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Annual Report
for the year ended December 31, 2007
The Cover Concept
Mapping the way for growth

Annual Report
When rocks in your path create a hindrance, when conditions are uncertain and the weather is overcast, it is then, that most people lose hope and disappointment sets in. In our 60 years history, we have learnt one thing to look for opportunities in uncertain scenarios, so much so that uncertainty becomes our ally and rocks become our foot holders to ascend to greater heights. This is what PTC is all about its about endeavor, its about growth, its about a glorious journey. We do not define growth as excess of everything but as enough of every thing only at a higher level. This strategy of clear delegation, call for action, and trust in ourselves & in our nation has changed things surprisingly quickly for us. Our next step is entirely within our grasp. We know where we stand and we know where we are headed. To us, our heritage and learning is a lever which we use to chalk out a way forward. This is a story of not just odds being surmounted and adversity transformed to opportunity, but those challenges met with an open heart and a resolve to thrive in the effort; leading to success and ultimately a new chapter in our history.
Behind any significant organisational achievement and growth is a focused approach to continuous learning and improvement
Toh Ah Wah
Managing Director & CEO
Annual Report 2007 Pakistan Tobacco Company Limited 01
Contents
03 04 06 08 12 14 16 18 22 30 31 32 34 36 37 38 40 42 44 48 49 54 133
Corporate Information Corporate Objectives & Business Principles Guiding Principles The Board of Directors Financial Highlights Notice of the Annual General Meeting Chairmans Message Managing Directors Review Directors Review Statement of Revenue Generated & Distributed Board Committees Pattern of Shareholding Statement of Compliance with the Code of Corporate Governance Statement of Compliance with the Best Practices on Transfer Pricing Review Report to the Members on Statement of Compliance with Best Practices of Code of Corporate Governance Who We Are Productivity Corporate Social Responsibility A Winning Organisation 60 Years of Excellence - Our Heritage Our Brands Financial Statements Form of Proxy
Corporate Information
Registered Office
Pakistan Tobacco Company Limited Evacuee Trust Complex, First Floor, Agha Khan Road, Sector F-5/1, P.O. Box 2549, Islamabad-44000. Telephone: (051) 2083200, 2083201 Fax: (051) 2278376, 2278377 Web: www.ptc.com.pk
Factories
Akora Khattak Factory P.O. Akora Khattak, Tehsil and District Nowshera, N.W.F.P. Telephone: (0923) 63090 1-1 1 Fax: (0923) 510792 Jhelum Factory G.T. Road, Kala Gujran, Jhelum. Telephone: (0544) 646500-7 Fax: (0544) 646524
Company Secretary
Ms. Ayesha Rafique
Company Secretary
E-mail: ayesha_rafique@bat.com
Regional Sales Offices

North Punjab & N.W.F.P. House 57-A/6, Satellite Town, Rawalpindi. Telephone: (051) 4582390-1 Fax: (051) 4582392 Central Punjab 128/129-G, Commercial Area, Phase-1, Defence Housing Authority, Lahore. Telephone: (042) 5899351-4 Fax: (042) 5899356 Southern Punjab House No.93, Street No.3, Meharban Colony, MDA Chowk, Multan. Telephone: (061) 4512553, 4584376 Fax: (061) 4542921 Sindh & Balochistan 8th Floor, N.I.C. Building, Abbasi Shaheed Road, Karachi. Telephone: (021) 5635490-5 Fax: (021) 5635500
Bankers
ABN Amro Bank Citibank N.A. Deutsche Bank Habib Bank Limited The Hong Kong & Shanghai Banking Corp. MCB Bank National Bank of Pakistan Standard Chartered Bank
Auditors
A.F. Ferguson & Co
Chartered Accountants
3rd Floor, PIA Building, 49 Blue Area, P.O. Box 3021, Islamabad-44000. Telephone: (051) 2273457-60 Fax: (051) 2277924
Share Registrar
Ferguson Associates (Pvt.) Limited State Life Building No.2A, 4th Floor, I.I. Chundrigar Road, Karachi.
Corporate Objectives
Our vision, mission and strategic objectives define the way we live and work
Our Vision
First Choice for Everyone.
Our Mission
Transform PTC to perform responsibly with the speed, flexibility and enterprising spirit of an innovative, consumerfocused Company.
Strategic Objectives
Our strategy reflects our vision, being the champions of Growth, Productivity, Responsibility and the Winning Organisation.
04 Corporate Objectives & Business Principles
Business Principles
Our company follows three fundamental Business Principles: Mutual Benefit, Responsible Product Stewardship and Good Corporate Conduct. Each principle is supported by a series of core beliefs, which are explained below:
Responsible Product Stewardship

The principle of Responsible Product Stewardship is the basis on which we meet consumer demand for a legal product that, put simply, is a cause of serious diseases. Therefore, our products and brands should be developed, manufactured and marketed in a responsible manner. We aspire to develop tobacco products with critical mass appeal that will, over time, be recognised by scientific and regulatory authorities as posing substantially reduced risks to health. Core Beliefs Provision of accurate, clear health messages about the risks of tobacco consumption Reduction of the health impact of tobacco consumption whilst respecting the right of informed adults to choose the products they prefer Continued availability of relevant and meaningful information about our products Underage people should not consume tobacco products Responsible marketing of our brands and products and directed at adult consumers Appropriate taxation of tobacco products and elimination of illicit trade Regulation that balances the interests of all sections of society, including tobacco consumers and the tobacco industry Approach public smoking in a way that balances the interests of smokers and non-smokers
Mutual Benefit
The principle of Mutual Benefit is the basis on which we build our relationships with our stakeholders. We are primarily in business to build long term shareholder value and we believe the best way to do this is to understand and take account of the needs and desires of all our stakeholders. Core Beliefs Creating long term shareholder value Engaging constructively with our stakeholders Creating inspiring work environment for our people Adding value to the communities in which we operate Ensuring that suppliers and other business partners have the opportunity to benefit from their relationship with us
Good Corporate Conduct

The principle of Good Corporate Conduct is the basis on which all our business should be managed. Business success brings with it an obligation for high standards of behaviour and integrity in everything we do and wherever we operate. These standards should not be compromised for the sake of results. Core Beliefs Our business upholds high standards of behaviour and integrity High standards of corporate social responsibility to be promoted within the tobacco industry Universally recognised fundamental human rights to be respected Tobacco industry to have a voice in the formation of government policies affecting it Achieving world class standards of environmental performance
Guiding Principles
We follow four guiding principles that represent Strength from Diversity, Open Minded, Freedom through Responsibility, and Enterprising Spirit. Our Guiding Principles describe the organisation we are and the type of organisation we want to be. They represent the common values at the heart of our success.
Strength from Diversity

Strength from Diversity reflects the cultural mix within the Company and a work environment that respects employees individual differences. It also reflects our vision of harnessing diversity of people, cultures, viewpoints, brands, markets and ideas to create opportunities and strengthen performance. For this reason, we are interested in what will differentiate you from others what makes you unique.
Open Minded
Open Minded reflects our openness to change, opportunities and new ideas, including ways of addressing regulatory issues and changing social expectations. We seek to listen without prejudice, actively and genuinely considering other viewpoints.
Freedom through Responsibility

Freedom through Responsibility describes how we make decisions: as close to the consumer as possible. It also affirms our belief that decision-makers should accept responsibility for their own decisions.
Enterprising Spirit
Enterprising Spirit has been a characteristic of our business for more than a century. It is reflected in our ability to grow our business and its value within challenging environments in the confidence to seek out opportunities for success, to strive for innovation and to accept considered risk-taking as part of doing business.
06 Guiding Principles
The Board of Directors
Mueen Afzal
Chairman and Non-Executive Director
Toh Ah Wah
Managing Director and Chief Executive
Mobasher Raza
Deputy Managing Director and Finance Director
Mueen Afzal graduated with Honours from Punjab University before going to Oxford University in 1963. He joined the Civil Service in 1964. He served in various prominent positions in Finance and Health ministries with the Provincial and Central Governments. He also served as a Secretary General Finance and Economic Affairs with the Government from 1999 to 2002. He is also on the board of various reputed organizations / institutions, which include Pakistan International Airline (PIA), ICI Pakistan Limited, Murree Brewery Company Limited, Beaconhouse National University Foundation, Al-Shifa Trust, Pakistan Poverty Alleviation Fund, Pakistan Philanthropy Centre, Sanjan Nagar Trust and Azgard Nine (Pvt.) Ltd etc. He is also an advisory member of Pakistan Cricket Board.
Toh Ah Wah has been Chief Executive Officer of Pakistan Tobacco Company since November 2005. William joined British American Tobacco (BAT) after the merger between British American Tobacco and Rothmans International in November 1999 as the Business Development Director for China. In October 2003, William moved to New Zealand as a Managing Director. Before joining BAT, William was the Managing Director of Greater China with Rothmans International, based in Hong Kong. He began his career with Rothmans International, Malaysia as a Management Trainee in 1981. He spent 10 years of his career with the Company in Malaysia; 5 years as State Sales Manager and 4 years as Marketing Manager before he was seconded overseas for his first posting in China in 1991.
Mobasher Raza has been with the Company for the last 28 years. He joined the Company as a Management Trainee in 1979 and has held various key positions in the finance function within PTC as well as with the other Group Companies. His international assignments include Internal Auditor for British American Tobacco UK, Finance Director Nigerian Tobacco Company Limited and Head of Finance Tvornica Duhana Zadar (British American Tobacco subsidiary in Croatia). In 2002, he returned to PTC as the Chief Financial Officer and was appointed the Finance Director in 2003. After holding the Chairman's Office in 2005-06, he is currently the Chairman of the Cigarette Manufacturer's Association. Since 2003, he has been a member of OICCI Taxation Committee. In November 2006, in addition to his role as a Finance Director he was appointed as the Deputy Managing Director of the Company.
08 The Board of Directors
Mirza Rehan Baig

Marketing Director
Ahmed Zeb
Supply Chain Director
Feroze Ahmed
IT Director
Rehan Baig joined Pakistan Tobacco Company as an international secondee from Dubai in July 2005 as Head of Brand Marketing. In October 2006, after serving for just over a year, he took over the role of Marketing Director. Rehan began his career with British American Tobacco (BAT) in 2000 as Brand Manager for the countries of the Gulf Cooperation Council based in Dubai. In 2002, Rehan relocated to Beirut as the Regional Manager and was later promoted to the position of the Head of Trade Marketing and served as a member of the Levant / Yemen Executive Committee. In 2004, he moved back to Dubai as the Marketing Development Manager. Prior to joining BAT, Rehan had spent over 3 years on the BAT account, working for Grey Worldwide advertising and covering the Middle East North Africa markets.
Ahmed Zeb joined the Company as a Management Trainee in the Production Department in 1976. Having held the positions of the Factory Manager, Chief Engineer, and a cross functional marketing tenure of two years, he was seconded to BAT Uganda in 1997. In Uganda, he worked as Head of Operations and Projects for the East Africa cluster. Thereafter, he was posted to Sri Lanka (Ceylon Tobacco Company) as Operations Director. He returned to Pakistan Tobacco Company in August 2004 and was appointed as Production Director. He joined the Board in August 2005. He has gone through an extensive range of International Management and Leadership Development Programmes over his service period. He assumed the role of Supply Chain Director in year 2006.
Feroze Ahmed joined PTC in October 2003 from Reckitt Benckiser plc, UK where he served as the Information Services Director for Eastern Europe, Africa & Middle East, East Asia & South Asia, and as a member of the Global IT leadership team. His career includes posts of Regional IT Director for Africa & Middle East, East Asia & South Asia based in South Africa, Singapore and Pakistan respectively. He served as a member of the Board of Directors in Reckitt & Colman, South Africa. He is a member of the Institute of Directors (loD), UK. In PTC, Feroze joined as the Head of IT in October 2003, was promoted to IT Director in October 2004. He joined the Board of Directors in October 2005. As of January 2007, Feroze has taken over as the Director IT for South Asia.
The Board of Directors
Lt. Gen. (Retd.) Ali Kuli Khan

Non-Executive Director
Ben Willem Fourie

Istaqbal Mehdi
Lt. Gen. (Retd.) Ali Kuli Khan hails from Peshawar and belongs to a renowned industrial family. He was educated at Aitichison College Lahore and graduated from the Royal Military Academy Sandhurst in 1964. He was commissioned in the Pakistan Army in 1964. General Ali and his late father are the only examples in Pakistan Army where both father and son have risen to the rank of Lieutenant Generals. Important assignments during his brilliant career were Commandant Staff College in Quetta, Chief of General Staff and Director General Military Intelligence. He also sits on the boards of Bannu Woolen Mills Limited, Janana De Malucho Textile Mills Limited, Liaquat National Hospital, Universal Insurance Company Limited, General Tyre & Rubber Company of Pakistan Limited, Ghandhara Nissan Limited, Ghandhara Industries Limited, Gammon Pakistan Limited.
Ben Fourie was born in South Africa and completed his B.Sc. degree in Physics from there before joining the consulting division of IBM. Later, he worked in the Middle East with Al-Futtaim group on system implementation and reengineering. Mr. Fourie joined BAT in 2001 as the Middle East Area IT manager, and later expanded his role to include strategic planning and program management. Simultaneously, he enrolled for and successfully completed his MBA at IMD (SZ). Mr. Fourie was transferred to the Asia Pacific Region in 2005 as Regional Strategy and Planning Manager. Since then, he has taken on the role of a Regional Manager and is responsible for regional business services. In addition, he is a member of the Regional Audit Committee and Corporate Social Responsibility Committee.
Istaqbal Mehdi is the Managing Director/ CEO of Pak Kuwait. Prior to this role, he was the President of Zarai Traqiati Bank of Pakistan. Mr. Mehdi held executive positions in several national organisations like Chief Experts Advisory Cell, Ministry of Industry and Production and Senior Economist with Board of Industrial Management. He was a Research Fellow at Leeds University, Leeds, UK from 1972-76. He was also an Advisor to the World Bank during the period 1969-72. He is also on the boards of various companies including Fauji Fertilizer Bin Qasim Ltd, Fauji Fertilizer Company Limited, Meezan Bank Limited, General Tyre & Rubber Company Limited of Pakistan, Pakistan State Oil, Shell Gas, National Commodity Exchange Ltd, AlMeezan Mutual Fund and Pakistan Textile City Limited.
10 The Board of Directors
Kunwar Idris
Abid Niaz Hasan

Nicholas Stewart Hales

Kunwar Idris joined the Civil Service of Pakistan in 1957 and retired in 1994. In a career spanning 36 years besides holding administrative posts like Chief Secretary, Home Secretary of Sindh and District Magistrate / Commissioner of Karachi, he was also Secretary to the Government of Pakistan in the Ministries of Petroleum and Production. In the earlier years of his career, he was an Assistant Commissioner and Political Agent in the North-West Frontier Tribal Areas. He was the Chairman / Chief Executive of Pakistan Automobile Corporation and Bankers Equity during the eighties. Since retirement from public service, besides Pakistan Tobacco Company, Mr. Idris has been associated with the boards of Hinopak Motors, Orix Investment Bank, and AI-Ghazi Tractors. He is also the Chairman of Pakistan Automotive Manufacturers Association. He also writes a column on current affairs for DAWN on Sundays.
Until recently, Abid Hasan was Operations Advisor for the World Bank in Washington. He has over 31 years of global experience in Economic Development, having worked for the World Bank from 1975-2006. Mr. Hasan has worked extensively with countries in South and West Asia and the Asian Tiger economies. He has worked in the capacity of an advisor to various Governments and managed World Bank programs related to Macro-Economic and Structural Reforms, Agriculture and AgroIndustrial Development, Financial and Banking Sector, Tax Administration, Private Sector Development, and Energy and Infrastructure Development. During his career with the bank, he represented International Finance Corporation (IFC) on board of several companies that were financed by it. Previously, he has worked with Northrop Corporation as a Project Engineer in Saudi Arabia (1972-73), and as a Budget Analyst in Los Angeles (1973-75). He graduated from University of Engineering and Technology, Lahore in 1971, and subsequently pursued an MBA from University of California.
Nicholas Hales started his career as a mining engineer in the gold mines of South Africa, and later, worked in the oil fields in Saudi Arabia. Mr. Hales started his career in the tobacco industry as a Trainee Salesman in the United Kingdom in 1989. After a number of years in sales, he moved into general management in West Africa and held numerous roles throughout the Sub-Saharan Region. More recently, he successfully managed a US$ 150 million greenfield site factory project in Nigeria. With the successful completion of this project, he became the West and Central Africa Area Director covering 26 different markets. After four successful years in this role, he was transferred to Bangladesh as Managing Director and Chairman in February 2007.
Financial Highlights
Profit & Loss
Volume Gross Turnover Excise & Sales Tax Net Turnover Gross Profit Operating Profit Profit Before Tax Profit After Tax Dividends Sticks million Rs million Rs million Rs million Rs million Rs million Rs million Rs million Rs million
2007 2006 2005 2004 2003 2002
37,188 40,889 24,846 16,043 6,510 3,973 3,714 2,413 2,014
34,549 35,715 21,824 13,891 5,534 3,072 2,861 1,905 1,405
30,620 30,615 18,783 11,832 4,530 2,378 2,082 1,322 946
26,846 25,453 15,693 9,760 3,483 1,445 1,056 665 511
24,861 22,572 13,849 8,723 2,872 1,010 615 321
24,364 20,556 12,570 7,986 2,505 952 730 420 204
Balance Sheet
Paid up Capital Shareholders Funds Reserves Property, Plant & Equipment Net Current Assets / (Liabilities) Capital Employed Capital Expenditure during the year Long Term / Deferred Liabilities Rs million Rs million Rs million Rs million Rs million Rs million Rs million Rs million 2,555 4,023 1,468 5,154 (182) 5,003 1,191 980 2,555 4,139 1,584 4,529 423 4,984 1,238 845 2,555 3,639 1,084 3,798 532 4,364 717 725 2,555 3,263 708 3,564 297 3,887 598 624 2,555 2,853 554 3,411 40 3,479 854 371 2,555 2,788 233 3,013 65 3,108 523 321
Investor Information
Gross Profit Ratio Earnings Per Share Inventory Turnover Ratio Fixed Assets Turnover Ratio Total Assets Turnover Ratio Breakup Value Per Share Market Value Per Share at year end Highest Market Value Per Share during the year Lowest Market Value Per Share during the year PriceEarning Ratio Dividend Per Share Dividend Yield Ratio Dividend Payout Ratio Return on Capital Employed Debt to Equity Ratio Current Ratio Interest Coverage Ratio Excise and Sales Tax as a Percentage of Turnover % Rs 15.9 9.4 7.2 7.9 4.2 15.7 155.5 198.3 74.5 16.5 7.9 5.1 83.5 48.2 0.3 1.0 74.8 64.7 15.5 7.5 6.7 7.9 4.2 16.2 72.0 80.0 60.5 9.7 5.5 7.6 73.8 38.2 0.3 1.1 57.0 62.0 14.8 5.2 6.1 8.1 3.8 14.2 69.0 77.0 47.6 13.3 3.7 5.4 71.6 30.3 0.3 1.1 46.9 62.5 13.7 2.6 7.0 7.1 3.6 12.8 61.5 61.5 46.4 23.6 2.0 3.3 76.9 17.1 0.5 1.0 29.9 64.0 12.7 1.3 5.9 6.6 3.1 12.2 27.0 39.0 19.5 21.4 9.2 0.6 1.0 7.7 64.0 12.2 1.7 5.4 6.8 3.1 10.9 23.8 32.4 10.3 14.5 0.8 3.4 48.5 13.5 0.9 1.0 4.7 63.1
Rs Rs Rs Rs Rs % % %
Government Levies
Customs, Excise Duties & Sales Tax Local Taxes and Other Duties Income Tax Total Government Levies Rs million Rs million Rs million Rs million 25,213 94 1,165 26,472 22,069 87 880 23,036 19,129 87 634 19,850 16,086 71 137 16,294 14,322 75 44 14,441 12,861 76 40 12,977
12 Financial Highlights
Volume
Sticks (million)
Gross Turnover
Rs (million)
34,549
30,620
24,364
24,861
26,846
2002
2003
2004
2005
2006
2007
2002
20,556
2003
22,572
2004
25,453
2005
30,615
2006
35,715
2007
Government Levies
Rs (million)
26,472
Gross, Operating & After Tax Profit

Rs (million)
23,036
5,534 4,530 3,973 3,483 2,505 2,872 1,010 321 1,445 1,322 665 3,072 2,413 2,378 1,905
12,977
14,441
16,294
19,850
952 420
2002 2002 2003 2004 2005 2006 2007
2003
2004
2005
2006
Gross Profit
Operating Profit
Net Profit
Earnings Per Share and Dividend Yield
Property, Plant & Equipment

Rs (million)
5.4% 5.17 3.4% 1.65 0.0% 1.26 3.3% 2.60
2002
2003
2004
2005
2006
2007 2002 2003 2004 2005 2006 2007
Earnings Per Share (Rs)
Dividend Yield %
3,013
3,411
7.6% 7.46
3,564
3,798
5.1% 9.44
4,529
5,154
40,889
6,510
37,188
2007
Notice of the Annual General Meeting

Notice is hereby given that the 61st Annual General Meeting of Pakistan Tobacco Company Limited (the Company) will be held at Evacuee Trust Complex (1st Floor) Sector F-5/1, Agha Khan Road, Islamabad on Thursday, March 27, 2008 at 1 1.00 a.m. to transact the following business: -
Ordinary Business
1. 2. 3. To receive, consider and adopt the audited Accounts for the year ended December 31, 2007, and the Report of the Directors and Auditors thereon. To approve the Final Dividend @ Rs 3.90 per share as recommended by the Board. To appoint Auditors and to fix their remuneration. By Order of the Board
Ayesha Rafique
Company Secretary
March 04, 2008 Islamabad

Notes: (1) The Share Transfer Books of the Company will be closed from March 20, 2008 to March 27, 2008, both days inclusive. Transfers received in order at the office of the Company's Share Registrar, Ferguson Associates (Pvt.) Ltd, State Life Building No.2-A, 4th Floor, I. I. Chundrigar Road, Karachi at the close of business on March 19, 2008 will be in time to be entitled to vote and for the entitlement of dividend. A member of the Company entitled to attend and vote at the General Meeting is entitled to appoint a proxy and such proxy will have the right to attend, speak and vote in place of that member. Forms of proxy must be deposited at the office of the Company's Share Registrar not less than 48 hours before the time appointed for the General Meeting and in default forms of proxy will not be treated as valid. Attendance of the General Meeting by account holders, sub-account holders where, in all cases, their registration details are uploaded to the Central Depository System shall be in accordance with the following:In person: i) ii) iii) The Company shall obtain list of beneficial owners from the Central Depository Company (CDC) as per Regulation 12.3.5 of the CDC Regulations; In the case of individuals, authentication of their identity through presentation of his/her National Identity Card (NIC) or original Passport at the time of the General Meeting; and In the case of a corporate entity, presentation of a Board of Directors Resolution/Power of Attorney with specimen signatures of the nominee at the time of the General Meeting.
(2)
(3)
A)
B)
By Proxy: i) ii) iii) iv) v) In case of individuals, the submission of the proxy form as per the requirement notified in Note 2 above. The proxy form shall be witnessed by two persons whose names, addresses and NIC numbers shall be stated on the form. Attested copies of NIC or the passport of the beneficial owners and proxy shall be furnished with the proxy form. The proxy shall produce his original NIC or original passport at the time of the General Meeting. In case of a corporate entity, the Board of Directors Resolution/Power of Attorney with specimen signatures shall be submitted with the proxy form to the Company.
(4)
Shareholders are requested to notify the Companys Share Registrar promptly of changes in their address.
14 Notice of the Annual General Meeting
We owe a lot to our intellectual property i.e. our people
Chairmans Message
It is with no small measure of pride that I would like to present here the highlights of what has been our 60th year of operations in Pakistan. As a Company that understands that its roots are firmly embedded with the Nations, we have been a part of the history of industrial development of the country.
The Company embarks on the next phase of its progress, while looking back at a heritage spanning many generations of stakeholders. Our business spans the length and breadth of the Country, where we have operations of sales, distribution and manufacturing as well as an agrarian based supply side. As one examines the value chain, the business directly and indirectly impacts the lives of thousands of farmers, sales staff, valued business partners and the employees. We believe, very strongly, that this impact must be one of mutual benefit to those that are involved in every aspect of our business. Be it through the training and crop management practices we impart to the farmers, the excellence we demand of our employees, or the role we play as a responsible corporate citizen, Pakistan Tobacco Company has been a positive force in the private and public purpose. These six decades have not been without their challenges. Most of which have been met by our
employees with determination. Our success is due in no small part to the culture of winning and team work that is passed on from year to year. Of these challenges, one that threatens not only the Company but continues to threaten all other sectors of the industry is the prevalence of the tax evaded sector. We are happy to note the positive steps taken by the Government in this regard, and look forward to the many innovations and reforms brought about to bring a level playing field in the industry. Some of the key achievements are: Launch of the second Social Report in 2007 Continued strong volume and profit growth Recipient of the ACCA-WWF Sustainability Award Management Association of Pakistan Excellence Certification 2nd Best Corporate Report in miscellaneous Category by ICMAP & ICAP
It gives me immense pleasure to highlight the prestigious legacy of the Company and to point to the bright future that awaits it. This is especially vital given that the BAT Asia Pacific Region is entering into a new phase of management and strategic outlook by looking at realignment of management in the area, in order to build on the synergies and create value for the shareholders.
Mueen Afzal
Chairman
16 Chairmans Message
A rare set of perfect numbers

