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Babri Cotton Mills Limited

Annual Report 1999

CONTENTS

COMPANY'S PROFILE

NOTICE OF ANNUAL GENERAL MEETING

DIRECTORS' REPORT

PATTERN OF SHAREHOLDING

AUDITORS' REPORT

BALANCE SHEET

PROFIT & LOSS ACCOUNT

CASH FLOW STATEMENT

NOTES TO THE ACCOUNTS

COMPANY'S PROFILE

BOARD OF DIRECTORS

RAZA KULI KHAN KHATTAK

Chairman/Chief Executive

LT. GEN. (Retd.) ALl KULI KHAN KHATTAK

AHMAD KULI KHAN KHATTAK

MUHAMMAD AZHAR KHAN

MUSHTAQ AHMAD KHAN, FCA

MRS ZEB GOHAR AYUB KHAN

MRS SHAHNAZ SAJJAD AHMAD

MRS. SHAHEEN TARIQ KHALIL

DR. AMJAD WAHEED (NIT)

MUHAMMAD LATIF (SLIC)

SECRETARY

AMIN-UR-RASHEED

(Manager Corporate Affairs)

AUDITORS

HAMEED CHAUDHRI & CO.,

Chartered Accountants

BANKERS

NATIONAL BANK OF PAKISTAN

PAKISTAN INDUSTRIAL CREDIT &

INVESTMENT CORPORATION

HABIB BANK LIMITED

UNITED BANK LIMITED

ALLIED BANK OF PAKISTAN LTD.

REGISTERED OFFICE

HABIBABAD, KOHAT

& MILLS

Phone (0922) 510063 - 512931,

Fax: (0922) 516335

NOTICE OF ANNUAL GENERAL MEETING

Notice is hereby given that 29th Annual General Meeting of the shareholders of BABRI

COTTON MILLS LIMITED will be held at Mills premises Habibabad, Kohat on Thursday, the 30th

March, 2000 at 10.00 A.M. to transact the following business:-

1. To confirm the minutes of the Annual General Meeting held on 31

March, 1999.

2. To receive consider and adopt the annual audited accounts of the company for the year

ended 30 September, 1999 together with the Directors' and Auditors' reports thereon.

3. To consider & approve the payment of dividend ~ 15% Rupee 1.50 per share for the year

ended 30th September, 1999 as recommended by the Board of Directors of the company.

4. To appoint Auditors for the year ending 30th September, 2000 and to fix their

remuneration.

5. To consider any other business which may be placed before the shareholders with the

permission of the Chair.

By order of the Board

AMIN-UR-RASHEED

Company Secretary

KOHAT

Dated: 8th March, 2000

Manager Corporate Affairs

NOTES:

1. The Share Transfer Books of the company shall remain closed from 19th March, 2000 to

25th March, 2000. (both days inclusive) and no transfer shall be accepted for registration

during this period.

2. Any Member entitled to attend and vote at this meeting shall be entitled to appoint any

other person as his/her proxy to attend and vote in respect of him/her and Proxy

instrument shall be received by the company not less than 48 hours before the meeting.

3. The transfer of shares received in order in the Registered Office of the company at the

close of business hours on 18th March, 2000, will be considered in time for payment of

dividend.

4. Shareholders are requested to notify the change of address, if any, immediately.

DIRECTORS' REPORT TO THE SHAREHOLDERS

Dear Shareholders,

The directors of your company are pleased to present the 29th Annual Report with the

balance sheet as on 30th September, 1999. The profit and loss for the year alongwith auditors'

report is also being presented. We have great pleasure in informing you that net profit (after tax)

of the company has increased by 116%. This improvement in profitability has been due to rise in

the price of the yam made by us and fall in the prices of the raw material used by us. For the year

under review the net profit of the company was Rs. 13.116 million, when compared to the net

profit of Rs. 6.061 million of the previous year. This can be considered a substantial

improvement.

REVIEW OF TEXTILE INDUSTRY FOR THE YEAR 1998/99.

OFFICIAL export statistics released show a dismal performance by the country's textile

industry with exports registering a drop of 11.29 percent from the previous fiscal year. In 1998-

99, textile exports amounted to 4.89 billion dollars, down from 5.52 billion the previous year.

Moreover, the textile business contributed to the overall slump in exports to the mammoth extent

of 68 percent with foreign sales dropping across all sub-categories.

Cotton yarn, fabrics and ready-made garments took the biggest hit, with numbers declining in

either value or quantity terms. Cotton yarn exports fell almost 20 percent in dollar terms to 931

million dollars while the quantity sold abroad also reflected a 9.5 percent decline. Cotton fabric

exports on the other hand, managed to grow by nearly 5 percent but in value terms the year ended

with a 13 percent drop. Similarly, ready-made garment exports rose 4 percent in quantity but fell

almost 13 percent in dollar terms.

