Chakwal Spinning Mills Limited- Annual Reports 2004

CHAKWAL SPINNING MILLS LIMITED

ANNUAL REPORT 2004

DIRECTORS' REPORT

The Directors are pleased to present before you the audited accounts for the year ended September 30, 2004.

The Company's net sales during the year showed a decline of Rs.61.60 million as compared to the preceding year,

decrease is mainly due to partial closure of facilities for installation and erection of new Ring Spinning Frames

imported during the year, shift to the production of finer counts and decrease in the number of orders executed in

knitting and stitching unit. The gross margins remained under pressure as a result of sharp increase in the prices

of raw material without commensurate increase in the selling price of yarn. Expenses were largely kept under

control and after accounting for administrative expenses of Rs.22.812 million (2003: Rs.25.787 million) selling

expenses of Rs.5.768 million (2003: Rs.10.938 million) and financial expenses of Rs.22.64 million (2003: Rs.31.40

million), the company suffered a pre tax loss of Rs. 10.74 million. The earnings per share of the company during the

year was (Rs. 0.86) as compared to (Rs. 4.25) of the last year.

The cotton prices both internationally and locally after attaining all time high, receded in the second half of the

financial year, however, most of the companies have procured cotton equal to whole year's consumption and are

now languishing under the burden of high material cost. In tandem with the decrease in cotton prices the yarn

prices have also drastically come down making the situation even worse. The management in view of the situation

has shifted the focus to the production of finer counts of yarn. Frequent increase in the polyester staple fibre prices

has put additional pressure on the industry.

During the current year, the country is expecting a bumper cotton crop, the indigenous cotton is of good quality and

the price both on the domestic and international front is competitive. The company intends to fully capitalize the

situation. However, the prices of Polyester Staple fibre continue to rise. The company is also working on the gradual

balancing and modernization plan and has recently upgraded the cone winding machinery. Plans have also been

finalized for import of gas fired generators thereby enabling to drastically reduce the electricity cost. The modernization

of machinery shall continue in future also. Similarly, concentrated efforts are being made to improve the working

efficiencies of the knitting and stitching unit in order to focus on the manufacture of value added goods.

The company during the year successfully restructured and negotiated the financial facilities and the rate of markup

on the facilities was considerably reduced. Similarly expensive long term debt was also swapped with a term

financial facility at a rate considerably lower than the previous rate. The full impact of such reduction will be evident

in the next financial year as the facility was swapped in the last quarter of the current financial year. The Directors

are fully aware of the financial health of the company and are taking steps to improve the financial position of the

company. The enhancement of issued and paid up capital that was deferred last year will betaken up this year. The

auditors' observation regarding the ability of the company to continue as a going concern is largely mitigated by the

above explanation. The directors believe that consequent to the investment in balancing and modernization of the

company, reduction in high priced loans and decline in interest rates, the company will be able to continue its

operation for the foreseeable future.

Corporate & Financial Reporting Framework:

We are pleased to report that your company has taken necessary steps to comply with the provisions of Code of

Corporate Governance as incorporated in the listing regulations of the Stock Exchanges.

We give below our statement on Corporate and Financial Reporting Framework:

• The financial statements prepared by the management of the company for the year ended September 30,

2004 present fairly its state of affairs, the results of its operations, cash flows and changes in equity;

• Proper books of account of the company have been maintained;

• Appropriate accounting policies have been consistently applied in preparation of financial statements and

accounting estimates are based on reasonable and prudentjudgment;

• International Accounting Standards (IAS) as applicable in Pakistan have been followed in preparation of

financial statements and departure if any has been adequately disclosed;

• The system of internal control is sound in design and has been effectively implemented. The process of

review will continue and any weakness in controls will be removed;

• In the light of explanations discussed in the report, the directors consider that there are no significant

doubts upon the company's ability to continue as a going concern;

• There has been no material departure from the best practices of corporate governance as detailed in listing

regulations;

Statement of Compliance with Code of Corporate Governance

This -statement is being presented to comply with the Code of Corporate Governance contained in the listing

regulations of Karachi & Lahore Stock Exchanges for the purpose of establishing a framework of good governance,

whereby a listed company is managed in compliance with the best practices of corporate governance.

The company has applied the principles contained in the Code in the following manner:

1. The company encourages the representation of independent non-executive directors on its Board of Directors.

At present the Board includes five non Executive Directors and one independent non-executive director

representing institutional equity interest.

2. It is confirmed that none of the directors is serving as a director in more than ten listed companies,

including this company.

