Fazal Cloth Mills Limited- Annual Reports 2004

FAZAL CLOTH MILLS LIMITED

ANNUAL REPORT 2004

Board of Directors

Sh. Naseem Ahmad

Chairman & Chief Executive

Sh. Amir Naseem

Nominee NIT Ltd.

Mr. Rehman Naseem

Mr. Fazal Ahmad Sheikh

Mr. Faisal Mukhtar

Mrs. Farrukh Mukhtar

Mr. Mian Mumtaz Abdullah

Audit Committee

Sh. Naseem Ahmad

Chairman

Mr. Rehman Naseem

Member

Mr. Faisal Mukhtar

Member

Company Secretary

Mr. M.D. Kanwar

Chief Financial Officer

Mr. Faizan-ul-Haq

Auditors

M/s. Yousuf, Adil, Saleem & Co.

Chartered Accountants

Bankers

Habib Bank Limited

Askari Commercial Bank Limited

Soneri Bank Limited

Bank Al Falah Limited

National Bank of Pakistan

Meezan Bank Limited

Bank AI-Habib Limited

Offices:

1st Floor, International Plaza, Bohra Street, Multan Cantt. Pakistan

Ph.No. 061-588733-587632 Fax: 00 92 61 541832.

E-mail: fazalgrp@brain.net.pk.

marketinq@fazalcloth.com

Mills:

i) Fazal Nagar, Jhang Road, Muzaffargarh-Pakistan

Ph. No.0661-422216-18 Fax: 00 92 661 422217

E-mail: fcml@brain.net.pk

ii) Qadirpur Rawan Bypass, Khanewal Road, Multan -Pakistan

Ph. No. 061-578022-23,578097 Fax: 00 92 61 578098

7. The organization as an important role towards society, shareholders, creditors, employees and

other sectors of the business community, as well as the government and the public at large for

sound financial accounting, reporting effective financial management and variety of business and

taxation matters. Sound business practices of the organization has an impact on the economic

well being of the country.

8. It is in the best interest of the organization that services are provided at the highest level of

performance and in accordance with ethical standards to ensure continued good performance.

9. In formulating this code of ethics, the Board of Directors has considered the public service and

employees expectations of the ethical standards of the organization.

OBJECTIVES OF THE ORGANIZATION

10. The code recognizes that the objectives of the organization are to work to highest standards of

professionalism, to attain the highest levels of performance and generally to meet the interested

group requirements set out above. These objectives require four basic needs to be met:

10.1 Credibility

In the whole of society there is a need for credibility in information and information systems.

10.2 Professionalism

The customers, employees and other interested parities can rely on the professionalism of

the organization.

10.3 Quality of Services

There is a need for assurance that all services provided are carried out to the highest

standards of performance.

10.4 Confidence

Interested groups should be able to feel confident that there exists a framework of

professional ethics, which governs the provision of services provided by the organization to

the community and the country.

FUNDAMENTAL PRINCIPLES

11. In order to achieve the objectives of the organization, employer and employees have to observe a

number of prerequisites or fundamental principles.

12. the fundamental principles are :

12.1 Integrity

An interested group connected with the organization should be straight forward and honest

in performing professionals services.

12.2 Objectivity

The organization should be fair and should not allow prejudice or bias or influence of other

to override objectivity

12.3 Professional Competence, Due Care and Timeliness

An organization should perform and provide goods and services with due care,

competence and diligence and has a continuing duty to maintain a level required to

ensure that a customer or employee receives goods and service based on up to date

product line. Further all industrial obligations should be adhered to for timely

compliance.

12.4 Confidentiality

The organization should respect the confidentiality of information acquired during the

course of providing goods and services and should not use or disclose any such

information without proper and specific authority or unless there is a legal or professional

right or duty to disclose.

12.5 Organizational Behavior

The organization should act in a manner consistent with the good reputation of the

industry and refrain from any conduct, which might bring discredit to the company.

12.6 Technical Standards

The organization should provide goods and services in accordance with the relevant

technical and professional standards. The organization has a duty to carry out with care

and skill, the instructions of the customers insofar as they are compatible with the

requirements of commercial trade practice. In addition they should conform with the

technical and professional standards promulgated by :

PCSIR (Pakistan Council for Scientific & Industrial Research)

International Standards

Relevant Legislation

13. In addition to observing the fundamental principles listed above; the organization should be and

appear to be free of any interest, which might be, regarded, whatever its actual effect, as being

incompatible with integrity, objectivity and independence.

14. The objectives as well as the fundamental principles are of a general nature and are not intended

to be used to solve the organization's ethical problems in a specific case, however, the code

provides some guidance as to the application in practice of the objectives and the fundamental

principles with regard to a number of typical situations occurring in the industrial process and

company procedure.

