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5th September 1999

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Fresh standards for lubricants

By Mel Gunasekera

New standards for lubricant will be introduced as an initial step towards liberalising the market.

Lubricant imports are expected to be liberalised later this year, and the Public Enterprise Reform Commission (PERC) has shortlisted nine international oil firms to bid for around five licences to import and market finished lubricants for an initial six year period.

PERC has given the mandate to Sri Lanka Standards Institute to draw up standards in consultation with Caltex Lubricants Lanka Ltd., Caltex Chief Executive, Peter Martin said.

The standards would ensure the quality and authenticity of imported lubricant products flowing into the country.

"We are recommending the formation of a formal lubricants regulatory body to ensure that quality of imported lubricants are proactive, measure that should be considered for implementation," he said.

Lanka Lubricants Ltd. changed its name to Caltex Lubricants Lanka Ltd. last Tuesday following their AGM.

The name change will be a platform for us to build our brands. "This will strengthen the company's image and reconfirm the alignment it receives from Caltex Corp,'' Chairman Shariq Yosufzai said, addressing the media last week.

Lanka Lubricants Ltd. a 51% subsidiary of U.S. oil giant Caltex Corporation, is owned by the recently merged Texaco Inc. and Chevron Corp.

Texaco is listed on the New York Stock Exchange. Caltex which operates in more than 60 countries of the Asia-Pacific region, Africa and the Middle East, reported US$ 17 bn in profits last year.

The name change was the first of several initiatives the company is taking before the impending competition following deregulation of the lubricants market.

The liberalisation effectively ends a monopoly enjoyed by Lanka Lubricants so far.

Thanks to the monopoly it enjoyed through the exclusive retail franchise agreement with Ceylon Petroleum Corporation, the protection against dumping, exclusive manufacturing rights, soft raw material prices and increase sale of premium products saw Lanka Lubricants enjoy one of its most successful years in 1998.

Profits rose sharply in calendar year 1998 to Rs. 547 mn against Rs. 265 mn in 1997. Net profit in the six months to June 1999 was up 27 percent at Rs. 322 mn.

Profit after tax rose from Rs. 424 mn to Rs. 756 mn in 1998. This was after making a specific provision of Rs. 8.18 mn during the year and after accruing Rs. 20.8 mn as employees voluntary compensation.Earnings per share rose to Rs. 18.15 from Rs. 8.84 last year.

Lanka Lubricants paid US$ 68,776 as technical fees to Caltex Services Corporation last year. The company also imports the majority of its grease and lubricant supplies from Caltex Trading & Transport Corporation and its related companies.

US$ 401,462 is payable to these related companies as at end 1998. The company exported US$ 103,920 finished goods during the year to these companies.

During the year, the company has paid Rs. 3.7 mn for the lease of premises and Rs. 660,000 for data processing to Ceylon Petroleum Corporation. Further a commission on depot sales amounting to Rs. 15 mn as well as 'out-of-pocket charges' for miscellaneous maintenance related services are provided on a day-to-day basis and paid to the Corporation.

Third South Asian Forex Dealers Assembly meets in Katmandu

The third South Asian Foreign Exchange Dealers Assembly met in Katmandu last week. Governors from the Central Bank of Sri Lanka and the Reserve Bank of India delivered lectures on topical subjects including, developments in international banking, capital flows with an emphasis on recent East Asian crisis and its aftermath. The congress also discussed the Y2K issues with special emphasis on the region, Dr. Dula Weeratunga, President Sri Lanka Forex Association said.

Business sessions also covered credit derivatives, option uses, emerging financial markets in Nepal, emerging technology in financial markets, transition to convertibility, he said.

South Asian Foreign Exchange Dealers Assembly had its inaugural meeting in Colombo in 1997 with the blessings of the Sri Lankan Central Bank governor.

This was a pro active strategy adopted by the dealers in order to establish co-operation among the participating countries, eventually with a view to create a tariff free zone within the region, Sri Lanka Forex Association member, Mangala Boyagoda said.

