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PHILIPS Electrical Industries of Pakistan Limited

(Annual Report 1996)

"Our aim is to bring out the best

in people, to set them a challenge

and to make Philips an organisation

with a promising future, an

organisation full of confidence."

Cor Boonstra, October 1996

"Our task now is to make the organisation more

transparent, flexible and responsive. To define

business responsibilities even more precisely, to

continue to structure the organisation around

businesses... the driving forces of the company."

Shareholders' meeting,

Amsterdam, March 21, 1997.

Cor Boonstra

President & Chairman

Philips Electronics N.V., The Netherlands.

Key Data

Rs in millions

Sales

3,365

2,666

Operating Profit

224

280

Profit before Taxation

103

196

Taxation

Profit after Taxation

122

Dividend -

Cash

Bonus Issue

Paid-up Capital

119

Shareholders' Equity

420

393

Earning per share

6.40

10.30

Number of Employees

1,045

1,048

Board of Directors

Syed Naseem Ahmad

Rafiq M. Habib

Nizam A. Shah

Hakimullah Siddiqui

S.W. Plokker

Razi-ur-Rehman Khan

Javed Iqbal

Bankers

ABN Amro Bank

American Express Bank Ltd

ANZ Grindlays Bank

Bank of America

Citibank N.A.

Emirates Bank International Ltd

Habib Bank Ltd

Hong Kong and Shanghai Banking Corp.

Muslim Commercial Bank

National Bank of Pakistan

Standard Chartered Bank

Management Team

Syed Naseem Ahmad

Javed Iqbal

M. Kamil Shahbazkar

M. Farooq Farooqi

Jalees A. Siddiqui

Auditors

A.F. Ferguson & Co.

Chartered Accountants

Chairman s Review

During 1996, a growth of 26% in total compa-

ny Sales was witnessed, from Rs. 2.67 Billion in

1995 to Rs. 3.36 Billion. Almost 15% of the

increase was achieved through volume increas-

es, resulting from the Company's policy of

selective diversification and product line exten-

sion. However, operating Profit decreased to

Rs. 224 Million against Rs. 280 Million of last

year, as difficult economic conditions prevailed

in the country.

Economic policies generally lacked consistency

in 1996, thus rendering long-term business

planning practically unreliable. Changes in poli-

cies ostensibly devised in pursuance of macro-

economic and structural reforms, were aimed

primarily at meeting IMF and World Bank con-

ditionalities, such as a reduction in budget

deficit to 4% of GDR The result was that Duty

exemptions and Subsidies were withdrawn,

even from areas where local industry merited

a degree of protection, and Indirect Taxes were

enhanced. Sales Tax was virtually doubled on

some products, Excise Duty was imposed on

imported goods, Custom Duties were

increased, and Regulatory Duty continued to

be imposed across the board.

The above factors had an adverse impact on

the economy, with inflation averaging above

15% during the year, and the rupee being

devalued almost 17%. As only a part of the

increase in costs could be passed on to

Consumers, profitability suffered. Also, as dis-

posable incomes declined, the economy

slowed down specially during the latter half of

the year. Inventories and receivables

remained high through most of the year, and

financial costs soared as a result.

In addition, the market for Consumer

Electronics remained exposed to lower-priced

international brands, brought in via irregular

channels. Meanwhile, as the government

deferred it's decision to lower the maximum

tariff to 35% as had been indicated earlier,

smuggled products continued to thrive, partic-

ularly at the expense of locally manufactured

brands like Philips.

Lighting

The Company successfully maintained it's lead-

ership in Lighting, despite adverse economic

conditions mentioned earlier. An impressive

27% growth in Sales was recorded during

1996, as compared to last year This was possi-

ble largely on account of improved Customer

Service, and our ability to offer Quality prod-

ucts at competitive prices. During the year, a

major Sports Lighting project was completed

at the Gaddafi Stadium in Lahore, in time for

the 1996 World Cup. Future Lighting strategy

is aimed at consolidating market share gains in

a larger section of the population.

Despite strong performance in Sales, Profits

declined by about 10% compared to last year.

This was largely due to higher cost of produc-

tion, as Tube Lights and Energy Savers were

subjected to Sales Tax in addition to

Regulatory Duty. However, cost reduction

measures, including alternate sourcing, were

implemented.

