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PAKISTAN TOBACCO COMPANY LIMITED

REPORT AND ACCOUNTS 1997

CONTENTS

Corporate Information

Chairman's Message

Review of Our Brands

Total Quality Management

Year at a Glance

Report of the Directors

Auditors Report

Afforestation Profit and Loss Account

Balance Sheet

Cash Flow Statement

Notes to the Accounts

Financial Highlights

Pattern of Shareholding

Notice of Meeting

Phoenix (Pvt) Limited

Report & Accounts

CORPORATE INFORMATION

BOARD OF DIRECTORS

MICHAEL PAUL FENN

Chairman & Chief Executive

FRANCISCO JOSE T. GARCIA

Finance Director

IRFAN NASR

Marketing Director

SAFDAR IQBAL

Production Director

ASLAM KHALIQ

Consumer & Regulatory

Affairs Director

PHILIPPE ADAMS

Human Resources Director

ANTHONY CAMERON

JOHNSTON

(Non-Executive Director)

FATEHALl WALIMUHAMMAD

VELLANI

(Non-Executive Director)

A.K.M. SAYEED

(Non-Executive Director)

NAVEED AFTAB AHMAD

Secretary & Corporate

Affairs Manager

AUDITORS

A.E FERGUSON & CO.

Chartered Accountants

REGISTERED OFFICE

Saudi Pak Tower, 61/A

Jinnah Avenue Islamabad.

CHAIRMAN'S MESSAGE

It is with great pleasure that I present my first message to all the stakeholders in

our Company, as we, together with Pakistan, look forward from our fiftieth

anniversary in 1997. After taking over from Ben Stevens in April 1997, I am

pleased to report that the Company fundamentals are firmly established and that

PTC's Business Renewal Strategy, built on the strong foundations of its brands

and its people, is well on track.

We have stated on numerous occasions that the turn around will not take place

overnight, and once again we are reporting a less than satisfactory financial result

for the year ending December 1997. We are however confident that we are on the

right course and are determined to continue our current strategy so that PTC

emerges amongst the strongest companies in Pakistan and can confidently offer

all its stakeholders a sustainable return on their investment.

Our long-term optimism is based on the very encouraging results we have seen from the investments

in our brands and our people made as a part of this continuing strategy.

Quality is foremost in our mind when addressing consumer needs. During the year we have continued

to invest in all aspects of our business which ensures that our brands offer the best quality and value

for money available in Pakistan. Capital Investment has been made to purchase new machinery and

refurbish other equipment. Due to the size of our business, this will require an ongoing commitment

to invest in order to ensure that we achieve our development plan.

In terms of our brands, our portfolio is well in place and offers consumers in Pakistan a well-

segmented choice catering to their every requirement. Our brand performance has demonstrated that

this strategy is sustainable into the future.

After launching imported Benson & Hedges in 1996, we are very happy to note that the brand is

extremely well perceived by its consumers. More importantly it is setting a higher benchmark price

for smuggled cigarettes thereby taking some of the pressure off locally manufactured cigarettes,

whilst clearly setting us a premium Quality benchmark.

For the third year in succession John Player Gold Leaf has grown strongly with sales in 1997

increasing by some 17% over 1996. The brand is firmly positioned as a top quality international offer

with all the elements of our brand support underlining that positioning. We have worked closely with

our suppliers to ensure that the materials we use are continuously improved to build further on the

brand quality. Although the volumes of the John Player Gold Leaf Lights line extension, remain low

- in line with our expectations - we now have a better offer for the discerning Pakistani consumers on

which we will build further.

Substantial support has been given to Wills Kings. This brand was relaunched nationally during the

year with a new modern pack and advertising campaign. From Consumer Research, the relaunch has

been very successful in building the brands image amongst its target consumers and recent sales

figures show that the brand has a very positive future.

Within the low price segment of the market Embassy volumes have grown strongly in the second half

of the year after a slow start. During the year we have enhanced both the product and the imagery and

are confident that the brand, as the outright volume leader in Pakistan and together with future

projects, will maintain a very solid platform on which to build on our other brands in the PTC

portfolio.

