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SALLY TEXTILE MILLS LIMITED NOTES TO THE ACCOUNTS FOR THE YEAR ENDED SEPTEMBER 30, 2002 1. STATUS & NATURE OF BUSINESS
Sally Textile Mills Limited was incorporated in Pakistan as a public limited company and its shares are quoted on the Lahore & Karachi Stock Exchanges. The company is engaged in the manufacture and sale of yarn.
2. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies adopted in preparation of company's accounts are as follows: -
2.1 Basis of Accounting
The Company has incurred after tax loss of Rs. 24.347 million for the year ended September 30, 2002 and has accumulated losses of Rs. 393.449 million as at that date. The Company is under heavy debt burden and its long-term finance from banks amounting to Rs 166.246 million have further deteriorated its debt equity ratio. These factors raise doubt that the Company will be able to continue as going concern.
The Company, in order to continue as a going concern, has taken major steps to reduce expenses. National Bank of Pakistan has approved rescheduling of its long-term finances amounting to Rs. 163.606 million after considering viability of project and future prospects of the Company.
As a result these accounts have been prepared on assumption that based on management’s plan for restructuring, the Company will continue as a going concern and subsequently do not include and adjustment that might result had the Company not be able to continue as a going concern.
These accounts have been prepared in accordance with the requirements of the Companies Ordinance, 1984 & International Accounting Standards as applicable in Pakistan.
2.2 Accounting Convention
These accounts have been prepared under the historical cost convention as modified by revaluation of land, building and plant and machinery Note 4 and by adjustments of exchange rate fluctuations as referred to in Note 2.5.
2.3 Staff Retirement Benefits
The company operates a gratuity scheme covering all its employees. The liability is calculated with reference to the last drawn gross salary and length of the service of employees.
2.4 Taxation
Current Provision for taxation is made at the current rates of taxation on taxable income for the year, if any. Tax credits and brought forward losses are recognized in arriving at taxable income for the year.
Deferred The company accounts for deferred taxation on all major timing differences, using the liability method if they are expected to reverse in the foreseeable future.
2.5 Foreign Currency Translations
Liabilities for suppliers' credit in foreign currencies are translated in Pak Rupees at rates of exchange prevailing on the balance sheet date.
Gains/losses due to exchange fluctuations on credit facilities are capitalized as part of cost of machinery acquired out of proceeds of such foreign currency credit facilities. All other exchange differences are accounted for in current income.
Export bills receivable at balance sheet date is accounted for at the value realized subsequently.
2.6 Fixed Assets & Depreciation
All fixed assets other than land, building and plant and machinery are shown at their purchase cost together with any incidental expenses of acquisition including difference arising due to exchange fluctuations on foreign currency credit facilities utilized for acquisition thereof.
Land and building are shown at valuation made on March 31, 1987. The increase in value of these assets are transferred to surplus on revaluation of fixed assets account and plant and machinery on the basis of valuation carried out on September 04, 1996.
Depreciation is calculated so as to write off the cost of fixed assets on a reducing balance basis at the rates specified in Note 10 to the financial statements.
Full year's depreciation is provided for normal additions in the year of acquisition. No depreciation is provided on the assets acquired for major expansion, where these assets have not been used for more than one month in a year. No depreciation is provided in the year of disposal of the assets.
Maintenance, normal repairs and replacements are charged to income as and when they are incurred. Major repairs and replacements are capitalized. Adjustments are made to the carrying value of the material fixed assets on replacements.
Gain or losses on disposal of assets are included in income in the year the assets are disposed off.
2.7 Stores, Spares & Stock in Trade
These are valued at lower of cost and net realizable value. Cost is determined as follows: -
Stores and spares - at moving average cost. Raw materials - at annual average cost. Work in process - at average cost. Finished goods - at average cost. Waste - at net realizable value.
(a) Cost in relation to work in process and finished goods represents the annual average manufacturing cost which consists of prime cost and appropriate production overheads.
(b) Net realizable value signifies the selling price in the ordinary course of business less costs necessary to be incurred to make the sale.
2.8 Revenue Recognition
Sales are recognized on despatch of goods to customers.
2.9 Borrowing Costs.
Borrowing cost related to financing of major projects during construction phase is capitalized. All other borrowing costs are expensed as and when incurred.
2.10 Contingencies & Commitments
These are accounted for only when they become due.
2.11 Financial Instruments
Financial Instruments are recognized in financial statements when the Company becomes party to a contract and ceased to recognized when it loses control of contractual right in case of financial assets and in case of financial liabilities when liabilities are extinguished.