3. All the resident directors of the company are registered as taxpayers and none of them has defaulted in

payment of any loan to a banking company, a DPI or an NBFI or, being a member of stock exchange, has

been declared as a defaulter by that stock exchange.

4. Two casual vacancies occurred in the Board on June 16, 2004 and August 04, 2004 were filled up by the

directors within 30 days thereof.

5. The company has prepared a 'Statement of Ethics and Business Practices' which has been signed by all

the directors and employees of the company.

6. The Board has developed a vision statement, overall corporate strategy and significant policies of the

company. A complete record of particulars of significant policies alongwith the date on which these were

approved or amended has been maintained.

7. All the powers of the Board have been duly exercised and decisions on material transactions have been

taken by the Board. The remuneration payable to Chief Executive was approved by the shareholders in

Annual General Meeting.

8. The meetings of the Board were presided over by the Chief Executive and the Board met six times during

the year. Written notices of the Board meetings, alongwith agenda were circulated at least seven days

before the meetings. The minutes of the meetings were appropriately recorded and circulated.

9. All the Directors on the Board are fully conversant with their duties and responsibilities as Director of

corporate bodies. The Chief Executive recommends that the members of the Board should approach him,

should they feel any necessity to conduct other orientation courses in this regard.

10. The Board approved appointment of Chief Financial Officer and his remuneration. In future appointments of

Chief Financial Officer, Company Secretary and Internal Auditor, their remuneration and terms & conditions

will be approved by the Board as determined by CEO.

11. The directors' report for the year ended September 30, 2004 has been prepared in compliance with the

requirements of the Code and fully describes the salient matters required to be disclosed.

12. The financial statements of the company were duly endorsed by CEO and CFO before approval of the

Board.

13. The directors, CEO and executives do not hold any interest in the shares of the company other than that

disclosed in the pattern of shareholding.

The key financial data of last six years is annexed;

There are no outstanding statutory payments on accounts of taxes, duties, levies or charges except those

reflected in Note No. 10 to the audited accounts;

Because of loss as explained in Directors' Report, dividend is not applicable;

The company operated an un-funded and unapproved gratuity scheme. The provision is made annually to

cover the obligations under the scheme as at the end of the financial year;

During the year under review six meetings of the Board of Directors were held and the attendance of each

Director was as under:

Name of Directors No. of Board Meetinqs Attended

Khawaja Mohammad Jawed

5

Khawaja Mohammad Jahangir

5

Khawaja Mohammad Tanveer

6

Khawaja Mohammad Kaleem

4

Khawaja Mohammad Nadeem

5

Khawaja Mohammad Naveed

6

Mr. Farooq Hassan

Nil

Mr. Anis Wahab Zuberi

Nil

Khawaja Mansoor Mukhtar Shah

Nil

Mr. Muhammad Imran Khalil (Nominee NIT)

Nil

(Leave of absence was granted to the Directors who could not attend the meetings due to

pre-occupation.)

Mr. Anis Wahab Zuberi was nominated by NIT in place of Mr. Farooq Hassan and was elected as a director

of the company in the election held on January 31, 2004. Mr. Anis Wahab Zuberi resigned on 16-06-2004

and Khawaja Mansoor Mukhtar Shah was co-opted in his place on 12-07-2004. Subsequently Khawaja

Mansoor Mukhtar Shah also resigned on 04-08-2004 and Mr. Muhammad Imran Khalil was co-opted in his

place on 25-08-2004.

The pattern of shareholding as on 30-09-2004 and its disclosure as required in the Code of Corporate

Governance is annexed with this report;

In compliance with directions of Central Board of Revenue, contained in SRO 684 (l)/2004, dated August

10,2004, regarding change in the close of accounting year of Textile Companies from September to June,

the next annual accounts after change of the accounting year, shall be prepared for nine months ending on

June 30, 2005 and thereafter, close of the accounting year will be June 30, every year.

Auditors

The auditors of the Company Messrs. M. Hussain Chaudhury & Co., Chartered Accountants retire and being

eligible, offer themselves for re-appointment. The Audit Committee has recommended re-appointment of the same

auditors.

Acknowledgement

Your directors are pleased to put on record their appreciation and gratitude to the executives, officers, staff members

and workers of the company in performance of their duties. Your directors would also like to put on record their

profound and sincere gratitude to valued customers, regulators, external auditors, bankers and our shareholders.