In terms of developing our people -1997 has been an exciting year. We formally launched a Total

Quality Management Programme in August 1997 to all our Managers under the banner of BEST 2000

Building Excellence & Success Together. We have established a shared vision in the Company of

how to succeed through developing a culture of continuous improvement. The old fashioned

hierarchical structures are being replaced with the clear message that each and everyone at PTC has

an important role to play in making PTC the BEST. This programme has already demonstrated

improvements in the way we interrelate and listen to our customers with cross-functional teams

developing more efficient work practices. BEST 2000 will be further expanded during 1998 to cover

our entire workforce. Throughout the year we have continued to recruit new young talent for the

future and enhanced our internal training & development programmes in order to ensure that our team

is well prepared to drive PTC into the 21st Century.

Within our entire operation we continue to invest in developing a safe, supportive and

environmentally friendly working environment. We are pleased to note that our safety standards are

constantly improving. Due to the very good working relationship we are developing with our workers

& Unions we have not lost any production to industrial disputes and a shared vision for our future at

PTC is clearly emerging.

Our Edible Oil Division has had a very successful year, with our brand Sundrop continuing to increase

its share of a very competitive market. By the end of the third year after launch Sundrop accounts for

35% share of its segment and has achieved a positive Trading profit. Through these efforts PTC is

demonstrating its contribution to Pakistan by helping develop the domestic Sunflower crop and

thereby reducing Pakistan's almost US $1billion Edible Oil import bill.

Pig Volumes (billion)

As a further contribution to safeguarding the environment for the future we continued

with our Afforestation efforts, planting over 2.5 million saplings during 1997. This

significant programme, demonstrating PTC's leading role as a good corporate citizen,

was once again recognised with PTC being awarded a Merit Certificate by the

Ministry of the Environment for the second consecutive year.

We continue to stress to the authorities the negative impact on PTC and the

Government Revenue of the ongoing availability in this market of smuggled and

domestic duty evaded cigarettes. This continues to hamper the legitimate industry in

competing in the market "on a level playing field". We look to the Government of Pakistan to take the

necessary action to curb this sector thereby allowing a return to sustainable turnover growth for the

legitimate industry with positive impact on Government revenues.

Although, as I stated earlier the short-term results are disappointing, we are confident that we have a

highly committed team of professionals at PTC who can deliver the long-term plan. The message to

our stakeholders is that we will succeed and we look to you to continue your support of the

Company's strategy as you have done in the past.

Review Of Our Brands

Benson & Hedges launched in 1996 is

successfully playing its role as defined in our

brand portfolio strategy to shape the premium

price end of the market. Research clearly

indicates that the brand is the preferred choice

among consumers looking for international

quality and imagery. Furthermore the brand

has also set a higher benchmark price point for

smuggled brands giving relief to the duty paid

domestic products.

Total Quality

Management

Best 2000

Total Quality Management - BEST 2000 - is the most ambitious Change

Management Programme ever initiated by our company.

Total Quality is more than just Product Quality; it is quality of everything we do

in our Business. It means understanding our Consumers, Customers, Stakeholders

and Suppliers, agreeing with them what they want and empowering our

employees to organise their own work to deliver the required Products and

Services to the agreed performance levels.

This programme will help us make Continuous Improvement a way of life and

encourage development of an Open & Empowered culture in the spirit of

Teamwork. Everyone will have a clear understanding of how their work

contributes towards achievement of PTC's overall objectives.

BEST 2000 will enable us to realise our Mission, live our Values, develop &

synchronise our Strengths and drive successfully into 21 st Century as one Team.