2.12 Figures - are rounded off to the nearest rupee. - have been rearranged where necessary to facilitate comparison.
3. SHARE CAPITAL 2002 2001 <Rupees> <Rupees>
3.1 Authorised
20,000,000 ordinary shares of Rs. 10/- each 200,000,000 200,000,000 ========== ==========
3.2 Issued, Subscribed & Paid-up
2,587,500 ordinary shares of Rs. 10/ each issued for cash 25,875,000 25,875,000 337,500 ordinary shares of Rs. 10/- each issued as bonus 3,375,000 3,375,000 5,850,000 right shares of Rs. 10/- each issued for cash 58,500,000 58,500,000 -------------- ------------------ ------------------ Total 8,775,000 87,750,000 87,750,000 ======== ========== ==========
4. SURPLUS ON REVALUATION OF FIXED ASSETS
This represents increase in value of land and factory building of Rs. 34.585 million on March 31, 1987, based on the valuation report of Hasib Associates dated April 30, 1987, and of plant and machinery of Rs. 60.574 million calculated on the basis of report of independent valuer, Indus Surveyors, dated September 04, 1996.
5. LONG TERM FINANCES - Secured 2002 2001 <Rupees> <Rupees>
National Bank of Pakistan
a) Demand Finance - I 52,120,000 52,120,000
b) Demand Finance - II 111,486,000 111,486,000
c) LMM Loan Scheme 1,196,336 1,959,052
Muslim Commercial Bank -Demand Finance 1,444,460 2,166,680 ---------------- --------------- 166,246,796 167,731,732 Less: Current Maturity a) Demand Finance 16,600,000 15,000,000 b) LMM Scheme 728,000 803,468 c) MCB DF 1,444,460 2,166,680 ---------------- ---------------- 18,772,460 17,970,148 ----------------- ----------------- 147,474,336 149,761,584 ========== ==========
5.1 The Sanctioned Limit of the above loans were :- 2002 2001 Sanctioned Limit (Million) (Million) National Bank of PakistanDemand Finance – I 54.621 54.621 Demand Finance – II 111.486 111.486 LMM Loan Scheme 5.820 5.820 MCB Demand Finance 6.500 6.500 ----------- ----------- 178.427 178.427 ====== ====== National Bank of Pakistan(a) Demand Finance - I is secured against 10% registered mortgage and 90% equitable mortgage on all present and future fixed assets of the company to the extent of Rs. 48.435 million and hypothecation of stocks of raw material, work in process, finished goods, spares, tools and unembedded machinery and counter guarantee by the company directors and lien over the documents of title of the machinery to be imported / purchased locally. (b) Demand Finance - II is secured against 10% registered mortgage and 90% equitable mortgage on all present and future fixed assets of the company, personal guarantees of all directors and demand promisory note. (c) Demand Finance I and II has been rescheduled by National Bank of Pakistan vide their letter No. MB:CR:CF/ 2592 dated November 20, 2002 on the following terms: i. Both facilities have been merged in single account. ii. Mark up rate has been reduced from 16.425% to 12% w.e.f July 01, 2001. iii. From October 01, 2002 to September 30, 2004 the company will make payment of Rs.50,000/- per day ( Rs 1.5 M monthly). From October 01, 2004 to September 30, 2007, payment of Rs.125,000/- per day ( Rs. 3.750 M monthly) and from October 01, 2007 onwards Rs 165,000/- per day ( Rs 4.950 M monthly) till adjustment of the accounts. iv. The Company will make down payment of Rs.5.00 million ( Rs. 2.50 million on 30.09.2002 and Rs.2.5 million on 31.12.2002) v. All payments made by the Compnay will be distributed in the ratio of 80:20 i.e. 80% of the payment amount will go toward adjustment of principal and 20% toward adjustment of markup. Mark up remaining unpaid on Principal Demand Finance will be added to Demand Finance for mark up amount. vi. The Bank’s existing first mortgage charge on fixed assets of the Company will be modified as per term of the package to cover outstandings of new accounts. vii. An undertaking duly drafted by the BLA will be furnished by the Company that in case of any default in payment of loan as per package, the loan will become payable as original terms and amount so far recovered will be appropriated first towards income as per provisions of Section 10 of the Recovery Finances Ordiance 2001 and as per Banks’ normal lending norms. viii. The Company shall undertake to start BMR their mills within next one year.