COMPARISON OF LAST SIX YEARS OF OPERATIONS:

Salient features of the financial performance of the company for last six years are reproduced

below:

Particulars

2004

2003

2002

2001

2000

1999

Production in Kgs (000)

24,411

21,924

20,047

15,170

13,237

12,311

Sales net

(Rs. In million)

3,851.88

2,820.26

2,363.75

1,903.90

1,553.00

1,353.20

Gross Profit

(Rs. In million)

437.796

318.853

263.004

259.345

297.648

144.373

Net Profit before tax

(Rs. In million)

180.841

154.868

52.612

52.068

154.31

31.335

Provision for taxation

including deferred tax

(Rs. In million)

79.546

62.428

12.113

12.757

47.149

16.335

Profit after taxation

(Rs. In million)

101.295

92.439

40.499

39.311

107.161

15

Un-appropriated profit

brought forward

(Rs. In million)

426.364

244.984

216.84

194.161

130.243

124.747

Profit available for

Appropriation

(Rs. In million)

426.364

337.424

257.339

233.472

237.404

139.747

Dividend per share

1

1.75

4.55

1.5

Gross Profit ratio

11.37%

11.31%

11.30%

13.62%

19.17%

10.67%

Net profit ratio

4.69%

5.49%

1 .74%

2.06%

6.90%

1.11%

Earnings before interest,

tax and depreciation

allowance (EBITDA)

(Rs. In million)

478.521

394.749

331.826

329.335

292.316

154.379

DIRECTORS REPORT

It is a pleasure to welcome you to 39th Annual General Meeting of the Company and place before

you the Audited Financial Statement of the Company for the year ended September 30, 2004.

FINANCIAL AND OPERATING RESULTS:

During the year under review, sales of your Company have increased by 33% from Rs. 2,900(M) to

Rs. 3,851 (M) and after tax profit from Rs. 92.440(M) to Rs.101.295(M) after charging depreciation

of Rs. 200(M) (2003:Rs.126.601 (M)) and contribution to Workers Profit Participation Fund of Rs.

9.332 (M) (2003: Rs.8.159(M));

The Tax provision for the year under review includes provision for Deferred Taxation of Rs.54.700

(M) as compared to Rs.43.726 (M) charged during the previous year. This provision has been

made in compliance with International Accounting Standard - 12 "Income Taxes". This provision is

a non cash expenses and Company does not expect to pay this amount in near future owing to its

Balancing & Modernization program;

Earning Per Share (EPS) increased to Rs.8.20 (2003:Rs. 7.48 ). Earning per share before interest

& tax increased to Rs. 22.54 (2003:Rs.21.70). Earning Per Share Before Interest, Tax and

Depreciation increased to Rs.38.73 (2003:Rs.31.96).

Your Directors and Chief Executive Officer, Chief Financial Officer, Company Secretary, their

spouses and minor children have made no transaction in Company's shares.

During the year 2003-2004, four board meetings were held which were attended as follow :

Name

No of Meeting Attended

Sh. Naseem Ahmad

Chairman/Chief Executive 3

Mr. Shamsuddin Khan

Nominee of NIT Ltd. 2

Sh. Amir Naseem

3

Mr. Rehman Naseem

4

Mr. Fazal Ahmad Sheikh

4

Mr. Faisal Mukhtar

1

Mrs. Farrukh Mukhtar

1

The Company plans to continue BMR of Spinning Units as well as set up a new Weaving Mills

capable of producing greige fabric and terry towels.Capital Investment of Rs. 1,100 (M) will be

required for these projects. To fund this amount, the Directors have proposed issuing Prefference

Shares valuing Rs. 300 (M) and/ or 50% Right Shares face value Rs. 10 per share at a premium of

Rs. 20 per share. As all quotas governing textile trade.have been abolished on 1 January, 2005,

your Directors believe investment in production of value added textile goods will be a profitable and

correct approach for the Company to follow.

DIRECTORS:

All the retiring Directors shall be eligible to offer themselves for re-election. The Board of Directors

have fixed the number of Directors to be elected at Seven.

AUDITORS:

M/s.Yousaf, Adil, Saleem & Co., Chartered Accountants,auditors of the Company retire and being

eligible offers themselves for reappoitment for the year 2004-2005.

MANAGEMENT/LABOUR RELATIONS:

The management/labour relations remained warm and cordial throughout the year under review.

We place great importance on our employees. We continue to invest in the professional

development and improvement of skills of our human resources, since we believe that by investing

in our people we invest in our future. Company' s human resource policy is based on the underlying

values of fairness, merit, equal opportunity and social responsibility. Complying with our human re-

source policies we do note hire any child labour.

The employees and management of the company continued to make joint efforts to keep up high

standards of productivity. By the grace of Allah the Almighty, relationship of management and

employees continued to remain in total harmony.

The board wishes to place on record its deep appreciation to all of them for their hard work and

dedication to achieve these results.