The textile industry, for the last three years, has continuously been facing unprecedented crisis.

Soaring Lint cotton prices, eroded competitiveness of local industry vis-a-vis suppliers of cheap

products from India, China, South Korea and Bangladesh. Analysts attribute the abysmal

performance by the textile industry to the world economic downturn. "When the world economy

slows, commodity prices always decline." So we saw the drop in cotton yarn prices. Moreover,

with oil prices at a record low, competing products like polyester staple fibre also came down in

prices. This further impacted yarn prices.

But as prices dropped, a lower than expected cotton crop meant quantity was insufficient as well.

The year 1998-99 which began with Government estimates of a crop as large as 11 million bales

ended with revised estimates of less than a million bales on account of poor weather conditions

in both the cotton growing provinces of Sindh and Punjab.

The textile industry was however, unable to take advantage of this increase in demand as it was

faced with a more serious crisis arising out of the shortage of basic raw cotton. It became

necessary to' import approximately 2 million bales at exorbitant prices. In a falling market for

textile product, the industry in 1997-98 and 1998-99 was forced to pay substantially high prices

for raw materials.

As a consequence, the textile industry in Pakistan, which thrived on locally available raw

material at prices 20 to 30 percent below the world market prices in 1997-98 and 1998-99 had to

procure cotton at prices 15 to 20 percent above the total cost of yarn production. The above-

narrated factors coupled with other constraints pushed up the cost of production with an

unavoidable rise in yarn prices. It was a worldwide phenomenon and yarn prices also increased

in some importing countries. In the domestic market, this increase in prices of yarn adversely

affected the ancillary industry. This has eroded the competitiveness of the spinning sector at time

when cheap suppliers of yam are emerging from Central Asia, China and India.

LACK OF VALUE ADDITION.

There has-been no significant movement within the spinning sub-sector towards value-added

products. Low count yarn still dominates and constitutes 14 percent of total yarn output followed

by medium count yarn 2.4 percent, superfine count yarn 1.2 percent and mixed yarn 1.5 percent.

Unless the spinning sub-sector modernises and abolishes the easy production of low count yarn,

no large gains in its export market share are possible. Now, with the initiation of free trade in

cotton yarn, it is expected that spinners will switch to higher count yarn in order to exploit export

opportunities.

Pakistan has won a significant share of Japanese cotton yarn market from Korea over the last ten

years while China has maintained its relative share of that market. But this has hurt the sector in

the value-added segment because Korea has been putting more emphasis on value-added textiles.

Since Pakistan is Japan's largest supplier of cotton yarn, Japanese credit to Pakistan textile units

and much needed technical assistance in balancing modernisation and replacement programmes.

NON-DEVELOPMENT OF WEAVING SECTOR

Textile spinning industry has grown rapidly in last ten years. Whereas in 1981-82, there were

only 155 running units with yarn production of 430 million kgs, which increased to 353 units in

1998-99 and production of yarn increased to 1555 million kgs. However, the weaving capacity

did not increase in the same proportion and over production of yarn could not be absorbed by

local consumption.

Export quota restrictions is also a major impediment to the export earnings of Pakistan

particularly for the weaving sector. This sector being new has not received its due share from the

export quotas against performance of the old units. These new units get no performance quota

and have to purchase their requirements for exports from the market after paying heavy premium.

This renders their prices in the world market uneconomical and on the other hand due to

recession in Europe and America, the prices of cotton yarn dropped drastically during 1998-99

and consequently whereas the cost increased substantially, the selling prices went down.

INCREASE IN FINANCIAL COST

During the crisis period, the interest rate on borrowing increased substantially. In 1991, the rates

were approximately 16 percent to 17 percent per annum which increased during the last 8 years

upto 24 percent per annum. The levies of excise duty on loans also aggravated the situation and

played its part in increasing the borrowing cost, on the other hand, turnover tax/Sales Tax was

levied by the government. This resulted in high financial burden on all units.

The major factors for sickness of textile industry were as under ·

1. BMRs were not undertaken when they made huge profits, instead they preferred to

increase production capacity. During this period quality of product and productivity

suffered resulting in the setback on the export front. At this stage, the mill owners were

forced to realize the need for BMR, but the cost of imported machines had become

extremely high. Huge funds/loans were required from the banks and DFIs, which every

mill could not afford to mange, resulting continued deterioration of the most of plants

and equipments.

2. Value addition is essential but has not been realised from the beginning and this grave

negligence has proved to be one of the obstacles in the continued profitable operation of

the mills

3. Soaring lint cotton prices have eroded competitiveness of local industry viz-a-viz

suppliers of cheap products from India, China, South Korea and Bangladesh.

