| Pakistan Tobacco Company Limited |
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| Annual
Report 2000 |
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| CONTENTS |
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| Corporate
Information |
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| Chairman's
Message |
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| Our Brands |
|
|
| Cigarettes
are Meant for Adults |
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| We
Believe in Doing Business Responsibly |
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| Financial
Highlights |
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| Report
of the Directors |
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| Auditors'
Report |
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| Profit
& Loss Account |
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| Balance Sheet |
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| Cash
Flow Statement |
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| Statement
of Changes in Equity |
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| Notes
to the Accounts |
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| Pattern
of Shareholding |
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| Notice
of Meeting |
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| Phoenix
(Private) Limited Report & Accounts |
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| Consolidated
Report and Accounts |
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|
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| BOARD
OF DIRECTORS |
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|
| GOTTFRIED
THOMA |
|
| Chairman & |
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| Chief Executive |
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| ASLAM
KHALIQ |
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| Corporate
& Regulatory |
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| Affairs Director |
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| STEPHEN
DAINTITH |
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| Finance
Director |
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| ALAIN
SCHACHER |
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| Leaf Director |
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| ZAFAR TAJI |
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| Human
Resources |
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| Director |
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| FATEHALI
VELLANI |
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| (Non-Executive
Director) |
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| MARCO
NOVOA |
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|
| Production
Director |
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| DR.
AMJAD WAHEED |
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| (Non-Executive
Director) |
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| CORPORATE
INFORMATION |
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|
| CHARLES
RICHARD GREEN |
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| (Non-Executive
Director) |
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| TAJAMAL
SHAH |
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| Company
Secretary |
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| BANKERS |
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| ABN-AMRO
Bank |
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| American
Express Bank |
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| Standard
Chartered Grindlays Bank |
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| Askari
Commercial Bank |
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| Union Bank |
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| Bank of Tokyo |
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| Citibank N.A. |
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| Emirates
Bank International |
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| Habib Bank Ltd. |
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| Hong
Kong & Shanghai Banking Corp. |
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| Muslim
Commercial Bank |
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| National
Bank of Pakistan |
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| Standard
Chartered Bank |
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| Societe
Generale |
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| AUDITORS |
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| A.F.
FERGUSON & Co. |
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| Chartered
Accountants |
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| REGISTERED
OFFICE |
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| Saudi
Pak Tower, 61/A, |
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| Jinnah
Avenue, Blue Area, |
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| P.O. Box 2549 |
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| Islamabad
- 44000 |
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| Telephone:
(051) 20832000, 20832001 |
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| Fax:
(051) 2278376, 2278377 |
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|
| SHARE
REGISTRAR |
|
| Ferguson
Associates (Pvt) Ltd, |
|
| State
Life Building I-A, |
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| I.I.
Chundrigar Road. |
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| Karachi. |
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| CHAIRMAN'S
MESSAGE |
|
|
| I
am delighted to present my message to you after my first full year as
Chairman of |
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| Pakistan
Tobacco Company (PTC) -- and what an exciting year it was! |
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| The
major developments during 2000 were the strong recovery of our sales volume
and the |
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| successful
implementation of a major restructuring program. |
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|
| Last
year we sold 21.4 billion cigarettes which translated into an estimated
market share of |
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| 37.6%.
This is an annual growth in sales volume of 14% which compares favourably
with the |
|
| 1999
sales performance of 18.7 billion cigarettes and an estimated market share of
33.4%. The |
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| major
part of this growth came from Gold Flake, a brand that sold just less than 1
billion |
|
| cigarettes
in 1999, but grew to 6.7 billion cigarettes in 2000! |
|
|
| This
sales growth has not, however, translated into a similar growth in
profitability. We are |
|
| reporting
an Operating Profit of Rs 316 million in 2000 compared with an Operating
Profit |
|
| of
Rs 344 million in 1999, a decline of 8%. There are two main reasons for this: |
|
|
| 1.
Given the decline of our sales volume in 1999 -- down 15% versus 1998 --we |
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| performed
a thorough review of our brand portfolio and our level of marketing |
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| expenditure
by brand. We identified brands that had failed to receive any level of |
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| support
for many years and, conversely, areas where consumer response had been |
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| rather
limited despite significant support levels. As a consequence of this review,
we |
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| reallocated
our marketing expenditure across our brands and, perhaps more |
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| importantly,
increased our level of marketing expenditure by 28%. Our total |
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| marketing
investment grew from a level of Rs 681 million in 1999 to Rs 873 million |
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| in
2000. This significant increase of Rs 192 million helps explain the decline
in |
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| operating profit. |
|
|
| 2.