It may even serve as a catalyst to remove trade restrictions within the region. Meeting the dealers within the region would provide an opportunity to forge ahead a single market, eventually in the line of European Economic Commission, he said.

The second conference was held in Hydarabad, India in October 1998.

A memorandum of understanding was signed at this meeting to fulfil the following objectives: to develop the regional foreign exchange market and financial market; to foster better understanding of the regional markets through exchange of information; to develop closer co-operation among the respective forex clubs and associations in the region and among their members; to provide training seminars on foreign exchange markets to the members of the forex clubs and associations in order to enhance professionalism among its members; and to encourage the establishment of forex clubs and associations in countries of the region where such associations are not available.

HNB takes a plunge

Hatton National Bank is expecting to utilise part of its new non-voting share issue to fund long-term infrastructure development projects.

"We feel we have to be ready when the economy takes off to participate in the activities more effectively. There are acquisitions, mergers, takeovers taking place globally and similar activities are taking place in Sri Lanka also. As a bank when opportunities like this come our way we can play a major role. We want to be ready and comfortable," HNB Managing Director, Rienzie T Wijetilleke said in an interview with the Sunday Times Business.

The funds will also improve the bank's capital adequacy ratio, reduce the mismatch of funds and fund part of the bank's new headquarters, which is estimated to cost around Rs. 3 bn within the next three years, he said.

HNB took the plunge in a depressed market by issuing 15 mn non-voting shares to the public at Rs. 70 each.

"As the chairman of the stock exchange, I took the challenge, I also have a responsibility to boost the equity market."

The offer worth Rs. 1.05 bn, amounts to 30% of the bank's existing issued share capital. At present, HNB does not have non-voting shareholders.

The offer, which will run simultaneously, is scheduled for October.

HNB says the existing voting shareholders can purchase shares on a pro-rata basis but will not be given the right of renunciation.

While this feature is different to a rights issue, the bank has described it as an IPO, where existing shareholder's unsubscribed shares will be offered to the public.

There will not be any underwriters to the issue. "We are going purely on our merits and our performance," Wijetilleke said.

Kelani Cables employees hostile

By Dinali Goonewardene

Kelani Cables employees have expressed their hostility towards DFCC Bank's move to call for bidders to take over Lanka Olex Cables (Pvt) Ltd which owns 75% in Kelani Cables Ltd.

In an effort to retain control, the employees of Kelani Cables have bid for the company themselves but have to compete with other bidders.

"There are strong rumours that there are two bidders from the cable industry in Sri Lanka," Financial Controller, Kelani Cables Ltd, Mr. Anoma Alwis told The Sunday Times Business.

"The cable market is intensely competitive and competes on price. A culture of competition has prevailed among employees and we would be hostile to a take-over by a competitor," he said. At present ACL Cables has 45 per cent of the market while Kelani Cables has 30 percent. Ruhunu Cables, Alucop and Kamal Cables are the other players in the market.

"Excess capacity in any of the other bidders plants would lead to job losses for KCL employees," Mr. Alwis said. "The sale of the company to a major player would facilitate manipulation of prices," he added.

Lanka Olex Cables was previously owned by the Pacific Dunlop Company of Australia, which had an 85 per cent stake and DFCC Bank which held the balance 15 per cent. Lanka Olex Cables was established for the purpose of holding a 75 per cent stake in KCL. Pacific Dunlop divested itself of its 85 per cent stake in Lanka Olex Cables as a part of a strategic move to diversify its cable business. In keeping with an agreement signed with DFCC, it immediately offered its stake to the bank.

KCL had a turnover of Rs 520 mn for the financial year 1998. Profit after tax was Rs. 32 mn while net assets per share was Rs 59.71.

Mind your business by business bug

Only first step

A blue chip with considerable investments in the hospitality industry already is planning more investments.

As a first step it will take over the management of a hotel just north of the city. More such 'management' contracts are being explored.

But the real objective is eventual control of these hotels and this is only a preliminary step in that direction, the group's top executives say.

Growing at will

Information technology is in vogue now and the newest business in town is provision of Internet services.