Growth in percentage (2007 vs. 2006)
Managing Directors Review

Pakistan Tobacco Company (PTC) has maintained its growth momentum during the year; scaled new heights with the achievement of milestones and made significant progress in every facet of the business. This is especially pertinent as the Company has embarked upon the 61st year of its operations in Pakistan.
Ladies & Gentlemen, My affiliation with PTC began in 2006 and re-counting the incredible two years we have had, are in many ways, an account of my wonderful experience in this country and interaction with my colleagues at PTC. On a personal level, I feel great pride in my association with this Company and its success. Some of the outstanding achievements of the year are outlined for your review.
We have achieved record level of sales and profitability during the year. Operating profit grew by 29% to Rs 3,973 million and profit after tax grew by 27% to Rs 2,413 million. Our contribution to the Governments revenue was an unprecedented amount of over Rs 26 billion, an increase of approximately 15% over the last year. Underpinning this exceptional financial performance were factors such as strong organic volume growth, efficient cost management, continued investment in our brands and people, and most of all the consumers who continue to support our brands. Our sales volume, at 37.2 billion sticks, grew by 8% during the year ahead of the industry growth that was estimated at 2%. Our market share also grew by 1.7 percentage points, further strengthening our position as the market leader in the domestic tobacco industry.
We have further strengthened our brand portfolio with the launch of new variants, limited edition products and packaging, consumer promotions, and effective presence across key market segments. Our key brands registered substantial growth in their respective segments during 2007:
Dunhill
A high point of the years activities was the Dunhill Centenary Celebration which took place with a distinctive display of style and substance. In future, the brand will continue to leverage its international expertise to bring the best tobacco experience to premium segment smokers.
Benson & Hedges (B&H)

B&H continues to be the largest brand in the premium segment and capitalised greatly on the packaging
18 Managing Directors Review
change done in 2006. The brand will continue to leverage its equity and will endeavour to consistently deliver the superior quality it promises to its consumers.
combined it with Pall Malls international appeal and delivered a winning combination. True to its innovative and invigorating appeal, Capstan by Pall Mall was launched in a new modern pack which offers smokers a unique opportunity to experience the same great taste with a fresh and exciting look. Capstan by Pall Mall is the leading offer in the medium segment.
Behind any significant organisational achievement and growth is usually a focused approach to improvement and investment in key strategic areas. Similarly, in the endeavour to continuously improve and re-engineer ourselves in 2007, world class initiatives were taken at PTC that improved the processes and presented us with new challenges. We are at the forefront of Corporate
John Player Gold Leaf (JPGL)

JPGL is an aspirational brand for the majority of smokers in Pakistan. 2007 has been a successful year for JPGL with the sales increasing by 8% and the brand growing both in terms of value and volume share. In this brand, which is part of the Companys brand heritage, we continue to bring innovation and improvement.
Gold Flake
Gold Flake further strengthened its position by achieving high levels of growth. It is the main volume driver in our portfolio. Brand building, targeted consumer promotion activities, and aggressive distribution drives have greatly contributed to Gold Flakes success.
Social Responsibility (CSR) in Pakistan through a number of initiatives undertaken for the betterment of our community. Some of our key initiatives include afforestation, mobile free dispensaries, eye care in collaboration with the Layton Rahmatullah Benevolent Trust (LRBT), Learning Resource Centers (LRCs), non-formal education through the NGO Adult Basic Education Society (ABES), support to The Citizens Foundation (TCF) to provide
Capstan by Pall Mall

2007 brought dramatic changes to Capstan - a year in which we saw a major shift in the brands essence and identity. We decided to preserve the taste of Capstan International,
educational facilities for children from disadvantaged backgrounds, installation of water filtration units, and introduction of new technology in tobacco growing and processing in collaboration with the Pakistan Tobacco Board (PTB). We further strengthened our credentials as a socially responsible corporate citizen through our various relief efforts and CSR initiatives with the support and assistance of our employees and sister concerns. In recognition of our efforts, the ACCA/WWF awarded us the Best Social Report Award for, our 200405 Social Report in 2007. PTCs good corporate governance has led to producing award winning annual reports that provide quality information to all the stakeholders while ensuring compliance with Companies Ordinance, 1984, Code of Corporate Governance and International Financial Reporting
Standards (IFRS). Recognising our efforts, the joint body of Institute of Cost and Management Accountants and Institute of Chartered Accountants of Pakistan awarded us with a second position in our category for our 2006 annual report. During the year, we were also awarded a certificate of corporate excellence by the Management Association of Pakistan (MAP). In my opinion, given my international experience, highly motivated, energized, and empowered people are instrumental for the success of any business, and such are the employees at PTC that I have come to call as my colleagues. This past year has been great for PTC in terms of building a winning organisation. We are proud to have a team of well trained professionals who are highly recognised for their
great potential both inside and outside the Company. British American Tobacco Group acknowledges our strength in talent; our managers have regularly been selected in the past to work for various BAT Operating Companies all over the world. During 2007, four of our managers were seconded out for long term assignments taking the total number of secondees to 20. As a responsible company, PTC is committed to conducting its business operations in a manner that sustains the environment and protects the health and safety of its employees. This covers all aspects of its operation from 'seed to smoke'. We take pride in providing assistance to our valued business partners to develop safer work environment for the health and safety of their employees, develop their surrounding communities and work towards conservation of the
20 Managing Directors Review
environment. Our endeavour to launch an environment protection programme has been recognised globally by BAT and they awarded us the 2007 Environment, Health and Safety (EH&S) Excellence Award. Our commitment to EH&S was further strengthened during 2007 as we achieved significant improvements in our EH&S road map and both of our production facilities were re-certified with ISO 14001. 2007 brought tremendous success for us in all areas of the business. Our Company attained new heights in terms of sales and profitability while further strengthening its place as a socially responsible corporate citizen. Key to all this success was our winning team. PTC employees and its valued business partners, put all their efforts in achieving and excelling at our Companys vision of first choice for everyone. I would like to take this
opportunity to express my sincere gratitude to all our employees and valued business partners; their dedication, commitment, resourcefulness and excellent teamwork significantly contributed to our success during the last year. Going forward, we continue to face daunting challenges amongst which one threat is of the sizeable illicit trade sector. We remain confident that the Government will continue in its efforts to curtail the activities of the illicit sector by taking strong and effective measures and ensuring law enforcement. We believe that there is still room for growth. PTCs strong brand portfolio and market leadership, trade marketing expertise, cost saving initiatives, drive and commitment of its people and valued business partners, continuous drive for process improvement, and the overall strength of it's organisation gives us reason to
believe that our business can and will continue to deliver healthy and sustainable growth in the future as well.
Toh Ah Wah
Managing Director & CEO
Directors Review
The Directors are pleased to present the 61st Annual Report along with the audited financial statements of the Company for the year ended December 31, 2007. 2007 was yet another year of outstanding performance by the Company characterised by significant growth in sales and profitability. The Company achieved sustained organic volume growth during the year, further consolidating its volume and value leadership of the tobacco industry.
Business Performance
The following summary of key financial results depicts the Companys outstanding performance as compared to 2006.
Rs (million) 2007 2006 Increase
Gross turnover Gross profit Operating profit Profit before tax Profit after tax Earning per share - EPS (Rs)
40,889 6,510 3,973 3,714 2,413 9.44
35,715 5,534 3,072 2,861 1,905 7.46
14% 18% 29% 30% 27% 27%
The main drivers of this strong financial performance were higher sales volumes, operational efficiencies and effective cost control measures.
22 Directors Review
Sharing our growth with the Nation

PTC contributed Rs. 26.5 billion to the National Exchequer
Sales Performance
The Company made significant progress in volume growth during 2007 delivering a record sales volume of 37.2 billion sticks, an increase of 8% in comparison to 2006. Continued focus on innovation, understanding of our consumer, superior quality product, and effective marketing activities led to strong organic growth in our brand portfolio. Gold Flake remained the volume leader with a 16% growth over 2006. The pack change on Capstan by Pall Mall was well received by the market and the brand continued to maintain its position as consumers first choice in the medium price segment. JPGL, in its key role as value driver, achieved 8% volume growth in the same period. The decline in Embassy was mainly due to the switching done by it's consumers to Gold Flake and by the increased pressure from the lower priced brands of the illicit sector. Despite inflationary pressures and Cost of sales increased by 14% over last year and this was mainly due to higher production volumes and inflation. However, the Company was able to derive benefit from economies of scale (highest ever production) and various cost control initiatives in its supply chain. As a result, increase in cost per unit was contained at 6% over last year, which is well below inflation. The Company considers talent a key factor in driving its growth. In pursuance of its commitment towards attracting and retaining high quality talent, the Company maintained a competitive remuneration package. Moreover, the employees further benefited from the performance bonuses, a result of the outstanding Company performance in 2007. These factors were the major drivers of the increase in the administrative expenses by 15% over last year. Other income increased by Rs 35 million in comparison to last year, and this was primarily due to the prior year adjustments. Other expenses showed an increase of 36% in 2007 and this can be attributed to the cost of restructuring and increased contribution to Workers Profit Participation Fund (WPPF) and Workers Welfare Fund (WWF).
Cost of Sales
Operating and Other Costs
Contribution to the National Exchequer

The Company contributed a total of Rs 26.5 billion (2006: Rs 23.0 billion) to the Governments revenue, the highest ever in its history and 15% more than last year.
increased volumes, the Company continued its focus on investment in its brands and people. A number of initiatives were undertaken in marketing, but effective campaigns coupled with adoption of global best practices kept marketing costs at the same spend level as in 2006.
Cash Flows
Improved financial performance of the Company translated into a significant increase in its operating cash flows. Though they were partially offset by higher dividend payments and investment in plant and equipment during the same period, yet it resulted in a net increase in cash amounting to Rs 358 million in comparison to a net decrease of Rs 887 million in 2006.
Appropriation of Profits
The profit for the year, along with distributable profit at year end, has been appropriated as follows:
Rs (million) 2007 2006
Operating profit Profit after tax Accumulated profit brought forward Profit available for appropriation Appropriations: 3rd Interim dividend 2007 @ 20% (2006: nil) 2nd Interim dividend 2007@ 20% (2006: 30%) 1st Interim dividend 2007@ 15% (2006: nil) Final dividend 2006 @ 44% Final dividend 2005 @ 25% Un-appropriated profit carried forward
3,973 2,413 1,584 3,997 511 511 383 1,124 1,468
3,072 1,905 1,084 2,989 766 639 1,584
Plant Modernisation
In line with its drive to invest in latest machinery and facilitate up-gradation in its technology footprint to meet the industrys increased demand, the Company invested Rs 1.2 billion in tangible fixed assets in 2007. Moreover, various process optimisation initiatives were undertaken at both the factories to further strengthen supply chain's competitive advantage.
Dividend
On account of the excellent performance of the Company during 2007, the Board is pleased to propose a final dividend of Rs 3.90 (2006: Rs 4.40) per share in respect of the financial year ended December 31, 2007, over and above the three interim dividends of Rs 5.50 (2006: Rs 3.00) per share in total during the year. This final dividend will be subject to the approval of shareholders in their meeting scheduled for March 27, 2008.
24 Directors Review
Environment, Health and Safety (EH&S)

The Companys commitment to ensure a safe work environment for all its employees and stakeholders was clearly manifested in its various EH&S initiatives and programmes carried out during the year. The Company pro-actively assessed and improved its processes and practices; identifying areas for reduction in energy consumption, waste and emissions. Subsequently, all areas of supply chain, from seed to smoke, were assessed during the year. The Company collaborated with it's business partners to help them to develop safer work environment for their employees. They were also assisted to work towards improving their communities and conserve the environment. The Company is committed to its cause of conserving the environment and has successfully implemented environment protection projects. Such efforts were globally recognised by BAT and were awarded EH&S Excellence Award to PTC in 2007. PTC made significant progress in its EH&S road map as both the production facilities at Jhelum as well as Akora Khattak were re-certified with ISO 14001. We have consistently sustained our accreditation in the last eleven surveillance audits with zero major or minor non-conformances. PTCs focus on accident prevention and lost work day case reduction has come a long way in managing its EH&S programmes. This involved extensive health and safety training, safety audits, incident investigations and
safety related communications. Utilising all these components have helped PTC maintain a zero lost work day case during 2007. Akora Khattak factory completed 7 million accident free working hours and was given the BAT EH&S Golden Award for the third consecutive time. Throughout the Companys history, it has maintained a strong stance on corporate and social responsibility. It strongly believes in building effective and constructive partnerships with communities by helping address various EH&S issues. Over the years, the Company has invested substantial resources in terms of finances and manpower in various initiatives like Mobile Free Dispensaries, Learning Resource Centres and Potable Water.
Corporate Governance for the following: a) The financial statements, prepared by the management of the Company, present fairly its state of affairs, the result of its operations, cash flows and changes in equity. Proper books of account of the Company have been maintained. Appropriate accounting policies have been consistently applied in preparation of financial statements and accounting estimates are based on reasonable and prudent judgement. International Financial Reporting Standards (IFRS), as applicable in Pakistan, have been followed in preparation of all financial statements. The system of internal control, which is sound in design has been effectively implemented and is being continuously reviewed.
f)
There are no doubts about the Companys ability to continue as a going concern. There has been no material departure from the best practices of corporate governance, as detailed in the listing regulations. All major Government levies in the normal course of business, payable as at December 31, 2006, have been cleared subsequent to the year end. Key operating and financial data for last six years in summarised form is annexed. Values of investments in employees retirement funds based on audited accounts of funds for the year ended December 31, 2006 are as follows:
Rs (million)
g)
h)
b) c)
i)
j)
d)
Good Corporate Governance

e) The Directors confirm compliance with the Corporate and Financial Reporting Framework of the SECPs Code of
Management Provident Fund Staff Pension Fund Employees Provident Fund Employees Gratuity Fund
335 1,203 446 274
26 Directors Review
The Board
The Board comprises 7 Non-Executive and 5 Executive Directors. The positions of Chairman and CEO are kept separate in line with good governance practice.
Board of Directors Meetings

During the year 2007, five meetings of the Board of Directors were Held on March 6, April 19, August 9, October 19 and December 18, 2007. Attendances are detailed below:
Name of Director Meetings attended
Board Committees
The Board has a number of committees, which assist the Board in the performance of its duties. A list of committees is annexed.
Audit Committee
The Audit Committee is a committee of the Board of Directors and assists the Board in the manner provided in
Changes in the Board

The Directors wish to report the following changes in the Board of Directors: Mr. Mueen Afzal was appointed as the Chairman after the retirement of Mr. Aslam Khaliq on completion of his successful tenure with the Company with effect from September 17, 2007. The Company remains indebted for his lifetime contribution to the Company and wishes him success in the future. Mr. Abid Niaz Hasan was appointed as Non-Executive Director with effect from October 29, 2007, to fill the casual vacancy created by the sad demise of Mr. Fatehali Walimuhammad Vellani. Mr. Ben Willem Fourie was appointed as Non-Executive Director with effect from January 01, 2007, to fill the casual vacancy caused by the resignation of Mr. Brendan James Brady. Mr. Nicholas Stewart Hales was appointed as Non-Executive Director with effect from October 12, 2007 to fill the casual vacancy caused by the appointment of Mr. Mueen Afzal as the Chairman after the retirement of Mr. Aslam Khaliq.
1. Mr. Mueen Afzal

Chairman and Non-Executive Director
05
2. Mr. Toh Ah Wah

Managing Director and Chief Executive
05
the Code of Corporate Governance issued by the Securities and Exchange Commission of Pakistan (SECP) and forming part of the Listing Regulations of the Stock Exchanges in Pakistan. The Audit Committee of Pakistan Tobacco Company comprises the following six Non-Executive Directors: Abid Niaz Hasan (Chairman) Lt. Gen. (Retd.) Ali Kuli Khan Ben Willem Fourie Istaqbal Mehdi Kunwar Idris Mueen Afzal The Managing Director and the Finance Director attend meetings of the Committee on standing invitation; however, they are not members. The Internal Audit Manager is the secretary of the Committee and reports directly to the Chairman of the Audit Committee.
3. Mr. Mobasher Raza

Deputy Managing Director and Finance Director
05
4. Mr. Mirza Rehan Baig

Marketing Director
05 05 01
5. Mr. Ahmed Zeb

Supply Chain Director
6. Mr. Feroze Ahmed

IT Director
7. Lt. Gen. (Retd.) Ali Kuli Khan

02 02 01 03 04
8. Mr. Ben Willem Fourie

9. Mr. Abid Niaz Hasan

10. Mr. Istaqbal Mehdi

11. Mr. Kunwar Idrees

12. Mr. Nicholas Stewart Hales*

00 03
13. Mr. Aslam Khaliq**

The Committee held five meetings during the year in which the External 03 Auditors were also in attendance to present and discuss specific issues. The quarterly, half-yearly and annual accounts of the Company and public announcements relating to them were reviewed and were recommended by
14. Late Mr. Fatehali Vellani ***

Non-Executive Director * ** ***
Joined the Board on October 12, 2007 Retired during the year. Mr. Vellani passed away on September 30, 2007.
the Committee before approval by the Board. Such reviews extend to major judgemental areas reflected in the accounts, significant adjustments resulting from the audit of accounts, the going concern assumption, and changes in accounting policies and practices, compliance with applicable accounting standards, and compliance with listing regulations and other statutory and regulatory requirements. The Audit Committee functions within the scope of the Terms of Reference approved by the Board which determine the roles and responsibilities of the Committee and reflect the requirements of the Code of Corporate Governance. The role and responsibilities of the Audit Committee include determining appropriate measures to safeguard the Companys assets, reviewing quarterly, half-yearly and annual financial statements of the Company and preliminary announcements of results before approval by the Board and publication, reviewing the Companys statement on internal control systems prior to their approval by the Board, reviewing the external auditors letter to the management and its response thereto, ascertaining that the internal control system including financial and operational controls and accounting system and reporting structure are adequate and effective, considering major findings of internal audit and managements responses thereto, monitoring compliance with the best practices of corporate governance and instituting special projects and investigations on any matter deemed appropriate by the Committee or desired by the Board.
The Audit Committee assists the Board of Directors in monitoring and managing risks and internal controls. It also monitors the performance of the Internal Audit department which adopts a risk-based approach for planning and conducting business process audits consistently with the Companys established work practices. The scope and extent of internal audit including the annual Internal Audit Plan are reviewed and approved by the Committee which regularly monitors the progress. While the External Auditors independently determine their plan of audit, the Committee is informed of their progress and especially in regard to issues stated in their letter to management and responses received. Without interfering with the independence of the External and Internal Auditors, the Committee encourages coordination between them in the discharge of their respective functions. The Committee recommends to the Board the appointment of the External Auditors and their engagement terms based on the Committees review of their performance and value provided to the Company.
The Auditors Messrs. A. F. Ferguson & Co. shall retire at the conclusion of Annual General Meeting (AGM), and they have indicated their willingness to continue as Auditors. They have confirmed achieving satisfactory rating by the Institute of Chartered Accountants of Pakistan (ICAP) and compliance with the Guidelines on the Code of Ethics of the International Federation of Accountants (IFAC) as adopted by ICAP. The Board proposes their reappointment as Auditors for the financial year ending December 31, 2008 on the recommendation of the Audit Committee.
Shareholding
The pattern of shareholding as at December 31, 2007 along with disclosure as required under Code of Corporate Governance is annexed. The Directors, Chief Executive Officer, Chief Financial Officer, Company Secretary and their spouses and minor children, have reportedly carried out no trading in the shares of the Company.
Holding Company
British American Tobacco (Investments) Limited incorporated in the United Kingdom holds 95% of the shares of the Company.
Auditors
Statutory audit for the Company for the financial year ended December 31, 2007 has been concluded and the Auditors have issued their Audit Reports on the Companys financial statements, consolidated financial statements and the Statement of Compliance with the Code of Corporate Governance.
Consolidated Financial Statements

Consolidated Financial Statements of the Company and its wholly owned subsidiary, Phoenix (Private) Limited, are submitted herewith.
28 Directors Review
Business Challenges and Future Outlook

2007 was, indeed, a challenging year for the company due to the exigent circumstances prevailing in the country. Despite these difficult circumstances and challenges, the Company continued to deliver and achieve its business objectives. This year also saw a major global tobacco player entering Pakistan through acquisition of controlling share of Lakson Tobacco Company. As the focus of PTC shifts from local competition to a global player, the Company looks forward to a healthy and level playing field that will benefit the industry on the whole. Illicit trade continues to be a key challenge and area of concern for the tax paying sector. For the time being, the Government initiatives seem to have contained the incidence of
smuggling and counterfeiting. However, the local Duty Not Paid (DNP)/illicit elements remain the biggest threat and are proving to be a major hurdle in creation of a level playing field. We are confident that the Government will continue to play its role with more stringent enforcement at all levels to curtail this segment. The outstanding performance of the Company for the year 2007 was not possible without the dedication, hard work, enterprising spirit, and enthusiasm of its employees. PTC appreciates and acknowledges their efforts in this regard. The Company would also like to express sincere appreciation to its customers, distributors and suppliers for their continued support and loyalty. The Company is also thankful to the shareholders for their confidence and it is due to this trust shown by the shareholders that PTC is able to set
stretched targets and put in place strategies to achieve them. The Company is confident that it will continue to lead the tobacco industry responsibly and will maintain the growth momentum. PTC remains committed to increase sustainably growing shareholders value by ensuring continuous focus on its strategy pillars of driving Growth, enhancing Productivity and acting Responsibly all of which are delivered through our Winning Organisation.
Mueen Afzal
Chairman
Toh Ah Wah
anaging Director & CEO
Statement of Revenue Generated & Distributed

Generation Revenue Generated Distribution Government Levies Materials and Services Employees Others Profit after Tax 26,472 7,402 1,836 2,766 2,413 40,889 23,036 6,291 1,652 2,831 1,905 35,715 40,889 35,715
30 Statement of Revenue Generated & Distributed
Board Committees
1. Executive Committee of the Board (ExCo) The Executive Committee of the Board (ExCo) is the central working nucleus of the organisation. Comprising on Executive Directors and Heads of the Departments of the Company, the ExCo drives to achieve the strategic targets set by the Board of Directors. In 2006, to deliver its responsibilities more efficiently, the ExCo formulated a Subcommittee and entitled it as Operating Committee (OPCo). This committee has a representation of senior managers from all functions of the organisation. The objective for the formulation is to assist ExCo in carrying out the day to day operations of the Company. With OPCo focusing on the operational tasks, it becomes more convenient for the ExCo to better focus on the development and delivery of strategies and long term vision of the organisation. 2. Board Compensation Committee The Committee is responsible to decide the pays and benefits of all employees of the Company. 3. Audit Committee Assists the Board of Directors in management of business risks, internal controls and the conduct of business in an economically sound and ethical manner. 5. Share Transfer Committee (STC) Responsible for dealing with the day to day matters relating to the shares of the Company. 6. Corporate Social Responsibility Committee (CSRC) The Committee's purpose is to set strategic direction and to act as an advisory body to the management of the Company for all CSR initiatives. Its role is to keep under review and make appropriate recommendations to the Company regarding the management of Corporate Social Responsibility and the conduct of business in accordance with the Statement of Business Principles. The Committee seeks to focus on the Companys social and environmental performance and provides a forum which demonstrates that the principles of CSR are effectively embedded throughout the Company.
Name
The Board
Executive Committee of the Board
Board Compensation Committee
Audit Committee
Share Transfer Committee
CSR Committee
Executive Directors Mr. Toh Ah Wah Mr. Mobasher Raza Mr. Rehan Baig Mirza Mr. Ahmed Zeb Mr. Feroze Ahmed Non-Executive Directors Mr. Mueen Afzal Lt. Gen. (Retd) Ali Kuli Khan Khattak Mr. Ben Willem Fourie Mr. Abid Niaz Hasan Mr. Istaqbal Mehdi Mr. Kunwar Idris Mr. Nicholas Stewart Hales Key Management Personnel Mr. Hasan Adnan Mr. Naveed A. Ahmad Syed Ali Naseer Mr. Tajamal Shah Mr. Dilshan Ranasinghe Miss Ayesha Rafique Other Management Personnel Mr. Faisal Saif Member l Secretary l
l l l l l l l l l l l l
l l l l
l l
l l l
l l
l l l l l l
l l
l l l l l l
l l l l l
Pattern of Shareholding as at December 31, 2007