Secondly, in order to further protect and grow our sales volume, we did not |
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| implement
the annual price increases typically carried out by the industry. Rather, we |
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| held
the prices of most of our brands and repositioned two brands (Capstan and
Gold |
|
| Flake).
For reference, we saw the negative effect of aggressive price increases in |
|
| 1999
when our annual sales volume fell by 15% versus 1998 levels. The absence of |
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| price
increases, combined with cost increases due to natural inflation, had an
impact |
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| on
our operating profit which we mitigated through stringent cost management |
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| initiatives.
As a very positive side effect, our pricing initiatives also contributed |
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| significantly
to the reduction of tax evasion in Pakistan. This is a subject that I shall |
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| turn
to later in more detail. |
|
|
|
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| It
would be inappropriate to comment on the results without highlighting the
restructuring |
|
| costs
of Rs 770 million included in "other expenses" within the Profit
and Loss Account. |
|
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| In
my previous message accompanying the 1999 financial statements, I noted that
-- |
|
| despite
various internal improvements -- our market position had in fact
deteriorated. In |
|
| 1999,
our market share fell to 33.4% compared with 37.8% in 1998. I noted that all
of us |
|
| at
PTC were fully determined to reverse this position and that part of this
reversal would |
|
| include
a restructuring of the Company in all aspects of the business - including |
|
| significant
personnel reductions. This restructuring took place during the course of 2000 |
|
| at
a total cost of Rs 770 million and affected approximately 1,200 employees -
around one |
|
| third
of our workforce. The benefits of this-are coming through already, not only
in cost |
|
| savings,
but also in a more efficient and effective workforce. |
|
|
| An
extremely pleasing aspect of 'the entire exercise was the manner in which the |
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| restructuring
took place. I am delighted to report that due to the combined efforts of all
our |
|
| people
and the Union officials, those members of staff affected were able to leave
the |
|
| Company
in a most dignified and humane manner. |
|
|
| The
full year savings of the restructuring exercise will be reflected in the
results for 2001. |
|
|
| Another
major event for us during the year was the successful completion of the $ 40 |
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| million
Right Issue. This saw Rs 2.2 billion injected into the Company -- the vast
majority |
|
| coming
from our major shareholder, British American Tobacco Investments Limited. The |
|
| funds
were used as described above for the restructuring exercise and for the
significant |
|
| growth
in marketing spend. At a time of limited foreign investment in Pakistan, the
$ 40 |
|
| million
Right Issue amply documents our confidence in a bright future for Pakistan
and PTC. |
|
|
| I
would now like to discuss the issue of tax evasion in Pakistan. |
|
|
| Pakistan
has one of the lowest priced cigarettes in the world. This is largely due to
tax |
|
| evasion
activity and is a key issue affecting the profitability of PTC. The
manufacturers of |
|
| tax-evaded
products are -- as a consequence of this evasion -- able to position their
brands |
|
| at
very low price points that would be unsustainable were they to pay excise
duty. Without |
|
| payment
of excise duty, and at the expense of the Central Board of Revenue (CBR), the |
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| tax-evaders
are able to generate very high profit margins on their products. Accordingly, |
|
| they
can operate at low selling prices and do not need to increase prices in line
with |
|
| inflation
to make profits. To retain PTC's market share and to fulfill Government's |
|
| expectations
regarding excise revenues, we are forced to hold prices at these low levels.
If |
|
| we
choose to increase prices substantially as in 1999, experience shows that we
lose |
|
| significant
sales volume. |
|
|
| The
determined steps taken by the Government to arrest evasion have been highly |
|
| encouraging.
Together with the lowering of prices by the industry of some key brands, this |
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| has
led to a substantial reduction in tax-evaded products from around 17% in 1999
to the |
|
| current
level of around 6%. However, it is disturbing to note that the tax-evading
local |
|
| cigarette
manufacturers are now moving facilities from their traditional stronghold of |
|
| NWFP
to other parts of Pakistan. |
|
|
| We
seek ongoing Government support to further curtail these tax-evading
activities |
|
| (including
counterfeit, imitation and smuggled products). We will continue to work with |
|
| the
Government to limit the damage that results from the illegitimate sector --
in particular |
|
| the
estimated annual loss of approximately Rs 2 billion. |
|
|
| As
stated in my previous message, sufficient sales and adequate profits are key
for any |
|
| responsible
company to operate on a sustainable basis. This applies equally well to |
|
| Pakistan
Tobacco Company. For each of the last six years, however, PTC has been losing |
|
| money.