Year at a Glance

1997

1996

1995

1994

1993

Volumes

millions

20599

21318

19311

16352

16692

Turnover

Rs. millions

12138

11832

10152

8788

8642

(Loss) / Profit Before Tax

(246)

(39)

(8)

229

(Loss) / Profit After Tax

(268)

(59)

(24)

104

158

Shareholders' Equity

1311

1579

590

615

543

Value Added

8880

9045

8092

7252

7056

Duties and Taxes

8158

8356

7411

6556

6402

Dividend Rate

Nil

----------

Earnings / (Loss) Per Share

Rs.

(7.7)

(1.2)

(0.2)

1.9

7.2

Before Tax

==========

REPORT OF THE DIRECTORS

FOR THE YEAR ENDED DECEMBER 31, 1997

The Director hereby present their Report and the Audited Accounts for the year ended December 31,

1997 before the fifty first Annual General Meeting of the Company to be held on May 11,1998.

1997

1996

(Rs. 000s)

Profit/(Loss) for the Year

(268,097)

988,686

Unappropriated Profit Brought Forward

----------

Appropriation

(268,097)

988,686

Transfer (to)/from Revenue Reserve

268,097

(988,686)

----------

Unappropriated Profit Carried Forward

Nil

==========

The results for 1997 are a reflection of our continued strategy to rebuild PTC in very difficult market

conditions. Whereas, the bottom line represents poor results, we are confident that we are well on track

to re-establish PTC as a strong company with long-term competitive advantage. The major strengths of

PTC are our people and our brands and we continue to enhance and develop both. This will put us in a

very positive position once a more realistic perspective returns to the market.

Our short-term profits have been badly affected in the absence of realistic price increases due to market

conditions. However, our resolve continues as strong as ever to take the short-term loss in order to secure

the long-term position of the Company. This was anticipated and we knew that it would take some time

to rebuild PTC to the level of profits that allows a good return to our shareholders. We are confident that

the market conditions will change allowing our products to be offered at realistic prices, thereby ensuring

reasonable and sustainable profit growth.

We are pleased that the Federal Budget in June 1997 took into account the problems of smuggling and

excise evasion faced by the legitimate cigarette industry and reduced the level of Excise Duty from 65%

to 63% in the high price slab. However, this tax relief alone could not fully offset the inflationary increase

in our cost base.

Price increases are fundamental for inflation recovery and for enhancing shareholder returns. Nevertheless,

we are convinced that we should maintain our investment programme during these difficult times.

Despite the disturbed political and depressed economic conditions during most of 1997, PTC was able to

consolidate its volume base. The volumes in the second half of 1997 were higher than during the same

period the year before, despite the continuing menace of smuggling, excise evasion and counterfeiting

taking place in our market.

Among the main growth in expenses, spare parts and maintenance rose by 29% and depreciation by 41%

due to the rupee devaluation and the induction of new generation high-speed machinery respectively. We

further invested in supporting our brands in line with our long-term strategy and in training and developing

our people, doubling our training and development budget from Rs. 7 million in 1996 to Rs. 18 million in

1997.

Working capital increased due to inflation and leaf stock built up to provide for the extra volume

projected in 1998. We maintained our investment in plant and machinery to provide superior quality

products to our consumers while servicing the continuous volume growth. The investments in these areas

have resulted in an increase in the total borrowing of 67% which consequently further increased our debt

servicing cost.

We should like to place on record our appreciation of the contribution of all our employees during 1997

and their ongoing commitment to PTC's long-term strategy.

Taking into account the high debt level and the need to maintain investment behind our brands and

people, the Board of Directors recommends that no dividend be paid for this financial year.

DIRECTORS

Mr. John Benedict Stevens, on his transfer to BAT Russia, resigned from the Board with effect from lst

April 1997. The Board would like to place on record their sincere appreciation for his decisive and expert

contribution to PTC and wish well in his new assignment.

Mr. Michael Paul Fenn was appointed to fill the vacancy created by Mr. Steven's resignation and took

over as Chairman, Managing Director and Chief Executive of the Company with effect from I st April

1997.

AUDITORS

The auditors Messers A. F. Ferguson & Co. retire and offer themselves for re-appointment.