Consumer Electronics

Sales of the Product Division recorded a

growth of 29% as compared to 1995, of which

25% is attributable to volume increases, result-

ing from the Company's continuing policy of

selective diversification in Audio and Video

products, such as VCP/VCR and portable

Stereo Systems. Another significant addition in

the Consumer Electronics product portfolio

was PC Monitors, which made an impressive

entry into the market in 1996.

Profit pressures however remained, even in the

Consumer Electronics area, specially during

the latter half of the year Overall, profits were

lower by about 25% compared to last year.

Products of this division were also subjected

to higher Sales Tax and Customs Duty.

Afghan Transit Trade, continued to dampen our

growth in market share, as lower priced prod-

ucts such as Televisions, Audio and Video

equipment arrived from time to time in the

market. It is our apprehension, that the open-

ing of the "green channel" by the newly elect-

ed Government, will have a severe, negative

impact on Consumer Electronics manufactur-

ing activity, unless the facility is strictly moni-

tored and judiciously administered.

Major Domestic Appliances

Within this Product Division, the Company

continued to follow a policy of optimal use of

plant capacity, supplemented by imports of fin-

ished Refrigerators to meet market demand.

In terms of Sales, Major Domestic Appliances

increased by about 22% of which nearly 10%

came from volume growth. Operating Profits

meanwhile slipped by 22%, as higher Sales Tax

and additional charge of Excise Duty were

applied on Refrigerators.

Keeping in line with our policy to offer better

and more innovative products, introduction of

more contemporary models, with "Curved-

door" design feature, and more durable VCM

coating was effected during the year. Further

extension in product line is being considered

during 1997.

Other Activities

This sector covers the activities of Small

Domestic Appliances & Personal Care (DAP)

products, Professional Systems, Medical

Systems and After Sales Service.

DAP activities have shown improvements dur-

ing 1996, in top and bottom-line performance

through effective and innovative marketing.

This is despite severe competition from

imports through irregular channels including

"Baggage" scheme and Afghan Transit Trade.

These goods are available in the market at

much lower prices than their counterparts

brought in through official trade channels, with

full payment of Duties and Taxes.

Continued imposition of Regulatory Duty and

high Tariffs sharply cut into the division's prof-

its for the year under review, as well as

restricted business expansion. DAP products

are also threatened by the opening of the

"green channel", which will have a negative

impact on this activity.

The Professional Systems and Medical Systems

business, being project-based, require high-cali-

bre manpower, and are largely dependent on

the availability of development budgets/funds.

The company, as a policy focuses on major

projects in this area, and maintains close liaison

with specifiers and project consultants. Paucity

of development funds/Government grants, has

resulted in a stagnant business scenario in

these products in 1996, with profits further

impacted by the restructuring of the Medical

Division.

To provide effective "After Sales Service", for

which your Company has a strong reputation,

we maintain a network of centres in all major

cities and towns. "After Sales Service" attends

to an essential need of the Customer, and is

undoubtedly a potential area for growth.

The Company and the Shareholders

It is matter of great privilege for our investors,

that the Company has been offered the coveted

Karachi Stock Exchange (KSE) Award for 1995,

this year. This award for the top twenty-five com-

panies, recognises the Company's resolve for

improved financial and operational performance,

and for surpassing planned Sales targets.

As mentioned earlier, Operating Profit for 1996

amounted to Rs. 224 Million versus Rs. 280 Million

in the previous year. Profit after Tax was lower at

Rs. 76 Million as against Rs. 122 Million in 1995.

Lower profits resulted from an increase in financial

charges on account of higher inventories and

receivables. Average borrowings thus remained

high, and were further impacted by an increase in

borrowing rates during the year.

At year-end, however, the situation with regard to

Inventories and Receivables improved consider-

ably. Earnings per share (EPS) amounted to

Rs. 6.40 (1995:Rs. 10.30).

The Board of Directors propose for your

approval, payment of Final Dividend of 15%, in

addition to interim Dividend of 25% already paid,

thus making a total Dividend of 40% for the year

under review, and the issuance of one Bonus Share

for every ten shares held, out of the share premi-

um account. The Board also recommends transfer

of Rs. 27 Million to General Reserve.

