Albancott Project Feasibility

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ALBANCOTT INVESTMENT PROJECT

Istanbul August, 1995

Prepared by XXX



NAME OF THE JOINT VENTURE: Albancott LTD.

ADDRESS: Sheshi Garibaldi Lagje No:6 Tirana - Albania

DATE OF ESTABLISHMENT: Nov 11, 1992

REGISTERY NUMBER: 7338

CAPITAL: USD 8 650 000

OBJECTIVE: Cotton processing and trading of all textile products.



I. TABLE OF CONTENTS

I. TABLE OF CONTENTS

II. PROJECT SUMMARY

A. AIM OF THE PROJECTB. PROJECT STAGESC. ASSETS ( OTHER THAN HUMAN ASSETS )D. FINANCIAL BRIEFS

E. KEY PERSONNEL

III. FEASIBILITY STUDY

A. GENERAL INFORMATION ABOUT ALBANIA1.Geographical information2.Demographical information

3.Government administration4.International relations5.Economic information6.Fiscal incentives apply to textile sector

B. TEXTILE SECTOR IN ALBANIAC. EVALUATION OF TEXTILE MARKETSD. TECHNICAL INFORMATION ABOUT THE PROJECT

1.Choice of technology2.Technological specifications3.Machinery list4.Supplementary machhines & equipment in production

E. OTHER ARRANGEMENTS BEFORE STARTING PRODUCTION1.Other machines & equipment2.Factory building maintenance

3.Expenditures for HRF. FINANCIAL ANALYSIS OF THE PROJECT

1.Initial investmenta.Building

b.Machinaryc.Supplementary machines & equipmentd.Other machines & equipmente.Factory building maintenance

f. Expenditures for human resourcesg.Other expenditures

h.Working capital investmenti.Total initial investment



2.Estimated revenues & expencesa.Estimated operational revenuesb.Estimated operational expencesc.Estimated general & administrative expences

3.Estimated net incomea.First year's net incomeb.First three year's net income projections

4.Amount of financing requireda.Total financing neededb.Breakdown of funds requiredc.Cumulative cash flows

d.Repayment of fundse.Profitability of the project

G. CONCLUSION

IV. APPENDIXA. CURRICULUM VITAE OF KEY PERSONNELB. LEGAL DOCUMENTS OF ALBANCOTT

1. Certificate of incorporation2.Articles of association

C. OTHER DOCUMENTS

II.PROJECT SUMMARY



A.AIM OF THE PROJECT

Albancott is a joint venture company, established in June 1994, under ministerial authority inaccordance of the Foreign Investment Law of Albania. The aim is to renew the old technology

of the second biggest textile mill of Albania; named Tirana-Textile Mill and extend andimprove the processes to an integrated textile complex; from spinning to garments productionbased on cotton.

B. PROJECT STAGES

The Albancott project has three main stages depending on our financial sources:

At the first stage for which we applied to your company for funding, we are concerned withcotton-spinning only. For the second stage, we will establish weaving , knitting, bleaching and

dying units. At the final stage, the ready-made cotton garments will be produced.

C. ASSETS (OTHER THAN HUMAN ASSETS)

Currently, there are 1100 metric tons of USA cotton in our warehouses. The yearly productioncapacity is planned as 5000 mt.

In later stages, the proposed capacities are 2000mt for weaving, knitting, bleaching and dyingand 1000 mt for the ready-made garments. The portion that is not going to enter the nextstage of production will be sold in the market, mainly USA and EC.

The factory building is rented from government for 99 years and has:

12 860 sqm. of factory area for spinning units,

12 860 sqm of area for weaving and knitting,1 370 sqm x 6 mt. hight as main warehouse,

850 sqm x 6 mt. of additional warehouse space,1 040 sqm. of administrative buildings,

11 150 sqm. of garden and open area.41 130 sqm total area

Bleaching and dying units are planned to be located in the factory space to be built in the openarea. Finally, garments are planned to be produced in another building which will be rented.

The factory buildings already have the electrical systems and water supplies ready for

production.

D. FINANCIAL BRIEFS



Amount of money sought : 4 218 300Currency : USDBreakdown on utilization of funds :

October 1995: 1 448 300November 1995: 216 000

December 1995: 314 000January 1996: 2 240 000

Location : Tirana/ ALBANIA

Projected Profitability : 27 %

The details about financial information is in the financial analysis section of the feasibilitystudy.