Number of Shareholders Size of Holding Rs. 10 Shares Number of Rs. 10 Shares Held
1,516 1,407 495 480 81 28 14 19 7 1 1 2 2 1 5 1 1 2 1 1 3 1 1 1 1 1 1 3 1 1 1 1 1 1 2 1 1 1 1 1 4,090
From From From From From From From From From From From From From From From From From From From From From From From From From From From From From From From From From From From From From From From From
1 101 501 1001 5001 10001 15001 20001 25001 30001 35001 40001 45001 50001 55001 60001 65001 70001 75001 90001 95001 100001 105001 110001 130001 135001 155001 165001 180001 185001 220001 350001 385001 405001 505001 700001 795001 1830001 1890001 241045001
To To To To To To To To To To To To To To To To To To To To To To To To To To To To To To To To To To To To To To To To
100 500 1000 5000 10000 15000 20000 25000 30000 35000 40000 45000 50000 55000 60000 65000 70000 75000 80000 95000 100000 105000 110000 115000 135000 140000 160000 170000 185000 190000 225000 355000 390000 410000 510000 705000 800000 1835000 1895000 241050000 Total
52,757 417,679 364,620 1,134,804 642,446 372,973 259,056 441,357 194,800 31,500 37,000 85,400 100,000 51,000 293,500 60,961 70,000 142,091 75,870 92,300 296,200 100,609 106,700 111,300 131,000 138,700 159,700 501,533 181,100 187,477 221,000 353,600 389,500 406,800 1,017,000 702,911 798,282 1,830,943 1,894,182 241,045,141 255,493,792
32 Pattern of Shareholding
Shareholders' category
No. of Shareholders
No. of Shares Held
Associated Companies, Undertakings and Related Parties British American Tobacco (Investments) Rothmans International NIT and ICP (name wise detail) National Bank of Pakistan, Trustee Department Investment Corporation of Pakistan Directors, CEO and their spouse and minor children (name wise detail) Mueen Afzal Ali Kuli Khan Kunwar Idris Nicholas Stewart Hales Brendan James Brady Toh Ah Wah Abid Niaz Hasan Executives Naveed Aftab Ahmad Mirza Zubair Ahmed Shahid Yamin Public Sector Companies and Corporations Banks, Development Finance Institutions, Non-Banking Finance Institutions Modarabas and Mutual Funds Insurance Companies Shareholders holding 10% or more voting interest British American Tobacco (Investments)
1 1 2 1
241,045,141 798,282 3,725,125 10,280
1 1 1 1 1 1 1 1 1 1 1 16 14 7 1
2,124 100 65 2,500 500 5,000 50 200 10 9 702,911 442,727 1,738,922 837,216 241,045,141
Categories of Shareholders as at Decmeber 31, 2007

Shareholders category No. of Shareholders Share Held %
Associated Companies, Undertakings and Related Parties NIT and ICP Directors, CEO and their Spouse and minor children Executives Public Sector Companies and Corporations Banks, Development Finance Institutions, Non-Banking Finance Institutions, Modarabas & Mutual Funds Insurance Companies Others Individuals Total
2 3 7 3 1 16 14 7 89 3,948 4,090
241,843,423 3,735,405 10,339 219 702,911 442,727 1,738,922 837,216 1,056,043 5,126,587 255,493,792
94.66 1.46 0.00 0.00 0.28 0.1 7 0.68 0.33 0.41 2.01 100.00
Statement of Compliance with the Code of Corporate Governance
This statement is being presented to comply with the Code of Corporate Governance (Code) as per the Listing Regulations of Karachi, Lahore and Islamabad Stock Exchanges for the purpose of establishing a framework of good governance, whereby a listed company is managed in compliance with the best practices of corporate governance. The Company has applied the principles contained in the Code in the following manner: 6. The Board has developed a vision/mission statement, overall corporate strategy and significant policies of the Company. A complete record of particulars of significant policies along with the dates on which they were approved or amended has been maintained. All the powers of the Board have been duly exercised and decisions on material transactions, including appointment and determination of remuneration and terms and conditions of employment of the CEO and other executive directors, have been taken by the Board. The meetings of the Board were presided over by the Chairman and the Board met at least once in every quarter. Written notices of the Board meetings, along with agenda and working papers, were circulated at least seven days before the meetings. The minutes of the meetings were appropriately recorded and circulated.
2.
The Directors have confirmed that none of them is serving as a director in more than ten listed companies, including this Company. All the resident directors of the Company are registered as taxpayers and none of them has defaulted in payment of any loan to a banking company, a DFI or an NBFC or, being a member of a stock exchange, has been declared as a defaulter by that stock exchange. Casual vacancies occurred in the Board on September 17, 2007 and September 30, 2007 were filled within 30 days thereof. The Company has prepared a Standards of Business Conduct, which has been signed by all the Directors, Management and Business Support Officers of the Company.
7.
3. 1. The Company encourages representation of independent Non-Executive Directors and directors representing minority interests on its Board of Directors. At present the Board includes six independent NonExecutive Directors and one NonExecutive Director representing minority shareholders.
8.
4.
5.
34 Statement of Compliance with the Code of Corporate Governance
9.
The Board has approved appointment of CFO, Company Secretary and Head of Internal Audit, including their remuneration and terms and conditions of employment.
10. The Directors Report for this year has been prepared in compliance with the requirements of the Code and fully describes the salient matters required to be disclosed. 11. The financial statements of the Company were duly endorsed by CEO and CFO before approval of the Board.
14. The Board has formed an Audit Committee. It comprises six members, of whom all are NonExecutive Directors including the Chairman of the Committee. 15. The meetings of the Audit Committee were held at least once every quarter prior to approval of interim and final results of the Company and as required by the Code. The terms of reference of the Committee have been formed and advised to the Committee for compliance. 16. The Board has set-up an effective internal audit function manned by suitable qualified and experienced personnel who are conversant with the policies and procedures of the Company and are involved in the internal audit function on a full time basis. 17. The statutory auditors of the Company have confirmed that they have been given a Satisfactory rating under the quality control review programme of the Institute of Chartered Accountants of Pakistan, that they or any of the partners of the firm, their spouses and minor children do not hold shares of the Company and that
the firm and all its partners are in compliance with International Federation of Accountants (IFAC) guidelines on code of ethics as adopted by Institute of Chartered Accountants of Pakistan. 18. The statutory auditors or the persons associated with them have not been appointed to provide other services except in accordance with the Listing Regulations and the Auditors have confirmed that they have observed IFAC guidelines in this regard. 19. We confirm that all other material principles contained in the Code have been complied with.
12. The Directors, CEO and executives do not hold any interest in the shares of the Company other than that disclosed in the pattern of shareholding. 13. The Company has complied with all the corporate and financial reporting requirements of the Code.
Toh Ah Wah
Managing Director and CEO
36 Statement of Compliance with the Best Practices on Transfer Pricing
Who We Are
Pakistan Tobacco Company Limited is part of British American Tobacco, the world's most international tobacco group, with brands sold in 180 markets around the world. We produce high quality tobacco products to meet the diverse preferences of millions of consumers, and we work in all areas of the business - from crop to consumer. Our operations in Pakistan began in 1947, making us one of Pakistan's first foreign investment. Our Company is committed to providing consumers with excellent products, and to demonstrating that we are meeting our commercial goals
in ways that are consistent with reasonable societal expectations of a responsible tobacco group in the 21st century. In November 2007, PTC completed 60 years in Pakistan and we shared this auspicious occasion with the country's celebration of independence. We are part of the global British American Tobacco Group which has been in the business now for more than 100 years. It is the worlds second largest quoted tobacco group in terms of global market share with brands sold in more than 180 markets. From a single factory operation to a Company which is involved in every
aspect of cigarette production, from tobacco cultivation to packaging, we have evolved and grown with Pakistan. However, what is significant about these sixty years is the involvement that PTC has demonstrated in the development of the country. By advocating modern agricultural and industrial practices, we have helped in the development and progress of these sectors in the country. We have been supporting and contributing towards various causes of national interest. Educating growers about the latest technology in agriculture, implementing afforestation projects and providing free health care in various areas are
38 Who We Are
but a few examples of the measures we have taken. Throughout these sixty years, our investment in people, brands, technology, innovation and communities where we operate has borne fruit in many ways and we are considered a partner of choice by many. Our Environmental, Health & Safety standards are a source of inspiration for local companies; our Industrial Relation practices have led and influenced local practices; and our managers are highly valued and sought after in the corporate world due to the training and exposure provided to them from the very start of their careers.
Our two factories, Jhelum and Akora Khattak, produce top quality blends and offer a wide range of choices. Employing around 1700 people, we have a diverse talent pool which allows us to deploy resources and capabilities in the most effective and efficient manner, and hence leading to high performance and a Winning Culture. We believe that because our products may pose risks to health, it is all the more important for us to manage our business responsibly. Therefore, responsibility is an integral part of our strategy and through dialogue with our stakeholders, we pursue our commercial objectives in a way which is consistent with the changing expectations from a modern tobacco
business. Awards: Regional Legacy Award BAT Global EH&S Award BAT Zero Accident Award Supply Chain Global Award by Supply Chain Council, USA. 2007 Environment Excellence by Ministry of Environment Government of Pakistan. Runner up Best Corporate Report in the miscellaneous category by Joint Committee of ICMAP & ICAP. ISO 9001 & 14001 Certification SA8000 Certification MRP II Class A Certification
Productivity
Our approach to productivity centres around effective cost and capital management across the Supply Chain deploying our resources efficiently to increase profits and to generate funds to reinvest in our business. This approach has led to reduction in unnecessary complexity and more productive use of our cash and other assets. Greater integration across our supply chain has helped us reduce costs, lead time, utilise economies of scale,
and increase product availability. We also take continuous measures to reduce our Overheads and Indirect costs. 2007 was a challenging year for the Supply Chain team. We catered to the increased market demand by running the factories 24 hours a day, 7 days a week and 358 days during the year and achieved the highest ever production of 38 billion sticks.
Higher inflation coupled with unprecedented rise in international fuel prices had an adverse impact on the prices of imported wrapping materials and leaf. During the year several supply chain projects were initiated to reduce costs and optimize processes which included localization of few imported wrapping materials, blend change and favourable leaf source drifts. Price increases passed on to the local suppliers and import of materials was kept to a minimum by effective negotiations and source changes.
40 Productivity
One of the other challenges for the team was to secure domestic leaf supply for the tremendous surge in the market demand. Highest ever leaf volumes were purchased at the best possible price with improved quality. Cigarettes Per Man-Hour (CPMH), a key productivity metric, improved to 17,750 in 2007 (was 15,271 in 2006). This was despite the fact that our 10s HL variant, which adversely affects productivity, showed a 15% increase in demand as compared to last year.
The key drivers of the above improvements were new technology, high speed machines induction, improved machine utilisation, crew optimization and enhanced skill level of the shop floor employees. Effective shop floor controls also enabled waste reduction, improved product quality, and high standards of Environment, Health & Safety (EH&S).
Through the efficient alignment of the Supply Chain function, PTC maintained its status as one of the lowest cost manufacturer in our Region.
Corporate Social Responsibility We approach corporate social investment as an end in itself rather than as a way to promote ourselves
Better Health Facilities

We run Mobile Doctor Units (MDUs) in Mansehra, Buner, Yar Hussain, Shergarh and in outskirts of Akora Khattak Factory. The MDUs follow a
At Pakistan Tobacco Company we aim to demonstrate responsible corporate conduct across all aspects of our operations. Our philosophy from appropriate marketing and consumer information to supporting sensible tobacco regulation; from respecting work place human rights and reducing our environmental impacts to contributing to local communities guides us in all our endeavours. We seek to work continuously to engage with our stakeholders, to balance their views and to align our business decisionmaking with reasonable societal expectations of a modern tobacco company.
We recognise that Corporate Social Responsibility (CSR) presents particular challenges for a tobacco company. Tobacco products pose real risks to health and raise important questions about how best to define responsible product stewardship. We, therefore, believe that for our business, the only meaningful approach to CSR is one based on candidly dealing with the issues around our products and on ways of responding to sometimes strongly held views of our stakeholders. During the course of the year, one of our most notable CSR activities has been the block afforestation drive we undertook in partnership with the Government of Pakistan. The mass plantation was conducted at Ghourghushti National Park in Attock District. In addition to the above, we continue with our key CSR initiatives, which are as follows:
five day schedule and in total provide health services to about 3,000 residents of these areas in a month. We also provide eye care through our partner Layton Rahmatullah Benevolent Trust (LRBT) benefiting over one thousand people per year. Our latest initiative is a partnership with the National Institute of Health/Ministry of Health and the Prime Ministers Programme for the Prevention and Control of Hepatitis. This will be launched in district Swabi in February 2008.
Water Filtration Units

Four water filtration plants are currently operational in Buner, Akora Khattak, Isori Payan and Yar Hussain with a capacity of 2,000 gallons/hour. In the year 2007 we installed another four units in partnership with the District Governments and the Community Citizen Boards of NWFP.
42 Corporate Social Responsibility
Learning Resource Centres (LRCs)

We have one LRC in each of our regions, namely, Buner, Mansehra, Yar Hussain, Shergarh and Akora Khattak Factory. The one operating in Akora Khattak town is dedicated especially for teaching women. All these centres are affiliated with Skill Development Council NWFP. So far, over 1,200 students have graduated from these centres with basic computer literacy.
Non Formal Education Schools

This programme was initiated about four years ago through an NGO called Adult Basic Education Society (ABES). We have sponsored nine schools in the Yar Hussain district and there are approximately 300 students enrolled currently in various classes of the primary school. Over 80% of these students are girls.
The Citizen Foundation (TCF) School in Nowshera

PTC has donated Rs 3.8 million to The Citizens Foundation for building a primary school in Nowshera to cater to the educational needs of the more disenfranchised children from the locality. The school opened its doors in March 2007.
A Winning Organisation
These drivers have evolved and continue to evolve through a collaborative process involving resources from all levels and from all over the world. Each driver is supported by a strategy and activities at global and local level to help embed it into the fabric of our environment. It is no coincidence that recent and ongoing research confirms that successful implementation of the 4 drivers theme is strongly linked to increased employee satisfaction. These drivers enable change, and adoption of new and better ways of doing things. derive from our four Guiding Principles. We are currently in the process of launching internal campaigns to further inculcate these values into the daily lives of our employees. Our Guiding Principles in brief are: Enterprising Spirit - We have the confidence to seek out opportunities for success, to strive for innovation and to accept the considered risk taking that comes with it. Freedom through Responsibility People have the freedom to take decisions and act by accepting personal responsibility, within the parameters of the organisation's strategic goals. Strength from Diversity - We actively utilise our diversity - of people, cultures, viewpoints, brands, markets and ideas - to create opportunities and strengthen performance. Open minded - We are open minded and encourage everyone to contribute, by actively listening; by being genuinely receptive to new ideas and the ideas of others; by being open to different perspectives and by questioning and challenging the conventional. Our Guiding Principles not only describe the sort of organisation we strive to be but also shape efforts to form a Winning Organisation. These Guiding Principles are an overarching guide to the way we work together, deal with other organisations and business partners. They apply to every employee in the Company, across all levels, functions and geographies. They act as a point of reference for every aspect of our working life; from communication to decision making.
The rules of the game are constantly and so is Pakistan Tobacco Company. In order to achieve a vision of First Choice for Every One, we have consistently embarked on strategies to ensure that we hired the right people and have the right work environment. We focus on four key strategies to drive these initiatives: Growth, Productivity, Responsibility and Wining Organisation. A Winning Organisation requires the Company to be a great place to work where outstanding talent comes together, share its learnings, mistakes and successes to ensure that its combined output is greater than the individual contributions. In order to achieve this goal, we focus on four vital areas of development called the 4 People Drivers. Great Place to Work Leadership Culture Outstanding People Talent Learning and Knowledge
Reward and Recognition Scheme

Our reward and recognition scheme, YOU ROCK has created a lot of energy and enthusiasm in the organisation. You Rock is both an individual and team recognition platform and its three-tier framework ensures timely delivery of reward and recognition. Under tier one of the Scheme ROCK-N-PERFORM; the performance and contribution in terms of initiative, innovation, entrepreneurship, leadership, stretch, dedication, commitment, teamwork of employees is instantly recognised and rewarded by the line managers. Employees are nominated for tier two (ROCK-N-RISE) based on their contribution towards leadership behaviour, application of Guiding Principles and quantitative impact on the business. As per rules of the scheme, these awards are given on the basis of functional contribution and are presented at the functional events during the year.
44 A Winning Organisation
ROCK-N-SHINE tier three award, which is aligned to BAT Battlefield Bonus criteria and awards an amount equivalent to two months gross salary to the employee.
Bonus Scheme
To focus and reward managers and officers, to encourage greater cohesion and to maintain a strong competitive position, this incentive scheme has been based on organisations performance against targets set for the following five dimensions: Operating Profit Volume Share Cash Flow Net Turnover Global Drive Brands Volume
Achievement against each of these five performance measures are assessed on a linear scale ranging across; Threshold, Target, Normal Maximum and Extra Maximum. Based on the extent of targets achieved a percentage of yearly gross salary is paid out.
Exporting Talent
BAT is truly a global company and considers employees from all operating companies as part of the same family. This is evident by BATs exchange programmes whereby employees are given a chance to work in other operating companies. The philosophy behind the initiative is that the individual is taken out of his/her comfort zone and exposed to a different environment, culture and
teams. This is a real leadership test and a tremendous learning experience for all involved. The employees of PTC have proven themselves over the years and our talent is in great demand. During 2007, four of our managers were seconded out for long term assignments taking the total number of secondees to 20. These managers are working in various BAT operating companies around the world, making PTC proud. These scondments enable them to add great value through introduction of best practices and coach other managers to improve their performance.
Growth Academy
In order to strengthen its leadership and talent pipeline, PTC launched an initiative to grow its internal talent. From the platform of Growth
Guiding Principles Mastermind Playshop (GPMP)

Based on the feedback received through 'Your Voice' survey in 2006 and subsequent action plan that was carried out suggested that we need to enhance the understanding and appreciation of PTCs Guiding Principles amongst our new joiners. Subsequently, three Guiding Principles Mastermind Playshops, popularly known as GPMP were rolled out during November-December, 2007 for all new employees who joined after January, 2006. A total number of 75 employees attended the programme in Islamabad and Karachi facilitated by a host of internally trained cross functional energizers. The GPMP took off with a spectacular start in Islamabad on November 14, 2007. The two-day retreat was intended to embed the spirit of our Guiding Principles (GP) in our people in a manner more effective than power-point. Not a single slide was shown throughout the playshop, and testimonies from the participants validate the efficacy of the methods employed. A range of activities run by the energizers provided entertainment and team building and developed an understanding of the GPs more profoundly.
Management Trainee (MT) Programme

The Global Management Trainee Programme is one of British American Tobaccos key approach to equip our young managers to succeed in our increasingly competitive business environment and to ensure that we attain world leadership in the tobacco industry. The Global Management Trainee Programme is Companys twoyear development programme for graduates and is only offered to high potential high performing individuals. The programme exposes MTs to all aspects of the business which enhances their learning process. At this point in time, we have a total of 9 Management Trainees in our organisation, hired from different institutions in the country.
Academy, accelerated development opportunities are being provided to a group of 12 high potential Business Support Officers to create a future pool of leaders. The group was selected after a robust screening process which comprised on-line test and assessment exercises. More than 100 employees took part in the process. The Academy runs over a span of 18 months and most of the learning opportunities are provided on site through self study, e-learning, action projects and coaching.
Peoples' Development
PTC is considered as an employer of choice by bright young graduates in Pakistan. We take the development of our people seriously and expose them to above market initiatives through training programmes held around the globe. We believe that in order to compete in such a competitive market we need to equip our workforce with the right skill set and knowledge so that they are prepared to face any challenges that come their way. Our recent employee survey confirmed that our workforce has a strong belief that the Company is committed to peoples' development.
Your Voice
PTC is committed to creating an environment where employees feel that they can speak honestly about the Company and issues that are important to them. We run annual employee surveys known as Your Voice with International Survey Research (ISR). The results are compiled and communicated to all employees after thorough analysis. The purpose is to address any areas of concern at all levels.
Amaze Yourself
In 2007, a new on-line tool for our new inductees was launched. Amaze Yourself provides the entrants with an opportunity to learn about the Company, its values, systems and processes, on-line. They can revisit the tool whenever required to enhance know-how of any subject of relevance to them. The tool is widely used and appreciated across the organisation.
Employer Branding
Campus Campaigns In order to attract the best talent, the Company introduced a unique Campus Campaign. This has been a huge success and the response unprecedented. We are the first multinational to adopt this approach and have been able to hire a great
46 A Winning Organisation
talent. The students of various institutions are invited to an off site venue to provide them an opportunity to learn about the Company and engage informally with PTC management.
Internships
Our internship programme is very sought after among students. It is well structured and provides opportunity to acquire practical knowledge. We have linked our internship programme with our recruitment process whereby successful candidates are given a chance to participate directly in Assessment Centers. All these activities along with other Employer Branding initiatives have ensured the strengthening of our employer brand and achievement of the vision to become the "Employer of Choice".
Diversity
One of our values and principles is Strength from Diversity. Diversity is not only limited to gender but also to diversity in race, beliefs and to the difference in work styles of our employees. Women are strongly encouraged to apply and our culture ensures that they are comfortable and well looked after. We have initiated several projects on diversity and this is one of the key approaches that will make PTC a great place to work with outstanding people. We engaged external research experts from ACNielsen as part of the Gender Diversity initiative last year, and guaged the perceptions of both male and female employees about diversity and work place practices in the Company.
The Company has recently introduced new policies to facilitate employees and support diversity in the organisation; 1) 2) 3) 4) 5) Sabbatical Leave Policy Harassment Prevention & Redress Policy Comprehensive Maternity Leave Policy Reduced Working hours Policy Paternity Leave Policy
We will continue to focus on these areas to have the right people with the ability to drive and deliver competitive advantage through superior performance.
60 Years of Excellence - Our Heritage
In 1947, with the birth of a sovereign state began the journey of a nation and with it the story of a Company. The historical archive of the corporate sector in Pakistan begins with PTC as one of its first corporate citizen, and hence, linking our heritage with that of this country. As millions of people looked towards the future as independent and free citizens of the newly formed state, the Pakistan Tobacco Company was born, becoming the first Multinational to be registered in the country and marking its name in the history of private enterprise in our country. In the few decades since its inception, like the nation that came to be, the Company has come a very long way. From being a single factory operation (in Karachi, the site of our first operational Head Quarters) to what is today, the largest tobacco company in the country, we are very proud of the many milestones and achievements that form the bedrock of our heritage. The Company came about as a result of the break-up of the Imperial Tobacco Company of India. Our collective memories have seen us take the culture and set-up of the Imperial Tobacco Company and embark upon a spirit of excellence that has taken
us from strength to strength in every field of our business. We have progressed from an agrarian value chain and classical production (and distribution) model to a state of the art supply chain with modern crop practices and the latest innovations in manufacturing. We have developed our employees to a level where we demand only excellence, recruit the best and enjoy a reputation of being second to none, both in the outlook of the business world as well as in the perception of the potential employees. An important constituent of this extraordinary heritage is the Companys partnership with the farming communities that provide us with the tobacco. We have started and implemented initiatives in the field of Corporate Social Responsibility from the very early days of our existence becoming the first to promote this field and to take the lead in many of its aspects. Over these many years, our close work with the communities has invariably brought us into a close dialogue based relationship with the Government. The Company has been a proactive partner with regards to the key issues surrounding our business, and maintains its status as the preferred industry consultant with
the Government; a status that helps us to better deliver on our social and business obligations. Our heritage includes the relationship we have enjoyed with our valued business partners. From retailers to suppliers, agencies to public sector organisations, the Company has benefited these stakeholders not merely in their growth and prosperity but in sharing benchmark practices that have led to improved productivity and learning at all levels. As we together look back on these 60 years as a Company, 6 decades of achievements and challenges, years of dedication and commitment, we are able to assimilate our collective learning and chalk out a path for ourselves into the future that not only will take us to new heights but will also build and expound on our heritage. Going forward, we want to congregate the modernity of the developed world through the principles of the British American Tobacco Group with the potential that Pakistan offers in terms of overt capabilities. By leveraging our heritage, we coalesce all these facets and deliver the best results possible.
48 Our Heritage
54
Pakistan Tobacco Company Limited
Financial Statements
Auditors Report to the Members
We have audited the annexed balance sheet of Pakistan Tobacco Company (the Company) as at December 31, 2007 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 conduct 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) (iii) the expenditure incurred during the year was for the purpose of the Company's business: and 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, 2007 and of the profit, its cash flows and changes in equity for the year then ended; and (d) in our opinion Zakat deductible at source under the Zakat and Ushr Ordinance, 1980 (XVIII of 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, Islamabad
Profit and Loss Account