So much so that the number of providers are growing exponentially with little or no regulation or supervision.

Alerted to the consequences of this by the 'Batty Affair' a few major service providers are now lobbying for greater control of the service. The commission that is supposed to regulate the telephones however is not too keen to step into the arena, and is hesitant to even regulate tariffs, we hear.

Bursting bubbles

Not so long ago, the beer industry was querying the government's double-edged policy towards their industry: saying they were eager to promote it but at the same time banning ads and raising duties.Come November the froth and bubble in the industry is likely to diminish even more.

A price hike is on the cards and with a more comprehensive ban on promotions coming into effect, any hopes of a growth in the market will have to be shelved.

East West revamps corporate identity and services

East West Information Systems launched a whole new range of services with the launch of its new corporate identity. One of the new additions to E-WIS is NetConnect, an Internet Service provider (ISP). This is a step taken towards popularising the net to the masses for personal development and for business growth/opportunities, E-WIS officials said.

Connections are provided free of start-up fees and receive up to 100 free hours per month. Company officials said that rural customers would benefit immensely because they would be dialling into E-WIS's existing and proposed regional offices. In other words customers will be making a local call to get connected. E-WIS currently has three regional offices in Galle, Badulla, Kurunegala and has proposed three more offices in Kandy, Matara, and Anuradapura.

Company officials also said they hoped to launch Cyber cafe in rural areas in keeping with the company's vision. Other new services include a cyber mall, which will include bookstores, clothing, travel, vehicles, etc...

At present E-WIS markets the full range of IBM products: the Servers, Desktops, ThinkPads, Services, Banking products and Lexmark range of Printers - the Lasers, Inkjets and Dotmatrix and Lexmark Supplies.With estimates that the number of world wide business establishments with Web access estimated to grow to 8 million by 2001, officials said they wanted to be ready for the future.

ICO files for bankruptcy protection

ICO Global Communications Ltd., which is trying to build the world's third global satellite-telephone network, filed for bankruptcy protection from creditors after struggling to raise funding.

In its Chapter 11 petition filed last week in U.S. Bankruptcy Court in Wilmington, Delaware, ICO listed assets of $2.5 billion and debt of $1.1 billion. The filing comes after ICO asked bondholders for a delay until Sept. 30 in paying $43 million in interest, according to a regulatory filing.

ICO's Chapter 11 filing follows Iridium LLC's by two weeks. Iridium, the first to offer satellite-telephone calling, stumbled in marketing the service, and its troubles may have played a role in ICO's failure to win backers for its $4.6 billion system, analysts and investors said.

"Iridium ripped the curtain off the satellite-telephone industry and people don't like what they've seen," said an analyst who follows the industry.

ICO's 15% bonds due in 2005 fell 25 points, or $250 per $1,000 face value, to 15 cents on the dollar, traders said - a 63% decline. They've tumbled 85% since the company issued debt in July 1998 totaling $460 million.

ICO Global shares, which have lost 67% of their value this year, fell 5/8 to 3 5/8 at midday before trading was halted.

This month, London-based ICO failed to get $600 million in financing from an unidentified investor group. It later said it would consider another proposal from the group for a smaller investment. Shareholders are expected to vote on that proposal tomorrow in Paris. Whether that vote was expected to move forward wasn't known.

ICO also failed to attract subscribers to a rights offering set for earlier this year. That offering, which was extended twice, intended to raise $500 million.

ICO has said it needs to raise about $1.6 billion, including the money raised from the strategic investors, to pay for operations before starting service in the fourth quarter of 2000.

"Our Chapter 11 filing should provide ICO with the extra time needed to reorganise, re-capitalise, and complete our financing," ICO Chief Executive Richard Greco said in a statement. "We believe that our actions will be successful, and that ICO will emerge as a very effective competitor in providing global mobile satellite telephone services."

Iridium expected to have as many as 600,000 customers by the end of this year has only about 20,000, according to analysts' estimates. ICO also will be competing with Globalstar Telecommunications Ltd. in the satellite-communications industry.