E. KEY PERSONNEL

1.Shareholders

Mr. Emin Türk (Nautilus Trading Limited) 75% shares - unique managerMr. Carlton Lawson ( Amaricott Inc.) %1

Mr. Arthur Hoxholli (On behalf of Albanian Government) 24% shares

2. Board of Directors

Mr. Emin Türk Mr. Stan Mehaffey (Technical Coordinator)Ms. Ayþe Nergis Turan ( Financial Director)

Mr. Ahmet Þenkal ( Administrative & Marketing Coordinator)Mr. Murat Durul Türk ( Marketing Director)Mr. Perparim Zaimi (Administrative Director -Firm representative to

Albanian Government)Mr. Isa Feçi ( Technical Director)

The CV's of the key personnel are in the appendix.

III. FEASIBILITY STUDY

A. GENERAL INFORMATION ABOUT ALBANIA



1. Geographical Information

The Republic of Albania lies in south-eastern Europe. It has boarders to Yugoslaviaon north and north-east, to the Republic of Mecadonia on the east, to Greece on south

and by the Adriatic and Ionian Seas on the west. The Mediterranean climate isdominant throughout the country. The average temperature is 18 C (64 F). The capitalcity is Tirana with a population of approximately 250.000 . The other major cities are

Durres, Elbasan, Skkoder, Vlore and Korçe. The total land area is 28.748 sq km.

2. Demographical Information

Population : 3.485.000 (estimated for 1994)

Urban : 24 %Rural : 76 %

Ethnic Groups : a.Albanian 98 %a. Greek 1.8 %

b. Macedonian 1.5 %0c. Others 4 %00

Language: The language is Albanian which has two dialects mainly Gheg and Tosk.The literary language is formed of both dialects with the stucture of Tosk prevailing.

Religion : The State permitted the places of worship and religious activities in 1990.Although there are groups of Roman-Catholics(10%) and Eastern-

Orthodox(20%), the majority are Muslims(70%).

Education: The literacy rate : 99 %Pre-primary school students : 130.000 4.0 %Primary and secondary students : 557.000 17.2 %

Highschool : 67.500 2.0 %Vocational school : 138.000 4.2 %Higher education : 27.500 0.8 %

Total schooling rate : 28.2 %

3. Government Administration:

Republic of Albania is a secular and parliamentary republic. The parliament consist of 140deputies is elected for four years with free,direct and secret ballot The last election was held

on March 22, 1992. The parliament is called "People's Assembly" elects the president of Republic who is also the Head of State. He appoints the Chairman of the Council of Ministers



and also the Ministers upon the recommendation of the Chairman. There are 28 political

parties. A coalition of Democratic Party of Albania( DPA), The Social Democratic Party of Albania (SDP), Albenian Republican Party (ARP) and Independents is in power. ThePresident and the Head of State is Dr. Sali Berisha.

The seperation of powers principle; namely legislative, executive, judicial holds. Albania alsorecognizes and guarantees those fundamental rights and freedoms that are proclaimed ininternational law, including those of national minorities.

Albania consists of 27 districts each of which is administered by multi-party executivecommittees.

4. International Relations

The Republic of Albania is recognized by almost all nations around the world. It has good

relationships with the neighbouring countries. But, there is still an unpredictable chaos informer Yugoslavia. It has been predicted that the struggle will come to an end by Crotianattacts to Sýrps and a new order to be established like Tito regime.

5. Economic Information:

Albania has been implementing a comprehensive economic adjustment program since mid-

1992. The government took mesures to establish fiscal and monetary control, introducedcomrehensive price, trade and foreign exchange system reforms, initiated privatization ogagricultural land, public housing and small and medium size enterprises.

Inflation as measured by consumer price index declined from very high levels to about 30%.GDP growth rate is estimated to be 8% for the coming years. The exchange rate against USDwas 80lek/$ in 1992, 100 lek/$ in 1993 and ....lek/$ at present. The devaluation rate of lek

against hard currencies is relatively low, compared to similar countries. But situation willchange as the economy develops and people accumulate money on their hands.

More than 50% of GDP is produced by agriculture, only 13-17% by industry and the rest by

costruction, transportation and other services. According to 1993 figures, exports are 11347.5million leks (US$ 113.475 million) and imports are 42981.9 million leks (US$ 429.819million). Main export items are mined ores, tobacco, energy, fertilizers and handicraft

products; import items on the other hand, food products, coal, detergents, cars& trucks,electrodomestic appliances.

The Albanian economy has the potential to achieve international competitiveness in sectorssuch as agriculture, mining, petrolium, turism and labor intensive consumer goods of which

textile is the strongest as far as the competitive advantages are concerned.

Albania is a country geographically very close to EC, but has diverse characteristics. So many

years of close regime, brought certain disadvantages, namely, inferior technology in industry

and services, low consumption, no competition, inefficiency, and low wages. On the other



hand, nationwide social security systems gave people equal chance to be educated and solve

their health problems. Highly educated but inefficient labor force work for very low wages.