Note
2007 Rs 000
2006 Rs 000
Gross turnover Sales tax Turnover (net of sales tax) Cost of sales Gross profit Marketing and distribution expenses Administrative expenses Operating profit Other income Other expenses Finance cost Profit before taxation Taxation Profit for the year Earnings per share (Rupees) 12 11 8 9 10 6 7 5
40,889,275 5,534,452 35,354,823 28,844,866 6,509,957 1,798,045 739,280 2,537,325 3,972,632 102,634 311,374 3,763,892 50,317 3,713,575 1,300,517 2,413,058 9.44
35,715,451 4,833,285 30,882,166 25,348,646 5,533,520 1,816,198 644,981 2,461,179 3,072,341 68,088 228,696 2,911,733 51,060 2,860,673 955,685 1,904,988 7.46
The annexed notes 1 to 32 form an integral part of these financial statements.
Mueen Afzal Chairman
Toh Ah Wah Managing Director & CEO
58 Financial Statements 2007
Balance Sheet
as at December 31, 2007
Note
2007 Rs 000
2006 Rs 000
Property, plant and equipment Long term investment in subsidiary company Long term loans Long term deposits and prepayments Current assets Stock-in-trade Stores and spares Trade debts Loans and advances Prepayments Other receivables Cash and bank balances
14 15 16 17
5,154,326 5,000 12,513 13,025
4,529,366 5,000 18,660 8,424
18 19 20 21 22 23
3,998,181 140,777 2,386 23,187 80,280 229,891 166,666 4,641,368
3,790,853 140,008 2,406 12,205 72,235 92,360 62,883 4,172,950
Less: current liabilities Trade and other payables Interest accrued Short term finances Income tax payable Net current (liabilities) / assets Deferred taxation Contingencies and commitments Net assets Financed by: Share capital Authorised capital 300,000,000 Ordinary shares of Rs 10 each Issued, subscribed and paid-up capital Revenue reserves Shareholders' equity 28 3,000,000 2,554,938 1,467,919 4,022,857 3,000,000 2,554,938 1,584,249 4,139,187 26 27 4,022,857 4,139,187 24 25 3,548,237 8,401 1,038,550 227,752 4,822,940 (181,572) (980,435) 2,212,241 11,115 1,293,141 233,712 3,750,209 422,741 (845,004)
Cash Flow Statement

2007 Rs 000
2006 Rs 000
Cash flow from operating activities Cash receipts from customers Cash paid to government for federal excise duty, sales tax and other levies Cash paid to suppliers Cash paid to employees and retirement funds Income tax paid Other cash receipts 40,889,295 (24,851,618) (9,596,729) (1,730,252) (1,171,046) 6,534 3,546,184 Cash flow from investing activities Purchase of property, plant and equipment Proceeds from sale of property, plant and equipment Cash paid to subsidiary company (1,190,624) 39,524 (325) (1,151,425) Cash flow from financing activities Dividend paid Financial charges paid Interest received Increase/ (decrease) in cash and cash equivalents Cash and cash equivalents at January 1 Cash and cash equivalents at December 31 Cash and cash equivalents comprise: Cash and bank balances Short term finances 166,666 (1,038,550) (871,884) 62,883 (1,293,141) (1,230,258) (2,014,232) (53,031) 30,878 (2,036,385) 358,374 (1,230,258) (871,884) (1,402,017) (43,216) 47,402 (1,397,831) (887,201) (343,057) (1,230,258) (1,238,014) 37,755 (420) (1,200,679) 35,715,939 (22,134,488) (8,850,492) (1,750,686) (1,278,610) 9,646 1,711,309
Statement of Changes in Equity

Share capital Rs '000 Balance as at December 31, 2005 Final dividend of Rs 2.50 Per share relating to the year Ended December 31, 2005 Profit for the year 2006 Interim dividend of Rs 3.00 per share relating to the Year ended December 31, 2006 Balance as at December 31, 2006 Final dividend of Rs 4.40 Per share relating to the year Ended December 31, 2006 Profit for the year 2007 1st interim dividend of Rs 1.50 Per share relating to the Year ended December 31, 2007 2nd interim dividend of Rs 2.00 Per share relating to the Year ended December 31, 2007 3rd interim dividend of Rs 2.00 Per share relating to the Year ended December 31, 2007 Balance as at December 31, 2007 2,554,938 2,554,938 2,554,938
Revenue reserves Rs '000 1,084,476
Total Rs '000 3,639,414
(638,734) 1,904,988
(638,734) 1,904,988
(766,481) 1,584,249
(766,481) 4,139,187
(1,124,173) 2,413,058
(1,124,173) 2,413,058
(383,241)
(383,241)
(510,987)
(510,987)
(510,987) 1,467,919
(510,987) 4,022,857
Notes to the Financial Statements

1.
The Company and its operations Pakistan Tobacco Company Limited (the Company) is a public listed company incorporated on November 18, 1947 under the Companies Act, 1913 (now the Companies Ordinance, 1984) and its shares are quoted on the Karachi, Lahore and Islamabad stock exchanges of Pakistan. The Company is a subsidiary of British American Tobacco (Investments) Limited, United Kingdom, whereas its ultimate parent company is British American Tobacco p.l.c, United Kingdom. The registered office of the Company is situated at Evacuee Trust Complex, Agha Khan Road, Sector F-5/1, Islamabad. The Company is engaged in the manufacture and sale of cigarettes.
2.
Summary of significant accounting policies 2.1 Basis of preparation These financial statements have been prepared in accordance with approved accounting standards as applicable in Pakistan. Approved accounting standards comprise of such International Financial Reporting Standards (IFRS) issued by the International Accounting Standard Board as are notified under the Companies Ordinance, 1984, provisions of and directives issued under the Companies Ordinance, 1984. In case requirements differ, the provisions or directives of the Companies Ordinance, 1984 shall prevail. (a) Standards, amendments and interpretations effective in 2007 IFRS 7 (Financial instruments: Disclosures) and the complementary amendment to IAS 1 (Presentation of financial statements Capital disclosures) introduces new disclosures relating to financial instruments and does not have any impact on the classification and valuation of the Companys financial instruments. IFRS 7 has been adopted by the Institute of Chartered Accountants of Pakistan but has not yet been adopted by the Securities and Exchange Commission of Pakistan. (b) Standards, amendments and interpretations effective in 2007 but not relevant The following standards, amendments and interpretations to published standards are mandatory for accounting periods beginning on or after January 1, 2007 but are not relevant to the Companys operations: 1. 2. 3. 4. 5. (c) IFRS 4: Insurance contracts; IFRIC 7: Applying the restatement approach under IAS 29 (Financial reporting in hyperinflationary economies); IFRIC 8: Scope of IFRS 2; IFRIC 9: Re-assessment of embedded derivatives; and IFRIC 10: Interim financial reporting and impairment.
Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Company The following standards, amendments and interpretations to existing standards have been published and are mandatory for the Companys accounting periods beginning on or after January 1, 2008 and the Company has not early adopted them: 1. IAS 1: Presentation of financial statements, issued in September 2007 (effective from January 1, 2009) revises the existing IAS 1 and requires apart from changing the names of certain financial statements, presentation of transactions with owners in statement of changes in equity and with non-owners in the Comprehensive Income statement. IFRIC 11: IFRS 2 - Group and treasury share transaction, provides guidance on whether share-based transactions involving treasury shares or involving group entities (for example, options over a parents shares) should be accounted for as equity-settled or cash-settled share-based payment transactions in the stand-alone accounts of the parent and group companies. Adoption of IFRIC 11 is not expected to have an impact on the Companys financial statements.
2.

3.
IFRIC 13: Customer loyalty programmes, clarifies that where goods or services are sold together with a customer loyalty incentive (for example, loyalty points or free products), the arrangement is a multiple-element arrangement and the consideration receivable from the customer is allocated between the components of the arrangement in using fair values. Adoption of IFRIC 13 is not expected to have any impact on the Company's financial statements. IFRIC 14: IAS 19 (The limit on a defined benefit asset, minimum funding requirements and their interaction) provides guidance on assessing the limit in IAS 19 (Employee benefits) on the amount of the surplus that can be recognised as an asset. It also explains how the pension asset or liability may be affected by a statutory or contractual minimum funding requirement. Adoption of IFRIC 14 is not expected to have any impact on the Companys financial statements. IAS 23: Borrowing costs (Amendment) requires an entity to capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset (one that takes a substantial period of time to get ready for use or sale) as part of the cost of that asset. The option of immediately expensing those borrowing costs will be removed. Adoption of IAS 23 (Amendment) is not expected to have any impact on the Company's financial statements.
4.
5.
(d)
Interpretations to existing standards that are not yet effective and not relevant for the Companys operations 1. IFRS 8: Operating segments (effective from January 1, 2009) requires a management approach, under which segment information is presented on the same basis as that used for internal reporting purposes. IFRIC 12: Service concession arrangements (effective from January 1, 2008) applies to contractual arrangements whereby a private sector operator participates in the development, financing, operation and maintenance of infrastructure for public sector services.
2.
2.2
Basis of measurement These financial statements have been prepared under the historical cost convention except for modifications for financial instruments which are stated at fair value, certain employment benefits obligations which are measured at present values, property, plant and equipment which are stated at recoverable amount and other modifications as required by International Financial Reporting Standards (IFRS) referred to in the accounting policies given below.
2.3 (a)
Foreign currency transactions and translation Functional and presentation currency Items included in the financial statements of the Company are measured using the currency of the primary economic environment in which the entity operates (the functional currency), which is the Pakistan Rupee (PKR or Rs).
(b)
Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the date of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the profit and loss account.
2.4
Revenue recognition Revenue comprises the fair value of the consideration received or receivable for the sale of goods in the ordinary course of the Company's activities. Revenue is recognised when it is probable that the economic benefits associated with the transaction will flow to the Company and the amount of revenue, and the associated cost incurred or to be incurred, can be measured reliably.

(a)
Sale of goods The Company manufactures and sells cigarettes to its appointed distributors. Sales of goods are recognised when the Company has delivered products to the distributor and there is no unfulfilled obligation that could affect the distributors acceptance of the products. Delivery does not occur until the products have been shipped to the specified location, the risks of obsolescence and loss have been transferred to the distributor, and either the distributor has accepted the products in accordance with the sales contract, the acceptance provisions have lapsed, or the Company has objective evidence that all criteria for acceptance have been satisfied.
(b)
Income on bank deposits Return on bank deposits and investments are accounted for on the time proportion basis using the applicable rate of return.
(c)
Others Scrap sales and miscellaneous receipts are recognised on realised amounts. All other income is recognised on accrual basis.
2.5
Taxation Current The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred Deferred tax is accounted for using the balance sheet liability method in respect of all temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of taxable profit. Deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which the deductible temporary differences, unused tax losses and tax credits can be utilised. Deferred tax is calculated at the rates that are expected to apply to the period when the differences reverse, based on tax rates that have been enacted or substantially enacted by the balance sheet date.
2.6
Provisions Provisions are recognised when the Company has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount could be reliably estimated. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. All provisions are reviewed at each balance sheet date and adjusted to reflect current best estimate.
2.7 (a)
Employee benefits Retirement benefits plans The Company operates various retirement benefit schemes. The schemes are generally funded through payments to trustee-administered funds or determined by periodic actuarial calculations. Accordingly, the Company has both defined contribution and defined benefit plans.

A defined contribution plan is a plan under which the Company pays fixed contributions into a separate fund. The Company has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. A defined benefit plan is a plan that is not a defined contribution plan. Typically defined benefit plans define an amount of benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. The Company operates: (i) approved funded pension scheme for management and certain grades of business support officers and gratuity scheme for all employees. The liability recognised in the balance sheet in respect of defined benefit pension and gratuity plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognised actuarial gains/ losses, if any. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are nominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related liability. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions in excess of the 'corridor' (10% of the higher of the fair value of the plan assets or the present value of the defined benefit obligation) at the current reporting date are recognized over the expected average remaining working life of employees participating in the defined benefit schemes. (ii) approved contributory provident fund for all employees administered by trustees (the Plan). The contributions of the Company are recognised as employee benefit expense when they are due. Prepaid contributions, if any, are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available.
(b)
Termination benefits Termination benefits are payable when employment is terminated by the Company before the normal retirement date or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Company recognises termination benefits when it is demonstrably committed to either; terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal; or providing termination benefits as a result of an offer made to encourage voluntary redundancy.
(c)
Medical benefit plans The Company maintains a health insurance policy for its full time permanent employees. The Company contributes premium to the policy annually. Such premium is recognised as an expense in the profit and loss account.
(d)
Bonus plans (i) The Company recognises a liability and an expense for bonuses based on a formula that takes into consideration the profit attributable to the Companys shareholders after certain adjustments and performance targets. The Company recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation. The Company also operates a deferred bonus plan for certain eligible management staff members. These benefits are usually paid after 3 years from the date of grant of such an award unless otherwise authorized by the Compensation Committee of the Board of Directors. The obligation for these payments is recognised in the profit and loss account on a straight line basis to allocate the expected award amount over the term of the award.
(ii)

2.8
Operating leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to profit and loss account on a straight-line basis over the period of the lease.
2.9
Borrowing cost Borrowing costs are expensed as incurred.
2.10
Related party transactions Transactions with the holding company and associated companies for sale and purchase of materials and manufactured goods are based on normal commercial practices and are separately disclosed in the financial statements.
2.11
Property, plant and equipment These are stated at cost less accumulated depreciation and impairment except free-hold land, capital work in progress and items in transit which are stated at cost. Cost includes expenditure that is directly attributable to the acquisition of the asset. Depreciation is calculated using the straight-line method to allocate their cost over their estimated useful lives at the following annual rates: Buildings on free-hold land, buildings on lease-hold land and private railway sidings Plant and machinery Air conditioners included in plant and machinery Office and household equipment Furniture and fittings Vehicles 3% 7% 25% 20% to 25% 10% to 20% 25%
Depreciation on additions and deletions during the year is charged on a pro rata basis from the month when asset is put into use or up to the month when asset is disposed/written off. Subsequent costs are included in the asset's carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. All other repairs and maintenance are recognised in profit and loss account during the financial period in which they are incurred. The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An assets carrying amount is written down immediately to its recoverable amount if the assets carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals of operating fixed assets are taken to the profit and loss account. 2.12 Long term investment in subsidiary company The investment in subsidiary company is carried at cost less impairment losses, if any. The profit and losses of the subsidiary company is carried in the financial statement of the subsidiary company and are not dealt with for the purpose of the financial statements of the Company except to the extent of dividend declared (if any) by the subsidiary company.

2.13
Impairment of non-financial assets Assets that have an indefinite useful life, for example land, are not subject to amortisation or depreciation and are tested annually for impairment. Assets that are subject to depreciation/amortisation are reviewed for impairment at each balance sheet date or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss or reversal of impairment loss is recognised in the profit and loss account. The recoverable amount is the higher of an assets fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. Reversals of the impairment loss is restricted to the original cost of the asset.
2.14
Financial assets The Company classifies its financial assets in three categories: at fair value through profit or loss, loans and receivables, and available for sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.
(a)
Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short-term. Derivatives (if any) are also categorised as held for trading unless they are designated as hedges. Assets in this category are classified as current assets.
(b)
Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. The Companys loans and receivables comprise trade debts and cash and cash equivalents (note 2.18).
(c)
Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose off the investment within 12 months of the balance sheet date. Regular purchases and sales of financial assets are recognised on the trade-date the date on which the Company commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed in the profit and loss account. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are carried at amortised cost using the effective interest rate method. Gains or losses arising from changes in the fair value of the financial assets at fair value through profit or loss category are presented in the profit and loss account in the period in which they arise. Dividend income from financial assets at fair value through profit or loss is recognised in the profit and loss account as part of other income when the Companys right to receive payments is established. The Company assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered as an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the impairment loss is removed from equity and recognised in the profit and loss account. Impairment losses recognised in the profit and loss account on equity instruments are not reversed through the profit and loss account. Impairment testing of trade debts is described in note 2.18.

2.15
Stock-in-trade Stock-in-trade is stated at the lower of cost and net realisable value. Cost is determined using the weighted average method. The cost of finished goods and work in process comprises design costs, raw materials, direct labour, other direct costs and related production overheads. Net realisable value is the estimated selling price in the ordinary course of business, less cost of completion and costs necessary to be incurred to make the sale.
2.16
Stores and spares Stores and spares are stated at lower of cost and net realisable value. Cost is determined using weighted average method less allowance for obsolete and slow moving items. Items in transit are valued at cost comprising invoice value and other related charges incurred upto the balance sheet date.
2.17
Dividend recognition Final dividend distributions to the Company's shareholders are recognised as a liability in the financial statements in the period in which the dividends are approved by the Company's shareholders at the Annual General Meeting, while interim dividend distributions are recognised in the period in which the dividends are declared by the Board of Directors.
2.18
Financial instruments Financial assets and financial liabilities are recognised when the Company becomes the party to the contractual provision of the instruments and the Company loses control of the contractual right that comprise the financial asset and in case of financial liability when the obligation specified in the contract is discharged, cancelled or expired. The particular measurement method adopted are disclosed in the individual policy statements associated with each item as shown below:
a)
Trade and other payables Trade and other payables are carried at cost which is the fair value of the consideration to be paid in future for goods and services received.
b)
Trade debts Trade debts are recognised initially at fair value and subsequently measured at cost less provision for doubtful debts. A provision for doubtful debts is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of the trade debts. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade debt is doubtful. The provision is recognised in the profit and loss account. When a trade debt is uncollectible, it is written off against the provision. Subsequent recoveries of amounts previously written off are credited against selling and marketing costs in the profit and loss account.
c)
Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet.
2.19
Offsetting Financial assets and liabilities are offset and the net amount is reported in the balance sheet, if the Company has a legally enforceable right to setoff the recognised amounts and the Company intends to settle either on a net basis or realise the asset and settle the liability simultaneously.

3.
Financial risk management 3.1 Financial risk factors The Companys activities expose it to a variety of financial risks: market risk (including currency risk, price risk and cash flow and fair value interest rate risk), credit risk and liquidity risk. The Companys overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance. Risk management is carried out by the Treasury Sub Committee (the Committee) of the Executive Committee (EXCO) of the Board of Directors (the Board) under policies approved by the Board. The Board provides written principles for overall risk management, as well as written policies covering specific areas such as foreign exchange risk, interest rate risk, credit risk and investment of excess liquidity. All treasury related transactions are carried out within the parameters of these policies. (a) Market risk (i) Foreign exchange risk Foreign exchange risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Foreign exchange risk arises mainly from future commercial transactions or receivables and payables that exist due to transactions in foreign currencies. The Company is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the United States Dollar (USD) and Great Britain Pound Sterling (GBP). Currently, the Companys foreign exchange risk exposure is restricted to bank balances, the amounts receivable/payable from/to the foreign entities and outstanding letters of credit. Most of the Companys foreign exchange risk arising out of import letters of credit is hedged through forward contracts. The Companys risk management policy is to hedge between 90% and 100% of anticipated cash flows (mainly materials & capex imports) in each year. If the functional currency, at the year end date, fluctuates by 5% against the USD and GBP with all other variables held constant, the impact on profit after taxation for the year would have been Rs. 0.01million and Rs 2.13 million (2006: Rs 2.21 million and Rs 3.99 million) respectively higher/lower, mainly as a result of exchange gains/losses on translation of foreign exchange denominated trade receivables and payables. (ii) Price risk Price risk represents the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market. The Company is not exposed to equity price risk since there are no investments in equity securities. The Company is also not exposed to commodity price risk since it has a diverse portfolio of commodity suppliers. (iii) Cash flow and fair value interest rate risk It represents the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company has no significant long-term interest-bearing assets. The Companys interest rate risk arises from short-term borrowings issued at variable rates. If interest rates on short term borrowings, at the year end date, fluctuates by 1% higher/lower with all other variables held constant, profit after taxation for the year would have been Rs 0.68 million (2006: Rs 8.40 million) lower/higher, mainly as a result of higher/lower interest expense on floating rate borrowings.

(b)
Credit risk Credit risk represents the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. Credit risk arises from deposits with banks and receivables due from the holding company and other associated entities. The table below shows the balances held with/ receivable due from seven major counterparties at the balance sheet date:Rating Short term Long term Rating Agency Rs (million) 2007 2006
Counterparty Banks ABN Amro Bank Habib Bank Limited MCB Bank Limited Citibank, N.A.
A1 A1+ A1+ P-1
A+ AA+ AA+ B
PACRA PACRA PACRA Moody's
11.19 12.53 67.45 67.81 158.98
9.61 2.27 13.72 29.80 55.40
Holding Company and other associated entities British American Tobacco p.l.c. - UK BAT Asia Pacific, Hong Kong Ceylon Tobacco Company - Sri Lanka 4.23 24.59 4.08 32.90 8.79 12.06 3.46 24.31
Due to the Company's long standing business relationships with these counterparties and after giving due consideration to their strong financial standing, management does not expect non-performance by these counter parties on their obligations to the Company. Accordingly the credit risk is minimal. (c) Liquidity risk Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. The Company manages liquidity risk by maintaining sufficient cash and the availability of funding through an adequate amount of committed credit facilities. At December 31, 2007, the Company had Rs 1,921 million available borrowing limit from financial institutions and Rs 118 million balances at banks. Further, the Company also has strong financial support from its holding company. Based on the above, inspite the fact that the Company is in a negative working capital position at the year end, management believes the liquidity risk to be low. 3.2 Capital risk management The Company's objectives when managing capital risks are to safeguard the Companys ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The Company monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including short term finances as shown in the balance sheet) less cash and cash equivalents. Total capital is calculated as equity as shown in the consolidated balance sheet plus net debt.

