Although the troubled Korea Ceylon Footwear Manufacturing Co. Ltd. (KCFMC) was able to post a Rs. 9.8 million operational profit for the year ended March 31, 1998, interest charges gobbled up much more than that. The company finished the year with a loss of Rs. 36.3 million in its books according to its just published annual report and accounts.

The picture, however, was not as bleak as in the previous year when KCFMC posted a Rs. 90 million loss. But with accumulated losses now running at Rs. 197.1 million, there is a long haul yet before a turnaround.

Reviewing the year, the company's chairman, Mr. A.G.L. Perera said that although they were better placed to meet challenges of "normal competitive pressure'', profitability will depend on the level of financing costs. He stressed that capital restructuring was needed and gearing had to be reduced with a new equity infusion.

Perera noted that turnover had increased to Rs. 742.7 million from the previous year's Rs. 595.3 million. This reflected an increase in export volume and a modest increase in prices realised.

He attributed the improved financial performance to the implementation of a rationalisation action plan. This had induced a 17% increase in production volumes, a 9% growth in unit export prices, a 5% reduction in unit prime material and overhead costs and enhanced the net sale margin by Rs. 83.8 million.

However, both interest charges (up to Rs. 46.7 million from Rs. 30.4 million a year earlier) and exchange losses (Rs. 23.7 million against Rs. 12.7 million the previous year) had grown.

The rationalisation action plan to which Perera said had been successfully implemented included replacement of key plant and equipment in the rubber component and shoe production departments at a cost of Rs. 23.4 million. Manpower had been reduced by 264 to 1,947 employees at balance sheet date.

Perera said that a skill enhancement programme was in place and production incentives have been enhanced. The management structure has been reorganised, administration procedure rationalised and export pricing strategies revised.

KCFMC continues to feel the bite of price competition from shoe manufacturers in China and Vietnam. Also, the South East Asian currency crisis had exerted pressure on export prices during the latter half of the year.

The company raised Rs. 63.2 million by way of a rights issue during the year under review and also drew down Rs. 61.2 million from long term loan facilities. These funds had been spent on capital expenditure (Rs. 47.4 million), repayment of long term loans (Rs. 62.7 million) and financing of working capital requirements (Rs. 14.3 million).

"The erosion of the equity capital base by losses and additional working capital requirements have increased borrowings. Consequently, the burden of financing costs has become a major factor affecting the profitability of the company,'' Perera said.

The chairman warned that "abnormal competitive pressures'' are likely to arise in the future until economic and financial stability is restored in South East Asia and Japan.

The C.W. Mackie Group (34%) and the Ceylon Trading Company Ltd. (27.2%) are the major shareholders of KCFMC. The Korean shares are held by the Doosan Corporation and the H.S. Corporation, with 5.32% each.

The directors of the company are A.G.L. Perera (chairman), P.B. Rasmussen (deputy chairman), S.S. Senaratne (managing director), Yoon. Il Kim, M.A. Abeynaike, D.A.T. Ranasinghe, S.H. Amarasekera and B. Norholm.