CORPORATE GOVERNANCE:

As required by the code of corporate governance the board of directors hereby declare that:

* The financial statements for the year ended September 30, 2004 present fairly the

state of affairs, the result of its operations, cash flows and changes in equity;

* Proper bocks of account have been maintained;

* Appropriate accounting policies have been consistently applied in preparation of

financial statements for the year ended September 30, 2004 and accounting

estimates are based on reasonable and prudent judgment;

* International Accounting Standard (IAS) as applicable in Pakistan, have been

followed in preparation of financial statements;

The system of internal control is sound in design and has been effectively

* implemented and monitored;

* There is no doubt about the company to continue as going concern;

* There has been no material departure from best practices of corporate governance

as detailed in listing regulations;

PATTERN OF SHAREHOLDING:

The pattern of share holding as on September 30, 2004 is annexed.

DIVIDEND/BONUS SHARES

Your Directors are pleased to propose Bonus Shares at 20% (2003: Nil) and a cash dividend of

Rs.NIL per share (NIL%) out of the profit of the Company for the year ended September 30, 2004.

FUTURE OUTLOOK:

During the year under review Pakistan's Economy continued to strengthen and all major economic

indicators remained stable. However, lately inflation has increased to a high level causing increase

in interest rates. 6 Month Kibor has increased from 2% to 5.75%. Although the current interest

rate level is sustainable, any further increase will be harmful for the Economy as well as your

Company. With the Grace of God, Pakistan has a bumper raw cotton crop (Cotton Arrivals till 31-

12-2004 exceed 13 Million bales). Due to this Raw Cotton prices have decreased to Rs. 2,000 per

maund compared to Rs. 3,200 per maund last year. As cotton constitues a major component of

costs, this decrease will help improve net margins. Installed capacity of the Company has

increased to 124,164 spindles (2003: 91,892 spindles). With this capacity, sales will rise further.

Your Directors remain cautiously optimistic about achieving better results during the current year.

11. The directors' report for this year has been prepared in compliance with the requirements of the

Code and it 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 by

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.

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

15. The Board has formed an audit committee which comprises of three members of whom two are non-

executive directors.

16. The meetings of the audit committee were held at least once every quarter prior to approval of

quarterly, interim and final results of the Company and as required by the Code. The terms of

reference of the committee have been formulated and advised to the committee for compliance.

17. The Board has set-up an effective internal audit function.

18. The statutory auditors of the Company have confirmed that they have been given a satisfactory

rating under the quality control review program of the Institute of Chartered Accountants of

Pakistan (ICAP), and 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 of Pakistan.

19. 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.

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

STATEMENT OF COMPLIANCE WITH BEST

PRACTICES OF CODE OF CORPORATE GOVERNANCE

The statement is being presented to comply with the Code of Corporate Governance contained in

Listing Regulation No.37 of Karachi Stock Exchange (Guarantee) Limited and Chapter XIII of the

Lahore Stock Exchange (Guarantee) Limited 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 representation of independent non-executive directors; at present the

Board includes three independent non-executive directors.

2. The Directors have confirmed that none of them is serving as a director in more than ten listed

companies, including this Company.

3. To the best of our knowledge 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 a NBFI or,

being a member of a stock exchange, has been declared as a defaulter by that stock exchange.

4. No casual vacancy occurred in the Board during the current year.

5. The Company has prepared a 'Statement of Ethics and Business Practices', which has been signed

by all the directors and key employees of the company.

6. The Board has developed a vission/mission statement, overall corporate strategy and significant

policies of the Company. A complete record of particulars of significant policies along with the

dates on which they were approved or amended has been maintained.

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

including appointment and determination of remuneration and terms and conditions of employment

of the CEO and other executive directors, have been taken by the Board.

8. The meetings of the Board were presided over by the Chief Executive and, in his absence, a

director elected by the Board for this purpose and the Board met at least once in every quarter.

Written notices of the Board meetings, along with agenda were circulated at least seven days

before the meetings. The minutes 9f the meeting were appropriately recorded and circulated.

9. Directors are well conversant with the Listing Regulations and legal requirements and as such are

fully aware of their duties and responsibilities.

10. There were no new appointments of CFO, Company Secretary or head of internal audit department

during the year.

AUDITORS' REPORT TO THE MEMBERS

We have audited the annexed balance sheet of FAZAL CLOTH 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.

The financial statements of the Company as of September 30, 2003 were audited by another auditor whose report

dated January 07, 2004 expressed an unqualified opinion on those statements.

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 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 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 the accounting policies consistently applied;

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

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 profit, its

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

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

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

Ordinance.

BALANCE SHEET AS AT

Note

2004

2003

Rupees

CAPITAL AND RESERVES

Authorized capital

25,000,000 (2003:

25,000,000) ordinary

250,000,000

shares of Rs. 10/- each

Issued, subscribed and

3

123,552,000

paid up capital

4

77,618,417

77,617,419

Capital reserve

426,363,999

325,069,160

Unappropriated profit

627,534,41