The gearing ratio as at December 31, 2007 was 18% (2006: 23%) and is calculated is as follows: Rs (million) 2007 Total borrowings Less: cash and cash equivalents Net debt Total equity Total capital Gearing ratio 3.3 Fair value estimation The carrying values of financial instruments approximate their fair values. 4. Critical accounting estimates and judgments The preparation of financial statements in conformity with approved accounting standards requires use of certain critical accounting estimates and assumptions. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. 4.1 (a) Critical accounting estimates and assumptions Provision for income taxes The Company recognises tax liabilities for pending tax assessments using estimates based on expert opinion obtained from tax/legal advisors. Differences, if any, between the income tax provision and the tax liability finally determined is recorded when such liability is so determined. Deferred tax (note 2.5) is calculated at the rates that are expected to apply to the period when the differences reverse, based on tax rates that have been enacted or substantially enacted by the balance sheet date. (b) Provision for retirement benefits Actuarial valuation of gratuity and pension contributions (note 2.7) requires use of certain assumptions related to future periods including increase in remuneration, expected long term return on plan assets and the discount rate used to convert future cash flows to current values. (c) Property, plant and equipment The Company reviews useful life and residual value of property, plant and equipment (note 2.11) on regular basis. Any change in estimates may affect the carrying amounts of the respective items of property, plant and equipment with a corresponding effect on the depreciation charge. 4.2 Critical judgments in applying the entitys accounting policies There have been no critical judgments made by the Company's management in applying the accounting policies that would have a significant effect on the amounts recognised in the financial statements. The aggregate actuarial losses of Rs 489.50 million (2006: Rs 328.11 million) in respect of defined benefit plans which remain unrecognised are due to adoption of corridor approach under IAS - 19 (Employee benefits) as explained in more detail in note 2.7 to the financial statements. 1,038 (167) 871 4,023 4,894 18% 2006 1,293 (63) 1,230 4,139 5,369 23%

2007 Rs 000
2006 Rs 000
5.
Cost of sales Raw material consumed Opening stock of raw materials and work in process Raw material purchases and expenses note 5.1 Closing stock of raw materials and work in process Government taxes and levies Federal excise duty Customs duty and surcharges Provincial and municipal taxes and other duties 19,311,946 366,140 94,344 19,772,430 26,625,949 Royalty Production overheads Salaries, wages and benefits Stores, spares and machine repairs Fuel and power Insurance Repairs and maintenance Postage, telephone and stationery Information technology Depreciation note 14.1 Damaged and obsolete materials written off Sundries Cost of goods manufactured Cost of finished goods Opening stock Closing stock 496,384 (482,629) 13,755 28,844,866 5.1 Raw material purchases and expenses Materials Salaries, wages and benefits Stores, spares and machine repairs Fuel and power Property rentals Insurance Repairs and maintenance Postage, telephone and stationery Depreciation note 14.1 Sundries 6,481,565 266,332 108,004 59,383 24,250 3,781 191 2,567 91,889 36,640 7,074,602 5,419,407 249,201 124,200 58,570 21,720 2,612 769 4,510 89,588 39,555 6,010,132 769,735 (496,384) 273,351 25,348,646 915,163 301,793 147,657 22,107 57,924 5,659 59,945 374,579 24,236 28,495 1,937,558 28,831,111 821,477 262,762 146,083 24,491 78,987 7,389 75,022 310,384 17,232 32,123 1,775,950 25,075,295 267,604 16,991,172 244,563 87,084 17,322,819 23,049,678 249,667 3,294,469 7,074,602 (3,515,552) 6,853,519 3,011,196 6,010,132 (3,294,469) 5,726,859

2007 Rs 000
2006 Rs 000
6.
Marketing and distribution expenses Salaries, wages and benefits Selling expenses Freight Property rentals Insurance Repairs and maintenance Postage, telephone and stationery Travelling Depreciation note 14.1 238,607 1,222,638 162,438 9,098 8,549 74,366 7,643 37,914 36,792 1,798,045 233,781 1,266,495 142,104 8,103 9,805 68,906 8,585 38,643 39,776 1,816,198
7.
Administrative expenses Salaries, wages and benefits Fuel and power Property rentals Insurance Repairs and maintenance Postage, telephone and stationery Legal and professional charges Donations note 7.1 Information technology Travelling Depreciation note 14.1 Directors' fee Auditors' remuneration and expenses note 7.2 Sundries 415,792 7,708 38,690 3,282 20,467 5,785 12,141 5,742 96,278 54,542 34,591 240 4,537 39,485 739,280 7.1 None of the directors and their spouses had any interest in any of the donees during the year.
2007 Rs 000 2006 Rs 000
347,429 8,048 30,118 2,485 14,788 9,764 11,392 4,027 94,417 50,846 42,438 310 4,450 24,469 644,981
7.2
Auditors' remuneration and expenses include: Statutory audit Special certifications, audit of consolidated accounts, staff retirement benefit funds and review of half yearly accounts Tax compliance and advisory services Outofpocket expenses 820 1,680 1,867 170 4,537 750 1,545 2,075 80 4,450

2007 Rs 000
2006 Rs 000
8.
Other income Income from financial assets Interest on short term bank deposits Income from nonfinancial assets Gain on disposal of operating fixed assets Net foreign exchange gain Others Old liabilities written back Miscellaneous 30,878 11,711 4,458 50,599 4,988 102,634 47,402 13,103 7,583 68,088
9.
Other expenses Workers' Profit Participation Fund Workers' Welfare Fund Net foreign exchange loss Restructuring cost note 24.2 199,024 67,880 44,470 311,374 153,261 51,295 24,140 228,696
10.
Finance cost Interest on short term finances Bank charges and fees Interest on Workers' Profit Participation Fund 25,928 24,389 50,317 22,093 23,236 5,731 51,060
11.
Taxation Current Current for the year for prior years 1,165,086 1,165,086 135,431 1,300,517 11.1 Effective tax rate reconciliation: Numerical reconcilation between the average effective income tax rate and applicable income tax rate is as follows:
% %
880,264 (44,911) 835,353 120,332 955,685
Deferred for the year
Applicable tax rate Tax effect of: Inadmissible expenses Income taxed at different rate Non taxable proceeds from asset disposals Provision for prior years Others Average effective tax rate
35.00 0.02 0.02 (0.02) 35.02
35.00 0.02 0.01 (0.03) (1.57) (0.02) 33.41

2007 000
2006 000
12.
Earnings per share Profit after tax (Rs) Number of fully paid weighted average ordinary shares Earnings per share Basic (Rs) There is no dilutive effect on the basic earnings per share of the Company. 2,413,058 255,494 9.44 1,904,988 255,494 7.46
13.
Remuneration of chief executive, directors and executives The aggregate amounts charged in the financial statements of the year for remuneration including all benefits to chief executive, directors and executives are as follows:
Chief executive Executive directors Executives *Key management personnel 2007 Rs '000 2006 Rs '000 2007 Rs '000 2006 Rs '000 2007 Rs '000 Other executives Total
2006 2007 2006 2007 2006 Rs '000 Rs '000 Rs '000 Rs '000 Rs '000
Managerial remuneration Corporate bonus Leave fare assistance Housing and utilities Medical expenses Post employment benefits Number of persons
41,274 15,871 435 5,144 62,724 1
43,173 11,995 435 4,460 196 60,259 1
57,501 24,150 1,842 8,177 501 4,413 96,584 5
41,854 20,205 3,503 7,505 482 4,077 77,626 5
50,051 37,083 1,198 17,052 1,714 11,891 118,989 13
53,159 42,350 1,859 13,127 1,412 8,047 119,954 11
229,869 86,162 195 107,618 20,596 78,822 523,262 208
174,485 57,988 222 76,214 11,332 55,147 375,388 142
378,695 163,266 3,670 137,991 22,811 95,126 801,559 227
312,671 132,538 6,019 101,306 13,422 67,271 633,227 159
* Represents remuneration paid to key management personnel other than the Chief executive and directors. 13.1 The Company, in certain cases, also provides individuals with the use of company accommodation, cars and household items, in accordance with their entitlements. In addition, Directors' fee of Rs 240 thousand (2006: Rs 310 thousand) was paid to five (2006: five) nonexecutive directors for attending board meetings during the year.
13.2

14.
Property, plant and equipment

Operating fixed assets Freehold land Buildings Buildings Private Plant Office Furniture on on railway and and freehold leasehold sidings machinery household fittings land land equipment Rs '000 Rs '000 Rs '000 Rs '000 Rs '000 Vehicles and Sub Total Capital work in progress Total
Rs '000
Rs '000
Rs '000
Rs '000 Rs '000 '000 Rs
At January 1, 2006 Cost Accumulated depreciation Net book amount at January 1, 2006 Year ended December 31, 2006 Net book amount at January 1, 2006 Additions/transfers in Deletions/transfers out Depreciation charge Depreciation on deletions Net book amount at December 31, 2006 At January 1, 2007 Cost Accumulated Depreciation Net book amount at January 1, 2007 Year ended December 31, 2007 Net book amount at January 1, 2007 Additions/transfers in Deletions/transfers out Depreciation charge Depreciation on deletions
6,834 6,834
342,196 (94,797) 247,399
22,977 (12,735) 10,242
349 (323) 26
4,752,390 (1,617,623) 3,134,767
308,698 63,006 (171,203) (41,896) 137,495
439,769 (249,067) 21,110
5,936,219 (2,187,644) 3,748,575
49,615
5,985,834 (2,187,644) 49,615 3,798,190
190,702
6,834 6,834
247,399 35,960 (4,285) (10,342) 1,742 270,474
10,242 2,199 (411) 12,030
26 26
3,134,767 137,495 21,110 190,702 3,748,575 49,615 3,798,190 893,842 37,188 1,073 65,328 1,035,590 1,088,935 2,124,525 (18,637) (33,576) (128) (58,807) (115,433) (886,511) (1,001,94 (343,124) (44,047) (7,162) (77,100) (482,186) (482, 11,305 29,268 91 48,375 90,781 3,678,153 126,328 14,984 168,498 4,277,327 252,039 4,529,366
6,834 6,834
373,871 (103,397) 270,474
25,176 (13,146) 12,030
349 5,627,595 (323) (1,949,442) 26
312,310 63,951 446,290 6,856,376 (185,982) (48,967) (277,792) (2,579,049) 126,328 14,984 168,498 4,277,327
252,039 7,108,415 (2,579,049) 252,039 4,529,366
3,678,153
6,834 6,834
270,474 122,879 (200) (11,171) 66 382,048
12,030 439 (49) (467) 49 12,002
26 26
3,678,153 924,073 (47,867) (412,166) 29,562 4,171,755
126,328 14,984 168,498 4,277,327 252,039 4,529,366 30,667 1,727 101,311 1,181,096 1,040,106 2,221,202 (11,315) (20) (48,636) (108,087) (1,030,578) (1,138,665 (39,070) (1,736) (73,241) (537,851) (537 9,473 18 41,106 80,274 116,083 14,973 189,038 4,892,759 261,567
Net book amount at December 31, 2007 At December 31, 2007 Cost Accumulated Depreciation Net book amount
5,154,32
6,834 6,834
496,550 (114,502) 382,048
25,566 (13,564) 12,002
349 6,503,801 (323) (2,332,046) 26 4,171,755
331,662 65,658 498,965 7,929,385 (215,579) (50,685) (309,927) (3,036,626) 116,083 14,973
2007 Rs 000
261,567 8,190,952 (3,036,626) 261,567 5,154,326
189,038
4,892,759
2006 Rs 000
14.1
Depreciation charge has been allocated as follows: Cost of sales note 5 Marketing expenses note 6 Administrative expenses note 7 466,468 36,792 34,591 537,851 399,972 39,776 42,438 482,186 6,613 194,037 51,389 252,039
14.2
Capital work in progress Civil works and buiildings Plant and machinery Advances to suppliers 5,662 176,737 79,168 261,567

14.3
Details of property, plant and equipment disposals, having net book value in excess of Rs 50,000 are as follows: Original Net Book Sale Particulars of Buyers Cost Value Proceeds Rs '000 Rs '000 Rs '000 Plant and Machinery by negotiation 6,591 2,016 2,162 BAT Indonesia 292 95 101 BAT Indonesia 7,198 2,201 2,361 BAT Indonesia 158 52 56 BAT Indonesia 8,434 7,647 8,202 BAT Indonesia Office and Household Equipment by insurance claim 120 76 110 EFU General Insurance Limited 110 92 109 EFU General Insurance Limited Vehicles as per the Company's policy 989 99 99 Qaiser Imam Employee 991 99 99 Mahboob Ahmad Employee 991 99 99 Khalil Ahmed Employee 1,024 102 102 Mian Masood Employee 745 75 75 Manzar Ijaz Rana Employee 750 75 75 Ihsan Ahmed Employee 835 417 460 Azhar Mahmood Employee 705 71 71 Azmatullah Employee 835 435 495 Zubair Khan Employee by auction 599 60 391 Abdul Basit Swabi 665 66 400 Naqeeb Ahmed Swabi 679 68 475 Rehmat Shah Karachi 709 71 465 Malik Mohammad Ali Awan Rawalpindi 769 77 550 Wali M. Khan Islamabad 769 77 528 Shakirullah Jan Shidu 769 77 527 Ghulam Fareed Karachi. 769 77 543 Amir Farooq Islamabad 1,350 135 626 Khanzada Islamabad 1,350 135 609 Farrukh Riaz Islamabad 705 71 485 Syed Riaz Ahmed Karachi. 1,191 119 746 Syed Mohsin Raza Islamabad 750 109 707 Liaqat Ali Rawalpindi 750 109 744 Karamatullah Nowshera 750 250 695 Imran Siddique Islamabad 640 173 285 Syed Riaz Ahmed Karachi. 859 86 725 Tahir Zada Chamanabad 1,945 195 1,024 Qadeem Khan Shaikhupura 1,562 156 657 M. Aamir Afzal Peshawar 1,562 156 598 Sheraz Sami Khan Islamabad 774 81 482 M. Tanveer Islamabad 774 77 457 Salman Zahid Rawalpindi 774 113 508 S.M.Aamil Hussain Islamabad 774 113 423 Arshad Qayum Rawalpindi 774 113 448 Zafar Iqbal Rawalpindi 1,385 139 65 Hafiz Mohammad Yaseen Rawalpindi 1,296 130 61 Hafiz Mohammad Yaseen Rawalpindi 1,196 598 828 Liaqat Ali Rawalpindi 739 74 455 Salman Iqbal Nowshera 745 75 463 Zahid Khan Taxila 1,467 147 69 Hafiz Mohammad Yaseen Rawalpindi 885 663 723 Liaqat Ali Rawalpindi 750 125 666 Liaqat Ali Rawalpindi 1,069 107 675 Adil Iqbal Islamabad 750 125 668 Afzal Saleem Islamabad by insurance claim 2,363 591 1,590 New Hampshire Insurance Company Limited by negotiation 705 71 123 Mohammad Raffique Islamabad 67,128 19,256 35,159

15.
Long term investment in subsidiary company This represents 500,001 (2006: 500,001) fully paid ordinary shares of Rs 10 each in Phoenix (Private) Limited. The break up value of shares calculated by reference to net assets worked out to be Rs 10 per share (2006: Rs 10 per share) based on audited accounts for the year ended December 31, 2007. This is a wholly owned subsidiary of Pakistan Tobacco Company Limited which has not yet commenced commercial production.
2007 Rs 000 2006 Rs 000
16.
Long term loans Related parties Directors Key management personnel Others Executives Other employees 11,863 6,099 17,962 Less: Receivable within one year - note 21 All long term loans are considered good. 16.1 Reconciliation of loans due from directors, key management personnel, executives and others:
Directors Executives Key management personnel 2007 Rs'000 2006 Rs'000 2007 Rs'000 2006 Rs'000 Other Executives 2007 2006 2007 2006 2007 Rs'000 Rs'000 Rs'000 Rs'000 2006 Rs'000 Rs'000 Others Total
470 470
110 445 555 7,489 17,582 25,071 25,626 6,966 18,660
18,432 5,919 12,513
Balance as at January 1 Disbursements Repayments Balance as at December 31
110 110
151 41 82 110
445 141 116 470
546 101 202 445
7,489 5,382 1,008 11,863
5,934 4,848 3,293 7,489
17,582 3,044 14,527 6,099
17,708 10,389 10,515 17,582
25,626 8,567 15,761 18,432
24,339 15,379 14,092 25,626
The above comprises interest free loans for purchase of household furniture, appliances, cars and motorcycles and are repayable over 5 to 10 years in equal monthly instalments. 16.2 The maximum amounts due from the directors, key management personnel and executives at the end of any month during the year was:
2007 Rs 000 2006 Rs 000
Directors Key management personnel Executives
517 15,513 16,030
117 445 7,787 8,349

2007 Rs 000
2006 Rs 000
17.
Long term deposits and prepayments Security deposits Prepayments 12,303 722 13,025 6,510 1,914 8,424
18.
Stockintrade Raw materials Raw materials in transit Work in process Finished goods 3,237,065 255,229 23,258 482,629 3,998,181 3,093,915 174,398 26,156 496,384 3,790,853
The costs of stockintrade recognised as expense and included in cost of sales amounted to Rs 6,867,274 thousand (2006: Rs 6,000,210 thousand). The amount of stockintrade written off during the year was Rs 48,109 thousand (2006:Rs 36,017 thousand).
2007 Rs 000 2006 Rs 000
19.
Stores and spares Stores Machine spares Machine spares in transit 1,412 137,370 1,995 140,777 1,507 131,498 7,003 140,008
20.
Trade debts Considered good Considered doubtful Provision for doubtful debts 2,386 2,322 4,708 (2,322) 2,386 2,406 2,322 4,728 (2,322) 2,406
21.
Loans and advances Related parties unsecured Loans to key management personnel note 16 Others Loans to executives and other employees note 16 Advances due from employees note 21.1 Advances due from others All loans and advances are considered good. 21.1 Includes Rs 1,535 thousand (2006: Rs 2,147 thousand) due from executives of the Company. 105 142
5,814 4,351 12,917 23,187
6,824 4,104 1,135 12,205

2007 Rs 000
2006 Rs 000
22.
Other receivables Related parties unsecured Due from holding company / associated companies note 22.1 Due from subsidiary company Employees' provident fund Management provident fund Workers' Profit Participation Fund Others Sales tax adjustable Margin against guarantees Claims Others 46,217 24,507 389 1,186 1,000 85,516 4,569 65,089 1,418 229,891 22.1 The amount due from holding company / associated companies comprises: Holding Company British American Tobacco p.l.c. UK Associated Companies BAT Asia Pacific, Hong Kong Ceylon Tobacco Company Sri Lanka BAT Thailand BAT Bangladesh BAT Nigeria BAT Uzbekistan BAT Uganda BAT Kenya BAT Senegal BAT South Korea BAT Ukraine BAT Syria BAT Malaysia BAT Dubai BAT Singapore BAT Vietnam BAT Switzerland 4,225 8,787 42,958 24,182 5,277 1,533 1,738 1,769 13,651 1,252 92,360
24,588 4,080 3,630 3,507 1,330 1,264 1,083 837 634 375 230 176 156 102 46,217
12,062 3,463 891 324 9,181 1,123 315 190 137 455 5,455 377 198 42,958
23.
Cash and bank balances Security deposits at banks Current accounts Local currency Foreign currency Cash in transit Cash in hand 14,205 24,862 79,001 118,068 46,934 1,664 166,666 8,927 13,779 39,410 62,116 1 766 62,883

2007 Rs 000
2006 Rs 000
24.
Trade and other payables Related parties unsecured Due to holding company / associated companies note 24.1 Others Creditors Restructuring cost note 24.2 Federal excise duty note 24.3 Sales tax Tobacco excise duty / Tobacco development cess note 24.4 Accrued liabilities Other employee benefits note 24.5 Workers' Welfare Fund Advances from customers Security deposits Unpaid and unclaimed dividend 182,441 536,087 14,720 1,665,499 63,474 103,815 293,903 76,913 69,551 14,205 527,629 3,548,237 24.1 The amount due to holding company / associated companies comprises: Holding Company British American Tobacco p.l.c. UK Associated Companies BAT Asia Pacific, Hong Kong BAT Uganda Souza Cruz Overseas, S.A., Brazil BAT Malaysia BAT Singapore Ceylon Tobacco Company Sri Lanka BAT Bangladesh BAT Australia BAT Vietnam BAT South Africa BAT Korea 96,893 172,969 298,690 411,599 739,118 390,290 58,784 42,639 183,907 60,348 5,467 8,927 12,472 2,212,241
42,338 24,891 14,219 2,902 1,008 92 58 40 182,441
55,774 40,554 11,737 7,766 4,716 3,491 1,212 399 72 298,690
24.2 This represents costs incurred on account of staff redundancy recognised in accordance with an approved plan, review of the Company's manufacturing operations and organizational structure, including initiative to reduce overheads and indirect costs.
2007 Rs 000 2006 Rs 000
24.3
Federal excise duty Balance as at January 1 Allocation for the year Payment to the Government during the year Balance as at December 31 739,118 19,311,946 (18,385,565) 1,665,499 668,877 16,991,172 (16,920,931) 739,118

2007 Rs 000
2006 Rs 000
24.4 Tobacco excise duty / Tobacco development cess Balance as at January 1 Provision during the year Payment to the Government during the year Balance as at December 31 24.5 Other employee benefits Balance as at January 1 Allocation for the year Payment to employees during the year Balance as at December 31 Other employee benefits represent bonuses to eligible employees. 25. Short term finances secured Short term loan Short term running finance 360,000 678,550 1,038,550 (i) Short term loan This represents money market loan obtained from a commercial bank, which carries markup of 10.02% per annum. This loan is for a period of 28 days with repayment allowable after 21 days and is secured against pari passu hypothecation charge over current assets of the Company. (ii) Short term running finance Short term finance facilities available under markup arrangements with banks amount to Rs 2,600 million (2006: Rs 1,815 million), out of which the amount unavailed at the year end was Rs 1,921 million (2006: Rs 522 million). These facilities are secured by hypothecation of stocks amounting to Rs 3,734 million (2006: Rs 2,858 million). The markup ranges between 9.52% and 11.14% ( 2006: 9% and 11.22%) per annum and is payable quarterly. The facilities are renewable on annual basis. 26. Deferred taxation The deferred tax liability is related to temporary differences between carrying amount of operating fixed assets and the corresponding tax base. The gross movement on the deferred income tax account is as follows:
2007 Rs 000 2006 Rs 000
58,784 62,300 (57,610) 63,474
203,658 58,570 (203,444) 58,784
183,907 282,076 (172,080) 293,903
146,475 181,219 (143,787) 183,907
1,293,141 1,293,141
Balance as at January 1 Charged during the year Balance as at December 31
845,004 135,431 980,435
724,673 120,331 845,004

2007 Rs 000
2006 Rs 000
27.
Contingencies and commitments 27.1 (a) Contingencies Claims and guarantees (i) (ii) (b) Claims against the Company not acknowledged as debt Guarantees issued by banks on behalf of the Company 59,944 107,908 53,345 85,758
Litigation The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have any material impact on the financial statements.
27.2 (a)
Commitments All property rentals are under cancellable operating lease arrangements as follows:
2007 Rs 000 2006 Rs 000
due not later than one year due later than one year and not later than five years within 2 years within 3 years within 4 years within 5 years due later than five years (b)
63,648 27,164 24,198 23,131 23,469 98,536
15,877 20,797 21,934 21,968 20,625 115,679
Letters of credit outstanding at December 31, 2007 were Rs 620,219 thousand (2006: Rs 599,700 thousand), out of which Rs 462,362 thousand (2006: Rs 534,897 thousand) were hedged through forward foreign currency contracts with various banks.
2007 Rs 000 2006 Rs 000
28.
Issued, subscribed and paidup capital 230,357,068 (2006: 230,357,068) ordinary shares of Rs 10 each fully paid in cash 25,136,724 (2006: 25,136,724) ordinary shares of Rs 10 each issued as fully paid bonus shares 255,493,792 (2006: 255,493,792) ordinary shares of Rs 10 each 2,303,571 251,367 2,554,938 2,303,571 251,367 2,554,938
British American Tobacco (Investments) Limited held 241,045,141 (2006: 241,045,141) ordinary shares at the year end.

29.
Employees' defined benefit funded pension and gratuity schemes The latest actuarial valuation of the defined benefit plans was conducted at December 31, 2007 using the projected unit credit method. Details of the defined benefit plans are:
Defined benefit pension plan 2007 Rs '000 2006 Rs '000 Defined benefit Gratuity plan 2007 Rs '000 2006 Rs '000
(a)
The amounts recognised in the profit and loss account: Current service cost Interest on obligation Expected return on plan assets Net actuarial losses recognised during the year 49,906 142,617 (121,446) 4,955 76,032 42,624 109,484 (93,448) 3,920 62,580 22,049 38,727 (27,744) 6,044 39,076 19,500 27,941 (20,206) 4,444 31,679
(b)
The amounts recognised in the balance sheet: Present value of defined benefit obligations Fair value of plan assets Unrecognised actuarial (losses) Net liability 1,704,382 (1,367,884) 336,498 (336,498) 1,413,319 (1,202,614) 210,705 (210,705) 490,379 (337,374) 153,005 (153,005) 388,407 (270,997) 117,410 (117,410)
(c)
Changes in the present value of defined benefit obligation: Present value of defined benefit obligation as at Jan 1 Current service cost Interest cost Actuarial losses Contribution by plan participants Benefits paid Present value of defined benefit obligation as at Dec 31 1,413,319 49,906 142,617 122,206 25,523 (49,189) 1,704,382 1,214,950 42,624 109,484 97,267 22,314 (73,320) 1,413,319 388,407 22,049 38,727 46,209 1,784 (6,797) 490,379 316,968 19,500 27,941 39,159 2,136 (17,297) 388,407
(d)
Changes in the fair value of plan assets: Fair value of plan assets as at Jan 1 Expected return Actuarial (losses)/gains Contribution by plan participants Contributions by employer Benefits paid Fair value of plan assets as at Dec 31 Actual return on plan assets 1,202,614 121,446 (8,542) 25,523 76,032 (49,189) 1,367,884 109,473 1,036,970 93,448 59,017 22,314 64,185 (73,320) 1,202,614 108,746 270,997 27,744 4,570 1,784 39,076 (6,797) 337,374 27,691 224,990 20,206 6,771 2,136 34,191 (17,297) 270,997 25,026
During the year 2008 the Company expects to contribute Rs 100 million and Rs 48 million to its defined benefit pension plan and defined benefit gratuity plan respectively.