(d) LMM loan is repayable in 32 equal quarterly installments commencing April 01, 1997 payable after a grace period of one year. It is secured by 10% registered mortgage and 90% equitable mortgage on all present and future fixed assets to the extent of for Rs. 5.82 million and hypothecation of stocks of raw material, work in process, finished goods, spares, tools and unembedded machinery and counter guarantee by all the company directors and lien over the documents of title of the machinery to be purchased locally. Markup is payable @ 38 paisas per thousand per day payable quarterly in the months of January, April, July and October. Muslim Commercial Bank (e) MCB Demand Finance has been created on account of realisation of guarantee provided by the bank to PILCORP against their financing facility of Rs. 9.00 million. The margin deposit of Rs.2.50 million in respect of guarantee provided by the bank has been adjusted and remaining amount has been converted into loan on following terms and conditions. This loan is payable in 36 equal monthly installments commencing July 01, 1999 after grace period of 6 months. It is secured by personal guarantees of directors. Mark up is payable @17% p.a. payable quarterly basis. The current maturity represents overdue portion.
6. GRATUITY 2002 2001 <Rupees> <Rupees>
Opening Balance. 20,912,997 17,468,925 Provision for the year 6,682,200 5,128,231 Payment / adjustment during the year (5,803,680) (1,684,159) -------------- -------------- Closing Balance 21,791,517 20,912,997 ======== ========
7. SHORT TERM FINANCES - Secured 2002 2001 <Rupees> <Rupees> National Bank of Pakistan Cash Finance 71,498,126 73,581,087 Packing Finance 10,000,000 10,000,000 Import LC due 6,604,808 0 ------------------ ------------------ 88,102,934 83,581,087 ========== ========== These have been obtained on mark-up basis from: - Sanctioned Limit (Million) (Million) National Bank of Pakistan Cash Finance 143.000 143.000 Packing Finance 10.000 10.000 ----------------- ------------------ 153.000 153.000 ========== ==========
Cash finance and Packing Finance is secured against the pledge of stocks, hypothecation of work in process, charge on book debts and other assets, demand promissory note, personal assets and guarantees of the directors and lien on confirmed Letter of Credit opened by bank.
Mark-up is chargeable on the following rates: National Bank of Pakistan Cash finance 16 % reduced to 14 % on 1st of Jan 2002 Packing Finance 16 % reduced to 14 % on 1st of Jan 2002
8. CREDITORS, ACCRUALS & 2002 2001 OTHER LIABILITIES <Rupees> <Rupees>
Creditors 75,583,953 91,594,526 Accrued liabilities 13,253,925 13,678,956 Advance from parties 56,465,961 37,635,583 Mark-up on secured long term finances 38,490,878 21,285,534 Mark-up on secured short term finances 40,629 4,081,056 Security Payable 305,000 305,000 Sales Tax Payable 1,989,375 6,808,821 Other Payables 1,283,137 299,017 ------------------ ------------------ 187,412,858 175,688,493 ========== ========== 9. CONTINGENCIES & COMMITMENTS 2002 2001 <Rupees> <Rupees> COMMITMENTSLetters of credits opened for purchase of cotton 13,829,420 7,474,000 Letters of credits opened for purchase of machinery 569,600 0
CONTINGENCIES The assessments have been completed upto the income year 1999-2000 (Assessment year 2001-2002) by the Deputy Commissioner of Income Tax raising a demand of Rs.0.390 million. Appeal has been filed against this demand.
11. CAPITAL WORK IN PROGRESS 2002 2001 <Rupees> <Rupees>
Opening Balance. 2,263,351 8,246,628 Addition during the year Plant & Machinery 1,881,601 0 Building 820,542 2,263,351 -------------- -------------- 4,965,494 10,509,979 Transferred to Fixed assets 1,881,601 8,246,628 -------------- --------------- Closing Balance 3,083,893 2,263,351 ======== ======== 11.1 The closing balance represents expenses incurred for the construction of guest house at site.
12. LOANS & ADVANCES 2002 2001 <Rupees> <Rupees>
These are unsecured but considered good.
Due within three years 188,241 233,599 Due after three years 1,323,006 571,006 ------------ ----------- 1,511,247 804,605 ======= ====== This represents interest free loans given to the employees for construction of house and other general purpose, against their salary and their balance of gratuity. The balance includes Rs. 1,323,006 (2001: Rs.571,006) given to employees whose basic salary exceeds Rs. 100,000 per annum. 13. LONG TERM DEPOSITS 2002 2001 <Rupees> <Rupees>
The amount represents deposits against utility connections. Addition during the year relates to deposit with WAPDA regarding extension of electricity load.