No one is after profitability which avoids the accumulation of funds to renew the technology;the lack of competition brings inefficiency, by nature of the past regime, there is no

management and entrepreneurship at all.

According to the 1989 figures (latest census) the economically active population is

approximately 46% of total population. 55% of the working population is employed inagriculture, hunting, forestry and fishing, 15% in governmental services sector and 19% inmining, manufacturing, electricity, gas and water supplies. 55% of the working population aremales, 45% are females.

To realize the potential in the economy, government has given vast importance to foreigninvestment and capital, thus maintain economic growth even further. Albania entered major

trade agreements:

GATT observer status, working party on accession (1992)EC Trade and Cooperation Agreement (Sept. 1993)

EFTA Declaration on Cooperation, Free Trade Agreement in negotiationAll other OECD countries except Japan have granted MFN and/or GSP status.

Albania has so far no export restriction imposed by EC and NAFTA, while many other textileexporting countries suffer from quota restrictions.

From 1991 on, Albania is the member of Multilateral Investment Guarantee Agency (MIGA)

and ICSID. Albania also signed bilateral agreements on the promotion and protection of reciprocal investments with more than 20 countries, most important is being the USA.

Foreign investments are not to be subject to nationalization, expropriation, consfication,requisition or any other measure of similar effect, except when this is in public interest, andthen only under due process of law and with appropriate compensation.

All revenues made by foreign investors in Albania may be trasferred abroad after payment of all due taxes. There are also no limits concerning the equity policy.

6. Fiscal incentives apply to textile sector:

1. Four-year tax holiday in manufacturing or production sector. 60% reduction on tax o profits

if the profits are re-invested.2. No turnover tax for imported goods needed for maintenance and development of investment as well as for raw materials and equipments that are part of the production cycle.

3. No turnover tax on goods that are exempted from customs duties.

4. Losses can be carried on for three consecutive years in addition to the year the loss occured.5. No withholding tax on outgoing dividends.



B.TEXTILE SECTOR IN ALBANIA

In 1989, the textile industry represents the main branch of light industry, covering 70% of theproduction of light industry and 16% of total industrial production of Albania.

Since 1989, in textile industry, the production consequently the employment is decreased 3-5fold, as a result of sudden economic and political changes which has arranged the albaniantextile enterprises in face of foreign competition.

Total Textile Output ( 1989) : 59 400 000 lb. (1994) 10 400 000 lbCotton Textile 57 800 000 lb. 9 900 000 lb.

Employment 20 714 7 763

The technology in textile industry is out of date and has low productivity. The technologybelongs to 1950-60. The strategy of the government is to privatize the textile enterprises,

making collaboration with foreign partners and joint ventures.

Approximately 15% of the row material is provided domestically and the rest from imports.

According to the research made by a foreign firm in 1994

Albanian production ( Textile Thread) 2 700 mtTextile Imports 9 470 mt

Textile Exports 950 mtAlbanian textile consumption 11 200 mtPer capita consumption 3.4 kg. (lowest in Europe)

C. EVALUATION OF TEXTILE MARKETS

Cotton Textile Market is evaluated in terms of cotton production and yarn manufacturing.

World cotton yield is 18.11 million metric tons in 1994. The productivity/hectar is 578 kg.The cotton usage 18.96 million mt. The excess demand over yield is met from the stocks. Thebiggest producers of cotton are China, USA, India, Pakistan and Uzbeckistan. All cotton

exporters with the exception of USA prefer to process cotton domestically in order to increase

the value added. Besides China, India and Pakistan has suffered from low productivity/ hectardue to technical inefficiencies ( diseases, wrong irrigation practices etc.) World cotton stocks



unprecedentedly below 8 million mt. For 1995 it is expected that cotton production will be

18.4 million mt and cotton consumption 19 million mt. It is also expected that, falling cottonprices in 1992-3 will increase and world prices will be above $ 1.75/ kg.

According to the data of International Textile Manufacturers Federation, the total spinning

capacity of the world is 172 400 000 needles and 8 400 000 open-end rotors. Ring spinningcapacity is decreasing (-1.1%) while open-end spinning capacity increase a little (1.2%) in1992. In the same year, Turkey's open-end spinning capacity increased by 20% and became

the sixth biggest capacity in the world ranking. Despite this fact, Turkey imports yarn from fareast, south Asia and Africa. The Turkey's imports of yarn in 1994 53 300 mt. with an averageprice of $ 3.13/kg.

