ORDER UNDER SECTION 265 OF THE COMPANIES ORDINANCE 1984 M/s. Kaiser Arts & Krafts Limited was listed on the Karachi Stock Exchange in the year 1995. It was incorporated as a private limited company on September 13, 1984 and was converted into public company on August 31, 1994. The paid up capital of the company as on 30-06-1998 is Rs.85.50O million. The principle activity of the company is to manufacture and sale of various type of garments and fabrics. The company before listing took over the assets and liabilities of M/s. Kaiser Art & Krafts (a group partner-ship concern) on September 30, 1994 at their book values.
2. On examination of the annual accounts for the year ended 30.06.1998 and earlier years of M/s. Kaiser Arts and Krafts Limited (herein-after referred to as the company) it was revealed that the company paid no dividend to its shareholders since its listing on the Stock Exchange in the year 1995 till to-date. The company, at the time of public offer, in the Prospectus disclosed its working results for 9 months ended on 31.03.1995, in which a profit of Rs. 2.249 million was reported. The working results of the partnership firm namely M/s. Kaiser Arts & Krafts, whose assets and liabilities were taken over by the company, were also disclosed in the Prospectus for the years 1990 to 1994 and 3 months period ending on 30.09.1994 in which consistent profits were disclosed. It was further disclosed in the Prospectus that the management of the company has been in the field for the last two decades and enjoys very good relation-ship with the foreign buyers. It was also stated that the chief executive had won the FPCCI Export Trophy Award for the year 1992-93 as "Businessman of the year".
It was also disclosed that at present the project has been running at 60% capacity and that the company, keeping in view the upward trend of the demand, has purchased/acquired additional export quota from Textile Quota Management Directorate for Rs.11.480 million by utilizing its running finance facility which shall he paid from the public subscription of Rs.30 million. The balance amount of public subscription was to be utilized for purchase of additional quota and for working capital requirements. All these statements generated the interest of the investors and the issue was heavily over-subscribed. However, the company's performance deteriorated after listing. In the year ended on 30.06.1996, the company suffered from a loss of Rs. 37.484 million on the total sales of Rs. 34.220 million which is more than 100% of the sales; again the company suffered from a loss of Rs.44.884 million in the year 1997 which is more than its sales and in the year 30.06.1998 the company suffered from a loss of Rs. 11.423 million. The accumulated loss as on this date stood at Rs.90.529 million which has completely eroded the capital of Rs.85.500 million of the company in the period less than 4 years after listing. The current liabilities amounting to Rs. 191.869 million exceed the current assets of the company amounting Rs.140.151 million. Further an analysis of its published accounts for the preceding years indicate alarming inconsistencies relating to gross profits margins. For example, the half yearly accounts ended 31st December, 1996, indicate Gross Profit rate of 4.9%, whereas as per the next half-yearly accounts for the period ended on June 30, 1997, there was gross loss of 90.70%, the annual accounts ended on 30th June, 1997 shows a gross loss of 45.8% while the next annual accounts indicates profit of 11.71% followed by gross loss of 7.4% in the following six months.
These inconsistencies raise very serious doubts about the correctness of the accounts maintained and the financial statements published by the company.
3. In view of the aforesaid state of affairs there is an apprehension that affairs of the company are not being managed in accordance with the sound business principles and prudent commercial practices, the members of the company have been deprived of a return on their investment and the solvency of the company is endangered. Accordingly a Show Cause Notice under section 265 of the Companies Ordinance, 1984 was served upon the company and its chief executive on 27th Feb, 1999 to show cause in writing by 15th March, 1999 as to why an Inspector should not be appointed to investigate into the affairs of the company. The company did not furnish any reply to the said show cause notice. It was decided to provide another opportunity to the company and its Chief Executive to explain their viewpoint and the case was fixed for hearing on 08.04.1999 before the undersigned. The Chief Executive of the company vide his fax message dated April 5, 1999 informed that he had already scheduled business meetings in USA and requested extension of time for another 20 days The hearing was, therefore, adjourned on his request to 08-05-1999. No body appeared on the date of hearing. However, again to provide opportunity, the case was refixed for hearing on 25.05.1999. The Chief Executive vide his fax message dated 25th May, 1999 informed that his mother was sick and none of his family members was available to look after her and, therefore, the hearing be adjourned for about 15 days. Although it appeared that the Chief Executive was applying delaying tactics yet the hearing was adjourned and the case was fixed for hearing on 12.06.1999. The hearing fixed on 12.06.1999 was adjourned to 24.06.1999 due to pressing official engagements. On 24.06.1999 no body appeared for hearing. It is very serious that neither the Chief Executive nor any authorized representative bothered to reply the show cause notice issued by the Commission. Further, they did not avail of the opportunity to explain their viewpoint before deciding the matter. In these circumstances I have not been left with any alternate except to decide the mater expartee.