REVIEW REPORT TO THE MEMBERS ON STATEMENT

OF COMPLIANCE WITH BEST PRACTICES OF

THE CODE OF CORPORATE GOVERNANCE

We have reviewed the Statement of Compliance with the best practices contained in the Code of Corporate Governance

prepared by the Board of Directors of Chakwal Spinning Mills Limited, to comply with the Listing Regulation

No. 37 (ChapterXI) and No. 40 (Chapter XIII) of the Karachi Stock Exchange and Lahore Stock Exchange respectively,

where the Company is listed.

The responsibility for compliance with the Code of Corporate Governance is that of the Board of Directors of the

Company. Our responsibility is to review, to the extent where such compliance can be objectively verified, whether

the Statement of Compliance reflects the status of the Company's compliance with the provisions of the Code of

Corporate Governance and report if it does not. A review is limited primarily to inquiries of the Company personnel

and review of various documents prepared by the Company to comply with the Code.

As part of our audit of the financial statements we are required to obtain an understanding of the accounting and

internal controls systems sufficient to plan the audit and develop an effective audit approach. We have not carried

out any special review of the internal control system to enable us to express an opinion as to whether the Board's

statement on internal control covers all controls and the effectiveness of such internal controls.

Based on our review, nothing has come to our attention which causes us to believe that the Statement of Compliance

does not appropriately reflect the Company's compliance, in all material respects, with the best practices contained

in the Code of Corporate Governance as applicable to the Company for the year ended September 30, 2004.

The company has complied with all the corporate and financial reporting requirements of the Code.

The Board has formed an Audit Committee. It comprises three members, all the members are non-executive

directors including the Chairman of the Committee.

The meetings of the Audit Committee were held prior to approval of interim and final results of the Company

and as required by the Code. The terms of references of the committee have been formed and advised to

the committee for compliance.

The Board has set up an effective internal audit function.

The statutory auditors of the company have confirmed that they have been given satisfactory rating under

the quality control review programme of the Institute of Chartered Accountants of Pakistan, that they or any

of the partners of the firm, their spouses and minor children do not hold shares of the Company and that the

firm and all its partners are in compliance with International Federation of Accountants (IFAC) guidelines on

code of ethics as adopted by Institute of Chartered Accountants.

The statutory auditors or the persons associated with them have not been appointed to provide other

services except in accordance with the listing regulations and the auditors have confirmed that they have

observed IFAC guidelines in this regard.

We confirm that all other material principles contained in the Code have been complied with.

BALANCE SHEET

Note

2004

2003

(Rupees)

CAPITAL AND LIABILITIES

Share Capital and Reserves

20,000,000 (2003: 20,000,000) ordinary shares

of Rs. 10/-each

200,000,000

Issued, subscribed and paid up share capital

3

113,256,000

Investment revaluation surplus

-

12,548,000

Accumulated Loss

-257,638,238

-252,296,999

-144,382,238

-126,492,999

Surplus on Revaluation of Fixed Assets

4

88,680,189

95,732,359

Non Current Liabilities

Long term loans

5

490,057,266

458,155,607

Deferred taxation

6

47,124,817

49,197,400

Gratuity

7

8,135,181

6,894,534

545,317,264

514,247,541

Current Liabilities

Current portion of long term liabilities

5

70,396,475

40,678,520

Short term borrowings

8

184,052,847

88,354,064

Due to directors

9

27,468,149

7,740,779

Creditors, accrued charges and other liabilities

10

202,857,246

165,231,115

Provision for taxation

11

3,914,247

1,608,224

488,688,964

303,612,702

CONTINGENCIES AND COMMITMENTS

12

-

978,304,179

787,099,603

AUDITORS' REPORT TO THE MEMBERS

We have audited the annexed balance sheet of CHAKWAL SPINNING MILLS LIMITED as at September 30, 2004

and the related profit and loss account, cash flow statement and statement of changes in equity 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.

It is the responsibility of the Company's management to establish and maintain a system of internal control, and

prepare and present the above said statements in conformity with the approved accounting standards and the

requirements of the Companies Ordinance, 1984. Our responsibility is to express an opinion on these statements

based on our audit.