D.TECHNICAL INFORMATION ABOUT THE PROJECT

1.Choice of technology:

The technology that is preferred for Albancott is the "Open-end" spinning. The basic reason isthat, it is newer, more advanced and less problematic than other technologies. Less machine isinvolved which reduces the overall price of machines. Wider product range satisfies the

market better. It has seen that technology is rather changing to open-end woldwide. USA hasthe largest capacity of updated open-end systems. Turkey which is the sixth in the sameranking increased its capacity by 20% last year. The reason to mention these two countries

specifically, is because the machinery will be from USA and also some of the back-ups willbe supplied from Turkey.

2.Technological specifications:

a. Production is based on 200 000 lbs/ 7 days and 3 shift. Average thickness 18/1 carded yarn.b. Range of yarn counts is 6/1 to 30/1.

c. Labor force required to operate plant total 114 workers for three shifts. Indirect and whitecollar workers are not included in this figure.d. Expected efficiency on rotors : 90%e. Amount of cotton x 93% = Amount of yarn produced.

f. Expected break factors 1500 to 1800.

3.Machinery list:

a. Opening and cleaning

Truetzschler Opening Lines(Model 1985) 2 units

Each consisting of:Blendomat Model BDT 18

Blendcommander Model BCMagnetCondenser Model LVSA- BCleaner Model MSR

Multimixer Model MPMoFun Model MTVR 500



Tandem X-L Cleaners with fiber control D 106 Condensers each 2 units

X-L Cleaner with fiber control d106 condenser

Fiber control stock funs 2 units

b. Blending

Fiber Control Blend LineConsisting of:

Fiber Control Weigh Pan Hoppers with Extended Aprons 2 units

Fiber Control Weigh Pan Hopper with D106 Condensers 2 units Fiber Control Conveyor

Fiber Control B1 BlenderMagnet

c. Carding

Rieter Aeromixer 1976

Rieter Condense 3 units Rieter Flock Feads 3 units

Rieter Fans 3 units

Rieter Control Panels 3 units Saco- Lowell 40" cards revolving Fiat Tabs, Crosrol Varga Fronts, Crosrol

Autolevellers, 30" Crosrol Coilers, Rieter Aerofeet Chutes 21 units

d. DrawingZinzer 720 Draw Frames ( Breaker) Model 1977

Dual Delivery 20 x 48, 8 End up Creel

30" Can Manual Doff Running 0 1198 ft/minute 9 units

Zinzer 720 Draw Frames ( Finisher) Model 1977

Dual Delivery 20 x 42, 8 End up Creel

20" Can Manual Doff Running 0 1198 ft/minute 9 units e. Spinning

Schlafhorst Autocorne/Open-End Machines Model SRZ 1985.

168 Rotor, 46 MM Rotor Dia 0820 Combing Rolls, 1 piecer 12 units

f. WindingSchlafhorst Autocorner Winder Model 107, Year 197760 Spindle, Uster C - 3 Clearers, Set Up Back Winding

4.Supplementary Machines and Equipment in Production:

a. Boiler with capacity of 5000 lt/ hour of steam.

b. Crane system

c. Forkliftd. Transformer 550 Volt



e. Air Conditioner industrial type 3 units

f. Additional Quality Control Labratory Equipmentg. Hand Tools

D. OTHER ARRANGEMENTS BEFORE STARTING PRODUCTION

1. Other Machines and Equipment:

a. Service Minibussesb. Carsc. Truck d.Computer hardware and software

e. Punchcard machine and guardwatches

2. Factory Building Maintenance:

a. Covering the floors of spinning area and warehouses with appropriate material.b. Painting of the factory and administartive building.c. Arrangements in the warehouses for yarn storage.

d. Office furniture and decoration.e. Functional arrangements in the open areas.

3. Expenditures for Human Resources:

a. Technical trainingb. Managerial training

c. Workcloths

F. FINANCIAL ANALYSIS OF THE PROJECT

1. Initial investment

a. Building (Only the buildings to be used are taken into account)

Factory space 12 860 sqm $ 300/sqm $ 3 858 000Warehauses 2 220 sqm $ 250/sqm $ 555 000Adm.Building 1 040 sqm $ 300/sqm $ 312 000TOTAL $ 4 725 000

Buildings and land is rented from Albaian Government for 99 years. However, in order not tohave a bias in profitability analysis, the equalent values for the buildings in use are calculated

and included in the investment amount. The electrical, clean and waste water and steamsystems are ready for use are assumed in the equavalent costs.

b. Machinery:



The total purchase price of the production machines which are given in the machinery list

section amounts to $ 1 580 000 (C&F price). It is negotiated to pay 50% at shipment and 50%with 6 Months L/C.

c. Supplementary Machines & Equipment:

1. Boiler $ 85 0002. Crane system $ 54 0003. Forklift $ 7 000

4. Transformer $ 16 0005. Air conditioner(3 units) $ 87 0006. Quality Control Lab. $ 10 000 (Ready to use in the factory at present)7. Additional QCL

equipment

$ 4 000

8. Hand tools $ 2 000TOTAL $ 265 000

d. Other Machines & Equipment: 1. Sevice minibusses (2units)

$ 30 000

2. Service cars (2 units) $ 25 0003. Truck $ 20 000

4. Computer hardware $ 18 0005. Computer software $ 10 0006. Punchcard mashine $ 5 000

7. Guard watches(3 units) $ 1 5008. Fire detector system $ 3 000TOTAL $ 112 500

e. Factory Building Maintenance:

1. Floor covering (15 080 sqm) $ 150 8002. Painting (12 000 sqm) $ 15 000

3. Arranging the warehaus $ 10 0004. Office furniture & decoration $ 80 0005. Open area arrangement $ 25 0006. Cafeteria $ 50 0007. Infirmary $ 5 000

TOTAL $ 335 000

f. Expenditures for Human Resources:

1. Technical training $ 25 000

2. Managerial training $ 15 0003. Work clothes $ 9 000



TOTAL $ 49 000

g. Other Expenditures:

1. Fees to local consultants $ 150 000

2. Legal consultancy $ 30 0003. Consultancy fee for US cooperation $ 120 0004. Financial consultancy $ 40 000

5. Salary payments to locals $ 16 0006. Misc. expenditures up to now $ 80 000TOTAL $ 436 000

h. Working Capital Investment:

1. Raw materials (cotton) $ 2 090 000 (1 100 mt x $1900/mt)

2. Work-in-process $ 03. Finished goods (yarn) $ 300 0004. Cash $ 200 000TOTAL $ 2 590 000

The level of raw materials are the portion of capital committed by the local partners and in thestocks of the company. However, the optimal level of inventory is lower and and calculated as

$ 600 000. The usage will decrease the inventory until the optimal level is reached.

i. Total Initial Investment:

1. Building $ 4 725 000 2. Machinery $ 1 580 000 3. Supplementary machine & eq $ 265 000 4. Other machine & eq. $ 112 500 5. Factory building maintenance $ 335 0006. Expenditures for HR $ 49 000

7. Other Expenditures $ 436 000 8. Unexpected expenditures $ 100 0009. Working capital investment $ 2 590 000TOTAL $10 193 300

2. Estimated Operational Revenues and Expenses:

In first two quarters, the capacity usage will be 85%. After than the firm will reach itspractical full capacity. Full capacity production is the processing of 200 000 lbs/week in threeshifts. The firm will work for 50 weeks/year and there will be two weeks of machine

maintenance period. Maintenance will be made in the first two weeks of August.



Raw cotton on hand is of Memphis origin, middle lenght fiber. (The cost of this kind of cotton

is $0.94/lb) Therefore its price is relatively high for open- end production. It is planned to bemixed with the lower grade short fiber cotton with the price of $0.80/lb. A mixture of highgrade 1/3 and low grade 2/3, the average cost will be $0.84/lb. After the high quality rawmaterial is exhausted (in 300 days), the lower grade cotton will be used in production.

Direct labor force consists of 114 workers for three shifts. This includes the workers in theweekend shifts. There will be 50% extra payment for the work done in official holidays,

weekends and night shifts. The indirect labor force consists of 26 workers of different jobs.Direct and indirect labor cost per worker / month is $100 net, $130 gross. Weekly workinghours of a worker is 45 hrs.

Management team consists of 7 managers. The firm needs 10 white collar personnel. foroffice jobs, like secretary, functional departmental jobs etc.

According to the information given by the ex-owner of the machines, the yearly maintenancecost is 8% of the machinery value. The other relevant cost will be given below

a. Estimated Operational Revenues:

According to the figures taken from USA and European markets, the selling price of 1 lb. of 18/1 yarn is $ 1.35 which is $ 2.97/kg. In order to penetrate to the market, price is assumed tobe $ 2.90/kg. The process has 7% waste and amount of production is equal to 93% of thecotton processed.

1.Q 2.Q 3.Q 4.QAmount of cotton processed(kg) 1 002 456 1 002 456 997 920 1 179 360

Yarn produced (kg) 932 284 932 284 928 066 1 096 805Sales revenue ($ 2.90/kg) 2 703 624 2 703 624 2 691 391 3 180 735

b. Estimated Operational Expenses: 1.Q 2.Q 3.Q 4.Q

Total Raw material usage $ 1 784 371 $ 1 784 371 $ 1 776 298 $ 2 046 347From the existing inventory $ 634 888 $ 634 888 $ 632 016 $ 188 205