Accumulated losses for the 1995 to 2000 period are now at about Rs 1.68
billion. |
|
| During
the same period, PTC generated Government revenue in excess of Rs 53 billion
in |
|
| the
form Of duties and taxes. While we are delighted to contribute such
substantial funds |
|
| for
national development, this highly unsatisfactory situation for PTC needs to
be |
|
| addressed
urgently. |
|
|
| PTC
has always been known as a highly ethical and responsible company in line
with good |
|
| corporate
governance. In the absence of a 'level playing field' due to tax evasion --
and the |
|
| resulting
artificially low selling prices of our products as explained earlier -- we
sincerely |
|
| request
the Government to lend their fullest support to the legal tobacco industry. |
|
|
| Finally,
I would like to stress my firm belief that the abilities and commitment of
our |
|
| people
are our greatest strengths. Ample testimony of this belief are our improved
sales |
|
| volume,
the successful completion of a major restructuring program, and the injection
of |
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| Rs
2.2 billion via a Right Issue as part of our recovery program during 2000.
Together, we |
|
| will
strive to be the best in everything we do to overcome all current and future
challenges. |
|
|
| With
kind regards, |
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|
GOTTFRIED THOMA |
|
|
|
Chairman & Chief Executive |
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| FINANCIAL
HIGHLIGHTS |
|
|
|
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|
2000 |
1999 |
1998 |
1997 |
1996 |
|
|
|
|
|
|
| Volume |
|
millions |
21,360 |
18,694 |
22,115 |
20,599 |
21,318 |
|
|
|
|
------------------ |
------------------ |
------------------ |
------------------ |
------------------ |
|
| Turnover |
|
Rs millions |
15,907 |
14,938 |
14,250 |
12,138 |
11,832 |
|
| Excise
and Sales Tax |
" |
9,790 |
9,345 |
8,846 |
7,703 |
7,804 |
|
|
|
|
------------------ |
------------------ |
------------------ |
------------------ |
------------------ |
|
| Net Turnover |
|
" |
6,117 |
5,593 |
5,404 |
4,435 |
4,028 |
|
| Operating Profit |
|
" |
316 |
344 |
92 |
8 |
139 |
|
| (Loss)
Before Tax |
" |
(854) |
(108) |
(281) |
(246) |
(39) |
|
| (Loss)
After Tax |
" |
(884) |
(136) |
(308) |
(268) |
(59) |
|
| (Loss)
Per Share Before Tax |
Rs |
(16.9) |
(3.4) |
(8.8) |
(7.7) |
(1.2) |
|
| (Loss)
Per Share After Tax |
Rs |
(17.5) |
(4.3) |
(9.7) |
(8.4) |
(1.8) |
|
|
|
|
|
|
| Shareholders
Funds |
Rs millions |
2,218 |
867 |
1,002 |
1,311 |
1,579 |
|
| Capital
Employed |
" |
2,430 |
1,324 |
1,414 |
1,710 |
1,843 |
|
| Capital
Expenditure |
" |
841 |
515 |
292 |
444 |
350 |
|
|
|
|
|
| Government
Levies |
|
| Customs,
Excise Duties |
|
|
| and Sales Tax |
|
Rs millions |
10,230 |
9,927 |
9,356 |
8,110 |
8,290 |
|
| Local
Taxes and other Duties |
" |
74 |
83 |
47 |
48 |
46 |
|
| Corporate Tax |
|
" |
31 |
28 |
27 |
22 |
20 |
|
| Total |
|
" |
10,335 |
10,038 |
9,430 |
8,180 |
8,356 |
|
|
|
| REPORT
OF THE DIRECTORS |
|
| FOR
THE YEAR ENDED DECEMBER 31, 2000 |
|
|
| The
Directors hereby present their Report and the Accounts for the year ended
December 31, |
|
| 2000
before the fifty-fourth Annual General Meeting of the Company to be held on
June 12, |
|
| 2001. |
|
|
|
|
|
|
|
|
2000 |
1 999 |
|
|
|
|
(Rs 000s) |
|
|
| (Loss)
for the year |
|
(884,474) |
(135,699) |
|
| Unappropriated
Profit Brought Forward |
|
-- |
-- |
|
|
------------------ |
------------------ |
|
| Appropriation |
|
|
(884,474) |
(135,699) |
|
| Transfer
from Revenue Reserve |
|
547,427 |
135,699 |
|
|
------------------ |
------------------ |
|
| Accumulated
Loss |
|
(337,047) |
-- |
|
|
|
========== |
========== |
|
|
|
|
|
|
| The
operating performance for 2000 showed a slight decline, decreasing to Rs 316
million |
|
| compared
to Rs 344 million for 1999. This small decline is despite a substantial Rs