"If Iridium hadn't launched its system, no one would have known that the market for satellite-phone service wasn't developing as quickly as hoped," Analysts said. "There'd be more money available to keep things moving forward."

Three ICO units also filed for Chapter 11 in addition to the parent company. ICO's operations division listed assets of $2.3 billion and debt of $2.3 billion, while its Dutch unit, ICO Global Communications Holdings BV, listed assets of $706.9 million and debt of $694.3 million. A third unit, ICO Global Communications Services listed $40.8 million in assets and $18.3 million in debt.

Among the largest creditors of the company and its units are Tokyo-based NEC Corp., which is owed $78.9 million, Entel Chile SA, owed S2.04 million and Hughes Space & Communications International Inc., a unit of General Motors Corp.'s Hughes Electronics subsidiary, which is owed $99 million.

Hughes Electronics, based in El Segundo, California, has a 4% stake in ICO and is building ICO's 12 satellites. Hughes has about $500 million in exposure to ICO, according to a U.S. Securities and Exchange Commission filing.

"We need to get some more information before we can really make an assessment as to what it means to us," Hughes spokesman Richard Dore said.

Investors are likely to view ICO's filing as positive because it removes a cloud that has been hanging over Hughes stock in recent weeks, CE Unterberg analyst William Kidd wrote in a report. Kidd said that Hughes exposure to Iridium equals about $1.34 a share, which he believes has been "more" than priced into the stock.

New rules for internet

An Internet governing group is crafting policy guidelines on solving disputes over "cybersquatting," the practice of buying Internet Web site names and then selling them at a profit.

The Internet Corporation for Assigned Names and Numbers, known as ICANN, describes cybersquatting as "bad-faith, abusive" domain name registration.

Cybersquatters buy domains that resemble corporate names or products with the intention of later selling them to those companies at high cost. Domains are the addresses Internet users enter to access a particular Web site.

California-based ICANN, created with help from the U.S. Commerce Department to manage and develop guidelines for the Internet, is meeting this week at the University of Chile, said Florencio Utreras, director of Reuna, a Chilean Internet group that is hosting the gathering.

ICANN was expected to approve guidelines on resolving domain disputes which often result in lengthy legal battles, board president Esther Dyson said.

The nonprofit group is working to draft formal policies, including those related to domain names, by the end of the year 2000.

ICANN refused to consider proposals that would give individual Internet users more input in the governing body's decision-making process.

At a meeting earlier this year in Germany, the interim ICANN board established a working group to advise it on oversight of the domain name system. But noncommercial groups and individuals complained that they lacked representation compared to businesses and national registries.

The board said it would extend recognition to a newly formed constituency of noncommercial domain names holders, but refused to consider a similar request by an individual domain owner. (AP)

Hotmail accounts exposed to all

No sooner was one catastrophic security flaw closed last Monday one that exposed millions of Hotmail accounts to prying eyes when another one appeared.

The net result: Hotmail account holders were in danger of having their email messages read as well as being impersonated in email until midday Monday.

The first breach was closed Monday at around 9 a.m. PDT, when Hotmail restored access to legitimate subscribers.

The second breach a variation of the first may have been the result of one Hotmail machine that evidently was not fixed when the others were.

The significance of these security holes is that private Hotmail accounts became available to anyone with a Web browser. Most security vulnerabilities on the Internet require in-depth knowledge of Unix or Windows NT language, technical knowledge that the average Web user does not possess.

The bug appears to have affected every customer of what Microsoft says is "the world's largest provider of free Web-based email."

Between 8:30 and 9 a.m. PDT, Microsoft pulled the plug on large portions of the entire Hotmail site, rendering it unreachable for millions of subscribers. During that period, the only access to Hotmail accounts could be made through illicit means by those who had access to a simple code that was spread wildly on the Net over the weekend.

That was about 12 hours after the company was notified of the security hole. But users already logged in to their accounts or someone else's could continue to send, receive, and delete email.

Around 9:30, sections of Hotmail began to slowly come back online. By that time, people without Hotmail accounts could connect to the site's homepage. Users with accounts configured to remember their password, however, received this unhelpful message: "ERROR: Cannot open UserData file."