To be purchased ($ 1.80/kg) $ 1 149 483 $ 1 149 483 $ 1 144 282 $ 1 858 142

Insurance & freight $ 22 000 $ 22 000 $ 22 000 $ 36 000

Direct Labor $ 64 110 $ 64 905 $ 58 215 $ 63 845Wages $ 48 345 $ 48 345 $ 48 345 $ 48 345



Night shift $ 8 060 $ 8 060 $ 4 030 $ 8 060

Holidays & weekends $ 7 705 $ 8 500 $ 5 840 $ 7 440

Indirect Labor $ 14 618 $ 14 799 $ 13 274 $ 14 557 Wages $ 11 023 $ 11 023 $ 11 023 $ 11 023

Night shift $ 1 838 $ 1 838 $ 919 $ 1 838Holidays & weekends $ 1 757 $ 1 938 $ 1 332 $ 1 696

Packaging $ 22 000 $ 22 000 $ 22 000 $ 25 000

Repairs & maintenance $ 31 600 $ 31 600 $ 31 600 $ 31 600

Electricity $ 11 765 $ 11 765 $ 9 955 $ 11 765

Steam & water $ 2 200 $ 2 200 $ 1 160 $ 2 200

Total Operating Costs $ 1 952 664 $ 1 953 640 $ 1 934 502 $ 2 231 314

c. Estimated General & Administrative Expenses:1.Q 2.Q 3.Q 4.Q

Management salaries $ 54 000 $ 54 000 $ 54 000 $ 54 000

Employee salaries (gross) $ 10 500 $ 10 500 $ 10 500 $ 10 500

Office expences $ 5 000 $ 1 000 $ 1 000 $ 1 000

Communication expenses $ 6 000 $ 6 000 $ 6 000 $ 6 000

Transportation expenses $ 19 500 $ 19 500 $ 19 500 $ 19 500Local $ 3 000 $ 3 000 $ 3 000 $ 3 000International $ 16 500 $ 16 500 $ 16 500 $ 16 500

Marketing & promotion exp. $ 40 000 $ 25 000 $ 25 000 $ 25 000

Accomodation expenses $ 8 000 $ 8 000 $ 8 000 $ 8 000Local $ 3 000 $ 3 000 $ 3 000 $ 3 000International $ 5 000 $ 5 000 $ 5 000 $ 5 000

Food for all personnel $ 10 000 $ 10 000 $ 7 500 $ 10 000



Unexpected expenditures $ 10 000 $ 10 000 $ 10 000 $ 10 000

Total Gen. & Adm. Exp. $ 163 000 $ 144 000 $ 141 500 $ 144 000

3. Estimated Net Income:

a. First Year's Net Income:1.Q 2.Q 3.Q 4.Q

Sales revenue ($ 2.90/kg.) $ 2 703 624 $ 2 703 624 $ 2 691 391 $ 3 180 735Total operating expenses $ 1 952 664 $ 1 953 640 $ 1 934 502 $ 2 231 314Operating income $ 750 960 $ 749 984 $ 756 889 $ 949 421

Gen.& Adm. expenses $ 163 000 $ 144 000 $ 141 500 $ 144 000Net Income $ 587 960 $ 605 984 $ 615 389 $ 805 421

b. First Three Years' Net Income Projections:

In the first year of activity, prices of yarn is kept below the market level in order to penetratethe market. Starting from the second year, prices are increased gradually to increase the

profitability. Therefore, The price of yarn will be $3.00/kg. for the second and third years. Dueto increasing activity level, certain positions will be opened and number of personnel willincrease. The proposed increase in general and administrative expenses is 10%.

Yearly depreciation charges are not shown in calculations. The reason is that, it is not a cashoutlay, but only an allowance from net income for tax purposes and for recording sake. Thefirm has 4 years of tax holiday and there is no need to show the depreciation. Therefore, The

figure calculated by deducting total operating expenses, general and administrative expensesfrom sales revenue directly gives the net income.

1.Year 2. Year 3.Year Sales revenue $ 11 279 374 $ 12 655 443 $ 12 655 443

Total operating expenses $ 8 072 120 $ 8 515 028 $ 8 515 028Operating income $ 3 207 254 $ 4 140 415 $ 4 140 415

Gen.& Adm. expenses $ 592 500 $ 651 750 $ 651 750Net income $ 2 614 754 $ 3 488 665 $ 3 488 665

4. Amount of Financing Required:

Total initial investment is $ 10 193 300. However, a part of this investment is already

completed. The building is ready to use, after maintenance. There is $ 2 090 000 worth of high

quality cotton in the warehouse which is going to be used with lower grade cotton until thefourth quarter. Apart from these two investment items, the rest has to be financed externally.



The lower grade cotton will be purchased starting from the first quarter. The first quarters

purchase should also be financed externally. After then, the cash flows will be adequate tomeet the purchasing requirement.