14. STORES & SPARES 2002 2001 <Rupees> <Rupees>
Stores 1,470,120 1,732,421 Spares 3,366,272 4,009,260 ------------------ ------------------ 4,836,392 5,741,681 ========== ========== 15. STOCK IN TRADE 2002 2001 <Rupees> <Rupees> Raw material 50,875,613 47,330,375 Work in process 9,781,841 4,824,891 Finished goods 1,975,779 1,137,019 ------------------ ------------------ 62,633,233 53,292,285 ========== ==========
16. TRADE DEBTORS
The balance relates to local debtors which are unsecured but considered good.
17. ADVANCES, DEPOSITS, PREPAYMENTS & 2002 2001 OTHER RECEIVABLES <Rupees> <Rupees>
These are unsecured but considered good.
Due from employees (Note 17.1) 1,337,368 1,553,834 Advances to Suppliers 1,086,809 2,605,026 Letters of credit (Note 17.2 ) 115,694 59,545 L/C margin 0 1,823,000 Advance Incom Tax 3,871,049 6,169,417 Prepayments 443,810 761,883 Others 132,478 436,983 ------------------ ------------------ 6,987,208 13,409,688 ========== ==========
17.1 These interest free loans & advances include Rs. 713,247 (2001: Rs 1,392,787 ) given to employees whose basic salary exceeds Rs. 100,000 per annum. 17.2 This amount relates to letter of credit for import of cotton.
18. CASH & BANK BALANCES 2002 2001 <Rupees> <Rupees>
Cash in hand 381,414 131,608 Cash at bank - In current accounts 389,591 272,663 ------------------ ------------------ 771,005 404,271 ========== ==========
19. SALES 2002 2001 <Rupees> <Rupees>
Yarn 461,798,526 563,208,088 Waste 7,662,508 10,381,261 ---------------- ------------------ 469,461,034 573,589,349 ========= ==========
20. COST OF SALES 2002 2001 <Rupees> <Rupees>
Raw material consumed (Note 20.1) 283,993,570 321,124,305 Salaries, wages & benefits 49,799,358 50,342,179 Gratuity 4,927,578 3,022,443 Power & Fuel 74,607,636 77,606,360 Store Consumed 10,085,538 12,129,130 Repair & Maintenance 7,395,476 11,768,401 Depreciation 17,273,605 18,928,638 Insurance 399,356 404,191 Other expenses 1,101,045 932,947 ----------------- ------------------ 449,583,162 496,258,594 Adjustment of work in process Opening stock 4,824,891 3,472,148 Closing stock (9,781,841) (4,824,891) ----------------- ------------------ (4,956,950) (1,352,743) ----------------- ------------------ Cost of goods manufactured 444,626,212 494,905,851 Adjustment of finished goods Opening stock 1,137,019 2,435,329 Closing stock (1,975,779) (1,137,019) ----------------- ------------------ (838,760) 1,298,310 ----------------- ------------------ 443,787,452 496,204,161 ========== ==========
20.1 Raw Material Consumed Opening stock 47,330,375 50,824,747 Add: Purchases 287,411,150 317,475,332 ---------------- ---------------- 334,741,525 368,300,079 Less: Closing stock 50,875,613 47,330,375 ---------------- ---------------- 283,865,912 320,969,704 Add: Cotton Cess 127,658 154,601 ---------------- ---------------- 283,993,570 321,124,305 ========== =========
21. ADMINISTRATIVE EXPENSES 2002 2001 <Rupees> <Rupees>
Salaries, wages & benefits (Including directors' remuneration) 8,187,629 7,917,486 Gratuity 1,399,086 1,274,795 Travelling & conveyance 193,762 691,486 Communication 1,360,873 1,721,211 Electricity & gas 1,248,014 1,610,370 Printing & stationery 456,499 474,640 Repair & maintenance 437,129 818,475 Vehicles maintenance 1,162,551 1,835,828 Rent, rates & taxes 534,997 514,298 Advertisement 24,440 37,150 Legal & professional charges 18,000 1,166,074 Auditors' remuneration (Note 21.1) 175,000 150,000 Donations (Note 21.2) 0 434,656 Depreciation (Note 10.1) 638,150 2,159,842 Others 689,516 1,699,895 -------------- ------------------ 16,525,646 22,506,206 ======== ========== 21.1 Auditors’ Remuneration
Audit fee 60,000 35,000 Out of pocket expenses 15,000 15,000 Tax Consultancy 100,000 100,000 --------------- ----------------- 175,000 150,000 ========= ========== 21.2 None of the directors or their spouses had any interest in the donees.