Defined benefit pension plan 2007 Rs '000 2006 Rs '000
Defined benefit gratuity plan 2007 Rs '000 2006 Rs '000
(e)
The major categories of plan assets: Investment in equities Investment in bonds Cash and cash equivalents 100,955 736,049 530,880 1,367,884 106,627 128,333 967,654 1,202,614 30,127 225,909 81,338 337,374 30,094 13,977 226,926 270,997
(f)
Significant actuarial assumptions at the balance sheet date: Discount rate Expected return on plan assets Future salary increases Future pension increases 10% 10% 14% 6% 10% 10% 15% 6% 10% 10% 14% 10% 10% 15%
The discount rate and expected return on plan assets was determined by considering the expected returns available on the assets underlying the current investment policy. Expected yields on fixed interest investments are based on gross redemption yields as at the balance sheet date. Salary increase assumption is based on the current general practice in the market. (g) Amounts for the current and previous four years:
2007 Rs '000 2006 Rs '000 2005 Rs '000 2004 2003 Rs '000 Rs '000
Defined Benefit Pension Plan Present value of defined benefit obligation Fair value of plan assets Deficit Experience adjustments on plan liabilities Experience adjustments on plan assets Defined Benefit Gratuity Plan Present value of defined benefit obligation Fair value of plan assets Deficit Experience adjustments on plan liabilities Experience adjustments on plan assets 29.1
(1,704,382) 1,367,884 (336,498) (122,206) 11,973
(1,413,319) (1,214,950) 1,202,614 1,036,970 (210,705) (177,980) (97,267) (73,958) (15,298) 43,548
(965,451) (868,626) 963,846 854,846 (1,605) (13,780) 2,330 (13,341) 70,279 62,427
(490,379) 337,374 (153,005) (46,209) 53
(388,407) 270,997 (117,410) (39,159) (4,820)
(316,968) 224,990 (91,978) (43,111) 4,585
(215,533) 213,021 (2,512) (13,834) 15,694
(205,825) 143,919 (61,906) (22,153) 6,440
Salaries, wages and benefits as appearing in note 5, 5.1, 6 and 7 include amounts in respect of the following:
2007 Rs 000 2006 Rs 000
Provident fund Pension fund Gratuity fund
36,620 76,032 39,076 151,728
22,948 62,580 31,679 117,207

30.
Financial instruments 30.1 Financial assets and liabilities 2007 Exposed to interest rate risk Rs '000 Financial assets Maturity up to one year: Trade debts Loans and advances Other receivables Local currency Foreign currency Cash and bank balances Local currency Foreign currency Maturity after one year: Loans Deposits 14,205 14,205 Financial liabilities Maturity up to one year: Trade and other payables Local currency Foreign currency Interest accrued Short term finances 1,038,550 1,038,550 Off balance sheet items Letters of credit Bank guarantees 620,219 107,908 728,127 620,219 107,908 728,127 599,700 85,758 685,458 599,700 85,758 685,458 3,365,796 182,441 8,401 3,556,638 3,365,796 182,441 8,401 1,038,550 4,595,188 1,293,141 1,293,141 1,913,551 298,690 11,115 2,223,356 1,913,551 298,690 11,115 1,293,141 3,516,497 2,386 23,187 183,674 46,217 73,460 79,001 12,513 12,303 432,741 2,386 23,187 183,674 46,217 87,665 79,001 12,513 12,303 446,946 8,927 8,927 2,406 12,205 49,402 42,958 14,546 39,410 18,660 6,510 186,097 2,406 12,205 49,402 42,958 23,473 39,410 18,660 6,510 195,024 Not exposed to interest rate risk Rs '000 Total Exposed to interest rate risk Rs '000 2006 Not exposed to interest rate risk Total
Rs '000
Rs '000 Rs '000
31.
Transactions with related parties British American Tobacco (Investments) Limited (BATIL) holds 94.34% (2006: 94.34%) shares of the Company at the year end. Therefore, all the subsidiaries and associated undertakings of BATIL and the ultimate parent company British American Tobacco, p.l.c (BAT) are related parties of the Company. Such entities are also referred to as 'BAT' in these financial statements. The related parties also include directors, major shareholders, key management personnel, employee funds and the entities over which the directors are able to exercise the influence. The amounts due from and due to these undertakings are shown under receivables and payables. The remuneration of the chief executive, directors, key management personnel and executives is disclosed in note 13 to the financial statements. Rs '000 Purchase Royalty Reimbursement of Sales Expenses on Expenses behalf of related party Goods Services Goods Services 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 Ultimate parent company British American Tobacco, p.l.c UK 12,931 25,831 117,952 119,286 267,604 249,666 2,616 8,457 458 Associated Companies BATAsia Pacific, Hong Kong 90,821 74,783 11,054 5,601 934 54 British American Tobacco, Australia 50 1,023 1,395 635 BAT, Bangladesh 68,979 35,394 267 3,276 324 232 Ceylon Tobacco Company, Sri Lanka 244 1,287 136 126 126 408 101 208 BAT, Cambodia 44 BAT, Dubai 1,401 1,719 BAT, Germany 542 BAT, Japan 126 BAT, Indonesia 132,873 258 60 10 12,966 146 70 BAT, South Korea 72 1,439 1,172 BAT, Kenya 7,440 BAT, Malaysia 139,385 42,252 19,974 606 841 97 BAT, Nigeria 1,665 5,353 BAT, New Zealand 14,407 BAT, Senegal 952 BAT, Singapore 28,843 34,290 7,879 2,633 511 673 Souza Cruz Overseas, S.A., Brazil 256,356 269,562 189 BAT, Solomon Islands 5,737 1,300 299 BAT, South Africa 30 399 BAT, Switzerland 198 BAT, Syria 681 595 BAT, Thailand 3,630 891 BAT, Uganda 76,727 4,286 1,123 238 BAT, Ukraine 880 278 BAT, Uzbekistan 1,264 BAT, Vietnam 40 179 377 486 Imperial Tobacco Company, Canada 16,342 Distribution Services (Pvt) Ltd, Karachi 3,364,539 4,144,910 Marketing Services (Pvt) Ltd, Hyderabad 380,988 499,994 Shell Pakistan Ltd 2,250 2,601 Pakistan State Oil Company Ltd 27,981 12,430 6,320 3,863 Contribution to retirement benefit funds by the Company Provident Fund 36,620 32,166 Pension Fund 76,032 62,580 Gratuity Fund 39,076 31,679 Subsidiary company Phoenix (Private) Limited, Azad Jammu and Kashmir 325 420

32.
GENERAL 32.1 Capacity and production Against an estimated manufacturing capacity of 42,797 million (2006: 35,343 million) cigarettes, actual production was 38,183 million (2006: 33,727 million) cigarettes. Actual production was sufficient to meet market demand. There was no production through any outside manufacturing source. 32.2 Number of employees Total number of employees as at December 31, 2007 was 1,668 ( 2006: 1,698). 32.3 Corresponding figures Corresponding figures (if any) have been rearranged, wherever necessary, for the purposes of comparison. However, no significant rearrangements have been made to the financial statements, except the following:
Reclassification from component: Reclassification to component: Rs '000
Marketing and distribution expenses (Selling expenses) note 6 Administrative expenses (Sundries) note 7 32.4 Post balance sheet event
Other expenses (Net foreign exchange loss) note 9 Other expenses (Net foreign exchange loss) note 9
7,850 16,290
Final dividend in respect of the year ended December 31, 2007 of Rs 3.90 per share (2006: Rs 4.40 per share) amounting to a total dividend of Rs 996,426 thousand (2006: Rs 1,124,173 thousand) has been proposed, over and above the three interim dividends of Rs 5.50 (2006: Rs 3.00) per share paid during the year, out of the unappropriated profit at the Board of Directors meeting held on February 20, 2008. These financial statements do not reflect this proposed dividend. 32.5 Date of authorisation These financial statements have been authorised for issue by the Board of Directors of the Company on February 20, 2008.
Phoenix (Pvt.) Limited
Financial Statements
Annual Report 2007 Phoenix (Pvt.) Limited 89
Company Information
Board of Directors Syed Nasir Shams Chief Executive
Registered Office Bun Khuma Chichian Road, Mirpur, Azad Jammu & Kashmir Auditors
Ahmed Zeb Director Khalil Ahmed Director Naveed Aftab Ahmad Director & Company Secretary
A.F. Ferguson & Co. Chartered Accountants
Directors Review
The Directors have pleasure in presenting report together with the Audited Accounts of the Company for the year ended December 31, 2007. Due to restrictions imposed on manufacture of Pakistani brand cigarettes in Azad Kashmir, and non-existence of an opportunity for export, no cigarette production activity took place during the year. The Company is a wholly owned subsidiary of Pakistan Tobacco Company Limited.
On behalf of the Board
Syed Nasir Shams Chief Executive
Khalil Ahmed Director
We have audited the annexed balance sheet of Phoenix (Private) Limited (the Company) as at December 31, 2007 and the related 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. 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 conduct 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 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) (iii) the expenditure incurred during the year was for the purpose of the Company's business: and 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, cash flow statement 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, 2007 and its 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 (XVIII of 1980), by the Company.
Balance Sheet
Note
2007 Rs 000
2006 Rs 000
Property, plant and equipment Preliminary expenses Current assets Balance with bank in current account Less:current liablities Trade and other payables Net current liablities
3 4
29,529 1
29,204 1
24,534 (24,530) 5,000
24,209 (24,205) 5,000
Financed by: Share capital Authorised capital 5,000,000 Ordinary shares of Rs 10 each Issued, subscribed and paid-up capital 6 50,000 5,000 5,000 50,000 5,000 5,000
Cash Flow Statement

2007 Rs 000
2006 Rs 000
Cash flow from investing activities Capital workinprogress Net cash outflow from investing activities Cash flow from financing activities Cash received from Pakistan Tobacco Company Limited Net cash inflow from investing activities Net (decrease)/ increase in cash and cash equivalents Cash and cash equivalents at January 1 Cash and cash equivalents at December 31 325 325 4 4 420 420 4 4 (325) (325) (420) (420)

1.
Legal status and operations Phoenix (Private) Limited (the Company) is a private company incorporated on March 9, 1992 in Azad Jamu and Kashmir under the Companies Ordinance, 1984. The registered office of the Company is situated at Bun Khuma, Chichian Road, Mirpur, Azad Jammu and Kashmir. The object for which the Company has been incorporated is to operate and manage an industrial undertaking in Azad Jammu and Kashmir to deal in tobacco products. The Company has not yet commenced its commercial operations, therefore, the Profit and Loss account has not been prepared. The Company is a wholly owned subsidiary of Pakistan Tobacco Company Limited, Pakistan and its ultimate parent company is British American Tobacco p.l.c, United Kingdom.
2.
Summary of significant accounting policies 2.1 Basis of preparation These financial statements have been prepared in accordance with approved accounting standards as applicable in Pakistan. Approved accounting standards comprise of such International Financial Reporting Standards (IFRS) issued by the International Accounting Standard Board as are notified under the Companies Ordinance, 1984, provisions of and directives issued under the Companies Ordinance, 1984. In case requirements differ, the provisions or directives of the Companies Ordinance, 1984, shall prevail. 2.2 Property, plant and equipment Freehold land and capital work-in-progress are stated at cost.
2007 Rs 000 2006 Rs 000
3.
Property, plant and equipment Freehold land Capital work-in-progress: Civil and electrical works Plant and machinery Advances to suppliers Pre-operating expenses 3,364 12,561 9,121 2 4,481 26,165 29,529 3,364 12,561 9,121 2 4,156 25,840 29,204
4.
Preliminary expenses Legal fees Registration fees Preliminary expenses transferred to Pakistan Tobacco Company Limited 16 81 97 (96) 1 16 81 97 (96) 1

2007 Rs 000
2006 Rs 000
5.
Trade and other payables Due to Pakistan Tobacco Company Limited Others 24,507 27 24,534 24,182 27 24,209
6.
Issued, subscribed and paid-up capital 500,001(2006: 500,001) ordinary shares of Rs 10 each fully paid in cash All the shares of the Company are held by Pakistan Tobacco Company Limited. Not exposed to interest rate risk
2007 Rs 000 2006 Rs 000
5,000
5,000
7.
Financial assets and liabilities Maturity upto one year Financial assets Cash and bank balances Financial liabilities Trade and other payables 7.1 Fair value of financial assets and liabilities The carrying value of financial assets and liabilities approximates their fair value. 4 4
24,534
24,209
8.
Date of authorisation These financial statements have been authorised for issue by the Board of Directors of the Company on February 20, 2008.
Consolidated Financial Statements

We have examined the annexed consolidated financial statements comprising consolidated balance sheet of Pakistan Tobacco Company Limited (the Company) and its subsidiary company Phoenix (Private) Limited as at December 31, 2007 and the related consolidated profit and loss account, consolidated cash flow statement and consolidated statement of changes in equity together with the notes forming part thereof, for the year ended December 31, 2007. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our examination. Our audit was conducted in accordance with the International Standards on Auditing and accordingly included such tests of accounting records and such other auditing procedures as we considered necessary in the circumstances. In our opinion, the consolidated financial statements examined by us present fairly the financial position of Pakistan Tobacco Company Limited and its subsidiary company consolidated therein as at December 31, 2007 and the results of their operations for the year then ended.
Consolidated Profit and Loss Account

Note
2007 Rs 000
2006 Rs 000
Gross turnover Sales tax Turnover (net of sales tax) Cost of sales Gross profit Marketing and distribution expenses Administrative expenses Operating profit Other income Other expenses Finance cost Profit before taxation Taxation Profit for the year Earnings per share (rupees) 12 11 8 9 10 6 7 5
40,889,275 5,534,452 35,354,823 28,844,866 6,509,957 1,798,045 739,280 2,537,325 3,972,632 102,634 311,374 3,763,892 50,317 3,713,575 1,300,517 2,413,058 9.44
35,715,451 4,833,285 30,882,166 25,348,646 5,533,520 1,816,198 644,981 2,461,179 3,072,341 68,088 228,696 2,911,733 51,060 2,860,673 955,685 1,904,988 7.46
The annexed notes 1 to 31 form an integral part of these consolidated financial statements.
100 Consolidated Financial Statements 2007
Consolidated Balance Sheet

Note
2007 Rs 000
2006 Rs 000
Property, plant and equipment Long term loans Long term deposits and prepayments Current assets Stock-in-trade Stores and spares Trade debts Loans and advances Prepayments Other receivables Cash and bank balances
14 15 16
5,183,855 12,513 13,025
4,558,570 18,660 8,424
17 18 19 20 21 22
3,998,181 140,777 2,386 23,187 80,280 205,385 166,670 4,616,866
3,790,853 140,008 2,406 12,205 72,235 68,179 62,887 4,148,773
Less: current liabilities Trade and other payables Interest accrued Short term finances Income tax payable 23 24 3,548,264 8,401 1,038,550 227,752 4,822,967 Net current (liabilities) / assets Deferred taxation Contingencies and commitments Net assets Financed by: Share capital Authorised capital 300,000,000 Ordinary shares of Rs 10 each Issued, subscribed and paid-up capital Revenue reserves Shareholders' equity 27 3,000,000 2,554,938 1,467,919 4,022,857 3,000,000 2,554,938 1,584,249 4,139,187 25 26 4,022,857 4,139,187 (206,101) (980,435) 2,212,268 11,115 1,293,141 233,712 3,750,236 398,537 (845,004)
The annexed notes 1 to 31 form an integral part of these consolidated financial statements.
Consolidated Cash Flow Statement

2007 Rs 000
2006 Rs 000
Cash flow from operating activities Cash receipts from customers Cash paid to government for federal excise duty, sales tax and other levies Cash paid to suppliers Cash paid to employees and retirement funds Income tax paid Other cash receipts 40,889,295 (24,851,618) (9,596,729) (1,730,252) (1,171,046) 6,534 3,546,184 Cash flow from investing activities Purchase of property, plant and equipment Proceeds from sale of property, plant and equipment (1,190,949) 39,524 (1,151,425) Cash flow from financing activities Dividend paid Financial charges paid Interest received Increase/ (decrease) in cash and cash equivalents Cash and cash equivalents at January 1 Cash and cash equivalents at December 31 Cash and cash equivalents comprise: Cash and bank balances Short term finances 166,670 (1,038,550) (871,880) 62,887 (1,293,141) (1,230,254) (2,014,232) (53,031) 30,878 (2,036,385) 358,374 (1,230,254) (871,880) (1,402,017) (43,216) 47,402 (1,397,831) (887,201) (343,053) (1,230,254) (1,238,434) 37,755 (1,200,679) 35,715,939 (22,134,488) (8,850,492) (1,750,686) (1,278,610) 9,646 1,711,309
Consolidated Statement of Changes in Equity

Share capital Rs '000 Balance as at December 31, 2005 Final dividend of Rs 2.50 Per share relating to the year Ended December 31, 2005 Profit for the year 2006 Interim dividend of Rs 3.00 per share relating to the Year ended December 31, 2006 Balance as at December 31, 2006 Final dividend of Rs 4.40 Per share relating to the year Ended December 31, 2006 Profit for the year 2007 1st interim dividend of Rs 1.50 Per share relating to the Year ended December 31, 2007 2nd interim dividend of Rs 2.00 Per share relating to the Year ended December 31, 2007 3rd interim dividend of Rs 2.00 Per share relating to the Year ended December 31, 2007 Balance as at December 31, 2007 2,554,938 2,554,938 2,554,938
Revenue reserves Rs '000 1,084,476
Total Rs '000 3,639,414
(638,734) 1,904,988
(638,734) 1,904,988
(766,481) 1,584,249
(766,481) 4,139,187
(1,124,173) 2,413,058
(1,124,173) 2,413,058
(383,241)
(383,241)
(510,987)
(510,987)
(510,987) 1,467,919
(510,987) 4,022,857
Notes to the Consolidated Financial Statements

1.
The Group and its operations The consolidated financial statements include the financial statements of Pakistan Tobacco Company Limited and its wholly owned subsidiary, Phoenix (Private) Limited. Pakistan Tobacco Company Limited (the Company) is a public listed company incorporated on November 18, 1947 under the Companies Act, 1913 (now the Companies Ordinance, 1984) and its shares are quoted on the Karachi, Lahore and Islamabad stock exchanges of Pakistan. The Company is a subsidiary of British American Tobacco (Investments) Limited, United Kingdom, whereas its ultimate parent company is British American Tobacco p.l.c, United Kingdom. The registered office of the Company is situated at Evacuee Trust Complex, Agha Khan Road, Sector F-5/1, Islamabad. The Company is engaged in the manufacture and sale of cigarettes. Phoenix (Private) Limited (PPL) is a private company incorporated on March 9, 1992 in Azad Jamu and Kashmir under the Companies Ordinance, 1984. The registered office of the PPL is situated at Bun Khuma, Chichian Road, Mirpur, Azad Jammu and Kashmir. The object for which PPL has been incorporated is to operate and manage an industrial undertaking in Azad Jammu and Kashmir to deal in tobacco products. PPL has not yet commenced its commercial operations. For the purpose of these consolidated financial statements, the Company and its wholly owned subsidiary PPL is referred to as the Group.
2.
Summary of significant accounting policies 2.1 Basis of preparation These consolidated financial statements have been prepared in accordance with approved accounting standards as applicable in Pakistan. Approved accounting standards comprise of such International Financial Reporting Standards (IFRS) issued by the International Accounting Standard Board as are notified under the Companies Ordinance, 1984, provisions of and directives issued under the Companies Ordinance, 1984. In case requirements differ, the provisions or directives of the Companies Ordinance, 1984 shall prevail. (a) Standards, amendments and interpretations effective in 2007 IFRS 7 (Financial instruments: Disclosures) and the complementary amendment to IAS 1 (Presentation of financial statements Capital disclosures) introduces new disclosures relating to financial instruments and does not have any impact on the classification and valuation of the Groupss financial instruments. IFRS 7 has been adopted by the Institute of Chartered Accountants of Pakistan but has not yet been adopted by the Securities and Exchange Commission of Pakistan. (b) Standards, amendments and interpretations effective in 2007 but not relevant The following standards, amendments and interpretations to published standards are mandatory for accounting periods beginning on or after January 1, 2007 but are not relevant to the Groups operations: 1. 2. 3. 4. 5. (c) IFRS 4: Insurance contracts; IFRIC 7: Applying the restatement approach under IAS 29 (Financial reporting in hyperinflationary economies); IFRIC 8: Scope of IFRS 2; IFRIC 9: Re-assessment of embedded derivatives; and IFRIC 10: Interim financial reporting and impairment.
Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Group The following standards, amendments and interpretations to existing standards have been published and are mandatory for the Groups accounting periods beginning on or after January 1, 2008 and the Group has not early adopted them:

1.
IAS 1: Presentation of financial statements, issued in September 2007 (effective from January 1, 2009) revises the existing IAS 1 and requires apart from changing the names of certain financial statements, presentation of transactions with owners in statement of changes in equity and with non-owners in the Comprehensive Income statement. IFRIC 11: IFRS 2 - Group and treasury share transaction, provides guidance on whether share-based transactions involving treasury shares or involving group entities (for example, options over a parents shares) should be accounted for as equity-settled or cash-settled share-based payment transactions in the stand-alone accounts of the parent and group companies. Adoption of IFRIC 11 is not expected to have an impact on the Groups financial statements. IFRIC 13: Customer loyalty programmes, clarifies that where goods or services are sold together with a customer loyalty incentive (for example, loyalty points or free products), the arrangement is a multiple-element arrangement and the consideration receivable from the customer is allocated between the components of the arrangement in using fair values. Adoption of IFRIC 13 is not expected to have any impact on the Group's financial statements. IFRIC 14: IAS 19 (The limit on a defined benefit asset, minimum funding requirements and their interaction) provides guidance on assessing the limit in IAS 19 (Employee benefits) on the amount of the surplus that can be recognised as an asset. It also explains how the pension asset or liability may be affected by a statutory or contractual minimum funding requirement. Adoption of IFRIC 14 is not expected to have any impact on the Groups financial statements. IAS 23: Borrowing costs (Amendment) requires an entity to capitalise borrowing cost directly attributable to the acquisition, construction or production of a qualifying asset (one that takes a substantial period of time to get ready for use or sale) as part of the cost of that asset. The option of immediately expensing those borrowing costs will be removed. Adoption of IAS 23 (Amendment) is not expected to have any impact on the Group's financial statements.
2.
3.
4.
5.
(d)
Interpretations to existing standards that are not yet effective and not relevant for the Groups operations 1. IFRS 8: Operating segments (effective from January 1, 2009) requires a management approach, under which segment information is presented on the same basis as that used for internal reporting purposes. IFRIC 12: Service concession arrangements (effective from January 1, 2008) applies to contractual arrangements whereby a private sector operator participates in the development, financing, operation and maintenance of infrastructure for public sector services.
2.
2.2
Basis of measurement These financial statements have been prepared under the historical cost convention except for modifications for financial instruments which are stated at fair value, certain employment benefits obligations which are measured at present values, property, plant and equipment which are stated at recoverable amount and other modifications as required by International Financial Reporting Standards (IFRS) referred to in the accounting policies given below.
2.3
Consolidation - Subsidiaries Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date control ceases.

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Groups share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in profit and loss account. Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated but considered an impairment indicator of the asset transferred. 2.4 (a) Foreign currency transactions and translation Functional and presentation currency Items included in the consolidated financial statements of the Group are measured using the currency of the primary economic environment in which the entity operates (the functional currency), which is the Pakistan Rupee (PKR or Rs). (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the date of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the profit and loss account. 2.5 Revenue recognition Revenue comprises the fair value of the consideration received or receivable for the sale of goods in the ordinary course of the Group's activities. Revenue is recognised when it is probable that the economic benefits associated with the transaction will flow to the Group and the amount of revenue, and the associated cost incurred or to be incurred, can be measured reliably. (a) Sale of goods The Group manufactures and sells cigarettes to its appointed distributors. Sales of goods are recognised when the Group has delivered products to the distributor and there is no unfulfilled obligation that could affect the distributors acceptance of the products. Delivery does not occur until the products have been shipped to the specified location, the risks of obsolescence and loss have been transferred to the distributor, and either the distributor has accepted the products in accordance with the sales contract, the acceptance provisions have lapsed, or the Group has objective evidence that all criteria for acceptance have been satisfied. (b) Income on bank deposits Return on bank deposits and investments are accounted for on the time proportion basis using the applicable rate of return. (c) Others Scrap sales and miscellaneous receipts are recognised on realised amounts. All other income is recognised on accrual basis.