Machinery will be bought 50% cash and with 50% 6 months L/C. The quality control lab. is

ready, but needs additional equipment worth of $ 4 000.

a. Total Financing Needed:

Machinary $ 1 580 000Supplementary mach.& eq. $ 255 000Other machine & equipment $ 112 500Factory building maintenance $ 335 800

Expenditures for HR $ 49 000Other expenditures $ 436 000Unexpected expenditures $ 100 000

Purchase of cotton $ 1 150 000Minimum cash $ 200 000

TOTAL $ 4 218 300

b. Breakdown of Funds Required:

Total of $ 4 218 300 is needed to start up the business. However, these funds are needed in a

period of time starting from September 1995 until the beginning of the first quarter. Theperiodical financing needs are given below:

EXPLANATION OCT 95 NOV 95 DEC 95 JAN 96

Purchase of machinery $ 790 000 $ 790 000Supp. mach.& eq. $ 255 000Other mach.&eq. $ 37 500 $ 75 000

Factory building maint. $ 175 800 $ 80 000 $ 80 000Expenditures for HR $ 15 000 $ 10 000 $ 24 000Other expenditures $ 175 000 $ 120 000 $ 135 000

Unexpected exp. $ 100 000

Purchasing cotton for 1.Q $ 1 150 000Minimum cash $ 200 000



Total $ 1 448 300 $ 216 000 $ 314 000 $ 2 240 000

Grand Total $ 4 218 300

c. Cumulative Cash Flows:

The table of Cumulative Cash Flows shows the accumulation of funds in the first year. As theproduction starts with the first quarter of 1996, the sales revenues are immediately begin andcover the costs of production as well as general and administrative expenses. Only the firstquarter's inventory purchase has to be financed externally. Starting from the second quarter,

the generated funds can meet the purchasing requirement. At the end of the first year, theexternal inventory financing is not necessary and that portion can be payed back.

Operational cash flows : 1.Q 2.Q 3.Q 4.Q

Sales revenue (collections) $ 2 703 624 $ 2 703 624 $ 2 691 391 $ 3 180 735

DisbursementsRaw material purchases $ 1 149 483 $ 1 149 483 $ 1 144 282 $ 1 858 142Other operational costs $ 168 203 $ 160 269 $ 158 204 $ 184 067

Gen. & adm. expenses $ 163 000 $ 144 000 $ 141 500 $ 144 000Total disbusements $ 1 488 776 $ 1 462 752 $ 1 443 986 $ 2 187 109Net cash position $ 1 222 848 $ 1 240 872 $ 1 247 405 $ 993 626Beginning cash balance $ 200 000 $ 1 422 848 $ 2 663 720 $ 3 911 125

Cumulative cash $ 1 422 848 $ 2 663 720 $ 3 911 125 $ 4 904 751(Minimum cash) $ 200 000 $ 200 000 $ 200 000 $ 200 000Cash surplus (deficit) $ 1 222 848 $ 2 463 720 $ 3 711 125 $ 4 704 751

If we subtract initial inventory financing from the cumulative cash at the end of the year, weget the accumulated cash as a result of the operations. ( $3 554 751)

d. Repayment of Funds: The total amount that is planned to be financed externally is equal to $ 4 218 300. The

repayment according to the cash flows generated from operations is planned as follows:

Amount Repayment time

$ 1 150 000 Dec. 31, 1997510 000 June 30, 1998

510 000 Dec. 31, 1998510 000 June 30, 1999510 000 Dec. 31, 1999510 000 June 30, 2000

518 300 Dec. 31, 2000

e. Profitability of the Project:



As seen from the cost and revenue figures, the relatively high gross margin and reasonableperiodic expenditures make up a considerable EBIT; since there is no interest and no taxaccrued for the first years, it is also firm's net income. The low labor cost is the mainadvantage as far as the operational costs are concerned.

The project's profitability is calculated on IRR basis. The economic life of the project isassumed as 10 years. The net income figures calculated in section 3b above is taken as the

yearly net cash benefits arising from the project. In the first 4 years, there is an incentive of taxholiday. After then, the tax rate is 20%.

The yearly cash benefits used to calculate IRR are:

Year 1 $ 2 614 754

Years 2-4 3 488 655Years 5-10 2 790 924

Initial investment taken as (-) cash benefit is: $10 193 300

IRR= 27%

A similar factory operates with 5-8% profitability in USA, which compares very poorly withAlbancott's profitability.

G. CONCLUSION:

Albancott project is a JV with Albanian Government and receive their full support. The poorperformance of textile industry in Albania due to lack of advanced technology,

entrepreneurship and financial sources locally; they spend their best effort to speed up theproject. Also, as an American investment in Albania, American Consulate in Tiran pays closeattention.