22 SELLING EXPENSES 2002 2001 <Rupees> <Rupees>
Salaries & benefits 2,290,934 1,851,013 Gratuity 355,536 402,131 Travelling & conveyance 202,122 140,679 Communication 181,060 203,261 Electricity & gas 114,620 101,610 Printing & stationery 1,822 5,959 Repair & maitenance 6,700 6,600 Vehicles maintenance 342,927 521,058 Carriage & Freight 2,501,208 2,551,703 Others 74,596 108,412 -------------- ------------------ 6,071,525 5,892,426 ======== ==========
23. FINANCIAL EXPENSES 2002 2001 <Rupees> <Rupees>
Mark-up on Secured Long term finances 20,132,480 29,155,594 Secured Short term finances 14,547,477 19,947,643 -------------- ------------------ 34,679,957 49,103,237
Bank Charges & Others 1,065,415 1,299,838 ---------------- ------------------ 35,745,372 50,403,075 ========= ==========
24. OTHER CHARGES/(INCOME) 2002 2001 <Rupees> <Rupees>
Sale of scrap (534,351) (984,043) Disposal of fixed assets (Note 10.2) (3,740,118) - Unclaimed balances written back adjustment (1,075,406) 778,148 Miscellaneous Income (213,772) 471,240 -------------- ------------------ (5,563,647) 265,345 ======== ==========
25. PRIOR YEAR’S ADJUSTMENT 2002 2001 <Rupees> <Rupees>
Reversal of Mark up (Note 25.1) 2,397,228 - Adjustment of retirement benefits (Note 25.2) 2,717,500 - -------------- ------------------ 5,114,72 8 - ======== ========== 25.1 This includes effect of reduction in mark up rate on prior years amounting to Rs 2.397 million. The mark up rate has been reduced as a part of reschduling of Long Term Finance by National Bank of Pakistan. (Note No. 5.1 (c)(ii).
25.2 Retirement Benefits, payable to the Company’s executives, have been reversed as these amounts are payable at the discretion of the Board of Directors of the Company on case to case basis considering the performance of the employee and length of the service. Accordingly, the effect of such transactions shall be accounted for at the time of making payments.
26. TAXATION
26.1 Provision for turnover tax Under Section 80 (D) of the Income Tax Ordinance, 1979 has been made for the current year on account of accumulated losses for the previous years.
26.3 No provision has been made for deferred taxation, as the timing differences are not expected to reverse in the foreseeable future. The estimated potential liability comes to Rs. 7.1 million. (2001: Rs. 4.384 million)
27. BASIC EARNING PER SHARE 2002 2001 <Rupees> <Rupees>
Profit /(Loss) for the year attributable (24,347,009) (4,630,220) to ordinary shareholders. No. of Ordinary Shares outstanding 8,775,000 8,775,000 during the year. Earning per share (2.775) (0.528)
28. REMUNERATION OF CHAIRMAN, DIRECTORS & OFFICERS
CHAIRMAN WORKING DIRECTORS PARTICULARS & OFFICERS 2002 2001 2002 2001
Managerial remuneration 240,000 240,000 1,118,460 1,133,400 Rent & utilities 439,361 980,830 812,287 972,626 Other perquisites & benefits: Medical Expenses 42,322 53,420 77,082 72,500 Servant salaries 75,000 90,000 37,500 42,000 ---------------- ---------------- ---------------- ---------------- 796,683 1,295,135 2,045,329 2,220,526 ========== ========== ========== ========== No. Of Persons 1 1 3 3
In addition to the above, company maintains cars of Chairman & above Directors . No meeting fee was paid during the year.
29. NO. OF EMPLOYEES
Total number of employees at the year end was 1203 ( 2001 : 1222 )
30. CAPACITY & PRODUCTION 2002 2001
No. Of spindles installed 40,344 40,344 No. Of spindles shifts worked 42,550,279 42,537,113 Assessed capacity all counts (Kgs) 5,270,412 5,270,412 Actual production all counts (Kgs) 3,660,174 3,674,771 Actual production converted into 20 S count (Kgs) 15,030,342 15,758,543 No. Of shifts worked 1,086 1,086
Due to defective & poor quality of local cotton and discontinuation of electricity for extension of load assessed level of production could not be attained.
32. DATE OF AUTHORIZATION OF ISSUE
The financial statements were authorized for issue on January 28,2002, by the Board of Directors of the Company.
MIAN IQBAL SALAH-UD-DIN MIAN YOUSAF SALAH-UD-DIN Chief Executive Director
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