4. Use of man-made fibre like polyester and viscose should be encouraged and policies be

formulated so that adequate supply of such fibre is ensured at competitive prices.

5. Quality is another basis in the mill operations. It starts from cotton fields and ends till

the products are safely delivered in the hands of the customers. All other efforts and

controls have no value unless total quality control at every stage and step of cotton

growing, ginning, weaving, finishing and packing/packaging is effectively undertaken.

6. THE SIGNIFICANCE OF MANAGEMENT'S CONTRIBUTION MUST BE

RECOGNISED IN THE SUCCESSFUL OPERATION OF THE INDUSTRY. MANY

ORGANISATIONS F FOR MANY REASONS. BUT THE MOST COMMON

REASON IS THE FAILURE ON THE PART OF THE MANAGEMENT.

IT IS COMMENDABLE THAT YOUR MANAGEMENT IN ALL DIFFICULT

CIRCUMSTANCES IN THE TEXTILE INDUSTRY AS DETAILED ABOVE, HAS

PRODUCED BEST QUALITY PRODUCTS IN THE MILLS, HAS LIQUIDATED

ALL THE LONG TERM LOANS AND MODERNIZED THE MILLS PLANT &

MACHINERY WITH ITS OWN CASH RESOURCES (WITHOUT OBTAINING ANY

LOAN) WHICH HAS RESULTED INTO HIGHER PROFITABILITY OF THE

COMPANY DURING THE YEAR UNDER REPORT.

FINANCIAL RESULTS

Total sales for the year under review were Rs. 304.380 million (1998 - Rs. 293.023

million). After payment of sales tax and commission of Rs. 43.174 million (1998- Rs. 34.502

million). The net sales were Rs. 261.206 million (1998 - Rs. 258.521 million) This nominal

decrease in sales was due to changes in the production in the year 1999. The cost of sales was Rs.

228.823 million (1998 - Rs. 239.257 million), since the cost of sales decreased by 4.56% this

further increased gross profits to Rs. 32.383million (1998 - Rs. 19.264 million). Hence gross

profit percentage (%) to sales also improved from 7.45% FAIL 2.39%.

The company has earned an operating profit (including other incomes) of

Rs. 23.892 million (1998 - Rs. 18.329 million). After adjustment of other charges (including the

financial charges) Rs. 10.777 million (1998 - Rs. 12.267 million). The profit before taxation

amounts to Rs. 13.116 million (1998- Rs. 6.061 million). After provision of Rs. 4.008 million for

tax, net profit amounts to Rs. 9.107 million.

Since in 1998 the company had earned after providing Rs. 11.00 million for tax a net

profit of Rs. 15.732 million, the earning per share in 1999 also increased to Rs. 4.55 from earning

per share of Rs. 7.87 in 1998.

OPERATING PERFORMANCE

The company has an installed capacity of 26,640 spindles, complete with all back

process. During the year it produced 1,352,557 kgs (1998 - 1,409,623 kgs) of super fine yarn of

72/80 counts. The average yarn spun in 1999 was of 72.5 counts (1998 - average 68.30 counts).

'When this average is converted in 20 counts the total production works out to 9,212,014 kgs

(1998 - 8,894,226 kgs). The efficiency of the plant also improved to 98.90% from 98.85% of the

previous year.

TOTAL PAYMENT OF LONG TERM LOANS OF THE COMPANY

It is matter of great satisfaction for us to inform you, that the company has repaid the

balance amount of Long Term Loans Rs. Ten million on 30th June, 1999. The mortgage charges

on the assets of the company have also been paid after 24 years i.e. since 1970 when the mill was

installed in Kohat

DIVIDEND

Since the company has made exceptional profit, and we have been able to liquidate the

accumulated loss of twenty two years, the directors are pleased to recommend payment of cash

dividend of 15% to ordinary share holders, of the company.

Replies to Auditors observations:

Note 9.3

The deferred Tax liability has not been accounted for as in the opinion of your directors,

no liability for deferred Tax is likely to crystallise in the foreseeable future (i.e. within next three

years) due to expansion plans of the Company.

Note 13.1 & 14.2

We have not made any provision for diminution in the value of Long Term investments

of the Company in its associated undertakings as in our opinion these investments are not for

trading purpose at the stock exchange.

Note 14.1 & 14.3

It is reported that 115,300 shares of JDM Textile Mills Limited have been received from

NBP, Treasury Division, Karachi, subsequent to the date of balance sheet.

APPOINTMENT OF AUDITORS

The company's auditors M/s Hameed Chaudhri & Co., Chartered Accountants, H.M.

House, 7-Bank Square, Lahore retire and offer themselves for re-appointment for the next

financial year.