We conducted our audit in accordance with the auditing standards as applicable in Pakistan. These standards

require that we plan and perform the audit to obtain reasonable assurance about whether the above said statements

are free of any material misstatement. An audit includes examining, on a test basis, evidence supporting the

amounts and disclosures in the above said statements. An audit also includes assessing the accounting policies

and significant estimates made by management, as well as, evaluating the overall presentation of the above said

statements. We believe that our audit provides a reasonable basis for our opinion and, after due verification, we

report that:

(a) in our opinion, proper books of accounts have been kept by the company as required by the Companies

Ordinance, 1984;

(b) inouropinion:-

(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;

(c) 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, cash flow statement and statement of changes in equity together with the

notes forming part thereof conform with approved accounting standards as applicable in Pakistan, and,

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 September 30, 2004 and of the loss, its

cash flows and changes in equity for the year then ended; and

(d) in our opinion, no zakat was deductible at source under the Zakat and Usher Ordinance, 1980

Without qualifying our opinion, we draw attention to Note 1.2 to the financial statements, which indicates that the

Company has incurred net loss of Rs. 10.009 million during the year and has accumulated losses of Rs. 257.638

million as at September 30, 2004. Its current liabilities exceed its current assets by Rs. 85.508 million as at

balance sheet date. These conditions indicate the existence of a material uncertainty which may cast significant

doubt about the Company's ability to continue as a going concern.

PROFIT AND LOSS ACCOUNT

FOR THE YEAR ENDED SEPTEMBER 30, 2004

Note

2004

2003

(Rupees)

Sales

22

681,204,844

742,806,926

Cost of goods sold

23

-659,751,685

-719,540,904

Gross Profit

21,453,159

23,266,022

Operating Expenses

Administrative and general

24

22,812,257

25,787,249

Selling and distribution

25

5,767,895

10,937,806

-28,580,152

-36,725,055

Operating Loss

-7,126,993

-13,459,033

Other income / charges

26

19,027,926

7,011,591

Financial charges

27

-22,639,630

-31,402,283

Loss Before Taxation

-10,738,697

-37,849,725

Taxation

28

730,080

-10,236,216

Loss After Taxation

-10,008,617

-48,085,941

Accumulated loss brought forward

-252,296,999

-271,214,410

Accumulated Loss

-262,305,616

-319,300,351

Transferred from surplus on revaluation of fixed assets

in respect of incremental depreciation charged to:

Prior years

4

-

61,964,816

Current year - Net of deferred taxation

4

4,667,378

5,038,536

4,667,378

67,003,352

Accumulated Loss Transferred to Balance Sheet

-257,638,238

-252,296,999

Earnings per Share - Basic

-0.88

-4.25

AS AT SEPTEMBER 30, 2004

Note

2004

2003

(Rupees)

PROPERTY AND ASSETS

Tangible Fixed Assets

13

553,379,160

461,985,702

Operating fixed assets

14

18,123,592

12,723,082

Capital work in progress

571,502,752

474,708,784

15

-

13,271,500

Long Term Investments

16

3,620,246

1,926,158

Long Term Deposits

Current Assets

17

8,433,826

7,094,460

Stores and spares

18

213,340,393

49,617,753

Stock in trade

19

19,322,567

93,651,382

Trade debts

Advances, deposits, prepayments and

20

36,181,669

56,898,390

other receivables

21

125,902,726

89,931,176

Cash and bank balances

403,181,181

297,193,161

978,304,179

787,099,603

2004

2003

(Rupees)

CASH FLOW FROM INVESTING ACTIVITIES

Fixed capital expenditure

-132,981,030

-35,987,303

Capital work in progress

-5,400,510

-11,671,966

Long term deposits

-1,694,088

-539,268

Sale proceeds of fixed assets

9,272,100

3,216,148

Sale proceeds of investments

17,430,042

-

Interest received

1,619,004

3,701,788

Dividend received

380,000

505,000

Net Cash used in Investing Activities

-111,374,482

-40,775,601

CASH FLOW FROM FINANCING ACTIVITIES

Long term loans

61,619,614

160,812,903

Short term borrowings

95,698,783

-68,176,635

Dividends paid

-

-2,222

Due to directors

19,727,370

2,368,831

Net Cash Flow from Financing Activities

177,045,767

95,002,877

Net Increase in Cash and Cash Equivalents

35,971,550

13,588,690

Cash and Cash Equivalents at the Beginning of the year

89,931,176

76,342,486

Cash and Cash Equivalents at the End of the Year

125,902,726

89,931,176

CASH FLOW STATEMENT

FOR THE YEAR ENDED SEPTEMBER 30, 2004

2004

2003

(Rupees)

CASH FLOW FROM OPERATING ACTIVITIES

Loss before taxation

-10,738,697

-37,849,725

Adjustments for:

Depreciation

32,576,873

28,837,894

Gratuity

2,864,911

3,068,318

Gain on sale of fixed assets

-261,401

-1,662,000

Gain on sale of investments

-16,706,542

-

Gain on reversal of import duty capitalized

-

-1,951,353

Interest income

-1,887,155

-2,977,611

Dividend income

-380,000

-505,000

Financial expenses

22,639,630

31,402,283

38,846,316

56,212,531