As of 10:15 a.m., Microsoft engineers, led by Mike Nichols in Redmond, Washington, had managed to fix that problem, too, and users could log in normally again. Yet there still was no reference to the problem anywhere on either the Hotmail or MSN sites.

A unnamed Microsoft spokeswoman could not offer any explanation for the problem. She said that the company took down the Hotmail servers as soon as the company was notified of the problem by the European press Monday morning.

She said Monday morning that the company had resolved the issue so that future attacks of this type would not be possible. That has not proven to be the case.

The exploit worked this way: Any Web page that contained a short, simple code visible on most browsers as a type-in form was able to connect to a Hotmail server simply by typing in a user name without requiring a password.

By early Monday, copies of that HTML code were posted on hacking-related Web sites.

The Hotmail exploit apparently took advantage of a bug in the start script that processed a login session between a Web browser and a server.

One site where the problem surfaced was at, which Network Solutions shows registered to Moving Pictures, a group based in Sweden. Erik Barkel, the contact associated with that domain, could not be reached for comment.

As of about 8:30 a.m. that site redirected to a Web page promoting a marketing company.

The managers of that company said they had nothing to do with the redirect. "It's just a point[er] put there by a person who's trying to make a joke," said Anders Herlin, business development manager at Abel and Baker. "We haven't had the slightest idea why."

"All I know is we do not want to be associated with it," said Herlin. "We are a fairly new company. Maybe someone wanted to cause us harm."

But the code quickly spread to dozens, if not hundreds of sites.

A Swedish newspaper, Expressen , reported the bug in its Monday editions. The bug let anyone log into a Hotmail account without typing a password.

"We know nothing about the individual who tipped us. It was anonymous," said Christian Carrwik, one of two Expressen reporters who broke the news. "It has been circulating for a couple of days." Expressen said Microsoft was alerted very early Sunday morning.

This is only the most recent Microsoft security gaffe. Redmond admitted earlier this month that its MSN Messenger instant messaging client can accidentally disclose Hotmail account passwords. Even if the password is supposedly deleted from a computer, someone else could still view it if they knew the proper keystrokes.

Last week, Wired News reported a bug in tens of millions of Microsoft Windows computers that lets an attacker take control of a PC by sending an email message.

Foreign fund managers will be back from their holiday

Market update By Dinali Goonewardene

A lacklustre week saw the Colombo bourse perk up on Wednesday with a foreign crossing. Foreign participation contributed 57 per cent of total turnover.

The All Share Price Index declined 0.92 per cent to close at 559.4 while the Milanka Price Index fell 1.11 per cent to register 914.

Top gainers included Ceylon and Foreign Trades which gained 46.79 per cent following an announcement of a one for one bonus issue. Kapila Heavy gained 20 per cent after the CSE lifted their suspension on the release of its annual report. Seylan Merchant Bank gained 14.29 per cent following the release of its interim results which showed a 34 per cent improvement in profit after tax YOY.

PD Keells lost 23.81 while Kotagala Plantations lost 15.15 per cent. Interim results indicated a loss of Rs 45 mn in comparison to a loss of Rs 4 mn YOY. Serendib Hotels declined 11.11 per cent following the release of interim corporate results showing a loss of 0.3 mn.

Interim corporate results released during the week were dismal with Hapugastenne Plantations realising a loss of Rs 74 mn, Watawala Plantations a loss of Rs 79 mn and Udapussellawa losing Rs 67 mn.

"Sentiments next week will be passive but export and import statistics indicate economic sentiments are improving and this is a positive sign for the market," Head of Research, Forbes ABN Amro Stock Brokers, Prassana Ludwick said. "Smaller declines in economic indicators are visible," he added. "Corporate results for the first quarter were depressing and the negative effects being felt by the market, however the next quarters results will be better," he said.