192 |
|
| million
increase in marketing expenses. As in prior years, our high debt levels
resulted in a |
|
| significant
interest charge of Rs 409 million. Combined with restructuring costs of Rs
770 |
|
| million
(as discussed in the Chairman's Message), tax of Rs 31 million and other
income of |
|
| Rs
10 million, this generated a loss after taxation during the year ended
December 31, 2000 |
|
| of
Rs 884 million. |
|
|
|
|
|
|
| Despite
the sixth consecutive year of losses, there are some encouraging signs. |
|
|
| *
A strong recovery in our sales volumes-up by 14% on 1999 levels. |
|
|
|
|
| *
An improvement in our gross margins-up from 8.6% of gross turnover in 1999 to
9.3% |
|
| in 2000. |
|
|
|
|
|
|
| *
Reduced manufacturing costs -- the full year benefit of the restructuring
exercise carried |
|
| out
in 2000 will be seen in 2001. |
|
|
|
|
|
|
| *
A significant investment behind our brands -- an increase of 28% in marketing
expenses |
|
| versus
last year. |
|
|
|
|
| The
combined effect of all of the above should help us to see a significant
improvement in |
|
| our
2001 results when compared with the performance in 2000. |
|
|
|
|
|
| We
are cautiously optimistic that we may even see a small profit after tax in
2001--for the first |
|
| time since 1994. |
|
|
|
|
|
| Our
commitment to re-establish Pakistan Tobacco Company as a stronger company
remains |
|
| on
track and has the full support of our major shareholder, British American
Tobacco. This |
|
| support
was evident in 2000 through the successful completion of the Rs 2.2 billion
Right |
|
| Issue,
the vast majority of these funds coming from British American Tobacco. The
proceeds |
|
| from
the Right Issue were used to invest heavily in building our brands, people
and asset base. |
|
|
|
|
| Aside
from marketing expenses as described above, there were no major growth areas
in |
|
| expenses.
As part of our Head Office expenses, our salary bill actually declined by
around 2% |
|
| largely
due to the reduction of staff as discussed in the Chairman's Message. We were
also able |
|
| to
implement salary increases below inflation and with the full support of our
staff who |
|
| appreciated
the financial situation the Company faced. Our travelling costs also
increased by |
|
| around
96% to just less than Rs 20 million. As with our brands, we have invested
heavily |
|
| behind
our people in 2000. This has led to increased exposure of our people to
businesses in |
|
| other
parts of the world. We have no doubt that this investment in people will help
us further |
|
| move
towards international standards and world class performance! |
|
|
| We
are pleased to report a significant reduction in working capital during the
year. This has |
|
| been
achieved despite a 14% growth in sales volumes. The main area of improvement
is in |
|
| finished
goods that at the end of 2000 were some Rs 244 million lower than at the end
of 1999. |
|
|
| We
also continued our investment in plant and machinery with some Rs 923 million
invested |
|
| in
fixed assets to provide superior quality products to our consumers and to
improve |
|
| productivity
in the long run. Despite this significant investment, our total debt fell by |
|
| approximately
Rs 1.3 billion to Rs 1.7 billion at December 31, 2000. This reduction is
largely |
|
| due
to the proceeds of the Right Issue as described above. |
|
|
| Finally,
we should like to record our appreciation for the significant contribution of
all our |
|
| employees
during 2000 and request their ongoing commitment for the future. This was an |
|
| exciting
year and we all look forward to the challenges ahead and to winning in the
market! |
|
|
| Given
the loss reported, continued high debt and the need to retain cash in the
business to fund |
|
| our
investment, the Board of Directors recommended that no dividend be paid for
this financial |
|
| year. |
|
|
| DIRECTORS |
|
| Mr.