4. Therefore, in view of the deteriorated performance after public offer and alarming inconsistencies in operational results outlined in the foregoings, I in the public interest and in exercise of the powers conferred by section 265 (b) of the Companies Ordinance, (XLVII of 1984) hereby appoint M/s. Ford Rhodes, Robson, Morrow, Chartered Accountants, First Floor, Finlay House, I.I. Chundrigar Road, Karachi-2 to act as Inspector to investigate into the affairs of M/s. Kaiser Arts & Krafts Limited on a remuneration of Rs. 150,000/- which shall be paid by the company.
5. Without in any way limiting to the scope of investigation, the Inspector shall conduct investigation on all aspects of the operations of the company and shall after scrutiny of the entire record and books of accounts furnish reports, inter alia, on the following
(i) Reasons and genuineness of heavy losses after public offer as the company was reportedly a well established concern before the public offer. Inspector will also report if any wrong statement was made regarding profitability of the business of the company (and of the partnership concern of which business was taken over) to lure to public to make investment.
(ii) Whether cost incurred on purchase of export quota has been amortized on a systematic basis, the value of export quota has been reviewed and fairly charged in financial statements, the gain or loss on sale of quota and surrender if any has been properly accounted for. The Inspector will thoroughly scrutinize the export quota account and will report about position positively.
(iii) The reasons for abnormal decline in sales and increase in cost of sales after listing as the company's sales for 9 months period ending on 30.06.1995 stood at Rs. 69.496 million on which the company earned a gross profit of Rs. 22.361 million whereas its sales for the year ended 30.06.1996 dropped to Rs. 34.220 million only and cost of sales jumped to Rs. 39.505 million resulting into gross loss of Rs. 5.284 million.
(iv) Whether or not funds raised through public offer were utilized in the manner as undertaken in the Prospectus specially relating to purchase of quota.
(v) Whether or not proper record have been kept by the company as required by section-230 and section-234 of the Companies Ordinance, 1984.
(vi) Whether or not an adequate system of internal controls exist so as to prevent misappropriation and misapplication of Company's assets.
(vii) Weather or not internal audit department is functioning properly, is it competent enough and independent to perform its functions. Evaluate internal audit reports and report that how these are disposed of by the Board i.e. whether or not immediate required actions are taken.
(viii) Is there some effective budgetary and cost control system and are any special studies carried out to improve workings of the company if so comment.
(ix) Whether or not the purchase and sales rates of materials and products respectively are comparable with the market rates generally reported.
(x) Whether or not expenses have been properly incurred, sanctioned, vouched and allocated and these were for exclusive purpose of the company.
(xi) Whether or not proper storage system has been maintained and stocks, stores, raw material and finished goods quantitatively reconcile and have been correctly valued, provision against dead stocks, slow moving spare & stores have been made and the production and wastage rates are comparable with other units.
(xii) Ascertain the frequency of meeting of board of directors, role of non-executive and executive directors, the over all comprehension of board of directors, their experiences to determine their ability to run this business in which company is engaged.
(xiii) To examine and report the reasons of inconsistencies in operating results as pointed out in the Annex.
(xiv) Compliance with statutory requirements in the operations of the company indicating that the business was conducted and expenditure were incurred in accordance with the objects and for purposes of the company.
(xv) To report in respect of any lapse or other delinquency detected during the course of investigation,
(xvi) Determine the trend of the business of the company and discuss the plans of company's management to come out of the present crisis. For this, the projections and business plans produced by the management will be evaluated and summarized with an opinion by the Inspector.
6. The Inspector shall submit a detailed report alongwith supporting documents/evidence to the Commission (in quadruplicate) within 60 days from the date of this order.