2.6
Taxation Current The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred Deferred tax is accounted for using the balance sheet liability method in respect of all temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of taxable profit. Deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which the deductible temporary differences, unused tax losses and tax credits can be utilised. Deferred tax is calculated at the rates that are expected to apply to the period when the differences reverse, based on tax rates that have been enacted or substantially enacted by the balance sheet date.
2.7
Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount could be reliably estimated. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. All provisions are reviewed at each balance sheet date and adjusted to reflect current best estimate.
2.8 (a)
Employee benefits Retirement benefits plans The Group operates various retirement benefit schemes. The schemes are generally funded through payments to trustee-administered funds or determined by periodic actuarial calculations. Accordingly, the Group has both defined contribution and defined benefit plans. A defined contribution plan is a plan under which the Group pays fixed contributions into a separate fund. The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. A defined benefit plan is a plan that is not a defined contribution plan. Typically defined benefit plans define an amount of benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. The Group operates: (i) approved funded pension scheme for management and certain grades of business support officers and gratuity scheme for all employees. The liability recognised in the balance sheet in respect of defined benefit pension and gratuity plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognised actuarial gains/ losses, if any.

The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are nominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related liability. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions in excess of the 'corridor' (10% of the higher of the fair value of the plan assets or the present value of the defined benefit obligation) at the current reporting date are recognized over the expected average remaining working life of employees participating in the defined benefit schemes. (ii) approved contributory provident fund for all employees administered by trustees (the Plan). The contributions of the Group are recognised as employee benefit expense when they are due. Prepaid contributions, if any, are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available.
(b)
Termination benefits Termination benefits are payable when employment is terminated by the Group before the normal retirement date or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either; terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal; or providing termination benefits as a result of an offer made to encourage voluntary redundancy.
(c)
Medical benefit plans The Group maintains a health insurance policy for its full time permanent employees. the Group contributes premium to the policy annually. Such premium is recognised as an expense in the profit and loss account.
(d)
Bonus plans i) The Group recognises a liability and an expense for bonuses based on a formula that takes into consideration the profit attributable to the Groups shareholders after certain adjustments and performance targets. the Group recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation. The Group also operates a deferred bonus plan for certain eligible management staff members. These benefits are usually paid after 3 years from the date of grant of such an award unless otherwise authorized by the Compensation Committee of the Board of Directors. The obligation for these payments is recognised in the profit and loss account on a straight line basis to allocate the expected award amount over the term of the award.
ii)
2.9
Operating leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to profit and loss account on a straight-line basis over the period of the lease.
2.10
Borrowing cost Borrowing costs are expensed as incurred.
2.11
Related party transactions Transactions with the holding company and associated companies for sale and purchase of materials and manufactured goods are based on normal commercial practices and are separately disclosed in the consolidated financial statements.

2.12
Property, plant and equipment These are stated at cost less accumulated depreciation and impairment except free-hold land, capital work in progress and items in transit which are stated at cost. Cost includes expenditure that is directly attributable to the acquisition of the asset. Depreciation is calculated using the straight-line method to allocate their cost over their estimated useful lives at the following annual rates: Buildings on free-hold land, buildings on lease-hold land and private railway sidings Plant and machinery Air conditioners included in plant and machinery Office and household equipment Furniture and fittings Vehicles 3% 7% 25% 20% to 25% 10% to 20% 25%
Depreciation on additions and deletions during the year is charged on a pro rata basis from the month when asset is put into use or up to the month when asset is disposed/written off. Subsequent costs are included in the asset's carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. All other repairs and maintenance are recognised in profit and loss account during the financial period in which they are incurred. The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An assets carrying amount is written down immediately to its recoverable amount if the assets carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals of operating fixed assets are taken to the profit and loss account. 2.13 Impairment of non-financial assets Assets that have an indefinite useful life, for example land, are not subject to amortisation or depreciation and are tested annually for impairment. Assets that are subject to depreciation/amortisation are reviewed for impairment at each balance sheet date or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss or reversal of impairment loss is recognised in the profit and loss account. The recoverable amount is the higher of an assets fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. Reversals of the impairment loss is restricted to the original cost of the asset. 2.14 Financial assets The Group classifies its financial assets in three categories: at fair value through profit or loss, loans and receivables, and available for sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. (a) Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short-term. Derivatives (if any) are also categorised as held for trading unless they are designated as hedges. Assets in this category are classified as current assets.

(b)
Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. the Groups loans and receivables comprise trade debts and cash and cash equivalents (note 2.18).
(c)
Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose off the investment within 12 months of the balance sheet date. Regular purchases and sales of financial assets are recognised on the trade-date the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed in the profit and loss account. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are carried at amortised cost using the effective interest rate method. Gains or losses arising from changes in the fair value of the financial assets at fair value through profit or loss category are presented in the profit and loss account in the period in which they arise. Dividend income from financial assets at fair value through profit or loss is recognised in the profit and loss account as part of other income when the Groups right to receive payments is established. The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered as an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the impairment loss is removed from equity and recognised in the profit and loss account. Impairment losses recognised in the profit and loss account on equity instruments are not reversed through the profit and loss account. Impairment testing of trade debts is described in note 2.18.
2.15
Stock-in-trade Stock-in-trade is stated at the lower of cost and net realisable value. Cost is determined using the weighted average method. The cost of finished goods and work in process comprises design costs, raw materials, direct labour, other direct costs and related production overheads. Net realisable value is the estimated selling price in the ordinary course of business, less cost of completion and costs necessarily to be incurred to make the sale.
2.16
Stores and spares Stores and spares are stated at lower of cost and net realisable value. Cost is determined using weighted average method less allowance for obsolete and slow moving items. Items in transit are valued at cost comprising invoice value and other related charges incurred upto the balance sheet date.
2.17
Dividend recognition Final dividend distributions to the Group's shareholders are recognised as a liability in the financial statements in the period in which the dividends are approved by the Group's shareholders at the Annual General Meeting, while interim dividend distributions are recognised in the period in which the dividends are declared by the Board of Directors.

2.18
Financial instruments Financial assets and financial liabilities are recognised when the Group becomes the party to the contractual provision of the instruments and the Group loses control of the contractual right that comprise the financial asset and in case of financial liability when the obligation specified in the contract is discharged, cancelled or expired. The particular measurement method adopted are disclosed in the individual policy statements associated with each item as shown below:
a)
Trade and other payables Trade and other payables are carried at cost which is the fair value of the consideration to be paid in future for goods and services received.
b)
Trade debts Trade debts are recognised initially at fair value and subsequently measured at cost less provision for doubtful debts. A provision for doubtful debts is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the trade debts. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade debt is doubtful. The provision is recognised in the profit and loss account. When a trade debt is uncollectible, it is written off against the provision. Subsequent recoveries of amounts previously written off are credited against selling and marketing costs in the profit and loss account.
c)
Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet.
2.19
Offsetting Financial assets and liabilities are offset and the net amount is reported in the balance sheet, if the Group has a legally enforceable right to setoff the recognised amounts and the Group intends to settle either on a net basis or realise the asset and settle the liability simultaneously.
3.
Financial risk management 3.1 Financial risk factors The Groups activities expose it to a variety of financial risks: market risk (including currency risk, price risk and cash flow and fair value interest rate risk), credit risk and liquidity risk. the Groups overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance. Risk management is carried out by the Treasury Sub Committee (the Committee) of the Executive Committee (EXCO) of the Board of Directors (the Board) under policies approved by the Board. The Board provides written principles for overall risk management, as well as written policies covering specific areas such as foreign exchange risk, interest rate risk, credit risk and investment of excess liquidity. All treasury related transactions are carried out within the parameters of these policies. (a) Market risk (i) Foreign exchange risk Foreign exchange risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Foreign exchange risk arises mainly from future commercial transactions or receivables and payables that exist due to transactions in foreign currencies.

The Group is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the United States Dollar (USD) and Great Britain Pound Sterling (GBP). Currently, the Groups foreign exchange risk exposure is restricted to bank balances, the amounts receivable/payable from/to the foreign entities and outstanding letters of credit. Most of the Groups foreign exchange risk arising out of import letters of credit is hedged through forward contracts. The Groups risk management policy is to hedge between 90% and 100% of anticipated cash flows (mainly materials & capex imports) in each year. If the functional currency, at the year end date, fluctuates by 5% against the USD and GBP with all other variables held constant, the impact on profit after taxation for the year would have been Rs 0.01 million and Rs 2.13 million (2006: Rs 2.21 million and Rs 3.99 million) respectively higher/lower, mainly as a result of exchange gains/losses on translation of foreign exchange denominated trade receivables and payables. (ii) Price risk Price risk represents the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market. The Group is not exposed to equity price risk since there are no investments in equity securities. The Group is also not exposed to commodity price risk since it has a diverse portfolio of commodity suppliers. (iii) Cash flow and fair value interest rate risk It represents the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Group has no significant long-term interest-bearing assets. the Groups interest rate risk arises from short-term borrowings issued at variable rates. If interest rates on short term borrowings, at the year end date, fluctuates by 1% higher/lower with all other variables held constant, profit after taxation for the year would have been Rs 0.68 million (2006: Rs 8.40 million) lower/higher, mainly as a result of higher/lower interest expense on floating rate borrowings. (b) Credit risk Credit risk represents the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. Credit risk arises from deposits with banks and receivables due from the holding company and other associated entities. The table below shows the balances held with/ receivable due from seven major counterparties at the balance sheet date:-

Counterparty Banks ABN Amro Bank Habib Bank Limited MCB Bank Limited Citibank, N.A.
Rating Short term Long term
Rating Agency
A1 A1+ A1+ P-1
A+ AA+ AA+ B
PACRA PACRA PACRA Moody's
11.19 12.53 67.45 67.81 158.98
9.61 2.27 13.72 29.80 55.40
Holding Company and other associated entities British American Tobacco p.l.c. - UK BAT Asia Pacific, Hong Kong Ceylon Tobacco Company - Sri Lanka 4.23 24.59 4.08 32.90 8.79 12.06 3.46 24.31
Due to the Group's long standing business relationships with these counterparties and after giving due consideration to their strong financial standing, management does not expect non-performance by these counter parties on their obligations to the Group. Accordingly the credit risk is minimal. (c) Liquidity risk Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. The Group manages liquidity risk by maintaining sufficient cash and the availability of funding through an adequate amount of committed credit facilities. At December 31, 2007, the Group had Rs 1,921 million available borrowing limit from financial institutions and Rs 118 million balances at banks. Further, the Group also has strong financial support from its holding company. Based on the above, inspite the fact that the Group is in a negative working capital position at the year end, management believes the liquidity risk to be low. 3.2 Capital risk management The Group's objectives when managing capital risks are to safeguard the Groups ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The Group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including short term finances as shown in the balance sheet) less cash and cash equivalents. Total capital is calculated as equity as shown in the consolidated balance sheet plus net debt.

The gearing ratio as at December 31, 2007 was 18% (2006: 23%) and is calculated is as follows: Rs (million) 2007 Total borrowings Less: cash and cash equivalents Net debt Total equity Total capital Gearing ratio 3.3 Fair value estimation The carrying values of financial instruments approximate their fair values. 4. Critical accounting estimates and judgments The preparation of financial statements in conformity with approved accounting standards requires use of certain critical accounting estimates and assumptions. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. 4.1 (a) Critical accounting estimates and assumptions Provision for income taxes The Group recognises tax liabilities for pending tax assessments using estimates based on expert opinion obtained from tax/legal advisors. Differences, if any, between the income tax provision and the tax liability finally determined is recorded when such liability is so determined. Deferred tax (note 2.6) is calculated at the rates that are expected to apply to the period when the differences reverse, based on tax rates that have been enacted or substantially enacted by the balance sheet date. (b) Provision for retirement benefits Actuarial valuation of gratuity and pension contributions (note 2.8) requires use of certain assumptions related to future periods including increase in remuneration, expected long term return on plan assets and the discount rate used to convert future cash flows to current values. (c) Property, plant and equipment The Group reviews useful life and residual value of property, plant and equipment (note 2.12) on regular basis. Any change in estimates may affect the carrying amounts of the respective items of property, plant and equipment with a corresponding effect on the depreciation charge. 4.2 Critical judgments in applying the entitys accounting policies There have been no critical judgments made by the Group's management in applying the accounting policies that would have a significant effect on the amounts recognised in the financial statements. The aggregate actuarial losses of Rs 489.50 million (2006: Rs 328.11 million) in respect of defined benefit plans which remain unrecognised are due to adoption of corridor approach under IAS - 19 (Employee benefits) as explained in more detail in note 2.8 to the financial statements. 1,038 (167) 871 4,023 4,894 18% 2006 1,293 (63) 1,230 4,139 5,369 23%

2007 Rs 000
2006 Rs 000
5.
Cost of sales Raw material consumed Opening stock of raw materials and work in process Raw material purchases and expenses note 5.1 Closing stock of raw materials and work in process Government taxes and levies Federal excise duty Customs duty and surcharges Provincial and municipal taxes and other duties 19,311,946 366,140 94,344 19,772,430 26,625,949 Royalty Production overheads Salaries, wages and benefits Stores, spares and machine repairs Fuel and power Insurance Repairs and maintenance Postage, telephone and stationery Information technology Depreciation note 14.1 Damaged and obsolete materials written off Sundries Cost of goods manufactured Cost of finished goods Opening stock Closing stock 496,384 (482,629) 13,755 28,844,866 5.1 Raw material purchases and expenses Materials Salaries, wages and benefits Stores, spares and machine repairs Fuel and power Property rentals Insurance Repairs and maintenance Postage, telephone and stationery Depreciation note 14.1 Sundries 6,481,565 266,332 108,004 59,383 24,250 3,781 191 2,567 91,889 36,640 7,074,602 5,419,407 249,201 124,200 58,570 21,720 2,612 769 4,510 89,588 39,555 6,010,132 769,735 (496,384) 273,351 25,348,646 915,163 301,793 147,657 22,107 57,924 5,659 59,945 374,579 24,236 28,495 1,937,558 28,831,111 821,477 262,762 146,083 24,491 78,987 7,389 75,022 310,384 17,232 32,123 1,775,950 25,075,295 267,604 16,991,172 244,563 87,084 17,322,819 23,049,678 249,667 3,294,469 7,074,602 (3,515,552) 6,853,519 3,011,196 6,010,132 (3,294,469) 5,726,859

2007 Rs 000
2006 Rs 000
6.
Marketing and distribution expenses Salaries, wages and benefits Selling expenses Freight Property rentals Insurance Repairs and maintenance Postage, telephone and stationery Travelling Depreciation note 14.1 238,607 1,222,638 162,438 9,098 8,549 74,366 7,643 37,914 36,792 1,798,045 233,781 1,266,495 142,104 8,103 9,805 68,906 8,585 38,643 39,776 1,816,198
7.
Administrative expenses Salaries, wages and benefits Fuel and power Property rentals Insurance Repairs and maintenance Postage, telephone and stationery Legal and professional charges Donations note 7.1 Information technology Travelling Depreciation note 14.1 Directors' fee Auditors' remuneration and expenses note 7.2 Sundries 415,792 7,708 38,690 3,282 20,467 5,785 12,141 5,742 96,278 54,542 34,591 240 4,537 39,485 739,280 7.1 None of the directors and their spouses had any interest in any of the donees during the year.
2007 Rs 000 2006 Rs 000
347,429 8,048 30,118 2,485 14,788 9,764 11,392 4,027 94,417 50,846 42,438 310 4,450 24,469 644,981
7.2
Auditors' remuneration and expenses include: Statutory audit Special certifications, audit of consolidated accounts, staff retirement benefit funds and review of half yearly accounts Tax compliance and advisory services Outofpocket expenses 820 1,680 1,867 170 4,537 750 1,545 2,075 80 4,450

2007 Rs 000
2006 Rs 000
8.
Other income Income from financial assets Interest on short term bank deposits Income from nonfinancial assets Gain on disposal of operating fixed assets Net foreign exchange gain Others Old liabilities written back Miscellaneous 30,878 11,711 4,458 50,599 4,988 102,634 47,402 13,103 7,583 68,088
9.
Other expenses Workers' Profit Participation Fund Workers' Welfare Fund Net foreign exchange loss Restructuring cost note 23.2 199,024 67,880 44,470 311,374 153,261 51,295 24,140 228,696
10.
Finance cost Interest on short term finances Bank charges and fees Interest on Workers' Profit Participation Fund 25,928 24,389 50,317 22,093 23,236 5,731 51,060
11.
Taxation Current Current for the year for prior years 1,165,086 1,165,086 135,431 1,300,517 11.1 Effective tax rate reconciliation: Numerical reconcilation between the average effective income tax rate and applicable income tax rate is as follows:
% %
880,264 (44,911) 835,353 120,332 955,685
Deferred for the year
Applicable tax rate Tax effect of: Inadmissible expenses Income taxed at different rate Non taxable proceeds from asset disposals Provision for prior years Others Average effective tax rate
35.00 0.02 0.02 (0.02) 35.02
35.00 0.02 0.01 (0.03) (1.57) (0.02) 33.41

2007 000
2006 000
12.
Earnings per share Profit after tax (Rs) Number of fully paid weighted average ordinary shares Earnings per share Basic (Rs) There is no dilutive effect on the basic earnings per share of the Group. 2,413,058 255,494 9.44 1,904,988 255,494 7.46
13.
Remuneration of chief executive, directors and executives The aggregate amounts charged in the financial statements of the year for remuneration including all benefits to chief executive, directors and executives are as follows:
Chief executive Executive directors Executives *Key management personnel 2007 Rs '000 2006 Rs '000 2007 Rs '000 2006 Rs '000 2007 Rs '000 Other executives Total
2006 2007 2006 2007 2006 Rs '000 Rs '000 Rs '000 Rs '000 Rs '000
Managerial remuneration Corporate bonus Leave fare assistance Housing and utilities Medical expenses Post employment benefits Number of persons
41,274 15,871 435 5,144 62,724 1
43,173 11,995 435 4,460 196 60,259 1
57,501 24,150 1,842 8,177 501 4,413 96,584 5
41,854 20,205 3,503 7,505 482 4,077 77,626 5
50,051 37,083 1,198 17,052 1,714 11,891 118,989 13
53,159 42,350 1,859 13,127 1,412 8,047 119,954 11
229,869 86,162 195 107,618 20,596 78,822 523,262 208
174,485 57,988 222 76,214 11,332 55,147 375,388 142
378,695 163,266 3,670 137,991 22,811 95,126 801,559 227
312,671 132,538 6,019 101,306 13,422 67,271 633,227 159
* Represents remuneration paid to key management personnel other than the Chief executive and directors. 13.1 The Group, in certain cases, also provides individuals with the use of company accommodation, cars and household items, in accordance with their entitlements. In addition, Directors' fee of Rs 240 thousand (2006: Rs 310 thousand) was paid to five (2006: five) nonexecutive directors for attending board meetings during the year.
13.2

14. Property, plant and equipment
Operating fixed assets Freehold land Buildings Buildings Private Plant Office Furniture on on railway and and freehold leasehold sidings machinery household fittings land land equipment Rs '000 Rs '000 Rs '000 Rs '000 Rs '000 Vehicles and Sub Total Capital work in progress Total
Rs '000
Rs '000
Rs '000
Rs '000 Rs '000 '000 Rs
At January 1, 2006 Cost Accumulated depreciation Net book amount at January 1, 2006 Year ended December 31, 2006 Net book amount at January 1, 2006 Additions/transfers in Deletions/transfers out Depreciation charge Depreciation on deletions
10,198 10,198 10,198
342,196 (94,797) 247,399 247,399 35,960 (4,285) (10,342) 1,742 270,474
22,977 (12,735) 10,242 10,242 2,199 (411) 12,030
349 4,752,390 (323) (1,617,623) 26 26 26 3,134,767 3,134,767 893,842 (18,637) (343,124) 11,305 3,678,153
308,698 63,006 (171,203) (41,896) 137,495 137,495 37,188 (33,576) (44,047) 29,268 126,328 21,110 21,110 1,073 (128) (7,162) 91 14,984
439,769 5,939,583 (249,067) (2,187,644) 190,702 190,702 65,328 (58,807) (77,100) 48,375 168,498 3,751,939
75,035 6,014,618 (2,187,644) 75,035 3,826,974
3,751,939 75,035 3,826,974 1,035,590 1,089,355 2,124,945 (115,433) (886,511) (1,001,944) (482,186) (482,186) 90,781 90,781 4,280,691 277,879 4,558,570
Net book amount at December 31, 2006 10,198 At January 1, 2007 Cost Accumulated Depreciation Net book amount at January 1, 2007 Year ended December 31, 2007 Net book amount at January 1, 2007 Additions/transfers in Deletions/transfers out Depreciation charge Depreciation on deletions
10,198 10,198
373,871 (103,397) 270,474
25,176 (13,146) 12,030
349 5,627,595 312,310 63,951 446,290 6,859,740 277,879 7,137,619 (323) (1,949,442) (185,982) (48,967) (277,792) (2,579,049) (2,579,049) 26 3,678,153 126,328 14,984 168,498 4,280,691 277,879 4,558,570
10,198
270,474 122,879 (200) (11,171) 66 382,048
12,030 439 (49) (467) 49 12,002
26 26
3,678,153 924,073 (47,867) (412,166) 29,562 4,171,755
126,328 30,667 (11,315) (39,070) 9,473 116,083
14,984 168,498 1,727 101,311 (20) (48,636) (1,736) (73,241) 18 41,106 14,973 189,038
4,280,691 277,879 1,181,096 1,040,431 (108,087) (1,030,578) (537,851) 80,274 4,896,123
4,558,570 2,221,527 (1,138,665) (537,851) 80,274
Net book amount at December 31, 2007 10,198 At December 31, 2007 Cost Accumulated Depreciation Net book amount
287,732 5,183,855
10,198 10,198
496,550 (114,502) 382,048
25,566 (13,564) 12,002
349 6,503,801 331,662 65,658 498,965 7,932,749 (323) (2,332,046) (215,579) (50,685) (309,927) (3,036,626) 26 4,171,755 116,083 14,973 189,038
2007 Rs 000
287,732 8,220,481 (3,036,626) 287,732 5,183,855

2006 Rs 000
4,896,123
14.1
Depreciation charge has been allocated as follows: Cost of sales - note 5 Marketing expenses - note 6 Administrative expenses - note 7 466,468 36,792 34,591 537,851 399,972 39,776 42,438 482,186 19,174 207,314 51,391 277,879
14.2
Capital work in progress Civil works and buildings Plant and machinery Advances to suppliers 18,223 190,339 79,170 287,732

14.3
Details of property, plant and equipment disposals, having net book value in excess of Rs 50,000 are as follows: Original Net Book Sale Particulars of Buyers Cost Value Proceeds Rs '000 Rs '000 Rs '000 Plant and Machinery by negotiation 6,591 2,016 2,162 BAT Indonesia 292 95 101 BAT Indonesia 7,198 2,201 2,361 BAT Indonesia 158 52 56 BAT Indonesia 8,434 7,647 8,202 BAT Indonesia Office and Household Equipment by insurance claim 120 76 110 EFU General Insurance Limited 110 92 109 EFU General Insurance Limited Vehicles as per the Company's policy 989 99 99 Qaiser Imam Employee 991 99 99 Mahboob Ahmad Employee 991 99 99 Khalil Ahmed Employee 1,024 102 102 Mian Masood Employee 745 75 75 Manzar Ijaz Rana Employee 750 75 75 Ihsan Ahmed Employee 835 417 460 Azhar Mahmood Employee 705 71 71 Azmatullah Employee 835 435 495 Zubair Khan Employee by auction 599 60 391 Abdul Basit Swabi 665 66 400 Naqeeb Ahmed Swabi 679 68 475 Rehmat Shah Karachi 709 71 465 Malik Mohammad Ali Awan Rawalpindi 769 77 550 Wali M. Khan Islamabad 769 77 528 Shakirullah Jan Shidu 769 77 527 Ghulam Fareed Karachi. 769 77 543 Amir Farooq Islamabad 1,350 135 626 Khanzada Islamabad 1,350 135 609 Farrukh Riaz Islamabad 705 71 485 Syed Riaz Ahmed Karachi. 1,191 119 746 Syed Mohsin Raza Islamabad 750 109 707 Liaqat Ali Rawalpindi 750 109 744 Karamatullah Nowshera 750 250 695 Imran Siddique Islamabad 640 173 285 Syed Riaz Ahmed Karachi. 859 86 725 Tahir Zada Chamanabad 1,945 195 1,024 Qadeem Khan Shaikhupura 1,562 156 657 M. Aamir Afzal Peshawar 1,562 156 598 Sheraz Sami Khan Islamabad 774 81 482 M. Tanveer Islamabad 774 77 457 Salman Zahid Rawalpindi 774 113 508 S.M.Aamil Hussain Islamabad 774 113 423 Arshad Qayum Rawalpindi 774 113 448 Zafar Iqbal Rawalpindi 1,385 139 65 Hafiz Mohammad Yaseen Rawalpindi 1,296 130 61 Hafiz Mohammad Yaseen Rawalpindi 1,196 598 828 Liaqat Ali Rawalpindi 739 74 455 Salman Iqbal Nowshera 745 75 463 Zahid Khan Taxila 1,467 147 69 Hafiz Mohammad Yaseen Rawalpindi 885 663 723 Liaqat Ali Rawalpindi 750 125 666 Liaqat Ali Rawalpindi 1,069 107 675 Adil Iqbal Islamabad 750 125 668 Afzal Saleem Islamabad by insurance claim 2,363 591 1,590 New Hampshire Insurance Company Limited by negotiation 705 71 123 Mohammad Raffique Islamabad 67,128 19,256 35,159

