. In spite of our best efforts, the export sales were 12.5% lower

compared with the previous year.

In the year under review, the 'Power' Division, organized the "International Power Master Open Golf'

tournament and "Amateur Power Golf" tournament.

More aggressive media campaigns and in-store promotions were conducted at various times during the

year to support our leadership position, stimulate sales during peak selling periods and provide support for

our branded programmes.

The efforts of the Sales Division to satisfy customer requirements were effectively supported by the

production, design, engineering, purchasing, costing and auxiliary groups, which comprise the technical

services of your Company. Due to lower sales, the production capacities of all our units remained

substantially underutilized. The total production of rubber, leather and plastic footwear in 1998 was 12.7

million pairs, of which 10.5 million pairs were produced at Batapur and 2.2 million pairs at the Maraka factory.

I wish to acknowledge here the continued support of Bata Limited of Toronto, Canada, in providing valuable

assistance and services in the technical, commercial and administrative areas.

The range of our training programmes covers the development of the technical and professional skills of

our employees at all levels, as well as the training of our new employees. In the former case there are

opportunities for in-service courses, and courses offered by the management training institutions in Pakistan.

In addition, Bata Limited, Canada and other companies in the Bata Shoe Organization provide

advanced training courses. These training programmes include specialized management

seminars, broad-based future-oriented commercial training and specialized and function-oriented training

for junior and upper levels of employees. Several participants from your Company have attended these

courses in 1998, enhancing their knowledge and experience and thereby enabling them to make a

greater contribution to the progress of your Company.

The Company is investing a considerable amount of time and money into human resources development,

which we consider necessary to keep our employees abreast of the latest developments in the fields of

technology and business administration.

At the beginning of the year, we employed 3,387 persons in all departments of the Company. Under

the Voluntary Retirement Scheme already introduced by the Company, 47 more employees opted for early

retirement. They were paid a total of Rs.10.9 million as retiring benefits. At the close of the year, we had

3,156 employees.

During the year, the newly elected Collective Bargaining Agent ("C.B.A.")served the Company with

a charter of demands on behalf of certain employees of the Company. A two-year agreement, expiring in May

2000, was negotiated and signed with the elected C.B.A., Bata Mazdoor League, which provided

increased benefits and higher incomes. I hope that the Management and the C.B.A. will maintain a

satisfactory relationship to achieve better results for the benefit of all concerned.

The new Millennium is fast approaching and the Year 2000 computer issue presents a significant threat to

the business community. Bata Pakistan is very conscious of the problems affecting its own programmes

and has made arrangements to overcome those problems before the close of 1999.

There have been important changes in the composition of the Board. I was appointed as Chairman of the Board

of Directors of your Company on 25th May, 1998, succeeding Mr. M. Oldroyd who deserves our gratitude

for all his guidance to the Company.

Mr. D. Barton resigned as Director and Managing Director of the Company. I wish to place on record the

Company's appreciation of Mr. Barton's efforts. He has been succeeded by Mr. G. Stricker, whose last

appointment was Managing Director of Bata a.s. in the Czech Republic. He brings with him a wealth of

experience and success in senior positions in the footwear industry.

We continue to reshape various operations and must fully implement our recovery strategy in order to reap

the rewards once the market improves.

While we are taking many remedial steps, there are elements outside our control. It is essential for the

law and order situation in the country to improve if we are to achieve sustained growth in sales and

profitability.

The future prospects of the Company depend very much on economic revival in the country. The economic

indicators so far predict a declining trend and a deeper recession. However, one hopes that the international

lending agencies will come forward and provide much needed assistance to Pakistan. In such a situation,

we can envisage a moderate growth in the economy and some increase in business. Economic growth will

help to create business activity and earning opportunities for the Company.

In conclusion, on behalf of the Board of Directors, I would like to express our appreciation to our valued

customers, shareholders, employees, suppliers and to the Government of the Islamic Republic of Pakistan

for their support to this Company.

A. KELLY

CHAIRMAN

DIRECTORS' REPORT TO THE MEMBERS

1. Your Directors have pleasure in submitting their Report and Statement of Accounts for the year ended

December 31, 1998.

2. The Chairman's Review on page 7 to 9 deals with the year's activities and the Directors of the Company

endorse the contents of the Statement.

3. The financial results of the company are as under:

Rs.'000s

Loss before taxation

(116,280)

Add: Provision for taxation

Current

10,551

Prior years

3,628

Deferred

(6,123)

------------------

8,056

------------------

Loss after tax

(124,336)

From this must be deducted

------------------

Unappropriated profit brought forward from last year

1,856

------------------

(122,480)

The Directors have recommended the following appropriation

Transfer from General Reserve

(124,000)

------------------

Leaving an unappropriated profit to be carried forward to next year

1,520

==========

4. The pattern of shareholding is provided on page 33

5. Loss per share of Rs.10 each is Rs 15.38

6. The consolidated financial information as required by SSAP-2 is provided on page 34

7. Messrs Gardezi and Company retire and being eligible, offer themselves for reappointment as

Auditors of the Company.

On behalf of the

BOARD OF DIRECTORS

Batapur

G. STRICKER

LAHORE: February 23, 1999.

MANAGING DIRECTOR

AUDITORS' REPORT TO THE MEMBERS

We have audited the annexed balance sheet of Bata Pakistan Limited as at December 31, 1998 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 purpose 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 December 31,

1998 and of the loss and cash flows for the year then ended; and

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

by the company and deposited in the Central Zakat Fund established under Section 7 of that

Ordinance.

GARDEZI & CO.

LAHORE: February 23,1999

CHARTERED ACCOUNTANTS

BALANCE SHEET AS AT DECEMBER 31, 1998

1998

1997

Note

Rs. '000s

CAPITAL AND RESERVES

Authorised capital

10,000,000 ordinary shares of Rs. 10 each

100,000

==========

Issued, subscribed and paid up capital

75,600

Reserves and surplus

Capital reserve

483

General reserve

203,000

327,000

Unappropriated profit

1,520

1,856

------------------

205,003

329,339

------------------

280,603

404,939

LONG TERM FINANCE

150,000

DEFERRED LIABILITIES

Provision for gratuity

53,117

51,190

Deferred taxation

6,123

------------------

53,117

57,313

LONG TERM DEPOSITS

12,794

12,120

OBLIGATION UNDER FINANCE LEASE

33,970

8,478

CURRENT LIABILITIES AND PROVISIONS

Short term running finances

175,562

258,530

Current portion of obligation under finance lease

20,063

8,263

Creditors, accrued and other liabilities

355,857

404,139

Proposed dividend

7,560

------------------

551,482

678,492

CONTINGENT LIABILITIES AND CAPITAL

COMMITMENTS

------------------

1,081,966

1,161,342

==========

The annexed notes form an integral part of these accounts.

A. KELLY

CHAIRMAN

1998

1997

Note

Rs. '000s

FIXED CAPITAL EXPENDITURE

Operating fixed assets

255,730

232,861

Capital work in progress

1,617

------------------

255,730

234,478

LONG TERM INVESTMENTS

12,013

13,150

LONG TERM LOAN

4,846

25,000

LONG TERM DEPOSITS AND PREPAYMENTS

8,462

6,347