HOLDING COMPANY

British American Tobacco Company Limited is the Holding Company and is incorporated in the

United Kingdom.

PATTERN OF SHAREHOLDING

The pattern of holding of shares of the company as at 31 st December 1997 is shown on page. 34

AUDITORS' REPORT TO THE MEMBERS

We have audited the annexed balance sheet of Pakistan Tobacco Company Limited as at December

31, 1997 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 the 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;

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, 1997 and of the loss 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.

A.F. FERGUSON & CO.

Islamabad: March 18, 1998

CHARTERED ACCOUNTANTS

Afforestation

Against a world average of 25%

forest cover, Pakistan has only 4% of

the total land area under forest.

This is a significant environmental

issue for the future, and your

company continues to play a

leading role here as a responsible

corporate citizen. Our

Afforestation programme

continued as a key priority. In 1997

we planted some 2,500~000 trees. In

recognition of these efforts, the

Ministry of Environment,

Government of Pakistan awarded

PTC a Merit Certificate for the

second consecutive year.

PROFIT & LOSS ACCOUNT

FOR THE YEAR ENDED DECEMBER 31, 1997

Note

1997

1996

(Rs. 000s)

TURNOVER

12,138,290

11,832,493

Less: Cost of sales

11,467,010

11,088,646

----------

GROSS PROFIT

671,280

743,847

----------

Less: Marketing expenses

504,178

487,152

Administration expenses

159,003

117,656

----------

663,181

604,808

----------

OPERATING PROFIT

8,099

139,039

Other income

13,189

10,545

Other expenses

7,836

25,550

----------

13,452

124,034

Less: Financial charges

259,372

163,064

----------

LOSS BEFORE TAXATION

(245,920)

(39,030)

TAXATION

Current - For the year

22,177

19,896

----------

LOSS AFTER TAXATION

(268,097)

(58,926)

Gain on sale of immovable property

134,650

Trade Marks Sale

912,962

----------

(LOSS)/PROFIT FOR THE YEAR

(268,097)

988,686

APPROPRIATION

Transfer from/(to) revenue reserve

268,097

(988,686)

UNAPPROPRIATED PROFIT

----------

CARRIED FORWARD

==========

The annexed notes form an integral part of these accounts.

BALANCE SHEET

AS AT DECEMBER 31, 1997

1997

1996

(Rs. 000s)

TANGIBLE FIXED ASSETS

1,328,772

1,012,586

LONG TERM INVESTMENT

5,000

LONG TERM LOANS

5,609

6,037

LONG TERM DEPOSITS AND PREPAYMENTS

3,740

3,374

CURRENT ASSETS

Stores and spares

161,596

113,122

Stocks

2,309,154

2,078,152

Trade debts

27,516

10,982

Loans and advances

16209

34,199

Deposits, Prepayments and Other receivables

201,442

199,031

Cash and bank balances

16,281

20,402

----------

2,732,198

2,455,888

LESS: CURRENT LIABILITIES

Current portion of long term

loans and lease obligations

235,270

80,019

Short term finances and loans

1,415,570

823,596

Creditors, accrued and other liabilities

714,843

736,267

----------

2,365,683

1,639,882

----------

NET CURRENT ASSETS

366,515

816,006

----------

1,709,636

1,843,003

==========

FINANCED BY:

SHARE CAPITAL

Authorised capital

320,000

==========

Issued, subscribed and paid-up capital

319,367

RESERVES

991,487

1,259,584

----------

SHAREHOLDERS' EQUITY

1,310,854

1,578,951

LONG TERM LOANS

370,000

207,500

OBLIGATIONS UNDER FINANCE LEASES

16,782

44,552

DEFERRED TAXATION

12,000

COMMITMENTS AND CONTINGENCIES

----------

1,709,636

1,843,003

==========

The annexed notes form an integral part of these accounts.

CASH FLOW STATEMENT

FOR THE YEAR ENDED DECEMBER 31, 1997

1997

1996

(Rs. 000s)

CASH FLOW FROM OPERATING ACTIVITIES