2007 Rs 000
2006 Rs 000
15.
Long term loans Related parties Directors Key management personnel Others Executives Other employees 11,863 6,099 17,962 Less: Receivable within one year - note 20 All long term loans are considered good. 15.1 Reconciliation of loans due from directors, key management personnel, executives and others:
Directors Executives Key management personnel 2007 Rs'000 2006 Rs'000 2007 Rs'000 2006 Rs'000 Other Executives 2007 2006 2007 2006 2007 Rs'000 Rs'000 Rs'000 Rs'000 2006 Rs'000 Rs'000 Others Total
470 470
110 445 555 7,489 17,582 25,071 25,626 6,966 18,660
18,432 5,919 12,513
Balance as at January 1 Disbursements Repayments Balance as at December 31
110 110
151 41 82 110
445 141 116 470
546 101 202 445
7,489 5,382 1,008 11,863
5,934 4,848 3,293 7,489
17,582 3,044 14,527 6,099
17,708 10,389 10,515 17,582
25,626 8,567 15,761 18,432
24,339 15,379 14,092 25,626
The above comprises interest free loans for purchase of household furniture, appliances, cars and motorcycles and are repayable over 5 to 10 years in equal monthly instalments. 15.2 The maximum amounts due from the directors, key management personnel and executives at the end of any month during the year was:
2007 Rs 000 2006 Rs 000
Directors Key management personnel Executives
517 15,513 16,030
117 445 7,787 8,349

2007 Rs 000
2006 Rs 000
16.
Long term deposits and prepayments Security deposits Prepayments 12,303 722 13,025 6,510 1,914 8,424
17.
Stockintrade Raw materials Raw materials in transit Work in process Finished goods 3,237,065 255,229 23,258 482,629 3,998,181 3,093,915 174,398 26,156 496,384 3,790,853
The costs of stockintrade recognised as expense and included in cost of sales amounted to Rs 6,867,274 (2006: Rs 6,000,210). The amount of stockintrade written off during the year was Rs 48,109 thousand (2006:Rs 36,017 thousand).
2007 Rs 000 2006 Rs 000
18.
Stores and spares Stores Machine spares Machine spares in transit 1,412 137,370 1,995 140,777 1,507 131,498 7,003 140,008
19.
Trade debts Considered good Considered doubtful Provision for doubtful debts 2,386 2,322 4,708 (2,322) 2,386 2,406 2,322 4,728 (2,322) 2,406
20.
Loans and advances Related parties unsecured Loans to key management personnel note 15 Others Loans to executives and other employees note 15 Advances due from employees note 20.1 Advances due from others All loans and advances are considered good. 20.1 Includes Rs 1,535 thousand (2006: Rs 2,147 thousand) due from executives of the Company. 105 142
5,814 4,351 12,917 23,187
6,824 4,104 1,135 12,205

2007 Rs 000
2006 Rs 000
21.
Other receivables Related parties unsecured Due from holding company / associated companies note 21.1 Employees' provident fund Management provident fund Workers' Profit Participation Fund Others Sales tax adjustable Margin against guarantees Claims Others 46,217 389 1,186 1,000 85,516 4,569 65,089 1,419 205,385 21.1 The amount due from holding company / associated companies comprises: Holding Company British American Tobacco p.l.c. UK Associated Companies BAT Asia Pacific, Hong Kong Ceylon Tobacco Company Sri Lanka BAT Thailand BAT Bangladesh BAT Nigeria BAT Uzbekistan BAT Uganda BAT Kenya BAT Senegal BAT South Korea BAT Ukraine BAT Syria BAT Malaysia BAT Dubai BAT Singapore BAT Vietnam BAT Switzerland 4,225 8,787 42,958 5,277 1,533 1,738 1,769 13,651 1,253 68,179
24,588 4,080 3,630 3,507 1,330 1,264 1,083 837 634 375 230 176 156 102 46,217
12,062 3,463 891 324 9,181 1,123 315 190 137 455 5,455 377 198 42,958
22.
Cash and bank balances Security deposits at banks Current accounts Local currency Foreign currency Cash in transit Cash in hand 14,205 24,866 79,001 118,072 46,934 1,664 166,670 8,927 13,783 39,410 62,120 1 766 62,887

2007 Rs 000
2006 Rs 000
23.
Trade and other payables Related parties unsecured Due to holding company / associated companies note 23.1 Others Creditors Restructuring cost note 23.2 Federal excise duty note 23.3 Sales tax Tobacco excise duty / Tobacco development cess note 23.4 Accrued liabilities Other employee benefits note 23.5 Workers' Welfare Fund Advances from customers Security deposits Unpaid and unclaimed dividend 182,441 536,114 14,720 1,665,499 63,474 103,815 293,903 76,913 69,551 14,205 527,629 3,548,264 23.1 The amount due to holding company / associated companies comprises: Holding Company British American Tobacco p.l.c. UK Associated Companies BAT Asia Pacific, Hong Kong BAT Uganda Souza Cruz Overseas, S.A., Brazil BAT Malaysia BAT Singapore Ceylon Tobacco Company Sri Lanka BAT Bangladesh BAT Australia BAT Vietnam BAT South Africa BAT Korea 96,893 172,969 298,690 411,626 739,118 390,290 58,784 42,639 183,907 60,348 5,467 8,927 12,472 2,212,268
42,338 24,891 14,219 2,902 1,008 92 58 40 182,441
55,774 40,554 11,737 7,766 4,716 3,491 1,212 399 72 298,690
23.2
This represents costs incurred on account of staff redundancy recognised in accordance with an approved plan, review of the Company's manufacturing operations and organizational structure, including initiative to reduce overheads and indirect costs.
2007 Rs 000 2006 Rs 000
23.3
Federal excise duty Balance as at January 1 Allocation for the year Payment to the Government during the year Balance as at December 31 739,118 19,311,946 (18,385,565) 1,665,499 668,877 16,991,172 (16,920,931) 739,118

2007 Rs 000
2006 Rs 000
23.4
Tobacco excise duty / Tobacco development cess Balance as at January 1 Provision during the year Payment to the Government during the year Balance as at December 31 58,784 62,300 (57,610) 63,474 203,658 58,570 (203,444) 58,784
23.5
Other employee benefits Balance as at January 1 Allocation for the year Payment to employees during the year Balance as at December 31 Other employee benefits represent bonuses to eligible employees. 183,907 282,076 (172,080) 293,903 146,475 181,219 (143,787) 183,907
24.
Short term finances secured Short term loan Short term running finance 360,000 678,550 1,038,550 (i) Short term loan This represents money market loan obtained from a commercial bank, which carries markup of 10.02% per annum. This loan is for a period of 28 days with repayment allowable after 21 days and is secured against pari passu hypothecation charge over current assets of the Company. (ii) Short term running finance Short term finance facilities available under markup arrangements with banks amount to Rs 2,600 million (2006: Rs 1,815 million), out of which the amount unavailed at the year end was Rs 1,921 million (2006: Rs 522 million). These facilities are secured by hypothecation of stocks amounting to Rs 3,734 million (2006: Rs 2,858 million). The markup ranges between 9.52% and 11.14% ( 2006: 9% and 11.22%) per annum and is payable quarterly. The facilities are renewable on annual basis. 1,293,141 1,293,141
25.
Deferred taxation The deferred tax liability is related to temporary differences between carrying amount of operating fixed assets and the corresponding tax base. The gross movement on the deferred income tax account is as follows:
2007 Rs 000 2006 Rs 000
Balance as at January 1 Charged during the year Balance as at December 31
845,004 135,431 980,435
724,673 120,331 845,004

2007 Rs 000
2006 Rs 000
26.
Contingencies and commitments 26.1 (a) Contingencies Claims and guarantees (i) (ii) (b) Claims against the Company not acknowledged as debt Guarantees issued by banks on behalf of the Company 59,944 107,908 53,345 85,758
Litigation The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have any material impact on the financial statements.
26.2 (a)
Commitments All property rentals are under cancellable operating lease arrangements as follows:
2007 Rs 000 2006 Rs 000
due not later than one year due later than one year and not later than five years within 2 years within 3 years within 4 years within 5 years due later than five years (b)
63,648 27,164 24,198 23,131 23,469 98,536
15,877 20,797 21,934 21,968 20,625 115,679
Letters of credit outstanding at December 31, 2007 were Rs 620,219 thousand (2006: Rs 599,700 thousand), out of which Rs 462,362 thousand (2006: Rs 534,897 thousand) were hedged through forward foreign currency contracts with various banks.
2007 Rs 000 2006 Rs 000
27.
Issued, subscribed and paidup capital 230,357,068 (2006: 230,357,068) ordinary shares of Rs 10 each fully paid in cash 25,136,724 (2006: 25,136,724) ordinary shares of Rs 10 each issued as fully paid bonus shares 255,493,792 (2006: 255,493,792) ordinary shares of Rs 10 each 2,303,571 251,367 2,554,938 2,303,571 251,367 2,554,938
British American Tobacco (Investments) Limited held 241,045,141 (2006: 241,045,141) ordinary shares at the year end.

28. Employees' defined benefit funded pension and gratuity schemes The latest actuarial valuation of the defined benefit plans was conducted at December 31, 2007 using the projected unit credit method. Details of the defined benefit plans are:
Defined benefit pension plan 2007 Rs '000 2006 Rs '000 Defined benefit Gratuity plan 2007 Rs '000 2006 Rs '000
(a)
The amounts recognised in the profit and loss account: Current service cost Interest on obligation Expected return on plan assets Net actuarial losses recognised during the year 49,906 142,617 (121,446) 4,955 76,032 42,624 109,484 (93,448) 3,920 62,580 22,049 38,727 (27,744) 6,044 39,076 19,500 27,941 (20,206) 4,444 31,679
(b)
The amounts recognised in the balance sheet: Present value of defined benefit obligations Fair value of plan assets Unrecognised actuarial (losses) Net liability 1,704,382 (1,367,884) 336,498 (336,498) 1,413,319 (1,202,614) 210,705 (210,705) 490,379 (337,374) 153,005 (153,005) 388,407 (270,997) 117,410 (117,410)
(c)
Changes in the present value of defined benefit obligation: Present value of defined benefit obligation as at Jan 1 Current service cost Interest cost Actuarial losses Contribution by plan participants Benefits paid Present value of defined benefit obligation as at Dec 31 1,413,319 49,906 142,617 122,206 25,523 (49,189) 1,704,382 1,214,950 42,624 109,484 97,267 22,314 (73,320) 1,413,319 388,407 22,049 38,727 46,209 1,784 (6,797) 490,379 316,968 19,500 27,941 39,159 2,136 (17,297) 388,407
(d)
Changes in the fair value of plan assets: Fair value of plan assets as at Jan 1 Expected return Actuarial (losses)/gains Contribution by plan participants Contributions by employer Benefits paid Fair value of plan assets as at Dec 31 Actual return on plan assets 1,202,614 121,446 (8,542) 25,523 76,032 (49,189) 1,367,884 109,473 1,036,970 93,448 59,017 22,314 64,185 (73,320) 1,202,614 108,746 270,997 27,744 4,570 1,784 39,076 (6,797) 337,374 27,691 224,990 20,206 6,771 2,136 34,191 (17,297) 270,997 25,026
During the year 2008 the Company expects to contribute Rs 100 million and Rs 48 million to its defined benefit pension plan and defined benefit gratuity plan respectively.

Defined benefit pension plan 2007 Rs '000 2006 Rs '000 Defined benefit gratuity plan 2007 Rs '000 2006 Rs '000
(e)
The major categories of plan assets: Investment in equities Investment in bonds Cash and cash equivalents 100,955 736,049 530,880 1,367,884 106,627 128,333 967,654 1,202,614 30,127 225,909 81,338 337,374 30,094 13,977 226,926 270,997
(f)
Significant actuarial assumptions at the balance sheet date: Discount rate Expected return on plan assets Future salary increases Future pension increases 10% 10% 14% 6% 10% 10% 15% 6% 10% 10% 14% 10% 10% 15%
The discount rate and expected return on plan assets was determined by considering the expected returns available on the assets underlying the current investment policy. Expected yields on fixed interest investments are based on gross redemption yields as at the balance sheet date. Salary increase assumption is based on the current general practice in the market. (g) Amounts for the current and previous four years:
2007 Rs '000 2006 Rs '000 2005 Rs '000 2004 2003 Rs '000 Rs '000
Defined Benefit Pension Plan Present value of defined benefit obligation Fair value of plan assets Deficit Experience adjustments on plan liabilities Experience adjustments on plan assets Defined Benefit Gratuity Plan Present value of defined benefit obligation Fair value of plan assets Deficit Experience adjustments on plan liabilities Experience adjustments on plan assets 28.1
(1,704,382) 1,367,884 (336,498) (122,206) 11,973
(1,413,319) (1,214,950) 1,202,614 1,036,970 (210,705) (177,980) (97,267) (73,958) (15,298) 43,548
(965,451) (868,626) 963,846 854,846 (1,605) (13,780) 2,330 (13,341) 70,279 62,427
(490,379) 337,374 (153,005) (46,209) 53
(388,407) 270,997 (117,410) (39,159) (4,820)
(316,968) 224,990 (91,978) (43,111) 4,585
(215,533) 213,021 (2,512) (13,834) 15,694
(205,825) 143,919 (61,906) (22,153) 6,440
Salaries, wages and benefits as appearing in note 5, 5.1, 6 and 7 include amounts in respect of the following:
2007 Rs 000 2006 Rs 000
Provident fund Pension fund Gratuity fund
36,620 76,032 39,076 151,728
22,948 62,580 31,679 117,207

29. Financial instruments 29.1 Financial assets and liabilities 2007 Exposed to interest rate risk Rs '000 Financial assets Maturity up to one year: Trade debts Loans and advances Other receivables Local currency Foreign currency Cash and bank balances Local currency Foreign currency Maturity after one year: Loans Deposits 14,205 14,205 Financial liabilities Maturity up to one year: Trade and other payables Local currency Foreign currency Interest accrued Short term finances 1,038,550 1,038,550 Off balance sheet items Letters of credit Bank guarantees 620,219 107,908 728,127 620,219 107,908 728,127 599,700 85,758 685,458 599,700 85,758 685,458 3,365,823 182,441 8,401 3,556,665 3,365,823 182,441 8,401 1,038,550 4,595,215 1,293,141 1,293,141 1,913,578 298,690 11,115 2,223,383 1,913,578 298,690 11,115 1,293,141 3,516,524 2,386 23,187 159,168 46,217 73,464 79,001 12,513 12,303 408,239 2,386 23,187 159,168 46,217 87,669 79,001 12,513 12,303 422,444 8,927 8,927 2,406 12,205 25,221 42,958 14,550 39,410 18,660 6,510 161,920 2,406 12,205 25,221 42,958 23,477 39,410 18,660 6,510 170,847 Not exposed to interest rate risk Rs '000 Total Exposed to interest rate risk Rs '000 2006 Not exposed to interest rate risk Total
Rs '000
Rs '000 Rs '000
Transactions with related parties British American Tobacco (Investments) Limited (BATIL) holds 94.34% (2006: 94.34%) shares of the Company at the year end. Therefore, all the subsidiaries and associated undertakings of BATIL and the ultimate parent company British American Tobacco, p.l.c (BAT) are related parties of the Company. Such entities are also referred to as 'BAT' in these financial statements. The related parties also include directors, major shareholders, key management personnel, employee funds and the entities over which the directors are able to exercise the influence. The amounts due from and due to these undertakings are shown under receivables and payables. The remuneration of the chief executive, directors, key management personnel and executives is disclosed in note 13 to the financial statements. Rs '000 Purchase Royalty Reimbursement of Sales Expenses on Expenses behalf of related party Goods Services Goods Services 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 Ultimate parent company British American Tobacco, p.l.c UK 12,931 25,831 117,952 119,286 267,604 249,666 2,616 8,457 458 Associated Companies BATAsia Pacific, Hong Kong 90,821 74,783 11,054 5,601 934 54 British American Tobacco, Australia 50 1,023 1,395 635 BAT, Bangladesh 68,979 35,394 267 3,276 324 232 Ceylon Tobacco Company, Sri Lanka 244 1,287 136 126 126 408 101 208 BAT, Cambodia 44 BAT, Dubai 1,401 1,719 BAT, Germany 542 BAT, Japan 126 BAT, Indonesia 132,873 258 60 10 12,966 146 70 BAT, South Korea 72 1,439 1,172 BAT, Kenya 7,440 BAT, Malaysia 139,385 42,252 19,974 606 841 97 BAT, Nigeria 1,665 5,353 BAT, New Zealand 14,407 BAT, Senegal 952 BAT, Singapore 28,843 34,290 7,879 2,633 511 673 Souza Cruz Overseas, S.A., Brazil 256,356 269,562 189 BAT, Solomon Islands 5,737 1,300 299 BAT, South Africa 30 399 BAT, Switzerland 198 BAT, Syria 681 595 BAT, Thailand 3,630 891 BAT, Uganda 76,727 4,286 1,123 238 BAT, Ukraine 880 278 BAT, Uzbekistan 1,264 BAT, Vietnam 40 179 377 486 Imperial Tobacco Company, Canada 16,342 Distribution Services (Pvt) Ltd, Karachi 3,364,539 4,144,910 Marketing Services (Pvt) Ltd, Hyderabad 380,988 499,994 Shell Pakistan Ltd 2,250 2,601 Pakistan State Oil Company Ltd 27,981 12,430 6,320 3,863 Contribution to retirement benefit funds by the Company Provident Fund 36,620 32,166 Pension Fund 76,032 62,580 Gratuity Fund 39,076 31,679
30.

31. GENERAL 31.1 Capacity and production Against an estimated manufacturing capacity of 42,797 million (2006: 35,343 million) cigarettes, actual production was 38,183 million (2006: 33,727 million) cigarettes. Actual production was sufficient to meet market demand. There was no production through any outside manufacturing source. 31.2 Number of employees Total number of employees as at December 31, 2007 was 1,668 ( 2006: 1,698). 31.3 Corresponding figures Corresponding figures (if any) have been rearranged, wherever necessary, for the purposes of comparison. However, no significant rearrangements have been made to the financial statements, except the following:
Reclassification from component: Reclassification to component: Rs '000
Marketing and distribution expenses (Selling expenses) note 6 Administrative expenses (Sundries) note 7 31.4 Post balance sheet event
Other expenses (Net foreign exchange loss) note 9 Other expenses (Net foreign exchange loss) note 9
7,850 16,290
Final dividend in respect of the year ended December 31, 2007 of Rs 3.90 per share (2006: Rs 4.40 per share) amounting to a total dividend of Rs 996,426 thousand (2006: Rs 1,124,173 thousand) has been proposed, over and above the three interim dividends of Rs 5.50 (2006: Rs 3.00) per share paid during the year, out of the unappropriated profit at the Board of Directors meeting held on February 20, 2008. These financial statements do not reflect this proposed dividend. 31.5 Date of authorisation These financial statements have been authorised for issue by the Board of Directors of the Group on February 20, 2008.
Notes
Form of Proxy
I, of a member of Pakistan Tobacco Company Limited, hereby appoint of or failing him of
or failing him either of them, may in writing appoint any other person to act my proxy at the 61st Annual General Meeting of the Company to be held on the March 27, 2008 and at any and every adjournment thereof.
As witness my hand this
day of
2008.
Revenue Stamp Rs 5/= Signed
Shareholder's folio No.
Note: 1. 2. 3. The signature should agree with the specimen signature registered with the Company. A proxy need not be a member of the Company. Proxy Forms properly completed should be deposited at the office of the Company's Share Registrar, Ferguson Associates (Pvt.) Ltd., State Life Building No. 2A, 4th Floor , I.I. Chundrigar Road, Karachi not later than 48 hours before the time for holding the Meeting or adjourned Meeting and in default the instrument of proxy shall not be treated as valid.
For Beneficial Owners as per CDC List In addition to the above the following requirements have to be met: (i) (ii) (iii) (iv) Attested copies of CNIC or the Passport of the beneficial owners and the proxy shall be submitted with the Company's Share Registrar not less than 48 hours before the Meeting. The proxy form shall be witnessed by two persons whose names, addresses and CNIC numbers shall be mentioned on the form. The proxy shall produce his original CNIC or Passport at the time of the Meeting. In case of a corporate entity, the Board of Directors' Resolution / Power of Attorney with specimen signature shall be submitted along with proxy form to the Company's Share Registrar.
Witness as per (ii) above: 1. 2.
www.ptc.com.pk
Pakistan Tobacco Company Limited

Evacuee Trust Complex, Agha Khan Road, Sector F-5/1, P.O. Box 2549, Islamabad-44000

Med MD7 T9 HLV

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Annual Report

for the year ended December 31, 2007

The Cover Concept

Mapping the way for growth

Annual Report 2007 Pakistan Tobacco Company Limited 01

Regional Sales Offices

Annual Report 2007 Pakistan Tobacco Company Limited 03

04 Corporate Objectives & Business Principles

Responsible Product Stewardship

Good Corporate Conduct

Annual Report 2007 Pakistan Tobacco Company Limited 05

Strength from Diversity

Freedom through Responsibility

Annual Report 2007 Pakistan Tobacco Company Limited 07

The Board of Directors

08 The Board of Directors

Mirza Rehan Baig

Annual Report 2007 Pakistan Tobacco Company Limited 09

The Board of Directors

Lt. Gen. (Retd.) Ali Kuli Khan

Ben Willem Fourie

10 The Board of Directors

Abid Niaz Hasan

Nicholas Stewart Hales

Annual Report 2007 Pakistan Tobacco Company Limited 11

37,188 40,889 24,846 16,043 6,510 3,973 3,714 2,413 2,014

34,549 35,715 21,824 13,891 5,534 3,072 2,861 1,905 1,405

30,620 30,615 18,783 11,832 4,530 2,378 2,082 1,322 946

26,846 25,453 15,693 9,760 3,483 1,445 1,056 665 511

24,861 22,572 13,849 8,723 2,872 1,010 615 321

24,364 20,556 12,570 7,986 2,505 952 730 420 204

Gross, Operating & After Tax Profit

2002 2002 2003 2004 2005 2006 2007

Earnings Per Share and Dividend Yield

Property, Plant & Equipment

5.4% 5.17 3.4% 1.65 0.0% 1.26 3.3% 2.60

2007 2002 2003 2004 2005 2006 2007

Earnings Per Share (Rs)

Annual Report 2007 Pakistan Tobacco Company Limited 13

Notice of the Annual General Meeting

March 04, 2008 Islamabad

14 Notice of the Annual General Meeting

We owe a lot to our intellectual property i.e. our people

Annual Report 2007 Pakistan Tobacco Company Limited 15

A rare set of perfect numbers

Annual Report 2007 Pakistan Tobacco Company Limited 17

Managing Directors Review

Benson & Hedges (B&H)

18 Managing Directors Review

John Player Gold Leaf (JPGL)

Capstan by Pall Mall

Annual Report 2007 Pakistan Tobacco Company Limited 19

20 Managing Directors Review

Annual Report 2007 Pakistan Tobacco Company Limited 21

40,889 6,510 3,973 3,714 2,413 9.44

35,715 5,534 3,072 2,861 1,905 7.46

14% 18% 29% 30% 27% 27%

Sharing our growth with the Nation

Operating and Other Costs

Contribution to the National Exchequer

Annual Report 2007 Pakistan Tobacco Company Limited 23

3,973 2,413 1,584 3,997 511 511 383 1,124 1,468