The machinery found for this purpose of that sort is not easy to find. New machines are muchmore expensive and delivery lead times are about a year.

The project constitutes 0.3% of Europe's up-dated open-end rotor capacity if the former SovietUnion's out-of-date capacity is excluded.

Albania is very close to EC market which is one of the major markets we direct our yarn

production. The final product (yarn) has higher cost than cotton, therefore it is advantageousto keep low yarn inventory. Also the transportation and collection of sales revenues will takeless time, better utilization of funds will be achieved.

Besides these advantages:1. Considerably low labor cost ($0.72/ hr), but fairly qualified and educated,

2. Incentives of Albanian Government in the privatization period,

3. The high profitability of the investment (27%),



are the main reasons to undertake this project.

CV OF KEY PERSONNEL

FRED STANLEY MAHAFFEY

CITIZENSHIP: American

RESIDENCE: 713 Ruhamah Rd. Liberty South Carolina 29 657 USATEL: 803- 843 41 02PERSONAL: Age:60, Health is excellent, Married, has four children, Veteran of World WarII.

EDUCATION: Furman University Industrial EngineeringBUSINESS EXPERIENCE:** 1989-1994 Retired from General Management Post, Buocon

**1988-1989 V.P. Belmont Huntage Belmont N.C.** 1987-1988 Vice President of Clemson Yarn Corporation- Owned and operated by Wm. A.Popp of Popp Yarn Corporation, Hatboro, Responsibilities: Start up Clemson Yarn and staff plant. Also operate and manage it for Mr. Wm A Popp.

**1984-1987 Vice President Mill Division, Opelika Manufacturing Corporation.**1978-1983 General Manager of Huntsville Manufacturing Company- Mr. Lowenstein. 4000to 1654 looms - 1700 to 600 employees. Products- flannel, printcloth, industrial fabrics, fiber

mix, polyester/cotton, 100% cotton, 100% filament warp, 100% filament filling. (Directedplant from 78% to 97% weaving efficiency, from print or ROM quality to 95% plain shadesand from no grading system to 40 point system.) Directed plant from a militant union strike toa non-union status. Attitude surveys indicate employee morale as good.

**1971-1978 Vice President of Manufacturing, Woolside Division of Dan River Inc. Myresponsibility was to direct the activities at six plants located in Fountain, Inn, Greenville,Basley and Liberty South Carolina. These plants manufacture woven fabrics, the fabrics may

be anything from Cam to Dobby Looms and Industrial to Apparel and use. The wage payrollfor these six plants was appoximately $23 million annually. There were approximately 4300hourly paid employees who produced 180 000 000 yards of fabric annually.It was my responsibility to coordinate the sale of the fabric with a Vice President of

Merchandising who was located at the New York office. I made frequent trips to call upon oldcustomers and potentially new customers. It was also my responsibility to explore newproduct areas. There was a management team located at each manufacturing unit. Themanager

reported to me, in addition, I also had a chemist, group personnel director, planner andassistant manufacturing expert on my staff. Of course, I utilized the staff services of thecompany to accomplish objectives.

**1968-1971 Group Manager of Woolside's Cotton Blended operations- six plants.

**1967-1968 Assistant Division Manager of Plain Goods Division - Woolside.



**1964-1967 Beattle Plant - Woolside Division. This plant has 56 000 spindles and 1152

looms.**1962-1964 Assistant Manager of Beattle Plant, Woolside Division. Assisted in the initialstart-up of this plant, which included specifications, machinery erection, methods andstandards and staffing.

**1960*1962 Worked out of a central office on special production problems and machineryresearch, cotton and synthetic ( this was a part of a training program).**1950-1960 Industrial engineer - Woolside Mills and Norris Cotton Mills.

REFERENCES:1. Virgil Simpson, Vice President of Woolside Delta.2. John D. Hollingsworth - Have worked on many yarn projects with John D. Hollingsworth.

3. Jim Smith - Plant Saco Lowell4. Monnie Broome - Formerly M. Lowenstein, presently with J.P.Stevens5. Harold Mason Sr. - Former President of Woolside Div. Dan River Mills - Retired and lives

in Greenville, SC. I formerly reported to Mr. Mason.

OUTSIDE ACTIVITIES AND INTERESTS:*Trustee of North Greenville Junior Collage

* Board of Directors - President of Southern Textile Association* President of Blue Ridge Council, Boy Scouts of America.* Former member of Greenville County Mental Health Commission

* Former President of Greenville Textile Club.*Holder of Silver Beaver Award.*Director, Rotary Club, Huntsville.



Documents

Albancott Project Feasibility