ACKNOWLEDGMENT

The new board or directors (elected in April 1999) acknowledge with thanks the effort

and co-operation of the team of management and the labour. It also appreciates the tradition of

good relations between them going back to twenty years.

For the future the directors expect that with further investment in new machinery and

import of fine quality of cotton, the company will keep on making progress and earn higher

profits.

We also express our gratitude to the financial institutions i.e. National Bank of Pakistan,

United Bank Limited and the PICIC for their co-operation and financial help to the company;

specially during the difficult times that the company passed through .during last

twenty nine years.

For & on behalf of the Board of Directors

RAZA KULI KHAN KHATTAK

Dated: February 28, 2000

Chairman

PATTERN OF SHAREHOLDING

AS ON 30 SEPTEMBER; 1999

Form - 34

The Companies Ordinance 1984

(Section 236)

NUMBER OF

SHAREHOLDING

TOTAL

SHAREHOLDER

FROM

SHARES HELD

1060

100

30,738

322

101

500

83,503

102

501

1,000

78,594

114

1,001

5,000

293,171

5,001

10,000

189,696

10,001

15,000

146,583

15,001

20,000

15,300

20,001

25,000

43,900

25,001

30,000

28,351

35,001

40,000

38,768

45,001

50,000

49,338

65,001

70,000

67,400

100,001

105,000

103,936

125,001

130,000

125,654

150,001

155,000

151,612

550,001

555,000

553,456

---------

1,648

TOTAL:

2,000,000

=========

Categories of

Number

Shares held

Percentage

Shareholders

Individuals

1618

913,923

45.70

Investment Campanies

28,351

1.42

Insurance Companies

54,538

2.73

Joint Stock Companies

831,693

41.59

Financial Institutions

144,805

7.24

Provincial Government

12,187

0.61

Administrator

Abandoned properties

1,503

0.08

Modaraba Companies

13,000

0.65

---------

TOTAL

1,648

2,000,000

100.00

=========

AUDITORS' REPORT TO THE MEMBERS

We have audited the annexed Balance Sheet of BABRI COTTON MILLS LIMITED as at

30 September, 1999 and the related Profit and Loss Account and the 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 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;

explanations given to us, the Balance Sheet, Profit and Loss Account and the

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, except for the fact that provision for diminution value of

investments aggregating Rs. 2.170 million (notes 13.1. & 14.2) has not been

made in these accounts and the contents of notes 9.3 and 14.3 and the extent to

which these may affect the annexed accounts, respectively give a true and fair

view of the state of the Company's affairs as at 30 September, 1999 and of the

profit and cash flows for the year then ended; and

(d) in our opinion, no Zakat was deductible at source under the Zakat and Ushr

Ordinance, 1980.

LAHORE

HAMEED CHAUDHRI & CO.,

March 7, 2000

CHARTERED ACCOUNTANTS.

BALANCE SHEET AS AT 30 SEPTEMBER, 1999

1999

1998

Note

Rupees

SHARE CAPITAL AND RESERVE

Authorised capital

5,000,000,ordinary shares

of Rs. 10 each

50,000,000

==========

Issued, subscribed and paid-up capital

2,000,000 ordinary shares

of Rs. 10 each issued for cash

20,000,000

Capital Reserve

6,000,000

Unappropriated Profit/(Accumulated loss)

1,278,570

(4,828,907)

----------

27,278,570

21,171,093

SURPLUS ON REVALUATION OF

FIXED ASSETS

35,838,096

DEFERRED LIABILITIES

Provision for gratuity

7,527,531

6,529,973

CURRENT LIABILITIES

Current portion of long

term loan

10,000,000

Short term finances

49,920,342

52,184,564

Creditors, accruals and

other liabilities

23,810,403

47,503,869

Workers' welfare fund

239,000

Provision for taxation

5,285,000

2,651,735

Dividends

3,306,453

306,580

----------

82,561,198

112,646,748

CONTINGENCIES AND COMMITMENTS

----------

153,205,395

176,185,910

==========

FIXED CAPITAL EXPENDITURE

Operating fixed assets

89,840,199

94,411,049

Stores held for capital

expenditure

1,051,072

1,097,811

----------

90,891,271

95,508,860

LONG TERM INVESTMENTS

2,531,100

DEPOSIT FOR INVESTMENTS

1,498,900

LONG TERM ADVANCES

144,898

84,785

LONG TERM DEPOSITS AND

DEFERRED COSTS

61,780

101,263

CURRENT ASSETS

Stores, spares and loose tools

4,288,630

4,525,270

Stock-in-trade

39,339,677

58,510,266

Trade debtors

49,600

4,216,240

Advances, deposits, prepayments