"The market will remain flat as most corporate results have been factored in," Head of Research, NDBS Stock Brokers, Chanaka Wickramasuriya. "Rumours of presidential elections in November are causing investors to adopt a wait and see attitude." he added. "The economy is not showing signs of recovery and although the region has showed some progress it has not translated into a regional turn around," he said. "Major issues such as liquidity need to be addressed for the market to look up," Mr Wickramasuriya said.

"There is a possibility of increased foreign interest next week as fund managers are back from their summer vacation," Head of Research, CT Smith Stock Brokers, Rajiv Casie Chitty, said. "Local investors should take a long term view but are holding back," he said

"The market is becoming very volatile. One good day is followed by a lull.." Director Research, John Keels Stock Brokers, Nandakumar Nair said. "Next week will see inactive trading and the indices will fluctuate within a narrow range," he predicted, attributing this to the lack of market making or breaking news.

"We are currently experiencing the impact of bad corporate results and this will continue till the middle of September," Head of Research, CDIC Sassoon Cumberbatch, Diluk Desinghe predicted.

Tea Update

Shafraz Farook
By Shafraz Farook

Prices failed to pick up last week following the Indian and Ukrainiam announcements (See story). In particular, teas in the below best category kept low. However, there was some improvement in the lower end of the market. Production also declined in July. Total production for the month dropped 4 per cent over the same period last year.

The drop is solely attributable to low grown teas, which dropped 17 per cent in July over last year, while the high growns and low growns recorded increases. However, tea production todate still continues to post a surplus of over 3.5 per cent over the first seven months of last year.

The figures also showed a shift in the quantity of orthodox tea production to CTC teas in July. Orthodox teas dropped by around 2 per cent to 21 million kgs in July '99 from 22 million kgs for the same month in '98 giving way to nearly a 34 per cent rise in CTC teas.

The category grew from 1.024 million kgs in July '98 went upto 1.377 million kgs in '99. Overall figure under this breakdown also showed an increase in CTC teas, although orthodox tea production too increased. A shortfall is expected in low growns, which recorded a cumulative decline of one per cent for the period under review, Asia Siyaka said. However, they estimate August production to be around 22 23 million kgs. A shortfall of over three million kgs compared to August '98.

                                 Sale                       Sale                       Corres..

                                 18.08.99            25.08.99                    1998

                                     Rs.                      Rs.                          Rs.

High Growns              109.71               108.18                   109.00

Mid Growns                106.49              106.12                   113.82

Low Growns                129.04              130.37                   149.11

Bottom Line

By KalQlus

Aitken Spence Up

Aitken Spence and Company's profit before tax for the three months ending June 30 increased 32 per cent YOY. Profits were Rs.13 mn for the period.

Turnover increased 15 per cent YoY. "The tourism sector performed well with both the operations in Colombo and the Maldives contributing to profits," Managing Director, Aitken Spence R Sivaratnam told The Sunday Times Business. "

The next quarter holds promise for the tourism sector and the plantation sector which fared badly will have a brighter future as the downturn in tea prices will be arrested," he said.

"The apparel industry showed a downturn in the first quarter but we have downsized the plant and are focusing on quality. A better performance for this sector is expected next quarter but it will be flat," he added.

Hayleys down

Hayleys Ltd profit before tax for the three months ending 30 th June 30, declined 44 per cent YOY to Rs. 130 mn.

Profits attributable to the group from associate Dipped Products declined by Rs. 30 mn. Profits from its subsidiary Haycarb also declined.

"The groups coir sector performance was adversely affected by weather conditions which impacted on supplies," Chairman, Hayleys Ltd, Sunil Mendis said in an interim report.

"The environment and rubber sectors faced stiff competition from South East Asian countries while plantations suffered from a steep decline in tea and rubber prices," he said. The groups turnover declined by 4 per cent YOY.

Lanka Lubricants up

Lanka Lubricants profit before tax for the first half increased 27.7 per cent YOY. Profits were Rs. 462 mn. Turnover increased 8.5 per cent YOY.The increase in profits were due to a change in the product mix and better raw material prices which was achieved through competitive sourcing," Finance Manager, Lanka Lubricants, Anura Perera said. "Performance in the next half will improve but it will not be as dramatic as this half," he said.

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