John Victor Richardson resigned from the Board with effect from 15th May
2000. |
|
| The
Board is pleased to welcome Mr. Stephen Wayne Daintith, who joined the Board
on 3rd |
|
| July
2000 as Finance Director. |
|
|
| AUDITORS |
|
| The
Auditors Messrs A. F. Ferguson & Co. retire and offer themselves for
re-appointment. |
|
|
|
| HOLDING
COMPANY |
|
| British
American Tobacco (Investments) 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 December 31, 2000 is shown
on page 40. |
|
|
|
|
On behalf of the Board |
|
|
|
|
|
|
GOTTFRIED THOMA |
|
F.W. VELLANI |
|
|
Chairman & |
|
Director |
|
|
Chief Executive |
|
|
|
| Islamabad:
April 10, 2001 |
|
|
|
| AUDITORS'
REPORT TO THE MEMBERS |
|
|
| We
have audited the annexed balance sheet of Pakistan Tobacco Company Limited as
at December |
|
| 31,
2000 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 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; |
|
|
|
| (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 December 31, 2000 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 Ushr
Ordinance, 1980 |
|
| (XVIII of 1980). |
|
|
|
|
|
|
A.F. FERGUSON & CO. |
|
| Islamabad:
April 12, 2001 |
|
Chartered Accountants |
|
|
|
|
| PROFIT
& LOSS ACCOUNT |
|
| FOR
THE YEAR ENDED DECEMBER 31, 2000 |
|
|
|
Note |
2000 |
1999 |
|
|
|
|
(Rs 000s) |
|
|
| TURNOVER |
|
|
|
15,907,028 |
14,937,845 |
|
| Less:
Cost of sales |
|
3 |
14,431,980 |
13,648,562 |
|
|
|
------------------ |
------------------ |
|
| GROSS
PROFIT |
|
|
1,475,048 |
1,289,283 |
|
|
|
|
| Less:
Marketing expenses |
|
4 |
872,522 |
680,643 |
|
| Administration
expenses |
|
5 |
286,752 |
264,192 |
|
|
|
------------------ |
------------------ |
|
|
1,159,274 |
944,835 |
|
|
------------------ |
------------------ |
|
| OPERATING
PROFIT |
|
315,774 |
344,448 |
|
| Add:
Other income |
|
6 |
11,159 |
11,459 |
|
| Less:
Other expenses |
|
7 |
771,467 |
53,612 |
|
|
|
------------------ |
------------------ |
|
|
|
(444,534) |
302,295 |
|
| Less:
Financial charges |
|
8 |
409,354 |
410,028 |
|
|
------------------ |
------------------ |
|
| (LOSS)
BEFORE TAXATION |
|
|
(853,888) |
(107,733) |
|
|
|
| TAXATION |
|
| Current
- For the year |
|
30,586 |
27,966 |
|
|
|
------------------ |
------------------ |
|
| (LOSS)
AFTER TAXATION |
|
|
(884,474) |
(135,699) |
|
|
|
|
|
| APPROPRIATION |
|
|
|
| Transfer
from revenue reserves |
|
24 |
547,427 |
135,699 |
|
|
|
|
| ACCUMULATED
(LOSS) |
|
|
------------------ |
------------------ |
|
| CARRIED
FORWARD |
|
|
(337,047) |
-- |
|
|
|
|
========== |
========== |
|
| (Loss)
Per Share |
|
31 |
(Rs 17.49) |
(Rs 4.25) |
|
|
| The
annexed notes form an integral part of these accounts. |
|
|
|
GOTTFRIED THOMA |
|
F. W. VELLANI |
|
|
Chairman & |
|
Director |
|
|
Chief Executive |
|
|
|
|
| BALANCE
SHEET |
|
| AS
AT DECEMBER 31, 2000 |
|
|
|
|
|
|
Note |
2000 |
1999 |
|
|
|
|
|
(Rs 000s) |
|
|
|
|
|
|
| TANGIBLE
FIXED ASSETS |
|
10 |
2,421,086 |
1,805,236 |
|
| LONG
TERM INVESTMENT |
|
11 |
5,000 |
5,000 |
|
| LONG
TERM LOANS |
|
12 |
6,984 |
6,762 |
|
|
|
|
|
| LONG
TERM DEPOSITS AND PREPAYMENTS |
13 |
3,168 |
1,273 |
|
|
|
|
|
|
| CURRENT
ASSETS |
|
|
|
| Stores
and spares |
|
14 |
140,909 |
172,583 |
|
| Stocks |
|
15 |
2,591,731 |
2,875,207 |
|
| Trade debts |
|
16 |
11,717 |
91,053 |
|
|