Profit and proposed appropriation for the year are

as follows:

Profit before providing

for taxation

103,110

Profit for taxation:

Current - for the year

45,808

'- for prior years

(13,251)

Deferred - for the year

(4,986)

27,571

Profit after tax

75,539

Adding hereto unappropriated

profit brought forward

969

Profit available for appropriation

76,508

Appropriation recommended:

General Reserve

27,000

Capital Reserve for tax on

issue of bonus shares

1,188

Interim Dividend

declared (25%)

29,698

Proposed final Dividend

17,819

75,705

Unappropriated

profit carried forward

803

Human Resources

Human Resource is the key strategic weapon

that ensures our competitive edge. Despite

adverse political environment, specially in

Karachi, early in the year, our employees coop-

erated fully to achieve laudable results in 1996.

The Board is grateful for the strength derived

from the efforts of all employees. Your

Company management signed a two-year

agreement with the Union during 1996, in an

atmosphere of cordiality and mutual respect.

Realising that human resource development is

a pivotal determinant of success, the Company

continued it's efforts towards development and

training of employees at all levels, both within

and outside of the organization, for facing the

challenges of an increasingly competitive busi-

ness environment.

Employee Motivation

Results of the Employee Motivation Survey,

conducted by an international consulting firm,

were very encouraging, and substantiated our

efforts to maintain a conducive working envi-

ronment, and achieve Philips' Five Corporate

Values - the guiding principles of your

Company.

200

150

Social Responsibilities

As a good corporate citizen, your Company

continued to contribute towards social welfare

projects largely through institutions like the

Layton Rahmatullah Benevolent Trust, Child Aid

Association and a few others. We also con-

tributed towards conservation of the

Environment, by providing support to organiza-

tions like the World Wide Life Fund.

Philips Quality Programme

To keep pace with the ever-increasing demand

from Consumers, for Quality products and

services, your Company has devised a compre-

hensive Quality Programme, aimed at inculcat-

ing Customer orientation, a more positive and

proactive pattern of behaviour, which would

enable us to maintain pace with the changing

business scenario.

During the year under review, the principles of

Philips Quality Programme were translated

into reality by bringing all six Lighting factories

under the purview of ISO 9000, and extending

it's scope to S&V and other areas. The final

objective remains that of improving the

Quality standards in all areas of the business,

to be able to qualify for the coveted Philips

Quality Award (PQA 90), within a specified

time frame, and to build Philips into a

"Winning Company".

Auditors

The retiring auditors A.F. Ferguson & Co., being

eligible, offer themselves for reappointment.

Pattern of Shareholding

A statement of the pattern of shareholding as

at December 31, 1996 is shown on page 47 of

this report. Philips Electronics N.V. (formerly

N.V. Philips Gloeilampenfabrieken) Eindhoven,

The Netherlands, continues to hold 60% of the

Company's shares.

Future Outlook

Your Company intends to maintain it's policy

of dynamic growth and selective diversification,

in areas where sustained, long-term profitabili-

ty is expected. Philips' strength in the Quality

of it's products, people and it's enduring

Customer goodwill, shall be fully utilised to

improve profitability. This optimism is based

on the following assumptions and recommen-

dations made to the Government directly or

through various forums:

· Adequate protection to local industry whilst

lowering Tariff rates,

· Rationalization of Tariff structure in the con-

text of Sales tax, Excise Duty and such other

Levies,

· Removal of Regulatory Duty,

· Effective control on Irregular trade either

through the "green channel" or Afghan Transit

Trade.

These measures would not only contribute

towards improved profitability for business, but

attract further investment in the country,

which is undoubtedly our most pressing need.

On behalf of the Board of Directors.

Sd/-

Syed Naseem Ahmad

Chairman & Managing Director

Karachi: March 25, 1997

Auditors' Report to the Members

We have audited the annexed balance sheet of

Philips Electrical Industries of Pakistan Limited

as at December 31, 1996 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 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;

informatian and according to the

explanations given to us, the 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, 1996 and of

the profit 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.

A.F. Ferguson & Co.

Chartered Accountants

Karachi: March 25, 1997

Balance Sheet as at December 31, 1996

Note

1996

1995

(Rupees in thousands)

SHARE CAPITAL AND RESERVES

Authorised capital

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

160,000

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